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C
Callable Bonds
Bonds that are redeemed prior to the stated maturity
date. These bonds are redeemed (called) at or above par.
Call Feature
The part of the agreement of a bond describing the
schedule and the price of redemption of a bond before maturity.
Cap
The highest possible interest rate that can be paid on a
floating-rate security.
CMO (Collateralized Mortgage Obligation)
Mortgage-backed bonds that
are backed by a pool of mortgage pass-through securities or mortgage loans.
These are separated into different maturity classes, called tranches.
Collar
The lower and upper limits on the interest rate of a
floating-rate security. Also used to mean the index level at which a circuit
breaker is triggered.
Coupon
The stated interest rate on a debt security the issuer
promises to pay to the holder.
Current Yield
The ratio of interest to the actual market price of
the bond. For example, if a bond is trading at par, $1,000, and is paying $ 60
per year, it has a current yield of 6%.
CUSIP
A number identifying all stocks and registered bonds.
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D
Debenture
A debt obligation, which is unsecured, and is issued
against the general credit of the entity.
Discounted:
A bond that is selling below its par value.
Discount Rate
The rate that the Federal Reserve charges it member
banks on loans.
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E
Extension Risk
The risk that rising interest rates will slow the
anticipated rate at which mortgages or other loans in a pool will be repaid.
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F
Face Amount
The par value of a security.
Federal Funds rate
The interest rate banks charge on loans of their
excess reserve funds to other banks.
Floating-rate bond
A bond where the interest rate is adjusted
periodically. A floating-rate bond is usually linked to an index.
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G
General obligation bond
A municipal bond that is secured by a pledge
of the issuer's full faith, credit and taxing power.
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H
Hedge
An investment strategy used with the intention of offsetting
investment risk including movements in interest rates or securities prices.
High-yield bond
Bonds issued by lower-rated corporations, rated Ba,
Bb or below and offering a higher yield than more creditworthy securities.
Sometimes known as junk bonds.
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I
Issuer
An entity that issues a bond and is obligated to pay
principal and interest.
Interest
Compensation paid for the use of money and generally
expressed as an annual percentage rate.
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J
Junk bond
A debt obligation rated by agencies as Ba, Bb or lower.
Junk bonds generally pay interest above the return on more highly rated bonds.
They are sometimes known as high-yield bonds.
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K
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L
Leverage
The use of borrowed money to increase investing power.
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M
Maturity
The date when the principal amount of a security is
payable.
Mortgage pass-through
A security representing a direct interest in a
pool of mortgage loans. These securities are backed by mortgages.
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N
Non-callable bond
A bond that cannot be redeemed by the issuer
before its specified maturity date.
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O
Offer
The price at which a seller will sell a security.
Offering price
The price at which members of an underwriting
syndicate for a new issue will offer securities to investors.
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P
Par value
The principal amount of a bond or face value of security.
Premium
The amount by which the price of a security exceeds its
principal amount.
Prepayment
The partial or complete payment of the principal amount
outstanding on a debt before it is due.
Prepayment risk
The risk that falling interest rates will lead to
heavy prepayments of mortgage or other loans, forcing the investor to reinvest
at lower prevailing rates.
Primary market
The market for new security issues.
Principal
The face amount of a bond that must be paid at maturity.
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Q
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R
Ratings
Designations used by credit rating agencies to give an
indication of the bond's credit quality.
Registered bond
A bond whose owner is registered with the issuer or
its agent.
Reinvestment risk
The risk that interest income or principal
repayments will have to be reinvested at lower rates.
Revenue bond
A bond issued to finance public works such as bridges
and tunnels. Revenue can be derived from tolls on motorists or other charges and
rents. These revenues directly support the projects.
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S
Settlement date
The delivery date of a security and the payment of
funds.
Sinking fund
Money accumulated by an issuer of bonds for the
specific purpose of redeeming debt securities.
Swap
An exchange of one security for another block of similar market
value. Swaps may be made to establish a tax loss, upgrade credit quality, extend
or shorten maturity, etc.
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T
Trade date
The date when the purchase or sale of a bond is executed.
Transfer agent
A party appointed by an issuer to maintain records of
stock and bond owners. Transfer agents can issue and cancel certificates and
address issues arising from lost or stolen certificates.
Trustee
A bank designated by the issuer as the custodian of funds
and official representative of bondholders.
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U
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V
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W
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X
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Y
Yield
The return earned on an investor's capital. The yield is a
function of a security's purchase price and coupon interest rate.
Yield curve
A line tracing relative yields on a type of security
over a spectrum of maturities ranging from three months to 30 years.
Yield to call
A yield on a security calculated by assuming that
interest payments will be paid until the call date, when the security will be
redeemed at the call price.
Yield to maturity
Represents the total of coupon payments until
maturity plus compounded interest, and the gains or losses realized from the
security. The assumption is that the security remains outstanding until
maturity.
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Z
Zero-coupon bond
A bond where no periodic interest payments are
made. The investor receives one payment, which includes principal and interest,
at redemption (call or maturity).
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