Definition of Variable rated demand bond (VRDB)

Variable rated demand bond (VRDB)

Floating rate bond that can be sold back periodically to the issuer.

Accelerated cost recovery system (ACRS)

Schedule of depreciation rates allowed for tax purposes.

Accelerated depreciation

Any depreciation method that produces larger deductions for depreciation in the
early years of a project's life. Accelerated cost recovery system (ACRS), which is a depreciation schedule
allowed for tax purposes, is one such example.

Accrual bond

A bond on which interest accrues, but is not paid to the investor during the time of accrual.
The amount of accrued interest is added to the remaining principal of the bond and is paid at maturity.

Bearer bond

bonds that are not registered on the books of the issuer. Such bonds are held in physical form by
the owner, who receives interest payments by physically detaching coupons from the bond certificate and
delivering them to the paying agent.

Bond

bonds are debt and are issued for a period of more than one year. The U.S. government, local
governments, water districts, companies and many other types of institutions sell bonds. When an investor
buys bonds, he or she is lending money. The seller of the bond agrees to repay the principal amount of the
loan at a specified time. Interest-bearing bonds pay interest periodically.

Bond agreement

A contract for privately placed debt.

Bond covenant

A contractual provision in a bond indenture. A positive covenant requires certain actions, and
a negative covenant limits certain actions.

Bond equivalent yield

bond yield calculated on an annual percentage rate method. Differs from annual
effective yield.

Bond indenture

The contract that sets forth the promises of a corporate bond issuer and the rights of
investors.

Bond indexing

Designing a portfolio so that its performance will match the performance of some bond index.

Bond points

A conventional unit of measure for bond prices set at $10 and equivalent to 1% of the $100 face
value of the bond. A price of 80 means that the bond is selling at 80% of its face, or par value.

Bond value

With respect to convertible bonds, the value the security would have if it were not convertible
apart from the conversion option.

Bond-equivalent basis

The method used for computing the bond-equivalent yield.

Bond-equivalent yield

The annualized yield to maturity computed by doubling the semiannual yield.

BONDPAR

A system that monitors and evaluates the performance of a fixed-income portfolio , as well as the
individual securities held in the portfolio. bondPAR decomposes the return into those elements beyond the
manager's control--such as the interest rate environment and client-imposed duration policy constraints--and
those that the management process contributes to, such as interest rate management, sector/quality allocations,
and individual bond selection.

Brady bonds

bonds issued by emerging countries under a debt reduction plan.

Bull-bear bond

bond whose principal repayment is linked to the price of another security. The bonds are
issued in two tranches: in the first tranche repayment increases with the price of the other security, and in the
second tranche repayment decreases with the price of the other security.

Bulldog bond

Foreign bond issue made in London.

Collateral trust bonds

A bond in which the issuer (often a holding company) grants investors a lien on
stocks, notes, bonds, or other financial asset as security. Compare mortgage bond.

Completion bonding

Insurance that a construction contract will be successfully completed.

Conflict between bondholders and stockholders

These two groups may have interests in a corporation that
conflict. Sources of conflict include dividends, distortion of investment, and underinvestment. Protective
covenants work to resolve these conflicts.

Continuous random variable

A random value that can take any fractional value within specified ranges, as
contrasted with a discrete variable.

Convertible bonds

bonds that can be converted into common stock at the option of the holder.

Convertible eurobond

A eurobond that can be converted into another asset, often through exercise of
attached warrants.

Corporate bonds

Debt obligations issued by corporations.

Cushion bonds

High-coupon bonds that sell at only at a moderate premium because they are callable at a
price below that at which a comparable non-callable bond would sell. Cushion bonds offer considerable
downside protection in a falling market.

Debenture bond

An unsecured bond whose holder has the claim of a general creditor on all assets of the
issuer not pledged specifically to secure other debt. Compare subordinated debenture bond, and collateral
trust bonds.

Deep-discount bond

A bond issued with a very low coupon or no coupon and selling at a price far below par
value. When the bond has no coupon, it's called a zero coupon bond.

Demand deposits

Checking accounts that pay no interest and can be withdrawn upon demand.

Demand line of credit

A bank line of credit that enables a customer to borrow on a daily or on-demand basis.

Demand master notes

Short-term securities that are repayable immediately upon the holder's demand.

Demand shock

An event that affects the demand for goods in services in the economy.

Discount bond

Debt sold for less than its principal value. If a discount bond pays no interest, it is called a
zero coupon bond.

Discrete random variable

A random variable that can take only a certain specified set of discrete possible
values - for example, the positive integers 1, 2, 3, . . .

Dollar bonds

Municipal revenue bonds for which quotes are given in dollar prices. Not to be confused with
"U.S. Dollar" bonds, a common term of reference in the Eurobond market.

Dollar price of a bond

Percentage of face value at which a bond is quoted.

Endogenous variable

A value determined within the context of a model.

Equivalent bond yield

Annual yield on a short-term, non-interest bearing security calculated so as to be
comparable to yields quoted on coupon securities.

Eurobond

A bond that is (1) underwritten by an international syndicate, (2) offered at issuance
simultaneously to investors in a number of countries, and (3) issued outside the jurisdiction of any single
country.

Eurodollar bonds

Eurobonds denominated in U.S.dollars.

Euroyen bonds

Eurobonds denominated in Japanese yen.

Exogenous variable

A variable whose value is determined outside the model in which it is used. Also called
a parameter.

Extendable bond

bond whose maturity can be extended at the option of the lender or issuer.

Flower bond

Government bonds that are acceptable at par in payment of federal estate taxes when owned by
the decedent at the time of death.

Foreign bond

A bond issued on the domestic capital market of anther company.

Foreign bond market

That portion of the domestic bond market that represents issues floated by foreign
companies to governments.

Full coupon bond

A bond with a coupon equal to the going market rate, thereby, the bond is selling at par.

General obligation bonds

Municipal securities secured by the issuer's pledge of its full faith, credit, and
taxing power.

Global bonds

bonds that are designed so as to qualify for immediate trading in any domestic capital market
and in the Euromarket.

Government bond

See: Government securities.

Hedging demands

demands for securities to hedge particular sources of consumption risk, beyond the usual
mean-variance diversification motivation.

High-coupon bond refunding

Refunding of a high-coupon bond with a new, lower coupon bond.

High-yield bond

See:junk bond.

Income bond

A bond on which the payment of interest is contingent on sufficient earnings. These bonds are
commonly used during the reorganization of a failed or failing business.

Indexed bond

bond whose payments are linked to an index, e.g. the consumer price index.

Industrial revenue bond (IRB)

bond issued by local government agencies on behalf of corporations.

Insured bond

A municipal bond backed both by the credit of the municipal issuer and by commercial
insurance policies.

International bonds

A collective term that refers to global bonds, Eurobonds, and foreign bonds.

Investment grade bonds

A bond that is assigned a rating in the top four categories by commercial credit
rating companies. For example, S&P classifies investment grade bonds as BBB or higher, and Moodys'
classifies investment grade bonds as Ba or higher. Related: High-yield bond.

Junk bond

A bond with a speculative credit rating of BB (S&P) or Ba (Moody's) or lower is a junk or high
yield bond. Such bonds offer investors higher yields than bonds of financially sound companies. Two
agencies, Standard & Poors and Moody's investor Services, provide the rating systems for companies' credit.

Level-coupon bond

bond with a stream of coupon payments that are the same throughout the life of the bond.

Limited-tax general obligation bond

A general obligation bond that is limited as to revenue sources.

Long bonds

bonds with a long current maturity. The "long bond" is the 30-year U.S. government bond.

Low-coupon bond refunding

Refunding of a low coupon bond with a new, higher coupon bond.

Long bonds

bonds with a long current maturity. The "long bond" is the 30-year U.S. government bond.

Mismatch bond

Floating rate note whose interest rate is reset at more frequent intervals than the rollover
period (e.g. a note whose payments are set quarterly on the basis of the one-year interest rate).

Money market demand account

An account that pays interest based on short-term interest rates.

Mortgage bond

A bond in which the issuer has granted the bondholders a lien against the pledged assets.
Collateral trust bonds

Municipal bond

State or local governments offer muni bonds or municipals, as they are called, to pay for
special projects such as highways or sewers. The interest that investors receive is exempt from some income taxes.

Normal random variable

A random variable that has a normal probability distribution.

Positive covenant (of a bond)

A bond covenant that specifies certain actions the firm must take. Also called
and affirmative covenant.

Precautionary demand (for money)

The need to meet unexpected or extraordinary contingencies with a
buffer stock of cash.

Premium bond

A bond that is selling for more than its par value.

Prerefunded bond

Refunded bond.

Pure-discount bond

A bond that will make only one payment of principal and interest. Also called a zerocoupon
bond or a single-payment bond.

Put bond

A bond that the holder may choose either to exchange for par value at some date or to extend for a
given number of years.

Random variable

A function that assigns a real number to each and every possible outcome of a random experiment.

Refunded bond

Also called a prerefunded bond, one that originally may have been issued as a general
obligation or revenue bond but that is now secured by an "escrow fund" consisting entirely of direct U.S.
government obligations that are sufficient for paying the bondholders.

Registered bond

A bond whose issuer records ownership and interest payments. Differs from a bearer bond
which is traded without record of ownership and whose possession is the only evidence of ownership.

Revenue bond

A bond issued by a municipality to finance either a project or an enterprise where the issuer
pledges to the bondholders the revenues generated by the operating projects financed, for instance, hospital
revenue bonds and sewer revenue bonds.

Samurai bond

A yen-denominated bond issued in Tokyo by a non-Japanese borrower. Related: bulldog
bond and Yankee bond.

Serial bonds

Corporate bonds arranged so that specified principal amounts become due on specified dates.
Related: term bonds.

Series bond

bond that may be issued in several series under the same indenture.

Shogun bond

Dollar bond issued in Japan by a nonresident.

Short bonds

bonds with short current maturities.

Single-payment bond

A bond that will make only one payment of principal and interest.

Speculative demand (for money)

The need for cash to take advantage of investment opportunities that may arise.

Speculative grade bond

bond rated Ba or lower by Moody's, or BB or lower by S&P, or an unrated bond.

Step-up bond

A bond that pays a lower coupon rate for an initial period which then increases to a higher
coupon rate. Related: Deferred-interest bond, Payment-in-kind bond

Stratified sampling bond indexing

A method of bond indexing that divides the index into cells, each cell
representing a different characteristic, and that buys bonds to match those characteristics.

Subordinated debenture bond

An unsecured bond that ranks after secured debt, after debenture bonds, and
often after some general creditors in its claim on assets and earnings. Related: Debenture bond, mortgage
bond, collateral trust bonds.

Sushi bond

A eurobond issued by a Japanese corporation.

Term bonds

Often referred to as bullet-maturity bonds or simply bullet bonds, bonds whose principal is
payable at maturity. Related: serial bonds

Transaction demand (for money)

The need to accommodate a firm's expected cash transactions.

Treasury bonds

Debt obligations of the U.S. Treasury that have maturities of 10 years or more.

U.S. Treasury bond

U.S. government debt with a maturity of more than 10 years.

Variable

A value determined within the context of a model. Also called endogenous variable.

Variable annuities

Annuity contracts in which the issuer pays a periodic amount linked to the investment
performance of an underlying portfolio.

Variable cost

A cost that is directly proportional to the volume of output produced. When production is zero,
the variable cost is equal to zero.

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