20 terms to get you up to speed with the bond market

If you are new to bonds and the bond market then these 20 terms should quickly get you up to speed.

1. Auction

This is the mechanism through which the primary issue of government securities occurs. Bids are invited for a particular issue from primary dealers and the general public with the total size of the auction pre-disclosed. The auction amount is placed from the highest price (lowest yield) onwards till the auction amount is reached. In summary when the government wants to raise money, they do so via an auction.

2. Bid

For outright transactions this can be expressed in terms of interest rates or prices. The actual convention varies from market to market. In the Nigeria market, bonds trade on price. The bid is the price at which the quoting party is willing to buy a security.

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3. Book Value

This is the value at which a debt security is shown on the holder’s balance sheet. Book value is often acquisition cost ± amortisation/ accretion of premium/ discount on purchase.

4. Consideration

The cost of or amount paid for the bond. (i.e., all-in-price

5. Clean Price

The present value of the future coupon payments and redemption proceeds of a bond discounted at the yield to maturity and expressed as a percentage of the nominal / par value.

6. Dirty Price

The clean price plus the accrued interest of a bond expressed as a percentage of the nominal value.

7. Cum Interest

When a bond is sold cum interest, the buyer receives the interest

8. Coupon Rate

It is the rate of interest payable on the nominal value of a bond.

9. Discount

A security is said to be trading at a discount when the price at which the price at which the security is trading is below the issuer’s par value.

10. Face Value

This is the par value of the security, i.e. the principal.

11. Mark-To-Market

This is to value a securities contract at market rates. It is done to determine the profitability of outstanding contracts.

12. Market Value

The price at which a security is trading and could presumably be purchased or sold.

13. Par Value

This is the principal amount at which the issuer of a bond contracts to redeem the bond at maturity (also known as face, nominal, or redemption value).

14. Premium

The amount by which the price at which an issue is trading exceeds the issue’s par value.

15. Price of Security

The price of a security is inversely related to interest rates. An increase in interest rates reduces the price of a security. Conversely, a decrease in interest rates increases the price of a security.

16. Trade Date

The date on which a deal is entered into.

17. Settlement Date

The day on which a financial transaction is to be settled, i.e., on which payment is actually made or received in exchange for securities. Current practice is (T+2) for bonds and Treasury bills

18. Spread

The spread is difference between the bid and offer price or rate.

19. Yield to Maturity

This is the interest rate that will make the present value of all the future cash flows of the bond equal to the market price. In essence, it is the internal rate of return (IRR) of the bond cash flows.

20. Yield Curve

The interest rates for each different tenor or maturity of a financial instrument, the graph of the yield curve has interest rates on the vertical Y axis and time-to maturity on the horizontal X axis.