| accrued interest | That portion of the coupon payment accrued between the last coupon payment and the settlement day.
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| adjustable rate mortgage | A mortgage in which the interest rate is tied to some market interest rate. Thus, the required monthly payments can change over the life of the mortgage.
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| adjustment credit | Discount window loan offered for short term liquidity problems that may result from a temporary deposit outflow.
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| American option | An option that can be exercised at any time before the expiration date.
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| amortization schedule | Schedule showing how the monthly mortgage payments are split between principal and interest.
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| amortized | A mortgage is amortized when the fixed principal and interest payments fully pay off the mortgage by its maturity date.
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| annuity | A series of equal cash flows received at fixed intervals over the investment horizon.
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| asset securitization | The packaging and selling of loans and other assets backed by securities issued by an FI.
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| asset transformer | Financial claims issued by an FI that are more attractive to investors than are the claims directly issued by corporations.
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| assignment | The purchase of a share in a loan syndication with some contractual control and rights over the borrower.
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| automatic rate reduction mortgages | Mortgages in which the lender automatically lowers the rate on an existing mortgage when prevailing rates fall.
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| back end fee | The fee charged on the unused component of a loan commitment.
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| balance payment accounts | Summary of all transactions between citizens of two countries.
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| balloon payment mortgages | Mortgage that requires a fixed monthly interest payment for a three to five year period. Full payment of the mortgage principal (the balloon payment) is then required at the end of the period.
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| bank loan sale | Sale of loan originated by a bank with or without recourse to an outside buyer.
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| bank panic | A systemic or contagious run on the deposits of the banking industry as a whole.
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| bank run | A sudden and unexpected increase in deposit withdrawals from a bank.
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| banker's acceptance | A time draft payable to a seller of goods, with payment guaranteed by a bank.
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| Basel (or Basle) Accord | An agreement that requires the imposition of risk based capital ratios on banks in major industrialized countries.
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| basis risk | A residual risk that occurs because the movement in a spot (cash) asset's price is not perfectly correlated with the movement in the price of the asset delivered under a futures or forward contract.
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| bearer bonds | Bonds with coupons attached to the bond. The holder presents the coupons to the issuer for payments of interest when they come due.
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| bearer instrument | An instrument in which the holder at maturity receives the principal and interest.
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| best efforts underwriting | An underwriting in which the investment banker acts as an agent rather than as a principal that bears risk. The underwriter does not guarantee a price to the issuer and acts more as a placing or distribution agent on a fee basis related to the success in placing the issue.
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| bond and income fund | Funds consisting of fixed income capital market debt securities.
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| bond indenture | The legal contract that specifies the rights and obligations of the bond issuer and the bondholders.
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| bond markets | Markets in which bonds are issued and traded.
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| bonds | Long term debt obligations issued by corporations and government units.
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| book value | Value of assets and liabilities based on their historical costs.
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| Brady bond | A bond that is swapped for an outstanding loan to a less developed country (LDC).
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| broker dealers | Firms that assist in the trading of existing securities.
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| brokered deposits | Wholesale CDs obtained through a brokerage house.
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| business credit institutions | Finance companies specializing in business loans.
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| call option | An option that gives a purchaser the right, but not the obligation, to buy the underlying security from the writer of the option at a prespecified exercise price on a prespecified date.
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| call premium | The difference between the call price and the face value on the bond.
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| call provision | A provision on a bond issue that allows the issuer to force the bond holder to sell the bond back to the issuer at a price above the par value (or at the call price).
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| cap | A call option on interest rates, often with multiple exercise dates.
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| capital accounts | The section of the balance of payment table that summarizes capital flows into and out of a country.
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| capital markets | Markets that trade debt (bonds and mortgages) and equity (stock) instruments with maturities of more than one year.
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| capital to assets ratio | Ratio of an FI's core capital to its assets.
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| captive finance company | A finance company wholly owned by a parent corporation.
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| career average formula | Pension plan pays retirement benefits based on the employee's average salary over the entire period of employment.
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| cash management account | Money market mutual fund sold by investment banks that offer check writing privileges.
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| cash reserves | Vault cash and cash deposits held at the Federal Reserve.
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| CGAP effect | The relation between changes in interest rates and changes in net interest income.
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| clearinghouse | The unit that oversees trading on the exchange and guarantees all trades made by the exchange traders.
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| closed end investment companies | Specialized investment companies that have a fixed supply of outstanding shares but invest in the securities and assets of other firms.
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| collar | A position taken simultaneously in a cap and a floor.
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| collateralized mortgage obligation (CMO) | A mortgage backed bond issued in multiple classes or tranches.
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| combined ratio | A measure of the overall underwriting profitability of a line; equals the loss ratio plus the ratios of loss adjustment expenses to premiums earned as well as commission and other acquisition costs to premiums written minus any dividends paid to policyholders as a proportion of premiums earned.
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| commercial banking | Banking activity of deposit taking and lending.
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| commercial paper | An unsecured short term promissory note issued by a company to raise short term cash, often to finance working capital requirements.
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| common stock | The fundamental ownership claim in a public corporation.
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| community bank | A bank that specializes in retail or consumer banking.
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| compensating balance | A proportion of a loan that a borrower is required to hold on deposit at the lending institution.
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| compound interest | Interest earned on an investment is reinvested.
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| conditions precedent | Those conditions specified in the credit agreement or terms sheet for a credit that must be fulfilled before drawings are permitted.
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| consol bond | A bond that pays a fixed coupon each year forever.
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| contemporaneous reserve accounting system | An accounting system in which the reserve computation and reserve maintenance periods overlap.
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| conventional mortgages | Mortgages issued by financial institutions that are not federally insured.
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| convertible bonds | Bonds that may be exchanged for another security of the issuing firm at the discretion of the bondholder.
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| convexity | The degree of curvature of the price interest rate curve around some interest rate level.
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| core deposits | Deposits of the bank that are stable over short periods of time and thus provide a long term funding source to a bank.
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| corporate bonds | Long term bonds issued by corporations.
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| correspondent bank | A bank that provides services such as reciprocal accounts and agreements to another commercial bank.
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| correspondent banking | A relationship between a small bank and a large bank in which the large bank provides a number of deposit, lending, and other services.
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| counterparty credit risk | The risk that the other party to a contract will default on payment obligations.
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| country or sovereign risk | The risk that repayments from foreign borrowers may be interrupted because of interference from foreign governments.
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| coupon bonds | Bonds that pay interest based on a stated coupon rate. The interest or coupon payments per year is generally constant over the life of the bond.
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| coupon interest rate | Interest rate used to calculate the annual cash flow the bond issuer promises to pay the bond holder.
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| credit equivalent amount | The amount of credit risk exposure of an off balance sheet item calculated by multiplying the face value of an off balance sheet instrument by a conversion factor.
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| credit risk | The risk that the promised cash flows from loans and securities held by FIs may not be paid in full.
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| credit scoring system | A mathematical model that uses observed loan applicant's characteristics to calculate a score that represents the applicant's probability of default.
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| credit spread call option | A call option whose payoff increases as a yield spread decreases below a stated spread.
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| cross sectional analysis | Analysis of financial statements comparing one firm with others.
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| cumulative preferred stock | Preferred stock in which missed dividend payments go into arrears and must be made up before any common stock dividends can be paid.
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| cumulative voting | All directors up for election are voted on at the same time. The number of votes assigned to each stockholder equals the number of shares held multiplied by the number of directors to be elected.
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| currency appreciation | When a country's currency rises in value relative to other currencies, meaning that the country's goods are more expensive for foreign buyers and foreign goods are cheaper for foreign sellers (all else constant).
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| currency depreciation | When a country's currency falls in value relative to other currencies, meaning the country's goods become cheaper for foreign buyers and foreign goods become more expensive for foreign sellers.
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| currency swap | A swap used to hedge against exchange rate risk from mismatched currencies on assets and liabilities.
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| current accounts | The section of the balance of payment table that summarizes foreign trade in goods and services, net investment income, and gifts, grants, or aid given to other countries.
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| current exposure | The cost of replacing a derivative securities contract at today's prices.
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| day traders | Exchange members who take a position within a day and liquidate it before day's end.
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| debentures | Bonds backed solely by the general credit of the issuing firm, unsecured by specific assets or collateral.
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| default option | An option that pays the par value of a loan in the event of a loan default.
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| default risk | The risk that a security's issuer will default on that security by being late on or missing an interest or principal payment.
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| defined benefit pension plan | Pension plan in which the employer agrees to provide the employee with a specific cash benefit upon retirement.
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| defined contribution benefit plan | Pension plan in which the employer agrees to make a specified contribution to the pension fund during the employee(s) working years.
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| delegated monitor | An economic agent appointed to act on behalf of smaller investors in collecting information and/or investing funds on their behalf.
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| de novo office | A newly established office.
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| derivative security | An agreement such as a futures, forward, swap, or option contract between two parties to exchange a standard quantity of an asset at a predetermined price at a specified date in the future. The agreement is entered by an FI for hedging or other purposes. The payoff of a derivative security is linked to other, previously issued securities.
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| derivative securities markets | The markets in which derivative securities trade.
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| direct transfer | A corporation sells its stock of debt directly to investors without going through a financial institution.
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| discount bond | A bond in which the present value of the bond is less than its face value.
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| discount broker | A stockbroker that conducts trades for customers but does not offer investment advice.
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| discount points | Interest payments made when the loan is issued (at closing). One discount point paid up front is equal to 1 percent of the principal value of the mortgage.
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| discount rate | The interest rate on loans made by Federal Reserve Banks to depository institutions.
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| discount window | The facility through which Federal Reserve Banks issue loans to depository institutions.
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| disintermediation | Withdrawal of deposits from depository institutions to be reinvested elsewhere(for example), in money market mutual funds.
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| diversify | The ability of an economic agent to reduce risk by holding a number of securities in a portfolio.
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| down payment | A portion of the purchase price of the property a financial institution requires the mortgage borrower to pay up front.
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| downsizing | Shrinking an FI's asset size.
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| dual banking system | The coexistence of both nationally and state chartered banks, as in the United States.
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| dual class firms | Two classes of common stock are outstanding, with differential voting rights assigned to each class.
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| duration | The weighted average time to maturity on an investment.
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| duration gap | A measure of overall interest rate risk exposure for an FI.
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| earning assets | Investment securities plus net loans and leases.
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| EAT | Earnings after taxes.
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| EBIT | Earnings before interest and taxes.
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| economies of scale | The concept that cost reduction in trading and other transaction services results from increased efficiency when FIs perform these services. It is measured as the degree to which an FI's average unit costs of producing financial services fall as its output of services increases. For example, cost reduction in trading and other transaction services resulting from increased efficiency when these services are performed by FIs.
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| economies of scope | The degree to which an FI can generate cost synergies by producing multiple financial service products.
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| elasticity | The percentage change in the price of a bond for any given change in interest rates.
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| equity funds | Funds consisting of common and preferred stock securities.
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| equity participation mortgage | A mortgage that is similar to a SAM except that an outside investor shares in the appreciation of the property rather than the financial institution.
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| equivalent annual return | Rate earned over a 12 month period taking the compounding of interest into account.
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| etrade | Buying and selling shares on the Internet.
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| Eurocommercial paper | Eurosecurities issued by dealers of commercial paper without involving a bank.
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| Eurodollar bond | Dollar denominated bonds issued mainly in London and other European centers such as Luxembourg.
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| Eurodollar deposit | Dollar denominated deposits in non U.S. banks.
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| Eurodollar market | The market in which Eurodollars trade.
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| Euronotes | Short term notes similar to commercial paper. These instruments are most frequently used by European banks that deal in commercial paper.
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| European option | An option that can be exercised only on the expiration date.
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| excess reserves | Additional reserves banks choose to hold.
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| expected rate of return | The interest rate an investor would earn on a security if he or she buys the security at its current market price, receives all promised or expected payments on the security, and sells the security at the end of his or her investment horizon.
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| extended credit | Discount window loan offered to banks with severe liquidity problems due to deposit outflows that will not be resolved in the foreseeable future.
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| factoring | The process of purchasing accounts receivable from corporations (often at a discount) usually with no recourse to the seller should the receivables go bad.
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| fed funds rate | The interest rate on short term funds transferred between financial institutions, usually for a period of one day.
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| federal funds | Short term funds transferred between financial institutions, usually for a period of one day.
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| federal funds market | An interbank market for short term borrowing and lending of bank reserves.
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| federal funds rate | The interest rate for borrowing fed funds.
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| Federal Open Market Committee (FOMC) | The major monetary policy making body of the Federal Reserve System.
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| Federal Reserve Board Trading Desk | Unit of the Federal Reserve Bank of New York through which open market transactions are conducted.
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| federally insured mortgages | Mortgages originated by financial institutions, with repayment guaranteed by either the Federal Housing Administration (FHA) or the Veterans Administration (VA).
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| final pay formula | Pension plan pays retirement benefits based on a percentage of the average salary during a specified number of years at the end of the employee's career times the number of years of service.
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| financial distress | The state when a borrower is unable to meet a payment obligation to lenders and other creditors.
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| financial institutions | Institutions that perform the essential function of channeling funds from those with surplus funds to those with shortages of funds.
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| financial markets | The arenas through which funds flow.
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| financing gap | The difference between a bank's average loans and average (core) deposits.
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| financing requirement | The financing gap plus a bank's liquid assets.
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| fire sale price | The price received for an asset that has to be liquidated (sold) immediately.
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| firm commitment offering | Securities offered from the issuing firm purchased by an underwriter.
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| firm commitment underwriting | The issue of financial instruments by an investment bank in which the investment bank guarantees the corporation a price for newly issued instruments by buying the whole issue at a fixed price from the corporate issuer. It then seeks to resell these instruments to suppliers of funds (investors) at a higher price.
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| firm specific credit risk | The risk of default for the borrowing firm associated with the specific types of project risk taken by that firm.
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| fixed rate mortgage | A mortgage that locks in the borrower's interest rate and thus the required monthly payment over the life of the mortgage, regardless of how market rates change.
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| flat benefit formula | Pension plan that pays a flat amount for every year of employment.
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| float | The interval between the deposit of a check and when the funds become available for a depositor use-that is, the time it takes for a check to clear at the bank.
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| floor | A put option on interest rates, often with multiple exercise dates.
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| floor broker | Exchange members who place trades from the public.
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| foreclosure | The process of taking possession of the mortgaged property in satisfaction of a defaulting borrower's indebtedness and forgoing claim to any deficiency.
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| foreign exchange intervention | Commitments between countries about the institutional aspects of their intervention in the foreign exchange markets.
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| foreign exchange markets | Markets in which cash flows from the sale of products or assets denominated in a foreign currency are transacted.
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| foreign exchange rate | The price at which one currency can be exchanged for another currency.
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| foreign exchange risk | Risk that cash flows will vary as the actual amount of U.S. dollars received on a foreign investment changes due to a change in foreign exchange rates.
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| foreign exchange risk | The risk that exchange rate changes can affect the value of an FI's assets and liabilities located abroad.
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| forward contract | An agreement to transact involving the future exchange of a set amount of assets at a set price.
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| forward foreign exchange transaction | The exchange of currencies at a specified exchange rate (or forward exchange rate ) at some specified date in the future.
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| forward rate | An expected rate (quoted today) on a security that originates at some point in the future.
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| 401(k) plans | Employer sponsored plans that supplement a firm's basic retirement plan.
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| fraudulent conveyance | A transaction such as a sale of securities or transference of assets to a particular party that is determined to be illegal.
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| frequency of loss | The probability that a loss will occur.
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| fully amortized | The equal, periodic repayment on a loan that reflects part interest and part principal over the life of the loan.
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| fully funded | A pension plan that has sufficient funds available to meet all future payment obligations.
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| futures contract | An agreement to transact involving the future exchange of a set amount of assets for a price that is settled daily.
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| futures option | An option contract that, when exercised, results in the delivery of a futures contract as the underlying asset.
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| GDS ratio (gross debt service) | Gross debt service ratio calculated as total annual accommodation expenses divided by annual gross income.
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| general obligation bonds | Bonds backed by the full faith and credit of the issuer.
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| graduated payment mortgages | Mortgages in which borrowers make small payments early in the life of the mortgage. Payments then increase over the first 5 to 10 years, and finally payments level off at the end of the mortgage period.
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| grandfathered subsidiaries | Subsidiaries established prior to the passage of a restrictive law and not subject to that law.
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| gross proceeds | The price at which the investment bank resells the stock to investors.
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| growing equity mortgages | Mortgages in which the initial payments are the same as on a conventional mortgage, but they increase over a portion or the entire life of the mortgage. In contrast to GPMs, which do not affect the time until the mortgage is paid off, the incremental increase in monthly payments on GEMs reduces the principal on the mortgage more quickly. This reduces the actual life of the mortgage.
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| hedging selectively | Only partially hedging the gap on individual assets and liabilities.
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| highly leveraged transaction (HLT) loan | A loan that finances a merger and acquisition; a leveraged buyout results in a high leverage ratio for the borrower.
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| holding company | A parent company that owns a controlling interest in a subsidiary bank or other FI.
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| home equity loan | Loans that let customers borrow on a line of credit secured with a second mortgage on their homes.
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| hybrid funds | Funds consisting of stock and bond securities.
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| immunized | Describes an FI that is fully hedged or protected against adverse movements in interest rates (or asset prices).
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| implicit premiums | Deposit insurance premiums or costs imposed on a bank through activity constraints rather than direct monetary charges.
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| indirect transfer | A transfer of funds between suppliers and users of funds through a financial intermediary.
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| individual retirement accounts (IRAs) | Self directed retirement accounts set up by employees who may also be covered by employer sponsored pension plans.
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| inflation | The continual increase in the price level of a basket of goods and services.
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| initial margin | A deposit required on futures trades to ensure that the terms of any futures contract will be met.
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| initial public offerings (IPOs) | The first public issue of financial instruments by a firm.
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| inside money | That part of the money supply produced by the private banking system.
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| insolvency risk | The risk that an FI may not have enough capital to offset a sudden decline in the value of its assets relative to its liabilities.
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| insurance guarantee fund | A fund of required contributions from within state insurance companies to compensate insurance company policyholders in the event of a failure.
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| insured pension plan | A pension fund administered by a life insurance company.
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| interest rate parity theorem (IRPT) | The theory that the domestic interest rate should equal the foreign interest rate minus the expected appreciation of the domestic currency.
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| interest rate risk | The risk incurred by an FI when the maturities of its assets and liabilities are mismatched.
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| interest rate spread | The difference between lending and deposit rates.
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| interest rate swap | An exchange of fixed interest payments for floating interest payments by two counterparties.
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| intrinsic value of an option | The difference between an option's exercise price and the underlying asset's price.
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| investment banking | Banking activity of underwriting, issuing, and distributing securities.
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| IO strips | The owner of an IO strip has a claim to the present value of interest payments by the mortgagees in the GNMA pool.
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| IPO | A corporation's initial or first time public offering of debt or equity.
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| junk bond | A bond rated as speculative or less than investment grade (below Baa by Moody's and BBB by S&P) by bond rating agencies.
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| lagged reserve accounting system | An accounting system in which the reserve computation and reserve maintenance period do not overlap.
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| LDC loan | Loans made to a less developed country (LDC).
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| letter of credit | A credit guarantee issued by an FI for a fee on which payment is contingent on some future event occurring, most notably default of the agent that purchases the letter of credit. For example, contingent guarantees sold by an FI to underwrite the trade or commercial performance of the buyer of the guarantee.
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| lien | A public record attached to the title of the property that gives the financial institution the right to sell the property if the mortgage borrower defaults.
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| limit order | An order to transact at a specified price.
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| limited liability | No matter what financial difficulties the issuing corporation encounters, neither it nor its creditors can seek repayment from the firm's common stockholders. This implies that common stockholder losses are limited to the original amount of their investment.
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| liquidity | The ease with which an asset can be converted into cash.
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| liquidity risk | The risk that a sudden surge in liability withdrawals may require an FI to liquidate assets in a very short period of time and at low prices.
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| load fund | A mutual fund with an up front sales or commission charge that the investor must pay.
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| loan commitment agreement | Contractual commitment to loan to a firm a certain maximum amount at given interest rate terms.
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| loan sharks | Subprime lenders that charge unfairly exorbitant rates to desperate, subprime borrowers.
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| loanable funds theory | A theory of interest rate determination that views equilibrium interest rates in financial markets as a result of the supply and demand for loanable funds.
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| loans sold | Loans originated by the FI and then sold to other investors that can be returned to the originating institution.
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| London interbank offered rate (LIBOR) | A base rate for prime interbank dollar loans in the Eurodollar market of a given maturity. FIs use LIBOR as an index for annual changes on variable rate loans.
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| long position | A purchase of a futures contract.
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| long tail loss | A loss for which a claim is made some time after a policy was written.
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| loss ratio | A measure of pure losses incurred to premiums earned.
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| lump sum payment | A single cash flow occurs at the beginning and end of the investment horizon with no other cash flows exchanged.
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| macrohedging | Hedging the entire duration gap of an FI.
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| maintenance margin | The margin a futures trader must maintain once a futures position is taken. If losses on the customer's futures position occur and the level of the funds in the margin account drop below the maintenance margin, the customer is required to deposit additional funds into his or her margin account bringing the balance back up to the initial margin.
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| marked to market | Describes the prices on outstanding assets and liabilities that are adjusted each day to reflect current market conditions. For example, asset and balance sheet values are marked to market when their values are adjusted to reflect current market prices.
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| market efficiency | The process by which financial security prices move to a new equilibrium when interest rates or a security specific characteristic changes. Measured as the speed with which financial security prices adjust to unexpected news pertaining to interest rates or a stock specific characteristic.
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| market order | An order to transact at the best price available when the order reaches the post.
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| market risk | The risk incurred in trading assets and liabilities due to changes in interest rates, exchange rates, and other asset prices.
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| market to book ratio | A ratio that shows the discrepancy between the stock market value of an FI's equity and the book value of its equity.
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| market value or mark to market value basis | Balance sheet values that reflect current market prices rather than historical prices.
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| McCarran Ferguson Act of 1945 | Regulation confirming the primacy of state over federal regulation of insurance companies.
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| megamerger | The merger of banks with assets of $1 billion or more.
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| microhedging | Using a futures (forward) contract to hedge a specific asset or liability.
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| minimum risk portfolio | A portfolio for which a combination of assets reduces the variance of portfolio returns to the lowest feasible level.
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| MMDAs | Money market deposit accounts with retail savings accounts and some limited checking account features.
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| modified duration | Duration divided by 1 plus the interest rate.
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| monetary base | Currency in circulation and reserves (depository institution reserves and vault cash of commercial banks) held by the Federal Reserve.
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| money center bank | A bank that relies heavily on nondeposit or borrowed sources of funds.
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| money market mutual funds | Specialized mutual funds that offers depositlike interest bearing claims to savers. These funds consist of various mixtures of money market securities.
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| money markets | Markets that trade debt securities or instruments with maturities of less than one year.
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| moral hazard | The loss exposure an insurer faces when providing insurance encourages the insured to take more risks.
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| mortgage (asset) backed bonds | Bonds collateralized by a pool of assets.
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| mortgage bonds | Bonds issued to finance specific projects, which are pledged as collateral for the bond issue.
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| mortgage sale | Sale of a mortgage originated by a bank with or without recourse to an outside buyer.
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| mortgages | Loans to individuals or businesses to purchase a home, land, or other real property.
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| multibank holding company (MBHC) | A parent banking organization that owns a number of individual bank subsidiaries.
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| municipal bonds | Securities issued by state and local (e.g., county, city, school) governments.
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| mutual organization | An institution in which the liability holders are also the owners for example, in a mutual savings bank, depositors also own the bank.
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| NAFTA | North American Free Trade Agreement.
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| naive hedge | A hedge of a cash asset on a direct dollar for dollar basis with a forward or futures contract.
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| naked options | Option positions that do not identifiably hedge an underlying asset or liability.
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| national treatment | Regulation of foreign banks in the same fashion as domestic banks, or the creation of a level playing field.
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| NAV | The net asset value of a mutual fund equal to the market value of the assets in the mutual fund portfolio divided by the number of shares outstanding.
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| negotiable certificates of deposit (CDs) | Bank issued, fixed maturity interest bearing time deposits with face values of $100,000 or more that specify an interest rate and maturity date and are negotiable. They can be resold in the secondary market.
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| negotiable instrument | An instrument whose ownership can be transferred in the secondary market.
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| net charge offs | Actual losses on loans and leases.
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| net deposit drain | The amount by which cash withdrawals exceed additions; a net cash outflow.
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| net exposure | A financial institution's overall foreign exchange exposure in any given currency.
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| net interest margin | Interest income minus interest expense divided by earning assets.
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| net long (short) in a currency | A position of holding more (fewer) assets than liabilities in a given currency.
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| net operating income | Income before taxes and extraordinary items.
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| net proceeds | The guaranteed price at which the investment bank purchases the stock from the issuer.
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| net regulatory burden | The difference between the private costs of regulations and the private benefits for the producers of financial services.
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| net worth | A measure of an FI's capital that is equal to the difference between the market value of its assets and the market value of its liabilities.
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| net write offs | Actual loan losses less loan recoveries.
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| no load fund | A mutual fund that does not charge up front sales or commission charges on the sale of mutual fund shares to investors.
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| nominal interest rates | The interest rates actually observed in financial markets.
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| nonbank bank | A bank divested of its commercial loans and/or its demand deposits.
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| noncumulative preferred stock | Preferred stock in which dividend payments do not go into arrears and are never paid.
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| noninsured pension plan | A pension fund administered by a financial institution other than a life insurance company.
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| nonparticipating preferred stock | Preferred stock in which the dividend is fixed regardless of any increase or decrease in the issuing firm's profits.
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| notional principal | The principal amount involved in a swap.
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| NOW account | Negotiable order of withdrawal account is similar to a demand deposit, but pays interest when a minimum balance is maintained that is, an interest bearing checking account.
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| off balance sheet (OBS) asset | When an event occurs, this item moves onto the asset side of the balance sheet or income is realized on the income statement.
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| off balance sheet liability | When an event occurs, this item moves onto the liability side of the balance sheet or an expense is realized on the income statement.
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| off balance sheet risk | The risk incurred by an FI as the result of activities related to contingent assets and liabilities.
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| one bank holding company | A parent banking organization that owns one bank subsidiary and nonbank subsidiaries.
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| open end mutual fund | A fund for which the supply of shares is not fixed but can increase or decrease daily with purchases and redemptions of shares.
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| open interest | The total number of the futures, put option, or call option contracts outstanding at the beginning of the day. For example, the outstanding stock of put or call contracts.
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| open market operations | Purchases and sales of U.S. government and federal agency securities by the Federal Reserve.
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| open outcry auction | Method of futures trading where traders face each other and (cry out their offer to) buy or sell a stated number of futures contracts at a stated price.
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| open position | An unhedged position in a particular currency.
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| operating ratio | A measure of the overall profitability of a P&C insurer; equals the combined ratio minus the investment yield.
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| operational risk | The risk that existing technology or support systems may malfunction or break down.
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| opportunity cost | The forgone interest cost from the holding of cash balances when they are received.
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| option | A contract that gives the holder the right, but not the obligation, to buy or sell the underlying asset at a specified price within a specified period of time.
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| originating house | The lead bank in the syndicate negotiates with the issuing company on behalf of the syndicate.
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| other savings deposits | All savings accounts other than MMDAs.
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| outside money | That part of the money supply directly produced by the government or central bank, such as notes and coin.
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| overfunded | A pension plan that has more than enough funds to meet the required future payouts.
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| overhead efficiency | A bank's ability to generate noninterest income to cover noninterest expense.
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| over the counter market | Markets that do not operate in a specific fixed location rather, transactions occur via telephones, wire transfers, and computer trading.
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| par bond | A bond in which the present value of the bond is equal to its face value.
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| participating preferred stock | Preferred stock in which actual dividends paid in any year may be greater than the promised dividends.
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| participation in a loan | The act of buying a share in a loan syndication with limited contractual control and rights over the borrower.
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| pass through mortgage securities | Mortgage backed securities that "pass through" promised payments of principal and interest on pools of mortgages created by financial institutions to secondary market participants holding interests in the pools.
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| pension plan | Document that governs the operations of a pension fund.
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| perfecting collateral | The process of ensuring that collateral used to secure a loan is free and clear to the lender should the borrower default on the loan.
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| personal credit institutions | Finance companies specializing in installment and other loans to consumers.
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| plain vanilla | A standard agreement without any special features.
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| PO strips | Represent the mortgage principal components in each monthly payment by the mortgagee.
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| policy directive | Statement sent to the Federal Reserve Board Trading Desk from the FOMC that specifies the money supply target.
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| policy loans | Loans made by an insurance company to its policyholders using their policies as collateral.
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| policy reserves | A liability item for insurers that reflects their expected payment commitments on existing policy contracts.
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| position traders | Exchange members who take a position in the futures market based on their expectations about the future direction of the prices of the underlying assets.
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| potential exposure | The risk that a counterparty to a derivative securities contract will default in the future.
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| power of sale | The process of taking the proceedings of the forced sale of a mortgage property in satisfaction of the indebtedness and returning to the mortgagor the excess over the indebtedness or claiming any shortfall as an unsecured creditor.
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| preemptive rights | A right of existing stockholders in which new shares must be offered to existing shareholders first in such a way that they can maintain their proportional ownership in the corporation.
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| preferred stock | A hybrid security that has characteristics of both bonds and common stock.
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| premium bond | A bond in which the present value of the bond is greater than its face value.
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| premiums earned | Premiums received and earned on insurance contracts because time has passed with no claim filed.
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| premiums written | The entire amount of premiums on insurance contracts written.
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| prepay | To pay back a loan before its maturity to the FI that originated the loan.
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| price risk | The risk that an asset's sale price will be lower than its purchase price.
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| price sensitivity | The percentage change in a bond's present value for a given change in interest rates.
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| primary markets | Markets in which corporations raise funds through new issues of securities
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| prime lending rate | The base lending rate periodically set by banks.
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| private mortgage insurance | Insurance contract purchased by a mortgage borrower guaranteeing to pay the financial institution the difference between the value of the property and the balance remaining on the mortgage.
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| private pension funds | funds administered by a private corporation.
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| private placement | A securities issue placed with one or a few large institutional investors.
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| professional traders | Exchange members who trade for their own account.
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| prompt corrective action | Mandatory action that regulators must take as a bank's capital ratio falls.
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| proxy | A voting ballot sent by a corporation to its stockholders. When returned to the issuing firm, a proxy allows stockholders to vote by absentee ballot or authorizes representatives of the stockholders to vote on their behalf.
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| public pension funds | Funds administered by a federal, state, or local government.
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| purchased funds | Rate sensitive funding sources of the firm.
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| purchasing power parity (PPP) | The theory explaining the change in foreign currency exchange rates as inflation rates in the countries change.
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| put option | An option that gives a purchaser the right, but not the obligation, to sell the underlying security to the writer of the option at a prespecified exercise price on a prespecified date.
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| QTL test | Qualified thrift lender test that sets a floor on the mortgage related assets that thrifts can hold (currently, 65 percent).
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| rate sensitivity | The time to repricing an asset or liability.
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| real interest rate | The interest rate that would exist on a default free security if no inflation were expected.
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| realized rate of return | The actual interest rate earned on an investment in a financial security.
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| recourse | The ability to put an asset or loan back to the seller or originator should the credit quality of that asset deteriorate.
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| red herring proxy | A preliminary version of the prospectus describing a new security issue distributed to potential buyers prior to the security's registration.
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| regional or super regional bank | A bank that engages in a complete array of wholesale commercial banking activities.
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| registered bond | A bond in which the owner is recorded by the issuer and the coupon payments are mailed to the registered owner.
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| regulation Q ceiling | An interest ceiling imposed on small savings and time deposits at banks and thrifts until 1986.
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| regulator forbearance | A policy not to close economically insolvent FIs, allowing them to continue in operation.
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| REIT | A real estate investment trust; a closed end investment company that specializes in investing in mortgages, property, or real estate company shares.
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| report of condition | Balance sheet of a commercial bank reporting information at a single point in time.
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| report of income | Income statement of a commercial bank reporting revenues, expenses, net profit or loss, and cash dividends over a period of time.
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| repricing or funding gap | The difference between those assets whose interest rates will be repriced or changed over some future period (RSAs) and liabilities whose interest rates will be repriced or changed over some future period (RSLs).
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| repurchase agreement | An agreement involving the sale of securities by one party to another with a promise to repurchase the securities at a specified price and on a specified date. For example, open market transactions in which the Trading Desk purchases government securities with an agreement that the seller will repurchase them within a stated period of time.
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| required rate of return | The interest rate an investor should receive on a security given its risk.
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| required reserves | Reserves the Federal Reserve requires banks to hold.
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| reserve computation period | Period over which required reserves are calculated.
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| reserve maintenance period | Period over which vault cash and deposits at the Federal Reserve Bank must meet or exceed the required reserve target.
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| reserves | Depository institution's vault cash plus reserves deposited at Federal Reserve Banks.
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| residual claim | In the event of liquidation, common stockholders have the lowest priority in terms of any cash distribution.
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| retail bank | A bank that focuses its business activities on consumer banking relationships.
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| retail CDs | Time deposits with a face value below $100,000.
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| revenue bonds | Bonds sold to finance a specific revenue generating project; they are backed by cash flows from that project.
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| reverse annuity mortgage | A mortgage for which a mortgage borrower receives regular monthly payments from a financial institution rather than making them. When the RAM matures (or the borrower dies), the borrower (or the estate of the borrower) sells the property to retire the debt.
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| reverse repurchase agreement | An agreement involving the purchase of securities by one party from another with the promise to sell them back.
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| risk adjusted assets | On and off balance sheet assets whose value is adjusted for approximate credit risk.
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| routine hedging | Hedging all interest rate risk exposure.
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| runoff | Periodic cash flow of interest and principal amortization payments on long term assets such as conventional mortgages that can be reinvested at market rates.
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| sales finance institutions | Finance companies specializing in loans to customers of a particular retailer or manufacturer.
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| saving institutions | Savings associations and savings banks combined.
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| scalpers | Exchange members who take positions for very short periods of time, sometimes only minutes, in an attempt to profit from this active trading.
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| seasonal credit | Discount window loan offered to banks for seasonal liquidity squeezes.
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| second mortgages | Loans secured by a piece of real estate already used to secure a first mortgage.
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| secondary market | A market that trades financial instruments once they are issued.
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| secondary stock markets | The markets in which stocks, once issued, are traded rebought and resold.
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| Section 20 affiliate | A securities subsidiary of a bank holding company through which a banking organization can engage in investment banking activities.
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| securitized | Securities are packaged and sold as assets backing a publicly traded or privately held debt instrument.
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| securitized mortgage assets | Mortgages packaged and used as assets backing secondary market securities.
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| separate account | Annuity program sponsored by life insurance companies in which the payoff on the policy is linked to the assets in which policy premiums are invested.
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| serial bonds | Bonds that mature on a series of dates, with a portion of the issue paid off on each.
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| severity of loss | The size of a loss.
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| shared appreciation mortgage | Allows a home buyer to obtain a mortgage at an interest rate below current market rates in exchange for a share in any appreciation in the property value. If the property is eventually sold for more than the original purchase price, the financial institution is entitled to a portion of the gain.
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| shelf registration | Allows firms that plan to offer multiple issues of stock over a two year period to submit one registration statement summarizing the firm's financing plans for the period.
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| short position | A sale of a futures contract.
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| simple interest | Interest earned on an investment is not reinvested.
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| sinking fund provision | A requirement that the issuer retire a certain amount of the bond issue each year.
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| sovereign bonds | A bond that is swapped for an outstanding loan to a less developed country, in which the U.S. Treasury secondary collateral backing is removed and the creditworthiness of the country is substituted instead.
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| specialists | Exchange members who have an obligation to keep the market going, maintaining liquidity in their assigned stock at all times.
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| spot contract | An agreement to transact involving the immediate exchange of assets and funds.
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| spot foreign exchange transactions | Foreign exchange transactions involving the immediate exchange of currencies at the current (or spot) exchange rate.
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| spread | The difference between lending and deposit rates.
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| spread effect | The affect that a change in the spread between rates on RSAs and RSLs has on net interest income (NII) as interest rates change.
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| standby letters of credit | Guarantees issued to cover contingencies that are potentially more severe and less predictable than contingencies covered under trade related or commercial letters of credit.
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| stock warrants | Bonds issued with stock warrants attached giving the bond holder an opportunity to purchase common stock at a specified price up to a specified date.
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| STRIP | A Treasury security in which the periodic interest payment is separated from the final principal payment.
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| subordinated debentures | Bonds that are unsecured and are junior in their rights to mortgage bonds and regular debentures.
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| subprime lender | A finance company that lends to high risk customers.
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| surrender value of a policy | The cash value of a policy received from the insurer if a policyholder surrenders the policy prior to maturity; normally, only a portion of the contract's face value.
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| swap | An agreement between two parties to exchange assets or a series of cash flows for a specified period of time at a specified price.
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| swap buyer | By convention, a party that makes the fixed rate payments in an interest rate swap transaction.
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| swap seller | By convention, a party that makes the floating rate payments in an interest rate swap transaction.
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| syndicate | The process of distributing securities through a group of investment banks.
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| systematic credit risk | The risk of default associated with general economywide or macroconditions affecting all borrowers.
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| TDS (total debt service) ratio | Total debt ratio calculated as total annual accommodation expenses plus all other debt service payments divided by annual gross income.
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| technology risk | The risk incurred by an FI when its technological investments do not produce anticipated cost savings.
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| term bonds | Bonds in which the entire issue matures on a single date.
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| term structure of interest rates | A comparison of market yields on securities, assuming all characteristics except maturity are the same.
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| tier I (core) capital ratio | The ratio of an FI's core capital to its risk adjusted assets.
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| time series analysis | Analysis of financial statements over a period of time.
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| time value of an option | The difference between an option's price (or premium) and its intrinsic value.
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| timing insurance | A service provided by a sponsor of pass through securities (such as GNMA) guaranteeing the bond holder interest and principal payments at the calendar date promised.
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| total operating income | The sum of the interest income and noninterest income.
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| total risk based capital ratio | The ratio of an FI's total capital to its risk adjusted assets.
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| trading post | A specific place on the floor of the exchange where transactions on the NYSE occur.
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| tranches | A bond holder class associated with a CMO.
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| transaction accounts | Deposits that permit the account holders to make multiple withdrawals. Measured as the sum of noninterest bearing demand deposits and interest bearing checking accounts.
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| Treasury bills | Short term obligations of the U.S. governments issued to cover government budget deficits and to refinance maturing government debt.
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| Treasury bill auction | The formal process by which the U.S. Treasury sells new issues of Treasury bills.
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| Treasury notes and bonds | Long term bonds issued by the U.S. Treasury to finance the national debt and other federal government expenditures.
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| 12b 1 fees | Fees relating to the distribution costs of mutual funds shares.
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| underfunded | A pension plan that does not have sufficient funds available to meet all future promised payments.
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| Underwriter's spread | The difference between the gross proceeds and the net proceeds.
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| underwriting | Assisting in the issue of new securities.
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| underwriting cycle | A pattern that the profits in the P&C industry tend to follow.
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| unearned premiums | Reserves set aside that contain the portion of a premium that has been paid before insurance coverage has been provided.
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| unit bank | A bank with a single office.
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| universal FI | An FI that can engage in a broad range of financial service activities.
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| up front fee | The fee charged for making funds available through a loan commitment.
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| vested | The period of time an employee must work before he or she is eligible to receive pension benefits.
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| vulture fund | A specialized fund that invests in distressed loans.
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| weekend game | Name given to the policy of lowering deposit balances on Fridays, since that day's figures count three times for reserve accounting purposes.
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| wholesale bank | A bank that focuses its business activities on commercial banking relationships.
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| wholesale CDs | Time deposits with a face value of $100,000 or more.
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| X efficiencies | Cost savings due to the greater managerial efficiency of the acquiring bank.
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| yield to maturity | The return or yield the bond holder will earn on the bond if he or she buys it at its current market price, receives all coupon and principal payments as promised, and holds the bond until maturity.
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| zero coupon bonds | Bonds that do not pay interest.
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