Absolute advantage

The ability of one country to produce more of a given good with its endowed resources.  In the context of swaps, the ability of one party to borrow at a lower rate of interest in a given currency than another party.

Accreting Swap

Any swap in which the notional principal increases over the tenor of the swap.  Thus, interest exchanges are made on a progressively larger notional principal.

Accrued Interest

The amount of interest earned on a bond since the last coupon payment date.  Accrued interest is added to the market price of the bond and paid by the purchaser of the bond.  At the next coupon payment date, the buyer will receive a full coupon payment

Active management

The management of a portfolio based on the judgment of the portfolio manager. Active management seeks to outperform an index or a benchmark. It involves active trading to take advantage of opportunities based on relative valuations across securities within the investment universe.

Agency Bonds

Bonds issued by an entity of the U.S. government, such as Ginnie Mae,  or by a Government Sponsored Enterprise (GSE), such as Fannie Mae, Freddie Mac, Federal Home Loan Bank System and Sallie Mae. 

All-in cost

Also called effective annual percentage cost (the latter term is often applied to component costs individually).  An important measure of the total cost of a financing that expresses the cost on an annual percentage basis.  This measure is very useful for comparing alternative financing opportunities

Alpha

The unsystematic or non-market risk in a portfolio.  Alpha is the risk specific to an asset and can be eliminated in a diversified portfolio of assets.

Amortization schedule

 A loan repayment schedule, which describes the payment process by which the principal on a loan will be amortized.  Such schedules usually also depict the interest payments and the total payments (principal and interest combined).

Amortizing debt

Any form of debt in which the principal balance is repaid gradually over the term of the loan.

Amortizing swap

Any swap in which the notional principal amortizes over the tenor of the swap.  Thus, interest exchanges are made on a progressively smaller notional principal.

Annual Yield

 A yield that is expressed on an annualized basis regardless of the number of payments per year.

Annuity

A series of fixed payments made at equal intervals in time

Arbitrage

The simultaneous transacting in two or more markets to
exploit a price discrepancy.  As generally understood, arbitrage involves little risk and little investment.

Arithmetic Return

The average return from any investment, calculated by summing up the returns of all the periods and then dividing this sum by the number of periods.

Ask Price

Sometimes referred to as the offered price and part of a two-way price quote, known as the bid-ask spread. In regard to the bid-ask spread, it is the right side of the quote and is the price at which the seller of the security is offering to sell.

Asset Allocation

The process of distributing investment funds among various investment avenues such as stocks, bonds, money market instruments, cash equivalents, precious metals, real estate etc. This distribution enables diversification of funds among various sectors and asset classes. It helps in gaining a balance between an investors return objectives and his risk appetite, as the risks and returns are not the same for all asset categories.

Asset Backed Security (ABS)

A fixed income security that is collateralized or securitized by the cash flows from other assets, usually smaller, illiquid assets that are pooled together.  Examples of ABS collateral are credit cards, home equity loans, auto loans and student loans.  Other names for ABS are Securitization and Structured Finance.

Asset-based swaps

Any swap written to transform the cash flow characteristics of an asset in order to replicate the cash flows characteristics of another asset.  The combination of the original asset together with the swap often constitutes a synthetic instrument.

Asset/liability management (ALM)

Simply known as ALM. 1) In a portfolio management context, it is the management of assets and/or liabilities in such a way as to match cash flows, durations, or maturities of assets and liabilities. 2) In commercial banking, it is the management of the balance sheet including interest rate, prepayment, credit and liquidity risk. There are some institutions that refer to ALM as risk management. Using this title all risks, including operational risk, would fall under this umbrella.

At-the-money

 A situation in which an option's strike price and the current market price of the underlying asset are the same.

Attribution analysis

1). A process used to analyze the sources of excess returns from a portfolio against its benchmark into the active decisions of the investment management process. This process helps to separate investment management skills from performance by luck. 2).  The process of identifying the source of excess returns from a portfolio over its benchmark wherein a fund manager’s performance is evaluated based on returns due to style allocation, sector allocation, stock selection and activity.

Average Life

A maturity measurement indicating the average amount of time that principal and interest will be received. It is calculated by weighting the future cash flows by the time period they are received divided by the original principal. Used in the U.S. mortgage markets to approximate the maturity of the security, the yield of the mortgage backed security is compared to the yield of the Treasury security whose maturity most closely matches the average life of the mortgage.