Financial Markets and Institutions (2-downloads)

secondary loan participation) of all or part of

the cash stream from a specific loan, thereby

removing the loan from the bank’s balance

sheet. 414

London interbank bid rate (LIBID):

The rate of

interest large international banks charge on

overnight loans among themselves. 271

London interbank offer rate (LIBOR):

The interest

rate charged on short-term funds bought or sold

between large international banks. 271

long position:

A contractual obligation to take deliv-

ery of an underlying financial instrument. 590

long-term:

With reference to a debt instrument,

having a maturity of 10 years or more. 18

longer-term refinancing operations:

A second

category of open market operations by the

European Central Bank that are similar to the

Fed’s outright purchase of securities. 231

macro hedge:

A hedge of interest-rate risk for a

financial institution’s entire portfolio. 596

Glossary

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main refinancing operations:

Operations that

involve weekly reverse transactions (purchase or

sale of eligible assets under repurchase agree-

ments or credit operations against eligible assets

as collateral) that are reversed within two weeks

and are the primary monetary policy tool of the

European Central Bank. 245

managed float regime:

The current international

financial environment in which exchange rates

fluctuate from day to day, but central banks

attempt to influence their countries’ exchange

rates by buying and selling currencies. Also

known as a dirty float. 380

management advisory services:

Auditing and

nonauditing consulting services that accounting

firms sometimes provide to their clients. 380

margin credit:

Loans advanced by a brokerage

house to help investors buy securities. 554

margin requirement:

A sum of money that must be

kept in an account (the margin account) at a

brokerage firm. 599

marginal lending facility:

The European Central

Bank’s standing lending facility in which banks

can borrow (against eligible collateral)

overnight loans from the national central bank

at a rate 100 basis points above the target

financing rate. 231

marginal lending rate:

The interest rate charged

by the European Central Bank for borrowing at

its marginal lending facility. 231

mark-to-market accounting:

An accounting method

in which assets are valued in the balance sheets

at what they would sell for in the market. 436

marked to market:

Repriced and settled in the

margin account at the end of every trading day

to reflect any change in the value of the futures

contract. 599

market equilibrium:

A situation occurring when the

quantity that people are willing to buy (demand)

equals the quantity that people are willing to sell

(supply). 70

market fundamentals:

Items that have a direct effect

on future income streams of the security. 120

market maker:

Dealers who buy or sell securities

from their own inventories, thereby ensuring

that there is always a market in which investors

can buy or sell their securities. 555

market order:

An order placed by a customer to

buy stock at the current market price. 553

market segmentation theory:

A theory of the

term structure that sees markets for different-

maturity bonds as completely separated and seg-

mented such that the interest rate for bonds of a

given maturity is determined solely by supply

and demand for bonds of that maturity. 102

matched sale-purchase transaction:

An arrange-

ment whereby the Fed sells securities and the

buyer agrees to sell them back to the Fed in the

near future; sometimes called a reverse repo. 226

maturity:

Time to the expiration date (maturity

date) of a debt instrument. 18

mean reversion:

The phenomenon that stocks with

low returns today tend to have high returns in

the future, and vice versa. 126

mergers and acquisitions market:

An informal and

unorganized market where firms are bought,

sold, or merged with other firms. 551

micro hedge:

A hedge for a specific asset. 596

monetary base:

The sum of the Fed’s monetary lia-

bilities (currency in circulation and reserves) and

the U.S. Treasury’s monetary liabilities (Treasury

currency in circulation, primarily coins). 215

monetary neutrality:

A proposition that in the long

run, a percentage rise in the money supply is

matched by the same percentage rise in the

price level, leaving unchanged the real money

supply and all other economic variables such as

interest rates. 360

monetary policy:

The management of the money

supply and interest rates. 6

monetary targeting:

A monetary policy strategy in

which the central bank announces that it will

achieve a certain value (the target) of the

annual growth rate of a monetary aggregate. 215

money:

Anything that is generally accepted in pay-

ment for goods or services or in the repayment

of debts. Also called money supply. 6

money center banks:

Large banks in key financial

centers. 409

money market:

A financial market in which only

short-term debt instruments (maturity of less

than one year) are traded. 20

money market mutual funds:

Funds that accu-

mulate investment dollars from a large group

of people and then invest in short-term securi-

ties such as Treasury bills and commercial

paper. 259

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Glossary

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money market securities:

Securities that have an

original maturity of less than one year, such as

Treasury bills, commercial paper, banker’s

acceptances, and negotiable certificates of

deposit. 260

money supply:

See money.

moral hazard:

The risk that one party to a transac-

tion will engage in behavior that is undesirable

from the other party’s point of view. 26

mortgage:

A long-term loan secured by real

estate. 324

mortgage-backed security:

A security that is col-

lateralized by a pool of mortgage loans. Also

called a securitized mortgage. 171, 336

mortgage pass-through:

A security that has the

multiple borrowers’ mortgage payments pass

through a trustee before being disbursed to the

investors. 336

mutual bank:

A bank owned by the depositors. 

mutual insurance company:

An insurance company

that is owned by the policyholders and has the

objective of providing insurance for the lowest

possible price. 517

named-peril policy:

Insurance policy that protects

against loss from perils that are specifically

named in the policy. 524

National Association of Securities Dealers Auto-

mated Quotation System (NASDAQ):

A com-

puterized network that links dealers around the

country together and provides price quotes on

over-the-counter securities. 305

national banks:

Federally chartered banks. 456

National Credit Union Act of 1970:

Law that

established the National Credit Union Adminis-

tration (NCUA), an independent agency charged

with the task of regulating and supervising fed-

erally chartered credit unions and state-char-

tered credit unions that receive federal deposit

insurance.

National Credit Union Share Insurance Fund

(NCUSIF):

Agency established by the National

Credit Union Act of 1970 that is controlled by

the National Credit Union Administration and

insures the deposits in credit unions for

$100,000 per account. 32 

natural rate of unemployment:

The rate of unem-

ployment consistent with full employment at

which the demand for labor equals the supply of

labor. 234

negotiable certificates of deposit:

A bank-issued

short-term security that is traded and that docu-

ments a deposit and specifies the interest rate

and the maturity date. 19, 267 

net asset value:

The total value of a mutual fund’s

assets minus any liabilities, divided by the num-

ber of shares outstanding. 495

net interest margin (NIM):

The difference between

interest income and interest expense as a per-

centage of assets. 420

net worth:

The difference between a firm’s assets

(what it owns or is owed) and its liabilities

(what it owes). Also called equity capital. 145

no-load fund:

A mutual fund that does not charge a

fee when funds are added to or withdrawn from

the fund. 502

nominal anchor:

A nominal variable such as the

inflation rate, an exchange rate, or the money

supply that monetary policy makers use to tie

down the price level. 232

nominal interest rate:

An interest rate that is not

adjusted for inflation. 48

nonbank banks:

Limited-service banks that either

do not make commercial loans or do not take in

deposits. 581

noncompetitive bidding:

Offering to buy Treasury

securities without specifying a price; the securi-

ties are ultimately sold at the weighted average

of the competitive bids accepted at the same

auction. 263

notional principal:

The amount on which interest is

being paid in a swap arrangement. 613

off-balance-sheet activities:

Bank activities that

involve trading financial instruments and the

generation of income from fees and loan sales,

all of which affect bank profits but are not visible

on bank balance sheets. 414, 431

official reserve transactions balance:

The current

account balance plus items in the capital

account. 379

open-end fund:

A mutual fund that accepts invest-

ments and allows investors to redeem shares at

any time. The value of the shares is tied to the

value of investment assets of the fund. 494

open interest:

The number of contracts outstand-

ing. 597

open market operations:

The buying and selling of

government securities in the open market that

affect both interest rates and the amount of

reserves in the banking system. 196, 216

Glossary

G-11

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operating expenses:

The expenses incurred from a

bank’s ongoing operations. 417

operating income:

The income earned on a bank’s

ongoing operations. 417

operating instrument:

A variable that is very

responsive to the central bank’s tools and indi-

cates the stance of monetary policy (also called

a policy instrument). 246

opportunity cost:

The amount of interest

(expected return) sacrificed by not holding an

alternative asset. 257 

options:

Contracts that give the purchaser the

option (right) to buy or sell the underlying finan-

cial instrument at a specified price, called the