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The Merrill Lynch US High Yield Master II Index (H0A0) is a commonly used benchmark index for high-yield corporate bonds. It is administered by Merrill Lynch. The Master II is a measure of the broad high yield market, unlike the Merrill Lynch BB/B Index, which excludes lower-rated securities.
The High Yield Master II Index came into being in 1989. Martin Fridson, who then headed Merrill Lynch's high yield bond research department, brought a problem to the attention of Phil Galdi, who was responsible for bond indexes. The existing High Yield Master Index excluded two types of issues that were becoming popular because of the boom in leveraged buyout financing, zero-coupon bonds and payment-in-kind (PIK) bonds. Galdi's solution was to maintain the existing rules for the Master Index, but to create a new index that included "zeros" and PIKs. The new Master II was introduced with retroactive data that extended its history back to August 31, 1986.
In finance, a high-yield bond is a bond that is rated below investment grade by credit rating agencies. These bonds have a higher risk of default or other adverse credit events, but offer higher yields than investment-grade bonds in order to compensate for the increased risk.
In finance, a bond is a type of security under which the issuer (debtor) owes the holder (creditor) a debt, and is obliged – depending on the terms – to repay the principal of the bond at the maturity date as well as interest over a specified amount of time. Interest is usually payable at fixed intervals.
A zero coupon bond is a bond in which the face value is repaid at the time of maturity. That definition assumes a positive time value of money. It does not make periodic interest payments or have so-called coupons, hence the term zero coupon bond. When the bond reaches maturity, its investor receives its par value. Examples of zero-coupon bonds include US Treasury bills, US savings bonds, long-term zero-coupon bonds, and any type of coupon bond that has been stripped of its coupons. Zero coupon and deep discount bonds are terms that are used interchangeably.
A government bond or sovereign bond is a debt obligation issued by a national government to support government spending. It generally includes a commitment to pay periodic interest, called coupon payments, and to repay the face value on the maturity date. For example, a bondholder invests $20,000 into a 10-year government bond with a 10% annual coupon; the government would pay the bondholder 10% of the $20,000 each year. At the maturity date the government would give back the original $20,000.
In finance, a convertible bond or convertible note or convertible debt is a type of bond that the holder can convert into a specified number of shares of common stock in the issuing company or cash of equal value. It is a hybrid security with debt- and equity-like features. It originated in the mid-19th century, and was used by early speculators such as Jacob Little and Daniel Drew to counter market cornering.
United States Treasury securities, also called Treasuries or Treasurys, are government debt instruments issued by the United States Department of the Treasury to finance government spending as an alternative to taxation. Since 2012, U.S. government debt has been managed by the Bureau of the Fiscal Service, succeeding the Bureau of the Public Debt.
The yield to maturity (YTM), book yield or redemption yield of a bond or other fixed-interest security, such as gilts, is an estimate of the total rate of return anticipated to be earned by an investor who buys a bond at a given market price, holds it to maturity, and receives all interest payments and the capital redemption on schedule. It is the (theoretical) internal rate of return : the discount rate at which the present value of all future cash flows from the bond is equal to the current price of the bond. The YTM is often given in terms of Annual Percentage Rate (A.P.R.), but more often market convention is followed. In a number of major markets the convention is to quote annualized yields with semi-annual compounding ; thus, for example, an annual effective yield of 10.25% would be quoted as 10.00%, because 1.05 × 1.05 = 1.1025 and 2 × 5 = 10.
Fixed income refers to any type of investment under which the borrower or issuer is obliged to make payments of a fixed amount on a fixed schedule. For example, the borrower may have to pay interest at a fixed rate once a year and repay the principal amount on maturity. Fixed-income securities — more commonly known as bonds — can be contrasted with equity securities – often referred to as stocks and shares – that create no obligation to pay dividends or any other form of income. Bonds carry a level of legal protections for investors that equity securities do not — in the event of a bankruptcy, bond holders would be repaid after liquidation of assets, whereas shareholders with stock often receive nothing.
In finance, the duration of a financial asset that consists of fixed cash flows, such as a bond, is the weighted average of the times until those fixed cash flows are received. When the price of an asset is considered as a function of yield, duration also measures the price sensitivity to yield, the rate of change of price with respect to yield, or the percentage change in price for a parallel shift in yields.
In finance, bond convexity is a measure of the non-linear relationship of bond prices to changes in interest rates, the second derivative of the price of the bond with respect to interest rates. In general, the higher the duration, the more sensitive the bond price is to the change in interest rates. Bond convexity is one of the most basic and widely used forms of convexity in finance. Convexity was based on the work of Hon-Fei Lai and popularized by Stanley Diller.
A collateralized mortgage obligation (CMO) is a type of complex debt security that repackages and directs the payments of principal and interest from a collateral pool to different types and maturities of securities, thereby meeting investor needs.
Floating rate notes (FRNs) are bonds that have a variable coupon, equal to a money market reference rate, like LIBOR or federal funds rate, plus a quoted spread. The spread is a rate that remains constant. Almost all FRNs have quarterly coupons, i.e. they pay out interest every three months. At the beginning of each coupon period, the coupon is calculated by taking the fixing of the reference rate for that day and adding the spread. A typical coupon would look like 3 months USD LIBOR +0.20%.
A corporate bond is a bond issued by a corporation in order to raise financing for a variety of reasons such as to ongoing operations, M&A, or to expand business. The term is usually applied to longer-term debt instruments, with maturity of at least one year. Corporate debt instruments with maturity shorter than one year are referred to as commercial paper.
Daily inflation-indexed bonds are bonds where the principal is indexed to inflation or deflation on a daily basis. They are thus designed to hedge the inflation risk of a bond. The first known inflation-indexed bond was issued by the Massachusetts Bay Company in 1780. The market has grown dramatically since the British government began issuing inflation-linked Gilts in 1981. As of 2019, government-issued inflation-linked bonds comprise over $3.1 trillion of the international debt market. The inflation-linked market primarily consists of sovereign bonds, with privately issued inflation-linked bonds constituting a small portion of the market.
The bond market is a financial market where participants can issue new debt, known as the primary market, or buy and sell debt securities, known as the secondary market.This is usually in the form of bonds, but it may include notes, bills, and so on for public and private expenditures. The bond market has largely been dominated by the United States, which accounts for about 39% of the market. As of 2021, the size of the bond market is estimated to be at $119 trillion worldwide and $46 trillion for the US market, according to Securities Industry and Financial Markets Association (SIFMA).
Gilt-edged securities are bonds issued by the UK Government. The term is of British origin, and then referred to the debt securities issued by the Bank of England on behalf of Her Majesty's Treasury, whose paper certificates had a gilt edge. Hence, they are known as gilt-edged securities, or gilts for short.
Reinvestment risk is a form of financial risk. It is primarily associated with fixed income securities, in the form of early redemption risk and coupon reinvestment risk.
The Merrill Lynch Domestic Master is a common American Bond index, analogous to the S&P 500 for stocks, owned by Merrill Lynch. The Domestic Master is similar to the Salomon BIG or the Barclays Capital Aggregate Bond Index. The Domestic Master Index was created on December 31, 1975. The index is re-balanced on the last calendar day of the month.
Martin Steven Fridson is an American author known for his application of rigorous financial theory to the field of high yield bonds. He is also a philanthropist and an author in the subjects of financial reporting, financial history, and political economy. Fridson has been referred to as the "dean of high yield debt." He is currently chief investment officer of Lehmann, Livian, Fridson Advisors LLC, an investment firm based in New York, and publisher of Income Securities Investor newsletter. He lives on Manhattan's Upper West Side with his wife, Elaine Sisman.
An inverse floating rate note, or simply an inverse floater, is a type of bond or other type of debt instrument used in finance whose coupon rate has an inverse relationship to short-term interest rates. With an inverse floater, as interest rates rise the coupon rate falls. The basic structure is the same as an ordinary floating rate note except for the direction in which the coupon rate is adjusted. These two structures are often used in concert.
