IMM settlement dates

The settlement dates of IMM Eurodollar futures contracts. These dates are often used as settlement dates on forward rate agreements, and swap contracts.

IMM swaps

Short-dated swaps that are priced off the IMM's Eurodollar futures strip.

Immunization

A bond portfolio strategy of matching the modified duration of the assets in a portfolio to the liability it is intended to pay off through portfolio rebalancing. The term of the liability represents the investment horizon of the investor. This strategy helps to eliminate interest rate risk, as interest rate changes will have equal and offsetting effects on the investor's portfolio of assets and liabilities.

Implied volatility

Inferred from option pricing model (typically Black-Scholes) using the market value of an option and solving for the value of volatility consistent with the observed value of the option.  Inputs include price of underlying, strike price of option, interest rates, time to expiration, volatility and type of option.

In-the-money

In the case of a call option, a situation in which the price of the underlying asset exceeds the strike price of the option.  In the case of a put option, a situation in which the price of the underlying asset is below the strike price of the option.

Index

A statistical measure of the weighted value of a group of securities used as a performance indicator. Example: S&P 500, Dow Jones, FTSE Indices etc. Indices act as mirrors of any given market (stock market or bond market), industry or economy and as benchmarks against which the performance of individual securities or portfolios is measured.

Indexing

A passive portfolio management strategy, which aims to replicate the performance of a select index such as, the S&P 500, Dow Jones, and FTSE Indices etc, by investing in companies that make up the index.

Inflation Linked Notes

Corporations and Government Sponsored Enterprises issue inflation-linked structures as part of their overall funding program. The notes are typically issued with a “floating coupon” structure based on the change in the Consumer Price Index for All Urban Consumers1 (CPI) over the previous year. The inflation component is added to the fixed rate coupon and paid to the investor. At maturity, the initial investment is returned to the investor without any inflation adjustment. Therefore, a portion of each interest payment is meant to offset inflation, and the remainder is the real return.

Interest differential

The rate differential between instruments of the same maturity but denominated in different currencies.

Interest Only (IO)

The interest only cash flows of a mortgage pass-through.   

Interest Rate Anticipation Swaps

A portfolio immunization strategy where bonds in a portfolio are exchanged for new bonds in order to achieve the target portfolio duration, given the investor’s expectations about changes in interest rates.

Interest-rate collar

A combination of an interest-rate cap and an interest-rate floor such that a cap is purchased and a floor is sold.  The effect is to place upper and lower bounds on the cost of funds.

Interest-rate futures

Futures on debt instruments or debt indexes.  The value of futures contracts moves inversely with changes in the level of interest rates.

Interest-rate risk

(1) The risk that on closing a position, the current interest rate will be different than the original contract rate.  (2) The price risk associated with holding a fixed-rate debt/derivative instrument as a result of fluctuations in the instrument's yield.

Interest-rate swap

An agreement between two parties to engage in a series of exchange of interest payments on the same notional principal denominated in the same currency.

Internal rate of return (IRR)

The discount rate (the yield to maturity for a note or bond) that equates the sum of the present values of the cash flows associated with an investment with the initial cost of the investment.

International Swaps and Derivatives Association (ISDA)

A New York-based trade association that deals with matters of common interest to member swap dealers.

Intrinsic value

 A major component of an option's value.  It is the greater of the amount by which an option is in-the-money or zero.

Inverse Floater

Bonds whose coupon rates increase as rates decline and decrease as rates rise. The coupon rate is based on a formula using an index and moves in the opposite direction of changes in that index. Some inverse floaters may be a type of structured note. Other inverse floaters, such as interest-only (I/O) and principal-only (P/O) strips are types of collateralized mortgage obligations (CMOs).

Investment grade bond

Any bond that has been rated as such by a rating agency. In the case of Moody's and Standard & Poor's, these would be ratings of Baa or better and BBB or better, respectively.

Investment Horizon

The time period over which an investor wishes to keep his money invested. Investment horizon varies from one investor to another depending on their investment objectives in terms of risk, return, market conditions and most importantly their liability profiles.

Investment Policy Statement (IPS)

A formal written plan, which communicates the long-term investment objectives, constraints and guidelines to be followed for achieving investors’ objectives. It lays down the possible courses of action that have to be followed to achieve the investment objectives.