What is Back Up
Back up is financial jargon for the movement in a security's spread, price, or yield before issue. It is characterized by an increase in bond yields and a decrease in price. Simply stated, the price of a security "backs up" when a company finds the security more costly to issue when raising funds.
BREAKING DOWN Back Up
When a back up 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 either 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.
Within the bond market, a back up occurs when yields rise and prices fall. The yield references the return paid on a stock and is generally expressed as an interest rate paid on the bond or stock. As a result, the return rate increases, causing higher amounts paid out in dividends, but the price of the bond decreases.
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 when short-term interest rates are more favorable than long-term rates. In these instances, the newly acquired bond results in more favorable yields than the one that was sold.
Alternatively, back up is used to describe a market experiencing a short-term trend relating to the direction of the market. For example, if the market is seen to be gaining overall (bullish) but subsequently experiences a brief downward trend (bearish), that downward trend may be referred to as a back up. The term can also be used when describing the reverse.
Interest Rates in the Bond Market
Although the bond market is generally viewed as safer than other investment options, it carries the same risks. Interest rates have the highest impact on the price of a bond. As interest rates rise, prices on existing bonds fall. This occurs because existing bonds have lower interest rates, which makes them less valuable on the bond market than newer bonds issued at the current, higher interest rate.