Fixed Income (Bond) Terminology and Math

Bond

A loan made by an investor to an issuer in return for payment of interest and principal.

Government Bonds

Bonds issued by the government, usually considered low risk.

Treasury Bills

Short-term government securities maturing in one year or less.

Treasury Notes

Government securities maturing between two to ten years.

Treasury Bonds

Government securities maturing greater than 10 years.

Treasury Inflation-Protected Securities (TIPS)

Government bonds that adjust their principal based on inflation expectations.

Corporate Bonds

Bonds issued by companies.

Investment Yield Bonds

Corporate bonds rated BBB- or above by national rating agencies.

High Yield (junk) Bonds

Corporate bonds with a rating of BBB- or below, indicative of higher risk.

Municipal Bonds (Munis)

Bonds issued by state and local governments, often with tax-exempt interest.

Certificate of Deposit (CDs)

Savings instruments with fixed interest rates and maturity dates, insured by FDIC.

Bond Yield

The return on a bond, which has an inverse relationship with market price.

Current Yield

Calculated as the annual coupon payment divided by the current market price.

Bond Duration

Measures the sensitivity of a bond’s price to changes in interest rates.

Yield Curve

A line that plots the yields of bonds with equal credit quality but different maturity dates.

Normal Yield Curve

An upward sloping curve indicating that longer maturity bonds have higher yields.

Inverted Yield Curve

A downward sloping curve where longer maturity bonds have lower yields, indicating expectations of a slower economy.