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- Understanding Fixed Income
Glossary for fixed income
Coupon
The fixed rate of interest a bond pays over its term. A coupon of 4% means a holder would receive $40 per annum for every $1000 invested.
Default
When an issuer misses an interest payment or fails to repay the principal, it is said to be in default.
Duration
Duration measures the sensitivity of a bond’s price to a change in interest rates and is commonly expressed as number of years.
High yield bond
A bond from an issuer with a lower credit rating. These have to pay a higher yield in order to persuade investors to hold them. They may also be called junk or non-investment grade bonds.
Index-linked bond
A fixed income security which pays an interest rate based upon the level of inflation.
Issuer
The government, agency or company that has issued the bond.
Investment grade bond
A bond from an issuer deemed to be of good financial standing.
Maturity date
The point in time when the issuer repays the original investment (principal) to bondholders. This is often called the redemption date.
Par value
The price the bond is originally issued at. This is also the price investors will receive at maturity for each bond they own. This can be referred to as the 'face value'.
Principal
The original investment which is repayable to investors at maturity.
Rating agency
An independent company which rates issuers depending on their perceived creditworthiness.
Securitised bonds
A bond created by packaging together some form of debt, such as mortgages.
Yield
The income return that investors can expect to receive from a bond over the next 12 months based upon its current price (not its par value).