Coupon interest accumulated on a bond or note since the last interest payment or, for a new issue, from the dated date to the date of delivery. Since interest on municipal bonds is payable semiannually, every six months, when you buy a bond in mid-term you are only entitled to the interest the bond earns after you buy it. The interest earned previously, the accrued interest, belongs to the seller. Some first-time bond buyers think this payment is a hidden charge or fee, not realizing that they will get it back in full at the next interest payment date as tax-free interest.
(It actually means "according to its value.") A state or local government tax based on the value of real property as determined by the county tax assessor.
A municipality may sell a second bond issue at a lower interest rate cost, placing the proceeds of the issue in an escrow account from which the first issue's principal and interest will be repaid when due. See also ETM bonds.
The number two-ranked municipal bond insurance company.
The annual reduction of principal through the use of serial bonds or term bonds with a sinking fund.
The interest rate differential that exists when proceeds from a municipal bond - which is tax-free and carries a lower yield - are invested in taxable securities with a yield that is higher. The 1986 Tax Reform Act made this practice by municipalities illegal solely as a borrowing tactic, except under certain safe-harbor conditions.
A municipality's worth in dollars based on real estate and/or other property for the purpose of taxation, sometimes expressed as a percent of the full market value of the community.
The average length of time an issue of serial bonds and/or term bonds with mandatory sinking funds and/or estimated prepayments is expected to be outstanding. It also can be the average maturity of a bond portfolio.
An inordinately large amount of bond principal maturing in any single year. Also called a Term Bond.
In the past, certain bond issues (i.e. revenue or conduit bonds) were not considered suitable for commercial bank portfolios or underwritings. These banking and securities laws prevented many local banks from participating in the public improvement of their own communities. Today banks may buy any bond issue - and use depositors' interest-bearing money to fund the purchase of tax-free money - provided the issuer does not sell more than $10 million in any calendar year. Private investors should not assume that because they are "bank qualified" they are in some way more creditworthy than non-bank qualified bonds. Because they are in demand by local banks, they tend to be higher priced, lower-yielding instruments than other equivalent issues.
One one-hundreth of one percent ( 1/100 % or 0.01 percent). Thus 25 basis points equal one-quarter of one percent, 100 basis points equal one percent. This is typical in-group, professional bond talk.
A bond that has no identification of the owner of the security. It is presumed to be owned by the bearer or the person who holds it. It was much sought after because of the ease of transferring or gifting. All bonds issued prior to June 1983 were bearer bonds;since then, they have been issued in Registered Bond form.
An offer to buy at a fixed price or yield. As opposed to Ask, which is an offering to sell.
A security whereby an issuer borrows money from an investor and agrees and promises, by written contract, to pay a fixed principal sum on a specified date (maturity date) and at a specified rate of interest.
A unit of debt, $1000 of principal or par amount. For 200 years municipal bonds were sold in $1000 denominations. Since the mid-1970s the minimum bond denomination has been $5000;nevertheless, "A Bond" is bought, sold, referred to and priced as if it were $1000.
A portfolio of municipal bonds sponsored by registered investment companies that offer shares to investors either through (1) closed-end funds or unit investment trusts, which offer shares of a fixed portfolio of municipal bonds;or (2) open-end or managed funds, which offer shares in a managed portfolio of municipal bonds whose size will vary as shares are purchased or redeemed.
The amount at which a bond or note is bought or sold above its par value or face value without including accrued interest.
A bond or note that is subject to redemption at the option of the issuer prior to its stated maturity. The call date and call premium, if any, is stated in the offering statement or broker's confirmation.
A mutual fund of a fixed-dollar amount of issues traded on one of the exchanges not at its NAV, but priced based on perception and supply and demand. These funds can sell at a substantial discount or premium to their net asset value.
The detachable part of a bond that evidences the rate of interest due and the interest payment date. In the good old days of bearer bonds, coupons were detached from the bonds and presented to the paying agent for payment just as one might cash a government check. Thus the reference to wealthy persons as "coupon clippers."
The specified annual interest rate payable to the bond or note holder as printed on the bond. This term is still used even though there are no coupon bonds anymore.
The ratio of the coupon rate on a bond to the dollar purchase price expressed as a percentage. Thus if you pay par or 100 cents on the dollar for your bond and the coupon rate is 6%, the current yield is 6%;however, if you paid 97 for your 6% discount bond the current yield is 6.186%. (.06 divided by 97). If you paid 102 for a 6% bond the current yield is 5.88% (.06 divided by 102).
Failure to pay in a timely manner principal and/or interest when due, or a Technical Default, the occurrence of an event as stipulated in the Indenture of Trust resulting in an abrogation of that agreement. A Technical Default can be a warning sign that a default on debt service is coming, but in reality actual debt service interruption does not always occur if the problems are resolved in time. A Technical Default will almost always drive down the price of a bond in secondary market trading.
For bonds bought or sold in the secondary market, delivery - and payment - must be in three business days. For new issues, the time when payment is made to, and the executed bonds and notes are received from, the issuer. New-issue delivery takes place several weeks after the sale to allow the bonds and notes to be printed and signed.
The face or par amount - nominally $1000 or $5000 but can be $100,000 or more in the case of a note - that the issuer promises to pay at a specific bond or note maturity.
Bonds which sell at a dollar price below par in which case the yield would exceed the coupon rate. The difference between the discount price and the maturity price is subject to federal capital gains tax except in the case of Original Issue Discount Bonds, which see.
The pledge of "the full faith and credit and taxing power without limitation as to rate or amount." A phrase used primarily in conjunction with General Obligation bonds to convey the pledge of utilizing all taxing powers and resources, if necessary, to pay the bond holders.
A bond secured by a pledge of the issuer's taxing powers (limited or unlimited). More commonly the general obligation bonds of local governments are paid from ad valorem property taxes and other general revenues. Considered the most secure of all municipal debt. Limited in California by Proposition 13 to debt authorized by a vote of two thirds of voters in the case of local governments or a simple majority for state issuance.
Bond issues that the three major bond rating agencies, Moody's, Standard & Poor's, and Fitch rate BBB or Baa or better. Many fiduciaries, trustees, some mutual fund managers can only invest in securities with an investment grade rating.
Bonds issued by any of the 50 states, the territories and their subdivisions, counties, cities, towns, villages and school districts, agencies, such as authorities and special districts created by the states, and certain federally sponsored agencies such as local housing authorities. Historically, the interest paid on theses bonds has been exempt from federal income taxes and is generally exempt from state and local taxes in the state of issuance. There are approximately $1.3 trillion municipal bonds outstanding and they generate about $50 billion tax-free interest income each year.
Short-term municipal obligations, generally maturing in one year or less. The most common types are (1) bond anticipation notes (Bans), (2) revenue anticipation notes (RANs), (3) tax anticipation notes (TANs), (4) grant anticipation notes, (5) project notes, and (6) construction loan notes. Also see Trans.
The market value of all the bonds in a mutual fund portfolio divided by all the outstanding shares.
A document (prospectus) circulated for an issuer prior to a bond sale with salient facts regarding the proposed financing. There are two OSs, the first known as the preliminary, or "red herring" - so named not because it smells but because some of the type on its cover is printed in red - and it is supposed to be available to the investor before the sale. The final OS must be sent to the purchaser before delivery of the bonds.
This is the standard municipal bond fund. It has no fixed number of bonds in its portfolio. Rather it buys issues as investors buy shares in the fund, sells issues as investors redeem shares. The tax-free dividend is dependent on a pro-rata share of the interest earned, and this varies as the income of the portfolio varies. The fund managers guarantee to buy back shares at their Net Asset Value, the market value of all the bonds in their portfolio as determined at the close of each business day. This NAV per share can be more or less than the original purchase price. Open-end funds have no maturity date so ultimately they must be sold to return principal.
The face value or principal amount of a bond, usually $5,000 due the holder at maturity. It has no relation to the market value. For pricing purposes it is considered 100.
amount, if any, by which the price exceeds the principal amount (par value) of a bond. Its current yield will be less than its coupon rate.
Various alphabetical and numerical designations used by institutional investors, Wall Street underwriters, and commercial rating companies to give relative indications of bond and note creditworthiness. Standard & Poor's and Fitch Investors Service Inc. use the same system, starting with their highest rating of AAA, AA, A, BBB, BB, B, CCC, CC, C, and D for default. Moody's Investors Services uses Aaa, Aa, A, Baa, Ba, B, Caa, Ca, C, and D . Each of the services use + or - or +1 to indicate half steps in between. The top four grades are considered Investment Grade Ratings
Process of retiring existing bonds prior to maturity from excess earnings or proceeds of refunding bonds. It also refers to redeeming shares in a mutual fund by selling the shares back to the sponsor.
A municipal bond whose debt service is payable solely from the revenues derived from operating the facilities acquired or constructed with the proceeds of the bonds.
The trading market for outstanding bonds and notes. This is an OTC market, a free form negotiated method of buying and selling, usually conducted by telephone or computer. Traders buy and sell for their own inventory. As many as $2 billion of issues trade each day.
The yield an investor would have to obtain on a taxable corporate or US government bond to match the same after-tax yield on a municipal bond. An internet site, emuni.com, has a taxable equivalent yield table for California residents.
Bonds issued in conjunction with a redevelopment project. The taxes pledged to their repayment come from the increase of assessed value over and above a pre-established base. The redevelopment creates this added value, known as the tax increment.
Bonds exempt from federal income, state income, or state tax and local personal property taxes. This tax exemption results from the theory of reciprocal immunity: States do not tax instruments of the federal government and the federal government does not tax interest of securities of state and local governments.
A mutual fund of a fixed number (20 to 30) of different issues in a portfolio placed in a trust. Units or shares are sold in the trust and each unit receives a proportionate amount of the tax-exempt interest earned by the bonds. As the bonds mature or are called, principal is returned to the investor. UITs, unlike other mutual funds, have a finite life.
A bond whose yield is not fixed but is adjusted periodically according to a prescribed formula.
available taking into account the interest rate, length of time to maturity, and price paid. It is assumed that the coupon reinvestment rate for the life of the bonds will be the same as the yield-to-maturity.
A deep discount municipal bond on which no current interest is paid. Instead, at bond maturity, the investor receives compounded interest at a specified rate. The difference between the discount price at purchase and the accreted value at maturity is not taxed as a capital gain but is considered tax-exempt interest. Widely used for college savings bonds.
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