Dictionary of Banking Terms: cushion
cushion
- interval between the issue date of a security and the earliest call date. Also referred to as call protection also, the degree of protection given investors holding discount pool mortgage-backed securities, which are essentially Collateralized Mortgage Obligation (CMO) backed by low-rate mortgages.
- cushion bond-a bond with a high coupon selling at a price below what might be considered a market price. This occurs when a bond is trading at a high premium but is callable at a lower price. The call option holds down the market price, creating a cushion between the market price and what could justifiably be a higher price.
- function served by a reserve account, such as a bank's loan loss reserves for possible bad debt.
Dictionary of Finance and Investment Terms: cushion
cushion
- interval between the time a bond is issued and the time it can be called. Also termed call protection.
- margin of safety for a corporation's financial ratios. For instance, if its debt-to-equity ratio has a cushion of up to 40% debt, anything over that level might be cause for concern.
- see Last In First Out.
