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Positive convexity

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Definition of Positive convexity

Positive Convexity Image 1

Positive convexity

property of option-free bonds whereby the price appreciation for a large upward change
in interest rates will be greater (in absolute terms) than the price depreciation for the same downward change
in interest rates.



Related Terms:

Convexity

A measure of the rate of change in duration; measured in time.
The greater the rate of change, the more the duration changes as yield changes.


Effective convexity

The convexity of a bond calculated with cash flows that change with yields.


Extraordinary positive value

A positive net present value.


Negative convexity

A bond characteristic such that the price appreciation will be less than the price
depreciation for a large change in yield of a given number of basis points.


Positive carry

Related:net financing cost



Positive covenant (of a bond)

A bond covenant that specifies certain actions the firm must take. Also called
and affirmative covenant.


Positive float

See:float.


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Positive Loan Covenants

Loan covenants expressing minimum and maximum financial measures
that must be met by a borrower.


Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees

A committee formed in response to SEC chairman Arthur Levitt's initiative to improve the financial
reporting environment in the United States. In a report dated February 1999, the committee
made recommendations for new rules for regulation of financial reporting in the United States that
either duplicated or carried forward the recommendations of the Treadway Commission.


Effective annual interest rate

An annual measure of the time value of money that fully reflects the effects of
compounding.


effective annual interest rate

Interest rate that is annualized using compound interest.


Effective annual yield

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


Effective Annual Yield

Annualized rate of return on a security computed using compound
interest techniques


Effective call price

The strike price in an optional redemption provision plus the accrued interest to the
redemption date.


Effective date

In an interest rate swap, the date the swap begins accruing interest.


Effective duration

The duration calculated using the approximate duration formula for a bond with an
embedded option, reflecting the expected change in the cash flow caused by the option. Measures the
responsiveness of a bond's price taking into account the expected cash flows will change as interest rates
change due to the embedded option.


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Effective Exchange Rate

The weighted average of several exchange rates, where the weights are determined by the extent of our trade done with each country.


Effective Interest Rate

The rate of interest actually earned on an investment. It is
calculated as the ratio of the total amount of interest actually
earned for one year divided by the amount of the principal.



Effective margin (EM)

Used with SAT performance measures, the amount equaling the net earned spread, or
margin, of income on the assets in excess of financing costs for a given interest rate and prepayment rate
scenario.


Effective rate

A measure of the time value of money that fully reflects the effects of compounding.


Effective spread

The gross underwriting spread adjusted for the impact of the announcement of the common
stock offering on the firm's share price.


Effective Tax Rate

The total tax provision divided by pretax book income from continuing
operations.


effectiveness

a measure of how well an organization’s goals
and objectives are achieved; compares actual output results
to desired results; determination of the successful accomplishment
of an objective


Panel on Audit Effectiveness

A special committee of the Public Oversight Board that was created
to perform a comprehensive review and evaluation of the way independent audits of financial
statements of publicly traded companies are performed. The panel found generally that the
quality of audits is fundamentally sound. The panel did recommend the expansion of audit steps
designed to detect fraud.


Policy-Ineffectiveness Proposition

Theory that anticipated policy has no effect on output.


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).


Asset activity ratios

Ratios that measure how effectively the firm is managing its assets.


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Backdating

A procedure for making the effective date of a policy earlier than the application date. Backdating is often used to make the age of the consumer at policy issue lower than it actually was in order to get a lower premium.



Backwardation

A market condition in which futures prices are lower in the distant delivery months than in
the nearest delivery month. This situation may occur in when the costs of storing the product until eventual
delivery are effectively subtracted from the price today. The opposite of contango.


Basic Earnings Power Ratio

Percentage of earnings relative to total assets; indication of how
effectively assets are used to generate earnings. It is calculated by
dividing earnings before interest and taxes by the book value of all
assets.


Bond equivalent yield

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


business process reengineering (BPR)

the process of combining information technology to create new and more effective
business processes to lower costs, eliminate unnecessary
work, upgrade customer service, and increase
speed to market


CFTC

The Commodity Futures Trading Commission is the federal agency created by Congress to regulate
futures trading. The Commodity Exchange Act of 1974 became effective April 21, 1975. Previously, futures
trading had been regulated by the Commodity Exchange Authority of the USDA.


common body of knowledge (CBK)

the minimum set of knowledge needed by a person to function effectively in a particular field


Defined benefit plan

A pension plan in which the sponsor agrees to make specified dollar payments to
qualifying employees. The pension obligations are effectively the debt obligation of the plan sponsor.
Related: defined contribution plan


Formula basis

A method of selling a new issue of common stock in which the SEC declares the registration
statement effective on the basis of a price formula rather than on a specific range.


In the box

This means that a dealer has a wire receipt for securities indicating that effective delivery on them
has been made.


Insured Retirement Plan

This is a recently coined phrase describing the concept of using Universal Life Insurance to tax shelter earnings which can be used to generate tax-free income in retirement. The concept has been described by some as "the most effective tax-neutralization strategy that exists in Canada today."
In addition to life insurance, a Universal Life Policy includes a tax-sheltered cash value fund that cannot exceed the policy's face value. Deposits made into the policy are partially used to fund the life insurance and partially grow tax sheltered inside the policy. It should be pointed out that in order for this to work, you must make deposits into this kind of policy well in excess of the cost of the underlying insurance. Investment of the cash value inside the policy are commonly mutual fund type investments. Upon retirement, the policy owner can draw on the accumulated capital in his/her policy by using the policy as collateral for a series of demand loans at the bank. The loans are structured so the sum of money borrowed plus interest never exceeds 75% of the accumulated investment account. The loans are only repaid with the tax free death benefit at the death of the policy holder. Any remaining funds are paid out tax free to named beneficiaries.
Recognizing the value to policy holders of this use of Universal Life Insurance, insurance companies are reworking features of their products to allow the policy holder to ask to have the relationship of insurance to investment growth tracked so that investment growth inside the policy may be maximized. The only potential downside of this strategy is the possibility of the government changing the tax rules to prohibit using a life insurance product in this manner.


internal accounting controls

Refers to forms used and procedures
established by a business—beyond what would be required for the
record-keeping function of accounting—that are designed to prevent
errors and fraud. Two examples of internal controls are (1) requiring a
second signature by someone higher in the organization to approve a
transaction in excess of a certain dollar amount and (2) giving customers
printed receipts as proof of sale. Other examples of internal
control procedures are restricting entry and exit routes of employees,
requiring all employees to take their vacations and assigning another
person to do their jobs while they are away, surveillance cameras, surprise
counts of cash and inventory, and rotation of duties. Internal controls
should be cost-effective; the cost of a control should be less than
the potential loss that is prevented. The guiding principle for designing
internal accounting controls is to deter and detect errors and dishonesty.
The best internal controls in the world cannot prevent most fraud
by high-level managers who take advantage of their positions of trust
and authority.


Internal rate of return

a. The average annual yield earned by an investment during the period held.
b. The effective rate of interest on a loan.
c. The discount rate in discounted cash flow analysis.
d. The rate that adjusts the value of future cash receipts earned by an investment so that interest earned equals the original cost.
See Yield to maturity.


Internal rate of return (IRR)

A discounted cash flow technique used for investment appraisal that calculates the effective cost of capital that produces a net present value of zero from a series of future cash flows and an
initial capital investment.


Lock-out

With PAC bond CMO classes, the period before the PAC sinking fund becomes effective. With
multifamily loans, the period of time during which prepayment is prohibited.


Magic of diversification

The effective reduction of risk (variance) of a portfolio, achieved without reduction
to expected returns through the combination of assets with low or negative correlations (covariances).
Related: Markowitz diversification


Market conversion price

Also called conversion parity price, the price that an investor effectively pays for
common stock by purchasing a convertible security and then exercising the conversion option. This price is
equal to the market price of the convertible security divided by the conversion ratio.


Nominal

In name only. Differences in compounding cause the nominal rate to differ from the effective
interest rate. Inflation causes the purchasing power of money to differ from one time to another.


Nominal annual rate

An effective rate per period multiplied by the number of periods in a year.


Pairoff

A buy-back to offset and effectively liquidate a prior sale of securities.


performance evaluation

the process of determining the degree
of success in accomplishing a task; it equates to both
effectiveness and efficiency


practical standard

a standard that can be reached or slightly
exceeded with reasonable effort by workers; it allows for
normal, unavoidable time problems or delays and for
worker breaks; it is often believed to be most effective in
inducing the best performance from workers, since such
a standard represents an attainable challenge


Precautionary motive

A desire to hold cash in order to be able to deal effectively with unexpected events
that require cash outlay.


Receivables turnover ratio

Total operating revenues divided by average receivables. Used to measure how
effectively a firm is managing its accounts receivable.


Settlement rate

The rate suggested in Financial Accounting Standard Board (FASB) 87 for discounting the
obligations of a pension plan. The rate at which the pension benefits could be effectively settled off the
pension plan wished to terminate its pension obligation.


Side Letter

A separate agreement that is used to clarify or modify the terms of a sales agreement.
Side letters become a problem for revenue recognition when they undermine a sales agreement
by effectively negating some or all of an agreement's underlying terms and are maintained
outside of normal reporting channels.


Stated conversion price

At the time of issuance of a convertible security, the price the issuer effectively
grants the security holder to purchase the common stock, equal to the par value of the convertible security
divided by the conversion ratio.


supply-chain management

the cooperative strategic planning,
controlling, and problem solving by a company and
its vendors and customers to conduct efficient and effective
transfers of goods and services within the supply chain


Swap buy-back

The sale of an interest rate swap by one counterparty to the other, effectively ending the swap.


Tax differential view ( of dividend policy)

The view that shareholders prefer capital gains over dividends,
and hence low payout ratios, because capital gains are effectively taxed at lower rates than dividends.


Yield

The percentage rate of return paid on a stock in the form of dividends, or the effective rate of interest
paid on a bond or note.



 

 

 

 

 

 

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