BROWSE

Back Up

What is 'Back Up'

A back up is a slang term for the movement in spread, price or yield of a security, which makes it more expensive to issue. A back up is characterized by an increase in bond yields and a decrease in price. The price of a security "backs up" when a company finds the security more costly to issue when raising funds.

Explaining 'Back Up'

When a backup occurs, the fund-raising efforts of a company are diminished. For example, if interest rates increase, the required yields on most bonds rise as well. This forces a company to raise the coupon on its bond issue, which increases the interest payment, or sell the bonds at a discount, reducing the level of incoming cash.

Additional Definitions of Back Up Within Finance

A back up can also represent the action of selling one bond, generally with a longer maturity, and using those proceeds to purchase a different bond, often with a shorter maturity. This method is most commonly used in situations where short-term interest rates are more favorable than the longer-term rate. In these instances, the newly acquired bond results in more favorable yields than the one that was traded.

Interest Rates in the Bond Market

Although the bond market is generally seen as a safer investment when compared to some other options, it carries the same risks as others. The factor with the highest impact on the price of a bond is interest rates. As interest rates rise, prices on existing bonds fall. This is because the existing bonds have lower interest rates. This makes them less valuable on the bond market than newer bonds issued at the current, higher interest rate.


Further Reading


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papers.ssrn.com [PDF]
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From social control to financial economics: the linked ecologies of economics and business in twentieth century AmericaFrom social control to financial economics: the linked ecologies of economics and business in twentieth century America
link.springer.com [PDF]
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royalsocietypublishing.org [PDF]
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Trends in park tourism: Economics, finance and managementTrends in park tourism: Economics, finance and management
www.tandfonline.com [PDF]
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The challenge of poverty and the poverty of Islamic economicsThe challenge of poverty and the poverty of Islamic economics
papers.ssrn.com [PDF]
… the backup line of credit acts as an insurance policy against liquidity shocks that can drive up credit spreads … In response to the default, commercial paper issuers began establishing backup lines of credit with banks to prevent … CURRENT ISSUES IN ECONOMICS AND FINANCE …

Structural causes of the global financial crisis: a critical assessment of the 'new financial architecture'Structural causes of the global financial crisis: a critical assessment of the 'new financial architecture'
academic.oup.com [PDF]
… the backup line of credit acts as an insurance policy against liquidity shocks that can drive up credit spreads … In response to the default, commercial paper issuers began establishing backup lines of credit with banks to prevent … CURRENT ISSUES IN ECONOMICS AND FINANCE …


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