CSC Chapter 7: Fixed-Income Securities - Pricing and Trading

present value

The current worth of a sum of money that will be received sometime in the future.

accrued interest

Interest accumulated on a bond or debenture since the last interest payment date.

market segmentation theory

Yield curve theory proposing that supply and demand of large institutions shapes the yield curve with banks preferring to borrow short term while other institutions prefer long-term money.

discount rate

The rate used in calculating the present value of future cash flows when computing the value of a bond.

expectations theory

A theory stating that the yield curve is shaped by a market consensus about future interest rates.

nominal rate

The quoted or stated rate, such as the quoted or stated rate on an investment or a loan. This rate allows for comparisons but does not account for the effects of inflation.

current yield

The annual income from an investment expressed as a percentage of the investment’s current value.

duration

The approximate percentage change in the price or value of a bond or bond portfolio for a 1% change in interest rates. Used as a measure of bond price volatility.

yield curve

A graph showing the relationship between yields of bonds of the same quality but different maturities.

liquidity preference theory

A theory that explains the shape of the yield curve by postulating that in order to entice investors to invest long-term, borrowers must offer higher rates for longer-term money.

reinvestment risk

The risk that interest rates will fall causing the cash flows on an investment, assuming that the cash flows are reinvested, to earn less than the original investment.

real rate of return

A rate of return adjusted for the effects of inflation.