Glossary of Financial Terms
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Yankee Bond
Bond issued in the U.S. by foreign companies or agencies. The Yankee bond is denominated in U.S. dollars. For example, if Canadian Tire issues bonds in New York with a total par value of $80-million U.S., then these bonds will be referred to as Yankee bonds. Since the bonds are denominated in U.S. dollars, the coupons will also be paid in U.S. dollars.
In order to perform the issuance, the foreign identity must apply to the Securities and Exchange Commission (SEC) in the U.S. and obtain a formal approval. This procedure can take several months, needless to say, not all foreign companies or agencies can qualify even if they don’t mind the wait. For those who are not likely to qualify, they can issue bonds without the SEC approval. In this case, they are referred to as “144A Bond.”
See “Bond,” “Coupon Payments” and “Face Value” for basic knowledge of bonds.
Also see “Bulldog Bond,” “Samurai Bond,” “144A Bond” and “SEC.”
Yield Curve
Synonym of “term structure of interest rates.”
Yield to Maturity
An investing in bond’s average rate of return. It is the rate of return a bond investor can expect if he continues to hold the bond to maturity and is able to reinvest all the coupons at this rate of return. In a nutshell, yield to maturity is nothing but the internal rate of return on a bond. Since the rate at which the coupons can be reinvested is generally governed by the market, the yield to maturity is merely a benchmark number. At maturity, the actual realized return may be higher or lower than the yield to maturity that was initially calculated, depending on the interest rate environment.
See also “Bond.”
Yield Spread
It is the difference between the yield to maturity of a corporate bond and that of a risk- free government bond. Suppose the yield to maturity of a 8-year IBM bond is 2.8% while that of a comparable Treasury note is 2.5%. Then the difference in yield, 0.3%, is the so-called yield spread. It basically measures the credit risk of IBM bonds. In essence, it is the annual return investors demand for bearing the default risk of IBM.