{"id":2192,"date":"2020-04-04T13:18:44","date_gmt":"2020-04-04T13:18:44","guid":{"rendered":"https:\/\/goldenpi.com\/blog\/?p=2192"},"modified":"2026-04-14T09:43:09","modified_gmt":"2026-04-14T09:43:09","slug":"bond-glossary-20-terms-definitions-you-need-to-know","status":"publish","type":"post","link":"https:\/\/goldenpi.com\/blog\/essentials\/bond-market\/bond-glossary-20-terms-definitions-you-need-to-know\/","title":{"rendered":"Bond Glossary"},"content":{"rendered":"

The bond market is full of complex concepts, terminology, and acronyms. \u201cBond Glossary\u201d is a one-stop resource for finding the meaning of terminologies and phrases any investor may encounter in the Bond Market.<\/span><\/span><\/p>\n

A<\/b><\/span><\/span><\/span><\/p>\n

ADDITIONAL TIER I BONDS (AT1 BONDS)<\/span><\/span><\/p>\n

Tier I Bonds also called Perpetual Bonds. <\/b>As per BASEL III norms, theoretically, these bonds<\/a> can be carried on till infinity. In reality, they come with a call option after 5 years or 10 years from the date of issuance. It is a popular option among Banks to raise capital to meet their core capital (Tier1 capital) needs as instructed by RBI.<\/span><\/span><\/p>\n

This category carries considerable risk and hence pays high-interest rates to investors. The issuer can skip interest payments if the current year business is in the loss. In dire conditions, it can get converted to equity (with approval from RBI). Hence they are also called<\/span><\/span> \u201cquasi-equity\u201d<\/i><\/span><\/span>. If RBI approves it can be written off up to the full value as well (with approval from RBI).<\/span><\/span><\/p>\n

Note:<\/b><\/span><\/span> In case of winding up of the issuer, if any payment is to be made to Tier I capital holders, AT I bondholders are paid before equity holders. However, in case the Bank is getting merged with another Bank due to its non-viable business state, then AT1 Bonds can be written off fully while keeping the equity capital unaffected. <\/i><\/span><\/span><\/p>\n

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ACCRUED INTEREST<\/span><\/span><\/p>\n

This is the <\/span><\/span>interest earned by an investor<\/b><\/span><\/span> for a given period of time, <\/span><\/span><\/p>\n

The bond issuer pays the bondholder a fixed interest on a predetermined schedule. However, if a bond were sold between its interest payment dates, the purchaser would have to pay the market price of the bond plus the appropriate fraction of the <\/span><\/span>accrued coupon interest earned<\/b><\/span><\/span> but not yet received by the party selling the bond.<\/span><\/span><\/p>\n

Example: A has a 1 unit of a Bond with a face value of Rs 1 Lac and a coupon rate of 10% (payable annually). Every year A receives Rs 10 K from the issuer on a specific date. Then, after 6 months from one such payment, A sells this Bond to B. B then has to pay Rs 5K as an accrued interest to A along with the principal value of the Bond to A. <\/span><\/span><\/p>\n

B<\/b><\/span><\/span><\/span><\/p>\n

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BASIS POINTS (BPS)<\/span><\/p>\n

\"BASIS
\nOne Basis Point(BPS) is equal to 1\/100th of 1%. It is a standard unit of measurement used to indicate a change in bond yield or percentages in the bond market. Small changes in yield or interest rates make a huge impact. Measuring and expressing such minute changes in the market is essential, and the same is done in terms of BPS.<\/p>\n

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BID PRICE AND ASK PRICE\u00a0<\/span><\/p>\n

Market prices depend upon the demand and supply of the bonds and the credit rating of the issuer. During a transaction, buyers and sellers bargain to decide the price of the bond. The buyer’s maximum price is the “bid price” (which means the buyer is not willing to pay beyond the bid price). The lowest price quoted by the seller is the “ask price” (means the seller is not willing
\nto sell the bonds below the ask price).<\/p>\n

\"BID<\/p>\n

Note: Narrow gap between the “bid price” and “ask-price” is called the spread. A lower spread indicates that a bond is actively traded and hence is liquid. Illiquid Bonds (lower ratings, mostly below A) typically have large spreads.<\/p>\n

BOND CONVEXITY<\/p>\n

\"BONDThe measure of the change in the bond duration for every 1% change in the market interest rates is called the Bond Convexity.<\/p>\n

There can be an accelerated change in bond price with a change in the interest rate in the market. As an example, say 1% change in the market interest rate causes the Bond<\/a> price to change by x% then 2% change in the interest levels, may cause the Bond price to change by more than 2X. It’s not a linear relationship. This measure, called convexity, helps understand and predict bond price movements in the market with fluctuating interest rate regimes.\u00a0\u00a0<\/span><\/p>\n

Note:<\/span><\/p>\n