Acquisition cost
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The sum of the present value and accrued interest payable to enter the trade. |
| Accrued interest |
Interest that has accumulated between the most recent payment and the sale of a fixed income security. At the time of sale, the seller of protection pays the buyer the CDS price plus “accrued interest”, calculated by multiplying the coupon rate by the fraction of the coupon period that has elapsed since the last payment. It is interest owed but not yet paid.
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Arbitrage
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A practice of taking advantage of a price differential between two or more markets.
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Basis point
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One hundredth of a percentage point (0.01%). Basis points are often used to measure changes in or differences between yields on fixed income securities, since these often change by very small amounts.
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Bid
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The price a potential buyer is willing to pay for a security. In the case of CDS, the spread buyer of credit protection is willing to pay.
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Bid-offer spread
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The difference between the price quoted by a market maker for an immediate selling of protection (bid) and an immediate buying of protection (offer). The size of the bid-offer spread is a measure of the liquidity of the market.
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Buying credit protection
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Where the investor pays a premium and, in exchange, receives a payoff if a credit instrument goes into default or the occurrence of a specified event by the seller.
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Cash settlement
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To settle a contract, the seller of protection delivers cash. |
Collateral
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The amount of money a customer deposits with a broker when borrowing from the broker to buy securities. |
Cost basis
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The original price of a security used in determining capital gains. Cost basis is usually the purchase price, but may be an assigned market value in the case of an inherited asset. |
| Coupon |
The annual interest paid on a debt security. A coupon is usually stated in terms of the rate paid on the face value. For example, a 9% coupon, $1,000 principal amount would pay its owner $90 in interest annually. A coupon is set at the time a security is issued and, for most bonds, stays the same until maturity. |
Counterparty risk
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The risk that the other party to a financial contract – who is the counterparty to the contract – will default on the obligation and fail to fulfil that side of the contractual agreement. |
Credit default swap
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A swap contract in which the buyer of CDS protection makes a series of payments to the seller and, in exchange, receives a payoff if a credit instrument (typically a bond or loan) goes into default or the occurrence of a specified credit event (see Credit Events). |
| Credit event |
A financial event related to a legal entity which triggers specific protection provided by a credit derivative. The events triggering a credit derivative are defined in a bilateral swap confirmation which is a transactional document that typically refers to an ISDA master agreement. There are several standard credit events which are typically referred to in CDS transactions:
- Bankruptcy
- Failure to Pay
- Restructuring
- Repudiation
- Moratorium
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Day count convention
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Determines how interest accrues over time for a variety of investments, including bonds. Possibilities include:
- 30/360 for US corporate bonds
- Actual/Actual for irregular coupon periods
- Actual / 365 where each month is treated normally and year is assumed to be 365 days
- Actual/360 used for money markets
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Discount rate
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The rate at which an investment’s revenues and costs are discounted in order to calculate its present value.
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Exchange traded funds
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Open-ended investment companies that can be traded at any time throughout the course of the day. Typically, ETFs try to replicate an index (S&P 500), a market sector (energy or technology) or a commodity (gold or petroleum).
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First to default basket
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To buy or sell protection on a small number of names instead of one, and a credit event will trigger a pay-out after the first default and the contract will then terminate. The premium will depend on the correlation between names, the lower it is, the higher the premium is and vice-versa with the boundaries at the sum of the premium at 0 correlation and highest single name spread at perfect correlation.
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Gain/loss
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The sum of the capital gain/loss and interest receipts/payments.
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Index CDS
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Used to take a position on a basket of names. This is usually a standardised credit security and is usually more liquid and trade at smaller bid-offer spread. They usually have a fixed coupon.
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| Interest |
The price paid for borrowing money. It is expressed as a percentage rate over a period. |
Liquidation cost
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The proceeds or amount payable to exit the trade (sum of the present value and interest payments). |
| Listed |
A security which is admitted for trading on an organised exchange. In order to be listed, the security and the issuer must meet certain minimal standards established by the exchange. |
Margin balance
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This balance represents either a debit balance, which is the amount of money owed as a result of such transactions as trade commitments, or a credit balance, which is the amount of money held in your account after all commitments have been paid in full. Please note: You may still be required to deposit additional funds and/or marginable securities to cover a margin call that may exist. |
Present value
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The current value of future cash payments when the payments are discounted by the discount rate |
| Offer |
The price at which someone is willing to sell a security. In the case of CDS, the spread seller of credit protection wants to receive. |
| OTC |
A security which is not traded on an exchange. For such securities, broker/dealers negotiate directly with one another over computer networks and by phone. |
Physical settlement
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To settle a contract, the seller of protection delivers enough of the underlying security to value it at par. |
Principal protected note
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Investments such as guaranteed investment certificates (GICs) and bonds provide investment security with little or no risk of capital loss. |
Selling credit protection
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Where the investor assumes default risk, or the occurrence of a specified credit event, on a credit instrument and receives regular premium payments from the buyer. |
| Series |
The issuance series of the security. |
single name credit default swap
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A credit default swap that references a specific credit instrument.
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SPV
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A special purpose vehicle is a body corporate created to fulfil narrow, specific or temporary objective, primarily to isolate financial risk, usually bankruptcy but sometimes a specific taxation or regulatory risk.
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Term
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The period of time during which a contract is in force
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Total portfolio value
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The sum of the individual values of each security.
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Unrealised P/L
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The increase or decrease in the profit/loss over the cost basis for unsold securities.
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Unit cost spread
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The price at which the security was purchased, including fees and commissions.
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Unrealised Gain/Loss
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The increase or decrease in market value over the cost basis for unsold securities.
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Value
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The number representing the calculation of the particular index.
The number representing the total value of securities listed, calculated as: the Last Price/NAV times Quantity.
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