Just like investors could purchase a multitude of diverse stocks in different industries and with different risk factors, so can they have a varied mix in their fixed income portfolio. Fixed income securities include Treasuries, Agencies, Corporates, Municipals, and Certificates of Deposit.

The U.S. Treasury regularly auctions short, intermediate and long term debt instruments. The most common issues include 3-month and 6-month bills, 52-week bills, 2-year notes, 5-year notes, 7-year notes, 10-year notes and 30-year bonds. They are considered risk-free securities because the U.S. has never defaulted on its debt. Treasury securities are probably the most liquid of all fixed income securities.

Federal agencies such as Freddie Mac and Fannie Mae, also offer a range of debt instruments from short term to long term issues. These are not guaranteed by the Federal government in the same way as Treasury securities, but are tied to indirect government guarantees. The yields offered on these instruments are typically higher than those on U.S. Treasuries. Traditionally, they have had high credit ratings due to implicit backing by the U.S. government.

Corporate bonds vary by company. Clearly, some companies have higher credit ratings than others. High investment grade bonds offer interest rates that are higher than Treasury securities, but lower than bonds from companies with poor credit ratings. Junk bonds are also known as high-yield bonds. These typically have a high probability of default and therefore investors are getting compensated for the higher risk with a higher yield.

Moody's, Standard & Poor's, and Citigroup are key raters of corporate bonds. Econoday tracks corporate bond yields on series rated by both Moody's and Citigroup. There are differences in their ratings grades. Using the Citigroup system, triple A (AAA) rated bonds have the lowest risk of default, whereas Triple B (BBB) bonds have the highest default risk among this group. Triple B bonds can be considered junk bonds, although distressed bonds are also rated "C" by some rating agencies. Moody's broad categories begin with a capital letter (A, B, or C with A being the highest quality and lowest credit risk). Each broad category is differentiated into further subdivisions with a lower case "aa," "a," or no additional letter. The following are in descending order of quality - Aaa, Aa, and A. According to Moody's, obligations rated Aaa are judged to be of the highest quality, with minimal credit risk.

State and local government areas offer municipal bonds. Since the federal government does not tax the interest earned on municipal bonds, these yields tend to be lower than Treasury securities. It is important to keep in mind that they are only comparable to other bonds after accounting for tax implications. Moreover, the municipal bond market is quite fragmented. These bonds can be rated by credit agencies and all offer different magnitude of risk to investors.

Investors sometimes forget that bank certificates of deposit are also part of the fixed income market. Investors can deposit their savings at local banks for varied time periods to earn higher or lower interest. Brokerage firms offer bank CDs to their customers as well.