A:

Fixed-income securities attract investors because they provide guaranteed returns in the form of fixed, regular cash payments. However, investing in fixed-income securities also carries some disadvantages. Their generally low risk compared to investments that don't come with guarantees often translates to lower returns. Additionally, many fixed-income securities, such as Treasury bonds (T-bonds), impose penalties on investors who withdraw their premiums before a set period of time has passed.

A fixed-income security is an investment that provides fixed payments at regular intervals for the duration that the investor holds the security. Common forms of fixed-income securities include T-bonds and corporate bonds. Consider an investor who purchases a 20-year T-bond at a par value of $1,000 and an annual yield of 5%. This bond pays the investor $50 per year until the 20 years are over, when his premium of $1,000 is returned.

Preferred stock also falls under the category of fixed-income security. It pays investors a dividend on a fixed schedule. The amount of a dividend is either a fixed dollar amount or a fixed percentage of share value. The dividend payments that a preferred stockholder receives are analogous to the annual payments received by a bondholder. When the investor sells his preferred stock, his premium is returned, plus or minus any gains or losses accrued over time.

Regardless of what the economy or the markets are doing, fixed-income securities pay a return. The bond investor described above receives his $50 per year even during a sharp recession or a depression. The guaranteed dividends received by a preferred stock holder enhance gains and mitigate losses. For example, if the stock falls by 5% but pays a 3% dividend, the investor's loss, effectively, is only 2%.

These built-in advantages come with corresponding disadvantages. In nearly all matters of finance, risk and reward correlate positively. For this reason, high-risk sectors such as tech startups offer investors the potential for the biggest gains. Government securities, while safe, rarely make investors rich in short order. The guaranteed cash payments that fixed-income securities provide lower their risk. With lower risk comes lower rewards. Fixed-income securities typically do not gain as aggressively as securities that do not provide guaranteed fixed payments.

Furthermore, many fixed-income securities tie up an investor's principal balance for a long period of time. If he wants to retrieve it, he's assessed a penalty that often wipes out any money he has made in the interim. For example, T-bonds have maturities of 10 years or greater. An investor isn't returned his premium for a decade or longer. In contrast, traditional stock investing, when done shrewdly, can produce big gains in far less than a decade, and the investor can actually access his money.

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