A graphical representation of possible intrinsic values that an option may take at different nodes or time periods. The value of the option depends on the underlying stock or bond, and the value of the option at any node depends on the probability that the price of the underlying asset will either decrease or increase at any given node. |||Binomial trees are useful tools when pricing options and embedded options, but there is a fundamental flaw with the model. The problem lies in the possible values the underlying asset can take in one period time. In this model, the underlying asset can only be worth exactly one of two possible values, which is not realistic, as assets can be worth any number of values within any given range.
A situation when too many orders of a particular type - either buy, sell or limit - for listed securities and not enough of the other, matching orders are received by an exchange. Also referred to as "order imbalance". Taobiz explains Imbalance of Orders Shares experiencing an imbalance of orders may be temporarily halted if trading has already commenced for the day. If it occurs prior to market open, trading may be delayed. Better-than-expected earnings or other unexpected good news can result in a surge in buy orders in relation to sell orders. Likewise, unexpected negative news can bring a large sell-off.
A slang term used to describe members of the stock exchange that transact bond orders from the floor of the exchange. The label “bond crowd” differentiates them from the members of the exchange who trade stocks. |||The bond crowd traditionally stood within the bond booth of the New York Stock Exchange to buy and sell bonds. The term “bond crowd” refers to the physical separation of the bond brokers and dealers from the stock traders that first occurred in 1902. Until then, stock and bond traders were on the same floor. The “active bond crowd” is a subset of the bond crowd and refers to the most active members in terms of volume traded.
The state of a security or other asset that cannot easily be sold or exchanged for cash without a substantial loss in value. Illiquid assets also cannot be sold quickly because of a lack of ready and willing investors or speculators to purchase the asset. The lack of ready buyers also leads to larger discrepancies between the asking price (from the seller) and the bidding price (from a buyer) than would be found in an orderly market with daily trading activity. Taobiz explains Illiquid Some examples of inherently illiquid assets include houses, cars, antiques, private company interests and some types of debt instruments. On the other end of the spectrum, most listed securities traded at major exchanges, such as stocks, funds, bonds and commodities are very liquid, and can be sold instantaneously during regular market hours at fair market price. Illiquid securities carry higher risks than liquid ones; this becomes especially true during times of market turmoil when the ratio of buyers to sellers may be thrown out of balance. During these times, holders of illiquid securities may find themselves unable to unload them at all, or unable to do so without losing a lot of money.
A standardized legal document that contains an abbreviated version of the relevant terms from the prospectus of a new bond issue. The bond circular is made available to prospective investors and contains basic information including: issuer, amount of the issue, coupon, use of proceeds and final legal maturity of the bond.Also known as an "offering circular". |||All securities and mutual funds made available for sale in the U.S. must have an offering circular per the Securities Act of 1933. It is usually delivered electronically along with the prospectus to potential investors. In addition to the basic information described above, the bond circular describes whether debt is senior or subordinated and how the company plans to use the issue proceeds.
A dividend declared by a corporation that is in violation of its charter and/or of state laws. Should such a dividend be declared, the company's board of directors can be sued by its shareholders and creditors; the company may also face prosecution. Taobiz explains Illegal Dividend Many states prohibit dividend payments from the capital surplus account. Dividends are generally paid out of net income or retained earnings. Illegal dividends may significantly weaken the financial position of the company and expose its creditors to a greater degree of risk.
An index published by The Bond Buyer, a daily finance newspaper that covers the municipal bond market. Investors use the Bond Buyer Index to plot interest rate patterns in the municipal market. Traders use the daily Bond Buyer Index to trade municipal bond index futures and futures options at the Chicago Board Of Trade (CBOT). Also referred to as the "Bond Buyer's Municipal Bond Index". |||The Bond Buyer Index includes the Bond Buyer 20 Index, the Bond Buyer 11 Index and the Revenue Bond Index.
A method used to calculate the share impact of convertible securities if they were converted into new shares. only in-the-money convertible securities (securities where the stock price is above the exercise price) are considered in the if-converted method. This method assumes that convertible securities are converted at the beginning of the fiscal period or at the time of issuance, whichever is later. The number of new shares is calculated on the basis of the convertible securities' conversion ratio. Taobiz explains If-Converted Method Convertible debt that is converted into stock increases share dilution but reduces interest expense, which is a tax-deductible expense for a company. For example, a company with a $20 million convertible debenture carrying an interest rate of 5% would incur an annual interest expense of $1 million. The if-converted method takes this into account by adding after-tax interest savings arising from the conversion to earnings per share (EPS), which offsets the dilution caused by the new shares.
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