AAA - the top rating accorded by ratings agencies such as Moody's Investor Services and Standard & Poor's.
Above Par - a bond, debenture, share or other security that is at a price higher than its face value is said to be above par. If a bond has a face value above $100 and it's market price is quoted at $103, then it is well above par. Securities carrying coupons -such as Commonwealth bonds - are above par if their market yield is below their coupon rate.
Accrued Interest - interest accounted for but not yet due for payment; a receivable not yet due.
Asset Backed Security - a financial instrument secured by a pool of assets such as property, a mortgage or credit card receivables.
Bank Bill of Exchange - a bill of exchange on which the name of a bank appears, either as acceptor or endorser. When the bank is the acceptor, the bill ranks as a bank accepted bill; where the bank has endorsed the bill on the back, either through buying the bill in the market or for a fee to raise the bank's status, it ranks as a bank-endorsed bill of exchange
Basis Risk - the possibility that an imperfectly matched hedge could produce a loss, eg, a hedger has taken offsetting positions in two related markets but not perfectly matched markets such as using bank bill futures to hedge a position in two year bonds.
Below Par - trading at less than face value.
Bid and Ask - buy and sell prices. Traders also speak of a bid price, the price offered; the asking price is the price requested. These usually indicate the top price a purchaser will pay and the lower price a seller will accept.
Bid-Ask Spread - the difference between the bid and offer prices. This can say a great deal about a market - about it's liquidity, volume, depth and enthusiasm or otherwise of its participants.
Bond Market - the market trading bonds - Commonwealth, State Government & Corporate. Bond trading is carried out via phone and screen by organisations such as professional bond brokers and dealers, banks, investment banks and fund managers.
Bond - a statement of debt similar to an IOU. Bonds are issued by governments, companies and other entities and individuals in return for cash from lenders and investors. The borrower pays interest to the lender or investor through the life of the bond. Borrowers seeking funds from the public through bond issues usually announce the issues through the financial press and electronic media, and spell out the details in a prospectus available from stockbrokers, banks and in the case of Commonwealth securities, the Reserve Bank. Bonds are generally medium to long term fixed interest securities. An early definition of a bond was a "coupon security offering more than one interest payment" but the emergence of zero coupon bonds has complicated the picture.
Bond Relative Value Rank- The relative value rank indicates the relative position of today's bond spread vs the range traded over the last 6 months. For example, if a bond issue is currently trading at 47 and the last 5 days spreads were 43,44,49,44 and 47, then the relative value rank would be 80% in this case. A higher(lower) value generally denotes that the bond is cheaper (more expensive) relative to its trading history.
Bond Tender - a form of auction through which Commonwealth Treasury bonds have been sold since July 1982.
Capital Gain - the result of selling a capital asset at a higher price than it cost. Whether an investor makes a capital gain or not depends on the purchase price of an asset compared to its selling price, the effect of depreciation on its value and whether inflation has bitten into the investor's profit margin.
Commercial Paper - the technical term used to describe domestic short-term promissory notes issued as evidence of debt. The issuer/ seller/ borrower raises the funds for a fairly short period (one to six months) most likely with periodic rollovers. Funds raised this way are usually used for working capital and liquidity. In Australia, promissory notes, commercial bills and non-bank certificates of deposit are types of commercial paper.
Commonwealth Bond - a security issued by the Commonwealth government as borrower, in return for cash from investors who buy the bonds. Investors are lending their money to the government for a given period (the life of the bond, unless they sell the bond before it matures) in return for interest paid, usually half yearly, by the government. Commonwealth bonds are sold through periodic tenders or auctions.
Contract Note - confirmation sent from broker to client detailing the purchase or sale of securities carried out on a client's behalf.
Convexity - a measure showing the sensitivity of a change in the price of a fixed income security in response to a change in interest rates.
Corporate Bond - a security issued by a party which is a company rather than an individual.
Coupon - the annual rate of interest promised to the buyer of bonds. A 10 percent coupon entitles the holder to receive $10 a year for each $100 invested, for the life of the bond, paid in two half yearly instalments.
Credit - is the power to buy without money on condition that you pay later. Those using credit benefit from the immediate possession of the goods they desire; those giving credit benefit usually by charging interest on the deferred payments.
Credit Rating - a measurement of the credit worthiness of an individual or business. The ratings are based on the opinions of banks, financial institutions and financial analysis to investigate stability and credit history. The computer age has seen the development of "banks" of such information providing instant references.
Credit Risk - the danger that a borrower will not repay a loan. This risk always exists; the degree of risk is assessed by credit analysts and is normally reflected in the interest charged and other conditions imposed by the lender.
Credit Risk Premium - an additional amount included in a security's yield (or discounted price) which reflects what could be lost if the issuer were to default. A company rated AAA would not pay a risk premium when issuing securities; a company rated BB or less would.
Credit Spread - the difference between two securities' yields based solely on differences in credit quality.
Credit Watch - a warning issued by a credit rating agency regarding a bank or company whose credit rating it expects to downgrade - that organisation has been "placed on credit watch".
Cum Interest - securities traded "cum interest" carry the right to the next interest payment.
Deep Discount Bonds - those bonds, sold at a large (deep) discount from face value, pay low cash coupons. They are beneficial for investors keen to fix their return over the life of the bond. An investor buys deep discount bonds at substantially less than face value and receives the capital gain on the investment when the bonds mature. There is no tax benefit attached for investors because tax has to be paid on interest as it is accrued rather than received. Zero coupon bonds are the ultimate example of deep discount bonds.
Default - failure to do what was legally or morally required, often referring to the failure to pay a debt that has fallen due. Since anything is better for a lender than not being paid at all, banks, which have advanced loans to organisations, or even countries, facing liquidity difficulties may avert default by reorganising the loans over a longer term.
Discount - In the long-term money market, securities such as bonds have an initial offering price. If the current price of the bond falls below its initial offering price, the bond is said to be trading at a discount. Discount is the opposite of premium.
Discount Securities - non-interest bearing money market instruments, issued at a discount from face value, with the holder receiving face value when the security matures. Discount securities carry no coupon; examples are bills of exchange, promissory notes and treasury notes.
Eurobonds - a branch of the euromarkets, eurocurrencies and eurobonds - currencies and securities held in Europe and outside their country of origin (euro is equivalent to external in this context). The euromarkets took off in the 1950's partly, it is said, as a reaction to the cold war between the US and the Soviet Union. This left the Soviet Union anxious about holding dollars in the US and so it placed them with European banks, which lent them to customers. At the same time, US banks were operating under restrictions which led to their holding $US balances in Europe, particularly London. The UK capital was the first euromarket centre and is still the largest.
Ex Interest - without interest. Bonds are quoted ex-interest seven days before coupon date so that interest can be paid to the registered holder.
Fixed Interest - interest paid on investments such as bonds and debentures, paid at a predetermined and unchanging rate for a specified period (the life of the bond or debenture).
Floating Rate Note - a form of security, popular in the euromarkets and developed elsewhere, issued for three years and longer and carrying a variable interest rate which is adjusted regularly (at one to six monthly intervals - whatever is preferred by the issuer) by a margin against a benchmark rate such as LIBOR. Increased volatility in interest rates helped by the popularity of FRN's as borrowers and lenders became reluctant to commit funds for a fixed period at a fixed rate.
High Yield Bonds - see junk bond.
Junk Bonds - a bond with a credit rating of BB or lower from credit rating agencies. Many issuers and holders prefer the securities to be called high yield bonds as the term junk bonds, although commonly used, has a pejorative connotation. Junk bonds are issued by companies, which do not have long track records of sales and earnings, or by those with questionable credit strength.
Indexed Bond - a bond whose coupon (income stream) or face value is linked to the inflation rate.
Indexed-Linked Bonds - securities whose principal and/or interest payments are linked to the performance of a particular index, such as a sharemarket index.
Inscribed Stock - securities for which ownership is recorded in a registry. The owner receives a certificate, which is not itself transferable. Only using the appropriate documents can transfer the stock.
Interest Rate Futures - futures contracts based on financial instruments such as bank bills of exchange or government bonds, which allow traders and investors to take out protection against future movements in interest rates.
Interest Rate Risk - exposure to loss resulting form a change in interest rates. Hedging strategies are designed to minimise, possibly eliminate, interest rate risk.
Issuer - The entity, which issues a fixed interest security, is referred to as the issuer or borrower. The most active issuers of bonds traded on the long term money market in Australia are governments, and government agencies, banks and corporations.
Long Term - subject to arbitrary interpretation but generally held in financial markets to mean a term of at least one year and probably more than five.
Margin - the difference between a benchmark interest rate and the rate charged to an individual borrower. It is sometimes called the spread.
Market Maker - a recognised institution or individual willing to trade certain securities at any time; that is, making a secondary market in those securities.
Market Value - what you would get for an asset were you to offer it for sale. The value might be quite different from what it cost you, what you have recorded as its book value, its insured value or its replacement cost.
Maturity - the term at the end of which a debt or borrowing is to be repaid. Bondholders are paid out when the bonds mature.
Medium Term Notes - intermediate-term debt securities, issued for one to thirty years and continuously offered.
Modified Duration - a measure of the proportional change in the value of an instrument that results from a change in interest rates, ie, it shows a security's sensitivity to interest rates.
Mortgage-Backed Security - a variety of asset backed securities representing an interest in a pool of mortgages. Australian issuers include FANMAC, PUMA & INTERSTAR.
Nominal Value - the stated (face) value of an asset as distinct from its market price.
Offer - the price at which a trader is willing to sell or lend.
Oversubscribed - an issue of stock in which the value of applications exceeds the amount to be issued. Semi government authorities and corporates are allowed to take oversubscriptions up to a given amount through their prospectuses.
Par - equal; used in bond markets to describe a security whose coupon and market yield are the same rate.
Premium - special value. Securities bought at a premium are bought for more than their par or face value.
Pre-Settlement Risk - the chance that something might go wrong in a transaction before it is settled; eg, a counterparty could go into liquidation.
Primary Market - the new issue market. Bonds and Treasury Notes sold by the Reserve Bank in regular tenders are primary market stock. Once they are sold into trader's hands they are in the secondary market.
Principal - the face value amount of a loan, on which interest is calculated.
Profit and Loss Limit - following the Origianl trade, there is the opportunity to declare subsequent trade orders which provide a mechanism to stop loss positions or close profitable positions.
on which interest is calculated.| An example of this in terms of yield is as follows: | |
| Original Trade: | Purchase @ 6.00% |
| Stop Loss | Sell Higher @ 6.25% |
| Take profit | Sell Lower @ 5.75% |
| Original Trade: | Sale @ 6.00% |
| Stop Loss | Buy Lower @ 5.75% |
| Take profit | Buy Higher @ 6.25% |
| An example of this in terms of price per hundred is as follows: | |
| Original Trade: | Purchase @ 101.500 |
| Stop Loss | Sell Lower @ 99.500 |
| Take profit | Sell Higher @ 104.000 |
| Original Trade: | Sale @ 101.500% |
| Stop Loss | Buy Higher @ 104.000 |
| Take profit | Buy Lower @ 99.500 |
Promissory Note - an IOU issued by a borrower, whose name appears on the front of the note and who undertakes to pay the amount stated on the note to the noteholder on a specified date. PN's can be issued at a discount from face value, representing the interest (yield/return) on the funds for the lender and the cost for the borrower.
Prospectus - a brochure that must be issued by any company or authority, such as a corporate, unit trust or semi government borrower, seeking to raise funds from the general public through the issue of shares or other securities. The prospectus sets out details of the investments offered, spelling out what interest rates are offered, what different investment maturities are available and other terms. It must be registered with ASIC.
Public Loan - a fund raising by a company or semi government authority in which members of the public can buy securities. When raising funds through a public (as opposed to a private placement) loan, the borrower has to draft a prospectus and have that approved and registered by ASIC. Public loans can be underwritten by a group of financial institutions, which would also market the stock.
Rally - an upswing or brisk improvement in market activity and prices after a downturn.
Real Interest Rates - interest rates less the rate of inflation.
Redemption - paying off or cancelling a debt. Commonwealth bonds are redeemable at face value on maturity; that is, the Commonwealth government pays you the lender, your money and redeems its debt.
Repo - see repurchase agreement.
Repurchase Agreement - a transaction between two parties in which securities are transferred in exchange for cash, on the basis that the deal will be reversed at a predetermined rate and at an agreed yield.
Secondary Market - one where existing securities are traded, as against the primary market where they are issued.
Securities - the word securities has come to mean any interest-bearing piece of paper traded in financial markets. Securities in the sense of "marketable securities" may be unsecured (that is, simply debt obligations) and so a holder may not have security in the generally accepted sense.
Securitisation - converting an asset such as a loan into a marketable commodity by turning it into securities. The most popular form of Securitisation involves mortgages, which are pooled and sold, often in unitised form, enabling the lender to reliquefy the asset. Any asset that generates an income stream can be securitised - eg, mortgages, car loans, credit-card receivables.
Semi-Government Securities - stock issued by a state government central borrowing authority. Because of a slightly higher credit risk, they are likely to offer a rate of return higher than that of Commonwealth bonds of similar amount and maturity.
Settlement Date - the date on which money and securities change hands following a market transaction.
Settlement Price - the price at which a transaction is settled.
Swap Relative Value Rank- The relative value rank indicates the relative position of today's swap spread vs the range traded over the last 6 months. For example, if a bond issue is currently trading at 47 and the last 5 days spreads were 43,44,49,44 and 47, then the relative value rank would be 80% in this case. A higher(lower) value generally denotes that the bond is cheaper (more expensive) relative to its trading history.
Switching - simultaneous selling and buying of securities which differ in maturity or coupon or type, to improve the settlement return.
Tender - a type of auction with verbal, written or electronic bids sought for the purchase of a commodity, often bonds or other securities.
Term to Maturity - the number of days, months or years until a loan, bill of exchange or bond becomes due for payment.
Treasuries - shorthand for US government securities.
Treasury Bonds - medium to long term securities issued through periodic tenders at yields determined by bidders.
Treasury Notes - Commonwealth government short-term securities, issued through the Reserve Bank as agent for the Commonwealth, issued to maturity dates in January, April, July and October to coincide with GST tax payments.
Yield - the annual return on an investment (bill of exchange, bond, property, shares) expressed as a percentage. Yield differs from discount in its application to security purchases; yield is the actual rate of return expressed as a percentage per annum of the net outlay and net proceeds of an investment, not of its face value.
Yield Curve - a graph showing the relationship between the yield to maturity and the term to maturity of a group of similar securities.
Zero Coupon Bonds - Bonds issued without a coupon; no periodic interest payments are made rather, the bond is sold at a deep discount from face value.
Sourced from the third edition of Language of Money (1996) with the permission of its author Edna Carew. Additions by Peter Sheahan and Denise Wong
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