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American option

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.

Bond indenture

1) The governing legal credit agreement, typically incorporated by reference in the prospectus. 2) A legal contract specifying the terms of a bond issue.

Bond option

An option in which the underlying is a bond; primarily traded in over-the-counter markets.

Bond-equivalent yield

The yield to maturity on a basis that ignores compounding.

Bond-yield-plus-risk-premium method

An approach to estimating the required return on equity which specifies that required return as a bond yield plus a risk premium.


An 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.

Conversion factor

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.

Convexity adjustment

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.

Credit analysis

The evaluation of credit risk; the evaluation of the creditworthiness of a borrower or counterparty.

Related Terms: Credit

Credit risk

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.

Credit-linked notes

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.

Cross-default provision

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.

Debt covenants

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.

Debt ratings

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.

Debt-to-assets ratio

A solvency ratio calculated as total debt divided by total assets.

Debt-to-capital ratio

A solvency ratio calculated as total debt divided by total debt plus total shareholders’ equity.

Debt-to-equity ratio

A solvency ratio calculated as total debt divided by total shareholders’ equity.

Default risk

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.

Defaultable debt

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.

Effective duration

The sensitivity of a bond's price to a change in a benchmark yield curve; duration adjusted to account for embedded options.

European option

An option contract that can only be exercised on its expiration date.

Synonyms: European-style option

Related Terms: Option American option Asian call option

Exercise date

The day that employees actually exercise the options and convert them to stock.

Exercise price

The fixed price at which an option holder can buy or sell the underlying.

Synonyms: strike price striking price strike

Exercise rate

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

Expiration date

The date on which a derivative contract expires.

Related Terms: Derivative

Face value

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

Fiduciary call

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

Financial risk

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.

Floating-rate note

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.

Synonyms: Floater

Floating-rate payer

The party to an interest rate swap that is obligated to make periodic payments based on a benchmark floating rate.

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Held-for-trading securities

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

Held-to-maturity investments

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.

High-yield investing

A distressed securities investment discipline that involves investment in high-yield bonds perceived to be undervalued.

Related Terms: High yield

Historical cost

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.

Holder-of-record date

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.

Synonyms: HPY

Related Terms: Holding period return

Implied yield

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.


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

Interest rate

A rate of return that reflects the relationship between differently dated cash flows; a discount rate.

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Maturity premium

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

Option price

The amount of money a buyer pays and seller receives to engage in an option transaction.

Synonyms: option premium; premium

Option-adjusted spread

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

Payment date

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

Present value

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.

Synonyms: PV


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.

Yield curve

The relationship between yield and time to maturity.

Yield curve risk

Risk related to changes in the shape of the yield curve.

Yield duration

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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