Abbreviation for Return on Assets. A company’s ability to operate profitably can be measured directly by calculating its return in three ways: 1. Return on total assets = a ratio of the attributable profits for the last 12 months to total assets (fixed and current) for the same period, expressed as a percentage. It measures how effectively a company can generate earnings from its assets. 2. Return on fixed assets = the ratio of attributable profits to fixed assets alone, expressed as a percentage. It measures how effectively a company can generate earnings from its long-term assets such as land and machinery. 3. Return on capital employed (ROCE) = the ratio of operating profit to capital employed, expressed as a percentage. Capital employed equals shareholders’ funds plus long-term liabilities, in other words all the long-term funds used by the company. The ratio measures the return on all sources of finance used by the company (i.e. equity plus debt) and is very similar to return on assets (which includes current liabilities).
Designations used by credit rating agencies to give relative indications as to opinions of credit quality.
For an inflation-indexed security, the yield based on the payment stream in constant dollars, i.e., before adjustment by the index ratio.
A downturn in economic activity on a large scale, such as in the U.S. economy. The Commerce Department defines a recession as two or more quarters of decline in output, as measured by Gross National Product (GNP) or Gross Domestic Product (GDP).
The doctrine that many believe provides the constitutional basis for the exemption from federal taxation of the interest earned on municipal securities. The doctrine holds that the states are immune from taxation by the federal government and vice versa. The advocates of tax-exemption for bonds believe that a tax on the interest income a taxpayer receives constitutes a tax on the issuer of the bonds.
The date for determining the owner entitled to the next scheduled payment of principal or interest on a security.
The paying off or buying back of a bond by the issuer; also, repurchase of investment trust units by the trustee, at the bid price.
A preliminary official statement.
Sale of a new issue, the proceeds of which are to be used, immediately or in the future, to retire an outstanding issue by, essentially, replacing the outstanding issue with the new issue. Refundings are done to save interest cost, extend the maturity of the debt, or to relax existing restrictive covenants.
A bond whose owner is registered with the issuer or its agent. Transfer of ownership can only be accomplished if the bonds are properly endorsed by the registered owner.
The name in which a security is registered, as stated on the certificate or on the books of the paying agent. P&I payments are made to the registered owner on the record date.
The risk that interest income or principal repayments will have to be reinvested at lower rates in a declining interest rate environment.
A technical analysis tool that compares the magnitude of price rises of a security with the magnitude of price falls so as to identify overbought and oversold signals. It acts as a warning when there is a divergence between movements in the Relative Strength Index and movements in the security’s price. For example, the RSI may be rising when the price of the security is falling, giving a buy signal
A pass-through investment vehicle which issues multiclass mortgage-backed securities that have certain tax and accounting advantages for issuers and investors due to the Tax Reform Act of 1986. Currently, most CMOs are issued in REMIC form and the terms “REMIC” and “CMO” are now used interchangeably.
Repurchase agreements (repos) are widely used as a source of financing by primary dealers, other securities firms, banking firms, and institutional investors, among others. A repo involves an agreement between a seller and a buyer, typically of U.S. government securities but increasingly involving other types of securities and financial assets as well, whereby the seller “sells” the securities to the buyer, with a simultaneous agreement to repurchase the securities at an agreed upon price at a future point in time. A reverse repurchase agreement is the flip side of the transaction, with the buyer “buying” the securities from the seller and simultaneously agreeing to resell them at a future point in time. The outstanding volume of repos and reverse repos is enormous.
Widely referred to as an “RFP.” A series of questions sent by a potential issuer to evaluate the qualification of potential underwriters of their negotiated issues. Written and sometimes oral (the “orals”) responses to questions may include a marketing plan for the bonds, the plan of finance, and estimated costs. Also referred to as “Request for Qualifications,” or “RFQs.”
Mortgage backed securities represent an ownership interest in mortgage loans made by financial institutions (savings and loans, commercial banks or mortgage companies) to finance the borrower’s purchase of a home or other residential real estate as opposed to commercial real estate. Mortgage securities are created when these loans are packaged, or “pooled,” by issuers or servicers for sale to investors. As the underlying mortgage loans are paid off by the homeowners, the investors receive payments of interest and principal.
Investors may purchase mortgage securities when they are issued or afterward in the secondary market. Investments in mortgage securities are typically made by large institutions when the securities are issued. These securities may ultimately be redistributed by dealers in the secondary market.
Resistance is a level, usually identified on a price chart, where selling interest is strong enough to overcome buying pressure with the result that prices rise no further. Each time a level of resistance is penetrated it will create a new level of support.
Earnings not paid out as dividends by a company. Retained earnings are typically reinvested back into the business and are an important component of shareholders’ equity
Individual investors who invest smaller amounts of money in the markets than institutional investors.
RANs are issued in anticipation of sources of future revenue other than taxes. This may include intergovernmental aid.
A municipal bond payable from income derived from tolls, charges or rents paid by users of the facility constructed with the proceeds of the bond issue.
A securitization structure frequently used for assets with high turnover rates, such as credit card, trade and dealer floor-plan receivables. It is characterized by having a revolving period and an accumulation (or controlled-amortization) period.
A measure of the degree of uncertainty and/or of financial loss inherent in an investment or decision. There are many different risks, including:
Block of bonds $100,000 or higher.
The coupon of a bond expressed as a percent of the price of the bond. An example is a 20-year bond with a coupon of 6% selling at 120 has a simple yield of 5% (6 x 100/120).