Glossary

A B C D E F H I L M N O P R S T U Y Z

A

  • Accrued interest

    Interest deemed to be earned on a security, but not yet paid to the investor.
  • Ask price

    (or Offer price). The price at which a seller is willing to sell a security.
  • Average life

    On a mortgage security, the average length of time that each principal dollar is expected to be outstanding, based on certain assumptions about prepayment speeds.

↑ Back to top

B

  • Basis point

    One one-hundredth (.01) of a percentage point Yield differences are often quoted in basis points (bps).
  • Bid price

    The price at which a buyer is willing to purchase a security.
  • Bond fund

    A professionally managed investment vehicle, which invests primarily in bonds. Types of bond funds include open-ended mutual funds, closed-end mutual funds, and exchange traded funds.
  • Bond insurers and reinsurers

    Specialized insurance firms serving the fixed-income market that guarantee the timely payment of principal and interest on bonds they insure in exchange for a fee.
  • Book-entry

    A method of recording and transferring ownership of securities electronically, eliminating the need for physical certificates.
  • Bullet bond / Bullet maturity

    A bond that pays regular interest, but that does not repay principal until maturity.

↑ Back to top

C

  • Call premium

    The dollar amount paid to the investor by the issuer for exercising a call provision that is usually stated as a percentage of the principal amount called.
  • Callable bonds

    Bonds that are redeemable by the issuer prior to the maturity date, at a specified price at or above par.
  • Cap

    The maximum interest rate that may be paid on a floating-rate security.
  • Closed-end mutual fund

    A mutual fund created with a fixed number of shares via a public offering, which is traded as listed securities on a stock exchange.
  • Collar

    Upper and lower limits (cap and floor, respectively) on the interest rate of a floating-rate security.
  • Compound interest

    Interest that is calculated on the initial principal and previously paid interest. Also known as "interest on interest".
  • Convertible bond

    A bond that can be exchanged, at the option of the holder, for a specific number of shares of the issuing company's stock. Because a convertible bond is a bond with a stock option built into it, it will usually offer a lower than prevailing interest rate.
  • Coupon

    The feature of a bond that denotes the interest rate (coupon rate) it will pay and the date on which the interest payment will be made.
  • Coupon payment

    The actual dollar amount of interest paid to an investor. The amount is calculated by multiplying the interest rate of the bond by its face value.
  • Coupon rate

    The interest rate on a bond, expressed as a percentage of the bond's face value. Typically, it is expressed on a semi-annual basis.
  • Credit rating agency

    A company that analyzes the credit worthiness of a company or security, and indicates that credit quality by means of a grade, or credit rating.
  • Crowdfunding

    Crowdfunding is a form of peer-to-peer lending and investing that connects an entrepreneur to a large number of investors, often contributing relatively small amounts, to amass operating capital.
  • Current yield

    The ratio of the interest rate payable on a bond to the actual market price of the bond, stated as a percentage.

↑ Back to top

D

  • Dated date

    (or Issue date) The date of a bond issue from which a bond begins to accrue interest.
  • Default

    A failure by an issuer to: (i) pay principal or interest when due, (ii) meet non-payment obligations, such as reporting requirements or (iii) comply with certain covenants in the document authorizing the issuance of a bond (an indenture).
  • Discount

    The amount by which the par (or face) value of a security exceeds its purchase price.
  • Discount note

    Short-term obligations issued at a discount from face value, with maturities ranging from one to 360 days. Discount notes have no periodic interest payments; the investor receives the note's face value at maturity.

↑ Back to top

E

  • Embedded option

    A provision that gives the issuer or bondholder an option, but not the obligation, to take an action unilaterally. The most common embedded option is a call option, giving the issuer the right to call, or redeem, the principal of a bond before the scheduled maturity date.
  • Exchange-traded fund (ETF)

    An ETF is a type of fund that is an exchange traded security, experiencing price changes throughout the day as they are bought and sold ETFs own underlying assets that typically track an index.
  • Extension risk

    The risk that investors' principal will be committed for a longer period of time than expected In the context of mortgage- or asset-backed securities, this may be due to rising interest rates or other factors that slow the rate at which loans are repaid.

↑ Back to top

F

  • Face

    (or Par or Principal) The principal amount of a security that appears on the face of the bond.
  • Fixed rate bond

    A bond with a set interest rate to maturity.
  • Floating rate bond

    (or variable rate bond or adjustable rate bond) A bond with an interest rate that is adjusted periodically according to a predetermined formula; it is usually linked to a benchmark interest rate 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, calculated using a specified rate of return.

↑ Back to top

H

  • High-yield bond

    (or junk bond) Bonds rated Ba (by Moody's) or BB (by S&P and Fitch) or below, whose lower credit ratings indicate a higher risk of default. Due to the increase risk of default, these bonds typically offer a higher yield than more creditworthy bonds.

↑ Back to top

I

  • Interest

    Compensation paid or to be paid for the use of assets.
  • Investment-grade bond

    (or high grade bond) Bonds rated Baa (by Moody's) or BBB (by S&P and Fitch) or above, whose higher credit ratings indicate a lower risk of default. These bonds tend to offer a lower yield than less creditworthy bonds.
  • Issuer

    The entity obligated to pay principal and interest on a bond.

↑ Back to top

L

  • LIBOR

    (London Interbank Offered Rate) A benchmark interest rate some banks charge each other for short-term loans. LIBOR is set daily in five currencies (US dollar, Euro, pound sterling, Japanese yen and Swiss franc) for seven different maturities (overnight , on week, and 1, 2, 3, 6 and 12 months). LIBOR is frequently used as the basis for resetting rates on floating-rate securities, as well as currency and interest rate swaps.
  • Liquidity

    (or marketability) A measure of the relative ease and speed with which a security can be purchased or sold in a secondary market.

↑ Back to top

M

  • Maturity

    The date when the principal amount of a security is due to be repaid.
  • Mortgage pass-through security

    A type of mortgage-backed security representing a direct interest 1n a pool of mortgage loans. The pass-through issuer or serv1cer collects payments on the loans in the pool and "passes through" the principal and interest to the security holders on a pro rata basis.
  • Municipal bonds

    Municipal bonds represent a long-term debt obligation, at a relatively low rate of interest, which can be paid back over years. That long-term debt structure means infrastructure projects can move forward without placing a heavy burden on taxpayers.
  • Mutual fund

    An investment vehicle that invests pooled cash of many investors to meet the fund's stated investment objective.

↑ Back to top

N

  • Non-callable bond

    A bond that cannot be called for redemption by the issuer before its specified maturity date.

↑ Back to top

O

  • Offering document

    (official statement or prospectus) The disclosure document prepared by the issuer that gives detailed security and financial information about the issuer and the securities being issued.
  • Open-end mutual fund

    Open-end mutual funds stand ready to sell and redeem their shares at any time at the fund's current net asset value: total fund assets, less any liabilities, divided by the number of shares outstanding.

↑ Back to top

P

  • Paying agent

    The entity, usually a designated bank or the office of the treasurer of the issuer, that pays the principal and interest of a bond.
  • Premium

    The amount by which the price of a bond exceeds its par value.
  • Prepayment

    The unscheduled partial or complete repayment of the principal amount outstanding on a loan, such as a mortgage, before it is due.
  • Prepayment risk

    The risk that principal repayment will occur earlier than scheduled, forcing the investor to receive principal sooner than anticipated and reinvest at lower prevailing rates. The measurement of prepayment risk is a key consideration for investors in mortgage- and asset-backed securities.
  • Present value

    The current value of a future payment or stream of payments, given a specified interest rate; also referred to as a discount rate.
  • Primary market

    The market for new issuances.

↑ Back to top

R

  • Ratings

    Designations used by credit rating agencies to give relative indications as to opinions of credit quality.
  • Reinvestment risk

    The risk that interest income or principal repayments will have to be reinvested at lower rates in a declining interest rate environment.
  • Risk

    The chance that an actual return will be different than expected, including losing some or all of the invested amount. There are many types of risk such as market risk, credit risk, interest rate risk, exchange rate risk, liquidity risk, and political risk.

↑ Back to top

S

  • Secondary market

    Market for previously issued securities.
  • Securitization

    Securitization transforms illiquid assets into more liquid assets and allows lenders and originators to obtain more capital for lending.
  • Senior bond

    A bond that has a higher priority than other bond's claim to the same class of assets.
  • Settlement date

    The date for the delivery of bonds and payment of funds agreed to in a transaction.
  • Subordinated bond

    A bond that has a lower priority than another bond's claim to the same assets.

↑ Back to top

T

  • Trade date

    The date upon which a bond is purchased or sold.
  • Transfer agent

    Also known as the bond registrar and is the party appointed by an issuer to maintain records of bondholders, and transfers ownership when bonds are acquired or sold.
  • Trustee

    An institution, usually a bank, designated by the issuer as the custodian of funds and official representative of bondholders. Trustees are appointed to ensure compliance with the trust indenture and represent bondholders to enforce their contract with the issuers.

↑ Back to top

U

  • Unit investment trust

    An investment fund created with a fixed portfolio of investments.
  • Unsecured bond

    A bond repayment that is not secured by collateral.

↑ Back to top

Y

  • Yield curve

    A line tracing yields on a type of bond over a spectrum of maturities.
  • Yield to call

    The yield to call is a calculation of the total return of a bond if held to the call date. It takes into account the value of all the interest payments that will be paid until the call date, plus interest on earned on those payments (using the current yield), the principal amount to be received on the call date and any gain or loss from the purchase price expressed as an annual rate.
  • Yield to maturity

    The yield to maturity is a calculation of the total return of a bond if held to maturity. It takes into account the value of all the interest payments that will be paid until the maturity date, plus interest on earned on those payments (using the current yield), the principal amount to be received and any gain or loss from the purchase price expressed as an annual rate.

↑ Back to top

Z

  • Zero-coupon bond

    A bond that does not make periodic interest payments; instead, the investor receives one payment, which includes principal and interest, at redemption (call or maturity)

↑ Back to top