Zero Coupon Bond Glossary

This zero coupon bond glossary will help you understand the principal characteristics of both municipal bonds and zero coupon bond structures.

Accreted value:
The current value of your zero coupon municipal bond, taking into account interest that has been accumulating and automatically reinvested in the bond.

Bond:
An interest-bearing promise to pay a specified sum of money — the principal amount — due on a specific date.

Callable bonds:
Bonds which are redeemable by the issuer prior to the specified maturity date at a specified price at or above par (or at or above their accreted value, for zero coupon bonds).

Compound accreted value:
The value of a zero coupon bond, at any given time, based on the principal with interest compounded at a stated rate of return over time.

Default:
Failure to pay principal or interest promptly when due.

Discount:
The amount by which the purchase price of a security is less than the principal amount or par value. In the case of a zero coupon bond, a discount (or premium) is measured from the compound accreted value based on the original issuance.

Double and triple tax-exemption:
Securities that are exempt from state and local as well as federal income taxes are said to have double or triple tax-exemption.

Interest:
Compensation paid or to be paid for the use of money. Interest is generally expressed as an annual percentage rate.

Issuer:
A state, political subdivision, agency or authority that borrows money through the sale of bonds or notes.

Marketability:
A measure of the ease with which a security can be sold in the secondary market.

Maturity:
The date when the face amount of a security becomes due and payable.

Original issue discount bond:
A bond issued at a dollar price less than par which qualifies for special treatment under federal tax law. Under federal tax law for tax-exempt bonds, the difference between the issue price and par value is treated as tax-exempt interest rather than capital gain.

Par value:
The principal amount of a bond or note due at maturity. Also called face amount.

Principal:
The face amount of a bond, exclusive of accrued interest and payable at maturity.

Redemption premium:
The amount by which the call price of a security exceeds its principal amount. In the case of zero coupon bonds, the amount by which the call price exceeds the accreted value.

Secondary market:
Market for issues previously offered or sold. There are more than 2,500 banks and brokerage firms across the country that are registered to sell municipal bonds. An estimated $10 billion in municipal bonds are traded daily in the secondary market.

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 the principal invested plus interest earned, compounded semiannually, at the original interest rate to maturity.

Copyright 2006. The Bond Market Association. Reprinted with permission.

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