A non-parallel yield curve shift in which short- and long-term rates shift upward by a greater magnitude than medium term rates. This yield curve shift effectively humps the curve, adding to its curvature. |||A non-parallel shift in the yield curve happens when not all of the maturities on the curve move by the same rate. For example, if short-term and long-term rates move upward by 100 basis points (1%) while medium-term rates remain the same, the convexity of the yield curve will increase. This yield curve shift is called a positive butterfly shift because it causes the curve to hump.
The percentage of the original principal that is left to be distributed in a mortgage-backed security, as represented by a numerical factor that will be attached on periodic market quotes and other presentations of the MBS’s price. Calculated as: |||For example, if the face amount of a pooled MBS is $100,000 and the stated pool factor is 0.4587, the remaining balance in the security, yet to be paid to the investor, would be $45,870. The pool factor is only used to describe mortgage-backed securities, which can be issued by Freddie Mac (FHLMC), Fannie Mae (FNMA) and Ginnie Mae (GNMA). A pooled MBS is one whose component mortgage payments are passed through to the investors, month to month, until the mortgage pool has been completely paid off, instead of being rebundled or collated,
A measure used to describe how a basis point change in yield affects the price of a bond.Also knows as the "value of a basis point" (VBP) or "basis point value" (BPV). |||There is an inverse relationship between bond price and yield. As bond prices decrease, their yields increase and vice versa. The degree of change in bond price for each basis point change in yield is determined by a number of other factors, such as the bond's coupon rate, time to maturity and credit rating.
A factor which can be used to calculate the present value of a series of annuities. The initial deposit, earning interest at the periodic rate (r), perfectly finances a series of (N) consecutive dollar withdrawals. PVIFA is also a variable used when calculating the present value of an ordinary annuity. PVIFA = 1 - (1 + r)^-N r |||The most common values of both N and r can be found in a PVIFA table, which will immediately show the value of PVIFA. This table is a particularly useful tool for comparing different scenarios with variable N and r values.
A convertible bond with an additional put feature that allows it to be redeemed at a premium sometime during its life. |||Similar to a regular put option, the issuer of the premium put convertible bond has an obligation to buy back the bond upon the discretion of the bondholder. Thus, the put option attached to this convertible bond allows it to be redeemed at a premium by the bondholder anytime before maturity.
A debt instrument that combines a coupon paying bond with the option to convert the bond into common stock at a set price. These are frequently described as hybrid securities because they combine features of debt and equity, converting to ordinary shares at a set date based on a pre-determined ratio. |||Convertible securities like PEACS allow investors to acquire a debt instrument with rights to interest and principal payments without sacrificing the chance to participate in the company's capital appreciation. When a company does well, investors can convert the debenture into stock that has a higher value. When a company is less successful, investors can retain the bond and receive interest and principal payments. Convertible-bond mutual funds can provide a diversified investment in convertibles. These funds are meant to offer most of the upside potential of stocks while limiting downside risk.
A type of fixed-income security where the holder is only entitled to receive regular cash flows that are derived from incoming principal repayments on an underlying loan pool. The loan is often a pool of mortgages in the form of a mortgage-backed security (MBS). |||This security is created by splitting a mortgage-backed security into its interest and principal payments. The principal payments create a string of cash flows which are sold at a discount to investors. These investors will receive the principal portions of the monthly mortgage payments from the underlying pool of loans.The yield on a PO strip depends on the prepayment speed of the underlying loan. The faster the principal is repaid, the higher the yield an investor will receive. Since the investor benefits from faster repayment speeds, he or she is protected from contraction risk. This means that, unlike a usual bond, the investor will benefit from decreases in the interest rate.
A type of debt security that pays interest semiannually and has a yield that is linked to foreign exchange rates. PERLs are denominated in U.S. dollars, but their repayment is determined by the exchange rate between the dollar and a specific foreign currency within a certain time frame. Many companies will purchase PERLs as a means of hedging against foreign exchange risk. |||A company wishing to expand into a foreign currency can safely do so via the purchase of PERLs. The PERLs allow for the currency to retain a link to the dollar. Reverse PERLs are denominated in one currency, but pay interest in another.
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