Definition of Serial covariance

Serial covariance

The covariance between a variable and the lagged value of the variable; the same as
autocovariance.

Covariance

A statistical measure of the degree to which random variables move together.

Serial bonds

Corporate bonds arranged so that specified principal amounts become due on specified dates.
Related: term bonds.

Covariance

A measure of the degree to which returns on two assets move in
tandem. A positive covariance means that asset returns move together; a
negative covariance means they vary inversely.

Brady bonds

bonds issued by emerging countries under a debt reduction plan.

Collateral trust bonds

A bond in which the issuer (often a holding company) grants investors a lien on
stocks, notes, bonds, or other financial asset as security. Compare mortgage bond.

Convertible bonds

bonds that can be converted into common stock at the option of the holder.

Corporate bonds

Debt obligations issued by corporations.

Cushion bonds

High-coupon bonds that sell at only at a moderate premium because they are callable at a
price below that at which a comparable non-callable bond would sell. Cushion bonds offer considerable
downside protection in a falling market.

Dollar bonds

Municipal revenue bonds for which quotes are given in dollar prices. Not to be confused with
"U.S. Dollar" bonds, a common term of reference in the Eurobond market.

Eurodollar bonds

Eurobonds denominated in U.S.dollars.

Euroyen bonds

Eurobonds denominated in Japanese yen.

General obligation bonds

Municipal securities secured by the issuer's pledge of its full faith, credit, and
taxing power.

Global bonds

bonds that are designed so as to qualify for immediate trading in any domestic capital market
and in the Euromarket.

International bonds

A collective term that refers to global bonds, Eurobonds, and foreign bonds.

Investment grade bonds

A bond that is assigned a rating in the top four categories by commercial credit
rating companies. For example, S&P classifies investment grade bonds as BBB or higher, and Moodys'
classifies investment grade bonds as Ba or higher. Related: High-yield bond.

Long bonds

bonds with a long current maturity. The "long bond" is the 30-year U.S. government bond.

Long bonds

bonds with a long current maturity. The "long bond" is the 30-year U.S. government bond.

Short bonds

bonds with short current maturities.

Term bonds

Often referred to as bullet-maturity bonds or simply bullet bonds, bonds whose principal is
payable at maturity. Related: serial bonds

Treasury bonds

Debt obligations of the U.S. Treasury that have maturities of 10 years or more.

Yankee bonds

Foreign bonds denominated in US$ issued in the United States by foreign banks and
corporations. These bonds are usually registered with the SEC. For example, bonds issued by originators with
roots in Japan are called Samurai bonds.

Bonds payable

Amounts owed by the company that have been formalized by a legal document called a bond.

Canada Savings Bonds

A bond issued each year by the federal government. These bonds can be cashed in at any time for their full face value.

Asset classes

Categories of assets, such as stocks, bonds, real estate and foreign securities.

Balanced fund

An investment company that invests in stocks and bonds. The same as a balanced mutual fund.

Balanced mutual fund

This is a fund that buys common stock, preferred stock and bonds. The same as a
balanced fund.

Basis point

In the bond market, the smallest measure used for quoting yields is a basis point. Each percentage
point of yield in bonds equals 100 basis points. Basis points also are used for interest rates. An interest rate of
5% is 50 basis points greater than an interest rate of 4.5%.

Bearer bond

bonds that are not registered on the books of the issuer. Such bonds are held in physical form by
the owner, who receives interest payments by physically detaching coupons from the bond certificate and
delivering them to the paying agent.

Bond

bonds are debt and are issued for a period of more than one year. The U.S. government, local
governments, water districts, companies and many other types of institutions sell bonds. When an investor
buys bonds, he or she is lending money. The seller of the bond agrees to repay the principal amount of the
loan at a specified time. Interest-bearing bonds pay interest periodically.

Bond value

With respect to convertible bonds, the value the security would have if it were not convertible
apart from the conversion option.

Bull-bear bond

Bond whose principal repayment is linked to the price of another security. The bonds are
issued in two tranches: in the first tranche repayment increases with the price of the other security, and in the
second tranche repayment decreases with the price of the other security.

Call protection

A feature of some callable bonds that establishes an initial period when the bonds may not be
called.

Cash

The value of assets that can be converted into cash immediately, as reported by a company. Usually
includes bank accounts and marketable securities, such as government bonds and Banker's Acceptances. Cash
equivalents on balance sheets include securities (e.g., notes) that mature within 90 days.

Cash and equivalents

The value of assets that can be converted into cash immediately, as reported by a
company. Usually includes bank accounts and marketable securities, such as government bonds and Banker's
Acceptances. Cash equivalents on balance sheets include securities (e.g., notes) that mature within 90 days.

CEDEL

A centralized clearing system for eurobonds.

Collateralized mortgage obligation (CMO)

A security backed by a pool of pass-throughs , structured so that
there are several classes of bondholders with varying maturities, called tranches. The principal payments from
the underlying pool of pass-through securities are used to retire the bonds on a priority basis as specified in
the prospectus.
Related: mortgage pass-through security

Commission

The fee paid to a broker to execute a trade, based on number of shares, bonds, options, and/or
their dollar value. In 1975, deregulation led to the creation of discount brokers, who charge lower
commissions than full service brokers. Full service brokers offer advice and usually have a full staff of
analysts who follow specific industries. Discount brokers simply execute a client's order -- and usually do not
offer an opinion on a stock. Also known as a round-turn.

Convertible exchangeable preferred stock

Convertible preferred stock that may be exchanged, at the
issuer's option, into convertible bonds that have the same conversion features as the convertible preferred
stock.

Convertible security

A security that can be converted into common stock at the option of the security holder,
including convertible bonds and convertible preferred stock.

Convex

Bowed, as in the shape of a curve. Usually referring to the price/required yield relationship for
option-free bonds.

Coupon rate

In bonds, notes or other fixed income securities, the stated percentage rate of interest, usually
paid twice a year.

Current coupon

A bond selling at or close to par, that is, a bond with a coupon close to the yields currently
offered on new bonds of a similar maturity and credit risk.

Current yield

For bonds or notes, the coupon rate divided by the market price of the bond.

Debenture bond

An unsecured bond whose holder has the claim of a general creditor on all assets of the
issuer not pledged specifically to secure other debt. Compare subordinated debenture bond, and collateral
trust bonds.

Debt securities

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

Defeasance

Practice whereby the borrower sets aside cash or bonds sufficient to service the borrower's debt.
Both the borrower's debt and the offestting cash or bonds are removed from the balance sheet.

Deferred equity

A common term for convertible bonds because of their equity component and the
expectation that the bond will ultimately be converted into shares of common stock.

Doubling option

A sinking fund provision that may allow repurchase of twice the required number of bonds
at the sinking fund call price.

Dow Jones industrial average

This is the best known U.S.index of stocks. It contains 30 stocks that trade on
the New York Stock Exchange. The Dow, as it is called, is a barometer of how shares of the largest
U.S.companies are performing. There are thousands of investment indexes around the world for stocks,
bonds, currencies and commodities.

Dual-currency issues

Eurobonds that pay coupon interest in one currency but pay the principal in a different
currency.

Equity kicker

Used to refer to warrants because they are usually issued attached to privately placed bonds.

Exchange

The marketplace in which shares, options and futures on stocks, bonds, commodities and indices
are traded. Principal US stock exchanges are: New York Stock Exchange (NYSE), American Stock Exchange
(AMEX) and the National Association of Securities Dealers (NASDAQ)

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.

Financing decisions

Decisions concerning the liabilities and stockholders' equity side of the firm's balance
sheet, such as the decision to issue bonds.

Fixed-dollar obligations

Conventional bonds for which the coupon rate is set as a fixed percentage of the par value.

Fixed-dollar security

A nonnegotiable debt security that can be redeemed at some fixed price or according to
some schedule of fixed values, e.g., bank deposits and government savings bonds.

Fixed-income instruments

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

Fixed-income market

The market for trading bonds and preferred stock.

Flight to quality

The tendency of investors to move towards safer, government bonds during periods of high
economic uncertainty.

Flower bond

Government bonds that are acceptable at par in payment of federal estate taxes when owned by
the decedent at the time of death.

Give up

The loss in yield that occurs when a block of bonds is swapped for another block of lower-coupon
bonds. Can also be referred to as "after-tax give up" when the implications of the profit or loss on taxes are
considered.

Glass-Steagall Act

A 1933 act in which Congress forbade commercial banks to own, underwrite, or deal in
corporate stock and corporate bonds.

Gray market

Purchases and sales of eurobonds that occur before the issue price is finally set.

Income bond

A bond on which the payment of interest is contingent on sufficient earnings. These bonds are
commonly used during the reorganization of a failed or failing business.

Interest-only strip (IO)

A security based solely on the interest payments form a pool of mortgages, Treasury
bonds, or other bonds. Once the principal on the mortgages or bonds has been repaid, interest payments stop
and the value of the IO falls to zero.

Intramarket sector spread

The spread between two issues of the same maturity within a market sector. For
instance, the difference in interest rates offered for five-year industrial corporate bonds and five-year utility
corporate bonds.

Investments

As a discipline, the study of financial securities, such as stocks and bonds, from the investor's
viewpoint. This area deals with the firm's financing decision, but from the other side of the transaction.

Junk bond

A bond with a speculative credit rating of BB (S&P) or Ba (Moody's) or lower is a junk or high
yield bond. Such bonds offer investors higher yields than bonds of financially sound companies. Two
agencies, Standard & Poors and Moody's investor Services, provide the rating systems for companies' credit.

Leveraged buyout (LBO)

A transaction used for taking a public corporation private financed through the use
of debt funds: bank loans and bonds. Because of the large amount of debt relative to equity in the new
corporation, the bonds are typically rated below investment grade, properly referred to as high-yield bonds or
junk bonds. Investors can participate in an LBO through either the purchase of the debt (i.e., purchase of the
bonds or participation in the bank loan) or the purchase of equity through an LBO fund that specializes in
such investments.

Liquidity diversification

Investing in a variety of maturities to reduce the price risk to which holding long
bonds exposes the investor.

Local expectations theory

A form of the pure expectations theory which suggests that the returns on bonds
of different maturities will be the same over a short-term investment horizon.

Long coupons

1) bonds or notes with a long current maturity.
2) A bond on which one of the coupon periods, usually the first, is longer than the other periods or the standard period.

Long coupons

1) bonds or notes with a long current maturity.
2) A bond on which one of the coupon
periods, usually the first, is longer than the other periods or the standard period.

Market sectors

The classifications of bonds by issuer characteristics, such as state government, corporate, or utility.

Money market

Money markets are for borrowing and lending money for three years or less. The securities in
a money market can be U.S.government bonds, treasury bills and commercial paper from banks and
companies.

Mortgage bond

A bond in which the issuer has granted the bondholders a lien against the pledged assets.
Collateral trust bonds

Municipal bond

State or local governments offer muni bonds or municipals, as they are called, to pay for
special projects such as highways or sewers. The interest that investors receive is exempt from some income taxes.

Optimal redemption provision

Provision of a bond indenture that governs the issuer's ability to call the
bonds for redemption prior to their scheduled maturity date.

Oversubscribed issue

Investors are not able to buy all of the shares or bonds they want, so underwriters must
allocate the shares or bonds among investors. This occurs when a new issue is underpriced or in great demand
because of growth prospects.

Pay-up

The loss of cash resulting from a swap into higher price bonds or the need/willingness of a bank or
other borrower to pay a higher rate of interest to get funds.

Payment-In-Kind (PIK)

bond A bond that gives the issuer an option (during an initial period) either to make
coupon payments in cash or in the form of additional bonds.

Pickup

The gain in yield that occurs when a block of bonds is swapped for another block of higher-coupon bonds.

Plus

ealers in government bonds normally give price quotes in 32nds. To quote a bid or offer in 64ths, they
use pluses; a dealer who bids 4+ is bidding the handle plus 4/32 + 1/64, which equals the handle plus 9/64.

Portfolio internal rate of return

The rate of return computed by first determining the cash flows for all the
bonds in the portfolio and then finding the interest rate that will make the present value of the cash flows
equal to the market value of the portfolio.

Positive convexity

property of option-free bonds whereby the price appreciation for a large upward change
in interest rates will be greater (in absolute terms) than the price depreciation for the same downward change
in interest rates.

Purchase fund

Resembles a sinking fund except that money is used only to purchase bonds if they are selling
below their par value.

Pure yield pickup swap

Moving to higher yield bonds.

Quality spread

Also called credit spread, the spread between Treasury securities and non-Treasury securities
that are identical in all respects except for quality rating. For instance, the difference between yields on
Treasuries and those on single A-rated industrial bonds.

Quantos

Currency options with a guaranteed exchange rate that enable buyers who like the asset, German
bonds for example, but not the asset's pricing currency, to arrange to be paid in a different currency for a fee.

Rate anticipation swaps

An exchange of bonds in a portfolio for new bonds that will achieve the target
portfolio duration, based on the investor's assumptions about future changes in interest rates.

REMIC (real estate mortgage investment conduit)

A pass-through tax entity that can hold mortgages
secured by any type of real property and issue multiple classes of ownership interests to investors in the form
of pass-through certificates, bonds, or other legal forms. A financing vehicle created under the Tax Reform
Act of 1986.

Reoffering yield

In a purchase and sale, the yield to maturity at which the underwriter offers to sell the bonds
to investors.

Required yield

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

Residuals

1) Parts of stock returns not explained by the explanatory variable (the market-index return). They
measure the impact of firm-specific events during a particular period.
2) Remainder cash flows generated by pool collateral and those needed to fund bonds supported by the collateral.

Return-to-maturity expectations

A variant of pure expectations theory which suggests that the return that an
investor will realize by rolling over short-term bonds to some investment horizon will be the same as holding
a zero-coupon bond with a maturity that is the same as that investment horizon.

Revenue bond

A bond issued by a municipality to finance either a project or an enterprise where the issuer
pledges to the bondholders the revenues generated by the operating projects financed, for instance, hospital
revenue bonds and sewer revenue bonds.

Riding the yield curve

Buying long-term bonds in anticipation of capital gains as yields fall with the
declining maturity of the bonds.

Risk premium

The reward for holding the risky market portfolio rather than the risk-free asset. The spread
between Treasury and non-Treasury bonds of comparable maturity.

Safekeep

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

Security

Piece of paper that proves ownership of stocks, bonds and other investments.

Selling group

All banks involved in selling or marketing a new issue of stock or bonds

Stratified sampling bond indexing

A method of bond indexing that divides the index into cells, each cell
representing a different characteristic, and that buys bonds to match those characteristics.

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