Fixed Income Glossary
This fixed income glossary covers the most important bond terms and definitions required for financial analysts. These terms are covered in detail in CFI’s Fixed Income Fundamentals Course.
An annuity is a series of payments in equal time periods, guaranteed for a fixed number of years.
An average calculated by adding the value of the points in a data set and dividing the sum by the number of data points.
Bloomberg is financial software, data, and media company that provides 24-hour financial news, information, financial and price data.
A constant stream of identical cash flows without end.
A statistical measure of how two securities move in relation to each other.
Coupon Rate is the amount of interest received by a bond investor expressed on a nominal annual basis.
A statistical measure of the variance of two random variables that are observed or measured in the same mean time period.
The spread between Treasury securities and non-Treasury securities that are identical in all respects except for quality rating.
The coupon from a bond divided by the market price of the bond, expressed as a percentage.
A decimal number or percentage multiplied by a future cash flow value to discount it back to the present value
A measure of the sensitivity of the price of a fixed-income investment to a change in interest rates.
The natural fluctuation of the economy between periods of expansion (growth) and contraction (recession).
The sum of every potential value of a variable multiplied with their chance or probability of occurring.
A constant stream of cash flows without end that is expected to rise indefinitely.
The theory where investors demand a premium or higher rate of return for securities with longer maturity times. This is due to the additional risk they take on when making long-horizon investments.
Market Segmentation Theory
The theory that investors have different investment goals, therefore there is no necessary relationship between long and short-term interest rates.
The average of time-series data from multiple consecutive periods. It is considered a ‘moving’ average because the average is constantly recalculated once new data becomes available for the next period.
The value of a security, such as a stock or bond, remains fixed for the duration of its life.
Par Value is the amount returned to the bond investor by the issuer upon maturity.
A fund set up by an employer to help plan the investment of an employee’s retirement savings. These savings are contributed by both the employer and employees.
Pure Expectations Theory
The idea that long-term interest rates predict what short-term rates will do in the future. So when the market expects short-term rates to fall, we expect to see lower long-term rates.
A measure of how far a set of data is from the average. The further it is, the higher its standard deviation is. Standard deviation is computed by taking the square root of variance.
The Sum of Squares Regression (SSR) measures how much variation there is in the modeled values and this is compared to the Total Sum of Squares (SST), which measures how much variation there is in the observed data, and to the Sum of Squares Residual (SSE), which measures the variation in the modeling errors.
International organizations or groups that operate beyond national boundaries. These groups share decision-making and look to work on issues regarding multiple countries. For example, the European Union is a supranational organization.
The concept that holds that a specific sum of money is more valuable the sooner it is received. Time value of money is dependent not only on the time interval being considered but also the rate of discount used in calculating current or future values.
A measure of how far a set of data is from their average value. The expectation of average squared deviations from the mean of a set of data.
An average in which some values count for more than others.
A graph plotting interest rates of bonds with equal credit risk, at the same point in time, but different maturity rates
Yield to Maturity
The annual return earned by a bond investor if purchasing a bond today and holding it until maturity.
Zero Coupon Bond
As the name suggests, this is a bond that has no coupon payments. It is typically traded at a discount, so there is a profit when it is redeemed for the face value at maturity.
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: