Conversion Price The conversion price is established at the time of the issuance of the convertible bond or preferred stock. It is the dollar price at which the convertible bond or preferred stock will be converted into the common stock.

Conversion Rate or Conversion Ratio The number of shares into which each convertible bond or preferred can be converted.   

Conversion Value The value of the number of shares into which a convertible security can be converted. Multiply the conversion ratio by the common stock price.

Convertible Preferred A bond or preferred that can be converted or exchanged into the common stock of a company. They can be mandatory or they may be optional at the election of the issuing company. But it must be declared upon issuance.

Corporate Bonds Corporate Bonds are usually issued in $1000 denominations. The holder of a bond is a creditor of the corporation, not a part owner like a shareholder.

Coupon Rate Annual interest in percent based on par value $1000.00. Example: 9.00%=$90.00

Cumulative Dividend All preferred stocks are designated cumulative. An issuer must declare and pay all current and unpaid past dividends (arrears) before they can pay common share dividends. An issuer can pay current dividends and still be in arrears from past dividends. Missed payments on non-cumulative issues are not covered. These types of dividends do not accrue and are not added to the purchase price such as occurs with bonds.

Current Price The current price of the security. The price of a bond is traditionally shown at 10% of the par value of $1000.00. Example: A bond trading at 88.5 is actually priced at $885.00. A bond at 100 is trading at par.

Current Yield The annual rate of return as stated as a percentage that an investor will be paid on a specific bond or preferred based upon the current price.

                  Bond Yields To calculate current yield for bonds, divide the coupon rate by the number shown as current price and multiply by 100. Example: 8.60% coupon divided by 85 current price = 0.1010, multiplied by 100 = 10.10% current yield on the bond.

CUSIP Stands for Committee on Uniform Securities Identification Procedure. This is a unique numeric identifier assigned to only one security.

Cycle of Dividend Payments This coding indicates when a preferred pays its dividend. 1: Jan., Apr., Jul., and Oct.  2: Feb., May. Aug., and Nov.  3: Mar., Jun, Sept., Dec. Monthly: M

Debenture An unsecured bond (no collateral) whose holder has the claim of a general creditor on all assets that are not specifically pledged to secure other debt.

Debt Maturity The date the underlying bond or preferred matures and return to the holder par value plus any accrued interest/dividend.  

Default The failure of a borrower to pay interest or repay principal in a timely manner.

Deferral of Distributions Occurs when a preferred or underlying bond has a feature allowing the issuer to defer interest payments, under certain stated circumstances, for up to 5 years before it can be declared in default. This can be done only if the parent also suspends dividend payments on its common stock

Distribution on the preferreds will continue to accrue and dividends on the common and preferred stock cannot resume until all unpaid interest is paid.

Discount The amount a bond or preferred trades below the face or par value of the security. It may also refer to a closed end fund trading below its net asset value or NAV as it is often referred.

Dividend The money paid to shareholders as a fixed amount stated in dollars or a percent of par value. When the dividend amount is stated as a percent of par, the dollar value of the dividend is calculated by multiplying the percentage by the par value. (Example: a $25.00 par value with a 6.25% dividend) is $25 times .0625 = $1.5625. Sometimes a dividend can be paid with common stock shares of the issuing company or additional preferred shares. The same tax rates apply.

Equity Linked Securities (ELS) A bond or preferred which is potentially convertible into shares of another company's security. The ELS typically pays interest or dividends and its price will move with the price of the linked security. Commodity Linked Securities. These hybrids are similar to Equity however; they are dependent on a commodity or Index for valuation.

Ex-Dividend Date Is the date on which a stock trades without the dividend. Investors purchasing stock on or after the ex dividend date will not receive the declared dividend. Opening price ex-dividend date is usually down an amount roughly equal to the dividend.

Face Value This is the principal amount of the bond, usually $1000.00. Commonly used synonymously with par value or $100 or $1000 depending on the security.

Floating Rate Securities (Floaters) Securities with a variable interest or dividend rate. Their rate is usually related to the yield of another security, treasury bills, notes, bonds or to indexed lending rates such as the Prime Rate or Libor. The amount they pay will rise or fall in concert with the rate or yield they are related to. These securities are ideal for principal protection when rates are rising.

Foreign Preferred These preferred securities are issued by foreign-based companies in US dollars. There are several types of these securities. They are often issued as American Depository Receipts (ADR). ADR’s are also called American Depository Shares (ADS). Some of these preferreds are subject to foreign withholding taxes. Those issued by banks usually have non-cumulative dividends.

Funds from Operations (REIT’s)  FFO are the most commonly accepted and reported measure of a Real Estate Investment Trust’s operating performance. It is equal to a REIT's net income, excluding gains or losses from sales of property, and adding back real estate depreciation. This alternative measure is preferable to traditional profit measures because REIT's are principally tax shelter vehicles and as such, are designed to minimize taxable income for the company as profits are required to be paid out to the shareholders (partners). .

High Yield Junk Bond The term "junk bonds" is used to refer to all high-yielding bonds that are rated below investment grade or are not rated. In other cases, the term refers to the lower tiers of high-yield bonds in credit quality.

Hybrid Preferred Corporate securities that have characteristics similar to both preferred stock and corporate bonds. There is a multitude of structures and acronyms for these securities but several things are common for all of them, the issuer can deduct the payments from their taxes. Holders receive interest not dividends and they are very liquid since they trade as stocks on major stock exchanges. See: Discussion of Family of Bonds.

Income Bond This type of bond pays interest only if the issuer has sufficient earnings. They are usually issued when a company is not sure of its earnings prospects.

Indenture The formal agreement between bondholders and an issuer defining key elements of the bond or debenture such as maturity, amount issued redemption rights and protective covenants. This information is shown in the prospectus.

Interest The agreed upon payment a borrower pays a lender for the use of money. Bonds are defined in annual interest rates often referred to as a coupon rate. To convert the percentage into dollars, multiply by 10. For ex. 9.60% X 10 = $96.00 of interest.

Interest Rate Risk The price erosion of a fixed income security in a rising interest rate environment.

Investment Grade Bonds and Preferreds considered suitable for investors with principal protection as their primary goal. Income Securities rated Baa3 and above by Moody's and BBB- and above by Standard & Poor's, Fitch IBCA and Duff & Phelps are considered investment grade.

Issuer Any authorized legal entity including governments, agencies, and corporations that has the power to issue a security.

Junk Bond High Yield The term "junk bonds" is used to refer to all high-yield bonds and those that are rated below investment grade or are not rated. In other cases, the term refers to the lower tiers of high-yield bonds in credit quality.

LIBOR London Interbank Offered Rate The rate banks charge each other for short-term Eurodollar loans. LIBOR is frequently used as the base for resetting rates on floating-rate securities

Mandatory Preferreds Convertible preferreds that will automatically convert to common stock on a specific date. Most issues have a variable conversion rate based upon the common stock price it relates to. Most convertibles in this area are not callable before the mandatory conversion date and usually are not to be convertible by the holder.

Maturity The date a bond comes due. Principal and any accrued interest must be paid off.

Mutual Funds Invested pools of money that are managed by an investment company. Some funds seek to generate income on a regular basis, others to preserve an investor's money or invest in growth stocks. Funds can impose a sales charge, or load, on investors when they buy or sell shares. Open End Mutual Fund buy and sell new shares to the public and redeem its outstanding shares on demand at a price equal to an appropriate share of the value of its portfolio computed daily at the close of the market. Closed End Funds have a fixed number of shares, which are traded on the stock market similarly to stocks. The market price may exceed the net asset value per share, in which case it is considered at a premium. When the market price falls below the net asset value per share is at discount. 

Net Asset Value (NAV) The market value of all the securities held in an open or closed end mutual fund divided by the number of shares outstanding.

Non-Cumulative Preferred A preferreds missed dividends do not accrue. Once omitted, dividends are gone forever.

Open End Mutual Fund An investment fund that stands ready to buy and sell new shares within the fund and to the public and to redeem its outstanding shares on demand at a price equal to an appropriate share of the value of its portfolio which is computed daily at the close of the market. This is the most typical type of the majority of mutual funds purchased today and available in 401 (k) programs

Optional Preferreds These convertible preferreds are normally convertible at any time by the holder at fixed conversion rates and typically are perpetual or with a long maturity. They are usually callable after five years. Most convertibles in this family are convertible by the holder into common stock at any time.

Par or Par Value The face value of a security. For bonds, it’s the principal amount due at maturity. In the case of preferreds the issuing company sets this value.  Par Value is often referred to as Liquidation Value.

Parity Conversion The price at which a convertible bond or preferred must sell for it to equal the current market value of the common shares to be received upon conversion.

Partnership Preferreds These preferred securities are issued by a Partnership. There are a variety of partnerships, however the most common are; Limited Liability Companies (LLC) and Limited Partnerships (LP). In most cases a parent company establishes and becomes the general partner of these entities. In most cases these securities are structured like Trust Preferreds including the holder having an indirect ownership of a bond. These issues pay interest not dividends.

Payment in Kind Securities (PIKS) These securities normally pay dividends or interest in the form of additional securities. However, PIKs can also include securities with payment in common stock, cash, or even the securities of a different company.

Pay Chain Refers to the order of payment made to debt holders of the company. Note however, the securities of an issuer of debt may vary depending upon the collateralization provided and the bond ratings relative to the ratings of preferred issues. When evaluating the securities, use either the bond ratings or the preferred ratings but do not mix both as it will provide a distorted view.  

  
Senior Secured Debt

Senior Unsecured Debt

Subordinate Debt

Trade Creditors, Junior Subordinate Debt

Debt Secured Hybrid Preferreds

Preferred Stock

Preference Stock

Common Stock

Perpetual Preferred is a type of capital stock of a company that is senior to common equity but junior to all debt. Perpetual preferreds usually have a fixed cumulative dividend but have no maturity just like common stock. Most are callable sometime in the future.

Preferred Equity Traded Bonds - Pet Bonds These preferreds are actually bonds. They are unique in that they are usually $25.00 Par and traded on the New York Stock Exchange. (The normal bond is $1000.00 par and trades over the counter). Pet Bonds are issued directly by a parent company. Pet Bonds pay interest, not dividends and can pay either a quarterly or semi-annual distribution.

Preference Stock Falls between preferred and common stock in their rights to dividends or liquidation payments. It is common for this stock to be rated lower than the preferred stock of a company by the credit agencies.

Preferred Designation (Finding a Quote) Most preferreds need a special type of   designation attached to their symbol for identification. Brokerages and online quote systems use different designators thus it is important investors know the designator for the system they are using. For example, Yahoo Finance uses _p after the symbol to designate a preferred stock. Check with each quote system for their designation.

Preferred Stock The senior class of capital stock or equity of a company. A company must pay preferred stock dividends before they pay preference or common stock dividends. This stock also has priority over the other two in any liquidation distributions, such as bankruptcy.

Premium The amount that a bond or preferred is selling above face value (par). Examples: a $1000 bond trading at $1050 has a $50 premium; a $25.00 par preferred trading at $26.00, has a $1 premium.

Premium for Convertibles Is the percent of market price the convertible bond is trading above the value of the common stock if a convertible bond could be converted into common stock. (i.e. Conversion Value). For example, the market price of the convertible bond $1050.00 minus Conversion Value (common stock price $20.25 multiplied by the conversion ratio 43.751 = $885.96). = $164.04. To convert the premium dollars into a percentage divide the premium $164.04 by the Market Price $1050.00 and multiply by 100 = 15.62% Premium.

Prospectus The official selling circular which must be given to purchasers of new bonds or preferreds registered with the Securities and Exchange Commission (SEC). The prospectus contains details of the security. Included are financial details of the issuer as well as management overview, history, experience, competition and prospects.

Put Bonds A bond that gives the holder the right to require the issuer to purchase the bonds at a set price, usually par, at some date prior to maturity.

Rate of Return The annual rate of return as stated as a percentage that an investor will be paid on a specific bond or preferred based upon the current price.

Ratings See full ratings schedule of Rating Categories under different heading.

Redemption The repayment of a security at or before its maturity date. Redemption values are commonly at par and in some cases can be in the form of another security.

REIT Real Estate Investment Trusts and REIT Preferreds are issued by a special purpose corporation or trust that raises capital from investors to acquire or provide financing for all forms of income-producing real estate. These properties include shopping centers, hotels, office buildings, apartment complexes, health facilities, industrial properties and more. A REIT does not pay corporate income tax if it distributes at least 90% of its taxable income to its shareholders. To qualify for this tax treatment, at least 75% of the gross income must come from rents of real property or interest income from mortgages on real property. REIT’s are taxed at full taxable income rates, not as a dividend. 

Reset Refers to the next scheduled date for a possible adjustment of the payout rate of a floating rate or adjustable rate security. Adjustments are calculated based on a defined index for the specific security.

Risk For income securities, risk refers primarily to credit risk or loss of principal or income because the company was unable to meet its obligations. This credit risk does not refer to other risks associated with income securities such as changes in interest rates or market risk. Generally, credit risks are determined by rating categories as outlined under Ratings including investment grade and below the investment grade quality. 

Sinking Fund Refers to money accumulated on a regular basis in a separate custodial account that is used to redeem bonds or preferreds. Some bonds or preferreds have a mandatory retirement clause, which requires the issuer to retire a set number of securities each year for a set time frame. The securities can be purchased in the open market or selected by lot. The redemption date can be a specific date or extend over a full year.   

Soft Call A call provision that can be attached to a convertible bond or preferred stock. If such a provision exists and the underlying stock of the convertible reaches a predetermined price for a set period of time, the bonds or preferreds become callable.

Step Securities These securities have a specific schedule for changing the interest or dividend rate. Commonly called Step-up/down notes or preferred.

Tender Offer Is when the issuer of a bond or preferred offers to buy back a specific security at a set price and for a set time period. Holders of the security are not obligated to accept the tender offer.

Trading flat A bond that trades with no accrued interest, such as a bond that is in default or an Income Bond. Most bonds trade with accrued interest, meaning the buyer pays the seller the market price of the bond plus the accrued interest from the last payment date.

Variable Conversion Rate The conversion rate of these convertibles depends on the price of the common stock. Typically, the higher the common stock price the lower the conversion rate and vice versa.

Variable Rate These are securities with a variable interest or dividend rate. Their rate is usually related to the yield of another security, treasury bills, notes, bonds or to indexed lending rates such as the Prime or Libor. The amount they pay will rise or fall in concert with the rate or yield they are related to. These securities are ideal for principal protection when rates are rising.

Yield Return on an investor's capital investment, expressed as an annual percentage rate.

Yield to Call The average annual return you would receive to the first call date including any discount or premium to the stated call price.

Yield to Maturity The average annual return you would receive to maturity date including any discount or premium to the stated par value or face value.

Yield to Worst The lower of the yield to call or the yield to maturity. It is the worst combination of all the possible call dates, maturity dates and call or maturity prices. The worst case scenario that creates the lowest possible yield to be paid.