The rate at which the price of a derivative changes relative to a change in the risk-free rate of interest. Rho measures the sensitivity of an option or options portfolio to a change in interest rate. For example, if an option or options portfolio has a rho of 12.124, then for every percentage-point increase in interest rates, the value of the option increases 12.124%.
A type of unit investment trust (UIT) that invests solely in municipal securities. Municipal investment trusts allow individuals to invest in a diversified pool of municipal bonds, which passes through tax-free income. Municipal investment trusts are designed for higher-income investors seeking tax-free income. |||Municipal investment trusts are generally available through brokers and usually have a sales charge and a minimum investment requirement. One of the primary advantages that this type of trust offers is a monthly payout of income, as opposed to the quarterly or semiannual payment of interest common with most individual municipal issues.
A new swap that undoes the effects of an existing swap (a type of derivative that involves the exchange of cash flow streams). A reverse swap is one of several ways to undo a swap. Other options for undoing a swap are completing a cash settlement based on market value, selling the swap (with permission from the other party) and using a swaption. One reason why a reverse swap would be used instead of simply canceling the original swap is to avoid negative tax or accounting implications. Swaps are private transactions that are traded over the counter and as such are subject to credit risk. These contracts exchange assets, liabilities, currencies, securities, equity participations and commodities. They are generally used for risk management by institutions and are less common among individual investors. Reverse swaps allow investors to mitigate the original risk that they are exposed to upon entering a swap, or to cancel a position if they feel that market conditions will change in such a way as to give the original swap a negative value.
A bond covenant preventing certain activities, unless agreed to by the bondholders. Negative covenants are written directly into the agreement creating the bond issue, are legally binding on the issuer, and exist to protect the best interests of the bondholders. Also referred to as "restrictive covenant". |||Think of a negative covenant as a promise not to do something. Usually, negative covenants limit the amount of dividends a firm can pay to shareholders and restrict the ability of the firm to issue additional debt. Generally, the more negative covenants exist in a bond issue, the lower the interest rate on the debt will be since the restrictive covenants make the bonds safer in the eyes of investors.
1. The move from one option position to another with a higher exercise price. 2. In the context of venture capital, when a VC forces small companies to merge in order to reduce costs. 1. When investors are bullish on a stock they will typically roll up.
When the shape of a bond's yield curve is concave. A bond’s convexity is the rate of change of its duration, and is measured as the second derivative of price with respect to yield.Most mortgage bonds are negatively convex. |||Callable bonds are negatively convex at lower yields than the yield at which the bond is likely to be called. One property of a non-callable bond is that as interest rates fall, its price will increase. However, with a callable bond, as interest rates fall, the incentive for the issuer to call the bond at par increases; therefore, its price will not rise as quickly as the price of a non-callable bond. The price of a callable bond might actually drop as the likelihood that the bond will be called increases. This is why the shape of a callable bond's curve of price with respect to yield is concave or "negatively convex."
When an investor replaces an old options position with a new one having a later expiration date (and same strike price). This is sometimes referred to as a roll over.
The NYSE requirement that all orders for nine bonds or less be sent to the floor for one hour, in which time a market is sought. The rule doesn't apply if the customer directs the broker to go to the OTC market. Also known as "Rule 396". |||Because of the relative inactivity of bond trading on the NYSE (due to a number of factors including many of the listed bonds being traded OTC), this rule, which enables an order to stay on the floor for one full hour, was put in place to garner the best possible price for the individual investor.
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