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See capital appreciation bond.
An option trading strategy that involves buying two calls or two
puts on the same underlying, but with different maturity dates.
If two call options are used, the spread may be referred to as a
calendar call spread. Similarly, if two put options are used, the
spread may be described as a calendar put spread. When the exercise
price of the two options is the same, the calendar spread is described
as a horizontal spread. When the exercise price of the two options
is different, the calendar spread is described as a diagonal spread.
An option that grants the holder the right to purchase an instrument
in the future at a price established today. The call option gives
the holder the right but not the obligation to purchase the underlying
instrument.
The date on which a call option may be exercised. The date before
the contractual maturity date on which a bond may be redeemed at
the option of its issuer.
See call option.
A contract, or a provision in a contract, that gives its holder
the right to buy an underlying security, commodity, or currency
before a certain date. The option to purchase is for a predetermined
price called the strike price. When the call option is a provision
in a contract defining a transaction such as a bond or a loan, it
is sometimes called a call feature. Options are often used in hedging.
or
Making demand for payment in full of a loan, usually a loan that
is in default, Often referred to as calling the loan.
The price at which a call option may be exercised. For example,
the price that an issuer is required to pay in order to redeem a
bond before its maturity.
A feature of a bond issue that protects investors from risk of prepayment.
In mortgage-backed bonds, call protection may take the form of prepayment
penalties or lock-in periods. A lock-in period is a time period,
starting from the issue date and ending at a specified subsequent
date, during which an otherwise callable bond may not be called.
This time period is specified in the bond’s indenture agreement.
The call protection period may be a few months or as long as 25
years. For convertible bonds, see hard call protection and soft
call protection.
The risk that declining interest rates will create an economic incentive
for the owner of a call option to exercise that option. In MBSs,
call risk is the risk that declining interest rates will accelerate
prepayment of the underlying mortgage loans and thereby shorten
the life of the investment.
A bond that the issuer has the right to redeem prior to maturity.
Some callable bonds may be redeemed on a single call date while
others have multiple call dates. Some callable bonds may be redeemed
at par while others can only be redeemed at a premium.
A receive fixed/pay floating interest-rated swap with an embedded
option that permits the holder to cancel the swap prior to its maturity.
An acronym for the institution composite rating system used by the
federal regulators during a regulatory examination. The evaluation
is based on Capital, Asset Quality, Management, Earnings and Liquidity.
An upper limit for a variable, such as the upper limit on the interest
rate paid or received in a transaction. For example, an adjustable-rate
mortgage may have a cap of 10 percent. In this case, the rate can
adjust however the loan terms provide, without exceeding 10 percent.
Also called a ceiling. Cap is often used with its converse, a floor.
A cap may be an embedded option, such as the cap on the rate for
a floating rate loan, or a stand-alone option contract.
An interest rate used in the process of capitalization.
A lending and credit analysis term that describes a borrower’s
or applicant’s ability to meet debt service obligations. See
debt service coverage.
(1) Usually refers to the total of the equity accounts in a firm.
For a bank, the equity accounts are common and preferred stock,
surplus, and undivided profits. For other corporations, equity accounts
are common and preferred stock, surplus, and retained earnings.
For bank capital, see tier 1 and tier 2 capital.
(2) Sometimes used as a synonym for common stock,
as in capital stock.
Securities that are issued at par, but which do not remit interest
to the holder until maturity. The interest accrues at the coupon
rate and is compounded at a stated rate. The issuer holds the accumulated,
compounded interest until the maturity date of the bonds. At the
maturity date, the bondholder receives all of the accumulated interest
along with the par amount of the security. Reflecting their structure,
CABs are sometimes called compound interest bonds or accumulators.
Expenditures resulting in the acquisition of or addition to fixed
assets. Expenditures made for the purpose of acquiring capital assets.
,
See lease.
A type of systemic liquidity risk. The risk of funding problems
arising from problems in the secondary markets for financial instruments.
For a community bank, the main problem is that a capital market
disruption arises from the fact that the bank is only able to sell
investment assets at very unacceptable prices. See flight to quality
and systemic liquidity risk.
Hedging done with instruments traded in the capital markets, including
but not limited to swaps, options, and futures. (These hedge instruments
are derivatives.) The term "capital markets" is slightly
broader than "exchange traded" since some instruments,
such as interest rate swaps, are bought and sold outside of the
exchanges in over the counter (OTC) markets that are still capital
markets.
(1) The process of imputing a value to an income stream by dividing
the annual net income before income taxes and depreciation by a
rate of return expressed as a decimal. This process is used in real
estate lending and appraisals.
(2) The total of, or the mix between, a corporation’s
shareholders’ equity and its long-term debt.
(3) The process of reflecting a long-term, noncancelable
lease on the lessee’s balance sheet.
A measure of a corporation’s reliance on long-term debt. Similar
to the debt-to-worth ratio but not the same. This ratio is calculated
by dividing long-term debt by the sum of long-term debt plus equity.
Interest that a lender "receives" by adding the unpaid
interest to the amount of the loan balance to be paid by the borrower.
Lease obligations that must be capitalized under GAAP; the unpaid
future lease payments due under the terms of the lease must be shown
as a liability on the firm's balance sheet. As a general rule, this
requirement applies to most equipment and buildings leased by a
business and used in the conduct of the business.
An option that grants the holder the right to purchase a cap.
See certificates of automobile receivables.
The practice of imposing late charges for previously unpaid late
charges. Federal Regulation AA prohibits this practice for consumer
loans.
A banking expression used to describe the total sum of assets represented
by cash, funds on deposit with the Federal Reserve bank, funds on
deposit with correspondent banks, and items in transit to those
banks
Defined by FASB as short-term, highly liquid investments that are
both: (a) readily convertible to known amounts of cash, and (b)
so near their maturity that they represent insignificant risk of
changes in value because of changes in interest rates.
A finance and accounting term used to describe the net amount of
cash generated by a firm’s operations. In traditional and
over-simplified usage, cash flow is defined as the sum of net income
after tax plus all noncash expenses such as depreciation. More modern
and sophisticated usage defines cash flow to include the net difference
between all cash outflows and cash inflows.
The difference between cash inflows and cash outflows in a defined
time period. Also called liquidity gap.
A type of hedge defined by FAS 133. An entity may designate a derivative
instrument as hedging the exposure to variability in expected future
cash flows that is attributable to a particular risk. That exposure
may be associated with a recognized asset or liability such as all
or some of the future interest payments due for a variable-rate
debt. Alternatively, that exposure may be associated with a forecasted
transaction such as a planned purchase or sale. Certain requirements
must be met to qualify for cash flow hedge accounting. Gains or
losses from the effective portion of a derivative used for a qualifying
cash flow hedge are reported in comprehensive income. In other words,
the gains and losses are used to adjust equity but are not included
in income or losses from operations. Gains or losses from the ineffective
portion of hedges must be reflected in earnings. See comprehensive
income, FAS 133, and hedge effectiveness.
A loan agreement or bond indenture provision that requires the borrower
to apply excess cash flow (or some percentage of excess cash flow)
to reduce the outstanding debt balance.
The monthly internal rate of return of an investment based upon
a projected stream of monthly principal and interest payments. The
cash flow yield depends upon the prepayment assumption that is used
to describe anticipated cash flows.
A commitment to purchase or sell a security at a future date that
is binding on both the buyer and the seller. Also known as a firm
commitment.
Financial instruments or commodities for which the value is dependent
upon the term, coupon rate, or other characteristics of the instrument
itself. Differs from derivative instruments, for which the value
is partially dependent upon characteristics or prices of an underlying
cash instrument. Cash instruments include U.S. Treasury, agency,
and government sponsored enterprise securities; municipal securities
and corporate securities; syndicated loans; securitized mortgages,
car loans and credit card receivables, (but not collateralized mortgage
obligations); and bank obligations such as negotiable certificates
of deposit and banker’s acceptances. Not the same as cash
market or cash market instruments.
Items (primarily checks) along with a letter that specifies amounts
and directions. Cash letters are sent to a bank for transmittal
to other banks for the purpose of clearing checks drawn on other
banks.
One or a combination of various techniques for accelerating cash
receipts, delaying cash disbursements, effectively utilizing banking
services, managing or augmenting liquidity, increasing the amount
of cash available for investment, and/or increasing returns from
liquid investments.
U.S. Treasury bills. Unlike more typical bills with 13-, 26- or
52-week maturities, cash management bills are issued with maturities
selected to match expected tax receipts.
(1) noun - A market for buying or selling financial instruments,
commodities, or other property for cash settlement and immediate
(as opposed to future) delivery. Also called spot market.
(2) adjective — A financial instrument or
transaction for which the ownership of the financial instrument
or commodity is transferred at, or very shortly after, the time
of the transaction, as opposed to futures market transactions where
ownership of the financial instrument or commodity is transferred,
if it is transferred at all, at a later date. Also called spot or
spot market transactions.
The agreement of a buyer and seller to exchange the security and
the payment on the same day as the trade. For money market instruments,
cash settlement is the delivery of purchased securities against
payment in fed funds on the same day that the trade is made. See
settlement.
The amount of cash that can be obtained by the policy owner upon
cancellation of a whole life insurance policy. CSV may also be borrowed
by the policy owner. Only certain kinds of life insurance policies
have cash surrender values.
See Certificate of Accrual on Treasury Securities.
See collateralized bond obligation.
See Chicago Board of Trade.
See collateralized debt obligation.
An upper limit for a variable. For example, an adjustable- rate
mortgage may have a ceiling of 10 percent. In this case, the rate
can be adjusted however the loan terms provide without exceeding
10 percent. Also called a cap.
See Comprehensive Environmental Response, Compensation, and Liability
Act of 1980.
See delivery and acceptance certificate.
A proprietary name for a zero coupon Treasury security created from
a coupon-bearing Treasury security.
A form of asset-backed security. Securitized installment
loans secured by automobiles.
A deposit of funds, in a bank or savings and loan association, for
a specified term that earns interest at a specified rate or rate
formula. CDs may be secured or unsecured. CDs may be for terms as
short as one week or for terms of 10 years or longer. CDs may have
fixed or floating rates. CDs may be issued in either non-negotiable
or negotiable form and in either physical or book-entry form. CDs
may be issued by domestic offices of U.S. banks, by foreign branches
of U.S. banks, and by foreign banks at either domestic U.S. or foreign
locations. See: Eurodollar CDs, jumbo CDs, negotiable CDs, and Yankee
CDs.
A written form prepared by a state office or officer attesting to
the fact that a named corporation is in good standing in that state.
A document that describes an insurance policy. It is issued for
informational purposes only. It is not legal evidence of insurance
and may even describe a policy that has not yet been issued. See
binder.
A document that specifies the country of origin for goods traded
internationally.
Undivided proportionate interests in the future lease payments made
by the municipal lessees/issuers. Investors owning COPs own the
right to receive a portion of the payments arising from the lease,
but do not own debt of the lessee.
See survey.
See title opinion.
Legal term used (especially in UCC Article 8) as an adjective to
describe stocks, bonds, other investments, and certificates of deposit
held in physical form.
See Commodity Futures Trading Commission.
Another name for abstract of title.
See level factor amortization.
A term used by lenders and credit analysts to describe an individual’s
integrity and management ability. The term also may be used to describe
the integrity and management ability of individuals managing a corporation.
As used by lenders, character does not mean the citizenship or moral
rectitude of an individual.
The reduction of unpaid invoices owed to a trade creditor due to
a dispute, return, offset, or any reason other than an account debtor's
inability to pay.
An archaic term for personal property that was common in many states
before the adoption of the UCC. The term is used almost exclusively
by bankers and lawyers who were trained before the adoption of the
code.
An archaic term for a security agreement.
A category of personal property defined by Article 9 of the UCC.
Chattel paper is a document that includes both a monetary obligation
and a security interest in goods or a lease. For example, installment
sales contracts that include a retail purchaser's promise to pay
and a security interest retained by the seller become chattel paper
for a bank when the seller pledges them to another party. Such a
document is often called dealer paper because automobile dealers
engaged in indirect lending frequently sell or pledge their retail
installment contracts to a financial institution.
The cash market instrument that is the least expensive instrument
to acquire and deliver into an exchange-traded contract at maturity.
A commercial demand deposit instrument signed by the maker and payable
on the presentation to the bank on which it is drawn.
A process whereby deposited checks are retained by the fist bank
(payee’s bank) with notification sent to the local bank (payor’s
bank) that the check has been deposited. Canceled checks are not
returned to the maker. Sometimes called check safekeeping.
The time between the date a check is deposited in a bank and the
date it is charged to the drawer. Also called bank float or transit
float.
A futures exchange.
A futures exchange.
See Clearing House Interbank Payment System.
A personal right to receive or recover a debt or damages, but only
through a lawsuit.
The process of unnecessary purchases and sales in customers’
accounts for the purpose of generating commissions.
See customer identification program.
See tranche.
A letter of credit that can be drawn upon with a simple written
request not supported by other documentation. Often used to identify
or describe standby letters of credit. This type of letter of credit
is often used to enhance the credit quality of securities.
See sequential-pay REMIC.
clean up (v.), clean-up (adj.),or cleanup (n.)
(1) An informal phrase used by lenders to describe a provision in
loan documents, usually the promissory notes used for lines of credit.
The clean-up provision requires that the loan balance outstanding
under the line of credit be reduced, usually to zero, for a period
of time, usually one or two months, with some specified frequency,
usually annually. Sometimes called an "out of debt" requirement.
A clean-up requirement is particularly well suited to borrowers
with significant seasonal fluctuations in sales.
(2) The unwinding of an asset-backed security when
the remaining balance is very small is sometimes referred to as
a clean-up call.
The collection of funds on which a check is drawn and the subsequent
payment of these funds to the holder of the check.
An account used to accumulate total charges or credits so that they
can be distributed later among the accounts to which they are allocable,
or so that the net differences can be transferred to the proper
account.
An agency connected with a financial exchange through which brokers
and other parties to a securities trade settle trades conveniently,
with minimum paperwork. Financial settlements are simplified by
combining and netting transactions. Sometimes called a clearinghouse.
A privately owned electronic system in New York City that is used
to transfer funds between banks. Often used for funds moving into
and out of the United States. See Fed wire and SWIFT.
See collateralized loan obligation.
Credit extensions in which the borrower receives the entire proceeds
of the loan at or shortly after the loan is closed. In closed-end
credit facilities, the amount borrowed cannot increase after it
has been disbursed and partially repaid. Closed-end credit may require
regular repayment of principal (see installment note and term note)
or may only require the repayment of principal at maturity. See
bullet loan, single-payment loan, and time note.
See combined loan to value ratio.
See Chicago Mercantile Exchange.
Report of International Transportation of Currency or Monetary Instruments.
Each person who physically transports, mails, or ships, or causes
to be physically transported, mailed, shipped or received currency
or other monetary instruments in an aggregate amount exceeding $10,000
on any one occasion from the United States to any place outside
the United States, or into the United States from any place outside
the United States must file form 4790 (CMIR).
See collateralized mortgage obligation.
See constant maturity Treasury.
See cost-of-funds index.
A promissory note that includes language in which the debtor acknowledges
liability and allows the creditor to obtain a judgment without suit.
Not permitted in some states.
A provision in an insurance policy that requires the insured to
carry an amount of insurance equal to a certain specified percentage
of the value of the insured property. The coinsurance provision,
or clause, provides for full payment of losses up to the amount
of the policy if the amount of insurance carried equals the specified
coinsurance percentage. If the amount of insurance carried does
not equal the specified coinsurance percentage, the losses are shared
between the insurer and the insured even if the loss is below the
amount of the policy.
(1) The combination of a cap option and a floor option.
(2) For CMOs, the collar is the range in which
certain performance variables (e.g., yield, average life) are guaranteed
to stay. This range is expressed in terms of PSA speeds. See band.
3) An informal name for caps and floors.
(1) Property that a debtor has pledged, mortgaged, or assigned to
a creditor.
(2) Securities exchanges in a repo, reverse repo,
buy/sellback, or sell/buyback.
See warehouse receipt.
A type of corporate bond that employs a trustee to hold collateral,
other than equipment or real estate, for the bond holders. For example,
a parent corporation may borrow funds through a bond issue and pledge
the stock in one of its subsidiaries as collateral for the bondholders.
A multi-tranche security secured by a pool of corporate securities
(generally noninvestment-grade corporate bonds) or sovereign debt.
Similar to the more familiar CMO, except that in a CBO the tiers
or tranches are created with differing levels of credit quality.
The CBO structure creates at least one tier of investment-grade
bonds, thus providing liquidity to a portfolio of junk bonds. CBOs
are a type of CDO. See "collateralized debt obligation",
"special purpose vehicle" and "waterfall".
(1) A multi-tranche security with credit risk exposure to corporations.
A securitization of corporate obligations. CDOs can be securitizations
or re-securitizations of commercial loans, corporate bonds, other
types of ABSs, residential MBSs, commercial MBSs, and emerging market
debt. CDOs may even be backed by other CDOs. Securitizations of
corporate bonds are a type of CDO called a collateralized bond obligation
or CBO. A synthetic CDO uses credit default swaps rather than actual
corporate obligations to create a pool of credit exposure. Similar
to the more familiar CMO, except that in a CDO the tiers or tranches
are created with differing levels of credit quality. A CBO divides
the credit risk of a pool of high yield bonds into different classes
that appeal to investors with different credit risk tolerances.
The CDO structure creates at least one tier of investment-grade
bonds. The contractual rules for the cash flow distributions in
a CDO structure enable the senior tranches to receive high credit
ratings by shifting risk to the equity tranche. See "equity
trance", "special purpose vehicle", and "waterfall".
(2) The term "CDO" may be used to refer
to the special purpose entity, SPV, that holds the securitized assets.
A multi-tranche security secured by a pool of corporate loans. Similar
to the more familiar CMO, except that in a CBO the tiers or tranches
are created with differing levels of credit quality. The CBO structure
creates at least one tier of investment-grade bonds, thus providing
liquidity to a portfolio of junk bonds.
A type of MBS created by dividing the rights to receive the principal
and interest cash flows from an underlying pool of mortgages into
separate classes or tiers. The tiers or classes are usually called
tranches. In other words, it is a multiclass bond backed or collateralized
by mortgage loans or mortgage pass-through securities. A given tranche
is typically not redeemed until all bonds with earlier priority
have been redeemed. By dividing the cash flows into one or more
tranches with shorter terms, the risk resulting from the potential
volatility from future changes in prevailing rates is shifted away
from the shorter-term tranche or tranches and onto the longer-term
tranches and the residual tranche.
Collected balances are bank ledger balances minus checks in the
process of collection. Also called available balances, good funds,
or usable funds.
Obtaining payment.
The total time period between when a check is prepared by the remitter
and when the check is presented to the remitter’s bank. The
float also includes the mail float, processing float, and transit
float, and is considered the disbursement float for the organization
that issues the check.
A guaranty in which the signer guarantees to pay the bank only if
the bank cannot obtain repayment through other means.
A measure of collateral coverage provided by a consumer borrower's
residence. The borrower's total senior and subordinated loan balances
divided by the appraised value of the borrower's residence.
An obligation issued by a bank on behalf of a bank customer to a
third party. A commercial or trade letter of credit is a bank promise
to pay the third party for the purchase of goods by the bank’s
customer. If the bank’s obligation to pay is not immediate,
the transaction can later give rise to a banker’s acceptance.
Also called trade letter of credit. See banker’s acceptance
and letter of credit.
An explanation of bank liquidity described by Adam Smith: short-term
loans advanced to finance salable goods on the way from producer
to consumer are the most liquid loans the bank can make. These are
self-liquidating loans because the goods being financed will soon
be sold. The loan finances a transaction and the transaction itself
provides the borrower with the funds to repay the bank. Adam Smith
described these loans as liquid because their purpose and their
collateral were liquid. The goods move quickly from the producers
through the distributors to the retail outlet and then are purchased
by the ultimate cash-paying consumer. Also called the real bills
doctrine.
Unsecured, short-term promissory notes issued by corporations for
specific amounts and with specific maturity dates. Firms with lower
ratings or firms without well-known names usually back their commercial
paper with guarantees or bank letters of credit. Commercial paper
may be sold on a discount basis or may be interest bearing. Terms
can be as short as 1 day and usually do not exceed 270 days.
A claim rising as a result of a tort that (a) does not include damages
arising out of a personal injury or death and (b) arises out of
the normal course of business from either an individual or organization.
A category of personal property collateral defined by the 2001 revisions
to Article 9 of the UCC. See tort.
Money pooled for a common purpose. Often funds pooled for investments.
See local government investment pools.
Goods that become part of a product or mass of goods. An example
is the flour used to bake bread.
A legally binding letter in which a lender documents the terms,
prerequisites and conditions under which it agrees to provide financing
to an applicant. Commitment letters may be used in almost any lending
transaction but are most common in commercial real estate transactions.
The Federal agency that is responsible for regulating futures trading
in the United States.
A type of equity or capital representing shares of ownership in
a corporation. May or may not receive distributions of corporate
income in the form of dividends. Receives the lowest priority for
repayment in the event of a corporate liquidation. As opposed to
preferred stock, which has a slightly higher claim to corporate
funds.
A federal statute enacted to require banks and savings and loan
associations to meet the credit needs of their communities, including
low- and moderate-income neighborhoods.
A specific tier or segment of REMIC security. A REMIC tranche that
is structured to absorb a disproportionate amount of the volatility
caused by variations in the prepayments of the underlying collateral.
Companion tranches are created to be more volatile so that other
tranches in the same REMIC, called PAC or TAC tranches, may have
more stable cash flows. Hence the name companion. Also called support
tranches.
A method of paying the bank for providing services.
(1) In lending, compensating balances are minimum
balances that the bank requires a borrower to maintain with the
bank as partial compensation to the bank for the credit facility.
(2) The amount of deposit balances necessary to
offset the cost of deposit, cash management, or other bank services.
Each period, usually monthly, the actual bank service charges applicable
for the services used by the depositor are used to determine the
level of balances to be left with the bank. Adjustments are made
to reduce the deposit total for reserve requirements and float.
See account analysis.
Financial statement put together for the client firm by a CPA that
is entirely based upon data submitted to the CPA by the firm with
no review, no testing, and no opinion expressed by the CPA.
A term used in the Uniform Standards of Professional Appraisal Practice
(USPAP) requirements for real estate appraisals. Synonymous with
an appraisal as defined by the Federal appraisal regulations for
real estate pledged to secure loans. A complete appraisal is a statement
of market value that meets the five specific standards. A complete
appraisal is conducted in conformity with USPAP rules and without
invoking the departure provision in those rules. See appraisal,
evaluation, and limited appraisal.
One of nine risks defined by the Office of the Comptroller of the
Currency (OCC). The risk to earnings or capital arising from violations
of or nonconformance with laws, rules, regulations, prescribed practices,
or ethical standards. This risk is incorporated in the Federal Reserve
definition of legal risk.
Interest computed by applying the simple rate of interest to calculate
interest on principal plus interest on successive increments of
interest earned in prior periods.
See capital appreciation bond.
An option on an option. Examples are captions and floortions.
Imposes liability on owners and operators for cleanup of environmental
sites.
A term defined by FAS 130 as the change in equity of an entity during
a reporting period that results from transactions and "other
events and circumstances from nonowner sources." The "other
events and circumstances from nonowner sources" are referred
to as "other comprehensive income." Accordingly, comprehensive
income is the change in equity during a reporting period that results
from the combination of net income and other comprehensive income.
See FAS 130 and also see other comprehensive income.
A cash management tool. A single account established by an entity,
usually in conjunction with one or more zero balance disbursement
accounts. Sometimes the concentration account is referred to as
a parent account while the associated zero balance accounts are
called daughter or subsidiary accounts.
The underwriting spread. The difference between the price that an
underwriter or underwriting syndicate pays to the issuer and the
price that is received from investors who buy the issue. The concession
is the income earned by the underwriter.
A term used by lenders and credit analysts to describe the background
or underlying economic and industry circumstances affecting a business.
The degree of certainty that an event will fall outside of boundaries
on a distribution. For a normal distribution, boundaries set at
two standard deviations from the mean create approximately 95 percent
confidence intervals. In other words, only 5 percent of the events
will be smaller or larger than the boundary amounts. Often applied
to VaR measures of risk.
The document used to state in writing the terms of a trade that
were previously agreed to orally by the buyer and the seller.
A copy of an original document on which the signature, seal, and
other such authenticating features are typed or otherwise noted.
A residential mortgage loan that meets all FNMA or FHLMC standards.
Mortgages may conform to agency requirements regardless of whether
they are sold or retained by the originator. Even though a conforming
mortgage may not be sold to FNMA or FHLMC, its amount, repayment
terms, and documentation meet the standards of those agencies, and
the loan may be sold to them at any time during its life.
A security interest given to a creditor by a debtor. A consensual
lien is granted by the consent of the parties and is the basis for
most secured transactions. See judicial lien and statutory lien
for alternative types of liens.
A legal term used to describe the benefit that a borrower, guarantor,
or pledgor receives in exchange for agreeing to repay, guarantee,
or pledge security to the bank. Usually, but not always, the consideration
is the proceeds of the loan. In some states, a reasonable expectation
of benefit can be sufficient. Consideration must involve benefit
that is meaningful, which means that the value of the consideration,
whether or not it is directly monetary, must be comparable to the
benefit.
(1) (adjective) — Goods or inventory that are held by a selling
agent, wholesaler, or reseller until the goods are either sold or
returned to the seller.
(2) (verb) — The physical transfer of goods
from a seller/consignor who retains title to a consignee who acts
as a selling agent.
Consolidated financial statements show the combined assets, liabilities,
net worth, income, expense, net income, and cash flows for a related
group of companies. Unlike simpler combined statements, consolidated
statements do not merely show the aggregate of the values for each
line item for all of the firms in the group. Instead, consolidated
statements also reflect the elimination of intercompany transactions.
Consolidated statements disregard the distinction between separate
legal entities and treat a parent firm and its subsidiaries as a
single economic entity.
Consolidating financial statements are reports or worksheets that
show the financial condition of each entity in a consolidated group
of entities as well as the intercompany eliminations used in the
preparation of consolidated reports.
An average of the yields from various Treasury securities that all
have the same remaining time until maturity. For example, the one-year
CMT is the average yield of various Treasury securities maturing
in one year. CMT indexes are published by the Federal Reserve Board
of Governors in statistical release H.15.
An expression of mortgage loan prepayments in annual terms. The
single monthly mortality rate (SMM) multiplied by 12. CPP annualizes
SMM without reflecting the impact of compounding. See constant prepayment
rate and single monthly mortality rate.
A measure of the historical or expected prepayment of principal
on a mortgage or an MBS that expresses the prepayment as a constant
proportion of the outstanding principal. The CPR is an annualized
expression of the SMM that reflects compounding and is therefore
more accurate. See single monthly mortality rate.
A category of goods defined by Article 9 of the UCC. Consumer goods
are goods used primarily for personal, family, or household purposes.
Typical examples are jewelry, furniture, automobiles, and appliances.
A consumer lease is defined under Article 2A of the UCC. It is a
lease between a lessor who regularly engages in the business of
leasing or selling to a lessee who is an individual and who takes
the lease for personal, family, or household purposes. To meet the
definition of a consumer lease, the total payments to be made under
the lease, excluding payments for options to renew or buy, may not
exceed $25,000. Any prohibitions on a party’s right to transfer
its rights in a consumer lease must be in writing, conspicuous,
and specific.
A federal law that governs consumer leases. The act is implemented
by Federal Reserve Regulation M. Compliance with the Consumer Leasing
Act is largely, but not entirely, a matter of providing the consumer
with required disclosures intended to enable the consumer to compare
different leases.
See back-end load.
A debt or obligation that becomes a liability only when something
else happens. For example, a guarantor becomes liable for his guarantee
only if the debt that is guaranteed does not get paid by the debtor.
A form and process by which a secured party extends the priority
of its security interest in the public record. The priority of liens
created under Article 9 of the UCC is usually established by filing
a financing statement. Under the provisions of Article 9, financing
statements are only valid for five years. However, a financing statement
can be renewed by filing a continuation statement, usually a UCC-3
form. Continuations must be filed no earlier than six months prior
to the expiration of the financing statement and no later than the
expiration date of the financing statement. Continuations last for
five years and can be extended by filing another continuation.
A guaranty in which the guarantor agrees to guarantee all future
loans made to that borrower by the bank, not just the loan or loans
made as part of the transaction in which the guaranty was obtained.
A repo/reverse repo transaction that does not have a specified term.
These transactions are like a series of overnight repos renewed
daily. The repo rate, the amount of funds invested, and/or the amount
of collateral is adjusted each day. Continuing repos are commonly
used in conjunction with bank sweep accounts. Under a continuing
repo agreement, the transaction is terminated whenever either party
requests termination. Also called open repos.
Accounts receivable due from debtors who also have accounts payable
due to them from the borrower.
An asset account that normally has a credit balance. Examples are
the allowance for doubtful accounts and accumulated depreciation.
A liability account that normally has a debit balance.
A defined term under the 1962 version of the UCC that means a right
to payment under a contract that has not yet been earned by performance
and is not evidenced by an instrument or chattel paper. Under the
1972 version of the UCC, these rights are either accounts or general
intangibles.
A crude measure of a financial institution’s exposure to adverse
consequences resulting from changes in prevailing interest rates.
The contractual gap is a gap mismatch measure calculated using the
contractual maturity and repricing dates for all assets and liabilities.
It is arguably the least accurate gap methodology.
Control stock is stock held by a person who directly or indirectly
controls the management of the issuing company. The right of the
owner or a pledgee to sell control stock is limited by provisions
in the Securities and Exchange Acts.
A bank that can provide better management control over checks being
presented. Generally, this bank is located outside the local area
and receives only presentments from the Federal Reserve System and
the local clearing-house.
A mortgage loan based solely upon the value of the mortgaged real
estate and the creditworthiness of the borrower. A mortgage loan
without insurance or guarantees from a government agency.
Describes an inevitable change in the relationship between cash
and futures prices for instruments until delivery. Prior to delivery,
the futures price and the cash price differ by the cost of carry.
As time passes, the cost of carry diminishes and the futures price
will equal the cash price at the time of delivery. This is a necessary
condition for the futures contract to effectively hedge the cash
instrument.
A convertible’s conversion premium is the amount by which
a convertible’s market price exceeds its value in stock. The
premium may be expressed as the dollar difference or as a percentage.
The specified number of shares of common stock that will be received
for each convertible bond or share of convertible preferred stock
at the time of conversion. This ratio is specified at issuance in
the bond indenture agreement. This is often an uneven amount using
partial shares.
For convertibles, the value in stock. Also called the parity value.
The conversion value can be determined by multiplying the conversion
ratio by the value of the stock at any point in time.
An ARM for which the borrower has the option to convert from a floating-rate
loan to a fixed-rate loan. Convertible ARMs can typically be converted
in the first through fifth years of the mortgage loan. Because borrowers
can exercise their conversion option for a modest fee, conversion
is more attractive to borrowers than the alternative of obtaining
a nonconvertible ARM and then later refinancing with a fixed-rate
loan when prevailing rates have fallen. Consequently, prepayment
speeds for convertible ARMs are faster than prepayment speeds for
nonconvertible ARMs.
A bond that includes a provision allowing the holder to exchange
the bond for a quantity of the issuer's common stock at some fixed
exchange ratio. An otherwise normal corporate bond that has a fixed
maturity date that pays coupon interest and repays principal at
maturity. It is issued with an option to exchange the bond for a
fixed number of shares of common stock at the option of the bondholder,
thereby allowing the convertible bond to share in the growth potential
of the underlying common stock. It is senior to stock within the
corporate equity structure, although probably junior to other corporate
debt. Convertible bonds are often callable.
The difference between the coupon interest rate on the convertible
and the coupon interest rate on the issuing company’s nonconvertible
bonds. The amount by which the convertible’s interest is lower
depends on a number of factors, including the structure of the convertible
itself. The debt spread typically ranges from two to five percentage
points.
Preferred stock that can be converted into the common stock of the
issuing company. Like nonconvertible preferred stock, the convertible
preferred stock is a class of the corporation’s capital stock;
has a specified dividend rate that is usually declared quarterly
and is cumulative (accumulates in arrears if the corporation does
not make the payment); and has priority over common shares for dividend
payments. Both convertible and nonconvertible preferred stock are
considered to be perpetual, but in fact, both are callable. Call
dates on convertible preferreds are specified in the prospectus
at issuance.
A measure of the sensitivity of duration to changes in yield levels.
Convexity is a measure of the stability or instability of the measured
duration over a range of yields. If convexity is low, that is, if
the price/yield relationship is close to a straight line, duration
is stable. If convexity is high, duration is unstable. The greater
an instrument’s convexity, the less accurate duration will
be. See duration, effective duration, Macaulay duration, and modified
duration.
See certificate of participation.
or
(1) A bank's deposits that are the most stable.
(2) A bank's deposits under $100,000 each.
(3) Deposits that have an indefinite maturity,
such as checking accounts, NOW accounts, money market deposit accounts,
and savings accounts. See retail deposits.
The agreement of a buyer and seller to exchange the security and
the payment on the third business day after the trade date. See
regular way settlement and settlement.
The degree of relationship between two sets of data. A correlation
near plus 1, called a positive correlation, indicates that changes
in one set of data are closely related to changes in the other set
and that the data sets change in the same direction. A correlation
near minus 1, called negative correlation, indicates that changes
in one set of data are closely related to changes in the other set
and that the data sets change in the opposite direction. A correlation
near zero indicates little or no relationship between the changes
in the two sets of data.
Correlation VAR is a measure of a financial instrument’s,
a portfolio of financial instruments,’ or an entity’s
exposure to reductions in value resulting from changes in prevailing
interest rates. Also called analytical VAR, correlation VAR is one
of several different methods for calculating VAR. Analytical or
correlation VAR compares the sensitivity of risk elements within
a portfolio. The volatility of each component is then calculated
using a standard matrix. This is the type of VAR calculated by popular
models such as RiskMetrics. This is the least computationally insensitive
of the three statistically based VAR measurements. However, this
approach does not do a good job of reflecting option risk or of
incorporating the risk of unlikely events. See empirical VAR, historical
VAR, and VAR.
A bank that serves as a depository and provides banking services
for another bank.
Terms used to identify multiple parties who sign as borrowers for
a loan.
An asset created under a type of accrual accounting used when firms
such as contractors incur expenses in accounting periods that are
repaid in subsequent accounting periods. This account is comprised
of money spent by the contractor for things that will be billed
to buyer at a future date.
The cost of financing an asset. If the cost of carry is smaller
than the interest received from the asset by the investor, the investor
has a positive carry. Conversely, if the cost of carry is larger
than the interest received from the asset by the investor, the investor
has a negative carry.
The weighted-average interest rate paid by savings institutions
to obtain funds. There are national and regional cost-of-fund indexes.
The most common is the 11th District Federal Home Loan Bank COFI.
A specific COFI index may be used as a benchmark rate for a floating-rate
security.
Amount shown on a firm's income statement representing the direct
expenses that the firm incurred for sales. Cost of goods sold is
always a debit balance and is shown as either a deduction or a negative
number.
A term sometimes used to describe the quantity of a funds that a
financial institution can obtain to meet liquidity requirements.
See "forward cash exposure".
A term used to identify the "other" party in a two-party
transaction. For example, the counterparty of a buyer is the seller
to that buyer. The term counterparty is frequently used to identify
the other party in repurchase agreement transactions and in interest
rate swap transactions.
The risk that a counterparty will default (fail to perform) on its
obligation under a contract. Counterparty risk is not limited to
credit risk (the risk that the counterparty cannot fulfill its contractual
obligations) but may also result from other problems associated
with a counterparty unwilling to honor the contract.
The inclusion of a multiple in the formula for calculating the coupon
rate on an inverse floating-rate CMO. For example, an inverse floater
with a multiple may pay interest at the rate of 22 percent minus
the product of 2 times the 1-month London Interbank Offered Rate
(LIBOR). (Note that when the rate formula for a floater or inverse
floater applies a multiple to a sum, the CMO tranche is called a
superfloater. See superfloater.)
See bond equivalent yield.
(1) The rate of interest received by the holder of a security. Not
necessarily the same as the yield realized by the holder. See rate.
(2) For pass-through securities, the holder’s
coupon rate is the gross coupon of the underlying loans less servicing
fees and any agency guarantee fees.
A measurement of the relationship between two variables. The arithmetic
mean of the products of the deviations of corresponding values of
two quantitative variables from their respective means.
The condition of varying with something else in a way that satisfies
a mathematical relationship. See covariance.
Restrictions on the activities of a debtor written into bank loan
agreements or bond indenture agreements. Also called indenture covenants
or protective covenants. Contractual terms of the loan or indenture
agreement that prohibit the debtor from taking actions that might
hurt the interests of the lenders or bondholders. Designed to protect
the interests of creditors — often (but not limited to) unsecured
creditors. Four common examples of covenants are prohibitions against:
issuing new debt, paying dividends if certain minimum financial
standards are not maintained, merging with another company, and
selling corporate assets.
A call option for which the owner of a security grants the buyer
of the call option the right to purchase a security owned by the
option seller. The opposite of naked calls. In theory, selling covered
calls can be a hedging strategy. If investment prices fall, the
investor’s loss will be offset by the income from the covered
call. (When prices fall, the call option is likely to expire unexercised
because the call buyer can buy the security on the open market at
a lower price.) On the other hand, if prices rise, the seller's
gain is limited to the difference between the seller's book value
and the option strike price (which in this case is probably less
than the market price), but the seller also retains the proceeds
of the option sale. For banks, regulatory restrictions as well as
practical difficulties may restrict the suitability of covered calls
as hedging tools.
The sale of a put option while holding sufficient cash to buy the
underlying.
Acronym for current portion of long-term debt.
See constant percent prepayment.
See constant prepayment rate.
See Community Reinvestment Act.
An informal name for a settlement or terms that a debtor forces
creditors to accept. For example, a debtor in Chapter 11 bankruptcy
proceedings can, subject to some restrictions, have a plan to resolve
the bankruptcy approved by the court even though a creditor or a
class of creditors objects.
See credit swap.
Contractual arrangements that allow one party to transfer credit
risk of a reference asset, which it may or may not own, to one or
more counterparties. The first party may be called the "protection
buyer", the "beneficiary" or the "originator".
The counterparty or counterparties may be called the "protection
seller" or the "guarantor". Credit derivatives are
contracts for transferring risk - just like foreign exchange, commodity
and interest rate risk derivatives. The only difference is the type
of risk transferred. See total return swaps, credit default swaps,
credit linked notes and credit options for definitions of specific
types of credit derivative instruments. Also see reference asset.
A measure that alters the structure of a security in a way that
reduces its credit risk. Credit enhancement may take the form of
a letter of credit issued to back securities. For mortgage-backed
and asset-backed securities, credit enhancement may take the form
of arrangements to over-collateralize the security.
A term used in credit swap and some other credit related contracts.
The specified credit event in each contract is defined by the parties
to suit their particular needs. Typical specified credit events
are bankruptcy, insolvency, credit rating downgrade or failure to
make a required scheduled payment. Note that for a credit swap transaction,
these events do not refer to occurrences or change impacting one
of the contract counter parties. Instead they refer to events applicable
to the underlying reference asset. The defined events must be well-defined
and unambiguous.
A record of how a person has borrowed and repaid debts.
A type of credit derivative instrument. Credit linked notes are
a securitized form of credit derivatives. The protection buyer issues
notes. If a specified credit event occurs, the investor who buys
the notes has to suffer either a delay in repayment or has to forego
interest. (The specified credit event is pre-defined can be any
one of a number of alternatives.) Also known as credit linked security.
Accounting adjustments that reduce account receivable balances due
from account debtors. Usually credit memos are generated to account
for merchandise that is returned and when credit is given to customers
for damaged goods. Credit memos are the accounting reflection of
charge-backs.
Improvement or deterioration in an obligor's credit worthiness over
time. Most often used to describe the improvement or deterioration
in the credit worthiness as represented by a rating or credit grade.
A type of credit derivative instrument. Options on a credit spread
take the form of credit-spread put options. The put-buyer pays an
upfront fee to the put-seller in exchange for a contingent payment
in the event that the credit spread for an asset rises beyond a
pre-agreed upon threshold. This is a put option where the underlying
is the spread on a third party security. For example, if you were
holding a bond issued by a third party and the bond's spread over
the comparable Treasury rate were 200 basis points, you might purchase
an option that pays off if the spread widens to 300 basis points.
(Although that example uses the Treasury rate as a basis for comparison,
it is becoming more common to use swap rates.) In other words, the
widening of the credit spread to a defined size gives the protection
buyer the right to demand a payment from the protection seller.
Unlike a total return or default swap, the parties in a credit spread
option do not have to agree upon any specific credit events. The
fact that the market spread for the underlying rises compared to
the reference index rate is, in effect, a proxy for a deterioration
in the credit quality. Also known as credit spread options and credit
spread put options.
The risk to earnings or capital from the potential that a borrower
or counterparty will fail to perform on an obligation. Usually,
but not always, the obligation in question is a requirement to make
interest or principal payments. Sometimes called default risk, the
failure to make required payments reduces the value of equity securities,
debt securities, and loans. In the extreme, credit defaults eliminate
all or almost all of the value in loans or securities. Adverse consequences
from credit risk are not restricted to default, the ultimate manifestation
of credit risk. In addition, asset owners can suffer from reductions
in value resulting from either real or perceived declines in the
obligor’s financial strength.
Both the Office of the Comptroller of the Currency (OCC) and the
Federal Reserve list credit risk as one of their defined risk types
for risk-based examinations. Credit risk exposure is found in all
activities in which success depends on the performance of a counterparty,
issuer, or borrower. Credit risk arises any time a financial institution
extends, commits, invests, or otherwise exposes its funds through
actual or implied contractual agreements, whether reflected on or
off the balance sheet.
A statistical system used to determine whether or not to grant credit
by assigning numerical scores to various characteristics related
to creditworthiness.
See credit options.
A type of credit derivative instrument. Swap contracts in which
one party makes payments only if a specified credit event occurs.
In a credit default swap, the protection seller agrees, for an upfront
or periodic fee, to compensate the protection buyer upon the happening
of the specified credit event. Credit default swaps are similar
to a traditional financial guarantees but more flexible. It is more
flexible because a credit swap need not be limited to compensation
upon an actual default. The specified credit event in each swap
is defined by the parties to suit their particular needs. Variations
of the basic structure outlined in this definition are also used.
Also known as default swaps or credit default swaps. See credit
derivative, credit event, reference asset.
A party who is owed money by another party.
A creditor's measure of a consumer's past and future ability and
willingness to repay debts.
A sequence of those tasks (e.g., in payment processing) which must
be completed before the next task can be started. Anything not on
the critical path is something that can be done later without delaying
an important step.
Extension of the creditor's interest in property of the debtor so
that collateral for one debt also serves as collateral for one or
more other debts.
Provision in the loan documents in which the debtor agrees that
default on one loan will also constitute default on other obligations
to the creditor.
A hedge transaction in which a cash market instrument is hedged
by an option contract for a different underlying instrument. Sometimes
called proxy hedge, surrogate hedge, or tandem hedge.
A phrase sometimes used to describe a guaranty of a loan to a borrowing
entity when the borrowing entity is affiliated with the guarantor
corporation through common ownership but is neither a parent nor
a subsidiary corporation. For the purposes of this definition, the
borrower and the guarantor do not necessarily have to meet the accounting
definition of affiliates.
See cash surrender value.
A mathematical technique used for yield curve smoothing. A cubic
spline fits a different third degree polynomial to each interval
between data points (0 to 1 years, 1 to 2 years, 2 to 3 years, etc.)
Either yields or prices can be smoothed using cubic splines. This
smoothing technique is the most common and works well for spot rates.
See smoothing.
The net sum obtained by adding all of the interval gaps or mismatches
between rate-sensitive assets and rate-sensitive liabilities beginning
with the first bucket in the gap analysis and proceeding to a selected
time. For example, the one-year cumulative gap is the sum of the
gaps for all of the time intervals prior to and including the gap
bucket ending one year from the date that the report was prepared.
A crude and highly inexact measure of interest rate risk.
Each financial institution (other than casinos, which instead must
file a CTRC form) must file a CTR for each deposit, withdrawal,
exchange of currency or other payment or transfer, by, through or
to the financial institution which involves a transaction in currency
of more than $10,000 unless a CTR Exemption form has been previously
filed. See Bank Secrecy Act.
The group of assets considered the most liquid. Usually comprised
of cash, accounts receivable, inventory, and a few minor items.
The subgrouping of assets into current and long-term categories
is common for all financial statements except for firms in the financial
industry.
The term used to refer to all fixed-income securities paying interest
at the rate currently required by purchasers for securities of that
maturity and quality. Current coupon securities trade at or very
near par.
See yield curve.
The total amount of the current principal outstanding of the loans
in an MBS pool. The current face is always equal to the product
of the original face multiplied by the current factor. Analogous
to the par value of a conventional debt security.
See factor.
The group of liabilities considered to be the shortest term. Usually
comprises accounts payable, short-term bank debt, bank overdrafts,
other short-term accounts or notes payable, current portion of long-term
debt, and a few minor items. The subgrouping of liabilities into
current and long-term categories is common for all financial statements
except for firms in the financial industry.
The ratio obtained when total current assets are divided by total
current liabilities. A commonly used but not always good proxy for
a firm's liquidity.
(1) For bonds, a measure of the simple interest annual yield for
investments with coupon rates and with maturities of one year or
more. To calculate the current yield, the annual coupon interest
income is simply divided by the amount paid to acquire the investment.
It is important to note that the current yield is only accurate
for investments purchased at par. The current yield calculation
includes just one income cash flow - the annual coupon interest
income. It ignores the profit or loss resulting from discounts and
premiums.
(2) For stocks, the annual dividend income divided
by the price per share.
An informal name for callable bonds with long maturities that have
coupon rates well above current market rates. Because these bonds
have such high coupon rates, they trade at prices and yields calculated
to the call date rather than to the maturity date. This makes the
cushion bond’s price less volatile. If prevailing rates remain
the same, fall, or rise to any level not greater than the coupon
rate, the bond will offer a competitive return. Even if rates do
rise to exceed the coupon rate, the cushion bond offers a higher
yield in exchange for its longer maturity since the premium paid
at purchase can be amortized over a longer period.
A nine-digit letter and number combination established by the Committee
on Uniform Securities Identification Procedures (CUSIP) that is
used to identify publicly traded securities. Each publicly traded
security receives a unique CUSIP number when the security is issued.
A written contract establishing the responsibilities of a custodian
who holds property. In finance, the custodian holds collateral for
deposits with financial institutions, investment securities, or
securities underlying repurchase agreements.
The risk that a financial instrument owner will suffer a loss resulting
from the default of a third party that holds the financial instrument.
The third party might be a safekeeping agent or a secured creditor.
The financial instruments are typically deposits or securities.
A proposed requirement under the Bank Secrecy Act that all financial
institutions implement a written, risk-based customer identification
program, maintain information used to verify identities and compare
the names of new customers against government lists of known or
suspected terrorists or terrorist organizations. The proposed rule
would apply to all customers seeking to open new accounts.
A type of systemic liquidity risk. The risk of funding problems
arising from national or regional macroeconomic corrections, such
as recessions or credit crunches. |
