- bond call
- a feature of certain bonds or other fixed-income instruments that allows the issuer to repurchase and retire these instruments before maturity
- bond price
- the present, discounted value of the future cash stream generated by a bond; the sum of the present values of all likely coupon payments and the present value of the par value at maturity
- bond ratings
- grades assigned to bonds by rating services that indicate their overall credit quality
- Business Cycle Dating Committee
- a subdivision of the National Bureau of Economic Research (NBER), the US government agency that maintains a chronology of US business cycles
- call risk
- the risk that a bond issuer will redeem a callable bond prior to maturity
- capital gains
- the increase in a capital asset’s value that is realized when the asset is sold
- cash rate
- the interest rate that a central bank, such as the Reserve Bank of Australia or the US Federal Reserve System, will charge commercial banks for loans; also known as the bank rate or the base interest rate
- convertible bonds
- fixed-income corporate debt securities that yield interest payments but can be converted into a predetermined number of common stock or equity shares
- coupon payment
- the periodic dollar value of interest that is paid to a bondholder by the bond issuer
- coupon rate
- the amount of annual interest paid by the bond issuer; is multiplied by the face value of a bond to determine annual interest or coupon payment amounts
- credit risk
- the risk taken by a bond investor that the bond issuer will default by failing to pay interest and repay the principal on schedule
- deep discount bonds
- bonds that sell at significantly lower values than their par values
- default
- when an issuer fails to make scheduled interest or principal payments on its bonds
- default risk
- the risk taken by investors that payments will be delayed or will not occur
- discount bond
- a bond currently trading for less than its par value in the secondary market; offers a coupon rate that is lower than prevailing interest rates
- duration
- a measure of how much bond prices are likely to change if and when interest rates move
- duration risk
- the risk associated with the sensitivity of a bond’s price to a 1% change in interest rates
- Federal Reserve funds rate (federal funds rate)
- the target interest rate, set by the Federal Reserve, at which commercial banks borrow and lend their excess reserves to each other
- Federal Reserve System (the Fed)
- the central banking system of the United States, responsible for administering fiscal policy for the country
- fixed-income securities
- investments that provide a return in the form of fixed, periodic interest payments and the eventual return of principal at maturity; the most common forms are bonds
- floating-rate bonds
- bonds with variable interest rates that allow investors to benefit from rising interest rates
- interest income
- annual interest amounts paid, or coupon payments made, on a bond between its issue date and the date of maturity
- interest rate risk
- the risk of investment losses that result from changes in interest rates
- investment grade
- describes a municipal or corporate bond with a rating that indicates it presents a low risk of default
- junk bonds
- bonds that have been given a low credit rating, below investment grade; riskier than other bonds due to a greater chance that the issuer will default or experience a credit event
- liquidity risk
- risk that stems from the lack of marketability of an investment, meaning that it cannot be bought or sold quickly enough to prevent or minimize a loss
- London Interbank Offered Rate (LIBOR)
- a benchmark interest rate at which major global banks lend to one another in the international interbank market for short-term loans
- maturity date
- the date on which a bondholder ceases to receive interest payments on a bond investment and instead is repaid its par, or face, value
- municipal bonds (“munis”)
- debt securities issued by state and local governments; can be thought of as loans that investors make to local governments to fund infrastructure
- par value
- also called the face amount or face value; the value written on the front of the bond, which is the amount of money that bond issuers promise to be paid at maturity
- premium bond
- a bond that is trading above its par value in the secondary market; offers a coupon rate that is higher than the current prevailing interest rates being offered
- prime rate
- the interest rate that banks charge creditworthy corporate customers; among the most widely used benchmarks for setting home equity lines of credit and credit card rates, based on the federal funds rate set by the Federal Reserve
- rating agencies (bond rating services)
- independent service agencies, such as Fitch, Moody’s, or Standard & Poor’s, that perform the isolated function of credit risk evaluation
- realized return
- the actual return that an investor earns over a given time period through the buying and selling of a security
- reinvestment risk
- the risk that an investor will be unable to reinvest cash flows received from an investment (e.g., coupon payments or interest) at a rate comparable to their current rate of return
- savings bonds
- debt securities purchased by investors, as a personal investments or as gifts, that the US government issues to pay for certain public or government programs
- term risk
- the risk of potentially earning lower returns on longer-term bond holdings compared to those potentially available when making several shorter-term investments over the same period of time
- US Treasury bills (T-bills)
- short-term US government debt obligations backed by the Treasury Department with a maturity of one year or less
- US Treasury note rate
- the interest rate that the US government pays to borrow money for different lengths of time; notes are issued in terms of two, three, five, seven, and 10 years
- yield curve
- a line that plots yields (interest rates) of bonds having equal credit quality but differing maturity dates; gives an idea of future interest rate changes and economic activity
- yield to maturity (YTM)
- the total return anticipated on a bond if the investment is held until maturity
- zero-coupon bonds
- bonds that are issued at a deep discount from face value and offer no interest or coupon payments