The Automated Bond System (ABS) was an early electronic bond-trading platform used by the New York Stock Exchange (NYSE) from 1977-2007.

At its launch, the NYSE noted that “trading in corporate bonds has traditionally been a tedious, time consuming and mostly manual operation that involved nine different steps and hour-long searches through cabinet files for possible matches on bonds, prices, quantities.” In April 2007, the NYSE launched a new online platform for trading U.S. corporate debt securities, called NYSE Bond. The Automated Bond System (ABS) was an early electronic bond-trading platform the New York Stock Exchange (NYSE) used from 1977 to 2007. Volume on the system peaked in 1992, but the system was ultimately phased and replaced by the NYSE Bond platform out as newer technologies entered the bond markets.

Automated Bond System (ABS)

Accretion of discount is the increase in the value of a discounted instrument as time passes and the maturity date looms closer.

Accretion of discount is the increase in the value of a discounted instrument as time passes and the maturity date looms closer. A bond purchased at a discount will slowly increase in value until it reaches par value at maturity; this process is the accretion of discount. Between issuance and maturity, the value of the bond will increase until it reaches its full par value of $1,000, which is the amount that will be paid to the bondholder at maturity. As the bond gets closer to maturity, the value of the bond declines until it is at par on the maturity date. As the bond approaches its redemption date, it will increase in value until it converges with the par value at maturity.

Accretion of Discount

An agency security is a low-risk debt obligation that is issued by a U.S. government-sponsored enterprise (GSE) or other federally related entity.

An agency security is a low-risk debt obligation that is issued by a U.S. government-sponsored enterprise (GSE) or other federally related entity. A Government-Sponsored Enterprise (GSE) bond is an agency bond issued by such agencies as Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage (Freddie Mac), Federal Farm Credit Banks Funding Corporation, and the Federal Home Loan Bank. Tax Status of GSEs and Government Agencies
Common Name
Federal Agricultural Mortgage Corporation
Fully taxable
Federal Farm Credit Banks Funding Corporation
Farm Credit
State and local exempt
Federal Home Loan Banks
FHL Banks Federal government agency bonds are issued by the Federal Housing Administration (FHA), Small Business Administration (SBA), Tennessee Valley Authority (TVA), and Government National Mortgage Association (GNMA). Tennessee Valley Authority, Federal Home Loan Banks, and Federal Farm Credit Banks agency bonds are exempt from local and state taxes.

Agency Security

In finance, the term “anticipated interest” refers to the total interest payments expected to be earned over the life of an investment.

In finance, the term “anticipated interest” refers to the total interest payments expected to be earned over the life of an investment. Given that her intention is to invest $100,000 in either account, Michaela calculates that over a one-year period, the traditional savings account would offer $1,004.92 in anticipated interest whereas the online account would offer $1,207.21 in anticipated interest. For example, a savings account would offer higher anticipated interest if the account holder deposits more funds into the account, while withdrawing funds would cause anticipated interest to decline. Investors can increase their anticipated interest income by increasing the amount of principal they invest, negotiating a higher interest rate, or calculating their interest payments on a more rapid schedule—such as by using daily compounding instead of monthly compounding. Reading over their terms and conditions, Michaela notes that the traditional account offers a 1.00% interest rate that is compounded on a weekly basis (52 compounding periods), whereas the online option offers a 1.20% interest rate that is compounded once per day (365 compounding periods).

Anticipated Interest

Australian stock price riskless indexed note (ASPIRIN) is a zero coupon bond with a yield derived from an index’s excess return over a hurdle rate.

An Australian stock price riskless indexed note (ASPIRIN) is a zero-coupon bond with a return that is linked to the Australian All-Ordinaries Stock Index. An Australian stock price riskless indexed note (ASPIRIN) is a zero-coupon bond with a return that is linked to the Australian All-Ordinaries Stock Index. Australian stock price riskless indexed note (ASPIRIN) is a zero-coupon bond with a return linked to the Australian All-Ordinaries Stock Index. So an ASPIRIN is a zero-coupon bond with an equity return kicker, meaning an investor receives the excess return of the Australian All-Ordinaries Stock Index if its gain is over and above the predefined hurdle rate. If the All-Ordinaries Index gained 15% during the note’s four-year lifespan, the ASPIRIN holder would receive a yield of 5%.
But what happens if the Index fails to earn more than 10% during that time frame?

Australian Stock Price Riskless Indexed Note (ASPIRIN)

An auction rate security (ARS) is a variable-rate security sold to investors through a Dutch auction at the lowest interest rate possible.

Testimony Concerning the SEC's Recent Actions With Respect to Auction Rate Securities

An auction rate security (ARS) is a type of variable-rate debt security that is sold through a Dutch auction. An auction rate security (ARS) is a type of variable-rate debt security that is sold through a Dutch auction. An auction rate security (ARS) is a type of variable-rate investment that is generally either a bond with a long-term maturity or preferred shares of stock. When the downside of ARS came to light, the auctions attracted too few bidders to establish a clearing rate, resulting in the inability of ARS holders to sell their long-term investments which had turned illiquid. Municipal and corporate issuers seeking to raise debt at a low cost and looking for the flexibility of variable rates can go the route of auction rate securities (ARS).

Auction Rate Security (ARS)

Average life is the length of time the principal of a debt issue is expected to be outstanding. The average life is an average period before a debt is repaid through amortization or sinking fund payments.

The average life is the length of time the principal of a debt issue is expected to be outstanding. Also called the weighted average maturity and weighted average life, the average life is calculated to determine how long it will take to pay the outstanding principal of a debt issue, such as a Treasury Bill (T-Bill) or bond. To calculate the average life, multiply the date of each payment (expressed as a fraction of years or months) by the percentage of total principal that has been paid by that date, add the results, and divide by the total issue size.
For example, assume an annual-paying four-year bond has a face value of $200 and principal payments of $80 during the first year, $60 for the second year, $40 during the third year, and $20 for the fourth (and final) year. The average life is the average length of time it will take to repay the outstanding principal on a debt issue, such as a Treasury bill, bond, loan, or mortgage-backed security. Prepayment risk occurs when the loan borrower or bond issuer repays the principal earlier than scheduled, thereby shortening the investment's average life and reducing the amount of interest the investor will receive.

Average Life

Balloon maturity is a scenario where a large number of the bonds issued by one issuer mature at the same time requiring payment. 

Balloon maturity refers to a scenario when the final payment to repay a debt is significantly larger than the previous payments. For example, if the structure of a mortgage has a balloon payment at the end, it will have several smaller payments followed by one large balloon payment. In this way, the issuer can prevent a balloon maturity because the bonds will not require the issuer to turn over one enormous lump sum payment when the bonds mature. A bond issuer might favor a balloon payment upon maturity if it anticipates income being more significant toward the end of the bond duration. However, balloon maturity has also come to refer to large final payments to repay mortgages, commercial loans, and other types of debts.

Balloon Maturity

The bank discount rate is the interest rate investors earn on short-term money-market instruments like commercial paper and Treasury bills.

The bank discount rate is the interest rate for short-term money market instruments like commercial paper and Treasury bills. , the formula for calculating the bank discount rate is:
Bank Discount Rate = (Dollar Discount/Face Value) x (360/Time to Maturity)
Since the formula uses 360 days instead of 365 days or 366 days in a year, the bank discount rate calculated will be lower than the actual yield you receive on your short-term money market investment. The interest rate for U.S. Treasury bills (T-bills) is calculated differently than the interest rate for Treasury notes (T-notes) and Treasury bonds (T-bonds). The bank discount rate refers to the interest rate an investor will receive for investing in short-term money market instruments such as Treasury bills and commercial paper. The bank discount rate is calculated relative to par value, which is the original value or face value of the investment when it was first issued.

Bank Discount Rate

The Bankrate Monitor Index is an index of money market interest rates paid on depository accounts at banks and credit unions in the United States.

Garn-St Germain Depository Institutions Act of 1982

Red Ventures Announces Closing of Acquisition of Bankrate, Inc

The Bankrate Monitor Index is an index of money market interest rates paid on depository accounts at banks and credit unions in the United States. The Bankrate Monitor Index is an index of money market interest rates paid on depository accounts at banks and credit unions in the United States. The Bank Rate Monitor Index was created by Robert K. Heady in response to the Federal Government's passage of the Garn-St Germain Depository Institutions Act of 1982, which deregulated savings and loan associations and permitted banks to issue adjustable rate mortgages and money market accounts.﻿﻿ The modern successors to the Bankrate Monitor Index are the various surveys of interest rates and other features that Bankrate publishes for consumers through its website. For example, Bankrate regularly compiles information about different credit cards and ranks them according to features such as their annual fees, credit requirements, interest rates, and membership benefits.

Bankrate Monitor Index

The BanxQuote Money Markets Index was an index of money market funds, compiled by the financial information firm BanxQuote.

The BanxQuote Money Markets Index was an index of money market funds, compiled by the financial information firm BanxQuote. In addition to providing data on money market interest rates, the BanxQuote Money Markets Index also included tools that consumers could use to analyze and compare the data presented. The BanxQuote Money Markets Index was an information aggregation service that helped investors by quoting and comparing the rates offered on both local and national money market funds. The BanxQuote Money Markets Index was a popular index of money market fund interest rates.

BanxQuote Money Markets Index

The barbell is an investment strategy often used in fixed-income portfolios, with the portfolio split between long-term bonds and short-term bonds.

The barbell is an investment strategy applicable primarily to a fixed income portfolio. Pros
Reduces interest rate risk since short-term bonds can be reinvested in a rising-rate environment
Includes long-term bonds, which usually deliver higher yields than shorter-term bonds
Offers diversification between short-term and long-term maturities
Can be customized to hold a mix of equities and bonds
Interest rate risk can occur if the long-term bonds pay lower yields than the market
Long-term bonds held to maturity tie up funds and limit cash flow
Inflation risk exists if prices are rising at a faster pace than the portfolio's yield
Mixing equities and bonds can increase market risk and volatility
The barbell investment strategy still has some interest rate risk even though the investor is holding long-term bonds with higher yields than the shorter maturities. If interest rates rise, the bond investor will have less interest rate risk since the short-term bonds will be rolled over or reinvested into new short-term bonds at the higher rates. The barbell strategy allows investors to take advantage of current interest rates by investing in short-term bonds, while also benefitting from the higher yields of holding long-term bonds. The barbell strategy will have a portfolio consisting of short-term bonds and long-term bonds, with no intermediate bonds.

Barbell

Basis price is a way of referring to the price of a fixed-income security that references its yield to maturity.

Basis price is a way of referring to the price of a fixed-income security that references its yield to maturity. Assuming that this interest is continually reinvested and that the bondholder does not sell the bond prematurely, the bond will eventually yield to maturity and earn the bondholder the full basis price. The term “basis price” is also used in the commodity futures market, to refer to the difference between the spot price of that commodity and its futures price at a given point in time. Since bond prices move in the opposite direction of interest rates, the price of bonds fluctuates based on changes to current interest rates and investors’ expectations of future interest rate changes. If that same bond had a basis price of 5% despite having a coupon rate of less than 5%, then that would imply that the bond in question was being offered at a discount to its par value.

Basis Price

A basis rate swap is a type of agreement in which two parties swap variable interest rates in order to protect themselves against interest rate risk.

A basis rate swap (or basis swap) is a type of swap agreement in which two parties agree to swap variable interest rates based on different money market reference rates. While these types of contracts are customized between two counterparties over-the-counter (OTC), and not exchange traded, four of the more popular basis rate swaps include:
LIBOR/LIBOR
Fed funds rate/LIBOR
Prime rate/LIBOR
Prime rate/fed funds rate
Payments on these types of swaps will also be customized, but it is prevalent for the payments to occur on a quarterly schedule.
In a LIBOR/LIBOR swap, one counterparty may receive three-month LIBOR and pay six-month LIBOR, while the other counterparty does the opposite. By entering into a basis rate swap—where the company exchanges the T-Bill rate for the LIBOR rate—the company eliminates this interest rate risk. A basis rate swap (or basis swap) is a type of swap agreement in which two parties agree to swap variable interest rates based on different money market reference rates. One of the most common forms of a basis rate swap is a plain vanilla swap, where a floating interest rate is exchanged for a fixed interest rate or vice versa.

Basis Rate Swap

A bearer instrument, or bearer bond, is a type of fixed-income security in which no ownership information is recorded and the security is issued in physical form to the purchaser.

A bearer instrument, or bearer bond, is a type of fixed-income security in which no ownership information is recorded and the security is issued in physical form to the purchaser. A bearer instrument, or bearer bond, is a type of fixed-income security in which no ownership information is recorded and the security is issued in physical form to the purchaser. Issuers of a bearer form security keep no record of who owns the security, which means the security is traded without a record of ownership. A bearer instrument is a type of fixed-income security in which no ownership information is recorded and the security is issued in physical form to the purchaser. Thus, whoever produces the bearer certificate is assumed to be the owner of the security and can collect dividends and interest payments tied to the security.

Bearer Instrument

A bank investment contract (BIC) provides a guaranteed rate of return over a specific period, at a relatively lower yield, but with lower risk.

A bank investment contract (BIC) is a security or portfolio of securities that offer a guaranteed rate of return. One advantage to BICs is that unlike certificates of deposit (CDs), bank investment contracts often allow subsequent incremental investments, with those deposits earning the same guaranteed rate. Many BICs include a deposit window of a few months where the investor can make investments in the BIC and receive the guaranteed interest rate for the contract duration. Although certificates of deposit (CDs) offer similar guarantees and a low-risk profile, they differ from BICs because BICs often allow for ongoing deposits. As with most types of bank deposits, the guaranteed rate of return for BICs is higher for more substantial deposits and over longer time frames.

Bank Investment Contract (BIC)

A Bond Anticipation Note (BAN) is a short-term interest-bearing security issued in advance of a larger, future bond issue.

A Bond Anticipation Note (BAN) is a short-term interest-bearing security issued in advance of a larger, future bond issue. The issuing bodies use the bond anticipation notes as short-term financing, with the expectation that the proceeds of the larger, future bond issue will cover the anticipation notes. Bond anticipation notes (BAN) are short-term debt securities issued by a municipal or state government to fund a new project. Once the project is started, the larger bond issue may generate enough funds to cover the bond anticipation notes in a short period of time. Bond anticipation notes are smaller short-term bonds that are issued by corporations and governments, such as local municipalities, wishing to generate funds for upcoming projects.

Bond Anticipation Note (BAN)

In a bond swap. one debt instrument is sold in order to fund the purchase another debt instrument.

Publication 550: Investment Income and Expenses

Advanced Topics in Wash Sales: Substantially Identical Bonds

A bond swap consists of selling one debt instrument and using the proceeds to buy another debt instrument. When an investor engages in a bond swap, they are simply replacing a bond in their portfolio with another bond using the sale proceeds from the longer-held bond. If interest rates are expected to rise, an investor may swap their existing bond with one with a shorter-term maturity since shorter-term bonds are less sensitive to changes in interest rates and should fluctuate less in value. Swapping to a higher-rated bond, for example, from a Baa to an Aa bond, may be a relatively easy way to gain greater confidence that the bond investors will have a higher probability of being repaid, in exchange for a lower yield. In addition, selling a shorter-term bond and purchasing a longer-term bond provides increased yield or income as the investor moves out along the yield curve.

Bond Swap

A bump-up certificate of deposit entitles the bearer to take advantage of rising interest rates with a one time option to "bump up" the rate paid.

A bump-up certificate of deposit is a savings certificate that entitles the bearer to take advantage of rising interest rates with a one time option to "bump up" the interest rate paid. The bump-up certificate of deposit (bump-up CD) yields a lower rate than that of a similar certificate of deposit (CD) with no bump-up option. When purchasing a bump-up CD, investors should ensure to find out how many times they are allowed to bump-up the interest rate, and whether they have to extend the term of the CD with each bump-up. Hence, investors of CDs with bump up options are at a disadvantage if interest rates decrease or remain unchanged for the life of the time deposit given that they would not get as much yield as the higher paying traditional CDs. A certificate of deposit, or CD, is a time deposit issued by banks to investors who purchase the CDs to earn interest on their investment for a fixed period of time.

Bump-Up Certificate of Deposit (Bump-Up CD)

A callable certificate of deposit (CD) is an FDIC-insured CD that contains a call feature similar to other types of callable fixed-income securities.

High-Yield CDs: Protect Your Money by Checking the Fine Print

A callable certificate of deposit (CD) is an FDIC-insured CD that contains a call feature similar to other types of callable fixed-income securities. If a bank issues a traditional CD that pays 4.5% to the investor, and interest rates fall to a point where the bank could issue the same CD to someone else for only 3.5%, the bank would be paying a 1% higher rate for the duration of the CD. A bank might choose to issue a callable CD so that it is not stuck paying higher interest for the term of the CD when interest rates drop. Due to the possibility of the CD being called before maturity, which would result in a loss of interest earnings and which poses reinvestment risk, interest rates on callable CDs are usually higher than those for regular CDs. Should the bank decide to call the CD at that point, the loss of the higher interest rate will be somewhat ameliorated by the lump-sum call premium the bank pays to the CD holder.

Callable Certificate of Deposit (CD)

A callable security is a security with an embedded call provision that allows the issuer to repurchase or redeem the security by a specified date.

Trust Examination Manual: B.1. Corporate Trustee

A callable security is a bond or other type of security issued with an embedded call provision that allows the issuer to repurchase or redeem the security by a specified date. A callable security is a bond or other type of security issued with an embedded call provision that allows the issuer to repurchase or redeem the security by a specified date. If the call protection on the bond is good for ten years, and interest rates go down to 3% in the next five years, the issuer cannot call the bond because its investors are protected for ten years. Since the holder of a callable security is exposed to the risk of the security being repurchased, the callable security is generally less expensive than comparable securities that do not have a call provision. Callable securities refer broadly to those securities issued that contain an embedded call option, allowing the issuer to redeem or repurchase those securities prior to maturity, subject to certain conditions.

Callable Security

The Canadian Depository for Securities Limited, known by its acronym CDS, is Canada's national securities depository, clearing and settlement hub.

Canadian Capital Markets Association declares transition to shorter securities settlement cycle a success, credits Canadian capital markets participants

The Canadian Depository for Securities, Ltd. (CDS) is Canada's national securities depository, clearing, and settlement hub. The CDS is now part of the TMX Group, a large Toronto-based financial services company that operates the Toronto Stock Exchange (TSX), TSX Venture Exchange, Montreal Exchange, and TSX Alpha Exchange.
The Canadian Depository for Securities Limited (CDS) is a centralized depository service and electronic clearing and settlement system used in Canada. The CDS provided the trading infrastructure and technology that enabled the Canadian Capital Markets Association (CCMA) to implement its T+2 initiative in 2017 that shortened trade settlements of investment funds, equities, and bonds from three to two business days. The CDS provided the trading infrastructure and technology that enabled the Canadian Capital Markets Association (CCMA) to implement its T+2 initiative in 2017 that shortened trade settlements of investment funds, equities, and bonds from three to two business days. The Canadian Depository for Securities Limited (CDS) responsibilities include the safe custody and movement of securities, post-trade transactions processing, accurate record-keeping, and the collection and distribution of securities entitlements such as dividends and interest payments.

Canadian Depository for Securities Limited (CDS)

A capital note is short-term unsecured debt issued by a company to pay short-term liabilities. Capital notes have low priority and carry more risk than other types of secured corporate debt.

Federal Reserve Board Approves Final Rule to Help Ensure Banks Maintain Strong Capital Positions

A capital note is short-term unsecured debt generally issued by a company to pay short-term liabilities. In addition to the high coupon rate on capital notes, capital notes are typically not callable_—_another feature that may attract investors to purchase the debt instrument. Since interest on capital notes is non-cumulative, if the bank misses an interest payment, it does not have to pay that interest at a later date. To satisfy regulatory demands regarding capital requirements under the Basel Accords, banks will issue capital notes classified as either Tier 1 or Tier 2 capital. Since payments on capital notes are guaranteed by the full faith and credit of the issuer, investors demand a higher interest rate for the default risk exposure that comes with holding these fixed income securities.

Capital Note

Compound accreted value is calculated to measure the value of a zero-coupon bond before it has reached maturity. 

Compound accreted value (CAV) is a measure of the value of a zero-coupon bond at a point in time prior to its maturity date. If the investor wants to sell their bond before the end of the term, then the bond would be valued at its CAV, which is equal to the purchase price of the bond plus any accrued interest that has been earned up to that point in time. In addition to signifying the current value of the bond, CAV can also be useful for determining whether the bond issuer is likely to call the bond. If the bond is called, this would force the bondholder to sell the bond back to the issuer, receiving a cash payment equal to the bond’s CAV. The provision will usually stipulate that the issuer can call the bond on a specific date at a price that is a premium to the bond's CAV.

Compound Accreted Value (CAV)

Cash management bill (CMB) is a short-term security sold by the U.S. Department of the Treasury. The maturity on a CMB can range from a few days to three months.

Cash management bill (CMB) is a short-term security sold by the U.S. Department of the Treasury. The cash management bill is the most flexible instrument of the U.S. Treasury because it can be issued when needed – in contrast to a regular schedule that is followed to issue other bills, notes, and bonds – allowing the Treasury to have lower cash balances and issue fewer long-term notes. When the cash balances of the U.S. Treasury are down and it needs to raise money for a few days, it sells securities, known as cash management bills, to institutional investors. They supplement regularly auctioned Treasury Bills (or T-bills) and allow The Treasury to simultaneously remain below the statutory debt limit and meet its projected cash needs for any given month. Cash management bills (CMB) are very short-term debt instruments with maturities that range from 7 to 50 days, although maturities of up to 3 months is not uncommon.

Cash Management Bill (CMB)

Competitive tender is an auction process through which large institutional investors (also called primary distributors) purchase newly issued government debt.

Competitive tender is an auction process through which large institutional investors (also called primary distributors) purchase newly issued government debt. The U.S. Treasury primarily uses non-competitive tender, while Canada's central bank, the Bank of Canada, primarily uses competitive tender (but also accepts non-competitive bids). The yield on the bond will be determined by the competitive side of the auction which is handled as a Dutch auction—a type of auction in which the price on an item is lowered until it gets a bid.
A competitive tender is a bid submitted by bigger investors, such as institutional investors. Competitive tender is one of two bidding processes for buying new government securities in the primary market; the other bidding process is non-competitive tender. Participants in any Treasury auction consist of small investors and institutional investors who submit bids categorized as either competitive or non-competitive tenders.

Competitive Tender

Conduit financing is funding provided to organizations for large scale projects through the issuance of municipal bonds.

Investor Bulletin: Municipal Bonds – An Overview

Conduit financing is a means for private companies, nonprofit organizations (NPO), and public entities to raise capital via tax-exempt municipal bonds to fund large-scale projects that typically benefit the general public. Common types of conduit financing include industrial development revenue bonds (IDRBs), private activity bonds (PABs), and housing revenue bonds—both for single-family and multifamily projects. Most conduit-issued securities are for projects that benefit either the public at large, such as airports, docks, sewage facilities, or specific population segments, including students, low-income homebuyers, and veterans. Municipal bonds are a form of revenue bonds known as conduit bonds and represent a public-private partnership. Conduit financing is a means for private companies, nonprofit organizations (NPO), and public entities to raise capital via tax-exempt municipal bonds to fund large-scale projects that typically benefit the general public. For instance, if a local non-profit hospital wants to build a new maternity center and uses conduit financing to fund the project, it is the hospital, not the conduit issuer, that is responsible for debt repayment.

Conduit Financing

Contraction risk is the risk that borrowers will increase the rate at which they pay back the maturity value of a fixed income security. 

Contraction risk is a type of risk faced by holders of fixed-income securities. Contraction risk, which typically takes place when interest rates decline, is the counterpart to extension risk, which usually takes place when interest rates increase. For fixed-rate loans, contraction risk typically comes into play in declining interest rate environments, because borrowers may be tempted to refinance their loans using the new, lower rates. Whereas contraction risk happens when borrowers pre-pay a loan, shortening its duration, extension risk occurs when they do the opposite—they defer loan payments, increasing the length of the loan. This is because declining interest rates might incentivize borrowers to prepay some or all of their outstanding debts in order to refinance at lower interest rates.

Contraction Risk

A convertible subordinate is a convertible bond, but which is junior to more senior convertible notes.

A convertible subordinate note is a short-term debt security issued by a company that can be exchanged for its common stock at the discretion of the bondholder. It is a short-term convertible bond, but which ranks below other, more senior loans (it is junior to other debt).
In the event the issuer becomes bankrupt and is forced to liquidate its assets, a convertible subordinate note will only be repaid after other debt securities have been paid. A convertible subordinate note is a short-term debt security issued by a company that can be exchanged for its common stock at the discretion of the bondholder. A convertible subordinate note, then, is a debt security that is both convertible to common stock at some point in the future and junior to other debts. Convertible subordinate notes are short-term convertible bonds issued by a company that may be converted into company shares.

Convertible Subordinate Note

Coupon stripping bifurcates a bond's interest payments from its principal repayment obligation to create a pair of securities.

Publication 1212: Guide to Original Issue Discount (OID) Instruments

Coupon stripping is the separation of a straight bond's periodic interest payments from its principal repayment obligation to create a series of individual securities. In coupon stripping, the underlying bond becomes a zero-coupon bond known as a strip bond and each interest payment becomes its own separate zero-coupon bond. For example, if an investment bank held a $50 million Treasury note that paid 5% interest annually for five years, coupon stripping would turn that bond into six new zero-coupon bonds—one $50 million bond that matures in five years and five $2.5 million (5% x $50 million) bonds that would each mature in one of the coming five years. Coupon stripping can also divide up a larger bond with a particular interest rate into a series of smaller bonds with different interest rates to satisfy investors' demands for particular types of bonds. Coupon stripping bifurcates the coupon interest and principal repayment features of a bond, creating two individual securities that both function as zero-coupon bonds.

Coupon Stripping

The coupon equivalent rate (CER) is an alternative calculation of coupon rate used to compare zero-coupon and coupon fixed-income securities.

The coupon equivalent rate (CER) is an alternative calculation of coupon rate used to compare zero-coupon and coupon fixed-income securities. The formula for coupon equivalent rate is:
CR \= Face Value − Market Price Market Price × 360 Days Until Maturity where: CR \= Coupon equivalent rate \\begin{aligned}&\\text{CR}=\\frac{\\text{Face Value}-\\text{Market Price}}{\\text{Market Price}}\\times\\frac{360}{\\text{Days Until Maturity}}\\\\ &\\textbf{where:}\\\\ &\\text{CR}=\\text{Coupon equivalent rate} \\end{aligned} ​CR\=Market PriceFace Value−Market Price​×Days Until Maturity360​where:CR\=Coupon equivalent rate​
The coupon equivalent rate (CER) is calculated as:
1.  Find the discount the bond is trading at, which is face value less market value.
2.  Then divide the discount by the market price.
3.  Divide 360 by the number of days until maturity. In effect, it states what the coupon rate on a discount instrument (such as a zero-coupon, Treasury bill, or commercial paper) would be if the instrument carried a coupon and had been sold at face value.
Because the quoted rate of bonds is calculated on the basis of the face value, this rate for bonds issued at a discount is inaccurate for comparing them to other coupon bonds. The coupon equivalent rate (CER) is an alternative calculation of coupon rate used to compare zero-coupon and coupon fixed-income securities. The coupon equivalent rate (CER) is the annualized yield of a zero-coupon bond when calculated as if it paid a coupon

Coupon Equivalent Rate (CER)

Cum coupon is a bond priced with the expectation that a seller will include the current coupon for the bond when the transaction is settled.

The term "cum coupon" is used in the secondary market for bonds, which is the market in which investors buy and sell bonds from one another as opposed to buying those bonds directly from the issuer. Because bonds trading cum coupon allow the new owner to collect an additional interest payment in the near future, cum coupon bonds generally command a higher price than those sold on an ex-coupon basis. Because of the time value of money, investors are willing to pay slightly more for a bond that is closer to its next coupon payment, provided that bond trades on a cum coupon basis. Ex-coupon, in which the new buyer is not entitled to the upcoming coupon payment, is the opposite of cum coupon. Cum coupon refers to the practice of selling a bond whereby the new buyer is entitled to the upcoming coupon payment.

Cum Coupon

A current coupon is a bond that pays a coupon consistent with its original face value.

A current coupon refers to a security that is trading closest to its par value without going over par. A bond with a coupon close to the yields currently offered on new bonds of a similar maturity and credit risk is known as a current coupon bond.
The current coupon is commonly used to understand yield spreads of mortgage-backed securities (MBS) which are guaranteed by U.S. government-sponsored enterprises Fannie Mae and Freddie Mac and the government agency Ginnie Mae.﻿﻿ In the mortgage-backed security (MBS) market, the benchmark to price and value mortgages is the current coupon, which is the to-be-announced (TBA) mortgage security that is trading closest to, but not exceeding par value. Because their coupon rate is close to that set by the market, current coupon bonds are inherently more stable and often more liquid than other bonds with lower coupon rates. A principle of mortgage analysis is that the higher a mortgage-backed security's coupon is relative to the current coupon, the more likely that mortgage-backed security is to prepay.

Current Coupon

A daily factor is a decimal representation of the portion of an annual investment yield of a bond, bought at market price, which represents one-day earnings.

The daily factor is a decimal figure representing the annual yield of an investment. For these types of investors, the granularity of the daily factor calculation can be helpful for keeping track of how much interest they are likely to earn in a day, week, or other short period of time. The purpose of the daily factor is to show the yield, or interest income, associated with a single calendar day. By convention, the daily factor is calculated either by using a presumed 360-day year, or by using a 365-day year. Using a 365-day year, Dorothy calculates that the daily rate of this bond purchase would be approximately 0.01% per day (0.037 divided by 365 days).

Daily Factor

The dated date is the date on which interest begins to accrue on a fixed-income security.

Often used to identify a particular series of bonds of an issuer, the dated date is the date on which interest begins to accrue on a fixed-income security. Investors who purchase a fixed-income security between interest payment dates must also pay the seller or issuer any interest that has accrued from the dated date to the purchase date, or settlement date, in addition to the face value. If the fixed-income security's date of issuance is the same as the dated date, the dated date is also the issue date. An investor who purchases the bond pays the amount equal to the interest accrued from the dated date to the settlement date and is reimbursed for the additional interest when the issuer makes the first interest payment on the security. It is also possible that a coupon paying bond is issued after the first accrual date, in which case, the issue date, and the dated date will be different.

Dated Date

Dealers banks are commercial banks, registered with the Municipal Securities Rulemaking Board, authorized to buy and sell government debt securities.

A dealer bank is a commercial bank that is authorized to buy and sell government debt securities. The term “dealer bank” can also be used in a more general sense to refer to banks that sell securities from their own portfolio, regardless of whether those securities were purchased from a government agency. If a municipal government wants to raise funds by issuing a municipal bond, they might sell that bond to a network of dealer banks who would then in turn resell those securities to the investing public. A dealer bank is a commercial bank that is authorized to buy and sell government debt securities. Certain dealer banks, known as “primary dealers”, are uniquely authorized to purchase U.S. government debt instruments directly from the Federal Reserve.

Dealer Bank

A debt tender offer is when a company retires its bonds by making an offer to its debtholders to repurchase them.

Part 240—General Rules and Regulations, Securities and Exchange Act of 1934: Regulation 14E

Wal-Mart Stores, Inc. Announces Cash Tender Offer for Certain of its Outstanding Debt Securities

A debt tender offer is when a company retires all or a portion of its outstanding bonds or other debt securities. A company that does not have access to the cash necessary to issue a cash tender offer, meanwhile, can make an offer to holders of its outstanding debt securities, agreeing to exchange newly issued debt for the outstanding debt securities. Although tender offers provide many benefits, there are some disadvantages. A tender offer can be an expensive and time-consuming process as depository banks verify tendered bonds and issue payments on behalf of the creditors.
A debt tender offer is an opportunity for a corporate issuer to retire its existing bonds at less than the original face value and, consequently, reduce its related interest costs. On Oct. 6, 2016, Walmart Inc. (WMT) initiated a cash debt tender offer to purchase up to $8,500,000,000 of certain outstanding debt securities in an attempt to reduce its overall interest expense. A debt tender offer is a public solicitation to a company's bondholders requesting that they sell back their bonds or debt securities at a specific price and during a certain timeframe.

Debt Tender Offer

A debt security is a debt instrument that has its basic terms, such as its notional amount, interest rate, and maturity date, set out in its contract.

Mortgage-Backed Securities and Collateralized Mortgage Obligation

A debt security is a debt instrument that can be bought or sold between two parties and has basic terms defined, such as the notional amount (the amount borrowed), interest rate, and maturity and renewal date. Debt securities can also come in the form of collateralized securities, such as collateralized debt obligations (CDOs), collateralized mortgage obligations (CMOs), mortgage-backed securities issued by the Government National Mortgage Association (GNMA), and zero-coupon securities. Unlike equity investments, in which the return earned by the investor is dependent on the market performance of the equity issuer, debt instruments guarantee that the investor will receive repayment of their initial principal, plus a predetermined stream of interest payments. Equity securities represent a claim on the earnings and assets of a corporation, while debt securities are investments in debt instruments. Bonds, such as government bonds, corporate bonds, municipal bonds, collateralized bonds, and zero-coupon bonds, are a common type of debt security.

Debt Security

A discount note is a short-term debt obligation corporations and governments sell to investors at a discount in order to raise money for projects.

A discount note is a short-term debt obligation issued at a discount to par. While the risk of default is minimal with government-issued discount notes, notes issued by corporations have a higher risk of default. Discount notes are issued at a discount to par, which means investors purchase them at a cost lower than the note's face value. On the maturity date, the notes mature at a par value above the purchase price, and the price appreciation is used to calculate the investment's yield. The notes are issued and maintained in book-entry form through the Federal Reserve Bank of New York, and investors may acquire the notes in denominations as small as $1,000.

Discount Note

A dumbbell or barbell investment strategy involves buying short- and long-term securities with varying maturities to provide steady, reliable income.

A dumbbell investment strategy, also known as a “barbell” investment strategy, involves buying a combination of bonds with short and long maturities in order to provide a steady and reliable income stream. Another advantage of this approach is that the investor’s short-term bonds can be used to cover any unanticipated large purchases or emergencies, whereas a portfolio of only long-term bonds would remain illiquid for many years. To implement a dumbbell strategy, an investor would selectively purchase bonds with short-term and long-term maturities, avoiding securities with intermediate terms. It is intended to offer the flexibility of short-term bonds in addition to the generally higher yields associated with longer-term bonds. Typically, long-term bonds offer higher yields, as compensation for the increased inflation and interest rate risks associated with the long term structure.

Dumbbell

Eurocommercial paper (ECP) are short-term commercial loans issued in the international money market.

ICMA Handbook: Chapter 12 - Euro Commercial Paper

Eurocommercial paper (ECP) is a form of unsecured, short-term loan that is issued by a bank or corporation in the international money market. Eurocommercial paper (ECP) refers to commercial paper issued by a company denominated in a currency that differs from the domestic currency of the market where the paper is issued. For example, if a U.S. corporation issues a short-term bond denominated in British pounds to finance its inventory through the international money market, it has issued eurocommercial paper. Commercial paper is a commonly used type of unsecured, short-term debt instrument issued by corporations, typically used for the financing of payroll, accounts payable and inventories, and meeting other short-term liabilities. Eurocommercial paper (ECP) is a form of unsecured, short-term loan that is issued by a bank or corporation in the international money market.

Eurocommercial Paper

Ex-coupon refers to a security that is trading without regular interest payments. Discover more about them here.

Ex-coupon is a bond or preferred stock that does not include the interest payment or dividend when purchased or sold. If the debt security is purchased on or after the ex-coupon date, the seller retains the right to receive the next due interest payment, and no coupon is included with the bond. A bond that is ex coupon is sold or bought with the knowledge that the investor will not receive the next coupon payment from the bond. If an investor purchases a bond sometime between the last coupon payment and the next coupon payment, s/he will receive the interest as s/he will be the bondholder of record. The price for a bond trading cum-coupon is referred to as the full or dirty price, which is the agreed purchase price plus accrued interest.

Ex-Coupon

A fixed income forward is a contract between two parties to either buy or sell a fixed income security in the future at a preset price. 

A fixed income forward is a derivatives contract to buy or sell fixed-income securities at some date in the future, but at a price accepted today. The value of the contract is the bond price, less the present value of coupons, less the present value of the price which will be paid at expiration (bond price - PV coupons - PV price paid at expiration).
Profiting from a fixed income forward depends on which side of the contract the investor is on. To calculate the price of a fixed income forward contract you subtract the present value (PV) of coupon payments, over the life of the contract, from the bond price. A fixed income forward is an agreement to transact in a fixed-income security at a preset price at some date in the future (the forward date). The value of a forward contract is the bond price less the present value of coupon payments less the present value of the price at expiration.

Fixed Income Forward

A fixed-interest security is a debt instrument such as a bond, debenture, or gilt-edged bond that investors use to loan money to a company in exchange for interest payments.

A fixed-interest security is a debt instrument such as a bond, debenture, or gilt-edged bond that investors use to loan money to a company in exchange for interest payments. A fixed-interest security is a debt instrument such as a bond, debenture, or gilt-edged bond that investors use to loan money to a company in exchange for interest payments. Because there is an inverse relationship between bond prices and interest rates, the value of the investor’s bond will fall to reflect the higher interest rate in the market. If interest rates decrease to 3%, however, the investor’s 5% bond would become more valuable if he were to sell it, since a bond’s market price increases when interest rates decrease. The fixed interest to be paid on a fixed-interest security is indicated in the trust indenture at the time of issuance and is payable on specific dates until the bond matures.

Fixed-Interest Security

A floating charge is a security interest or lien over a group of assets, which are non-constant or change in quantity and value.

A floating charge, also known as a floating lien, is a security interest or lien over a group of non-constant assets that may change in quantity and value. However, with a floating charge, the underlying assets are usually current assets or short-term assets that can change in value. The floating charge is secured by the current assets while allowing the company to use those assets to run its business operations. A floating charge, also known as a floating lien, is a security interest or lien over a group of non-constant assets that may change in quantity and value. The assets backing the floating charge are short-term current assets, usually consumed by a company within one year.

Floating Charge

A forced conversion allows an issuing company to make a security callable, forcing the investor to convert their securities into shares.

Forced conversion occurs when the issuer of a convertible security exercises their right to call the issue. Because the bonds offered a conversion ratio of 25 shares for every $1,000 of par value, this means that Michaela was forced to exchange her $100,000 of XYZ bonds for 2,500 shares of XYZ common stock. At the time of the forced conversion, XYZ’s shares were still trading at $40, meaning that the value of Michaela’s common shares was still $100,000, the same as before the conversion. In the case of convertible bonds, for example, this would prompt a forced conversion of the bonds into a predetermined number of common shares. In such a scenario, the forced conversion benefits the security issuer because it allows them to reduce their interest burden and potentially issue new debt securities at a lower interest rate.

Forced Conversion

Full faith and credit describes one entity's unconditional guarantee or commitment to back the interest and principal of another entity's debt.

Municipal Bonds: Understanding Credit Risk

Frequently Asked Questions on Build America Bonds and Recovery Zone Economic Development Bonds

Government National Mortgage Association (Ginnie Mae)

Full faith and credit is a phrase used to describe one entity's unconditional guarantee or commitment to back the interest and principal of another entity's debt. The full faith and credit commitment is typically employed by a government to help lower borrowing costs of a smaller, less stable government or of a government-sponsored agency. To encourage investors to purchase the debt issues, the Treasuries are backed by the full faith and credit of the government, providing assurance to fixed income investors that the expected interest payments and principal repayments will be made regardless of the economic situation. The Government National Mortgage Association (Ginnie Mae) is one example of a government agency that is backed by the full faith and credit of the U.S. government. The Government National Mortgage Association (Ginnie Mae) is one example of a government agency that is backed by the full faith and credit of the U.S. government.

Full Faith and Credit

A gross coupon is the annual interest rate received from a mortgage-backed security or other mortgage pool security.

The term “gross coupon” refers to the average coupon rate received from a portfolio of mortgage loans. Unlike the weighted average coupon, which takes into account the different sizes of the mortgages when making this calculation, the gross coupon is simply an average of all the underlying mortgages’ interest rates. Unlike the weighted average coupon, which takes into account the different sizes of the mortgages when making this calculation, the gross coupon is simply an average of all the underlying mortgages’ interest rates. The financial institution selling the mortgage-backed securities typically deducts administrative fees from the gross coupon to produce a net coupon, which is thus always lower than the initial gross coupon. The gross coupon associated with a portfolio of mortgages is calculated by averaging all of the coupon rates from the individual mortgages that make up an MBS.

Gross Coupon

A humped yield curve is a relatively rare type of yield curve that results when the interest rates on medium-term fixed income securities are higher than the rates of both long and short-term instruments.

A humped yield curve is a relatively rare type of yield curve that results when the interest rates on medium-term fixed income securities are higher than the rates of both long and short-term instruments. An inverted yield curve occurs when short-term rates are higher than long-term rates or, to put it another way, when long-term rates fall below short-term rates. A humped yield curve is a relatively rare type of yield curve that results when the interest rates on medium-term fixed income securities are higher than the rates of both long and short-term instruments. As opposed to a regularly shaped yield curve, in which investors receive a higher yield for purchasing longer-term bonds, a humped yield curve does not compensate investors for the risks of holding longer-term debt securities. short-term and long-term interest rates decrease by a greater degree than intermediate-term rates, a humped yield curve known as a negative butterfly results.

Humped Yield Curve

An inflation-indexed security is a security that guarantees a return higher than the rate of inflation if it is held to maturity. Inflation-indexed securities link their capital appreciation, or coupon payments, to inflation rates.

Treasury Inflation-Protected Securities (TIPS)

Series I Savings Bonds Rates & Terms: Calculating Interest Rates

An inflation-indexed security is a security that guarantees a return higher than the rate of inflation if it is held to maturity. The Bank of Canada issues that nation's real return bonds, while Indian inflation-indexed bonds are issued through the Reserve Bank of India (RBI).
Inflation-linked bonds were first developed during the American Revolution to combat inflation's corrosive effects on the real value of consumer goods in the colonies during the war.
The federal government offers several types of inflation-indexed investments, two of which are the Series I U.S. Savings Bond and Treasury Inflation-Protected Securities (TIPS). Inflation-indexed securities guarantee a return that’s greater than inflation, often indexed to the Consumer Price Index (CPI) or another inflation index. Although inflation is usually bad for the profitability of any fixed-income instrument, as it often causes interest rates to rise, an inflation-indexed security guarantees a real return. The periodic coupon on inflation-indexed securities is equal to the product of the daily inflation index and the nominal coupon rate.

Inflation-Indexed Security

As their name suggests, inflation-linked certificates of deposit (CD) are a type of CD whose interest rates are indexed to the rate of inflation.

As their name suggests, inflation-linked certificates of deposit (CD) are a type of CD whose interest rates are indexed to the rate of inflation. Inflation-linked CDs provide investors with this protection by indexing the CD’s interest rate to the consumer price index (CPI), which is a widely used measure of inflation. Because she is concerned that inflation might erode the real value of her cash holdings, Michaela decides to invest a portion of her cash into an inflation-linked CD with a term of 6 months. As their name suggests, inflation-linked certificates of deposit (CD) are a type of CD whose interest rates are indexed to the rate of inflation. In the meantime, the inflation-linked CD will protect her against inflation risk by increasing her interest payments in line with any potential increases to the CPI.

Inflation-Linked Certificates of Deposit

An inflation-protected security (IPS), typically issued by the U.S. government, is a type of fixed-income investment that guarantees a real rate of return adjusted for inflation.

Comparison of TIPS and Series I Savings Bonds

An inflation-protected security (IPS) is a type of fixed-income investment that guarantees a real rate of return. The U.S. federal government is the main issuer of inflation-protected securities, including Treasury inflation-protected securities (TIPS) and other inflation-protected bonds. One example is corporate inflation-protected securities (CIPS), also referred to as inflation-linked bonds. Expressing rates of return in real values rather than in non-inflation-adjusted terms, especially during periods of high inflation, offers a clearer picture of an investment's value. The U.S. federal government is currently the leading issuer of these types of securities, primarily in the form of Treasury inflation-protected securities (TIPS) and Series I savings bonds.

Inflation-Protected Security (IPS)

Medium-term debt is a type of bond or other fixed income security with a maturity, or date of principal repayment, that is set to occur in two to 10 years.

Tentative Auction Schedule of U.S. Treasury Securities

Medium-term (also referred to as intermediate) debt is a type of bond or other fixed-income security that has a maturity date set for between two and 10 years. The interest rate risk on medium-term debt is higher than that of short-term debt instruments but lower than the interest rate risk on long-term bonds. In a standard (or positive) yield curve environment, intermediate-term bonds pay a higher yield for a given credit quality than short-term bonds, but a lower yield compared to long-term (10+ year) bonds. There are three terms of debt: short-term, long-term, and medium-term debt. Long-term debt is more sensitive to interest rate changes than short-term debt given that there is a greater probability of interest rates rising within a longer time period than within a shorter time frame.

Intermediate/Medium-Term Debt

InterNotes® are newly issued corporate bonds available for direct purchase at par value distributed through broker-dealers by Incapital LLC.

InterNotes® is a product sold by the investment banking firm, Incapital LLC. Its purpose is to make corporate debt securities more accessible to retail investors, by allowing investments in $1,000 increments.﻿﻿ The company was founded by Thomas S. Ricketts in 1999 with a mission to offer investors access to new corporate bonds issued by companies in a wide variety of sectors including the financial services, telecommunications, and automotive industries.
InterNotes® is a platform for purchasing corporate bonds. When deciding which bonds to purchase, investors using the InterNotes® platform can select from different maturities, coupon rates, and interest payment schedules. InterNotes® includes convenience-oriented features such as small upfront investment sizes, diverse maturity periods and interest payment schedules, and a “survivor’s option” to help with estate planning. InterNotes® carry the same type of market risk of any other corporate bond, which is not often readily sold on secondary markets and will tend to fall in price as interest rates rise.

InterNotes®

An inverse floater is a bond or other type of debt whose coupon rate has an inverse relationship to a benchmark rate.

An inverse floater is a bond or other type of debt whose coupon rate has an inverse relationship to a benchmark rate. The general formula for the coupon rate of an inverse floater can be expressed as:
Floating rate = Fixed rate – (Coupon leverage x Reference rate)
The coupon leverage is the multiple by which the coupon rate will change for a 100 basis point (bps) change in the reference rate. Inverse floaters come about through the separation of fixed-rate bonds into two classes: a floater, which moves directly with some interest rate index, and an inverse floater, which represents the residual interest of the fixed-rate bond, net of the floating-rate. An inverse floating rate note, or inverse floater, works in the opposite way of a floating-rate note (FRN), which is a fixed income security that makes coupon payments that are tied to a reference rate. An inverse floater has a fluctuating interest rate; this differs from a fixed-rate note, which pays the same interest rate throughout the life of the note.

Inverse Floater

An inverted spread occurs when the yield difference between a longer-term financial instrument and a shorter-term instrument is negative. 

Explainer: Countdown to recession - What an inverted yield curve means

The yield curve is inverted. Here's what that means, and what the implications are for the economy

An inverted spread is a type of yield spread. An inverted spread can be a red flag for a recession; in particular, investors and economists pay particular attention to inverted spreads between short-term and long-term U.S. Treasury notes and/or bonds.
Inverted spreads generally indicate that investor confidence in the short-term outlook is dropping.﻿﻿ An inverted spread occurs when the yield difference between a longer-term financial instrument and a shorter-term instrument is negative. An inverted spread occurs when the yield on a short-term financial instrument is greater than that of a long-term one. In other words, when a shorter-term instrument yields a higher rate of return (RoR) than a longer-term instrument, it is referred to as an inverted spread.

Inverted Spread

Liquidity preference theory deals with how stakeholders value cash relative to receiving interest over varying lengths of time.

Liquidity Preference Theory is a model that suggests that an investor should demand a higher interest rate or premium on securities with long-term maturities that carry greater risk because, all other factors being equal, investors prefer cash or other highly liquid holdings. Keynes describes the theory in terms of three motives that determine the demand for liquidity:
1.  The **transactions motive*states that individuals have a preference for liquidity to guarantee having sufficient cash on hand for basic day-to-day needs. In other words, stakeholders have a high demand for liquidity to cover their short-term obligations, such as buying groceries and paying the rent or mortgage. Liquidity Preference Theory is a model that suggests that an investor should demand a higher interest rate or premium on securities with long-term maturities that carry greater risk because, all other factors being equal, investors prefer cash or other highly liquid holdings. According to the liquidity preference theory, interest rates on short-term securities are lower because investors are not sacrificing liquidity for greater time frames than medium or longer-term securities. A three-year Treasury note might pay a 2% interest rate, a 10-year treasury note might pay a 4% interest rate and a 30-year treasury bond might pay a 6% interest rate.

Liquidity Preference Theory

A market discount in when an asset, usually a bond, trades below its intrinsic or face value.

A market discount is the difference between an asset's stated redemption price and its lower price in the secondary market. A bond issued at a discount has its market price below the face value, creating the potential for capital appreciation upon maturity since the higher face value is paid when the bond matures. Discounts on bonds are not taxable in an of themselves, but will be owed as taxable interest when the bond matures (unless the discount is considered _de minimus_).
While any asset or security can trade at a market discount, the term most often applies to fixed-income securities, and especially to bonds. Under the de minimis rule, the market discount is treated as effectively zero if the amount of the discount upon purchase is less than 0.25% of the bond's face value, multiplied by the number of full years from the time of purchase to the maturity date. A market discount on a bond is not subject to taxation annually in the U.S., but it is taxable as ordinary interest income in the year that the bond is sold or redeemed.

Market Discount

Market index target-term securities (MITTS) are principal-protected bonds that are connected to an index or group of securities.

The market index target-term security is a type of principal-protected note designed to provide equity exposure while protecting the initial investment. The market index target-term securities mature in exactly one year, at which time they require the return of the $10 principal value to the investor, plus a proportional return based on the performance of the selected index, such as the S&P 500, during that time period. The purpose of a market index target-term security is to provide equity exposure to an investor's portfolio while still providing a guarantee that, even if the stock market performs poorly during a specified investment horizon, they will still be left with a specified minimum amount of capital. In this 2019 offering from Bank of America, market index target-term securities were offered at a price of $10 per unit, linked to the S&P 500, with a maturity of roughly six years. Market index target term securities (MITTS), or equity-linked notes, are bonds connected to an index or series of stocks.

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