Glossary
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Bonds denominated in U.S. dollars and issued in the United States
by foreign issuers for U.S. investors.
Certificates of deposit denominated in U.S. dollars and issued in
the United States by a U.S. branch of a foreign financial institution.
See Eurodollar CDs.
The annual return on an investment expressed as a percentage on
an annual basis. For interest-bearing securities, the yield is a
function of the rate; the purchase price; the income that can be
earned from the reinvestment of income received prior to maturity,
call, or sale; and the time from purchase to maturity, call, or
sale. Different formulas or methods are used to calculate yields.
See total return analysis and yield-to-maturity.
A graph showing the relationship at a selected point in time between
the available maturities of a security or similar securities with
essentially identical credit risk and the yields that can be earned
for each available maturity. A graphical depiction of the term structure
of interest rates at any given point in time. Yield curves may be
constructed for different instruments such asTreasury securities,
AAA-rated municipal bonds, A-rated corporate bonds, etc. Even within
the field of Treasury securities, yield curves are constructed from
many different types of Treasury rates. When a yield curve is constructed
by calculating the coupon rates necessary for the Treasury obligations
of various maturities to be priced at par, it is called a par yield
curve. When a yield curve is constructed using currently prevailing
rates for instruments available for cash delivery, it is called
the spot curve. When a yield curve is constructed using currently
prevailing rates for instruments to be delivered at future dates,
it is called the forward yield curve. When a yield curve is calculated
using currently prevailing rates for interestbearing Treasuriy securities,
it may be referred to as a coupon curve. When a yield curve is calculated
using currently prevailing yields for zero coupon instruments, it
is called the zero coupon curve.
See term structure model.
The risk to a holder of financial instruments that a change in prevailing
interest rates will not affect the prices or yields of the same
instruments in exactly equal amounts for each available term. For
example, an increase in prevailing interest rates might raise 3-month
U.S. Treasury yields by 100 basis points while 6-month U.S. Treasury
yields go up by only 85 basis points. (In this example, the change
to the yield curve would be described as flattening. If, instead,
the 6-month rate had risen by more than the 3-month rate, the change
in the yield curve would be described as steepening.) The risk of
a nonparallel shift in the yield curve. One of the four primary
components of interest rate risk. Sometimes called yield curve twist
risk, twist risk, or rotation risk.
Yield curves also describe the amount of difference between short-term
and long-term rates. A yield curve that depicts the customary situation
of long-term rates higher than short-term rates is called an upward
sloping or positively sloped yield curve. A yield curve depicting
the less common occurrence of short-term rates higher than long-term
rates is called a downward sloping, negatively sloped, or inverted
yield curve. When long-term rates are much higher than short-term
rates, the yield curve is steep. When long-term rates are virtually
the same as short-term rates, the yield curve is flat.
.
See smoothing.
A phrase used to describe changes in prevailing interest rates that
change the shape/slope of the yield curve. For example, a small
increase in short-term rates and a large increase in lon- term rates
that occur at the same time. A manifestation of yield curve risk.
The annual percentage yield of a security calculated using the yield-to-maturity
formula but with the assumption that the security is called on the
first call date or on the first par call date.
The annual percentage yield of a security calculated in a specific
manner. The yield-to-maturity is the single discount rate that,
when applied to all future interest and principal payments, produces
a net present value equal to the purchase price of the security.
See yield to call.
See yield-to-maturity.
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