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Accrued Interest

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Interest that has accumulated between the most recent payment and the sale of a bond or other fixed income security-- at the time of sale the buyer pays the seller the bon's price plus accrued interest Accrued Interest=the coupon payment multiplied by the fraction of the time between payment dates that the seller has held the bond

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Ask Price

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The price which an investor initiating a security purchase will pay a dealer

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Asset-Backed Securities

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The product of the asset securitization process whereby specific assets are pledged as collateral for a loan (so if the company you buy in defaults, you're guaranteed something and aren't screwed)

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Balloon-Payment Bond

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Bond with a terminal payment at maturity (principal) which is substantially larger than any intermediate coupon payment (ie: coupon bond with constant semiannual coupon payments and principal payment at maturity)

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Basis Points

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A basis point is the smallest measure used in quoting yields on bonds and notes. One basis point is .01% of yield. Thus, a bond's yield changing from 10.67% --> 11.57% would be said to have moved 90 basis points

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Bid Price

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The price which an investor initiating a security sale will receive from a dealer (company or agency selling the bond)

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Bid-Ask Spread

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The difference between the price a security can be purchased for (the ask price) and the price that security can be sold for (the lower bid price) at a given point in time by an investor initiating trades. In other words, the amount by which the ask price exceeds the bid. The size of the spread from one asset to another will differ mainly because of the difference in liquidity of each asset. (Cash/currency has an extremely small bid-ask spread) Close spread-- high volume of trades

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Bond

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Any interest bearing or discounted government or corporate security that obligates the issuer to pay the bondholder a specified sum of money, usually at specific intervals, and to repay the principal amount of the loan at maturity. Bondholders have an IOU from the issuer, but no corporate ownership privileges Bearer bonds vs. registered bonds Secured bond- backed by collateral which may be sold by the bondholder to satisfy a claim if the bond's issuer fails to pay when due Convertible bond- gives its owner the privilege of exchange for other securities of the issuing company at some future date and under prescribed conditions

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Bowie Bonds

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Bonds secured by "future royalties of entertainers"-- artists get the money ip front, free of income tax; the bonds must be repaid over 10-20 years at about an 8% interest rate (If royalties unexpectedly dry up-- the investor bears the burden)

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Brady Bonds

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Securities that have resulted from the exchange of commercial bank loans to developing nations (sometimes defaulted) into new bonds Goal of exchange is to reduce and restructure the debt of those countries that have reformed their economic policies so that they can achieve economic growth and make timely payments on their (now reduced) debt obligations 100% backed and secured by US Treasury zero-coupon bonds

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Callable Bond

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A bond which may be repurchased at the call price from the bondholder by the issuer Call Premium- an amount over the bonds face value, paid to the bondholder int he event of a call at certain times Callable bond will have a larger coupon than otherwise equivalent non-callable

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Certificate of Deposit

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(CD) is a debt instrument (savings certificate) issued by a bank that entitles the bearer of the certificate to receive interest -A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate and can be issued in any denomination. CDs are generally issued by commercial banks and are insured by the FDIC. The term of a CD generally ranges from one month to five years.

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Closed-End Fund

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A mutual fund with a limited number of shares outstanding -Starts with a set number of shares issued -If you want more after, you must find someone who has shares and is looking to sell (similar to stocks) -An investor wishing to sell closed-end fund shares cannot turn then in for redemption unless the fund is liquidated -Investor wishing to sell closed-end fund shares must find a buyer for those shares

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Centralized Mortgage Obligations (CMO's)

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A generic term for a security backed by real estate mortgages -CMO payment obligations are covered by interest and or principal payments from a pool of mortgages -See Bond Notes pg. 16 for more information

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Commerical Paper

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A short-term unsecured promissory note issued by a finance company or a relatively large industrial firm -Generally sold at a discount from face value with maturities ranging from 30-270 days -Un-common for individual investors because of large denominations ($25,000 minimum) -Popular for money market mutual funds

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Convertible Bond

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A bond which is convertible into a set number of some other security, usually common stock, at the option of the bondholder -Typically smaller coupon than otherwise equivalent non-convertible bond

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Deadbeat Parents Bond

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Municipal bonds backed by the assets of "deadbeat parents"- investors buy high-yield bonds, funds go to some of the families to whom back child-support payments are owed, and the city would go after the assets of those with payments in arrears in order to make the interest payments on the bonds

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Death Puts

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A corporate bond which gives you a little reward for dying-- your estate has the right to put the bond back to the issuer and collect par value -Depending on what you paid for the bond and how interest rates have changed, your estate could make a nice profit by exercising the put option -Sooner you die, the greater the potential profit

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Debenture

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A general debt obligation backed only by the integrity of the borrower and documented by an agreement called an indenture (aka, unsecured bond)

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Duration

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A weighted average of the times from today until a security's promised cash payments would occur. The weights equal the fraction of the security's present value represented by each cash flow -Significance= the change in a bond's price due to a change in interest rates is negatively proportional to the bond's duration

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Equal-Payment Bond

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A bond where the regular cash payments to the holder are equal in magnitude. Part of each payment will be an interest payment and part of each payment will be a return of principal.

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Eurobond

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A bond denominated in US dollars or other currencies and sold to investors outside the country whose currency is used -Usually issued by large underwriting groups composed of banks and issuing housings from many countries

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Eurodollar

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US currency held in banks outside the United States, mainly in Europe, an commonly used for settling international transactions

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Flower Bonds

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Type of US government bond that, regardless of its price, is acceptable at par value in payment of estate taxes if the deceased was the legal holder at the time of death Investopedia: Fixed income products that were originally purchased by investors at a discount for the purpose of paying federal estate taxes upon their maturity. Investors would purchase these bonds before their death in anticipation of federal estate taxes. If the bondholder passed away, the bonds would mature at par value and be used as payment for the deceased's federal estate taxes.

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Hedge Fund

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A limited partnership that operates in Wall Street's shadows; private and largely unregulated investment pools for the rich. Keep the contents of their portfolios hidden, and can borrow as much as they choose, or as much as their bankers are willing to lend them

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Load Fund

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A mutual fund that is sold for a sales charge by a brokerage firm or other sales representative-- may be stock, bond, or commodity funds -Advantage: Salesperson will explain the fund to the customer and advise him or her when it is appropriate to sell the fund or when to buy more shares -You will pay a fee either up front when you buy or back end when you sell (or both) -Backend may be a function of how long you held it (hold longer) -Individual investors (you and me) do not often invest in load funds

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Money Market Fund

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An open-ended mutual fund that invests in commercial paper, banker's acceptances, repurchase agreements, government securities... and other highly liquid and safe securities, and pays money market rates of interest

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Mortgage

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A loan collateralized by land or buildings-- if the borrower defaults on the loan, the lender can foreclose, sell the asset, and keep the amount owed. Any excess, if there is any, goes to the defaulting borrower

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Municipal Bond

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A debt obligation of a sate or local government entity; the funds may support general governmental needs or special projects-- issuance must be approved by referendum or by an electoral body

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Mutual Fund

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A fund operated by an investment company that raises money from shareholders and invests it in stocks, bonds, options, commodities, or money market securities -Pools money from investors -Market capitalization= price per share multiplied by the number of outstanding shares -Different mutual funds invest in different sized companies depending on capitalization size -Mutual funds offer investors the advantages of diversification and professional management (charge a management fee of 1% or less of assets per year)

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No-load funds

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A mutual fund offered by an open-end investment company that imposes no sales charge (load) on its shareholders--consequently receive no investing advice

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Open-End Fund

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A mutual fund run by a management company that continually creates new share son demand-- buy the shares at net asset value and can redeem them at any time at the prevailing market price which may be higher or lower than the investors bought at (opposite from closed-end funds whose shares are limited in number and cannot be redeemed except at liquidation of the fund)

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Perpetual Bond

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A bond that has no maturity date, is not redeemable, and pays a steady stream of interest indefinitely; also called an annuity bond

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Payment-In-Kind Bond (PIK)

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Bond that pays interest in the form of more bonds as opposed to interest paid in cash. The value of additional bonds paid as interest will be taxable income, thus necessitating an additional source of cash for a taxable investor

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Points

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A percentage of the face value of a loan often added as a placement fee or service charge ie) If you pay "two points" on a $100,000 mortgage loan you will be paying a $2,000 fee up front.

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Repurchase Agreements

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An agreement between a seller and a buyer, usually of US government securities, whereby the seller agrees to repurchase the securities at an agreed upon price and, usually, a stated time Widely used both as a money market investment vehicle and as an instrument of Federal reserve monetary policy Attractive to corporations because maturities are flexible-- good place to park funds on a temporary basis

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Step-up Bond

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A bond where the interest coupon adjust upward if a rating agency downgrades its ranking of the bond

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Subordinated

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Junior in claim on assets to other debt, that is, repayable only after other debts with a higher claim have been satisfied (if your debt is less important or doesn't need to be paid first, it is subordinated and seen as "junior" importance under higher claimed debts

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Term Structure of Interest Rates

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The relationship between the yield to maturity of a bond and the time until maturity of that bond. Obtained by looking at yields on government securities of various maturities in order to isolate the impact of the time to maturity

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Treasury Bills

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Negotiable debt obligations of the US government, secured by its full faith and credit and issued at various schedules and maturities -Income exempt from state and local (but not federal) taxes -Maturities of one year or less -Issued at a discount from face value

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Treasury Bonds

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Negotiable debt obligations of the US government, secured by its full faith and credit and issued at various schedules and maturities -Income exempt from state and local (but not federal) taxes Similar to treasury bills, but are longer term with maturities of 10 years or longer issued in minimum denominations of $1,000

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Treasury Notes

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Negotiable debt obligations of the US government, secured by its full faith and credit and issued at various schedules and maturities -Income exempt from state and local (but not federal) taxes -Similar to treasury bonds/bills but are "intermediate securities with maturities of 1 to 10 years. Denominations range from 1,000 to 1 million or more. Notes are sold by cash subscitrption

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Treasury Inflation-Protection Securities (TIPS)

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Securities issued by the US treasury-- immune to the erosion of inflation if held to maturity and guarantee investors that their portfolios will retain their purchasing power Pay a basic interest rate-- in contrast to old fashioned treasuries, interest payment is based on a principal amount that rises with the Consumer Price Index (CPI)

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Zero-Coupon Bond

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A security that makes no periodic interest payments but instead is sold at a deep discount from its face value-- receive principal and accrued interest at maturity date Holder of ZCB owes income tax on the interest that has accrued each year, even though the bondholder does not actually receive the cash until maturity

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