Fixed Income Securities

Fixed income securities have historically provided a finite or an infinite stream of a constant periodic payment. They are essentially an obligation on part of the issuer to continue making the periodic payment in good faith. Typically, these were and are to this day issued by sovereign entities and, more recently, by corporations. Over time, these instruments have evolved and many of them no longer provide a fixed periodic payment per se but a floating payment that is tied to the prevailing level of interest rates. More exotic variants exist which make the periodic payment vary inversely with the general level of interest rates. In the case of fixed income securities issued by a sovereign entity denominated in local currency, these securities are considered “risk-free” in the sense that the sovereign entity can always either increase its local currency money supply or raise more money via additional taxes with which to cover its obligation. Nonsovereign issuers do not have this luxury and have to generate extra earnings or sell valuable assets in order to meet their obligations or default giving risk to credit risk. Occasionally, a sovereign issuer will denominate its bonds in a currency other than its own which also raises the issue of credit risk via its potential inability to raise sufficient foreign exchange with which to meet its foreign currency obligations.