Posted in Finance, Accounting and Economics Terms, Total Reads: 326
Definition: Fixed Interest Security
Fixed Interest securities are debt instruments such as bonds, debentures used to loan money to borrowers in exchange of fixed interest payments. Fixed interest securities pay a specified rate of interest during the whole maturity period of the security. The fixed interest rate is called the coupon rate.
The interest payment is constant and does not change over the life of the instrument. The par value of the instrument is also returned after the maturity period of the security is over. Fixed interest securities can be tradable or non tradable. Tradable securities include government bonds, local government bonds, or corporate binds, whereas term deposits are non tradable securities. Tradable fixed income securities offer the holder a fixed income via interest payments, and can be traded (before the maturity period) in the secondary financial markets as well to earn capital gains as well. The fixed interest charges are paid generally at a half yearly basis. The value of the tradable fixed income securities varies with the interest rates of the market. As and when the interest rates rise above the coupon rate, the value of the security falls. And if the interest rates of the market fall down below the coupon rate, the value of the security increases. The value of the fixed interest securities also depend on the credit ratings, inflation and the maturity period.
Fixed interest securities are less risky than equities, as if and when a company is liquidated, bondholders are repaid before the shareholders. Also they offer fixed interest payments, and thus have certainty of return associated with them. Governments bonds are considered safe because the country’s governments are more secure. Corporate bonds carry a considerable amount of risk as the company might face difficulties in its business and thus its ability to pay back the maturity amount as well as the interest.