1. Basis Point – A basis point is equal to one-hundredth of a percentage point, or 0.01%. In other words, if the 10-year Treasury bond yield is 5% and you hear that it went up by 12 basis points, that means that it rose to 5.12%.

2. Bond Quality – A rating given to bonds that indicates their respective issuer’s creditworthiness. The three primary rating agencies are Standard & Poor’s, Moody’s, and Fitch. 

The rating agency rates the bond issuer on its financial strength and/or its ability to repay the bond’s principal and interest. For example, Standard & Poor’s will issue ratings found on the schedule below: 

AAA High Grade 

AA+ to AA- Upper / Medium Grade 

A+ to A- Medium Grade 

BBB+ to BBB- Lower / Medium Grade 

BB+ to BB- Non Investment Grade / Speculative 

B+ to B- Highly Speculative 

CCC+ to CCC- Extremely Speculative or In Default

D In Default 

3. Bond Laddering – A portfolio management strategy that applies the basic concept of purchasing multiple bonds, each with different maturity dates, in order to achieve diversification. 

Desirable outcomes of bond laddering include the following:

• Decrease interest rate risk by holding both short-term and long-term bonds

• Decrease re-investment risk, since, as one bond in the ladder matures, the proceeds are re-invested.

4. Callable Bond – A bond that can be bought back before the time when it would normally mature. 

5. Convertible Bond – A combination some features of stocks with some features of bonds. They generally function like standard bonds but have a provision where the holder can choose to convert the bond into shares of common stock at a certain exchange rate.

6. Coupon Rate – the interest rate paid by the bond issuer and is based on the par value of the bond. For instance, a $1,000 bond with a 6% coupon rate would pay $60 in interest each year. This is also known as the nominal interest rate of the bond.

7. Duration – A measure of the sensitivity of the price of an investment to a change in interest rates. For example, if the duration of a bond (or portfolio) is 5 Years, one can assume that as interest rates decrease by 1%, the price of the bond (or portfolio) will increase by 5%. Duration, however, cannot be used as an appropriate measure of price responsiveness when the interest rates rise or fall by more than 1%. The greater the duration, the greater the interest-rate risk or greater potential reward for bonds. 

8. Issuer – A bond’s issuer is the entity that is using the bond to borrow money, and that is responsible for paying the agreed-upon interest, and for eventually repaying the principle

9. Maturity – The amount of time until the principal amount of a bond is repaid, or the end of life for an investment. 

10. Par value – The face value of the bond and is the amount the issuer promises to repay the holder upon maturity. The majority of bonds are issued with a par value of $1,000. So if you hold a 30-year Treasury bond until its maturity date, the U.S. government will give you back $1,000.

11. Price (Bond Price) – Price and par value are confounding one another.  Price refers to how much is actually paid when a bond is purchased. For example, a company may issue bonds with a par value of $1,000 but may end up selling them at a discounted price to entice investors to buy them. Price can refer to the amount paid to buy a bond from an issuer, or from a third party.

If the asking price is lesser than the par value, it is said to be trading at a discount. For example, a bond with a $1,000 par value that sells for $950 is sold at a discount. In contrast, if the price is greater than its par value is said to be selling at a premium. A $1,000 par value bond that sells for $1,100 would have been sold at a premium.

12. Yield –  Current indicated annual income (dividend or coupon) divided by the current price, stated as a percentage.

13. Yield Curve – A graphical representation of the various interest rates on a specific day of bonds having equal quality, but different maturities. 

14. Yield to Maturity – The rate of return on a bond expected if the bond is held until maturity.

Coupon: The interest rate stated on a bond at the time it is issued. Typically, interest payments are made semiannually.

Example: A $1,000 bond with a 10% coupon will pay $100 in interest annually.

15. Zero Coupon Bond – A bond that is issued at a deep discount to its face value but pays no interest.