Glossary

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• Accrued interest.
  Interest earned on a security since the date of issue or the last coupon payment or payment date.
• Adjustable-rate mortgage (ARM).
  A mortgage loan on which interest rates are adjusted at regular intervals according to predetermined criteria. An ARM’s interest rate is tied to an objective, published interest rate index.
• Advance refunding.
  A financing structure under which new bonds are issued to repay an outstanding bond issue prior to its first call date. Generally, the proceeds of the new issue are invested in government securities, which are placed in escrow. The interest and principal repayments on these securities are then used to repay the old issue, usually on the first call date.
• Amortization.
  Liquidation of a debt through installment payments.
• Average life.
  The average amount of time that will elapse from the date of an MBS purchase until the principal is repaid based on an assumed prepayment forecast. Alternatively, average life is the average amount of time a dollar of principal is invested in an MBS pool.

• Basis point.
  One one-hundredth (1/100 or .01) of 1 percent. Yield differences among fixed-income securities are stated in basis points.
• Bearer security.
  A security that has no identification as to its owner. It is presumed to be owned, therefore, by the bearer or the person who holds it. Bearer securities are freely and easily negotiable since ownership can be quickly transferred from seller to buyer.
• Beneficial owner.
  One who benefits from owning a security, even if the security’s title of ownership is in the name of a broker or bank (“street name”).
• Bid.
  The price at which an investor is willing to sell a security.
• Bond.
  An interest-bearing promise to pay the principal amount due on a specific date.
• Bond funds.
  Registered investment companies whose assets are invested in diversified portfolios of bonds.
• Book-entry.
  A method of registering and transferring the ownership of securities electronically, thereby eliminating the need for physical certificates.
• Book-entry security.
  A security which is not available in physical form. A centralized securities depository holds the security on behalf of its owner. When the security is sold, ownership is transferred by bookkeeping entry from seller to purchaser.

• Callable bonds.
  Bonds which are redeemable by the issuer prior to the specified maturity date at a specified price which is at or above par.
• Call premium.
  A dollar amount, usually stated as a percentage of the principal amount called, paid as a “penalty” or a “premium” for the exercise of a call provision.
• Certificate of ownership.
  Proof of ownership, a document issued to shareholders by a trustee of a unit investment trust.
• Collateral.
  Assets pledged by a borrower to secure repayment of a loan or bond.
• Confirmation.
  A document used by securities dealers and banks to state in writing the terms and execution of an oral agreement to buy or sell a security.
• Conventional mortgage loan.
  A mortgage loan granted by a bank or thrift institution collateralized solely by real estate and not insured or guaranteed by a government agency.
• Coupon.
  The part of a bond that denotes the amount of interest due and on what date and where the payment is to be made. Bearer coupons are presented to the issuer’s designated paying agent or deposited in a commercial bank for collection. In the case of registered coupons (see “Registered bond”), the interest payment is mailed directly to the registered holder. Coupons are generally payable semi-annually.
• Coupon rate.
  Stated annual percentage of interest paid on a fixed-income investment.
• Current yield.
  The ratio of interest to the actual market price of the bond stated as a percentage. For example, a $1,000 bond that pays $80 per year in interest would have a current yield of 8%.
• Current face.
  The current monthly remaining principal on a mortgage security. Current face is computed by multiplying the original face value of the security by the current principal balance factor.
• CU.S.IP.
  The Committee on Uniform Security Identification Procedures, which was established under the auspices of the American Bankers Association to develop a uniform method of identifying municipal, U.S. government, and corporate securities.
• CU.S.IP number.
  A unique, nine-digit identification number permanently assigned by the Committee on Uniform Securities Identification Procedures to each publicly traded security at the time of issuance. If the security is in physical form, the CU.S.IP number is printed on its face.

• Dated date (or issue date).
  The date of a bond issue from which the bondholder is entitled to receive interest, even though the bonds may actually be delivered at some other date.
• Default.
  A borrower’s failure to make timely payments of interest and principal when due or to meet other requirements related to the bonds, such as maintenance of collateral or financial covenants.
• Denomination.
  Most municipal bonds are issued with a minimum denomination of $5,000. Most unit investment trusts are issued with a $1,000 minimum denomination.
• Discount.
  The amount by which the purchase price of a security is less than the principal amount or par value.
• Distribution of principal.
  Return of principal to unit trust shareholders, usually when a bond in the portfolio reaches maturity or is called or, if necessary, is sold prior to maturity.
• Double exemption.
  Securities that are exempt from state as well as federal income taxes.

• Evaluator.
  An independent service responsible for appraising the value of securities in a trust’s portfolio.
• Extraordinary redemption.
  This is different from optional redemption or mandatory redemption in that it occurs under an unusual circumstance such as destruction of the facility financed.

• Face value.
  The value that appears on the front, or face, of a security, which represents the amount the issuer promises to repay at maturity. Also known as par or principal amount.
• Floating-rate bond.
  A long-term bond for which the interest rate is adjusted periodically according to a predetermined formula, based upon specific market indicators.
• Factor.
  A decimal value reflecting the proportion of the outstanding principal balance of a mortgage security which changes over time in relation to its original principal value. The Bond Buyer publishes the “Monthly Factor Report,” which contains a list of factors for Ginnie Mae, Fannie Mae, and Freddie Mac securities.
• Fixed-rate mortgage.
  A mortgage featuring level monthly payments, determined at the outset, which remain constant over the life of the mortgage.

• General obligation bond.
  A bond secured by the pledge of the issuer’s full faith, credit, and taxing power.
• Ginnie Mae I.
  Pass-through mortgage securities on which registered holders receive separate principal and interest payments on each of their certificates. Ginnie Mae I securities are single-issuer pools.
• Ginnie Mae II.
  Pass-through mortgage securities on which registered holders receive an aggregate principal and interest payment from a central paying agent on all of their Ginnie Mae II certificates. Ginnie Mae II securities are collateralized by multiple-issuer pools or custom pools, which contain loans from one issuer but interest rates that may vary within one percentage point.

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• Industrial revenue bond.
  A security issued by a state, political subdivision or certain agencies or authorities for certain specific purposes but backed by the credit of a private enterprise.
• Interest.
  Compensation paid or to be paid for the use of money, generally expressed as an annual percentage rate. The rate may be constant over the life of the bond (fixed-rate) or may change from time to time by reference to an index (floating-rate).
• Investment grade.
  Bonds considered suitable for preservation of invested capital; ordinarily, those rated BAA or better by Moody’s Investors Service, or BBB or better by Standard & Poor’s Corporation. See “Ratings.”
• Issue date.
  The date on which a security is deemed to be issued or originated.
• Issuer.
  A entity such as a state, political subdivision, agency, or authority which borrows money through the sale of bonds or notes.

• Jumbo pools.
  Ginnie Mae II pass-through mortgage securities collateralized by pools which are generally larger and contain mortgages that are often more geographically diverse than single-issuer pools. Mortgage loans in jumbo pools may vary in terms of the interest rate within one percentage point.

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• Legal opinion.
  An opinion concerning the validity of a securities issue with respect to statutory authority, constitutionality, procedural conformity, and usually the exemption of interest from federal income taxes. The legal opinion is usually rendered by a law firm recognized as specializing in public borrowings, often referred to as “bond counsel.”
• Limited tax bond.
  A bond secured by a pledge of a tax or category of taxes limited as to rate or amount.
• Liquidity.
  The capacity of a market to absorb a reasonable level of selling without significant losses.

• Market price or market value.
  For securities traded through an exchange, the last reported price at which a security was sold; for securities traded “over-the-counter,” the current price of the security in the market.
• Marketability.
  A measure of the ease with which a security can be sold in the secondary market.
• Maturity.
  The date when the principal amount of a security becomes due and payable.
• Maturity date of MBS.
  The last possible date on which the last payment of the longest loan may be paid (also known as “stated maturity”).
• Moral obligation bond.
  A revenue bond which, in addition to its primary source of security, possesses a structure whereby a state pledges to make up shortfalls in a debt service reserve fund, subject to legislative appropriation. There is no legal obligation for the state to make such a payment, but market participants recognize that failure to honor the “moral” pledge would have negative consequences for the state’s own creditworthiness.
• Mortgage.
  A legal instrument that creates a lien upon real estate securing the payment of a specific debt.
• Mortgage banker.
  An entity that originates mortgage loans, sells them to investors, and services the loans.
• Mortgage loan.
  A loan secured by a mortgage.

• New-issue market.
  A market for new issues of municipal bonds and notes.
• Non-callable bond.
  A bond that cannot be called either for redemption by or at the option of the issuer before its specified maturity date.
• Notes.
  Short-term promises to pay specified amounts of money, secured by specified sources of future revenues, such as taxes, federal and state aid payments, and bond proceeds. For municipal notes, maturities generally range from six to twelve months.

• Offer.
  The price at which an investor will purchase a security.
• Offering price.
  The price at which members of an underwriting syndicate for a new issue will offer securities to investors.
• Official statement.
  A document prepared by or for the issuer that gives in detail security and financial information about the issue.
• Optional redemption.
  A right to retire all or part of an issue prior to the stated maturity during a specified period of years, often at a premium. The right can be exercised at the option of the issuer.
• Original face.
  The face value or original principal amount of a security on its issue date.
• Original issue discount.
  The amount by which a security’s price at issuance is lower than its par value. Under that law, the difference between the issue price and par is treated as tax-exempt income rather than capital gain, if the bonds are held to maturity.

• P & I.
  Principal and interest. The term is used to refer to regularly scheduled payments or prepayments on mortgage securities.
• Par.
  A price equal to the face amount of a security, as distinct from its market value. On a debt security, the par or face value is the amount the investor has been promised to receive from the issuer at maturity.
• Par value.
  The principal amount of a bond due at maturity – usually $1000 per bond.
• Paying agent.
  An entity responsible for making the payment of interest and principal to bondholders on behalf of the bond’s issuer. Usually a designated bank or the office of the treasurer of the issuer.
• Payment date.
  The date that actual principal and interest payments are paid to the registered owner of a security.
• Pool.
  A collection of mortgage loans assembled by an originator or master servicer as the basis for a security. Ginnie Mae, Fannie Mae, or Freddie Mac pass-through securities are identified by a number assigned by the issuing agency.
• Premium.
  The amount by which the price of a security exceeds its principal amount.
• Prepayment.
  The unscheduled partial or complete payment of the principal amount outstanding on a debt obligation before it is due.
• Price.
  The dollar amount to be paid for a security, stated as a percentage of its face value or par in the case of debt securities.
• Principal.
  The face amount of a bond, exclusive of accrued interest, if any, and payable at maturity. With mortgage securities, principal refers to the amount outstanding on the mortgage loans.
• Public offering price.
  The aggregate value of securities in a unit investment trust fund, divided by the number of units, plus the applicable sales charge. This is the price at which units are offered for sale to the public.

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• Ratings.
  Designations used by investors’ services to give relative indications of credit quality.
• Record date.
  The date for determining the owner entitled to the next scheduled payment of principal or interest on a mortgage security.
• Redemption.
  The paying off or buying back of a bond by the issuer; also, repurchase of investment trust units by the trustee, at the bid price.
• Refunding.
  The redemption of a bond issue by a new bond issue at conditions generally more favorable to the issuer.
• Registered bond.
  A bond whose owner is registered with the issuer or its agent either as to both principal and interest or as to principal only. Transfer of ownership can only be accomplished when the securities are properly endorsed by the registered owner.
• Registered owner.
  The name in which a security is registered, as stated on the certificate or on the books of the paying agent. P & I payments are made to the registered owner on the record date.
• Revenue bond.
  A bond payable from revenues derived from tolls, charges, or rents paid by users of the facility constructed from the proceeds of the bond issue.

• Safekeeping.
  The storage and protection of customers’ securities, typically held in a vault, provided as a service by a bank or institution acting as agent for the customer.
• Secondary market.
  The market for securities previously issued and sold.
• Security.
  Collateral pledged by a bond issuer (debtor) to an investor (lender) to secure repayment of the loan.
• Servicing.
  Collection and aggregation of principal, interest, and escrow payments on mortgage loans and mortgage securities, as well as certain operational procedures such as accounting, bookkeeping, insurance, tax records, loan payment follow-up, delinquency loan follow-up, and loan analysis. The party providing servicing, the servicer, receives a servicing fee.
• Servicing fee.
  The amount withheld from monthly interest payments made on a mortgage which is retained by the mortgage servicer.
• Settlement date.
  The date agreed upon by the parties to a transaction for the delivery of securities and payment of funds. This may vary from other bonds.
• SMMEA.
  Secondary Mortgage Market Enhancement Act of 1984.
• SMMEA securities.
  Securities that are both ultimately secured by a first-lien mortgage loan and rated in one of the top two rating categories by at least one nationally recognized statistical rating organization. The complete definition may be found in Section 3(a)(41) of the Securities Exchange Act of 1934, as amended. Institutional investors should check state laws regarding investments in SMMEA securities.
• Special tax bond.
  A bond secured by a special tax, such as a gasoline tax.
• Sponsor.
  An investment firm that organizes a unit investment trust and offers the units for sale.
• Swap.
  Simply, the sale of a block of bonds and the purchase of another block of similar market value. Swaps may be made to achieve many goals, including establishing a tax loss, upgrading credit quality, extending or shortening maturity, etc.

• Trade date.
  The date when a bond transaction is executed.
• Transfer agent.
  A party appointed to maintain records of securities owners, to cancel and issue certificates, and to address issues arising from lost, destroyed, or stolen certificates.
• Trustee.
  A bank designated by the issuer as the custodian of funds and official representative of bondholders. Trustees are appointed to ensure compliance with the contract and represent bondholders to enforce their contract with the issuers.

• Unit.
  A fractional, undivided interest in a unit investment trust.
• Unit investment trust.
  A closed-end portfolio of securities sold in fractional, undivided interests (usually $1,000).
• Unit investment trust (municipal).
  A fixed portfolio of tax-exempt bonds sold in fractional, undivided interests.
• Unlimited tax bond.
  A bond secured by the pledge of taxes that are not limited by rate or amount.

• Volatility.
  The propensity of a security’s price to rise or fall sharply.

• Weighted average coupon (WAC).
  An arithmetic mean of the coupon rate of the underlying mortgage loans or pools that serve as collateral for a security.
• Weighted average loan age (WALA).
  The weighted average number of months since the date of note origination of the mortgages in a PC pool.
• Weighted average maturity (WAM).
  An arithmetic mean of the remaining term to maturity of the underlying mortgage loans that collateralize a security.

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• Yield.
  The annual percentage rate of return earned on a security, as computed in accordance with standard industry practices. Yield is a function of a security’s purchase price, coupon rate, and maturity.
• Yield to maturity.
  A yield concept designed to give the investor the average annual yield on a security. It is based on the assumption that the security is held to maturity and that all interest received over the life of the security can be reinvested at the yield to maturity.

• Zero-coupon bond.
  A bond where no periodic interest payments are made. The investor receives one payment – at maturity. The maturity value an investor receives is equal to rhe principal invested plus interest earned compounded semi-annually at the original interest rate to maturity.