Bonds & Fixed Income — 50 Terms Defined

Floating-Rate Bond Bonds & Fixed Income % A bond whose coupon resets periodically against a reference rate rather than staying fixed. Coupon = Reference Rate at Reset + Fixed Spread

Government Security Bonds & Fixed Income qualitative 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

High-Yield Bond Bonds & Fixed Income qualitative 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

Inflation-Indexed Bond Bonds & Fixed Income ₹ 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

Inverted Yield Curve Bonds & Fixed Income % 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

Investment Grade Bonds & Fixed Income qualitative 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

Laddering Bonds & Fixed Income qualitative 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

Macaulay Duration Bonds & Fixed Income years 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

Maturity Bonds & Fixed Income years The date on which a bond's principal is repaid and the obligation ends. Residual Maturity = Maturity Date - Today's Date, expressed in years

Modified Duration Bonds & Fixed Income years 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)

Non-Convertible Debenture Bonds & Fixed Income qualitative 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

Perpetual Bond Bonds & Fixed Income ₹ 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

Primary Dealer Bonds & Fixed Income qualitative 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

Principal Bonds & Fixed Income ₹ 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

Puttable Bond Bonds & Fixed Income qualitative 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

RBI Retail Direct Bonds & Fixed Income qualitative 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

Reinvestment Risk Bonds & Fixed Income % 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

Sovereign Gold Bond Bonds & Fixed Income ₹ 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

State Development Loan Bonds & Fixed Income qualitative 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

Subordinated Debt Bonds & Fixed Income qualitative 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

Term Premium Bonds & Fixed Income bps 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

Treasury Bill Bonds & Fixed Income % 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

Yield Curve Bonds & Fixed Income % 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

Yield to Call Bonds & Fixed Income % 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