Legal Definitions - fixed-income investment

A fixed-income investment is a type of financial asset designed to provide investors with a predictable stream of payments over a specified period, typically in the form of interest. At the end of the investment term, the original amount invested (known as the principal) is usually returned to the investor. These investments are characterized by their relatively stable and predetermined returns, making them attractive to investors seeking regular income and generally lower risk compared to more volatile assets like stocks.

• Corporate Bond

  Scenario: Imagine a large technology company needs to raise capital to fund the development of a new product line. Instead of issuing more shares of stock, it decides to issue bonds to investors. An individual investor purchases a $5,000 bond from this company, which promises to pay 4% interest annually for seven years.

  Explanation: This is a fixed-income investment because the investor receives a fixed payment of $200 (4% of $5,000) every year for seven years. At the end of the seven-year term, the company repays the original $5,000 principal to the investor. The income stream is predictable and set at the time of purchase, providing a stable return.

• Certificate of Deposit (CD)

  Scenario: A small business owner has $20,000 in surplus cash that they won't need for at least three years. To earn a better return than a standard savings account, they open a 3-year Certificate of Deposit (CD) at their bank, which offers a guaranteed interest rate of 2.5% per year.

  Explanation: This CD is a fixed-income investment because the bank commits to paying a specific, unchanging interest rate (2.5%) on the $20,000 for the entire three-year period. The business owner knows exactly how much interest they will earn and when they will receive their principal back, providing a stable and predictable return on their idle cash.

• Municipal Bond

  Scenario: A city government issues bonds to finance the construction of a new public library. An investor purchases a $10,000 municipal bond that pays 3% interest semi-annually for 15 years. The interest earned on municipal bonds is often exempt from federal income tax, and sometimes state and local taxes too.

  Explanation: This municipal bond is a fixed-income investment because the city government guarantees regular, predetermined interest payments to the bondholder every six months for the duration of the 15-year term. Upon maturity, the original $10,000 principal amount invested is returned to the investor, providing a reliable and stable income stream with potential tax advantages.