Summary of fixed income securities - Essay Example

Debt securities have two essential components namely interest and principle. Fixed income securities which fall in the category of debt includes bonds, mortgage-backed securities, asset-backed securities and bank loans. Preferred stock obligations can be defined as the stock in which the investors gain ownership interests in an organization. Fixed dividends are paid to the stock holders out of the profits which are earned by the company. Preferred stock holders are different from the common stock holders as they do not have voting rights.

Preferred stock holders only can realize fixed dividends at periodical intervals. However, preference stock holders are given more priority when it comes to payment of dividends as compared to common stock holders. If a company becomes bankrupt, the obligations to preference stock holders are cleared off first. Considering such aspects associated with preferred stock, they are termed as form of equity having characteristic features which are similar to bonds (Barnhill Jr and Maxwell 347). Treasury bonds- They are also referred to as government bonds as the federal government of a nation issues such bonds.

The government is expected not to default the payments associated with such bonds. Hence, the risks associated with such bonds are perceived to be low. However, since the price of such bonds may fall if the rate of interest rises, they are not completely riskless. Corporate bonds- Such bonds are issued by business organizations. Unlike government bonds, corporate bonds are exposed to high default risks. If the issuing company does not earn adequate profits or is suffering huge losses, it may not be able to make timely payments to the bondholders.

The default risks which are associated with the bonds may range on the basis of the characteristics of the company and the terms of the bond. Such default risks are