Bond Terminology
Bond terminology refers to the specialized language used in the bond market to describe various aspects of bond issuance, trading, and valuation. Key terms include face value, coupon rate, maturity date, yield, and credit rating. Understanding bond terminology is essential for investors and financial professionals to effectively analyze and trade bonds.
7 Key excerpts on "Bond Terminology"
eBook - ePub- Moorad Choudhry(Author)
- 2010(Publication Date)
- Wiley(Publisher)
...The bond markets in developed countries are large and liquid, a term used to describe the ease with which it is possible to buy and sell bonds. In emerging markets a debt market usually develops ahead of an equity market, led by trading in government bills and bonds. This reflects the fact that, as in developed economies, government debt is usually the largest in the domestic market and the highest quality paper available. We look first at some important features of bonds. This is followed by a detailed look at pricing and yield. We conclude this introductory chapter with some spreadsheet illustrations. DESCRIPTION Bonds are identified by just one or two key features. Type of issuer A key feature of a bond is the nature of the issuer. There are four issuers of bonds: sovereign governments and their agencies, local government authorities, supranational bodies such as the World Bank, and corporations. Within the corporate bond market there is a wide range of issuers, each with differing abilities to satisfy their contractual obligations to investors. An issuer’s ability to make these payments is identified by its credit rating. Term to maturity The term to maturity of a bond is the number of years after which the issuer will repay the obligation. During the term the issuer will also make periodic interest payments on the debt. The maturity of a bond refers to the date that the debt will cease to exist, at which time the issuer will redeem the bond by paying the principal. The practice in the market is often to refer simply to a bond’s ‘term’ or ‘maturity’. The provisions under which a bond is issued may allow either the issuer or investor to alter a bond’s term to maturity. The term to maturity is an important consideration in the make-up of a bond. It indicates the time period over which the bondholder can expect to receive the coupon payments and the number of years before the principal will be paid in full. The bond’s yield also depends on the term to maturity...
eBook - ePubThe Handbook of Traditional and Alternative Investment Vehicles
Investment Characteristics and Strategies
- Mark J. P. Anson, Frank J. Fabozzi, Frank J. Jones(Authors)
- 2010(Publication Date)
- Wiley(Publisher)
...CHAPTER 4 Bond Basics In its simplest form, a bond is a financial obligation of an entity that promises to pay a specified sum of money at specified future dates. The payments are made up of two components: (1) the repayment of the amount of money borrowed and (2) interest. The entity that promises to make the payment is called the issuer of the security or the borrower. We provide the basic features of bonds and the risks associated with investing in this asset class in this chapter. In subsequent chapters we provide details on specific sectors of the bond market. FEATURES OF BONDS In the following sections, we describe the basic features of bonds. Maturity Unlike common stock, which has a perpetual life, bonds have a date on which they mature. The number of years over which the issuer has promised to meet the conditions of the obligation is referred to as the term to maturity. The maturity of a bond refers to the date that the debt will cease to exist, at which time the issuer will redeem the bond by paying the amount borrowed. The maturity date of a bond is always identified when describing a bond. For example, a description of a bond might state “due 12/15/2025.” The maturity of a bond is used for classifying two sectors of the market. Debt instruments with a maturity of one year or less are referred to as money market instruments and trade in the money market. What we typically refer to as the “bond market” includes debt instruments with a maturity greater than one year. The bond market is then categorized further based on the bond’s term to maturity: short-term, intermediate-term, and long-term. The classification is somewhat arbitrary and varies amongst market participants...
eBook - ePubTreasury Finance and Development Banking
A Guide to Credit, Debt, and Risk
- Biagio Mazzi(Author)
- 2013(Publication Date)
- Wiley(Publisher)
...CHAPTER 5 Bond Pricing We have built all the tools needed to approach the topic that is at the center of any discussion of credit and the activity of a treasury: debt. We have seen how to generate and discount future cash flows, we have seen how a choice of discounting is highly sensitive to the credit environment, and we have explicitly discussed credit. It is now time to use this knowledge to observe and price debt instruments. In order to build a self-contained narrative we shall begin with an introduction to the basic concepts surrounding a bond. We shall then move on to the very important issue of trying to isolate the credit component of a bond in a more or less explicit way; we shall present the concepts of benchmarks, asset swaps (introduced here and revisited in the following chapters); and an analysis of the relationship between bonds and credit default swaps. We shall conclude with a section on how to price distressed and/or highly illiquid bonds and one where this final topic is presented through a numerical example. 5.1 WHAT IS A BOND? We have defined a bond as a way for an entity to raise capital without relinquishing control. Bonds are among the oldest financial instruments and among the first types of securitization, 1 a way of turning the scattered revenues of a government or a corporation into a well-defined and tradable instrument. An entity forecasts a fairly regular set of revenues (from sales for a company or from taxes and investments for a government) but needs an immediate and large cash amount: on the back of its revenues it will issue a bond in which it promises to return the amount at maturity and to pay interest at regular dates. The regularity of the entity’s revenues should ensure the regular payment of coupons. An investor will decide to buy a certain amount of this bond (effectively lending money to the entity) and the price for this bond will be driven by the investor’s trust in the entity’s abilities to meet its obligations...
- H. Kent Baker, John R. Nofsinger, Andrew C. Spieler(Authors)
- 2020(Publication Date)
- Emerald Publishing Limited(Publisher)
...Second, a bond may be quoted based on its yield. Therefore, a bond with a YTM of 4% is expected to return 4% per year assuming a constant reinvestment rate as discussed in the previous question. This quotation method is simple and intuitive but does not indicate the current price, maturity, or coupon. Third, bond prices may be quoted as a spread relative to a benchmark. The most common benchmark to use is a maturity-matched US Treasury. Suppose a 5-year corporate bond is quoted with a spread of 120 basis points where 100 basis points = 1%. This quote indicates that the corporate bond has a yield of 1.2% (120 basis points) higher than a 5-year US Treasury. If the 5-year Treasury’s yield is 1.7%, the corporate bond is yielding 2.9%. 3.13. HOW DO BONDS TRADE? Unlike the exchanges where many stocks trade, no centralized location exists for bond trading. Bonds usually trade over-the-counter, which is a loosely connected market of dealers who communicate electronically. The market is similar to a large, online garage sale where the sellers are bond dealers or trading desks of major investment banks. A few bonds and bond-related products trade on stock exchanges. Although the trading volume for Treasury securities is high, the trading of corporate and muni bonds is comparatively sparse. For individual investors whose purchases are relatively small, using a broker or online trading platform is sufficient. 3.14. WHAT ARE THE TAX LIABILITIES OF BOND INVESTMENTS? Answering this question can be tricky because different investors face their own unique tax situations. In fact, certain institutions such as foundations, endowments, and not-for-profits don’t pay taxes. But, in general, investors pay taxes on the coupons received, and this amount is considered ordinary income. An investor who sells a bond before maturity may incur additional taxes. Suppose you buy a bond at a discount due to rising interest rates for $900 and then sell it for $950 two years later...
eBook - ePubA Pragmatist's Guide to Leveraged Finance
Credit Analysis for Below-Investment-Grade Bonds and Loans
- Robert S. Kricheff(Author)
- 2021(Publication Date)
- Harriman House(Publisher)
...Chapter 1: Common Leveraged Finance Terms and Trading Parlance What’s in t his chapter: definitions of general terms duration, spread, and yield definitions a pragmatic comment on yields, prices, and trading terminology J ust as specialties from firefighting to neurosurgery have their own lingo, so does the leveraged finance market. Understanding the terminology that is common to this marketplace will help analysts to operate e ffectively. This chapter outlines commonly used key terms. Some definitions are fairly generic to the securities business; others tend to be specific to the leveraged finance market. In many cases, there are several different words that describe the same thing. Even the market itself goes by several names: leveraged finance, high yield, and the junk market. There are also cases where the same word is used to describe a number of different things. Throughout the book, we will repeat some of these definitions and concepts wi th examples. Definitions of General Terms Amortization : Generally refers to spreading some type of payment over time. When it is used in reference to a bond or loan, it usually refers to the required paydown of a debt instrument. On company financial statements, it refers to the depletion in the value of intangible assets on the balance sheet, whereas the term depreciation refers to depletion of tangible assets. Basis points : There are 100 basis points (often abbreviated as bp or bps) in 1 percentage point. As an example, 0.5% = 50 basis points, 2% = 200 basis points. Bullet bond : A bond that is not callable, meaning the company that issues it cannot require the holder to sell the bond back to the company. These are also sometimes labeled NCL, an acronym for the term noncallable for life. Call : The right to purchase a bond or loan at a set price for a set period of time...
eBook - ePubInvesting in Fixed Income Securities
Understanding the Bond Market
- Gary Strumeyer(Author)
- 2012(Publication Date)
- Wiley(Publisher)
...We learned about the relationship between present value and future value and we saw how the discount rate affected these values and thus the value of our investment at any given time. Now let’s explore those concepts as they relate to the returns on various investment alternatives. It is important to understand the underlying framework of bond pricing. The name commonly given to the discount rate when speaking in the context of valuing a bond is yield. What, exactly, does yield mean to the investor? By now, we understand its mathematical meaning. We understand its use in the bond pricing formula. We understand that bond prices move in the opposite direction, or inversely, from their yields. But what is yield? Think of yield as a measure of simple return to the investor or trader who purchases a bond at a particular price. Your bond has the price that it does simply because other investors and traders have determined that the bond’s particular characteristics—the size of the coupon, the length of time to maturity, the issuer’s industry and credit rating, and any embedded options—should earn you a certain yield, or simple return, relative to other securities with similar and different characteristics. For example, let’s say the long bond—the U.S. Treasury’s 30-year bellwether bond—is yielding 4.90 percent (for a price of 107). From the standpoint of traders and investors, this yield is the simple return one should earn in today’s economic environment on securities held for 30 years with the highest credit quality (lowest risk of default). The current 30-year bond is the 5.375 percent maturing in February 2031. What else does the yield tell us? It also says that investors require a simple return of 4.90 percent to allow an entity like the U.S. government to hold their money for 30 years. During that time, the money is not available to investors for other investment alternatives...
eBook - ePub- Robert Irons(Author)
- 2019(Publication Date)
- Routledge(Publisher)
...The issuer of the bond agrees to repay the debt in full on a certain date and to make regular interest payments until that date (assuming the life of the debt is more than one year). A debtor issues a bond (a firm or a government), and a creditor buys a bond (an investor, either an individual or an institution, such as a hedge fund, or an insurance company, or a mutual fund). All bonds have most or all of the following features: An issue date (the date on which the bond was issued), a maturity date (the date on which the contract ends, and the loan amount is repaid) and an original maturity (the time between the issue date and the maturity date). Thus, a bond that is issued on March 1, 2018 and is due to mature on March 1, 2028 has an original maturity of ten years. On March 1, 2019, the bond will have nine years remaining to maturity, but its original maturity will always be ten years. A par value, or face value, which is usually $1,000 or some multiple thereof. It is clearly marked on the face of the bond. A coupon interest rate (or coupon rate), which is the percentage of the par value that the holder of the bond will earn annually. Thus, a $1,000 par value bond with a 4.50% coupon rate will pay $45.00 in interest per year. Interest payments are typically made semiannually (twice a year), and so the investor in this case would receive $22.50 interest per bond every six months. Most bonds have fixed interest payments, but there are some variable interest rate bonds. Variable rate bonds tend to have their interest payments tied to some other rate, such as the LIBOR (London Interbank Offer Rate), or the rate of inflation. For this chapter, we will assume that the bonds in question have a fixed coupon rate. Note that there are bonds without coupons, known as zero coupon bonds, or zeros. These are bonds whose time to maturity is less than one year...
