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Fixed income

A fixed income investment is one that is obligated to pay a predetermined amount of interest per year. The most common examples are bonds and certificates of deposit (CDs).

Expanded Definition

Give yourself a pat on the back if you guessed that a fixed-income investment provides the holder with a fixed amount of income -- based on the size of the original investment -- on a regular basis. (Don't worry if you didn't guess correctly. The Fool is here to educate, amuse, and enrich you.) Treasury bonds, for instance, pay a set rate of interest every six months until the bond matures. At maturity, the holder gets back the face value of the bond.

Types of fixed-income securities include fixed annuities, Treasury bonds, Treasury notes, and Treasury bills, municipal bonds, corporate bonds, and certificates of deposit. Preferred stock is sometimes considered fixed income.

The term "loanership" is sometimes used to describe fixed-income investments, which involve giving (loaning) your money in return for a set return.

Of course, investors need to take into account that although a fixed stream of income can be a balm in volatile times, the value of the payments will fluctuate depending on what inflation does. And fixed income doesn't mean guaranteed income. There is default risk. Corporate debtholders, for instance, might lose out if their company hits troubled waters.

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FAQ on TMF's "Bond and Fixed Income Investments" discussion board: http://boards.fool.com/Message.asp?mid=25173616

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