The Fixed Income Market is a segment of the financial market where participants can buy and sell debt securities. It is also known as the debt market or bond market. Its primary role is to enable entities like governments and corporations to borrow money from investors for a fixed period at a specified rate of interest.
What is a Bond?
A bond is the most common type of fixed-income security. It’s essentially a loan agreement between an investor (the lender) and an issuer (the borrower). The issuer promises to pay the investor periodic interest payments (called coupons) and to repay the principal amount (the face value) on a specific future date (the maturity date).
Simple Analogy: Buying a bond is like lending money to a large organisation. The organisation issues an IOU certificate (the bond) that promises to pay you regular interest and return your original investment after a set time.
Key Components of a Bond:
- Face Value (or Par Value): The amount of money the issuer promises to repay at maturity. This is the principal amount of the loan.
- Coupon Rate: The fixed rate of interest that the issuer pays to the bondholder.
- Maturity Date: The date on which the issuer has to repay the principal amount to the bondholder.
Types of Bonds (Based on Issuer)
1. Government Bonds (G-Secs)
- Issued by: The central or state governments to finance their fiscal deficit and public projects.
- Key Feature: They are considered the safest type of bond because they are backed by the government and have virtually no risk of default. In India, they are called Government Securities (G-Secs).
- Examples: Treasury Bills (T-Bills) for short-term and Government Bonds for long-term borrowing.
2. Corporate Bonds
- Issued by: Public and private companies to raise capital for expansion, operations, or specific projects.
- Key Feature: They carry a higher risk of default than government bonds, so they typically offer a higher interest rate to compensate investors for this additional risk. Their risk level is often assessed by credit rating agencies.
3. Municipal Bonds
- Issued by: Municipal corporations and local government bodies to fund public projects like building roads, schools, or water systems.
Other Debt Instruments
Besides bonds, the fixed income market also includes other instruments like:
- Debentures: These are a type of long-term debt instrument that, unlike bonds, are often unsecured (not backed by any specific asset).
- Commercial Papers (CPs): Short-term debt instruments issued by corporations, which we discussed under the money market.
In summary, the fixed income market is a critical part of the economy, providing a stable and predictable way for governments and companies to raise debt capital from a wide range of investors.