Glossary - Fixed Income

1. Sinking Fund Provision: It requires that the issuer to retire the fixed portion of bond's principal each year.

2. Accelerated Sinking Fund Provision: It allows the issuer to retire more than the amount that is stipulated by the Sinking Fund Provisions.

3. Redeemed: Bonds are redeemed when they are called through a call option or sinking fund provisions.

4. Refunded: Bonds are refunded whey they are called using the funds obtained through issuing lower coupon bonds.

5. Convertible Bond: A convertible bond is an issue that provides the investor the option or right to convert the bond into a specified number of shares of common stock.

6. Exchangeable Bond: An exchangeable bond provides the investor the option to exchange the bonds for a fixed number of shares of common stock of a company other than the issuer of the bond. 

Glossary - Fixed Income

Regular Redemption Price: Regular or general call redemption pricing is normally set at a premium price above par until the first par call date.

Special Redemption Prices: It is normally set for bonds redeemed through sinking fund or other special redemption conditions. The special redemption pricing is usually set at par value.

Par Call Problem: Problem which arises when the issuer maneuvers a call so that the issue can be redeemed at special redemption price instead of regular or general call redemption price.

Prepayment: Any principal payment paid prior to a scheduled principal payment date is called prepayment.

Prepayment option: An option which allows the borrower to repay the principal before due date.

Glossary - Fixed Income

1. Call Provision: It grants the issuer an option to retire all or part of the issue prior to the stated maturity date.

2. First call date: The first date of call or redemption.

3. Redemption Price: The price at which the issuer must pay to retire the bond early is referred to as the call price or redemption price.

4. Make-whole redemption price: It is equal to the premium plus the principle at which the issue is called.

5. Currently callable: Bonds with no protection against called early.

6. Non-callable bonds: Bonds having some restrictions against early redemption.

7. Non-refundable bonds: Bonds which prohibit the issuer from redeeming by issuing fresh bonds at lower coupon rate.

Glossary - Fixed Income

Bullet Maturity: Bonds with entire amount paid as lump sum payment at maturity.

Non amortizing securities: Securities that only pay interest during the tenure and the entire principal is paid at maturity

Amortizing Securities: Securities that repay both interest and the principal amount over the tenure of the bond.

Sinking fund provision: A kind of amortizing feature in which issuer can pay all of an issue by the maturity date or may only repay a part of the total by the maturity date.

Glossary - Fixed Income

1. Accrued Interest: The amount that was earned by the seller since the last coupon payment was made.

2. Full/Dirty Price: The agreed upon price plus accrued interest.

3. Clean price. The agreed upon price without accrued interest.

4. Trading cum-coupon: A bond in which the buyer must pay the seller accrued interest is said to be trading "with coupon."

5. Trading ex-coupon: A bond in which the buyer forgoes the next coupon payment, it is said to be trading "without coupon" or ex-coupon.

6. Traded Flat: When the issuer has not fulfilled its promise to make the periodic interest payments, issuer is said to be in default and bond buyer is not required to pay accrued interest.

Glossary - Fixed Income

Zero Coupon Bonds: Bonds not contracted to make periodic coupon payments. Interest is realized by the bond holder by buying the bond at substantially below its par value.

Interest of Zero coupon bond: The difference between the par value, realized at maturity and the purchase price.

Step-up Notes: Securities with coupon rate that increases over time.

Deferred coupon bonds: Bonds with coupon payment deferred for a period of time. Payments made after deferred period are higher than interest payments to compensate for lack of interest payment during deferred period.

Floating-rate securities (floater): Also called variable rate securities, do not have fixed coupon rate. Coupon payments reset periodically according to some reference rate.

Cap: The maximum coupon rate for a floater.

Floor: The minimum coupon rate for a floater.

Inverse Floater: Floating securities whose coupon rate moves in opposite direction to the reference rate. Increase in reference rates case decrease in coupon for floaters and vice versa.

Glossary - Fixed Income

Coupon Rate: The interest rate promised in a contract; this is the rate used to calculate the periodic interest payments.Also known as the nominal rate.

Coupon: The annual amount of interest payment made to the bondholder during the term of the bond.

Maturity: Number of years remaining prior to final principle payment. Years when the debt is outstanding.

Short term bonds: Maturity 1 to 5 years.

Intermediate-term bonds: Maturity 5 to 12 years

Long term bonds: Maturity over 12 years

Par value: Amount of bond that the issuer promises to repay to the bond holder at or by maturity date. Also termed as face value, maturity value, principle value and redemption value.

Glossary - Fixed Income

Investors/Bond holders/Lenders: Those who have purchased the bonds or invested in the company

Borrowers/Bond issuers: Those who have issued the bonds.

Bond Indenture: The contract that specifies all rights of the investors & obligations of the issuers.

Covenants: Provisions of the bond indenture.

Affirmative covenants: Actions that borrowers promise to perform e.g. maintenance of certain financial ratios, timely payment of principal and interest etc.

Negative covenants: Prohibitions on the borrowers e.g. restrictions on additional borrowings, negative pledge of collateral etc.