 |
|
Glossary
A |
B | C
| D |
E | F
| G |
H | I
| J |
K | L
| M |
N | O
| P |
Q | R
| S |
T | U
| V |
W | X
| Y |
Z
See banker’s acceptance.
A form of sales charge imposed on investors by some mutual funds.
These charges may be called back-end loads, deferred loads, deferred
sales charges, contingent deferred sales charge (CDSC), or redemption
fees. Regardless of the name, funds with deferred sales charges
are simply one form of load funds. These funds offer investors the
opportunity of paying a sales charge later rather than paying one
at the time of purchase. The main advantage is that earnings from
the investment in a deferred charge fund are paid on the full amount
of the investor’s principal. In contrast, earnings in a fund
with an front-end load are only paid on the net amount of the investor’s
principal after the front-end charge is deducted. A second, potentially
significant, advantage, is that deferred sales charges often decrease
as the investor’s holding period lengthens. See front-end
load, load, and no load.
Unfilled orders for goods or services. Orders for goods or services
that the company has not yet delivered or rendered to its customers.
In general, the process of comparing predictions from a forecasting
model to observable data. A model may be run using historical inputs
after which the mode's forecast is compared to the actual outcomes
observed for the forecasted period. In practice, either final model
outputs or intermediate calculations may be backtested. Backtesting
is often inexact because of the impact of extraneous events on the
observable data.
A delivery of securities that does not fulfill the requirements
for good delivery. See good delivery.
A safekeeping agreement between a safekeeping institution and its
customer. A contract whereby a third-party bank or other financial
institution, for a fee, agrees to exercise ordinary care in protecting
the securities held in safekeeping for its customers.
A loan for which the final payment, larger than all of the previous,
regularly scheduled payments, is due in a lump sum before the loan
is fully amortized. The final payment is called a balloon payment.
A mortgage loan with a balloon payment. Typically, the balloon payment
is due 10 or 15 years after the loan is made.
A contractually required loan payment, almost always the final payment,
that is larger than the other contractually required, periodic loan
payments. Results from the fact that required, periodic loan payments
are too small to fully amortize the loan balance by the maturity
date.
See bond anticipation note.
The PSA range within which certain performance measures such as
yield and average life are set for a CMO tranche. This range is
expressed in terms of PSA speeds. Differences between predicted
speeds and the actual speeds subsequently experienced can cause
bracket creep.
A method of determining a cap rate that blends the return or cash
flow required by an equity investor with the return or interest
rate required by the debt lender. Also called cash flow method.
The time between the date a check is deposited in a bank and the
date it is charged to the drawer. Also called check-clearing or
transit float. Not the same as float.
or
See bank-specific liquidity risk.
More formally known as The Financial Recordkeeping and Reporting
of Currency and Foreign Transactions Act of 1970. Designed to aid
the federal government in detecting illegal activity through tracking
certain monetary transactions. Requires financial institutions,
broker-dealers, casinos and money services businesses to file reports
of suspicious transactions. Also establishes certain exemptions
to the currency transaction reporting requirements. The corresponding
BSA regulation is found at 31 C.F.R. Part 103. See also USA PATRIOT
Act which substantially amended this statute in 2001.
A contract with a bank outlining the responsibilities of the bank
and the bank’s customer.
One of three main types of liquidity need environments. The risk
that a bank might experience a funding crisis resulting when one
or more events or problems applicable just to the bank cause funds
providers to lose confidence in the bank. Also know as internal
liquidity risk or bank name risk. See liquidity in the ordinary
course of business and systemic liquidity risk.
A short-term financial instrument that is the unconditional obligation
of the accepting bank. Banker’s acceptances, or BAs, arise
from transactions involving the import, export, transit, or storage
of goods, including domestic as well as international transit. For
investors, it is very important to realize that the underlying transaction
that gives rise to a BA is almost completely irrelevant to the credit
quality or the liquidity of the instrument. The actual BA is created
at a late stage in the underlying transaction when a bank accepts
its obligation to pay the holder of the accepted draft. In other
words, when the transaction becomes a BA it becomes an unconditional
obligation of the accepting bank. From an investor's point of view,
a BA is a bank obligation that has at least the same credit strength
as any CD issued by the same bank. Typically, BAs are stronger than
CDs because, in addition to the credit strength of the accepting
bank, BAs are backed by the credit strength of a drawer; an endorsing
bank, if one is involved in the transaction; and usually by the
pledge of documents representing ownership of the trade goods and
insurance on the goods. BAs do not, however, carry federal deposit
insurance. BAs are considered safe, liquid, short-term money market
investments. For bank holders of BAs, an additional issue is called
eligibility. See eligible banker’s acceptances.
A maturity pattern within a portfolio in which maturities of the
portfolio assets are concentrated in both the short and long ends
of the maturity spectrum with substantially smaller holdings of
assets with intermediate-term maturities.
(1) The difference between rates or prices of assets that are related
but not identical. For example, the difference between the cash
price and the futures price of a security. Sometimes called spread.
(2) The difference between the price of a futures
contract and the price of the underlying.
(3) The number of days in a bond coupon period.
See day basis.
A unit of measurement for interest rates or yields that is expressed
as a percentage. One-hundredth of one percent. One hundred basis
points equal one percent.
The risk to a holder of financial instruments that a change in prevailing
interest rates will not affect the prices of or yields on similar
instruments in exactly equal amounts. For example, an increase in
prevailing interest rates might raise 3-month U.S. Treasury yields
by 100 basis points while 3-month certificate of deposit yields
go up by only 85 basis points. One of the four primary components
of interest rate risk. Sometimes called spread risk.
A type of interest rate swap in which the net cash flows that the
parties agree to exchange are based upon the differences between
two different interest rate indexes. Banks use basis swaps to hedge
basis risk by locking in a net interest rate spread between a variable
rate cost of funds tied to one index and a variable rate asset tied
to a different index. See interest rate swap and swap.
The holder of an instrument.
Securities owned by and payable to whomever holds the physical certificate.
Securities without a registered owner.
(1) A standard of comparison used for judging performance. For example,
the return from a bond portfolio may be compared to the return from
a benchmark instrument or portfolio. In this context, a nearly risk-free
benchmark or one that closely matches the risk in the bond portfolio
may be selected.
(2) The process of comparing a forecast or simulation
to a standard for the purpose of evaluating the accuracy of the
forecast or simulation. For example, the forecasted change in net
income projected by an ALM simulation model may be benchmarked by
comparing that forecast to subsequent earnings. Also called benchmarking.
(3) See index.
The party that receives all of the benefits or rights of an owner
of a security even though the legal ownership of the security is
recorded in the name of a broker or a bank in street name.
An option that allows the issuer of a security to call the security
at discrete points in time after a certain date. Also known as a
modified American option. See American, European and Asian options.
A Greek letter used by mathematicians to label the degree of sensitivity
to changes in one variable to changes in another. The name for correlation
of the changes.
Gap reports modified to mollify the errors caused by basis risk.
The essential concept of beta-adjusted gap is that all interest
rates do not change by the same amounts, but that there is an identifiable
relationship, a correlation, between changes in various interest
rates. Some rates are more sensitive to change than other rates.
In beta-adjusted gap analysis, the volumes of assets and liabilities
subject to repricing are weighted to reflect the historical sensitivity
of the yields or costs of those assets and liabilities relative
to some benchmark yield or cost.
See bond equivalent yield.
or
The trading price acceptable to a prospective buyer of securities.
Informal name for the New York Stock Exchange.
A legally enforceable arrangement between two parties to two or
more swaps that creates a single legal obligation covering all of
the individual swap contracts. This means that the size of the risk
that one party is exposed to for the default or insolvency of the
counterparty is net of all of the positive and negative values of
the contracts included in the bilateral netting arrangements. Parties
that engage in numerous swap contracts may use bilateral netting
agreements to be able to recognize only the net sum of their obligations
rather than the gross total of the individual swap contracts. Bilateral
netting is also used by a party that wishes to cancel a swap contract,
in which case the party can enter into a new swap that is an equal
but offsetting swap with the same counterparty. The two parties
can then enter into a bilateral netting agreement under which the
two equal but offsetting swap contracts net to zero.
The number of days between statement dates.
Float resulting from delays in billing or in the payor’s response
to those bills. For governments, can also occur if payor taxpayers
drag their feet in filing self-assessed taxes. When due dates are
fixed, an easy measure of billing float compares the date paid to
the date due.
A liability created under a type of accrual accounting used when
firms such as contractors bill their customers in accounting periods
for costs that they incur in subsequent accounting periods.
See Treasury bills.
A preliminary, temporary insurance agreement that obligates the
insurance company to pay the insured if the loss insured against
occurs after the binder is issued but before the insurance policy
is issued.
A model used to value options. This model was developed in 1973
by Fischer Black and Myron Scholes. While not the only sophisticated,
mathematically derived model for valuing options, it was the first,
and it remains the best known.
An informal term meaning a lien on all of the debtor's current and
subsequently acquired personal property assets.
Informal name for a daily Standard & Poor's publication titled
the Blue List of Current Municipal Offerings.
See Bond Market Association.
(1) A debt security. Sometimes used only in reference to long-term
debt securities. Sometimes called a fixed-income security even though
many bonds have floating interest rates.
(2) A guarantee provided by a surety or insurance
company. For example, fidelity bond, indemnity bond, performance
bond, or payment bond.
A short-term note sold by a public entity that will be repaid from
the proceeds of an anticipated bond issue.
An annual yield, expressed as a percentage, describing the return
provided to bond holders. A bond equivalent yield is double the
simple interest, semiannual yield. Since Treasury and agency notes
and bonds, as well as most corporate and municipal bonds, pay interest
semiannually, the bond equivalent yield is a way to compare yields
available from discount securities such as Treasury bills and BAs
with yields available from coupon securities. From that usage, this
yield measure is also known as the coupon yield equivalent or the
equivalent bond yield. For securities that pay daily, monthly, or
quarterly interest, the bond equivalent yield understates the benefits
obtained from the compounding of income.
A document that sets forth the terms of a bond issue, the obligations
of a bond issuer, and the rights of the bond holders. The bond indenture
is a contract between the company that issued the bonds and the
bond trustee acting on behalf of the bond holders. Bond indentures
may include a variety of provisions and thus define and create the
differences in term and risk.
Credit support for a bond or a tranche in a multi-tranche debt security.
The credit support is provided by an external, third party - usually
an insurance company that specializes in financial guarantees.
An industry trade organization for U.S. broker/dealers. Among other
things, the BMA has developed standard documentation for repurchase
agreement transactions and for describing prepayments received from
MBSs. Formerly known as the Public Securities Association (PSA).
The simultaneous, or nearly
simultaneous, purchase of one debt security with the proceeds from
the sale of another debt security. The swap is done after the investor
has conducted an analysis showing that the debt security being purchased
has more desirable characteristics than the debt security being
sold.
See investment value (for convertible bonds).
(1) Either the process of obtaining or the state of having a fidelity,
indemnity, performance, payment, or similar bond. In commercial
construction financing, bonding usually refers to a contractor’s
performance bond. For employees of financial institutions, bonding
usually refers to fidelity bonds. See fidelity bond, payment bond,
and performance bond.
(2) Refinancing short-term debt with long-term
debt is sometimes called bonding out.
The nonphysical record of ownership, custody, and transfer of securities
through electronic means. The system for settlement, delivery, and
custody of uncertificated securities.
Stocks, bonds, other securities, and some certificates of deposit
that are purchased, sold, and held with only manual or computer
accounting entries rather than transfers of physical certificates
to evidence the transfer. Typically, instead of a physical certificate
or instrument, buyers only receive receipts or confirmations as
evidence of their ownership.
The value at which an asset is carried and reported on the owner’s
balance sheet. For debt securities, the current book value may be
the purchase price plus accretion (in the case of securities purchased
at a discount) or the purchase price minus amortization (in the
case of securities purchased at a premium). Book value may differ,
perhaps significantly, from market value.
For financial risk mangers, bootstrapping means (1) the procedure
where coupon bonds are used to generate the set of zero-coupon bond
prices, or (2) the use of historical returns to create an empirical
probability distribution for returns. Bootstrapping is an iterative
calculation technique, often used in the construction of specialized
time series. For example, the calculation of forward rates from
traditional yield curves uses an iterative process to extract the
implied rate for each forward period. The term is used in other
ways in other contexts.
(1) The price level at which income equals expense.
(2) The expense level at which expense equals income.
(3) The market price of a financial instrument
that just equals the purchase price plus cost of carry for an investor
owning that instrument.
(4) The price level of a call option that equals
the sum of the exercise price plus the premium paid to acquire the
option, or the price level of a put option that equals the exercise
price minus the premium.
The maximum interest rate that a firm or property can pay from available
cash flow and still have enough cash flow to make all required principal
and interest payments.
The minimum occupancy level of a commercial real estate property
that will generate enough cash flow to make all required principal
and interest payments.
The specific prepayment rate (speed) at which the yield of a mortgage
security is equal to the yield available from another security to
which it is being compared.
The minimum sales level that a firm must achieve in order to generate
enough cash flow to make all required principal and interest payments.
The amount of time before the higher yield on the convertible bond
compared to an otherwise similar nonconvertible bond compensates
the investor for the excess cost of the convertible over the common
stock. Usually calculated by using current yields rather than the
coupon and dividend rates.
A party who brings buyers and sellers together. Brokers do not take
ownership of the property being traded, but rather they are compensated
by commissions. Brokers are not the same as dealers; however, the
same individuals and firms who act as brokers in some transactions
may act as dealers in other transactions.
Bank deposits solicited by a third-party broker. Usually but not
always deposits for some amount slightly below $100,000 so that
all interest as well as principal is covered by deposit insurance.
Brokers are typically paid a fee by the depository bank.
See Bank Secrecy Act.
In gap reports, the predefined time interval groups are often called
buckets. The buckets can be defined to represent whatever time units
a bank wants to see in its gap reports. The time intervals can be
single months or years. Smaller buckets, such as one-month buckets,
give more detail, which in turn can provide a more accurate measure
of interest rate risk. On the other hand, smaller buckets can require
a greater number of buckets to show the interest rate risk far enough
into the future for prudent analysis. Often, one-month buckets are
used for the first six or twelve months with larger time intervals
used as buckets for later periods.
Insurance covering perils resulting in loss caused by the builder's
operations on the borrower's property. Usually required by property
owners and by construction lenders when a contractor is hired to
make improvements in an existing building or to construct a new
building.
Laws, usually but not always enacted by local government units,
that set safety and fire protection standards. These codes affect
the materials and methods used in the construction of buildings.
For example, a code provision might require sprinkler systems in
motel rooms.
Informal term used by some lenders to describe a provision in a
line of credit promissory note that allows for a temporary increase
in the maximum amount that can be borrowed under the line of credit.
A bulge is particularly suited to loans to firms with seasonal increases
in sales.
A name occasionally used to describe a promissory note used for
transactions that do not require any principal to be repaid until
the maturity of the note. Interest is usually due periodically prior
to maturity. Most often used to describe loans with time periods
of at least one year.
An instrument that repays the full principal at maturity.
A convertible bond trading so far below its conversion value that
it trades on investment value alone, meaning it has value only as
a bond. It has essentially no equity value.
Planned amortization class tranches in collateralized mortgage obligations
for which the companion or support tranche has been completely retired
by larger than expected prepayments from the underlying mortgage
loans. Because the companion or support tranche is no longer outstanding
and can therefore no longer absorb future prepayments, the maturity
of the PAC tranche(s) may be shorter than expected. See stressed
PAC.
One of the more well known option trading strategies. A complex
option trading strategy using puts and calls with different maturity
dates and different strike prices. An option strategy designed to
profit from stable or decreasing volatility.
A lump sum payment made to a creditor by a borrower or a third party
to reduce the amount of some or all of the borrower's periodic payments
to repay the indebtedness.
A form of secured, short-term investment in which a security is
purchased with a simultaneous agreement to sell it back to the seller
at a future date. The purchase and sales agreements are simultaneous
but the settlement dates for the transactions are not. The purchase
is a cash transaction while the return sale is a forward transaction
since it occurs at a future date. A buy/sellback is very similar
to a reverse repurchase agreement, except that in a buy/sellback
the investor is compensated by the difference between the purchase
price and sales price rather than by interest. Unlike a reverse
repurchase agreement, a buy/sellback probably does not include a
haircut or collateral margin. Furthermore, the buy/sellback may
be treated differently in the event of the buyer’s bankruptcy.
Every transaction that is a buy/sellback from the buyer/lender’s
point of view is, by definition, a sell/buyback from the seller/borrower's
point of view.
A purchaser who buys inventory from a seller who is in the business
of selling that type of inventory.
|
