9.a Interest Rates

Fixed Income

A type of investment that pays returns in the form of regular, fixed payments and the principal upon maturity.

Coupon

The annual interest payment made by a bond issuer to the bondholders, typically expressed as a percentage of the bond's face value.

Yield to Maturity

The total return anticipated on a bond if it is held until it matures, considering all future coupon payments and the face value.

Present Value (PVA)

The current value of a future sum of money or stream of cash flows given a specified rate of return.

Future Value (F.B.)

The value of a current asset at a future date based on an assumed rate of growth.

Inverse Relationship

A correlation between two variables that move in opposite directions, such as interest rates rising while bond prices fall.

Default Risk Premium (DRP)

The additional yield an investor demands to compensate for the risk that a bond issuer may default.

Maturity Risk Premium (MRP)

The extra yield required by investors to compensate for the added risk of holding a bond with a longer time to maturity.

Liquidity Premium (LP)

The extra yield required by investors for assets that are not easily traded or sold.

Inflation Premium

The portion of a bond's yield that compensates for expected inflation, which erodes the purchasing power of future cash flows.

Taxability Premium

The additional yield investors demand on fixed-income securities that are subject to taxes, compared to those that are tax-exempt.

Time Value of Money

The concept that money available now is worth more than the same amount in the future due to its potential earning capacity.