Finance 1.2

Question 1

DK

Answer 1

when a custodian or broker does not accept a trade on settlement. Decaying the trade means they are sending it back to the party who is delivering the security. Sometimes referred to as kicking back.

Question 2

fail or failed trade

Answer 2

A custodian or broker has not delivered the securities

Question 3

DTC

Answer 3

Depository Trust Company. DTC settles most fixed income and equity trades between brokers and custodians. All custodians and brokers have a DTC number. The DTC numbers are 3 or 4 digits long.

Question 4

FED

Answer 4

Federal Reserve; it settles all Treasury trades and most agency trades.

Question 5

Euroclear

Answer 5

All custodians and brokers who settle Euro trades have a Euroclear number. The Euroclear number is an account used to settle foreign securities.

Question 6

Confirm

Answer 6

Brokers send a confirm for every trade done in order to confirm the details of a trade versus the order we have entered on our accounting system.

Question 7

Affirmation

Answer 7

After a confirm is received and finds an order that matches all the details or required details, an affirmation is sent to DTC stating that both parties know the trade with these details, therfore settle the trade.

Question 8

Re-Bill or Re-Submit

Answer 8

If a broker bills a confirm incorrectly, they should send both a cancel (to cancel the existing confirm) and a re-bill with the correct information. Often the broker sends a re-bill or re-submit, but doesn’t cancel the bad confirm.

Question 9

Fed Wire

Answer 9

Any money that has to be wired back and forth between parties is sent on the fed wire.

Question 10

Free delivery

Answer 10

A security is delivered without payment being received for it. It is very rare that we agree to do a free delivery. Usually it is only done if there is a settlement problem, and the money is sent by a separate wire.

Question 11

Broker to Broker step out

Answer 11

When credit is given to a broker other than the broker the security was traded with. This trade is treated as if it were traded with the broker stepped out to, and billed by the broker stepped out to. The broker who did the trade must meet comparisons on the step out system, otherwise the trade will not settle.

Question 12

Record date

Answer 12

security holders are paid dividends and interest payments based upon a record date. If you are the holder of record on record date, then you receive the payment. However, on bonds, the interest payment datae and the record date are not always the same. It is rare that this ever comes into play on settlement, but it can. If you purchase a bond between record date adn payment date, and you paid for the interest, the party you purchased from must pay you the interest they received if you have not been credited.

Question 13

Bullet loan

Answer 13

A lump sum payment for the entire loan amount paid at maturity. A bullet repayment is often linked to ballon loans or similar products. Bullet repayments are usually built in to the terms of the loans.

Question 14

ABS

Answer 14

Asset-backed security. It’s a financial security backed by a loan, lease, or receivables against other assets. It’s an alternative to corporate debt. There are three main sectors: credit cards, student loans, and autos.

Question 15

Pro rata vs. sequential

Answer 15

For example, a pro-rata dividend means that every shareholder gets an equal proportion for each share he or she owns. Pro-rating also refers to the practice of applying interest rates to different time frames. If the interest rate was 12% per annum, you could pro-rate this number to be 1% a month (12%/12 months).

Question 16

Excess spread

Answer 16

Excess spread is the cash flow remaining after payment of the transaction expenses. The formula for excess spread is: Pool yield - (servicing fee + coupon interest expense) = Excess Spread available to absorb losses

Question 17

Turbo Payments

Answer 17

The trust may accelerate repayment of the senior classes by the application of excess spread to the senior tranches. The effect of this is that the remaining subordinated class as a proportion of the outstanding deal is greater than the original structure. (Ford uses the turbo structure, for example.)

Question 18

Monoline insurance

Answer 18

The trust may utilize third-party insurance to guaranty repayment of auto loan (and other) ABS. Subprime and nonprime auto issuers frequently utilize monoline insurance to “wrap” (guaranty) their deals. Monolines are mostly triple-A rated insurance companies with the sole purpose of guaranteeing payment of principal and interest to investors.

Question 19

Triggers

Answer 19

The purpose of a trigger is to fortify the structure if the collateral fails to meet defined performance levels. Prime auto loan transactions do not typically contain any credit performance triggers. For example, it is rare to see a prime auto ABS require additional credit enhancement if delinquencies increase beyond defined levels. Credit performance triggers are not rare, however, in the nonprime and subprime sectors, monoline wrapped transactions frequently contain performance triggers. Wrapped deals may contain performance triggers.

Question 20

Controlled Amortization

Answer 20

In this structure, investors receive repayment of principal in a fixed number of equal payments. The principal repayment schedule is established at issuance, based on current and historical principal payment rates for the portfolio.

Question 21

Early Amortization

Answer 21

The revolving period that will terminate early pursuant to certain trigger events, and principal collections will be distributed to investors as collections are received. Once a pool enters early amortization, no recovery or cure is possible.

Question 22

Interchange

Answer 22

Interchange is the fees accruing to the credit card processor and credit card issuing bank in return for processing and approving the credit card sale. Credit card issuers typically derive 1-2% p.a. in additional interchange fees.

Question 23

Investor interest

Answer 23

The share of the master trust allocated to investors.

Question 24

Master Trust

Answer 24

A master trust is a single pool of assets that may issue numerous series of notes backed by the same, shared collateral pool. Each series is entitled to a pro rata share of the assets and cash flows of the trust.

Question 25

Maturity Types

Answer 25

Currently, two maturity types dominate the credit card securities issued - controlled amortization and soft-bullet.