Your Cheatsheet to Common Terms and Jargon for Bonds

Terminology

A

Ask Price

The minimum price that a seller is willing to take for the bond, or the price that an investor looking to acquire the bond will be paying.

B

Bid Price

The maximum price that a buyer is willing to pay for the bond, or the price that an investor looking to sell the bond will be receiving.

Blue Chip Companies

Companies that are considered to be well-established and more financially-sound.

Bonds

Bonds are loans issued by the government or a corporation in exchange for money from an investor. In return, the investor will receive coupon payments until repayment on the maturity date.

Bond Index

A hypothetical portfolio of bonds that allows for the measure of the performance of a particular bond segment.

C

Callable Bond

A bond where the issuer has the option to redeem the bond prior to maturity.

Capital Appreciation

The increase in price between the purchase and sale of the bond.

Coupon

A coupon is the fixed interest rate of a bond relative to its face value, where payments are made at fixed periods.

Credit Rating

An evaluation of the ability of a bond issuer to meet its financial obligations. The largest credit rating agencies are Standard & Poor's, Fitch Ratings and Moody's.

D

Default

The failure of an issuer to pay coupons and/or bond principal, or to meet the legal obligations and conditions of a bond.

Discount

Purchasing the bond at a price less than the face value.

Dividend

A portion of the profit of a company that is paid on to shareholders. A firm usually needs to make the coupon payments for bondholders before it can distribute dividends to shareholders.

F

Face Value / Par Value / Principal

Face value is the amount of money received at maturity. It is also called par value or principal. However, the face value may not necessarily be the price of the bond.

I

Investment-Grade

A credit rating that indicates bonds with a relatively low risk of default.

J

Junk Bonds

A credit rating that indicates bonds with a higher risk of default, but which typically carry higher yields than investment-grade bonds. These are typically rated 'BB+' or lower by Standard & Poor's and Fitch, and 'Ba1' or lower by Moody's. Such bonds are also referred to as “High Yields” and can be used interchangeably.

M

Maturity

The date on which the bond issuer repays the bondholder the principal amount.

O

Offering Circular

  A type of prospectus for a new security listing.

P

Perpetual Bond

Bonds that do not have a maturity date. The issuer of a perpetual bond may pay coupons for perpetuity and does not have to redeem the principal. Perpetual bonds are often accompanied by an issuer call option.

Premium

Purchasing the bond at a price higher than the face value.

Puttable Bond

A bond that provides its holder the right (but not the obligation) to demand early repayment of the principal prior to maturity.

S

Secondary Market

After bonds have been bought directly from the government or a corporation, they can be bought or sold before maturity in the secondary market.

Seniority

This refers to where the bond stands in the issuer’s hierarchy of claims.

In the case of a bankruptcy or liquidation process, a bond’s seniority will determine whether an investor will receive any recovery value. Such rankings include (from highest to lowest):

-          Senior Secured

-          Secured

-          Senior Unsecured

-          Senior Subordinated

-          Subordinated

-          Junior Subordinated

-          Equity

Sukuk

Islamic bonds that are structured to comply with Shariah principles and concepts.

T

Treasury Bill

A Singapore Government Security issued at a discount to their face value, pays no coupon (investors receive the face value upon maturity), and has a range of maturities : 2, 5, 10, 15, 20, and 30 years.

Y

Yield

The annualised return an investor expects to receive from a bond, which can be defined in various ways. E.g., the Current Yield of a bond is calculated simply by dividing the coupon (interest) by the price of the bond.

Yield Curve

The curve showing the relationship between yields and maturities among similar bonds. Usually, the Yield Curve is upward sloping, which means that longer maturity bonds command higher yields.

Yield to Maturity

A measure of the expected return for a bond if held to maturity, expressed as an annualised yield figure, which takes into account the bond’s current market price, the coupon rate, time to maturity as well as the bond’s face value. The measure also assumes that coupons are reinvested at the bond’s current yield.

Yield to Worst

A measure of the lowest possible return for a bond which operates within the terms of its contract without defaulting. The Yield to Worst can equal to the Yield to Maturity, but not surpass it.