Investing 101: Fixed Income Derivatives

When it comes to investing, you’re not limited to invest in stocks and currencies.  You may also try out fixed income assets, which are characterized as investments that return payments to you on a regular basis.

There many kinds of fixed income investments.  The four main types are short term fixed income assets, long term fixed income assets, fixed income derivatives, and third party fixed income payment streams.

In this article, we’ll be discussing fixed income derivatives. Let’s dig into these kinds of fixed income assets, and see how you can earn money from them.

Fixed Income Derivatives

The financial instruments that fall under this category derive their value from the underlying bonds, just like any other derivatives that derive their value from their underlying assets.  They are also used as a way to hedge against potential losses. Most of those who engage in fixed income derivatives are sophisticated investors, financial firms, and companies.

Here are some types of fixed income derivatives.

Asset-backed Commercial Paper

These are one-year corporate bond packages which are based on the underlying commercial assets.  You can find real estate, corporate auto fleets, and other business properties under this category.

Collateralized Debt Obligation

These rely on auto loans and credit card debt for them to derive their value.  There are also cases in which these use bundles of corporate bonds in order for them to determine their value.

Futures Contracts

Futures contracts serve as an agreement to either buy or sell an asset on publicly-traded exchanges.  The asset can be commodities, bonds, currencies, or stocks. The contract also has predetermined date during which the seller should deliver the asset.

Interest Rate Swaps

These contracts give bondholders the chance to swap their future interest rate payments.  The contract is made between some who holds a fixed interest bond and someone who is holding flexible interest bond.  These contracts are trade over the counter.

There are also some types of these that are referred to as Swaptions.  These are the options on an underlying interest rate swap. Aside from this, they are also known as a derivative based on another kind of derivative.  Most of the time, investors are encouraged to use them as only a way to speculate about the possible interest rate movements.

Mortgage-backed Securities

These securities rely on the bundles of home loans when it comes to deriving their value.  And when it comes to the rate of returns, it shares some similarities and bases as bonds. Meanwhile, the rates of return they offer are based on the value of their underlying asset.


With options, you as a buyer have the right to Trading Benefits a bond at a specific price on an agreed-upon future date.  The right to buy a bond is referred to as a call option. On the other hand, the right to sell a bond is known as the put option.  Options are also traded on a regulated exchange, just like the way futures contracts work.