Investing in Fixed Income
Fixed income is a debt instrument with a commitment to future payment. The most common type is bonds, which are grouped into:
- Government: issued by the state or a public entity (regional government, local authority, etc.).
- T-bills: The term is usually short, less than 18 months. These do not pay a coupon; they are issued at a discount and redeemed at par. For example, you might buy at a discount at €90, but they buy it back at par at €100.
- Bonds: Long term; these do pay a coupon.
- Corporate: issued by companies. They can be secured (collateral against assets; in default the bondholder can claim liquidation) or unsecured (no real collateral; generally higher coupon and higher risk).
A bond usually pays a coupon (periodic interest) and has a maturity.
The issuer must buy it back by that date at par value (face value, nominal). This information appears in the broker fact sheet and in the prospectus.
Credit quality
The S&P, Moody’s and Fitch agencies assign a rating: the higher the quality, the lower the coupon (lower default risk).
| Type | Rating range |
|---|---|
| Investment Grade (IG) | AAA to BBB- (Baa3 in Moody’s) |
| High-Yield / Junk | BB+ to D (C in Moody’s) |
There are also unrated bonds (mid or small companies), where more valuation inefficiencies can appear because many funds do not consider them.
Credit rating scales (Moody’s, S&P, Fitch)
Payment hierarchy (corporate bonds)
In the event of dissolution (bankruptcy or agreed liquidation), the order of payment is usually:
- Senior – highest priority
- Subordinated – next
- Preferred stock – after that
- Common stock – last
That is why shareholders often receive nothing in a bankruptcy: bondholders are paid first (and often they do not recover 100% either).
Value investing in bonds: Yield to Maturity (YTM)
Value investing consists of buying assets below their intrinsic value (bonds, shares, property, etc.).
If we buy a bond below par and the issuer is solvent, we are buying below that value.
What matters is the Yield to Maturity (YTM): the annualised return if the bond is held to maturity. There are free calculators using current price, par value, years to maturity and coupon.
Conceptual formula:
Where:
- = years to maturity
- Face value = par
- Current price = current price
Bonds and interest rates
Central banks raise or lower reference rates; that trend is reflected in short-term bond yields.
Price–interest rate relationship
- Rates fall → bond price RISES.
- Rates rise → bond price FALLS.
The longer the bond’s duration, the more these moves are amplified. US bonds with more than 20 years to maturity fell by almost 50% between 2020 and 2023. Buying very long maturities is equivalent to taking a strong view on the path of interest rates.