BALLOON PAYMENT

one large payment for the remaining principal balance of a mortgage, due at a time specified in the contract.

BASIS POINT (BP)

1/100th of 1% expressed as a margin over an index rate.

BORROWING ENTITY TYPE

the legal form under which property is owned.

BRIDGE/SHORT TERM LOAN

a short-term or interim loan for borrowers who need more time to find permanent financing or are repositioning a commercial property.

BUILDING PERMIT

a document issued by government regulatory authority that allows a builder to construct or modify a structure.

BUILDING SF

the usable square footage of the building.

CAP

the maximum which an adjustable-rate mortgage may increase, regardless of index changes. An interest rate cap limits the amount the interest can change, while a payment cap limits the increase in monthly payment to a specific dollar amount.

CAPITAL EXPENDITURES

line items on a profit and loss statement that would not be expensed on an annual basis. This category would include replacement of major building systems, such as roofs, etc.

CAPITALIZATION RATE

the ratio of the first-year NOI to the asking price (NOI/Asking price). Not the rate of return.

CARVE OUT

the definition used for the inclusion of recourse in loan documents for fraud and misrepresentation.

CASH–OUT REFINANCING

when the principal amount of a new mortgage involved in refinancing is greater than the principal amount outstanding of the existing mortgage being refinanced, and all or a portion of the equity is converted to cash.

CENTRAL BUSINESS DISTRICT (CBD)

the downtown section of a city, generally consisting of retail, office, hotel, entertainment, and government land uses with some high-density housing.

CLEARANCE

the distance between the building’s floor and effective storage ceiling.

CLIMATE CONTROLLED

an industrial and self-storage term that represents temperature-controlled commercial space.

CLOSING

the meeting between the buyer, seller and lender (or their agents) where the property and funds legally change hands.

CLOSING COSTS

the costs and fees associated with the official change in ownership of the property and with obtaining the mortgage are assessed at the closing.

CMBS (Commercial Mortgage Backed Security)

a bond or other financial obligation secured by a pool of mortgage loans.

COFI (Cost of Funds Index)

index used to determine interest rate changes for adjustable-rate mortgages. It is based on the cost of funds of the 11th District of the Federal Home Loan Bank.

COMMERCIAL LAND

development and transitional land acquired for investment use: land for lots, site selection and assemblage of parcels.

COMPARATIVE MARKET ANALYSIS

an estimate of the value of a property based on an analysis of sales of properties with similar characteristics.

CONDUIT

the financial intermediary that sponsors the conduit between the lender(s) originating loans and the ultimate investor. The conduit makes or purchases loans from third-party correspondents under standardized terms, underwriting and documents, and then, when sufficient volume has been obtained, pools the loans for sale to investors in the CMBS market.

CONGREGATE CARE

a type of senior housing that typified by a central eating facility, smaller rooms, and a higher level of care for its tenants.

CONSTANT MATURITY TREASURE (CMT)

an index based on the U.S. Treasury that is used in the pricing of debt for banks.

CONSTRUCTION LOAN

a short-term loan to pay for the construction of commercial buildings. These loans typically provide periodic disbursements to the builder as each stage of the building is completed. When construction is completed, a take-out or permanent loan is used to pay off the construction loan.

CONSTRUCTION TYPE

the type of construction used for a commercial building (i.e. concrete tilt-up, etc.).

CONTINGENCY

an element of an agreement that must be satisfied before the total agreement can be consummated.

COUPON

the coupon on U.S. Government securities expressed as an annual percentage of face value is the interest rate the U.S. Government promises to pay to the holder on an ongoing basis until maturity.

CREDIT TENANT

a tenant who has obtained a debt rating by S&P or Moody’s of “BBB-” or better.

CREDIT TENANT NET LEASE

a lease with a tenant that has a credit rating of BBB- or better.

DEBT SERVICE

the periodic payments (principal and interest) made on a loan.

DEBT SERVICE COVERAGE RATIO (or DEBT COVERAGE RATIO)

measures a mortgaged property’s ability to cover monthly payments, defined as the ratio of net operating income over the periodic payments (principal and interest) made on a loan. A DSCR of less than 1.0 indicates that the property's cash flow is insufficient to cover the necessary debt payments.

DEFEASANCE

a clause in a mortgage that gives the borrower the right to prepay a commercial mortgage by purchasing US Treasury securities in an escrow account to pay off ongoing debt service.

DENSITY

the number of buildings or persons occupying a certain area of land, generally an acre.

DEPRECIATION (ACCOUNTING)

allocating the cost of an asset over its estimated useful life.

DEPRECIATION (APPRAISAL)

a charge against the reproduction cost (new) of an asset for the estimated wear and obsolescence. Depreciation may be physical, functional or environmental.

DISCOUNT RATE

the rate of interest that the Federal Reserve charges member banks for loans.

DISTRIBUTION WAREHOUSE

(also called light industrial) is generally the least intense industrial use. Office use is limited to management tasks for the distribution or warehouse facility, or about 15 percent of total space.

DOCK HIGH

existence and/or number of dock-level doors.

DOUBLE–WIDE

a mobile home consisting of two units which have been fastened together along their length.

DUE DILIGENCE

The legal definition is: a degree of caution, activity, or assiduity that is reasonable to expect from, and typically exercised by, a reasonable and prudent person under the particular circumstances. In CMBS, due diligence is the foundation of the process because of the reliance that investors must place on the specific expertise of the professionals involved in the transaction.

EFFECTIVE GROSS INCOME

gross income of a building if fully rented, less an allowance for estimated vacancies.

ENGINEERING REPORT

report generated by an architect or engineer describing the current physical condition of the property and its major building systems, i.e., HVAC, parking lot, roof, etc. The report also determines an amount for calculating replacement reserves, if needed.

ENTITLEMENTS

a right to benefits specified, especially by law or contract.

ENVIRONMENTAL REPORT

report generated by qualified environmental firms to determine potential environmental hazards in a building’s region or within the building itself.

ENVIRONMENTAL RISK

risk of loss of collateral value and of lender liability due to the presence of hazardous materials, such as asbestos, PCB’s, radon or leaking underground storage tanks (LUSTS) on a property.

EQUITY

the difference between the fair market value and current indebtedness, also referred to as “owner’s interest.”

EQUITY LOAN

a loan for an equity position which represents an ownership position in a property or a loan for participation in the profits of the commercial property

ESCROW

1. A special account set up by the lender in which money is held to pay for taxes and insurance. 2. A third party who carries out the instructions of both the buyer and seller to handle the paperwork at the settlement.

EURODOLLAR

U.S. dollar-denominated deposits at commercial banks outside of the United States.

EXTENDED STAY

a hotel that caters to a business traveler on an extended lodging period.

FAIR MARKET VALUE

an appraisal term for the price which a property would bring in a competitive market, given a willing seller and willing buyer, each having a reasonable knowledge of all pertinent facts, with neither being under any compulsion to buy or sell.

FARM

land used for agricultural purposes for crop and livestock farming.

FEDERAL FUNDS (FED FUNDS)

Fed Funds is the interest rate that banks with excess reserves (reserves above the minimum amount required by the Federal Reserve) charge to banks in need of overnight loans to meet reserve requirements. Since it is set daily, the Federal Funds rate is the most sensitive indicator of the direction of interest rates.

FIT–OUT

tenant improvements within a commercial property.

FIXED–RATE MORTGAGE

a mortgage with an interest rate that remains constant for the life of the loan.

FIXTURES

personal property that, for some reason, such as the manner of attachment, has become realty. Such property is also referred to as chattel real.

FLEX SPACE

an industrial property, which has both an office and an industrial component.

Floor-to-Area RATIO (FAR)

the relationship between the total amount of floor space in a multi-story building and the base of that building. Zoning regulations, which in essence set the maximum number of stories a building may have, are what determine FARs.

FORECLOSURE

the process by which a lender takes back a property on which the mortgage has defaulted. A service may take over a property from a borrower on behalf of a lender. A property usually goes into foreclosure if payments are more than 90 days past due.

FOUNDATION

the concrete slab beneath the property, which holds the property in place.

FRANCHISE

a business arrangement undertaken for the purpose of marketing a product or service. One party (the franchiser) provides marketing and selling expertise for a fee to another party (the franchisee), who in turn sells the product or service in the marketplace.

FRANCHISE FEES

the fee is usually an initial purchase requirement plus an ongoing percentage of gross sales of the business.

FREESTANDING RETAIL

a building which contains only one retail business. Fast-food franchises and retail stores are often freestanding buildings.

FREESTANDING

one commercial building designed for a single user.

FULL SERVICE

a hotel definition that represents services provided to its guests outside of lodging (i.e. room service, concierge services, and restaurant).

GENERAL BUSINESS

includes all business assets and equipment, which may include property or land.

GENERAL PARTNERSHIP

in a partnership, a partner whose liability is not limited. All partners in an ordinary partnership are general partners. A limited partnership must have at least one general partner.

GOOD FAITH DEPOSIT

a deposit made by a purchaser of real estate to evidence honesty.

GOVERNMENT SUBSIDIZED

rents that receive a portion of their funding from the government (such as Section 8 residential subsidies).

GRADE LEVEL DOOR

a door at ground level at the foundation.

GROUND LEVEL

existence and/or number of ground-level doors.

HIGH RISE OFFICE

a commonly used expression referring to an office building that is high enough to require an elevator.

INDEX

an economic indicator, usually a published interest rate.

INDUSTRIAL

property used for industrial purposes, such as factories.

INDUSTRIAL FOR LEASE

industrial space available.

INTEREST

the sum paid for borrowing money, which pays the lender’s costs of doing business.

INTEREST RATE

the sum charged for borrowing money, expressed as a percentage

INTEREST RATE CAP

limits the interest rate or the interest rate adjustment to a specified maximum. This protects the borrower from increasing interest rates.

JOINT VENTURE

an agreement by two or more individuals or entities to engage in a single project or undertaking. Joint ventures are used in real estate development as a means of raising capital and spreading risk. For all practical purposes, a joint venture is similar to a general partnership. However, once the purpose of the joint venture has been accomplished, the entity ceases to exist.

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LEASE ASSIGNMENT

an agreement between the commercial property owner and the lender that assigns lease payments directly to the lender.

LEASE TYPE

Gross, Triple Net (NN), Net Net (NN), Hybrid, etc.

LEASEHOLD IMPROVEMENTS

the cost of improvements for a leased property, often paid by the tenant.

LEASING COMMISSIONS

an amount earned by a real estate broker or leasing agent for his services.

LESSEE

tenant in a building.

LIBOR (London Interbank Offered Rate)

the rate that the most creditworthy international banks dealing in euros charge each other for large loans. Rates are quoted in monthly increments out to 1 year.

LIMITED LIABILITY COMPANY (LLC)

the restriction of one’s potential losses to the amount invested. The absence of personal liability. Provided to stockholders in a corporation and limited partners of a limited partnership.

LIMITED PARTNERSHIP

one in which there is at least one partner who is passive and limits liability to the amount invested, and at least one partner whose liability extends beyond monetary investment.

LIMITED SERVICE

a hotel that offers lodging services only.

LOAN PROCESSING FEE

the fee charged by a lender to prepare all the documents associated with your mortgage.

LOAN-TO-VALUE RATIO (LTV)

the ratio between the principal amount of the mortgage balance, at origination or thereafter, and the current value of the underlying real estate collateral. The ratio is commonly expressed to a potential borrower as the percentage of value a lending institution is willing to finance. The ratio is dynamic and varies by lending institution, property type, geographic location, property size, etc.

LOCK–OUT PERIOD

a period of time after loan origination during which a borrower cannot prepay the mortgage loan.

LOT SIZE

total square footage of the land.

LOW–RISE OFFICE

a commonly used expression referring to an office building that is too low to require an elevator.

MALL

(also called Super Regional Center) is an enclosed shopping center with three or more major department stores which draws from a large trade area of 12 or more miles.

MANAGEMENT FEE

the agreed-upon compensation paid to a property management company for managing a real estate project. The fee is usually based on a percentage of effective gross income.

MANUFACTURING

(also called Heavy Industrial) auto making, textiles, steel, chemicals, and food processing are typical uses of such properties. Typically, there is zero to five percent office space.

MARGIN

the amount that is added to an index rate to determine the total interest rate.

MARKETING EXPENSES

expenses accrued to market commercial properties.

MAT

Monthly Average Treasury

MATURITY

1. The termination period of a note (e.g., a 25-year mortgage has maturity of 25 years.) 2. In sales law, the date a note becomes due.

MAX CONTIGUOUS SF

the number of available connected square feet.

MAX LEASE RATE

the highest asking lease rate.

MEDICAL OFFICE

an office space which offers medical services.

MID–RISE

a commonly used expression referring to an office building that is high enough to require stairs but too low to require an elevator.

MILITARY CLAUSE

a clause included in a lease of residential property which allows the tenant to terminate the lease without penalty if and when the tenant is transferred to another location.

MIN LEASE RATE

the lowest lease rate available.

MIN. DIVISIBLE SF

the smallest amount of available square feet.

MIXED USE

a real estate development that contains two or more different uses, all intended to be harmonious and complementary. An example would include a high-rise building with retail shops on the first two floors, office space on floors three through ten, apartments on the next ten floors, and a restaurant on the top floor.

MOBILE HOME PARK

a parcel of land zoned and developed for use by occupants of mobile homes.

MONEY MARKET

the market for short-term debt instruments.

MULTI-FAMILY PROPERTY CLASS A

properties are above average in terms of design, construction and finish; command the highest rental rates; have a superior location in terms of desirability and/or accessibility; and are generally professionally managed by national or large regional management companies.

MULTI-FAMILY PROPERTY CLASS B

properties frequently do not possess design and finish reflective of current standards and preferences; construction is adequate; command average rental rates; generally are well maintained by national or regional management companies; and unit sizes are usually larger than current standards.

MULTI-FAMILY PROPERTY CLASS C

properties provide functional housing, exhibit some level of deferred maintenance, command below-average rental rates, are usually located in less desirable areas, and are generally managed by smaller, local property management companies. tenants provide a less stable income stream to property owners than Class A and B tenants.

NEIGHBORHOOD CENTER

(including a community center), a shopping center anchored by a supermarket and/or drugstore that provides convenience goods and services to a neighborhood. It is usually between 30,000 and 100,000 square feet and draws from a one- to three-mile radius.

NET EFFECTIVE RENT

rental rate adjusted for lease concessions.

NET OPERATING INCOME (NOI)

total income less operating expenses, adjustments, etc., but before mortgage payments, tenant improvements and leasing commissions.

NET-NET LEASE (NN)

usually requires the tenant to pay for property taxes and insurance in addition to the rent.

NOTICE OF DEFAULT (NOD)

to initiate a non-judicial foreclosure proceeding involving a public sale of the real property, securing the deed of trust. The trustee, under the deed of trust, records a Notice of Default and Election to Sell (“NOD”) the real property collateral in the public records.

OFFICE

a structure used primarily for the carrying on of business.

100% PRIVATE PAY

assisted living designation, where senior housing residents pay 100% of the rent versus by welfare or government subsidies.

OPERATING EXPENSE

periodic expenses necessary to the operation and maintenance of an enterprise (e.g., taxes, salaries, insurance, and maintenance). Often used as a basis for rent increases.

ORIGINATION

securing a completed mortgage application from a commercial or residential borrower.

PERCENTAGE LEASE

commonly used for large retail stores. Rent payments include a minimum or “base rent,” plus a percentage of the gross sales “overage.” Percentages generally vary from 1% to 6% of the gross sales, depending on the type of store and sales volume.

PHASE I

an assessment and report prepared by a professional environmental consultant who reviews the property—both land and improvements—to ascertain the presence or potential presence of environmental hazards at the property, such as underground water contamination, PCB’s, abandoned disposal of paints and other chemicals, asbestos and a wide range of other potentially damaging materials. This Environmental Site Assessment (ESA) provides a review and makes a recommendation as to whether further investigation is warranted (a Phase II Environmental Site Assessment). This latter report would confirm or disavow the presence of an environmental hazard and, should one be found, would recommend additional review and/or mitigation efforts that should be undertaken.

POINTS (LOAN DISCOUNT POINTS)

each point is equal to 1% of the total amount of a mortgage.

POTENTIAL GROSS RENT

gross income of a building if it is fully rented.

PRE–LEASED %

to obtain lease commitments in a building or complex prior to its being available for occupancy.

PREPAYMENT PENALTY

fees paid by borrowers for the privilege of retiring a loan early.

PRIME RATE

the rate at which banks lend to their most creditworthy customers.

PRINCIPAL

1. The amount of debt, not including interest, left on a loan. 2. The face amount of the mortgage.

PRO FORMA

(from Latin pro forma, “according to form”). financial statements showing what is expected to occur.

PROPERTY ADMINISTRATOR

person in broker’s employ who is responsible for updating and renewing a property listing, if it is different from the contact name.

PROPERTY GRADE

a stratification of property type that is indicative of the property’s ability to

command rental rates.

PROPERTY SUBTYPE

a property description that provides additional information to the lender.

PROPERTY TAX

taxes based on the market value of a property. Property taxes vary from state to state.

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R & D

these facilities are generally used in high technology markets and are broadly defined to include wide variations in markets across the country. R & D properties could have lab facilities, offices, warehouse facilities, or services such as carpentry or machine repair. Typically, each property allows a variable combination of office and other uses. The percentage of office space ranges from 20 to 100 percent, depending on the market and individual needs of the user.

RAIL SERVED

whether a railroad serves the building.

RANCH

land devoted to raising livestock under range conditions with forage grass as main source of feed.

RATE INDEX

an index used to adjust the interest rate of an adjustable mortgage loan (e.g., the change in U.S. Treasury securities (T-Bills) with 1-year maturity. The weekly average yield on said securities, adjusted to a constant maturity of 1 year, which is the result of weekly sales, may be obtained weekly from the Federal Reserve Statistical Release H.15 (519). This change in interest rates is the “index” for the change in a specific Adjustable Mortgage Loan).

RECOURSE

personal liability.

RECREATIONAL LAND

land devoted to commercial outdoor sporting activity and relaxation.

REFINANCE

to replace an old loan(s) with a new loan(s).

REGIONAL CENTER

a shopping center with one or two department stores and a variety of smaller stores. It is larger than 300,000 square feet and draws from an eight mile radius or more.

RENT ROLL

a list of tenants leasing a property, which details terms of lease, area leased, and the amount of rent being paid.

RENT STEP–UP

a lease agreement in which the rent increases every period for a fixed amount of time or for the life of the lease.

RENTABLE SQUARE FEET (same as Net Leasable Area)

in a building or project, floor space that may be rented to tenants. The area upon which rental payments are based. Generally excludes common areas and space devoted to the heating, cooling, and other equipment of a building.

REPLACEMENT RESERVES

an amount set aside from net operating income to pay for the eventual wearing out of short-lived assets. Monthly deposits that a lender may require a borrower to a reserve in an account, along with principal and interest payments for future capital improvements of major building systems; i.e., HVAC, parking lot, carpets, roof, etc.

RESERVE FUNDS

in CMBS, portion of the bond proceeds that are retained to cover losses on the mortgage pool. A form of credit enhancement (also referred to as “reserve accounts”).

RETAIL

a property type which sells goods to consumers.

RV (REVERSIONARY VALUE)

the value of property at the expiration of a certain time period. In transportation, recreational vehicle.

SALES BROKER

commercial real estate broker that represents client in the sale or purchase of commercial real estate property.

SECOND MORTGAGE

a mortgage that is second in priority because of the time of recording the mortgage or of the subordination of the mortgage.

SECONDARY MORTGAGE MARKET

the buying and selling of first mortgages or trust deeds by banks, insurance companies, government agencies, and other mortgages. This enables lenders to keep an adequate supply of money for new loans. The mortgages may be sold at full value (“par”) or above, but are usually sold at a discount. Not to be confused with a “second mortgage.”

SELF–STORAGE

(also called Mini-Storage) provides personal storage for lease by consumers.

SELF–AMORTIZING MORTGAGE

one that will retire itself through regular principal and interest payments. Contrast with balloon mortgage or interest-only loan.

SENIOR HOUSING

(includes Assisted Listing, Congregate Care, Senior Apartments and Skilled Nursing Centers) is a multi-residential property specifically designed for care of senior citizens and/or physically disabled persons.

SHADOW ANCHORED

an unanchored shopping center located near an anchored shopping center.

SINGLE WIDE

a mobile home consisting of one unit.

SITE WORK

the location or place of a plot of ground set aside for a particular type of land use.

SKILLED NURSING

a type of senior housing which offers on-site medical care.

SOLE PROPRIETORSHIP

ownership of a business, with no formal entity as a vehicle or structure.

SPREAD

number of basis points over a base rate index.

SPRINKLER

existence of fire suppression systems in the building.

STABILIZED OPERATING PROPERTY

the income generated on an annual basis from the commercial property is stable, consistent and reliable.

STRIP CENTER

a string of stores in a commercial area, totaling less than 30,000 square feet, without central leasing, management, or theme.

STRUCTURAL/ENGINEERING REPORT

a property Condition Report that outlines the current structural stability or instability of a property. The report will outline immediate costs needed to repair the property as well as a maintenance program to maintain the property at its current status.

SUBURBAN

describes a town or unincorporated, developed area in close proximity to a city. Suburbs, largely residential, are often dependent on the city for employment and support services and are generally characterized by low-density development relative to the city.

TAX & INSURANCE implications

monthly deposits that a lender may require to be included with principal and interest payments for the payment of taxes and insurance.

TENANT

one who is given possession of real estate for a fixed period or at will.

TENANT IMPROVEMENTS (TI)

the expense to physically improve the property to attract new tenants to new or vacated space, which may include new improvements or remodeling. The tenant, the landlord, or both may be responsible for paying it. Typically, tenants are provided with a market-rate TI allowance ($/sq. ft.) that the owner will contribute towards improvements. Over and above the TI allowance that the tenant desires, the tenant is responsible for paying.

TERM

the length of a mortgage.

THIRD PARTY COSTS

costs resulting from third-party reports, whether it be appraisal reports,

environmental reports or structural engineering reports.

TIMBERLAND

land used for production of forest stands for commercial use.

TITLE

the actual legal document conferring ownership of a piece of real estate.

TITLE INSURANCE

an insurance policy that insures you against errors in the title search, essentially guaranteeing your and your lender’s financial interest in the property.

TOTAL ANNUAL OPERATING INCOME

total yearly income less operating expenses, adjustments, etc., but before mortgage payments, tenant improvements and leasing commissions.

TOTAL ANNUAL ROOM INCOME

a hotel definition that represents the gross annual receipts from room revenue.

TRAFFIC COUNT

the amount of incoming and outgoing traffic a retailer or self-storage building

generates over a fixed period of time.

TRIPLE-NET LEASE (NNN)

a lease that requires the tenant to pay for property taxes, insurance and maintenance in addition to the rent (also referred to as “Net Net Net Lease”).

TRIPLE–WIDE

a mobile home consisting of three units which have been fastened together along their length.

U.S. TREASURY BILL

Treasury Bills, or T-Bills, are short-term securities with maturities of up to one year. The U.S. government issues them at a discount from their face value. The price is quoted in yield, not dollars. At maturity, T-Bills are redeemed for full face value. T-bills are issued in three-month, six-month and one-year maturities and are backed by the full faith and credit of the U.S. Government.

U.S. TREASURY BOND

Treasury Bonds are long-term securities with maturities greater than 10 years. Treasury bonds are coupon-bearing securities that pay interest on a semiannual basis. The U.S. government has the full faith and credit to back Treasury bonds.

U.S. TREASURY NOTE

Treasury Notes are intermediate-term securities issued with 2, 3, 5, and 10-year maturities. Treasury notes are coupon-bearing securities that pay interest on a semiannual basis. The U.S. government offers its full faith and credit as backing for Treasury notes.

UNANCHORED

a tenant in a shopping center which doesn’t have an anchored tenant.

UNDERWRITING

the process of deciding whether to make a loan based on property cash flow, credit, and/or other factors.

VACANCY PERCENT

the percentage of all units or spaces that are unoccupied or not rented. On a

pro-forma income statement, a projected vacancy rate is used to estimate the vacancy allowance, which is deducted from potential gross income to derive effective gross income.

VACANCY

unoccupied units as a percentage of the total number.

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YIELD

the rate of return on a security, taking into consideration annual interest payments, purchase price, redemption value, and the time remaining until maturity.

YIELD MAINTENANCE

a prepayment premium that allows investors to attain the same yield as if the borrower made all scheduled mortgage payments until maturity. Yield maintenance premiums are designed to make investors indifferent to prepayments and to make refinancing unattractive and uneconomical to borrowers.

YIELD TO AVERAGE LIFE

yield calculation used, in lieu of “Yield to Maturity” or “Yield to Call,” where books are retired systematically during the life of the issue, as in the case of a “Sinking Fund,” with contractual requirements. Because the issuer will buy its own bonds on the open market to satisfy its sinking fund requirements if the bonds are trading below Par, there is, to that extent, automatic price support for such bonds; they therefore tend to trade on a yield-to-average-life basis.

YIELD TO MATURITY (YTM)

concepts used to determine the rate of return an investor will receive if a long-term, interest-bearing investment, such as a bond, is held to its maturity date. It takes into account purchase price, redemption value, time to maturity, coupon yield and the time between interest payments. Recognizing time value of money, it is the discount rate at which the present value of all future payments would equal the present price of the bond (also referred to as “internal rate of return”). It is implicitly assumed that coupons are reinvested at the YTM rate. YTM can be approximated using a bond value table (also referred to as a “bond yield table”) or can be determined using a programmable calculator equipped for bond mathematics calculations.

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