 Bond indentures: specifies all the obligations of the issuer of a fixed income security
 negative covenants: prohibitions on the borrower
 affirmative covenants: promises by the borrower
 Debt securities 2 semiannual installments
 zerocoupon bonds: no periodic payments
 stepup notes: coupon rate increases
 deferred coupon bonds: compounded coupon payments
 floating rate securities: interestsensitive variable rate
 coupon formula: Reference rate + margin (e.g. LIBOR + 1.5%)
 caps & floors: upper/lower limit on formula rate
<math> Accrued interest = T \times P \times R </math> where <math>T</math> is the fraction of the year, <math>P</math> is the principal, and <math>R</math> is the annualized interest rate.  Amortization
 nonamortizing: pay only interests, returned at par value
 amortizing~: equal payments which consist of interest and principal (mortgage)
 Embedded options
 prepayment: early retirement/repayment
 call provision: right to prepayment
 call protection: restriction of prepayment over period
 Conversion options
Investment risksDuration measure of interest rate risk price sensitivity, Δ% bond price in response to Δ%I/y
 longer maturity
 lower coupon
 lower yield
 without embedded option
 higher coupon: more returns
 call feature: subject to early retirement
 amortizing security
 prepayment option
 Credit risk
 downgrade risk: probability of ratings decrease
 default risk
 credit spread risk: higher market yield for lower rating
 Liquidity risk
 bidask spread: indicates liquidity of the market for a security
 decrease in liquidity > increase bidask spread > lower sale price > decrease in returns
 Exchange rate risk
 actual cash flows from investment may be worth more or less than expected
 depreciation of the foreign currency
Bond Sectors Treasury securities
 Treasury Inflation Protected Securities(TIPS): coupon rate fixed, par value adjusted for inflation
Monetary policy tools  Debt securities valuation
 clean price = quoted price
Yield measures Zerovolatility (ZV) spread: (parallel) spread to Treasury spotrate curve to get PV = market price
 Optionadjusted spreads(OAS): that take out the effect of embedded options on yield, reflect yield differences for differences in risk and liquidity
 Option cost in yield% = ZV spread% –OAS%
 Option cost > 0 for callable, < 0 for putable
Interest rate risk
