Annual Percentage Rate (APR)
Cost of credit that consumers pay, expressed as a simple annual percentage, as opposed to perhaps a simple monthly interest rate. For example, the monthly simple interest rate may be 5.00% whereas the APR would be 5.11%.
Asset Liability Management
Financial institutions carry out asset-liability management when they match deposit maturities with the length of their loan commitments in order to avoid being adversely affected by rapid changes in interest rates.
Base Market Value
Average market price of the group of securities at a given time; used for indexing.
A certificate of deposit (CD) that can be redeemed by the issuer before the scheduled maturity.
Certificate of Deposit (CD)
A debt instrument, issued by a bank, offering interest payments at a determined interval for the use of the money. The required principal amount varies with each issuing bank; however, most Jumbo CDs are $50,000 to $250,000 per individual account.
Interest earned on the principal amount invested, plus interest earned on the interest itself. For example, if the interest is earned monthly, but paid annually, the interest is calculated monthly. Therefore, an investment on $100,000 and paying 10% interest monthly, or $833 times 12 months is then added to the overall principal.
Also referred to as the interest rate on a debt security. It is the rate at which the debtor will pay for the use of the money over the life of the security.
Depository Trust Company (DTC) CDs
These are CDs that are purchased through the DTC, which is a central securities repository for large denominational CDs. Funds are commingled in aggregates of $5 million and more. These CDs are registered securities, and thus can be sold at market conditions.
The interest rate the Federal Reserve charges member banks for loans, using government securities as collateral. This provides a floor on interest.
Federal Deposit Insurance Corporation (FDIC)
The federal agency that guarantees funds on deposit with member banks up to $250,000. The guarantee is backed by the full faith credit of the U.S. Government.
Federal Funds (FedFunds)
Funds deposited by commercial banks at Federal Reserve Banks, including funds in excess of bank requirements. Banks may lend to each other on an overnight basis at the Fed Fund rate. (Fed Funds are also used to pay for the purchase of government securities.)
Federal Fund Rate
The interest rate charged by banks with excess reserves at the Federal Reserve district bank to banks needed overnight loans to meet reserve requirements. This rate is set daily by market conditions.
A high-speed computerized network system of the Federal Reserve Banks that enables banks to transfer reserve balances and other funds between banks.
Securities issued by the U.S. Government, such as Treasury bills, bonds, notes, and savings bonds. Governments are the most creditworthy of all debt instruments, since they are backed by the full faith and credit of the U.S. government, which can print money to make payments.
Negotiable Certificate of Deposit
These instruments are not exempt securities, like a regular bank CD. These CDs are securities that can be purchased and sold in the secondary market, where they generally trade in round lots of $5 million. As a security, they also have a CUSIP number associated with it, whereas regular CDs do not have a CUSIP number. A regular CD issued by a bank to a retail customer cannot be sold to another party.
The term describing the process whereby a bank, having issued a CD, wishes to continue to offer a CD interest rate as a means to retain those funds currently on deposit as the CD matures on a predetermined date.
The period of time during which the conditions of the contract will be carried out. The term of the CD may be 180 days, or even five years, but it is a contract between the investor and the issuing bank. The contract is usually the signature cards signed by the investor that has the specific information regarding those conditions.
This is a CD where the rate may change during the term of the investment, but is known in advance of the settlement date. This rate will vary depending on a specific index or rate, such as the prime bank rate, S&P or based on LIBOR (London Interbank Offered Rate). Generally, there is as floor (lowest rate level) and a ceiling (highest rate level) as a rate range for payment.
Zero Coupon CD
A CD that makes no periodic interest payments, instead it is sold at a deep discount from its face value. For example, a five-year term CD discounted at a 5% interest rate, to mature at $100,000, requires an investment of $79,991.23.