Basis Point: A basis point is a unit of measurement commonly used in finance to express small changes in interest rates or bond yields. One basis point is equal to 0.01%, or one-hundredth of a percentage point. It allows for precise discussions of interest rate movements, especially in fixed income markets, where even minor rate changes can significantly impact bond prices and yields.
Benchmark Formula: The benchmark formula refers to a predefined mathematical calculation used to determine the interest rate or yield on a fixed-income security, such as bonds. This formula serves as a standard for pricing and valuation, helping investors compare different bonds or securities within the same asset class. Common benchmark formulas include government bond yields, LIBOR-based rates, or other market-established methodologies.
Benchmark Reference: A benchmark reference is a specific financial instrument, index, or rate that serves as a standard for measuring the performance or pricing of other fixed-income securities. It provides a point of comparison, enabling investors to assess the relative attractiveness of bonds or debt instruments in the market. Examples include the 10-year U.S. Treasury bond yield as a reference for other bond yields or the London Interbank Offered Rate (LIBOR) for short-term interest rates.
Bid: In the context of fixed income, a bid represents the price at which an investor or trader is willing to purchase a bond or other fixed-income security. It is the highest price that a buyer is willing to pay for the security at a given moment. Bids play a crucial role in bond markets, as they determine the buying side of the market and help establish market prices.
Bid Request: A bid request is a formal solicitation made by an issuer or seller to potential buyers in the fixed income market. It includes details about a specific bond or security, such as its characteristics, quantity available, and the desired terms of the transaction. Investors and dealers respond to bid requests with their bids, indicating their willingness to purchase the offered security.
Build America Bonds (BAB): Build America Bonds are a type of taxable municipal bond issued by state and local governments in the United States. These bonds were introduced as part of the American Recovery and Reinvestment Act of 2009 to stimulate infrastructure investments. BABs offer issuers the advantage of receiving federal subsidies on a portion of the interest payments, making them an attractive financing option for municipal projects.
Buy/Sell: In the fixed income market, “buy” and “sell” are straightforward terms indicating the two primary actions that investors or traders can take regarding bonds or other fixed-income securities. “Buy” refers to the act of purchasing a bond, while “sell” indicates selling a bond. These actions are essential for market liquidity and price discovery, as they determine the supply and demand dynamics influencing bond prices and yields.
Bonds: Bonds are debt securities issued by governments, corporations, or other entities to raise capital. When an investor buys a bond, they are essentially lending money to the issuer in exchange for periodic interest payments and the return of the bond’s face value at maturity. Bonds have fixed terms, interest rates, and payment schedules, making them a relatively stable investment option. They provide income to investors through these regular interest payments, hence offering a predictable stream of income. The bond market plays a crucial role in global finance and is a key component of diversified investment portfolios.
Prop Trading Glossary
Brady Bonds: Brady Bonds refer to US dollar-denominated debt securities issued by various emerging market governments during the late 1980s and early 1990s. Named after then-U.S. Treasury Secretary Nicholas Brady, these bonds were typically used to restructure and resolve the sovereign debt crises that plagued many developing countries. Brady Bonds often involved the exchange of defaulted loans for new bonds with more manageable terms, aiming to stabilize the economies of the issuing nations.
Brick Bond: A Brick Bond is a specialized type of municipal bond issued by a local government to fund the construction or maintenance of public infrastructure projects, such as schools, hospitals, or transportation systems. These bonds are typically backed by the revenue generated from specific projects, like tolls, user fees, or taxes, ensuring that the bondholders are repaid from the income generated by the funded facility or service.
Call Feature: A call feature in the context of fixed income refers to a provision in a bond’s terms that grants the issuer the option to redeem or “call” the bond before its maturity date. This feature allows issuers to repurchase the bond at a predetermined price, usually at a premium to the bond’s face value, providing them with flexibility when interest rates decline, ultimately reducing their interest expenses.
Call Protection: Call protection is a safeguard for bondholders, limiting the issuer’s ability to exercise the call feature for a specified period after issuance. During this call protection period, bondholders are shielded from the risk of an early redemption, ensuring they receive the promised interest payments until the protection period expires.
Call Provision: A call provision is a contractual clause in a bond’s documentation that outlines the conditions and terms under which the issuer can exercise its right to call or redeem the bond before its maturity date. It specifies the call date, call price, and any applicable call premiums or penalties.
Call Schedule: A call schedule is a predetermined timetable provided by the issuer, indicating the dates on which a callable bond can be redeemed before maturity. This schedule outlines the call dates, call prices, and any changes in the call premium or redemption terms over the bond’s life.
Callable: A callable bond is a type of fixed-income security that can be redeemed by the issuer before its scheduled maturity date, typically when interest rates have fallen, allowing the issuer to refinance at a lower cost. Callable bonds often provide higher yields to compensate investors for the increased risk of early redemption.
Called Bonds: Called bonds are those fixed-income securities that an issuer has chosen to redeem or “call” before their original maturity date, usually in accordance with the call feature stipulated in the bond’s terms. Once called, bondholders receive the predetermined call price and cease to receive interest payments.
Conditional Call: A conditional call is a callable bond provision that allows the issuer to exercise the call feature only under specific circumstances or conditions outlined in the bond’s documentation. These conditions may include changes in interest rates, financial performance metrics, or other predefined triggers.
Conduit Bonds: (complete definition) Conduit bonds are debt securities issued by a special purpose entity (SPE) or conduit to finance specific projects, such as infrastructure or real estate development. The issuer passes through the funds generated from the bond issuance to the project sponsor, and the bond’s repayment is typically dependent on the project’s cash flows rather than the issuer’s general creditworthiness.
Continuously Callable: A continuously callable bond is a type of security that can be redeemed by the issuer at any time after an initial call protection period. Unlike bonds with fixed call dates, continuously callable bonds provide issuers with ongoing flexibility to call the bonds whenever it is financially advantageous for them to do so, typically with advance notice to bondholders. This feature allows issuers to respond dynamically to changing interest rate environments.
Callable Bond: A callable bond is a type of bond issued by a corporation or government entity that includes a provision allowing the issuer to redeem or “call” the bond before its scheduled maturity date. When a bond is called, the issuer repurchases it from bondholders at a predetermined price, typically at a premium to the face value. Callable bonds offer issuers flexibility in managing their debt and interest expenses but can pose risks to investors, as they may receive their principal back earlier than expected, potentially reinvesting at less favorable terms.
Expected Value: In the context of fixed income bonds, the Expected Value represents the anticipated future worth of an investment, factoring in potential returns and risks. It’s calculated by multiplying the probability of various outcomes by their respective values and summing them. For bonds, this entails considering coupon payments, principal repayment, and the likelihood of default or early redemption. The Expected Value aids investors in assessing the potential return on their bond investments, incorporating the uncertainty associated with market conditions and issuer behavior.
Face Value: Face value, also known as par value or nominal value, refers to the predetermined dollar amount assigned to a financial instrument, such as a bond or a stock, at the time of issuance. It represents the principal amount that will be repaid to the bondholder or the nominal value of a stock share. Face value plays a crucial role in calculating interest payments for bonds and is used as a basis for stock accounting. However, it may not reflect the current market price of the instrument, which can fluctuate based on supply and demand factors.
FDIC Certificate: An FDIC certificate is a document issued by the Federal Deposit Insurance Corporation (FDIC) to indicate that a bank or financial institution is insured by the FDIC. This insurance ensures that depositors’ funds, up to a certain limit, are protected in the event of bank failure.
FDIC Insured: FDIC insured means that a bank or financial institution is covered by the Federal Deposit Insurance Corporation (FDIC). It guarantees that eligible deposits made by customers are protected up to a specified limit, typically $250,000 per account holder, in case of bank insolvency or financial instability.
Federal Deposit Insurance Corporation (FDIC): The FDIC is a U.S. government agency responsible for insuring deposits at banks and savings institutions. It was created to maintain stability in the financial system by guaranteeing the safety of depositors’ funds.
Federally Tax Exempt/Taxable: In the realm of fixed income, this term indicates whether the interest income generated from a bond is subject to federal income tax. “Federally tax-exempt” means the interest income is not taxable at the federal level, while “taxable” means it is subject to federal income tax.
Fill or Kill Order: A fill or kill order is a trading order used in bond markets. It requires that the entire order be executed immediately or canceled (“killed”). This type of order is often used when precise execution is critical, and partial fills are not acceptable.
FINRA: The Financial Industry Regulatory Authority (FINRA) is a self-regulatory organization that oversees and regulates securities firms and brokers in the United States. It sets rules and standards to ensure the integrity and fairness of the securities industry.
First Coupon Date: The first coupon date is the date on which the issuer of a bond makes its initial interest payment to bondholders. It marks the beginning of the bond’s regular interest payment schedule.
First Settlement Date: The first settlement date refers to the date on which the transfer of ownership and payment for a bond trade occurs. It’s the date when the buyer pays for the purchased bonds, and the seller delivers them to the buyer.
Fixed Rate Capital Securities: Fixed rate capital securities are debt instruments with a fixed interest rate and a specific maturity date. They represent a form of capital for the issuer and are often used by financial institutions to raise funds while offering investors a predictable interest income.
Foreign: In the fixed income context, “foreign” typically refers to bonds issued by foreign governments or corporations. These bonds are denominated in a currency other than the domestic currency of the investor, and they may carry additional currency exchange risk. Investors in foreign bonds should be aware of the potential impact of exchange rate fluctuations on their returns.
Growing Perpetuity: In the realm of fixed income bonds, a Growing Perpetuity refers to a financial instrument that provides regular, indefinite payments that increase over time. These payments typically consist of periodic coupon interest payments that escalate at a predetermined rate, reflecting inflation or other factors. Such bonds are valuable for investors seeking income streams that keep pace with rising costs, ensuring a more stable future income. Growing perpetuities offer a predictable income source, albeit with potentially lower initial payments compared to fixed-rate bonds.
Haircut: A haircut in the context of fixed income refers to the reduction in the market value of an asset, typically a bond or collateral, used as security in a lending or borrowing transaction. It is a risk management tool employed by financial institutions to account for potential fluctuations in the asset’s value and ensure that the lender is adequately protected in case of default. The haircut amount represents the percentage by which the asset’s value is discounted when determining its eligibility as collateral, with a higher haircut reflecting a greater perceived risk associated with the asset.
Histogram: A Histogram is a graphical representation of the distribution of data in fixed income markets. In this context, it illustrates the frequency or occurrence of different bond yields or prices within a specified range. The data is divided into intervals or “bins,” and the height of each bar in the histogram corresponds to the number of bonds or observations falling within that range. Histograms help investors and analysts visualize the shape and characteristics of yield or price distributions, aiding in risk assessment and decision-making.
Historical Inflation Factor: The Historical Inflation Factor is a metric used to adjust fixed income securities’ returns or cash flows for the impact of inflation over time. It measures the percentage increase in prices, as represented by a price index, from a historical base year to the present. By applying this factor to bond returns, investors can assess the real or inflation-adjusted performance of their investments, helping to account for the eroding effects of inflation on purchasing power.
Inflation-Linked Bonds: Inflation-Linked Bonds, also known as Treasury Inflation-Protected Securities (TIPS) in the United States, are government-issued bonds designed to protect investors from the eroding effects of inflation. The principal value of these bonds adjusts with changes in the Consumer Price Index (CPI) or another inflation index, ensuring that the bond’s purchasing power remains relatively stable over time. Inflation-linked bonds provide investors with a hedge against rising prices, as both interest payments and the bond’s face value increase in line with inflation.
Increment: An Increment in the fixed income context refers to a small, predetermined increase or step-up in the interest rate or coupon of a bond. Bonds with incremental features typically experience periodic adjustments to their interest payments, often tied to specific factors such as changes in market rates or economic conditions. These adjustments help bond issuers align their interest expenses with prevailing market conditions and provide investors with some protection against interest rate fluctuations.
Indenture: An Indenture is a legal contract or agreement that outlines the terms and conditions of a fixed income security, typically a bond. It specifies details such as the bond’s interest rate, maturity date, payment schedule, and any covenants or restrictions that the issuer and bondholder must adhere to. Indentures serve as a binding document that governs the relationship between the issuer and bondholders, ensuring that both parties understand their rights and obligations regarding the bond.
Inflation Factor: The Inflation Factor, in the context of fixed income, is a factor used to adjust cash flows or returns for the impact of inflation. It represents the percentage increase in prices over a specific period, as measured by a price index. Adjusting fixed income investments for inflation allows investors to evaluate their real purchasing power and assess the true returns earned after accounting for the erosion caused by rising prices.
Interest: Interest, in the context of fixed income, refers to the regular payments made by a bond issuer to bondholders as compensation for lending money. These payments, often referred to as “coupons,” are typically calculated as a fixed percentage of the bond’s face value and are paid at specified intervals, such as annually or semi-annually. Interest income represents a significant component of bond returns for investors.
Interest Accrual Date: The Interest Accrual Date is the specific date on which interest begins to accumulate on a fixed income security. It marks the start of the interest accrual period, which continues until the next interest payment date. Investors who purchase a bond between interest payment dates will receive a portion of the interest that has accrued up to the date of purchase when the next interest payment is made.
Interest Income: Interest Income is the earnings generated by owning fixed income securities, such as bonds. It represents the regular interest payments received by bondholders as compensation for lending money to the issuer. Interest income is a crucial component of total return for bond investors and contributes to the yield on the investment.
Issue Date: The Issue Date is the date on which a fixed income security, such as a bond, is first offered and sold to investors by the issuer. It marks the beginning of the bond’s life and sets the reference point for its maturity and interest payment schedule. The issue date is essential for determining when interest payments will commence and when the bond will reach its maturity date.
Issue Price – Fixed Income: The Issue Price, in the context of fixed income, is the initial price at which a bond or other fixed income security is sold to investors by the issuer on the issue date. It represents the face value of the bond plus any accrued interest or premium (if sold above face value) or discount (if sold below face value). The issue price is a critical factor in determining the yield and potential returns for bondholders.
Issuer: The Issuer refers to the entity or organization that issues and sells fixed income securities, such as bonds, to raise capital. Issuers can include governments, corporations, municipalities, or other entities seeking to finance their operations or projects. The issuer is responsible for making regular interest payments to bondholders and repaying the principal amount at maturity. Bond investors assess the creditworthiness of the issuer to evaluate the risk associated with the investment.
Liquidity Risk: Liquidity Risk refers to the potential difficulty of converting an asset into cash quickly without significantly affecting its price. It arises when an investment or asset cannot be sold or traded easily in the market due to limited buyer interest or market disruptions. Liquidity risk can result in lower prices, wider bid-ask spreads, or delays in executing transactions. Investors and financial institutions must assess and manage liquidity risk to ensure they can meet their short-term cash needs and avoid potential losses.
Liquidity Preference Theory: Liquidity Preference Theory in the context of fixed income refers to the concept that investors demand a premium for holding longer-term bonds as opposed to shorter-term ones, due to their preference for liquidity. This theory posits that individuals are generally averse to tying up their funds for extended periods, so they require higher yields on longer-term bonds to compensate for the lack of immediate access to their capital.
Maturity Date: The maturity date of a financial instrument, typically a bond or a loan, is the specific date when the issuer is obligated to repay the principal amount or face value to the bondholder or lender. It signifies the end of the instrument’s term, and bondholders can expect to receive their initial investment back on this date, in addition to any remaining interest payments. Maturity dates vary widely among different financial products and can range from a few months to several decades, influencing the instrument’s risk and return profile.
Market Segmentation Theory: Market Segmentation Theory for fixed income asserts that the bond market is divided into distinct segments based on different maturities, and investors have specific preferences for particular maturity ranges. This theory suggests that interest rates are determined independently within each segment, with demand and supply dynamics influencing rates for bonds of specific maturities. Consequently, long-term and short-term interest rates may not necessarily move in sync, as they cater to separate investor preferences.
Nominal Value: Nominal value refers to the face value or the stated value of a financial instrument, such as a stock, bond, or currency, as determined by its issuer. It is often used to indicate the initial or original value of the instrument, which may not necessarily reflect its current market worth. Nominal value is important for accounting, legal, and regulatory purposes, but it may not represent the actual market price or intrinsic value of the asset.
Par: Par refers to the face value of a bond, which is the amount the bond will be worth when it matures. It is also known as the nominal or redemption value, and it represents the amount the bondholder will receive back from the issuer upon maturity, assuming no default or early redemption.
Pay frequency: Pay frequency is the regularity with which interest payments are made to bondholders. It indicates how often the issuer disburses interest payments to bondholders, typically expressed in terms of semi-annual, annual, quarterly, or monthly payments.
Premium, fixed income: Premium in fixed income refers to the price of a bond that is higher than its par value. When a bond is trading at a premium, it means investors are willing to pay more for the bond than its face value, usually because it offers a higher coupon rate or is in high demand due to its credit quality.
Pre-refunded bonds: Pre-refunded bonds are municipal bonds that have been paid off or refunded by the issuer before their original maturity date. This is often done to take advantage of lower interest rates, resulting in cost savings for the issuer.
Pre-refunded price: Pre-refunded price refers to the market price at which pre-refunded bonds are currently trading. It reflects the bond’s value in the secondary market, considering its pre-refunded status and prevailing interest rates.
Principal repayment: Principal repayment refers to the return of the initial investment amount (the bond’s face value) to the bondholder upon maturity. It is separate from interest payments and represents the repayment of the borrowed funds by the issuer.
Provision: In the context of fixed income, a provision refers to a clause or condition within a bond’s indenture that outlines specific terms, conditions, or rights related to the bond issue. Provisions can cover various aspects, including call options, conversion features, covenants, and other terms that impact bondholders and issuers.
Par Value: Par value, also known as face value or nominal value, is the fixed value assigned to a financial instrument, typically bonds or stocks, by its issuer. It represents the principal amount that will be repaid at maturity for bonds or the minimum value of a share of stock. Par value is essential for accounting and legal purposes and may differ from the market price, which can fluctuate based on supply and demand dynamics.
Pickle Bond: A pickle bond is a slang term for a financial instrument, often a bond, that has become illiquid or difficult to trade due to its undesirable or distressed characteristics. These bonds are usually associated with issuers in financial distress or with poor credit quality, making them unappealing to investors. The term “pickle” underscores the challenging situation these bonds pose, as they are often hard to sell or exit from without incurring significant losses.
Pure Expectations Theory: The Pure Expectations Theory is a financial concept that suggests that the interest rates on long-term bonds are solely determined by the market’s expectations for future short-term interest rates. According to this theory, investors are indifferent between holding short-term bonds or rolling over a series of short-term bonds, as long as the expected returns are equal. It implies that long-term interest rates are an aggregation of future short-term rates and do not contain a risk premium.
Sum of Squares: The Sum of Squares is a mathematical calculation that involves summing the squared deviations of a set of values from their mean or expected value. It is commonly used in statistics to measure the variability or dispersion of data points within a dataset. By squaring the differences between individual data points and their mean, the Sum of Squares quantifies the total variance within the dataset, providing valuable information for various statistical analyses and hypothesis testing.
Survivor’s option: Survivor’s option refers to a provision often found in certain bonds, such as mortgage-backed securities (MBS) or annuity contracts, that allows the surviving beneficiary or policyholder to continue receiving payments or benefits after the death of the original bondholder or annuitant. This feature ensures that the surviving party can maintain the income stream or benefits established by the bond or annuity, providing financial security in the event of the original holder’s demise.
Symbol: In the context of fixed income, a symbol represents a unique alphanumeric code or ticker used to identify and track a specific bond or financial instrument in financial markets. These symbols make it easier for investors, traders, and financial institutions to quickly access information and execute transactions related to particular bonds, aiding in efficient market operations and price discovery.
ax-exempt income: Tax-exempt income refers to the earnings or interest payments generated from certain bonds, such as municipal bonds issued by state or local governments in the United States. These earnings are exempt from federal income tax and, in many cases, state and local income taxes as well. Investors are attracted to tax-exempt income because it allows them to potentially earn interest without incurring tax liabilities, enhancing the after-tax returns on their fixed income investments.
Term: In the fixed income context, “term” refers to the duration or maturity period of a bond or debt instrument. It represents the length of time until the issuer must repay the bond’s principal to the bondholders. Bonds can have short-term, intermediate-term, or long-term maturities, and the term of a bond plays a crucial role in determining its risk and return profile.
Third-party price: The third-party price is the valuation or pricing of a fixed income security, such as a bond, by an independent and unbiased third-party entity. This objective pricing is essential for fair and transparent market operations, as it helps investors assess the market value of their holdings and make informed decisions. Third-party prices are often used to calculate the net asset value (NAV) of mutual funds and other investment vehicles.
Third-party providers: Third-party providers in the fixed income market are external entities or companies that offer specialized services related to bond pricing, analytics, data, and other financial information. These providers play a crucial role in supplying accurate and reliable data to market participants, including investors, traders, and financial institutions, helping them make informed investment decisions and manage risk effectively.
TIGRs: TIGRs, or Treasury Investment Growth Receipts, were a type of U.S. Treasury security issued in the 1980s and 1990s. TIGRs were zero-coupon bonds created by separating the principal and interest components of Treasury bonds. They were sold at a deep discount and did not make periodic interest payments but instead paid the face value (par value) upon maturity. TIGRs were popular among investors seeking a predictable return and were eventually replaced by STRIPS (Separate Trading of Registered Interest and Principal of Securities).
TRACE eligibility: TRACE, or Trade Reporting and Compliance Engine, is a system operated by the Financial Industry Regulatory Authority (FINRA) that provides transparency and reporting for fixed income securities, particularly corporate bonds. TRACE eligibility refers to whether a specific bond or security is eligible for reporting and trading on the TRACE platform. Bonds meeting certain criteria, such as publicly traded corporate bonds, are TRACE-eligible, allowing for enhanced market transparency and regulatory oversight.
Trading flat: Trading flat refers to a situation in the bond market when a bond is traded without accrued interest. This means that the buyer does not receive the interest that has accumulated on the bond since the last interest payment date. Bonds typically trade flat on the day when the seller retains the accrued interest, and the buyer receives the full face value of the bond without the additional interest amount. It is essential for investors to be aware of trading flat dates when buying or selling bonds to avoid misunderstandings regarding interest payments.
Treasuries: Treasuries, short for U.S. Treasuries or Treasury securities, are debt instruments issued by the United States Department of the Treasury to raise funds for government operations. They are considered one of the safest investments in the world, as they are backed by the full faith and credit of the U.S. government. Treasuries come in various maturities, including Treasury bills (T-bills), Treasury notes (T-notes), and Treasury bonds (T-bonds), catering to different investment needs with varying terms and yields.
Treasury auctions: Treasury auctions are the primary method through which the U.S. government sells its Treasury securities to investors. These auctions are typically conducted on a regular schedule and involve the sale of newly issued Treasury bills, notes, and bonds to the highest bidders. Treasury auctions play a critical role in determining the yields and interest rates on U.S. government debt and serve as benchmarks for other fixed income securities.
Treasury benchmark: A Treasury benchmark refers to a specific Treasury security, such as a Treasury note or bond, that is widely recognized and used as a benchmark or reference point in the fixed income market. Treasury benchmarks serve as key indicators of interest rates and market sentiment, influencing the pricing and yields of other fixed income securities, including corporate bonds and mortgages. Investors often compare the yields of other bonds to Treasury benchmarks to assess their relative value and risk.
Treasury bonds: Treasury bonds, often referred to as T-bonds, are long-term U.S. government debt securities with maturities typically ranging from 10 to 30 years. These bonds pay periodic interest to bondholders and return the full face value (par value) at maturity. Treasury bonds are considered low-risk investments due to the U.S. government’s backing and are popular among investors seeking stable income and capital preservation. They also serve as important benchmarks for pricing other fixed income securities in the market.
Time Value of Money: The Time Value of Money (TVM) is a financial concept that acknowledges the principle that a sum of money has different values at different points in time. It asserts that a dollar received today is worth more than the same dollar received in the future, as money can earn interest or generate returns over time. TVM is fundamental in financial decision-making and is used to calculate present value, future value, and determine the profitability of investments, loans, or any financial transactions involving cash flows occurring at different time periods.
Toilet Paper Bond: The term toilet paper bond is not a recognized financial term but is used informally to describe bonds or debt securities issued by companies or entities with extremely low creditworthiness or those facing imminent financial distress. These bonds are considered highly speculative and are often on the verge of default. The humorous term “toilet paper bond” implies that their value may be as worthless as disposable toilet paper.
Toxic Debt: Toxic debt refers to debt securities, often bonds or loans, that have significantly declined in value due to a high risk of default or insolvency associated with the issuer. These assets are typically characterized by their poor credit quality, often resulting from deteriorating financial conditions or unsustainable business practices. Investors holding toxic debt may face substantial losses if the issuer defaults, leading to a severe impairment of the debt’s market value. During financial crises, the presence of toxic debt in the market can contribute to systemic instability and economic downturns.
Treasury Inflation-Protected Securities (TIPS): Treasury Inflation-Protected Securities (TIPS) are U.S. government bonds designed to protect investors from inflation. Their principal value adjusts with changes in the Consumer Price Index (CPI), ensuring that investors receive a consistent real return. When inflation rises, the bond’s principal increases, and when it falls, the principal decreases, but the interest payments rise or fall accordingly.
Treasury Inflation-Protected Securities (TRACE): TRACE, short for Trade Reporting and Compliance Engine, is a system operated by the Financial Industry Regulatory Authority (FINRA) to provide transparency in the secondary market for fixed-income securities. TRACE records and disseminates information on bond trades, including transaction prices, volumes, and times, helping market participants make informed decisions.
Treasury Security: A Treasury security is a debt instrument issued by the U.S. Department of the Treasury to raise funds for government operations. These securities include Treasury bills, notes, and bonds, and they are considered among the safest investments because they are backed by the full faith and credit of the U.S. government.
Use of Proceeds – Fixed Income: Use of proceeds in the fixed income context refers to the specific purposes for which a bond issuer will allocate the funds raised from the bond issuance. This information is typically outlined in the bond’s prospectus and may include financing capital projects, debt refinancing, or funding operations, providing investors with transparency about how their investment will be utilized.
Variance: Variance is a statistical measure that quantifies the spread or dispersion of data points in a dataset. It is calculated as the average of the squared differences between each data point and the mean of the dataset. Variance provides insights into the extent to which individual data points deviate from the central tendency of the dataset, helping to assess the degree of variability or volatility. Higher variance indicates greater dispersion, while lower variance suggests that data points are closer to the mean, indicating lower volatility or risk in certain contexts, such as finance or data analysis.
Weighted Average: A weighted average is a calculation that assigns different levels of importance, or “weights,” to individual values within a set. This means that some values contribute more significantly to the final average than others. It is commonly used in various fields, such as finance and statistics, to provide a more accurate representation of the overall data by giving greater significance to specific data points based on their importance or relevance.
Workout Date: The workout date in fixed income represents the date when a bond issuer, often in financial distress, is obligated to repay the bondholders the principal amount or take specific actions to resolve the situation, such as restructuring or bankruptcy proceedings. It is a critical date for bondholders to assess potential outcomes and make informed decisions.
Yield: Yield represents the return on investment generated by a fixed income bond, expressed as a percentage of the bond’s face value or its current market price. It comprises two main components: coupon yield and capital gain/loss yield. Coupon yield is the interest income received from periodic coupon payments, while capital gain/loss yield reflects changes in the bond’s market price. Yield is a crucial metric for investors, as it helps assess the bond’s profitability and risk relative to its price and coupon payments.
Yield Curve: A yield curve is a graphical representation of interest rates for bonds with the same credit risk but different maturity periods, all observed at the same point in time. It displays the relationship between interest rates and bond maturities, typically plotting longer-term yields against shorter-term yields. The shape of the yield curve can offer insights into the market’s expectations regarding future economic conditions and interest rate movements.
Yield to Call: Yield to Call refers to the anticipated rate of return an investor can expect to receive from a bond or preferred stock if it is redeemed or “called” by the issuer before its maturity date. This metric takes into account the bond’s current market price, the call price, and the time remaining until the call date. It helps investors assess the potential profitability of a callable security, factoring in the possibility of early redemption by the issuer.
Yield to Maturity: Yield to Maturity (YTM) is the annualized rate of return that an investor can expect to earn on a bond if it is purchased at its current market price and held until it matures. YTM accounts for the bond’s coupon payments, its purchase price, and the final redemption value at maturity. It represents the total return potential of a bond investment over its entire holding period, making it a critical metric for assessing bond investments.
Zero Coupon Bond: A zero coupon bond is a debt instrument that does not make periodic interest or coupon payments to bondholders. Instead, it is typically sold at a discounted price and pays the investor its face value when it matures. The profit for investors in zero coupon bonds comes from the difference between the purchase price and the face value at maturity, as there are no regular interest payments during the
Yield to Sink: Yield to sink is a specialized measure of a bond’s yield that takes into account the possibility of the bond being retired (sunk) before its scheduled maturity date. It considers the potential impact of any sinking fund provisions or other mechanisms that allow the issuer to repurchase and retire a portion of the outstanding bonds before maturity. Calculating yield to sink helps investors assess the bond’s expected return, considering the issuer’s potential actions to redeem a portion of the bonds early.
Yield to Worst: Yield to worst is a crucial metric in fixed income investing that provides investors with the lowest potential yield they can expect to receive from a bond under various scenarios. It accounts for all possible call provisions, sinking fund redemptions, and other factors that may affect the bond’s yield, ensuring that investors are aware of the worst-case yield scenario. Yield to worst is particularly valuable for risk-averse investors seeking to assess the downside risk associated with a bond investment, as it helps them make informed decisions while considering the full range of possible outcomes.