The current value of your 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 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.
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.
basis point
Smallest measure used in quoting yields on bonds and notes. One basis
point is 0.01% of yield. For example, a bond's yield that changed from 6.52%
to 7.19% would be said to have moved 67 basis points.
basis price
The price of a security expressed in yield, or percentage of return on the
investment. Price differentials in municipal bonds are usually expressed in
multiples of 5/100 of 1%, or "05."
bearer security
A security that has no identification as to owner. It is presumed to be
owned by the bearer or the person who holds it. Bearer securities are freely
and easily negotiable since ownership can quickly be transferred from seller
to buyer. Tax-exempt municipal bonds are no longer being issued in bearer
form.
benchmark
A bond whose terms are used for comparison with other bonds of similar
maturity. The global financial market typically looks to U.S Treasury
securities as benchmarks.
beneficial owner
One who benefits from owning a security, even if the security's title of
ownership is in the name of a broker or bank ("street name").
bid
Price at which a buyer is willing to purchase a security.
bid list
Schedule of bonds distributed by holder or broker to dealer in order to
get a bid, or current price, on the bonds.
bill
A short-term direct obligation of the U.S. Treasury that has a maturity of
not more than one year (for example, 13-, 26- or 52-week maturity).
blended yield to maturity
The combination and average of two points on the yield curve to find a
yield at the midpoint.
blue-sky memorandum
A memorandum for use by the account specifying the way a specific issue
will be treated under state securities laws, frequently of all 50 states,
Puerto Rico, and the District of Columbia. This memorandum is prepared first
in preliminary form, which may note that certain steps need to be taken in
various jurisdictions in order to qualify the issue for sale within these
jurisdictions. The memorandum is then issued in supplemental form and
generally the supplemental form reports that the required actions in the
various jurisdictions have been taken.
bond
(1) The written evidence of debt, bearing a stated rate or stated rates of
interest, or stating a formula for determining that rate, and maturing on a
date certain, on which date and upon presentation a fixed sum of money plus
interest (usually represented by interest coupons attached to the bond) is
payable to the holder or owner. A municipal bond issue is usually comprised of
many bonds that mature over a period of years; (2) For purposes of
computations tied in to "per bond," a $1,000 increment of an issue (no matter
what the actual denominations are); (3) Bonds are long-term securities with a
maturity of greater than one year.
bond anticipation note (BAN)
A note issued in anticipation of later issuance of bonds, usually payable
from the proceeds of the sale of the bonds or of renewal notes. BANs can also
be general obligations of the issuer.
bond bank
Agencies created by a few states to buy entire issues of bonds of
municipalities. The purchases are financed by the issuance of bonds by the
bond bank. The purpose is to provide better market access for small,
lesser-known issuers.
The Bond BuyerTM
The daily newspaper of the municipal bond market. The Bond Buyer
publishes news stories, new-issuer calendars, results of bond sales, notices
of redemptions and other items of interest to the market. The Bond
Buyer also publishes weekly indexes of bond yields that are widely
followed by the market.
bond counsel
A lawyer or law firm that delivers a legal opinion which deals with the
issuer's authorization to issue bonds and the tax-exempt nature of the bond.
Bond counsel is retained by the issuer.
bond equivalent yield
An adjustment to a CMO yield which reflects its greater present value,
created because CMOs pay monthly or quarterly interest, as opposed to
semiannual interest payments on most other types of bonds.
bond funds
Registered investment companies whose assets are invested in diversified
portfolios of bonds.
bond insurance
Legal commitment by insurance company to make scheduled payment of
interest and principal of a bond issue in the event that the issuer is unable
to make those payments on time. The cost of insurance is usually paid by the
issuer in case of a new issue of bonds, and the insurance is not purchased
unless the cost is far more than offset by the lower interest rate that can be
incurred by the use of the insurance.
bond purchase agreement (BPA)
The contract between the issuer and the underwriter setting forth the
terms of the sale, including the price of the bonds, the interest rate or
rates which the bonds are to bear and the conditions to closing. It is also
called the purchase contract.
bond resolution
Issuer legal document which details the mechanics of the bond issuer,
security features, covenants, events of default and other key features of the
issue's legal structure. Indentures and trust agreements are functionally
similar types of documents, and the use of each depends on the individual
issue and issuer.
bond swap
The sale of a bond and the purchase of another bond of similar market
value. Swaps may be made to establish a tax loss, upgrade credit quality,
extend or shorten maturity, etc.
bond year
An element in calculating average life of an issue and in calculating net
interest cost and net interest rate on an issue. A bond year is the number of
12-month intervals between the dated date of the bond and its maturity date,
measured in $1,000 increments. For example, the "bond years" allocable to a
$5,000 bond dated April 1, 1980, and maturing June 1, 1981, is 5.830 [1.166
(14 months divided by 12 months) x 5 (number of $1,000 increments in $5,000
bond)]. Usual computations include "bond years" per maturity or per an
interest rate, and total "bond years" for the issue.
book entry
A method of registering and transferring ownership of securities
electronically which eliminates the need for physical certificates.
bought deals
GSE-issued securities sold through negotiated direct placements or
competitive bids, with terms and size determined by the immediate needs of the
GSE.
broker
A firm or person who acts as an intermediary by buying and selling
securities to dealers on an agency basis rather than for its own account.
bullet
A security with a fixed maturity and no call feature.
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
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.
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.
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.
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
The rate of interest payable annually. 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.
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.
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 ratings
Designations used by ratings services to give relative indications of
credit quality.
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 $60 per year in interest would have a current yield of 6%.
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. CUSIP numbers are unique nine-digit numbers assigned to each
series of securities.
dated date (or issue date)
The date of a bond issue from which the bondholder is entitled to receive
interest, even though the bonds may actually be sold or delivered at some
other date.
daycount
The convention used to calculate the number of days in an interest payment
period. A 30/360 convention assumes 30 days in a month and 360 days in a year.
An actual/360 convention assumes the actual number of days in the given month
and 360 days in the year. An actual/ actual convention uses the actual number
of days in the given interest period and year.
dealer
A securities firm or department of a commercial bank that engages in the
underwriting, trading and sale of municipal (or other) securities.
dealer bank
Department of commercial bank that engages in the underwriting, trading
and sale of municipal (or other) securities.
debenture
Unsecured debt obligation, issued against the general credit of a
corporation, rather than against a specific asset.
debt limit
Statutory or constitutional limit on the principal amount of debt that an
issuer may incur (or that it may have outstanding at any one time).
debt service
Principal and interest.
debt service coverage
The ratio of net revenues to the debt service requirements.
debt service requirements
Amounts required to pay debt service, often expressed in the context of a
time frame (such as "annual debt service requirements").
debt service reserve fund
The fund into which are paid monies which are required by the trust
agreement or indenture as a reserve against a temporary interruption in the
receipt of the revenues or other amounts which are pledged for the payment of
the bonds. A common deposit requirement for a "debt service reserve fund" is
six months or one-year's debt service on the bonds. The "debt service reserve
fund" may be initially funded out of bond proceeds, over a period of time from
revenues, or by a combination of the above.
deep discount
A discount greater than traditional market discounts of 3%.
default
Failure to pay principal or interest when due. Defaults can also occur for
failure to meet nonpayment obligations, such as reporting requirements, or
when a material problem occurs for the issuer, such as a bankruptcy.
default risk
Possibility that a bond issuer will fail to pay principal or interest when
due.
defeasance
Termination of the rights and interests of the trustee and bondholders
under a trust agreement or indenture upon final payment or provision for
payment of all debt service and premiums, and other costs, as specifically
provided for in the trust instrument.
denomination
The face amount, or par value, of a bond or note that the issuer promises
to pay on the maturity date. Most municipal bonds are issued in a minimum
denomination of $5,000.
derivative
A financial product that derives its value from an underlying security. In
the tax-exempt market, there are primary and secondary derivative products.
discount
(1) Amount (stated in dollars or a percent) by which the selling or
purchase price of a security is less than its face amount; (2) Amount by which
the amount bid for an issue is less than the aggregate principal amount of
that issue.
discount bond
A bond sold at less than par.
discount margin
The effective spread to maturity of a floating-rate security after
discounting the yield value of a price other than par over the life of the
security.
discount note
Short-term obligations issued at discount from face value, with maturities
ranging from overnight to 360 days. They have no periodic interest payments;
the investor receives the note's face value at maturity.
discount rate
The rate the Federal Reserve charges on loans to member banks.
distribution of principal
Return of principal to unit trust shareholders, usually when a bond in the
portfolio reaches maturity, is called or, if necessary, is sold prior to
maturity.
divided account
Account structure that is divided as to liability, and not as to sales.
Also called "Western" account.
dollar bond
A bond that is quoted and traded in dollar prices rather than in terms of
yield.
double and triple tax-exemption
Securities that are exempt from state and local as well as federal income
taxes are said to have double or triple tax-exemption.
double-barreled bond
A bond is said to be "double-barreled" when it is secured by the pledge of
two (or more) sources of payment. In some states a bond secured in the first
instance by a user charge, e.g., water or sewer, may be additionally secured
by ad valorem taxes if the user charges don't bring enough revenue.
double exemption
Securities that are exempt from state as well as federal income taxes are
said to have "double exemption." In states where this exemption occurs, the
exemption is usually only for bonds issued by the state or its local
governments. An exception to this rule is the bond debt of U.S. territories
such as Guam. Debt of Puerto Rico is also double exempt.
downgrade risk
Possibility that a bond's rating will be lowered because the issuer's
financial condition, or the financial condition of a party to the financial
transaction, deteriorates.
duration
The weighted maturity of a fixed-income investment's cash flows, used in
the estimation of the price sensitivity of fixed-income securities for a given
change in interest rates.
embedded option
A provision within a bond giving either the issuer or the bondholder an
option to take some action against the other party. The most common embedded
option is a call option, giving the issuer the right to call, or retire, the
debt before the scheduled maturity date.
evaluator
An independent service responsible for appraising the value of securities
in a trust's portfolio.
excess spread
The net amount of interest payments from the underlying assets after
bondholders and expenses are paid and after all losses are covered. Excess
spread may be paid into a reserve account and used as a partial credit
enhancement or it may be released to the seller or the originator of the
assets.
exempt facilities bond
Refers to those types of privately owned or privately used facilities
which are authorized to be issued on a tax-exempt basis under the Internal
Revenue Code. The Tax Reform Act of 1986 amended prior law to exclude the
following types of facilities from those which can be financed on a tax-exempt
basis: sports facilities; convention and trade show facilities; air and water
pollution control facilities; privately owned airport, dock, wharf and
mass-commuting facilities; and most parking facilities, among others.
expected maturity date
The date on which principal is projected to be paid to investors. It is
based on assumptions about collateral performance.
extension risk
The risk that rising interest rates will slow the anticipated rate at
which mortgages or other loans in a pool will be repaid, causing investors to
find their principal committed longer than expected. As a result, they may
miss the opportunity to earn a higher rate of interest on their money.
extraordinary redemption
This is different from optional redemption, or mandatory redemption, in
that it occurs under an unusual circumstance, such as destruction of the
facility financed.
face amount
The par value (i.e., principal, or maturity, value) of a security
appearing on the face of the instrument.
face value
The par value of a security, as distinct from its market value.
factor
A decimal value reflecting the proportion of the outstanding principal
balance of a mortgage security, which changes over time, in relation to its
original principal value. publishes the "Monthly Factor Report,"
which contains a list of factors for Ginnie Mae, Fannie Mae, and Freddie Mac
securities. Fannie Mae, Freddie Mac and trustees of private-label CMOs also
publish CMO tranche factors.
federal funds rate
The interest rate charged by banks on overnight loans of their excess
reserve funds to other banks.
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.
final maturity date
The date on which the principal must be paid to investors, which is later
than the expected maturity date. Also called legal maturity date.
financial advisor
A consultant to an issuer of municipal securities who provides the issuer
with advice with respect to the structure, timing, terms or other similar
matters concerning a new issue of securities.
financial and operations principal
A municipal securities employee who is required to meet qualifications
standards established by the MSRB. The individual is the person designated to
be in charge of the preparation and filing of financial reports to the SEC and
other regulatory bodies.
firm
Free option to buy securities for a stated time at a stated price.
fixed-rate bond
A long-term bond with an interest rate fixed to maturity.
fixed-rate mortgage
A mortgage featuring level monthly payments, determined at the outset,
which remain constant over the life of the mortgage.
floating-rate bond
A bond for which the interest rate is adjusted periodically according to a
predetermined formula, usually linked to an index.
floor
The lower limit for the interest rate on a floating-rate bond.
flow of funds
Refers to the structure which is established in the bond resolution or the
trust documents which sets forth the order in which funds generated by the
enterprise will be allocated to various purposes.
forward cap
An agreement to enter into a cap at some date in the future.
forward floor
An agreement to enter into a floor at some date in the future.
forward swap
An agreement to enter into a swap at some date in the future.
fully registered
A security that is registered as to principal and interest, payment of
which is made only to or on the order of the registered owner.
futures contract
In the municipal market, an agreement to purchase or sell the municipal
bond index (The Bond Buyer 40-Bond Index) for delivery in the future.
General Obligation Bond (GO)
A municipal bond secured by the pledge of the issuer's full faith, credit
and taxing power.
Ginnie Mae I
Pass-through mortgage securities on which registered holders receive
separate principal and interest payments on each of their certificates. Ginnie
Mae I securities are single-issuer pools.
Ginnie Mae II
Pass-through mortgage securities on which registered holders receive an
aggregate principal and interest payment from a central paying agent on all of
their Ginnie Mae II certificates. Ginnie Mae II securities are collateralized
by multiple-issuer pools or custom pools, which contain loans from one issuer,
but interest rates that may vary within one percentage point.
global debt facility
The issuance platform used by most GSEs when issuing "global" debt into
the international marketplace or a particular foreign market. Has same credit
characteristics as nonglobal debt but is more easily "cleared" through
international clearing facilities.
good-faith funds
Security deposit on new securities, ranging from 1% to 5% of the par
amount, provided to the issuer at the time of a competitive bid by each
underwriting syndicate. Also called good-faith check, if delivered as a check,
or good-faith deposit.
Government-Sponsored Enterprise (GSE)
Financing entities created by Congress to fund loans to certain groups of
borrowers, such as homeowners, farmers and students.
grantor trust
A special-purpose vehicle set up to issue fixed-rate capital securities
and use the proceeds to purchase debt of the parent company. Investors who
hold interests in the trust are taxed as if they owned pro rata undivided
interests in the trust's assets.
hedge
An investment made with the intention of minimizing the impact of adverse
movements in interest rates or securities prices.
high-yield bond
Bonds issued by lower-rated corporations, sovereign countries and other
entities rated Ba or BB or below and offering a higher yield than more
creditworthy securities; sometimes known as junk bonds.
I Bonds
A type of inflation-adjusted security issued by the Treasury. Series I
savings bonds pay interest according to an earning rate that is partly a fixed
rate of return and partly adjusted for inflation.
indenture
Issuer legal document which details the mechanics of the bond issuer,
security features, covenants, events of default and other key features of the
issue's legal structure. Bond resolutions and trust agreements are
functionally similarly types of documents, and the use of each depends on the
individual issue and issuer.
index ratio
For any particular date and any particular inflation-indexed security, the
Reference CPI-U applicable to such date divided by the Reference CPI-U
applicable to the original issue date (or dated date, when the dated date is
different from the original issue date).
indexed rate bonds
Tax-exempt bonds where the rate is periodically reset on a formula that
incorporates an index, such as The Bond Market Association Swap Index.
industrial revenue bond
A security issued by a state, political subdivision or certain agencies or
authorities, for certain specific purposes, but backed by the credit of a
private enterprise.
inflation-adjusted principal
For an inflation-indexed security, the principal amount of the security,
derived by multiplying the par amount by the applicable index ratio.
inflation-indexed securities
1. Securities designed to protect investors and the future value of their
fixed-income investments from the adverse effects of inflation. Using the
Consumer Price Index as a guide, the value of the securities’ principal is
adjusted to reflect the effects of inflation. Also known as Treasury Inflation
Protected Securities (TIPS) or Treasury Inflation-Indexed Securities (TIIS).
2. Notes periodically issued by the GSEs whose return is adjusted with changes
in the PPI or CPI.
initial delivery
The delivery of a new issue by the issuer to the original purchaser, upon
payment of the purchase price. Also called "original delivery."
initial offering price
The price (based upon yield to maturity) stated as a percentage of par at
which the account determines to market the issue during a set period of time,
called the initial offering period. Members of the account may not offer any
part of the issue at any other price during that period.
insurance
Municipal bond insurance companies guarantee timely payment of principal
and/or interest on municipal and certain other types of bonds in the event of
a default. The major insurers are identified by these symbols:
the compensation paid or to be paid for the use of money, usually
expressed as an annual percentage rate. Interest rates change in response to a
number of things including revised expectations about inflation, and such
changes in the prevailing level of interest rates affects the value of all
outstanding bonds.
interest rate cap
An agreement where a party pays a premium up front or in installments to
the counterparty. If the floating interest rate exceeds a stated fixed rate
during the time of the cap agreement, the counterparty will pay the
difference, based on the notional amount. The cap rate is also called the
strike rate. An interest rate cap can protect the purchaser against rising
interest rates.
inverse floater
A CMO tranche that pays an adjustable rate of interest that moves in the
opposite direction from movements in a representative interest rate index such
as the London Interbank Offered Rate (LIBOR), the Constant Maturity Treasury
(CMT) or the Cost of Funds Index (COFI).
inverse floater bonds
A primary derivative tax-exempt bond. The interest payable is based on a
formula that has a ceiling rate less a specified floating rate index or bond.
inverted, or negative, yield curve
The interest rate structure which exists when short-term interest rates
exceed long-term interest rates. See "ascending, or positive, yield curve."
investment grade
Bonds considered suitable for preservation of invested capital;
ordinarily, those rated Baa3 or better by Moody's Investors Service, or BBB-
or better by Standard & Poor's Corporation (see "ratings").
IO (interest-only) security
In the case of a CMO, an IO tranche is created deliberately to pay
investors only interest and not principal. IO securities are priced at a deep
discount to the "notional" amount of principal used to calculate the amount of
interest due.
issue
The issue description includes the name of the issuer of the bonds. If a
municipal bond, the issuer is typically a state, political subdivision, agency
or authority which borrows money through the sale of bonds or notes. Corporate
bonds are issued by private corporations.
issue date
The date on which a security is deemed to be issued or originated.
issuer
A state, political subdivision, agency, authority or corporation that
borrows through the sale of bonds or notes. The public entity is the "issuer"
even in those cases where the actual source of the money to pay debt service
is to be an entity other than the issuer.
joint managers
Underwriting accounts are headed by a manager. When an account is made up
of several groups of underwriting firms that normally function as separate
accounts, the larger account is often managed by several underwriters, usually
one from each of the several groups, and these managers are referred to as
"joint managers."
jumbo pools
Ginnie Mae II pass-through mortgage securities collateralized by pools
which are generally larger and contain mortgages that are often more
geographically diverse than single-issuer pools. Mortgage loans in jumbo pools
may vary in terms of the interest rate within one percentage point.
jump Z-tranche
A Z-tranche that may start receiving principal payments before prior
tranches are retired if market forces create a "triggering" event, such as a
drop in Treasury yields to a defined level, or a prepayment experience that
differs from assumptions by a specific margin. "Sticky" jump Z-tranches
maintain their changed payment priority until they are retired. "Non sticky"
jump Z-tranches maintain their priority only temporarily, for as long as the
triggering event is present. Although jump Z-tranches are no longer issued,
some still trade in the secondary market.
junior security
A security with a claim on a corporation's assets and income that is
subordinate to that of a senior security. For example, common stock is junior
to preferred stock, which is junior to unsecured debt such as debentures,
which is junior to secured debt.
junk bond
A debt obligation with a rating of Ba or BB or lower, generally paying
interest above the return on more highly rated bonds, sometimes known as
high-yield bonds.
legal opinion
An opinion concerning the validity of a securities issue with respect to
statutory authority, constitutionality, procedural conformity and usually the
exemption of interest from federal income taxes. The legal opinion is usually
rendered by a law firm recognized as specializing in public borrowings, often
referred to as bond counsel.
letter of credit (LOC)
A commitment, usually issued by a bank, used to guarantee the payment of
principal and interest on debt issues. The LOC is drawn if the issuer is
unable to make the principal and/or interest payments on a timely basis.
level debt service
A debt service schedule where total annual principal plus interest is
approximately the same throughout the life of the bond. This entails a
maturity schedule with increasing principal amounts each year.
level principal
A debt service schedule where total annual principal plus interest
declines throughout the life of the bond. This entails a maturity schedule
with the same amount of principal maturing each year, with a resulting smaller
interest component each year. This is also called declining debt service.
leverage
The use of borrowed money to increase investing power.
LIBOR (London Interbank Offered Rate)
The rate banks charge each other for short-term Eurodollar loans. LIBOR is
frequently used as the base for resetting rates on floating-rate securities.
limited-liability company
A special-purpose company incorporated under special limited-liability
company legislation enacted in many states and foreign countries. This type of
entity is structured as a "pass-through" and treated like a partnership for
tax purposes.
limited partnership
An entity formed under state legislation that enables large numbers of
investors to become limited partners of a partnership, owning an economic
interest in the entity's assets, but sharing in its liabilities only to the
extent of their initial investment.
limited tax bond
A bond secured by a pledge of a tax or category of taxes limited as to
rate or amount.
line of credit
A commitment by a bank to provide funds to a borrower, if certain
conditions have been met, or if certain conditions do not exist.
liquidation value
The amount a securities holder may receive in case of a liquidation of the
issuer.
liquidity
The ability to trade bonds efficiently without causing any major changes
in their prices.
lockout
The period of time before an investor will begin receiving principal
payments.
long
Securities that are owned by a dealer or investor.
long-term debt
Debt which matures in more than one year.
manager (or senior manager)
The underwriter that serves as the lead underwriter for an account. The
"manager" generally negotiates the interest rate and purchase price in a
negotiated transaction or serves as the generator of the consensus for the
interest rate and purchase price to be bid in a competitive bidding situation.
The "manager" signs the contracts on behalf of the account and generally
receives either a fee or a slightly larger spread for its services in this
capacity. See also "joint managers."
mandatory sinking-fund redemption
A requirement to redeem a fixed portion of term bonds, which may comprise
the entire issue, in accordance with a fixed schedule. Although the principal
amount of the bonds to be redeemed is fixed, the specific bonds which will be
called to satisfy the requirement as to amount are selected by the trustee on
a lot basis.
marketability
A measure of the ease with which a security can be sold in the primary and
secondary market without an undue price concession.
market price or market value
For securities traded through an exchange, the last reported price at
which a security was sold; for securities traded "over-the-counter," the
current price of the security in the market.
material events
In the municipal market, with regard to Rule 15c2-12, one of 11 specified
events that must be disclosed to investors if they occur.
maturity date
The date when the principal amount of a security becomes due and payable,
if not subject to prior call or redemption.
maturity schedule
The listing, by dates and amounts, of principal maturities of an issue.
medium-term note
A debt security issued under a program that allows an issuer to offer
notes continuously to investors through an agent. The size and terms of
medium-term notes may be customized to meet investors' needs. Maturities can
range from one to 30 years.
modified duration
Duration adjusted to price and yield levels to represent percent change
relationship of price and yield.
monetary default
Failure to pay principal or interest promptly when due.
monoline bond insurer
A Triple-A-rated company that guarantees that all interest and principal
payments on a bond will be paid as scheduled and that participates in no other
line of insurance business.
moral obligation bond
A municipal bond which, in addition to its primary source of security,
possesses a structure whereby a state pledges to make up shortfalls in a debt
service reserve fund, subject to legislative appropriation. There is no legal
obligation for the state to make such a payment, but market participants
recognize that failure to honor the "moral" pledge would have negative
consequences for the state's own creditworthiness.
mortgage
A legal instrument that creates a lien upon real estate securing the
payment of a specific debt.
mortgage banker
An entity that originates mortgage loans, sells them to investors and
services the loans.
mortgage loan
A loan secured by a mortgage.
mortgage pass-through security
A security representing a direct interest in a pool of mortgage loans. The
pass-through issuer or servicer collects the payments on the loans in the pool
and "passes through" the principal and interest to the security holders on a
pro rata basis. Mortgage pass-through securities are also known as
mortgage-backed securities (MBS) and participation certificates (PC).
mortgage revenue bond
A security issued by a state, certain agencies or authorities, or a local
government to make or purchase loans (including mortgages or other
owner-financing) with respect to single-family or multifamily residences.
municipal bond
A bond issued by a state or local governmental unit.
municipal over bond (MOB)
Spread measures the relative difference between the municipal bond index
future price and the U.S. Treasury bond futures price.
municipal securities principal
A municipal securities employee under MSRB rules who has supervisory
responsibility for the municipal securities operations of the firm.
municipal securities representatives
The broadest class of municipal securities professionals who are required
to pass a qualifications examination under the rules of the MSRB. This group
includes individuals who underwrite, trade or sell municipal securities, do
research or offer investment advice, provide financial advisory services or
communicate with investors in municipal securities.
Municipal Securities Rulemaking Board (MSRB)
An independent self-regulatory organization established by the Securities
Acts Amendments of 1975, which is charged with primary rulemaking authority
over dealers, dealer banks and brokers in municipal securities. Its 15 members
are divided into three categories -- securities firms representatives, bank
dealer representatives and public members -- each category having equal
representation on the Board.
mutual fund
Also known as an open-end investment company, to differentiate it from a
closed-end investment company. Mutual funds invest pooled cash of many
investors to meet the fund's stated investment objective. Mutual funds stand
ready to sell and redeem their shares at any time at the fund's current net
asset value: total fund assets divided by shares outstanding.
NASD
National Association of Securities Dealers. Largest securities industry
self-regulatory organization in the United States.
negative convexity
A characteristic of callable or prepayable securities that causes
investors to have their principal returned sooner than expected in a declining
interest rate environment or later than expected in a rising interest rate
environment. In the former scenario, investors may have to reinvest their
funds at lower rates ("call risk"); in the latter, they may miss an
opportunity to earn higher rates ("extension risk").
negotiated underwriting
In a negotiated underwriting, the sale of bonds is by negotiation and
agreement with an underwriter or underwriting syndicate selected by the issuer
prior to the moment of sale. This is in contrast to a competitive or an
advertised sale,
net direct debt
Total direct debt of a municipality less all self-supporting debt, any
sinking funds, and short-term debt such as tax anticipation notes and revenue
anticipation notes.
net interest cost
The traditional method of calculating bids for new issues of municipal
securities. The total dollar amount of interest over the life of the bonds is
adjusted by the amount of premium or discount bid, and then reduced to an
average annual rate. The other method is known as the true interest cost (see
also "true interest").
net order
Bond sold to investors at the price or yield shown in the reoffering
scale. This is the price with no concessions.
net price
Price paid to a dealer for bonds when the dealer acts as principal in a
transaction, i.e., the dealer sells bonds that he owns, as opposed to an
agency transaction (see "agency transaction").
new-issue market
Market for new issues of bonds and notes.
noncallable bond
A bond that cannot be called for redemption at the option of the issuer
before its specified maturity date.
non-investment grade
Bonds not considered suitable for preservation of invested capital;
ordinarily, those rated Baa3 or below by Moody's Investors Service, or BBB- or
below by Standard & Poor's Corporation. Bonds that are non-investment
grade are also called high-yield bonds.
notes
Short-term promises to pay specified amounts of money, secured usually by
specific sources of future revenues, such as taxes, federal and state aid
payments, and bond proceeds.
notice of sale
An official document disseminated by an issuer of municipal securities
that gives pertinent information regarding an upcoming bond issue and invites
bids from prospective underwriters.
notional amount
A stated principal amount in an interest rate swap on which the swap is
based.
NRMSIRS
Nationally Recognized Municipal Securities Information Repositories
odd lot
Block of bonds of $100,000 or less.
offer
The price at which a seller will sell a security.
offering price
The price at which members of an underwriting syndicate for a new issue
will offer securities to investors.
official statement (OS)
The offering document for municipal securities that is prepared by the
issuer. The "OS" discloses security features, and economic, financial and
legal information about the issue. The final OS contains the pricing
information on the issue that is not contained in the preliminary official
statement.
off-the-run Treasuries
Those sold in the secondary market rather than "on-the-run" Treasury
Securities, which are those most recently issued by the Government.
option-adjusted duration (effective duration)
A measure of the bond's movement for a shift in the yield curve. For
noncallable bonds modified duration and effective duration are the same.
option-adjusted spread
The average spread over the AAA spot curve, based on potential paths that
can be realized in the future for interest rates. The potential paths of the
cash flows are adjusted to reflect the options (puts/calls) embedded in the
bond.
optional principal redemption bond
Term used to describe callable securities issued by the FHLB with either
fixed- or floating-rate structures.
optional redemption
A right to retire an issue or a portion thereof prior to the stated
maturity thereof during a specified period of years. The right can be
exercised at the option of the issuer or, in pass-through issues, of the
primary obligor. "Optional redemption" usually requires the payment of a
premium for its exercise, with the amount of the premium decreasing the nearer
the option exercise date is to the final maturity date of the issue.
order period
Specific length of time when orders for new issues are placed by
investors.
original delivery
The delivery of a new issue by the issuer to the original purchaser, upon
payment of the purchase price. Also called "initial delivery."
original face
The face value or original principal amount of a security on its issue
date.
original-issue discount
The amount by which a security's price at issuance is lower than its par
value. In the case of fixed-rate capital securities, original-issue discount
is also generally considered to exist if the issuer is entitled to elect to
defer distributions.
original-issue discount bond (OID)
A bond initially issued at a dollar price less than par which qualifies
for special treatment under federal tax law. Under federal tax law for
tax-exempt bonds, the difference between the issue price and par value is
treated as tax-exempt interest rather than capital gain.
overcollateralization
A type of credit enhancement in which the principal amount of collateral
used to secure a given transaction exceeds the principal of the securities
issued.
overlapping debt
On a municipal issuer's financial statement, "overlapping debt" is the
debt of other issuers which is payable in whole or in part by taxpayers of the
subject issuer. As an example, a county usually includes several smaller
governmental units and its debt is apportioned to them for payment based on
the ratio of the assessed value of each smaller unit to the assessed value of
the county. Another example is when a school district includes two or more
municipalities within its bounds. In each example, "overlapping debt" is the
proportionate share of the county and/or of the school district borne by the
included subject issuer.
over-the-counter market (OTC)
A securities market that is conducted by dealers throughout the country
through negotiation of price rather than through the use of an auction system
as represented by a stock exchange.
owner trust
An amortizing structure that permits significant cash-flow engineering,
which is generally prohibited with grantor trusts. Owner trusts are often used
with auto loans, equipment leases and student loans.
P&I (principal and interest)
The term used to refer to regularly scheduled payments or prepayments of
principal and of interest on mortgage securities.
PAC (planned amortization class) tranche
A CMO tranche that uses a mechanism similar to a sinking fund to determine
a fixed principal payment schedule that will apply over a range of prepayment
assumptions. The effect of the prepayment variability that is removed from a
PAC bond is transferred to a companion tranche.
par
Price equal to the face amount of a security; 100%.
par amount
The principal amount of a bond or note due at maturity. Also known as par
value.
parity debt
Securities issued or to be issued with equal and ratable claim on the same
underlying security and source of payment for debt service.
participation
Principal amount of bonds to be underwritten by each syndicate member.
party
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.
paying agent
Place where principal and interest are payable. Usually a designated bank
or the office of the treasurer of the issuer.
payment date
The date that actual principal and interest payments are paid to the
registered owner of a security.
performance
An investment's return (usually total return), compared to a benchmark
that is comparable to the risk level or investment objectives of the
investment.
perpetual floating-rate note
A floating-rate note with no stated maturity date.
plain-vanilla CMO
Or "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.
PO (principal-only) security
In the case of a CMO, a PO tranche is created deliberately to pay
investors principal only and not interest. PO securities are priced at a deep
discount from their face value.
point
Shorthand reference to 1%. In the context of a "bond," a "point" means
$10, since a "bond" with this reference means $1,000 (no matter what the
actual denominations of the bonds of the issue). An issue or a security that
is "discounted two points" is quoted at 98% of its par value.
pollution control bond
A debt security issued by a state, certain agencies or authorities, a
local government, or development corporation to finance the construction of
air- or water-pollution control facilities or sewage or solid waste disposal
facilities pursuant to federal law. The bonds are backed by the credit of the
beneficiary of the financing rather than the credit of the issuer. New issues
of these bonds are prohibited under the 1986 Tax Law.
pool
A collection of mortgage loans assembled by an originator or master
servicer as the basis for a security. In the case of Ginnie Mae, Fannie Mae,
or Freddie Mac mortgage pass-through securities, pools are identified by a
number assigned by the issuing agency.
preferred stock
An equity security that is junior to the issuing entity's debt obligations
but senior to common stock in the payment of dividends and the liquidation of
assets. The dividend can be fixed or floating and is usually stated as a
percentage of par value. Preferred stock usually has no voting rights and
frequently has a mandatory or optional redemption provision.
preliminary official statement
The offering document for municipal securities, in preliminary form, which
does not contain pricing information. It is also called a POS, or a red
herring.
premium
The amount by which the price of a security exceeds its principal amount.
premium bond
Bonds priced greater than par.
premium or discount price
When the dollar price of a bond is above its face value, it is said to be
selling at a premium. When the dollar price is below face value, it is said to
be selling at a discount.
prepayment
The unscheduled partial or complete payment of the principal amount
outstanding on a mortgage loan or other debt before it is due.
prepayment provision
Provision specifying that, and at what time and on what terms, repayment
of the principal amount may be made by the issuer prior to the stated
maturity. Includes "call," but "prepayment" usually connotes less formal
procedures than a call.
prepayment risk
The risk that falling interest rates will lead to heavy prepayments of
mortgage or other loans, forcing the investor to reinvest at lower prevailing
rates.
price
The dollar amount to be paid for a security, stated as a percentage of its
face value, or par. Bond prices are best reflected in their yields, which vary
inversely with the dollar price. The price you pay for a bond is based on a
host of variables, including interest rates, supply and demand, credit
quality, maturity and call features, tax status, state of issuance, market
events and the size of the transaction.
primary market (new-issue market)
Market for new issues of municipal bonds and notes.
primary tax-exempt derivative products
These are based on bonds issued by state and local governments. Examples
include inverse floater bonds; bonds with embedded swaps and caps; and bonds
based on interest rate tax-exempt derivative products that are based on a
custodial receipt, a trust certificate, or another security that is not
directly issued by a state or local government. Examples include tender option
bonds, trust certificates with interest rate swaps, and stripped interest rate
bonds.
prime rate
A commercial bank's stated reference rate for lending.
principal
The face amount of a bond, exclusive of accrued interest and payable at
maturity.
principal transaction
A sale and purchase of bonds in which the dealer commits its own capital
in effecting the transaction.
private activity bond
Under the 1986 Code, PABs are defined as any municipal obligation,
irrespective of the purpose for which it is issued or the source of payment,
if
(1) more than 10% of the proceeds of the issue will finance property
that will be used by a nongovernmental person in a trade or business, and
(2) the payment of debt service on more than 10% of the proceeds of the
issue will be (a) secured by property used in a private trade or business or
payments in respect of such property, or (b) derived from payments in
respect of property used in a private trade or business.
These two tests
-- the "private business use test" and the "private payment or security test"
-- must be examined in connection with the issuance of any municipal security.
private label
The term used to describe a mortgage security whose issuer is an entity
other than a U.S. government agency or U.S. government-sponsored enterprise.
Such issuers may be subsidiaries of investment banks, financial institutions
or home builders.
private placement
The negotiated offering of new securities directly to investors, without a
public underwriting.
public offering price
The aggregate value of securities in a unit investment trust fund, divided
by the number of units, plus the applicable sales charge. This is the price at
which units are offered for sale to the public.
put bond
A bond that gives the holder the right to require the issuer or the
issuer's agent to purchase the bonds at a price, usually at par, at some date
or dates prior to the final stated maturity.
put option
A put option allows the holder of a bond to "put," or present, the bond to
an issuer (or trustee) and demand payment at a stated time before the final
stated maturity of the bond.
ramp
A concept often used with HELs and manufactured-housing transactions to
describe a series of increasing monthly prepayment speeds, prior to a plateau,
on which the expected average life of a security is based.
rate covenant
A covenant in the financing proceedings requiring the charging of rates or
fees for the use of specified facilities or operations at least sufficient to
achieve a stated minimum coverage.
rate reset
The adjustment of the interest rate on a floating-rate security according
to a prescribed formula.
ratings
Alpha and/or numeric symbols used to give indications of relative credit
quality. In the municipal market, these designations are published by the
rating services. Internal ratings are also used by other market participants
to indicate relative credit quality.
real yield
For an inflation-indexed security, the yield based on the payment stream
in constant dollars, i.e., before adjustment by the index ratio.
recession
A downturn in economic activity on a large scale, such as in the U.S.
economy. The Commerce Department defines a recession as two or more quarters
of decline in output, as measured by Gross National Product (GNP) or Gross
Domestic Product (GDP).
reciprocal immunity doctrine
The doctrine that many believe provides the constitutional basis for the
exemption from federal taxation of the interest earned on municipal
securities. The doctrine holds that the states are immune from taxation by the
federal government and vice versa. The advocates of tax-exemption for bonds
believe that a tax on the interest income a taxpayer receives constitutes a
tax on the issuer of the bonds.
record date
The date for determining the owner entitled to the next scheduled payment
of principal or interest on a mortgage security.
redemption
The paying off or buying back of a bond by the issuer; also, repurchase of
investment trust units by the trustee, at the bid price.
red herring
A preliminary official statement.
redemption premium
The amount by which the "call" price of a security exceeds its principal,
or par value.
redemption provisions
Another term for call provisions. 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.
refunding
Sale of a new issue, the proceeds of which are to be used, immediately or
in the future, to retire an outstanding issue by, essentially, replacing the
outstanding issue with the new issue. Refundings are done to save interest
cost, extend the maturity of the debt, or to relax existing restrictive
covenants.
registered bond
A bond whose owner is registered with the issuer or its agent. Transfer of
ownership can only be accomplished when the securities are properly endorsed
by the registered owner.
registered owner
The name in which a security is registered, as stated on the certificate
or on the books of the paying agent. P&I payments are made to the
registered owner on the record date.
reinvestment risk
The risk that interest income or principal repayments will have to be
reinvested at lower rates in a declining rate environment.
remarketing
A formal re-underwriting of a bond for which the form or structure is
being changed. Most commonly used in connection with changing variable rate to
fixed-rate financings -- typically because "the construction phase is over";
or rates are at a level the issuer feels comfortable with for the long term;
or because of indenture requirements (probably relating to arbitrage).
remarketing agent
A dealer or dealer bank responsible for the pricing of variable-rate
demand bonds. The remarketing agent periodically sets and resets the interest
rate of a VRDN. If bonds are tendered, the remarketing agent will use his/her
best efforts to sell tendered bonds to another purchaser.
REMIC (Real Estate Mortgage Investment Conduit)
Because of changes in the 1986 Tax Reform Act, most CMOs are now issued in
REMIC form to create certain tax advantages for the issuer. The terms REMIC
and CMO are now used interchangeably.
request for proposals
Widely referred to as an "RFP." A series of questions sent by a potential
issuer to evaluate the qualification of potential underwriters of their
negotiated issues. Written and sometimes oral (the "orals") responses to
questions may include a marketing plan for the bonds, the plan of finance, and
estimated costs. Also referred to as "Request for Qualifications," or "RFQs."
residual
In a CMO, the residual is that tranche which collects any cash flow from
the collateral that remains after obligations to the other tranches have been
met.
revenue anticipation note (RAN)
RANs are issued in anticipation of sources of future revenue other than
taxes. This may include intergovernmental aid.
revenue bond
A bond on which the debt service is payable solely from the revenue
generated from the operation of the project being financed or a category of
facilities, or from other non-tax sources.
revolving trust
A securitization structure frequently used for assets with high turnover
rates, such as credit card, trade and dealer floor-plan receivables. It is
characterized by having a revolving period and an accumulation (or
controlled-amortization) period.
risk
A measure of the degree of uncertainty and/or of financial loss inherent
in an investment or decision. There are many different risks, including:
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.
credit risk--The risk that the obligor on the bonds will be
unable to make debt service payments due to a weakening of their credit.
event risk--The risk that an issuer's ability to make debt
service payments will change because of unanticipated changes, such as a
corporate restructuring, a regulatory change or an accident, in their
environment.
market risk--Potential price fluctuations in a bond due to
changes in the general level of interest rates.
underwriting risk--The risk of pricing and underwriting
securities and then ultimately not being able to sell them to the
investor.
round lot
Block of bonds $100,000 or higher.
safekeeping
The storage and protection of customers' securities, typically held in a
vault, provided as a service by a bank or institution acting as agent for the
customer.
scale
Listing by maturity of the price or yields at which a new issue will be
offered.
consensus scale--In a negotiated issue, the very early price
indications.
preliminary scale--Initial prices and yields, before a bid is
submitted.
final scale--Scale that is submitted to the issuer at the time of
the sale.
reoffering scale--Scale offered to the investor by the
underwriter who has purchased bonds. Also called the winning scale.
scenario analysis
Examining the likely performance of an investment under a wide range of
possible interest rate environments.
seasoning
The age of accounts. In the ABS market, this term refers to the fact that
various asset types have different seasoning patterns, which are characterized
by periods of rising and then declining losses.
secondary market
Ongoing market for bonds previously offered or sold in the primary market.
Section 501(c)(3)
The section of the Internal Revenue Code under which not-for-profit
organizations receive their tax-exempt status.
sector
The grouping of securities into a category, based upon similarities that
they share. Typically, securities found in a distinct industry are grouped
together.
secured debt
Debt backed by specific assets or revenues of the borrower. In the event
of default, secured lenders can force the sale of such assets to meet their
claims.
security
Specific revenue sources or assets pledged by an issuer to the bondholder
to secure repayment of the bond.
selling group
A selling group includes dealers or brokers who have been asked to join in
the offering of a new issue of securities, but are neither liable for any
unsold syndicate balance, nor share in the profits of the overall syndicate.
They obtain securities for sale less the take-down.
senior manager
The underwriter who coordinates the sale of a bond or note issue and
manages a syndicate or selling group. A senior manager is usually used only
with regard to a negotiated financing. The senior manager will "run the
books." If other securities firms share in the management responsibilities,
they may be called co-senior managers, or, to a lesser extent, co-managers.
senior securities
Bonds and other debt obligations, fixed-rate capital securities and
preferred stock that are considered senior to common stock within an entity's
capitalization structure.
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.
serial bonds
All or a portion of an issue with stated maturities in consecutive years
(as opposed to mandatory sinking fund redemption amounts).
servicing
Collection and pooling of principal, interest and escrow payments on
mortgage loans and mortgage pools, as well as certain operational procedures
such as accounting, bookkeeping, insurance, tax records, loan payment
follow-up, delinquency loan follow-up and loan analysis. The party providing
the servicing receives a servicing fee.
servicing fee
The amount retained by the mortgage servicer from monthly interest
payments made on a mortgage loan.
settlement date
The date for the delivery of securities and payment of funds.
short
Borrowing and then selling securities that one does not own, in
anticipation of a price decline. When prices fall, the short is "covered" by
buying the securities back and returning them to the lender.
short-term debt
Generally, debt which matures in one year or less. However, certain
securities that mature in up to three years may be considered short-term debt.
Single Monthly Mortality (SMM)
The percentage of outstanding mortgage loan principal that prepays in one
month.
sinker
A bond with a sinking fund.
sinking fund
Separate accumulation of cash or investments (including earnings on
investments) in a fund in accordance with the terms of a trust agreement or
indenture, funded by periodic deposits by the issuer (or other entity
responsible for debt service), for the purpose of assuring timely availability
of moneys for payment of debt service. Usually used in connection with term
bonds.
SMMEA
Secondary Mortgage Market Enhancement Act of 1984.
SMMEA securities
Securities that are both ultimately secured by a first-lien mortgage loan
and rated in one of the top two rating categories by at least one nationally
recognized statistical rating organization. The complete definition may be
found in Section 3(a)(41) of the Securities Exchange Act of 1934, as amended.
Institutional investors should check state laws regarding investments in SMMEA
securities.
Special-Purpose Vehicle (SPV)
A bankruptcy-remote entity set up to insulate the issuer of ABS (the
trust) from the sponsor, or originator, of the assets. Also called
special-purpose corporation (SPC).
special tax bond
A bond secured by a special tax, such as a gasoline tax or a sales tax.
sponsor
An investment firm that organizes a unit investment trust and offers the
units for sale.
spread
(1) The difference between the price at which an issue is purchased from
an issuer and that at which it is reoffered by the underwriters to the first
holders. (2) The difference in price or yield between two securities. The
securities can be in different markets, or within the same securities market
between different credits, sectors or other relevant factors.
spread to Treasury
The difference between between the yield on a
fixed-income security and the yield on a Treasury security of comparable
maturity. For example, the spread between a 10-year Treasury yielding 4.75%
and a 10-year corporate yielding 5.25% is 50 basis points.
Standard Prepayment Model of The Bond Market Association
A model based on historical mortgage prepayment rates that is used to
estimate prepayment rates on mortgage securities. The Association's model is
based on the Constant Prepayment Rate (CPR), which annualizes the Single
Monthly Mortality (SMM), or the amount of outstanding principal that is
prepaid in a month. Projected and historical prepayment rates are often
expressed as "percentage of PSA" (Prepayment Speed Assumptions). A prepayment
rate of 100% PSA implies annualized prepayment rates of 0.2% CPR in the first
month, 0.4% CPR in the second month, 0.6% CPR in the third month and 0.2%
increases in every month thereafter until the 30th month, when the rate
reaches 6%. From the 30th month until the mortgage loan reaches maturity, 100%
PSA equals 6% CPR.
stated maturity
The last possible date on which the last payment of the longest loan may
be paid.
STRIPS
Separate Trading of Registered Interest and Principal of Securities. The
Treasury Department's program under which eligible securities are authorized
to be separated into principal and interest components, and transferred
separately. These components are maintained in book-entry accounts and
transferred in TRADES (Treasury/Reserve Automated Debt Entry System).
subordinated debt
A type of debt that places the investor in a lien position behind or
subordinated to a company's primary creditors. Securities issued as
subordinated debt will pay interest and principal but only after all interest
that is due and payable has been paid on any and all senior debt.
super PO
A principal-only security structured as a companion bond.
superfloater
A floating-rate CMO tranche whose rate is based on a formulaic
relationship to a representative interest rate index.
support 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. Also known as a "companion
tranche."
surety bond
A bond that backs the performance of another. In the ABS market, a surety
bond is an insurance policy typically provided by a rated and regulated
monoline insurance company to guarantee securities holders against default.
swap
A transaction in which an investor sells one security and simultaneously
buys another with the proceeds, usually for about the same price and
frequently for tax purposes.
syndicate
A group of underwriters formed for the purpose of participating jointly in
the initial public offering of a new issue of municipal securities. The terms
under which a "syndicate" is formed and operates are typically set forth in an
"agreement among underwriters." One or more underwriters will act as manager
of the "syndicate" and one of the managers will act as lead manager and "run
the books." A "syndicate" is also often referred to as an "account" or
"underwriting account."
TAC (targeted amortization class) tranche
A TAC tranche uses a mechanism similar to that of a sinking fund to
determine a fixed principal payment schedule based on an assumed prepayment
rate. The effect of prepayment variability that is removed from the TAC
tranche is transferred to a companion tranche.
take-down
The discount from the list price allowed to a member of an underwriting
account on any bonds purchased from the account.
Tax Anticipation Note (TAN)
TANs are issued by states or local governmental units to finance current
operations in anticipation of future tax receipts. TRANS are notes that are
issued in anticipation of both taxes and revenues.
taxable municipal bond
A municipal bond whose interest is not excluded from the gross income of
its owners for federal income tax purposes. Certain municipal bonds are
taxable because they are issued for purposes which the federal government
deems not to provide a significant benefit to the public at large.
tax-backed bond
A broad category of bonds that are secured by taxes levied by the obligor.
The taxes are not necessarily unlimited as to rate or amount, so while all
general obligation bonds are tax backed, not all tax-backed bonds are general
obligations. Examples of tax-backed bonds include moral obligations and
appropriation-backed bonds. This category is also known as tax-supported.
tax base
The total property and resources subject to taxation. (See "assessed
valuation.")
tax-exempt bond
A common term for municipal bonds. The interest on the bond is excluded
from the gross income of its owners for federal income tax purposes under
Section 103 of the Internal Revenue Code of 1954, as amended. Municipal bonds
that are also exempt from state and local as well as federal income taxes are
said to have double or triple tax exemption.
tax-exempt commercial paper
A short-term promissory note issued for periods up to 270 days, often used
in lieu of fixed-rate BANs, TANs and RANs because of the greater flexibility
offered in setting both maturities and determining rates. The purpose for
issuing TECP or TXCP can be the same as that for BANs, TANs and RANs.
tax-exempt/taxable yield equivalent formula
A formula which converts the lower yield of a tax-exempt security into the
higher yield of a taxable security. The tax-exempt yield is divided by 100%
less the investor's marginal tax rate, and the resulting quotient is expressed
as a percentage. This allows investors to compare equivalent yields on the two
securities.
T-bill rate
The weekly average auction rate of the three-month Treasury bill stated as
the bond equivalent yield.
technical default
A default under the bond indenture terms, other than nonpayment of
interest or principal. Examples of technical default are failure to maintain
required reserves, or to maintain adequate fees and charges for service.
term bonds
Bonds of an issue that have a single stated maturity date. Mandatory
redemption provisions require the issuer to call or purchase a certain amount
of the term bonds using money set aside in a sinking fund at regular intervals
before the stated maturity date.
term funding
A financing done to meet specific cash-flow needs for a specific period of
time.
toggle tranche
A Z-tranche that may start receiving principal payments before prior
tranches are retired if market forces create a "triggering" event, such as a
drop in Treasury yields to a defined level, or a prepayment experience that
differs from assumptions by a specific margin. "Sticky" jump Z-tranches
maintain their changed payment priority until they are retired. "Non sticky"
jump Z-tranches maintain their priority only temporarily, for as long as the
triggering event is present. Although jump Z-tranches are no longer issued,
some still trade in the secondary market.
total bonded debt
Total general obligation bond debt outstanding of a municipality,
regardless of the purpose.
total direct debt
The sum of the total bond debt and any unfunded debt (typically,
short-term notes) of a municipality.
total return
Investment performance measure over a stated time period which includes
coupon interest, interest on interest, and any realized and unrealized gains
or losses.
trade date
The date that a trade, or sale and purchase, is consummated, with
settlement to be made later (see "settlement date").
tranche
A class of bonds in a CMO offering which shares the same characteristics.
"Tranche" is the French word for "slice."
transcript of proceedings
Final documents relating to a municipal bond issue.
transfer agent
A party appointed by an issuer to maintain records of securities owners,
to cancel and issue certificates and to address issues arising from lost,
destroyed or stolen certificates.
transparency
The concept of disseminating price, volume and other information to the
public about transactions in the municipal market.
Treasury Inflation-Indexed Securities (TIIS)
Securities designed to protect investors and the future value of their
fixed-income investments from the adverse effects of inflation. Using the
Consumer Price Index as a guide, the value of the securities' principal is
adjusted to reflect the effects of inflation. Also known as Treasury Inflation
Protected Securities (TIPS).
trigger
The market interest rate at which the terms of a security might change.
Triggers are common on index amortization notes and range securities.
triple-A claims-paying rating
Designation for insurers offering superior security on both an absolute
and a relative basis. Such insurers have been judged to possess the highest
safety and have the capacity to meet policyholder obligations.
true interest cost
A method of calculating bids for new issues of municipal securities that
takes into consideration the time value of money (see "net interest cost").
true sale
An actual sale, as distinct from a secured borrowing, which means that
assets transferred to an SPV are not expected to be consolidated with those of
the sponsor in the event of the sponsor's bankruptcy. Rating agencies usually
require what is called a true-sale opinion from a law firm before the
securities can receive a rating higher than that of the sponsor.
true yield
The rate of return to the investor taking into account the payment of
capital gains at maturity on a bond bought at a discount.
trust agreement
Agreement between the issuer and the trustee (1) authorizing and securing
the bonds; (2) containing the issuer's covenants and obligations with respect
to the project and payment of debt service; (3) specifying the events of
default; and (4) outlining the trustee's fiduciary responsibilities and
bondholders' rights. Generally does not include an assignment to the trustee
of collateral to secure the payment of debt service.
trustee
A bank designated by the issuer as the custodian of funds and official
representative of bondholders. Trustees are appointed to ensure compliance
with the bond documents and to represent bondholders in enforcing their
contract with the issuer.
undated issue
A floating-rate note with no stated maturity date (see also "perpetual
floating-rate note").
underwrite
The purchase of a bond or note issue from an issuer to resell it to
investors.
underwriter
The securities dealer who purchases a bond or note issue from an issuer
and resells it to investors. If a syndicate or selling group is formed, the
underwriter who coordinates the financing and runs the group is called the
senior or lead manager.
underwriting spread
The difference between the offering price to the public by the underwriter
and the purchase price the underwriter pays to the issuer. The underwriter's
expenses and selling costs are usually paid from this amount.
undivided account
Syndicate account structure that is undivided as to sales and liability.
Also called "Eastern" account.
unit
A fractional, undivided interest in a unit investment trust.
unit investment trust
Investment funds created with a fixed portfolio of investments that never
changes over the life of the trust. They are created by brokerage houses, and
are liquidated as investments within the trust are paid off. They provide a
steady, periodic flow of income to investors.
unlimited tax bond
A bond secured by the pledge of taxes that are not limited as to rate or
amount.
variable-rate demand obligation (VRDO)
A bond which bears interest at a variable, or floating, rate established
at specified intervals (e.g., flexible, daily, weekly, monthly or annually).
It contains a put option permitting the bondholder to tender the bond for
purchase when a new interest rate is established. VRDOs are also referred to
as VRDNs (N=Notes), VRDBs (B=Bonds) or low floaters.
volatility
A statistical measure of the variance of price or yield over time.
Volatility is low if the price does not change very much over a short period
of time, and high if there is a greater change.
volume cap
Dollar limitation of private-activity bonds that are allowed to be issued,
by state, each year. Legislation enacted by Congress sets the volume cap.
weighted average coupon (WAC)
The weighted average interest rate of the underlying mortgage loans or
pools that serve as collateral for a security, weighted by the size of the
principal loan balances.
weighted average loan age (WALA)
The weighted average number of months since the date of the loan
origination of the mortgages in a mortgage pass-through security pool issued
by Freddie Mac, weighted by the size of the principal loan balances.
weighted average maturity (WAM)
The weighted average number of months to the final payment of each loan
backing a mortgage security, weighted by the size of the principal loan
balances. Also known as weighted average remaining maturity (WARM) and
weighted average remaining term (WART).
window
In a CMO bond, the period of time between the expected first payment of
principal and the expected last payment of principal.
yield
The annual percentage rate of return earned on a security. Yield is a
function of a security's purchase price and coupon interest rate.
yield burning
In a refunding, the practice of a dealer marking up the price of the
securities to be put in an escrow, in order to "burn the yield down" to levels
that do not violate federal arbitrage regulations. Yield burning has a
negative connotation.
yield curve
The graphical relationship between yield and maturity among bonds of
different maturities and the same credit quality. This line shows the term
structure of interest rates.
yield spread
The difference in yield between two bonds or bond indexes.
yield to call
A yield on a security calculated by assuming that interest payments will
be paid until the call date, when the security will be redeemed at the call
price.
yield to maturity
A yield on a security calculated by assuming that interest payments will
be made until the final maturity date, at which point the principal will be
repaid by the issuer. Yield to maturity is essentially the discount rate at
which the present value of future payments (investment income and return of
principal) equals the price of the security.
yield to worst
This is the lowest yield generated, given the potential stated calls prior
to maturity.
zero-coupon bond
A bond for which no periodic interest payments are made. The investor
receives one payment at maturity equal to the principal invested plus interest
earned compounded semiannually at the original interest rate to maturity.
Z-tranche
Often the last tranche in a CMO, the 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.