Fixed-Income Instrument Features

The building blocks of every bond and loan: who issues it, when it matures, how much principal is repaid, how interest is paid (fixed, floating or zero), where it ranks and what options it carries; how those features turn into cash flows and simple yield measures; and what the indenture says about sources of repayment, collateral and the affirmative and negative covenants that protect lenders.

1. 1. Bonds, issuers, maturity and principalA fixed-income instrument is a contract in which a borrower takes investors' money today and commits to pay interest and repay principal on set dates, and its first features are who borrows, for how long and how much.Free12 min
2. 2. Coupons: fixed, floating and zeroInterest on a bond comes in one of three forms: a fixed coupon, a floating coupon that resets with a market reference rate, or no coupon at all with the interest built into a discount price.14 min
3. 3. Seniority, embedded options and yieldWhere a bond ranks in repayment and which embedded options it carries shape its risk, and its price and expected cash flows together give its yield, which moves opposite to price.13 min
4. 4. The indenture, repayment sources and collateralThe bond indenture is the legal contract behind a bond, and among other things it tells investors where the money to repay them will come from and whether specific assets stand behind the promise.12 min
5. 5. Covenants: affirmative versus negativeCovenants are the enforceable promises in an indenture: affirmative covenants say what the issuer must do, negative covenants say what it must not do, and both give bondholders recourse if broken.14 min