A special type of municipal bond used to fund a development project. Interest owed to lenders is paid by taxes levied on the community benefiting from the particular bond-funded project. |||For example, if a bond of this sort was issued to pay for sidewalks to be re-paved in a certain community, an additional tax would be levied on homeowners in the area benefiting from this project. Area homeowners get nicer walking paths, and they will probably see the value of their property increase accordingly, but this comes at a price. Their property taxes will increase to pay the interest owed to the bondholders by the municipality.
A default on the repayment of a county’s government debts. Countries are often hesitant to default on their debts, since it will be difficult and expensive to borrow funds after a default event. However, sovereign countries are not subject to normal bankruptcy laws and have the potential to escape responsibility for debts without legal consequences. |||Sovereign defaults are relatively rare and are often precipitated by an economic crisis affecting the defaulting nation. Recent sovereign defaults include Argentina’s 2002 default on its World Bank debt and Russia's default on its internal debts in 1998. Investors in sovereign debt closely study the financial status and political temperament of sovereign borrowers in order to determine the risk of sovereign default.
A bond where both the principal and regular coupon payments--which have been removed--are sold separately. Also known as a "zero-coupon bond." |||An investment firm will usually buy a debt instrument and "strip" it into its separate parts. Strip bonds usually trade at a discount and mature to par value.
A type of convertible bond issued by companies that pays a quarterly cash coupon and can also be exchanged for a certain number of shares or receive the cash equivalent at maturity. STRYPES were created and trademarked by Merrill Lynch, and are traded on major exchanges. |||STRYPES were created to help sell the stock of a company that pays a low dividend. The yield paid on the STRYPES makes up for the low dividend yield until the investor converts the STRYPES into common shares. Executives can also use STRYPES to gain cash periodically without significantly diluting a company's share value.The features of the STRYPES allows high-risk companies to access investment capital that might otherwise be unattainable.
A debt obligation that also contains an embedded derivative component with characteristics that adjust the security's risk/return profile. The return performance of a structured note will track that of the underlying debt obligation and the derivative embedded within it. |||A structured note is a hybrid security that attempts to change its profile by including additional modifying structures. A simple example would be a five-year bond tied together with an option contract. This structure would work to increase the bond's returns.
A pool of investment assets that attempts to profit from credit spreads between short-term debt and long-term structured finance products such as asset-backed securities (ABS). Funding for SIVs comes from the issuance of commercial paper that is continuously renewed or rolled over; the proceeds are then invested in longer maturity assets that have less liquidity but pay higher yields. The SIV earns profits on the spread between incoming cash flows (principal and interest payments on ABS) and the high-rated commercial paper that it issues. SIVs often employ great amounts of leverage to generate returns. Also known as "conduits". |||SIVs are less regulated than other investment pools, and are typically held off the balance sheet by large financial institutions such as commercial banks and investment houses. They gained much attention during the housing and subprime fallout of 2007; tens of billions in the value of off-balance sheet SIVs was written down as investors fled from subprime mortgage related assets. Many investors were caught off guard by the losses because little is publicly known about the specifics of SIVs, including such basics as what assets are held and what regulations determine their actions. SIVs essentially allow their managing financial institutions to employ leverage in a way that the parent company would be unable to due to capital requirement regulations.
A type of credit facility that helps developing countries become more economically self-sufficient. Structural adjustments are intended to reduce the current account debt of a debtor nation, as opposed to financing a new project. They do this by allowing the debtor nation to reschedule principal payments to a later date. |||Structural adjustments were first introduced by the World Bank in 1979. They usually take the form of multi year agreements, in which the borrower promises to instigate domestic economic growth through increased exports and economic diversity. Therefore, the borrowing country will be better able to make the payments later, when its economy is stronger.
1. For bonds, the process of removing coupons from a bond and then selling the separate parts as a zero coupon bond and interest paying coupons. Also known as a stripped bond or zero coupon bond. 2. In options, a strategy created by being long in one call and two put options, all with the exact same strike price. |||In the context of bonds, stripping is typically done by a brokerage or other financial institution.
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