A beginner’s guide to bond market terminology and jargon

The bond market can be a complex and intimidating place for beginners, especially with all the industry-specific terminology and jargon that is used. In this blog post, we’ll provide you with a beginner’s guide to bond market terminology to help you navigate this world.

Bond: A bond is a debt security that is issued by a company, government, or other entity to raise capital. Bonds pay a fixed rate of interest to investors over a set period of time, and at maturity, the principal is repaid.

Coupon rate: The coupon rate is the interest rate that the issuer of the bond pays to bondholders. It is usually expressed as a percentage of the bond’s face value.

Yield: The yield is the return that an investor earns from a bond, expressed as a percentage of the bond’s price.

Maturity: The maturity is the date when the bond issuer repays the bond’s principal to the investor. Bonds can have short-term maturities (less than one year), medium-term maturities (one to ten years), or long-term maturities (more than ten years).

Face value: The face value, also known as the par value, is the amount that the bond issuer repays to the investor at maturity.

Credit rating: The credit rating is a measure of the creditworthiness of the bond issuer. It is assigned by credit rating agencies such as Standard & Poor’s and Moody’s.

Yield curve: The yield curve is a graph that shows the relationship between bond yields and maturities. Typically, the yield curve slopes upward, indicating that longer-term bonds have higher yields than shorter-term bonds.

Duration: Duration is a measure of the sensitivity of a bond’s price to changes in interest rates. Bonds with longer durations are more sensitive to interest rate changes than bonds with shorter durations.

Callable bond: A callable bond is a bond that can be redeemed by the issuer before its maturity date. This gives the issuer the option to call the bond when interest rates are low, which can be advantageous for them but potentially harmful to the bondholder.

Bond fund: A bond fund is a mutual fund or exchange-traded fund that invests in a diversified portfolio of bonds. Bond funds offer investors a convenient way to access the bond market without having to purchase individual bonds.

Understanding these bond market terms and jargon will help you make more informed investment decisions and navigate the bond market with greater confidence. As you become more familiar with these concepts, you can expand your knowledge and explore more advanced topics in bond investing.