Fixed Income Securities and Fixed Income Trading
Instruments and pricing
Know government, agency, municipal, corporate and securitised debt; fixed versus floating coupons; callable, putable and convertible features; and the meaning of duration, convexity, credit spread and yield to maturity. Understand accrued interest, clean versus dirty price, and day-count conventions. Be able to explain why prices and yields move inversely.
Market structure
Fixed income is largely dealer-intermediated and quote-driven rather than exchange-traded. Understand request-for-quote protocols, the role of primary dealers, benchmark issuance and when-issued trading, and the relative opacity of corporate bond markets compared with equities. Note that many bonds trade infrequently, so the last trade may be stale and marks may be model-based.
Traps
- Quoting yield when the client asked for price, or vice versa, without stating the convention.
- Forgetting accrued interest: the buyer pays the dirty price.
- Treating a bond's last trade as a current market price in an illiquid issue.
- Assuming a callable bond trades to maturity - it may trade to the call.
- Ignoring that rising rates reduce prices and increase reinvestment risk trade-offs.
Worked example
A bond with a 5% coupon, 100 face, 90 days of accrued interest on a 30/360 basis: accrued = 100 × 5% × 90/360 = 1.25. A clean price of 98 means the buyer pays 99.25. Rule of thumb: clean price plus accrued equals the cash the buyer actually pays.