Definitions
For more information on IntaCapital Swiss and how they can help you with your finance solutions please follow the link below.
Debt Securities
Medium Term Notes, (MTN’s)
A medium-term note, also referred to as an MTN or MTN’s, is a corporate debt security, which carries an interest rate and has a maturity date of five to ten years. There are two types of MTN, a domestic MTN which is issued in the country of origin and cleared locally, and a Euro medium-term note, (EMTN), which are issued in the euro markets, and are listed on acceptable stock exchanges within the EU, and are settled either via Euroclear or Clearstream.
MTN’s can be issued by corporations, federal and state governments, non-profit organisations, and are often issued under a MTN programme, allowing the issuer to offer the notes to investors without producing reams of legal documents for each issue.
Corporate Bonds
A corporate bond is issued by corporations so they may raise capital to finance expansion plans, mergers and acquisitions, or finance for the company’s operational expenses. To summarise, corporate bonds fall into five categories, International Issues, Banks and Finance Companies, Transportation, Public Utilities and Industrials.
Corporate Bonds are usually issued with a maturity date of one to thirty years, and the longer the maturity date the higher the interest rate. The interest rate will also be calculated on the rating of the company. If it is of Investment Grade quality, then the interest rate will be low, but if of non-investment grade and therefore deemed a higher risk, the interest rate will be higher.
Government Bonds
A government bond, also referred to as sovereign debt, is a debt instrument or security issued by a national government to support their spending and various obligations. Obviously, if such bonds are issued by a G8 government they are considered a low risk investment as the government is backing the issue. The government bond pays a fixed interest rate up to maturity, referred to as a coupon.
In the United States of America, a government bond is referred to as a Treasury Bill, and in the United Kingdom they are referred to as Gilts, short for Gilt-edged securities, (many years ago the Bank of England issued their paper bond with a gilt edge hence Gilt-edge Securities).
Municipal Bonds
A municipal bond is a debt security, issued by local governments or States, (USA), which carry a maturity date and a fixed interest rate. They are issued to help finance roads, schools, and other local government projects. In the United States of America, the interest earned is tax free. They are fairly uncommon in the United Kingdom, but some bonds boast tax free returns which make these bonds attractive to earners in in the top tax bracket.
Preferred Stock
Preferred stock, (sometimes referred to as preference shares), are shares or ownership in a company or corporation, where dividends can be fixed, and are paid out before common or ordinary stock.
Preferred stock, unlike common or ordinary stock, carries no voting rights, and combines both features of debt and equity insofar as it has a fixed dividend, (debt), plus it has the potential to rise in price, (equity).
Equity Securities
Common Shares
A common share represents equity ownership in a company or corporation, and allows voting rights, (unless they are non-voting shares), usually one vote per share in the election of the board of directors
The owner of the share(s) is entitled to share in the success of the company through dividends or through capital appreciation. If the company goes bankrupt and is put into liquidation, common shareholders are last in line to be repaid as they are behind bondholders, debtholders, other debtholders and preferred stock holders.
A dividend is a distribution of earnings or profits to various classes of shareholders in a company as approved by the board of directors.
Callable Common Shares
Callable common stock or shares is an equity or ownership stake in a company, where the issuer of the stock or a third party, has the right but not the obligation to buy back the shares at an agreed price after an agreed date.
Putable Common Shares
Putable common stock or shares is an equity or ownership stake in a company, and allows the owner of the stock or shares, to sell the stock back to the issuer at an agreed price. The price is determined when the stock is issued and is usually set fairly low to discourage abuse of the trade.
Preference Shares
This stock combines both debt and equity as explained above under Preferred Stock.
Hybrid Securities
Convertible Bonds
A convertible bond is a debt security, and as the name implies gives the holder or the owner the option to convert the bond into common stock or equity at an agreed time or times during the life of the bond.
The instrument carries a maturity date and provides an interest rate or in this case a coupon, and the conversion ratio will determine how many shares the holder of the bond will receive.
Equity Warrants
An equity warrant gives the holder a contractual right to buy or sell equity in the underlying company or corporation at a certain price, which more often than not is the strike price just before or on expiration.
It must be noted that European warrants may be exercised on or just before expiration, but in the United States of America warrants may be exercised at any time during the lifetime of the warrant.
Derivatives
Swaps
A swap is a derivative contract and is basically an exchange of financial instruments between two parties at a future date. The most commonly used swap is an interest rate swap, and is an exchange of interest rates, based on an exact principal amount between two parties at a fixed date in the future. The principle amount is not exchanged.
However, with a currency swap, which is a foreign exchange transaction, both the principal and the interest is exchanged between two different currencies.
Options
An option is a derivative contract which is based on the underlying asset, such as commodities, (gold, silver, oil etc), stocks and shares, and is a contract between two parties, and allows the holder to buy or sell the option, (the underlying asset), at a given price, prior to the expiry of the contract.
There are two types of options, a call option and a put option.
- A call option gives the owner the right to buy the underlying asset
- A put option gives the owner the right to sell the underlying asset
Futures Contract
There are many different types of futures contracts in both the commodity market and the financial market. Futures contracts are very diverse and an example of these are gold, silver from the metal market, crude oil, unleaded gas, natural gas from the energy market, currencies and interest rates from the financial markets and form the agricultural market, South American soybean, corn, wheat, urea, frozen concentrated orange juice, to mention but a few.
The simple definition of a derivative futures contract is an agreement between two parties to buy or sell an asset, commodity or currency at a pre agreed price at an exact time in the future.
Forward Contract
A forward contract is a derivative instrument and is traded in the financial, commodity, energy and agricultural markets. It is a contract between two parties for an asset or security, to be settled at an agreed date in the future. Unlike futures contracts, forward contracts are not traded on exchanges, and are therefore classed as “over the counter” (OTC) trades, and settlement can be in cash or on a delivery basis.