A type of convertible bond that has a required conversion or redemption feature. Either on or before a contractual conversion date, the holder must convert the mandatory convertible into the underlying common stock. These securities provide investors with higher yields to compensate holders for the mandatory conversion structure. |||These are often used when a traditional equity issuance would otherwise place severe market pressure on the underlying stock.
A type of call provision on a bond allowing the borrower to pay off remaining debt early. The borrower has to make a lump sum payment derived from a formula based on the net present value (NPV) of future coupon payments that will not be paid because of the call. |||A make whole call will be defined in the indenture. The issuer doesn't expect to have to use this type of provision, but if the issuer does, investors will be compensated, or "made whole." Because the cost can often be significant, such provisions are rarely invoked.
A type of surety bond purchased by a contractor that protects the owner of a completed construction project for a specified time period against defects and faults in materials, workmanship and design that could arise later if the project was done incorrectly. A maintenance bond is not technically insurance, but basically functions as an insurance policy on a construction project to make sure a contractor will either correct any defects that arise or that the owner is compensated for those defects. Pricing a maintenance bond is very different from pricing regular coupon paying bonds. |||A surety bond is a three-way contract where a third party called the surety guarantees the contractual obligations of one party (the principal) to another party (the obligee) by agreeing to pay a sum to the obligee as compensation if the principal does not fulfill its obligations. The surety assures the obligee that the principal will perform the required tasks. A maintenance bond is structured in such a way.
The weighted average term to maturity of the cash flows from a bond. The weight of each cash flow is determined by dividing the present value of the cash flow by the price, and is a measure of bond price volatility with respect to interest rates.Macaulay duration can be calculated by: |||The metric is named after its creator, Frederick Macaulay. Macaulay duration is frequently used by portfolio managers who use an immunization strategy. Macaulay duration is also used to measure how sensitive a bond or a bond portfolio's price is to changes in interest rates.
A bond issued in the U.S. and U.K. with a rate of return dependent upon a lottery style payout. |||The lottery payout structure involves a method of random draws. Every issued bond is similar to a lottery ticket with an equal opportunity at winning payments in monthly draws for cash prizes. These prizes are generally larger than coupon payments on regular payout bonds. However, there is always the possibility that a bondholder will not win any of the cash prizes during the life of the bond. These bonds are now issued as premium bonds, but be warned, sometimes these bonds are used as scams for unwitting investors. The only corporation permitted to sell these bonds in the U.S. is National Savings.
The amount of funds that is lost by a bank or other financial institution when a borrower defaults on a loan. Academics suggest that there are several methods for calculating the loss given default, but the most frequently used method compares actual total losses to the total potential exposure at the time of default. Of course, most banks don't simply calculate the LGD for one loan. Instead, they review their entire portfolio and determine LGD based on cumulative losses and exposure. |||Institutions such as banks will determine their credit losses through an analysis of the actual loan defaults. While quantifying some losses may be simple, in some situations it may be quite difficult and require the analysis of multiple variables. For example, if Bank X loans $1 million to ABC Company and ABC defaults on the note, Bank X's loss isn't necessarily $1 million. This is because Bank X may hold substantial assets as collateral, and/or may use the courts in an effort to be made whole. When all of these variables are factored in, Bank X may have lost substantially less than the original $1 million loan. The process of analyzing all of these variables (as well as all of the other loans in Bank X's portfolio) is paramount to determining the loss given default.
A floating rate debt security traded among qualified institutional buyers (QIBs) and originated by German financial firm Deutsche Bank. The receipts pay a yield equal to a fixed base interest rate minus the floating rate of a benchmark (such as LIBOR+). As such, the interest rate paid moves inversely to the direction of the variable rate itself. |||LIFERs fall under municipal structured finance; the underlying cash flows for the receipts are provided by municipal authorities, such as airports, roads and schools. These securities are generally exempt from registration with the SEC under a provision in the Securities Act of 1933 known as Rule 144A. Bearer-bond versions (that offer no coupon) are also allowed for trade in the U.S. under Regulation S. LIFERs are considered more volatile than vanilla floating-rate notes, as the fixed rate of the contract will be set higher than the typical ranges of the (variable) benchmark, and often by a larger margin than the benchmark is from zero. Their complexity and increased risks are why they are only traded among QIBs.
A bond that matures in more than 10 years. When people refer to "the long bond," this typically is the 30-year U.S. treasury. |||Because they tie up money for such a long time, a long bond will usually pay investors a higher yield.
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