Guide to Analysing Companies


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FINANCE Essencial finance

Strike price
The price, in contracts for put options and call options, at
which the option to buy or sell the underlying security can be
S
STRIKE PRICE
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03 Essential Finance 10/11/06 2:22 PM Page 285


exercised. Also called the exercise or basis price. (See also in
the money.)
Strips
Shorthand for separate trading of registered interest
and principal of securities, the practice of separating a
bond into its capital element (the corpus) and its coupons
(the bits that bear the interest). The capital is then sold as a
zero-coupon bond and the coupons as an interest-only se-
curity. In this case, the acronym (Strip) preceded the full name.
Investment bankers hit upon the idea and started trading in the
stripped securities before the US Treasury actually legitimised
the practice. Indeed, the idea took off so well that now the Trea-
sury issues pre-stripped obligations to certain types of Treasury
bonds so that they can be traded as Strips. The term also refers
to certain combinations of put options and call options
and to shares stripped of their entitlement to dividends.
Subordinated
A loan or security with an inferior (or more junior) claim to
repayment compared with other loans or securities. In the
pecking order of securities, a junior subordinated debenture
therefore ranks below a subordinated debenture. But the latter
may still be downgraded if the issuer agrees to demote it by
means of a subordination letter. The chance for one type of se-
curity to throw its weight around at the expense of others only
really occurs if the company issuing them is liquidated.
Sub-prime lending
Lending to people who find it difficult to borrow from tradi-
tional sources, such as banks, because they are perceived to be
a bad risk. Sub-prime loans carry a high rate of interest to
compensate the lender for the higher chance of default. In the

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