Bond

Question 1

Accrued Interest

Answer 1

Interest earned on a security but not yet paid to the investor.

Question 2

Basis Point

Answer 2

One one-hundredth (.01) of a percentage point. For example, eight percent is equal to 800 basis points.

Question 3

Bond

Answer 3

A debt security, similar to an IOU. When you buy a bond, you are lending money to the issuer. In return for the loan, the issuer promises to pay you a specified rate of interest during the life of the bond and to repay the principal when it “matures,” or comes due.

Question 4

Bond Swap

Answer 4

The investor sells one bond and uses the proceeds to buy another bond, often at the same price.

Question 5

Callable Bonds (or Redeemable Bonds)

Answer 5

Bonds that can be redeemed or paid off by the issuer prior to the bond’s maturity date.

Question 6

Committee on Union Security Identification Procedures (CUSIP)

Answer 6

The Committee on Uniform Security Identification Procedures (CUSIP) number identifies most securities, including U.S. government and municipal bonds. CUSIP numbers are unique nine-character alphanumeric identifiers assigned to each series of securities.

Question 7

Convertible Bond

Answer 7

A corporate bond that can be exchanged for a specific number of shares of the company’s stock, usually common stock. In most cases, the holder of the convertible bond determines whether and when a conversion occurs.

Question 8

Coupon

Answer 8

A feature of a bond that denotes the amount of interest due and the date that the payment will be made.

Question 9

Coupon Payment

Answer 9

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

Question 10

Coupon Rate

Answer 10

The interest rate on a bond. It is expressed as a semi-annual rate.

Question 11

Credit Rating Agencies

Answer 11

Provide their opinion on the creditworthiness of a corporate or government borrower by issuing a grade, or credit rating, on bonds issued by that borrower.

Question 12

Current Yield

Answer 12

The ratio of the interest rate payable on a bond to the actual market price of the bond, stated as a percentage. For example, a bond with a current market price of $1,000 that pays $80 per year would have a current yield of 8%.

Question 13

Debentures

Answer 13

An unsecured bond backed solely by the general credit of a company.

Question 14

Default

Answer 14

A failure by an issuer to pay principal or interest when due, or to fulfill other obligations, such as reporting requirements.

Question 15

Discount

Answer 15

A bond sold before it matures might not sell at full par value. If it sells below par, it is selling at discount.

Question 16

Discount Note

Answer 16

Short-term obligations issued at a discount from face value. Discount notes have no periodic interest payments; the investor receives the note’s face value at maturity. For example, a one-year, $1,000 face value discount note purchased at issue at a price of $950, would yield $50 or 5.26% ($50/$950).

Question 17

Fixed-rate Bond

Answer 17

A long-term bond with a set interest rate.

Question 18

Floating-rate Bond (or Variable or Adjustable rate Bond)

Answer 18

A bond whose interest rate is adjusted periodically according to a predetermined formula; it is usually linked to an interest rate index such as LIBOR.

Question 19

Floor

Answer 19

The lower limit for the interest rate on a floating-rate bond.

Question 20

Future Value

Answer 20

The value of an asset at a specified date in the future.

Question 21

General Obligation Bond

Answer 21

A municipal bond not secured by any assets; instead it is backed by the issuer’s power to tax residents to pay bondholders.

Question 22

High-yield Bond (or Junk Bond)

Answer 22

Bonds that are believed to have a higher risk of default and receive low ratings by credit rating agencies, namely bonds rated Ba or below (by Moody’s) or BB or below (by S&P and Fitch). These bonds typically are issued at a higher yield (for example, a higher interest rate) than more creditworthy bonds, reflecting the perceived higher risk to investors.

Question 23

Interest

Answer 23

The price paid for borrowing money. It is expressed as a percentage rate over a period of time.
Interest rates may be fixed, meaning the rate is set and will not change, or may be variable or “floating,” meaning the rate may move higher or lower over time.

Question 24

Investment-grade Bond (or High-grade Bond)

Answer 24

Bonds that are believed to have a lower risk of default and receive higher ratings by the credit rating agencies, namely bonds rated Baa (by Moody’s) or BBB (by S&P and Fitch) or above. These bonds tend to be issued at lower yields than less creditworthy bonds.

Question 25

Issuer

Answer 25

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

Question 26

Liquidity (or Marketability)

Answer 26

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

Question 27

London Interbank Offered Rate (LIBOR)

Answer 27

The interest rates banks charge each other for short-term loans. LIBOR is frequently used as the base for resetting rates on floating-rate securities.

Question 28

Offering Document (or Official Statement or Prospectus)

Answer 28

The disclosure document prepared by a bond issuer that gives detailed financial information about the issuer and the bond offering.
Municipal securities issuers must prepare an “Official Statement” before presenting the primary offering. These municipal disclosure documents provide information for investors, including the terms of the bond and financial information on the issuer. They also typically contain information regarding: the purpose of the bond; whether the issuer can redeem the bond prior to maturity; and when and how principal and interest on the bond will be repaid.

Question 29

Premium

Answer 29

The amount by which the price of a bond exceeds its principal (par) amount.

Question 30

Prepayment

Answer 30

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

Question 31

Prepayment Risk

Answer 31

The risk that principal repayment will occur earlier than scheduled, forcing the investor to reinvest at lower prevailing rates.

Question 32

Revenue Bond

Answer 32

A municipal bond not backed by the government’s taxing power but by revenues from a specific project or source, such as highway tolls or lease fees.

Question 33

Senior Bond

Answer 33

A bond that has a higher priority than another bond’s claim to the same class of assets in case of a default or bankruptcy. Settlement Date – The agreed date for the delivery of bonds and payment of funds.

Question 34

Trustee

Answer 34

An institution, usually a bank, designated by the issuer as the custodian of funds and official representative of bondholders.

Question 35

Yield Curve

Answer 35

A line graph that shows the relative yields on debt over a range of maturities from three months to 30 years. Investors, analysts and economists use yield curves to evaluate bond markets and interest rate expectations.