Par value

The redemption value of a bond.  Also known as face value.

Parallel shift

With reference to yield curve movements, a parallel shift is an equal shift of the whole curve; either upwards or downwards.  A parallel shift in the yield curve occurs when the interest rate on all maturities increases or decreases by the same number of basis points.

Pass-through Security

A security backed by mortgages where the interest and principal paid on the underlying mortgages is passed through to the holders of the pass-through security on a pro-rata basis, less any servicing and guaranty fees.

Passive Management

An investment strategy which aims to track the performance of an index but not to beat it. Buy and hold strategy and indexing are passive management strategies.

Performance Evaluation

Compares the actual performance of the portfolio with the desired performance, on the parameters of returns and risks. It also includes attributing the reasons for the variances.

Performance Measurement

The process of quantifying the performance of a security/portfolio by calculating returns generated and the risks faced by the portfolio over the measurement period.

Performance Risk

The risk that the performance of a portfolio / manager may not track the appropriate benchmark over the next measurement period. Investors try to minimize this risk by allocating the investments to two or more investment managers.

Plain vanilla

The simplest form of a financial instrument.  Often associated with the first manifestation of an instrument, e.g. a "plain vanilla swap.”

Planned Amortization Class (PAC)

A structure to give the investor more stable cash flow by channeling prepayments from the underlying mortgage pass-throughs to companion or support classes.

Portfolio

A set of investments made by an investor in assets such as stocks, bonds, money market instruments, mutual funds, precious metals, real estate etc. with different risk/return characteristics and maturities. A well structured portfolio offers an investor the benefit of diversification which an individual security, asset class or investment sector may not offer.

Portfolio duration

The weighted average duration of a bond portfolio. The modified duration of each bond is multiplied by the market value weight of that bond to the entire portfolio; this product is then summed over all the bonds in the portfolio to get the portfolio duration. This is a measure of the interest rate risk of the portfolio.

Positioning a swap

Also called booking a swap.  The taking of a position in a swap by a swap dealer.  This contrasts with a broker in which the swap facilitator acts as an agent in a swap and does not take the swap on its own books.

Positive convexity

Convexity is defined as the property of a financial instrument that dictates the amount by which its value changes with changes in market rates. For example, a straight bond is said to have positive convexity if its price rises by an amount p1 when yields fall, and its price falls by an amount p2 when yields rise, and if p1>p2. Graphically, the curve of the instrument’s price against its yield will be a convex curve.

Power Reverse Dual Currency Notes

A power reverse dual currency note (PRDN) or power reverse dual currency bond (PRDB) is an exotic financial structured product where an investor is seeking a better return and a borrower a lower rate by taking advantage of the interest rate differential between two countries. The power component of the name denotes higher initial coupons and the fact that coupons rises as the domestic/foreign exchange rate depreciates. The power feature comes with a higher risk for the investor. Cash flows may have a digital cap feature where the rate gets locked once it reaches a certain threshold. Other add-on features are barriers such as knockouts and cancel provision for the issuer.

Prepayment Risk

Usually referred to in the ABS and MBS markets.  This is the risk that borrowers prepay their loan early.  In the mortgage market, homeowners will prepay their mortgage when interest rates decline.  As rates decline, the MBS investor will receive their principal back sooner than expected and will have to reinvest the proceeds at lower interest rates, thus exposing their portfolios to lower returns than originally expected.

Present value

The current value of a sum of money to be received at some later date.

Present value annuity factor

The present value of one dollar to be received at a later point in time.

Principal Only (PO)

The principal only cash flows of a mortgage pass-through.

Private Placement

Bonds that are directly placed with investors rather than underwritten and sold to the general public.  The issuer doesn’t have to register with the SEC and investors are able to write stronger covenants into the deal.  Private placements are less liquid but offer higher yield versus comparable credit/maturity public issues.

Protective Put

The purchase of a put option to hedge an asset or a portfolio from a decrease in price of the underlying asset or assets.

PSA

Public Securities Association (now known as the SIFMA) developed a prepayment benchmark based on CPR (conditional prepayment rate).  PSA is used as a measure of relative prepayment speeds.

Put option

An option that grants its holder the right to sell the underlying asset to the option writer at the option's strike price within a given time frame.

Puttable bond

A bond that allows the owner to terminate or redeem the bond prior to its scheduled maturity date.

Puttable swap

A fixed-for-floating interest rate swap in which the floating ratepayer has the right to terminate the swap prior to its scheduled maturity date.