A mortgage loan that allows the borrower to make minimum payments that are less than the entire amount of interest owed. The remaining interest is added to the amount of loan to be paid off. This is considered to be a negative amortization. The homeowner will let interest accrue, and will ultimately owe more than the original value of the loan. An adjustable rate mortgage (ARM) might offer this sort of payment structure. |||By making minimum payments that do not cover the loan principal, the balance on the loan is unlikely to get smaller since the interest is calculated on the outstanding principal. While low minimum payments do give the borrower payment flexibility, homeowners might not fully understand how complex this sort of mortgage can be.
A debt instrument that pays no interest until a date specified in the future. |||Zero-coupon bonds are a form of deferred interest bond.
The period after the issue of callable security during which it cannot be called by the issuer. |||Different types of securities will have a call option allowing the issuer to buy them back at a predetermined price. The issuer cannot call the security back during the deferment period, which is uniformly predetermined by the underwriter and the issuer at the time of issuance.For example, European options have a deferment period for the life of the option (they can be called only on expiry). Most municipal bonds are callable and have a deferment period of 10 years.
A provision that voids a bond or loan when the borrower sets aside cash or bonds sufficient enough to service the borrower's debt.Also referred to as "defease." |||The borrower sets aside cash to pay off the bonds, therefore the outstanding debt and cash offset each other on the balance sheet and don't need to be recorded.
A digested security is a financial instrument which an investor has bought and intends to hold for a long period of time. The security is thus effectively taken out of trading. If a large number of investors choose to digest a particular security, then it can result in a relatively illiquid market for that security, making it difficult to buy or sell. |||The illliquidity caused by digested securities poses a frequent problem in certain markets. This dilemma is particularly prevalent in the bond market, for example, where many bonds end up in the hands of investors who wish to hold them until maturity. It is common for a particular bond issue to experience a steadily decline in trading volume, as the securities are gradually digested by investors who wish to hold them to maturity.
A bond pricing quote referring to the price of a coupon bond that includes the present value of all future cash flows, including interest accruing on the next coupon payment. The dirty price is how the bond is quoted in most European markets, and is the price an investor will pay to acquire the bond. |||Accrued interest is earned when a coupon bond is currently in between coupon payment dates. As the next coupon payment date approaches, the accrued interest increases until the coupon is paid. Immediately following the coupon payment, the clean price and dirty price will be equal. The dirty price is sometimes called the "price plus accrued". The clean price is quoted more often in the United States.
A measure, created by Moody's Investors Service, to estimate the diversification in a portfolio, specifically in the context of a collateralized debt obligation (CDO). The calculation methodology for a diversification score takes into account the extent to which a portfolio is diversified by industry. |||Technically speaking, the diversification score measures the number of uncorrelated assets that would have the same loss distribution as the actual portfolio of correlated assets. For example, if a portfolio of 100 assets had a diversification score of 50, this means that the 100 correlated assets have the same loss distribution as 50 uncorrelated assets.
The return earned in addition to the index underlying the floating rate security. |||The size of the discount margin depends on the price of the floating rate security. There are three basic situations: 1. If the price of a floater is equal to par, the investor's discount margin would be equal to the reset margin. 2. Due to the tendency for bond prices to converge to par as the bond reaches maturity, the investor can make an additional return over the reset margin if the floating rate bond was priced at a discount. The additional return plus the reset margin equals the discount margin. 3. Should the floating rate bond be priced above par, the discount margin would equal the reference rate less the reduced earnings.
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