A tax anticipation bill is a Treasury bill that matures in fewer than 273 days and is repaid with tax receipts. For example, let's assume that the U.S.
A+ and A1 are actually two ratings from different ratings agencies: Standard & Poor's uses the A+ rating, and Moody's uses the A1 rating.Both ratings indicate a relatively high level of creditworthiness.
A- and A3 are actually two ratings from different ratings agencies: Standard & Poor's uses the A- rating, and Moody's uses the A3 rating.Both ratings indicate a relatively high level of creditworthiness.
When a bond's price is above par, the bond is selling at a premium above face value. In the bond world, par is the face value of a bond.
An active bond is a corporate bond that is traded actively on the New York Stock Exchange (NYSE). Companies participating on the NYSE often choose to offer their bonds to investors in the same venue.
Active bond crowd refers to the group of bond traders of the New York Stock Exchange (NYSE) that trades the highest volume of active bonds. Members of the NYSE's active bond crowd include those traders whose trading volumes in active bonds are disproportionately larger than those of other traders in the bond market called the cabinet crowd.
Advance refunding occurs when a bond issuer, usually a municipality, invests the proceeds from the sale of new bonds in U.S.Treasurys with the intent of using the Treasurys to pay off the old bonds.
Agency bonds are bonds issued by agencies of the U.S.government.
In the bond world, at par means "equal to face value." Face value, also known as par value, is the amount the issuer promises to pay the bondholder when the bond matures. Let's assume Company XYZ issues $10 million in bonds to the public.
The Automated Bond System (ABS) is a computerized platform that tracks the prices for inactive bonds on the New York Stock Exchange (NYSE). Many bonds on the NYSE do not experience much price movement due to exceptionally low volume levels.
Baby bonds are bonds with a par value below $1,000.Additionally, the term also refers to savings bonds issued by the Treasury Department from 1935 to 1941.
Bad paper refers to uncollateralized bonds (typically with short maturities) that are poorly rated and at high risk of default. For example, let's assume Company XYZ is teetering on the verge of bankruptcy.
A bailout bond is intended to help ailing companies.Bailout bonds were most common in the 1980s and 1990s when many savings and loans were failing; they are less common  now.
In the bond world, balloon interest is an increase in the coupon rate of a bond issue corresponding to the maturity of the bond.Serial bonds often use balloon interest.
A balloon maturity is a the date on which a large payment is due, usually at or near the end of a loan term.In the bond market, a balloon maturity refers to the idea that a large portion of an issuer's bonds become due at the same time. Unlike a loan whose total cost (interest and principal) is amortized -- that is, paid incrementally during the life of the loan -- a balloon loan's principal is paid in one sum at the end of the term.
The Barclays Capital U.S.Aggregate Bond Index is the most common index used to track the performance of investment grade bonds in the U.S.
In the bond world, below par means "below face value." Face value is the amount the issuer promises to pay the bondholder when the bond matures. Let's assume Company XYZ issues $10 million in bonds to the public.
A bond is an agreement between an investor and the company, government, or government agency that issues the bond.When investors buy a bond, they are loaning money to the issuer in exchange for interest and the return of principal at maturity.
The bond equivalent yield (BEY) is a formula that allows investors to calculate the annual yield from a bond being sold at a discount. The bond equivalent yield enables investors to compare the yield of a short-term security purchased at a discount with that of a bond with an annual yield.Calculated as: ((Par Value – Purchase Price) / Purchase Price) * (365 / Days to Maturity)The BEY for a bond with 100 days to maturity, a par value of $1000, and purchased at the discounted price of $975 would be calculated as follows:(($1000 - $975) / $975) * (365 / 100) = 0.0935The BEY would be 9.35%.
A bond fund is a mutual fund or exchange traded fund (ETF) composed of bonds. Bond funds come in many shapes and sizes.
A bond ladder is an investment strategy whereby an investor staggers the maturity of the bonds in his/her portfolio so that the bond proceeds mature and can be reinvested at regular intervals. For example, say you have $75,000 to invest.
Bond laddering is a bond investment strategy whereby an investor staggers their portfolio with bonds according to their maturity so that the bond proceeds can be reinvested at regular intervals. For example, say you have $75,000 to invest.
A bond option is a derivative contract that allows investors to buy or sell a particular bond with a given expiration date for a particular price (strike price).  For example, a call bond option hedges that the value of a bond will increase at a future date.If the price of the underlying bond is higher than the strike price, the bond option is valued at a premium.
A bond quote refers to a bond's market price. The market prices of bonds are quoted as a percentage of the bonds' par value.
A bond rating is a "grade" assigned to a bond.These ratings can also be assigned to bond issuers, insurance companies or other entities or securities to indicate riskiness.
A bondholder is a person who owns a bond issued by a borrower, typically a company or a government.They are considered a creditor of a company.
A book-entry savings bond is a savings bond issued in electronic form rather than in paper form. Savings bonds are bonds issued by the U.S.
Brady bonds are U.S.Treasury bonds issued by developing countries in an effort to reduce these countries’ external debt.
A cabinet security is an inactive security (often a bond) that is listed on an exchange. Before the advent of computers, it was necessary to move physical evidence of securities and orders.
A call date is the date after which a bond issuer can redeem a callable bond. Callable bonds usually have a call schedule.
The call price is the price a bond issuer or preferred stock issuer must pay investors if it wants to buy back, or call, all or part of an issue before the maturity date. The bond indenture will stipulate when and how a bond can be called, and there are usually multiple call dates throughout the life of a callable bond.
Call protection is a period of time during which a bond issuer cannot call, or buy back, a bond. Call protection is described in a callable bond's indenture.
A call provision is a clause in a bond's indenture granting the issuer the right to call, or buy back, all or part of an issue prior to the maturity date. The bond indenture will stipulate when and how the bond can be called, and there are usually multiple call dates throughout the life of a callable bond.
Call risk is the risk that a bond issuer will redeem its bonds before they mature. Some bonds are callable, that is, the issuer has the right to call, or buy back all or some of the bonds before they mature.
A callable bond gives the borrower (issuer) the right to pay back the obligation to the lender (bondholder) before the stated maturity date. A callable bond (also called a "redeemable bond") is a bond with an embedded call option.
A canary call is a step-up bond that can't be called after a certain period. A step-up bond is a bond with a coupon that increases (“steps up”), usually at regular intervals, while the bond is outstanding.
Cash-flow matching is an investing strategy for investors who need to fund a series of future cash needs.  Buy-and-hold and indexing strategies are about generating steady rates of return in a portfolio.But a structured portfolio strategy (also called a dedicated portfolio strategy) is for investors who want to make sure their portfolios are worth a specific amount at a certain point in the future, usually because they need to fund future expenses like tuition or retirement.  Cash-flow matching is one of two kinds of structured portfolio strategies (the other is immunization), and it is intended for investors who need to fund a series of future expenses.
Catastrophe calls are provisions in bonds that allow the issuer to call the bonds if the item built or produced by the bond is destroyed. Let's assume ABC Town wants to build a new toll road, but it doesn't have the money to fund the construction.
A collateralized bond obligation (CBO) is a bond that uses a variety of high-yield junk bonds as collateral.These bonds are separated, or pooled, into tranches with higher and lower levels of risk.
A collateralized debt obligation (CDO) is a security that repackages individual fixed-income assets into a product that can be chopped into pieces and then sold on the secondary market.They are called collateralized because the assets being packaged -- mortgages, corporate debt, auto loans or credit card debt- - serve as collateral for investors.
A collateralized mortgage obligation (CMO) is a fixed income security that uses mortgage-backed securities as collateral.  Like other structured securities, CMOs are subdivided into graduated risk classes, called tranches that vary in degree based on the maturity structure of the mortgages. When an investor purchases a CMO, he or she purchases some class or tranche of the security whose risk depends on the maturity structure of the mortgages backing it.
A commercial mortgage-backed security (CMBS) is a fixed-income security, typically in the form of a bond, which uses commercial real estate loans as collateral. A CMBS is comprised of numerous commercial mortgages of varying terms and values, such as multi-family dwellings, commercial real estate, etc.
A convertible bond gives the bondholder the right to convert the bond into a fixed number of shares of common stock in the issuing company. For example, consider a Company XYZ bond with a $1,000 par value that is convertible into Company XYZ common stock.
In the bond world, convexity refers to the shape of the yield curve and  how sensitive bond prices are to changes in interest rates. The degree to which a bond's price changes when interest rates change is called duration, which often is represented visually by a yield curve.
Corporate bonds are debt instruments created by companies for the purpose of raising capital.They are called fixed-income securities because they pay a specified amount of interest on a regular basis.
A coupon bond, frequently referred to as a "bearer bond," is a bond with a certificate that has small detachable coupons.The coupons entitle the holder to interest payments from the borrower.  Actual coupon bonds are rare today because most bonds are not issued in certificate form; rather, they are registered electronically (although some bondholders still choose to hold paper certificates).
The coupon equivalent rate (CER), also known as the bond equivalent yield (BEY), is the effective yield on a zero-coupon bond when calculated as if it paid a coupon. To calculate the coupon equivalent rate, use the following formula: (Spread between current price and face value / current price) x (365 / time to maturity)   note that some versions of the formula use a 365-day year while others use 360-day year.
The coupon equivalent yield is the effective annual interest rate earned on a bond.It is used to understand what the annual return is or would have been on an investment lasing less than one year.
In the finance world, the coupon rate is the annual interest paid on the face value of a bond.It is expressed as a percentage.
A covenant is a promise a company makes, usually in return for a loan or bond issue. Covenants are most common in lending agreements and bond indentures.
A credit spread is the difference between the yields of two bonds that offer the same coupon and have the same maturity.Since yield reflects the risk of a bond, the credit spread reflects the difference in the risk of two bonds with otherwise similar characteristics.
Current yield represents the prevailing interest rate that a bond or fixed income security is delivering to its owners. The formula for current yield is defined as follows: CY = Annual interest payment / Current Bond Price For example, let's assume a particular bond is trading at par, or 100 cents on the dollar, and that it pays a coupon rate of 3%.
A day-count convention is a method of counting the days between coupon dates. Let's assume a $1,000 bond from Company XYZ has a 10% coupon, which means it pays out $100 a year.
A death bond is a bond backed by life insurance policies. Let's say Company XYZ is a life-settlement provider.
A death put is an option added to a bond that gives the bondholder's estate the right, but not the obligation, to sell the bond back to the issuer at face value if the bondholder dies. Bob buys a bond with a death put for $1,000.
Debentures are bonds that are not secured by specific property or collateral.Instead, they are backed by the full faith and credit of the issuer, and bondholders have a general claim on assets that are not pledged to other debt.
A debt security is an investment in a debt instrument issued by a corporation or government as it borrows money.Commonly, the security, also referred to as a bond or fixed income security, will be issued with a stated face value (amount borrowed), maturity date, and rate of interest.  An issuer, whether a corporation, municipality, state, or nation, will borrow money from investors by issuing or selling debt securities.
A deep discount bond is a bond that sells at a price which is 20% or more below the face value of the bond, and carries a low rate of interest during the term of the bond.  The investor purchases the bond at a price that is below face value.
Default risk is the chance that the bond issuer will not make the required coupon payments or principal repayment to its bondholders. Although the definition of default risk may be fairly concrete, measurement of it is not.  Many things can influence an issuer's default risk and in varying degrees.
A deferred interest bond is a bond which pays interest in full upon maturity. A deferred interest bond, unlike most bonds, does not pay interim (coupon) payments between issuance and maturity.
A bond’s duration is a measure of the bond’s sensitivity to interest rate changes.Duration may also be thought of as a measurement of interest rate risk.  It's common for new bond investors to confuse the financial term “duration” with the length of time until a bond is repaid.
In the mortgage business, a dwarf is a group of mortgage-backed securities that mature in fewer than 15 years.The Federal National Mortgage Association (FNMA or Fannie Mae) issues dwarves.
Early amortization refers to the accelerated repayment of bond principal, generally for an asset-backed security (ABS). Early amortization is also referred to as payout events or early calls.
An early call refers to the accelerated repayment of bond principal, normally on an asset-backed security (ABS). An early call is also known as early amortization or a "payout event." An early call usually takes place when the number of delinquencies on the loans underlying an ABS suddenly increases.
EE Bonds are one of two types of savings bond sold by the U.S.Treasury (the other is I Bonds).
Effective duration is a calculation used to approximate the actual, modified duration of a callable bond.It takes into account that future interest rate changes will affect the expected cash flows for a callable bond.
For bonds, effective yield is an annual rate of return associated with a periodic interest rate. The formula for effective yield is: [1 + (i/n)]n - 1 Where: i = the nominal rate n = the number of payment periods in one year Let's assume you purchase a Company XYZ bond that has a 5% coupon.
An election period is a window of time during which a person can take a certain action.In the bond world, the term refers to the period of time a holder of an extendible or retractable bond can extend or retract a bond.
An equity linked note (or ELN) is a debt instrument that varies from a standard fixed-income security in that the coupon is built on the return of a single stock, basket of stocks, or equity index, otherwise known as the underlying equity. An ELN is a principal-protected instrument generally intended to return 100% of the original investment at maturity, but deviates from a typical fixed-coupon bond in that its coupon is governed by the appreciation of the underlying equity.
As the name implies, equity-linked securities (ELKS) are hybrid debt securities whose return is connected to an underlying equity (usually a stock).ELKS pay a higher yield than the underlying security and generally mature in one year.
An equivalent taxable interest rate (also called equivalent taxable yield) is the return that is required on a taxable investment to make it equal to the return on a tax-exempt investment.The equivalent taxable interest rate is commonly used when evaluating municipal bond returns.
A eurobond is a bond denominated in a currency not native to the issuer's home country.Eurobonds are commonly issued by governments, corporations, and international organizations.
An exchangeable bond gives the holder the option to exchange the bond for the stock of a company other than the issuer (usually a subsidiary) at some future date and under prescribed conditions.This is different from a convertible bond, which gives the holder the option to exchange the bond for other securities (usually stock) offered by the issuer.
Expectations theory suggests that the forward rates in current long-term bonds are closely related to the bond market's expectation about future short-term interest rates.  Expectations theory attempts to explain the term structure of interest rates.There are three main types of expectations theories: pure expectations theory, liquidity preference theory and preferred habitat theory.
Face value, also referred to as par value or nominal value, is the value shown on the face of a security certificate, including currency.The concept most commonly applies to stocks and bonds, so it is particularly important to bond and preferred stock investors.
A fallen angel is a bond which once carried a high rating and displayed exceptional performance, but has since experienced a serious sustained decline in ratings and market demand. For the last five years, the Standard & Poor's agency gave Company XYZ an investment-grade rating of A, meaning it believes XYZ is a quality company with low credit risk.
The Federal Open Market Committee (FOMC) is main policy-making body of the Federal Reserve.The FOMC is responsible for conducting open market operations.
A final maturity date is the date upon which all principal and interest must be repaid. Any debt instrument is made of interest and principal components which an issuer is implicitly obligated to repay.
Flat yield curve refers to a yield curve that reflects little or no disparity between short-term and long-term interest rates. A flat yield curve is essentially a horizontal line representing similar yields for short-term and long-term debt securities in the same credit category, as shown below: Under these circumstances, for instance, a bond with a 30-year term would have virtually the same yield as a similarly-rated bond with only a five-year term.
G7 bonds are generally regarded as less risky than bonds issued by other countries.Accordingly, they are often more liquid than sovereign debt from other countries and are sometimes preferred by conservative income investors who want some international exposure.
A general obligation bond is a municipal debt issue that is secured by a broad government pledge to use its tax revenues to repay the bond holders. General obligation debt issued by local governments generally requires a pledge of full faith and credit of the local government.  Since a local government's credit is based on tax receipts, it is pledging the receipt of taxes and its ability to levy those taxes in support of the debt.  Local governments are able to secure the receipt of taxes through priority liens on property.  As a result, general obligation bonds, supported by the taxing and lien powers, carry the credit rating of the local government.
Gilts are bonds issued by the British government.India's government bonds are also called gilts.
A government bond is debt issued by the government. The Treasury Department usually issues government bonds, typically through an auction process.
A guaranteed bond is a bond whose interest and principal payments are guaranteed by a third party. An entity that issues a guaranteed bond has solicited a third party (usually a bank, insurance company or another corporation) that agrees to pay the interest and principal payments on the bond should they, the issuer, be unable to make such payments.
Hard call protection is a provision in a callable bond that limits the issuer's ability to exercise the call feature. A callable bond allows the issuer to repay the bond's principal balance before its maturity date with little notice to the holder.
A harmless warrant is a bond provision that instructs a holder to relinquish the bond to the issuer should the holder purchase another bond from the same company with comparable features. A bond with a harmless warrant, also known as a wedding warrant, requires the holder to return the bond to the issuer if the holder purchases a different bond from the same company that quantitatively resembles the original bond.
High-income trigger securities (HITS) are senior unsecured debt securities that pay an annual coupon rate and repay their original principal either in cash or shares, depending on the issuer's stock performance. Let's assume Morgan Stanley issues HITS on Company XYZ that have $10 face values, pay a 10% annual coupon, and mature one year from today.
A high-yield bond is a corporate bond with a credit rating below BBB (also called a junk bond). High-yield bonds are high-risk investments, and for this reason they (and the mutual funds that invest in them) have potential for higher returns than other types of bonds or bond funds.
A high-yield bond fund is a mutual fund that invests in corporate bonds rated below BBB (i.e., high-yield bonds, also called junk bonds). High-yield bonds are high-risk investments, and for this reason they (and the funds that invest in them) have potential for higher returns than other types of bonds or bond funds.
A high-yield bond spread is simply the difference in yield between two high-yield debt securities or, more commonly, two classes of high-yield debt securities. Let's assume that junk bond X is yielding 5%, and junk bond Y is yielding 7%.
An I Bond is one of two types of savings bonds sold by the U.S.Treasury (the other is the EE Bond).
An indenture agreement is the formal contract between a bond issuer and the bondholders.It sets forth the details of all the terms and conditions of the bonds, such as the exact day of their maturity, the timing of the interest payments and how they are calculated, and the details of any special features.
Inflation-indexed securities are a form of savings that protects the principal and interest from the erosion of inflation. One of the most significant economic threats to anyone living on a fixed income or a fixed stock of assets is the eroding effects of inflation.  For example, with an inflation rate of 3% per year, a fixed income investment earning 5% per year will yield only 2% earnings in real terms.  Retirees receiving Social Security payments are exposed to inflation on their savings or pensions, even when those payments are adjusted for inflation.
Interest rate risk is the chance that an unexpected change in interest rates will negatively affect the value of an investment. Let's assume you purchase a bond from Company XYZ.
International bonds are debt securities issued by foreign companies or governments and sold domestically. Foreign companies or governments may issue bonds that are securitized and sold to domestic investors in the form of international bonds.
An inverted yield curve, also called a negative yield curve, is a yield curve indicating that short-term yields are higher than long-term yields. Also known as the term structure of interest rates, the yield curve is a graph that plots the yields of similar-quality bonds against their maturities, ranging from shortest to longest.
Investment grade is a quality designation ascribed by rating agencies to bonds that have little risk of default. Municipal and corporate bonds are rated by credit agencies, such as Standard & Poor's and Moody's, based on the creditworthiness of the issuer.
A joint bond is a bond that is backed by an issuer and one or more additional guarantors. A company that wants to raise capital using bonds may choose to issue joint bonds if it generates low or fluctuating levels of revenue.
A jumbo CD is a certificate of deposit of $100,000, $1 million or more. Let's say Company XYZ is a retirement fund for a firefighters' union.
A jumbo pool is a security backed by mortgages from several issuers. To understand how jumbo pools work, it's important to understand how they're created.
A junk bond is a fixed-income security that is rated below investment grade by one or more of the major bond ratings agencies.  A junk bond works the same as most other bonds: An investor purchases a bond from a bond issuer with the assumption that the money will be paid back when the bond reaches its maturity date.The difference between an "investment grade" bond and a "junk" bond is that the junk bond issuer may not be able to repay the original principal.
Also known as a Matilda bond, a kangaroo bond is a bond issue in the Australian market by a non-Australian company. Let's say Company XYZ is headquartered in San Diego.
Key rate duration is not the same as effective duration.Effective duration is an estimate of a security's sensitivity to a parallel shift in interest rates, meaning that it assumes that interest rates change by the same degree for, say, one-year bonds, five-year bonds, 10-year bonds, and 30-year bonds.
Laddering is a bond investment strategy whereby an investor staggers the maturity of  the bonds in his/her portfolio so that the bond proceeds can be reinvested at regular intervals. For example, say you have $75,000 to invest.
A long bond is a Treasury bond that is issued for an extended period of time (twenty to thirty years).  The investing public can purchase long bonds from brokers.The desire to obtain these types of long bonds originates from the needs of pension funds and others to hold low-risk securities as a portion of their portfolios.
The Macaulay duration (named after Frederick Macaulay, an economist who developed the concept in 1938) is a measure of a bond's sensitivity to interest rate changes.Technically, duration is the weighed average number of years the investor must hold a bond until the present value of the bond’s cash flows equals the amount paid for the bond.
A make-whole call provision is a call provision attached to a bond, whereby the borrower must make a payment to the lender in an amount equal to the net present value of the coupon payments that the lender will forgo if the borrower pays the bonds off early. Let's say John Doe buys a Company XYZ bond that matures in 20 years but has a make-whole call provision.
Mandatory Convertibles are hybrid securities (bonds linked to equities) that automatically convert to equity (stock) at a pre-determined date.Common names are PERCS (Preferred Equity Redemption Cumulative Stock) and DECS (Debt Exchangeable for Common Stock or Dividend Enhanced Convertible Securities).
Market discount is the loss in market value sustained by a bond following an increase in interest rates. In the secondary bond market, bond prices move inversely to interest rates.
Also known as a kangaroo bond, a Matilda bond is a bond issue in the Australian market by a non-Australian company.   Let's say Company XYZ is headquartered in San Diego.
Maturity is the date on which a bond or preferred stock issuer must repay the original principal borrowed from a bondholder or shareholder. Let's assume that on January 1, 2000, you purchased an XYZ Company bond that had a 10-year maturity.
Maturity date refers to the date on which the principal and interest associated with a debt security must be repaid to the holder in its entirety. Debt instruments such as bonds, CDs, and commercial paper are issued with a lifespan that terminates on a specific date, known as the maturity date.
Coined the "Junk Bond King" during the 1980s, Michael Milken was instrumental in engineering a lucrative junk-bond market before being indicted on numerous counts of securities fraud.After serving a brief prison sentence from 1989 to 1991, he became a philanthropist supporting advances in medical treatments.
Moody's Corporation (NYSE:MCO) is a publicly traded financial services company. Moody's Corporation operates two segments: Moody's Investor Service and Moody's Analytics.
A mortgage bond uses a mortgaged property as collateral. A mortgage bond is collateralized by one or several mortgaged properties.
A municipal bond, commonly referred to as a "muni" bond, is a debt security issued by a state or local government. The purchaser of a municipal bond is effectively loaning money to a government entity, which will make a predetermined number of interest and principal payments to the purchaser.
Municipal investment trusts (MITs) are entities that hold a stake in numerous municipal bonds and then sell shares to the public that represent an interest in those bonds.When the municipal bonds then pay off interest or mature, the trust passes the income on to their shareholders.
The Municipal Securities Rulemaking Board (MSRB) regulates municipal bond underwriters and dealers in an attempt to prevent fraud and manipulation in the issuance and trading of municipal bonds.Congress created the MSRB when it passed the Securities Acts Amendments of 1975.
Negative butterfly refers to a change in the yield curve whereby medium-term yields change by a greater magnitude than short-term and long-term yields.It is important to note that the negative butterfly is the opposite of the positive butterfly, where medium-term rates change less than the short-term and long-term rates.
Negative convexity refers to the shape of a bond's yield curve and the extent to which a bond's price is sensitive to changing interest rates. The degree to which a bond's price changes when interest rates change is called duration, which often is represented visually by a yield curve.
Net debt to assessed valuation is a term used in the municipal bond world to compare the value of debt to the value of the issuer's assets purchased or assessed. The formula for net debt to assessed valuation is: Net Debt to Assessed Valuation = (Short-Term Debt + Long-Term Debt - Cash and Cash Equivalents)/Total Property or Asset Taxable Value For example, let's assume that County XYZ has $100 million in short-term debt, $400 million in long-term debt and $10 million in cash and cash equivalents.
Net debt to estimated valuation is a term used in the municipal bond world to compare the value of debt to the market value of the issuer's assets.It is not the same as net debt to assessed valuation.
A net revenue pledge requires issuers of municipal bonds to use their net revenues (revenue minus expenses) to pay the principal and interest of the municipal bonds before any other use. Let's assume City XYZ issues $10 million of municipal bonds to build a toll road.
Also called a positive yield curve, a normal yield curve is one in which short-term yields are lower than long-term yields. A yield curve is a graph that plots the yields of similar-quality bonds against their maturities, ranging from shortest to longest.
An off-the-run Treasury is any Treasury bill or note that is not part of the most recent issue of the same maturity. For example, let's assume that in March, the U.S.
An off-the-run Treasury yield curve is a yield curve based on the maturities, prices, and yields of Treasury bills or notes that are not part of the most recent issue of Treasury securities. For example, let's assume that in March, the U.S.
Par value is the face value of a bond.It is the principal amount that the lender (investor) is lending to the borrower (issuer).
The term "payee" refers to an individual or entity that will receive a payment.It can also be referred to as the beneficiary in situations that pertain to a benefactor.  There are a number of examples of payees.
A payment in kind (PIK) bond is a bond that pays interest in additional bonds instead of cash. Instead of the returns on a bond being paid in cash, the dividend is returned to the bond buyer in the form of additional principal (more bonds).   Usually, the issuer has the option to deliver more bonds during an initial period, instead of a coupon payment.
A payout event refers to the accelerated repayment of bond principal, usually on an asset-backed security (ABS). A payout event is also referred to as early amortization or early calls.
A perpetual bond is a debt with no maturity date.Investors may collect interest from these bonds indefinitely much as they would expect from a dividend-paying stock or preferred stock.
A premium put convertible bond is a bond that can be redeemed by the investor at premium before its maturity date. Premium put convertible bonds have a feature comparable to a put option that permits the holder to redeem the bond at a premium in advance of maturity date.
Principal-only STRIPS are synthetic zero-coupon bonds that are based on the principal component of Treasury securities. STRIPS stands for Separate Trading of Registered Interest and Principal of Securities.
A private-purpose bond is a municipal bond that uses a significant amount of its proceeds to fund private activities or benefit private parties. Let's assume Company XYZ wants to open a factory in ABC Town, which is economically depressed, but Company XYZ doesn't have the $100 million necessary to construct the factory.
A public-purpose bond is a municipal bond that is used to fund projects that benefit the general public rather than private groups or individuals.Public-purpose bond contrast with private-purpose bonds, which use a significant amount their proceeds to fund private activities or benefit private parties.
A pure yield pickup swap describes an investing strategy where an investor exchanges lower yield bonds for higher yield bonds. In a pure yield pickup swap, an investor who holds bonds with lower yields purchases higher yield bonds using the proceeds from the sale of the former.
A put bond permits the bond holder to force the issuer to repurchase the security before maturity.  In bond financing, the issuer sells bonds at a coupon rate (i.e., the interest rate payable on the bonds to the bond buyer) for a specific period of time.The issuer knows that they will have the principal and pay interest on the principal for the term of the bonds.
Putable bonds are bonds that give the holder the right to sell his or her bond to the issuer prior to the bond's maturity date. The bond indenture will stipulate when and how the bond can be sold, and there are often multiple sell dates throughout the life of a putable bond.
Qualified savings bonds are series EE bonds issued after December 1989.  Series EE savings bonds are bonds guaranteed by the United States government.They pay interest (usually at relatively low rates) and have varying maturities.
A rate trigger is a change in interest rates that prompts a bond issuer to call its bonds.   Let's say Company XYZ issued a bond with a 10% coupon rate this  year.
Refunding protection is bond provision that keeps an issuer from using cheaper debt to redeem a bond issue before it matures. Let's assume Company XYZ issues $10 million of 10% coupon bonds that mature in 10 years.
Reinvestment rate is the rate at which an investor can reinvest cash flows from an investment. Put simply, an investor might receive, say, a 6% dividend, but what does he do with that money when he gets it?
Reinvestment risk is the chance that an investor will not be able to reinvest cash flows from an investment at a rate equal to the investment's current rate of return. For example, consider a Company XYZ bond with a 10% yield to maturity (YTM).
Revenue bonds are municipal bonds that are issued to fund specific projects that generate their own revenue. Let's assume ABC Town wants to build a new toll road, but it doesn't have the money to fund the construction.
Rising star companies have a low credit rating (often "junk"), but only because they are new to the bond market or still establishing a track record.  A rising star is a relatively new company that doesn't yet have the track record and/or the size to earn an investment-grade rating from a credit rating agency like Standard & Poor's or Moody's.  For example, let's say Company XYZ is a small video gaming company.Company XYZ is profitable, but it needs $10 million right now so it can hire new programmers to expand its line of video games.
Samurai bonds are corporate bonds issued in Japan by a non-Japanese company.  Samurai bonds are yen-denominated bonds issue in Japan by a foreign company.The bonds are subject to Japanese bond regulations, attracting buyers (i.e., investors) from Japan and provide capital to a foreign issuer.
Savings bonds are bonds sold by the U.S.Treasury.
STRIPS stands for Separate Trading of Registered Interest and Principal of Securities.They are securities that represent the separate interest and principal components of Treasuries.
Serial bonds (or installment bonds) describes a bond issue that matures in portions over several different dates.  Instead of facing a large lump-sum principal re-payment at maturity, an issuer can opt to spread the principal repayment over several periods. Normally, when a company or government body issues bonds, all of those bonds mature on the same date (that is, the borrower must repay all of the debt on one particular day).
A sinking fund is a part of a bond indenture or preferred stock charter that requires the issuer to regularly set money aside in a separate custodial account for the exclusive purpose of redeeming the bonds or shares. To understand how a sinking fund works, let's assume Company XYZ issues $10 million of bonds that mature in 10 years.
Special assessment bonds (also known as special assessment obligations) are municipal bonds that are repaid with taxes assessed on the land that benefits from the improvements financed by the bonds. For example, let's assume ABC Town wants to revamp the sewer system in the XYZ neighborhood, but it does not have the $10 million necessary to do so.
Special assessment obligations (also called special assessment bonds) are municipal bonds that are repaid with taxes assessed on the property that benefits from the improvements financed by the bonds. For example, let's assume ABC Town wants to revamp the sewer system in the XYZ neighborhood, but it does not have the $10 million it needs to do so.
A step-up bond is a bond with a coupon that increases ("steps up"), usually at regular intervals, while the bond is outstanding.Step-up bonds are often issued by government agencies.
STRIPS stands for Separate Trading of Registered Interest and Principal of Securities.They are securities that represent the separate interest and principal components of Treasury securities.
A structured portfolio is a type of passively managed portfolio whose cash inflows are designed to meet the cash outflow requirements to fulfill a future obligation. A structured portfolio is also referred to as a dedicated portfolio.
A taxable bond is a bond whose interest payments are taxable at the federal, state and/or local level. The purchaser of a taxable bond is, in effect, lending money to a company or other entity that will make a predetermined number of interest and principal payments to the purchaser.
Taxable equivalent yield (also called equivalent taxable interest rate) is the return that is required on a taxable investment to make it equal to the return on a tax-exempt investment.The taxable equivalent yield is commonly used when evaluating municipal bond returns.
The term structure of interest rates, also called the yield curve, is a graph that plots the yields of similar-quality bonds against their maturities, from shortest to longest.  The term structure of interest rates shows the various yields that are currently being offered on bonds of different maturities.It enables investors to quickly compare the yields offered on short-term, medium-term and long-term bonds.
A Treasury Bill, or T-bill, is short-term debt issued and backed by the full faith and credit of the United States government.These debt obligations are issued in maturities of four, 13 and 26 weeks in various denominations as low as $1,000.
Treasury bonds ("T-Bonds") are long-term, semiannual bonds issued by the U.S.Treasury.
Treasury Inflation-Protected Securities (TIPS) are Treasury bonds that are adjusted to eliminate the effects of inflation on interest and principal payments, as measured by the Consumer Price Index (CPI). Let's assume you purchase a 10-year TIPS for $1,000, and the annual coupon rate is 5%.
The Treasury market is where the United States government raises money by issuing debt.The U.S.
Treasury notes, also known as T-notes, are intermediate-term bonds issued by the U.S.Treasury.
TreasuryDirect is the website used by the U.S.Treasury Department to sell Treasury securities directly to investors.
A trustee holds or manages cash, assets or a property title for a beneficiary.The trustee has a fiduciary duty to act in the best interest of the beneficiary.
U.S.savings bonds are bonds sold by the U.S.
A war bond is a bond issued to finance war. Let's say that Country X attacks Country Y.
A wedding warrant is a bond provision that requires the holder of a bond to relinquish the bond to the issuer if the holder purchases another bond with similar features from the same company. A bond with a wedding warrant, also known as a harmless warrant, requires the holder to return the bond to the issuer if the holder purchases another bond from the same company that quantitatively resembles the original bond.
Yankee bonds are bonds issued in the U.S.bond market by a foreign entity, and they are denominated in U.S.
A Yankee CD is a certificate of deposit issued by a foreign bank in the United States and denominated in U.S.dollars.
Similar to the Pink Sheets, the Yellow Sheets are information about the prices of corporate bonds traded on the over-the-counter market (that is, bonds not listed on the mainstream exchanges). The Yellow Sheets disseminate information to market data vendor terminals and websites to subscribing customers.
Yield refers to the cash return to the owner of a security or investment.  In general, yield is calculated as follows: Periodic Cash Distributions / Total Cost of Investment = Yield The term yield may refer to slightly different aspects of a return for variable types of investments.For example, a yield on bonds, such as the coupon yield is the annual interest paid on the principal amount of the bond.
Yield advantage is the difference between yields on two different securities issued by the same company.It is the additional amount an investor can expect to earn if he or she chooses one security over another.
Yield basis refers to the act of quoting bond prices in terms of yield percentages rather than in dollars. Let's assume Company XYZ has $20,000,000 in bonds outstanding that pay 5% interest per year (or $50 per $1,000 bond).
Yield burning is the illegal practice of excessively marking up municipal and/or Treasury bonds in order to complete a bond offering. Let's assume interest rates have come down and City XYZ wants to refinance some outstanding municipal bonds.
The yield curve, also known as the "term structure of interest rates," is a graph that plots the yields of similar-quality bonds against their maturities, ranging from shortest to longest.(Note that the chart does not plot coupon rates against a range of maturities -- that's called a spot curve.) The yield curve shows the various yields that are currently being offered on bonds of different maturities.
Yield curve risk refers to the probability that the yield curve will shift in a manner that affects the values of securities tied to interest rates -- particularly, bonds. Also known as the term structure of interest rates, the yield curve is a graph that plots the yields of similar-quality bonds against their maturities, ranging from shortest to longest.
A yield elbow is the highest point on the yield curve. Also known as the term structure of interest rates, the yield curve is a graph that plots the yields of similar-quality bonds against their maturities, ranging from shortest to longest.
The yield equivalence is the yield a taxable investment would have to offer to equal the tax-free yield on a municipal bond.The formula to calculate yield equivalence for a taxable security is: Yield equivalence = Taxable Yield x (1 - Tax Rate) The formula to calculate yield equivalence for a tax-exempt security is: Yield Equivalence = Tax-Exempt Yield / (1 - Tax Rate) Let's assume an investor is trying to decide whether to invest in the bonds of Company XYZ or in municipal bonds issued by City ABC.
Yield pickup is the increase in yield an investor gets by selling one bond and buying another one with a higher yield. Let's assume Jane owns a bond issued by Company XYZ with a 5% yield.
Yield spread is the difference in yield between two securities or, more commonly, two classes of securities. Let's assume that Bond X is yielding 5% and Bond Y is yielding 7%.
The yield to average life is the yield on a security based on the security's average maturity rather than the maturity date of the issue.The concept is usually applied to bonds with sinking funds, which are often retired early and thus have shorter lives than their maturity dates suggest.
Yield to call is a measure of the yield of a bond if you were to hold it until the call date. To understand yield to call, one must first understand that the price of a bond is equal to the present value of its future cash flows, as calculated by the following formula: where: P = price of the bond n = number of periods C = coupon payment r = required rate of return on this investment F = principal at maturity t = time period when payment is to be received   To calculate the yield to call, the investor then uses a financial calculator or software to find out what percentage rate (r) will make the present value of the bond's cash flows equal to today's selling price.
Yield to worst (YTW) is the lowest yield an investor can expect when investing in a callable bond. The concept is best illustrated with an example.
A yield-based option is a financial instrument that gives the owner the right but not the obligation to purchase a debt security.The value of the yield-based option depends on the difference between the strike price, expressed as a percentage, and the yield on the debt security.
A Z-bond is a bond representing the last tranche of a bond that relies on payments from underlying securities. To understand how Z-bonds work, it's important to understand how they're created.
A Z-tranche is the last tranche of a bond that relies on payments from underlying securities. To understand how Z-tranches work, it's important to understand how they're created.
A zero coupon bond is a bond that makes no periodic interest payments and is sold at a deep discount from face value.The buyer of the bond receives a return by the gradual appreciation of the security, which is redeemed at face value on a specified maturity date.