Glossary

This glossary presents explanations of a number of key terms and concepts in the area of government debt. Terms in italics are included elsewhere in the glossary.

Acceptance rate
Issued government securities as a share of the total bid volume.

Accrued interest
Accrued interest is payment for the interest accruing on a paper since the last interest due date. In the Danish bond market trades are with coupon interest. The buyer of the paper pays a proportion of the coupon to the seller for the period from the last due date to the settlement date. See also clean price and dirty price.

Asset swap
A swap attached to specific assets, by means of which the investor can alter the interest rate and/or currency of the assets concerned.

Auction
At an auction, a bond is offered. A group of market participants may submit bids requesting a certain volume of bonds at a given price or interest rate.

Basis points
1 basis point is 0.01 percentage point.

Benchmark bond
A key bond for issuance. Changes in the benchmark status of Danish government bonds are determined by Government Debt Management after discussion with the Primary Dealers.

Bid-ask price
The bid-ask price is the price at which the market maker is willing to buy/sell. The difference between the ask and bid prices is the bid-ask spread.

Bullet loans
Loans on which only interest is paid during the term of the loans. The loans are repaid on the maturity date. Danish government bonds are bullet loans.

Buy-back issues
The government securities which the central government can buy back before maturity.

Callable bond
A bond which can be prematurely redeemed by the debtor on terms agreed in advance. The debtor's right to redeem is tantamount to having a call option on the bond.

Capital losses/gains on issuance
Capital losses and gains on issuance arise when a loan is issued at prices below and above par, respectively.

Central-government debt
Comprises liabilities in the form of domestic and foreign debt as well as assets in the Social Pension Fund, the Danish National Advanced Technology Foundation, the Preventive Measures Fund and the balance of the central government's account with Danmarks Nationalbank.

Cibor (Copenhagen Interbank Offered Rate)
The interest rate at which a bank in the Copenhagen interbank market is willing to lend Danish kroner without collateral to another creditworthy bank. Cibor is the reference interest rate for a large number of financial contracts. See also Euribor and Libor.

Clean price
The price of a bond excluding accrued interest. Government bonds are quoted on the trading platforms at a clean price. See also accrued interest and dirty price.

Clearing and settlement
Clearing is the compilation of each participant's purchase and sale, resulting in the net position of each participant. Settlement is completion of a trade by final settlement of agreed commitments.

Commercial Paper (CP)
Short-term debt instruments with maturities of up to one year. The central government has two CP programmes, directed to the European market (ECP programme) and American market (USCP programme), respectively. Under the USCP programme the issuance is exclusively in US dollar, while under the ECP programme it is possible to issue in several currencies. The USCP programme has a maximum outstanding of USD 6 billion, while maximum outstanding in the ECP programme is USD 12 billion.

Cost-at-Risk (CaR) model
Simulation model developed by Government Debt Management to quantify the risk of the central-government debt portfolio to future interest-rate developments.

Credit standing
Assessment of a debtor's willingness and ability to honour its obligations. See also rating.

Derivative
See financial derivative.

Dirty price
The price of a bond including accrued interest. See also accrued interest and clean price.

Discount rate
Danmarks Nationalbank's discount rate is a signal rate indicating the overall level of the monetary-policy interest rates.

Duration
The average fixed-interest period for a financial portfolio. Long duration of the government debt usually implies a low interest-rate risk, since on average smaller proportions of the interest costs are adjusted to changes in the level of interest rates.

Electronic trading
Placement of orders (bid or ask) via electronic facilities to a trading system in which orders are matched and executed automatically.

Emission
Issuance of government securities.

Euribor (Euro Interbank Offered Rate)
The interest rate at which a bank in the euro interbank market is willing to grant money-market loans in euro to another creditworthy bank without collateral. Used as a reference interest rate in a large number of financial contracts, e.g. swaps. See also Cibor and Libor.

Exposure
Exposure denotes a financial position that entails a risk of losses or gains if the market conditions change.

Final exposure
Denotes the currency or interest-rate exposure on a loan compiled after swaps.

Financial derivative
An instrument of which the value is derived from the price of an underlying asset, e.g. securities, goods or currency.

Floating interest rate
An interest rate that is agreed to float as, or in step with, another interest rate listed on the market at specific shorter intervals than the maturity of the loan, typically every third or sixth month.

Forward contract
Agreement on delivery and payment of goods, securities or currency on a future date at a price fixed at the time of the agreement (forward price).

Funding rules
Framework for the distribution of the central government's domestic and foreign borrowing.

Gross financing requirement
The gross financing requirement is compiled as the net financing requirement with the addition of redemptions on the domestic and foreign debts, the net bond purchases of government funds, and the central government's currency swap payments.

Haircut
The deduction made from a paper's market value on determining its collateral value. A haircut takes account of the risk of a lower value of the security from the date of compilation of the collateral value until the possible enforced realisation of the paper.

Interest-rate fixing
The interest-rate fixing assessed at a given point in time is the amount of debt that will have the interest rate refixed within one year.

ISDA Master Agreement
Framework agreement whereby all swaps with one and the same counterparty are documented.

Key on-the-run issues
Government series that are being built up and which are issued to cover the current domestic borrowing requirement.

Lead manager
The bank or banks, that organize a syndicated bond loan. Lead manager is responsible for co-ordination, distribution and documentation of the supply of bonds. Distribution of the bond loan is normally handled by a syndicate of banks. See also syndicated bond issuance.

Libor (London Interbank Offered Rate)
The interest rate at which a bank in the London interbank market is willing to undertake money-market lending in various currencies to another creditworthy bank without collateral. Used as a reference interest rate in a large number of financial contracts, e.g. swaps. See also Cibor and Euribor.

Liquidity
Liquidity expresses tradability. Liquid bonds are often characterised by a large outstanding amount, high turnover and a narrow spread between bid and ask prices. Investors will generally be willing to pay a higher price for a more liquid bond (liquidity premium).

Market maker
A securities dealer that quotes current tradable bid and ask prices (market making) in securities.

Market risk
The risk that fluctuations in market prices (e.g. interest rates, exchange rates, bond prices and equity prices) will result in losses.

Medium Term Notes, MTN
Bonds issued under a loan programme with standardised documentation. The Central Government has a Euro Medium Term Notes (EMTN) programme that is used for foreign borrowing.

MTS Denmark
A market segment in MTS where wholesale trading in Danish government bonds is conducted at present.

Net financing requirement
The net financing requirement is compiled as the deficit on the central government's current, investment and lending (CIL) account with addition of re-lending (net of redemptions) and portfolio movements and accruals.

Non-competitive allocation
Right to bid where a price quotation is not needed. In various countries non-competitive allocations are used in connection with government bond auctions. Dependent on the size of the separate primary dealer's participation in the actual auction, the primary dealer have the option to buy an extra share of bonds at the same price after the auction.

Option-adjusted duration
The duration for callable bonds where adjustments have been made for the uncertainty of the maturity structure as a consequence of the bor rower's right to early redemption of the bond.

Over-the-Counter (OTC)
Trading in financial instruments outside a stock exchange, e.g. via a dealer network or by telephone.

Par yield
Par yields are adjusted for differences in the remaining maturities of the bonds. For example, the par yield for a 10-year government bond is the coupon rate which ensures that a synthetic bullet loan with a maturity of exactly 10 years has a theoretical value of 100 ("par").

Perpetual
Loan with infinite maturity, i.e. the only payments are the ongoing coupon payments. The Kingdom of Denmark has a few minor perpetuals from the end of the 19th century and beginning of the 20th century.

Plain vanilla
Term used for standardised and simple products.

Primary dealer
Primary dealers are financial institutions that by agreement with the issuer, against special rights, are obliged to provide liquidity in specific government securities.

Primary market
Market for issuance of bonds. See also secondary market.

Private placement
Bond or other loan offered to a small group of buyers and not normally listed.

Rating
Grade of credit standing assigned by rating institutes such as Fitch Ratings, Moody's and Standard & Poor's.

Refinancing risk
The risk that a borrower has to finance repayments on its debt in a period with a temporary general high interest level or in a period, where the loan terms of the specific borrower are particularly un-favourable.

Re-lending
Re-lending constitutes central-government loans to government-owned companies and Danish Ship Finance.

Re-lending list
The range of government securities in which re-lending can be granted. The re-lending list is specified by Government Debt Management.

Risk aversion
Applied to describe an investor's preference for safe assets. The degree of risk aversion expresses investors' demand for compensation in order to take on a risk.

Risk-free interest rate
The risk-free interest rate is the interest rate that can be obtained in the market without assuming any risk. The risk-free interest rate is often the yield on short-term, liquid government securities with a high credit rating. See also risk premium.

Risk premium
Additional payment for holding assets that are subject to risk. See also risk-free interest rate.

Secondary market
Market for trading of bonds after they are issued in the primary market.

Securities lending
Securities lending is a transaction whereby the seller is paid to transfer securities to a buyer. On conclusion of the agreement, the parties simultaneously commit to buy back the securities at an agreed price on expiry of the agreement.

Serial loan
A loan for which the debt is repaid in equal redemptions on each interest due date.

Swap
A swap is an agreement between two parties to exchange payments over a fixed period. A swap is a separate financial transaction.

Swap rate
The swap rate is the fixed interest rate paid or received in an interest-rate swap.

Swap spread
The swap spread is the difference between the fixed interest rate received by the central government in an interest-rate swap, and the yield to maturity on a government bond with the same maturity.

Syndicated bond issue
Bond issue intermediated by a syndicate of banks which carry out the practical part of the sale for a payment. At issuance the syndicate banks obtain bids from investors. When the "book" of bids has been build up, the issuer determines price and allocation together with the syndicate banks.

Synthetic re-lending
Bond loans that are included on the re-lending list. The loans are granted on the basis of an estimated zero-coupon yield curve and are introduced to bridge the gaps between existing bullet loans in the maturity segments between 2 and 10 years.

Tap sale
Ongoing issuance in the same series. In Denmark, the issuance of government bonds is normally via tap sale. See also auction.

T-bills
T-bills (Treasury Bills) are government securities in the short end of the maturity spectrum. In 2010, the T-bill programme will be reopened in Denmark after having been closed down since the end of 2008.

From the end of February 2010, Danish T-bills will be issued at monthly auctions. Every third month a new 9-month bill will be opened. Issuance in the bills can continue up until the term to maturity reaches 1 month.

T-bills are zero-coupon bonds, i.e. the cost of borrowing is solely a result of a capital loss on issuance.

Tick
1 tick is equivalent to 0.01 price quotation points.

Uncollateralised yield
The interest rate payable on bonds and lending agreements connected with credit risks. The spread between an uncollateralised and a risk-free interest rate for a given maturity determines the risk premium.

Value date
Settlement date, i.e. the date on which e.g. a securities deal is closed by delivery of securities against payment.

Volatility
Statistical term for the size of variation in the rate of return of an asset or an index. It is typically measured by the standard deviation on the yearly rate of return.

VP Securities Services
Securities clearing/settlement and custodian institution. VP also handles electronic issuance of securities and registration of ownership and rights pertaining to electronic securities.

Yield curve
Relationship between the interest rate and maturity of securities. A rising yield curve – i.e. where interest rates for short-term securities are lower than interest rates for long-term securities – is called normal. A falling yield curve is described as inverted.

Yield spread
The spread between the yields on two bonds. On calculating yield spreads, adjustment is often made for differences in the bonds' remaining terms to maturity.

Yield to maturity
The fixed discount rate that makes the present value of payments on the bond equivalent to the actual price of the bond.

Zero-coupon bond
Loan that is not subject to current interest payments, and which is redeemed on maturity. The cost of borrowing is solely a result of a capital loss on issuance. T-bills and Commercial Papers are zero-coupon bonds.

Zero-coupon rate
The yield to maturity on a zero-coupon bond. The zero-coupon yield structure indicates the relation between remaining maturity and the zero-coupon rate.