Thursday, January 14, 2016

Fixed Income Glossary

Accrued Interest: Interest that has accumulated on a bond since its most recent regular interest
payment date.

Ask Price: The lowest price a prospective seller is willing to accept.

Asset Allocation: The distribution of investment assets into various categories such as savings and
cash equivalents, bonds and common stocks, etc. to match the specific goals and objectives of
individual investors.

Bank Rate: The rate charged by the Bank of Canada on short-term loans made to members of the
Canadian Payments Association (banks, trust companies, caisse populaires and other deposit taking
institutions). Considered somewhat of a base for the general level of short-term interest rates.

Bankers Acceptance (BA): A type of short-term negotiable commercial paper issued by a
non-financial corporation but guaranteed as to principal and interest by its bank.
Basis Point: One one-hundredth of a percentage point. It is often used to explain changes in bond
yields. A 12 basis points increase in yield would mean a yield increase of 0.12 percentage points
(e.g. 5.24 per cent to 5.36 per cent is an increase of 12 basis points).

 Bear Market: Prices are declining, and interest rates are rising.

 Bearer Security: A security (stock or bond) that does not have the owner’s name recorded in the
books of the issuing company nor on the security itself, and which is payable to the holder, i.e. the
possessor.

 Bearer Deposit Note (BDN): A short term promissory note issued directly by a financial
institution, carrying the same credit rating as the issuing institution.

Benchmark: An actively traded large issue, which determines the value of other bonds of similar
maturity.

 Bid Price: The highest price a prospective buyer is willing to pay.

 Bond: Evidence of a debt that is owed by a borrower who has agreed to pay a specific rate of
interest, usually for a defined time period. At the end of that period the debt is repaid. Legally, a bond
has assets pledged against the loan. In practice the word is applied to any kind of term debt,
collateralized or not.

 Bull Market: Prices are rising, and interest rates are declining.
Callable: Describes a bond or preferred share that gives the issuing company the right to redeem
(buy back) the security prior to the maturity date at a previously specified price.

 Canada Savings Bond (CSB): A bond issued each year by the Government of Canada which is
considered the safest and most liquid investment available in Canada. Available in various
denominations, the bonds can be cashed at any time and are unconditionally guaranteed by the Federal Government of Canada for payment of all accrued interest and repayment of the principal.

CDIC: Canada Deposit Insurance Corporation.

Central Bank: The banker for a national government. With varying degrees of independence central banks are responsible for its nation’s monetary policy.

CMHC: Canada Mortgage and Housing Corporation.

 Commercial Paper: Short-term debt instruments issued by non-financial corporations with terms to
maturity from a few days to one year.

 Compound Interest: Interest on interest. One of the most important features of a bond market
investment.

Consumer Price Index (CPI): A measure of the annual increase in the cost of certain consumer
goods and services; often used as an indication of the rate of inflation.

Correction: Short-term downswing in bond prices often associated with profit-taking.

Coupon: That portion of a bond that provides the holder with a fixed interest payment at a
pre-specified rate. Quoted as an annual rate, but usually paid semi-annually.

Debenture: A debt that is secured solely by the general credit worthiness of the issuer and not by
the collateralization or lien against specific assets.

Derivative: An investment that derives its value from the value of an underlying investment. The
most common are options and futures.

Discount: The amount by which a bond sells below its par (or maturity) value.

 Duration: The true measure of the time period of a bond investment. Included in its
calculation is a time factor that relates to future interest payments. A related measure, MODIFIED
DURATION (see definition), is used as a proxy for the sensitivity of a bond’s price, to changes
in yield levels.

Extendible Bond: An issue with a stated maturity date that under specific conditions gives the holder
the right to extend the maturity for a further period.

Face Value: The value of a bond or debenture that appears on its face. Usually, this is the amount
that is due on maturity. It is also called par value. The bond or debenture may trade in the market at
either a premium or discount to its face value.

Federal Reserve: U.S. Central Bank.

IDA: Investment Dealers Association of Canada.

In the Long End: Refers to the market movement of the long term benchmark bond.

In the Short End: Refers to the market movement of the short term benchmark bond.

Inflation: The deterioration in the purchasing power of the dollar, as evidenced by rising prices,rising wages and an increasing money supply. Central Bank often attempts to control inflation
through monetary policy.

Inverted Yield Curve: The somewhat unusual phenomenon of short-term interest rates being higher
than long-term rates. This results from high demand for short-term credit, which drives up rates on
short-term instruments such as treasury bills. At the same time, borrowers are unwilling to make
long-term commitments and this reduced demand results in long-term rates rising more slowly. The
lack of longer-term confidence that causes an inverted yield curve can be a sign of a faltering economy, and is often a warning of an impending recession.

 Issue Date: The date on which the bond was issued and interest starts to accrue.

Liquidity: The ease with which the marketplace can absorb the pressures of buying and selling
without materially effecting the price. Probably the most important characteristic of the marketplace.

Long Term Bond: Matures in more than 10 years.

Maturity Date: The date when the amount borrowed must be paid back by the bond issuer and
interest payments stop.

Medium Term Bond: Matures from 3 to 10 years.

Modified Duration: A measure of a bond’s potential price volatility. For example, a bond with a
modified duration of 5 years would see its price change by approximately 5 per cent, if yields moved
by a percentage point.

Monetary Policy: A policy adopted by a nation’s central bank on behalf of the national government.
It is designed to control credit and money conditions in the economy and to protect the integrity of
the national currency.

Money Market: That portion of the market where short-term instruments are traded. These include
treasury bills, commercial paper and short-term bank paper (Banker’s Acceptances and Bearer
Deposit Notes).

Mortgage-Backed Securities (MBS): Mortgage-Backed Securities are fixed rate income investments that represent an ownership share in a pool of many Canadian Mortgage and Housing
Corporation (CMHC) insured residential mortgages. Unlike government bonds which pay semiannual
interest, MBS’s pay monthly – usually on the 15th of the month. The investor’s monthly
cash flow is a blend of principal repayments as well as interest accruing from the poolof mortgages.

NHA: National Housing Act.

NHA-MBS: National Housing Act Mortgage-Backed Securities.

Overbought: Market prices are considered too high and a correction is expected. This means prices
will go down and yields will go up (higher).

Oversold: Market prices are considered too low and a movement up is expected (rally). This meansprices will go up and yields will go down (lower).

Par Value: The stated face value of a bond. It has no connection with the same expression that
sometimes relates to common stocks.

Pari Passu: On an equal basis. Typically refers to equal claims that a bond has when compared to
other debt of the same issuer.

Pool Factor: The outstanding principal balance divided by the original principal balance with the
result expressed as a decimal. Pool factors are calculated and published monthly bythe Central Payor
Transfer Agent of Canada Mortgage Housing Corporation (Montreal Trust).

Premium: The amount by which the market price of a bond rises above its par value. With new
issues it is the amount of increase above its issue price, which may not be its par or face value.

Prime Rate: The rate the major chartered banks charge to their most creditworthy borrowers.

Private Placement: A new bond issue sold to a small number of institutions. Usually,no prospectus
is required.

Prospectus: A document that describes all aspects of a new issue. Prepared to conform to the
requirements of the securities regulators where the bonds will be offered.

Provincial Savings Bonds: Provincial Savings Bonds are issued by Canadian provincial
governments and are available at various times throughout the year. They pay a fixed, variable or
step-up rate of interest (depending on the campaign) for a specified period of time.

Prudent Man Rule: A widely accepted investment management standard. It requires that those
looking after the investment affairs of others, conduct their business in a manner that is considered
morally prudent.

Rally: An upswing in the market that means prices will increase and yields will decrease.

Real Interest Rate: The nominal interest rate less the rate of inflation. When inflation increases, the
real rate of return will decline if nominal interest rates remain the same.

Recession: A downturn in economic activity, generally defined as at least two consecutive quarters
of decline in a nation’s gross national product.

Redemption Price: The price at which a bond may be called for whole or partial cancellation by
the issuer.

Retractable: An issue that gives the holder the option, under certain circumstances, to redeem his
holdings at their face value, prior to the final maturity date.

SEC: The Securities and Exchange Commission. The national regulatory securities authority in
the United States. In Canada there is (as yet) no national regulatory agency. The function is a
provincial matter. In practice, Ontario sets the Canadian standard.

Securitization: A process by which corporations pool various types of assets (credit cards, car payments, mortgages) into a single-purpose trust, then debt is issued against the trust with the funds
passed back to the corporation. Debtholders’ security is the pooled assets; they have little or no claim
against the seller.

Serial Bond: An issue that has specific amounts maturing each year. A popular form of financing
municipal debt.

Short Term Bond: A bond or debenture maturing within 3 years.

Sinking Fund: A fund set up to retire a portion of an issue prior to the final maturity date.

Spread: Price spread – the difference between the bid and offering prices. Credit spread –
the difference in yield between the benchmark and a bond of another issuer.

Stripped Bonds: Federal or provincial bonds whose interest coupons have been “stripped” from the
principal. The coupons and principal are then sold separately at a discount to mature at par value.

T-Bill: A government issued treasury bill. They are sold at a discount and carry a maximum
maturity of one year.

Thin Market: A market where there are few bids or offerings.

Yield to Maturity (or Yield): The rate of return that an investor can expect to receive if an issue
is held to its maturity date and all coupons, as they are received, are re-invested at that yield level. It
takes into account the price paid for the bond, its coupon interest rate, its value at maturity and the
time remaining until the bond matures.

Yield Curve: Graph of bond yields from short to long maturities. The curve for Government of
Canada bonds sets the base of relationships for the Canadian market.
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Friday, January 8, 2016

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