A class of tranche found in a planned amortization class (PAC) bond that is responsible for protecting the PAC tranche from both contraction and extension risk. The companion bond is designed to absorb excess principal payments during times of high prepayment speeds and defer receiving principal payments during times of low prepayment speeds. Also known as a "support tranche" or "companion tranche" |||More specifically, in situations of high prepayment speeds, the companion bond takes as much of the excess prepayments from the PAC tranche as possible and uses them to repay its own principal amount. once its portion of the principal is completely paid off, all excess principle payments go back to the PAC bond.Conversely, in situations of low prepayment speeds, the companion bond defers the reception of any payments. The principal payments then go toward paying off the PAC bond.As long as the prepayment speed stays within the designated upper and lower PAC collars, the companion bond will be able to operate as designed.
A commodity-backed bond is a type of debt security which is linked with the price of a commodity. Under the most common arrangement, the interest rate paid on a commodity-backed bond is set to fluctuate based on the market price of the commodity to which it is linked. |||Commodity-backed bonds are often issued by the producers of those commodities. This reduces default risk since the profits of producers generally fluctuate based on the price of the commodity. If the price of the commodity increases, then the producers can afford to pay the higher interest rates. If prices fall, the producers pays less interest, cushioning the blow.
A commodity-backed bond is an investment term referring to a type of bond whose value is directly related to the price of a specified commodity. Most bonds have a fixed value determined at the time of purchase. A commodity-backed bond, however, can experience fluctuations in value because its value is tied to the value of its underlying commodity. |||Commodity-backed bonds are frequently used to hedge against inflation and other economic variables. Also called gold bonds, commodity-backed bonds carry more risk than traditional bonds because the value of the underlying commodity is not guaranteed. There is the possibility, however, of achieving higher returns with a commodity-backed bond versus a traditional, fixed-dollar bond.
A credit facility whereby terms and conditions are clearly defined by the lending institution and imposed upon the borrowing company. |||In committed facilities, the borrowing companies must meet specific requirements set forth by the lending institution in order to receive the stated funds.
A financing arrangement involving a government or other qualified agency using its name in an issuance of fixed income securities for a non-profit organization's large capital project. |||The government or other qualified agency is not responsible for paying the required cash flows to investors - all cash flows come directly from the project.
A loan prepayment rate that is equal to the proportion of the principal of a pool of loans that is assumed to be paid off prematurely in each period. The calculation of this estimate is based on a number of factors such as historical prepayment rates for previous loans that are similar to ones in the pool and on future economic outlooks. |||The CPR can be used for a variety of loans. For example, mortgages, student loans and pass-through securities all use CPR as estimates of prepayment. Typically, CPR is expressed as a percentage. For example, a pool of mortgages with a CPR of 8% would indicate that for each period, 8% of the pool's remaining principal outstanding will be paid off.
A provision that requires the issuer of a callable bond to replace the bond with a non-callable bond of similar maturity and interest rate in the case that the security is called before maturity is reached. Conditional call options usually only refer to junk/high-high yield fixed income securities. |||Call options help protect investors holding high-yield bonds from having their securities called early. If an issuer wants the security back then another high-yield bond has to replace the one the investor had to give up. While the terms of the new bond might not be exactly the same, the provision does mitigate some downside risk to the investor.
A type of debenture in which the whole value of the debenture must be converted into equity by a specified time. The compulsory convertible debenture's ratio of conversion is decided by the issuer when the debenture is issued. Upon conversion, the investors become shareholders of the company. |||The main difference between convertible debentures and other convertible securities is that owners of the debentures must convert their debentures into equity, whereas in other types of convertible securities, the owner of the debenture has an option. Some CCDs, which are usually considered equity, are structured in a manner that makes them more like debt. Often, the investor has a put option which requires the issuing companies to buy back shares at a fixed price.
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