Glossary Of Banking Terms

Realization Principle Of Accounting
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to compensate the bondholders for getting the bond called, the issuer pays which of the following?

A REMIC tranche that is structured to absorb a disproportionate amount of the volatility caused by variations in the prepayments of the underlying collateral. Companion tranches are created to be more volatile so that other tranches in the same income summary REMIC, called PAC or TAC tranches, may have more stable cash flows. A federal statute enacted to require banks and savings and loan associations to meet the credit needs of their communities, including low- and moderate-income neighborhoods.

Treasury bonds with regard to the federal government’s full faith and credit guarantee. We can estimate a stock’s value by using the book value of the total stockholder equity section. Discounting the future dividends and future stock price appreciation. Compounding the past dividends and past stock price appreciation. Using the book value of the total assets divided by the number of shares outstanding. A bond with a ____ structure pays coupon interest periodically and repays the entire principal value at maturity. A – A put provision gives the bondholders certain rights regarding early payment of principal.

to compensate the bondholders for getting the bond called, the issuer pays which of the following?

Treasury, but are considered moral obligations of the government. Like other federal securities, the interest from these bonds are exempt from state and local taxes, but not federal tax. Bonds are long-term debt or funded debt, issued by corporations, and governments and their agencies to finance operations or special projects. Corporations pay interest and principal from earnings, whereas governments pay from taxes, or revenues from special projects. Unlike preferred stock, a corporation must pay interest on its bonds, and if the corporation goes bankrupt, bondholders are paid before stockholders.

A correlation near plus 1, called a positive correlation, indicates that changes in one set of data are closely related to changes in the other set and that the data sets change in the same direction. A correlation near minus 1, called negative correlation, indicates that changes in one set of data are closely related to changes in the other set and that the data sets change in the opposite direction. A correlation near zero indicates little or no relationship between the changes in the two sets of data.

Eurobonds Are Issued _____ Country And Denominated In ______ Currency

The review of a prospectus, official statement, statement of financial condition or amendments to these types of documents is critical. All of these can be found on to compensate the bondholders for getting the bond called, the issuer pays which of the following? public websites and should be part of any investment decision-making process. Before maturity, the bond is bought back at a premium to compensate for lost interest.

to compensate the bondholders for getting the bond called, the issuer pays which of the following?

Some bonds offer high potential for rewards and, consequently, higher risk. Diversification may be achieved by buying a number of individual securities to construct your own diversified portfolio or by investing in a fund or funds, which themselves have diversified portfolios. There are a number of online tools to help investors compare current prices of bonds. Most of these tools allow you to sort and search bond data including yields, ratings and prices. A bond is a type of debt obligation, so bondholders are creditors of the bond issuer. Therefore, bondholders will have priority rights to assets over equity holders when receiving a payout from the liquidation or restructuring of an issuer.

If your buddy asks you to cover their brunch tab, you might do an internal calculation of their ability to pay you back. Credit rating agencies use a similar approach for bond issuers, but typically conduct more rigorous and complex analysis to evaluate an issuer’s creditworthiness. They also publish the results of their analyses, typically called credit ratings, to help investors make decisions. The bond issuer pays the bondholder interest in the form of coupon payments, and the bondholder wants the highest coupon payments possible considering the risk of the bond. If interest rates rise, and other companies start issuing bonds at higher interest rates, that may make your bonds less attractive to investors. These features allow bondholders to accelerate repayment at a defined price due to certain events. The most common example is the change-of-control put, usually at 101% of par.

The interest rate paid on a bond might not keep up with inflation. Inflationary risk is a measure of price increases throughout an economy. If prices rise by 3% and the bond pays a 2% coupon, the bondholder has a net loss in real terms.

Most government agencies are also not formally rated but have an implied AAA rating. Corporate issued bonds are considered a higher risk commodity than either of the popular government backed securities. That’s because companies are more likely to default on their debts than the federal government or state and local municipalities. Consequently, the potential yield on corporate bonds is generally greater than what you would receive from a treasury note or T-bond. Interest rates on private sector securities are determined by the credit quality of the issuing organization. So, a bond issued by a company with a strong credit rating would carry a lower interest rate than one issued by a firm with a less impressive credit score. The higher yield associated with corporate bonds makes them particularly rewarding as fixed income investments, and the returns for the investor can be substantial.

_____ Are From Foreign Issuers But Denominated In The Currency Of The Country Where They Trade

Shariah is the law of Islam and it bans usury and interest payments — consequently, it also bans bonds. It is a means by which insurance companies can transfer their risk. Reinsurance is not readily available for such disasters, and, in the event of a disaster, insurance companies get their money faster from catastrophe bonds than they do from reinsurance. Another advantage of bonds over reinsurance is that the issuer can get coverage over several years. Reinvestment risk — The risk that as coupon payments are received on a bond, they must be reinvested at lower interest rates.

To change the reference bond, drag the new reference bond to the first column. You can access the Compare Bonds feature from the Search Results page and the View List – page where is the name of a selected list. The adjustment of the interest rate on a floating-rate security according to a prescribed formula.

However, there is no guarantee that interest rates will be higher when an individual bond reaches maturity. Bond ladders are not without their risk, and it takes some understanding of the market and attention to detail to reap their full benefits. While the advantages of a laddered portfolio are many, there are some definite disadvantages that investors should be aware of. Intermediate Bonds – These reach maturity in 5 to 12 years, and offer a slightly higher return on the buyer’s investment. A written contract establishing the responsibilities of a custodian who holds property. In finance, the custodian holds collateral for deposits with financial institutions, investment securities, or securities underlying repurchase agreements. A hedge transaction in which a cash market instrument is hedged by an option contract for a different underlying instrument.

  • Bond calls are less likely when interest rates are stable or moving higher.
  • A hedge transaction in which a cash market instrument is hedged by an option contract for a different underlying instrument.
  • Both were well received in market during the first half of 2011 and secured the exit financing despite past investor losses with the credits.
  • The total time period between when a check is prepared by the remitter and when the check is presented to the remitter’s bank.

The yields are also higher on these bonds than on investment grade bonds. An agency operated by the Department of Housing and Urban Development to purchase mortgages from private lenders, package them into pass-through securities and sell them to investors. The securities are backed by the U.S. government bookkeeping and are fully taxable. 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.

Thus, a company’s fixed-income securities have, in theory, lower risk than that company’s common shares. Sinking fund redemption requires the issuer to adhere to a set schedule while redeeming a portion or all of its debt. On specified dates, the company will remit a portion of the bond to bondholders. A sinking fund helps the company save money over time and avoid a large lump-sum payment at maturity. A sinking fund has bonds issued whereby some of them are callable for the company to pay off its debt early. A measure of an investor’s return on a bond calculated by dividing the annual interest on the bond by the market price. It is the actual income rate or the yield to maturity as opposed to the coupon rate .

If you can not afford to buy a large number of bonds, and simply hold them to maturity, a mutual fund is your best option. As a participant in a mutual fund you will own a stake in a wider variety of bonds than you might otherwise be able to afford, and you will have the benefit of professional oversight to protect your investments. Dividends are paid on a monthly basis, as opposed to the annual or semi-annual coupons on individual bonds, and funds can be reinvested to a set schedule.

U S Federal Agency Securities

They evaluate many factors, but the core focus is on evaluating the company’s capability to repay its debts. If its business is enjoying growing sales and profits, its credit rating is more likely to improve than if it is not growing in those areas. If a country hits an economic recession, its government credit rating is more likely to suffer. Interest rates and bond prices tend to have a see-saw style inverse relationship. When interest rate levels in the economy rise, the price of a bond tends to fall. As a result, the demand for those existing lower interest bonds falls, pushing their prices down.

to compensate the bondholders for getting the bond called, the issuer pays which of the following?

Of course, like any portfolio your bond ladder should consist of a diverse range of investments, and where they are placed on the ladder will largely depend on yield and maturity. One thing to beware of, however, is including callable bonds in a laddered portfolio. If a bond is called, it will undermine the stability of your portfolio, and undercut your ultimate earning potential.


They are offered in amounts of $1,000 or more, and pay no interest . STRIPS and zeroes are well suited to such long-term goals as college planning and retirement savings. Government obligation that is available for terms of 1 to 10 years. Interest is paid twice a year, or semiannually, and the bonds can be purchased in denominations of $1,000 or multiples thereof.

Issuer’s Home; Issuer’s Home

Because the market value of bonds fluctuates, a fund’s net asset value will change to reflect the aggregate value of the bonds in the portfolio. This section is intended to be a simplified overview of the basic tax characteristics of fixed income investments and it does not comprehensively address particular tax matters that may be relevant in your case. You should always consult with a tax professional when considering an investment in fixed income securities. Yield to maturity is the total return received by holding the bond until it matures and is typically quoted as an annual rate. This figure is common to all bonds and enables you to compare bonds with different interest rates, or coupons. Bonds may have a redemption, or call, provision that allows or requires the issuer to redeem the bonds at a specified price and date before maturity. For example, bonds may be called when interest rates have dropped significantly from the time the bond was issued.

Higher Conversion Price Than A Rights Issue Strike Price

With this method, the issuing company returns specific amounts each year until the debenture is repaid on the date of maturity. Bonds are typically considered safer investments than stocks because bondholders have a higher claim on the issuing company’s assets in the event of bankruptcy. In other words, if the company must sell or liquidate its assets, any normal balance proceeds will go to bondholders before common stockholders. Which of the following is an important advantage to the issuer of a bond with a call provision? Indexed bonds that adjust the principal value while keeping the coupon rate fixed are best described as capital-indexed bonds. The highest ratings are AAA (S&P and Fitch Ratings) and Aaa (Moody’s).

Loss of Potential Capital Gains – If interest rates drop, your holdings will be worth more on the open market. But in a bond ladder you are expected to hold on to your securities until they mature. While treasury notes and bonds are initially sold at auction, once they are purchased they can be resold on the open market. This adds greatly to their liquidity, making them particularly attractive investment opportunities. Bonds may be issued by federal and local governments, as well as larger corporations.

It is notable that early repurchase happens more often when the interest rate in the market is on decline and when it is a callable bond. Some structured bonds can have a redemption amount that is different from the face amount and can be linked to performance of particular assets such as a stock or commodity index, foreign exchange rate or a fund. This can result in an investor receiving less or more than his original investment at maturity. A number of governments also issue sovereign bonds that are linked to inflation, known as inflation-linked bonds or, in the U.S., Treasury Inflation-Protected Securities .

This call premium is to compensate the investor for losing his investment earlier than anticipated. A callable bond is a debt instrument in which the issuer reserves the right to return the investor’s principal and stop interest payments before the bond’smaturity date. Corporations may issue bonds to fund expansion or to pay off other loans. If they expect market interest rates to fall, they may issue the bond as callable, allowing them to make an early redemption and secure other financings at a lowered rate. The bond’s offering will specify the terms of when the company may recall the note. Before you begin buying any bonds, you need to consider your overall objective. If it is to achieve long term capital gains, then your portfolio should be weighted towards intermediate and long term maturities.

A large municipal bond issue with all the bonds maturing on a single date. A bond issued by the Federal Government designed specifically for individual investors. The bonds come in denominations of ranging from $50 to $10,000. The interest earned on the bonds is tax exempt from both state and local income taxes. The return on a bond considering purchase price and reinvestment of the coupon payments at a stated rate of interest.