Glossary of Terms

Arbitrage —refers to trading to generate a risk-free profit without investment. For purposes of the province’s Matched Book Program, arbitrage refers to borrowing funds at one rate and investing the same funds at a higher rate with minimal risk.

Benchmark portfolio — represents the debt manager’s neutral liability position and represents the minimum cost subject to an acceptable level of risk. The manager may make active decisions to deviate from the neutral position with the intention of adding value to the actual portfolio. The performance of the manager is judged by comparing the total cost of the actual portfolio with the total cost of the benchmark portfolio.

Call — an option which gives the holder the right but not the obligation to purchase a financial instrument at a set price at some point in the future.

Commercial Crown corporations — corporations which generate revenue from the sale of services at commercial rates and pay their own operating expenses, including debt service charges.

Commercial debt — self-supporting debt.

Debt per capita — the ratio of debt to total population.

Debt to GDP — the ratio of debt outstanding at year end to provincial nominal gross domestic product (GDP) for the calendar year ending in the fiscal year.

Debt to revenue — the ratio of debt outstanding at fiscal year end compared to revenue from all sources during the year.

Defeasance — is an accounting term meaning extinguishment of debt by setting aside sufficient assets/investments in an irrevocable trust to satisfy future interest payments and principal repayment.

Derivative product — a swap or other financial instrument that is used to hedge interest rate or foreign currency exposure.

Discount — the difference between the par value of an issue and its actual price. Discounts, which occur when the price is below par, are amortized over the life of a bond/note.

Fiscal agency loans — debt borrowed directly by the government with proceeds relent to Crown corporations and agencies.

Guaranteed debt — debt incurred by Crown corporations and others with a provincial government guarantee as to the payment of principal and interest.

Hedging — using derivative products to reduce exposure to interest rate and currency fluctuations.

Infrastructure — includes roads, water and sewer services, ferry and transit systems, schools, hospitals, universities and other capital works.

Interest bite — how much of each dollar of provincial revenue is used to pay for taxpayer-supported debt service costs.

Market Value — The market value of a portfolio is the sum of the market values of the individual securities comprising the portfolio. The market value of a security is the amount one would reasonably expect to pay for it on the open market. In particular, the market value of a debt instrument is the present value of its future cash flows. The market value of debt is negative because the cash flows are negative (interest and maturity payments made by the province to the investor). The market value of a derivative instrument is also the present value of its future cash flows. However, a derivative may have both negative and positive cash flows, and hence its market value may be either negative or positive.

Matched Book Program — a portfolio of offsetting assets and liabilities with equal maturities. The program is designed to generate low-risk arbitrage profit for the government. Also called the Provincial Treasury Revenue Program.

MTN — domestic medium term note — is often placed directly with end investors, much like a private placement.

Non-guaranteed debt — debt which is incurred by a government body but which is not guaranteed by the province.

Premium — the difference between the par value of an issue and its actual price. Premiums which occur when the price is above par, are amortized over the life of a bond/note.

Provincial government direct debt — funds borrowed for government operations and capital spending, refinancing of maturing debt and other financing transactions.

Put — an option which gives the holder the right but not the obligation to sell a financial instrument at a set price at some point in the future.

Self-supporting debt — includes debt of entities which generate sufficient revenues from external sources to cover their operating expenses including debt interest costs and redemptions. It also includes debt of the warehouse borrowing program.

Sinking fund — a trust account established by policy to provide for the orderly repayment of debt obligations. Sinking funds accumulate through annual payments and retain all investment earnings. Sinking funds are deducted form gross debt to yield net debt.

Swap — a derivative product used to hedge interest rate and currency exposure. Swaps involve an exchange of cash flows.

Taxpayer-supported debt — includes direct debt incurred for government operations and debt of Crown corporations and agencies, which undertake capital projects that provide essential services to the province, but require an operating or debt service subsidy from the provincial government.

Warehouse borrowing program — takes advantage of receptive markets to borrow money in advance of actual requirements. Funds are invested until required. This debt is eventually allocated to either the provincial government or its Crown corporations and agencies.