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A type of credit enhancement used in asset backed securities. One
or more triggers, defined in the asset backed security's documentation
require the termination of revolving periods, controlled amortization
periods and/or accumulation periods. Once triggered, the early amortization
provision requires that the monthly principal payments be distributed
to investors as they are received. The most common trigger is a
measure of how the portfolio yield net of charge-offs exceeds the
base rate of servicing plus the investor coupon rate. Also called
a payout event.
The quantity by which net income is projected to decline in the
event of an adverse change in prevailing interest rates. One measure
of an institution’s exposure to adverse consequences from
changes in prevailing interest rates. See value at risk for an alternative
measure.
An interest rate applied to investable account balances to determine
how much expense for bank services used by a depositor is offset
by the deposits maintained by that depositor. The same calculation
can work in the opposite way by applying the earnings credit rate
to the actual service charges to determine how much deposit balance
is needed to pay for the charges. The earnings credit rate is always
expressed as an annual rate even though the calculations are usually
done monthly. Also called earnings allowance rate.
The percent of current period earnings retained by the firm as opposed
to being paid out as dividends or partners’ withdrawals. The
after-tax net income minus dividends then divided by the after-tax
net income. Not to be confused with retained earnings, a name for
the quantity on the balance sheet that includes the accumulated
total of earnings retained.
Acronym for earnings before income taxes.
See Equal Credit Opportunity Act. Pronounced ee
Systems of mathematical formulas that attempt to represent the interaction
of various macroeconomics variables. Some economists use these models
to predict the alterations that will result from changes in one
or more economic conditions. These models are sometimes used to
predict interest rates. Rate forecasts made by econometric models
are seldom correct.
A special type of corporation established by a community solely
to act as a conduit. The EDC can, as a municipal entity, borrow
funds or sell securities that are, in most cases, exempt from federal
income tax. Consequently, the EDC can raise funds at lower interest
rates than businesses. The lower-cost funds are used by the EDC
to buy fixed assets that are then leased to the business. The lease
rate reflects the EDC’s low cost of capital. The EDC has no
responsibility for the payment of interest and principal on the
debt except to pass the business's rent payments through to the
investors.
One measure of exposure to interest rate risk. The difference between
the sum of the present values of all cash flows from assets and
the sum of the present values of all cash flows from liabilities.
This difference is a proxy or estimate used for capital when the
sensitivity of capital to changes in prevailing interest rates is
calculated. The rate risk exposure target focuses on the amount
of change in the economic value of equity that might result from
a change in prevailing interest rates. It is a long-term, economic
target for measuring rate risk exposure. Previously known by the
less-accurate name market value of portfolio equity or MVPE. Sometimes
called net portfolio value (NPV).
See Economic Development Corporation.
A seldom-used expression to refer to the yield on an investment
expressed on a compound interest basis.
(1) The date on which funds will be transferred electronically from
or to a customer’s account.
(2) The date on which cash flows due under a swap
contract begin to accrue.
(1) One of several methods of expressing duration. More accurate
than Macaulay duration or modified duration. See convexity, duration,
Macaulay duration, and modified duration
(2) A synonym for empirical duration. See empirical
duration.
(3) A synonym for option-adjusted duration. See
option-adjusted duration.
See hedge effectiveness.
A methodology for amortizing premiums or accreting discounts for
MBSs that is required by FAS 91. Under this methodology, premiums
are amortized and discounts are accreted into income over the average
life of the securities. To accomplish this, a prepayment speed assumption
(PPA) must be made when the MBS is purchased. An average life is
then estimated from that prepayment assumption. Then an initial
accretion or amortization schedule is determined to evenly spread
the accretion or amortization into income over the estimated life
of the MBS investment. If actual prepayments received during the
life of the investment differ from the assumed speed, as they almost
always will, the average life projection must be revised. When the
average life projection is revised, a revised accretion or amortization
schedule must be calculated for the entire period from the purchase
date. In practice, many investors do not do this until the difference
between the original speed assumption and a more accurate, current
assumption, is material. An alternative system, level factor amortization,
is often considered superior.
The effective margin is the average spread over the underlying index
that the investor expects to earn over the life of a floating-rate
security. For a floating-rate security selling at its par line,
the effective margin is identical to the spread between the coupon
rate and the underlying index. An advantage of using an effective
margin measurement is that it applies equally well to floating-rate
securities trading at discounts, at par, or at premiums. A security
trading at a discount will have an effective margin greater than
the difference between the coupon rate and the index.
One description of the tenor of a CMO. The final date at which principal
will be repaid based upon the prepayment speed assumption selected
for the calculation.
The spread between specified upper and lower limits for prepayments
in a structured CMO such as a PAC.
A measure of the annual return from an investment. The Effective
yield is calculated by dividing the coupon interest rate by the
amount invested expressed as a percentage of the par value.
or
An asset or portfolio of assets that earns the maximum possible
return for its given level of risk. An asset or a portfolio of assets
is considered to be efficient if no other asset or portfolio of
assets offers a higher expected return with the same (or lower)
risk or offers a lower risk with the same (or higher) expected return.
This concept is part of a financial explanation sometimes called
the Markowitz Portfolio Model or the Efficient Frontier Theory.
The efficient portfolio is defined mathematically based upon the
expected returns, the standard deviation of returns, and the covariance
of returns for the portfolio.
See electronic funds transfer.
See Emerging Issues Task Force.
A document that includes both monetary obligation and a security
agreement consisting of information stored in an electronic medium.
A category of personal property collateral defined by the 2001 revisions
to Article 9 of the UCC.
An electronically based rather than paper-based system of transferring
funds to and from accounts. Two main EFT remittance methods are
wire transfers and automated clearing house (ACH).
A Federal statute that gives electronic signatures the same validity
as handwritten signatures on paper documents. Actually, it is more
accurate to say that under this law online contracts "may"
have the same legal status as paper contracts. The e-sign law does
not make electronic contracts enforceable it merely provides that
courts cannot deem an electronic contract to be unenforceable solely
because they are in electronic form. Enacted in 2000. Better known
as the "e-sign law".
Receivables that are acceptable to the lender for the purpose of
making advances to the borrower under a line of credit with an advance
formula. The criteria for determining the eligibility of accounts
must be set forth in the loan documentation.
Banker’s acceptances that meet Federal Reserve requirements
and thus can serve as collateral for bank borrowings from the Federal
Reserve. The accepting bank can sell eligible BAs without incurring
reserve requirements. (When an accepting bank sells an ineligible
BA, the sale is treated as a borrowing subject to reserve requirements.)
See banker’s acceptance.
See intercompany eliminations.
Defined by FASB in FAS 133. An implicit or explicit term in a contract
such as a bond, insurance policy, or lease, that meets the definition
of a derivative even though the entire contract may not. Under FAS
133, the certain embedded derivatives must be separated from the
host contract for purposes of reporting and accounting. See embedded
option and FAS 133.
A provision in a financial contract or financial instrument, such
as a loan or a security, that allows one party to change the timing
or amount of one or more cash flows associated with that contract
or instrument. An options feature of minor importance in bank products
or debt instruments. Sometimes called a hidden option. They are
"hidden" not because they are in any way secret but because
they are not separate, detachable features that banks or customers
can add or subtract to customize individual transactions. Instead,
they are one of a number of features, terms, or contract rights
that are embedded in the contract or financial instrument. Examples
include prepayment options on loans, early withdrawal options on
certificates of deposit, annual and lifetime rate caps on ARMs,
and call options in bonds. Embedded options make both the projected
return and the interest rate risk of a financial instrument difficult
to evaluate because the probability that the option will be exercised
must be evaluated, and may vary with movements in rates. See embedded
derivative instrument, option, and option risk.
A unit of the Financial Accounting Foundation that addresses accounting
issues not yet addressed by a published FASB Statement of Financial
Accounting Standards.
The power of a government to acquire private property for public
purposes. It is used frequently to obtain real property that cannot
be purchased from owners in a voluntary transaction. When the power
of eminent domain is exercised, owners normally are compensated
by the government in an amount determined by the courts.
A measure of duration calculated by "backing into" the
duration value using changes in observed market prices resulting
from changes in prevailing rate.
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
known as simulation VAR, empirical VAR is one of several different
methods for calculating VAR. Empirical or simulation VAR calculates
VAR by modeling potential value changes for a defined time horizon
over a large number of possible scenarios. The result of these hundreds
or even thousands of simulations is a distribution of possible outcomes.
VAR is then calculated from that distribution. This approach does
the best job of capturing option risk. Unfortunately, it is the
most computationally intensive of the three statistical techniques
for calculating VAR. See correlation VAR, historical VAR, and VAR.
Legislation mandating standards for vesting requirements and funding
of pension plans.
See permanent lender.
A determination of the number and value of checks drawn on each
transit routing number.
A counterparty who intends to own the position. Contrast with a
counterparty such as a dealer who intends to sell the position to
an end user.
A written statement on a document, usually on the back of the document,
in which the owner assigns his rights to an individual or entity
named in the endorsement.
Technically, an endorser is anyone who signs the back of a financial
instrument. In lending, the term is used as functional equivalent
of a guarantor. A loan endorser usually signs a guaranty agreement
included on the promissory note form, often on the back.
Funds or property that are donated with either a temporary or permanent
restriction as to the use of principal.
(1) A fund established to account for government operations financed
and operated in a manner similar to private business enterprises
(e.g., water, gas, and electric utilities; airports; parking garages;
or transit systems). In this case the governing body intends that
costs (i.e., expenses, including depreciation) of providing goods
or services to the general public on a continuing basis be refinanced
or recovered primarily through user charges.
(2) A fund established because the governing body
has decided that periodic determination of revenue earned, expenses
incurred, and/or net income is appropriate for capital maintenance,
public policy, management control, accountability, or other purposes.
A Federal statute that makes it illegal for creditors to discriminate
in any aspect of a credit transaction on the basis of sex, marital
status, age, race, national origin, color, religion, receipt of
public assistance, or the exercise of rights under the Consumer
Protection Act. The Federal Reserve Board of Governors has adopted
Regulation B to implement this statute.
A category of goods defined by Article 9 of the UCC. Equipment is
goods used primarily in the operation of a business. It includes
professional equipment and farm equipment. Any personal property
that is tangible and is not consumer goods, farm products, or inventory.
A common type of secured corporate bond. For these bonds, a collateral
interest in equipment or machinery provides extra protection for
bond holders. In most cases, the equipment that is pledged to secure
the bonds is equipment or machinery that is purchased from the proceeds
of the bond issue. Typically, a trustee will purchase the equipment,
issue the bonds, and lease the equipment to the end user. The end
user's lease payments to the trustee are passed to the bond holders
in the form of interest and principal. When the bonds are retired,
the end user acquires title to the equipment. Airlines, railroads,
and shipping companies are the most common issuers.
A legal term used in bankruptcy to describe a process in which a
bankruptcy judge decides that fairness can only be achieved by giving
lower priority (subordinating) the claims of one or more creditors
(usually a secured bank) to the claims of other (usually unsecured)
creditors.
An accounting method used to reflect an investor's interest in a
company. This method is used when the investor owns 20 percent or
more of the investee and has significant influence over the investee.
Under the equity method, the investment is originally recorded on
the books of the investor at its cost. Subsequently, the asset value
of that investment on the investor's financial statements is increased
or decreased by the investor's proportionate share of the increase
or decrease in the investee's net worth.
Any security representing an ownership interest in the issuing entity.
This includes common, preferred, or other capital stock. It also
includes mutual funds and contractual rights to acquire or dispose
of ownership interests at fixed or determinable prices such as warrants,
rights, call options, and put options. Does not include convertible
debt.
One name for the lowest quality (highest credit risk) tranche in
a CDO structure. Sometimes called junior subordinated notes, preferred
stock or income notes. 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 "collateralized
debt obligation" and "waterfall".
A less-commonly used synonym for value at risk. The quantity by
which the assumed market value, or portfolio value, of an institution’s
equity is projected to decline in the event of an adverse change
in prevailing interest rates. One measure of an institution’s
exposure to adverse consequences from changes in prevailing interest
rates. See earnings at risk for an alternative measure.
See bond equivalent yield.
Cash held in abeyance until an event occurs or does not occur. For
example, funds paid monthly by a mortgagor to the mortgagee are
held in escrow until they are due to the taxing authority.
See Electronic Signatures in Global and National Commerce Act.
A legal term describing the preclusion of a party from alleging
in a legal action anything that is contrary to previous actions
or admissions of that party. See estoppel letter or estoppel certificate.
or
A document used in commercial mortgage transactions where the lender
is secured by property that is leased to tenants. Also known as
tenant estoppel letters or tenant acceptance letters. Written admissions
that are obtained by the lender prior to funding to create estoppel.
In an estoppel letter, the tenants attest that they believe the
lease to be valid and enforceable, that they are making lease payments
as agreed, that the landlord is not in default of any lease provisions
requiring landlord performance and that no rent has been prepaid.
The estoppel letter gives the lender more rights and more flexibility
for disposing of the property in the event that the borrower defaults.
See estoppel.
One type of Eurodollar deposit. The certificates are more liquid
than the time deposits and therefore trade at lower yields/higher
prices.
Bank deposits denominated in U.S. dollars but held at locations
outside of the U.S. Initially, the term only referred to dollar
deposits in London; later it became applicable to dollar deposits
anywhere in Europe or the Caribbean; now it often refers to dollar
deposits at any offshore location. The deposits may be held by the
foreign branches of U.S. banks or by non-U.S. banks. Eurodollar
deposits may be Eurodollar certificates of deposit or simply Eurodollar
time deposits.
or
An option that the holder can exercise only on the expiration date.
See American, Bermuda and Asian options.
The act or process of estimating the market value of real estate
when a transaction secured by real estate falls within one or more
of the exemptions set forth to the requirements for obtaining a
full appraisal. If a transaction falls under one of three exemptions,
an evaluation is required. If the transaction is exempted under
one or more exemptions not including one of the three that require
an evaluation, an evaluation may still conducted if the lender considers
it prudent. An evaluation may be conducted by independent bank personnel
or by an appraiser. When an appraiser conducts such an estimate
of value, it is called a limited appraisal and must meet requirements
for limited appraisals. See limited appraisals and USPAP.
See equity value at risk.
See economic value of equity.
An event described in a promissory note, security agreement, or
loan agreement that triggers rights of the lender to take remedies
set forth in the documents. The most common event of default is
the debtor’s failure to make required interest and/or principal
payments to the bank when they are due. Often, the remedy permitted
to the bank when an event of default occurs is the right to declare
the debt to be due and payable in its entirety. Formal loan agreements
frequently include numerous events of default.
The risk of an unexpected, future decrease in credit quality that
is a result of events such as a corporate acquisition or material
changes in taxes, laws, or regulations.
A term used in asset backed securities to describe the amount by
which the yield from the loan collateral, net of charge-offs, exceeds
the sum of the servicing fee and the interest paid to holders of
the security.
An expression used to refer to financial instruments that are purchased
and sold in securities exchanges such as the Chicago Board of Trade.
It excludes instruments that are actively traded in over-the-counter
(OTC) capital markets.
Some derivatives are traded on organized exchanges. These derivatives
usually have margin requirements. Common exchange-traded derivatives
include futures and options. Other derivatives, such as swaps, are
not exchange traded but are traded in over-the-counter (OTC) capital
markets.
The implementation or use of a contractual right, for example, a
call option holder’s purchase of the underlying security.
The price at which an option may be used. The price at which the
owner of the option has the right to buy or sell whatever the option
contract is for. Sometimes called the strike price.
The theory that the shape of yield curves is determined by investors'
collective expectations of future interest rates. See implied forward
rates. Also see liquidity preference for a modification of this
interest rate theory.
The portion or component of risk or loss that is predicted by statistical
analysis.
Decreases in net financial resources. Expenditures include current
operating expenses requiring the present or future use of net current
assets, debt service, and capital outlays, intergovernmental grants,
entitlements, and shared revenue.
Outflows or other reductions of assets or increases in liabilities
(or a combination of both) from delivering or producing goods, rendering
services, or carrying out other activities that constitute the entity’s
ongoing major or central operations.
The final date on which an option may be used. See American option
and European option.
The risk that rising interest rates may slow prepayment speeds and
therefore cause an investment in a pass-through or CMO MBS to last
longer than the investor anticipated. By taking longer to return
the investor's principal, the extension of the MBS prevents the
investor from taking advantage of higher rates available from other
investments.
A term defined by the Federal Reserve. The risk that a bank will
experience funding problems as a result of factors outside of its
direct control. The Federal Reserve defines three types of external
liquidity risk. These are geographic (such as the premiums required
on deposits at many Texas banks in the late 1980s), systemic (such
as the adverse effects upon several large banks caused by the near
failure of Continental Illinois Bank in 1984), or instrument-specific
(such as the collapse of the perpetual floating-rate note market
in 1986.) See bank-specific liquidity risk and systemic liquidity
risk.
See discharge.
Accounting income, gains, expenses, or losses resulting from transactions
or events that are both unusual in their nature and infrequent in
their occurrence. The GAAP requirements for defining something as
extraordinary are strict. The exact language, found in APB Opinion
No. 30, paragraph 20, states in order for extraordinary items to
be considered unusual... "the underlying event or transaction
should possess a high degree of abnormality and be of a type clearly
unrelated to, or only incidentally related to, the ordinary and
typical activities of the entity, taking into account the environment
in which the entity operates ....". Thus the same transactions
or events can be extraordinary for one firm but ordinary for another
firm. When extraordinary items are reported, they are shown on the
income statement net of applicable income taxes. |
