Fixed Income: intro to Fixed Income Valuation Flashcards
Accrued Interest
Interest earned but not yet paid
Add-On Rates
Bank certificates of deposits, repos, and indexes such as Libor and Euribor are quoted on an add-on rate basis (bond equivalent yield basis).
Asset Swap
Converts the periodic fixed coupon of a specific bond to a Libor plus or minus a spread.
Basis Point
Used in stating yield spreads, one basis point equals one-hundredth or a percentage point, or .01%
Benchmark
A comparison portfolio; a point of reference or comparison
Benchmark rate
Typically the yield-to-maturity on a government bond having the same, or close to the same, time to maturity.
Benchmark Spread
The yield spread over a specific benchmark, usually measured in basis points
Bond Equivalent Yield
A calculation of yield that is annualized using the ratio of 365 to the number of says to maturity. bond equivalent yield allows for the restatement and comparison of securities with different compounding periods.
Call Protection
The time during which the issuer of the bond is not allowed to exercise the call option
Callable Bond
A bond containing an embedded call option that gives the issuer the right to buy the bond back from the investor at specified prices on predetermined dated.
Cash Market Securities
Money market securities settled on a “same day” or “cash settlement” basis.
Constant-yield price trajectory
A graph that illustrates the change in the price of a fixed-income bond over time assuming no change in yield-to-maturity. The trajectory shows the “pull to par” effect in the price of a bond trading at a premium or a discount to par value
Current Yield
The sum of the coupon payments received over the year divided by the flat price
Discount
To reduce the value of a future payment in allowance for how far away it is in time; to calculate the present value of some future amount. Also, the amount by which an instrument is priced below its face (par) value.
Discount Margin
The yield spread over, or under, the reference rate such that an FRN is priced at par value on a rate reset date
Discount Rates
In general, the interest rate used to calculate a present value. In the money market, however, discount rate is a specified type of quoted rate
Effective Annual Rate
The amount by which a unit of currency will grow in a year with interest on interest included
Embedded Option
Contingency provisions that provide the issuer or the bondholders the right but not the obligation, to take action. These options are not part of the security and cannot be traded separately.
Flat price
The full price of a bond minus accrued interest
Floating rate notes
A not me on which interest payments are not fixed but instead vary from period to period on the current level of a reference interest rate
Forward Curve
A series of forward rates, each having the same timeframe
Forward market
For future delivery, beyond the usual settlement time period in the cash market.
Forward rate
The interest rate on a bond money market instrument traded in a forward market. A forward rate can be interpreted as an incremental or marginal, return for extending the time-to-maturity for an additional time period
Full price
The price of a security with accrued interest
G-Spread
The yield spread in basis points over an actual or interpolated government bond
Government equivalent yield
A yield that restates a yield to maturity based on 30/360 day count to one based on actual/actual
I-Spread
The yield of a specific bond over the stand swap rate in that currency of the same tenor
Implied forward rates
Calculated from spot rates, an implied forward rate is a break even reinvestment rate that links the return on an investment in a shorter-term zero-coupon bond to the return on an investment in a longer-term zero coupon bond
Interpolated spread
The yield spread of a specific bond over the standard swap rate in that currency of the same tenor
Market Discount Rate
The rate of return requires by investors given the risk of the investment in a bond
Matrix pricing
Process of estimating the market discount rate and price of a bond based on the quoted or flare prices of more frequently traded comparable bonds
Maturity Structure
A favor explaining the differences in yields on similar bonds
Off-the-run
Seasoned government bonds are off-the-run securities; they are not the most recently issued or the most actively traded
On-the-run
The most recently issued and most activist traded sovereign securities
Option-Adjusted price
The value of the embedded option plus the flat price of the bond.
Option Adjusted Spread
OAS = Z-spread - Option value (in basis points per year)
Option-adjusted yield
The required market discount rate whereby the price is adjusted for the value of the embedded option
Par curve
The sequence of yields to maturity such that each bond is priced at par value. The bonds are assumed to have the same currency, credit risk, liquidity, tax status, and annual yields stated for the same periodicity.
Par Value
The amount of principal on a bond
Periodicity
The assumed number or period la in the year, typically matches the frequency of coupon payments
Premium
In the case of bonds, premium refers to the amount by which a bond is priced above its face (par) value. In the case of an option the amount paid for the option contract
Quoted Margin
The specified yield spread over the reference rate, used to compensate an investor for the difference in which the credit risk of the issuer and that implied by the reference rate.
Required Margin
The yield spread over, or under; the reference rate such that an FRN is priced at par value on a rate reset date
Required rate of return
The rate of return required by investors given the risk of the investment in a bond
Required yield
The rate of return required by investors given the risk of the investment in a bond
Required yield spread
The difference between the yield on o maturity on a new bond and the benchmark rate; additional compensation required by investors for the difference in risk and tax status of a bond relative to a government bond
Semiannual bond basis yield
An annual rate having a periodicity of two
Semiannual bond equivalent yield
An annual rate having a periodicity of two
Settlement date
Date when the buyer makes cash payment and the seller delivers the security
Simple yield
The sum of the coupon payments plus the straight-line amortized share of the gain or loss, divided by the flat price
Spot curve
A sequence of yields to maturity on zero coupon bonds. Sometimes called zero or strip curve because coupon payments are “stripped” off of the bonds
Spot rates
A sequence or marker discount rates that correspond to the cash flow dates; yields to maturity on zero coupon bonds maturing at the date of each cash flow
Spread
In general, the difference in yield between different fixed income securities. Often used to refer to the difference between the yield-to-maturity and the benchmark
Spread over benchmark
The difference between the yield to maturity on a new bond and the benchmark rate; additional compensation required by investors for the difference in risk and tax status of a bond relative to a government bond
Street convention
Yield measure that neglects weekends and holidays; the internal rate of return on cash flows assuming payments are made on scheduled dates, even when the scheduled date falls on a weekend or holiday.
Tenor
The time-to-maturity for a bond or derivative contract
Term structure
A factor explaining the differences in yields on similar bonds
Term structure of credit spreads
The relationship between the spreads over the risk “risk-free” (or benchmark) rates and times-to-maturity.
True Yield
The internal rate of return on cash flows using the actual calendar including weekends and bank holidays
Yield to maturity
Annual return that an investor earns on a bond if the investor purchases the bond today and holds until maturity. It is the discount rate that equates the present value of the bonds expected cash flows until maturity with the bonds price
Yield-to-worst
The lowest of the sequence of yields-to-call and the yield-to-maturity
Zero Volatility Spread
Calculated a constant yield spread over a government (or interest rate swap (spot curve)
