Seasoned

A seasoned pool of mortgages is one that is outstanding for a while, generally more than 30 months, and experiences faster prepayment levels.   This can be due to increased housing turnover coming from homeowners relocating due to trading up, realizing equity gains in real estate value, improved financial situation, etc .  

Sector Valuation

The process of measuring the relative investment attractiveness of one sector as compared to another. Various valuation techniques are employed to infer the relative attractiveness of the sectors. The valuation techniques depend on the way the sector is defined, for example, industry sector or yield-curve segment or credit class. Sector valuation plays a major role in the top-down approach for investment management.

Securitization

Also known as Structured Finance, securitization refers to the combination or pooling of cash flows from various underlying collateral (such as mortgages, credit cards, home equity loans, commercial mortgages, bank loans), then repackaging these cash flows to create securities that are then sold to investors.

Security Market Line (SML)

SML shows the relationship between the expected returns and market risk. According to SML, at equilibrium, the return on a security is equal to the risk free return plus the excess return (over the risk free return) on the market portfolio times the beta of the security.

Semi-annual rate

An annual rate of interest that is paid in two semiannual installments.  Not to be confused with a "half-year rate" which is a rate of interest stated on a six-month basis.

Series

With respect to futures, all futures listed on the same exchange and having the same terms, including the same delivery month.

Settlement date

(1) In securities trading, the date a transaction is cleared.  (2) In futures trading, the date a cash settled contract is marked to the spot price or index.  (3) The date that the cash settlement is due on an interest rate contract.  This may or may not coincide with the calculation date.

Settlement price

The price established by the clearinghouse of a futures exchange to be used as the basis of the daily marking-to-market of margin accounts.

Settlement Risk

The risk that differences between market settlement hours may result in exchanges of interest and/or principals at different times or even on different days.  The first paying party is exposed to the risk that the later paying party will default after the first paying party has made its required payment but before the later paying party has made its payment.

Sharpe Ratio

Measures excess returns, relative to the total variability of the portfolio, as measured by the portfolio’s standard deviation.  The Sharpe ratio shows the portfolio risk premium versus the risk free rate as measured by Treasury Bills.

Short

1) A party is said to be short securities if he or she has sold the securities without owning them.  2) A party is said to be short futures and options if he or she has sold the contracts.

SIFMA

The Securities Industry and Financial Market Association, SIFMA is the combination of the Securities Industry Association (SIA) and the Bond Markets Association (BMA) and represents over 600 member firms in all financial markets in the U.S. and worldwide.  SIFMA is committed to enhancing the public’s trust and confidence in the markets, offering forward-looking services and educational resources to financial professionals.

Simple rate of interest

Also known as the effective annual rate of return.  The clearest and simplest statement of yield.  It is obtained by dividing the value of a position at the end of a one-year period by the value of the position at the beginning of the one-year period and then deducting 1.
 

Sovereign risk

Sometimes referred to as country risk. The risk that an issuer may be barred by its government from making interest and principal payments on its debt.  In the context of swaps, the risk that a counterparty will be barred by its government from fulfilling its swap obligations.

Special Purpose Vehicle (SPV)

Legal entity created for the sole purpose of issuing securities to investors.  In a mortgage backed pass-through, the cash flows of the underlying mortgages are used to satisfy the investors interest and principal payments.

Spot Date

Trade date plus two business days.

Spot exchange rate

Also known as a spot rate.  The exchange rate quoted for immediate deliver of a currency.  As a practical matter, immediate delivery is understood to be two business days.  See also exchange rate.

Spot rate

1) See spot exchange rate. 2) Refers to a spot interest rate. This is also a zero coupon yield

Spreads

1). The amount a security is trading above a specific benchmark.  Important measurement to determine bond values.  Common benchmarks include the government bond curve and interest rate swap curves.  2). The relationship between one point on a yield curve relative to another part of a yield curve.  For example, the “2’s-10’s”, stated as “twos tens”, compares the two year interest rate to the ten year interest rate on the same curve.  The spread is the difference between the two rates and can be positive or negative.

Standard deviation

A statistical measure of dispersion around some central (mean) value.  Obtained by taking the square root of the variance.

Static Yield Spread

See Z-spread

Statutory Capital

The minimum amount of capital required by state regulators to conduct business within the respective state.

Strategic Asset Allocation

Long term strategy for allocating investment capital among various asset classes based on economic conditions and investor risk/return parameters and constraints.  Not a trading strategy but a long term, big picture asset allocation strategy

Strike price

Also known as exercise price.  The amount that must be paid (or the price that will be received) by an option owner to buy (or sell) the underlying asset from the option writer.

Strip

A series of successive contracts of a particular type and the accompanying price structure.  For example, in the U.S. it is the set of Eurodollar futures traded on the IMM that are often used to price swaps and forward rate agreements.

STRIPS

Stands for “Separate Trading of Registered Interest and Principle of Securities” and refers to breaking down a coupon bearing bond into its constituent parts of interest and principle payments which can be held /traded separately. These individual cash flows can be traded as zero coupon bonds.

Supplemental 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 and generally contains items such as allowance for loan and lease losses (limited), non-qualifying perpetual preferred stock, certain hybrid capital instruments, mandatory convertible securities, long-term preferred stock and other qulifying items.

Swap

 A contractual agreement providing for a series of exchanges of principals and/or interest in the same or different currencies.  At a more general level, the term includes the exchange of fixed for floating payments on a given quantity of commodity, i.e., commodity swap.  See also interest-rate swaps and currency swaps.

Swap broker

An agent, acting on behalf of one or more principals, that finds parties with matching swap needs in exchange for a commission.

Swap coupon

The fixed rate of interest on the fixed-rate side of a swap.

Swap dealer

Also known as a market maker.  A financial intermediary that makes a market in swaps and that profits from its bid-ask spread.  Unlike a swap broker, the swap dealer becomes a counterparty to each swap.

Swap driven

A term loosely used to describe pricing behaviors in non-swap instruments that are brought about through a linkage to the swap market.  Examples include price movements in the futures and forward markets.

Swaption

An option on a swap.  The swaption purchaser has the right to enter a specific swap for a defined period of time.

Synthetic instruments

A basket of instruments that behaves, in terms of its cash flow stream, like some real instrument not included in the original basket.  The basket constitutes the synthetic instrument.

Systematic Risk

The degree to which the fluctuations in the value of a financial instrument are associated with fluctuations in the value of the underlying market.