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Fixed-Income Investments: Guide and How to Invest
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Fixed-Income Investments: Guide and How to Invest
Fixed-income investments have a place in many portfolio. Here’s why and how to invest in them.
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Chris Davis is a Managing Editor on the Investing team. As a writer, he covered the stock market, investing strategies and investment accounts, and as a spokesperson, he appeared on NBC Bay Area and was quoted in Forbes, Apartment Therapy, Martha Stewart and Lifewire, among others. His work has appeared in The Associated Press, The Washington Post, MSN, Yahoo Finance, MarketWatch, Newsday and TheStreet. Published in Managing Editor + more + more
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Robert Beaupre leads the SMB team at NerdWallet. He has covered financial topics as an editor for more than a decade. Before joining NerdWallet, he served as senior editorial manager of QuinStreet's insurance sites and managing editor of Insure.com. In addition, he served as an online media manager for the University of Nevada, Reno. Published in Head of Content, Small Business + more + moreFixed-income investments, such as government and corporate bonds, can provide a steady, predictable source of income, often with lower risk than other investments. Along with stocks and stock mutual funds, fixed-income investments make up the backbone of a well-diversified investment portfolio.
Fixed-income investments, such as government and corporate bonds, can provide a steady, predictable source of income, often with lower risk than other investments. Along with stocks and stock mutual funds, fixed-income investments make up the backbone of a well-diversified investment portfolio.» MORE: How to choose a good financial advisor
» MORE: How to choose a good financial advisor » MORE: How to choose a good financial advisorBrokerage firms
Brokerage firms
Brokerage firmson Charles Schwab's website
on E*TRADE's website
on Vanguard's website
on Fidelity's website
What are fixed income investments?
What are fixed income investments?Fixed income investments are investments, typically bonds, that generate a predictable amount of income (usually via interest payments) for the investor. Preferred stocks or bank certificates of deposits are also fixed income investments.
Fixed income investments are investments, typically bonds , that generate a predictable amount of income (usually via interest payments) for the investor. Preferred stocks or bank certificates of deposits are also fixed income investments.A bond is a loan from the investor to a corporation or government. The borrower pays interest over time and repays the principal amount at the end of a predetermined period. Bonds may make interest payments monthly, quarterly or semi-annually.
A bond is a loan from the investor to a corporation or government. The borrower pays interest over time and repays the principal amount at the end of a predetermined period. Bonds may make interest payments monthly, quarterly or semi-annually.For example, if you buy a 10-year bond with a face value of $5,000 that pays 3% interest, you’ll earn $150 annually for 10 years.
For example, if you buy a 10-year bond with a face value of $5,000 that pays 3% interest, you’ll earn $150 annually for 10 years.After 10 years, you’ll have earned $1,500 in interest, and the government or corporation will also repay you your original principal amount of $5,000.
After 10 years, you’ll have earned $1,500 in interest, and the government or corporation will also repay you your original principal amount of $5,000.Like other investments, bonds can be bought and sold, and their value can rise above or fall below what you originally paid for them. Selling a fixed-income investment for a profit is one way to make money, though it’s often the regular payments investors are after, not the capital gains.
Like other investments, bonds can be bought and sold, and their value can rise above or fall below what you originally paid for them. Selling a fixed-income investment for a profit is one way to make money, though it’s often the regular payments investors are after, not the capital gains.» MORE: How capital gains tax works and how to save
» MORE: How capital gains tax works and how to save » MORE: How capital gains tax works and how to savePros and cons of fixed-income investments
Pros and cons of fixed-income investments ProsSteady source of income.
Diversification.
ConsDefault risk.
Interest rate risk.
Relatively low returns.
Benefits of fixed-income investments
Benefits of fixed-income investmentsSteady source of income
Steady source of incomeThis is a big reason that fixed-income investments are a staple in many investment portfolios. A regular stream of income is extremely valuable for most investors.
This is a big reason that fixed-income investments are a staple in many investment portfolios. A regular stream of income is extremely valuable for most investors.Diversification
DiversificationThe goal of diversification is to reduce the volatility of your portfolio by spreading risk. This can be accomplished by investing in various companies from different sectors, for example, but fixed-income investments provide even more stability for one main reason: Bond prices typically rise when stock prices fall (and vice versa).
The goal of diversification is to reduce the volatility of your portfolio by spreading risk. This can be accomplished by investing in various companies from different sectors, for example, but fixed-income investments provide even more stability for one main reason: Bond prices typically rise when stock prices fall (and vice versa).In general, advisors typically recommend increasing a portfolio's asset allocation in fixed-income investments as retirement approaches. Doing so can reduce the risk that market-based turmoil could an oversized bite from your portfolio at a bad time.
In general, advisors typically recommend increasing a portfolio's asset allocation in fixed-income investments as retirement approaches. Doing so can reduce the risk that market-based turmoil could an oversized bite from your portfolio at a bad time.Risks of fixed-income investments
Risks of fixed-income investmentsBonds are often less risky than stocks, but they have a few risks worth considering.
Bonds are often less risky than stocks, but they have a few risks worth considering.Default risk
Default riskDefault risk is the likelihood that the bond issuer will fail to make its interest payments on time or fail to repay its debt. You can learn about an issuer’s creditworthiness by checking its credit-quality ratings from agencies such as Moody’s Analytics or Standard & Poor’s.
Default risk is the likelihood that the bond issuer will fail to make its interest payments on time or fail to repay its debt. You can learn about an issuer’s creditworthiness by checking its credit-quality ratings from agencies such as Moody’s Analytics or Standard & Poor’s.Investment-grade bonds are the least likely to default; they have credit ratings of BBB or above (Standard and Poor’s) or Baa and above (Moody’s).
Investment-grade bonds are the least likely to default; they have credit ratings of BBB or above (Standard and Poor’s) or Baa and above (Moody’s).High-yield bonds (also known as junk bonds) have ratings below those thresholds, meaning they're more likely to default.
High-yield bonds (also known as junk bonds) have ratings below those thresholds, meaning they're more likely to default.Investment-grade bond ratings
Investment-grade bond ratings Investment-grade bond ratings Investment-grade bond ratingsMoody's
Moody's Moody'sStandard & Poor's
Standard & Poor's Standard & Poor'sFitch
Fitch FitchWhat the grade means
What the grade means What the grade meansAaa.
Aaa.AAA.
AAA.AAA.
AAA.Highest quality, minimal risk.
Highest quality, minimal risk.Aa.
Aa.AA.
AA.AA.
AA.High quality, very low risk.
High quality, very low risk.A.
A.A.
A.A.
A.High/Medium quality, low credit risk.
High/Medium quality, low credit risk.Baa.
Baa.BBB.
BBB.BBB.
BBB.Medium grade, moderate credit risk.
Medium grade, moderate credit risk.Non-investment-grade bond ratings
Non-investment-grade bond ratings Non-investment-grade bond ratings Non-investment-grade bond ratingsMoody's
Moody's Moody'sStandard & Poor's
Standard & Poor's Standard & Poor'sFitch
Fitch FitchWhat the grade means
What the grade means What the grade meansBa.
Ba.BB.
BB.BB.
BB.Substantial credit risk.
Substantial credit risk.B.
B.B.
B.B.
B.High credit risk.
High credit risk.Caa.
Caa.CCC.
CCC.CCC.
CCC.Low quality, very high credit risk.
Low quality, very high credit risk.Ca.
Ca.CC.
CC.CC.
CC.In or near default, some prospect of recovery.
In or near default, some prospect of recovery.C.
C.C.
C.C.
C.Moody's lowest rating, typically in default with little prospect of recovery.
Moody's lowest rating, typically in default with little prospect of recovery.C.
C.D.
D.D.
D.In default, also used when bankruptcy has been filed.
In default, also used when bankruptcy has been filed.Interest rate risk
Interest rate riskInterest rate risk is the risk that market interest rates will rise, causing the value of the bond to drop. Specifically, if overall interest rates rise, newly issued bonds—and their higher coupon rates—will become more attractive, lowering the market value of older bonds with lower coupon rates.
Interest rate risk is the risk that market interest rates will rise, causing the value of the bond to drop. Specifically, if overall interest rates rise, newly issued bonds—and their higher coupon rates—will become more attractive, lowering the market value of older bonds with lower coupon rates.Conversely, if interest rates fall, newly issued bonds will offer lower coupon rates, making the older bonds — whose coupon rates look now look relatively high — more attractive.
Conversely, if interest rates fall, newly issued bonds will offer lower coupon rates, making the older bonds — whose coupon rates look now look relatively high — more attractive.» Learn more about how interest rate risk affects bonds.
» Learn more » Learn more about how interest rate risk affects bonds .Relatively low returns
Relatively low returnsBonds may be less risky than stocks, but they often don’t offer investors the same level of investment returns. Typically, investors allocate more of their portfolio toward stocks early on, then gradually shift it to bonds as they near retirement. This strategy maximizes long-term growth while minimizing risk as retirement approaches. Even with diligent saving, an all-bond portfolio may not grow enough for retirement.
Bonds may be less risky than stocks, but they often don’t offer investors the same level of investment returns. Typically, investors allocate more of their portfolio toward stocks early on, then gradually shift it to bonds as they near retirement. This strategy maximizes long-term growth while minimizing risk as retirement approaches. Even with diligent saving, an all-bond portfolio may not grow enough for retirement.» Learn more about what a bond market crash is and how to prepare.
» Learn more » Learn more about what a bond market crash is and how to prepare.Types of fixed-income investments
Types of fixed-income investmentsThere is a wide range of fixed-income investments. See the most common below.
There is a wide range of fixed-income investments. See the most common below.Treasury securities
Treasury securitiesTreasurys are bonds issued and backed by the U.S. government. They make up the largest portion of the U.S. fixed-income market.
Treasurys are bonds issued and backed by the U.S. government. They make up the largest portion of the U.S. fixed-income market.Treasurys come in three forms: notes, bills and bonds. The biggest difference among these three is how long it takes for each one to reach maturity, as noted below:
Treasurys come in three forms: notes, bills and bonds. The biggest difference among these three is how long it takes for each one to reach maturity, as noted below:Bills: Up to one year.
Bills: Bills : Up to one year.Notes: 2, 3, 5, 7 or 10 years.
Notes: Notes : 2, 3, 5, 7 or 10 years.Bonds: 20 or 30 years.
Bonds: Bonds : 20 or 30 years.The risk of the U.S. government defaulting on its bonds is virtually nonexistent, which secures bonds' status as a relatively safe long-term investment with consistent returns.
The risk of the U.S. government defaulting on its bonds is virtually nonexistent, which secures bonds' status as a relatively safe long-term investment with consistent returns.Municipal bonds
Municipal bondsState and local governments issue municipal bonds.
State and local governments issue municipal bonds .Generally, interest income from municipal bonds is free from federal and state taxes (although this can vary by state). However, municipal bonds typically provide lower yields than other types of bonds. They are often recommended for investors in high tax brackets.
Generally, interest income from municipal bonds is free from federal and state taxes (although this can vary by state). However, municipal bonds typically provide lower yields than other types of bonds. They are often recommended for investors in high tax brackets.Municipal bonds are generally low risk, as the issuing cities and states can always introduce new taxes to generate the money to repay bondholders.
Municipal bonds are generally low risk, as the issuing cities and states can always introduce new taxes to generate the money to repay bondholders.Corporate bonds
Corporate bondsCorporate bonds are bonds from companies. Highly-rated, creditworthy companies are the least likely to default on their debt, making their bonds stronger candidates for reliable fixed-income vehicles.
Corporate bonds are bonds from companies. Highly-rated, creditworthy companies are the least likely to default on their debt, making their bonds stronger candidates for reliable fixed-income vehicles.High-yield bonds
High-yield bondsThese “junk bonds” are fixed-income securities that fall not investment-grade. However, they tend to offer higher interest payments in return for taking that extra risk.
These “junk bonds” are fixed-income securities that fall not investment-grade. However, they tend to offer higher interest payments in return for taking that extra risk.Bond funds
Bond fundsBond funds pool several different bonds into a single basket, allowing investors to add even more diversification to their portfolios with a single investment.
Bond funds pool several different bonds into a single basket, allowing investors to add even more diversification to their portfolios with a single investment.» MORE: Learn the financial independence retire early (FIRE) method
» MORE: Learn the financial independence retire early (FIRE) method » MORE: Learn the financial independence retire early (FIRE) methodFixed-income taxes
Fixed-income taxesTaxes on fixed-income investments vary, though these differences are relatively straightforward. The table describes a type of security, the state and federal taxes on interest payments and the capital gains taxes you’d incur if you sell the bond before maturity.
Taxes on fixed-income investments vary, though these differences are relatively straightforward. The table describes a type of security, the state and federal taxes on interest payments and the capital gains taxes you’d incur if you sell the bond before maturity.Federal income (interest payments)
Federal income (interest payments)
Federal income (interest payments)State income (interest payments)
State income (interest payments)
State income (interest payments)Capital gains (sell before maturity)
Capital gains (sell before maturity)
Capital gains (sell before maturity)Municipal bonds
Municipal bondsTypically no
Typically noVaries by state
Varies by stateYes
YesTreasury securities
Treasury securitiesYes
YesNo
NoYes
YesCorporate bonds
Corporate bondsYes
YesYes
YesYes
YesHigh-yield bonds
High-yield bondsYes
YesYes
YesYes
YesHow to invest in fixed-income securities
How to invest in fixed-income securitiesThere are several ways to acquire fixed-income securities, but it's a good idea to consult with a qualified financial advisor before purchasing.
There are several ways to acquire fixed-income securities, but it's a good idea to consult with a qualified financial advisor before purchasing.New-issue Treasury securities. The easiest way to buy newly issued U.S. Treasury securities is through treasurydirect.gov.
New-issue Treasury securities. New-issue Treasury securities. The easiest way to buy newly issued U.S. Treasury securities is through treasurydirect.gov.Municipal bonds. There are a few ways to buy municipal bonds, but the easiest is through a brokerage account. Most major online brokerages will have municipal bonds on offer.
Municipal bonds. Municipal bonds. There are a few ways to buy municipal bonds, but the easiest is through a brokerage account. Most major online brokerages will have municipal bonds on offer.Corporate and high-yield bonds. To purchase these, you’ll need a brokerage account. Once you’ve set up your account, you can use the brokerage’s screening tools to find the bonds that best suit your situation and portfolio.
Corporate and high-yield bonds. Corporate and high-yield bonds. To purchase these, you’ll need a brokerage account. Once you’ve set up your account, you can use the brokerage’s screening tools to find the bonds that best suit your situation and portfolio.Secondary market. You’ll need a brokerage account to buy or sell all bonds on the secondary market.
Secondary market. Secondary market. You’ll need a brokerage account to buy or sell all bonds on the secondary market.» MORE: See our picks for the year's best financial advisors
» MORE: See our picks for the year's best financial advisors » MORE: See our picks for the year's best financial advisors About the author Chris Davis Chris Davis Chris Davis is a Managing Editor on the Investing team. He has covered the stock market, investing strategies, investment accounts and cryptocurrency, and his work has appeared in The Associated Press, The Washington Post, MSN, Yahoo Finance, MarketWatch, Newsday and TheStreet. See full bio.ON THIS PAGE
What are fixed income investments? What are fixed income investments? Pros and cons of fixed-income investments Pros and cons of fixed-income investments Benefits of fixed-income investments Benefits of fixed-income investments Risks of fixed-income investments Risks of fixed-income investments Types of fixed-income investments Types of fixed-income investments Fixed-income taxes Fixed-income taxes How to invest in fixed-income securities How to invest in fixed-income securitiesON THIS PAGE
What are fixed income investments? What are fixed income investments? Pros and cons of fixed-income investments Pros and cons of fixed-income investments Benefits of fixed-income investments Benefits of fixed-income investments Risks of fixed-income investments Risks of fixed-income investments Types of fixed-income investments Types of fixed-income investments Fixed-income taxes Fixed-income taxes How to invest in fixed-income securities How to invest in fixed-income securities More like this Learn About Financial Advisors Investment Basics Investing NerdWallet’s Financial Advisor Content How Much Does a Financial Advisor Cost? Most financial advisors charge based on how much money they manage for you. Fees are typically 1% a year but can be lower. 2 By Andrea Coombes, Taryn Phaneuf Do You Need a Financial Advisor? 7 Ways to Tell You may need a financial advisor if you're facing big life changes, don't have financial goals, have complex compensation, high tax bills or for other reasons. Taryn Phaneuf How to Find Cheap or Free Financial Advice Quality financial advice is more accessible than ever — and much of it is free or inexpensive. Here's how to get it. Anna-Louise Jackson Retirement Calculator Are you on track to save enough for retirement? Use our calculator to check your progress, see how much retirement income you'll have and estimate how much more you should save. 2 By June Sham, Alana Benson