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Fixed IncomeModule 1 of 5

Fixed-Income Instrument Features

4

Concepts

2

Formulas

1

Decisions

2

Quiz Questions

Key Concepts

4 concepts covered in this module.

Bond Features

Issuer, maturity, par value, coupon rate, coupon frequency, currency, seniority.

Yield Measures

Current yield = Annual coupon/Price. YTM = IRR of all cash flows. YTC = yield if called at first call date.

Bond Covenants

Affirmative: maintain ratios, pay taxes, insure assets. Negative: limit debt, restrict dividends, limit asset sales.

Contingency Provisions

Callable: issuer can redeem early (benefits issuer). Putable: holder can sell back early (benefits holder). Convertible: exchange for equity.

Formulas

2 essential formulas for this module.

Current Yield

CY = Annual Coupon / Current Price

Where: Simple yield measure, ignores capital gains/losses

Bond Price

P = Σ C/(1+r)t + FV/(1+r)n

Where: C = coupon, r = yield per period, n = periods

Decision Frameworks

1 decision frameworks to guide your analysis.

Callable vs Putable bonds?

  • Callable: higher coupon to compensate investor for call risk
  • Putable: lower coupon because put option benefits investor

Mind Map

Visual overview of how concepts connect in this module.

FI Instrument Features
Basic Features
Par/face value
Coupon rate & frequency
Maturity date
Seniority
Yield Measures
Current yield
YTM
YTC/YTP/YTW
Covenants
Affirmative (must do)
Negative (must not do)
Protect bondholders
Embedded Options
Call (issuer benefit)
Put (holder benefit)
Convertible
Exchangeable

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Fixed-Income Cash Flows and Types