115 CFA
File: Fixed Income - Reading 42 - 1. Basic Features of a Fixed-Income Security

1. Basic Features of a Fixed-Income Security

a. describe basic features of a fixed-income security;

What is a fixed income security?
A fixed income security is a financial obligation of an entity (the issuer) that promises to pay a specified sum of money at specified future date.

What is credit risk?
The risk of the issuer failing to make full and timely payments of interest and/or repayment of principal is called credit risk. Credit risk is inherent in all debt investments.

What is a maturity date?
The maturity date is the date when the bond issuer is obligated to pay the outstanding principal amount. It defines the remaining life of the bond.

What is par value? What are some other names for par value?
The par value (principal, face value, redemption value, or maturity value) is the amount that the issuer agrees to repay the bondholder on the maturity date.

What is a coupon rate (nominal rate)?
The interest rate that the issuer agrees to pay each year is called the coupon rate (or nominal rate). The coupon is the annual amount of the interest payment: par value x coupon rate.

What is a floating-rate security?
A floating-rate security's coupon payments are reset periodically according to some reference rate. The typical coupon formula is: coupon rate = reference rate + quoted margin.

What is a zero-coupon bond?
A zero-coupon bond promises to pay a stipulated principal amount at a future maturity date, but it does not promise to make any interim interest payments. The value of a zero-coupon bond increases overtime, and approaches par value at maturity.

What is a dual-currency issue bond?
If an issue has coupon payments in one currency and principal payments in another currency, it is called dual-currency issue.

What are currency option bonds?
The holders of currency option bonds can choose the currency in which coupons and principals are paid.

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