Fixed Income Data


Equity Indices with the laspeyres calculation methodologies can get complicated enough, but at least they tend to be linked to market movements and terminologies (TLA) that people understand. Fixed Income products however are a different ball game,so to assist we have attempted to put together a brief description / terminology of constructs used within fixed Income indices.

Index ValueThe index level that changes daily, usually starting from an arbitrary base amount of 100. It is used as a rough indicator of the return of the index
DivisorThe amount the market value needs to be altered by
Market CapPrice multiplied by bond nominal gives its market value. This in turn rolls up to the index level market value which may or may not include coupon payments from the current month depending on the index vendors methdology
Index CurrencyThe currency that an index is denominated in, affecting the index and market values
Face valueThe amount of money you get back upon redemption of a bond at maturity date. Typically $1000
Maturity DateThe date at which a bond matures and your initial investment is repaid
PriceA bond price is usually expressed as a percentage of par. So a bond priced at 100 with a face value of $1000 will cost you $1000 to buy. If it’s priced at 90, you’ll pay $900 for a future repayment of $1000
YieldThe return on your investment. There are many different ways of calculating this, but the most common is yield to maturity (YTM). It is influenced by interest rates external to the coupon you receive on the bond itself.
Macaulay DurationThe weighted average time in years until you receive back your initial investment into a bond. The oldest duration measure
Modified DurationThe amount a bond price will move for a 1% change in interest rates. Expressed as an annualised rate so will usually look very similar to Macaulay Duration but developed in the high interest rate environment of the 1970s to give further precision on the impact of future rate changes
Effective DurationAKA option adjusted duration. Bonds with call features come with risk of the issuer calling in the debt early and reissuing at a lower rate. As interest rates fell in the 1980s, this risk was rising, so an enhanced duration measure taking embedded call options into account was developed
Held Cash / Investing CashAn index will either hold cash paid as a separate weight and reinvest at the end of the month or reinvest it daily. A bond fund will typically hold more cash in reserves than an equity fund. This is because a fund manager may need to meet large redemptions and bond positions are not as easy to liquidate as equities
Call optionThe option an issuer has to redeem debt early and reissue it at a lower interest rate
Put optionThe option a buyer has to get their money back early
CouponExpressed as a percentage of face value, the amount of interest a bond will pay annually
Day countThe convention a bond accrues interest on. These range from simple assumptions such as 30 days in a month and 360 days in a year (30/360) up to more complex calculations such as taking into account the actual number of days in the period, accounting for holidays, leap years and so on (ACT/ACT)
Payment basisHow many times a year a bond pays out its coupon – this could technically be anything but annual, semi annual and quarterly are the most common
DefaultA bond issuer defaults when they can no longer meet their obligation to make interest payments
Present ValueHow much future money is worth now. Future bond coupons become worth progressively less as the purchase power of $1 falls over time so a present value is worked out by discounting (dividing) the future cashflow by an interest rate
Market ValueFace Value multiplied by price
Broker spreadBrokers will buy and sell bonds typically without a commission. Instead, they will make a spread on the buy and sell price instead
Payment in Kind (PIK)Bonds that do not pay cash, but pay in bonds instead. This may be for the whole or part of the term
Pool FactorThe factor that an ABS bonds principal reduces by each month based on the underlying principal remaining
Asset backedBonds with cashflows determined by the payout of an underlying pool of assets such as mortgages. They can come with substantial risk if the credit quality of the underlying borrowers has not been analysed properly as this can lead to heightened risk of large defaults such as in the 2008 crisis. Mortgage backed securities (MBS) have two sub groups CMBS and RMBS for commercial or residential
ReturnBond indices are usually implemented in gross return versions. This contains both the capital appreciation from price movements and the return from coupons
Clean PriceThe price of a bond excluding accrued interest for the period
Dirty PriceThe price of a bond including accrued interest for the period. Bonds are usually quoted this way as the buyer will need to make the seller good on accrued interest they will miss out on when they sell the bond
Credit riskThe risk of default of a bond issuer. Corporations have much higher risk than governments because if they have trouble paying their debts, they cannot simply issue more debt or print more money like a government can. In turn, emerging market governments have much higher credit risk than western governments.
IssuerThe organisation responsible for selling the bond and making payments. This is usually a corporation or a government
Flat yieldYield received if an investor buys and holds until maturity. Calculated as the annual coupon payment/Clean price*100%
Coupon yieldThe most simple yield, effectively the amount a bond pays if it pays its coupons on time. Calculated as Annual coupon payment/Bond face value
Yield to maturity (YTM)The expected return on a bond, if held to maturity and all payments are received on time and reinvested at the same rate of return. Assumes static interest rates so not always the most accurate measure, but the most widely used yield in bond analysis. Often calculated by trial and error, best deduced through bond yield tables or specific YTM calculators
Effective yieldReturn using coupons reinvested at the same rate, found by dividing coupons by their associated bonds current market value
ConvexityDuration is good for small yield changes and is represented as a linear relationship between price and yield. However at the ends of the curve its observed that the rate at which price decreases as yield increases slows over time, but the rate at which price increases as yield decreases accelerates over time. As such, convexity adjustments are made to duration to give greater precision, making it the second derivative of price/yield, duration being the first
Bond futureA futures contract where a bond is delivered upon expiry
Cheapest to Deliver (CTD)The bond that is literally ‘cheapest to deliver’ upon expiry of a bond future. CTD is calculated as current price – settlement price*conversion factor. The factors are released by the exchange the futures contracts are traded on, such as the CME Group
Yield curveA representation of expected yields plotted against different maturity dates. These are used for many things including pricing new bonds against similar maturities and interest rate forecasting
Key Rate Durations (KRD)Standard duration assumes that yield changes are the same along the whole of the curve. KRD instead shows the effect of the yield curve shifting in a non-parallel manner
Bond typesMany different bond types are available, in fact ‘bond’ itself is usually used as a generic term for fixed income but in some markets such as the US it specifically refers to longer dated fixed income investments.
Inflation linked (IL)A bond with cashflows and principal payments linked to an inflation index. The cashflows are therefore variable
Floating Rate Note (FRN)A bond that is linked to an interest rate. The cashflows are therefore variable and usually involve an interest rate uplifted bny a margin for example EURIBOR 3 Month + 25bps
ConvertibleA bond that an investor can convert into underlying stock rather than hold to maturity. Coupons are given up in favour of dividends
Special Purpose Vehicle (SPV)An entity created to issue asset backed securities
Credit RatingBonds carry a rating which amongst other things can be interpreted to show its risk of default. Governments, particularly western ones, tend to carry the lowest risk. AAA to BBB tends to be considered investment grade (high quality and low level of default risk). Lower than BBB will be labelled high yield or junk, with higher (sometimes extreme) risk of default. As such, BBB and lower will typically come with a high coupon to make up for the higher risk
Credit Ratings AgencyMoodys, Fitch, Standard and Poors issue credit ratings.
Interest ratesMarket rates that are the biggest influence on bond pricing and trading. As rates go up, bond prices fall. This is because consumers will look elsewhere for new debt issued at higher coupons. Conversely, when rates fall bond prices go up because consumers are willing to pay more to access higher coupon rates that are no longer being issued
Yield to worstThe projected yield an investor will earn on an investment that has call options. YTW will show yield to the call date/dates rather than to maturity
When Issued (WI)A bond that has not fully settled its terms that is open for auction, terms settling post-auction
Grey MarketPre-issue trading market for bonds, usually over the counter (OTC)
Accrued interestBond carrying coupon rates pay out interest on specified dates. In between these dates, the interest slowly accrues each day until it reaches the full coupon amount on payment day. The accrued interest represents the percentage of the coupon accumulated so far in the period
Zero coupon bondBonds that do not pay a coupon. Investors make money on them as they are issued at a discount and pay their full face value on redemption
SpreadThe difference in yield of a bond and a risk free rate, typically the yield of a government bond. Gives an important indicator of the level of extra return received for taking on the risk of a corporate issuer rather than a government
Option Adjusted Spread (OAS)The same as spread but taking a bonds call features into account in the pricing model as well. Callable bonds have uncertain future cashflows so need further adjustments in analysis
Z spread/Static SpreadThe rate that will make the bond price equal its cashflow present value, must be added individually to each point of the curve
I spreadDifference between the bond YTM and the yield of a similar bond on the same point of the yield curve