Wednesday, May 5, 2010

Business TERMS-financial instruments, cash,derivative,multiline insurance, Free Cash Flow To Equity (FCFE), Amortization, Indenture, Debentures, Fannie Mae, Freddie MacConnie, LeeSallie Mae, Jumbo loan/ Jumbo mortgageFinancial markets ,Capital markets ,Currency markets ,Derivatives markets

Financial instruments: Financial instruments are cash, evidence of an

ownership interest in an entity, or a contractual right to receive, or deliver,

cash or another financial instrument. It can be thought as of a real or

virtual document representing a legal agreement involving some sort of

monetary value or as easily tradable packages of capital, each having their

own unique characteristics and structure.

Two types:

Cash instruments: Cash instruments are financial instruments whose

value is determined directly by markets. They can be divided into

securities, which are readily transferable, and other cash instruments such

as loans and deposits, where both borrower and lender have to agree on a


Derivative instruments: Derivative instruments are financial

instruments which derive their value from the value and characteristics of

one or more underlying assets.

Multiline Insurance: An insurance instrument used to bundle the risk

exposures of multiple insurance obligations into one insurance contract.

The risk exposures put together often are related, such as property and

casualty risks. The basis behind multiline contracts is that a firm often is

exposed to a portfolio of risk, and instead of creating a portfolio of

insurance policies to manage that risk; they should use a single multiline

contract to manage the portfolio of risks. One insurance contract is then

more efficient and less costly than many contracts.

Free Cash Flow To Equity (FCFE): This is a measure of how much

cash can be paid to the equity shareholders of the company after all

expenses, reinvestment and debt repayment.

Calculated as: FCFE = Net Income - Net Capital Expenditure - Change in

Net Working Capital + New Debt - Debt Repayment

FCFE is often used by analysts in an attempt to determine the value of a


Amortization: The paying off of debt in regular installments over a

period of time or the deduction of capital expenses over a specific period

of time (usually over the asset's life). More specifically, this method

measures the consumption of the value of intangible assets, such as a

patent or a copyright. While amortization and depreciation are often used

interchangeably, technically this is an incorrect practice because

amortization refers to intangible assets and depreciation refers to tangible


Debentures: The term is used in corporate finance for a medium to

long-term debt instrument used by large companies to borrow money. In

some countries the term is used interchangeably with bond, loan stock or

note. Debentures are generally freely transferable by the debenture

holder. Debenture holders have no voting rights and the interest paid to

them is a charge against profit in the company's financial statements.

Indenture: A contract between an issuer of bonds and the

bondholder stating the time period before repayment, amount of interest

paid, if the bond is convertible (and if so, at what price or what ratio), if

the bond is callable and the amount of money that is to be repaid. The

indenture is another name for the bond contract terms, which are also

referred to as a deed of trust.

Fannie Mae: The Federal National Mortgage Association (FNMA),

commonly known as Fannie Mae, is a government-sponsored, publicly

traded company corporation co founded in 1938.

The corporation's purpose is to purchase and securitize mortgages in order

to ensure that funds are consistently available to the institutions that lend

money to home buyers.

Fannie Mae's "little brother" is Freddie Mac. Together, Fannie Mae and

Freddie Mac purchase or guarantee between 40% to 60% of all mortgages

originated annually in the United States, depending upon market

conditions and consumer trends.

Freddie Mac: Federal Home Loan Mortgage Corp (FHLMC), A

stockholder-owned, government-sponsored enterprise (GSE) chartered by

Congress in 1970 to keep money flowing to mortgage lenders in support of

homeownership and rental housing for middle income Americans. U.S.

government allows it to borrow money at interest rates lower than those

available to other financial institutions. With this funding advantage, it

issues large amounts of debt (known in the market place as agency debt

or agencies), and in turn purchases and holds a huge portfolio of

mortgages known as its retained portfolio.

Connie Lee: College Construction Loan Insurance Association (CCLIA),

a formerly government-sponsored enterprise created by the Higher

Education Amendments of 1986. The sole purpose of this organization was

to insure and reinsure debt instruments that were issued by universities,

colleges and other educational institutions to help fund building initiatives.

This organization's acronym has the same naming scheme as other

government organizations like Fannie Mae, Ginnie Mae and Freddie Mac.

Ginnie Mae: Government National Mortgage Association – GNMA, a

U.S. government corporation within the U.S. Department of Housing and

Urban Development (HUD). Ginnie Mae neither issues, sells nor buys passthrough

mortgage-backed securities, nor does it purchase mortgage loans.

It simply guarantees (insures) the timely payment of principal and interest

from approved issuers (such as mortgage bankers, savings and loans, and

commercial banks) of qualifying loans. Unlike its cousins Freddie Mac,

Fannie Mae and Sallie Mae, Ginnie Mae is not a publicly-traded company.

An investor in a GNMA security will not know who the underlying issuer of

the mortgages is, but merely that the security is guaranteed by GNMA,

which is backed by the full faith and credit of the U.S government.

Sallie Mae: SLM Corporation, commonly known as Sallie Mae (Student

Loan Marketing Association), A publicly traded company that is the largest

provider of educational loans in the U.S. Along with providing student

loans, Sallie Mae purchases student loans from the original lenders and

provides financing to state student-loan agencies.

Sallie Mae was originally formed in 1972 as a government enterprise but

as of 2004 is a completely independent publicly traded company. Sallie

Mae is traded on the NYSE with the ticker symbol SLM.

Jumbo loan/ Jumbo mortgage: In the United States, a jumbo

mortgage is a mortgage with a loan amount above the industry-standard

definition of conventional conforming loan limits. This standard is set by

the two largest secondary market lenders, Fannie Mae and Freddie Mac.

Loans above the conforming limits may be offered by seller services of

these wholesale institutions, as well as Wall Street conduits that provide

warehouse financing for mortgage lenders. The loan amounts reflect

average loan sizes nationwide. Jumbo mortgages apply when agency

(FNMA and FHLMC) limits don't cover the full loan amount.

Jumbo mortgage loans are a higher risk for lenders. This is because if a

jumbo mortgage loan defaults, it is harder to sell a luxury residence

quickly for full price. That is one reason lenders prefer to have a higher

down payment from jumbo loan seekers. That is one reason lenders prefer

to have a higher down payment from jumbo loan seekers. The interest

rate charged on jumbo mortgage loans is generally higher than a loan that

is conforming, due to the slightly higher risk to the lender.

Security: An instrument representing ownership (stocks), a debt

agreement (bonds) or the rights to ownership (derivatives). A security is

essentially a contract that can be assigned a value and traded.

Examples of a security include a note, stock, preferred share, bond,

debenture, option, future, swap, right, warrant, or virtually any other

financial asset.

Financial markets: In economics, a financial market is a mechanism

that allows people to easily buy and sell (trade) financial securities (such

as stocks and bonds), commodities (such as precious metals or agricultural

goods), and other fungible items of value at low transaction costs and at

prices that reflect the efficient-market hypothesis. Markets work by placing

many interested buyers and sellers in one "place", thus making it easier

for them to find each other.

Capital markets: A capital market is a market for securities (debt or

equity), where business enterprises (companies) and governments can

raise long-term funds. It is defined as a market in which money is

provided for periods longer than a year, as the raising of short-term funds

takes place on other markets (e.g., the money market). The capital

market includes the stock market (equity securities) and the bond market


Capital markets may be classified as primary markets and secondary

markets. In primary markets, new stock or bond issues are sold to

investors via a mechanism known as underwriting. In the secondary

markets, existing securities are sold and bought among investors or

traders, usually on a securities exchange, over-the-counter, or elsewhere.

Derivatives markets: The derivatives markets are the financial

markets for derivatives (A derivative is a financial instrument that is

derived from some other asset, index, event, value or condition). The

market can be divided into two that for exchange traded derivatives and

that for over-the-counter derivatives.

Currency markets: The foreign exchange market (currency, forex, or

FX) trades currencies. It lets banks and other institutions easily buy and

sell currencies. The purpose of the foreign exchange market is to help

international trade and investment. A foreign exchange market helps

businesses convert one currency to another. For example, it permits a U.S.

business to import European goods and pay Euros, even though the

business's income is in U.S. dollars.

Underwriting: Underwriting refers to the process that a large financial

service provider (i.e. bank, insurer, investment house) uses to assess the

eligibility of a customer to receive their products (equity capital, insurance,

mortgage or credit). The name derives from the Lloyd's of London

insurance market. Financial bankers, who would accept some of the risk on

a given venture (historically a sea voyage with associated risks of

shipwreck) in exchange for a premium, would literally write their names

under the risk information that was written on a Lloyd's slip created for

this purpose.

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