A debt security that contains an option where the note will be converted into a predefined amount of the issuer's shares. A senior convertible note has priority over all other debt securities issued by the same organization.Since the bondholder receives two benefits not found on a normal bond issue (a call option and first priority for recourse in the event that the issuer goes bankrupt), the amount of interest offered to the bondholder will tend to be lower than on any other bond offered by the same issuer. |||The worst-case scenario would be if the issuing company initially performed well, meaning that the debt would be converted into shares, and subsequently went bankrupt. The converted shares would become worthless, but the holder of the note would no longer have any recourse.
A debt financing obligation issued by a bank or similar financial institution to a company or individual that holds legal claim to the borrower's assets above all other debt obligations. The loan is considered senior to all other claims against the borrower, which means that in the event of a bankruptcy the senior bank loan is the first to be repaid, before all other interested parties receive repayment. |||Senior bank loans are usually secured via a lien against the assets of the borrower. At the time the loan is made, there typically tend to be no other existing liens on the borrower's assets, or at least not on any of the assets being secured by the senior bank loan. Thus, if the borrower should enter a state of bankruptcy in the future, the assets used to secure the senior bank loan must be used to repay the senior bank loan before other creditors, preferred stockholders or common stockholders receive any payment.
A conversion metric to compare rates on bonds with varying characteristics. Since bonds come with all types of coupon rates and payment frequencies, it's important to be able to find some common measure to compare different types of bonds side-by-side. By using a semi-annual bond basis (SABB), the interest rate of a bond that pays other than semi-annually is converted into its semi-annual equivalent. |||When considering the purchase of a bond from a brokerage, be sure to ask for the interest rate to be quoted on a semi-annual bond basis. If they are unable to provide this computation for you and you plan on investing in bonds on a regular basis, you should consider investing in a financial calculator or computer program that can assist you in this calculation.
A legal claim on collateral that has been pledged, usually to obtain a loan. The borrower provides the lender with a security interest on certain securities/assets which can be repossessed in the event that timely obligation payments are not met. |||In the event that the lender fails to uphold a proper debt repayment schedule, the holder of the security interest takes possession and is able to sell the underlying collateral. In the event of bankruptcy secured lenders have precedence over unsecured lenders.
A combination of a serial bond issue and a term bond issue. Essentially, the serial bond with balloon has bonds that mature at different intervals throughout the issue's life, and then a large percentage of the bonds (the term bonds) mature in the last year of the issue's term. Alternatively, the bulk of the bonds may mature at the first maturity date with the rest of the bonds gradually maturing over the remainder of the issue's life. |||All the bonds in a term issue have the same maturity date. All the bonds in a serial bond issue mature in intervals. The combination of the two creates an issue that matures at regular intervals with a large portion of the bonds maturing at the same time in the first or last interval, creating the 'balloon'.
A type of collateralized mortgage obligation (CMO) in which there are several tranches. Each tranche's holder receives interest payments as long as the tranche's principal amount has not been completely paid off. The senior tranche receives all initial principal payments until it is completely paid off, after which the next most senior tranche receives all the principle payments, and so on. |||Investors with shorter investment horizons, such as commercial banks, can purchase bonds from senior tranches in order to protect their investments from extension risk. Investors with longer investment horizons, such as pension funds, can protect their investments from contraction risks by purchasing bonds from more junior tranches.
The magnitude of a financial instrument's reaction to changes in underlying factors. Financial instruments, such as stocks and bonds, are constantly impacted by many factors. Sensitivity accounts for all factors that impact a given instrument in a negative or positive way in an attempt to learn how much a certain factor will impact the value of a particular instrument. |||Interest rates are one of the most important underlying factors in the movement of bond prices and are closely watched by bond investors. These investors get a better idea of how their bonds will be affected by interest rate movements by incorporating sensitivity into their analyses.
A specific type of loan to a business entity, which possesses certain characteristics of both asset-based loans and cash-flow loans. Senior stretch loans are cheaper than straight cash-flow loans, since the borrowing company has a healthy balance sheet and generates sufficient cash flows to satisfy their obligations. |||Senior stretch loans usually provide financing that is equal to more than the total lending value of the borrower's current and fixed assets. However, the borrower must show the capacity to repay this type of loan either through high operational cash flows or a strong balance sheet consisting of a substantial asset base.
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