Deck 01 - Fixed Income + Credit Foundations

001 What is Bond?

A bond is a loan from an investor to an issuer. The issuer borrows money and promises to pay interest and repay principal at maturity.

Example: If Apple issues a bond, investors are lending Apple money and Apple promises to pay them back over time.

002 What is Issuer?

The issuer is the entity that sells the bond and borrows the money. Example: If the U.S. government sells a Treasury bond, the government is the issuer.

003 What is Investor?

The investor is the person or institution that buys the bond and lends money to the issuer. Example: If a fund buys a corporate bond, that fund is the investor.

004 What is Trustee?

The trustee is the party that helps represent bondholders and enforce the bond's legal terms. Example: If an issuer violates the bond agreement, the trustee helps protect bondholders.

005 What is Par value?

Par value is the amount the issuer repays at maturity, usually $1,000 per bond. Example: If you hold a bond to maturity, you usually receive the par value back.

006 What is Face value?

Face value is another name for the amount repaid at maturity. Example: A bond with $1,000 face value returns $1,000 when it matures.

007 What is Coupon rate?

The coupon rate is the annual interest rate paid on the bond's face value. Example: A $1,000 bond with a 5% coupon pays $50 a year.

008 What is Maturity date?

The maturity date is when the issuer repays the bond's principal. Example: If a bond matures in 2030, that is when the issuer gives the principal back.

009 What is Bond indenture?

A bond indenture is the legal agreement that sets the bond's terms, including coupon, maturity, repayment rules, and restrictions. Example: Think of it as the official contract that says what the issuer promised to do.

010 What happens to bond prices when rates rise?

Bond prices usually fall when interest rates rise because older bonds become less attractive than newly issued bonds. Example: If your bond pays 4% and new bonds pay 6%, your bond's price falls.

011 What happens to bond prices when rates fall?

Bond prices usually rise when interest rates fall because older bonds become more attractive than newly issued bonds. Example: If your bond pays 6% and new bonds now pay 4%, your bond's price rises.

012 What is Yield to maturity (YTM)?

Yield to maturity is the total annualized return an investor earns if the bond is held until maturity and coupons are reinvested. Example: If you buy a bond for $950 and it matures at $1,000, YTM includes that $50 gain plus the coupon payments.

013 What is Current yield?

Current yield measures annual coupon income divided by the bond's current price. Example: If a bond pays $50 a year and trades at $950, its current yield is about 5.26%.

014 What is Yield to call (YTC)?

Yield to call is the annualized return an investor earns if the bond is redeemed on its call date instead of being held to maturity. Example: If rates fall and the issuer calls the bond early, your realized return is YTC, not YTM.

015 What is Zero-coupon bond?

A zero-coupon bond pays no periodic interest and is issued at a discount to par. Example: If you buy it for $800 and it matures at $1,000, your return comes from that $200 increase.

016 What is Premium bond?

A premium bond trades above face value. Example: A $1,000 bond trading at $1,050 is a premium bond.

017 What is Discount bond?

A discount bond trades below face value. Example: A $1,000 bond trading at $950 is a discount bond.

018 What is Par bond?

A bond trades at par when its market price equals its face value. Example: A $1,000 bond trading at $1,000 is trading at par.

019 What is Accrued interest?

Accrued interest is the interest that has built up since the last coupon payment and is usually paid by the buyer to the seller. Example: If you buy a bond halfway through the coupon period, you usually owe the seller half the coupon.

020 What is Callable bond?

A callable bond can be paid off early by the issuer. Example: If rates fall, the issuer may call the bond and refinance more cheaply.

021 What is Putable bond?

A putable bond can be sold back early by the investor. Example: If rates rise sharply, the investor may use the put feature for protection.

022 What is Floating-rate note (FRN)?

A floating-rate note is a bond whose coupon resets periodically based on a reference rate such as SOFR plus a spread. Example: If SOFR rises, the FRN's coupon usually rises too.

023 What is Step-up bond?

A step-up bond is a bond whose coupon rate increases at predetermined dates. Example: It may pay 4% for a few years and then step up to 5.5%.

024 What is PIK bond?

A PIK bond allows the issuer to pay interest with additional debt instead of cash. Example: Instead of sending you cash interest, the issuer may add that amount to what it already owes you.

025 What is Macaulay duration?

Macaulay duration is the weighted average time it takes to receive a bond's cash flows. Example: If most of the value comes far in the future, Macaulay duration is longer.

026 What is Modified duration?

Modified duration measures how sensitive a bond's price is to a change in yield. Example: If modified duration is 6 and rates rise by 1%, the bond's price falls by about 6%.

027 What is Effective duration?

Effective duration measures interest-rate sensitivity when a bond's cash flows can change, such as for callable bonds or MBS. Example: It works better than basic duration when the timing of cash flows can shift.

028 What is DV01?

DV01 measures the dollar change in a bond's price for a 1 basis point change in yield.

Example: If DV01 is $4,000, a 1 bp rise in rates means about a $4,000 loss.

029 How do you use duration to estimate a bond price move?

Duration gives an approximate percentage price change for a yield move. Example: If duration is 7 and rates rise 50 bps, price falls about 3.5%.

030 Why do longer maturity bonds usually have higher duration?

Longer maturity bonds usually have higher duration because more of their cash flows come further in the future. Example: A 30-year bond usually swings more than a 2-year bond when rates move.

031 Why do lower coupon bonds usually have higher duration?

Lower coupon bonds usually have higher duration because less cash is received earlier and more value is tied to the final payment. Example: A very low-coupon bond acts more like a long wait for principal.

032 What is Convexity?

Convexity measures how the bond price/yield relationship curves instead of moving in a straight line. Example: If rates move a lot, convexity helps explain why the actual price move differs from a simple duration estimate.

033 What is Positive convexity?

Positive convexity means a bond tends to gain more when yields fall than it loses when yields rise by the same amount. Example: Plain vanilla bonds often do a bit better on large rallies than duration alone would suggest.

034 What is Negative convexity?

Negative convexity means a bond's upside becomes limited when yields fall, usually because its cash flows shorten or get called away. Example: Mortgage-backed securities often show this when refinancing speeds up.

035 What is Key rate duration?

Key rate duration measures a bond's sensitivity to yield changes at a specific maturity point on the curve. Example: A bond may be especially sensitive to moves in the 5-year part of the curve.

036 What is Interest rate duration?

Interest rate duration measures sensitivity to changes in benchmark rates like Treasury yields. Example: A bond can lose value just because Treasury yields rise, even if credit spreads do not change.

037 What is Spread duration?

Spread duration measures how sensitive a bond's price is to changes in credit spreads. Example: If spreads widen by 100 bps, a bond with higher spread duration loses more.

038 What is Dollar duration?

Dollar duration measures the dollar change in a position's value for a change in yields. Example: A larger position has more dollar duration even if the percentage duration is the same.

039 What is Yield curve?

The yield curve is a graph showing yields across different maturities. Example: You can compare the 2-year and 10-year Treasury yields to see the curve's shape.

040 What is Normal yield curve?

A normal yield curve slopes upward, meaning longer-term yields are higher than shorter-term yields. Example: If the 10-year Treasury yields more than the 2-year Treasury, the curve is normal.

041 What is Inverted yield curve?

An inverted yield curve means short-term yields are higher than long-term yields. Example: If the 2-year Treasury yields more than the 10-year Treasury, the curve is inverted.

042 What is Flat yield curve?

A flat yield curve means short-term and long-term yields are close to each other. Example: If the 2-year and 10-year yields are nearly the same, the curve is flat.

043 What is Steepening?

Steepening means the gap between long-term and short-term yields gets wider. Example: If the 10-year yield rises much more than the 2-year yield, the curve steepens.

044 What is Flattening?

Flattening means the gap between long-term and short-term yields gets narrower. Example: If the difference between the 10-year and 2-year shrinks, the curve flattens.

045 What is Bear steepener?

A bear steepener happens when yields rise and long-term yields rise more than short-term yields. Example: Bond prices are falling, and the long end gets hit harder.

046 What is Bull steepener?

A bull steepener happens when yields fall and short-term yields fall more than long-term yields. Example: The curve steepens because the front end rallies faster.

047 What is Bear flattener?

A bear flattener happens when yields rise and short-term yields rise more than long-term yields. Example: Aggressive Fed tightening often causes this pattern.

048 What is Bull flattener?

A bull flattener happens when yields fall and long-term yields fall more than short-term yields. Example: The curve flattens because the long end rallies harder.

049 What is 2s10s spread?

The 2s10s spread is the difference between the 10-year Treasury yield and the 2-year Treasury yield. Example: If the 10-year yields 4.2% and the 2-year yields 3.8%, the 2s10s spread is 40 bps.

050 What is 3m10y spread?

The 3m10y spread is the difference between the 10-year Treasury yield and the 3-month Treasury bill yield. Example: If the 3-month yield is above the 10-year yield, the spread is negative.

051 What is Term premium?

Term premium is the extra compensation investors require for holding longer-term bonds instead of rolling short-term bonds. Example: If investors worry more about inflation or fiscal deficits, they may demand more term premium.

052 What is Expectations Theory?

Expectations Theory says long-term yields mainly reflect expected future short-term interest rates. Example: If markets expect the Fed to cut rates later, long rates may already price that in.

053 What is Liquidity Preference Theory?

Liquidity Preference Theory says investors demand additional yield for locking money up in longer maturities. Example: Even if future short rates were unchanged, long bonds may still yield more because investors want compensation.

054 What is Market Segmentation Theory?

Market Segmentation Theory says different investors prefer different maturity buckets, which can shape yields independently. Example: Heavy demand for long bonds from pension funds can affect the long end even if the macro outlook is unchanged.

055 What is On-the-run Treasury?

An on-the-run Treasury is the most recently issued Treasury security of a given maturity and is usually more liquid. Example: The newest 10-year Treasury tends to trade most actively.

056 What is Off-the-run Treasury?

An off-the-run Treasury is an older Treasury issue of the same maturity bucket and is usually less liquid. Example: Last month's 10-year issue becomes off-the-run once a new one is sold.

057 What is Credit spread?

A credit spread is the extra yield a bond offers over a risk-free benchmark, usually a Treasury, to compensate for credit risk. Example: If a Treasury yields 4.0% and a corporate bond yields 5.5%, the spread is 150 bps.

058 What do wider credit spreads mean?

Wider credit spreads mean investors are demanding more compensation for credit risk. Example: In a recession scare, spreads often widen because investors get more cautious.

059 What do tighter credit spreads mean?

Tighter credit spreads mean investors are demanding less compensation for credit risk. Example: In a strong market, spreads often tighten as confidence improves.

060 What is OAS?

OAS is the spread of a bond after adjusting for the value of embedded options, such as call or prepayment features. Example: For an MBS, OAS tries to separate pure spread value from refinancing behavior.

061 What is Z-spread?

Z-spread is the constant spread added to the Treasury spot curve that makes the present value of a bond's cash flows equal its market price. Example: A callable bond may show a wider Z-spread than OAS because Z-spread ignores the option effect.

062 What is G-spread?

G-spread is the yield difference between a bond and a government bond of similar maturity. Example: If a corporate bond yields 5.2% and a similar government bond yields 4.0%, the G-spread is 120 bps.

063 What is Investment grade (IG)?

Investment grade bonds are higher-quality credits rated BBB-/Baa3 or above. Example: Large stable companies often issue investment grade debt.

064 What is High yield (HY)?

High yield bonds are lower-rated credits below BBB-/Baa3 and usually offer higher yields. Example: A more leveraged company may issue high yield bonds and pay investors more for the risk.

065 What are S&P credit ratings?

S&P's rating scale is AAA, AA, A, BBB, BB, B, CCC, CC, C, and D. Example: BBB is still investment grade, while BB and below is high yield.

066 What are Moody's credit ratings?

Moody's rating scale is Aaa, Aa, A, Baa, Ba, B, Caa, Ca, and C. Example: Baa is investment grade, while Ba and below is high yield.

067 What is BBB/Baa?

BBB/Baa is the lowest investment grade rating. Example: If a BBB-rated bond gets downgraded to BB, some investors may be forced to sell.

068 What is Fallen angel?

A fallen angel is a bond downgraded from investment grade to high yield. Example: A weakening company can become a fallen angel after a downgrade.

069 What is Rising star?

A rising star is a bond upgraded from high yield to investment grade. Example: A company that improves its balance sheet may become a rising star.

070 What is Cross-over credit?

Cross-over credit refers to bonds near the boundary between investment grade and high yield. Example: BBB and BB credits are watched closely because one notch can change who is allowed to own them.

071 What is Credit default swap (CDS)?

A CDS is a derivative that provides protection against a borrower defaulting or having another credit event. Example: It works like insurance on a bond because you pay a premium for protection.

072 What is CDX index?

A CDX index is a basket of CDS contracts on multiple issuers, used to gain or hedge broad credit exposure. Example: Instead of buying protection on one company, you can use CDX to express a view on a whole credit market segment.

073 What is T-bill?

A T-bill is a U.S. Treasury security that matures in 1 year or less and usually does not pay a coupon. Example: A 3-month Treasury is a T-bill.

074 What is T-note?

A T-note is a U.S. Treasury security that matures in 2 to 10 years and pays coupons. Example: A 5-year Treasury is a T-note.

075 What is T-bond?

A T-bond is a U.S. Treasury security that matures in 20 to 30 years and pays coupons. Example: A 30-year Treasury is a T-bond.

076 What is TIPS?

TIPS are Treasury Inflation-Protected Securities whose principal adjusts with inflation. Example: If inflation rises, the principal value increases and the coupon payments rise too because they are paid on that higher principal.

077 What is Real yield?

Real yield is the yield on an inflation-protected bond after inflation adjustment. Example: The quoted yield on a TIPS bond is a real yield.

078 What is Breakeven inflation?

Breakeven inflation is the difference between the nominal Treasury yield and the TIPS yield of the same maturity. Example: If a 10-year Treasury yields 4.0% and a 10-year TIPS yields 1.5%, breakeven inflation is 2.5%.

079 What is Municipal bond?

A municipal bond is debt issued by a state or local government, and its interest is often exempt from federal income tax. Example: High-tax-bracket investors often like munis because of the tax benefit.

080 What is GO bond?

A GO bond is a municipal bond backed by the issuer's general taxing authority. Example: A city may use tax revenue to support a GO bond.

081 What is Revenue bond?

A revenue bond is a municipal bond backed by revenues from a specific project or source. Example: A toll road may issue a revenue bond backed by toll collections.

082 What is Investment grade corporate bond?

An investment grade corporate bond is debt issued by a company rated BBB-/Baa3 or above. Example: A stable blue-chip company may issue investment grade debt at a relatively low yield.

083 What is Leveraged loan?

A leveraged loan is a loan made to a below-investment-grade borrower, usually senior secured and floating-rate. Example: A sponsor-backed company with a lot of debt may borrow through a leveraged loan.

084 What is High yield bond?

A high yield bond is a lower-rated corporate bond that usually has a fixed coupon and more duration than a leveraged loan. Example: If rates rise, a high yield bond may feel the move more than a floating-rate loan.

085 What is Agency MBS?

Agency mortgage-backed securities are pools of mortgages guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae. Example: Investors receive cash flows from many homeowners' mortgage payments.

086 What is Pass-through security?

A pass-through is a structure that passes homeowners' principal and interest payments through to investors. Example: Instead of one mortgage, you own a slice of a big pool of them.

087 What is Non-agency MBS?

Non-agency MBS do not have the same government-backed guarantee as agency MBS, so investors take more credit risk. Example: If the underlying borrowers are weaker, losses matter more because there is no agency guarantee.

088 What is CMO?

A collateralized mortgage obligation is a structured mortgage security that divides cash flows into tranches with different payment priorities and risks. Example: One tranche may get paid faster, while another takes more timing risk and earns more yield.

089 What is Prepayment risk?

Prepayment risk is the risk that borrowers repay their mortgages earlier than expected, usually when rates fall. Example: If homeowners refinance, MBS investors get cash back sooner and may have to reinvest at lower yields.

090 What is CPR?

CPR, or constant prepayment rate, is a standard measure of how quickly mortgages are prepaying. Example: A higher CPR means homeowners are paying off or refinancing faster.

091 What is Extension risk?

Extension risk is the risk that mortgage cash flows come back more slowly than expected, usually when rates rise and refinancing slows. Example: Investors get stuck holding lower-coupon mortgages for longer.

092 What is ABS?

ABS are bonds backed by pools of assets such as auto loans, student loans, or credit card receivables. Example: Instead of mortgages, the collateral may be car loans or card payments.

093 What is CLO?

A CLO is a securitization backed by a pool of leveraged loans. Example: The structure issues different tranches that absorb risk in a set order.

094 What is AAA CLO tranche?

The AAA tranche is the most senior CLO debt tranche and is designed to be the safest in the structure. Example: It gets paid before lower-rated tranches.

095 What is AA CLO tranche?

The AA tranche is below AAA but still very senior in a CLO structure. Example: It takes losses only after the equity and lower-rated debt tranches are exhausted.

096 What is A CLO tranche?

The A tranche sits below AA and above BBB in the CLO capital structure. Example: It offers more yield than AAA or AA because it takes more risk.

097 What is BBB CLO tranche?

The BBB tranche is lower in the CLO debt stack and carries more risk than senior tranches. Example: It earns more spread because it absorbs losses earlier.

098 What is BB CLO tranche?

The BB tranche is one of the riskiest debt tranches in a CLO and sits just above equity. Example: It earns higher yield because it is closer to the first-loss part of the structure.

099 What is CLO equity?

CLO equity is the residual tranche that takes the first losses but also keeps the remaining upside after debt tranches are paid. Example: If the loan pool performs well, equity can benefit the most.

100 What is CLO manager?

A CLO manager selects and manages the underlying leveraged loan portfolio. Example: The manager decides which loans go into the CLO and monitors their performance.