An exchange of cash flows in which one counterparty makes payments based on a fixed interest rate, the other counterparty makes payments based on a floating interest rate, and the counterparty paying the floating interest rate (and receiving the fix rate) has the right to end the swap before it matures. An investor might choose a putable swap if interest rates are expected to change in a way that would adversely affect the floating rate payer. The additional features of a putable swap make it more expensive than a plain vanilla interest rate swap - the floating rate payer will pay a higher interest rate and possibly an early termination fee. The opposite of a putable swap is a callable swap, which allows the fixed interest rate payer to end the swap early.
An independent, unaffiliated research company that rates fixed income securities. Moody's assigns ratings on the basis of risk and the borrower's ability to make interest payments. Moody's backs its ratings with exhaustive financial research and unbiased commentary and analysis. |||Many bond investors pay close attention to the rating Moody assigns to bonds and preferred stock. Moody's ratings are ranked as follows: Aaa - highest grade, best quality issuer, lowest riskAa ABaa - medium grade, moderate riskBaBCaa - Poor grade, high riskCaC
Common stock that gives investors the option to put the stock back to the company at a predetermined price. Also known as a "putable swap". With putable common stock, investors have the option of selling their shares back to the issuer at a predetermined price. Typically, this price is relatively low, so the option to put acts merely as a type of insurance for investors, sweetening the security.
A zero-coupon municipal bond that can be converted into an interest-bearing bond under certain circumstances. The municiple convertible is a zero-coupon bond, and so is sold at a discount from its face value. The bondholder does not have to worry about paying tax on the appreciation, much like they would not pay tax on the interest of a regular municiple bond.Also known as stepped tax-exempt appreciation on income realization securities (STAIRS). |||Because the securities bear no interest payments, they a much more volatile than traditional municiple bonds. Municiple convertibles fall in value much quicker as interest rates rise, and rise in value much quicker when rates fall. An investor may want to convert to an interest bearing bond if they want to reduce volatility, or lock in bond value (should they believe rates will rise in the future).
A ratio of the trading volume of put options to call options. It is used to gauge investor sentiment. For example, a high volume of puts compared to calls indicates a bearish sentiment in the market.
One of the few types of municipal bonds ever issued that may be subject to taxation, provided that the funds raised were used for home mortgages. Mortgage subsidy bonds were issued by cities and other municipalities, and may be either taxable or tax-free. |||Mortgage subsidy bonds were created by the Mortgage Subsidy Act of 1980. They are issued by either state or local governments and are usually taxable. The exceptions are a select group of mortgage bonds and veterans' bonds.
A principle referring to the static price relationship, given a stock's price, between the prices of European put and call options of the same class (i.e. same underlying, strike price and expiration date). This relationship is shown from the fact that combinations of options can create positions that are the same as holding the stock itself. These option and stock positions must all have the same return or an arbitrage opportunity would be available to traders. Any option pricing model that produces put and call prices that don't satisfy put-call parity should be rejected as unsound because arbitrage opportunities exist. The above illustration demonstrates a simple put-call parity relationship. Looking at the graph, we see that a long-stock/long-put position (red line) has the same risk/return profile as a long call (blue line) with the same expiration and strike price. The only difference between the two lines is the assumed dividend that is paid during the time to expiration. The owner of the stock (red line) would receive the additional amount, while the owner of the call (blue line) would not. However, if we assume no dividend would be paid to stockholders during the holding period, then both lines would overlap.
A funding source for home mortgages. Mortgage revenue bonds help low- and middle-income first-time home buyers by offering long-term mortgages at below-market rates. A state can issue mortgage revenue bonds (a form of tax-free municipal bond) to investors, then use the capital proceeds to invest in that state’s MRB home loan program. In order to qualify, prospective home buyers must earn below stated threshold levels for annual income, and must otherwise financially qualify for a mortgage from a conventional lender. Many mortgages that were funded by MRBs first originated through the Federal Housing Administration (FHA), Freddie Mac and Fannie Mae. |||MRB funding is not available in all areas of the United States. The process is run state by state where it exists, with each program targeting certain areas or neighborhoods based on state demographics. Eligibility is different from program to program, but most states have eligibility requirements; for example, the home in question must be the primary residence, and the prospective buyer(s) must not have owned a home in the past three years. There are also limits on how much a given mortgage can be written for, which may be less than the original application source's limits (such as the FHA loan limit).
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