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17 Cards in this Set

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Interbank Rate
The rate of interest charged on short-term loans made between banks. Banks borrow and lend money in the interbank market in order to manage liquidity and meet the requirements placed on them. The interest rate charged depends on the availability of money in the market, on prevailing rates and on the specific terms of the contract, such as term length.
Banks are required to hold an adequate amount of liquid assets, such as cash, to manage any potential withdrawals from clients. If a bank can't meet these liquidity requirements, it will need to borrow money in the interbank market to cover the shortfall. Some banks, on the other hand, have excess liquid assets above and beyond the liquidity requirements. These banks will lend money in the interbank market, receiving interest on the assets.
Interbank Market
The financial system and trading of currencies among banks and financial institutions, excluding retail investors and smaller trading parties. While some interbank trading is performed by banks on behalf of large customers, most interbank trading takes place from the banks' own accounts.
The interbank market for forex serves commercial turnover of currency investments as well as a large amount of speculative, short-term currency trading. According to data compiled in 2004 by the Bank for International Settlements, approximately 50% of all forex transactions are strictly interbank trades.
Debt Service
Cash required over a given period for the repayment of interest and principal on a debt.
Your monthly mortgage payments are a good example of debt service.
A debt investment with which the investor loans money to an entity (company or government) that borrows the funds for a defined period of time at a specified interest rate.
The indebted entity issues investors a certificate, or bond, that states the interest rate (coupon rate) that will be paid and when the loaned funds are to be returned (maturity date). Interest on bonds is usually paid every six months (semiannually). The main types of bonds are the corporate bond, the municipal bond, the Treasury bond, the Treasury note, the Treasury bill and the zero-coupon bond. The higher rate of return the bond offers, the more risky the investment. There have been instances of companies failing to pay back the bond (default), so, to entice investors, most corporate bonds will offer a higher return than a government bond. It is important for investors to research a bond just as they would a stock or mutual fund. The bond rating will help in deciphering the default risk.
An entity that has an obligation to pay all principal and interest payments on a debt.
Examples of obligors are bond issuers. Also referred to as debtor.
Secured Debt
Debt backed or secured by collateral to reduce the risk associated with lending. An example would be a mortgage, your house is considered collateral towards the debt. If you default on repayment, the bank seizes your house, sells it and uses the proceeds to pay back the debt.
Assets backing debt or a debt instrument are considered security, which means they can be claimed by the lender if default occurs. Obviously unsecured debt is higher risk, and as such lenders of unsecured money typically require a much higher return.
Debt Security
A security representing a loan given by an investor to an issuer. In return for the loan, the issuer promises to pay interest and to repay the debt on a specified date.
Issuers may include corporations, municipalities, the federal government, or a federal agency.
1. In general, the annual rate of return for any investment and is expressed as a percentage. 2. With stocks, refers to the rate of income generated from a stock in the form of regular dividends. This is often represented in percentage form, calculated as the annual dividend payments divided by the stock's current share price. 3. With bonds, it is the effective rate of interest paid on a bond, calculated by the coupon rate divided by the bond's market price: = Coupon Rate/Current Market Price of Bond
1. Investors can use yield to measure the performance of their investments and compare it to the yield on other investments or securities. Higher risk securities generally offer higher expected yields as compensation for the additional risk incurred through ownership of the security. 2. Investors looking to generate income or cash flow streams from equity investments commonly look for stocks that pay high dividend yields, in other words, stocks that provide a relatively large amount of annual cash dividends for a relatively low share price. 3. Bonds are typically issued with fixed coupon payments (regular cash payments of a fixed dollar amount). Thus, bonds are typically valued in terms of the their yield - what dollar amount as coupon payments is received as compared to the bond's current market price.
Yield Curve
A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity dates. The most frequently reported yield curve compares the three-month, two-year, five-year and 30-year U.S. Treasury debt. This yield curve is used as a benchmark for other debt in the market, such as mortgage rates or bank lending rates. The curve is also used to predict changes in economic output and growth.
The shape of the yield curve is closely scrutinized because it helps to give an idea of future interest rate change and economic activity. There are three main types of yield curve shapes: normal, inverted and flat (or humped). A normal yield curve (pictured here) is one in which longer maturity bonds have a higher yield compared to shorter-term bonds due to the risks associated with time. An inverted yield curve is one in which the shorter-term yields are higher than the longer-term yields, which can be a sign of upcoming recession. A flat (or humped) yield curve is one in which the shorter- and longer-term yields are very close to each other, which is also a predictor of an economic transition. The slope of the yield curve is also seen as important: the greater the slope, the greater the gap between short- and long-term rates.
Maturity Date
The date on which the principal amount of a note, draft, acceptance bond or other debt instrument becomes due and is repaid to the investor and interest payments stop. It is also the termination or due date on which an installment loan must be paid in full.
The maturity date tells you when to expect to get your principal back and how long to expect to receive interest payments. However, it is important to note that some debt instruments, such as fixed-income securities, are "callable", which means that the issuer of the debt is able to pay back the principal at any time. Thus, investors should inquire, before buying any fixed-income securities, whether the bond is callable or not.
Dutch Auction
An auction where the price on an item is lowered until it gets its first bid, and then the item is sold at that price.
The U.S. Treasury (and other countries) uses a Dutch auction when it sells securities.
Auction Rate
The interest rate that will be paid on a specific security as determined by the Dutch auction process. The auctions take place at periodic intervals, and the interest rate is fixed until the next auction is held. This process is commonly used to determine the interest rate on Treasury bills.
The auction rate is also used in other debt securities, such as municipal bonds. This is a good way for both the investor and the issuer to forecast their returns and costs, respectively, as the auctions can be held as often as annually or even weekly. The auction process also allows investors to mitigate reinvestment risk because the interest rate fluctuations are generally less volatile.  
Competitive Bid
A process whereby an underwriter submits a sealed bid to the issuer. The issuer awards the contract to the underwriter with the best price and contract terms.
This process is used for everything from IPOs to large construction projects.
Negotiated Underwriting
A process in which both the purchase price and the offering price for a new issue are negotiated between the issuer and a single underwriter.
The underwriter pays the issuer a purchase price, and the public pays the offering price. The spread between the purchase price and the public offering price represents the proceeds to the underwriter.
1. The process by which investment bankers raise investment capital from investors on behalf of corporations and governments that are issuing securities (both equity and debt). 2. The process of issuing insurance policies.
The word "underwriter" is said to have come from the practice of having each risk-taker write his or her name under the total amount of risk that he or she was willing to accept at a specified premium. In a way, this is still true today, as new issues are usually brought to market by an underwriting syndicate in which each firm takes the responsibility (and risk) of selling its specific allotment.
Constant Maturity
Used by the Federal Reserve Board to quote the yields on various treasury securities, adjusted to an equivalent maturity.
By providing the constant maturity yields, the Fed allows investors to compare against securities with the same maturity date (such as corporate bonds). Constant maturity yields are often used by lenders to determine mortgage rates. For example, the 1 year constant maturity rate might be 4%, while the lender charges 5% to borrowers for a 1 year loan. The 1% difference is the lender's profit margin.
Bond Market
The environment in which the issuance and trading of debt securities occurs. The bond market primarily includes government-issued securities and corporate debt securities, and facilitates the transfer of capital from savers to the issuers or organizations requiring capital for government projects, business expansions and ongoing operations.
Most trading in the bond market occurs over-the-counter, through organized electronic trading networks, and is composed of the primary market (through which debt securities are issued and sold by borrowers to lenders) and the secondary market (through which investors buy and sell previously issued debt securities amongst themselves). Although the stock market often commands more media attention, the bond market is actually many times bigger and is vital to the ongoing operation of the public and private sector.