Bond Vocabulary

Question 1

Default

Answer 1

Failure to pay principal or interest when due. Defaults can also occur for failure to meet non-payment obligations, such as reporting requirements, or when a material problem occurs for the issuer, such as bankruptcy.

Question 2

Fixed-Income Investments

Answer 2

Pay interest on a set schedule. Fixed-Income Investments include corporate, municipal, agency, and US Treasury bonds.

Question 3

High-Yield Bonds

Answer 3

To attract investors, the issuers of these bonds pay a higher rate of interest than investment grade bonds with the same maturity. They are rated below investment grade bonds and are also called “Junk Bonds.”

Question 4

Issuer

Answer 4

An entity which issues and is obligated to pay principal and interest on a debt security.

Question 5

Interest rate

Answer 5

Compensation paid or to be paid for the use of money. Interest is generally expressed as a percentage rate. (Also referred to as coupon rate)

Question 6

Investment Grade Bonds

Answer 6

Bonds that are sold by a very reliable issuer, the government, a large corporation, or a government agency that is most likely to repay the loan and the interest as promised.

Question 7

IOU

Answer 7

Means exactly as it sounds, “I Owe You.” It is an acknowledgement of a debt.

Question 8

Maturity

Answer 8

The date when the principal amount of a security is payable

Question 9

Par value

Answer 9

The principal amount of a bond or note due at maturity.( also referred to as face value)

Question 10

Prepayment

Answer 10

The unscheduled partial or complete payment of the principal amount outstanding on a mortgage or other debt before it is due.

Question 11

Principal

Answer 11

The face amount of a bond, payable at maturity (also referred to as face or par value)

Question 12

Trade date

Answer 12

The date when the purchase or sale of a bond is transacted.

Question 13

Corporate bonds

Answer 13

Bonds are major sources of corporate borrowing. Debentures, the most common type of corporate bond, are backed by the general credit of the corporation, while asset-backed bonds are backed by specific corporate assets, such as property or equipment.

Question 14

Municipal bonds

Answer 14

Millions of bonds have been issued by state and local governments. General obligation bonds are backed by the full faith and credit of the issuer, and revenue bonds by the income generated by the particular project being financed.

Question 15

Agency bonds

Answer 15

Some government sponsored but privately owned corporations (like Fannie Mae and Freddie Mac), and certain federal government agencies (like Ginnie Mae and Tennessee Valley Authority) issue bonds to raise funds either to make loan money available or to pay off new projects.

Question 16

U.S. Treasury bonds

Answer 16

US Treasury bonds are backed by the full faith and credit of the United State government. When the government spends more than it collects in taxes and other revenues, it issues Treasury notes, bills, and bonds to borrow the money to pay the difference. Treasury bonds have the longest term or period of time before the loan must be repaid (10 years or more). Treasury bills have the shortest (less than two years).