Key financial jargon you need to know for successful investment in bonds – Part 2
In Part 2 of this series, we look at the most common bond types and categories. Clearly the US bond market is far and away the largest globally, and therefore this article is focused on the US. However, the bond markets of Asia are also steadily developing, and it is quite possible that many of the bonds which are now issued exclusively in the US, will make an appearance in Asia in the future.
1. Agency bond – is a bond issued by a Government Sponsored Enterprise (GSE) or a Federal Government Agency for the purpose of raising funds for public causes (eg assistance for farming, increase in home ownership, etc.).
2. Auction rate bond – is a tax-exempt bond with a floating coupon rate. The rate is periodically modified via auction.
3. Bearer bond – A person who holds a bearer bond is recognized as its owner.
4. Asset-backed bond or security (ABS) – is a bond backed by assets other than commercial or residential mortgages.
5. Bullet bond – is a bond with a fixed maturity period and devoid of a call feature.
6. Callable bond – is a bond which can be called (for principal payment plus interest) before maturity. The bond may or may not carry a call premium.
7. Collateralized Mortgage Obligation (CMO) – is a bond backed by a pool of mortgage loans.
8. Convertible bond – is a type of bond which can be converted into shares by the issuer. Usually, such a bond will be converted into shares of the issuing company.
9. Covered bond – is a fully collateralized debt issued by banks. Residential or commercial mortgage loans back the bond. Sometimes, loans issued to public sector institutions are also used as collateral.
10. Dollar bond – is a type of bond traded and quoted in terms of dollar price rather than yield.
11. Discount bond – A bond sold below par value.
12. Fixed-rate bond – A long-term bond which offers a fixed interest rate until maturity.
13. Floating-rate bond – A category of bond with an interest rate modified periodically using a predetermined formula.
14. General obligation bond (GO) – A bond which is secured by a pledge of the issuer (usually a state or the federal government) to repay using tax-payer money.
15. High-yield bond – A bond issued by a corporations and/or sovereign countries with a low credit rating. Usually such a bond will carry a credit rating of Ba, BB or below.
16. I bond – The letter ‘I’ stands for inflation. An I bond is an inflation adjusted bond issued by the US Treasury. The interest rate of the Series I bond is partly fixed and partly adjusted for inflation.
17. Indexed rate bond – The interest rate for an indexed rate bond would be based on some sort of formula using an index (e.g. Bond Market Association Swap Index) as one of its constituents. Normally, such a bond would be tax exempt.
18. Industrial revenue bond – is a bond issued by a state or any other government authority, but backed by the credit of a private entity. Such a bond is usually issued with a specific purpose.
19. Inverse floater bond – is usually a tax exempt bond with a coupon rate inversely related to a benchmark rate.
20. Junk bond – is also referred to as a high-yield bond. This bond usually carries a rating of BB or lower. To attract investors, the junk bond issuers will offer a higher interest rate compared to bonds with a good credit rating. A junk bond is also known as a non-investment grade bond.
21. Limited tax bond – is similar to a General Obligation bond. However, the bond is secured by a limited percentage of revenue from a single or multiple source of taxes.
22. Medium-term note (MTN) – is a debt security offered on a continuous basis to investors. Usually, an MTN is offered through an agent, and customized as per the needs of the investor. The maturity period of MTNs can range from one to 30 years.
23. Moral obligation bond – A bond issued by a state financial intermediary and backed by the moral obligation of a state. The state will not have any legal obligation towards the bond. A moral obligation bond is usually a tax-exempt bond with a higher yield.
24. Municipal bond – is a bond issued by a state or local government authority.
25. Non-callable bond – As the name says, the issuer of the bond will have no right to call the bond for redemption before the maturity date.
26. Premium bond – a bond priced above par.
27. Put bond – is a bond giving the holder the right to demand redemption at par (or at a pre-determined price), on a specific date before maturity.
28. Perpetual floating-rate note – is a debt instrument which has neither a fixed rate of interest, nor a maturity date. It is also referred to as an undated issue.
29. Registered bond – A bond, the owner of which is registered with the issuer or the agent. Transfer of ownership is possible only with a proper endorsement of the bond by the registered owner.
30. Revenue bond – is a bond secured by the non-tax revenue generated from the operation of the project being financed.
31. Serial bond – A security which matures in installments over a period of time. For example, a $200,000 bond may mature over a period of five years with an annuity of $40,000.
32. Term bond – A bond which matures on a single date.
33. Special tax bond – When a bond is backed by a special tax, it is referred to as a special tax bond.
34. Surety bond – is a bond or any other security (e.g. insurance policy) which backs the performance of another.
35. Taxable municipal bond – is a bond with a yield which is not exempt from federal income tax.
36. Tax-exempt bond – When the yield on a bond is exempt from federal income tax, it is called a tax-exempt bond.
37. Tax-backed bond – When a bond is secured by tax levied by the issuer, it is called a tax-backed bond.
38. Unsecured bond – Refers to a bond which is not backed by any kind of collateral.
39. Variable rate bond – is a long-term bond with an interest rate periodically adjusted, based on precise market indicators.
40. Zero coupon bond – is a bond without interest payments.