NYC Public Finance Glossary
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1915 Act, 1911 Act Bonds
The California name for Special Assessment bonds or Improvement
Bonds, named, obviously, for the years in which the enabling legislature
was approved. A special district is formed, public improvements
(streets, curbs, gutters, water or sewer systems, etc.) are constructed,
assessments are levied on all the properties in the district in
proportion to the benefit derived from the improvement. Bonds are
sold - without voter approval - and are repaid from the special
assessments received. '15 Acts are callable on any interest payment
date and are usually dated on the 2nd of the month instead of the
1st or the 15th. '11 Act bonds are payable from the assessments
from one specific property and have a prior lien on that property
in the event of default.
Accrued Interest
Coupon interest accumulated on a bond or note since the last interest
payment or, for a new issue, from the dated date to the date of
delivery. Since interest on municipal bonds is payable semi-annually,
every six months, when you buy a bond in mid-term you are only entitled
to the interest the bond earns after you buy it. The interest earned
previously, the accrued interest, belongs to the seller. Some first-time
bond buyers think this payment is a hidden charge or fee, not realizing
that they will get it back in full at the next interest payment
date as tax-free interest.
Ad Valorem Tax ("according to its value")
A state or local government tax based on the value of real property
as determined by the county tax assessor.
Advance refunding
A financing structure under which new bonds are issued to repay
an outstanding bond issue prior to its first call date. Generally,
the proceeds of the new issue are invested in government securities,
which are placed in escrow. The interest and principal repayments
on these securities are then used to repay the old issue, usually
on the first call date.
Advanced Refunded Bonds
A municipality may sell a second bond issue at a lower interest
rate cost, placing the proceeds of the issue in an escrow account
from which the first issue's principal and interest will be repaid
when due. See also ETM bonds.
Amortization of Debt
The annual reduction of principal through the use of serial bonds
or term bonds with a sinking fund.
Arbitrage
The interest rate differential that exists when proceeds from a
municipal bond - which is tax-free and carries a lower yield - are
invested in taxable securities with a yield that is higher. The
1986 Tax Reform Act made this practice by municipalities illegal
solely as a borrowing tactic, except under certain safe-harbor conditions..
Assessed Valuation
A municipality's worth in dollars based on real estate and/or other
property for the purpose of taxation, sometimes expressed as a percent
of the full market value of the community.
At Maturity
Securities requiring interest at maturity pricing are those that
do no have periodic interest payments, but rather one interest payment
made at the maturity of the security. Interest at maturity formulas
differ from Interest Multiplier formulas (Zero Coupon) in that the
former are based on simple interest theory while the latter are
based on compound interest theory. Certificates of Deposit and Interest
Bearing Commercial Paper are examples of this type of security.
Authority or Agency
A state or local unit of government created to perform a single
activity or a limited group of functions and authorized by the state
legislature to issue bonded debt.
Authorizing Ordinance
A law that when enacted allows the unit of government to sell a
specific bond issue or finance a specific project.
Average Life
The average length of time an issue of serial bonds and/or term
bonds with mandatory sinking funds and/or estimated prepayments
is expected to be outstanding. It also can be the average maturity
of a bond portfolio.
Balloon Maturity
An inordinately large amount of bond principal maturing in any single
year. Also called a Term Bond.
Bond Anticipation Note (BANs)
These are issued when revenue is anticipated from a bond issue.
To avoid poor market conditions, an issuer might delay a bond issue.
Or, the issuer might want to combine several projects into one larger
issue. During this process, they issue the BANs.
Base Point (or Basis Point)
One one-hundredth of one percent ( 1/100 % or 0.01 percent). Thus
25 basis points equal one-quarter of one percent, 100 basis points
equal one percent.
Bearer Bond
A bond that has no identification of the owner of the security.
It is presumed to be owned by the bearer or the person who holds
it. It was much sought after because of the ease of transferring
or gifting. All bonds issued prior to June 1983 were bearer bonds;
since then, they have been issued in Registered Bond form. Before
July 1983, municipal securities were issued for the most part in
certificate form with coupons attached. Some of these so-called
"bearer bonds" are still available in the marketplace.
The issuer has no record of who owns these bonds. The owner clips
the coupons and collects the interest from the issuer's paying agent.
Transferring the bonds requires physical delivery and payment.
Bid Price
An offer to buy at a fixed price or yield. The price, expressed
as a percentage of par, which the underwriters pay the issuer on
the delivery date for a new issue of bonds. The bid price is equal
to the par amount of bonds plus any premium, less any original issue
discount, less underwriter's discount --- all divided by the par
amount of bonds and multiplied by 100%. Accrued interest is not
factored into the bid price.
Bond or Note
A security whereby an issuer borrows money from an investor and
agrees and promises, by written contract, to pay a fixed principal
sum on a specified date (maturity date) and at a specified rate
of interest.
Bond
A unit of debt, $1000 of principal or par amount. For 200 years
municipal bonds were sold in $1000 denominations. Since the mid-1970s
the minimum bond denomination has been $5000; nevertheless, "a
bond" is bought, sold, referred to and priced as if it were
$1000.
Bond Counsel or Bond Approving Attorney
A lawyer who writes an opinion on the bond or note as to its tax
exempt status and the authenticity of its issuance. In theory their
opinion is meant to assure the bond investor, but they are paid
by the issuer so it is not clear who their real client is.
Bond Insurance
A financial guaranty insurance policy provided by a well-capitalized,
rated (claims paying ability) insurance company which pledges to
make timely payments of principal and interest on a bond or bond
issue in the event that the issuer is unable to pay. Insurance premiums
on new issues are paid at closing from bond proceeds (as a cost
of issuance) and are usually calculated as a percentage of debt
service on the insured bond or bonds. For arbitrage yield purposes,
a bond insurance premium may be treated as interest expense.
Bond Fund (Tax-Exempt)
A portfolio of municipal bonds sponsored by registered investment
companies that offer shares to investors either through (1) closed-end
funds or unit investment trusts, which offer shares of a fixed portfolio
of municipal bonds; or (2) open-end or managed funds, which offer
shares in a managed portfolio of municipal bonds whose size will
vary as shares are purchased or redeemed.
Bond Insurance
Insurance issued by a private insurance company for either an entire
issue or specific maturities that guarantees to pay principal and
interest when due. This will provide a credit rating of triple-A
and thus a lower borrowing cost for the issuer. The four largest
monoline bond insurers are AMBAC, FGIC, FSA and MBIA.
Bond Premium
The amount at which a bond or note is bought or sold above its par
value or face value without including accrued interest.
Bond Proceeds
The money paid to the issuer by the purchaser for a new issue of
municipal bonds, used to finance a project or purpose for which
the bonds were issued and to pay certain costs of issuance. This
is equal to the par amount of bonds, plus accrued interest, less
original issue discount plus premium.
Bond Year or Fiscal Year
The 12-month accounting period used in connection with an issue
of bonds. Bond Year Ending refers to the last day of that accounting
period and therefore defines the period. The key information if
the month and day; the actual year used has no meaning in this case.
Bond Years
The product of the number of bonds (1 bond equals $1,000, regardless
of actual denomination) and the number of years from issuance to
stated maturity. Partial years are expressed in decimals. The total
amount of bond years on all maturities is used in calculating the
average life of an issue and the net interest cost.
Book Entry
A system of security ownership in which the ownership is held as
a computer entry on the records of a central company for its owner.
The bond owner gets a computer printout as proof of ownership.
Broker
Technically a broker is a bond trader in the secondary market buying
from and selling to bond dealers. Its most common usage is as a
description of a bond salesperson.
Call Option
The exercise of the right of the issuer to prepay a bond prior to
the specified maturity date and demand surrender of its bond for
redemption, refunding or sinking fund purposes on a specific date
at a specified price. The issuer is said to "call the bonds"
by giving notice in a manner described in the trust indenture.
Callable Bond
A bond or note that is subject to redemption at the option of the
issuer prior to its stated maturity. The call date and call premium,
if any, is stated in the offering statement or broker's confirmation.
Call Features
The terms of the indenture giving the issuer the right or requiring
the issuer to redeem or call all or a portion of an outstanding
issue of bonds prior to their stated maturities at specified prices.
·In structuring an advance refunding, the issuer is usually exercising
an Optional Redemption Provision in which case the issuer has the
right to redeem bonds, usually after a stated date and at some price
(a premium) greater than par/accreted value, but is not required
to do so.
·Term bonds generally have a predetermined Mandatory Redemption
Schedule which gives a fixed schedule of dates and principal amounts
to be redeemed by the trustee from issuer or estate funds. These
calls are usually at par plus accrued interest.
·Other types of calls are Extraordinary Optional Redemptions which
allow the issuer to call or redeem bonds upon the occurrence of
certain events, and Extraordinary Mandatory Redemptions which are
required calls based on the occurrence of certain events, (e.g.,
the change in the use of a facility originally financed by private
activity bonds).
·When a bond has no optional call provisions, it is said to be
non-callable, abbreviated N/C or N.C.
Call Premium
The amount of money that must be paid to the bondholder in addition
to the par amount/accreted value of the bond in order to exercise
a redemption provision. Premiums are usually associated with optional
call provisions. When a bond is said to be "callable on 11/1/99
at 102", the first optional call date is on 11/1/1999 and the
call price is 102%, of which the 2% above par is the call premium
expressed as a percentage of par (or accreted value in the case
of most callable CABs).
Call Price
The call price is the percentage of par (or accreted value) which
must be paid to exercise a call option.
Call Protection
Any legal measure that reduces the probability of a bond being redeemed
prior to maturity. Protected bonds include non-callable bonds, discount
bonds, and deep-discount bonds.
Capital Appreciation Bond (CAB)
A bond which pays no interest on a periodic basis, but accretes
in value from the date of issuance (delivery date) to the date of
maturity. CABs usually accrete to a future denomination of $5,000
and are sold at a deep discount to $5,000. However, the discounted
purchase price is considered the Par Amount of the CAB maturity.
CABs are sold with a stated accretion rate and accretion table which
demonstrates how the interest that would be paid on a current-interest
bond is instead compounded on a periodic basis, reinvesting the
interest at the same rate for the life of the bond. At maturity,
the investor receives the original par amount plus all the accreted
interest, which together is usually a multiple of $5,000.
Capitalized Interest Fund
An amount funded by bond proceeds and used to pay interest on the
bond issue for a specific period of time, usually from closing to
the end of construction period of a project. This project will produce
revenues necessary to pay debt service after the capitalized interest
amount has been exhausted. Capitalized interest periods normally
pay interest between 6 months and 3 years.
Certificates of Participation (COPs)
A form of lease revenue bond that permits the investor to participate
in a stream of lease payments, installment payments or loan payments
relating to the acquisition or construction of specific equipment,
land or facilities. In theory the certificate holder could foreclose
on the equipment or facility financed in the event of default, but
so far no investor has ended up owning a piece of a school house
or a storm drainage system. COPs are not viewed legally as "debt"
because payment is tied to an annual appropriation by the government
body. As a result, COPs are seen by investors as providing weaker
security and often carry ratings that are a notch or two below an
agency's general obligation rating.
Closing Date
Synonymous with Delivery Date, Settlement Date and Date of Issuance.
The delivery of the bonds is made to the investors in exchange for
the purchase price. This is generally the date that underwriters
get paid.
Closed End Fund
A mutual fund of a fixed-dollar amount of issues traded on one of
the exchanges not at its net asset value, but priced based on perception
and supply and demand. These funds can sell at a substantial discount
or premium to their net asset value.
Compounded Interest
The interest which is accumulated and compounded over the life of
a CAB and is finally paid at the maturity of the CAB. The compounding
period is usually semiannual.
Conduit Bonds
Bonds whose repayment is the responsibility of the business or developer
who benefits from the financing, rather than the issuer who only
collects the taxes, fees or revenues and passes them on to the bondholder.
Convertible CAB
A convertible capital appreciation bond is a bond which compounds
interest (as a CAB does) for a fixed period of time, usually between
5 and 10 years, and then pays interest periodically like a normal
serial or term bond. The conversion date is the final compounding
date for the accretion period at which time the bond begins to accrue
and pay interest on a semiannual basis. Convertible CABs usually
accrete to an integral $1000 or $5000 denomination at the conversion
date. See also Capital Appreciation Bond.
Cost of Issuance
All expenses associated with the sale of a new issue which are not
part of the Underwriter's Discount. These can include legal fees,
printing costs, and rating agency fees among others. Cost of Issuance
can be recovered from bond proceeds, and are included in the calculation
of the All-In TIC as a deduction from bond proceeds for the PV target.
Coupon
The detachable part of a bond that evidences the rate of interest
due and the interest payment date. In the good old days of bearer
bonds, coupons were detached from the bonds and presented to the
paying agent for payment just as one might cash a government check.
Thus the reference to wealthy persons as "coupon clippers."
Coupon Rate
The specified annual interest rate payable to the bond
or note holder as printed on the bond. This term is still used even
though there are no coupon bonds anymore.
Covenant
A legally binding commitment by the issuer of municipal bonds to
the bondholder. An impairment of a covenant can lead to a Technical
Default.
Coverage (Debt Service)
This is the margin of safety for payment of debt service on a revenue
bond that reflects the number of times the actual and/or estimated
project earnings or income for a 12-month period of time exceeds
debt service that is payable.
Current Yield
The ratio of the coupon rate on a bond to the dollar purchase price
expressed as a percentage. Thus if you pay par or 100 cents on the
dollar for your bond and the coupon rate is 6%, the current yield
is 6%; however, if you paid 97 for your 6% discount bond the current
yield is 6.186%. ( .06 divided by 97). If you paid 102 for a 6%
bond the current yield is 5.88% (.06 divided by 102).
Crossover Date
The last call date on the refunded bonds in a crossover refunding.
This is also the date of the last interest payment date on the refunding
bonds which was defeased in the escrow.
Crossover Refunding
A refunding transaction which is an economic defeasance rather than
a legal defeasance since only the principal is defeased on the refunded
bonds to the call date. Also, the interest on the refunding bonds
is defeased until the call date on the refunded bonds, which is
known as the crossover date. Before the crossover date, the issuer
is paying interest on the old bonds and principal on the new bonds;
afterward, the issuer pays normal debt service on the refunding
bonds as the refunded bonds will be retired.
CUSIP
Abbreviation for the Committee on Uniform Security Identification
Procedures. A bond's CUSIP is an alphanumeric identification code,
usually 9 characters, assigned each maturity of a bond issue and
is printed on the face of each individual bond. All Treasury, agency,
and municipal bonds are assigned a CUSIP number prior to pricing.
Dated Date
The date carried on the face of a bond or note from which interest
normally begins to accrue.
Dealer
A corporation or partnership that buys, sells and maintains an ongoing
position in bonds and/or notes. They are also authorized to underwrite
new issues. Some large commercial banks are licensed to act as bond
dealers.
Debt Limit
The maximum statutory or constitutional amount of debt that the
general obligation bond issuer can either issue or have outstanding
at any time.
Debt Ratio
The ratio of the issuer's general obligation debt to a measure of
value, such as real property valuations, personal income, general
fund resources, or population.
Debt Service
The total amount of money required to meet annual principal and
interest payments when due.
Debt Service Reserve Fund
A bank trustee account established by the trust indenture and used
as a backup security for an issuer's bonds. It usually amounts to
one year's debt service, and can be drawn on by the Trustee in the
event of an impairment of the Trust indenture.
Deep Discount Bonds
Bonds which bear interest at a rate well below market and accordingly
are priced for sale at a substantial discount from their face value
so that the yield to maturity approximates market rates. Under
the July 1993 arbitrage regulations, if the original issue discount
> 0.25%*(average life of term), sinking funds on excessive discount
term bonds must be valued at the net present value of the interest
and principal that would be paid to final maturity of the term bond
discounted at the yield to maturity of the term bond. See Arbitrage
Yield.
Default
Failure to pay in a timely manner principal and/or interest when
due. See Technical Default.
Defeasance
Termination of the rights and interests of the bondholders and extinguishment
of their lien on the pledged revenues in accordance with the terms
of the indenture for the prior issue of bonds. Defeasance usually
occurs in connection with the refunding of an outstanding issue
by the final payment (current refunding), or provision for future
payment (advance refunding with an escrow account), of principal
and interest on a prior issue.
Defeased bonds
Refunded bonds for which the payment of principal and interest has
been assured through the structuring of a portfolio of government
securities, the principal and interest on which will be sufficient
to pay debt service on the refunded, outstanding bonds. When a bond
issue is defeased, the claim on the revenues of the issuer is usually
eliminated. See ETM bonds
Delivery Date
The date that a bond issue is delivered to and paid for by the purchasers.
Also known as settlement date, closing date, and date of issuance.
Delivery
For bonds bought or sold in the secondary market, delivery -and
payment - must be in three business days. For new issues, the time
when payment is made to, and the executed bonds and notes are received
from, the issuer. New-issue delivery takes place several weeks after
the sale to allow the bonds and notes to be printed and signed.
Denomination
The face or par amount - nominally $1000 or $5000 but can be $100,000
or more in the case of a note - that the issuer promises to pay
at a specific bond or note maturity.
Direct Debt
In general obligation bond analysis, the amount of debt that a particular
local unit of government has incurred in its own name or assumed
through annexation.
Discount
The amount by which par value exceeds the price paid for a security
and which generally represents the difference between the nominal
interest rate and the actual or effective return to the investor.
On a municipal bond, the discount usually refers to the Original
Issue Discount (OID) which is the dollar amount below par at which
a new issue comes to market.
·In open-market databases, U.S. Treasury bills are referred to as
discount securities in that they do not pay interest periodically
and are always sold at a discount from par. The only payment on
a T-bill is the receipt of the par amount at maturity.
·Discount can also mean any bond trading at a price below par, or
100%. These bonds have coupons which are below the market yield
for such a bond.
Discount Bonds
Bonds which sell at a dollar price below par in which case the yield
would exceed the coupon rate. The difference between the discount
price and the maturity price is subject to federal capital gains
tax except in the case of Original Issue Discount Bonds.
Discount Note
Non-interest-bearing note sold at a discount and maturing at par.
A U.S.Treasury Bill is a discount note.
Discount Rate
In reference to the Federal Reserve Bank, this is the rate which
is charged to banks when borrowing directly from the Fed. In reference
to Treasury bills, this is the annual rate used to compute the discount
from par when determining the purchase price of a T-bill.
Duration
A measure of the timing of the cash flows to be received from a
security. A useful indicator of the relative price volatility of
securities due to a change in interest rates. used in asset/liability
management. Equal to: the sum of the present values of each of the
cash flows weighted by the time to receipt, divided by the total
of the present values of the cash flows.
Dollar Bond
Generally a term bond that is quoted and traded in dollars rather
than in yield-to-maturity. They are well known issues of well known
names in the market.
Double Barreled Bonds
These are tax exempt bonds which are backed by a pledge of two or
more sources. These are quite like general obligation bonds which
are additionally backed by a second source of revenue. This usually
increases their safety.
Double Exemption
Securities that are exempt from state as well as federal income
taxes are said to have double exemption.
Escrow Fund
A fund that contains monies that only can be used to pay debt service.
Escrow Account
A fund set up to hold pledged money or securities used to pay debt
service. Various types of escrows can be structured in Refund including
a open market securities escrow, SLGS escrow, and a PV (theoretical)
escrow.
Escrow Cost
The initial deposit amount to the escrow account at closing. The
purchase price of the securities plus the cash deposit.
Escrow Requirements
The debt service cash flow which an escrow is structured to pay.
This is the cash flow to be paid by an escrow in order for an issue
to be considered defeased.
Escrow Yield
The annual discount rate that, when used in computing the present
value (as of the purchase date of the escrow securities) of the
securities' receipts, produces an amount equal to the present value
of the aggregate purchase price of the securities. If a float contract
is used in conjunction with an open market escrow, then the PV target
is equal to the cost of the open market securities less the value
received for the contract, and the receipt dates used are those
dates when funds are disbursed from the float account instead of
the actual receipt dates on the securities.
ETM
Escrowed to maturity. An advanced refunded bond. When interest rates
fall, an issuer may chose to sell a new issue called a refunding
issue and use the proceeds of the second issue to pay off the original
issue, much the same as a home owner refinancing a mortgage in an
effort to save interest costs. The proceeds of the refunding issue
are used to structure a portfolio of U.S. government securities,
the principal and interest payments of which exactly match the principal
and interest payments of the refunded bonds. The portfolio is placed
in escrow at the paying agent and the bond issue is said to be fully
defeased and escrowed to maturity. In actual practice the bonds
are usually called on the first call date. Because of the U.S. Treasury
backing, ETM bonds are considered the safest municipal bonds available
and trade on the market as a rich triple-A.
Expenses
This is a component of the Underwriters' Discount which includes
expenses incurred by the underwriters in the course of processing
a deal.
Extraordinary Redemption
Different from "optional redemption" or "mandatory
redemption" in that it occurs under an unusual circumstance
such as destruction of the facility financed.
Federal National Mortgage Association (Fannie Mae)
Previously, Fannie Mae was a government owned corporation. However,
in 1968, it was converted to a privately held corporation whose
stock trades on the New York Stock Exchange. The purpose of Fannie
Mae is to buy and sell real estate mortgages. Primarily, these mortgages
are guaranteed by the Federal Housing Authority (FHA) and the VA.
Fannie Mae gets the resources to purchase these mortgages from private
investors and from borrowing from the Treasury Department. Fannie
Mae issues mortgaged backed bonds which can be purchased by investors.
However, and this is the only case where this is true, the Fannie
Mae mortgage backed bonds are subordinated to regular debentures.
Fannie Mae bonds pay semi-annual interest and are regarded as quite
safe.
Feasibility Study
A financial study provide by the issuer of a revenue bond that estimates
service needs, construction schedules, and most importantly, future
project revenues and expenses used to determine the financial feasibility
and creditworthiness of the project to be financed.
Federal Home Loan Banks (FHLB)
Supervised by the Federal Home Loan Bank Board, this agency is backs
up the nations savings and loan institutions. Over 98% of the total
assets of all Savings & Loans in the country are held by these
banks. The FHLB's loans to member banks to augment their deposits.
Simply put, the FHLB issues debt securities in the open market to
loan to the S&L's who loan this money to their customer's to
buy homes. Interest received by investors is free from state and
local taxes but not federal income tax.
Federal Intermediate Credit Bank (FICB)
The FICB is a group of twelve banks authorized to make loans to
farmers. The money is to be used for expenses, machinery, and livestock.
The loans may not run for more than 10 years. These are not direct
obligations of the U.S. government. They are, however, considered
moral obligations of the U.S. government. Interest received by investors
is free from state and local taxes but not federal income tax.
Federal Land Banks
The Farm Credit Association supervises these. Loans are made to
farmers and ranchers. They are secured by mortgages made by Federal
Land Banks through the Federal Land Banks Association. These are
not direct obligations of the U.S. government. They are, however,
considered moral obligations of the U.S. government. Interest received
by investors is free from state and local taxes but not federal
income tax.
Financial Advisor
Generally a bank, investment-banking company or independent consulting
firm that advises the issuer on all financial matters pertaining
to a proposed issue and is not part of the underwriting syndicate.
Fiscal Agent
Also known as the Paying Agent. The bank, designated by the
issuer, to pay interest and principal to the bondholder.
Fiscal Year
A 12-month time horizon by which state and local governments annually
budget their respective revenues and expenditures. This is usually
not the calendar year, January to December, but often July to June.
Flexible Repurchase Agreement (Flex Repo)
A taxable investment provided by banks, securities firms, and insurance
companies which earn a fixed or indexed rate of interest over the
term. Commonly used for the investment of project funds and reserve
funds in a bond financing. The investor usually has the ability
to withdraw and deposit funds as needed, subject to predetermined
limits-greater flexibility usually lowers the yield. Repos are usually
collateralized with government or agency securities for the benefit
of the investor.
Float Contract
An agreement in which an issuer invests funds (float balance) between
the receipt dates of open market securities and the corresponding
escrow disbursement dates. The objective is to reduce 'dead time'
and reduce the Escrow Cost. Also known as a Forward Supply Contract.
Floating Rate Bond
A long-term bond for which the interest rate is adjusted periodically
according to a pre-determined formula, based upon specific market
indicators.
Forward Supply Contract
An agreement to deliver open market securities or an investment
contract in the future. See Float Contract.
Full Faith and Credit
The pledge of "the full faith and credit and taxing power without
limitation as to rate or amount." A phrase used primarily in
conjunction with general obligation bonds to convey the pledge of
utilizing all taxing powers and resources, if necessary, to pay
the bond holders.
General Obligation Bonds (GOs)
General obligation bonds are backed by the full faith and credit
of the issuer for prompt payment of principal and interest. Many
bonds issued by city, county, or school district, also have the
added security that they have can raise property taxes to assure
payment. This guarantee is of an unlimited nature. The issuer can
raise taxes as high as they want to pay the bonds. If the property
tax is not paid, the property can be sold at auction giving the
bond holder a superior claim above mortgages, mechanical liens,
and other encumbrances. General obligation bonds are usually analyzed
in terms of the size of the taxable resources. These bonds are regarded
as very safe.
General Property Tax
A tax levied on real estate and personal property.
Government National Mortgage Association (GNMAs or Ginnie
Mae)
When the government split off Fannie Mae into a private corporation,
it split Fannie Mae into two parts. Ginnie Mae is the second part.
Ginnie Mae is wholly owned by the U.S. government. Ginnie Mae issues
'Modified Pass Through certificates'. These certificates represent
an interest in a pool of mortgages. The pool includes mortgages
from the VA, FHA insured mortgages, and Farmers Home Administration
guaranteed mortgages. As people make their mortgage payments, the
proportionate share passes through to the investor. Payments to
the investor are paid monthly. Each payment the investor receives
is part interest and part principal. After all, when a person pays
their mortgage, they are paying part interest and part principal.
The minimum denomination is $25,000. These bonds are backed by the
full faith and credit of the U.S. government. The interest is subject
to state and local taxes.
Government Securities
U.S. government securities are the safest of all the bonds in circulation.
They have direct government backing or in the case of federal agencies,
a moral guarantee. Most government issues trade in the secondary
or capital market. Although some trade in the Money Market.
Gross Debt
The sum total of a state's or local government's debt obligations.
Gross Revenues
Generally, all annual receipts of a revenue bond issuer prior to
the payment of all expenses. Normally only Net Revenues are pledged
to the repayment of bonds.
Guaranteed Investment Contract (GIC)
An investment which pays investors a stated rate of return over
the term of the contract. Economically the same as a Flexible Repurchase
Agreement, but different legally. Collateral may or may not be required
depending on the credit of the provider.
Housing Bonds
Housing bonds are issued by both state and local governments. They
are secured by mortgage repayments on single family homes. Added
protections come from, federal subsidies for low income families,
FHA insurance, VA guarantees, and private mortgage insurance. Public
Housing Authority (PHA) issues are no longer available. However,
some do trade in the secondary market. PHA's are backed by the full
faith and credit of the U.S. government.
Indenture of Trust
A legal document describing in specific detail the terms
and conditions of a bond offering, the rights of the bondholder,
and the obligations of the issuer to the bondholder; such document
is alternatively referred to as a bond resolution.
Industrial Development Bonds (IDBs). Also Called
Industrial Revenue Bonds (IRBs)
The local community creates an Industrial Development Agency. Most
larger communities have one form of this. The purpose of the agency
is to develop industrial or commercial property for the benefit
of private users. The agency raises revenue for this by issuing
municipal bonds. The money raised from this type of bond issue is
used to pay for the construction of the new facilities. The facilities
are then leased to the corporate guarantor. The safety of an Industrial
Revenue bond depends on the credit worthiness of the corporate guarantor.
Institutional Investor
An organization investing in securities for the benefit of others.
Insurance companies, pension funds, investment managers and mutual
funds are institutional investors.
Interest
Compensation paid to a lender (investor) by the borrower (issuer
of bonds) for the use of money. Usually expressed as an annual percentage
rate, and most often paid semiannually, or twice a year.
Interest Day Basis
The day-counting system for the computation of interest payments
on bonds and notes which pay interest more than once a year. The
number of days in an interest period can be expressed in two ways:
the number of actual days elapsed or the number of days elapsed
if every month had 30 days.
Interest Rate
Usually a percentage rate per annum which is applied to the principal
amount of a bond for computing periodic interest.
Interim Borrowing (See Municipal Notes)
(1) Short-term loans to be repaid from general revenues or tax collections
during the current fiscal year (TRANs or RANs); (2) short-term loans
in anticipation of bond issuance or grant receipts (BANs).
Intermediate Range Maturities
Bonds maturing in 5 to 15 years.
Insured Bonds
Many municipal bonds are backed by municipal bond insurance that
is specifically designed to reduce investment risk. In the event
of a Default, the insurance company guarantees payment of principal
and interest to the investors for as long as the Default lasts.
Most insured bonds carry the highest quality credit rating -AAA.
Issue Date (See Dated Date)
The date of a bond issue from which interest starts accruing. The
bondholder is entitled to receive interest from the issuer starting
from this date even though the bonds may actually be delivered on
a later date.
Issuer
The entity that borrows money through the issuance of bonds. This
can be a state, political subdivision, agency or authority in the
case of municipal bonds, a corporation for corporate and Agency
bonds, and the U.S. government for Treasury Bonds.
Issuance
Authorization, sale and delivery of a new issue of municipal securities.
Issuance Denomination
The face value of a single bond at issuance.
Issue Amount
The principal or par amount of a bond maturity.
Issue Price
The gross dollar cost of a bond or bond issue, which is equal to
its par value plus accrued interest, less OID or plus premium.
Investment Banker
A firm engaged in raising capital for an issuer. Participates as
the middleman in purchasing securities from the issuer and in selling
the same securities to investors.
Investment Grade
Bonds graded Baa and higher by Moody's Investors Service and Fitch
Investors Service, or BBB and higher by Standard and Poor's are
considered to have only minor speculative characteristics. These
are considered to have a high probability of being paid and are
considered "investment grade." Many fiduciaries, trustees,
some mutual fund managers can only invest in securities with an
investment grade rating.
Junk Bond
A bond rated lower than Baa/BBB. Also called a high yield bond.
Bonds with credit ratings below Baa/BBB are considered speculative
compared with investment grade bonds. (See Investment Grade).
Legal Opinion
An opinion by legal counsel concerning the validity of a securities
issue with respect to conformity to statutory authority, and constitutionality,
and usually as to the exemption of interest from federal income
taxation.
Letter of Credit
A form of supplement or, in some cases, direct security for a municipal
bond under which a commercial bank or private corporation guarantees
payment on the bond under certain specified conditions.
Level Debt Service
Principal and interest payments that, together, represent more or
less equal annual payments over the life of the loan. Principal
may be serial maturities or sinking fund installments.
Lien
A claim on revenues, assessments or taxes made for a specific issue
of bonds.
Limited and Special Tax Bonds
These bonds are payable from a pledge of the proceeds against a
specific tax. This tax could be a gasoline tax, a special assessment,
or ad valorem tax levied at a fixed price. Unlike general obligation
bonds and their unlimited ability to raise taxes, with these bonds,
the issuer is limited as to its source for the revenue to pay the
bonds. These bonds are quite safe.
Liquidity
The measure of the ease or difficulty with which securities can
be bought and sold in the markets. Bonds that have many buyers and
sellers, or "market - makers" and a readily available
price are considered highly liquid.
Long Bond
The 30 year U.S. Treasury Bond is the longest bond issued by the
government. It is also the most widely traded bond in the world.
It is viewed as a benchmark in the industry and is commonly called
the "long bond."
Maturity (or Maturity Date)
The date when the principal amount of a security becomes due and
payable. An issue can have multiple maturities.
Marketability
A measure of the ease or difficulty with which a security can be
resold in the market.
Maximum Annual Debt Service
The maximum amount of principal and interest due by a revenue bond
issuer on its outstanding bonds in any future fiscal year. This
is sometimes the amount to be maintained in the Debt Service Reserve
Fund.
Money Market Funds
Where borrowing and lending for periods of less than one year takes
place. Securities and other instruments traded in the money markets
include federal funds; certificates of deposit; repurchase agreements;
Treasury bills; commercial paper; and bankers acceptances.
Moral Obligation Bonds
These were brought out in the 1960's in New York State. These bonds
were issued for a specific purpose (e.g. public housing). It was
implied that in the event of a shortfall, the state would make up
the difference.
Mortgage-Backed Bonds
Bonds secured by pools of mortgages.
Municipal Lease (See Lease/Purchase)
An obligation by a municipal agency to lease equipment
or property. The lease payments usually include a component for
repayment of principal and an component for interest. The interest
component is usually tax-free (exempt from federal, and sometimes
state, income taxation).
Mortgage Revenue Bond
A bond backed by a lien on the monthly payments of a large pool
of mortgages, usually issued by a state or local housing authority.
Municipal Bonds
Debt instruments are issued by any of the 50 states, the territories
and their subdivisions, counties, cities, towns, villages and school
districts, agencies, such as authorities and special districts created
by the states, and certain federally sponsored agencies such as
local housing authorities. The funds go to support a government's
general financing needs or for special projects. Municipal bonds
are free from federal tax on the accrued interest and may also be
free from state and local taxes if they are issued in the state
of residence. For example, a resident of New York who buys a municipal
bond issued by the state of New York, will not pay New York State
or local taxes on it. However, if a resident of New York buys a
municipal bond from a city in Connecticut, state and local tax will
be owed on the accrued interest. Keep in mind that any profit realized
from the purchase or sale is not exempt from tax. Only the accrued
interest is tax exempt. The U.S. government's Federal Reserve system
brings U.S. government, Treasury bonds issues public. There is no
agency that handles municipal bond issues. However, there are brokerage
firms which specialize in bringing out municipal bond issues. There
are several types of municipal bonds. They are: General Obligation
Bonds, Limited and Special Tax Bonds, Industrial Revenue Bonds,
Housing Bonds, Moral Obligation Bonds, Double Barreled Bonds, Tax
Anticipation Notes, Bond Anticipation Notes, and Revenue Anticipation
Notes.
Municipal Futures
A municipal index futures contract that has been traded at the Chicago
Board of Trade since June 11, 1985. The futures contract is based
on an index, known as The Bond Buyer Municipal Bond Index, composed
of 40 bonds which are priced at the close of trading each day. It
is used primarily by professional money managers to hedge their
municipal portfolios.
Municipal Notes
Municipal Notes are short term debt instruments issued by state
and local authorities. Their maturities run from about 60 days to
one year. They are usually available in denominations of about $25,000.
A municipality uses this type of financing as an interim step in
anticipation of future revenue. There are several types of municipal
notes: (1) bond anticipation notes (BANs), (2) revenue anticipation
notes (RANs), (3) tax anticipation notes (TANs), (4) grant anticipation
notes, (5) project notes, and (6) construction loan notes. Also
see TRANs.
Municipal Securities Rulemaking Board (MSRB)
An independent self-regulatory organization established by Congress
in 1975 which is charged with primary rulemaking authority - under
the SEC - over dealers, dealer banks, and brokers in municipal securities.
Mutual Fund
A pool of investment capital from people who share the same investment
goals. Mutual funds made up of bonds do not have a fixed maturity
date. The manager of a bond fund continuously buys and sells securities
in an effort to maintain the best overall returns for the investors.
New Issue Market (Primary Market)
A bond offering sold for the first time, also called the primary
offering.
Non-Callable Bond
A bond that cannot be called either for redemption by or at the
option of the issuer before its specified maturity date.
Notes
A security similar to a bond but with a shorter term, usually five
years securities. Municipal notes often are secured by specific
sources of future revenues such as tax receipts or bond proceeds.
Net Bonded Debt
Gross general obligation debt less self-supporting general obligation
debt, housing bonds, water revenue bonds, etc..
Net Interest Cost (NIC)
Generally speaking, issuers award competitive bond sales to the
underwriter bidding the lowest NIC. It represents the average coupon
rate weighted to reflect the time until repayment of principal and
adjusted for the premium or discount.
Offering Date
The date on which a new offering of stocks or bonds will be available
to the public.
Original Issue Discount
A bond offered at a dollar price less than par (100%) which qualifies
for special treatment under federal tax law. For tax-exempt municipal
bonds, the difference between the issue price and par is treated
as tax-exempt income rather than as a capital gain, if the bonds
are held to maturity.
Offering Price
The price, and corresponding yield in the case of bonds, at which
an underwriter of securities offers them to investors in the secondary
market.
Official Statement (OS) or Offering Circular (OC)
A document (prospectus) circulated for an issuer prior to a bond
sale with salient facts regarding the proposed financing. There
are two OSs, the first known as the preliminary, or "red herring"
- so named not because it smells but because some of the type on
its cover is printed in red - and it is supposed to be available
to the investor before the sale. The final OS must be sent to the
purchaser before delivery of the bonds.
Open Market Securities (OMS)
Debt securities which are traded in the bond secondary markets.
Portfolios of open markets can be structured to meet escrow requirements
in advance refunding structures. For standard advance refundings,
the open market securities which are allowed are direct obligations
of the U.S. government: Treasury bills, notes, bonds and STRIP (zero
coupons), and STRIPs issued by the Resolution Trust Corporation
(Refcorp STRIPs). In crossover refundings, higher yielding open
markets, such as Agency securities, are used in refunding escrows;
however, use of Agency securities does not constitute a legal defeasance.
Optional Redemption
A right to retire all or part of an issue, prior to the stated maturity,
during a specified period of years, often at a premium. The right
can be exercised at the option of the issuer.
Over The Counter (OTC)
The buying and selling method used in the secondary market for municipal
bonds (and unlisted stocks). Not on an exchange.
Par Value
The face value or principal amount of a bond, usually $5,000 due
the holder at maturity. It has no relation to the market value.The
par value is the amount on which interest payments are calculated.
For pricing purposes it is considered 100.
Parity Bonds
Revenue bonds that have an equal lien on the revenues of the issuer.
Paying Agent (Also Fiscal Agent)
Generally a bank that performs the function of paying interest and
principal for the issuing body.
Payment Date
The date on which interest or principal and interest are payable
on a municipal bond. Fixed rate bonds usually pay interest semiannually.
Preliminary Official Statement (POS)
The document prepared by or for a municipal securities issuer that
gives in detail the security and financial information about the
issue. The Preliminary Official Statement includes all relevant
material except the interest rates and prices for the securities,
and is made available to prospective investors prior to the setting
of the rates and prices.
Premium
The amount, if any, by which the price exceeds the principal amount
(par value) of a bond. Its current yield will be less than its coupon
rate.
Price
Bonds are quoted either in terms of a percentage of par value (98
bid/99 offered) or in terms of yield to maturity (7.25% bid/7.50%
offered).
Price to Call
The yield of a bond priced to the first call date rather than maturity.
Usually the price of the bond is expressed as a percent.
Primary Market (See New Issue Market)
The market on which newly issued securities are sold. This includes
the auction market for government bonds and the underwriting period
for bonds which an underwriter purchases for resale to investors.
Principal
The face amount or par value of a bond. The principal amount of
a trade is the par value of one bond times the number of bonds involved
in the trade.
Put Bonds
Some bonds have a "put" feature which allows you to redeem
the bond at par value on a specified date, long before its maturity
date. If interest rates increase, you can cash in the bonds at any
put date, recoup the principal and purchase higher-yielding bonds.
Also known as an option tender bond.
Qualified Legal Opinion
Conditional affirmation of the legal basis for the bond or note
issue. The average investor should avoid any but the strongest opinion
by the most recognized bond approving attorneys.
Revenue Anticipation Notes (RANs)
These are issued in anticipation of revenue coming in from the federal
government. Or if a local municipality issues them, they may be
waiting for revenue from the state or federal government.
Rate Covenant
A legal commitment by a revenue bond issuer to maintain rates at
levels to generate a specified debt-service coverage.
Ratings
Various alphabetical and numerical designations used by institutional
investors, Wall Street underwriters, and commercial rating companies
to give relative indications of bond and note creditworthiness.
Standard & Poor's and Fitch Investors Service Inc. use the same
system, starting with their highest rating of AAA, AA, A, BBB, BB,
B, CCC, CC, C, and D for default. Moody's Investors Services uses
Aaa, Aa, A, Baa, Ba, B, Caa, Ca, C, and D . Each of the services
use + or - or +1 to indicate half steps in between. The top four
grades are considered investment grade ratings.
Redemption
Process of retiring existing bonds prior to maturity from excess
earnings or proceeds of refunding bonds. It also refers to redeeming
shares in a mutual fund by selling the shares back to the sponsor.
Refunded Bonds
The outstanding bonds replaced by new bonds during a refunding.
Refunding Bonds
The issuance of a new bonds for the purpose of replacing outstanding
bonds.
Refund Provisions
The collective term for the facts that describe the first and subsequent
call dates, call or redemption prices and premiums, the call priority,
the eligible call dates, the number of days notice required of an
existing or actual bond Series. The information is available in
the Official Statement or the Trust Indenture, along with the defeasance
requirements of the Series. Defeasance requirements determine the
type of securities that are necessary for the escrow.
Registered Bond
A non-negotiable instrument in the name of the holder either registered
as to principal or as to principal and interest.
Remarketed Issue
An outstanding issue that is in the floating rate or variable rate
mode and is being offered in a new mode. A remarketed issue appears
much like a new issue when it is being offered to maturity, except
the par amount and maturity amounts are already established.
Repo
A financial transaction in which one party "purchases"
securities (primarily U.S. Government bonds) for cash and simultaneously
the other party agrees to "buy" them back at some future
time according to specified terms. Municipal bond and note issuers
have used repos to manage cash on a short term basis. (Known formally
as repurchase agreements.)
Revenue Bonds
These are payable from the earnings of a revenue producing agency
or enterprise. Examples are water, sewer, school district, airport,
etc. States and their sub-divisions create certain agency's and
authorities to perform specific tasks. Many times, the agency or
authority has the ability to levy charges and fees for its services
(e.g. the water company). These bonds are analyzed in terms of historical
or potential earnings compared with the bond requirements. Usually,
the yield is higher than that of a general obligation bond. This
is because taxes are more secure than revenues. These bonds have
built up a good record over a long period of time.
Revenue Constraints
A debt service solution concept that requires a revenue cash flow
in order to set an upper limit of periodic (e.g., annual) debt service.
The resulting debt service, if graphed over the life of the issue,
is 'shaped' like the revenue line.
Reserve Fund
A reasonably required reserve fund is maintained to secure the timely
payment of principal and interest to bond holders.
·For governmental or 501©(3) bonds Section 148(d) permits issuers
to invest up to 10% of the proceeds of an issue in a reserve fund.
This may apply only to the proceeds from the sale of a Series.
·There are additional reserve fund limits for bonds other that governmental
or 501©(3) bonds.
·A reserve is ordinarily not allowed if the bonds are general obligation
bonds.
·Revenue rulings have established alternatively that a reserve fund
is reasonably required if the fund is the lesser of maximum annual
debt service or 125% of average annual debt service.
·Both Section 148(d) and the revenue rulings must be complied with.
Secondary Market
The trading market for outstanding bonds and notes. This is an over-the-counter
market, a free form negotiated method of buying and selling, usually
conducted by telephone or computer. Traders buy and sell for their
own inventory. As many as $2 billion of issues trade each day.
Security
The legally available revenues and assets that are used to pay the
bond holders. The key component that supports debt service.
Serial Bond
A bond of an issue that features maturities every year, annually
or semiannually over a period of years, as opposed to a Term Bond,
which is a large block of bonds maturing in a single year.
Settlement Date
The date when a bond transaction must be paid.
Short Term
Bonds or notes sold on an interim basis with tax-exempt securities
for a period of from one to five years.
Sinking Fund
Money set aside on a periodic basis to retire term bonds at or prior
to maturity.
Sinking Fund Schedule
A schedule of payments required under the original revenue bond
resolutions to be placed each year into a special fund, called the
sinking fund, and to be used for retiring a specified portion of
a term bond issue prior to maturity.
SLGS
State and local government securities used for deposit in escrow
accounts in connection with the issuance of refunding bonds. Issued
by U.S. Treasury on a subscription basis to municipal government
entities only.
Stepped Coupon Bonds
A bond on which the interest rate periodically changes (increases)
over the life of the bond. Sold on a yield basis.
Street Name
The registration of bonds in the name of a dealer or other third
party instead of the owner, usually for custodial or safe keeping
purposes. This also facilitates buying and selling from the account.
The bond holder gets a monthly statement of the bonds in the account.
STRIPS
Acronym for the U.S. Treasury zero coupon program called Separate
Trading of Registered Interest and Principal of Securities. These
securities are sold at a discount and redeem for their full face
value at maturity. They are offered in amounts of $1,000 or more,
and pay no interest (the interest is reinvested over the life of
the security. STRIPS and zeroes are well suited to long-term goals
as college planning and retirement savings.
Super Sinker
A term maturity in a housing mortgage bond issue. These will be
the first bonds to be called, on any interest payment date, from
the proceeds of prepaid mortgages. The average mortgage is prepaid
though refinancing or sale in 6.8 years. While it is likely, it
cannot be guaranteed that a super sinker will be called; as a result
they are priced as a long-term bond but are most likely to be a
short-term maturity. It is a way to get a higher yield for a short
term bond.
Swap
The exchange of one bond for another. Generally, the act of selling
a bond to establish an income tax loss and replacing the bond with
a new item of comparable value.
Takedown
The gross sales concession for a bond, expressed in dollars per
thousand dollars of bonds. For example, a $5.00 takedown on $1,000,000
of bonds, would result in a gross sales concession of $5,000.
Total Return
Return on investment, taking into account capital appreciation,
dividends or interest, and individual tax considerations. The total
return is usually adjusted for present value and expressed on an
annual basis.
Tax Anticipation Notes (TANs)
These are issued by cities in anticipation of future tax revenue.
The security of the issue depends on the security and amount of
the tax revenue the municipality intends to receive. Usually, these
funds are used to finance current obligations.
Tax Base
The total resource of the community that is legally available for
taxation.
Tax Levy
The ratio of debt service to the necessary tax revenues to pay for
the debt service.
Taxable Equivalent Yield
The yield an investor would have to obtain on a taxable corporate
or U.S. government bond to match the same after-tax yield on a municipal
bond.
Tax-Exempt Bond
Bonds exempt from federal income, state income, or state tax and
local personal property taxes. This tax exemption results from the
theory of reciprocal immunity: States do not tax instruments of
the federal government and the federal government does not tax interest
of securities of state and local governments.
Technical Default
Failure by the issuer to meet the requirements of a bond covenant.
These defaults do not necessarily result in losses to the bond holder.
The default may be cured by simple changes of policy or actions
by the issuer.
Tender
The act of offering bonds to a sinking fund.
Term Bond
A term bond is a set of maturities that are sold as a single unit,
at a single price and yield. A typical term bond has mandatory sinking
fund requirements that are the maturity amounts. A bond issue may
be composed of various serial and term bonds.
Territorial Bonds
Issued by Puerto Rico, the Virgin Islands, etc. Interest on this
debt is exempt from state income taxes because of Congressional
action that provides these territories with such benefits.
Thin Market
The scarcity of secondary market supply or few bid or offer quotes
for a particular security.
Tombstone
An advertisement placed for information purposes, after bonds or
notes are sold, that describes certain details of the issue and
lists the managing underwriters and the members of the underwriting
syndicate.
TRAN
Tax and Revenue Anticipation Note.
Trading Position
The holding of bonds in inventory by the dealer for purposes of
buying or selling.
True Interest Cost (TIC)
The TIC is a method of calculating an issuer's borrowing interest
cost, which considers the present value of the debt service payments.
It is defined as the rate necessary to discount the debt service
payments, compounding semi-annually, to the purchase price received
by the issuer at the time of bond closing.
Trustee
A bank designated as the custodian of funds and official representative
of bondholders. Trustees are appointed to insure compliance with
the trust indenture and represents bondholders to enforce their
contract with the issuer.
Underlying Debt
The general obligation bonds of smaller units of local government
within a given issuer's jurisdiction.
Underwrite
An agreement to purchase an issuer's unsold securities at a set
price, thereby guaranteeing the issuer proceeds and a fixed borrowing
cost.
Underwriter's Discount ("Underwriter’s spread")
The differential between the price paid to the issuer for the new
issue and the prices at which the securities are initially offered
to the investing public. The underwriter's discount has four components:
Management Fee
The amount paid to the management group.
Takedown
Similar to commission, income derived from sale of securities.
Expenses
The costs of the management group and syndicate.
Risk
The amount set aside to absorb potential syndicate losses in an
actual 'underwriting' (when the syndicate has an unsold balance
when the bond purchase agreement is signed or award has been made).
Unit Investment Trust
A mutual fund of a fixed number (20 to 30) of different issues in
a portfolio placed in a trust. Units or shares are sold in the trust
and each unit receives a proportionate amount of the tax-exempt
interest earned by the bonds. As the bonds mature or are called,
principal is returned to the investor. Unit investment trusts, unlike
other mutual funds, have a finite life.
U.S. Treasury Bills
Treasury bills have maturities of 3 months and 6 months. They are
auctioned once every week. Once every month 1 year T-bills are auctioned.
These are a direct short term obligation of the U.S. government.
T-bills do not pay interest. They are purchased at a discount. For
example, one might buy a $10,000 three month T-bill for $9,700.
The investor would then receive $10,000 when the T-bill reached
maturity in 3 months. T-bills are the only Treasury security issued
at a discount. They are also the only Treasury security issued without
a stated interest rate. The interest rate is determined at auction.
T-bills are also offered in Book Entry form only. The investor does
not receive a certificate. T-bills are also highly liquid.
U.S. Treasury Bonds
Treasury bonds are direct obligations of the U.S. government. They
pay interest on a semi-annual basis. These have long term maturities.
They mature in 10 years to 30 years. Thirty year T-bonds are callable
beginning 5 years prior to maturity.
U.S. Treasury Notes
U.S. Treasury notes are direct obligations of the U.S. government.
These notes have maturities from one year to10 years. T-notes pay
interest on a semi-annual basis. T-notes always expire at par value.
The different length notes are auctioned at different periods throughout
the year.
Variable Rate Bond
A bond whose yield is not fixed but is adjusted periodically according
to a prescribed formula.
Yield
This is the basis on which a bond is priced and sold. It reflects
the value of the bond giving consideration to the length of time
to maturity, credit quality of the issuer/guarantor, and general
market conditions.
Yield Curve
Graph depicting the relationship between yields and current maturity
for securities with identical default risk.
Yield-to-Call
Return available to call date taking into consideration the current
value of the call premium, if any.
Yield-to-Maturity
Investment return which takes into account the interest rate, length
of time to maturity, and price paid. It is assumed that the coupon
reinvestment rate for the life of the bonds will be the same as
the yield-to-maturity.
Zero-Coupon Bonds
A deep discount municipal bond on which no current interest is paid.
Instead, at bond maturity, the investor receives compounded interest
at a specified rate. The difference between the discount price at
purchase and the accreted value at maturity is not taxed as a capital
gain but is considered tax-exempt interest. Widely used for college
savings bonds.
