Bonds that may be repurchased by the issuer at a specified call price during the call period.
Convertible Bond
A bond with an option allowing the bondholder to exchange the bond for a specified number of shares of common stock in the firm.
Put Bond
A bond that the holder may choose either to exchange for par value at some date or to extend for a given number of years.
Floating Rate Bonds
Bonds with coupon rates periodically reset according to a specified market rate.
Yield to Maturity
The discount rate that makes the present value of a bond's payments equal to its price.
Current Yield
Annual coupon divided by bond price.
Realised Compound Return
Compound rate of return on a bond with all coupons reinvested until maturity.
Horizon Analysis
Analysis of bond returns over multiyear horizon, based on forecasts of a bonds yield to maturity and reinvestment rate of coupons.
Reinvestment Rate Risk
Uncertainty surrounding the cumulative future value of reinvested bond coupon payments.
Investment Grade Bond
BBB and above (Standard & Poor's)
Baa and above (Moody's)
Speculative Grade (Junk Bond)
BB or lower (Standard & Poor's)
Ba or lower (Moody's)
Unrated Bond
Default Premium
The increment to promised yield that compensates the investor for default risk.
Credit Default Swap (CDS)
An insurance policy on the default risk of a corporate bond or loan.
Term Structure of Interest Rates
The relationship between yields to maturity and terms to maturity across bonds.
Expectation Hypothesis
The theory that yields to maturity are determined solely by expectations of future short-term interest rates.
Forward Rate
The inferred rate of interest for a future period that makes the expected total return of a long-term bond equal to that of rolling over short-term bonds.
Liquidity Preference Theory
The theory that investors demand a risk premium on long-term bonds.
Liquidity Premium
The extra expected return demanded by investors as compensation for the greater risk of longer term bonds.
Macaulay's Duration
A measure of the effective maturity of a bond.
The weighted average of the times until each payment, with weights proportional to the present value of the payment.
Modified Duration
Measure interest rate sensitivity of bond.
Macaulay's duration divided by 1 + yield to maturity.
Immunisation
A strategy to shield net worth from interest rate movements.
Rebalancing
Realigning the proportions of assets in a portfolio as needed.
Substitution Swap
Exchange of one bond for a bond with similar attributes but more attractively priced.
Intermarket Spread Swap
Switching from one segment of the bond market to another.
Rate Anticipation Swap
A switch made in response to forecasts of interest rate changes.
Pure Yield Pickup Swap
Moving to higher yield bonds, usually with longer maturities.
Tax Swap
Swapping two similar bonds to receive a tax benefit.