Saving Bonds - Terms Explained
Now
that we understand a little about saving bonds in broad terms, and how and
when to consider them as a long terms investment, let's look at some of the
terms you will come across when you begin to research the market. The term
that always creates the most difficulty is yield, which can be very
confusing. I have therefore devoted a whole page to this term which I hope
explains this complex area clearly and simply ( well I hope so anyway!!)
As we are looking at bonds in the US, UK and Canada, I have explained terms in all three countries - some of these are common, others are unique to each country. In many cases they mean the same thing. Let's start with the US saving bonds terms first, followed by the UK and Canada.
Saving Bonds - Terms Used For US Savings Bonds
Par Value
Par value is also known as face or principal value and is the value you will receive at maturity. A $1000 par value bond will be worth $1000 on maturity. In other words your original investment!
Coupon
This is simply the interest rate of the bond. The rate is generally fixed over the life of the bond, although there are some that pay a variable rate.
Maturity
This is the length of time before the par value is returned to the bond holder. This can be as short as a few months and as long as forty or fifty years. At maturity you will receive the par value for the bond - your original investment is returned.
Yield
Now yield is probably the most confusing part of saving bonds ( and many other types of bonds ) New investors are often surprised to learn that the price of a bond changes on a daily basis. In simple terms the yield is a figure that shows the return you get on your bond. However beneath this there are really three different types of yield, namely, nominal yield, current yield, and yield to maturity. This can be a complex area for new investors so I have devoted the next page of the site to explain this term in more detail with some examples, as it is the one aspect of saving bonds that is the least understood. I hope the explanation on the next page will make help you to understand it in simple terms - saving bonds yield.
Saving Bonds - Terms Used For UK Savings Bonds
AER
This the annual rate of interest, taking into account how often the interest is added to your account. The higher the AER, the better the return.
Capital
The overall amount of money you have invested
Fixed Interest
The interest rate is fixed for a set period. So you win if interest rates on other accounts later fall, but you will be stuck on a poor rate if interest rates rise. There are usually penalties to stop you switching to another account and you may not be able to get your money out early.
Variable Rate
The interest rate varies according the bank base rate set by the Bank of England
Guaranteed Equity
A form of saving bonds which is based on stock market performance, but the initial capital is still guaranteed, despite the performance of the market, hence the term guaranteed equity.
Saving Bonds - Terms Used For Canadian Bonds
CSB
Canada Savings Bond
CPB
Canada Premium Bond
Debenture
A long-term debt instrument used by governments and large companies to obtain funds.
RRSP
Registered retirement savings plan is a wrapper for holding CSB's and CPB's
RRIF
Registered retirement income fund, is a wrapper for holding CSB's and CPB's
Now let's have a look at the savings bond term, 'yield', and I will try to explain this in simple terms so that you can apply it to any saving bond in any market, anywhere in the world.