accrued interest
1- The dollar amount of interest accrued
on an issue, based on the stated interest rate on
that issue, from its date to the date of delivery
to the original purchaser. This is usually paid
by the original purchaser to the issuer as part
of the purchase price of the issue.
2- Interest deemed to be earned on a security
but not yet paid to the investor.
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ask price
Price being sought for the security by the seller.
Also called the offer.
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basis point
Smallest measure used in quoting yields on bonds
and notes. One basis point is 0.01% of yield. For
example, a bond's yield that changed from 5.50%
to 5.90% would be said to have moved 40 basis points.
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benchmark
A bond whose terms are used for comparison with
other bonds of similar maturity. The global financial
market typically looks to U.S Treasury securities
as benchmarks.
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bid
Price at which a buyer is willing to purchase a
security.
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bullet
A security with a fixed maturity and no call feature.
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coupon
The rate of interest payable annually. Where the
coupon is blank, it can indicate that the bond can
be a 'zero-coupon,' a new issue, or that it is a
variable-rate bond.
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current yield
The ratio of interest 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 $60 per year in interest would have a current
yield of 6%.
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CUSIP
The Committee on Uniform Security Identification
Procedures, which was established under the auspices
of the American Bankers Association to develop a
uniform method of identifying municipal, U.S. government,
and corporate securities. CUSIP numbers are unique
nine-digit numbers assigned to each series of securities
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duration
The weighted maturity of a fixed-income investment's
cash flows, used in the estimation of the price
sensitivity of fixed-income securities for a given
change in interest rates.
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floating-rate bond
A bond for which the interest rate is adjusted periodically
according to a predetermined formula, usually linked
to an index.
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hedge
An investment made with the intention of minimizing
the impact of adverse movements in interest rates
or securities prices.
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high-yield bond
Bonds issued by lower-rated corporations, sovereign
countries and other entities rated Ba or BB or below
and offering a higher yield than more creditworthy
securities; sometimes known as junk bonds.
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investment grade
Bonds considered suitable for preservation of invested
capital; ordinarily, those rated Baa3 or better
by Moody's Investors Service, or BBB- or better
by Standard & Poor's Corporation (see "ratings").
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leverage
The use of borrowed money to increase investing
power.
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LIBOR (London Interbank
Offered Rate)
The rate banks charge each other for short-term
Eurodollar loans. LIBOR is frequently used as the
base for resetting rates on floating-rate securities.
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maturity date
The date when the principal amount of a security
becomes due and payable.
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negative convexity
A characteristic of callable or prepayable securities
that causes investors to have their principal returned
sooner than expected in a declining interest rate
environment or later than expected in a rising interest
rate environment. In the former scenario, investors
may have to reinvest their funds at lower rates
("call risk"); in the latter, they may miss an opportunity
to earn higher rates ("extension risk").
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settlement
date
The date for the delivery of securities and payment
of funds.
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sinking fund
Separate accumulation of cash or investments (including
earnings on investments) in a fund in accordance
with the terms of a trust agreement or indenture,
funded by periodic deposits by the issuer (or other
entity responsible for debt service), for the purpose
of assuring timely availability of moneys for payment
of debt service. Usually used in connection with
term bonds.
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spread to Treasury
The difference between between the yield on a fixed-income
security and the yield on a Treasury security of
comparable maturity. For example, the spread between
a 10-year Treasury yielding 5.15% and a 10-year
corporate yielding 5.80% is 65 basis points.
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yield curve
The graphical relationship between yield and maturity
among bonds of different maturities and the same
credit quality. This line shows the term structure
of interest rates.
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yield to maturity
A yield on a security calculated by assuming that
interest payments will be made until the final maturity
date, at which point the principal will be repaid
by the issuer. Yield to maturity is essentially
the discount rate at which the present value of
future payments (investment income and return of
principal) equals the price of the security.
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zero-coupon bond
A bond for which no periodic interest payments are
made. The investor receives one payment at maturity
equal to the principal invested plus interest earned
compounded semiannually at the original interest
rate to maturity.
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Glossary
Important legal information - please read the