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Fixed Income & Bonds

Bond fundamentals, duration, and yield mechanics. 11 indexed terms, 24 additional definitions.

Key Concepts

Bond Auction

Bond auctions are the primary market mechanism through which governments and agencies sell new debt securities to investors, with results closely watched as indicators of demand for sovereign debt.

Bond Convexity

Bond convexity measures how a bond's duration changes as interest rates move, capturing the curvature in the price-yield relationship that duration alone cannot explain.

Bond Default

A bond default occurs when an issuer fails to make scheduled interest or principal payments, triggering legal remedies for bondholders and often leading to restructuring or bankruptcy.

Bond Indenture

A bond indenture is the legal contract between a bond issuer and bondholders that specifies all terms of the bond, including coupon rate, maturity, covenants, and bondholder rights.

Bond Spread

Bond spread is the yield difference between a bond and a benchmark (typically a Treasury of similar maturity), reflecting the additional compensation investors demand for credit and liquidity risk.

Callable Bonds

Callable bonds give the issuer the right to redeem the bond before its maturity date, typically when interest rates fall, allowing refinancing at lower borrowing costs.

Clean Price and Dirty Price

Clean price is a bond's quoted market price excluding accrued interest, while dirty price includes accrued interest and represents the actual settlement amount paid by the buyer.

Floating Rate Notes

Floating rate notes are bonds with variable coupon rates that reset periodically based on a benchmark interest rate, offering protection against rising rates.

On-the-Run vs. Off-the-Run

On-the-run Treasuries are the most recently issued securities for each maturity, trading with superior liquidity and slightly lower yields than older off-the-run issues.

Puttable Bonds

Puttable bonds give the bondholder the right to sell the bond back to the issuer at a specified price before maturity, providing protection against rising interest rates.

Yield to Maturity

Yield to maturity (YTM) is the total annualized return an investor will earn if they hold a bond until maturity, accounting for coupon payments, purchase price, and the return of par value.

Show 24 additional definitions ▾
Accrued Interest
Accrued interest is the portion of a bond's coupon payment that has accumulated since the last payment date, which a bond buyer must pay the seller at the time of purchase.
Agency Bonds
Agency bonds are debt securities issued by government-sponsored enterprises or federal agencies, offering slightly higher yields than Treasuries with an implicit or explicit government guarantee.
Bond Laddering
Bond laddering is an investment strategy that staggers bond maturities across multiple dates to manage interest rate risk and provide regular liquidity from maturing bonds.
Bond Rating
Bond ratings are letter grades assigned by credit rating agencies that assess the creditworthiness of a bond issuer and the likelihood of timely repayment of principal and interest.
Corporate Bonds
Corporate bonds are debt securities issued by companies to raise capital, offering investors fixed or variable interest payments until maturity.
Coupon Rate
The coupon rate is the annual interest rate paid by a bond issuer on the bond's face value, expressed as a percentage and typically paid semiannually.
Credit Rating Agencies
Credit rating agencies are firms that assess the creditworthiness of bond issuers and their debt securities, with the "Big Three" being S&P, Moody's, and Fitch.
Current Yield
Current yield is a simple bond return measure calculated by dividing the annual coupon payment by the bond's current market price, showing the income return on investment.
Discount Bond
A discount bond trades below its par value, meaning its coupon rate is lower than prevailing market yields, offering investors capital appreciation potential at maturity.
Inflation-Linked Bonds
Inflation-linked bonds are securities whose principal and interest payments adjust with inflation, protecting investors from the erosion of purchasing power.
Investment Grade
Investment grade refers to bonds rated BBB-/Baa3 or higher by major credit rating agencies, indicating a relatively low risk of default and suitability for conservative investors.
Junk Bonds
Junk bonds are debt securities rated below investment grade (BB+/Ba1 or lower), offering higher yields to compensate investors for elevated default risk.
Municipal Bonds
Municipal bonds are debt securities issued by state and local governments, often offering tax-exempt interest income to investors.
Par Value
Par value is the face amount of a bond that the issuer promises to repay at maturity, typically $1,000 for corporate bonds, and serves as the base for calculating coupon payments.
Premium Bond
A premium bond trades above its par value because its coupon rate exceeds prevailing market yields, providing higher current income but a capital loss if held to maturity.
Primary Dealer
Primary dealers are major financial institutions authorized to trade directly with the Federal Reserve and required to participate in U.S. Treasury auctions, forming the backbone of government securities markets.
Recovery Rate
Recovery rate is the percentage of a defaulted bond's face value that bondholders ultimately receive through bankruptcy proceedings or debt restructuring.
Sinking Fund
A sinking fund is a bond provision requiring the issuer to retire a portion of the outstanding bonds periodically before maturity, reducing default risk for investors.
Sovereign Bonds
Sovereign bonds are debt securities issued by national governments to finance public spending, serving as benchmarks for risk-free rates in their respective currencies.
Treasury Bonds
Treasury bonds are long-term U.S. government debt securities with 20 or 30 year maturities, offering semiannual interest payments backed by the full faith and credit of the U.S. government.
Treasury Notes
Treasury notes are U.S. government debt securities with maturities of 2 to 10 years, paying semiannual interest and serving as key benchmarks for global interest rates.
Yield to Call
Yield to call (YTC) is the return an investor would earn if a callable bond is redeemed by the issuer at the earliest possible call date rather than held to maturity.
Zero-Coupon Bonds
Zero-coupon bonds pay no periodic interest, instead selling at a deep discount to face value and providing the full return as price appreciation at maturity.
Z-Spread
The Z-spread is the constant spread added to every point on the Treasury spot rate curve to make a bond's present value equal to its market price, providing a more accurate risk measure than the nominal spread.

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