What is 'Back Up'

Back up is financial jargon for the movement in a security's spread, price, or yield before issue. A back up 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 descibe 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.

RELATED TERMS
  1. Discount Bond

    A discount bond is a bond that is issued for less than its par ...
  2. Bond Fund

    A bond fund is a fund invested primarily in bonds and other debt ...
  3. Current Yield

    Current yield is the annual income (interest or dividends) divided ...
  4. Extendable Bond

    An extendable bond (or extendible bond) is a long-term debt security ...
  5. Corporate Bond

    A corporate bond is a debt security issued by a corporation and ...
  6. Negative Bond Yield

    A negative bond yield is an unusual situation in which issuers ...
Related Articles
  1. Investing

    5 Fixed Income Plays After the Fed Rate Increase

    Learn about various ways that you can adjust a fixed income investment portfolio to mitigate the potential negative effect of rising interest rates.
  2. Investing

    Why Bond Prices Fall When Interest Rates Rise

    Never invest in something you don’t understand. Bonds are no exception.
  3. Investing

    Corporate Bond Basics: Learn to Invest

    Understand the basics of corporate bonds to increase your chances of positive returns.
  4. Investing

    How To Choose The Right Bond For You

    Bond investing is a stable and low-risk way to diversify a portfolio. However, knowing which types of bonds are right for you is not always easy.
  5. Investing

    How To Evaluate Bond Performance

    Learn about how investors should evaluate bond performance. See how the maturity of a bond can impact its exposure to interest rate risk.
  6. Investing

    4 basic things to know about bonds

    Learn the basic lingo of bonds to unveil familiar market dynamics and open to the door to becoming a competent bond investor.
  7. Investing

    Key Strategies To Avoid Negative Bond Returns

    It is difficult to make money in bonds in a rising rate environment, but there are ways to avoid losses.
  8. Investing

    Corporate Bonds: Advantages and Disadvantages

    Corporate bonds can provide compelling returns, even in low-yield environments. But they are not without risk.
  9. Investing

    Find The Right Bond At The Right Time

    Find out which bonds you should be investing in and when you should be buying them.
Hot Definitions
  1. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  2. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  3. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  4. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
  5. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
  6. Limit Order

    An order placed with a brokerage to buy or sell a set number of shares at a specified price or better.
Trading Center