Fixed Income - 1 Flashcards
Fixed income security
A financial obligation where the issuer promises to pay a specified sum of money at specified future dates.
Issuer
The entity that borrows money by issuing a fixed income security.
Creditor
The lender or investor in a fixed income security.
Coupon rate
The interest rate that the issuer agrees to pay annually on the bond’s face value.
Face value (par value)
The amount the issuer agrees to repay at maturity.
Maturity
The time until the issuer returns the bond’s face value to the creditor.
Bonds
A type of fixed income security representing a loan from the investor to the issuer.
Mortgage-backed security
A bond secured by a pool of mortgages.
Preferred stock
Equity with fixed dividend payments, but no maturity date.
Asset-backed securities (ABS)
Securities backed by a pool of loans or receivables.
Par value
The face value or principal amount of a bond, which is repaid at maturity.
Coupon
The periodic interest payment made to bondholders during the bond’s life.
Zero-coupon bond
A bond that pays no interest and is sold at a discount, with the difference between purchase price and face value representing the interest earned.
Floating-rate note (FRN)
A bond whose coupon rate varies according to a reference interest rate.
Step-up note
A bond with a coupon rate that increases over time.
Bullet maturity
A bond where the entire principal is repaid at the maturity date.
Amortizing bond
A bond with a repayment schedule that includes both interest and part of the principal.
Sinking fund provision
A requirement for the issuer to periodically repay portions of the bond’s principal before maturity. Either in the open market or by calling some bonds chosen by lottery.
Callable bond
A bond that gives the issuer the option to repay it before its maturity date.
Putable bond
A bond that allows the bondholder to sell it back to the issuer at a specified price before maturity.
Convertible bond
A bond that gives the bondholder the option to convert it into a specified number of shares of the issuer’s stock.
T-bill
A U.S. Treasury security with a maturity of less than one year, issued at a discount and repaid at par value.
T-note
A U.S. Treasury security with a maturity between 1 and 10 years, paying periodic interest.
T-bond
A U.S. Treasury security with a maturity of more than 10 years, paying periodic interest.
Treasury STRIPS
A zero-coupon security created by separating the interest and principal payments of a Treasury bond or note.
Mortgage loan
A loan secured by real estate, where the lender can foreclose if the borrower fails to make payments.
Prepayment risk
The risk that a borrower will repay a loan before its scheduled maturity, affecting the return on mortgage-backed securities.
Collateralized mortgage obligation (CMO)
A structured bond where the principal and interest from a pool of mortgages are redistributed to bondholders in tranches.
Credit risk
The risk that an issuer will default on its payment obligations.
Yield-to-maturity (YTM)
The interest rate that equates the present value of a bond’s cash flows to its price.
Reinvestment risk
The risk that future coupon payments will be reinvested at a lower rate than the bond’s original yield.
Yield to call (YTC)
The interest rate calculated assuming the bond will be called at the earliest possible date.
Yield to worst (YTW)
The lowest potential yield of a bond, considering all possible redemption scenarios (e.g., calls, puts, maturity).
Current yield
The annual coupon payment divided by the bond’s current price.
Liquidity risk
The risk of being unable to sell a bond quickly at its fair market value.
Sovereign bond
Debt issued by a national government.
Default risk
The risk that the issuer will fail to make timely payments of interest or principal.
Yield spread
The difference in yields between two bonds, often reflecting differing risks.
Inflation risk
The risk that inflation will erode the purchasing power of a bond’s future cash flows.
Duration
A measure of a bond’s sensitivity to interest rate changes, representing the weighted average time to receive the bond’s cash flows.
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Credit spread
The difference in yield between a non-Treasury bond and a U.S. Treasury bond of similar maturity, reflecting the additional risk of the non-Treasury bond.
Interest rate risk
The risk that the value of a bond will decrease due to rising interest rates.
Yield curve
A graph that shows the relationship between bond yields and maturities.
Parallel shift
A situation where interest rates for all maturities increase or decrease by the same amount.
Non-parallel shift
A change in the yield curve where interest rates for different maturities change by varying amounts.
Callable provision
A feature that allows the issuer to repay the bond before the maturity date, typically when interest rates have declined.
Put provision
A feature that allows the bondholder to sell the bond back to the issuer at a specified price before maturity.
Transition matrix
A tool used to track the probability of a bond being upgraded or downgraded by credit rating agencies over a specific time period.
Liquidity
The ease with which a bond can be bought or sold in the market without affecting its price.
Event risk
The risk that a specific event, such as a natural disaster or corporate restructuring, will negatively impact the issuer’s ability to repay bondholders.
Sovereign risk
The risk that a foreign government will default on its debt or make unfavorable changes to the terms of repayment due to political or economic changes.
Volatility risk
The risk that changes in the volatility of interest rates will affect the price of bonds with embedded options.
Callable bond price
The price of a callable bond is the price of a similar option-free bond minus the price of the embedded call option.
Putable bond price
The price of a putable bond is the price of a similar option-free bond plus the price of the embedded put option.
Capital gain
The profit realized when a bond is sold for more than its purchase price.
Capital loss
The loss realized when a bond is sold for less than its purchase price.
Total return
The overall return on a bond, which includes coupon payments, capital gains or losses, and reinvestment income.
Horizon analysis
An analysis that estimates the total return of a bond over a specific investment horizon.
Coupon interest payments
Periodic interest payments made to bondholders, typically semi-annually or annually.
Reinvestment income
The interest income generated from reinvesting coupon payments and principal repayments before the bond’s maturity.
Yield to put (YTP)
The interest rate that will make the present value of a bond’s cash flows equal to its price, assuming it is put back to the issuer at the put date.
Accrued interest
Interest that has accumulated since the last coupon payment but has not yet been paid.
Clean price
The price of a bond excluding any accrued interest.
Dirty price (gross price)
The price of a bond including accrued interest.
Call price / Redemption price
The price at which a bond can be redeemed before maturity under its call provision.
Put price
The price at which a bondholder can sell a bond back to the issuer before maturity under its put provision.
Inflation-indexed bonds
Bonds whose principal and interest payments are adjusted for inflation to protect the investor from inflation risk.
Step-up coupon bond
A bond that pays a coupon rate that increases at predetermined intervals.
Floating-rate security
A bond whose coupon rate is periodically adjusted based on a reference rate, such as LIBOR or the Treasury bill rate.
TIPS (Treasury Inflation-Protected Securities)
U.S. Treasury bonds that provide protection against inflation by adjusting the principal based on changes in the Consumer Price Index (CPI).
Premium bond
A bond trading above its face value because its coupon rate is higher than the prevailing market interest rates.
Discount bond
A bond trading below its face value because its coupon rate is lower than the prevailing market interest rates.
Callable bond yield
The yield calculated assuming the bond is called at the earliest possible date.
Maturity date
The date when the bond’s principal is due to be repaid to the bondholder.
Sovereign debt / bond
Debt issued by a national government, usually considered to have low default risk when issued by stable governments.
Corporate bonds
Debt securities issued by corporations to raise capital, often with higher risk and yield than government bonds.
Agency bonds
Bonds issued by government-sponsored enterprises (GSEs) or federal agencies, typically with lower risk than corporate bonds.
Term spread
The difference between yields on bonds with different maturities, often used to gauge economic expectations.
Default rate
The percentage of issuers expected to default on their debt obligations over a specified period.
Recovery rate
The percentage of the bond’s face value that investors expect to recover in the event of a default.
Duration
A measure of the sensitivity of a bond’s price to changes in interest rates.
Convexity
A measure of the curvature in the relationship between bond prices and yields, indicating how duration changes with interest rates.
Yield-to-worst (YTW)
The lowest possible yield that can be received on a bond without the issuer defaulting.
Yield-to-call (YTC)
The yield of a bond assuming it is called before its maturity date.
Annuity
Every year you get the same coupon, which includes a interest and principal. The component of interest therefore decreases over time.
