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A |
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- accreted value
- 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.
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- 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 Buyer™
- 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.
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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
- 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.
- convertible
- Convertible bonds 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
- 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.
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- 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.
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- 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.
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- 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.
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- 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.
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- 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.
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- 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:
ACA = American Capital Access;
AMBAC = AMBAC Indemnity Corp.;
CapMAC = Capital Markets Assurance Corp.;
CL = Connie Lee;
FGIC = Financial Guaranty Insurance Co.;
FSA = Financial Security Assurance Inc.;
MBIA = MBIA Insurance Corp.
- interest
- 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.
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- 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.
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- 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.
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- 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.
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- 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
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- 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.
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- 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
- 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
- the payment of debt service on more
than 10% of the proceeds of the issue will be
- secured by property used in a private
trade or business or payments in respect of such
property, or
- 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.
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- 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.
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- 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."
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- 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.
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- 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.
-
- 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.
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- 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.
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- 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.
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- 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.
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- 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.
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