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Municipal Bonds

Glossary

Accrued interest:
Interest earned on a bond from the last date interest was paid by the issuer to the present.

Alternative minimum tax (AMT):
A different method of calculating an individual's tax liability. The interest income from some municipal bonds may be subject to the alternative minimum tax.

Amortization of premium:
For a bond purchased at a price above par (or accreted value on an OID), a portion of the premium is written down, or "amortized," daily prior to maturity. This adjustment reduces the "basis" price used in calculating capital gains or losses.

Assessed valuation:
The total value placed on property for taxation purposes within a specific geographical area.

Basis:
A means of expressing yield as a percentage. Each basis point is 1/100 of 1%.

Bearer bond:
The typical form in which municipal bonds used to be issued. Ownership is not registered, so the holder is presumed to be the owner. Because bearer bonds are fully negotiable, owners should take great care to provide for their safekeeping.

Bid price:
The price at which a broker/dealer is willing to sell a security.

Blue Sky Laws:
State securities laws pertaining to registration requirements and procedures for issuers, broker/dealers, their employees and other associated persons of those entities.

Bond:
A promise to repay a specified sum of principal on a stated date with interest.

Book entry:
The most common way in which municipal bonds are now issued. A single "global" certificate is created for each issue and ownership is electronically entered on the bond depository's records. Ownership is verified by confirmation and periodic account statements.

Call date:
The date on which the issuer is entitled to redeem the bond at the specified call price, before the bond's maturity date. Bonds can be non-callable, in which case they will be paid on their maturity date. Bonds may have one call date or multiple call dates.

Call price:
The amount of money the investor will receive per bond in the event that the issuer redeems the bond on the call date. The call price is typically an amount equal to or above the bond's face amount. Certain zero-coupon bonds may be called at their accreted value as of a given date.

Callable bond:
A bond that the issuer is able to redeem, usually at a premium, prior to the maturity date. Typically the first call date is ten years from the issuance date.

Certificates of participation (COPs):
Certificates of participation are typically secured by lease payments from the government entity using a facility. A COP issue is often used to finance projects such as prisons or courthouses necessary to provide government services but that may not enjoy sufficient public support to be financed through a voter approved general obligation bond issue. In many cases, payments by the municipality are subject to annual legislative appropriations.

Compound Accreted Value (CAV):
The compound accreted value is used as a starting point in determining the value of zero coupon bonds. It includes all interest accrued from the time the bond was issued. In calculating the CAV, the yield to maturity at the issuance of the bond is held constant.

Coupon:
States the rate interest will be paid on a bond, usually semiannually.

Current yield:
The relationship, stated in a percentage, between the price and the annual income of a bond. The current yield is found by dividing the coupon by the current market value of the bond.

CUSIP number:
A unique identification number assigned to each type of security by the Committee on Uniform Security Identification Procedure, a securities industry coding service.

Dated date:
The specific date on each bond issue from which interest is originally accrued.

Debt service:
The total amount of money required to meet the annual principal and interest payments when due.

Debt service coverage:
For revenue bonds, a ratio of how many times the net project revenues exceed the total annual debt service due in the same period.

Default:
The failure of an issuer to promptly pay principal and/or interest when due.

Discount bond:
A bond that is selling, or was issued, at a dollar price below the par value.

Discount rate:
A rate of interest associated with borrowing reserves from a central bank by member banks in the Federal Reserve district. The rate is set by the officials of that central bank.

Discount yield:
The discount yield represents the percentage discount from the face value of the security.

Dollar bond:
A bond that is traded and quoted at a dollar price rather than a yield to maturity; usually a long-term, bond.

Double-barreled bond:
A bond that is secured by a pledge of two or more sources of income (usually taxes and revenues).

Face amount:
The par value of a bond.

General obligation:
A bond backed by a municipality's full faith and credit to meet the annual debt service expense.

Insured bonds:
Bond insurance is a form of backup security for a municipal bond issue, under which the investor is insured against default on principal and interest. Insured bonds can provide a form of portfolio diversification since, in case of default by an issuer, ultimate liability for payment of principal and interest when due, rests with the insurer.

Interest dates:
The specific dates on which the bondholder receives interest income. Municipals typically pay interest semiannually, usually on the 1st or the 15th of the month.

Interest rate:
The annual tax-free interest paid. (Also called coupon rate.)

Issuer:
The state, municipality or other governmental authority that is issuing the bonds.

Legal opinion:
The opinion of a qualified law firm stating that the municipal bonds being offered for sale are validly issued. The opinion often includes a statement indicating the tax-exempt status of the income.

Limited tax bond:
A general obligation bond secured by the pledge of a specified tax (usually the property tax) or category of taxes that is limited as to rate or amount.

Marketability:
The measure of ease with which a bond can be sold in the secondary market.

Maturity:
The date upon which the issuer repays the principal.

Maturity value:
The amount an investor receives when a security is redeemed at maturity, not including any periodic interest payments. This value usually equals the par value, although on zero-coupon, compound-interest and multiplier bonds, the principal amount of the security at issuance plus the accumulated investment return on the security is included.

Municipal bonds:
Debt securities issued by states, municipalities and various public authorities whose coupon interest is exempt from federal income tax and state and local taxes if issued in the state of residence. See
 General obligation and Revenue bond.

NASD:
A self-regulatory organization whose function is to operate and regulate the Nasdaq (OTC) marketplace and to protect investors in the OTC market. In general, OTC securities are not traded on an exchange.

Non-callable security:
A bond or preferred stock without a call feature.

Official statement:
A document much like a prospectus prepared by a municipality and distributed at the time of a bond sale that contains information about the issue.

Over-the-counter market:
A market that trades unlisted securities, conducted by dealers through negotiation rather than through the use of an auction system such as in the New York Stock Exchange.

Par value:
The face or dollar amount of a security, usually $1,000 for a municipal bond.

Paying agent:
The agent designated by the issuer to pay interest and principal; usually a bank or a trust company.

Premium:
The amount by which a security is selling above its par (stated) value. Can also refer to the premium an issuer will pay to redeem bonds prior to maturity.

Pre-refunded bonds:
Pre-refunded bonds ("preres") are municipals that are generally backed or secured by U.S. Treasury bonds. Pre-res can provide investors with a combination of the highest possible credit quality, and a taxable equivalent yield that compares favorably with that available on Treasuries.

Pre-refunding:
A bond issue designed to provide funds that will be set aside for the retirement of outstanding bonds.

Price:
Value of a security in dollar terms. For bonds, price refers to percentage of par value.

Principal:
The face amount or par value of a bond. Also used to define the market value of a bond, before adding accrued interest.

Put bond:
A bond that gives the holder the right to require the issuer to purchase the bond in accordance with the terms specified for the security.

Ratings:
Credit categories that denote the various degrees of quality for a bond.

Redemption:
The repayment of an outstanding bond on or before maturity.

Registered bond:
An increasingly rare form in which municipal bonds are issued. The owner's name will be on record as to principal only, or as to both principal and interest.

Revenue bond:
A municipal security backed by earnings or revenues of a project (e.g., tolls for a bridge).

Secondary market:
The market for outstanding bonds.

Self-supporting debt:
Bonds sold for a project that will produce sufficient revenues to retire the debt.

Serial bonds:
A portion of an issue of bonds that matures annually over a period of years.

Settlement (delivery) date:
The day on which certificates or payments involved in a transaction are due at the purchaser's office.

Special tax bond:
A bond secured by the revenues of a special tax (e.g., a gasoline tax).

Subdivision:
A governmental entity legally authorized under the jurisdiction of a state, city, county, village, etc.

Swap:
The exchange of one bond or a group of bonds for another bond or group of bonds. Typically, swaps are done to take losses, but there are a number of other reasons including change of residence, change of tax status and to restructure portfolios.

Syndicate:
A group of investment banking firms that agrees to underwrite or purchase a new bond issue and reoffer it for sale to the general public.

Underwriter:
The investment banking firm that purchases an issue of municipal bonds from the issuer and resells them to the public.

Unlimited tax bond:
A general obligation bond secured by a pledge of taxes that are not limited in rate or amount.

Variable rate:
The interest rate payable on a security that is subject to change, commonly on a set frequency, in relation to other benchmark financial rates such as selected issues of the Treasury, Fed Funds rate, LIBOR, etc. Also called "floating rate."

Yield (rate of return):
The percentage return on an investor's money in terms of current prices. If a yield is designated with a (C), (M), (P), (D), (R) or (W), please see
 the Yield to call, Yield to maturity, Yield to put, Discount yield, Yield to prerefunded or Yield to worst definitions respectively.

Yield to call:
The average annual return on an investment assuming the security will be redeemed by the issuer at the predetermined call date.

Yield to maturity:
The average annual return on an investment if the security is held to maturity. This calculation takes into consideration any discount or premium initially paid for the security.

Yield to pre-refunded:
The yield the bondholder will receive, assuming the bond is redeemed on the next call date.

Yield to put:
The average annual return on a security, assuming the holder will exercise the put and put (sell) the bond to the issuer on the date specified for the security.

Yield to worst:
Yield to worst: The average annual return on an investment, assuming the security will be redeemed by the issuer at the lower of either the lowest of all the security's yield to calls or the yield to maturity.

Zero coupon bonds:
Municipal zero-coupon bonds are bonds issued at a fraction of their maturity value (the longer the maturity, the greater the discount.) Interest is only paid with principle at maturity, or at the time the bonds are called, instead of being distributed semi-annually. By purchasing a zero-coupon bond, investors lock in the reinvestment rate and, if they hold the bond to maturity, are not vulnerable to interest rate fluctuations in the market. Zero coupon bonds are an ideal investment for individuals seeking to fund future known expenses.

For more information, please contact your Financial Advisor.

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