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call

Actions taken to pay the principal amount prior to the stated maturity date, in accordance with the provisions for “call” stated in the proceedings and the securities. Another term for call provisions is redemption provisions.

callable bonds

Bonds that are subject to payment of the principal amount (and accrued interest) prior to the stated maturity date, with or without payment of a call premium. Bonds can be callable under a number of different circumstances, including at the option of the issuer, or on a mandatory or extraordinary basis.

call date

The date at which some bonds are redeemable by the issuer prior to the maturity date. In the event of a refunded security, a prerefunded date will appear in place of any call date and will be indicated by an R = prerefunded; or an E = escrowed to maturity.

call premium

A dollar amount, usually stated as a percentage of the principal amount called, paid as a “penalty” or a “premium” for the exercise of a call provision.

call price

The specified price at which a bond will be redeemed or called prior to maturity, typically either at a premium (above par value) or at par.

call protection

Bonds that are not callable for a certain number of years before their call date.

call risk

The risk that declining interest rates may accelerate the redemption of a callable security, causing an investor’s principal to be returned sooner than expected. As a consequence, investors may have to reinvest their principal at a lower rate of interest.

cap

The top interest rate that can be paid on a floating-rate security.

carry

The cost of borrowing funds to finance an underwriting or trading position. A positive carry happens when the rate on the securities being financed is greater than the rate on the funds borrowed. A negative carry is when the rate on the funds borrowed is greater than the rate on the securities that are being financed.

certificate of ownership

Proof of ownership; a document issued to shareholders by a trustee of a unit investment trust.

certificates of participation (COPs)

COPs are a structure where investors buy certificates that entitle them to receive a participation, or share, in the lease payments from a particular project The lease payments are passed through the lessor to the certificate holders with the tax advantages intact. The lessor typically assigns the lease and lease payments to a trustee, which then distributes the lease payments to the certificate holders.

clean CMO

Also known as "sequential-pay CMO," the most basic type of CMO, in which all tranches receive regular interest payments, but principal payments are directed initially only to the first tranche until it is completely retired. Once the first tranche is retired, the principal payments are applied to the second tranche until it is fully retired, and so on.

closed-end investment company

An investment company created with a fixed number of shares, which are then traded as listed securities on a stock exchange. After the initial offering, existing shares can only be bought from existing shareholders.

closing date

This is similar to a settlement date, but occurs for a new issuance of bonds. The closing may be as long as 30 days in case of a competitively sold issue.

collar

Upper and lower limits (cap and floor, respectively) on the interest rate of a floating-rate security.

collateral

Securities or property pledged by a borrower to secure payment of a loan. If the borrower fails to repay the loan, the lender may take ownership of the collateral. Collateral for CMOs consists primarily of mortgage pass-through securities or mortgage loans, but may also encompass letters of credit, insurance policies, or other credit enhancements.

collateralize

The process by which a borrower pledges securities or property or other types of financial assets in order to provide security or collateral toward repayment of a loan or debt.

collateralized mortgage obligation (CMO)

A multiclass bond backed by a pool of mortgage pass-through securities or mortgage loans.

commission

The fee paid to a dealer when the dealer acts as agent in a transaction, as opposed to when the dealer acts as a principal in a transaction (see “net price”).

common stock

A share representing participation in the ownership of an enterprise, generally with the right to participate in dividends and in most cases to vote on major matters affecting stockholder interests.

companion tranche

A CMO tranche that absorbs a higher level of the impact of collateral prepayment variability in order to stabilize the principal payment schedule for a PAC or TAC tranche in the same offering.

competitive underwriting or sale

A sale of municipal securities by an issuer in which underwriters or syndicates of underwriters submit sealed bids (or oral auction bids) to purchase the securities. The securities are won and purchased by the underwriter or syndicate of underwriters which submits the best bid according to guidelines in the notice of sale. This is contrasted with a negotiated underwriting.

compound accreted value

The value of a zero-coupon bond at any given time, based on the principal, with interest compounded at a stated rate of return over time.

compound interest

Interest that is calculated on the initial principal and previously paid interest.

concession

Fractional discount from the public offering of new securities at which the underwriter sells the bonds to dealers not in the syndicate.

confirmation

A written document confirming an oral transaction in municipal securities that provides pertinent information to the buyer and seller concerning the securities and the terms of the transaction.

constant maturity treasury (CMT)

A series of indexes of various maturities (one, three, five, seven or 10 years) published by the Federal Reserve Board and based on the average yield of a range of Treasury securities adjusted to a constant maturity corresponding to that of the index.

confirmation

A document used by securities dealers and banks to state in writing the terms and execution of a verbal arrangement to buy or sell a security.

constant prepayment rate (CPR)

The percentage of outstanding mortgage loan principal that prepays in one year, based on the annualization of the Single Monthly Mortality (SMM), which reflects the outstanding mortgage loan principal that prepays in one month.

continuing disclosure

Under amendments to Rule 15c2-12, the obligation on the issuer’s part to provide annual updating of financial information and operating data of the type included in the official statement for the primary bond offering. The issuer must also provide notice of material events.

conventional mortgage loan

A mortgage loan granted by a bank or thrift institution that is based solely on real estate as security and is not insured or guaranteed by a government agency.

convertible bond

A corporate bond that may be converted into shares of another security under stated terms, often into the issuing company's common stock.

convexity

A measure of the change in a security’s duration with respect to changes in interest rates. The more convex a security is, the more its duration will change with interest rate changes.

Cost of Funds Index (COFI)

A bank index reflecting the weighted average interest rate paid by savings institutions on their sources of funds. There are national and regional COFI indexes.

counterparty

One of two entities in a traditional interest rate swap. In the municipal market a counterparty and a party can be a state or local government, a broker-dealer or a corporation.

coupon

This is the amount of interest due and the date on which payment is to be made. Where the coupon is blank, it can indicate that the bond can be a “ zero-coupon,” a new issue, or that it is a variable-rate bond. In the case of registered coupons (see "Registered Bond"), the interest payment is mailed directly to the registered holder. Bearer coupons are presented to the issuer's designated paying agent or deposited in a commerical bank for collection. Coupons are generally payable semiannually.

coupon payment

The actual dollar amount of interest paid to an investor. The amount is calculated by multiplying the interest of the bond by its face value.

coupon rate

The interest rate on a bond, expressed as a percentage of the bond's face value. Typically, it is expressed on a semi-annual basis.

covenant

The issuer’s pledge, in the financing documents, to do or to avoid from doing certain practices and actions.

cover bid

The second-highest bidder in a competitive sale.

covered bond

Covered bonds are debt issued by banks that are fully collateralized by residential or commercial mortgage loans or by loans to public sector institutions. The dedicated group of loans backing the covered bond is called a “cover pool.” Interest on the covered bond is paid to investors from the issuer's cash flows, while the cover pool serves as secured collateral. Covered bonds typically have high credit ratings, with most, but not all having double or triple-A ratings. Covered bonds offer an additional protection to bondholders than asset-backed debt because in addition to the collateral pool as an ultimate source of repayment, the issuing bank is also liable for repayment, although in some cases the rating of the covered bonds is based more on the collateral than on the rating of the bank. If the issuing bank is downgraded, then the covered bond may also be downgraded but this depends on the specific situation. Unlike mortgage-backed securities (MBS), covered bonds remain on an issuer's balance sheet. Another difference from MBS is that the collateral—the pool of loans—for covered bonds is dynamic, so non-performing or prepaying loans are replaced with performing assets. And, if a covered bond repays investors at an amount less than the principal and interest owed, investors retain an unsecured claim on the issuer. Covered bonds are popular in Europe, making up the second largest segment of the European bond market after government bonds. Covered bonds were first associated with Germany and Denmark and then spread throughout Europe. U.S. issuance in covered bonds started in September 2006. After the subprime crisis, the U.S. Treasury began promoting covered bonds as a safe investment for institutional investors and financing option for the housing market. The U.S. covered bond market is not a market of investments suitable for individuals.

CP Index

Usually the Federal Reserve Commercial Paper Composite, calculated each day by the Federal Reserve Bank of New York by averaging the rate at which the five major commercial paper dealers offer "AA" industrial commercial paper for various maturities. Most CP-based floating-rate notes are reset according to the 30- and 90-day CP composites.

CPI-U

The index for measuring the inflation rate is the non-seasonally adjusted U.S. City Average All Items Consumer Price Index for All Urban Consumers (CPI-U), published monthly by the Bureau of Labor Statistics (BLS). The CPI-U was selected by the Treasury because it is the best known and most widely accepted measure of inflation.

credit enhancement

The use of the credit of a stronger entity to strengthen the credit of a weaker entity in bond or note financing. This term is used in the context of bond insurance, bank facilities and government programs.

credit rating agency

A company that analyzes the credit worthiness of a company or security, and indicates that credit quality by means of a grade, or credit rating.

credit ratings

Designations used by ratings services to give relative indications of credit quality.

credit risk

The risk for bond investors that the issuer will default on its obligation (default risk) or that the bond value will decline and/or that the bond price performance will compare unfavorably to other bonds against which the investment is compared due either to perceived increase in the risk that an issuer will default (credit spread risk) or that a company's credit rating will be lowered (downgrade risk).

credit spread

A yield difference, typically in relation to a comparable U.S. Treasury security, that reflects the issuer’s credit quality. Credit spread also refers to the difference between the value of two securities with similar interest rates and maturities when one is sold at a higher price than the other is purchased.

current face

The current remaining monthly principal on a mortgage security. Current face is computed by multiplying the original face value of the security by the current principal balance factor.

current refunding

A financing structure under which the old bonds are called or mature within 90 days of the issuance of the new refunding bonds.

current yield

The ratio of interest to the actual market price of the bond, stated as a percentage. For example, a bond with a current market price of $1,000 that pays $80 per year in interest would have a current yield of 8%.

CUSIP

The Committee on Uniform Security Identification Procedures, which was established under the auspices of the American Bankers Association to develop a uniform method of identifying municipal, U.S. government, and corporate securities. When issued, each bond is assigned a unique CUSIP number consisting of nine alphanumeric characters.

Last Updated on Wednesday, 09 June 2010 07:07