ABS – (1) Asset-backed security. ABS expresses principal prepayments as a percentage of the original number of loans and contracts in the pool of securitized loans that created the security.

Acceleration – Making demand for payment in full for a debt that has not yet matured. Usually, a remedy provided in a loan document for the lender to use in the event of default by the borrower.

Accounts Payable – A category of liabilities at represents funds due to creditors. Usually, accounts payable is due to trade creditors who have supplied goods or services without requiring immediate payment. Accounts payable is sometimes simply called payable. Accounts payable to trade creditors are sometimes called accounts payable trade, due to trade, or trade payables.

Accounts Receivable – An asset account that reflects amounts due from private persons or organizations for goods and services furnished. For corporations, accounts receivable excludes funds due from departments, but many include funds due from affiliates. For governments and nonprofit organizations using funds accounting, it does not include funds due from other funds owned by the same entity. A category of personal property defined by Article 9 of the UCC. Accounts receivable s the right to receive payment for goods sold or leased or for services rendered where those rights are not evidenced by an instrument or by chattel paper.

Accrual Bond – (1) Bonds that pay the investor an above-market coupon rate as long as the reference rate is between preset levels established at the time the security is issued. A type of structured note. Also called range bonds. (2) A type of CMO security that does not pay holders periodic interest in cash. Instead, periodic interest for these bonds is accrued. Its is added to the principal amount due to the holder at a later date.

Accrued Interest – Interest that has been earned by not yet paid. For example, the interest earned by a bondholder between semiannual coupon payments or the interest earned by a lender since that last monthly interest payment was collected from the borrower. Accrued interest for investment securities is calculated from the issue date or the last payment date up to but not including the settlement date. When a buyer purchases a bond, the buyer owes the seller the accrued interest in addition to the market price of the security purchased.

Accumulated Depreciation – The total of the periodic reductions for depreciation in fixed assets. Also called allowance for depreciation.

Adjustable-Rate Mortgage (ARM) – A loan for which the interest rate (coupon rate) is adjusted periodically to reflect changes in a previously selected index rate. ARMs may have caps and floors that limit the annual and/or the lifetime change in the coupon rate.

Amortization – (1) The process of making regular, periodic decreases in the book or carrying value of an asset. For example, when a bond is purchased at a price above 100, the difference between the purchase price and the par value, the premium, is amortized. Premiums are usually amortized in roughly equal amounts that completely eliminate the premium by the time the bond has matured or by the call date, if applicable. (2) Liquidation of a loan or security by means of periodic reductions. The principal amount of loans is amortized by the periodic, usually monthly, payment of a fraction of the principal calculated to repay the entire amount of principal due by the date of the last scheduled periodic payment. Amortization methods differ based upon the type of loan. Mortgage loans and securities usually have level payments of principal and interest. For such amortizations, the interest consumes most of the early payments and, therefore, principal amortization increase as the loan ages. Many business loans use a level amortization with roughly equal principal reductions from each periodic payment.

Annual Percentage Rate (APR) – The total financing costs associated with a loan on an annualized basis, divided by the amount borrowed.

Annual Percentage Yield (APY) – A precisely calculated measure of yield paid on a bank deposit account(s).

Appraisal – A statement or estimate of the market value of tangible personal property or real estate. Under the federal appraisal regulations for real estate pledged to secure loans, the term “appraisal” refers to a statement of market value that meets the five specific standards. See complete appraisal, evaluation, and limited appraisal.


Bank Secrecy Act (BSA) – More formally known as The Financial Record keeping and Reporting of Currency and Foreign Transactions Act of 1970. Designed to aid the federal government in detecting illegal activity through tracking certain monetary transaction. Requires financial institutions, broker-dealers, casinos and money services businesses to file reports of suspicious transactions. Also establishes certain exemptions to the currency transaction reporting requirements. The corresponding BSA regulations is found at 31 C.F.R. Part 103. See also USA PATRIOT Act which is substantially amended this statute in 2001.


Certificate of Deposit (CD or Term Share) – A deposit of funds, in a bank or savings and loan association, for a specific 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.


Fannie Mae – An informal name for the Federal National Mortgage Association (FNMA) or for securities issued by it.

Federal Home Loan Bank (FHLB) – A U.S. government-sponsored enterprise. Twelve district banks and a Federal Housing Finance Board created by the U.S. government and owned by member financial institutions. The main purpose of the system is to provide loans to members for the accommodation of home lending.

Fee Appraiser – An individual qualified under federal rules to perform real estate appraisals. Unlike a staff appraiser, a fee appraiser is not employed by the financial institution contemplating the extension of credit to be secured by the property to be appraised.

FHA – Federal Housing Administration.

Financial Statement – Collective name for historical financial reports of assets, liabilities, capital, income, and expense.

Foreclosure – A remedy provided by state law for creditors secured by an interest in real property to obtain title to the property under certain conditions.

Forwards – Contracts for the sale/purchase of a specified quantity of a financial instrument, currency, or commodity at an agreed-upon price on a given future date. Unlike an option, a forward contract obligates both parties to consummate the transaction. Forwards are very similar to futures – the principal difference is that futures are almost always exchange traded while forwards are traded over the counter.

Futures – Contracts for the sale/purchase of a specified quantity of a financial instrument, currency, or commodity at an agreed-upon price on a given future date. Futures are often used in hedging. Unlike an option, a futures contract obligates both parties to consummate the transaction. Futures are very similar to forwards – the principal difference is that futures are almost always exchange traded while forwards are traded over the counter.


Hedge – (1) Verb – To reduce risk or behavior that reduces risk from future price movements. (2) Noun – A transaction undertaken to reduce risk by offsetting the risk in another transaction. The risk in on position is hedged by counterbalancing it with the risk in another transaction. The values of each position must change inversely and with a high degree of correlation. Hedges may be cash to cash in which a position in a cash instrument such as a loan or investment reduces or offsets the risk in another cash position such as a deposit. For example, a $1,000,000 invest in a U.S. Treasury bond maturing in 10 years and a $1,000,000 certificate of deposit are largely (but not completely) offsetting risks. Hedges may also be cash to futures or futures to futures.

Hold – A process by which a bank restricts funds deposited by checks. Usually but not always used to restrict the proceeds of checks drawn on the other banks until the funds have been transferred by the drawor’s bank to an account that the depositor’s bank maintains with the Federal Reserve.


Jumbo CDs – An informal name for certificates of deposit of $100,000 or larger. In order to include accrued interest within the $100,000 federal deposit insurance coverage, some banks issue $98,000 jumbo CDs.


Leverage – The amount of the owners’ or stockholders’ money relative to the money that lenders, suppliers and others have contributed to the firm. The ratio of owners’ money to other peoples’ money.

Lien – An interest or encumbrance held by a creditor in a debtor’s real or personal property for the satisfaction of a debt. The lien may arise as a result of a consensual contract between the debtor and the creditor such as a security agreement or a mortgage. Alternatively, liens may be established by courts or by statutes.

Line of Credit – A type of credit facility. The specific meaning of the term varies from bank to bank. Since the various uses often cause confusion, two definitions are presented here. (1) A type of loan that permits a borrower to draw funds, up to a specified maximum, for a defined period of time. Sometimes called a non revolving line or credit. (2) Any loan that permits the borrower to borrow funds up to a specified maximum, make repayments in any amount at any time, and obtain any number of re advances so long the maximum is not exceeded. Sometimes called a revolving line of credit. The distinguishing feature of a line of credit is that it rebounds, which means that the amount borrowed can be paid down and re borrowed, or re advanced, as the borrower’s needs change.

Liquidity – Both the capacity and the perceived capacity to meet all obligations whenever due and to take advantage of business opportunities important to the future of the enterprise. The capacity and the perceived ability to meet known near-term and projected long-term funding commitments while supporting selective business expansion.


Market Value – The value of a financial instrument based upon he price at which a financial instrument is purchased or sold or the price at which it could presumably be purchased or sold. For an equity instrument, the product of the number of shares times the market price. For a debt instrument, the product of the par or current face times the market price.

Maturity Date – The date a financial instrument’s contractual term expires. The date on which the principal or last principal payment on a debt is due and payable.

Money Market – The aggregation of buyers and sellers actively trading money market instruments.

Mortgage – (1) noun – A legal instrument that creates a lien upon real estate for the purpose of securing a debt. The instrument is executed by a lender and a borrower or guarantor as collateral for the payment of a debt that creates a lien on real estate owned by the borrower or guarantor. The borrower or guarantor is called the mortgagor and the lender is called the mortgagee. In some states, a different legal instrument called a deed of trust fulfills a similar function even through it is not legally the same.


P & I – Principal and interest as in the principal and interest required for periodic loan repayments.

Preferred 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. Has a higher priority claim to corporate earnings or assets than common stock but lower priority than corporate debt. A corporation may issue more than one class of preferred stock with differing priority status such as first or second preferred. Often preferred stock issues have a defined dividend payment rate as long as there are sufficient corporate earnings to distribute.

Principal – The remaining balance owed on a loan by a borrower or on a security by its issuer, exclusive of any accrued interest.


Quick ratio – A commonly used, but not always accurate, proxy for a firm’s liquidity. The quick ratio is calculated by subtracting inventory from current assets and then dividing the results by current liabilities. Sometimes called the acid test ratio.


Rate – The cost of debt service paid by a borrower or issuer to a lender or investor. The rate is expressed as an annual percentage of the amount borrowed. For some notes and bonds that pay interest semiannually, the semiannual interest due to the invest used to be evidence by a coupon that could be detached and sent for collection. Thus the cost to the issuer for notes and bonds paying semiannual interest is often called the coupon rate. Lenders or investors may receive a yield that is higher or lower than the rate.

Residual – (1) For sequential-pay CMO structures, a residual tranche is the CMO tranche that receives the excess cash flow that remains after all of the payments due to the holders of other tranches and all the administrative expenses have been met. When the residual is an accrual bond, it is often called a Z tranche or a Z bond. (2) In REMIC CMO structures, one class of each issue must be designated as the residual for tax purposes. Some REMIC residual do not meet the traditional definition of a residual as the last tranche to be retired.

Retainage – The portion of the payment due to a contractor or equipment builder that is withheld until final inspection and acceptance of the work. Also called a holdback.

Retained EArnings – Earnings of a corporation from the current as well as prior years that have neither been distributed to the shareholders as dividends nor transferred to the surplus account. Corporate earnings accumulated over time. One of a corporation’s equity or capital accounts.

Return on Assets (ROA) – A percentage calculated by dividing net income after tax by total assets. Annual income is usually used in the numerator; however, the annualized income for a month, quarter, or half year can be used. Period-end assets is often used in the calculation; however, average assets for the period is more accurate. This ratio is a measurement of how profitability assets are used in an enterprise. Firms in different industries usually have quite different returns on assets. This ratio is best used to compare firms in the same industry.

Return on Capital – The return earned by an investor from a specific investment or group of investments measured in terms of a percentage return on the amount of capital invested.

Return on Equity (ROE) – A measure of the return realized by the owners of an enterprise. Calculated by dividing an enterprise’s annualized net income by its average capital for the period. Alternatively, it can be calculated by multiplying the enterprise’s ROA by its leverage/equity multiplier. ROE indicates how effectively the enterprise is using its capital to produce income.

Roll over – The paying off of existing debt, usually debt about to mature, through the issuance of new debt. Can also refer to the rolling over of an investment, such as a certificate of deposit at maturity, to another investment.


SEC – Securities and Exchange Commission.

Secondary Market – Markets for the purchase and sale of any previously issued financial instrument. The first scale of a financial instrument by the original issuer is said to be made on a primary market. All subsequent trades are said to be secondary market.

Spread – (1) noun – The difference between two prices or two rates. Different users have many different and highly specific usages of this term. For example, traders use spread to mean the difference between bid and asked prices for a security. Underwriters use spread to mean the difference between the price realized by the issuer and the price paid by the investor. Bank analysts use spread to mean the difference between the average rate paid on a bank’s assets and the average rate paid on the bank’s liabilities. In connection with the use of the term spread by bank analysts, see net interest margin. In ALM, when spread is used as a noun it most often refers to the difference between two rates or yields. (2) noun – Financial analysts, credit analysts, and lenders use the term spread to refer to a financial statement that has been converted to a standard format for purposes of analysis or comparison. (3) verb – In ALM, most often means the disaggregation of a quantity. For example, he total amount of certificates of deposit on a bank’s balance sheet may be spread into different time intervals buckets on a gap report. (4) verb – The process of reformatting financial statements for the purposes of analysis or comparison.

Statement Savings Account – A savings account which does not provide the depositor with a passbook. Instead, the depositor receives a monthly or quarterly statement from the bank.

Sustainable Growth Rate – One term used to describe the maximum rate at which a firm’s sales can grow without straining the capacity of the firm’s financial condition. This term is closely associated with a formula of the same name.


Termination – 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.

Time Deposit – A deposit with a specific maturity. Usually, but not always, a certificate of deposit.

Time Value – The portion of an options 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.

Trading – (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 included provisions that restrict investors’ ability to transfer assets from the trading category to available-for-sale (AFS) or held-to-maturity (HTM).


Underwriter – The investment bank, commercial bank, or brokerage firm that works with an issuer to sell a new issue. Issuers may select underwriters by obtaining bids or on a negotiated basis. Potential underwriters may form groups called underwriting syndicates to bid collectively.

Underwriting – The name used to describe the process of analyzing and structuring a proposed loan. Good underwriting is the most important aspect of secured lending. Outside of banking, the term primarily refers to the purchase of risk.

UCC – A compilation of laws relating to commercial contracts involving personal property. The code does not address real property. In addition a few types of personal property are also excluded. While the UCC has been adopted by all 50 states, there are difference among the versions adopted in each state. Secured lenders tend to focus on UCC Article 2A covering leases, Article 8 covering securities, and Article 9 covering all other personal property collateral.


Volatility – The rate of change in a variable. More formally, a statistical term to quantify the dispersion of variables such as rates or prices around the mean. A measure of the variability of the price of an underlying financial instrument, rate, commodity, or currency. Volatility only measures the quantity of the change – not the direction. Volatility is not influenced by the direction of the change; it does not matter whether the price rises or falls. Volatility is often used as a proxy for riskiness.


Wire transfers – One of the two major methods of electronic funds transfer. only the payer can originate the remittance. A wire transfer’s information format is completely flexible, but this flexibility adds significantly to the bank’s labor costs and results in much higher fees.

Withdrawals – 1) Any reduction in funds maintained in a deposit account of mutual fun. 2) Funds of a proprietorship or a partnership that are directly removed from the firm by the proprietor or partners. These are distributions distinct from salary, commission, bonus, or rent payments paid to proprietors or partners.


Yield – The annual return on an investment expressed as a percentage on an annual basis. For interest-bearing securities, the yield is a function of the rate; the purchase price; the income that can be earned from reinvestment of income received prior to maturity, call, or sale; and the time from purchase to maturity, call or sale. Different formulas or methods are used to calculate yields.

Yield-to-Maturity (YTM) – The annual percentage yield of a security calculated in a specific manner. The yield-to-maturity is the single discount rate that, when applied to all future interest and principal payments, produces a net present value equal to the purchase price of the security.

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