Glossary of Bond Terminology
The bond world is full of hard-to-follow jargon. Here's where you'll find simple explanations of some of the more complex terminology.
Auction Rate Securities, or ARS -- High Risk Debt Instruments
Auction rate securites (ARS) are bonds in which the interest rate is reset on a recurring basis -- sometimes as often as every seven days. Both corporate bonds and municipal debt issues are available in ARS form. However, the minimum amount needed to purchase an ARS is generally around $25,000. As a result the ARS market -- which largely collapsed in early 2008 -- is limited to institutional investors and the wealthy.
Auction rate securites (ARS) are bonds in which the interest rate is reset on a recurring basis -- sometimes as often as every seven days. Both corporate bonds and municipal debt issues are available in ARS form. However, the minimum amount needed to purchase an ARS is generally around $25,000. As a result the ARS market -- which largely collapsed in early 2008 -- is limited to institutional investors and the wealthy.
Credit Default Swaps
Credit default swaps are a form of derivative. The swaps are complex investment vehicles that can be used to protect a bond buyer from the risk of default.
Credit default swaps are a form of derivative. The swaps are complex investment vehicles that can be used to protect a bond buyer from the risk of default.
Default Risk
Default risk describes the danger that a bond issuer will become insolvent and unable to honor its debt obligations. In the bond world, default risk is highest for below-investment-grade securities known as junk bonds. Default risk is lowest for government-backed securities.
Default risk describes the danger that a bond issuer will become insolvent and unable to honor its debt obligations. In the bond world, default risk is highest for below-investment-grade securities known as junk bonds. Default risk is lowest for government-backed securities.
"Dirt" Bonds -- Muni Bonds for Real Estate Developoment
"Dirt" bonds are the nickname given to tax-free municipal bonds used to finance real-estate development projects.
"Dirt" bonds are the nickname given to tax-free municipal bonds used to finance real-estate development projects.
EE Savings Bond
An EE Savings Bond, available in both paper and electronic versions, is an investment vehicle sold by the U.S. Treasury Department. It's a popular choice among small investors and newcomers to the bond market.
An EE Savings Bond, available in both paper and electronic versions, is an investment vehicle sold by the U.S. Treasury Department. It's a popular choice among small investors and newcomers to the bond market.
Face Value
In bonds, face value refers to what is owed to a bondholder when the security matures. By tradition, most bonds in the U.S. have a face value of $1,000.
In bonds, face value refers to what is owed to a bondholder when the security matures. By tradition, most bonds in the U.S. have a face value of $1,000.
I Bonds: U.S. Savings Bond Adjusted for Inflation
I Bonds are a form of U.S. Savings Bond sold by the U.S. Treasury Department. The primary difference between I Bonds and the older EE Savings Bond is that I Bonds are adjusted for inflation.
I Bonds are a form of U.S. Savings Bond sold by the U.S. Treasury Department. The primary difference between I Bonds and the older EE Savings Bond is that I Bonds are adjusted for inflation.
Opportunity Cost
Opportunity cost is a form of investment risk that measures what is lost when an investor must make a choice among alternatives. For example, by keeping money in a savings account rather than buying a corporate bond, the opportunity cost is the difference between the two investments -- the money that could have been made, but wasn't.
Opportunity cost is a form of investment risk that measures what is lost when an investor must make a choice among alternatives. For example, by keeping money in a savings account rather than buying a corporate bond, the opportunity cost is the difference between the two investments -- the money that could have been made, but wasn't.
Underwriters and Underwriting
Selling bonds is a complex endeavor. There are millions and millions of dollars at stake even in the smallest of offerings. Investment banks are key to the process. Those banks bid for the right to serve an intermediary between the bond issuer and the buying public. That intermediate role is called "underwriting."
Selling bonds is a complex endeavor. There are millions and millions of dollars at stake even in the smallest of offerings. Investment banks are key to the process. Those banks bid for the right to serve an intermediary between the bond issuer and the buying public. That intermediate role is called "underwriting."