Glossary

  • Yield

    The interest rate that will make the present value of the cashflows from an investment equal to the price (or cost) of the investment. Also called the internal rate of return. The current yield relates the annual coupon yield to the market price by dividing the coupon by the price divided by 100 and ignores the time value of money or potential capital gains or losses. Simple yield to maturity takes into account the effect of the capital gain or loss on maturity of a bond in addition to the current yield.

  • Yield adjustment

    A payment by one counterparty, usually at the outset of a swap or at a reset date, to compensate the other counterparty for entering into a swap on off-market terms.

  • Yield curve

    The yield curve is a graphical representation of the term structure of interest rates. It is usually depicted as the spot yields on bonds with different maturities but the same risk factors (such as creditworthiness of issuer), plotted against maturity. The usual features of a spot yield curve are higher long-term yields than short-term yields and a curve for default-free bonds that is lower at each point than the equivalent curve for riskier debt. It is possible to construct variants of the yield curve from this basic form. The par yield curve is found by calculating the coupons that would be necessary for bonds of each maturity to be priced at par; the forward yield curve is found by extrapolating the spot yield curve point-by-point, based on the implied forward interest rates.

  • Yield curve option

    An option that allows investors to take a view on the shape of a yield curve without taking a view on a bond market's direction. It is normally structured as the yield of a longer maturity bond minus the yield of a shorter one. A call would therefore appreciate in value as a curve flattened. A put would decrease in value. Such options were developed in the US in 1991 in response to a steepening yield curve.

  • Yield curve swap

    A swap in which the two interest streams reflect different points on the swap yield curve. Yield curve swaps can be used to exploit a yield curve steepening or flattening view. For example, one side pays the two-year Constant Maturity Treasury (CMT) rate and the other the 10-year CMT rate.

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