Banker's Glossary
CAB
See capital appreciation bond.
Calendar spread
An option trading strategy that involves buying two calls or two puts on the same underlying, but with different maturity dates. If two call options are used, the spread may be referred to as a calendar call spread. Similarly, if two put options are used, the spread may be described as a calendar put spread. When the exercise price of the two options is the same, the calendar spread is described as a horizontal spread. When the exercise price of the two options is different, the calendar spread is described as a diagonal spread.
Call
An option that grants the holder the right to purchase an instrument in the future at a price established today. The call option gives the holder the right but not the obligation to purchase the underlying instrument.
Call date
The date on which a call option may be exercised. The date before the contractual maturity date on which a bond may be redeemed at the option of its issuer.
Call feature
See call option.
Call option
A contract, or a provision in a contract, that gives its holder the right to buy an underlying security, commodity, or currency before a certain date. The option to purchase is for a predetermined price called the strike price. When the call option is a provision in a contract defining a transaction such as a bond or a loan, it is sometimes called a call feature. Options are often used in hedging.
Call or calling
Making demand for payment in full of a loan, usually a loan that is in default, Often referred to as calling the loan.
Call price
The price at which a call option may be exercised. For example, the price that an issuer is required to pay in order to redeem a bond before its maturity.
Call protection
A feature of a bond issue that protects investors from risk of prepayment. In mortgage-backed bonds, call protection may take the form of prepayment penalties or lock-in periods. A lock-in period is a time period, starting from the issue date and ending at a specified subsequent date, during which an otherwise callable bond may not be called. This time period is specified in the bond’s indenture agreement. The call protection period may be a few months or as long as 25 years. For convertible bonds, see hard call protection and soft call protection (for convertible bonds).
Call risk
The risk that declining interest rates will create an economic incentive for the owner of a call option to exercise that option. In MBSs, call risk is the risk that declining interest rates will accelerate prepayment of the underlying mortgage loans and thereby shorten the life of the investment.
Callable bond
A bond that the issuer has the right to redeem prior to maturity. Some callable bonds may be redeemed on a single call date while others have multiple call dates. Some callable bonds may be redeemed at par while others can only be redeemed at a premium.
Callable swap
A receive fixed/pay floating interest-rated swap with an embedded option that permits the holder to cancel the swap prior to its maturity.
CAMEL
An acronym for the institution composite rating system used by the federal regulators during a regulatory examination. The evaluation is based on Capital, Asset Quality, Management, Earnings and Liquidity.
Cap
An upper limit for a variable, such as the upper limit on the interest rate paid or received in a transaction. For example, an adjustable-rate mortgage may have a cap of 10 percent. In this case, the rate can adjust however the loan terms provide, without exceeding 10 percent. Also called a ceiling. Cap is often used with its converse, a floor. A cap may be an embedded option, such as the cap on the rate for a floating rate loan, or a stand-alone option contract.
Cap rate
An interest rate used in the process of capitalization.
Capacity
A lending and credit analysis term that describes a borrower’s or applicant’s ability to meet debt service obligations. See debt service coverage.
Capital
(1) Usually refers to the total of the equity accounts in a firm. For a bank, the equity accounts are common and preferred stock, surplus, and undivided profits. For other corporations, equity accounts are common and preferred stock, surplus, and retained earnings. For bank capital, see tier 1 capital and tier 2 capital.
(2) Sometimes used as a synonym for common stock, as in capital stock.
Capital appreciation bond (CAB)
Securities that are issued at par, but which do not remit interest to the holder until maturity. The interest accrues at the coupon rate and is compounded at a stated rate. The issuer holds the accumulated, compounded interest until the maturity date of the bonds. At the maturity date, the bondholder receives all of the accumulated interest along with the par amount of the security. Reflecting their structure, CABs are sometimes called compound interest bonds or accumulators.
Capital expenditures
Expenditures resulting in the acquisition of or addition to fixed assets. Expenditures made for the purpose of acquiring capital assets.
Capital lease, capitalized lease
See lease.
Capital markets disruptions
A type of systemic liquidity risk. The risk of funding problems arising from problems in the secondary markets for financial instruments. For a community bank, the main problem is that a capital market disruption arises from the fact that the bank is only able to sell investment assets at very unacceptable prices. See flight to quality and systemic liquidity risk.
Capital markets hedges
Hedging done with instruments traded in the capital markets, including but not limited to swaps, options, and futures. (These hedge instruments are derivatives.) The term "capital markets" is slightly broader than "exchange traded" since some instruments, such as interest rate swaps, are bought and sold outside of the exchanges in over the counter (OTC) markets that are still capital markets.
Capitalization
(1) The process of imputing a value to an income stream by dividing the annual net income before income taxes and depreciation by a rate of return expressed as a decimal. This process is used in real estate lending and appraisals.
(2) The total of, or the mix between, a corporation’s shareholders’ equity and its long-term debt.
(3) The process of reflecting a long-term, noncancelable lease on the lessee’s balance sheet.
Capitalization ratio
A measure of a corporation’s reliance on long-term debt. Similar to the debt-to-worth ratio but not the same. This ratio is calculated by dividing long-term debt by the sum of long-term debt plus equity.
Capitalized interest
Interest that a lender "receives" by adding the unpaid interest to the amount of the loan balance to be paid by the borrower.
Capitalized lease
Lease obligations that must be capitalized under GAAP; the unpaid future lease payments due under the terms of the lease must be shown as a liability on the firm's balance sheet. As a general rule, this requirement applies to most equipment and buildings leased by a business and used in the conduct of the business.
Caption
An option that grants the holder the right to purchase a cap.
CAR
See certificates of automobile receivables.
Cascading late charges
The practice of imposing late charges for previously unpaid late charges. Federal Regulation AA prohibits this practice for consumer loans.
Cash and due from banks
A banking expression used to describe the total sum of assets represented by cash, funds on deposit with the Federal Reserve bank, funds on deposit with correspondent banks, and items in transit to those banks
Cash equivalents
Defined by FASB as short-term, highly liquid investments that are both: (a) readily convertible to known amounts of cash, and (b) so near their maturity that they represent insignificant risk of changes in value because of changes in interest rates.
Cash flow
A finance and accounting term used to describe the net amount of cash generated by a firm’s operations. In traditional and over-simplified usage, cash flow is defined as the sum of net income after tax plus all noncash expenses such as depreciation. More modern and sophisticated usage defines cash flow to include the net difference between all cash outflows and cash inflows.
Cash flow gap
The difference between cash inflows and cash outflows in a defined time period. Also called liquidity gap.
Cash flow hedge
A type of hedge defined by FAS 133. An entity may designate a derivative instrument as hedging the exposure to variability in expected future cash flows that is attributable to a particular risk. That exposure may be associated with a recognized asset or liability such as all or some of the future interest payments due for a variable-rate debt. Alternatively, that exposure may be associated with a forecasted transaction such as a planned purchase or sale. Certain requirements must be met to qualify for cash flow hedge accounting. Gains or losses from the effective portion of a derivative used for a qualifying cash flow hedge are reported in comprehensive income. In other words, the gains and losses are used to adjust equity but are not included in income or losses from operations. Gains or losses from the ineffective portion of hedges must be reflected in earnings. See comprehensive income, FAS 133, and hedge effectiveness.
Cash flow recapture clause
A loan agreement or bond indenture provision that requires the borrower to apply excess cash flow (or some percentage of excess cash flow) to reduce the outstanding debt balance.
Cash flow yield
The monthly internal rate of return of an investment based upon a projected stream of monthly principal and interest payments. The cash flow yield depends upon the prepayment assumption that is used to describe anticipated cash flows.
Cash forward agreement
A commitment to purchase or sell a security at a future date that is binding on both the buyer and the seller. Also known as a firm commitment.
Cash instrument
Financial instruments or commodities for which the value is dependent upon the term, coupon rate, or other characteristics of the instrument itself. Differs from derivative instruments, for which the value is partially dependent upon characteristics or prices of an underlying cash instrument. Cash instruments include U.S. Treasury, agency, and government sponsored enterprise securities; municipal securities and corporate securities; syndicated loans; securitized mortgages, car loans and credit card receivables, (but not collateralized mortgage obligations); and bank obligations such as negotiable certificates of deposit and banker’s acceptances. Not the same as cash market or cash market instruments.
Cash letter
Items (primarily checks) along with a letter that specifies amounts and directions. Cash letters are sent to a bank for transmittal to other banks for the purpose of clearing checks drawn on other banks.
Cash management
One or a combination of various techniques for accelerating cash receipts, delaying cash disbursements, effectively utilizing banking services, managing or augmenting liquidity, increasing the amount of cash available for investment, and/or increasing returns from liquid investments.
Cash management bills
U.S. Treasury bills. Unlike more typical bills with 13-, 26- or 52-week maturities, cash management bills are issued with maturities selected to match expected tax receipts.
Cash market
(1) noun - A market for buying or selling financial instruments, commodities, or other property for cash settlement and immediate (as opposed to future) delivery. Also called spot market.
(2) adjective — A financial instrument or transaction for which the ownership of the financial instrument or commodity is transferred at, or very shortly after, the time of the transaction, as opposed to futures market transactions where ownership of the financial instrument or commodity is transferred, if it is transferred at all, at a later date. Also called spot or spot market transactions.
Cash settlement
The agreement of a buyer and seller to exchange the security and the payment on the same day as the trade. For money market instruments, cash settlement is the delivery of purchased securities against payment in fed funds on the same day that the trade is made. See settlement.
Cash surrender value (CSV)
The amount of cash that can be obtained by the policy owner upon cancellation of a whole life insurance policy. CSV may also be borrowed by the policy owner. Only certain kinds of life insurance policies have cash surrender values.
CATS
See Certificate of Accrual on Treasury Securities.
CBO
See collateralized bond obligation.
CBOT
See Chicago Board of Trade.
CDO
See collateralized debt obligation.
Ceiling
An upper limit for a variable. For example, an adjustable- rate mortgage may have a ceiling of 10 percent. In this case, the rate can be adjusted however the loan terms provide without exceeding 10 percent. Also called a cap.
CERCLA
See Comprehensive Environmental Response, Compensation, and Liability Act of 1980.
Certificate of acceptance
See delivery and acceptance certificate.
Certificate of Accrual on Treasury Securities (CATS)
A proprietary name for a zero coupon Treasury security created from a coupon-bearing Treasury security.
Certificate of automobile receivables (CAR)
A form of asset-backed security. Securitized installment loans secured by automobiles.
Certificate of deposit (CD)
A deposit of funds, in a bank or savings and loan association, for a specified term that earns interest at a specified rate or rate formula. CDs may be secured or unsecured. CDs may be for terms as short as one week or for terms of 10 years or longer. CDs may have fixed or floating rates. CDs may be issued in either non-negotiable or negotiable form and in either physical or book-entry form. CDs may be issued by domestic offices of U.S. banks, by foreign branches of U.S. banks, and by foreign banks at either domestic U.S. or foreign locations. See Eurodollar CDs, jumbo CDs, negotiable CDs and Yankee CDs.
Certificate of good standing
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.
Certificate of insurance
A document that describes an insurance policy. It is issued for informational purposes only. It is not legal evidence of insurance and may even describe a policy that has not yet been issued. See binder.
Certificate of origin
A document that specifies the country of origin for goods traded internationally.
Certificate of participation (COP)
Undivided proportionate interests in the future lease payments made by the municipal lessees/issuers. Investors owning COPs own the right to receive a portion of the payments arising from the lease, but do not own debt of the lessee.
Certificate of survey
See survey.
Certificate of title
See title opinion.
Certificated
Legal term used (especially in UCC Article 8) as an adjective to describe stocks, bonds, other investments, and certificates of deposit held in physical form.
CFTC
See Commodity Futures Trading Commission.
Chain of title
Another name for abstract of title.
Change in factor amortization
See level factor amortization.
Character
A term used by lenders and credit analysts to describe an individual’s integrity and management ability. The term also may be used to describe the integrity and management ability of individuals managing a corporation. As used by lenders, character does not mean the citizenship or moral rectitude of an individual.
Charge-backs
The reduction of unpaid invoices owed to a trade creditor due to a dispute, return, offset, or any reason other than an account debtor's inability to pay.
Chattel
An archaic term for personal property that was common in many states before the adoption of the UCC. The term is used almost exclusively by bankers and lawyers who were trained before the adoption of the code.
Chattel mortgage
An archaic term for a security agreement.
Chattel paper
A category of personal property defined by Article 9 of the UCC. Chattel paper is a document that includes both a monetary obligation and a security interest in goods or a lease. For example, installment sales contracts that include a retail purchaser's promise to pay and a security interest retained by the seller become chattel paper for a bank when the seller pledges them to another party. Such a document is often called dealer paper because automobile dealers engaged in indirect lending frequently sell or pledge their retail installment contracts to a financial institution.
Cheapest to deliver
The cash market instrument that is the least expensive instrument to acquire and deliver into an exchange-traded contract at maturity.
Check
A commercial demand deposit instrument signed by the maker and payable on the presentation to the bank on which it is drawn.
Check 21 Act
The Check Clearing for the 21st Century Act (Pub. L. No. 108-100 - signed by President Bush on October 28, 2003). The law facilitates check truncation by creating a new negotiable instrument called a substitute check, which permits banks to truncate original checks, to process check information electronically, and to deliver substitute checks to banks that want to continue receiving paper checks. A substitute check is the legal equivalent of the original check and includes all the information contained on the original check. The law does not require banks to accept checks in electronic form nor does it require banks to use the new authority granted by the Act to create substitute checks. Check 21 is designed to foster innovation in the payments system and to enhance its efficiency by reducing some of the legal impediments to check truncation.
Check truncation
A process whereby deposited checks are retained by the fist bank (payee’s bank) with notification sent to the local bank (payor’s bank) that the check has been deposited. Canceled checks are not returned to the maker. Sometimes called check safekeeping.
Check-clearing float
The time between the date a check is deposited in a bank and the date it is charged to the drawer. Also called bank float or transit float.
Chicago Board of Trade (CBOT)
A futures exchange.
Chicago Mercantile Exchange (CME)
A futures exchange.
CHIPS
See Clearing House Interbank Payment System.
chose in action
A personal right to receive or recover a debt or damages, but only through a lawsuit.
Churning
The process of unnecessary purchases and sales in customers’ accounts for the purpose of generating commissions.
CIP
See customer identification program.
Class
See tranche.
Clean letter of credit
A letter of credit that can be drawn upon with a simple written request not supported by other documentation. Often used to identify or describe standby letters of credit. This type of letter of credit is often used to enhance the credit quality of securities.
Clean REMIC
See sequential-pay REMIC.
Clean up (v.), clean-up (adj.),or cleanup (n.)
(1) An informal phrase used by lenders to describe a provision in loan documents, usually the promissory notes used for lines of credit. The clean-up provision requires that the loan balance outstanding under the line of credit be reduced, usually to zero, for a period of time, usually one or two months, with some specified frequency, usually annually. Sometimes called an "out of debt" requirement. A clean-up requirement is particularly well suited to borrowers with significant seasonal fluctuations in sales.
(2) The unwinding of an asset-backed security when the remaining balance is very small is sometimes referred to as a clean-up call.
Clear
The collection of funds on which a check is drawn and the subsequent payment of these funds to the holder of the check.
Clearing account
An account used to accumulate total charges or credits so that they can be distributed later among the accounts to which they are allocable, or so that the net differences can be transferred to the proper account.
Clearing corporation
An agency connected with a financial exchange through which brokers and other parties to a securities trade settle trades conveniently, with minimum paperwork. Financial settlements are simplified by combining and netting transactions. Sometimes called a clearinghouse.
Clearing House Interbank Payment System (CHIPS)
A privately owned electronic system in New York City that is used to transfer funds between banks. Often used for funds moving into and out of the United States. See Fed wire and Society for Worldwide Interbank Financial Telecommunication (SWIFT).
CLO
See collateralized loan obligation.
Closed-end credit
Credit extensions in which the borrower receives the entire proceeds of the loan at or shortly after the loan is closed. In closed-end credit facilities, the amount borrowed cannot increase after it has been disbursed and partially repaid. Closed-end credit may require regular repayment of principal (see installment note and term note) or may only require the repayment of principal at maturity. See bullet loan, single-payment loan, and time note.
Closed form solution
A solution to a math problem that can be obtained from simple formulas. Risk modelers and investors can use closed form solutions such as Black-Scholes or Vasicek models to value options. Also known as analytical solution. See one-factor model.
CLTV ratio
See combined loan to value ratio.
CME
See Chicago Mercantile Exchange.
CMIR
Report of International Transportation of Currency or Monetary Instruments. Each person who physically transports, mails, or ships, or causes to be physically transported, mailed, shipped or received currency or other monetary instruments in an aggregate amount exceeding $10,000 on any one occasion from the United States to any place outside the United States, or into the United States from any place outside the United States must file form 4790 (CMIR).
CMO
See collateralized mortgage obligation.
CMT
See constant maturity Treasury.
COFI
See cost-of-funds index.
Cognovit note
A promissory note that includes language in which the debtor acknowledges liability and allows the creditor to obtain a judgment without suit. Not permitted in some states.
Coinsurance
A provision in an insurance policy that requires the insured to carry an amount of insurance equal to a certain specified percentage of the value of the insured property. The coinsurance provision, or clause, provides for full payment of losses up to the amount of the policy if the amount of insurance carried equals the specified coinsurance percentage. If the amount of insurance carried does not equal the specified coinsurance percentage, the losses are shared between the insurer and the insured even if the loss is below the amount of the policy.
Collar
(1) The combination of a cap option and a floor option.
(2) For CMOs, the collar is the range in which certain performance variables (e.g., yield, average life) are guaranteed to stay. This range is expressed in terms of PSA speeds. See band.
(3) An informal name for caps and floors.
Collateral
(1) Property that a debtor has pledged, mortgaged, or assigned to a creditor.
(2) Securities exchanges in a repo, reverse repo, buy/sellback, or sell/buyback.
Collateral receipt
See warehouse receipt.
Collateral trust bonds
A type of corporate bond that employs a trustee to hold collateral, other than equipment or real estate, for the bond holders. For example, a parent corporation may borrow funds through a bond issue and pledge the stock in one of its subsidiaries as collateral for the bondholders.
Collateralized bond obligation (CBO)
A multi-tranche security secured by a pool of corporate securities (generally noninvestment-grade corporate bonds) or sovereign debt. Similar to the more familiar CMO, except that in a CBO the tiers or tranches are created with differing levels of credit quality. The CBO structure creates at least one tier of investment-grade bonds, thus providing liquidity to a portfolio of junk bonds. CBOs are a type of CDO. See collateralized debt obligation (CDO), special purpose vehicle and waterfall.
Collateralized debt obligation (CDO)
(1) A multi-tranche security with credit risk exposure to corporations. A securitization of corporate obligations. CDOs can be securitizations or re-securitizations of commercial loans, corporate bonds, other types of ABSs, residential MBSs, commercial MBSs, and emerging market debt. CDOs may even be backed by other CDOs. Securitizations of corporate bonds are a type of CDO called a collateralized bond obligation or CBO. A synthetic CDO uses credit default swaps rather than actual corporate obligations to create a pool of credit exposure. Similar to the more familiar CMO, except that in a CDO the tiers or tranches are created with differing levels of credit quality. A CBO divides the credit risk of a pool of high yield bonds into different classes that appeal to investors with different credit risk tolerances. The CDO structure creates at least one tier of investment-grade bonds. The contractual rules for the cash flow distributions in a CDO structure enable the senior tranches to receive high credit ratings by shifting risk to the equity tranche. See equity tranche, special purpose vehicle, and waterfall.
(2) The term "CDO" may be used to refer to the special purpose entity, SPV, that holds the securitized assets.
Collateralized loan obligation (CLO)
A multi-tranche security secured by a pool of corporate loans. Similar to the more familiar CMO, except that in a CBO the tiers or tranches are created with differing levels of credit quality. The CBO structure creates at least one tier of investment-grade bonds, thus providing liquidity to a portfolio of junk bonds.
Collateralized mortgage obligation (CMO)
A type of MBS created by dividing the rights to receive the principal and interest cash flows from an underlying pool of mortgages into separate classes or tiers. The tiers or classes are usually called tranches. In other words, it is a multiclass bond backed or collateralized by mortgage loans or mortgage pass-through securities. A given tranche is typically not redeemed until all bonds with earlier priority have been redeemed. By dividing the cash flows into one or more tranches with shorter terms, the risk resulting from the potential volatility from future changes in prevailing rates is shifted away from the shorter-term tranche or tranches and onto the longer-term tranches and the residual tranche.
Collected balances
Collected balances are bank ledger balances minus checks in the process of collection. Also called available balances, good funds, or usable funds.
Collection
Obtaining payment.
Collection float
The total time period between when a check is prepared by the remitter and when the check is presented to the remitter’s bank. The float also includes the mail float, processing float, and transit float, and is considered the disbursement float for the organization that issues the check.
Collection guaranty
A guaranty in which the signer guarantees to pay the bank only if the bank cannot obtain repayment through other means.
Combined loan to value ratio (CLTV)
A measure of collateral coverage provided by a consumer borrower's residence. The borrower's total senior and subordinated loan balances divided by the appraised value of the borrower's residence.
Commercial letter of credit
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. Also called trade letter of credit. See banker's acceptance and letter of credit.
Commercial loan theory of liquidity
An explanation of bank liquidity described by Adam Smith: short-term loans advanced to finance salable goods on the way from producer to consumer are the most liquid loans the bank can make. These are self-liquidating loans because the goods being financed will soon be sold. The loan finances a transaction and the transaction itself provides the borrower with the funds to repay the bank. Adam Smith described these loans as liquid because their purpose and their collateral were liquid. The goods move quickly from the producers through the distributors to the retail outlet and then are purchased by the ultimate cash-paying consumer. Also called the real bills doctrine.
Commercial paper
Unsecured, short-term promissory notes issued by corporations for specific amounts and with specific maturity dates. Firms with lower ratings or firms without well-known names usually back their commercial paper with guarantees or bank letters of credit. Commercial paper may be sold on a discount basis or may be interest bearing. Terms can be as short as 1 day and usually do not exceed 270 days.
Commercial tort claim
A claim rising as a result of a tort that (a) does not include damages arising out of a personal injury or death and (b) arises out of the normal course of business from either an individual or organization. A category of personal property collateral defined by the 2001 revisions to Article 9 of the UCC. See tort.
Commingled funds
Money pooled for a common purpose. Often funds pooled for investments. See local government investment pools.
Commingled goods
Goods that become part of a product or mass of goods. An example is the flour used to bake bread.
Commitment letter
A legally binding letter in which a lender documents the terms, prerequisites and conditions under which it agrees to provide financing to an applicant. Commitment letters may be used in almost any lending transaction but are most common in commercial real estate transactions.
Commodity Futures Trading Commission (CFTC)
The Federal agency that is responsible for regulating futures trading in the United States.
Common stock
A type of equity or capital representing shares of ownership in a corporation. May or may not receive distributions of corporate income in the form of dividends. Receives the lowest priority for repayment in the event of a corporate liquidation. As opposed to preferred stock, which has a slightly higher claim to corporate funds.
Community Reinvestment Act
A federal statute enacted to require banks and savings and loan associations to meet the credit needs of their communities, including low- and moderate-income neighborhoods.
Companion tranche
A specific tier or segment of REMIC security. A REMIC tranche that is structured to absorb a disproportionate amount of the volatility caused by variations in the prepayments of the underlying collateral. Companion tranches are created to be more volatile so that other tranches in the same REMIC, called PAC or TAC tranches, may have more stable cash flows. Hence the name companion. Also called support tranches.
Compensating balance
A method of paying the bank for providing services.
(1) In lending, compensating balances are minimum balances that the bank requires a borrower to maintain with the bank as partial compensation to the bank for the credit facility.
(2) The amount of deposit balances necessary to offset the cost of deposit, cash management, or other bank services. Each period, usually monthly, the actual bank service charges applicable for the services used by the depositor are used to determine the level of balances to be left with the bank. Adjustments are made to reduce the deposit total for reserve requirements and float. See account analysis.
Compilation statement
Financial statement put together for the client firm by a CPA that is entirely based upon data submitted to the CPA by the firm with no review, no testing, and no opinion expressed by the CPA.
Complete appraisal
A term used in the Uniform Standards of Professional Appraisal Practice (USPAP) requirements for real estate appraisals. Synonymous with an appraisal as defined by the Federal appraisal regulations for real estate pledged to secure loans. A complete appraisal is a statement of market value that meets the five specific standards. A complete appraisal is conducted in conformity with USPAP rules and without invoking the departure provision in those rules. See appraisal, evaluation, and limited appraisal.
Compliance risk
One of nine risks defined by the Office of the Comptroller of the Currency (OCC). The risk to earnings or capital arising from violations of or nonconformance with laws, rules, regulations, prescribed practices, or ethical standards. This risk is incorporated in the Federal Reserve definition of legal risk.
Compound interest
Interest computed by applying the simple rate of interest to calculate interest on principal plus interest on successive increments of interest earned in prior periods.
Compound interest bond
See capital appreciation bond.
Compound option
An option on an option. Examples are captions and floortions.
Comprehensive Environmental Response, Compensation, and Liability Act of 1980
Imposes liability on owners and operators for cleanup of environmental sites.
Comprehensive income
A term defined by FAS 130 as the change in equity of an entity during a reporting period that results from transactions and "other events and circumstances from nonowner sources." The "other events and circumstances from nonowner sources" are referred to as "other comprehensive income." Accordingly, comprehensive income is the change in equity during a reporting period that results from the combination of net income and other comprehensive income. See FAS 130 and also see other comprehensive income.
Concentration account
A cash management tool. A single account established by an entity, usually in conjunction with one or more zero balance disbursement accounts. Sometimes the concentration account is referred to as a parent account while the associated zero balance accounts are called daughter or subsidiary accounts.
Concession
The underwriting spread. The difference between the price that an underwriter or underwriting syndicate pays to the issuer and the price that is received from investors who buy the issue. The concession is the income earned by the underwriter.
Conditions
A term used by lenders and credit analysts to describe the background or underlying economic and industry circumstances affecting a business.
Confidence interval
The degree of certainty that an event will fall outside of boundaries on a distribution. For a normal distribution, boundaries set at two standard deviations from the mean create approximately 95 percent confidence intervals. In other words, only 5 percent of the events will be smaller or larger than the boundary amounts. Often applied to VaR measures of risk.
Confirmation
The document used to state in writing the terms of a trade that were previously agreed to orally by the buyer and the seller.
Conformed copy
A copy of an original document on which the signature, seal, and other such authenticating features are typed or otherwise noted.
Conforming mortgage
A residential mortgage loan that meets all FNMA or FHLMC standards. Mortgages may conform to agency requirements regardless of whether they are sold or retained by the originator. Even though a conforming mortgage may not be sold to FNMA or FHLMC, its amount, repayment terms, and documentation meet the standards of those agencies, and the loan may be sold to them at any time during its life.
Consensual lien
A security interest given to a creditor by a debtor. A consensual lien is granted by the consent of the parties and is the basis for most secured transactions. See judicial lien and statutory lien for alternative types of liens.
Consideration
A legal term used to describe the benefit that a borrower, guarantor, or pledgor receives in exchange for agreeing to repay, guarantee, or pledge security to the bank. Usually, but not always, the consideration is the proceeds of the loan. In some states, a reasonable expectation of benefit can be sufficient. Consideration must involve benefit that is meaningful, which means that the value of the consideration, whether or not it is directly monetary, must be comparable to the benefit.
Consignment
(1) (adjective) — Goods or inventory that are held by a selling agent, wholesaler, or reseller until the goods are either sold or returned to the seller. The goods are owned by the consignor. The selling agent is merely a consignee.
(2) (verb) — The physical transfer of goods from a seller/consignor who retains title to the goods to a consignee who acts as a selling agent.
Note that not all consignments are "true" consignments. Also note that not all true consignments are covered by UCC Article 9.
Consignee
Selling agent, wholesaler or retailer holding goods owned by a consignor.
Consignor
Owner of goods (e.g. retains right and title to the goods) that are placed with a selling agent.
Consolidated statements
Consolidated financial statements show the combined assets, liabilities, net worth, income, expense, net income, and cash flows for a related group of companies. Unlike simpler combined statements, consolidated statements do not merely show the aggregate of the values for each line item for all of the firms in the group. Instead, consolidated statements also reflect the elimination of intercompany transactions. Consolidated statements disregard the distinction between separate legal entities and treat a parent firm and its subsidiaries as a single economic entity.
Consolidating statements
Consolidating financial statements are reports or worksheets that show the financial condition of each entity in a consolidated group of entities as well as the intercompany eliminations used in the preparation of consolidated reports.
Constant maturity Treasury (CMT)
An average of the yields from various Treasury securities that all have the same remaining time until maturity. For example, the one-year CMT is the average yield of various Treasury securities maturing in one year. CMT indexes are published by the Federal Reserve Board of Governors in statistical release H.15.
Constant percent prepayment (CPP)
An expression of mortgage loan prepayments in annual terms. The single monthly mortality rate (SMM) multiplied by 12. CPP annualizes SMM without reflecting the impact of compounding. See constant prepayment rate and single monthly mortality rate.
Constant prepayment rate (CPR)
A measure of the historical or expected prepayment of principal on a mortgage or an MBS that expresses the prepayment as a constant proportion of the outstanding principal. The CPR is an annualized expression of the SMM that reflects compounding and is therefore more accurate. See single monthly mortality rate.
Consumer goods
A category of goods defined by Article 9 of the UCC. Consumer goods are goods used primarily for personal, family, or household purposes. Typical examples are jewelry, furniture, automobiles, and appliances.
Consumer lease
A consumer lease is defined under Article 2A of the UCC. It is a lease between a lessor who regularly engages in the business of leasing or selling to a lessee who is an individual and who takes the lease for personal, family, or household purposes. To meet the definition of a consumer lease, the total payments to be made under the lease, excluding payments for options to renew or buy, may not exceed $25,000. Any prohibitions on a party’s right to transfer its rights in a consumer lease must be in writing, conspicuous, and specific.
Consumer Leasing Act
A federal law that governs consumer leases. The act is implemented by Federal Reserve Regulation M. Compliance with the Consumer Leasing Act is largely, but not entirely, a matter of providing the consumer with required disclosures intended to enable the consumer to compare different leases.
Contagion
The process (verb) or risk (noun) were a crisis in one bank, country, market or currency spreads. Typically, regulators worry about contagion in two directions. Upward contagion arises when idiosyncratic problems at one financial institution spread to create systemic problems. Downward contagion arises when the systemic problems lead to severe problems at individual banks that are relatively more vulnerable.
Contingent deferred sales charge (CDSC)
See back-end load.
Contingent liability
A debt or obligation that becomes a liability only when something else happens. For example, a guarantor becomes liable for his guarantee only if the debt that is guaranteed does not get paid by the debtor.
Continuation
A form and process by which a secured party extends the priority of its security interest in the public record. The priority of liens created under Article 9 of the UCC is usually established by filing a financing statement. Under the provisions of Article 9, financing statements are only valid for five years. However, a financing statement can be renewed by filing a continuation statement, usually a UCC-3 form. Continuations must be filed no earlier than six months prior to the expiration of the financing statement and no later than the expiration date of the financing statement. Continuations last for five years and can be extended by filing another continuation.
Continuing guaranty
A guaranty in which the guarantor agrees to guarantee all future loans made to that borrower by the bank, not just the loan or loans made as part of the transaction in which the guaranty was obtained.
Continuous repo
A repo/reverse repo transaction that does not have a specified term. These transactions are like a series of overnight repos renewed daily. The repo rate, the amount of funds invested, and/or the amount of collateral is adjusted each day. Continuing repos are commonly used in conjunction with bank sweep accounts. Under a continuing repo agreement, the transaction is terminated whenever either party requests termination. Also called open repos.
Contra account
Accounts receivable due from debtors who also have accounts payable due to them from the borrower.
Contra asset
An asset account that normally has a credit balance. Examples are the allowance for doubtful accounts and accumulated depreciation.
Contra liability
A liability account that normally has a debit balance.
Contract right
A defined term under the 1962 version of the UCC that means a right to payment under a contract that has not yet been earned by performance and is not evidenced by an instrument or chattel paper. Under the 1972 version of the UCC, these rights are either accounts or general intangibles.
Contractual gap
A crude measure of a financial institution’s exposure to adverse consequences resulting from changes in prevailing interest rates. The contractual gap is a gap mismatch measure calculated using the contractual maturity and repricing dates for all assets and liabilities. It is arguably the least accurate gap methodology.
Control stock
Control stock is stock held by a person who directly or indirectly controls the management of the issuing company. The right of the owner or a pledgee to sell control stock is limited by provisions in the Securities and Exchange Acts.
Controlled disbursement bank
A bank that can provide better management control over checks being presented. Generally, this bank is located outside the local area and receives only presentments from the Federal Reserve System and the local clearing-house.
Conventional mortgage
A mortgage loan based solely upon the value of the mortgaged real estate and the creditworthiness of the borrower. A mortgage loan without insurance or guarantees from a government agency.
Convergence
Describes an inevitable change in the relationship between cash and futures prices for instruments until delivery. Prior to delivery, the futures price and the cash price differ by the cost of carry. As time passes, the cost of carry diminishes and the futures price will equal the cash price at the time of delivery. This is a necessary condition for the futures contract to effectively hedge the cash instrument.
Conversion premium
A convertible’s conversion premium is the amount by which a convertible’s market price exceeds its value in stock. The premium may be expressed as the dollar difference or as a percentage.
Conversion ratio
The specified number of shares of common stock that will be received for each convertible bond or share of convertible preferred stock at the time of conversion. This ratio is specified at issuance in the bond indenture agreement. This is often an uneven amount using partial shares.
Conversion value
For convertibles, the value in stock. Also called the parity value. The conversion value can be determined by multiplying the conversion ratio by the value of the stock at any point in time.
Convertible ARM
An ARM for which the borrower has the option to convert from a floating-rate loan to a fixed-rate loan. Convertible ARMs can typically be converted in the first through fifth years of the mortgage loan. Because borrowers can exercise their conversion option for a modest fee, conversion is more attractive to borrowers than the alternative of obtaining a nonconvertible ARM and then later refinancing with a fixed-rate loan when prevailing rates have fallen. Consequently, prepayment speeds for convertible ARMs are faster than prepayment speeds for nonconvertible ARMs.
Convertible bond
A bond that includes a provision allowing the holder to exchange the bond for a quantity of the issuer's common stock at some fixed exchange ratio. An otherwise normal corporate bond that has a fixed maturity date that pays coupon interest and repays principal at maturity. It is issued with an option to exchange the bond for a fixed number of shares of common stock at the option of the bondholder, thereby allowing the convertible bond to share in the growth potential of the underlying common stock. It is senior to stock within the corporate equity structure, although probably junior to other corporate debt. Convertible bonds are often callable.
Convertible debt spread
The difference between the coupon interest rate on the convertible and the coupon interest rate on the issuing company’s nonconvertible bonds. The amount by which the convertible’s interest is lower depends on a number of factors, including the structure of the convertible itself. The debt spread typically ranges from two to five percentage points.
Convertible preferred stock
Preferred stock that can be converted into the common stock of the issuing company. Like nonconvertible preferred stock, the convertible preferred stock is a class of the corporation’s capital stock; has a specified dividend rate that is usually declared quarterly and is cumulative (accumulates in arrears if the corporation does not make the payment); and has priority over common shares for dividend payments. Both convertible and nonconvertible preferred stock are considered to be perpetual, but in fact, both are callable. Call dates on convertible preferreds are specified in the prospectus at issuance.
Convexity
A measure of the sensitivity of duration to changes in yield levels. Convexity is a measure of the stability or instability of the measured duration over a range of yields. 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. See duration, effective duration, Macaulay duration and modified duration.
COP
See certificate of participation.
Core deposits or core funding
(1) A bank's deposits that are the most stable.
(2) A bank's deposits under $100,000 each.
(3) Deposits that have an indefinite maturity, such as checking accounts, NOW accounts, money market deposit accounts, and savings accounts. See retail deposits.
Corporate settlement
The agreement of a buyer and seller to exchange the security and the payment on the third business day after the trade date. See regular way settlement and settlement.
Correlation
The degree of relationship between two sets of data. A correlation near plus 1, called a positive correlation, indicates that changes in one set of data are closely related to changes in the other set and that the data sets change in the same direction. A correlation near minus 1, called negative correlation, indicates that changes in one set of data are closely related to changes in the other set and that the data sets change in the opposite direction. A correlation near zero indicates little or no relationship between the changes in the two sets of data.
Correlation VAR
Correlation VAR is a measure of a financial instrument’s, a portfolio of financial instruments,’ or an entity’s exposure to reductions in value resulting from changes in prevailing interest rates. Also called analytical VAR, correlation VAR is one of several different methods for calculating VAR. Analytical or correlation VAR compares the sensitivity of risk elements within a portfolio. The volatility of each component is then calculated using a standard matrix. This is the type of VAR calculated by popular models such as RiskMetrics. This is the least computationally insensitive of the three statistically based VAR measurements. However, this approach does not do a good job of reflecting option risk or of incorporating the risk of unlikely events. See empirical VAR, historical VAR and value at risk (VAR).
Correspondent bank
A bank that serves as a depository and provides banking services for another bank.
Cosigner, co-maker and co-obligor
Terms used to identify multiple parties who sign as borrowers for a loan.
COSO
(1) The Committee of Sponsoring Organizations of the Treadway Commission. Formed in 1985 by five U.S. professional organizations to sponsor the National Commission on Fraudulent Financial Reporting. This was an independent, private sector initiative. The committee developed recommendations used by financial auditors, the SEC and regulators.
(2) The name most commonly used to refer to guidelines for enterprise-wide risk management (ERM) called "Internal Control - Integrated Framework". These COSO guidelines now serve two purposes.
They are used by internal and external auditors to implement and evaluate a firm's financial controls. The 2002 Sarbanes-Oxley Act and similar legislation is a primary driver of this application.
Financial institutions are also using COSO guidelines for ERM in general but primarily for the identification and control of operations risk. The Basel II capital requirements and related rules issued by national banking regulators are a primary driver of this application.
See enterprise-wide risk management, operations risk and self-assessment.
Cost in excess of billing
An asset created under a type of accrual accounting used when firms such as contractors incur expenses in accounting periods that are repaid in subsequent accounting periods. This account is comprised of money spent by the contractor for things that will be billed to buyer at a future date.
Cost of carry
The cost of financing an asset. If the cost of carry is smaller than the interest received from the asset by the investor, the investor has a positive carry. Conversely, if the cost of carry is larger than the interest received from the asset by the investor, the investor has a negative carry.
Cost-of-funds index (COFI)
The weighted-average interest rate paid by savings institutions to obtain funds. There are national and regional cost-of-fund indexes. The most common is the 11th District Federal Home Loan Bank COFI. A specific COFI index may be used as a benchmark rate for a floating-rate security.
Cost of goods sold
Amount shown on a firm's income statement representing the direct expenses that the firm incurred for sales. Cost of goods sold is always a debit balance and is shown as either a deduction or a negative number.
Counter balancing capacity (CBC)
A term sometimes used to describe the quantity of funds that a financial institution can obtain to meet liquidity requirements. See forward cash exposure.
Counterparty
A term used to identify the "other" party in a two-party transaction. For example, the counterparty of a buyer is the seller to that buyer. The term counterparty is frequently used to identify the other party in repurchase agreement transactions and in interest rate swap transactions.
Counterparty risk
The risk that a counterparty will default (fail to perform) on its obligation under a contract. Counterparty risk is not limited to credit risk (the risk that the counterparty cannot fulfill its contractual obligations) but may also result from other problems associated with a counterparty unwilling to honor the contract.
Coupon leverage
The inclusion of a multiple in the formula for calculating the coupon rate on an inverse floating-rate CMO. For example, an inverse floater with a multiple may pay interest at the rate of 22 percent minus the product of 2 times the 1-month London Interbank Offered Rate (LIBOR). (Note that when the rate formula for a floater or inverse floater applies a multiple to a sum, the CMO tranche is called a super floater. See super floater.)
Coupon yield equivalent
See bond equivalent yield.
Coupon, coupon rate
(1) The rate of interest received by the holder of a security. Not necessarily the same as the yield realized by the holder. See rate.
(2) For pass-through securities, the holder’s coupon rate is the gross coupon of the underlying loans less servicing fees and any agency guarantee fees.
Covariance
A measurement of the relationship between two variables. The arithmetic mean of the products of the deviations of corresponding values of two quantitative variables from their respective means.
Covariant
The condition of varying with something else in a way that satisfies a mathematical relationship. See covariance.
Covenants
Restrictions on the activities of a debtor written into bank loan agreements or bond indenture agreements. Also called indenture covenants or protective covenants. Contractual terms of the loan or indenture agreement that prohibit the debtor from taking actions that might hurt the interests of the lenders or bondholders. Designed to protect the interests of creditors — often (but not limited to) unsecured creditors. Four common examples of covenants are prohibitions against: issuing new debt, paying dividends if certain minimum financial standards are not maintained, merging with another company, and selling corporate assets.
Covered calls
A call option for which the owner of a security grants the buyer of the call option the right to purchase a security owned by the option seller. The opposite of naked calls. In theory, selling covered calls can be a hedging strategy. If investment prices fall, the investor’s loss will be offset by the income from the covered call. (When prices fall, the call option is likely to expire unexercised because the call buyer can buy the security on the open market at a lower price.) On the other hand, if prices rise, the seller's gain is limited to the difference between the seller's book value and the option strike price (which in this case is probably less than the market price), but the seller also retains the proceeds of the option sale. For banks, regulatory restrictions as well as practical difficulties may restrict the suitability of covered calls as hedging tools.
Covered put
The sale of a put option while holding sufficient cash to buy the underlying.
CPLTD
Acronym for current portion of long-term debt.
CPP
See constant percent prepayment.
CPR
See constant prepayment rate.
CRA
See Community Reinvestment Act.
Cram down
An informal name for a settlement or terms that a debtor forces creditors to accept. For example, a debtor in Chapter 11 bankruptcy proceedings can, subject to some restrictions, have a plan to resolve the bankruptcy approved by the court even though a creditor or a class of creditors objects.
Credit default swaps
See credit swap.
Credit derivative
Contractual arrangements that allow one party to transfer credit risk of a reference asset, which it may or may not own, to one or more counterparties. The first party may be called the "protection buyer", the "beneficiary" or the "originator". The counterparty or counterparties may be called the "protection seller" or the "guarantor". Credit derivatives are contracts for transferring risk - just like foreign exchange, commodity and interest rate risk derivatives. The only difference is the type of risk transferred. See total return swaps, credit default swaps, credit linked note and credit options for definitions of specific types of credit derivative instruments. Also see reference asset.
Credit enhancement
A measure that alters the structure of a security in a way that reduces its credit risk. Credit enhancement may take the form of a letter of credit issued to back securities. For mortgage-backed and asset-backed securities, credit enhancement may take the form of arrangements to over-collateralize the security.
Credit event
A term used in credit swap and some other credit related contracts. The specified credit event in each contract is defined by the parties to suit their particular needs. Typical specified credit events are bankruptcy, insolvency, credit rating downgrade or failure to make a required scheduled payment. Note that for a credit swap transaction, these events do not refer to occurrences or change impacting one of the contract counter parties. Instead they refer to events applicable to the underlying reference asset. The defined events must be well-defined and unambiguous.
Credit history
A record of how a person has borrowed and repaid debts.
Credit linked note
Credit linked security
A type of credit derivative instrument. Credit linked notes are a securitized form of credit derivatives. The protection buyer issues notes. If a specified credit event occurs, the investor who buys the notes has to suffer either a delay in repayment or has to forego interest. (The specified credit event is pre-defined can be any one of a number of alternatives.) Also known as credit linked security.
Credit memos
Accounting adjustments that reduce account receivable balances due from account debtors. Usually credit memos are generated to account for merchandise that is returned and when credit is given to customers for damaged goods. Credit memos are the accounting reflection of charge-backs.
Credit migration
Improvement or deterioration in an obligor's credit worthiness over time. Most often used to describe the improvement or deterioration in the credit worthiness as represented by a rating or credit grade.
Credit options
A type of credit derivative instrument. Options on a credit spread take the form of credit-spread put options. The put-buyer pays an upfront fee to the put-seller in exchange for a contingent payment in the event that the credit spread for an asset rises beyond a pre-agreed upon threshold. This is a put option where the underlying is the spread on a third party security. For example, if you were holding a bond issued by a third party and the bond's spread over the comparable Treasury rate were 200 basis points, you might purchase an option that pays off if the spread widens to 300 basis points. (Although that example uses the Treasury rate as a basis for comparison, it is becoming more common to use swap rates.) In other words, the widening of the credit spread to a defined size gives the protection buyer the right to demand a payment from the protection seller. Unlike a total return or default swap, the parties in a credit spread option do not have to agree upon any specific credit events. The fact that the market spread for the underlying rises compared to the reference index rate is, in effect, a proxy for a deterioration in the credit quality. Also known as credit spread options and credit spread put options.
Credit risk
The risk to earnings or capital from the potential that a borrower or counterparty will fail to perform on an obligation. Usually, but not always, the obligation in question is a requirement to make interest or principal payments. Sometimes called default risk, the failure to make required payments reduces the value of equity securities, debt securities, and loans. In the extreme, credit defaults eliminate all or almost all of the value in loans or securities. Adverse consequences from credit risk are not restricted to default, the ultimate manifestation of credit risk. In addition, asset owners can suffer from reductions in value resulting from either real or perceived declines in the obligor’s financial strength.
Both the Office of the Comptroller of the Currency (OCC) and the Federal Reserve list credit risk as one of their defined risk types for risk-based examinations. Credit risk exposure is found in all activities in which success depends on the performance of a counterparty, issuer, or borrower. Credit risk arises any time a financial institution extends, commits, invests, or otherwise exposes its funds through actual or implied contractual agreements, whether reflected on or off the balance sheet.
Credit scoring system
A statistical system used to determine whether or not to grant credit by assigning numerical scores to various characteristics related to creditworthiness.
Credit spread options
See credit options.
Credit swap
A type of credit derivative instrument. Swap contracts in which one party makes payments only if a specified credit event occurs. In a credit default swap, the protection seller agrees, for an upfront or periodic fee, to compensate the protection buyer upon the happening of the specified credit event. Credit default swaps are similar to a traditional financial guarantees but more flexible. It is more flexible because a credit swap need not be limited to compensation upon an actual default. The specified credit event in each swap is defined by the parties to suit their particular needs. Variations of the basic structure outlined in this definition are also used. Also known as default swaps or credit default swaps. See credit derivative, credit event and reference asset.
Credit watch
A warning issued by a credit rating agency alerting investors that the current rating is under review and may be upgraded or downgraded.
Creditor
A party who is owed money by another party.
Creditworthiness
A creditor's measure of a consumer's past and future ability and willingness to repay debts.
Critical path
A sequence of those tasks (e.g., in payment processing) which must be completed before the next task can be started. Anything not on the critical path is something that can be done later without delaying an important step.
Cross collateralization
Extension of the creditor's interest in property of the debtor so that collateral for one debt also serves as collateral for one or more other debts.
Cross correlation
Statistical term for the degree of similiarity for two different sets of data.
Cross default
Provision in the loan documents in which the debtor agrees that default on one loan will also constitute default on other obligations to the creditor.
Cross hedge
A hedge transaction in which a cash market instrument is hedged by an option contract for a different underlying instrument. Sometimes called proxy hedge, surrogate hedge, or tandem hedge.
Cross stream guaranty
A phrase sometimes used to describe a guaranty of a loan to a borrowing entity when the borrowing entity is affiliated with the guarantor corporation through common ownership but is neither a parent nor a subsidiary corporation. For the purposes of this definition, the borrower and the guarantor do not necessarily have to meet the accounting definition of affiliates.
CSV
See cash surrender value.
Cubic spline
A mathematical technique used for yield curve smoothing. A cubic spline fits a different third degree polynomial to each interval between data points (0 to 1 years, 1 to 2 years, 2 to 3 years, etc.) Either yields or prices can be smoothed using cubic splines. This smoothing technique is the most common and works well for spot rates. See smoothing.
Cumulative gap
The net sum obtained by adding all of the interval gaps or mismatches between rate-sensitive assets and rate-sensitive liabilities beginning with the first bucket in the gap analysis and proceeding to a selected time. For example, the one-year cumulative gap is the sum of the gaps for all of the time intervals prior to and including the gap bucket ending one year from the date that the report was prepared. A crude and highly inexact measure of interest rate risk.
Currency transaction report (CTR)
Each financial institution (other than casinos, which instead must file a CTRC form) must file a CTR for each deposit, withdrawal, exchange of currency or other payment or transfer, by, through or to the financial institution which involves a transaction in currency of more than $10,000 unless a CTR Exemption form has been previously filed. See Bank Secrecy Act.
Current assets
The group of assets considered the most liquid. Usually comprised of cash, accounts receivable, inventory, and a few minor items. The subgrouping of assets into current and long-term categories is common for all financial statements except for firms in the financial industry.
Current coupon
The term used to refer to all fixed-income securities paying interest at the rate currently required by purchasers for securities of that maturity and quality. Current coupon securities trade at or very near par.
Current coupon yield curve
See yield curve.
Current face
The total amount of the current principal outstanding of the loans in an MBS pool. The current face is always equal to the product of the original face multiplied by the current factor. Analogous to the par value of a conventional debt security.
Current factor
See factor.
Current liabilities
The group of liabilities considered to be the shortest term. Usually comprises accounts payable, short-term bank debt, bank overdrafts, other short-term accounts or notes payable, current portion of long-term debt, and a few minor items. The subgrouping of liabilities into current and long-term categories is common for all financial statements except for firms in the financial industry.
Current ratio
The ratio obtained when total current assets are divided by total current liabilities. A commonly used but not always good proxy for a firm's liquidity.
Current yield
(1) For bonds, a measure of the simple interest annual yield for investments with coupon rates and with maturities of one year or more. To calculate the current yield, the annual coupon interest income is simply divided by the amount paid to acquire the investment. It is important to note that the current yield is only accurate for investments purchased at par. The current yield calculation includes just one income cash flow - the annual coupon interest income. It ignores the profit or loss resulting from discounts and premiums.
(2) For stocks, the annual dividend income divided by the price per share.
Cushion bonds
An informal name for callable bonds with long maturities that have coupon rates well above current market rates. Because these bonds have such high coupon rates, they trade at prices and yields calculated to the call date rather than to the maturity date. This makes the cushion bond’s price less volatile. If prevailing rates remain the same, fall, or rise to any level not greater than the coupon rate, the bond will offer a competitive return. Even if rates do rise to exceed the coupon rate, the cushion bond offers a higher yield in exchange for its longer maturity since the premium paid at purchase can be amortized over a longer period.
CUSIP number
A nine-digit letter and number combination established by the Committee on Uniform Securities Identification Procedures (CUSIP) that is used to identify publicly traded securities. Each publicly traded security receives a unique CUSIP number when the security is issued.
Custodial agreement
A written contract establishing the responsibilities of a custodian who holds property. In finance, the custodian holds collateral for deposits with financial institutions, investment securities, or securities underlying repurchase agreements.
Custodial credit risk
The risk that a financial instrument owner will suffer a loss resulting from the default of a third party that holds the financial instrument. The third party might be a safekeeping agent or a secured creditor. The financial instruments are typically deposits or securities.
Customer identification program (CIP)
A proposed requirement under the Bank Secrecy Act that all financial institutions implement a written, risk-based customer identification program, maintain information used to verify identities and compare the names of new customers against government lists of known or suspected terrorists or terrorist organizations. The proposed rule would apply to all customers seeking to open new accounts.
Cyclical liquidity risk
A type of systemic liquidity risk. The risk of funding problems arising from national or regional macroeconomic corrections, such as recessions or credit crunches.