Page 18 - PRIAA Glossary

BOND BASIS
A type of day count convention specific to bonds, the bond basis is a factor used to calculate accrued interest on a bond since the last coupon payment. For the bond basis, the fraction of days in a month over days in a year is 30/360, a fraction which, while slightly inaccurate, is easy to use for calculations. The day count convention for treasury bonds, however, is actual/actual.
BOND CREDIT RATING
An alphanumeric score that reflects the probability of
timely payment of principal and interest for a given debenture as provided by services providers such as Moody’s or S&P. Higher credit ratings represent a lower probability
of default, and therefore a more attractive (less risky) investment to potential investors. Lowered credit rating, a function of poorer credit worthiness of the issuer of the debt, usually translates to a lower price of the bond and a more risky investment.
BONUS ISSUE
When a company automatically issues additional shares to shareholders, within the same ratio of shares previously held. For example, if the bonus issue ratio is 5 to 1, an investor with 200 shares will now have 1000, but the total value remains the same. Similar to a stock split, a company may choose to issue bonus shares if the price of its stock is prohibitively high and it wants to increase trading activity. Also called “capitalisation issue”.
BOOTSTRAPPING
A process that uses a general algorithm to construct curves from underlying market data. It is typically used
in mathematical finance to describe the iterative process whereby discount factors for zero-coupon yield curves are obtained from the underlying rates-market instruments, such as deposits, Eurodollar futures and swaps. One must bootstrap the discount factors from the shortest tenor instruments before moving onto longer tenors.
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