Definition of Events of default

Events of default

Contractually specified events that allow lenders to demand immediate repayment of a debt.

Cross default

A provision under which default on one debt obligation triggers default on another debt
obligation.

Default

Failure to make timely payment of interest or principal on a debt security or to otherwise comply
with the provisions of a bond indenture.

Default premium

A differential in promised yield that compensates the investor for the risk inherent in
purchasing a corporate bond that entails some risk of default.

Default risk

Also referred to as credit risk (as gauged by commercial rating companies), the risk that an
issuer of a bond may be unable to make timely principal and interest payments.

Default

The failure by a debtor to make a principal or interest payment in a timely
manner.

default premium

Difference in promised yields between a default-free bond and a riskier bond.

Default

Failure of a debtor to make timely payments of principal and interest as they become due.

Average (across-day) measures

An estimation of price that uses the average or representative price of a
large number of trades.

Cross hedging

The practice of hedging with a futures contract that is different from the underlying being
hedged.

Cross holdings

One corporation holds shares in another firm.

Cross rates

The exchange rate between two currencies expressed as the ratio of two foreign exchange rates
that are both expressed in terms of a third currency.

Cross-border risk

Refers to the volatility of returns on international investments caused by events associated
with a particular country as opposed to events associated solely with a particular economic or financial agent.

Cross-sectional approach

A statistical methodology applied to a set of firms at a particular point in time.

Crossover rate

The return at which two alternative projects have the same net present value.

Barrier options

Contracts with trigger points that, when crossed, automatically generate buying or selling of
other options. These are very exotic options.

Double-dip lease

A cross-border lease in which the disparate rules of the lessor's and lessee's countries let
both parties be treated as the owner of the leased equipment for tax purposes.

Hot money

Money that moves across country borders in response to interest rate differences and that moves
away when the interest rate differential disappears.

International diversification

The attempt to reduce risk by investing in the more than one nation. By
diversifying across nations whose economic cycles are not perfectly correlated, investors can typically reduce
the variability of their returns.

Lag response of prepayments

There is typically a lag of about three months between the time the weighted
average coupon of an MBS pool has crossed the threshold for refinancing and an acceleration in prepayment
speed is observed.

Overshooting

The tendency of a pool of MBSs to reflect an especially high rate or prepayments the first time
it crosses the threshold for refinancing, especially if two or more years have passed since the date of issue
without the WAC of the pool having crossed the refinancing threshold.

Price-specie-flow mechanism

Adjustment mechanism under the classical gold standard whereby
disturbances in the price level in one country would be wholly or partly offset by a countervailing flow of
specie (gold coins) that would act to equalize prices across countries and automatically bring international
payments back in balance.

Second pass regression

A cross-sectional regression of portfolio returns on betas. The estimated slope is the
measurement of the reward for bearing systematic risk during the period analyzed.

Systematic risk

Also called undiversifiable risk or market risk, the minimum level of risk that can be
obtained for a portfolio by means of diversification across a large number of randomly chosen assets. Related:
unsystematic risk.

Cost pool

The costs of (cross-functional) business processes, irrespective of the organizational structure of the business.

enterprise resource planning (ERP) system

a packaged software program that allows a company to
(1) automate and integrate the majority of its business processes,
(2) share common data and practices across the entire enterprise, and
(3) produce and access information in a realtime environment

Zero curve, zero-coupon yield curve

A yield curve for zero-coupon bonds;
zero rates versus maturity dates. Since the maturity and duration (Macaulay
duration) are identical for zeros, the zero curve is a pure depiction of supply/
demand conditions for loanable funds across a continuum of durations and
maturities. Also known as spot curve or spot yield curve.

diversification

Strategy designed to reduce risk by spreading the portfolio across many investments.

purchasing power parity (PPP)

Theory that the cost of living in different countries is equal, and exchange rates adjust to offset inflation differentials across countries.

Interest Rate Parity

Theory that real interest rates are approximately the same across countries except for a risk premium.

Sales-type Lease

Lease accounting used by a manufacturer who is also a lessor. Up-front gross
profit is recorded for the excess of the present value of the lease payments to be received across
a lease term over the cost to manufacture the leased equipment. Interest income also is recognized
on the lease receivable as it is earned over the lease term.

PLUS system

A bank machine network outside Canada, across the U.S. and internationally. Customers who use a bank machine with a 'PLUS' symbol may be charged a fee.

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