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Glossary
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Acronym for National Association of Credit Managers.
The position of an option holder who does not also own an offsetting
position in the underlying. For example, an investor who sells a
call option but who does not own the underlying instrument that
can be called has a naked call option or a naked call position.
Also called uncovered. The opposite of covered.
Acronym for the National Asset and Liability Management Association.
An association of broker/dealers. The association supervises and
regulates the trading and the conduct of its member organizations
and the licensed brokers who work for those member organizations.
The NASD was created under the Securities and Exchange Act of 1934.
Even though it is not a government organization, it works closely
with state and federal securities regulators.
Prior to 1984, this group and its predecessor organization were
responsible for setting generally accepted accounting principals
for state and local governments.
A Federal law that establishes requirements for flood insurance.
Under the National Flood Insurance Reform Act of 1994, lenders taking
an interest in real property are required to complete a standard
flood hazard determination form developed by the Federal Emergency
Management Agency (FEMA). Flood hazard forms must be retained in
the lender’s records. If the form indicates that the property
is in a designated flood hazard zone, the lender is required to
have flood insurance protection. Lenders may also have notice requirement
obligations for collateral located in flood hazard zones.
Balance sheet hedge activity done by altering asset and/or liability
repricing characteristics or volumes to reduce the entity's interest
rate risk exposure without purchasing derivative hedge instruments
such as interest rate swaps or futures. The opposite of natural
hedging is capital markets or derivatives hedging. Note that some
bankers use the term "natural hedges" more narrowly than
others. As narrowly defined, a natural hedge is one in which the
rate risk in one piece of customer business is offset by the rate
risk in another piece of customer business. Thus a hedge involving
the investment portfolio is not a natural hedge under the most narrow
definition of the term.
See National Council on Government Accounting.
The increase in a loan balance resulting from a situation in which
the payments due from the borrower are not sufficient to cover the
full amount of the interest due. The amount of interest due that
is not covered by the amount of the payment is added to the unpaid
principal balance of the loan. Negative amortization typically occurs
during periods of high interest rates for loans with floating interest
rates but fixed monthly payments.
A phrase use to describe a particular type of instability in the
duration of an instrument. Negative convexity means that as yields
rise, duration rises and as yields fall, duration falls. Graphically,
this is seen as a price/yield curve for which the price at very
low and very high yields is less than the price indicated by a straight,
tangent line. For an instrument with negative convexity, duration
understates the interest rate sensitivity. 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. Callable bonds, loans, and mortgage-backed bonds typically
have negative convexity.
See correlation.
A provision in the lender's documents that prohibits the borrower
from doing something in the future. For example, a provision prohibiting
the borrower from acquiring additional debt during the term of the
loan.
(1) The name for a particular relationship between changes in the
price of a debt security and changes in prevailing interest rates.
When a security has negative duration, its price decreases in response
to a decrease in prevailing market rates. Very few securities have
negative duration. Note that the term "duration," as used
in this definition, refers to modified duration. See convexity,
duration, and positive duration.
(2) For a financial institution, a situation in
which the total duration of its assets is shorter than the total
duration of its liabilities. In such cases, the duration of equity
is negative. In other words, an entity with short-term assets funded
by long-term liabilities will have a negative duration of equity.
A financial institution that has a negative duration of equity may
also be described as having a positive gap or as being asset sensitive.
The theoretical equity value, but not necessarily the stock price,
of a financial institution with a negative duration of equity will
decrease if rates decline and increase if rates rise. Note that
the term "duration," as used in this definition, refers
to modified duration. See convexity, effective duration, Macaulay
duration, and modified duration.
A term referring to a liability-sensitive condition. A mismatch
in which interest-sensitive liabilities exceed interest-sensitive
assets.
A document or a provision in a document in which a borrower agrees
not to give any creditor a security interest in identified property
owned by the borrower.
A form of auditing account balances in which the account debtor
is only requested to respond if the balance owed is not the same
as the amount shown on the confirmation letter. One of two forms
of direct verification.
See yield curve slope.
Salable.
The name of an interest-bearing checking account that banks are
permitted by regulation to offer to certain customers.
A mutual fund’s share value. It is calculated by subtracting
total liabilities from total assets to determine net worth or equity.
The equity value is then divided by the number of outstanding shares.
The NAV is calculated once each day at the close of business.
Term favored by the Federal Banking regulators in lieu of market
value of portfolio equity. 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 is a proxy
or estimated value used for capital when the sensitivity of capital
to changes in prevailing interest rates is calculated. See market
value of portfolio equity and value at risk.
The amount of interest income minus interest expense, usually expressed
as a percentage. The net interest margin percentage is calculated
by dividing interest income less interest expense by average earning
assets. If interest income includes tax-free income, that income
should be "grossed up" to its taxable equivalent before
calculating the percentage. (To gross up tax-free income to its
taxable equivalent, divide the income by one minus the marginal
income tax rate.) The net interest margin expressed as a percentage
of earning assets is often confused with the net spread. The spread
is the difference between the average rate earned on assets minus
the average rate paid on liabilities. That spread would only equal
the net interest margin percentage if the dollar amount of earning
assets equaled the dollar amount of interest-bearing liabilities.
Leases that require the lessee to pay expenses. For real estate
leases, see triple net. For personal property leases, a net lease
is a lease that requires the customer/lessee to pay for the insurance,
maintenance, and all taxes, if any, levied on the equipment.
See margin.
Total noninterest expense minus total noninterest income. A measure
used by financial institutions to monitor the extent to which fees
and other sources of noninterest income offset noninterest expenses.
For a financial institution, expenses other than interest expense
are almost always much larger than income other than interest income.
Also called net overhead. Often expressed as a percentage of average
earning assets. See noninterest income and noninterest expense.
See net noninterest expense.
A term used by the Office of Thrift Supervision to refer to a proxy
value for an institution’s capital when the rate sensitivity
of capital is measured. See market value of portfolio equity and
net economic value.
Term used to describe a firm's revenue after the amount of returns,
allowances, and discounts is deducted from gross revenue from the
firm's principal operations.
(1) For groups of financial transactions between the same counterparties,
the settlement of a group of monetary transactions by delivery of
only the net amount due.
(2) For derivatives, a type of arrangement between
two counterparties to a financial transaction in which the parties
exchange value without the delivery of the full value or an asset.
FAS 133 defines net settlement to be the case in which neither party
is required to deliver an asset that is associated with the underlying.
This is the case in which a net amount of interest is exchanged
between the parties based upon some notional amount that is not
exchanged. See notional amount and underlying.
See net economic value.
The agreement of a buyer and seller to exchange the security and
the payment on the first business day after the trade date. See
settlement.
Acronym for net income after income taxes.
Acronym for net income before income taxes.
An informal name for 5 basis points.
An expression used to describe a mutual fund that does not impose
any sales charges on investors. The term "no-load" fund
is sometimes used to describe a fund without either a front-end
charge or a deferred sales charge but which may nevertheless have
a 12b-1 charge. However, a true no-load fund is one without any
sales charges at all - front-end, deferred or 12b-1. See 12b-1 fee,
back-end load, and front-end load.
In real estate construction, this is a contract in which the subcontractors
agree to give up their rights to file mechanic’s or materialman's
liens.
A provision in some municipal leases. The clause provides that the
lease terminates without penalty to the lessee in the event that
the municipal lessee fails to appropriate sufficient funds to make
required lease payments during the ensuing annual or biannual budget
period. Usually, this clause is only used in states where legal
restrictions apply to the quantity of or to the approval process
required for municipal debt. The nonappropriation clause is intended
to avoid characterization of the lease as debt subject to such restrictions.
This clause is almost always used in conjunction with a nonsubstitution
clause.
A demand, time, savings, passbook, or similar deposit account maintained
with a bank, credit union, or other financial institution that is
used primarily for business purposes. A category of personal property
collateral defined by the 2001 revisions to Article 9 of the Uniform
Commercial Code.
An agreement used in some commercial mortgage loans that are secured
by interests in real estate leased to tenants. In a nondisturbance
agreement, the lender promises the tenant that in the event of foreclosure,
the lender will not cancel the tenant’s lease. Often, lenders
have to give nondisturbance agreements to tenants in order to induce
the tenants to provide the lender with subordination and attornment
agreements and/or tenant estoppel letters.
Fifteen-year FHLMC MBS pools that are issued under the FHLMC 15
year-Guarantor Program. See gnome.
For a financial institution, operating expense from sources other
than interest expense. The main components of noninterest expense
are usually personnel, occupancy, equipment, and professional services.
For a financial institution, operating income from sources other
than interest income. The main components of noninterest income
are fees such as deposit service charges, funds transfer fees, trust
fees, brokerage fees, etc.
Receivable lending in which the borrower's account debtors are not
notified of the bank's lien. (The bank may use non-notification
lending but still have a provision in the loan document that allows
the bank to switch to notification-based financing in the event
of a default.) Under non-notification financing arrangements, payments
may be sent directly to the bank by the account debtors.
An interest other than a security interest in farm products that
secures payment or performance of an obligation for goods or services
furnished in connection with a debtor’s farming operation.
Arises primarily through the furnishing of goods and services or
leased property that are connected with a debtor’s farming
operation.
A provision in some municipal leases. This lease provision stipulates
that if the municipal lessee terminates the lease under a nonappropriation
clause, the lessee will not use any other property performing a
similar function to that performed by the property covered by the
lease for the period of time covered by the lease. The nonsubstitution
clause is intended to be a deterrent to termination of the lease
contract under a nonappropriation clause.
In many cases, lenders are required by law to provide applicants
with timely notice of adverse action, such as denial of credit applications.
This requirement applies to some loans covered by the Equal Credit
Opportunity Act and to some loans covered by the Women’s Business
Ownership Act.
Receivable lending with the requirement that the borrower's account
debtors must be notified of the bank's lien. The payments on the
accounts are then usually sent directly to the lender by the account
debtors. Sometimes called notification plan.
The principal amount or face value of a derivative. Defined by the
Financial Accounting Standards Board (FASB) in FAS 133 as the number
of currency units, shares, bushels, pounds or other units specified
in a derivatives contract. The notional amount is used to calculate
the payments that are exchanged by the counterparties in the transaction.
Market participants refer to notional principal because, unlike
bonds or other conventional credit instruments, these types of derivatives
do not involve an exchange of principal. Rather, the parties state
the principal amount only as a basis for calculating the sizes of
the interest related payments that they exchange. In this application,
principal is only a reference point or idea - hence the term. Also
called the notional principal balance.
See notional amount.
(1) The substitution of an existing debt with a newer debt.
(2) An agreement to substitute an existing party
to a contract with a new party. All of the original parties to the
contract must agree to the substitution.
See Negotiable Order of Withdrawal.
Acronym used by the Securities Exchange Commission (SEC) and by
banking and securities regulators to refer to nationally recognized
statistical rating organizations. The most well known NRSROs are
Standard & Poor’s and Moody’s.
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