corporation in Country X, but it would stripping...

Ludzie pragną czasami się rozstawać, żeby móc tęsknić, czekać i cieszyć się z powrotem.

Treasury bonds were first
simultaneously place a limit on overall
stripped of their coupons in 1977 by
lending (i.e., aggregate lending) to cor-
Merrill Lynch to create the first form
porations domiciled in Country X.
of Treasury-based zero coupon bonds
called Treasury Investment Growth Re-
ceipts or TIGRs. Today, Treasurys can
coupon (1) The periodic interest pay-
ment on a debt instrument. (2) The
be stripped through the Fed wire sys-
periodic interest payment on the fixed-
tem to create generic zeros called
rate side of an interest rate or currency
STRIPS.
swap.
coupon swap A plain vanilla fixed-for-
floating interest rate swap.
coupon bonds Bonds that pay periodic
interest. The periodic payment is called
covariance
the coupon. The term is generally used
A measure of the degree to
which two random variables move in
to refer to bonds that pay a fixed cou-
the same or opposite direction with re-
pon.
spect to one another. In other words, if
two random variables generally move
coupon leverage Some debt instru-
in the same direction, they would be
ments leverage up the effects of a
said to have positive covariance. If they
change in interest rates, particularly
tend to move in opposite directions,
for inverse floating rate instruments.
they would be said to have negative co-
For example, suppose that a particu-
variance. Covariance is measured as
lar issuer could sell a five-year fixed
the expected value of the products of
rate note at par if it pays a coupon of
the deviations of two random variables
7.5%. It could also sell a five-year
from their respective means. A variance
floating rate note if it pays LIBOR (L).
is a special case of a covariance. See
Suppose now that the issuer offers an
variance-covariance matrix.
inverse floating rate note paying a
coupon of 22.5% – 2 LIBOR. Thus, if
covenants Clauses in a bond indenture
LIBOR is 7.5%, the instrument pays
that place restrictions on the issuer’s ac-
7.5%. If LIBOR rises 1%, the coupon
tivities, or which provide protections
declines by 2%. If LIBOR declines by
for the bondholder or the issuer. Can
1%, the coupon rises by 2%. The lever-
also refer to clauses within a derivatives
aging up of the coupon is called coupon
contract having a similarly restrictive
leverage.
nature.
coupon rate (1) The fixed rate of inter-
cover (1) In the context of short sales of
est on a debt instrument. (2) The fixed
securities, the return of borrowed secu-
rate of interest on the fixed-rate side of
rities used for a short sale. (2) In bid-
a swap. (3) The floating rate on a float-
ding on auctioned securities, the spread
ing rate note is often referred to as a
between the winning bid and the next
floating coupon.
highest bid.
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covered call–credit facility
covered call A situation in which the
options pay off if and only if some
writer of a call option owns the under-
credit event, such as a default, occurs;
lying asset on which the option is
other swaps and options pay off based
written. Thus, if the option is exercised,
on the difference between the yields on
the option writer can deliver the un-
instruments with dissimilar credit rat-
derlying without having to purchase it.
ings. This difference in yields is called
a credit spread. Credit derivatives were
covered interest arbitrage A strategy re-
first developed in the early 1990s as an
quiring the borrowing of funds in one
outgrowth of total return swaps and
currency for lending in another cur-
options, but the real growth of the mar-
rency with two simultaneous foreign
ket did not begin until the second half
exchange transactions (one spot and
of the 1990s.
one forward) to remove the exchange
rate risk. These strategies are under-
credit enhancement Any of a variety of
taken when the difference between the
measures that improve the creditwor-
interest rates in the money markets is
thiness of a bond, loan, or swap. These
out of line with the difference between
may include guarantees from third
the forward foreign exchange rate and
parties, overcollateralization, reserve
the spot foreign exchange rate. This
funds, and special purpose vehicles
type of covered interest arbitrage re-
that are bankruptcy remote.
sults in an equilibrium state known as
interest rate parity.
credit event Any credit-related con-
dition specified as a credit event by the
CPR See constant prepayment rate.
counterparties to a financial instru-
ment. Credit events will almost always
crack spread The potential for profit to
include extreme conditions, such as a
an oil refiner from the difference be-
default on a required payment, but may
tween the prices of refined products
include less extreme conditions such as
made from oil and the price of the
a downgrade of some reference asset. A
crude oil from which these products are
credit event triggers the termination of
made.
most over-the-counter derivatives.
crack swap/option A swap or option
credit exposure The potential for a fi-
contract in which the reference rate is
nancial loss to result from the inability
linked in some manner to the crack
of a counterparty to a financial trans-
spread. See crack spread.
action to fulfill its obligations. In the
case of a loan or bond, credit exposure
credit arbitrage The derivation of profit
represents the potential for a loss of the
(or, equivalently, cost savings) by ex-
principal. In a swap, credit exposure
ploiting differences in borrowing costs
has two components: current expo-
for different credit borrowers. Credit ar-
sure—representing the current mark-
bitrage is often used as an explanation
to-market value of the position; and
for the use of swaps to reduce corporate
potential exposure—representing fu-
borrowing costs.
ture changes in the mark-to-market
value of the position. Credit exposure
credit derivative An over-the-counter,
is also called credit risk.
usually off–balance sheet, instrument
that makes payments based on some
credit facility Any lending arrange-
specified credit-related measure or
ment (including both the party willing
event. For example, some swaps and
to provide capital and the mechanics
Marshall_001_108 9/27/00 7:29 AM Page 53
credit quality–credit swaps
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of the lending and collateralization
spread are the same. Credit risk premi-