Asset-backed securities Financial securities created by securitisation whose associated payments and value are backed by a pool of underlying assets, such as car loans, credit card receivables, bank loans, or airplane leases.

Basis point A measure equal to 0.01% or 0.0001. Bond A formal contract that represents a loan from an investor (bondholder) to an issuer. The contract describes the key terms of the debt obligation, such as the interest rate and the maturity.

Call risk The risk that the issuer will buy back the bond issue prior to maturity through the exercise of a call provision. Callable bond A bond that provides the issuer with the right to buy back (call) the bond from bondholders prior to the  maturity date at a pre-specified price.

Collateral Specific assets (generally a tangible asset) that a borrower pledges to a lender to secure a loan.

Convertible bond A bond that offers the bondholder the right to convert the bond into a pre-specified number of shares of common stock of the issuing company.

Coupon rate The interest rate for a bond. The bond’s coupon rate multiplied by its par value equals the annual interest owed to the bondholders.

Covenants Actions that the issuer must perform (positive covenants) or is prohibited from performing (negative covenants).

Credit rating Assessment of the credit quality of a bond based on the creditworthiness of the issuer.

Credit risk For a lender, the risk of loss caused by a borrower’s failure to honour the contract and make a promised payment in a timely manner.

Credit spread The difference between a risky bond’s yield and the yield on a government bond with the same maturity.

Current yield The annual coupon payment divided by the current market price.

Default A situation in which the bond issuer fails to make the promised payments.

Fixed-rate bonds A bond with a finite life that offers a coupon rate that does not change over the life of the bond. Also known as straight bonds.

Floating-rate bonds A bond with a finite life that offers a coupon rate that changes over time. Also known as variablerate bonds.

High-yield bonds See non-investment-grade bonds.

Inflation risk The risk associated with inflation.

Inflation-linked bonds Bonds that contain a provision that adjusts the bond’s par value for inflation and thus mitigates inflation risk.

Interest rate risk The risk associated with decreases in bond prices resulting from increases in interest rates.

Investment-grade bonds Bonds rated BBB– or higher by Standard & Poor’s and Fitch or Baa3 or higher by Moody’s.

Junk bonds See non-investment-grade bonds.

Liquidity risk The risk that a financial instrument cannot be purchased or sold in a timely manner without a significant concession in price.

London Interbank Offered Rate The most widely used reference rate, defined as the average interest rate that banks charge each other in the London interbank market. Also called Libor.

Maturity date Date when the borrower must repay the amount borrowed.

Non-investment-grade bonds Bonds rated BB+ or lower by Standard & Poor’s and Fitch and Ba1 or lower by Moody’s. Also called high-yield bonds or junk bonds.

Par value The stated value or face value of a security; the amount the investor would be entitled to receive in a liquidation scenario, which also serves as the principal value on which coupon payments are calculated.

Putable bond A bond that provides bondholders with the right to sell (or put back) their bonds to the issuer prior to the maturity date at a pre-specified price.

Reference rate An interest rate that serves as the benchmark to set the coupon rate of a floating-rate bond.

Reinvestment risk Risk that in a period of falling interest rates, the periodic coupon payments received during the life of a bond and/or the principal payment received from a bond that is called early must be reinvested at a lower interest rate than the bond’s original coupon rate.

Securitisation Creation of new financial products by buying and repackaging securities or other assets; the creation and issuance of new debt securities that are backed by a pool of other debt securities.

Seniority ranking A priority of claims among a company’s providers of capital, which affects the amounts investors will receive upon the company’s liquidation.

Term structure of interest rates The relationship between the yields to maturity offered by government bonds and the maturities of these government bonds.

Variable-rate bonds See floating-rate bonds.

Yield curve Term structure of interest rates presented in graphical form.

Yield to maturity The discount rate that equates the present value of a bond’s promised cash flows to its market price.

Zero-coupon bonds Bonds that do not offer periodic interest payments during the life of the bond.The only cash flow offered by a zero-coupon bond is a single payment equal to the bond’s par value to be paid on the bond’s maturity date.