Fixed-Income Securities Glossary: Key Terms and Concepts

Glossary for Chapter 6: Fixed-Income Securities

In Chapter 6, we delve into the world of fixed-income securities, a cornerstone of the financial markets. This glossary serves as a comprehensive guide to the key terms and concepts you’ll encounter, providing clear definitions and practical examples to enhance your understanding. Whether you’re preparing for the CSC® exam or looking to deepen your knowledge of fixed-income investments, this glossary is an invaluable resource.

Accrued Interest

Definition: Interest that has accumulated on a bond since the last interest payment date but has not yet been paid to the bondholder.

Example: If a bond pays interest semi-annually and three months have passed since the last payment, the accrued interest is the interest earned during those three months.

After-acquired Clause

Definition: A provision in a bond agreement stating that any assets acquired by the issuer after the bond is issued are included as collateral for the bond.

Example: A company issues a bond secured by its current assets. An after-acquired clause ensures that any new assets the company acquires will also secure the bond.

Bankers’ Acceptance (BA)

Definition: A short-term credit investment created by a non-financial firm and guaranteed by a bank, commonly used in international trade.

Example: A Canadian exporter might use a BA to finance the shipment of goods to a foreign buyer, with the bank guaranteeing payment.

Bear Bond

Definition: A bond issued in physical form, payable to the bearer, meaning whoever holds the bond certificate is entitled to the interest and principal payments.

Example: Historically, bear bonds were common, but they have largely been replaced by registered bonds due to security concerns.

Bid

Definition: The highest price a buyer is willing to pay for a security.

Example: If an investor is willing to pay $950 for a bond with a face value of $1,000, the bid price is $950.

Bond

Definition: A fixed-income instrument representing a loan made by an investor to a borrower, typically corporate or governmental.

Example: When you purchase a Canadian government bond, you are lending money to the government in exchange for periodic interest payments and the return of the bond’s face value at maturity.

Call Protection Period

Definition: A timeframe during which a callable bond cannot be redeemed by the issuer.

Example: A bond with a 10-year maturity might have a call protection period of five years, during which the issuer cannot call the bond.

Callable Bond

Definition: A bond that can be redeemed by the issuer before its stated maturity date, usually at a premium.

Example: A company might issue a callable bond to take advantage of falling interest rates, allowing it to refinance its debt at a lower cost.

Commercial Paper

Definition: Short-term unsecured promissory notes issued by corporations to raise funds for short-term liabilities.

Example: A large Canadian corporation might issue commercial paper to finance its accounts payable.

Conversion Price

Definition: The price per share at which a convertible bond can be converted into common stock.

Example: If a convertible bond has a conversion price of $50, the bondholder can convert the bond into shares at this price.

Convertible Bond

Definition: A bond that can be converted into a predetermined number of the issuer’s shares, offering the potential for capital appreciation.

Example: A Canadian technology company might issue convertible bonds to attract investors interested in both fixed income and equity potential.

Coupon Rate

Definition: The annual interest rate paid on a bond’s face value, expressed as a percentage.

Example: A bond with a face value of $1,000 and a coupon rate of 5% pays $50 in interest annually.

Debenture

Definition: An unsecured bond backed by the issuer’s general credit rather than specified assets.

Example: Many Canadian corporations issue debentures to raise capital without pledging specific assets as collateral.

Denomination

Definition: The face value of a bond or the amount that each bond certificate represents.

Example: Bonds are often issued in denominations of $1,000, meaning each bond certificate represents $1,000 of debt.

Discount

Definition: The amount by which a bond’s market price is lower than its face value.

Example: A bond with a face value of $1,000 might sell for $950, indicating it is trading at a discount.

Extendible Bond

Definition: A bond that allows the holder to extend its maturity date, providing flexibility in uncertain interest rate environments.

Example: An investor might choose to extend a bond’s maturity if interest rates are expected to rise, locking in the current rate.

Face Value (Par Value)

Definition: The nominal value of a bond that is repaid at maturity, also known as par value.

Example: A bond with a face value of $1,000 will repay $1,000 to the bondholder at maturity.

Financial Leverage

Definition: The use of debt to acquire additional assets, increasing the potential return on equity.

Example: A Canadian company might use financial leverage to finance a new project, aiming to increase its return on equity.

Floating-rate Security

Definition: A bond with a variable interest rate adjusted periodically based on a benchmark rate.

Example: A floating-rate bond might have its interest payments tied to the Bank of Canada’s overnight rate.

Forced Conversion

Definition: When an issuer forces bondholders to convert their convertible bonds into equity, often to reduce debt.

Example: A company might force conversion if its stock price rises significantly, reducing its debt obligations.

Guaranteed Investment Certificate (GIC)

Definition: A Canadian investment that offers a guaranteed rate of return over a fixed period, typically issued by banks.

Example: A GIC might offer a 2% annual return over a five-year term, providing a safe investment option for risk-averse investors.

Interest Income

Definition: Income earned from lending money or investing in debt instruments, such as bonds or GICs.

Example: An investor holding a Canadian government bond earns interest income from the periodic interest payments.

Investment-grade Bond

Definition: A bond with a low risk of default, rated BBB-/Baa3 or higher by credit rating agencies.

Example: Canadian government bonds are typically considered investment-grade due to the government’s strong creditworthiness.

Maturity Date

Definition: The date when the principal amount of a bond is due to be repaid to the bondholder.

Example: A bond issued on January 1, 2020, with a 10-year term, has a maturity date of January 1, 2030.

Mortgage Bond

Definition: A bond secured by a mortgage on the issuer’s property, providing additional security to bondholders.

Example: A Canadian real estate company might issue mortgage bonds to finance new property developments.

Par Value

Definition: The face value of a bond or stock, typically the amount paid back to the bondholder at maturity.

Example: A bond with a par value of $1,000 will repay this amount to the bondholder at maturity.

Premium

Definition: The amount by which a bond’s market price exceeds its face value.

Example: A bond with a face value of $1,000 might sell for $1,050, indicating it is trading at a premium.

Principal

Definition: The amount of money borrowed or the face value of a bond.

Example: The principal of a $1,000 bond is $1,000, which is repaid to the bondholder at maturity.

Protective Provisions

Definition: Covenants or clauses in a bond contract that protect the interests of bondholders, such as limits on additional debt.

Example: A bond might include a protective provision preventing the issuer from taking on excessive additional debt.

Real Return Bond

Definition: A bond that provides returns adjusted for inflation, protecting the investor’s purchasing power.

Example: The Canadian government issues real return bonds that adjust for changes in the Consumer Price Index (CPI).

Redeemable Bond

Definition: Another term for a callable bond, which can be redeemed by the issuer before maturity.

Example: A company might issue redeemable bonds to retain the flexibility to refinance if interest rates fall.

Retractable Bond

Definition: A bond that allows the holder to force the issuer to repay the principal before the maturity date.

Example: An investor might choose to retract a bond if interest rates rise, allowing them to reinvest at higher rates.

Serial Bond (Instalment Debenture)

Definition: A bond issue with staggered maturity dates, allowing the issuer to repay portions of the debt over time.

Example: A municipality might issue serial bonds to finance a long-term infrastructure project, repaying the debt in instalments.

Sinking Fund

Definition: A fund established by an issuer to retire debt before maturity, reducing default risk.

Example: A company might contribute to a sinking fund annually to ensure it can repay its bonds at maturity.

Strip Bond

Definition: A zero-coupon bond created by separating the interest and principal payments, sold at a discount.

Example: A Canadian investor might purchase a strip bond to receive a lump sum payment at maturity, without periodic interest.

Subordinated Debenture

Definition: A bond that is paid after other debts if the issuer defaults, carrying higher risk and potentially higher returns.

Example: Subordinated debentures are often issued by financial institutions to raise capital, offering higher yields to compensate for increased risk.

Term to Maturity

Definition: The time remaining until a bond’s maturity date, influencing its interest rate risk and price volatility.

Example: A bond with a term to maturity of five years will be less sensitive to interest rate changes than a bond with a 20-year term.

Trust Deed

Definition: A formal agreement between bond issuers and holders specifying the terms and conditions of the bond.

Example: A trust deed might outline the bond’s interest rate, maturity date, and any protective covenants.

Treasury Bill (T-bill)

Definition: A short-term government security sold at a discount, maturing in one year or less.

Example: The Canadian government issues T-bills to manage short-term funding needs, offering a safe investment option for investors.

Yield to Maturity (YTM)

Definition: The total return anticipated on a bond if held until it matures, considering both interest payments and capital gains or losses.

Example: An investor calculates the YTM of a bond to assess its potential return compared to other investments.

Zero-coupon Bond

Definition: A bond that does not pay periodic interest and is sold at a discount, with the full face value repaid at maturity.

Example: A zero-coupon bond might be attractive to investors seeking a lump sum payment at a future date, such as for retirement planning.

References and Further Exploration

To deepen your understanding of fixed-income securities, consider exploring the following resources:

• Bank of Canada: Offers educational resources on fixed-income securities, including research papers and market analysis.
• Investment Industry Regulatory Organization of Canada (IIROC): Provides regulatory information and investor education on bonds and other fixed-income products.
• Canadian Securities Administrators (CSA): Offers comprehensive guides on investing in bonds and fixed-income products, including regulatory insights.
• Additional Reading: “Fixed Income Markets and Their Derivatives” by Suresh M. Sundaresan provides an in-depth look at the mechanics and strategies of fixed-income markets.

Ready to Test Your Knowledge?

Practice 10 Essential CSC Exam Questions to Master Your Certification