- Debt securities, also known as fixed-income securities, are bonds that promise to provide either a fixed stream of income or an income that is determined according to a specified formula. For example, a corporate bond might promise to pay the bondholder a fixed amount of interest each year or make interest payments that depend on current market interest rates.
- Investments in financial markets are generally considered to be short-term if the duration is one year or less. Conversely, long-term financial investments last considerably longer, with the average duration being greater than 10 years.
- Liquidity, also referred to as marketability, refers to how quickly and easily an investment can be converted to cash. Of critical importance is the ability to obtain cash without decreasing the initial value of the investment.
- Risk refers to the uncertainty involved in investing. Investors do not have the ability to accurately predict future events. In general, the riskier an investment is, the greater the rate of return will be and vice versa. This relationship is commonly referred to as the risk-return trade-off.
- Some familiar examples of money market securities are U.S. Treasury bills or bank certificates of deposit (CDs). Treasury bills, or T-bills, are issued at less than face value and the full amount is returned to the investor upon maturity. A CD is basically a fixed-term time-restricted bank deposit. Time deposits are not able to be withdrawn on demand. The bank pays the interest and principal only at the end of the fixed term.