Accrual Day Count
The convention used to determine the number of days in each coupon payment cycle, which is then used to calculate accrued interest on the security.
The amount of interest that has accumulated since the last interest payment date. The seller of a bond is entitled to accrued interest, which is paid by the buyer and added to the price of a bond transaction. Accrued interest is calculated up to (but not including) the settlement date.
Field that indicates whether the order is a "buy" or "sell."
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The process of issuing new bonds to repay an outstanding bond prior to its first call date. Usually, the proceeds of a lower-interest bond (the refunding bond) are used to retire a callable, higher-interest bond (the refunded bond) during periods of declining interest rates. Refunded bonds can be refunded to either the maturity date or a call date. Advance refunding is common with municipal bonds.
To accomplish this, issuers:
- Sell a new bond with lower interest and possibly longer maturity than the original bond.
- Invest the proceeds in bonds that mature at either the maturity or call date of the refunded bonds, essentially holding the funds in escrow.
Note: The newly purchased bonds are usually lower-risk bonds such as U.S. Treasuries, agencies, or State and Local Government Series (SLGS or SLUGS) securities. Once the newly purchased bonds mature, issuers use the principal to retire the outstanding refunded bonds. (See pre-refunding.)
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Ad Valorem Tax Status
Indicates whether a municipal bond issue is supported by a limited or unlimited ad valorem tax pledge from the issuing entity. If the bond is supported by an ad valorem tax pledge, principal and interest on the issue are generally paid to holders from the stated tax revenue source.
A security issued by either a government-sponsored enterprise (GSE), such as the Government National Mortgage Association (GNMA), Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC), Federal Home Loan Bank (FHLB), and Federal Farm Credit System (FFCS), or a government-owned corporation such as the Tennessee Valley Authority (TVA). Although agency bonds are not guaranteed by the full faith and credit of the U.S. government (except those issued by GNMA), they do involve some level of federal sponsorship. Most agencies sell bonds to raise capital, which is loaned to groups like farmers and homeowners.
Alternative Minimum Tax (AMT)
Created by Congress in 1969, the AMT was designed to ensure that all taxpayers pay at least some tax. The rules governing AMT identify a minimum amount of tax that an individual should pay, based on his or her income. If the individual, following normal tax rules, is not required to pay at least this amount, then he or she will need to pay the AMT.
Alternative Trading System (ATS)
An electronic trading system that is SEC registered. It matches buyers and sellers for trades, making it useful for intermarket trading and large trades that might otherwise trigger price changes on a traditional exchange. In addition, trading costs may be lower than those on a formal securities exchange. Examples include an electronic communication network (ECN), a crossing network, or a call market.
Annual Percentage Yield (APY)
Unlike the annualized rate, the APY takes into account the effect of compound interest. It is a standardized way to quote the annual rate of return for certificates of deposit (CDs).
The formula for APY is: APY = (1 + Periodic Rate)n – 1
n = number of periods
A rate of return that’s calculated by taking the return for a period of time (less than one year) and extrapolating it to a full year’s rate.
The price at which a seller is willing to sell a security. Also known as the offer price.
Asset-Backed Security (ABS)
A security with a specific asset pledged as collateral should the issuer be unable to make interest or principal payments when due.
Assumed Yield to Average Life
The average annual return on a bond, based on the assumed prepayments of mortgages held within a pool of mortgage-backed securities.
For mortgage-backed securities, the weighted average number of years to get back all principal on a security. For example, an investment that pays back 50% of the principal after one year and the other 50% of its principal in two years has an average life of 1½ years. (This estimate can vary and is based on prepayment assumptions that may or may not be met.)
Indicates that a municipal bond has been designated a "qualified tax-exempt obligation," allowing banks to benefit from tax deductions on the cost to carry the bonds.
A bond portfolio strategy in which you buy one group of bonds with short-term maturities and another group with longer-term maturities. The shorter bonds provide liquidity and less price volatility, while the longer bonds provide additional yield. By combining the two, you can achieve an intermediate duration with higher liquidity than a bond ladder.
One basis point is equal to 0.01%. Yield differences between fixed income securities are often stated in basis points (e.g., the difference between a bond yielding 4.85% and one yielding 4.96% is 11 basis points).
Also known as the selling price, this is the price that a buyer is willing to pay for a security.
A debt security maturing in less than one year.
Blue Sky Terms and Conditions
Refers to the set of state laws governing the registration and sale of securities. The specific provisions of these laws vary among states (and may include certain exemptions), but generally these laws require state registration of all securities sold within the state, as well as state registration of the brokers and brokerage firms that sell them. Each state's blue sky law is administered and enforced by its own regulatory agency. Due to state-specific securities laws, not all securities are available to legal residents of all 50 states and U.S. territories.
A debt security that obligates the issuer to pay the bondholder specific amounts of interest on specific dates, and usually to repay the principal value at the maturity date. The term is sometimes used to differentiate a debt security maturing in over 10 years from those with shorter maturities.
Bond Anticipatory Note (BAN)
A bond issue used as short-term financing by a government or corporation that is sold in advance of a larger upcoming bond issue. Part of the proceeds from the larger issue are used to pay off the BAN.
Field that contains details of the specific bond issue.
A bond insurance company that guarantees the timely payment of principal and interest on municipal and certain other types of bonds if the issuer defaults.
Bond Mutual Fund (or Bond Fund)
A mutual fund that holds fixed income securities such as Treasury bonds, municipal bonds, or corporate bonds. With small investment minimums, bond funds offer low-cost access to professionally managed fixed income portfolios.
Bond Mutual Fund—Nontaxable
A bond mutual fund that invests primarily in tax-free securities like municipal bonds.
Bond Mutual Fund—Taxable
A bond mutual fund that invests in taxable securities like Treasuries or corporate bonds.
The sale of one bond and purchase of another to get a bond with a better credit rating, earn a higher yield, make a maturity adjustment, or realize a gain.
See Schwab BondSource®.
Field that shows the symbol of a bond if it trades on an exchange.
Brokered Certificate of Deposit
A certificate of deposit (CD) issued by a bank but available for sale by a broker such as Schwab. Brokered CDs are FDIC-insured and generally have a survivor’s option. Unlike CDs held at the issuing bank, brokered CDs do not allow reinvestment of interest payments and can be sold in the secondary market. They have a CUSIP number and can be transferred between financial institutions.
Build America Bond (BAB)
The American Recovery and Reinvestment Act of 2009 created this new form of security with government-subsidized interest payments on certain municipal bonds. BABs have credit ratings, maturities, and interest payment structures similar to those of traditional municipal bonds; they are underwritten the same way and can trade in the secondary market. In addition, they can be general obligation (GO) or revenue bonds and are obligations of the issuer, not the federal government. Like traditional municipal bonds, BABs may be exempt from state tax in the state where they’re issued, but they are subject to federal taxes.
A noncallable bond (or portfolio of bonds) with one fixed maturity date.
Buying Treasuries at Auction (Non-Competitive)
The process for buying U.S. government securities from the Treasury. If you make a noncompetitive bid, you agree to accept the securities at the average bid price, which is determined at the auction.
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