A feature added to convertible fixed-income and debt securities. The provision dictates that a premium will be paid by the issuer if early redemption occurs. |||A sweetener added to increase securities' attractiveness, a soft call provision acts as an added restriction for issuers should they decide to redeem the issue early.
A means of repaying funds that were borrowed through a bond issue. The issuer makes periodic payments to a trustee who retires part of the issue by purchasing the bonds in the open market. |||Rather than the issuer repaying the entire principal of a bond issue on the maturity date, another company buys back a portion of the issue annually and usually at a fixed par value or at the current market value of the bonds, whichever is less. Should interest rates decline following a bond issue, sinking-fund provisions allow a firm to lessen the interest rate risk of its bonds as it essentially replaces a portion of existing debt with lower-yielding bonds.From the investor's point of view, a sinking fund adds safety to a corporate bond issue: with it, the issuing company is less likely to default on the repayment of the remaining principal upon maturity since the amount of the final repayment is substantially less. This added safety affects the interest rate at which the company is able to offer bonds in the marketplace.
A type of credit facility, often a bank, that accepts an arrangement that finances projects via secondary obligations. SNIFs will guarantee payment to the lender if the borrower defaults. In this way, SNIFs ultimately act as a form of insurance for the lender. |||SNIFs are used most frequently by weak borrowers of credit that pose a higher risk of default. The borrower pays the SNIF a commission in return for its secondary guarantee. SNIFs are often reported as off-balance sheet items for financial reporting purposes.
A bond that pays an initial coupon rate for the first period, and then a higher coupon rate for the following periods. |||In other words, the coupon "steps up". For example a five-year bond may pay a 4% coupon for the first two years of its life and a 6% coupon for the final three years.
A type of bond that is repaid by revenues derived from taxation of a particular activity or asset. These bonds are repaid with either excise taxes, special assessment taxes or ad valorem taxes. |||For example, say a special tax bond is be issued to fund the building of a new hospital wing dedicated to the treatment of cancer. An excise tax levied on cigarettes at the point of sale would be used to pay the debt to bondholders. Another example of a project for which a special tax bond may be issued is the building of a new freeway. People who live in areas would be assessed an increased property tax based on their likelihood of using the new road.
A special type of municipal bond used to fund a development project. Interest owed to lenders is paid by taxes levied on the community benefiting from the particular bond-funded project. |||For example, if a bond of this sort was issued to pay for sidewalks to be re-paved in a certain community, an additional tax would be levied on homeowners in the area benefiting from this project. Area homeowners get nicer walking paths, and they will probably see the value of their property increase accordingly, but this comes at a price. Their property taxes will increase to pay the interest owed to the bondholders by the municipality.
A default on the repayment of a county’s government debts. Countries are often hesitant to default on their debts, since it will be difficult and expensive to borrow funds after a default event. However, sovereign countries are not subject to normal bankruptcy laws and have the potential to escape responsibility for debts without legal consequences. |||Sovereign defaults are relatively rare and are often precipitated by an economic crisis affecting the defaulting nation. Recent sovereign defaults include Argentina’s 2002 default on its World Bank debt and Russia's default on its internal debts in 1998. Investors in sovereign debt closely study the financial status and political temperament of sovereign borrowers in order to determine the risk of sovereign default.
A bond where both the principal and regular coupon payments--which have been removed--are sold separately. Also known as a "zero-coupon bond." |||An investment firm will usually buy a debt instrument and "strip" it into its separate parts. Strip bonds usually trade at a discount and mature to par value.
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