A fixed income investment is the purchase of a bond or certificate of deposit (CD) that has a predetermined, set interest rate. Investors are paid interest annually until the bond or CD matures, at which point they recoup their initial investment. Fixed income investing can be a lower-risk strategy compared to investing in stocks. The objective is to preserve capital and income.

Governments and corporations often fund operations and projects by selling debt securities. For example, a company may issue a $5,000, 10-year bond with a 3% interest rate. If you purchased that bond and held it to maturity you’d be paid $150 annually for 10 years (3% of your investment amount). At maturity, you would also recoup your $5,000 investment.

Certain fixed income investments provide a guaranteed return—U.S. Treasuries, for example, are backed by the full faith and credit of the Constitution—and many are generally safer than stocks, although no investment is risk-free. There are a number of risks to be considered with fixed income investing, such as the potential that an entity might go bankrupt and not be able to pay back bondholders. Credit ratings can provide an indication as to an entity’s creditworthiness. The higher the credit rating of a company or government, the more likely it will be able to pay back its bondholders. An additional risk is inflation; if inflation rates outpace a bond or CD interest rate, bondholders will have lost purchasing power on the money they invested.

CDs are FDIC insured to specific limits and offer a fixed rate of return if held to maturity, whereas investing in securities is subject to market risk including loss of principal.