See option-adjusted spread.
Any party with an obligation to discharge; usually used to refer to a borrower.
See Office of the Comptroller of the Currency.
A term used to describe contingent liabilities, contingent assets, and commitments that are legally binding but are not assets or liabilities shown on the balance sheet under GAAP. Examples include loan commitments and letters of credit.
A term used to describe all but the most recently issued treasury or agency securities in a particular maturity class. For example, at any given time, there may be a number of U.S. Treasury security issues with remaining lives of about two years. The most recently issued two year securities are described as on-the-run. All the rest are described as off-the-run. Off the run securities trade at wider spreads than similar securities that are actively quoted or traded. They may also trade at slightly lower prices(higher yields).
Offer or offered price
The trading price proposed by the prospective seller of securities. Also called the asked or asking price.
Office of the Comptroller of the Currency (OCC)
Part of the U.S. Treasury department. The OCC is the primary regulator for banks with national charters.
Office of Thrift Supervision (OTS)
The OTS regulates federally insured savings and loan institutions. One of the provisions of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) established the OTS to replace the Federal Home Loan Bank Board as the primary thrift regulator.
See original-issue discount.
A term used to describe the most recently issued treasury or agency securities in a particular maturity class. For example, at any given time, there may be a number of U.S. Treasury security issues with remaining lives of about two years. The most recently issued two year securities are described as on-the-run. (All the rest are described as off-the-run.) On the run securities trade at narrower spreads than similar securities that are less actively traded. They may also trade at slightly higher prices(lower yields).
Checks or drafts drawn on the same bank that is used by the payee/drawee to cash the check or deposit the proceeds. Checks or drafts payable to the drawor’s bank itself, as opposed to checks drawn on other institutions.
A simple financial model where the future price of an instrument is the single variable or unknown. One-factor models, such as Black-Scholes or Vasicek, usually lead to closed form solutions. See closed form solution.
Types of credit extensions that permit borrowers to add to the amount borrowed, usually in irregular amounts, at various times subsequent to the granting of the credit. Examples include credit card loans, personal lines of credit, and home equity lines of credit.
Open market activities
The purchase or sale of government securities conducted by the Federal Reserve Bank of New York acting upon instruction from the Federal Reserve Board of Governors. Used to decrease the money supply when bonds are sold and the purchase funds paid the Fed are taken out of circulation or increase the money supply when newly created cash is used to buy securities. The changes in the money supply impact short-term interest rates and through that mechanism are the primary monetary tool of the FRB.
See continuous repo.
Operating expense ratio
A ratio used in real estate lending analysis. The ratio is the total operating expenses divided by the effective gross income.
An income statement subtotal that is variously called operating income or operating profit. Gross profit minus operating expenses. A credit balance here, shown as a positive number, indicates that the firm makes money on its principal operations. . A debit balance, shown as a negative number, indicates that the firm loses money on its principal operations.
A term used to describe the characteristic of a secondary market for a financial instrument evidenced by low transaction costs and smooth execution of trades. The spread between bid and offered prices, brokerage commissions, and taxes are the three main types of transaction costs. One of the requirements for readily marketable assets.
The risk to the bank that errors made in the course of conducting its business will result in losses. The Federal Reserve calls this operational risk and states in its definition that operational risk arises from the potential that inadequate information systems, operational problems, breaches in internal controls, fraud, or unforeseen catastrophes will result in unexpected losses. The Office of the Comptroller of the Currency calls this transaction risk and defines it as the risk to earnings or capital from problems with service or product delivery. Operations risk is covered under Basel II pillar I.
Letter issued by a certified public accountant to accompany financial statements. The opinion letter has two parts. One describes the scope of the accountant’s work in the preparation and testing, if any, related to the preparation of the financial reports covered by the letter. The other provides the accountant’s opinion regarding the fairness, accuracy, and conformity with GAAP of the financial statements. Accountant’s opinions are categorized as unqualified, qualified, disclaimer, or adverse depending upon the nature of the comments in the letter. See adverse opinion, disclaimer opinion, qualified opinion and unqualified opinion.
The cost of pursuing one course of action measured in terms of the foregone return that could have been earned on an alternative course of action that was not undertaken.
(1) A contract that gives its holder the right, but not the obligation, to buy or sell an underling security, commodity, or currency before a certain date. Options are often used in hedging. Put options give the holder the right to sell the underlying security, commodity, or currency at the strike price. Call options give the holder the right to buy the underlying security, commodity or currency at the strike price.
(2) A provision in a financial contract that gives one party to the contract one or more rights to change the maturity, the principal amount, the interest rate, or other contract term. In loans, the most common form of option risk arises from a borrower’s right to prepay. In securities, the most common form of option risk arises from an issuer’s right to call the security. See embedded option.
A duration measure that does allow for changes in cash flows as yields change A variation of effective or empirical duration. Option adjusted duration incorporates the expected duration-shortening effect of an issuer's embedded call provision. It is also called adjusted duration.
Option-adjusted spread (OAS)
(1) A measurement of the return provided to an investor from a financial instrument that is either an option or that includes an option. The option-adjusted spread calculations break up a security into separate cash flows. Each of those cash flows is discounted at a unique discount rate appropriate for its maturity. The discount rates are obtained from a benchmark yield curve. The benchmark yield curve is simply the currently available (spot) yields for risk-free investments of various maturities. Since U.S. Treasury obligations are not considered to have any credit risk, Treasury rates are used. OAS is not quoted as a yield. Instead, it is quoted as a difference, or spread, in basis points.
(2) A valuation technique for valuing financial instruments, portfolios of financial instruments, or financial institutions with options. This tool is one component used in the Office of Thrift Supervision net portfolio value model for modeling the interest rate risk in complex financial instruments. This methodology is also used by high-end commercial interest rate risk analysis models.
The risk that a change in prevailing interest rates will lead to an adverse impact on earnings or capital caused by changes in the timing of cash flows from investments. Cash flows may be received earlier than expected as a result of the exercise of options or of embedded options in financial contracts. One of the four primary components of interest rate risk. Option risk usually arises when a change in prevailing interest rates prompts the option holder to exercise the option. See option.
The seller of a put or call option.
Original face or original face value
The total principal amount of all of the loans in an MBS pool as of the issue date.
Original-issue discount (OID)
The amount of the difference between the par or redemption price and the price of the security at the time of its original issue. Issuers can issue securities with OID as an alternative to making periodic interest payments as a means of compensating investors. Zero coupon notes, strips, discount notes, and banker’s acceptances are examples of investment types with OID. For those instruments, the return provided to the investor comes in the form of a discount. OID should not be confused with the discounts that investors may pay for either coupon-bearing instruments or discount instruments resulting from a change in prevailing rates subsequent to the issuance of a security. OID is subject to different income tax treatment than discounts resulting from changes in market prices.
See over the counter.
Other comprehensive income (OCI)
A term defined by FAS 130. FAS 130 identifies three components of other comprehensive income
See Office of Thrift Supervision.
Out of the money
The situation where an option has only time value as opposed to intrinsic 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 out of the money when the strike price is above the spot price. A put option is out of the money when the strike price is below the spot price.
A type of credit enhancement used in some asset backed securities and some private mortgage backed securities. The principal amount of the collateral pledged for a given security exceeds to the principal amount of the security.
Over the counter (OTC)
Purchases and sales of financial instruments that do not take place in organized exchanges such as the New York Stock Exchange or the Chicago Board of Trade are termed over the counter. The phrase may be used as a noun to describe capital markets other than organized exchanges. The phrase may also be used as an adjective to describe instruments not traded on an organized exchange, such as over-the-counter derivatives.
See adjusted trading.
Ownership and encumbrance reports
See title search.