Financial instruments typically with original maturities of less than nine months. Short-term paper is typically issued at a discount and provides a low-risk investment alternative. Examples of short-term paper include U.S. Treasury bills and negotiable instruments issued by financial and non-financial corporations, such as commercial bills, promissory notes, bills of exchange and certificates of deposit. |||The majority of financial institutions rely on being able to roll over short-term paper for their day-to-day financing needs. During the U.S. financial-market meltdown of 2008, institutions essentially halted issuing short-term paper, and the U.S. government had to intervene to provide liquidity for corporations caught without the means to finance operations.
A payment made on a bond within a shorter time interval than is normal for the bond. Most often, a short coupon is a bond's first coupon. A short coupon is used if the issuer wishes to make payments on certain dates, for example, June 30 and December 31, rather than simply after a particular interval from when it is sold in the primary market. |||In the U.S., coupon payments are commonly made every six months. In other countries, it is customary to make coupon payments only once per year. The schedule by which coupon payments are made does not generally affect yields, since the price of a bond will quickly adjust such that the effective yield on any given issue is comparable to similar bonds in the market. However, unusual payment schedules, such as those in which no payment is made for several years, may require a higher effective yield to entice buyers.
A provision allowing a bond issuer the opportunity to buy outstanding bonds from bondholders for a set rate, using money (a sinking fund) from the issuer's earnings saved specifically for security buybacks. Because it adds doubt for investors over whether the bond will continue to pay until its maturity date, a sinking fund call is seen as an additional risk for investors. |||Securities that have a sinking fund call provision provide higher yields to make up for the additional risk associated with holding them. Also, if the bonds are called, the call price is usually paid at a premium. Borrowers who opt to have a sinking fund call mitigate interest rate risk, allowing for the opportunity to buy back outstanding securities and issue new ones with lower interest rates.
In mortgage-backed securities (MBSs), this is the percentage of the principal amount of mortgages that are prepaid in a given month. For investors of MBSs, prepayment of mortgages is usually undesirable since future interest is foregone. This is more broadly referred to as "prepayment risk." Due to the importance of prepayment risk, single monthly mortality was developed as a metric for tracking prepayments in the mortgage pool. |||Prepayment hinders the returns for MBS investors because mortgages are normally prepaid using refinancing loan, and this happens primarily when interest rates have fallen. So while an investor in an MBS believes they have locked in a higher yielding investment in a low rate environment, they may in fact have the carpet pulled out from under them. The mortgage holders in the MBS may refinance at lower interest rates, and then pay off the mortgage in the MBS pool. Now the investor has their money back and must reinvest the funds in a lower interest rate environment.
A letter of credit that is payable once it is presented along with the necessary documents. |||These letter of credits require a more stringent process of verification.
Bonds issued by a national government in a foreign currency, in order to finance the issuing country's growth. Sovereign debt is generally a riskier investment when it comes from a developing country, and a safer investment when it comes from a developed country. The stability of the issuing government is an important factor to consider, when assessing the risk of investing in sovereign debt, and sovereign credit ratings help investors weigh this risk. |||An unfavorable change in exchange rates, and an overly optimistic valuation of the payback from the projects that the debt is used to finance, can make it difficult for countries to repay sovereign debt. The only recourse for the lender is to renegotiate the terms of the loan - it cannot seize the government's assets. A country that defaults on its sovereign debt will have difficulty obtaining a loan in the future.
A debt security issued by a national government within a given country and denominated in a foreign currency. The foreign currency used will most likely be a hard currency, and may represent significantly more risk to the bondholder. |||The government of a country with an unstable economy will tend to denominate its bonds in the currency of a country with a stable economy. Because of default risk, sovereign bonds tend to be offered at a discount. Brady bonds, which are issued by governments in developing countries, are a popular example of sovereign debt securities.
1. A loan with a below-market rate of interest. 2. Loans made by multinational development banks and the World Bank to developing countries. Typically, soft loans have extended grace periods in which only interest or service charges are due. They also offer longer amortization schedules and lower interest rates than conventional bank loans. |||Also known as "soft financing".
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