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Bonds & Fixed Income

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Bonds & Fixed Income

Floating-Rate Bond

A bond whose coupon resets periodically against a reference rate rather than staying fixed.

Coupon = Reference Rate at Reset + Fixed Spread % Bonds & Fixed Income

Government Security

A debt instrument issued by the central government, carrying sovereign credit and used as the benchmark for all other rates.

Test: the issuer is the Government of India and the obligation is in rupees qualitative Bonds & Fixed Income

High-Yield Bond

A bond rated below investment grade, offering a higher coupon to compensate for higher default risk.

Test: the rating is BB+ or lower on the standard scale qualitative Bonds & Fixed Income

Inflation-Indexed Bond

A bond whose principal is adjusted for inflation, so both the coupon and the redemption amount rise with prices.

Adjusted Principal = Original Principal x (Current Index Value / Index Value at Issue); Coupon = Adjusted Principal x Real Coupon Rate ₹ Bonds & Fixed Income

Inverted Yield Curve

A yield curve on which short-maturity yields exceed long-maturity yields.

Test: yield on a short maturity, such as two years, exceeds the yield on a longer one, such as ten years % Bonds & Fixed Income

Investment Grade

A credit rating of BBB minus or above, indicating relatively low expected default risk.

Test: the rating is BBB- or higher on the standard scale qualitative Bonds & Fixed Income

Laddering

Holding bonds with staggered maturities so that a portion matures each year.

Test: the portfolio is divided across n maturity rungs, with roughly equal amounts maturing in each successive period qualitative Bonds & Fixed Income

Macaulay Duration

The weighted average time until a bond's cash flows are received, with each time weighted by the present value of its cash flow.

Macaulay Duration = Sum of (Time x Present Value of Cash Flow) / Bond Price years Bonds & Fixed Income

Maturity

The date on which a bond's principal is repaid and the obligation ends.

Residual Maturity = Maturity Date - Today's Date, expressed in years years Bonds & Fixed Income

Modified Duration

The percentage change in a bond's price for a one-percentage-point change in yield.

Modified Duration = Macaulay Duration / (1 + Yield to Maturity / Number of Coupons per Year) years Bonds & Fixed Income

Non-Convertible Debenture

A debenture that cannot be converted into equity and is repaid in cash at maturity.

Test: the instrument carries no conversion right; principal is repaid in cash on the stated date qualitative Bonds & Fixed Income

Perpetual Bond

A bond with no maturity date, paying interest indefinitely unless the issuer exercises a call option.

Price = Annual Coupon / Required Yield, for a perpetual stream with no redemption ₹ Bonds & Fixed Income

Primary Dealer

An institution authorised by the Reserve Bank to underwrite and make markets in government securities.

Test: the entity holds a Reserve Bank authorisation, bids in primary auctions and quotes two-way prices in the secondary market qualitative Bonds & Fixed Income

Principal

The face amount a bond issuer borrows and must repay at maturity, on which interest is calculated.

Coupon Payment = Principal x Coupon Rate / Number of Payments per Year ₹ Bonds & Fixed Income

Puttable Bond

A bond the holder may sell back to the issuer before maturity, at a stated price on stated dates.

Test: the terms give the holder an option to require early redemption at a specified price and date qualitative Bonds & Fixed Income

RBI Retail Direct

A Reserve Bank platform allowing individuals to buy government securities directly, without an intermediary.

Test: the individual holds a Retail Direct Gilt account with the Reserve Bank and participates in primary auctions or secondary trading qualitative Bonds & Fixed Income

Reinvestment Risk

The risk that coupons or maturing principal must be reinvested at rates lower than the original investment earned.

Test: the realised return falls below the original yield to maturity because intermediate cash flows were reinvested at lower rates % Bonds & Fixed Income

Sovereign Gold Bond

A government security denominated in grams of gold, paying interest and redeeming at the prevailing gold price.

Redemption Value = Grams Held x Average Gold Price over the three business days before maturity ₹ Bonds & Fixed Income

State Development Loan

A dated security issued by an Indian state government to fund its own borrowing requirement.

Test: the issuer is a state government, and the security is issued through the Reserve Bank's auction process qualitative Bonds & Fixed Income

Subordinated Debt

Debt that ranks behind other debt for repayment if the borrower is wound up.

Repayment order: secured creditors, then senior unsecured, then subordinated, then hybrid capital, then equity qualitative Bonds & Fixed Income

Term Premium

The extra yield lenders require for holding a longer-maturity bond rather than rolling short-maturity ones.

Term Premium = Long-Maturity Yield - Average Expected Short-Term Rate over the same period bps Bonds & Fixed Income

Treasury Bill

A short-term government security issued at a discount to face value and redeemed at par, with no coupon.

Yield = [(Face Value - Price) / Price] x (365 / Days to Maturity) x 100 % Bonds & Fixed Income

Yield Curve

A plot of yields on bonds of the same credit quality across different maturities.

Test: yields on identical-credit instruments are plotted against their residual maturities at a single point in time % Bonds & Fixed Income

Yield to Call

The return on a bond assuming the issuer redeems it at the earliest call date rather than at maturity.

Same calculation as yield to maturity, using the call date and call price in place of the maturity date and face value %