GLOSSARY

List of Financial Terms in alphabetical order:

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ACH See Automated Clearing House.

Accidental Death Benefit Benefit in addition to the amount of a life insurance policy, payable in the event of accidental death of the insured.

Account Aggregation A service that allows customers to electronically access and consolidate personal account information from a variety of unrelated sources through a single user name and password. Useful for banks and brokerage houses as an enhancement of their advisory services and as a component of a customer relationship management (CRM) strategy.

Accrued Liability An amount owed that has not yet been paid as of the balance sheet date. Accrued taxes are a common type of accrued liability.

Accumulation Period Refers to the time between the payment of the first premium and the first benefit payout under a deferred annuity.

Acquisition Costs Variable costs that are principally related t the acquisition of new and renewal insurance contracts (for example commissions and salaries of employees involved in the underwriting of new policies).

Actuary An expert employed by an insurance company who uses risk tables and other tools to calculate a variety of estimates and projections including life expectancy, premium rates, dividends, pension calculations, and annuity rates. Actuaries are required to pass a series of rigorous mathematical examinations before becoming a certified actuary.

Adjustable Life Insurance A type of life insurance in which the insured can raise or lower the face amount of the insurance, the premium or the protection period.

Adjustable Rate Mortgage (ARM) A loan on a property in which the interest rate (or coupon rate) periodically changes depending on changes in a specific index rate. These types of mortgages will typically have floors and caps that limit the changes that occur in the interest rate annually or for the duration of the loan.

Admitted Insurance Carrier An insurance company licensed to do business in a given state in the U.S., subject to the rules and regulations of that state. Disputes between admitted insurance carriers and their clients or prospects are investigated and adjudicated by the relevant state's insurance commission.

ADR See American Depository Receipt.

Advanced Computerized Execution System (ACES) A system run by the NASDAQ stock market that automates trades between firms that have an existing trading relationship. Firms designate specific amounts of securities for automatic execution and the system executes the purchase.

Adverse Selection Occurs when a party to a transaction holds information not available to you regarding the value of a transaction. The term is used in insurance when people with a high probability of filing a claim withhold significant information regarding their risk profile from the insurance underwriter, thereby affecting the price the underwriter sets for the policy. An example would be someone who smokes and does not tell the insurer to whom an application for a life insurance policy is being made.

Advising Bank The bank which notifies the seller (exporter) that a letter of credit has been opened by the buyer (importer) for the specified trade transaction. The term is used in trade finance. (Please note: advising banks do not guarantee payment while a confirming bank does. A bank can be both the confirming and advising bank, in which case payment would be guaranteed. However, these roles can also be handled by two different banks.)

Affinity Cards Credit cards issued by major banks and sponsored by other companies such as airlines, automakers, and department stores or nonprofit organizations such as alumni associations or charities. The issuer and the company or group co-market the cards and share in the revenue that is generated. See co-branded cards.

Aftermarket The trading of a stock or security that happens after the initial public offering (IPO). Also referred to as the secondary market. Proceeds from sales in this market go to brokers and dealers, whereas the proceeds in an IPO go to the issuing company.

Agency Services A service for which an agency charges the customer a fee. In banking, these services can include investment management and the safekeeping of assets. A bank carries a more limited level of responsibility to protect and defend the client's interests when providing these services than when providing fiduciary services.

ALCO See Asset Liability Committee.

Allowance for Credit Losses See Allowance for Loan Losses.

Allowance for Loan Losses An item on a bank’s balance sheet that shows the amount of funds the bank has set aside to absorb future loan losses expected from its existing loan portfolio. As the bank experiences actual loan charge-offs, these charge-offs reduce the bank’s allowance. Funds used to increase the Allowance are shown on a bank’s profit and loss statement as the provision for loan losses. See also Provision for Loan Losses.

Alpha An estimate expressed as a coefficient that measures how a stock will perform based solely on its inherent value (e.g., growth in earnings per share), independent of market movements. This is in contrast to Beta, which indicates return based on share volatility.

Alternative Risk Transfer A term used to describe a broad range of innovative, customized products used to manage a client's total risk, including insurance, financial and business risks. The ART market encompasses a variety of mechanisms including captives, finite risk insurance, and securitization of risk.

American Depository Receipt (ADR) A receipt given for the shares of a foreign-based corporation that is held in a U.S. bank. Transfer and settlement practices are the same as for the securities of U.S.-based companies. Holding an ADR is essentially the same as owning the stock itself. However, it provides investors with lower transaction costs and ready access to information on the U.S. exchanges regarding the stock.

American Option Option that can be exercised at any time before the stated exercise date.

Amortization Schedule Schedule of repayments of the principal amount of a loan.

Annual Limits A statement of the allowable annual movement of interest rates charged to a borrower.

Annuitant The person who receives an annuity income payment.

Annuity (or Annuity Contract) A contract, traditionally sold by insurance companies (but is also sold by other financial services companies), that allows a customer to make tax deferred investments that guarantee a fixed or variable payment at a future time. Annuities are most often used as a long-term investment for retirement and are funded either through a lump sum or through a series of payments.

Arbitrage A transaction that involves the simultaneous purchase and sale of securities, currencies or commodities in two or more markets. Profit is made from the gap between the prices in the different markets. In classical arbitrage, both sides of the transaction are guaranteed, thereby excluding the risk of loss. Risk arbitrage is the simultaneous purchase of a stock in a company being acquired and the sale of the stock of the proposed acquirer. Profit is created by the differential between the expected rise in the target company's shares and the drop in price of the acquirer's shares. Risk is incurred if the proposed acquisition is not completed.

Arbitrageur A trader that attempts to profit through arbitrage. See Arbitrage.

Arbitrageurs See Arbitrageur.

ARM See Adjustable Rate Mortgage.

Arrears A term that generally refers to any past due obligation, such as an interest or principal payment on a loan. Can also be specifically used in reference to deferred dividends on cumulative preferred stock that must be paid to the holders before common stock dividends.

ATM See Automated Teller Machine.

Ask Price The price at which a security is offered for sale on an exchange or market. Also known as the "offer price".

Asset Allocation Investment approach that involves dividing an investor's funds among different types of assets to manage risk exposure and increase opportunities for overall gains in the portfolio.

Asset Financing (Asset-Backed Lending) Financing that converts assets (e.g., receivables, inventory, and real estate) into working cash in exchange for a security interest in those assets.

Asset/Liability Committee (ALCO) A management committee at a bank that is responsible for coordinating borrowing and lending strategy through the monitoring of interest rate fluctuations, pricing and profitability targets.

Asset-Backed Securities Securities backed (securitized) by a pool of receivables that are issued and sold by a trust or special purpose vehicle (SPV). The receivables in the pool may carry varying degrees of risk and payment terms.

Asset-Liability Management Process in which banks and other financial institutions monitor the maturity of their deposits (and short-term liabilities) against the length of their commitments (loans and investments and other short-term assets) taking into account interest rate fluctuations and their potential impact on the financial results of the institution.

Assignment The document (and the process) that enables the transfer of ownership rights of a life insurance policy from the insured to another person.
Assumption Reinsurance A type of reinsurance in which the contractual relationship, policy administration and liabilities pass to the reinsurer.

At-The-Money Refers to a call or put option when the strike price (price that can be paid for the underlying security) is equal to the value of the asset on which the option is written.

Auction Market A system where buyers enter competitive bids and sellers enter competitive offers at the same time. Traditionally with auctions, there is one seller and multiple buyers. The New York Stock Exchange is a double auction system because there are multiple buyers and sellers.

Authentication A method in electronic funds transfer of verifying that a payment instruction has been sent by the sending institution without any tampering or interference by unauthorized parties.

Authorization The act of approving the completion of a transaction or the issuance of funds. An example would be the authorization a merchant receives from a bank on a credit card transaction in which the bank indicates that the customer has available credit.

Automated Clearing House (ACH) A computer-based clearing and settlement network established for the exchange of electronic transactions among participating institutions within a domestic market. ACH also provides an automated, low cost method for processing and issuing checks.

Automated Payment Systems Systems that enable customers to transfer funds electronically, replacing the use of paper checks.

Automated Teller Machine (ATM) A terminal located either on the bank's premises or at a remote location (e.g., supermarkets, convenience stores) that allows customers to perform limited types of banking transactions 24 hours a day.

Automatic Premium Loan A feature in a life insurance policy that allows the insurer to use the loan value of the policy to pay any premiums unpaid at the end of the grace period.

Average Balance Sheet A type of balance sheet used by financial institutions showing average amounts in each balance sheet category (assets, liabilities, and equity) over a period of time. It also includes rates paid and earned on average over a given period. The average balance sheet is supplemental to the year-end financial reporting.

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