Appendix VI: Definition and Description of Instruments

International Monetary Fund
Published Date:
May 2002
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Equity Instruments

Ordinary Share

Ownership share with full voting rights, commonly known as “equities.” Ordinary shares are usually issued in registered form.

Preference Share

Part of the share capital of a company that ranks after secured creditors but before ordinary shareholders in the event of liquidation. Preference rights are defined in the articles of association of the relevant company but may relate to dividend, voting rights, or distribution of surplus assets. (Issued in registered form.)

Participating Preference Share

These preference shares have further rights that are normally linked to the relevant company’s profits or dividend payment on ordinary shares. (Issued in registered form.)

Other Preference Shares

These will have the rights of standard preference shares but may also be:

  • cumulative (i.e., income arrears are carried forward to the next payment date),
  • convertible (into ordinary shares),
  • redeemable (at a fixed date or contingent on a special event), or
  • permanent (not redeemable except at issuer’s option). (Issued in registered form.)

Preferred Stock

Stock that pays a stipulated dividend to the holder. Preferred stock has a claim prior to that of common stock upon the earnings of a corporation and upon the assets of the corporation in the event of its liquidation. Frequently without voting rights. (Registered; may be held in book-entry form.)

Callable Preferred Stock

Callable preferred stock can be repurchased by its issuer at a specified price. (Registered; may be held in book-entry form.)

Convertible Preferred Stock

Convertible into a fixed amount of common stock at the option of the owner. (Registered; may be held in book-entry form.)

Protected Preferred Stock

Protected stock has its dividend guaranteed in the event that the corporation does not earn a profit in a certain year. A special fund established from previous corporate earnings pays the dividend when it is due. (Registered; may be held in book-entry form.)

Cumulative Preferred Stock

Cumulative preferred stock is entitled to receive at a later date those dividends that accumulate during profitless years (dividends in arrears). During such years, common stock and regular preferred stock are generally paid no dividends. (Registered; may be held in book-entry form.)

Participating Preferred Stock

Participating preferred stock allows its holders to receive dividends in addition to the fixed amount in years in which the common stock dividend exceeds a specified level. (Registered; may be held in book-entry form.)

Prior Preferred Stock

A class of preferred stock that has senior rights over other classes of preferred stock. (Registered; may be held in book-entry form.)

Investment Trust Share

A share of a company bound by a trust deed, formed to invest in specific types of securities. Shares in an investment trust can usually be bought and sold only through the stock exchange. Sometimes referred to as a “closed-end” fund. (Issued in registered form.)

Unit Trust and OEIC (Open-Ended Investment Company)

A unit of an open-end fund or an open-ended investment company (OEIC) governed by a trust deed or memorandum with specific investment objectives. The funds are pooled under management, and the price of units is based on net asset value. Purchases and sales are largely directed through the managers. (Issued in registered form; the units may be certificate or dematerialized.)

Share Action d’une Société d’Investissement à Capital Variable (SICAV)

Share representing one part of ownership in an open-ended investment company (OEIC) with a variable capital (SICAV). Certain companies issue capitalization and distribution shares. (Issued in bearer or registered form; may also be held in book-entry form.)

Share Action d’une Société d’Investissement à Capital Fixe (SICAF)

Share representing one part of ownership in a fixed capital investment company. (Issued in bearer or registered form; may also be held in book-entry form.)

Unit Trust Part d’un Fonds Commun de Placement

Participation unit in a mutual fund (“unit trust”). A unit trust can issue capitalization and distribution units. (Issued in registered or bearer form; may be held in book-entry form.)

Debt Instruments

Due to the increasing internationalization of debt instruments, they are defined by market, interest, maturity, currency, borrower, amount issued, collateral, convertibility, and subordination.

Defined by the Market

The matrix below helps to classify a debt instrument by market, taking into account the other main elements of the instrument. Many (domestic) sovereign bonds are now traded intensively on international markets. Nevertheless, they still remain domestic instruments: Their form, tax, and custody aspects are fixed under specific rules, which all are different, depending on the market.

MarketCurrencyIssuerMain market
InternationalDomestic and basketAnyInternational and domestic
GlobalEurocurrencyAnyInternational and domestic

International Bond

Bond issued by a borrower in a foreign country. International bonds include foreign bonds, parallel bonds, and Eurobonds.

Global Bond

International issue placed at the same time in the Euro and one or more domestic markets with securities fungible between the markets.


Bond issued by a borrower in a foreign country, denominated in a Eurocurrency (e.g., U.S. dollar, Canadian dollar, yen, euro, French franc, etc.), underwritten and sold by an international syndicate of financial institutions.

Foreign Bond

Securities—for example, Yankee, Samurai, Shogun, Shibosai, Bulldog, Matador, and Daimyo bonds—issued by a borrower in a domestic capital market other than its own, usually denominated in the currency of that market, underwritten and sold by a national underwriting and selling group of the lenders’ country. (Usually issued in bearer or registered form.)

Defined by Interest

Fixed-Rate Bond

A fixed-rate, interest-bearing debt security.

Bull and Bear Bond

Fixed-interest bond whose value at maturity is dependent on the performance of a stock market index. The issue is divided into two parts: a bull bond and a bear bond. The bull bond’s redemption value rises if the market index increases and declines if the index decreases. Conversely, the bear bond has a higher redemption value if the stock market weakens and a lower value if stock prices rise.

Step-Up or Step-Down Bond (or Note)

Rate will go up or down as indicated in the terms and conditions of the notes.

Zero-Coupon Bond

Bond without a coupon providing interest payments. Zero-coupon bonds have an issue price well below 100 percent, with repayment on maturity at face value or par. The investor’s return is the difference between the issue price and redemption value. Variants of zero-coupon bonds include the following:

Capital Growth Bond

Issue price of par (100 percent) with redemption at a multiple of that amount.

Deep-Discount Bond

A bond with issue price significantly below maturity price because of a lack of coupon or a coupon below market rate.

Liquid Yield Option Note (LYON)

A LYON combines the features of a zero-coupon bond with those of a convertible bond. The zero-coupon bond pays no interest until it is redeemed at or before maturity; the difference between the issue price and the redemption price represents the accrued interest. In addition, the LYON bond may be converted by the holder into stock of the issuing corporation within a specified period and at a specified conversion price.

Floating-Rate Notes (FRNs)

FRNs are medium- to long-term debt obligations with variable interest rates that are adjusted periodically (typically every one, three, or six months). The interest rate is usually fixed at a specified spread over one of the following specified deposit rates:

  • London interbank offered rate (LIBOR),
  • London interbank bid rate (LIBID), or
  • London interbank mean rate (LIMEAN) (average of LIBOR and LIBID)

FRNs may also use short-term obligations of the U.S. government (Treasury bills) to establish their interest rate. Interest is payable at the end of each interest period.

Variants of FRN are:

Drop-Lock Bond

The drop-lock bond (DL bond) combines the features of both floating- and fixed-rate securities. The DL bond is issued with a floating-rate interest that is reset semiannually at a specified margin above a base rate, such as six months LIBOR. This continues until the base rate is at or below a specified trigger rate on an interest fixing date or, in some cases, on two consecutive interest fixing dates. At that time the interest rate becomes fixed at a specified rate for the remaining lifetime of the bond.

Mismatch FRN

FRN with a coupon structure that is refixed more often and for different maturities than the interest periods (e.g., the interest rate is based on six months’ LIBOR but adjusted every month).

Mini-Max (or Collared) FRN

FRN with a minimum and a maximum interest rate.

Capped FRN

FRN with a maximum interest rate.

Flip-Flop FRN

FRN that combines an FRN with a very long final maturity, or even a perpetual issue, and an investor option to convert after a specified period into a short-dated FRN that typically pays a lower margin over LIBOR than the original issue. The investor further has the option at a later date to convert back into the initial issue before redemption of the short-dated note.

Convertible Rate FRN

Issue that carries the option to convert either from an initial floating-rate note into a fixed-rate bond or from a fixed-rate bond into a floating-rate note. This provides ways in which investors and borrowers can speculate or hedge against the future course of interest rates.

Variable-Rate Note

FRN where the margin over the reference rate is fixed by the issuer and the remarketing agent several days before the following interest period. The holders, during a predetermined period of time, have the right to either bid for the new applicable margin over the reference rate or (under certain conditions) put the notes to the arranger (but not the issuer) on the following interest payment date.

Defined by Maturity

Bond with Call Option

The issuer has the right to redeem the bond at a specified earlier date than the one originally fixed as the final maturity.

Bond with Put Option

The investor has the right to require redemption of the principal at a specified date earlier than the one originally fixed as the final maturity.

Retractable Bond

Issue carrying the option (for both the issuer and the investor) for early redemption at one or several fixed dates.

Extendable Bond

The investor has the option at one or several fixed dates to extend the maturity.

Perpetual Bond

Bonds that are due for redemption only in the case of the borrower’s liquidation. Usually the terms and conditions provide a call option at a premium. The interest rate can be fixed for the whole maturity or only for an initial period (e.g., 10 years). For each subsequent period the interest is reset as provided in the terms and conditions. (Issued in bearer form; entire bond should be reprinted after coupon sheet is used up.)

Bullet Bond

An issue with no call and no prepayments until maturity.

Sinking Fund

Payments made by the borrower on a regular basis to a special account to set aside the necessary funds for the redemption of its long-term debt. In the Euromarket, borrowers can meet their requirements through purchases in the open market or through drawings by lot.

Defined by Currency

Dual-Currency Bond

A dual-currency bond is a hybrid debt instrument with payment obligations over the life of the issue in two different currencies. The borrower makes coupon payments in one currency, but redeems the principal at maturity in another currency in an amount fixed at the time of the issue of the bonds. The price of the bonds in the secondary market is indicated as a percentage of the redemption amount.

The following are variants of dual-currency bonds:

Foreign Interest Payment Security (FIPS)

FIPS is an instrument in the Swiss capital market. Its features are similar to a reverse dual-currency bond that offers interest payments in a foreign currency but keeps the principal in Swiss francs.

Adjustable Long-Term Putable Security (ALPS)

The currency conditions are similar to a FIPS; however, the bonds have a floating interest rate and a put option.

Yen-Linked Bond

Bond expressed in U.S. dollars or Swiss francs, whose face value is also indicated in yen (parity fixed at issuance). Issuance and redemption are in yen, which are converted into the original currency at the parity of the payment date.

Multiple Currency Clause Bond

Issue with an investor’s option to choose the currency for redemption and sometimes also for interest payments.

Special Drawing Right (SDR) Bond

The SDR bond is issued in the currency of the IMF. The SDR is a composite currency unit based on a standard basket system of valuation. SDR bonds are traded only in U.S. dollars.

Shogun or Geisha Bond

Non-yen-denominated issue in the Japanese domestic market by a non-Japanese borrower. (Issued in bearer or registered form; may be held as global certificate.)

Defined by Borrower

Brady Bonds

Eurobonds issued by the government of a developing country refinancing its debt to foreign commercial banks under a Brady-type agreement. The agreement is characterized by introduction of an IMF plan and the opportunity for the creditor to exchange its debt against a set of instruments aimed at satisfying both counterparts of the deal. The main features of Brady bonds are collateralization, debt reduction, debt-equity conversion, underwriting against new money, and options on oil revenues.

Guaranteed Bond

Guaranteed bonds have their interest, principal, or both guaranteed by another corporation. It is common for a parent company to guarantee bonds issued by subsidiaries. (Bearer or registered; may be held in book-entry form.)

Defined by Amount Issued

Deferred or Partial-Payment Issues

Instruments that consist of debt obligations where the investor pays only a portion of the issue price on the initial payment date and the balance several months later. The structure allows the borrower to achieve a lower all-in cost compared with straight issues by offering the investor a potential gain from a decline in rates and/or protection against depreciation of the currency between the time of the initial payment and that of the final payment. The appeal of these securities is a function of the interest rate and currency outlook at any given time.

Defined by Collateral

Mortgage-Backed Security (MBS)

A generic term that refers to securities backed by mortgages, including pass-through securities, mortgage-backed bonds, mortgage pay-through securities, and collateralized mortgage obligations (see below).

Pass-Through Mortgage-Backed Security

A security representing an ownership interest in an underlying pool of mortgages. The cash flow from the underlying mortgages is “passed through” to the security holder as monthly payments of principal, interest, and prepayments. Pass-through securities have been guaranteed and issued by the Government National Mortgage Association (GNMA), the Federal National Mortgage Association (FNMA or “Fannie Mae”), and the Federal Home Loan Mortgage Corporation (FHLMC or “Freddie Mac”), as well as private institutions. (Registered; usually in book-entry form.)

Private Pay-Through Security

These securities are secured by mortgage collateral and are issued by private financial entities (sometimes called “private conduits”) with no guarantees by any government or government-sponsored agency. Some securities are issued by public offering (registered with the Securities and Exchange Commission, SEC), and others are marketed through private placement. (Registered.)

Collateralized Mortgage Obligation (CMO)

CMOs are debt obligations of an entity established by a financial institution or other sponsor. They are collateralized by whole mortgage loans or by mortgage-backed pass-through securities guaranteed by the Government National Mortgage Association (GNMA), the Federal National Mortgage Association (FNMA), or the Federal Home Loan Mortgage Corporation (FHLMC). CMOs are sold in multimaturity classes called tranches. (Registered; usually in book-entry form.)

Asset-Backed Security

A security collateralized by loans, leases, unsecured receivables, or installment contracts on personal property, automobiles, or credit cards. The cash flows generated by the underlying obligations are used to pay principal and interest to the asset-backed security holders. (Registered; usually in book-entry form.)

Defined by Convertibility/Exchangeability

Convertible Issue

A bond or note that can be converted for newly issued shares or bonds at predetermined prices during specified periods of time.

Exchangeable Issue

A bond or note that can be exchanged for existing shares or bonds of a third party at predetermined prices during specified periods of time.

Straight Bond

Bond without clauses granting conversion or warrant privileges.

Reverse Convertible Bond Obligation

Convertible bond that may be redeemed at the issuer’s discretion against existing shares of an underlying company that has no economic relation with the issuer or the guarantor of the bonds.

Defined by Subordination

Subordinated debt (sometimes called mezzanine finance) has many of the characteristics of both debt and equity. A subordinated creditor agrees to rank after senior creditors but before ordinary shareholders in a liquidation. For regulatory purposes certain forms of subordinated debt issued by financial institutions may be treated, like equity, as “primary capital.”

Money Market Instruments


A short-term, negotiable bearer promissory note usually issued at a discount with maturities of less than one year. (Issued in bearer form; may be held as a global certificate.)

Certificate of Deposit (CD)

A negotiable instrument issued by a bank, evidencing a deposit for a stated rate of interest (floating rate or fixed rate). Because the bulk of CDs in the international securities market are issued by a bank in London or a London branch of a foreign bank, these issues are termed “London CDs.” However, CDs are also issued on the international securities market by banks from their country of origin. (Issued in bearer form; may be held as a global certificate.)

Revolving Underwriting Facility (RUF)

A medium- to long-term finance instrument that allows the borrower, by issuing short-term paper, to benefit from cheaper short-term funds. An RUF consists of the following:

  • Euronotes;
  • The borrower issues short-term paper for periods of less than one year through different mechanisms (CDs, in the case of banks);
  • Underwriting banks’ contingent liability (backup line);
  • A group of underwriting banks, whose obligation consists of purchasing any of the above-mentioned unsold short-term notes at previously arranged rates or, alternatively, who provide funds through separate lending arrangements that offer the issuer the certainty that the requested amount will be available. The instruments that RUFs most closely resemble are floating-rate notes and syndicated loans. An RUF, however, includes the special feature of staggered maturities. (Issued in bearer form.)

Transferable Revolving Underwriting Facility (TRUF)

Similar to an RUF, but the underwriting banks’ contingent liability (backup line) to purchase notes in the event of nonplacement by the borrower is fully transferable.

Note Issuance Facility (NIF)

Another name for an RUF.

Grantor Underwriting Notes (GUNs)

A floating-rate note facility is similar to an RUF in that a group of banks (grantors) undertake to purchase any notes put back to them by investors on any FRN interest rate fixing date. Put notes are then auctioned out to the market by the grantors.

Banker’s Acceptance (B/A)

Bill of exchange accepted by large American banks. B/As bear interest for three to six months. B/As constitute an irrevocable primary obligation of the drawer and of any endorsers whose names appear on them. The minimum amount accepted is $10,000. B/As primarily serve to finance imports and exports. (Bearer or registered in book-entry form.)

London Eurodollar Banker’s Acceptance (LEBA)

A short-term, negotiable, bearer money market instrument in the form of a “bill of exchange” drawn by a company on a prime bank and accepted by the bank. LEBAs are generally issued with maturities of three or six months, in either interest-bearing or discount-to-yield form. The rate of interest on a LEBA is usually set at a margin below the three- to six-month LIBOR rate to approximate a rate close to the three- or six-month prime bank CD rate. The interest is calculated on the basis of the actual days over a 360-day year. After a LEBA is accepted by the bank on which it is drawn, it becomes a primary obligation of that bank.

Euro Commercial Paper (ECP)

Euro Commercial Paper is an unsecured general obligation in the form of a promissory bearer note, issued on a discount or interest-bearing basis by large commercial and industrial organizations. Maturities of ECP range from a few days up to one year, with most being 182 days; the minimum amount is usually $500,000. ECP provides a flexible alternative to short-term finance credit lines with commercial banks, and the rate for prime issuers is usually set at a small margin above that offered by prime bank money market securities of comparable maturities.

Treasury Bill (T-bill)

Government obligation, issued for periods of three to 12 months. T-bills are traded on a discount basis. They are the most liquid form of short-term investment. (In book-entry form only.)

Municipal Note

Municipal notes are interest-bearing securities issued by state and local governments as interim financing for a period usually less than one year. (Registered; may be held in global or book-entry form.)

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