Basics of Bonds

Bond

A debt instrument where an investor lends money to an issuer in exchange for interest payments and return of principal at maturity

Issuer

The entity that sells bonds to raise capital and is responsible for paying interest and principal

Par Value

The face value of a bond that is repaid to the investor at maturity

Coupon Rate

The fixed interest rate a bond pays based on its par value

Coupon Payment

The periodic interest payment made to bondholders during the life of the bond

Zero Coupon Bond

A bond that pays no periodic interest and is sold at a discount to par value

Discount Bond

A bond sold below par value due to lower demand or higher market yields

Premium Bond

A bond sold above par value due to higher demand or lower market yields

Maturity Date

The date when the issuer must repay the bond principal to investors

Term To Maturity

The length of time remaining before a bond principal is repaid

Yield

The return earned on a bond based on interest payments and price changes

Current Yield

The annual coupon payment divided by the bond current market price

Yield To Maturity

The total expected return on a bond if held until maturity including interest and price changes

Yield To Call

The expected return on a callable bond if it is redeemed before maturity

Callable Bond

A bond that allows the issuer to repay principal early usually when interest rates fall

Call Protection Period

The time during which a callable bond cannot be redeemed by the issuer

Putable Bond

A bond that allows investors to sell the bond back to the issuer before maturity

Convertible Bond

A bond that can be exchanged for a predetermined number of company shares

Secured Bond

A bond backed by specific collateral that reduces investor risk

Unsecured Bond

A bond not backed by collateral relying on issuer creditworthiness

Debenture

An unsecured bond supported only by the issuer promise to pay

Mortgage Bond

A bond backed by real estate or physical property as collateral

Subordinated Bond

A bond with lower priority in repayment compared to other debt obligations

Senior Bond

A bond with higher priority in repayment during liquidation

Investment Grade Bond

A bond with strong credit quality and lower risk of default

High Yield Bond

A bond with lower credit quality and higher risk that offers greater returns

Credit Rating

An assessment of issuer ability to repay debt based on financial strength

Rating Agency

An organization that evaluates creditworthiness of bond issuers

Default Risk

The risk that an issuer fails to make interest or principal payments

Interest Rate Risk

The risk that bond prices fall when market interest rates rise

Reinvestment Risk

The risk that future cash flows must be reinvested at lower rates

Inflation Risk

The risk that rising prices reduce the real value of bond interest payments

Liquidity Risk

The risk that a bond cannot be sold quickly at a fair price

Market Risk

The risk that overall market conditions affect bond prices

Duration

A measure of bond price sensitivity to interest rate changes

Modified Duration

A refined measure of interest rate sensitivity used to estimate price changes

Convexity

A measure of how bond price sensitivity changes as interest rates move

Treasury Bond

A long term government issued bond considered low risk due to government backing

Treasury Note

A medium term government issued debt instrument with fixed interest payments

Treasury Bill

A short term government issued security sold at a discount with no coupon payments

Municipal Bond

A bond issued by local governments that may offer tax advantages

General Obligation Bond

A municipal bond backed by the full taxing power of the issuer

Revenue Bond

A municipal bond backed by income from a specific project or service

Corporate Bond

A bond issued by a company to raise capital for operations or expansion

Foreign Bond

A bond issued by a foreign entity in the domestic market of another country

Eurobond

A bond issued in a currency different from the country where it is sold

Sovereign Bond

A bond issued by a national government to finance public spending

Agency Bond

A bond issued by government affiliated organizations to support specific sectors

Inflation Protected Bond

A bond whose principal adjusts with inflation to preserve purchasing power

Floating Rate Note

A bond with interest payments that adjust based on a reference rate

Fixed Rate Bond

A bond with interest payments that remain constant throughout its life

Bond Indenture

A legal contract that outlines the terms and obligations of a bond issue

Covenant

A rule in a bond contract that restricts issuer actions to protect investors

Sinking Fund

A fund set aside by the issuer to repay bonds gradually before maturity

Amortizing Bond

A bond that repays principal through periodic payments rather than a lump sum

Bullet Bond

A bond that pays interest periodically and repays principal in one lump sum at maturity

Perpetual Bond

A bond with no maturity date that pays interest indefinitely

Callable Feature

A provision that allows the issuer to redeem a bond early

Put Feature

A provision that allows investors to sell a bond back to the issuer early

Conversion Ratio

The number of shares a convertible bond can be exchanged for

Conversion Price

The price at which a convertible bond can be converted into shares

Bond Price Quote

The market price of a bond expressed as a percentage of par value

Accrued Interest

Interest earned but not yet paid since the last coupon date

Clean Price

The price of a bond excluding accrued interest

Dirty Price

The price of a bond including accrued interest

Primary Bond Market

The market where new bonds are issued and sold to investors

Secondary Bond Market

The market where existing bonds are traded among investors

Bond Dealer

A financial intermediary that buys and sells bonds to provide liquidity

Bond Broker

A professional who executes bond trades on behalf of investors

Bid Price

The highest price a buyer is willing to pay for a bond

Ask Price

The lowest price a seller is willing to accept for a bond

Bid Ask Spread

The difference between the bid and ask prices representing transaction cost

Credit Spread

The difference in yield between a corporate bond and a government bond of similar maturity

Yield Curve

A graph that shows the relationship between bond yields and maturities

Normal Yield Curve

A curve where long term yields are higher than short term yields

Inverted Yield Curve

A curve where short term yields are higher than long term yields

Flat Yield Curve

A curve where yields are similar across all maturities

Steep Yield Curve

A curve where long term yields rise sharply above short term yields

Bond Ladder

A strategy that spreads bond maturities to manage interest rate risk

Barbell Strategy

A strategy that invests in short and long term bonds while avoiding intermediate maturities

Bullet Strategy

A strategy that concentrates bond maturities around a single date

Immunization

A strategy that matches bond duration to investment horizon to reduce interest rate risk

Credit Analysis

The evaluation of issuer financial strength to assess default risk

Call Risk

The risk that a bond is redeemed early reducing expected interest income

Extension Risk

The risk that a bond maturity extends due to slower than expected repayments

Prepayment Risk

The risk that borrowers repay debt earlier than expected affecting cash flow timing

Marketability

The ease with which a bond can be bought or sold in the market

Benchmark Bond

A widely traded bond used as a reference for pricing other bonds

Treasury Yield

The return on government issued debt used as a reference for other interest rates

Bond Swap

The sale of one bond and purchase of another to improve yield or adjust risk

Bond Index

A benchmark that tracks the performance of a group of bonds

Callable Yield

The return on a bond assuming it is redeemed at the earliest call date

Bond Portfolio

A collection of bonds managed to achieve specific income and risk objectives