CCM Debt Securities flashcards
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32 cards. Read the term and the definition here. The deck at the top of this page is optional.
- Yield to maturity
- The single discount rate that equates a bond's future coupon and principal cash flows to its current price, assuming coupons are reinvested at that same rate until maturity.
- Current yield
- Annual coupon payment divided by the bond's current market price. It measures income return only and ignores any capital gain or loss realized at maturity.
- Clean versus dirty price
- Clean price excludes accrued interest and is the quoted price; dirty price equals clean price plus accrued interest and is the actual amount the buyer pays the seller.
- Accrued interest
- Interest earned by the seller since the last coupon date, calculated as coupon rate times elapsed days divided by days in the coupon period, times par value.
- Macaulay duration
- The present-value-weighted average time in years until a bond's cash flows are received. It is the standard measure of a bond's interest-rate sensitivity horizon.
- Modified duration
- Macaulay duration divided by one plus the periodic yield. It approximates the percentage price change for a one-percentage-point parallel shift in yields.
- Convexity
- The second-order curvature of the price-yield relationship. Positive convexity means price rises more when yields fall than it falls when yields rise equally.
- Price-yield inverse relationship
- Bond prices and yields move in opposite directions. When market yields rise above a bond's coupon, the bond trades at a discount; when below, at a premium.
- Investment-grade threshold
- The boundary at BBB− (S&P/Fitch) or Baa3 (Moody's). Ratings at or above this line are investment grade; one notch below is high yield.
- Credit spread
- The yield difference between a corporate bond and a comparable-maturity government benchmark, compensating investors for default risk, liquidity, and recovery uncertainty.
- Recovery rate
- The percentage of principal and accrued interest an investor recovers after a default, typically higher for secured and senior debt than for subordinated obligations.
- Callable bond
- A bond the issuer may redeem early at a specified price. The issuer exercises when rates fall, capping investor upside and giving the bond negative convexity.
- Putable bond
- A bond the holder may sell back to the issuer at a set price on set dates. This embedded option supports the bond's price when yields rise.
- Convertible bond
- A bond exchangeable into a fixed number of issuer shares. It combines coupon income with equity upside, so its value reflects both credit quality and stock price.
- Zero-coupon bond
- A bond issued at a discount that pays no periodic coupons and returns full par at maturity. Its duration equals its time to maturity.
- Floating-rate note
- A bond whose coupon resets periodically to a reference rate plus a spread. Its price sensitivity to rate changes is low between reset dates.
- Basis point
- One hundredth of one percentage point (0.01%). Spreads, yield changes, and duration-based price estimates are commonly expressed in basis points.
- Bid-ask spread
- The difference between the price at which dealers buy and sell a bond. Wider spreads signal lower liquidity and raise the effective cost of trading.
- Yield curve
- A plot of yields against maturity for similar-credit bonds. Its shape (normal, flat, inverted) reflects rate expectations and term premium.
- Inverted yield curve
- A curve where short-term yields exceed long-term yields. It often reflects expectations of falling rates or tighter monetary policy ahead.
- Duration gap
- The difference between a portfolio's assets and liabilities duration. A nonzero gap exposes the portfolio's surplus to parallel shifts in interest rates.
- Immunization
- Matching asset duration to liability duration so that interest-rate changes leave the portfolio's ability to meet liabilities approximately unchanged.
- Reinvestment risk
- The risk that coupons and principal received are reinvested at lower rates than the original yield, reducing realized return below the stated yield to maturity.
- Interest rate risk
- The risk that a rise in market yields lowers a bond's price. It increases with longer maturity and lower coupon, as captured by duration.
- Credit risk
- The risk the issuer fails to pay interest or principal on time, or that its credit quality deteriorates and its spread widens, lowering the bond's price.
- Default rate
- The percentage of issuers in a rating category that fail to meet obligations within a given period, typically rising sharply as ratings fall.
- Senior unsecured debt
- A bond backed by the issuer's general credit without specific collateral, ranking above subordinated debt but below secured debt in the repayment waterfall.
- Subordinated debt
- Debt ranking below senior obligations for repayment, so it carries higher yields and lower recovery rates in a default or liquidation.
- Sinking fund
- A provision requiring the issuer to retire a portion of principal periodically before maturity, reducing credit risk by spreading repayment over the bond's life.
- Yield spread
- The difference in yield between two bonds, usually a corporate bond and a government benchmark, quoted in basis points and reflecting relative credit and liquidity.
- Term premium
- Extra yield investors demand for holding a longer-maturity bond rather than rolling over short-term securities, a component of the yield curve's slope.
- Duration-based price estimate
- Percentage price change approximated as negative modified duration times the yield change in decimal form; convexity refines this estimate for larger yield moves.