Fixed Income

This marketWhat it is, what trades, and the ideas it runs on.

The market at a glance

Fixed income is the largest securities market on earth: government debt, corporate bonds, securitised products and more. It dwarfs equities in size while getting a fraction of the headlines, because bonds are where the price of money is set: every mortgage rate, corporate loan and equity valuation keys off this market.

The buyers are institutions with liabilities: pension funds and insurers matching future payouts, banks parking liquidity, central banks holding reserves (and, in QE eras, buying in size), and bond funds aggregating everyone else. Trading is still largely OTC through dealers, though electronic platforms now handle most government-bond and a growing share of credit volume.

The three risks in every bond

• Rate risk (duration). Prices fall when yields rise — mechanically, unavoidably. Duration tells you how much: a duration-7 bond loses ~7% per 100bp yield rise. 2022 delivered the worst bond-market year in modern history purely through this channel.
• Credit risk (spread). Will the borrower pay? The extra yield over governments — the spread — prices default probability, recovery and bad-times correlation. See corporate bonds.
• Optionality. Many bonds contain embedded options — issuer calls, homeowner prepayments in MBS — that cap upside and demand option-adjusted analysis.

Reading the yield curve

Plot government yields by maturity: upward-sloping is normal (term premium), flat says late-cycle, and inversion — short yields above long — is the market's most famous recession signal, because it means the market expects rate cuts ahead. The curve's zero-coupon skeleton (see zeros) is the discount function every valuation in finance rests on.

Interactive: bond price, duration & convexityMedium

Price a bond from its coupon and yield, and see the risk numbers professionals actually manage to.

Coupon % p.a. Yield to maturity % Years to maturity Coupons per year

Price (per 100 face)

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Macaulay duration

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Modified duration

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Convexity

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Est. move for +100bp

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Standard bond mathematics (flat yield, no credit or options). Try coupon 0 to see why zeros are the most rate-sensitive bonds of their maturity.

How the products fit together

Government bonds set the risk-free baseline; corporates add credit spread; covered bonds add collateral to bank debt. FRNs delete duration and keep credit; linkers swap nominal certainty for purchasing-power certainty. Securitisation (MBS, ABS) manufactures bonds out of loan pools, sorted into risk tranches.

Concepts to master

Price and yield are the same fact in two languages — internalise the inverse relation until it's reflex. Duration is your position: portfolio managers speak in years and DV01s, not in bond names. And the curve is the trade: steepeners, flatteners and butterflies express macro views far more precisely than "buy bonds" ever could.

Interactive: yield-to-maturity solverMedium

Quotes come as prices; comparisons need yields. This solves the discount rate at which the bond's cash flows equal its price.

Clean price (per 100) Coupon % Years to maturity Coupons per year

Yield to maturity

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Current yield

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Trading status

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Solved by bisection on the standard price–yield relation. Assumes coupons are reinvested at the YTM — the assumption everyone states and no one achieves.

Interactive: tax-equivalent yieldEasy

A 3% tax-free bond and a 4.5% taxable bond — which wins? Depends entirely on your marginal rate. Gross up and compare.

Tax-exempt yield % Marginal tax rate % Competing taxable yield %

Tax-equivalent yield

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Taxable bond after tax

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Verdict

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Edge per year

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The arithmetic behind the entire municipal bond market. Tax rules differ by country and instrument — this is the concept, not your tax return.

Interactive: loan & mortgage amortisationEasy

The most widely held fixed-income instrument in the world is a mortgage — usually held by the borrower, from the other side. Here is what the schedule actually costs.

Loan amount $ Interest rate % p.a. Term (years)

Monthly payment

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Total paid

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Total interest

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First payment is

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Standard annuity formula. Note the last line: early payments are almost entirely interest, which is why overpaying in year one saves far more than overpaying in year twenty — and why MBS investors care so much about prepayment.

Interactive: bond ladder plannerEasy

A ladder spreads maturities evenly so something matures every year — reinvestment risk diversified across time instead of concentrated in one date.

Total to invest $ Number of rungs 1-year yield % Longest-rung yield %

Per rung

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Average yield

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Annual income

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Average maturity

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Yields interpolated linearly along the curve. The ladder's real feature isn't the yield — it's that each year one rung matures at par and reinvests at whatever rates then are, so you are never forced to guess the top or bottom of the cycle.

The same questions, asked of all elevenThese sections answer the same thing on every asset class, so the answers can be read next to each other.

The units this market speaks in

• Price is per 100 of face value, not per bond. A bond "at 96.5" costs 965 for every 1,000 of face — and that is the clean price, before accrued interest is added to get what actually settles.
• Yields are in percent; changes in yield are in basis points. One hundredth of a percentage point, because "rates rose half a percent" is ambiguous and "fifty basis points" is not.
• The position is stated in risk, not in notional. Modified duration in years, and DV01 — what one basis point is worth — per million of notional. A million of two-year and a million of thirty-year are not the same position, and DV01 says so in one number. How to work it out in your head.
• Credit is quoted as a spread in basis points over a government benchmark or over the swap curve, and which one changes the number. Credit spreads.
• A "point" is one percent of face. "It fell two points" is two percent of face, not two percent of the price.
• Day-count conventions decide the accrued interest, and they differ by market and instrument. This is not a detail: it is the difference between the price agreed and the money paid. The conventions table.

Who is choosing, and who is forced

More than any other market, this one is priced by participants who are not expressing a view. They are matching a promise, meeting a rule, or tracking an index, and they buy at prices an opinion would not.

• Forced: pension funds matching liabilities. The liability has a duration; the assets must have one too. When rates move, the required hedge moves with them — and it moves in the same direction as everybody else's. The LDI episode.
• Forced: insurers under capital rules. What may be held, and how much capital it costs, is written down. A downgrade changes the arithmetic before it changes anybody's opinion.
• Forced: index funds tracking a duration. When an index extends, the fund extends.
• Forced by design: central banks. Buying or not buying for policy reasons, in size, on a published schedule. Monetary policy.
• Choosing: total-return managers, macro funds, and anybody who can hold cash. A small share of the market, and the only part of it that can wait.

The consequence worth carrying: a yield is not a forecast. It is where the forced and the choosing met.

What a bad day looks like here

• The shape of it: everybody needs to shorten duration at once, and the people who normally take the other side are the ones selling. A market that is enormous on a calm day is thin on this one.
• The first tell: an auction that tails — the government sells at a worse price than the market was quoting minutes earlier. It is the cheapest available measure of who is actually willing to buy.
• The second tell: the swap spread moving without the yield moving. That is a balance-sheet signal rather than a rates signal.
• Where it has happened: the LDI episode, where hedging a liability required selling the asset that was hedging it, and March 2023, where the losses were in the safest instrument on the shelf.
• The question that would have caught it: if this moves against me, what does the position require me to do next — and does everybody holding it have to do the same thing?

How a trade actually happens here

Most bonds never touch an order book. One company has one share line and can have dozens of bond lines, most of which do not trade on a given day, so the market is organised around asking rather than around a queue.

• Agreeing it — a request for quote. The buyer asks several dealers for a price in a stated size and the dealers answer. Each one trades as principal, out of its own inventory or into a short position, which is why a size that is routine for one is not for another.
• What is agreed is a price, and what is paid is not. The cash amount is the clean price on the nominal plus the interest accrued since the last coupon. A trade struck at 99.40 does not settle at 99.40, and every operations dispute in this market starts there. Corporate bond.
• Confirming it: both sides book the trade and match the economics — nominal, price, accrued, settlement date. A break found the next morning is an ordinary event rather than a crisis, and it is found because somebody looks.
• Settling it: government bonds usually the next business day, corporates a day later, at a domestic depository or an international one, delivery against payment on the same principle as equities.
• When it fails: the bond is not delivered on the day, and the buyer keeps its cash. The seller has in effect borrowed that cash, and the penalty for not delivering is the interest forgone — which at very low short-term rates is close to nothing, which is why fails rise when rates do not. A bond everybody has sold short goes special in the repo market long before it fails.

Where the spread is, and who earns it

A bond is the one instrument here whose total return can be worked out in advance, which makes every cost on the way a subtraction from a known number rather than a guess against an unknown one.

• The dealer's bid-offer, in price or in spread. There is no order book to cross for most of the market; there is an inventory to buy from or sell into. The dealer carries what it buys and funds it, so the spread reflects how long it expects to hold it and what that costs. Repo is where the funding half happens.
• The new-issue concession. A deal usually prices a little cheap to where the issuer's existing bonds trade. That discount is real money paid by the borrower to get the deal away, and it is received by whoever is allocated at the new-issue price.
• The underwriting fee, a percentage of the amount raised, paid by the issuer and disclosed in the prospectus.
• On a bond fund, the charge plus what the charge does not include. The ongoing figure covers management. The costs of trading the portfolio — spreads on hundreds of lines that mostly do not trade daily — are real and sit outside it. Reading a factsheet.
• The bit that is not a cost at all. Accrued interest is not a fee: it is the seller's share of the next coupon, added to the clean price to get the money that actually moves. Reading it as a cost is the most common misreading of a bond confirmation. Reading a bond quote.

How a position here ends

Unlike a share, a bond is written to end. That is its defining feature, and it is also where most of the surprises live — because several of the endings below are the borrower's option and none of them is the lender's.

• It matures. Face value on a stated day. The only ending known from the first day, and the reason a bond held to maturity has a return that can be computed rather than estimated.
• It amortises. Principal comes back in pieces rather than at the end, so the position shrinks on a schedule and the money returned has to be put somewhere at whatever rates then exist. Mortgage-backed securities do this at a speed that depends on other people's refinancing decisions.
• It is called. The issuer repays early, and does so when refinancing is cheaper — which is when rates have fallen and the holder would most have liked to keep it. The option belongs to the borrower and the holder was paid for it in the coupon. Reading a term sheet.
• You sell it. At the bid, in the size somebody wants, which for an off-the-run line can be a materially different number from the price on the statement.
• It is tendered or exchanged. The issuer offers to buy the bonds back or swap them for new ones. Accepting is voluntary; the terms are often written so that not accepting is worse.
• It defaults. The instrument stops being an instrument and becomes a claim in a process, and the holder's position turns from arithmetic into documents and seniority.

Which risk decides across this class

Every product page here carries the same five bars. Read down the class instead of across one instrument, the question changes: is this a shelf of things that fail the same way, or a shelf of things that only share a department?

Which of the five decides what, across these 17

Counted from the same table each product page prints, so the two cannot disagree. Not a rating and not a ranking: it says which failure mode drives the outcome, not how dangerous anything is.

• Market12 of 17The price of the thing moves.Decides: Asset-Backed Security, Callable Bond, Contingent Convertible Bond, Corporate Bond, Covered Bond, Emerging Market Bonds, Government Bond, Green & Sustainability-Linked Bonds, Inflation-Linked Bond, Mortgage-Backed Security, Sukuk, Zero-Coupon Bond. Matters on 5 more.
• Credit12 of 17Somebody who owes you does not pay.Decides: Asset-Backed Security, CMBS, Contingent Convertible Bond, Corporate Bond, Emerging Market Bonds, Floating Rate Note, Green & Sustainability-Linked Bonds, High-Yield Bond, Mortgage-Backed Security, Municipal Bond, Schuldschein, Sukuk. Matters on 4 more.
• Liquidity4 of 17You cannot get out at anything near the marked price.Decides: CMBS, High-Yield Bond, Municipal Bond, Schuldschein. Matters on 13 more.
• Funding0 of 17Cash is needed before the position pays off — margin, calls, rolls.Decides: none of them. Matters on 3 more.
• Operational0 of 17The failure is in documents, systems, keys or people, not in prices.Decides: none of them. Matters on 2 more.

Market decides 12 of the 17 — which is what makes this a class rather than a list: the instruments differ in shape and fail the same way. Funding and Operational decide nothing here — which is not the same as being absent.

The same five read across all 129 instruments →

Go deeper, and practiseLonger pieces, what an interview asks here, and a page to print.

Go deeper

Interactive: accrued interest & dirty priceEasy

Bond quotes are "clean", but you pay "dirty": quoted price plus the interest earned since the last coupon. The gap surprises every first-time bond buyer.

Coupon % p.a. Coupons per year Days since last coupon Clean price

Accrued interest

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Dirty (invoice) price

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Interest per day (per 100)

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Act/365 approximation — real markets use per-market day-count conventions (30/360, act/act) that shift the cents, not the concept.

Interactive: real return after inflationEasy

The only return that buys anything is the real one. Fisher's equation, exactly:

Nominal return % p.a. Inflation % p.a.

Real return (exact)

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Rule-of-thumb (n − i)

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Price level in 10 years

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What 100 buys in 10 years

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Real = (1+n)/(1+i) − 1. The approximation n − i is fine at low inflation and dangerously flattering at high inflation — see the inflation-linked bond page for the instrument that removes the guesswork.

How this market works

Analysis

Market mapWho is on the other side of your trade

Prices are made by participants with different jobs, different constraints and different reasons to trade. Knowing whose need you are meeting explains more about a market than any indicator.

• Central banks are the largest holders of government debt in several markets after a decade of asset purchases. Their buying and its reversal are policy, not opinion.
• Insurers and pension funds buy duration because their liabilities have it. They are price-insensitive at the long end in a way no other participant is — which is what made the 2022 LDI episode possible.
• Bank treasuries hold high-quality bonds for liquidity rules, not for return. That demand is regulatory and stable until a deposit run makes it forced selling.
• Index funds in bonds buy in proportion to how much an issuer has borrowed — a genuinely odd rule that mechanically overweights the most indebted.
• Dealers hold far less inventory than before 2008. That is why liquidity looks fine until everyone wants the same direction.

Costly mistakesThe five mistakes that cost the most here

Not a list of ways to be clever — a list of the errors that recur, why each one is structural rather than careless, and which tool on this site settles it.

• Reading yield as return. Yield to maturity assumes reinvestment at the same yield and that you hold to maturity. Neither is usually true.
• Buying the higher coupon. Coupon is a cash-flow schedule, not a return. Compare yields, and compare them after credit and tax treatment.
• Assuming bonds hedge equities. They did in demand-shock decades and did not in 2022. The correlation is regime-dependent — see diversification.
• Underestimating duration. A 20-year bond loses roughly a fifth of its value on a 1-point yield rise. Long bonds are not the safe end of the market.
• Ignoring the call. A callable bond caps your upside and leaves the downside. The extra yield is the option you sold, and it is priced accordingly.

What an interview asks here

Bond questions test one instinct: price and yield are the same fact stated twice, and everything else is about the shape of the cash flows.

Try each one out loud before you open it. What is underneath is the shape of a complete answer, not a script — somebody who can produce those parts in their own words can also answer the four variations that follow, and somebody who has memorised a paragraph can answer one.

Q1Rates rise. Why does a bond fall?

What it is checking. The first question on any rates desk, and the answer must be about competition rather than about sentiment.

A complete answer contains:

• The bond's coupons are fixed. A newly issued bond pays more, so nobody will pay the old price for the old coupon.
• The price falls until the return from holding to maturity matches what is available elsewhere.
• How far it falls depends on duration — the weighted average time to the cash flows.
• Convexity means the relationship is not a straight line: prices rise more when yields fall than they fall when yields rise by the same amount.
• Nothing about the issuer changed; this is arithmetic rather than credit.

Read it properly: Why a bond falls · The yield curve

Q2What is duration, in words a non-specialist would accept?

What it is checking. Whether the candidate can explain it without the formula, which is the actual job.

A complete answer contains:

• The weighted average time until you get your money back, weighted by the present value of each payment.
• Which makes it, usefully, the approximate percentage price move for a one percent move in yield.
• A zero-coupon bond's duration is its maturity; a coupon bond's is shorter, because some money arrives earlier.
• Higher coupons and higher yields both shorten it, because more of the value arrives sooner.
• And it is a local measure — it is accurate for small moves and needs convexity for large ones.

Read it properly: Bond maths · Government bond

Q3Two bonds, same issuer, same maturity, different prices. Why?

What it is checking. A precision question with several legitimate answers, and naming three is the pass.

A complete answer contains:

• Different coupons: a high-coupon bond trades above par and a low-coupon one below, at the same yield.
• Different seniority or security, so they are not the same credit claim.
• Different optionality: a call, a put, a make-whole or a change-of-control provision each move the price.
• Liquidity: an on-the-run benchmark trades richer than an older line of the same maturity.
• And accrued interest — the quoted clean price is not what changes hands.

Read it properly: Corporate bond · Why a bond trades above 100

Q4The curve inverts. What does that tell you?

What it is checking. Whether the candidate can give a mechanism rather than a folk statistic.

A complete answer contains:

• Long yields below short ones mean the market expects short rates to be lower in future than they are now.
• That usually means expected policy easing, which usually means expected weakness — but it is an expectation, not a forecast anybody has to be right about.
• There is also a term premium in the shape, and it can be negative, so the pure expectations reading is incomplete.
• It changes behaviour: a bank borrowing short and lending long earns less, which tightens credit independently of any forecast.
• So the mechanism is at least as interesting as the signal.

Read it properly: The yield curve · Monetary policy

Q5What is a credit spread compensating you for?

What it is checking. Three components, and most candidates name one.

A complete answer contains:

• Expected loss: probability of default times loss given default.
• A risk premium for the uncertainty around that, because defaults cluster in bad states of the world.
• Illiquidity, which is why a small unrated issue trades wider than its default probability alone would justify.
• Historically the spread has exceeded realised losses, which says the last two components are real rather than a mispricing.
• So reading a spread as income is the standard error — most of it is compensation, and some of it is not income at all.

Read it properly: Credit spreads · Credit

Q6Why does a bond fund not mature?

What it is checking. The most consequential misunderstanding a retail investor has, and it comes up as an explanation question.

A complete answer contains:

• A bond matures at par on a date: hold it and you get your money back regardless of the path.
• A fund holds a rolling portfolio and sells bonds as they fall below its maturity band, so there is no date on which it returns par.
• So a fund's loss in a rate rise is real to the holder in a way an individual bond's mark-to-market loss is not.
• The fund's yield does rise, so a long-enough holder is eventually compensated — roughly around the duration horizon.
• The right comparison is a target-maturity fund, which reintroduces the date.

Read it properly: Bonds vs. bond funds · ETF

Q7How would you check whether a bond is priced correctly?

What it is checking. A method question. The answer is relative value, not an absolute number.

A complete answer contains:

• Build a curve for the issuer from its liquid bonds, and see where this one sits against it.
• Compare its spread with issuers of the same rating and sector, adjusting for maturity.
• Decompose the yield: benchmark, plus spread, plus anything the optionality is worth.
• For a callable, compare yield to worst rather than yield to maturity, because the issuer chooses.
• And say what would make you wrong: a rating action, an issuance calendar, or an index rebalancing are all price events with no new information in them.

Read it properly: Corporate bond · Credit spreads

Do these against a clock → — one at a time, ninety seconds each, answer before you look.

Whose questions these are. Every question on this page was written for this publication. None is taken from anybody else’s question bank, and none is a claim about what any named firm asks — that is neither verifiable from here nor ours to assert. They are our own reading of which mechanism a question of this kind is testing. Information and education only.

Test yourself: five questions

Five quick questions on this asset class — checked entirely on your device, nothing stored or sent. Wrong answers come with explanations; the deep dives above hold every answer. For education only.

⬇ The whole class on one printable page

Who pays whom, drawn

The payoff charts on this site say what an instrument is worth at the end. These say who the parties are and what each one hands over — every payment between the investor and the bank on the other side, in the order it happens. Each diagram sits on its product's own page.

• Government Bond — The plain bond, and every bond that behaves like one
• Floating Rate Note — The coupon that is decided after the period starts
• Inflation-Linked Bond — What inflation actually does to the payments
• Covered Bond — Two pools of recourse instead of one
• Sukuk — Rent instead of interest, and the SPV that makes it possible
• Mortgage-Backed Security — The homeowner's option, and who is short it
• Asset-Backed Security — Where the lender stops being the lender
• Contingent Convertible Bond — The bond that can stop being a debt

Who does this: Fixed Income is quoted from five sell-side seats — Sales, Trading, Structuring, Research, Prime Services — and held from the buy-side by Asset Management, Private Markets, Hedge Funds & Alternatives, Wealth Management, Insurance & Pensions. See the industry map.