Debentures and Bonds Financial Definitions; F thru K header graphic

Debentures and Bonds - Definitions; F thru K

Most UK government securities (e.g. Treasury Loan, Exchequer Stock, War Loan) are registered, so that their locality is determined by the place of registration. However, some bonds issued by the UK government (containing an express obligation to pay) are governed by the general rule that a debt due from the Crown is a specialty debt, situated where the document evidencing the obligation is physically found.

Debentures if under seal, are specialty debts, locally situated where the document is found. So, also, are debts due from the Crown, or under a statute, whether under seal or under hand, and even when they are secured by registered bonds.

Most UK government securities (e.g. Treasury Loan, Exchequer Stock, War Loan) are registered, so that their locality is determined by the place of registration. However, some bonds issued by the UK government (containing an express obligation to pay) are governed by the general rule that a debt due from the Crown is a specialty debt, situated where the document evidencing the obligation is physically found.
Interest is the cost to the borrower of borrowing money. It is a payment from the borrower to the lender. In certain circumstances at the same time that the borrower pays the interest, he is required by ICTA88/S349 to deduct tax at the basic rate.

Agreements for the avoidance of double taxation have been negotiated between the UK and the governments of many other countries that provide for residents of those other countries to claim relief from UK tax. These agreements provide for relief to be allowed either at a reduced rate of UK tax or for exemption from UK tax to be allowed. The benefit of a double taxation agreement cannot be assumed; a claim must be made by the non-resident recipient of the interest.

"Interest" is defined in Article 11 of the OECD Model Double Taxation Agreement (DTA) as

"The term "interest" as used in this Article means income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor's profits, and in particular, income from government securities and income from bonds and debentures, including premiums and prizes attaching to such securities, bonds and debentures. Penalty charges for late payment shall not be regarded as interest for the purpose of this Article."

The OECD Model double taxation agreement is used when countries are negotiating a new bilateral treaty. However, the standard text is only the starting point, used to inform discussions. For instance, the UK does not normally include the words "including premiums and prizes attaching to such securities, bonds or debentures". But the UK does seek to include additional words to ensure that payments which are categorised as a dividend or other distribution of profits are dealt with under the terms of the article in the treaty that deals with dividends rather than under the terms of the interest article.

The country with which the agreement is being negotiated will often also have a preferred form of words that it normally seeks to include in the text of DTAs that it enters into. For this reason the final agreed text of double taxation agreements often contain variations in their terms country by country.

Interest can be calculated by reference to a fixed rate. Or it may be calculated by reference to a stated formula such as 1% above the London Interbank lending rate and is paid on a fixed date.

Face Value - The value of a bond that appears on the face of the bond, unless the value is otherwise specified by the issuing company. Face value is ordinarily the amount the issuing company promises to pay at maturity. Face value is not an indication of market value. Sometimes referred to as par value.

Financial Futures - Futures contracts based on financial instruments such as U.S. Treasury bonds, CDs and other interest-sensitive issues, currencies and stock market indicators.

Fiscal Year - A corporation's accounting year. Due to the nature of their particular business, some companies do not use the calendar year for their bookkeeping. A typical example is the department store that finds December 31 too early a date to close its books after the Christmas rush. For that reason many stores wind up their accounting year January 31. Their fiscal year, therefore, runs from February 1 of one year through January 31 of the next. The fiscal year of other companies may run from July 1 through the following June 30. Most companies, though, operate on a calendar year basis.

Fixed Charges - A company's fixed expenses, such as bond interest, which it has agreed to pay whether or not earned, and which are deducted from income before earnings on equity capital are computed.

Flat Income Bond - This term means that the price at which a bond is traded includes consideration for all unpaid accruals of interest. Bonds that are in default of interest or principal are traded flat. Income bonds that pay interest only to the extent earned are usually traded flat. All other bonds are usually dealt in "and interest," which means that the buyer pays to the seller the market price plus interest accrued since the last payment date.

Floor - The huge trading area - about the size of a football field - where stocks, bonds and options are bought and sold on the New York Stock Exchange.

Floor Broker - A member of the Stock Exchange who executes orders on the floor of the Exchange to buy or sell any listed securities.

Formula Investing - An investment technique. One formula calls for the shifting of funds from common shares to preferred shares or bonds as a selected market indicator rises above a certain predetermined point - and the return of funds to common share investments as the market average declines.

Free and Open Market - A market in which supply and demand are freely expressed in terms of price. Contrasts with a controlled market in which supply, demand and price may all be regulated.

Fundamental Research - Analysis of industries and companies based on such factors as sales, assets, earnings, products or services, markets and management. As applied to the economy, fundamental research includes consideration of gross national product, interest rates, unemployment, inventories, savings, etc.

Funded Debt - Usually interest-bearing bonds or debentures of a company. Could include long-term bank loans. Does not include short-term loans, preferred or common stock.

Futures - Exchange traded contracts specifying a future date of delivery or receipt of a certain amount of a specific tangible or intangible product. The commodities traded in futures markets include stock index futures, agricultural products like wheat, soybeans and pork bellies; metals; and financial instruments. Futures are used by business as a hedge against unfavorable price changes, and by speculators who hope to profit from such changes.

General Mortgage Bond - A bond that is secured by a blanket mortgage on the company's property but may be outranked by one or more other mortgages.

Gilt-Edged - High-grade bond issued by a company that has demonstrated its ability to earn a comfortable profit over a period of years and pay its bondholders their interest without interruption.

Give-Up - A term with many different meanings. For one, a member of the Exchange on the floor may act for a second member by executing an order for him or her with a third member. The first member tells the third member that he or she is acting on behalf of the second member and "gives up" the second member's name rather than his or her own.

Gold Fix - The setting of the price of gold by dealers (especially in a twice daily London meeting at the central bank); the fix is the fundamental worldwide price for setting prices of gold bullion and gold-related contracts and products.

Good Delivery - Certain basic qualifications must be met before a security sold on the Exchange may be delivered. The security must be in proper form to comply with the contract of sale and to transfer title to the purchaser.

Good 'Til Canceled (GTC) or Open Order - An order to buy or sell that remains in effect until it is either executed or canceled.

Government Bonds - Obligations of the U.S. Government, regarded as the highest-grade securities issues.

Growth Stock - Stock of a company with a record of growth in earnings at a relatively rapid rate.

Hedging - The purchase or sale of a derivative security (such as options or futures) in order to reduce or neutralize all or some portion of the risk of holding another security.

Holding Company - A Corporation that owns the securities of another, in most cases with voting control.

Hypothecation - The pledging of securities as collateral - for example, to secure the debit balance in a margin account.

Income Bond - Generally income bonds promise to repay principal but to pay interest only when earned. In some cases unpaid interest on an income bond may accumulate as a claim against the corporation when the bond becomes due. An income bond may also be issued in lieu of preferred stock.

Indenture - A written agreement under which bonds and debentures are issued, setting forth maturity date, interest rate, and other terms.

Index - A statistical yardstick expressed in terms of percentages of a base year or years. For instance, the NYSE Composite Index of all NYSE common stocks is based on 1965 as 50. An index is not an average.

Institutional Investor - An organization whose primary purpose is to invest its own assets or those held in trust by it for others. Includes pension funds, investment companies, insurance companies, universities and banks.

Interest - Payments borrowers pay lenders for the use of their money. A Corporation pays interest on its bonds to its bondholders.

Interrogation Device - A computer terminal that provides market information - last sale price, quotes, volume, etc. - on a screen or paper tape.

Intrinsic Value - The dollar amount of the difference between the exercise price of an option and the current cash value of the underlying security. Intrinsic value and time value are the two components of an option premium, or price.

Investment - The use of money for the purpose of making more money, to gain income or increase capital, or both.

Investment Banker - Also known as an underwriter. The "middleman" between the corporation issuing new securities and the public. The usual practice is for one or more investment bankers to buy outright from a corporation a new issue of stocks or bonds. The group forms a syndicate to sell the securities to individuals and institutions. Investment bankers also distribute very large blocks of stocks or bonds - perhaps held by an estate.

Investment Company - A Company or trust that uses its capital to invest in other companies. There are two principal types: the closed-end and the open-end or mutual fund. Shares in closed-end investment companies, some of which are listed on the New York Stock Exchange, are readily transferable in the open market and are bought and sold like other shares. Capitalization of these companies remains the same unless action is taken to change, which is seldom. Open-end funds sell their own shares to investors, stand ready to buy back their old shares, and are not listed. Open-end funds are so called because their capitalization is not fixed; they issue more shares as people want them.

Investment Counsel - One whose principal business consists of acting as investment adviser and rendering investment supervisory services.

IRA - Individual Retirement Account. A pension plan with tax advantages. IRA permits investment through intermediaries like mutual funds, insurance companies and banks or directly in stocks and bonds through stockbrokers.

Issue - Any of a company's securities, or the act of distributing such securities.

Keogh Plan - Tax advantaged personal retirement program that can be established by a self-employed individual.