Bond terminologies
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Coupon- This is the fixed interest on the bond that is paid to the bondholder at a regular interval until the maturity of the bond.
Yield- The bond yield is an approximate measure of the annual return on the bond if it is held till maturity.
Call date- The date on which issuer decides to call off the bond and pay back the face value of the bond to its bondholders
Maturity date- This is the day on which the bond matures and the face value of the bond is paid back to its bondholders
Secured- This is a type of bond which is backed by some collaterals while issuing the bond. There can be 2 types of security, assets & future receivables.
Unsecured- These type of bonds are not backed by any collaterals and is completely dependent on the creditworthiness of the issuer.
Senior debt- This is a nature of the bond that decides the hierarchy of re-payments. In case, the issuer defaults, senior bondholders are to be first paid off.
Subordinate debt- This is a nature of re-payment hierarchy which is below senior bondholders. In case, the issuer defaults sub-ordinate bondholders are paid off after senior bondholders.
Perpetual- Perpetual bonds are bonds that do not have a maturity date. They have a call date on the bond on which the issuer may call off the bond by paying the face value to investors or decide to extend the bond further. In case of an extension, the bondholders will keep receiving the interest.
Price- The price is the value of the bond. During the issuance of the bond, the price is at par value which is considered to be 100. Once, the bond starts trading in the secondary market, the price can be either premium or discount. Premium is price > 100. Discount is price < 100. This price is valued based on the bond issuer and the market conditions.
Principal- This is the amount which includes face value (+/-) premium or discount.
Ex- ABC bank issues a bond with face value 1 unit= 10,00,000
So, Par value is 100. If X buys a bond at 100, his principal amount will be 10,00,000. Now X decides to sell the bond to Y at 100.5, so the principal amount that Y will pay is (100.5* 10,00,000)/100= 10,05,000 where 5000 is the premium.
Accrued interest- This is the interest accumulated since the last interest payment date till the date of purchase which the buyer pays to the seller.
Ex- ABC bank issued a bond on 5th july and was bought by X on that date. Now X decides to sell the bond on 10th July to Y. So, Y will pay the principal amount plus an accrued interest of 5 days to X.
Settlement amount- This is the final amount which is principal amount + accrued interest + stamp duty that the buyer pays to purchase a bond.
Credit rating- This is a rating given to the bond by agencies based on factors like the past financials of the issuer, future cash-flows and the nature of the bond. Please note that the credit rating is dynamic in nature and is evaluated by credit rating agencies in regular intervals so it is important to keep a track on the latest credit rating of the bond.
Type of guarantee- Guaranteed bonds are a debt security that offers a third part guarantee on the re-payment of the bond in case the issuer defaults.
Face value- A bond’s face value is the amount the issuer provides to the bond holder at the time of the maturity of the bond.
ISIN- International Securities Identification Number is a universal unique number given to a security. It is a 12-digit alphanumeric code that starts with the country code. All securities issued in India start with ‘IN’.
Step up- Step up bond is a bond where the coupon increases when a certain condition is met. For example, a step up condition could be if the credit rating of the bond decreases, then the coupon rate increases.
Step down- Step down bond is a bond where the coupon decreases when a certain condition is met. For example, a step down condition could be if the credit rating of the bond increases, then the coupon rate decreases.
Call option- Call option is a choice not obligation by the issuer to pay off the principal debt to the bond holders. In case, the call option is not exercised by the issuer, the bond continues to pay the interest to its bondholders.
Put option- Put option is a choice not obligation by the bondholder to demand the issuer to pay back the principal before the bond matures.
Payment frequency- It is the time interval when the interest is paid out to its bond holders.
Shut period- This is a period which is right before the interest payout date. Once the shut period starts, the bondholders are locked for that period and interest will be paid to those bondholders. Any buyer buying a bond during a shut period will not get the next interest payout and the interest is adjusted in the accrued interest accordingly.