Calculation date

The date specified as such for the calculation of the cash settlement amount on an interest-rate or exchange-rate contract.  If the calculation and settlement dates differ, the calculation date will precede the settlement date.

Call

1).  An option that grants the holder the right to buy the underlying asset from the option writer.  2). The act of redeeming an instrument prior to its scheduled maturity.

Callable Bond

A feature on a bond allowing the issuer to buy back or call the bond at a specific price and on a specific date. 

Callable swap

 A swap that may be terminated prior to its scheduled maturity at the discretion of the fixed-rate payer.

Cap

Multi- period cash settled options on interest-rates. The cap purchaser receives a cash payment whenever the reference rate exceeds the ceiling rate (also called the cap and sometimes called the contract rate) on a fixing date.

Capital

The difference between market value of a bank's/financial institution's assets and liabilities.  The primary purpose is to protect against large unexpected losses.  As seen in the "credit crisis" it is also meant to instill confidence to external investors and protect the firm's credit rating.

Capital Adequacy

Refers to a desired level of capital maintained by a financial institution to cover losses.  It is an indication of the firm's ability to remain a viable concern.

Capital Adequacy Ratio (CAR)

See capital ratio

Capital Appreciation

 An increase in the value of a portfolio or a particular security due to a rise in the market price from the time of purchase to the time of sale.

Capital Asset Pricing Model (CAPM)

CAPM explains the relationship that should exist between the expected return and the risk, of a security or a portfolio. This theory is concerned with deriving the expected or required rates of return on a risky asset based on the asset’s systematic risk level measured by beta. In this financial model, the cost of capital for any security or portfolio of securities equals a risk-free rate plus a risk premium that is proportionate to the systematic risk of the security or portfolio.

Capital Markets

Markets that bring issuers of debt and equity together with investors

Capital Ratio

Also known as capital adequacy ratio (CAR) and risk based capital ratio.  It is a measure, specifically a ratio, of a financial institution's capital position.  In general, it is the amount of capital held by the firm divided by the amount of assets adjusted for risk.

Cash flow stream

 The series of cash flows associated with a debt instrument, swap, or other derivative instrument.

Cash flows

The payments made by one party of a contract to another party of the contract.

Cash settlement

(1) A transaction made for immediate settlement.  (2) In futures trading, refers to contracts that do not provide for physical delivery of the underlying asset.  Instead, contracts are settled in cash on a final settlement date using a mark-to-market procedure.

Circus swap

A combination involving a fixed-for-floating interest rate swap and a fixed-for-floating currency swap in which both floating rate sides are LIBOR based in the same currency.  Allows for the creation of a fixed-for-fixed or floating-for-floating currency swap.

Clearing Corporation/Organizations

Exchange affiliated organizations that handle the clearing, settling, matching of trades.

Closing trade

Also called an offsetting trade.  A trade that closes an existing position by taking an offsetting position equal and opposite to that of the existing position. 

Collar

A collar is the purchase of a cap and the sale of a floor.  A collar is constructed to reduce the cost of the cap.

Collateralized Bond Obligation (CBO)

Securitized product that is backed by low quality, or junk bonds.  The cash flows are divided, or tranched into different risk exposures.  CBOs are issued as investment grade bonds even though they are backed by junk bonds because the credit diversification within the structure increases the credit quality of the bond.

Collateralized Debt Obligation (CDO)

The pooling of bonds (CBO’s) or loans (CLO’s) that are transferred to a trust and the claims to these assets are subsequently sold to investors in different classes or tranches. Each tranche has different credit and investment characteristics.

Collateralized Loan Obligation (CLO)

Securitized product that is backed by bank loans.  The cash flows are divided, or tranched into different risk exposures.  The sale of the loans allows the financial institution to reduce regulatory capital requirements.

Collateralized Mortgage Obligation

Known as a CMO or REMIC (Real Estate Mortgage Investment Conduit). A structure which allows issuers to carve the cash flows of the underlying pass-through securities into various classes or tranches having different investment characteristics. 

Commercial paper

Short-term corporate IOUs often used as part of a rollover strategy to obtain long-term financing at lower cost.  Often called paper and sometimes denoted as CP.  May be placed directly or through commercial paper dealers. May be used as an index for a leg of a swap.

Commodity swaps

Swaps that are structured to convert floating-prices paid (or received) for commodities to fixed prices, or vice versa.  These swaps have a similar structure to interest-rate swaps.

Companion classes

A tranche of a CMO, companion classes absorb the excess cash flow generated by faster prepayments so that the other tranches in the structure, such as PACs and TACs have more stable cash flows.  Further, when prepayments are slow, the companion classes will extend so that the PACs and TACs in the structure can receive the required cash flows.  Companion classes have the most volatile cash flows in a CMO structure, even more so than the underlying collateral.

Comparative advantage

A situation in which one country (or firm) can produced a good (or engage in a borrowing) at less cost than another country (or firm) in the
special sense that it must sacrifice less of an alternative good to achieve production.  The term is associated with the Theory of Comparative Advantage used to explain trade between nations.

Conforming Loans

Conforming loans meet FNMA and FHLMC eligibility requirements.  Among the requirements that are necessary to qualify as a conforming loan, the two most important are: maximum loan size, which changes every year and minimum loan to value ratio, also subject to change.  Use of property and payment to income ratio are also analyzed.

Contingent Capital

Arrangement entered into, before an event occurs which would trigger losses exceeding a certain threshold, giving the company the flexibility to raise capital by issuing securities or borrowing money to cover those losses.  Generally a fee is paid by the company to the party who agrees to advance the funds.

Contingent Immunization

A bond portfolio management strategy which attempts to combine active and passive management techniques. The strategy allows the manager to actively manage the portfolio as long as the returns are above a floor (target, trigger) rate. If the returns fall below the target level and the floor is activated, the manager must immunize the portfolio and lock in this floor return.

Contract rate

The rate of interest (or exchange) to serve as the basis of a cash settlement on a forward contract or an option contract.  More precisely, the difference between the contract rate and the reference rate serves as the basis of the cash settlement.

Conventional Mortgage

Conventional Mortgages are non-government guaranteed mortgages.

Convertible bonds

 A bond with an added feature where the holder/owner of the bond has the option to exchange the bond for a specific number of shares of the company’s common stock at a future date. The price at which the bond will be converted and the conversion ratio is determined at the time the bond is issued.

Convexity

A measure of price sensitivity for fixed income securities.  Duration measures the linear change in price for a change in yield; convexity is the second derivative of duration and explains the price change that is not explained by duration.

Core Capital

Generally speaking, regulators break down capital into tier 1 and tier 2 capital.  Tier 1 is considered core capital and generally contains items such as equity and retained earnings and other qualifying items.  Tier 2 is referred to as supplemental capital (see supplemental capital).

Corporate Debt

Debt issued by a corporation. Can be money markets such as commercial paper or notes or bonds

Correlation

The degree to which the price of one or more securities correspond to each other. Perfect positive correlation, or +1, means that the prices will move 100% in the same direction.  Perfect negative correlation, or -1, means that the prices will move 100% in the opposite direction.  Zero correlation means that the prices move independently of each other with no distinct relationship.

Counterparty

 A principal to a swap or other derivative instrument, as opposed to an agent such as a broker.

Coupon

 (1) The periodic interest payment on a debt instrument.  (2) The periodic interest payment on the fixed-rate side of an interest rate or currency swap.

Coupon bonds

Bonds that pay periodic interest.  The periodic payment is called the coupon.

Coupon dates

The dates that the coupons are paid and can be annual, quarterly, semi-annual or monthly.

Coupon rate

(1) The fixed rate of interest on a debt instrument.  (2) The fixed rate of interest on the fixed-rate side of a swap.  See coupon

Credit analysis

The process of analyzing financial and non-financial information on companies, individuals, sovereign states, local bodies or any other obligation seeker in order to estimate the ability of the obligation seeker to live up to its future contractual obligations. The inputs to credit analysis are from many sources, some of which include: detailed financial analysis, industry analysis, economic analysis, and views of the experts. The output of a credit analysis process is usually a subjective judgment on the credit quality (rating) of the obligation seeker.

Credit Default Swaps

A financial contract where the protection buyer pays a premium commonly referred to as a spread, based on a percentage (basis points) of a notional principal, quoted on an annual basis paid quarterly.  The protection seller agrees to make a payment, contingent on a credit event.

Credit Derivative

A financial contract that protects the buyer, or end user, against a loss due to a credit event.

Credit Event

Payment trigger in a credit derivative, resulting from bankruptcy, failure to pay or restructuring.

Credit risk

The risk that a counterparty to a contract will be unable to fulfill its obligations due to bankruptcy or other cause.

Creditworthiness

A reference to the likelihood that a party to a contract will default on its obligations.  The greater the likelihood of default the less creditworthy is the party.

Currency markets

Also known as foreign exchange markets, FOREX markets, and FX markets.  These are the markets in which the world's currencies are exchanged.  With the exception of futures markets in currencies, the currency markets are dealer markets made, for the most part, by commercial banks.

Currency swap

An agreement between two parties providing for the exchange of a future series of interest and principal payments in which one party pays in one currency and the other party pays in a different currency.  The exchange rate is fixed over the life of the swap.

Current Coupon

Newly originated mortgages represent the current coupon in mortgage issuance.  In the MBS market, practitioners refer to the current coupon as the coupon trading at or near par.

Current income

Cash received on a regular basis in the form of interest, dividend etc. from investments such as stocks, fixed income securities, or mutual funds.

Custodian

A financial institution with the legal responsibility for safekeeping, administering and servicing customers’ assets.