Fixed Income Instruments

Overview

Fixed Income instruments come in many different structures. The structures are designed to either appeal to the needs of the person or company issuing the security, or to make it more appealing to the buyers (or lenders), in order to sell it at a higher price.

Basic Payout Structures

• Bullet : A bullet bond is the typical example of a loan or bond. The borrower borrows a certain amount of money, called the principal, which is paid in entirety at the maturity of the loan. In the interim, at a set of pre-specified dates, the borrower pays interest on the loan.
• Amortized : An amortizing loan is structured so that the payments on the loan are all equal. This means that each payment will include a payment for both interest, and a portion of the principal. Mortgages are a common example of an amortized loan. For information on calculating an amortzied payout structure, please see amortization calculations.
• Zero Coupon : A zero coupon bond is a bond that makes a single payment at the maturity of the loan. This single payment includes both the principal and all interest. Zero coupon structures are not as common in the market as other structures (see US Treasury STRIPS), but they represent a useful abstraction when valuing fixed income securities.
• Bond with Embedded Option : a bond with an embedded option is a fixed income structure that comes with an option, usually to put the bond back to the issuer, or an option for the issuer to call the bond back.
• Annuity : An annuity is a contract to pay a fixed amount of money on a periodic basis for as long as the holder of the annuity is alive.

Common Instruments

• Bonds : instruments that are issued by companies to raise money and typically traded in the secondary market.
• Mortgages : the common instrument used by borrowers to buy a house.
• Structured Instruments - a set of instruments that are pooled together and then partitioned out to the investors in order to be able engineer a set of risk characteristics.

Day Count Conventions

Day Count Conventions are used to create a language for the exact dates on which a fixed income instrument makes its payments.