Very often things are not as complicated as they seem, it’s only that you don’t know the nomenclature. If the doctor says you’ve cracked your tibia, you may not know what she’s talking about. But if she said you broke your leg, you would. I thought as an ‘investment basics’ tip I’d explain a few of the terms used in the bond market to demystify it a bit.
Bearer Bond – You hear about these in movies all the time. “Give us $100 million in bearer bonds or we’ll sell your secret formula to the Martians”. Bearer bonds aren’t issued any more, they are a dying breed. Basically it’s a bond that’s not registered to anyone. The ownership of the bond and the twice yearly dividend is payable to the ‘bearer’ (physical possessor) of the bond. Which is why those bonds would have a….
Bond Coupon – With bearer bonds they actually had a sheet of coupons you would cut out and bring to the bank when it was time to collect your dividend. Bearer bonds and coupons haven’t been issued in the US for more than 20 years, but there are still a few old ones around.
CUSIP Number – Many bonds are similar so they must have a unique identifier. That’s the CUSIP number (CUSIP stands for Committee for Unified Security Identification Procedure, quite a mouthful). If you buy a bond you’ve got to know the CUSIP so you get the right one.
Debenture – A bond that isn’t secured by any particular property, just the good faith and credit of the issuer.
Junk Bond – A junk bond (or high yield bond) isn’t a special kind of bond. It just refers to a bond that has a low credit rating. The credit rating agencies give bonds grades of AAA to D. Anything that is BB or below is a ‘junk bond’. So if it’s not a junk bond it’s an:
Investment Grade Bond – Bonds with a credit rating of BBB or higher are investment grade. Bonds on the border between junk and investment grade can move back and forth several times between one and the other during their (normally) 30 year life.
If nothing else, you now have cool trivia for your next cocktail party.