Investing Basics

Note that the term bond is used in place of debenture in most of this glossary.  See below for the distinction between the two.  

A

Accrued Interest
The accumulated interest paid to a seller of a bond by the buyer (unless the bond is in default).  The buyer of a fixed-income security must pay the seller of the security to compensate the seller for holding the security between the last coupon date and the settlement date. 

Agency Bonds
Bonds issued by Federal Crown Corporations.  These agencies are special purpose corporations created by an act of the Canadian parliament.  These Corporations are either direct obligations of the Government of Canada or fully guaranteed by the Government of Canada and carry the same credit quality.  Examples of these agencies are Export Development Bank, Canadian Mortgage and Housing Corp., Farm Credit Corporation and Business Development Bank of Canada.

Amortization
The process of incrementally reducing debt through installment payments of principal and interest.

Arbitrage
The simultaneous sale and purchase of the same or equal security in such a way as to take advantage of a price difference in separate markets.

Arrears
Interest or dividends that were not paid when due and are still owed.

Ask Price
The lowest price a prospective seller is willing to accept.

B

Balloon
A large principal repayment in the later years of some serial bonds.

Bankers' Acceptance (BA's)
BA's are short term promissory notes issued by corporations with the unconditional guarantee of a major Canadian chartered bank.  The guarantee reduces risk and consequently increases price and lowers yield compared to Commercial Paper.  BA's are typically issued in terms of 30 days, 60 days, 90 days, 6 months and a year.  When these notes are issued directly by financial institutions they are called Bearer Deposit Notes (BDN's).

Bank of Canada
The central Bank of Canada was founded in the 1930s to facilitate the functioning of the financial system.  The Bank conducts monetary policy to manage the Canada's money supply and influence interest rates.  In addition, it is responsible for issuance of currency and advises the government on foreign exchange and fiscal policy.

Bank Rate
The minimum rate at which the Bank of Canada will make short-term advances to the chartered banks and money-market dealers.  The trend of the bank Rate affects the prime lending rate that chartered banks give to their most creditworthy borrowers.  It is therefore a base for the general level of short-term interest rates and a very important determinant of bond market prices.

Basis Point
One one-hundredth of  a percentage point.  This is the most common measure of changes in bond yields.  For example, if a bond yielding 6.09% changes in price to yield 6.20%, it is said to have increased 11 basis points.  Basis points (bps) are commonly referred to as "beeps".

Bear Market
A prolonged period of time for which the prices of bonds are decreasing and yields are rising.

Bearer Bonds
Bonds that do not have the owner’s name registered on the books of the issuing corporation or government and are payable to the bearer.  Bearer bonds are negotiable by the holder, since it is not in registered form.

Benchmarks
In the bond market, the commonly quoted and actively traded mid-term and long-term Government of Canada bonds.  In the United States, they are the most recently issued 10-year and 30-year treasury bonds.  Benchmarks, also known as bellwethers, are usually considered to be a measure of the direction and magnitude of yield and  price changes in the bond market.

Bid Price
The highest price a prospective buyer is willing to pay.

Bond
Evidence of a debt on which the issuer promises to pay the holder in a prescribed amount of time a specified amount of both interest and principal.  Technically, a bond has assets pledged against it as security for the loan with the exception of government bonds.  In practice, however, the term is often used to describe debentures; these evidences of indebtedness are backed by the general creditworthiness of the issuer and are not secured by assets.

Bond Rating
A measure of expected performance, quality and safety of a bond issue.  Dominion Bond Rating Service (DBRS) is the primary rating service in Canada.  Moody's and Standard and Poor's are the two largest agencies in the United States.

Bond Ratio
The percentage of a company's outstanding debt as a part of the company's total capitalization.  This ratio is used by analysts to assess risk inherent in a particular issue or company's debt.

Bonded Debt
Also known as funded debt.  It is the portion of an issuer's total debt represented by longer term bonds.

Book Entry Bond / BEO (book entry only)
A bond that has no certificate.  Records of ownership are are kept by a depository and its members (banks and brokerage firms).  Bonds issued now are almost exclusively book-entry, or book-based.

Bull Market
A period of rising bond prices and declining yields.

Call
The action taken to pay the principal of bond prior to the stated maturity date.

Callable Bond
A condition of a bond permitting the issuer to redeem it before maturity on specified dates at specified prices.

Call Protection
A dollar amount paid as a penalty or premium by an issuer who exercises the right to redeem securities prior to the maturity date.  It is a also used to describe a period of time in which the bond cannot be called.

Canada Call (Doomsday Call)
A Canada call issue is simply a bond which may be called back by the issuer to redeem the debt prior to the maturity date at an equivalent yield of a Government of Canada bond of the same maturity plus a premium (example, Canada call + 15bps).  The holder of the bond is paid the calculated price (based on the yield plus the additional 15bps) or par whichever is higher.  Typically there are not many doomsday calls redeemed before maturity as it is not advantageous for the issuer to do so. This feature is more commonly attached to corporate issues.

Canadian Bond Rating Service / CBRS
Effective October 31, 2000, CBRS combined operations with Standard & Poor's.  S&P provides credit ratings of Canadian borrowers in the bond market.  They specialize in publishing unbiased research on the credit quality of public sector debt and corporate bonds.  See also S&P Credit Ratings.

Canadas
The term is often used when referring to marketable bonds issued by the Canadian Government.

Certificate of Deposit
Negotiable certificates issued  by most chartered banks and trust companies, usually with minimum face value of $5,000 and denominations of $1,000.  Maturity terms vary from 30 days to 5 years.  Although the term to maturity is fixed, CDs may be pre-encashable at a penalty rate lower than the original fixed rate.

Closing Quotation
A market maker's final bid and asked prices for an issue at the end of a business day.

Collateral
Assets pledged by a borrower until a loan is repaid. These assets are subject to seizure if the loan is in default.

Commercial Paper
Short-term debt issued by non-financial corporations with terms up to one year.  This paper is sold at a discount and matures at par.  It is typically available in terms of 30 days, 60 days, 90 days, 6 months and a year. The difference between cost of proceeds and the maturity amount is treated as interest income.  All commercial paper offered by TD Waterhouse is rated R-1(Prime Credit Quality) by the Dominion Bond Rating Service.

Commission
A fee paid to an investment dealer when the dealer acts as an agent in a securities transaction.  The dealer does not receive a commission when acting as a principal in the trade.

Convertible Bond
A bond, debenture or preferred share which may be exchanged for common shares usually of the same company, at a set price and usually by a set date.  A forced conversion clause may be used by a company to    force an exchange if the value of its common shares goes above the value of the conversion ratio or conversion price.   Most convertible bonds trade on a listed exchange such as the TSE.

Corporate Bond
These are debt instruments companies issue that are considered financial obligations of a corporation.   Generally, corporate bonds are broken down into four sectors: industrial, financial, transportation, and utility.  They can be issued in both callable and non-callable formats.

Coupon
This is the portion of the bond that provides the holder an interest payment at a pre-determined rate.  Coupons are the amount of interest that will be paid on annual basis.  Most bonds, however, pay interest semi-annually.

Coupon Frequency
Most bonds pay interest on a semi-annual basis.  For example, a holder of 10000 face of a 6.50% Government of Canada bond maturing 1 June 2004 would receive $650.00 interest annually (10000 * 6.50%).  The interest would be broken down into two $325.00 payments; one on June 1st and the other on December 1st.  Some bonds pay interest on a monthly basis and others, such as Eurobonds, pay interest annually.

Current Yield
A crude measure of an investor's return on a bond calculated by dividing the annual interest on the bond by the market price.  It does not take into account any capital gain or loss.  For example, a bond with a 10% coupon bought at discount of $80.00 has a current yield of 12.5% (10%/800 per 1000 face).

CUSIP
The 9-digit alpha-numeric ID assigned to securities including bonds by the Committee on Uniform Security Identification Procedures.  It was established as a uniform method of identifying securities.

Dealer
An individual or firm acting as a principal rather than a broker or agent.  An individual or entity, such as a securities firm, that acts as a principal and stands ready to buy and sell for its own account.  A dealer buys and sells securities and holds inventory.

Debenture
Indebtedness of a government or corporation that is backed strictly by the general credit of the issuer.  Unlike a bond, no assets are pledged against a debenture.  In practice, the terms bonds and debentures are often used interchangeably.

Default
A term used when a company breaks the terms of an agreement.  For example, a company who fails to make a scheduled bond interest payment is said to be in default.

Denomination
The face amount or value of a bond.  This is the amount the issuer agrees to pay on maturity.  It also refers to the investment increment of bonds.  For example, the minimum purchase or sell amount of a bond on WebBroker is $5,000 face with increments of $1,000 thereafter.  The $5,000 minimum applies to strip bonds as well.  Higher minimums apply to money market instruments and vary depending on issuer and term-to-maturity.

Discount
The difference between a bond's current market price and its face value.  Generally, bonds with coupons below the prevailing interest rate will trade at a discount.

Discount Yield
The yield on money market instruments which are sold at a discount.  Take, for example, a Government of Canada Treasury Bill sold at a cost of  98.60 ($9,860 per $10,000) and maturing at $10,000. To determine the yield, divide the discount ($140) by the cost ($9860) and multiply that number by 365 (days) divided by the number of days to maturity (90).  The calculation results in a yield of 5.758%.

Discount Yield    = [ (100-Price) / Price ] * [ (365*100) / Term ]

                         = [ (100-98.60) / 98.60 ] * [ (365*100) / 90 ]

                         = 5.75%

Diversification
The practice of buying several different types of securities over different asset classes, economic sectors, and maturities in order to reduce risk if one particular type of investment or sector performs poorly.  Fixed Income securities are integral to asset class diversification.  Within fixed income, investors can diversify by holding debt issued by companies in different sectors.  Varying terms to maturity can also mitigate yield curve and reinvestment risk.

Dominion Bond Rating Service  / DBRS
DBRS is an independent rating agency that assesses an entity’s ability to make timely payments of interest and principal.  Similar to S&P, it assigns credit ratings based on a scale.

DBRS uses the following ratings schedule for bond and long term debt:

Doomsday Call
See Canada Call

Downgrade
A reduced credit rating on a company's debt issued by a credit rating agency.

Duration
Duration is a measurement that allows an investor to compare bonds for potential price volatility by considering both the term and the coupon together.  It is defined as the average time that it would take to receive all cash flows in terms of current dollars.  Both coupon payments and principal are factored into the calculation. 

Bonds with longer terms are more volatile than shorter term bonds because cash flows are received over a longer period of time, and therefore are subject to a greater deal of uncertainty.  Similarly, market prices of higher coupon bonds are less volatile than a lower coupon bond because a greater proportion of the bond's total return is realized with the semi-annual payments than at maturity.

E

Emerging Market
A financial market of a developing country, usually a small market with a short operating history.

Extendible
A bond with a specific maturity date, but granting either the issuer or the holder, the option to extend the maturity date by a prescribed number of years.

F

Face Amount/Face Value
It is almost always the value of a bond at maturity.  It is also called par.  Face value is no indication of market value.

Federal Reserve
The United States' equivalent of the Bank of Canada.  It is comprised of 12 central banks.  Among other roles, this widely watched institution implements monetary policy in the U.S. by setting the Federal funds rates and Discount Rates.

Firm
An offer status which has a high probability of execution. The order can still be rejected by the contributor based on a change in the order criteria. An example would include the inventory level changed after an order was submitted but prior to being received by the contributor. This status is placed on most offerings during market hours.

First Call Date
The right of the bond issuer to redeem the bonds before its maturity date is usually accompanied by a schedule of call dates and prices at which the bond can be called on each corresponding call date.  The earliest of which is the "first call date".

First Settlement
The first possible settlement date on a newly issued security.

Fiscal Policy
The government’s use of spending and taxes to influence the overall level of economic activity

Fixed-Floaters
Callable bonds issued by Canadian chartered banks.  As the name suggests, the coupon is rate is set for the term that precedes a call date and then floats thereafter.  After the call date, the floating rate would be determined by adding a pre-specified number of basis points to a prevailing Bankers' Acceptance rate.  The bond market generally anticipate that fixed floaters will be called on the first call date.  Hence their yield is always cited to the near - or call date - rather than the long - or maturity - date.

Fixed Income Securities
Investments such as bonds, mortgage-backed securities, and money market instruments (e.g. Treasury Bills) that provide investors with a predictable income and relative safety of principal.

Flat
A bond that is trading without accrued interest.

Floater
A fixed income security sold with a variable coupon.

Foreign Pay Bonds
These comprise bonds denominated in currencies other than Canadian dollars.  They include U.S. dollar bonds issued by the U.S. government, domestic corporations or foreign issues.  There are also a variety of "Euro" bonds denominated in currencies of European nations (including the Euro itself).  TD Waterhouse offers foreign pay bonds.

G

Government Bonds
Bonds issued by governments (federal or provincial), crown corporations, or government agencies.  Backed by the taxation powers of governments, these bonds typically have the highest credit ratings.

Guaranteed Investment Certificate (GIC)
An investment instrument commonly available from trust companies or banks requiring a minimum investment for a pre-determined time period at a specified rate.  Most are non-redeemable prior to maturity but there are exceptions.  For example, most TD Mortgage GICs can be sold prior to maturity at prevailing market rates.  GICs usually range in terms from 1 to 5 years.  Those with terms to maturity of less than one year are usually referred to as term deposits.

H

High Yield Bonds
Also called non-investment grade bonds or "junk bonds".  These bonds are usually rated lower than BBB and are considered speculative compared to investment grade bonds.  The higher yields are commensurate with the higher risk perceived by the market.

Hybrid
A security that contains characteristics of both bonds and preferred shares.  Hybrids can be structured like bonds (i.e. trading units of 1000 and semi-annual interest payments).  Usually hybrids rank between the most junior debt and highest ranking preferred shares in the priority of payment hierarchy.  They frequently contain special call or exchange features.

I

Initial Offering Price
The cost of a bond in the primary market.  Bond new issues are usually sold at par or a slight discount.

Interest
Compensation paid for the use of borrowed funds that is usually expressed as a percentage rate of principal.

Inventory
Investment dealers' holdings of fixed income securities that are available for sale to investors.  Inventories fluctuate from day to day and throughout a day as well.

Investment Grade
Bonds considered appropriate for risk-averse investors because they usually represent moderate to low risk.  These bonds are usually rated in the top four categories (e.g. BBB or better) by a bond rating agency.

Issue Description
The description of a bond list name of issuer, coupon, maturity date, and title of the issue.  To enter an issuer's name for a search, enter the first few letters of the issuer's name or enter the entire name.

Issuer

An entity which issues and is obligated to pay principal and interest on securities.

J

Junior Debt
One or more bond issues for which collateral has been pledged for more senior issues.  It therefore ranks behind these bonds in priority of payment.

L

Ladder
A fixed income investment strategy in which an investor will purchase issues with maturities staggered over several months, or more often, years.  The principal objective is to mitigate reinvestment risk by avoiding a large maturity at a time when interest rates and yields are relatively low.  It also serves to enhance liquidity in a portfolio by ensuring that funds made available by maturing bonds will satisfy cash requirements without the need to sell a position prior to maturity.

Liquidity
The ability of the market to absorb the pressures of buying and selling without substantially affecting the price of the fixed income instrument.  A liquid market is characterized by active trading and tighter spreads. This is a very important characteristic of an issue.  Liquidity is dependent on a variety of factors including the size of the issue, the term to maturity and how widely held an issue it is.  Intuitively then, it is understandable that Government of Canada bonds are relatively liquid.  An illiquid market is marred by low trading and price concessions on the part of a seller.

Listed
Bonds that are listed and traded through the facilities of a major exchange (e.g. the TSE).  Listed bonds in Canada are predominantly convertible debentures or hybrids.

Long Term Bond
Generally refers to bonds that mature in more than 10 years.

M

Make Whole Call Only
When "make whole call" is displayed as part of the security description, the bond is redeemable at par plus a premium.  The premium is based on the yield of the then current treasury.

Market Order
An order placed to be executed at the best available price.

Market Price
The price at which a bond trades to reflect current market conditions.  Bonds can trade at par ($100.00), a discount (e.g. $99.200), or a premium (e.g. $104.70).

Markup
The fee charged by a dealer who purchases a security from a market maker and sells it to a customer at a higher price.  The fee is included in the price of the bond.

Maturity Date
This is the date when the principal amount of the bond becomes due and payable.

Medium Term Bond
Generally refers to bonds that mature in 3 to 10 years.

Monetary Policy
Implemented by the Bank of Canada, it is policy using money supply and control of credit in the Canadian economy to control the general direction of interest rates and maintain the integrity of the Canadian dollar.

Tightening monetary policy is indicative of rising rates usually near the end of a phase of economic expansion.  Conversely, loosening monetary policy is accompanied by decreasing rates that usually precedes economic expansion.

Money Market
The money market links investors who want to earn competitive rates on their money, with governments and corporations that need short term loans.  Money market instruments include Treasury Bills (T-Bills), Bankers' Acceptances and Commercial Paper.

Mortgage-Backed Securities / MBS
Fixed rate debt instrument that represent an undivided interest in a pool of insured residential first mortgages. The Canadian Mortgage and Housing Corporation (CMHC), a federal crown corporation, insures these pools of mortgages, thus guaranteeing the timely payment of principal and interest due to certificate holders.  They are ideal for conservative investors who require monthly income.  The monthly income is in the form of interest and principal that is made to the mortgages.  They trade in the bond market at prices reflecting current interest rates.  MBS are identified primarily by an eight digit Pool Number.

Municipal Bonds
Fixed income securities issued by local governments.

Moody's Credit Rating
A designation given by Moody's to indicate the relative credit quality, or the strength of the ability to pay a fixed income instrument's obligation.

N

Net Amount
The total amount an investor pays for a bond including principal and accrued interest.  For a seller, it is the total amount received including principal and accrued interest.  It is also called the settlement amount.

Next Coupon
Next Coupon refers to the date of the next interest (coupon) payment arising from a fixed income security.  See also Coupon.  A search that specifies a next coupon date range will return fixed income instruments having any coupon payment within the date range specified.

New Issues
Bonds sold in the primary - as opposed to the secondary - market.  They are bonds offered to the public for the first time.  They are usually priced at par or a discount with relatively attractive yields.  New Issue bonds may or may not be available depending upon market conditions.  TD Waterhouse is an active participant in the distribution of new issues.

Non Callable
A bond that cannot be called either for redemption by or at the option of the issuer before its specified maturity date.

Note
An unsecured promise to pay (e.g. a promissory note such as Bankers' Acceptances).

O

Offer
This is the same as ask which is the lowest price a prospective seller will take for a security.

Order
A commitment by a purchaser to buy or sell a stated number of bonds at the offered or bid price.

Over-the-Counter Market  /OTC
Bond trading conducted outside the facilities of an exchange.  Trades are done by way of telephone or computer.  The Canadian bond market is almost exclusively an over-the-counter one.  It is also called an unlisted market.

Overnight Position
The inventory a firm or trader holds at the end of the trading day.

P

Packages
Packages are usually synthetic combinations of stripped bonds.  They are tailored to meet special needs of investors.  For example, a package bond may trade like a strip (with no interest payments) until some predetermined point in the future.  After that point, it will take on characteristics of normal bond (i.e. regular semi-annual interest payments).  This type of package may suit a person with a self-directed RSP who intends to convert the plan into a RIF a few years down the road.  Income is not generated from the package until it is required.  These types of bonds tend to be more illiquid in nature and hence are intended to be buy and hold investments.

Par Value
The stated face value or principal amount of a bond which the issuer undertakes to pay back usually at maturity.

Parity Bonds
Two issues having the same priority of claim or lien against pledged revenues.

Premium
The amount by which a bond is priced over its par value. Whether or not, and the extent to which, a bond trades at a premium is dependent on its coupon, term to maturity, credit quality, and the general interest rate environment.

Premium Bond
A bond with a price above par value.

Premium Call
A provision for a bond allowing the issuer to call the bond prior to the maturity date at a price above the par value of the bond.

Present Value
The value today of a sum of money available in the future based on a certain interest rate.  The determination of present value enables an investor to determine the amount of money to be invested in order to receive a specified amount in the future.

Price
A pricing method by which the bond is traded at the dollar price specified.  The price is per $100.00 face, or principal amount, of a bond.  For example, buying 1 bond (1000 face) at $95.50 represents paying $955.00 for that $1000 face value.

Primary Market
The market for new issues of securities.  After bonds are traded here, they are then traded on the secondary market.

Prime Rate
The lowest interest rate charged by Canadian commercial banks to their best, most creditworthy,  customers.

Principal Trade
An investment firm is acting as a principal when it is on the other side of a transaction with a client.  For example, when an investor buys a bond out of a dealer's inventory, the firm is acting as a principal.  Because the Canadian bond market is predominantly an over-the-counter market, most bond trades are principal trades.  A firm acts on an agency basis when it facilitates trades between third party buyers and sellers.  This is commonly the case with exchange-traded debentures.

Private Placement
A new bond issue sold to a small number of institutions.  Regulations are usually not as onerous on the issuers of private placements.

Proceeds
The money received by a bond issuer at the close of the sell.

Prospectus
A legal document that describes securities being offered for sale to the public.  It is prepared in conformity with the requirements of applicable securities regulators.

Protective Covenants
The agreements imposing obligations on the bond issuer to protect the bondholders.  Requirements may include segregation of funds or adequate debt service coverage among others.

Province
This is the province or territory in which the bond was issued.  To choose the province, select from the drop-down list by clicking on the down arrow and highlight the desired province or territory.

Provisional Rating
A temporary credit rating of an issuer by a credit rating agency.  The provisional rating is revised when the agency receives complete financial information on the issuer.

Put Bond
A bond that is redeemable at the option of the holder or upon certain circumstances.  This is not a common feature in the Canadian marketplace.

Q

Quantity of Bonds
The number of bonds.  For example, 10 bonds is equivalent to $10,000 face value.

R

Rate of Return
The yield-to-maturity.  Most bond are calculated and stated as a semi-annual percentage.

Rating
The credit rating of a fixed income security provided by an independent rating agency.

Real Return Bonds
These are long-term bonds issued by the Government of Canada that offer investors a real rate of return (i.e. adjusted for inflation).  The principal, and consequently the interest payments, are linked to the Consumer Price Index.  These bonds are traded on the secondary market.

Redemption
The retirement of bonds by an issuer who repays the face value or call price to the holders.  Occasionally, redemption may be at the option of the holder (e.g. Canada Savings Bonds).  These bonds are sold in varying denominations usually as low as $100.00.

Registered Bond
A bond which is registered under in a specific name with the issuing corporation or government.  Such a bond may only be cashed by the person(s) it is registered to.

Retractable
A feature of a bond which grants either the issuer or the holder the option, under specified conditions, to redeem the security on a prescribed date before maturity.

S

S&P Credit Ratings
A Standard & Poor's issue credit rating is a current opinion of the creditworthiness of an obligor with respect to a specific financial obligation, a specific class of financial obligations, or a specific financial program (including ratings on medium-term note programs and commercial paper programs).  It takes into consideration the creditworthiness of guarantors, insurers, or other forms of credit enhancement on the obligation and takes into account the currency in which the obligation is denominated.  The issue credit rating is not a recommendation to purchase, sell, or hold a financial obligation, inasmuch as it does not comment as to market price or suitability for a particular investor.

Savings Bonds
Bonds issued by the Government of Canada or provincial governments.  The bonds are designed for individual investors.

Secondary Market
The market after the new issue stage, or primary market, in which an investor purchases a bond from someone other than the issuer of the bond at prevailing prices. 

Secured Obligation
A debt backed by physical assets.  Repayment of interest and principal can be provided by these assets in case of default.

Securitization
The act of packaging loans of different types into pools and then selling shares of these pools in the form of marketable securities.

Security Types
Security types refers to different categories and subtypes of fixed income securities.  These categories include

• Bankers Acceptances

• Commercial Paper

• Canadas / Agencies

• Corporates

• Treasury Bills

• Municipals

• Provincials

• Strips/Residuals/Zeros

Within the fixed income centre, these security categories are often displayed in abbreviated format, as per the chart below.

Specific security subtypes are also often displayed in abbreviated format, as per the chart below.

Senior Debt
A senior debt issue ranks ahead of other bonds in terms of claims of assets in the event of default or company dissolution.

Serial Bond
A bond issue with specific amounts of principal maturing each year.

Settlement Periods
The date on which a fixed income buyer must pay for the cost of the security plus any accrued interest.  In Canada, all money market instruments settle the same day as the transaction.  U.S. treasury bonds and bills settle the next business day.  Short term bonds (maturing in three years or less) settle in two business days.

Most other issues settle three business days after the transaction date.

Sinking Fund
A fund set up by an issuer to retire a portion of a bond prior to maturity.  This reduces the burden on issuers at maturity.

Spread
A price spread is the difference between the bid and offer prices for a specific fixed income security.

A credit spread is the difference in yield between a benchmark (e.g. a Government of Canada) and the bond of another issuer.  The credit spread is normally cited in terms of basis points.  The riskier the issue as perceived by the market, the greater the credit spread will be.

Stripped Bonds
Bonds in which the coupons have been detached from the principal.  The principal (commonly referred to as the residual) and the coupons trade separately.  They will trade at discounts and mature at par.  The maturity dates of coupons will be the scheduled interest payment date; for residuals, it will be the originally established maturity date.  The longer the term to maturity, the greater the discount will be.  Interest is not paid to the holder but accretes in the value of the bond as maturity approaches.  Strips have special tax consequences when bought outside of a registered account.  Because no interest is received throughout the  duration of the bond, they tend to be more volatile than interest bearing bonds.  Strips are well suited to such long-term goals as education planning and retirement savings.  Strips are sometimes referred to as zeros.

Subject
An offering status that has a lower probability of execution as the price and quantity are indicative only. This status is usually placed on an offer after defined market hours or in a fast moving market.

Switching
The act of selling one fixed income security and purchasing another.  Investors may switch bonds when they perceive some benefit in doing so.  Possible motives of bond switching include: net yield improvement, term extension or reduction, improvement in credit quality, and cash take-outs.

T

Term
The length of time to maturity.

Treasury Bills
These are commonly called T-Bills.  It is a short-term money market instrument issued by the federal government to meet near term borrowing needs.  Provincial T-Bills are less common.  T-Bills are sold at a discount and mature at par.  The difference between the cost and maturity value represents the purchaser's income in lieu of interest.  Like other money market instruments, T-Bills can typically be purchased with terms of 30 days, 60 days, 90 days, six months and one year.  They are well suited to very conservative investors who opt to obtain higher rates than cash offers for a short period of time.

Trade Date
The date on which a bond transaction occurs.   Payment for the transaction  will occur on the Settlement Date.

Treasuries / Treasury Bonds
This term is often used when referring to bonds issued by the Canadian government or U.S. federal government.  See also Canadas.

Trustee
It is generally a trust company appointed by an issuer to ensure that all the terms of a bond's trust deed or covenant are maintained.

U

Upgrade
An improved credit rating on a company's debt issued by a credit rating agency.

W

Worst Yield
A yield calculation based on the minimum trade amount. Typically, wholesale transactions will be bought at a lower price and therefore offer a better yield.

Y

Yankee Bonds
Bonds issued by a domestic corporation, Canadian Province or Federal Government in U.S. currency. These bonds are subject to foreign exchange fluctuations when interest or principal is paid out to an RSP account since it is converted to Canadian dollars.

Yield
This is the basis on which a fixed income investment is priced and sold.  It reflects the value of the bond giving consideration to the term to maturity, credit quality of the issuer/guarantor, specific term of the issue, and general market conditions.

Yield Curve
A graphic representation  of the relationship among yields of bonds with similar credit qualities but different maturities.  A normal yield curve is upward sloping and is explained by the hypothesis of term risk.  That is, because uncertainty increases with longer terms to maturity, yields will increase as well to compensate holders for the perceived greater risk.  Occasionally a yield curve may be flat or inverted.

(An inverted curve is marked by higher yields at the short end of the spectrum.  They decrease as term increases).

Yield to Call

Yield to call is computed in the same manner as yield to maturity, except the maturity date is replaced by the call date and the redemption value at maturity is replaced by the call price.

Yield to Maturity
It is the rate of return on an investment in a fixed income security taking into account the total of annual interest payments, the purchase price, the redemption value, and the time remaining until maturity.  It is based on the assumptions that the security is held by the investor until final maturity and that all interest received can be reinvested at the yield to maturity.

Z

Zeros
See Stripped Bonds.