Select a letter above to jump to the corresponding section.
A
Accretion
Adding principal to a fund over a period of time. Similar to amortization except that accretion results in an increase of accounting worth, while amortization results in a decrease. In portfolio accounting, discount bonds are accreted to par while premium bonds are amortized to par.
Accrued Interest
The interest accumulated on a bond since issue date of the last coupon payment. The buyer of the bond pays the market price and accrued interest, which is payable to the seller.
Accumulator
An investor whose goal is to acquire as much of a specific sinking fund issue as possible in order to control the floating supply of the issue and affect its market value.
Active Management
A portfolio strategy of aggressively managing assets by continually repositioning portfolios to take advantage of the most favorable investment opportunities.
Adjusted Rate Mortgage (ARM)
Mortgage agreement between a financial institution and a real estate buyer stipulating predetermined adjustments of the interest rate at specified intervals, usually 1-, 3-, or 5- years. Payments are tied to some index outside the control of the bank or savings and loan institution, such as the interest rates on U.S. Treasury bills or the average national mortgage rate. Borrowers get lower rates at the beginning of the ARM than they would if they took out a fixed rate mortgage covering the same term.
ADRs
American Depository Receipts. A depository receipt issued against foreign securities by an American bank that holds those securities.
After-Tax Yield
The net return a bond earns after income taxes are paid on interest income and capital gains taxes are assessed on changes in book value. It is common practice to disregard any long-term capital losses in calculating after-tax yield.
Agency
The debt of an agency of the U.S. Government. The government sometimes guarantees payment of principal and interest itself.
Agency Trade
A trade in which the executing dealer acts as an agent for the seller or buyer and is paid an agreed commission which is specifically identified on the customer's confirmation.
All or None (AON)
A requirement that the total amount of a given order be executed at the specified price. Any lesser amount will not be acceptable.
Alternative Mortgage Instrument (AMI)
A non-traditional mortgage; a mortgage with terms varying from those of traditional mortgages in one or more ways. Several AMIs in use today are:
Variable Rate Mortgage (VRM): characterized by interest rates that vary according to a formula tied to the lender's cost of money or other index.
Graduated Payment Mortgage (GPM): characterized by a fixed interest rate and term to maturity, but payments at first relatively small and rise by a fixed percentage per year for a fixed number of years.
Flexible Loan Insurance Program Mortgage (FLIP): a mortgage similar to a GPM from the borrower's standpoint, but in which a portion of the down payment is used to create a pledged savings account which is then used to subsidize the mortgage payment. The lender receives level payments comprised of loan payments plus savings accounts withdrawals.
Rollover Mortgage (ROM): a series of short-term loans periodically renegotiated as to interest rate in order to provide long-term financing. The interest rate on each individual loan is fixed and principal is amortized over the entire term of all loans.
Shared Appreciation Mortgage (SAM): a mortgage in which the lender receives some percentage of any appreciation in the value of the property upon sale or maturity of the loan in return for offering the borrower a lower interest rate than prevailing traditional mortgage rates.
Reverse Annuity Mortgage (RAM): a means of receiving fixed annuity payments for some fixed period of time using the equity value of the property as collateral.
Amortization
A reduction of debt by means of periodic payments of interest and principal sufficient to pay off a loan at maturity.
Annualized
To convert to an annual basis. For example, if a mutual fund earns 1% in a month, it would earn 12% on an annualized basis, by multiplying the monthly return by 12. Many economists annualize a monthly number such as auto sales or housing starts to make it easier to compare to prior years.
ARM
Adjusted Rate Mortgage
At or Better
In connection with a buy order, it means to purchase at the price specified or under; in a sell order, to sell at the price specified or above.
Average Life
The arithmetic weighted average life of a bond where the weights are the proportion of the principal amount being redeemed.
B
Baby Bond
A bond issued in a denomination of less than $1000 issued as a means of reaching small investors and thus widening the possible market and permitting increased diversification for small investors.
Balanced Account
An account which holds both fixed income or debt securities (bonds) as well as equities (stocks), or bonds and international bonds.
Balloon
A principal amount retired at maturity on a sinking fund issue which is substantially larger than any sinking fund payment. For example, an issue might have 12 payments of 5 percent of the issue followed by a balloon of 40 percent at maturity.
Bankers' Acceptance (BA)
A money market instrument representing time drafts drawn on and accepted by a banking institution, which in effect adds its credit to that of the importer or holder of merchandise.
Barbell
Portfolio structuring technique using a mix of short and long-term securities to achieve a targeted average maturity or duration.
Basis
An investor's yield to maturity at a given bond price. A 10% bond selling at 100 has a 10% basis.
Basis Point
One one-hundredth of one percent (.01%). Thus 100 basis points equal 1%.
Basis Risk
The risk of a change in yield to maturity. Also, the risk of an unfavorable basis change resulting in a futures gain less than a cash market or a futures loss greater than a cash market gain.
Bear Market
A market characterized by a trend of falling prices.
Bear Spread
A simultaneous sale of a nearby delivery month and purchase at a deferred delivery month fixed income future in expectation of short-term interest rates rising, thereby increasing the relative attractiveness of the back month contract.
Bearer Bond
A bond presumed to be owned by its holder, who collects interest by presenting one of the detachable interest coupons to the issuer's agent or bank. Bearer securities are freely negotiable, since ownership can be quickly transferred from seller to buyer by delivery of the instrument.
Bearish
Pessimistic about the market; anticipating a decline in prices
Benchmark
A bond, frequently the most recent, sizable issue, whose terms set a standard for the market. The benchmark bond usually has the greatest liquidity, the highest turnover, and is the most frequently quoted.
Block
An amount of bonds, usually substantially larger than what would be considered a normal round lot of a given issue.
Blue List
Generally refers to a daily list of dealer offerings of municipal bonds. Also includes corporate bond offerings, job advertisements, etc.
Bogey
Performance indices by which an account performance is measured.
Bond
An instrument of debt issued by a corporation or government to raise capital. Bonds are interest bearing and promise to pay the holder a specified sum of money at its maturity plus interest at given intervals.
Bond Characteristics
Par value - principal value to maturity. Not necessarily the current market price.
Coupon - Annual yield, generally paid semi-annually. Stated as a percentage of par.
Maturity - Date principal is to be repaid.
Yield To Maturity - Implicit rate of return assuming no change in market interest rates.
Quality - Rating assigned to issue based upon issuer's creditworthiness. Investment grade issues are BAA-AAA (Moody's is one example of a credit rating agency)
Call Provisions - Most corporate bonds can be called, or redeemed, prior to maturity. This shortens the maturity and affects pricing.
Prepayment Terms - Mortgages can generally be prepaid. Like call provisions, prepayments shorten maturity and affect pricing.
Collateral - Mortgages and other asset-backed securities have houses, cars, airplanes, receivables, or other assets collateralizing them.
Bond House
A firm primarily engaged in underwriting, distributing and dealing in bonds.
Bond Returns
Consist of two components: current yield and price performance.
Current Yield - is the amount of coupon income received, expressed as a percentage of the current market value of the bond or portfolio.
Price Performance - of bonds is determined by changes in interest rates. If rates rise, bond prices fall. If rates fall, bond prices rise.
Bond-Years
For a block of bonds, the sum of the products of the years to maturity times the number of bonds retired on each maturity.
BP
Basis Point(s)
Brady Bond
Public issue, U.S. dollar-dominated bonds of developing countries, mainly in Latin America, that were exchanged, in a restructuring, for commercial bank loans in default. The securities, named for former Bush administration Treasury Secretary Nicholas Brady, are collateralized by U.S. Treasury zero-coupon bonds to ensure principal. In the mid-1990s prices of these bonds became depressed as a reflection of the risk that South American economies would be restructured a second time.
BRE (Bond Reinvestment Equivalent) Yield
A method for analyzing the value of discounts or premiums and reinvestment potential in (current) yield to maturity terms. BRE yield allows the investor to compare relative values under uniform reinvestment assumptions.
Bucketing
Holding a firm customer order which can be executed immediately while attempting to get execution at a better price, i.e., "holding the order in a bucket."
Builder Operative Loan
A loan that is given to a homebuilder and insured by FHA pursuant to section 203 of the Housing and Urban Development Act. Such a loan may be assumed by the eventual homebuyer. If not assumed, the loan is repaid by the builder with the proceeds of the sale of the home.
Bullet Maturity
A bond whose principal is paid only on the final maturity date.
Bullish
Optimistic about the market; anticipating a rise in prices.
Busted Convertible
A convertible issue whose conversion privilege has no value because the underlying conversion price on the equity is significantly above the market level for the stock.
Buying Ahead
Refers to the purchasing of bonds in the open market by a sinking fund, either in excess of current requirements or before the sinking fund due date. The purchasing of excess bonds because of an option to double is not considered buying ahead.
C
Calendar
List of securities about to be offered for sale. Separate calendars are kept for municipal bonds, corporate bonds, government bonds and new stock offerings.
Call
The right to redeem outstanding bonds before their scheduled maturity. The first dates when an issuer may call bonds are specified in the prospectus of every issue that has a call provision in its indenture (contract).
Call Date
The date on which a bond may be redeemed prior to maturity at the option of the issuer.
Call Provision
The call provision describes the details by which a bond may be redeemable by the issuer in whole or in part prior to the maturity.
Callable
A feature of a bond whereby it may be redeemed by the issuer prior to maturity under terms designated prior to issuance.
Called Bonds
Bonds that are redeemable by the issuer prior to the maturity date at a specified price at or above par.
Canadian Type Sinking Fund
A sinking fund that obligates the issuer to set aside a specified percentage of the principal amount outstanding of an issue in cash. This cash may be used to purchase either the given issue or another approved security, as defined in the original indenture.
Cap
Maximum rate of interest payable on an adjusted rate security or mortgage loan.
Capital Gain / Capital Loss
A realized gain or loss calculated at the time of sale or maturity of any capital asset or security. Refers to the profit or loss attributable to the difference between the purchase and sale prices.
Capital Spending
Nonresidential fixed investment in the GNP; consists of business outlays on long-lived productive facilities (plant and equipment) including office building and shopping center construction, as well as purchases of such long-lived items as trucks, office and farm equipment.
Capital Structure
The division of a company's capitalization among bonds, debentures, preferred and common stock, earned surplus and retained income.
Carry
The cost of financing positions; the rate of interest earned from the securities held minus the cost of funds borrowed to purchase them.
Cash Equivalents
Any kind of savings account, short-term bank account, commercial paper, or other type of security with short maturities (generally under one year) which can be readily converted to cash. (i.e.-Treasury Bill)
CBO
Collateralized Bond Obligation
CBOE
Chicago Board of Options Exchange
CBOT
Chicago Board of Trade
CDR (Collateralized Depository Receipt)
A futures contract traded on the CBOT, representing $100,000 face amount of 8% yield maintenance GNMAs.
Cedel
Centrale de Livraison de Baleurs Mobilieres; a clearing system for Euro-currency and international bonds. Cedel is located in Luxembourg and is jointly owned by a large number of European banks.
Certificate of Deposit (CD)
An interest-bearing negotiable time deposit of fixed maturity at a commercial bank. CDs trade on a yield basis with interest computed for the actual number of days held on the basis of a 360- day year.
CFTC
Commodity Futures Trading Commission
Clean Price
The clean price of a bond does not include accrued interest (see Dirty Price).
Clearing Bank
Any commercial bank that settles corporate and government securities for customers and dealers. The clearing bank agrees to deliver and receive securities, taking cash against delivery. The bank is usually part of the Federal Reserve so as to be able to utilize the Federal Reserve Bank book entry system for government securities.
CLO
Collateralized Loan Obligation
Closed
Refers to a pot in which there are no further securities available and no further bonds can be run through it.
Closed Book Period
A period, usually the two or three weeks before each coupon due date. The coupon is paid to the person holding the bond prior to the closed-book period. If this person sells the bond during this period, he must compensate the buyer for any accrued interest.
Closed-End Fund
A mutual fund in which the shares owned, representing an interest in the mutual fund's portfolio, are fixed in number. New shares are not issued regularly and old shares cannot be redeemed. Instead, shares are traded on the open market and may differ from the underlying net asset value per share. They tend to have specialized portfolios of stocks, bonds, and convertibles
Collateral Trust Certificate
A bond backed by securities placed with a trustee by the issuing corporation.
Commercial Paper
Financial instruments which can be bought and settled on the same day with a minimum of complications, which have a short-term maturity (ranging from 2 to 270 days and issued by banks and corporations) and pay interest at maturity. They are cash equivalents.
ConnieMac
A conventional mortgage pass-through security issued by a private corporation (i.e. not GNMA or FHLMC)
Consumer Price Index (CPI)
The Consumer Price Index (CPI) measures price changes at the retail level, and is often inaccurately labeled the "cost of living" (COL). It is based primarily on prices found in stores by specially trained "shoppers"
Consumer Spending
The sum of personal outlays on new (as opposed to used) goods and services other than housing.
Conventional Loan
A mortgage loan neither insured by FHA nor guaranteed by VA.
Convertible
A feature of certain bonds, debentures, or preferred stocks that allows them to be exchanged by the owner for another class of securities, in accordance with the terms of issue.
Convertible Bond
A bond which, at the option of the holder, is convertible into other securities of the corporation, usually into common equity. Occasionally, convertibles have been issued by one corporation convertible into the equity of another. Also, some securities have been issued which are convertible into a specified amount of an underlying commodity.
Convexity
Mathematical concept that measures sensitivity of the market price of an interest-bearing bond to changes in interest rate levels.
Core-Holding
That portion of a portfolio which is regarded as a long-term holding.
Corporate Bond Equivalent (CBE) Yield
The yield that a corporate bond must offer in order to produce the same rate of return as a given investment. Corporate bonds pay interest semi-annually and their yields are assumed to be compounded semi-annually. Therefore, corporate bond equivalent yield is ordinarily computed for those instruments which pay interest other than semi-annually, or for which compounding is assumed to be other than semi-annually.
Corporate Bonds
Debt instrument issued by a private corporation, as distinct from one issued by a government agency or municipality.
Corporate Tax Equivalent (CTE) Yield
The rate of return required on a par bond to produce the same after-tax yield to maturity as a given bond.
Cost Amount
This is the original cost of a position. When a position consists of several "lots" purchased at different prices it is the total cost of the lots. Any expenses associated with an acquisition (i.e., postage, insurance, commissions) are included.
Coupon
The interest to be paid on a bond semi-annually. Refers to the interest payment of "par" or face value. It is expressed as a percentage of par.
Coupon Issue
In the Treasury market, a coupon issue is a bond or note (i.e., an issue paying semi-annual coupons) as opposed to a Treasury bill. May be collectively referred to as simply "coupons."
Covenant
A pledge by the issuer in the Bond Resolution or Indenture to do something that will benefit the bondholders, or to refrain from doing something that might be disadvantageous to them.
Cover
Amount of net-asset value underlying a bond or equity security. Coverage is an important aspect of a bond's safety rating.
Coverage
The margin of safety for payment of debt service, calculated as the ratio of operating income plus interest expense to long and short-term interest requirements over a period. May be calculated before or after taxes.
CPI
Consumer Price Index
Credit Risk
The risk that an issuer may default on its securities. Relative degrees of credit risk are delineated by the ratings of the rating agencies.
CTE
Corporate Tax Equivalent
Current Coupon
Securities selling at a price most nearly to par (100). In reference to pass-throughs, the nominal rate (coupon rate) at which an issuer sells securities currently. The rate usually depends on the rates of the underlying mortgages.
Current Yield
Amount of coupon income received, expressed as a percentage of the current market value of the bond or portfolio. 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%.
Cushion Bond
A high coupon bond selling at prices above its call price.
Cusip Number
Stands for Committee on Uniform Securities Identification Procedures. Special computer identification number for all stocks and registered bonds.
D
Dates
There are several important dates to keep in mind when describing bond markets. However, it is important to note that date terms are not used consistently across markets. The following definitions allow for a consistent comparison:
Announcement Date (or Launch Date): The day most of the terms of the bond are made public such as the issue size and maturity date.
Bad Days: refers to days delayed in the receipt of redemption proceeds because the maturity date falls on a weekend or a holiday.
Call Date: the date on which a call option may be exercised.
Cutting Date: The day on which the coupon is actually "cut" from the bond.
Dated Date: The date of a bond issue from which the first owner of a bond is entitled to receive interest.
Ex-Dividend Date: The ex-dividend date determines who, from a trading perspective, receives the next coupon payment. Transactions settled on or after the ex-dividend date are deemed to be "ex-coupon" and therefore the buyer does not receive the next coupon. The seller must compensate the buyer with negative accrued interest.
Issue Date (or Payment Date or Primary Date): The day the issuer receives payment for a new bond issue.
Market Day: A day when the domestic bond market is open.
Nominal Day: Any calendar day without regard to whether the bond market is open or not.
Nominal Payment Dates (or Coupon Dates or Coupon Due Dates): The dates on which coupons are scheduled to be paid. This day is used to calculate the accrued interest due to the holder. If the nominal payment date falls on a non-market day, the actual coupon payment is usually on the next market day.
Non-Market Day: a day when the domestic bond market is closed.
Record Date (or Cutting Date): The record date determines, from a custodial perspective, which actually receives the next coupon payment. This is usually the market day preceding the coupon due date (or ex-dividend date). Ownership of the next coupon payment is determined by who holds the securities after close of business on the Record Date.
Secondary Date: The first day that the bond is available for trading in the secondary market.
Settlement Date: The day on which settlement is scheduled to take place. In the Eurobond market, this is referred to as "value date."
Subscription Period: The period during which investors place their bids for a new issue with a syndicate.
Value Date: The day the buyer begins to earn interest on his investment, often referred to as the interest bought/sold date. In many markets this is the same as the settlement date. Value dates may fall on non-market days.
Day Count Basis
Following is a list of conventions used to count the appropriate number of days between two dates in order to calculate accrued interest, yields and odd coupon amounts. For each rule, the numerator indicates the number of days between the dates and determines what happens if one of the dates falls on the 31st of a month. The denominator indicates how many days are considered in a year.
Numerator: The actual number of days between two dates.
Denominator: The actual number of days in the coupon period times the coupon frequency resulting in values ranging from 362 to 368 for semi-annual bonds.
Actual/360-
Numerator: The actual number of days between two dates.
Denominator: 360
Actual/365
Numerator: the actual number of days between two dates.
Denominator: 365
Actual/365L
This rule is used for some Sterling Flat rate notes (FRNs).
Numerator: The actual number of days between two dates.
Denominator: If the next coupon payment date falls within a leap year use 366, otherwise use 365.
DEB
Debenture
Debenture
General debt obligation backed only by the intensity of the borrower and documented by an agreement called an indenture. An unsecured bond is a debenture.
Debt Service
Cash required in a given period, usually one year, for payments of interest and current maturities of principal on an outstanding debt. In corporate bond issues, the annual interest plus annual sinking fund payments; in government bonds, the annual payments into the debt service fund.
Deep Discount Bond
A bond selling for a discount of more than about 20% from its face value. Unlike a current coupon bond, which has a higher interest rate, a deep discount bond will appreciate faster as interest rates fall and drop faster as rates rise. Unlike original issue discount bonds, deep discounts were issued at par value of $1,000.
Default
Failure to pay principal or interest promptly when due. If caused by a minor omission that is remedied quickly, it is known as a technical default.
Deferred Purchase Note (DPN)
A new issue whose terms call for payment of a percentage (i.e.- 25%) of the issue price on the normal closing date with the remaining percentage paid at a future date, usually six months to one year later. Failure to make the second payment results in forfeiture of the initial payment.
Deficiency Payment
On a FHLMC GMC issue, a principal amount guaranteed and paid to bondholders in excess of actual principal collections on the underlying mortgages. All deficiency payments on a given issue must be repaid to FHLMC bondholders and may receive payments of principal in excess of the guaranteed amounts.
Deficit
The amount by which expenditures exceed revenues.
Delayed Delivery
Trades arranged to settle after scheduled settlement date (i.e., Mortgage securities), and ordinarily five business days after the trade date.
Dirty Price
The price of a bond which includes accrued interest.
Disintermediation
Removing funds from low-yielding accounts in traditional (intermediary) banking institutions to invest them directly in higher yielding investments in the general market. An example is the withdrawal of funds from a passbook savings account paying 5 1/2% to buy a Treasury bill paying 10%. As a counter move, banks may pay higher rates to depositors, then charge higher rates to borrowers, which leads to tight money and reduced economic activity. Since banking deregulation, disintermediation is not the economic problem it once was.
Discount Basis
A method for quoting non-coupon securities (which always sell at a discount) in which the discount from par is annualized based on a 360-day year.
Discount Bonds
Those bonds selling below par.
Discount Rate
The interest rate, fixed by the Federal Reserve, which must be paid by a financial institution when it borrows from its regional Federal Reserve Bank.
Dividend Rate
In the case of bonds, it is the coupon rate on the bonds. In the case of stocks, it is the current annual dividend amount per share expressed in dollars. In the case of cash equivalents, it is the annualized yield.
Downgrade
The changing of a rating by a rating agency to a lower (less creditworthy) rating. The sale of one block of bonds and the purchase of another block with a lower rating.
Drop Lock
A provision on certain floating rate securities assuring that, should rates drop on the instrument to which the floater is tied, the coupon will become fixed ("locked") until maturity.
DTC
Depository Trust Company
Dumbbell
Refers to a fixed income portfolio strategy in which assets are concentrated only in the very short or very long maturity issues.
Duration
A measure of average maturity that incorporates a bond's yield, coupon, final maturity and call features into one measure. Duration measures the sensitivity of a bond or portfolio's price to changes in interest rates. It is similar to an average.
A two year duration portfolio will rise (fall) 2% if rates fall (rise) 1%.
A five year duration portfolio will rise or fall 5%.
If the outlook on bonds is "bullish", i.e., we expect the interest rates to fall, the duration is then extended.
If the outlook on bonds is "bearish", i.e., we expect the interest rates to rise, the duration is then reduced.
E
Earnings Yield
The percentage found by dividing the earnings per share by the market price of a stock.
EBY
Equivalent Bond Yield
Effective Yield
The rate of return realized by an investor who buys a security and subsequently sells it. It reflects coupon, interest on interest, principal payments and capital gains or losses in comparison to the original purchase price.
Equipment Trust Certificate Form of borrowing secured by property, generally issued by railroads, to pay for new equipment. Title to the equipment is held in trust until the notes are paid off. It is usually secured by a first claim on the equipment.
Equivalent Bond Yield (EBY) A comparison of discount yields and yields on bonds with coupons. Also called coupon-equivalent rate. For instance, if a 10%, 90-day Treasury bill with a face value of $10,000 cost $9,750, the equivalent bond yield would be 10.40%.
($250/$9750) x (365/90) = 10.40%
Equivalent Life
The arithmetic weighted average maturity of a bond where the weights are the present value of the redemption payments discounted by the internal rate of return.
Eurobond
A bond denominated in a currency of a European country.
Eurocurrency
Created when a banking office in one country accepts a deposit (or other evidence of debt) denominated in the currency of another. When the deposit is denominated in U.S. dollars, it is a Eurodollar deposit. In addition to bank deposits, Eurocurrency instruments may take the form of bankers' acceptances, letters of credit, certificates of deposit and loans of various maturities. Hence the terms Eurodollar CD, Eurodollar Bond, etc.
Eurodollar Issues
Dollar denomination securities of U.S. issuers traded in foreign markets.
Even Par Swap
The sale of one block of bonds and the simultaneous purchase of the same principal amount of another block of bonds.
Exempt
Instruments exempt from registration requirements of the Securities Act of 1933 and the margin requirements of the Securities and Exchange Act of 1934. Exempt securities include debt of the U.S. Treasury, U.S. Government agencies and municipalities, private placements, commercial paper, Title XI, and equipment trust certificates.
Experience
In the pass-through market, refers to a rate of prepayments, usually measured in terms of some "norm". For example, "200% FHA-experience" means prepayments at twice the rate predicted by the FHA model.
Extendible Bond (or Retractable)
A bond with a call provision that gives the issuer the option to extend the maturity date (if the call is not exercised) and reset the coupon at any rate. The investor then may choose to put the bond at the call price or accept the new coupon.
F
Face Value (Amount)
The par value of a bond that appears on the face. This is the amount that the issuer promises to pay at maturity as well as the amount on which interest is computed.
Factor
The multiple or original face outstanding at the time of purchase or sale.
FED
Federal Reserve
Federal Funds
Deposit balances at the Federal Reserve, most of which represent legal reserves. Transactions that involve the sale of immediately available funds for one business day are "Federal Funds" transactions.
Federal Funds Rate
The interest rate at which federal funds are traded. It is monitored by the Fed in the process of regulating the growth of bank reserves and money supply in the execution of its monetary policy. Changes in the federal funds rate are sometimes studied by economists and investors for clues to Federal Reserve intentions.
Federal Home Loan Mortgage Corporation (FHLMC)
A corporate instrumentality of the United States, created by an act of Congress on July 24, 1970 in order to increase the availability of mortgage credit for the financing of housing. FHLMC raises funds by issuing securities backed by pools of conventional mortgages, either Participation Certificates (PCs) or Guaranteed Mortgage Certificates (GMCs). Also referred to as Freddie Mac.
Federal National Mortgage Association (FNMA)
A government-sponsored corporation owned entirely by private stockholders. It is subject to regulation by the Secretary of Housing and Urban Development. It purchases and sells residential mortgages insured by FHA or guaranteed by VA, as well as conventional home mortgages. Purchases of mortgages are financed by the sale of corporate obligations to private investors. Known as "Fannie Maes."
Federal Reserve Open Market Committee (FOMC)
The Fed's arm for establishing and executing monetary policy. This committee is composed of the seven Governors of the Federal Reserve Board, the president of the Federal Reserve Bank of New York and four of the presidents of regional Federal Reserve Banks. It normally meets on the third Tuesday of each month to issue guidelines to its trading desk at the Federal Reserve Bank of New York. A summary report of each meeting is released the Friday after the subsequent meeting.
Federal Reserve Open Market Operations
All of the Fed's activities in the marketplace. When the Fed is a buyer of securities, the quantity of bank reserves is increased. When the Fed sells securities, banks lose reserves. The purpose of most open market operations is merely to offset changes in the quantity of bank reserves arising from other factors, most notably changes in the Treasury's balance at the Federal Reserve.
Federal Reserve System
Established in 1913, it is the central banking system of the United States. There are 12 regional Federal Reserve Banks but virtually all the policy-making powers are lodged in the Board of Governors of the Federal Reserve System in Washington, D.C. The board has 7 members appointed by the President of the United States for 14-year terms. The president chooses one of these to be chairman for a 4-year term. All depository institutions must hold reserves at the Fed or in vault cash.
FF
Federal Funds
FHA
Federal Housing Authority
FHA- Experience
A statistical study done by the Actuarial Division of the Department of Housing and Urban Development describing the probability of a mortgage prepaying or defaulting in a given year of its life. The data, which dates back to 1957, is updated annually and compiled for each state as well as the entire nation.
FHLB
Stands for Federal Home Loan Bank. One of the federal agencies which guarantees mortgages for home loans.
FHLMC
Stands for Federal Home Loan Mortgage Corporation, another federal agency guaranteeing home mortgages. Also known as "Freddie Mac."
Fiduciary
An individual, corporation, or association, to whom certain property is given to hold in trust, according to the trust agreement under which the property is held.
Financial Futures
PIMCO views futures contracts as substitutes for cash market securities. Treasury Bond futures, for instance, can be an attractive substitute for Treasury Bonds when priced "cheap." We can earn a higher rate of return on the future with virtually no additional risk.
First Mortgage Bond
A debt instrument secured by a first mortgage deed of trust containing a pledge of real property.
Fiscal Policy
Federal taxation and spending policies designed to level out the business cycle and achieve full employment, price stability, and sustained growth in the economy. Fiscal policy basically follows the economic theory of the 20th-century English economist John Maynard Keynes that insufficient demand causes unemployment and excessive demand leads to inflation.
Fixed Income
Securities/Investments in which the income during ownership is fixed or constant. Generally refers to any type of bond investment.
Flat
-Excluding any accrued interest. Only the dollar price is figured in the settling contract. Preferred stock, income bonds and bonds in default are quoted and sold flat.
-Describes transactions executed for no profit. FLIP Flexible Loan Insurance Program Mortgage Float
-Credits on the Fed's books to bank accounts during process of check clearing without corresponding debits to other banks' accounts; also a result of delays in the check clearing process. Known as the Federal Reserve Float.
-To allow the exchange rate of a foreign currency to be determined by supply and demand, free of official intervention.
Floating Rate Note (FRN)
A fixed income security which has variable coupon rates, periodically changed according to the rise and fall of a certain interest rate index or a specific fixed income security which is used as a benchmark. Also known as a "floater".
Flow of Funds Accounts - Municipal bonds:
Statement found in the bond resolutions of municipal revenue issues showing the priorities by which municipal revenue will be applied. Typically, the flow of funds in decreasing order of priority is operation and maintenance, bond debt service, expansion of the facility, and sinking fund for retirement of debt prior to maturity. The flow of funds statement varies in detail from issue to issue.
Flower Bonds
U.S. Treasury bonds that can be applied to the payment of federal estate taxes at par when held by and included in the estate of a deceased.
FMB
First Mortgage Bonds
FNMA
Stands for Federal National Mortgage Association or "Fannie Mae." This publicly owned government sponsored corporation backs mortgage loans, which are packaged together and sold to investors as "FNMAs."
FOMC
Federal Reserve Open Market Committee (or OMC)
Form
Bond issues can take different forms, such as:
Allotment letter: the issuer sends the buyer a letter representing ownership of the bond.
Bearer Form: the holder of the bond is the owner. Physical certificates exist.
Book Entry Form (or Inscribed Form): the issuer or agent records the ownership of the bond, usually in computerized records. There are no bond certificates.
Registered Form: the issuer or agent records bond ownership and occasionally bond certificates are allotted.
Forward
A forward trade is a principal-to-principal non-transferable agreement which stipulates that delivery and payment for securities will take place on a date in the future at a price agreed to at the time of the transaction.
Fractional Reserve System
A reserve system similar to that of the United States in which reserves required by the Federal Reserve are only a fraction of deposits, allowing deposits to expand by several times any change in the quantity of reserves.
FRB
Federal Reserve Bank Free Reserve System. Excess reserves minus depository institutions' borrowings at the Fed.
Front Months Futures
Futures contracts that are within twelve months of the current date.
Funnel Sinking Fund
A sinking fund in which the trustee may purchase bonds of any series outstanding under a mortgage in order to satisfy a sinking fund requirement. The requirement is stated as a percentage of the total debt outstanding in a year.
FYI
For Your Information
G
General Mortgage Bond
A bond which is secured by a blanket mortgage on the issuer's property, but may be subordinate to one or more mortgages.
General Obligation Bond (GO)
A federal tax-exempt bond backed by the "full faith, credit and taxing power" of the issuing municipality.
Give-up
- Give-up of yield results from the sale of bonds at one yield and the purchase of an equivalent amount of bonds at a lower yield.
- Give-up of a name is the standard practice, involving NYSE bond trades only, whereby a broker upon execution notifies the seller of the buyer's identity so that delivery can be effected via the Stock Clearing Corporation.
GMC
Guaranteed Mortgage Certificate
GNMA
Stands for Government National Mortgage Association or "Ginnie Mae." This is a federal agency which backs home loan mortgages. A wholly-owned U.S. Government cooperation within the Department of Housing and Urban Development, established in 1968 as a spin-off from the Federal National Mortgage Association (FNMA). GNMA took over the assets and liabilities and operations of the Special Assistance Functions and the Management and Liquidating functions of FNMA. GNMA can raise funds by issuing securities backed by pools of mortgages. Primary functions of GNMA are the purchase and sale of certain FHA and VA mortgages pursuant to various programs for support of the housing market, and the guaranteeing of mortgage-backed securities issued against pools of FHA and VA mortgages.
GNP
Gross National Product
Good Faith Deposit
A cash deposit required on a competitive bid. Deposits usually range from one to five percent of the value of an issue, and are due at the time of the bid.
Government
A security issued by the U.S federal government and its agencies (all are U.S. treasury obligations).
Government Agencies
Obligations of the federal government other than direct obligations such as Treasury Notes, Bonds, or Bills. Examples of these are GNMAs, FHLMCs, etc.
Government Bonds
Bonds backed by the federal government, whether issued by the Treasury or one of the government agencies.
Graduated Payment Mortgages (GPMs)
A mortgage which calls for monthly payments that are initially relatively small and which rise by a fixed percentage each year for a specified period of time.
Gross Domestic Product (GDP)
The market value of the goods and services produced by labor and property in the Untied States. GDP is made up of consumer and government purchases, private domestic investments, and net exports of goods and services. Figures for GDP are released by the Commerce Department on a quarterly basis. Growth of the U.S. economy is measured by the change in inflation-adjusted GDP, or real GDP. Formerly Gross National Product.
Gross Spread
The dollar difference between the price which the issuing company receives for its securities and the price which the public pays for those securities. The sum of the selling concession, management fee and the underwriting fee equals the gross spread.
GTC
Good Till Canceled
Guaranteed Coupon
In the GNMA forward market, a trade in which the seller guarantees the buyer delivery of a specific-coupon GNMA at the agreed price, thereby avoiding the yield maintenance and par cap procedures associated with delivery of different coupons.
Guaranteed Mortgage Certificate (GMC)
A bond issued by FHLMC backed by a pool of conventional mortgages and similar to a pass-through except that FHLMC guarantees that some minimum principal amount will be paid each year. Unlike pass-throughs GMC's pay interest semi-annually and principal annually. The investor also has the option to put his remaining principal balance to FHLMC at par some time prior to maturity.
H
Half-life
The amount of time that must elapse until half the principal amount of a block of bonds has been retired (via a sinking fund or other process).
Handle
Refers to the dollar price of a bond without additional fractions. Quoting a bond only in fractions presumes that the "handle" is known by market participants.
High Grade Bonds
A bond of superior merit upon which the principal and interest will be paid under most conceivable circumstances, as with U.S. Government obligations.
Honest-To-God Yield
A yield computed on a mortgage-related security based on an actual or an assumed prepayment rate on the underlying mortgages.
Hedge
An investment made with the intention of minimizing the impact of adverse movements in interest rates or securities prices.
I
Immunization
A process for designing fixed income portfolios to obtain a target rate of return over a specified time period, within a narrow range, despite market conditions.
Implied Yield
A forecasted yield derived from present yields and based on the theory that the yield curve on one day is an excellent prediction of itself in the future.
In Competition
A situation in which two or more dealers compete for the purchase, sale or swap of bonds by an account, with the implicit agreement that the execution will be awarded to the dealer who provides the most advantageous price to the account. Ties are generally decided by the flip of a coin or by resubmission of proposals.
Income Bond
A bond obligation on which the payment of interest is contingent on sufficient earnings from year to year. Such bonds are traded flat-that is, with no accrued interest and are often an alternative to bankruptcy.
IND%
Refers to percent of asset clarification (i.e., Cash and Cash Equivalents, Bond, Equities).
Indenture
For debt securities, the contract that specifies all legal obligations of the issuer with respect to the securities and any qualifications or restrictions that may exist. The indenture names a trustee which holds the indenture, supervises payments of principal and interest to the security holders, and acts on behalf of the holders in the event of a default or other violation of the indenture's provisions.
Index-Linked Bond
A bond whose coupon payments are a function of an index. For example, coupons on index-linked gilts are linked to the Retail Price Index.
Inflation
A general rise in prices, usually measured by changes in prices of major indices, such as the Consumer Price Index. An increase in a particular price may or may not be inflationary, depending on how it affects other prices and on how promptly it brings additional supplies of the product to market.
Inflation Index Bond
Fixed income securities whose principal value is periodically adjusted according to the rate of inflation. The interest rate on these bonds is fixed at issuance, but over the life of the bond this interest is paid on an increasing principal value, which has been adjusted for inflation.
Interest
An amount charged to a borrower by a lender for the use of money, expressed in terms of an annual percentage rate of the principal amount.
Interest Calculations
Current Yield: this is simply the annual coupon rate divided by the clean price of the bond
ISMA Yield: a standard yield to maturity calculation recommended by the ISMA (formerly AIBD). Yield is compounded annually regardless of the coupon frequency.
SABE: Semi-Annual Bond Equivalent Yield. A method of converting yields and other measures of value in order to place them on a comparable basis. This method assumes interest is reinvested semi-annually. SABE is often applied to discount securities in order to compare their rate of return to the yield to maturity on coupon bonds.
Simple Yield: a modified version of the current yield that accounts for a deviation in a bond's clean price from par. Any capital gain or loss is assumed to occur uniformly over the life of the bond.
U.S. Street Method: The standard yield to maturity calculation used in the United States by market participants other than the U.S. Treasury. Yield is compounded semi-annually regardless of the coupon frequency. If the value date does not fall on a coupon date, the present value of the bond on the next coupon date is discounted over the fractional period with compound interest.
U. S. Treasury Method: The yield to maturity used by the U.S. Treasury to price bonds at auction. Partial periods are discounted using simple rather than compound interest.
Yield to Average Life: A yield which assumes the entire issue amount matures on the average life date rather than the maturity date. This is a quick-and-dirty method for comparing bonds with sinking funds with straight issues.
Yield to Equivalent Life: The discount rate that equates the present value of the future cash flows to the dirty price where the cash flows take into account the bond's amortization schedule. This calculation is appropriate for sinking funds; however, it is rarely used because of its complexity.
Yield to Maturity: The yield if the bond is held to maturity. This is the most frequently used measure of value for a bond. Generally, the calculation is a function of coupon payments, dirty price, and the method for discounting coupons and the redemption value. However, the exact functional form is determined by market or dealer conventions.
Interest Equalization Tax (IET)
A tax of 15% on interest received by foreign borrowers in U.S. capital markets, imposed in 1963 and removed in 1974.
Interest-Rate Risk
Risk that changes in interest rates will adversely affect the value of an investor's securities portfolio. For example, an investor with large holdings in long-term bonds and utilities has assumed a significant interest-rate risk, because the value of those bonds and utility stocks will fall if interest rates rise. Investors can take various precautionary measures to hedge their interest-rate risk, such as buying interest-rate futures or interest-rate options contracts.
Interest Rates
The percentage paid as a fee for the use of money, expressed as an annual percentage of the principal amount. Influenced by a variety of factors including economic growth, inflation, supply/demand and international factors.
Interest Receivable
Interest income impacts the portfolio as soon as it is earned. Income is posted to cash automatically on payment date except in the case of mortgage a pass-through, where it is posted based on actual bank receipts.
Interest Yield Equivalent (IYE)
A measurement of the rate of return on a security sold on a discount basis that assumes actual days to maturity and a 360-day year.
Intermediate
A bond with a maturity of intermediate length. Depending on the particular market, the range for this length may vary. In the corporate bond market, an intermediate would have a maturity between 1 and 12 years.
Inventory Valuation Adjustment (IVA)
A statistical estimate of what part of the national increase in the book value of inventories results merely from replacing identical items at higher or lower cost. The IVA is subtracted from the book value increase to obtain the inventory change component of the GNP.
Investment Grade
Bonds rated in the top four rating categories (AAA, AA, A, BBB) are commonly known as investment grade securities and are considered eligible for bank investment under present commercial bank regulations issued by Comptroller of the Currency.
ISITC
The Industry Standards for Institutional Trade Communication (ISITC) committee, a group of U.S. banks and investment managers formed to develop and maintain standards used for securities message communication among participants in the U.S. securities.
ISMA
International Securities Market Association (formerly, Association of International Bond Dealers)
IYE
Interest Yield Equivalent
J
Junk Bond
A bond claimed to have high yield, a low investment quality and credit worthiness, usually with a rating of BB or less.
K
L
Labor Force Participation Rate
The labor force as a percentage of the total population.
Laddering
A fixed income portfolio strategy in which assets are distributed evenly over a range of maturities.
Leading Indicators
Those economic statistics that in the past have turned up or down in advance of the general business situation. The Leading Indicator Index is a composite of several such series. There are also Coincidental Indicators (that move with the situation) and Lagging Indicators (that move after the situation).
Legality
The legal status of a bond generally used to indicate whether it is a legal investment for savings banks in Connecticut, Massachusetts, New Hampshire, New Jersey and/or New York. Also called Legal Status.
Leg-In
To execute the first side of a spread trade. This presumes that each side is done separately to establish the spread.
Less the Reallowance
Refers to a trade between two NASD member dealers of an item subject to syndicate restrictions at the maximum permissible discount. Often abbreviated as "less the re."
Leverage
-The effect of the use of senior capital (bonds and preferred stocks) over junior capital (common stock) in capitalizations.
-A measurement of a portfolio's exposure to market risk.
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.
Lifting a Leg
Closing out one side of a spread trade by making the transactions with the securities involved individually to eliminate the spread.
Limit
The maximum daily price change of a futures contract above or below the previous day's settlement price.
Liquidity
The ability to convert an investment into cash promptly with a minimum risk of principal.
Liquidity Preference
The increased willingness of investors to hold issues that are more liquid. In the Treasury market, where the shorter maturity issues are generally more liquid, the yield curve often has a rising (positive) shape due in part to liquidity preference.
Liquidity Premium
The extent to which yields are lower on more liquid securities due to the relative ease with which such securities can be bought or sold in the secondary market.
London Interbank Offered Rate (LIBOR)
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.
M
Maintenance and Replacement Fund
A fund provided in most electric utility mortgage indentures requiring minimal annual property additions based on a percentage of revenues and/or assets to maintain or replace depreciable property. Deficiencies must usually be made up by deposit of cash, bonds or additional unfunded property. Deposited cash can often be used to redeem bonds at the special (lower) call price which frequently does not carry refunding protection.
Management Fee
A fixed percentage (usually 20%) of the gross underwriting spread which accrues only to the managers.
Market Price
The most current price of a security.
PIMCO prices securities by using the following sources:
-Agencies, Treasuries, Preferred Stocks - Interactive Data Service.
-CMOs, Pass-Throughs, & Strips - are priced using an in-house Duration Model based on a treasury yield spread. These securities are compared to Treasuries with similar features such as coupon and maturity date and given like prices.
-Private Placements, Corporate Bonds -priced by a Merrill Lynch pricing source.
Market prices are also obtained from other services such as Bloomberg, Reuters and various market makers.
Market Risk
The risk that current interest rates may change and thus adversely affect current market prices.
Matched Sales
FOMC procedure whereby the Federal Reserve Bank of New York sells government securities to a nonbank dealer against payment in federal funds. The agreement requires the dealer to sell the securities back by a specified date, which ranges from one to 15 days. The Fed pays the dealer a rate of interest equal to the discount rate. These transactions, also called reverse repurchase agreements, decrease the money supply for temporary periods by reducing the dealer's bank balances and thus excess reserves. The Fed is thus able to adjust an abnormal monetary expansion due to seasonal or other factors.
Maturity
The date on which a loan, bond, mortgage or other debt security becomes due and is to be paid off.
MERC
Chicago Mercantile Exchange
Method or System of Issue
Auction: A method of issue where brokers or dealers submit bids to the issuer on either a price or yield basis. Auction rules vary considerably across markets.
Competitive Auction: There are two types of competitive auctions: English and Dutch. In an English auction, bidders buy bonds at their bid price if they bid above the stop price. In a Dutch auction, bidders buy bonds at the stop price as long as their bid prices are above the stop price. For an oversubscribed auction, bids at the stop price are scaled proportionately.
Non-Competitive Auction: An auction at which bidders receive bonds at the average price.
Subscription Offering: Practice of issuing a security(s) by allotment to distributors or a syndicate who agree to distribute the issue(s) by procuring subscribers. The terms of the issue(s) are widely publicized in advance.
Syndicate: A group consisting of managers, underwriters and selling groups that is responsible for distributing new issues or taps.
Tap (or Reopening): A method of reissuing an already existing bond, also the term used to describe such an issue.
Mobile Homes
Mobile home mortgage pass-through securities issued by GNMA.
Mortgage
Debt instrument by which the borrower (mortgagor) gives the lender (mortgagee) a lien on property as security for the repayment of a loan. The borrower has use of the property, and the lien is removed when the obligation is fully paid. A mortgage normally involves real estate.
Mortgage Banker
A firm that supplies its own funds for mortgage loans which are later sold to permanent investors. Usually they continue to service the loans for a specified fee.
Mortgage Bond
A bond backed by a lien against real property.
Mortgage Insurance
A type of term life insurance often bought by mortgagors. The amount of coverage decreases as the mortgage balance declines. In the event that the borrower dies while the policy is in force, the debt is automatically repaid by insurance proceeds.
Mortgage-Backed Securities
Bonds which are a general obligation of the issuing institution but are collateralized by a pool of mortgages.
Mortgagor
One who borrows money, giving as security a mortgage or deed of trust on real property; a debtor.
N
New Issue
A stock or bond sold by a corporation for the first time. Proceeds may be used to retire outstanding debt, for new plants or equipment, or for additional working capital.
Nine Bond Rule
The rule of the New York Stock Exchange that all orders for the nine bonds ($9000 par amount) or less in listed issues must be sent to the floor for execution unless the customer directs the broker to go the OTC market.
Nominal Yield
The rate listed on the face of a bond; the coupon rate.
Nominee name
The registered name issued by the Comptroller of the Currency into which a bank or a trust company registers the securities it holds as an investment agent for its trust department portfolios, thereby facilitating a good delivery to brokers at time of sale or exchange.
Non-Callable Treasuries
A Treasury which cannot be redeemed at the option of the issuer before its specified maturity date.
Non-Refundable
Ineligible for a stated period of time, for redemption with funds raised through the sale of an issue having an interest cost lower than that on the outstanding bonds. Bonds with refunding protection are still subject to regular redemption and call for sinking funds.
Note
A promise to pay as distinguished from an order to pay. Refers to municipal notes, promissory notes and Treasuries. A written promise of the maker to pay a certain sum of money to the person named as payee, on demand or at a fixed or determinable future date. In the government securities market, a note is a coupon issue with a maturity of 1- to 10 years. In contrast to Treasury bonds, coupon rates on Treasury notes are not restricted by law.
O
Odd Coupons
Sometimes, the first or last coupon period is either longer or shorter than a normal coupon period and therefore the coupon payment is more or less than a normal coupon payment. Calculating the odd coupon payment is roughly the same as calculating accrued interest for the number of days in the odd coupon period.
Odd-Lot
Refers to a trading unit of a bond that is some fraction of a round-lot. A premium is usually charged for odd-lot transactions.
OMC
Open Market Committee
Open Order
An order to buy or sell entered at a certain price and designated good until canceled.
Open-end
To liquidate all or part of a portfolio and to hold cash or cash equivalents.
Open-end Fund
A mutual fund that has no fixed number of shares outstanding. The shares represent an interest in the fund's portfolio. New shares are offered to the public and any investor can sell shares back to the fund at market value. Price is determined by the per share net asset value of the portfolio on a daily basis.
Option to Double
A feature of an indenture that allows a sinking fund to purchase twice the normal principal amount of bonds for the sinking fund, at the sinking fund call price. These additional purchases are not considered buying ahead.
Original Issue Discount (OID)
OID is the discount from Par Value at the time a bond or other debt instrument, such as a STRIP, is issued. A bond may be issued at $50 ($5) per bond instead of $100 ($1,000), for example. The bond will mature at $100 ($1,000), however, so that an investor has a built-in gain if the bond is held until maturity. The most extreme version of an original issue discount is a zero-coupon bond, which is originally sold at far below par value and pays no interest until it matures.
Original Principal
The principal amount of a pass-through pool originally issued. Also called original face.
Originator
A person who solicits builders, brokers, and others to obtain applications for mortgage loans. Origination is the process by which the mortgage banker brings into being a mortgage secured by real property.
Overtrading
The practice of allowing illegal concessions by paying substantially more than the market value for one security in order to affect the sale of another.
P
Pair Off
-To offset a position in the GNMA forward market by buying an issue previously sold or selling an issue previously bought. Both buy and sell side must be in the same delivery month and both must be for the same guaranteed coupon.
-To offset a trade in the match book; to do a repurchase agreement on securities acquired through a reverse repurchase agreement or vice-versa.
Par
A bond selling at par is worth the same dollar amount it was issued for or at which it will be redeemed at maturity-typically, $1,000 per bond.
Par Bond
A bond selling at par, the amount equal to its nominal value or face value. A corporate bond redeemable at maturity for $1,000 is a par bond when it trades on the market for $1,000.
Par Cap
A restriction which prohibits the delivery of an issue in the GNMA forward market in satisfaction of a yield maintenance contract if the equivalent price of the security delivered is over par. The only exception is when the issue bought for yield maintenance was at a price over par. In this case, the issue delivered may be at the contracted price or lower.
Par Value
- The value of a security as expressed on its face value without consideration to any premium or discount. A bond selling at par, for instance, is worth the same dollar amount it was issued for or at which it will be redeemed at maturity-typically, $1,000 per bond.
- The principal amount or denomination at which the obligor (issuing corporation) contracts to redeem the bond at maturity. This amount is stated on the face of the bond.
Participation Certificate
A security issued by FHLMC representing an undivided interest in a pool of conventional mortgages. Principal and interest payments on the mortgages are passed through to the certificate holders each month. Participation certificates qualify as "loans secured by an interest in real property" and as "qualifying real property loans" with respect to certain thrift institutions.
Pass-Through
A mortgage-backed security for which the payments on the underlying mortgages are passed from the mortgage holder through the servicing agent (who usually keeps a portion as a fee) to the security holder. There are three types of pass-through securities:
Straight Pass-Through: the security holder receives principal and interest actually collected by the servicing agent.
Modified Pass-Through: the security holder receives interest due, whether or not it has been collected, and principal as collected.
Fully Modified Pass-Through : the security holder receives principal and interest due, whether or not they have been collected.
Paydown
For bonds, it is a refunding by a company of an outstanding bond issue through a smaller new bond issue, usually to cut interest costs. For instance, a company that issued $100 million of 12% bonds a few years ago will pay down (refund) that debt with a new $80 million issue with an 8% yield. The amount of the net deduction is called the paydown.
Pay up
Treated as the opposite of a paydown where payments are being added to the par. Included are regular additions to GNMA Graduated-Payment Mortgages principal balances, as well as some CMOs.
Perpetual
A fixed income security with no maturity date, is not redeemable and pays a steady stream of interest indefinitely. Also called an annuity bond. Some people in the United States believe it would be more realistic to issue perpetual government bonds than constantly to refund portions of the national debt, as is the practice.
Pick-up
The gain in yield resulting from the sale of one block of bonds and the purchase of another block with a greater yield.
Point
One percent of the face amount of a bond; $10 for each $1000 face amount. Bond prices are quoted in points and fractions of points.
Pool
A group of mortgages sharing similar characteristics in terms of class or property, interest rate, and maturity. Investors buy participations and receive income derived from payments on the underlying mortgages. The principal attractions to the investor are diversification and liquidity, along with a relatively attractive yield.
Pool Insurance
Insurance carried to guarantee the payments of principal and interest on the mortgages comprising a mortgage pool.
Portfolio Structure
Refers to the maturity structure of the portfolio. There are three ways to structure a portfolio given a target duration. For example, a portfolio given a target duration of five years could be structured:
Bullet: Focus on intermediate securities (3-7 year maturities).
Barbell: Mix short (1-2 years) and long (10+ years) maturities to achieve a 5 year average duration.
Maturity structure of a portfolio is chosen largely based upon our expectations of the yield curve shifts:
Bullet: Short rates to fall while long rates rise or fall less.
Barbell: Short rates to rise while long rates fall or rise less.
PPI
Producer Price Index
Premium
The amount by which the price exceeds the par amount or maturity value of a bond.
Premium Bond
A bond selling above par; the opposite of a discount bond. The excess over par is called the premium.
Prepayment
The unscheduled partial or complete payment of the principal amount outstanding on a debt obligation before it is due.
Price
The dollar amount to be paid for a security, expressed as a percentage of its current face value.
Price Performance
Determined by changes in interest rates. If rates rise, bond prices fall. If rates fall, bond prices rise.
Principal
The face amount of a bond, payable at maturity. Principal and Interest Letter A request by the beneficial owner for payment of principal and interest paid to the registered holder.
Principal and Interest Letter
A request by the beneficial owner for payment of principal and interest paid to the registered holder.
Principal Balance
The outstanding balance of a mortgage, sinking fund bond or other debt, exclusive of interest and any other charges
Principal Only (P/O)
The principal only portion of a stripped mortgage-backed security. For P/O securities, all of the principal distribution is due to the registered holder based on the current face of the underlying mortgage-backed security.
Producer Price Index
A measure of change in wholesale prices (formerly called the wholesale price index), as released monthly by the U.S. Bureau of Labor Statistics. The index is broken down into components by commodity, industry sector, and stage of processing. The PPI tracks prices of foods, metals, lumber, oil and gas, and many other commodities, but does not measure the price of services. Economists look at trends in the PPI as an accurate precursor to changes in the Consumer Price Index (CPI), since upward or downward pressure on wholesale prices is usually passed through to consumer prices over time. They also look at the PPI excluding the volatile food and energy components, which they call the "core" PPI. The consumer equivalent of this index is the CPI.
Project Loan
A mortgage on a commercial property or multi-family dwelling, with a maturity of up to 40 years. Also used to refer to pass-through pools containing project loans.
Project Notes
A short-term federal tax-exempt note issued by local authorities to build low-cost housing backed by the U.S. Government. When the housing is finished, the notes are redeemed and the project is financed with long-term bonds. Both project notes and bonds usually pay tax-exempt interest to note and bondholders, and both are also guaranteed by the U.S. Department of Housing and Urban Development.
Public Housing Authority Bonds (PHA)
Federal tax-exempt bonds which are issued by local housing authorities to finance public housing and are backed by the U.S. Government.
Purchase Fund
A provision in bond indentures requiring the issuer to use its best efforts to purchase a specified number of shares or bonds annually at a price not to exceed par value. Purchase funds require only that a tender offer be made; if no securities are tendered, none are retired. Purchase fund issues benefit the investor in a period of rising rates when the redemption price is higher than the market price and the proceeds can be put to work at a higher return.
Puttable Bonds
Corporate issues in which the investor has the option to "put" (sell) the bond back to the issuer at a stated price.
Q
Quality
Rating assigned to issue based upon issuer's creditworthiness. Investment grade issues are BAAA - AAA (Moody's rating).
R
Rally
An expression used in market parlance and literature to indicate a rise in prices following a flat or declining trend.
Rate of Purchase
The yield obtainable on a security based on its purchase price or its current market price. This may be an amortized yield to maturity on a bond or the current income return.
Rate of Return
Otherwise known as current yield, that is, the coupon or contractual dividend rate divided by the purchase price.
Rating
The designation used by investor's services to give relative indications of quality (i.e., AAA, Ba).
Real Estate Mortgage Investment Conduit (REMIC)
A pass-through vehicle created under the Tax Reform Act of 1986 to issue multiclass mortgage-backed securities. REMICs may be organized as corporations, partnerships or trusts, and those meeting qualifications are not subject to double taxation. Interests in REMICs may be senior or junior, regular (debt instruments) or residual (equity interests). The practical meaning of REMICs has been that issuers have more flexibility than is afforded by the collateralized mortgage obligation (CMO) vehicle. Issuers can thus separate mortgage pools not only into different maturity classes but into different risk classes as well. Whereas CMOs normally have AAA bond ratings, REMICs represent a range of risk levels. The terms REMIC and CMO are now used interchangeably.
Recession
A downturn in economic activity, defined by many economists as at least two consecutive quarters of decline in a country's gross domestic product.
Redemption
Repayment of a debt security or preferred stock issue at or before maturity, at PAR or at a premium price. Mutual fund shares are redeemed at Net Asset Value (NAV) when a shareholder's holdings are liquidated.
Redemption Price
The price at which a bond may be redeemed (at the option of the company) prior to its maturity day. Redemption prices are determined when the bond is issued and are usually based on the original coupon and offering price.
Refunding
A debt instrument which has been negotiated directly between the issuer and investor, without any middleman (brokers).
Registered Bond
A bond registered on the issuing company's books in the name of the owner. Although interest can be collected upon presentation of the coupon, the principal can be transferred only with the endorsement of the registered owner. A fully registered bond pays interest to the owner by check from the issuer's agent.
REIT
Real Estate Investment Trust
Repurchase Agreements (RPs)
A method of borrowing by using a security as collateral for a loan. The interest rate and term of the loan are agreed upon in advance, and upon repayment of the loan the security is returned to the owner. The borrower retains possession of the security and continues to receive any interest payments during the term of the agreement (also known as a repo.) In reference to Federal Reserve actions, a means of temporarily adding to reserves. The fed buys securities under a contract to sell them back at an agreed price and date. (General RPs mature within 1-7 days, the maximum term being 15 days.) Dealers may repurchase prior to the maturity of the RP if they wish.
Reserves
Deposit maintained by a commercial bank in a federal reserve bank to meet the Fed's reserve requirement.
Reversal
A bond swap that is the "reverse" of a prior bond swap. If the initial bond swap consisted of selling bond A and buying bond B, the reversal is the sale of B and the purchase of A.
Risk
A measure of the probability of financial loss. In the fixed income markets there are several types of risk:
Credit risk: the risk that an issuer will default on its bonds at some time prior to maturity.
Market risk: the risk that an investor will experience a financial or book loss from an adverse change in market prices.
Liquidity risk: the risk that an issue will be illiquid and force an investor to take a loss if he attempts to sell the issue prior to maturity.
Prepayment risk: the risk that a pass-through issue will have an adverse pattern of prepayments (i.e., low prepayments for discount issues, high prepayments for premium issues).
Reinvestment Risk: the risk that an investor will be forced to reinvest cash flow from an issue at substantially lower rates that the yield of the original investment.
Riskless
-Without credit risk. Treasury issues and government-guaranteed issues are regarded as the only riskless issues.
-With respect to bond trading, simultaneous buying and selling so as to eliminate market risk.
Round Lot
Generally accepted unit of trading on a securities exchange. On the New York Stock Exchange, for example, a round lot is 100 shares for stock and $1000 or $5000 par value for bonds.
-Colloquially and in institutional context, the smallest amount of bonds acceptable for dealing, ranging from $100,000 to $1 million, depending on the liquidity of the issue and the size of the institution involved.
-The smallest amount of bonds traded in a tight market without a price differential or adjustment.
S
SABE
Semi-Annual Bond Equivalent
Samurai Bond
Bonds denominated in yen issued by non-Japanese companies for sale mostly in Japan. The bonds are not subject to Japanese withholding taxes, and therefore offer advantages to Japanese buyers.
Saving Certificate
A deposit of a fixed maturity and amount usually earning a higher rate of interest than a savings bond.
Sector
A group of securities with similarities (for example, industry type, coupon rate, maturity date and/or rating).
The four bond sectors of the market, as we view them are:
Treasuries, Mortgages, Corporates, and International.
Treasuries - All U.S. Treasury Issues. Highest quality (AAA), and liquidity.
Mortgages - Agency and other pass-throughs (FNMA,FHLMC,FHA), plus derivatives (CMOs, POs. etc.). Mostly AA-AAA credit ratings, prepayable at any time.
Corporates - All industrial, financial, utility, and other corporate issuers. Terms and quality vary. Generally callable prior to maturity.
International - Includes U.S. issuers in foreign markets (Euros), foreign issues in U.S. market (Yankees), and foreign issues in foreign markets.
Secular Trend
A long-term movement in the price of a security or of interest rates, either upward or downward, which is not related to seasonal or technical factors.
Securities
Stocks, bonds and notes that give evidence to and assure the fulfillment of an obligation.
Serial Bond
A bond issue, usually of a municipality, with various maturity dates scheduled at regular intervals until the entire issue is retired. Each bond certificate in the series has an indicated redemption date.
Settlement
Cash Settlement: Same day settlement
Corporate Settlement: Settlement 5 market days after the trade date (used in the U.S. Market).
Delivery Versus Payment Basis: Under this settlement rule, the delivery of and payment for bonds is simultaneous.
Domestic Settlement: Settlement according to the accepted market convention.
Euroclear Settlement: Settlement is 7 calendar days after the trade day. As of June 1995, settlement is 3 market days after the trade day.
Free Payment Basis: The delivery of a bond and the payment for it are not necessarily simultaneous.
International Settlement: The settlement of securities is effected through an international clearing agency such as Euroclear or Cedel. International settlement usually assumes no local or generally recognized holidays.
Regular Way Settlement: In the United States, settlement is on the next market day after the trade date.
Skip-Day Settlement: Settlement on the day after the next market trade day.
Short-Term
A type of obligation with a maturity of less than 1 year. In differentiating between short-, medium-, and long-term bonds, short-term is often stretched to mean 2 years or less.
Sinking Fund
Money, either cash or an acceptable substitute, regularly set aside by a company out of its earnings at stated intervals to redeem all or part of its long-term debt as specified in the indenture. The creation of a sinking fund provides for an orderly amortization of a debt over the life of an issue. A Cash Sinking Fund can be satisfied by cash or bonds purchased in the open market or called at the sinking fund call price. A Property Additions Sinking Fund is generally satisfied by pledging a stated portion of the value of un-mortgaged property.
Spread
- The difference between yields on securities of the same quality but different maturities. For example, the spread between 6% short-term Treasury bills and 10% long-term Treasury bonds is 4 percentage points.
- The difference between yields on securities of the same maturity but different quality. For instance, the spread between a 10% long-term Treasury bond and a 14% long-term bond of a B-rated corporation is 4 percentage points, since an investor's risk of default is so much less with a Treasury bond.
Standard Deviation
Statistical measure of the degree to which an individual value in a probability distribution tends to vary from the mean of the distribution. It is widely applied in modern portfolio theory, where the past performance of securities is used to determine the range of possible future performances and a probability is attached to each performance. The standard deviation of performance can then be calculated for each security and for the portfolio as a whole. The greater the degree of dispersion, the greater the risk.
Stop
To agree to trade a specific block of securities at a certain price or better. The agreed trade will be executed in any event. In a Treasury auction, the stop is the last competitive bid which is accepted on the high yield side.
Straight Bond
A bond with unquestioned right to repayment of principal at a specified future date, an unquestioned right to fixed interest payments on stated dates and no right to any additional interest, principal or conversion privilege.
STRIP
Separate Trading of Registered Interest and Principal of Securities
-A brokerage-house practice of separating a bond into its CORPUS and COUPONS, which are then sold separately as zero-coupon securities.
-A prestripped zero-coupon bond that is a direct obligation of the U.S. Treasury.
Subordinated Debt
Subordinated debt is junior in claim on assets to other debt, that is, repayable only after other debts with a higher claim have been satisfied. Some subordinated debt has less claim on assets than other subordinated debt; a junior subordinated debenture ranks below a subordinated debenture, for example.
Swap
The sale of a block of bonds and the purchase of another block of similar market value. Bond swaps fall into three basic categories, although a given swap may have aspects of two or more of these:
Substitution Swaps: swaps done in order to improve upon one or more characteristics of the original bonds. Swaps done for yield pickup, quality improvement or change in call protection are in this category.
Intermarket Spread Swaps: swaps done in anticipation of a (favorable) change in the price or yield spread between the two issues from two different sectors of the market.
Rate Anticipation Swaps: swaps done in anticipation of a (favorable) change in the overall level of interest rates. Rate anticipation swaps generally consist of lengthening maturity and/or lowering coupon when bullish and shortening maturity and/or increasing coupon when bearish.
T
T+3
Shorthand abbreviation for Trade Date plus three which is the current standard settlement time frame for equity and debt securities in the U.S.
TAB
Tax Anticipation Bill
Tail
Commonly refers to the difference between the average and stop prices in Treasury cash auctions. An increment to a bid or offer in competition to avoid ties.
Take-Out
Cash retained as a result of the sale of one block of bonds and the purchase of another block at a lower cost.
Term Structure
The internal structure of the yield curve; the level and shape of the yield curve; the relationship among yields on securities of varying maturities.
Term Structure Hypothesis
The theory that the market is priced in such a way that an investment in a riskless issue of any maturity is expected to produce roughly the same rate of return. The hypothesis enables bond investors to imply a market forecast based on the shape (or term structure) of the existing yield curve.
Thin
As applied to a market, means that bids and offerings are scarce and the market is subject to wide fluctuations and small-sized executions.
Through the market
When a new bond offering has come to market and the yield to maturity is lower than comparable bonds outstanding, the new bond is said to be offered "through the market."
Tick
The minimum price fluctuation for a futures contract. Commonly used in reference to GNMAs and Treasury bond futures to indicate 1/32 of one percent par value.
Tick Size
The increments used for expressing bond prices. For example, the tick size for United Kingdom Gilt Stocks is 1/32nd.
Tight
Highly competitive. A tight market is characterized by a small spread between the bid and offer levels for a given security.
Title XI
A bond backed by a ship mortgage and guaranteed by the United States Government according to the ship Financing Act of 1972.
Total Return
The aggregate increase or decrease in the value of the portfolio resulting from the net appreciation or depreciation of the principal of the fund, plus or minus the net income or loss experienced by the fund during the period.
Trade Date
The date when a transaction is effected or executed.
Trade Date Basis, Accrual Basis
PIMCO employs a double entry accounting system. Since many custodian statements are based on settlement date-basis, or cash-basis accounting systems, there can be some confusion with regard to which information is contained under which accounting system.
Traditional Mortgage
A mortgage with a fixed interest rate and term to maturity, requiring level payments of principal and interest.
Tranche
A part of a single market operation which may have shared documentation, but different terms; e.g. a $200 million issue, one tranche of $100 million having a maturity of 5 years and the second tranche of $100 million having a 10-year maturity.
Treasuries
Negotiable debt obligations of the U.S. government, secured by its full faith and credit and issued at various schedules and maturities. Examples are T-Bills with maturities ranging from 3 months to 30 years at the time of the issue. These are generally non-callable.
Treasury Bill
A non-interest bearing obligation, fully guaranteed by the U.S. Government, payable to the bearer. Bills are sold on a discount basis so that the income is the difference between the purchase price and the face value.
Treasury Bond
A coupon security of the U.S. Treasury which may be issued with any maturity but generally carries a maturity of more than 10 years.
Treasury Note
A coupon security issued by the U.S. Treasury with a maturity of not less than one year but not more than 10 years.
Treasury Strips (Zero Coupons)
Treasury STRIPs: Broker/Dealers repackage Treasury cash flows to create STRIP securities. STRIPs have varying maturities, trade on a discount basis, pay no coupon and mature at par.
U
Unamortized Bond Discount
The difference between the face value or par value of a bond and the proceeds received from the sale of the bond by the issuing company, less whatever portion has been amortized, that is, written off to expense as recorded periodically on the profit and loss statement.
Unit Cost
This is Cost Amount divided by Quantity multiplied by 100.
Unsecured Bonds
A bond which is not backed by any pledge of assets that the debt will be paid; the debtor merely pledging the credit standing.
Upgrade
- The changing of a rating by a rating agency to a higher (more credit worthy) rating.
- The sale of one block of bonds and the purchase of another block with a higher rating.
USGG
United States Government Guaranteed
V
VA
Value Added. The enhancement that a company adds to a product or service.
Variable Rate Mortgage (VRM)
An adjustable rate mortgage whose rate is tied to an index of lender's cost of money, calculated periodically.
Velocity
In the most common usage, the number obtained when Gross National Product (GNP) is divided by money supply. As such, it represents the number of times per year that each dollar in the money supply is spent on goods and services.
Volatility
Measures the variation of bond returns and/or interest rates over a set time period. It can be integral to pricing many issues with call options.
W
ex-Warrants
A security for which the buyer is not entitled to the attached warrants. A warrant is a certificate entitling the holder of a stock or bond to buy a set amount of securities at a set price within a given time-frame.
Workout order
Either a firm order in response to a workout market, or, more likely, a firm swap order usually involving two rare issues or at a level away from the current market levels.
Workout-Market
An indicated market for the price range that a security will trade at within the near future, with the inference that, in time, either one or both sides could be made firm by the trader.
Wrap-Around Mortgage
A junior lien which is written for the entire mortgage indebtedness of the borrower; the wrap-around lender assumes the responsibility for the original lien, and the borrower thereby makes only one monthly payment to the wrap-around lender.
Y
Yankee Securities
Dollar denominated bonds issued in the United States by foreign banks and corporations for trade in U.S. markets.
Yield
The rate of annual income return on an investment expressed as a percentage. Income yield is obtained by dividing the current dollar income by the current market price of the security.
Yield Curve
A graphic depiction of interest rates across all maturities, ranging from 3 months to 30 years. The shape of the curve is largely influenced by the Federal Reserve Policy as well as factors listed under "Interest Rates".
Yield Maintenance
For a GNMA or other mortgage security bought under a futures contract or standby commitment, the adjustment of the price upon delivery necessary to provide the same yield to the buyer that was specified in the original agreement. Yield maintenance becomes necessary when the coupon on the GNMA that is delivered is different from the coupon that had been expected at the time the agreement was made.
Yield to Adjusted Minimum Maturity
A measure designed to give the yield to the shortest possible life of a bond.
Yield to Average Life
The yield derived when the average life date (average maturity) is substituted for the maturity date of the issue.
Yield to call
The yield computed assuming cash flow is the coupon stream to the call date, when the issue is redeemed at its call date, and when the issue is redeemed at its call price.
Yield to Maturity
The return a bond earns on the price at which it was purchased if it were held to maturity. It assumes that coupon payments can be reinvested at the yield to maturity.
Yield To Put
The return a bond earns assuming that it is held until a certain date and put (sold) to the issuing company at a specific price (the put price).
Yield to Worst
The yield resulting from the most adverse set of circumstances from the investor's point of view; the lowest of all possible yields.
Z
Zero-coupon bond
Zero-coupon bonds, usually municipal bonds, will convert into an interest bearing bond at some time before maturity. For example, a zero-coupon tax-free municipal bond would automatically accumulate and compound interest for its first 15 years at which time it would convert to a regular interest rate with a small initial investment.
