A yield curve in which short-term debt instruments have a lower yield than long-term debt instruments of the same credit quality. This gives the yield curve an upward slope. This is the most often seen yield curve shape.Sometimes referred to as "positive yield curve". |||This yield curve is considered "normal" because the market usually expects more compensation for greater risk. Longer-term bonds are exposed to more risks such as changes in interest rates and an increased exposure to potential defaults. Also, investing money for a long period of time means an investor is unable to use the money in other ways, so the investor is compensated for this through the time value of money component of the yield.
A broad term describing mortgages that do not take the traditional form. A traditional mortgage would require a relatively high initial down payment of about 25% and 25-year payment schedule with an interest rate that is compounded on a monthly basis. Nontraditional mortgages include interest-only mortgages, payment option adjustable rate mortgages (ARMs) and subprime mortgages. |||A subprime mortgage is extended to individuals who are of higher risk due to a history of bankruptcy, a higher debt to equity ratio, a history of non-payment of debt despite sufficient cash flow and/or a low credit score.Interest-only mortgages are balloon loans in which the borrower must service the interest during the life of the loan and then make a balloon payment at maturity to pay off the principal. ARMs are loans that have interest rates that will be reset in periodic intervals. These intervals can vary from months to years, and will cause payments to fluctuate more then a traditional mortgage.
A debt obligation where the borrower has not paid any previously agreed upon interest and principal repayments to the designated lender for an extended period of time. The nonperforming asset is therefore not yielding any income to the lender in the form of principal and interest payments. |||For example, a mortgage in default would be considered non-performing. After a prolonged period of non-payment, the lender will force the borrower to liquidate any assets that were pledged as part of the debt agreement. If no assets were pledged, the lenders might write-off the asset as a bad debt and then sell it at a discount to a collections agency.
A full-recourse loan that is securitized by accounts receivable (AR). Customers making accounts-receivable payments are not notified that their account/payment is being used as collateral for a loan. They continue making payments to the company that rendered services or made the original loan, and the company then uses those payments to repay their lender for financing obtained. Non-notification loans do not transfer the risk to the third party. If the AR payments are not made by the customers, the company is still liable for repaying the loan it obtained using the AR as security. |||Commercial banks and finance companies are the primary originators of non-notification loans. They began providing the service to commercial clients in the early 20th century because the Federal Reserve would not buy notes backed by AR. Today non-notification loans can be attractive for the financing company because they do not assume any credit risk on the receivables sold or assigned.
Any type of security that is difficult to buy or a sell because it does not trade on a normal market or exchange. These types of securities trade over the counter (OTC) or in a private transaction. Finding a party with which to transact business is often difficult; in some cases, these securities can't be resold due to regulations surrounding the security. |||Some examples of non-marketable securities are savings bonds, series (A, B, EE, etc.) bonds and private shares. The U.S. government offers both marketable and non-marketable securities to the public. Marketable securities, such as treasury bills and bonds can be purchased and resold to the public. But non-marketable securities, such as savings bonds must be held by the holder until maturity and can't be resold to another party.Limited partnership (LP) interests are often difficult, if not impossible to resell.
One of the two bid processes for buying debt issuances. Non-competitive tender is for small investors, while competitive tender is for large institutional investors. The price that a non-competitive bidder receives is the average bid price of all competitive bids. Also known as a "non-competitive bid". |||This is a method of distribution used primarily by the U.S. Treasury. The minimum non-competitive tender is $10,000, and these are usually made through a Federal Reserve Bank or a commercial bank.There is no guarantee on the price or the amount received.
A spread within futures contracts created by offsetting positions in 30-year treasury bond futures with positions in 10-year treasury note contracts. |||Also known as the note over bond spread, the position a futures trader will take depends upon their perception of the yield curve. If a flat yield curve is expected, the investor will take a long position in the bond and a short in the note contract. If the yield curve is steep, the investor will short the bond and take a long position in the note contract.
A specialized index of loan-only credit default swaps (CDS) covering 100 individual companies that have unsecured debt trading in the broad secondary markets. The LCDX is traded over the counter and is managed by a consortium of large investment banks, which provide liquidity and assist in pricing the individual credit default swaps.The index begins with a fixed coupon rate (225 bps); trading moves the price and changes the yield, much like a standard bond. The index rolls every six months. Buyers of the index pay the coupon rate (and purchase the protection against credit events), while sellers receive the coupon and sell the protection. What is being protected is a "credit event" at the company, such as defaulting on a loan or declaring bankruptcy. If a credit event occurs in one of the underlying companies, the protection is paid out via physical delivery of the debt or through a cash settlement between the two parties. The underlying company is then removed, and a new one is placed in the index to return it to 100 members. |||Credit default swaps essentially put a price on the risk of a particular debt issuer's default. Companies with strong credit ratings have low risk premiums, so protection can be purchased for a minimal fee, assessed as a percentage of the notional (dollar) amount of the underlying debt. Companies with low credit ratings cost more to protect against, and the credit default swaps covering them may cost several percentage points of the notional amount. Minimum purchase amounts for the LCDX run in the millions, so most investors are large institutional firms who invest as either a hedge or a speculative play. The advantage is that one can gain access to a diversified group of companies for much less than purchasing the credit default swaps individually.
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