Investing

Fixed Income: The Basics (VIDEO)

  • 27.FEB.2018
  • Richard Murphy,  XTB

XTB CEO Richard Murphy introduces fixed income

Fixed income is simply a loan

Fixed Income is really about people lending other people money – or loaning companies or governments money.

You lend money to a company and that’s a loan – we all know what a loan is, we all have loans for a mortgage or other types of loans. A bond is a security version of that loan. I lend money to a company – I have the choice of  just lending money to them or I can invest in their bond – when I do this, they give me a security called a bond in exchange for my loan. So, a bond is just really just a security version of the loan.

Bond issuers and other key characteristics

When you think about bonds, there are government bonds and company bonds. With bonds, there’s always a maturity data. This means that for example I lend the company $100 and they pay me back in 3 years, and along the way they will pay me interest. If that interest received is the same interest every six months, that’s a fixed-rate bond. If the interest goes up and down as interest rates go up and down, then that’s a floating-rate bond. Some bonds are fixed-rate, some bonds are floating-rate.

Another thing about bonds is they often have a credit rating. A credit rating indicates how likely is it that I’m going to be paid back.  The Australian Government is AAA credit rating, most people have heard the term “triple A rated”. Australian banks tend to be around AA (double-A rated) or A rated. At the other end of the spectrum ASX-listed company number 850 may be unrated. That’s clearly a much higher risk of being paid back than an Australian Bank or the Australian Government.

Watch the first in our series of videos introducing investors to the world of corporate bonds.

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