See index amortizing note.
See index amortizing swap.
See Industrial Development Authority.
See Industrial Development Authority bond.
Acronym for Industrial Development Corporation. See Industrial Development Authority.
See embedded option.
A physical certificate representing ownership of a security (a stock certificate or bond) that is held by a trustee. An arrangement through which a physical certificate is held so that all future transactions can be conducted as if the security were book entry. Ownership and liens are recorded in the books of the trustee rather than evidenced by physical possession of the certificate. Also called dematerialized.
Establishing and maintaining equal and offsetting exposures to interest rate risk. For example, holding equal amounts of assets and liabilities of the same duration.
Implied forward rates
Indicated future interest rates derived from the differences between current rates for different maturities of the same instrument. Yield curves include implied information about future interest rates. For example, suppose that a 2-year investment offers a return of 6 percent while an otherwise identical 1–year investment offers a return of 5 percent. In this case, an investor who bought the 1-year investment and realized a return of 5 percent for the first year would have to be able to reinvest his money at 7 percent in the second year in order to get an average 2-year return of 6 percent. If the investor gets less than 7 percent in the second year, he will not do as well as the investor who purchased the 2-year investment. This implies that the rate for 1-year investments that will be available one year in the future will be 7 percent.
Volatility of a financial instrument that is imputed by subtracting all of the other factors thought to contribute to the price of an option. The amount remaining after those subtractions is attributed to volatility. Implied volatility is not the same as the actual volatility. See realized volatility, volatility and variance swap.
A legal name for a situation in which a lender is deemed to have lost the right to enforce a provision in the loan documents as a result of the lender's failure to enforce the same provision when it was previously violated.
In the money
The situation in which an option has value because of the relationship between the option's strike price and the current market price for the underlying instrument, the spot price. A call option is in the money when the strike price is below the spot price. A put option is in the money when the strike price is above the spot price.
See equity tranche.
A list of the names of the individuals holding various corporate offices within a corporation.
An agreement in which the borrower promises to protect the bank or reimburse the bank for any damages, claims, costs, penalties, or liabilities that may arise from some problem. For example, the bank may obtain an indemnification agreement to protect itself from costs, penalties, or liabilities arising from environmental contamination or from violations of environmental regulations.
An unspecified maturity date for a financial instrument. For example, the maturity date of a savings account.
A benchmark upon which the payment rate or accrual rate for an adjustable-rate loan or investment is based. For example, a business loan may pay interest at the prime rate plus 1 percent. In that example, the prime rate is the index. For adjustable-rate residential mortgage loans, federal law requires that indexes must move independently (not controlled by the lender) and that indexes must be easily confirmed by borrowers. See margin and reset date.
Index amortizing note (IAN)
Securities which repay principal according to a predetermined amortization schedule that is linked to the level of a specific index or a specific prepayment rate. As market interest rates increase or prepayment rates decrease, the maturity of an IAN extends. An IAN is a type of structured note.
Index amortizing swap (IAS)
A type of amortizing interest rate swap in which the notional amount declines or amortizes based upon a specific index such as a mortgage prepayment speed.
In cost accounting applications, the share of costs imputed, attributed or allocated to the cost center or product being measured.
A form of lease financing in which the bank acquires or finances a lease transaction entered into by an end user and a third party. The third party is the lessor and the end user is the lessee. The bank is the lender to the third party if it merely finances the transaction or the assignee of the third party if it purchases the lease.
Industrial Development Authority (IDA)
Special types of municipal authorities established to promote economic development in their communities. A community establishes an Industrial Development Authority to act as a conduit. The authority can, as a municipal entity, borrow funds or sell securities that are, in most cases, exempt from federal income tax. Consequently, the authority can raise funds at lower interest rates than businesses. The lower-cost funds are used by the authority to buy fixed assets that are then leased to the business. The lease rate reflects the authority’s low cost of capital. See Industrial Development Authority bond.
Industrial Development Authority bond (IDB)
A special type of revenue bond issued by municipal authorities established to promote economic development in their communities. A community establishes an Industrial Development Authority to act as a conduit. A business that would otherwise have to borrow at taxable interest rates to finance the purchase or construction of a building may, under some defined circumstances, let the IDA own the building and pay rent to the authority with an option to purchase. The authority borrows at a lower, tax-exempt rate. The authority has no responsibility for the payment of interest and principal on the securities except to pass the business’s rent payments through to the investors. The business’s rent payments equal the interest and principal due for the lower rate, tax-exempt securities.
Industrial Revenue Authority bond (IRB)
See Industrial Development Authority bond.
See hedge effectiveness.
A provision found in some promissory notes that attempts to give the lender the right to demand payment in full at any time the lender deems itself insecure. More often than not, such a clause is unenforceable except when other material defaults are also involved.
A legal term used in bankruptcy to describe parties that have a special relationship to the bankrupt debtor. Creditors who are officers, directors, or stockholders are obvious examples of insiders. In some cases, the bank may be deemed to be an insider. The main consequence of being deemed an insider is that insiders are subject to a one-year preference period while other creditors are only subject to a 90-day preference period. See preference.
The lack of adequate capital. The condition that exists when the amount of losses exceeds the amount of capital. See solvency and solvency risk.
In consumer lending, name used to describe a promissory note that calls for mostly regular, periodic payments of principal and.
Instrument-specific liquidity risk
A type of systemic or capital markets liquidity risk. The risk that the failure of a market for a financial instrument, such as the commercial paper market, might trigger a bank funding crisis. See systemic liquidity risk.
A category of personal property defined by Article 9 of the Uniform Commercial Code. Instruments are notes, checks, drafts, securities (such as stocks and bonds), and any other written evidence of rights to the payment of money that, in the ordinary course of business, is transferred by delivery with any necessary endorsements or assignments. See financial instrument
An advanced refunding in which the debtor is not legally released from being the primary obligor on the refunded bonds, but the possibility of the debtor having to make additional payments is considered remote under criteria provided by FAS 76.
Intangible pension asset
An asset booked to offset the additional minimum pension obligation. This asset is created under the FAS 87 rules to offset the minimum liability for underfunded plans that FAS 87 required firms to recognize as a liability. Little or no justification can be made to support the classification of this debit as an asset; it is conceptually more accurate to consider it as a reduction to equity.
An informal term used by secured lenders to refer to the categories of personal property defined by Article 9 of the Uniform Commercial Code as accounts and general intangibles.
Accounts receivable or payable from or to affiliated companies.
Accounting entries made on consolidating statements in the process of generating consolidated financial statements. Intercompany eliminations cancel the accounting effects of transactions between firms in the consolidated group so that the final consolidated numbers exclude all transactions between entities in the group.
(1) A monetary benefit paid by a borrower for the right to use a lender’s or a depositor’s funds. Usually, the interest is paid periodically over the life of the loan, deposit, or security. However, some interest-bearing instruments, such as savings accounts, do not have defined maturities. Under the terms of some instruments, interest is not paid periodically over the life of the instrument but instead is paid solely at the end of the loan/deposit/security term.
(2) A right to enjoy some benefits of ownership of property. For example, the rights that a debtor or a court grants to a secured party in the assets owned by the debtor. Or, for example, the rights that a lessee is granted in the lease of property owned by a lessor.
A ratio that uses historical financial information. sometimes combined with projected financial information, to measure a firm's short-term credit strength. This ratio measures the firm's ability to make its required interest payments. In its simplest form, the ratio takes the firm's pretax net income plus interest expense and divides that sum by the interest expense. Interest-coverage ratios can be calculated with several variations. One variation involves using next year's projected interest expense in the denominator rather than the most recent year's actual interest expense. A second variation reduces net income by deducting nonrecurring income amounts. Other variations are in use. Sometimes called times interest earned.
Interest-only strip (I/O)
A form of stripped mortgage-backed security (MBS) that only passes interest payments received from the underlying mortgage loans to the security owners. May be a real estate mortgage investment conduit (REMIC) tranche.
Interest rate cap
Interest rate floor
Interest rate risk (IRR)
The potential that changes in market rates of interest will reduce earnings and/or capital. The risk that changes in prevailing interest rates will adversely affect assets, liabilities, capital, income, and/or expense at different times or in different amounts. The Federal Reserve calls this type of risk market risk and defines it as the risk to a financial institution’s condition resulting from adverse movements in market rates or prices, such as interest rates, foreign exchange rates, or equity prices. Within that definition, the Federal Reserve clearly views interest rate risk as just one component of market risk. The Office of the Comptroller of the Currency (OCC) defines interest rate a bit more narrowly than the Federal Reserve since it defines price risk as a separate risk. The OCC defines price risk as the risk to earnings or capital arising from adverse changes in the value of portfolios of financial instruments. Since such adverse changes generally result from changes in prevailing interest rates, price risk is essentially the same as interest rate risk. Most rate risk managers use the term in the broadest sense as defined in the first sentence of this paragraph. Interest rate risk has four components. See basis risk, mismatch risk, option risk and yield curve risk. Closely related to price risk and market risk.
Interest rate swap
A financial instrument representing a transaction in which two parties agree to swap or exchange net cash flows, on agreed-upon dates, for an agreed-upon period of time, for interest on an agreed-upon principal amount. The agreed-upon principal amount, called the notional amount, is never exchanged. Only the net interest cash flows are remitted. In the simplest form of interest rate swap, one party agrees to swap fixed-rate loan payments with the floating-rate payments of the other party. Interest rate swaps are often used in hedging. See basis swap and swap.
Financial statements prepared for periods other than the firm's fiscal year-end.
Elapsed time for processing checks. Also called administrative float or processing float.
Internal liquidity risk
A term defined by the Federal Reserve. Internal liquidity risk relates largely to funding problems arising from unfavorable changes in the perception of an institution in its various markets: local, regional, national, or international. See bank-specific liquidity risk, external liquidity risk and systemic liquidity risk.
Internal rate of return (IRR)
A measure of yield that relates the cash flow from each interest payment and the cash flow from the investment's redemption value at maturity to the purchase price of the investment. It is a present value calculation that reflects the time value of each of those cash flows. By calculating the present value of the cash flows, the IRR reflects the reinvestment income that the investor can earn from reinvesting those cash flows, at the same yield as the investment that generated them, during the life of the investment.
International Swaps and Derivatives Association, Inc. (ISDA)
A global trade association representing participants in the privately negotiated (i.e., nonexchange traded) derivatives industry. Most derivatives transactions use a standard set of three documents often called "the ISDA". See master agreement.
The mathematical process of obtaining an unknown number that has a value between two known numbers in a series of numbers. For example, if the yields or prices for 2-, 3-, and 5-year Treasury notes are known, a yield or price for 4-year Treasury notes can be extrapolated or interpolated. Interpolated values are not always correct, but they are usually close enough for most users.
That portion of an option’s value that derives from the fact that the option is in the money. The difference between exercise price of the option and the price of the underlying. The other primary component of an option's price is its time value.
A category of goods defined by Article 9 of the Uniform Commercial Code. Inventory is goods held for sale or lease. It includes raw materials, work-in-progress, finished goods, and materials used or consumed in a business.
Bonds whose coupon rates increase as rates decline and decrease as rates rise. The coupon rate is based on a formula using an index and moves in the opposite direction of changes in that index. Some inverse floaters may be a type of structured note. Other inverse floaters, such as interest-only (I/O) and principal-only (P/O) strips are types of collateralized mortgage obligations (CMOs).
Inverted yield curve
See yield curve slope.
A term defined by the Office of Comptroller of the Currency (OCC) (12 CFR 1) and used in its investment regulation to define eligible investments. Investment grade means a security that is rated in one of the four highest rating categories by either:
(1) Two or more nationally recognized statistical rating organizations (NRSROs); or (2) One NRSRO if the security has only been rated by one NRSRO.
Investment premium (for convertible bonds)
The amount by which it’s the convertible bond’s market price exceeds its value as a bond only, expressed as a percentage. The calculation is done by subtracting the investment value from the market value and dividing the difference by the investment value.
(1) Certificated or uncertificated security, entitlement, securities account, commodity contract, or commodity account. A category of personal property collateral defined by the 2001 revisions to Article 9 of the Uniform Commercial Code. See certificated and uncertificated.
(2) An informal term for real estate owned for investment rather than the owner’s use.
As defined by the Office of the Comptroller of the Currency (OCC) (12 CFR 1), a marketable debt obligation that is not predominantly speculative in nature. A security is not predominantly speculative in nature if it is rated investment grade. When a security is not rated, the security must be the credit equivalent of a security rated investment grade. See marketable and investment grade.
Investment value (for convertible bonds)
The value of a convertible bond calculated as a straight bond without giving any value to the conversion feature. Although this is done according to normal bond calculations, the rate used to discount the bond is that for similar, nonconvertible debt. The discount rate is likely to be two to five percentage points higher than the convertible’s coupon rate. Also called the bond value.
IO or I/O
See interest-only strip.
See Industrial Development Authority bond.
See internal rate of return and interest rate risk.
See International Swaps and Derivatives Association.
ISDA master agreement
a.k.a. the ISDA
An industry-standard agreement used between the counterparties to privately negotiated (i.e., nonexchange traded) derivatives transactions. The body of the master agreement" presents the most common legal and operating terms and conditions that could apply to derivatives transactions between parties to the agreement. These include basic representations, events of default and termination events, numerous contractual housekeeping items, and a list of key definitions. The provisions in the master agreement itself are non-negotiable so users customize the agreement in the "schedule", selecting from terms provided in the master agreement or adding new provisions. The schedule contains a number of optional provisions that counterparties can choose to select or add. A third and final part of the ISDA is a "Credit Support Annex" (CSA),that details the terms of certain credit support required in the Agreement.
The date on which interest for a new security issue begins accruing. For mortgage-backed bonds, the issue date of the pool is not the same as the origination date of the underlying mortgages. A pool may be assembled from new loans or from older loans.
A party or entity that sells a security representing a claim on its assets (an equity security) or its contractual obligation to pay the holder at a future date (a debt security).