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Banker's Glossary


See banker's acceptance.

Back-end load
A form of sales charge imposed on investors by some mutual funds. These charges may be called back-end loads, deferred loads, deferred sales charges, contingent deferred sales charge (CDSC), or redemption fees. Regardless of the name, funds with deferred sales charges are simply one form of load funds. These funds offer investors the opportunity of paying a sales charge later rather than paying one at the time of purchase. The main advantage is that earnings from the investment in a deferred charge fund are paid on the full amount of the investor’s principal. In contrast, earnings in a fund with an front-end load are only paid on the net amount of the investor’s principal after the front-end charge is deducted. A second, potentially significant, advantage, is that deferred sales charges often decrease as the investor’s holding period lengthens. See front-end load, load, and no-load.

Unfilled orders for goods or services. Orders for goods or services that the company has not yet delivered or rendered to its customers.

In general, the process of comparing predictions from a forecasting model to observable data. A model may be run using historical inputs after which the mode's forecast is compared to the actual outcomes observed for the forecasted period. In practice, either final model outputs or intermediate calculations may be backtested. Backtesting is often inexact because of the impact of extraneous events on the observable data.

Bad delivery
A delivery of securities that does not fulfill the requirements for good delivery. See good delivery.

Bailment for hire
A safekeeping agreement between a safekeeping institution and its customer. A contract whereby a third-party bank or other financial institution, for a fee, agrees to exercise ordinary care in protecting the securities held in safekeeping for its customers.

Balance sheet matching
The (discredited) process of "assigning" groups or quantities of liabilities to groups or quantities of assets. Sometimes described as the identification of "mini-banks" within the bank.

Balloon loan
A loan for which the final payment, larger than all of the previous, regularly scheduled payments, is due in a lump sum before the loan is fully amortized. The final payment is called a balloon payment.

Balloon mortgage
A mortgage loan with a balloon payment. Typically, the balloon payment is due 10 or 15 years after the loan is made.

Balloon payment
A contractually required loan payment, almost always the final payment, that is larger than the other contractually required, periodic loan payments. Results from the fact that required, periodic loan payments are too small to fully amortize the loan balance by the maturity date.

See bond anticipation note.

The PSA range within which certain performance measures such as yield and average life are set for a CMO tranche. This range is expressed in terms of PSA speeds. Differences between predicted speeds and the actual speeds subsequently experienced can cause bracket creep.

Band of investment
A method of determining a cap rate that blends the return or cash flow required by an equity investor with the return or interest rate required by the debt lender. Also called cash flow method.

Bank 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 collection float, check-clearing or transit float. Not the same as float.

Bank name risk or Bank name liquidity risk
See bank-specific liquidity risk.

Bank Secrecy Act of 1970 (BSA)
More formally known as The Financial Recordkeeping and Reporting of Currency and Foreign Transactions Act of 1970. Designed to aid the federal government in detecting illegal activity through tracking certain monetary transactions. 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 regulation is found at 31 C.F.R. Part 103. See also USA PATRIOT Act which substantially amended this statute in 2001.

Bank services contract
A contract with a bank outlining the responsibilities of the bank and the bank’s customer.

Bank-specific liquidity risk
One of three main types of liquidity need environments. The risk that a bank might experience a funding crisis resulting when one or more events or problems applicable just to the bank cause funds providers to lose confidence in the bank. Also know as internal liquidity risk or bank name risk. See liquidity in the ordinary course of business and systemic liquidity risk.

Banker's acceptance (BA)
A short-term financial instrument that is the unconditional obligation of the accepting bank. Banker’s acceptances, or BAs, arise from transactions involving the import, export, transit, or storage of goods, including domestic as well as international transit. For investors, it is very important to realize that the underlying transaction that gives rise to a BA is almost completely irrelevant to the credit quality or the liquidity of the instrument. The actual BA is created at a late stage in the underlying transaction when a bank accepts its obligation to pay the holder of the accepted draft. In other words, when the transaction becomes a BA it becomes an unconditional obligation of the accepting bank. From an investor's point of view, a BA is a bank obligation that has at least the same credit strength as any CD issued by the same bank. Typically, BAs are stronger than CDs because, in addition to the credit strength of the accepting bank, BAs are backed by the credit strength of a drawer; an endorsing bank, if one is involved in the transaction; and usually by the pledge of documents representing ownership of the trade goods and insurance on the goods. BAs do not, however, carry federal deposit insurance. BAs are considered safe, liquid, short-term money market investments. For bank holders of BAs, an additional issue is called eligibility. See eligible banker's acceptances.

A maturity pattern within a portfolio in which maturities of the portfolio assets are concentrated in both the short and long ends of the maturity spectrum with substantially smaller holdings of assets with intermediate-term maturities.

Basel II
The common name for capital guidelines issued by the Bank for International Settlements (BIS) located in Basel, Switzerland. The Basel II capital guidelines replace previous, much simpler, BIS guidelines. The guidelines are developed by an international committee of banking regulators and implemented by rules issued by the national regulators.

Risks, under Basel II, are regulated in three general ways called "pillars". Pillar I calls for explicit capital allocations. Credit risk and operations risk fall under pillar I. Pillar II calls for supervisory review of capital adequacy. Interest rate risk and liquidity risk fall under pillar II. Pillar III calls for public disclosure. All risks fall under pillar III.

Basel III
Revised capital and liquidity risk rules published by the Bank for International Settlements. The rules include a quantitative requirement called liquidity coverage ratio (LCR) and a requirement called net stable funding ration (NSFR).

Basic indicator approach
One of three methods for quantifying capital required for operational risk under proposed Basel II capital rules. Banks using the basic indicator approach must hold capital for operational risk equal to the average over the previous three years of a fixed percentage of positive annual gross income. Based on the questionable assumptions that losses from operational risk are closely proportionate to gross income. See also Standardized Approach, Advanced Measurement Approaches and operations risk.

Basic indicator approach
One of three methods for quantifying capital required for operational risk under proposed Basel II capital rules. Banks using the basic indicator approach must hold capital for operational risk equal to the average over the previous three years of a fixed percentage of positive annual gross income. Based on the questionable assumptions that losses from operational risk are closely proportionate to gross income. See also Standardized Approach, Advanced Measurement Approaches and operations risk.

(1) The difference between rates or prices of assets that are related but not identical. For example, the difference between the cash price and the futures price of a security. Sometimes called spread.

(2) The difference between the price of a futures contract and the price of the underlying.

(3) The number of days in a bond coupon period. See day basis.

Basis point
A unit of measurement for interest rates or yields that is expressed as a percentage. One-hundredth of one percent. One hundred basis points equal one percent.

Basis risk
The risk to a holder of financial instruments that a change in prevailing interest rates will not affect the prices of or yields on similar instruments in exactly equal amounts. For example, an increase in prevailing interest rates might raise 3-month U.S. Treasury yields by 100 basis points while 3-month certificate of deposit yields go up by only 85 basis points. One of the four primary components of interest rate risk. Sometimes called spread risk.

Basis swap
A type of interest rate swap in which the net cash flows that the parties agree to exchange are based upon the differences between two different interest rate indexes. Banks use basis swaps to hedge basis risk by locking in a net interest rate spread between a variable rate cost of funds tied to one index and a variable rate asset tied to a different index. See interest rate swap and swap.

The holder of an instrument.

Bearer bonds or stocks
Securities owned by and payable to whomever holds the physical certificate. Securities without a registered owner.

Behavioral assumptions
Forecast assumptions about future deposit, loan or other balance changes where the change is the result of customer decisions to exercise options or to renew maturing instruments.

(1) A standard of comparison used for judging performance. For example, the return from a bond portfolio may be compared to the return from a benchmark instrument or portfolio. In this context, a nearly risk-free benchmark or one that closely matches the risk in the bond portfolio may be selected.

(2) The process of comparing a forecast or simulation to a standard for the purpose of evaluating the accuracy of the forecast or simulation. For example, the forecasted change in net income projected by an ALM simulation model may be benchmarked by comparing that forecast to subsequent earnings. Also called benchmarking.

(3) See index.

Beneficial owner
The party that receives all of the benefits or rights of an owner of a security even though the legal ownership of the security is recorded in the name of a broker or a bank in street name.

Bermuda option
An option that allows the issuer of a security to call the security at discrete points in time after a certain date. Also known as a modified American option. See American option, European option and Asian option.

A Greek letter used by mathematicians to label the degree of sensitivity to changes in one variable to changes in another. The name for correlation of the changes.

Beta-adjusted gap
Gap reports modified to mollify the errors caused by basis risk. The essential concept of beta-adjusted gap is that all interest rates do not change by the same amounts, but that there is an identifiable relationship, a correlation, between changes in various interest rates. Some rates are more sensitive to change than other rates. In beta-adjusted gap analysis, the volumes of assets and liabilities subject to repricing are weighted to reflect the historical sensitivity of the yields or costs of those assets and liabilities relative to some benchmark yield or cost.

See bond equivalent yield.

Bid or bid price
The trading price acceptable to a prospective buyer of securities.

Big board
Informal name for the New York Stock Exchange.

Bilateral netting
A legally enforceable arrangement between two parties to two or more swaps that creates a single legal obligation covering all of the individual swap contracts. This means that the size of the risk that one party is exposed to for the default or insolvency of the counterparty is net of all of the positive and negative values of the contracts included in the bilateral netting arrangements. Parties that engage in numerous swap contracts may use bilateral netting agreements to be able to recognize only the net sum of their obligations rather than the gross total of the individual swap contracts. Bilateral netting is also used by a party that wishes to cancel a swap contract, in which case the party can enter into a new swap that is an equal but offsetting swap with the same counterparty. The two parties can then enter into a bilateral netting agreement under which the two equal but offsetting swap contracts net to zero.

Billing cycle
The number of days between statement dates.

Billing float
Float resulting from delays in billing or in the payor’s response to those bills. For governments, can also occur if payor taxpayers drag their feet in filing self-assessed taxes. When due dates are fixed, an easy measure of billing float compares the date paid to the date due.

Billings in excess of cost
A liability created under a type of accrual accounting used when firms such as contractors bill their customers in accounting periods for costs that they incur in subsequent accounting periods.

See Treasury bills.

A preliminary, temporary insurance agreement that obligates the insurance company to pay the insured if the loss insured against occurs after the binder is issued but before the insurance policy is issued.

Black Scholes model
A model used to value options. This model was developed in 1973 by Fischer Black and Myron Scholes. While not the only sophisticated, mathematically derived model for valuing options, it was the first, and it remains the best known.

Blanket lien
An informal term meaning a lien on all of the debtor's current and subsequently acquired personal property assets.

Blue list
Informal name for a daily Standard & Poor's publication titled the Blue List of Current Municipal Offerings.

See Bond Market Association.

Acronym for "bank-owned life insurance".

(1) A debt security. Sometimes used only in reference to long-term debt securities. Sometimes called a fixed-income security even though many bonds have floating interest rates.

(2) A guarantee provided by a surety or insurance company. For example, fidelity bond, indemnity bond, performance bond, or payment bond.

bond anticipation note (BAN)

A short-term note sold by a public entity that will be repaid from the proceeds of an anticipated bond issue.

Bond equivalent yield
An annual yield, expressed as a percentage, describing the return provided to bond holders. A bond equivalent yield is double the simple interest, semiannual yield. Since Treasury and agency notes and bonds, as well as most corporate and municipal bonds, pay interest semiannually, the bond equivalent yield is a way to compare yields available from discount securities such as Treasury bills and BAs with yields available from coupon securities. From that usage, this yield measure is also known as the coupon yield equivalent or the equivalent bond yield. For securities that pay daily, monthly, or quarterly interest, the bond equivalent yield understates the benefits obtained from the compounding of income.

Bond indenture
A document that sets forth the terms of a bond issue, the obligations of a bond issuer, and the rights of the bond holders. The bond indenture is a contract between the company that issued the bonds and the bond trustee acting on behalf of the bond holders. Bond indentures may include a variety of provisions and thus define and create the differences in term and risk.

Bond insurance
Credit support for a bond or a tranche in a multi-tranche debt security. The credit support is provided by an external, third party - usually an insurance company that specializes in financial guarantees.

Bond Market Association (BMA)
An industry trade organization for U.S. broker/dealers. Among other things, the BMA has developed standard documentation for repurchase agreement transactions and for describing prepayments received from MBSs. Formerly known as the Public Securities Association (PSA).

Bond swap
The simultaneous, or nearly simultaneous, purchase of one debt security with the proceeds from the sale of another debt security. The swap is done after the investor has conducted an analysis showing that the debt security being purchased has more desirable characteristics than the debt security being sold.

Bond value (for convertible securities)
See investment value (for convertible bonds).

(1) Either the process of obtaining or the state of having a fidelity, indemnity, performance, payment, or similar bond. In commercial construction financing, bonding usually refers to a contractor’s performance bond. For employees of financial institutions, bonding usually refers to fidelity bonds. See fidelity bond, payment bond and performance bond.

(2) Refinancing short-term debt with long-term debt is sometimes called bonding out.

Book entry
The nonphysical record of ownership, custody, and transfer of securities through electronic means. The system for settlement, delivery, and custody of uncertificated securities.

Book entry securities
Stocks, bonds, other securities, and some certificates of deposit that are purchased, sold, and held with only manual or computer accounting entries rather than transfers of physical certificates to evidence the transfer. Typically, instead of a physical certificate or instrument, buyers only receive receipts or confirmations as evidence of their ownership.

Book value
The value at which an asset is carried and reported on the owner’s balance sheet. For debt securities, the current book value may be the purchase price plus accretion (in the case of securities purchased at a discount) or the purchase price minus amortization (in the case of securities purchased at a premium). Book value may differ, perhaps significantly, from market value.

For financial risk mangers, bootstrapping means (1) the procedure where coupon bonds are used to generate the set of zero-coupon bond prices, or (2) the use of historical returns to create an empirical probability distribution for returns. Bootstrapping is an iterative calculation technique, often used in the construction of specialized time series. For example, the calculation of forward rates from traditional yield curves uses an iterative process to extract the implied rate for each forward period. The term is used in other ways in other contexts.

An informal term used to describe the curvature in a yield curve.

Break-even point
(1) The price level at which income equals expense.

(2) The expense level at which expense equals income.

(3) The market price of a financial instrument that just equals the purchase price plus cost of carry for an investor owning that instrument.

(4) The price level of a call option that equals the sum of the exercise price plus the premium paid to acquire the option, or the price level of a put option that equals the exercise price minus the premium.

Break-even interest rate
The maximum interest rate that a firm or property can pay from available cash flow and still have enough cash flow to make all required principal and interest payments.

Break-even occupancy
The minimum occupancy level of a commercial real estate property that will generate enough cash flow to make all required principal and interest payments.

Break-even prepayment rate
The specific prepayment rate (speed) at which the yield of a mortgage security is equal to the yield available from another security to which it is being compared.

Break-even sales

The minimum sales level that a firm must achieve in order to generate enough cash flow to make all required principal and interest payments.

Break-even time (for convertible securities)
The amount of time before the higher yield on the convertible bond compared to an otherwise similar nonconvertible bond compensates the investor for the excess cost of the convertible over the common stock. Usually calculated by using current yields rather than the coupon and dividend rates.

Bridge loan
Bridge financing
A short-term loan to enable the borrower to purchase an asset where the loan is to be repaid from the proceeds of the sale of an asset being replaced by the asset just purchased. In consume loans bridge loans may be used to enable the cons8umer to buy a new house before selling her current house. Also commonly used investment banking for project finance, buyouts and other large transactions.

A party who brings buyers and sellers together. Brokers do not take ownership of the property being traded, but rather they are compensated by commissions. Brokers are not the same as dealers; however, the same individuals and firms who act as brokers in some transactions may act as dealers in other transactions.

Brokered deposits
Bank deposits solicited by a third-party broker. Usually but not always deposits for some amount slightly below $250,000 so that all interest as well as principal is covered by deposit insurance. Brokers are typically paid a fee by the depository bank.

See Bank Secrecy Act.

In gap reports, the predefined time interval groups are often called buckets. The buckets can be defined to represent whatever time units a bank wants to see in its gap reports. The time intervals can be single months or years. Smaller buckets, such as one-month buckets, give more detail, which in turn can provide a more accurate measure of interest rate risk. On the other hand, smaller buckets can require a greater number of buckets to show the interest rate risk far enough into the future for prudent analysis. Often, one-month buckets are used for the first six or twelve months with larger time intervals used as buckets for later periods.

Builder’s risk insurance
Insurance covering perils resulting in loss caused by the builder's operations on the borrower's property. Usually required by property owners and by construction lenders when a contractor is hired to make improvements in an existing building or to construct a new building.

Building code
Laws, usually but not always enacted by local government units, that set safety and fire protection standards. These codes affect the materials and methods used in the construction of buildings. For example, a code provision might require sprinkler systems in motel rooms.

Informal term used by some lenders to describe a provision in a line of credit promissory note that allows for a temporary increase in the maximum amount that can be borrowed under the line of credit. A bulge is particularly suited to loans to firms with seasonal increases in sales.

Bullet loan
A name occasionally used to describe a promissory note used for transactions that do not require any principal to be repaid until the maturity of the note. Interest is usually due periodically prior to maturity. Most often used to describe loans with time periods of at least one year.

Bullet security
An instrument that repays the full principal at maturity.

Busted convertible
A convertible bond trading so far below its conversion value that it trades on investment value alone, meaning it has value only as a bond. It has essentially no equity value.

Busted PAC
Planned amortization class tranches in collateralized mortgage obligations for which the companion or support tranche has been completely retired by larger than expected prepayments from the underlying mortgage loans. Because the companion or support tranche is no longer outstanding and can therefore no longer absorb future prepayments, the maturity of the PAC tranche(s) may be shorter than expected. See stressed PAC.

Butterfly call spread
One of the more well known option trading strategies. A complex option trading strategy using puts and calls with different maturity dates and different strike prices. An option strategy designed to profit from stable or decreasing volatility.

A lump sum payment made to a creditor by a borrower or a third party to reduce the amount of some or all of the borrower's periodic payments to repay the indebtedness.

A form of secured, short-term investment in which a security is purchased with a simultaneous agreement to sell it back to the seller at a future date. The purchase and sales agreements are simultaneous but the settlement dates for the transactions are not. The purchase is a cash transaction while the return sale is a forward transaction since it occurs at a future date. A buy/sellback is very similar to a reverse repurchase agreement, except that in a buy/sellback the investor is compensated by the difference between the purchase price and sales price rather than by interest. Unlike a reverse repurchase agreement, a buy/sellback probably does not include a haircut or collateral margin. Furthermore, the buy/sellback may be treated differently in the event of the buyer’s bankruptcy. Every transaction that is a buy/sellback from the buyer/lender’s point of view is, by definition, a sell/buyback from the seller/borrower's point of view.

Buyer in the ordinary course of business
A purchaser who buys inventory from a seller who is in the business of selling that type of inventory.