Glossary: Fixed income investments

Financial securities that generate a fixed amount of income that does not vary over the life of the investment. They are generically referred to as bonds but are known as gilts in the UK. They are issued by the government, public companies and local authorities to raise money and sell off debt in the shape of a bond that promises to pay the holder a fixed rate of interest (the coupon) on a specified date for a specified period (although some bonds can be undated). Bond prices fluctuate on the market and the level of fixed interest the bond provides determines the price. The higher the price paid for a bond, the less interest it yields. For example, if a bond is issued at £100 (known as “par”) and pays a 10% coupon in an economic environment where base rate is 5%, the 10% coupon looks attractive, so sellers move in on a fixed supply and prices double to £200 (the bond is trading “over par”), so the bond is still paying 10% of its original £100 face value as a coupon but because it was bought for £200, it now yields 5%.

Relevant to: First-time investor

More about