An Introduction to Bond Markets, Fourth Edition

GLOSSARY

Accrued interest Interest which has been earned on a bond but not yet paid. An investor buying a bond must pay accrued interest to the seller, and this forms part of the final purchase price.

All-in price See Dirty price.

Arbitrage The process of buying securities in one country, currency or market, and selling identical securities in another to take advantage of price differences. When this is carried out simultaneously, it is in theory a risk-free transaction. There are many forms of arbitrage transactions. For instance, in the cash market a bank might issue a money market instrument in one money centre and invest the same amount in another centre at a higher rate, such as an issue of 3-month US dollar CDs in the US at 5.5% and a purchase of 3-month Eurodollar CDs at 5.6%. In the futures market, arbitrage might involve buying 3-month contracts and selling forward 6-month contracts.

Asset-backed security (ABS) A financial security backed by a loan or receivables against assets such as credit cards or commercial loans. Where the underlying asset is real estate or mortgages the security is known as a mortgage-backed security (MBS). For investors, asset-backed securities are an alternative to investing in corporate debt.

Auction A method of issue where institutions submit bids to the issuer on a price or yield basis. Auction rules vary considerably across markets.

Basis risk A form of market risk that arises whenever one kind of risk exposure is hedged with an instrument ...