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 date
The date on which a loan is agreed.

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 coupons. 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. In return, the buyer receives the whole of the following coupon.

Annuity loan
Loan for which service payments (interest and redemptions) are constant throughout the lifetime of the loan.

Auction
Issuance of government securities via auction is undertaken in large single issues at regular intervals. At an auction, a bond is offered at a given nominal interest rate, maturity and redemption profile. An eligible group of market participants may submit bids for a certain volume of bonds at a given price (or interest rate).

When government securities are sold via auction, a distinction is often drawn between two different methods of fixing the price paid by the bidders. In the "uniform pricing" method, a cut-off price is fixed on the basis of the bids received, and all bids at the cut-off price or above are met at the cut-off price. If the total volume of bids at the cut-off price and above exceeds the volume that the issuer intends to sell, allocation can take place on a pro-rata basis. This entails that for bidders who have submitted bids at the actual cut-off price, only a part of the bids are honoured. The Danish central government uses auctions with "uniform pricing" on sale of Treasury bills where bids are made for an interest rate rather than a price.

By the "multiple pricing" method, a cut-off price is likewise fixed on the basis of the bids received, and all bids at the cut-off price or above are met at the prices offered by the individual bidders. This method is used in the Danish central government's opening auctions for government bonds.

Basis points
1 basis point is 0.01 percentage point. This is applied especially to yield spreads.

Benchmark bond
A key issue. Benchmark bonds are used as a reference in the pricing of other bonds and financial products in the market. Changes of the benchmark status of Danish government bonds are determined and published by Government Debt Management after discussion in the Primary Dealer Committee.

Bid/ask price
The bid/ask price is the price from the perspective of the market maker. The difference between the ask and bid price is the bid-ask spread.

Borrowing requirement
The part of the gross financing requirement that is covered by issuance of government securities. Both domestic and foreign borrowing requirements are applied.

Bullet loan
Loan on which only interest is paid during the term of the loan. The loan is repaid in full on the maturity date. Danish government bonds and Treasury notes are bullet loans.

Buy-back issues
The government securities which the central government can buy back before maturity. Buy-backs are used to manage interest-rate risk, smooth the central government's redemption profile and to maintain liquid on-the-run issues.

Callable bond
Bond that can be redeemed before maturity by the borrower on terms agreed in advance. The debtor has 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 above and below par respectively. Capital losses/gains on issuance are distributed in the government accounts across the maturity of the loan under distributed capital losses on issuance.

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 calculated on the basis of rates offered by a number of individual banks (Cibor quoters). Cibor is fixed for 8 different maturities: 1, 2, 3, 4, 5, 6, 9 and 12 months.

Cibor is the reference interest rate for a large number of financial contracts. See also Euribor and Libor.

Clearing
Compilation of each participant's purchase and sale resulting in the net position of each participant. See also Settlement.

Clearstream
Securities clearing/settlement and custody institution.

Commercial Paper (CP)
Short-term debt instruments (zero-coupon paper) with maturities of up to one year. CP are mainly issued to cover a short-term financing requirement. The central government has a CP programme in the American and European markets.

Credit risk
The risk of a financial loss as a consequence of a counterparty's default on its payment obligations. In connection with the government debt, the credit risk occurs in relation to swaps.

Cross default
Clause in loan or swap agreement that permits cancellation of the agreement should one of the parties default on its payment obligations vis‑à‑vis the counterparty or a third party.

Distributed capital losses on issuance
Capital losses/gains on issuance are distributed linearly in the government accounts over the maturity of the loan.

Dual currency bond
Loan raised and serviced in one currency but repaid in another currency. In reality, the loan is a combination of an annuity loan (interest payments) in one currency and a zero-coupon loan (redemptions) in the other currency. See also Reverse dual currency bond.

Duration
The average fixed-interest period for a financial portfolio. Long duration of the government debt 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.

In other contexts, duration is also used to express the price sensitivity of the portfolio. The higher the duration, the greater the price sensi­tivity.

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

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. Used as a reference interest rate in a large number of financial contracts, e.g. swaps. See also Cibor and Libor.

Euroclear
Securities clearing/settlement and custody institution.

EuroMTS
Electronic trading platform for the most liquid benchmark bonds denominated in euro. Fully owned by MTS S.p.A. See also electronic trading.

Exchange-rate risk
The exchange-rate risk on the government debt is the risk of an increase in the value of the debt due to exchange-rate movements.

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. Options and swaps are examples of financial derivatives.

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.

Floating rate note (FRN)
Bond issued with floating interest rate.

Foreign-exchange reserve
The purpose of the foreign-exchange reserve is first and foremost to support Denmark 's fixed-exchange-rate policy vis-à-vis the euro area. The foreign-exchange reserve is held at Danmarks Nationalbank and mainly placed in foreign bonds and as foreign bank deposits.

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).

Forward price
The price fixed at the time of agreement in a forward contract on future delivery of goods, securities or currency.

Funding rules
Framework for the distribution of the central government's domestic and foreign borrowing. Under the domestic funding rules, the domestic borrowing in kroner in principle covers the central government's gross domestic financing requirement. The foreign funding rule implies that the foreign borrowing corresponds to the redemptions on the foreign debt raised in order to maintain the foreign-exchange reserve.

Government debt
Comprises liabilities in the form of domestic and foreign debt as well as assets in the Social Pension Fund, the High-Technology Foundation, the Financing Fund for increased distributions from the Danish National Research Foundation, and the balance of the central government's account.

Government-guaranteed company
Government-owned company that can raise government-guaranteed loans.

Gross financing requirement
The gross domestic financing requirement is compiled as the net domestic financing requirement with addition of redemptions on the domestic debt including buy-backs, the net bond purchases of three government funds, and krone payments from the central government in currency swaps.

The gross foreign financing requirement is compiled as the net foreign financing requirement with addition of repayments on the foreign debt including buy-backs and foreign-exchange payments from the central government in currency swaps. See also borrowing requirement.

Haircut
The deduction made from a paper's market value on determining its collateral value. This gives a prudent estimate of the value of the securities received as collateral for lending or another outstanding. A haircut takes account of the risk of the paper's depreciation from the date of compilation of the collateral value until the possible enforced realisation of the paper, if the pledgor of collateral (the borrower) defaults. The central government uses haircuts for collateral pledged by counterparties in connection with swaps and securities lending.

ICMA (International Capital Market Association)
International association of financial institutions that trade securities in the international market and e.g. work for standardisation of practice and documentation of settlement of trades.

ICMA was established on 1 July 2005 on the merger of the International Securities Market Association (ISMA) and the International Primary Market Association (IPMA).

Interest-rate fixing
The interest-rate fixing at a given time is the amount for which a new interest rate is to be fixed within one year. The portfolio at a given time affects the interest-rate fixing via the redemptions within the next year as well as the size of the floating-rate debt and the swap portfolio on which a new interest rate is to be fixed within one year. Analyses of the interest-rate fixing take account of the expectations of the Ministry of Finance of future budget surpluses or deficits that respectively reduce and increase the interest-rate fixing, as well as new swaps and buy-backs.

Interest-rate risk
In connection with the government debt this is the risk of higher interest costs as a consequence of the development in interest rates. See also refinancing risk.

In other contexts, interest-rate risk applies to the risk of capital losses as a consequence of interest-rate fluctuations.

ISDA (International Swaps and Derivatives Association)
International association of financial institutions. ISDA's objective is to work for standardisation of practice and documentation in relation to swaps.

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

ISO currency codes

Issuance
Danish government bonds are issued on MTSDenmark. See also auction and tap sale.

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

Lead manager
The bank(s) that arrange(s) a bond loan. Lead manager is responsible for coordination, distribution and documentation of the supply of bonds. A syndicate of banks normally undertakes distribution of the bond loan, cf. also syndicated bond issue. Government Debt Management uses syndicated bond issues in its foreign borrowing.

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. 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 in securities.

Medium Term Note (MTN)
A bond issued in accordance with standardised loan documentation.

Minimum coupon rate
The permitted minimum coupon rate for bonds that exempts the capital gains of investors who are liable to pay income tax in Denmark from taxation, cf. the Capital Gains Act (Consolidated Act No. 1015 of 24 October 2005).

Ordinary fixing of the minimum coupon rate takes place for the six-month periods January-June and July-December. The minimum coupon rate is fixed on the basis of a reference yield calculated on a daily basis by the Copenhagen Stock Exchange. The reference yield is calculated to two decimal places as a simple average of the yields to maturity for open, fixed-yield krone bonds (apart from callable bonds quoted above par and index-linked bonds) for the last 20 trading days prior to 15 December and 15 June. The minimum coupon rate is 7/8 of the average yield compiled, rounded down to the nearest whole number of percentage points.

The minimum coupon rate can be changed extraordinarily should the reference yield on 10 consecutive trading days be more than 2 percentage points higher, or 1 percentage point lower, than the average which is the basis for the current minimum coupon rate. The new minimum coupon rate is 7/8 of the average of the reference yield for these 10 trading days, rounded down to the nearest whole number of percentage points.

Monetary-policy counterparties
Financial institutions with access to the monetary-policy instruments: deposits with Danmarks Nationalbank on a day-to-day basis, purchase of certificates of deposit and loans against securities as collateral. Danish banks and mortgage-credit institutes, as well as a number of branches of foreign credit institutions, comprise the monetary‑policy counterparties.

MTS Associated Markets (MTSAM)
Belgian company with market segments for wholesale trading in Belgian, Danish and Finnish government securities.

MTS Denmark (MTSDk)
A market segment under MTS Associated Markets (MTSAM) for wholesale trading in Danish government bonds. The segment uses the electronic trading system Telematico. Further information on trading in Danish government securities is available on www.mtsdenmark.com. See also Electronic trading.

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

Operational risk
The risk of economic loss as a consequence of faults in internal processes, human errors or system faults, or as a consequence of external events.

Option
A contract giving the owner (the buyer) the right, but not the obligation, to buy or sell an underlying asset (goods, a financial instrument or a currency) at an agreed price (strike price) at an agreed future time or for an agreed future period. The seller is obliged to recognise the owner's right.

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 borrower's right to early redemption of the bond. The option-adjusted duration is lower than if the borrower did not have the possibility of early redemption. In connection with government debt, option-adjusted duration is used to calculate the duration of the Social Pension Fund's portfolio of callable bonds.

Par yield
Par yields are adjusted for differences in the remaining maturities of the bonds and are used e.g. when comparing yields over time or across countries. Par yields are calculated on the basis of estimated zero-coupon yield curves. For instance, the par yield for a 10-year Danish 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"), calculated on the basis of the zero-coupon yield curve for Danish government bonds.

Perpetual
Loans 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, e.g. bullet loans and simple interest-rate swaps. See also Structured loans.

Portfolio
Term used for holdings of assets and/or liabilities.

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 dealers typically have the exclusive right to bid at government securities auctions, and are normally obliged to accept a certain minimum amount. Primary dealers are also typically obliged to e.g. contribute to liquidity in the bond market by quoting current bid and ask prices for bonds vis-à-vis other banks (market-making).

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. See also Public issue.

Public issue
Bond loan that is offered to the general public and is listed. See also Private placement.

Rating
Credit rating given by rating institutes such as Standard & Poor's and Moody's, cf. Tables 10 and 11 of the Appendix of Tables.

Re-financing risk
The risk that the borrower has to refinance redemptions on the debt at a time when the interest-rate level is high, or in a period where the borrower's specific borrowing terms are particularly unfavourable.

Re‑lending
Re-lending constitutes central-government loans to first and foremost Ørestadsselskabet I/S (the Ørestad Development Corporation), but also to A/S Storebælt (the Great Belt Bridge ) and A/S Øresund (Øresund Landworks), etc. These loans precisely reflect an existing government paper. Coupon, interest due date and maturity date will thus be identical with an existing government paper. The price of the loan is set on the basis of the current market conditions.

In addition, Danish Ship Finance A/S has access to a re-lending facility whereby re-lending is offered as fixed-rate serial loans with a maturity of up to 12 years. Re-lending to Danish Ship Finance A/S can take place in both Danish kroner and US dollars.

Re-lending list
The range of government securities in which re-lending can be granted. The re-lending list is determined by Government Debt Management and comprises all fixed-rate government bonds that are bullet loans in Danish kroner in maturity segments between 2 and 10 years. The central government finances re-lending via key on-the-run issues.

Reverse dual currency bond
Loans raised and repaid in one currency, while interest is paid in another. See also Dual currencybond.

Saxess
Electronic trading system for bonds and shares used on e.g. the Copenhagen Stock Exchange. See also Electronic trading.

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/borrower is paid to transfer securities to a buyer/lender. On conclusion of the agreement, the seller/borrower simultaneously commits to buy back the securities at an agreed price on expiry of the agreement. For legal/technical reasons, securities lending is defined in the contracts as sale and buy-back of securities, but in reality these are collateralised loans. The counterparty in this transaction lends against securities as collateral.

The central government and the Social Pension Fund lend government bonds to primary dealers in Danish government bonds.

Serial loan
A loan for which the debt is repaid in equal redemptions on each interest due date. As the outstanding debt decreases throughout the maturity of the loan, the interest payments, and thereby the overall payments, are lower for each due date.

Settlement
Completion of trade by final settlement of agreed commitments. See also Clearing.

Strategic benchmarks
Guiding points for liquidity and interest-rate exposure used in the implementation of the Danish government debt strategy. For example, strategic benchmarks are set for the outstanding amount in key on-the-run government securities and for the duration of the government debt.

Structured loan
A loan on special terms, e.g. special redemption terms or built-in options, is characterised as a structured loan, in contrast to a plain vanilla loan.

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

Currency swaps are used to restructure debt among various payment currencies. Payments in one currency are thus swapped to payments in another currency. In a currency swap from kroner to euro, the central government e.g. receives interest in kroner at a floating rate and pays interest in euro at a floating rate. The counterparty pays interest and repays the krone principal, in return for payments on the euro principal. Normally, principals are exchanged both at the start and end of the deal.

Interest-rate swaps are typically used to restructure debt between fixed and floating interest rates. In an interest-rate swap from fixed to floating interest rates in the krone market, the central government e.g. receives interest on the swap at a fixed rate (e.g. 5- or 10-year) and pays interest in kroner at a floating rate. In contrast to a currency swap, there is no exchange of principal between the parties in an interest-rate swap. The principal in an interest-rate swap is synthetic and is used only to determine the size of the interest payments at the individual due dates. The principal in an interest-rate swap is often described as the notional value rather than the nominal value. The central government's interest-rate swaps are typically transacted as portfolio swaps, i.e. not connected to specific loans.

The overall value of a swap is usually zero when the swap is transacted, but the value of the swap can subsequently become positive or negative, depending on market developments in interest and exchange rates.

Swap assignment
Term used when a swap is assigned to another counterparty. The purpose of the transaction can be to reduce the credit risk on the original swap counterparty.

Swap interest rate
The swap interest rate is the fixed interest rate paid or received in an interest-rate swap against respectively receipt or payment of a floating interest rate (normally Euribor for euro interest-rate swaps and Cibor for krone interest-rate swaps).

Swap termination
When a swap agreement is cancelled before actual expiry, it is said to be terminated. This can be by specific agreement between the parties or because an event has occurred which gives one party the right to terminate the swap. On termination, settlement is at the market value of the swap.

Syndicated bond issue
Bond issue intermediated by a syndicate of banks, typically comprising 2-4 lead managers and 4-6 co-lead managers. The lead managers are responsible for coordinating and distributing the largest share of the issue, while the remaining bonds are sold via co-lead managers. Issuance is often based on bookbuilding whereby lead managers and co-lead managers obtain bids from investors. When the "book" of bids has been built up, the issuer determines price and allocation, that subsequently can be accepted by the investors.

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

Telematico
The dominant electronic trading system for wholesale trading of European benchmark bonds.

The Cost-at-Risk (CaR) model
Simulation model developed by Government Debt Management to quantify the risk on the exposure of the central-government debt portfolio to future interest-rate developments. The model simulates 2,500 scenarios for the central government's annual interest costs 10 years ahead.

Absolute CaR for a given year indicates the maximum interest costs for the debt with a probability of 95 per cent. Relative CaR is the difference between absolute CaR and the expected interest costs (mean). Conditional CaR quantifies relative CaR for a given future year, conditional on known interest rates up until that year. The target is therefore not affected by a longer calculation horizon.

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

Volatility
The movements in the price of an asset, e.g. the fluctuation in a bond price.

VP Securities Services
Securities clearing/settlement and custody 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 term structure is described as inverse.

Yield spread
The spread between the yields to maturity on two bonds. On calculating yield spreads, adjustment is often made for differences in the bonds' remaining terms to maturity, e.g. based on an estimated yield or zero-coupon yield curve (par yield spread).

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. On calculating the yield to maturity all payments are included, irrespective of whether they are interest or redemption payments.

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. Treasury bills and Commercial Paper 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.