Fixed Income (Bond) Terminology and Math

  • Bond is a loan made by an investor to the issuer (from the issuer perspective it is called a debt) in return for payment of interest and principal. 

  • Types of bonds

    • Government Bonds (US Treasuries) - bonds issued by the government, usually considered low risk; foreign government bonds are perceived to have higher risk than the US government.  

      • Treasury Bills - short-term government securities maturing in one year or less (securities issued with maturities in 4, 3, 13, 17, 26, and 52 weeks)

      • Treasury Notes - government securities maturing between two to ten years (securities issued with maturities 2, 3, 5, 7, and 10 years)

      • Treasury Bonds - government securities maturing greater than 10 years (currently issuing 20 and 30 years bonds)

      • Treasury Inflation-Protected Securities (TIPS) - government bonds that adjust their principal based on inflation expectations.

    • Corporate Bonds - Bonds issued by companies

      • Investment Yield bonds - corporate bonds rated by national rating agencies (such as Moody’s, S&P, and Fitch) with minimum rating of BBB- or above

      • High Yield (junk) bonds - corporate bonds with BBB- rating or below, indicative of higher risk

    • Municipal Bonds (Munis) - bonds issued by state and local governments (often the interest earned is not taxed on state income taxes)

    • Certificate of Deposit (CDs) - savings instruments offered by banks and credit unions with fixed interest rates and maturity dates.  All CDs issued in the US are FDIC (Federal Deposit Insurance Corporation - federal agency that supervises the banks/credit unions) insured up to $250,000.


  • Bond yield (aka return on a bond) and market price has an inverse relationship - when yield rises, price on the bond will fall and vice versa.

  • Current yield = Annual coupon payment / current market price

If a bond with a face value of $1000 pays 5% coupon and is trading at a discount of $950.  

The current yield = $1000*5%/$950 = 5.26%

  • Bond Duration = measures the sensitivity of a bond’s price to changes in interest rate (rate of change in price for a given change interest rate).  The higher the duration, the more bond price will fall if interest rates rise.


  • Yield Curve - a line that plots the yields or interest rates of bonds that have equal credit quality but different maturity dates


  • Normal yield curve is upward sloping and indicates bonds with longer maturity will have higher yield.  Investors will demand higher yield to hold bonds with longer maturity under normal circumstances.


  • Inverted yield curve is downward sloping where longer maturity bonds have lower yield than shorter maturity.  This is not normal and indicates investors expect a decline in future rates, anticipating a slower economy in the future.