Fixed Income Glossary
AMP Capital Investors Limited
ABN 59 001 777 591
AFSL 232497
GLOSSARY OF FIXED INCOME INVESTMENT TERMS
Accrued interest
Interest deemed to be earned on a security but not yet paid to the investor.
Ask price
Price being sought for the security by the seller.
Asset backed
A bond or note backed by loan paper or accounts receivable other than mortgages.
Bank capital
A collective term used for subordinated bonds issued by the banking sector.
Basis point
One one-hundredth of a percentage point. Yield differences among bond securities are stated in basis points
(bps).
Bearer bond
A security that has no identification as to owner. It is presumed to be owned by the person who holds it. Bearer
bonds are freely negotiable since ownership can be transferred quickly from seller to buyer by delivery of the
instrument.
Bid
The price at which a buyer offers to purchase a security.
Bond
A debt instrument, similar to an IOU. It is a contract between the borrower (issuer) and the lender (bondholder).
The issuer pledges to pay the loan principal to the bondholder on a fixed date (maturity date) as well as a
specified rate of interest during the life of the bond.
Bond swap
The sale of a bond and the purchase of another bond of similar market value. Swaps may be made to establish a
tax loss, upgrade credit quality, extend or shorten maturity, etc.
Call
The repurchase of a bond by its issuer before its maturity date, without requiring the holder’s consent. If a bond is
callable, the date and price at which it can be called is specified on the certificate.
Callable bonds
Bonds which are redeemable by the issuer prior to the maturity date at a specified price at or above par.
Cap
The top interest rate that can be paid on a floating rate note.
CDO (Collateralised Debt Obligation)
A security backed by a pool of bonds, loans and other assets. CDOs are similar in structure to a collateralised
mortgage obligation (CMO) but do not specialise in one type of debt.
CMO (Collateralised Mortgage Obligation)
A security backed by a pool of mortgage pass-through securities or mortgage loans, which generally supports
several classes of obligations.
Collar
Upper and lower limits (cap and floor, respectively) on the interest rate of a floating rate note.
Convexity
A volatility measure for bonds. Used together with duration, convexity provides a more accurate approximation of
the gains and losses on a bond or bond portfolio from a change in interest rates rather than using duration alone.
The higher the convexity, the greater the price gain or price loss for a given change in interest rates. Bonds with
a longer maturity will generally have a higher convexity, and for instruments with the same duration, the more
dispersed the cash flows, the greater the convexity.
Corporate bond
Also known as ‘credit’. A bond issued by a corporate entity.
Coupon
Also known as ‘interest’. Annual payout the borrower promises to pay the bondholder during the life of the bond.
It is expressed as a percentage of the bond’s par value. Most bonds are still offered with a traditional fixed rate,
although floating rate notes and zero coupon bonds are also common.
Credit
A collective term used for bonds issued by corporate entities.
Credit rating
Designations used by credit rating agencies to give relative indications of credit quality.
Credit risk
The risk of loss to an investor due to an issuer’s non-payment of interest or principal on a bond.
Credit spread
Refers to the difference between the yield of a corporate bond and a government bond of the same maturity.
The actual spread of a corporate bond versus a government bond is usually referred to in terms of basis points
(bps). After purchasing a corporate bond the bondholder may benefit from a narrowing of the credit spread which
contributes to a smaller yield to maturity. This drives up the price of the bond, delivering a capital gain.
Current yield
Also known as ‘running yield’. It refers to the annual payout as a percentage of the current market price you
actually pay. For example, a bond with a current market price of $1,000 that pays $80 per year in interest would
have a current yield of 8%.
Debenture
Unsecured debt obligation, issued against the general credit of a corporation rather than against a specific asset.
Default
Failure to pay principal or interest when due. Defaults can also occur for failure to meet non payment obligations,
such as reporting requirements, or when a material problem occurs for the issuer, such as a bankruptcy.
Discount
The amount by which the purchase price of a security is less than the principal amount, or par value.
Discount note
Short-term obligations issued at discount from face value, with maturities ranging from overnight to 360 days.
They have no periodic interest payments - the investor receives the note’s face value at maturity.
Discount rate
The rate the Federal Reserve charges on loans to member banks.
Duration
2
1
Duration is used as a measure of risk in bond investing. While it comes in many forms, the ones most commonly
used are ‘Macaulay duration’ and ‘Modified duration’.
GLOSSARY OF FIXED INCOME INVESTMENT TERMS
Embedded option
A provision within a bond giving either the issuer or the bondholder an option to take some action against the
other party. The most common embedded option is a call option, giving the issuer the right to call, or retire, the
debt before the scheduled maturity date.
Face value
Also known as ‘maturity value’, ‘par value’, ‘principal’ and ‘redemption rate’. The amount a bond or note will pay at
maturity.
Floating rate note
A bond for which the interest rate is adjusted periodically according to a predetermined formula, usually linked to
LIBOR.
Floor
The lower limit for the interest rate on a floating rate bond.
Government bond
Also known as a ‘sovereign bond’. A bond issued by a government.
Gross redemption yield
Also known as ‘yield to maturity’. A yield based on the assumption that the security will remain outstanding till
maturity. It represents the total of coupon payments until maturity, plus interest on interest, and whatever gain
or loss is realised from the security at maturity.
Hedge
An investment made with the intention of minimising the impact of adverse movements in interest rates or
security prices.
High grade
Also known as ‘investment grade’. Bonds considered suitable for preservation of invested capital by credit rating
agencies and rated Baa or BBB or above.
High yield bond
Also known as ‘sub investment grade bond’ or ‘junk bond’. Bonds issued by lower rated corporations, sovereign
countries and other entities (Ba or BB or below) and offering a higher yield than more creditworthy securities.
Hybrid security
A security that combines two or more different financial instruments. Hybrid securities generally combine both
debt and equity characteristics. In the field of bank capital, ‘hybrid’ is often used to refer to preferred securities.
Interest
Also known as ‘coupon’. Annual payout the borrower promises to pay the bondholder during the life of the bond.
It is expressed as a percentage of the bond’s par value. Most bonds are still offered with a traditional fixed rate,
although floating rate notes and zero coupon bonds are also common.
Interest rate swap
Financial derivatives used by banks and other financial institutions for hedging market interest rate risk. A
conventional swap comprises two legs, one fixed rate and the other floating rate which is referenced to an
external reference such as LIBOR. They are an important asset-liability management and risk management tool in
financial markets. See also ‘Swap spread’.
Investment grade
Also known as ‘high grade’. Bonds considered suitable for preservation of invested capital by credit rating
agencies and rated Baa or BBB or above.
Issue date
The date of a bond issue from which the first owner of a bond is entitled to receive interest.
Issuer
An entity which issues and is obligated to pay principal and interest on a debt security.
Junk bond
Also known as ‘sub investment grade bond’ or ‘high yield bond’. Bonds issued by lower rated corporations,
sovereign countries and other entities (Ba or BB or below) and offering a higher yield than more creditworthy
securities.
Leveraged loan
A loan provided to a company already holding a considerable amount of debt. Since the company being offered
the loan is already highly leveraged, this type of loan carries more risk to investors who, in return, require higher
rates of return.
LIBOR (London Interbank Offered Rate)
The rate banks charge each other for short-term loans. LIBOR is frequently used as the base for resetting rates on
floating rate notes.
Liquidity
A measure of the relative ease and speed with which a security can be purchased or sold in the secondary market
at a price that is reasonably related to its actual market value.
1
Macaulay duration
This form of duration measures the number of years required to recover the true cost of a bond, considering
the present value of all coupon and principal payments received in the future. Interest rates are assumed to be
continuously compounded. It is the only type of duration quoted in ‘years’. See also ‘Modified duration’.
Maturity date
The date when the principal amount of a security is payable.
Maturity value
Also known as ‘face value’, ‘par value’, ‘principal’ and ‘redemption rate’. The amount a bond or note will pay at
maturity.
1
Modified duration
This form of duration expands or modifies Macaulay duration to measure the responsiveness of a bond’s price
to interest rate changes. It is defined as the percentage change in price for a 1% change in interest rates. The
formula assumes that the cash flows of the bond do not change as interest rates change. See also ‘Macaulay
duration’.
Money market
Market for short-term debt securities with a maturity of one year or less, and often 30 days or less.
Municipal bond
Bond issued by a state, city or local government.
New issue
A bond being offered for sale for the first time.
Non-callable bond
A bond that cannot be called for redemption by the issuer before its specified maturity date.
3
GLOSSARY OF FIXED INCOME INVESTMENT TERMS
Offer
The price at which a seller will sell a security.
Par value
Also known as ‘face value’, ‘maturity value’, ‘principal’ and ‘redemption rate’. The amount a bond or note will pay
at maturity.
Preferred security
A security possessing characteristics of both equity and debt. Preferred securities are generally longer-term in
maturity but have early redemption or ‘call’ features. Preferred securities have been created by companies for
their favourable accounting treatments and flexibility. See also ‘hybrid security’.
Premium
The amount by which the price of a security exceeds its principal amount.
Primary market
The market for new issues.
Principal
Also known as ‘face value’, ‘maturity value’, ‘par value’ and ‘redemption rate’. The amount a bond or note will pay
at maturity.
Redemption rate
Also known as ‘face value’, ‘maturity value’, ‘par value’ and ‘principal’. The amount a bond or note will pay at
maturity.
Registered bond
A bond whose owner is registered with the issuer or its agent. Transfer of ownership can only be accomplished
when the securities are properly endorsed by the registered owner.
Reinvestment risk
The risk that interest income or principal repayments will have to be reinvested at lower rates in a declining rate
environment.
Revenue bond
A municipal bond payable from revenues derived from tolls, charges or rents paid by users of the facility
constructed with the proceeds of the bond issue.
Running yield
Also known as ‘current yield’. It refers to the annual payout as a percentage of the current market price you
actually pay. For example, a bond with a current market price of $1,000 that pays $80 per year in interest would
have a current yield of 8%.
Secondary market
Market for issues previously offered or sold.
Senior bond
Senior bonds have greater seniority in the issuer’s capital structure than subordinated bonds and preferred
securities. That is to say, in the event the issuer goes bankrupt, senior debt must be repaid before other creditors
receive any payment. Senior debt is often secured by collateral on which the lender has put in place a first lien.
Sovereign bond
Also known as a ‘government bond’. A bond issued by a government.
Sub-investment grade bond
Also known as ‘high yield bond’ or ‘junk bond’. Bonds issued by lower rated corporations, sovereign countries and
other entities (Ba or BB or below) and offering a higher yield than more creditworthy securities.
Subordinated bond
A bond whose claim on income and assets of the issuer in the event of default (or if the issuer files for
bankruptcy) is ranked below the claims of senior bonds. A subordinated bond is paid after senior bonds but
before ordinary shares in a liquidation.
Swap spread
The difference between the swap rate on a contract and the yield on a government bond of the same maturity.
The spread itself is the number of basis points the swap rate lies above the equivalent maturity government bond
yield, quoted on the same interest basis. The higher rate payable on swaps represents the additional risk premium
associated with bank credit risk compared to government credit risk. Swap spreads are based on LIBOR rates, the
creditworthiness of the swap’s counterparties, and other economic factors that could influence the terms of the
investment’s interest rates. See also ‘Interest rate swap’.
Transfer agent
A party appointed by an issuer to maintain records of securities’ owners, to cancel and issue certificates, and to
address issues arising from lost, destroyed or stolen certificates.
Subordinated bond
A bond whose claim on income and assets of the issuer in the event of default (or if the issuer files for
bankruptcy) is ranked below the claims of senior bonds. A subordinated bond is paid after senior bonds but
before ordinary shares in a liquidation.
Swap spread
The difference between the swap rate on a contract and the yield on a government bond of the same maturity.
The spread itself is the number of basis points the swap rate lies above the equivalent maturity government bond
yield, quoted on the same interest basis. The higher rate payable on swaps represents the additional risk premium
associated with bank credit risk compared to government credit risk. Swap spreads are based on LIBOR rates, the
creditworthiness of the swap’s counterparties, and other economic factors that could influence the terms of the
investment’s interest rates. See also ‘Interest rate swap’.
Transfer agent
A party appointed by an issuer to maintain records of securities’ owners, to cancel and issue certificates, and to
address issues arising from lost, destroyed or stolen certificates.
Treasury bond
A bond issued by the US government.
Trustee
A bank designated by the issuer as the custodian of funds and official representative of bondholders.
Yield
The annual percentage rate of return earned on a security. Yield is a function of a security’s purchase price and
coupon.
Yield curve
A line tracing relative yields on a type of security over a spectrum of maturities ranging from three months to 30
years.
4
GLOSSARY OF FIXED INCOME INVESTMENT TERMS
Yield to call
A yield on a security calculated by assuming that interest payments will be paid until the call date, when the
security will be redeemed at the call price.
Yield to maturity
Also known as ‘gross redemption yield’. A yield based on the assumption that the security will remain
outstanding till maturity. It represents the total of coupon payments until maturity, plus interest on interest, and
whatever gain or loss is realised from the security at maturity.
Zero-coupon bond
A bond on where no periodic interest payments are made. The investor receives one payment which includes
principal and interest at redemption (call or maturity). See also ‘Discount note’.
Source: ipac. The Securities Industry and Financial Markets Association (www.investinginbonds.com), OECD Glossary of Statistical Terms, Investopedia.
1 California Debt and Investment Advisory Commission, January 2007.
CONTACT US
If you would like to know more about how AMP Capital can help you, please visit www.ampcapital.com
Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) makes no representation or
warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This
document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor
should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives,
financial situation and needs. This document is solely for the use of the party to whom it is provided.
© Copyright 2016 AMP Capital Investors Limited. All rights reserved.