Bond Glossary
Index of Common Bond terminology
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Bond Glossary Index of Common Bond terminology
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The current value of your zero-coupon municipal bond, taking into account interest that has been accumulating and automatically reinvested in the 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.
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.
(1) The dollar amount of interest accrued on an issue, based on the stated interest rate on that issue, from its date to the date of delivery to the original purchaser. This is usually paid by the original purchaser to the issuer as part of the purchase price of the issue; (2) Interest deemed to be earned on a security but not yet paid to the investor.
A CMO tranche that is currently paying principal payments to investors.
[Latin: to the value added] A tax based on the value (or assessed value) of real property.
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.
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.
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.
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.
Liquidation of a debt through installment payments.
Transcript certificate evidencing compliance with the limitations on arbitrage imposed by the Internal Revenue Code and the applicable regulations.
The interest rate structure which exists when long-term interest rates exceed short-term interest rates.
Price being sought for the security by the seller. Also called the offer.
The return an investor would receive on a Treasury security if he or she paid the ask price.
The value of property against which an ad valorem tax is levied, usually a percentage of "true" or "market" value.
Sealed-bid public sale of Treasury securities; method of determining the rate or yield.
Floating-rate tax-exempt bonds where the rate is periodically reset by a dutch auction.
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.
Issuer document which states the legal basis for debt issuance, and states the general terms of the financing.
On a mortgage security, the average time to receipt of each dollar of principal, weighted by the amount of each principal prepayment, based on prepayment assumptions.
Smallest measure used in quoting yields on bonds and notes. One basis point is 0.01% of yield. For example, a bond's yield that changed from 6.52% to 7.19% would be said to have moved 67 basis points.
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."
A security that has no identification as to owner. It is presumed to be owned by the bearer or the person who holds it. Bearer securities are freely and easily negotiable since ownership can quickly be transferred from seller to buyer. Tax-exempt municipal bonds are no longer being issued in bearer form.
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.
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").
Price at which a buyer is willing to purchase a security.
Schedule of bonds distributed by holder or broker to dealer in order to get a bid, or current price, on the bonds.
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).
The combination and average of two points on the yield curve to find a yield at the midpoint.
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.
(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.
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.
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 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.
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.
An adjustment to a CMO yield which reflects its greater present value, created because CMOs pay monthly or quarterly interest, as opposed to semiannual interest payments on most other types of bonds.
Registered investment companies whose assets are invested in diversified portfolios of bonds.
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.
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.
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.
The sale of a bond and the purchase of another bond of similar market value. Swaps may be made to establish a tax loss, upgrade credit quality, extend or shorten maturity, etc.
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, 1980, and maturing June 1, 1981, 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.
A method of registering and transferring ownership of securities electronically which eliminates the need for physical certificates.
GSE-issued securities sold through negotiated direct placements or competitive bids, with terms and size determined by the immediate needs of the GSE.
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.
A security with a fixed maturity and no call feature.
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.
Subject to payment of the principal amount (and accrued interest) prior to the stated maturity date, with or without payment of a call premium. Bonds can be callable under a number of different circumstances, including at the option of the issuer, or on a mandatory or extraordinary basis.
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.
A dollar amount, usually stated as a percentage of the principal amount called, paid as a "penalty" or a "premium" for the exercise of a call provision.
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.
Bonds that are not callable for a certain number of years before their call date.
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.
The top interest rate that can be paid on a floating-rate security.
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.
Proof of ownership; a document issued to shareholders by a trustee of a unit investment trust.
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.
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.
An investment company created with a fixed number of shares, which are then traded as listed securities on a stock exchange. After the initial offering, existing shares can only be bought from existing shareholders.
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.
Upper and lower limits (cap and floor, respectively) on the interest rate of a floating-rate security.
A multiclass bond backed by a pool of mortgage pass-through securities or mortgage loans.
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").
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.
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.
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.
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.
Fractional discount from the public offering of new securities at which the underwriter sells the bonds to dealers not in the syndicate.
A written document confirming an oral transaction in municipal securities that provides pertinent information to the buyer and seller concerning the securities and the terms of the transaction.
A series of indexes of various maturities (one, three, five, seven or 10 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.
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.
The percentage of outstanding mortgage loan principal that prepays in one year, based on the annualization of the Single Monthly Mortality (SMM), which reflects the outstanding mortgage loan principal that prepays in one month.
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.
A mortgage loan granted by a bank or thrift institution that is based solely on real estate as security and is not insured or guaranteed by a government agency.
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.
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.
Designations used by ratings services to give relative indications of credit quality.
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.
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.
The ratio of interest to the actual market price of the bond, stated as a percentage. For example, a bond with a current market price of $1,000 that pays $60 per year in interest would have a current yield of 6%.
The Committee on Uniform Security Identification Procedures, which was established under the auspices of the American Bankers Association to develop a uniform method of identifying municipal, U.S. government, and corporate securities. CUSIP numbers are unique nine-digit numbers assigned to each series of securities.
The date of a bond issue from which the bondholder is entitled to receive interest, even though the bonds may actually be sold or delivered at some other date.
A securities firm or department of a commercial bank that engages in the underwriting, trading and sale of municipal (or other) securities.
Principal and interest.
The ratio of net revenues to the debt service requirements.
Amounts required to pay debt service, often expressed in the context of a time frame (such as "annual debt service requirements").
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.
A discount greater than traditional market discounts of 3%.
Failure to pay principal or interest when due. Defaults can also occur for failure to meet nonpayment obligations, such as reporting requirements, or when a material problem occurs for the issuer, such as a bankruptcy.
Possibility that a bond issuer will fail to pay principal or interest when due.
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.
A financial product that derives its value from an underlying security. In the tax-exempt market, there are primary and secondary derivative products.
(1) Amount (stated in dollars or a percent) by which the selling or purchase price of a security is less than its face amount; (2) Amount by which the amount bid for an issue is less than the aggregate principal amount of that issue.
A bond sold at less than par.
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.
Short-term obligations issued at discount from face value, with maturities ranging from overnight to 360 days. They have no periodic interest payments; the investor receives the note's face value at maturity.
The rate the Federal Reserve charges on loans to member banks.
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.
Account structure that is divided as to liability, and not as to sales. Also called "Western" account.
A bond that is quoted and traded in dollar prices rather than in terms of yield.
Securities that are exempt from state and local as well as federal income taxes are said to have double or triple tax-exemption.
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.
Securities that are exempt from state as well as federal income taxes are said to have "double exemption." In states where this exemption occurs, the exemption is usually only for bonds issued by the state or its local governments. An exception to this rule is the bond debt of U.S. territories such as Guam. Debt of Puerto Rico is also double exempt.
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.
The weighted maturity of a fixed-income investment's cash flows, used in the estimation of the price sensitivity of fixed-income securities for a given change in interest rates.
A provision within a bond giving either the issuer or the bondholder an option to take some action against the other party. The most common embedded option is a call option, giving the issuer the right to call, or retire, the debt before the scheduled maturity date.
The par value (i.e., principal, or maturity, value) of a security appearing on the face of the instrument.
The par value of a security, as distinct from its market value.
The date on which the principal must be paid to investors, which is later than the expected maturity date. Also called legal maturity date.
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.
A long-term bond with an interest rate fixed to maturity.
A mortgage featuring level monthly payments, determined at the outset, which remain constant over the life of the mortgage.
A bond for which the interest rate is adjusted periodically according to a predetermined formula, usually linked to an index.
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.
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.
Financing entities created by Congress to fund loans to certain groups of borrowers, such as homeowners, farmers and students.
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.
An investment made with the intention of minimizing the impact of adverse movements in interest rates or securities prices.
Bonds issued by lower-rated corporations, sovereign countries and other entities rated Ba or BB or below and offering a higher yield than more creditworthy securities; sometimes known as junk 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.
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.
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).
Tax-exempt bonds where the rate is periodically reset on a formula that incorporates an index, such as The Bond Market Association Swap Index.
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.
For an inflation-indexed security, the principal amount of the security, derived by multiplying the par amount by the applicable index ratio.
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.
The delivery of a new issue by the issuer to the original purchaser, upon payment of the purchase price. Also called "original delivery."
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.
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 = American Capital
Access;
AMBAC = AMBAC Indemnity Corp.;
CapMAC = Capital Markets Assurance Corp.;
CL = Connie Lee;
FGIC = Financial Guaranty Insurance Co.;
FSA = Financial Security Assurance Inc.;
MBIA = MBIA Insurance Corp.
the compensation paid or to be paid for the use of money, usually expressed as an annual percentage 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.
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.
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).
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.
The interest rate structure which exists when short-term interest rates exceed long-term interest rates. See "ascending, or positive, yield curve."
Bonds considered suitable for preservation of invested capital; ordinarily, those rated Baa3 or better by Moody's Investors Service, or BBB- or better by Standard & Poor's Corporation (see "ratings").
In the case of a CMO, an IO tranche is created deliberately to pay investors 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.
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.
The date on which a security is deemed to be issued or originated.
A state, political subdivision, agency, authority or corporation that borrows through the sale of bonds or notes. The public entity is the "issuer" even in those cases where the actual source of the money to pay debt service is to be an entity other than the issuer.
A debt obligation with a rating of Ba or BB or lower, generally paying interest above the return on more highly rated bonds, sometimes known as high-yield bonds.
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. The legal opinion is usually rendered by a law firm recognized as specializing in public borrowings, often referred to as bond counsel.
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.
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.
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.
The use of borrowed money to increase investing power.
The rate banks charge each other for short-term Eurodollar loans. LIBOR is frequently used as the base for resetting rates on floating-rate securities.
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.
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.
A bond secured by a pledge of a tax or category of taxes limited as to rate or amount.
A commitment by a bank to provide funds to a borrower, if certain conditions have been met, or if certain conditions do not exist.
The amount a securities holder may receive in case of a liquidation of the issuer.
The ability to trade bonds efficiently without causing any major changes in their prices.
The period of time before an investor will begin receiving principal payments.
Securities that are owned by a dealer or investor.
Debt which matures in more than one year.
The date when the principal amount of a security becomes due and payable, if not subject to prior call or redemption.
The listing, by dates and amounts, of principal maturities of an issue.
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.
A municipal bond which, in addition to its primary source of security, possesses a structure whereby a state pledges to make up shortfalls in a debt service reserve fund, subject to legislative appropriation. There is no legal obligation for the state to make such a payment, but market participants recognize that failure to honor the "moral" pledge would have negative consequences for the state's own creditworthiness.
A legal instrument that creates a lien upon real estate securing the payment of a specific debt.
An entity that originates mortgage loans, sells them to investors and services the loans.
A security 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 pass-through securities are also known as mortgage-backed securities (MBS) and participation certificates (PC).
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.
A bond issued by a state or local governmental unit.
Spread measures the relative difference between the municipal bond index future price and the U.S. Treasury bond futures price.
A municipal securities employee under MSRB rules who has supervisory responsibility for the municipal securities operations of the firm.
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.
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.
Also known as an open-end investment company, to differentiate it from a closed-end investment company. Mutual funds 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.
National Association of Securities Dealers. Largest securities industry self-regulatory organization in the United States.
A bond that cannot be called for redemption at the option of the issuer before its specified maturity date.
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.
Short-term promises to pay specified amounts of money, secured usually by specific sources of future revenues, such as taxes, federal and state aid payments, and bond proceeds.
Block of bonds of $100,000 or less.
The price at which a seller will sell a security.
The price at which members of an underwriting syndicate for a new issue will offer securities to investors.
The offering document for municipal securities that is prepared by the issuer. The "OS" discloses security features, and economic, financial and legal information about the issue. The final OS contains the pricing information on the issue that is not contained in the preliminary official statement.
Those sold in the secondary market rather than "on-the-run" Treasury Securities, which are those most recently issued by the Government.
Price equal to the face amount of a security; 100%.
The principal amount of a bond or note due at maturity. Also known as par value.
An investment's return (usually total return), compared to a benchmark that is comparable to the risk level or investment objectives of the investment.
Or "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.
In the case of a CMO, a PO tranche is created deliberately to pay investors principal only and not interest. PO securities are priced at a deep discount from their face value.
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.
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.
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.
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.
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.
The amount by which the price of a security exceeds its principal amount.
Bonds priced greater than par.
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.
The unscheduled partial or complete payment of the principal amount outstanding on a mortgage loan or other debt before it is due.
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.
The risk that falling interest rates will lead to heavy prepayments of mortgage or other loans, forcing the investor to reinvest at lower prevailing rates.
The dollar amount to be paid for a security, stated as a percentage of its face value, or par. 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.
Market for new issues of municipal bonds and notes.
A commercial bank's stated reference rate for lending.
The face amount of a bond, exclusive of accrued interest and payable at maturity.
A sale and purchase of bonds in which the dealer commits its own capital in effecting the transaction.
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 (a) secured by property used in a private trade or business or
payments in respect of such property, or (b) 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.
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.
The negotiated offering of new securities directly to investors, without a public underwriting.
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.
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.
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.
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.
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.
The adjustment of the interest rate on a floating-rate security according to a prescribed formula.
Alpha and/or numeric symbols used to give indications of relative credit quality. In the municipal market, these designations are published by the rating services. Internal ratings are also used by other market participants to indicate relative credit quality.
For an inflation-indexed security, the yield based on the payment stream in constant dollars, i.e., before adjustment by the index ratio.
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).
A preliminary official statement.
A bond whose owner is registered with the issuer or its agent. Transfer of ownership can only be accomplished when the securities are properly endorsed by the 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.
The risk that interest income or principal repayments will have to be reinvested at lower rates in a declining rate environment.
RANs are issued in anticipation of sources of future revenue other than taxes. This may include intergovernmental aid.
A bond on which the debt service is payable solely from the revenue generated from the operation of the project being financed or a category of facilities, or from other non-tax sources.
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.
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 obligor on 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.
Block of bonds $100,000 or higher.
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.
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.
Examining the likely performance of an investment under a wide range of possible interest rate environments.
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.
Ongoing market for bonds previously offered or sold in the primary market.
The section of the Internal Revenue Code under which not-for-profit organizations receive their tax-exempt status.
The grouping of securities into a category, based upon similarities that they share. Typically, securities found in a distinct industry are grouped together.
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.
Specific revenue sources or assets pledged by an issuer to the bondholder to secure repayment of the bond.
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.
The date for the delivery of securities and payment of funds.
A bond secured by a special tax, such as a gasoline tax or a sales tax.
An investment firm that organizes a unit investment trust and offers the units for sale.
(1) The difference between the price at which an issue is purchased from an issuer and that at which it is reoffered by the underwriters to the first holders. (2) The difference in price or yield between two securities. The securities can be in different markets, or within the same securities market between different credits, sectors or other relevant factors.
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).
A type of debt that places the investor in a lien position behind or subordinated to a company's primary creditors. Securities issued as subordinated debt will pay interest and principal but only after all interest that is due and payable has been paid on any and all senior debt.
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.
The discount from the list price allowed to a member of an underwriting account on any bonds purchased from the account.
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.
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.
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.
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.
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.
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.
The weekly average auction rate of the three-month Treasury bill stated as the bond equivalent yield.
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.
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.
A financing done to meet specific cash-flow needs for a specific period of time.
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 general obligation bond debt outstanding of a municipality, regardless of the purpose.
The sum of the total bond debt and any unfunded debt (typically, short-term notes) of a municipality.
Investment performance measure over a stated time period which includes coupon interest, interest on interest, and any realized and unrealized gains or losses.
The date that a trade, or sale and purchase, is consummated, with settlement to be made later (see "settlement date").
A class of bonds in a CMO offering which shares the same characteristics. "Tranche" is the French word for "slice."
Final documents relating to a municipal bond issue.
A party appointed by an issuer to maintain records of securities owners, to cancel and issue certificates and to address issues arising from lost, destroyed or stolen certificates.
The concept of disseminating price, volume and other information to the public about transactions in the municipal market.
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).
The market interest rate at which the terms of a security might change. Triggers are common on index amortization notes and range securities.
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.
A method of calculating bids for new issues of municipal securities that takes into consideration the time value of money (see "net interest cost").
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.
The rate of return to the investor taking into account the payment of capital gains at maturity on a bond bought at a discount.
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.
A bank designated by the issuer as the custodian of funds and official representative of bondholders. Trustees are appointed to ensure compliance with the bond documents and to represent bondholders in enforcing their contract with the issuer.
A floating-rate note with no stated maturity date (see also "perpetual floating-rate note").
The purchase of a bond or note issue from an issuer to resell it to investors.
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.
Syndicate account structure that is undivided as to sales and liability. Also called "Eastern" account.
A fractional, undivided interest in a unit investment trust.
Investment funds created with a fixed portfolio of investments that never changes over the life of the trust. They are created by brokerage houses, and are liquidated as investments within the trust are paid off. They provide a steady, periodic flow of income to investors.
A bond secured by the pledge of taxes that are not limited as to rate or amount.
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.
A statistical measure of the variance of price or yield over time. Volatility is low if the price does not change very much over a short period of time, and high if there is a greater change.
Dollar limitation of private-activity bonds that are allowed to be issued, by state, each year. Legislation enacted by Congress sets the volume cap.
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.
The weighted average number of months since the date of the loan origination of the mortgages in a mortgage pass-through security pool issued by Freddie Mac, weighted by the size of the principal loan balances.
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).
In a CMO bond, the period of time between the expected first payment of principal and the expected last payment of principal.
The annual percentage rate of return earned on a security. Yield is a function of a security's purchase price and coupon interest rate.
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.
The graphical relationship between yield and maturity among bonds of different maturities and the same credit quality. This line shows the term structure of interest rates.
The difference in yield between two bonds or bond indexes.
A yield on a security calculated by assuming that interest payments will be paid until the call date, when the security will be redeemed at the call price.
A yield on a security calculated by assuming that interest payments will be made until the final maturity date, at which point the principal will be repaid by the issuer. Yield to maturity is essentially the discount rate at which the present value of future payments (investment income and return of principal) equals the price of the security.
This is the lowest yield generated, given the potential stated calls prior to maturity.
A bond for which no periodic interest payments are made. The investor receives one payment at maturity equal to the principal invested plus interest earned compounded semiannually at the original interest rate to maturity.
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