a.

Bond- a bond is debt instrument that is issued for more than one year with the purpose of raising
capital by borrowing.

Treasury bond- this is long-term fixed interest rate debt security issued by a federal government

Corporate bond- this is a bond issued by a corporation for it to raise financing for a variety of
reason

Municipal bond-this is a security issued on behalf or by local authority.

Foreign bond- this is a bond issued by a foreign entity in the currency of the country in which it
is sold.

b.

Par value- this refers to the nominal value of a share or bond as stated in the corporate charter.

Maturity date- This refers to the time and date on which the principal and interest associated
with a debt security are due.

Coupon payment- this is the amount of interest which a bond issuer pays to a bondholder at
each payment date.

Coupon interest rate –This is the Interest to be annually paid by the issuer of a bond as a
percent of par value.

c.
Floating-rate bond – this refers to a bond whose interest amount fluctuates in step with the
market interest rates, or some other external measure.

Zero coupon bond- this refers to a bond that does not pay coupons, or interest payments, to the
bondholder.

Original issue discount bond (OID) - this is a type of interest that is not payable as it accrues.it
is the discount from par value at the time a bond or other debt instrument is issued

d.

Call provision-Clause in a debt instrument which allows its issuer to redeem it before its
maturity date.

Redeemable bond-A bond which the issuer has the right to redeem prior to its maturity date

Sinking fund-a fund formed by periodically setting aside money for the gradual repayment of a
debt.

e.

Convertible bond- this is a type of bond that the holder can convert into a specified number of
shares of common stock in the issuing company or cash of equal value.

Warrant- is a security that entitles the holder to buy the underlying stock of the issuing
company at a fixed price called exercise price until the expiry date.

Income bond- this is a bond that pays interest only if the issuing entity has earned income

Indexed bond (also called a purchasing power bond) - this is a bond in which payment of
income on the principal is related to a specific price index
 f.

Premium bond- this is a bond trading above its par value

Discount bond - this is a bond trading below its par value

g.

Current yield (on a bond) - is a bond's annual return based on its annual coupon payments and
current price.

Yield to maturity (YTM) - is the total return anticipated on a bond if the bond is held until the
end of its lifetime.

Yield to call (YTC) - is the rate of interest earned on a bond when it is called.

h.

Indentures –this is a legal contract between the bond issuer and the bondholder that specifies the
terms of the bond.

Mortgage bond- this is a bond backed by a pool of mortgages on a real estate asset such as a
house.

Debenture –this refers to a type of debt instrument that is not secured by physical assets or
collateral.

Subordinated debenture- this is a bond classified lower than more senior debt in the event of a
default.

i.

Development bond- Bond issued by a government to raise financing for funding one or more
specific projects or development work.
Municipal bond insurance- It is a guaranty that the holder of a municipal bond will receive
scheduled interest and principal payments when due, even if the municipal issuer fails to make
these payments.

Junk bond- a high-yield, high-risk security, typically issued by a firm seeking to raise capital
quickly

Investment-grade bond- These are secure but generally low-yield bonds, and the only type of
bonds in which parties with fiduciary responsibilities are allowed by law to invest.

j.

Real risk-free rate of interest, r- is the theoretical rate of return of an investment with no risk
of financial loss.

Nominal risk-free rate of interest- The sum of the real risk-free interest rate and the inflation
premium.

Inflation premium (IP) - Return on an investment over its normal rate of return

Default risk premium (DRP) - is a premium based on the probability that the issuer will default
on the loan, and it is measured by the difference between the interest rate on a U.S.

Liquidity- is the term used to describe how easy it is to convert assets to cash.

Liquidity premium (lp) - is a premium demanded by investors when any given security cannot
be easily converted into cash for its fair market value.

Interest rate risk- is the risk that an investment's value will change due to a change in the
absolute level of interest rates, in the spread between two rates, in the shape of the yield curve, or
in any other interest rate relationship

Maturity risk premium (mrp) - is the amount of extra return you'll see on your investment by
purchasing a bond with a longer maturity date.

Reinvestment rate risk - is the chance that an investor will not be able to reinvest cash flows
from an investment at a rate equal to the investment's current rate of return.
Term structure of interest rates- is the relationship between interest rates or bond yields and
different terms or maturities

Yield curve. - is a curve showing several yields or interest rates across different contract lengths

“Normal” yield curve- is upward sloping showing that, all else being equal, a bond with a
longer maturity pays a higher yield than the same bond with a shorter maturity.

Inverted (“abnormal”) yield curve- An inverted yield curve is an interest rate environment in
which long-term debt instruments have a lower yield than short-term debt instruments of the
same credit quality.