Reviewed by Oct 05, 2020| Updated on
Back up is a financial terminology concerning the movement of a security's price, spread, or yield prior to issue. It is characterised by a rise in bond yields and a fall in price. Plainly defined, the security price "backs up" when a company determines that the security is more expensive to issue when raising funds.
If back up happens, the company's fund-raising activities are reduced. For example, if interest rates increase, the expected returns on most bonds would also increase. It forces a corporation to either lift the coupon on its bond issue, which raises interest costs or sell the bonds at a loss, which reduces the amount of cash incoming.
In the bond market, a back-up happens when yields rise, and prices decline. The return refers to the return paid on the stock and is usually expressed as the interest rate charged on the debt or the stock. As a result, the rate of return increases, leading to higher sums paid out in dividends, but the price of the bond decreases.
Backup can also constitute an activity to sell a bond, usually with a longer maturity, and to use the proceeds to buy a different bond, often with a shorter maturity. This is most widely used when short-term interest rates are more attractive than long-term interest rates. In such cases, the newly obtained bond yields are more favourable than the one offered.
Conversely, backup is used to describe a market that is experiencing a short-term change in business direction. For example, if the market is seen to be increasing overall (bullish) but then experiences a brief downward trend (bearish), the downward trend may be referred to as a back up. The word may also be utilised to describe the opposite.