A type of municipal bond that is used to finance private rather than public facilities and projects. For example, the construction of a new airport could be financed through a private purpose bond. |||The Tax Reform Act of 1986 separated munipal bonds into two types: public purpose bonds, and private issue bonds. Public purpose bonds are exempt from federal taxation. On the other hand, private purpose bonds are subject to tax unless they are specifcially exempted.
The actual amount of return earned on a security investment over a period of time. This period of time is typically the holding period which may differ from the expected yield at maturity. The realized yield also includes the returns that have been earned from reinvested interest, dividends and other cash distributions. |||The realized yield tends to differ from the yield at maturity in scenarios where the holding period is less than that of the maturity date. In other words, the security is settled or sold prior to the maturity date given at the time of purchase. For example, suppose an investor purchases a 10-year bond for $1,000 that issues a 5% annual coupon. Furthermore, if the investor sells the bond for $1,000 at the end of the first year (and after receiving the first coupon payment), her realized yield would only include the $50 coupon payment.
A special purpose vehicle (SPV) that is used to pool mortgage loans and issue mortgage-backed securities (MBS). Real estate mortgage investment conduits (REMIC) hold commercial and residential mortgages in trust, and issue interests in these mortgages to investors. |||Similar to collateralized mortgage obligations (CMOs), REMICs piece together mortgages into pools based on risk, and issue bonds or other securities to investors. These securities then trade on the secondary mortgage market.
The additional fixed spread above the index underlying a floating-rate security. |||For example, if a floating-rate note has a rate based on LIBOR plus 0.5%, the 0.5% or 50 basis points would be the reference rate and would not change throughout the life of the note.
The return a bond must offer in order to be a worthwhile investment. Required yield is set by the market and sets the precedent for how current bond issues will be priced. |||For example, if the required yield increases to a rate that is greater than that of the bond's coupon, the bond will be priced at a discount. In this way, the investor acquiring the bond will be compensated for the lower coupon rate in the form of accrued interest. If the bond is not priced at a discount, investors will not purchase the issue because its yield will be lower than that of the market. The opposite occurs when the required yield decreases to a rate that is less than that of the bond's coupon. In this case, investor demand for the higher coupon will drive the bond's price up, making the bond's yield equivalent to market yield.
A form of short-term borrowing for dealers in government securities. The dealer sells the government securities to investors, usually on an overnight basis, and buys them back the following day. For the party selling the security (and agreeing to repurchase it in the future) it is a repo; for the party on the other end of the transaction, (buying the security and agreeing to sell in the future) it is a reverse repurchase agreement. |||Repos are classified as a money-market instrument. They are usually used to raise short-term capital.
A bond that features an option for the holder to force the issuer to redeem the bond before maturity at par value. An investor may choose to shorten the maturity on a bond because of market conditions or if he or she requires the principal sooner than expected. |||For example, a company might issue 20-year retractable bonds to the market. This means the investor who buys the bond from the issuer has the right to receive the par value or face value of the bond at any time before maturity. If the investor exercises the right to retract, then he or she will forgo the rest of the coupon payments on the bond. An investor might exercise this option due to unfavorable market conditions such as a rise in interest rates. An increase in interest rates would translate into lower bond prices. As a result, investors may want to switch to higher-yielding bonds.
A bond issued to one party of a contract as a guarantee against the failure of the other party to meet obligations specified in the contract. |||For example, a contractor may issue a bond to a client for whom a building is being constructed. If the contractor fails to construct the building according to the specifications laid out by the contract, the client is guaranteed compensation for any monetary loss.
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