|
|
|
|
|
Bond market: Glossary
General notionsCross-border loans - Cross-border loans are any loan agreements entered into by the lender and the borrower (or the borrower and several lenders) registered in different jurisdictions.
Grey market - A new bond issue is quoted unofficially in the ’grey markets’ before the settlement date.
Market participantsBookrunner - A bookrunner is usually the main underwriter or lead-manager/arranger/coordinator in equity, debt, or hybrid securities issuances. The bookrunner usually syndicates with other investment banks in order to lower its risk. The bookrunner is listed first among all underwriters participating in the issuance.
Issuer - A legal entity that develops, registers and sells securities for the purpose of financing its operations.
SPV or SPE - A special purpose vehicle (SPV) or special purpose entity (SPE) is a company that is created solely for a particular financial transaction or series of transactions.
Issue processListing - The acceptance of a security for trading on a registered exchange.
Tap issue (reopening) - A procedure that allows borrowers to sell bonds or other debt instruments from past issues. The bonds are issued at their original face value, maturity and coupon rate, but sold at the current market price.
Issue parametersCommon Code - A nine-digit identification code issued jointly by CEDEL and Euroclear. As of January 1991 common codes replaced the earlier separate CEDEL and Euroclear codes.
Common Code 144A - A common code allocated under Rule 144A.
Common Code RegS - A common code allocated under RegS.
Coupon - The interest rate on a fixed income security, determined upon issuance, and expressed as a percentage of par.
Currency of issue - Currency of issue is the currency wherein the security is denominated.
Face value (par value, denomination) - means the original value of a bond which is usually stated on the bond certificate. If a bond exists in the form of Definitive Notes, several denominations can be specified for such notes by the issuer.
Integral Multiple - (Multiple Settlement Amount) The smallest amount of the security that can be transferred.
ISIN - International Securities Identification Number. A unique international code which identifies a securities issue. Each country has a national numbering agency which assigns ISIN numbers for securities in that country .
ISIN 144A - An ISIN allocated in line with Rule 144A.
Issue price - The price at which a new issue of securities is offered to the public.
Issuer rating - A rating assigned to the issuer by a rating agency representing an opinion of the rating agency on the issuer’s general capacity to fulfill its financial obligations.
Maturity date - Maturity or maturity date refers to the final payment date of a bond (loan) or other financial instrument, at which point the (and all remaining interest) is due to be paid.
Minimum denomination - (Minimum settlement amount) - applies to securities issued in bearer form. The issuer determines the total nominal amount and defines a minimum denomination
with higher integral multiples in a lesser amount thereafter.
For example, an issuer determines a total nominal amount of USD 100,000,000 and defines a minimum denomination of USD 100,000 and integral multiples of 1,000 thereafter. In this example, a depository will only settle instructions that are greater than 100,000 and that are divisible by multiples of 1,000 thereafter. Minimum denomination may not be defined in the prospectus.
Minimum tradeable unit - It is the minimum amount of securities available for purchase, shown at their face value.
Reg S - is a "safe harbor" that defines when an offering of securities is deemed to be executed in another country and therefore not be subject to the registration requirement under section 5 of the 1933 Act. The regulation includes two safe harbor provisions: an issuer safe harbor and a resale safe harbor. In each case, the regulation demands that offers and sales of the securities be made outside the United States and that no offering participant (which includes the issuer, the banks assisting with the offer and their respective affiliates) engage in "directed selling efforts". In the case of issuers for whose securities there is substantial U.S. market interest, the regulation also requires that no offers and sales be made to U.S. persons (including U.S. persons physically located outside the United States).
Section 5 of the 1933 Act is meant primarily as protection for United States investors. As such, the U.S. Securities and Exchange Commission had only weakly enforced regulation of foreign transactions, and had only limited constitutional authority to regulate foreign transactions.
Rule 144A - Securities Act of 1933, as amended (the "Securities Act") provides a safe harbor from the registration requirements of the Securities Act of 1933 for certain private resales of minimum $500,000 units of restricted securities to QIBs (qualified institutional buyers), which generally are large institutional investors that own at least $100 million in investable assets. When a broker or dealer is selling securities in reliance on Rule 144A, it is subject to the condition that it may not make offers to persons other than those it reasonably believes to be QIBs. (Qualified Institutional Buyers)
Analytical characteristicsAI (accrued interest) - Value measured in currency units and characterizing the part of coupon yield “accrued” from the beginning of the current coupon period. The bond coupon is paid on periodic basis, usually quarterly, annually or semiannually. Respectively, upon redemption of another coupon and start of a new coupon period, the coupon begins to “accrue”.
Importance of this figure calculation results from the fact that on most bond markets they are traded at so called “clean price”, which excludes accrued interest (hereinafter – AI) (although there are some exceptions, like on the Ukrainian bond market bonds are quoted at full price). Therefore, in order to calculate the full price to be paid by the bonds buyer to the seller (also known as “dirty” price) we need to add AI to clean price.
It is calculated by the following formula:
Where
AI - accrued coupon yield t
C – size of current coupon (in currency units)
t [0]– current date
t[ñ-1] – the coupon period starting date
t[c] – the next coupon redemption date
For example, if the size of a coupon equals USD50, coupon period starting date – April 1, Coupon redemption date – October 1, then on September 1 AI would equal 50*153/183=41.80
The size of AI can be also expressed not through the coupon size in currency units, but through the coupon rate expressed as percentage (usually this kind of formulas can be found in an issue prospectus). In this case AI formula will look like this:
Where:
N - par
C(%) – current coupon rate (% p.a. )
t [0]– current date
t[ñ-1] – coupon period starting date
B – allocation base (usually 365 days, sometimes 360 days)
Current yield - It is the ratio of the annual interest payment and the bond’s current clean price.
The current yield only therefore refers to the yield of the bond at the current moment. It does not reflect the total return over the life of the bond. In particular, it takes no account of reinvestment risk (the uncertainty about the rate at which future cashflows can be reinvested) or the fact that bonds usually mature at par value, which can be an important component of a bond’s return.
Clean price is the price of a bond excluding any interest that has accrued since issue or the most recent coupon payment
Effective YTM - The indicator of yield to maturity implying that the coupon payments will be re-invested each year at the same rate as the initial investment. Effective yield to maturity is the internal yield rate of all the cash flows from a bond.
Effective yield is the root in the following equation:
Where
r – effective yield
C[i] – i-th coupon payment
t[0] – current date
t[i] – date of the i-th coupon payment
N - par
P – current price (inclusive AI)
T – number of payments on bonds
In technical terms, effective yield is a more correct measure than nominal yield. But due to tradition par yield is in much wider use on most developed markets. Effective yield is more frequently used in Russia, while in Ukraine both effective and nominal yields are common.
Macaulay duration - Duration is an estimation of the average term-to-maturity of a bond taking into account discounting of individual payments value. Therefore duration will always be less or equal to the term to bond’s maturity; it will be equal only to the term to maturity of discount (zero coupon) bonds. Duration is usually measured in years, but on Russian and Ukrainian markets days are more common. The duration formula is shown below:
Where:
D – duration
C[i] – current coupon payment i
t[0] – current date
t[i] – date of i coupon payment
N[i] – current par payment i (usually the bonds are redeemed in the end, then N[i]=0, i
P – current price (inclusive of AI)
T – amount of bond payments
r – effective yield-to-maturity
Suppose, that the bond has a 3-year maturity, 10% annual coupon, effective yield – 10% p.a., bond traded at par. The bond’s duration will be as follows:
It is important to say that duration of the money flow depends not only on its structure but also on the current interest rate. The higher the rate, the lower is the cost of long-term payments as compared to the short-term and the smaller is the duration; and visa versa, the lower the rate, the longer the duration of payments.
Duration does not only indicate the average term of the payments flow; it is also a good measure of the interest rate sensitivity of the price. The longer the duration, the higher is the interest rate volatility depending on the price fluctuations. The phrase “bond duration equals 3 years” means the bond in question has the same interest rate sensitivity as a 3-year zero coupon yield.
Modified duration is an even better measure of the price dependence on interest rates.
Modified duration - Modified duration is a measure of the price sensitivity of a bond to yield-to-redemption movements. In Math terms, it represents the first-order derivative of a price function from the yield. It is important to note that modified duration shows volatility not of the net price, but of the full price inclusive of AI. Its connection with duration can be proved by the formula:
Where:
MD – modified duration
D – Macaulay duration
r – yield-to-maturity
With small values the equation will be as follows:
Where:
P – price (inclusive of AI)
P – price change
r – yield change
Suppose modified duration equals 4, the bond is traded at a price of 90% and yield of 8%, AI is 0. How will the price change if the yield grows to 8.5% (by 0.005%).
Price movement can be calculated the following way: -4*0.005*90 = -1.8. I.e. the bond price will decrease by 1.8 to 88.2%.
Nominal YTM - Measure of yield-to-maturity which does not account for reinvestment of coupon payments in the course of the year. If the bond is placed at par, at the moment of placement par yield equals the coupon rate. For example, a bond with semiannual coupon of 10% would have par yield-to-maturity of 10%, while effective yield would amount to 10.25%.
If the cash flow from the bond has only one payment, the formula for par yield calculation would be as follows:
Where
P[1] – bond purchase price (inclusive of AI)
P[0] – overall payment of the bond (par plus coupon)
If the cash flow from the bond contains more than 1 payment, par yield is calculated on the bases of the following equation:
Where
r [eff] – effective rate
r [nom] – coupon rate
n – number of coupon payments per year
The par yield-to-maturity is a more accurate indicator than effective yield, but is a common term on financial markets of most developed countries. To a large extent it is a tribute to tradition due to comparative simplicity of this indicator. In Russia par (simple) yield is the official measure for calculation of yield on the market of short-term government bonds (GKO) and is widely used on the promissory note market.
Yield to maturity - Indicator characterizing the rate of return from bond investments, on condition of their purchase before redemption. Usually is denoted in % p.a. Yield to maturity can be calculated with regards to re-investment of coupon payments in the course of the year (effective yield), as well as without it (par yield, simple yield). It is important to note that yield to maturity is only an ESTIMATE of what yield the investor would get buying the particular bond, as calculation of the yield to maturity implies re-investment of coupons at the same interest rate. In reality such an assumption could not be realized, so the actual yield will be different from the estimated yield to maturity. Nevertheless, yield to maturity is one of the most widely used methods of bond estimation.
Yield to option (CALL, PUT) - Yield To Put.
The annual yield on a bond, assuming the security will be put (sold back to the issuer) on the first permissible date after purchase. Bonds are quoted in this manner only if they sell at a price below the put price. Therefore, the yield includes interest and price appreciation.
Yield to Call.
The percentage rate of a bond or note if the investor buys and holds the security until the call date. This yield is valid only if the security is called prior to maturity. Generally bonds are callable over several years and normally are called at a slight premium. The calculation of yield to call is based on coupon rate, length of time to call, and market price.
Transaction typesCredit-Linked Note (CLN) - A security with an embedded credit default swap allowing the issuer to transfer a specific credit risk to credit investors.
CLNs are created through a Special Purpose Company (SPC), or trust, which is collateralized with AAA-rated securities. Investors buy securities from a trust that pays a fixed or floating coupon during the life of the note. At maturity, the investors receive par unless the referenced credit defaults or declares bankruptcy, in which case they receive an amount equal to the recovery rate. The trust enters into a default swap with a deal arranger. In case of default, the trust pays the dealer par minus the recovery rate in exchange for an annual fee which is passed on to the investors in the form of a higher yield on the notes.
Dim Sum - Offshore renminbi bonds (Offshore yuan bonds) are Eurobonds denominated in Chinese renminbi (RMB). RMB bonds issued outside mainland China carry lower coupons than similar bonds issued on the mainland because of strong international demand. In 2011 the Chinese authorities allowed foreign companies to issue bonds in RMB to offshore investors, primarily through the Hong Kong market.
Euro-Commercial Paper (ECP) - A short-term, unsecured loan issued by a corporation in a currency other than the one in which the corporation operates. Corporations issue eurocommerical papers in order to tap into the international money markets for their financing. Like other commercial papers, eurocommercial papers are rarely for a term longer than a few months and they are usually issued at a discount.
Loan Participation Note (LPN) - A fixed-income security that permits investors to buy portions of an outstanding loan or package of loans. LPN holders participate, on a pro rata basis, in collecting interest and principal payments. Banks or other financial institutions often enter into loan participation agreements with local businesses, and also offer loan participation notes as a type of short-term investment.
Schuldscheindarlehen or Schuldschein, Schuldscheine - A unique type of borrowing used in the domestic market and unique to the German market where the loans are traded in the form of a promissory letter setting out the terms and conditions of the debt. Although by convention treated by investors as securities, Schuldscheine are legally loans and are treated as such by accounting conventions. The primary market involves banks making loans to companies, institutions, the state and central governments, and receiving a certificate which can then be traded in the active secondary market (cf. sub-participation). Interest is paid annually on a 30/360-day year basis.
Securitisation - Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations and selling said debt as bonds, pass-through securities, or Collateralized mortgage obligation (CMOs), to various investors. The principal and interest on the debt, underlying the security, is paid back to the various investors regularly. Securities backed by mortgage receivables are called mortgage-backed securities, while those backed by other types of receivables are asset-backed securities. The so-called lower risk of securitised instruments attracts a greater number of investors seeking to benefit in the process of taking many individual assets and repackaging them as Collateralized debt obligation.
Uridashi - An Uridashi bond is a bond denominated in a foreign currency and sold directly to Japanese household investors. An Uridashi bond is normally issued in high-yielding currencies such as New Zealand Dollars or Australian Dollars in order to give the investor a higher return than the historically low domestic interest rate in Japan.
Day count conventions30/360 German - Other names: 30E/360 ISDA
Start date: M1/D1/Y1
End date: M2/D2/Y2
Day count = (Y2-Y1)*360+(M2-M1)*30+(D2-D1)
Convention:
• if D1=31 then D1=30
• if D2=31 then D2=30
• if D1 is the last day of February then D1=30
• if D2 is the last day of February then D2=30
The last day of February is February 29 in leap years and February 28 in non leap years.
30/360 ISDA (30/360) - Other names: Bond Basis, 30-360 U.S. Municipal
Start date: M1/D1/Y1
End date: M2/D2/Y2
Day count = (Y2-Y1)*360+(M2-M1)*30+(D2-D1)
Convention:
• if D1=31 then D1=30
• if D2=31 and D1=30 then D2=30
30/360 US - Other names: 30U/360, 30US/360
Start date: M1/D1/Y1
End date: M2/D2/Y2
Day count = (Y2-Y1)*360+(M2-M1)*30+(D2-D1)
Convention:
• if D1=31 then D1=30
• if D2=31 and D1=31 then D2=30
• if D1 is the last day of February then D1=30
• if D1 is the last day of February and D2 is the last day of February then D2=30
The last day of February is February 29 in leap years and February 28 in non leap years.
30E+/360 -
Start date: M1/D1/Y1
End date: M2/D2/Y2
Day count = (Y2-Y1)*360+(M2-M1)*30+(D2-D1)
Convention:
•if D1=31 then D1=30
•if D2=31 then D2.M2.Y2 is the first day of the next month
((D2=1; Y2=Y2+integer part((M2+1)/12); M2 = ((M2 +1) mod 12) – the remainder on division of (M2+1)by 12)
30E/360 - Other names: Bond Basis, 30-360 U.S. Municipal
30/360 Eurobond, 30/360 ISMA, 30/360 European, 30S/360 Special German, Eurobond Basis
Start date: M1/D1/Y1
End date: M2/D2/Y2
Day count = (Y2-Y1)*360+(M2-M1)*30+(D2-D1)
Convention:
• if D1=31, then D1=30
• if D2=31, then D2=30
Actual/360 - Other names: Act/360, French
The year is assumed to be 360 days. Actual number of days between dates is used.
Day count basis = 360
Actual/364 - is a special case of Actual/Actual (ISMA) when a coupon period contains 91 or 182 days. Actual/364 applies for some short-term instruments.
Day count basis = 364
Actual/365A - Other names: Actual/365 Actual
Actual number of days between dates is used.
If February 29 is included then Day count basis = 366, ålse Day count basis = 365
Actual/365F - Other names: Actual/365 Fixed, English
The year is assumed to be 365 days. Actual number of days between dates is used.
Day count basis = 365
Actual/365L - Other names: Actual/365 Leap year
Actual number of days between dates is used.
If end day is in leap year then Day count basis = 366 else Day count basis = 365
Actual/Actual (ISDA) - Other names: Act/Act, Actual/Actual, Act/ISDA
This convention accounts for days in the period based on the portion in a leap year and the portion in a non-leap year.
Day count fraction = Days in leap year / 366 + Days not in leap year / 365
Actual/Actual (ISMA) - Other names: Actual/Actual (ICMA)
All coupon payments are always for the same amount, all days in a coupon period are valued equally.
Day count fraction = Days between start and end days/ (Frequency * Days in current coupon period)
Day count fraction - means the number of days in the relevant period divided by the number of days in a year (Day count basis). Day count fraction calculation depends on the Day count convention.
Day count basis - (Year basis) means 360, 364, 365 or 366 etc. days per year depending on the Day count counvention.
Day count convention - Day count convention determines how interest accrues over time. It determines the number of days between two dates in a coupon (accrual) period and the number of days in the year (Day count basis). Day count convention determines the Day count fraction for cash flows discounting in bond Analytical characteristics calculation.
NL/365 - Other names: Actual/365 No Leap year, NL 365
If February 29 is not in the period then actual number of days between dates is used. Else actual number of days minus 1 is used.
Day count basis = 365
Financial ratios: DebtEBITDA - Earnings before Interest, Taxes, Depreciation and Amortization
|
|
|
|
