debt securities terminologies

In the previous blog we learnt about debt securities meaning with examples. In this blog we discuss about the terminologies used in debt securities market, types in it and many more..

Basic Terms

Bond – A fixed-income instrument where an investor loans money to a borrower (usually corporate or government) for a defined period at a fixed or variable interest rate.
Coupon – The periodic interest payment made to the bondholder, usually expressed as a percentage of the face value.
Face Value (Par Value) – The amount the issuer agrees to repay the bondholder at maturity (typically $1,000).
Maturity – The date when the principal (face value) of a bond is due to be repaid.
Yield – The return an investor earns on a bond, expressed as a percentage of the bond’s price.

Types of Debt Securities

Government Bonds – Bonds issued by national governments (e.g., U.S. Treasury Bonds).
Municipal Bonds – Bonds issued by state or local governments; often tax-exempt.
Corporate Bonds – Bonds issued by corporations to raise capital.
Convertible Bonds – Bonds that can be converted into a specified number of shares of the issuing company’s stock.
Zero-Coupon Bonds – Bonds that don’t pay periodic interest but are issued at a discount and repay the face value at maturity.

Pricing and Valuation

Discount Bond – A bond sold below its face value.
Premium Bond – A bond sold above its face value.
Yield to Maturity (YTM) – The total return an investor can expect if the bond is held to maturity.
Current Yield – Annual coupon payment divided by the current market price of the bond.
Duration – A measure of a bond’s sensitivity to changes in interest rates.

Risk and Credit

Credit Rating – An assessment of a bond’s creditworthiness by agencies like Moody’s, S&P, and Fitch.
Default Risk – The risk that the issuer will not be able to make interest or principal payments.
Interest Rate Risk – The risk that rising interest rates will cause bond prices to fall.
Inflation Risk – The risk that inflation will erode the purchasing power of bond payments.
Call Risk – The risk that a bond issuer will repay the bond before maturity (if interest rates drop).

Special Features

Callable Bond – A bond that can be redeemed by the issuer before its maturity date.
Putable Bond – A bond that allows the holder to demand early repayment from the issuer.
Floating Rate Bond – A bond with an interest rate that adjusts periodically based on a benchmark rate.
Indexed Bond – A bond whose interest payments and/or principal are tied to an inflation index (e.g., TIPS).
Sinking Fund – A fund set aside by the issuer to repay bonds over time.