In Insolvency and Bankruptcy Board of India’s valuer exam, Fixed Income Securities comes under Valuation Applications chapter that carry 35% weightage. Along with this, various set of asset pricing model are covered in this chapter, which are very important to understand for the purpose of clearing IBBI Registered valuer examination. You can expect 4 to 5 marks from Fixed Income Securities in the IBBI registered valuer exam. In today’s blog we will discuss regarding Fixed Income Securities meaning, types, popular products and risks of investing in them.

Fixed Income Securities – Meaning

 Fixed Income Securities are a type of debt instrument that provides returns in the form of regular, or fixed, interest payments and repayments of the principal when the security reaches maturity. The instruments are issued by governments, corporations, and other entities to finance their operations. They differ from equity, as they do not entail an ownership interest in a company, but they confer a seniority of claim, as compared to equity interests, in cases of bankruptcy or default.

 How Does Fixed Income Work?

 The term fixed income refers to the interest payments that an investor receives, which are based on the creditworthiness of the borrower and current interest rates. Generally speaking, fixed income securities such as bonds pay a higher interest, known as the coupon, the longer their maturities are.

The borrower is willing to pay more interest in return for being able to borrow the money for a longer period of time. At the end of the security’s term or maturity, the borrower returns the borrowed money, known as the principal or “par value.”

Examples of Fixed Income Securities

 Many examples of fixed income securities exist, such as bonds (both corporate and government), Treasury Bills, money market instruments, and asset-backed securities, and they operate as follows:

1. Bonds

The topic of bonds is, by itself, a whole area of financial or investing study. In general terms, they can be defined as loans made by investors to an issuer, with the promise of repayment of the principal amount at the established maturity date, as well as regular coupon payments (generally occurring every six months), which represent the interest paid on the loan. The purpose of such loans ranges widely. Bonds are typically issued by governments or corporations that are looking for ways to finance projects or operations.

2. Treasury Bills

Considered the safest short-term debt instrument, Treasury bills are issued by the US federal government. With maturities ranging from one to 12 months, these securities most commonly involve 28, 91, and 182-day (one month, three months, and six months) maturities. These instruments offer no regular coupon, or interest, payments. Instead, they are sold at a discount to their face value, with the difference between their market price and face value representing the interest rate they offer investors. 

3. Money Market Instruments

Money market instruments include securities such as commercial paper, banker’s acceptances, certificates of deposit (CD), and repurchase agreements (“repo”). Treasury bills are technically included in this category, but due to the fact that they are traded in such high volume, they have their own category here.

4. Asset-Backed Securities (ABS)

Asset-backed Securities (ABS) are fixed income securities backed by financial assets that have been “securitized,” such as credit card receivables, auto loans, or home-equity loans. ABS represents a collection of such assets that have been packaged together in the form of a single fixed-income security. For investors, asset-backed securities are usually an alternative to investing in corporate debt.

Risks of Investing in Fixed Income Securities

 Principal risks associated with fixed-income securities concern the borrower’s vulnerability to defaulting on its debt. Such risks are incorporated in the interest or coupon that the security offers, with securities with a higher risk of default offering higher interest rates to investors.

Additional risks include exchange rate risk for securities denominated in a currency other than the US dollar (such as foreign government bonds) and interest rate risk – the risk that changes in interest rates may reduce the market value of a fixed-income security that an investor holds. For example, if an investor holds a 10-year bond that pays 3% interest, but then later on interest rates rise and new 10-year bonds being issued offer 4% interest, then the bond the investor holds that pays only 3% interest becomes less valuable.

Benefits of Investing in Fixed Income Securities

1. Stable Returns – One of the primary benefits of investing in fixed income securities is the stability of returns that they offer. Since these instruments have a fixed interest rate, the returns delivered by them are more or less steady. This makes them a comparable alternative to bank savings accounts which give a minimal interest rate on your deposits.

2. Safety of Investment – The invested capital in a fixed income security is at lower risk when compared to investment in equities. As some of these instruments, such as treasury bills or government bonds, are backed by the government, the chances of defaulting on the payment of interest and principal is almost zero. Also, if the instrument is highly rated by the credit rating agencies such as CRISIL, the possibility of an investor incurring a loss is minuscule. This makes fixed income financial instruments, one of the safest investment avenues available in the market.

3. Portfolio Diversification – Investment in fixed income securities offer a much needed diversification to a concentrated portfolio of equities. It is a well-known fact that equities deliver much higher returns than debt securities, however the volatility of returns delivered by the former is much higher than that of the latter. To make your overall portfolio returns stable, it is imperative that you make a significant investment in highly rated debt securities.

4. Priority during Liquidation – When the company files for bankruptcy and goes for liquidation, it is liable to pay back to its debtors and stock holders. However, it might not have enough assets to pay off both. In that case, lenders of the company, who hold corporate bonds of the firm get priority over those who hold equity. This is one more reason why debt securities are considered to be a safe investment avenue.

From this piece of information, you must have realised by now that how important this concept of Fixed Income Securities is from the point of view of IBBI registered valuer Examination. This concept of Fixed Income Securities is so relevant that at times in IBBI registered valuer exam questions come only from this topic alone for 4-5 marks. Therefore, Student’s unfamiliarity with Fixed Income Securities types, popular products and other concepts related to this (as mentioned in IBBI Securities and Financial Asset class syllabus) assuming that these areas are complex is not justified. Therefore, I would like to encourage you all to study this concept precisely and adequately. You can easily score those 4 or 5 marks in valuer examination that will make the difference between passing and failing.

What is eventually important for you is to study strategically and work on your weak areas with complete dedication so that you could pass the IBBI registered valuer examination. And for passing that examination with a minimum of 60% marks, these small and easy areas make a lot of difference. RVMOCKTEST.ONLINE is there to help you in this path of becoming a Registered Valuer by making you exam ready. You can check your preparedness and identify your mistakes, by appearing in online mock tests of RVMOCKTEST.ONLINE that will boost your confidence and increase your chances of clearing in one single shot!!

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