Mortgages - loans to individuals or businesses to purchase
a home, land, or other real property.
Alt-A Mortgages - Mortgages that are considered more
risky than a prime mortgage and less risky than a subprime
mortgage
Securitized - Securities packaged and sold as assets
backing a publicly traded or privately held debt instrument.
Second Mortgages - Loans secured by a piece of real
estate already used to secure a first mortgage.
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.
Home Equity Loan - Loans that let customers borrow on a
line of credit secured with a second mortgage on their
homes.
Down Payment - a portion of the purchase price of the
property a financial institution requires the mortgage
borrower to pay up front.
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.
MORTGAGES
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.
Federally Insured Mortgages - mortgages originated by
financial institutions, with repayment guaranteed by either
the Federal Housing Administration (FHA) or the Veterans
Administration (VA).
Conventional Mortgages - mortgages issued by financial
institutions that are not federally insured.
Amortized - A mortgage is amortized when the fixed
principal and interest payments fully pay off the mortgage by
its maturity date.
payment of the mortgage principal (the balloon payment) is
then required at the end of the period.
Balloon Payment Mortgage - 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.
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.
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.
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.
Amortization Schedule - Schedule showing how the
monthly mortgage payments are split between principal and
interest.
Jumbo Mortgages - Mortgages that exceed the
conventional mortgage conforming limits.
Subprime Mortgages - Mortgages to borrowers who have
weakened credit histories.
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.
Mortgage Sale - Sale of a mortgage originated by a bank
with or without recourse to an outside buyer.
Recourse - The ability of a loan buyer to sell the loan back
to the originator should it go bad.
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.
GSE - A government-sponsored enterprise such as Fannic
Mae or Freddie Mac.
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.
Collateralized Mortgage Obligation (CMO) - A
mortgage-backed bond issued in multiple classes or
tranches.
Tranche - A bond holder class associated with a CMO.
Mortgage (asset) backed bonds - Bonds collateralized by
a pool of assets.
STOCK MARKET
Common Stock - The fundamental ownership claim in a
public or private corporation.
Residual Claim - In the event of liquidation, common
stockholders have the lowest priority in terms of any cash
distribution.
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 stockholders’ losses are limited to
the original amount of their investment.
Dual-Class Firms - Two classes of common stock are
outstanding, with differential voting rights assigned to each
class.
Red Herring Prospectus - A preliminary version of the
prospectus describing a new security issue distributed to
potential buyers prior to the security’s registration.
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.
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.
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.
Secondary Stock Markets - The markets in which stocks,
once issued, are traded—rebought and resold.
Preferred Stock - A hybrid security that has characteristics
of both bonds and common stock.
Nonparticipating Preferred Stock - Preferred stock in
which the dividend is fixed regardless of any increase or
decrease in the issuing firm’s profits.
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.
Participating Preferred Stock - Preferred stock in which
actual dividends paid in any year may be greater than the
promised dividends.
Noncumulative Preferred Stock - Preferred stock in which
dividend payments do not go into arrears and are never
paid.
Trading Post - A specific place on the floor of the exchange
where transactions on the NYSE occur.
Specialists - Exchange members who have an obligation to
keep the market going, maintaining liquidity in their assigned
stock at all times.
Market Order - An order to transact at the best price
available when the order reaches the post.
Limit Order - An order to transact at a specified price.
Order Book - A floor broker’s record of unexecuted limit
orders.
Flash Trading - For a fee, traders are allowed to see
incoming buy or sell orders milliseconds earlier than general
market traders.
Primary Stock Markets - Markets in which corporations
raise funds through new issues of securities.
Naked Access - Allows some traders to rapidly buy and sell
stocks directly on exchanges using a broker’s computer
code without exchanges or regulators always knowing who
is making the trades.
Net Proceeds - The price at which the investment bank
purchases the stock from the issuer.
Dark Pools Of Liquidity - Trading networks that provide
liquidity but that do not display trades on order books.
Gross Proceeds - The price at which the investment bank
resells the stock to investors.
Penny Stocks - Stocks that trade for less than $5 per share.
Underwriter’s Spread - The difference between the gross
proceeds and the net proceeds.
Syndicate - The process of distributing securities through a
group of investment banks.
Originating Houses - The lead banks in the syndicate,
which negotiate with the issuing company on behalf of the
syndicate.
Initial Public Offering (IPO) - The first public issue of
financial instruments by a firm.
Market Efficiency - The speed with which financial security
prices adjust to unexpected news pertaining to interest rates
or a stock specific characteristic.
FOREIGN MARKET EXCHANGE
Foreign Exchange Markets - Markets in which cash flows
from the sale of products or assets denominated in a foreign
currency are transacted.
Foreign Exchange Rate - The price at which one currency
can be exchanged for another currency.
Seasoned Offering - The sale of additional securities by a
firm whose securities are currently publicly traded.
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.
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.
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.
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.
Dollarization - The use of a foreign currency in parallel to,
or instead of, the local currency.
Spot Foreign Exchange Transactions - Foreign exchange
transactions involving the immediate exchange of currencies
at the current (or spot) exchange rate.
Forward Foreign Exchange Transaction - The exchange
of currencies at a specified exchange rate (or forward
exchange rate) at some specified date in the future.
Net Exposure - A financial institution’s overall foreign
exchange exposure in any given currency.
Net Long (Short) In a Currency - A position of holding
more (fewer) assets than liabilities in a given currency.
Open Position - An unhedged position in a particular
currency.
Purchasing Power Parity (PPP) - The theory explaining
the change in foreign currency exchange rates as inflation
rates in the countries change.
Law Of One Price - An economic rule which states that, in
an efficient market, identical goods and services produced in
different countries should have a single price.
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.
DERIVATIVE SECURITIES MARKET
Derivative Security - An agreement between two parties to
exchange a standard quantity of an asset at a
predetermined price at a specified date in the future.
Derivative Securities Markets - The markets in which
derivative securities trade.
Spot Contract - An agreement to transact involving the
immediate exchange of assets and funds.
Forward Contract - An agreement to transact involving the
future exchange of a set amount of assets at a set price.
Futures Contract - An agreement to transact involving the
future exchange of a set amount of assets for a price that is
settled daily.
Marked To Market - Describes the prices on outstanding
futures contracts that are adjusted each day to reflect
current futures market conditions.
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.
Floor Broker - Exchange members who place trades from
the public.
Professional Traders - Exchange members who trade for
their own account.
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.
Day Traders - Exchange members who take a position
within a day and liquidate it before day’s end.
Scalpers - Exchange members who take positions for very
short periods of time, sometimes only minutes, in an attempt
to profit from this active trading.
Long Position - A purchase of a futures contract.
Short Position - A sale of a futures contract.
Clearinghouse - The unit that oversees trading on the
exchange and guarantees all trades made by the exchange
traders.
Open Interest - The total number of futures or option
contracts outstanding at the beginning of the day.
Initial Margin - A deposit required on futures trades to
ensure that the terms of any futures contract will be met.
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.
Leveraged Investment - An investment in which traders
post and maintain only a small portion of the value of their
futures position in their accounts. The vast majority of the
investment is borrowed from the investor’s broker.
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.
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 or
before a prespecified date.
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 price on or before a
prespecified date.
American Option - An option that can be exercised at any
time before and on the expiration date.
European Option - An option that can be exercised only on
the expiration date.
Intrinsic Value Of An Option - The difference between an
option’s exercise price and the underlying asset’s price.
Time Value Of An Option - The difference between an
option’s price (or premium) and its intrinsic value.
Swap - An agreement between two parties to exchange
assets or a series of cash flows for a specific period of time
at a specified interval.
Interest Rate Swap - An exchange of fixed interest
payments for floating-interest payments by two
counter-parties.
Swap Buyer - By convention, a party that makes the
fixed-rate payments in an interest rate swap transaction.
Notional Principal - The principal amount involved in a
swap.
Swap Seller - By convention, a party that makes the
floating-rate payments in an interest rate swap transaction.
Currency Swap - A swap used to hedge against exchange
rate risk from mismatched currencies on assets and
liabilities
Floor - A put option on interest rates, often with multiple
exercise dates.
Collar - A position taken simultaneously in a cap and a floor.