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Legal entity that is a special kind of Corporation. An S corporation
offers shareholders the same limitations on personal liability that
are available to corporate stockholders. At the same time, S corporations
are taxed similarly to partnerships, that is, the income or loss
incurred by the S corporation is allocated to the stockholders for
tax purposes. S corporations are subject to limits on stockholders
and may not be part of affiliated corporate groups.
An arrangement under which a third party holds securities or other
valuables under safe, controlled conditions. A safekeeping arrangement
is evidenced by a safekeeping receipt.
See Student Loan Marketing Association.
See Suspicious Activity Report.
See discharge.
An outline of a hypothetical situation or chain of events. For example,
a future recession.
(1) In investment analysis, the process of examining the anticipated
performance of an investment under a variety of alternative potential
interest rate environments.
(2) In bank asset/liability management, the process
of modeling the anticipated effects of interest rate changes on
the net income or capital of a financial institution. Scenario analysis
incorporates assumptions for changes in the behavior of the institution's
managers and its customers that are anticipated to be associated
with the modeled changes in interest rates.
An informal market term for a contractual clause or provision in
the indenture agreement for a convertible bond. A screw clause provides
that, upon conversion, the convertible bondholder may not receive
accrued interest on the bond. Screw clauses may work in different
ways. For example, the first call date may coincide with an interest
payment date and the conversion rights may expire just before the
interest payment date. In that example, an investor cannot take
advantage of the bond’s conversion feature without failing
to hold the bond long enough to receive the semiannual interest
payment. Another example is a mandatory convertible bond that requires
conversion before the interest pay date.
or
A mortgage-backed security with underlying mortgages that are seasoned
loans. Sometimes described as vintage securities especially in the
case of CMOs.
Loans for which a year or more has passed since periodic payments
began. GNMA requires that mortgages within a given pool be originated
within two years of the issue date. FNMA and FHLMC pools may contain
older mortgages called seasoned loans.
See Securities and Exchange Commission.
A rule issued by the SEC that governs stock issued under special
circumstances. See control stock, dribble rule, and restricted stock.
A measure of return for investments in mutual bond funds. The SEC
yield is calculated by dividing the net investment income per share
for the 30 days ended on the date of the calculation by the net
asset value per share on that date. The SEC has required fund managers
to report uniform, annualized 30-day yields since 1988.
Markets for the purchase and sale of any previously issued financial
instrument. The first sale of a financial instrument by the original
issuer is said to be made on a primary market. All subsequent trades
are said to be secondary market.
See Securities and Exchange Act Section 17(f).
A creditor that has been granted a collateral interest in property.
The collateral interest is usually given to the creditor by the
debtor but may be given by a guarantor or another third party.
A legal provision that requires investigations for possible lost
or stolen securities. See Securities Information Center.
The Federal agency with responsibility for regulating financial
exchanges for cash instruments.
A corporation that has been designated by the SEC to maintain and
operate a national database of lost and stolen securities. Under
Section 17(f) of the Securities and Exchange Act, banks, brokers,
and dealers are required to use this database.
A private corporation providing insurance to brokerage firms to
cover customer accounts up to $500,000 in securities (including
$100,000 in cash).
The temporary transfer of securities from an investor’s portfolio
to a counterparty borrower. The counterparty may borrow to cover
securities transaction fails (securities sold but for some reason
unavailable for delivery to the buyers), short sales, or other trading
activities such as arbitrage. While corporate stocks used to be
the most common securities lent, U.S. government and agency securities
now comprise a major portion of this activity. Securities loans
are usually secured by the pledge of U.S. government or agency bonds.
Alternatively, cash or letters of credit may back some securities
loans. The value of the collateral pledged exceeds the value of
the securities lent by an agreed-upon collateral margin. When a
securities loan is terminated, the securities are returned to the
lender and the collateral is returned to the borrower. The two main
risks in securities lending are counterparty risk (a form of credit
risk) and reinvestment risk (a form of interest rate or market risk).
The process and the result of pooling financial assets together
and issuing liability and equity obligations backed by the resulting
pool of assets to convert those assets into marketable securities.
The underlying assets are usually, but always, non-marketable by
themselves. Any type of financial asset can be securitized. Securitized
mortgage obligations may be called mortgage backed securities or
collateralized mortgage obligations. Securitized non-mortgage assets
are typically called asset backed securities however the term collateralized
debt obligation is increasingly used to refer to securitized corporate
debts. A single loan or groups of similar loans may be securitized.
Loans to be securitized must usually be underwritten with terms
and documents that conform to wholesale market standards. For some
securitizations, additional credit support, called credit enhancement,
may be obtained through insurance, a letter of credit, over collateralization
or other means. Many securitizations use multi-tranche structures
that allocate the principal and interest cash flows from the underlying
assets in patterns that create higher and lower risk securities.
See "collateralized debt obligation", collateralized mortgage
obligation", mortgage backed security", "special
purpose vehicle" and "waterfall".
An agreement between one or more debtors and one or more creditors
in which the debtor grants the creditor an interest in the debtor’s
personal property as collateral for the debt. (Alternatively or
in addition, the collateral may be property owned by a guarantor
or by another third party.) As used in Article 9 of the Uniform
Commercial Code, it is an agreement that: is in writing; gives the
names of the parties; is signed or authenticated by the debtor;
describes the collateral; and includes language stating that the
debtor is granting or giving the security interest in the collateral
to the creditor. While the security agreement establishes the creditor’s
interest in the collateral, it does not establish the priority of
the creditor’s interest relative to the interests of other
creditors. See financing statements and perfection.
Term used to describe an interest in personal property (collateral)
owned by a debtor.
See margin.
One of three types of real estate appraisal reports defined under
Uniform Standards of Professional Appraisal Practice rules. A self-contained
appraisal report is the most detailed of the three report formats.
See buy/sellback.
A creditor holding senior debt.
Obligations of an issuer for which repayment has contractually been
given a priority that is higher than the repayment priority of other
debts of the same obligor. This arrangement may arise from either
a specific subordination agreement or a public issuance of subordinated
debt instruments.
A designation earned by qualifying residential real estate appraisers.
It is awarded by the Appraisal Institute.
A single variant test to see how dependent a forecast, projection
or stress test outcome is upon a single, selected variable or assumption.
For example, a bank AL manager might perform a sensitivity analysis
by examining a range of rate risk forecasts where the only difference
in the forecast generation is a range of possible values for savings
account maturities. In that example, the AL manager would be able
to see how sensitive the projected rate risk exposure is to changes
in the savings maturity assumption.
The most basic, simplest REMIC structure. All investors owning a
sequential-pay REMIC receive interest payments; however, the principal
received from the underlying mortgages is directed to repay each
tranche, one at a time, in a predetermined order.
A bond that provides for the amount of debt to be divided into a
series of different staggered maturities. For example, instead of
issuing$10 million of 15-year bonds, a municipality may issue $10
million with $1 million maturing each year from the year 6 to the
year 15. By issuing debt in serial form, the municipal issuer can
match its need to redeem maturing debts to its cash flow. This form
also enables the issuer to save money since the shorter-term bonds
carry a lower interest cost than longer-term debt.
The collection of principal, interest, and sometimes property taxes
from borrowers; accounting for the cash flows due and the cash flows
received; and remitting the cash flows to the entitled recipients.
A percentage of a loan’s or security’s principal amount
that is paid to a third party as compensation for servicing. For
example, in a mortgage pass-through security, the interest paid
to the investors is typically one-half percent less than the weighted
average coupon rate paid by the underlying borrowers. In that example,
the one-half percent difference is the servicing spread.
(1) In general, the legal right to reduce the amount owed by one
party to another party by the sum that the second party also owes
to the first party.
(2) The confiscation of a deposits held by a borrower
to offset some or all of the amounts owed by the depositor the depository
institution for defaulted loans. A common law right that is usually
blocked or reversed by a bankruptcy court.
(1) Noun — The standard number of days between the date that
a purchase or sale is agreed upon (the trade date) and the date
that the security and the payment actually change hands (the settlement
date). See net settlement and regular way settlement.
(2) Verb — The process of exchanging a security
delivered by a seller for the payment delivered by a buyer.
The agreed-upon date for transferring funds to complete a transaction.
For example, the date of both the delivery of and the payment for
a security.
The possibility that operational problems might interrupt or delay
the settlement of a purchase or sale of a financial instrument.
See statement of financial accounting standards
An explanation of bank liquidity that holds that a bank’s
capacity to meet liquidity demands is related to the volume of its
assets that can be readily shifted to another bank.
(1) noun — The position of an investor who sells, or commits
to sell, a security in either the cash or futures markets. For example,
the sale of an interest rate future is a commitment to deliver securities
at some future date in exchange for an agreed-upon amount. This
is called a short futures position.
(2) verb — The act of selling or committing
to sell in the future.
The sale of security that is not owned by the seller. The seller
borrows the security, sells it, and then buys it at a later date
to return it to the lender. The purpose of a short sale is to attempt
to profit from the fall in the price of a security. Short sales
are considered trading activities. For banks, when the security
that is sold is "borrowed" from the seller's investment
portfolio, the transaction is not considered a short sale; it must
be treated as an outright sale of the underlying security.
See Securities Information Center.
A draft that is payable upon presentation to the drawee.
See empirical VAR.
Loans secured by properties occupied by one to four families.
A measure of the amount of monthly principal reduction in excess
of the scheduled monthly principal payment. The SMM is simply the
amount of prepaid principal in a given month expressed as a percentage
of the principal balance at the beginning of the month. It is not
commonly quoted; however, an annualized SMM, called the constant
prepayment rate or CPR, is commonly quoted.
Another name for a time or balloon loan. A closed-end loan that
does not require periodic principal payments. Instead, the full
amount is due at maturity.
Cash set aside under restricted conditions as required by the terms
of certain types of debt. See sinking fund bonds.
Revenue bond issues that require the issuer to accumulate or set
aside part of the annual revenue which is then used to redeem bonds
before maturity, often well before regular call dates. The set-aside
funds are called the sinking fund. The quantity of bonds subject
to a sinking fund call is established in a sinking fund schedule.
The specific bonds that are called each year are normally chosen
for redemption by the drawing of random lots. Sinking fund calls
are usually at or near par.
See Securities Investors Protection Corporation.
A phrase used to describe the agreement of a buyer and seller to
exchange the security and the payment two business days after the
trade date. See settlement.
See Student Loan Marketing Association.
or
An informal name for mortgage-backed security pools that repay slowly.
A type of security defined in Section 3(a)(53) of the Securities
Exchange Act of 1934. A security that represents ownership of one
or more promissory notes or leases that are evidence of the obligation
of a small business concern. It does not mean a security issued
or guaranteed by the Small Business Administration.
Also called yield curve smoothing. The name for a set of alternative
techniques for creating continuous yield curves by connecting the
dots between observed. If, for example, we have observed rates for
1, 2, 3, 5 and 10 year maturities, smoothing is the technique used
to infer rates for all maturities between those known points. The
known points are called "knot points". The simplest smoothing
technique is "linear smoothing". The most commonly used
technique is "cubic splines". For forward rates, the most
accurate method is called "maximum forward rate smoothing".
See stripped mortgage-backed securities.
See single monthly mortality rate.
A privately owned electronic payments system used for funds transfers
between member banks. See CHIPS and Fedwire.
One of two types of call protection. Soft or provisional call protection
prohibits an issuer from calling a bond issue until a certain threshold
price level for the underlying stock has been reached. For example,
the bond structure might specify that the bonds may be called when
the closing price of the underlying stock is at least 120-150 percent
of the conversion price for any 20 out of 30 consecutive trading
days. Soft call provisions will be in effect for two to three years
after hard call protection has expired. Soft call protection is
a compromise between issuers and investors. It guarantees that the
issuing company will not be able to call the bonds until the investors
have achieved a certain level of profitability, but it also provides
issuers with more flexibility than that available from hard call
protection and allows the company to call the bonds once the bondholders
have achieved a certain threshold level of returns.
Soft costs are legitimate expenses incurred by a borrower or developer
for things not directly reflected in the construction value of the
property.
(1) A computer program, any informational content included in the
program, and any supporting information provided in connection with
a transaction relating to the computer program or informational
content.
(2) A category of personal property collateral
defined by the 2001 revisions to Article 9 of the Uniform Commercial
Code.
The condition of having sufficient funds to cover losses. In the
short term, solvency is a manifestation of liquidity. Fundamentally,
however, solvency is a function of capital adequacy. See insolvency.
The risk of not being able to cover losses regardless of the source,
type, or size of the losses. In a broad sense, solvency is often
equated with liquidity risk since ready money is needed to cover
losses. However, it is more accurate to say that the ultimate source
of funds available to cover losses is capital. Therefore, solvency
risk is the risk that the bank will default. Ultimately, it is the
risk of bank failure.
An informal lender's term for real estate projects that are built
in anticipation of finding tenants; the term "spec" is
lender slang for speculative.
or
Municipal securities repaid from taxes that are imposed only on
the individuals who are considered to directly benefit from public
improvements made to a neighborhood or community within the municipality.
The most common examples are school district bonds. These bonds
are repaid from taxes, most often property taxes, imposed on residents
served by the school district. Another example is securities issued
to finance installation of a sewer system extended to a neighborhood.
A legal entity, sometimes a trust or a limited partnership, that
is created solely for the purpose of holding assets.
(1) The SPV may be used to obtain "off balance
sheet funding" by obtaining secured loans backed by its assets.
GAAP accounting rules may permit the assets and liabilities of the
SPV to be unconsolidated and therefore off the balance sheet of
the entity that generated the assets.
(2) The SPV may issue securities backed by its
assets. In a typical collateralized debt obligation, the underlying
assets are owned by a special purpose vehicle. The SPV then issues
different classes of securities with different risk characteristics.
Note that the term "CDO" may be used to refer to the SPV
or to the securities that are issued by the SPV.
Municipal securities that are repaid solely from specific taxes.
These taxes are typically excise taxes imposed upon purchases of
items such as gasoline, tobacco products, or liquor. Only the revenue
collected from that specific tax is available to pay interest and
principal due for the securities.
The rate at which an MBS prepays. An MBS with little or no prepayments
is said to have a slow speed. An MBS with significant prepayments
is said to have a high speed or to be speeding. Since pools that
prepay faster than anticipated can perform much worse than investors
hoped, investors only half jokingly say that speed kills. See CPR,
prepayment estimate, and PSA for information about measures of speed.
An amortization schedule that has periodic payments inconsistent
with the maturity date of the debt. For example, a 5/10 amortization
schedule requires payments just large enough to fully amortize the
debt in 10 years together with a final maturity date only 5 years
in the future. Split-term amortization schedules result in balloon
payments at maturity.
The transfer of financial instruments or commodities upon purchase.
Market for the purchase or sale of financial instruments, commodities,
or other assets for cash settlement and immediate, as opposed to
future, delivery. Also called the cash market.
The price available in the spot market.
The rate available in the spot market as opposed to forward rates.
See yield curve.
(1) noun — The difference between two prices or two rates.
Different users have many different and highly specific usages of
this term. For example, traders use spread to mean the difference
between bid and asked prices for a security. Underwriters use spread
to mean the difference between the price realized by the issuer
and the price paid by the investor. Bank analysts use spread to
mean the difference between the average rate paid on a bank’s
assets and the average rate paid on the bank’s liabilities.
(In connection with the use of the term spread by bank analysts,
see net interest margin. In ALM, when spread is used as a noun it
most often refers to the difference between two rates or yields.
(2) noun — Financial analysts, credit analysts,
and lenders use the term spread to refer to a financial statement
that has been converted to a standard format for purposes of analysis
or comparison. (3) verb — In ALM, most often means the disaggregation
of a quantity. For example, the total amount of certificates of
deposit on a bank’s balance sheet may be spread into different
time interval buckets on a gap report.
(4) verb — The process of reformatting financial
statements for the purposes of analysis or comparison.
A contract that guarantees the ability to enter into an interest
rate swap at a predetermined rate above some benchmark rate.
The difference between the bond equivalent yield for any investment
and the bond equivalent yield for a Treasury investment with the
same maturity. Comparisons of the returns for most fixed-income
investments are typically made using spread over Treasury values.
Investments of the same type but different maturities as well as
different types of investments can be readily compared in this manner.
For example, one MBS may offer a bond equivalent yield that is 20
basis points above Treasury yields while another may offer a 40
basis point spread.
See basis risk.
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.
Bankers almost always change the format of the borrower's financial
statements to a standard format used by the bank in order to facilitate
both analysis and comparisons. The process of restating the format
is usually called spreading and the reformatted reports are often
called spreads.
See Senior Residential Appraiser.
An individual qualified under Federal rules to perform real estate
appraisals who is employed by and performs appraisals for the financial
institution contemplating the extension of credit to be secured
by the property to be appraised. The opposite of a fee appraiser.
Advances made under construction loans when the loan proceeds are
disbursed only as specific construction tasks are completed. For
example, a portion of the loan proceeds may be disbursed after the
foundation is poured. Construction lenders often disperse funds
in 4 or 5 stages; however, as many as 10 stages are common.
A statistical measure of the extent to which measurements vary from
their mean. A quantification of the dispersion for a set of data.
For example, if the high temperature each day in one four-day period
was 70 degrees, 71 degrees, 69 degrees, and 70 degrees, that four-day
period has a mean (average) high temperature of 70 degrees. A second
four-day period might have high temperatures of 70 degrees, 60 degrees,
80 degrees, and 70 degrees. That second period also has an average
high temperature of 70 degrees. Even though both four-day periods
had the same average high temperature, they were quite different.
In the first period, the standard deviation is quite small. There
is little dispersion. In the second period, the standard deviation
is much larger.
A provision in a hazard insurance contract stipulating that in the
event of a loss, proceeds will be paid to a secured party. Usually
used when the insured property is real property. Includes personal
property that is insured as contents of the insured real property.
Sometimes referred to as simply a mortgagee clause, the standard
mortgagee clause is actually a much broader, stronger type of insurance
policy stipulation. Under the standard mortgagee clause, the secured
party is protected against any act or neglect of the insured that
may otherwise invalidate the policy for the owner. For example,
if an insured burns down his insured property, his arson may void
his insurance coverage, but it does not invalidate the insurance
protection provided to his secured lender. Sometimes called a New
York mortgagee clause. See mortgagee clause.
An obligation issued by a bank on behalf of a bank customer to a
third party. A standby letter of credit is a bank promise to pay
the third party in the event of some defined failure by the bank’s
customer, usually, but not always, a failure to pay. Standby letters
of credit are often used as credit enhancements for securities issued
by bank customers.
Liquidity held for liquidity contingency risk. Also called prudential
liquidity.
See delay days.
A ruling issued by the Financial Standards Accounting Board (FASB)
covering a particular topic. Usually, these statements are referenced
with the acronym FAS followed by the numeral for a specific statement.
For example, FAS 119 covers disclosures required for holdings of
derivatives. See FAS [numeral] for more information on specific
accounting rulings.
A savings account which does not provide the depositor with a passbook.
Instead, the depositor receives a monthly or quarterly statement
from the bank.
Gap analysis method that measures exposure to interest rate risk
based solely upon the assets and liabilities held by the bank at
the time that the analysis is performed. The opposite of dynamic
gap analysis.
(1) The difference between two values at a single point in time.
For example, the difference between two yields.
(2) The calculated spread over the Treasury yield
that the investor would realize from all of the cash flows produced
by his investment if it is held to maturity. Those cash flows are
each compared to the Treasury spot rate curve. Because the cash
flows from a security are each compared to the Treasury yield curve,
the static spread is a spread over the entire curve. Each of the
cash flows from a bond is discounted to a present value using the
spot Treasury rate with the same maturity as the cash flow. Those
present values are then totaled. The static spread amount must be
added to the discount rates obtained from the Treasury spot curve
so that the sum of the discounted cash flows equals the bond's price.
A lien created by either federal or state legislatures or through
court rulings. For example, a lien that banks are given against
a borrower’s deposits. See consensual lien and judicial lien.
See yield curve slope.
A form of callable security for which the coupon rate increases
if the security is not called.
(1) A term used by economists to describe changes in dependent variables
that tend to lag behind changes in the independent variables with
which they are associated. For example, time lags are known to exist
between changes in prevailing interest rates and changes in the
rates offered on bank core deposit products. But they are sticky.
Almost all banks are able to change the rates paid on their administered-rate
deposit products after rates for money market instruments have already
changed.
(2) An informal term used to describe the propensity
of a deposit of indeterminate maturity to remain a stable source
of funding.
A term used to describe outcomes based on uncertain relationships.
The process of change in a variable resulting from change in a parameter.
For example, option adjusted spread measures of yield and Monte
Carlo models of interest rate risk are stochastic measures. A method
of modeling changes that allows for a range of possible outcomes.
Sometimes called probabilistic. The opposite of deterministic.
A document assigning ownership of stock.
An options trading strategy involving the purchase of an equal number
of put and call options for the same underlying at the same strike
price and with the same maturity. An options trade designed to profit
from an increase in the volatility of the price for the underlying.
A method for achieving periodic reductions in the book value of
fixed assets in which each periodic reduction is the same amount
as every other reduction for the same asset.
A trading strategy using options that is designed to profit from
material increases in the volatility of the underlying. Similar
to a straddle but using only put and call options with strike prices
that are out of the money.
One of nine risks defined by the Office of the Comptroller of the
Currency. The risk to earnings or capital arising from a bank’s
adverse business decisions or improper implementation of those decisions.
See proprietary trading.
A colloquial expression used to describe Wall Street investors or
the community of dealers. For example, the street consensus of prepayment
speeds is the average forecast of prepayment speeds from major mortgage-backed
securities dealers.
A name used by a broker or bank as the legal owner of a security
actually owned by a client or customer. The true owner is called
the beneficial owner. Street names are often assumed names or partnership
names used by banks and brokers.
A multivariate test of a specific scenario at a specific stress
level. Not to be confused with single variant testing of variables
in a projection or forecasted scenario. (See sensitivity test.)
Usually called stress testing but also known as stress analysis
or stress scenario analysis. Modeling a series of unusual, hypothetical
events or scenarios. Stress tests may model the impact of extreme
market conditions, or they may model the change in the measured
amount of value at risk (VAR) that occurs when simulation assumptions
are pushed to extremes. For example, stress tests for correlation
measures of VAR include simulations in which the correlations are
assumed to change dramatically. See value at risk.
A planned amortization class (PAC) CMO tranche in a CMO experiencing
rapid prepayments of underlying collateral. The PAC tranche is still
performing within expected ranges, (i.e., it is not a busted PAC);
however, the support tranches are under strain. A stressed PAC will
become a busted PAC if the prepayments continue at or near their
current speed. See busted PAC.
See exercise price.
Mortgage securities that separate principal and interest payments
from the underlying mortgage-backed securities. SMBSs can take four
forms: interest-only strips, called I/O strips; principal-only strips,
called P/O strips; discount strips; and premium strips. I/O and
P/O strips are the more common of the four. Today, REMIC CMOs are
used far more frequently than SMBSs to create securities with the
same cash flow characteristics.
Principal and interest cash flows due from any interest-bearing
securities can be separated into different financial instruments.
This is done by stripping each coupon payment from the underlying
investment to create a separate security. For example, a 5-year
note can be separated into 11 pieces: 10 semiannual coupon payments
and the final principal payment. Each of these 11 pieces is a separate
cash flow that can be purchased or sold just like a Treasury bill.
The cash flows are sold at a discount. The amount of the discount
and the time until the cash flow is paid determine the investor's
return.
A term used to refer to the liquidity available to a financial institution
from its current positions - principally its unpledged marketable
assets and its holdings of term liabilities with long remaining
lives.
A general term used to describe either the practice or the result
of creating securities by repackaging cash flows from financial
contracts. Examples include MBSs, CMOs, ABSs, and CDOs.
The broad, regulatory definition of this term is debt securities
whose cash flow characteristics (coupon, redemption amount, or stated
maturity) depend upon one or more indices and/or that have embedded
forwards or options. For example, since the early 1990s, U.S. government
agencies have been issuing unsecured bonds and notes with coupons
that are fixed for a predetermined time and then increase or step
up to a higher amount if the securities are not called. Embedded
forwards and options in the structure of notes allow underwriters
to create an unlimited number of risk/reward profiles and to customize
risk characteristics to fit an investor’s desired risk exposure.
By this broad definition, structured notes include all CMOs. However,
the term also includes a variety of other securities that are not
necessarily mortgage related. In fact, many structured notes are
not mortgage backed and some definitions of this term explicitly
exclude mortgage-backed securities. Sometimes called hybrid securities.
A U.S. government sponsored, privately owned corporation that provides
liquidity for student loans and for the credit needs of students.
Informally but widely known as Sallie Mae.
A type of corporate bond for which the indenture covenants provide
that some of the company's debt has a lower priority than other
debts in the event of a liquidation. For example, some bonds may
be subordinate to others. Subordinate bonds are usually unsecured.
Unsecured subordinate bonds may be referred to as subordinate debentures.
Debts or claims that have a lower status or priority than other
debts or claims are subordinate. For example, creditor A may agree
in a subordination agreement to have its claims on the cash flow
or on the assets of a borrower lower in priority than (i.e., subordinate
to) the claims to that cash flow or collateral by creditor B. In
finance and accounting, the term also refers to debts that include
provisions making them subordinate to other liabilities. For example,
a bond issue may, by contractual agreement, be subordinate to all
other bonds issued by a company.
Documents used in commercial mortgage transactions in which the
mortgaged property is leased by the borrower to tenants. The agreement
is executed by the tenants in favor of the lender. By executing
the agreement, the tenant/lessee agrees to subordinate its lease
to the mortgage that the borrower/lessor is granting to the lender.
These agreements give the lender more rights and more flexibility
for disposing of the property in the event that the borrower defaults.
A separate corporation that is owned by another corporation.
A written form prepared by a state office or officer attesting to
the fact that a named corporation is in good standing in that state.
A term used in the securities industry to describe the match between
the risk characteristics of any investment and the investment needs,
risks awareness and risk appetite of any buyer. Brokers and dealers
have substantial legal and ethical responsibility to make sure that
what they sell is suitable for each buyer.
One of three types of real estate appraisal reports defined under
Uniform Standards of Professional Appraisal Practice rules. A summary
appraisal report provides the middle level of detail of the three
report formats.
Floating rate CMO tranches that have coupon rates that are determined
by formulas such that the interest rate paid is a multiple of an
underlying rate minus a stated spread. For example, a superfloater
may pay interest at the rate of 3 times 1-month LIBOR minus 16 percent.
In this example, if 1-month LIBOR is 5 percent, then the coupon
rate for this super floater might be a negative 1 percent. However,
to prevent the possibility of negative interest rates, super floaters
often have floors. Super floaters are more desirable in high or
rising rate environments.
A principal-only security structured as a companion bond.
See CERCLA.
A collateral description in a security agreement, financing statement,
or other loan document that is very broad and does not specifically
list individual items of collateral, for example, "All of the
Borrower’s Assets."
See companion tranche.
A letter of credit right or secondary obligation that supports the
payment or performance of an account, chattel paper, document, general
intangible, instrument, or investment property. A category of personal
property collateral defined by the 2001 revisions to Article 9 of
the Uniform Commercial Code.
Generally the same as guarantor; however, in some states there are
important distinctions.
A precise physical determination of the location and boundaries
of real property. Surveys are performed by qualified experts called
surveyors. Survey findings are reflected in documents called surveys,
survey reports, or certificates of survey. For unplatted land, the
survey determines the location of the property with reference to
known points. For all land, the survey shows the dimensions of the
property, the location of improvements (such as buildings), and
the dimensions of the improvements. Lenders use surveys to verify
the legal description of property, to verify that the property discussed
in appraisal reports is identical to the property owned by the borrower,
and to verify that driveways, terraces, garden walls, and other
structures do not cross property lines.
All financial institutions operating in the United States, including
insured banks, savings associations, savings association service
corporations, credit unions, bank holding companies, non-bank subsidiaries
of bank holding companies, Edge and Agreement corporations, and
U.S. branches and agencies of foreign banks are required to make
this report following the discovery of: insider abuse involving
any amount, violations aggregating $5,000 or more where a suspect
can be identified, violations aggregating $25,000 or more regardless
of a potential suspect, or transactions aggregating $5,000 or more
that involve potential money laundering or violations of the Bank
Secrecy Act. Casinos must file an SARC Form and Securities Brokers
and Dealers are required to file an SAR-S Suspicious Activity Report.
See also Bank Secrecy Act (BSA).
One term used to describe the maximum rate at which a firm's sales
can grow without straining the capacity of the firm's financial
condition. This term is closely associated with a formula of the
same name.
(1) The sale of one or more securities in order to purchase one
or more different securities with the proceeds from the sale. Bond
swaps are usually done to take advantage of changes in market conditions
or more favorable investment characteristics. For example, swaps
are often done to lengthen or shorten maturities when investors
change their outlook for future rates.
(2) A financial instrument representing a transaction
in which two parties agree to swap or exchange some obligation.
Swaps began with currency swaps, but the idea quickly spread to
interest rate exchanges. In an 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 interest rate swap.
The yield curve of interest rate swap rates from 1 week to 30 years.
See yield curve.
An option to enter into a swap. A payer or put swaption is the option
to enter into a pay fixed/receive floating swap. A receiver or call
swaption is the option to enter into receive fixed/pay floating
swap.
A deposit account, usually at a bank, that periodically removes
a portion of the customer’s funds into a higher yielding instrument.
Bank sweep accounts are often sold as cash management tools. With
a bank sweep account, idle funds are swept each night from a transaction
account into a higher-yielding, overnight investment. Some banks
offer sweep accounts that only remove excess balances weekly. Brokerage
firms offer sweep accounts as well with weekly or monthly sweep
frequencies.
See Society for Worldwide Interbank Financial Telecommunication.
Behavior exhibited by financial instruments whose rates or values
move linearly with respect to changes in market rates.
An arrangement in which two or more banks lend directly to the same
borrower pursuant to one loan agreement. Each bank in the syndicate
is a party to the loan agreement and may receive a note from the
borrower evidencing the debt. Banks involved in syndicated transactions
often sell some or all of their allotment in the credit facility.
A CDO that uses credit default swaps rather than actual corporate
obligations to create a pool of credit exposure. See collateralized
debt obligation.
A somewhat out-of-date term for capital markets hedges. Hedges that
use derivatives.
Liquidity risk arising from causes external to the entity. Systemic
liquidity requirements can take a number of forms:
(1) Macro economic corrections. These may be recessions
or credit crunches. They may be national or regional in scope.
(2) Capital markets disruptions. These types of
liquidity crises are more common. An excellent recent example is
the flight to quality that occurred in August and September of 1998
after the collapse of the Russian ruble and the rescue of a highly
leveraged hedge fund.
(3) Payments systems disruptions. Banks are heavily
dependent upon a few national and international data systems for
transferring funds. A disruption in one of these systems can easily
and quickly cascade into a major systemic problem. |
