Bonds Glossary

  1. A
  2. B
  3. C
  4. D
  5. E
  6. F
  7. G
  8. H
  9. I
  10. J
  11. K
  12. L
  13. M
  14. N
  15. O
  16. P
  17. Q
  18. R
  19. S
  20. T
  21. U
  22. V
  23. W
  24. X
  25. Y
  26. Z
A
Accreted Value Zero Coupon Bonds are issued at a discount and mature at Par ($1,000). The value of the bond increases mathematically by a slight amount every day during the life of the bond. The mathematical value of the bond on a given day is its accreted value (or accumulated value to date). Note that the accreted value may be higher or lower than the market value of the bond.
Accrued Interest Accrued interest is the amount of interest that has been earned since the last interest payment date. When a bond trades, the buyer pays the seller the accrued interest - a pro rata portion of the next interest payment, which will be paid to the buyer of the bond.
Agency Bonds Agency bonds are issued by United States agencies, and are generally thought to be very safe investments in terms of default risk. Examples of well known agencies that issue bonds are Federal Home Loan Mortgage Corporation (FHLMC or "Freddie Mac"), Federal National Mortgage Association (FNMA or "Fannie Mae"), and the Federal Home Loan Bank.
Alternative Minimum Tax (AMT) In addition to calculating regular income tax, taxpayers are also required to calculate tax liability using the AMT method. The taxpayer then pays the higher of the tax calculated by the two methods. Some municipal bonds are subject to AMT, meaning that if you pay AMT, the interest earned on these bonds is taxable under the AMT calculation. Other municipal bonds are not subject to AMT, meaning that even if you pay taxes using the AMT method, interest from non-AMT municipals will not be taxable. Please consult your tax advisor for complete details, and how you might be affected by buying municipal bonds that are subject to AMT.
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B
Bank Qualified Refer to Investment Grade
Basis Point A basis point is simply 1/100th of one percent.
Bearer Bonds Bearer bonds are unregistered bonds which are payable to the bearer. Bonds are no longer issued in bearer form, but there are some older bearer bonds that are still in circulation.
Bond A bond is a debt instrument in which the issuer promises to pay to the bondholder principal and interest according to the terms and conditions of the bond.
Bond Ladder (Laddered Portfolio) A bond ladder is a portfolio of bonds that have staggered maturities. For example, rather than invest $100,000 in a 5 year bond, an investor might choose to invest in 4 blocks of $25,000 maturing in 2, 4, 6, and 8 years. This enables the investor to diversify in terms of default risk and reinvestment risk.
Book Entry Most bonds are issued in book entry form, which means that there is no physical bond certificate. Bond ownership is evidenced by a trade confirmation issued by the broker/dealer, and by the monthly statements that the brokerage firm provides.
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C
Call Date When a bond is issued, the issuer may have the option to call (redeem) the bond on specified dates and prices prior to maturity. The list of dates on which a specified bond can be called is shown in a call schedule.
Call Protection Call protection refers to the amount of time from the current date until a bond can be called. For example, if the first call on a bond is in 3 years from now, a buyer will have 3 years of call protection, and they are assured that they can own the bond for at least 3 years.
Call Risk Call risk refers to the risk that a bond may be called when the investor does not want it to be called. Bond are often called when interest rates decline, so investors in the bond get their cash back and have to reinvest it at the lower rates. Call risk can be eliminated by buying non-callable bonds.
Call Schedule A call schedule is a list of the dates that a bond can be called, together with the corresponding price for each call date.
Callable If a bond can be called (redeemed) prior to maturity, the bond is said to be callable. If a bond can not be called prior to maturity, it is said to be non-callable.
Certificates of Participation Certificates of Participation (COPs) are a type of municipal bond that are often used to finance capital improvement projects or equipment. The COPs represent participation in lease payments made by the municipality for the project or equipment.
Corporate Bond Corporate bonds represent debt of corporations. The bonds are fully taxable, and they are issued in maturities ranging from less than one year to about 30 years (although there are a few corporate bonds that mature in more than 30 years). They typically pay interest twice a year. Corporate bonds can be quite safe when they are issued by strong companies, or they can have significant risk of default when issued by weak companies. Two rating agencies, Moody's and Standard & Poors rate bonds as to the risk of default. Please see the BondFinder section on safety for a complete discussion on ratings and default risk.
Coupon A coupon is the stated interest rate for a bond. Most bonds have a fixed coupon that does not change during the life of the bond. Most bonds have two coupon payments per year. For example, a bond with a 5.0% coupon will pay $25 twice per year, for total interest of $50 which is 5.0% of the face value of the bond (almost all bonds have a face value of $1,000).
Credit Ratings In order to help us assess the credit worthiness of a bond issuer, there are agencies that study the financial strength of bond issuers, and assign credit ratings to them. The two major rating agencies are Moody and Standard & Poors. These agencies assign ratings to bond issues so that investors can determine the credit worthiness of an issue without having to do the financial analysis on their own. For a more detailed list of ratings and their meanings, please see the section on safety.
Current Yield Current yield is the rate of return an investor will get, without taking into account the value of the premium or discount of the purchase price. It is calculated by dividing the coupon by the price. The current yield is not a good indication of your return on investment. Yield to maturity and yield to call take into account the value of the discount or premium paid for the bond, and as such they offer a much better indication of the value of the bond.
CUSIP A CUSIP is a unique identifier assigned to a bond at the time it is issued.
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D
Dated Date The dated date is the date the bond is issued and starts to accrue interest.
Default A bond that ceases to pay interest (because the issuer has financial problems) is in default of the terms of the bond agreement, and is said to be in default. Clearly, purchasing a bond in default is an extremely risky investment.
Delivery Bonds are issued in several different delivery forms. The most popular forms of delivery are Book Entry and Registered. There are also some older bonds in circulation that were issued in bearer form.
Discount Bond Bonds mature at a par value, which is almost always $1,000. A premium bond is any bond that is currently trading at a price above par. A discount bond is a bond trading at a price lower than par.
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E
Escrowed to Maturity (ETM) Sometimes an issuer desires to pay off a bond in order to remove the debt from its books. However, the bond may not be callable, and the issuer can not redeem the bonds at its discretion. In this case the issuer may deposit sufficient funds with a trustee into an escrow account so that the trustee can use the funds to pay all interest and principal as they come due.
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F
First Coupon Date Bonds typically pay interest twice per year on coupon payment dates. The first coupon date is the date on which the very first interest payment will be made for a bond. It is relevant because bonds often have a longer or shorter than normal first payment period. Once the first coupon payment has been made, the bond will likely pay every 6 months after that.
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G
General Obligation Bonds The interest and principal payments for a municipal bond are typically either guaranteed by the issuer or by the revenue from a specific project. If they are guaranteed by a specific project, the bondholder is relying on revenue from the project to pay principal and interest, and the bonds are known as revenue bonds. If the issuer guarantees the repayment of principal and interest, the bonds are known as a general obligation (often referred to as G.O.) of the issuer.
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H
High Yield Bonds (See Junk Bonds) High Yield Bonds are typically corporate bonds that are rated below investment grade by the major rating services. These bonds pay much higher interest than investment grade bonds, but there is usually a substantial risk of default, which is why they are often referred to as "junk" bonds.
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I
Industry Group Corporations are often grouped by the industry to which they belong. A few industry groups are Financial Services, Industrials and Transportation.
Insured Bonds Some municipal bonds are insured as to principal and interest by large bond insurance firms. The insurance firms are generally large with considerable financial strength. Therefore, any bond that is insured by one of the major insurers will carry a top credit rating from the major rating services, regardless of the issuer's credit strength.
Interest Interest is the money the issuer pays to the bondholder at specified times throughout the life of the bond. The stated interest rate of a bond is usually referred to as the coupon rate. Most bonds pay interest semi-annually (twice per year).
Interest Payment Dates Most bonds pay interest twice per year. The interest payment dates are usually the same month and day as the maturity date of the bond, and the six month anniversary. For example, a bond with a stated interest rate (coupon) of 5.0% and a maturity of 02/15/2005 will pay $25 every February 15 (the same month and day as the maturity date) and $25 every August 15 (the 6 month anniversary). Note that each payment is half of the stated interest rate of 5% ($50) per year per $1,000 bond.
Investment Grade The two major credit rating services rate bonds as to their credit worthiness. Bonds that are rated at or above "Baa" by Moody's, or "BBB" by S&P are said to be investment grade bonds. Bonds rated lower than these ratings are said to be high yield (junk) bonds.
Issue Description This is the name of the issuer of the bond, and sometimes a brief description of the purpose of the bond. Think of this as the bond's name.
Issuer The issuer is the entity that issues a bond. It could be the name of a company in the case of a corporate bond, or the name of the state, city, or county in the case of a municipal bond. The U.S. government is the issuer of Treasury bonds.
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J
Junk Bonds The two major credit rating services rate bonds as to their credit worthiness. Bonds that are rated at or above "Baa" by Moody, or "BBB" by S&P are said to be investment grade bonds. Bonds rated lower than these ratings are said to be high yield (junk) bonds.
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L
Listed Most corporate bonds trade over-the-counter - that is to say that they do not trade on an exchange. There are a small number of bonds that do trade on the NYSE, and these bonds are said to be "listed" on the exchange.
Long Bond The U.S. government currently issues new Treasury notes and bonds with maturities in 2, 3, 5, 10, and 30 years. The 30 year bond is called the long bond, and it is considered one of the benchmark indicators of interest rates.
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M
Maturity Date The maturity date of a bond is the date on which the bond will be repaid. Note that many bonds have features such as puts and calls which may cause the principal to be repaid on an earlier date.
Minimum See quantity.
Moody's Investors Service One of the major bond credit rating services.
Municipal Bonds Municipal bonds are issued by state, county, or city governments. They are generally exempt from federal tax, and are generally state tax-free for residents of the state in which they are issued. (This is not true for all states. Please see the discussion on states below for more information.) It should also be noted that though interest is tax-exempt, any capital gains are taxed at the appropriate levels.
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N
Non-Callable Bond If a bond can be called (redeemed) prior to maturity, the bond is said to be callable. If a bond can not be called prior to maturity, it is said to be non-callable.
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O
Original-Issue Discount (OID) Some bonds are issued at a discount to the Par value. In the case of a municipal bond, the accretion of the value from the original issue discount price to Par is considered tax-free income. Throughout the life of the bond, the cost basis of the bond will increase based on a formula known as constant yield to maturity (CYM). This means that if you buy a bond with an OID priced at 96, and sell it 5 years later at 98, you will not incur a capital gain as long as the accreted value of the bond based on CYM is 98 or greater
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P
Par Value Par value, also known as Face value, is the value of the bond at maturity. Almost all bonds have a $1,000 par value. Bond prices are almost always quoted as a percentage of par, so you will hear prices such as 99 or 101.5. These refer to the percentage of $1,000, and mean $990 and $1,015 per bond respectively.
Pay Frequency The pay frequency refers to the frequency that the bond pays interest. The most common pay frequency is semi-annually (twice per year), but bonds can also pay interest monthly, quarterly, annually, or at maturity.
Physical Bonds are issued in several different delivery forms. The most popular forms of delivery are Book Entry and Registered. There are also some older bonds in circulation that were issued in bearer form. In the case of book entry bonds, there is no physical bond certificate created. Bearer bonds and registered bonds are both issued with physical bond certificates that can be delivered to the bondholder, so they are said to be physical bonds.
Premium Bond Bonds mature at a par value, which is almost always $1,000. A premium bond is any bond that is currently trading at a price above par. A discount bond is a bond trading at a price lower than par.
Pre-Refunded Sometimes an issuer desires to pay off a bond in order to remove the debt from its books. However, the bond may not be immediately callable, and the issuer can not redeem the bonds at its discretion. In this case the issuer may deposit sufficient funds with a trustee into an escrow account so that the trustee can use the funds to pay all interest and principal on a specified call date in the future. In this case, the bond is said to be pre-refunded, and the pre-refunded date should be viewed as the date that the bond will be redeemed.
Price Almost all bonds have a $1,000 par value. Bond prices are almost always quoted as a percentage of par, so you will hear prices such as 99 or 101.5. These refer to the percentage of $1,000, and mean $990 and $1,015 per bond respectively. The price of a bond moves higher and lower throughout the life of a bond based on movements in general market rates, the maturity of the bond, changes to credit ratings, and other factors.
Principal The principal is the cost per bond multiplied by the number of bonds in a transaction. Note that the price of a bond is quoted as a percentage of $1,000 (Par). So if you purchase 10 bonds that are priced at 99.0, the price is 10 x (99% of 1,000) = $9,900. (To convert a bond price to principal, simply move the decimal one place to the right.)
Purpose Most municipal bonds are issued for a specific purpose. Some common purposes of issuing bonds are to pay for housing, education, healthcare, and transportation.
Put Bonds Put bonds are issued with an option that entitles bondholders to force the issuer to buy back the bonds on specific dates (put the bonds back to the issuer).
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Q
Quantity The quantity refers to the number of bonds being offered. Note that bonds typically have a $1,000 par value, so 50 bonds means $50,000 of par value. The current actual price may be more or less than par. In some cases the bond offering may be for a minimum number of bonds as well. This means that you can not buy fewer bonds than the minimum designated in the offering.
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R
Ratings (See Credit Rating)
Redemption When the principal of the bond is paid off, the bond is said to be redeemed. Bonds can be redeemed at maturity, or on a call date or put date.
Registered Bonds Registered bonds are bonds that are issued as a physical certificate, and the owner is registered with the bond trustee. If the bond is lost, the registered owner can get the certificate replaced by paying a small fee.
Revenue Bonds The interest and principal payments for a municipal bond are typically either guaranteed by the issuer or by the revenue from a specific project. If they are guaranteed by a specific project, the bondholder is relying on revenue from the project to pay principal and interest, and the bonds are known as revenue bonds. If the issuer guarantees the repayment of principal and interest, the bonds are known as a general obligation (often referred to as G.O.) of the issuer.
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S
Secondary Market Bonds which have been issued and then trade subsequent to the original issue are said to be trading in the secondary market.
Settlement Date When a bond trade takes place, the buyer and seller agree on a date when the buyer will pay for the bonds and the seller will deliver the bonds. For municipal bonds and corporate bonds, the settlement date is typically 3 business days after the trade date. For Treasury and zero coupon bonds the settlement date is typically the next business day after the trade.
Sinking Fund Some municipal or corporate bonds are issued with a sinking fund provision, which could be optional or mandatory. In the case of a sinking fund the issuer pays off the principal of the bond over time, for example 10% of the principal in each of the last 10 years of the life of the bond. If the sinking fund is mandatory the issuer must make these payments each year.
Spread The spread of a bond refers to the difference between the yield of the bond and the yield of a Treasury bond with a comparable maturity. Since the Treasury yield is considered risk-free, the spread reflects the risk premium of the bond. The spread is expressed in basis points (1/100th of 1 percent.).
Standard & Poors One of the major credit rating companies.
State This is the state in which the bond was issued. This is important for tax purposes since in some states interest earned from municipal bonds is exempt from state tax for investors who live in the state where the bond was issued. State will only appear on queries for municipal bonds. Click here for more information about states.
STRIPS A Zero Coupon Treasury Security which stands for Separate Trading of Registered Interest and Principal of Securities (Refer to Zero Coupon Bonds).
Subject to Extraordinary Redemption Some municipal bonds are issued with an extraordinary redemption provision which gives the issuer the right to call the bonds under certain circumstances. The circumstances could range from natural disasters to cancelled projects to almost anything else.
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T
Tax Status Municipal bonds are generally free of federal tax, and are generally not subject to alternative minimum tax (AMT). However, some municipal bonds are subject to federal income tax (tax status = "taxable"), and some are subject to AMT (tax status = "Subject to Alt min tax").
Taxable See tax status.
Taxable Equivalent Yield The taxable equivalent yield (TEY) is a calculated value that calculates the pre-tax yield an investor would need to get so that after paying tax, the after tax yield would be equal to the tax-free yield on a municipal bond.
Treasury Bills The U.S. government issues Treasury Bills, Treasury notes, and Treasury bonds. Treasury bills are issued in 3 month, 6 month and 1 year maturities, and they are sold at a discount to par. The bonds do not pay period interest, and the return an investor receives is based on the amount that the purchase price is discounted from par.
Treasury Bonds and Notes Treasury notes and bonds are issued by the U.S. government in maturities of 2 years, 3 years, 5 years, 10 years and 30 years. They all pay interest semi-annually. The issues that mature in 10 years or less are called notes, and the 30 year issue is called a bond. The most recently issued 30 year bond is called "the long bond".
Type (Rev or G.O) The interest and principal payments for a municipal bond are typically either guaranteed by the issuer or by the revenue from a specific project. If they are guaranteed by a specific project, the bondholder is relying on revenue from the project to pay principal and interest, and the bonds are known as revenue bonds. If the issuer guarantees the repayment of principal and interest, the bonds are known as a general obligation (often referred to as G.O.) of the issuer.
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Y
Yield See Yield to maturity, yield to call and current yield.
Yield to Call Some bonds can be called (redeemed) by the issuer on specified dates throughout the life of the bond. Based on the current price of a bond, the yield to all calls should be calculated, and the investor should note the lowest yield to call and the yield to maturity. This will give the investor their worst case scenario.
Yield to Maturity Yield to maturity is the calculated return on investment that an investor will get if they hold the bond to maturity. It takes into account the present value of all future cash flows, as well as any premium or discount to par that the investor pays.
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Z
Zero Coupon Bonds Zero Coupon Bonds are bonds that do not pay interest during the life of the bond. They are bought at a discount to the maturity value. For example, you might pay $700 today to get back $1,000 in 5 years. The difference between what you pay now and what you receive in the future is your return. Zero Coupon Bonds are similar in concept to savings bonds.
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