Definition of Liquid yield option note (LYON)

Liquid yield option note (LYON)

Zero-coupon, callable, putable, convertible bond invented by Merrill

Liquid yield option note (LYON)

Zero-coupon, callable, putable, convertible bond invented by Merrill Lynch & Co.

Abandonment option

The option of terminating an investment earlier than originally planned.

Accounting liquidity

The ease and quickness with which assets can be converted to cash.

American option

An option that may be exercised at any time up to and including the expiration date.
Related: European option

American-style option

An option contract that can be exercised at any time between the date of purchase and
the expiration date. Most exchange-traded options are American style.

Annual percentage yield (APY)

The effective, or true, annual rate of return. The APY is the rate actually
earned or paid in one year, taking into account the affect of compounding. The APY is calculated by taking
one plus the periodic rate and raising it to the number of periods in a year. For example, a 1% per month rate
has an APY of 12.68% (1.01^12).

Arbitrage-free option-pricing models

yield curve option-pricing models.

Asian option

option based on the average price of the asset during the life of the option.

BAN (Bank anticipation notes)

notes issued by states and municipalities to obtain interim financing for
projects that will eventually be funded long term through the sale of a bond issue.

Bargain-purchase-price option

Gives the lessee the option to purchase the asset at a price below fair market
value when the lease expires.

Barrier options

Contracts with trigger points that, when crossed, automatically generate buying or selling of
other options. These are very exotic options.

Basket options

Packages that involve the exchange of more than two currencies against a base currency at
expiration. The basket option buyer purchases the right, but not the obligation, to receive designated
currencies in exchange for a base currency, either at the prevailing spot market rate or at a prearranged rate of
exchange. A basket option is generally used by multinational corporations with multicurrency cash flows
since it is generally cheaper to buy an option on a basket of currencies than to buy individual options on each
of the currencies that make up the basket.

Binomial option pricing model

An option pricing model in which the underlying asset can take on only two
possible, discrete values in the next time period for each value that it can take on in the preceding time period.

Black-Scholes option-pricing model

A model for pricing call options based on arbitrage arguments that uses
the stock price, the exercise price, the risk-free interest rate, the time to expiration, and the standard deviation
of the stock return.

Bond equivalent yield

Bond yield calculated on an annual percentage rate method. Differs from annual
effective yield.

Bond-equivalent yield

The annualized yield to maturity computed by doubling the semiannual yield.

Call an option

To exercise a call option.

Call option

An option contract that gives its holder the right (but not the obligation) to purchase a specified
number of shares of the underlying stock at the given strike price, on or before the expiration date of the
contract.
Call premium
Premium in price above the par value of a bond or share of preferred stock that must be paid to
holders to redeem the bond or share of preferred stock before its scheduled maturity date.

Capital gains yield

The price change portion of a stock's return.

Compound option

option on an option.

Convenience yield

The extra advantage that firms derive from holding the commodity rather than the future.

Coupon equivalent yield

True interest cost expressed on the basis of a 365-day year.

Covered or hedge option strategies

Strategies that involve a position in an option as well as a position in the
underlying stock, designed so that one position will help offset any unfavorable price movement in the other,
including covered call writing and protective put buying. Related: naked strategies

Currency option

An option to buy or sell a foreign currency.

Current yield

For bonds or notes, the coupon rate divided by the market price of the bond.

Dealer options

Over-the-counter options, such as those offered by government and mortgage-backed
securities dealers.

Delivery options

The options available to the seller of an interest rate futures contract, including the quality
option, the timing option, and the wild card option. Delivery options make the buyer uncertain of which
Treasury Bond will be delivered or when it will be delivered.

Demand master notes

Short-term securities that are repayable immediately upon the holder's demand.

Dividend yield (Funds)

Indicated yield represents return on a share of a mutual fund held over the past 12
months. Assumes fund was purchased 1 year ago. Reflects effect of sales charges (at current rates), but not
redemption charges.

Dividend yield (Stocks)

Indicated yield represents annual dividends divided by current stock price.

Documented discount notes

Commercial paper backed by normal bank lines plus a letter of credit from a
bank stating that it will pay off the paper at maturity if the borrower does not. Such paper is also referred to as
LOC (letter of credit) paper.

Doubling option

A sinking fund provision that may allow repurchase of twice the required number of bonds
at the sinking fund call price.

Down-and-in option

Barrier option that comes into existence if asset price hits a barrier.

Down-and-out option

Barrier option that expires if asset price hits a barrier.

Earnings yield

The ratio of earnings per share after allowing for tax and interest payments on fixed interest
debt, to the current share price. The inverse of the price/earnings ratio. It's the Total Twelve Months earnings
divided by number of outstanding shares, divided by the recent price, multiplied by 100. The end result is
shown in percentage.

Effective annual yield

Annualized interest rate on a security computed using compound interest techniques.

Elasticity of an option

Percentage change in the value of an option given a 1% change in the value of the
option's underlying stock.

Embedded option

An option that is part of the structure of a bond that provides either the bondholder or
issuer the right to take some action against the other party, as opposed to a bare option, which trades
separately from any underlying security.

Equity options

Securities that give the holder the right to buy or sell a specified number of shares of stock, at
a specified price for a certain (limited) time period. Typically one option equals 100 shares of stock.

Equivalent bond yield

Annual yield on a short-term, non-interest bearing security calculated so as to be
comparable to yields quoted on coupon securities.

Equivalent taxable yield

The yield that must be offered on a taxable bond issue to give the same after-tax
yield as a tax-exempt issue.

European option

option that may be exercised only at the expiration date. Related: american option.

European-style option

An option contract that can only be exercised on the expiration date.

Euro-medium term note (Euro-MTN)

A non-underwritten Euronote issued directly to the market. Euro-
MTNs are offered continuously rather than all at once as a bond issue is. Most Euro-MTN maturities are
under five years.

Euro-note

Short- to medium-term debt instrument sold in the Eurocurrency market.

Exercising the option

The act buying or selling the underlying asset via the option contract.

Extendable notes

note the maturity of which can be extended by mutual agreement of the issuer and
investors.

Flattening of the yield curve

A change in the yield curve where the spread between the yield on a long-term
and short-term Treasury has decreased. Compare steepening of the yield curve and butterfly shift.

Flip-flop note

note that allows investors to switch between two different types of debt.

Floating-rate note (FRN)

note whose interest payment varies with short-term interest rates.

Foreign currency option

An option that conveys the right to buy or sell a specified amount of foreign
currency at a specified price within a specified time period.

Futures option

An option on a futures contract. Related: options on physicals.

Garmen-Kohlhagen option pricing model

A widely used model for pricing foreign currency options.

Greenshoe option

option that allows the underwriter for a new issue to buy and resell additional shares.

High-yield bond

See:junk bond.

Index and Option Market (IOM)

A division of the CME established in 1982 for trading stock index
products and options. Related: Chicago Mercantile Exchange (CME).

Index option

A call or put option based on a stock market index.

Indicated yield

The yield, based on the most recent quarterly rate times four. To determine the yield, divide
the annual dividend by the price of the stock. The resulting number is represented as a percentage. See:
dividend yield.

Intrinsic value of an option

The amount by which an option is in-the-money. An option which is not in-themoney
has no intrinsic value. Related: in-the-money.

Inverse floating rate note

A variable rate security whose coupon rate increases as a benchmark interest rate declines.

Involuntary liquidation preference

A premium that must be paid to preferred or preference stockholders if
the issuer of the stock is forced into involuntary liquidation.

Irrational call option

The implied call imbedded in the MBS. Identified as irrational because the call is
sometimes not exercised when it is in the money (interest rates are below the threshold to refinance).
Sometimes exercised when not in the money (home sold without regard to the relative level of interest rates).

Liquid asset

Asset that is easily and cheaply turned into cash - notably cash itself and short-term securities.

Liquidation

When a firm's business is terminated, assets are sold, proceeds pay creditors and any leftovers
are distributed to shareholders. Any transaction that offsets or closes out a Long or short position. Related:
buy in, evening up, offsetliquidity.

Liquidation rights

The rights of a firm's securityholders in the event the firm liquidates.

Liquidation value

Net amount that could be realized by selling the assets of a firm after paying the debt.

Liquidator

Person appointed by unsecured creditors in the United Kingdom to oversee the sale of an
insolvent firm's assets and the repayment of its debts.

Liquidity

A market is liquid when it has a high level of trading activity, allowing buying and selling with
minimum price disturbance. Also a market characterized by the ability to buy and sell with relative ease.

Liquidity diversification

Investing in a variety of maturities to reduce the price risk to which holding long
bonds exposes the investor.

Liquidity preference hypothesis

The argument that greater liquidity is valuable, all else equal. Also, the
theory that the forward rate exceeds expected future interest rates.

Liquidity premium

Forward rate minus expected future short-term interest rate.

Liquidity ratios

Ratios that measure a firm's ability to meet its short-term financial obligations on time.

Liquidity risk

The risk that arises from the difficulty of selling an asset. It can be thought of as the difference
between the "true value" of the asset and the likely price, less commissions.

Liquidity theory of the term structure

A biased expectations theory that asserts that the implied forward
rates will not be a pure estimate of the market's expectations of future interest rates because they embody a
liquidity premium.

Lookback option

An option that allows the buyer to choose as the option strike price any price of the
underlying asset that has occurred during the life of the option. If a call, the buyer will choose the minimal
price, whereas if a put, the buyer will choose the maximum price. This option will always be in the money.

Liquidating dividend

Payment by a firm to its owners from capital rather than from earnings.

Liquidity ratios

Ratios that measure a firm's ability to meet its short-term financial obligations on time.

Margin requirement (Options)

The amount of cash an uncovered (naked) option writer is required to
deposit and maintain to cover his daily position valuation and reasonably foreseeable intra-day price changes.

Medium-term note

A corporate debt instrument that is continuously offered to investors over a period of
time by an agent of the issuer. Investors can select from the following maturity bands: 9 months to 1 year,
more than 1 year to 18 months, more than 18 months to 2 years, etc., up to 30 years.

Money market notes

Publicly traded issues that may be collateralized by mortgages and MBSs.

Multi-option financing facility

A syndicated confirmed credit line with attached options.

Municipal notes

Short-term notes issued by municipalities in anticipation of tax receipts, proceeds from a
bond issue, or other revenues.

Naked option strategies

An unhedged strategy making exclusive use of one of the following: Long call
strategy (buying call options ), short call strategy (selling or writing call options), Long put strategy (buying
put options ), and short put strategy (selling or writing put options). By themselves, these positions are called
naked strategies because they do not involve an offsetting or risk-reducing position in another option or the
underlying security.
Related: covered option strategies.

Non-parallel shift in the yield curve

A shift in the yield curve in which yields do not change by the same
number of basis points for every maturity. Related: Parallel shift in the yield curve.

Note

Debt instruments with initial maturities greater than one year and less than 10 years.

Note agreement

A contract for privately placed debt.

Note issuance facility (NIF)

An agreement by which a syndicate of banks indicates a willingness to accept
short-term notes from borrowers and resell these notes in the Eurocurrency markets.

Notes to the financial statements

A detailed set of notes immediately following the financial statements in
an annual report that explain and expand on the information in the financial statements.

Option

Gives the buyer the right, but not the obligation, to buy or sell an asset at a set price on or before a
given date. Investors, not companies, issue options. Investors who purchase call options bet the stock will be
worth more than the price set by the option (the strike price), plus the price they paid for the option itself.
Buyers of put options bet the stock's price will go down below the price set by the option. An option is part of
a class of securities called derivatives, so named because these securities derive their value from the worth of
an underlying investment.

Option elasticity

The percentage increase in an option's value given a 1% change in the value of the
underlying security.

Option not to deliver

In the mortgage pipeline, an additional hedge placed in tandem with the forward or
substitute sale.

Option premium

The option price.

Option price

Also called the option premium, the price paid by the buyer of the options contract for the right
to buy or sell a security at a specified price in the future.

Option seller

Also called the option writer , the party who grants a right to trade a security at a given price in
the future.

Option writer

option seller.

Option-adjusted spread (OAS)

1) The spread over an issuer's spot rate curve, developed as a measure of
the yield spread that can be used to convert dollar differences between theoretical value and market price.
2) The cost of the implied call embedded in a MBS, defined as additional basis-yield spread. When added to the
base yield spread of an MBS without an operative call produces the option-adjusted spread.

Options contract

A contract that, in exchange for the option price, gives the option buyer the right, but not
the obligation, to buy (or sell) a financial asset at the exercise price from (or to) the option seller within a
specified time period, or on a specified date (expiration date).

Options contract multiple

A constant, set at $100, which when multiplied by the cash index value gives the
dollar value of the stock index underlying an option. That is, dollar value of the underlying stock index = cash
index value x $100 (the options contract multiple).

Options on physicals

Interest rate options written on fixed-income securities, as opposed to those written on
interest rate futures contracts.

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