Glossary of bonds for neophytes

The bond glossary helps you understand technical and specific terms used in the bond world, such as “coupon,” “maturity,” “issue price,” “nominal interest rate,” and “yield to maturity.” This knowledge is essential to properly evaluate the various aspects of a bond investment.

Knowing the key terms and concepts allows you to analyze and compare different bonds more effectively. You can better assess the risks and returns associated with each bond and make more informed investment decisions.

Understanding the various types of risk associated with bonds, such as interest rate risk, credit risk, and reinvestment risk, is critical to managing your portfolio efficiently. Knowing these terms helps you identify and mitigate potential risks.

If you are involved in financial planning, either for yourself or others, knowing the bond glossary enables you to create investment strategies that are aligned with your long-term financial goals, liquidity needs, and risk tolerance.

If you work in the financial industry or work with financial advisors, having a good grasp of the bond glossary makes communication easier. You can express your needs and concerns clearly and better understand the advice you receive.

Knowing the technical terms allows you to better monitor and evaluate the performance of your bond portfolio. You can understand changes in bond prices, changes in yields, and the impact of market conditions on your investment.

An informed investor is able to make more educated and thoughtful decisions. Knowledge of the bond glossary helps you avoid common mistakes and take advantage of investment opportunities more effectively.

Understanding bond-related terms and concepts is also important to ensure that you are in compliance with financial regulations and laws. This is especially relevant for professionals in the financial sector.

In summary, knowing the bond glossary is essential to safely and competently navigate the world of bond investing, enabling you to make more informed decisions and better manage your investments.

Issuer: is the entity that will benefit from the financing transaction. Issuer which may in fact be a private company, a bank or a state and on whose economic and financial soundness depends the payment of interest and the return of invested capital.

Rating: rating is a synthetic alphanumeric judgment, conducted by some specialized companies, on the “financial health” of enterprises, states and public institutions issuing a bond, in order to assess their degree of risk.

Maturity: maturity is the deadline by which the issuer is required to repay the principal loaned by the bondholder.

Coupon: The coupon or “coupon” (annual, semi-annual, or quarterly) indicates the interest that the bond holder will collect periodically throughout the life of the bond or otherwise for as long as he or she holds it. The coupon depends on the rate, which can be either fixed or variable.

Issue price: is the price demanded by the underwriters when the securities are placed on a primary market and can be (i) at par if the issue price is equal to the par value, (ii) below par if the issue price is less than the par value, or (iii) above par if the issue price is greater than the par value.

BTp: Multi-year Treasury Bonds (BTp) are medium- to long-term debt securities (bonds) issued by the Department of Treasury (Ministry of Economy and Finance) with a fixed coupon in arrears paid semi-annually.

Spread: denotes the range of difference between the yields offered by Italian 10-year government bonds (BTp) and German government bonds (Bund)-considered benchmarks for all European countries’ issues, being the most economically and financially stable nation.

High yield: “High yield” bonds are bonds issued by companies that have been given low ratings (BB+ or lower) by a credit rating agency.

Callable bonds: bonds that are characterized by the fact that, in the prospectus (or in the issuance regulations), the issuer has reserved the right to decide, from a certain date onward, whether or not to avail itself of the option to repay the loan before its natural maturity.

Nominal value: this is the amount on which interest is calculated. The face value remains unchanged over time and is not affected by the issuer’s financial position.

Junk Bond: Junk bonds, also referred to as junk bonds, are bonds issued by companies at high risk of default and incorporating a high expected yield.

Credit risk: risk that the borrower will be unable to meet its obligations to pay interest and repay principal. It is a component of all lending activities and, as such, influences investment choices.

Investment grade bonds: investment grade bonds are medium to high quality bonds generally associated with large issuers with stable businesses and strong balance sheets. In the capital market, such instruments possess lower yield spreads than high-yield bonds.

Volatility: market volatility is an indicator of the variation in prices with which securities are traded in the market, often measured by the standard deviation of returns or a measure of the variance of possible returns from the mean.

Government deficit: the difference between revenues (tax revenue) and expenditures (government spending) is called the government balance: if this balance is negative, it is called a deficit (or deficit); if it is positive, it is called a surplus; and if, finally, it is zero, it is called a balanced budget.

BOT: The Treasury bond is a security issued by the Italian government on a short-term basis to finance public debt. The term of the issues is normally 3, 6 and 12 months, although the state reserves the right to issue bonds with different terms.

Convertible bonds: a convertible bond is a bond whose redemption may be made, at the option of the subscriber, through the delivery of securities of another kind and of equal value (e.g., shares).

Seniority: represents the order of priority by which, in the event of issuer failure, you are entitled to be repaid-with what is available. According to this concept, we can therefore speak of senior secured bonds, senior unsecured bonds, and subordinated bonds.

Basket bond: a basket bond is a financial instrument that allows SMEs and Mid-Caps to issue bonds by bundling them into a single financial structure. This also enables them to obtain medium- to long-term financing from institutional investors.