Fixed-income securities are distinguished by their promise to pay a fixed or specified stream of income to their holders. The coupon bond is a typical fixed-income security.

Treasury notes and bonds have original maturities greater than 1 year. They are issued at or near par value, with their prices quoted net of accrued interest.

Callable bonds should offer higher promised yields to maturity to compensate investors for the fact that they will not realize full capital gains should the interest rate fall and the bonds be called away from them at the stipulated call price. Bonds often are issued with a period of call protection. In addition, discount bonds selling significantly below their call price offer implicit call protection.

Put bonds give the bondholder rather than the issuer the option to terminate or extend the life of the bond.

Convertible bonds may be exchanged, at the bondholder's discretion, for a specified number of shares of stock. Convertible bondholders "pay" for this option by accepting a lower coupon rate on the security.

Floating-rate bonds pay a coupon rate at a fixed premium over a reference short-term interest rate. Risk is limited because the rate is tied to current market conditions.

The yield to maturity is the single interest rate that equates the present value of a security's cash flows to its price. Bond prices and yields are inversely related. For premium bonds, the coupon rate is greater than the current yield, which is greater than the yield to maturity. The order of these inequalities is reversed for discount bonds.

The yield to maturity is often interpreted as an estimate of the average rate of return to an investor who purchases a bond and holds it until maturity. This interpretation is subject to error, however. Related measures are yield to call, realized compound yield, and expected (versus promised) yield to maturity.

Prices of zero-coupon bonds rise exponentially over time, providing a rate of appreciation equal to the interest rate. The IRS treats this built-in price appreciation as imputed taxable interest income to the investor.

When bonds are subject to potential default, the stated yield to maturity is the maximum possible yield to maturity that can be realized by the bondholder. In the event of default, however, that promised yield will not be realized. To compensate bond investors for default risk, bonds must offer default premiums, that is, promised yields in excess of those offered by default-free government securities. If the firm remains healthy, its bonds will provide higher returns than government bonds. Otherwise the returns may be lower.

Bond safety is often measured using financial ratio analysis. Bond indentures are another safeguard to protect the claims of bondholders. Common indentures specify sinking fund requirements, collateralization of the loan, dividend restrictions, and subordination of future debt.

Credit default swaps provide insurance against the default of a bond or loan. The swap buyer pays an annual premium to the swap seller, but collects a payment equal to lost value if the loan later goes into default.

Collateralized debt obligations are used to reallocate the credit risk of a pool of loans. The pool is sliced into tranches, with each tranche assigned a different level of seniority in terms of its claims on the cash flows from the underlying loans. High seniority tranches are usually quite safe, with credit risk concentrated on the lower level tranches. Each tranche can be sold as a stand-alone security.