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 Bond Investing Terms

bond A security that obligates the issuer to repay the principal amount upon maturity and to make specified interest payments over specified time intervals to the bond holder. The issuer can be a corporation or a governmental entity. A bond is a debt obligation; the bondholder is a lender to the issuer and there is no ownership position.

bond amortization Each year a portion of the bond's original issue discount must be accrued and included in gross income.

call date The date at which some bonds are redeemable by the issuer prior to the maturity date.

callable bond A bond that can be redeemed by the issuer prior to its maturity. Usually a premium is paid to the bond owner when the bond is called.

cash investment Very short-term (usually 90 days' maturity or less) obligation such as money market fund or very short-term CD that provides a return in the form of interest payments.

certificate of deposit (CD) Savings certificate that entitles the holder to the receipt of interest. CDs are issued by commercial banks and savings and loans (or other thrift institutions).

collateralized mortgage obligation (CMO) Specialized instrument designed to even-out the cash flow payments of mortgage-backed securities. CMOs are backed by pools of mortgages and are not riskless.

commercial paper Unsecured short-term obligations with maturities ranging from 2 to 270 days issued by banks, corporations, and other borrowers.

convertible security A corporate bond or a share of preferred stock that can be converted into shares of common stock of the issuing corporation.

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.

current yield Annual income (interest or dividends) divided by the current price of the security. For stocks, this is the same as the dividend yield. Or, a bond with a current market price of $1,000 that pays $60 per year in interest would have a current yield of 6%.

debenture A long-term debt instrument that is not secured by a specific asset. In the event of default, the holder does not have a claim against any specific asset(s) of the issuing firm.

deep discount bond A bond that has a coupon rate far below rates currently available on investments and whose value is at a significant discount from par value.

default risk The risk that a company will be unable to pay the contractual interest or principal on its debt obligations.

discount bond A bond that is valued at less than its face amount.

discount rate The interest rate used in discounting future cash flows; also called the "capitalization rate."

face value The stated principal amount of a debt instrument.

fixed-income security An investment vehicle that provides a return in the form of fixed periodic payments and return of principal; examples are bonds and certificates of deposit.

general obligation bond (GO) A municipal bond backed by the full faith, credit, and "taxing power" of the issuing unit rather than the revenue from a given project.

GNMA (Ginnie Mae) pass-through certificate Fixed-income securities that represent an undivided interest in a pool of federally insured mortgages put together by GNMA, the Government National Mortgage Association.

government bond A debt obligation issued by the U.S. government.

guaranteed investment (interest) contract (GIC) Debt instrument sold in large denominations often bought for retirement plans. The word guaranteed refers to the interest rate paid on the GIC; the principal is at risk.

junk bond Bond purchased for speculative purposes. Usually rated BB and lower, and has a higher default risk.

maturity The length of time until the principal amount of a bond must be repaid.

maturity date The date when the principal amount of a security becomes due and payable.

municipal bond Tax-free debt instrument issued by a state or local government.

par value (bond) The face value of a bond, generally $1,000 for corporate issues, with higher denominations for many government issues.

premium bond A bond that is valued at more than its face amount.

principal The amount owed; the face value of a debt; the amount invested.

revenue bond A municipal bond supported by the revenue from a specific project, such as a toll road, bridge, or municipal coliseum.

sinking fund provision A means of repaying funds advanced through a bond issue. The issuer makes periodic payments to the trustee, who retires part of the issue by purchasing the bonds in the open market.

Treasury bill Short-term debt security issued by the federal government for periods of one year or less.

Treasury bond Longer-term debt security issued by the federal government for a period of seven years or longer.

Treasury note Longer-term debt security issued by the federal government for a period of one to seven years.

unit investment trust A company that purchases securities (usually fixed income) and sells shares representing proportional interest in the portfolio of those securities. The trust is liquidated when the securities mature.

yield The amount of interest paid on a bond divided by the price. A measure of the income generated by a bond. A yield is not a total return measure because it does not include capital gains or losses.

yield curve A curve that shows interest rates at a specific point for all securities having equal risk but different maturity dates. Usually, government securities are used to construct such curves.

yield to maturity The yield on a security assuming that interest payments will be made and reinvested until the final maturity date, at which point the principal will be repaid by the issuer.

zero-coupon bond A bond that generates no periodic interest payments and is issued at a discount from face value. All return is realized at maturity.