Fixed Income in Depth
10 articles
Beyond Treasuries: corporate and municipal bonds, ratings and spreads, the options embedded in them, and the difference between owning a bond and owning a bond fund.
Foundations
Start here if the subject is new.Intermediate
Assumes the foundations above.Corporate Bonds
A loan to a company, with terms set out in an indenture. The yield compensates for the time and for the possibility that the company does not pay.
Credit Ratings
An opinion on the likelihood of repayment, expressed on a letter scale, produced by firms paid by the issuers they rate.
Credit Spreads
The extra yield over a government bond of the same maturity. It compensates for default risk and for liquidity, and it is one of the better-watched indicators of financial conditions.
Municipal Bonds
Debt issued by states, cities and their agencies. The interest is generally exempt from federal tax, which changes how the yield should be compared to anything else.
Inflation-Linked Bonds
Bonds whose principal adjusts with a price index. They pay a real yield, and the difference against a nominal bond is the market's inflation expectation.
Ladders, Barbells and Bullets
Three ways of arranging maturities across a bond portfolio, each with a different response to a change in the shape of the yield curve.
Bond Funds and Individual Bonds
An individual bond matures; a fund does not. That single difference produces most of the distinction between them, and it is smaller than it is usually made to sound.
Advanced
Detail, edge cases and methodology.Embedded Options
A call gives the issuer the right to repay early; a put gives the holder the right to demand repayment. Each is an option, and someone pays for it.
Defaults and Recovery
A default is a failure to meet the terms of the indenture, which is not always a failure to pay. What holders recover depends on their position in the capital structure.
Frequently Asked Questions
What is a credit rating?
A credit rating is an agency's opinion of how likely a bond issuer is to pay interest and principal in full and on time. Bonds rated BBB- or higher by S&P and Fitch, or Baa3 or higher by Moody's, are called investment grade; anything lower is high yield. Ratings change, and often after the market has already moved.
Read the full article: Credit RatingsWhy do bond prices fall when interest rates rise?
A bond's coupon is fixed when it is issued. When market rates rise, newly issued bonds pay more, so an existing bond is only worth buying at a lower price that brings its yield up to the new rate. The longer the bond's duration, the further its price falls for a given rise in rates.
Read the full article: Bonds: Coupon, Par, Price and YieldWhat is a money market fund?
A money market fund is a mutual fund that holds very short-term, high-quality debt such as Treasury bills and commercial paper, and aims to keep a stable value per share. It is commonly used to hold cash, but it is an investment rather than a bank deposit, so it is not FDIC insured.
Read the full article: Money Market Funds