Fixed Income Bond Terms

In this article we review the key terms and definitions used in fixed income.

What are the key terms used in fixed income?

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Annuity:

An annuity is a series of payments in equal time periods, guaranteed for a fixed number of years.

Annuity factor:

Present value of $1 paid for each of t periods.

Constant perpetuity:

A constant stream of identical cash flows without end.

Correlation:

A statistical measure of how two securities move in relation to each other.

Coupon rate:

The amount of interest received by a bond investor expressed on a nominal annual basis.

Current yield:

The coupon from a bond divided by the market price of the bond, expressed as a percentage.

Discount factor:

The percentage rate required to calculate the present value of a future cash flow.

Expected value:

The percentage rate required to calculate the present value of a future cash flow.

Growing perpetuity:

A constant stream of cash flows without end that is expected to rise indefinitely.

Moving average:

Mean of time series data (observations equally spaced in time) from several consecutive periods. Called ‘moving’ because it is continually recomputed as new data becomes available.

Par value:

The amount returned to the bond investor by the issuer upon maturity.

Time value of money:

A measure of the dispersion of a set of data points around their mean value. Variance is a mathematical expectation of the average squared deviations from the mean

Yield to maturity:

The annual return earned by a bond investor if purchasing a bond today and holding it until maturity.

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