Investments that offer a periodic cash payment that may be fixed in dollar terms or may vary according to a predetermined formula are considered Fixed-income securities. For example, the formula might dictate that cash payments rise if a general rise in market interest rates occurs.
Some offer contractually guaranteed returns, meaning that the issuer of the security (i.e., the borrower) must fulfill a promise to make payments to investors or risk being sued. Other types of fixed-income securities come with the expectation of regular payments even if a contractual obligation is absent.
Because of their relatively predictable cash payments, fixed-income securities tend to be popular during periods of economic uncertainty when investors are reluctant to invest in riskier securities such as common stocks. Fixed-income securities are also attractive during periods of high interest rates when investors seek to “lock in” high returns. The most common fixed-income securities are bonds, convertible securities, and preferred stock.