Bond Markets and coupons to the issuer for payments of
interest when they come due.
Commercial Banks
(Chapter 6 and 11)
Bond Markets - they are used to assist in
the transfer of funds.
Bonds - long-term debt obligations
issued by corporations and government.
Capital Markets - markets that trade
debt like bonds and mortgages and equity
instruments with maturities of more than
1 year.
Treasury Notes - issued by the
government to finance national debt and
other government expenditures.
STRIP - a treasury security in which the
periodic interest payment is separated
from the final principal payment.
Accrued Interest - portion of the coupon
payment accrued between the last
coupon payment and the settlement day.
Municipal Bonds - securities issued by
the state and local government.
General Obligation Bonds - bonds
backed by the full faith and credit of the
issuer.
Revenue Bonds - bonds sold to finance a
specific revenue-generating project,
backed by cash flows from the project.
Firm Commitment Underwriting - the
issue of securities by an investment bank;
guarantees the issuer a price for newly
issued securities by buying the whole
issue at affixed price.
Bond Indenture - the legal contract that
specifies the rights and obligations of the
bond issuer and the bondholders.
Corporate Bonds - long-term bonds
issued by corporations.
Bearer Bonds - bonds with coupon
attached and the holder presents the
Registered Bonds - bond in which the
owner is recorded by the issuer and the
coupon payments are mailed to the
registered owner.
Term Bonds - bonds in which the entire
issue matures on a single date.
Serial Bonds - bonds that mature on a
series of dates, with a portion of the
issued paid off on each.
Mortgage Bonds - bonds issued to
finance specific projects, which are
pledged as collateral for the bond issue.
Debenture Bonds - bonds backed solely
by the general credit worthiness of the
issuing firm, unsecured by specific assets
or collateral.
Subordinate Debenture Bonds - bonds
that are unsecured and are junior in their
rights to mortgage bonds and regular
debentures.
Convertible Bonds - bonds that may be
exchanged for another security of the
issuing firm, at the direction of the
bondholder.
Stock Warrants - bonds issued with
stock warrants attached giving the
bondholder an opportunity to purchase
common stock.
Call Provision - provision on a bonds
issue that allows the issuer to force the
bondholder to sell the bond back.
Call Premium - difference between the
call price and the face value of the bond.
Sinking Fund Provision - requirement
that the issuer retire a certain amount of
the bonds issue each year.
Junk Bonds - bonds rated as speculative
or less than investment grade by
bond-rating agencies.
Commercial Banks - represents the
largest group of depository institutions
measured by asset size; accepts deposits
and make loans.
Investment Securities - consist of items
such as interest-bearing deposit
purchased from other FIs.
Transaction Accounts - sum of
noninterest-bearing demand deposit and
interest-bearing checking accounts.
NOW Account - an interest-bearing
checking account.
Off-BS Activities - increasingly
important in terms of their dollar value
and the income they generate.
Off-BS Asset - this item moves to the
asset side when an event occurs.
Off-BS Liability - this item moves onto
the liability side when an event occurs.
Corresponding Banking - provision of
banking services to other banks that do
not have the staff resources to perform the
services themselves.
Retailing Banking - consumer oriented
banking, providing residential and
consumer loans and accepting smaller
deposits.
Interest Spread - difference between
lending and deposit rates.
Net Interest Margin - interest income
minus interest expense divided by
earning assets.
Noncurrent Loans - loans past due 90
days or more and loans not accruing
interest.
Dual Banking System - coexistence of
both nationally and state-chartered
banks.
Holding Company - parent company that
owns a controlling interest in a subsidiary
bank or other FI.
PDIC - a government instrumentality
created by RA 3591 to insure the deposit
of all banks.
Commercial Banks’ Financial
Statement and Analysis
( Chapter 12 )
Report of Condition- Balance sheet of
a commercial bank reporting information
at a single point in time.
Report of Income - Income statement
of a commercial bank reporting revenues,
expenses, net profit or loss, and cash
dividends over a period of time.
Retail Bank - A bank that focuses its
business activities on consumer banking
relationships.
Wholesale Bank - A bank that focuses
its business activities on commercial
banking relationships.
Correspondent Bank - A bank that
provides services to another commercial
bank.
Loans and leases - are the major asset
items on a bank’s balance sheet and
generate the largest flow of revenue
income. However, these items are also the
least liquid asset items and the major
sources of credit and liquidity risk
for most banks.
Commercial and Industrial Loans -
are used to finance a firm’s capital needs,
equipment purchases, and plant
expansion.
Real estate loans - are primarily
mortgage loans and some revolving home
equity loans
Consumer Loans - A third major
category of loans is the individual or
consumer loan— for example, personal
and auto loans.
Other loans - include a wide variety of
borrowers and types such as loans to
nonbank financial institutions, state and
local governments, foreign banks, and
sovereign governments.
Net Write-offs - Actual loan losses less
loan recoveries.
Earning Assets - Investment securities
plus net loans and leases.
NOW accounts (Negotiable order of
withdrawal accounts) - are similar to
demand deposits but pay interest when a
minimum balance is maintained.
MMDAs (Money market deposit
Accounts) - with retail savings accounts
and some limited checking account
features.
Other Savings Deposits - All savings
accounts other than MMDAs.
Retail CDs - Time deposits with a face
value below $100,000.
Wholesale CDs - Time deposits with a
face value of $100,000.
Negotiable Instrument - An
instrument whose ownership can be
transferred in the secondary market.
Brokered Deposits - Wholesale CDs
obtained through a brokerage house.
Core Deposits - Deposits of the bank
that are stable over short periods of time
and thus provide a long-term funding
source to a bank.
Purchased Funds - Rate-sensitive
funding sources of the bank.
Loan Commitment -
Contractual
commitment to loan to a firm a certain
maximum amount at given interest rate
terms.
Up-front Fee - The fee charged for
making funds available through a loan
commitment.
Commitment Fee - The fee charged on
the unused component of a loan
commitment.
Commercial Letters of Credit -
Contingent guarantees sold by an FI to
underwrite the trade or commercial
performance of the buyers of the
guarantees.
Standby Letters of Credit -
Guarantees issued to cover contingencies
that are potentially more severe and less
predictable than contingencies covered
under trade related or commercial letters
of credit.
Loans Sold - Loans originated by the
bank and then sold to other investors that
can be returned to the originating
institution.
Recourse - The ability to put an asset or
loan back to the seller should the credit
quality of that asset deteriorate.
Derivative Securities -
Futures,
forward, swap, and option positions
taken by the FI for hedging or other
purposes.
Total Operating Income - The sum of
the interest income and non-interest
income.
Time Series Analysis - Analysis of
financial statements over a period of
time.
Cross-Sectional Analysis - Analysis
of financial statements comparing one
firm with others.
Return on Equity (ROE)—measures
overall profitability of the FI per dollar of
equity.
Return on Assets (ROA)—measures
profit generated relative to the FI’s assets.
Equity Multiplier (EM)—measures
the extent to which assets of the FI are
funded with equity relative to debt.
Profit Margin (PM)—measures the
ability to pay expenses and generate net
income from interest and non-interest
income.
Asset Utilization (AU)—measures the
amount of interest and non-interest
income generated per dollar of total
assets.
Net Interest Margin - Interest income
minus interest expense divided by
earning assets.
Spread - The difference between
lending and borrowing rates.
Overhead Efficiency - A bank’s
ability to generate non-interest
income to cover non-interest expense.
Regulation of
Commercial Banks
(Chapter 13)
Net Regulatory Burden -The
difference between the private costs of
regulations and the private benefits for
the producers of financial services.
Outside Money - That part of the
money supply directly produced by the
government or central bank, such as
notes and coin.
Inside Money - That part of the money
supply produced by the private banking
system.
Universal FI - An FI that can engage in a
broad range of financial service activities.
Commercial Banking - Banking
activity of deposit taking and lending.
Investment Banking - Banking activity
of underwriting, issuing, and distributing
securities.
Nonbank Bank - A bank divested of its
commercial loans and/ or its demand
deposits.
Unit Bank - A bank with a single office.
Multibank Holding Company(MBHC)
- A parent banking organization that
owns a number of individual bank
subsidiaries.
Grandfathered Subsidiaries -
Subsidiaries established prior to the
passage of a restrictive law and not
subject to that law.
One-bank Holding Company - A
parent banking organization that owns
one bank subsidiary and nonbank
subsidiaries.
Disintermediation - The withdrawal
of deposits from depository institutions
and their reinvestment elsewhere.
Regulator Forbearance - A policy of
not closing economically insolvent
depository institutions, but allowing
them to continue in operation.
capital-to-assets ratio - Ratio of an
FI’s core capital to its assets.