41 Index Brandes 7/18/03 12:46 PM Page 235 INDEX Accommodative monetary policy, 63 Bearer bond, 29 Accrual bonds, 31 Bid/offer spread, 21–22 Accrued interest, 24 Bid price, 21–24 Active management, 153–154 Bloomberg, 166 Adjustable-rate preferreds, 134 Bond: Agency securities, 83–86 (see also individual types) issuers of, 85 advantages of, 3–4 types of, 86 credit quality, 43–44 Aggressive: definition, 3–4 investor, 171 funds, 151–157 portfolio, 177 issuers, 5–9 Alternative minimum tax (AMT), maturity ranges, 25–26 111 pricing, 21–24 AMBAC (American Municipal strategies, 189–194 Bond Assurance Company), swaps, 207–209 115 Bond anticipation notes (BANs), 113 American Stock Exchange, 6, 12 Bond equivalent yield (BEY), 74–75 Anticipation notes, 112–113 Bond Market Association, 6, 13, 166 Ask price, 21, 24 Book entry, 29 Asset allocation,COPYRIGHTED 176 Bowie, MATERIAL David, 97 Asset-backed securities (ABSs), 97 Brady bonds, 125 Average life, 92 Broker, 11, 148–149, 171–172 Broker-dealer, 11 Back-end load, 155 Brown, James, 97 Banker’s acceptance (BA), 160 Buy Direct, 73 Barbell portfolio, 191–192 Bullet: Barron’s, 166 security, 28 Basis points, 40–41 strategy, 192 235 41 Index Brandes 7/18/03 12:46 PM Page 236 236 Index Bureau of Public Debt, 73, 145 Convexity, 94 Busted convert, 139 Corporate bonds, 99–108 capital structure, 100 Callable bonds, 26–28 credit quality of, 101–106 call protection, 27 high yield, 104–106 call risk, 26–27 investment-grade, 102–104 Capital: leverage and default, 106–107 preservation, 16, 170 Cost basis, 217 structure, 99–100 Coupon, 29–35, 38–39 Capital gains and losses, 217–218 Covenants, 7 Cash management bills, 75 Credit: Certificates of deposit (CDs), agency rankings, 103, 105 147–149, 159–160 quality, 43–44 FDIC insurance, 148 upgrades and downgrades, Chapter 11 bankruptcy, 106–107 107–108 Closed-end funds, 151–157 Cumulative dividends, 134 leverage of, 153 Currency: Collar, 134 appreciation and Collateralized mortgage obligations depreciation, 125–127 (CMOs), 94–96 risk, 125–127 Commercial paper (CP), 100, 161 Current yield, 37 Commissions, 216–217 Curtailment, 91 Committee on Uniform Security Cushion bond, 53, 204 Identification Procedures (CUSIP), 6 Death put, 101 Common investment mistakes, Debenture, 100 211–214 Debt markets, 15 Competitive bid, 73 Default rate: Compound interest, 32–35 corporates, 106 Confirmation, 217 municipals, 114 Conservative: Default risk, 106 investor, 171 Deflation, 48 portfolio, 177 Diluting shareholder equity, 9 Constant dollar plan, 198 Discount bonds: Consumer Price Index (CPI), 47–49, comparison to premium and par, 60–61 22–23 Consumer sentiment, 60–61 definition, 22 Contrarian investor, 166 impact of interest rates on, 53 Convertible securities, 137–140 Discount price, 22 busted convert, 139 Discount rate: conversion parity, 139 Federal Reserve, 63–64 conversion ratio, 138 Treasury bills, 74 41 Index Brandes 7/18/03 12:46 PM Page 237 Index 237 Disinflation, 48 Open Market Committee Distressed market, 107 (FOMC), 63 Diversification, 175–178 Treasury auctions, 72–74 bond portfolio, 177 website, 166 funds, 195–196 FGIC (Financial Guaranty Insurance Dividend received deduction (DRD), Company), 115 133 Fitch Ratings, 43–44, 101–103, 105, Dollar cost averaging, 197–198 166 Downgrades (see Credit ratings) Financial advisor, 171–173 Durable goods, 60–61 Flight to quality, 72 Duration: Floating rate, 113 definition, 55 Forecasting, 62 managing, 183–185 Freddie Mac, 83–86, 88–89 measuring, 55–57 Front end load, 155 Dutch auction, 73 FSA (Financial Security Assurance), 115 Early redemption, 26 Funds, 151–157 Eastwood, Clint, 170 active vs. passive management, Economic indicators, 60–62 153–154 impact on bonds, 61–62 compared to individual bonds, listing of, 61 201 Emerging market bonds, 125 comparing types of, 157 Employment report, 60–61 dollar cost averaging, 197–198 Escrowed to maturity, 114 expenses, 155–156 Eurobond, 122 income, 154–155 Exchange-traded funds (ETFs), net asset value (NAV), 152 152–153 Expense ratio, 156 no-load, 155, 173 Extension risk, 93 perpetual versus fixed maturity, 154 Face value, 22 performance rankings, 196–197 Fallen angel, 107 strategies, 195–198 Fannie Mae: Future value, 29, 34–35 agency bonds, 83–86 mortgage-backeds, 88–89 General obligation (GO) bond, Federal Home Loan Bank (FHLB), 111–112 84–85 Ginnie Mae (Government National Federal Home Loan Mortgage Mortgage Association, GNMA), Corporation (FHLMC), 84–85 84, 88–89 Federal Reserve: Global bonds, 124–125 funds rate, 63–64 Goal setting, 165–166 monetary policy, 62–64, 79–80 Gore, Al, 171 41 Index Brandes 7/18/03 12:46 PM Page 238 238 Index Government-sponsored enterprises risk, 55 (GSEs), 83–84 Intermediate term bonds, 25 Gross domestic product (GDP), International bonds, 121–127 60–61 currency risk, 125–127 emerging markets, 125 High-grade: nondollar and multicurrency, corporate bonds, 99, 102–104 124–125 ratings scale, 103 sovereign risk, 123 High-yield: Yankee bonds, 123–124 corporate bonds, 99, 104–106 Internet: ratings scale, 105 agency bond websites, 85 Housing starts, 60–61 financial websites, 145, 156, 166 online trading, 13–14 I bonds (see U.S. savings bonds) Treasury Direct, 73 Illiquidity, 66, 101 Inverted yield curve, 80 Indenture, 6–7 Investment-grade: Index of Leading Economic corporate bonds, 99, 102–104 Indicators (LEI), 60–61 ratings scale, 103 Indications of interest, 6, 216 Industrial production, 60–61 Jobless claims, 61 Inflation, 47–50, 75 Jumbo CD, 148 determining real yield, 49 Junk bonds (see High-yield) money market funds, 162 Inflation indexed securities: Laddered portfolio, 190–191 I bonds, 142–143, 145 Liquidity, 65–67, 101 TIPS, 75–77 Lipper, 197 Institute of Supply Management Load, 155 (ISM), 60–61 Lockout, 95 Institutional investors, 12, 14, 66 Long Term Capital Management, Insured bonds, 114–116 213 Interest: accrued, 24 Managed accounts, 157–158 compound, 32–35 Management fees, 156 expense, 8 Markup and markdown, 216–217 simple, 32–33 Maturity, 25–28 Interest-on-interest, 33 defined, 25 Interest rates: date, 26 impact on bond prices, 51–53 ranges, 25, –26 mortgage prepayments, 91 Maturity matching, 192 nominal and real, 48–49 MBIA (Municipal Bond Insurance preparing for rising, 204 Association), 115, 117 preparing for declining, 205 Medium-term note (MTN), 101, 216 41 Index Brandes 7/18/03 12:46 PM Page 239 Index 239 Moderate: short term ratings, 113 investor, 171 structure of, 113–114 portfolio, 177 taxable equivalent yield (TEY), Money market funds, 159–162 116–120 commercial paper, 161 Mutual funds (see Funds) inflation impact, 162 repurchase agreements, 161 NASDAQ, 6 tax-exempt, 161–162 Negative convexity, 93–94 types of securities in, 160–162 Negative slope, 80 Moody’s, 43–44, 101–105, 161, 166 Net asset value (NAV), 152–153 Morningstar, 197 New York Stock Exchange (NYSE), Mortgage-backed securities (MBSs), 6, 12, 132 87–97 New York Times, 166 cash flow, 90 9-bond rule, 12 collateralized mortgage No-load funds, 155, 173 obligations (CMOs), 94–96 Nominal yield, 37–38 extension risk, 93 Noncumulative dividends, 134 mortgage pool, 89 Nonmarketable securities, 141–142 negative convexity, 93–94 Nongovernmental purpose bond, origination, 88–90 111 planned amortization class (PACs), 95–96 Odd lot, 66 pass-throughs, 94 Offer price, 21–24 prepayments, 90–94 Off-the-run, 74 sequentials, 95 On-the-run, 74 support bonds, 96 Online trading, 13–14 tranches, 95–96 Open-end funds, 151–157 (see types of, 94–97 Funds) whole loans, 96 Original issue discount (OID), Municipal bonds (munis), 109–120 218 alternative minimum tax (AMT), Outstanding bonds, 6 111 Over-the-counter (OTC), 12, 132 anticipation notes, 112–113 categories of, 110–111 Par value, 22 compared to Treasuries, Pass-through securities, 94 118–120 Passive management, 153–154 escrowed to maturity, 114 Patriot Savings Bond, 143–144 general obligation (GO) bonds, Phantom income, 31 111–112 PIMCO, 156 insured, 114–116 Plain vanilla CMO, 95 pre-refunded, 113 Planned amortization class (PACs), revenue bonds, 111–112 95–96 41 Index Brandes 7/18/03 12:46 PM Page 240 240 Index Poison put, 106 Rate shock, 212 Portfolio: Rating agencies (see Credit ratings) barbell, 191–192 Reaching for yield, 211–212 income, 193 Real estate investment trust (REIT) laddered, 190–191 preferred, 133 managing, 203 Real estate mortgage investment maturity matching, 192 conduit (REMIC) (see also Portfolio manager, 153 CMOs), 95 Positive slope, 79 Real interest rate, 48–49 Preferred securities, 131–135 Recovery value, 106 debt, 133 Refinancing wave, 91 equity, 132 Refunding bond, 114 yields, 134 Regular way settlement, 217 Premium bonds: Reinvestment risk, 27 comparison to discount and par, Reopening, 73 22–23 Repurchase agreements (repos), cushion bond, 53, 204 161 definition, 22 Retail offering, 67, 101 impact of interest rates on, 53 Retail sales report, 60–61 Prepayment, 90–94 Revenue anticipation notes (RANs), risk, 91 113 speed assumption, 92 Revenue bonds, 111–112 Pre-refunded bonds (Pre-re’s), Risk profiles, 171 113 Risk-free rate of return, 74 Present value, 29, 34–35 Round lots, 66 Price transparency, 13 Rule of 72, 193–194 Pricing, 21–24, 66–67 Rule 144a, 106 Primary dealers, 72 Primary market, 6 Safe haven, 72 Principal transaction, 216–217 Savings Bond Direct, 145 Private activity bond, 111 Savings bonds (see U.S. savings Private label bonds, 96 bonds) Private placement, 106 Secondary market, 6 Private sector, 8–9 Securities and Exchange Producer Price Index (PPI), 61 Commission (SEC), 7, 156 Pro-rata sinker, 28 mutual