Glossary

Every term in the course, in plain English. Each one links to the lesson that teaches it.

Available for sale: Bonds that can be sold any time. Carried at market; losses come out of equity through AOCI. Interest rate risk: a bank run case
Bank run: Depositors withdrawing at once because they fear the bank cannot pay them all. Interest rate risk: a bank run case
Basis point: One hundredth of a percentage point. 150 bp = 1.50 points. Credit ratings and bond spreads
Bond: A loan cut into tradable pieces. The issuer owes fixed payments to whoever holds it. How bonds work
Breakeven inflation: Nominal Treasury yield minus the TIPS yield of the same maturity: the inflation rate at which both pay the same. Inflation, TIPS and real yields
Callable bond: A bond the issuer may repay early at a set call price. It gets called when rates fall. Callable bonds and mortgage-backed securities
Convexity: The bend in the price curve: real prices fall a little less and rise a little more than duration says. Bond duration and interest rate risk
Coupon: The yearly interest as a share of face. US notes and bonds pay it in two halves. How bonds work
Credit rating: An agency’s grade of default risk, from AAA (safest) to D (in default). Moody’s uses Aaa to C. Credit ratings and bond spreads
Current yield: A year’s coupon divided by today’s price. Ignores the gain or loss back to face. Bond prices and yields
Deposit insurance (FDIC): US insurance on bank deposits, up to $250,000 per depositor, per bank, per ownership category. Interest rate risk: a bank run case
Duration: A bond’s sensitivity to rates. Modified duration ≈ the % price move for a 1-point move in yield. Bond duration and interest rate risk
Duration gap: Asset duration minus liability duration scaled by liabilities ÷ assets. Positive: the bank loses value when rates rise. Bank interest rate risk: EVE and hedging
Economic value of equity (EVE): Assets minus liabilities, each valued at today’s rates. How a bank measures what rate moves do to its worth. Bank interest rate risk: EVE and hedging
Expected loss: Default probability × loss given default. 4% × 60% = 2.4% a year. Credit ratings and bond spreads
Face value (par): The amount repaid at maturity, $1,000 on a typical note. Prices are quoted per 100 of it. How bonds work
Federal funds rate: The overnight rate banks charge each other. The FOMC sets a target range for it, eight meetings a year. The Fed and interest rates
Forward rate: The rate for a future period implied by today’s spot rates. Below spot means the market expects cuts. Zero-coupon bonds and forward rates
Hedge: A position that gains when another loses, held to cut risk, not to bet on a forecast. Bank interest rate risk: EVE and hedging
Held to maturity: Bonds a bank promises to keep to the end. Carried at cost; price drops only in a footnote. Interest rate risk: a bank run case
Interest on reserve balances (IORB): What the Fed pays banks on money held at the Fed. The lever that keeps the federal funds rate in its range. The Fed and interest rates
Interest rate swap: A contract to trade fixed-rate for floating-rate interest on a notional amount. Only the difference is paid. Interest rate swaps
Inverted yield curve: Short maturities yield more than long ones; 10-year minus 2-year below zero. Often, not always, a recession warning. The yield curve and inversion
Investment grade / high yield: BBB− (Moody’s Baa3) and above is investment grade. Below that is high yield, or junk. Credit ratings and bond spreads
Maturity: The date the face value is repaid and the bond ends. How bonds work
Mortgage-backed securities (MBS): Bonds that pass homeowners’ mortgage payments to investors. Agency MBS are guaranteed against default, not prepayment. Callable bonds and mortgage-backed securities
Negative convexity: Price gains less than duration says when rates fall and loses more when they rise. The lengthening is extension risk. Callable bonds and mortgage-backed securities
Notional: The amount a swap’s interest is worked out on. It never changes hands. Interest rate swaps
Pay fixed / receive fixed: Paying fixed gains when rates rise, like being short a bond. Receiving fixed is like owning one. Interest rate swaps
Premium and discount bonds: Above face (coupon above market rates) or below face (coupon below). Both drift back to face at maturity. Bond prices and yields
Quantitative easing / tightening: QE: the Fed buys long bonds, pushing long yields down. QT: it lets them mature without replacing them. The Fed and interest rates
Real yield: A yield after inflation: roughly the nominal yield minus inflation. TIPS yields are real yields. Inflation, TIPS and real yields
SOFR: Secured Overnight Financing Rate: the cost of borrowing overnight against Treasuries. The floating rate in most dollar swaps. Interest rate swaps
Spot rate: The yield on a zero-coupon bond: the rate for money lent today and repaid on one date. Zero-coupon bonds and forward rates
Spread over Treasuries: How much more a bond yields than a Treasury of the same maturity. The market’s price for its credit risk. Credit ratings and bond spreads
STRIPS: Treasury notes and bonds split into separate zero-coupon pieces: each coupon and the principal. Zero-coupon bonds and forward rates
TIPS: Treasury Inflation-Protected Securities: principal rises with the consumer price index; never repays less than the original. Inflation, TIPS and real yields
Treasury bills, notes and bonds: US government debt by length: bills a year or less (no coupon), notes 2 to 10 years, bonds 20 or 30 years. How bonds work
Unrealized loss: A fall in a holding’s market value that has not been locked in by a sale. Interest rate risk: a bank run case
Yield curve: Treasury yields plotted against maturity, on one day. Normally slopes up. The yield curve and inversion
Yield to maturity: The yearly return from buying at today’s price and holding to the end, counting coupons and the move back to face. Bond prices and yields
Yield to worst: The lower of yield to maturity and yield to call: the yield if the issuer acts against you. Callable bonds and mortgage-backed securities
Zero-coupon bond: A bond that pays only its face value, at maturity. Bought below face; its duration equals its maturity. Zero-coupon bonds and forward rates