• Fixed income investments attract conservative savers.dollar bill image by jimcox40 from Fotolia.com
  
  Investors purchase fixed income securities to preserve purchasing power and outpace inflation. Besides preferred shares, fixed income assets are credit securities that make regular payments to investors. Overall, fixed income investments reduce financial risks within your portfolio, because of their senior asset claims above common equity. In the event of bankruptcy, bondholders and preferred shareholders are paid first from any proceeds that arise from forced asset liquidations. Learn to identify basic fixed income terms before purchasing these investments.
  
  

Principal

• Investment principal is the amount of your initial investment. For example, you may invest $5,000 principal into one banking certificate of deposit (CD). As of 2010, the FDIC guarantees $250,000 worth of deposits per bank per customer. These guarantees extend over CD principal. Additionally, U.S. Treasuries are also described as risk-free securities. U.S. Treasury principal is effectively guaranteed, because of the federal government’s power to tax and create money to repay its debt.
  
  Principal-guaranteed fixed income securities pay minimal returns because investors are willing to accept small payments for less volatility. Corporate bonds and preferred shares, however, are fixed income securities where values fluctuate, and investment principal is not guaranteed. Corporate bonds and preferred share prices track underlying business performance and may collapse toward zero in the event of corporate bankruptcy.
  
  Value investors, however, purchase distressed fixed income investments, with the intent of making large profits on principal. Failing businesses may install new management and return to long-term profitability. Fixed income securities that formerly traded for pennies on the dollar would then rebound significantly toward fair value.
  
  

Interest Rates

• Interest rates calculate payments made on credit security principal. For preferred shares, dividend yield is comparable to interest rate statistics. For example, a 5 percent annual bond interest rate, or preferred dividend yield, translates into $500 worth of annual income on a $10,000 principal amount.
  
  Investors demand higher interest rates and returns for assuming increased risks. U.S. Treasuries pay the lowest interest rates, because of their safety and status as risk-free investments. Conversely, junk bonds are recognized for their high interest rates and profit potential. Junk bonds are associated with corporations that struggle with elevated default and bankruptcy risks.
  
  

Duration

• Duration, or maturity, describes that length of time that is specified for loan repayment. Fixed income investors receive interest payments until the principal balance is repaid at maturity.
  
  Interest rates generally increase with lengthier maturity dates and financial commitments. In time, institutions have greater opportunities to fail, while long-term inflation could reduce the purchasing power of your future fixed income. Extended durations also feature elevated interest rate risks, where prevailing interest rates on competing assets shift higher. Older fixed income investments would then lose value because newly issues securities would pay higher rates.
  
  The yield curve graphs duration against interest rates for major fixed income asset classes. The Wall Street Journal publishes the U.S. Treasury yield curve within its newspaper, daily.