| | A B C D E F G H I J K L M N O P Q R S T U V W X Y Z Strictly interpreted, a junior class or creditor cannot receive any value in bankruptcy resolution if the more senior classes have not yet been fully satisfied. This rule guides allocations among creditor classes concerning a plan of reorganization, but is rarely strictly applied. Commonly the bankruptcy court will give some amount of consideration to lower class creditors and/or to preferred and common stockholders in order to circumvent objections, delays and other litigation. - A provision of many bankruptcy systems that senior creditors are fully compensated before junior creditors receive anything, and that junior creditors are fully compensated before shareholders receive anything. In practice, lower ranking creditors and shareholders often receive something as compensation for expediting the settlement process. See also Cram-down Rules.
accounting analytic-- An approach to credit quality evaluation. The use of financial ratios and fundamental analysis to estimate firm specific credit quality examining items such as leverage, capital and coverage measures, with an evaluation of the level and stability of earnings and cash flows.
accrued interest-- Interest earned (and thus added with the principal to the claim amount in default) since the last interest payment up to, but not including, the settlement date. In the U.S., there are two methods for calculating accrued interest: the 30-day-month (360-day-year) method for corporate and municipal bonds, and the actual-calendar-days (365-day-year) method for government bonds. Income bonds, bonds in default typically trade without accrued interest (i.e., trade "flat").
allowance for loan and lease losses-- An accounting reserve set aside to equate "expected" (mean) losses from credit defaults. It is common to consider this reserve as the buffer for either 1) long-term average losses, or 2) forecast next period losses. Separately, some risk-based economic capital (perhaps calculated via a value-at-risk model) could be a buffer against "unexpected" losses (i.e., volatility of value).
amortization-- The paying off of debt according to a schedule over a period of time.
annuities-- Most literally, a stream of annual payments of fixed amount for an defined period of time. More generally, a stream of fixed cash flows according to a uniform (fixed) schedule.
arbitrage-- The act of buying something at a low price in one market and simultaneously selling it for a higher price in another market.
- Doing a spread trade - i.e., selling one thing and using the proceeds to buy a second thing.
- Yield Curve Arbitrage: Doing a spread trade that exploits anomalies in the yield curve.
- Statistical Arbitrage: Taking a calculated gamble that the two sides of a spread trade will move in your favor, back to a more normal relationship.
asset swap-A Swap that converts a fixed- (floating-) coupon asset into a floating- (fixed-) coupon asset. This is in contrast to the more familiar (Liability) Swap that converts a fixed- (floating-) coupon liability into a floating- (fixed-) coupon liability. This is the transaction by which the right of ownership to an asset is transferred from one person to another. For example, an endowment policy belonging to you could be assigned to a lending bank. They may insist on this as security for lending money. - Autocorrelation is the correlation (relationship) between members of a time series of observations, such as weekly share prices or interest rates, and the same values at a fixed time interval later. More technically, autocorrelation occurs when residual error terms from observations of the same variable at different times [commonly a one period lag] are correlated (related).
average exposure-- Credit exposure arising from market -driven instruments (e.g., an interest rate swap) will have an ever-changing mark-to-market credit exposure amount. Since this exposure is dynamic and can be projected in the future, it is common to estimate a time-bucketed mean (or more ambitiously a distribution) of exposures in each forward period. Such a projection would be a probability-weighted aggregation across all potential market rate paths.
average shortfall-- An alternative way of describing the magnitude of the "tail" (or an extreme value level) of a probability distribution. For example, rather than stating what level of loss could occur with 1% likelihood. A statement of average shortfall would be the average of all potential losses that fall below a 1% likelihood. The hope is to give some sensitivity to the severity of loss beyond the stated target level.
- An organization dominated by central banks, the BIS is concerned with international payments.
bankruptcy futures-The futures contract based on the CME Quarterly Bankruptcy Index. - (Quote from MoneyCenter.com) "November 3, 1998-Leaders from the consumer lending industry joined Chicago Mercantile Exchange (CME) officials today to ring the opening bell on trading in the CME Quarterly Bankruptcy Index (CME QBI). The contract is the first exchange-traded derivative designed specifically to address the growing default risk in the $1.3 trillion consumer credit market. . . . "
basis point (BP, BIP)-- A measure of a bond's yield, equal to 1/100th of 1% of yield. A bond whose yield increases from 5.0% to 5.5% is said to increase by 50 basis points. When applied to a price rather than a rate, the term is often expressed as annualized basis points.
Bayes Stein adjustment-- An adjustment by which the sample means of several variables are compressed toward the grand mean of those variables. For example, if two variables have sample means of 10% and 20%, they can be compressed toward the grand mean of 15% by weighting the sample means by 70% and the grand mean by 30%. In this example, the adjusted means would equal 11.5% and 18.5%, respectively. The optimal weighting scheme is a function of the size of the samples used to derive the original estimates. The Bayes Stein procedure is often used in optimization applications to reduce the sensitivity of the results to errors in the parameter estimates.
Bayes' Theorem-- A technique for estimating the conditional probability of a cause given that a particular event has occurred. The theorem states that the probability of cause Bj given the observation of event A is equal to the joint probability of A and Bj divided by the sum of the joint probabilities of A with B1 through Bn. The theorem is named after Thomas Bayes, an 18th century English clergyman who was interested in mathematics.
bell curve-- This is a common description of the characteristic shape of the most common of statistical distributions: the Normal distribution. This typically results from a large, random (i.e., uncorrelated) sampling who's chart looks like a "bell seen in profile" where the scale measurement is along the x-axis and the frequency within the sample up the y-axis. Examples of normality are common such as: peoples' heights or the length of dogs' tails.
- A legally enforceable arrangement between a bank and a counter party that creates a single legal obligation covering all included individual contracts. This means that a bank's obligation, in the event of the default or insolvency of one of the parties, would be the net sum of all positive and negative fair values of contracts included in the bilateral netting arrangement. See also Netting Agreement.
BISTRO-- Broad Index Secured Trust Offering. J.P.Morgan's preferred vehicle for transferring a significant amount of diverse credit risk to an Special Purpose Vehicle (SPV).
bond-- A legal obligation of an issuing company or government to repay the principal of a loan to bond investors at a specified future date. Bonds are usually issued with a par or face value of $1,000, representing the amount of money borrowed. The issuer promises to pay a percentage of the par value as interest on the borrowed funds. The interest payment is stated on the face of the bond at issue. Of course, there are many variations on this theme such as: sinking funds, reverse amortization, zero coupon, perpetual maturity, etc.
bond quote-- One of a number of quotations listed in the financial press and most daily newspapers that provide representative bid prices from the previous day's bond market. Quotes for corporate and government bonds are percentages of the bond's face value (usually $1,000). Corporate bonds in the US are quoted in increments of 1/8th, where a quote of 99 1/8 represents 99.125% of par ($1,000), or $991.25. Government bonds are quoted in 1/32nds. Municipal bonds may be quoted on a dollar basis or on a yield-to-maturity basis.
bond rating-- An evaluation of the possible risk of credit losses due to a bond issuer default, based on an analysis of the issuer's financial condition and profit potential as well as the structure and terms of the debt instrument. The largest and most experienced bond rating service is Moody's Corporation.
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