Fixed Income
Bonds are loans with a price, and that price moves inversely to yield.
This category explains the whole chain, across the explainers on bond basics, coupon versus yield, yield to maturity, call, and worst, the price-yield relationship, and the duration family from Macaulay through modified to effective duration.
Convexity, credit quality, and the main instrument types extend the set.
Investing With Purpose keeps the math tethered to intuition, so you grasp why a given bond reprices when rates shift and by how much.
Whether you are sizing rate risk or comparing two credits, this is where the mechanics of fixed income become something you can use rather than memorize.
A bond is a loan packaged as a tradable security. The buyer lends money to the issuer, and the issuer promises to pay…
The coupon rate is the fixed interest payment a bond promises. The yield is the actual return a buyer earns given the…
Current yield is a bond's annual coupon income divided by its current market price. It is the simplest yield measure in…
A credit rating is a letter grade that summarizes an agency's opinion of how likely a bond issuer is to default on its…
Investment grade and high yield are the two halves of the corporate bond market, split at the BBB- / Baa3 threshold.…
US Treasury securities are debt obligations of the federal government, split into three maturity buckets: bills (one…
TIPS are US Treasury securities whose principal adjusts up and down with the Consumer Price Index. They pay a fixed…
Municipal bonds, or munis, are debt securities issued by states, cities, counties, and related agencies to finance…
A bond ladder is a portfolio of individual bonds with maturities staggered at regular intervals. As each rung matures,…
A barbell splits your bond holdings between short and long maturities and avoids the middle. A bullet concentrates…
Accrued interest is the interest a bond has earned since its last coupon payment but has not yet paid out. When you buy…
Yield to maturity is the single discount rate that equates a bond's future cash flows to its current price, assuming…
Yield to call is the return a buyer earns on a callable bond assuming the issuer redeems it at the first available call…
Yield to worst is the lowest yield an investor can receive on a bond across all possible scenarios short of default.…
When market yields rise, bond prices fall. When yields fall, bond prices rise. The relationship is mechanical, not…
Macaulay duration is the present-value-weighted average time until a bond's cash flows are received. It is measured in…
Modified duration is the percentage price change a bond will experience for a small change in its yield. It is the…
Effective duration measures how much a bond's price changes when the whole yield curve shifts, and unlike modified…
Convexity is the curvature in the price-yield relationship of a bond. It is the second-order correction to duration,…
Key-rate duration measures how much a bond or portfolio moves when a single point on the yield curve shifts while every…
A corporate bond is a debt security issued by a company to raise capital. You lend the company money, and in return the…
Agency bonds are debt securities issued by US federal agencies and government-sponsored enterprises. They sit between…
A mortgage-backed security is a bond whose cash flows come from a pool of residential mortgage loans. Homeowners pay…
A callable bond gives the issuer the right, but not the obligation, to redeem the bond before its stated maturity at a…
A convertible bond is a corporate bond that gives the holder the right to exchange the bond for a predetermined number…
A steepener and a flattener are paired-leg trades that profit from changes in the slope of the yield curve, not the…
A 2s5s10s butterfly is a three-leg rates trade that isolates curvature. It profits when the middle of the curve (the…
Carry and roll-down are the two return components a bond earns purely from the passage of time, assuming yields do not…
A collateralized loan obligation, or CLO, is a securitization backed by a managed pool of leveraged corporate loans.…
Asset-backed securities are bonds backed by pools of consumer or commercial receivables such as auto loans, credit card…
A covered bond is a debt instrument issued by a bank and secured by a ring-fenced pool of high-quality assets that…
The TED spread and LIBOR-OIS spread were the two most-watched gauges of interbank funding stress from the 1980s until…
A CDS index basis trade is a relative-value position that profits when the spread on a credit default swap index…
A credit curve steepener is a paired-leg trade on the same issuer that profits when the spread between long-dated and…
CVaR, also called Conditional Value at Risk or Expected Shortfall, measures the average loss of a credit portfolio in…
Credit long/short is a hedge fund strategy that buys undervalued corporate debt and shorts overvalued debt, usually…
A recovery rate is the share of a defaulted bond's face value that creditors eventually receive through restructuring,…
A credit transition matrix is a table that shows the probability that an issuer rated in one category at the start of a…
Distressed debt trading means buying the bonds or loans of companies in or near bankruptcy, often at 40 to 60 cents on…
Moody's corporate rating methodology is a sector-specific framework that combines a scorecard of business and financial…
S&P Global Ratings uses a two-stage framework to rate corporate issuers: a Business Risk Profile and a Financial Risk…
Fitch Ratings produces corporate credit ratings through a sector-specific Master Criteria document backed by a visual…
An NRSRO is a credit rating agency registered with the U.S. Securities and Exchange Commission under the Credit Rating…
The main conflict of interest in credit ratings is the issuer-pays model: the entity being rated hires and pays the…
Municipal bond analysis is the process of valuing tax-exempt debt issued by US states, cities, counties, and…
The TBA (To-Be-Announced) market is the forward market for Fannie Mae, Freddie Mac, and Ginnie Mae mortgage-backed…
Ginnie Mae MBS are mortgage-backed securities guaranteed by the Government National Mortgage Association, a wholly…
A commercial mortgage-backed security (CMBS) is a bond backed by a pool of loans on income-producing commercial real…
A CLO is an actively managed securitization of leveraged loans. It takes a 500-million to 1-billion dollar pool of…
A credit default swap (CDS) is a bilateral contract that pays the protection buyer if a reference entity experiences a…
The CDX family is a set of tradable credit default swap indices covering North American corporate credit. The two…
Sovereign credit default swaps reference the debt of a national government rather than a corporate issuer. They trade…