Stocks and Bonds Glossary: EPS, P/E, Yield, Duration and Credit Risk
Stocks and bonds represent different claims on an issuer and use different measures of value, income and risk. Shareholders hold residual ownership, while bondholders generally hold defined contractual claims. Financial reports, valuation ratios, dividends, coupons, duration and credit spreads help investors interpret those differences.
This reference glossary explains the terminology behind equities and fixed income with worked calculations. It distinguishes accounting values from market values and contractual bond cash flows from uncertain realised investment returns.
Stocks and bonds glossary: key financial-market definitions
Accrued interest
Interest earned on a bond since the previous coupon date under a market day-count convention. A bond’s dirty settlement price commonly includes accrued interest in addition to its quoted clean price.
Balance sheet
A statement of assets, liabilities and shareholder equity at a particular date. It gives a snapshot of financial position rather than the profitability or cash generation achieved across an entire year.
Book value
The accounting value of equity after liabilities are deducted from recorded assets, subject to relevant recognition and measurement rules. It need not equal economic liquidation value or stock-market capitalisation.
Bond
A debt instrument representing contractual payment obligations of an issuer. Coupon, principal, maturity, currency and seniority shape the instrument’s risks, and the issuer’s ability to pay remains important.
Buyback
A company’s repurchase of its shares. It can change shares outstanding and earnings per share, but economic value depends on the purchase price, financing and alternative uses of capital.
Callable bond
A bond whose terms allow the issuer to redeem it early under specified conditions. The embedded call option can limit price appreciation when market yields fall and complicates duration analysis.
Cash flow from operations
A financial-statement measure of cash generated or consumed by operating activities. It is useful for assessing earnings quality, but classification conventions and working-capital fluctuations deserve attention.
Common stock
An ownership interest in a company, with voting and economic rights specified by its share class and law. Its residual claim makes it riskier than senior obligations when an issuer fails.
Convexity
The curvature of a bond’s price-yield relationship under specified assumptions. It improves on the first-order duration approximation for larger yield changes, though embedded options can complicate the measure.
Corporate bond
Debt issued by a company rather than a government. Default risk, recovery, ranking, liquidity and covenants all influence valuation and the spread investors demand.
Coupon rate
The contractual interest amount expressed relative to bond face value according to its terms. It stays fixed on a fixed-coupon bond even while the market price and yield change.
Credit rating
An agency’s opinion of relative creditworthiness under its methodology. Ratings are not guarantees of repayment and may change after market prices already reflect deteriorating issuer conditions.
Credit spread
A yield premium over a selected reference curve for debt exposed to additional credit or related risks. It may also contain liquidity, optionality and structural differences.
Current yield
Annual coupon income divided by current bond market price under a simple calculation. It omits capital gain or loss at redemption and reinvestment effects, unlike more complete yield measures.
Debt maturity
The date when contractual principal becomes due, subject to bond terms and possible early repayment. A company’s overall maturity profile helps assess refinancing needs and liquidity risk.
Default
A failure to meet a defined contractual obligation or another event specified in debt documentation. Recovery outcomes depend on seniority, collateral, jurisdiction and restructuring.
Diluted EPS
Earnings per share calculated after considering the potential effects of dilutive securities under accounting standards. It may differ materially from basic EPS when options or convertible instruments are significant.
Dividend
A distribution to shareholders when declared and legally permitted. The cash received affects total return, but dividend amounts and continuity are not guaranteed.
Dividend yield
Dividend amount over a defined past or forecast period divided by share price. A high yield may reflect a falling share price or an unsustainable distribution, so it is not automatically attractive.
Duration
A measure of interest-rate price sensitivity for a bond or portfolio under stated assumptions. Modified and effective duration differ, especially when securities contain embedded options.
Earnings per share
Net earnings attributable to ordinary shareholders divided by a specified weighted-average share count. One-time items and accounting choices can make headline EPS a poor proxy for recurring earning power.
Enterprise value
An attempt to estimate the value attributable to all major capital providers, often equity market value plus debt and selected claims minus available cash. Precise definitions vary with leases and minority interests.
Equity
The residual ownership claim after liabilities, or securities representing that claim. Book equity, market equity and economic value are separate concepts that answer different questions.
Ex-dividend date
A market date used to determine which share purchases normally carry an entitlement to an upcoming dividend. Prices may adjust for the foregone distribution along with wider market information.
Free cash flow
Cash available after a defined set of operating and investment spending items. It is often calculated from operating cash flow less capital expenditure, but analysts must state adjustments clearly.
Government bond
Debt issued by a sovereign government, such as a UK gilt or US Treasury security. Creditworthiness, inflation, currency and market liquidity still affect risk.
Gross margin
Revenue remaining after cost of goods sold, expressed relative to revenue under a reporting convention. It gives insight into product economics but not the whole company’s operating profitability.
Index weighting
The rule allocating importance to securities in an index, such as free-float market value or price weighting. Different methodologies can produce different performance from overlapping holdings.
Interest coverage
A measure comparing a company’s earnings or cash-flow capacity with financing expense. The numerator and denominator need definition, and one ratio cannot capture all refinancing risks.
Investment grade
A broad rating category indicating relatively higher assessed creditworthiness under agency thresholds. It is not equivalent to risk-free and can change through downgrades.
Leverage ratio
A measure of debt or total exposure relative to a capital or earnings base. Gross debt-to-EBITDA, net debt-to-EBITDA and other ratios are not interchangeable.
Market capitalisation
Share price multiplied by the relevant outstanding share count. It measures market equity value, not the cost of buying the entire company or its enterprise value.
Modified duration
A common fixed-income measure approximating the percentage price change for a small change in yield, with other assumptions held constant. It is a first-order sensitivity, not a maximum loss estimate.
Net income
Accounting profit after expenses, financing and tax under reporting standards. It can diverge from cash generation because of accruals, provisions and non-cash charges.
P/E ratio
A company’s equity market value relative to its reported or forecast earnings, often expressed as share price divided by EPS. It can be meaningless or misleading when earnings are negative or distorted.
Preferred stock
An equity-like security class often with specified dividend or seniority features relative to common shares. Exact rights differ substantially across issuers and jurisdictions.
Return on equity
Profit relative to accounting shareholder equity under a stated convention. It can be increased by leverage or reduced equity rather than superior operating performance alone.
Return on invested capital
A measure of operating return relative to defined invested capital. Analyst calculations vary, and comparisons should consider taxes, goodwill, leases and business models.
Revenue
The income recognised from business activities before many expenses under applicable accounting rules. Revenue growth does not by itself establish profitability or positive cash flow.
Rights issue
An offer of new shares to existing owners under a specified entitlement structure. It can raise capital while changing share counts, ownership percentages and per-share valuation metrics.
Share float
Shares considered available for public trading under a chosen adjustment method. Float is different from total shares outstanding and influences some market-capitalisation-weighted indexes.
Stock split
An increase in shares with proportional adjustment to the nominal per-share price under the split ratio, ignoring market reactions. It does not mechanically create company economic value.
Total return
Performance that includes price changes and relevant cash distributions under a defined reinvestment convention. Price-only indexes or charts do not capture the same investor experience.
Yield curve
The relationship between yields and maturities for comparable bonds. It can shift, steepen, flatten or twist, producing different effects on bonds of different duration and cash-flow structure.
Yield to maturity
The internal discount rate linking a bond’s contractual cash flows to its market price, assuming a defined payment schedule. It may not equal the realised holding-period return.
Zero-coupon bond
A bond with no periodic coupon whose return, if obligations are met, arises from purchase price and maturity proceeds. Its interest-rate sensitivity can differ from coupon-paying bonds of similar maturity.
Worked example: share price, earnings and market capitalisation
Imagine a hypothetical company with 100 million ordinary shares outstanding and a share price of £60. Its simple equity market capitalisation is £6 billion. If the company reports £300 million in earnings attributable to those shares, an oversimplified basic EPS is £3 and the resulting price-to-earnings multiple is 20 times. Actual reported EPS uses appropriate weighted-average share counts and reporting conventions, so a real company’s published basic and diluted figures may differ.
A 20-times earnings multiple describes the price relative to stated earnings, not a promise of a 5% annual shareholder return. Valuation must also consider growth, investment needs, debt, competitive advantages, accounting quality and whether recent earnings are representative. A fall in price can lower the P/E ratio while simultaneously signalling deteriorating business prospects.
Worked example: enterprise value and the role of debt
Suppose the same fictional business has £2 billion of relevant debt and £500 million of available cash. A simplified enterprise value is £6 billion equity value plus £2 billion debt minus £0.5 billion cash, giving £7.5 billion. This is not a definitive takeover price: actual enterprise-value conventions may incorporate leases, preferred claims, minority interests and transaction-specific liabilities.
Comparing companies solely on market capitalisation can overlook their financing structure. Two firms each worth £6 billion in equity may have very different total capital claims and operating risks. Analysts comparing EV/EBITDA or other enterprise ratios must reconcile the enterprise-value definition with the earnings denominator and consider financial-statement adjustments.
Worked example: coupon rate versus current yield
Consider a fixed-rate bond with £100 face value and annual coupons totalling £4. The coupon rate is 4% of face value under this simplified structure. If the bond trades at a clean price of £96, its current yield based on annual coupon divided by price is about 4.17%. The coupon rate remains 4%; it does not rise merely because the secondary-market bond price has fallen.
Yield to maturity requires the bond’s remaining cash flows and redemption date and includes the assumed redemption difference. The calculation also depends on payment frequency, accrued interest and market conventions. A yield to maturity estimate is not an unconditional realised return: issuer default, reinvestment changes, sales before maturity and transaction costs can alter the investor’s result.
Worked example: duration and basis points
Suppose a bond has an illustrative modified duration of seven years. If its applicable yield rises by 50 basis points, or 0.005 in decimal units, the first-order duration estimate for price change is approximately -7 × 0.005 = -3.5%. If yield falls by the same amount, the linear estimate is +3.5%, but the true price-yield relationship is curved. Convexity can improve the approximation and may differ when options are embedded in the bond.
A portfolio of long-dated bonds may have greater sensitivity to yield changes than an equal-market-value portfolio of short-dated bonds. Duration depends on cash-flow timing, yield, maturity and instrument structure; merely comparing coupon rates is not enough to understand rate risk.
How stock dividends differ from bond coupons
A dividend generally depends on a company’s distribution decision and legal capacity. It can be reduced, suspended or financed in ways that impair future growth. A bond coupon is a contractual obligation, but the issuer may still fail to pay if it suffers distress or default. Neither should be treated as guaranteed income without examining the relevant legal, credit and economic risks.
For shares, the value of a dividend should be assessed alongside the share-price adjustment and other cash-flow uses. For bonds, credit quality, ranking and covenants determine the strength of the contractual promise. Investors should distinguish senior secured debt, subordinated obligations and residual equity claims when assessing recovery in insolvency.
What financial ratios cannot tell you
Return on equity may look impressive because high leverage or share repurchases have reduced the accounting equity base. A low P/E may result from temporarily high cyclical earnings. A high dividend yield may come from a collapsing share price. A favourable debt-to-EBITDA ratio can be less informative if the issuer faces an imminent cash refinancing requirement or large off-balance-sheet commitments.
Ratios help organise questions but must be evaluated with cash-flow detail, industry structure, accounting policies, maturity schedules and scenario analysis. One company’s financial year may not align with another’s, and adjustments for acquisitions or non-recurring items can change comparability.
How interest rates affect equity and fixed-income valuation
Higher risk-free yields can increase the discount rate used to value future cash flows, potentially reducing present values when other assumptions are held fixed. Bonds with fixed cash flows often have a direct price-yield relationship. Equities respond less mechanically because growth, earnings margins, currency movements and required risk premia can change at the same time.
For example, stronger economic activity might lift rates and expected corporate profits simultaneously. Some equity sectors may benefit while long-duration growth valuations face greater discount-rate pressure. Understanding whether a rate move reflects stronger growth, inflation risk or tighter policy is more useful than applying a blanket ‘higher rates are bad for stocks’ rule.
Why earnings, cash flow and debt must be examined together
Consider two fictional businesses reporting identical annual profits. One collects cash promptly and has modest borrowing, while the other reports revenue before its customers pay and faces a large debt maturity next year. Equal earnings do not imply equal resilience. Analysts should examine receivables, working-capital movements, capital expenditure, debt covenants and upcoming refinancing obligations to determine whether reported profit is supported by cash and adequate liquidity.
Capital structure also affects the claims held by different investors. A bondholder’s return may depend primarily on timely contractual repayment and recovery in stress, while a shareholder participates in uncertain residual value after senior obligations. High returns on equity may partly arise from borrowing, making analysis of profitability incomplete without a review of leverage and refinancing capacity.
Explore related glossary guides
Definitions are most useful when connected to neighbouring concepts. See Trading Glossary A–Z, Macroeconomic Trading, Trading Risk Management, Market Data for complementary market terms, risk considerations and examples.
Frequently asked questions
Does a bond’s coupon rate change when its price changes?
Not for a conventional fixed-coupon bond. The cash coupon is set contractually, while current yield and yield to maturity change with the market price and other inputs.
Is market capitalisation the same as enterprise value?
No. Market capitalisation focuses on equity market value; enterprise value adjusts for specified other capital claims and cash. The exact enterprise-value calculation must be reconciled to the company.
Are investment-grade bonds risk-free?
No. Ratings describe relative credit opinions under a methodology. Interest-rate risk, spread changes, inflation, liquidity and the possibility of downgrade or default remain.
Is a high P/E always a sign a stock is overvalued?
No. The earnings measure may be temporarily depressed, and the market may expect significant future growth. A multiple needs company, sector and cash-flow context.
Can a share split create shareholder wealth by itself?
A split changes share count and the nominal price per share proportionally, all else equal. It does not mechanically change the firm’s total economic value, though market reactions can occur.
Related Education
Read Stock Valuation Explained, How to Read Financial Statements and Bond Prices and Yields.
References
See the SEC’s investment-products overview and SEC investor terminology. For particular issuers, review regulatory filings, bond prospectuses, company accounts and official index rules.
General financial education only; not an assessment of the suitability or investment merits of any specific issuer or security.