Welcome to our comprehensive guide on fixed income glossary, where we’ll demystify the world of bonds and debt securities. In this article, we’ve compiled a concise bond trading glossary of key terms and concepts to help you navigate the landscape of fixed-income investments.

Whether you’re a seasoned investor or just starting your journey in the world of finance, this guide will provide you with the essential knowledge to understand the language of fixed-income markets. Let’s dive in!

Bond Dictionary and terminology

A

Accordion Feature: An Accordion Feature is a flexible provision often included in fixed income agreements, allowing the issuer to increase or decrease the size of the debt instrument over time, usually in response to changing financial needs or market conditions. This feature grants the issuer the option to expand or contract the bond’s outstanding principal, providing them with greater financial flexibility and potentially lowering borrowing costs.

Accrued interest: Accrued interest refers to the interest that has been earned on a fixed income security but has not yet been paid to the investor. It accumulates daily and is typically calculated from the last interest payment date up to the settlement date of a trade. When buying or selling bonds, the buyer compensates the seller for the accrued interest, ensuring that each party receives the appropriate amount of interest income.

Adjusted options: Adjusted options are modified versions of standard options contracts, typically resulting from corporate actions like stock splits, mergers, or dividend payments. These adjustments are made to maintain the fairness and integrity of the options market, ensuring that the options continue to represent the underlying assets accurately.

Agency/GSE: Agency or Government-Sponsored Enterprise (GSE) bonds are debt securities issued by entities like Fannie Mae, Freddie Mac, or Ginnie Mae, which are sponsored or guaranteed by the U.S. government. They are considered relatively safe investments due to the implicit or explicit backing of the government, and they play a significant role in the mortgage and housing markets.

All or none: All or none is a trading order that specifies that the entire order must be executed in a single transaction, or none of it should be executed at all. This type of order is often used when an investor wants to ensure that a complete block of securities is bought or sold in one go, rather than in partial fills.

Ask yield to maturity: The ask yield to maturity represents the yield an investor can expect to receive if they purchase a fixed income security at its current asking price and hold it until maturity. It takes into account the security’s price, par value, coupon rate, and the time remaining until maturity, providing an estimate of the annualized return on the investment.

Auction: An auction in the context of fixed income refers to the process of selling or buying bonds through a competitive bidding system. Participants submit bids specifying the quantity and price at which they are willing to trade, and the bonds are awarded to the highest bidder(s) at the clearing price determined by the auction.

Auction date: The auction date is the specific day on which the auction for a particular fixed income security or bond issue takes place. It marks the deadline for investors to submit their bids and compete for the bonds being offered.

Auto Roll: (complete definition) Auto Roll is a feature in fixed income markets that allows investors to automatically reinvest the proceeds from maturing or called bonds into new bonds with similar characteristics. It simplifies the reinvestment process, helping investors maintain their portfolio’s desired allocation.

Average coupon rate: The average coupon rate is the weighted average of the interest rates or coupon payments of all the bonds within a particular fixed income portfolio. It provides an overall measure of the income generated by the bonds in the portfolio, taking into account their respective coupon rates and weights.

Average price: The average price represents the weighted average price of all the bonds within a fixed income portfolio. It takes into consideration the prices at which each bond was acquired or traded, with each bond’s weight determined by its market value or face value.

Average yield: Average yield is the weighted average yield of all the bonds within a fixed income portfolio. It factors in the yields of individual bonds, taking into account their respective weights based on market value or face value.

Average yield to worst: The average yield to worst is the weighted average of the yields to worst call or redemption options among the bonds held in a fixed income portfolio. It helps investors assess the potential minimum yield they could receive if issuers exercise their call options or the bonds are redeemed at the least favorable times for investors.

Annuity: In the realm of fixed income, an annuity refers to a regular series of payments made at equal intervals, typically annually or semi-annually. These payments are commonly associated with bonds or other fixed-income securities. Annuities serve as a mechanism for issuers to repay investors their principal along with interest over a predetermined period. Investors receive predictable, steady income from these periodic payments, making annuities a favored choice for risk-averse individuals seeking stable returns from their investments.

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Arithmetic Mean: In the context of fixed income and bonds, the arithmetic mean refers to the simple average of a set of bond yields or coupon rates. It is calculated by summing up all the yields or rates in a dataset and then dividing the total by the number of values. This measure provides insight into the average return generated by a group of bonds, helping investors assess the overall performance and income potential of a bond portfolio. It serves as a key indicator for evaluating the expected earnings from fixed income investments, aiding in investment decision-making.

More fixed income terms.

B

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.

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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.

C

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.

Constant Perpetuity: In the realm of fixed income, a Constant Perpetuity refers to a financial instrument, often bonds, that pays a fixed amount of income at regular intervals indefinitely into the future. Unlike standard bonds with finite maturities, a Constant Perpetuity has no maturity date, providing a continuous stream of income, typically at a predetermined interest rate. This perpetual nature is beneficial for investors seeking long-term income, as they receive consistent payments without worrying about the bond’s principal repayment or expiration.

Correlation refers to the statistical measure that quantifies the degree to which the prices or returns of different bonds move together. It assesses the relationship between bond performance, indicating whether they tend to move in the same direction (positive correlation), move in opposite directions (negative correlation), or have no consistent relationship (zero correlation). Understanding correlation is crucial for managing bond portfolios, as it helps investors diversify effectively and manage risk by identifying bonds that may perform similarly or differently in various market conditions.

Coupon Rate: The coupon rate is the annual interest rate that a bond pays to its bondholders, expressed as a percentage of the bond’s face value. It represents the fixed periodic payments investors receive from the issuer as compensation for lending their capital. For example, a bond with a $1,000 face value and a 5% coupon rate will pay $50 in interest annually. The coupon rate is crucial for determining the income generated by a bond and assessing its attractiveness to investors in the fixed-income market.

Covariance: In the context of fixed income, covariance refers to the statistical measure of how two bond investments move in relation to each other. It quantifies the degree to which the returns of two bonds tend to fluctuate together. A positive covariance indicates that the two bonds generally move in the same direction, while a negative covariance suggests they move in opposite directions. Investors use covariance to assess the diversification benefits of combining different bonds in a portfolio and manage risk by minimizing the correlation of bond returns.

Credit Spread: In the realm of fixed income and bonds, a credit spread refers to the difference in yield or interest rates between a riskier debt instrument, such as corporate bonds or lower-rated government securities, and a safer benchmark like US Treasury bonds with a similar maturity. It serves as a measure of the additional compensation investors demand for taking on the higher default risk associated with non-Treasury debt. A wider credit spread indicates greater perceived risk, while a narrower spread suggests lower perceived risk and can impact bond prices and market sentiment accordingly.

Contingent Convertible (CoCo) Bond: Contingent Convertible Bonds, commonly known as CoCo Bonds, are hybrid securities that combine characteristics of both debt and equity. These bonds come with a special feature that allows them to convert into equity or be written down to absorb losses if predefined trigger events occur, such as a decline in the issuer’s capital. CoCo Bonds are often used by financial institutions to strengthen their capital position and absorb financial shocks.

CUSIP: CUSIP, which stands for Committee on Uniform Security Identification Procedures, is a unique nine-character alphanumeric code used to identify securities, including fixed income instruments, stocks, and mutual funds. These codes help investors and financial institutions track and differentiate various securities, making it easier to trade, clear, and settle transactions. CUSIPs play a crucial role in the financial industry for accurate record-keeping and compliance purposes.

Credit Default Swap (CDS): A Credit Default Swap is a financial contract that allows an investor to protect against the risk of default on a particular debt security or loan. In a CDS, one party (the protection buyer) pays periodic premiums to another party (the protection seller) in exchange for a promise to compensate for losses if the underlying borrower defaults. CDS can be used as insurance against credit events and can also be employed for speculative purposes or to hedge against credit risk exposure.

Credit Rating: Credit Rating is an evaluation provided by credit rating agencies to assess the creditworthiness and risk associated with a borrower, such as a corporation, government, or individual. These ratings assign letter grades or symbols to indicate the likelihood of timely debt repayment. High ratings (e.g., AAA) suggest lower credit risk, while lower ratings (e.g., BB or below) indicate higher risk. Investors and lenders rely on credit ratings to make informed decisions about lending or investing in bonds, loans, or other debt instruments.

Current Yield: Current Yield is a crucial metric in the realm of fixed income investments, specifically bonds. It represents the annual interest income generated by a bond, expressed as a percentage of its current market price. To calculate the Current Yield, divide the bond’s annual interest or coupon payment by its prevailing market price. It offers investors insight into the bond’s income potential relative to its current cost, aiding in the assessment of investment opportunities and comparison with alternative fixed-income options.

Convertible Bond: A convertible bond is a type of corporate bond that allows the bondholder to convert their bond into a specified number of the issuer’s common stock shares within a predetermined period, at a predetermined conversion price. This provides the bondholder with the opportunity to benefit from potential stock price appreciation while still receiving periodic interest payments.

Convexity to Worst: Convexity to Worst is a measure used to assess the potential price sensitivity of a bond to changes in interest rates, considering the worst-case scenario for bondholders. It calculates the bond’s price change when yields rise or fall significantly, helping investors evaluate risk by taking into account call options, sinking funds, or other factors that could impact the bond’s yield.

Corporate Bond: A corporate bond is a debt security issued by a corporation to raise capital. Investors purchase corporate bonds, essentially lending money to the issuing company in exchange for periodic interest payments (coupon) and the return of the bond’s face value at maturity.

Corporate Debt: Corporate debt refers to the total amount of money a corporation borrows through various debt instruments, such as bonds or loans, to finance its operations, expansion, or other financial needs. Corporations are obligated to make interest payments and eventually repay the principal amount to creditors.

Corporate Notes ProgramSM: Corporate Notes ProgramSM is a structured program offered by financial institutions or corporations to issue short-term debt securities, typically with maturities ranging from a few months to a few years. These notes are used to raise funds for various corporate purposes and often provide a source of short-term financing.

Coupon: A coupon is the fixed annual interest payment that a bondholder receives from the issuer, typically expressed as a percentage of the bond’s face value. Coupons are paid periodically (e.g., semiannually or annually) and represent the bond’s income component.

Coupon Frequency: Coupon frequency refers to how often the interest payments (coupons) are made to bondholders. Common frequencies include semiannual, annual, quarterly, or monthly, depending on the bond’s terms and issuer’s preferences.

Coupon Rate: The coupon rate is the annualized interest rate stated on a bond’s face value, representing the fixed percentage of the face value that bondholders receive as periodic interest payments.

Coupon Type: Coupon type specifies the nature of the interest payments on a bond. It can be fixed, where the interest rate remains constant, or variable, where it may change over time based on a predetermined benchmark, such as a floating or adjustable rate.

Credit Quality: Credit quality assesses the creditworthiness of a bond issuer, reflecting the likelihood of timely interest and principal payments. Credit rating agencies assign credit quality ratings, with higher ratings indicating lower credit risk and greater financial stability.

Credit Risk: Credit risk, also known as default risk, is the risk that a bond issuer may fail to make interest or principal payments as scheduled. It encompasses the possibility of financial distress or default by the issuer, leading to potential losses for bondholders.

Creditor: A creditor is an entity or individual that extends credit to another party, often by lending money or providing goods or services on credit terms. In the context of bonds, bondholders are creditors to the bond issuer.

Creditworthiness: Creditworthiness refers to an individual or entity’s ability and likelihood to meet their financial obligations, such as repaying loans or making interest payments on bonds. It is assessed based on factors like financial stability, income, and credit history.

Current Factor: The current factor is a value that represents the bond’s present worth, usually calculated relative to its face value. It reflects changes in the bond’s price due to factors like changes in interest rates, call provisions, or other embedded options.

Current Factor Effective Date: The current factor effective date is the date on which the current factor value for a bond is determined and used for pricing or valuation purposes.

Current Rate Effective Date: The current rate effective date is the date on which the current interest rate on a bond is determined and becomes applicable for future interest payments.

Current Yield: Current yield is a measure of a bond’s yield based on its current market price, not its face value. It is calculated by dividing the annual coupon payment by the bond’s current market price and is expressed as a percentage.

D

Date (Convertible Information): In the realm of fixed income, the term “Date (Convertible Information)” pertains to the specific date on which important information regarding a convertible security, such as a convertible bond or preferred stock, is disclosed to investors. This information typically includes details about the conversion terms, such as the conversion price, conversion ratio, and any relevant call or put provisions. Investors rely on this date to make informed decisions regarding the potential conversion of their securities into common stock or other specified assets.

Date/Time: In the fixed income market, “Date/Time” refers to the precise point in time on a particular date when a financial transaction or event occurs. This timestamp is crucial for tracking and recording various activities, including trade executions, interest payments, and market data updates, ensuring accuracy and transparency in the bond market.

Dated Date: The “Dated Date” in fixed income terminology signifies the date from which a bond or debt instrument starts accruing interest. It is the point in time from which the bondholder becomes entitled to receive periodic interest payments. This date is critical for calculating interest accruals and establishing the bond’s payment schedule.

Day Count Basis: The “Day Count Basis” is a fundamental aspect of fixed income instruments, specifying the method used to calculate accrued interest and the number of days between two dates. Various day count conventions exist, such as Actual/360, 30/360, or Actual/Actual, each affecting interest calculations differently. Selecting the appropriate day count basis is crucial for accurately determining interest payments and yield calculations.

Day Order: In fixed income trading, a “Day Order” refers to a specific type of order that remains active only for the trading session on the day it is placed. If the order is not executed by the end of the trading day, it expires. This order type is distinct from Good ’til Cancelled (GTC) orders, which remain in force until they are executed or manually canceled by the investor.

De Minimis Tax Rule: The “De Minimis Tax Rule” in fixed income finance pertains to a regulation that exempts certain minimal interest or capital gains income from taxation. This rule is designed to simplify tax reporting and reduce the tax burden on investors for small income amounts, typically applied to interest earned on bonds or other fixed income securities.

Debt Refinancing: “Debt Refinancing” refers to the process of replacing existing debt with a new debt obligation, often with more favorable terms. Companies and governments engage in debt refinancing to reduce interest costs, extend maturities, or modify covenants to better suit their financial needs. It can involve issuing new bonds to repay existing ones or securing a new loan to retire old debt.

Default: In the fixed income context, a “Default” occurs when a bond issuer fails to meet its obligations, such as making interest or principal payments, on time or in full. Defaults can result from financial distress or a breach of contractual terms and can lead to a significant loss for bondholders. Default risk is a critical consideration for fixed income investors when assessing the creditworthiness of issuers.

Delete: “Delete” is a basic action in fixed income trading and management systems, allowing users to remove specific data or records from a database or trading platform. Traders may delete orders, positions, or other information to ensure accurate and up-to-date records in their portfolio management.

Delivery: “Delivery” in the context of fixed income refers to the transfer of bond certificates or ownership rights from the seller to the buyer as part of a bond transaction. Proper delivery is essential to complete the trade and transfer ownership, often involving the transfer of physical certificates or electronic records through a clearing system or custodian.

Depth of Book: “Depth of Book” is a term used in fixed income markets to describe the comprehensive view of all buy and sell orders at different price levels for a particular security. It provides market participants with insights into the liquidity and supply-demand dynamics of a bond, helping them make informed trading decisions based on the available order depth.

Discount: “Discount” in fixed income refers to the situation where a bond is trading in the secondary market at a price lower than its face value (par value). When a bond is sold at a discount, the investor pays less than the bond’s principal amount and receives the full face value at maturity, effectively earning the difference as interest income.

Domicile Country: The “Domicile Country” refers to the legal jurisdiction or country where an issuer of fixed income securities is incorporated or registered. This country’s laws and regulations govern the issuer’s operations and financial obligations, including those related to bonds and debt instruments. Understanding the domicile country is essential for assessing legal and regulatory risks associated with fixed income investments.

Dummy CUSIP: A “Dummy CUSIP” is a placeholder or temporary identification code used in the fixed income market when a security has not yet been assigned a formal CUSIP (Committee on Uniform Securities Identification Procedures) number. It allows for trading and record-keeping until the official CUSIP is assigned, ensuring that the security can still be tracked and identified in the interim.

Duration to Worst: “Duration to Worst” is a risk measure used in fixed income analysis that estimates the potential price sensitivity of a bond to changes in interest rates, assuming the worst-case scenario. It considers the bond’s yield to worst (the lowest potential yield, often due to call or prepayment options) rather than its current yield or yield to maturity. Duration to Worst helps investors assess the downside risk of their fixed income investments in a rising interest rate environment.

Dirty Float: Dirty Float is a term used in the context of foreign exchange rates, referring to a system where a country’s currency exchange rate is allowed to fluctuate in response to market forces but is subject to occasional government interventions or controls. In a dirty float system, authorities may influence their currency’s value through interventions like buying or selling their own currency in the foreign exchange market to stabilize or manage its exchange rate.

Discount Factor: a Discount Factor represents the present value of future cash flows from a bond or investment, discounted at a specific interest rate or yield. It is a crucial component in bond pricing, determining the current worth of expected future payments. The discount factor is inversely related to interest rates; as rates rise, the factor decreases, lowering the bond’s present value, and vice versa. Essentially, it quantifies the time value of money, aiding investors in assessing the attractiveness of fixed-income investments by comparing them to prevailing interest rates.

Duration: In the realm of fixed income and bonds, duration refers to a key measure of the sensitivity of a bond’s price to changes in interest rates. It quantifies the time it takes for an investor to recover the bond’s total cost, factoring in both periodic coupon payments and the bond’s face value. A longer duration implies greater price volatility in response to interest rate fluctuations, while a shorter duration suggests less sensitivity. Duration serves as a crucial risk management tool for bond investors, aiding in portfolio diversification and interest rate risk assessment.

E

Economic Cycle: In the context of fixed income, the economic cycle refers to the recurring pattern of economic growth, contraction, and recovery in an economy. It typically includes four phases: expansion, peak, contraction, and trough. These phases influence interest rates, inflation, and investor sentiment, impacting bond markets. During expansion, yields may rise, while during contraction, they tend to fall. Understanding the economic cycle is crucial for fixed income investors as it helps assess the risk and return dynamics of bonds and make informed investment decisions.

Escrow End Date: The Escrow End Date refers to the specific date in the future when funds or assets held in escrow will be released or transferred to their designated recipient or purpose. In the context of bonds, it often pertains to the release of funds held in an escrow account for purposes such as bond redemption, debt service, or other contractual obligations.

Estimated Annual Income (EAI): Estimated Annual Income, abbreviated as EAI, is a projection of the annual interest or dividend income an investor can expect to receive from a fixed income investment, such as bonds. It takes into account the bond’s coupon rate, face value, and any other relevant factors. EAI provides investors with a rough estimate of the income they can anticipate, helping them make informed investment decisions.

Estimated Yield (EY): Estimated Yield, denoted as EY, is an approximation of the total return an investor can expect from a fixed income investment like bonds. It considers both the annual interest income (coupon payments) and any potential capital gains or losses upon maturity or sale of the bond. EY aids investors in evaluating the potential profitability of their bond investments.

Exchange: In the context of fixed income, an exchange refers to a centralized marketplace or platform where bonds are bought and sold. These exchanges facilitate the trading of bonds, allowing investors to purchase or sell fixed income securities with ease. Prominent examples include the New York Stock Exchange (NYSE) and Nasdaq, where bonds are listed and traded alongside other financial instruments.

Expected Yield: Expected Yield represents the anticipated total return on a fixed income investment, including both interest income (coupon payments) and any potential capital gains or losses. It is based on a combination of factors, such as prevailing market conditions, issuer creditworthiness, and the bond’s specific characteristics. Expected Yield provides investors with a forward-looking estimate of the bond’s potential profitability.

Extraordinary Redemption: Extraordinary Redemption refers to the early repayment of a bond issue by the issuer, typically under exceptional circumstances defined in the bond’s terms and conditions. These circumstances might include events like a change in the issuer’s financial situation or the occurrence of specific predefined events. The purpose of extraordinary redemption is to protect bondholders’ interests and ensure they are compensated in case of unforeseen developments affecting the bond’s stability or issuer’s ability to meet obligations.

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.

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F

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.

Fixed income: Fixed income refers to a category of investments that provide a predetermined and regular stream of income to investors. These investments typically include bonds, certificates of deposit (CDs), and other debt securities. Fixed income investments are known for their stability and relatively low risk compared to equity investments. The income generated from these investments is usually in the form of interest payments, which are paid at regular intervals, and the principal amount is returned to the investor upon maturity. Fixed income securities are favored by investors seeking a steady income stream and capital preservation.

Floater Spread: Floater Spread represents the additional interest rate or yield offered by floating-rate securities, such as floating-rate bonds or adjustable-rate mortgages, over a specific reference rate or benchmark, often a short-term interest rate like LIBOR or the Treasury bill rate. This spread compensates investors for taking on the interest rate risk associated with variable-rate securities, and it can change periodically based on market conditions and the issuer’s creditworthiness.

G

Ghost Month Bonds: Ghost Month Bonds are a colloquial term used in certain Asian financial markets, particularly in regions with strong belief in superstitions and traditions like China and Taiwan. These bonds are so-called because they are believed to bring bad luck if issued or purchased during the “Ghost Month,” which is considered an inauspicious time in the lunar calendar. Investors may avoid buying or issuing bonds during this period due to superstitious beliefs, impacting market activity during that time.

Global Indicator: A Global Indicator in the context of Fixed Income refers to a benchmark or reference point that provides insights into the overall performance or health of the global bond market. It typically includes key economic indicators, interest rates, or market indices that influence fixed income investments on a global scale. Investors and analysts use global indicators to assess market conditions, make investment decisions, and gauge the risk and potential returns of fixed income securities.

Government Bond: A Government Bond is a debt security issued by a national government to raise capital. These bonds are considered low-risk investments because they are backed by the full faith and credit of the government. They offer fixed interest payments, known as coupons, and a predetermined maturity date when the principal amount is repaid to the bondholder. Government bonds are widely regarded as a benchmark for safety and are often used as a reference point for pricing other fixed income securities.

Greenium: Greenium is a term used in the context of green bonds, which are debt securities issued to fund environmentally friendly projects. Greenium represents the premium or lower yield that investors are willing to accept for these bonds compared to conventional bonds issued by the same issuer. It reflects the additional value placed on environmentally responsible investments and incentivizes issuers to fund sustainability projects through green bonds by offering more favorable borrowing terms.

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.

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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.

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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.

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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.

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Maturity: Maturity, in the context of bonds, refers to the date on which the bondholder is entitled to receive the bond’s principal amount (face value). It marks the end of the bond’s life cycle and signifies the point at which the issuer must repay the borrowed funds to the bondholders. Maturity dates can vary, ranging from short-term bonds with maturities of a few months to long-term bonds spanning several decades. Bondholders may receive periodic interest payments (coupon payments) throughout the bond’s life, but the principal is returned in full on the maturity date, effectively concluding the bond’s contractual obligations between the issuer and investor.

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.

Moving Average: A Moving Average refers to a statistical calculation used to assess trends in bond prices or yields over a specified period. It involves continuously updating an average value by adding new data points while removing older ones, providing a smoothed representation of market fluctuations. This technique helps analysts and investors identify potential shifts in bond market sentiment, aiding in decision-making for investment and risk management strategies in the fixed-income market.

More Fixed Income Resources

This fixed income glossary provided an overview of the most important bond terms that every financial analyst needs to know. To continue building your career as a world-class financial analyst, these additional resources will be helpful:

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Trading strategy memberships: Bronze, Gold And Platinum

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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.

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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.

Puttable Bond: A puttable bond is a financial instrument, usually a bond, that grants the bondholder the right to sell the bond back to the issuer or a designated third party at a specified price (usually par value or face value) before its scheduled maturity date. Puttable bonds provide investors with an exit strategy and downside protection, as they can choose to sell the bond if market conditions become unfavorable. This feature can make puttable bonds more attractive to investors concerned about interest rate fluctuations or credit risk, offering greater liquidity and flexibility compared to traditional bonds.

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Quantity: Quantity in the context of fixed income refers to the amount of a bond or security held or traded. It indicates the face value or par value of the bond, typically denominated in a specific currency, and represents the principal amount that will be repaid at maturity.

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Reverse Yankee Bond: A reverse Yankee bond is a type of bond issued by a non-U.S. corporation in the United States market, denominated in U.S. dollars. Unlike traditional Yankee bonds issued by foreign entities in the U.S., reverse Yankee bonds are issued by non-U.S. companies seeking to raise capital from U.S. investors. These bonds are attractive to issuers because they can benefit from lower interest rates in the U.S. market and tap into a broader pool of investors.

Redeem: To redeem a bond means to pay back the bond’s face value to the bondholder upon maturity, effectively retiring the bond and fulfilling the issuer’s obligation to the investor.

Redemption: Redemption refers to the process of returning the principal or face value of a bond to the bondholder at the bond’s maturity date. It marks the completion of the bond’s life cycle, and the investor receives their initial investment.

Redemption Price: The redemption price is the amount at which a bond will be repaid to the bondholder at maturity. It is typically equal to the bond’s face value, although it can differ if the bond is callable or has specific redemption provisions.

Reopening—Treasury Issues: Reopening in the context of treasury issues refers to the practice of reissuing additional quantities of an existing treasury security with the same maturity date and coupon rate. This allows the government to raise additional funds without introducing a new bond series.

Reset Frequency: Reset frequency pertains to variable-rate or floating-rate bonds. It denotes how often the interest rate on such bonds is adjusted, typically based on a specified benchmark or reference rate. Common reset frequencies include monthly, quarterly, or annually.

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Special Purpose Vehicle (SPV): A Special Purpose Vehicle (SPV) is a legal entity created for a specific and limited purpose, often used in fixed income markets for securitization purposes. SPVs are designed to isolate financial risk and protect the interests of investors. They hold and manage a pool of financial assets, such as loans or mortgages, and issue securities backed by these assets. By separating these assets from the parent company’s balance sheet, SPVs provide investors with a degree of bankruptcy remoteness and enhance the overall transparency of the securitization process.

S&P Rating: S&P rating refers to the credit rating assigned to a bond issuer or a specific bond issue by Standard & Poor’s, a prominent credit rating agency. These ratings assess the creditworthiness and risk associated with the issuer or the bond itself, helping investors make informed decisions.

Secondary Market: The secondary market is where previously issued bonds are bought and sold among investors, rather than directly from the issuer. It provides liquidity to bondholders, allowing them to trade their securities before maturity.

Secured Overnight Financing Rate (SOFR): SOFR is a benchmark interest rate that serves as an alternative to the London Interbank Offered Rate (LIBOR) for pricing and valuing fixed-income securities. It represents the cost of borrowing cash overnight, secured by U.S. Treasury securities, and is considered a more reliable and transparent reference rate.

SEDOL: SEDOL stands for Stock Exchange Daily Official List, a unique seven-character alphanumeric code assigned to each security listed on stock exchanges in the United Kingdom and Ireland. It helps facilitate the efficient trading and identification of financial instruments.

Share amount: Share amount refers to the number of shares of a company’s stock that are included in a fixed-income security, such as convertible bonds or preferred stock. It indicates the equity ownership or conversion rights associated with the security.

Sink defeased: Sink defeased is a term used in the context of bond issuance. When a bond is “sink defeased,” it means that a designated portion of the bond’s principal is set aside in a sinking fund to ensure timely repayment, reducing the issuer’s credit risk.

Sinking fund price: Sinking fund price is the predetermined price at which an issuer can repurchase bonds from the open market for retirement using funds from a sinking fund. This price may be fixed or determined through a specific formula outlined in the bond’s indenture.

Sinking fund protection: Sinking fund protection is a feature in some bonds that provides investors with assurance that the issuer will set aside funds periodically to retire the bonds at maturity or through a sinking fund call, reducing the risk of default.

Sovereign debt: Sovereign debt refers to the bonds or debt securities issued by a national government to finance its expenditures or manage fiscal deficits. These bonds are considered relatively safe investments, backed by the full faith and credit of the issuing country.

Special mandatory redemption: (complete definition) A special mandatory redemption is a provision in bond contracts that requires the issuer to redeem the bonds under specific circumstances, such as a regulatory change or an event that significantly impacts the issuer’s ability to meet its obligations.

Special optional redemption: Special optional redemption allows an issuer to redeem bonds before their scheduled maturity date under specific conditions outlined in the bond’s indenture, offering flexibility to manage its debt portfolio strategically.

Spread to treasury: Spread to treasury represents the additional yield or interest rate premium that investors demand for holding a fixed-income security, such as a corporate bond, over the yield on a comparable U.S. Treasury security with a similar maturity. It reflects credit risk and market conditions.

Standard & Poor’s (S&P) Corporation: Standard & Poor’s (S&P) Corporation is a prominent financial services company known for its credit ratings, stock market indices, and financial research. S&P provides credit ratings on various fixed-income securities, helping investors assess creditworthiness.

Standard market session: Standard market session refers to the regular trading hours established by stock exchanges during which securities are bought and sold. It excludes pre-market and after-hours trading and typically follows a set schedule during the trading day.

Sector: In fixed income, the term sector refers to the categorization of bonds or securities based on the industry or economic sector to which the issuer belongs. Common sectors include government, corporate, municipal, and various segments of the economy, helping investors diversify their bond portfolios.

Super Floater: A super floater is a type of floating-rate bond with a unique structure that provides investors with exceptionally high coupon payments. These bonds typically have variable interest rates tied to a reference benchmark, such as LIBOR, plus a substantial spread. Super floaters are designed to offer investors higher yields than standard floating-rate notes, making them appealing in a rising interest rate environment. However, they also carry higher interest rate risk, as their coupon payments can be more volatile due to the elevated spreads.

Synthetic CDO: A synthetic CDO (Collateralized Debt Obligation) is a complex financial product that combines various credit derivatives to create a synthetic exposure to a portfolio of debt obligations, such as bonds or loans. Unlike traditional CDOs, which hold actual debt securities, synthetic CDOs do not own the underlying assets. Instead, they rely on credit default swaps (CDS) and other derivative instruments to replicate the performance of the reference portfolio. Synthetic CDOs are used for risk management, speculation, or investment purposes, and their complexity has been a subject of controversy due to their role in the 2008 financial crisis.

Swaption: A swaption is a financial derivative contract that provides the holder with the option, but not the obligation, to enter into an interest rate swap at a specified future date and under predetermined terms. Essentially, it is an option on an interest rate swap. Swaptions allow parties to hedge against interest rate fluctuations or speculate on future interest rate movements. There are two main types of swaptions: a payer swaption gives the holder the right to pay a fixed interest rate and receive a floating rate, while a receiver swaption allows the holder to receive a fixed rate and pay a floating rate.

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.

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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.

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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.

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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.

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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.

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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.

Yield Spread: Yield Spread, often referred to as the yield differential, is the difference between the yields of two different fixed-income securities or asset classes with similar maturities but varying levels of risk. It serves as an indicator of the relative attractiveness of one investment over another. A positive yield spread indicates that the higher-yielding asset compensates investors for taking on additional risk, while a negative spread may suggest a safer but lower-yielding investment. Yield spreads are commonly used to assess credit risk, economic conditions, and investment opportunities.

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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

Zombie Bond: A zombie bond is a type of bond issued by a financially distressed company that continues to operate and make interest payments, despite having a high risk of defaulting on the principal repayment. These bonds are often issued as part of debt restructuring efforts or bankruptcy proceedings, allowing the company to temporarily delay or avoid default. Investors in zombie bonds face heightened credit risk, as the issuer’s financial condition remains precarious. The term “zombie” reflects the bond’s status, with the company appearing financially undead but potentially facing a grim financial fate in the future.

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.

Fixed Income Glossary – Common Bond Definitions, Terms And Terminology

Bond Dictionary and terminology

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Bond Dictionary and terminology

A

100 Free Backtested Trading Strategies Trading strategy memberships: Bronze, Gold And Platinum

B

C

D

E

100 Free Backtested Trading Strategies Trading strategy memberships: Bronze, Gold And Platinum

F

G

H

I

J

K

L

M

More Fixed Income Resources

N

O

P

Q

R

S

T

U

V

W

X

Y

Z

Latest Posts

Popular Categories

100 Free Backtested Trading Strategies
Trading strategy memberships: Bronze, Gold And Platinum

100 Free Backtested Trading Strategies
Trading strategy memberships: Bronze, Gold And Platinum