BK Glossary
Below is a list of around 100 common and uncommon words and phrases related to fixed-income investments. To suggest a new entry, contact us at info@bondknowledge.com.
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A
ACCRETED VALUE: Accreted value refers to the increase in value of a Zero Coupon bond as it reaches maturity.
ACCRUED INTEREST: Interest which has been earned on a security but not yet paid to the holder of the security. (Formula)
AGENCY BONDS: Bonds issued by Agencies of the United States Government. They generally have AAA credit ratings, but are not backed by the full faith and credit of the US Government.
ARBITRAGE: A simultaneous buy and sell of the same commodity or investment in two different markets at two different prices, which results in a riskless profit. True arbitrage opportunities are extremely rare.
ARM: An Adjustable Rate Mortgage. A mortgage that has an interest rate which is periodically reset according to a predetermined index or other interest rate.
ASK (PRICE): The price at which a seller will sell a specific security.
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B
BASIS POINT: One one-hundredth of one percent (.0001). The difference, for instance of a bond yielding 6.25% and 6.30% is 5 Basis Points.
BEARER BOND (OR SECURITY): A bond that does not have the identification of the bondholder. The owner physically has possession of these Bonds and collects interest by detaching coupons attached to the certificate and sending them to the issuer.
BID (price): The price where a buyer will purchase a specific security.
BOOK-ENTRY: A method for "delivering" bonds that does not involved the physical transfer of a certificate. Instead ownership is recorded electronically by a broker/dealer.
BOND SWAP: Exchanging a bond with another of similar value. These should not be confused with interest rate swaps (or just plain swaps).
BRADY BONDS: These Bonds are issued by Emerging nations, particularly in Latin America. These nations restructured their debt according to a plan worked out by then Secretary of the US Treasury Nicholas Brady. Both the principal of the Bonds and 12 to 18 months interest is secured by US Treasury securitites.
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C
CALL PREMIUM: The amount paid above par by an issuer for exercising a call privelege.
CALL PRIVILEGE: A privilege kept by the bond issuer to redeem the bond at an earlier date than the stated maturity should certain specific conditions occur
CALLABLE BOND: A bond which can be redeemed early by the issuer. Often certain conditions must exist for the security to be called. In addition, the price at which a bond is called may be above par.
CAPITAL GAIN: When a security (or any investment)is sold for a profit, the Capital Gain is the difference between the sales price and the acquisition price. A Capital Loss is incurred if the sale price is less than the acquisition price.
CERTIFICATES OF DEPOSIT (CDs): Negotiable instruments that are issued by a bank and payable to the bearer. CDs have a fixed amount of interest and a fixed maturity.
CERTIFICATES OF PARTICIPATION: Municipal bonds used to finance capital improvement projects or equipment.
COMPETITIVE BID: A securities offering process (often via auction) where rival securities firms submit competitive bids to the issuer of the securities.
CONVERSION PRICE: The price at which the issuer of a Convertible Bond will sell stock to the Bondholder.
CONVERTIBLE BOND: A Bond which is convertible into common stock (usually the common stock of the issuing entity).
CORPORATE BONDS: Debt obligations issued by private or public corporations. Funds are used for a variety of purposes including facility expansion, new equipment purchasing and general business expenses.
COUPON: The periodic interest payment made to bondholders during the term of the bond.
CREDIT RATINGS: Credit ratings are Rating Agencies current opinion of an issuers' financial capacity to meet its financial obligations. Moody and Standard and Poor's classifications can be found on the BondKnowledge.com Rating's Card.
CUSIP: The Committee on Uniform Security Identification Process' method for identifying individual securities. Each security should have an individual nine digit CUSIP number.
COUPON: The periodic interest payment made to bond holders during the bonds' term. Payments are most often made semiannually or annually. United States Treasury Bonds, for instance, pay half the stated coupon amount twice a year.
CURRENT YIELD: One of the least important yield measures used to evaluate any bond. Defined as the coupon divided by the price. Interest on interest is not taken into account, nor is gain or loss realized from the security at maturity. (Formula)
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D
DEBENTURE: A general obligation of the issuer, which is not secured by any specific asset. These Bonds are generally considered to higher risk than specifically collateralized Bonds.
DEFAULT: Failure by an issuer to pay interest or principal when due. Default can be deemed to occur for other issues not related to payments, such as bankruptcy filing.
DISCOUNT: The amount by which the purchase price of a security is less than the par, or face, amount.
DISCOUNT BOND: A bond that has a value less than its Face amount.
DISCOUNT NOTE: Generally short-term debt security discounted from face value. Instead of receiving interest payments the obligation is paid at face value at maturity.
DISCOUNT RATE: The interest rate charged by Federal Reserve Banks on money loaned to its member banks. Market forces do not determine this rate. It is set by the Federal Reserve.
DIVERSIFICATION: Inclusion of different assets and/or asset classes in a portfolio in an attempt to reduce risk and increase performance.
DURATION (Macaulays' Duration): The weighted average number of years until the securities cash flows occur. Duration is a measure of the volatility risk of the Bond. Higher duration bonds are more sensitive to changes in interest rates. (Formula)
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E
EXCHANGE: A place where goods or services are exchanged; more specifically an organized market or center where securites and commodities are traded.
EXPIRATION DATE: The last date on which an option may be exercised.
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F
FEDERAL FUNDS RATE ("FED FUNDS"): Overnight loans between commercial banks. Bank reserves loaned by banks with excess reserves to those with insufficient reserves. This rate is closely controlled by the Federal Reserve and often targetted in the setting of its monetary policy.
FIXED RATE: Fixed Rate Bonds have an interest rate that is set for the life of the Bond.
FLOATING RATE: Floating Rate Bonds have coupons that change during the life of the Bond. The interest rate will change due to changes in another predetermined benchmark.
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G
GENERAL OBLIGATION BONDS (GOs): Municipal bonds which are backed by the full faith and credit of that municipality.
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H
HEDGE: A Hedge is an investment in one market or security in an attempt to offset some of the investment risk from holding another security.
HIGH-YIELD BOND: see junk bond.
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I
INDENTURE: The legal document that defines the rights and the obligations of the issuer and the bondholder with respect to a specific Bond issue. Indenture provisions include put and call features, sinking funds and various limitations-such as a limitation on the sale of additional debt- on the activities of the issuer.
INFLATION: The rate at which the general level of goods and services is rising.
INSURED BONDS: A bond with a credit rating above or higher than that of its issuer because it is backed by a third party insurer.
INTEREST: The "price" of money. The amount paid or to be paid for a loan or on a security.
INTEREST RATE SWAPS: Contracts which require an exchange of cash flows based on a notional principal amount. Generally a fixed interest rate payment is exchanged against a floating rate payment.
INVESTMENT GRADE: A bond deemed to have a low likelihood of issuer default. These bonds generally have lower yields due to their creditworthiness. (see Credit Ratings)
ISSUER: The federal agency, municipality, corporation, or other entity that is obligated to repay a fixed-income security.
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J
JUNK BOND: A higher yielding bond generally considered a speculative investment. Bonds with ratings Ba or BB and below. (see Credit Ratings)
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K
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L
LADDERED PORTFOLIO: Bond holdings with variable maturity dates.
LEVERAGE: The use of non-equity capital (usually borrowed money) to increase the return on an investment.
LIBOR: The London InterBank Offer Rate. The rate at which banks in London will lend currencies in the interbank market.
LIQUIDITY: The measure of the relative ease or difficulty by which a security can be bought or sold. Securities that are highly LIQUID can be bought or sold very easily at a readily available price.
LONG BOND: A synonym for the United States Treasury's 30 year bond.
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M
MARKET ORDER: An order to buy or sell that is to be immediately executed at the best available market price.
MARKETABILITY: see liquidity
MATURITY: The date on which the specific obligation terminates. On this date the security is redeemed through the issuer paying the bond holder the face amount (see Principal).
MONETARY POLICY: Policies directed by the Board of Governors of the Federal Reserve. These policies target and set short term interest rates and the money supply.
MUNICIPAL BONDS: Bonds issued by states, counties, or cities. See the BondKnowledge.com discussion on tax issues.
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N
NOMINAL RATE: An Interest rate that has not been adjusted to reflect inflation.
NON-CALLABLE BOND (also STRAIGHT BOND): A bond that does not have an option to be redeemed by issuer or holder prior to maturity.
NON-COMPETITIVE BID: Generally for a Treasury Bond Auction. A Bid for a specific number of Bonds at the average price of the competitive bids. The Nom-Competitive bid price is not actually known until the auction is completed.
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O
ODD LOT: An amount of a security that is less than a normal trading amount of that security. Less than 100 shares of stock is considered an Odd Lot.
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P
PAR VALUE: The Face Value of a Bond (usually $1,000).
PREMIUM: The amount by which the purchase price of a security exceeds the Par, or Face, amount.
PREMIUM BOND: A bond which sells above Par Value.
PRINCIPAL: The face amount of a bond, which is due at Maturity.
PUT PRIVILEGE: A privilege of the bond holder allowing him or her to force early redemption of the bond should specific conditions occur.
PUTTABLE BONDS: Bonds that can be redeemed prior to maturity at the initiative of the Bondholder. The Bond's Indenture enumerates the terms and dates by which the bond can be redeemed. (See Callable Bonds)
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Q
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R
RATINGS: see credit ratings
REGISTERED BOND: A bond whose issuer records the identity of the bondholder.
REINVESTMENT RISK: The risk that interest payments or principal payment will have to be invested at a lower rate in the future.
REVENUE BOND. Municipal bond that has repayment tied to a specific revenue source. Contrast with general obligation bonds.
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S
SETTLEMENT DATE: The date on which securities are actually deliverd to the buyer and payment is made.
SINKING FUND: Money set aside by an issuer targetted for the redemption of specific debt. Sinking Funds generally have the effect of lowering the risk of the issue.
STRIPS: An acronym meaning Separate Trading of Registered Interest and Principal of Securities. A program of the US Treasury whereby Zero Coupon Bonds are created by separating (Stripping) interest payments and principal payments. Each cash flow is then sold as a separate Zero Coupon security.
SWAP: see interest rate swaps
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T
TRADE DATE: The date on which a security trade is executed. Settlement day is generally a few days later (often 3 business days).
TREASURY BILLS: Securities issued by the US Treasury maturing in less than a year. T-BILLs are issued as Discount Secuirities in denominations of $1,000, starting at $10,000,
TREASURY NOTES: US Government Bonds having terms between one and 10 years. Interest is paid semiannually, and T-NOTEs can be purchased in increments of $1,000, starting at $1,000.
TREASURY BONDS: US Government Bonds having maturities longer than ten years. Interest is paid semiannually, and T-BONDs can be purchased in increments of $1,000, starting at $1,000.
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U
UNIT INVESTMENT TRUST: A fixed portfolio of securities sold in fractional, undivided interests.
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X
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Y
YIELD CURVE: The relationship between yields and maturities for a given risk class at a specific point in time.. The yield curve most often displayed is a line drawn between the various maturities of US Treasury securities. (see chart on our home page)
YIELD TO MATURITY (YTM): The discount rate which equates the present value of all net cash flows to the cost of the investment. More simply, the YTM of a bond is the total of all coupon payments to maturity, interest on interest and the gain or loss realized from the security at maturity. (Formula)
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Z
ZERO COUPON BONDS: A bond with no periodic interest payments. Bond is sold at a Discount to Par, and the difference represents the interest earned on the bond.
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