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Encyclopedia > Fixed income
Financial markets

Bond market
Fixed income
Corporate bond
Government bond
Municipal bond
Bond valuation
High-yield debt
In economics a financial market is a mechanism that allows people to easily buy and sell (trade) financial securities (such as stocks and bonds), commodities (such as precious metals or agricultural goods), and other fungible items of value at low transaction costs and at prices that reflect efficient markets. ... Download high resolution version (480x640, 110 KB)Blockade in front of NYSE. Picture taken in April 2004. ... The bond market, also known as the debit, credit, or fixed income market, is a financial market where participants buy and sell debt securities usually in the form of bonds. ... A corporate bond is a bond issued by a corporation. ... A government bond is a bond issued by a national government denominated in the countrys own currency. ... In the United States, a municipal bond or muni is a bond issued by a state, city or other local government, or their agencies. ... Bond valuation is the process of determining the fair price of a bond. ... To meet Wikipedias quality standards, this article or section may require cleanup. ...

Stock market
Stock
Preferred stock
Common stock
Stock exchange
A stock market is a market for the trading of company stock, and derivatives of same; both of these are securities listed on a stock exchange as well as those only traded privately. ... This article does not cite any references or sources. ... A preferred stock, also known as a preferred share or simply a preferred, is a share of stock carrying additional rights above and beyond those conferred by common stock. ... Common stock, also referred to as common shares, are, as the name implies, the most usual and commonly held form of stock in a corporation. ...

Foreign exchange market
Retail forex
The foreign exchange (currency or forex or FX) market exists wherever one currency is traded for another. ... The Retail Forex (Retail Currency Trading or Retail Forex or Retail FX) market is a subset of the much larger Foreign exchange market. ...

Derivative market
Credit derivative
Hybrid security
Options
Futures
Forwards
Swaps
A derivatives market is any market for a derivative security, that is a contract which specifies the right or obligation to receive or deliver future cash flows based on some future event such as the price of an independent security or the performance of an index. ... A credit derivative is a contract (derivative) to transfer the risk of the total return on a credit asset falling below an agreed level, without transfer of the underlying asset. ... Definition A hybrid security, as the name implies, is a security that combines two or more different financial instruments. ... In finance options are types of derivative contracts, including call options and put options, where the future payoffs to the buyer and seller of the contract are determined by the price of another security, such as a common stock. ... In finance, a futures contract is a standardized contract, traded on a futures exchange, to buy or sell a certain underlying instrument at a certain date in the future, at a specified price. ... This article does not cite any references or sources. ... This article or section is in need of attention from an expert on the subject. ...

Other Markets
Commodity market
OTC market
Real estate market
Spot market
Chicago Board of Trade Futures market Commodity markets are markets where raw or primary products are exchanged. ... Over-the-counter (OTC) trading is to trade financial instruments such as stocks, bonds, or derivatives directly between two parties. ... Real estate is a legal term that encompasses land along with anything permanently affixed to the land, such as buildings. ... Template:The Spot Market The Spot Market or Cash Marketis a commodities or securities market in which goods are sold for cash and delivered immediately. ...

Valuation and Theories
Market Valuation
Financial market efficiency
Financial market efficiency is an important topic in the world of Finance. ...


Finance series
Financial market
Financial market participants
Corporate finance
Personal finance
Public finance
Banks and Banking
Financial regulation
This article does not cite any references or sources. ... In economics a financial market is a mechanism that allows people to easily buy and sell (trade) financial securities (such as stocks and bonds), commodities (such as precious metals or agricultural goods), and other fungible items of value at low transaction costs and at prices that reflect efficient markets. ... There are two basic financial market participant catagories, Investor vs. ... Domestic credit to private sector in 2005 Corporate finance is an area of finance dealing with the financial decisions corporations make and the tools and analysis used to make these decisions. ... Personal finance is the application of the principles of finance to the monetary decisions of an individual or family unit. ... Public finance (government finance) is the field of economics that deals with budgeting the revenues and expenditures of a public sector entity, usually government. ... “Banker” redirects here. ... Financial supervision is government supervision of financial institutions by regulators. ...

v d

Fixed income refers to any type of investment that yields a regular (or fixed) return. Invest redirects here. ... In financial economics, the yield of a financial instrument/security (finance), usually a debt instrument, or other investment is the rate of return the holder earns on that instrument. ...


For example, if you borrow money and have to pay interest once a month, you have issued a fixed-income security. When a company does this, it is often called a bond or corporate bank debt (although 'preferred stock' is also sometimes considered to be fixed income). Sometimes people misspeak when they talk about fixed income, bonds actually have higher risk, while notes and bills have less risk. For other senses of this word, see interest (disambiguation). ... For security (collateral), the legal right given to a creditor by a borrower, see security interest A security is a fungible, negotiable interest representing financial value. ... In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and is obliged to repay the principal and interest (the coupon) at a later date, termed maturity. ... A preferred stock, also known as a preferred share or simply a preferred, is a share of stock carrying additional rights above and beyond those conferred by common stock. ...


The term fixed income is also applied to a person's income that does not vary with each period. This can include income derived from fixed-income investments such as bonds and preferred stocks or pensions that guarantee a fixed income. When pensioners or retirees are dependent on their pension as their dominant source of income, the term "fixed income" can also carry the implication that they have relatively limited discretionary income or have little financial freedom to make large expenditures. A security that shows ownership in a corporation and gives the holder a claim, prior to the claim of common stockholders, on earnings and also generally on assets in the event of liquidation. ... A pension (also known as superannuation) is a retirement plan intended to provide a person with a secure income for life. ... Disposable income is the amount of an individuals total income left after taxes, plus any transfer payments (grants) received from the government or elsewhere. ...


Fixed-income securities can be contrasted with variable return securities such as stocks. To understand the difference between stocks and bonds, you have to understand a company's motivation. A company wants to raise money, and it doesn't want to wait until it has earned enough through ongoing operations (selling products or providing services). In order for a company to grow as a business, it often must raise money; to finance an acquisition, buy equipment or land or invest in new product development. Investors will only give money to the company if they believe that they will be given something in return commensurate with the risk profile of the company. The company can either pledge a part of itself, by giving equity in the company (stock), or the company can give a promise to pay regular interest and repay principal on the loan (bond) (bank loan) or (preferred stock). This article does not cite any references or sources. ... Ownership equity, commonly known simply as equity, also risk or liable capital, is a financial term for the difference between a companys assets and liabilities -- that is, the value that accrues to the owners (sole proprietor, partners, or shareholders). ... This article does not cite any references or sources. ... For other senses of this word, see interest (disambiguation). ...


While a bond is simply a promise to pay interest on borrowed money, there is some important terminology used by the fixed-income industry:

  • The principal of a bond is the amount that is being lent.
  • The coupon is the interest that will be paid.
  • The maturity is the end of the bond, the date that the amount must be returned.
  • The issuer is the entity (company or govt.) who is borrowing the money (issuing the bond) and paying the interest (the coupon).
  • The issue is another term for the bond itself.
  • The indenture is the contract that states all of the terms of the bond.

People that invest in fixed-income securities are typically looking for a constant and secure return on their investment. For example, a retired person might like to receive a regular dependable payment to live on, but not consume principal. This person can buy a bond with their money, and use the coupon payment (the interest) as that regular dependable payment. When the bond matures or is refinanced, the person will have their money returned to them. For other uses, see Debt (disambiguation). ... In finance, coupons are attached to bonds, either physically, as with old bonds (with a stapler), or electronically. ... Maturity may refer to: Sexual maturity Maturity, a geological term describing hydrocarbon generation Maturity, a financial term indicating the end of payments of principal or interest Look up Maturity in Wiktionary, the free dictionary. ... Issuer - A legal entity that develops, registers and sells securities for the purpose of financing its operations. ... Look up Issue in Wiktionary, the free dictionary. ... An Indentured servant is an unfree labourer under contract to work (for a specified amount of time) for another person, often without any pay, but in exchange for accommodation, food, other essentials and/or free passage to a new country. ...


Interest rates change over time, based on a variety of factors, particularly rates set by the Federal Reserve. For example, if a company wants to raise $1 million and not a lot of people in the market have free cash to lend, the company will have to offer a high rate of interest (coupon) to get people to buy their bond. If there are a lot of people in the market trying to get a return on their money, the company can offer a lower coupon. The Federal Reserve System is headquartered in the Eccles Building on Constitution Avenue in Washington, DC. The Federal Reserve System (also the Federal Reserve; informally The Fed) is the central banking system of the United States. ...


To complicate matters further, fixed income securities are actually traded on the open market, just like stocks. To understand this, first realize that bonds are usually created in round face values, for example $100,000. If the current yield (interest rate) of newly issued similar bonds is 6% per year, and you are buying a bond with a coupon rate below 6%, then you can get the bond at a discount (below face value of $100,000), which brings your rate of return on that bond to 6%. Similarly, if the coupon rate of the bond you are buying is greater than 6% you will have to pay a premium for the bond to bring the rate of return down to 6%.


There are also index-linked, fixed-income securities. The most common and an example of the highest rated variety of this kind could include Treasury Inflation Protected Securities (TIPS). This type of fixed income is adjusted to the Consumer Price Index for all urban consumers (CPI-U), and then a real yield is applied to the adjusted principal. This means that the US Treasury issues fixed income that is backed by the full faith and credit of the US Gov to outperform the CPI (e.g. to outperform the inflation rate). This allows investors of all sizes to not lose the purchasing power of their money due to inflation, which can be very uncertain at times. For example, assuming 3.88% inflation over the course of 1 year (just about the 56 year average inflation rate, through most of 2006), and a real yield of 2.61% (the fixed US Treasury real yield on October 19, 2006, for a 5 yr TIPS), the adjusted principal of the fixed income would rise from 100 to 103.88 and then the real yield would be applied to the adjusted principal, meaning 103.88 x 1.0261, which equals 106.5913; giving a total return of 6.5913%. TIPS moderately outperform conventional US Treasuries, which yield just 5.05% for a 1 yr bill on October 19, 2006. By investing in such fixed income, index linked fixed income securities, consumers can exceed the pace of inflation, and gain value in real terms. Treasury securities are government bonds issued by the United States Department of the Treasury through the Bureau of the Public Debt. ... A consumer price index (CPI) along with a population census, is one of the two most important products of national statistical offices. ... is the 292nd day of the year (293rd in leap years) in the Gregorian calendar. ... is the 292nd day of the year (293rd in leap years) in the Gregorian calendar. ...


All fixed income securities from any entity have risks including but not limited to:

  • inflationary risk
  • interest rate risk
  • currency risk
  • default risk
  • repayment of principal risk
  • reinvestment risk
  • liquidity risk
  • maturity risk
  • streaming income payment risk
  • duration risk
  • convexity risk
  • credit quality risk
  • political risk
  • tax adjustment risk
  • market risk

External links

  • Fixed Income Glossary Reuters Fixed Income Services Financial Glossary
  • Basic Fixed Income Derivative Hedging - Article on Financial-edu.com.


  Bond market v d  
Fixed income | Bond | Debenture
Types of Bonds
By Issuer: Government bond | Sovereign bond | Agency bond
Municipal bond | Corporate bond | Emerging market debt
By Payout: Fixed rate bond | Floating rate note | Zero coupon bond
Inflation-indexed bond | Commercial paper | Accrual bond
Auction rate security | High-yield debt | Convertible bond
Mortgage-backed security | Asset-backed security
Derivatives
Bond option | Credit derivative | Credit default swap
Collateralized debt obligation | Collateralized mortgage obligation
Bond valuation
Pricing: Par value | Coupon | Clean price | Dirty price
Accrued interest | Day count convention
Yield analysis: Nominal yield | Current yield | Yield to maturity
Yield curve | Bond duration | Bond convexity
Credit analysis: Credit analysis | Credit risk
Spread analysis: Yield spread | Credit spread | Option adjusted spread
Interest rate models: Short rate models | Rendleman-Bartter | Vasicek
Ho-Lee | Hull-White | Cox-Ingersoll-Ross | Chen
Heath-Jarrow-Morton | Black-Derman-Toy

 
 

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