Bond Investing Terms

October 6, 2009

Bond investing terms can be confusing for someone who’s never been around the bond market. I remember the first conversation I had with a bond investor; I knew he was speaking English but his talk of yield curves and zero coupon bonds made it feel like a foreign language.

If you don’t know the bond investing basics jargon, you could easily get left behind, or worse, make a poor decision. Here’s a quick list of terms to help as you navigate investing in the bond market:

Accrued Interest – The interest that has been earned, but not paid out to the bondholder. Bond interest accrues equally every day and does not compound.

Call Date – Some bonds have a provision that give the issuer the ability to redeem the bond early. There is usually one call date per year. The list of dates is called the “call schedule.”

Call Premium – The payment by the bond issuer if the bond is called before the maturity date. This is the incentive that makes bond investors look at callable bonds compared to non-callable ones.

Coupon Payment – The actual dollar amount paid to the bondholders at each coupon date.

Coupon Rate – The annual interest rate paid to bondholders. Rates are generally fixed, though variable rate bonds are available.

Current Yield – The annual interest payment divided by the current market price of the bond.

Discount – This is when a bond is sold at a discount to its face value.

Face Value – Also called the principal or par value of the bond, this is the amount that will be repaid when the bond matures.

Maturity Date – The day in which the last interest payment is made, and the face value of the bond will be repaid.

Real Rate of Return – The combination of the interest earned and the market value of the bond.

Term to Maturity – The time left until the bond matures and the principal is repaid.

Yield to Call – This is the calculated yield from the current time until the call date. It is assumed that the bond will be called at the next call date.

Yield to Maturity – The compound average annual expected rate of return if the bond is purchased at its current market price and held to maturity. It is assumed in the calculation that the interest payments are reinvested for the life of the bond at the same yield. This is also called the internal rate of return of the bond.

Yield to Worst – This is a “worst case scenario” in terms of yield on a bond. It is the lowest yield possible for a bond.

This is certainly not an all-encompassing list, but I do hope it helps you the next time you hear investors talking about the bond market on television or if you’re looking up a bond quote yourself. For an intro to bonds you can check out the bond investing basics post; next time we’ll take a look at some bond investing strategies.


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One Response to Bond Investing Terms

  • William Little

    You say in Yield to Maturity – “It is assumed in the calculation that the interest payments are reinvested for the life of the bond at the same yield. This is also called the internal rate of return of the bond.”
    If the interest payments are ‘consumed’ instead of being ‘reinvested for the life of the bond at the same yield’ then you get the same Yield to Redemption or Internal Rate of Return on the bond.
    Your assumption above is not necessary or usual since consumption of interest payments as shown in a cash flow statement is more normal – you may but do NOT need to reinvest at any yield.