Indenture

An agreement declaring the benefits and obligations of two or more

parties, often applicable in the context of Bankruptcy and bond trading.

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

Senior Mortgage
A mortgage that is secured by a lien on a property and that has
preference to another mortgage on the same property. In general, the
senior mortgage is the original mortgage; one takes out a junior
mortgage to pay for home repairs or for other reasons. In the event
of default or bankruptcy, the senior mortgage must be paid entirely
before the junior mortgage is paid at all. As a result, a senior mortgage
carries a lower interest rate than a junior mortgage. See
also: Piggyback mortgage.

Junior Mortgage
A mortgage that will be satisfied only after more senior
mortgages have been satisfied. E.g., a first mortgage will be satisfied
prior to a second or a third mortgage.

Bond Discount
The difference by which a bond's market price is lower than
its face value. The antithesis of a bond premium, which prevails when
the market price of a bond is higher than its face value. See: Original
issue discount.

Sinking Fund
A fund to which money is added on a regular basis that is used to
ensure investor confidence that promised payments will be made and
that is used to redeem debt securities or preferred stock issues.

Refunding

Redeeming a bond with proceeds received from issuing lowercost debt obligations with ranking equal to or superior to the debt to be
redeemed.

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.

Coupon Equivalent Rate

An alternative method of calculating the yield on a bond. It is
used for zero-coupon bonds, as these are issued atdiscounts to
their face value; that is, the CER states what the coupon rate would be
if it carried a coupon and had beensold at face value. As such, it gives
a more accurate picture of the yield of a zero-coupon bond. It is
calculated as:
CER = ((Market Price - Face Value) / Market Price) * (365 / Days
until Maturity).

Debt Limitation
A negative covenant in a bond indenture limiting
the issuer's ability to acquire more debt before the bond matures. Debt
limitation may take a variety of forms. For example, the indenture may
restrict the debt service coverage ratio, meaning that the company can
acquire theoretically unlimited debt provided it increases it income to
such a level that it can service the debt. On the other hand, debt
limitation may set a maximum dollar amount of debt that the issuer
may acquire during the life of the bond, or even may prevent the
issuer from becoming any more indebted at all. These latter debt
limitations are more likely when the issuer is not on
sound financial footing and possibly is issuing junk bonds. A debt
limitation should not be confused with a debt limit, which is similar but
is a legal requirement on a government.

Callable Bond
A bond that may be redeemed before maturity. Callability allows
the bond to be called at the discretion of the issuerwithin certain limits.

When the bond is called, the bondholder receives the par value (or
sometimes a bit more) and does not receive any more coupons.
Callable bonds are issued to allow the issuers to hedge against interest
rate risk. That is, if interest rates fall significantly, the issuer can call
the bond and issue a new bond at a lower interest rate, reducing its
liabilities. However, to protect the bondholder, most callable bonds
also include call protection which prevents the bonds from being called
for a certain period of time and thereby guarantees the current interest
rate for that time.

Common Stock
Securities that represent equity ownership in
a company. Common shares let an investor vote on such matters as
the election of directors. They also give the holder a share in a
company's profits via dividend payments or the capital appreciation of
the security. Units of ownership of a public corporation with junior
status to the claims of
secured/unsecured creditors, bondholders and preferred shareholders
in the event of liquidation.

Preferred Stock
A security that shows ownership in a corporation and gives
the holder a claim, prior to the claim of common stockholders,
on earnings and also generally on assets in the event of liquidation.
Most preferred stock pays a fixed dividend that is paid prior to
the common stock dividend, stated in a dollar amount or as a
percentage of par value. This stock does not usually carry voting
rights. Preferred stock has characteristics of both common stock
and debt.

Cumulative Preferred Stock

Preferred stock whose dividends accrue, should the issuer not
make timely dividend payments.

Noncumulative Preferred Stock

Preferred stock whose holders must forgo dividend payments
when the company misses a dividend payment.

Stock Option
An option whose underlying asset is the common stock of
a corporation.

Stock Split
Occurs when a firm issues new shares of stock and in turn lowers
the current market price of its stock to a level that is proportionate to
pre-split prices.

Preemptive Right
Common stockholders' right to anything of value distributed by
the company.

Treasury Shares
Shares issued in the name of the corporation. The shares are
considered issued, but not outstanding.Usually refers to stock that was
once traded in the market but has since been repurchased by the
corporation. Treasury stock not considered when calculating dividends
or earnings per share.

Reverse Stock Split

A proportionate decrease in the number of shares, but not the
total value of shares of stock held by shareholders. Shareholders
maintain the same percentage of equity as before the split. For
example, a 1-for-3 split would result in stockholders owning one share
for every three shares owned before the split. After the reverse split,
the firm's stock price is, in this example, three times the pre-reverse
split price. A firm generally institutes a reverse split to boost its stock's
market price. Some think this supposedly attracts investors.

Participating Preferred Stock

Preferred stock that provides the holder with a
specified dividend plus the right to additional earnings under specified
conditions.

Stock Purchase Plan

A plan allowing employees of a company to purchase shares of
the company, often at a discount or with matching employer funds.

Vertical Integration
A business strategy in which a company expands its operations
to offer similar goods and services at a different point on the supply
chain. For example, a widget wholesaler may expand
into retailing widgets directly with consumers. More concretely, an oil
exploration company may also begin refining oil in addition to its
exploration operations. Vertical integration always occurs at different
points on the supply chain: a retailer does not expand into retailing
other products. Rather, it may move into wholesaling.

Horizontal Integration
A business strategy in which a company expands its operations
to provide similar goods and services at the same point on the supply
chain. For example, a widget retailer may begin selling what sits in
addition to widgets. More concretely, an oil exploration company may
also begin exploring for natural gas. It is important to note that
horizontal integration always occurs at the same point on the supply
chain: a retailer does not move into wholesale and vice versa.

Leveraged Buyout
The acquisition of a publicly-traded company, often by a group of
private investors, that is financed with debt. Often, the acquirer in a
LBO issues junk bonds in order to raise the capital necessary for the
acquisition. A leveraged buyout allows a company to be taken over
with little capital, but it can be a high risk endeavor.

Voluntary Insolvency
An insolvent debtor owing debts exceeding in amount in the
sum of P1000, may apply to be discharged from his debts and liabilities
by petition to the RTC of the province or city in which he has resided
for 6 months next preceding the filing of the petition

Involuntary Insolvency
An adjudication of insolvency may be made by the petition of 3
or more creditors, residents of the Philippines, whose credits or
demands accrued in the Philippines, for the amount of which
credits or demands are in the aggregate of not less than P1000

Debt/equity ratio
Indicator of financial leverage. Compares assets provided
by creditors to assets provided by shareholders. Determined by
dividing long-term debt by common stockholder equity.

Receivership
In corporate bankruptcy, a situation in which a court or regulator
appoints a custodian to administer all assets and debts. This custodian
is known as a receiver; his/her duty is to pay off as many debts as
possible as cheaply as possible. One obvious way to do this is
to liquidate the company, but this is not always done. The receiver
may restructure the company to put it on a path toward solvency.

Aggressive Financing Strategy

Involves solving permanent needs with debt that is short term.
Permanent needs are solved with debt that is long term. The firm will
do the financing.

Conservative Investment Strategy

One where preserving capital and minimizing risk is of utmost
concern. This strategy invests in lower risk securities like money
market and fixed income securities, and blue chip and large cap
equities rather than riskier securities in an attempt to preserve a
portfolios value. In addition to preserving capital, conservative
investment strategies also often look to generate current income.

Stretching Accounts Payables

A common way that some firms gain cheap financing. However, a
firm can only get away with it if they have an imbalance of power
between them and the vendor.

Prime Rate or Prime Lending Rate

A term applied in many countries to reference an interest
rate used by banks. The term originally indicated the rate of interest at
which banks lent to favored customers, i.e., those with good credit,
though this is no longer always the case. Some variable interest rates
may be expressed as a percentage above or below prime rate.

Effective Interest Rate

The interest rate on a loan or financial product restated from
the nominal interest rate as an interest rate with annual compound
interest payable in arrears.

Floating Interest Rate

Refers to any type of debt instrument, such as
a loan, bond, mortgage, or credit, that does not have a fixed
rate of interest over the life of the instrument.