Glossary

The bond market operates with its own specialized vocabulary. This glossary consolidates the essential terms used throughout Bonds & Fixed Income, from foundational concepts like yield-to-maturity and duration to advanced topics such as convexity, credit spreads, and the yield curve. Whether you are building a bond ladder, evaluating credit risk, or understanding how interest rates affect your portfolio, these definitions provide the precision needed to navigate fixed-income markets confidently. Each entry is grounded in practical market usage rather than abstract theory, making it a working reference for investors at any stage.

Glossary entries

Accrued interest — Interest earned on a bond between coupon payment dates. When you buy a bond between coupon dates, you pay the seller this amount in addition to the clean price, compensating them for the interest they've already earned.

AGG — The iShares Core U.S. Aggregate Bond ETF, tracking the Bloomberg Aggregate Bond Index. Offers broad U.S. investment-grade exposure with over 10,000 holdings and a historically low expense ratio around 0.03%.

Amortizing bond — A bond whose principal is repaid gradually over the life of the security rather than in a single payment at maturity. Common in mortgage-backed securities and some municipal bonds.

Asset-backed security (ABS) — A bond collateralized by a pool of assets—typically consumer loans such as auto loans, credit card receivables, or student loans. Investors receive payments from the underlying loan flows.

Barbell strategy — A portfolio structure holding bonds at two ends of the maturity spectrum (short-term and long-term) while minimizing mid-maturity exposure. Aims to capture yield from long bonds while maintaining short-duration flexibility.

Basis point (bp) — One hundredth of a percentage point; 100 basis points equal 1%. The standard unit for quoting bond yields, spreads, and fee changes in fixed-income markets.

BND — The Vanguard Total Bond Market Index Fund, tracking the Bloomberg U.S. Aggregate Bond Index. A core U.S. bond holding with expense ratio near 0.03%, offering complete investment-grade exposure.

Bond — A fixed-income security representing a loan from the investor to the issuer. The issuer promises to pay interest (coupons) at regular intervals and return the principal (face value) at maturity.

Bullet bond — A bond structure where the entire principal is repaid in a single lump sum at maturity, with no intermediate amortization. Most corporate and Treasury bonds are bullets.

Callable bond — A bond that the issuer can redeem before maturity, typically when interest rates fall and refinancing becomes attractive. Callable bonds offer higher yields to compensate for this embedded call option.

Call option — The issuer's right to redeem a bond before maturity, usually at a pre-specified call price. Tends to limit upside for the bondholder if interest rates decline significantly.

Clean price — The quoted price of a bond excluding accrued interest. Published bond prices and indices use clean prices; the actual amount paid includes accrued interest (the "dirty price").

Convertible bond — A corporate bond that the bondholder can convert into a fixed number of shares of the issuer's stock. Offers equity upside with downside protection from the bond floor.

Convexity — The curvature of the price-yield relationship. Bonds with positive convexity gain more when yields fall than they lose when yields rise by the same amount, an advantage especially valuable in volatile markets.

Coupon — The periodic interest payment made to bondholders, typically expressed as an annual percentage of par value and paid semi-annually (in the U.S.) or annually (in many other markets).

Coupon rate — The stated annual interest rate on a bond, calculated as a percentage of its face value. A bond with $1,000 par and a 4% coupon pays $40 annually.

Covenant — A promise or restriction in the bond indenture, such as limits on additional debt issuance, asset sales, or dividend payments. Negative covenants protect bondholders by constraining issuer behavior.

Credit rating — An assessment of the issuer's ability to repay its obligations, typically assigned by agencies like Moody's, S&P, or Fitch on scales ranging from AAA (safest) to C or D (default risk).

Credit spread — The yield difference between a risky bond and a risk-free Treasury of the same maturity. Widens in downturns and narrows in recoveries, reflecting changing default risk perceptions.

Current yield — Annual coupon divided by the current market price; simpler but less accurate than yield-to-maturity since it ignores price appreciation or loss at maturity.

Day-count convention — The method for calculating accrued interest and yield, with common choices being Actual/360, Actual/Actual, and 30/360. Different conventions can shift calculations by basis points.

Discount bond — A bond trading below its par value, typically because yields have risen since issuance. The difference between par and price represents unrealized capital gains if held to maturity.

Dirty price — The full cash price paid for a bond, including accrued interest. The dirty price equals the clean price plus accrued interest, and it's the amount that actually changes hands at settlement.

Duration — A measure of a bond's sensitivity to interest-rate changes, expressed in years. A duration of 5 means the bond's price will fall roughly 5% for every 1% rise in yield (for small moves).

Effective duration — Duration calculated from price changes in response to yield curve shifts, appropriate for bonds with embedded options like callables where modified duration is misleading.

Eurobond — An international bond issued and traded outside the issuer's home country, typically in a currency other than the local currency. Exempt from some regulatory constraints, often offering competitive pricing.

Face value — The principal amount of a bond, repaid at maturity. U.S. Treasury and corporate bonds typically have par values of $1,000; municipal bonds are often $5,000 or $25,000.

Fallen angel — A bond downgraded from investment grade to speculative grade, sometimes offering attractive yields for investors comfortable with added credit risk.

Floating-rate note (FRN) — A bond whose coupon resets periodically (monthly, quarterly, or semi-annually) to a benchmark rate plus a spread. Protects investors from rising rates but typically offers lower yield than fixed-rate bonds.

Forward rate — The implied future interest rate between two points in time, derived from today's yield curve. If the 1-year rate is 2% and the 2-year rate is 3%, the implied 1-year forward rate one year from now is roughly 4%.

General obligation bond (GO bond) — A municipal bond backed by the full faith and credit of the issuing government, secured by the government's taxing power rather than specific revenue sources.

High-yield bond — A bond rated below investment grade (BB or lower), offering higher yields to compensate for elevated default risk. Also called junk bonds; widely held in dedicated funds and ETFs.

Indenture — The legal contract between the bond issuer and bondholders, specifying terms, covenants, repayment schedules, and remedies for default. Foundation of bondholder rights and protections.

Inflation-protected security — See TIPS.

Inverted yield curve — A situation where shorter-maturity bonds yield more than longer-maturity bonds, inverting the normal upward-sloping curve. Historically correlated with economic recessions.

Investment grade (IG) — Bonds rated BBB- or higher by S&P, Baa3 or higher by Moody's, or BBB- or higher by Fitch. Considered safer than speculative-grade securities; widely held by conservative investors.

Junk bond — A speculative-grade bond, rated below BBB-/Baa3. Offers higher yield but carries meaningful default risk; integral to many high-yield portfolios.

LIBOR — London Interbank Offered Rate, historically the reference rate for floating-rate bonds and derivatives. Being phased out globally in favor of SOFR (in the U.S.) by end of 2021 and beyond.

Macaulay duration — The weighted-average time until a bond's cash flows are received, measured in years. Provides an intuitive sense of a bond's interest-rate sensitivity.

Maturity — The date on which the bond's principal is repaid. Bonds are typically classified as short-term (under 3 years), intermediate (3–10 years), or long-term (over 10 years).

Modified duration — Macaulay duration divided by (1 + yield-to-maturity), expressing interest-rate sensitivity as a percentage price change per 1% yield change. The standard measure for fixed-rate bonds.

Mortgage-backed security (MBS) — A bond collateralized by a pool of mortgages, where investors receive principal and interest payments from homeowners' mortgage payments. Subject to prepayment risk when rates fall.

Municipal bond (muni) — A bond issued by a state or local government, typically offering tax-free interest income to U.S. federal (and sometimes state) income tax. Trades at lower yields than taxable bonds due to this tax advantage.

Negative duration — A rare property of some bonds (typically those with very short expected lives or unusual optionality) where price rises when yields rise. Most bonds have positive duration.

OAS (option-adjusted spread) — The constant spread above the risk-free curve that equates a bond's price to its expected cash flows, adjusting for embedded options. Allows fair comparison of bonds with different optionality.

OID (original issue discount) — The difference between a bond's issue price and its par value when issued at a discount. Creates tax complications for some investors; important in zero-coupon bonds.

Par bond — A bond trading at its face value, meaning the coupon rate equals the current yield-to-maturity. Occurs when market rates haven't changed since issuance.

Par value — See face value.

Putable bond — A bond that grants the bondholder the right to sell it back to the issuer at a specified price before maturity. Offers downside protection if rates rise and prices fall.

Premium bond — A bond trading above its par value, typically because its coupon exceeds the current market yield. The price decay toward par at maturity represents unrealized loss if held to maturity.

Recovery rate — The percentage of a bond's par value recovered by investors following a default, influenced by seniority and collateral quality. Senior secured bonds typically recover more than subordinated unsecured bonds.

Revenue bond — A municipal bond backed only by revenues from a specific project (tolls, utility fees, airport revenues), not the general taxing power of the issuer. Carries higher credit risk than GO bonds.

Senior debt — Bonds that rank ahead of subordinated debt in bankruptcy, receiving priority claim on the issuer's assets. Typically carries lower yield than junior debt.

SOFR (Secured Overnight Financing Rate) — The risk-free overnight rate, administered by the Federal Reserve, now the primary reference rate for floating-rate bonds and derivatives, replacing LIBOR.

Spread — The yield difference between a bond and a reference bond (usually a Treasury of similar maturity). Credit spread, OAS, and other spread measures indicate relative value and risk compensation.

STRIPS (Separate Trading of Registered Interest and Principal of Securities) — Treasury securities decomposed into individual principal and coupon payments, each trading separately as a zero-coupon security. Useful for matching specific future liabilities.

Subordinated debt — Bonds that rank behind senior debt in bankruptcy; pays higher yield to compensate creditors for lower recovery in default. Common in bank capital structures.

Taxable equivalent yield — The pre-tax yield a taxable bond must offer to equal the after-tax return of a municipal bond. Computed as municipal yield divided by (1 − marginal tax rate).

T-bill (Treasury bill) — A short-term U.S. government security with maturity of one year or less, issued at discount and redeemed at par. Considered the safest investment; sets the floor for risk-free rates.

T-bond (Treasury bond) — A long-term U.S. government security (typically 20+ years to maturity) that pays semi-annual coupons. Fundamental to the U.S. fixed-income market.

TIPS (Treasury Inflation-Protected Security) — A U.S. Treasury security whose principal is adjusted for inflation using the Consumer Price Index, protecting investors from inflation erosion. Offers lower nominal yield but real-return certainty.

T-note (Treasury note) — An intermediate-term U.S. government security with maturity of 2 to 10 years, paying semi-annual coupons. Among the most liquid fixed-income instruments.

Total return — The sum of coupon income and price appreciation (or depreciation) over a holding period, expressed as a percentage. The most comprehensive measure of bond performance.

Treasury — U.S. government fixed-income securities, including bills, notes, and bonds; considered the world's safest investments and anchors the global yield curve.

Yield curve — A graph showing bond yields across maturities, typically upward-sloping in normal conditions but sometimes flat or inverted during stress or expected recession.

Yield-to-call (YTC) — The annualized return if a callable bond is redeemed at its call price before maturity, assuming all coupons are reinvested at the YTC rate. Critical metric for callable bonds.

Yield-to-maturity (YTM) — The annualized return earned by an investor if a bond is held to maturity and all coupons are reinvested at the YTM rate. The standard yield quotation for fixed-rate bonds.

Yield-to-worst (YTW) — The lowest of YTM, YTC, or any other redemption scenario for a bond with embedded options. Conservative measure for evaluating callable or putable bonds.

Zero-coupon bond — A bond that makes no coupon payments, instead paying a single lump sum at maturity. Trades at steep discount; useful for matching specific future needs and highly sensitive to interest-rate changes.

Z-spread (zero-volatility spread) — The constant spread above each point on the Treasury spot curve that equates a bond's price to its discounted cash flows. Used when the Treasury curve is non-parallel.

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This glossary complements the articles and examples throughout Bonds & Fixed Income. When you encounter a term in the chapter discussions, returns to this reference for precise definition and context. For deeper exploration of how these concepts connect—how duration relates to convexity, how credit spreads reflect default risk, or how yield curves drive portfolio construction—continue through the book's core chapters on bond mechanics, valuation, strategy, and credit analysis.