Definition of Fixed Income Securities

Banks repackage mortgages into fixed-income securities.

Securities that make fixed and regular payments, either in the form of interest or dividends, are fixed-income securities. They fall into two categories: debt obligations and preferred stock.

Bonds

Bonds are debt obligations that promise to pay the holder--the creditor--regular interest payments for the duration of the maturity period, when the bond issuer--the borrower--must pay back the principal. Bonds are issued by local and national governments, as well as companies.

Mortgage-Backed and Asset-Backed Securities

These are bonds of pooled mortgages issued by banks in order to reduce risk from lending to less creditworthy clients. When homeowners make their monthly payments to their banks, a part of the interest and principal is passed on to the security holder.

Preferred Stock

As with common stock, preferred stock gives the holder part ownership of a company. The difference is that preferred stock pays fixed dividends, before payments to owners of the common stock. The downside is that preferred stock does not give its owners voting rights and tends to grow less in value.

References

• "Fixed Income Securities"; Frank J. Fabozzi; 2002
• My Stock Market Power: Treasury Bonds
• This Matter: Bonds

Resources

• Economy Watch: Fixed Income Bonds