Legal Definitions - fixed-income security

A fixed-income security is a type of investment that provides a predictable stream of payments to the investor over a specified period, typically returning the initial principal amount at the end of that period. Essentially, when you purchase a fixed-income security, you are lending money to a borrower—which could be a government, a corporation, or another entity—in exchange for regular interest payments and the promise that your original investment will be repaid. The "fixed" aspect refers to the predetermined nature of these payments, which are usually set at the time of purchase.

• Example 1: U.S. Treasury Bond
  A retired couple decides to invest a portion of their savings in a 10-year U.S. Treasury bond. This bond promises to pay a specific interest rate, for instance, 3% annually, distributed every six months for the entire ten-year period. At the end of the ten years, the U.S. government repays the original amount the couple invested.

  Explanation: This is a fixed-income security because the investors receive regular, predetermined interest payments (the "fixed income") from the U.S. government, and their original investment amount is returned at a set future date. The payment schedule and amount are known in advance, providing a predictable income stream.

• Example 2: Corporate Bond
  A large renewable energy company issues bonds to raise capital for the construction of a new solar farm. An investor purchases one of these bonds, which has a maturity of seven years and promises to pay 5% interest annually, distributed quarterly. The investor holds the bond until maturity.

  Explanation: This bond is a fixed-income security because the investor is guaranteed to receive a consistent, pre-set interest payment every quarter for seven years. At the end of the seven years, the company will repay the principal amount of the bond to the investor. The income stream is fixed and predictable, making it a fixed-income investment.

• Example 3: Certificate of Deposit (CD)
  An individual deposits a sum of money into a 5-year Certificate of Deposit (CD) at a local bank, which offers a fixed annual interest rate of 2.0%. The individual agrees not to withdraw the money before the 5-year term ends, in exchange for this guaranteed rate.

  Explanation: While often considered a bank account, a CD functions as a fixed-income security. The investor lends money to the bank for a set period, and in return, the bank promises to pay a fixed interest rate over that term. At maturity, the original deposit plus all accrued interest is returned, providing a predictable income stream and principal repayment.