Terms Flashcards
Duration
A measure of the sensitivity of the price of a fixed-income investment to a change in interest rates. Duration is expressed as a number of years. Rising interest rates mean falling bond prices, while declining interest rates mean rising bond prices.
The bigger the duration number, the greater the interest-rate risk or reward for bond prices.
Absolute Return
The return that an asset achieves over a certain period of time. This measure looks at the appreciation or depreciation (expressed as a percentage) that an asset - usually a stock or a mutual fund - achieves over a given period of time.
Absolute return differs from relative return because it is concerned with the return of a particular asset and does not compare it to any other measure or benchmark.
EXAMPLE: In general, a mutual fund seeks to produce returns that are better that its peers, its fund category, and/or the market as a whole. This type of fund management is referred to as a relative return approach to fund investing. As an investment vehicle, an absolute return fund seeks to make positive returns by employing investment management techniques that differ from traditional mutual funds.
10-YEAR TREASURY NOTE
A debt obligation issued by the United States government that matures in 10 years. A 10-year Treasury note pays interest at a fixed rate once every six months and pays the face value to the holder at maturity. An advantage of investing in 10-year Treasury notes, and other federal government securities, is that the interest payments are exempt from state and local income tax. However, they are still taxable at the federal level.
Investors can choose to hold Treasury notes until maturity or sell early.
Why The 10 Year US Treasury Rates Matter
The importance of the ten-year treasury bond yield goes beyond just understanding the return on investment for the security. The ten-year is used as a proxy for many other important financial matters, such as mortgage rates. This bond, which is sold at auction by the U.S. government, also tends to signal investor confidence. When confidence is high, the ten-year treasury bond’s price drops and yields go higher because investors feel they can find higher returning investments and they do not feel they need to play it safe, but when confidence is low, the price goes up as there is more demand for this safe investment, and yields fall. This confidence factor can also be explored in non-U.S. countries. Often the price of U.S. government bonds is impacted by the geopolitical situations of other countries with the U.S. being deemed a safe haven, pushing the prices of U.S. government bonds up (as demand increases) and lowering yields.
