Fixed Income Glossary

 
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Coupon rate:

Every government security carries a coupon rate also called as interest rate, which is fixed. e.g. 12.00% GOI 2008 where 12.00% is the coupon rate payable on the face value which is maturing in the year 2008.

Face value:

The par value of the security. (The issue price may be at a discount or a premium to the par value).

Current price:

As these G-secs are traded in the secondary market the price of these G-secs fluctuates according to the demand/supply in the market for that security. The current price is the prevailing price in the secondary market.

Wholesale price index:

A wholesale price index is an index of prices of select commodities. The percentage in the index reflects the inflation/deflation.

Primary dealer:

Primary dealer is an intermediary who buys and sells government securities and treasury bills. He is authorised by the RBI.

Secondary market:

Like the stock market where stocks are traded there is a secondary market where the debt instruments like gilts, bonds and treasury bill can be bought and sold.

Yield:

Yield is the actual return on the investments. There are different types of yield

  • Coupon yield: Coupon yield is the fixed interest rate on a government security or bond e.g. 12.00% GOI 2008 where 12.00% is the coupon yield. This yield does not reflect the change in the interest rate, inflation rate or any other economic factor.
  • Current yield: Current yield is the return on the government security or bond depending on its purchase price. e.g. An investor 'A' purchases 12.00% GOI 2008 at Rs 100 and an other investor 'B' purchases the same instrument at Rs 110. The current yield of investor 'A' will be =12.00% The current yield of investor 'B' will be =10.91%
  • Yield to Maturity (YTM): Yield to maturity is the discount rate that equates present value of all the cash inflows to the cost price of the government security or bond. This is actually the Internal Rate of Return (IRR) of the government security or bond.