Reading...
Play button
Play button
Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
108 Cards in this Set
- Front
- Back
|
Corporate bonds
|
a debt security issued by a corporation and sold to investors |
|
|
Asset-backed securities
|
A financial security backed by a loan, lease or receivables against assets other than real estate and mortgage-backed securities. For investors, asset-backed securities are an alternative to investing in corporate debt. An ABS is essentially the same thing as a mortgage-backed security, except that the securities backing it are assets such as loans, leases, credit card debt, a company's receivables, royalties and so on, and not mortgage-based securities. |
|
|
Government bonds
|
a debt security issued by a government to support government spending – backed by the full faith of the government |
|
|
Municipal bonds
|
represent debt of states and subdivisions of states, such as counties, cities, etc. Repayment of principal and interest usually collected through taxes.
|
|
|
Primary dealers
|
banks or brokers recognized by the Federal Reserve as market makers in Treasury bills, notes and bonds
|
|
|
Bid-ask spread
|
Dealers buy at a lower price than they sell the same issue at the same issue at the same time.
|
|
|
Carry
|
The difference between the interest earned on securities in inventory and the cost of financing that inventory. Carry depends n the shape of the yield curve. Steep normal yield curves magnify the carry, where inverted yield curves can make the carry negative.
|
|
|
STRIPS
|
Separate Trading of Registered Interest and Principal Secutites. Essentially zero-coupon bonds and sell at a discount to their face value. The yield on STRIPS conforms closely to the theoretical spot rates calculated from the principal and interest component of treasuries
|
|
|
Revenue bonds
|
Backed by the revenues of a specific project. Are as creditworthy as the project they finance
|
|
|
General obligation bonds
|
backed by the “full faith and credit” of the issuing agencies. Aka backed by the ability of the government to levy taxes
|
|
|
Anticipation notes
|
Municipal notes issued as a funding gap
|
|
|
Protective covenants
|
Conditions specified in the indenture. Designed to protect the investors’ interests.
|
|
|
Sinking fund provision
|
reserve account set up to accumulate funds needed to pay the principal on the bond issue when it comes due or, in many cases, sooner. Ensures the firm is actually putting aside sufficient funds to repay the principal on the bond.
|
|
|
Serial bonds
|
issues arranged such that the principal comes due on a series of specified dates, rather than all at the end.
|
|
|
Lien
|
A mortgage, pledge, security interest, charge or any other kind of encumbrance that attached specific property to the debt for eventual repayment
|
|
|
Debenture
|
Longer term unsecured issues. Debentures have a claim on the firm’s unsecured assets and can force the firm into bankruptcy and claim its assets to pay off the bond
|
|
|
Subordinated debenture
|
have a claim on the firm’s assets after secured debt and debenture bondholders.
|
|
|
Mortgage bonds
|
grant the bondholder a first-mortgage lien on a specified property. Because this lien gives bondholders the legal right to seize and sell the property if the issuer defaults on the bond it provides greater security
|
|
|
Equipment trust certificates
|
secured by stocks, bonds, or notes placed with a trustee. Generally issued by holding companies;firms whose assets of consist of the common stock of their subsidiaries
|
|
|
Income bond
|
an issue where coupon payments are contingent on earnings. If earnings are insufficient to make the payment then the bondholders cannot force the company into bankruptcy.
|
|
|
Flat
|
means without accrued interest. Income bonds and bonds already in default generally trade flat.
|
|
|
Put bond
|
Includes a provision whereby investors can sell the bond back to the issuer at a specified amount on a specified date.
|
|
|
Poison put
|
Provision that allows investors to redeem the bond at par in the event of a hostile takeover or the purchase of a large block of shares
|
|
|
Callable bond
|
Call provision that allows the corporation to pay off the bond early
|
|
|
Call price
|
The price the company must pay if it calls the bond
|
|
|
Yield to worst
|
lowest yield-to-call in the call schedule
|
|
|
Term to maturity
|
the life of the bond contract
|
|
|
Coupon rate
|
the interest specified by the bond contract
|
|
|
Call provisions
|
the contractual provisions whereby the bond can be paid off early
|
|
|
Liquidity
|
the degree which an asset can be bought or sold in the market without affecting its price
|
|
|
Risk of default
|
The risk that the issuer will not pay coupon and/or principal when it is due
|
|
|
Tax status
|
How income and capital gain are treated under the tax law
|
|
|
Term structure
|
The pattern of yields for bonds with similar coupon, call, liquidity, risk, and tax status, but different terms-to-maturity is called the term structure of yields
|
|
|
Risk structure
|
The pattern of yields for bonds with similar term, coupon, call, liquidity risk, and tax status, but with different risks is called the risk structure of yields
|
|
|
Spread
|
The difference in return to investment is a spread. P. 296
|
|
|
Promised yield to maturity
|
the YTM calculated on the assumption coupon and principal payments will be paid in full on the dates specified
|
|
|
Expected yield to maturity
|
The YTM adjusted for the probability that not all coupon and principal payments will be paid in full. E[YTM]= probability * promised yield to maturity
|
|
|
Expected market yield
|
YTM of a fully diversified portfolio of all possible bonds with the same term, coupon, call liquidity risk and tax status
|
|
|
Risk premium
|
Difference between expected YTM and the YTM of the risk free bond – arises out of economy wide or market-wide risk
|
|
|
Default premium
|
The difference between the expected YTM and the promised YTM – is company specific
|
|
|
Investment grade bonds
|
bonds that have been assigned to one of the top four ratings groups
|
|
|
Speculative grade bonds
|
Junk bonds or high-yield bonds, have been assigned a lower rating or have no rating at all
|
|
|
Fallen angel
|
a fallen angel is a bond that loses its investment grade rating
|
|
|
Convertible bonds
|
a bond that can be converted into a predetermined amount of the country’s equity at certain times during its life
|
|
|
Investment value
|
the estimate of the market value of the bond if it were not convertible
|
|
|
Conversion price
|
price per share of common stock if it is paid for with a bond. Expressed price per share.
|
|
|
Conversion ratio
|
number of shares received in an exchange for one $1,000 bond
|
|
|
Conversion value
|
the market value of the bond if it were converted to common shares and sold at the current market value
|
|
|
Parity
|
the market price of a convertible bond at which conversion yields exactly zero profit. Parity exists when the market is in equilibrium
|
|
|
Preferred stock
|
a hybrid of equity and debt. A perpetuity because there is no maturity date, although almost all preferred stock is issued with a sinking fund provision
|
|
|
Cumulative preferred stock
|
senior to noncumulative preffered stock. If the issuer is unable to pay dividends for some time and then recovers, cumulative preferred stockholders are entitled to arrears
|
|
|
Convertible preferred stock
|
CP stock is convertible to common shares
|
|
|
Warrants
|
generally issued with the bond as an added feature to increase the value and marketability of the issue and are then detached from the bond and traded separately
|
|
|
Investment companies
|
own securities, advantages of access to securities that trade in large minimum denominations, economies of scale such as diversification, professional management
|
|
|
Unit investment trust
|
an investment company that owns a fixed set of assets and often terminates on a specific prespecified date
|
|
|
Closed-end investment company
|
an investment company with a fixed number of shares. Shares are traded in the secondary market at a price determined by supply and demand
|
|
|
Open-end investment company
|
An investment company that creates shares or units whenever required by new investment and retires shares or units whenever redeemed. Price is determined by the underlying value of the asset of the company
|
|
|
Load
|
the load on a fund is the additional fee levied on the purchase or sale of units in the fund
|
|
|
Net asset value
|
the market value of the fund per unit into which the fund is divided
|
|
|
No load funds
|
sell their shares at the NAV
|
|
|
Loaded funds
|
sell their shares at a premium, adding a load charge to the NAV
|
|
|
Back-end load funds
|
Charge the load when the shares are sold. Often decrease with the length of time the shareholder holds the shares
|
|
|
Mortgagor
|
The individual or institution borrowing the money under a mortgage with real estate as collateral
|
|
|
Mortgagee
|
the mortgagee is the individual/institution lending money with real estate as collateral
|
|
|
Foreclose
|
the legal process by which the mortgage by which the mortgagee takes possession of the real estate used as collateral after the terms of the mortgage have not been met by the mortgagor
|
|
|
Securitization
|
the originator creates a pool of mortgages and sells shares or participation certificates in the pool through a broker. The process of pooling assets and selling participation certificates in a pool as asset securitization because it turns an asset into a negotiable security
|
|
|
Pass throughs
|
a refinement of the securitization process. Guarantees timely payment to investors in the pass-through certificates will continue
|
|
|
Ginnie Mae
|
most common GNMA modified pass-throughs – guaranteed by the full faith and credit of the government
|
|
|
Freddie Mac
|
similar certificates issues through the FHLMC and issued in denomination of $100,000 or more.
|
|
|
Fannie Mae
|
issued by FNMA – changed to now be backed by the US government
|
|
|
Prepayment risk
|
the risk that mortgagors pay off the loan early. This is similar to a call risk in bonds because the mortgagor has an incentive to pay early when mortgage rates decrease
|
|
|
Adjustable rate mortgages (ARMs)
|
reduces systematic prepayment risk since the rates are tied to an index. Interest rates are reset periodically. Didn’t allow ARMs until 1982
|
|
|
Underwater
|
a homeowner is underwater when the outstanding balance on the mortgage is greater than the value of the house collateralizing the mortgage
|
|
|
Mortgage-backed securities (MBS)
|
a debt security – an amortized loan – interest and principal are paid back in constant periodic payments.
|
|
|
Collateralized mortgage obligations (CMOs)
|
were developed to overcome the major disadvantage of pass-throughs – the monthly payments and actual term to maturity are uncertain. CMOs are serial bonds collateralized by a pool of mortages or by a portfolio of mortgage-backed securities, designed to regularize the allocation of principal and interest payments among investors
|
|
|
Spot price
|
a contract for the delivery of goods, services or assets at a specified price for immediate delivery and payment
|
|
|
Forward contract
|
the terms of a forward contract reflect the specific needs of the buyer and seller and exposes both parties to default risk. Secondary market is almost nonexistent. Generally delivered
|
|
|
Futures contract
|
futures contracts are standardized as to quantity, quality and delivery date. Trade through the exchange or clearinghouse on which they are listed, no default risk
|
|
|
Open interest
|
the number of contracts outstanding as at the close of trading. Generally increases until a month before the contract matures
|
|
|
Initial margin
|
whenever a futures contract is traded, both the buyer and sell are required to make security deposits. This initial margin is intended to guarantee that the obligations under the contact will be fulfilled
|
|
|
Maintenance margin
|
The equity in an account must be maintained above a prescribed minimum.
|
|
|
Equity
|
equity represents what your broker would return to you if your position was unwound at the closing price
|
|
|
Clearinghouse
|
takes on the responsibility of ensuring that every contract is honored and that existing positions can be reversed without default
|
|
|
Margin call
|
notification that the money and assets you have deposited in your margin account is no longer enough to satifsy minimum or variation margin requirements
|
|
|
Limit move
|
a limit move occurs when trading stops because the price limit is reached. The settle reflects the price limit so that positions can be marketed to market
|
|
|
Hedgers
|
buy and sell futures to offset an otherwise risky position in the spot or cash market
|
|
|
Speculators
|
buy and sell futures as financial investments, taking on risk to generate return.
|
|
|
Arbitrageurs
|
profit by the simultaneous buying and selling of closely related securities designed to take advantage of different prices of essentially the same asset
|
|
|
Basis
|
difference between the spot price and the market price.
|
|
|
Convergence
|
typically the basis narrows over time until it equals zero on the delivery date
|
|
|
Textbook hedge
|
results when the basis remains unchanged
|
|
|
Basis risk
|
risk in change of futures price – could result in margin calls and overall loss
|
|
|
Long hedge
|
the buy of the futures contract to hedge against an increase in the price of the asset
|
|
|
Short hedge
|
the sale of a futures contract to hedge against a decrease in price
|
|
|
Cross hedge
|
when the future contract used to construct a hedge is on a related, but not identical, asset.
|
|
|
Cash and carry arbitrage
|
is a long position in an asset together with a short position in the futures contract. Buy low in the spot, sell high in the futures.
|
|
|
Reverse cash and carry arbitrage
|
a short position in an asset together with a long position in the corresponding futures contract. Buy low in the futures, sell high in the spot market.
|
|
|
Arbitrage free range
|
the price range in which neither cash and carry nor reverse cash and carry arbitrage are profitable
|
|
|
Derivatives
|
financial instruments whose value is derived form another financial instrument
|
|
|
Hedge ratio
|
the number of futures contracts required to hedge an equity portfolio. Number of contracts = portfolio market value / ($multiplier * futures value) (B port. – B. target)
|
|
|
Call option
|
gives the holder the right to buy the item
|
|
|
Put option
|
gives the buyer the right to SELL the specified stock at the strike price on or before the expiry date
|
|
|
Strike price/Exercise price
|
the price at which the stock is bought and sold if the option is exercised
|
|
|
In the money (ITM)
|
whenever the option has a favorable strike price with respect to the market price |
|
|
Out of the money (OTM)
|
whenever the option has an unfavorable strike price with respect to the market
|
|
|
At the money (ATM) |
whenever the strike price is roughly equal to the market price
|
|
|
Exercise
Payout graph
|
shows the value and profit for each possible price of the underlying asset
|
|
|
Premium
|
the price of an option is called a premium. It is paid buy the buyer of the option to the writer
|
