A security similar to a traditional convertible bond in that there is a strike price (the cost of the stock when the bond converts into stock). What differs is that there is another price, even higher than the strike price, which the company's stock price must reach before an investor has the right to make that conversion (known as the "upside contingency"). |||Issuing contingent bonds is more advantageous to companies than issuing regular convertibles. Until an investor exercises the option, the company does not need to count shares in its calculation of diluted earnings. (Note: as of July 2004, the FASB's Emerging Issues Task Force proposed an accounting change that, if passed, would eliminate the accounting advantage of CoCos.)
A short-term obligation in the form of a note, used for the funding of construction projects such as housing developments. In most cases, the note issuers will repay the note obligation by issuing a longer term bond and using the proceeds from the bond to pay back the note. |||This type of financing is most often seen at the municipal level: for example, a large city might use a construction loan note to finance a large housing project to meet the demands of its growing population.
A type of surety bond used by investors in construction projects to protect against an adverse event that causes disruptions, failure to complete the project due to insolvency of the builder(s), or the job's failure to meet contract specifications. There are generally three parties involved in a construction bond – the party or parties building the project, the investor/eventual owners, and the surety company that backs the bond. May also be called a "construction surety bond" or a "contract bond". Watch: Understanding Bonds |||Many things can go wrong in a large construction project. Because of this, construction bonds are almost a mandatory prerequisite of any project beyond a certain size, and for most (if not all) government and public works projects. On larger projects, construction bonds may come in portions; one to protect against overall job completion and to specifications and another to protect against the cost of materials from suppliers and subcontractors. Surety companies will evaluate the financial merits of the principal builder and charge a premium according to their calculated likelihood that an adverse event will occur.
One of two ways of calculating the accrued discount of bonds that trade in the secondary market. The constant yield method is an alternative to the ratable accrual method, and although it usually results in a lesser accrual of discount than the latter method, it is also requires more complex calculations. |||The constant yield amount is calculated by multiplying the adjusted basis by the yield at issuance and then subtracting the coupon interest. This method is also known as the effective or scientific method of amortization. The decision to use the constant yield method is irreversible, and is similar to the method the IRS prescribes to computer taxable original issue discount as outlined in IRS Publication 1212.
The risk of a security shortening in duration due to the acceleration of prepayments. |||This risk is mainly due to lowering interest rates. Contraction risk is generally associated with mortgage securities. As interest rates decrease, the likelihood of prepayment increases.
A type of bond that's been sold by the World Bank since 1989 in order to finance its operations. The bonds range in length from three to 30 years and can be fixed rate, variable rate or zero coupon. |||The World Bank provides financial assistance to developing countries in the form of low-interest loans, no-interest credit and grants. This money helps fund education, health, agriculture and other development initiatives.
A method of fixed income portfolio management, whereby managers are granted significant powers of control over the selection of products to be added and removed from the portfolio, as long as the products remain profitable. Should these products become unprofitable past a set threshold, the manager must then capitalize the security under immunization procedures. |||Similar to the portfolio insurance methodology used in the equity markets, contingent immunization provides managers with the ability to replace underperforming fixed income assets with better performing ones while restricting their powers in cases where declines in profits occur.
A variation on the credit default swap (CDS). In a simple CDS, payment under the swap is triggered by a credit event, such as non-payment of interest. In a contingent credit default swap (CCDS), the trigger requires both a credit event and another specified event. |||The second trigger in a CCDS is usually a market or industry variable. A CCDS is generally employed to protect specific exposure when larger industry or market forces have deteriorated.
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