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.
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 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