Fixed Income Glossary

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Last Updated:September 14, 2023

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A

Annuity: An annuity is a financial product that offers regular payments at set intervals, commonly used to provide a consistent income, especially in retirement.

B

Bonds: Bonds are debt securities used by organizations to raise capital. They typically have fixed interest rates and are rated for creditworthiness, with AAA being the highest and C or D the lowest.
Bond Coupon: This is the interest payment received by a bondholder.
Bondholder: A bondholder is an individual or entity that holds and owns a bond, making them a creditor or debtholder of the issuer. Bondholders receive periodic interest payments and the repayment of the bond's principal amount at maturity.
Basis Point: A basis point, often denoted as "bp," is a unit of measurement used in finance to represent a percentage change in interest rates or financial instruments. One basis point is equal to 0.01% or 1/100th of a percentage point. It is used to express small changes in interest rates, yields, or spreads.
Bid Price: The bid price is the highest price a buyer is willing to pay for a financial instrument or security, such as a stock or bond, in a market. It represents the maximum price a buyer is willing to offer when trying to purchase an asset. The bid price is a crucial component of bid-ask spreads and plays a key role in determining the current market price of an asset.
Bullet Bond: A bullet bond pays interest periodically and returns the full principal at maturity. During the maturity period, the entire loan plus any remaining accrued interest must be repaid.

C

Callable Bonds: Callable bonds allow the issuer to pay back the principal and stop interest payments before the maturity date, similar to call options in which the issuer can redeem the bonds early.
Commercial paper: A commercial paper is an unsecured financial instrument. It is issued as a promissory note. Their maturity period is between 2 and 270 days. These do not possess any interest rate and are issued on a money market basis.
Constant perpetuity: A perpetuity is a security that pays a fixed amount of money for an infinite amount of time. Though this might look like giving someone infinite money, if we look at the present value formulation, it comes out to be a finite value. The concept of perpetuity is used in the "Dividend Discount" model.

Coupon Rate (Floating): This is the percent interest rate paid on the par value. T he reference rate is a benchmark rate like the federal funds rate. The quoted margin is the amount of additional interest rate above the reference rate. It is also defined as spread over the reference rate.
Coupon Rate (Inverse Floaters): This is the percent interest rate paid on bonds where the coupon rate negatively correlates to a specific interest rate.
Current Yield: It is a bond's annual interest payment divided by its current market price, expressed as a percentage.

D

Dollar Duration: It is used to understand the sensitivity of bond prices to interest rate changes. This method is used to calculate the risk associated with products. It measures the change in bond price for every 1% change in interest rates.
Debenture: A type of bond not backed by specific collateral, relying on the issuer's general creditworthiness.

E

Economic Cycle: The recurring pattern of expansion and contraction in the economy, with four stages: expansion, peak, contraction (recession), and trough.
Embedded Option: A feature in some bonds that allows the issuer or bondholder to take certain actions.

F

Federal Funds: Excess reserves held by banks at Federal Reserve banks, influenced by reserve requirements, discount rates, and interest rates set by the central bank.
Floating rate Coupons: These are financial instruments with variable interest rates (coupon rates). The coupon rate for these are given as follows:
Full Faith and Credit: It's refer to a guarantee by a government, typically a national government, that it will honor its financial obligations and debts. This assurance provides a high level of confidence in the government's ability to repay borrowed funds, making its bonds and securities considered low-risk investments.

G

Government Bond: This bonds are debt securities issued by governments to raise funds for various purposes, considered low-risk investments backed by the government's credit. They pay interest and return the principal at maturity.

H

High-Yield Bond: This bonds, often called junk bonds, are debt securities issued by organizations with lower credit ratings, offering higher interest rates to compensate for increased risk.

I

Inflation-Protected Securities (TIPS): This bonds designed to protect investors from inflation by adjusting their principal and interest payments based on changes in the Consumer Price Index (CPI).
Interest Rate Risk: Interest Rate Risk refers to the potential for the value of an investment, particularly bonds, to fluctuate due to changes in prevailing interest rates. When interest rates rise, bond prices tend to fall, and vice versa.
Investment-Grade: It refers to bonds or securities that are considered to have a relatively low risk of default by credit rating agencies. These bonds are typically issued by financially stable companies or governments and are seen as safer investments compared to lower-rated or high-yield bonds.

J

Junk Bond: A high-yield, high-risk bond with a lower credit rating.

K

Kicker: A feature of certain bonds or other fixed-income securities that allows the issuer or bondholder to adjust certain terms, such as interest rates or maturity dates, under specific conditions.
Key Rate Duration: A measure of the sensitivity of a bond's price to changes in a specific benchmark interest rate, such as the yield on a U.S. Treasury bond with a particular maturity.

L

Long-Term Bond: A bond with a maturity period usually exceeding 10 years.
Laddering: A strategy of spreading investments across bonds with different maturities.
Liquid Bond: A bond with high trading volume. These are easily tradable in the secondary market, making it relatively simple to buy or sell them.
Liquidity Risk: The risk of being unable to sell a bond without a significant loss.

M

Maturity Date: The date when a bond or investment reaches the end of its term, and the principal amount is due to be repaid to the investor.
Municipal Bond: A debt security issued by a state, municipality, or local government to finance various public projects or initiatives, typically with interest income that is exempt from federal taxes.
Make whole call: A corporate issue with an implicit call at an increasing premium as interest rates decline. Issuers may call these bonds at par plus a premium. This premium is derived from the yield of a comparable Treasury security plus additional basis points. The "street" treats these issues as non-call bonds due to the fact that it would be prohibitively expensive for a company to exercise this call option

N

Nominal Yield: The fixed interest rate specified on a bond, often expressed as a percentage of its face value, that determines the periodic interest payments made to bondholders.
Next coupon date: The date (MM/YY) of the bond's next coupon payment
Next reset date: The next date upon which a new rate will be established for stepped and variable rate securities
Next reset rate: The next rate that will be established for stepped and variable securities

O

Offer price: The price at which a security may be purchased; conversely, bid price is the price at which a security may be sold
Open order: an order status indicating that an order has been placed and that no part of that order has been executed
Option strategy: Consists solely of either calls or puts, or a combination of both, to take advantage of a specific market forecast
Original issue amount: The amount or quantity offered to the public at the time of original issuance

P

Pension Funds: Funds set up to provide retirement income, primarily invested in both publicly traded and private companies.
Puttable Bonds: Bonds that grant the holder the right to request early repayment of the principal amount.
Par Value: The face value or principal amount of a bond, which is the amount that will be repaid to the bondholder at maturity. It's typically the amount the bond was originally issued for and serves as the basis for calculating interest payments.
Premium Bond: A bond that is trading at a price higher than its face value or par value. Investors pay a premium to purchase these bonds, and they receive lower interest payments compared to the premium paid. The bond's yield to maturity is typically lower than its coupon rate because of the premium.
Principal: The face value of a bond, which represents the amount of money that the bondholder will receive when the bond matures. It is also the initial amount of money borrowed or invested in a financial transaction, and it does not include interest or returns earned on that amount.
Put Provision: A bond feature allowing bondholders to sell the bond back to the issuer before maturity at a predetermined price.

Q

Quality Spread Differential (QSD): The difference in yields between two bonds of differing credit quality.

R

Repo: Repo stands for Repurchase Agreement. It is a form of short-term borrowing. Repos are used by the Federal Reserve’s ON RRP facility to support the federal funds rate.
Risk-Free Rate: The theoretical interest rate at which an investment can be made without any risk of financial loss, typically based on government bond yields.
Reinvestment Risk: The risk that cash flows from an investment will be reinvested at a lower interest rate.

S

Skip day settlement: Skip day settlement takes an extra business day to settle a transaction. Suppose a transaction is settled in 2 days generally. The skip day settlement would take three business days for the same. This skip-day settlement frees up billions of dollars in margin for large firms, giving these organizations more time to meet their obligations.
Spread: The difference between the yield on a bond and the yield on a risk-free benchmark, usually expressed in basis points. It reflects the additional compensation investors demand for holding a riskier asset compared to a safe one.

T

Treasury bills: Short-term government debt with maturities up to one year. T-Bills are low-risk investments, and their interest rates may be higher for longer-term options due to the attractiveness of liquidity.

U

Unsecured Bond: A bond not backed by specific collateral.

v

Value Date: The date on which a transaction in the bond market settles and ownership of the securities is transferred. It is also known as the settlement date.
Volatility: In the context of fixed income, volatility refers to the degree of fluctuation in the price of a bond or bond portfolio. Higher volatility indicates greater price fluctuations, which can be a concern for bond investors.
Variable-Rate Bond: A bond with an interest rate that can change over time based on a specific benchmark, such as a reference interest rate plus a spread. Also known as a floating-rate bond.

W

Workout date: Based on the current price and call schedule for a bond, this is the date when the bond is most likely to be called or redeemed

Y

Yield: The return on an investment, often expressed as a percentage of the investment's cost or market value.
Yield to sink: The rate of return to the investor earned from payments of principal and interest, with interest compounded (typically semi-annually) at the stated yield, presuming that the security is redeemed on the next scheduled sinking fund date
Yield to maturity: The rate of return an investor receives if an investment is held to the maturity date