Glossary of terms
Published 09/10/2010 | 05:00
Bond: An IOU that banks, big businesses and governments use to raise money. An investment company pays over an amount of money, and is guaranteed to be re-paid in full at a certain date. The investor is also usually guaranteed interest.
Bondholder: The investor who has loaned money to banks, big business or government. Usually pension funds, asset management firms and hedge funds. Can include governments.
Default: Forcing a change in the agreed terms of a bond. Could involve not paying the full interest rate or refusing to repay the bond in full.
Sovereign Bonds: Bonds issued by governments. About €20bn in Irish Government bonds were issued this year. The money is being used to bridge the gap between the money the State is taking in from taxes and the money being spent.
Government Guaranteed Bonds: Bonds that are issued by banks and backed up by the State's promise that the loans will be re-paid. The Government guarantee makes it cheaper for banks to get loans.
Senior Bonds: Seen as 'safe' bonds, since Irish law means anyone who buys senior bonds has as much entitlement to be repaid as anyone who puts money on the deposit in a bank. The trade-off for this safety is a lower interest rate.
Sub-ordinate Bonds: Riskier bonds that will be repaid last in the event of a bank collapse. Those who buy sub-ordinate bonds are paid a higher interest rate in exchange for this risk.
Haircut: Jargon for the discount a bondholder accepts. If a bondholder originally loaned out €10m to a company and only gets back €5m, then they're said have taken a 'haircut' of €5m.
Liquidity management exercise: Jargon for how banks, businesses and governments can change the terms of bonds by agreement. If a bank is paying 5pc interest on loans that are due to be repaid next year, it may offer to pay a higher rate of interest so it can keep the money for longer. The deal gives the bank some breathing space, and gives the bondholders a higher rate. Bank may ask bondholders to take a 'haircut' in exchange for early repayment.