A type of call provision on a bond allowing the borrower to pay off remaining debt early. The borrower has to make a lump sum payment derived from a formula based on the net present value (NPV) of future coupon payments that will not be paid because of the call. |||A make whole call will be defined in the indenture. The issuer doesn't expect to have to use this type of provision, but if the issuer does, investors will be compensated, or "made whole." Because the cost can often be significant, such provisions are rarely invoked.
A type of surety bond purchased by a contractor that protects the owner of a completed construction project for a specified time period against defects and faults in materials, workmanship and design that could arise later if the project was done incorrectly. A maintenance bond is not technically insurance, but basically functions as an insurance policy on a construction project to make sure a contractor will either correct any defects that arise or that the owner is compensated for those defects. Pricing a maintenance bond is very different from pricing regular coupon paying bonds. |||A surety bond is a three-way contract where a third party called the surety guarantees the contractual obligations of one party (the principal) to another party (the obligee) by agreeing to pay a sum to the obligee as compensation if the principal does not fulfill its obligations. The surety assures the obligee that the principal will perform the required tasks. A maintenance bond is structured in such a way.
The weighted average term to maturity of the cash flows from a bond. The weight of each cash flow is determined by dividing the present value of the cash flow by the price, and is a measure of bond price volatility with respect to interest rates.Macaulay duration can be calculated by: |||The metric is named after its creator, Frederick Macaulay. Macaulay duration is frequently used by portfolio managers who use an immunization strategy. Macaulay duration is also used to measure how sensitive a bond or a bond portfolio's price is to changes in interest rates.
An exotic call option that's value is determined by the differing performance of two underling assets or securities. The holder gains on the amount one asset outperforms another, both of which are pre-determined. These options are typically European-style, settled in cash, and traded in the over-the-counter market.Also referred to as "margrabe option". For example an investor may purchase an outperformance option, where they gain if the S&P 500 outperforms the FTSE 100 over a six-month period. If at the end of the six months the S&P 500 outperforms the FTSE 100, the option holder will gain. However, if the S&P has underperformed the FTSE 100 over this time period, the option will expire worthless.
1. For a call, when an option's strike price is higher than the market price of the underlying asset. 2. For a put, when the strike price is below the market price of the underlying asset. Watch: Out Of The Money Options Basically, an option that would be worthless if it expired today.
A bond issued in the U.S. and U.K. with a rate of return dependent upon a lottery style payout. |||The lottery payout structure involves a method of random draws. Every issued bond is similar to a lottery ticket with an equal opportunity at winning payments in monthly draws for cash prizes. These prizes are generally larger than coupon payments on regular payout bonds. However, there is always the possibility that a bondholder will not win any of the cash prizes during the life of the bond. These bonds are now issued as premium bonds, but be warned, sometimes these bonds are used as scams for unwitting investors. The only corporation permitted to sell these bonds in the U.S. is National Savings.
Exotic options traded on the over-the-counter market, where participants can choose the characteristics of the options traded. The flexibility of these options is attractive to many. With OTC options, both hedgers and speculators can benefit from avoiding the restrictions that normal standardized exchanges place on options. The flexibility allows participants to achieve their desired position more precisely and cost effectively.
The amount of funds that is lost by a bank or other financial institution when a borrower defaults on a loan. Academics suggest that there are several methods for calculating the loss given default, but the most frequently used method compares actual total losses to the total potential exposure at the time of default. Of course, most banks don't simply calculate the LGD for one loan. Instead, they review their entire portfolio and determine LGD based on cumulative losses and exposure. |||Institutions such as banks will determine their credit losses through an analysis of the actual loan defaults. While quantifying some losses may be simple, in some situations it may be quite difficult and require the analysis of multiple variables. For example, if Bank X loans $1 million to ABC Company and ABC defaults on the note, Bank X's loss isn't necessarily $1 million. This is because Bank X may hold substantial assets as collateral, and/or may use the courts in an effort to be made whole. When all of these variables are factored in, Bank X may have lost substantially less than the original $1 million loan. The process of analyzing all of these variables (as well as all of the other loans in Bank X's portfolio) is paramount to determining the loss given default.
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