The 30/360 day-count method is used in the U.S. for most corporate, agency, and municipal bonds and for mortgage-backed securities. It is sometimes used for floating-rate notes and short-term CDs.
To find the size of an interest period, use this formula:
360(Y2-Y1)+30(M2-M1)+(D2-D1)
where Yn is the year, Mn is the month, and Dn is the number of days. However,if D1=31, set D1=30. If D2 is 31 and D1 is 30 or 31, change D2 to 30; otherwise,leave at 31.
For example, there are 29 days between May 1 and May 30 and 30 days between May 1 and May 31.
To calculate the number of days in a normal coupon period, multiply the number of calendar months in the period by 30.
The 30E/360 day-count method is used for Eurobonds and many foreign government bonds.
To find the size of an interest period, use this formula:
360(Y2-Y1)+30(M2-M1)+(D2-D1)
where Yn is the year, Mn is the month, and Dn is the number of days. However,if Dn=31, set Dn=30.
For example, there are 29 days between May 1 and May 30, and 29 days between May 1 and May 31, since D2 was changed to 30.
To calculate the number of days in a normal coupon period, multiply the number of calendar months in the period by 30.
A prepayment model used for asset-backed securities. It is similar to the SMM model except that it is a percentage of the original balance, rather than the outstanding balance, paid down in a month.
For sinking funds, the factor used to calculate the maximum amount of the issue that the issuer can retire on any scheduled sinking-fund date.
An acceleration factor of 1.0 means that the issuer can retire only the scheduled amount. An acceleration factor of 2.0 means that the issuer can retire up to twice the scheduled amount.
Common acceleration rates are 1.0, 1.5, 2.0 and 3.0. However, a rate of 1.0 is the most common.
Investors who try to acquire as much of an issue as possible. Accumulators may control the supply of the issue, thereby affecting the market value.
The amount of interest that the buyer owes the seller of the security on the settlement date. For example, if you hold a security for two months after the last coupon payment, the buyer owes you two months' worth of interest at settlement. The buyer gets that money back when he or she receives the next coupon payment.
The actual/actual day-count method is used primarily to calculate U.S. government notes and bonds, but may also be used to calculate foreign government bonds and floating-rate notes.
When calculating a fraction of the normal coupon period, the actual number of calendar days in the interest period is used as the number of days for which interest is paid, and the actual number of calendar days in the normal coupon period is used as the denominator.
The actual/365 day-count method is used primarily to calculate Treasury bond equivalent yields for U.S. Treasury bills, but may also be used to calculate foreign government bonds and floating-rate notes.
When calculating a fraction of the normal coupon period, the actual number of calendar days in the interest period is used as the number of days for which interest is paid, and 365 is used as the denominator.
The actual/365 (366) day-count method is used by some analysts to calculate Treasury bond equivalent yields for U.S. Treasury bills.
When calculating a fraction of the normal coupon period, the actual number of calendar days in the interest period is used as the number of days for which interest is paid. The denominator is 366 if the year in question is a leap year or 365 if it is not.
The actual/360 day-count method is used mainly for money-market securities: medium-term CDs, short-term CDs, and floating-rate notes. The U.S. Treasury bill dollar discount is also calculated using this method.
When calculating a fraction of the normal coupon period, the actual number of calendar days in the interest period is used as the number of days for which interest is paid. The denominator is 360 (12 months of 30 days each).
For mortgage pools and CMOs, the number of days from the date on which the investor would expect to receive an interest payment (usually the first day of the month following the month for which the homeowner's payment is due) to the date on which the investor receives payment.
Actual delays are 31 days less than the stated delay days.
Abbreviated "ARM." A type of mortgage in which the interest rate floats against an index such as the three-month LIBOR or the one-year CMT.
A pool composed of adjustable-rate mortgages.
A set of prepayment data calculated regularly from mortgage pool prepayment histories. The prepayment histories of individual pools are often compared to the history of the aggregate to which they belong.
All aggregated pools have similar net coupons, original terms, weighted average maturities, and so on. (The Bridge rules for aggregating pool prepayments are described in the online essay, "Collateral Aggregation in Price/Yield and Total-Return Calculations.")
A futures option that can be exercised any day up to and including the expiration date.
The regularly scheduled principal portion of a mortgage payment that is sufficient to pay off the mortgage security by maturity.
A swap in which the notional principal is reduced over the tenor of the swap. The fixed interest payment and the floating payment become smaller during the life of the swap.
The part of the total issued amount which was not privately placed.
Usually stated in millions of dollars.
Par amount in millions (MM) of dollars for a security still held by investors. The value is as accurate as can be determined from available data.
A formula used to divide a nominal amount or rate of return into an annual amount or rate. In other words, an 18% nominal rate of return over three years is roughly 6% a year.
The formula is AROR = [(1 + NROR)^1/n)-1] * (f * 100), where AROR is the annualized rate of return; NROR is the nominal rate of return; n is the number of coupon payments in the horizon period (set to 2 in Bridge applications); and f is the compounding frequency (also set to 2).
For more information, see Comparison: Annualized and Nominal Rates of Return.
The interest rate required to generate the present value of a future cash flow, annualized. Same as the annualized nominal rate of return.
For more information, see Comparison: Annualized and Nominal Rates of Return.
Structured financial products backed by assets such as student-loan, credit-card (nicknamed "plastic bonds") and auto-loan receivables (one type of which is called "Certificates for Automobile Receivables").
A code that indicates the status (active, called, matured, and so on) of the asset. Bridge tracks callable and sinking-fund bond redemptions daily using the Wall Street Journal, New York Times, Bond Buyer, and the AMEX Bulletin, and monthly using the NYSE Bulletin.
Bridge also receives called bond information weekly from the CUSIP Service Bureau. In addition, DMO monitors individual high-yield callable bonds for early redemptions. All redemptions are confirmed by calling the issuer directly.
A shift of the U.S. Treasury yield curve at a specified future day.
The market-weighted Macaulay duration of the specified portfolio.
A measure of how long it takes, on average, for the security to repay its principal.
For a Treasury note, no principal is repaid until maturity, so the average life equals the term to maturity. A sinking-fund bond or a mortgage pool, on the other hand, pays down principal at various times in its life, and in this case, average life may be significantly different from the time to final maturity.
See also weighted average life.
The market-weighted yield to maturity of the specified portfolio.
Scheduled final principal repayment that is substantially larger than the preceding scheduled principal repayments.
The difference between the bond's price and its delivery price (conversion factor times futures price). Basis can be broken into net basis and carry, or into cheapest-to-deliver net basis, cheapest-to-deliver carry, yield bias, and factor bias.
One hundredth of one percent (0.01%) of yield. A yield change from 10.00% to 10.55% is a change of 55 basis points.
A standard; a set of information used for comparisons. Indexes are often used as benchmarks, as are U.S. Treasury yield curves.
For more information, see Types of Benchmarks.
A measure of a security's sensitivity to changes in the overall market. A beta of 0.9 means that a 1% change in the market in the short run implies a 0.9 percent change in the value of the security. Securities with a beta greater than one are move volatile than the market.
Debt security that obligates the issuer to pay the holder interest during the term of the bond, with some exceptions, and the principal at or before maturity.
The yield of a security assuming semi-annual compounding. Used to standardize the yields of securities, such as mortgage-backed securities and U.S. Treasury bills, that have different coupon conventions.
A CMO deal in which the difference between the present value of the collateral's last period and the present value of the collateral today is paid into the tranches.
The date which the user assigns a specific book price to a security.
The amortized value the user has assigned to the bond on the book date.
analytic curve, generated from 70-74 securities each night, is used for OAS calculations. The program derives intermediate points using interpolated curves.
A pool-specific, one-factor, path-dependent prepayment model based on historical and projected interest rates from current-coupon FNMA mortgages (which are assumed to be equivalent to 10-year Treasuries plus a spread of 96 basis points).
The Bridge model is based on the Lehman Brothers prepayment model.
The bid-side valuation for a round-lot market as of 3 p.m. on the pricing date shown, as collected and validated by Bridge, L.P.
A security with one principal payment on the workout date.
A yield that assumes one principal payment on the workout date (no prepayments). A bullet yield is always a bond equivalent yield.
Value computed from historical costs and expenses using accounting rules rather than current market value.
The next date on which the issuer can call the bond (redeem it before maturity).
If the bond is callable now, the next call date is the date on which the call price changes.
For futures, the right to buy a particular security at a predetermined price on or before a predetermined date. It is the option that gives the buyer the right, but not the obligation, to purchase (go "long on") the underlying futures contract at the strike price on or before the expiration date.
Price at which a callable security can be redeemed by the issuer.
Period during which the issuer cannot redeem a callable security.
Security that the issuer can redeem before maturity on a specific date or set of dates, at specific prices.
The schedule of call dates and redemption prices for callable securities.
An interest rate cap/ceiling agreement whereby one party agrees to pay the other if the reference rate exceeds a predetermined level.
The term financing cost or benefit of the bond; the interest earned from the securities held less the cost of funds borrowed to purchase them. When the interest earned is greater than the cost of funds, there is positive carry; when the cost of funds is greater than the interest earned, there is negative carry.
The condition whereby an issuer of a security may redeem the security for cash, as opposed to refunding the issue with the proceeds from the issuance of a new security.
Net cash produced by an asset, as opposed to earnings calculated by accounting rules. For a fixed-income security held to maturity, cash flow consists of interest payments and return of principal.
Cash from payment of principal, interest, sinking funds, and so on, that has not yet been invested or reinvested. Also cash in transit into or out of a portfolio.
"Certificates of Accrual on Treasury Securities." A zero-coupon Treasury-derivative security offered by Salomon Brothers.
The bond from among the deliverable bonds which has the highest implied repo rate associated with it at the current price levels. Therefore, it is the most likely to be selected for delivery into the futures contract.
The value of a security as of a specified date. The value is expressed as a percentage of the security's face amount. Accrued interest is excluded.
If Bridge is the valuation source, the value is the Bridge bid-side indication for a round-lot market as of 3 p.m. on the pricing date shown.
The date on which the structure and price of a CMO was determined. The pricing date appears on the front page of the prospectus supplement.
An organization, usually an investment bank, that holds the CMO's assets--for example, the certificates of the mortgage pool backing up the CMO. The trustee may also collect cash flows and redistribute them to investors.
"Cost of Funds Index." Two are in common use:
The Monthly 11th District Cost of Funds Index is computed by dividing the monthly interest expenses of the 11th District member institutions (California, Nevada, and Arizona banks) by average liabilities (passbook accounts, money market deposit accounts, CDs, and so on) and multiplying by 12.
The index is released by the Federal Home Loan Bank of San Francisco at the close of business on the last business day of each month. The data come from the preceding month. For example, the February cost of funds is reported on March 31. This index is then in effect until the end of April.
About 48 percent of all ARMs are based on the Monthly 11th District Cost of Funds Index. For a recording of the current rates, call 415/616-2600.
The Monthly Median National COFI is the median-average interest rate paid by all FSLIC-insured institutions.
Also called "band." For a CMO, the highest and lowest prepayment speeds within which a PAC is paid according to schedule.
Also "CMO" or "CMO deal." A type of mortgage-backed security that is backed by mortgage pools and that is documented and sold as a collection of separate bonds, which are called tranches.
CMOs may reduce the uncertainties caused by mortgage prepayments by separating cash flows into a variety of tranches. Each tranche can have different prices, yields, expected maturities, expected prepayment speeds, and so on.
For CMOs, a term used when there is more than one manager in the syndicate. Co-managers are responsible for sales of the securities allocated to them. They do not, however, run the books--in other words, they are not responsible for administration of the marketing, allocation, or delivery.
Units of ownership in a public corporation. Owners are typically entitled to vote on director appointments and other matters, as well as to receive dividends on their holdings. Convertible securities convert to common stock.
A group of individual portfolios, retaining their original attributes, that are treated as a single portfolio for analysis.
For example, to track returns for an entire department, a department head might create a composite of all of the portfolios managed by the department.
Interest earned on interest as well as on principal payments.
Any condition described in the prospectus that allows the issuer to call a bond. Typical conditions might be net assets reaching a certain level; common stock hitting a certain price; and losses of a particular type of collateral.
In UniVu, these conditions usually appear in the Notes section of the Government/Corporate Description window.
Also "CPR." For mortgage-backed securities, the annualized principal repayments in excess of regular payments.
The CPR is expressed as an assumed constant percentage of outstanding principal. Synonymous with "constant prepayment rate," "constant percentage prepayment," and "CPP."
Abbreviated "CMT." A set of indexes based on the average yields of the nine Treasury securities (the seven-year index is generated from three-year-old 10-year notes). Adjustable-rate mortgages (ARMs) and other floating-rate financial products often float off CMT indexes.
Each index is calculated daily by the Federal Reserve Board and published weekly on Tuesday in Federal Reserve Publication H15. Once a week, Bridge receives the CMTs as part of an automatic feed from the Federal Reserve. Once the feeds are received, Bridge updates the database overnight.
CMT indexes have four flavors: daily, weekly (an average of the past week's daily rates), monthly (an average of the past month's daily rates), and yearly (an average of the past year's daily rates).
For historical analyses, using a CMT may be better than using an on-the-run since the CMT's maturity is artificially constant: A one-year CMT is always going to mature in one year. The maturity of an on-the-run Treasury, however, gets shorter every day until a new issue is auctioned.
One-year, three-year, five-year, seven-year, and 10-year CMT histories go back to 1973. The two-year CMT history goes back to 1976, and the 30-year CMT history goes back to 1977.
A horizon pricing method that assumes that the option-adjusted spread remains constant from the trade date to the horizon date.
Bridge applications calculate constant spreads by projecting the current spread to the horizon. For example, if the spread to the 10-year Treasury is 60 basis points today (if today is the trade date), the program assumes that the spread will still be 60 basis points a year from now, at horizon.
A horizon pricing method that assumes that the nominal spread remains constant from the trade date to the horizon date.
Bridge applications calculate constant spreads by projecting the trade-date spread to the horizon. For example, if the spread to the 10-year Treasury is 60 basis points today (if today is the trade date), the program assumes that the spread will still be 60 basis points a year from now, at horizon.
Abbreviated "CPI." A measure of changes in consumer prices, as determined monthly by the U.S. Bureau of Labor Statistics. Components of the CPI include housing, food, transportation, and electricity. Also called "cost of living index."
Published between the 10th and 20th of each month on the front page of the Wall Street Journal .
A type of preferred stock that is convertible to a given number of shares of common stock.
A security that can be exchanged, at a specified price, for shares of the issuer's stock.
Measure of the curvature of the price-yield relationship of a fixed-income security. Any fixed-income security with known cash flows has positive convexity.
For mortgage securities, an adjustment to the cash flow yield that takes into account any options embedded in the security.
The parties who agree to the swap.
Identifies the country from which a security was issued.
The periodic interest payment on a security paid by the issuer to the holder. Coupon is quoted as an annual percentage of face amount.
The number of interest payments made annually.
Evaluation of a company by a rating agency, based on its credit history and ability to repay its obligations.
Rate at which yield-to-maturity and yield-to-call of a security are equal.
"Coupons Under Book Entry Safekeeping." STRIPS, originally issued with paper certificates, that were later converted to computerized book entries.
In 1987, when the U.S. Treasury started issuing securities in book-entry form only, investors were asked to exchange the paper certificates for computer records managed by the Federal Reserve Bank.
For mortgage pools, the sum of the remaining unpaid principal balances at the end of the prior month. For example, if today is October 5, then the current balance is the principal calculated at the end of September.
Calculated as the original balance multiplied by the factor.
The FNMA current coupon is generally the coupon on the pass-through pool trading closest to par. In Bridge applications, the current coupon FNMA is a 96-point spread from the 10-year Treasury.
The GNMA current coupon is the maximum allowable pass-through Veteran's Administration mortgage rate in effect. In Bridge applications, the current coupon GNMA is a 106-point spread from the 10-year Treasury.
For mortgage pools and mortgage-backed securities, original holdings multiplied by the factor.
Current flat price of a security.
Depending on the context, the current price can be the Bridge valuation, the offering price, or a user-entered price.
Coupon rate divided by the flat market price.
The issuer's option to redeem a security at any time up until the final maturity.
Security ID number assigned by the American Bankers Association's Committee on Uniform Security Identification Procedures.
Each security has it own unique nine-character CUSIP. The first six numbers identify the organization issuing the security. The next two characters identify the issue itself. The last digit is a "check digit," which is used to test for transmission and data-entry errors. The check digit contains no identification information.
Note: Privately-placed issues do not have CUSIPs. Medium-term notes may or may not have CUSIPs.
The date on which a new security begins accruing interest. See also issue date.
The method for counting the days in a month and the days in a year. The notation used is (days in a month)/(days in a year).
An issue's day-count basis specifies how to count the number of days between any two dates and how to calculate the size of an interest period when the period is a fraction of the normal coupon period.
The most common day-count types are actual/actual, actual/365, actual/365(366) (for leap years), actual/360, 30/360, and 30E/360 (European).
The number of days from the first of the month to the payment date of the first installment of coupon and principal on a mortgage-backed security. Also called the delay period.
General debt obligation backed only by the promise and credit of the borrower.
Debt security that obligates the issuer to pay the holder the principal amount of the loan at or before maturity.
In Bridge applications, a choice that the program uses automatically whenever it gets no other input. Defaults can be overridden from the keyboard.
A technique in which an issuer discharges old, low-rate debt by buying new securities paying higher interest or having a higher market value, then paying bondholders from the proceeds of the new purchase. For example, an issuer could buy AAA bonds paying 10% to pay the interest and principal on its own, old bonds paying 5%.
The two types of defeasance are "economic" and "legal." In economic defeasance, the issuer has provided money for all coupon and principal payments to a trustee. In legal defeasance, the bond issuer sets up an irrevocable trust for the profit of the bondholder and is no longer legally bound by the covenants of the issue.
For asset-backed securities, the period between issuance and the first payment of coupon and principal.
The futures price multiplied by the conversion factor; the fair price of the bond given the futures price at delivery.
The theoretical change in the value of an option premium relative to a small change in the value of the underlying security. The inverse of the delta gives the theoretical hedge ratio. Closely related to "gamma" and "hedge ratio."
A market instrument that is derived from an underlying security or that is created from other securities. Derivatives include swaps, futures, and options.
Any institution regulated by the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Bank (FRB), or the Office of the Comptroller of the Currency (OCC).
Organizations such as savings and loan institutions, savings banks, and credit unions are considered to be depository institutions. Organizations such as investment banks, commercial banks, and insurance companies are generally not considered to be depository institutions.
Bond selling below face amount.
Used to analyze floating-rate notes and floating-rate tranches. According to PSA Uniform Practices (p. SF-26, 6/1/90), the discount margin is "the increment over the index rate that causes the settlement price of a floating-rate security to equal the discounted present value of its cash flows, with yield compounding frequency matching the security payment schedule."
The yield-to-maturity spread is also used to analyze floating-rate securities. The discount margin allows for varying interest-rate scenarios while the YTM spread does not. However, discount margins for securities with different payment frequencies cannot be compared easily because the frequencies are not normalized. YTM spreads, on the other hand, can be compared because cash flows are calculated using semi-annual compounding and actual/360 (CD) or 30/360 (bond-equivalent) calendars, with compounding and calendar assumptions converted as needed.
1. Interest rate used to determine the present value of a future cash flow. In other words, the interest rate, given the current price of the security, that generates a particular value for the security at a particular point in the future (usually at the horizon date).
2. The interest rate that the Federal Reserve Board charges member banks for emergency borrowing.
The actual yield of a zero-coupon security. Zero-coupon securities (such as Treasury bills) are always sold at a discount from their face value. To find the yield, Bridge applications annualize the discount using the actual/360 day-count method.
For a security or portfolio, DV01 multiplied by current holdings. (For mortgage pools and mortgage-backed securities, current holdings is factored holdings.)
In Bridge applications, calculated as the option-adjusted DV01 multiplied by par holdings.
The attempt to determine the true maturity, as opposed to final maturity, of a security, by measuring the average time required to collect all payments of principal and interest. See also Macaulay duration and modified duration.
A measure of the interest rate sensitivity of a portfolio computed as a market-value weighted sum of security durations.
Duration measured to the first call date.
A trade in which the weighted average duration of securities purchased is equal to that of the securities sold.
For a portfolio, the overall spread to Treasuries weighted by the option-adjusted durations of the securities in the portfolio.
It is calculated by multiplying each security's option-adjusted dollar duration by its spread, adding up the results, and dividing the sum by the total option-adjusted dollar duration of the portfolio.
For portfolios, a close approximation of the internal rate of return. It is weighted by the option-adjusted duration.
It is calculated by multiplying each security's option-adjusted dollar duration by its yield, adding up the results, and dividing the sum by the total option-adjusted dollar duration of the portfolio.
"Dollar value of .01." The approximate change in price (for $100 face value) for a one basis-point change in yield (0.01%).
DV01 is also referred to as "price value of a basis point" (PVBP).
Abbreviated "ECF." The schedule of principal repayments of a sinking fund bond assuming all optional redemptions are exercised.
Convexity, computed using an option-adjusted model, that incorporates the effect of embedded options. A callable security whose price becomes "capped" in a market rally has negative effective convexity. Also called "option-adjusted convexity."
The dollar value of a one basis point change in a security's yield, assuming the security is evaluated using its effective duration rather than its modified duration.
An indicator of price volatility and changes in cash flows when interest rates change. For securities with embedded options, the effective duration (like the option-adjusted spread) will usually depend on the volatility.
Note: The calculations are based on a parallel shift of the par Treasury yield curve rather than a shift in the yield of the security being analyzed.
The benchmark used to calculate the spread at the effective redemption date. For example, if a callable security's worst call date is three months away, Bridge applications use the three-month Treasury as the benchmark.
The date on which the security is expected to be redeemed. For yields to maturity, for example, the effective redemption date is always the maturity date. For yields to best put, the effective redemption date is the put date with the highest yield. For yields to worst call, the effective redemption date is the call date with the lowest yield.
Note that Bridge applications ignore the refund date when looking for a callable security's yield to worst call, since most callable securities are traded to the next call date, not to the refund date. Only utility securities are traded to the refund date, although there may be exceptions even here. To analyze a security that actually is traded to the refund date, use yield to refund date.
Also called "workout date."
Maturity, call, put, sinking-fund payment, or other event that causes or might cause the issuer to redeem the security.
The expected price as of the effective redemption date.
The expected nominal spread as of the effective redemption date.
Also called "effective yield," "yield to effective redemption" and "yield to effective date."
Effective redemption yield means different things for different types of securities: For securities with call but no put options, yield to effective date is yield to worst call. For securities with puts, it is yield to best put.
Note that Bridge applications ignore the refund date when looking for a callable security's yield to worst call, since most callable securities are traded to the next call date, not to the refund date. Only utility securities are traded to the refund date, although there may be exceptions even here. To analyze a security that actually is traded to the refund date, use yield to refund date.
A spread off the ARM pool's floating-rate index that makes the average present value equal to the current price (F.J. Fabozzi, "Handbook of Mortgage-Backed Securities," Probus Publishing Co., Chicago, IL, 1988, p. 811).
Also called "effective margin." See Lederman and Celic (eds.), "Adjustable Rate Mortgages & Mortgage-Backed Securities," Business One Irwin, Homewood, IL, 1991, pp. 132-136, 160-163.
The EOM payment flag tells the calculators whether payments will be made on the last day of the month or on the anniversary day of the maturity.
This field is important only if the maturity date is February 28 or 29, April 30, June 30, September 30, or November 30.
The PSA speed that most closely approximates the prepayment speed discovered using the Bridge prepayment model, SMM, CPR, or any other prepayment model.
Bridge applications find an equivalent PSA by looking for the PSA speed that produces the same average life as the original model does.
Bond denominated in U.S. dollars or other currencies and sold in countries other than the one in whose currency the issue is denominated.
The Eurobond market is an important source of capital for multinational corporations and foreign governments, including Third World governments.
Yield to maturity calculated using a 30E/360 day-count basis.
A futures option that can be exercised only on the expiration date.
Japanese yen invested in European markets. Current rates are available on the financial assumptions windows and from Telerate and other financial information services. Bridge updates the index from public sources as needed.
A security whose early maturity date or dates may be extended to the final maturity date, at the option of the issuer. Also "extendible."
Options on futures generally expire on a specific date during the month preceding the futures contract delivery month. For example, an option on a March futures contract expires in February but is referred to as a March option because its exercise would result in a March futures contract position.
A security whose early maturity date or dates may be extended to the final maturity date, at the option of the issuer. Also "extendible."
Also "face value," "nominal value" and "par value." The value of the security as it appears on the certificate or instrument.
The face amount is the amount of principal due the bondholder at maturity. It is also the amount on which interest payments are calculated. For example, a bond with a 10% coupon and a face amount of $1,000 pays bondholders $100 a year.
For securities or mortgage pools in which some or all of the principal is paid down before the scheduled maturity, the ratio of the outstanding principal balance to the original principal balance.
Calculated as current balance divided by original balance.
For mortgage pools, the first day of the month following the homeowners' payments and prepayments for the prior month. For example, a factor dated "October" or "October 1" reflects the balance in the pool at the end of September.
For tranches, the dates on which the agencies, private deal issuers, and ABS issuers release factor information.
More information is available in the online essays, "Timing of Mortgage Factor Updates in Bridge Releases" and "Timing of CMO and ABS Factor Updates in Bridge Releases."
Federal Home Loan Mortgage Corporation (Freddie Mac). A government-sponsored corporation that buys conventional mortgages from lenders, packages them into CMOs and other mortgage-backed securities, provides guarantees, and sells the securities on the open market.
For more information about FHLMC securities, call Freddie Answers at 1-800-336-3672. You can request an account number for FHLMC's automated dial-up service (good for off-hours information).
A financial instrument or security whose cash flows depend on another financial instrument or security.
The earliest date specified in the prospectus supplement on which optional redemptions may take place. When no date is specified, it is often the date on which a given condition is met, such as when a certain percentage of original principal amount remains.
The first date after settlement on which a coupon is paid to the buyer.
For CMOs, the first date on which an interest payment is paid to any investor in any tranche. Also called "first coupon date."
Coupon rate on a security that remains constant throughout the life of the bond.
Price of a bond without accrued interest. Bond traders typically quote flat price, although purchasers pay the full price (full price = flat price + accrued interest).
Coupon rate that varies with ("floats against") a standard market benchmark or index.
Government or agency security with a floating coupon, reset periodically against a short-term index such as the three-month or six-month LIBOR.
Bridge resets most coupons on the reset date identified in the prospectus. For notes that use the value of the index on the reset date itself, we reset the coupon the day after the reset date. For coupons that reset daily, we update the database whenever the index changes or an interest-payment date occurs.
Note that Bridge does not distinguish between structured notes and floating-rate notes.
Not the same as a variable-rate bond.
A tranche with a coupon that floats against an index or a Treasury rate. The coupon is reset periodically.
An interest rate floor agreement whereby one party agrees to pay the other if the reference rate falls below a predetermined level.
The oldest low-coupon U.S. Treasury securities. Flower bonds have a special provision that lets them be redeemed at face amount as payment for an individual holder's U.S. federal estate taxes. Because of this provision, their yields to maturity are not comparable to other securities.
Federal National Mortgage Association (Fannie Mae). A government-sponsored but privately owned corporation that buys mortgages backed by the Federal Housing Authority and other organizations, then packages and resells them as CMOs and other mortgage-backed securities to investors.
For more information about FNMA securities, call 1-800-BEST-MBS. You can request an account number for FNMA's automated dial-up service (good for off-hours information).
Also called "implied forward rates." The return over a future holding period implicit in the current cash-market yield curve.
The implied forward rate is the rate that would make an investment in a two-year security now, and an investment in a one-year security now and another one-year security a year from now, equivalent.
The exchange of interest rates at some date in the future with the interest agreed to on the contract date. It is a one-time contract, however parties can transact in multiple agreements going further in time.
The direct trading of large blocks of securities between institutional investors. Fourth market trading is used to save on brokerage commissions. It is facilitated by computerized subscriber services such as Instinet (Institutional Networks Corporation).
Number of coupon installments paid annually.
Zero-coupon bonds, which pay no coupons, have frequencies of zero.
Corporate bonds typically pay interest twice a year (semi-annually). CMOs pay interest either monthly or quarterly, while mortgage pools pay once a month.
Eurobonds often pay annually.
A type of sinking-fund bond in which the issuer can redeem a specified amount of its total debt outstanding. (In other words, a funnel redemption is not restricted to a single issue.) If a funneling option is available, the highest coupon bonds are normally targeted first for redemption.
Also called "tunnel," "blanket," and "aggregate."
A contract to buy or sell a specific amount of a particular grade of securities or commodities for a specific price or yield, for receipt or delivery on a specified future date.
The process of meeting an obligation to deliver or receive securities or commodities on a date and in a location as specified by terms of the contract. Not applicable to cash-settled contracts.
Also "FV." Value of present dollars at a future time, given as P(1 + R)T, where P is dollar amount, R is rate/compounding periods per year, and T is number of compounding periods.
Bond's quoted price plus accrued interest. The buyer must pay the full price to the seller by the settlement date.
Also, the sum of the present value of all future cash flows at the settlement date.
Rate of change of an option's delta with respect to the price of the underlying security. Closely related to Delta.
A bond issued in two or more countries' markets, usually by the World Bank. Coupon frequency is twice yearly.
A nine-point curve updated overnight from the prior trading day's bid-side valuations for the on-the-run Treasuries.
In Bridge applications, the global yield curve (also called the "OTR curve") is used for all nominal-spread calculations. ( OAS calculations use the Bridge analytic curve.)
To look at or change the global yield curve, use the financial assumptions windows (accessed from the Assumptions menu).
Portfolio managers for your firm can also change the global yield curve for all in-house calculations.
Government National Mortgage Association (Ginnie Mae). A wholly owned U.S. government corporation within the U.S. Department of Housing and Urban Development. GNMA packages mortgages guaranteed by the Federal Housing Authority and Veterans Administration into mortgage pass-through securities, provides guarantees, and sells the securities on the open market.
GNMA has two programs, GNMA I and Jumbo GNMA II. GNMA I securities are the most common and most liquid, constituting the majority of outstanding GNMA securities. GNMA II securities are more recent.
Other differences: GNMA I securities are based on single pools. GNMA II securities, on the other hand, are based on custom pools (containing securities from the same issuer but with slightly different coupons), and multiple-issuer pools (designed to accommodate smaller issuers who cannot generate the $1 million minimum needed to participate in a GNMA I). GNMA II mortgage coupon requirements are also more relaxed, and there is an additional delay of five days in passing through principal and interest payments because of a centralized payment facility.
Pass-through mortgage-backed securities on which registered holders receive separate principal and interest payments on each of their certificates. GNMA I securities are single-issuer pools. Investors may expect to receive principal and interest payments on the 15th day of each month. (From PSA Uniform Practices , 7/1/88, p. 2-8.)
Pass-through mortgage-backed securities on which registered holders receive an aggregate principal and interest payment from a central paying agent on all of their GNMA II certificates. Principal and interest payments are disbursed on the 20th day of each month.
GNMA II securities are collateralized by multiple-issuer pools or custom pools (one issuer but different interest rates that may vary within one percentage point). Multiple-issuer pools are known as "Jumbos." Jumbo pools are generally larger and often contain mortgages that are more geographically diverse than single-issuer pools. Jumbo pool mortgages have interest rates that may vary within one percentage point. (From PSA Uniform Practices , 7/1/88, p. 2-8.)
Debt security issued by a government.
A movement over time of the U.S. Treasury yield curve.
Payments on GPMs increase at predetermined rates for a predetermined term at the beginning of the loan period. Since the early payments may not cover the interest due, negative amortization occurs--the unpaid interest is added to the loan, thereby extending the loan's cost to the borrower as well as its average life.
GPMs were designed to help young home buyers who had relatively low incomes to start, but who expected their incomes to rise.
For a mortgage pool, the weighted average of the interest rates paid by the homeowners on their mortgages, before deduction of service fees.
Difference between offering price on a security and price paid by an underwriter to the issuer.
Payments for GEMs increase over the life of the mortgage. The increased payments are applied to the principal, thus building the borrower's equity in the home and paying off the loan more quickly than a traditional mortgage.
GEMs, unlike GPMs, have no negative amortization. In the most common form of a GEM, the borrower's monthly payments during the first year are fixed. At the end of the first year, and for every year thereafter until the loan is retired, the monthly payment is increased by 4 percent. Since all of these payment increases are applied to the principal, the mortgage is fully repaid in slightly less than 13 years.
The technique of making offsetting commitments to minimize the impact of adverse movements in the price of a commodity or security.
The number of futures or options contracts that are bought or sold to hedge a position in an underlying security.
For CMOs, the discount rate used for bond value calculations. This rate is usually set to the coupon of the highest coupon tranche. It is required by rating agencies.
Bond rated triple-A or double-A by Standard & Poor's or Moody's.
For most securities, the face amounts of issues held in a portfolio.
Current holdings and original holdings are usually the same. However, current and original holdings start to diverge for securities that are subject to paydowns of principal. Some or all of the principal of a mortgage-backed security or a sinking fund, for example, is paid before maturity. This paydown reduces the dollar value of the individual holding, but not the value of the entire portfolio if the cash flows have been reinvested well.
The face amounts of the issues held in a portfolio.
Note that current holdings and original holdings for most securities are the same. However, current and original holdings start to diverge for securities that are subject to paydowns of principal. Some or all of the principal of a mortgage-backed security or a sinking fund, for example, is paid before maturity.
The principal balance of a security at the horizon date, expressed as a percentage of face amount.
A yield curve used to forecast the effects, at a particular point in the future, of interest-rate changes on an investment.
Set up and save horizon curves using the Scenario option. Many calculators also let you create ad hoc horizon curves.
In "what-if" analyses, the point at which you plan to sell the securities. In Bridge applications, the default horizon date is one year plus settlement.
Period over which an investment is to be evaluated.
The flat price of the security at the horizon date.
The user's projection of the level of interest rates at a specified future date.
An instantaneous shift of the U.S. Treasury yield curve.
The financing rate for a bond determined by its current price and its delivery price; that is, the financing rate derived by considering delivery into the futures contract to be a repurchase agreement.
This is the break-even rate that eliminates arbitrage profits between the cash market and the futures market.
The value of an option is a function of five variables: the price of the underlying security; time to expiration; the strike price; the short-term interest rate; and volatility. Volatility can be calculated if the other four variables as well as the market price of the option are known. If volatility is calculated in this way, it is called implied volatility.
A basket of bonds, Treasuries, currencies, or other financial instruments used as a benchmark for floating-rate notes and floating-rate tranches. Common indexes are LIBOR indexes, the Prime Rate, the 11th District COFI, and CMTs.
To qualify as a floating-rate benchmark, an index must be both quantifiable and publicly available.
In Bridge applications, refers to portfolios that you create or import to act as benchmarks. See also market index.
The annualized rate of interest for an index such as the LIBOR or the 11th District COFI. Index rates are used as benchmarks for floating-rate securities.
A legal document that specifically states the conditions under which a bond has been issued, the rights of the bondholders, and the duties of the issuing corporation.
The information about a security that doesn't change. CUSIP, ticker, maturity date, and issue date are all examples of indicative data.
Also "industry sector." The broad market group--industrial manufacturing, banking, and so on--that best describes the nature of the issuer's business.
Also "industry sector detail." A subgroup of a industry type.
An agreement between two parties whereby one party, for an up-front premium, agrees to compensate the other at specific time periods if a designated interest rate, called the reference rate, is different from a predetermined level.
The percentage increase in the value of a bond over the holding period that results from interest income, including:
The percentage increase in the value of a pool over the holding period that results from all interest income, including:
An agreement between two or more parties to exchange interest rates and cash flows over a specified period of time.
The interest rate at which the present value equals the market value of the security. Synonymous with "yield."
Any bond denominated in a foreign (non-U.S.) currency but available to U.S. investors.
In Bridge applications, estimating the value of a point that falls between two known values on the on-the-run Treasury yield curve.
To estimate the yield of a bond maturing in six years, for example, an Bridge application finds the difference between the yields of the 5-year and the 7-year bonds, then finds the rate at six years.
Yield curve in which short-term rates are higher than long-term rates.
A CMO tranche with an interest rate that decreases as a specific market index increases, and increases as the index decreases.
Bond with a rating of BBB- or above (Standard & Poor's) or Baa3 or above (Moody's).
The date on which a new security begins trading. See also dated date.
Note: For issue date, Bridge uses the "on or about date" that appears in the text of the prospectus, not the prospectus date that appears at the bottom of the first page.
The dollar value of a security when it first comes to the market.
Issue prices are determined in three ways: by auction, as for Treasuries, by consensus, as in a private placement, and by the lead underwriter, who sets the yield.
Par or face amount of a security issued by a corporation, often stated in millions of dollars.
An entity, such as a corporation or government agency, that creates a bond, mortgage-backed security, CMO, or other obligation, and promises to pay holders principal and/or interest according to the schedule described in the prospectus.
Mortgages that exceed agency size guidelines (in 1995, $151,725
for
Jumbos often used as whole-loan CMO collateral.
Not the same as the GNMA II jumbo pool.
Bond with a rating of BB+ or below (S & P) or Ba1 or below (Moody's); also unrated bonds whose quality is questionable.
The date on which the last coupon is paid prior to settlement. Although the issuer may pay a final coupon at settlement, that coupon is not considered the last coupon.
The leading member of the syndicate issuing a new security such as a corporate bond or a CMO. The lead manager administers the marketing, allocation, and delivery of the security. The lead manager--in consultation with the borrower--also selects co-managers; determines the initial and final terms of the issue; selects the underwriters; and selects the selling group.
"London Interbank Offered Rate." According to the Wall Street Journal , the LIBOR is "the average of interbank offered rates for dollar deposits in the London market based on quotations at five major banks." The rate is published daily in the Wall Street Journal "Money Rates" section. Bridge updates the database from public sources as needed.
Lockout period. A period during which prepayment is prohibited. Lockouts are common with federally insured and conventional multifamily mortgages.
Bond that matures in more than 10 years.
The weighted-average term to maturity, in years, that it takes for an investor to receive the cash flows from a security or portfolio. The time to receive each cash flow is weighted by the present value of that cash flow. See also modified duration.
Also called "index." Statistical composite that measures changes in the economy or financial markets. Often expressed in percentage changes from a base year or from the previous month. Examples are Standard & Poor's 500-Stock Index, the Corporate Bond Index, the Dow Jones Industrial Average, and the Value Line index.
In Bridge applications, "index" also refers to portfolios that you create or import to act as benchmarks.
In Bridge applications, market value for government and corporate securities is defined as the principal balance multiplied by the market price of the security.
Market value for mortgage pools and CMOs is defined as:
original holdings * ( market price + accrued interest) * factor / 100.
The last reported price at which the security was sold or, in the absence of an actual price, the estimated highest price that a buyer would pay for this security or a similar security.
For mortgage pools used to back mortgage-backed securities (MBS), an organization that administers, supervises, and collects monthly mortgage payments from the primary servicer and distributes the payments to the MBS investors.
The date on which the unpaid principal balance of the security becomes due and payable. For corporate bonds without options, this date is stated in the prospectus. For bonds with options, the maturity date is affected by calls, puts, sinking-fund schedules, and so on. For mortgage pools and CMOs, the maturity date is the last date for which the investor can ever receive a cash flow of either principal or interest.
Note that, although maturity dates appear for mortgage generics, generics do not actually mature at any particular point in time. Therefore, these maturity dates are only approximate. However, they can be useful for creating approximate remaining terms during portfolio analyses.
Abbreviated "MTN." Security issued as part of a shelf registration.
Publicly issued medium-term notes are issued under the SEC "shelf registration" Rule 415. The issuer develops a "Master Official Statement" that specifies the total face amount of the issue, the coupon payment date, and any redemption options. The issuer can then issue securities whenever it wants to until the entire registered amount is issued. (Even then, the issuer can ask for an extension, allowing it to continue issuing securities under the same registration. Also, the issuer does not have to issue the full registered amount.)
Medium-term notes have maturities of almost any length and any type of coupon (fixed, floating, variable, and so on). Specifying the actual dated date, maturity, and coupon is done at the time of issuance.
MTNs often have odd maturity dates--for example, "02/ 16 /93" instead of "02/ 15 /93"--and odd coupons--for example, "7.410" instead of "7.750." They may also have odd first and last coupon payment dates.
Note: European medium-term notes have maturities of one to five years.
Source of Bridge data: Most of the partners of Bridge have supplied MTN data to Bridge. Bridge analysts have also called the companies and the SEC for information about current public issues.
CMO or structured financial product deals for which Bridge has sufficient information to compute cash flows.
For CMOs or other structured financial products, a status indicating whether enough information is available to calculate the effects of call options.
A 15-year or 30-year mortgage aged at least 30 months but less than 90 months (approximately).
A measure of the sensitivity of a bond's price to changes in yields, shown as a number of years to maturity.
The modified duration is calculated as the Macaulay duration divided by 1 plus the periodic yield.
Example: If a bond has a modified duration of 4 years, for every 100 basis-point change in yield, the price changes by 4 percent in the opposite direction. In other words, if interest rates go up 4 percent, the security's price goes down 4 percent.
When the cash flows from a security are not sensitive to changes in interest rates, the modified duration can be used as a measure of the security's price sensitivity.
A U.S. organization that rates the quality of securities according to the credit-worthiness of their issuers.
Bridge updates Moody's ratings nightly.
A mortgage-backed security, backed by mortgage pools, in which interest and principal payments follow standard corporate bond practice: interest every six months, principal at maturity.
Also "MBS." A security backed by mortgage pools. There are four basic types:
Corporate security that is backed by property, not by mortgage pools. A mortgage bond is not a mortgage-backed security.
The yield to maturity of a mortgage-backed security, computed using monthly compounding and the 30/360 day-count method.
A representative (and hypothetical) set of mortgages used as a pricing benchmark. A typical mortgage generic might be "FNMAs with 30-year maturities and 8% coupons."
Bridge analysts create mortgage generics using these criteria:
Whenever a large enough outstanding amount exists within a distinct seasoning range for a particular coupon level, Bridge sets up a standard mortgage generic.
However, for some coupon levels, the current outstanding balance is large enough, but there is no clear seasoning range. In these cases, Bridge Partner analysts create mortgage generics without a specified seasoning.
A mortgage-backed security, backed by residential mortgages, in which each resident's monthly mortgage payments, plus any optional prepayments, are passed through to the investors. A servicing fee is deducted from each pass-through payment. Payments are monthly.
Securities that are composed of groups of mortgages sharing similar characteristics. Pools serve as collateral for mortgage-backed securities.
The mean for the last N periods, where N can be any number of days, months, years, or other period. For example, a 3-month PSA moving average would be calculated as:
PSA for current month + PSA for (current month - 1) + PSA for (current month - 2) / 3 months
On graphs, a large number of periods creates a relatively smooth line--good for overviews. A small number of periods creates a more jagged line--good for information about volatility.
For a floating-rate tranche, the index coefficient used to calculate the current coupon.
For standard floating-rate tranches, the multiplier is usually 1. For superfloaters, the multiplier is a number greater than one, and for inverse floaters, the multiplier is a negative number.
The current coupon for a floating-rate tranche is: multiplier x index rate + offset.
In Bridge applications, the on-the-run Treasury with the maturity date closest to the maturity date (or effective date, depending on the context) of the security being analyzed.
To estimate the yield of a bond maturing in 6.5 years, for example, Bridge applications select the 7-year point on the yield curve.
In general, negative amortization occurs whenever the scheduled monthly payment on a mortgage is not large enough to cover the interest payment. The interest shortfall is added to the remaining balance of the mortgage.
In ARMs with payment caps, negative amortization occurs when the payment required to cover a rate increase is greater than the payment cap. The shortfall is, as usual, added to the principal balance. Note, however, that most ARMs also cap the amount of negative amortization--if the cap is set at 125 percent, for example, the principal owed cannot exceed 125 percent of the original mortgage. When the amount owed reaches 125 percent, the payment cap is lifted. (This means that the borrower now has higher payments on real estate in which he or she has negative equity.) For more information, see F.J. Fabozzi, "Handbook of Mortgage-Backed Securities," Probus Publishing Co., Chicago, IL, 1988, p. 799.
Basis less carry; that portion of the basis which is not explained by the costs of financing the bond. Net basis may also be viewed as the difference between the bond price and the parity price.
The homeowners' gross interest payments minus servicing, management, and guarantee fees. Investors receive the net coupon cash-flows.
For ARM pools, the net coupon is the net margin plus the floating-rate index rate as of the last reset date.
For ARM pools, the gross margin minus the cost of mortgage insurance and the expense of securitizing the mortgages. The gross margin is the spread in percentage points added to the index rate to compute the pool's net coupon rate and cash flows.
For whole-loan ARMS, net margin is gross margin minus servicing fees.
The principal amount to be retired at the next sinking fund date.
The next date on which the issuer can call the bond (redeem it before maturity).
If the bond is callable now, the next call date is the date on which the call price changes.
The next scheduled date on which the issuer can or must make a sinking fund redemption.
A 15-year or 30-year mortgage aged less than 30 months (approximately).
The total percentage increase in the value of an investment over the holding period. The annualized rate of return is, roughly, the nominalized rate divided by the number of years in the holding period.
For more information, see Comparison: Annualized and Nominal Rates of Return.
Also called "spread." The difference, in basis points, between the yield of a security and a point on the OTR curve.
Unlike the option-adjusted spread, the nominal spread does not account for options (calls, puts, sinking funds, prepayments, and so on).
The annual dollar amount of income from the security divided by the face amount of the security. The result is stated as a percentage. When the security is sold at par, the nominal yield and actual yield are the same.
A convexity that ignores the effect of embedded options.
A security that the issuer cannot redeem before maturity, except under unanticipated or unusual circumstances as specified in the prospectus.
The issuer or holder has a specific number of days before a call or a put date to give notice of an intention to exercise the option.
The amount used as a base for computations. Notional principal plays a conceptual role in determining the amount of the interest payments. This is not the principal amount that is actually transferred from one party to another.
"Option-adjusted spread." A measure of a security's extra return over the return of a comparable Treasury security after accounting for embedded options.
The OAS is the incremental spread above the Treasury spot rates that causes the present value of the cash flows from all interest-rate paths to equal the known security price. The security's cash flows are assumed to be affected by changes in the Treasury yield curve, but not by changes in OAS.
For more information, see:
A set of securities that a trader or portfolio manager wants to buy or sell.
For a floating-rate tranche, the spread from the index. For example, if the prospectus says that the float is "40 basis points over the LIBOR rate," the offset is 40 basis points.
The current coupon for a floating-rate tranche is: multiplier x index rate + offset.
Also "OTR." A yield curve created from the yields to maturity of the most recently issued 3-month, 6-month, 1, 2, 3, 5, 7, 10, and 30-year Treasuries. Note that the 7-year Treasury is the most current three-year-old 10-year Treasury (the U.S. government no longer sells 7-year bonds).
The curve is updated nightly using the prior trading day's bid-side valuations for the on-the-run Treasuries. Bridge uses straight-line interpolation to define the curve (the line segments are visible on the financial assumption windows' yield-curve graphs).
In Bridge applications, the OTR curve (also called the "global yield curve") is used for all nominal spread calculations. OAS calculations use the Bridge analytic curve.
The most recently issued 3-month, 6-month, 1-year, 2-year, 3-year, 5-year, 7-year, 10-year, and 30-year Treasury securities. Note that the 7-year Treasury is the most current three-year-old 10-year Treasury (the U.S. government no longer sells 7-year bonds).
In small-search operations, the codes TSY n M and TSY n Y access the on-the-run Treasuries. For the actual, underlying Treasuries, use the ticker UST or the codes b.TSY n M or b.TSY n Y instead.
A contract that gives the holder the right to buy from or sell to the writer a specified amount of securities at a specified price, good for a specified period of time. An American option can be exercised at any time prior to its expiration. A European option can be exercised only on its expiration date.
A measure of the curvature of the price-yield relationship of a fixed-income security, calculated using a model that accounts for embedded options.
For a security or portfolio, a dollar duration that includes the effects of embedded options.
Also "rate duration" and "OA duration." The modified duration of a security, calculated using a model that accounts for embedded options. The OA duration indicates how cash flows change when interest rates change.
The DV01 of a security, calculated from an option-based model, that accounts for any embedded options.
Also "OAS." A measure of a security's extra return over the return of a comparable Treasury security after accounting for any options (calls, puts, sinking funds).
The modified duration of a security, calculated using an option-based model, that accounts for embedded options. Also indicates how changes in option-adjusted spread (OAS) affect the price--the yield curve is held constant while the OAS changes.
Yield to maturity adjusted for the value of embedded options (call, put, sinking fund, prepayments, and so on).
Option-adjusted yield can also be described as the yield if interest-rate volatility were zero and price were increased by the amount of the option value.
The internal rate of return of the weighted average of the pool's simulated cash flows.
This yield differs from the corporate option-adjusted yield, which is derived by adding the option value to the price and recalculating the yield to maturity.
The value of a tranche, mortgage pool, or generic without prepayments. The yield duration is calculated as follows:
A code indicating the type of option associated with a security:
The dollar value of a security's embedded options (call, put, sinking fund, prepayments, and so on).
In other words, if there were no options, the price of this security would be this much higher (if callable) or lower (if putable).
For mortgage pools, the unpaid principal dollar amount at pool issuance; the sum of the unpaid balances of all mortgages backing the pool at the time that the mortgages were pooled.
For CMO deals, the sum of the remaining balances of the mortgages on the date the pool was issued.
Note that it is possible for the original balance of the pool to be less than the sum of the original balances of the mortgages backing the pool. The reason is that some of the mortgages may have been seasoned for more than a month before being pooled. Therefore, some principal may have already been paid off.
The face amounts of the issues held in a portfolio.
Note that current holdings and original holdings for most securities are the same. However, current and original holdings start to diverge for securities that are subject to paydowns of principal. Some or all of the principal of a mortgage-backed security or a sinking fund, for example, is paid before maturity.
For mortgage pools, the term category to which the mortgages in the pool belong. The original terms are shown in months--for example, 180 for 15-year loans or 360 for 30-year loans.
Note that the actual original terms of the mortgages in the pool may differ from the stated term category. A GNMA pool, for example, may contain 20-year or 25-year mortgages that are classified as 30-year mortgages.
A quality rating for the security other than Moody's or S&P's.
Also "on-the-run" Treasury curve. A yield curve created from the yields to maturity of the most recently issued 3-month, 6-month, 1, 2, 3, 5, 7, 10, and 30-year Treasuries. Note that the 7-year Treasury is the most current three-year-old 10-year Treasury (the U.S. government no longer sells 7-year bonds).
The curve is updated nightly using the prior trading day's bid-side valuations for the on-the-run Treasuries. Bridge uses straight-line interpolation to define the curve (the line segments are visible on the financial assumption windows' yield-curve graphs).
In Bridge applications, the OTR curve (also called the "global yield curve") is used for all nominal spread calculations. OAS calculations use the Bridge analytic curve.
The amount of principal sunk ahead of schedule, if any. Calculated as (principal sunk) minus (principal scheduled to have been sunk).
"Planned Amortization Class." A CMO tranche with a planned amortization schedule similar to that of a sinking fund.
Principal payments of a CMO are first made to the PAC bonds, as per the schedule, then to other tranches. The weighted average life of the PAC remains constant within a wide band of prepayment speeds for the collateral.
Also called "Planned Redemption Obligation" (PRO) and "Scheduled Redemption Obligation" (SRO).
Face value of the bond. The value of the security as it appears on the certificate or instrument.
Face value of the bond multiplied by the number of bonds held, in dollars. For example, if you purchase two bonds with face values of $1,000, the par amount is $2,000.
Par amount is not the same as market value.
In Bridge applications, current holdings ( original holdings multiplied by the factor) divided by 100.
The discounted yield that results in the price of the security at par. Another way to describe the par yield is that the coupon and the yield are equal.
A 54-point analytic curve derived from the par yields of recent U.S. Treasuries. (To create a par-yield curve, the zero-coupon bonds are given coupons.) Bridge applications use straight-line interpolation between points.
Historical yield-curve applications regenerate the curves from Treasury rates saved nightly in an historical database. Bridge has data back to March 9, 1993.
A movement in a yield curve such that the shape of the curve remains unchanged. In Bridge applications, a change, in basis points, along the U.S. Treasury yield curve.
For futures, parity price is the spot price of the bond which would recover the delivery price at delivery of the current repo rate.
A FHLMC-issued security representing an undivided interest in a pool of conventional mortgages. Principal and interest payments are passed through to the certificate holders each month.
The timetable of principal redemptions for an asset-backed security.
For ARMs, the maximum amount of interest and principal that the borrower can be asked to pay each month, expressed as a percentage of the payment--for example, "the maximum allowable change is 7.5% of the monthly payment."
Payment caps help borrowers meet their payment obligations and avoid default during periods when rates increase significantly for short periods of time. A 2 percent index rate increase would, without a payment cap, translate into an almost 20 percent payment increase.
Monthly payment caps are rescheduled based on the underlying floating-rate index; lifetime caps may be rescheduled if negative amortization caps require it.
For a tranche, the interval during which it pays principal.
Cash required of the buyer to settle a trade. In a securities swap, payup is required when the securities bought are more expensive than the securities sold.
Opposite of takeout.
The yield to maturity divided by the discounting frequency per year.
An agreement between two or more parties to exchange a fixed rate of interest (cash flows equal to interest at a predetermined fixed rate on a notional principal amount) for a floating rate of interest over a specified period of time. The market level of the floating rate is typically LIBOR (London Interbank Offered Rate). The currencies of the two sets of interest cash flows are the same. Also known as a pay-fixed swap.
A provision in the indenture that lets the holders redeem securities at par in the case of such designated events as a hostile takeover, the purchase of a large block of shares, or an excessively large dividend pay-out.
An alphanumeric code assigned by the issuer that uniquely identifies the mortgage pool.
The securities owned by an investor.
A portion of the management fee, calculated on the full principal amount of an issue, taken by the lead manager or managers as compensation for assuming responsibility for the coordination and distribution of a primary market issue.
A class of stock that, like bonds, pays dividends at a specified rate and that has preference over common stock in payment of dividends and liquidation of assets on bankruptcy.
Preferred stock is not normally convertible to common stock--however, see convertible preferred stock.
Months to balloon maturity.
Unscheduled mortgage principal payments over and above the regularly scheduled principal payments.
For mortgage-backed securities, the excess amount of principal expected to be repaid over a defined horizon.
For mortgage-backed securities, an assumption about the rate at which principal will be prepaid. Bridge offers these models:
For mortgage-backed securities, the rate at which excess amounts of principal are expected to be repaid over a defined horizon. The speed assumption is expressed by two pieces of information: the prepayment model and the rate calculated according to the model's rules. Also called "prepayment rate."
The amount you would have to invest today to generate a particular future value at the horizon date. Synonymous with "discounted value."
Current market price of a security; the current flat price.
Depending on the context, the current price can be the Bridge valuation, a company-defined price, or a local price.
The date on which the source of the pricing information (Bridge or other entity) received or computed the value appearing in the price field.
For mortgage-backed securities, the assumption about prepayment speeds that the issuer used to project cash flows and price the securities. The pricing speed appears in the prospectus.
According to the Wall Street Journal , "the base rate on corporate loans posted by at least 75 percent of the nation's 30 largest banks." The rate is published daily in the Wall Street Journal "Money Rates" section.
Face amount of a security. The amount that the issuer must pay the holder at maturity.
The amount of principal returned to the holder over the horizon period expressed as a percentage of par.
The rate of return of the principal component of a security, calculated on a nominal basis and dependent on the current horizon period.
In Bridge applications, the type of mortgages--single-family home, construction, mobile home, etc.--backing a particular mortgage-backed security.
Different types of mortgages have different payback rates and risks, which can affect the rates and risks of the securities.
The term project loan refers to FHA-insured and HUD-guaranteed mortgages on multifamily housing complexes, but includes others as well nursing homes, hospitals, land development, retirement centers, and other types of development.
A sinking fund in which each investor loses an equal percentage of holdings when the issuer retires parts of the issue as per the sinking-fund schedule.
A standard prepayment model, defined by the PSA, for mortgage-backed securities. The model assumes that prepayments occur less frequently for new mortgages, then speed up as the mortgages become seasoned.
The benchmark rate is 100% PSA. Other prepayment speeds are shown as percentages of the PSA--"50% PSA" means half the standard rate, "200% PSA" means double the rate, and so on.
The benchmark assumes a prepayment speed of 0.2% CPR for the first month, increasing by 0.2% each month for the next 30 months, then 6% CPR for the remaining months.
"Public Securities Association." An association of banks, dealers, and brokers that has defined the PSA prepayment model and has set up trading, settlement, and calculation practices for mortgage-backed securities.
The Public Securities Association (PSA) currently publishes monthly settlement dates for five different classes. The PSA defines the classes by term, issuer, coupon level, and program type. For example, on the July 1995 schedule, the PSA defined Class A as "30-year FHLMC Gold, FHLMC 75 Day Delay, and FNMA pools."
Each class settles once a month, during the last two weeks of the month. For instance, Class A's official settlement date for July 1995 was Monday, July 17.
There are different conventions for deciding, based on the trade date, which settlement date to use: the current month's or next month's. The default cut-off trade date in Bridge applications is the second Monday of each month. In other words, if a trade takes place before the second Monday, the pool settles on the current month's official settlement date; as of the second Monday, it settles on the next month's date.
The schedules appear in Section 15, "Settlement Schedules," of the PSA Uniform Practices manual.
The date on which the holder originally purchased the security.
The flat price of the security paid when originally purchased by the holder.
Security that allows its holder to redeem it, before maturity, at specified intervals at a specified price (usually par).
The next date on which the holder can redeem the security.
An option that gives the option buyer the right, but not the obligation, to sell (go "short") the underlying futures contract at the strike price on or before the expiration date.
The price for which the holder can redeem the security on the put date.
A schedule of put dates and redemption prices for securities with put options.
"Interest rate duration." The price sensitivity of a security to interest-rate shifts in the Treasury market.
Unlike spread duration, the option-adjusted spread (OAS) is held constant while the yield curve is shifted.
For ARM pools, rate duration quantifies the sensitivity of price to a change in the level of the floating-rate index. It measures how much the price of an ARM will move when only the index changes (F.J. Fabozzi, "Handbook of Mortgage-Backed Securities," Probus Publishing Co., Chicago, IL, 1988, p. 812).
Termination or partial repayment of a debt obligation with a payment by the issuer.
The date when the cancellation or partial repayment of an outstanding debt occurs.
The price to be paid by the issuer to redeem the security at a call date, sinking-fund date, or maturity.
The price to be paid by the issuer, at maturity, to redeem the security.
The bond that serves as a benchmark against which the yield spreads to other deliverable bonds are held constant. It is used to analyze parallel shifts in the yield curve.
The first date on which callable securities can be redeemed using the proceeds from a new issue of bonds.
Note, however, that most callable securities are traded to the next call date, not the refund date--the refund date is ignored. (Most callable securities can be redeemed for cash prior to the refund date.)
Only utility securities are traded to the refund date, although there may be exceptions even in this area.
The rate used in total-return analysis applications to calculate the interest earned by reinvesting cash flows during a horizon period. You can set the default reinvestment rate on the scenarios windows.
"Real Estate Investment Trust." An investment pool established by a group of investors for the purpose of investing in real estate or mortgages. REITs are generally exempt from federal taxes, provided that 95 percent of earned income is distributed and that the various investors are not treated differently.
The remaining term of a mortgage is the number of months between the current month and the mortgage's scheduled maturity date.
The remaining term of a mortgage pool is the weighted average of the underlying mortgages' remaining terms--same as the weighted average maturity.
"Real Estate Mortgage Investment Conduit." A tax status elected by CMO issuers that lets the issuers pass received income to investors without the issuers themselves being taxed. The REMIC vehicle was authorized by the Tax Reform Act of 1986. Unlike REITs, REMICs can incorporate tranches of different maturities as well as risk classes.
A REMIC that can be backed by any combination of CMO tranches, REMICs, REMIC-backed REMICs, and mortgage pools. Also called "re-REMIC."
Repurchase agreement rate. The rate at which a holder of securities sells them to an investor with an agreement to repurchase them at a fixed price on a fixed date. The security "buyer," in effect, lends the "seller" money for the period of the agreement.
For mortgage-backed securities, cash flows in excess of what is remitted to investors. The residual flows are often sold to investors. Also called "excess cash flow."
For other bonds: Overcollateralization, mismatched coupons, and reinvestment income that generate more cash than is needed to retire bonds. The excess can be used to retire additional bonds early, released to the issuer, or sold to investors.
The date on which any restrictions on the source of funds for a refunding call no longer apply.
The amount earned on an investment over a period of time.
A process that switches your holdings in a user-defined security to a newly issued or newly available security. A rollover also switches user-security offerings, if any, to the new security.
Roll over user securities:
Seasonality simulates the normal seasonal variation in mortgage prepayment speeds. Prepayments are typically fastest in the summer months (when people shop for houses) and slowest in winter. This variation is important when projecting mortgage cash flows, especially for CMOs.
A 15-year or 30-year mortgage aged more than 90 months (approximately).
The age of the mortgages underlying a mortgage pool or mortgage generic.
Univu has four types of seasoning: new, moderately seasoned, seasoned, unspecified.
A description of a particular type of security--for example, "telephone utilities," "securities with coupons between 6 and 8," or "AAA securities." Many of Bridge' sectors are based on the Salomon Brothers Yield Book.
The percentage gain or loss earned by the issue or portfolio over the horizon period, compounded on a semi-annual basis.
For CMO deals, the code that distinguishes deals issued by the same organization from one other. Each series is unique, with different collateral and with various coupons and maturities for the tranches.
For a mortgage pool, the amount deducted by the servicing agent for accepting the actual mortgage payments and passing them through to investors.
The service fee can generally be calculated by subtracting the net coupon from the weighted average coupon.
Also "servicer." For a mortgage pool, an organization that, for a fee, handles the administrative and record-keeping functions.
The servicer may send out payment notices, keep track of the principal balance, ensure that property taxes and mortgage insurance are paid, and remit payments to investors.
Asset-backed securities (student-loan securities, credit-card securities, auto-loan securities, and so on) also require servicing agents.
Date on which cash payments for purchases are due and for which accrued interest and price/yield relationships are computed. The Bridge price/yield calculators discount future cash flows back to the settlement date.
As per SEC Rule 15c6-1(b) and as of June 7, 1995, market conventions for settlement dates are:
Expected valuation for the selected security on the settlement date.
Face amount (in millions) of a security that is still held by investors, as accurately as can be determined from available data.
The sale of securities with various maturities and interest rates on a continuous basis, as allowed by SEC Rule 415.
How quickly yields change from the base-curve level to the level shown in a scenario curve. This change can occur immediately (at the settlement date), at horizon, or gradually (over the time period from the settlement date to the horizon date).
Shift timing affects the rate earned when reinvesting the cash payments received between settlement and horizon dates.
Sale of securities that the seller has borrowed. Within a fixed period of time, the seller must actually buy these securities (or equivalents) and repay the lender.
"Standard Industrial Classification." The SIC code is a numbering system used by the federal government to identify companies by industry.
Interest calculated only on the original principal amount. In other words, accrued interest is ignored.
When a bond is settled on or after the date of the last coupon prior to maturity, the price is calculated using a simple-interest formula.
Also, some Japanese securities are priced using simple interest.
Abbreviated as "SMM." A model in which the prepayment speed of a mortgage pool is the percentage of outstanding mortgages assumed to terminate each month.
The SMM model assumes that a mortgage pool will prepay at a fixed percentage rate, regardless of the age of the mortgages. SMM is, therefore, more accurate for high-coupon pass-throughs. High-coupon pass-throughs are affected more by interest rates than by the age of the underlying mortgages.
An issue in which most or part of the issuer's long-term debt is redeemed, according to a schedule, prior to maturity.
Sinking-fund bonds are often considered to be of lower risk than similar securities without sinking-fund provisions because the issue is retired in an orderly manner before maturity.
If the sinking-fund provision applies to a particular issue, the issue is called a "specific" sinking fund. If it applies to the issuer's total debt, the bonds are called funnel bonds.
The annualized internal rate of return of the security, calculated by discounting multiple principal payments. Although these payments are usually sinking-fund payments, they may also be partial calls or partial puts.
A schedule that specifies the amounts sunk on particular dates. Bridge checks, and if necessary, updates sinking-fund schedules weekly.
Note: Zero amounts appear when the amount to be sunk is stated either in terms of a percentage of debt across the company or in terms of a percentage of the amount outstanding. In either case, since the amounts to be redeemed are impossible to anticipate, they are shown as zero--until the issuer actually starts to redeem them.
"Student Loan Marketing Association." Also called "Sallie Mae." A publicly traded stock corporation that guarantees student loans traded in the secondary market. It buys student loans from originating financial institutions and sells them repackaged as floating-rate, short-term, and medium-term notes.
A yield curve consisting of spot (zero-coupon) rates. A zero-coupon curve is the time value of money.
The yield to maturity of a zero-coupon bond.
Also called "nominal spread." The difference, in basis points, between the yield of a security and a point on the OTR curve.
Unlike the option-adjusted spread, the nominal spread does not account for options (calls, puts, sinking funds, prepayments, and so on).
The sensitivity of a security's price to a small change in option-adjusted spread (OAS).
Unlike rate duration, the yield curve is held constant while the option-adjusted spread changes.
For ARM pools, spread duration quantifies the sensitivity of price to a change in the effective margin (the investors' desired spread) above the floating-rate index. If the spread duration of an ARM is 5.4 years, for example, and the effective margin widens by 10 basis points, then the ARM will decline in price like a bond with a modified duration of 5.4 years (F.J. Fabozzi, "Handbook of Mortgage-Backed Securities," Probus Publishing Co., Chicago, IL, 1988, p. 812).
The difference between the yield to call of a security and the nearest benchmark treasury yield at the call date of the security.
The difference between the yield to put of a security and the yield of the benchmark U.S. treasury bond maturing closest to the security's put date; expressed in basis points.
A three-step process: First the application finds the security's weighted average life (WAL). Then it finds the point on the OTR curve corresponding to that average life. Finally, it calculates the difference, in basis points, between the current security's yield and the Treasury yield at that point.
For example, if the weighted average life of a tranche or portfolio is five years, the spread to WAL is to the five-year point on the Treasury curve.
Standard deviation is the measurement of average variation (dispersion) of actual values about the mean.
Abbreviated as "S&P." A U.S. organization that rates the quality of securities according to the credit-worthiness of their issuers.
Bridge updates S&P ratings nightly.
For mortgage pools and CMOs, the time lag between the date on which the homeowners make their mortgage payments and the date on which the pool investors or CMO investors are paid.
The stated delay is usually the actual delay plus 31 days.
For mortgage-backed securities, the date of the final principal repayment as specified at issue. Prepayments are not included in the stated maturity.
A variable-rate security with a coupon that rises according to a predetermined fixed schedule.
An option that allows interest rate market participants to place both an upside limit and downside limit on their risk by purchasing a Cap and a Floor at the same Strike Price.
The median of the prepayment forecasts (shown as PSA speeds) supplied monthly by Bridge's partners.
The price at which an option may be exercised for the underlying security. Also called "exercise price."
The predetermined interest rate level on an interest rate agreement.
A series of Forward Rate Agreement (FRA) contracts.
Securities, backed by Treasuries, agency bonds, municipal bonds, or other bonds, in which coupons are sold separately from principal.
Zero-coupon bonds are a type of stripped instrument.
A mortgage-backed security in which interest cash-flows are separated from principal cash-flows. Investors can buy interest-only (IO) bonds, principal-only (PO) bonds, or combinations that are mostly interest or mostly principal.
"Separate Trading of Registered Interest and Principal of Securities." A set of zero-coupon securities backed by the U.S. Treasury and other government agencies.
A security that is:
CMOs are the most common types of structured financial products. Other types are " Asset-Backed Securities," "Equipment Pass Through Certificate," "Collateralized Sequential Pay Bonds," and so on.
You can analyze these securities using the CMO/ABS price/yield, cash-flow, and total-return calculators.
The sale of one security to purchase another. A swap can change the characteristics of a portfolio, such as yield, quality, call protection, and interest-rate sensitivity.
Agents who help counterparties identify each other, and help the counterparties consummate the swap transaction.
An option that gives the buyer the right to enter into an interest rate swap agreement on or before a specified future date. The swaption agreement specifies whether the buyer is a fixed-rate receiver or a fixed-rate payer. If the buyer enters into the swap as a fixed-rate payer, the agreement is called a Put Swaption. If the buyer enters into the swap as a floating-rate payer, the agreement is called a Call Swaption.
"Targeted Amortization Class" bond. Like a PAC bond except that the principal-balance schedule uses a narrower band of collateral prepayments.
The cash balance on hand as of the final settlement date. In a securities swap, takeout results when the securities sold are more expensive than the securities purchased. Accrued interest, if any, is included in the sale price.)
The opposite of