Capital raisings were not always easy to access for individuals. That's changed and investors now have a wide variety of entry points into private and public capital markets.
While exploring the world of fixed income you may come across words or phrases your unsure of. Our jargon guide is here to help
Accrued Interest: Total interest accumulated on the bond since the last coupon payment but not yet paid.
Annuity: Regular fixed payments scheduled over a period of years.
Benchmark Reference: Group of securities or an index used as a standard against which relative investment performance is measured.
Call feature: A feature of a bond or other security that determines the terms under which it can be redeemed by the issuer before the scheduled maturity.
Correlation: Statistical measure of how two securities move in relation to each other.
Convertible Bond: Issues of bonds with an option allowing the bondholder to exchange the bond for a specified number of shares or common stock in a firm. This is disclosed at the time the bond is issued.
Corporate Bond: Debt security issued by a private corporation; interest is taxable and is generally paid according to a coupon rate set at the time the bond is issued; generally have a face value of $1,000.
Coupon rate: Amount of interest received by a bond investor, generally expressed as an annual percentage.
Credit Rating: Measurement of the risk of default of an individual fixed income security or the issuer of a fixed income security; generally measured by one of the major ratings agencies.
Credit Risk: The risk that the issuer of a fixed income security may not be able to make regularly scheduled interest payments or repay the principal at maturity.
Credit Spread: The difference in yields between 2 securities of the same maturity but different credit quality.
Current yield: The coupon from a bond divided by the market price of the bond, expressed as a percentage.
Trading at Discount: The price of a bond is currently lower than its face value.
Duration: A measure of the sensitivity of the price of a fixed-income investment to a change in interest rates.
Fixed rate bond: The coupons received each period are predetermined for the life of the bond and will not change.
Floating rate bond: The coupons received each period are variable throughout the life of the bond and are dependent on the benchmark rate, e.g. BBSW.
Green bonds: Bonds issued for the purpose of funding activities relating to climate and environmental activities.
High yield bond: Bonds typically offering a higher yield due to the issuers being perceived as a greater default risk. (These bonds carry a credit rating below BBB-)
Investment Grade: Bonds with a credit rating of BBB- or higher.
ISIN: The International Securities Identification Number (ISIN) is used to uniquely identify each bond.
Issue date: The first day a bond is tradable and begins to accrue interest.
Issuer: The name of the corporation issuing the bond.
Kangaroo Bonds: AUD-denominated bonds issued by overseas entities in the Australian market.
Maturity date: The day the initial principal of a bond is due to be repaid from the issuer to investor.
Nominal Value: The value of a security, such as a stock or bond, which remains fixed for the duration of its life.
Par Value: The amount returned to the bond investor by the issuer upon maturity.
Perpetual Bond: Bonds with no set maturity date. Some offer a “step up” feature whereby the coupon rate increases on future predetermined dates if the bond isn’t called.
Senior Debt: A form of seniority in the capital structure used during liquidation to determine priority of payments. Senior debt holders are first in line to be repaid after term deposit holders. Due to the lower risk relative to other forms of debt, yields tend to be lower.
Subordinated Debt: A form of seniority in the capital structure used during liquidation to determine priority of payments. Subordinated debt holders are repaid before hybrid and equity holders, but after term deposit and senior debt holders. Due to this hierarchy, subordinated debt tends to offer greater yields relative to senior debt.
Supranational: International organisations or groups that operate beyond national boundaries. These groups share decision-making and look to work on issues regarding multiple countries. For example, the World Bank is a supranational organisation.
Tier 2 Bonds: A form of subordinated debt banks issue to meet regulatory capital requirements.
Trading at Premium: The price of a bond that is currently higher than its face value of $1000.
Yield Curve: Graph plotting interest rates of bonds with equal credit risk, at the same point in time, but with different maturity dates.
Yield to Maturity: Annual return earned by a bond investor if purchasing a bond today and holding it until maturity.
Zero Coupon Bond: A bond that has no coupon payments. It is typically traded at a discount, so there is a profit when it is redeemed for face value at maturity.
The information contained in this article is gathered from multiple sources believed to be reliable as at January 2024 and is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. NAB recommends that you seek independent legal, property, financial and taxation advice before acting on any information in this article. Past performance is not necessarily indicative of future results. No warranty is made as to its accuracy, reliability or completeness. To the extent permitted by law, neither NAB or any of its related entities accept liability to any person for loss or damage arising from the use of this information. ©2024 NAB Private Wealth is a division of National Australia Bank Limited ABN 12 004 044 937 AFSL and Australian Credit Licence 230686.
The information contained in this article is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. NAB does not guarantee the accuracy or reliability of any information in this article which is stated or provided by a third party. Before acting on this information, NAB recommends that you consider whether it is appropriate for your circumstances. NAB recommends that you seek independent legal, property, financial and taxation advice before acting on any information in this article. You may be exposed to investment risk, including loss of income and principal invested.
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