Glossary of Useful Terms

Ask (Asked Price)
The lowest round-lot price a broker will offer to sell a security.

Auction
The issuance of new Treasury bills, notes and bonds at stated intervals by the Federal Reserve Bank of the U.S.

Baby Bond
Bond with a face value of less than $1,000.

Basis Points
1/100th of a percentage point of yield.

Bid
The highest price offered for a security at a given time.

Bond
A debt security of a corporation or government. Usually refers to those with long maturity periods (10 to 30 years).

Bond Fund
Type of mutual fund that invests primarily in bonds.

Callable
A bond feature that permits the issuer to redeem the bond earlier than maturity.

Convexity
Measure of the curvature of the price-yield relationship of a fixed-income security.

Conversion Ratio
Issue price of a convertible divided by the conversion price.

Convertible (Bond)
A bond that allows the holder to convert to common stock.

Coupon
The annual interest percentage paid on a bond.

Current Yield
Coupon payment divided by market price.

CUSIP (The Committee on Uniform Security Identification Procedure)
Each type of security is assigned a unique CUSIP number.

Debenture
A debt issued by a corporation that is secured only by the issuing company's reputation, as distinguished from one backed by real assets.

Derivative Zeros
Zero coupon bonds created by stripping coupon and principal payments from a U.S. Treasury Security. (The coupon and bond are then sold separately.)

Discount
When the market price of a bond is lower than the original issue price (par).

Duration
A measure of the average time required to collect all payments of principal and interest.

Eurobonds
A bond issued in a currency other than that of the country of issue. Interest is usually non-taxed.

Face Value (par)
The amount that appears on the face of the certificate and that the issuer pays at maturity.

Hedge
To reduce the risk in one security by taking an offsetting position in another. (Hedging involves attempting to hold instruments whose prices tend to move in opposite directions.)

Intermediate-Term Bonds
Bonds with five to ten year maturity.

Maturity
The date on which a bond's principal is to be repaid.

Modified Duration
A measure of the sensitivity of a bond's price to changes in yields, shown as a number of years to maturity. (Example: If a bond has a modified duration of 4 years, for every 100 basis-point change in yield, the price changes by 4 percent in the opposite direction.)

Par - Face value
the original issue price of a bond.

Subordinated Debenture
A debenture whose claim to interest and principal of the corporation comes after those of regular debentures and other debt.

Tax Exempt Bonds
Municipal securities whose interest is free from Federal income tax.

Treasury Bills
Bonds issued by the U.S. Treasury with maturities of 13, 26 or 52 weeks.

Treasury Bond
U.S. bonds with maturities of 10 to 30 years.

Treasury Note
U.S. Bonds with 1 to 10 year maturities.

Volatility
Relative measure of a security's price movement during a specific time.

Yield
The rate of return on an investment.

Yield Curve
A graph showing the general pattern of yields on bonds or other instrument.

Zero Coupon
A bond that pays zero interest. Sold at a discount to face value, the investor profits at maturity.