A type of inflation-adjusted security issued by the Treasury. Series I savings bonds pay interest according to an earning rate that is partly a fixed rate of return and partly adjusted for inflation.
An initial public offering is the first offering of shares to the public by a privately or state owned company. IPOs are used by companies to raise new funds, or to achieve a listing on an exchange. The issuer normally offers the shares to the public through an underwriter who promotes the offering and usually guarantees to take the shares at a certain price to protect the issuer against adverse market movements. Also known as a flotation or going public.
A market is illiquid when there is insufficient cash flowing to meet financial debts or obligations. In the context of bonds or other investments, illiquid refers to a bond or other investment that cannot be converted into cash quickly or near prevailing market prices. Liquid investments or assets are defined as those that can be converted into cash quickly and without great impact on the price of the asset.
Issuer legal document which details the mechanics of the bond issuer, security features, covenants, events of default and other key features of the issue’s legal structure. Bond resolutions and trust agreements are functionally similarly types of documents, and the use of each depends on the individual issue and issuer.
For any particular date and any particular inflation-indexed security, the Reference CPI-U applicable to such date divided by the Reference CPI-U applicable to the original issue date (or dated date, when the dated date is different from the original issue date).
Tax-exempt bonds where the rate is periodically reset on a formula that incorporates an index, such as The Securities Industry and Financial Markets Association Municipal Swap Index.
A provision in the IRA law allowing individuals who receive lump-sum payments from pension or profit-sharing plans to “roll-over” into, or invest that sum in, an IRA. IRA funds can be “rolled-over” from one investment to another.
The financial statement of a firm that summarizes revenues and expenses over a specified time period; a statement of profit and loss.
A security issued by a state, political subdivision or certain agencies or authorities, for certain specific purposes, but backed by the credit of a private enterprise.
The International Monetary Fund provides policy advice and financing to members in economic difficulties and works with developing nations to help them achieve macroeconomic stability and reduce poverty. It has 186 member countries.
This is the risk that inflation may undermine the performance of investments and reduce the future real value of any investments after inflation has been taken into consideration.
The rate of increases in the price of goods and services usually measured on an annualized basis
For an inflation-indexed security, the principal amount of the security, derived by multiplying the par amount by the applicable index ratio.
1. Securities designed to protect investors and the future value of their fixed-income investments from the adverse effects of inflation. Using the Consumer Price Index as a guide, the value of the securities’ principal is adjusted to reflect the effects of inflation. Also known as Treasury Inflation Protected Securities (TIPS) or Treasury Inflation-Indexed Securities (TIIS). 2. Notes periodically issued by the GSEs whose return is adjusted with changes in the PPI or CPI.
Trading by management or others who have special access to unpublished information. If the information is used to illegally make a profit, there may be large fines and possible jail sentences.
Large organizational entities with significant amounts of money to invest such as insurance companies, pension funds, investment companies and unit trusts. Institutional investors account for a majority of overall volume in the bond markets.
Municipal bond insurance companies guarantee timely payment of principal and/or interest on municipal and certain other types of bonds in the event of a default. The major insurers are identified by these symbols:
ACA = American Capital Access;
AMBAC = AMBAC Indemnity Corp.;
CapMAC = Capital Markets Assurance Corp.;
CL= Connie Lee;
FGIC = Financial Guaranty Insurance Co.;
FSA = Financial Security Assurance Inc.;
MBIA = MBIA Insurance Corp.
Compensation paid or to be paid to borrow money, generally expressed as an annual percentage rate.
What a borrower pays a lender for the use of money. This is the income you receive from a bond, note, certificate of deposit, or other form of IOU.
A person who manages assets, making portfolio composition and individual security selection decisions, for a fee, usually a percentage of assets invested.
This is the risk that an investment may not generate the desired returns over time, and may even result in the loss of any initial capital.
Interest rates change in response to a number of things including revised expectations about inflation, and such changes in the prevailing level of interest rates affects the value of all outstanding bonds.
An agreement where a party pays a premium up front or in installments to the counterparty. If the floating interest rate exceeds a stated fixed rate during the time of the cap agreement, the counterparty will pay the difference, based on the notional amount. The cap rate is also called the strike rate. An interest rate cap can protect the purchaser against rising interest rates.
Interest-rate swaps are a derivative financial instrument which exchange or swap fixed rate interest rate payments for floating rate interest rate payments. Usually these swaps are an agreement between two parties to exchange one stream of interest payments for another over a set period of time. Plain, “vanilla” swaps are the most commonly used type of interest rate swap in the market. Investors use interest-rate swaps for debt portfolio management; corporate finance; to lock in interest rates; and to manage and hedge risk. It is important for an individual investor to understand that swaps are between institutions and not between individual investors; however, the result of these swaps may affect his/her portfolio or the price he/she may pay for a particular bond.
Interest-rate swaps have become critical to the bond markets. Initially interest-rate swaps helped corporations pay fixed rates and receive floating rate payments (or vice versa depending on their business needs). But then, swaps were seen to reflect market expectations and sensitivity to interest rates and credit concerns via what an interest-rate swap reflects which is a desire to exchange loans-one that was borrowed at a fixed rate and the other at a floating rate tied to, most commonly, (London Interbank Offered Rate) LIBOR. The graph plotting swap rates across available maturities became known as the swap curve. Swap rates suggest what the market expects the direction of LIBOR rates to be; and reflect the market’s perception of credit quality. The swap rate curve is an important interest-rate benchmark for the bond markets and is commonly used in Europe as the pricing reference for all European government bonds.
The interest rate structure which exists when short-term interest rates exceed long-term interest rates. See ascending, or positive, yield curve.
Bonds rated Baa (by Moody’s) or BBB (by S&P and Fitch) or above, whose higher credit ratings indicate a lower risk of default. These bonds tend to issue at lower yields than less creditworthy bonds.
A security or tranche that pays only interest and not principal. IO securities are priced at a deep discount to the “notional” amount of principal used to calculate the amount of interest due.
ISIN is the numbering code system set up by the International Organization for Standardization and used by internationally traded securities to identify and number each issue of securities. An ISIN code has twelve characters structured as follows: the first two characters of the ISIN are the country of origin for the security; the security identification number (which is called the National Securities Identifying Number NSIN) is the next 9 characters long; and a final character, called a check digit, is added to prevent errors and provide an additional verification for authenticity. The organization that allocates ISINs in any given country is called the National Numbering Agency (NNA). The NNA of the appropriate country administers the 9 digit security identification number. In the U.S., that NNA is called the Committee on Uniform Security Identification Procedures (CUSIP) Service Bureau, established under the auspices of the American Bankers Association to develop a uniform method of identifying securities.
The issue description includes the name of the issuer of the bonds. If a municipal bond, the issuer is typically a state, political subdivision, agency or authority which borrows money through the sale of bonds or notes. Corporate bonds are issued by private corporations.
The entity obligated to pay principal and interest on a bond it issues.