From zero
07 From zero · Traditional markets · United States

Fixed income and equities

The name “fixed income” promises one thing and delivers another. It does fix something — just not what almost everyone assumes, and the difference shows up on the day you need to sell.

Fêr UlianovOpening · 14 s · in Portuguese

The sentence
Ten-year Treasuries fell in price on rising rates, the curve stays inverted, and the yield rose — but anyone who holds to maturity gets what was agreed.

Blurred on purpose. It says a bond fell and nobody lost. Both are true.

The two families

Either you become an owner, or you lend

There are two ways to put money into a company — or a country — and they are completely different. In lesson 01 you became an owner: you bought a piece, and you gain if things go well. The other is to lend: you hand over the money, and the other side commits to giving it back with interest.

Whoever lends buys a bond. The paper states three things: how much comes back, when, and how much interest it pays along the way. None of that depends on the company doing well — only on its being able to pay.

Bond (fixed income) Share (equity)
What you areA creditorAn owner
What you are promisedAn amount and a date, in writingNothing
If the company failsPaid before the ownersPaid from what is left, if any
How much you can gainAt most what was agreedNo ceiling
How much you can loseEverything, if the debtor defaultsEverything
The order in a bankruptcy is what most separates the two columns: a creditor is paid before an owner, always. In exchange, the creditor gives up the upside — if the company multiplies in size, they still receive exactly what was agreed.
Treasuries

U.S. Treasury securities are the most quoted fixed income in the world. They come in three maturities, with different names: up to a year they are bills; two to ten years, notes; twenty or thirty years, bonds. The last two pay interest every six months; the first pays no interest at all — it is sold for less than it is worth at maturity, and the gain is the difference.

The heart

What fixed income fixes — and what it does not

Picture a bond that returns $1,000 in ten years and pays $40 a year along the way. That is written down and never changes. That is what fixed income fixes: what you receive if you hold the paper to the end.

But tomorrow new bonds may be issued paying more. Then nobody wants yours, which pays less, at the same price — and its price falls until buying yours returns the same as buying a new one. That is why price and yield move in opposite directions. Drag it and watch both at once.

What the market pays today
Your bond's price, if you sell today
What you receive if you hold to the end

Watch the third number as you drag: it never changes. The second swings the whole time. The word “fixed” is about the third one, and the headline is almost always about the second. Example bond, with annual interest so the arithmetic stays visible.
The curve

Lending for longer usually pays more

Lending for ten years is riskier than lending for two: more time for something to happen. So the normal case is that the longer maturity pays more. Drawing the rate for each maturity side by side gives the yield curve.

When the curve becomes inverted — lending for two years paying more than for ten — something has flipped in the market's mind: it expects lower rates further out, and lower rates usually come when the economy cools.

It is worth knowing why the word appears so often, and worth knowing its limit: an inverted curve <strong>has appeared before several American recessions</strong>. That is a repeated coincidence, not a cause-and-effect relation — the curve causes no recession, and it has inverted without one following.

Rate paid Length of the loan

Three possible shapes for the same thing: the price of lending money for different lengths of time. Illustrative curves, not quotes.
The proof

Now read the sentence

It's the same one from the top, unblurred. Tap each highlighted part.

fell in price on , the , and the rose — but anyone who gets what was agreed.
Start here

Five pieces

Each highlighted part hides an idea. Tap one of them.

Five taps and the sentence is done.

You can already answer these

If this landed, the lesson did what it promised

  • A share is ownership; a bond is a loan. A creditor is paid before an owner.
  • Fixed income fixes what you receive at the end, not the paper's price tomorrow.
  • Price and yield move in opposite directions — the same fact stated two ways.
  • An inverted curve is the short end paying more than the long end.

Fêr UlianovClosing · 25 s · in Portuguese

Educational material. The example bond, the curves and every figure are illustrative and round, with annual interest so the arithmetic stays visible — none is a quote. What is structural, such as the maturities and names of U.S. Treasury securities, comes from official sources. It is not a recommendation to buy or sell.