Fixed Income Analysis, Second Edition

CHAPTER 1

FEATURES OF DEBT SECURITIES

I. INTRODUCTION

In investment management, the most important decision made is the allocation of funds among asset classes. The two major asset classes are equities and fixed income securities. Other asset classes such as real estate, private equity, hedge funds, and commodities are referred to as “alternative asset classes.” Our focus in this book is on one of the two major asset classes: fixed income securities.

While many people are intrigued by the exciting stories sometimes found with equities—who has not heard of someone who invested in the common stock of a small company and earned enough to retire at a young age?—we will find in our study of fixed income securities that the multitude of possible structures opens a fascinating field of study. While frequently overshadowed by the media prominence of the equity market, fixed income securities play a critical role in the portfolios of individual and institutional investors.

In its simplest form, a fixed income security is a financial obligation of an entity that promises to pay a specified sum of money at specified future dates. The entity that promises to make the payment is called the issuer of the security. Some examples of issuers are central governments such as the U.S. government and the French government, government-related agencies of a central government such as Fannie Mae and Freddie Mac in the United States, a municipal government such as the state of New York in the United ...