A-C | D-H | I-N | O-R | S-Z AAccreted ValueZero Coupon Bonds are issued at a discount and mature at Par ($1,000). The value of the bond increases mathematically by a slight amount every day during the life of the bond. The mathematical value of the bond on a given day is its accreted value (or accumulated value to date). Note that the accreted value may be higher or lower than the market value of the bond.
Accrued InterestAccrued interest is the amount of interest that has been earned since the last interest payment date. When a bond trades, the buyer pays the seller the accrued interest - a pro rata portion of the next interest payment, which will be paid to the buyer of the bond.
Agency BondsAgency bonds are issued by United States agencies, and are generally thought to be very safe investments in terms of default risk. Examples of well known agencies that issue bonds are Federal Home Loan Mortgage Corporation (FHLMC or "Freddie Mac"), Federal National Mortgage Association (FNMA or "Fannie Mae"), and the Federal Home Loan Bank.
Alternative Minimum Tax (AMT)In addition to calculating regular income tax, taxpayers are also required to calculate tax liability using the AMT method. The taxpayer then pays the higher of the tax calculated by the two methods. Some municipal bonds are subject to AMT, meaning that if you pay AMT, the interest earned on these bonds is taxable under the AMT calculation. Other municipal bonds are not subject to AMT, meaning that even if you pay taxes using the AMT method, interest from non-AMT municipals will not be taxable. Please consult your tax advisor for complete details, and how you might be affected by buying municipal bonds that are subject to AMT.
B
Basis PointA basis point is simply 1/100th of one percent.
Bearer BondsBearer bonds are unregistered bonds which are payable to the bearer. Bonds are no longer issued in bearer form, but there are some older bearer bonds that are still in circulation.
BondA bond is a debt instrument in which the issuer promises to pay to the bondholder principal and interest according to the terms and conditions of the bond.
Bond Ladder (Laddered Portfolio) A bond ladder is a portfolio of bonds that have staggered maturities. For example, rather than invest $100,000 in a 5 year bond, an investor might choose to invest in 4 blocks of $25,000 maturing in 2, 4, 6, and 8 years. This enables the investor to diversify in terms of default risk and reinvestment risk.
Book EntryMost bonds are issued in book entry form, which means that there is no physical bond certificate. Bond ownership is evidenced by a trade confirmation issued by the broker/dealer, and by the monthly statements that the brokerage firm provides.
CCall DateWhen a bond is issued, the issuer may have the option to call (redeem) the bond on specified dates and prices prior to maturity. The list of dates on which a specified bond can be called is shown in a call schedule.
Call ProtectionCall protection refers to the amount of time from the current date until a bond can be called. For example, if the first call on a bond is in 3 years from now, a buyer will have 3 years of call protection, and they are assured that they can own the bond for at least 3 years.
Call RiskCall risk refers to the risk that a bond may be called when the investor does not want it to be called. Bond are often called when interest rates decline, so investors in the bond get their cash back and have to reinvest it at the lower rates. Call risk can be eliminated by buying non-callable bonds.
Call ScheduleA call schedule is a list of the dates that a bond can be called, together with the corresponding price for each call date.
CallableIf a bond can be called (redeemed) prior to maturity, the bond is said to be callable. If a bond can not be called prior to maturity, it is said to be non-callable.
Certificates of ParticipationCertificates of Participation (COPs) are a type of municipal bond that are often used to finance capital improvement projects or equipment. The COPs represent participation in lease payments made by the municipality for the project or equipment.
Corporate BondCorporate bonds represent debt of corporations. The bonds are fully taxable, and they are issued in maturities ranging from less than one year to about 30 years (although there are a few corporate bonds that mature in more than 30 years). They typically pay interest twice a year. Corporate bonds can be quite safe when they are issued by strong companies, or they can have significant risk of default when issued by weak companies. Two rating agencies, Moody's and Standard & Poors rate bonds as to the risk of default. Please see the BondFinder section on safety for a complete discussion on ratings and default risk.
CouponA coupon is the stated interest rate for a bond. Most bonds have a fixed coupon that does not change during the life of the bond. Most bonds have two coupon payments per year. For example, a bond with a 5.0% coupon will pay $25 twice per year, for total interest of $50 which is 5.0% of the face value of the bond (almost all bonds have a face value of $1,000).
Credit RatingsIn order to help us assess the credit worthiness of a bond issuer, there are agencies that study the financial strength of bond issuers, and assign credit ratings to them. The two major rating agencies are Moody and Standard & Poors. These agencies assign ratings to bond issues so that investors can determine the credit worthiness of an issue without having to do the financial analysis on their own. For a more detailed list of ratings and their meanings, please see the section on safety.
Current YieldCurrent yield is the rate of return an investor will get, without taking into account the value of the premium or discount of the purchase price. It is calculated by dividing the coupon by the price. The current yield is not a good indication of your return on investment. Yield to maturity and yield to call take into account the value of the discount or premium paid for the bond, and as such they offer a much better indication of the value of the bond.
CUSIPA CUSIP is a unique identifier assigned to a bond at the time it is issued.
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