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.
AnnuityAnnuityAn annuity is a financial product that provides certain cash flows at equal time intervals. Annuities are created by financial institutions, primarily life insurance companies, to provide regular income to a client.
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 is financial software, data, and media company that provides 24-hour financial news, information, financial and price data.
Constant PerpetuityPerpetuityA perpetuity is a cash flow payment which continues indefinitely. An example of a perpetuity is the UK’s government bond called a Consol. Although the total value of a perpetuity is infinite, it has a limited present value using a discount rate. Learn the formula and follow examples in this guide
A constant stream of identical cash flowsCash FlowCash Flow (CF) is the increase or decrease in the amount of money a business, institution, or individual has. In finance, the term is used to describe the amount of cash (currency) that is generated or consumed in a given time period. There are many types of CF without end.
CorrelationCorrelationA correlation is a statistical measure of the relationship between two variables. The measure is best used in variables that demonstrate a linear relationship between each other. The fit of the data can be visually represented in a scatterplot
A statistical measure of how two securities move in relation to each other.
Coupon RateCoupon RateA coupon rate is the amount of annual interest income paid to a bondholder based on the face value of the bond. Government and non-government entities issue bonds to raise money to finance their operations. When a person buys a bond, the bond issuer promises to make periodic payments to the bondholder
Coupon Rate is the amount of interest received by a bond investor expressed on a nominal annual basis.
CovarianceCovarianceIn mathematics and statistics, covariance is a measure of the relationship between two random variables. The metric evaluates how much - to what extent - the variables change together. In other words, it is essentially a measure of the variance between two variables
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 FactorDiscount FactorA discount factor in financial modeling is a way of discounting cash flows to calculate the net present value (NPV) of an investment. A discount factor is a decimal number multiplied by a cash flow value to discount it to the present. It increases over time (the decimal value gets smaller) as the effect of compounding
A decimal number or percentage multiplied by a future cash flowValuationFree valuation guides to learn the most important concepts at your own pace. These articles will teach you business valuation best practices and how to value a company using comparable company analysis, discounted cash flow (DCF) modeling, and precedent transactions, as used in investment banking, equity research, value to discount it back to the present value
DurationDurationDuration is one of the fundamental characteristics of a fixed-income security (e.g., a bond) alongside maturity, yield, coupon, and call features. It is a tool used in the assessment of the price volatility of a fixed-income security.
A measure of the sensitivity of the price of a fixed-income investment to a change in interest rates.
Economic CycleBusiness CycleA business cycle is a cycle of fluctuations in the gross domestic product (GDP) around its long-term natural growth rate. It explains the expansion, peak, recession, depression, trough, recovery, expansion, and the entire business cycle keeps repeating in this loop. See examples and descriptions of the stages.
The natural fluctuation of the economy between periods of expansion (growth) and contraction (recession).
Expected ValueExpected ValueExpected value (also known as EV, expectation, average, mean value) is a long-run average value of random variables. The expected value also indicates the
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 TheoryTheory of Liquidity PreferenceThe Theory of Liquidity Preference states that agents in financial markets have a preference for liquidity. Formally, if and then where:
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 dataTime Series Data AnalysisTime Series Data Analysis is the analysis of datasets that change over a period of time. Time-series datasets record observations of the same variable over 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 ValuePar ValuePar Value is the nominal or face value of a bond, or stock, or coupon as indicated on a bond or stock certificate. It is a static value determined at the time of issuance and unlike market value, it doesn’t fluctuate on a regular basis.
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 DeviationStandard DeviationFrom a statistics standpoint, the standard deviation of a data set is a measure of the magnitude of deviations between values of the observations contained
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 SquaresSum of SquaresSum of squares (SS) is a statistical tool that is used to identify the dispersion of data as well as how well the data can fit the model in regression
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 MoneyTime Value of MoneyThe time value of money is a basic financial concept that holds that money in the present is worth more than the same sum of money to be received in the future. This is true because money that you have right now can be invested and earn a return, thus creating a larger amount of money in the future. (Also, with future
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.
VarianceVariance AnalysisVariance analysis can be summarized as an analysis of the difference between planned and actual numbers. The sum of all variances gives a picture of the overall over-performance or under-performance for a particular reporting period. For each individual item, companies assess its favorability by comparing actual costs
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 AverageWeighted MeanThe weighted mean is a type of mean that is calculated by multiplying the weight (or probability) associated with a particular event or outcome with its
An average in which some values count for more than others.
Yield CurveYield CurveThe Yield Curve is a graphical representation of the interest rates on debt for a range of maturities. It shows the yield an investor is expecting to earn if he lends his money for a given period of time. The graph displays the bonds' yield on the vertical axis and the time to maturity across the horizontal axis.
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 IncomeEquity vs Fixed IncomeEquity vs Fixed Income. Equity and fixed income products are financial instruments that have very important differences every financial analyst should know. Equity investments generally consist of stocks or stock mutual funds, while fixed income securities generally consist of corporate or government bonds.
- Fixed Income TradingFixed Income TradingFixed income trading involves investing in bonds or other debt security instruments. Fixed income securities have several unique attributes and factors that affect their price and value. Fixed income investing is favored by investors who prefer low-risk investments with a guaranteed return.
- Financial ModelingWhat is Financial ModelingFinancial modeling is performed in Excel to forecast a company's financial performance. Overview of what is financial modeling, how & why to build a model. A 3 statement model links income statement, balance sheet, and cash flow statement. More advanced types of financial models are built for valuation, plannnig, and
- Financial Analyst DesignationsTop Finance CertificationsList of the top finance certifications. Get an overview of the best financial certifications for professionals around the world working in the field. This guide compares the top 6 programs to become a certified financial analyst from various program providers such as CFA, CPA, CAIA, CFP, FRM, FMVA
