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An interest rate swap in which the notional principal amount increases at a predetermined way over time.
Interest earned but not collected. Interest earned, but not paid, since the latest payment date.
An interest rate swap in which the notional principal amount decreases in a predetermined way over the life of the swap.
A general term for transactions involving moving capital from one market to another, from one security to another or from one maturity to another, in the hope of realising a higher yield or capital gain. The simultaneous purchase and sale of the same commodity in two different markets in order to profit from price discrepancies between the markets.
Securities collateralised by a pool of assets. The process of creating securities backed by assets is referred to as asset securitisation.
An option with an exercise price equal to or near the current price of the stock of the underlying futures contract.
A lender's base rate, or prime rate, is their fundamental reference rate of interest. It is reset as often as daily.
In the futures market, the difference between the cash price and the futures price.
The risk between two different instruments used to index the floating-rate side of a swap transaction.
An interest rate swap from one floating instrument into another floating instrument in the same currency, undertaken to eliminate or minimise basis risk.
A bond is a negotiable note or certificate which evidences indebtedness. Bonds are also referred to as notes or debentures. The term note usually implies a shorter maturity than bond. (See also Debenture.)
A contract sold for a price that gives the holder the right to buy from the writer of the option, over a specified period, something (referred to as the underlying) at a specified price.
A bond that the issuer has the right to redeem prior to maturity by paying some specified call price.
Capital appreciation bonds
Zero-coupon bonds sold at par or better.
A measure of a company’s liquidity, consisting of net income plus non-cash expenditures (such as depreciation charges).
Collateralised bond obligation.
Collateralised loan obligation.
Bonds with interest rates or par value tied to the price of a certain commodity.
A swap in which the exchange of payments by the counterparties is based on the value of a particular physical commodity such as oil.
A contingent liability is a liability which may arise sometime in the future, may never arise and is dependent upon some factor other than the passage of time.
The annual rate of interest on the bond’s face value that a bond’s issuer promises to pay the bondholder. One of a series of actual certificates attached to a bond, each evidencing interest due on a payment date.
Covered interest arbitrage
Investing dollars in an instrument denominated in a foreign currency and hedging the resulting foreign exchange risk by selling the proceeds of the investment forward for dollars.
Credit default swap
Simplest and most common type of credit derivative for transferring credit risk.
Cross-currency interest rate swap
A swap that combines the features of single currency interest rate swaps and currency swaps.
A swap in which the parties sell currencies to each other subject to an agreement to repurchase the same currency in the same amount, at the same exchange rate, and at a fixed date in the future.
Failure to make timely payment of interest or principal on a debt security or to otherwise comply with provisions of a bond indenture or loan agreement.
In loans and leases and swaps, a substitution of a lump sum payment for the present value of a stream of payments.
An agreement to guarantee revenues will be received or expenses paid to make up a shortfall needed to pay debt.
A term used in accounting and finance to indicate the actual paying out of cash.
A bond selling below par.
Non-interest-bearing money market instruments that are issued at a discount and redeemed at maturity for full face value; for example, US Treasury bills.
The excess of revenues over all related expenses for a given period of time. Sometimes used to describe income, net income, profit or net profit.
Net worth; assets minus liabilities. The stockholder’s residual ownership position.
A credit rating agency.
A currency whose official exchange value in terms of gold or other currencies is maintained by the central bank or monetary authority of the concerned country and does not vary. Although most exchange rates are now floating rates, they will usually fix them against the dollar.
Any security which promises an unvarying payment stream to holders over its life.
Fixed rate bond
A fixed rate bond pays the same rate of interest to investors throughout its life and has a final maturity date.
A currency whose rate of exchange is allowed to fluctuate according to the forces of supply and demand. All currencies are subject to some degree of central bank intervention to soften the effects of market forces. Conversely, governments also manipulate their domestic economies to boost their currencies.
Floating interest rate
An interest rate which fluctuates during the term of a loan and which is adjusted upwards or downwards during the term of a loan in accordance with some index of short-term rates.
Floating rate notes
A floating rate note issue has no fixed rate of interest. The coupon is set periodically according to a predetermined formula tied to short-term interest rates in the appropriate market. Usually refers to floating rate notes issued in Europe, although all kinds of floating rate instruments are issued in the United States. The holder may have the right to demand redemption at par on specified dates.
An agreement between two parties whereby one party, for an upfront premium, agrees to compensate the other at designated times if the underlying (ie, a designated price or rate) is less than the strike level.
Foreign exchange (Forex)
The currency of foreign countries; and the process of converting the currency of one country to that of a second country.
Foreign exchange risk
The risk that a long or short position in a foreign currency will have to be closed out at a loss, due to an adverse movement in the relevant exchange rate. The long or short position which may arise out of a financial or commercial transaction.
Contract between two parties to exchange a currency at a set price on a future date. Differs from a futures contract in that most forward commitments are not actively traded or standardised and carry the risk from the creditworthiness of the other side of the transaction.
Forward rate agreement
A customised agreement between two parties (one of whom is a dealer firm – a commercial bank or investment banking firm) where the two parties agree at a specified future date to exchange an amount of money based on a reference interest rate and a notional principal amount.
An legal agreement between a buyer (seller) and an established exchange or its clearing house in which the buyer (seller) agrees to take (make) delivery of something at a specified price at the end of a designated period of time. The price at which the parties agree to transact in the future is called the futures price. The designated date at which the parties must transact is called the settlement or delivery date.
A market in which contracts for future delivery of a commodity or a security are bought and sold. Different exchanges specialise in particular kinds of contracts. The exchange generally acts as a middleman, guaranteeing payment in case either buyer or seller defaults. In return, both sides of the trade put up collateral, which is adjusted daily, to back their obligations.
General obligation bond
Municipal securities secured by the issuer’s pledge of its full faith, credit and taxing power, as contracted to an industrial revenue bond which is dependent upon revenue generated by a particular facility.
A currency considered by the market to be likely to maintain its value against other currencies over a period of time and not likely to be eroded by inflation. A soft currency, on the other hand, is one whose value melts away as you hold it. Hard currencies are usually freely convertible. The most obvious hard currencies in recent times have been the US dollar, Euro, yen, Swiss franc and sterling.
A method whereby currency exposure (the risk of possible loss due to currency fluctuations) or commodity exposure is covered or offset for a fixed period of time. This is accomplished by taking a position in futures equal and opposite to an existing or anticipated cash or commodity position, or by shorting a security similar to one in which a long position has been established.
International Finance Corporation, a subsidiary of the International Bank for Reconstruction and Development (World Bank).
Indenture of a bond
A legal statement spelling out the obligations of the bond issuer and the rights of the bondholder.
Investors such as banks, insurance companies, trusts, pension funds foundations and educational, charitable and religious institutions.
Bond whose payments depends on the occurrence of a credit event. Also knows as a catastrophe-linked bond.
Cash amounts paid by borrowers to lenders for the use of their money. Normally expressed as a percentage.
Interest rate exposure
Risk of gain or loss to which a company is exposed due to possible changes in interest-rate levels.
Interest rate swap
A swap in which two parties agree to exchange interest rate payments based on a notional principal amount, with typically one paying a fixed rate and the other generally paying a floating rate.
A financial institution specialising in the original sale and subsequent trading of company securities, and private placements including management and underwriting of issues as well as securities trading and distribution. The main function of an investment bank is to locate and collect funds for clients so they can finance new investment projects. Investment banks engage in buying and selling securities, such as stocks, bonds and mortgages. Investment banks also act as intermediaries between the corporation, who requires funds for such improvements as new equipment, new buildings, or plant expansions; and the investor, who wishes to invest his savings. Investment banks may promote a new industry, handle the finances of a corporation for expansion purposes, or act as brokers with other investment banking firms in the flotation of stocks and bonds.
Internal rate of return.
Internal Revenue Service.
Investment tax credit.
Bonds that have a credit rating that below investment grade.
An obligation to pay an amount or perform a service.
The London Interbank Offered Rate of interest on Eurodollar deposits traded between banks. There is a different Libor rate for each deposit maturity. Different banks may quote slightly different Libor rates because they use different reference banks.
A liquid asset is one that can be converted easily and rapidly into cash without a substantial loss of value.
The process of closing down a company, selling its assets, paying off its creditors and distributing any remaining cash to owners.
Factors that pertain to developments in the general economy and government fiscal policy.
Marginal cost of capital
The incremental cost of financing above a previous level.
The price at which an item can be sold.
The date on which a given debt security or any obligation to pay money becomes due and payable to the holder in full.
A debt instrument with the unique characteristic that notes are offered continuously to investors by an agent of the issuer. Investors can select from several maturity ranges: nine months to one year, more than one year to 18 months, more than 18 months to two years and so on up to 30 years. In the United States, medium-term notes are registered with the Securities and Exchange Commission under Rule 415 (the shelf registration rule) which gives a corporation the maximum flexibility for issuing securities on a continuous basis.
A credit rating agency.
Any written evidence of a payment obligation which may be transferred by endorsement or by delivery, such as checks, bills of exchange, drafts, promissory notes and some types of bonds or securities and of which the transferee may become a holder in due course.
A stated rate which is usually subdivided for compounding purposes, resulting in a higher effective rate.
An instrument recognised as a legal evidence of a debt that is signed by the maker, promising to pay a certain sum of money, on a specified date, at a certain place of business, to the payee or other holder of the note. The difference, if any, between notes and bonds is normally that of maturity, notes having a shorter life. Coupon issues with a relatively short original maturity are often called notes. However, US Treasury notes are coupon securities that have an original maturity of up to 10 years.
The cost of pursuing one course of action measured in terms of the forgone return offered by the most-attractive alternative investment.
A contract in which the writer of the option grants the buyer of the option the right, but not the obligation, to purchase from or sell to the writer something at a specified price within a specified period of time (or at a specified date). The writer, also referred to as the seller, grants this right to the buyer in exchange for a certain sum of money, which is called the option price or option premium. The price at which the asset may be bought or sold is called the strike or exercise price. The date after which an option is void is called the expiration date.
The principal amount at which the issuer of a debt security contracts to redeem that security at maturity. The face value.
A bond supplied by one party to protect another against loss in the event of default of an existing contract, usually to motivate a contractor to perform a contract. Some performance bonds require satisfactory completion of the contract. Other performance bonds provide for payment of a sum of money for failure of the contractor to perform under a contract.
An annuity forever; periodic equal payments or receipts on a continuous basis.
A bank depositing Eurodollars with or selling Eurodollars to another bank is often said to be making a placement.
100 basis points is equal to 1 per cent. However, 1 per cent of the face value of a note or bond is also called a point.
A kind of equity whose owners are given certain privileges over common stockholders, such as a prior claim on the assets of the firm. Preferred stockholders may have no voting rights and are usually paid a fixed dividend.
A bond selling above par.
Also called a offering circular. The offering circular contains a complete description of a loan offering or securities issue, including a complete statement of the terms of the issue and a description of the issuer, as well as its historical and latest financial statements. A prospectus for a public offering must be filed (in the US) with the SEC prior to the sale of a new issue.
Put option (generally)
A contract sold for a price that gives the holder the right to sell to the writer of the contract, over a specified period, a specified property or amount of securities at a specified price.
An evaluation given by Moody’s, Standard & Poor’s, Fitch or other rating services as to a security’s credit worthiness.
Agencies that study the financial status of a company and then assign a quality rating to securities issued by that firm. Standard and Poor’s, Moody’s and Fitch are the leading rating agencies that will rate project finance debt.
Redemption of securities by funds raised through the sale of a new issue.
Earned surplus. The amount of earnings retained and reinvested in a business and not distributed to stockholders as dividends.
A formal and official increase in the exchange rate of a currency that is made unilaterally by a country or through the International Monetary Fund.
Instability; uncertainty about the future; more specifically, the degree of uncertainty involved with a loan or investment.
Risk adjusted discount rate
A discount rate which includes a premium for risk.
Risk-free interest rate
The interest rate prevailing on a default-free bond in the absence of inflation.
An additional required rate of return that must be paid to investors who invest in risky investments to compensate for the risk.
A rule adopted by the US Securities and Exchange Commission in April 1990, that eliminates the two-year holding period of privately placed securities by permitting large institutions to trade such securities among themselves without having to register them with the SEC.
Sale and leaseback
A transaction in which an investor purchases assets from the owner and then leases such assets back to the same person. The lessee receives the sale price (and can return it to his capital) and continues to enjoy the use of the assets.
After the initial distribution of bonds or securities, secondary market trading begins. New issue houses usually make a market in bonds or securities which they have co-managed. Other institutions, such as banks, investment banks and securities trading firms, generally act as market makers in a wide range of issues and instruments by quoting two-way prices and being prepared to deal at those prices.
Process of (1) pooling of assets; (2) creating different bond classes that are backed by the pool of assets; and (3) de-linking of the credit risk of the pool of assets from the credit risk of the originator.
Analysis of impact on an economic analysis, plan or forecast of a change in one of the input variables.
A bond issue in which maturities are staggered over a number of years.
A market participant assumes a short position by selling a commodity or security he does not own.
The special risk, if any, that attaches to an investment or loan because the borrower’s country of residence differs from that of the investor’s. Also referred to as country risk.
The market for buying and selling a specific commodity, foreign currency or asset at the current price for immediate delivery. Markets in which goods, currencies, assets or commodities are sold for cash and delivered immediately, except in the spot market for foreign exchange, settlement is two business days ahead. Trades that occur in futures contracts expiring in the current month are also called spot market trades. The spot market tends to be conducted over-the-counter (via telephone trading) rather than on the floor of an organised commodity exchange. Known also as actual market, cash market or physical market.
Standard & Poor’s
A credit rating agency.
The price at which an option to purchase can be exercised.
Contract whereby two parties agree to exchange periodic payments. The dollar amount of the payments exchanged is based on a notional principal amount. There are four types of swaps: currency swaps, interest rate swaps, commodity swaps and equity swaps. (See also exotic options.)
Used in a global note facility or bonus to allow the issuer to move from the US commercial paper market to the Euronote market. Typically available for a maximum of seven days and priced in relation to US prime.
Sometimes used as a synonym for a swap; for example, buying a currency spot and selling it forward.
Bonds issued by political subdivisions which bear interest exempt from US income tax.
Risk capital in the form of equity investments or equity related debt securities extended to start-up or small going concerns.
An instrument allowing the holder to purchase a given security at a given price; for either a set period or into perpetuity.
A foreign bond issued in the US market, payable in dollars and registered with the SEC.
Rate of return on a loan, expressed as a percent and annualised.
The relationship between yield and current maturity is depicted in graphic form as a yield curve. This curve plots yield on the vertical axis and maturity on the horizontal axis. A normal yield curve slopes upward from left to right, from short maturities to long maturities.
Yield to maturity
The rate of return yielded by a debt security held to maturity when both interest payments and the investor’s capital gain or loss on the security are taken into account.
A bond which does not pay interest. The security is sold at a discount and its yield interest rate is determined by a rise in value per unit of time. Its maturity value equals par.
Zero coupon bond with option to convert to common stock or other security.
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