PMI Academy Partner: T. Rowe Price - Fixed Income: Back to Basics

Fixed income remains the world’s biggest and most complex market and our aim is to help you navigate this asset class with confidence and clarity. In this manual, we go back to basics - we explain how fixed income securities work and how they can fit into your portfolio.

Bond Terminology and Mechanics

Bond

Obligation assumed by the issuer to return principal and pay stated amount of interest to the investor at pre-determined time periods (analogous with a loan)

Principal

The amount on which the issuer pays interest, and which has to be repaid upon maturity.

Maturity

• The length of time until a bond’s principal is to be repaid
• Maturity is not the same as duration

Coupon

• Interest rate paid on a bond’s face value (i.e. a coupon rate of 4% on a $1,000 face value annual payout bond is $40 per year)
• The greater the perceived risk in the issuer, the higher the coupon needs to be in order to entice investors to “lend” money