FIMS key terms

A measure of how much a bond's price changes when interest rates move, expressed in years. Higher duration means greater sensitivity to rate changes and therefore more price risk for the holder.

The curvature in the relationship between bond prices and yields. It captures price changes that duration alone misses, so a bond with higher convexity gains more when yields fall and loses less when yields rise.

The single annual return an investor earns by buying a bond at its current price and holding it to maturity, assuming all coupons are reinvested at that same rate. It summarizes the bond's total expected return.

The extra yield a corporate or other non-government bond offers over a comparable government bond. It compensates investors for default risk and liquidity risk, and it widens when market confidence falls.

An independent agency's opinion of a borrower's ability and willingness to repay debt on time. Ratings range from high investment grade down to speculative levels and influence the interest rate an issuer must pay.

The chance that a bond issuer fails to make scheduled interest or principal payments. Investors demand higher yields to hold debt with greater default risk, and rating agencies assess it for issuers.

The risk that changing market interest rates reduce the value of a fixed income investment or portfolio. Prices of existing bonds fall when rates rise, with longer maturities and lower coupons most exposed.

A contract giving the buyer the right, but not the obligation, to buy an underlying asset at a set price before or on an expiry date. The buyer pays a premium for this right.

A contract giving the buyer the right, but not the obligation, to sell an underlying asset at a set price before or on an expiry date. It is often used to hedge against price declines.

The price a buyer pays and a seller receives for an option contract. It reflects intrinsic value plus time value, and it is influenced by volatility, time to expiry, and the level of interest rates.

The change in an option's price for a one-unit change in the price of the underlying asset. It also approximates the equivalent number of underlying shares represented by the option position.

The level of future price variability that market participants expect, inferred from current option prices. Rising implied volatility usually raises option premiums because larger price swings increase the chance of profit.

Taking an offsetting position to reduce or control an existing risk exposure, such as buying a put option to protect a shareholding. It trades away some potential gain in exchange for lower downside risk.

A financial contract whose value depends on the price of an underlying asset, rate, or index. Common forms include futures, forwards, options, and swaps used for hedging or speculation.

An agreement between two parties to exchange cash flows over a set period, often one fixed rate for a floating rate. Swaps are widely used to manage interest rate or currency exposure.

The process of dividing a portfolio among asset classes such as equities, bonds, and cash. It is a primary driver of long-term return and volatility and should reflect the investor's goals and risk tolerance.

Spreading investments across assets, sectors, and regions so that poor performance in one holding is offset by others. It reduces unsystematic risk but cannot eliminate broad market risk.

Market-wide risk that affects all securities and cannot be reduced through diversification, such as changes in interest rates or a recession. Investors are compensated for bearing it through higher expected returns.

A measure of how sensitive a security's returns are to movements in the overall market. A beta above one indicates greater volatility than the market, while a beta below one indicates less.

A model that prices risky assets by combining the risk-free rate with a risk premium based on beta. It expresses expected return as the risk-free rate plus beta times the market risk premium.

An investor's willingness and ability to accept losses in pursuit of higher returns. It depends on financial capacity, time horizon, and psychology, and it guides the construction of a suitable portfolio.

A documented summary of an investor's objectives, time horizon, financial situation, and attitude toward risk. Advisers use it to recommend suitable investments and to review whether a portfolio remains appropriate.

The regulatory and ethical duty to recommend investments that fit a client's objectives, risk profile, and circumstances. Recommendations must be justified by the client's needs rather than by adviser compensation.

A legal obligation to act in another party's best interests, putting the client's interests ahead of the adviser's own. It requires loyalty, care, and full disclosure of conflicts of interest.

A situation where an adviser's personal or firm incentive could compromise objectivity toward a client, such as commissions on a recommended product. Such conflicts must be disclosed or avoided.

Buying or selling securities while in possession of material non-public information, or passing such information to others. It is illegal in most markets because it undermines fairness and market integrity.

Information that a reasonable investor would consider important when deciding to buy or sell a security, such as an earnings surprise or merger. Trading on it before public release may be unlawful.

Improper conduct that distorts market prices or misleads investors, including insider dealing and market manipulation. Regulators investigate and sanction it to protect confidence in financial markets.

The total value of goods and services produced within a country in a period. It is a headline measure of economic activity, and its growth rate signals expansion or contraction.

A sustained rise in the general level of prices, which erodes purchasing power over time. Central banks often respond by raising interest rates, affecting bond and equity valuations.

The recurring pattern of expansion, peak, contraction, and trough in economic activity. Its stage influences corporate earnings, interest rates, and which asset classes tend to perform well.

Actions by a central bank to influence money supply and interest rates, mainly to control inflation and support growth. Tools include policy rates, reserve requirements, and asset purchases.

The return on an investment considered free of default risk, typically a short-term government security. It serves as the baseline for pricing other assets and appears in models such as the CAPM.

A financial statement showing a company's assets, liabilities, and equity at a point in time. It reveals financial strength and the mix of debt and equity used to fund the business.

A financial statement summarizing revenues, expenses, and profit over a period. It shows how effectively a company converts sales into earnings available to shareholders.

Net profit divided by the number of outstanding shares. It is a widely used measure of profitability and a key input to valuation multiples such as the price-to-earnings ratio.

The use of borrowed money to increase the size of an investment or business. It magnifies both gains and losses and raises financial risk when cash flows decline.

The share price divided by earnings per share, showing how much investors pay for each unit of profit. A high ratio may reflect expected growth or overvaluation.

A valuation method that estimates an asset's worth by projecting future cash flows and discounting them to present value. The chosen discount rate reflects risk and the time value of money.

The principle that money available today is worth more than the same amount in the future because it can be invested and earn a return. It underpins compounding and discounting calculations.

Interest earned on both the original principal and previously accumulated interest. Over long periods, compounding significantly accelerates growth and is central to retirement and savings planning.

The ease and speed with which an asset can be converted to cash without materially affecting its price. Cash is most liquid, while property and private holdings are far less so.

The market for short-term debt instruments, typically maturing within one year, issued by governments, banks, and corporations. It provides liquidity and a place to park cash temporarily.