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See index amortizing note.
See index amortizing swap.
See Industrial Development Authority.
See Industrial Development Authority bond.
Acronym for Industrial Development Corporation. See Industrial Development
Authority.
See embedded option.
A physical certificate representing ownership of a security (a stock
certificate or bond) that is held by a trustee. An arrangement through
which a physical certificate is held so that all future transactions
can be conducted as if the security were book entry. Ownership and
liens are recorded in the books of the trustee rather than evidenced
by physical possession of the certificate. Also called dematerialized.
Establishing and maintaining equal and offsetting exposures to interest
rate risk. For example, holding equal amounts of assets and liabilities
of the same duration.
Indicated future interest rates derived from the differences between
current rates for different maturities of the same instrument. Yield
curves include implied information about future interest rates.
For example, suppose that a 2-year investment offers a return of
6 percent while an otherwise identical 1–year investment offers
a return of 5 percent. In this case, an investor who bought the
1-year investment and realized a return of 5 percent for the first
year would have to be able to reinvest his money at 7 percent in
the second year in order to get an average 2-year return of 6 percent.
If the investor gets less than 7 percent in the second year, he
will not do as well as the investor who purchased the 2-year investment.
This implies that the rate for 1-year investments that will be available
one year in the future will be 7 percent.
A legal name for a situation in which a lender is deemed to have
lost the right to enforce a provision in the loan documents as a
result of the lender's failure to enforce the same provision when
it was previously violated.
The situation in which an option has value because of the relationship
between the option's strike price and the current market price for
the underlying instrument, the spot price. A call option is in the
money when the strike price is below the spot price. A put option
is in the money when the strike price is above the spot price.
See equity tranche.
A list of the names of the individuals holding various corporate
offices within a corporation.
An agreement in which the borrower promises to protect the bank
or reimburse the bank for any damages, claims, costs, penalties,
or liabilities that may arise from some problem. For example, the
bank may obtain an indemnification agreement to protect itself from
costs, penalties, or liabilities arising from environmental contamination
or from violations of environmental regulations.
See covenants.
An unspecified maturity date for a financial instrument. For example,
the maturity date of a savings account.
A benchmark upon which the payment rate or accrual rate for an adjustable-rate
loan or investment is based. For example, a business loan may pay
interest at the prime rate plus 1 percent. In that example, the
prime rate is the index. For adjustable-rate residential mortgage
loans, federal law requires that indexes must move independently
(not controlled by the lender) and that indexes must be easily confirmed
by borrowers. See margin, reset date.
Securities which repay principal according to a predetermined amortization
schedule that is linked to the level of a specific index or a specific
prepayment rate. As market interest rates increase or prepayment
rates decrease, the maturity of an IAN extends. An IAN is a type
of structured note.
A type of amortizing interest rate swap in which the notional amount
declines or amortizes based upon a specific index such as a mortgage
prepayment speed.
A form of lease financing in which the bank acquires or finances
a lease transaction entered into by an end user and a third party.
The third party is the lessor and the end user is the lessee. The
bank is the lender to the third party if it merely finances the
transaction or the assignee of the third party if it purchases the
lease.
Special types of municipal authorities established to promote economic
development in their communities. A community establishes an Industrial
Development Authority to act as a conduit. The authority can, as
a municipal entity, borrow funds or sell securities that are, in
most cases, exempt from federal income tax. Consequently, the authority
can raise funds at lower interest rates than businesses. The lower-cost
funds are used by the authority to buy fixed assets that are then
leased to the business. The lease rate reflects the authority’s
low cost of capital. See Industrial Development Authority bond.
A special type of revenue bond issued by municipal authorities established
to promote economic development in their communities. A community
establishes an Industrial Development Authority to act as a conduit.
A business that would otherwise have to borrow at taxable interest
rates to finance the purchase or construction of a building may,
under some defined circumstances, let the IDA own the building and
pay rent to the authority with an option to purchase. The authority
borrows at a lower, tax-exempt rate. The authority has no responsibility
for the payment of interest and principal on the securities except
to pass the business’s rent payments through to the investors.
The business’s rent payments equal the interest and principal
due for the lower rate, tax-exempt securities.
See Industrial Development Authority bond.
See hedge effectiveness.
A provision found in some promissory notes that attempts to give
the lender the right to demand payment in full at any time the lender
deems itself insecure. More often than not, such a clause is unenforceable
except when other material defaults are also involved.
A legal term used in bankruptcy to describe parties that have a
special relationship to the bankrupt debtor. Creditors who are officers,
directors, or stockholders are obvious examples of insiders. In
some cases, the bank may be deemed to be an insider. The main consequence
of being deemed an insider is that insiders are subject to a one-year
preference period while other creditors are only subject to a 90-day
preference period. See preference.
The lack of adequate capital. The condition that exists when the
amount of losses exceeds the amount of capital. See solvency and
solvency risk.
In consumer lending, name used to describe a promissory note that
calls for mostly regular, periodic payments of principal and.
A type of systemic or capital markets liquidity risk. The risk that
the failure of a market for a financial instrument, such as the
commercial paper market, might trigger a bank funding crisis. See
systemic liquidity risk.
A category of personal property defined by Article 9 of the Uniform
Commercial Code. Instruments are notes, checks, drafts, securities
(such as stocks and bonds), and any other written evidence of rights
to the payment of money that, in the ordinary course of business,
is transferred by delivery with any necessary endorsements or assignments.
See financial instruments
An advanced refunding in which the debtor is not legally released
from being the primary obligor on the refunded bonds, but the possibility
of the debtor having to make additional payments is considered remote
under criteria provided by FAS 76.
See binder.
An asset booked to offset the additional minimum pension obligation.
This asset is created under the FAS 87 rules to offset the minimum
liability for underfunded plans that FAS 87 required firms to recognize
as a liability. Little or no justification can be made to support
the classification of this debit as an asset; it is conceptually
more accurate to consider it as a reduction to equity.
An informal term used by secured lenders to refer to the categories
of personal property defined by Article 9 of the Uniform Commercial
Code as accounts and general intangibles.
Accounts receivable or payable from or to affiliated companies.
Accounting entries made on consolidating statements in the process
of generating consolidated financial statements. Intercompany eliminations
cancel the accounting effects of transactions between firms in the
consolidated group so that the final consolidated numbers exclude
all transactions between entities in the group.
(1) A monetary benefit paid by a borrower for the right to use a
lender’s or a depositor’s funds. Usually, the interest
is paid periodically over the life of the loan, deposit, or security.
However, some interest-bearing instruments, such as savings accounts,
do not have defined maturities. Under the terms of some instruments,
interest is not paid periodically over the life of the instrument
but instead is paid solely at the end of the loan/deposit/security
term.
(2) A right to enjoy some benefits of ownership
of property. For example, the rights that a debtor or a court grants
to a secured party in the assets owned by the debtor. Or, for example,
the rights that a lessee is granted in the lease of property owned
by a lessor.
A ratio that uses historical financial information. sometimes combined
with projected financial information, to measure a firm's short-term
credit strength. This ratio measures the firm's ability to make
its required interest payments. In its simplest form, the ratio
takes the firm's pretax net income plus interest expense and divides
that sum by the interest expense. Interest-coverage ratios can be
calculated with several variations. One variation involves using
next year's projected interest expense in the denominator rather
than the most recent year's actual interest expense. A second variation
reduces net income by deducting nonrecurring income amounts. Other
variations are in use. Sometimes called times interest earned.
A form of stripped mortgage-backed security (MBS) that only passes
interest payments received from the underlying mortgage loans to
the security owners. May be a real estate mortgage investment conduit
(REMIC) tranche.
See cap.
See floor.
The potential that changes in market rates of interest will reduce
earnings and/or capital. The risk that changes in prevailing interest
rates will adversely affect assets, liabilities, capital, income,
and/or expense at different times or in different amounts. The Federal
Reserve calls this type of risk market risk and defines it as the
risk to a financial institution’s condition resulting from
adverse movements in market rates or prices, such as interest rates,
foreign exchange rates, or equity prices. Within that definition,
the Federal Reserve clearly views interest rate risk as just one
component of market risk. The Office of the Comptroller of the Currency
(OCC) defines interest rate a bit more narrowly than the Federal
Reserve since it defines price risk as a separate risk. The OCC
defines price risk as the risk to earnings or capital arising from
adverse changes in the value of portfolios of financial instruments.
Since such adverse changes generally result from changes in prevailing
interest rates, price risk is essentially the same as interest rate
risk. Most rate risk managers use the term in the broadest sense
as defined in the first sentence of this paragraph. Interest rate
risk has four components. See basis risk, mismatch risk, option
risk, and yield curve risk. Closely related to price risk and market
risk.
A financial instrument representing a transaction in which two parties
agree to swap or exchange net cash flows, on agreed-upon dates,
for an agreed-upon period of time, for interest on an agreed-upon
principal amount. The agreed-upon principal amount, called the notional
amount, is never exchanged. Only the net interest cash flows are
remitted. In the simplest form of interest rate swap, one party
agrees to swap fixed-rate loan payments with the floating-rate payments
of the other party. Interest rate swaps are often used in hedging.
See basis swap and swap.
Financial statements prepared for periods other than the firm's
fiscal year-end.
Elapsed time for processing checks. Also called administrative float
or processing float.
A term defined by the Federal Reserve. Internal liquidity risk relates
largely to funding problems arising from unfavorable changes in
the perception of an institution in its various markets: local,
regional, national, or international. See bank-specific liquidity
risk, external liquidity risk, and systemic liquidity risk.
A measure of yield that relates the cash flow from each interest
payment and the cash flow from the investment's redemption value
at maturity to the purchase price of the investment. It is a present
value calculation that reflects the time value of each of those
cash flows. By calculating the present value of the cash flows,
the IRR reflects the reinvestment income that the investor can earn
from reinvesting those cash flows, at the same yield as the investment
that generated them, during the life of the investment.
A global trade association representing participants in the privately
negotiated (i.e., nonexchange traded) derivatives industry.
The mathematical process of obtaining an unknown number that has
a value between two known numbers in a series of numbers. For example,
if the yields or prices for 2-, 3-, and 5-year Treasury notes are
known, a yield or price for 4-year Treasury notes can be extrapolated
or interpolated. Interpolated values are not always correct, but
they are usually close enough for most users.
That portion of an option’s value that derives from the fact
that the option is in the money. The difference between exercise
price of the option and the price of the underlying. The other primary
component of an option's price is its time value.
A category of goods defined by Article 9 of the Uniform Commercial
Code. Inventory is goods held for sale or lease. It includes raw
materials, work-in-progress, finished goods, and materials used
or consumed in a business.
Bonds whose coupon rates increase as rates decline and decrease
as rates rise. The coupon rate is based on a formula using an index
and moves in the opposite direction of changes in that index. Some
inverse floaters may be a type of structured note. Other inverse
floaters, such as interest-only (I/O) and principal-only (P/O) strips
are types of collateralized mortgage obligations (CMOs).
See yield curve slope.
A term defined by the Office of Comptroller of the Currency (OCC)
(12 CFR 1) and used in its investment regulation to define eligible
investments. Investment grade means a security that is rated in
one of the four highest rating categories by either:
(1) Two or more nationally recognized statistical
rating organizations (NRSROs); or (2) One NRSRO if the security
has only been rated by one NRSRO.
See NRSRO.
The amount by which it’s the convertible bond’s market
price exceeds its value as a bond only, expressed as a percentage.
The calculation is done by subtracting the investment value from
the market value and dividing the difference by the investment value.
(1) Certificated or uncertificated security, entitlement, securities
account, commodity contract, or commodity account. A category of
personal property collateral defined by the 2001 revisions to Article
9 of the Uniform Commercial Code. See certificated and uncertificated.
(2) An informal term for real estate owned for
investment rather than the owner’s use.
As defined by the Office of the Comptroller of the Currency (OCC)
(12 CFR 1), a marketable debt obligation that is not predominantly
speculative in nature. A security is not predominantly speculative
in nature if it is rated investment grade. When a security is not
rated, the security must be the credit equivalent of a security
rated investment grade. See marketable and investment grade.
The value of a convertible bond calculated as a straight bond without
giving any value to the conversion feature. Although this is done
according to normal bond calculations, the rate used to discount
the bond is that for similar, nonconvertible debt. The discount
rate is likely to be two to five percentage points higher than the
convertible’s coupon rate. Also called the bond value.
or
See interest-only strip.
See Industrial Development Authority Bond.
See internal rate of return and interest rate risk.
See International Swaps and Derivatives Association.
An industry-standard agreement used between the counterparties to
privately negotiated (i.e., nonexchange traded) derivatives transactions.
The agreement sets forth all of the terms and conditions for the
transaction. The provisions of the document are not negotiable but
can be amended by executing a schedule attached to the master agreement.
The date on which interest for a new security issue begins accruing.
For mortgage-backed bonds, the issue date of the pool is not the
same as the origination date of the underlying mortgages. A pool
may be assembled from new loans or from older loans.
A party or entity that sells a security representing a claim on
its assets (an equity security) or its contractual obligation to
pay the holder at a future date (a debt security).
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