Flashcards in Bond Deck (35):
Interest earned on a security but not yet paid to the investor.
One one-hundredth (.01) of a percentage point. For example, eight percent is equal to 800 basis points.
A debt security, similar to an IOU. When you buy a bond, you are lending money to the issuer. In return for the loan, the issuer promises to pay you a specified rate of interest during the life of the bond and to repay the principal when it "matures," or comes due.
The investor sells one bond and uses the proceeds to buy another bond, often at the same price.
Callable Bonds (or Redeemable Bonds)
Bonds that can be redeemed or paid off by the issuer prior to the bond's maturity date.
Committee on Union Security Identification Procedures (CUSIP)
The Committee on Uniform Security Identification Procedures (CUSIP) number identifies most securities, including U.S. government and municipal bonds. CUSIP numbers are unique nine-character alphanumeric identifiers assigned to each series of securities.
A corporate bond that can be exchanged for a specific number of shares of the company's stock, usually common stock. In most cases, the holder of the convertible bond determines whether and when a conversion occurs.
A feature of a bond that denotes the amount of interest due and the date that the payment will be made.
The dollar amount of interest paid to an investor. The amount is calculated by multiplying the interest of the bond by its face value.
The interest rate on a bond. It is expressed as a semi-annual rate.
Credit Rating Agencies
Provide their opinion on the creditworthiness of a corporate or government borrower by issuing a grade, or credit rating, on bonds issued by that borrower.
The ratio of the interest rate payable on a bond to the actual market price of the bond, stated as a percentage. For example, a bond with a current market price of $1,000 that pays $80 per year would have a current yield of 8%.
An unsecured bond backed solely by the general credit of a company.
A failure by an issuer to pay principal or interest when due, or to fulfill other obligations, such as reporting requirements.
A bond sold before it matures might not sell at full par value. If it sells below par, it is selling at discount.
Short-term obligations issued at a discount from face value. Discount notes have no periodic interest payments; the investor receives the note's face value at maturity. For example, a one-year, $1,000 face value discount note purchased at issue at a price of $950, would yield $50 or 5.26% ($50/$950).
A long-term bond with a set interest rate.
Floating-rate Bond (or Variable or Adjustable rate Bond)
A bond whose interest rate is adjusted periodically according to a predetermined formula; it is usually linked to an interest rate index such as LIBOR.
The lower limit for the interest rate on a floating-rate bond.
The value of an asset at a specified date in the future.
General Obligation Bond
A municipal bond not secured by any assets; instead it is backed by the issuer's power to tax residents to pay bondholders.
High-yield Bond (or Junk Bond)
Bonds that are believed to have a higher risk of default and receive low ratings by credit rating agencies, namely bonds rated Ba or below (by Moody's) or BB or below (by S&P and Fitch). These bonds typically are issued at a higher yield (for example, a higher interest rate) than more creditworthy bonds, reflecting the perceived higher risk to investors.
The price paid for borrowing money. It is expressed as a percentage rate over a period of time.
Interest rates may be fixed, meaning the rate is set and will not change, or may be variable or "floating," meaning the rate may move higher or lower over time.
Investment-grade Bond (or High-grade Bond)
Bonds that are believed to have a lower risk of default and receive higher ratings by the credit rating agencies, namely bonds rated Baa (by Moody's) or BBB (by S&P and Fitch) or above. These bonds tend to be issued at lower yields than less creditworthy bonds.
The entity obligated to pay principal and interest on a bond.
Liquidity (or Marketability)
A measure of the relative ease and speed with which a security can be bought or sold in a secondary market.
London Interbank Offered Rate (LIBOR)
The interest rates banks charge each other for short-term loans. LIBOR is frequently used as the base for resetting rates on floating-rate securities.
Offering Document (or Official Statement or Prospectus)
The disclosure document prepared by a bond issuer that gives detailed financial information about the issuer and the bond offering.
Municipal securities issuers must prepare an “Official Statement” before presenting the primary offering. These municipal disclosure documents provide information for investors, including the terms of the bond and financial information on the issuer. They also typically contain information regarding: the purpose of the bond; whether the issuer can redeem the bond prior to maturity; and when and how principal and interest on the bond will be repaid.
The amount by which the price of a bond exceeds its principal (par) amount.
The unscheduled partial or complete payment of the principal amount outstanding on a loan, such as a mortgage, before it is due.
The risk that principal repayment will occur earlier than scheduled, forcing the investor to reinvest at lower prevailing rates.
A municipal bond not backed by the government's taxing power but by revenues from a specific project or source, such as highway tolls or lease fees.
A bond that has a higher priority than another bond's claim to the same class of assets in case of a default or bankruptcy. Settlement Date -- The agreed date for the delivery of bonds and payment of funds.
An institution, usually a bank, designated by the issuer as the custodian of funds and official representative of bondholders.