Bonds & Fixed Income — 50 Terms Defined

Accrued Interest Bonds & Fixed Income ₹ Interest earned on a bond since the last coupon payment but not yet paid out. Accrued Interest = Coupon Payment x (Days Since Last Coupon / Days in the Coupon Period)

AT1 Bond Bonds & Fixed Income qualitative An Additional Tier 1 bond: a perpetual, subordinated bank instrument that can be written down or converted to equity to absorb losses. Test: perpetual, subordinated, with discretionary coupons and a contractual write-down or conversion trigger on a capital shortfall

Bond Bonds & Fixed Income ₹ A tradable debt instrument under which the issuer borrows a sum and agrees to pay interest and repay the principal at maturity. Bond Price = Present Value of all Coupon Payments + Present Value of the Principal Repayment

Bond Covenant Bonds & Fixed Income qualitative A condition in a debt agreement restricting the borrower's actions or requiring it to maintain stated financial ratios. Test: the agreement specifies obligations whose breach constitutes an event of default, whether or not a payment is missed

Bond Market Bonds & Fixed Income qualitative The market in which debt securities are issued and traded. Test: the instrument traded represents a debt obligation rather than an ownership interest

Bond Price Bonds & Fixed Income ₹ The present value of a bond's remaining cash flows, discounted at the yield the market requires. Price = Sum of (Coupon / (1 + Yield) raised to t) + Face Value / (1 + Yield) raised to n

Bond Yield Bonds & Fixed Income % The return a bond generates, expressed as an annual percentage of the price paid for it. Yield varies by measure: Current Yield = Annual Coupon / Market Price; Yield to Maturity accounts for all cash flows and the redemption amount

Callable Bond Bonds & Fixed Income qualitative A bond the issuer may redeem before maturity, at a stated price on stated dates. Test: the terms give the issuer an option to redeem early; the investor's return should be computed to the earliest call date

Certificate of Deposit Bonds & Fixed Income % A negotiable short-term deposit receipt issued by a bank at a discount to face value. Yield = [(Face Value - Price) / Price] x (365 / Days to Maturity) x 100

Clean Price Bonds & Fixed Income ₹ A bond's quoted price excluding accrued interest. Clean Price = Dirty Price - Accrued Interest

Commercial Paper Bonds & Fixed Income % A short-term unsecured promissory note issued by a company at a discount to face value. Yield = [(Face Value - Price) / Price] x (365 / Days to Maturity) x 100

Convertible Bond Bonds & Fixed Income ₹ A bond that can be exchanged for a fixed number of the issuer's shares at the holder's option. Conversion Value = Conversion Ratio x Current Share Price; Conversion Premium = (Bond Price - Conversion Value) / Conversion Value

Convexity Bonds & Fixed Income ratio (x, times) The curvature in the relationship between a bond's price and its yield, correcting duration's straight-line estimate. Price Change % = -Modified Duration x Change in Yield + 0.5 x Convexity x (Change in Yield) squared

Corporate Bond Bonds & Fixed Income qualitative A debt security issued by a company to borrow from investors rather than from banks. Corporate Bond Yield = Government Security Yield of the same maturity + Credit Spread

Coupon Rate Bonds & Fixed Income % The annual interest a bond pays, expressed as a percentage of its face value. Annual Coupon = Face Value x Coupon Rate

Credit Rating Bonds & Fixed Income qualitative An agency's opinion on an issuer's ability to meet its debt obligations, expressed on a letter scale. Scale in India runs AAA, AA, A, BBB, BB, B, C, D, with plus and minus modifiers within categories

Credit Risk Bonds & Fixed Income % The risk that a borrower fails to make interest or principal payments as promised. Expected Loss = Probability of Default x Loss Given Default x Exposure at Default

Credit Spread Bonds & Fixed Income bps The extra yield a bond offers over a government security of the same maturity, compensating for credit risk. Credit Spread = Corporate Bond Yield - Government Security Yield of the same maturity

Current Yield Bonds & Fixed Income % A bond's annual coupon expressed as a percentage of its current market price. Current Yield = Annual Coupon / Current Market Price x 100

Debenture Bonds & Fixed Income qualitative A debt instrument issued by a company, which in India may be secured against assets or unsecured. Test: the instrument acknowledges a debt of the company and is issued under a debenture trust deed

Default Bonds & Fixed Income qualitative A failure by a borrower to pay interest or principal when due, or a breach of another obligation under the debt agreement. Test: a scheduled payment is missed beyond any grace period, or a covenant breach triggers an event of default

Dirty Price Bonds & Fixed Income ₹ The total amount a buyer pays for a bond, including accrued interest since the last coupon. Dirty Price = Clean Price + Accrued Interest

Discount Bond Bonds & Fixed Income ₹ A bond trading below its face value, because its coupon is lower than the yield the market currently requires. Test: Market Price < Face Value, which implies Yield to Maturity > Coupon Rate

Duration Bonds & Fixed Income years A measure of how sensitive a bond's price is to a change in interest rates. Approximate Price Change % = -Modified Duration x Change in Yield in percentage points