Capital markets

Here you can find a list of definitions for terms associated with capital markets. These terms are listed alphabetically, alternatively you can use the find facility within your internet browser (by pressing control + F simultaneously) to search for terms within this page.

ABS
See asset-backed securities.

Accreted Value
The value of a zero-coupon bond at a given point time. It incorporates the additional value generated by accrued and reinvested interest.

Accretion
The continual increase in value of a zero-coupon bond between its purchase and its redemption or maturity dates.

Accretion Bond (USA)
The last payment of a CMO (collateralized mortgage obligation bond). It has higher face value than the previous tranches due to the periodically accrued interest that was added to the principal through the lifetime of the CMO. Also known as an accrual bond or Z bond.

Accrual Bond (USA)
See accretion bond.

Accrued Interest (AI)
The interest accumulated on a debt security since its issue date but not yet paid out. This is accounted for in the actual gross purchase price of the debt security.

Advance Refunding (USA)
The practice of issuing new bonds in order to acquire funds for the redemption of an existing issue. Generally, while awaiting the first call date of the existing issue that is to be redeemed, the proceeds of the new issue are invested in short-term government securities and placed in an escrow account. Called pre-funding in the UK.

Agency Transaction
Any type of transaction whereby bonds are placed by an agent on a commission basis, rather than through a direct sale which is known as a principal transaction.

Agreement Among Underwriters
An agreement between members of an underwriting syndicate defining which parties bear the risks and make the payments involved in a negotiated sale of an issue, in addition to the terms and conditions.

All or None
An agreement where a transaction is cancelled if the whole transaction cannot be completed as intended.

Allotment
In a syndicated issue, the process whereby the lead manager allocates bonds to syndicate members; it also refers to the number of bonds allotted.

Alpha
A coefficient of excess return which calculates an investment’s risk-adjusted performance, taking into account its level of market risk. A large alpha (excess return) indicates that an investment performed well in relation to its normal relationship with market movements which is measured by beta.

Amortisation
The gradual elimination of debt over a certain period via periodic payments incorporating principal and interest.

Analyst
An employee of a broker house (sell side), private bank or investment manager (buy side) whose remit is to analyse specific markets, industry sectors or securities in order to provide trading or investment recommendations for internal (buy side) and external use (sell side).

Arbitrage
The process by which profits are generated from the buying of an asset in one market and simultaneously selling in another market of the same asset or its economically-equivalent derivative. Arbitrage occurs when there is a price differential for the same asset in two different markets.

Ask Price
The offered (selling) price of traded securities or other instruments i.e. the price which a buyer would be expected to pay.

Asset-Backed Securities (ABS)
Securities that are backed or secured with income producing assets such as receivables, mortgages or company cash flow. They are typically structured in tranches of differing credit qualities.

Asset-Equity Ratio
Total assets divided by total shareholder equity whereby total shareholder equity comprises share capital and additional paid-in capital plus retained earnings.

Auction Market
A financial market where, unlike an over the counter market, prices are based on simultaneous price competition rather than negotiation between buyers and sellers.

Auction Rate Note
A variable rate note whose margin is reset through a Dutch auction.

Automated Order Entry System
An automated system facilitating the execution of orders by forwarding them directly to the relevant specialist.

Back-to-Back Transaction
A chain of securities transactions among three or more counterparties involving the purchase and sale of a single security for settlement on a single date. The most simple back-to-back trade is a pair of transactions in which one party agrees to purchase securities from a second party and then agrees to sell them to a third party. One can also have back-to-back loans, which were the common way of switching obligations before the invention of currency swaps.

Bear
An investor who expects security prices to decrease and, on that basis, sells borrowed securities in order to buy them back later at lower price levels.

Bear Market
A market that is characterised by falling security prices, sometimes defined as starting once prices have fallen by 20%.

Bearer Bond or Bearer Security
A bond/security that is not registered in the name of a specific owner. The owner of the bond is the person who holds it. Thus, title to the bearer bond is transferred through delivery. Principal and interest were historically paid, upon presentation of coupons, to a paying agent though nowadays bearer bonds usually operate by book entry, whereby investors buy and sell their interests in a global note representing the entire issue and held within the clearing system.

Bells and Whistles
Slang term applied to any types of financial instruments that have features other than the standard or plain-vanilla features.

Benchmark Bonds
Bonds which serve as major reference points for market prices. As such, they represent, at the same time, a standard for the evaluation of the performance of other bonds.

Best Ask
Dealer’s instruction to sell securities or assets at the highest price possible.

Best Bid
Dealer’s instruction to buy securities or assets at the lowest price possible.

Beta
A measurement of the volatility of an asset compared to a given index or overall market.

Bid and Ask
Quote (quotation) at a given point in time, which simultaneously includes the highest bid price (bid) for a security and the lowest offer price (ask). The spread between the highest bid and lowest offer is referred to as “the touch”.

Bid Price
The market-maker’s buying price of securities or assets.

Block Trade
A trade involving a large number of securities. Use of block trades is usually confined to institutional investors.

Blotter
A (foreign exchange) dealer’s daily record listing all that day’s transactions chronologically.

Bond
A long-term debt security issued by a company, a financial institution, a local, regional national government or its affiliated agencies, a supranational institution etc. A bond represents an undertaking to repay the holder the fixed amount of the principal on the maturity date and a specified rate of interest payable either as a coupon on a regular basis during the bond’s life (coupon) or as an accumulated and reinvested amount at maturity (zero-coupon bonds). The rate of interest may be fixed or floating – most floating interest bonds are issued by banks whilst companies generally issue in fixed rate. See interest rate swap.

Bond House
A bank or securities company specialising in underwriting, selling and trading of bonds.

Bond Insurance
A legal agreement in which an insurance company is committed to paying the fixed amount of the principal on maturity date and a specified rate of interest if the bond issuer fails to carry out the scheduled payments. This is commonly referred to as a ‘wrap’.

Bond Market
A market where all bond types can be bought and sold.

Bonds with Option Features
In the USA market, bonds where the lenders are allowed to repay the borrower at par value on specific dates prior to maturity (call options). More generally this category includes all bonds which have one or more of a very wide variety of types of options embedded or attached to the issue.

Bonus Issue
When a company issues additional shares to its existing shareholders for nil consideration. Known in the UK as a scrip issue.

Book Runner
In a syndicated security issue, the lead manager who is responsible for the allocation of a new issue. This role is often performed jointly by two to four banks on larger issues.

Book Value
The book value of the equity, calculated from the company’s published financial accounts. The book value of the equity is calculated using fixed, current and intangible assets then subtracting all current and long-term liabilities in addition to the value of any preference shares.

BTP
Bond auctioned in fungible tranches and issued by the Italian government with a maturity of 3-30 years.

Bull
An investor expecting security prices to increase and therefore buying securities in order to sell them later at higher price levels.

Bull/Bullish Market
A market that is characterised by increasing security prices.

Bulldog Bond
A bond that is denominated in sterling (GBP), issued by a foreign borrower and traded on the UK domestic markets. This is now rare, as most issuers and investors now prefer the eurosterling market.

Bullet (Bullet Maturity)
A security (or loan) with a fixed maturity on which no amortisation or prepayment may take place.

Bullet Bond
A bond that cannot be paid off before its maturity date. Bullet bonds generally offer a lower yield than callable bonds as there is no risk of the bonds being repaid early if there is a fall in market interest rates.

Bunds (Bundesanleihen)
Treasury bonds of 2–30 years issued by the German government. 2–5 year maturities are also called Schatzwechsel.

Call
The act of paying/redeeming a security’s principal before its actual maturity date in line with the rules laid out in the bond documentation.

Callable Bond (or Redeemable Bond)
A bond that can be redeemed by its issuer before its actual maturity date.

Call Date(s)
The date(s) on which a security can be redeemed prior to its actual maturity date.

Call Option
A contractual option to purchase securities at a set price (to redeem a security’s principal) before or on a set date. Also called redemption option.

Call Premium
See redemption premium.

Call Price
The price at which a security can be called/redeemed before its specified maturity date. This price is either at a premium or equals the security’s face value.

Call Protection
The minimum period following issue of a callable security during which the issuer cannot call the security.

Call Provision
A provision in the contractual issue terms of a security, according to which the issuer has the option to redeem or buy back the security before its maturity date.

Call Risk
The risk that a callable debt security will be redeemed as a result of falling interest rates.

Canadas
Standard bonds issued by the Government of Canada.

Cap
The maximum rate of interest applicable to a floating rate security.

Capital Markets
The generic term for markets used to raise longer term funds from various investors. As opposed to money markets where short-term securities are traded, capital markets are more specifically understood as the markets for medium- to long-term financial products such as shares and bonds, as well as derivatives thereof.

Capital Share
See zero-dividend preference share.

Capitalisation
The total value of the existing debt and equity securities (such as bonds, debentures, preference and ordinary shares) issued by a company, in addition to its earned and capital surplus.

Certificates of Participation (COPs)
Securities entitling investors to a share of and participation in a pool of conventional mortgages or municipal lease payments.

Chinese Wall
The practice adhered to within a stockbroker’s business/investment and universal banks that separates the different departments in order to restrict access to insider information which could potentially affect the price of stocks if it became public.

Clean Price
The price of a bond excluding any interest accumulated.

Closing Date
The date on which a new security is issued, i.e. payment is made and securities are delivered. Closing may take up to 30 days from the initial offering date.

CMO
See collateralised mortgage obligation.

Collars (Interest Rate Collars)
The maximum and minimum rates of interest applicable to a floating-rate security.

Collateralised Bond
A bond that is secured or collateralised by assets of the issuing company such as real estate or factory equipment.

Collateralised Mortgage Obligation (CMO)
A mortgage-backed security which is divided into a number of bonds. These separate bonds are also called tranches, they can have different prices, levels of security, maturity periods, yields, etc. and are used to repay the principal of the CMO at different times and/or with different priority.

Commercial Paper
A relatively low-risk, short-term and unsecured promissory note traded on money markets issued by companies or other entities to finance their short-term expenses. In the USA, commercial paper matures within 270 days maximum, while in Europe, it may have a maturity period of up to 365 days; although maturity is commonly 30 days in the USA and 90 days in Europe.

Commission/Commission Fee
Fee paid by counterparties for intermediary agents’ dealing, issuing and brokerage services.

Common Stock/Shares
USA term for ordinary shares.

Competitive Bidding
The process of receiving bids from investors or underwriting institutions for the issue of securities. In recent years, competitive bidding has also taken place amongst banks bidding for portfolios of securities held by investors.

Compliance
Systems and processes used to ensure that market operators comply with legal and supervisory requirements in addition to meeting acceptable standards of behaviour and performance.

Compound Accreted Value
The value of a zero-coupon bond at any given point of time, including both principal and accrued interest. Compound accreted value continuously increases as a result of interest accrued. See accreted value.

Concession
The discount given by underwriters, on behalf of the company issuing new securities, to non-syndicate dealers.

Connected Person
A person who is either a trust fund beneficiary or a member in a partnership/close corporation. This term also refers to a close relative or spouse of that person, or even an institution which is either controlled by the aforementioned people or at least 10% owned in terms of capital by the aforementioned.

Constant Maturity Treasury (CMT) (USA)
An index published by the Federal Reserve listing the yields of US Treasury securities, adjusted to a constant maturity.

Convertible Bond
A corporate bond that gives the holder the right to exchange it for shares of the same issuer. The conversion may take place before the bond’s maturity date or on the maturity date instead of repayment of the principal. A convertible bond offers investors the right to rank above shareholders in case of liquidation of the company’s assets. Moreover, it gives investors the option to receive an increased yield from exposure to the company’s equity in exchange for which the issuer can sell them the equity at a premium to the current market price. See exchangeable bond.

Convertible Unsecured Loan Stock (CULS)
Loan stock issued to lenders, backed only by the borrower’s integrity, which can be converted into ordinary shares at a specific date upon the request of the borrower or lender.

Convexity
A measure of interest rate risk used in conjunction with duration. Convexity allows (potential) investors to correct the initial estimate derived from the duration measure, by taking account of the non-linear character of the relationship between interest rate and the price of debt securities.

Corporate Bonds
Bonds that are issued by a company or other non-government issuers. They represent a form of corporate debt finance and raise new capital as an alternative to equity finance or bank lending.

Corporate Finance Markets
Markets involving buying and selling activities between public or private companies (e.g. loans, bonds, shares).

Coupon
The periodic rate of interest paid on bonds and money market securities, stated as a percentage of the principal and usually paid out once or twice a year, depending on the terms of the issue.

Covenants
Undertakings given by an issuer of securities in a prospectus which commit the issuer to run their business within certain stated parameters. If breached, investors may be able to demand repayment or compensation.

Cover Bid
The runner-up bid in a competitive sale of a security or a portfolio of securities.

Credit Enhancement
The increasing of the creditworthiness of securities. There are three main methods of credit enhancement:

1. Junior/Senior tranches: The entire debt is divided into so-called junior and senior tranches with the former bearing all the first losses. Thus, the credit standing of the remaining senior tranches is raised considerably.
2. Insurance: A third party, usually an insurance company, undertakes to insure the credit risk of the respective securities (called ‘wrapping’).
3. Collateralisation: Securities may be backed by other financial assets, usually equity, of higher values. The difference serves as collateral for the repayment of the debt (overcollateralisation). The issuing company may also put collateral on the differential between the respective security’s original and market values (margin).

Credit Markets
The markets for all forms of securities and derivatives.

Credit Rating
A standardised assessment, expressed in alphanumeric characters, of the creditworthiness of an entity raising debt capital – be it a company, an investment vehicle (mutual fund), a country (sovereign) and its affiliated public agencies or regional/local authorities or a supranational institution – provided by credit rating agencies to investors and analysts. Ratings also serve as a measure of the risks related to specific financial investments.

Credit Rating Agencies (CRA)/Rating Agencies
Independent institutions that assess the creditworthiness or the credit risk of issuers and provide credit ratings which are publicly available and used by investors as well as analysts as a guide for investment decisions.

Credit Risk
The risk of a debtor being unable to repay interest and/or principal in a timely fashion.

Credit Spread

1. The difference in yield between a given security and a comparable benchmark government security. It gives an indication of the issuer’s credit quality.
2. The difference in value of two securities with comparable maturity and yield but different credit qualities.

Cum Coupon
Debt securities sold with the next or due coupon attached. This is reflected in the price of the security.

Cum Dividend
Securities sold with the next or due dividends attached. This is reflected in the price of the security.

Current Income
The running yield from capital market investments be it in the form of interest received from bonds and other fixed rate instruments or in the form of dividends from shares.

Current Refunding
A structure set up as part of a refunding programme under which the old bonds are either redeemed or mature a maximum of 90 days after the new bonds have been issued.

Current Yield (Running Yield)
The annual return in the form of dividend or interest payment on an investment. Also known as flat yield, income yield.

Day Count

1. The number of days within a specific interest payment period in which interest payments are due.
2. The convention governing the way such interest payments are to be calculated (e.g. 360/365 days).

Day Order
An instruction to buy or sell in a trading session. Non-executed sessions expire at the end of the session.

Dealer
An individual, securities firm or commercial bank department that acts as a principal in the underwriting and dealing of securities. The dealer may also act as a broker in certain instances.

Dealing
The process of buying and/or selling securities.

Debenture
See secured debt.

Debt Capital
Together with equity capital, a source of funding for a company’s business activities. Debt capital may appear as bank loans as well as capital market instruments such as bonds, notes or commercial paper. Providers of debt capital do not have any ownership rights in companies, as opposed to equity holders, but their rights are mainly restricted to the repayment of the principal and regular interest payments.

Debt Issue
The issuing of debt securities such as bonds, commercial paper or treasury bills.

Debt Limit
The provision in a covenant that limits the amount of debt a borrower can contract. This can be in relation to either a single issue or the borrower’s total outstanding debt.

Debt Service Coverage Ratio
Ratio of debt service obligations to net revenue.

Debt Service Requirements
Debt required to be paid to meet principal and interest payments as they fall due, generally in relation to a given period of time.

Debt Service Reserve Fund or Account (DSRF or DSRA)
Under a debt agreement, the fund into which money is paid as a reserve against a possible interruption in the payment of principal and interest.

Declining Debt Service
See level principal.

Deep Discount Bond
A bond that is issued at a discount to its par value because it pays a below-market interest rate or no interest (zero-coupon bonds).

Deep Discount Rights Issue
The issue of new securities at a substantial discount to their market price. This is done in order to minimise or eliminate underwriting fees and retain the value for the benefit of all shareholders.

Deep Discount Securities
Securities that are issued at a considerable discount to their par value.

Defaulted Bonds
Bonds where the issuer has failed to effect payment of the principal and/or interest to the holders of the bond and where the investors have subsequently given notice that a default has occurred.

Defeasance

1. A portfolio structure that is risk-free or deemed risk free, which has been specifically put in place to meet (‘defease’) a future liability.
2. The termination of a debt agreement by final payment, or provision for payment of all debt service and premiums, and other costs specified under the agreement.
3. An issue contract that does not leave any possibility of the issuer obtaining exemption from the fulfilment of all security obligations.
4. A provision in a debt security agreement which allows for the invalidation of the contract if a specific act is carried out or failed to be carried out.

Denomination

1. The face value of a security that is required to be paid on its maturity date.
2. The currency in which a security is denominated.

Dilution
The negative effect an increase in the number of shares issued has on the value of the existing shares of a company when the increase in shares is not matched by a corresponding rise in the earnings and/or assets of the company.

Discount
The difference between a financial instrument’s market price and its face value or redemption price when its market price is the lower of the two.

Discount Instruments
Securities that are sold at a discount to face value.

Discount Note
A short-term note (with a maximum maturity of 360 days) issued at a discount to its par value. It pays out no interest but investors receive par value upon maturity.

Discount Rate
In the USA, the interest rate that member banks pay the Federal Reserve when the banks use securities as collateral. The discount rate acts as a benchmark for interest rates issued. Other central banks also have similar discount rates.

Discretionary Broker
A broker who not only deals in capital market instruments on behalf of his clients but, in contrast to advisory and execution-only brokers, can also decide which securities to buy or to sell without any specific approval being required from his clients.

Disintermediated Debt
Debt (such as commercial paper, bonds and securities) directly issued by companies, so avoiding financial intermediation.

Distribution
The distribution of dividends, parts of company profits or retained earnings, to shareholders.

Distribution of Principal
When the principal of a security is returned to the holders of that security. Distribution of principal occurs when the security either reaches maturity or is redeemed before its maturity date.

Dividend
Part of a company’s profit after tax that is paid to its shareholders. In the UK, most companies pay dividends twice a year: the interim (in the middle) and the final (at the end) of the company’s accounting year. In other European countries, dividends are often paid out annually. In the USA, dividends are usually distributed on a quarterly basis.

Dividend Cover Ratio
The ratio of a company’s profits to the portion that is distributed as dividends to its shareholders.

Dividend Policy
A company’s strategic decision on how much of its profits should be paid out as dividends to its shareholders and whether (and how) that dividend should be changed in line with company profitability.

Dividend Yield
Ratio of a company’s annual dividend per share to its market price expressed as a percentage.

Downgrade Risk
Risk of the credit rating of a security being downgraded due to a deterioration in the issuer’s or that of a related party’s creditworthiness.

Drop-lock Securities
Securities that are issued at floating interest rates and changed into fixed rate bonds when the rate to which they are indexed falls below a specified level.

Dual Currency Bond
A bond that is denominated in a different currency to the one in which interest is paid. Foreign exchange rates on the bond are predetermined at the time of issue.

Dual Listing
A security being listed on at least two stock exchanges.

Dual Tranche (Two Tranche)
An issue of two similar securities by the same company at the same time, usually differentiated by currency, maturity, etc.

Due Diligence
The process prior to investment or lending where all information relating to that potential investment or borrower is verified.

Duration
The average or weighted lifespan of a debt security in relation to fluctuation in market yields. The longer its duration, the more a security’s price is likely to be affected by changes in interest rates. Duration is also used as a measure to compare debt securities that have different maturities and yields.

Earnings Per Share
After-tax profit divided by the number of outstanding shares.

Embedded Option

1. A provision in a debt security which allows the issuer or the holder to exercise an option – this is generally a call option (issuer) or a put option (holder). The option is generally linked to specific dates and may be subject to other conditions.
2. A provision in a debt security which links payments on the security to pre-specified changes in an underlying security, currency, index or commodity.

Emerging Markets
The markets or securities in developing countries with high economic growth rates which attract foreign capital for portfolio investments. Generically, these are high risk/return markets.

End Placement
The sale of a new issue to institutions, as opposed to intermediaries or traders.

Equity
The risk-bearing capital of a company, mostly in the form of shares, on which dividends may be paid. The counterpart of equity is debt. While equity gives its providers ownership and voting rights in the company, debt instruments do not.

Equity Finance
The raising of new capital by a company through the issue of new shares.

Equity-linked Market
A market for securities that have their returns linked to the market performance of certain shares, a stock index or a basket of several shares. This includes convertibles, exchangeables, bonds with warrants and others linked to specific equity prices or indices.

Eurobonds
International long-term debt securities with maturities over one year denominated in any Eurocurrency. International distribution is a key feature and they are usually in bearer form but the bonds can be issued in any currency or any interest basis.

Eurocommercial Paper (ECP)
A promissory note that is issued and traded in the Euromarkets.

Eurocurrency
Generic term for deposits held or financial instruments which may be issued and held outside the country/countries in which currency they are denominated, though this does not usually exclude purchases by domestic investors.

Euromarkets
The Eurobond, ECP and Euroloan markets.

Exchangeables/Exchangeable Bonds
Securities that entitle their holders to exchange their securities for shares of companies other than the issuing company.

Ex-coupon
Debt securities that are sold without the right to receive the next or due coupon.

Ex-dividend (XD)
A security which is sold without the right to receive the next or due dividend, and which is priced accordingly. Opposite of cum-dividend.

Ex-rights
Shares in a company that is currently making a rights offer to shareholders but which are being sold without the right attached. See rights issue.

Expected Maturity Date
The date on which a security’s principal is expected to be repaid.

Extension Risk
The risk that a rise in interest rates will lengthen the repayment period or delay the repayment of principal of loans or mortgages, meaning that investors will have to commit their principal for longer than expected and will consequently miss out on earning a potentially higher interest rate on their capital.

Face Amount
See face value.

Face Value (Par Value/Principal Value/Nominal Value)
The nominal amount indicated on the security which is the basis for interest or dividend payments.

Fair Value (or Fair Market Value)
The price at which an asset can be bought or sold in transparent/perfect markets, i.e. where contracting parties are informed and act in their best interest. It represents the theoretical equilibrium price of securities or derivatives on open markets, i.e. both buyers and sellers do not perceive them as overpriced or under-priced.

Fallen Angels
Companies that have encountered a sudden and dramatic drop in their credit rating due to excessive debt levels.

Fannie Mae (FNMA) (USA)
A private company operating under a congressional charter which, as its remit, has to increase availability and affordability of homeownership in the USA. With Freddie Mac and Ginnie Mae, it is the major issuer of mortgage-backed securities in the USA market.

Final Maturity Date
The date on which a security’s principal is required to be repaid to investors. See maturity date.

Firm Bid/Firm Offer
Unconditional order to purchase or sell securities during a specific period at a specified price.

Fitch Ratings
A rating agency which provides credit ratings for companies and banks indicating their creditworthiness and their risk of default. Ratings can refer to short-term or long-term obligations and are based on historic analyses of business as well as on future projections for creditworthiness. See Moody’s, Standard and Poor’s.

Fixed Income Securities
Fixed rate debt securities (bonds) where the debtor is obliged to pay a fixed rate of interest during the life of the security and to repay the principal on the stated maturity date.

Fixed Price Re-offer
A method of distribution of a new issue under which investors will be offered the securities at a fixed price by the underwriters. This method provides the underwriter with a notionally fixed underwriting/management fee and removes much of the underwriting risk via the associated “bookbuilding” process.

Flat Yield
See current yield.

Floating Rate Bond
A bond where the debtor is obliged to pay a floating rate of interest periodically in accordance with an index or benchmark rate.

Floating Rate Note (FRN)
A money market security paying a floating interest rate, which may incorporate a minimum or floor. Floating rate notes trade close to their face value since their coupons are regularly readjusted to current market rates.

Floor

1. The term may refer to the lowest price activating a stop order; or
2. to a physical area where securities trading transactions take place. See trading floor.

Flotation
The admission of new company shares to stock market trading. A first issue of shares by a company is commonly referred to as an initial public offering (IPO).

Foreign Bond
A bond issued by non-domestic companies and traded in the national capital markets of a country e.g. ‘Samurai’ bonds in Japan, ‘Bulldog’ bonds in the UK, ‘Yankee’ bonds in the USA.

Freddie Mac (FHLMC) (USA)
A private company operating under a congressional charter which, as its remit, has to increase availability and affordability of homeownership in the USA. With Fannie Mae and Ginnie Mae, it is the major issuer of mortgage-backed securities in the USA market.

Free and Open Market
A market in which there are no restrictions with regard to supply and demand and prices are only determined by those two elements.

Fully Registered
A security where principal and interest payments are recorded as belonging solely to the registered owner.

Fundamental Research
See fundamentals.

Fundamentals
A company’s financial situation, current and forecast, business model and the business environment and sector in which it operates. The in-depth analysis of all these elements with the view of assessing the investment potential of that company.

Funded Debt
Long-term debt securities (with a minimum maturity of one year) such as interest-bearing bonds and debentures issued by a company, in addition to long-term bank loans.

Funding
The process, or proceeds of, a company financing its activities from banks (intermediated debt) or via issuance in the capital markets. See disintermediated debt.

Fungible Issue
When a new tranche is issued on identical terms (save for the issue price and first coupon) with an earlier issue. The tranches are traded separately until all of their remaining forms are identical, at which point the tranches are funged i.e. traded interchangeably.

General Obligation Bonds (USA)
A municipal security.

Gilts/Gilt-edged Securities
Fixed-interest debt securities issued or secured by the British government. Gilts are always denominated in sterling (GBP) though the Government occasionally also issues instruments in other currencies in the Eurobond market or elsewhere.

Ginnie Mae (GNMA) (USA)
A government corporation which, as its remit, has to increase availability and affordability of homeownership in the USA. With Fannie Mae and Freddie Mac, it is a major issuer of mortgage-backed securities in the USA market. Its mortgage-backed securities generally enjoy government guarantees.

Global Bonds
Bonds that are issued and cleared fungibly in both the USA and Eurobond (international) markets. This feature does not necessarily mean they are distributed globally.

Global Stock Offering
The simultaneous issue of securities of mostly multinational companies in various national stock markets. A global lead manager is responsible for organising the issue and a syndicate of agents carrying out the placement of the respective securities in the different national stock exchanges.

Good-faith Funds
In a competitive bid between underwriters for new securities, the security deposit demanded from underwiters. The deposit ranges between one to five per cent of the face value of the new securities.

Good 'Til Cancelled (GTC) Order
An order to buy or sell securities that remains valid until its execution or cancellation. Also known as open order.

Government Securities
Negotiable debt securities issued by governments and traded on stock exchanges. They can take the form of treasury bonds, treasury bills or treasury notes.

Grantor Trust (USA)
A special purpose vehicle which takes over debt from a parent company by the issuance of fixed rate securities.

Greenshoe Option
An option in an issue that gives the underwriter the right to buy additional securities from an issuer and resell these in a new issue of securities. This option is often exercised when there is oversubscription.

Grey Market
An unofficial market (most of which is now more commonly known as the primary market) where dealers trade newly issued securities before they are actually issued. The term ‘Grey Market’ is now usually restricted to indicating a market in securities which have either not even had their detailed terms announced or which are suspended or otherwise untradable. See payment date, issue date.

Growth Stock (USA)
Ordinary shares which have increased or are expected to increase earnings significantly faster than the market average.

High-yield Bond (or Junk Bond)
A bond with a sub-investment (speculative) grade credit rating at the time of issue. This type of bond is used particularly to finance leveraged buy-outs and to pay higher yields to investors than bonds with higher ratings do. The term, therefore, increasingly refers to financial instruments with speculative credit ratings.

High-yield Securities
Sub-investment grade or speculative securities that offer high yields.

I Bond
An inflation-adjusted savings bond security issued by the US Government, on which the rate of interest is partially adjusted for inflation and partially fixed rate.

Income Bond
A bond where the repayment of principal is guaranteed but where interest will only be paid to the bondholder once it has been earned by the issuer. These types of bonds are generally issued by companies that are in the process of restructuring their activities.

Income Yield
See current yield (running yield).

Indenture
A legal document stipulating the terms and conditions of a security issue, including the various rights of the holders of the security and the obligations of the issuing entity. See prospectus.

Index-linked Bond
A bond of which the principal and coupon payments are linked to and thus calculated on the basis of a stock market index such as the S&P 500 or the Dow Jones. The term may, however, also be used for bonds that are indexed to the retail price index or other inflation measures in order to protect the real value of principal as well as the interest payments against inflation.

Industrial Revenue (or Development) Bonds
Municipal bonds used to finance assets which are leased to businesses.

Inflation-indexed Securities
Securities of which the principal value to be repaid goes up in relation to an inflation index.

Initial Offering Price
The price of at which a security is marketed during a specific period i.e. the initial offering period.

Initial Public Offering (IPO)
A company’s first sale of shares to the public via the stock market. IPOs are usually launched by small or recently founded companies. From the investors’ perspective, these newly issued shares bear high risk as well as a high potential for gains.

Insider Dealing
The trading of securities or derivatives by people with information from inside the company that is not available to the public. Dealing on the basis of such information could affect the prices of the respective securities or derivatives traded and is, therefore, illegal in most markets.

Insured Bond (USA)
A municipal bond insured against default with the credit of a commercial insurance company as well as the issuer. See wrap.

Interbank Market
Wholesale market for bank deposits and foreign exchange.

Interest-bearing Instruments
Securities on which a specific rate of interest is required to be paid periodically or at maturity.

International Bond
A bond issued outside the home country of the borrowing company. International bonds may appear as Eurobonds or foreign bonds.

Inverse Floater
A security (e.g. a tranche of a CMO – collateralised mortgage obligation) that pays an interest rate which is inversely related to a floating reference rate i.e. the interest rate rises as the reference rate falls, and vice versa.

Inverted/Negative Yield Curve
A situation where securities with short-term maturities attract higher interest rates than those with long-term maturities. So called because the term premium is negative.

Investment Banks
Bank institutions acting as intermediaries between companies and individual or institutional investors. Their main activities include underwriting and marketing of new issues of securities (equities and debt), syndicating loans, trading in securities and offering investment advice, particularly on mergers and acquisitions. In the UK, an investment bank is called a merchant bank.

Investment Grade Rating
An evaluation, provided by credit rating agencies such as Standard and Poor’s, Moody’s and Fitch Ratings, of the credit backing of bonds and other debt instruments. An investment grade rating includes all opinions which denote a greater level of investment safety than speculative grade investments. The higher the investment grade of debt securities, the higher the likelihood of their timely repayment.

Investor Relations
The department within a publicly quoted company which, as its remit, has to inform and educate the company’s current and prospective shareholders/holders of company’s debt securities and/or their agents on the company’s current and forecasted performance as well as any future plans or events that may affect that performance.

IO (Interest-Only) Security
A security or tranche of a CMO which is used solely for the purpose of paying interest, as opposed to principal, to the investor. The value of such a security increases as market interest rates rise. See principal only (PO) security.

IPMA (International Primary Market Association)
UK-based international trade association for the world’s major commercial and investment banks whose objective is to encourage smooth operations within the international primary markets.

Issue
The creation of new securities by a private or public entity in exchange for cash or assets. An issue can involve one or more types of debt and/or equity security.

Issue Date
The date from which the interest on a security is calculated. The issue date is, therefore, the effective date of a securities issue even though they may be physically delivered at a later time. Issue date is the same as payment date unless a new tranche is launched that is fungible into an existing issue. Primary market securities are settled on the issue/payment date; subsequent trading is done in the secondary market.

Issue Price
The price at which new securities are issued. The issue price may be at par or face value, or at a discount from par (below par), or at a premium over par (above par).

Issued Shares
See outstanding shares.

Issuer
A company or other entity that borrows or raises capital via the financial markets through the issuance of securities.

JGB (Japanese Government Bond)
A bond issued by the Japanese government.

Joint Lead
One of two or more underwriters/managers that is jointly responsible for a new issue of securities.

Junior Debt
See subordinated debt.

Junior Security
A corporate security that ranks below another security in the event of default. See subordinated debt.

Junk Bond
See high-yield bond.

Lead Manager
A bank or a broker organising and co-ordinating a new issue of securities. Its main activities comprise determination of the terms of the issue, selection of managers (senior underwriters) or other junior underwriters and administration of the underlying documents.

Level Debt Service
An amortising debt repayment schedule that involves periodic repayment of both principal and interest whereby the total annual payments remain constant until maturity. See bullet maturity.

Level Principal
An amortising debt repayment schedule that involves periodic repayment of both principal and interest whereby the same amount of principal matures every year. Consequently, the interest to be paid declines every year, hence it is sometimes called declining debt service.

Leveraged Buy-Out (LBO)
A method of making a publicly held company private. LBOs are financed externally, predominantly with debt capital such as bank loans or bond issues.

Limit Order (Limited Order, Limited Price Order)
An instruction by an investor to their brokers to buy or sell securities at specified prices away from current market prices. Limit orders will only be executed if market moves permit.

Liquidation Value
Value of securities in the event of the issuer being put into liquidation.

Liquidity
The ease or difficulty with which financial assets can be bought or sold in capital markets. Liquidity depends on several factors such as the number of actual buyers and sellers in the markets, the number of securities available for trading and the extent to which available securities are turned over by investors.

Listed Company
A company that has its shares quoted on an official stock exchange.

Listing
The admission of the securities of a company for trading on a stock exchange. An important condition for listing is the fulfilment of the listing requirements such as company size, amount of capital raised, etc. by the company.

Listing Requirements
Conditions that are set by stock exchanges and need to be fulfilled by companies if they want to have their shares listed on these stock exchanges. Examples of listing requirements are company size, time since company formation or a minimum number of shares to be issued.

Loan Stocks
This is a security issued by a company in respect of a loan made by investors. Loan stocks may be secured but often, unlike a debenture, they are not. Loan stock holders rank with other unsecured creditors in the event of insolvency. Loan stocks usually bear a fixed rate of interest.

Lockout
Period of time before the holder of a debt security is entitled to receive repayment of the invested principal.

Lockup Period
Period of time before a primary security issued in the Eurobond market can be sold into the secondary market.

Long Bond
The US Government Treasury bond with the longest maturity period of 30 years. The long bond is widely traded and serves as a benchmark for other long-term bonds.

Long-dated Security
A security with a maturity of 10 years or more.

Low Floaters
See variable rate demand obligation.

Manager
See lead manager, book runner.

Management Buy-In (MBI)
The purchase of a company by a group of outside or non-executive managers, which is mainly financed with external funds.

Management Buy-Out (MBO)
A leveraged buy-out of a company where the acquiring party is composed of the company’s own management. MBOs are usually financed by external sources such as financial institutions and venture capital funds. They generally occur in cases of bankruptcy, divestment of subsidiary companies or privatisation of state-owned companies.

Mandate
In the context of capital markets,

1. an authorisation given to a bank to lead an issue or
2. an authorisation given to brokers by their clients to execute certain security deals.

Mandatory Redemption
A debt security of which a fixed portion or tranche is required to be redeemed before maturity.

Margin
In the context of securities markets,

1. the part of the price of the securities that is paid for with credit from a broker.
2. The term may also refer to the collateral in the form of cash deposit or high-yield securities for the sale of securities by a short seller to a broker.

Margin Call

1. A request by a broker to a client for a deposit in cash or securities, upon a purchase of securities.
2. Request by broker or exchange to their client or participant to provide additional money or securities in order to keep an account within a pre-agreed or required limit.

Market
Traditionally, the exchange where trading took place. Nowadays the term includes the full transactional process of buying, selling and lending securities, currencies, commodities and their derivatives. Most markets now take place over the telephone or, more commonly, via computer networks and therefore no longer imply a physical location.

Market Capitalisation
The total value of all the outstanding shares of a listed company obtained by multiplying the current share price with the total number of issued shares.

Market Indicators
Indices which reflect a particular market’s direction and performance.

Market Maker
A bank or brokerage firm which acts as a principal, buying and selling securities or derivatives. Market makers ‘make a market’ for these financial instruments, i.e. they quote firm bid and ask prices at which they are willing to carry out dealing transactions.

Market Order
An instruction by retail investors to their brokers to buy or to sell a specific amount of securities at the best price obtainable on the stock exchange, which is also called a transaction ‘at the market’ or ‘at best’. At times of scarce liquidity ‘best’ may appear a misnomer, especially if trying to deal early or late in the day, when technical factors and/or a lack of market participants may mean that liquidity is low.

Market Price
The current or most recent price of a security sold or available to be sold on the open market.

Market Value
See market price.

Market Volatility
The rate at which the cost of a security changes within a given market.

Marketability
A qualitative judgement denoting the ease with which a security can be purchased or sold in the market.

Material Adverse Change (MAC) Clause
A provision in an underwriting agreement giving the underwriter the right to refuse to acquire securities not bought by investors and thus to provide funds to the issuing company in case of a significant and unexpected deterioration of the relevant fundamentals of the issuer. Such clauses are rarely legally enforced however, though issues are often ‘pulled’ (withdrawn from sale) by the issuer in such circumstances.

Maturity Date (Redemption Date)
The date when the last principal payment on a security is made to the investors.

Maturity Schedule
A schedule of the maturities of a debt security’s principal.

Medium-Term Note (MTN)
A debt security issued to meet specific investor requirements and with maturity ranging from a few weeks up to 30 years. MTNs are usually issued in tranches of different maturity periods and different coupon rates (fixed, floating or zero-coupon). Such notes are referred to as ‘plain vanilla’. More complex notes may be ‘structured’, containing embedded derivatives linked to equities, commodities, currencies or interest rates. MTNs issued in the Eurobond market are referred to as Euro MTNs (EMTNs) and most have maturities between 1 and 10 years. See also commercial paper and ECP.

Member Firm
A brokerage firm that is a member of a stock exchange. As an investment company, the member firm deals in securities and derivatives on behalf of their clients or for their own account.

Merchant Bank (UK)
See investment bank.

Mergers and Acquisitions (M&A)
Methods of combining two or more companies. While a merger refers to the unification of several companies into a new company, an acquisition is the take-over of a (smaller) company by a (larger) company through the purchase of all or part of a company’s equity interests.

Money Broker
An intermediary agent in the money markets arranging for the investment in money market instruments such as banker’s acceptances or commercial paper.

Money Market
The market for short-term debt instruments, such as certificates of deposit, commercial paper or treasury bills, with maturities of up to one year.

Money Market Deposit Accounts
A deposit account which pays a floating interest rate based on the rates that short-term highly liquid financial instruments pay.

Money Market Instruments
Short-term securities or investments with a maximum maturity of 365 days (270 days in the USA).

Monoline Bond Insurer
An insurance company whose sole activity is the guaranteeing of the prompt repayment of interest and/or principal of securities.

Moody’s (Moody’s Investor Services)
A rating agency which provides credit ratings for companies and banks indicating their creditworthiness and their risk of default. Ratings can refer to short-term or long-term obligations and are based on historic analyses of business fundamentals as well as on future projections for creditworthiness. See also Fitch Ratings and Standard and Poor’s.

Mortgage-Backed Security (MBS)
A security that is backed up by mortgage loans, i.e. the proceeds from these loans serve for payment of principal and interest on the mortgage-backed security and the cash flows on the security reflect those on the underlying pool of mortgages.

Mortgage Bond
A bond collateralised by a mortgage on a real estate asset.

MOTHERS (Market of the High-Growth and Emerging Stocks)
Japanese stock exchange for high-growth and emerging companies.

Multi-tranche
The issue of several securities differing with regard to maturity, yield, currency risk, etc. by the same issuer.

Municipal Bond
A low-yield bond issued in the USA by the state or local governments to finance public projects such as the building of infrastructure. Income from municipal bonds is usually exempt from federal income tax.

Municipal Note
A short-term municipal bond with a maturity of one year or less. It is issued by the US state or local governments in anticipation of future state revenues such as tax receipts or funds from a bond issue.

NASD (National Association of Securities Dealers)
An organisation in the USA which provides financial regulatory services to the private sector and establishes standard investment and financial practices.

Negative Yield Curve
See inverted/negative yield curve.

Negotiated Underwriting
Non-competitive sale of new securities, i.e. the sale is negotiated between the issuer and underwriter or underwriting syndicate.

Net Price (USA)
The price of a security transaction where the dealer selling the security acts as principal rather than as an agent.

New Issue
The issue of new securities. This may be an initial public offering or the issue of additional securities by companies.

Non-callable Bond
A bond that, in normal circumstances, cannot be redeemed before its maturity date. See bullet.

Non-investment Grade
A rating attributed to a security which is deemed speculative i.e. less certain in respect of the preservation of capital in the opinion of a credit rating agency such as Fitch Ratings, Moody’s or Standard & Poor’s. See high-yield security.

Note
A short-term tradable debt security with a maturity period of up to five years. This term is mainly used in the USA.

OAT
Fixed rate fungible bond issued by the French Government, with a maturity of 2-30 years.

Obligation
A pledge agreed between the issuer and holder of a security to pay principal and interest of that security.

Offer
The price or yield required by an issuer or lender for selling or lending an asset or security.

Offer for Sale
The method used by companies for launching shares for trade on the stock exchange by offering them for sale to the public. The sponsors of the issue buy the shares from the issuing company and sell them to investors.

Offer Price
The price at which securities are sold by underwriters to investors.

Open Market
See free and open market.

Open Order
See good ‘till cancelled (GTC) order.

Optional Redemption
See call option.

Order Driven Market
As opposed to a quotation driven market, a market that is mainly dominated by limit orders from investors i.e. by the demand side of the stock market.

Order Period
In a new issue, the period of time during which investors are able to place orders.

Ordinary Shares
The most common form of shares and an essential part of the company’s equity capital. As such, they give their holders (shareholders), ownership rights in the company, entitling them to share in the company’s profits in the form of dividends and to participate in corporate control via their voting rights. Ordinary shares are called common stock in the USA.

Original-Issue Discount (OID) (USA)
A debt security that is issued below par for tax reasons.

Outstanding Shares
The number of shares of a company that have been issued, paid for and are currently owned by the public. Sometimes called issued shares.

Overcollateralisation
A method of credit enhancement where the principal value of the collateral provided exceeds that of the security.

Oversubscription
A situation where the applications for the purchase of a new security exceed the amount of securities offered by the issuing company. The reasons for oversubscription include the possibility that the securities are under-priced. In such cases, underwriters may have to allocate the securities available among investors. See allocation and allotment.

Over-the-Counter (OTC)
A market for the trade of securities that are not listed on the stock exchange consisting of bilateral dealing contracts between brokers. As opposed to an organised stock exchange, prices in the OTC markets are set by direct negotiation between dealers and not by an auction system. The OTC market is a market for companies which do not fulfil the listing requirements of the official stock exchange markets, or for derivatives or other financial instruments that do not have a liquid market.

Par Value
See face value.

Parity Debt (USA)
Debt securities that have equal rights to an underlying security and/or the income stream this security generates.

Payment Date
See issue date.

Performance
The difference between the return on a given security and a pre-established benchmark which has the same characteristics.

Perpetual Bond
Bond (normally paying a floating rate of interest) that has no specified maturity date.

Perpetual Floating Rate Note
Floating rate note that has no specified maturity date.

P&I (Principal and Interest)
The (re)payments of principal and/or interest made periodically on mortgage-backed securities.

Pfandbrief
Mortgage bond issued by German mortgage banks. The strict regulatory regime governing Pfandbrief-issuing and their relatively high credit ratings has enabled issuers to sell them widely to international investors.

Pipeline
An investment bank’s expected future issuing and underwriting commitment with regard to securities. The securities may be pre-registered (in the context of USA) but they are not actually offered to investors.

Placement
The sale of new securities to a selected group of investors. The term may also refer to interbank deposits in the Euromarkets.

Placing
When a company’s shares are offered for sale at a specified price by an intermediary (investment or merchant bank or broker) to specific companies or individuals. Placing often takes place before shares are offered for sale to the public, so that a minimum price has already been established. In the case of shares which are to be offered to the public or shareholders in an open offer, the placing of shares with institutions can be conditional and subject to claw-back depending on the level of subscriptions.

Plain-vanilla
Instruments that have only the standard features. The opposite of bells and whistles.

Poison Pill
Any course of action that a company uses in order to deter a hostile takeover. Usually the action imposes additional costs on any buyer.

Pool
The assemblage of various securities into one security instrument or into one fund.

Positive Yield Curve
Where yields increase as maturities lengthen.

Pre-emption Right
The right given by a company to its shareholders to buy additional shares in proportion to their existing holdings so as to maintain their amount of interest in the company.

Preference Shares
Called preferred stock in the USA. Company shares that entitle their holders to preferential rights (compared to ordinary shareholders) with regard to dividends and repayment of the invested capital in case of liquidation. As far as dividends are concerned, preference shareholders receive their dividends before ordinary shareholders. Also, when the assets of the company are distributed in the event of it being winded up, holders of preference shares rank above those of ordinary shares. However, preference shares do not give their holders any voting rights or allow them to attend general meetings. Preference shares are comparable to debentures (as understood in the UK market) in that they yield fixed rate dividends. The main difference, however, is that dividends on preference shares are paid provided the company makes a profit, whereas dividends on debentures need to be paid irrespective of a profit or a loss. The main types of preference shares are:

1. Cumulative. If the company is unable to pay dividends in a year, the shareholders have the right to claim dividend payments for that year when the company makes a profit again.
2. Redeemable. This type of preference shares can be repaid like debentures.
3. Participating. The shareholders are not only paid a fixed rate but also a variable dividend from the company’s profit.
4. Convertible. The shareholders have the right to convert their preference shares into ordinary shares.

Preliminary Official Statement (USA)
A preliminary statement offering municipal securities for sale. It does not include information on the proposed price.

Pre-market
Securities transactions between brokers and investors that take place before their respective financial instruments are officially traded on an exchange. See grey market.

Premium
The amount by which securities are traded above their face or par value.

Price
The value at which securities are quoted on the stock exchange. Prices may be expressed as a percentage of face value in the case of bonds. Some fixed income instruments may trade on a yield basis rather than price (e.g. commercial paper).

Price-Earnings (P/E) Ratio
A ratio calculated by dividing the share price by the post-tax earnings per share, which is the net profit of the company divided by the number of its shares. The higher the P/E ratio, the higher the investors’ or the market’s expectation of future growth of earnings yielded by the respective share.

Price Earnings Multiple
See price-earnings ratio.

Price Range
The range between the lowest and the highest prices of a security, usually over the past 52 weeks.

Primary Market
The market for new issues of securities with the aim of raising new capital.

Principal
The face value of a debt instrument. The principal amount of a trade is the face value of the debt instrument involved in the trade.

Principal-Only (PO) Security
A security or tranche of a CMO which is used solely for the purpose of paying the principal (and not interest) to the investor. It is effectively a zero-coupon bond. See IO (interest-only) security.

Principal Transaction
A security transaction involving the dealer’s own capital.

Private Placement
The sale of securities by a lead manager directly to a limited number of institutional investors instead of to a wider group of investors as is the case with a public offering. Securities sold via private placement are not listed on the stock exchange.

Privatisation
The sale by a government of its stake in a business: More broadly the sale of publicly owned assets.

Prospectus
Documentation supporting the issue of a new security describing its nature, price and issue date in addition to the history and financial background of its issuer. Issuers take legal responsibility for the accuracy of the contents of any prospectus issued on their behalf.

Proxy

1. Authorisation given to another individual/company to represent a shareholder at a company meeting and to vote on their behalf on company business.
2. A substitute reference price used in the marking to market of over-the-counter securities.

Public Listing
Admission of a security to trading on a recognised (stock) exchange, after which the security is placed on the ‘list’ of securities which may be traded on that exchange.

Public Offering Price
The price at which new securities are offered for sale to the public.

Put Bond
A bond giving the holder the option to sell at a set price (usually the face value) before or on a set date/a number of set dates.

Quotation Driven Market
As opposed to an order driven market, a market that is to a large extent dominated by market makers who compete for orders and display their quotations i.e. the prices at which they are willing to buy or sell securities.

Rate Reset
An amendment, in accordance with a specific formula, in the rate of interest applied to an adjustable rate debt security.

Rating
See credit rating.

Rating Agency
See credit rating agency.

Recapitalisation
The restructuring of the capital composition of a company or the proportion of debt and equity. The reasons behind a recapitalisation may lie in the aim of preventing bankruptcy or reacting to new business conditions.

Redemption
The paying off or buying back of a debt security by the issuer on or before its stated maturity date. The redemption can be made at par value or at a premium, as is the custom when exercising a call option.

Redemption Option
See call option.

Redemption Premium
The amount by which the redemption price of a debt security exceeds its face or par value. The redemption premium is inversely correlated to maturity i.e. the closer the maturity date, the lower the redemption premium. Also called call premium.

Redemption Price
The price at which a debt security can be redeemed, by the issuer, before maturity. Also called call price.

Redemption Provision
See call provision.

Refinancing
The raising of new funds in order to meet financial obligations at or before the point that they become due. See pre-funding.

Refunding
The issue of new lower cost debt obligations, usually bonds, in order to replace existing or redeemed debt capital, frequently coincident with the exercise of a call option on outstanding debt.

Registered Bond
A bond where ownership and interest payments are officially recorded in a register, in contrast to a bearer bond. Registration provides evidence of ownership, which can only be transferred by the amendment of the entry on the register, now maintained as simple computer records.

Remarketing
The reoffering of securities, such as variable rate notes/bonds, of which the interest rate may have changed and the form or structure may have been altered. In such situations, the original investors will usually have exercised a put option.

Remarketing Agent
A bank or broker responsible for the marketing and sale of the reoffered securities. Request for Proposals (RFP)/Request for Qualifications (RFQ) A potential issuer’s method of evaluating the suitability of potential underwriters.

Request for Proposals (RFP)/Request for Qualifications (RFQ)
A potential issuer's method of evaluating the suitability of potential underwriters.

Residual Bond
The bond tranche in an asset-backed security that collects any outstanding cash flow after all the other tranches have been redeemed.

Retail Investors
Small investors such as individuals or small-sized companies.

Revenue Bond (USA)
Municipal bond where the funds used to repay the debt service derive solely from the revenue generated by the project which it is being used to finance. See industrial revenue bond.

Reverse Convertible Bond
A bond containing an embedded equity put option for the issuer, in which the investor can either be redeemed in cash or in shares, at a pre-specified rate. They are typically for one to two years and offer high coupons in order to attract retail investors who will usually underprice the option they are selling, partly because the reference equity is generally viewed as ‘solid’.

Rights Issue
A method of issuing securities whereby new shares are issued at a discount to existing shareholders, pro-rata to their existing holdings, if they wish to subscribe fresh money in order to take up their rights. See open offer.

Roadshow
A sequence of company presentations before a new securities issue, addressing potential investors and giving them the opportunity to learn more about the company, its business and management. This always includes some group presentations but may also include one-on-one meetings with individual institutions that are potential investors.

Running Yield
See current yield.

Samurai Bond
A bond that is denominated in Japanese yen (JPY), issued by a foreign borrower and traded on Japanese markets.

Scrip Issue
See bonus issue.

Seasoning Period
A restricted period after a new issue. For example, the period in the eurobond market that must elapse before US investors are allowed to buy the new issue. See lockup period.

Secondary Market
The market for the trading in securities that have previously been bought by investors as new issues in the primary market.

Secondary Offering (Secondary Distribution)
The sale of securities that have already been issued and offered to the public via the market. It is an investor, not the originally issuing company, who resells the securities to other investors and who receives the earnings from this sale. Secondary offerings have no effects on the number of shares outstanding and are usually the result of an institution wishing to sell a large block of securities.

Secured Debt
Sometimes referred to as a debenture in the UK, a debt that is secured or backed up by the issuer’s assets. This means that holders of this type of debt have the first right of repayment in case of default, as opposed to holders of unsecured debt, and can sell the assets provided as security, if required. See fixed charge, floating charge.

Securities
The general term for the different types of equity and debt capital instruments that are tradable and transferable such as shares and bonds as well as derivative instruments including options, futures and warrants (note, however, that futures and other derivatives are not securities under a strict definition). Securities entitle their holders to certain rights. Equity securities offer ownership rights, which may include voting rights, as well as the right to share in the profits of a company. The most frequent examples of equity securities are shares. Debt securities such as bonds bear creditorship rights i.e. the right to an interest on the capital lent and to the repayment of the principal.

Securities Buyback Programme
An organised process of buying back securities from investors so as to reduce the amount of external capital (equity or debt capital) or to reduce the cost of external capital.

Securities Market
A financial market for trading in securities, particularly in long-term financial instruments such as shares and bonds. Securities markets are, thus, also referred to as capital markets whereas markets for short-term instruments, such as notes or deposits, belong to the money markets. Securities markets can appear in the form of stock exchanges or over-the-counter (OTC) markets. These two types differ in the extent to which they are formally organised. Stock exchanges sometimes still consist of physical trading floors as in the USA and are strictly regulated with regard to trading hours, membership, etc. OTC markets, on the other hand, are a platform for bilateral securities transactions which are carried out electronically or over the phone. Here, prices are set by the respective traders and not by an auction system as is the case for stock exchanges. See order-driven and quotation-driven markets.

Securitisation
The aggregation and repackaging of non-tradable instruments such as loans and receivables, or company cash flow into securities that can be issued and traded in the capital markets.

Selling Group
A group of dealers and/or brokers who participate in the sale of a new issue, but who have no obligations in respect of any unsold securities. Conversely, whilst they acquire the securities at a take-down, they do not share in any potential profit from underwriting. See underwriting fee, management fee, selling commission.

Senior Debt
In contrast to subordinated debt, senior debt has priority with regard to repayment in case of default over all types of unsecured debt as well as secured junior debt.

Senior Manager
A senior underwriter in an underwriting syndicate. See lead manager, book runner.

Senior Securities
Corporate securities that rank above other securities in the event of default (e.g. preference shares).

Serial Bond
A bond separated into tranches with different maturities and, in certain cases, different coupon rates.

Share (Stock)
A security giving its holders ownership rights in the respective issuing company. Shares represent portions of a company’s capital and are classified as equity.

Short-term Debt
Usually a debt security with a maturity below one year. However, in the case of bonds, maturities of up to two years or even three years may be considered short-term (referred to as ‘short-dated’ bonds).

Sinker
A security, usually a debenture, which contains a sinking fund.

Sinking Fund
A provision in a debt security, usually governed by a bond indenture, according to which the issuing company has to make regular repayments of the principal in cash or securities to redeem the bond before its maturity date.

Sole Placing Agent
A financial intermediary who is exclusively responsible for the placement of a securities issue in the capital markets.

Split (Stock Split)
The division of existing shares into smaller shares with lower nominal values. See scrip issue, bonus issue.

Spread

1. The differential between the yields of two fixed-income securities, mostly expressed in basis points.
2. The difference between the bid and ask prices quoted for a security.

Spread to Treasury/Governments
The spread differential between the yields of a non-government fixed income security and that of a treasury/government security with the same or similar characteristics, whereby the latter acts as a benchmark.

Stag
A speculative investor who buys into a new issue of shares, intending to sell them for a quick profit once trading has started.

Standard and Poor’s
A rating agency which provides credit ratings for companies and banks indicating their creditworthiness and their risk of default. Ratings can refer to short-term or long-term obligations and are based on historic analyses of business as well as on future projections for creditworthiness. See Fitch Ratings, Moody’s.

Standby Facility
An agreement in a rights issue under which the underwriter has the right to purchase shares which are not bought by investors.

Stock
US term for a share.

Stock Exchange (Stock Market)
A formally organised market for securities issued by private companies or governments and affiliated agencies. Only members of the stock exchange are allowed to deal in securities and other financial instruments.

Straight
A bond which has a single bullet payment of principal at maturity and which pays a fixed rate of interest.

Structured Finance
The structuring of assets or debt issues in accordance with customer and/or market requirements. Frequently this will involve consideration of tax issues.

Subordinated Debt (Junior Debt)
A corporate debt that ranks below senior debt in the event of default. This means that holders of subordinated debt receive repayment of their investment after holders of senior debt are fully paid. To compensate for this higher risk, subordinated debt instruments usually offer a higher yield.

Subscription
The part of a new issue of securities that is allocated among managers, underwriters, dealers and institutional investors.

Surety Bond
A bond specifically issued as a guarantee for the performance of another debt obligation.

Syndicate
In the context of capital markets, a group of underwriters, managers and selling institutions responsible for the underwriting and the distribution of a new issue of securities.

Take-down (USA)

1. The share of a security issue offered to each underwriter.
2. The discount price offered to an underwriter on securities purchased (net of his spread).

Takeover
A method of combining two companies, whereby a usually smaller company is acquired by a larger company, with the latter buying a majority stake, i.e. 50% or more of its ordinary shares, and thus gaining control. See mergers and acquisitions.

Tax-backed/supported Bond
Bonds backed by taxes levied by the debtor.

Tax-free Security (USA)
A security issued by the state or municipal authorities, the interest payments of which are exempt from income taxation.

T-bill Rate (USA)
The yield derived from the interest rate achieved on the weekly auctions of the three-month treasury bill.

Technical Default
A failure to fulfil the contractual requirements of a debt obligation which does not involve a failure to pay interest or principal. Typically, this might involve a temporary breach of a financial covenant as the result of some unanticipated corporate event.

Tender
In the context of a hostile takeover, direct and competitive bidding for the shares held by shareholders of the target company by offering to buy them prices that are higher than they could sell them for in the market.

Tender Panel
An arrangement in a new issue of securities (or syndicated loan) under which the issuing company allows only a limited number or a selected group of banks and brokers to bid for the placement of securities in the stock exchange. Tender panels may also be used for derivatives deals.

Tenor

1. The term may be used synonymously with maturity, but may also refer to
2. The period between a security issue and its maturity.

Terms and Conditions
The detailed legal terms governing an offer of securities. They are contained in a prospectus and include all the conditions of the issue and any representations and warranties made by the issuer.

Trade
See dealing.

Trader
See dealer.

Trading Floor
The floor in a building housing an exchange where authorised traders meet to sell and buy securities, currencies, commodities and their derivatives. Many exchanges have substituted this physical trading by electronic screen trading.

Tranche
One part of a number of different securities that are issued by the same company at the same time. Such securities may differ in terms of risk, yield and/or (most commonly) maturity.

Treasury Bills (T-bills)

1. Short-term discount debt instruments issued by the US Treasury in maturities of 13, 26, and 52 weeks.
2. Debt securities issued by a government with a short-term maturity of three months to one year.

Treasury Bonds

1. Debt securities issued by a government with a long-term maturity of ten years or more.
2. More specifically, coupon securities issued by the US Treasury with interest paid semi-annually in original maturities of ten to 30 years.

Treasury Inflation-indexed Securities (TIIS), Treasury Inflation-protected Securities (TIPS) (USA)
Government securities which are inflation-protected in respect of their real value through their linkage to the consumer price index.

Treasury Notes (T-notes)
Interest-bearing securities issued by the US Treasury with original maturities of two to ten years.

Treasury Securities (Treasuries)
‘Full Faith and Credit’ obligations of the US Government, issued by sale at periodic auctions, and delivered and cleared electronically. Treasury securities appear in the form of treasury bills, treasury notes and treasury bonds. Income from treasury securities is subject to US federal tax.

Trigger (Rate)
The threshold rate that triggers a change in the terms and conditions of a debt security or its derivative. See drop-lock securities.

Undated Issue
A floating rate security without a specified maturity date. The security can be perpetually outstanding.

Under-subscription
A situation where the demand for the purchase of newly issued securities is lower than the number of securities offered to the public.

Underwrite
Agree to purchase newly issued securities from the issuer with the view of selling them on to an investor, but being prepared to hold them if no investor can be found at the outset.

Underwriter
The individual or entity acting as the intermediary between the issuing company offering securities and the investor.

Underwriting Spread (Underwriting Fee)
The differential between the price an underwriter is willing to sell a security to an investor and the net price initially paid to the issuer for the security.

Unsecured Loan Stocks
See loan stocks.

Value Stocks
Shares that have a low price-earnings ratio and therefore may be considered to be cheap to buy in terms of their prospective future cash flows.

Variable Rate Demand Obligation (VRDO)/Variable Rate Demand Notes (VRDN)/Variable Rate Demand Bond (VRDB)
US term for a debt security which applies a floating rate of interest determined periodically (e.g. on either a daily, weekly, monthly, annual or flexible basis) in accordance with the market rate. VRDOs give the holder the option to sell the security when a new rate of interest is applied. VRDOs are also known as low floaters.

Volume
The total number of a particular security traded during a given period, usually expressed per day.

Voting Stock (USA)
Shares which give shareholders the right to vote on company decisions in company meetings.

Warrants
Securities which give their holders the right to buy a certain number of shares or bonds at a predetermined price and within a given period of time (usually several years). They are distinguished from ordinary options usually by being long-dated and traded/listed on the stock exchange independently of the underlying securities.

Weighted Average Maturity (WAM)

1. The average period of time (in months) until the maturity date of mortgage loans in a mortgage pool, weighted by the existing principal balances.
2. The average maturity of securities held in a fixed income or money market fund.

Yankee Bond
A bond that is denominated in US dollars (USD) issued by a foreign borrower and traded on the US domestic markets.

Yield
The annual rate of return from income paid out on an investment in securities, expressed as a percentage of the current market price of the relevant securities.

Yield Curve
A graphical representation demonstrating the relationship between yield and maturity on comparable debt securities with different maturities, usually for a single issuer or a very closely-related group of issuers.

Yield Spread
The difference in the effective rate of interest offered by two debt securities.

Yield to Call (YTC)
The return on a debt security, calculated with the assumption that it will be redeemed at its call price on the first call date.

Yield to Worst (YTW)
The minimum rate of interest that can be achieved from a debt security, given its terms and conditions.

Z Bond
See accrual bond.

Zero-coupon Bonds
Debt instruments that are issued at a discount as they do not pay out interest until maturity. Their value increases as they approach maturity because the interest that would have been due is capitalised and rolled-up instead. This type of debt security offers tax advantages in certain jurisdictions to the issuer or investor. From the investor’s point of view, they may be fiscally advantageous in the sense that they allow deferment of tax payments on the generated income until maturity. However, the price volatility of zero-coupon bonds is higher than that of interest-bearing bonds of the same maturity and credit quality as the postponing of interest payments till maturity increases the overall risk i.e. zero-coupon bonds have a longer duration than coupon-bearing bonds and the duration of their cashflows is equal to the stated maturity.

Zero-dividend Preference Share
A preference share on which a return is acquired in the form of an increase in capital and on which dividends are not required to be paid. Hence, they are also known as capital shares.

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