US Capital Markets

Practical Terms in Bond Markets

  • Bonds can be Secured or Unsecured.  Unsecured bonds are called Debentures.  Secured bonds are corporate bonds with specific assets listed that guarantee them.

 

  • Every bond has a Face or Par Value, which is the amount that is paid to the bondholder when it is redeemed.  Most bonds in the US are written for the following par values.
  • Corporate Bonds:          1,000 Dollars.
  • Municipal Bonds:          5,000 Dollars.
  • Treasury Securities:       10,000 Dollars.

 

  • The interest rate that is paid to the bondholder is often called the Coupon Rate and it is calculated as a percent of the face value. Generally, the interest is paid in two semi-annual payments.  Each one is for half of the annual interest.  If an investor holds a bond with a face value of 1,000 dollars that carries an 8% coupon rate, then he will receive two payments, each for forty dollars, every year.

  • The interest rate of a bond can be set – a Fixed Rate, or it can change – a Floating Rate.  A fixed rate never changes, while a floating rate is usually connected to some other base rate, and it changes as the base rate changes.

 

  • Every bond has a Maturity Date, which is the date that the face value will be returned to the bondholder.  This payment is called the Principal Payment.

 

  • A Callable Bond is one that can be redeemed before the maturity date.  A bond like this has a Call Provision that lists a number of different dates when the bond issuer can call the bond, and force the holder to redeem it early.  For example, a bond that had an original maturity of fifteen years might also have a call provision that allows it to be redeemed at any time after five years.

 

  • A bond’s Yield to Maturity is the amount of money an investor will gain from holding a bond until it matures.

 

  • Zero Coupon Bonds are ones that don’t pay interest.  These bonds are sold to investors at less than their par value, and when they are redeemed the investors receive the full par value.  On these bonds, profits are gained from this spread rather than from interest.  The value of these bonds is particularly sensitive to changes in interest, since the investor is not compensated at all for a large interest rise.

 

  • Not paying back a bond is called Defaulting.
Practical Terms in Bond Markets 599  Practical Terms in Bond Markets