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Types of Bonds

GSE Debt Securities Contents

GSE Debt Securities Glossary

Amortization

Repayment of debt principal through periodic installment payments rather than in a lump sum

Average life

On a security where principal is subject to prepayment, the average time to receipt of each dollar of principal, weighted by the amount of each principal prepayment, based on prepayment assumptions

Benchmark and Reference Notes

Large ($2 to $4 billion minimum size) debt tranches issued by Fannie Mae and Freddie Mac, respectively, in a non-scheduled but regular pattern of maturity and size meant to establish a yield curve framework for the government and the GSE marketplace.

Blended yield to maturity

The combination and average of two points on the yield curve to find a yield at the midpoint

Bond

An interest-bearing debt obligation

Bond equivalent yield

An adjustment to yield on a note which has monthly or quarterly interest payments. The frequency of such interest payments, compared to semiannual interest payments on most other types of securities, may result in a different present value of the interest income.

Bought Deals

GSE-issued securities sold through negotiated direct placements or competitive bids, with terms and size determined by the immediate needs of the GSE

Bullet

A security with a fixed maturity and no call feature

Call risk

See Reinvestment risk

Callable security

A security that the issuer has the right to redeem prior to maturity

Cap

A maximum interest rate on a floating-rate security. The rate paid can never exceed the cap even though the calculation of the rate at the time might be higher

CMT

See Constant Maturity Treasury Series

COFI

See Cost of Funds Index

Collar

Upper and lower limits (cap and floor, respectively) on the interest rate of a floating-rate security

Constant Maturity Treasury Series (CMT)

The average yield of a range of U.S. Treasuries with various fixed maturities. The five- and ten-year CMTs are commonly used as indices on floating-rate notes whose rates are tied to long-term interest rates. The index may be found in the Federal Reserve H.15 Report

Convexity

A measure of the change in a security’s duration with respect to changes in interest rates. The more convex a security is, the more its duration will change with interest rate changes

Cost of Funds Index (COFI), 11th District

The monthly weighted average cost of funds for savings institutions in Arizona, California and Nevada that are members of the 11th Federal Home Loan Bank District. Published on the last day of the month, the rate reflects the cost of funds for the prior month and is used to set rates on adjustable-rate mortgages, mortgage-backed securities and public issues of floating-rate debt. Some issues may use the national COFI rather than the 11th District’s.

CP Index

Usually the Federal Reserve Commercial Paper Composite calculated each day by the Federal Reserve Bank of New York by averaging the rate at which the five major commercial paper dealers offer “AA” industrial Commercial Paper for various maturities. Most CP-based floating-rate notes are reset according to the 30- and 90-day CP composites

Credit Spread

A yield difference, typically in relation to a comparable U.S. Treasury security, that reflects the issuer’s credit quality. Credit spread also refers to the difference between the value of two securities with similar interest rates and maturities when one is sold at a higher price than the other is purchased.

Coupon

The stated interest rate on a security

Day Count

The convention used to calculate the number of days in an interest payment period. A 30/360 convention assumes 30 days in a month and 360 days in a year. An actual/360 convention assumes the actual number of days in the given month and 360 days in the year. An actual/actual convention uses the actual number of days in the given interest period and year.

Discount margin

The effective spread to maturity of a floating-rate security after discounting the yield value of a price other than par over the life of the security

Discount note

Short-term obligations issued at discount from face value with maturities ranging from overnight to 360 days. Discount notes have no periodic interest payments; the investor receives the note’s face value at maturity

Duration

A measure of the price sensitivity of fixed-income securities for a given change in interest rates.

Fed Funds effective rate

The overnight rate at which banks lend funds to each other, usually as unsecured loans from regional banks to money center banks. The Fed Funds rate is the average dollar-weighted rate of overnight funds. It is reported with a one-day lag (Monday’s rate is reported Tuesday morning) and may be found in various financial information services.

Federal Reserve Commercial Paper Composite

See CP Index.

Floor

The lower limit for the interest rate on a floating-rate security

Global Debt Facility

The issuance platform used by most GSEs when issuing “global” debt into the international marketplace or a particular foreign market. Has same credit characteristics as nonglobal debt but is more easily “cleared” through international clearing facilities

Inflation-Indexed Securities

Notes periodically issued by the GSEs whose return is adjusted with changes in the PPI or CPI

Lock-Out Period

A prescribed period of time before principal repayments begin on a security that has amortizing principal repayments. On some floating-rate securities, the term “lock-out period” also applies to the interval between the day the rate for the current interest period is set and the actual payment date, which may be several days apart (see page 10)

Maturity

The date on which a bond or note must be fully redeemed by its issuer if not subject to prior call or redemption

Medium-Term Note

A debt security issued under a program that allows an issuer to offer notes continuously to investors through an agent. The size and terms of medium-term notes may be customized to meet investors’ needs. Maturities can range from one to 30 years

Note

In the government securities market, a note is a coupon issue with a maturity of one to ten years

Option-Adjusted Spread (OAS)

For a security with an embedded option, the yield spread over a comparable Treasury security after deducting the cost of the option

Optional Principal Redemption Bond

Term used to describe callable securities issued with either fixed- or floating-rate structures.

Perpetual floating-rate note

A floating-rate note with no stated maturity date

Prime Rate

A commercial bank’s stated reference rate for lending

Rate reset

The adjustment of the interest rate on a floating-rate security according to a prescribed formula

Reinvestment risk

For an investor, the risk that interest income or principal repayments will have to be reinvested at lower rates in a declining-rate environment. Reinvestment risk applies to fixed-rate callable securities. Because issuers typically call fixed-rate securities when rates are falling, the investors will have to reinvest their returned principal at a lower prevailing rate. This risk is sometimes referred to as call risk

Sinkers

A security with a sinking fund. In a sinking fund, an issuer sets aside money on a regular basis, sometimes from current earnings, for the specific purpose of redeeming debt

Subordinated debt (Sub-debt)

A type of debt that places the investor in a lien position behind or subordinated to a company’s primary creditors. Securities issued as subordinated debt will pay interest and principal but only after all interest that is due and payable has been paid on any and all senior debt.

T-Bill Rate

The weekly average auction rate of the three-month Treasury bill stated as the bond equivalent yield

Term funding

A financing done to meet specific cash-flow needs for a specific period of time

Trigger

The market interest rate at which the terms of a security might change. Triggers are common on index amortization notes and range securities

Undated issue

A floating-rate note with no stated maturity date (see also Perpetual floating-rate note)

Volatility

A representation of the uncertainty of future securities prices. Technically, volatility is the amount of price variation around a general trend. It is a major determinant of the value of any option

Yield

The annual percentage rate of return earned on a security, as computed in accordance with standard industry practice. Yield is a function of a security’s purchase price and coupon interest rate

Yield curve

The charting of yields on a particular type of security over a spectrum of maturities ranging from three months to 30 years

Yield to call

A yield on a security calculated by assuming that interest payments will be paid until the call date, at which point the security will be redeemed.

Yield to maturity

A yield on a security calculated by assuming that interest payments will be paid until the final maturity date, at which point the principal will be repaid by the issuer

 

All information and opinions contained in this publication were produced by the Securities Industry and Financial Markets Association from our membership and other sources believed by the Association to be accurate and reliable. By providing this general information, the Securities Industry and Financial Markets Association makes neither a recommendation as to the appropriateness of investing in fixed-income securities nor is it providing any specific investment advice for any particular investor. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and sources may be required to make informed investment decisions.