Interest Rates & Fixed-Income Fundamentals

Vocabulary flashcards covering key terms and concepts from the lecture on interest rates and fixed-income instruments, structured for exam review.

Interest Rate

The cost of borrowing money, reflecting the time value of money.

Zero Rate (Spot Rate)

The interest rate earned on an investment that pays off only at a single future time T.

Discount Factor

D(T) = e^{-R(T)T}; the present value today of $1 received at time T.

Discrete Compounding

Interest added at regular intervals (e.g., annually, semi-annually).

Continuous Compounding

Interest compounded instantaneously at every moment; uses e^{RT} formulas.

SOFR

Secured Overnight Financing Rate, the post-LIBOR benchmark overnight rate in the U.S.

Repo Rate

The implicit interest rate in a repurchase agreement (short-term collateralized loan).

Treasury Bill

U.S. government security with maturity up to 1 year; issued at a discount, no coupons.

Treasury Note

U.S. government security with original maturity between 2 and 10 years; pays coupons.

Treasury Bond

U.S. government security with maturity of 10 years or more; pays coupons.

Fed Funds Rate

The overnight rate at which U.S. banks lend reserve balances to each other.

Bond

Debt instrument paying periodic coupons and returning principal at maturity.

Bond Yield

The interest rate that equates the present value of a bond’s cash flows to its market price.

Par Yield

Coupon rate that sets a bond’s price exactly equal to its face value.

Yield Curve

Graph of zero (spot) rates versus maturities; shows the term structure of interest rates.

Bootstrapping

Sequential method for deriving zero rates from market bond prices.

Forward Rate

Interest rate implied today for a future period between two dates.

Duration

First-derivative measure of bond price sensitivity to yield changes.

Convexity

Second-derivative measure capturing curvature of the price–yield relationship.

Forward Rate Agreement (FRA)

OTC contract that locks in an interest rate for a specified future borrowing or lending period.

Floating-Rate Bond

Bond whose coupon resets periodically based on a reference rate, reducing price sensitivity.

Callable Bond

Bond that the issuer can redeem early; subject to prepayment risk when rates fall.

Zero-Coupon Bond

Bond paying no coupons; sold at a discount and redeemed at face value—high duration.

Bond Portfolio

Collection of bonds exposed to parallel shifts and shape changes in the yield curve.

Duration Risk

Risk that bond prices fall when interest rates rise; proportional to duration.

Yield Curve Twist Risk

Risk to a bond portfolio when different maturities’ yields move unequally.

Prepayment Risk

Risk that borrowers repay debt early (e.g., callable bonds) when rates decline.

Swap

Derivative exchanging fixed-rate and floating-rate cash flows; value moves with rate changes.

Repo Transaction

Sale of securities with agreement to repurchase; rate risk low but collateral value matters.

SOFR-Based Instrument

Financial product referencing the Secured Overnight Financing Rate; minimal credit risk but still sensitive to rate moves.