First introduced by Merrill Lynch, PRIDES are synthetic securities consisting of a forward contract to purchase the issuer's underlying security and an interest bearing deposit. Interest payments are made at regular intervals, and conversion into the underlying security is mandatory at maturity. |||Similar to convertible securities, PRIDES allow investors to earn stable cash flows while still participating in the capital gains of an underlying stock.This is possible because these products are valued along the same lines as the underlying security.
A short-term debt obligation issued to finance a project or endeavor past a specified milestone, or to fund multiple small projects on a short-term basis. Project notes are often used by municipalities to fund urban renewal programs and are guaranteed by the U.S Department of Housing and Urban Development. |||Occasionally, organizations need funding for short-term projects that require one-time injections of cash to finance. Rather than issue long-term debt or seek alternative financing arrangements, short-term notes can be issued with the specific project written into the indenture so that the funds must be used for that purpose.
A type of clause, seen most often in municipal bond indentures, which requires the issuing party to sell debt securities (often in the form of revenue bonds) to finance the full completion of a particular project. |||Project cash flow projections are rarely certain, and if construction costs exceed estimates, the debt issuer may reconsider the completion or the final structure of the project. A project completion restriction protects the interests of bondholders, as it forces the issuer to secure the debt financing needed to complete the project, which should produce the revenues needed to meet bond payment obligations.
A type of municipal bond that is used to finance private rather than public facilities and projects. For example, the construction of a new airport could be financed through a private purpose bond. |||The Tax Reform Act of 1986 separated munipal bonds into two types: public purpose bonds, and private issue bonds. Public purpose bonds are exempt from federal taxation. On the other hand, private purpose bonds are subject to tax unless they are specifcially exempted.
The actual amount of return earned on a security investment over a period of time. This period of time is typically the holding period which may differ from the expected yield at maturity. The realized yield also includes the returns that have been earned from reinvested interest, dividends and other cash distributions. |||The realized yield tends to differ from the yield at maturity in scenarios where the holding period is less than that of the maturity date. In other words, the security is settled or sold prior to the maturity date given at the time of purchase. For example, suppose an investor purchases a 10-year bond for $1,000 that issues a 5% annual coupon. Furthermore, if the investor sells the bond for $1,000 at the end of the first year (and after receiving the first coupon payment), her realized yield would only include the $50 coupon payment.
A special purpose vehicle (SPV) that is used to pool mortgage loans and issue mortgage-backed securities (MBS). Real estate mortgage investment conduits (REMIC) hold commercial and residential mortgages in trust, and issue interests in these mortgages to investors. |||Similar to collateralized mortgage obligations (CMOs), REMICs piece together mortgages into pools based on risk, and issue bonds or other securities to investors. These securities then trade on the secondary mortgage market.
The additional fixed spread above the index underlying a floating-rate security. |||For example, if a floating-rate note has a rate based on LIBOR plus 0.5%, the 0.5% or 50 basis points would be the reference rate and would not change throughout the life of the note.
The return a bond must offer in order to be a worthwhile investment. Required yield is set by the market and sets the precedent for how current bond issues will be priced. |||For example, if the required yield increases to a rate that is greater than that of the bond's coupon, the bond will be priced at a discount. In this way, the investor acquiring the bond will be compensated for the lower coupon rate in the form of accrued interest. If the bond is not priced at a discount, investors will not purchase the issue because its yield will be lower than that of the market. The opposite occurs when the required yield decreases to a rate that is less than that of the bond's coupon. In this case, investor demand for the higher coupon will drive the bond's price up, making the bond's yield equivalent to market yield.
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