Shorthand market terminology for any obligation issued by a government-sponsored entity (GSE), or a federally related institution. Obligations of GSEs are not guaranteed by the full faith and credit of the US government. There are eight GSEs, five of which are currently active in the new issue market. The five include:

  • FFCB
    The Federal Farm Credit Bank System provides credit and liquidity in the agricultural industry. FFCB issues discount notes and bonds.
  • FHLB
    The Federal Home Loan Bank provides credit and liquidity in the housing market. FHLB issues discount notes and bonds.
    Like FHLB, the Federal Home Loan Mortgage Corporation provides credit and liquidity in the housing market. FHLMC, more commonly referred to as “FreddieMac” issues discount notes, bonds and mortgage pass-through securities.
  • FNMA
    Like FHLB and FreddieMac, the Federal National Mortgage Association was established to provide credit and liquidity in the housing market. FNMA, also known as “FannieMae,” issues discount notes, bonds and mortgage pass-through securities.

Federally related institutions are arms of the federal government. Most do not issue securities directly into the market. Those, which do issue directly, include the following:

  • GNMA
    The Government National Mortgage Association, known as “GinnieMae,” issues mortgage pass-through securities, which are guaranteed by the full faith and credit of the US Government.
    The Private Export Funding Corporation assists exporters. Obligations of PEFCO are not guaranteed by the full faith and credit of the United States government.
  • TVA
    The Tennessee Valley Authority provides flood control and power and also promotes development in portions of the Tennessee, Ohio and Mississippi River valleys. TVA currently issues discount notes and bonds.

Amortized cost
Measure of the cost of a security whereby the cost value will change over time as the discount or premium paid for the security is gradually incorporated into the principal value as interest payments are received.

The price at which a seller offers to sell a security.

Asset-backed securities
Securities collateralized with consumer receivables, such as automobile loans, credit card receivables, or home equity loans, which are owned by the issuer, but placed with a trustee for the benefit of the investor.

Average life
In mortgage-related investments, including CMOs, the average time to expected receipt of principal payments, weighted by the amount of principal expected.


Banker’s acceptance
A money market instrument created to facilitate international trade transactions. This instrument is highly liquid and safe because the risk of the trade transaction is transferred to the bank which “accepts” the obligation to pay the investor.

A comparison security or portfolio. A performance benchmark is a partial market index, which reflects the mix of securities allowed under a specific investment policy.

The price at which a buyer offers to buy a security.

A bond is essentially a loan made by an investor to a division of the government, a government agency, or a corporation. The bond is a promissory note to repay the loan in full at the end of a fixed time period. The date on which the principal must be repaid is the called the maturity date, or maturity. In addition, the issuer of the bond, that is, the agency or corporation receiving the loan proceeds and issuing the promissory note, agrees to make regular payments of interest at a rate initially stated on the bond. Interest from bonds is taxable based on the type of bond. Corporate bonds are fully taxable, municipal bonds issued by state or local government agencies are free from federal income tax and usually free from taxes of the issuing jurisdiction, and Treasury bonds are subject to federal taxes but not state and local taxes. Bonds are rated according to many factors, including cost, degree of risk, and rate of income.

A broker brings buyers and sellers together for a transaction for which the broker receives a commission. A broker does not sell securities from his own position.


Certificate of deposit (CD)
A CD is a note issued by a bank for a savings deposit that an individual agrees to leave invested in the bank for a certain term. At the end of this term, on the maturity date, the principal may either be paid to the individual or rolled over into another CD. Interest rates on CDs between banks are competitive. Monies deposited into a CD are insured by the bank, thus they are a low-risk investment and a good way of maintaining principal. Maturities may be as short as a few weeks or as long as several years. Most banks set heavy penalties for premature withdrawal of monies from a CD. Large denomination CDs may be marketable.

Securities or cash pledged by a borrower to secure repayment of a loan or repurchase agreement. Also, securities pledged by a financial institution to secure deposits of public monies.

Collateralized Mortgage Obligations (CMO)
Classes of bonds that redistribute the cash flows of mortgage securities (and whole loans) to create securities that have different levels of prepayment risk, as compared to the underlying mortgage securities.

Commercial paper
The short-term unsecured debt of corporations.

Conditional prepayment rate (CPR)
A measure of mortgage prepayment activity. It assumes that a constant fraction of the principal prepays each month and is based on the previous month’s remaining balance. The rate is expressed as an annualized percentage. For instance, a CPR of 6% indicates that each month 6% of the remaining principal balance prepays on an annualized basis.

The rate of change in a bond’s price as duration changes. It is a particularly important component of price change for longer term bonds, or for large changes in interest rates. (see Negative Convexity)

Cost yield
The annual income from an investment divided by the purchase cost.

The rate of interest paid on a bond.

Credit risk
The risk that principal and/or interest on an investment will not be paid in a timely manner due to changes in the condition of the issuer.

Current yield
The annual income from an investment divided by the current market value. Since the mathematical calculation relies on the current market value rather than the investor’s cost, current yield is unrelated to the actual return the investor will earn if the security is held to maturity.


A dealer acts as a principal in security transactions, selling securities from, and buying securities for, his own position.

A bond secured only by the general credit of the issuer.

Any security that has principal and/or interest payments which are subject to uncertainty (but not for reasons of default or credit risk) as to timing and/or amount, or any security which represents a component of another security which has been separated from other components (“Stripped” coupons and principal). A derivative is also defined as a financial instrument the value of which is totally or partially derived from the value of another instrument, interest rate or index.

To default is to fail to repay principal or make timely interest payments on a bond or other debt investment security. Also, a default is a breach of or failure to fulfill the terms of a note or contract.

Delivery Versus Payment (DVP)
A securities industry procedure whereby payment for a security must be made at the time the security is delivered to the purchaser’s agent.

Any security that has principal and/or interest payments which are subject to uncertainty (but not for reasons of default or credit risk) as to timing and/or amount, or any security which represents a component of another security which has been separated from other components (“Stripped” coupons and principal). A derivative is also defined as a financial instrument the value of which is totally or partially derived from the value of another instrument, interest rate or index.

The difference between the par value of a bond and the cost of the bond, when the cost is below par. Some short-term securities, such as Tbills and banker’s acceptances, are known as discount securities. They sell at a discount from par, and return the par value to the investor at maturity without additional interest. Other securities, which have fixed coupons, trade at a discount when the coupon rate is lower than the current market rate for securities of that maturity and/or quality.

Dividing investment funds among a variety of investments to avoid excessive exposure to any one source of risk.

The weighted average time to maturity of a bond where the weights are the present values of future cash flows. Duration measures the price sensitivity of a bond to changes in interest rates. (See Modified Duration)


Effective duration
Measures the price volatility of a fixed income security that contains embedded options. A more accurate measure of price volatility when the cash flow characteristics of the bond change when interest rates shift.


Federal funds rate
The rate of interest charged by banks for short-term loans to other banks. The Federal Reserve Bank through open-market operations establishes this rate.

Federal Open Market Committee
A committee of the Federal Reserve Board that establishes monetary policy and executes it through temporary and permanent changes to the supply of bank reserves.


Hedging is a strategy of reducing risk by offsetting investments with investments of opposite risk. Risks must be negatively correlated in order to hedge each other; for example, an investment with high inflation risk and low immediate returns with investments with low inflation risk and high immediate returns. Long hedges protect against a short-term position and short hedges protect against a long-term position.


Ladder structure
A portfolio strategy in which a manager attempts to weight securities equally across the yield curve. (see Barbell structure)

Borrowing funds in order to invest in securities that have potential to pay earnings at a rate higher than the cost of borrowing.

The ease with which investments can be converted to cash at their present market value. Liquidity is significantly affected by the number of buyers and sellers trading a given security and the number of units of the security available for trading.


Market risk
Market risk is the risk that investments will change in value based on changes in general market prices.

Market value
Market value is the current value of an investment between willing buyers and sellers.

Marking to market
The process of posting current market values for securities in a portfolio.

The final date upon which the principal of a security becomes due and payable.

Medium Term Notes (MTN)
Unsecured, investment-grade senior debt securities of major corporations which are sold either on a continuous or an intermittent basis. MTNs are highly flexible debt instruments that can be structured to respond to market opportunities or to investor preferences.

Modified duration
The percent change in price of a bond with no embedded options for a 100 basis point change in yields. Modified duration is the best single measure of a portfolio’s or security’s exposure to market risk.

Money market
The exchange environment in which short term debt instruments (Tbills, discount notes, commercial paper and banker’s acceptances) are issued and traded.

Mortgage pass-through securities
A securitized participation in the interest and principal cash flows from a specified pool of mortgages. Principal and interest payments made on the mortgages are passed through to the holder of the security.

Mutual fund
An entity which pools the funds of investors and invests those funds in a set of securities which is specifically defined in the fund’s prospectus. Mutual funds can be invested in various types of domestic and/or international stocks, bonds and money market instruments, as set forth in the individual fund’s prospectus. For most large, institutional investors, the costs associated with investing in mutual funds are higher than the investor can obtain through an individually managed portfolio.


Negative convexity
A phenomenon associated with bonds which have embedded call options, it measures the rate at which duration of a callable bond gets smaller as interest rates fall. Negative convexity is an undesirable characteristics in bonds. (see Convexity)

Net Asset Value (NAV)
NAV is the price of a share in a mutual fund or investment company. This price is calculated once or twice daily. Net asset value is the amount by which the assets’ value exceeds the company’s liabilities. It is calculated by adding up the market value of all securities owned by the company, subtracting the company’s liabilities, and dividing this value by the number of shares of the company outstanding. Thus, the NAV indicates the current buying or selling price of a share in an investment company.


A marketable security contract that fixes the purchase price of some other security at a point in time.

Option adjusted spread
A measure of the value of a bond relative to a benchmark security, which takes into account the value of the embedded option inherent in any bond that has uncertain cash flows (i.e., callable bonds).


The difference between the par value of a bond and the cost of the bond, when the cost is above par.

Prepayment speed
Measure of how quickly principal is repaid to investors in mortgage securities.

Prepayment window
The time period over which principal repayments will be received on mortgage securities at a specified prepayment speed.

Primary dealer
A financial institution (1) that is a trading counter party with the Federal Reserve in its execution of market operations to carry out U.S. monetary policy, and (2) that participates for statistical reporting purposes in compiling data on activity in the U.S. Government securities market.

Prudent expert rule
A standard of care which fiduciaries must exercise. It states that in the investment of the fund, the fiduciaries shall act with the care, skill, prudence and diligence under the prevailing circumstances that a prudent person acting in a like capacity and familiar with such matters would use.

Prudent investor rule
The trustee is under a duty to the beneficiaries to invest and manage the funds of the trust as a prudent investor would, in light of the purposes, terms, distribution requirements, and other circumstances of the trust.

Prudent person rule
A standard of care which fiduciaries must exercise. It states that in the investment of the fund, the fiduciaries shall exercise the judgment and care under the circumstances then prevailing which persons of prudence, discretion, and intelligence exercise in the management of their own affairs, not for the purpose of speculation, but with regard to the permanent disposition of funds, considering the probable income, as well as the probable safety, of their capital.

PSA Standard Prepayment Model (PSA)
A measure of mortgage prepayment activity. The model is expressed as a monthly series of annual prepayment rates. The series begins at .2% per year in the first month, and increases by .2% per year in each successive month until month 30, where it levels out at 6% per year until maturity. This series is labeled 100 PSA. 200 PSA doubles this series, and 50 PSA would cut the series in half.


A quotation, or quote, refers to the current price of a security, be it either the highest bid price for that security or the lowest ask price, as provided by a broker or dealer.


Realized return
The change in value of the portfolio due to interest received and interest earned and realized gains and losses. It does not give effect to changes in market value on securities which have not been sold from the portfolio.

Realized yield
The change in value of the portfolio due to interest received and interest earned and realized gains and losses. It does not give effect to changes in market value on securities in the portfolio not yet sold.

Real rate of return
The annual return on an investment after being adjusted for both inflation and taxes.

Regional dealer
A financial intermediary that buys and sells securities for the benefit of its customers without maintaining substantial inventories of securities and is not a primary dealer.

Repurchase agreement (RP, Repo)
Short term purchases of securities with a simultaneous agreement to sell the securities back at a higher price. From the seller’s point of view, the same transaction is a reverse repurchase agreement.


A service to bank customers whereby securities are held by the bank in the customer’s name.

Scenario analysis
A portfolio management technique that measures the performance of the portfolio under varying scenarios including, but not limited to, interest rate movements, spread changes and nonparallel yield curve shifts.

Securities and Exchange Commission (SEC)
A federal government agency comprised of five commissioners appointed by the President and approved by the Senate. The SEC was established to protect the individual investor from fraud and malpractice in the marketplace. The Commission oversees and regulates the activities of registered investment advisers, stock and bond markets, broker/dealers, and mutual funds.

Structured note
A complex fixed income instrument that pays interest based on a formula tied to other interest rates, commodities or indices. Examples include inverse floating rate notes that have coupons that increase when other interest rates are falling and fall when other interest rates are rising, and “dual index floaters” which pay interest based on the relationship between two other interest rates–for example, the yield on the ten-year Treasury Note minus the LIBOR rate. Issuers of such notes lock in a reduced cost of borrowing by purchasing interest rate swap agreements.


Total rate of return
A measure of a portfolio’s performance over time. It is the internal rate of return that equates the beginning value of the portfolio with the ending value, and includes interest earnings and realized and unrealized gains and losses on the portfolio.

Treasury bills
All securities issued with initial maturities of one year or less are issued as discounted instruments, and are called Treasury Bills (Tbills). The Treasury currently issues three-month and six-month Tbills at regular weekly auctions. It also issues “cash management” bills as needed to smooth cash flows.

Treasury notes
All securities issued with initial maturities of two to ten years are called Treasury Notes (Tnotes), and pay interest semi-annually.

Treasury bonds
All securities issued with initial maturities greater than ten years are called Treasury bonds. Like Treasury notes, they pay interest semi-annually.


An underwriter is an individual distributing securities as an intermediary between the issuer of the security and the buyer.

U.S. Treasury obligations (Treasuries)
Securities issued by the U.S. Treasury and backed by the full faith and credit of the United States. Treasuries are considered to have no credit risk and are the benchmark for interest rates on all other securities in the US and overseas. The Treasury issues both discounted securities and fixed coupon notes and bonds.


The rate at which security prices change with changes in general economic conditions or the general level of interest rates.


Yield to maturity (YTM)
The annualized internal rate of return on an investment which equates the expected cash flows from the investment to its cost.

Yield to maturity (at market)
The discount rate that equates the present value of the promised cash flow (interest payments and redemption value)to the market price, assuming that all cash flows are invested at the YTM rate.

Yield to maturity (at purchase cost)
The YTM that equates to the purchase price of the security.

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