A type of convertible bond issued by companies that pays a quarterly cash coupon and can also be exchanged for a certain number of shares or receive the cash equivalent at maturity. STRYPES were created and trademarked by Merrill Lynch, and are traded on major exchanges. |||STRYPES were created to help sell the stock of a company that pays a low dividend. The yield paid on the STRYPES makes up for the low dividend yield until the investor converts the STRYPES into common shares. Executives can also use STRYPES to gain cash periodically without significantly diluting a company's share value.The features of the STRYPES allows high-risk companies to access investment capital that might otherwise be unattainable.
A debt obligation that also contains an embedded derivative component with characteristics that adjust the security's risk/return profile. The return performance of a structured note will track that of the underlying debt obligation and the derivative embedded within it. |||A structured note is a hybrid security that attempts to change its profile by including additional modifying structures. A simple example would be a five-year bond tied together with an option contract. This structure would work to increase the bond's returns.
A pool of investment assets that attempts to profit from credit spreads between short-term debt and long-term structured finance products such as asset-backed securities (ABS). Funding for SIVs comes from the issuance of commercial paper that is continuously renewed or rolled over; the proceeds are then invested in longer maturity assets that have less liquidity but pay higher yields. The SIV earns profits on the spread between incoming cash flows (principal and interest payments on ABS) and the high-rated commercial paper that it issues. SIVs often employ great amounts of leverage to generate returns. Also known as "conduits". |||SIVs are less regulated than other investment pools, and are typically held off the balance sheet by large financial institutions such as commercial banks and investment houses. They gained much attention during the housing and subprime fallout of 2007; tens of billions in the value of off-balance sheet SIVs was written down as investors fled from subprime mortgage related assets. Many investors were caught off guard by the losses because little is publicly known about the specifics of SIVs, including such basics as what assets are held and what regulations determine their actions. SIVs essentially allow their managing financial institutions to employ leverage in a way that the parent company would be unable to due to capital requirement regulations.
A type of credit facility that helps developing countries become more economically self-sufficient. Structural adjustments are intended to reduce the current account debt of a debtor nation, as opposed to financing a new project. They do this by allowing the debtor nation to reschedule principal payments to a later date. |||Structural adjustments were first introduced by the World Bank in 1979. They usually take the form of multi year agreements, in which the borrower promises to instigate domestic economic growth through increased exports and economic diversity. Therefore, the borrowing country will be better able to make the payments later, when its economy is stronger.
1. For bonds, the process of removing coupons from a bond and then selling the separate parts as a zero coupon bond and interest paying coupons. Also known as a stripped bond or zero coupon bond. 2. In options, a strategy created by being long in one call and two put options, all with the exact same strike price. |||In the context of bonds, stripping is typically done by a brokerage or other financial institution.
The implied sovereign yield of a bond, or the theoretical yield of the non-collateralized portion of a bond. |||Because many Brady bonds have built-in interest features and principal guarantees to attract secondary-market investors, stripping out these enhancements allows investors to discern easily the underlying sovereign risk of the bond. In other words, the stripped yield is the yield on the cash flow from the part of the bond that isn't guaranteed by U.S. zero-coupon bonds.
A loan (or security) that ranks below other loans (or securities) with regard to claims on assets or earnings. Also known as a "junior security" or "subordinated loan". |||In the case of default, creditors with subordinated debt wouldn't get paid out until after the senior debtholders were paid in full. Therefore, subordinated debt is more risky than unsubordinated debt.
Debt financing that is ranked behind that held by secured lenders in terms of the order in which the debt is repaid. "Subordinate" financing implies that the debt ranks behind the first secured lender, and means that the secured lenders will be paid back before subordinate debt holders. |||The lender's risk in subordinate financing is higher than that of senior lenders because the claim on assets is lower. As a result, subordinate financing can be made up of a mix of debt and equity financing. This allows the lender involved to look for an equity component, such as warrants or options, to provide additional yield and compensate for the higher risk.
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