Glossary

Accrued interest

The accumulation of interest since the last interest payment date. Accrued interest is added to the clean price of a bond to determine the total price (or dirty price) of a bond.

Austraclear System

The Austraclear system is an electronic registry and settlement system for government, semi-government and private sector debt securities. It is a wholly owned subsidiary of ASX Limited. Commonwealth Government Securities issued at tender are settled via the Austraclear System.

Australian Government Securities (AGS)

Also known as Commonwealth Government Securities, refers to debt obligations of the Australian Government evidenced by the issue of securities. The vast bulk of the AGS on issue is represented by Treasury Bonds and Treasury Indexed Bonds.

Australian Savings Bond

A debt security aimed at retail investors issued by the Australian Government from 1976 until 1987. The bonds were sold ‘on tap’ and had a maximum maturity of around 7.5 years. The security could be redeemed early at the request of the holder on a month’s notice and without penalty after a minimum holding period.

Bank Bill Swap Reference Rates (BBSW)

Reference rates for bank bills accepted by approved banks published each business day by the Australian Financial Markets Association.

Basis point

One hundredth of one per cent or 0.01 per cent. The term is used in money and securities markets to define differences in interest rates or yields.

Basis risk

The risk that there is a divergence in the price response of financial instruments with similar risk characteristics to changes in market rates (for example, a bond and the corresponding bond futures contract). This is a risk with hedging strategies where a financial position in one particular instrument is hedged with a position in another instrument with similar risk characteristics, such that any loss in one position from changes in market rates is expected to be offset by a corresponding gain on the other position. A hedge may not be as effective as expected if there is a divergence in the price response of the financial instruments.

Bearer securities

A negotiable instrument, akin to cash, which evidences a payment obligation to be met, on presentation, at designated dates. The issuer of the instrument does not record the identity of the security holder, and as such physical possession of the certificate is sufficient proof of ownership. The certificates for bonds issued as bearer securities normally carry detachable coupons. In the past some Commonwealth Government Securities were issued in bearer form.

Bid-offer spread

The difference between the price (or yield) at which a market maker is willing to buy and sell a particular financial product or instrument.

Bid-to-cover ratio

See coverage ratio.

Book value

(Also known as carrying amount). The amount at which an asset or liability is recognised in the balance sheet. Under a fair value methodology, measurement is by reference to current market rates.  Under an historic cost methodology, measurement is by reference to market value rates at the time the original transaction was conducted. The AOFM’s assets and liabilities are measured at fair value, except for Australian Government advances to State and Territory governments for public housing, which are measured at historic cost.

Bullet security

A security that repays principal owing to investors as a lump sum at a predetermined future date.

Buyback Tender

A method of repurchasing outstanding debt securities through auction. The amount and security to be repurchased are announced by the issuer. Registered participants then offer their desired amounts of stock at interest rates at which they are prepared to sell. Offers are accepted descending from the highest interest rate (yield) until the buyback amount has been filled. Stock is therefore repurchased in order of highest yield (and lowest price).

Cash Management Portfolio

The Cash Management Portfolio is a part of the overall portfolio of assets and liabilities managed by the AOFM. It contains short-term assets and liabilities and is used to manage the within-year variability in Government cash flows.

Clean price

The price of a bond excluding accrued interest.

Commonwealth Government Securities (CGS)

Also known as Australian Government Securities, refers to debt obligations of the Australian Government evidenced by the issue of securities. The vast bulk of the CGS on issue is represented by Treasury Bonds and Treasury Indexed Bonds.

Coupon

The interest payment on a bond. In the case of Treasury Bonds coupon interest is payable semi-annually.

Coverage ratio

The ratio of the total amount of bids received to the amount on offer at a tender for the issue of Commonwealth Government Securities. Also referred to as the bid-to-cover ratio.

Credit risk

The risk of financial loss arising from a counterparty to a transaction defaulting on its financial obligations under that transaction. Credit risk is contingent on both a default taking place and there being pecuniary loss as a result. The Australian Government faces credit risk as a part of its debt management activities in relation to its swap derivative transactions.

Defeasance

Arrangements whereby a set of debt liabilities are held against a set of assets with closely matching and offsetting cost and risk characteristics.

Derivative

A financial contract whose value is based on, or derived from, another financial instrument (such as a bond or share) or a market index (such as a share index). Examples of derivatives include futures, forwards, swaps and options.

Dirty price

The total price payable for a bond calculated as the clean price plus accrued interest.

Discount

The amount by which the value of a security is less than its face, or par, value.

Duration

A measure of the present value weighted average of the cash flows associated with a bond or portfolio of bonds. Quoted in years, duration can be used to measure the sensitivity of the present value of a bond or portfolio of bonds to changes in market interest rates.

Exchange-traded Treasury Bonds

Exchange-traded Treasury Bonds (eTBs) offer a convenient and readily accessible way to invest in Treasury Bonds. eTBs are quoted and traded on the Australian Securities Exchange (ASX). An eTB Holder has beneficial ownership of Treasury Bonds in the form of CHESS Depositary Interests (CDIs). This means obtaining all of the economic benefits (including coupon and principal payments) attached to legal ownership of the Treasury Bonds over which the CDIs have been issued. A one unit holding of an eTB provides beneficial ownership of $100 Face Value of the Treasury Bond over which it has been issued.

Exchange-traded Treasury Indexed Bonds

Exchange-traded Treasury Indexed Bonds (eTIBs) offer a convenient and readily accessible way to invest in Treasury Indexed Bonds. eTIBs are quoted and traded on the Australian Securities Exchange (ASX). An eTIB Holder has beneficial ownership of Treasury Indexed Bonds in the form of CHESS Depositary Interests (CDIs). This means obtaining all of the economic benefits (including coupon and principal payments) attached to legal ownership of the Treasury Indexed Bonds over which the CDIs have been issued. A one unit holding of an eTIB provides beneficial ownership of $100 Face Value of the Treasury Indexed Bond over which it has been issued.

Exposure

The amount of money at risk in a portfolio. Exposure to a risk is calculated by measuring the current mark-to-market value that is exposed to that risk.

Face value

The amount of money indicated on a security, or inscribed in relation to a security, as being due to be paid on maturity.

Financial year

The 12-month period decided upon for financial measurement. For the Australian Government the financial year is from 1 July to 30 June in the following calendar year.

Fixed rate

An interest rate calculated as a constant percentage of the face value or notional principal and generally payable quarterly, semi-annually or annually. Treasury Bonds pay a fixed coupon rate semi-annually.

Foreign Debt Portfolio

The non-domestic currency component of the Long-Term Debt Portfolio. Following the elimination of the foreign currency derivatives exposure, this portfolio now consists of a single US dollar denominated loan that was issued in the 1980s.

Funding risk

The risk that an issuer is unable to raise funds, as required, in an orderly manner and without financial penalty. For the Australian Government funding risk encompasses both long-term fund raising to cover budget deficits and the short-term funding or cash management implications of mismatches in the timing of government outlays and receipts.

Future Fund

The Future Fund is a financial asset fund established by the Australian Government with the purpose of accumulating sufficient financial assets to fully offset the Government’s unfunded public sector superannuation liability. The stated aim is to reach this point by 2020.

Futures baskets

A collection of like financial products or commodities, grouped together to underpin a particular futures contract. For example, 3 year, 10-year and 20-year Treasury Bond futures baskets consist of a collection of Treasury Bond lines that have an average term to maturity of approximately 3, 10 and 20 years respectively.

Futures contract

An agreement between two parties that commits one party to buy an underlying financial instrument or commodity and one party to sell a financial instrument or commodity at a specific price at a future date. The agreement is completed at a specified expiration date by physical delivery or cash settlement or offset prior to the expiration date. In Australia standardised futures contracts are traded on the Sydney Futures Exchange. Futures contracts traded on the Sydney Futures Exchange include contracts for 3-year, 10-year and 20-year Treasury Bonds.

General government sector net debt

The sum of selected financial liabilities less the sum of selected financial assets on the general government sector balance sheet. It is the sum of financial liabilities in the form of deposits held, advances received, outstanding government debt securities, and other borrowings less financial assets in the form of cash held, deposits and advances paid, debt securities held as an investment, and loans advanced.

Interest

The charge for borrowing money, usually expressed as an annual percentage rate. For the AOFM financial statements, interest cost is the coupon payment (where relevant) adjusted for the amortised cost carrying value of a debt security. Where a debt security is issued at a premium or discount to its principal value, the premium or discount at issuance is recognised in amortised cost carrying value and amortised over the life of the security using the effective interest method. This amortisation is recognised in the interest cost. For Treasury Indexed Bonds, the change in its amortised cost carrying value includes capital accretion of the principal due to inflation. As capital accretion occurs, it is also recognised in the interest cost.

Interest rate swap

An agreement between two parties to swap interest payments. It usually involves one party exchanging a stream of fixed interest cash flows for a stream of floating interest cash flows.

Issuance

The sale of debt securities in the primary market.

Liquidity risk

The risk that arises from the difficulty of selling an asset or buying back a financial liability. The AOFM faces liquidity risk with respect to transactions in existing Australian Government debt, such as debt repurchases prior to maturity, and restructuring the interest rate swap portfolio it manages.

Market risk

The risk that the price (value) of a financial instrument or portfolio of financial instruments will vary as market conditions change. In the case of a debt issuer such as the AOFM, the principal source of market risk is from changes in interest rates. For example, once debt has been issued, interest rates may move such that either debt servicing costs increase directly or the opportunity to reduce debt servicing costs is missed.

Market value

The amount of money for which a security trades in the market at a particular point in time.

Modified duration

A measure of the sensitivity of the market value of a debt security or portfolio of debt securities to a change in interest rates. It is measured as the percentage change in market value in response to a one percentage point change in nominal interest rates. Modified duration is the primary risk parameter used by the AOFM. Portfolios with higher modified durations have more stable interest costs through time but have a more volatile market value through time.

Net debt portfolio

The AOFM’s net debt portfolio comprises Commonwealth Government Securities on issue (net of Australian Government holdings), term deposits at the Reserve Bank of Australia, and interest rate swaps administered by the AOFM. This portfolio represents a subset of Australian Government general government sector net debt.

Nominal debt

Debt that is not indexed to inflation. Treasury Notes and Treasury Bonds are examples of nominal debt.

Operational risk

The risk of loss, whether direct or indirect, arising from inadequate or failed internal processes, people or systems, or from external events. It encompasses risks inherent in the agency’s operating activities such as fraud risk, settlement risk, legal risk, accounting risk, personnel risk and reputation risk.

Overnight cash rate

The interest rate charged on overnight loans between financial intermediaries. The Reserve Bank manages the supply of funds available in the money market to keep the cash rate as close as possible to a target set by the Bank Board as an instrument of monetary policy.

Overnight Indexed Swap (OIS)

A fixed for floating interest rate swap in which one party agrees to pay another party a fixed interest rate in exchange for receiving the average overnight cash rate recorded over the term of the swap. The term to maturity of such swaps is typically between one week and one year. Financial market participants enter into overnight indexed swaps to manage their exposures to movement in the overnight cash rate. Overnight indexed swaps are quoted by reference to the fixed interest rate leg of the swap. For example, the 3 month OIS rate is the interest rate for the fixed leg of an overnight indexed swap with a term to maturity of 3 months. Interest rates for term deposits placed by the AOFM with the RBA are set by reference to quoted rates for overnight interest swaps.

Overdue securities

Securities which have passed their maturity date but remain unpresented by stockholders. Overdue securities issued the Australian Government are predominately in the form of Treasury Bonds, Australian Savings Bonds and War Savings Certificates. The Australian Government repays the amount due when the stock is presented for payment. No interest accrues on the stock following its maturity date.

Physical debt

Securities that give rise to debt, in contrast to derivatives (which give rise to a contingent liability). Treasury Bonds, Treasury Indexed Bonds and Treasury Notes represent physical debt.

Primary market

The market where securities are issued for the first time and where the sale proceeds go to the issuer. For example, the primary market for Treasury Bonds is when the bonds are sold at tender by the AOFM on behalf of the Australian Government.

Principal

See face value.

Redemption yield

The rate of interest at which all future payments (coupons and principal) on a bond are discounted so that their total equals the current dirty price of the bond.

Repurchase agreement (repo)

An agreement under which the seller of a security agrees to buy it back at a specified time and price. The AOFM securities lending facility operates through repurchase agreements.

Repricing risk

The risk that interest rates have increased when maturing debt needs to be refinanced. Whenever the AOFM enters the market to borrow funds, it is exposed to repricing risk. Similarly, the use of interest rate swaps to reduce the duration of the portfolio, by receiving a fixed rate and paying a floating rate, increases the level of repricing risk.

Reserve Bank of Australia (RBA)

The Reserve Bank of Australia is Australia’s central bank. The RBA’s main responsibility is monetary policy. Other major roles are maintaining financial system stability and promoting the safety and efficiency of the Australian payments system. It also serves as banker to the Australian Government.

Residential mortgage-backed security (RMBS)

A debt instrument issued by a special purpose vehicle to finance the securitisation of a pool of loans that is secured by residential mortgages. A description of the principal features of a typical RMBS transaction can be found on pages 30-31 of the AOFM’s 2008-09 Annual Report.

Risk premium

The difference between the return available on a risk-free asset and the return available on a riskier asset.

Secondary market

Market where securities are bought and sold subsequent to original issuance, which took place in the primary market. Investors trade securities between themselves in the secondary market.

Securities lending

An activity whereby securities are lent to a financial market participant for a fee.

Securities lending facility

A facility established by the AOFM in 2004 that uses repurchase agreements to lend Treasury Bonds and Treasury Indexed Bonds to market participants for short periods. The facility is operated by the Reserve Bank of Australia on behalf of the AOFM. It supports the efficient operation of these markets as it facilitates trading by enabling dealers to obtain specific lines of stock when they are not readily available from other sources.

Securitisation

The process of converting a pool of assets into marketable financial instruments. The rights and obligations relating to the assets are assigned or transferred to a special purpose vehicle (typically a trust), which issues securities to pay for the assets. The cash flow from the asset pool is used to service the securities and any other costs of the special purpose vehicle.

Semi-government bond

A bond issued in the Australian capital market by Australian State or Territory governments.

Short-dated exposure

A measure of the proportion of the AOFM net debt portfolio subject to immediate repricing. After allocating each cash flow within the net debt portfolio proportionally to the nearest two annual pricing points, the share of the portfolio’s market value allocated to the zero-year pricing point is the short-dated exposure. For example, a liability due to mature in one day would be allocated almost entirely to the zero-year pricing point, while 50 per cent of a bond with six months to maturity would be allocated to the zero-year pricing point. The net interest cost of debt portfolios with higher short-dated exposures responds more quickly to movements in market interest rates, all else being equal.

Special Bond

A retail debt instrument issued by the Australian Government from 1959 to 1976 which was sold on tap and with an original maturity of around 7.5 years. The instrument was the forerunner of the Australian Savings Bond.

Spread

The difference between two prices or yields.

Swap

A financial transaction in which two counterparties agree to exchange streams of payments occurring over time according to predetermined rules.

Tax Free Stock (TFS)

Stock with no fixed date of maturity issued by the New South Wales, Victorian and South Australian Governments prior to 1 January 1924. Under the Financial Agreement Act 1994, Tax Free Stock is administered by the Australian Government on behalf of State governments.

Tender

A method of issuance whereby debt is sold through auction. The amount, coupon and maturity date of the stock are announced by the issuer. Registered participants then bid for their desired amounts of stock at interest rates at which they are prepared to buy. Bids are accepted from lowest interest rate (yield) upward until the issue amount has been filled. Stock is therefore allocated in order of lowest yield (and highest price).

Tenor

The tenor of a financial instrument is another name for its term to maturity.

Treasury Adjustable Rate Bond (TAB)

A medium-term debt security issued by the Australian Government from 1994 to 1997 that carried an interest rate adjusted quarterly in line with movements in the bank bill swap reference mid-rate, payable on the face value of the security. TABs were repayable at face value on maturity.

Treasury Bond

A medium- to long-term debt security issued by the Australian Government that carries an annual rate of interest (the coupon) fixed over the life of the security, payable in six monthly instalments (semi-annually) on the face, or par, value of the security. The bonds are repayable at face value on maturity.

Treasury Indexed Bond

A medium- to long-term debt security which was issued by the Australian Government in two forms (Capital Indexed and Interest Indexed) from 1985 until 2003. With Capital Indexed Bonds, the nominal value of the security, on which a fixed rate of interest applies, varies over time according to movements in the Consumer Price Index (CPI). At maturity, the adjusted capital value of the bonds is paid. Interest Indexed Bonds have all matured. Interest on these bonds varied over time according to movements in the CPI. The bonds were repayable at face value on maturity.

Treasury Note

A short-term debt security issued by the Australian Government at a discount and redeemable at par on maturity. The ‘interest’ payable on the Notes is represented by the difference between their issue value and their par or face value. Treasury Notes are issued to cover short-term mismatches between the Australian Government’s outlay and revenue streams that cannot be funded by other means, such as changes in the AOFM’s holdings of term deposits with the Reserve Bank of Australia.

Two-way price

A price (or yield) at which a market-maker is prepared to both buy and sell a particular financial product or instrument. That is, the simultaneous quoting of a bid and an offer.

War Savings Certificates (WSC)

War Savings Certificates were securities issued by the Australian Government in bearer form to raise funds during the World Wars. The securities had maturities ranging from 3 to 10 years in the case of the First World War and 5 to 7 years in the case of the Second World War. Certificates were issued at a discount, with interest being incorporated in the face value of the certificate payable at maturity. All outstanding War Savings Certificates War Savings Certificates are now overdue securities.

Weighted Average Issue Yield

The weighted average of yields for successful bids in a tender for the issue Commonwealth Government Securities. Yields are weighted by the share of the total amount sold that is allotted to each successful bidder.

Yield

The expected rate of return expressed as a percentage of the net outlay or net proceeds of an investment, not of its face value.

Yield curve

The graphical representation of the relationship between the yield on debt securities of the same credit quality but different maturities.

Last updated: 17 January 2017