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Fixed Income Glossary

The most common bond terms and definitions

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.

 

Fixed Income Fundamentals Glossary

 

Annuity

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

 

Arithmetic Mean

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

Bloomberg is financial software, data, and media company that provides 24-hour financial news, information, financial and price data.

 

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

Coupon Rate is the amount of interest received by a bond investor expressed on a nominal annual basis.

 

Covariance

A statistical measure of the variance of two random variables that are observed or measured in the same mean time period.

 

Credit Spread

The spread between Treasury securities and non-Treasury securities that are identical in all respects except for quality rating.

 

Current Yield

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

 

Discount Factor

A decimal number or percentage multiplied by a future cash flow value to discount it back to the present value

 

Duration

A measure of the sensitivity of the price of a fixed-income investment to a change in interest rates.

 

Economic Cycle

The natural fluctuation of the economy between periods of expansion (growth) and contraction (recession).

 

Expected Value

The sum of every potential value of a variable multiplied with their chance or probability of occurring.

 

Growing Perpetuity

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

 

Liquidity Preference Theory

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.

 

Moving Average

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.

 

Nominal Value

The value of a security, such as a stock or bond, remains fixed for the duration of its life.

 

Par Value

Par Value is the amount returned to the bond investor by the issuer upon maturity.

 

Pension Funds

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.

 

Standard Deviation

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.

 

Sum of Squares

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.

 

Supranational

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.

 

Time Value of Money

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.

 

Variance

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.

 

Weighted Average

An average in which some values count for more than others.

 

Yield Curve

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:

  • Equity vs Fixed Income
  • Fixed Income Trading
  • Financial Modeling
  • Financial Analyst Designations

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