Fixed Income Glossary

Transcription

1 Fixed Income Glossary AMP Capital Investors Limited ABN AFSL

2 Accrued interest Ask price Asset backed Bank capital Basis point Bearer bond Bid Bond Bond swap Call Callable bonds Cap CDO (Collateralised Debt Obligation) CMO (Collateralised Mortgage Obligation) Collar Convexity Corporate bond Coupon Credit Credit rating Credit risk Credit spread Current yield Debenture Default Discount Discount note Discount rate Duration 1 Interest deemed to be earned on a security but not yet paid to the investor. Price being sought for the security by the seller. A bond or note backed by loan paper or accounts receivable other than mortgages. A collective term used for subordinated bonds issued by the banking sector. One one-hundredth of a percentage point. Yield differences among bond securities are stated in basis points (bps). A security that has no identification as to owner. It is presumed to be owned by the person who holds it. Bearer bonds are freely negotiable since ownership can be transferred quickly from seller to buyer by delivery of the instrument. The price at which a buyer offers to purchase a security. A debt instrument, similar to an IOU. It is a contract between the borrower (issuer) and the lender (bondholder). The issuer pledges to pay the loan principal to the bondholder on a fixed date (maturity date) as well as a specified rate of interest during the life of the bond. 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. The repurchase of a bond by its issuer before its maturity date, without requiring the holder s consent. If a bond is callable, the date and price at which it can be called is specified on the certificate. Bonds which are redeemable by the issuer prior to the maturity date at a specified price at or above par. The top interest rate that can be paid on a floating rate note. A security backed by a pool of bonds, loans and other assets. CDOs are similar in structure to a collateralised mortgage obligation (CMO) but do not specialise in one type of debt. A security backed by a pool of mortgage pass-through securities or mortgage loans, which generally supports several classes of obligations. Upper and lower limits (cap and floor, respectively) on the interest rate of a floating rate note. A volatility measure for bonds. Used together with duration, convexity provides a more accurate approximation of the gains and losses on a bond or bond portfolio from a change in interest rates rather than using duration alone. The higher the convexity, the greater the price gain or price loss for a given change in interest rates. Bonds with a longer maturity will generally have a higher convexity, and for instruments with the same duration, the more dispersed the cash flows, the greater the convexity. Also known as credit. A bond issued by a corporate entity. Also known as interest. Annual payout the borrower promises to pay the bondholder during the life of the bond. It is expressed as a percentage of the bond s par value. Most bonds are still offered with a traditional fixed rate, although floating rate notes and zero coupon bonds are also common. A collective term used for bonds issued by corporate entities. Designations used by credit rating agencies to give relative indications of credit quality. The risk of loss to an investor due to an issuer s non-payment of interest or principal on a bond. Refers to the difference between the yield of a corporate bond and a government bond of the same The actual spread of a corporate bond versus a government bond is usually referred to in terms of basis points (bps). After purchasing a corporate bond the bondholder may benefit from a narrowing of the credit spread which contributes to a smaller yield to This drives up the price of the bond, delivering a capital gain. Also known as running yield. It refers to the annual payout as a percentage of the current market price you actually pay. For example, a bond with a current market price of $1,000 that pays $80 per year in interest would have a current yield of 8%. Unsecured debt obligation, issued against the general credit of a corporation rather than against a specific asset. Failure to pay principal or interest when due. Defaults can also occur for failure to meet non payment obligations, such as reporting requirements, or when a material problem occurs for the issuer, such as a bankruptcy. The amount by which the purchase price of a security is less than the principal amount, or par value. 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 The rate the Federal Reserve charges on loans to member banks. Duration is used as a measure of risk in bond investing. While it comes in many forms, the ones most commonly used are Macaulay duration and Modified duration. 2

3 Embedded option Face value Floating rate note Floor Government bond Gross redemption yield Hedge High grade High yield bond Hybrid security Interest Interest rate swap Investment grade Issue date Issuer Junk bond Leveraged loan LIBOR (London Interbank Offered Rate) Liquidity Macaulay duration 1 Maturity date Maturity value Modified duration 1 Money market Municipal bond New issue Non-callable bond 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. Also known as maturity value, par value, principal and redemption rate. The amount a bond or note will pay at A bond for which the interest rate is adjusted periodically according to a predetermined formula, usually linked to LIBOR. The lower limit for the interest rate on a floating rate bond. Also known as a sovereign bond. A bond issued by a government. Also known as yield to maturity. A yield based on the assumption that the security will remain outstanding till It represents the total of coupon payments until maturity, plus interest on interest, and whatever gain or loss is realised from the security at An investment made with the intention of minimising the impact of adverse movements in interest rates or security prices. Also known as investment grade. Bonds considered suitable for preservation of invested capital by credit rating agencies and rated Baa or BBB or above. Also known as sub investment grade bond or junk bond. Bonds issued by lower rated corporations, sovereign countries and other entities (Ba or BB or below) and offering a higher yield than more creditworthy securities. A security that combines two or more different financial instruments. Hybrid securities generally combine both debt and equity characteristics. In the field of bank capital, hybrid is often used to refer to preferred securities. Also known as coupon. Annual payout the borrower promises to pay the bondholder during the life of the bond. It is expressed as a percentage of the bond s par value. Most bonds are still offered with a traditional fixed rate, although floating rate notes and zero coupon bonds are also common. Financial derivatives used by banks and other financial institutions for hedging market interest rate risk. A conventional swap comprises two legs, one fixed rate and the other floating rate which is referenced to an external reference such as LIBOR. They are an important asset-liability management and risk management tool in financial markets. See also Swap spread. Also known as high grade. Bonds considered suitable for preservation of invested capital by credit rating agencies and rated Baa or BBB or above. The date of a bond issue from which the first owner of a bond is entitled to receive interest. An entity which issues and is obligated to pay principal and interest on a debt security. Also known as sub investment grade bond or high yield bond. Bonds issued by lower rated corporations, sovereign countries and other entities (Ba or BB or below) and offering a higher yield than more creditworthy securities. A loan provided to a company already holding a considerable amount of debt. Since the company being offered the loan is already highly leveraged, this type of loan carries more risk to investors who, in return, require higher rates of return. The rate banks charge each other for short-term loans. LIBOR is frequently used as the base for resetting rates on floating rate notes. A measure of the relative ease and speed with which a security can be purchased or sold in the secondary market at a price that is reasonably related to its actual market value. This form of duration measures the number of years required to recover the true cost of a bond, considering the present value of all coupon and principal payments received in the future. Interest rates are assumed to be continuously compounded. It is the only type of duration quoted in years. See also Modified duration. The date when the principal amount of a security is payable. Also known as face value, par value, principal and redemption rate. The amount a bond or note will pay at This form of duration expands or modifies Macaulay duration to measure the responsiveness of a bond s price to interest rate changes. It is defined as the percentage change in price for a 1% change in interest rates. The formula assumes that the cash flows of the bond do not change as interest rates change. See also Macaulay duration. Market for short-term debt securities with a maturity of one year or less, and often 30 days or less. Bond issued by a state, city or local government. A bond being offered for sale for the first time. A bond that cannot be called for redemption by the issuer before its specified maturity date. 3

4 Offer Par value Preferred security Premium Primary market Principal Redemption rate Registered bond Reinvestment risk Revenue bond Running yield Secondary market Senior bond Sovereign bond Sub-investment grade bond Subordinated bond Swap spread Transfer agent Subordinated bond Swap spread Transfer agent Treasury bond Trustee Yield The price at which a seller will sell a security. Also known as face value, maturity value, principal and redemption rate. The amount a bond or note will pay at A security possessing characteristics of both equity and debt. Preferred securities are generally longer-term in maturity but have early redemption or call features. Preferred securities have been created by companies for their favourable accounting treatments and flexibility. See also hybrid security. The amount by which the price of a security exceeds its principal amount. The market for new issues. Also known as face value, maturity value, par value and redemption rate. The amount a bond or note will pay at Also known as face value, maturity value, par value and principal. The amount a bond or note will pay at 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. The risk that interest income or principal repayments will have to be reinvested at lower rates in a declining rate environment. 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. Also known as current yield. It refers to the annual payout as a percentage of the current market price you actually pay. For example, a bond with a current market price of $1,000 that pays $80 per year in interest would have a current yield of 8%. Market for issues previously offered or sold. Senior bonds have greater seniority in the issuer s capital structure than subordinated bonds and preferred securities. That is to say, in the event the issuer goes bankrupt, senior debt must be repaid before other creditors receive any payment. Senior debt is often secured by collateral on which the lender has put in place a first lien. Also known as a government bond. A bond issued by a government. Also known as high yield bond or junk bond. Bonds issued by lower rated corporations, sovereign countries and other entities (Ba or BB or below) and offering a higher yield than more creditworthy securities. A bond whose claim on income and assets of the issuer in the event of default (or if the issuer files for bankruptcy) is ranked below the claims of senior bonds. A subordinated bond is paid after senior bonds but before ordinary shares in a liquidation. The difference between the swap rate on a contract and the yield on a government bond of the same The spread itself is the number of basis points the swap rate lies above the equivalent maturity government bond yield, quoted on the same interest basis. The higher rate payable on swaps represents the additional risk premium associated with bank credit risk compared to government credit risk. Swap spreads are based on LIBOR rates, the creditworthiness of the swap s counterparties, and other economic factors that could influence the terms of the investment s interest rates. See also Interest rate swap. 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. A bond whose claim on income and assets of the issuer in the event of default (or if the issuer files for bankruptcy) is ranked below the claims of senior bonds. A subordinated bond is paid after senior bonds but before ordinary shares in a liquidation. The difference between the swap rate on a contract and the yield on a government bond of the same The spread itself is the number of basis points the swap rate lies above the equivalent maturity government bond yield, quoted on the same interest basis. The higher rate payable on swaps represents the additional risk premium associated with bank credit risk compared to government credit risk. Swap spreads are based on LIBOR rates, the creditworthiness of the swap s counterparties, and other economic factors that could influence the terms of the investment s interest rates. See also Interest rate swap. 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. A bond issued by the US government. A bank designated by the issuer as the custodian of funds and official representative of bondholders. The annual percentage rate of return earned on a security. Yield is a function of a security s purchase price and coupon. Yield curve A line tracing relative yields on a type of security over a spectrum of maturities ranging from three months to 30 years. 4

5 Yield to call Yield to maturity Zero-coupon bond 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. Also known as gross redemption yield. A yield based on the assumption that the security will remain outstanding till It represents the total of coupon payments until maturity, plus interest on interest, and whatever gain or loss is realised from the security at A bond on where no periodic interest payments are made. The investor receives one payment which includes principal and interest at redemption (call or maturity). See also Discount note. Source: ipac. The Securities Industry and Financial Markets Association ( OECD Glossary of Statistical Terms, Investopedia. 1 California Debt and Investment Advisory Commission, January CONTACT US If you would like to know more about how AMP Capital can help you, please visit Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN , AFSL ) makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided. Copyright 2016 AMP Capital Investors Limited. All rights reserved.