Banker's Glossary


P & I
Principal and interest as in the principal and interest required for periodic loan repayments.

PAC tranche
Planned amortization class tranche. A REMIC security created to receive selected cash flows from a pool of underlying mortgages securing the REMIC. PAC tranches use a structure similar to a sinking fund to establish a fixed principal payment schedule. Created together with a companion or support tranche.

PAC Z tranche or PAC Z bond
A CMO Z bond with some call and extension protection provided by collars. Like other Z bonds, a PAC Z bond earns interest that is accrued but not paid in cash for a defined time period. See Z tranche.

A security purchase transaction that is closed out or sold on or before the settlement or expiration date. In a pair-off, the investor commits to purchase a security. Then, prior to the predetermined settlement date, the investor offsets that purchase with a sale of the same security that is arranged to settle on or before the settlement date for the purchase. Instead of paying for the purchased security on the settlement date, the investor need only pay or receive the difference between the purchase and sale prices. Pair-offs are price speculations that are considered trading activities and may be criticized by bank examiners if not handled as trading activities.

(1) The principal or maturity value of a non-amortizing, debt security.

(2) The current face of a mortgage-backed security. See par line.

(3) The price at which the face value of a debt security equals its selling price or 100.

(4) For stocks, the face or nominal amount of a share.

Par line
The parity price at which the yield of a mortgage-backed bond equals its net coupon rate. Because of the delay days, the par line is not 100 but instead is somewhat lower. Par line is not constant for different coupon rates at different delay days. However, it is not a function of prepayment speeds.

Par value
See par for all securities except MBSs. See par line for MBSs.

Par yield curve
See yield curve.

Parallel yield curve shift
A change in interest rates that affects all of the different maturities for an instrument by the same amount. For example, if there was a parallel shift in U. S. Treasury rates in the amount of a 25 basis point increase, every maturity from 30 days to 30 years would rise by 25 basis points. The new yield curve, or graphical depiction of the term structure of interest rates, would be 25 basis points above the old yield curve at all points.

Pari passu
A lending term meaning at an equal rate or pace.

Parity price
(1) For a mortgage-backed security, see par line.

(2) For a convertible security, see conversion value.

Parity value of a convertible bond
See conversion value.

Partial duration
A duration measure calculated by changing one variable while all other variable are held constant. The most common example Is key rate duration where all variables are held constant except the yield for a specific maturity point on the yield curve. Another application of partial duration is the calculation of option-adjusted duration by changing a variable such the OAS while holding all other variables constant.

Partial release
A document or a process in which a secured party gives up its collateral interest in a portion of the property of the debtor that is pledged to secure a loan. For example, if a real estate developer has pledged 10 lots as collateral for a loan, a partial release may be used for each lot as it is sold. For personal property collateral, a partial release may be entered into the public record by using a standard form called a UCC-3.

An agreement between lenders to share a commitment to extend funds (if any), the extension of funds, and the credit risk for one or more credit facilities to a borrower. Almost always evidenced by a written agreement.

See general partnership and limited partnership.

The original type of MBS structure. In a pass-through, investors own a pro rata claim to the cash flows from the pool of underlying mortgages. Each investor’s pro rata share of interest and principal is remitted to the investor, "passed through," by an agent.

Pass-through rate
The net amount of interest paid to investors owning mortgage-backed securities after all servicing and guarantee fees are deducted.

Path-dependent options
Options whose exercise is influenced by the historical trend in interest rates in addition to the current level of interest rates. The exercise of a path dependent option is influenced by whether or not it is in the money as well as by how many times that option has previously been that deep in the money. Loan prepayments are path dependent. For example, if interest rates fall to 8 percent, a borrower with an 11 percent loan is less likely to prepay his loan than another borrower if rates have fallen to 8 percent and returned to 11 percent several times since the first borrower obtained his loan but only fallen to 8 percent once since the second borrower obtained his loan.

Patriot Act
Short name for the "Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001" ("USA PATRIOT Act"). The Patriot Act was signed by President Bush on October 26, 2001.

This act contains a number of significant regulatory requirements for banks. Section 314(b) permits financial institutions, upon providing notice to the United States Department of the Treasury, to share information with one another in order to identify and report to the federal government activities that may involve money laundering or terrorist activity. Section 326 of the USA PATRIOT Act requires that financial institutions implement reasonable procedures to (1) verify the identity of any person opening an account; (2) maintain records of the information used to verify the person's identity; and (3) determine whether the person appears on any list of known or suspected terrorists or terrorist organizations. Additional provisions prohibit banks from having accounts with shell banks, address availability of bank records, and change and clarify suspicious activity report requirements.

Payable-through-draft (PTD)
A form of check that is written on an organization other than a bank but is payable through banks. Credit union "checks" are actually PTDs. PTDs are recognized as disbursements after they clear, not when they are written. A PTD functions the same as a warrant.

Payee processing float
Time between when a payment is received and when the funds are deposited. When employees hold their paychecks over a weekend and when vendors process receipts only once a week, the payor benefits from the extra time its investments earn interest. These beneficial payee processing delays are limited to payments by check. Electronic payments (wire transfers and ACH credits) produce no processing delay at all.

Paying agent
An entity responsible for paying bond principal and interest on behalf of the debtor.

Payment bond
A type of insurance purchased by a builder that protects both the bank and the owner by providing that the insurance company will be responsible for payments due to laborers and other parties who provided services for the building project.

Payment date
The date that dividends, interest, or principal and interest payments are due to be paid to the owner of record of a security.

Payment guaranty
A guaranty in which the signer is guarantying payment of the obligation upon the borrower's failure to pay without the bank having to first attempt to collect from the borrower or from any collateral.

Payment intangible
A general intangible under which a debtor’s principal obligation is a monetary obligation from a third party. A category of personal property collateral defined by the 2000 revisions to Article 9 of the Uniform Commercial Code.

Payment processing float
See administrative float.

Payments systems disruptions
A type of systemic liquidity risk. The risk of funding problems arising from the failure to receive funds due to the bank. A payments system disruption need not result from an operational or computer failure. If one party fails to make a required funds transfer, that failure can trigger more defaults down the line. See systemic liquidity risk.

See projected benefit obligation.

Penciled in
An informal expression used to indicate that a potential buyer's offer to purchase a portion of a new issue is accepted subject to the potential seller winning the bid to become the underwriter.

Pension Benefit Guaranty Corporation (PBGC)
A U.S. Government agency that was created to insure guaranteed pension benefits. PBGC has statutory authority to claim up to 30% of the net assets of a firm that sponsors a pension plan when an underfunded plan is terminated. Such a PBGC claim is granted the same priority over the claims of other creditors as a tax lien.

Perfected security interest
A collateral interest in personal property collateral that has been properly documented. See security agreement and perfection.

The name for a procedure established by Article 9 of the Uniform Commercial Code. Creditors must comply with this procedure in order to establish the priority of their security interest in personal property relative to the priority of security interests in the same property that may be held by other creditors. (It may be used when an interest in collateral is provided by the debtor or by a guarantor or other third party.) Perfection does not normally constitute the actual agreement between the secured party and the debtor. By itself, perfection does not create a security interest and must therefore be supported by a separate security agreement or pledge agreement. There are several different procedures that can be used to achieve perfection of a security interest in a debtor’s personal property. The most common method is perfection by filing a financing statement. See financing statements and security agreement.

Performance bond
A type of insurance purchased by a builder that protects both the bank and the owner by providing that the insurance company will be responsible for completing construction if the contractor fails to do so.

Periodic cap
The maximum amount by which an adjustable-rate security’s coupon rate can change in any given period of time. Also called reset cap. For most ARMs and floaters, the maximum periodic or reset change is defined as an amount of change in each consecutive 12-month period over the life of the security. Thus the term annual cap is also used to describe most periodic caps.

Permanent lender
A lender, which may be a financial institution, an insurance company, or a pension fund, that finances real estate projects after construction is completed. Also called end lender. See takeout commitments.

Permanent working capital
An informal phrase used to describe the amount of short-term liabilities needed to offset a continuous or nearly continuous working capital shortfall. Also used as a name for a borrower's need for year-round working capital financing. This type of financing is usually needed by rapidly growing and/or undercapitalized firms and is usually provided by asset-based lenders.

Personal property
Defined by law to be all property that is not real property. Further classified in Article 9 of the Uniform Commercial Code into various categories.

Personal property.

Phase I audit
The most common form of environmental liability risk assessment. A phase I audit consists of a thorough review of the past and present ownership of the property as well as the past and present uses of the property. These reviews include examinations of public records regarding the property. Additional information is obtained from both a physical inspection of the property and from interviews with people who are familiar with the property. The goal of a phase I audit is to determine the presence or the likely presence of hazardous substances in the buildings, soil or ground water. Phase I audits are noninvasive and do not include the collection or analysis of samples. Accordingly, the findings of a phase I audit cannot be conclusive. The audit merely determines whether further investigations are needed.

Phase II audit
An environmental liability risk assessment. A phase II audit is usually conducted only when the phase I audit or other information about the property or about the activities conducted on the property indicate that there is a possibility of contamination. In the phase II audit, qualified individuals collect ground and water samples, test storage tanks, and/or collect building materials samples. Drilling may be conducted to obtain subsurface soil samples. Samples are then tested and analyzed.

Pillar I, pillar II, pillar III
See Basel II.

Pivot point
The point on a yield curve that separates the rising rates from the falling rates when yield curves flatten or steepen. Often near the five year point.

Plain vanilla
Simple; not complex. Sometimes used to differentiate pass-through MBS pools from CMO structures. More often used to mean sequential-pay REMICs, the simplest REMIC structure.

Planned amortization class (PAC) tranche
A REMIC security created to receive selected cash flows from a pool of underlying mortgages securing the REMIC. PAC tranches use a structure similar to a sinking fund to establish a fixed principal payment schedule. Created together with a companion or support tranche. PAC tranches are intended to have low call and low extension risk. Sometimes called controlled amortization bonds.

Platted land
Land that has been divided into lots described in a plat plan that is filed in the real estate records of a political entity.

An informal term for 1/64. Half of 1/32, the smallest increment commonly used to quote the price of an agency security. For example, a quoted price of 101 and 5/32 plus is equivalent to 101 and 11/64ths.

PO or P/O
See principal-only strip.

See basis point.

Political subdivision
A county, city, town, or other municipal corporation, a public authority, and generally any publicly owned entity that is an instrumentality of a state or of a municipal corporation.

(1) For mortgage-backed securities, a pool is a group of mortgage loans backing an individual security issue.

(2) In funds transfer pricing systems, a pool is an aggregation of funds to provide average or moving average cost of funds for allocation to products or business units.

Pool factor
See factor.

A collection of financial assets belonging to a single owner. For example, the municipal bond portfolio. Risk in portfolios is reduced by diversification.

The act of holding a financial instrument, one or more portfolios of financial instruments, or one’s entire balance sheet in a way that exposes the holder to profits or losses from future changes in market prices. Positions may be taken with the intent to profit from expected future market changes (trading activities); may result from inventories of financial assets maintained for sale to customers (dealing activities); or may be the result of the net exposure from transactions (residual positions resulting from trading activities, dealing activities, or customer accommodations).

Banks take positions in one of two ways: (1) In their trading accounts, banks (mainly large banks) may take positions with one or more financial instruments in the expectation of profiting from future rate changes. (2) More typically, banks hold or take balance sheet positions. The cumulative interest rate risk exposure from customer deposits, loans, and other activities creates a net residual position that the bank may or may not hedge. Choosing not to hedge is positioning. Alternatively, banks may create a position or add to a residual position in the expectation of profiting from them.

Positive convexity
A particular type of instability in the duration of an instrument. Positive convexity means that as yields rise, duration declines. Graphically, this is seen as a price/yield curve for which the price at very low and very high yields exceeds the price indicated by a straight, tangent line. For an instrument with positive convexity, duration overstates the interest rate sensitivity. If convexity is low, that is, if the price/yield relationship is close to a straight line, duration is stable. If convexity is high, duration is unstable. The greater an instrument's convexity, the less accurate duration will be.

Positive correlation
See correlation.

Positive duration
(1) The name for a particular relationship between changes in the price of a debt security and changes in prevailing interest rates. When a security has positive duration, its price increases in response to a decrease in prevailing market rates. Almost all securities have positive duration. Note that the term "duration" as used in this definition refers to modified duration. See convexity, modified duration and negative duration.

(2) For a financial institution, a situation in which the total duration of its assets is longer than the total duration of its liabilities. In such cases, the duration of equity is positive. In other words, an entity with long-term assets funded by short-term liabilities will have a positive duration of equity. A financial institution that has a positive duration of equity may also be described as having a negative gap or as being liability sensitive. The theoretical equity value, but not necessarily the stock price, of a financial institution with a positive duration of equity will decrease if interest rates rise and increase if interest rates decline. Note that the term "duration" as used in this definition refers to modified duration. See convexity, modified duration and negative duration.

Positive gap
A term referring to an asset-sensitive condition. A mismatch in which interest-sensitive assets exceed interest-sensitive liabilities.

Positive response verification
A form of auditing account balances in which the account debtor is requested to respond to either confirm or dispute the balance. One of two forms of direct verification.

Positive sloping yield curve
See yield curve slope.

Postclosing lien search
An investigation of the appropriate public records, conducted shortly after the closing of a secured transaction, to verify that the creditor’s security interest in the collateral was properly recorded and that it received the priority intended. See lien search.

Preauthorized check
A process by which the issuer of a check gives written permission to have the check written and charged against his or her account on a predetermined basis.

Prebid conference
A conference held with potential bank bidders to explain a request for proposal and answer questions.

Preclosing lien search
An investigation of the appropriate public records, conducted shortly before the closing of a secured transaction, to determine the likely priority that will be received for the creditor’s security interest in the proposed collateral. See lien search.

preference period
A legal term used in bankruptcy to describe a transaction deemed to have occurred under circumstances favorable to the creditor that benefited from the transaction. This provision is intended to protect unsecured creditors. Under the U.S. Bankruptcy Code, the preference period for most creditors is 90 days prior the date of the debtor's petition filing. The exception is a one year preference period applicable to creditors deemed to be an "insider" with respect to the bankrupt debtor. Collateral interests obtained by a creditor during the preference period are undone by the bankruptcy. See insiders.

Preferential transfer
See preference.

Preferred stock
A type of equity or capital representing shares of ownership in a corporation. May or may not receive distributions of corporate income in the form of dividends. Has a higher priority claim to corporate earnings or assets than common stock but lower priority than corporate debt. A corporation may issue more than one class of preferred stock with differing priority status such as first or second preferred. Often preferred stock issues have a defined dividend payment rate as long as there are sufficient corporate earnings to distribute.

(1) The amount by which the price for a security is greater than its par amount.

(2) The amount that must be paid above the par amount for an issuer to call or refund an issue before its maturity.

(3) The amount paid to purchase an option.

(4 The cost of an insurance policy.

(5) In banking, the segment of an interest rate that is offered or paid by one issuer representing the difference between the rate offered or paid by that issuer and the rate that other issuers of the same type offer or pay for similar issues. For example, the extra or higher interest rate that a distressed bank must pay above rates offered by other banks in order to attract funds.

Premium payer
The party in an options collar contract required to pay the difference between the cap and floor.

Expenses that are capitalized as assets on a firm's financial statements because they will be charged against activities in the near future rather than past activities. Also called prepaid expenses, prepaid assets or prepaid items. For example, if insurance premiums for the next six months are paid today, the amount paid may be shown as a pre- paid asset. The asset in that example would then be reduced to zero over the following six months by recognizing one-sixth of the amount as an expense in each of next six months. Insurance, taxes, and subscriptions are common prepaid expenses.

Prepayment estimate
A reasonable and supportable forecast of loan prepayments. In the case of a mortgage-backed security, it is the forecast of principal amortization caused by loan prepayments. A single prepayment estimate is associated with each projected interest rate environment. Estimates are used to forecast expected lives. Investors typically examine data for a range of prepayment estimates applicable to a range of preselected rate changes.

Prepayment or prepayments
(1) noun — A term used to describe loan or bond principal payments that are made in excess of the scheduled principal payments and before maturity. Any amount paid to reduce the principal before the due date or in excess of the required principal amortization. Prepayments may be voluntary or involuntary. For example, most residential mortgage loan contracts permit the homeowner to voluntarily prepay his or her loan at any time. Involuntary prepayments are liquidations resulting from foreclosures, condemnations, or casualty.

2) verb — The action of making excess or early payments.

Prepayment penalty
A fee that must be paid to the lender if the borrower prepays a loan within a defined time period. Many consumer loans, especially residential mortgage loans, do not have prepayment penalties.

Prepayment rate
A representation that reflects the rate at which prepayments are received or forecasted to be received for a mortgage loan, a pool of mortgage loans, or an MBS. May be expressed as a PSA or CPR speed.

Prepayment risk
The risk that prepayments will speed or slow and therefore change the yield and/or life of the security.

Pre-refunding (pre-re)
The sale of bonds used to obtain funds that are then placed in escrow to back bonds previously issued. The first issue typically comprises bonds that were originally issued at high, fixed coupon rates and that could not be called when rates subsequently fell. Since they could not be called, the issuer’s alternative method for reducing its interest cost for the debt is to issue new, lower cost debt and to use the proceeds of the new bonds to purchase Treasury securities. The interest received from the Treasury securities pays the interest due for the pre-refunded bonds until they can be called or until they mature. The original set of bonds is said to be pre-refunded by the second set of bonds. Those pre-refunded bonds have very little credit risk since the cash for their debt service comes from the Treasury securities and does not depend on the issuer. See refunding escrow deposits.

A process by which a check is presented for payment at the drawee’s bank.

The amount paid for a security. The price of a security is usually expressed as a percentage of its par value. For mortgage-related securities, the price is usually expressed as a percentage of the current face value. A price greater than 100 percent is a premium price while a price less than 100 percent is a discount price. See current face, discount, par and premium.

Price risk
The risk that the market value of an asset or liability will change adversely. One of nine risks defined by the OCC. 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. The Federal Reserve includes this risk in its definition of market risk. See interest rate risk and market risk.

Primary market
The issuance (sale) of new securities. As distinguished from the secondary market.

Primary reserves
For a bank, assets considered to be the primary source of extra liquidity. Primary reserves are usually defined to be cash on hand, balances on deposit with the Federal Reserve Bank, and balances due from correspondent banks (e.g., cash and due from banks).

The remaining balance owed on a loan by a borrower or on a security by its issuer, exclusive of any accrued interest.

Principal component analysis (PCA)
A mathematical tool used to reduce the number of variables while retaining the original variability of the data The first principal component accounts for as much of the variability in the data as possible, and each succeeding component accounts for as much of the remaining variability as possible. In interest rate risk analysis, PCA is applied to define non-parallel yield curve sifts to model. The number of variables is equal to the number of points on the yield curve, the first principal component is the rate level, the second is the twist or rotation of the yield curve around a pivot point and the third is the change in curvature or "bow" in the yield curve.

Principal-only strip (P/O)
A form of stripped mortgage-backed security that only passes principal payments received from the underlying mortgage loans to the security owners. May be a REMIC tranche.

Prior service costs
Costs that arise from amendments to defined benefit pension plans that retroactively increase benefits. In rare cases, retroactive amendments that decrease benefits can create negative prior service costs. Under FAS 87 rules, these costs are not added to the minimum pension liability reported on the balance sheets for sponsors of underfunded defined benefit pension plans. Instead, the costs are amortized over the projected remaining service lives for the employees expected to receive benefits. The amortization increases the reported benefit expense of the sponsoring firm. The unamortized portion of this off-balance sheet liability is disclosed as "unrecognized prior service costs" in a footnote to the financial statements.

Private placement
Instead of being sold to the general public after completion of an SEC registration, some bonds are sold privately, without a registration, to one or a few investors. When a bond issue is underwritten in this way, it is called a private placement.

Private pool
private label
Mortgage-backed securities not issued by or guaranteed by a U.S government agency or U.S. government sponsored enterprise. The mortgage loans comprising private pools are generally loans that do not meet GNMA, FNMA, or FHLMC requirements. Private pools may be structured as fixed-rate pass-through securities, floating-rate pass-through securities, or CMOs. Also known as whole loan pools.

Pro formas or pro forma statements
Financial information, often just balance sheets, prepared by adjusting a recent financial report to show the effect of recent or planned changes. Projected financial statements.

Probability distribution
The mathematical function describing the probability of different events, as described by values for a variable. A symmetrical distribution (one where to values are evenly distributed around the mean) is called a bell curve, a normal distribution or Gaussian bell curve. Values that are far more widely spread from the mean are said to have "fat tails", an informal name for kurtosis. Credit risk and liquidity risk have distributions that are very asymmetrical a phenomena called "skewness".

Money or property received when collateral is sold, exchanged, or collected.

Processed goods
Goods that become part of a product or mass of goods. An example is the flour used to bake bread.

Processing float
The internal processing time that an organization takes to prepare a receipt for a deposit or an invoice for payment.

Property that is created from other property.

Professional corporations
Entities sometimes used by doctors, lawyers, and other professionals. These entities can provide favorable tax treatment and administrative advantages and can therefore be advantageous to the professionals who use them. In most respects, other than taxes, they are indistinguishable from all other corporations.

Progress payments
Progress payments are payments made by the purchaser in stages as the seller acquires or builds the property to be sold. A written purchase agreement or contract establishes the seller's rights to claim payments before the property is delivered to the buyer. When the Federal government is making progress payments, the purchase contracts usually include standard clauses that affect secured lenders. These clauses provide that title to all materials, inventory, fixtures, and equipment that are chargeable to the government contract vests in the government.

Projected benefit obligation (PBO)
The actuarial present value of the pension benefits earned to date. In contrast to the ABO, measurement of the projected benefit obligation incorporates assumptions for future compensation rates for pay-related benefit plans. The PBO must be disclosed in a footnote to the financial statements.

Projected financial statements showing predicted income, cash flow, and/or balance sheets. Unlike pro forma statements, projections typically cover multiple time periods — sometimes as many as five future years.

Promissory note
A written contract between a borrower/debtor and a lender/creditor in which the borrower agrees to repay a loan granted by the lender. The contract specifies the amount of the loan and the terms of repayment.

Proprietary trading
Trading activity that is conducted purely for the anticipated profit of the trading entity. The term is used to distinguish such trades from trading that is conducted for customers, for market-making, or for hedging. Also
called strategic trading.

Name used to identify a business that is not a separate legal entity but instead is operated by an individual.

A document that describes the details and financial support for a new bond or stock issue offering. A prospectus is required by the Securities and Exchange Commission.

Protection buyer
Protection seller
Parties in a credit derivatives transaction. See credit derivative, credit swap, credit options and credit linked note.

The name used in some states, (e.g., Pennsylvania) for the public official responsible for receiving and maintaining public notices of liens such as financing statements. Usually a county official.

Provisional call protection
See soft call protection (for convertible bonds).

Prudential liquidity
Liquidity held for liquidity contingency risk or as a safety cushion. Also called standby liquidity.

See Bond Market Association and PSA model.

PSA model
One of two standard models for describing the rate at which prepayments have been, are, or are expected to be received for mortgages and mortgage-backed securities. The model assumes that borrowers are far less likely to refinance a new mortgage than they are to refinance an older mortgage. Thus the PSA model builds in an assumption of a 30-month phasein or ramp-up of prepayments. After a mortgage or a pool of mortgages is 30 months old, a speed of 100 percent PSA is equal to 6 percent CPR. Similarly, a speed of 200 percent PSA is equal to 12 percent CPR and 50 percent PSA is equal to 3 percent CPR. During the initial 30-month ramp-up, the PSA model assumes much slower speeds. For the first month, 100 percent PSA equals 0.20 percent CPR. In the second month, 100 percent PSA equals 0.40 percent CPR. This level rate of increase continues throughout the 30-month period. PSA is the standard prepayment model of the Bond Market Association, formerly the Public Securities Association. The letters PSA were once an acronym for the former organization name but now stand for "prepayment speed assumptions."

See payable-through-draft.

Public records
The records maintained by a filing authority that record the ownership and/or security interests held in property. Under Article 9 of the Uniform Commercial Code (UCC), creditors can perfect interests in a debtor’s personal property by recording a lien in the public records. Some states require such UCC filings to be made in a central, state-wide location. Other states require UCC filings to be made in public records maintained locally in each county. Both ownership and liens in real property are usually recorded in public records maintained by each county.

Public Securities Association (PSA)
Former name for the Bond Market Association.

Public warehouse
A central warehouse that accepts, stores, and delivers goods for multiple businesses. Often, public warehouses are bonded. Importers often use bonded public warehouses located in or near points of entry to delay payment of duties. Food is often kept in public warehouses, including grain elevators. Public warehouses issue collateral receipts or warehouse receipts and can be used for controlling inventory pledged to secure loans. See warehouse receipt.

Purchase money interest
A security interest in a debtor's property that is created when the creditor's extension of credit to the debtor is used by the debtor to acquire the property that is used to secure the transaction.

A contract that gives its holder the right to sell an underlying security, commodity, or currency on or before a certain date. The sale option is for a predetermined price called the strike price. Options are often used in hedging. See American option and European option.

Puttable advance
A loan granted to a member financial institution by a Federal Home Loan Bank. The put feature in a puttable advance enables the borrower to prepay the advance, in whole or in part, in the event that prevailing rates decline. Borrowers benefit when using this type of borrowing to fund loans or investments that prepay when prevailing interest rates fall.

Putable swap
A pay fixed/receive floating swap that grants the holder the option to cancel the swap before its maturity.