The phenomenon or the result of a declining volatility trend.
Obtaining information about customers or groups of customers from a data warehouse for marketing or other purposes.
A computerized database composed of data extracted from the data processing and accounting systems used for various bank deposit, loan, and other customer products. Typically, data is extracted from the various product systems, balanced, scrubbed, and converted into a standardized, readily accessible format.
Receivables created by invoices that do not require the account party to pay until some date in the future. Sometimes called datings.
See accrual convention.
Day count basis
See accrual convention.
A negative position in a bank's Federal Reserve account that occurs at any time during the business day.
The level of inventory expressed as its equivalent in days of a portion of cost of goods sold for the year. Calculated by multiplying inventory by 365 and then dividing that product by cost of goods sold.
The level of accounts payable expressed as its equivalent in days of a portion of cost of goods sold for the year. Calculated by multiplying accounts payable by 365 and then dividing that product by cost of goods sold.
The level of accounts receivable expressed as its equivalent in days of a portion of net sales for the year. Calculated by multiplying accounts receivable by 365 and then dividing that product by net sales.
See demand deposit.
A firm or an individual who buys and sells for his own account. A dealer has ownership, even if only for an instant, between a purchase from one party and a sale to another party, and is thus compensated by the spread between the price paid and the price received. Not the same as a broker, although an individual or firm may act as either a broker or a dealer in separate transactions.
Retail installment sales contracts, often for automobiles, that are sold or pledged to a third party, usually a financial institution. See chattel paper.
Unsecured, long-term corporate bonds. Even though debenture holders are not protected by collateral, they still have a legal right to repayment. In the event of default, debenture holders are treated like other unsecured creditors. In addition, debenture holders may benefit from indenture restrictions.
Funds owed by a debtor to a creditor. Outstanding debt obligations are assets for creditors and liabilities for debtors. May or may not be covered by written agreements.
See debt service coverage.
Any financial instrument representing a creditor relationship between the issuer (the debtor) and the holder of the instrument (the creditor). This generally includes all U.S. Treasury securities, municipal securities, corporate bonds, convertible debt, commercial paper, and securitized debt instruments such as CMOs and REMICs. Debt securities are usually not defined to include option contracts, futures contracts, forward contracts, lease contracts, or nonsecuritized loans.
A term used to refer to the amount of principal and interest payments required by a borrower's loans or securities issued. Also used as a verb to describe making such payments.
Debt service coverage ratio
A simple comparison of the cash available to make principal and interest payments to the bank or to bond holders with the amount of those required principal and interest payments. Debt service coverage is expressed as a ratio with the annual net income divided by the annual debt service requirement.
Debt service coverage (DSC)
The margin by which all of a borrower’s or bond issuer's required principal payments (not just those for the loan under consideration or just those for loans to one bank) are exceeded by the sum of the firm's cash flow plus all of the principal repayments and interest expense deducted in the process of calculating that cash flow.
Debt sinking fund
See sinking fund.
Tranches in a multi-class security that have seniority ranking, for repayment, ahead of equity trances. See collateralized debt obligation (CDO), equity tranche and waterfall.
The simplest way to measure leverage. Calculated by dividing total liabilities by total equity.
(1) A party who owes money or other performance to another party. Under the UCC, debtor includes the seller of accounts or chattel paper.
(2) For the purposes of UCC provisions dealing with collateral, debtor also applies to the owner of collateral given as security for the debt of another.
Debtor in possession
In some bankruptcy proceedings, the debtor, rather than a trustee, may continue to operate the business. The debtor in possession is the same person or company that controlled the business prior to the bankruptcy, however, the debtor in possession is a different legal entity.
Statistical analysis of the rate of attrition. Decay analysis is used to analyze historical volatility of core deposit volumes, specifically rates for withdrawals and account closures. Deposit decay rates should be calculated by tracking a representative sample of accounts over a period of time that covers at least one interest rate cycle. Such volatility studies have been used by banks for many years to determine effective maturity assumptions that are then employed in present value analysis to calculate core deposit values for deposit purchases, branch acquisitions, and bank acquisitions.
The page in an insurance policy that contains all, or almost all, of the policy information specific to that particular insurance policy. The declaration page typically includes the name of the insured, the identification of the insured property, the amount of the insurance coverage, the expiration date of the policy, and the name of any lender with an interest in the insured property.
Deed in lieu of foreclosure
A deed executed by the mortgagor that transfers ownership in real estate to a lien creditor. This instrument is used when the debtor is unable or unwilling to pay and wishes to avoid foreclosure.
Deed of trust
A three-party document conveying interest in property, almost always real estate, to a trustee. In many states, deeds of trust are used instead of mortgages. In those states, the trustee holds the deed in favor of the lender and then reconveys the title to the borrower when the loan is paid in full. Sometimes called a trust deed.
A large discount for a financial instrument. The condition that exists when a financial instrument is trading at a market price that is well below its par value. May also be used to refer to those securities selling at prices well below par.
Deep in the money
A phrase used to describe an option with a high intrinsic value resulting from the fact that the market value of the underlying instrument is well below (for a call option) or well above (for a put option) the strike price of the option.
(1) noun — A condition in which a loan or investment is not performing as expected because of the debtor's failure to act or refrain from acting in ways contractually agreed upon. As in "the loan is in default" or "an event of default."
(2) verb — A debtor's failure to act or refrain from acting in ways contractually agreed upon in the loan documents. Most often, default is the debtor's failure to pay.
An alternative higher rate of interest or a premium specified in a loan document to be added to the contractual rate of interest that can be charged by the lender if the borrower is in default.
The risk arising from the chance that debtors will not make promised payments either on time or in full. Also called credit risk.
The legal release of a debtor from being the primary obligor under the debt, either by the courts or by the creditor. Also called legal defeasance. See in-substance defeasance.
Costs capitalized as assets on a firm's balance sheet for expenses such as long-term expenses that will not be recovered in the normal working capital cycle of the business or expenditures that will be charged to future operations. Examples include costs of rearranging equipment in a factory and capitalized research costs.
See back-end load.
Deferred sales charge
See back-end load.
Deferred tax asset
An asset reflecting a likely reduction in future income taxes. Accounting for deferred tax assets is governed by FAS 109.
A liability account that reflects the accumulated difference between the amount of income tax that the firm shows each year as an expense on its financial statements and the amount of income tax, usually lower, that the firm pays to the government.
Defined benefit plan
A pension or other employee benefit plan that provides specified amounts of benefits to eligible participants. The specified amounts of benefits are usually determined based upon age, years of service, and/or levels of compensation.
Defined contribution plan
A pension or other employee benefit plan that provides a specified contribution amount for the benefit of eligible employees. The participants ultimately receive amounts that depend on both the accumulated contributions and the investment returns realized from investment of the accumulated contributions.
Lag times. The amount of time before the owner of a MBS receives payments from the underlying mortgages. The time between when the underlying mortgagors make their payments to the servicers and when those payments are due to the MBS investors. Delay days may refer to either stated delay or actual delay days. Stated delay days is the number of days from the issuance of an MBS pool or from the beginning of the interest accrual period until the first payment remitted to the investors who own the right to receive the cash flow. For example, a GNMA MBS pool with a stated delay of 45 days would pay interest accrued in January to security holders on February 15. Actual delay days is the monthly lag, measured in days, between the date the payments are due from a mortgage loan borrower and the date that the pro rata share of those payments is remitted to the MBS investors who own the right to receive the cash flow. Thus, since the January payment is not due until February 1, GNMA holders who receive January’s payment on February 15 have 14 actual delay days.
Bonds that pay interest to investors according to a formula based on a fraction of the increase or decrease in a specified index. De-leveraged bonds are a type of structured note.
Delivery and acceptance certificate
A document that evidences the fact that goods have been delivered to a purchaser or lessee and accepted by that purchaser or lessee.
The time between when a check is ready for disbursement and when the vendor or employee actually receives it. For vendors, this may be considered the same as mail float.
Delivery vs. payment (DVP)
The simultaneous exchange of securities and cash. The safest method of settling either the purchase or sale of a security. In a DVP settlement, the funds are wired from the buyer's account and the security is delivered from the seller's account in simultaneous, interdependent wires.
(1) The Greek letter used by mathematicians to refer to change or the quantity of change.
(2) The price sensitivity of an option. The change in an option’s price divided by the change in the price of the underlying instrument. As an option becomes deeper in the money, its delta gets closer to 1.0. As an option get further out of the money, its delta gets closer to zero. However, the change is nonlinear - the delta changes faster when the option is close to being in the money. The rate of change in an option’s delta is called the option’s gamma.
Term used to describe a creditor's right to request payment in full of a debt.
A deposit account that permits the depositor to withdraw funds on demand. Usually, but not always, a checking account. Sometimes called demand deposit account (DDA).
A promissory note that calls for principal to be payable on demand. In recent years, courts have significantly restricted the circumstances under which a bank could make and enforce a demand for repayment under a demand note.
A term used to describe a physical certificate representing ownership of a security (a stock certificate or a bond) that is held by a trustee. This is an arrangement through which a physical certificate is held so that all future transactions can be conducted as if the security were issued as a book-entry security. Ownership and liens are recorded in the records of the trustee rather than evidenced by physical possession of the certificate. Also called immobilized. Less often, dematerialized is used to refer to book-entry securities that have never been issued in physical form.
The par value of a bond.
Department of Housing and Urban Development (HUD)
A department of the U.S. government that promotes private and public housing. FHA and GNMA are agencies within HUD.
A specific provision in the USPAP rules for real estate appraisals. The departure provision states that: "An appraiser may enter into an agreement to perform an assignment that calls for something less than, or different from, the work that would otherwise be required by the specific guidelines." An appraisal conducted under the departure provision is called a limited appraisal. See complete appraisal, limited appraisal, and Uniform Standards of Professional Appraisal Practice.
A form of bank obligation that is similar to a deposit. Deposit notes are typically issued with terms from two to five years. Like CDs, deposit notes are issued for specified terms at either specified rates or specified rate formulas. Unlike CDs, deposit notes are sold in a predetermined amount for a predetermined time period. The deposit note terms are usually described in an offering circular similar to an offering of securities. For investors, the primary difference between bank CDs and bank deposit notes is the way in which interest is calculated. Like many government agency securities and corporate bonds, interest rates for deposit notes are typically calculated using accrual methods that assume a 360-day year comprised of months that all have 30 days. Deposit notes may be rated by a nationally recognized statistical rating organization (NRSRO).
A bank used as the point of deposit for cash receipts
Depository Trust Company (DTC)
An organization that holds physical certificates for stocks and bonds and issues receipts to owners. Securities held by DTC are immobilized so that they can be traded on a book-entry basis.
The amount by which a fixed asset's accounting or book value is periodically reduced to reflect the fact that the economic value of the asset is steadily reduced by a combination of wear and tear from use, age, and/or obsolescence. The offsetting entry is depreciation expense.
(1) Financial instruments whose value depends upon the values of underlying assets, interest rates, currency exchange rates, or indexes. Various authorities define derivative instruments in broad, inclusive terms or narrow, exclusive terms. It is a common misconception that all derivatives are high-risk, speculative instruments. Large financial institutions use derivatives for hedging. Options, futures, swaps, and swaptions are common derivatives used for hedging purposes. All CMOs are derivatives. There are many derivative instruments, and new ones are developed often. See underlying.
(2) In FAS 133, FASB defines derivatives narrowly. With some exceptions, FAS 133 defines a derivative instrument to be any financial instrument or other contract that has all three of the following characteristics:
A. The financial instrument or contract has both:
1. One or more underlyings.
2. One or more notional amounts or payment provisions or both.
B. The financial instrument or contract either does not require an initial investment or requires an initial net investment that is "smaller than the amount that would be required for other types of contracts that would be expected to have a similar response to changes in market factors."
C. The terms of the financial instrument or contract either
1. Require or permit net settlement.
2.Provide that the contract can be readily settled net by a means outside the contract.
3.Provide for delivery or an asset that puts the recipient in a position not substantially different from net settlement.
Mainly as a result of FASB’s second requirement, financial instruments such as CMOs and structured notes that are commonly called derivatives are not derivatives as defined by FASB. See FAS 133.
Detail method financing
See dominion of funds.
(1) The difference between gross sales and net sales. Dilution is caused by sales that are reversed as a result of returns and/or allowances.
(2) The reduction in an existing stockholder’s position that results from the issuance of new shares.
Dilution as a percentage of gross sales.
An informal name for 10 basis points.
A system wherein amounts are transferred from a payor’s checking account to the accounts of payees no matter where they bank. The transfers are made electronically and do not require a paper check or draft. The key consideration is that the transaction is accomplished without involving the payee.
A form of capital markets or derivatives hedge in which the cash market instrument being hedged is hedged by an options or futures contract on the same underlying instrument. For example, a 91-day U.S. Treasury bill hedged with a Treasury bill future. Because traded futures and options contracts have underlying instruments tied to securities, retail banks do not have much opportunity to use direct hedges to manage the interest rate risk in their loans and deposit portfolios. The opposite of a direct hedge is a cross hedge.
A form of lease financing in which the bank acquires property from a supplier and then leases that property directly to an end user. The bank is the owner and the lessor and the end user is the lessee.
The audit procedure of mailing the account debtor a note requesting the account debtor to confirm the balance owed.
An expression used to indicate that a measurement is accurate to the extent that it shows the quantity to be measured to be positive or negative even though the degree to which the quantity is positive or negative may be measured inaccurately.
The total time period between when a check is prepared by the remitter and when the check is presented for payment. This float also includes the delivery float, processing float, and transit float. Disbursement float is the float period for the remitter. The collection float for the organization that will receive the check is the same duration as the disbursement float.
(1) The action of releasing a lien or the document in which the creditor relinquishes a lien. Also known as a satisfaction, a release, a reconveyance, or an extinguishment. However, release tends to be used in connection with both real and personal property, while the discharge, extinguishment, reconveyance, and satisfaction are more often used only in connection with real property. See partial release and release.
(2) Relief granted to a debtor by a bankruptcy court. Discharge relieves the debtor from all further responsibility for pre-petition debt covered by the discharge.
An opinion letter accompanying audited financial statements in which the CPA states that he or she cannot express an opinion because of limitations in either the scope of the audit and/or because of uncertainties about the future which either have an effect that cannot be estimated or which cannot be resolved.
The amount by which the price for a security is less than its par or face value. The discount or difference between such a reduced value purchase price and the redemption (par) value comprises all or part of the investor's compensation for owning the security.
(1) The percentage rate applied to the redemption value of a security in order to calculate a reduced value for a purchaser. Some (or all in the case of zero coupon securities) of the investor’s return comes from the resulting price discount.
(2) The rate of return for short-term securities for which the investor’s entire compensation comes from the discount amount.
(3) The rate of interest charged by the Federal Reserve Banks for advances.
(4) An interest rate applied to a single cash flow that will not be paid or received until a future time in order to calculate the present value of that future cash flow.
(5) An interest rate or a series of interest rates applied to every one of the future cash flows of interest and principal expected from a financial instrument in order to create a single value for that instrument. This single value is equivalent to the sum of the present values for each of the separate cash flows expected from the instrument. When prevailing market rates are used as the discount rate, this technique produces a fair market value that is used as a proxy for market value when the market value of a financial instrument is not readily available. See fair value.
(1) Securities that do not pay periodic interest. Investors earn the difference between the discount issue price and the full face value paid at maturity. Treasury bills, banker’s acceptances, and zero coupon bonds are discount securities. Most commercial paper is also issued at a discount. See original issue discount.
(2) Any security that is trading at a price less than par or 100.
Discounted cash flow
A technique or process for valuing a financial instrument by applying a discount rate (or a series of discount rates) to calculate a present value of each future interest and principal cash flow expected from a financial instrument. The sum of the market values of the cash flows is considered to be the value of the instrument. For financial instruments with readily available, current trade prices, this value is called the fair value and is used in lieu of a trade- or transaction-based market value.
(1) The investing of funds that would normally have been placed in a bank or other financial institution (financial intermediaries) directly into investment instruments issued by the ultimate users of the funds. Investors and borrowers transact business directly and thereby bypass banks or other financial intermediaries.
(2) The elimination of intermediaries between the first case provides of capital and the ultimate users of capital.
The distribution pattern of measurements. The standard deviation is the most common measure of dispersion.
Dividend received deduction (DRD)
Federal tax law allows a C corporation investing in the stock of other corporations to take a tax deduction for the dividend income received from other corporations. This tax treatment applies to dividends from preferred and convertible preferred stock in addition to common stock. The deduction is usually, but not always, 70 percent of the dividend amount received.
(1) Part of a corporation's profits that are distributed to shareholders rather than kept by the corporation in retained earnings.
(2) The interest expense paid out by mutual financial institutions for deposits and by credit unions for shares.
An unincorporated subunit of a corporation.
Acronym for "Don’t Know." A security is said to be "DK'd" when it is delivered to the purchaser or more typically the purchaser's correspondent but is rejected because the purchaser either doesn't know or doesn't agree with one or more of the aspects of the trade. For example, a trade may be DK'd because of an incorrect price, amount, or CUSIP number.
A category of personal property defined by Article 9 of the UCC. Documents are written evidence of title such as bills of lading, warehouse receipts, and dock receipts. To be a document of title, it must be issued by or addressed to a third party (called a bailee) and cover goods in the bailee's possession.
Doing business as (d.b.a.)
Designation, usually following a name, indicating that a name used by a business is not the legal name of the entity doing business but is an assumed name or trade name instead.
A short-term funding technique used for mortgage pass-through securities. A seller of a roll agrees to sell a mortgage security at an agreed-upon price on a specified date and to buy back a similar security at a specified future date. The seller receives the use of the funds for the specified time period but does not receive the monthly cash flows from the mortgage security during the roll period. The buyer or counterparty agrees to buy the mortgage security at an agreed-upon price and to sell back a similar security at a specified future date. The buyer is the owner of the security for that time period and as the owner is entitled to all of the cash flows during that period. Unlike a repo/reverse repo transaction, at the end of the transaction time period, the buyer is only required to resell a substantially similar security to the seller. See drop.
Dominion of funds
A form of receivable lending in which the bank requires that the borrower give the bank control over the borrower's accounts receivable collections. Dominion is a legal term meaning control. This form of lending is also called ledgering or the detail method financing. Do not confuse with factoring.
Municipal revenue bonds that are also supported by a second source of repayment. For example, payments of an airport bond issue may depend primarily upon income generated by the airport. Those funds may then be further backed by a limited guarantee from the county or city that owns the airport.
Leverage in bank holding companies that use borrowed funds to finance the holding company's equity investments in its subsidiaries.
The practice of borrowing funds at the bank holding company level. The funds are then lent by the holding company to a subsidiary.
A guaranty of a loan to a borrowing entity when the guarantor is a parent company or stockholder of the borrowing entity.
Downward sloping yield curve
A yield curve depicting a situation in which yields for shorter-term maturities are higher than those for longer-term maturities. Downward sloping yield curves are atypical.
A written order drawn by one party, called a drawer, that directs a second party (almost always a bank), called a drawee, to pay a sum of money to a third party, called the payee. For example, a check. Drafts are used with letters of credit. Drafts may be sight drafts, payable upon receipt, or time drafts, payable on some specified future date.
A provision in a mortgage or security agreement that attempts to extend the security interest granted to the creditor to cover not only the described debt but also all other present and future indebtedness of the debtor.
The party to whom a check or draft is written. Also called payee.
The party who writes a draft or check against funds he or she owns. Also called payor.
See dividend received deduction.
An unofficial name for a provision in Securities and Exchange Commission Rule 144. The dribble rule is a limit on how much restricted or controlled stock can be sold within a period.
A market interest rate used in simulation modeling to affect interest rates for other instruments. For example, instead of forecasting future levels of rates to be paid on its 90 day CDs, a bank modeler may tie those rate changes to future changes in a market driver rate such as the 90 day T-Bill rate.
The difference between the prices in a dollar roll on the two settlement dates. The drop is expressed in 32nds. The drop is the price that the buyer of the dollar roll pays to the seller for the right to own the mortgage security and receive its cash flows during the term of the transaction.
Drop dead agreement
See forbearance agreement.
See debt service coverage.
See Depository Trust Company.
Dual index notes
Securities with coupon rates that are determined by the difference between two market indexes. These bonds often have a fixed coupon rate for a brief period followed by a longer period of variable rates. A type of structured note.
An instrument evidencing the obligation of a seller to deliver sold securities to the buyer of those securities.
A provision in a mortgage permitting the lender to demand payment in full when the property is sold.
A sophisticated measure of the average timing of cash flows from an asset or a liability or from an asset portfolio or a liability portfolio. Essentially, duration is a more accurate measure of maturity because it reflects the timing of cash flows from periodic interest and/or principal payments in addition to the cash flows represented by the funds transferred at maturity. Duration is computed by summing the present values of all of the future cash flows after multiplying each by the time until receipt, and then dividing that product by the sum of the present value of the future cash flows without weighting them for the time of receipt. One way to view duration is as the balancing point for a series of cash flows. One author described it as that "sweet spot" or "balancing point" somewhere between the day a position is acquired and the day that it matures, where the return remains practically unchanged no matter what happens to interest rates. See convexity, effective duration, Macaulay duration and modified duration.
A phrase used to describe the slow but inexorable change in duration that occurs with the passage of time. Measurements of duration must be regularly recalculated because of duration drift.
The measured interest rate sensitivity of bank equity calculated with the use of duration methodology. The modified duration of equity. This name is used to distinguish between MVPE rate sensitivity calculated using duration methodology and the more common VAR calculation using economic value simulation methodology.
Duration of equity
An application of duration analysis that measures the interest rate sensitivity of the bank as whole. Duration of equity views the bank's equity as if it were a bond. This "bond" has a stream of obligations for future cash inflows. Those are the cash flows from the bank's assets. It also has a stream of obligations for future cash outflows. Those are the cash flows from the bank's liabilities. When the present value weighted average for the asset cash flows is calculated and reduced by the total of the present value weighted cash flows from the liabilities, then the duration of the equity "bond" is determined. It is expressed by the formula: duration of equity = duration of assets minus (the duration of liabilities times (total liabilities divided by total assets)).
See delivery vs. payment.
Fifteen-year FNMA MBS pools.
Gap analysis methodologies that include assumed volumes for renewals, rollovers, replacement business, growth, etc., to reflect the fact that banks do not close their doors and simply honor remaining outstanding obligations as of the date on which gap reports are prepared. Dynamic gap analysis attempts to reflect the reality that on an ongoing basis loan payments and maturities are replaced with new loans; deposit withdrawals are replaced by new deposits. The opposite of static gap analysis.