When a borrower appears to be heading toward defaulting on its debt. An incipient default is the foreshadowing of a person or company's inability to service a debt obligation. |||Within the loan arrangement, the lender can make specific provisions regarding an incipient default. Such provisions may place covenants on the borrower or impair a contractual right. Incipient defaults may be determined based on current business problems, such as an illiquid balance sheet or a low quick ratio.
The rate of return that can be earned by simultaneously selling a bond futures or forward contract and then buying an actual bond of equal amount in the cash market using borrowed money. The bond is held until it is delivered into the futures or forward contract and the loan is repaid. |||The implied repo rate comes from the reverse repo market, which has similar gain/loss variables as the implied repo rate. All types of futures and forward contracts have an implied repo rate, not just bond contracts.For example, the price at which wheat can be simultaneous purchased in the cash market and sold in the futures market (minus storage, delivery and borrowing costs) is an implied repo rate. In the mortgage-backed securities TBA market, the implied repo rate is known as the dollar roll arbitrage.
The interest portion of mortgage, Treasury or bond payments, which is separated and sold individually from the principal portion of those same payments. The periodic payments of several bonds can be "stripped" to form synthetic zero-coupon bonds. Also, an IO strip might be part of a larger collateralized mortgage obligation (CMO), asset-backed security (ABS) or collateralized debt obligation (CDO) structure. |||Financial engineers, such as Wall Street dealers, frequently strip and restructure bond payments in an effort to earn arbitrage profits. Zero-coupon Treasury strips are an important building block in many financial calculations and bond valuations. For example, the zero coupon or spot-rate Treasury yield curve is used in option-adjusted spread (OAS) calculations and for other valuations of bonds with embedded options.
A bond with interest and principle payments insured by a third party. Insured bonds are usually found as a feature of municipal bonds; they are purchased, underwritten and repackaged by a financial guarantee company who then sells the issue to investors.. |||Insured bonds have higher credit ratings than bonds that are uninsured. The premium cost paid to the financial guarantee firm is passed along through lower coupon yields in the final issue.Among the largest guarantee companies are Ambac Financial Group and MBIA, which underwrite thousands of municipal issues every year and have extremely high credit ratings. Very few default cases over the past 20 years have made insuring bonds a relatively inexpensive option for bond issuers.An insured bond will be clearly noted in its description on most quote systems, such as the Bloomberg Terminal.
An organization that serves a public purpose and is closely tied to federal and/or state government, but is not a government agency. Many instrumentalities are private companies, and some are chartered directly by state or federal government. Instrumentalities are subject to a unique set of laws that shape their activities. |||Fannie Mae, Ginnie Mae, Freddie Mac and Sallie Mae are all federal instrumentalities. So are many other financial services organizations, including the Federal Reserve Banks, national banks, commercial banks, most thrifts, most credit unions and insurance companies.
U.S. government-issued debt securities similar to regular savings bonds, except they offer an investor inflationary protection, as their yields are tied to the inflation rate. |||Available directly from the U.S. Treasury, these debt securities are an exceptionally low-risk investment suitable for the most risk-averse investor; they have virtually zero default risk and inflationary risk.While relatively risk-free assets such as these usually offer some of the lowest rates of return, it is important to note that I Bonds are usually exempt from income tax. They therefore provide a more attractive after-tax return.
Federally insured debt securities that are similar to regular certificates of deposit (CDs), but provide investors with inflationary protection via annually variable interest rates that increase or decrease with changes in the consumer price index, a measure of inflation. |||Because they pose little inflationary risk to the investor, this type of CD offers slightly lower interest rates than regular CDs. This inflation protection together with the regular low default risk of CDs makes for very safe investments. An investor will never realize huge gains with these securities, but they may play a role in a diversified portfolio or serve as an ideal investment for risk-averse investors.
A security that guarantees a return higher than the rate of inflation if it is held to maturity. |||In other words, an inflation-indexed security guarantees a real return. These usually come in the form of a bond or note.
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