Fixed income securities represent the debt of domestic and international governments, corporations, banks, institutions, and municipalities. In essence, when you buy a fixed income security, you are lending money to the issuer for a specified period of time. In return, you expect the issuer to make regular interest payments (annually, semi-annually, quarterly, or monthly) and to pay back the face amount on the maturity date (the end of the specified period for the loan).

• Most fixed income securities offer a relatively safe and predictable income flow.
• The coupon (the amount of interest the issuer has agreed to pay) is set at issuance and remains the same until maturity; thus, the term "fixed income."
• The different fixed income vehicles in the market allow you to choose from a range of credit ratings and maturities (generally one day to 30 years, with some as long as 100 years). This diversity helps improve your management of risk.

Security Ratings

To help you evaluate the relative creditworthiness of these securities, ratings systems have been established. The two most recognized independent rating agencies are Moody's Investors Service and Standard & Poor's. The ratings can help you make informed decisions based on their professional evaluation of the credit quality of a security and the issuer's ability to make payments of interest and principal. Once a rating is assigned, it is periodically reviewed and may be raised or lowered, based on the issuer's merits. The better the issuer's ability to repay interest and principal (as indicated by its rating), the lower the amount of interest you will generally receive. Conversely, an issue with a lower credit rating will pay a higher rate of interest to compensate for the additional risk.

Risks

There is no such thing as a risk-free investment. Here are some of the more common types of risk to consider when choosing fixed income securities.

• Credit Risk
  The risk that the issuer will default on its payments of interest and principal on its debt. You can help manage this risk by choosing only investment-grade bonds (rated BBB or higher) or by diversifying among several issues of high yield bonds. Or you can purchase bonds that are insured, a guarantee that interest and principal will be paid in the event of a default by the issuer. The insurance does not guarantee the original price if sold before maturity, or current market value.
  
  
• Market or Interest Rate Risk
  The market value of bonds will fluctuate with changes in the level of interest rates. When interest rates drop, bond prices generally rise, because the market is willing to pay more for a higher coupon on outstanding bonds. When interest rates rise, bond prices generally fall because the market will pay less for a lower coupon on outstanding bonds. Therefore, your investment, if sold prior to maturity, may be worth more or less than its original cost.
  
  
• Reinvestment Risk
  The possibility that you will reinvest coupon income from a bond at interest rates that are considerably lower than expected.
  
  
• Call Risk
  The possibility that an issuer will retire a bond (pay back the principal) before its scheduled maturity date when interest rates decline, leaving you to reinvest your bond proceeds at lower interest rates.
  
  
• Inflation Risk
  The possibility that the value of your investment may not grow enough to keep up with inflation, reducing your purchasing power as a result.