The practice of accounting for the discount at which a bond is sold as an interest expense to be amortized over the life of the bond. Using this method, additional interest expense is calculated using the prevailing market interest rate at the time of the bond issue. The market rate is multiplied by the book value of the bond to find the amount of the discount to be amortized as interest expense each period. |||The effective interest method is regarded as one of the preferred methods for amortizing a bond discount. In theory, investors demand a discount on bonds because the market interest rate at the time of issue exceeds the coupon payments on the bond. Thus, by amortizing the discount at the market interest rate, a company’s accounting statements more closely reflect the economic reality of the bond issue and the firm’s true cost of debt.
A type of credit enhancement used in certain asset backed securities (ABS). Early amortization is an accelerated payment of bond principal in an asset-backed security, usually triggered when there is a sudden increase in delinquencies in the underlying loans or when excess spread, the issuer's net profit after deducting servicing fees, charge-offs and other costs, falls below an acceptable level. Also called a payout event. |||Early amortization signals liquidity crisis for the originator, as funding dries up. The early payout protects investors from prolonged exposure to receivables with deteriorated credit performance. However, the investor is relying on the fixed income from the ABS - prepayment is an inherent risk for investors.
A slang term used to describe a pool of mortgage backed securities (MBSs) that have been issued by Fannie Mae and have a maturity of 15 years. |||Fannie Mae is short for the Federal National Mortgage Association. It is one of the governing bodies that are able to issue MBS that are guaranteed by the U.S. government or by an independent governing body in the secondary market. The other official bodies are Freddie Mac and Ginnie Mae. Ginnie Mae has the authority to guarantee MBS issues from qualified private lenders which meet a set of stringent criteria.
The value of an investment at the end of the investment period. Ending market value (EMV) is calculated by taking the beginning market value and adding the interest earned over the course of the investment. Ending Market Value = Beginning Market Value x (1 + interest rate). This is an important equation to consider when choosing an investment as the time value of money can be a valuable decision-making variable. |||For example:Beginning market value = 100Interest rate = 10%EMV = 100 x (1 + 0.10)EMV = 110
The calculation of a bond's duration based on historical data. Empirical duration is estimated statistically using historical market-based bond prices and historical market-based Treasury yields. When the historical yields change, the historical bond prices will change accordingly, which forms that basis for empirical duration. Regression analysis is the statistical process used to estimate empirical duration. Duration is the percentage change in a bond's price with a 100-basis-point change in yield. |||The calculation of empirical duration has some advantages and disadvantages over other duration calculations, such as effective duration or modified duration. The advantages of using empirical duration include that the estimate does not rely on theoretical formulas and analytic assumptions, and the only inputs needed are a reliable series of bond prices and a reliable series of Treasury yields.Some disadvantages are that a reliable series of a bond's price may not be available, and the series of prices that is available might not be market based, but rather modeled or matrix priced (the price is based on a similar security).
A benchmark index for measuring the total return performance of international government bonds issued by emerging market countries that are considered sovereign (issued in something other than local currency) and that meet specific liquidity and structural requirements. The most popular indexes are the J.P. Morgan Emerging Bond Index (EMBI) and EMBI+; the latter measures both Brady bonds and other sovereign debt while the EMBI measures only Brady bonds. In order to qualify for index membership, the debt must be more than one year to maturity, have more than $500 million outstanding, and meet stringent trading guidelines to ensure that pricing inefficiencies don't affect the index. |||The J.P. Morgan indexes are a popular benchmark for money managers that deal in emerging market debt, so investors may see the index used as a comparison for their mutual funds or exchange-traded funds. Because of their higher interest rates, emerging market bonds can significantly outperform U.S. Treasury bonds. For example, in the 10-year period ending in May of 2004, the J.P. Morgan Global Emerging Markets Bond Index had a total return of 248%, greater than both U.S. corporate bonds and the S&P 500.
The period of time during which an investor who owns an extendable or retractable bond must indicate to the issuer whether or not he or she will exercise his or her option. |||In this time frame, a person can elect to extend the maturity date on an extendable bond, or retract (shorten) the maturity date on a retractable bond.
A guarantee made by accredited institutions assuring the legitimacy and accuracy of changes made to bonds and securities. |||An erasure guarantee is similar to a document being witnessed by a notary public.
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