Home Glossary
Glossary A PDF Print

A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z

accreted value

The current value of a zero-coupon municipal bond, taking into account interest that has been accumulating and automatically reinvested in the bond.

accretion bond

Often the last tranche in a CMO, the accretion bond, or Z-tranche, receives no cash payments for an extended period of time until the previous tranches are retired. While the other tranches are outstanding, the Z-tranche receives credit for periodic interest payments that increase its face value but are not paid out. When the other tranches are retired, the Z-tranche begins to receive cash payments that include both principal and continuing interest.

accrual bond

Often the last tranche in a CMO, the accrual bond or Z-tranche receives, no cash payments for an extended period of time until the previous tranches are retired. While the other tranches are outstanding, the Z-tranche receives credit for periodic interest payments that increase its face value but are not paid out. When the other tranches are retired, the Z-tranche begins to receive cash payments that include both principal and continuing interest.

accrued interest

(1) The dollar amount of interest accrued on an issue, based on the stated interest rate on that issue, from its date to the date of delivery to the original purchaser. This is usually paid by the original purchaser to the issuer as part of the purchase price of the issue; (2) Interest deemed to be earned on a security but not yet paid to the investor.

active tranche

A CMO tranche that is currently paying principal payments to investors.

ad valorem tax

[Latin: to the value added] A tax based on the value (or assessed value) of real property.

adjustable-rate mortgage (ARM)

A mortgage loan on which interest rates are adjusted at regular intervals according to predetermined criteria. An ARM’s interest rate is tied to an objective, published interest rate index.

advance refunding

A financing structure under which new bonds are issued to repay an outstanding bond issue prior to its first call date. Generally, the proceeds of the new issue are invested in government securities, which are placed in escrow. The interest and principal repayments on these securities are then used to repay the old issue, usually on the first call date.

agency bond

A bond issued by two types of entities—1) Government Sponsored Enterprises (GSEs), usually federally-chartered but privately-owned corporations; and 2) Federal Government agencies which may issue or guarantee these bonds—to finance activities related to public purposes, such as increasing home ownership or providing agricultural assistance. Agency bonds are issued in a variety of structures, coupon rates and maturities. Each GSE and Federal agency issues its own bonds, with sizes and terms appropriate to the needs and purposes of the financing.

agency transaction

A sale and purchase of bonds in which the dealer places bonds with the buyer on a commission basis rather than selling bonds that the dealer owns.

Agreement Among Underwriters (AAU)

Legal document used principally in negotiated sales by underwriters. The document consists of the instructions, terms and acceptances, and the standard terms and conditions.

allotment

Distribution of bonds to syndicate members by the book running manager.

all or none (AON)

Where the offeror of a block of bonds will only sell all of the available bonds and not only a portion of them.

Alternative Minimum Tax (AMT)

An alternative way of calculating income under the Internal Revenue Code. Interest on private-activity bonds [other than 501(c)(3) obligations] issued after August 7, 1986, is used for such a calculation.

amortization

Liquidation of a debt through installment payments.

arbitrage

In the municipal market, the difference in interest earned on funds borrowed at a lower tax-exempt rate and interest on funds that are invested at a higher-yielding taxable rate. Under the 1986 Tax Act, with very few exceptions, arbitrage earnings must be rebated back to the federal government.

arbitrage certificate

Transcript certificate evidencing compliance with the limitations on arbitrage imposed by the Internal Revenue Code and the applicable regulations.

ascending, or positive, yield curve

The interest rate structure which exists when long-term interest rates exceed short-term interest rates.

ask price

Price being sought for the security by the seller. Also called the offer.

ask yield

The return an investor would receive on a Treasury security if he or she paid the ask price.

assessed valuation

The value of property against which an ad valorem tax is levied, usually a percentage of “true” or “market” value.

asset allocation

Asset allocation is an investment strategy in which an investor divides his/her assets among different broad categories of investments (such as bonds) to reduce risk in an investment portfolio while maximizing return. The percentages allocated to each investment category at any given time depend on individual investor needs and preferences including investment goals, risk tolerance, market outlook, and how much money there is to invest.

asset-backed bonds or securities (ABS)

Asset-backed securities, called ABS, are bonds or notes backed by financial assets other than residential or commercial mortgages—an investor is purchasing an interest in pools of loans or other financial assets. Typically these assets consist of receivables other than mortgage loans, such as credit card receivables, auto loans and consumer loans. As the underlying loans are paid off by the borrowers, the investors in ABS receive payments of interest and principal over time. The ABS market is for institutional investors and is not suitable for individual investors.

asset swap spread

The asset swap spread (also called the gross spread) is the aggregate price that bondholders would receive by exchanging fixed rate bonds for floating rate bonds using the swaps market, mainly used to reduce interest rate risk. The asset swap spread is one widely used metric to determine relative value of one bond against other bonds of the same currency. Asset swaps can be a tool to understand which bond or bonds maximize the spread or price over a reference interest rate benchmark, almost always LIBOR, the London InterBank Offered Rate.

auction

Sealed-bid public sale of Treasury securities; method of determining the rate or yield.

auction rate bonds

Floating-rate tax-exempt bonds where the rate is periodically reset by a dutch auction.

authority

A separate state or local governmental issuer expressly created to issue bonds or run an enterprise, or to do both. Certain authorities issue bonds on their own behalf, such as transportation or power authorities. Authorities that issue bonds on the behalf of qualified nongovernmental issuers include health facilities and industrial development authorities.

authorizing resolution

Issuer document which states the legal basis for debt issuance, and states the general terms of the financing.

average life

On a mortgage security, the average time to receipt of each dollar of principal, weighted by the amount of each principal prepayment, based on prepayment assumptions.

average annual yield

Average annual yield is the average yearly income on an investment, such as a bond, expressed in percentage terms. To calculate average annual yield, add all the income from an investment and divide that total amount by the number of years in which the money was invested. For example, if you receive $10 interest on a $1,000 bond each year for ten years, the average annual yield is 1% ($10 ÷ $1,000 = 0.01 or 1%).

Print
Last Updated on Wednesday, 09 June 2010 07:27