Advanced Search

Glossary of Bond Terms

Glossary of Bond Terms

A| B| C| D| E| F| G| H| I| J| K | L| M| N| O| P| Q | R| S| T| U| V| W| X | Y| Z

accreted value

The current value of a zero coupon municipal bond, taking into account interest that has been accumulating and automatically reinvested in the bond.

accretion bond

Often the last tranche in a CMO, the accretion bond, or Z-tranche, receives no cash payments for an extended period of time until the previous tranches are retired. While the other tranches are outstanding, the Z-tranche receives credit for periodic interest payments that increase its face value but are not paid out. When the other tranches are retired, the Z-tranche begins to receive cash payments that include both principal and continuing interest.

accrual bond

Often the last tranche in a CMO, the accrual bond or Z-tranche receives, no cash payments for an extended period of time until the previous tranches are retired. While the other tranches are outstanding, the Z-tranche receives credit for periodic interest payments that increase its face value but are not paid out. When the other tranches are retired, the Z-tranche begins to receive cash payments that include both principal and continuing interest.

accrued interest

 Interest deemed to be earned on a security but not yet paid to the investor.

active tranche

A CMO tranche that is currently paying principal payments to investors.

ad valorem tax

[Latin: to the value added] A tax based on the value (or assessed value) of real property.

adjustable-rate mortgage (ARM)

A mortgage loan on which interest rates are adjusted at regular intervals according to predetermined criteria. An ARM’s interest rate is tied to an objective, published interest rate index.

advance refunding

A financing structure under which new bonds are issued to repay an outstanding bond issue prior to its first call date. Generally, the proceeds of the new issue are invested in government securities, which are placed in escrow. The interest and principal repayments on these securities are then used to repay the old issue, usually on the first call date.

agency bond

A bond issued by two types of entities—1) Government Sponsored Enterprises (GSEs), usually federally-chartered but privately-owned corporations; and 2) Federal Government agencies which may issue or guarantee these bonds—to finance activities related to public purposes, such as increasing home ownership or providing agricultural assistance. Agency bonds are issued in a variety of structures, coupon rates and maturities. Each GSE and Federal agency issues its own bonds, with sizes and terms appropriate to the needs and purposes of the financing.

agency transaction

A sale and purchase of bonds in which the dealer places bonds with the buyer on a commission basis rather than selling bonds that the dealer owns.

Agreement Among Underwriters (AAU)

Legal document used principally in negotiated sales by underwriters. The document consists of the instructions, terms and acceptances, and the standard terms and conditions.

allotment

Distribution of bonds to syndicate members by the book running manager.

all or none (AON)

Where the offeror of a block of bonds will only sell all of the available bonds and not only a portion of them.

Alternative Minimum Tax (AMT)

An alternative way of calculating income under the Internal Revenue Code. Interest on private-activity bonds [other than 501(c)(3) obligations] issued after August 7, 1986, is used for such a calculation.

amortization

Liquidation of a debt through installment payments.

arbitrage

In the municipal market, the difference in interest earned on funds borrowed at a lower tax-exempt rate and interest on funds that are invested at a higher-yielding taxable rate. Under the 1986 Tax Act, with very few exceptions, arbitrage earnings must be rebated back to the federal government.

arbitrage certificate

Transcript certificate evidencing compliance with the limitations on arbitrage imposed by the Internal Revenue Code and the applicable regulations.

ascending, or positive, yield curve

The interest rate structure which exists when long-term interest rates exceed short-term interest rates.

ask price (or offer price)

The price at which a seller offers to sell a security.

ask yield

The return an investor would receive on a Treasury security if he or she paid the ask price.

assessed valuation

The value of property against which an ad valorem tax is levied, usually a percentage of “true” or “market” value.

asset allocation

Asset allocation is an investment strategy in which an investor divides his/her assets among different broad categories of investments (such as bonds) to reduce risk in an investment portfolio while maximizing return. The percentages allocated to each investment category at any given time depend on individual investor needs and preferences including investment goals, risk tolerance, market outlook, and how much money there is to invest.

asset-backed bonds or securities (ABS)

Asset-backed securities, called ABS, are bonds or notes backed by financial assets other than residential or commercial mortgages—an investor is purchasing an interest in pools of loans or other financial assets. Typically these assets consist of receivables other than mortgage loans, such as credit card receivables, auto loans and consumer loans. As the underlying loans are paid off by the borrowers, the investors in ABS receive payments of interest and principal over time. The ABS market is for institutional investors and is not suitable for individual investors.

asset class

A category or type of investment which has similar characteristics and behave similarly when subject to particular market forces. Broad financial asset classes are stocks (or equity), bonds (fixed income) and cash. Real estate, precious metals and commodities can also be viewed as asset classes.

assets

Assets are anything tangible or intangible of economic value owned by a business or individual. In reference to securitized debt, often assets refer to specific collateral, such as credit-card receivables, car loans, equipment, or real estate.

asset swap

An exchange of assets. In reference to the debt market, exchanging fixed rate debt to floating rate debt to change the cash flow of a firm's assets to provide a more favorable payment stream. For example, to swap the fixed flow of payments of the guaranteed cash flows on a U.S. Government Bond, with a floating investment, such as an index like LIBOR. Asset swaps can provide yield enhancement, change interest-rate sensitivity, and customize assets.

asset swap spread

The asset swap spread (also called the gross spread) is the aggregate price that bondholders would receive by exchanging fixed rate bonds for floating rate bonds using the swaps market, mainly used to reduce interest rate risk. The asset swap spread is one widely used metric to determine relative value of one bond against other bonds of the same currency. Asset swaps can be a tool to understand which bond or bonds maximize the spread or price over a reference interest rate benchmark, almost always LIBOR, the London InterBank Offered Rate.

auction

Sealed-bid public sale of Treasury securities; method of determining the rate or yield.

auction rate bonds

Floating-rate tax-exempt bonds where the rate is periodically reset by a Dutch auction.

authority

A separate state or local governmental issuer expressly created to issue bonds or run an enterprise, or to do both. Certain authorities issue bonds on their own behalf, such as transportation or power authorities. Authorities that issue bonds on the behalf of qualified nongovernmental issuers include health facilities and industrial development authorities.

authorizing resolution

Issuer document which states the legal basis for debt issuance, and states the general terms of the financing.

average life

On a mortgage security, the average length of time that each principal dollar is expected to be outstanding, based on certain assumptions about prepayment speeds.

average annual yield

Average annual yield is the average yearly income on an investment, such as a bond, expressed in percentage terms. To calculate average annual yield, add all the income from an investment and divide that total amount by the number of years in which the money was invested. For example, if you receive $10 interest on a $1,000 bond each year for ten years, the average annual yield is 1% ($10 ÷ $1,000 = 0.01 or 1%).

balance of trade

The difference between the value of a region's imports and exports during a specific period of time. If the United States imports more than it exports, it has a trade deficit; if the U.S. exports more than it imports it has a trade surplus.

barbell strategy

Barbell strategy is used as a way to earn more interest without taking more risk when investing in bonds. In a barbell strategy, an investor invests in short-term bonds, say perhaps some maturing in one to two years and long-term bonds such as those maturing in 30 years. When shorter-term bonds come due, the investor replaces them with other short-term bonds, thus keeping a balance between short and long term bonds. The goal is to earn more interest without taking more risk than having a portfolio of intermediate term bonds only.

basis point

One one-hundredth (.01) of a percentage point. For example, eight percent would be equal to 800 basis points. Yield differences are often quoted in basis points (bps).

basis price

The price of a security expressed in yield, or percentage of return on the investment. Price differentials in municipal bonds are usually expressed in multiples of 5/100 of 1%, or “05."

bearer bond

A physical bond that does not identify its owner and is presumed to be owned by the person who holds it. In the United States, it has not been legal to issue bearer bonds in the municipal or corporate markets since 1982. As a result, the only bearer bonds that still exist in the secondary market are long-dated maturities issued prior to 1982, which are becoming increasingly scarce. Among the disadvantages of bearer securities are that you must actually clip the coupons and present them to the issuer's trustee in order to receive your interest; and if the bonds are called, you will not automatically be alerted by the issuer or trustee as they do not know who the owners are.

behavioral finance

Behavioral finance is the study of why investors act the way they do and how such behavior affects the markets. Behavioral finance theorists use the disciplines of economics and psychology to suggest that the investor behavior that affects market prices may be not be based on such “rational” factors as analysis of the strength or performance of a company.

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.

beneficial owner

One who benefits from owning a security, even if the security’s title of ownership is in the name of a broker or bank ("street name").

bid

Price at which a buyer is willing to purchase a security.

bid list

Schedule of bonds distributed by holder or broker to dealer in order to get a bid, or current price, on the bonds.

bill

A short-term direct obligation of the U.S. Treasury that has a maturity of not more than one year (for example, 13-, 26- or 52-week maturity).

blended yield to maturity

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

blue-sky memorandum

A memorandum for use by the account specifying the way a specific issue will be treated under state securities laws, frequently of all 50 states, Puerto Rico, and the District of Columbia. This memorandum is prepared first in preliminary form, which may note that certain steps need to be taken in various jurisdictions in order to qualify the issue for sale within these jurisdictions. The memorandum is then issued in supplemental form and generally the supplemental form reports that the required actions in the various jurisdictions have been taken.

bond

(1) The written evidence of debt, bearing a stated rate or stated rates of interest, or stating a formula for determining that rate, and maturing on a date certain, on which date and upon presentation a fixed sum of money plus interest (usually represented by interest coupons attached to the bond) is payable to the holder or owner. A municipal bond issue is usually comprised of many bonds that mature over a period of years; (2) For purposes of computations tied in to “per bond,” a $1,000 increment of an issue (no matter what the actual denominations are); (3) Bonds are long-term securities with a maturity of greater than one year.

bond anticipation note (BAN)

A note issued in anticipation of later issuance of bonds, usually payable from the proceeds of the sale of the bonds or of renewal notes. BANs can also be general obligations of the issuer.

bond bank

Agencies created by a few states to buy entire issues of bonds of municipalities. The purchases are financed by the issuance of bonds by the bond bank. The purpose is to provide better market access for small, lesser-known issuers.

The Bond Buyer™

The daily newspaper of the municipal bond market. The Bond Buyer publishes news stories, new-issuer calendars, results of bond sales, notices of redemptions and other items of interest to the market. The Bond Buyer also publishes weekly indexes of bond yields that are widely followed by the market.

bond counsel

A lawyer or law firm that delivers a legal opinion which deals with the issuer’s authorization to issue bonds and the tax-exempt nature of the bond. Bond counsel is retained by the issuer.

bond equivalent yield

An adjustment to a CMO yield which reflects its greater present value, created because CMOs pay monthly or quarterly interest, unlike most other types of bonds, which pay interest semiannually.

bond fund

An investment vehicle, which invests in a portfolio of bonds that is professionally managed. Types of bond funds include open-ended mutual funds, closed-end mutual funds, and exchange traded funds.

bond insurance

Legal commitment by insurance company to make scheduled payment of interest and principal of a bond issue in the event that the issuer is unable to make those payments on time. The cost of insurance is usually paid by the issuer in case of a new issue of bonds, and the insurance is not purchased unless the cost is far more than offset by the lower interest rate that can be incurred by the use of the insurance. Individual investors cannot buy bond insurance.

bond insurers and reinsurers

Specialized insurance firms serving the fixed-income market that guarantee the timely payment of principal and interest on bonds they insure in exchange for a fee.

bond purchase agreement (BPA)

The contract between the issuer and the underwriter setting forth the terms of the sale, including the price of the bonds, the interest rate or rates which the bonds are to bear and the conditions to closing. It is also called the purchase contract.

bond resolution

Issuer legal document which details the mechanics of the bond issuer, security features, covenants, events of default and other key features of the issue’s legal structure. Indentures and trust agreements are functionally similar types of documents, and the use of each depends on the individual issue and issuer.

bond swap

The sale of a block of bonds and the purchase of another block of similar market value. Swaps may be made to achieve many goals, including establishing a tax loss, upgrading credit quality, extending or shortening maturity, etc.

bond year

An element in calculating average life of an issue and in calculating net interest cost and net interest rate on an issue. A bond year is the number of 12-month intervals between the dated date of the bond and its maturity date, measured in $1,000 increments. For example, the “bond years” allocable to a $5,000 bond dated April 1, 2000, and maturing June 1, 2001, is 5.830 [1.166 (14 months divided by 12 months) x 5 (number of $1,000 increments in $5,000 bond)]. Usual computations include “bond years” per maturity or per an interest rate, and total “bond years” for the issue.

book entry

A method of recording and transferring ownership of securities electronically, eliminating the need for physical certificates.

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.

broker

A firm or person who acts as an intermediary by buying and selling securities to dealers on an agency basis rather than for its own account.

Build America Bonds (BABs)

Build America Bonds (BABs) are new taxable municipal bonds that were authorized under the American Recovery and Reinvestment Act of 2009. Unlike municipal bonds, most of which are tax exempt, BABs are taxable bonds, which means that the interest is subject to taxation. Proceeds of these bonds can be used for the most of the same purposes as proceeds of regular tax-exempt government bonds. The two types of BABs are: Direct Payment bonds on which the United States Treasury Department pays state or local government issuers a payment equal to 35 percent of the coupon interest payments on such bonds, and Tax Credit bonds on which the bond holders receive a tax credit equal to the 35 percent of interest on such bonds. The program is set to expire at the end of 2010, but a bill is in Congress to extend the legislation for two years with a reduced tax credit equal to a 32 percent subsidy in 2011, and 30 percent subsidy in 2012.

bullet bond/ bullet maturity

A bond that pays regular interest, but that does not repay principal until maturity.

buy and hold

A strategy for investing in which investors buy a bond and hold the bond until the date of maturity when the investor receives principal back and interest, if any.

call

Actions taken to pay the principal amount prior to the stated maturity date, in accordance with the provisions for “call” stated in the proceedings and the securities. Another term for call provisions is redemption provisions.

callable bonds

Bonds that are redeemable by the issuer prior to the maturity date, at a specified price at or above par.

call date

The date at which some bonds are redeemable by the issuer prior to the maturity date. In the event of a refunded security, a prerefunded date will appear in place of any call date and will be indicated by an R = prerefunded; or an E = escrowed to maturity.

call premium

The dollar amount paid to the investor by the issuer for exercising a call provision that is usually stated as a percent of the principal amount called.

call price

The specified price at which a bond will be redeemed or called prior to maturity, typically either at a premium (above par value) or at par.

call protection

Bonds that are not callable for a certain number of years before their call date.

call risk

For a CMO, the risk that declining interest rates may accelerate mortgage loan prepayment speeds, causing an investor’s principal to be returned sooner than expected. As a consequence, investors may have to reinvest their principal at a lower rate of interest.

cap

The maximum interest rate that can be paid on a floating-rate security.

capital markets

Capital markets are the electronic and physical markets in which bonds and other financial instruments such as stocks and commodities are sold to investors. Institutions such as governments and corporations use the capital markets to raise money through public offerings of bonds and stocks or through private placements of securities to institutional investors such as pension funds and insurance companies.

carry

The cost of borrowing funds to finance an underwriting or trading position. A positive carry happens when the rate on the securities being financed is greater than the rate on the funds borrowed. A negative carry is when the rate on the funds borrowed is greater than the rate on the securities that are being financed.

certificate of ownership

Proof of ownership; a document issued to shareholders by a trustee of a unit investment trust.

certificates of participation (COPs)

COPs are a structure where investors buy certificates that entitle them to receive a participation, or share, in the lease payments from a particular project The lease payments are passed through the lessor to the certificate holders with the tax advantages intact. The lessor typically assigns the lease and lease payments to a trustee, which then distributes the lease payments to the certificate holders.

clean CMO

Also known as "sequential-pay CMO," the most basic type of CMO, in which all tranches receive regular interest payments, but principal payments are directed initially only to the first tranche until it is completely retired. Once the first tranche is retired, the principal payments are applied to the second tranche until it is fully retired, and so on.

clean price

Price of a bond excluding accrued interest. Bond prices are usually quoted clean.

closed-end mutual fund

A fund created with a fixed number of shares, which are traded as listed securities on a stock exchange.

closing date

This is similar to a settlement date, but occurs for a new issuance of bonds. The closing may be as long as 30 days in case of a competitively sold issue.

closing price

The closing price of a bond is the last trading price before the exchange or market in which it is traded closes for the day. Given the existence of after-hours trading, the opening price at the start of the next trading day may be different from the closing price of the day before.

collar

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

collateral

Securities or property pledged by a borrower to secure payment of a loan. If the borrower fails to repay the loan, the lender may take ownership of the collateral. Collateral for CMOs consists primarily of mortgage pass-through securities or mortgage loans, but may also encompass letters of credit, insurance policies, or other credit enhancements.

collateralize

The process by which a borrower pledges securities or property or other types of financial assets in order to provide security or collateral toward repayment of a loan or debt.

collateralized debt obligation (CDO)

A type of asset-backed security (ABS), CDOs are backed by fixed income assets such as bonds, receivables on loans—usually non-mortgage—or other debt that have different levels of risk. Shares of the pool are sold to investors, divided into the different risk classes or "tranches" enabling the isolation of credit risk to reduce the risk of loss due to default. Each tranche usually has different maturities and risks.

collateralized mortgage obligation (CMO)

A multiclass bond backed by a pool of mortgage pass-through securities or mortgage loans. See REMIC.

commercial mortgage-backed securities (CMBS)

Commercial mortgage-backed securities (CMBS) have as underlying collateral loans on hotels, multifamily housing, retail properties, and office or industrial properties. Unlike residential mortgage loans, commercial loans tend to be “locked out” from prepayment for ten years and thus prepayment risk is reduced. However, default risk is greater on commercial loans.

commercial paper

Short term, unsecured bond notes issued by a corporation or a bank to meet immediate short term needs for cash. Maturities typically range from 2 to 270 days. Commercial paper is usually issued by corporations with high credit ratings and sold at a discount from face value.

commission

The fee paid to a dealer when the dealer acts as agent in a transaction, as opposed to when the dealer acts as a principal in a transaction (see “net price”). Commissions differ in how they are calculated, such as a percentage of the value of a transaction or flat fee amount, and including whether the investor is using a bank, brokerage or online firm. Investors should be sure to ask and to understand what commission or other sales fees are charged by a broker or agent to make an investment transaction, including if such information is not provided in writing).

common stock

A share representing participation in the ownership of an enterprise, generally with the right to participate in dividends and in most cases to vote on major matters affecting stockholder interests.

companion tranche

A CMO tranche that absorbs a higher level of the impact of collateral prepayment variability in order to stabilize the principal payment schedule for a PAC or TAC tranche in the same offering.

competitive underwriting or sale

A sale of municipal securities by an issuer in which underwriters or syndicates of underwriters submit sealed bids (or oral auction bids) to purchase the securities. The securities are won and purchased by the underwriter or syndicate of underwriters which submits the best bid according to guidelines in the notice of sale. This is contrasted with a negotiated underwriting.

compound accreted value

The value of a zero-coupon bond at any given time, based on the principal, with interest compounded at a stated rate of return over time.

compounding

Compounding is the process by which investment interest earnings added to the investment principal form a larger base on which to accumulate additional earnings over time.

compound interest

Interest that is calculated on the initial principal and previously paid interest.

concession

Fractional discount from the public offering of new securities at which the underwriter sells the bonds to dealers not in the syndicate.

confirmation

A document used by securities dealers and banks to state in writing the terms and execution of a verbal arrangement to buy or sell a security.

constant maturity treasury (CMT)

A series of indexes of various maturities (one, three, five, seven or ten years) published by the Federal Reserve Board and based on the average yield of a range of Treasury securities adjusted to a constant maturity corresponding to that of the index.

confirmation

A document used by securities dealers and banks to state in writing the terms and execution of a verbal arrangement to buy or sell a security.

constant prepayment rate (CPR)

The percentage of outstanding mortgage loan principal that prepays in one year, based on an annualized Single Monthly Mortality (SMM), which reflects the outstanding mortgage loan principal that prepays in one month.

contingent convertible bond or CoCo Bond

A type of convertible bond with an innovative feature that may provide insurance for companies like banks during a financial crisis. For example, a CoCo bond, also referred to as contingent capital bonds, would mandatorily convert into the company's common shares when one or more triggers occur, such as capital levels falling below a pre-specified level. Such bonds converting to stock would provide the bank a boost to its capital, speeding recapitalization of a bank in distress. Also referred to as contingent capital bonds.

continuing disclosure

Under amendments to Rule 15c2-12, the obligation on the issuer’s part to provide annual updating of financial information and operating data of the type included in the official statement for the primary bond offering. The issuer must also provide notice of material events.

contraction risk

For mortgage-related securities, the risk that declining interest rates will accelerate the assumed prepayment speeds of mortgage loans, returning principal to investors sooner than expected and compelling them to reinvest at the prevailing lower rates. In contraction risk, the average time that it takes for the investor to get principle back is what is being “contracted.”

conventional mortgage loan

A mortgage loan that is based solely on real estate as security, is not insured or guaranteed by a government agency, and is eligible for purchase or insurance by Fannie Mae or Freddie Mac.

convertible bond

A corporate bond that can be exchanged, at the option of the holder, for a specific number of shares of the company's stock. Because a convertible bond is a bond with a stock option built into it, it will usually offer a lower than prevailing rate of return.

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)

A bank index reflecting the weighted average interest rate paid by savings institutions on their sources of funds. There are national and regional COFI indexes.

counterparty

One of two entities in a traditional interest rate swap. In the municipal market a counterparty and a party can be a state or local government, a broker-dealer or a corporation.

corporate bond

Bonds issued by corporations. Corporations use the funds they raise from selling bonds for a variety of purposes, from building facilities to purchasing equipment to expanding their business. Corporate bonds (also called corporates) are debt obligations, or IOUs, issued by private and public corporations. They are typically issued in multiples of $1,000 and/or $5,000.

coupon

A feature of a bond that denotes the amount of interest due and the date payment is to be made. 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. In the case of registered coupons (see "Registered Bond"), the interest payment is mailed directly to the registered holder. Bearer coupons are presented to the issuer's designated paying agent or deposited in a commercial bank for collection. Coupons are generally payable semiannually.

coupon payment

The actual dollar amount of interest paid to an investor. The amount is calculated by multiplying the interest of the bond by its face value.

coupon rate

The interest rate on a bond, expressed as a percentage of the bond's face value. Typically, it is expressed on a semi-annual basis.

covenant

The issuer’s pledge, in the financing documents, to do or to avoid from doing certain practices and actions.

cover bid

The second-highest bidder in a competitive sale.

covered bond

Covered bonds, at their most basic, are debt securities backed by a guarantee from the issuing entity and secured by a dynamic pool of assets on that entity's balance sheet. The issuer is typically a regulated financial institution. Germany introduced covered bonds, known as Pfandbriefe, in 1770—the bonds have continued to be a widely used funding tool for mortgage loans and public works projects across Europe for over 200 years.

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.

CPI-U

The index for measuring the inflation rate is the non-seasonally adjusted U.S. City Average All Items Consumer Price Index for All Urban Consumers (CPI-U), published monthly by the Bureau of Labor Statistics (BLS). The CPI-U was selected by the Treasury because it is the best known and most widely accepted measure of inflation.

credit default swap (CDS)

A credit default swap is akin to an insurance policy in the event of certain credit events such as bankruptcy, failure to pay and restructuring of debt. The CDS contract protects the buyer against the loss of principal in an underlying asset if a credit event occurs. The buyer of protection pays a premium-a fixed periodic payment--usually on a quarterly basis, to the seller of protection until a credit event occurs or the contract matures, whichever is earlier.

credit enhancement

The use of the credit of a stronger entity to strengthen the credit of a weaker entity in bond or note financing. This term is used in the context of bond insurance, bank facilities and government programs.

credit rating agency

A company that analyzes the credit worthiness of a company or security, and indicates that credit quality by means of a grade, or credit rating.

credit ratings

Designations used by ratings services to give relative indications of credit quality.

credit risk

The risk for bond investors that the issuer will default on its obligation (default risk) or that the bond value will decline and/or that the bond price performance will compare unfavorably to other bonds against which the investment is compared due either to perceived increase in the risk that an issuer will default (credit spread risk) or that a company's credit rating will be lowered (downgrade risk).

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.

currency risk or exchange rate risk
Investors who invest in a government bond that is not in his/her home currency face currency or exchange rate risk since the value of his/her investment could go down as well as up depending on what happens to the currency exchange rate.
current face

The current remaining monthly principal on a mortgage security. Current face is computed by multiplying the original face value of the security by the current principal balance factor.

current refunding

A financing structure under which the old bonds are called or mature within 90 days of the issuance of the new refunding bonds.

current yield

The ratio of the interest rate payable on a bond to the actual market price of the bond, stated as a percentage. For example, a bond with a current market price of  par ($1,000) that pays eighty dollars ($80) per year in interest would have a current yield of eight percent.

CUSIP

The Committee on Uniform Security Identification Procedures was established by the American Bankers Association to develop a uniform method of identifying securities. CUSIP numbers are unique nine-character alphanumeric identifiers assigned to each series of securities. 

dated date (or issue date)

The date of a bond issue from which a bond begins to accrue interest.

daycount

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.

dealer

A securities firm or department of a commercial bank that engages in the underwriting, trading and sale of municipal (or other) securities.

dealer bank

Department of commercial bank that engages in the underwriting, trading and sale of municipal (or other) securities.

debenture

Unsecured debt obligation, issued against the general credit of a corporation, rather than against a specific asset.

debt limit

Statutory or constitutional limit on the principal amount of debt that an issuer may incur (or that it may have outstanding at any one time).

debt service

Principal and interest.

debt service coverage

The ratio of net revenues to the debt service requirements.

debt service requirements

Amounts required to pay debt service, often expressed in the context of a time frame (such as “annual debt service requirements”).

debt service reserve fund

The fund into which are paid monies which are required by the trust agreement or indenture as a reserve against a temporary interruption in the receipt of the revenues or other amounts which are pledged for the payment of the bonds. A common deposit requirement for a “debt service reserve fund” is six months or one-year’s debt service on the bonds. The “debt service reserve fund” may be initially funded out of bond proceeds, over a period of time from revenues, or by a combination of the above.

deep discount

A discount greater than traditional market discounts of 3%.

default

A failure by an issuer to: (i) pay principal or interest when due, (ii) meet non-payment obligations, such as reporting requirements, or (iii) comply with certain covenants in the document authorizing the issuance of a bond (an indenture).

default risk

Possibility that a bond issuer will fail to pay principal or interest when due.

defeasance

Termination of the rights and interests of the trustee and bondholders under a trust agreement or indenture upon final payment or provision for payment of all debt service and premiums, and other costs, as specifically provided for in the trust instrument.

deflation

A sustained drop in the prices of goods and services.

denomination

The face amount, or par value, of a bond or note that the issuer promises to pay on the maturity date. Most municipal bonds are issued in a minimum denomination of $5,000.

derivative

A financial product that derives its value from an underlying security. In the tax-exempt market, there are primary and secondary derivative products.

dirty price

Price of a bond including accrued interest. May also be called the all-in price.

discos

Agency bond no-coupon discount notes (“discos”) issued by federal agencies to meet short-term financing needs that are issued at a discount to par value. Investors who sell such discos prior to maturity may lose money.

discount

The amount by which the par value of a security exceeds its purchase price. For example, a $1,000 par amount bond which is currently valued at $980 would be said to be trading at a two percent discount.

discount bond

A bond sold at less than par.

discounting

The opposite of compounding, discounting allows an investor to multiply an amount by a discount rate to compute the present or discounted value of an investment. As an example $1,000 compounded at an annual interest rate of 10% will be $1,610.51 in five years. The present value of $1,610.51 realized after five years of investment is $1,000, when discounted at an annual rate of 10%.

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 a discount from face value, with maturities ranging from one to 360 days. Discount notes have no periodic interest payments; the investor receives the note's face value at maturity. For example, a one year, $1,000 face value discount note purchased at issue at a price of $950, would yield $50 or 5.26 percent ($50/$950).

discount rate

The key interest rates central banks charge on overnight loans to commercial and member banks.

In the U.S., the interest rate used by the Federal Reserve on loans to its member banks. Changes in the rate by the Federal Reserve generally indicate future changes in monetary policy.

In Europe, the European Central bank focuses on three key interest rates for the Euro area as its way to manage inflation and the economy: the main short term lending interest rate on the main refinancing operations (MRO); the rate on the deposit facility which banks may use to make overnight deposits; the rate on the marginal lending facility, which offers overnight credit to banks. The rates are closely watched by markets as setting these rates are a prime way for a central bank to manage inflation. Commercial banks use the discount rate as a benchmark for the interest rates they charge on other financial instruments and products, including commercial and consumer loans.

distribution of principal

Return of principal to unit trust shareholders, usually when a bond in the portfolio reaches maturity, is called or, if necessary, is sold prior to maturity.

diversification

A strategy by which an investor distributes investments among different asset classes and within each asset class among different types of instruments in order to protect the value of the overall portfolio in case of changes in market conditions or market downturn and reduce exposure to risk. For example, a diversified bond portfolio might include different types of bonds and/or bond funds with different maturities and coupons.

divided account

Account structure that is divided as to liability, and not as to sales. Also called “Western” account.

dollar bond

A bond that is quoted and traded in dollar prices rather than in terms of yield.

double and triple tax-exemption

Securities that are exempt from state and local as well as federal income taxes are said to have double or triple tax-exemption.

double-barreled bond

A bond is said to be “double-barreled” when it is secured by the pledge of two (or more) sources of payment. In some states a bond secured in the first instance by a user charge, e.g., water or sewer, may be additionally secured by ad valorem taxes if the user charges don't bring enough revenue.

double exemption

Securities that are exempt from state and federal income taxes.

downgrade risk

Possibility that a bond’s rating will be lowered because the issuer’s financial condition, or the financial condition of a party to the financial transaction, deteriorates.

dual-currency bonds

Dual-currency bonds are bonds in which principal payments are in one currency and coupon payments are in another currency. This type of bond is used for foreign bonds, when an issuer issues bonds in a foreign country and makes coupon payments in that country's currency, but principal payments are made in the currency of the issuer's country of residence.

duration

The effect that each 1% change in interest rates has on a bond's market value. Duration takes into account a bond's interest payments in measuring bond price volatility and is stated in years. As an example, a 5-year duration means that a bond will decrease in value by 5% if interest rates rise 1% and increase in value by 5% if interest rates fall 1%.

duration risk

The duration of a bond is a measure of its price sensitivity to interest rates movements, based on the average time to maturity of its interest and principal cash flows. Duration enables investor to more easily compare bonds with different maturities and coupon rates by creating a simple rule: with every percentage change in interest rates, the bond's value will decline by its modified duration, stated as a percentage. Modified duration is the approximate percentage change in a bond's price for each 1% change in yield assuming yield changes do not change the expected cash flows. For example, an investment with a modified duration of 5 years will rise 5% in value for every 1% decline in interest rates and fall 5% in value for every 1% increase in interest rates.

Bond duration measurements help quantify and measure exposure to interest rate risks. Bond portfolio managers increase average duration when they expect rates to decline, to get the most benefit, and decrease average duration when they expect rates to rise, to minimize the negative impact. The most commonly used measure of interest rate risk is duration.

Dutch auction

In reference to debt securities, a type of auction when a competitive bidding process establishes the interest rate on a security (typically municipal or corporate bond). Through broker/dealers, bidders specify the number of shares and the lowest interest rate they are willing to accept for a security. The lowest bid rate which all shares can be sold at par determines the interest rate. This is the rate paid for entire issue during a given period.

A Dutch auction is also used in Treasury auctions, allowing each successful competitive bidder and noncompetitive bidder to be awarded securities at the price equivalent to the highest accepted rate or yield. Differing from other types of Dutch auctions, Treasury accepts various prices, taking the highest bids first and working through progressively lower bids until an issue is completely sold.

early amortization risk

Most revolving ABS are subject to the risk of early-amortization events-also known as payout events or early calls. A variety of developments, such as the following, may cause an early-amortization event: insufficient payments by the underlying borrowers; insufficient excess spread; a rise in the default rate on the underlying loans above a specified level; a drop in available credit enhancements below a specified level; and bankruptcy on the part of the sponsor or the servicer.

early call risk

The risk to bond investors that high-yielding bonds will be called early, with the result that proceeds may be reinvested at lower interest rates.

economic indicator

Statistical measures of current conditions in an economy. “Leading” economic indicators such as those that track consumer confidence, factory orders, or money supply may signal short term economic strength or weakness. “Lagging” economic indicators such as business spending or unemployment figures move up or down as the economy strengthens or weakens. Economic indicators together provide a picture of the overall health of an economy or economic zone and how bond prices and yields might be affected.

economic risk

Economic risk describes the vulnerability of a bond to downturns in the economy. For example, virtually all types of high-yield bonds are vulnerable to economic risk. In recessions, high-yield bonds typically lose more principal value than investment-grade bonds. If investors grow anxious about holding low-quality bonds, they may trade them for the higher-quality debt, such as government bonds and investment-grade corporate bonds. This “flight to quality” particularly impacts high-yield issuers.

embedded option

A provision that gives the issuer or bondholder an option, but not the obligation, to take an action against the other party. The most common embedded option is a call option, giving the issuer the right to call, or redeem, the principal of a bond before the scheduled maturity date.

emerging market bonds

Emerging market bonds usually include government (or “sovereign”) bonds; sub-sovereign bonds and corporate bonds. Domestic emerging market bonds-those issued within an emerging market country-make up about ¾ of the amount of debt in the emerging market bond markets but because it can be difficult for a variety of reasons to trade in domestic emerging bonds, emerging market bonds held by foreign investors are usually foreign or external emerging market bonds. The majority of external emerging market bonds are government bonds.

EMMA

The Municipal Securities Rulemaking Board's, Electronic Municipal Market Access website, www.emma.msrb.org, which is the repository for municipal issuers' continuing disclosure documents. The official website provides free real-time access to prices of bonds and notes when sold or bought from customers, as well as prices paid in inter-dealer transactions and key bond data, such as official statements for most new offerings of municipal bonds, notes, college savings plans and other municipal securities.

Eurobond

Eurobonds are bonds that are denominated in a currency other than that of the European country in which they are issued. They are usually issued in more than one country of issue and traded across international financial centers. Supranational organizations and corporations are major issuers in the Eurobond market.

Euro-zone

The European Union Countries that use the Euro as the single currency and in which a single monetary policy is conducted under the responsibility of the European Central Bank. In sharing a common currency, the member states of the European Economic and Monetary Union (EMU) are governed by the same monetary policy but this uniformity does not extend at the country level to alignment of all economic, regulatory and fiscal matters, including matters of taxation.

evaluator

An independent service responsible for appraising the value of securities in a trust’s portfolio.

event risk

Company and industry “event” risk encompasses a variety of pitfalls that can affect a company's ability to repay its debt obligations on time. These include poor management, changes in management, failure to anticipate shifts in the company's markets, rising costs of raw materials, regulations and new competition. Another kind of event risk is the possibility of natural or man made disasters affecting an issuer's ability to repay its obligations. Events that adversely affect a whole industry may have a spillover effect on the bonds of issuers in that industry.

excess spread

The net amount of interest payments from the underlying assets after bondholders and expenses are paid and after all losses are covered. Excess spread may be paid into a reserve account and used as a partial credit enhancement or it may be released to the seller or the originator of the assets.

exchangeable bond

A bond with an option to exchange it for shares in a company other that the issuer.

exchange-traded fund

A fund that tracks an index, a commodity or a basket of assets. It is passively-managed like an index fund, but traded like a stock on an exchange, experiencing price changes throughout the day as they are bought and sold. Bond ETFs like bond mutual funds, hold a portfolio of bonds and can differ widely in their investment strategies.

exempt facilities bond

Refers to those types of privately owned or privately used facilities which are authorized to be issued on a tax-exempt basis under the Internal Revenue Code. The Tax Reform Act of 1986 amended prior law to exclude the following types of facilities from those which can be financed on a tax-exempt basis: sports facilities; convention and trade show facilities; air and water pollution control facilities; privately owned airport, dock, wharf and mass-commuting facilities; and most parking facilities, among others.

expected maturity date

The date on which principal is projected to be paid to investors. It is based on assumptions about collateral performance.

extension risk

The risk that investors' principal will be committed for a longer period of time than expected. In the context of mortgage- or asset-backed securities, this may be due to rising interest rates or other factors that slow the rate at which loans are repaid.

extraordinary redemption

This redemption is different from optional redemption or mandatory redemption in that it occurs under an unusual circumstance such as destruction of the facility financed.

face (or par value or principal value)

The principal amount of a security that appears on the face of the instrument.

face value

The par value of a security, as distinct from its market value.

factor

A decimal value reflecting the proportion of the outstanding principal balance of a mortgage security, which changes over time, in relation to its original principal value.

fallen angel

A corporate bond which when issued was investment-grade rated by credit rating agencies such as Standard & Poor's or Moody's but is now downgraded due to a deteriorated financial situation.

federal funds rate

The interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight. The target federal funds rate is set by the Federal Reserve Board's Federal Open Market Committee and is a principal tool of monetary policy. For more information, see www.federalreserve.gov.

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.

final maturity date

The date on which the principal must be paid to investors, which is later than the expected maturity date. Also called legal maturity date.

financial advisor

A consultant to an issuer of municipal securities who provides the issuer with advice with respect to the structure, timing, terms or other similar matters concerning a new issue of securities.

financial and operations principal

A municipal securities employee who is required to meet qualifications standards established by the MSRB. The individual is the person designated to be in charge of the preparation and filing of financial reports to the SEC and other regulatory bodies.

FINRA

Created in July 2007 through the consolidation of NASD and the member regulation, enforcement and arbitration functions of the New York Stock Exchange, FINRA is the largest non-governmental regulator for all securities firms doing business in the United States.

firm

Free option to buy securities for a stated time at a stated price.

fixed-rate bond

A long-term bond with a set interest rate to maturity.

fixed-rate mortgage

A mortgage featuring level monthly payments, determined at the outset, which remain constant over the life of the mortgage.

floating-rate bond (or variable rate bond or adjustable rate bond)

A bond whose interest rate is adjusted periodically according to a predetermined formula; it is usually linked to an interest rate index such as LIBOR.

floating-rate CMO

A CMO tranche which pays an adjustable rate of interest tied to a representative interest rate index such as the London Interbank Offered Rate (LIBOR), the Constant Maturity Treasury (CMT), or the Cost of Funds Index (COFI).

floor

The lower limit for the interest rate on a floating-rate bond.

flow of funds

Refers to the structure which is established in the bond resolution or the trust documents which sets forth the order in which funds generated by the enterprise will be allocated to various purposes.

forward cap

An agreement to enter into a cap at some date in the future.

forward floor

An agreement to enter into a floor at some date in the future.

forward swap

An agreement to enter into a swap at some date in the future.

fully registered

A security that is registered as to principal and interest, payment of which is made only to or on the order of the registered owner.

futures

Financial futures are a contract agreeing to buy or sell a specified amount of an underlying financial instrument at a specific price on a specific day in the future. The price is agreed to at the time of the contract. Financial futures are usually of three main types: interest rate futures; stock index futures or currency futures. Because futures are complicated and risky, with the potential for losses not limited to your original investment, futures products are not suitable for many individual investors.

futures contract

In the municipal market, an agreement to purchase or sell the municipal bond index (The Bond Buyer 40-Bond Index) for delivery in the future.

future value

The value of an asset at a specified date in the future, calculated using a specified rate of return.

general obligation bond (GO)

A municipal bond secured by the pledge of the issuer’s full faith, credit and taxing power.

general use of proceeds

Refers to the type of project proceeds or funds received from a muncipal bond issuance are used for such as government use, education, water, sewer and gas, health care.

Ginnie Mae I

Pass-through mortgage securities on which registered holders receive separate principal and interest payments on each of their certificates. Ginnie Mae I securities are single-issuer pools.

Ginnie Mae II

Pass-through mortgage securities on which registered holders receive an aggregate principal and interest payment from a central paying agent on all of their Ginnie Mae II certificates. Ginnie Mae II securities are collateralized by multiple-issuer pools or custom pools, which contain loans from one issuer, but interest rates that may vary within one percentage point.

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.

good-faith funds

Security deposit on new securities, ranging from 1% to 5% of the par amount, provided to the issuer at the time of a competitive bid by each underwriting syndicate. Also called good-faith check, if delivered as a check, or good-faith deposit.

government-sponsored enterprise (GSE)

Financing entities created by Congress to fund loans to certain groups of borrowers, such as homeowners, farmers and students.

GSE debt security

Debt issued by government-sponsored enterprises (GSEs)—those financing entities created by Congress to fund loans to certain groups of borrowers such as homeowners, farmers and students. Through the creation of GSEs, the government has sought to address various public policy concerns regarding the ability of members of these groups to borrow sufficient funds at affordable rates. There are organizational differences among the GSEs although all are established with a public purpose. All GSE debt is not guaranteed by the federal government. GSE-issued debt securities can be structured to offer investors fixed or floating interest rates. While the basic structures share many characteristics of non-structured fixed- or floating-rate debt, many variations are possible.

grantor trust

A special-purpose vehicle set up to issue fixed-rate capital securities and use the proceeds to purchase debt of the parent company. Investors who hold interests in the trust are taxed as if they owned pro rata undivided interests in the trust’s assets.

hedge

A commitment or investment made with the intention of minimizing the impact of adverse price movements in an asset or liability, offsetting potential losses.

high grade bond

See investment-grade bond.

high-yield bond (or junk bond)

Bonds rated Ba (by Moody's) or BB (by S&P and Fitch) or below, whose lower credit ratings indicate a higher risk of default. Due to the increased risk of default, these bonds are typically issued at a higher yield than more creditworthy bonds.

I Bonds

A type of inflation-adjusted security issued by the Treasury. Series I savings bonds pay interest according to an earning rate that is partly a fixed rate of return and partly adjusted for inflation.

illiquid

A market is illiquid when there is insufficient cash flowing to meet financial debts or obligations. In the context of bonds or other investments, illiquid refers to a bond or other investment that cannot be converted into cash quickly or near prevailing market prices. Liquid investments or assets are defined as those that can be converted into cash quickly and without great impact on the price of the asset.

indenture

Issuer legal document which details the mechanics of the bond issuer, security features, covenants, events of default and other key features of the issue’s legal structure. Bond resolutions and trust agreements are functionally similarly types of documents, and the use of each depends on the individual issue and issuer.

index ratio

For any particular date and any particular inflation-indexed security, the Reference CPI-U applicable to such date divided by the Reference CPI-U applicable to the original issue date (or dated date, when the dated date is different from the original issue date).

indexed rate bonds

Tax-exempt bonds where the rate is periodically reset on a formula that incorporates an index, such as The Securities Industry and Financial Markets Association Municipal Swap Index.

industrial revenue bond

A security issued by a state, political subdivision or certain agencies or authorities, for certain specific purposes, but backed by the credit of a private enterprise.

inflation

The rate of increases in the price of goods and services usually measured on an annualized basis.

inflation-adjusted principal

For an inflation-indexed security, the principal amount of the security, derived by multiplying the par amount by the applicable index ratio.

inflation-indexed securities

1. Securities designed to protect investors and the future value of their fixed-income investments from the adverse effects of inflation. Using the Consumer Price Index as a guide, the value of the securities’ principal is adjusted to reflect the effects of inflation. Also known as Treasury Inflation Protected Securities (TIPS) or Treasury Inflation-Indexed Securities (TIIS). 2. Notes periodically issued by the GSEs whose return is adjusted with changes in the PPI or CPI.

initial delivery

The delivery of a new issue by the issuer to the original purchaser, upon payment of the purchase price. Also called “original delivery."

initial offering price

The price (based upon yield to maturity) stated as a percentage of par at which the account determines to market the issue during a set period of time, called the initial offering period. Members of the account may not offer any part of the issue at any other price during that period.

institutional investors

Large organizational entities with significant amounts of money to invest such as insurance companies, pension funds, investment companies and unit trusts. Institutional investors account for a majority of overall volume in the bond markets.

insurance

Municipal bond insurance companies guarantee timely payment of principal and/or interest on municipal and certain other types of bonds in the event of a default. The major insurers are identified by these symbols:

ACA Financial Guaranty Corporation
Ambac Assurance Corporation
American Overseas Reinsurance Company Limited
Assured Guaranty Corp. (AGC)
Assured Guaranty Municipal (AGM)
Build America Mutual (BAM)
CIFG
Financial Guaranty Insurance Company (FGIC)
MBIA Insurance Corp.
National Public Finance Guarantee Corp.
Radian Asset Assurance Inc.
Syncora Guarantee

interest

Compensation paid or to be paid to borrow money, generally expressed as an annual percentage rate.

interest rate

Interest rates change in response to a number of things including revised expectations about inflation, and such changes in the prevailing level of interest rates affects the value of all outstanding bonds.

interest rate cap

An agreement where a party pays a premium up front or in installments to the counterparty. If the floating interest rate exceeds a stated fixed rate during the time of the cap agreement, the counterparty will pay the difference, based on the notional amount. The cap rate is also called the strike rate. An interest rate cap can protect the purchaser against rising interest rates.

interest-rate swaps

Interest-rate swaps are a derivative financial instrument which exchange or swap fixed rate interest rate payments for floating rate interest rate payments. Usually these swaps are an agreement between to parties to exchange one stream of interest payments for another over a set period of time. Plain, “vanilla” swaps are the most commonly used type of interest rate swap in the market. Investors use interest-rate swaps for debt portfolio management; corporate finance; to lock in interest rates; and to manage and hedge risk. It is important for an individual investor to understand that swaps are between institutions and not between individual investors; however, the result of these swaps may affect his/her portfolio or the price he/she may pay for a particular bond.

Interest-rate swaps have become critical to the bond markets. Initially interest-rate swaps helped corporations pay fixed rates and receive floating rate payments (or vice versa depending on their business needs). But then, swaps were seen to reflect market expectations and sensitivity to interest rates and credit concerns via what an interest-rate swap reflects which is a desire to exchange loans-one that was borrowed at a fixed rate and the other at a floating rate tied to, most commonly, (London Interbank Offered Rate) LIBOR. The graph plotting swap rates across available maturities became known as the swap curve. Swap rates suggest what the market expects the direction of LIBOR rates to be; and reflect the market's perception of credit quality. The swap rate curve is an important interest-rate benchmark for the bond markets and is commonly used in Europe as the pricing reference for all European government bonds.

inverse floater

A CMO tranche that pays an adjustable rate of interest that moves in the opposite direction from movements in a representative interest rate index such as the London Interbank Offered Rate (LIBOR), the Constant Maturity Treasury (CMT) or the Cost of Funds Index (COFI).

inverse floater bonds

A primary derivative tax-exempt bond. The interest payable is based on a formula that has a ceiling rate less a specified floating rate index or bond.

inverted, or negative, yield curve

The interest rate structure which exists when short-term interest rates exceed long-term interest rates. See ascending, or positive, yield curve.

investment-grade bond (or high grade bond)

Bonds rated Baa (by Moody’s) or BBB (by S&P and Fitch) or above, whose higher credit ratings indicate a lower risk of default. These bonds tend to issue at lower yields than less creditworthy bonds.

IO (interest-only) security

A security or tranche that pays only interest and not principal. IO securities are priced at a deep discount to the "notional" amount of principal used to calculate the amount of interest due.

ISIN

ISIN is the numbering code system set up by the International Organization for Standardization and used by internationally traded securities to identify and number each issue of securities. An ISIN code has twelve characters structured as follows: the first two characters of the ISIN are the country of origin for the security; the security identification number (which is called the National Securities Identifying Number NSIN) is the next 9 characters long; and a final character, called a check digit, is added to prevent errors and provide an additional verification for authenticity. The organization that allocates ISINs in any given country is called the National Numbering Agency (NNA). The NNA of the appropriate country administers the 9 digit security identification number. In the U.S., that NNA is called the Committee on Uniform Security Identification Procedures (CUSIP) Service Bureau, established under the auspices of the American Bankers Association to develop a uniform method of identifying securities.

issue

The issue description includes the name of the issuer of the bonds. If a municipal bond, the issuer is typically a state, political subdivision, agency or authority which borrows money through the sale of bonds or notes. Corporate bonds are issued by private corporations.

issue date

See dated date.

issuer

The entity obligated to pay principal and interest on a bond it issues.

joint managers

Underwriting accounts are headed by a manager. When an account is made up of several groups of underwriting firms that normally function as separate accounts, the larger account is often managed by several underwriters, usually one from each of the several groups, and these managers are referred to as “joint managers."

jumbo pools

Ginnie Mae II pass-through mortgage securities collateralized by pools which are generally larger and contain mortgages that are often more geographically diverse than single-issuer pools. Mortgage loans in jumbo pools may vary in terms of the interest rate within one percentage point.

jump Z-tranche

A Z-tranche that may start receiving principal payments before prior tranches are retired if market forces create a "triggering" event, such as a drop in Treasury yields to a defined level, or a prepayment experience that differs from assumptions by a specific margin. "Sticky" jump Z-tranches maintain their changed payment priority until they are retired. "Non sticky" jump Z-tranches maintain their priority only temporarily, for as long as the triggering event is present. Although jump Z-tranches are no longer issued, some still trade in the secondary market.

junior security

A security with a claim on a corporation’s assets and income that is subordinate to that of a senior security. For example, common stock is junior to preferred stock, which is junior to unsecured debt such as debentures, which is junior to secured debt.

junk bond

Bonds rated Ba (by Moody's) or BB (by S&P and Fitch) or below, whose lower credit ratings indicate a higher risk of default. Due to the increased risk of default, these bonds are typically issued at a higher yield than more creditworthy bonds.

laddering

A technique for reducing the impact of interest-rate risk by structuring a portfolio with different bond issues that mature at different dates.

legal opinion

An opinion concerning the validity of a securities issue with respect to statutory authority, constitutionality, procedural conformity and usually the exemption of interest from federal income taxes if this relates to a municipal bond issue. The legal opinion is usually rendered by a law firm recognized as specializing in public borrowings, often referred to as "bond counsel."

letter of credit (LOC)

A commitment, usually issued by a bank, used to guarantee the payment of principal and interest on debt issues. The LOC is drawn if the issuer is unable to make the principal and/or interest payments on a timely basis.

level debt service

A debt service schedule where total annual principal plus interest is approximately the same throughout the life of the bond. This entails a maturity schedule with increasing principal amounts each year.

level principal

A debt service schedule where total annual principal plus interest declines throughout the life of the bond. This entails a maturity schedule with the same amount of principal maturing each year, with a resulting smaller interest component each year. This is also called declining debt service.

leverage

The use of borrowed money to increase investing power.

liberty bonds

A special type of tax-exempt private activity bond created to boost construction or renovation of residential property within the Liberty Zone in Lower Manhattan, New York, and commercial property within New York City primarily in the Liberty Zone following the September 11, 2001 terrorist attacks. The Liberty Bond program, created in July 2002 by Congress, targeted real estate development in the “Liberty Zone” area with $8 billion in tax exempt financing to developers. Interest income from Liberty Bonds is exempt from Federal, State, and City income tax. While the program expired at the end of 2009, some in Congress are working to enact legislation to extend authority to issue the remaining Liberty Bonds through the end of 2010.

LIBOR (London Interbank Offered Rate)

The interest rate banks charge each other for short-term Eurodollar loans. LIBOR is frequently used as the base for resetting rates on floating-rate securities.

limited-liability company

A special-purpose company incorporated under special limited-liability company legislation enacted in many states and foreign countries. This type of entity is structured as a "pass-through" and treated like a partnership for tax purposes.

limited partnership

An entity formed under state legislation that enables large numbers of investors to become limited partners of a partnership, owning an economic interest in the entity’s assets, but sharing in its liabilities only to the extent of their initial investment.

limited tax bond

A bond secured by a pledge of a tax or category of taxes limited as to rate or amount.

line of credit

A commitment by a bank to provide funds to a borrower, if certain conditions have been met, or if certain conditions do not exist.

liquidation value

The amount a securities holder may receive in case of a liquidation of the issuer.

liquidity (or marketability)

A measure of the relative ease and speed with which a security can be purchased or sold in the secondary market.

lockout

The period of time before a CMO investor will begin receiving principal payments.

long

Securities that are owned by a dealer or investor.

long-term debt

Debt which matures in more than one year.

make whole call

The obligation of an issuer of a corporate bond to pay a premium to an investor if the issuer pays off its bond before the final maturity. The premium is based on a formula that compensates the investor for future coupon payments that it will not receive because the bonds have been called.

manager (or senior manager)

The underwriter that serves as the lead underwriter for an account. The “manager” generally negotiates the interest rate and purchase price in a negotiated transaction or serves as the generator of the consensus for the interest rate and purchase price to be bid in a competitive bidding situation. The “manager” signs the contracts on behalf of the account and generally receives either a fee or a slightly larger spread for its services in this capacity. See also joint managers.

mandatory sinking-fund redemption

A requirement to redeem a fixed portion of term bonds, which may comprise the entire issue, in accordance with a fixed schedule. Although the principal amount of the bonds to be redeemed is fixed, the specific bonds which will be called to satisfy the requirement as to amount are selected by the trustee on a lot basis.

marketability

A measure of the relative ease and speed with which a security can be purchased or sold in the secondary market.

market price or market value

For securities traded through an exchange, the last reported price at which a security was sold; for securities traded "over-the-counter," the current price of the security in the market.

market or interest rate risk

While investors are effectively guaranteed to receive interest and principal as promised, the underlying value of the bond itself may change depending on the direction of interest rates. As with all fixed-income securities, if interest rates in general rise after a bond is issued, the value of the issued security will fall, since bonds paying higher rates will come into the market. Similarly, if interest rates fall, the value of the older, higher-paying bond will rise in comparison with new issues. Interest rate risk is also known as market risk.

material events

In the municipal market, with regard to Rule 15c2-12, one of 11 specified events that must be disclosed to investors if they occur.

maturity date

The date when the principal amount of a security is due to be repaid.

maturity schedule

The listing, by dates and amounts, of principal maturities of an issue.

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.

modified duration

Duration adjusted to price and yield levels to represent percent change relationship of price and yield.

monetary default

Failure to pay principal or interest promptly when due.

monoline bond insurer

A Triple-A-rated company that guarantees that all interest and principal payments on a bond will be paid as scheduled and that participates in no other line of insurance business.

moral obligation bond

A revenue bond which, in addition to its primary source of security, possesses a structure whereby an issuer pledges to make up shortfalls in a debt service reserve fund, subject to legislative appropriation. While the issuer does not have a legal obligation to make such a payment, the failure of the issuer to honor the moral pledge would have negative consequences for its creditworthiness.

mortgage

A legal instrument that creates a lien upon real estate securing the payment of a specific debt.

mortgage-backed bonds or securities (MBS)

Mortgage-backed securities, called MBS are bonds or notes backed by mortgages on residential or commercial properties—an investor is purchasing an interest in pools of loans or other financial assets. As the underlying loans are paid off by the borrowers, the investors in MBS receive payments of interest and principal over time. The MBS market is for institutional investors and is not suitable for individual investors.

mortgage banker

An entity that originates mortgage loans, sells them to investors and services the loans.

mortgage loan

A loan secured by a mortgage.

mortgage pass-through security

A debt instrument representing a direct interest in a pool of mortgage loans. The pass-through issuer or servicer collects the payments on the loans in the pool and "passes through" the principal and interest to the security holders on a pro rata basis.

mortgage revenue bond

A security issued by a state, certain agencies or authorities, or a local government to make or purchase loans (including mortgages or other owner-financing) with respect to single-family or multifamily residences.

municipal bond

A bond issued by a state or local governmental unit.

municipal G.O. (general obligation bond) to Treasury ratio

Measure of credit risk of municipal bonds relative to risk-free securities, Treasuries. It is a measure comparable to the “spread to Treasury” measure in the taxable markets. Note that the municipal yield is typically less than 100 percent of the Treasury yield due to the tax-free nature of municipal securities.

municipal over bond (MOB)

Spread measures the relative difference between the municipal bond index future price and the U.S. Treasury bond futures price.

municipal securities principal

A municipal securities employee under MSRB rules who has supervisory responsibility for the municipal securities operations of the firm.

municipal securities representatives

The broadest class of municipal securities professionals who are required to pass a qualifications examination under the rules of the MSRB. This group includes individuals who underwrite, trade or sell municipal securities, do research or offer investment advice, provide financial advisory services or communicate with investors in municipal securities.

Municipal Securities Rulemaking Board (MSRB)

An independent self-regulatory organization established by the Securities Acts Amendments of 1975, which is charged with primary rulemaking authority over dealers, dealer banks and brokers in municipal securities. Its 15 members are divided into three categories—securities firms representatives, bank dealer representatives and public members—each category having equal representation on the Board. The MSRB also collects and disseminates market information, operating the Electronic Municipal Market Access (EMMA) website, www.emma.msrb.org, which is the official repository for municipal issuers' continuing disclosure documents, promoting transparency in the municipal market.

mutual fund (or open-end fund)

Investment companies that invest pooled cash of many investors to meet the fund’s stated investment objective. Mutual funds stand ready to sell and redeem their shares at any time at the fund’s current net asset value: total fund assets divided by shares outstanding.

negative convexity

A characteristic of CMOs and other callable or prepayable securities that causes investors to have their principal returned sooner than expected in a declining interest rate environment, and later than expected in a rising interest rate environment.

negotiated underwriting

In a negotiated underwriting, the sale of bonds is by negotiation and agreement with an underwriter or underwriting syndicate selected by the issuer prior to the moment of sale. This is in contrast to a competitive or an advertised sale,

net direct debt

Total direct debt of a municipality less all self-supporting debt, any sinking funds, and short-term debt such as tax anticipation notes and revenue anticipation notes.

net interest cost

The traditional method of calculating bids for new issues of municipal securities. The total dollar amount of interest over the life of the bonds is adjusted by the amount of premium or discount bid, and then reduced to an average annual rate. The other method is known as the true interest cost (see also true interest).

net order

Bond sold to investors at the price or yield shown in the reoffering scale. This is the price with no concessions.

net price

Price paid to a dealer for bonds when the dealer acts as principal in a transaction, i.e., the dealer sells bonds that he owns, as opposed to an agency transaction (see agency transaction).

new-issue market

Market for new issues of bonds and notes.

nominal value

The face value of a bond (as opposed to the amount an individual investor might have paid for the bond).

non-callable bond

A bond that cannot be called for redemption by the issuer before its specified maturity date.

non-investment grade

Bonds not considered suitable for preservation of invested capital; ordinarily, those rated Baa3 or below by Moody’s Investors Service, or BBB- or below by Standard & Poor’s Corporation. Bonds that are non-investment grade are also called high-yield bonds.

notes

Short-term bonds to pay specified amounts of money, secured by specified sources of future revenues, such as taxes, federal and state aid payments, and bond proceeds.

notice of sale

An official document disseminated by an issuer of municipal securities that gives pertinent information regarding an upcoming bond issue and invites bids from prospective underwriters.

notional amount

A stated principal amount in an interest rate swap on which the swap is based.

NRMSIRS

Nationally Recognized Municipal Securities Information Repositories

odd lot

Block of bonds of $100,000 or less.

offer

The price at which a seller offers to sell a security.

offering price

The price at which members of an underwriting syndicate for a new issue will offer securities to investors.

offering document (official statement or prospectus)

The disclosure document prepared by the issuer that gives in detail security and financial information about the issuer and the bonds or notes.

official statement (OS)

See offering document.

off-the-run Treasuries

Those sold in the secondary market rather than "on-the-run" Treasury securities, which are those most recently issued by the Government.

on-the-run

The most recently auctioned U.S. Treasury bond of a particular maturity. Opposite of off-the-run, which are Treasuries sold in the secondary market. Typically, on the run Treasuries are the most liquid, frequently traded securities. On-the-run bonds are usually more expensive, yielding less than off-the-run securities.

option-adjusted duration (effective duration)

A measure of the bond’s movement for a shift in the yield curve. For noncallable bonds modified duration and effective duration are the same.

option-adjusted spread

The average spread over the AAA spot curve, based on potential paths that can be realized in the future for interest rates. The potential paths of the cash flows are adjusted to reflect the options (puts/calls) embedded in the bond.

optional principal redemption bond

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

optional redemption

A right of the issuer, at its option, to retire all or part of an issue prior to the stated maturity during a specified period of years, often at a premium.

order period

Specific length of time when orders for new issues are placed by investors.

original delivery

The delivery of a new issue by the issuer to the original purchaser, upon payment of the purchase price. Also called “initial delivery."

original face

The face value or original principal amount of a security on its issue date.

original issue discount

A bond, issued at a dollar price less than par which qualifies for special treatment under federal tax law. Under that law, the difference between the issue price and par is treated as tax-exempt income rather than a capital gain, if the bonds are held to maturity.

overcollateralization

A type of credit enhancement in which the principal amount of collateral used to secure a given transaction exceeds the principal of the securities issued.

overlapping debt

On a municipal issuer’s financial statement, “overlapping debt” is the debt of other issuers which is payable in whole or in part by taxpayers of the subject issuer. As an example, a county usually includes several smaller governmental units and its debt is apportioned to them for payment based on the ratio of the assessed value of each smaller unit to the assessed value of the county. Another example is when a school district includes two or more municipalities within its bounds. In each example, “overlapping debt” is the proportionate share of the county and/or of the school district borne by the included subject issuer.

over-the-counter market (OTC)

A securities market that is conducted by dealers throughout the country through negotiation of price rather than through the use of an auction system as represented by a stock exchange.

owner trust

An amortizing structure that permits significant cash-flow engineering, which is generally prohibited with grantor trusts. Owner trusts are often used with auto loans, equipment leases and student loans.

P&I (principal and interest)

The term used to refer to regularly scheduled payments or prepayments of principal and of interest on mortgage securities.

PAC (planned amortization class) tranche

A CMO tranche that uses a mechanism similar to a sinking fund to determine a fixed principal payment schedule that will apply over a range of prepayment assumptions. The effect of the prepayment variability that is removed from a PAC bond is transferred to a companion tranche.

par

Price equal to the face amount of a security; 100%.

par amount

The principal amount of a bond or note due at maturity. Also known as par value.

parity debt

Securities issued or to be issued with equal and ratable claim on the same underlying security and source of payment for debt service.

participation

Principal amount of bonds to be underwritten by each syndicate member.

party

One of two entities, in a traditional interest rate swap. In the municipal market a counterparty and a party can be a state or local government, a broker dealer, or a corporation.

paying agent

The entity, usually a designated bank or the office of the treasurer of the issuer that pays the principal and interest of a bond.

payment date

The date that actual principal and interest payments are paid to the record owner of a security.

performance

An investment’s return (usually total return), compared to a benchmark that is comparable to the risk level or investment objectives of the investment.

perpetual floating-rate note

A floating-rate note with no stated maturity date.

plain-vanilla CMO

Or "sequential-pay CMO." The most basic type of CMO. All tranches receive regular interest payments, but principal payments are directed initially only to the first tranche until it is completely retired. Once the first tranche is retired, the principal payments are applied to the second tranche until it is fully retired, and so on.

PO (principal-only) security

A tranche or security that pays investors principal only and not interest. PO securities are priced at a deep discount from their face value.

point

Shorthand reference to 1%. In the context of a “bond,” a “point” means $10, since a “bond” with this reference means $1,000 (no matter what the actual denominations of the bonds of the issue). An issue or a security that is “discounted two points” is quoted at 98% of its par value.

pollution control bond

A debt security issued by a state, certain agencies or authorities, a local government, or development corporation to finance the construction of air- or water-pollution control facilities or sewage or solid waste disposal facilities pursuant to federal law. The bonds are backed by the credit of the beneficiary of the financing rather than the credit of the issuer. New issues of these bonds are prohibited under the 1986 Tax Law.

pool

A collection of mortgage loans assembled by an originator or master servicer as the basis for a security. In the case of Ginnie Mae, Fannie Mae, or Freddie Mac mortgage pass-through securities, pools are identified by a number assigned by the issuing agency.

portfolio

The group of investments that an individual or institutional investor holds.

preferred stock

An equity security that is junior to the issuing entity’s debt obligations but senior to common stock in the payment of dividends and the liquidation of assets. The dividend can be fixed or floating and is usually stated as a percentage of par value. Preferred stock usually has no voting rights and frequently has a mandatory or optional redemption provision.

preliminary official statement

The offering document for municipal securities, in preliminary form, which does not contain pricing information. It is also called a POS, or a red herring.

premium

The amount by which the price of a security exceeds its principal amount.

premium bond

Bonds priced greater than par.

premium or discount price

When the dollar price of a bond is above its face value, it is said to be selling at a premium. When the dollar price is below face value, it is said to be selling at a discount.

prepayment

The unscheduled partial or complete repayment of the principal amount outstanding on a loan, such as a mortgage, before it is due.

prepayment provision

Provision specifying that, and at what time and on what terms, repayment of the principal amount may be made by the issuer prior to the stated maturity. Includes “call,” but “prepayment” usually connotes less formal procedures than a call.

prepayment risk

The risk that principal repayment will occur earlier than scheduled, forcing the investor to receive principal sooner than anticipated and reinvested at lower prevailing rates. The measurement of prepayment risk is a key consideration for investors in mortgage- and asset-backed securities.

present value

The current value of a future payment or stream of payments, given a specified interest rate; also referred to as a discount rate.

price

The dollar amount to be paid for a security, which may also be stated as a percentage of its face value or par in the case of debt securities. Bond prices are best reflected in their yields, which vary inversely with the dollar price. The price you pay for a bond is based on a host of variables, including interest rates, supply and demand, credit quality, maturity and call features, tax status, state of issuance, market events and the size of the transaction.

primary market 

The market for new issues.

primary tax-exempt derivative products

These are based on bonds issued by state and local governments. Examples include inverse floater bonds; bonds with embedded swaps and caps; and bonds based on interest rate tax-exempt derivative products that are based on a custodial receipt, a trust certificate, or another security that is not directly issued by a state or local government. Examples include tender option bonds, trust certificates with interest rate swaps, and stripped interest rate bonds.

prime rate

A commercial bank’s stated reference rate for lending.

principal

The face amount of a bond, exclusive of accrued interest and payable at maturity.

principal transaction

A sale and purchase of bonds in which the dealer commits its own capital in effecting the transaction.

prior charge

The claim that a bondholder may have on the assets of a company in the event of liquidation ahead of other asset holders.

private activity bond

Under the 1986 Code, PABs are defined as any municipal obligation, irrespective of the purpose for which it is issued or the source of payment, if

  1. more than 10% of the proceeds of the issue will finance property that will be used by a nongovernmental person in a trade or business, and
  2. the payment of debt service on more than 10% of the proceeds of the issue will be
    1. secured by property used in a private trade or business or payments in respect of such property, or
    2. derived from payments in respect of property used in a private trade or business.

These two tests — the "private business use test" and the "private payment or security test" — must be examined in connection with the issuance of any municipal security.

private label

The term used to describe a mortgage security whose issuer is an entity other than a U.S. government agency or U.S. government-sponsored enterprise. Such issuers may be subsidiaries of investment banks, financial institutions or home builders, for example.

private placement

The negotiated offering of new securities directly to investors, without a public underwriting.

pro rata

Proportional distribution to all holders of the same class, based on ownership.

prospectus

Documents provided to investors who are considering investing in financial instruments such as stocks, shares, bonds, bond funds, investment trusts, etc. The prospectus details the investment's objectives, the nature of the investment, past performance, information on the investment company or managers, etc.  In the U.S., the Securities Exchange Commission (SEC) requires investment companies to issue and file with them a prospectus that explains the investment offer and provides other information that could help an individual investor decide whether the investment is appropriate.

public offering price

The aggregate value of securities in a unit investment trust fund, divided by the number of units, plus the applicable sales charge. This is the price at which units are offered for sale to the public.

put bond

A bond that gives the holder the right to require the issuer or the issuer’s agent to purchase the bonds at a price, usually at par, at some date or dates prior to the final stated maturity.

put option

A put option allows the holder of a bond to “put,” or present, the bond to an issuer (or trustee) and demand payment at a stated time before the final stated maturity of the bond.

ramp

A concept often used with HELs and manufactured-housing transactions to describe a series of increasing monthly prepayment speeds, prior to a plateau, on which the expected average life of a security is based.

rate covenant

A covenant in the financing proceedings requiring the charging of rates or fees for the use of specified facilities or operations at least sufficient to achieve a stated minimum coverage.

rate reset

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

ratings

Designations used by credit rating agencies to give relative indications as to opinions of credit quality.

real yield

For an inflation-indexed security, the yield based on the payment stream in constant dollars, i.e., before adjustment by the index ratio.

recession

A downturn in economic activity on a large scale, such as in the U.S. economy. The Commerce Department defines a recession as two or more quarters of decline in output, as measured by Gross National Product (GNP) or Gross Domestic Product (GDP).

reciprocal immunity doctrine

The doctrine that many believe provides the constitutional basis for the exemption from federal taxation of the interest earned on municipal securities. The doctrine holds that the states are immune from taxation by the federal government and vice versa. The advocates of tax-exemption for bonds believe that a tax on the interest income a taxpayer receives constitutes a tax on the issuer of the bonds.

record date

The date for determining the owner entitled to the next scheduled payment of principal or interest on a mortgage security.

redemption

The paying off or buying back of a bond by the issuer; also, repurchase of investment trust units by the trustee, at the bid price.

redemption date (maturity date)

The redemption date is the day when the bond's term ends and the principal amount of a security is payable along with any final interest payment. Also called maturity date. In cases of a callable bond, it may be the call date.

redemption premium

The amount by which the "call" price of a security exceeds its principal, or par value.

redemption provisions

Another term for call provisions. Actions taken to pay the principal amount prior to the stated maturity date, in accordance with the provisions for “call” stated in the proceedings and the securities.

redemption yield

Annual percentage return received by investor if the bond is held to maturity, a calculation often used to compare bonds. Also called yield to maturity (YTM). The redemption yield on the bond is a function of the price paid for the bond (which will almost always differ from its face, or par, value), the coupon rate and the length of time to go to maturity.

The really important aspect of the redemption yield is that it is the single number expressed as a percentage that encapsulates all aspects of a bond - where the price stands relative to par, whether the bond is high coupon or low coupon (or indeed zero coupon), and its number of years to maturity. It can therefore be used to compare any bond from any issuer with any other bond from any other issuer.

red herring

A preliminary official statement.

refunding

Sale of a new issue, the proceeds of which are to be used, immediately or in the future, to retire an outstanding issue by, essentially, replacing the outstanding issue with the new issue. Refundings are done to save interest cost, extend the maturity of the debt, or to relax existing restrictive covenants.

registered bond

A bond whose owner is registered with the issuer or its agent. Transfer of ownership can only be accomplished if the bonds are properly endorsed by the registered owner.

registered owner

The name in which a security is registered, as stated on the certificate or on the books of the paying agent. P&I payments are made to the registered owner on the record date.

reinvestment risk

The risk that interest income or principal repayments will have to be reinvested at lower rates in a declining interest rate environment.

remarketing

A formal re-underwriting of a bond for which the form or structure is being changed. Most commonly used in connection with changing variable rate to fixed-rate financings — typically because “the construction phase is over"; or rates are at a level the issuer feels comfortable with for the long term; or because of indenture requirements (probably relating to arbitrage).

remarketing agent

A dealer or dealer bank responsible for the pricing of variable-rate demand bonds. The remarketing agent periodically sets and resets the interest rate of a VRDN. If bonds are tendered, the remarketing agent will use his/her best efforts to sell tendered bonds to another purchaser.

REMIC (Real Estate Mortgage Investment Conduit)

A pass-through investment vehicle which issues multiclass mortgage-backed securities that have certain tax and accounting advantages for issuers and investors due to the Tax Reform Act of 1986. Currently, most CMOs are issued in REMIC form and the terms "REMIC" and "CMO" are now used interchangeably.

repurchase agreements (repos)

Repurchase agreements (repos) are widely used as a source of financing by primary dealers, other securities firms, banking firms, and institutional investors, among others. A repo involves an agreement between a seller and a buyer, typically of U.S. government securities but increasingly involving other types of securities and financial assets as well, whereby the seller "sells" the securities to the buyer, with a simultaneous agreement to repurchase the securities at an agreed upon price at a future point in time. A reverse repurchase agreement is the flip side of the transaction, with the buyer "buying" the securities from the seller and simultaneously agreeing to resell them at a future point in time. The outstanding volume of repos and reverse repos is enormous.

request for proposals

Widely referred to as an “RFP.” A series of questions sent by a potential issuer to evaluate the qualification of potential underwriters of their negotiated issues. Written and sometimes oral (the “orals”) responses to questions may include a marketing plan for the bonds, the plan of finance, and estimated costs. Also referred to as “Request for Qualifications,” or “RFQs.”

residential mortgage backed securities (RMBS)

Mortgage backed securities represent an ownership interest in mortgage loans made by financial institutions (savings and loans, commercial banks or mortgage companies) to finance the borrower's purchase of a home or other residential real estate as opposed to commercial real estate. Mortgage securities are created when these loans are packaged, or “pooled,” by issuers or servicers for sale to investors. As the underlying mortgage loans are paid off by the homeowners, the investors receive payments of interest and principal.

Investors may purchase mortgage securities when they are issued or afterward in the secondary market. Investments in mortgage securities are typically made by large institutions when the securities are issued. These securities may ultimately be redistributed by dealers in the secondary market.

residual

In a CMO, the residual is that tranche which collects any cash flow from the collateral that remains after obligations to the other tranches have been met.

retail investors

Individual investors who invest smaller amounts of money in the markets than institutional investors.

revenue anticipation note (RAN)

RANs are issued in anticipation of sources of future revenue other than taxes. This may include intergovernmental aid.

revenue bond

A municipal bond payable from income derived from tolls, charges or rents paid by users of the facility constructed with the proceeds of the bond issue.

revolving trust

A securitization structure frequently used for assets with high turnover rates, such as credit card, trade and dealer floor-plan receivables. It is characterized by having a revolving period and an accumulation (or controlled-amortization) period.

ring fencing

A newer term that essentially represents the series of steps involved in securitizations where assets are made "bankruptcy remote" or "bankruptcy proof." The goal of ring fencing is to enable such assets to stand independent of any bankruptcy or reorganization of the ultimate or immediate parent of the entity that holds the relevant assets.

risk

A measure of the degree of uncertainty and/or of financial loss inherent in an investment or decision. There are many different risks, including:

  • call risk—The risk that declining interest rates may accelerate the redemption of a callable security, causing an investor’s principal to be returned sooner than expected. As a consequence, investors may have to reinvest their principal at a lower rate of interest.
  • credit risk—The risk that the issuer of the bonds will be unable to make debt service payments due to a weakening of their credit.
  • event risk—The risk that an issuer’s ability to make debt service payments will change because of unanticipated changes, such as a corporate restructuring, a regulatory change or an accident, in their environment.
  • market risk—Potential price fluctuations in a bond due to changes in the general level of interest rates.
  • underwriting risk—The risk of pricing and underwriting securities and then ultimately not being able to sell them to the investor.
round lot

Block of bonds $100,000 or higher.

running yield or simple yield or income yield

The coupon of a bond expressed as a percent of the price of the bond. An example is a 20-year bond with a coupon of 6% selling at 120 has a simple yield of 5% (6 x 100/120).

safekeeping

The storage and protection of customers' securities, typically held in a vault, provided as a service by a bank or institution acting as agent for the customer.

scale

Listing by maturity of the price or yields at which a new issue will be offered.

  • consensus scale—In a negotiated issue, the very early price indications.
  • preliminary scale—Initial prices and yields, before a bid is submitted.
  • final scale—Scale that is submitted to the issuer at the time of the sale.
  • reoffering scale—Scale offered to the investor by the underwriter who has purchased bonds. Also called the winning scale.
scenario analysis

An analysis examining the likely performance of an investment under a wide range of possible interest rate environments.

seasoning

The age of accounts. In the ABS market, this term refers to the fact that various asset types have different seasoning patterns, which are characterized by periods of rising and then declining losses.

secondary market

Market for issues previously offered or sold.

Section 501(c)(3)

The section of the Internal Revenue Code under which not-for-profit organizations receive their tax-exempt status.

sector

The grouping of securities into a category, based upon similarities that they share. Typically, securities found in a distinct industry are grouped together.

secured bond

Debt backed by specific assets or revenues of the borrower. In the event of default, secured lenders can force the sale of such assets to meet their claims.

securitization

Securitization may be broadly defined as the process of issuing new securities backed by a pool of existing assets such as loans, residential or commercial mortgages, credit card debt, or other assets. These securities, which are generally referred to as “mortgage or asset-backed securities” are issued and sold to investors (principally institutions) and the cash flows or economic values following the assets are redirected to them. Securitization includes a diverse array of assets, such as residential and commercial mortgage loans, trade receivables, credit card balances, consumer loans, lease receivables, automobile loans, insurance receivables, commercial bank loans, health care receivables, obligations of purchasers to natural gas producers, future rights to entertainment royalty payments and other consumer and business receivables.

security

Collateral pledged by a bond issuer (debtor) to an investor (lender) to secure repayment of the loan.

selling group

A selling group includes dealers or brokers who have been asked to join in the offering of a new issue of securities, but are neither liable for any unsold syndicate balance, nor share in the profits of the overall syndicate. They obtain securities for sale less the take-down.

senior manager

The underwriter who coordinates the sale of a bond or note issue and manages a syndicate or selling group. A senior manager is usually used only with regard to a negotiated financing. The senior manager will “run the books.” If other securities firms share in the management responsibilities, they may be called co-senior managers, or, to a lesser extent, co-managers.

senior bonds

Bonds and other debt obligations, fixed-rate capital securities and preferred stock that are considered senior to common stock within an entity’s capitalization structure and therefore have a higher priority to repayment than another bond's claim to the same class of assets.

sequential-pay CMO

The most basic type of CMO. All tranches receive regular interest payments, but principal payments are directed initially only to the first tranche until it is completely retired. Once the first tranche is retired, the principal payments are applied to the second tranche until it is fully retired, and so on. Also known as 'plain vanilla' or 'clean' CMO.

serial bonds

All or a portion of an issue with stated maturities in consecutive years (as opposed to mandatory sinking fund redemption amounts).

Series EE Savings Bonds

Series EE bonds are safe low risk savings bonds issued by U.S. Treasury. Series EE bonds issued after April 2005 earn a fixed interest rate based on 10-year Treasury note market yields that is set each May 1 and November 1. Series EE bonds issued from May 1997 to April 2005 accrued interest according to a floating rate (90% of the average market yields on 5-year Treasury securities for the previous six months). The holder doesn't receive the interest until the bonds are cashed in. If the bonds are redeemed less than five years from the time they are purchased, the holder must sacrifice three-months' interest. The Treasury guarantees that Series EE bonds will mature at full face value in no more than 17 years. If you want to hold them longer, they will continue to accrue interest for 30 years.

Series I Savings Bonds

Series I savings bonds have a built-in inflation adjustment. They are issued in the same denominations as Series EE bonds but pay interest according to an earning rate that is partly a fixed rate of return and partly adjusted for inflation. Interest, if any, is added to the bond monthly and is paid when the bond is redeemed. These bonds can now be issued electronically.

servicing

The collection and pooling of principal, interest and escrow payments on mortgage loans and mortgage pools; accounting, bookkeeping, insurance, tax records, loan payment follow-up, delinquency loan follow-up and loan analysis. The party providing the servicing receives a fee, the servicing fee, as compensation.

servicing fee

The amount retained by the mortgage servicer from monthly interest payments made on a mortgage loan.

settlement date

The date for the delivery of bonds and payment of funds agreed to in a transaction.

share

A share is a unit of ownership in a corporation, or a mutual fund or an interest in a partnership. In the US, the term stock is often used instead of share, although an investor actually owns shares of stock.

short

Borrowing and then selling securities that one does not own, in anticipation of a price decline. When prices fall, the short is “covered” by buying the securities back and returning them to the lender.

short-term debt

Generally, debt which matures in one year or less. However, certain securities that mature in up to three years may be considered short-term debt.

single monthly mortality (SMM)

The percentage of outstanding mortgage loan principal that prepays in one month.

sinker

A bond with a sinking fund.

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. Bonds with such a feature are known as "sinkers."

sovereign risk

The risk that the government in the country where the bonds are issued will take actions that will hurt the bond's value.

special-purpose vehicle (SPV)

A bankruptcy-remote entity set up to insulate the issuer of ABS (the trust) from the sponsor, or originator, of the assets. Also called special-purpose corporation (SPC).

special tax bond

A bond secured by a special tax, such as a gasoline tax.

sponsor

An investment firm that organizes a unit investment trust and offers the units for sale.

spread

When buying or selling a bond through a brokerage firm, an individual investor will be charged a commission or spread, which is the difference between the market price and cost of purchase, and sometimes a service fee. Spreads differ based on several factors including liquidity.

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 4.75% and a 10-year corporate yielding 5.25% is 50 basis points.

Standard Prepayment Model (SIFMA prepayment model).

A model based on historical mortgage prepayment rates used to estimate prepayment rates on mortgage securities. SIFMA’s model is based on the Constant Prepayment Rate (CPR), which annualizes the Single Monthly Mortality (SMM), or the amount of outstanding principal that is prepaid in a month. Projected and historical prepayment rates are often expressed as "percentage of PSA" (Prepayment Speed Assumptions). A prepayment rate of 100% PSA implies annualized prepayment rates of 0.2% CPR in the first month, 0.4% CPR in the second month, 0.6% CPR in the third month and 0.2% increases in every month thereafter until the thirtieth month, when the rate reaches 6%. From the thirtieth month until the mortgage loan reaches maturity, 100% PSA equals 6% CPR.

stated maturity

The last possible date on which the last payment of the longest loan may be paid.

state rating

Indicates the general obligation bond (G.O.) credit rating a rating agency may apply to a state. The rating on a specific municipal bond issue or issuer located with the state may differ from the state rating.

STRIPS

Separate Trading of Registered Interest and Principal of Securities. The Treasury Department’s program under which eligible securities are authorized to be separated into principal and interest components, and transferred separately. These components are maintained in book-entry accounts and transferred in TRADES (Treasury/Reserve Automated Debt Entry System).

structured products

Many different types of products are “structured” to some extent. “Structuring” usually refers to any type of obligation that is not a straightforward secured or unsecured government or corporate obligation. Although these types of transactions are usually issued through special purpose vehicles, this is not always the case. For example, securitizations are one type of structured product. Another type of structured product refers to a packaging or repackaging of bonds together with various types of interest rate swaps and/or credit derivatives to change the interest and principal payment stream, in order to provide an investor with a particular risk profile that they want. In some cases, these products are also called “structured credit” if they involve products with some type of corporate or asset-related credit risks. Due to the complexity of structured products, they are rarely part of traditional retail investor portfolios or fund offerings.

subordinated bond

A type of debt that places the investor in a lien position behind or subordinated to a company’s primary creditors. Bonds 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.

super PO

A principal-only security structured as a companion bond.

superfloater

A floating-rate CMO tranche whose rate is based on a formulaic relationship to a representative interest rate index.

support tranche

A CMO tranche that absorbs a higher level of the impact of collateral prepayment variability in order to stabilize the principal payment schedule for a PAC or TAC tranche in the same offering. Also known as a "companion tranche."

surety bond

A bond that backs the performance of another. In the ABS market, a surety bond is an insurance policy typically provided by a rated and regulated monoline insurance company to guarantee securities holders against default.

swap

A transaction in which an investor sells one security and simultaneously buys another with the proceeds, usually for about the same price and frequently for tax purposes.

syndicate

A group of underwriters formed for the purpose of participating jointly in the initial public offering of a new issue of municipal securities. The terms under which a “syndicate” is formed and operates are typically set forth in an “agreement among underwriters.” One or more underwriters will act as manager of the “syndicate” and one of the managers will act as lead manager and “run the books.” A “syndicate” is also often referred to as an “account” or “underwriting account."

TAC (targeted amortization class) tranche

A TAC tranche uses a mechanism similar to that of a sinking fund to determine a fixed principal payment schedule based on an assumed prepayment rate. The effect of prepayment variability that is removed from the TAC tranche is transferred to a companion tranche.

take-down

The discount from the list price allowed to a member of an underwriting account on any bonds purchased from the account.

Tax Anticipation Note (TAN)

TANs are issued by states or local governmental units to finance current operations in anticipation of future tax receipts. TRANS are notes that are issued in anticipation of both taxes and revenues.

taxable municipal bond

A municipal bond whose interest is not excluded from the gross income of its owners for federal income tax purposes. Certain municipal bonds are taxable because they are issued for purposes which the federal government deems not to provide a significant benefit to the public at large.

tax-backed bond

A broad category of bonds that are secured by taxes levied by the obligor. The taxes are not necessarily unlimited as to rate or amount, so while all general obligation bonds are tax backed, not all tax-backed bonds are general obligations. Examples of tax-backed bonds include moral obligations and appropriation-backed bonds. This category is also known as tax-supported.

tax base

The total property and resources subject to taxation. (See “assessed valuation.”)

tax-exempt bond

A common term for municipal bonds. The interest on the bond is excluded from the gross income of its owners for federal income tax purposes under Section 103 of the Internal Revenue Code of 1954, as amended. Municipal bonds that are also exempt from state and local as well as federal income taxes are said to have double or triple tax exemption.

tax-exempt commercial paper

A short-term promissory note issued for periods up to 270 days, often used in lieu of fixed-rate BANs, TANs and RANs because of the greater flexibility offered in setting both maturities and determining rates. The purpose for issuing TECP or TXCP can be the same as that for BANs, TANs and RANs.

tax-exempt/taxable yield equivalent formula

A formula which converts the lower yield of a tax-exempt security into the higher yield of a taxable security. The tax-exempt yield is divided by 100% less the investor’s marginal tax rate, and the resulting quotient is expressed as a percentage. This allows investors to compare equivalent yields on the two securities.

T-bill rate

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

technical default

A default under the bond indenture terms, other than nonpayment of interest or principal. Examples of technical default are failure to maintain required reserves, or to maintain adequate fees and charges for service.

term bonds

Bonds of an issue that have a single stated maturity date. Mandatory redemption provisions require the issuer to call or purchase a certain amount of the term bonds using money set aside in a sinking fund at regular intervals before the stated maturity date.

term funding

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

toggle tranche

Also known as "Jump  Z-tranche." A Z-tranche that may start receiving principal payments before prior tranches are retired if market forces create a "triggering" event, such as a drop in Treasury yields to a defined level, or a prepayment experience that differs from assumptions by a specific margin. "Sticky" jump Z-tranches maintain their changed payment priority until they are retired. "Non sticky" jump Z-tranches maintain their priority only temporarily, for as long as the triggering event is present. Although jump Z-tranches are no longer issued, some still trade in the secondary market.

total bonded debt

Total general obligation bond debt outstanding of a municipality, regardless of the purpose.

total direct debt

The sum of the total bond debt and any unfunded debt (typically, short-term notes) of a municipality.

total return

Investment performance measure over a stated time period which includes coupon interest, interest on interest, and any realized and unrealized gains or losses.

trade date

The date upon which a bond is purchased or sold.

tranche

The French word for "slice", tranche usually refers to part, segment or portion of an investment issue such as a specific class of bond or mortgage backed security within an offering in which each tranche offers different terms including varying degrees of risk. Tranche may also refer to the segment of the bond offering being distributed in different geographical areas.

transcript of proceedings

Final documents relating to a municipal bond issue.

transfer agent

The party appointed by an issuer to maintain records of bondholders, cancel and issue certificates, and address issues arising from lost, destroyed or stolen certificates.

transparency

The concept of disseminating price, volume and other information to the public about transactions in the municipal market.

Treasury Inflation-Indexed Securities (TIIS)

Securities designed to protect investors and the future value of their fixed-income investments from the adverse effects of inflation. Using the Consumer Price Index as a guide, the value of the securities' principal is adjusted to reflect the effects of inflation. Also known as Treasury Inflation Protected Securities (TIPS).

Treasury Securities

U.S. Treasury securities are debt obligations of the U.S. government. These include bills, notes, bonds, TIPS, and Savings Bonds. When you buy a Treasury security, you are lending money to the federal government for a specified period of time. Treasury bills are short-term instruments with maturities of no more than one year. Treasury notes are intermediate- to long-term investments, typically issued in maturities of two, three, five, seven and ten years. Treasury bonds cover terms of more than ten years and are currently issued in 30-year maturities. Interest is paid semi-annually. For more information on buying Treasury securities see the government's website www.treasurydirect.gov.

trigger

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

triple-A claims-paying rating

Designation for insurers offering superior security on both an absolute and a relative basis. Such insurers have been judged to possess the highest safety and have the capacity to meet policyholder obligations.

true interest cost

A method of calculating bids for new issues of municipal securities that takes into consideration the time value of money (see “net interest cost”).

true sale

An actual sale, as distinct from a secured borrowing, which means that assets transferred to an SPV are not expected to be consolidated with those of the sponsor in the event of the sponsor’s bankruptcy. Rating agencies usually require what is called a true-sale opinion from a law firm before the securities can receive a rating higher than that of the sponsor.

true yield

The rate of return to the investor taking into account the payment of capital gains at maturity on a bond bought at a discount.

trust agreement

Agreement between the issuer and the trustee (1) authorizing and securing the bonds; (2) containing the issuer’s covenants and obligations with respect to the project and payment of debt service; (3) specifying the events of default; and (4) outlining the trustee’s fiduciary responsibilities and bondholders' rights. Generally does not include an assignment to the trustee of collateral to secure the payment of debt service.

trustee

An institution, usually a bank, designated by the issuer as the custodian of funds and official representative of bondholders. Trustees are appointed to ensure compliance with the trust indenture and represent bondholders to enforce their contract with the issuers.

undated issue

A floating-rate note with no stated maturity date (see also "perpetual floating-rate note").

underwrite

The purchase of a bond or note issue from an issuer to resell it to investors.

underwriter

The securities dealer who purchases a bond or note issue from an issuer and resells it to investors. If a syndicate or selling group is formed, the underwriter who coordinates the financing and runs the group is called the senior or lead manager.

The difference between the offering price to the public by the underwriter and the purchase price the underwriter pays to the issuer. The underwriter’s expenses and selling costs are usually paid from this amount.

undivided account

Syndicate account structure that is undivided as to sales and liability. Also called “Eastern” account.

unit

A fractional, undivided interest in a unit investment trust.

unit investment trust

An investment fund created with a fixed portfolio of investments to provide a steady, periodic flow of income to investors.

unlimited tax bond

A bond secured by the pledge of taxes that are not limited by rate or amount.

unsecured debt

Debt with a claim for repayment that ranks last after all other forms of debt securities in the event of a corporate liquidation.

U.S. Savings Bond

U.S. Savings Bond A non-marketable bond issued by the U.S. Treasury in face value denominations designed for individual investors. Since savings bonds are direct obligations of the U.S. Government, the credit quality is the highest available. Each bond is a registered security for which a record is maintained by the Bureau of the Public Debt. Interest from savings bonds are exempt from state and local taxes, and unlike most investments no federal tax is due until the bond is redeemed. Two categories of bonds are currently available for purchase-Series EE and series I. For more information on purchasing savings bonds go to www.treasurydirect.gov.

variable rate bond

A long-term bond the interest rate of which is adjusted periodically, typically based upon specific market indicators.

variable-rate demand obligation (VRDO)

A bond which bears interest at a variable, or floating, rate established at specified intervals (e.g., flexible, daily, weekly, monthly or annually). It contains a put option permitting the bondholder to tender the bond for purchase when a new interest rate is established. VRDOs are also referred to as VRDNs (N=Notes), VRDBs (B=Bonds) or low floaters.

;volatility

The propensity of a security's price to rise or fall sharply.

volume cap

Dollar limitation of private-activity bonds that are allowed to be issued, by state, each year. Legislation enacted by Congress sets the volume cap.

weighted average coupon (WAC)

The weighted average interest rate of the underlying mortgage loans or pools that serve as collateral for a security, weighted by the size of the principal loan balances.

weighted average loan age (WALA)

The weighted average number of months since the date of the loan origination of the mortgages (i.e., the age of the loans) that collateralize a security, weighted by the size of the principal loan balances.

weighted average maturity (WAM)

The weighted average number of months to the final payment of each loan backing a mortgage security weighted by the size of the principal loan balances. Also known as weighted average remaining maturity (WARM) and weighted average remaining term (WART).

window

In a CMO security, the period of time between the expected first payment of principal and the expected last payment of principal.

yield

The annual percentage rate of return earned on a bond calculated by dividing the coupon interest by its purchase price.

yield burning

In a refunding, the practice of a dealer marking up the price of the securities to be put in an escrow, in order to "burn the yield down" to levels that do not violate federal arbitrage regulations. Yield burning has a negative connotation.

yield curve

A line tracing relative yields on a type of bond over a spectrum of maturities ranging from three months to 30 years.

yield spread

The difference in yield between two bonds or bond indexes.

yield to call

The yield on a bond calculated by dividing the value all interest payments that will be paid until the call date, plus interest on interest, by the principal amount received on the call date at the call price, taking into consideration whatever gain or loss is realized from the bond at the call date. Example: You pay $900 for a five year bond with a face value of $1000. The bond pays an annual coupon of ten percent. This bond is called at year three for $1,100. The yield to call of this bond is 18.4 percent. This reflects the three years of coupon payments and the difference between the price paid and the call price. Had the bond not been called, the yield to maturity would have been 12.8 percent. Bond calculators are available on this website, www.investinginbonds.com.

yield to maturity

The yield on a bond calculated by dividing the value of all the interest payments that will be paid until the maturity date, plus interest on interest, by the principal amount received at the maturity date, taking in to consideration whatever gain or loss is realized from the bond at the maturity date. Example: You pay $900 for a five year bond at a face value of $1000. The bond pays an annual coupon of ten percent. Here the yield to maturity is 12.8 percent. This reflects the coupon payments and the difference between the price and the face value of the bond. Bond calculators are available on this website, www.investinginbonds.com.

yield to worst

This is the lowest yield generated, given the potential stated calls prior to maturity.

zero-coupon bond

A bond which does not make periodic interest payments; instead the investor receives one payment, which includes principal and interest, at redemption (call or maturity). See discount note.

Z-tranche

Often the last tranche in a CMO, the Z-tranche receives no cash payments for an extended period of time until the previous tranches are retired. While the other tranches are outstanding, the Z-tranche receives credit for periodic interest payments that increase its face value but are not paid out. When the other tranches are retired, the Z-tranche begins to receive cash payments that include both principal and continuing interest.

 

 
public offering price

The aggregate value of securities in a unit investment trust fund, divided by the number of units, plus the applicable sales charge. This is the price at which units are offered for sale to the public.

put bond

A bond that gives the holder the right to require the issuer or the issuer’s agent to purchase the bonds at a price, usually at par, at some date or dates prior to the final stated maturity.

put option

A put option allows the holder of a bond to “put,” or present, the bond to an issuer (or trustee) and demand payment at a stated time before the final stated maturity of the bond.

ramp

A concept often used with HELs and manufactured-housing transactions to describe a series of increasing monthly prepayment speeds, prior to a plateau, on which the expected average life of a security is based.

rate covenant

A covenant in the financing proceedings requiring the charging of rates or fees for the use of specified facilities or operations at least sufficient to achieve a stated minimum coverage.

rate reset

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

ratings

Designations used by credit rating agencies to give relative indications as to opinions of credit quality.

real yield

For an inflation-indexed security, the yield based on the payment stream in constant dollars, i.e., before adjustment by the index ratio.

recession

A downturn in economic activity on a large scale, such as in the U.S. economy. The Commerce Department defines a recession as two or more quarters of decline in output, as measured by Gross National Product (GNP) or Gross Domestic Product (GDP).

reciprocal immunity doctrine

The doctrine that many believe provides the constitutional basis for the exemption from federal taxation of the interest earned on municipal securities. The doctrine holds that the states are immune from taxation by the federal government and vice versa. The advocates of tax-exemption for bonds believe that a tax on the interest income a taxpayer receives constitutes a tax on the issuer of the bonds.

record date

The date for determining the owner entitled to the next scheduled payment of principal or interest on a mortgage security.

redemption

The paying off or buying back of a bond by the issuer; also, repurchase of investment trust units by the trustee, at the bid price.

redemption date (maturity date)

The redemption date is the day when the bond's term ends and the principal amount of a security is payable along with any final interest payment. Also called maturity date. In cases of a callable bond, it may be the call date.

redemption premium

The amount by which the "call" price of a security exceeds its principal, or par value.

redemption provisions

Another term for call provisions. Actions taken to pay the principal amount prior to the stated maturity date, in accordance with the provisions for “call” stated in the proceedings and the securities.

redemption yield

Annual percentage return received by investor if the bond is held to maturity, a calculation often used to compare bonds. Also called yield to maturity (YTM). The redemption yield on the bond is a function of the price paid for the bond (which will almost always differ from its face, or par, value), the coupon rate and the length of time to go to maturity.

The really important aspect of the redemption yield is that it is the single number expressed as a percentage that encapsulates all aspects of a bond - where the price stands relative to par, whether the bond is high coupon or low coupon (or indeed zero coupon), and its number of years to maturity. It can therefore be used to compare any bond from any issuer with any other bond from any other issuer.

red herring

A preliminary official statement.

refunding

Sale of a new issue, the proceeds of which are to be used, immediately or in the future, to retire an outstanding issue by, essentially, replacing the outstanding issue with the new issue. Refundings are done to save interest cost, extend the maturity of the debt, or to relax existing restrictive covenants.

registered bond

A bond whose owner is registered with the issuer or its agent. Transfer of ownership can only be accomplished if the bonds are properly endorsed by the registered owner.

registered owner

The name in which a security is registered, as stated on the certificate or on the books of the paying agent. P&I payments are made to the registered owner on the record date.

reinvestment risk

The risk that interest income or principal repayments will have to be reinvested at lower rates in a declining interest rate environment.

remarketing

A formal re-underwriting of a bond for which the form or structure is being changed. Most commonly used in connection with changing variable rate to fixed-rate financings — typically because “the construction phase is over"; or rates are at a level the issuer feels comfortable with for the long term; or because of indenture requirements (probably relating to arbitrage).

remarketing agent

A dealer or dealer bank responsible for the pricing of variable-rate demand bonds. The remarketing agent periodically sets and resets the interest rate of a VRDN. If bonds are tendered, the remarketing agent will use his/her best efforts to sell tendered bonds to another purchaser.

REMIC (Real Estate Mortgage Investment Conduit)

A pass-through investment vehicle which issues multiclass mortgage-backed securities that have certain tax and accounting advantages for issuers and investors due to the Tax Reform Act of 1986. Currently, most CMOs are issued in REMIC form and the terms "REMIC" and "CMO" are now used interchangeably.

repurchase agreements (repos)

Repurchase agreements (repos) are widely used as a source of financing by primary dealers, other securities firms, banking firms, and institutional investors, among others. A repo involves an agreement between a seller and a buyer, typically of U.S. government securities but increasingly involving other types of securities and financial assets as well, whereby the seller "sells" the securities to the buyer, with a simultaneous agreement to repurchase the securities at an agreed upon price at a future point in time. A reverse repurchase agreement is the flip side of the transaction, with the buyer "buying" the securities from the seller and simultaneously agreeing to resell them at a future point in time. The outstanding volume of repos and reverse repos is enormous.

request for proposals

Widely referred to as an “RFP.” A series of questions sent by a potential issuer to evaluate the qualification of potential underwriters of their negotiated issues. Written and sometimes oral (the “orals”) responses to questions may include a marketing plan for the bonds, the plan of finance, and estimated costs. Also referred to as “Request for Qualifications,” or “RFQs.”

residential mortgage backed securities (RMBS)

Mortgage backed securities represent an ownership interest in mortgage loans made by financial institutions (savings and loans, commercial banks or mortgage companies) to finance the borrower's purchase of a home or other residential real estate as opposed to commercial real estate. Mortgage securities are created when these loans are packaged, or “pooled,” by issuers or servicers for sale to investors. As the underlying mortgage loans are paid off by the homeowners, the investors receive payments of interest and principal.

Investors may purchase mortgage securities when they are issued or afterward in the secondary market. Investments in mortgage securities are typically made by large institutions when the securities are issued. These securities may ultimately be redistributed by dealers in the secondary market.

residual

In a CMO, the residual is that tranche which collects any cash flow from the collateral that remains after obligations to the other tranches have been met.

retail investors

Individual investors who invest smaller amounts of money in the markets than institutional investors.

revenue anticipation note (RAN)

RANs are issued in anticipation of sources of future revenue other than taxes. This may include intergovernmental aid.

revenue bond

A municipal bond payable from income derived from tolls, charges or rents paid by users of the facility constructed with the proceeds of the bond issue.

revolving trust

A securitization structure frequently used for assets with high turnover rates, such as credit card, trade and dealer floor-plan receivables. It is characterized by having a revolving period and an accumulation (or controlled-amortization) period.

ring fencing

A newer term that essentially represents the series of steps involved in securitizations where assets are made "bankruptcy remote" or "bankruptcy proof." The goal of ring fencing is to enable such assets to stand independent of any bankruptcy or reorganization of the ultimate or immediate parent of the entity that holds the relevant assets.

risk

A measure of the degree of uncertainty and/or of financial loss inherent in an investment or decision. There are many different risks, including:

  • call risk—The risk that declining interest rates may accelerate the redemption of a callable security, causing an investor’s principal to be returned sooner than expected. As a consequence, investors may have to reinvest their principal at a lower rate of interest.
  • credit risk—The risk that the issuer of the bonds will be unable to make debt service payments due to a weakening of their credit.
  • event risk—The risk that an issuer’s ability to make debt service payments will change because of unanticipated changes, such as a corporate restructuring, a regulatory change or an accident, in their environment.
  • market risk—Potential price fluctuations in a bond due to changes in the general level of interest rates.
  • underwriting risk—The risk of pricing and underwriting securities and then ultimately not being able to sell them to the investor.
round lot

Block of bonds $100,000 or higher.

running yield or simple yield or income yield

The coupon of a bond expressed as a percent of the price of the bond. An example is a 20-year bond with a coupon of 6% selling at 120 has a simple yield of 5% (6 x 100/120).

safekeeping

The storage and protection of customers' securities, typically held in a vault, provided as a service by a bank or institution acting as agent for the customer.

scale

Listing by maturity of the price or yields at which a new issue will be offered.

  • consensus scale—In a negotiated issue, the very early price indications.
  • preliminary scale—Initial prices and yields, before a bid is submitted.
  • final scale—Scale that is submitted to the issuer at the time of the sale.
  • reoffering scale—Scale offered to the investor by the underwriter who has purchased bonds. Also called the winning scale.
scenario analysis

An analysis examining the likely performance of an investment under a wide range of possible interest rate environments.

seasoning

The age of accounts. In the ABS market, this term refers to the fact that various asset types have different seasoning patterns, which are characterized by periods of rising and then declining losses.

secondary market

Market for issues previously offered or sold.

Section 501(c)(3)

The section of the Internal Revenue Code under which not-for-profit organizations receive their tax-exempt status.

sector

The grouping of securities into a category, based upon similarities that they share. Typically, securities found in a distinct industry are grouped together.

secured bond

Debt backed by specific assets or revenues of the borrower. In the event of default, secured lenders can force the sale of such assets to meet their claims.

securitization

Securitization may be broadly defined as the process of issuing new securities backed by a pool of existing assets such as loans, residential or commercial mortgages, credit card debt, or other assets. These securities, which are generally referred to as “mortgage or asset-backed securities” are issued and sold to investors (principally institutions) and the cash flows or economic values following the assets are redirected to them. Securitization includes a diverse array of assets, such as residential and commercial mortgage loans, trade receivables, credit card balances, consumer loans, lease receivables, automobile loans, insurance receivables, commercial bank loans, health care receivables, obligations of purchasers to natural gas producers, future rights to entertainment royalty payments and other consumer and business receivables.

security

Collateral pledged by a bond issuer (debtor) to an investor (lender) to secure repayment of the loan.

selling group

A selling group includes dealers or brokers who have been asked to join in the offering of a new issue of securities, but are neither liable for any unsold syndicate balance, nor share in the profits of the overall syndicate. They obtain securities for sale less the take-down.

senior manager

The underwriter who coordinates the sale of a bond or note issue and manages a syndicate or selling group. A senior manager is usually used only with regard to a negotiated financing. The senior manager will “run the books.” If other securities firms share in the management responsibilities, they may be called co-senior managers, or, to a lesser extent, co-managers.

senior bonds

Bonds and other debt obligations, fixed-rate capital securities and preferred stock that are considered senior to common stock within an entity’s capitalization structure and therefore have a higher priority to repayment than another bond's claim to the same class of assets.

sequential-pay CMO

The most basic type of CMO. All tranches receive regular interest payments, but principal payments are directed initially only to the first tranche until it is completely retired. Once the first tranche is retired, the principal payments are applied to the second tranche until it is fully retired, and so on. Also known as 'plain vanilla' or 'clean' CMO.

serial bonds

All or a portion of an issue with stated maturities in consecutive years (as opposed to mandatory sinking fund redemption amounts).

Series EE Savings Bonds

Series EE bonds are safe low risk savings bonds issued by U.S. Treasury. Series EE bonds issued after April 2005 earn a fixed interest rate based on 10-year Treasury note market yields that is set each May 1 and November 1. Series EE bonds issued from May 1997 to April 2005 accrued interest according to a floating rate (90% of the average market yields on 5-year Treasury securities for the previous six months). The holder doesn't receive the interest until the bonds are cashed in. If the bonds are redeemed less than five years from the time they are purchased, the holder must sacrifice three-months' interest. The Treasury guarantees that Series EE bonds will mature at full face value in no more than 17 years. If you want to hold them longer, they will continue to accrue interest for 30 years.

Series I Savings Bonds

Series I savings bonds have a built-in inflation adjustment. They are issued in the same denominations as Series EE bonds but pay interest according to an earning rate that is partly a fixed rate of return and partly adjusted for inflation. Interest, if any, is added to the bond monthly and is paid when the bond is redeemed. These bonds can now be issued electronically.

servicing

The collection and pooling of principal, interest and escrow payments on mortgage loans and mortgage pools; accounting, bookkeeping, insurance, tax records, loan payment follow-up, delinquency loan follow-up and loan analysis. The party providing the servicing receives a fee, the servicing fee, as compensation.

servicing fee

The amount retained by the mortgage servicer from monthly interest payments made on a mortgage loan.

settlement date

The date for the delivery of bonds and payment of funds agreed to in a transaction.

share

A share is a unit of ownership in a corporation, or a mutual fund or an interest in a partnership. In the US, the term stock is often used instead of share, although an investor actually owns shares of stock.

short

Borrowing and then selling securities that one does not own, in anticipation of a price decline. When prices fall, the short is “covered” by buying the securities back and returning them to the lender.

short-term debt

Generally, debt which matures in one year or less. However, certain securities that mature in up to three years may be considered short-term debt.

single monthly mortality (SMM)

The percentage of outstanding mortgage loan principal that prepays in one month.

sinker

A bond with a sinking fund.

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. Bonds with such a feature are known as "sinkers."

sovereign risk

The risk that the government in the country where the bonds are issued will take actions that will hurt the bond's value.

special-purpose vehicle (SPV)

A bankruptcy-remote entity set up to insulate the issuer of ABS (the trust) from the sponsor, or originator, of the assets. Also called special-purpose corporation (SPC).

special tax bond

A bond secured by a special tax, such as a gasoline tax.

sponsor

An investment firm that organizes a unit investment trust and offers the units for sale.

spread

When buying or selling a bond through a brokerage firm, an individual investor will be charged a commission or spread, which is the difference between the market price and cost of purchase, and sometimes a service fee. Spreads differ based on several factors including liquidity.

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 4.75% and a 10-year corporate yielding 5.25% is 50 basis points.

Standard Prepayment Model (SIFMA prepayment model).

A model based on historical mortgage prepayment rates used to estimate prepayment rates on mortgage securities. SIFMA’s model is based on the Constant Prepayment Rate (CPR), which annualizes the Single Monthly Mortality (SMM), or the amount of outstanding principal that is prepaid in a month. Projected and historical prepayment rates are often expressed as "percentage of PSA" (Prepayment Speed Assumptions). A prepayment rate of 100% PSA implies annualized prepayment rates of 0.2% CPR in the first month, 0.4% CPR in the second month, 0.6% CPR in the third month and 0.2% increases in every month thereafter until the thirtieth month, when the rate reaches 6%. From the thirtieth month until the mortgage loan reaches maturity, 100% PSA equals 6% CPR.

stated maturity

The last possible date on which the last payment of the longest loan may be paid.

state rating

Indicates the general obligation bond (G.O.) credit rating a rating agency may apply to a state. The rating on a specific municipal bond issue or issuer located with the state may differ from the state rating.

STRIPS

Separate Trading of Registered Interest and Principal of Securities. The Treasury Department’s program under which eligible securities are authorized to be separated into principal and interest components, and transferred separately. These components are maintained in book-entry accounts and transferred in TRADES (Treasury/Reserve Automated Debt Entry System).

structured products

Many different types of products are “structured” to some extent. “Structuring” usually refers to any type of obligation that is not a straightforward secured or unsecured government or corporate obligation. Although these types of transactions are usually issued through special purpose vehicles, this is not always the case. For example, securitizations are one type of structured product. Another type of structured product refers to a packaging or repackaging of bonds together with various types of interest rate swaps and/or credit derivatives to change the interest and principal payment stream, in order to provide an investor with a particular risk profile that they want. In some cases, these products are also called “structured credit” if they involve products with some type of corporate or asset-related credit risks. Due to the complexity of structured products, they are rarely part of traditional retail investor portfolios or fund offerings.

subordinated bond

A type of debt that places the investor in a lien position behind or subordinated to a company’s primary creditors. Bonds 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.

super PO

A principal-only security structured as a companion bond.

superfloater

A floating-rate CMO tranche whose rate is based on a formulaic relationship to a representative interest rate index.

support tranche

A CMO tranche that absorbs a higher level of the impact of collateral prepayment variability in order to stabilize the principal payment schedule for a PAC or TAC tranche in the same offering. Also known as a "companion tranche."

surety bond

A bond that backs the performance of another. In the ABS market, a surety bond is an insurance policy typically provided by a rated and regulated monoline insurance company to guarantee securities holders against default.

swap

A transaction in which an investor sells one security and simultaneously buys another with the proceeds, usually for about the same price and frequently for tax purposes.

syndicate

A group of underwriters formed for the purpose of participating jointly in the initial public offering of a new issue of municipal securities. The terms under which a “syndicate” is formed and operates are typically set forth in an “agreement among underwriters.” One or more underwriters will act as manager of the “syndicate” and one of the managers will act as lead manager and “run the books.” A “syndicate” is also often referred to as an “account” or “underwriting account."

TAC (targeted amortization class) tranche

A TAC tranche uses a mechanism similar to that of a sinking fund to determine a fixed principal payment schedule based on an assumed prepayment rate. The effect of prepayment variability that is removed from the TAC tranche is transferred to a companion tranche.

take-down

The discount from the list price allowed to a member of an underwriting account on any bonds purchased from the account.

Tax Anticipation Note (TAN)

TANs are issued by states or local governmental units to finance current operations in anticipation of future tax receipts. TRANS are notes that are issued in anticipation of both taxes and revenues.

taxable municipal bond

A municipal bond whose interest is not excluded from the gross income of its owners for federal income tax purposes. Certain municipal bonds are taxable because they are issued for purposes which the federal government deems not to provide a significant benefit to the public at large.

tax-backed bond

A broad category of bonds that are secured by taxes levied by the obligor. The taxes are not necessarily unlimited as to rate or amount, so while all general obligation bonds are tax backed, not all tax-backed bonds are general obligations. Examples of tax-backed bonds include moral obligations and appropriation-backed bonds. This category is also known as tax-supported.

tax base

The total property and resources subject to taxation. (See “assessed valuation.”)

tax-exempt bond

A common term for municipal bonds. The interest on the bond is excluded from the gross income of its owners for federal income tax purposes under Section 103 of the Internal Revenue Code of 1954, as amended. Municipal bonds that are also exempt from state and local as well as federal income taxes are said to have double or triple tax exemption.

tax-exempt commercial paper

A short-term promissory note issued for periods up to 270 days, often used in lieu of fixed-rate BANs, TANs and RANs because of the greater flexibility offered in setting both maturities and determining rates. The purpose for issuing TECP or TXCP can be the same as that for BANs, TANs and RANs.

tax-exempt/taxable yield equivalent formula

A formula which converts the lower yield of a tax-exempt security into the higher yield of a taxable security. The tax-exempt yield is divided by 100% less the investor’s marginal tax rate, and the resulting quotient is expressed as a percentage. This allows investors to compare equivalent yields on the two securities.

T-bill rate

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

technical default

A default under the bond indenture terms, other than nonpayment of interest or principal. Examples of technical default are failure to maintain required reserves, or to maintain adequate fees and charges for service.

term bonds

Bonds of an issue that have a single stated maturity date. Mandatory redemption provisions require the issuer to call or purchase a certain amount of the term bonds using money set aside in a sinking fund at regular intervals before the stated maturity date.

term funding

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

toggle tranche

Also known as "Jump  Z-tranche." A Z-tranche that may start receiving principal payments before prior tranches are retired if market forces create a "triggering" event, such as a drop in Treasury yields to a defined level, or a prepayment experience that differs from assumptions by a specific margin. "Sticky" jump Z-tranches maintain their changed payment priority until they are retired. "Non sticky" jump Z-tranches maintain their priority only temporarily, for as long as the triggering event is present. Although jump Z-tranches are no longer issued, some still trade in the secondary market.

total bonded debt

Total general obligation bond debt outstanding of a municipality, regardless of the purpose.

total direct debt

The sum of the total bond debt and any unfunded debt (typically, short-term notes) of a municipality.

total return

Investment performance measure over a stated time period which includes coupon interest, interest on interest, and any realized and unrealized gains or losses.

trade date

The date upon which a bond is purchased or sold.

tranche

The French word for "slice", tranche usually refers to part, segment or portion of an investment issue such as a specific class of bond or mortgage backed security within an offering in which each tranche offers different terms including varying degrees of risk. Tranche may also refer to the segment of the bond offering being distributed in different geographical areas.

transcript of proceedings

Final documents relating to a municipal bond issue.

transfer agent

The party appointed by an issuer to maintain records of bondholders, cancel and issue certificates, and address issues arising from lost, destroyed or stolen certificates.

transparency

The concept of disseminating price, volume and other information to the public about transactions in the municipal market.

Treasury Inflation-Indexed Securities (TIIS)

Securities designed to protect investors and the future value of their fixed-income investments from the adverse effects of inflation. Using the Consumer Price Index as a guide, the value of the securities' principal is adjusted to reflect the effects of inflation. Also known as Treasury Inflation Protected Securities (TIPS).

Treasury Securities

U.S. Treasury securities are debt obligations of the U.S. government. These include bills, notes, bonds, TIPS, and Savings Bonds. When you buy a Treasury security, you are lending money to the federal government for a specified period of time. Treasury bills are short-term instruments with maturities of no more than one year. Treasury notes are intermediate- to long-term investments, typically issued in maturities of two, three, five, seven and ten years. Treasury bonds cover terms of more than ten years and are currently issued in 30-year maturities. Interest is paid semi-annually. For more information on buying Treasury securities see the government's website www.treasurydirect.gov.

trigger

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

triple-A claims-paying rating

Designation for insurers offering superior security on both an absolute and a relative basis. Such insurers have been judged to possess the highest safety and have the capacity to meet policyholder obligations.

true interest cost

A method of calculating bids for new issues of municipal securities that takes into consideration the time value of money (see “net interest cost”).

true sale

An actual sale, as distinct from a secured borrowing, which means that assets transferred to an SPV are not expected to be consolidated with those of the sponsor in the event of the sponsor’s bankruptcy. Rating agencies usually require what is called a true-sale opinion from a law firm before the securities can receive a rating higher than that of the sponsor.

true yield

The rate of return to the investor taking into account the payment of capital gains at maturity on a bond bought at a discount.

trust agreement

Agreement between the issuer and the trustee (1) authorizing and securing the bonds; (2) containing the issuer’s covenants and obligations with respect to the project and payment of debt service; (3) specifying the events of default; and (4) outlining the trustee’s fiduciary responsibilities and bondholders' rights. Generally does not include an assignment to the trustee of collateral to secure the payment of debt service.

trustee

An institution, usually a bank, designated by the issuer as the custodian of funds and official representative of bondholders. Trustees are appointed to ensure compliance with the trust indenture and represent bondholders to enforce their contract with the issuers.

undated issue

A floating-rate note with no stated maturity date (see also "perpetual floating-rate note").

underwrite

The purchase of a bond or note issue from an issuer to resell it to investors.

underwriter

The securities dealer who purchases a bond or note issue from an issuer and resells it to investors. If a syndicate or selling group is formed, the underwriter who coordinates the financing and runs the group is called the senior or lead manager.

The difference between the offering price to the public by the underwriter and the purchase price the underwriter pays to the issuer. The underwriter’s expenses and selling costs are usually paid from this amount.

undivided account

Syndicate account structure that is undivided as to sales and liability. Also called “Eastern” account.

unit

A fractional, undivided interest in a unit investment trust.

unit investment trust

An investment fund created with a fixed portfolio of investments to provide a steady, periodic flow of income to investors.

unlimited tax bond

A bond secured by the pledge of taxes that are not limited by rate or amount.

unsecured debt

Debt with a claim for repayment that ranks last after all other forms of debt securities in the event of a corporate liquidation.

U.S. Savings Bond

U.S. Savings Bond A non-marketable bond issued by the U.S. Treasury in face value denominations designed for individual investors. Since savings bonds are direct obligations of the U.S. Government, the credit quality is the highest available. Each bond is a registered security for which a record is maintained by the Bureau of the Public Debt. Interest from savings bonds are exempt from state and local taxes, and unlike most investments no federal tax is due until the bond is redeemed. Two categories of bonds are currently available for purchase-Series EE and series I. For more information on purchasing savings bonds go to www.treasurydirect.gov.

variable rate bond

A long-term bond the interest rate of which is adjusted periodically, typically based upon specific market indicators.

variable-rate demand obligation (VRDO)

A bond which bears interest at a variable, or floating, rate established at specified intervals (e.g., flexible, daily, weekly, monthly or annually). It contains a put option permitting the bondholder to tender the bond for purchase when a new interest rate is established. VRDOs are also referred to as VRDNs (N=Notes), VRDBs (B=Bonds) or low floaters.

;volatility

The propensity of a security's price to rise or fall sharply.

volume cap

Dollar limitation of private-activity bonds that are allowed to be issued, by state, each year. Legislation enacted by Congress sets the volume cap.

weighted average coupon (WAC)

The weighted average interest rate of the underlying mortgage loans or pools that serve as collateral for a security, weighted by the size of the principal loan balances.

weighted average loan age (WALA)

The weighted average number of months since the date of the loan origination of the mortgages (i.e., the age of the loans) that collateralize a security, weighted by the size of the principal loan balances.

weighted average maturity (WAM)

The weighted average number of months to the final payment of each loan backing a mortgage security weighted by the size of the principal loan balances. Also known as weighted average remaining maturity (WARM) and weighted average remaining term (WART).

window

In a CMO security, the period of time between the expected first payment of principal and the expected last payment of principal.

yield

The annual percentage rate of return earned on a bond calculated by dividing the coupon interest by its purchase price.

yield burning

In a refunding, the practice of a dealer marking up the price of the securities to be put in an escrow, in order to "burn the yield down" to levels that do not violate federal arbitrage regulations. Yield burning has a negative connotation.

yield curve

A line tracing relative yields on a type of bond over a spectrum of maturities ranging from three months to 30 years.

yield spread

The difference in yield between two bonds or bond indexes.

yield to call

The yield on a bond calculated by dividing the value all interest payments that will be paid until the call date, plus interest on interest, by the principal amount received on the call date at the call price, taking into consideration whatever gain or loss is realized from the bond at the call date. Example: You pay $900 for a five year bond with a face value of $1000. The bond pays an annual coupon of ten percent. This bond is called at year three for $1,100. The yield to call of this bond is 18.4 percent. This reflects the three years of coupon payments and the difference between the price paid and the call price. Had the bond not been called, the yield to maturity would have been 12.8 percent. Bond calculators are available on this website, www.investinginbonds.com.

yield to maturity

The yield on a bond calculated by dividing the value of all the interest payments that will be paid until the maturity date, plus interest on interest, by the principal amount received at the maturity date, taking in to consideration whatever gain or loss is realized from the bond at the maturity date. Example: You pay $900 for a five year bond at a face value of $1000. The bond pays an annual coupon of ten percent. Here the yield to maturity is 12.8 percent. This reflects the coupon payments and the difference between the price and the face value of the bond. Bond calculators are available on this website, www.investinginbonds.com.

yield to worst

This is the lowest yield generated, given the potential stated calls prior to maturity.

zero-coupon bond

A bond which does not make periodic interest payments; instead the investor receives one payment, which includes principal and interest, at redemption (call or maturity). See discount note.

Z-tranche

Often the last tranche in a CMO, the Z-tranche receives no cash payments for an extended period of time until the previous tranches are retired. While the other tranches are outstanding, the Z-tranche receives credit for periodic interest payments that increase its face value but are not paid out. When the other tranches are retired, the Z-tranche begins to receive cash payments that include both principal and continuing interest.