ABN / Australian Business Number

Australian Business Number registered with ASIC. A Public Register is available on the ASIC website: https://abr.business.gov.au/.

ABS / Asset Backed Security

An ABS / Asset backed security is a type of debt security backed by a pool of underlying assets or collateralised by the cash flows from a specific pool of underlying assets. The asset pools can be constructed from many types of receivables including (but not limited to) mortgages, credit card payments, auto loans etc. Typically, the underlying assets are illiquid and private in nature, but by combining them in a large and diversified pool and segmenting the securities into tranches, they become marketable securities. The most common type of ABS is a residential mortgage backed security (RMBS).

Accrued Interest

For a bond the investment will accrue interest on a daily basis from the last coupon (interest) payment to the next coupon payment day when the full coupon will be paid. Essentially it is interest earned, but not yet paid since the beginning of an investment or coupon period. If an existing investor sells a bond halfway through a coupon period then the new investor will pay the seller the accrued interest up until the date of sale as part of the bond purchase consideration. The new investor would then receive the full coupon at the next coupon date if they are the registered holder at that time.

ADI / Authorised Deposit taking Institution

APRA defines ADIs / Authorised Deposit taking Institution as the following: “ADIs are corporations which are authorised under the Banking Act 1959. ADIs include banks, building societies and credit unions All ADIs are subject to the same prudential standards but the use of the names “bank”, “building society” and “credit union” is subject to corporations meeting certain criteria”

For a list of ADIs go to the APRA website (https://www.apra.gov.au/register-authorised-deposit-taking-institutions).

AFMA / Australian Financial Markets Association

Australian Financial Markets Association or AFMA is the leading industry association promoting efficiency, integrity and professionalism in Australia’s wholesale banking and financial markets – including the capital, credit, derivatives, foreign exchange and other specialist markets. AFMA has more than 130 members from Australian and international banks, leading brokers, securities companies and state government treasury corporations to fund managers, energy traders and industry service providers. Their role is to provide a forum for industry leadership and to advance the interests of all these market participants.

AOFM / Australian Office of Financial Management

Australian Office of Financial Management or AOFM is a specialised agency within Treasury responsible for management of Australian Government debt. The AOFM’s activities include the issue of treasury bonds, treasury notes, management of the Australian Government’s cash balance and management of a portfolio of debt and investments.

APRA

Australian Prudential Regulation Authority or APRA is charged with the prudential supervision of Authorised Deposit-taking Institutions (ADIs), ultimately aiming to ensure that financial promises made by the bodies it regulates are met within financial markets which are stable, efficient and competitive. It oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, friendly societies and most members of the superannuation industry.

ASIC

Australian Securities and Investments Commission or ASIC is Australia’s corporate, markets and financial services regulator (sometimes referred to as Corporate Watchdog’). ASIC ensures that Australia’s financial markets are fair and transparent and supported by confident and informed investors and consumers. ASIC is an independent Commonwealth Government body set up under, and administered by, the Australian Securities and Investments Commission Act 2001 (ASIC Act), and carries out most of the work under the Corporations Act.

ASX / Australian Stock Exchange

Australian Stock Exchange is a national organisation within Australia that enables electronic trading of shares and other securities through SEATS (stock exchange automated trading system).

ATO / Australian Taxation Office

The ATO is the Australian Taxation Office: https://www.ato.gov.au/.

Austraclear

Also known as Exigo, Austraclear is an electronic system managed by the Australian Stock Exchange (ASX) for the settlement and registry of money market and fixed income securities.

Australian Government Gurantee

On the 12th of October 2008 the Australian Government put in place far reaching guarantee arrangements for deposits with eligible Authorised Deposit – Taking Institutions (ADIs). Known as the Financial Claims Scheme, initially all deposits were covered but from November 28 2008 a cap of $1 million per account-holder, per ADI was put in place. There is no charge for accessing the Financial Claims Scheme to the depositor.

Around the same time in 2008 the government also introduced the Guarantee Scheme for Large Deposits and Wholesale Funding, which should not be confused with the financial Claims Scheme. This scheme attracted a fee to guarantee large deposits and securities based funding, paid by the ADI and ended in March 2010.

Initially the Financial Claims Scheme (FCS) was to end on October 12 2011 but on September 11 2011 the government announced the FCS would be a permanent feature of the banking landscape and changes to the guarantee cap were made, as outlined briefly below:

  • Deposits placed prior to September 10 2011 are covered up to a cap of $1 million until maturity or December 31 2012, whichever occurs first.
  • Deposits placed after September 10, 2011 are covered, up to a cap of $1 million, until January 31 2012 and then from February 1, 2012 they are covered up to a cap of $250,000 only.
  • Deposits placed from February 1, 2012 and onwards are covered up to a cap of $250,000 until maturity.
  • The Government retains the right however to adjust the guarantee cap in response to global financial circumstances should the need arise.
  • The FCS applies to Authorised Deposit-Taking Institutions incorporated in Australia. This includes Australian Banks, Building Societies and Credit Unions and Foreign Subsidiary Banks. The FCS does NOT apply to branches of foreign banks.

For more detailed information on the FCS please follow this link to the Australian Prudential Regulation Authority’s website http://www.apra.gov.au/CrossIndustry/FCS/Pages/default.aspx.

Bank Bill

There are two types of bank bills:

– bank accepted bills

– bank endorsed bills

A bank accepted bill, is a bill of exchange where the issuing bank has a liability to pay the holder the face value of the bill at maturity. The parties involved are the bank as acceptor and a borrower as drawer. In certain circumstances, the liability is contingent on the borrower, or the drawer, defaulting Bank endorsed bills have a 100% bank guarantee. In the event of default the first call for payment is back to the drawer of the bill, then, if the drawer fails to pay, the holder will present to the bank for payment.

Bank Bonds

A promise by a bank to repay a debt on a certain date subject to conditions Banks issue both senior and subordinated bonds.

Base Payments

The term for the initial base amount (typically with an indexed linked bond) where the value rises and falls according to changes in CPI. For example, a capital indexed bond might have a base payment of 100 in year one and a coupon of 4%. If, over year one, the CPI increases by 10%, then the base payment would rise from 100 to 110, so that coupon payment would also rise from 4% to 110% of 4%, or 44%.

Basel III

A comprehensive set of reform measures, developed by the Basel Committee on Banking Supervision, to strengthen the regulation, supervision and risk management of the banking sector.

Basis Points / Bps

The basis point is commonly used for calculating changes in interest rates, equity indexes and the yield of a fixed-income security. The relationship between percentage changes and basis points can be summarised as follows: 1% = 100 Basis Points 001% = 1 Basis Point. A bond whose yield increases from 3.42% to 3.49% is said to increase by 7 basis points; or interest rates that have dropped by 0.5% are said to have decreased by 50 basis points.

BBSW

The AFMA Bank Bill Swap (BBSW) Benchmark Rates represent the midpoint of the nationally observed best bid and best offer (NBBO) for AFMA Prime Bank Eligible Securities. BBSW is representative of a traded and transparent market which expressly does not rely on a submissions process, and therefore is a rate which does not rely on any unfounded or unsupported assessment of any individual organisation’s own borrowing costs. BBSW rates cover terms between 1 and 6 months and is calculated at 10am each morning. The purpose of BBSW is to provide independent and transparent reference rates for the pricing and revaluation of Australian dollar derivatives and securities. For more information on BBSW, visit: http://www.afma.com.au/data.

Bid / Bid Price

An expression used in share, bond and foreign exchange markets for the price at which a broker will buy a security (that is the price at which an investor can sell) See also ‘Offer’.  Bid offer or Bid ask spread the difference in price between the highest price that a buyer is willing to pay for bond and the lowest price for which a seller is willing to sell it.

Bloomberg

Bloomberg is a financial software, news and data company. The company provides financial software tools such as analytics and an equity trading platform, data services and news to financial companies and organisations around the world. It has a one-third share of the market, similar to Thomson Reuters.

Bloomberg Composite Bond Index

Formerly the UBS composite bond index, a daily market value-weighted accumulation index consisting a range of fixed interest securities issued by Australian Commonwealth and state governments’ guaranteed treasury corporations, semi-government authorities and investment grade corporate issues.

Bond

A bond is a loan from an investor to the issuer of the security. The Investor pays a defined distribution (the coupon) for a given period of time (the term) and repays the face value of the security at maturity. There are many types of bonds including; floating, fixed, consumer price index (CPI) bonds, inflation-linked, nominal and Eurobonds.

Buy-back

An agreement that the seller will repurchase its own securities within a specified time at a pre-determined price.

Call Date

The date prior to maturity on which a callable bond may be redeemed by the issuer. If the issuer determines there is a benefit to refinancing the issue, the bond may be redeemed on the call date, at par, or at a small premium to par depending on the terms of the call option.

Call Option

An option that gives the holder the right but not the obligation to buy a security at an agreed upon price (the “strike price”) at any time up to an agreed upon date. The holder of the call option is hoping that the price of the underlying security will increase. The holder of the call option makes money by purchasing the security at the agreed upon strike price and selling it at the higher actual current market price if the option is exercised. In compensation for this benefit a payment (the premium) is made to the seller of the option.

Cap

A maximum level at which an interest rate cannot increase.

Capital Gain

The result of selling a capital asset such as shares, bonds or real estate at a higher price than it cost.

Capital Loss

Arises if the proceeds from the sale of a capital asset are less than the purchase price.

CDO / Collateralised Debt Obligation

Collateralised Debt Obligation or CDOs are normally floating rate structured debt securities that pay a higher return compared to similarly rated securities in exchange for a higher risk profile. They are complex, structured products typically arranged by investment banks with a range of tranches that are independently rated by credit rating agencies. The performance of an investment in a CDO security is linked to the credit risk of an underlying portfolio of company debt or other securities. The exposure to this portfolio is leveraged, the degree of which is determined by the subordination of the investment in the structure of the CDO; the tenor of CDO securities typically ranges from 3 to 7 years. If only a few of the underlying portfolio of securities default over the life of the CDO, investors will receive their capital back in full. If more than a handful default, investor’s capital may be at risk. The more companies that default, the greater the probability of investors losing capital. Synthetic CDOs reference a portfolio of credit default swaps (i.e. synthetic credit exposure) as opposed to investing in corporate bonds. Instead of acquiring the physical portfolio of assets, credit default swaps are used to create a synthetic portfolio of assets and the investors” cash is “parked” in highly rated (typically AAA rated) collateral.

CDS / Credit Default Swap

A financial contract whereby a buyer of corporate or sovereign debt in the form of bonds attempts to eliminate possible loss arising from default by the issuer of the bonds. This is achieved by the issuer of the bonds insuring the buyer’s potential losses as part of the agreement.

CGIS

Commonwealth Government Inscribed Stock or Commonwealth Government Bonds.

CGL

Commonwealth Government Loans.

CHESS

The Australian Clearing House Electronic Sub-register System (commonly abbreviated to CHESS) is an electronic book entry register of holdings of approved securities that facilitates the transfer and settlement of share market transactions between CHESS participants (including stockbrokers on behalf of their clients, and large institutional investors on their own behalf) as well as speed up the registration of the transfer of securities.

CIB / Capital Indexed Bonds

Capital indexed bonds or a CIB is a bond whose base payment rises and falls with the CPI.

Clean Price

The price of a coupon bond that does not include any accrued interest. Clean Price = Dirty Price (total price) – Accrued Interest. Clean price is also known as capital price, meaning “clean of, or excluding, coupon”.

CLO / Collateralised Loan Obligation

Collateralised loan obligation or CLO is an asset backed security backed by loan receivables. Banks package and sell their loan receivables to investors in order to decrease risk and improve liquidity. CLOs are a structured product and are assigned tranches that are rated by credit rating agencies. The lowest tranche bears the first loss position and due to this leverage through subordination, returns the highest coupon.

CMBS / Commercial Mortgage Backed Security

Commercial mortgage-backed securities (CMBS) are a type of mortgage-backed security that is secured by mortgages on commercial properties, instead of residential real estate. A CMBS can provide liquidity to real estate investors and commercial lenders.

Collateral

A borrower’s pledge of a security or guarantee, usually an asset such as property, for the repayment of a loan if the borrower fails to repay the loan in full. The collateral serves as protection for a lender against a borrower’s risk of default. If a borrower does default on a loan due to insolvency or other event that borrower forfeits the property pledged as collateral and the lender then becomes the owner of the collateral, which can then be liquidated.

Commercial Paper

An unsecured promissory note usually with a fixed maturity of 1 to 270 days. Commercial paper is a money market security issued by banks and corporations to raise funds to meet short-term obligations.

Commonwealth Government Bonds

Commonwealth Government bonds (also known as Commonwealth Government Loans or CGL) are debt securities issued by the Commonwealth of Australia. These bonds are issued by the Commonwealth Government to meet its financing requirements. Commonwealth Government bonds carry the highest credit rating (AAA/Aaa) and are considered a risk free investment as the Commonwealth has unlimited ability to tax and/or produce currency to repay a bond.

Contract Note

A document setting out the agreed terms of a transaction between the two parties for the settlement of a security.

Convertible Bond

A fixed interest security that gives the investor the option of converting the bond at a later date to equity.

Corporate Bond

A bond issued by a corporation.

Coupon

The rate of interest paid on a fixed income investment or bond. Coupons can be paid annually, semi-annually or quarterly or as agreed in the terms of the security. The coupon rate can be fixed or floating for the term of the security. If it is a floating rate then it is likely that it will be linked to a benchmark such as the 90 day bank bill rate. The coupon rate is set by the issuer based on a number of factors including prevailing market interest rates and its credit rating. Fixed rate bonds in Australia predominantly pay a semi-annual coupon whereas floating rate bonds predominantly pay a quarterly coupon. Indexed linked bonds usually pay quarterly coupons .For example, a $500,000 bond with a fixed rate semi-annual coupon of 4% will pay two $10,000 coupons each year.

CPI / Consumer Price Index

The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them.

Credit Enhancement

A method where a company or a debt issuer attempts to improve its debt or credit worthiness. Common examples include the use of insurance, wrapped debt or provision of a third party guarantee.

Credit Rating Agencies

Are engaged by issuers to assign credit ratings which reflect the issuer or its securities ability to pay coupons and repay principal. The major credit ratings agencies include Standard & Poors (S&P), Moody’s Investor Services and Fitch Ratings.

Credit Risk

The risk that an issuer may be unable to meet the interest or capital repayments on the loan when they fall due. Generally, the higher the credit risk of the issuer, the higher the interest rate that investors will expect in order to risk lending funds to the issuer. Ratings agencies like Standard & Poor’s and Moody’s provide an independent credit rating service that allows investors to assess and grade issuers. For example, the Australian Commonwealth Government has the highest possible credit rating of AAA (meaning it has very low credit risk).

Credit Spread

The difference between two securities’ yields, based exclusively on the variation in credit quality. For example, Australian Government bonds which are rated AAA and a corporate bond of a lower credit quality, single A. For investors to accept a higher risk asset like a corporate bond they must be paid a higher return / yield. The difference in margin between the government bond and the corporate bond is known as the credit spread.

Cum Interest

Cum interest is the amount of interest accrued in the duration between the last coupon date and the settlement date or transaction date.

Cumulative Interest

Cumulative interest is the sum of all interest payments made over a certain time period.

Debenture

A type of debt security usually secured by a fixed or floating charge over an underlying asset or pool of assets. There are specific provisions of the Corporations Act 2001 that govern the issue of debentures.

Debt

In the financial sense, is an obligation to repay a specific value of borrowed funds.

Default

Failure by an issuer to satisfy the terms of a loan or bond obligation.

Dirty Price

Is the price of a bond that includes interest accruing and is due for payment on the next coupon payment. Dirty Price is also known as Gross Price or Total Price.

Discount Margin

A discount margin (DM) is the average expected return earned in addition to the index underlying, or reference rate of, the floating rate security. The size of the discount margin depends on the price of the floating rate security.

Discount Security

Non-interest bearing money market securities issued at a discount to the face value. The holder receives face value at maturity. Examples include bills of exchange, promissory notes, Negotiable Certificates of Deposit (NCD) and treasury notes.

Discount to Face Value

Bonds may trade at a discount to face value in secondary markets where coupon, demand and market perception of the entity influence the price of secondary trades. Bonds usually have a face value of $100. If a bond is acquired at a discount price, say of $75, then the bondholder will make a capital gain of $25 assuming the company makes a full repayment of $100 face value at maturity .

Distribution

The payment of income from a fixed income security usually referred to as coupon. Sometimes the term distribution is associated with instruments where payment of income is conditional (for example a hybrid security) rather than an unconditional payment (for example a senior bond).

Duration

Average weighted term to maturity of the bond cash flows. Duration of a financial asset measures the sensitivity of the asset’s price to interest rate movements. It is approximately equal to the percentage change in price for a given change in yield.

DVP / Delivery v Payment

Delivery versus payment (DVP) is a securities industry settlement procedure in which the buyer’s payment for securities is due at the time of delivery.

EC / European Commission

The European Commission is an institution of the European Union, responsible for proposing legislation, implementing decisions, upholding the EU treaties and managing the day-to-day business of the EU.

Effective Yield

The effective yield is the yield of a bond, assuming that you reinvest the coupon (interest payments) once you have received payment. Reinvesting the coupon will produce a higher yield because interest is earned on the interest payments. The calculation assumes the investor can reinvest their coupon payments at the coupon rate. For bonds, effective yield is an annual rate of return associated with a periodic interest rate. The formula for effective yield is: (1 + i / n)^ n – 1 i = periodic interest rate n = the number of payment periods in one year.

Equity

Corporations raise funds for operations in different forms. Equity (shares or stock) is one method. From an investor’s perspective it ranks behind other sources of funds for repayment should the corporation go into wind-up. Equity is also referred to as the first loss security.

Eurobond

A Eurobond is a debt security issued by a borrower in a market outside its home jurisdiction in a denominated currency. For example, an Australian Dollar Eurobond is a bond issued in Australian dollars which is issued and sold outside Australia. The bonds are typically governed by UK law (rather than Australian law), are listed on a European exchange and traded and settled outside Australia. There are limitations on the sale of Eurobonds in some jurisdictions. The majority of Eurobonds are now owned in electronic rather than physical form. The bonds are held and traded within one of the clearing systems (Euroclear and Clearstream being the most common). Coupons (interest payments) are paid electronically via the clearing systems to the holder of the Eurobond or their nominee account. The Eurobond market has no national “home” and is by no means exclusively European in its composition. In recent years EU resident borrowers have only accounted for 40% of Eurobonds issued.

Ex-coupon / Ex-interest / Ex-dividend

A classification of trading bonds or preference shares when the coupon belongs to the seller rather than the buyer. The terms of a bond will establish on what date the bond will trade ex-coupon and it can be different for different bonds. For Commonwealth Government bonds the ex-coupon date is seven calendar days before the coupon date. The period between the ex-coupon date and the coupon date is known as the ex-period.

Exigo

Is an Austraclear settlement system.

Face Value

Is the initial capital value of the bond and the amount repaid to the bondholder on its maturity.

FED / Federal Reserve System

The Federal Reserve System is the central banking system of the United States of America.

FSC / Financial Services Council

The Financial Services Council represents the interests of members (wealth managers), members’ clients and customers, all investors and superannuation fund members, life insurance policyholders, users of financial advice and trustee services. The FSC engages in advocacy concerning the development of the social, economic and regulatory framework in which their members operate, thereby helping them to better serve their clients and customers.

Fixed Income

Fixed income refers to debt securities (for example bonds) that pay a defined distribution (the coupon) for a given period of time (the term) and repay the face value of the security at maturity. A fixed income security or bond is a loan from an investor to the issuer of the security.

Fixed Rate Bond

A fixed rate bond is a security that pays a fixed pre-determined distribution or coupon. The coupon of a fixed rate bond will be set at the time of issue and not change during the life of the bond.

Fixed / Floating Interest Rates

Rates on bonds can be fixed (set at the time of issue) or floating. If they are floating then they will be set as a constant margin to a variable benchmark such as the 90-day bank bill rate expressed, for example, BBSW +125%. The coupon rate is set by the issuer and is based on a number of factors such as prevailing market interest rates and the entity’s credit rating.

Floating (Flexi or Structured) Term Deposit

A Term Deposit where the investment yield ‘floats’ or is reset as a margin to a benchmark such as 1 month or 3 mth BBSW. The investment yield therefore floats up and down in line with wholesale yields. Typically term deposits can be structured in line with customer requirements based on cash flow needs or interest rate expectations.

Floating Charge

A form of security, giving a creditor such as a bank, finance company or individual lender the right to receive payment from a specific fund or from the proceeds of the sale of a specific item, property or asset of a business, should a borrower default. With a floating charge the creditor’s charge or claim is not lodged over one particular asset of the borrower but fixes on all, or nominated assets if the borrower defaults.

Floor

A minimum level at which an interest rate cannot decrease.

FRN / Floating Rate Note

A floating rate note (FRN) or bond is a security that pays a coupon linked to a variable benchmark. In Australia FRNs generally pay a coupon set as a margin above the bank bill swap rate (BBSW) which is the market benchmark three month interbank rate (sometimes the 1 month BBSW). The actual coupon for an interest period will be determined at the start of that period by applying the margin to the three-month BBSW rate on the first day of the coupon period. The three-month BBSW rate will rise and fall over time based on prevailing interest rates. The margin is fixed and will be set at the time of issue.

Fungible Goods

Securities or instruments that are equivalent, and therefore, interchangeable. They are securities that consist of many identical parts which can be easily replaced by other identical securities.

Gearing Measures

The extent to which a company or an investment is funded by debt. Also known as leverage.

Government & Semi-Government Bonds

A medium to long term debt security in which a promise by either the Commonwealth Government (known as government bond) or one of the state governments or territories (semi-government bond) to repay a debt on a certain date subject to conditions.

Guarantee

The assumption of responsibility for the payment of a debt or performance of some obligations if the party primarily liable does not meet its obligations.

Gurantor

A party who will guarantee repayment or performance of an obligation .

HIN

A Holder Identification Number (HIN) is a unique number that is issued to you by ASX when you become a client of a broker.

Hybrid Securities

Hybrid security is a generic term used to describe a security that combines elements of debt securities and equity securities. Hybrid securities typically promise to pay a rate of return (fixed or floating) until a certain date, in the same way debt securities do. However, they also have equity-like features that can mean they may provide a higher rate of return than regular debt securities. In some cases, this is because they give the holder or the issuer an option to convert the hybrid securities into equity securities (typically ordinary shares), which will give the holder and “equity kicker” if the underlying security performs well or for the issuer a “capital kicker” if this is needed. In other cases it may be that the hybrid securities have equity-like risks attached and the issuer has to pay a higher rate of return to compensate investors for those risks.

IIA / Inflation Indexed Annuities

Inflation-indexed immediate annuities offer inflation protection by paying income indexed to the consumer price index CPI or to a guaranteed rate of increase.

IMF / International Monetary Fund

The International Monetary Fund or IMF plays various roles in the global monetary system. The IMF surveys and monitors economic and financial developments and lends funds to countries with balance of payment difficulties. It promotes global monetary and exchange stability, facilitates the expansion and balanced growth of international trade as well as assisting in the establishment of a multilateral system of payments for current transactions.

Income Security

Generic term for a subset of hybrid securities where there is no expected maturity, call date, reset or other conversion mechanism. Income securities are considered true perpetual instruments.

ILBS / Indexed-Linked Bonds

Index-linked bonds are securities whose return includes a component that is determined by the future level of a predetermined index, for example; CPI or inflation. There are two main types of inflation linked bonds issued in Australia:  Capital indexed bonds (CIB) and Inflation indexed annuities (IIA). CIBs pay a pre-determined coupon based on a capitalising principal amount where the capitalisation is a function of inflation At maturity the investor receives the capitalised face value. An IIA is an annuity structure where each periodic payment includes a coupon and principal component where the principal is adjusted for inflation The Commonwealth Government, state governments and some corporations have issued inflation linked bonds in Australia ILBs are also known as inflation indexed bonds or CPI bonds.

Insolvent

When an individual or entity is unable to pay all their debts as and when they become due and payable See Corporations Act 2001 section 95A.

Interest Rate Risk

The risk associated with an interest bearing asset, such as a loan or a bond, due to variability of interest rates. In general, as rates fall, the price of a fixed rate bond will rise, and vice versa Interest rate risk is commonly measured by the bond’s duration.

Investor

A person or entity that lends money or invests in order to earn an income through interest payments or achieve a capital gain on sale or redemption of the investment.

IPO

Initial public offering or IPO is when a company issues shares or some classes of debt instruments to the public for the first time. After the initial issuance, investors can often purchase from other investors in the secondary market.

ISIN

Is an acronym for “International Security Identification Number” and is a unique number assigned to a bond / security at the time of issue. This 12 digit number identifies an exact bond / security to any institution in the world.

Issue Margin

The amount of interest paid by an issuer on a Floating Rate Note is the sum of a variable rate plus a margin. That margin is called the Issue Margin, also known as the Coupon Margin. In Australia, the variable rate is generally the Bank Bill Swap Rate (BBSW), while many other OECD countries use a form of LIBOR.

Issuer

The entity (or borrower) that issues the debt security to raise money from investors. Issuers in the Australian bond market include the Commonwealth Government, state governments and territories, large institutions or corporations.

Junk Bond

Bonds rated by credit rating agencies with a sub-investment grade rating.

LIBOR

London interbank offered rate (similar to the Australian BBSW). LIBOR is calculated daily by the British Bankers Association by asking a panel of major banks what it would cost them to borrow funds for various periods of time and in various currencies and then creating an average of the individual bank’s figures. LIBOR is the benchmark used by banks, securities houses and investors to gauge the cost of unsecured borrowing in the London money markets.

Liquidation

The liquidity or marketability of an asset is a function of the difference between the bid (the price at which the market is willing to buy the security) and the offer (the price at which the market is willing to sell the security), more commonly known as the bid-offer spread. If a market is liquid it will have many participants at any given time competing to buy or sell the assets, resulting in a narrow spread. If it is not liquid it will be very difficult to buy or sell the asset without adjusting the capital price paid or received for the asset significantly, creating a wide bid-offer spread.

Liquidity Risk

This is the risk that a security cannot be easily sold at, or close to, its market value.

Managed Funds

Investors pool funds to provide scale to invest in a diverse range of assets. Usually used by smaller investors rather than investing in a smaller number of direct investments.

Mark to Market

A realistic appraisal of a securities’ current realisable value. It is the accounting act of recording the price or value of a security, portfolio or account to reflect its current market value rather than its book value. For fixed income securities that do not trade on a recognised exchange, the mark to market is often determined by reference to a recognised pricing source.

Market Index

A measure of change in the value of a specific group of shares, bonds or other investments that the market index tracks from a specific starting point. The purpose of an index (in most cases) is to replicate the returns accumulated from a proportional holding in every security included as a constituent of the index. Indices generally use index numbers to allow return comparisons. Index numbers are created by starting a portfolio at an arbitrary value (100 or 1000) and incrementing them each day by the portfolio’s daily return as a percentage of the starting value. In Australia, the most frequently used market indices for assessing fixed income performance are the Bloomberg family of fixed interest indices.

Maturity

This is the date when the bond is due for repayment by the issuer. The principal plus any outstanding interest of a particular security will be repaid on this date.

MBS/ Mortgage Backed Security

Mortgage Backed Security or MBS is a type of asset backed security or debt obligation that is secured by a mortgage or collection of mortgages, most commonly on residential property. These loans are assembled together to form pooled investments Instead of paying investors fixed coupons and principal, it pays out the cash flows from the pool of mortgages. The bank acts as a middleman between the home buyer and the investment markets.

Minimum Investment

Minimum amount required to invest in an offering or security.

Modified Duration

Modified duration (sometimes called Macaulay duration) is a measure of the price sensitivity of a bond to interest rate movements. Typically, modified duration provides an estimate of how a bond will change in price for a 100 basis point (bps) or a 1% movement in interest rates.

MTN / Medium Term

Medium term note or MTN is a generic term covering debt securities also commonly termed corporate bonds (bonds) and floating rate notes (FRNs).

NCD

Negotiable certificate of deposit or NCDA is a short term, low risk, transferable discount security issued by a bank or ADI. If the issuer has a credit rating they may apply to the Reserve Bank of Australia to have the securities included in their ‘Repo Eligible’ list.

Nominal Bonds

A nominal bond pays a return on a fixed principal amount. The bond takes no account of possible rises in inflation.

Non-Cumulative

Missed dividend payments are forgone the issuer of the security is not obliged to pay the unpaid amount to the holder.

Notice Account

A savings account where the customer agrees to give the borrowing institution (usually an ADI) notice for a specified period of time before making a withdrawal. A common notice period is 31 days or more. The purpose of the account is to bring greater stability to bank liquidity and was generally in response to regulatory imposts brought about by Basel III banking reforms.

Offer / Offer Price

An expression used in share, bond and foreign exchange markets for the price at which a broker will sell a security (that is the price at which an investor will buy). Note the offer price will typically be the capital price or clean price also see “Bid”.

Offer Yield

The offer yield is the yield to maturity based on current prevailing interest rates at which a fixed income broker (eg Curve Securities) would sell a bond to an investor .

Offering

The term used for the primary issuance of bonds by an entity.

Official Cash Rate

Established by the Reserve Bank of Australia (RBA) at its monthly board meetings. It determines the overnight cash rate applicable to loans between financial intermediaries. It is the main tool the RBA employs to dictate monetary policy.

Open Market

The term used to describe the market in which bonds are bought and sold after primary issuance.

Opportunity Cost

The opportunity cost is the loss of potential income in placing funds in an investment. The potential income that is lost is that additional income which could have been earned from an alternative investment.

OTC / Over the Counter

Over the counter or OTC refers to the sale of securities outside of an exchange, whether electronically or over the phone. Traditionally, most fixed income securities are traded over the counter.

Par Value

The face value of a debt security.

Payment Schedule

The schedule of dates on which the issuer of a debt security will pay coupons and principal.

Perpetual Security

A security with regular periodic payments for an infinite number of periods with no maturity date.

Premium

A bond’s value in the secondary market can be greater than its face value. The bond is then deemed to be selling at a premium. This will occur if the coupon is higher than the yield to maturity of a fixed income security.

Present Value

The value of a future cash flow discounted at an appropriate rate of interest to give its value in today’s dollars.

Primary Market

A primary market is a market that issues new securities on an exchange, facilitated by underwriting groups and consisting of investment banks.

Principal

The face value of the debt security on which interest is calculated.

Promissory Note

A discount security that is an unconditional promise to pay at a fixed or determinable future time a sum certain in money.

Prospectus

A document disclosing the details and particularly the risks of a security issue where the security can be sold to retail investors under the Corporations Act 2001.

Purchase Price

Purchase price is the amount that a bondholder pays to purchase a bond Price can be quoted on a “clean” basis meaning that this is the capital price of the bond, or it can be quoted on a “dirty” basis meaning that it includes both the capital price plus the accrued interest.

Put Option

An option that gives the holder the right but not the obligation to sell a security at an agreed-upon price at any time up to an agreed upon date.

RBA / Reserve Bank of Australia

The Reserve Bank of Australia combines the roles of financial system supervisor, banker and manager of monetary policy. The RBA has the responsibility of ensuring that its monetary and banking policies add to the stability of the Australian economy and to the welfare of the community. The RBA has a responsibility to protect the deposits of the Australian banks and has the power to regulate bank lending and interest rates and to influence banks” asset holdings. The RBA is an independent entity of the Australian Government separate from the Government to eliminate political influences from monetary policy which conflict with the long term objectives of a stable economy.

Recovery Rate

Refers to the percentage amount recovered once an entity enters liquidation or goes into wind-up with relevance to an investment’s ranking in the capital structure of the entity.

Redeemable / Non-redeeable

Redeemable: A bond which the issuer has the right to redeem prior to its maturity date, under certain conditions.

Non redeemable: A bond which the issuer does not have the right to redeem prior to its maturity date.

Repo / Repurchase Agreement

A contract where a seller of a security agrees to buy the security back from a buyer at a later date for an agreed price.

Repurchase Eligible Securities

With respect to the list compiled by the Reserve Bank of Australia (RBA), this refers to securities that the RBA will enter into Repurchase Agreements on with their holders. This list is published on the RBA website as an excel spreadsheet.

RITS

Reserve bank information and transfer system or RITS is an electronic system for the settlement of Commonwealth Government securities.

RMBS

Residential mortgage backed securities or RMBS is a pool of residential mortgages.

Return

The amount earned on an investment or made on a transaction (realised or unrealised) relative to the amount of money invested. Generally assessed as yield to maturity.

Risk

All investments carry risk. It is a measure of the variability of returns from an investment. Types of risk include credit risk, interest rate risk, liquidity risk, economic risk, systemic risk and maturity risk.

Roll Over

The renewal of a loan facility or continuity of a deposit or bond holding at each maturity date.

RTGS / Real Time Gross Settlement

Real Time Gross Settlement (RTGS) is an electronic form of funds transfer where the transmission takes place on a real time basis.

Running Yield

The interest rate on an investment expressed as a percentage of the capital invested. It takes no account of the capital accumulated. It is used to describe the income investors receive from their portfolio as a percentage of market value of the securities.

S&P / Standard & Poor’s

S&P Global Ratings provides high-quality market intelligence in the form of credit ratings, research, and thought leadership.

Seasoned Bonds

Wholesale bonds that have been in circulation for more than 12 months from the date of issue.

Secondary Market

The financial market where previously issued securities and financial instruments such as stocks, bonds, options and futures are bought and sold. The major stock exchanges are the most visible example of liquid secondary markets .

Securities

Securities are defined in section 92 of the Corporations Act 2001 to include:
– debentures, stocks or bonds, issued by a government
– shares in, or debentures of a body such as a corporation
– interests in a managed investment scheme

Securitisation

The process through which an issuer creates a financial instrument by combining financial assets and then marketing different tiers of the repackaged instruments to investors. The process can encompass any type of financial asset and promotes liquidity in the marketplace.

Senior Debt

Senior debt is a class of corporate debt that has priority with respect to interest and principal over other classes of debt (except senior secured debt) and over all classes of equity by the same issuer. A company has no ability to defer coupon payment to senior or subordinated debt holders .

Settlement

Settlement (of securities) is the process whereby securities or interests in securities are delivered, usually against payment, to fulfil contractual obligations. Usually settlement is preceded by trading, which involves entering into contracts of sale and purchase .

SSI / Standard Settlement Instruction

Standard Settlement Instructions (SSIs) are the agreements between two financial institutions which fix the receiving agents of each counter-party in ordinary trades of some type. These agreements allow traders to make faster trades since the time used to settle the receiving agents is conserved.

SMSF / Self-Managed Super Fund

An SMSF is a private superannuation fund, regulated by the Australian Taxation Office (ATO) that you manage yourself. SMSFs can have up to four members. All members must be trustees (or directors, if there is a corporate trustee) and are responsible for decisions made about the fund and compliance with relevant laws.

Sophisticated Investor

Someone who meets certain requirements of the Corporations Law 2001 including:
– has net assets of at least $2.5 million, or
– has a gross income for each of the last 2 financial years of at least $250,000
– the purchase price of the product is at least $500,000

SRN / Security Reference Number

Your Securityholder Reference Number (SRN) or Holder Identification Number (HIN) is a unique identifier for your security holdings within a company.

State Government Bonds / Semis

State government bonds are debt securities issued by or on behalf of the state and territory governments of Australia. State governments issue bonds to meet their financing requirements. Each of the state issuers typically has five to ten bonds outstanding at any one time. State government bonds typically carry a high credit rating (between AA / Aa and AAA / Aaa) reflecting the credit worthiness of the underlying state governments. They are also known as semi-government bonds.

Step-up Securities

A callable bond issued with a low coupon rate that gradually increases over the life of the bond. The increases occur at regular intervals stated in the bond indenture. It is also called a step-up coupon security or a dual coupon bond.

Subordinated Debt

A bond or loan that ranks below senior debt, loans and creditors In the event of a wind-up (insolvency) of an issuer, subordinated debt is not paid until all senior debt and unsecured creditors are paid first.

Swap

A financial agreement to exchange one set of cash flows for another. A common swap in fixed income markets is an exchange of a fixed interest rate for a floating interest rate .

Synthetic Security

Any combination of financial instruments producing a market instrument with different characteristics than could otherwise be achieved, for example, higher yield, better liquidity or interest rate protection. These securities mimic conventional financial instruments that may or may not be available to investors. Most deals are private placements involving two investors and usually are created through interest rate swaps, for example, creating a synthetic floating rate note by matching a fixed rate bond and an interest rate swap.

Term

Length of the investment. Time in days, months or years from the investment date till the maturity date.

Term Deposits

These are non-tradable fixed or floating income investments usually with maturities ranging anywhere from 1 month to 5 years or even more. When a term deposit is created, the lender (investor) understands that the money can only be withdrawn after the term has ended. If the investor wishes to withdraw the money at an earlier date, they may be charged a fee for obtaining the funds prior to maturity. ‘Breaking’ the TD is often at the borrowers discretion and for the most of largest ADIs a 31 days notification period is required. Investors should read the terms and conditions of a term deposit investment thoroughly before investing their funds.

TFN / Tax File Number

A TFN is a unique number issued by the Australian Taxation Office (ATO) to individuals and organisations to help manage tax and other government services.

Tier1 Capital

Capital that must be held by banks to meet regulatory requirements, including; share capital, other non-redeemable capital and reserves.

Trade / Switch

An idea to trade or switch an investment for greater return or lower risk or vice versa.

Trading Margin

The margin above a variable market indicator (for example BBSW or LIBOR), where a floating rate security is trading in the secondary market. It is the effective margin you will receive on a FRN if you buy it at the current price and hold it to maturity.

Tranche

Is a term used to describe a specific class of bonds within an offering wherein each tranche offers varying degrees of risk and return to the investors.

Treasury inflation protected securities / TIPS

A US Department of Treasury product which increases with inflation and decreases with deflation, as measured by the Consumer Price Index. When a TIPS matures, you are paid the adjusted principal or original principal, whichever is greater TIPS pay interest twice a year, at a fixed rate. The rate is applied to the adjusted principal, so, like the principal, interest payments rise with inflation and fall with deflation TIPS are the same as CIBs.

Trust Deed

A document conveying title to trust property to the trustee and setting out the purpose for which a trust has been formed, the rights and obligations of the trustee, the trust’s manager and the trust’s beneficiaries. The trust deed lays down the rules within which the trust must operate, dictates its investment guidelines and describes how benefits will accrue to the beneficiaries (such as unit holders) under the trust .

Unsecured Note

A bond or a note that has no security attached and repayment is reliant on the integrity or credit quality of the issuer .

Wind-Up

A term used to describe the liquidation of the assets of a company, the payment out of the proceeds of the liquidation and the eventual deregistration of the company.

Wrapped Bonds

A wrapped bond is a security issued by a company and then insured by a third party, most commonly an insurance company, which provides a guarantee to the investors that if the underlying issuer fails to pay principal or interest that the insurer or wrapper will make such payments. Such bonds usually attempt to enhance the credit rating of the issuer thereby reducing the cost of borrowing for the issuer.

Write-Down

Reducing the book value of an asset because it is overvalued compared to the market value. This is generally shown in the company’s income statement as an expense, reducing net income.

YTM / Yield to Maturity

The return an investor will receive if they buy a bond and hold the bond to maturity. It refers to the interest or dividends received from a security and are usually expressed annually or semi-annually as a percentage based on the investment’s cost, its current market value or its face value. Bond yields may be quoted either as an absolute rate or as a margin to the interest rate swap rate for the same maturity.

It is a very useful indicator of value because it allows for direct comparison between different types of securities with various maturities and credit risk.

Zero Coupon Bond

bond that pays no coupon, has a single cash flow at maturity (return of face value) and is traded at a discount to face value.