Accrued Interest: Interest deemed to be earned on a security but not yet paid to the investor.
Amortization: Liquidation of a debt through installment payments.
On a mortgage security, the average time to receive each dollar of principal, weighted by the amount of each principal payment, based on prepayment assumptions.
Basis Point: One-one hundredth (1/100 or 0.01) of one percent. Yield differences among bonds are stated in basis points.
Bid: The price at which a buyer is willing to buy a security.
Bond Equivalent Yield: An adjustment to a CMO yield to equate it to semiannual interest payments on most other types of bonds.
Book-Entry: A method of recording and transferring ownership electronically. This eliminates the need for physical certificates.
For a CMO, the risk that declining interest rates may accelerate mortgage loan prepayment speeds, causing an investor's principal to be returned sooner than expected. As a consequence, investors may have to reinvest their principal at a lower rate of interest.
Callable Bond: A bond which the issuer has the right to redeem prior to its maturity date, under certain conditions.
Cap: The upper limit for the interest rate on an adjustable-rate loan or security.
CMO (Collateralized Mortgage Obligation):
A multiclass bond backed by a pool of mortgage pass-through securities or mortgage loans. See "REMIC."
CMT (Constant Maturity Treasury): A series of indexes of various maturities (one, three, five, seven or ten years) published by the
Federal Reserve Board and based on the average yield of a range of Treasury securities adjusted to a constant maturity corresponding to that of the index.
COFI (Cost of Funds Index):
A bank index reflecting the weighted average interest rate paid by the savings institutions on their sources of funds. There are national and regional COFI indexes.
Securities or property pledged by a borrower to secure payment of a loan. Collateral for CMOs consists primarily of mortgage pass-through securities or mortgage loans, although it may also encompass letters of credit, insurance policies, or other credit enhancements.
Confirmation: A document used by security dealers and banks to state in writing the terms and execution of a verbal agreement to buy or sell a security.
Conventional Mortgage Loan:
a mortgage loan granted by a bank that is based solely on real estate as security and is not insured or guaranteed by a government agency.
Coupon: The interest rate stated on a fixed income security.
The current remaining monthly principal on a mortgage security. Current face is computed by multiplying the original face value of the security by the current principal balance factor.
A unique nine-digit identification number permanently assigned by the Committee of Uniform Securities Identification Procedures to each publicly traded security at the time of issuance.
For a CMO, the risk that rising interest rates may slow the anticipated prepayment speeds, causing investors to find their principal committed longer than they expected.
Face Value: The par value of a security, as distinct from its market value.
A decimal value reflecting the proportion of the outstanding principal balance of a mortgage security, which changes over time, in relation to its original principal value.
Federal Home Loan System:
A privately capitalized, cooperative government Âsponsored enterprise (GSE) created by Congress in 1932. Consisting of twelve regional FHLBs, the System's public policy mission is to support residential mortgage lending and related community development lending by its member-shareholders. The twelve FHLBs raise funds by issuing debt instruments in the capital markets. FHLB debt is not backed by the full faith and credit of the U. S. Government. However, by virtue of their strong capital, pristine asset quality, solid earnings, and conservative management, the FHLBs are rated "AAA", the highest possible rating available from Moody's and Standard and Poor's. FHLB debt securities and interest are exempt from state and local taxes.
Federal Home Loan Mortgage Corporation (Freddie Mac):
Freddie Mac is a publicly held government-sponsored enterprise (GSE) created in 1970 to
provide stability in the secondary market for home mortgages. The principal activity of Freddie Mac consists of the purchase of first lien mortgages from mortgage lending institutions and the resale of loans and
participations in the form of guaranteed mortgage securities. Mortgages retained by Freddie Mac are financed with short-term and long-term debt and equity capital.
Federal National Mortgage Association (Fannie Mae):
A federally charted and stockholder-owned corporation organized and existing under the
Federal National Mortgage Association Charter Act. It is the largest investor in home mortgage loans in the United States. Established in 1938 as a government agency to provide supplemental liquidity to the mortgage
market and was transformed into a stockholder-owned and privately managed corporation by legislation enacted in 1968. Fannie Mae provides funds to the mortgage market by purchasing mortgage loans from lenders, thereby
replenishing their funds for additional lending. Fannie Mae acquires funds to purchase loans from many capital market investors that ordinarily may not invest in mortgage loans, thereby expanding the total amount of funds
available for housing.
Final Maturity: See "Maturity."
First Call Date: The first date on which a callable bond may be redeemed.
A CMO Tranche, which pays an adjustable rate of interest tied to a representative interest rate index such as LIBOR, the CMT, or COFI.
Floor: The lower limit for the interest rate on an adjustable-rate loan or security.
GMAC SMARTNOTES: GMAC's are fixed rate medium-term notes that offer a variety of payment options and maturities. They are issued by General
Motors Acceptance Corporation (GMAC), a wholly owned subsidiary of General Motors.
As the financing arm of GM, GMAC is one of the world's largest financial services company.
SMARTNOTES carry a credit rating of A2 by
Moody's and A by S&P (the same as the parent company)
Since 1996, more than $4 billion have been issued.
Government National Mortgage Association (Ginnie Mae) is a wholly owned U.S. Government Corporation within the U.S. Department of Housing and Urban Development. GNMA guarantees the timely payment of principal and interest on all of its mortgage backed securities. The guarantee is backed by the "Full Faith and Credit" of the U.S. Government.
Hedge: A commitment or investment made with intention of minimizing the impact of adverse movements in interest rates or securities prices and offsetting
Issue Date: The date on which a security is deemed to be issued or originated.
Issue: Description of bond being offered.
Issuer: An entity, which issues and is obligated to pay amounts due on securities.
LIBOR (London Interbank Offered Rate): The interest rates banks charge each other for short-term Eurodollar loans ranging from overnight to five years in
Lockout: The period of time before a CMO investor will begin receiving principal payments.
Maturity Date: The date on which the principal amount of a security is due and payable.
Mortgage: A legal instrument that creates a lien upon real estate securing the payment of a specific debt.
Mortgage Loan: A loan secured by a mortgage.
Mortgage Pass-Through Security: A security representing a direct interest in a pool of mortgage loans. The pass-through
issuer or servicer collects the payments on the loans in the pool and "passes through" the principal and interest to the security holders on a pro rata basis.
Net Investment: The total of transaction including any accrued interest.
Next Call: Next date on which a callable bond may be redeemed.
Offer: The price at which a seller will sell a security.
Offering Price: See "Price."
Original Face: The face value or original principal amount of a security on its issue date.
A price equal to the original face amount of a security, as distinct from its market value. On a debt security, the par or face value is the amount the investor has been promised to receive from the issuer at maturity.
Payment Date: The date that principal and interest payments are paid to the owner of record of the security.
P&I (Principal and Interest): The term used to refer to regularly scheduled payments or prepayments of principal and interest on mortgage securities.
Plain-Vanilla CMO: See "Sequential-pay CMO."
Pool: A collection of mortgage loans assembled by an originator or master servicer as the basis for a security.
Prepayment: The unscheduled partial or complete payment of the principal amount outstanding on a mortgage loan or other debt before it is due.
Price: The dollar amount to be paid for a security, which may also be stated as a percentage of its face value or par in the case of debt securities.
Principal: With mortgage securities, the amount of debt outstanding on the underlying mortgage loans.
The term used to describe a mortgage security whose issuer is an entity other than a U.S. government agency or U.S. government-sponsored enterprise. Such issuers may be subsidiaries of investment banks, financial institutions, or homebuilders.
Ratings: Designations used by investors' services to give relative indications of credit quality.
Record Date: The date for determining the owner entitled to the next scheduled payment of principal and/or interest on a mortgage security.
Real Estate Mortgage Investment Conduit. As a result of a change in the 1986 Tax Reform Act, most CMOs are today issued in REMIC form to create certain tax advantages for the issuer. The terms "REMIC" and "CMO" are now used interchangeably.
Scenario Analysis: Examining the likely performance of an investment under a wide range of possible interest rate environments.
The most basic type of CMO, in which all Tranches receive regular payments, but the principal payments are directed initially only to the first Tranche until it is completely retired. Once the first Tranche is retired, the principal payments are applied to the second Tranche until it is fully retired, and so on.
Collection and pooling of principal, interest, and escrow payments on mortgage loans and mortgage pools, as well as certain operational procedures such as accounting, bookkeeping, insurance, tax records, loan payment follow-up, delinquency loan follow-up, and loan analysis. The party providing the servicing receives a servicing fee.
Servicing Fee: The amount retained by the mortgage servicer from monthly interest payments made on a mortgage loan.
Settlement Date: The date agreed upon by the parties to a transaction for the delivery of securities and payment of funds.
Sinking Fund: Money set aside on a regular basis, sometimes from current earnings, for the specific purpose or redeeming debt.
Size: Amount of securities offered.
A party appointed to maintain records of security owners, to cancel and issue certificates, and to address issues arising from lost, destroyed, or stolen certificates.
Trustee: An individual or institution that holds assets for the benefit of another.
Tennessee Valley Authority (TVA): TVA is a wholly owned corporation of the U.S. government that was established in 1933. TVA is
currently authorized to obtain advances from the Treasury.
TVA's are neither obligations of nor guaranteed by the U.S. and are rated AAA. They are exempt from State and Local taxes.
Weighted Average Coupon (WAC): The weighted average interest rate of the underlying mortgage loans or pools that serve as collateral for
a security, weighted by the size of the principal loan balances.
Weighted Average Loan Age (WALA):
The weighted average number of months since the date of the loan origination of the mortgages in a mortgage pass-through security pool issued by Freddie Mac, weighted by the size of the principal loan balances.
Weighted Average Maturity (WAM):
The weighted average number of months to the final payment of each loan backing a mortgage security weighted by the size of the principal loan balances. Also known as weighted average remaining maturity (WARM) and weighted average remaining term (WART).
Window: In a CMO bond, the period of time between the expected first payment of principal and the expected last payment of principal.
Worst Call: The lowest of all yield to calls.
The annual percentage rate of return earned on a security, as computed in accordance with standard industry practices. Yield is a function of a security's purchase price and interest rate.
Yield To Call (YTC): The yield that would be realized on a callable bond in the event that it was redeemed by the issuer on the next
available call date.
Yield To First Call (YTFC): Yield that would be realized on a callable bond in the event that it was redeemed by the issuer on the
first possible call date.
Yield To Maturity (YTM): The rate of return on a bond if it is held to the maturity date.
Yield To Worst Call (YTWC): The lowest of all yields to call or the yield to maturity.