A type of inverse floating-rate bond created by dividing the income from a municipal bond into two portions. The municipal bondholder will create two new securities: a primary direct floating-rate bond and a residual inverse floating-rate bond. The floaters will be linked to a reference interest rate, such as LIBOR, and the municipal bond's income will be used to pay the coupon on the direct floater, with any remaining income going toward the residual interest bond. |||Because the residual interest bond is an inverse floater and only pays a residual income, its price will be highly sensitive to changes in interest rates. As market interest rates increase, investors can expect to see large decreases in the value of a residual interest bond.
A type of security whose cash flows come from residential debt such as mortgages, home-equity loans and subprime mortgages. This is a type of mortgage-backed securities that focuses on residential instead of commercial debt. |||Holders of an RMBS receive interest and principal payments that come from the holders of the residential debt. The RMBS comprises a large amount of pooled residential mortgages.
The rate at which cash flows from fixed-income securities may be reinvested. |||Because of the additional interest income, bondholders can make larger investment returns if they reinvest received coupon payments.
A bond whose owner is registered with the bond's issuer. The owner's name and contact information is recorded and kept on file with the company, allowing it to pay the bond's coupon payment to the appropriate person. If the bond is in physical form, the owner's name is printed on the certificate. Most registered bonds are now tracked electronically, using computers to record owners' information. |||Transferring the ownership of a registered bond depends on the way the bond is held. Certificate bonds must be endorsed by the owner before the transfer is complete, while electronic bonds simply need to have the change of information phoned, mailed or faxed to the company.Registered bonds are the opposite of bearer bonds, which contain no information on the owner. Bearer bonds will pay a coupon or the principal to whoever holds the physical certificate.
Retiring an outstanding bond issue at maturity by using money from the sale of a new offering. |||In other words, issuing more bonds to pay off the old bonds that just matured.
The purchase of securities with the agreement to sell them at a higher price at a specific future date. For the party selling the security (and agreeing to repurchase it in the future) it is a repo; for the party on the other end of the transaction (buying the security and agreeing to sell in the future) it is a reverse repurchase agreement. |||Repos are classified as a money-market instrument. They are usually used to raise short-term capital.
A trading strategy that is based upon the yield curve and used for interest rate futures. Investors hope to achieve capital gains by employing this strategy. |||Traders riding the yield curve buy long term bonds with the hopes of making a profit as the yields fall with the declining maturity of the bonds.
A floating-rate note in which the coupon rises when the underlying reference rate falls. The floating rate resets with each coupon payment and may have a cap and/or floor. The underlying reference rate is often the London Interbank Offered Rate (LIBOR), the rate at which banks can borrow funds from other banks in the London interbank market, the most common benchmark for short-term interest rates. |||For example, the coupon on a reverse floater may be calculated as: principal*(10%-LIBOR). Floaters (bonds or other types of debt whose coupon rate changes with short-term interest rates) are also known as "floating-rate debt." Reverse floaters offer guaranteed principal and are an option for investors looking to benefit from falling interest rates.
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