Glossary

Asset-Backed Security: A securitized interest in a pool of assets.

Bond: An interest-bearing promise to pay a specified sum of money - the principal amount - due on a specific date.

Collateral: Assets held to secure an obligation.

Collateralized Debt Obligation: A type of asset-backed security with a pool of corporate bonds or bank loans as collateral

Concentration: Aggregation of exposure to geographic area, asset type, counterparty or other risk.

Covenant: An issuer's enforceable promise to perform or refrain from performing certain actions.

Credit Enhancement: Any methodology that reduces the credit exposure of a transaction (e.g., bond insurance, a letter of credit or credit default swap).

Credit Risk: The risk that a counterparty may fail to perform on its obligations.

Cross Collateralization: A situation in which collateral for one loan also serves as collateral for other loans.

Cross Default: A situation in which a default under one security agreement constitutes a default under another.

Debt Service: The principal and interest charges payable on outstanding debt, the principal of maturing serial bonds and the required contributions to a sinking fund for term bonds.

Default Risk: Possibility that an issuer will fail to pay principal or interest when due.

Derivative Instrument: A type of financial instrument which derives its value from the value of other financial instruments.

Diversification: A technique for managing risk or to improve overall portfolio performance where risk is divided among multiple uncorrelated exposures.

Downgrade Risk: Possibility that a bond's rating will be lowered because the issuer's financial condition, or the financial condition of a party to the financial transaction, deteriorates.

Equity: The amount by which the value of the collateral exceeds the debtor's obligation.

General Obligation Bond: A bond secured by the full faith and credit of an issuer with taxing power.

High Yield (Junk) Bond: A bond which pays a high yield due to significant credit risk.

Investment-Grade: A bond considered suitable for preservation of invested capital by the rating agencies and rated Baa or BBB or above.

Issuer: A governmental, corporate or special purpose entity that borrows money through the sale of bonds or other securities.

Legal Risk: Risk relating to legal uncertainties.

Leverage: The compounding of risks; frequently the ratio of debt to equity.

Liquidity: The ability to easily convert a security into cash.

Market Risk: Risk from changes in market prices.

Marketability: A measure of the ease or difficulty with which a security can be sold.

Maturity Date: The date when the principal amount of a security becomes due and payable.

Monoline Bond Insurer: A financial guaranty company that guarantees all scheduled interest and principal payments on its insured bonds and writes no other line of insurance.

Mortgage-Backed Security: A security backed by a pool of mortgages.

Multiline Insurer: An insurance company that writes several lines of insurance, one of which may be financial guaranty.

Municipal Lease: A lease with a public entity. Usually, it can be terminated if funds for payments are not appropriated.

Municipal Bond: A debt obligation of a state or local government entity. There are two kinds of municipal bonds -- revenue bonds and general obligation bonds.

Municipal Bond Insurance: Policy underwritten by a private insurer guaranteeing interest and principal payments on a municipal bond in the event of an issuer default.

Operational Risk: Risk from mistakes or failures in operations or performance.

Pass-Through Securities: Securities in which investors own interests in a pool of financial assets and receive pro rata shares of the cash flows the assets generate.

Primary Instrument: A financial instrument whose value is determined by the market and is not derived from that of another instrument.

Primary Market: The marketplace in which new issues are brought to market and traded.

Principal: The face amount of a bond that must be repaid at maturity, as separate from interest.

Ratings: Designations used to give relative indications of ability to repay principal and interest on a timely basis.

Reinvestment Risk: Risk from uncertainty as to the interest rate at which future cash flows may be invested.

Reinsurance: Insurance provided by one insurance company to another; usually to the company writing the original policy.

Residual Value: The projected market value of an asset at the end of a financing term.

Revenue Bond: A bond payable from the non-tax revenues generated by a facility constructed with the proceeds of the bond issue.

Risk: Exposure to uncertainty.

Salvage Value: The value of an asset after its useful life has expired.

Securitization: Packaging of assets to allow the issuance of securities conveying an ownership interest in the assets and their cash flows.

Secondary Market: Ongoing market for bonds previously offered or sold in the primary market.

Spread Risk: Risk from changes in interest rate differences between a reference and a market security.

Stress Test: A type of risk measure used by rating agencies to determine the claims-paying strength of financial guarantors.

Systemic Risk: Risk which threatens an entire financial system.

Yield: Percentage rate of return earned on a security.

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