| Accrued interest. Interest deemed to be
earned on a security but not yet paid to the investor.
Ask price.
Price being sought for the security by the seller.
ABS.
Asset-backed securities.
Amortizing.
Securities that return principal to investors throughout the life of the security.
Average life.
The average amount of time that will elapse from the date of Mortgage Bond purchase until
principal is repaid based on an assumed prepayment forecast.
Basis point.
One one-hundredth of 1 percent. Yield differences among fixed-income securities are stated
in basis points.
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.
Bid. This
price at which a buyer will purchase a security.
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.
Book-entry.
A method of recording and transferring ownership of securities electronically, eliminating
the need for physical certificates.
Bullet. A
single lump sum payment at maturity.
Callable bonds.
Bonds which are redeemable by the issuer prior to the maturity date at a specified price
at or above par.
Call premium.
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.
Cap. The
top interest rate that can be paid on a floating-rate security.
Cash collateral
Account. The bond issuer borrows the required credit-enhancement amount from the bank
and invests into quality short-term commercial paper for extra receivable generation.
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 form existing shareholders.
CMO
(Collateralized Mortgage Obligation). A bond backed by a pool of mortgage pass-through
securities or mortgage loans, which generally supports several classes of obligations.
(See "REMIC.")
Collar.
Upper and lower limits (cap and floor, respectively) on the interest rate of a
floating-rate security.
Collateral
Invested Amount. Certain part of the assets of a bond is purchased through private
placing on a negotiated basis by a single or several third-part credit enhancers.
Collateralized
Assets. The underlying assets that back the securities.
Coupon.
This part of a bearer bond denotes the amount of interest due, and on what date and where
payment will be made. 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."
CPF.
Central Provident Fund is a kind of pension funds required by law in Singapore.
Credit
enhancement. Additional credit supports provided in forms of guarantees, cash
collateral, cash flow management and extra receivable generating mechanisms by the
issuers, parents, sponsors, servicers and third-party credit enhancers.
Current yield.
The ratio of interest to the actual market price of the bond, stated as a percentage.
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 number assigned to each series of securities.
Dated date (or
issue date). The date of a bond issue from which the first owner of a bond is entitled
to receive interest.
Default.
Failure to pay principal or interest when due. Defaults can also occur for failure to meet
nonpayment obligations, such as reporting requirements, or when a material problem occurs
for the issuer, such as a bankruptcy.
Debenture.
Unsecured debt obligation, issued against the general credit of a corporation, rather than
against the general credit of a corporation, rather than against a specific asset.
Discount.
The amount by which the purchase price of a security is less than the principal amount, or
par value.
Discount note.
Short-term obligations issued at discount from face value, with maturities ranging from
overnight to 360 days. They have no periodic interest payments; the investor receives the
note’s face value at maturity.
Duration.
The weighted maturity of a fixed-income investment’s cash flows, used in the
estimation of the price sensitivity of fixed-income securities for a given change in
interest rates.
Embedded
option. A provision within a bond giving either the issuer or the bondholder an option
to take some action against the other party. The most common embedded option is a call
option, giving the issuer the right to call, or retire, the debt before the scheduled
maturity date.
Excess
servicing. It comprises the difference between the coupon on the underlying collateral
and the security coupon.
Excess spread.
It is the net amount of interest payments from the underlying assets after bondholders and
expenses have been paid.
Extension risk.
The risk that rising interest rates will slow the anticipated rate at which mortgages or
other loans in a pool will be repaid, causing investors to find that their principal is
committed for a longer than expected repayment period. As a result, they may miss the
opportunity to earn a higher rate of interest on their money.
Face amount.
Par value (principal or maturity value) of a security appearing on the face of the
instrument.
Federal funds
rate. The interest rate charged by banks on loans to other banks. The Federal
Reserve’s ability to add or withdraw reserves from the banking system gives it close
control over this rate. Changes in the federal funds rate are sometimes studied by
economists and investors for clues to Federal Reserve intentions.
Final maturity
date. The date on which the principal must be paid to investors, which is later than
the expected/original maturity date.
Floating-rate
bond/"Floater". A bond for which the interest rate is adjusted periodically
according to a predetermined formula, usually linked to an index.
Floor. The
lower limit for the interest rate on a floating-rate bond.
General
obligation bond. A municipal bond secured by the pledge of the issuer’s full
fait, credit an taxing power.
Hedge. An
investment made with the intention of minimizing the impact of adverse movements in
interest rates or securities prices.
High-yield
bond. Bonds issued by lower-rated corporations, sovereign countries and other entities
rate Ba or BB or below and offering a higher yield than more creditworthy securities,
sometimes known as junk bonds.
Investment-grade.
Bonds considered suitable for preservation of invested capital by the rating agencies and
rated Baa or BBB or above.
Issuer. An
entity which issues and is obligated to pay principal and interest on a debt security.
Interest.
Compensation paid or to be paid for the use of money. Interest is generally expressed as
an annual percentage rate.
IO.
Interest only.
Jumbo Pool.
A collateralized mortgage asset securitized from pools which are generally larger and
contain mortgages that are often more geographically diverse than single-issuer pools.
Junk bond.
A debt obligation with a rating of Ba or Bb or lower, generally paying interest above the
return on more highly rated bonds; sometimes known as high-yield bonds.
Leverage.
The use of borrowed money to increase investing power.
LIBOR (London
Interbank Offered Rate). The rate banks charge each other for short-term Eurodollar
loans. LIBOR is frequently used as the base for resetting rates on floating-rate
securities.
Marketability.
A measure of the ease and speed with which a security can be purchased or sold in the
secondary market a price that is reasonably related to its actual market value.
Maturity.
The date when the principal amount of a security is payable.
Mortgage
pass-through. A security representing a direct interest in a pool of mortgage loans.
The pass-through issuer or servicer collects payments on the loans in the pool and
"passes through" the principal and interest to the security holders on a pro
rata basis.
MPF.
Mandatory Provident Fund serves as a kind of pension funds required by law in Hong Kong
Mutual fund.
Also known as an open-end investment company, to differentiate it from a close-end
investment company. Mutual funds invest pooled cash of many investors to meet the
fund’s stated investment objective. Mutual funds stand ready to sell and redeem their
shares at any time at the fund’s current net asset value: Total fund assets divided
by shares outstanding.
Nonamortizing.
A loan which does not require principal payments on a schedule, so long as interest is
paid regularly.Non-callable bond. A bond that cannot be called for redemption by
the issuer before its specified maturity date.
Offer. The
price at which a seller will sell a security.
Offering price.
The price at which members of an underwriting syndicate for a new issue will offer
securities to investors.
Overcollateralization.
A type of credit enhancement in which the principal amount of collateral used to secure a
given transaction exceeds the principal of the securities issued.
PAC & TAC.
Planned amortization class and targeted amortization class function as to reduce
investors’ prepayment risk by establishing a sinking-fund structure. PAC and TAC
bonds assure to varying degrees that their investors will receive payments over a
predetermined time period under various prepayment scenarios.
Par value.
The principal amount of a bond or note due at maturity.
Parental
Guarantee. A guarantee provided by the parent company of the bond issuer.
Paying agent.
Place where principal and interest are payable --usually a designated bank or the office
of the treasurer of the issuer.
PO.
Principal only.
Premium.
The amount by which the price of a security exceeds its principal amount.
Prepayment.
The unscheduled partial or complete payment of the principal amount outstanding on a
mortgage or other debt before it is due.
Prepayment
risk. The risk that falling interest rates will lead to heavy prepayments of mortgage
or other loans-forcing the investor to reinvest at lower prevailing rates.
Primary market.
The market for new issues.
Principal.
The face amount of a bond, payable at maturity.
Pro rata pay.
All principal repayments are based on a predetermined percentage of the receivable, under
which all tranches receive their proportionate shares of principal payments during the
life of the Bonds.
Ratings.
Designations used by credit rating agencies to give relative indications of credit
quality.
Redemption.
This is a feature that allows or requires the issuer to repay the investors’
principal at a specified date before maturity.
Registered
bond. A bond whose owner is registered with the issuer or its agent. Transfer of
ownership can only be accomplished when the securities are properly endorsed by the
registered owner.
Reinvestment
risk. The risk that interest income or principal repayments will have to be reinvested
at lower rates in a declining rate environment.
REMIC (Real
Estate Mortgage Investment Conduit). Because of changes in the 1986 Tax Reform Act,
most CMOs are now issued in REMIC form to create certain tax advantages for the issuer.
The terms REMIC and CMO are now used interchangeably.
Repurchase
Guarantee. Being as an internal protection mechanism provided by the issuer, a third
party or an insurance by guaranteeing the repurchase of a portion or full amount of the
principal payment throughout the lifetime of a bond.
Reserve Fund.
It is a kind of credit enhancement or reimbursement for losses to the trust up to the
amount of the reserve.
Revenue bond.
A municipal bond payable from revenues derived from tolls, charges or rents paid by users
of the facility constructed with the proceeds of the bond issue.
Safekeeping.
The storage and protection of customers’ securities, typically held in a vault,
provided as a service by a bank or institution acting as agent for the customer.
Secondary
market. Market for issues previously offered or sold.
Sequential pay.
For bonds that are structured with multiple payment classes, the first tranche receives
all available principal payments until it is retired; only then does the second tranche
begin to receive principal; and so on.
Settlement
date. The date for the delivery of securities and payment of funds.
Sinking fund.
Money set aside by an issuer of bonds on a regular basis, for the specific purpose of
redeeming debt.
Sinker. A
bond with a sinking fund.
Strips.
Strips in mortgage securities are designed to segregate the cash flows from the underlying
mortgage loans or mortgage securities to create two or more new securities, each with a
specified percentage of the underlying security’s principal payments, interest
payments or a combination of the two. It can be partially or completely stripped as to
regulate or differentiate payment patterns for each specified investor class.
Subordination.
Another internal credit support structured to have senior/subordinated classes, which is
technically a form of "overcollateralization". The senior securities are the
portion of the ABS issue and are backed by the higher-yielding protection layer of
subordinated classes. The senior is unaffected unless losses exceed the amount of the
subordinated tranches.
Surety bonds.
It is an insurance policy provided to reimburse the asset-backed securities for any losses
incurred.
Trade date.
The date when the purchase or sale of a bond is transacted.
Tranche.
One class of securities which shares the same characteristics.
Transfer agent.
A party appointed by an issuer to maintain records of securities owners, to cancel and
issue certificates and to address issues arising from lost, destroyed or stolen
certificates.
Trustee. A
bank designated by the issuer as the custodian of funds and official representative of
bondholders.
Unit investment
trust. Investment fund created with a fixed portfolio of investments that never
changes over the life of the trust. As investments within the trust are paid off, they
provide a steady, periodic flow of income to investors.
Yield. The
annual percentage rate of return earned on a security. Yield is a function of a
security’s purchase price and coupon interest rate.
Yield curve.
A line-tracing relative yields on a type of security over a spectrum of maturities ranging
from three months to 30 years.
Yield to call.
A yield on a security calculated by assuming that interest payments will be paid until the
call date, when the security will be redeemed at the call price.
Yield to
maturity. A yield based on the assumption that the security will remain outstanding to
maturity. It represents the total of coupon payments until maturity, plus interest on
interest, and whatever gain or loss is realized from the security at maturity.
Zero-coupon
bond. A bond where no periodic interest payments are made. The investor receives one
payment, which includes principal and interest – at redemption (call or maturity).
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