 Celebrating 10 years on the NYSE |
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GlossaryPrimary Government Dealer– a group of banks and investment dealers authorized to buy and sell government securities in direct dealings with the Federal Reserve Bank of New York in its execution of Federal Open Market Operations. The Federal Reserve decides which firms it will "recognize" as primary dealers. Such dealers must be qualified in terms of reputation, capacity and adequacy of staff and facilities. Primary Government DealersABN AMRO Inc. Money Center Bank – a bank in one of the world’s major financial centers, such as London, Tokyo or New York, that is a large lender, money market buyer and securities purchaser. A money center bank also lends money to governments and international corporations. Commercial Bank – a bank whose principal functions are to receive demand deposits and makes loans to businesses regardless of its other services. Investment Bank – a firm that acts as an intermediary between a company or government agency that needs money and potential investors. To make the exchange, the banker aids in a number of functions, such as underwriting a securities issue. Most investment banks also provide broker-dealer services. Mortgage-Backed Securities – an ownership interest in mortgage loans made by financial institutions (savings & loans, commercial banks, or mortgage companies) to finance a borrower’s purchase of a home or other real estate. Investors may purchase mortgage securities either when they are issued or afterward in the secondary market from a dealer. Pass-throughs – or participation certificate (PC) these are the most basic mortgage securities, which represent a direct ownership interest in a pool of mortgage loans. Most pass-through mortgage securities are issued and/or guaranteed by GNMA, FNMA or FHLMC and carry an implied AAA credit rating. The payments of principal and interest on pass-throughs are considered secure; however, the cash flow on these investments may vary from month-to-month, depending on the actual prepayment rate of the underlying mortgage loans. Most pass-throughs are backed by fixed-rate mortgage loans; however, adjustable-rate mortgage loans (ARMs) are also pooled to create the securities. Most ARMs have caps and floors limiting the extent of interest-rate changes. GNMA (Government National Mortgage Association) – Ginnie Mae is a government-owned corporation within the Department of Housing and Urban Development. Ginnie Mae guarantees the timely payment of principal and interest on all of its pass-through securities, and Ginnie Mae’s guarantee is backed by the full faith and credit of the U.S. government. This guarantees prompt payment of monthly interest, whether or not mortgage payments are collected, and full repayment of principal even if the mortgages in the pool default. FNMA (Federal National Mortgage Association) – Fannie Mae is chartered by Congress, but owned by stockholders. Fannie Mae guarantees timely payment of both principal and interest on its mortgage securities whether or not the payments have been collected from the borrower. FHLMC (Federal Home Loan Mortgage Corporation) – Freddie Mac is chartered by Congress, but owned by stockholders. Freddie Mac guarantees timely payment of both principal and interest on its Gold PCs. Some older series of Freddie Mac PCs guarantee timely payment of interest and eventual payment of principal. Collateralized Mortgage Obligations (CMOs) – The CMO is a multiclass bond backed by a pool of mortgage pass-throughs or mortgage loans. IO (Interest Only) – Represents the right to receive 100% of the interest payment and zero of the principal payment on the mortgages. PO (Principal Only) – Represents the right to receive 100% of the principal payment and zero of the interest payment on the mortgages. Currency Risk – The risk that a company’s operations or an investment’s value could be affected by changes in one currencies value relative to another. Global business’ operations, in particular, are exposed to currency risk. Credit Risk – The risk that the underlying borrower on the mortgage defaults on his mortgage payment either in part or in whole, which would result in a loss on the investment. Floating Rate or Adjustable-Rate Coupon – A coupon payment on a mortgage that adjusts to changes in an index, generally a short-term interest rate benchmark such as Libor (London Inter Bank Offered Rate) or the CMT (Constant Maturity Treasury), at a predetermined spread to that index. (eg; if Libor equals 6% and the spread equals 1% then the resulting coupon equals 7%.) Repurchase Market – A market in which an institutional investor finances their securities purchases. The investor sells (pledges) their securities to a broker-dealer for a loan, with the agreement that the investor will buy them back on a predetermined date at a specified price. The difference between the principal received and the amount paid to the broker-dealer represents the interest on the loan. The term of each transaction can be as short as one day or as long as five years. The interest rate is highly correlated to the Fed Funds rate. Broker Loan – A loan extended by a broker-dealer to an individual investor for the purchase of securities. The interest rate on these loan is closely correlated to the Prime Rate. Fed Funds – Funds in excess of the reserve requirements that banks deposit in Federal Reserve Banks. Member banks may lend reserves to one another. Prime Rate – The indicative interest rate on loans that banks quote to their best commercial customers. |
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