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Every financial specialty has its own vocabulary and bonds are no exception. This lesson introduces some of the terms used when evaluating bond investments. A bond is a debt instrument issued for a period of more than one year that an institution uses to raise debt by borrowing. The length of time the borrower has to use of the money is called the bond's term. U.S. Treasury Bond, which is backed by the full faith and credit of the US government and therefore has near zero risk, has a term of more than one year. A US Treasury Bill or T-Bill is also government-backed but has a term of less than one year.
A bond's maturity or maturity date is the day it comes due for payment. The amount that's paid on the day is known as the bond's maturity value. A capital gain or a capital loss is the amount that a bond's market price increases or decreases after the bond is purchased. Coupon or coupon rate is the interest rate on a security with a fixed rate of return. A bond's yield is the bond's interest, interest earned on that interest through compounding and capital gains if any. A bond is said to be callable if you can redeem it, prior to the end of the bond's term.
Most callable bonds specify a first call date before which the investor can't redeem the bond. Finally risk, the likelihood that some factor, such as currency fluctuations, inflation, interest rates, or external events such as natural disasters or wars, will negatively affect the value of a bond. This list of bond related terms is by no means all-inclusive. You should read as much as you can about bonds, so you can better understand the intricacies of bond pricing and trading.
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