Interested in investing in bonds? Confused by the terminology? Bonds provide balance and stability to a portfolio. They can also provide a good income stream. Bond investing comes with its own set of investing terms. A list of bond terms with their definitions follows to help you quickly learn bond investing language.
The process by which new bonds are issued. Individuals and institutions bid on the offered bonds for sale. The final price may be lower or higher than the face value of the issued bond.
The yield/rate and amount of money a buyer is willing to pay for the bond being offered. Bids can be competitive or noncompetitive. Competitive bidding is actively offering a set amount for the bond at a yield/rate the buyer is willing to pay. Noncompetitive bidding is when the bidder accepts the final yield/rate determined at auction in order to get the amount of bond wanted. For example, if you want a $1000 bond then you accept whatever the yield/rate was in the auction.
A loan to a company, state, city or government in exchange for interest on the loan. The bond has a maturity date when it is to be repaid.
The interest rate on a bond at par. The interest rate is set at the time of issue.
The risk that the bond issuer will default on the bond. Credit risk takes into account the financial situation of the bond issuer.
Failure of the issuer of the bond to pay either the interest on time or the final repayment at maturity.
The amount that the bond sold for below its face value. In auction bidding a bond will often sell for less than its face value; this is selling at a discount.
The amount the bond is issued for.
The percent of interest a bond will pay every year. Interest is the money a bondholder receives in exchange for loaning money to the bond issuer.
The date the bond is issued.
This is the date the bond matures and the issuer repays the loan.
The face value of the bond.
The amount that the bond sold for above its face value.
Yield/Yield to Maturity
The annualized rate of return on a bond held to maturity. Interest rate is the percent of interest paid out each year. Yield includes the price paid for the bond. For example, if you paid more than face value for the bond your yield would be lower than the interest rate. Conversely, if you paid more the yield would be higher than the interest rate.
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