Bond Glossary

Accreted Value
The value of a bond on any given day is its accreted value or accumulated value to date. A bond’s accreted value may be higher or lower than the bond’s market value.

Accrued Interest
Amount of interest earned since the last interest payment date. During a bond trade, the buyer pays the seller accrued interest.

Agency Bonds
Bonds issued by United States governmental agencies. Usually safe investments in terms of default risk.

Alternative Minimum Tax (AMT)
IRS requires taxpayers to calculate tax liability using the AMT method, in addition to calculation of income taxes. Interest earned on bonds is subject to AMT.

Bank Qualified
Investment Grade Bonds

Basis Point
A basis point is 1/100th of one percent.

Bearer Bonds
Unregistered bonds which are payable to the bearer. No new bearer bonds are issued, but many older bearer bonds are still in circulation.

Bond
Debt instruments in which the issuer promises to pay the holder of the bond principal and interest according to the terms and conditions of the bond.

Bond Ladder
Portfolio containing bonds with staggered maturities. For example, instead of investing $150,000 in a 5 year bond, an investor may choose to invest in 6 blocks of $25,000 maturing in 2, 4, 6, 8, 10, 12 years. This procedure permits the investor to diversify in terms of reinvestment risk and default risk.

Book Entry
Bonds are issued in book entry form, meaning that no physical bond certificate is provided. The bondowner receives a trade confirmation issued by the broker/dealer, and monthly statements.

Call Date
The issuer of a bond may have the option to call or redeem the bond on certain specific dates and prices before maturity. The list of dates on which a specified bond can be called, is shown in a call schedule.

Call Protection
Relates to the amount of time from the bond’s current date until it can be called. For example, if a bond’s first call is 2 years from now, the bondholder will have 2 years of call protection.

Call Risk
The risk associated with the bond being called when the investor doesn’t want it to be called. Bonds are usually called when interest rates decline, so bondholders get their investment back and have to reinvest it at the lower rates. However, call risk can be terminated by buying non-callable bonds.

Call Schedule
A list of dates that a bond can be called.  Call schedule includes a corresponding price for each call date.

Callable
A bond that can be called or redeemed before its maturity. A bond that can’t be called before its maturity is a non-callable bond.

Certificates of Participation
Municipal bonds used to finance capital improvement projects or equipment at a state or local level.

Corporate Bond
Bonds issued to corporations. Corporate bonds are fully taxable with various maturities ranging from less than one year to about 30 years. Generally, the bond’s interest is paid twice a year. Investing in corporate bonds issued by financially strong companies can be safe.

Coupon
A coupon is the interest rate for a bond. Majority of bonds have fixed coupons rates that are fixed for the life of the bond. For example, a bond with a 10.0% coupon will pay $50 twice per year, for total interest of $100 which is 10.0% of the face value of $1,000 bonds.

Credit Ratings
Security rating agencies assess the credit worthiness of bond issuers. These credit rating agencies assign credit ratings to bond issuers based on the financial strength of bond issuers. The main credit agencies are Moody and Standard & Poor’s. Investors can review the ratings of bond issues and determine whether to invest in the bonds or not.

Current Yield
It is the investor’s rate of return on bond’s that, doesn’t take into account the value of the premium or discount of the bond’s purchase price. Current yield is calculated by dividing the coupon rate by the price.  However, the current yield is not the best indicator for calculating return on investment, yield to maturity and yield to call can sometimes be better tools.

CUSIP
A unique identifier consigned to a bond at the time of issuance.

Dated Date
The date of the bond’s issuance and the start of its interest accrual.

Default
A bond that no longer pay’s interest and thus goes into default, based on terms of the bond agreement.

Delivery
The various methods bonds are issued. The most common type of bond delivery is Book Entry and Registered.

Discount Bond
Bonds that mature at par value, which is usually $1,000. Meanwhile, a premium bond is a bond currently trading at a price above par. A discount bond always trades at a price lower than par.

Escrowed to Maturity (ETM)
If a bond issuer wishes to pay off a bond to remove the debt from its books and the bond is not callable; the issuer may have no choice but to deposit the necessary funds with a trustee in an escrow account to pay off all the issued bonds’ interest and principal as they come due.

First Coupon Date
The date on which the first interest payment is made for a bond. Generally, bonds pay interest two times per year on coupon payment dates.

General Obligation Bonds
Municipal bond’s interest and principal payments can either be guaranteed by the issuer or by the revenue from a certain project. A bond that guarantees repayment of principal and interest is known as a general obligation.
However, bonds guaranteed by certain municipal project in which the bondholder gets revenue from a specific project to pay the principal and interest are known as revenue bonds.

High Yield Bonds
Generally, corporate bonds rated below investment grade as defined by the major credit rating services. High yield bonds pay much higher interest than investment grade bonds due to higher risk of default associated with these “junk” bonds.

Industry Group
Companies grouped by the industry to which they belong.

Insured Bonds
Municipal bonds insured as to principal and interest by big bond insurance firms. Any bond insured by one of the large insurers carries a top credit rating from one of the major rating services.

Interest
Interest is the revenue earned by the bondholder at specified periods throughout the life of the bond. The interest rate is also known as the coupon rate. Majority of bonds pay interest twice per year.

Interest Payment Dates
The dates on which interest is paid to the bondholder.  Generally, interest payment dates are at the same time of the month and day.

Investment Grade
Bonds rated at or above “Baa” by Moody’s, or “BBB” by Standard & Poor’s.  Bonds that are rated lower than these ratings are high yield (junk) bonds.

Issuer
Any entity that issues a bond. Bonds may be issued by corporations, local, state, or federal governments

Junk Bonds
Bonds rated by the two major credit rating services below “Baa” by Moody, or “BBB” by Standard & Poor’s are said to be high yield (junk) bonds.

Listed
Majority of corporate bonds trade over-the-counter, thus are not listed. However, there are a small amount of bonds that trade on the NYSE, and are said to be “listed” on the exchange.

Long Bond
U.S. government issues Treasury notes and bonds with varying maturities, including 2, 3, 5, 10, and 30 years. The 30 year bond would be an example of a long bond.

Maturity Date
The date on which the bond will be repaid.

Moody’s Investors Service
A major bond credit rating service.

Municipal Bonds
Municipal bonds are issued by state or local governments. Generally exempt from federal tax, and usually tax-free for residents of that state in which the bonds are issued.

Non-Callable Bond
A bond that can be redeemed before maturity, this bond is said to be callable. A bond that can’t be called before maturity, it is called non-callable.

Original-Issue Discount (OID)
Bonds issued at a discount to the par value.

Par Value
Face value or par value, the value of the bond at maturity. Most bonds have a $1,000 par value. Bond prices are almost entirely quoted as a percentage of par.

Pay Frequency
Refers to the frequency that the interest is paid on the bond. Generally, the pay frequency is semi-annual (twice per year).

Physical
There are various ways bonds are issued, as well as delivery forms. The major forms of delivery are Book Entry and Registered.

Premium Bond
Most bonds mature at par value of $1,000. A premium bond is currently trading at a price above par.

Pre-Refunded
In many cases an issuer wants to pay off a bond to remove debt from its books. However, a bond may not be callable right away or an issuer can’t redeem the bonds at its discretion. Herein, the issuer may deposit funds into an escrow account with a trustee that can be used to pay all interest and principal on certain call dates in the future.

Price
Bond prices are mostly quoted as a percentage of par, usually $1,000.  Bond prices vary depending on the movements of the market rates, the maturity of the bond, changes to credit ratings, and other factors.

Principal
It is the cost per bond multiplied by the number of bonds in a specific transaction. The bond price is quoted as a percentage of $1,000, par.

Purpose
Majority municipal bonds are issued for certain purpose.  Municipals issue bonds to pay for housing, education, healthcare, transportation, etc.

Put Bonds
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).

Quantity
The number of bonds that are offered. Bonds mostly have a $1,000 par value.

Redemption
The time when the bond’s principal is paid off, it is said to be redeemed. Bonds are redeemed at maturity, on a call date, or put date.

Registered
Bonds issued as physical certificates and the owners are registered with the bond trustee. If the bond is misplaced, the registered owner can receive a replacement certificate by paying a small fee.

Revenue
Revenue includes interest and principal payments for a municipal bond which are guaranteed by the issuer or stream of revenue from a certain project.

Secondary Market
Issued bonds that trade subsequent to the original issue are known to be trading in the secondary market.

Settlement Date
During the trade of a bond, the buyer and seller consent to a specific date that the seller will deliver the bonds and the buyer will pay for the bonds. For corporate bonds or municipal bonds, the settlement date is generally 3 business days after the trade date. For zero coupon and Treasury bonds the settlement date is generally the next business day after the trade.

Sinking Fund
Sinking fund provision is an optional or mandatory provision of corporate or municipal bonds. It is a pool of money set aside by the bond issuer to help repay a bond issue.

Spread
The difference between the bond’s yield and the yield of a Treasury bond with an equivalent maturity. The spread is reflected in basis points (1/100th of 1 percent.).

Standard & Poor’s
A major credit rating companies.

State
The state in which the bond is issued.  The term “slate” is associated with municipal issues, regards the tax status of the issued bond.

STRIPS
Separate Trading of Registered Interest and Principal of Securities, also known as Zero Coupon Bonds.

Subject to Extraordinary Redemption
Certain municipal bonds are issued with a special redemption provision that gives the issuer rights to call the bonds under specific circumstances. The specific circumstances range from natural disasters, etc.

Tax Status
The tax state of bonds, taxable or tax-free

Taxable Equivalent Yield
The taxable equivalent yield (TEY) is a value that is the result of a calculation of the pre-tax yield an investor would need to get after paying tax. The after tax yield would then be equal to the tax-free yield on a municipal bond.

Treasury Inflation-Protected Securities (TIPS)
Inflation-indexed bonds issued by the U.S. government. The principal of these bonds is adjusted to the Consumer Price Index, which is used to measure of inflation. Coupon rates of TIPS are constant, but generate diverse amounts of interest when multiplied by the inflation-adjusted principal, hence protecting the TIPS holders against inflation. TIPS are offered in 5, 7, 10, and 20-year maturities.

Treasury Bills (T-Bills)
American government issued Treasury Bills (T-bills) mature in one year or less. Like zero-coupon bonds, are sold at a discount to par. The bonds pay at the time of maturation the face value, do not pay interest.

Treasury Bonds and Notes
Bonds issued by the U.S. government with maturities ranging from 2, 3, 5, 10, and 30 years. Interest is paid semi-annually.

Yield
Also see yield to maturity, yield to call, and current yield.

Yield to Call
Certain bonds can be called or redeemed by an issuer on specific dates throughout the tenure of the bond. The yield to call is the yield of a bond or note if you buy and hold the bond until the call date.

Yield to Maturity
Calculated return on bond investment for an investor at the time of the bond’s maturity. Takes into account, the premium or discount to par, present value of all future cash flows, as well as what the investor pays.

Zero Coupon Bonds
Bonds that do not pay interest during the tenure of the bond.  Zero-coupon bonds are bought at a discount.