There are two types of fixed income depending on the nature of the issuer:
- Government debt: The issuance of the securities is carried out by the State and other governments and public bodies.
- Corporate debt securities: Under this category are grouped the securities issued by private sector companies.
In relation to government debt, the following types can be found:
- Treasury bills: These are securities issued with a term normally equal to or less than 18 months and issued at a discount, that is, the amount of interest is discounted to the investor at the time of purchase and the nominal value is reimbursed.
- Treasury bonds and obligations: Issued for a term generally between two and thirty years, with an explicit yield, with a fixed interest in the form of a coupon paid annually.
- Securities of other Governments and Public Bodies: They comprise securities with characteristics similar to those issued by the Central Government, either on a short-term basis, such as notes, and on a long-term basis, by Public Governments other than the State and by the various Public Bodies.
On the other hand, under the name of corporate debt securities, there is a wide range of instruments, among which the following can be highlighted:
- Commercial paper: They are zero coupon securities issued at a discount, so their return is derived from the difference between the purchase price and the nominal value of the commercial paper that is received on the maturity date. It is a short-term instrument, for which the most frequent terms are one, three, six, twelve and eighteen months, and they do not usually have any type of specific guarantee, except that of the company itself.
- Bonds and obligations: They are medium- and long-term securities issued to attract financing, with different conditions in terms of maturity, coupon periodicity and forms of issuance, fundamentally. Among the main types the following can be mentioned:
- Debentures: In which the acquirer receives a periodic income during the life of the security, together with the return of the principal amount at the agreed time.
- Subordinated obligations: These are debt securities, normally with a fixed coupon and repayment of the nominal amount or with a premium, in which the holder of these securities will be placed behind every unsecured creditor for claims priority purposes.
- Indexed or referenced bonds and obligations: In this case, the amount of the coupons is linked to the evolution of a pre-established reference index, which means that the return of these securities is variable.
- Convertible and exchangeable bonds: They give their owner the right to exchange them for shares on a certain date. The difference between the exchange and the conversion is that, in the first case, the transformation into shares is carried out through the delivery of shares that are part of the issuer’s portfolio, that is, its treasury stock, while, in the second, new shares are delivered, which represents a capital increase.
Until the moment of the exchange or conversion, the holder receives the interest by collecting the periodic coupons. At the time of the exchange, the investor has two options:
- To exercise the exchange / conversion option, which will be of interest to them if the price of the shares offered in exchange / conversion is lower than their market price.
- To hold the obligations until the date of the next exchange / conversion option or until their expiration.
When an investor buys a convertible bond, they are actually buying two related assets: A bond that offers a certain fixed return, generally lower than that of a normal bond issued by the same company, and a call option on shares of the company that can be exercised at the stipulated time.
- Mortgage loan-related securities:
- Covered bonds: These are debt securities issued exclusively by credit institutions, backed globally by their mortgage loan portfolio. Its holders are senior creditors of the issuer, since they are more protected by such mortgage guarantees in cases of insolvency, in addition to collecting debt securities amounts with priority in respect of depositors and holders of unsecured debt.
- Mortgage bonds: In which the holder’s guarantee is provided by a specific credit or group of credits, identified in the issuance document.
- Mortgage-backed securities: They are bonds issued by special purpose vehicles. These vehicles are generally formed by a specialized management company. Credit institutions assign a portfolio of mortgage loans to these vehicles and they integrate them into their assets, which constitutes their guarantee. The vehicles issue mortgage-backed securities (vehicle’s liabilities) to finance such purchase, backed by the portfolio of loans acquired. The operation of mortgage-backed securities is very similar to that of other bonds, since they provide periodic interest. As a characteristic feature, they have the risk of early redemption, because of the possible prepayment of the vehicle’s assets.
- Mortgage participations. Occasionally, due to the high amount of a certain mortgage loan, financial institutions choose to segregate such claim into different mortgage participations. In this way, each investor who acquires a mortgage participation will become the holder of the loan subject to the mortgage only in the percentage acquired and, therefore, the returns made with this investment will be paid based on such participation.
- Other securities: Among them are high yield bonds or high yield, which are debt instruments that offer high returns to investors, as they are issued by companies and States with a low credit rating (below investment grade). Therefore, these issuers compensate investors for their higher risk of insolvency with a high return, and are therefore suitable for more risky investors.
