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The phenomenon or the result of a declining volatility trend.
Obtaining information about customers or groups of customers from
a data warehouse for marketing or other purposes.
A computerized database composed of data extracted from the data
processing and accounting systems used for various bank deposit,
loan, and other customer products. Typically, data is extracted
from the various product systems, balanced, scrubbed, and converted
into a standardized, readily accessible format.
Receivables created by invoices that do not require the account
party to pay until some date in the future. Sometimes called datings.
See accrual convention.
See accrual convention.
A negative position in a bank's Federal Reserve account that occurs
at any time during the business day.
The level of inventory expressed as its equivalent in days of a
portion of cost of goods sold for the year. Calculated by multiplying
inventory by 365 and then dividing that product by cost of goods
sold.
The level of accounts payable expressed as its equivalent in days
of a portion of cost of goods sold for the year. Calculated by multiplying
accounts payable by 365 and then dividing that product by cost of
goods sold.
The level of accounts receivable expressed as its equivalent in
days of a portion of net sales for the year. Calculated by multiplying
accounts receivable by 365 and then dividing that product by net
sales.
See demand deposit.
A firm or an individual who buys and sells for his own account.
A dealer has ownership, even if only for an instant, between a purchase
from one party and a sale to another party, and is thus compensated
by the spread between the price paid and the price received. Not
the same as a broker, although an individual or firm may act as
either a broker or a dealer in separate transactions.
Retail installment sales contracts, often for automobiles, that
are sold or pledged to a third party, usually a financial institution.
See chattel paper.
Unsecured, long-term corporate bonds. Even though debenture holders
are not protected by collateral, they still have a legal right to
repayment. In the event of default, debenture holders are treated
like other unsecured creditors. In addition, debenture holders may
benefit from indenture restrictions.
Funds owed by a debtor to a creditor. Outstanding debt obligations
are assets for creditors and liabilities for debtors. May or may
not be covered by written agreements.
See debt service coverage.
Any financial instrument representing a creditor relationship between
the issuer (the debtor) and the holder of the instrument (the creditor).
This generally includes all U.S. Treasury securities, municipal
securities, corporate bonds, convertible debt, commercial paper,
and securitized debt instruments such as CMOs and REMICs. Debt securities
are usually not defined to include option contracts, futures contracts,
forward contracts, lease contracts, or nonsecuritized loans.
A term used to refer to the amount of principal and interest payments
required by a borrower's loans or securities issued. Also used as
a verb to describe making such payments.
A simple comparison of the cash available to make principal and
interest payments to the bank or to bond holders with the amount
of those required principal and interest payments. Debt service
coverage is expressed as a ratio with the annual net income divided
by the annual debt service requirement.
The margin by which all of a borrower’s or bond issuer's required
principal payments (not just those for the loan under consideration
or just those for loans to one bank) are exceeded by the sum of
the firm's cash flow plus all of the principal repayments and interest
expense deducted in the process of calculating that cash flow.
See sinking fund.
Tranches in a multi-class security that have seniority ranking,
for repayment, ahead of equity trances. See "collateralized
debt obligation", "equity tranche" and "waterfall".
The simplest way to measure leverage. Calculated by dividing total
liabilities by total equity.
(1) A party who owes money or other performance to another party.
Under the UCC, debtor includes the seller of accounts or chattel
paper.
(2) For the purposes of UCC provisions dealing
with collateral, debtor also applies to the owner of collateral
given as security for the debt of another.
In some bankruptcy proceedings, the debtor, rather than a trustee,
may continue to operate the business. The debtor in possession is
the same person or company that controlled the business prior to
the bankruptcy, however, the debtor in possession is a different
legal entity.
Statistical analysis of the rate of attrition. Decay analysis is
used to analyze historical volatility of core deposit volumes, specifically
rates for withdrawals and account closures. Deposit decay rates
should be calculated by tracking a representative sample of accounts
over a period of time that covers at least one interest rate cycle.
Such volatility studies have been used by banks for many years to
determine effective maturity assumptions that are then employed
in present value analysis to calculate core deposit values for deposit
purchases, branch acquisitions, and bank acquisitions.
The page in an insurance policy that contains all, or almost all,
of the policy information specific to that particular insurance
policy. The declaration page typically includes the name of the
insured, the identification of the insured property, the amount
of the insurance coverage, the expiration date of the policy, and
the name of any lender with an interest in the insured property.
A deed executed by the mortgagor that transfers ownership in real
estate to a lien creditor. This instrument is used when the debtor
is unable or unwilling to pay and wishes to avoid foreclosure.
A three-party document conveying interest in property, almost always
real estate, to a trustee. In many states, deeds of trust are used
instead of mortgages. In those states, the trustee holds the deed
in favor of the lender and then reconveys the title to the borrower
when the loan is paid in full. Sometimes called a trust deed.
A large discount for a financial instrument. The condition that
exists when a financial instrument is trading at a market price
that is well below its par value. May also be used to refer to those
securities selling at prices well below par.
A phrase used to describe an option with a high intrinsic value
resulting from the fact that the market value of the underlying
instrument is well below (for a call option) or well above (for
a put option) the strike price of the option.
(1) noun — A condition in which a loan or investment is not
performing as expected because of the debtor's failure to act or
refrain from acting in ways contractually agreed upon. As in "the
loan is in default" or "an event of default."
(2) verb — A debtor's failure to act or refrain
from acting in ways contractually agreed upon in the loan documents.
Most often, default is the debtor's failure to pay.
An alternative higher rate of interest or a premium specified in
a loan document to be added to the contractual rate of interest
that can be charged by the lender if the borrower is in default.
The risk arising from the chance that debtors will not make promised
payments either on time or in full. Also called credit risk.
The legal release of a debtor from being the primary obligor under
the debt, either by the courts or by the creditor. Also called legal
defeasance. See in-substance defeasance.
Costs capitalized as assets on a firm's balance sheet for expenses
such as long-term expenses that will not be recovered in the normal
working capital cycle of the business or expenditures that will
be charged to future operations. Examples include costs of rearranging
equipment in a factory and capitalized research costs.
See back-end load.
See back-end load.
An asset reflecting a likely reduction in future income taxes. Accounting
for deferred tax assets is governed by FAS 109.
A liability account that reflects the accumulated difference between
the amount of income tax that the firm shows each year as an expense
on its financial statements and the amount of income tax, usually
lower, that the firm pays to the government.
A pension or other employee benefit plan that provides specified
amounts of benefits to eligible participants. The specified amounts
of benefits are usually determined based upon age, years of service,
and/or levels of compensation.
A pension or other employee benefit plan that provides a specified
contribution amount for the benefit of eligible employees. The participants
ultimately receive amounts that depend on both the accumulated contributions
and the investment returns realized from investment of the accumulated
contributions.
Lag times. The amount of time before the owner of a MBS receives
payments from the underlying mortgages. The time between when the
underlying mortgagors make their payments to the servicers and when
those payments are due to the MBS investors. Delay days may refer
to either stated delay or actual delay days. Stated delay days is
the number of days from the issuance of an MBS pool or from the
beginning of the interest accrual period until the first payment
remitted to the investors who own the right to receive the cash
flow. For example, a GNMA MBS pool with a stated delay of 45 days
would pay interest accrued in January to security holders on February
15. Actual delay days is the monthly lag, measured in days, between
the date the payments are due from a mortgage loan borrower and
the date that the pro rata share of those payments is remitted to
the MBS investors who own the right to receive the cash flow. Thus,
since the January payment is not due until February 1, GNMA holders
who receive January’s payment on February 15 have 14 actual
delay days.
Bonds that pay interest to investors according to a formula based
on a fraction of the increase or decrease in a specified index.
De-leveraged bonds are a type of structured note.
A document that evidences the fact that goods have been delivered
to a purchaser or lessee and accepted by that purchaser or lessee.
The time between when a check is ready for disbursement and when
the vendor or employee actually receives it. For vendors, this may
be considered the same as mail float.
The simultaneous exchange of securities and cash. The safest method
of settling either the purchase or sale of a security. In a DVP
settlement, the funds are wired from the buyer's account and the
security is delivered from the seller's account in simultaneous,
interdependent wires.
(1) The Greek letter used by mathematicians to refer to change or
the quantity of change.
(2) The price sensitivity of an option. The change
in an option’s price divided by the change in the price of
the underlying instrument. As an option becomes deeper in the money,
its delta gets closer to 1.0. As an option get further out of the
money, its delta gets closer to zero. However, the change is nonlinear
- the delta changes faster when the option is close to being in
the money. The rate of change in an option’s delta is called
the option’s gamma.
Term used to describe a creditor's right to request payment in full
of a debt.
A deposit account that permits the depositor to withdraw funds on
demand. Usually, but not always, a checking account. Sometimes called
demand deposit account (DDA).
A promissory note that calls for principal to be payable on demand.
In recent years, courts have significantly restricted the circumstances
under which a bank could make and enforce a demand for repayment
under a demand note.
A term used to describe a physical certificate representing ownership
of a security (a stock certificate or a bond) that is held by a
trustee. This is an arrangement through which a physical certificate
is held so that all future transactions can be conducted as if the
security were issued as a book-entry security. Ownership and liens
are recorded in the records of the trustee rather than evidenced
by physical possession of the certificate. Also called immobilized.
Less often, dematerialized is used to refer to book-entry securities
that have never been issued in physical form.
The par value of a bond.
A department of the U.S. government that promotes private and public
housing. FHA and GNMA are agencies within HUD.
A specific provision in the USPAP rules for real estate appraisals.
The departure provision states that: "An appraiser may enter
into an agreement to perform an assignment that calls for something
less than, or different from, the work that would otherwise be required
by the specific guidelines." An appraisal conducted under the
departure provision is called a limited appraisal. See complete
appraisals, limited appraisals, and Uniform Standards of Professional
Appraisal Practice.
A form of bank obligation that is similar to a deposit. Deposit
notes are typically issued with terms from two to five years. Like
CDs, deposit notes are issued for specified terms at either specified
rates or specified rate formulas. Unlike CDs, deposit notes are
sold in a predetermined amount for a predetermined time period.
The deposit note terms are usually described in an offering circular
similar to an offering of securities. For investors, the primary
difference between bank CDs and bank deposit notes is the way in
which interest is calculated. Like many government agency securities
and corporate bonds, interest rates for deposit notes are typically
calculated using accrual methods that assume a 360-day year comprised
of months that all have 30 days. Deposit notes may be rated by a
nationally recognized statistical rating organization (NRSRO).
A bank used as the point of deposit for cash receipts
An organization that holds physical certificates for stocks and
bonds and issues receipts to owners. Securities held by DTC are
immobilized so that they can be traded on a book-entry basis.
The amount by which a fixed asset's accounting or book value is
periodically reduced to reflect the fact that the economic value
of the asset is steadily reduced by a combination of wear and tear
from use, age, and/or obsolescence. The offsetting entry is depreciation
expense.
(1) Financial instruments whose value depends upon the values of
underlying assets, interest rates, currency exchange rates, or indexes.
Various authorities define derivative instruments in broad, inclusive
terms or narrow, exclusive terms. It is a common misconception that
all derivatives are high-risk, speculative instruments. Large financial
institutions use derivatives for hedging. Options, futures, swaps,
and swaptions are common derivatives used for hedging purposes.
All CMOs are derivatives. There are many derivative instruments,
and new ones are developed often. See underlying.
(2) In FAS 133, FASB defines derivatives narrowly.
With some exceptions, FAS 133 defines a derivative instrument to
be any financial instrument or other contract that has all three
of the following characteristics:
A. The financial instrument or contract has both:
1. One or more underlyings.
2. One or more notional amounts or payment provisions
or both.
B. The financial instrument or contract either
does not require an initial investment or requires an initial net
investment that is "smaller than the amount that would be required
for other types of contracts that would be expected to have a similar
response to changes in market factors."
C. The terms of the financial instrument or contract
either
1. Require or permit net settlement.
2.Provide that the contract can be readily settled
net by a means outside the contract.
3.Provide for delivery or an asset that puts the
recipient in a position not substantially different from net settlement.
Mainly as a result of FASB’s second requirement,
financial instruments such as CMOs and structured notes that are
commonly called derivatives are not derivatives as defined by FASB.
See FAS 133.
See dominion of funds.
(1) The difference between gross sales and net sales. Dilution is
caused by sales that are reversed as a result of returns and/or
allowances.
(2) The reduction in an existing stockholder’s
position that results from the issuance of new shares.
Dilution as a percentage of gross sales.
An informal name for 10 basis points.
A system wherein amounts are transferred from a payor’s checking
account to the accounts of payees no matter where they bank. The
transfers are made electronically and do not require a paper check
or draft. The key consideration is that the transaction is accomplished
without involving the payee.
A form of capital markets or derivatives hedge in which the cash
market instrument being hedged is hedged by an options or futures
contract on the same underlying instrument. For example, a 91-day
U.S. Treasury bill hedged with a Treasury bill future. Because traded
futures and options contracts have underlying instruments tied to
securities, retail banks do not have much opportunity to use direct
hedges to manage the interest rate risk in their loans and deposit
portfolios. The opposite of a direct hedge is a cross hedge.
A form of lease financing in which the bank acquires property from
a supplier and then leases that property directly to an end user.
The bank is the owner and the lessor and the end user is the lessee.
The audit procedure of mailing the account debtor a note requesting
the account debtor to confirm the balance owed.
An expression used to indicate that a measurement is accurate to
the extent that it shows the quantity to be measured to be positive
or negative even though the degree to which the quantity is positive
or negative may be measured inaccurately.
The total time period between when a check is prepared by the remitter
and when the check is presented for payment. This float also includes
the delivery float, processing float, and transit float. Disbursement
float is the float period for the remitter. The collection float
for the organization that will receive the check is the same duration
as the disbursement float.
Cash payments.
(1) The action of releasing a lien or the document in which the
creditor relinquishes a lien. Also known as a satisfaction, a release,
a reconveyance, or an extinguishment. However, release tends to
be used in connection with both real and personal property, while
the discharge, extinguishment, reconveyance, and satisfaction are
more often used only in connection with real property. See partial
release and release.
(2) Relief granted to a debtor by a bankruptcy
court. Discharge relieves the debtor from all further responsibility
for pre-petition debt covered by the discharge.
An opinion letter accompanying audited financial statements in which
the CPA states that he or she cannot express an opinion because
of limitations in either the scope of the audit and/or because of
uncertainties about the future which either have an effect that
cannot be estimated or which cannot be resolved.
The amount by which the price for a security is less than its par
or face value. The discount or difference between such a reduced
value purchase price and the redemption (par) value comprises all
or part of the investor's compensation for owning the security.
(1) The percentage rate applied to the redemption value of a security
in order to calculate a reduced value for a purchaser. Some (or
all in the case of zero coupon securities) of the investor’s
return comes from the resulting price discount.
(2) The rate of return for short-term securities
for which the investor’s entire compensation comes from the
discount amount.
(3) The rate of interest charged by the Federal
Reserve Banks for advances.
(4) An interest rate applied to a single cash flow
that will not be paid or received until a future time in order to
calculate the present value of that future cash flow.
(5) An interest rate or a series of interest rates
applied to every one of the future cash flows of interest and principal
expected from a financial instrument in order to create a single
value for that instrument. This single value is equivalent to the
sum of the present values for each of the separate cash flows expected
from the instrument. When prevailing market rates are used as the
discount rate, this technique produces a fair market value that
is used as a proxy for market value when the market value of a financial
instrument is not readily available. See fair value.
(1) Securities that do not pay periodic interest. Investors earn
the difference between the discount issue price and the full face
value paid at maturity. Treasury bills, banker’s acceptances,
and zero coupon bonds are discount securities. Most commercial paper
is also issued at a discount. See original issue discount.
(2) Any security that is trading at a price less
than par or 100.
A technique or process for valuing a financial instrument by applying
a discount rate (or a series of discount rates) to calculate a present
value of each future interest and principal cash flow expected from
a financial instrument. The sum of the market values of the cash
flows is considered to be the value of the instrument. For financial
instruments with readily available, current trade prices, this value
is called the fair value and is used in lieu of a trade- or transaction-based
market value.
(1) The investing of funds that would normally have been placed
in a bank or other financial institution (financial intermediaries)
directly into investment instruments issued by the ultimate users
of the funds. Investors and borrowers transact business directly
and thereby bypass banks or other financial intermediaries.
(2) The elimination of intermediaries between the
first case provides of capital and the ultimate users of capital.
The distribution pattern of measurements. The standard deviation
is the most common measure of dispersion.
Federal tax law allows a C corporation investing in the stock of
other corporations to take a tax deduction for the dividend income
received from other corporations. This tax treatment applies to
dividends from preferred and convertible preferred stock in addition
to common stock. The deduction is usually, but not always, 70 percent
of the dividend amount received.
(1) Part of a corporation's profits that are distributed to shareholders
rather than kept by the corporation in retained earnings.
(2) The interest expense paid out by mutual financial
institutions for deposits and by credit unions for shares.
An unincorporated subunit of a corporation.
Acronym for "Don’t Know." A security is said to
be "DK'd" when it is delivered to the purchaser or more
typically the purchaser's correspondent but is rejected because
the purchaser either doesn't know or doesn't agree with one or more
of the aspects of the trade. For example, a trade may be DK'd because
of an incorrect price, amount, or CUSIP number.
A category of personal property defined by Article 9 of the UCC.
Documents are written evidence of title such as bills of lading,
warehouse receipts, and dock receipts. To be a document of title,
it must be issued by or addressed to a third party (called a bailee)
and cover goods in the bailee's possession.
Designation, usually following a name, indicating that a name used
by a business is not the legal name of the entity doing business
but is an assumed name or trade name instead.
A short-term funding technique used for mortgage pass-through securities.
A seller of a roll agrees to sell a mortgage security at an agreed-upon
price on a specified date and to buy back a similar security at
a specified future date. The seller receives the use of the funds
for the specified time period but does not receive the monthly cash
flows from the mortgage security during the roll period. The buyer
or counterparty agrees to buy the mortgage security at an agreed-upon
price and to sell back a similar security at a specified future
date. The buyer is the owner of the security for that time period
and as the owner is entitled to all of the cash flows during that
period. Unlike a repo/reverse repo transaction, at the end of the
transaction time period, the buyer is only required to resell a
substantially similar security to the seller. See drop.
A form of receivable lending in which the bank requires that the
borrower give the bank control over the borrower's accounts receivable
collections. Dominion is a legal term meaning control. This form
of lending is also called ledgering or the detail method financing.
Do not confuse with factoring.
Municipal revenue bonds that are also supported by a second source
of repayment. For example, payments of an airport bond issue may
depend primarily upon income generated by the airport. Those funds
may then be further backed by a limited guarantee from the county
or city that owns the airport.
Leverage in bank holding companies that use borrowed funds to finance
the holding company's equity investments in its subsidiaries.
The practice of borrowing funds at the bank holding company level.
The funds are then lent by the holding company to a subsidiary.
A guaranty of a loan to a borrowing entity when the guarantor is
a parent company or stockholder of the borrowing entity.
A yield curve depicting a situation in which yields for shorter-term
maturities are higher than those for longer-term maturities. Downward
sloping yield curves are atypical.
A written order drawn by one party, called a drawer, that directs
a second party (almost always a bank), called a drawee, to pay a
sum of money to a third party, called the payee. For example, a
check. Drafts are used with letters of credit. Drafts may be sight
drafts, payable upon receipt, or time drafts, payable on some specified
future date.
A provision in a mortgage or security agreement that attempts to
extend the security interest granted to the creditor to cover not
only the described debt but also all other present and future indebtedness
of the debtor.
The party to whom a check or draft is written. Also called payee.
The party who writes a draft or check against funds he or she owns.
Also called payor.
See dividend received deduction.
An unofficial name for a provision in Securities and Exchange Commission
Rule 144. The dribble rule is a limit on how much restricted or
controlled stock can be sold within a period.
A market interest rate used in simulation modeling to affect interest
rates for other instruments. For example, instead of forecasting
future levels of rates to be paid on its 90 day CDs, a bank modeler
may tie those rate changes to future changes in a market driver
rate such as the 90 day T-Bill rate.
The difference between the prices in a dollar roll on the two settlement
dates. The drop is expressed in 32nds. The drop is the price that
the buyer of the dollar roll pays to the seller for the right to
own the mortgage security and receive its cash flows during the
term of the transaction.
See forbearance agreement.
See debt service coverage.
See Depository Trust Company.
Securities with coupon rates that are determined by the difference
between two market indexes. These bonds often have a fixed coupon
rate for a brief period followed by a longer period of variable
rates. A type of structured note.
An instrument evidencing the obligation of a seller to deliver sold
securities to the buyer of those securities.
A provision in a mortgage permitting the lender to demand payment
in full when the property is sold.
A sophisticated measure of the average timing of cash flows from
an asset or a liability or from an asset portfolio or a liability
portfolio. Essentially, duration is a more accurate measure of maturity
because it reflects the timing of cash flows from periodic interest
and/or principal payments in addition to the cash flows represented
by the funds transferred at maturity. Duration is computed by summing
the present values of all of the future cash flows after multiplying
each by the time until receipt, and then dividing that product by
the sum of the present value of the future cash flows without weighting
them for the time of receipt. One way to view duration is as the
balancing point for a series of cash flows. One author described
it as that "sweet spot" or "balancing point"
somewhere between the day a position is acquired and the day that
it matures, where the return remains practically unchanged no matter
what happens to interest rates. See convexity, effective duration,
Macaulay duration, and modified duration.
A phrase used to describe the slow but inexorable change in duration
that occurs with the passage of time. Measurements of duration must
be regularly recalculated because of duration drift.
The measured interest rate sensitivity of bank equity calculated
with the use of duration methodology. The modified duration of equity.
This name is used to distinguish between MVPE rate sensitivity calculated
using duration methodology and the more common VAR calculation using
economic value simulation methodology.
An application of duration analysis that measures the interest rate
sensitivity of the bank as whole. Duration of equity views the bank's
equity as if it were a bond. This "bond" has a stream
of obligations for future cash inflows. Those are the cash flows
from the bank's assets. It also has a stream of obligations for
future cash outflows. Those are the cash flows from the bank's liabilities.
When the present value weighted average for the asset cash flows
is calculated and reduced by the total of the present value weighted
cash flows from the liabilities, then the duration of the equity
"bond" is determined. It is expressed by the formula:
duration of equity = duration of assets minus (the duration of liabilities
times (total liabilities divided by total assets)).
See delivery vs. payment.
Fifteen-year FNMA MBS pools.
Gap analysis methodologies that include assumed volumes for renewals,
rollovers, replacement business, growth, etc., to reflect the fact
that banks do not close their doors and simply honor remaining outstanding
obligations as of the date on which gap reports are prepared. Dynamic
gap analysis attempts to reflect the reality that on an ongoing
basis loan payments and maturities are replaced with new loans;
deposit withdrawals are replaced by new deposits. The opposite of
static gap analysis.
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