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This glossary presents two kinds of terms:
This is not a general financial or IT glossary. There are many good on-line financial dictionaries. See [Investopedia] and
Please contact us if there are terms you would like added, or discussions that could be expanded.
Aka keyoff, linkage.
See the discussions in Data Structures and Knowledge Base.
See "BDC" in Date Count Conventions for detailed information.
A security trade is done on a clean price basis if the interest is figured independently and than added to the principal (which is figured from the clean price). If interest is not figured separately, it is said to be done on a dirty price basis because the price must include a factor to cover interest bought/sold.
See price below and Clean and Dirty Prices for an in-depth treatment.
Unfortunately, these terms are often used interchangeably (particularly within IT departments). Even [AICPABDSec06] says "receipt or delivery of securities against payment." Adding to the confusion is the fact that in banking (as opposed to the securities industry) clearing an item such as a check is indeed the same as settling it.
Positions at a custodian positions are on a settled (not settlement date) basis. See Date Bases.
See Day Count Conventions.
See also record date and payment date.
More specifically, it is the date that the register entry is entered into the system. If a trade is corrected, for example, the effective date of the reversal and of the new record is the date the correction is done; the effective date of the original trade is not affected.
It is sometimes referred to as booking date or entry date.
See Date Bases for further explanation and a discussion of how it affects positions and balances.
For a trade on a coupon-bearing security, it is the sum of the principal and interest bought/sold (and any fees and commissions). See Bond Prices in the Market for a discussion.
The distinction is important for amortizing securities, i.e., where principal is being paid down over time. The most common examples are asset-backed securities, such as mortgage or credit card pools. The "face" is original principal, e.g., $1,000,000, which never changes. As the mortgage or credit card holders pay down their loans, the remaining principal (the "par") declines.
In terms of valuing the security, it is the par value that is important. The principal amount of a trade = par * price.
For record keeping, the face is most often used, simply because it is fixed. Depositories (such as the Fed) track securities at face value, for instance.
For fixed income securities such as Treasury or corporate bonds, the face and par are the same, because there is no paydown. Par is sometimes defined as the amount that will be received by holders at maturity. While true for many types of bonds, it is true only because they don't pay down principal. This obscures the more precise nature of the term.
If there is a final interest payment (coupon) at maturity, in addition to the principal, this amount is not included in par.
See also declaration date and record date.
See the discussion in Framework.
See also positions and balances.
See also declaration date and payment date.
See the discussions in Data Structures and Knowledge Base.
We avoid defining it in terms of an exchange of securities and/or cash because transactions can settle via pair-offs or other means.
See Transaction Operations for further discussion.
See also clearance for the relationship between these two terms.
See Positions and Balances for further discussion of contractual terms. Transaction Operations addresses a variety of settlement through examples and discussion.
Other terms used for this sense include value date (common in Europe) and contractual settlement date.
The confusion comes when a term is needed for the date that a transaction actually settles. This concept can be very slippery; see Settlement as Trade Status.
Sometimes the term "maturity" is used for this concept, but this can be misleading. It usually refers to the maturity date (17 June 2009 in the example) or the original tenor (e.g., 1 year if the bill were issued on 17 June 2008). For these reasons the term "remaining maturity" is sometimes used.
However, coupon payments also have a time period until the cash payment, and "remaining maturity" would hardly be appropriate.
Note that this is only a convention, like showing debits on the left and credits on the right. There are no implications about the figures themselves beyond this. Positive amounts aren't "good", nor negative amounts "bad". Trading P&L showing as -150 in trial balance format is generally considered better than -100, for instance. Like any convention it requires a period of acclimation.
What this convention captures explicitly, of course, is that debits and credits offset. This makes enforcing balancing and recognizing offsetting positions very simple. For an audience in accounting and IT, where these concerns are paramount, this is generally the most useful convention (see Audience for the purposes of this site). This is the convention used most commonly within accounting systems.
The other common convention is "natural sign". A credit in an asset account would appear as a negative, while a credit in a liability account would appear as a positive number. This is a useful convention for financial reports, which generally have a wider and different audience.
There are a number of drawbacks with the natural sign convention for material such as that on this site. First, the natural sign convention makes it very difficult to enforce balancing or recognize offsetting amounts, of course. Next, it is extremely (and painfully) dependent on getting the association of accounts with their natural signs correct. Further, it avoids the issue of how to represent totals, where the choice of "natural sign" may not be obvious. Certain accounts also present a problem for this approach. For instance, Accumulated Depreciation normally has a credit balance, but that credit balance is "naturally" presented with a minus sign.
While we have been discussing presentation formats, trial balance format is particularly well-suited for the storage of values, for all the reasons given above. With such a basis, presenting figures in natural sign (or another convention) is relatively straightforward. The reverse is not true.
If you invest $100 and receive $107 in one year's time, your yield (or return) is 7%.
If you are going to receive $107 in one year on an investment, and it's present value is $100, we say the investment is being discounted at 7%.
In all cases the percentage is based on an annual basis. If you invest $100 and receive $103.50 in half a year, your return is 7.1225%.
There are alternative definitions of these terms, particularly yield.
These measures, and bond valuation and pricing more generally, are treated in detail in Bond Pricing in the Market.
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