Amortization of premium - Amount paid over the face value of the bond. Taxable bond interest is reduced by the bond premium amortization amount each year until the bond matures.
Accretion of a discount - An accounting
process by which the book value of a security purchased
at a discount from par increases during its holding period.
Accrued interest - Amount of interest
that the buyer owes the seller on transactions involving
fixed-income securities.
Advanced refunding - A second bond issued
at a lower interest rate cost, placing the proceeds of the
issue in an escrow account from which the first issue's
principal and interest will be repaid at maturity.
Agencies - U.S. agencies that issue bonds,
such as the Federal Home Loan Mortgage Corporation (Freddie
Mac), Federal National Mortgage Association (Fannie Mae)
and the Federal Home Loan Bank.
Basis point - A method of stating small
differences in yield; 100 basis points equals 1% interest
yield.
Bid wanted - A solicitation to sell bonds
at the highest price.
Bond funds - A portfolio of municipal
bonds sponsored by registered investment companies that
offer shares to investors through either closed - end funds
or unit investment trusts, or open-end or managed funds.
Callable Bond - A bond that the issuer
can choose to redeem prior to its stated maturity date.
It includes a call date and a call price. The risk of a
callable bond is it that it may be redeemed when its stated
coupon is higher than prevailing rates at the time of the
call date, which can prevent reinvestment of capital in
a comparable bond at as high a yield.
Call premium - The dollar amount over
the par value of a security given to holders when the security
is called by the issuer (see Callable Bond).
Coupon - The stated interest rate on a
bond at time for issue. For example, a $1,000 bond with
a coupon of 4% will pay $40 a year.
Current refunding - A refund under which
the securities being refunded will mature or be redeemed
within 90 days or less from the date of the issue of the
refunding issue (see Refunding).
Current yield - As opposed to the coupon
rate, the current yield of a bond fluctuates with a bond's
price on the secondary market. The current yield is determined
by dividing the coupon by the bond's current market price.
When the current yield rises, its market price declines
and vice versa.
CUSIP - The unique identifier assigned
to a bond at the time of issue, assigned by the Committee
on Uniform Securities Identification Procedures (CUSIP).
Dated date - The date a bond is issued
and begins to accrue interest.
Default - The failure of an issuer to
pay principal in a timely manner and/or interest when due.
Discount - A bond that trades at a price
lower than par.
Double exemption - A bond, generally municipal,
under which the issuer and the holder are in the same state.
The bond is free from federal and state taxes.
Duration - A method of measuring a portion
of the risk in a bond or bond fund, duration determines
the length of time it will take to recoup the principal.
Extraordinary redemption - Calamity call
or unused proceeds call.
Fixed Rate Bond - A bond on which the
rate remains constant during the life of the bond.
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General Obligation Bond - A bond on which the issuer guarantees the repayment of principal and interest.
In the case of a municipality it is a pledge of unlimited
taxing power.
Interest - The money paid by the issuer
to the bondholder at specified times throughout the life
of the bond (interest is generally paid out bi-annually).
Issuer - Any entity that issues a bond,
such as the federal government, state or municipality.
Legal opinion - A written opinion from
bond counsel stating that a bond issue has been duly authorized
and issued.
Limited Tax Bond - A bond limited in rate
or amount, secured by a tax.
Liquidity - The ease with which financial
assets can be converted to cash without creating a substantial
change in price or value.
Maturity - The date at which a bond will
mature and principal investment is returned.
Moral Obligation Bond - A municipal bond
that adds to its primary source of security a promise by
the state to make up shortfalls in a debt service reserve
fund, subject to legislative appropriation.
Non-Callable Bond - A bond that cannot
be called prior to maturity (see Callable Bond).
Note - A security whereby an issuer borrows
money from an investor and agrees, by written contract,
to pay a fixed principal sum at a specified maturity date
and interest rate.
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Par value - Also referred to as face value,
par is the value of the bond at maturity.
Refunding - Refunding occurs when a new
bond is issued to retire an outstanding bond issue.
Revenue Bond - A municipal bond whose
debt service is paid from the revenues paid from the operation
of the facilities acquired or constructed from the proceeds
of the bond.
Serial Bond - As opposed to a term bond,
which is a block of bonds that matures in a single year,
a serial bond features maturities each year, annually or
semiannually, during a period of years (see Term Bond).
Settlement date - The date on which a
buyer will pay for the bonds and the seller will deliver
them.
Tax equivalent yield - Calculates the
pre-tax yield an investor would need to get so that the
after-tax yield would equal the tax-free yield on a municipal
bond.
Term Bond - A large block of bonds that
matures in a single year (see Serial Bond).
Underwriter - The individual or group
that purchases a security from the issuer and distributes
it to investors.
Yield curve - A graph illustrating the
yields for different bond maturities.
Yield to call - The yield on a bond to
the call date, at the call price.
Yield to maturity - Similar to current
yield, yield to maturity also takes into account any gain
or loss of principal at maturity. Yield to maturity allows
comparison of bonds with different maturities selling for
more or less than par.
Zero Coupon Bond - Bought at a discount,
zero coupon bonds pay no interest during the life of the
bond.
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