The Term ‘Fixed’ in a Business, Financial, and Trading Context Explained

What is the meaning of the term fixed?

The term ‘fixed’ generally refers to something that does not change. The basic meaning of fixed can also be put into the following words, referring to something, such as an amount, as:

• agreed upon,
• determined,
• set,
• specified,
• being constant,
• unchanging,
• invariable,
• not subject to variation, and
• not subject to fluctuation.

This article will briefly explain the term ‘fixed’ as used in the subjects below in a business, financial, and trading context.

• Fixed annuity
• Fixed assets
• Fixed asset turnover (FAT) ratio
• Fixed-charge coverage ratio (FCCR)
• Fixed cost
• Fixed deposit
• Fixed exchange rate
• Fixed income
• Fixed-income security
• Fixed interest rate
• Fixed-price
• Fixed-price contract
• Fixed-rate mortgage
• Fixed monthly salary

What is a fixed annuity?

A fixed annuity refers to an investment product sold by an insurance company to an individual, guaranteeing periodic income payments to the annuity purchaser, also known as the annuitant – the holder of the annuity.

Put differently, a fixed annuity is a contract where the interest rate return that is earned on the amount invested in the annuity is set and guaranteed at the time when the annuitant purchases the annuity.

For instance, if the guaranteed rate of investment return is specified as 6% per annum, the annuitant is guaranteed to receive a 6% return annually on his or her annuity investment. This means that the 6% return will not change even if interest rates in a country change over time.

Investors are allowed to purchase fixed annuities with either a lump sum of money or a series of payments made at equal intervals, such as monthly or quarterly.

Regarding the guaranteed income payments, a fixed amount can be paid monthly, or another regular interval, for a certain period of time, or until a specific event occurs.

Income payments from a fixed annuity can be guaranteed for the annuitant’s lifetime, called a life annuity, or for a specified number of years, referred to as a period certain annuity or a term certain annuity.

One of the benefits of a fixed annuity is that an annuitant will benefit if interest rates drop below the guaranteed rate of the fixed annuity. Conversely, an annuitant may miss an opportunity to gain from rising interest rates.

What are fixed assets?

Fixed assets are long-term tangible (physical) assets that businesses use in their operations, providing long-term financial benefits for the business.

They are a type of non-current asset. Other non-current assets comprise long-term investments, such as stocks, bonds, mutual funds, and intangibles, which are described as ‘an identifiable non-monetary asset without physical substance,’ by IAS (International Accounting Standards) 38. (Accentuation in the description by the article writer.)

Examples of intangible assets include trademarks, patents, licences, and copyrights.

Fixed assets, also known as fixed capital, are reported as property, plant, and equipment (PP&E) on the balance sheet of a business.

Furthermore, the acquisition or disposal of a fixed asset is recorded on the cash flow statement of a business under the item, ‘cash flow from investing activities (CFI).’ The acquisition of a fixed asset represents a cash outflow, which is a cash flow negative. A sale of a fixed asset represents a cash inflow, which is a cash flow positive.

Key features of fixed assets

• They have a useful life of more than one year

Fixed assets are items of value owned by a business and used in business operations to generate income in the long term. Useful life refers to the fact that these assets will not be used up or disposed of within a year. They are also not held for investment purposes.

• They can be depreciated

Land excluded, fixed assets are depreciated to reflect the wear-and-tear of using a particular fixed asset. Depreciation reduces the original value of the fixed asset each year over its life expectancy.

Depreciation allows a business to account for the cost of a fixed asset over periods longer than a year.

• They are illiquid

Contrary to current assets, fixed assets cannot be easily and quickly converted into cash. Current assets, also referred to as liquid assets, can easily be converted into cash in less than a year.

Examples of fixed assets

Fixed assets comprise, inter alia, vehicles, machinery, land, furniture, computer equipment, office equipment, and tools.

What is the fixed asset turnover (FAT) ratio?

The fixed asset turnover (FAT) ratio is an efficiency ratio that determines how efficiently a business utilises its fixed assets to generate sales over a given financial period.

Express differently, the FAT ratio measures a business’s return on its investment in fixed assets, namely property, plant, and equipment (PP&E), by comparing net sales with fixed assets.

The ratio is particularly valuable in the manufacturing industry where companies use large and expensive equipment.

Generally, a higher ratio indicates the more effective use of fixed assets to generate income.

The formula to calculate the FAT ratio is:

FAT = Net sales/Average fixed assets

Where:

• Net sales = gross sales fewer allowances, discounts, and returns
• Average fixed assets = (Opening balance of fixed assets + Closing balance of fixed assets)/2

The balances of the fixed assets include the amounts of property, plant, and equipment, less the accumulated depreciation.

Example

Let us say, company Happy Go Lucky reported gross sales of R5 million in the 2025 financial year. The company’s sales returns were R15 000. The opening (beginning) balance of fixed assets was R950 000, while the closing balance amounted to R1 050 000.

Based on the given figures, the company’s FAT ratio for the 2025 financial year will be calculated as follows:

FAT = (R5 000 000 – R15 000) / (R950 000 + R1 050 000)/2

= R4 985 000/R2 000 000/2

= R4 985 000/R1 000 000

= R4.99

The company’s FAT ratio for the 2025 financial year is R4.99, implying that for every one ZAR invested in fixed assets, a return of almost five ZAR is earned. Put differently, one ZAR of fixed assets generated almost five ZAR of sales.

What is the fixed-charge coverage ratio (FCCR)?

The fixed-charge coverage ratio (FCCR) is a debt ratio that measures the ability of a business to cover its fixed charges such as interest expenses, equipment lease expenses, and mortgage expenses.

Express in different words, the FCCR indicates how many times a business can pay for its fixed charges (costs) with its earnings before interest and taxes.

The FCCR is an expanded version of the interest coverage ratio, the difference being: in the interest coverage ratio calculation only the interest expenses are used as the denominator, while in the calculation of the FCCR other fixed costs such as leases and mortgages are also included in the denominator.

The ratio is very adaptable because several additional fixed charges, such as insurance payments and dividend payments for preference (preferred) shares, can be built into the calculation.

Similar to other commonly used debt ratios, a higher fixed-cost ratio, preferably 2 or higher, is an indication that a business can safely borrow more money to fund its operations. An FCCR of lower than 1 indicates that a business is struggling to cover its regular debt obligations

This ratio is typically used by lenders to determine the creditworthiness of a prospective or existing borrower.

The formula to calculate the fixed-charge coverage ratio looks as follows:

FCCR = (EBIT + Fixed charges before taxes) / (Fixed charges before taxes + Interest)

Where:

• EBIT = earnings before interest and taxes
• Fixed charges before taxes can be shortened to FCBT

Keep in mind, this ratio is not limited to one or two fixed costs. Several types of fixed charges can be used in the formula.

Example

Samuel’s hardware store records earnings before interest and taxes (EBIT) of R700 000, interest expenses of R70 000, and the store’s lease payments amount to R250 000.

Based on the information provided by Samuel, his hardware store’s FCCR will be calculated as follows:

FCCR = (R700 000 + R250 000) / (R250 000 + R70 000)

= R950 000/R320 000

= 2.97

The ratio of 2.97 shows that the store’s earnings are almost three times higher than its fixed charges, implying that Samuel would be able to pay the fixed charges three times with the earnings generated.

What is a fixed cost?

A fixed cost, also called an indirect cost, overhead cost, supplementary cost, or period cost, refers to a cost that does not change with an increase or decrease in the number of goods produced or services rendered.

Fixed costs are expenses a business incurs regardless of the amount of income generated or the level of business activities.

Sage mentions that ‘the general fixed cost definition includes any costs that are consistent with a company’s normal operations.’

Fixed costs are time-related, meaning they stay constant for a given period of time.

Examples of fixed costs are:

• Advertising
• Utilities (The cost of electricity and water. Although, they can include a small variable amount)
• Property taxes
• Rent
• Mortgage payments
• Insurance premiums
• Interest expenses
• Salaries (A fixed compensation paid to employees regardless of the hours worked)
• Depreciation
• Vehicle leases
• Loan payments

Variable costs are the opposite of fixed costs. Both types of costs are key concepts in managerial accounting, also called management accounting, which is a type of accounting that enables the management of a business to make informed decisions in order to accomplish the strategic goals of the business.

Variable costs, also known as direct costs or prime costs, are volume-related, fluctuating according to the number of units produced.

Examples of variable costs are:

• Commissions on sales
• Operational expenses
• Wages of employees who are employed on an hourly basis (Also referred to as piece-rate labour)
• Direct materials

What is a fixed deposit (FD)?

A fixed deposit (FD) is a financial investment vehicle offered by banks and non-bank financial companies (NBFCs) wherein investors can deposit a certain amount of money for a specified period.

FDs offer a higher rate of interest than normal savings accounts.

Basic features of a fixed deposit account are, inter alia:

The basic features can differ from bank to bank.

• The investment is for a fixed term – can be for several years.
• An investor is not allowed to make additional payments into the account once the investment has started.
• Interest is calculated in terms of the simple interest formula, implying the interest is calculated on the original (principal) amount invested.
• Interest, quoted per annum, is paid at a fixed rate.
• Options to receive the interest earned are monthly, quarterly, bi-annually, annually, or at maturity.
• Interest is subject to the actual principal amount deposited and the chosen investment term completing its full term.
• Premature withdrawals are subjected to penalties, which will be deducted from the investment amount before the funds are paid out to the investor.
• At maturity, the funds can be withdrawn, transferred to a nominated bank account, or reinvested in a fixed deposit account – with the option to change the investment term and the investment amount.

Advantages of a fixed deposit:

• An FD is a risk-free investment because FDs are not market-driven. Investors are guaranteed to get their principal back at maturity.
• The interest rate on FDs is higher than that on savings accounts.

What is a fixed exchange rate?

A fixed exchange rate also called a pegged exchange rate comes into play when the monetary authority, such as a central bank, of a country links its currency to either:

• the currency of another country, which is typically a most frequent trading partner,
• a widely-used currency, such as the U.S dollar,
• a basket of other currencies, or
• a commonly traded commodity such as gold.

The purpose of a fixed exchange rate is to keep the value of a country’s currency in a narrow band.

In contrast, a floating exchange rate, also referred to as a flexible or fluctuating exchange rate, is an exchange rate system where a country’s government allows its currency’s value to be determined by supply and demand factors relative to other currencies in the foreign exchange (forex) market.

Advantages of a fixed exchange rate

• Fixed exchange rates with trading partners provide greater certainty for exporters and importers.
• It provides currency stability, allowing investors to always be aware of the value of the currency. This makes it attractive to foreign investors to invest in projects and businesses in the country because they are protected against wild fluctuations in the currency’s value.
• When a developing country links its currency to the currency of a powerful country like the U.S.A., it protects itself from paying more when importing goods from developed countries. Hence, a pegged exchange rate hedges the developing country from currency risk.
• Pegging its currency to a popular one like the euro or U.S. dollar helps to develop (smaller) countries to avoid inflation, keeping interest rates down and stimulating investments and trades.

Disadvantages of fixed exchange rates

The following examples are some of the disadvantages of a pegged exchange rate:

• A system of a fixed exchange rate will limit the freedom and ability of a central bank to adjust interest rates as required to enhance economic growth.
• The currency of a country with a fixed exchange rate can become a target for speculators who can short the currency, driving the value of the currency down by artificial means.
• It can be expensive to sustain the system. In order to maintain a fixed exchange rate, a country must have enough foreign exchange reserves.

What is fixed income?

Fixed income broadly refers to an investment approach that focuses on the preservation of income and capital. It provides investors a constant stream of cash flows in the form of fixed interest or dividend payments until the maturity date of the investment.

At maturity, investors receive the principal (original) amount they had invested.

Fixed income typically includes investments such as bonds (government and corporate), money market accounts, treasury notes, and certificates of deposit (CDs). (Refer the subject ‘What is a fixed-income security?’ below for more information on these investment types.)

Potential benefits of fixed income

• Lower risk than investments in stocks (shares)

It is generally understood that fixed income carries lower risks than shares because fixed-income investments are typically less sensitive to macroeconomic risks, such as inflation, unemployment, economic downturns, and geopolitical issues like international tensions, climate change, and political unrest and violence.

• A constant source of income

Fixed income investments allow investors to generate a constant source of income. For example, holders of bonds receive a fixed amount of income at regular intervals in the form of coupon payments on their bonds.

Treasury notes pay a fixed interest rate.

• Preservation of capital

Capital preservation implies that an investor is guaranteed that his or her original amount (called the principal) invested will be returned to the investor at maturity.

However, investors should be mindful of inflation risk, meaning that the future real value (value after inflation) of a fixed-income investment will be reduced by increasing inflation.

• Attractive returns

Some fixed-income investments, such as emerging market bonds, offer attractive returns. However, keep in mind, higher returns imply more risks, like interest rate risk or credit risk.

Risks related to fixed income

Although considered a safe investment, there are several risks related to fixed income.

• Liquidity risk

Liquidity risk occurs when an investor wants to sell a fixed income asset but can find no willing buyer.

• Credit risk

Credit risk, also called business risk, principal risk, or financial risk refers to the possibility that an issuer of a bond could default on its debt. This means that an investor may not receive the full amount of his/her principal investment.

• Inflation risk

Inflation risk is possible if the rate of inflation outperforms the fixed income amount, affecting the investor’s purchasing power.

• Interest rate risk

One of the major causes of price volatility in bond markets is fluctuations in interest rates. When interest rates increase, bond prices decrease, causing bondholders to lose money.

What is fixed-income security?

See the subject ‘What is fixed income?’ above for potential benefits of fixed income as well as risks associated with fixed income.

Fixed-income securities are a type of investment or type of debt instrument that provides returns in the form of frequent, or fixed interest payments and the eventual repayment of the principal at the maturity date of the security.

As long as fixed-income securities are held to maturity, they will provide a guaranteed return on an investor’s investment. The fixed income payments are known in advance.

These debt instruments are issued by corporations and other entities to finance and expand their operations. Governments issue bonds to raise funds to, inter alia, operate the government, repay debt, and finance new projects and infrastructure.

Some examples of fixed-income securities:

• Bonds

Bonds are the most common type of fixed-income securities.

A bond is a fixed-income instrument that represents a loan or debt obligation made by an investor (the bondholder) to a bond issuer (typically a government or corporation) or a borrower.

Key concepts regarding bonds are, amongst others:

• The principal, also called the par value, is the original amount of the loan made by the investor (bondholder). Express differently, the principal is the amount the bond issuer agrees to pay the bondholder when the bond matures.
• The coupon rate is the interest rate that the issuer accepts to pay the bondholder when the bond reaches maturity. In the case of a fixed-income instrument, the coupon rate is a fixed rate. Bonds may make payments annually, semi-annually, quarterly, or monthly, depending on the type of bond.
• The maturity date of a bond, commonly referred to as maturity, is the date on which the issuer is required to pay the principal in full to the bondholder.

Examples of bonds are government bonds (issued and guaranteed by governments), corporate bonds (issued by companies), and municipal bonds (issued by local governments such as metropolitan municipalities).

• Money market instruments

Money market instruments comprise securities such as:

• Commercial paper – issued by companies).
• Banker’s acceptance – a short-term financial instrument, representing a promised future payment from a bank.
• Certificates of deposit (CDs) – a type of savings account offered by banks and credit unions.

• Asset-backed securities (ABS)

ABS are fixed income securities backed by underlying assets, such as leases, student loans, auto loans, and credit card debt, which have been securitized.

What is a fixed interest rate?

A fixed interest rate refers to an invariable interest rate that is charged on the debt, such as a loan, mortgage, or credit card.

Also known as a static interest rate, it may apply to the entire term of a loan or for just a certain part of the term. However, the interest rate remains unchanged throughout a given period.

With a fixed interest rate, the regular repayments (for example monthly instalments) stay the same for the set period.

Types of loans on which fixed interest rates are offered by banks and financial institutions:

• Mortgages commonly referred to as home purchase loans – range from 15 years to 30 years.
• Auto loans are also known as vehicle loans.
• Personal loans.
• Student loans.

Pros of a fixed interest rate

• Relatively simple to calculate.
• Predictable and fixed monthly repayment amounts – borrower knows exactly how much interest he or she will pay.
• Protection against sudden increases in the overnight lending rate of central banks.

Cons of a fixed interest rate

• Borrowers who have loans with fixed interest rates cannot benefit from declining interest rates.
• If rates decrease, and a borrower wants to refinance to a lower fixed rate or change to a variable-rate loan, it can be time-consuming and costly.
• Fixed-rate loans usually start at a higher rate than variable-rate loans.

Calculation of fixed interest rate costs

To calculate the fixed interest costs for a loan, only the following information is required:

• The principal amount.
• The interest rate.
• Repayment period of the loan

Example

A borrower takes out a loan of R50 000, with a repayment period of 48 months and a fixed interest rate of 7% per annum. Payments will be monthly.

The fixed interest costs will be calculated as follows:

Interest = (Interest rate/Number of payments) x Principal amount

= (0.07/12) x R50 000 = R291.67 per month, an amount of R14 000.16 for 48 months.

What is a fixed price?

Broadly speaking, fixed price refers to a price that has been set for goods or services, and in most circumstances non-negotiable. The price remains unchanged regardless of the cost of production.

One of the most obvious reasons for a fixed price for a product or service is control or instruction by some official authority. For example, the petrol retail price in South Africa is regulated by the government and changed every month on the first Wednesday of the month. The new price is determined by the Central Energy Fund (CEF) on behalf of the Department of Energy (DOE).

One of the key benefits of a fixed price is that it allows a buyer (consumer) to budget in advance.

Fixed price can also refer to a fixed price leg of a swap where the payments are based on an unchanging interest rate.

A fixed price leg is part of a type of interest rate swap, referred to as a fixed-for-floating swap. The fixed price leg is one that is based on a constant interest rate, allowing one party to pay (or receive) a fixed interest payment on the value of an underlying asset, while the other party receives (or pays) a variable interest rate on the same underlying asset amount.

What is a fixed-price contract?

A fixed-price contract refers to a type of contract used in project management and construction.

Put differently, it is a type of contract in which the contractor agrees to deliver work or a project for a set amount of money.

The agreed-upon contract price does not depend on the resources, or the time spent.

The contractor determines in advance how much the project, product, or service will cost, allows for-profit and contingency, and works within the scope of the contract.

A contractor is allowed to change the fixed price of a contract when it is specifically stated in the contract that the contractor may do so. Reasons for such a change may be to account for inflation (if the contract remains in place for a number of years) or for circumstances, which the contractor cannot control.

Some of the benefits of fixed-price contracts:

• Fixed-price contracts allow contractors flexibility and freedom.
• They allow customers (owners/buyers) certainty and predictability, knowing exactly how much the project, product, or service will cost.
• Contractors know how much they can spend.
• Buyers have the assurance that the project, product, or service will not exceed the pre-determined amount.

Some risks involved in fixed-price contracts:

• If contractors bid too low, or if the conditions are different from what they anticipated, they can quickly incur losses.
• Predictability may come with a price for the buyer. The contractor may build the risk he or she is taking by including a high fixed price in the contract price.

What is a fixed-rate mortgage?

A fixed-rate mortgage is one type of fixed-rate loan, referring to a home loan that has an unchanged interest rate for the entire term of the loan.

Loan terms for fixed-rate mortgages range from 15 years to 30 years. Keep in mind, the longer the term of the mortgage, the more interest you eventually pay.

The interest rate of fixed-rate mortgages does not fluctuate with market-related rates and is not affected by future changes in interest rates.

Conversely, the interest rate of variable- and adjustable-rate mortgages changes when the rate, set by monetary authorities, changes.

Fixed-rate mortgages are popular with homeowners who prefer a constant monthly payment (instalment).

Most fixed-rate mortgages are amortised (also spelled amortized) loans, meaning the loan is paid off via pre-agreed instalments that include both the principal and interest on the loan.

Common features of a fixed-rate mortgage:

• The interest rate does not change throughout the loan term.
• Part of the principal (original amount borrowed) is paid off monthly, making the interest payment on the remaining principal less.
• At the start of the mortgage, most of the monthly instalment goes towards interest.
• Over the life of the mortgage, and with every consecutive monthly instalment, the amount that goes towards interest decreases, while the amount that pays off the principal increases.
• In the end, most of the monthly payment goes towards the principal.

Pros of a fixed-rate mortgage:

• The monthly instalments remain the same. However, changes in property taxes and insurance could cause an instalment to change if these costs are included in the instalment.
• Protects the homeowner from future rises in interest rates.
• The loan principal reduces monthly by a certain amount.

Cons of a fixed-rate mortgage

• If interest rates drop, the fixed mortgage rate will not follow, preventing the borrower to take advantage of decreasing interest rates.
• The fixed interest rate may be higher than variable-rate mortgages.

What is a fixed monthly salary?

Fixed monthly salary, also called base fixed salary, refers to an employee’s monthly compensation, not varying from month to month, regardless of the number of hours work, the performance of the employee, or whether the employee takes annual or medical leave.

An employee’s fixed monthly salary consists of the basic monthly salary and fixed monthly allowances, which include fixed housing and food allowances.

Fixed monthly salary does not include the following:

• Fringe benefits
• Payment for overtime, commission, and bonus
• Variable allowances
• Any reimbursements, such as expenses incurred in the course of an employee’s employment
• Any incentives, such as long-term incentives (for example, shares, options, or cash), and productivity incentive payments
• Contributions payable by the employer to any pension or provident fund of the employer
• Gratuities payable on discharge, retirement, or retrenchment

Disclaimer: This article does not intend to provide legal or investment advice and is for information purposes only.