Fixed Income

Résumé

Fixed Income covers the features, markets, valuation, and risks of debt securities. Instrument features include the issuer, maturity, par value, coupon rate and frequency, currency, and embedded options such as calls, puts, and conversions, along with covenants and seniority. Issuance, trading, and funding describe primary and secondary markets, money market instruments, and how corporations, sovereigns, and financial institutions raise short- and long-term debt, including repurchase agreements. Bond valuation discounts promised cash flows at appropriate rates; prices move inversely to yields, and a bond trades at a premium, par, or discount depending on the relationship between its coupon and market yield. Yield measures include the yield to maturity, current yield, and yields on money market instruments, and the term structure is described by spot rates, forward rates, and par rates, with yield curve shapes reflecting expectations and risk premia. Interest rate risk is measured by duration (Macaulay, modified, and effective) and convexity, which together approximate the percentage price change for a given yield change; money duration and the price value of a basis point express risk in currency terms. Credit analysis evaluates default probability and loss given default, credit ratings, credit spreads, and the drivers of spread changes. Securitization transforms pools of assets such as mortgages and receivables into asset-backed and mortgage-backed securities with tranching that redistributes credit and prepayment risk among investors.