Learn about Bonds: Glossary

Glossary

ABSAsset backed  securities. A bond backed by financial securities such as credit card receipts, loans, leases etc.
Accrued Interest The theoretical (ie not yet paid) amount of interest that the bond has earned since the last coupon payment.
Basis Point (BP)

 

One-hundredth of one percent. Used to describe small increments of yield and price. For instance, a quarter of 1% would be expressed as 25 basis points or bp.
BulldogA Sterling bond issued by an overseas borrower into the UK domestic bond market. Now rare.
BundGerman Government Bonds
CallA feature where the issuer has the option to redeem the bond early.
CapA maximum coupon
CDCertificate of Deposit.  A short-term note issued by a Bank.
CDSCredit Default Swaps: a contract offering protection against the default of a given issuer. The premium charged will be closely related to the "spread" on the bond and is a measure of perceived risk.
ClearstreamThe Deutsche Borse settlement and custody system.
CMO Collateralised Mortgage Obligation
Collar A combination of a minimum and maximum coupon features.
Convertible A bond that may be converted into equity (or another asset).
Coupon The annual (or other) regular interest payment from a bond.
Credit Rating

 

The creditworthiness of a bond, as determined by several credit rating agencies. AAA is best, C the worst.

Crest

The central securities depository for UK and Irish markets. Certain bonds can also be settled in Crest.

Cross default An issuer failing to pay one debt may be often viewed as in default on all outstanding debt.
Default The issuer failing to pay a coupon or redemption payment. See also cross default.
Dirty Price The price of a bond plus any accrued interest outstanding.
DiscountWhere the price of a security is below its principal amount. Large amounts are known as “deep discounts”.
Discounted MarginCalculation used by market professionals to establish the spread over LIBOR for an FRN. Also known as DM.
DM Discounted Margin; used to calculated the spread of LIBOR for an FRN
DurationThe weighted average of a bond’s cash flows. Used as a measure of the bond’s sensitivity to interest rate shifts.
Eurobond A bond issued into the international capital markets, may be denominated in any currency.
Euroclear Large custodian used by all professional traders for holding Eurobonds and other securities.
Floor A minimum coupon
FSAThe UK Financial Service Authority
FRN Floating Rate Note
Gilt British Government Bonds
Global A bond tradable on both the US and the international markets.
Investment Grade Bonds rated above BBB
ICMAThe International Capital Markets Association. The trade body for bond dealers.
JGBJapanese Government Bond
Junk BondA bond rated below investment grade. Generally BBB- or lower.
LIBOR The London Interbank Offered Rate; the wholesale lending rate.
MaturityThe redemption date of the bond
MBSMorgage backed securities. Bonds backed by mortgage loans.
Moody’sMajor international credit rating agency
MTNMedium Term Note
NominalThe face value of the bond
OATFrench Government Bond
PerpetualsBonds with no fixed maturity date
PIBSPermanent Interest Bearing Securities. Issued by many UK Building Societies
Preference (shares) A type of equity, often bearing a fixed coupon. NB, taxed as shares and subject to stamp duty.
Premium When the price of a security is greater than its principal amount (see discount).
PrepaymentA feature on MBOs and some asset-backed instruments allowing for full or partial early redemption.
PutA feature allowing the bondholder to redeem the bond ahead of maturity at a specified date or dates.
RedemptionThe maturity date of the bond.
Running YieldThe coupon payment adjusted for the price.
S&PStandard & Poors, a major credit rating agency.
SeasonedCertain US accounts may not purchase a bond until it is trading freely in the secondary market or “seasoned”.
Senior DebtThe highest ranked obligation of a company
Simple Margin Simple calculation used to establish the spread of LIBOR for and FRN.
Sinking FundWhere the issuer has an obligation to repurchase a given number of outstanding bonds.
SpreadThe difference between the yield of a bond (typically corporate) and the yield of a benchmark such as a UK Gilt .
Strip

 

A component of a bond such as a coupon or redemption payment which trades independently from the bond.

SubordinatedDebt ranked below senior debt.
SwapA financial transaction where cash flows are exchanged, ie swapping fixed income from a bond to a floating rate.
TrancheBond may be issued in several blocks, known as tranches.
Yield CurveThe relationship between yield and maturity. Shows the market’s future expectation of rates.
Yield to worstThe yield allowing for the potential exercise of any issuer options.
YTMYield to maturity
Zero (coupon)Bond without coupon, generally issued at discount

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