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Types of Bonds

Fixed-Rate Capital Securities Glossary

Basis point

One one-hundredth (1/100 or .01) of one percent. Yield differences among fixed-income securities are stated in basis points.

Bond

An interest-bearing promise to pay a specified sum of money—the principal amount—due on a specific date.

Callable securities

Securities that may be redeemed by the issuer prior to the specified maturity date at a specified price at or above par.

Common stock

A share representing participation in the ownership of an enterprise, generally with the right to participate in dividends and in most cases to vote on major matters affecting stockholder interests.

Coupon rate

The stated annual interest rate on a security.

Current yield

The ratio of the coupon to the market price of a bond, expressed as a percentage.

Debenture

Debt secured only by unpledged assets and the general credit of the issuer. Also called an unsecured bond.

Default

Failure to pay principal or interest promptly when due.

Face amount or Face value

See “Par value.”

Grantor trust

A special-purpose vehicle set up to issue fixed-rate capital securities and use the proceeds to purchase debt of the parent company. Investors who hold interests in the trust are taxed as if they owned pro rata undivided interests in the trust’s assets.

Interest

Compensation paid or to be paid for the use of money. Interest is generally expressed as an annual percentage rate.

Issuer

The entity that issues and is obligated to pay amounts due on securities.

Junior security

A security with a claim on a corporation’s assets and income that is subordinate to that of a senior security. For example, common stock is junior to preferred stock, which is junior to unsecured debt such as debentures, which is junior to secured debt.

Limited-liability company

A special-purpose company incorporated under special limited-liability company legislation enacted in many states and foreign countries. This type of entity is structured as a “pass-through” and treated like a partnership for tax purposes.

Limited partnership

An entity formed under state legislation that enables large numbers of investors to become limited partners of a partnership, owning an economic interest in the entity’s assets, but sharing in its liabilities only to the extent of their initial investment.

Liquidation value

The amount a securities holder may claim in case of a liquidation of the issuer.

Maturity

The date when the face amount of a security becomes due and payable by the issuer if not previously called or redeemed.

Original-issue discount

The amount by which a security’s price at issuance is lower than its par value. In the case of fixed-rate capital securities, original-issue discount is also generally considered to exist if the issuer is entitled to elect to defer distributions.

Par value

The amount of a fixed-rate capital security due at maturity, generally $25, which may be different from its current market value. Also called face value or face amount.

Preferred stock

An equity security that is junior to the issuing entity’s debt obligations but senior to common stock in the payment of dividends and the liquidation of assets. The dividend can be fixed or floating and is usually stated as a percentage of par value. Preferred stock usually has no voting rights and frequently has a mandatory or optional redemption provision.

Principal

The face amount of a bond, exclusive of accrued interest and payable at maturity.

Redemption premium

The amount by which the “call” price of a security exceeds its principal, or par value.

Secondary market

The market of issues previously offered or sold.

Secured debt

Debt backed by specific assets or revenues of the borrower. In the event of default, secured lenders can force the sale of such assets to meet their claims.

Senior securities

Bonds and other debt obligations, fixed-rate capital securities and preferred stock that are considered senior to common stock within an entity’s capitalization structure.

Spread

The difference in yield between two securities.

Subordinated securities

Securities with a promise to pay that cannot legally be fulfilled until payments on certain other obligations have been made.

Yield to call

A yield on a security calculated by assuming that interest payments will be made until the “call” date, at which point the security will be redeemed at its “call” price.

Yield to maturity

A yield on a security calculated by assuming that interest payments will be made until the final maturity date, at which point the principal (or par value) will be repaid by the issuer. Yield to maturity is essentially the discount rate at which the present value of future payments (investment income and return of principal) equals the price of the security.

 

All information and opinions contained in this publication were produced by the Securities Industry and Financial Markets Association from our membership and other sources believed by the Association to be accurate and reliable. By providing this general information, the Securities Industry and Financial Markets Association makes neither a recommendation as to the appropriateness of investing in fixed-income securities nor is it providing any specific investment advice for any particular investor. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and sources may be required to make informed investment decisions.