Glossary
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Z
See targeted amortization class tranche.
A time period during which a borrower is permitted to draw down
(i.e., request and receive advances from) the proceeds of a loan.
Legally binding commitments made by end lenders to construction
lenders. The end, or permanent, lender commits to providing financing
to the property owner that will pay off the construction loan. End
lenders may be banks, insurance companies, pension funds, or others.
Also see permanent lender.
See tax anticipation notes.
or
Terms used to describe the amount of owners' or stockholders' equity
after deduction of intangible assets. Total assets minus intangible
assets minus total liabilities.
Bonds created in scheduled-pay CMO structures. A TAC tranche is
structured to avoid prepayment volatility. Each TAC has a designated
target speed. When prepayments exceed the targeted speed, the excess
cash flow is diverted to other tranches in the CMO. Unlike a planned
amortization class (PAC) tranche, a TAC tranche is not protected
from extension risk if prepayments are slower than expected. For
this reason, TACs can be viewed as half PACs. TACs offer investors
protection (but not immunity) from call risk but no protection from
extension risk.
Short-term notes sold by a public entity that will be repaid from
the proceeds of anticipated tax and/or fee collections.
Short-term notes sold by a public entity that will be repaid from
the proceeds of anticipated tax collections.
The yield that a tax-free investment would provide to an investor
if the tax-free yield was "grossed up" by the amount of
taxes not paid. This is the most common way of comparing yields
on taxable and tax-free investments. Instead of reducing a taxable
yield by the amount of applicable taxes to compare it with a tax-free
yield, the tax-free yield is increased by a hypothetical amount
of income tax.
See Thrift Bulletin 13.
Acronym for to be announced. Most new MBS pass-through bonds can
be purchased on a TBA basis.
A teaser rate is a below-market interest rate offered to borrowers
of adjustable-rate loans during the initial period of some adjustable-rate
mortgages. A teaser period is the period of time during which the
teaser rate applies.
One of two types of real estate appraisal reviews. A technical review
is a review performed by another appraiser. The primary purpose
of the technical review is to determine whether or not the appraisal
meets Uniform Standards of Professional Appraisal Practice requirements
and whether the opinions and conclusions in the report are reasonable.
Technical reviews ordinarily do not challenge the original appraiser’s
choice of comparables unless there is an obvious problem. See administrative
review.
The difference between U.S. Treasury bill yields and yields for
Euro deposit contracts of the same maturity. The TED spread is used
as a measure of investor confidence. When the spread is small, investors
are not requiring a large amount of additional compensation for
the additional risk of Euro deposits. When the spread is large,
investors are willing to give up yield to obtain the higher quality
of U.S. Treasury bills. A sudden widening of the TED spread is indicative
of a flight to quality. See quality spread.
or
See estoppel letter.
Financial reports that must be filed by publicly traded corporations
with the Securities and Exchange Commission (SEC). The quarterly
reports are called 10Qs. The annual reports are called 10-Ks. Both
must follow proscribed formats.
Federal funds transactions made for tenors longer than one day.
Typical term fed funds transactions range from a few days to a few
months.
A form of life insurance that has no built-in savings feature and
does not accumulate any cash surrender value.
(1) A name used to describe a promissory note used for any closed-end
loan granted for a predetermined amount of time (e.g., short-term,
medium-term or long-term).
(2) A name used in business or commercial lending
to describe a promissory note that calls for mostly regular, periodic
payments of principal and interest.
Also known as yield curve models. An assumption, or set of assumptions,
used to describe future changes in interest rates over a range of
maturities. The most simple term structure model is a parallel shift
in rates, e.g. all rates rise by 1 percent. Implied forward rates
may be the most common term structure model. More accurate models
provide a systematic way to assume the random movement of the interest
rates along the yield curve. These models constrain the range of
movement of the rates, and the corresponding probabilities such
that they are (i) internally consistent, that is, there is no riskless
profitable arbitrage, and (ii) externally consistent, that is, the
values of certain securities implied from the model agree with the
market values. The following five term structure models are the
most systemic and accurate: Vasicek, Extended Vasicek (Hull and
White), Ho and Lee, Heath, Jarrow and Morton (constant volatility),
and Heath, Jarrow and Morton (declining volatility).
The relationship between interest rates (or yields) for otherwise
similar securities with different maturities. Yield curves are graphical
depictions of the term structure of interest rates.
The action taken by a secured party to end or give up its interest
in collateral. For personal property collateral, a termination may
be entered into the public record by using a standard form called
a UCC-3.
The date on which cash flows due under a swap contract cease to
accrue.
See tax-equivalent yield.
The Greek letter used in the financial industry to represent the
amount by which the price of an option changes for each one-day
decrease in the time remaining until its expiration.
A rule published by the Office of Thrift Supervision (OTS) entitled
Responsibilities of the Board of Directors and Management with Regard
to Interest Rate Risk. This rule governs the measurement and management
of interest rate risk at all insured savings and loan associations.
A regulatory definition of bank capital. Tier 1 capital consists
of common shareholders’ equity, perpetual preferred shareholders’
equity with noncumulative dividends, retained earnings, and minority
interests in the equity accounts of consolidated subsidiaries.
A regulatory definition of bank capital. Tier 2 capital consists
of subordinated debt, intermediate-term preferred stock, cumulative
and long-term preferred stock, and a portion of the bank’s
allowance for loan and lease losses.
A proprietary name for a zero coupon Treasury security created from
a coupon-bearing Treasury security.
See buckets.
A deposit with a specific maturity. Usually, but not always, a certificate
of deposit.
A draft that is payable on a future date.
A name used to describe a promissory note used for closed-end transactions
that do not require any principal to be repaid until the maturity
of the note. Interest may or may not be due periodically prior to
maturity. Time notes are usually for periods of time no greater
than one year.
The portion of an option’s value imputed to the possibility
that the price of the underlying will move in the option holder’s
favor during the time remaining before the option expires.
See interest-coverage ratio.
See Treasury inflation-protected securities.
An insurance policy that insures that the ownership of a parcel
or parcels of real property and the lien priority of secured creditors
with an interest in that property is as the title insurance policy
states. The insured party protected by the title insurance policy
may be the property owner, in which case the policy is called a
owner’s policy, or the lender, in which case the policy is
called a lender’s policy.
A preliminary report prepared by a title insurance company and submitted
to a potential secured party prior to a loan closing. The commitment
shows the information and conditions that will appear on the final
title insurance policy unless changes are made in the chain of title
or in the outstanding liens prior to the issuance of the final policy.
A document prepared by an attorney that states ownership and a brief
report of lien priority for a designated parcel of real property.
The opinion is usually given in a letter written on the attorney’s
letterhead stationary. It includes the date and time of the record
investigation. Also called attorney’s certificate of title
or certificate of title.
A report prepared by a title insurance company that indicates the
ownership and outstanding liens for a designated parcel or parcels
of real property. Even though a title search is prepared by a title
insurance company, it does not offer any insurance protection. Also
called ownership and encumbrance reports.
See jump Z tranche.
The informal name for a published notice listing the major participants
in a syndicated loan or newly issued security.
A legal term for a wrongful act that results in an injury or damages
to another person or entity that is not contractual in nature. See
commercial tort claim.
A methodology for calculating an investor's return from an investment.
In total return analysis, the investor's returns from interest income
paid on the invested principal plus interest income earned from
the successive reinvestment of previously earned interest on that
investment is combined with projected capital gains or losses. Total
return differs from yield-to-maturity first because it can include
gains or losses from sales prior to maturity and second because
it permits the assumption of a reinvestment rate different from
the yield earned on the underlying principal.
A type of credit derivative instrument. Swap contracts in which
the protection buyer sells the total return from a particular reference
asset such as a corporate loan or bond. In exchange, the protection
buyer receives a rate of interest such as LIBOR. Alternatively,
the protection buyer may agree to receive the total return from
a different reference asset. (In the first case, the protection
buyer has reduced credit risk by taking a rate such as LIBOR and
giving up the cash flow from a reference asset with credit risk.
In the second case, the protection buyer is diversifying credit
risk by exchanging the risk from one obligor for the risk for another
obligor.) Note that in a total return swap, the support seller is
guaranteeing not just against default by the reference obligor but
also against the deterioration in the credit quality of the reference
obligor even if there is no default. "Total return" includes
interest payments and changes in the market value of the reference
asset. As a result, the total return of a credit asset can be affected
by various factors, some of which may be quite extraneous to the
asset in question, such as interest rate movements, exchange rate
fluctuations etc. Also known as a total rate of return swap or TROR
swap.
A regulatory definition of bank capital. The sum of tier 1 plus
tier 2 capital.
Credit granted by a supplier to a customer to finance the customer’s
purchase of goods or services from the supplier.
The day on which a buyer and seller agree upon a transaction.
An obligation issued by a bank on behalf of a bank customer to a
third party. A commercial or trade letter of credit is a bank promise
to pay the third party for the purchase of goods by the bank’s
customer. If the bank’s obligation to pay is not immediate,
the transaction can later give rise to a banker’s acceptance.
See letter of credit and banker’s acceptance. Also called
commercial letter of credit.
Name used by a proprietorship, partnership, or corporation to conduct
business that is different from the legal name of the proprietorship,
partnership, or corporation.
Also known as accounts receivable - trade. Amounts due from the
sale of goods or service on credit that are not evidenced by promissory
notes.
(1) The activity of buying and selling financial instruments or
commodities for profit. Individuals or entities may engage in trading
either strictly on their own behalf or for current or future transactions
with customers. Trading profits may come from market price changes
but may also come from the spreads between bid and asked prices
or from customer markups. Trading is distinct from investing, although
trading activities are not always easy to distinguish from investing
activities. In trading, the profit goal is almost always short term.
Unlike trading, investing is generally longer term and may even
include the intent to hold the instrument to maturity. A common
misconception is that trading activities are speculative while investing
activities are not. Trading may indeed include highly speculative
transactions. However, trading may also include relatively low-risk
transactions such as matched trading or arbitrage. Like investing,
trading may involve either cash or derivative instruments. Trading
transactions may involve cash and/or futures positions.
(2) One of three defined categories established
in FAS 115 for the classification of financial instruments held
as assets on the books of an investor. Trading securities are those
owned by investors engaged in trading activities including short-term
speculation. Under FAS 115, trading assets must be reported at their
market values. FAS 115 also includes provisions that restrict investors’
ability to transfer assets from the trading category to available-for-sale
(AFS ) or held-to-maturity (HTM). Also see available-for-sale, FAS
115, and held-to-maturity .
Designation, usually following a name, indicating that a name used
by a business is not the legal name of the entity doing business
but is an assumed name or trade name instead.
See tax and revenue anticipation notes. Also see TAN and BAN.
A segment or tier within a loan or security. Also known as a class.
For example, collateralized mortgage obligations (CMOs) are securities
for which the cash flows are segregated into tranches and sold separately.
Each tranche is a separate security with its own maturity date and
interest rate. CMOs may have over a hundred tranches or classes.
Tranche is the French word for slice. Tranches are used to reallocate
principal and interest cash flows so that some classes have lower
risk while some have higher risk. See "waterfall".
One of nine risks defined by the Office of the Comptroller of the
Currency. The risk to earnings or capital arising from problems
with service or product delivery. The Federal Reserve and most banks
refer to this risk as operations or operational risk.
A check deposited and processed for collection that is drawn on
another bank.
A nine-digit number contained in the MICR line of each check. The
routing number identifies the paying bank.
An off-balance sheet asset created under FAS 87 rules when pension
plan assets exceed the projected benefit obligation (PBO) at the
date that FAS 87 rules are implemented. The amount of the off-balance
sheet asset is the amount of the excess. This asset is amortized
- usually over the projected remaining service lives for employees
expected to receive benefits. The amortization reduces the reported
benefit expense of the sponsoring firm. The unamortized remaining
balance of the transition asset is disclosed in a footnote to the
financial statements as unrecognized initial net gain.
An off-balance sheet liability created under FAS 87 rules when the
PBO exceeds the amount of pension plan assets as of the date that
FAS 87 rules are implemented. The amount of the off-balance sheet
liability is the amount of the shortfall. This liability is amortized
- usually over the projected remaining service lives for the employees
expected to receive benefits. The amortization increases the reported
benefit expense of the sponsoring firm. The unamortized remaining
balance of the transition obligation is disclosed in a footnote
to the financial statements as unrecognized initial net loss.
An informal name for securities issued by the United States Department
of the Treasury.
Short-term obligations issued by the U.S. Treasury. Bills are issued
for maturities of one year or less. They do not pay interest but
are issued on a discount basis instead.
Long-term obligations issued by the U.S. Treasury. Bonds are issued
for initial maturities greater than ten years.
Securities issued by the U.S. Treasury that provide inflation protection
to investors. These securities have a fixed coupon rate and maturity
date. However the interest payment is based on a principal amount
that is adjusted semiannually to reflect changes in the Consumer
Price Index (CPI).
Medium-term obligations issued by the U.S. Treasury. Notes are issued
for initial maturities from over one year to ten years.
The name for shares of a corporation's stock that were issued and
then subsequently repurchased by the corporation.
An expression used to describe real estate leases that require utilities,
insurance, and taxes to be paid by tenants.
A phrase used to refer to municipal securities that are exempt from
federal, state, and local income taxes.
A transaction in which a person delivers goods to a merchant for
the purpose of sale, and the merchant deals in goods of that type
under a name other than that of the person delivering the goods.
A legal term for a transaction that is intended by the parties to
be an actual lease of personal property rather than a conditional
sale.
A seldom-used term meaning the simple interest yield for an investment
maturing in one year or less. In calculating true yield, the actual
number of days in the year (365) is divided by the actual number
of days that the investment income is earned.
A Federal statute that governs a number of practices related to
bank loans - especially, but not only, consumer loans. The Federal
Reserve Board of Governors has adopted Regulation Z to implement
this statute. The regulation has specific requirements giving some
borrowers the right to rescind certain loans and very specific requirements
about how banks must disclose rescission rights. The regulation
also includes very detailed requirements for calculating and disclosing
annual percentage rates for many loans. See annual percentage rates
and rescission.
or
Terms used to describe the number of operating cycles in a defined
period of time or the length of each specific operating cycle. Typical
turnover cycles are: the rate at which accounts receivable converts
to cash, the rate at which inventory converts to receivables or
cash, the rate at which accounts payable are paid, and the number
of times in a year inventory can be said to be sold and replaced.
For example, if a firm's average inventory level is equivalent to
one quarter of its annual sales, it can be said that inventory turns
four times a year. (See days inventory, days payables, and days
receivables for definitions of other common measurements of turnover.)
While turnover concepts are most often applied to elements of the
working capital conversion cycle, there are other applications.
For example, asset turnover is the ratio of net sales divided by
total assets.
A type of fee charged to investors in some mutual funds. In theory,
the fee is supposed to reimburse the sponsor for sales, distribution,
or shareholder liaison expenses. In reality, however, it is another
type of administrative or management fee. See load.
See yield curve risk.
A category of investment securities defined by the Office of the
Comptroller of the Currency (OCC) (12 CFR 1). A Type I security
is any one of the following:
(1) Obligations of the U.S. government.
(2) Obligations issued, insured or guaranteed by
a department or an agency of the U.S. government if the obligation,
insurance, or guarantee commits the full faith and credit of the
United States for the repayment of the obligation.
(3) Obligations issued by a department or agency
of the United States or an agency or political subdivision of a
State of the United States that represent an interest in a loan
or in a pool of loans made to third parties,if the full faith and
credit of the United States has been validly pledged for the full
and timely payment of interest on, and principal of, the loans in
the event of nonpayment by the third party obligors.
(4) General obligations of a State of the United
States or of any political subdivision.
(5) Obligations authorized under 12 USC 24 (Seventh)
as permissible for a national bank to deal in, underwrite, purchase,
and sell for the bank’s own account, including qualified Canadian
government obligations.
(6) Other securities that the OCC determines to
be eligible as Type I securities under 12 USC 24 (seventh).
A category of investment securities defined by the Office of the
Comptroller of the Currency (OCC) (12 CFR 1). A Type II security
is any one of the following:
(1) Obligations issued by a State or a political
subdivision or an agency of a state for housing, university, or
dormitory purposes.
(2) Obligations of international and multilateral
development banks and organizations listed in 12 USC 24 (Seventh).
(3) Other obligations listed in 12 USC 24 (Seventh)
as permissible for a bank to deal in, underwrite, purchase, and
sell for the bank’s own account, subject to a limitation per
obligor of 10 percent of the bank’s capital and surplus.
(4) Other securities that the OCC determines to
be eligible as Type II securities under 12 USC 24 (Seventh).
A category of investment securities defined by the Office of the
Comptroller of the Currency (OCC) (12 CFR 1). All investment securities
that do not qualify as Type I, II, IV, or V. For example, obligations
of corporations and municipal revenue securities other than those
defined as Type II.
A category of investment securities defined by the Office of the
Comptroller of the Currency (OCC) (12 CFR 1). This is a category
added in the 1996 amendments. A Type IV security is any one of the
following:
(1) A small business-related security as defined
in section 3(a)(53)(A) of the Securities Exchange Act of 1934,15
USC 78c(a)(53)(A), that is rated investment grade or is that is
the credit equivalent of investment grade and that is fully secured
by interests in a pool of loans to numerous obligors.
(2) A commercial mortgage-related security that
is offered or sold pursuant to section 4(5) of the Securities Act
of 1933 that is rated investment grade or that is the credit equivalent
of investment grade.
(3) A commercial mortgage-related security as described
in section 3(a)(41) of the Securities Exchange Act of 1934, 15 USC
78c(a)(41), that is rated investment grade in one of the two highest
investment grade rating categories, that represents ownership of
a promissory note or certificate of interest of participation that
is directly secured by a first lien on one or more parcels of real
estate upon which one or more commercial structures are located,
and that is fully secured by interests in a pool of loans to numerous
obligors.
(4) A residential mortgage-related security that
is offered and sold pursuant to section 4(5) of the Securities Act
of 1933, 15 USC 77d(5), that is rated investment grade or is the
credit equivalent of investment grade.
(5) A residential mortgage-related security as
described in section 3(a)(41) of the Securities Exchange Act of
1934,15 USC 78c(a)(41), that is rated investment grade in one of
the two highest investment grade rating categories and that does
not other wise qualify as a Type I security.
See investment grade.
A category of investment securities defined by the Office of the
Comptroller of the Currency (OCC) (12 CFR 1). This is a category
added in the 1996 amendments. A Type V security is a security that
meets the following four requirements:
(1) Rated investment grade;
(2) Marketable;
(3) Not a Type IV security;
(4) Fully secured by interests in a pool of loans
to numerous obligors and in which a national bank could invest directly.
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