Fixed Income Securities - FAQ's
World Of Finance by Vijaya Sai.M |
Securities are financial instruments that represent a creditor relationship with a corporation or government. Generally they represent agreements to receive a certain amount depending on the terms contained within the agreement.
What are fixed income securities? Fixed-income securities are investments where the cash flows are according to a predetermined amount of interest, paid on a fixed schedule.
What are the types of fixed income securities? The different types of fixed income securities include government securities, corporate bonds, commercial paper, treasury bills, strips etc.
What is the difference between a fixed income security and equity? Holders of fixed-income securities are creditors of the issuer, not owners. Equity represents a share in the ownership of the issuer.
What are fixed interest rate securities and floating interest rate securities? Fixed interest rate securities are those in which the interest payable is fixed beforehand. Floating interest rate securities are those in which the interest payable is reset from at pre-determined intervals according to a pre-determined benchmark.
What are the key components of fixed income securities?
Credit quality, yield, and maturity are key components of fixed-income securities.
What is credit quality? Credit quality is an indicator of the ability of the issuer of the fixed income security to pay back his obligation. The credit quality of fixed-income securities is usually assessed by independent rating agencies such as Standard & Poor's, Moody's in the U.S. and CRISIL in India. Most large financial institutions also have their own internal rating systems.
What is the yield on a security? Yield on a security is the implied interest offered by a security over its life, given its current market price.
What is maturity? Maturity indicates the life of the security i.e. the time over which interest flows will occur.
What are coupon payments? Coupon payments are the cash flows that are offered by a particular security at fixed intervals. The coupon expressed as a percentage of the face value of the security gives the coupon rate.
Why is there a difference between coupon rate and yield? The difference between coupon rate and yield arises because the market price of a security might be different from the face value of the security. Since coupon payments are calculated on the face value, the coupon rate is different from the implied yield.
Why do long term securities offer more return than short- term securities? Long-term securities typically offer more return than short-term securities because investors usually prefer to lend money for shorter terms. Hence money lent out for longer terms will have a higher yield.
What are callable securities?
Callable securities are those which can be called by the issuer at a predetermined time/times, by repaying the holder of the security a certain amount which is fixed under the terms of the security.
What is the relationship between price and Yield?
Prices and interest rates are inversely related.
Why do long term securities offer more return than short- term securities? Long-term securities typically offer more return than short-term securities because investors usually prefer to lend money for shorter terms. Hence money lent out for longer terms will have a higher yield.
What are callable securities?
Callable securities are those which can be called by the issuer at a predetermined time/times, by repaying the holder of the security a certain amount which is fixed under the terms of the security.
What is the relationship between price and Yield?
Prices and interest rates are inversely related.
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