Fixed Income Glossary


Accrued Interest
The interest accruing on a security since the previous coupon date. If a security is sold between two payment days, the buyer usually compensates the seller for the interest accrued, either within the price or as a separate payment.

ADB
Asian Development Bank. Supranational Issuer. The Bank offers loans, equity investment and technical assistance to developing nation members. It has 41 members within Asia and 16 outside the region. www.adb.org

Agent Bank
Bank appointed by members of an international syndicate to protect lenders interests during the life of a loan. >>see Syndicate.

Amortisation
The reduction of principal or debt at regular intervals. This can be achieved via purchase or sinking fund.

Asian Development Bank
>>see ADB.

Ask
A market maker's price to sell a security, currency or any financial instrument. Also known as offer, a two way price comprises the bid and ask. The difference between the two quotations is spread. >>see also Bid.

At Par
When a security is selling at a price that is equal to its face value.

Auction
A public sale of security whereby the issuer invites authorised dealers to make bids in price or yield until the full amount of issue is sold. >>see also Dutch Auction.

Auction Date
The date when the auction results are announced.

Back Office
The department in a financial institution that processes deals and handles delivery, settlement and regulatory procedures.

Bank of England
>>see BOE.

Bank for International Settlements
>>see BIS.

Basis Point
One hundredth of one per cent (of yield) or 0.01.

Bearer Bonds/Forms
A bond for which physical possession of the certificate is proof of ownership. The issuer does not know the identity of holder. Interest payments are claimed by presenting coupons, clipped from the certificate to a paying agent. Eurobonds are usually issued in bearer form. These days bearer bonds are usually settled electronically, and while no register of ownership is kept by the issuer, coupon payments may be made electronically.

Benchmark
A bond whose terms set a standard for the market. The benchmarks usually has the greatest liquidity, the highest turnover and is usually the most frequently quoted.

Bid
A market maker's price to buy a security or instrument.

BIS
Bank for International Settlements. An association of central banks from the G10 countries. The BIS is concerned with safeguarding the stability of international financial markets and ensuring that all banks have sufficient capital to support their operational risk. www.bis.org

BOE
Bank of England. The UK's central bank. www.bankofengland.co.uk

Bonds
Bonds are long term debt instruments traded in a market. A legal contract in which an issuer promises to pay holders a specific rate of interest and redeem the contract at face value. Usually bonds are considered to be those debt securities with terms to maturity of more than one year. >>see also Bullet Bonds and Fixed Income.

Book Entry
Securities registered by the issuer, usually in computerised form, and for which there are no physical issues.

Book Runner
The investment firm responsible for looking after the administration of a new bond issue. The book runner is responsible for tasks such as inviting others to subscribe and allocation tranches of the bonds.

Brady Bonds
These bonds originated as syndicated bank credits to developing countries, denominated in the major Eurocurrencies. During the economic recession of the early 1980's, many developing countries ran out of foreign currency to meet their payment obligations of these loans. To restore confidence in the borrowers, much of this debt was converted into negotiable bonds backed by US Treasury , under a scheme introduced by the then US Treasury Secretary Nicholas Brady.

BTP
Buoni del Tesoro Poliennali are Italian fixed-rate Treasury bonds with maturities of between five and 30 years.

Bulldog Bonds
A bond denominated in GBP, issued in the UK by foreign borrower.

Bullet Bond
Also known as a straight or fixed bond because it has no special features. It pays a fixed rate of interest and is redeemed in full on maturity. Interest is usually paid annually. >>see also Bonds and Maturity.

Bunds
German Federal government bonds issued with maturities of up to 30 years.

Busted Convertible
A convertible issue of little value because the underlying stock has fallen below the conversion price.

Call Option on Bond
An option which gives the issuer the right to repay the bond prior to maturity as described in terms and conditions of a bond.
>>see also Put Option on Bond.

Callable Bond
A callable bond gives the issuer right to early redemption at a given price (redemption price) or a given date (call date).
>>see also Puttable Bond.

Call Provision
A clause in bond's indenture, granting the issuer the right to buy back all or part of issue prior to maturity date.

Capped FRN
A floating rate instrument with an embedded cap that places a maximum coupon rate of the issue. Stipulate a maximum ceiling on the interest rate payable.

CCI
Certificati di Credito del Tesoro. Italian Government floating rate notes with maturities of seven years, although there have also been maturities of five and ten years. The first coupon is fixed and the following coupons are indexed to six-month to one-year Treasury bill yields, depending on interest frequency of a bond.

CEDEL
Centrale de Livraison de Valeurs Mobilières , provides clearance/settlement and borrowing/lending of securities and funds through a computerized book-entry system. CEDEL is now part of Deutsche Boerse. www.cedelinternational.com

Central Gilts Office
The office of the Bank of England which runs the computer-based settlement system for gilt-edged securities and certain other securities (mostly Bulldogs) for which bank acts as Registrar.

Clean Price
Present value of cash flow of a bond excluding accrued interest, the quoted price of a bond. >>see also Dirty Price.

Clearing House
A clearing house is the administrative centre of the market through which all transactions are cleared. In addition to administering trades, the clearing house guarantees the performance of contracts. It becomes the counterparty to both the buyer and seller of a contract when a trade has been matched, treaty reducing counterparty risk.

Clearing System
A system that facilitates the transfer of ownership for securities and arranges custody. >>See also CEDEL and Euroclear.

CMO
Collateralized Mortgage Obligations. A mortgage-backed security in which payments by the borrower are passed into a pool from which principal and interest are paid to security holders class by class. CMOs were developed to solve the problem of uncertainty with regard to cash flows. They do this by creating different classes of bonds with different maturities , so that payments from the mortgage holders retire the bonds on a priority basis. >>see also Securitisation.

Collateral
Assets used as a form of security for bond issuances. In case of default by the borrowers, the lenders (bondholders) have the legal right to claim those assets and sell them off to repay the loan.

Collateralised Mortgage Obligations
>>see CMO.

Common Code
Cedel and Euroclear clearing security code. Nine digit code with XS prefix.

Conversion
The process of converting a convertible security, such as a bond or preferred stock, into common stock.

Consent
The process whereby issuer offers cash payments to holders for their acceptance of the proposed changes

Conversion Price
For convertible bonds this is the price at which the existing security will be converted into the underlying security. Subject to change due to various capital events as stipulated in bonds terms and conditions.

Conversion Ratio
The ratio fixed on the convertibility of a preferred share into a fixed number of common shares, or from a convertible bond into the underlying shares.

Convertible Bond
A bond that is convertible into a fixed number of an issuing company's shares at a pre-set conversion price. This price usually represents a premium over the current or average price. Because of this inducement, the bond can carry a lower coupon at par. >>see also Bonds.

Convertible FRNs
Convertible at investor's option into a fixed rate bond at any time during a stated period.

Coupon/ Coupon Rate
Coupon is the interest paid on a bond expressed as a percentage of the face value. If a bond carries a fixed coupon, the interest is paid on an annual or semi-annual basis. The term also describes the detachable certificate entitling the bearer to payment of the interest. >> see also Bullet Bond and Bearer Forms.

Coupon Stripping
Detaching the coupons from a bond and trading the principal repayment and coupon amounts separately, thus forming zero coupon bonds. >>see also Zero Coupon Bonds.

Credit Rating
Credit ratings measure a borrower's creditworthiness and provide an international framework for comparing the credit quality of issuers and rated debt securities. Rating agencies allocate three kinds of rating: issuer credit rating, long-term debt and short-term debt. The top credit rating issued by the main agencies – Standard and Poor's, Moody's and Fitch IBCA is AAA or Aaa. This is reserved for a few sovereign and corporate issuers. Rating are divided into two broad groups: investment grade and speculative grade. www.moodys.com; http://www2.standardandpoors.com/NASApp/cs/ContentServer?pagename=sp/Page/HomePg; www.fitchibca.com

Credit Watch
A credit rating agency announces that it is putting a company on credit watch, meaning that it expects shortly to issue a lower or higher credit rating. >> See also Credit Rating

CTO
(Certificati del Tesoro con Opzione) Italian Government fixed-rate notes with six year maturities, puttable at par after three years. Coupons are paid semi-annually.

Cum
Latin for with something.

Current Coupon
The prevailing coupon on a floating rate note or other variable rate security. >>see also Coupon.

Current Issue
>>see On the Run Issue.

Current Maturity
The time remaining to maturity, an important factor in bond valuation.
>>see also Maturity.

Current Yield
A measure of the return a bondholder calculated as a ration of the coupon to the market price. It is simply the annual coupon rate divided by the clean price of the bond. >>See also YTM.

Custody
The storing and safekeeping of securities together with maintaining the accurate records of their ownership.

Dated Date
Date from which interest begins to accrue on a new issue, frequently the issue date.

Daycount Conventions
Every bond market has its own system of determining the number of days in year and even the number of days between two coupon dates. These different methods are referred as daycount conventions and are important when calculating accrued interest and present value (when the next coupon is less than a full coupon period away).

Debenture Bond
Debt not secured by a specific property but which gives bondholders the claim of general creditors over all assets that are not specifically pledged elsewhere.

Debt
Financial instruments, such as bonds, that represent loans to borrowers. Debt instruments have a defined life, a maturity date and normally a fixed rate. Debt instruments fall into three broad categories: sovereign, government and corporate.

Debt for Equity Swap
A debtor country buys back its foreign debt at a discount in line with market conditions for local currency that the creditor can then use to invest in one of nation’s companies. The debtor country is then said to have securitised the debt.

Default
Failure to meet an obligation such as payment of interest or principal. Technically the borrower does not default. The initiative comes from the lender who declares the borrower in default.

Deferred Coupon FRNs
A bond that delays coupon (interest) payment for the first few years, paying it in a lump sum at maturity. It is aimed at investors who want delayed cash flow and who also seek a lower tax bill in early years when their income might be higher than in later years. >> See also Coupon.

Deferred Coupon FRNs
FRN that pays no interest for a fixed period and then pays interest for its remaining life at a wide spread over the appropriate index.

Depositary Trust Corporation
>> See DTC.

Detachable Warrant
Issued as part of bond but then detached and traded separately in the secondary market. The warrant holder has the right to buy new equity or debt. >> See also Warrant.

Dirty Price
Present value of the cash flow of a bond including accrued interest. Also known as gross price. >> See also Clean Price.

Discount Rate
Interest Rate at which a central bank will discount government paper or lend money against government paper collateral.

Disposal of Assets Covenant
This sets a limit on the amount of assets that can be disposed of by the borrower during the tenor (term to maturity) to the debt.

Domestic Bonds
Issued by local governments, government agencies, local governmental authorities and corporations in local currency, traded on a local stock exchange.

Downgrade
The reduction of credit rating for a borrowing institution or its debt instruments. Opposite to Upgrade. >> See also Credit Rating and Upgrade.

Dragon Bond
Bonds issued by Asian companies outside Japan and usually denominated in US dollars. Dragon bonds are usually short-dated, three to five years, and issued by companies from among Asia’s rapidly growing economies that want to expand their range of investors.

Drop-lock FRNs
Automatically convert into fixed rate bonds when short term interest rates fall below a specified level.

DTC
Depository Trust Corporation. In the US, shares that are kept in Street Name or Nominee account or may be deposited in a central depository such as the DTC for safekeeping. www.nscc.com