1. A repayment schedule for a bond issue where a large number of the bonds come due at a one time (normally at the final maturity date). 2. A final loan payment that is considerably higher than prior payments. This is also known as a "balloon payment." |||When a balloon maturity occurs, a company must pay the principal back to borrowers on many bonds at once. If the company is short on cash then it may have trouble making all the payments.
An increased coupon rate on the longer term maturity instruments within a serial bond issue. In a serial issue, bonds mature at different intervals, creating a string of short- to long-term instruments. Higher interest is earned on the long-term bonds, providing incentive to investors for holding the instrument for an increased period. |||Investors refer to this large coupon rate as balloon interest, since it is often inflated. Serial bonds are usually issued to fund revenue-generating projects with steadily increasing cash flows. The issuer hopes that the project will be near the height of its earning power, by time the balloon interest is due.
A debt security issued by the Resolution Funding Corporation to bail out the savings and loan associations during the financial crisis of the late 1980s and early 1990s. The bailout bonds had zero-coupon Treasury bonds backing the principal amounts, making the instruments a safe investment. |||In the mid 1990s, after the savings and loan associations recovered from its crisis, bailout bonds were no longer issued. Because the bonds were backed by Treasury securities, the yields were only marginally better than those of similar T-bonds.
A confidence indicator calculated by dividing the average yield on high-grade bonds by the average yield on intermediate-grade bonds. The discrepancy between the yields is indicative of investor confidence. A rising ratio indicates investors are demanding a lower premium in yield for increased risk and so are showing confidence in the economy. |||The theory is that if investors are optimistic they are more likely to invest in the more speculative grade of bonds, driving yields downwards and the confidence index upwards. The opposite is true if investors are pessimistic.
A bond investment strategy that concentrates holdings in both very short-term and extremely long-term maturities. This is also known as the "dumbbell" or "barbelling." |||The shape that appears when charting the strategy on a timeline looks like a barbell (dumbbell). The reasoning behind this strategy is that it allows one portion of the portfolio to achieve high yields while the other portion minimizes risk.
A short-term credit investment created by a non-financial firm and guaranteed by a bank. |||Acceptances are traded at a discount from face value on the secondary market. Banker's acceptances are very similar to T-bills and are often used in money market funds.
A security with an interest rate guaranteed by a bank. It provides a specific yield on a portfolio over a specified period. |||A BIC is a relatively safe investment, but it provides a low rate of return.
A quoting convention used by financial institutions when quoting prices for fixed-income securities sold at a discount, particularly U.S. Government issues. The quote is presented as a percentage of face value, and is determined by discounting the bond by using a 360-day-count convention, which assumes there are twelve 30-day months in a year.Also referred to as "discount yield". |||Differences in the day count convention used by the firm quoting a fixed-income security is subtle, but important. Over longer maturities, the day count convention will have a greater impact on the current 'price' of a bond than if the time to maturity is much shorter.The 30/360 day-count convention is the standard when quoting government treasury bonds for banks.
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