SHOP

A financial contract where the protection buyer (PB) pays a premium commonly referred to as a spread, to the protection seller (PS). The amount paid will be based on the percentage (basis points) of a notional principal. The notional is agreed up front between the PB and PS. The premium…

The process of analyzing financial and non-financial information on companies, individuals, sovereign states, local bodies or any other obligation seeker in order to estimate the ability of the obligation seeker to live up to its future contractual obligations. The inputs to credit analysis are from many sources, some of which…

(1) The fixed rate of interest on a debt instrument. (2) The fixed rate of interest on the fixed-rate side of a swap.

The dates that the coupons are paid and can be annual, quarterly, semi-annual or monthly.

Bonds that pay periodic interest. The periodic payment is called the coupon.

(1) The periodic interest payment on a debt instrument. (2) The periodic interest payment on the fixed-rate side of an interest rate or currency swap.

A term used in derivatives to define the risk that a counterparty will not meet their obligations under the terms of a derivatives contract. This can be further broken down into pre-settlement and settlement risk. In pre-settlement risk the counterparty defaults prior to maturity. Settlement risk refers to the risk…

A principal to a swap or other derivative instrument, as opposed to an agent such as a broker.

The degree to which the price of one or more securities correspond to each other. Perfect positive correlation, or +1, means that the prices will move 100% in the same direction. Perfect negative correlation, or -1, means that the prices will move 100% in the opposite direction. Zero correlation means…

Debt issued by a corporation. Can be money markets such as commercial paper or note or bonds.

Generally speaking, regulators break down capital into tier 1 and tier 2 capital. Tier 1 is considered core capital and generally contains items such as equity and retained earnings and other qualifying items. Tier 2 is referred to as supplemental capital (see supplemental capital).

A measure of price sensitivity for fixed income securities. Duration measures the linear change in price for a change in yield; convexity is the second derivative of a bond’s price relative to its yield.  Convexity explains the price change that is not explained by duration.