Bond Terminology
“Bonds are perhaps less complicated than some other
kinds of investments. But the bond market has a language
all its own.”
- Ilyce R. Glink, author of
100 Questions You Should Ask About Your Personal Finances
Callable: a bond is said to be callable if the issuer
is allowed to pay it back before the maturity date. This simply
means the issuer has decided to refinance its debt and repay
bondholders sooner than originally planned. This tends to
occur when interest rates have fallen, and the issuer can
save money by refinancing the debt.
Convertibles: a convertible bond is one that can actually
be converted into shares of stock.
Coupon: this is the interest paid by the bond. For
example, if you have a $10,000 bond paying out 5% in interest,
you will receive $500 a year--referred to as the coupon. The
interest rate--5%--is referred to as the coupon rate.
Current Yield: the current yield is how much the bond
is paying out in income and can fluctuate based on bond prices
and interest rates. The current yield is calculated by dividing
the interest payment by the bond’s current price.
Discount: just like it sounds, this is when a bond--usually
a newly issued bond or in an environment of rising interest
rates--is sold at a discount to its face value. For example,
a $1,000 bond may sell for $950, or at a $50 discount.
Investment Grade: a term used to describe bonds that
are highly rated and considered safe investments.
Maturity: the date the bond issuer agrees to pay back
the bondholder the full face value of the bond.
Par: a reference to the bond’s face value. When
a bond is sold at a discount, it is said to be selling below
par.
Real Rate of Return: a combination of the interest
you earn and the market value of the bond. If the bond price
has risen and you are able to sell it for a profit, you will
be subject to capital gains taxes on the profit you made.
Speculative: bonds that are below investment grade,
generally considered speculative in nature, and present greater-than-average
risk.
Term: the period of time that must pass before a bond
matures and must repay its value.
Yield to Maturity: the income you will receive if
you hold the bond until it matures and reinvest the interest
you receive; the total return would be your yield to maturity.
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