The earliest form of duration measurement. Developed in 1938 by Professor Frederick Macaulay, this simple form of duration provides only an approximate measure of the true price volatility and interest rate sensitivity of an instrument. See convexity, duration, effective duration and modified duration.
Hedging the net risk exposure of an entity’s entire portfolio or balance sheet. As opposed to micro hedging a single instrument. In interest rate risk management, macro hedging involves hedging the net mismatch or the net duration for the entire entity.
Magnetic Ink Character Recognition (MICR)
A description comprising numbers and symbols printed in magnetic ink on documents for automated processing. For checks, this MICR line appears at the bottom of the check.
See Member Appraisal Institute.
The time it takes a remittance to move from the remitter to the recipient through the mail. This period can range from one to several days. Also called remittance float; however, remittance float can also result from electronic rather than mail delivery.
Making a market
The conduct of a dealer who buys or sells at his or her bid and offered prices to ensure that there is a secondary market for other buyers or sellers. See market maker.
A document prepared by a firm’s auditors in conjunction with its annual audit.
Term used to describe financial reports prepared by the borrower with no assistance from independent, outside parties.
Mandatory convertible securities
Types of convertible bonds that have required conversion or redemption features. One type of mandatory convertible requires the holder to exchange the bonds for common stock at maturity. Often used by banks seeking to meet regulatory capital requirements without issuing common stock until a later date. Often called equity-linked securities. These securities provide investors with higher yields to compensate holders for the mandatory conversion structure. They also typically have caps on the amount of upside potential that the security can achieve. For moderate stock increases, they will outperform the common stock due to the yield advantage, but the cap on the upside means that they lag stock performance for high stock returns.
Margin, gross margin, net margin, security margin, variation margin
(1) An amount of cash or collateral that a buyer or borrower must provide in excess of value owed to that buyer or borrower by a seller, lender or depositor. Ensures performance by the buyer or borrower. Initial margin is posted at inception. Variation margin is the amount of any additional margin needed to correct deficiencies in the currently posted margin.
(2) The amount by which the coupon rate for a floating- or variable- rate financial instrument differs from the defined index for that coupon rate. For example, if a floating-rate note requires that the coupon rate be set at 250 basis points above 30-day LIBOR, the gross margin is 250 basis points. Can also be the amount added to, or subtracted from, the index in determining the instrument's fully indexed rate. Investors in adjustable rate mortgage-backed securities (MBSs) receive a coupon rate that is lower than the fully indexed rate because the cost of servicing, the servicing spread, is deducted. The gross spread minus the servicing spread is called the net margin or the security margin. See index and servicing.
(3) In a firm’s profit and loss statement, margin is the difference between sales price and the cost of goods sold. It may be expressed as a dollar quantity or as a percentage of the cost of goods sold.
Loans acquired from brokers or financial institutions for the purpose of acquiring margin stock.
A term defined by the Federal Reserve Board of Governors in Regulations T and U. Any stock listed on a national securities exchange, any over-the-counter security approved by the SEC for trading in the national market system, or any security appearing on the Board's list of over-the-counter margin stock and most mutual funds. There are certain requirements a stock must meet before it can be margined. The most important of which is that the price must be greater than five dollars.
The incremental rate or return realized by making just one change, adding a single additional unit, or deleting a single unit. For example, if one more new loan is added to an existing portfolio, and the yield on that loan is 10%, the marginal yield for the portfolio is 10%. Not the same as the average.
Mark to market
The process of restating the carrying value of an asset or liability to equal its current market value. Under FAS 115, financial instruments held in trading accounts must be marked to market by increasing income to reflect unrealized gains or by decreasing income to reflect unrealized losses. Financial instruments categorized as available-for-sale (AFS) under FAS 115 must also be marked to market but receive different accounting treatment.
A term used to describe the characteristic of a secondary market for a financial instrument evidenced by more than a minimal amount of active daily trading. One of the requirements for readily marketable assets.
Market liquidity risk
The potential that an institution cannot easily unwind or offset specific exposures, such as investments held as liquidity reserves, without incurring a loss because of inadequate market depth or market disruptions. One of the three primary components of liquidity risk along with mismatch liquidity risk and liquidity contingency risk.
An individual or entity that stands ready to buy or sell financial instruments at all times. Market makers quote both a bid and an offer price to the market. Market makers provide liquidity to markets. They profit from the spread between bid and offer prices as well as from changes in market prices. Market makers adjust their bid or offer prices depending upon positions that they hold and/or upon their outlook for changes in prices.
One of six risks defined by the Federal Reserve. The risk of an increase or decrease in the market value/price of a financial instrument. Market values for debt instruments are affected by actual and anticipated changes in prevailing interest rates. Market values for all financial instruments, except direct obligations of the U.S. Treasury, are affected by either actual or perceived changes in credit quality. Market risk includes reinvestment risk - that is, the risk that all or part of the principal may be received when interest rates are lower than when the security was originally purchased. In that case, the principal must be reinvested at a lower rate than that originally received. Sometimes called market value risk. Also see interest rate risk and price risk.
See market depth.
The value of a financial instrument based upon the 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.
Market value of portfolio equity (MVPE)
The difference between the sum of the present values of all cash flows from assets and the sum of the present values of all cash flows from liabilities. In other words, the market value of the institution’s capital account. Defined by the Office of Thrift Supervision (OTS) to represent the difference between the market value of a financial institution’s assets and liabilities plus or minus the value of any off-balancesheet positions. This is a proxy or estimate used for capital when the sensitivity of capital to changes in prevailing interest rates is calculated. As used by thrift institutions and the OTS, the term has been replaced by "net portfolio value" or NPV. As used by bankers and banking regulators, the term is slowly being replaced by "economic value of equity" or EVE. See net economic value and value at risk.
Market value simulation
The process of generating multiple forecasts for future interest rate scenarios and then discounting the estimated cash flows anticipated under those rate scenarios. The results of market value simulation are a range of forecasted market values of equity for both current and potential rate risk exposures. Comparisons of these forecasted MVPE values reveal the sensitivity of MVPE to changes in rates.
An attribute that may or may not be associated with a security. A security is considered to be marketable if it is readily salable to buyers in an active secondary market. As defined by the Office of the Comptroller of the Currency (OCC) (12 CFR 1), marketable means that the security:
(1) Is registered under the Securities Act of 1933,15 USC 77a et seq.;
(2) Is a municipal revenue bond exempt from registration under the Securities Act of 1933, 15 USC 77c(a)(2);
(3) Is offered and sold pursuant to Securities and Exchange Commission Rule 144A,17 CFR 230.144, and rated investment grade or is the credit equivalent of investment grade; or
(4) Can be sold with reasonable promptness at a price that corresponds reasonably to its fair value.
(1) Securities A written contract covering all future transactions between the parties to repurchase/reverse repurchase agreements and establishing each party's rights in the transactions. A master agreement often will specify, among other things, the right of the buyer-lender to liquidate the underlying securities in the event of default by the seller-borrower.
(2) Derivatives. See ISDA master agreement.
Match fund or matching
An entity is said to match fund a loan or investment when it acquires a liability in equal amount for the same maturity. However it is not perfectly match funded unless all of the interest and principal cash flows and any prepayment options are also the same for the asset as they are for the liability.
Match maturity funds transfer pricing (MMFTP)
A funds transfer pricing system or methodology that assigns a cost of funds to assets and a credit for funds to liabilities that reflect the interest rate risk - especially the rate risk associated with the time remaining to maturity - in those assets or liabilities. See funds transfer pricing.
A trade that is mirrored by an equal and offsetting trade with a different counterparty. In a matched trade, the interest rate, market, and price risks are offset but not the credit risk. The trading entity incurs credit risk for the counterparties on each side of the trade.
A lien against real property created under state laws that give a person who supplies materials used to repair or improve real estate the right to place a lien against the property if that person is not paid.
The remaining time to maturity calculated as the time between the execution date of a trade and the maturity.
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. For mortgage-related securities, see final distribution date and final maturity.
See laddered maturities.
The term economists use to describe the activity of a financial intermediary that accepts deposits or investments of one term (usually short) and places those funds with a debtor in another term (usually intermediate or long term).
Maximum forward rate smoothing
An alternative yield curve smoothing technique. The most accurate yield curve smoothing method for forward rates. The yield curve with the smoothest possible forward rate function, consistent with observable data, is closely related to but significantly different from the popular cubic spline approach to the smoothing of both yields and discount bond prices. The yield curve which produces the smoothest possible forward rates consistent with given zero coupon bond prices has a quartic forward rate function which spans each time interval between observable data points. This contrasts with the cubic polynomial that is used to fit either yields or discount bond prices in the cubic spline approach. This method produces the smoothest possible forward rate curve (with f’=0 at the longest maturity) that causes the interpolated yield curve to be totally consistent with the observable data. See smoothing.
See mortgage-backed security.
The behavior of a variable in which the values for that variable move towards the long-run average value for that variable.
A lien against real property created under state laws that give a person who makes repairs or improvements to real estate the right to place a lien against the property if that person is not paid.
Medium-term notes (MTNs)
Debt instruments with maturities ranging from 9 months to 30 years that are offered on a continuous basis. Offered on a continuous basis means that they are issued and sold as buyers request them rather than on a single issue date. MTNs have features similar to corporate bonds. Bank deposit notes are a form of MTNs.
FNMA MBSs created when older pools that have been reduced to small outstanding balances (i.e., low current face) as a result of cumulative prepayments are combined to create new securities with larger remaining balances.
Member Appraisal Institute (MAI)
A designation earned by qualifying commercial real estate appraisers. It is awarded by the Appraisal Institute.
Data about data. A term used in database management and data warehousing.
Metes and bounds
A name for a type of property description used to identify parcels of land for which the legal identification is expressed in surveying terms. "Metes" means measurements and "bounds" means boundaries. A metes and bounds description gives the length and direction of the boundaries of a property.
Financing wherein the junior debt in a leveraged buyout comes from a lender willing to take a subordinate position. See leveraged buyout.
See magnetic ink character recognition.
Hedging the interest rate risk exposure of a single asset or liability. See macro hedging, its converse.
Government National Mortgage Association (GNMA) issued pools of fixed-rate mortgages with original maturities of 15 years.
Minimum pension liability
A term used to describe a liability for underfunded pension obligations that FAS 87 required firms to recognize as an actual balance sheet liability. The minimum pension liability is the excess of accumulated vested and nonvested plan benefits over plan assets. FAS 130 establishes accounting requirements for adjustments to minimum pension liability.
Used in asset/liability management to describe the difference between rate-sensitive assets and rate-sensitive liabilities in rate gaps or between cash inflows and outflows in liquidity gaps. See gap.
(1) The risk that a financial institution will suffer either a decline in income or capital because future changes in prevailing interest rates impact assets more or less than they impact liabilities. The component of interest rate risk arising from differences in the timing of asset and liability repricing. Also called gap or repricing risk.
(2) The risk that a financial institution will suffer either a decline in income or capital because of future funding problems. The component of liquidity risk arising from differences in the timing of cash inflows and outflows. Also called liquidity gap or liquidity mismatch risk.
See money market deposit account.
See match maturity funds transfer pricing.
The risk that incorrect or sub-optimal interest rate risk management decisions will be made because of errors in the model used to measure risk exposure. Errors may arise from inaccurate data input into the model, from inaccurate assumptions used in the simulation, and/or from errors in model logic or programming.
Modified American option
See Bermuda option.
Macaulay duration adjusted for compounding. The figure for Macaulay duration is divided by the sum of one plus the rate divided by the number of compounding periods per year. A more accurate measure of the weighted average time remaining until receipt of a series of cash flows. In essence, modified duration is a measurement of price and interest rate sensitivity. (Economists refer to this as price elasticity.) Modified duration expresses the percentage change in the value of an instrument for each one percentage point change in prevailing interest rates. See convexity, duration, effective duration, Macaulay duration, negative duration and positive duration.
A term used to describe a variety of gap analysis methodologies that make modifications to contractual gap analysis in an effort to improve the accuracy of the gap analysis. See beta-adjusted gap and dynamic gap.
The conversion or transfer of property derived from a criminal offense for the purpose of concealing, or disguising, the illicit origin of the property, or of assissting any person who is involved in the commission of such an offense, to evade the legal consequences of the action; the concealment or disguise of the true nature, source, location, disposition, movement, rights with respect to, or ownership of property, knowing that such property is derived from a criminal offense.
The aggregation of buyers and sellers actively trading money market instruments.
Money market deposit account (MMDA)
A bank deposit account designed to pay a higher rate of interest to depositors than might otherwise be earned in checking or savings accounts. Money market deposit accounts do not have specified maturities. Their rates are administered by the bank although they are influenced by prevailing rates for money market instruments traded in capital markets. Some banks index the rates that they pay on MMDAs to rates paid for traded money market instruments such as U.S. Treasury bill rates. Federal regulations limit the number of transactions that can be made from these accounts.
Money market fund
A form of mutual fund that restricts investments to relatively safe, relatively short-term instruments. Typical money market funds may invest in short-term U.S. government obligations, commercial paper, and banker’s acceptances. Average maturities of fund assets are typically 14 to 28 days. The income, less costs, is paid out every day so that the share value is always the same. However, shareholders are not protected against loss from the fund's investments.
Money market instrument
The broadest definition of a money market instrument is a short-term debt instrument that is purchased from a broker, dealer, or bank. Sometimes the term "money market" is used more restrictively by further defining short-term to mean an instrument with no more than 12 months remaining from the purchase date until the maturity date. (The remaining life of the instrument is the basis for the definition rather than the its original term.) Sometimes money market is used more restrictively to mean only those instruments that have active secondary markets. Definitions of money market instruments that only include instruments with active secondary markets exclude non-negotiable investments such as most bank certificates of deposit.
Money market mutual fund
See money market fund.
Money market rate
In asset/liability management, the phrase money market rate is used to distinguish a rate set in actively traded markets from a rate that is administratively set by banks or other financial institutions. Rates on short-term U.S. Treasury notes and the London Interbank Offered Rate (LIBOR) are the most common money market rates. However, any actively traded, short-term, high-quality instrument might be considered to be a money market instrument.
Monte Carlo method
A statistical technique that involves using a large number of repeated calculations. A methodical and formalized version of trial and error.
Monte Carlo simulation
A statistical technique that involves using a large number of repeated calculations. A methodical and formalized version of trial and error. Monte Carlo simulation uses historically known interest rate volatilities to scientifically generate the large number of interest rate paths needed to simulate the interest rate sensitivity of bank products with embedded options. Monte Carlo simulation is one of the best tools for dealing with many of the option-related problems in interest rate risk measurement.
Moral obligation bond
Revenue bonds issued by state agencies, government commissions, or other special purpose municipal entities that purport to have the added backing of a moral obligation of the city or state government. Since there is no legal obligation for the state or city to back the principal or interest due on these bonds, the moral obligation provides limited, if not dubious, support.
(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 though it is not legally the same. See chattel mortgage.
(2) verb — The action of granting a lien to pledge real property as security for the repayment of a debt.
A common type of secured corporate bond. The bond indenture for mortgage bonds, along with associated documents executed by the issuer, provides for the bondholders to have, through the trustee, an interest in real property collateral. For example, the bonds may be secured by a mortgage on real estate used by the company. This may be the case when the bond proceeds are used to finance the construction of a factory or plant. (Many pollution control and utility bonds are mortgage bonds.) It is important to understand that the mortgage is not the sole, or even the primary, backing for the repayment of these bonds. These debts are still financial obligations that the firm must repay even if the value of the collateral falls.
Percentages that are an expression of the total interest and principal payments that must be made each year to fully amortize a loan over a specified number of years using level payments.
A loan secured by a mortgage. In the mortgage-backed securities industry, loans secured through deeds of trust are also referred to as mortgage loans.
A name used to describe a promissory note that is secured by an interest in real property. Mortgage notes generally, but not always, call for mostly regular, periodic payments of principal and interest.
The simplest and oldest type of MBS. A pass-through is a security that provides its owners with a pro rata claim to all of the cash flow generated from a pool of mortgage loans.
See real estate investment trust.
Mortgage-backed security (MBS) or mortgage-backed bond
Securities composed of, or collateralized by, loans that are themselves collateralized by liens on real property. MBSs can be categorized into two major types. Pass-through pools are mortgage-backed bonds created by assembling a pool of similar mortgage loans into a single security. Investors in a pass-through pool receive a portion of every interest and principal payment (less serving charges) that is equivalent to the investor’s pro rata ownership share in the pool. The other major type is collateralized mortgage obligations (CMOs), usually real estate mortgage investment conduits (REMICs). Investors in a CMO own the rights to receive cash flow from an underlying pool of mortgages in a predetermined order based on priority. CMO securities are secured by pass-through pools. Both types of MBSs may be backed by either liens on residential or commercial properties; however, residential mortgages are more common. Both types of MBSs may be issued by either government agencies or private issuers; however, those issued by government agencies are more common. See pass-through, collateralized mortgage obligation and real estate mortgage investment conduit.
A secured party to whom insurance proceeds are paid as stipulated in a mortgagee payee clause of an insurance policy obtained by a debtor and covering property owned by a debtor and pledged to the secured party. Generally applies to real property.
A provision in a hazard insurance contract stipulating that in the event of a loss, proceeds will be paid to a secured party. Usually used when the insured property is real property. Includes personal property that is insured as contents of the insured real property. The term mortgagee clause may be used to refer to all such insurance policy stipulations. However mortgagee clauses are technically not as broad as a similar insurance policy stipulation called a standard mortgagee clause. See standard mortgagee clause.
A document obtained by some secured lenders with a collateral interest in property covered or potentially covered by a mortgage granted to a different lender. For example, if Bank B is taking a security interest in large equipment that might be deemed to be fixtures covered by a mortgage held by Bank A, Bank B may request a mortgagee waiver from Bank A. May also be used when a tenant is granting its lender a security interest in property that might be deemed to be fixtures subject to a mortgage granted by the landlord to its lender.
See medium-term notes.
Synthetic securities created from municipal securities. Variable-rate, short-term securities are, for example, created from long-term, taxable municipals when remarketing agents add a series of put options, the backing of a letter of credit, and an agreement to pay interest at rates that vary weekly, monthly, quarterly, or semiannually.
See market value of portfolio equity.