Fixed Income Securities: Bond Basics

Flashcards for key vocabulary terms related to bond basics.

Bond

A contract between an issuer and an investor, where the issuer agrees to make payments at specified times.

Money Market

Short-term issues that mature within one year.

Notes

Intermediate-term issues that mature between one and ten years.

Bonds

Long-term obligations with maturity greater than ten years.

Coupon Rate

Interest payment that is promised to the bondholder, relative to the par value.

Maturity Date

The date at which the issuer returns the principal to the bondholder

Principal / Par Value

Also known as face value, represents the amount the issuer pays back to the bondholder at maturity.

Offshore Bond

Bonds issued in a market that is not the issuer's home market.

Conventional Bonds

Types of bonds where the issuer agrees to pay coupon payments at scheduled intervals and principal at maturity date; proceeds used for general corporate purposes.

ESG Bonds

Types of bonds where the issuer agrees to pay coupon payments at scheduled intervals and principal at maturity date; proceeds used for targeted ESG purposes.

Yield to Maturity

Return bond investors will earn if no defaults occur; investors reinvest all coupon payments at the same yield to maturity over the holding period; and investor holds until maturity, or interest rates have not changed.

Current Yield

The coupon payment relative to market price.

Yield to Call

The return to investor if bond is called and cannot be held to maturity

Yield Curve

The graph that displays the relationship between YTM and time to maturity.

Spot Rate

The rate that prevails today for a given maturity

Short Rate

The rate for a given maturity (e.g. 1-year) at different points in time

Forward Rate

One-year forward rate for period n

Expectations Hypothesis Theory

Observed long-term rate is a function of today’s short-term rate and expected future short-term rates

Liquidity Preference Theory

Long-term bonds are more risky, therefore, fn generally exceeds E(rn)