Quiz 1 Jargon Flashcards
Liquidity
A measure of cash and other assets that are available to quickly meet financial obligations
Securitization
Pooling of certain types of assets so they can be repackaged into interest-bearing financial vehicles and sold on a market
Capital structure
The distribution of debt and equity that a bank has that makes up its finances
Leverage
The level of borrowed money used as a funding source relative to the amount of equity the bank holds ie: the level of assets to equity in the case of banks because they fund loans using deposits
Collateral
Backing a loan with an asset that can be converted for cash
Priority
Which groups get paid out first
1) first lien — secured
2) second lien — secured
3) senior — secured
4) subordinate — unsecured
5) preferred equity
6) shareholders equity
First lien debt
First person paid out by sale of the collateral and assets given a default
Second lien
Second person to be paid out by asset sale and collateral given a default
Debt — bonds
Debt security similar to an IOU, investors issue bonds to raise money from investors willing to lend them money for a set amount of time
Equity
The value that would be returned to a company’s shareholders if all the assets were liquidated and all the debt was paid off
Preferred equity
Different type of equity that represents ownership of a company and the right to claim income from the company’s operations. Get paid out more than regular equity holders
Dividends
Money paid out to investors from business operations
Interest — Coupon payments
A percentage paid out to an investor on a bond or security of debt based on the value of that debt
Fire sale
When a bank sells its assets quickly to raise equity during a bank run
Book equity — tangible book value of equity
Value of equity on the company’s balance sheet. Total assets minus total liabilities. Tells you the firms net asset value
Market equity
The price of shares of the company traded on the stock exchange times the number of shares outstanding. Or in other words the market value of the company’s equity
Market-to-book ratio
The value of the market value of equity relative to the book value of equity. Or the price per share * shares outstanding over the net asset value
Return on assets
How profitable a company is relative to its total assets. Net income / total assets
Return on equity
The profitability of a company relative to its level of equity. Net income / shareholders’ equity
Net interest margin
The amount of cash earned or lost on loans and debt. Interest income - interest expense
Delinquent loans
Borrower is behind on the interest payments on a loan
Provision for loan losses
Capital deployed by banks to absorb losses on their loan portfolio
Charge off
Debt that is deemed unlikely to be collected by the creditor but the debt is not necessarily forgiven or written off entirely. Similar to writing down an asset but it applies specifically to loans
Cash flow
Total amount of money being transferred into and out of business
Default and recovery
A borrow fails to repay the funds on a loan according to the loan agreement. Recovery is borrower liquidating it’s assets in order to repay investors. Think FTX going bankrupt
Regulatory capital
Capital requirements for banks that helps them absorb losses on risk assets and falling prices and restricts leverage
Tier 1 capital
Core capital on the banks reserves including shareholders equity and retained earnings
Tier 2 capital
Supplementary capital that includes hybrid capital instruments , subordinated debt and loan-loss reserves
Repurchase agreements (Repo transactions)
Collateralized overnight loans where 1 bank lends to another with an agreement to repurchase the collateralized loan at a higher price
Haircut
The difference between the market value of the collateral and the price of the loan in a repo transaction
Rehypothacate
Sell the original collateral from the first repo agreement in another repurchase agreement
Principle agent problem
Conflict between depositors and the bank in they way they use the deposits
Volatility index (VIX)
Measures the volatility in the market using future annualized volatility implied option market prices. Higher VIX indicates market is willing to pay higher prices for insurance. Based on the Black-Scholes model
Implied option volatility
Annualized volatility given the other option inputs (calls and puts) and market price. Returns of call and put options on the S&P 500
Realized volatility
Standard deviation of actual market returns — annualized returns of the S&P 500 at present time
Procyclical Leverage
Banks enthusiastically respond to asset price appreciation and expand their balance sheet but overreact when prices depreciate and are forced to heavily de-lever by selling assets to raise equity which further decreases prices
Marked-to-market balance sheet
Assets and liabilities on the balance sheet are marked to the fair value. Aims to provide a realistic appraisal of an institutions current financial situation
Losses from credit risk
Probability of default * (1 - recovery rate), the losses incurred by a bank for lending to risky borrowers who have a higher probability of default
Margin spiral
Rush by borrowers to withdraw their securities (draw down lines of credit) posted as collateral to a dealer
Value at Risk (VaR)
Estimate of the probability of a potential loss in value X for over a period of time for a given confidence interval Y. Probability that an asset drops below a specific value over a given period
Target federal funds rate
The interest rate the fed wants banks to lend at
Effective federal funds rate
Interest rate banks actually lend at
Open market operations
Tool the fed uses to align the effective fed funds rate with the target rate. Open market operations either add or drain reserves from the banking system
Federal funds rate
Interest rate at which banks lend to each other overnight
Fed funds
Immediately available reserve balances that depository institutions with accounts at the fed can access. Consists of short term borrowings of money funds and liabilities of depository institutions. Exempt from reserve requirements and price ceilings
Why might banks be special?
1) provide transaction accounts for individuals and corporations
2) backup source of liquidity in times of economic stress
3) act as transmission for monetary policy
How are banks treated as special?
1) access to the discount window at the federal reserve
2) take FDIC insured deposits
3) restrictions on competition
4) government regulation and supervision
5) capital and reserve requirements
