Fixed Income Article Series - 2

Terms You’ll Often See In Fixed Income Instruments

Reference:
https://www.bixmalaysia.com/learning-center/bond-glossary

Content:
 Bond
 Price & Yield Dynamics
 Bond Yield vs Price
 Yield to Maturity & Par Value/Face Value
 Interest Rates & Bond Price
 Dovish/Hawkish
 Duration
 Yield Curve

Fixed-income securities, commonly known as bonds, play a vital role in the portfolios of pension
and insurance funds, offering stability and reliable income. Despite their importance, retail
investors often find the world of bonds confusing due to complex terminology. In this article, we
aim to unravel the intricacies of fixed-income securities, making it accessible and demystifying
common misunderstandings.

Embarking on the world of fixed-income investments might feel like entering a maze of
confusing terms and jargon. This article will guide you through the key terms you'll often
encounter in this financial landscape. Whether you're an experienced investor looking to
deepen your knowledge or someone new to the scene, here are some terms in fixed-income
investments you will frequently encounter.

1. Tenor
The term "tenor" in financial contexts denotes the specific time period throughout
which an investment remains active and outstanding. This crucial concept provides
investors with a clear understanding of the duration they commit to when engaging with
a particular financial instrument. Essentially, the tenor represents the lifespan of the
investment, stretching from the initial point of acquisition to the designated maturity
date. During this period, investors can assess how external factors, market conditions,
and economic trends may impact the performance of the investment, enabling them to
make informed decisions based on their financial objectives and risk tolerance.

2. Redemption
Redemption is the process where the issuer repurchases the investment, either before
or at its maturity, fulfilling its financial obligations to the investor.
 3. Coupon & Coupon Rate
A coupon is a regular interest payment disbursed by the issuer to investors throughout
the investment's duration. The coupon rate represents the fixed percentage of the
investment's face value paid as interest.

Example: Consider a financial instrument with a 5% coupon rate. Investors holding this
instrument receive periodic interest payments amounting to 5% of the investment's face
value.

4. Rating & Credit Rating

Rating evaluates the creditworthiness of an investment, indicating its ability to meet its
financial commitments. A credit rating provides a measure of the security's financial
stability and reliability.

5. Programme
In the fixed income context, a program denotes a structured framework under which
multiple issuances or transactions can occur, enhancing flexibility and efficiency.

Understanding the nuances of fixed-income investments is key to achieving financial

stability and fostering growth in your portfolio. At KLDX, we recognize the significance of a
diversified portfolio that includes fixed-income opportunities. Our platform provides a seamless
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We will not use this:

1. What is a Bond?
A bond is a debt instrument issued by entities like companies or governments to fulfill
funding needs. Investors lending money through bonds receive regular interest
payments (coupon) and the principal amount at maturity.

2. Price and Yield Dynamics

 Price: The amount investors pay for a bond, fluctuating based on market forces.
 Yield: The rate of return on a bond, inversely related to its price. For example,
consider Bond ABC with a price tag of $100 and an annual interest/coupon payment
of $10; in this scenario, its yield stands at 10%. It's noteworthy that the coupon
payment remains consistent, while the bond yield exhibits an inverse correlation
with the price.

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3. Bond Yield vs. Price

The relationship between bond prices and yield is inverse. Using the formula mentioned
earlier, when the bond price rises above $100, the yield decreases below 10% since we
are dividing by a larger amount. Conversely, a lower bond price results in a higher yield.

4. Yield To Maturity (YTM) and Par Value

Yield to Maturity (YTM) represents the percentage of return on a bond when held until
its maturity date.

Par Value/Face Value signifies the sum that the bond issuer commits to pay upon the
bond's maturity. This amount might differ from the bond price, as some debt
instruments are issued at either a premium or a discount. For instance, if a bond is
priced at $80 while its par value is $100, it indicates a 20% discount at issuance.

5. Interest Rates and Bond Price

 The relationship between interest rates and bond prices is inverse, meaning that when
interest rates go up, the prices of existing bonds generally go down, and when interest
rates fall, bond prices tend to rise.
This is because fixed-interest payments on existing bonds become less attractive to
investors when new bonds with higher interest rates are available. As a result, the
market value of existing bonds decreases when interest rates rise.
Conversely, when interest rates fall, existing bonds become more appealing, leading to
an increase in their market value. This relationship has a significant impact on the overall
value of bond portfolios and is essential for investors to consider when navigating the
fixed-income market.

6. Dovish/Hawkish
Dovish and hawkish are commonly employed to characterize decisions related to
monetary policy. A dovish stance by a central bank indicates a preference for
maintaining low interest rates to promote expansive economic growth. Conversely, a
hawkish central bank advocates for higher interest rates to curb inflation and prevent
the economy from overheating.

7. Duration
Duration serves as a gauge of how a bond's price responds to shifts in interest rates, with
greater sensitivity observed in bonds with longer durations. The significance lies in the
fact that as a bond's duration increases, its susceptibility to changes in interest rates
intensifies. For instance, a bond portfolio possessing a 10-year duration is likely to
experience a more pronounced decline in value if interest rates rise, in contrast to a
portfolio with a shorter duration, such as 1 year.

8. Yield Curve
A yield curve is a graphical representation illustrating the yields of bonds at various
maturity dates. The shape of the yield curve provides insights into the sentiments of
bond investors regarding expectations for economic growth, inflation, or potential
changes in interest rates. Depending on whether the yield curve is steep, flat, or
inverted, investors can glean valuable information about market expectations and
conditions.