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#### In this article we review the key terms used in fixed income

Annuity:

An annuity is a series of payments in equal time periods, guaranteed for a fixed number of years.

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Annuity factor:

The present value of \$1 paid for each of the “t” periods.

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Constant perpetuity:

A constant stream of identical cash flows without end.

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Correlation:

A statistical measure of how two securities move in relation to each other.

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Coupon rate:

The amount of interest received by a bond investor expressed on a nominal annual basis.

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Current yield:

The coupon from a bond divided by the market price of the bond expressed as a percentage.

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Discount factor:

The percentage rate required to calculate the present value of future cash flow.

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Expected value:

The anticipated value for a given investment. Calculate EV by multiplying each possible outcome by its likelihood of occurring, and then calculate the sum of all those values.

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Growing perpetuity:

A constant stream of cash flows without end that is expected to rise indefinitely.

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Moving average:

Average of time series data (observations equally spaced in time) from several consecutive periods. Called “moving” because it is continually recomputed as new data becomes available.

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Par value:

The principal amount returned to a bond investor, by the issuer, upon maturity.

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Time value of money:

The concept that money available now is worth more than the same amount of money available in the future, due to the fact that money available now can be invested and thereby increased in the future.

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Yield-to-maturity:

The annual return earned by a bond investor if purchasing a bond today and holding it until maturity.

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Zero-Coupon Bond:

As the name suggests, this is a bond that has no coupon payments. It is typically traded at a discount, so there is a profit when it is redeemed for face value at maturity.

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###### Yield Curve:

A graph plotting interest rates of bonds with equal credit risk, at the same point in time, but with different maturity rates.

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Pure Expectations Theory:

The idea that long-term interest rates predict what short-term rates will do in the future. So when the market expects short-term rates to fall, we expect to see lower long-term rates.

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Nominal Value:

The value of a security, such as a stock or bond, remains fixed for the duration of its life.

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Current Yield:

The coupon from a bond divided by the market price of the bond expressed as a percentage.

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