An option that can be exercised at any time until its expiration date. Related Terms: Option European option
Asian call option
A European-style option with a value at maturity equal to the difference between the stock price at maturity and the average stock price during the life of the option, or $0, whichever is greater.
At the money
An option in which the underlying value equals the exercise price. Related Terms: Option Moneyness Out-of-the-money
Bond equivalent yield
A calculation of yield that is annualized using the ratio of 365 to the number of days to maturity. Bond equivalent yield allows for the restatement and comparison of securities with different compounding periods.
1) The governing legal credit agreement, typically incorporated by reference in the prospectus. 2) A legal contract specifying the terms of a bond issue.
An option in which the underlying is a bond; primarily traded in over-the-counter markets.
The yield to maturity on a basis that ignores compounding.
An approach to estimating the required return on equity which specifies that required return as a bond yield plus a risk premium.
CallAn option that gives the holder the right to buy an underlying asset from another party at a fixed price over a specific period of time.
Synonyms: Call option
Related Terms: Option
Cheapest to deliver
A bond in which the amount received for delivering the bond is largest compared with the amount paid in the market for the bond.
An adjustment used to facilitate delivery on bond futures contracts in which any of a number of bonds with different characteristics are eligible for delivery.
1) For a bond, one half of the annual or approximate convexity statistic multiplied by the change in the yield-to-maturity squared. 2) An estimate of the change in price that is not explained by duration.
A fixed-income mandate that permits the portfolio manager to add instruments with relatively high return potential to core holdings of investment-grade debt.
Cost of debt
The cost of debt financing to a company, such as when it issues a bond or takes out a bank loan.
Cost of preferred stock
The cost to a company of issuing preferred stock; the dividend yield that a company must commit to pay preferred stockholders.
With respect to double-entry accounting, a credit records increases in liability, owners’ equity, and revenue accounts or decreases in asset accounts; with respect to borrowing, the willingness and ability of the borrower to make promised payments on the borrowing.
The evaluation of credit risk; the evaluation of the creditworthiness of a borrower or counterparty.
Related Terms: Credit
The risk of loss caused by a counterparty’s or debtor’s failure to make a promised payment.
Synonyms: default risk
Related Terms: Default risk
Credit scoring model
A statistical model used to classify borrowers according to creditworthiness.
Credit spread risk
The risk that the spread between the rate for a risky bond and the rate for a default risk-free bond may vary after the purchase of the risky bond.
Fixed-income securities in which the holder of the security has the right to withhold payment of the full amount due at maturity if a credit event occurs.
The perceived ability of the borrower to pay what is owed on the borrowing in a timely manner; it represents the ability of a company to withstand adverse impacts on its cash flows.
A provision stipulating that if a borrower defaults on any outstanding credit obligations, the borrower is considered to be in default on all obligations.
Current credit risk
The risk associated with the possibility that a payment currently due will not be made.
Agreements between the company as borrower and its creditors.
Debt incurrence test
A financial covenant made in conjunction with existing debt that restricts a company’s ability to incur additional debt at the same seniority based on one or more financial tests or conditions.
Debt rating approach
A method for estimating a company’s before-tax cost of debt based upon the yield on comparably rated bonds for maturities that closely match that of the company’s existing debt.
An objective measure of the quality and safety of a company’s debt based upon an analysis of the company’s ability to pay the promised cash flows, as well as an analysis of any indentures.
A solvency ratio calculated as total debt divided by total assets.
A solvency ratio calculated as total debt divided by total debt plus total shareholders’ equity.
A solvency ratio calculated as total debt divided by total shareholders’ equity.
1) The probability that a borrower defaults or fails to meet its obligation to make full and timely payments of principal and interest, according to the terms of the debt security. 2) The risk of loss if an issuer or counterparty does not fulfill its contractual obligations.
Synonyms: Default probability
Related Terms: Credit risk
Default risk premium
An extra return that compensates investors for the possibility that the borrower will fail to make a promised payment at the contracted time and in the contracted amount.
Debt with some meaningful amount of credit risk.
Related Terms: Credit risk
A measure of an option-free bond’s average maturity. Specifically, the weighted average maturity of all future cash flows paid by a security in which the weights are the present value of these cash flows as a fraction of the bond’s price. A measure of a bond’s price sensitivity to interest rate movements.
The sensitivity of a bond's price to a change in a benchmark yield curve; duration adjusted to account for embedded options.
An option contract that can only be exercised on its expiration date.
Synonyms: European-style option
Related Terms: Option American option Asian call option
The day that employees actually exercise the options and convert them to stock.
The fixed price at which an option holder can buy or sell the underlying.
Synonyms: strike price striking price strike
The fixed rate at which the holder of an interest rate option can buy or sell the underlying.
Synonyms: strike rate
Related Terms: Option
Exercise the option
The process of using an option to buy or sell the underlying.
Synonyms: exercising the option
Related Terms: Option
The date on which a derivative contract expires.
Related Terms: Derivative
The amount of cash payable by a company to the bondholders when the bonds mature; the promised payment at maturity separate from any coupon payment.
Synonyms: principal par value stated value maturity value
A combination of a European call and a risk-free bond that matures on the option expiration day and has a face value equal to the exercise price of the call
The risk that environmental, social, or governance risk factors will result in significant costs or other losses to a company and its shareholders; the risk arising from a company’s obligation to meet required payments under its financing agreements.
Related Terms: ESG risk
Fixed rate perpetual preferred stock
Nonconvertible, noncallable preferred stock with a specified dividend rate that has a claim on earnings senior to the claim of common stock, and no maturity date.
A note on which interest payments are not fixed, but instead vary from period to period depending on the current level of a reference interest rate.
The party to an interest rate swap that is obligated to make periodic payments based on a benchmark floating rate.
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Debt or equity financial assets bought with the intention to sell them in the near term, usually less than three months; securities that a company intends to trade.
Synonyms: trading securities
Debt (fixed-income) securities that a company intends to hold to maturity; these are presented at their original cost, updated for any amortization of discounts or premiums.
A distressed securities investment discipline that involves investment in high-yield bonds perceived to be undervalued.
Related Terms: High yield
In reference to assets, the amount paid to purchase an asset, including any costs of acquisition and/or preparation; with reference to liabilities, the amount of proceeds received in exchange in issuing the liability.
The date that a shareholder listed on the corporation’s books will be deemed to have ownership of the shares for purposes of receiving an upcoming dividend; two business days after the ex-dividend date.
Holding period yield
The return that an investor earns during a specified holding period; holding period return with reference to a fixed-income instrument.
Related Terms: Holding period return
A measure of the yield on the underlying bond of a futures contract implied by pricing it as though the underlying will be delivered at the futures expiration.Indenture
1) Legal contract that describes the form of a bond, the obligations of the issuer, and the rights of the bondholders. 2) A written contract between a lender and borrower that specifies the terms of the loan, such as interest rate, interest payment schedule, maturity, etc.
Synonyms: Trust deed
A rate of return that reflects the relationship between differently dated cash flows; a discount rate.
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An extra return that compensates investors for the increased sensitivity of the market value of debt to a change in market interest rates as maturity is extended.
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Official interest rate
An interest rate that a central bank sets and announces publicly; normally the rate at which it is willing to lend money to the commercial banks.
Synonyms: Official policy rate Policy rate
A financial instrument that gives one party the right, but not the obligation, to buy or sell an underlying asset from or to another party at a fixed price over a specific period of time.
Synonyms: Contingent claims
Related Terms: Contingent claims
The amount of money a buyer pays and seller receives to engage in an option transaction.
Synonyms: option premium; premium
The current spread over the benchmark yield minus that component of the spread that is attributable to any embedded optionality in the instrument.Synonyms: OAS
The day that the company actually mails out (or electronically transfers) a dividend payment. Synonyms: Payable date
A perpetual annuity, or a set of never-ending level sequential cash flows, with the first cash flow occurring one period from now.
Related Terms: Annuity
The present discounted value of future cash flows: For assets, the present discounted value of the future net cash inflows that the asset is expected to generate; for liabilities, the present discounted value of the future net cash outflows that are expected to be required to settle the liabilities.
An option that gives the holder the right to sell an underlying asset to another party at a fixed price over a specific period of time.
Synonyms: Put option
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The amount for which one can sell something, or the amount one must pay to acquire something.
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The actual return on a debt security if it is held to maturity.
The relationship between yield and time to maturity.
Yield curve risk
Risk related to changes in the shape of the yield curve.
The sensitivity of the bond price with respect to the bond's own yield-to-maturity.
Yield to maturity
Annual return that an investor earns on a bond if the investor purchases the bond today and holds it until maturity. It is the discount rate that equates the present value of the bond's expected cash flows until maturity with the bond's price.
Synonyms: Yield to redemption; Redemption yield
Yield to worst
The yield on a callable bond that assumes a bond is called at the earliest opportunity.
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