Fixed Income Flashcards
Learn about fixed income securities, markets, valuation, asset-based securities, fixed income risk and return, and credit analysis.
Define:
Add-on rates
Method of calculating interest rate, in terms of the amount that will be added to the principal in order to arrive at a future value.
Used for CDs, repos (bond yield basis).
As opposed to a discount rate.
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Amortizing bond
Bond with scheduled payments which pay interest as well as paying down the principal over the life of the bond.
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Asset-backed securities
(ABS)
A type of bond which is backed by a collection of claims on assets (car loans, credit card receivables, etc.) and the cashflows from those assets. An ABS is issued by a special purpose entity (SPE) which owns the underlying assets and is a separate legal entity unto itself.
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Auction
A type of bond issuing mechanism often used for sovereign bonds that involves bidding.
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Balloon payment
Large payment at maturity to retire a bond’s outstanding principal.
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Bullet Bond
Bond where principal is repaid entirely at maturity.
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Basis point
aka bp or “bips”
One basis point equals one-hundredth of a percentage point.
.01% or .0001
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Bearer bonds
Bonds for which ownership is not recorded; ownership is determined by who actually holds (bears) the bond.
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Benchmark issue
The latest sovereign bond issue for a given maturity. It serves as a benchmark against which to compare bonds with similar features.
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Benchmark rate
The yield-to-maturity on a government bond having a similar time-to-maturity.
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Benchmark spread
The yield spread over a benchmark.
Typically measured in bps.
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Best effort offering
When an investment bank, acting as agent for the issuer, promises to use its best efforts to sell the offering but does not guarantee that a specific amount will be sold.
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Bond
Contractual agreement between the issuer and the lender (holder of the bond).
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Bond equivalent yield
Method of calculating yield which annualizes the yield using the ratio of 365:number of days to maturity.
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Book building
When Investment bankers develop a list (“build a book”) of parties that have indicated interest in buying part of an offering.
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Broker
An agent who matches buyers and sellers and helps to facilitate transactions/execute trades on behalf of a client in exchange for a commission.
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Broker–dealer
A financial intermediary who fulfills different roles depending on the type of trade. They may act as a dealer (fulfilling the role of the principal) or as a broker (fulfilling the role of agent).
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Callable bond
A bond containing an embedded call option. This gives the issuer the right to buy the bond back at specified prices on pre-determined dates.
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Capital-indexed bonds
Type of index-linked bond. The coupon rate is fixed but it gets applied to a principal amount that increases in line with increases in the index during the bond’s life. Therefore the coupon amount changes along with the principal.
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Capital market securities
Securities with maturities at issuance longer than one year.
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Cash flow yield
The IRR on a series of cash flows.
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Central bank funds market
Fed Funds Market in the US.
The market in which deposit-taking banks which have an excess reserve with the central bank can loan money to banks that need funds.
Used for maturities ranging from overnight to a year.
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Central bank funds rates
Interest rates applied to money lent within the central bank funds market (Fed Funds Market in the US).
Maturities from overnight to a year.
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Certificate of deposit
(CD)
Investment instrument which enables one to invest a specific amount of money for a fixed period at a predetermined interest rate. It is issued in small or large denominations, and can be negotiable or non-negotiable.