Bond Flashcards
(35 cards)
Accrued Interest
Interest earned on a security but not yet paid to the investor.
Basis Point
One one-hundredth (.01) of a percentage point. For example, eight percent is equal to 800 basis points.
Bond
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.
Bond Swap
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.
Convertible Bond
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.
Coupon
A feature of a bond that denotes the amount of interest due and the date that the payment will be made.
Coupon Payment
The dollar amount of interest paid to an investor. The amount is calculated by multiplying the interest of the bond by its face value.
Coupon Rate
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.
Current Yield
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%.
Debentures
An unsecured bond backed solely by the general credit of a company.
Default
A failure by an issuer to pay principal or interest when due, or to fulfill other obligations, such as reporting requirements.
Discount
A bond sold before it matures might not sell at full par value. If it sells below par, it is selling at discount.
Discount Note
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).
Fixed-rate Bond
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.
Floor
The lower limit for the interest rate on a floating-rate bond.
Future Value
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.
Interest
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.
