Glossary
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See option-adjusted spread.
Any party with an obligation to discharge; usually used to refer
to a borrower.
See Office of the Comptroller of the Currency.
A term used to describe contingent liabilities, contingent assets,
and commitments that are legally binding but are not assets or liabilities
shown on the balance sheet under GAAP. Examples include loan commitments
and letters of credit.
A term used to describe all but the most recently issued treasury
or agency securities in a particular maturity class. For example,
at any given time, there may be a number of U.S. Treasury security
issues with remaining lives of about two years. The most recently
issued two year securities are described as on-the-run. All the
rest are described as off-the-run. Off the run securities trade
at wider spreads than similar securities that are actively quoted
or traded. They may also trade at slightly lower prices(higher yields).
or
The trading price proposed by the prospective seller of securities.
Also called the asked or asking price.
Part of the U.S. Treasury department. The OCC is the primary regulator
for banks with national charters.
The OTS regulates federally insured savings and loan institutions.
One of the provisions of the Financial Institutions Reform, Recovery,
and Enforcement Act (FIRREA) established the OTS to replace the
Federal Home Loan Bank Board as the primary thrift regulator.
See original-issue discount.
A term used to describe the most recently issued treasury or agency
securities in a particular maturity class. For example, at any given
time, there may be a number of U.S. Treasury security issues with
remaining lives of about two years. The most recently issued two
year securities are described as on-the-run. (All the rest are described
as off-the-run.) On the run securities trade at narrower spreads
than similar securities that are less actively traded. They may
also trade at slightly higher prices(lower yields).
Checks or drafts drawn on the same bank that is used by the payee/drawee
to cash the check or deposit the proceeds. Checks or drafts payable
to the drawor’s bank itself, as opposed to checks drawn on
other institutions.
Types of credit extensions that permit borrowers to add to the amount
borrowed, usually in irregular amounts, at various times subsequent
to the granting of the credit. Examples include credit card loans,
personal lines of credit, and home equity lines of credit.
See continuous repo.
A ratio used in real estate lending analysis. The ratio is the total
operating expenses divided by the effective gross income.
An income statement subtotal that is variously called operating
income or operating profit. Gross profit minus operating expenses.
A credit balance here, shown as a positive number, indicates that
the firm makes money on its principal operations. . A debit balance,
shown as a negative number, indicates that the firm loses money
on its principal operations.
See lease.
A term used to describe the characteristic of a secondary market
for a financial instrument evidenced by low transaction costs and
smooth execution of trades. The spread between bid and offered prices,
brokerage commissions, and taxes are the three main types of transaction
costs. One of the requirements for readily marketable assets.
The risk to the bank that errors made in the course of conducting
its business will result in losses. The Federal Reserve calls this
operational risk and states in its definition that operational risk
arises from the potential that inadequate information systems, operational
problems, breaches in internal controls, fraud, or unforeseen catastrophes
will result in unexpected losses. The Office of the Comptroller
of the Currency calls this transaction risk and defines it as the
risk to earnings or capital from problems with service or product
delivery.
Letter issued by a certified public accountant to accompany financial
statements. The opinion letter has two parts. One describes the
scope of the accountant’s work in the preparation and testing,
if any, related to the preparation of the financial reports covered
by the letter. The other provides the accountant’s opinion
regarding the fairness, accuracy, and conformity with GAAP of the
financial statements. Accountant’s opinions are categorized
as unqualified, qualified, disclaimer, or adverse depending upon
the nature of the comments in the letter. See adverse opinion, disclaimer
opinion, qualified opinion, and unqualified opinion.
The cost of pursuing one course of action measured in terms of the
foregone return that could have been earned on an alternative course
of action that was not undertaken.
(1) A contract that gives its holder the right, but not the obligation,
to buy or sell an underling security, commodity, or currency before
a certain date. Options are often used in hedging. Put options give
the holder the right to sell the underlying security, commodity,
or currency at the strike price. Call options give the holder the
right to buy the underlying security, commodity or currency at the
strike price.
(2) A provision in a financial contract that gives
one party to the contract one or more rights to change the maturity,
the principal amount, the interest rate, or other contract term.
In loans, the most common form of option risk arises from a borrower’s
right to prepay. In securities, the most common form of option risk
arises from an issuer’s right to call the security. See embedded
option.
A duration measure that does allow for changes in cash flows as
yields change A variation of effective or empirical duration. Option
adjusted duration incorporates the expected duration-shortening
effect of an issuer's embedded call provision. It is also called
adjusted duration.
(1) A measurement of the return provided to an investor from a financial
instrument that is either an option or that includes an option.
The option-adjusted spread calculations break up a security into
separate cash flows. Each of those cash flows is discounted at a
unique discount rate appropriate for its maturity. The discount
rates are obtained from a benchmark yield curve. The benchmark yield
curve is simply the currently available (spot) yields for risk-free
investments of various maturities. Since U.S. Treasury obligations
are not considered to have any credit risk, Treasury rates are used.
OAS is not quoted as a yield. Instead, it is quoted as a difference,
or spread, in basis points.
(2) A valuation technique for valuing financial
instruments, portfolios of financial instruments, or financial institutions
with options. This tool is one component used in the Office of Thrift
Supervision net portfolio value model for modeling the interest
rate risk in complex financial instruments. This methodology is
also used by high-end commercial interest rate risk analysis models.
The risk that a change in prevailing interest rates will lead to
an adverse impact on earnings or capital caused by changes in the
timing of cash flows from investments. Cash flows may be received
earlier than expected as a result of the exercise of options or
of embedded options in financial contracts. One of the four primary
components of interest rate risk. Option risk usually arises when
a change in prevailing interest rates prompts the option holder
to exercise the option. See option.
The seller of a put or call option.
or
The total principal amount of all of the loans in an MBS pool as
of the issue date.
The amount of the difference between the par or redemption price
and the price of the security at the time of its original issue.
Issuers can issue securities with OID as an alternative to making
periodic interest payments as a means of compensating investors.
Zero coupon notes, strips, discount notes, and banker’s acceptances
are examples of investment types with OID. For those instruments,
the return provided to the investor comes in the form of a discount.
OID should not be confused with the discounts that investors may
pay for either coupon-bearing instruments or discount instruments
resulting from a change in prevailing rates subsequent to the issuance
of a security. OID is subject to different income tax treatment
than discounts resulting from changes in market prices.
See over the counter.
A term defined by FAS 130. FAS 130 identifies three components of
other comprehensive income
See Office of Thrift Supervision.
The situation where an option has only time value as opposed to
intrinsic 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 out of the money when the strike
price is above the spot price. A put option is out of the money
when the strike price is below the spot price.
A type of credit enhancement used in some asset backed securities
and some private mortgage backed securities. The principal amount
of the collateral pledged for a given security exceeds to the principal
amount of the security.
Purchases and sales of financial instruments that do not take place
in organized exchanges such as the New York Stock Exchange or the
Chicago Board of Trade are termed over the counter. The phrase may
be used as a noun to describe capital markets other than organized
exchanges. The phrase may also be used as an adjective to describe
instruments not traded on an organized exchange, such as over-the-counter
derivatives.
See adjusted trading.
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