Fixed Income Securities: Types, Risks, and How They Work

Key takeaways

• Fixed-income securities are debt investments with defined repayment terms, and their returns depend on factors such as interest rates, credit quality, maturity, and the price paid.
• Government bonds, corporate bonds, and short-term money market instruments serve different financing needs and carry different levels of credit, liquidity, and interest-rate risk.
• Fixed income plays an important role in both investing and business finance because borrowing costs affect portfolio decisions, company funding, and the viability of new investments.
• At HIM Business School, the Finance major within the Bachelor of Business Administration develops this understanding through subjects including capital markets, portfolio management, international finance, and corporate investment decisions.

Governments and companies regularly need to borrow money, whether to fund public spending, invest in new operations, or manage existing obligations. Fixed income securities are one of the main ways they raise that capital, which is why movements in interest rates can affect borrowing costs well beyond financial markets.

For business and finance professionals, understanding fixed income helps make sense of those effects. The cost and structure of debt can influence which investments a company pursues, how it finances growth, and how investors assess the return they receive for lending their money.

What are fixed-income securities?

A fixed-income security is a financial instrument that represents debt owed by an issuer, such as a government or a company. Investors can buy these securities when they are first issued or later on the secondary market. In return, the issuer is required to make payments according to the terms of the security, which may include interest payments and repayment of the principal at maturity.

The term fixed income refers to the contractual terms attached to the debt rather than guaranteeing that every payment will always be fixed. Many bonds pay a fixed coupon, while other fixed income securities use rates that change over time or structure the return differently. This also separates debt from shares. A shareholder owns part of a company and participates in its financial performance, while a bondholder is a lender with defined repayment terms.

The scale of the market shows how widely this form of financing is used. According to SIFMA's 2026 Capital Markets Fact Book, global fixed income debt outstanding reached $160.7 trillion in 2025, compared with $157.8 trillion in global equity market capitalization.

How do fixed income securities work?

For a conventional bond, the process begins when a government, company, or other issuer raises money by selling debt to investors. The bond sets out how much has been borrowed, what interest will be paid, and when the debt is due to be repaid. Investors can hold the bond until maturity or, in many cases, buy and sell it on the secondary market before that date.

The following four terms are crucial elements of how a bond works:

• Face value (or par value): The amount the issuer is due to repay when the bond matures.
• Coupon: The interest paid on the bond, usually expressed as a percentage of its face value.
• Maturity: The date when the principal is due to be repaid, and the bond comes to the end of its term.
• Yield: A measure of the return an investor receives based on the bond's payments and the price paid for it.

Take a CHF 1,000 bond with a 5% annual coupon and a five-year maturity. If you buy it at face value and hold it to maturity, the bond pays CHF 50 in interest each year, for CHF 250 over five years, before the CHF 1,000 principal is repaid. If the same bond is available on the secondary market for CHF 950, the coupon remains CHF 50, but the yield is higher because the investor is paying less for the same stream of payments.

This distinction becomes important when looking at yield to maturity, which estimates the annual return from buying a bond at its current market price and holding it until maturity, assuming the scheduled payments are made. It takes both the coupon payments and the difference between the purchase price and the amount repaid at maturity into account.

Duration looks at something different: how sensitive a bond's price is to changes in interest rates. A bond with greater duration will generally move more when rates change. As a rough example, a modified duration of five suggests that a one-percentage-point rise in yields would correspond to about a 5% fall in the bond's price, with the reverse applying when yields fall.

Individual bonds and bond funds also work differently. An individual bond generally has a defined maturity date when the principal is due to be repaid. Most conventional bond funds hold many securities with different maturity dates and continually adjust their portfolios, so the fund itself has no single date when an investor's original capital is automatically returned. Its value continues to move with the securities it holds.

That relationship with market prices is central to fixed income. Once a bond is trading on the secondary market, its price responds to changes in prevailing interest rates. When market rates rise, existing bonds offering lower rates become less attractive, and their prices generally fall. When market rates fall, existing bonds with higher coupons become more attractive, and their prices generally rise.

Types of fixed-income securities

Fixed-income securities can be grouped by the type of issuer, the length of the borrowing period, and the way interest and principal are paid.

Government bonds

National governments issue bonds to fund spending and refinance existing debt. Familiar examples include US Treasuries, German Bunds, UK Gilts, Japanese Government Bonds, and Swiss Confederation bonds.

The level of risk depends on the government issuing the debt, its currency, and the terms of the bond. Debt issued by governments with strong credit profiles is generally treated as having relatively low credit risk, and government bond yields are often used as reference rates when other debt is priced.

Corporate bonds

Companies can raise money from investors by issuing bonds instead of relying entirely on bank financing. Credit rating agencies assess the issuer's ability to meet its debt obligations, helping investors compare the relative credit risk of different bonds.

Under S&P Global's scale, BBB- and above is investment grade, while lower ratings fall into speculative-grade or high-yield categories. Moody's uses Baa3 as the lowest rung within its investment-grade range. Lower-rated bonds generally need to offer higher yields because investors are taking on greater credit risk.

Municipal and other public-sector bonds

Regional and local governments can also issue debt to finance public services and capital projects. In the US, these are commonly known as municipal bonds, while other countries use different structures at the regional or local level.

The source of repayment varies. Some bonds are backed by the general revenues of the issuing authority, while others depend on income from a particular project or service. That distinction affects the level and type of risk an investor takes on.

Money market instruments

Money market instruments are short-term debt used by governments, companies, banks, and other financial institutions. Treasury bills, commercial paper, negotiable certificates of deposit, and bankers' acceptances are common examples, generally with maturities of one year or less.

Their short maturities often make them less sensitive to interest-rate movements than longer-term bonds, although credit and liquidity risk still depend on the individual instrument and issuer.

Preferred shares are sometimes discussed alongside fixed-income investments because they can provide regular dividends and generally rank ahead of common shares. They are still equity rather than debt, however, and bondholders have a higher claim on company assets if the company is liquidated.

Benefits of fixed-income securities

The benefits depend on the type of security, its issuer, and how long it is held.

• More predictable cash flows: Many bonds pay interest according to a known schedule, which can make future income easier to estimate.
• Potential capital preservation: If a bond is held to maturity and the issuer meets its obligations, the investor receives the principal due under the bond's terms.
• Portfolio diversification: Bonds can behave differently from shares under some market conditions, giving investors another source of return and risk within a portfolio.
• Priority over shareholders: In a corporate bankruptcy, bondholders generally have a higher claim than shareholders, although their exact position depends on whether the debt is secured, senior, or subordinated.

Understanding these features sits alongside budgeting, borrowing, and interest within the financial literacy essentials business professionals use when assessing financial decisions. The same concepts appear in personal finance when comparing options for saving, investing, or generating income.

Risks of fixed-income securities

Fixed-income securities have defined payment terms, but the return an investor ultimately receives can still be affected by several risks:

• Interest-rate risk: Bond prices generally fall when market interest rates rise. Securities with greater duration are usually more sensitive to those changes.
• Credit and default risk: The issuer may become unable to make interest or principal payments when they are due.
• Inflation risk: The purchasing power of fixed payments can fall when prices rise.
• Liquidity risk: Some securities may be difficult to sell quickly without accepting a lower price.
• Call risk: Some bonds allow the issuer to repay the debt before its scheduled maturity, which can end future coupon payments earlier than the investor expected.

Yield helps investors compare some of these trade-offs, but a high yield should not be read as extra return without extra risk. A bond offering substantially more than government debt in the same currency may reflect weaker credit quality, lower liquidity, a subordinated position in the capital structure, or other terms that increase uncertainty for the investor.

For companies, these same questions form part of risk management, particularly when assessing borrowing costs, maturity structures, exposure to interest-rate changes, and the ability to meet future obligations.

This article is for educational purposes only and is not investment advice.

Fixed income vs. equities: key differences

Buying shares gives you an ownership interest in a company. Buying its bonds makes you one of its creditors. That distinction affects how returns are generated, how prices respond to changing conditions, and where investors stand if the company runs into financial trouble.

Many investment portfolios include both asset classes because they provide different sources of return and risk. The appropriate balance depends on the investor's objectives, time horizon, liquidity needs, and capacity for losses. For individuals, understanding those differences also helps place bonds within broader decisions about personal finance.

Why fixed income matters in business decisions

Fixed income is relevant well beyond investment portfolios. Companies issue bonds to raise capital for acquisitions, expansion, refinancing, and other business needs, and the interest rate they have to offer affects the cost of that financing.

A project that looks attractive when borrowing is inexpensive may become much harder to justify when interest rates rise. Higher financing costs can change expected returns, affect how much debt a company is willing to take on, and influence the timing of investment.

Understanding debt is therefore part of understanding a company's financial position. Analysts look at how much a business owes, when its obligations fall due, what interest it is paying, and how comfortably its cash flows can support those commitments. These questions form part of the work of a financial analyst, as well as professionals working in credit, corporate finance, and treasury.

At HIM Business School, students who choose Finance within the three-year Bachelor of Business Administration study the subject across Years 2 and 3. The curriculum includes Financial Institutions, Portfolio Management, Capital Markets & Analysis, International Finance, Corporate Investment Decisions, and Corporate Financing Decisions & Valuation.

The finance major also connects those subjects with company projects. HIM students have worked with Swissquote on challenges involving financial market analysis and product innovation, while the wider BBA includes three paid worldwide internships lasting four to six months each. Students who complete the BBA receive a degree awarded by Northwood University, whose business programs are accredited by ACBSP.

Read the market, then learn to work in it

Fixed-income securities turn borrowing into investments with defined terms for repayment. Understanding those terms helps explain why bond prices move, why one borrower pays more than another, and how changes in interest rates feed into financing decisions across a business.

One way to follow the market is to compare the yield on a country's benchmark government bond over time. A higher 10-year yield, for example, indicates that benchmark long-term borrowing rates have risen, although the financing cost faced by a particular company will also depend on its own credit quality and the terms of its debt.

For students interested in understanding those decisions in greater depth, the Finance major within HIM's Bachelor of Business Administration moves from the workings of financial institutions and capital markets into portfolio management, international finance, and corporate investment decisions. This progression develops the financial intelligence needed to navigate today's fast-paced and volatile markets, equipping students with the expertise to address critical financial questions: How should capital be raised, invested, and managed to create sustainable value?

Frequently asked questions

What is an example of a fixed-income security?

A government bond is an example of a fixed-income security. An investor buys debt issued by a government under specified terms, which may include regular interest payments and repayment of the principal at maturity. Corporate bonds, Treasury bills, and commercial paper are other examples.

Can you lose money on fixed-income securities?

Yes. A bond can fall in market value if interest rates rise, and an investor who sells before maturity may receive less than they paid. Credit risk also means the issuer may fail to make some or all of the promised payments. Even when principal is repaid in full, inflation can reduce the purchasing power of the money received.

How should beginners start learning about fixed income?

Start with the basic relationship between face value, coupon, maturity, price, and yield. From there, comparing a few government and corporate bonds can help show how maturity and credit quality affect the return investors require. Bond or bond-fund fact sheets can then introduce measures such as duration and average credit rating.

What is the difference between a bond and a fixed-income security?

A bond is one type of fixed-income security, while fixed income is the broader category. It also includes instruments such as Treasury bills, commercial paper, and some securitized debt. These instruments differ in structure, but all represent forms of debt rather than ownership in a company.