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Fixed Income Investing
Glossary
Agency Bonds are bonds issued by government bodies such as the Government National Mortgage Association (also called Ginnie Mae).
Asset-Backed Securities (ABS) are securities backed (collateralized) by a pool of other assets that would be sold in the event of issuer’s default to repay securities’ holders. The payment of principal and interests is derived from income generated by the pool of collateral assets.
Fixed income securities are exchanged in the market the same way other securities are. The bid is the highest price a buyer is willing to pay for a security. The ask/offer is the lowest price a seller is willing to accept for a security. The bid-ask spread is the difference between the bid and the ask and is often used as an indicator of the liquidity of an asset, the lower the spread is, the better the liquidity is.
Duration measures the sensitivity of the bond’s price to an interest rate change. In general, a longer duration indicates a greater likelihood that the value of a bond will fall as interest rates increase. The duration metric comes in several forms with the most common being the Macaulay duration, the modified duration, and the effective duration.
A strategy that consists of holding bonds with different maturity dates. The maturity dates of the bonds in a bond ladder are regularly spaced over several months or years, allowing the proceeds to be reinvested at regular intervals as bonds mature.
Some bonds can be “Called” by the issuer. It means the bond can be redeemed (paid off) by the issuer before the final maturity date.
Climate-Aware ETFs refer to funds investing in (1) Green bonds issued by entities that aim to use the proceeds in order to have a beneficial impact on the environment and to fight against global warming; (2) Climate risk-adjusted government bonds offering a higher (resp. lower) exposure to countries less (resp. higher) exposed to climate change risks; and (3) Corporate bonds selected based on a carbon transition tilt including the fulfillment of constraints dictated by Paris-Aligned Benchmarks.
Convertible Bonds are bonds that give the ability to investors to convert their bonds into equities (companies’ shares). These bonds are especially useful for companies with good potential. If the price of the company’s share rises a lot, investors convert their bonds into shares and make a profit.
A measure of the non-linear relationship between bond’s price and interest rates.
Corporate Bonds are issued by companies to finance their projects.
A Coupon is the interest rate paid by the issuer to the investor. It can remain the same over the life of the bond, or vary. There are many different types of coupons such as floating rate, fixed rate, and step-up coupons.
Coupon Frequency is the frequency in which the coupons are paid. It can be yearly, monthly, quarterly, but most often bonds pay semi-annual coupons.
A Coupon Rate is the rate used to calculate the coupon. The Coupon Rate multiplied by the face value of the security gives the coupon.
A Coupon Type represents the characteristics of a coupon. For example, floating, fixed, or step up.
Covered Bonds are bonds issued by credit institutions and collateralized against a pool of assets. In the event of issuer’s default, these assets will be liquidated, and proceeds will be used to pay the amount due to investors.
Credit Default Swaps (CDS) are a derivative product that work like insurance. In the scenario of issuer's default, CDS holders are paid what they are due.
A Credit Quality or Rating is a rating that indicates the creditworthiness of a company or country. For example, its ability to repay its debt and interest.
Credit Risk refers to the risk of default of the entity that issues the bond.
A Credit Spread is the difference in yield between bonds of similar maturity but different credit rating. The bond with the lower credit rating will offer a higher yield. Credit spread to treasury calculates the difference in yield between a non-government bond and a government bond of similar maturity. Credit spreads tend to tighten in an economic expansion environment and widen when the economy performs poorly.
Current Yield is the yield delivered by the bond based on its current price. It is calculated by dividing the coupon by the current price of the security.
A Default happens when an issuer fails to make a principal or interest payment on time.
Discount Bonds are bonds that are trading for less than their par value. This happens when the market yield is higher than the coupon rate of the bond.
Emerging Market (EM) Debt and EM Bonds are debt instruments issued by developing countries.
Effective duration is a measure of the duration for bonds with embedded options (e.g., callable bonds). Unlike the Macaulay duration and modified duration, effective duration considers fluctuations in the bond’s price movements relative to the changes in the bond’s yield to maturity (YTM) therefore taking into account possible fluctuations in the expected cash flows of a bond. In other words, an effective duration of X means that if there were to be a change in yield of 100 basis points, or 1%, then the bond's price would be expected to change by X%.
Estimated Yield is an estimate of the annual yield for the next 12 months and for a specific security.
Expected Yield is the expected annual rate of return delivered by newly issued fixed income securities.
Face value/Par value/Nominal value refers to the amount paid to the holder of a bond at maturity.
Fixed-Rate Bonds are bonds that pay a fixed coupon over their life.
Floating Rate Bonds are bonds that have a coupon linked to a reference rate such as the LIBOR. It means their coupons are not fixed during the life of the bond and reset frequently to reflect the variation of the reference rate.
Bonds issued by governments to finance projects and public services. Japanese Government Bonds (JGBs) refer to bonds issued by Japanese government. US Treasuries refer to bonds issued by the US government. BTPs refer to bonds issued by the Italian government. Bunds refer to bonds issued by German government. Gilts refer to bonds issued by UK government.
Hard currencies are globally traded currencies issued by countries considered as being politically and economically stable. Hard currencies include the following: AUD CAD CHF EUR GBP JPY USD
High Yield Bonds refer to the credit quality of a company or issuer. To be considered high yield, a company or issuer must be rated below BBB or equivalent by a credit rating agency.
Inflation is the general increase in prices of goods of a reference basket. It is calculated by comparing the current prices of a Consumer Price Index (CPI) with its prices on a reference year.
Inflation Factor is a measure of inflation calculated by dividing the latest CPI by the CPI on the base year.
Inflation-Linked Coupon is a type of coupon linked to the price changes of a CPI. It protects investors from inflation.
Interest is a payment made from the issuer to the holder of the bond in order to compensate the holder for the use of the borrowed money.
Interest Income is income earned from interest.
Investment-Grade Bonds refer to the credit quality of a company/issuer. To be considered investment grade, a company/issuer must be rated above or BBB or equivalent by a credit rating agency.
The Issue Date is the earliest date a security can be exchanged.
An Issuer is an entity such as a government or a company that issues bonds, or other debt securities in order to raise money to finance its projects.
An Issuer Event refers to changes in the standing of an issue or issuer. It can be positive or negative. Examples of issuer events would be upgrades or downgrades of the issuer’s credit rating.
Liquidity represents the ease at which an asset can be transformed to cash (i.e., sold) without impacting its price. Fixed income securities are less liquid than equities and commodities, and therefore liquidity is an important consideration. Fixed Income ETFs can offer improved liquidity compared to the underlying market of individual bonds. Indeed, the secondary market of ETFs allows investors to benefit from a second buffer of liquidity as buying and selling ETF shares into the market can be done without having to buy or sell individual bonds. In-kind redemptions allowed by some ETF providers can also give access to individual bonds while a direct access can be prohibitively expensive or operationally cumbersome.
The term "Listed" indicates if a security is tradable on an exchange.
Introduced by Canadian economist Frederick Macaulay, the Macaulay duration is a weighted average of the times until the cash flows of a fixed-income instrument are received. It measures the time required for an investor to be repaid the bond’s price by the bond’s total cash flows. The Macaulay duration for coupon-paying bonds is always lower than the bond’s time to maturity. For zero-coupon bonds, the duration equals the time to maturity. It is measured in units of time (e.g., years).
Maturity is the date at which the final repayment will be made. After this final repayment, all due interest and principal are paid to the bond holder.
As a more precise measure of price sensitivity, the modified duration indicates the percentage change in the bond’s value given a percentage interest rate change. Primarily applied to bonds, it can also be used with other types of securities the behaviour of which vary as a function of yield. It is measured in percentage.
Money Market refers to the market of fixed-income instruments with a maturity of less than a year.
Mortgage-Backed Security (MBS) are asset-backed securities collateralized by one or several mortgages. The cash flows are similar to bonds. The issuer buys mortgages, and pools them to create a new financial product, MBS. The issuer pays MBS’s investors with the repayments it receives from pooled mortgages.
Municipal Bonds are bonds issued by municipalities or states in order to finance projects such as the construction of a highway. Some municipal bonds have preferred tax regimens.
Option Adjusted Spread is an adjustment made in the yield of a bond to consider its option feature.
Overnight Rate is the interest rate at which a major bank would lend or borrow with another major bank in the very short term (1 day).
Preferred Stock or Share is an instrument that pays fixed dividends and has infinite life. It is a trade-off between a bond and a stock. They are senior to common stocks but not to debt. Unlike common stocks they usually do not come with voting rights.
Premium Bonds are bonds traded for more than their par value. This happens when the market yield is lower than the coupon rate of the bond.
Principal Repayment is the payment of the face value of a security by the issuer to the holder. The principal can be repaid at maturity or, for some securities, be redeemed before by the issuer.
Puttable Bonds are bonds that have an embedded put option that gives the holder the right to request the issuer to repurchase the bond.
A Redemption is the action from the issuer, of calling or repurchasing the bond from the holder.
A Reset Frequency is the frequency the coupon of a security will adjust to reflect the variation of the reference rate.
Settlement Date is the date when the trade is finalized. The buyer must make the payment and the seller transfers the security’s ownership to the buyer.
Sinking Fund Bonds are bonds that require the issuer to repay part of the nominal on a regular basis before the maturity date.
Soft currencies are currencies with lower stability on the foreign exchange market in comparison to hard currencies. Soft currencies strongly react to political or economic changes of a country.
Sovereign Debt is a bond issued by a government or other sovereign entity.
Supranational Bonds are bonds issued by supranational entities such as development banks and central banks. These entities use the proceeds to have a global social and economic positive impact.
Tax-Exempt Bonds are bonds that are not subject to taxation.
Treasury Inflation-Protected Securities (TIPS) are bonds that have their coupons indexed to inflation. They protect the holder from inflation.
Use of Proceeds is the way the issuer will use the proceeds from the bonds it has issued.
A Yield is the percentage of return an investor receives. It is calculated based on the initial amount invested and the current value of investments.
A Yield Curve is a result of a plot of the yields of different maturity bonds and similar credit ratings. The yield curve is used as a visualization of the relationship between interest rates and time to maturity. Yield curves can be used to understand how healthy the market expects the economy will be in the future.
Yield To Maturity (YTM) is the rate of return an investor would earn by holding debt security until its maturity.
Yield To Worst (YTW) is the lowest potential return on a debt instrument if all terms of the contract are respected. YTW is a specifically useful measure for bonds with embedded call options.
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