Basic Bond Jargon
A fixed income instrument that represents a loan made by an investor to a borrower (typically corporate or governmental)
What is a bond?
How long you will hold a bond until it matures
What is holding period?
The dirty price - accrued interest
What is clean price?
The bond YTM - the benchmark treasury YTM
What is the yield spread?
A chart showing the current yields on different duration US govt bonds
What is the yield curve?
The money returned by the debtor
What is FV?
A way to calculate the annual yield on a short-term security that pays out only monthly or quarterly
What is BEY?
The price value of a basis point
What is the dollar value of a 1 (DV01)?
The yield spread which takes into account spot rates
The rate at which banks lend to each other
What is the federal funds rate?
The money given by the creditor
What is PV, or price?
The return on a bond that has its interest payments (or coupons) reinvested at the same rate by the bondholder
What is EAY?
how a bond price changes in response to yield change in comparison to the original price
What is modified duration?
The spread which takes into account options
What is the option-adjusted spread?
Central banks buying and selling bonds for cash, and thus moving the supply curve until the desired interest rate is reached
What is open-market operations?
The nominal rate, the nominal yield, or $ coupon / face value
What is the coupon rate?
The interest rate earned by investing in securities with high liquidity and maturities of less than one year such as a CD or a T-bill
What is money market yield?
The property that makes estimation error larger for longer term bonds and at lower yields
What is convexity?
A security where the issuer has the right, but not the obligation, to buy it back if it reaches a certain price
What is a callable bond?
Central bank creates electronic cash balances then uses these to buy assets
What is quantitative easing?
FV / PV - 1
What is the total return for a zero-coupon bond?
MMY / (1 + MMY*t / 360)
What is the discount rate?
(Days between settlement date and last coupon date * Coupon ($)) / (Days between coupons)^2
What is the formula for accrued interest?
The instrument that caused the Great Financial Crisis
What is a mortgage-backed security?
A recession is often indicated by this property.
What is an inverted yield curve?