Definition of Instrument

Instrument

See debt instrument.

Alternative mortgage instruments

Variations of mortgage instruments such as adjustable-rate and variablerate
mortgages, graduated-payment mortgages, reverse-annuity mortgages, and several seldom-used
variations.

Debt instrument

An asset requiring fixed dollar payments, such as a government or corporate bond.

Deliverable instrument

The asset in a forward contract that will be delivered in the future at an agree-upon price.

Derivative instruments

Contracts such as options and futures whose price is derived from the price of the
underlying financial asset.

Fixed-income instruments

Assets that pay a fixed-dollar amount, such as bonds and preferred stock.

Instruments

Financial securities, such as money market instruments or capital market insturments.

Limited-liability instrument

A security, such as a call option, in which the owner can only lose his initial
investment.

Limited-liability instrument

A security, such as a call option, in which the owner can only lose his initial investment.

Debt Instrument

Any financial asset corresponding to a debt, such as a bond or a treasury bill.

Financing Instruments

This is a generic term that refers to the many different forms of financing a business may use. For example - loans, shares, and bonds are all considered financing instruments.

Banker's acceptance

A short-term credit investment created by a non-financial firm and guaranteed by a
bank as to payment. Acceptances are traded at discounts from face value in the secondary market. These
instruments have been a popular investment for money market funds. They are commonly used in
international transactions.

Capital market

The market for trading long-term debt instruments (those that mature in more than one year).

Cash markets

Also called spot markets, these are markets that involve the immediate delivery of a security
or instrument.
Related: derivative markets.

Comanger

A bank that ranks just below a lead manager in a syndicated Eurocredit or international bond
issue. Comanagers may assist the lead manger bank in the pricing and issue of the instrument.

Covered interest arbitrage

A portfolio manager invests dollars in an instrument denominated in a foreign
currency and hedges his resulting foreign exchange risk by selling the proceeds of the investment forward for
dollars.

Credit risk

The risk that an issuer of debt securities or a borrower may default on his obligations, or that the
payment may not be made on a negotiable instrument. Related: Default risk

Current maturity

Current time to maturity on an outstanding debt instrument.
Current / noncurrent method
Under this currency translation method, all of a foreign subsidiary's current
assets and liabilities are translated into home currency at the current exchange rate while noncurrent assets
and liabilities are translated at the historical exchange rate, that is, the rate in effect at the time the asset was
acquired or the liability incurred.

Debt market

The market for trading debt instruments.

Debt securities

IOUs created through loan-type transactions - commercial paper, bank CDs, bills, bonds, and
other instruments.

Delivery

The tender and receipt of an actual commodity or financial instrument in settlement of a futures contract.

Delivery points

Those points designated by futures exchanges at which the financial instrument or
commodity covered by a futures contract may be delivered in fulfillment of such contract.

Derivative markets

Markets for derivative instruments.

Discount securities

Non-interest-bearing money market instruments that are issued at a discount and
redeemed at maturity for full face value, e.g. U.S. Treasury bills.

Due bill

An instrument evidencing the obligation of a seller to deliver securities sold to the buyer.
Occasionally used in the bill market.

Euro-note

Short- to medium-term debt instrument sold in the Eurocurrency market.

Exempt securities

instruments exempt from the registration requirements of the Securities Act of 1933 or the
margin requirements of the SEC Act of 1934. Such securities include government bonds, agencies, munis,
commercial paper, and private placements.

Figuring the tail

Calculating the yield at which a future money market (one available some period hence) is
purchased when that future security is created by buying an existing instrument and financing the initial
portion of its life with a term repo.

Financial engineering

Combining or dividing existing instruments to create new financial products.

First notice day

The first day, varying by contracts and exchanges, on which notices of intent to deliver
actual financial instruments or physical commodities against futures are authorized.

Future

A term used to designate all contracts covering the sale of financial instruments or physical
commodities for future delivery on a commodity exchange.

Futures

A term used to designate all contracts covering the sale of financial instruments or physical
commodities for future delivery on a commodity exchange.

Hedge ratio (delta)

The ratio of volatility of the portfolio to be hedged and the return of the volatility of the
hedging instrument.

Hybrid

A package containing two or more different kinds of risk management instruments that are usually
interactive.

Hybrid security

A convertible security whose optioned common stock is trading in a middle range, causing
the convertible security to trade with the characteristics of both a fixed-income security and a common stock
instrument.

Indexing

A passive instrument strategy consisting of the construction of a portfolio of stocks designed to
track the total return performance of an index of stocks.

Last trading day

The final day under an exchange's rules during which trading may take place in a particular
futures or options contract. Contracts outstanding at the end of the last trading day must be settled by delivery
of underlying physical commodities or financial instruments, or by agreement for monetary settlement
depending upon futures contract specifications.

Medium-term note

A corporate debt instrument that is continuously offered to investors over a period of
time by an agent of the issuer. Investors can select from the following maturity bands: 9 months to 1 year,
more than 1 year to 18 months, more than 18 months to 2 years, etc., up to 30 years.

Note

Debt instruments with initial maturities greater than one year and less than 10 years.

Open contracts

Contracts which have been bought or sold without the transaction having been completed by
subsequent sale or purchase, or by making or taking actual delivery of the financial instrument or physical
commodity.

Other capital

In the balance of payments, other capital is a residual category that groups all the capital
transactions that have not been included in direct investment, portfolio investment, and reserves categories. It
is divided into long-term capital and short-term capital and, because of its residual status, can differ from
country to country. Generally speaking, other long-term capital includes most non-negotiable instruments of a
year or more like bank loans and mortgages. Other short-term capital includes financial assets of less than a
year such as currency, deposits, and bills.

Paper

Money market instruments, commercial paper and other.

Plain vanilla

A term that refers to a relatively simple derivative financial instrument, usually a swap or other
derivative that is issued with standard features.

Primitive security

An instrument such as a stock or bond for which payments depend only on the financial
status of the issuer.

Relative value

The attractiveness measured in terms of risk, liquidity, and return of one instrument relative to
another, or for a given instrument, of one maturity relative to another.

Repurchase agreement

An agreement with a commitment by the seller (dealer) to buy a security back from
the purchaser (customer) at a specified price at a designated future date. Also called a repo, it represents a
collateralized short-term loan, where the collateral may be a Treasury security, money market instrument,
federal agency security, or mortgage-backed security. From the purchaser (customer) perspective, the deal is
reported as a reverse Repo.

Required yield

Generally referring to bonds, the yield required by the marketplace to match available returns
for financial instruments with comparable risk.

Round-turn

Procedure by which the Long or short position of an individual is offset by an opposite
transaction or by accepting or making delivery of the actual financial instrument or physical commodity.

Safekeep

For a fee, bankers will hold in their vault, clip coupons on, and present for payment at maturity
bonds and money market instruments.

Short hedge

The sale of a futures contract(s) to eliminate or lessen the possible decline in value ownership of
an approximately equal amount of the actual financial instrument or physical commodity.
Related: Long hedge.

Substitute sale

A method for hedging price risk that utilizes debt-market instruments, such as interest rate
futures, or that involves selling borrowed securities as the primary assets.

Synthetics

Customized hybrid instruments created by blending an underlying price on a cash instrument with
the price of a derivative instrument.

Tail

1) The difference between the average price in Treasury auctions and the stopout price.
2) A future
money market instrument (one available some period hence) created by buying an existing instrument and
financing the initial portion of its life with a term repo.
3) The extreme end under a probability curve.
4) The odd amount in a MBS pool.

Thin market

A market in which trading volume is low and in which consequently bid and asked quotes are
wide and the liquidity of the instrument traded is low.

True interest cost

For a security such as commercial paper that is sold on a discount basis, the coupon rate
required to provide an identical return assuming a coupon-bearing instrument of like maturity that pays
interest in arrears.

capital structure, or capitalization

Terms that refer to the combination of
capital sources that a business has tapped for investing in its assets—in
particular, the mix of its interest-bearing debt and its owners’ equity. In a
more sweeping sense, the terms also include appendages and other features
of the basic debt and equity instruments of a business. Such things
as stock options, stock warrants, and convertible features of preferred
stock and notes payable are included in the more inclusive sense of the
terms, as well as any debt-based and equity-based financial derivatives
issued by the business.

Bond

A long-term debt instrument in which the issuer (borrower) is
obligated to pay the investor (lender) a specified amount of
money, usually at specific intervals, and to repay the principal
amount of the loan at maturity. The periodic payments are based
on the rate of interest agreed upon at the time the instrument is
sold.

Derivitive

An instrument with a value that is derived from the value of the
underlying security

Beta

The price volatility of a financial instrument relative to the price
volatility of a market or index as a whole. Beta is most commonly used with
respect to equities. A high-beta instrument is riskier than a low-beta
instrument.

Derivative

A financial instrument that is based on some underlying asset.
For example, an option is a derivative instrument based on the right to buy or
sell an underlying instrument.

Duration

The expected life of a fixed-income security considering its coupon
yield, interest payments, maturity, and call features. As market interest rates
rise, the duration of a financial instrument decreases. See Macaulay duration.

Long position

Outright ownership of a security or financial instrument. The
owner expects the price to rise in order to make a profit on some future sale.

Macaulay duration

A widely used measure of price sensitivity to yield
changes developed by Frederick Macaulay in 1938. It is measured in years and
is a weighted average-time-to-maturity of an instrument. The Macaulay
duration of an income stream, such as a coupon bond, measures how long, on
average, the owner waits before receiving a payment. It is the weighted
average of the times payments are made, with the weights at time T equal to
the present value of the money received at time T.

Par value

The maturity or face value of a security or other financial
instrument.

Short sale, short position

The sale of a security or financial instrument not
owned, in anticipation of a price decline and making a profit by purchasing the
instrument later at a lower price, and then delivering the instrument to
complete the sale. See Long position.

Cost of capital

The blended cost of a company’s currently outstanding debt instruments
and equity, weighted by the comparative proportions of each one. During a capital
budgeting review, the expected return from a capital purchase must exceed this cost
of capital, or else a company will experience a net loss on the transaction.

Money Market

A financial market in which short-term (maturity of less than a year) debt instruments such as bonds are traded.

Market Value

A quoted market price per unit times the number of units being valued. Synonymous
with fair value for financial instruments when a quoted market price is available.

Cash Equivalents

instruments or investments of such high liquidity and safety that they are virtually equal to cash.

Common Shares

Are equity instruments that take no security against assets, have no fixed terms of repayment and pay no fixed dividends.

Convertible Debenture

Are debt instruments that are convertible into common or preferred shares, take secondary or no security against assets, have flexible terms of repayment and charge fixed or floating interest rates.

Face Value

The nominal value which appears on the face of a document recording an entitlement, generally an amount of money that has to be repaid on the maturity of a debt instrument.

Front End Fees

Fees paid when for example a financial instrument such as a loan is arranged.

Mortgage

Debt instrument by which the borrower (mortgagor) gives the lender (mortgagee) a lien on property as security for the repayment of a loan.

Preferred Shares

Are equity instruments that take no security against assets, have flexible terms of repayment and pay fixed or floating dividends.

Present Value (PV)

Are equity instruments that take no security against assets, have flexible terms of repayment and pay fixed or floating dividends.

Principal

The obligation due under a debt instrument exclusive of interest.

Senior Debt

Are debt instruments that provide financing, take primary security against either specific or all assets of the borrower, have fixed terms of repayment and charge fixed or floating interest rates.

Subordinated Debt

Debt instruments that provide financing for acquisitions, expansion and restructuring, take secondary security against assets, have fixed or flexible terms of repayment and charge fixed or floating interest rates.

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