Tag: bond

Prepayment Risk definition explanation

What is Prepayment Risk?
The risk associated with the early unscheduled return of principal on a fixed-income security. Some fixed-income securities, such as mortgage-backed securities, have embedded call options which may be exercised by the issuer, or in the case of a mortgage-backed security, the borrower.

The yield-to-maturity of such securities cannot be known for certain at the time of purchase since the cash flows are not known. When principal is returned early, future interest payments will not be paid on that part of the principal. If the bond was purchased at a premium (a price greater than 100) the bond’s yield will be less than what was estimated at the time of purchase. Read more for examples and further explanation including related video clips and also comments
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Spread Option definition explanation

What is Spread Option?
A type of option that derives its value from the difference between the prices of two or more assets. Spread options can be written on all types of financial products including equities, bonds and currencies. This type of position can be purchased on large exchanges, but is primarily traded in the over-the-counter market. Read more for examples and further explanation including related video clips and also comments
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Defined Portfolio definition explanation

What is Defined Portfolio?
An investment trust that invests in a predefined portfolio of bonds and/or stocks that have been professionally selected by the company. Similar to some classes of mutual funds, these trusts are closed-ended and are not actively managed. The securities in the portfolio are fixed, and units can only be sold after the initial buying phase. These units tend to have a predefined life of a handful of years, after which they are liquidated and the proceeds are returned to the investors. Read more for examples and further explanation including related video clips and also comments
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Risk definition explanation

What is Risk?
The chance that an investment’s actual return will be different than expected. This includes the possibility of losing some or all of the original investment. Risk is usually measured by calculating the standard deviation of the historical returns or average returns of a specific investment. Read more for examples and further explanation including related video clips and also comments
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Grandfathered Bond definition explanation

What is Grandfathered Bond?
A classification for bonds in the European Union that excludes the payments made on these bonds from retention taxes. For a bond to fall into this classification it has to have been issued before March 1, 2001, or had its prospectus certified before this date, and has not had any re-issues at any point after February 28, 2002. Read more for examples and further explanation including related video clips and also comments
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Cap definition explanation

What is Cap?
The highest point to which an adjustable rate mortgage (ARM) can rise in a given time period or the highest rate that investors can receive on a floating-rate type bond. The issuer typically sets the cap at the time the contract is issued. With an ARM, it is detailed in the terms of the mortgage document. Read more for examples and further explanation including related video clips and also comments
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Plain Vanilla definition explanation

What is Plain Vanilla?
The most basic or standard version of a financial instrument, usually options, bonds, futures and swaps. Its opposite is an exotic instrument, which alters the components of a traditional financial instrument, resulting in a more complex security. Read more for examples and further explanation including related video clips and also comments
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