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Bond terminology

  • Face Value. The principal, or the amount borrowed.

  • Maturity date. The date by which the borrower has to pay back the money.

  • Coupon. The coupon is the amount of the interest payment, in dollars. It is called this because the physical bonds used to come with coupons had to be cut off and sent in to get the interest payment.

  • Coupon rate. The coupon rate is the yield that the bond had when it was issued. This is not the interest rate you will get if you buy the bond.

  • Current yield. This is the interest rate you will get when you buy the bond. It is calculated by dividing the annual coupon payments into the current bond price.

  • Tax-equivalent yield. This is the yield of a muni bond as if it were taxable. This is used to compare the tax-adjusted yields of muni bonds to taxable bonds.

  • Basis point. The smallest measure used in quoting yields on bonds. One basis point is equal to 0.01%. For example, if a bondís yield rose from 5.50% to 5.65% then the yield has risen 15 basis points.

  • Point. A point is equal to 1% of the face value of a bond. Therefore, when a bond is "up two points" that could mean a bond went from 84 up to 86 or 110 up to 112.

  • Par value. This is the starting price of the bond when it was issued. Almost all bonds are issued at a par value of 100.

  • Bond rating. A measure of the quality and safety of a bond as defined by a bond rating agency.


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