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This article is a basic introduction to the fixed income market.  Itcovers the primary facets and features of fixed income as they relateto trading from the individual, as opposed to institutional,perspective.
The term “fixed income” is used to describe a collection ofsecurities which have predefined pay-out terms.  An example would be acertificate of deposit (CD) in which one deposits a set amount of moneyand in return receives a given amount of money, which includes both theoriginal deposit plus interest income, at some future date, known asthe maturity.  Fixed income securities, unlike stocks, are based onloans.  While one might think of “buying” a CD, what he/she is in factdoing is loaning the bank money, for which they are paying interest. That interest, which is pre-determined in some fashion at the outset,is the “fixed income”.
Money Markets
Fixed income securities come in a wide array of maturities.  Thosewith initial maturities of one year or less trade in what is oftenreferred to as the money market.  This term comes from the fact thatthese short-term instruments tend to be very liquid and often tradedbetween banks.  Money market instruments included such things as:

• Bankers’ Acceptance: A draft or bill of exchange accepted by a bank to guarantee payment of a bill.
  
• Certificate of Deposit: A time deposit with aspecific maturity date shown on a certificate; large-denominationcertificates of deposits can be sold before maturity.
  
• Commercial Paper: An unsecured promissory note with a fixed maturity of one to 270 days; usually it is sold at a discount from face value.
  
• Eurocurrency Deposit: Currency deposits in adomestic bank branch or a foreign bank located outside the country ofthe currency in question.  For example, Eurodollars are deposits of USDollars outside the United States.
  
• Federal Agency Short-Term Securities (in the US):Short-term securities issued by federally sponsored agencies such asthe Farm Credit System, the Federal Home Loan Banks and the FederalNational Mortgage Association.
  
• Federal Funds (in the US): Interest-bearingdeposits held by banks and other depository institutions at the FederalReserve.  These are immediately available funds that institutionsborrow or lend, usually on an overnight basis. They are lent for thefederal funds rate.
  
• Municipal Notes: Short-term notes issued by municipalities (cities, towns, counties, etc.) in anticipation of tax receipts or other revenues.
  
• Repurchase Agreements: Short-term loans—normallyfor less than two weeks and frequently for one day—arranged by sellingsecurities to an investor with an agreement to repurchase them at afixed price on a fixed date.
  
• Treasury Bills: Short-term debt obligations of a national Treasury issued to mature in 3 to 12 months.
  

Most of the securities above are out of the realm of the individualtrader, but a handful can be traded, generally via the futuresmarkets.  Money market instruments normally trade at a discount whichmeans the buyer (lender) pays some amount below the final pay-offvalue.  For example, if a Treasury Bill is going to pay 100 atmaturity, the buyer might pay 95.  The difference would be the interestearned.
Notes and Bonds
The intermediate term fixed income market is made up of securitieswhich are generally (but not exclusively) referred to as notes.  Theyare instruments which have initial maturities of two to ten years. Bonds, on the other hand, are the longer-term instruments with initialmaturities of more than ten years at the time of issuance.
The standard structure of notes and bonds are the same.  They eachfeature a par or principle value which is paid at maturity, as well asintermediate interest payments, referred to as coupon payments, whichare paid out on a predefined periodic basis (monthly, semi-annually,etc.).  The coupons represent the nominal interest on the bond ornote.  For example, if a bond has a 100 par value, and a coupon of 10per year, that means a 10% interest rate.
Notes and bonds, however, will not always trade at par value. Depending on the overall interest rate market, they can be priced at adiscount (below par) or at a premium (above par).  The result is thatthe effective interest rate may not be the same as the nominal rate. For example, if the bond  above were trading at 90, the effectiveinterest rate would be 11.11%.  Note, though, that the bond price of 90represents a 10 point discount off the 100 par value.  Those 10 pointsbecome extra profit to the bondholder when he/she is paid par atmaturity.  That then becomes part of the yield to maturity equation. If the bond in the example has a 20-year maturity, its yield tomaturity is about 11.28%.  Were the bond trading at a premium (above100), then the yield to maturity would be lower than both the effectiveand nominal interest rate.
Notes and bonds are both actively traded on a number of exchanges. Individual traders can transact in them via either the cash or futuresmarket.
Callable vs. Non-Callable
Some fixed income instruments are callable.  That means the issuercan essentially buy them back from the holders prior to maturity. Normally there are specific terms related to this such as a date afterwhich calling is allowed, or not allowed.  When an issue is called, theholder receives the par or principal value, and sometimes a premium aswell, depending on the call conditions.
Issuers
Fixed income securities are issued by a wide array oforganizations.  Probably the best known and most liquid of them all arethe government instruments, which are often referred to as sovereigndebt because they come from national governments.  They come in a widearray of varieties and maturities from country to country, though themost commonly traded securities tend to be the notes and bonds.  Theyhave names like Gilts (UK), Bunds (Germany), and JGBs (Japan). Individuals can trade in government debt via the cash market throughdirect purchase, or they can go through the futures market.
Corporate debt is also quite well common.  A great many companiesissue debt as an alternative to issuing more stock.  Many of theseissues, generally notes and bonds, are listed and traded on stockexchanges.  As such, they are readily tradable by anyone with abrokerage account.
States, counties, cities and towns also issue debt, which is commonly referred to as municipal or munidebt.  These issues are often less well known and actively traded thangovernment or corporate securities.  Unlike the other two, however,they often come with incentives for the debt holder such as theinterest being federally tax-deductible.  As such, they will generallytrade at lower yields.
Government agencies and quasi-government agencies also issues fixedincome instruments.  Among the best known in the U.S. are the FederalNational Mortgage Association (FNMA - Fannie Mae) and the GeneralNational Mortgage Association (GNMA - Ginnie Mae).  Like governmentdebt, these instruments are accessible to the individual through eitherthe cash or futures market.
The last major group of issuers is the supra-national organizationssuch as the World Bank.  These issues are not commonly a part of theportfolio of the individual trader, but can be transacted in the cashmarket.
Credit Ratings
Fixed Income securities all have ratings assigned to them by one ormore credit agencies.  These ratings are an indication of thecreditworthiness of the issuer.  They are essentially an indication ofhow likely the instrument is to be paid off by the terms of itsissuance.  The higher the rating the better.  For example, thesovereign debt of most major industrial countries is of the highestrating.  So too are those of many large corporations.  An issuer neednot have a top level rating for it’s securities to be considered a goodrisk, though the yields will generally increase with lower debt ratings.
Non-investment grade debt, or junk as it is often called, is thecollection of securities which carry low ratings.  Issuers with ratingsin this category often have high amounts of debt outstanding, maypossibly have defaulted, or otherwise are considered to be in financialstress, suggesting that the debt holder is at risk of not being paidoff as per the terms.
Influences on Fixed Income Prices
Since the fixed income market is driven by interest rates (pricesare inversely related to yields), those things which impact on ratesdirectly influence prices.  The biggest driver of these rates, from amacro perspective, is monetary policy, the decisions central banks makein regards to the level of domestic interest rates.  Since the centralbanks directly control interest rates (at least short-term rates), theyhave a heavy influence over their level and direction.  Other, lessdirect, influencers include:

• Government fiscal policy
  
• General economic growth
  
• Employment
  
• Inflation
  
• Currency exchange rates and trade
  

Obviously, when considering the likes of corporate debt,considerations related to that particular issuer come in to play.  Thisincludes things like earnings, total debt outstanding, interest coverratios, and others.  All of this, though, is also account for in thecredit rating.
Yield Curve
The yield curve is the graphic portrayal of yields over the array ofmaturities, from shortest to longest.  An example is shown on thefollowing chart.
  
Notice that the plot above depicts two lines.  The blue line is themore standard, upwardly sloping yield curve in which thelonger-maturities feature higher yields.  The spread between the longmaturity issues over the short maturity ones is positive.  The pinkline, shows an inverted, or negatively sloped curve.  A negativelysloped curve is often considered an indication of a pending downturn inthe economy as the higher return on short term money will tend toprevent longer-term investment.
It should be noted that while it is most often the case that whenone discusses yield curves that it is the government rate curve towhich is being referred, it need not always be the case.  There areyield curves for corporate debt, for example.
Additional Topics

• Mortgage-Backed Security (MBS): Instruments whichare based on commercial and residential property mortgage loans.  Theseloans are packaged together and securitized by the likes of FannieMae.  The primary consideration for an MBS is that since mortgages canbe prepaid, the actual maturity of the security is unknown, though itcan be estimated.
  
• Convertible: Some bonds and notes (mostlycorporate) can be exchange for another security (generally stock).  Forexample, a company could issue a bond which allows the holder toconvert the bond in to 10 shares of company stock.  The terms of theseconversions are pre-set in terms of price of the security into whichthe issue can be converted, and oftentimes also the timeframe in whichthe conversion is allowed.  The price of convertible securities areheavily influenced by the price of the security they are convertibleinto.
  
• Inflation Protected Securities: This is a group offixed income securities which are tied in to inflation, as measured bythe Consumer Price Index (CPI) or some other similar measure.  Theinterest and/or principal payments of such instruments vary based on aformula.  The idea is the nullify the influence of inflation on theholder so that the real rate of return (nominal rate minus inflation)will remain fairly steady.
  

Further Study
This article is but a brief introduction to fixed income.  If youwish to go further, consider the following as worthy resources.

The Handbook of Fixed Income Securities By Frank Fabozzi This book is considered the bible among market participants and academics alike.  It is very comprehensive.

The Bond Market By Christina RayWhile not nearly as thorough as the Fabozzi book above, it is a very practical guide to the markets in application.

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