Accrued Interest (AI)The interest that has accumulated on a bond since the last interest payment up to, but not including, the settlement date.
Arbitrage The simultaneous purchase and sale of an asset in order to profit from a difference in the price. It is a trade that profits by exploiting price differences of identical or similar financial instruments, on different markets or in different forms. Arbitrage exists as a result of market inefficiencies; it provides a mechanism to ensure prices do not deviate substantially from fair value for long periods of time.
Basis Point (bps)A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly used for calculating changes in interest rates, equity indexes and the yield of a fixed-income security.
Bid-Offered SpreadThe amount by which the offered/ask price exceeds the bid. This is essentially the difference in price between the highest price that a buyer is willing to pay for an asset and the lowest price for which a seller is willing to sell it.
Bid-to-Cover-Ratio A ratio that compares the numbers of bids received in a Treasury security auction to the number of bids accepted. A ratio above 2.0 indicates a succesful auction comprised of aggresive bids. A low ratio is an indication of a disappointing auction , marked by a wide bid-ask spread. (Sumber : Investopedia)
Bill of Exchange (B/E)A non-interest-bearing written order used primarily in international trade that binds one party to pay a fixed sum of money to another party at a predetermined future date.
Bond A debt investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate. Bonds are used by government, companies, municipalities, states and foreign governments to finance a variety of projects and activities.
Bond Index A statistical measure of change in bond market. Each index has its own calculation methodology and is usually expressed in terms of a change from a base value. Thus, the percentage change is more important than the actual numeric value.
Capital GainProfit that results when the price of a security held by a mutual fund rises above its purchase price and the security is sold (realized gain). If the security continues to be held, the gain is unrealized. A capital loss would occur when the opposite takes place.
Convertible DebentureAny type of debenture that can be converted into some other security.
Convexity A measure of the curvature in the relationship between bond prices and bond yields that demonstrates how the duration of a bond changes as the interest rate changes. Convexity is used as a risk-management tool, and helps to measure and manage the amount of market risk to which a portfolio of bonds is exposed.
Corporate BondA debt security issued by a corporation and sold to investors. The backing for the bond is usually the payment ability of the company, which is typically money to be earned from future operations. In some cases, the company's physical assets may be used as collateral for bonds.
Coupon The interest rate stated on a bond when it's issued. The coupon is typically paid semiannually. This is also referred to as the "coupon rate" or "coupon percent rate".
CovenantA promise in an indenture, or any other formal debt agreement, that certain activities will or will not be carried out.
DealerAn individual or firm willing to buy or sell securities for their own account.
DebentureA type of debt instrument that is not secured by physical asset or collateral. Debentures are backed only by the general creditworthiness and reputation of the issuer. Both corporations and governments frequently issue this type of bond in order to secure capital. Like other types of bonds, debentures are documented in an indenture.
DefaultThe failure to promptly pay interest or principal when due. Default occurs when a debtor is unable to meet the legal obligation of debt repayment. Borrowers may default when they are unable to make the required payment or are unwilling to honor the debt.
DurationA measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. Duration is expressed as a number of years. Rising interest rates mean falling bond prices, while declining interest rates mean rising bond prices. The bigger the duration number, the greater the interest-rate risk or reward for bond prices.
Macaulay DurationThe weighted average term to maturity of the cash flows from a bond. The weight of each cash flow is determined by dividing the present value of the cash flow by the price, and is a measure of bond price volatility with respect to interest rates.
Modified DurationModified duration follows the concept that interest rates and bond prices move in opposite directions.
Face Value (Par value)The nominal value or dollar value of a security stated by the issuer. For stocks, it is the original cost of the stock shown on the certificate. For bonds, it is the amount paid to the holder at maturity. Also known as "par value" or simply "par".
Fixed Income A type of investing or budgeting style for which real return rates or periodic income is received at regular intervals at reasonably predictable levels. Fixed-income budgeters and investors are often one and the same - typically retired individuals who rely on their investments to provide a regular, stable income stream. This demographic tends to invest heavily in fixed-income investments because of the reliable returns they offer.
Government BondA debt security issued by government and sold to investors.
IssuerA legal entity that develops, registers and sells securities for the purpose of financing its operations. Issuers may be domestic or foreign governments, corporations or investment trusts. Issuers are legally responsible for the obligations of the issue and for reporting financial conditions, material developments and any other operational activities as required by the regulations of their jurisdictions. The most common types of securities issued are common and preferred stocks, bonds, notes, debentures, bills and derivatives.
Mark-to-Market (MTM)A measure of the fair value of accounts that can change over time, such as assets and liabilities. Mark to market aims to provide a realistic appraisal of an institution's or company's current financial situation.
Maturity DateThe date on which the principal amount of a note, draft, acceptance bond or other debt instrument becomes due and is repaid to the investor and interest payments stop. It is also the termination or due date on which an installment loan must be paid in full.
Net Asset Value (NAV) A mutual fund's price per share or exchange-traded fund's (ETF) per-share value. In both cases, the per-share dollar amount of the fund is calculated by dividing the total value of all the securities in its portfolio, less any liabilities, by the number of fund shares outstanding.
Present ValueThe current worth of a future sum of money or stream of cash flows given a specified rate of return. Future cash flows are discounted at the discount rate, and the higher the discount rate, the lower the present value of the future cash flows. Determining the appropriate discount rate is the key to properly valuing future cash flows, whether they be earnings or obligations.
Clean Price The price of a coupon bond not including any accrued interest. A clean price is the discounted future cash flows, not including any interest accruing on the next coupon payment date. Immediately following each coupon payment, the clean price will equal the dirty price.
Gross/Dirty Price [Gross Price = Clean Price + Accrued Interest] A bond pricing quote referring to the price of a coupon bond that includes the present value of all future cash flows, including interest accruing on the next coupon payment. The dirty price is how the bond is quoted in most European markets, and is the price an investor will pay to acquire the bond.
Bid Price The price a buyer is willing to pay for a security. This is one part of the bid with the other being the bid size, which details the amount of shares the investor is willing to purchase at the bid price. The opposite of the bid is the ask price, which is the price a seller is looking to get for his or her shares.
Offered Price The price, which is the price a seller is looking to get for his or her shares.
Primary MarketA market that issues new securities on an exchange. Companies, governments and other groups obtain financing through debt or equity based securities. Primary markets are facilitated by underwriting groups, which consist of investment banks that will set a beginning price range for a given security and then oversee its sale directly to investors.
Private Placement (PP)Raising of capital via private rather than public placement. The result is the sale of securities to a relatively small number of investors. Investors involved in private placements are usually large banks, mutual funds, insurance companies, and pension funds.
ProspectusA formal legal document, which is required by and filed with the Bapepam-LK, that provides details about an investment offering for sale to the public. A prospectus should contain the facts that an investor needs to make an informed investment decision.
Public OfferingThe sale of equity shares or other financial instruments by an organization to the public in order to raise funds for business expansion and investment.
Redemption The return of an investor's principal in a fixed income security, such as a preferred stock or bond; or the sale of units in a mutual fund. A redemption occurs, in a fixed income security at par or at a premium price, upon maturity or cancellation by the issuer. Redemptions occur with mutual funds, at the choice of the investor, however limitations by the issuer may exist, such as minimum holding periods.
Repo A form of short-term borrowing for dealers in government securities. The dealer sells the government securities to investors, usually on an overnight basis, and buys them back the following day. For the party selling the security (and agreeing to repurchase it in the future) it is a repo; for the party on the other end of the transaction, (buying the security and agreeing to sell in the future) it is a reverse repurchase agreement.
RiskThe chance that an investment's actual return will be different than expected. This includes the possibility of losing some or all of the original investment. Risk is usually measured by calculating the standard deviation of the historical returns or average returns of a specific investment.
Counter Party Risk The risk to each party of a contract that the counterparty will not live up to its contractual obligations. Counterparty risk as a risk to both parties and should be considered when evaluating a contract.
Default Risk The risk that companies or individuals will be unable to pay the contractual interest or principal on their debt obligations.
Interest Rate Risk The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between two rates, in the shape of the yield curve or in any other interest rate relationship.
Reinvestment Risk The risk that future proceeds will have to be reinvested at a lower potential interest rate.
Secondary MarketA market where investors purchase securities or assets from other investors, rather than from issuing companies themselves.
Settlement DateThe date by which an executed security trade must be settled. That is, the date by which a buyer must pay for the securities delivered by the seller.
Term/Life/TenorThe period of time assigned as the lifespan of any investment. In the case of debt, the time it takes for all payments to be made by the borrower and received by the lender. In the case of an equity investment, the time that elapses between the acquisition of the equity and its sale or removal from holdings for another reason.
Time to Maturity The remaining life of a financial instrument. In bonds, it is the time between when the bond is issued and when it matures (maturity date), at which time the issuer must redeem the bond by paying the principal (or face value).
Treasury BillA short-term debt obligation backed by the U.S. government with a maturity of less than one year.
UnderwriterA company or other entity that administers the public issuance and distribution of securities from a corporation or other issuing body. An underwriter works closely with the issuing body to determine the offering price of the securities, buys them from the issuer and sells them to investors via the underwriter's distribution network.
Unsecured BondA loan not secured by an underlying asset or collateral. Unsecured bond is the opposite of secured bond.
Yield to Maturity (YTM)The rate of return anticipated on a bond if it is held until the maturity date. YTM is considered a long-term bond yield expressed as an annual rate. The calculation of YTM takes into account the current market price, par value, coupon interest rate and time to maturity. It is also assumed that all coupons are reinvested at the same rate. Sometimes this is simply referred to as "yield" for short.
Zero-coupon BondA debt security that doesn't pay interest (a coupon) but is traded at a deep discount, rendering profit at maturity when the bond is redeemed for its full face value.