Debt Market Glossary

Glossary of terms:  A  B  C  D  E  F  G  H  I  J  K  L  M  N  O  P  Q  R  S  T  U  V  W  X  Y  Z  #

- A -


AAA
The highest rating given on bonds by bond rating agencies. AAA bonds are thought to have virtually no risk of default. Moody's, Standard & Poor's, and Fitch are the most widely used rating agencies. 


Abandonment
Controlling party giving up rights to property voluntarily.


Abandonment option
The option of terminating an investment earlier than originally planned.


Abnormal returns
The component of the return that is not due to systematic influences (market-wide influences). In other words, abnormal returns are above those predicted by The market movement alone. Related: excess returns.


Absolute form of purchasing power parity
A theory that prices of products of two different countries should be equal when measured by a common currency. Also called the "law of one price."


Absolute priority
Rule in bankruptcy proceedings requiring senior creditors to be paid in full before junior creditors receive any payment. This is also known as 'liquidation preference'. In other words, absolute priority specifies the pecking order. Senior creditors always get first grabs at the proceeds from liquidation. And, shareholders are the last people to get paid if a company goes under. 


Abusive tax shelter
A company (usually incorporated in the form of a Limited Partnership company) that the IRS judges to be claiming tax deductions illegally.


Accelerated cost recovery system (ACRS)
A schedule of depreciation rates allowed for tax purposes.


Accelerated depreciation
Any depreciation method that produces larger deductions for depreciation in the early years of a asset`s life. Accelerated cost recovery system (ACRS), which is a depreciation schedule allowed for tax purposes, is one such example.


Acceleration clause
A contract stating that the unpaid balance becomes due and payable if specific actions transpire, such as failure to make interests payments on time. This is also known as an accelaration covenant. A clause included in certain debt securities and swap agreements stating that the immediate collection of payment and termination of contract will take place should default or a downgrade of debt occur. This covenant helps to protect parties that extend financing to businesses in need of capital. Under an acceleration covenant, the borrowing party must maintain a specified credit rating in order to prevent termination of the contract and immediate repayment. 


Acceptance
Contractual agreement instigated when the drawee of a time draft "accepts" the draft by writing the word "accepted" thereon. The drawee assumes responsibility as the acceptor and for payment at maturity. See: Letter of Credit and Banker's Acceptance.


Accredited Investor  (a term used in Regulation D, US securities law)
Refers to an individual whose net worth, or joint net worth with a spouse, exceeds $1,000,000; or whose individual income exceeded $200,000 or whose joint income with a spouse exceeded $300,000 in each of the 2 most recent years and can be expected to meet that income in the current year. More details of the definitions for investors other that individuals are found in Regulation D of the Securities and Exchange Commission.  


Accretion 
(1) Asset growth through addition or expansion.
(2) In reference to discount bonds, it describes the accumulation of value until maturity.
(i) Accretion can occur through a company's internal development or by way to mergers and acquisitions. (ii) Bonds at discount are sold below face value and mature at par. In the duration between the bond's issuance and maturity, no additional value is actually being accumulated within the bond but accretion occurs with the paper or implied capital gain. 


Accrual Basis  
In the context of accounting, practice in which expenses and income are accounted for as if they are earned or incurred, whether or not they have been received or paid. Antithesis of Cash Basis accounting.  


Accrual Bond  
A Bond on which interest accrues but is not paid to the investor during the time of accrual. The amount of accrued interest is added to the remaining principal of the bond and is paid at maturity or coupon payment days.  


Accrued Interest
Interest deemed to be earned on a security but not yet paid to the investor. The interest that has accumulated on a bond since the last interest payment up to, but not including, the settlement date.
There are two methods for calculating accrued interest:
(1) 360-day year method, used for corporate and municipal bonds
(2) 365-day year method, used for government bonds
Accrued interest is added to the contract price of a bond transaction. Essentially, accrued interest has been earned since the last coupon payment - but since the bond hasn't expired or the next payment is not yet due, the owner of the bond hasn't officially received the money. If he or she sells the bond, accrued interest is added to the sale price.  


Accrued Market Discount
The gain in the value of a discount bond expected from holding it for any duration until its maturity. As discount bonds are sold below face value, it is expected that they will gradually rise in market price until reaching maturity.
For example, let's say someone purchases a discount bond with a par value of $1000 for $700. By holding the bond, they can expect a maximum gain of $300. Any appreciation above the $700 paid is called the accrued market discount.
This rise in price is different than that which occurs in regular coupon bonds as a result of lowering interest rates. 
 

Act of God Bond
A bond issued by an insurance company, linking principal and interest to the company's losses due to natural disasters. Such bonds create flexibility for insurance companies if an unforeseen natural disaster occurs. Because principal and interest depend directly on losses resulting from natural disasters, the insurance company can soften the financial strain by delaying, reducing or eliminating payment of the bond. 


Active Bond
A term used to describe fixed-income securities that trade frequently on the floor of the NYSE. These are typically corporate debt instruments and convertible bonds issued by well established companies on the NYSE.


Active Bond Crowd
The name given to members of the NYSE and their specific bond trading departments that are acknowledged as frequent traders in active bonds. The active bond crowd creates liquidity and can affect the price of bonds traded on the market because they typically account for the largest volume of transactions in the market. Generally, this crowd will be able to demand better prices for buying and selling bonds. 


Actuals  
The physical commodities Underlying a futures contract. Cash commodity, physical asset. 


Adaptive Expectations Hypothesis
A hypothesis stating that individuals make investment decisions based on the direction of recent historical data, such as past inflation rates, and adjust the data (based on their expectations) to predict future rates.
For example, if inflation over the last 10 years has been running in the 2-3% range, investors would use an inflation expectation of that range when making investment decisions. Consequently, if a temporary extreme fluctuation in inflation occurred recently, such as a cost-push inflation phenomenon, investors will overestimate the movement of inflation rates in the future. The opposite would occur in a demand-pull inflationary environment.


Add-On Certificate of Deposit
A certificate of deposit that allows the bearer to deposit additional funds, after the initial purchase date, that will bear the same rate of interest. Add-on's or add-in's to a certificate of deposit are beneficial when investors feel interest rates will decline. By having this feature, the bearer of the CD will be guaranteed a minimum interest rate return. Most financial institutions that permit the use of an add-on feature will require these additional deposits to meet a minimum dollar amount (typically $500).


Adjustable-rate Mortgage (ARM)  
A mortgage that features predetermined adjustments of the loan interest rate at regular intervals based on an established index. The interest rate is adjusted at each interval to a rate equivalent to the index value plus a predetermined spread, or margin, over the index, usually subject to per-interval and to life-of-loan interest rate and/or payment rate caps.  


Adjustment Bond
Issued by a corporation during a restructuring phase, an adjustment bond is given to the bondholders of an outstanding bond issue prior to the restructuring. The debt obligation is consolidated and transferred from the outstanding bond issue to the adjustment bond. This is effectively a recapitalization of the company's outstanding debt obligations, which is accomplished by adjusting the terms (such as interest rates and lengths to maturity) to increase the likelihood that the company will be able to meet its obligations.
If a company is near bankruptcy and requires protection from creditors (Chapter 11), it is likely unable to make payments on its debt obligations. If this is the case, the company will be liquidated and the value will be spread among its creditors. However, creditors will generally only receive a fraction of their original loans to the company. This is why creditors and the company will work together to recapitalize debt obligations so that the company is able to meet its obligations and continue operations, thus increasing the value that creditors will receive. 


Advance Refunding 
(1) A bond issuance used to pay off another outstanding bond. The new bond will often be issued at a lower rate than the older outstanding bond.
(2) A bond issuance in which new bonds are sold at a lower rate than outstanding ones. The proceeds are then invested, and when the older bonds become callable they are paid off with the invested proceeds. 
(i) Advance refunding is most often used by governments seeking to postpone their debt payments to the future instead of having to pay off a large amount of debt in the present. (ii) Municipal bonds are traditionally exempt from federal tax, but if a municipal bond is issued in an advance refunding it is no longer tax exempt. This is because municipal bonds tend to have lower rates, and municipalities could potentially use advance refunding to issue unlimited amounts of debt at low rates and invest in higher rate investments. 


After-Acquired Clause
A provision included in legal contracts ensuring that subsequent acquisitions of assets will be included in the debtors liability to the lender. This clause is used to provide extra protection to lenders. The clause ensures that new purchases can be seized if previously held loan payments are defaulted. This type of clause is commonly included in bond indentures and mortgage agreements.


Agency Bond
A bond issued by a government agency. These bonds are not fully guaranteed in the same way as U.S. Treasury and municipal bonds. These bonds do not include those issued by the U.S. Treasury or municipalities. They include such agencies as Fannie Mae, Freddie Mac, Sallie Mae and the Federal Home Loan Banks. 


Agency Securities
Low risk debt obligations issued by enterprises that the U.S. Government sponsors. Agency securities are similar to U.S. Treasury Bills in that they pay interest and have low default risk. However, the main differences are that they are not backed entirely by the U.S. Government and the interest income is taxed differently. 


Allonge
A sheet of paper attached to a bill of exchange for the purpose of documenting endorsements. The need for an allonge arises due to the lack of space on the bill itself for additional endorsements. Because a bill of exchange is transferable through endorsement, it may be exchanged among so many parties that these parties don't all fit on the bill. In this case, a separate piece of paper - the allonge - is attached to the bill, acting as a legal extension of the document.


American Callable Bond
A bond that can be redeemed by the issuer at any time prior to its maturity. Usually a premium is paid to the bondholder when the bond is called. The main cause of a call is a decline in interest rates since the first date of issue. The issuer would likely call the current bonds and distribute new bonds at a lower interest rate. Unfortunately, these types of bonds pose considerable interest rate risk to bondholders. Also, since the issuer can call the bond at any time before maturity, there is also uncertainty as to when the call (and corresponding interest rate exposure) will occur.


American Depository Receipt (ADR)  
Certificates issued by a US depository bank, representing foreign shares held by the bank, usually by a branch or correspondent in the country of issue. One ADR may represent a portion of a foreign share, one share or a bundle of shares of a foreign corporation. If the ADRs are "sponsored," the corporation provides financial information and other assistance to the bank and may subsidize the administration of the ADR. "Unsponsored" ADRs do not receive such assistance. ADRs are subject to the same currency, political, and economic risks as the underlying foreign share. Arbitrage keeps the prices of ADRs and underlying foreign shares, adjusted for the SDR/ordinary ratio essentially equal. American depository shares (ADS) are a similar form of certification.  
 

American Depository Share (ADS)  
Foreign stock issued in the US and registered in the ADR system.
 

American Option  
A put option or call option that can be exercised at any time prior to expiration. Most listed stock options, including those on European exchanges, are American-style options. 
 

Amortization  
The repayment of a loan by installments.  


Amortizing interest rate swap  
Swap in which the principal or notional amount rises (falls) as interest rates rise (decline).  


Angel Bond
A slang term for investment-grade bonds. This is the opposite of fallen angels, which are bonds that have a 'junk' rating.  An investment-grade bond is rated at minimum as BBB by the S&P and Fitch, and Baa by Moody's. If the company's ability to pay back the bond's principal is reduced, the bond rating may fall below investment-grade minimums, and thereby become a fallen angel. 


Annualized holding-period return  
The annual rate of return that when compounded t times generates the same t-period holding return as actually occurred from period 1 to period t.  

 
Annuity  
A regular periodic payment made by an insurance company to a policyholder for a specified period of time.  
 

Annuity certain  
An annuity that pays a specific amount on a monthly basis for a set amount of time.  
 

Annuity in arrears  
An Annuity with a first payment one Full period hence, rather than immediately.  
 

Antitrust laws  
Legislation established by the US federal government to prevent the formation of monopolies and to regulate trade. 
 

Arbitrage  
Arbitrage is the simultaneous buying and selling of two or more different, but related securities, in different markets to take advantage of price disparities. The simultaneous buying and selling of a security at two different prices in two different markets, resulting in profits without risk. Perfectly efficient markets present no arbitrage opportunities. Perfectly efficient markets seldom exist, but, arbitrage opportunities are often precluded because of transactions costs.  


Arbitrage Bond
A lower-rate debt security issued by a municipality prior to the call date of the municipality's existing higher-rate security.
Proceeds from the issuance of lower-rate bonds are invested in treasuries until the call date of the higher-interest bonds. This strategy is used by municipalities when they wish to gain an interest-rate advantage. As long as the proceeds from net sales and investments are to be used in future projects, the bonds will qualify for a temporary tax exemption. If, however, the project experiences a significant delay or cancellation, the municipality may be taxed. Some conflicts in federal regulations can be avoided by using a ZEBRA agreement. 


Arbitrage Pricing Theory (APT)  
An alternative model to the capital asset pricing model developed by Stephen Ross and based purely on arbitrage arguments. The APT implies that there are multiple risk factors that need to be taken into account when calculating risk-adjusted performance or alpha. 
 

Arbitrageur  
One who profits from the differences in price when the same, or extremely similar, security, currency, or commodity is traded on two or more markets. The arbitrageur profits by simultaneously purchasing and selling these securities to take advantage of pricing differentials (spreads) created by market conditions. See: risk arbitrage, convertible arbitrage, index arbitrage, and international arbitrage.  
 

Arrearage
An amount on a loan, cumulative preferred stock, or any credit instrument that is overdue. Also referred to as "Arrears." In the case of a preferred dividend, if the dividend is not paid for any reason, it cumulates, meaning, in the future, arrearages must be paid before any dividend can be paid on common stock.


Arm's length price  
The price at which a willing buyer and a willing unrelated seller would freely agree to transact. 


Asian Bond Fund - ABF
A type of bond fund launched by the Executives' Meeting of East Asia and Pacific Central Banks (EMEAP) group that allows its members to invest in bonds issued by Asian sovereign  issuers in EMEAP economies. Managed by the Bank for International Settlements, the inaugural Asian bond fund was a US$1 billion issue that was launched in June 2003.
Although the original ABF issue was denominated in U.S. dollars, the second ABF issue was  denominated in member currency funds. Overall, the main goal of this bond fund is to further enhance the underdeveloped bond markets of EMEAP member countries by enhancing the efficiency of financial intermediation and promoting financial stability.
Another reason for the establishment of this class of bond funds is to give some Asian countries, who have built up massive foreign reserves, the opportunity to invest in financial assets that would return benefits back to the region.  


Asian dollar market  
Asian banks that collect deposits and make loans denominated in US dollars.  
 

Asian Option  (also an Average Price Option)
Option based on the average price of the underlying assets during the life of the option.
 

Ask Price
Price sought for the security by the seller.

Asset-backed security  (ABS)
A security that is collateralized by loans, leases, receivables against assets other than real estate and mortgage-backed securities, or installment contracts on personal property. For investors, asset-backed securities are an alternative to investing in corporate debt. An ABS is essentially the same thing as a mortgage-backed security, except that the securities it backs are assets such as loans, leases, credit card debt, a company's receivables, royalties and so on, and not mortgage-based securities.  


Asset classes  
Categories of assets, such as stocks, bonds, real estate, and foreign securities.  
 

Asset for asset swap  
Creditors exchange the debt of one defaulting borrower for the debt of another defaulting borrower.  


Asset Stripper
An individual who determines if the value of a company is worth more purchased as a whole or divided into separate assets which are sold off. This is usually done in order to fulfill debt agreements. In essence, this is a corporate bargain finder who discovers discounts amongst financially troubled companies preparing to liquidate their assets. The job description is almost as exciting as the name.  

 
Asset swap  
An interest rate swap used to alter the cash flow characteristics of an institution's sssets in order to provide a better match with its liabilities. 
 

Asset Swapped Convertible Option Transaction - ASCOT
An option on a convertible bond that is used to separate a convertible bond into its two components: (1) a bond and (2) an option to acquire stock. When the bond is stripped of its conversion feature, the holder has a bond featuring fairly stable returns on debt, and a volatile - but potentially very valuable - option.
Increasingly, ASCOTs are being bought and sold by hedge funds employing convertible arbitrage strategies to increase their portfolios' leverage. Often, the bond component is broken down into small denomination bonds and sold to individual investors, while the option component is retained if the investor anticipates share price appreciation.  


Assignment  (in Options)
The receipt of an exercise notice by an options writer that requires the writer to sell (in the case of a call) or purchase (in the case of a put) the underlying security at the specified strike price. 
 

Asymmetric information  
Information that is known to some people but not to other people. 
 

At par  
A price equal to nominal or face value of a security. See: Par.  
 

At-the-money  (of Option)
An option is at-the-money if the strike price of the option is equal to the market price of the underlying security. For example, if xyz stock is trading at 54, then the xyz 54 option is at the money. 


Auction Rate (on US T-bills)
The interest rate that will be paid on a specific security as determined by the Dutch auction process. The auctions take place at periodic intervals, and the interest rate is fixed until the next auction is held. This process is commonly used to determine the interest rate on Treasury bills. The auction rate is also used in other debt securities, such as municipal bonds. This is a good way for both the investor and the issuer to forecast their returns and costs, respectively, as the auctions can be held as often as annually or even weekly. The auction process also allows investors to mitigate reinvestment risk because the interest rate fluctuations are generally less volatile.    


Audit trail  
Resolves the validity of an accounting entry by a step-by-step record by which accounting data can be traced to their source.  


Automated Bond System - ABS (of NYSE)
The electronic system on the NYSE that records bids and offers for inactively traded bonds until they are canceled or executed. Because the bid and ask prices of inactively traded bonds aren't constantly changing due to demand and supply conditions, investors looking for a quote may have difficulties. By having all inactive bonds electronically monitored, the NYSE is able to keep a good inventory of bond prices, just in case an investor is interested in purchasing them.  

 
Auto-Regressive (AR) Process  (in Time Series Analysis)
A stationary stochastic process where the current value of the time series is related to the past p values, where p is any integer, is called an AR(p) process. When the current value is related to the previous two values, it is an AR(2) process. An AR(1) process has an infinite memory.  


Auto-Regressive Conditional Heteroskedasticity (ARCH)  
A nonlinear stochastic process, where the variance is time-varying, and a function of the past variance. ARCH processes have frequency distributions which have high peaks at the mean and fat-tails, much like fractal distributions. The generalized ARCH (GARCH) model is also widely used. See: Fractal Distributions.  


Autocorrelation  (in statistics)
The correlation of a variable with itself over successive time intervals. Sometimes called serial correlation.  


Average Life
An estimate of the number of terms to maturity, taking the possibility of early payments into account. Average life is calculated using the weighted average time to the receipt of all future cash flows. This is often used in sinking funds.


Axe
The interest a person or trader shows in buying or selling a bond. A trader may have specific interest in a certain type of bond based on his or her existing positions. In a bond market, trader axes are matched up in order to execute a transaction.





- B -


Baby Bond
Any bond issued with a par value less than $1,000. Baby bonds are usually issued by corporations that lack access to large institutional markets. These companies make their bonds more affordable to attract small investors.


Baccalaureate Bond
A zero-coupon bond issued by certain states to assist families save for college tuition by means of added tax benefits. These bonds are typically issued in small denominations and are offered in several maturities, making them more convenient for investing and paying yearly college tuition fees. In some states, additional benefits like tuition discounts may be included. 


Back months  
In the context of futures and options trading, refers to the months of contracts with expiration dates farthest away. See farthest month. 
 

Back office  
Brokerage house clerical operations that support, but do not include, the trading of stocks and other securities. All written confirmation and settlement of trades, record keeping, and regulatory compliance happen in the back office.  
 

Back Testing  
Optimizing a trading strategy on historical data and applying it to fresh data to see how well the strategy works.  
 

Back-to-back loan  
A loan in which two companies in separate countries borrow each other's currency for a specific time period and repay the other`s currency at an agreed-upon maturity.  
 

Backdating  
In the context of mutual funds, a feature allowing fundholders to use an earlier date on a letter of intent to invest in a mutual fund in exchange for a reduced sales charge, e.g. giving retroactive value to purchases from the earlier date.  
 

Backup Line of Credit  
A bank assurance of funds obtained by an issuer of commercial paper to protect the investor from default. The issuer pays a commitment fee to the bank to obtain the assurance. 
 

Backwardation  
A market condition in which futures prices are lower in the distant delivery months than in the nearest delivery month. This may occur when the costs of storing the product until eventual delivery are effectively subtracted from the price today. The opposite of contango.  
 

Bai-kai  
Two-sided market picture, in Japanese terminology applies mainly to international equities. 
 

Balance of payments  
A statistical compilation formulated by a sovereign nation of all economic transactions between residents of that nation and residents of all other nations during a stipulated period of time, usually a calendar year.  
 

Balance of trade  
Net flow of goods (exports minus imports) between two countries.  
 

Balloon interest  
In the context of serial bond issues, the elevated coupon rate on bonds with late maturity's.


Balloon Maturity 
(1) A repayment schedule for a bond issue where a large number of the bonds come due at a one time (normally at the final maturity date).
(2) A final loan payment that is considerably higher than prior payments. This is also known as a "balloon payment."
When a balloon maturity occurs, a company must pay the principle back to borrowers on many bonds at once. If the company is short on cash then it may have trouble making all the payments. 


Balloon Payment  
The final (large) payment that repays all the remaining principal and interest of a partially amortized or unamortized loan. 
 

Bank for International Settlements (BIS)  
An international bank headquartered in Basel, Switzerland, which serves as a forum for monetary cooperation among several European central banks, the Bank of Japan, and the US Federal Reserve System. Founded in 1930 to handle the German payment of World War I reparations, it now monitors and collects data on international banking activity and promulgates rules concerning international bank regulation.  
 

Bank Insurance Fund (BIF)  
A unit of the Federal Deposit Insurance Corporation (FDIC) that provides deposit Insurance for banks excluding thrifts.  
 

Bank Investment Contract (BIC)  
Interest guaranteed by the bank in a portfolio over a specific time frame with a specific yield.  A security with an interest rate guaranteed by a bank. It provides a specific yield on a portfolio over a specified period. A BIC is a relatively safe investment, but it provides a low rate of return.


Bank line  
Line of credit that by a bank grants to a customer. 
 

Banker's Acceptance  
A short-term credit investment created by a nonfinancial firm and guaranteed by a bank as to payment. Banker's Acceptances are traded at discounts to face value in the secondary market. These Instruments have been a popular investment for money market funds. They are commonly used in international transactions.  Banker's acceptances are very similar to T-bills and are often used in money market funds.
 

Bankruptcy  
Inability to pay debts. In bankruptcy of a publicly owned entity, the ownership of the firm's assets is transferred from the stockholders to the bondholders.  


Bankruptcy Risk
The risk that a company will be unable to meet its debt obligations. Often referred to as "default" or "insolvency risk". This is a risk that both equity- and bondholders take when deciding to invest in a company. Aside from looking at overall profitability, analyzing a company's debt obligations and ability to repay, agencies like Moody's and Standard & Poor's attempt to determine this risk by giving bond ratings. 


Bar Chart  
A kind of chart used to plot price movements using vertical bars indicating price ranges.  
 

Barbell strategy  
A fixed income strategy in which the maturity's of the securities included in the portfolio are concentrated at two extremes. The shape that appears when charting the strategy on a timeline looks like a barbell (dumbbell).  The reasoning behind this strategy is that it allows one portion of the portfolio to achieve high yields while the other portion minimizes risk.
 

Barrier options  
Option contracts with trigger points that, when crossed, automatically generate buying or selling of other options. These are exotic options.  


Barron's Confidence Index
A confidence indicator calculated by dividing the average yield on high-grade bonds by the average yield on intermediate-grade bonds. The discrepancy between the yields is indicative of investor confidence. A rising ratio indicates investors are demanding a lower premium in yield for increased risk and so are showing confidence in the economy. The theory is that if investors are optimistic they are more likely to invest in the more speculative grade of bonds, driving yields downwards and the confidence index upwards. The opposite is true if investors are pessimistic. 

 
Base currency  
Applies mainly to international equities. Currency in which gains or losses from operating an international portfolio are measured.  
 

Base rate  
British equivalent of the US prime rate.
 

Basel Accord  
Agreement concluded among country representatives in 1988 in Switzerland to develop standardized risk-based capital requirements for banks across countries.  
 

Basic IRR rule  
Accept the project if IRR is higher than the discount rate; reject the project if it is lower than the discount rate. It is wise to also consider net present value for project evaluation.  
 

Basis  
The price an investor pays for a security plus any out-of-pocket expenses. It is used to determine capital gains or losses for tax purposes when the stock is sold. Also, for a futures contract, the difference between the cash price and the futures price observed in the market. 
 

Basis Point
One one-hundredth of 1 percent. Yield differences among fixed-income securities are stated in basis points. A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly used for calculating changes in interest rates, equity indexes and the yield of a fixed-income security.
 The relationship between percentage changes and basis points can be summarized as follows: 1% change = 100 basis points, and  0.01% = 1 basis point. So, a bond whose yield increases from 5% to 5.5% is said to increase by 50 basis points; or interest rates that have risen 1% are said to have increased by 100 basis points. 


Basis price  
Price quotation for a security expressed in terms of yield to maturity or annual rate of return. This will usually only be quoted on fixed-income securities such as bonds. For example, if a bond price was quoted as 10% and this was also the yield to maturity, then the 10% would be the basis price. 

 
Basis risk  
Uncertainty about the basis at the time a hedge may be lifted. Hedging substitutes basis risk for price risk.  
 

Basket options  
Packages that involve the exchange of more than two currencies against a base currency at expiration. The basket option buyer purchases the right, but not the obligation, to receive designated currencies in exchange for a base currency, either at the prevailing foreign exchange market rate or at a prearranged rate of exchange. Multinational corporations with multicurrency cash flows frequently use basket options because it is generally cheaper to buy an option on a basket of currencies than to buy individual options on each of the currencies that make up the basket.  
 

BD form  (in the US)
An SEC required document of brokerage houses that outlines the firm's finances and officers. 
 

Bear  
Someone who believes or speculates that a particular security or the securities in a market will decline in value is referred to as a bear. An investor who believes a stock or the overall market will decline. A Bear market is a prolonged period of falling stock prices, usually by 20% or more. Related: bull.  
 

Bear CD  
A Bear Certificate of Deposit that pays the holder a fraction of any fall in a given market index. 


Bear Flattener
A yield-rate environment in which short-term interest rates are increasing at a faster rate than long-term interest rates. This causes the yield curve to flatten as short-term and long-term rates start to converge.
At any time, the yield curve is either in a state of steepening or flattening. These fluctuations occur due to investor demand, change in interest rates, and institutional investors trading large blocks of fixed-income securities.
If the curve is flattening, the spread between long-term rates and short-term rates is narrowing. A bear flattener often occurs when the government raises interest rates in the short term. Increasing interest rates drives short-term bond prices down, increasing their yields rapidly in the short term, relative to long-term securities. 


Bear Market  
A longer period of time when prices in the market are generally declining. Any market in which prices exhibit a declining trend. For a prolonged period, usually falling by 20% or more.  
 

Bear Spread  
An option strategy with maximum profit when the price of the underlying security declines. Maximum loss occurs if the underlying security rises in price. The strategy involves the purchase and simultaneous sale of options. Puts or calls can be used. In the case of put options (a put bear spread), the put with the higher strike price is purchased and a lower strike price is sold. In the case of call options (a call bear spread), the call with the higher strike price is purchased and a lower strike price is sold. The options have the same expiration date. Applies to derivative products. Strategy in the options market designed to take advantage of a fall in the price of a security or commodity, usually executed by buying a combination of calls and puts on the same security at different strike prices in order to profit as the security's price falls.  


Bear Steepener
A widening of the yield curve caused by long-term rates increasing at a faster rate then short-term rates. This causes a larger spread between the two rates as the long-term rate moves further away from the short-term rate.
This widening yield curve is similar to a bull steepener except with a bear steepener this is driven by the changes in long-term rates, compared to a bull steepener where short-term rates have a greater effect on the yield curve. 


Bearer bond  
Bonds that are not registered on the books of the issuer. Such bonds are held in physical form by the owner, who receives interest payments by physically detaching coupons from the bond certificate and delivering them to the paying agent.  A bearer bond, also known as a coupon bond, has coupons that must be clipped from the security and presented in order to receive interest payments. The issuer will not remind the bearer of coupon payments.


Bearer Form
A security not registered in the books of issuing corporation but that is payable to its bearer (the person possessing it). Securities can be issued in two forms: registered or bearer. Registered form means the issuing firm keeps records of a security's owner and mails out payments to him/her. Bearer form means the security is traded without any record of ownership, so physical possession of the security is the sole evidence of ownership. Most securities issued today are in registered form.


Bearer Security
A security that has no identification as to owner. It is presumed to be owned by the person who holds it. Bearer securities are freely negotiable, since ownership can be quickly transferred from seller to buyer by delivery of the instrument. However, note that in the United States it has not been legal to issue bearer bonds in the municipal or corporate markets since 1982. As a result, the only bearer bonds available in the secondary market are long-dated maturities issued before this date, which are becoming increasingly scarce. Among the disadvantages of bearer securities are that you must clip the coupons and present them to the trustee in order to receive your interest; and if the bonds are called, you will not automatically be alerted by the issuer or trustee.
A bearer stock certificate is negotiable without endorsement and is transferred upon delivery. 

Benchmark  
The performance of a predetermined set of securities, used for comparison purposes. Such sets may be based on published indexes or may be customized to suit an investment strategy.  
 

Benchmark interest rate  
Also called the base interest rate, it is the minimum interest rate investors will demand for investing in a non-Treasury security. It is also tied to the yield to maturity offered on the comparable-maturity Treasury security that was most recently issued (on-the-run).  
 

Benchmark issue  
Also called on-the-run or current-coupon issue or bellwether issues. In the secondary market, the benchmark issue is the most recently auctioned Treasury issues for each maturity.  A benchmark bond is a bond that provides a standard against which the performance of other bonds can be measured. Government bonds are almost always used as benchmark bonds. More specifically, the benchmark is the latest issue within a given maturity. For a comparison to be appropriate and useful, the benchmark and the bond being measured against it should have a comparable liquidity, issue size and coupon.  


Beneficiary  
Term used to refer to the person who receives the benefits of a trust or the recipient of the proceeds of a life insurance policy.  


Beta  
The measure of an asset's risk in relation to the market (for example, the S&P500) or to an alternative benchmark or factors. Roughly speaking, a security with a Beta of 1.5, will have move, On average, 1.5 times the market return. [More precisely, that stock's excess return (over and above a short-term money market rate) is expected to move 1.5 times the market excess return).] According to asset pricing theory, beta represents the type of risk, systematic risk, that cannot be diversified away. When using beta, there are a number of issues that you need to be aware of: (1) betas may change through time; (2) betas may be different depending on the direction of the market (i.e. betas may be greater for down moves in the market rather than up moves); (3) the estimated beta will be biased if the security does not frequently trade; (4) the beta is not necessarily a complete measure of risk (you may need multiple betas). Also, note that the beta is a measure of comovement, not volatility. It is possible for a security to have a zero beta and higher volatility than the market. 
 

Bid
The price at which a buyer offers to purchase a security.

Bid-asked spread  
The difference between the bid and the asked prices. 
 

Bid-to-cover ratio  
The ratio of the number of bids received in a Treasury security auction compared to the number of accepted bids.  
 

Bifurcation  
When a non-linear dynamic system develops twice the possible solutions that it had before it passed its critical level. A bifurcation cascade is often called the period doubling route to chaos because the transition from an orderly system to a chaotic system often occurs when the number of possible solutions begins increasing, doubling each time.  


Big Bang  
The term applied to the liberalization in 1986 of the London Stock Exchange (LSE) when trading was automated. 
 

Big Board  
A nickname for the New York Stock Exchange (NYSE). Also known as The Exchange. More than 2,000 common and preferred stocks are traded. Founded in 1792, the NYSE is the oldest exchange in the United States, and the largest. It is located on Wall Street in New York City.  


Bill of Exchange
A non-interest-bearing written order used primarily in international trade that binds one party to pay a fixed sum of money to another party at a predetermined future date. Bills of exchange are similar to checks and promissory notes. They can be drawn by individuals or banks and are generally transferable by endorsements. The difference between a promissory note and a bill of exchange is that this product is transferable and can bind one party to pay a third party that was not involved in its creation. If these bills are issued by a bank, they can be referred to as bank drafts. If they are issued by individuals, they can be referred to as trade drafts. 


Binomial option pricing model  
An option pricing model in which the underlying asset can assume one of only two possible, discrete values in the next time period for each value that it can take on in the preceding time period.  
 

Black-Scholes option-pricing model  
A model for pricing call options based on arbitrage arguments. Uses the stock price, the exercise price, the risk-free interest rate, the time to expiration, and the expected standard deviation of the stock return. Developed by Fischer Black and Myron Scholes in 1973.  
 

Block Trade
Large quantity of stock or large dollar amount of bonds held or traded. As a rule of thumb, 10,000 shares or more of stock and $200,000 or more worth of bonds would be described as a block.  


Blue List
A daily digest of municipal and corporate bond offerings, market commentaries, fixed-income statistics and other bond information. The blue list is used by bond investors to identify investment opportunities in the bond market. Historically printed on blue paper, the Blue List is printed by Standard & Poor's and was first printed in 1935. 


Blue-sky laws  
State laws covering the issue and trading of securities.  
 

Bond
A debt investment with which the investor loans money to an entity (company or government) that borrows the funds for a defined period of time at a specified interest rate.
The indebted entity issues investors a certificate, or bond, that states the interest rate (coupon rate) that will be paid and when the loaned funds are to be returned (maturity date). Interest on bonds is usually paid every six months (semiannually). The main types of bonds are the corporate bond, the municipal bond, the Treasury bond, the Treasury note, the Treasury bill and the zero-coupon bond.
The higher rate of return the bond offers, the more risky the investment. There have been instances of companies failing to pay back the bond (default), so, to entice investors, most corporate bonds will offer a higher return than a government bond. It is important for investors to research a bond just as they would a stock or mutual fund. The bond rating will help in deciphering the default risk. 


Bond Anticipation Note - BAN
A short-term interest-bearing security issued in the anticipation of larger future bond issues. Bond anticipation notes are smaller short-term bonds issued by governments and corporations. Knowing that the proceeds of the larger future issue will cover the anticipation notes, the issuing bodies use the notes as short-term financing.


Bond Attorney
A lawyer who represents the bondholders' interests during a bond offering and who prepares the legal opinion attesting that the issue is legal, valid and binding. For example, during a municipal bond offering a bond attorney will make sure that the interest on the bonds is exempt from federal taxation.


Bond covenant  
A contractual provision in a bond indenture. A positive covenant requires certain actions, and a negative covenant limits certain actions.  
 

Bond Equivalent Yield - BEY
A calculation for restating semi-annual, quarterly, or monthly discount-bond or note yields into an annual yield. For a fixed income security with a par value of $1000, the calculation is as follows:
BEY =  [ (1000 - Purchase Price) / Purchase Price ] * [ 365 / (# of Days to Maturity) ]
The BEY allows fixed-income securities whose payments are not annual to be compared with securities with annual yields. The BEY is the yield that is quoted in newspapers. Alternatively, if the semi-annual or quarterly yield to maturity of a bond is known, the APR calculation may be used. 


Bond fund  
A mutual fund whose investment objective is to provide stable income while taking on minimal risk, rather than emphasising capital growth by investing in corporate, municipal, or US government debt obligations, or some combination of them.
 

Bond indenture  
Contract that sets forth the promises of a corporate bond issuer and the rights of investors.  
 

Bond indexing  
Designing a bond portfolio so that its performance will match the performance of some bond index. 
 

Bond Insurers (and Reinsurers)
A partial list of bond insurers includes American Municipal Bond Assurance Corp. (AMBAC), ACA Financial Guaranty, Asset Guaranty Insurance Co., Financial Guaranty Insurance Co. (FGIC), Financial Security Assurance (FSA), Municipal Bond Insurance Association (MBIA) and Radian Reinsurance Inc.


Bond Ladder
A strategy for managing fixed-income investments by which the investor builds a ladder by dividing his or her investment dollars evenly among bonds or CDs that mature at regular intervals simultaneously (for example, every six months, once a year or every two years). Advantages of bond ladders are consistent returns, low risk and ongoing liquidity because every interval you have securities expiring. The bond ladder also protects the investor's bond portfolio from call risk: since maturies are staggered, there is little chance that all bonds in one portfolio will be called at once. 


Bond Market
The environment in which the issuance and trading of debt securities occurs. The bond market primarily includes government-issued securities and corporate debt securities, and facilitates the transfer of capital from savers to the issuers or organizations requiring capital for government projects, business expansions and ongoing operations. Most trading in the bond market occurs over-the-counter, through organized electronic trading networks, and is composed of the primary market (through which debt securities are issued and sold by borrowers to lenders) and the secondary market (through which investors buy and sell previously issued debt securities amongst themselves). Although the stock market often commands more media attention, the bond market is actually many times bigger and is vital to the ongoing operation of the public and private sector. 


Bond market association  
An international trade association of broker/dealers and banks in US government and federal agency securities, municipal securities, mortgage-backed securities, and money market securities.  


Bond Option
An option contract in which the underlying asset is a bond. Other than the different characteristics of the underlying assets, there is no significant difference between stock and bond options. Just as with other options, a bond option allows investors the ability to hedge the risk of their bond portfolios or speculate on the direction of bond prices with limited risk. A buyer of a bond call option is expecting a decline in interest rates and an increase in bond prices. The buyer of a put bond option is expecting an increase in interest rates and a decrease in bond prices.  
 

Bond Quote
The statement of a bond's price. Quotes for corporate and government bonds are represented either by a percentage of the bond's face value or as a dollar value. Corporate bonds are quoted in 1/8th increments, so a quote of 99 1/8 represents 99.125% of par ($1,000), or $991.25. Government bonds are typically quoted in 1/32nds. Municipal bonds may be quoted on a dollar basis or on a yield-to-maturity basis. 


Bond rating  
A rating based on the possibility of default by a bond issuer. The ratings range from AAA (highly unlikely to default) to D (in default). See: Rating, Investment grade. A specification of a bond issuer's probability of defaulting based on an analysis of the issuer's financial condition and profit potential. Bond rating services are provided by Standard & Poor's, Moody's Investors Service and Fitch Investors Service. Bond ratings start at 'AAA' (denoting the highest investment quality) and usually end at 'D' (meaning payment is in default).  

 
Bond Swap
The sale of a bond and the purchase of another bond of similar market value. Swaps may be made to establish a tax loss, upgrade credit quality, extend or shorten maturity, etc. A strategy in which an investor sells a bond and at the same time purchases a different bond with the proceeds from the sale. There are several reasons why people use a bond swap: to seek tax benefits, to change investment objectives, to upgrade a portfolio's credit quality or to speculate on the performance of a particular bond. 


Bond value  
With respect to convertible bonds, the value the security would have if it were not convertible. That is the market value of the bond minus the value of the conversion option. 
 

Book-Entry
A method of recording and transferring ownership of securities electronically, eliminating the need for physical certificates.

Book-entry securities  
System in which securities are not represented by paper certificates but are maintained in computerized records at the Fed or other clearing agents (such as Euroclear) in the names of member banks, which in turn keep computer records of the securities they own as well as those they are holding for customers. In the case of other securities where a book-entry has developed, certificates reside in a central clearinghouse or by another agent. These securities do not move from holder to holder. Securities that are recorded in electronic records called book entries rather than as paper certificates. Also referred to as "book-entry receipt." Ownership of U.S. government book-entry securities is transferred over fedwire.


Book runner  
The managing underwriter for a new issue. The book runner maintains the book of securities sold. 
 

Book value  
A company's total assets minus intangible assets and liabilities, such as debt. A company's book value might be higher or lower than its market value.  


Bootstrapping
(1) A procedure used to calculate the zero coupon yield curve from market figures. Since the T-bills offered by the government are not available for every time period, the bootstrapping method is used to fill in the missing figures in order to derive the yield curve. The bootstrap method uses interpolation to determine the yields for Treasury zero coupon securities with various maturities.
(2) A situation in which an entrepreneur starts a company with little capital. An individual is said to be bootstrapping when he or she attempts to found and build a company from personal finances or from the operating revenues of the new company. Compared to using venture capital, bootstrapping can be beneficial as the entrepreneur is able to maintain control over all decisions. On the downside, however, this form of financing may place unnecessary financial risk on the entrepreneur. Furthermore, bootstrapping may not provide enough investment for the company to become successful at a reasonable rate. 


Borrowed reserves  
Funds borrowed from a Federal Reserve Bank by member banks to maintain the required reserve ratios.  
 

Box Spread  
Option arbitrage in which a profitable position is established with no risk. One spread is established with aall options. The other spread is established using put options.  
 

Brady bonds  
Bonds issued by emerging countries (esp. Latin America) under a debt reduction plan. Brady Bonds are some of the most liquid emerging market securities. They are named after former U.S. Treasury Secretary Nicholas Brady, who sponsored the effort to restructure emerging market debt instruments. The price movements of Brady Bonds provides an accurate indication of market sentiment toward developing nations. Most issuers are Latin American countries. 


Bretton Woods Agreement  
An agreement signed by the original United Nations members in 1944 that established the International Monetary Fund (IMF) and the post-World War II International monetary system of fixed exchange rates.  
 

Bridge financing  
Interim financing of one sort or another used to solidify a position until more permanent financing is arranged. 
 

British clearers  
The large British clearing banks that dominate deposit taking and short-term lending in the domestic sterling market. These ussally refer to Barclays, National Westminster, Lloyds and HSBC.


Broker  
An individual or a firm who is paid a commission for executing customer orders. Either a floor broker who executes orders on the floor of the exchange, or an upstairs broker who handles customers and their orders. Also, person who acts as an intermediary between a buyer and seller, usually charging a commission. A "broker" who specializes in stocks, bonds, commodities, or options acts as an agent and must be registered with the Exchange where the securities are traded. Antithesis of dealer. 
 

Broker-dealer  
A firm that handles transactions for its customers and also purchases securities for its own account, selling them to customers.  
 

Brokered Deposit
A large-denomination deposit similar to a certificate of deposit. A brokered deposit is sold by a bank to a brokerage, who then divides it into smaller pieces for sale to its customers. 


Bull  
A person who believes that prices will rise.  
 

Bull CD  
A Bull Certificate of Deposit pays its holder a specified percentage of the increase in return on a specified market index when the index goes up.


Bull Flattener
A yield-rate environment in which long-term rates are decreasing at a rate faster than short-term rates. This causes the yield curve to flatten as the short-term and long-term rates start to converge. When the yield curve is moving, it is either steepening or flattening. These fluctuations occur due to investor demand, changes in interest rates and institutional investors trading large blocks of fixed-income securities. If the yield curve is exhibiting bull flattener behavior, the spread between the long-term rate and the short-term rate is getting smaller because long-term rates are decreasing as short-term rates are increasing. This could occur as more investors choose long-term bonds relative to short-term bonds, which drives long-term bond prices up and reduces yields.


Bull Market  
A market characterized by rising prices. Any market in which prices are in an upward trend.  
 

Bull spread  
A spread strategy in option trading in which an investor expects the market to go up. In the case of using call options, the investor buys an in-the-money call option, financing it by selling an out-of-the money call option on the same underlying security.  


Bull Steepener
A change in the yield curve caused by short-term rates falling faster than long-term rates, resulting in a higher spread between the two rates. A steepener differs from a flattener in that a steepener widens the yield curve while a flattener causes long-term and short-term rates to move closer together. When the yield curve is said to be a bull steepener it means that the higher spread is caused by the short-term rates, not long-term rates.


Bull-bear bond  
Bond whose principal repayment is linked to the price of another underlying asset. The bonds are issued in two tranches: In the first tranche repayment increases with the price of the underlying asset, and in the second tranche repayment decreases with the price of the underlying asset. 
 

Bulldog bond  
Bonds denominated in the British pound issued by foreign issuers in London.  These sterling bonds are referred to as bulldog bonds as the bulldog is a national symbol of England.


Bullet Bond
A noncallable regular coupon paying debt instrument with a single repayment of principal on the maturity date. Sometimes referred to as a virgin bond. 


Bullet contract  
A guaranteed investment contract purchased with a single (one-shot) premium. 


Bullet GIC
A guaranteed investment contract (GIC) is purchased with a single premium and only one payout that is made at maturity. With a GIC, there is no contribution risk and no withdrawal risk.  

 
Bullet loan  
A bank term loan that calls for no amortization.  


Bullet Repayment
A single payment for an entire loan amount that is paid at maturity. For large loan amounts, such as mortgage loans, refinancing is usually required in order to pay the entire bullet repayment amount. 


Bullet strategy  
A fixed income strategy in which a portfolio is constructed so that the maturity`s of its securities are highly concentrated at one point on the yield curve.  
 

Bunny Bond
A type of bond that offers investors the option to reinvest coupon payments into additional bonds with the same coupon and maturity. Also known as a "multiplier bond" or a "guaranteed coupon reinvestment bond". Bunny bonds are an effective way to protect against reinvestment risk, which arises from the possibility that interest rates will drop in the future. With a normal bond, investors are exposed to the risk of having to reinvest their coupons at a lower interest rate. If an investor chooses to reinvest all cash coupons back into the bond he or she is currently holding, it behaves similarly to a zero-coupon bond because the investor receives no cash flows until maturity. 


Busted Convertible Security
A convertible security that is trading well below its conversion value. The result is that the security is valued as regular debt because there is very little chance that it will ever reach the convertible price before maturity. Basically this is a convertible that is now a non-convertible because the convertible price is 50% or more above the current share price. Some investors have found success in trading busted convertibles. While the possibility of converting into stock is usually remote, busted converts usually trade at prices and yields very close to other nonconvertible debt (so you don't compromise returns). Meanwhile, if by chance the stock rebounds, the bond could become extremely valuable. 


Butterfly spread  
Applies to derivative products. Complex option strategy that involves selling two calls and buying two calls on the same or different markets, with several maturity dates. One of the options has a higher exercise price and the other has a lower exercise price than the other two options. The payoff diagram resembles the shape of a butterfly. An option strategy combining a bull and bear spread. Three strike prices are used. The lower two strike prices are used in the bull spread and the higher two strike prices are used in the bear spread. Either puts or calls can be used. This strategy has limited risk and limited profit.  
 

Buyer's market  
Market in which the supply exceeds the demand, creating lower prices. Antithesis of seller's market.
 





- C -

Cabinet Crowd
Members of the NYSE that typically trade in inactive bonds. Also known as the inactive bond crowd or book crowd. The name cabinet crowd arises from the fact that these members will typically enter limit orders for transacting these bonds which are kept in "cabinets" adjacent to the bond trading floor until the limit prices are attained. 


Call Date
The date on which a bond can be redeemed before maturity. If the issuer feels there is a benefit to refinancing the issue, the bond may be redeemed on the call date at par or at a small premium to par.  The call date is important to be aware of when buying a bond. You are only guaranteed interest payments up to this date. 


Call Premium 
(1) A dollar amount, usually stated as a percent of the principal amount called, paid by the issuer as a "penalty" for the exercise of a call provision. The dollar amount over the par value of a callable fixed-income debt security that is given to holders when the security is called by the issuer.
(2) The amount the purchaser of a call option must pay to the writer. 
(i) The call premium is somewhat of a penalty paid by the issuer to the bondholders for the early redemption. (ii) In order to receive the rights associated with a call option, the premium must be paid to the seller. 


Call Price
The price at which a bond or a preferred stock can be redeemed by the issuer. This price is set at the time the security is issued. Also referred to as "redemption price". For example, let's say ABC issues 100,000 preferred shares with a face value of $100 with a call provision built in at $110. This means that if ABC were to exercise its right to call the stock, the call price would be $110.
A company may exercise its right to call preferred stock if it wishes to discontinue payment of the dividend associated with the shares. It may choose to do this in an effort to increase earnings for common shareholders. 


Call Protection
A protective provision of a callable security prohibiting the issuer from calling back the security for a period early in its life. The call protection is advantageous to investors because it prevents the issuer from forcing redemption early on in the life of a security. This means that investors will have a minimum number or years, regardless of how poor the market becomes, to reap the benefits of the security. The period for which the bond is protected is known as the "deferment period" or the "cushion". 


Call Risk
The risk, faced by a holder of a callable bond, that a bond issuer will take advantage of the callable bond feature and redeem the issue prior to maturity. This means the bondholder will receive payment on the value of the bond and, in most cases, will be reinvesting in a less favorable environment (one with a lower interest rate). Typically, bond issuers will call a bond because of the high rate they are paying on the bond. If interest rates have declined since it first issued the bonds, issuers will often call the bond once it becomes callable and will create a new issue at a lower rate. The bondholders will then lose out on the high rate of their bond and will have to invest in a lower rate environment.


Callable Bonds
A bond that can be redeemed by the issuer prior to its maturity date at a specified price at or above par. Usually a premium is paid to the bond owner when the bond is called. Also known as a "redeemable bond". The main cause of a call is a decline in interest rates. If interest rates have declined since a company first issued the bonds, it will likely want to refinance this debt at a lower rate of interest. The company will call its current bonds and reissue them at a lower rate of interest. 


Called Away
A term used to describe the elimination of a contract due to the obligation of delivery. This occurs if an option is exercised, if a redeemable bond is called before maturity or if a short position held in a security requires delivery.  For example, if an investor has written a call option and the holder of the option exercises it, then the option has been "called away" and the writer has to complete his/her obligation to the contract. When an investment is "called away", it can result in an investor missing out on potential gains in the underlying asset.


Canada Premium Bond - CPB
A debt instrument issued by the Bank of Canada that offers a higher interest rate than a Canada Savings Bond (CSB) with the same issuance date. While a Canada Savings Bond is redeemable at any time, a Canada Premium Bond is redeemable once a year. It must be redeemed either on the anniversary of the issue date or within 30 days of it.


Canada Savings Bond - CSB
A financial product issued by the Bank of Canada. It offers a competitive rate of interest and guarantees a minimum interest rate. Canada Savings Bonds have both regular and compound interest features and are redeemable at any time. 


Cap
The top interest rate that can be paid on a floating-rate security.

Capital market
The market in which corporate equity and longer-term debt securities (those maturing in more than one year) are issued and traded.


Capital Note
Fixed income products issued by companies as a source of short term debt. Capital notes are unsecured, and rely upon the company's credit rating for backing, as they are generally ranked lowest in the order of repayment.


Capital Share
The class of shares offered by a dual-purpose fund that has opportunity for capital appreciation but does not offer the holder any portion of the fixed income earned within the portfolio. Capital shares typically attract investors that are looking more for capital growth than for income growth as profits are made only if the stocks increase in price.


Cash Investment
Short-term obligations, usually ninety days or less, that provide a return in the form of interest payments. Examples are money-market funds and short-term CDs.


Cash Management Bill - CMB
A short-term security sold by the U.S. Department of the Treasury. The maturity on a CMB can range from a few days to six months. The money raised through these issues is used by the Treasury to meet any temporary shortfalls. The cash management bill is the most flexible instrument of the U.S. Treasury because it can be issued when needed, allowing the Treasury to have lower cash balances and issue fewer long-term notes. CMBs tend to pay higher yields than bills with fixed maturities, but their shorter maturities lead to lower overall interest expense.


Catastrophe Bond - CAT
A high-yield debt instrument that is usually insurance linked and meant to raise money in case of a catastrophe such as a hurricane or earthquake. It has a special condition that states that if the issuer (insurance or reinsurance company) suffers a loss from a particular pre-defined catastrophe, then the issuer's obligation to pay interest and/or repay the principal is either deferred or completely forgiven.  Advantages of CAT bonds are that they are not closely linked with the stock market or economic conditions and offer significant attractions to investors. For example, for the same level of risk, investors can usually obtain a higher yield with CAT bonds relative to alternative investments. Another benefit is that the insurance risk securitization of CATs shows no correlation with equities or corporate bonds, meaning they'd provide a good diversification of risks. 


Central bank
Principal monetary authority of a nation, which performs several key functions, including issuing currency and regulating the supply of money and credit in the economy. The Federal Reserve is the central bank of the United States.


Certificate Of Deposit - CD
A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate and can be issued in any denomination. CDs are generally issued by commercial banks and are insured by the FDIC. The term of a CD generally ranges from one month to five years.  A certificate of deposit is a promissory note issued by a bank. It is a time deposit that restricts holders from withdrawing funds on demand. Although it is still possible to withdraw the money, this action will often incur a penalty. For example, let's say that you purchase a $10,000 CD with an interest rate of 5% compounded annually and a term of one year. At year's end,  the CD will have grown to $10,500 ($10,000 * 1.05). CDs of less than $100,000 are called "small CDs"; CDs for more than $100,000 are called "large CDs" or "jumbo CDs". Almost all large CDs, as well as some small CDs, are negotiable. 


Certificate of Government Receipts (COUGRs)
U.S. Treasury fixed-income securities stripped of their coupon payments, providing payment of face value. These are synthetic securities offered by the firm A.G. Becker Paribas. Part of the "feline" family of synthetic zero-coupon Treasury securities, which include CATS, COUGRs and TIGRs. This default-free family of products provide safety of principal and transparent profits. The product is sold at a discount and redeemed at face value as there are no interest payments during the life of the security.


Certificate of Indebtedness
A short-term fixed income security issued by the United States Treasury that has a coupon. Unlike treasury bills -- which are sold at a discount and mature at par value without a coupon payment -- certificates of indebtedness offer fixed coupon payments. Certificates of indebtedness typically mature in one year or less.


Certificate of Participation - COP
A type of financing where an investor purchases a share of the lease revenues of a program rather than the bond being secured by those revenues. The authority usually uses the proceeds to construct a facility that is leased to the municipality, releasing the municipality from restrictions on the amount of debt that they can incur.


Certificates of Accrual on Treasury Securities - CATS
Issued by the U.S. Treasury and stripped by a financial intermediary, these products are sold at a significant discount from face value and pay no interest during their lifetime. However, they return full face value and cannot be called away. Secure investments backed by the U.S. Government, CATS are part of the feline family of U.S. Treasury zero-coupon offerings (CATS, COUGRs and TIGRs).


Chastity Bond
A bond designed to prevent unwanted takeovers by having a maturity that is activated once a takeover is complete. The idea behind the chastity bond is that companies will be less inclined to take over a company if they know that afterward they will immediately be forced to pay bondholders. This is similar in nature to a macaroni strategy except that the redemption prices of the bonds are not inflated - the chastity bond matures at par.


Clean Price
The price quoted for a bond excluding accrued interest. This term's cousin is the dirty price.


Clinton Bond
A bond that is said to have no principal, no interest and no maturity. Named after former President Bill Clinton and his well documented, um... extravagances. Also known sometimes as a Quayle Bond, named after former Vice-President Dan Quayle. We're not sure if such a bond really exists. Even so, it is a hilarious buzzword.


Closed-End Indenture
A term in a bond contract that guarantees that the collateral used to back the bond issue cannot be used again to back another bond issue. This is the opposite of an open-end indenture in which more than one bond can be backed by a single collateral. If the bond issuer defaults, a closed-end indenture ensures the bondholders will have the only claims on collateral, making their bonds the most senior security. The fewer claims that exist on the collateral, the more safety a bondholder has.
 

Closed-End Investment Company
An investment company created with a fixed number of shares, which are then traded as listed securities on a stock exchange. After the initial offering, existing shares can only be bought from existing shareholders.


Club Deal
A syndicated loan agreement in which the participants in the syndicate are specifically requested by the borrower. The borrower normally has the right to know what institutions are participating in the syndicate. Once the borrower requests the participation of specific institutions, the syndicated loan becomes known as a club deal.


Collar
Upper and lower limits (cap and floor, respectively) on the interest rate of a floating-rate security.

Collateral Trust Bond
A bond that is secured by a financial asset - such as stock or other bonds - that is deposited and held by a trustee for the holders of the bond. If the issuing company were to default on the debt obligation, the debt holders would receive the securities held in trust, like collateral for a loan. For example, say Company A issues a collateral trust bond, and as collateral for the bond it includes the right to Company A shares held by a trust company. If Company A were to default on the bond payments, the bondholders would be entitled to the shares held in trust. 


Collateralised Bond Obligation  (CBO)
An investment-grade bond backed by a pool of junk bonds. Junk bonds are typically not investment grade, but because they pool several types of credit quality bonds together, they offer enough diversification to be "investment grade."  Similar in structure to a collateralised debt obligation (CDO) or a collateralised mortgage obligation (CMO), but different in that CBOs represent different levels of credit risk, not different maturities. 


Collateralised Debt Obligation (CDO)
A bond, backed by a pool of debt securities or securitised loans, which generally supports several classes of obligations. An investment-grade security backed by a pool of bonds, loans and other assets. CDOs do not specialise in one type of debt but are often non-mortgage loans or bonds.  Similar in structure to a collateralised mortgage obligation (CMO) or collateralised bond obligation (CBO), CDOs are unique in that they represent different types of debt and credit risk. In the case of CDOs, these different types of debt are often referred to as 'tranches' or 'slices'. Each slice has a different maturity and risk associated with it. The higher the risk, the more the CDO pays. 


Collateralized Loan Obligation (CLO)
A special purpose vehicle (SPV) with securitisation payments in the form of different tranches. Financial institutions back this security with receivables from loans. Identical to a CMO except for the assets securing the obligation. CLOs allow banks to reduce regulatory capital requirements by selling large portions of their commercial loan portfolios to international markets, reducing risks associated with lending. 


Collateralized Mortgage Obligation (CMO)
A bond, backed by a pool of mortgage pass-through securities or mortgage loans, which generally supports several classes of obligations. A type of mortgage-backed security that creates separate pools of pass-through rates for different classes of bondholders with varying maturities, called tranches. The repayments from the pool of pass-through securities are used to retire the bonds in the order specified by the bonds' prospectus. Here is an example how a very simple CMO works: The investors in the CMO are divided up into three classes. They are called either class A, B or C investors. Each class differs in the order they receive principal payments, but receives interest payments as long as it is not completely paid off. Class A investors are paid out first with prepayments and repayments until they are paid off. Then class B investors are paid off, followed by class C investors. In a situation like this, class A investors bear most of the prepayment risk, while class C investors bear the least. CMOs usually offer low returns because they are very low risk and are sometimes backed by government securities.
 

Collection
The presentation of a Negotiable instrument for payment, or the Conversion of any Accounts receivable into cash.


Commercial Mortgage-Backed Securities - CMBS
A type of mortgage-backed security that is secured by the loan on a commercial property. A CMBS can provide liquidity to real estate investors and to commercial lenders. As with other types of MBS, the increased use of CMBS can be attributable to the rapid rise in real estate prices over the years. Because they are not standardized, there are a lot of details associated CMBS that make them difficult to value. However, when compared to a residential mortgage-backed security (RMBS), a CMBS provides a lower degree of prepayment risk because commercial mortgages are most often set for a fixed term. 


Commercial Paper
An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories and meeting short-term liabilities. Maturities on commercial paper rarely range any longer than 270 days. The debt is usually issued at a discount, reflecting prevailing market interest rates. Commercial paper is not usually backed by any form of collateral, so only firms with high-quality debt ratings will easily find buyers without having to offer a substantial discount (higher cost) for the debt issue. A major benefit of commercial paper is that it does not need to be registered with the Securities and Exchange Commission (SEC) as long as it matures before nine months (270 days), making it a very cost-effective means of financing. The proceeds from this type of financing can only be used on current assets (inventories) and are not allowed to be used on fixed assets, such as a new plant, without SEC involvement. 


Committed Facility
A credit facility whereby terms and conditions are clearly defined by the lending institution and imposed upon the borrowing company. In committed facilities, the borrowing companies must meet specific requirements set forth by the lending institution in order to receive the stated funds.


Companion Bond
A class of tranche found in a planned amortization class (PAC) bond that is responsible for protecting the PAC tranche from both contraction and extension risk. The companion bond is designed to absorb excess principal payments during times of high prepayment speeds and defer receiving principal payments during times of low prepayment speeds. More specifically, in situations of high prepayment speeds, the companion bond takes as much of the excess repayments from the PAC tranche as possible and uses them to repay its own principal amount. Once its portion of the principal is completely paid off, all excess principle payments go back to the PAC bond. Conversely, in situations of low prepayment speeds, the companion bond defers the reception of any payments. The principal payments then go toward paying off the PAC bond. As long as the prepayment speed stays within the designated upper and lower PAC collars, the companion bond will be able to operate as designed. 


Competitive Tender
A method of distributing debt issues. Bids are submitted by primary distributors and those who bid the highest receive the debt issue. This is a method of distribution used primarily by the Bank of Canada. 


Conduit Financing
A financing arrangement involving a government or other qualified agency using its name in an issuance of fixed income securities for a non-profit organization's large capital project. The government or other qualified agency is not responsible for paying the required cash flows to investors - all cash flows come directly from the project.


Conforming Loan
A conventional mortgage under $203,150 that conforms to the loan amounts and mortgage guidelines used by Fannie Mae and/or Freddie Mac. Conventional mortgages or conforming loans are classified as non-conforming or jumbo loans when the amount of the loan exceeds $203,150.


Connie Lee - College Construction Loan Insurance Association - CCLIA
A formerly government-sponsored enterprise created by the Higher Education Amendments of 1986. The sole purpose of this organization was to insure and reinsure debt instruments that were issued by universities, colleges and other educational institutions to help fund building initiatives. This organization's acronym has the same naming scheme as other government organizations like Fannie Mae, Ginnie Mae and Freddie Mac. Although the Department of Education originally provided Connie Lee with some start up equity capital, this amount was eventually paid back when Connie Lee was privatized back in 1997. Connie Lee is now a considered a private, for-profit organization. 


Consent Solicitation
A solicitation by one party to the stakeholders of a particular security for the consent of a material change. Should the majority of stakeholders provide valid consent prior to the consent expiry date, the issuer may then follow through with the proposed amendments. This is commonly used to change various provisions within an indenture. Bondholders who have consented to the amendments may also receive a consent payment.


Constant Maturity
Used by the Federal Reserve Board to quote the yields on various treasury securities, adjusted to an equivalent maturity. By providing the constant maturity yields, the Fed allows investors to compare against securities with the same maturity date (such as corporate bonds). Constant maturity yields are often used by lenders to determine mortgage rates. For example, the 1 year constant maturity rate might be 4%, while the lender charges 5% to borrowers for a 1 year loan. The 1% difference is the lender's profit margin.


Construction Loan Note - CLN
A short-term obligation in the form of a note, used for the funding of construction projects such as housing developments. In most cases, the note issuers will repay the note obligation by issuing a longer term bond and using the proceeds from the bond to pay back the note. This type of financing is most often seen at the municipal level: for example, a large city might use a construction loan note to finance a large housing project to meet the demands of its growing population.


Contingent Convertibles - CoCos
A security similar to a traditional convertible bond in that there is a strike price (the cost of the stock when the bond converts into stock). What differs is that there is another price, even higher than the strike price, which the company's stock price must reach before an investor has the right to make that conversion (known as the "upside contingency"). Issuing contingent bonds is more advantageous to companies than issuing regular convertibles. Until an investor exercises the option, the company does not need to count shares in their calculation of diluted earnings. (Note: as of July 2004 the FASB's Emerging Issues Task Force proposed an accounting change that, if passed, would eliminate the accounting advantage of CoCos.)


Contingent Immunization
A method of fixed income portfolio management, whereby managers are granted significant powers of control over the selection of products to be added and removed from the portfolio, as long as the products remain profitable. Should these products become unprofitable past a set threshold, the manager must then capitalize the security under immunization procedures. Similar to the portfolio insurance methodology used in the equity markets, contingent immunization provides managers with the ability to replace underperforming fixed income assets with better performing ones while restricting their powers in cases where declines in profits occur.


Contraction Risk
The risk of a security shortening in duration due to the acceleration of prepayments. This risk is mainly due to lowering interest rates. Contraction risk is generally associated with mortgage securities. As interest rates decrease, the likelihood of prepayment increases. 


Conversion
The exchange of a convertible type of asset into another type of asset, usually at a predetermined price, on or before a predetermined date. The conversion feature is a financial derivative instrument that is valued separately from the underlying security. Therefore, an embedded conversion feature adds to the overall value of the security. An example of an asset that can undergo conversion is a convertible bond. This type of bond gives the bondholder the option to exchange the bond for a predetermined amount of the bond issuer's equity. Typically, the bondholder will exercise the option when the total value of the shares received from conversion exceeds the bond's worth. For example, John owns a convertible bond worth $1,000 from XYZ Corp. If the bond can be converted into 100 shares of XYZ, John will most likely exercise the conversion option only when XYZ's share price exceeds $10.   


Conversion Premium
The amount by which the price of a convertible security exceeds the current market value of the common stock into which it may be converted. Most convertible securities trade at a price above its conversion value


Conversion Price
The price per share at which a convertible security, such as corporate bonds or preferred shares, can be converted into common stock. The conversion price is determined when the convertible security is issued and can be found in the bond indenture (in the case of convertible bonds) or in the security prospectus (in the case of convertible preferred shares). The conversion price is essential in determining the number of shares to be received, by computing the quotient of the principal value of the convertible security divided by the conversion price. Usually, the conversion price is set at a significant amount higher than the current price of the common stock, so as to make conversion desirable only if a company's common shares experience a significant increase in value. 


Conversion Ratio
The number of common shares received at the time of conversion for each convertible security. It is calculated by using this formula:

The higher the ratio, the higher the number of common shares exchanged per convertible security. The conversion ratio is determined at the time the convertible security is issued and will have an impact on the relative price of the security. 


Convertible Adjustable Preferred Stock - CAPS
A preferred, floating rate issue, whose interest rate is tied to Treasury security rates. They can be exchanged for common stock or cash after the next period's dividend rates are announced. The shares received upon conversion are equal in market value to the par value of the preferred. The convertible feature is designed to protect the preferred investor's principal and provide greater liquidity in case the issuer's credit rating declines. 


Convertible Arbitrage
An investing strategy that involves the long position on a convertible security and a short position in its converting common stock. This strategy attempts to exploit profits when there is a pricing error made in the conversion factor of the convertible security.


Convertible Bond
A bond that can be converted into a predetermined amount of the company's equity at certain times during its life, usually at the discretion of the bondholder. Convertibles are sometimes called "CBs".  Issuing convertible bonds is one way for a company to minimize negative investor interpretation of its corporate actions. For example, if an already public company chooses to issue stock, the market usually interprets this as a sign that the company's share price is somewhat overvalued. To avoid this negative impression, the company may choose to issue convertible bonds, which bondholders will likely convert to equity anyway should the company continue to do well. From the investor's perspective, a convertible bond has a value-added component built into it; it is essentially a bond with a stock option hidden inside. Thus, it tends to offer a lower rate of return in exchange for the value of the option to trade the bond into stock.


Convertible Debenture
Any type of debenture that can be converted into some other security. For example, a convertible bond can be converted into stock. 


Convertible Subordinate Note
A short-term debt security (note), that can be changed into common stock (convertible) and ranks below other loans (subordinate). This is a common type of debt that companies issue. 


Convertibles
Securities, usually bonds or preferred shares, that can be converted into common stock.


Convexity
A measure of the curvature in the relationship between bond prices and bond yields. Positive convexity corresponds to curvature that opens upward. Negative convexity corresponds to curvature that opens downward.


Core Plus
A fixed-income style that permits managers to add instruments with greater risk and greater potential return, such as high yield, global, and emerging market debt, to their core portfolios of investment-grade bonds. The percentage of a portfolio in other sectors is variable, but is usually less than 25%. As you can imagine, with this broad definition there are a number of different strategies that can be considered core-plus.


Corporate Bond
A debt security issued by a corporation, as opposed to those issued by the government. A corporate bond typically has a par value of $1,000, is taxable, has a term maturity and is traded on a major exchange. 


Coupon
This part of a bearer bond denotes the amount of interest due, and on what date and where payment will be made. The coupon is typically paid semiannually. This is also referred to as the "coupon rate" or "coupon percent rate". For example, a $1,000 bond with a coupon of 7% will pay $70 a year. Bearer coupons are presented to the issuer's designated paying agent for collection. With registered bonds, physical coupons don't exist (see Registered Bond). The payment is mailed directly to the registered holder. Note that while bearer bonds are no longer issued in the United States and, hence, physical coupons are increasingly scarce, dealers and investors often still refer to the stated interest rate on a registered or book-entry bond as the "coupon." It is called a "coupon" because some bonds literally have coupons attached to them. Holders receive interest by stripping off the coupons and redeeming them. This is less common today as more records are kept electronically. The coupon rate is the interest rate that is paid out to the bond holder. The name derives from the old system of payment, in which bond holders would need to send in coupons in order to receive payment. The coupon is set when the bond is issued and is usually expressed as an annual percentage of the par value of the bond. Payments usually occur every six months, but this can vary. If there is a 5% coupon on a $1000 face value bond, the bondholder will receive $50 every year. If two bonds with equal maturities and face values pay out different coupons, the prices of these bonds will behave differently in the secondary market. For example, the bond with a lower coupon rate will be less expensive because the bondholder is going to be getting more of his/her return from the return of principal at maturity than will the holder of a bond with a higher coupon. There are some bonds that do not pay out any coupons; these are called zero-coupon bonds (see InvestorGuide University: Zero Coupon Bonds).

Coupon Bond
A debt obligation with coupons attached that represent semiannual interest payments. Also known as a "bearer bond". No record of the purchaser is kept by the issuer, and the purchaser's name is not printed on the certificate. 
 

Coupon Equivalent Rate - CER
An alternative calculation of coupon rate used to compare zero-coupon and coupon fixed-income securities.
Formula: CER =  [ (Market Price - Face Value) / (Market Price) ] * [ 360 / (# of Days to Maturity) ]
Because the quoted rate of bonds is calculated according to face value, this rate for bonds issued at a discount is inaccurate for comparing them to other coupon bonds. It is more accurate to use the CER because it uses the investor's initial investment as the basis.
 

Coupon Equivalent Yield - CEY
A method of calculation used to calculate the yield on bonds with maturities of less than one year and which normally sell at a discount and do not pay coupons.
Formula:  CEY =  [ Coupon / (Purchase Price) ] * [ 365 / (# of Days to Maturity) ]
For example, the CEY calculation allows bond investors to compare the return on a 180-day Treasury bill to a one-year coupon paying bond, to evaluate which instrument will give the investor a higher return.

 
Coupon Pass
The purchase of treasury notes or bonds from dealers, by the Federal Reserve. When a dealer says: "there is a coupon pass", he means that the Fed is buying treasury notes or bonds from dealers. The "coupon" refers to the coupons which are the main difference between T-notes and T-bills. The "pass" comes from when the Federal Reserve buys T-bills from dealers thus passing the bill.


Covenant
A promise in an indenture, or any other formal debt agreement, that certain activities will or will not be carried out. The purpose of a covenant is to give the lender more security. Covenants can cover everything from minimum dividend payments to levels that must be maintained in working capital. 


Crammed Down 
(1) A situation in which venture capitalists refuse to invest in a new project unless the preceding investors of the company lower the value of their original investment. If the earlier investors of the company don't pony up new cash for the next round of financing, then their interest in the company is "crammed down."
(2) A bankruptcy procedure that allows a bankruptcy court to initiate a reorganization plan for a company despite objections from creditors. The creditors will still maintain collateral on the company as long as the firm offers repayment of the "secured portion" or fair market value of the collateral in their repayment plan. Creditors usually don't like this because they would rather liquidate the company's assets and get back some of the money owed to them.

Credit Cliff
A slang term referring to the compounding of a company's credit deterioration caused by provisions such as financial covenants, or events that trigger a change in the company's credit rating. These can put pressure on the company's liquidity or its business to a material extent. For example, if a company is performing poorly it may get a credit rating downgrade, which gives the company a higher cost of capital (because a lower rating means the company would have to pay higher interest on its debt), making the company's situation even worse. You can think of a highly leveraged company that is in financial trouble as teetering on the edge of a cliff. One false step and they'll be in a freefall!


Credit Enhancement
A method whereby a company attempts to improve its debt or credit worthiness. Credit enhancements take many different forms. An example of a credit enhancement would be conversion rights added on to a debt instrument in order to lower the issuing interest rate. 


Credit Linked Note - CLN
A security with an embedded credit default swap allowing the issuer to transfer a specific credit risk to credit investors. CLNs are created through a Special Purpose Company (SPC), or trust, which is collateralized with AAA-rated securities. Investors buy securities from a trust that pays a fixed or floating coupon during the life of the note. At maturity, the investors receive par unless the referenced credit defaults or declares bankruptcy, in which case they receive an amount equal to the recovery rate. The trust enters into a default swap with a deal arranger. In case of default, the trust pays the dealer par minus the recovery rate in exchange for an annual fee which is passed on to the investors in the form of a higher yield on the notes. Under this structure, the coupon or price of the note is linked to the performance of a reference asset. It offers borrowers a hedge against credit risk, and gives investors a higher yield on the note for accepting exposure to a specified credit event.


Credit Rating
An assessment of the credit worthiness of individuals and corporations. It is based upon the history of borrowing and repayment, as well as the availability of assets and extent of liabilities. Credit is important since individuals and corporations with poor credit will have difficulty finding financing, and will most likely have to pay more due to the risk of default. 


Creditor
An entity (person or institution) that extends credit by giving another entity permission to borrow money if it is paid back at a later date. Creditors can be classified as either "personal" or "real". Those people who loan money to friends or family are personal creditors. Real creditors (i.e. a bank or finance company) have legal contracts with the borrower granting the lender the right to claim any of the debtor's real assets (e.g. real estate or car) if he or she fails to pay back the loan. When creditors are notified of bankruptcy proceedings, they have a couple of options with respect to their claim against the debtor:  
1. They can share in any distribution from the bankruptcy estate according to the priority of their claim. Most unsecured, non-wage claims come low on the priority list.
2. They can take the debtor to court and challenge a debtor's discharge (the right not to pay back) due to bankruptcy protection. 


Cross Default
A provisions in a bond indenture or loan agreement that puts the borrower in default if the borrower defaults on another obligation. Also known as "cross acceleration". This provides more security to the lender. You can think of this as an "out-clause" to the contract.


Currency Carry Trade
A strategy in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase a different currency yielding a higher interest rate. A trader using this strategy attempts to capture the difference between the rates - which can often be substantial, depending on the amount of leverage the investor chooses to use. Here's an example of a "yen carry trade": let's say a trader borrows 1,000 yen from a Japanese bank, converts the funds into U.S. dollars and buys a bond for the equivalent amount. Let's assume that the bond pays 4.5% and the Japanese interest rate is set at 0%. The trader stands to make a profit of 4.5% (4.5% - 0%), as long as the exchange rate between the countries does not change. Many professional traders use this trade because the gains can become very large when leverage is taken into consideration. If the trader in our example uses a common leverage factor of 10:1, then she can stand to make a profit of 45%. The big risk in a carry trade is the uncertainty of exchange rates. Using the example above, if the U.S. dollar were to fall in value relative to the Japanese yen, then the trader would run the risk of losing money. Also, these transactions are generally done with a lot of leverage, so a small movement in exchange rates can result in huge losses unless hedged appropriately. 


Current Maturity
 The interval between the present date and the maturity date of a bond. For example, in 2006, a bond that was issued in 2000 with a maturity date in 2010 would have a current maturity of 4 years (2010 minus 2006).


Current Yield
The ratio of interest to the actual market price of the bond, stated as a percentage. Annual income (interest or dividends) divided by the current price of the security. This measure looks at the current price of a bond instead of its face value and represents the return an investor would expect if he or she purchased the bond and held it for a year. This measure is not an accurate reflection of the actual return that an investor will receive in all cases because bond and stock prices are constantly changing due to market factors. Also referred to as "bond yield", or "dividend yield" for stocks.
Formula:   Current Yield  =  [ (Annual Cash Inflow) / (Market Price) ] * 100% 
For example (1), a bond with a current market price of $1,000 that pays $80 per year in interest would have a current yield of eight (8) percent.
For example (2), if a bond is priced at $95.75 and has an annual coupon of $5.10, the current yield of the bond is 5.33%. If the bond is a 10-year bond with nine years remaining and you were only planning to hold it for one year, you would receive the $5.10, but your actual return would depend on the bond's price when you sold it. If, during this period, interest rates rose and the price of your bond fell to $87.34, your actual return for the period would be -3.5% (-$3.31/$95.75) because although you gained $5.10 in dividends, your capital loss was $8.41. 


Cushion Bond
A type of callable bond that sells at a premium because the issued coupon payments are above market interest rates. Mostly chosen by investors interested in generating high income conservatively. As interest rates rise, the cushion bond depreciates less than regular bonds, since it already pays a premium. On the other hand, as interest rates fall, the cushion bond's value appreciates less due to the risk of the company calling the bond. 


CUSIP
The Committee on Uniform Security Identification Procedures, established under the auspices of the American Bankers Association to develop a uniform method of identifying securities. CUSIP numbers are unique nine-digit numbers assigned to each series of securities.

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Dated Date (or Issue Date)
The date of a bond issue from which the first owner of a bond is entitled to receive interest.


Day-Count Convention
A system used to determine the number of days between two coupon dates, which is important in calculating accrued interest and present value when the next coupon payment is less than a full coupon period away. Each bond market has its own day-count convention.  There are several different types of day-count conventions. For example, a 30/360 day-count convention assumes there are 30 days in a month and 360 days in a year. An actual/actual day-count convention uses the actual number of days in the month and year for a given interest period. This concept might sound illogical. After all, regardless of the particular bond market there will always be 365 days in a year! Nevertheless, these conventions are standards that have developed over time and help to ensure that everybody is on an even playing field when a bond is sold between coupon dates. 


Debenture
Unsecured debt obligation, issued against the general credit of a corporation, rather than against a specific asset. A type of debt instrument that is not secured by physical asset or collateral. Debentures are backed only by the general creditworthiness and reputation of the issuer. Both corporations and governments frequently issue this type of bond in order to secure capital. Like other types of bonds, debentures are documented in an indenture. Debentures have no collateral. Bond buyers generally purchase debentures based on the belief that the bond issuer is unlikely to default on the repayment. An example of a government debenture would be any government-issued Treasury bond (T-bond) or Treasury bill (T-bill). T-bonds and T-bills are generally considered risk free because governments, at worst, can print off more money or raise taxes to pay these type of debts. 
 

Debenture Redemption Reserve
A provision that was added to the Indian Companies Act of 1956 during an amendment in the year 2000. The provision states that any Indian company that issues debentures must create a debenture redemption service to protect investors against the possibility of default by the company. Under the provision, debenture redemption reserves will be funded by company profits every year until debentures are to be redeemed. If a company does not create a reserve within 12 months of issuing the debentures, they will be required to pay 2% interest in penalty to the debenture holders. Only debentures that were issued after the amendment in 2000 are subject to the debenture redemption service. 


Debt Exchangeable for Common Stock - DECS
A debt instrument that provides the holder with coupon payments in addition to an embedded short put option and a long call on the issuing company's stock. DECS instruments provide the holder with the right to convert the security into the underlying company's common stock. PRIDES securities are one example of debt exchangeable for common stock 


Debt Financing
When a firm raises money for working capital or capital expenditures by selling bonds, bills, or notes to individual and/or institutional investors. In return for lending the money, the individuals or institutions become creditors and receive a promise that the principal and interest on the debt will be repaid. The other way of raising capital is to issue shares of stock in a public offering. This is called equity financing. 


Debt Instrument
A paper or electronic obligation that enables the issuing party to raise funds by promising to repay a lender in accordance with terms of a contract. Types of debt instruments include notes, bonds, certificates, mortgages, leases or other agreements between a lender and a borrower. Debt instruments are a way for markets and participants to easily transfer the ownership of debt obligations from one party to another. Debt obligation transferability increases liquidity and gives creditors a means of trading debt obligations on the market. Without debt instruments acting as a means to facilitate trading, debt is an obligation from one party to another. When a debt instrument is used as a medium to facilitate debt trading, debt obligations can be moved from one party to another quickly and efficiently. 


Debt Restructuring
A method used by companies with outstanding debt obligations to alter the terms of the debt agreements in order to achieve some advantage. Companies use debt restructuring to avoid default on existing debt or to take advantage of a lower interest rate. A company will often issue callable bonds to allow them to readily restructure debt in the future. The existing debt is called and then replaced with new debt at a lower interest rate. Companies can also restructure their debt by altering the terms and provisions of the existing debt issue. 


Debt Security
A security representing a loan given by an investor to an issuer. In return for the loan, the issuer promises to pay