Bond Glossary |
| Accrued interest |
The interest that is due and payable at a point of time.
A Bond on which interest accrues, but is not paid to the investor during the time of accrual. The amount of accrued interest is added to the principal of the bond and is paid at the time of maturity.
The effective, or true, annual rate of return. The APY is the rate actually earned or paid in one year, taking into account the affect of compounding. The APY is calculated by taking one plus the periodic rate and raising it to the number of periods in a year. For example, a 1% per month rate has an APY of 12.68% (1.0112 -1). This is similar to the concept of Annual Rate of Return.
A regular periodic payment made under agreement for a specified period of time.
The simultaneous buying and selling of a security at two different prices in two different markets, resulting in profits without risk. Perfectly efficient markets present no arbitrage opportunities. However, arbitrage opportunities are often precluded because of transaction costs
It is a technique of liquidity management to ensure that the tenure of liabilities more or less match with the average tenure of the assets. This concept is of utmost importance to banks and financial institutions in the spreads business.
Scheduled final principal repayment that is substantially larger than the preceding scheduled principal repayments.
A standard interest rate used for comparison. Globally the LIBOR is considered as a benchmark rate. In India the Government T-Bill rate is considered as a benchmark rate. All variable rate instruments are expressed as a spread over the benchmark rate.
It represents 1/100th of a percentage point. In other words, 100 basis points is equal to one percent
A measure of a security's sensitivity to changes in the overall market. It is the extent to which changes in security returns can be explained by the market. A beta of 0.9 means that a 1 % change in the market in the short run implies a 0.9 % change in the value of the security. Securities with a beta greater than unity are classified as aggressive securities.
A security with one principal payment on the settlement date.
These are bonds that are not registered in the books of the issuer. Such bonds are held in physical form by the owner, who receives interest payments by physically detaching coupons from the bond certificate and delivering them to the paying agent.
A bond is a contract between two parties where the owner of the bond is promised interest and principal repayment in exchange for the money paid for the bond. When an investor buys bonds, he or she is lending money.
It is the contract that sets forth the promises of a corporate bond issuer and the rights of investors.
It is the designing of a bond portfolio so that its performance will match the performance of some bond index.
These are bonds issued by emerging countries under a debt reduction plan.
These are bonds that give the right to the issuer to redeem the bonds before the maturity after an agreed period of time from the issue date. The issuer in the event of a falling interest regime, which permits them to raise funds at a lower rate, exercises these call options.
Price at which a callable security can be redeemed by the issuer.
An interest rate cap/ceiling agreement whereby one party agrees to compensate the other if the reference rate exceeds a predetermined level.
A published ranking, based on detailed financial analysis by a credit bureau, of one's financial soundness, specifically relating to one's ability to service debt obligations. The highest rating is usually AAA, and the lowest is D. In India Crisil is the largest credit rating agency.
It measures the sensitivity of the yield to maturity (YTM) of a bond to changes in duration of the bond.
Interest earned on interest as well as on principal.
A security that can be exchanged, at a specified price, for shares of the issuer's stock.
Rate of interest at which yield-to-maturity and yield-to-call of a security are equal.
The ratio of coupon interest to the current market price. It reflects the interest yield at the point of entry.
For asset backed securities, the period between issuance and the first payment of coupon and principal.
An unsecured bond whose holder has the claim of a general creditor on all assets of the issuer not pledged specifically to secure other debt. Usually issued by corporates.
The market for trading debt instruments.
Interest payment plus repayments of principal to creditors, that is, retirement of debt.
A bond issued with a very low coupon or no coupon and selling at a price far below par value. When the bond has no coupon, it is called a Zero coupon bond.
Failure to make timely payment of interest or principal on a debt security or to otherwise comply with the provisions of a bond indenture.
A differential in promised yield that compensates the investor for the risk inherent in purchasing a corporate bond that entails some risk of default.
Also referred to as credit risk (as gauged by commercial rating companies), the risk that an issuer of a bond may be unable to make timely principal and interest payments.
Future cash flows multiplied by discount factors to obtain present values
A common gauge of the price sensitivity of a fixed income asset or portfolio to a change in interest rates.
A spread off the floating-rate index that makes the average present value equal to the current price.
Effective annual interest rate
An annual measure of the time value of money that fully reflects the effects of compounding.
Annualized interest rate on a security computed using compound interest techniques.
The convexity of a bond calculated using cash flows that change with yields.
Annual yield on a short-term, non-interest bearing security calculated in order to be comparable to yields quoted on coupon securities.
The yield that must be offered on a taxable bond issue to give the same after-tax yield as a tax-exempt issue.
A bond that is (1) underwritten by an international syndicate, (2) issued simultaneously to investors in a number of countries, and (3) issued outside the jurisdiction of any single country.
Eurobonds denominated in U.S dollars.
Eurobonds denominated in Japanese yen.
Bond whose maturity can be extended at the option of the lender or issuer.
The risk that the cash flows of an issuer will not be adequate to meet his financial obligations. Also referred to as the additional risk that a firm's stockholder bears when the firm utilizes debt and equity.
A change in the yield curve where the spread between the yield on a long-term and short-term treasury has decreased.
Price of a bond without accrued interest. Bond traders typically quote flat price, although purchasers pay the full price (full price = flat price + accrued interest).
Coupon rate that varies with ("floats against") a standard market benchmark or index.
A basket of bonds, Treasuries, currencies, or other financial instruments used as a benchmark for floating rate notes.
Government or agency security with a floating coupon, reset periodically against a short-term index such as the three-month or six-month LIBOR.
An interest rate floor agreement whereby one party agrees to pay the other if the reference rate falls below a predetermined level.
Debt maturing after more than one year.
Municipal securities secured by the issuer’s pledge of its full faith, credit, and taxing power.
A transaction that reduces the risk of an investment.
Bond rated triple-A or double-A by Standard & Poor's or CRISIL.
A yield curve used to forecast the effects, at a particular point in the future, of interest-rate changes on an investment.
Refunding of a high-coupon bond with a new, lower coupon bond.
Agreement between lender and borrower which details specific terms of the bond issuance. Specifies legal obligations of bond issuer and rights of the bondholder. Document spelling out the specific terms of a bond as well as the rights and responsibilities of both the issuer of the security and the holder
A municipal bond backed both by the credit of the municipal issuer and by commercial insurance policies.
Discount rate at which Net present value (NPV) of the investment is zero. The rate at which a bond’s future cash flows, discounted back to today, equals its current price.
Yield curve in which short-term rates are higher than long-term rates. This usually reflects diminishing confidence in the future and is a sign of impending recession in the economy.
A bond with a speculative credit rating of BB (S&P) or BA (Moody's) or lower is a junk or high yield bond. Such bonds offer investors higher yields than bonds of financially sound companies.
The leading member of the syndicate issuing a new security such as a corporate bond. The lead manager administers the marketing, allocation, and delivery of the security. The lead manager--in consultation with the borrower--also selects co-managers; determines the initial and final terms of the issue; selects the underwriters; and selects the selling group.
A legal claim against an asset which is used to secure a loan and which must be paid when the property is sold.
London Interbank Offered Rate. The LIBOR is "the average of interbank offered rates for dollar deposits in the London market based on quotations at five major banks." The rate is published daily in the Wall Street Journal "Money Rates" section. This rate forms the benchmark for most floating rate debt issues.
A bond portfolio strategy in which the portfolio is constructed to have approximately equal amounts invested in every maturity within a given range. It is an example of a passive investment strategy.
A market is liquid when it has a high level of trading activity, allowing buying and selling with minimum price disturbance. Also a market characterized by the ability to buy and sell with relative ease. When there are many securities then the market is liquid in the broad sense and when these securities have sufficient volumes then the market is liquid in deep sense.
Bonds with a long current maturity.
An obligation having a maturity of more than one year from the date it was issued. Also called funded debt.
Is related to the lump sum payments made when a loan or bond is called, equal to the NPV of future loan or coupon payments not paid because of the call. The payment can be significant and negate the attractiveness of a call.
The process whereby the book value or collateral value of a security is adjusted to reflect current market value.
An arrangement whereby the profits or losses on a futures contract are settled each day.
For a bond, the date on which the principal is required to be repaid
Usually used for bonds. Date that the bond finishes and is paid off. Date on which the principal amount of a note, draft, acceptance, bond, or other debt instrument becomes due and payable.
The spread between any two maturity sectors of the bond market.
Mumbai Interbank Bid and Offer rates. Calculated by the average of the interbank offer rates based on quotations at nearly 30 Major banks.
Also called "index." Statistical composite that measures changes in the economy or financial markets. Often expressed in percentage changes from a base year or from the previous month.
Floating rate note whose interest rate is reset at more frequent intervals than the rollover period (e.g. a note whose payments are set quarterly on the basis of the one-year interest rate).
The ratio of Macaulay duration to (1 + y), where y = the bond yield. Modified duration is inversely related to the approximate percentage change in price for a given change in yield.
State or local governments offer municipal bonds or municipals, as they are called, to pay for special projects such as highways or sewers. The interest that investors receive is exempt from some income taxes.
The present value of the expected future cash flows minus the cost.
The total percentage increase in the value of an investment over the holding period.
The annual amount of income from the security divided by the face amount of the security. The result is stated as a percentage. When the security is sold at par, the nominal yield and actual yield are the same.
The amount used as a base for computations. Notional principal plays a conceptual role in determining the amount of the interest payments. This is not the principal amount that is actually transferred from one party to another.
Purchase or sale of government securities by the monetary authorities (RBI in India) to increase or decrease the domestic money supply. A sale of government securities is a sign of a dear money policy while a purchase of government securities is a sign of a cheap money policy.
Equal to the nominal or face value of a security. A bond selling at "par," for instance, is worth an amount equivalent to its original issue value or its value upon redemption at maturity
The risk of loss in the value of an asset’s cash flow due to inflation. Also referred to as inflation risk
An option that gives the option buyer the right, but not the obligation, to sell (go "short") the underlying futures contract at the strike price on or before the expiration date.
The date on which the holder originally purchased the security.
The flat price of the security paid when originally purchased by the holder.
Also called the maturity value or face value, the amount that the issuer agrees to pay at the maturity date.
A pool of fixed-income securities backed by a package of assets (i.e. mortgages) where the holder receives the principal and interest payments.
A bond that is selling for more than its par value.
The face amount of debt; the amount borrowed or lent. Often called principal.
A bond that will make only one payment of principal and interest.
Relatively uncommon type of bond which allows the bondholder to redeem the bond at a specified price prior to maturity.
In banking, the risk that profits may decline or losses occur because a rise in interest rates forces up the cost of funding fixed rate loans or other fixed-rate assets.
The return that is actually earned over a given time period. For a bond that is held to maturity and does not default on interest payments, the realized yield is equal to the YTM.
Repayment of a debt security or preferred stock issue, at or before maturity, at par or at a premium price.
The risk that intermediate cash flows like interest may not be reinvested at the YTM. This problem becomes more acute in a falling interest rate scenario.
The ratio of the yield spread to the yield level. Used for bonds.
Generally referring to bonds, the yield required by the marketplace to match available expected returns for financial instruments with comparable risk.
A bond issued by a municipality to finance either a project or an enterprise where the issuer pledges to the bondholder the revenues generated by the operating projects financed, for instance, hospital revenue bonds and sewer revenue bonds.
The flat price of the security paid when originally purchased by the holder.
The bond that serves as a benchmark against which the yield spreads to other deliverable bonds are held constant. It is used to analyze parallel shifts in the yield curve.
Repurchase agreement rate. The rate at which a holder of securities sells them to an investor with an agreement to repurchase them at a fixed price on a fixed date. The security "buyer," in effect, lends the "seller" money for the period of the agreement
A process that switches your holdings in a user-defined security to a newly issued or newly available security. A rollover also switches user-security offerings, if any, to the new security.
A yen-denominated bond issued in Tokyo by a non-Japanese borrower. Related: bulldog bond and Yankee bond.
Debt that, in the event of default, has first claim on specified assets.
Piece of paper that proves ownership of stocks, bonds and other investments.
Corporate bonds arranged so that specified principal amounts become due on specified dates.
Bond that may be issued in several series under the same indenture.
Bonds with short (less than one year) term to maturity
A bond that will make only one payment of principal and interest.
A change in the yield curve where the spread between the yield on a long-term and short-term Treasury has increased.
A bond that pays a lower coupon rate for an initial period which then increases to a higher coupon rate.
Bonds that can be subdivided into a series of Zero-coupon Bonds.
Debt that has been customized for the buyer, often by incorporating unusual options.
Date on which cash payments for purchases are due and for which accrued interest and price/yield relationships are computed.
Expected valuation for the selected security on the settlement date.
Standard deviation is the measurement of average variation (dispersion) of actual values about the mean.
Subsidiary general ledger (SGL)
It is the dematerialized ledger account in which accounts of government securities are held in the electronic form.
An unsecured bond that ranks after secured debt, after debenture bonds, and often after some general creditors in its claim on assets and earnings. Related: Debenture bond, Mortgage bond, and Collateral trust bonds.
A Eurobond issued by a Japanese corporation.
The reduction in income taxes that results from taking an allowable deduction from taxable income.
Often referred to as bullet-maturity bonds or simply bullet bonds, bonds whose principal is payable at maturity. Related: serial bonds
Excess of the yields to maturity on long-term bonds over those of short-term bonds
The time remaining on a bond’s life or the date on which the debt will cease to exist and the borrower will have completely paid off the amount borrowed. See: Maturity
A premium (of higher yield) that bondholders expect to receive for securities with longer maturity dates.
The value of a bond at maturity, typically its par value, or the value of an asset (or an entire firm) on some specified future valuation date.
Debt that does not identify specific assets that can be taken over by the debtholder in case of default.
A measure of risk based on the standard deviation of the asset return. Also, volatility is a variable that appears in option pricing formulas. In the option pricing formula, it denotes the volatility of the underlying asset’s return from now to the expiration of the option. Some have created volatility indices.
An authorized but not yet issued security that is traded conditionally ("when, as, and if issued") in the period between the announcement date and the auction date. New corporate-bond and Treasury-security issues are often traded on a when-issued basis.
Foreign bonds denominated in US dollars issued in the United States by foreign banks and corporations. These bonds are usually registered with the Securities Exchange Commission (SEC). For example, bonds issued by originators with roots in Japan are called Samurai bonds.
The percentage rate of return paid on a stock in the form of dividends, or the effective rate of interest paid on a bond or note.
The graphical depiction of the relationship between the yield on bonds of the same credit quality but different maturities. The yield curve can fairly forecast the turning points of the business cycle.
Strategies that involve positioning a portfolio capitalize on expected changes in yield spreads between sectors of the bond market.
The percentage rate of a bond or note, if you were to buy and hold the security until the call date. This yield is valid only if the security is called prior to maturity. Generally bonds are callable over several years and normally are called at a slight premium. The calculation of yield to call is based on the coupon rate, length of time to the call and the market price.
The percentage rate of return paid on a bond, note or other fixed income security if you buy and hold it to its maturity date. The calculation for YTM is based on the coupon rate, length of time to maturity and market price. It assumes that coupon interest paid over the life of the bond will be reinvested at the same rate.