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Bonds 101


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"Street" Name

The name of a broker-dealer or nominee. Securities registered in the name of a broker-dealer or nominee are described as being “registered in ‘street’ name.” These securities generally can be transferred more easily than securities with other forms of registration and are considered to be in “good delivery” form for purposes of inter-dealer transactions.

Accredited Investor

An investor to whom a security otherwise required to be registered under the Securities Act of 1933 may be sold in a limited offering without registration under the SEC’s Regulation D and who does not count against the maximum limit of 35 investors. In addition to a variety of categories of institutional investors (including banks, insurance companies, investment companies, business development companies and employee benefit plans, as well as certain 501(c)(3) organizations, corporations, business trusts and partnerships), an accredited investor includes high net worth or high income individuals. Municipal securities generally are not subject to registration under the Securities Act of 1933 but sometimes their sales are restricted to accredited investors to ensure that they are sold only to persons who are capable of understanding the risk and bearing the potential loss of an investment in the securities.

Accrued interest

On a transaction in a security, the dollar amount of interest, based upon the stated rate or rates of interest, that has accumulated on the security from (and including) the most recent interest payment date (or, in certain circumstances, the dated date or other stated date), up to but not including the date of settlement of the transaction. Accrued interest is paid to the seller by the purchaser. Accrued interest is usually calculated on the basis of a 360-day year (assuming that each month has 30 days), but alternative day counting methods (most commonly based on a 365- or 366-day year counting actual days elapsed) are used for many securities that bear interest at a variable rate and for certain other types of securities (e.g., some municipal notes). The formula for computing accrued interest based on a 360-day year is as follows:

Alternative Minimum Tax (AMT)

Taxation based on an alternative method of calculating federal income tax intended to ensure that taxpayers are not able to avoid paying any federal income tax. For taxpayers subject to the alternative minimum tax, certain tax preference items, including interest on some private activity bonds, otherwise not subject to taxation are added to the gross income of the taxpayer for purposes of calculating the federal income tax liability.

Amortization of Premium

An accounting process by which the book value of a security purchased at a premium above par is decreased during the security’s holding period. The amortization reflects the decrease in the security’s value as it approaches the redemption or maturity date. Under a “straight line” amortization method, the amount of the yearly amortization is the same for all years and is equal to the product of the total amount of the premium divided by the number of years to redemption or maturity. Under a “constant interest” amortization method, the amount of the yearly amortization decreases as the redemption or maturity date approaches and for any semi-annual period is equal to (a) the current interest payment less (b) the original semi-annual yield to maturity multiplied by the current book value.


A proposal to purchase securities at a specified price. With respect to a competitive of a new issue of municipal securities, the bid specifies the interest rate(s) for each maturity and the purchase price. The purchase price is usually stated in terms of par, par plus a premium or par minus a discount.

Bond Isurance

A guarantee by a bond insurer of the payment of the principal of and interest on municipal bonds as they become due should the issuer fail to make required payments. Bond insurance typically is acquired in conjunction with a new issue of municipal securities, although insurance also is available for outstanding bonds trading in the secondary market. In the case of insurance obtained at the time of issuance, the issuer of the policy typically is provided extensive rights under the bond contract to control remedies in the event of a default.

Certificate of Participation (COP)

An instrument evidencing a pro rata share in a specific pledged revenue stream, usually lease payments by the issuer that are subject to annual appropriation. The certificate generally entitles the holder to receive a share, or participation, in the lease payments from a particular project. The lease payments are passed through the lessor to the certificate holders. The lessor typically assigns the lease and lease payments to a trustee, which then distributes the lease payments to the certificate holders.

Coupon Rate

The annual rate of interest payable on a security expressed as a percentage of the principal amount. The coupon rate, sometimes referred to as the “nominal interest rate,” does not take into account any discount (or premium) in the purchase price of the security.

Covenant or Bond Covenant

The issuer’s enforceable promise to perform or refrain from performing certain actions. With respect to municipal securities, covenants are generally stated in the bond contract. Covenants commonly made in connection with a bond issue may include covenants to charge fees sufficient to provide required pledged revenues (called a “rate covenant”); to maintain casualty insurance on the project; to complete, maintain and operate the project; not to sell or encumber the project; not to issue parity bonds unless certain tests are met (called an “additional bonds covenant”); and not to take actions that would cause the bonds to be arbitrage bonds. A covenant whereby the issuer is affirmatively obligated to undertake a duty in order to protect the interests of bondholders (e.g., to maintain insurance) is called a “protective covenant.” A covenant whereby the issuer obligates itself to refrain from performing certain actions (e.g., not to sell the project) is called a “negative covenant.”

Current Yield

The ratio of the annual dollar amount of interest paid on a security to the purchase price or market price of the security, stated as a percentage. For example, a $1,000 bond purchased at par with a 5% coupon pays $50 per year, or a current yield of 5%. The same bond, if purchased at a discount price of $800, would have a current yield of 6.25%. A $1,000 bond purchased at a premium price of $1,200 would have a current yield of 4.17%.

CUSIP Number (Committee on Uniform Securities Identification Procedures)

An identification number assigned to each maturity of an issue intended to help facilitate the identification and clearance of securities. In some cases, separate CUSIP numbers may be assigned to different portions of a maturity that bear different interest rates or where differences exist in the terms of the securities of such maturity that may impair the fungibility of the securities within the maturity. For example, if a portion of a maturity has been advance refunded and the remaining portion remains outstanding, each portion will be assigned a separate CUSIP number.

Debt Service

The amount of money necessary to pay interest on outstanding bonds, the principal of maturing bonds and the required contributions to a sinking fund for term bonds. This amount is also known as the “debt service requirement.” “Annual debt service” refers to the total principal and interest paid in a calendar year, fiscal year, or bond fiscal year. “Total debt service” refers to the total principal and interest paid throughout the life of a bond issue. “Average annual debt service” refers to the average debt service payable each year on an issue


A failure to pay principal of or interest on a bond when due or a failure to comply with any other covenant, promise or duty imposed by the bond contract. The most serious event of default, sometimes referred to as a “monetary” default, occurs when the issuer fails to pay principal, interest, or both, when due. Other defaults, sometimes referred to as “technical” defaults, result when specifically defined events of default occur, such as failure to maintain covenants. Technical defaults may include failing to charge rates sufficient to meet rate covenants, failing to maintain insurance on the project or failing to fund various reserves. If the issuer defaults in the payment of principal, interest, or both, or if a technical default is not cured within a specified period of time, the bondholders or trustee may exercise legally available rights and remedies for enforcement of the bond contract.

Dutch Auction

A process by which securities are sold at the highest price at which sufficient bids are received to sell all securities offered. Generally, the securities will be sold at the clearing price established by the Dutch auction to all investors placing bids at or above the clearing price. In the municipal securities market, Dutch auctions may be used as a method of distributing or remarketing variable rate demand obligations. Dutch auctions also are sometimes used in the secondary market to sell out an investor’s large position in a security.

Excise Tax

A tax levied upon the manufacture, sale or consumption of commodities, upon the license to pursue certain occupations, or upon corporate privileges within a taxing jurisdiction. Examples of such taxes include sales and use taxes and taxes on alcohol and cigarettes.

Fixed Income Security

An investment representing an indebtedness on the part of the obligor and having the basic characteristic of providing for periodic payments of investment return and repayment on a specified date of the principal amount of the investment. Certain forms of indebtedness that do not provide for periodic payments of a fixed amount of interest income (e.g., variable rate demand obligations, zero coupon bonds) nonetheless generally are considered to be fixed income securities.

General Obligation Bond (G.O. Bond)

A bond that is secured by the full faith, credit and taxing power of an issuer. General obligation bonds issued by local units of government are typically secured by a pledge of the issuer’s ad valorem taxing power; general obligation bonds issued by states are generally based upon appropriations made by the state legislature for the purposes specified. Ad valorem taxes necessary to pay debt service on general obligation bonds are often not subject to the constitutional property tax millage limits (an “unlimited tax bond”), although in some cases such limit may exist (a “limited tax general obligation bond”). Such bonds constitute debts of the issuer and often require approval by election prior to issuance. In the event of default, the holders of general obligation bonds have the right to compel a tax levy or legislative appropriation.

High-Yield Bond

A bond with unfavorable credit characteristics that is typically non-rated or rated below investment grade. A high-yield bond trades at yields substantially higher than bonds with more favorable credit characteristics and often suffers from lack of liquidity and marketability.


The amount paid by a borrower as compensation for the use of borrowed money. This amount is generally calculated as an annual percentage of the principal amount.

Interest Rate

The annual rate, expressed as a percentage of principal, payable for use of borrowed money

Investment Grade

A credit designation given municipal securities that have a high probability of being paid. Bonds rated “BBB” or higher by Standard & Poor’s or Fitch Ratings or “Baa” or higher by Moody’s Investors Service, Inc., are generally deemed to be investment grade. Notes and other short term obligations rated “F3” or higher by Fitch Ratings, “MIG 3” or “VMIG 3” or higher by Moody’s Investors Services, Inc., or “SP-2” or higher by Standard & Poor’s are also deemed to be investment grade.


A state, political subdivision, municipality, or governmental agency or authority that raises funds through the sale of municipal securities.

Lease Rental, Lease Revenue or LeaseHold Revenue Bond

A bond from an issue that is secured by lease payments made by the party leasing the facilities financed by the issue. Typically, lease rental bonds are used to finance construction of facilities (e.g., schools or office buildings) used by a state or municipality, which leases the facilities from a financing authority. In many cases, lease payments may be subject to annual appropriation or will be made only from revenues associated with the facility financed. In other cases, the leasing state or municipality is obligated to appropriate moneys from its general tax revenues to make lease payments.


A benchmark interest rate upon which many transactions are based. Obligations of parties to such transactions are typically expressed as a spread to LIBOR. The term is an acronym for “London Inter-Bank Offered Rate.”

Limited Tax Bond

A bond secured by the pledge of a specified tax or category of taxes.

Limited Tax General Obligation Bond

A general obligation bond secured by the pledge of ad valorem tax that is limited as to rate or amount.

Mandatory Tender

The requirement that a holder of a security surrender the security to the issuer or its agent (e.g., a tender agent) for purchase. The tender date may be established under the bond contract or may be specified by the issuer upon the occurrence of an event specified in the bond contract. The purchase price typically is at par. This term is sometimes referred to as a “mandatory put.”

Mark Up

A form of remuneration received by a broker-dealer when selling securities as principal to a customer. Mark-up generally is considered to be the differential between the prevailing market price of the security at the time the broker-dealer sells the security to the customer and the higher price paid by the customer to the broker-dealer. MSRB rules require that the price at which a broker-dealer sells a municipal security to a customer be fair and reasonable, taking into consideration all relevant factors. MSRB rules do not provide numerical guidelines regulating the amount of mark-up but do recognize that the mark-up can affect whether the total price paid by a customer is fair and reasonable.


A process whereby the carrying value of a security is adjusted to reflect its current market value. Certain regulatory requirements mandate that broker-dealers carry positions at prices that reflect current market values. Issuers or their agents also must generally adjust the value of securities held in a debt service reserve fund or other bond-related fund, or of investments held in a local government investment pool, to reflect current market value.

Market Discount Bond

A bond purchased in the secondary market at a price that is less than the original issue price plus the accreted original issue discount, if any, through the date of purchase. This market discount may be treated differently than original issue discount for federal income tax purposes.

Material Event Disclosure

Disclosure of certain enumerated events affecting a municipal security required to be made under a continuing disclosure agreement meeting the requirements of Rule 15c2-12. These events include the following, if material: (1) principal and interest payment delinquencies; (2) non-payment related defaults; (3) unscheduled draws on debt service reserves reflecting financial difficulties; (4) unscheduled draws on credit enhancements reflecting financial difficulties; (5) substitution of credit or liquidity providers, or their failure to perform; (6) adverse tax opinions or events affecting the tax-exempt status of the security; (7) modifications to rights of securities holders; (8) bond calls; (9) defeasances; (10) release, substitution, or sale of property securing repayment of the securities; (11) rating changes; and (12) failure to provide annual financial information as required.

Moral Obligation Bond

A bond, usually issued by a state agency or authority, that is secured by a non-binding covenant that any amount necessary to make up any deficiency in pledged revenues available for debt service will be included in the budget recommendation made to the state legislature or other legislative body, which may appropriate moneys to make up the shortfall. The legislature or other legislative body, however, is not legally obligated to make such an appropriation.

Municipal Securities

A general term referring to securities issued by local governmental subdivisions such as cities, towns, villages, counties or special districts, as well as securities issued by states and political subdivisions or agencies of states. A prime feature of these securities is that interest or other investment earnings on them usually are excluded from gross income of the holder for federal income tax purposes. Issuers of municipal securities are exempt from most federal securities laws.

Municipal Securities RuleMaking Board (MSRB)

The Municipal Securities Rulemaking Board is an independent self-regulatory organization, consisting of representatives of securities firms, dealer banks and the public, that is charged with primary rulemaking authority over dealers, dealer banks and brokers in connection with their municipal securities activities. MSRB rules are approved by the SEC and enforced by NASD for broker-dealers other than dealer banks and by the appropriate regulatory agencies for dealer banks.

Municipal Utility District Bonds (MUDs)

Bonds issued to finance the construction of water, sewer and related facilities in undeveloped areas. Repayment of the bonds generally is dependent upon the development of the properties benefited by the improvements.

Net Price

The price at which a security is offered to the general public. The price of a transaction between municipal securities professionals is generally the net price less a concession.

Net Revenues

The amount of money available after subtracting from gross revenues such costs and expenses as may be provided for in the bond contract. The costs and expenses most often deducted are operations and maintenance expenses

Non-AMT Bond

A tax-exempt bond, interest on which is not subject to the federal alternative minimum tax.

Non-Investment Grade

A credit designation given municipal securities that is below investment grade.


The party having an obligation with respect to the payment of debt service on bonds, typically but not always the borrower (such as a conduit borrower) of bond proceeds.

Odd Lot

A principal amount of securities that is smaller than what is considered a normal trading unit. An odd lot is often traded at a price that includes a differential attributable to the size of the lot (e.g., a broker-dealer may bid lower for an odd lot than for a larger block).

Offer Wanted

Process by which a broker-dealer or investor actively solicits offers for a position of bonds from the marketplace.

Offering Price

The price or yield at which broker-dealers offer securities to investors.

Official Statement (O.S.)

A document or documents prepared by or on behalf of the issuer of municipal securities in connection with a primary offering that discloses material information on the offering of such securities. For primary offerings subject to Rule 15c2-12, the “final official statement” must include, at a minimum, information on the terms of the securities, financial information or operating data concerning the issuer and other entities, enterprises, funds, accounts or other persons material to an evaluation of the offering, and a description of the continuing disclosure undertaking made in connection with the offering (including an indication of any failures to comply with such undertaking during the past 5 years). Official statements typically also include information regarding the purposes of the issue, how the securities will be repaid, and the financial and economic characteristics of the issuer or obligor with respect to the offered securities. Investors may use this information to evaluate the credit quality of the securities. Although functionally equivalent to the prospectus used in connection with registered securities, an official statement for municipal securities is exempt from the prospectus requirements of the Securities Act of 1933.

Original Issue Discount (O.I.D.)

An amount by which the par value of a security exceeded its public offering price at the time of its original issuance. The original issue discount is amortized over the life of the security and, on a municipal security, is generally treated as tax-exempt interest. When the investor sells the security before maturity, any profit realized on such sale is calculated (for tax purposes) on the adjusted book value, which is calculated for each year the security is outstanding by adding the accretion value to the original offering price. The amount of the accretion value (and the existence and total amount of original issue discount) is determined in accordance with the provisions of the Internal Revenue Code and the rules and regulations of the Internal Revenue Service.

Paying Agent

The entity responsible for transmitting payments of interest and principal from an issuer of municipal securities to the security holders. The paying agent is usually a bank or trust company, but may be the treasurer or some other officer of the issuer. The paying agent may also provide other services for the issuer such as reconciliation of the securities and interest paid, destruction of paid securities, and similar services. The trustee under a trust indenture often also acts as paying agent.

Preliminary Official Statement (P.O.S.)

A preliminary version of the official statement, which is used to describe the proposed new issue of municipal securities prior to the determination of the interest rate(s) and offering price(s). The preliminary official statement may be used to gauge interest in an issue and is often relied upon by potential purchasers in making their investment decisions. Normally, offers for the sale of or acceptance of securities are not made on the basis of the preliminary official statement and a statement to that effect appears on the face of the document generally in red print, which gives the document its nickname, “red herring.”

Premium Call Price

A price, in excess of par value (or compound accreted value, in the case of certain original issue discount or zero coupon bonds) and expressed as a percentage of par (or compound accreted value), that the issuer agrees to pay upon redemption of its outstanding bonds prior to the stated maturity date. The amount of premium to be paid often declines as the possible redemption date approaches the maturity date.

Private Activity Bond

A municipal security the proceeds of which are used by one or more private entities. A municipal security is considered a private activity bond if it meets either of two sets of conditions set out in Section 141 of the Internal Revenue Code. A municipal security is a private activity bond if, with certain exceptions, more than 10% of the proceeds of the issue are used for any private business use (the “private business use test”) and the payment of the principal of or interest on more than 10% of the proceeds of such issue is secured by or payable from property used for a private business use (the “private security or payment test”). A municipal security also is a private activity bond if, with certain exceptions, the amount of proceeds of the issue used to make loans to non-governmental borrowers exceeds the lesser of 5% of the proceeds or $5 million (the “private loan financing test”). Interest on private activity bonds is not excluded from gross income for federal income tax purposes unless the bonds fall within certain defined categories (“qualified bonds” or “qualified private activity bonds”), as described below. Most categories of qualified private activity bonds are subject to the alternative minimum tax.

Private Placement

A negotiated offering in which a new issue of municipal securities is sold on an agency basis by a placement agent directly to institutional or private investors rather than through an offering to the general investing public. Investors purchasing privately placed securities often are required to agree to restrictions as to resale and are sometimes requested or required to provide a private placement letter to that effect.

Qualified Institutional Buyer (QIB)

An entity to whom a security otherwise required to be registered under the Securities Act of 1933 may be sold without such registration under SEC Rule 144A. In general, a QIB must own and invest on a discretionary basis at least $100 million in securities and must be an insurance company, investment company, employee benefit plan, trust fund, business development company, 501(c)(3) organization, corporation (other than a bank with net worth less than $25 million), partnership, business trust or investment adviser.


Evaluations of the credit quality of notes and bonds made by rating agencies. Ratings are intended to measure the probability of the timely repayment of principal of and interest on municipal securities. Ratings often are assigned upon issuance and are periodically reviewed and may be amended to reflect changes in the issuer’s credit position. Ratings also are sometimes assigned after the initial issuance, often on bonds that have been advance. The factors upon which the rating agencies base their credit ratings vary with each type of issue. The ratings may derive from the credit worthiness of the issuer itself or from a credit enhancement feature of the security (e.g. guarantor, letter of credit provider, bond, etc.). In the case of short term obligations, liquidity generally is a significant factor in determining a short term rating. Some rating agencies provide both long term and short term ratings on variable rate demand obligations. The principal rating agencies in the municipal securities market use the following system of ratings as of the date of this publication – ratings from different rating agencies with the same or similar designation do not necessarily represent equivalent ratings – explanations of the significance of each rating classification are available from the rating agencies at the websites indicated:

Record Date

A predetermined date prior to the interest payment date on an issue of registered securities that is used to determine to whom the next interest payment will be made. Persons who are listed as the registered owners of the securities on the record date will receive the interest payment. The record date is usually identified in the bond contract.


A transaction in which the issuer repays to the holder of an outstanding security the principal amount thereof (plus, in certain cases, an additional amount representing a redemption premium). Redemption can be made under several different circumstances: at maturity of the security, as a result of the issuer exercising a right under the bond contract to repay the security prior to its scheduled maturity date (often referred to as a “call”), or as a result of the security holder's election to exercise a put or tender option privilege. Redemption provisions in the bond contract for a security may provide the issuer the right to retire the debt fully or partially before the scheduled maturity date.


A procedure whereby an issuer refinances outstanding bonds by issuing new bonds. There are generally two major reasons for refunding: to reduce the issuer’s interest costs or to remove a burdensome or restrictive covenant imposed by the terms of the bonds being refinanced. The proceeds of the new bonds are either deposited in escrow to pay the debt service on the outstanding bonds when due or used to promptly (typically within 90 days) retire the outstanding bonds. The new bonds are referred to as the “refunding bonds,” and the outstanding bonds being refinanced are referred to as the “refunded bonds” or the “prior issue.” Generally, refunded bonds are not considered a part of the issuer’s debt because the lien of the holders of the refunded bonds, in the first instance, is on the escrowed funds, not on the originally pledged source of revenues.


(1) A repricing of a new issue of municipal securities, although in some cases involves more significant modifications to the structure of the new issue, including changing the principal amounts and/or maturity schedule of the offering. See: REPRICE.
(2) In the workout of a defaulted issue of municipal securities, the modification of the terms of, or security for, the issue.

Revenue Bond

A bond that is payable from a specific source of revenue and to which the full faith and credit of an issuer with taxing power is not pledged. Revenue bonds are payable from identified sources of revenue and do not permit the bondholders to compel taxation or legislative appropriation of funds not pledged for payment of debt service. Pledged revenues may be derived from operation of the financed project, grants and excise or other specified non-ad-valorem taxes. Generally, no voter approval is required prior to issuance of such obligations

Securities and Exchange Commission (SEC)

The federal agency responsible for supervising and regulating the securities industry. Generally, municipal securities are exempt from the SEC’s registration and reporting requirements. Broker-dealers in municipal securities, however, are subject to SEC regulation and oversight. The SEC also has responsibility for the approval of MSRB rules and has jurisdiction, pursuant to SEC Rule 10b-5, over fraud in the sale of municipal securities.

Securities Investor Protection Corporation (SIPC)

A non-profit corporation created by the Securities Investor Protection Act of 1970 under which investors are partially insured against the possibility of loss resulting from the insolvency of a broker-dealer. In the event of a firm’s insolvency, SIPC appoints a trustee to conclude the affairs of the firm. The trustee typically would return identifiable property (e.g., securities registered in a particular customer’s name) to customers and handle customer claims for other securities or funds due them. SIPC maintains a trust fund for the protection of customers into which broker-dealers make contributions, and SIPC may pay customer claims out of this fund, up to certain specified limits.

Series of Bonds

Bonds of an issue sharing the same lien on revenues and other basic characteristics. A series of bonds may consist of serial bonds, term bonds or both. An issue of bonds can consist of one or more series of bonds. Typically, where a single issue consists of more than one series of bonds, the series are distinguished from one another based on one or more key characteristics. For example, one series may be senior lien bonds and the other may be junior lien bonds; two series may have liens on different revenue sources; one series may consist of capital appreciation bonds and the other may consist of current interest paying bonds; one series may be tax-exempt bonds and the other may be taxable municipal securities; one series may bear interest at a fixed rate and the other may bear interest at a variable rate.

Settlement Date

The date on which settlement is scheduled to occur. This date is used in price and interest calculations.

Sophisticated Investor

Typically, an investor viewed by an issuer or underwriter as having sufficient resources, market knowledge and experience to understand and bear the risks involved in a particular investment.

Split Ratings

An assignment of different ratings, one higher and one lower, on an issue of municipal securities by two or more rating agencies.

Standard & Poor's (S&P)

A nationally recognized statistical rating organization that provides ratings for municipal securities and other financial information to market participants.


A sale of a security and the simultaneous purchase of another security for purposes of enhancing the investor’s holdings. The swap may be used to achieve desired tax results, to gain income or principal, or to alter various features of a bond portfolio, including call protection, diversification or consolidation, and marketability of holdings.

Tax Increment Bond

A bond (also known as a “tax allocation bond”) payable from the incremental increase in tax revenues realized from any increase in property value resulting from capital improvements benefiting the properties that are financed with bond proceeds. Tax increment bonds often are used to finance the redevelopment of blighted areas.

Tax-Exempt Bond

Another term for a municipal bond, other than taxable municipal bonds. Interest on most municipal securities is excluded from gross income for federal income tax purposes and may or may not be exempt from state income or personal property taxation in the jurisdiction where issued or in other jurisdictions. If the bond is exempt from state income tax, it possesses “double exemption” status. “Triple exemption” bonds are exempt from municipal, local income or other special taxes, as well as from federal and state income tax.

Taxable Equivalent Yield

The interest rate that must be received on a taxable security to provide the holder the same after-tax return as that earned on a tax-exempt bond. Because interest earned on municipal securities generally is not subject to federal income taxation, a tax-exempt bond does not have to yield to a holder as much as a taxable security to produce an equivalent after-tax yield; this differential is attributable to the effect of the tax liability incurred by the holder if it held a taxable security. The taxable equivalent yield varies according to the holder’s marginal federal income tax bracket and, where applicable, any state or local tax liability as well.

Taxable Municipal Security

Bonds or other securities issued by a municipal issuer for which interest or other investment return is included in gross income for federal income tax purposes. A municipal security may be issued on a taxable basis because the intended use of proceeds does not meet federal tax law requirements for the exclusion from gross income (e.g. private activity bonds that are not qualified bonds) or because certain other federal tax law requirements are not met (e.g., insufficient volume cap). In some cases, municipal securities are initially issued on a tax-exempt basis but subsequent events (e.g., failure to comply with arbitrage requirements or change in use of proceeds to a non-qualifying purpose) may cause the Internal Revenue Service to declare the issue taxable. Private activity bonds that are subject to the federal alternative minimum tax are not considered taxable municipal securities.

Taxable Security

A bond or other security that does not qualify for an exclusion from gross income under federal tax law. Corporate, U.S. government and agency debt generally is federally taxable. In some cases, municipal securities also are taxable under federal tax law.

Trust Indenture

A contract between the issuer of municipal securities and a trustee for the benefit of the bondholders. The trustee administers the funds or property specified in the indenture in a fiduciary capacity on behalf of the bondholders. The trust indenture, which is generally part of the bond contract, establishes the rights, duties, responsibilities and remedies of the issuer and trustee and determines the exact nature of the security for the bonds. The trustee is generally empowered to enforce the terms of the trust indenture on behalf of the bondholders. In many governmental issues (particularly for general obligation bonds and some types of limited tax bonds and revenue bonds), the issuer may forego using a trust indenture and set forth the duties of the issuer and the rights of bondholders in the bond resolution.


A financial institution with trust powers that acts in a fiduciary capacity for the benefit of the bondholders in enforcing the terms of the trust indenture. In many cases, the trustee also acts as paying agent, registrar and/or transfer agent for the bonds.

Two-Sided Market

A statement of the bid and offer prices at which a broker-dealer would be willing to effect a transaction in a security. Some broker-dealers make two-sided markets on larger, term bond issues. Generally, two-sided markets are made in actively traded bonds and rarely made in inactively traded bonds.

Underlying Rating

In the case of a security for which credit enhancement has been obtained, the rating assigned by a rating agency to such security without regard to credit enhancement or assigned to other securities of the same issuer having the same features and security structure but without the credit enhancement.

Unit investment trust

The annual rate of return on an investment, based on the purchase price of the investment, its coupon rate and the length of time the investment is held.


A debt security issued in certain jurisdictions that is often issued in relatively small principal amounts to pay project costs as they are incurred.


The annual rate of return on an investment, based on the purchase price of the investment, its coupon rate and the length of time the investment is held.

Yield curve

A graph that plots market yields on securities of equivalent quality but different maturities at a given point in time. The vertical axis represents the yields, while the horizontal axis depicts time to maturity. The relationship of interest rates over time, as reflected by the yield curve, will vary according to market conditions, resulting in a variety of yield curve configurations, as follows:

Yield to call

The rate of return to the investor earned from payments of principal and interest, with interest compounded semi-annually at the stated yield, presuming that the security is redeemed on a specified call date (if the security is redeemed at a premium call price, the amount of the premium is also reflected in the yield). Yield to call takes into account the amount of the premium or discount at the time of purchase, if any, and the time value of the investment.

Yield to Maturity

The rate of return to the investor earned from payments of principal and interest, with interest compounded semi-annually at the stated yield, presuming that the security remains outstanding until the maturity date. Yield to maturity takes into account the amount of the premium or discount at the time of purchase, if any, and the time value of the investment.

Yield to Put Option or Yield to Put

The rate of return to the investor, presuming that the security is put back to the issuer or its agent (or a third party) on a specified date in accordance with the terms of a put option granted by the issuer (or the third party). The investment return reflected in the yield consists of the return of the principal (or the portion of the principal amount payable upon the exercise of the put) and payment of the interest (with the interest compounded semi-annually) to the put date.

Yield to Sinker

The rate of return to the investor earned from payments of principal and interest, with compounded semi-annually at the stated yield, presuming that the security is redeemed on the next scheduled sinking fund date.

Yield to Worst

For a given dollar price on a municipal security, the lowest of the yield calculated to the pricing call, par option or maturity.

Zero-coupon bond

An original issue discount bond on which no periodic interest payments are made but which is issued at a deep discount from par, accreting (at the rate represented by the offering yield at issuance) to its full value at maturity.