Glossary of Fixed Interest Terminology

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

A

Acceptor: The addressee of a Bill of Exchange. This party holds the primary liability to pay the face value of the bill to its owner upon maturity.
Accrued Interest: Interest that has been earned on a security or bank deposit but which has not yet been paid.
Actual Price: The price at which an asset is formally bought or sold.
ADF: Approved Deposit Fund.
ADI: Approved Deposit-taking Institution
AFMA: Australian Financial Markets Association.
Annualising: The conversion of periodic rates of return into annual terms.
Application Price: The price you pay to enter a unitised managed investment scheme.
APRA: Australian Prudential Regulatory Authority. APRA is the prudential regulator of banks, insurance companies and superannuation funds, credit unions, building societies and friendly societies
ASIC: Australian Securities & Investments Commission.
Ask Price: The price at which a seller is prepared to sell a security. Could also see ask yield.
Asset Class: A broadly defined group of financial assets.
ASX: Australian Stock Exchange.
ATO: Australian Taxation Office.
Austraclear: An electronic system for the settlement of money market securities, semi Government Bonds and Corporate Bonds
At a Discount: When a security has a market value less than its par value.
At a Premium: When a security has a market value greater than its par value.
ATO: Australian Taxation Office.
At Par: The price that is equal to the face value of a security.
Australian Stock Exchange (ASX): Replacing the state based exchanges in 1987, the ASX is the national organisation for security dealings.

B

Bank Bill: A Bill of Exchange involving a bank and another entity (either a company or individual). Can either be endorsed or accepted by the bank.
Banker's Acceptance: A short-term credit investment created by a non-financial intermediary and guaranteed by a bank. Acceptances are traded at discounts from face value in the secondary market.
Basis Point: A measurement of yield fluctuations of an investment (bill/bond). Each 1/100 of a percent equals one point (eg. 25 basis points equals ¼ of 1%).
BBSW: Bank Bill Swap Reference Rate. Is a daily calculation of the yields on bank bills of 1,2,3,4,5,and 6 month maturities. It is calculated as at 10 a.m. each day.
Bear: An investor who believes the market will weaken.
Bearer Bond: A bond made payable to its holder (bearer), as it is not registered in anyone's name. These are no longer being issued.
Bear Market: A term which describes declining stock prices, usually against a background of widespread pessimism.
Below Par: A price under the face or par value of a security.
Benchmark: A market measurement that is used as a comparative tool or yardstick for assessing the performance and risk of a portfolio.
Bid/ Bid Price: The uppermost price a buyer is willing to pay for a security.
Bid-Asked: The asked price is the lowest price a seller will take for a security.
Bid Rate: The exchange rate at which a bank is prepared to purchase a currency in exchange for another.
Bill of Exchange: A negotiable instrument, whereby the party to whom it is addressed unconditionally agrees to pay a certain sum on a fixed date in the future.
Bond: An interest-bearing debt security issued by a government or a corporation. The bondholder receives a specific amount of interest for a specified time, usually several years, and then redeems the face value of the bond on the maturity date.
Brokerage: A commission charged by a broker for the execution of a transaction.
Building Society: A non-bank financial institution that offers finance to borrowers and bank-type savings vehicles.
Bull Market: An upward-moving securities market.
Business Cycle: A recurring economic period that is characterised by changes in the state of the economy, including recessions, booms, expansions and recoveries. Call Option: An option contract that gives its holder the right with no obligation to purchase an asset at or before a pre-set date for a pre-set price.

C

Cap: The maximum rate of interest that is payable on a loan.
Capital: Assets utilised to generate income.
Capital Adequacy: In relations to banks, whereby a set minimal level of shareholders' equity must be sustained to maintain the lending and investing activities of a bank.
Capital Gain: The increase between the price an investment was purchased for, and the price for which it was sold.
Capital Gains Tax: A tax on the appreciation of the capital value of investments, not including value increases that are due to inflation, ie, the cost base is usually indexed along with movements in the consumer price index.
Capital Growth: An increase in the market value of an investment.
Capital Guaranteed: Refers to an investment product that includes a guaranteed return of capital. Capital guarantees are ordinarily offered by life insurance companies.
Capital-Indexed Bonds (CIBs): A type of indexed bond, whereby movements in the CPI effect proceeds on maturity. These bonds normally offer a smaller coupon rate.
Capital Price: Gross price less accrued interest.
Capital Markets: Markets where investment securities are traded.
Capital Protected: A form of investment portfolio whereby the risk of capital loss is limited or totally eliminated.
Cash Account: A type of brokerage account where a customer agrees to pay the broker-dealer the full amount of the purchase by the settlement date.
Cash Management Trust (CMT): A pooled investment tool, usually of six months duration, designed for individuals who would not otherwise have access to the high-yield returns of the professional money market.
Certificate: Evidence on paper of ownership of a security.
Certificate of Deposit (CD): A short to medium term instrument issued by a bank or financial institution stating that a certain amount of money has been deposited with it for a certain period of time at a fixed rate of interest.
CHESS: Clearing House Electronic Subregister System. A mode of increasing share transaction efficiency, the system grants shareholders regular holding statements, in place of the traditional 'share certificate'. CHESS is also the settlement facility for options.
Collar: A facility for lending which specifies both the minimum and maximum interest rates payable.
Commercial Paper: Negotiable, short-term, IOUs issued on a discount basis by corporations without collateral, in order to raise immediate capital..
Commission: The fee charged by a broker for services performed in trading securities on the customer's behalf.
Confirmation: Issued immediately after any trade is made in the securities market, spelling out information on the terms of the trade.
Consideration: The 'price' for which a pledge is bought from one party when entering a contract with another.
Consumer Price Index (CPI): An index measuring the changing prices of household goods and services bought by ordinary Australian consumers. It is used as a measure of inflation and the relative cost of living.
Contract: An agreement between two or more parties that is legally binding.
Convertible bond: A bond that can be exchanged for a predetermined number of shares of common stock in the same company.
Convertible Notes: Those securities that can be converted by the holder when they choose to, into the ordinary shares of a company at a fixed ratio or price.
Convexity: The rate to which the price of a bond will be responsive to interest rate fluctuations.
Corporate Bond: An acknowledgement by a company that a stated sum is owed and will be repaid by a specific date.
Corporations Law: The legal regulation of companies, securities, and futures industries in Australia.
Counterparty: This is the party with whom an over-the-counter or foreign exchange deal is made.
Coupon: A certificate attached to a bond, which denotes the interest rate payable.
Coupon Payments: The continual interest payments on a bond.
Coupon Rate: The stated percentage rate of interest rate on a bond, usually payable in half-yearly instalments.
CPI: Consumer Price Index, official government measure of inflation.
CPI Bond: A bond where the coupon payment or the principal amount is adjusted in line with CPI.
Credit Rating: The comparison of the financial standing of a company, financial institution, or government to other such entities.
Credit Risk: The risk that the bond issuer cannot meet his financial obligations.
Credit Union: A co-operative, non-bank institution for loans and personal savings.
Cum Distribution: Referring to a unit in a unit trust, which is trading such that the buyer rather than the seller is entitled to receive the next distribution of income from the trust.
Cum Dividend: Referring to shares or units in a unit trust which are trading to the advantage of buyers rather than sellers so as to qualify them to receive the next dividend payment. The value of the dividend is declared and included in the market value, but not yet paid.

D

Debenture: An unsecured bond backed by the integrity of the borrower and not by collateral. It is therefore riskier than a bond
Default: The failure of a contractual obligation to be carried out.
Delivery: The fulfilment of contractual obligations resulting in the transfer of equity from one individual or firm to another.
Delta: A measure indicating the sensitivity of an option's price movements in the underlying security. Calls have positive deltas. Puts have negative deltas.
Derivatives: Securities whose value is determined in part by that of another security.
Discount: The amount at which a security sells below its asset backing (par value).
Discount Rate: The discount related to the face value of a bank bill or promissory note expressed as a an annual percentage.
Distributions: Payments, including dividends and capital returns, from fund or corporate cash flow.
Diversification: Investing in a large number of securities across a range of different classes in order to reduce the amount risk in an investment portfolio.
Dividend: A distribution of part of a company's profit to its shareholders. Most dividends are paid in cash, although some are paid in the form of additional shares of stock.
Duration: A gauge of the impact of fixed interest investments on changing interest rates. Duration measures not only the redemption date, but also the dates and amounts of interest paid.

E

Equity: The value of the common and preferred stockholder's ownership interest in a company.
Equity Risk Premium: The rate of return differential between low risk assets such as government bonds, and higher risk assets such as shares.
Exchange: The marketplace in which securities are bought and sold.
Ex-date: The date on which shares change from 'cum' to 'ex' status, usually an interval of five days.
Ex-Dividend: Purchasing shares ex-dividend means the seller is entitled to the current dividend.

F

Face Value: The amount of money which the issuer of a bond promises to pay at maturity to the bondholder, and does not reflect the bond's current market price.
Fair Market Value: The term used to describe an option's intrinsic value, or its worth as determined by a mathematical model.
Financial Asset: Any asset that takes the form of a written certificate such as a bond or share and establishes a claim on the issuer.
Financial Market: The trading environment for the buying and selling of futures contracts, securities, and currency.
Firm Offer: An offer to sell a security at a set price on the condition it will be secure for a set interval.
Firm Price: Where the maker of a firm offer or a firm bid is obliged to meet a stated price if that bid or offer has been made within the specified time.
Fixed-income investment: A term for investments that pay a fixed amount of interest, such as bonds and other debt based instruments.
Fixed Interest: This refers to a fixed flow income that does not fluctuate.
Floating Rate: An interest rate which, rather than staying constant throughout the life of a loan, reflects movement in market rates.
Floor: The place in an exchange where securities are traded.
Forward: A reference to future commitments with respect to prices for which terms are set out in the present.
Forward Contract: A cash market transaction in which a commodity trade is organised for a specific date in the future.
Forward Interest Rate: The current interest rate for a contract for the duration of a specific future interval.
Forward Margin: The variance between the present price and its estimated future price
Forward Rate Agreement (FRA): A borrowing or lending contract where interest conditions are determined in the present even though the contract does not take effect until a future date.
FRNs: The term stands for floating rate notes, being long-term debt securities whose interest rates are periodically altered in line with a benchmark rate.

G

GDP: Abbreviation for Gross Domestic Product, which is the total value of goods and services produced in Australia.
Government Bond: Bonds issued by a government
Gross Price: The total price an investor pays to buy bonds. Gross price = capital price + accrued interest.

I

Income Portfolio: A portfolio with securities that provide a steady flow of income.
Income Security: Term to describe a debenture that only makes an interest payment if the issuer earns the income necessary to make the payment.
Income Stock: Stocks that have a history of high earnings levels and are expected to continue in this way in the future.
Index: A statistical measurement of market performance (eg. All Ordinaries Index) or price movements in financial markets (eg Consumer Price Index).
Indexed Bonds: Bonds with an interest rate or maturity value that, instead of being fixed, are indexed to inflation when the bonds are issued.
Inflation: An increase in the prices of goods and services caused by an abundance of money chasing too few goods and services.
Inscribed Stock: A type of stock where a central registry has record of ownership details, and the owner holds a certificate which in itself is not transferable.
Interest: The payment made by a borrower to a lender in return for the loan of money, on top of the principle repayments.
Interest Rate Cycle: A business cycle that concerns fluctuations in interest rates.
Interest-Rate Risk: The chance that a fixed interest bond will depreciate in value when interest rates rise.
Interest Rate Sensitivity: The impact of a movement in interest rates on the movement in the price of a security.
Investment: The purchase of an asset for the specific purpose of generating income for its owner.
Investment Grade Bonds: Bonds that have a sufficient credit rating for them to be purchased by most institutional investors.
Investor: A person who aims to achieve reasonable levels of return and capital appreciation through investing money over the long term.
Issue Margin: Or coupon margin is the spread above the variable rate paid on floating rate instrument. If a FRN pays the 3 month bank bill + 0.35% each quarter then 0.35% (or 35 basis points) is the issue margin.

L

Leverage: The use of borrowed money in investing, in the hope of increased earnings. For example, a corporation or individual may borrow money at 5 percent, invest it and make 10 percent on the investment. However, leveraging can also multiply losses if an investor loses money on an investment.
Liquid Assets: Assets that can be converted to cash immediately and without capital loss.
Liquidity: The ability of assets to be quickly converted to cash without suffering a loss in value of the asset.
Liquidity Premium: The additional price paid for those assets that are highly liquid.
Liquidity Risk: The chance that an asset will not easily be converted into cash with little or no loss of capital and minimum delay.
Liquid Market: A market whereby trading is done with ease due to a high number of buyers and sellers.
Long Term Debt: The value of financial obligations of over 1 year that require the payment of interest.

M

Management Expense Ratio (MER): A ratio denoting the costs incurred in a collective investment fund as a proportion of the total assets in the fund minus the liabilities.
Margin: The difference between the purchase and sale rates of a foreign exchange quotation.
Marked to Market Value: The valuation of a contract in line with current market rates.
Market Cycle: A business cycle concerned specifically with movements in market activity, as measured by an index. Market cycles generally correspond to the economic cycles, with periods of heavy purchasing indicating growth, and periods of hefty selling indicating recession.
Market Price: The prevailing price at which a security can be bought or sold on the market.
Market Risk: Risk relating to the movements in the underlying market, not relating to a particular security or security type.
Market Timing: The selling or buying of securities on the basis of short term trends and fluctuations in the market.
Market Value: The current value of an asset, as opposed to its purchase price.
Mark to Market: To make a summary accounting adjustment to reflect unobtained gains and losses on purchase price values of a particular investment.
Maturity: The final repayment date for a loan, mortgage, bond or other debt security.
Maturity Date: The date when a bond's principal is repaid by the bond issuer to the bond holder.
Maturity Structure: The configuration of the yield curve, for fixed interest securities. It is measured in years to maturity of the applicable bonds held.
Modified Duration: Interest rate sensitivity resulting from small fluctuations in the yield to maturity of a bond.
Monetary Policy: The actions of the Reserve Bank to influence access, volume and cost of money in the economy.
Money Market: The market for exchange in short-term securities.
Money Market Account: A bank account with interest rates comparable to those available in the money market.
Mortgage-backed Securities: Securities backed by mortgages that have been packaged together to provide liquidity by creating marketable securities.

N

Negotiable Instrument: A tradable piece of paper that represents ownership of a financial asset or debt.
New Issue: Any issue of securities aimed at raising more money.
NPV: Net present value

O

Offer: Also known as Ask Price, it is the price at which a person is ready to sell.
Operations Risk: The risks that are taken within the operational structure of a company (eg. the separation of duties between front office and back office).
Opportunity cost: The cost of forgoing one investment in favor of another.
Over the Counter (OTC): Where stocks and bonds are traded over the phone or through computer networking. These stocks are not listed on the Australian Stock Exchange

P

Par: The nominal or stated value of a stock or bond, set by the issuing company at the time of issue.
Payment Date: The date that the company declares its dividend, or interest payment date for a fixed interest security.
Perpetual: A security issued without a maturity date. The issuer is under no obligation to repay principal at any time.
Portfolio Construction: The process of choosing the constitution of one's investments, in terms of asset classes and proportion of shares.
Premium: The total price at the time of purchase for an option contract.
Present Value: The current value of an investment which develops in the future, after deducting the maturity at an assumed rate of interest, taking into account for the probability of its payment.
Primary Market: The market in which securities are sold for the first time. All subsequent stock purchases and sales are conducted in the secondary market.
Principal: The original dollar amount invested.
Profit Margin: Calculated by dividing net income by revenue. It is used as an indicator of profitability.
Promissory Note: A debt security put out by a borrower, indicating how much the borrower is prepared to pay the holder at the maturation date.
Proper Authority: An order under the Corporations Law which details the responsibility of a securities dealer or investment adviser for an employee or agent's actions. Proper authorities are necessary for certain employees of fund managers, sharebroking and investment firms.
Prospectus: Formal written document, lodged with the Australian Securities Commission, describing a securities offering, along with a company history, objectives, financial statements and the current status of the company or fund. It is made available to all interested investors, and provides them with background information needed to make an investment decision.
Purchase Price: The dollar amount paid for bonds (gross price multiplied by number of bonds).

Q

Quotation (or Quote): The price at which a security is currently trading

R

Rate of Return: The income earned from a capital investment.
Redemption Price: The price at which an investor can remove his or her units from a unit trust.
Registered Securities: Stocks or bonds or other securities for which a registration statement has been filed with the Securities and Exchange Commission.
Registry: An organisation engaged to issue shares authorised by a company.
Reserve Bank of Australia: Founded in 1959, the RBA is Australia's central bank, closely tied to the Federal Government, and guardian and overseer of Australia's financial system and markets.
Return: The annual amount, usually in percentage, received from an investment.
Risk: The measurable prospect of investments increasing or decreasing in value. Those investments with a high level of risk generally offer the greater returns.
RITS: Reserve Bank Information and Transfer System. RITS is an electronic system for the settlement of Commonwealth Government securities (bonds and Treasury Notes).
Rollover: The transfer of a termination payment from a superannuation fund into a approved deposit fund, or deferred annuity prior to retirement in order to defer or avoid lump sum tax. It can also apply to the renewal of a bank loan or extension of a deposit at defined intervals, with revised interest rate levels.

S

Secondary Market: A market whereby existing stocks are bought or sold, which includes stock exchanges and over-the-counter markets.
Securities: The type of investment offered by a company or an authority, such as shares, bonds, stocks, debentures, etc. Semi-Government Paper: Securities which have a fixed interest and are issued by a Semi-Government Authority. They are normally of greater than six months' duration, and carry a high credit standing, for example, in the form of a government guarantee.
Settlement: The final dealing in a securities transaction, handled through the stock clearing corporation.
Settlement Date: The date on which a securities transaction must be settled and payment made.
Simple Interest: The sum of interest paid solely on the initial investment.
SPV: Special Purpose vehicle. Usually used in securitisations.
Standard Deviation: An important measure of risk, based on the statistically measured dispersion of a set of numbers around a central point. The higher, the standard deviation, the higher the uncertainty of return.
Subordinated Debt: Unsecured bonds that in the event of liquidation, rank behind other debt, but ahead of shareholders.
Swap: An exchange transaction, for example, in equity, currency or interest rate, between two parties.
Systemic Risk: Risk pertaining to the fundamentals of a system (the market) as a whole.

T

Tax File Number (TFN): An allocated number given to taxpayers and used by the Australian Taxation Office to monitor income and taxation details.
Term Deposit: When money is deposited for a fixed time period at a fixed interest rate.
Term to Maturity: The amount of time to transpire before the capital of a fixed interest investment is due for repayment.
Trade: The process of one party selling a security to another party.
Trade Date: This is the date on which a trade occurs.
Trading Margin: The margin above (or below) a variable market indicator (such as BBSW) where a floating rate security is trading in the market. It is the actual effective margin you will receive on a FRN if you buy it at the current price and hold it to maturity.
Treasury Note (TN): Issued by the Government, it is a short-term debt instrument that is issued on a tender basis each week for terms of either 13 or 26 weeks.
Trend: The general direction, either upwards or downwards, that prices, commodities or other variables take over a period of time.

U

Uncertificated Shareholdings: The holding of securities without a share certificate, leading to simpler settlements on sales. Instead of issuing a scrip certificate, companies issue periodical transaction statements to shareholders. See CHESS.
Unlisted Securities: Refers to securities which are not listed on the ASX or any other organised stock exchange.
Unsecured note: A bond or note that is not backed by an asset or charge over an asset.

V

Value Date: The date of trade of the vehicle being used to offset an underlying exposure.
Volatility: The degree to which the price of a security fluctuates over a given period of time. Highly volatile securities are regarded as risky investments.
Volume: The amount of securities that have been traded during a particular period of time.

Y

Yield: The effective percentage return earned by an investment in a stock or bond, usually expressed as a percentage of the current market price.
Yield Curve: A graphical representation of the relationship between bond yields and maturity lengths.
Yield To Call: The percentage return earned on a bond if it was to be held until the next call date. This yield is valid only if the security is called prior to maturity. It is calculated on the basis of the coupon rate, length of time to the call and the market price.
Yield to Maturity: The percentage return earned on a bond if it was to be held until its maturity date. It is calculated on the basis of the coupon rate, length of time to maturity and the market price.

Z

Zero-Coupon Bond: A discounted bond that makes no interest payments until its maturity. The return on investment to the bondholder originates from the value of the bond at its maturity