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What is Modified Duration?
A formula that expresses the measurable change in the value of a security in response to a change in interest rates. Calculated as:
Where:
n = number of coupon periods per year
YTM = the bond’s yield to maturity Read more for examples and further explanation including related video clips and also comments
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What is Liquidity Premium?
A premium that investors will demand when any given security can not be easily converted into cash, and converted at the fair market value. When the liquidity premium is high, then the asset is said to be illiquid, which will cause prices to fall, and interest rates to rise. Read more for examples and further explanation including related video clips and also comments
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What is Inverted Spread?
A situation in which the yield difference between a longer term financial instrument and a shorter term instrument is negative. This is calculated by subtracting the longer term by the shorter term. In effect, the shorter term instrument is yielding a higher rate of return than the longer term instrument. This is in contrast to what is considered a normal market, where longer term instruments should yield higher returns to compensate for time. Read more for examples and further explanation including related video clips and also comments
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What is Indenture?
A contract between an issuer of bonds and the bondholder stating the time period before repayment, amount of interest paid, if the bond is convertible (and if so, at what price or what ratio), if the bond is callable and the amount of money that is to be repaid. Read more for examples and further explanation including related video clips and also comments
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What is Gilts?
Risk-free bonds issued by the British government. They are the equivalent of U.S. Treasury securities. Read more for examples and further explanation including related video clips and also comments
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What is Five Against Note Spread – FAN?
A spread in the futures markets created by taking offsetting positions in futures contracts for five-year treasury notes and ten-year treasury bonds. Read more for examples and further explanation including related video clips and also comments
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What is Eurodollar Bond?
A U.S.-dollar denominated bond issued by an overseas company and held in a foreign institution outside both the U.S. and the issuer’s home nation. Eurodollar bonds are an important source of capital for multinational companies and foreign governments.
A eurodollar bond is a type of Eurobond. Read more for examples and further explanation including related video clips and also comments
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What is Double Barreled?
A municipal general obligation bond in which the cash flows are pledged by two distinct and different entities. One entity will make interest payments, and the other, the principal payments. These are municipal general obligation (GO) bonds as opposed to revenue bonds because they are ultimately backed by the issuer and its taxing power.
Double-barreled bonds are sometimes referred to as “”combination bonds””. Read more for examples and further explanation including related video clips and also comments
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What is Deep-Discount Bond?
1. A bond that sells at a significant discount from par value.
2. A bond that is selling at a discount from par value and has a coupon rate significantly less than the prevailing rates of fixed-income securities with a similar risk profile. Read more for examples and further explanation including related video clips and also comments
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What is Current Yield?
Annual income (interest or dividends) divided by the current price of the security. This measure looks at the current price of a bond instead of its face value and represents the return an investor would expect if he or she purchased the bond and held it for a year. This measure is not an accurate reflection of the actual return that an investor will receive in all cases because bond and stock prices are constantly changing due to market factors.
Also referred to as “”bond yield””, or “”dividend yield”” for stocks. Read more for examples and further explanation including related video clips and also comments
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