Glossary of Terms

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A

Ability-to-pay Principle
The idea that taxes should be levied on a person according to how well that person can shoulder that burden.

Absolute Advantage
The ability to produce more of a good or service than another producer using the same amount of resources as that producer.

Adjustable-rate Mortgage (ARM)
A mortgage that permits the lender to periodically adjust the interest rate on the basis of changes in a specified index.

Agency Debt
Direct debt obligations issued by Fannie Mae, Freddie Mac, and the Federal Home Loan Banks, which are government sponsored enterprises (GSEs).

Aggregate Demand Curve
A graphical depiction of the amounts of real output (gross domestic product or GDP) that buyers collectively desire to purchase at each possible price level.

Aggregate Supply Curve
A graphical depiction of the amounts of real output (gross domestic product or GDP) that businesses will choose to produce at each possible price level.

Alt-A (Alternative A) Mortgage
A non-standard mortgage owed by a borrower characterized by a strong credit history but with less traditional features; for example, reduced documentation, low down payment or non-owner occupier.

Alternatives
The different possibilities to choose from in a given situation.

Annual Percentage Rate (APR)
The percentage cost of credit on an annual basis and the total cost of credit to the consumer. APR combines the interest paid over the life of the loan and all fees that are paid up front.

Annuity
A series of fixed payments of the same amount paid at regular intervals (i.e., every week, month or pay period) over a specified period of time.

Appreciation
An increase in value. Currency appreciation is an increase in the value of one currency relative to another.

Asset
A resource with economic value that an individual, corporation or country owns with the expectation that it will provide future benefits.

Asset-backed Commercial Paper (ABCP)
Short-term debt that is typically limited to a fixed maturity of between 1 and 270 days. The proceeds of ABCP issuance are used primarily to purchase various assets, such as trade receivables, consumer debt receivables, auto and equipment loan leases, and collateralized debt obligations. (See also: Commercial paper)

Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF)
A Federal Reserve lending facility that provides funding to U.S. depository institutions and bank holding companies to finance their purchases of high-quality asset-backed commercial paper (ABCP) from money market mutual funds under certain conditions.

Asset-backed Security (ABS)
In general, a money or capital market instrument, usually marketable (that is, transferable to third-parties in market transactions), that has specific financial assets generating the cash flow from which the instrument will be paid. (See also: Commercial mortgage-backed security and Residential mortgage-backed security.)

Auction
A sale of property to the highest bidder.

Automated Teller Machine (ATM) Card
A form of debit card used in a cash machine to access an account by using a code or personal identification number.

Automatic Transfer
An online payment that is automatically deducted from the account balance on a recurring basis.

B

Balanced Budget
Occurs when the federal government’s expenditures on programs equal the amount of tax revenue collected.

Balance Of Trade
The difference between a country’s total exports and total imports. Also known as “net exports.”

Bank Account Register
A tool in which an account holder lists his or her initial balance in an account and then records all debits and credits in order to maintain an accurate record of account activity and an accurate balance.

Bank Failure
Occurs when banks are unable to meet depositors’ demands for their money.

Bank Holding Company
A company that owns, or has controlling interest in, one or more banks. The Federal Reserve is responsible for regulating and supervising bank holding companies, even if the bank owned by the holding company is under the primary supervision of a different federal agency.

Bank Panic
Occurs when a bank run begins at one bank and spreads to others, causing people to lose confidence in banks.

Bank Reserves
The amount of deposits not loaned out by banks.

Bank Run
Occurs when many depositors rush to the bank to withdraw their money at the same time.

Banks
Businesses that accept deposits and make loans.

Bank Statement
A statement given to account holders by a bank or credit union to keep them informed of all transactions they made during the statement period. These statements are sent on a regular basis or posted online.

Bank Suspensions
Banks closed to the public because of financial difficulties.

Barter
Trading goods and services for other goods and services without using money.

Benefits
Things favorable to a decision-maker.

Board Of Governors
A federal government agency that is the centralized component of the Federal Reserve System. These governors guide the policy actions of the Federal Reserve System.

Board Of Governors Of The Federal Reserve System
Central governmental agency of the Federal Reserve System located in Washington, D.C., and composed of seven members appointed by the president and confirmed by the Senate. The Board, with other components of the System, has responsibilities associated with the conduct of monetary policy, the supervision and regulation of certain banking organizations, the operation of much of the nation’s payments system, and the administration of many federal laws that protect consumers in credit transactions. The Board also supervises the Federal Reserve Banks. Also known as Board of Governors and Federal Reserve Board.

Borrowing
Taking money with a promise to repay the money in the future.

Boycott
A method of protest where people show a business that they are angry by refusing to buy the goods or services it produces.

Budget
An itemized summary of probable income and expenses for a given period. A budget is a plan for managing income, spending and saving during a given period of time.

Budget Deficit
Government expenditures exceed revenues.

Bureau Of Labor Statistics (BLS)
A research agency of the United States Department of Labor that compiles statistics on employment, unemployment and other economic data.

Business Cycle
The fluctuating levels of economic activity in an economy over a period of time measured from the beginning of one recession to the beginning of the next.

C

Capacity
A borrower’s ability to repay debt.

Capital Account

That part of a country's balance of payments that records movements of capital into and out of a country.

Capital (banking)
The funds invested in a bank that are available to absorb loan losses or other problems and therefore protect depositors. Capital includes all equity and some types of debt. Bank regulators have developed two definitions of capital for supervisory purposes: Tier 1 capital can absorb losses while a bank continues operating. Tier 2 capital may be of limited life and may carry an interest obligation or other char­acteristics of a debt obligation; therefore it provides less protection to depositors than tier 1 capital. Capital ratio (banking system): Total assets minus total liabilities as a percentage of total assets

Capital Gains
A profit from the sale of financial investments.

Capital Goods
See Capital resources.

Capital Investment
Money invested in a firm that increases its output/productivity.  Some examples include new machinery, buildings, technology, and training.

Capital Purchase Program
A program through which the U.S. Treasury Department purchases senior preferred shares in eligible financial institutions. The program is available to institutions that elected to participate before 5:00 pm (EDT) on November 14, 2008, including qualifying U.S. bank and savings and loan holding companies, U.S. controlled banks, savings associations, and certain bank and savings and loan holding companies engaged only in financial activities. Privately held financial institutions that have filed a bank or thrift holding company application on or before December 8, 2008, may apply to the TARP program through their federal banking regulator.

Capital Resources
Goods that have been produced and are used to produce other goods and services. They are used over and over again in the production process. (Also called capital goods).

Certificate Of Deposit (CD)
A time deposit in a financial institution with a specific maturity date. May also refer to large-denomination CDs ("Negotiable CDs") that can be sold but not redeemed before maturity. For accounting and regulatory purposes, these are bank deposits. Typical issue amounts of negotiable CDs are $1 million to $5 million.. The adjective “small” is applied to time deposits of less than $100,000, and “large” to time deposits of $100,000 or more.

Certificate Of Deposit (CD)
A savings alternative in which money is left on deposit for a stated period of time to earn a specific interest rate.

Chapter 11 Bankruptcy Protection
The chapter of the Bankruptcy Code providing (generally) for reorganization, usually involving a corporation or partnership. A chapter 11 debtor usually proposes a plan of reorganization to keep its business alive and pay creditors over time. Business owners and individuals can also seek relief in chapter 11.

Character
A borrower’s reputation for paying bills and debts based on past behavior.

Characteristics Of Money
Important features money should have. Money should be portable, durable, divisible, generally acceptable and relatively scarce.

Check
A printed form directing a bank to withdraw money from an account and pay it to another account.

Check-cashing Services
Businesses that provide services such as cashing all types of checks, including payroll, insurance, tax refund, settlement, and government and Social Security payments. These businesses may also provide other services, such as payday loans, money orders and money wires.

Checking Account
An account held at a bank or credit union in which account owners deposit funds. Account owners have the privilege of writing checks on their accounts and are able to use ATM cards and debit cards to access funds.

Choice
A decision made between two or more possibilities or alternatives.

Clearing Banks
Financial institutions that clear trades in government securities, agency securities, and other money market instruments for nonblank dealers.

Clearinghouse
An institution where mutual claims and accounts are settled, as between banks.

Closed Economy
An economy that does not interact with other economies.

Coin
Money, usually minted from some combination of metals.

Coincidence Of Wants
Each participant in an exchange is willing to trade what he or she has in exchange for what the other participant is willing to trade.

Collateral
Property required by a lender and offered by a borrower as a guarantee of payment on a loan. Also, a borrower’s savings, investments, or the value of the asset purchased that can be seized if the borrower fails to repay a debt.

Collateral
An asset that is pledged as security for a loan. The borrower risks losing the asset if the loan is not repaid according to the terms of the loan agreement.

Collateral (elementary)
Something of value that a bank is able to keep if a borrower fails to repay a loan.

Collateralized Obligations
CDO – Collateralized Debt Obligation: A security that represents a claim on cash flows generated by a pool of debt obligations. CLO – Collateralized Loan Obligation: A security that represents a claim on cash flows generated by a pool of loans. CMO – Collateralized Mortgage Obligation: A security that represents a claim on cash flows generated by a pool of mortgages.

Commercial Mortgage-backed Security (CMBS)
A security that relies for payment on cash flows generated by a pool of commercial mortgage debt obligations. (See also: Asset-backed security and Residential mortgage-backed security)

Commercial Paper
A short-term, unsecured promissory note issued by an industrial or commercial firm, a financial company, or a foreign government. Typically, maturity is 90 to 180 days.

Commercial Paper Funding Facility (CPFF)
A Federal Reserve lending facility designed to provide a liquidity backstop to U.S. issuers of commercial paper. The CPFF is intended to improve liquidity in short-term funding markets and thereby contribute to greater availability of credit for businesses and households.

Comparative Advantage
The ability to produce at a lower opportunity cost than another producer.

Complement (resources)
Productive inputs that are used jointly with other inputs in the production process.

Compound Interest
Interest computed on the sum of the original principal and accrued interest.

Conforming Mortgage
A mortgage loan that qualifies for purchase by one of the housing-related Government Sponsored Enterprises (GSEs), Fannie Mae or Freddie Mac. The maximum size of a single-family conforming mortgage loan effective January 1, 2008 was $417,000. The Economic Stimulus Act of 2008 temporarily raised the maximum to as much as $729,750 in some high-cost areas. This amendment expired December 31, 2008.

Conservatorship
A conservatorship is the legal process (for entities that are not eligible for Bankruptcy court reorganization) in which a person or entity is appointed to establish control and oversight of a company to put it in a sound and solvent condition. In a conservatorship, the powers of the company’s directors, officers, and shareholders are transferred to the designated conservator.

Consumer Confidence
A measure of how consumers feel about the economy, considered an indicator of consumers’ spending and saving decisions.

Consumer Goods
Goods and services that are used for current consumption.

Consumer Price Index (CPI)
A measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

Consumers
People who buy goods and services to satisfy their wants.

Contract
An exchange, promise or agreement between two parties that is enforceable by law. For example, a car buyer agrees to pay the amount financed at an agreed upon interest rate for the length of the contract.

Contractionary Monetary Policy
Actions taken by the Federal Reserve to decrease the growth of the money supply and the amount of credit available.

Core Consumer Price Index
The consumer price index (CPI), (A measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services), excluding food and energy. 

Core Inflation
See Core Consumer Price Index.

Corporation
A company owned by shareholders.

Costs
Things unfavorable to a decision-maker.

Credit
The granting of money or something else of value in exchange for a promise of future repayment.

Credit Card
Cards that represent an agreement between a lender—the institution issuing the card—and the cardholder. Credit cards may be used repeatedly to buy products or services or to borrow money on credit. Credit cards are issued by banks, savings and loan associations, retail stores, and other businesses.

Credit Default Swap (CDS)
A type of derivative that allows a buyer to hedge against default of a counterparty. A CDS buyer agrees to pay a counterparty (the seller) a periodic premium in return for insurance against “credit event” such as a default on a specified, underlying obligation.

Credit History
A person’s payment activity over a period of time.

Creditor
A person, financial institution or other business that lends money.

Credit Rating Agency
Firms that rate the quality of bonds and other financial securities. These ratings are used by investors to assess the probability of default. Well-known rating agencies include Moody’s, Standard & Poors, and Fitch Ratings. Firms in this business must meet standards enforced by the Securities and Exchange Commission.

Credit Report
A loan and bill payment history kept by a credit bureau and used by financial institutions and other potential creditors to determine the likelihood that a future debt will be repaid.

Credit Reporting Bureau
An organization that compiles credit information on individuals and businesses and makes it available to businesses for a fee.

Credit Responsibilities
Refers to the actions or behaviors in which people should engage when they use credit.

Credit Rights
Refers to the protections put in place by law to help people obtain and maintain credit.

Credits
Additions or deposits to an account. In a bank account register, credits are added to the balance.

Credit Score
A number based on information in a credit report, which indicates a person’s credit risk.

Credit Union
A nonprofit financial institution that is owned by its members.

Criteria
A set of standards to consider when choosing among alternatives.

Criteria (elementary)
Things that are really important to think about when making a decision.

Crowding Out
The situation in which increases in government spending lead to reductions in private spending.  

Currency
Money, usually made from some type of paper-like material.

Current Population Survey
A statistical survey carried out by the U.S. Bureau of Labor Statistics.

Cyclical Unemployment
Unemployment associated with recessions in the business cycle.

D

Debit Card
A plastic card similar to a credit card that allows money to be withdrawn or payments made directly from the holder’s bank account.

Debits
Charges to or withdrawals from an account. In a bank account register, debits are subtracted from the balance.

Decision-making
Deciding among choices (alternatives or options).

Decision-making Grid
A table used to evaluate alternatives based on criteria for the purpose of making a decision.

Default
Default is the failure to promptly pay interest or principal when due.

Deflation
A general, sustained downward movement of prices for goods and services in an economy.

Demand
The quantity of a good or service that buyers are willing and able to buy at all possible prices during a certain time period.

Deposit Insurance
Federal insurance of deposits received at an insured bank or thrift, including deposits in checking, negotiable order of withdrawal (NOW), and savings accounts; money market deposit accounts; and time deposits such as certificates of deposit (CDs).

Depository Institution
A financial institution such as a savings bank, commercial bank, savings and loan association, or credit union that is legally allowed to accept monetary deposits from consumers.

Depreciation
A decrease in value. Currency depreciation is a decrease in the value of one currency relative to another.

Depression
A severe and long-lasting economic downturn that is worse and deeper than a recession; a severe reduction in gross domestic product (GDP).

Determinants Of Demand
Factors that cause the demand curve to shift, such as changes in consumer income, consumer tastes and preferences, prices of related goods, number of buyers in the market, and consumer expectations.

Determinants Of Supply
Factors that cause the supply curve to shift, such as changes in input prices, taxes or subsidies, technology, producer expectations, and the number of sellers.

Discount Rate
The interest rate charged by the Federal Reserve to banks for loans obtained through the Fed’s discount window.

Discouraged Worker
Someone who is not working and is not looking for work because of a belief that there are no jobs available to him or her.

Disinflation
A decrease in the inflation rate or a slowdown in the upward movement of prices for goods and services in the economy.

Disposable Income
The amount of a person’s paycheck that is available to spend or save.

Diversification
Investment in various financial instruments in order to reduce risk.

Divisible
Easily divided into smaller amounts.

Division Of Labor
An approach to completing a complex task that breaks the project into a number of smaller, simpler tasks, which are assigned to individuals who generally perform only these duties.

Down Payment
A sum of money put toward the purchase price to reduce the amount of money borrowed.

Dual Mandate
The Federal Reserve’s responsibility to use monetary policy to promote maximum employment and stable prices.

Durable
Something that is long lasting.

E

Earned Income Tax Credit:
A refundable federal tax credit for low-income working people designed to reduce poverty and encourage labor force participation.

Economic Activity
Actions that involve the production, distribution and consumption of goods and services at all levels within a society.

Economic Equality
A more equal distribution of goods and services to citizens. Also known as economic equity.

Economic Equity
A more equal distribution of goods and services to citizens. Also known as economic equality.

Economic Growth
A sustained rise over time in a nation’s production of goods and services.

Economic Indicator
Statistical data used to determine the health of the economy.

Economic Models
Simple depictions of complex ideas.

Economic Wants
Desires that can be satisfied by consuming goods and services. Also known as wants.

Economy
The process or system by which goods and services are produced, sold, and bought in a country or region.

Educational Attainment
Level of education a student completes (high school, college, graduate).

Elasticity Of Demand
The ratio of the percentage change in quantity demanded of a good or service to the percentage
change in its price; a measure of the responsiveness of buyers to a change in the price of a good or service.

Elements Of A Contract
Competent parties, consideration and mutual agreement are the elements of a contract that must be present to make the contract legal and enforceable. Competent parties are individuals involved in a contract who must be able to understand the conditions of the contract. Consideration refers to the fact that each party of a contract gives up something in exchange for what the other party is providing. Mutual agreement means that each party to the contract must be clear about the essential details, rights and obligations of the contract.

Employed
People 16 years and older who have jobs.

Employment Rate
The percentage of the labor force that is employed.

Energy
Fuel used to power the economy. Energy is harvested from non-renewable resources like fossil fuels, (natural gas, coal, oil), or renewable resources like solar, wind, or geothermal heat.

Entrepreneurs
Individuals who are willing to take risks in order to develop new products and start new business. They recognize opportunities, enjoy working for themselves and accept challenges.

Entrepreneurship
A characteristic of people who assume the risk of organizing productive resources to produce goods and services.

Equilibrium Price
The price at which quantity supplied and quantity demanded are equal. The point at which the supply and demand curves intersect.

Equilibrium Wage
The wage at which the quantity of labor supplied and quantity of labor demanded are equal.

Excess Reserves
Amount of funds held by a depository institution in its account at a Federal Reserve Bank in excess of its required reserve balance and its contractual clearing balance.

Exchange
Trading goods and services with people for other goods and services or for money.

Exchange Rate
The price of one country’s currency in terms of another country’s currency.

Exchange Stabilization Fund (ESF)
A U.S. Treasury Department Fund that typically holds three types of assets: U.S. dollars, foreign currencies, and Special Drawing Rights (SDRs). The ESF can be used to purchase or sell foreign currencies, to hold U.S. foreign exchange and SDR assets, and to provide financing to foreign governments. All operations of the ESF require the explicit authorization of the Secretary of the Treasury.

Exempt (from Withholding)
Free from withholding of federal income tax. A person must meet certain income, tax liability and dependency criteria. This does not exempt a person from other kinds of tax withholding, such as the Social Security tax.

Exemption
Amount that taxpayers can claim for themselves, their spouses and eligible dependents. There are two types of exemptions: personal and dependency. Each exemption reduces the income subject to tax. The exemption amount is a set amount that changes from year to year.

Expansionary Monetary Policy
Actions taken by the Federal Reserve to increase the growth of the money supply and the amount of credit available.

Expenses
The costs people incur for goods and services. Expenses are often categorized as fixed, variable and periodic. Fixed expenses are those that occur each month in a regular amount, such as rent, car payments and mortgage payments. Variable expenses are those that change from one time period to the next, such as food, clothing, gasoline and entertainment. Periodic expenses are those that occur several times a year, such as car insurance and life insurance payments.

Explicit Cost

A cost that involves actually laying out money.

F

Factors Of Production
The natural resources, human resources and capital resources that are available to make goods and services. Also known as productive resources.

Fannie Mae
Fannie Mae is a Government Sponsored Enterprise (GSE), which was established as a federal agency in 1938 and chartered by Congress as a private company in 1968. Fannie Mae's chartered mission is to provide liquidity and stability to the U.S. housing and mortgage markets by operating in the U.S. secondary mortgage market.  The full legal name for Fannie Mae is the Federal National Mortgage Association.

FDIC Loss-sharing Arrangement
Loss sharing is a feature that the Federal Deposit Insurance Corporation (FDIC) first introduced into selected purchase and assumption (P&A) transactions used to resolve failed insured depository institutions in 1991. The original goals of loss sharing were to (1) sell as many assets as possible to the acquiring bank and (2) have the nonperforming assets managed and collected by the acquiring bank in a manner that aligned the interests and incentives of the acquiring bank and the FDIC. Under loss sharing, the FDIC agrees to absorb a significant portion of the loss—typically 80 percent—on a specified pool of assets while offering even greater loss protection in the event of financial catastrophe; the acquiring bank is liable for the remaining portion of the loss.

Federal Deposit Insurance Corp. (FDIC)
The FDIC is an agency of the U.S. government that insures deposits in banks and thrift institutions, supervises the risks associated with these insured funds, and limits the repercussions on the economy when a bank or thrift institution fails.

Federal Deposit Insurance Corporation (FDIC)
A U.S. government agency that insures deposits in banks and thrift institutions and supervises state-chartered, non-Federal Reserve member banks.

Federal Funds Rate
The interest rate at which a depository institution lends funds that are immediately available to another depository institution overnight.

Federal Home Loan Banks
A system of 12 regional banks with a primary mission to meet credit and financial service needs of local communities. Chartered by Congress in 1932 to promote a healthy mortgage finance system. Home loan banks are privately owned, wholesale banks without publicly traded stock.

Federal Housing Administration (FHA)
An agency within the U.S. Department of Housing and Urban Development (HUD) that insures mortgages and loans made by private lenders.

Federal Housing Finance Agency
An independent regulatory agency of the executive branch of the U.S. government that regulates the 12 Federal Home Loan Banks, Fannie Mae, and Freddie Mac.

Federal Income Tax
The federal government levies a tax on personal income. The federal income tax provides for national programs such as defense, foreign affairs, law enforcement and interest on the national debt.

Federal Insurance Contributions Act (FICA) Tax
A tax or required contribution that most workers and employers pay. FICA is a payroll tax used to fund Social Security and Medicare.

Federal Open Market Committee (FOMC)
The Federal Reserve’s chief body for conducting monetary policy. The FOMC consists of the Board of Governors and five Federal Reserve bank presidents. Fed presidents rotate on and off of the committee at regular intervals.

Federal Open Market Committee (FOMC)
A Committee created by law that consists of the seven members of the Board of Governors; the president of the Federal Reserve Bank of New York; and, on a rotating basis, the presidents of four other Reserve Banks. Nonvoting Reserve Bank presidents also participate in Committee delib­erations and discussion. The FOMC generally meets eight times per year in Washington, D.C., to set the nation’s monetary policy. It also establishes policy relating to System operations in the foreign exchange markets.

Federal Reserve Act
Federal legislation, enacted in 1913, that established the Federal Reserve System.  Section 13(3): Federal Reserve Banks can be authorized by the Board of Governors to lend to corporations if circumstances arise that are deemed “unusual and exigent” and, moreover, the borrower is unable to obtain funding elsewhere. This statute provides the legal basis for a number of the Fed's recent special lending facilities, including facilitating the JP Morgan Chase acquisition of Bear Stearns, the Fed's loan to AIG, and the Commercial Paper Funding Facility (CPFF). For more information, see: www.federalreserve.gov/aboutthefed/section13.htm

Section 23(A): Restrictions on Transactions with Affiliates: A section of the Federal Reserve Act that limits certain transactions between insured institutions and their affiliates. The limits are designed to protect the assets of the insured institution. For more information, see: www.federalreserve.gov/aboutthefed/section23a.htm

Federal Reserve Act
The 1913 act of congress establishing the Federal Reserve System.

Federal Reserve Bank
One of 12 regional banks providing services to commercial banks, serving as fiscal agents for the U.S. government, and conducting economic research on its region and the nation.

Federal Reserve Districts
Twelve regions in the United States that are represented by a reserve bank.

Federal Reserve Limited Liability Companies
Maiden Lane: On June 26, 2008, the Federal Reserve Bank of New York (FRBNY) extended credit to Maiden Lane LLC under the authority of section 13(3) of the Federal Reserve Act. This limited liability company was formed to acquire certain assets of Bear Stearns and to manage those assets to maximize repayment of the credit extended and to minimize disruption to financial markets. Payments by Maiden Lane LLC from the proceeds of the net portfolio holdings will be made in the following order: operating expenses of the LLC, principal due to the FRBNY, interest due to the FRBNY, principal due to JPMorgan Chase & Co., and interest due to JPMorgan Chase & Co. Any remaining funds will be paid to the FRBNY.

Maiden Lane II: On December 12, 2008, the FRBNY began extending credit to Maiden Lane II LLC under the authority of section 13(3) of the Federal Reserve Act. This limited liability company was formed to purchase residential mortgage-backed securities from the U.S. securities lending reinvestment portfolio of subsidiaries of AIG. Payments by Maiden Lane II LLC from the proceeds of the net portfolio holdings will be made in the following order: operating expenses of Maiden Lane II LLC, principal due to the FRBNY, interest due to the FRBNY, and deferred payment and interest due to AIG subsidiaries. Any remaining funds will be shared by the FRBNY and AIG subsidiaries.

Maiden Lane III: On November 25, 2008, the FRBNY began extending credit to Maiden Lane III LLC under the authority of section 13(3) of the Federal Reserve Act. This limited liability company was formed to purchase multi-sector collateralized debt obligations (CDOs) on which the Financial Products group of American International Group, Inc. (AIG) has written credit default swap (CDS) contracts. In connection with the purchase of CDOs, the CDS counterparties will concurrently unwind the related CDS transactions. Payments by Maiden Lane III LLC from the proceeds of the net portfolio holdings will be made in the following order: operating expenses of Maiden Lane III LLC, principal due to the FRBNY, interest due to the FRBNY, principal due to AIG, and interest due to AIG. Any remaining funds will be shared by the FRBNY and AIG.

Federal Reserve (role In Consumer Protection)
The Fed and the Federal Trade Commission (FTC) are the primary rule writers for federal consumer protection legislation, including the Home Mortgage Disclosure Act (HMDA)and the Home Ownership and Equity Protection Act (HOEPA).

Federal Reserve System
The central bank system of the United States.

Fees
Money charged to review your application for credit or to service your credit account, such as maintenance fees or late fees. Banks often charge fees for servicing bank accounts, including overdraft fees and charges for using a non-bank ATM.

Fiat Money
A substance or device used as money, having no intrinsic value (no value of its own), or representational value (not representing anything of value, such as gold).

FICO Credit Score
The most widely used credit score. FICO stands for Fair Isaac Corp., the company that developed this system of credit evaluation, which is based on information provided by three major credit-reporting agencies: Trans­Union, Equifax and Experian. Fair Isaac sells the scores to the credit-reporting agencies. Lenders buy FICO scores from one or all three of the major credit-reporting agencies. FICO scores vary, but generally the scores are between 500 and 850. FICO scores between 700 and 850 indicate that a borrower is very likely to repay loans and other debts. FICO scores lower than 600 indicate that a borrower may not be a good credit risk.

File A Return
To mail or transmit a taxpayer’s information in specified format about income and tax liability. The return can be filed on paper, electronically or by telephone to an IRS service center.

Financial Investment
Placing money in a savings account or in any number of financial assets, such as stocks, bonds or mutual funds, with the intention of making a financial gain.

Financial Literacy
Having knowledge of financial matters and applying that knowledge to one’s life.

Fiscal Agent
A person or organization serving as another’s financial representative.

Fiscal Policy
Spending and taxing policies of the federal government to influence the economy.

Fixed-rate Mortgage (FRM)
A mortgage loan in which the interest rate does not change during the entire term.

Flat Tax
A tax system in which all levels of income are taxed at the same rate.

Flexible Exchange Rate
A system in which supply and demand determine exchange rates.

Foreclosure
The legal process by which a property that is mortgaged as security for a loan may be sold and the proceeds of the sale applied to the mortgage debt. A foreclosure can occur when the loan becomes delinquent because payments have not been made or when the borrower is in default for a reason other than the failure to make timely mortgage payments.

Fractional Reserve Banking System
A banking system in which the amount of reserves that banks hold is less than the value of their customers’ deposits.

Freddie Mac
Freddie Mac is a Government Sponsored Enterprise (GSE) chartered by Congress in 1970 to provide liquidity, stability and affordability to the housing market.  Like Fannie Mae, Freddie Mac operates in the secondary mortgage market.  The full legal name for Freddie Mac is the Federal Home Loan Mortgage Corporation. 

Frictional Unemployment
Unemployment that results when people are new to the job market, including recent graduates, or are transitioning from one job to another.

Full Employment
The lowest possible unemployment rate in a growing economy with all factors of production used as efficiently as possible.

Functions Of Money
Activities that can be carried out through the use of money. Activities include medium of exchange, unit of account and store of value.

Future Value
The value of an asset or cash at a specified date in the future that is equal in value to a specified sum today.

G

Generally Acceptable (money)
People will take an item as payment for their work or as payment for goods and services.

Gini Coefficient
A statistical measure of income inequality that ranges from 0 to 1. A Gini coefficient of 1 indicates perfect income inequality, where one person earns all the income and the rest of the population earns none. Conversely, a Gini coefficient of 0 indicates that total income is equally distributed among the entire population. A Gini coefficient, at a particular point in time, can be calculated graphically by finding the area between the line representing a country’s income distribution (known as the Lorenz curve) and a line of perfect income equality.

Gold Standard
The ability to exchange dollars for gold at a fixed price.

Goods
Objects that satisfy people’s wants.

Government Debt
The sum of accumulated budget deficits. Also known as national debt.

Government Expenditures
Purchases of goods and services by government.

Government Securities
Bonds, notes and other debt instruments sold by a government to finance its expenditures.

Government Securities Auction
A sale of government securities in which competitive bidding determines their yield.

Government-sponsored Enterprises (GSE)
Enterprises that were established and chartered by the federal government for public policy purposes. GSEs include the Federal Home Loan Banks, the Agricultural Credit Bank and Farm Credit Banks, and the Federal Agricultural Mortgage Corporation. With the exception of Fannie Mae and Freddie Mac, which were taken into conservatorship by the federal government on September 7, 2008, GSEs are private companies and their securities are not backed by the full faith and credit of the federal government.

Gross Domestic Product (GDP)
The total market value, expressed in dollars, of all final goods and services produced in an economy in a given year.

Gross Pay
The amount people earn per pay period before any deductions or taxes are paid.

H

Hedge Fund
Although there is no precise legal definition, the term “hedge fund” generally refers to a pooled investment vehicle that is privately organized, administered by a professional investment manager, and not widely available to the public. The assets, investment strategies, and risk profiles of funds that meet this broad definition are quite diverse. In no sense are hedge funds an “asset class,” like stocks, bonds, commodities, or real estate. While some hedge funds pursue investment strategies similar to those pursued by private equity funds, the strategies of the sector as a whole are quite varied. Some hedge funds are highly leveraged, while many use little or no leverage.

Home Mortgage Disclosure Act (HMDA)
A 1974 Act of Congress that required certain mortgage lenders to disclose information about mortgages they make. HMDA requires mortgage lenders to report information about both successful and unsuccessful mortgage applications. HMDA applies to all mortgage lenders, with a few exceptions (those not based in MSAs and with no branches or offices in MSAs, and very small lenders).

Homeowner's Equity
The owner's interest in a property, calculated as the current fair market value of the property less the amount of existing liens. The appraised, or carrying value, of a property minus the amount of existing liens.

Home Owners Equity Protection Act (HOEPA)
A 1994 amendment to HMDA that provides certain protections to mortgage borrowers. These include protecting consumers from unfair, abusive, or deceptive mortgage lending and servicing practices, ensuring that mortgage advertisements provide accurate and balanced information, and providing consumers with transaction-specific disclosures early enough to use while shopping for a mortgage.

Housing Market
The market for buying homes. Housing is often an indicator for the overall health of the economy.

Human Capital
The knowledge and skills that people obtain through education, experience and training.

Human Resources
The quantity and quality of human effort directed toward producing goods and services. Also known as labor.

Human Resources (elementary)
People who do mental and/or physical work to produce goods and services.

I

Implict Cost

A cost that does not require an outlay of money; it is measured by the value, in dollar terms, or foregone benefits.

Incentives
Perceived benefits that encourage certain behaviors.

Incentives (elementary)
Actions, awards and rewards that determine the choices people make.

Income
The payment people receive for providing resources in the marketplace. When people work, they provide human resources (labor) and in exchange they receive income in the form of wages or salaries. People also earn income in the forms of rent, profit and interest.

Income (elementary)
Payment people earn for the work they do.

Income Tax
Taxes on income, both earned (salaries, wages, tips, commissions) and unearned (interest, dividends). Income taxes can be levied on both individuals (personal income taxes) and businesses (business and corporate income taxes).

Inelastic Demand
The type of demand that exists when the percentage change in quantity demanded is less than the
percentage change in price.

Inflation
A general, sustained upward movement of prices for goods and services in an economy.

Inflation Rate
The percent change in price level determined by comparing the percentage increase or decrease in the price level of goods and services from one time period to another.

Inputs
Materials and resources used to produce goods and services.

Interbank Funding Markets
In the United States, the market for bank reserves, which is an overnight loan of federal funds between depository institutions.

Interest
The price of using someone else’s money. When people place their money in a bank, the bank uses the money to make loans to others. In return, the bank pays interest to the account holder. Those who borrow from banks or other organizations pay interest for the use of the money borrowed.

Interest (elementary)
Money paid to customers for keeping their money at the bank.

Interest Rate
The percentage of the amount of a loan that is charged for a loan. Also, the percentage paid on a savings account.

Interest Rate Effect
The effect on consumer spending and investment spending caused by a change in the aggregate price level on the purchasing power of consumers’ and firms’ money holdings.

Intermediary
One who stands between two parties to facilitate a transaction; a mediator.

Intermediate Good
A man-made good that is used to produce another good or service, becoming part of that good or service.

Internal Revenue Service (IRS)
The federal agency that collects income taxes in the United States.

Inventory

Goods that have been produced but remain unsold.

 

Investment
The purchase of physical capital goods (e.g., buildings, tools and equipment) that are used to produce goods and services.

Investment Banking Company
A firm that engages in the origination, underwriting, and marketing of new securities that are issued in the credit markets.

Investment Grade Securities
Bonds that have been deemed to have a relatively low probability of default. These securities are generally rated Baa (or BBB) and above.

Investment In Human Capital
The efforts people put forth to acquire human capital. These efforts include education, training and practice.

J

Jumbo Loan
A loan that exceeds the mortgage amount eligible for purchase by Fannie Mae or Freddie Mac. Also called “nonconforming loan.”

K

Keynesian Multiplier Effect
An effect where an increase (or decrease) in a component of aggregate demand (i.e., consumption, investment, or government spending) produces an increase (or decrease) in national income that is greater than the initial increase (or decrease) in the component.  This greater than proportional change in national income is the result of chain reactions that generate more (or less) activity than the original increase (or decrease).

L

Labor
The quantity and quality of human effort directed toward producing goods and services. Also known as human resources.

Labor Force
The total number of workers, including both the employed and the unemployed actively looking for work.

Labor Force Participation Rate
The number of people who are either employed or are actively looking for work, usually expressed a percentage.

Labor Market
The exchange of labor by workers who want to sell labor and businesses that want to purchase labor. (Also known as the job market).

Law Of Demand
As the price of a good or service rises, the quantity demanded of that good or service falls. Likewise, as the price of a good or service falls, the quantity demanded of that good or service rises.

Law Of Supply
As the price of a good or service rises, the quantity supplied of that good or service rises. Likewise, as the price of a good or service falls, the quantity supplied of that good or service falls.

Legacy Benefits
Benefits that accrue over time.

Liar Loan
An industry term for a low- or no-documentation loan, typically Alt-A or subprime, where there is a suspicion the borrower, mortgage broker or loan officer may have fraudulently overstated the income and/or assets to qualify for a larger loan. These loans are typically “stated income” or “stated asset” loans, where the lender does not verify the income and instead records income based on the borrower’s verbal statement.

LIBOR Index
An index used to determine interest rate changes for certain ARM plans, based on the average interest rate at which international banks lend to or borrow funds in the London interbank market.

Lien
The legal right to take or sell property as security for a debt.

Liquid Asset
An asset that is easily convertible to cash with relatively little loss of value in the conversion process.

Liquidation
The sale of a debtor's nonexempt property and the distribution of the proceeds to creditors. Chapter 7 of the Bankruptcy code provides for the liquidation of the filer’s assets and distribution of the proceeds to the filer’s creditors.

Liquidity
The quality that makes an asset easily convertible into cash with relatively little loss of value in the conversion process.

Liquidity
A liquid asset is one that can be converted easily and rapidly into cash without a substantial loss of value. Liquidity is sometimes defined as a firm’s ability to acquire money whenever it is needed in large and highly variable sums. Indicators that an asset may be highly liquid include historically narrow spreads between bid and ask prices, large daily trading volumes, a large number of market participants, and prices that are insensitive to transactions of modest size.

Loan
A sum of money provided temporarily on the condition that the amount borrowed be repaid, usually with interest.

Loanable Funds
Money made available to borrowers through the actions of savers.

Loanable Funds Market
A virtual market that consists of 1) borrowers, including money demanders, consumers and firms who want loans to buy goods and services or invest in capital or inventory; and 2) savers, such as money suppliers, households and firms who save money. It is the market in which the supply and demand for loanable funds determines the interest rate.

Long-term Savings Goals
Goods or services you want to buy in a year or longer.

M

Manufacture
To make or process goods, especially in large quantities and by means of industrial machines.

Margin Call
“Margin” refers to borrowing money using securities or other collateral that fluctuates in value. If the value of the collateral falls below the lender's maintenance requirement, the lender generally will require the deposit of additional collateral.

Market Price
The price at which buyers and sellers trade a good or service in the marketplace; where the quantity demanded equals the quantity supplied. Also known as the market-clearing price or the equilibrium price.

Mark-to-market
An accounting rule (FASB 157) that requires companies to value assets at prices determined in the marketplace.

Means-tested
Programs in which eligibility depends on the level of one’s current income or assets.

Medicare Tax
A payroll tax that is part of FICA, collected from most employees and employers to fund the hospital insurance provided under the Medicare system. Used to provide medical benefits for certain individuals when they reach age 65. Workers, retired workers, and the spouses of workers and retired workers are eligible to receive Medicare benefits upon reaching age 65.

Medium Of Exchange
Anything that is generally acceptable in exchange for goods and services.

Medium-term Notes
Debt securities issued by corporations, with typical maturities between five and 10 years; however, the maturity may be as short as one year. Usually issued at floating rates.

Menu Costs
The cost incurred by a firm when they change prices. For example, to change prices at a restaurant, the firm must incur the cost to print new menus indicating the new prices for meals (hence the origin of the term).

Minimum Wage
The lowest wage that employers may legally pay for an hour of labor.

Monetary Policy
Central bank actions involving the use of interest rate or money supply tools to achieve such goals as maximum employment, stable prices and moderate long-term interest rates.

Money
Anything widely accepted in exchange for goods and services.

Money Creation
An increase in the money supply generated by the banking system through the lending of reserves.

Money Market Mutual Fund
A mutual fund (SEC-registered investment fund) that invest primarily in money market instruments and/or other short-term debt instruments. All money market mutual funds must hold assets with a weighted average maturity of no more than 90 days.

Money Neutrality
An economic theory stating that, in the long run, changes in the money supply cause changes in variables, such as price and wages, but not in unemployment or real (or inflation-adjusted) variables, such as real GDP (gross domestic product) and real consumption.

Money Supply
The quantity of money available in an economy. The basic money supply in the United States consists of currency, coins and checking account (demand) deposits. Also known as money stock.

Monoline Bond Insurers
A financial guaranty (insurance) company that guarantees all scheduled interest and principal payments on the bonds it insures and writes no other line of insurance.

Monopolistic Competition
A market structure where many firms produce similar but not identical products.

Mortgage-related Assets
Generally defined to be whole mortgage loans, mortgage-backed securities, collateralized debt obligations that contain MBS, or derivative instruments that refer to any of the above, such as credit default swaps. Many of these assets are held on the balance sheets of financial institutions.

Multiplier
A factor of proportionality that measures how much an endogenous variable changes in response to a change in an exogenous variable.   Some examples include the government spending multiplier, the money multiplier, and the Keynesian multiplier.

Mutually Beneficial Trade
In order for a trade to be mutually beneficial among each party involved, the price of the good or service must fall between the opportunity costs of producers involved in the trade. Importers will pay no more for goods or services than what it costs to produce them, while exporters will sell goods or services for no less than what it costs to produce them.

N

National Debt
The accumulation of budget deficits. Also known as government debt.

Natural Rate Of Unemployment
The unemployment rate that stems from economic factors unrelated to changes in aggregate demand. The rate of unemployment that does not contain cyclical unemployment.

Natural Resources
Things that occur naturally in and on the earth that are used to produce goods and services.

Negative Amortization
An increase in the balance of a loan caused by adding unpaid interest to the loan balance; this occurs when the payment does not cover the interest due.

Negative Equity
A situation in which a borrower’s mortgage principal is greater than the value of the house.

Negative Externality
A negative side effect that results when the production or consumption of a good or service affects the welfare of people who
are not the parties directly involved in a market exchange.

Negative Externality
A negative side effect that results when the production or consumption of a good or service affects the welfare of people who
are not the parties directly involved in a market exchange.

Nest Egg
An amount of money saved for a special occasion, such as retirement, buying a house, etc.

Net Exports
A component of gross domestic product (GDP), net exports are the result of U.S. exports minus U.S. imports.

Net Pay
Gross pay minus deductions and taxes.

Nominal
Monetary values measured in current prices.

Nominal Gross Domestic Product
The total market value of all final goods and services produced in an economy in a given year, expressed using the current year’s price for goods and services. Also known as current-dollar GDP.

Non-interest Bearing Account
An account in which no interest is paid on the principal, which is the amount of deposit or account balance. Also called zero-interest account.

Non-liquid Asset
An asset that is not easily convertible into cash with relatively little loss of value in the conversion process.

Non-recourse Loans
A loan (debt) that is secured by a pledge of collateral (could apply to any type of collateral), for which the lender agrees to rely solely on the collateral if borrower fails to make the required payments of principal and interest.

Northern Rock
A United Kingdom bank that was taken into temporary public ownership in February 2008. The Bank concentrated primarily on mortgage lending to individuals for the purpose of home ownership.

O

Office Of The Comptroller Of The Currency (OCC)
A bureau of the U.S. Department of the Treasury, the OCC charters, regulates and supervises all national banks. It also supervises the federal branches and agencies of foreign banks.

Office Of Thrift Supervision (OTS)
The federal regulator and supervisor of savings associations (“thrifts”) and their subsidiaries. The OTS also oversees domestic and international activities of the holding companies and affiliates that own these savings institutions. The OTS is an office within the Department of the Treasury.

Open Market Operations
The buying and selling of government securities through primary dealers by the Federal Reserve in order to control the money supply.

Opportunity Cost
The value of the next-best alternative when a decision is made; it’s what is given up.

Option ARM (pay-option ARM)
An adjustable-rate mortgage that gives the borrower a set of choices of how much interest and principal to pay each month. This may result in negative amortization. The option period is typically limited, for example, to five years.

Originate-to-distribute Model
A business model where lenders intend to securitize or sell loans that they originate. In contrast to portfolio lending, under this model, lender income is generated by fees paid by the buyers of the loans, rather than from payments made by borrowers.

Output Gap
The difference between potential and actual output.

Output Potential
Points along the production possibilities frontier.

Outputs
Goods and services that are produced.

Overdraft
The result of an account holder authorizing a withdrawal through a check, ATM withdrawal, debit card purchase or electronic payment when the account does not have enough money to cover the transaction.

Overdraft Fee
The penalty associated with an overdraft.

Overdraft Service
Provided by financial institutions to generally approve and pay overdraft transactions when the account holder does not have enough funds to cover the transactions in return for a fee.

P

Paradox Of Thrift
A controversial Keynesian economics theory, which proposes that if everyone tries to save a larger portion of his or her income during a recession, then aggregate demand will fall.  As a result, the theory argues, everyone would grow poorer instead of richer due to the decreases in aggregate consumption and economic growth.

Payday Loan
A small, short-term loan that is intended to cover a borrower’s expenses until his or her next payday. May also be called a paycheck advance or a payday advance.

Payroll Deduction
Amounts subtracted from gross pay.

Penalties
Negative incentives that make people worse off.

Per Capita Gross Domestic Product
Gross domestic product (GDP) divided by the total population of a country.

Per Capita Personal Income
The total income earned by individuals in a state, region or country during a year, divided by the population of the state, region or country.

Perfect Competition
A market in which there are many buyers and many sellers of an identical product.

Personal Saving Rate
The ratio of personal saving to disposable personal income; the fraction of income after taxes that is saved.

Portable
Easy to carry.

Portfolio
A list or collection of financial assets that an individual or company holds.

Potential Output
The level of  full gross domestic product that the economy would produce if all prices, including nominal wages, were fully flexible.

Poverty Threshold
The dollar amount the U.S. Census Bureau uses to determine a family’s or person’s poverty status.

Preferred Stock (equity)
Equity (ownership) shares in a firm that have a senior claim over common shareholders on the assets of a firm in the event of bankruptcy. A firm must pay preferred dividends on these shares, according to a contractually specified schedule at a rate that is either fixed or floating, before it can pay dividends to common shareholders.

Present Bias
Choosing what makes one happy in the moment.

Present Value
Present value is the current value of a future sum of money, given a specified rate of return.

Price Discrimination
The practice of selling the same good or service at different prices to different customers.

Price Floor
A government-mandated minimum price that must be paid for a good or service.

Price Stability
A low and stable rate of inflation maintained over an extended period of time.

Primary Credit Rate
The interest rate charged by the Federal Reserve for primary credit loans to depository institutions. Because primary credit is the Federal Reserve's main discount window program, the Federal Reserve at times uses the term “discount rate” to mean the primary credit rate. Discount rates are established by each Reserve Bank's board of directors, subject to the review and determination of the Board of Governors.

Primary Dealer Credit Facility (PDCF)
An overnight Federal Reserve loan facility that provides funding to primary dealers in exchange for any eligible collateral.

Primary Dealers
Banks and securities broker-dealers that trade in U.S. government securities with the Federal Reserve Bank of New York.

Principal
The original amount of money deposited or invested, excluding any interest or dividends. Also refers to the original amount of a loan without any interest.

Private Good
A good that used by one person cannot be used by someone else They are considered rival in consumption and/or excludable. A person can be excluded from using a private good.

Private Label Securities
In the housing-finance business, a mortgage-backed security or other bond created and sold by a company other than a government-sponsored enterprise. Private label securities frequently are collateralized by loans that are ineligible for purchase by Fannie Mae or Freddie Mac.

Producers
People who make goods and services.

Production Function
The combination of inputs to produce outputs.

Production Possibilities Frontier
A graphic representation of output combinations that can be produced given an economy’s available resources and technology.

Productive Resources
The natural resources, human resources and capital resources used to make goods and services. Also known as factors of production.

Productivity
The ratio of output per worker per unit of time.

Profit
The amount of revenue that remains after a business pays the costs of producing a good or service.

Progressive Tax
A tax in which high-income earners pay a larger fraction of their income in taxes than low-income earners do.

Public Good
A good that is non-rival and non-excludable. Use by one person does not prevent its consumption by others.

Purchasing Power
The amount of goods and services that a unit of currency can buy.

Q

Quantitative Easing
A monetary policy in which a central bank makes large-scale asset purchases designed to bolster financial market conditions.

Quantity Demanded
The amount of a good or service that consumers are willing and able to buy at a specific price.

Quantity Supplied
The amount of a good or service that businesses are willing and able to sell at a specific price.

R

Real Gross Domestic Product (GDP)
The total market value of all final goods and services produced in an economy in a given year calculated by using a base year’s price for goods and services; nominal gross domestic product (GDP) adjusted for inflation.

Real Interest Rate
The price of borrowed money, adjusted for inflation.

Real (prices)
Monetary values, wages, prices or values, adjusted for inflation, measured in constant prices, that is, in prices of a given or base period. Real monetary values are obtained by adjusting nominal wages or prices with a price measure like the CPI.

Real Value
A measure of money that removes the effect of inflation.

Recession
A period of declining real income and rising unemployment; significant decline in general economic activity extending over a period of time.

Reciprocal Currency (swap) Arrangements
Short-term reciprocal arrangements between a Federal Reserve Bank and a foreign central bank. By drawing on a swap the foreign cen­tral bank obtains dollars that can be used to conduct foreign exchange intervention in support of its currency or to lend to its domestic banking system to satisfy temporary liquidity demands. For the duration of the swap, the Federal Reserve Bank obtains an equivalent amount of foreign currency along with a commitment from the foreign central bank to re­purchase the foreign currency at a preset exchange rate.

Relatively Scarce
An item that is scarce in relation to people’s desire for it.

Rent
The payment for natural resources.

Rent-to-own Contract
A contract that allows consumers to get immediate delivery on new furniture, appliances or other items. There is no down payment or credit check required. If the consumer keeps the rental item for a minimum amount of time, there is no penalty charged for returning it. If the renter misses a payment, the contract requires that he or she return the item.

Required Reserves
Funds that a depository institution is required to maintain in the form of vault cash or, if vault cash is insufficient to meet the requirement, in the form of a balance maintained directly with a Reserve Bank or indirectly with a pass-through correspondent bank. The required amount varies ac­cording to the required reserve ratios set by the Federal Reserve Board and the amount of reservable liabilities held by the institution.

Reserve Maintenance Period
The period of time that reserve balance requirements and contractual clearing balances need to be met (only on average).

Reserve Requirement
The percentage of a bank’s reserves it is required by law to hold.

Reserves (bank)
The sum of cash that banks hold in their vaults and the deposits they maintain with Federal Reserve banks.

Residential Mortgage-backed Security (RMBS)
A security that relies for payment on cash flows generated by a pool of residential mortgage debt obligations. (See also: Asset-backed security and Commercial mortgage-backed security)

Retail
The resale of new and used goods to general consumers.

Rewards
Positive incentives that make people better off.

Risk
The chance of loss.

Risk-reward Relationship
The idea that there is a direct relationship between risk of the loss of principal and the expected rate of return. The higher the risk of loss of principal for an investment, the greater the potential reward. Conversely, the lower the risk of loss of principal for an investment, the lower the potential reward.

Rule Of 72
A method to estimate the number of years it will take for a financial investment (or debt) to double its value (or cost). Divide 72 by the interest rate (percentage) to determine the approximate number of years it will take the investment (debt) to double its value (cost).

S

Salary
Income earned for providing human resources (labor) in the market. Salaries are generally an annual amount paid monthly or bimonthly for a specified number of hours, usually 40 hours per week.

Save
Keep money to spend in the future.

Saving
Income not spent on current consumption or taxes. Saving involves giving up some current consumption for future consumption.

Saving (elementary)
Keeping some income to buy things in the future.

Savings Account
An account with a bank or credit union in which people can deposit their money for future use and earn interest.

Savings And Loan Associations
Financial institutions with a federal or state charter that accept savings deposits and invest the bulk of those deposits in mortgages.

Savings Goal
A good or service that you want to buy in the future.

Savings Plan
A schedule listing tasks that, when completed, will allow a saver to reach a savings goal.

Scarcity
The condition that exists because there are not enough resources to produce everyone’s wants.

Seasonal Unemployment
Unemployment caused by changes in the weather or seasons.

Second Mortgage
A mortgage that has a lien position subordinate to the first mortgage.

Secured Loan
A loan that is backed with collateral; a loan for which the lender requires and the borrower offers property as a guarantee of repayment.

Securities And Exchange Commission (SEC)
The SEC oversees the key participants in the securities industry, including securities exchanges, securities brokers and dealers, investment advisors, and mutual funds. The regulatory mission of the SEC is concerned primarily with promoting the disclosure of important market-related information, maintaining fair dealing, and guarding against fraud.

Securities And Exchange Commission (SEC)
The SEC is an independent U.S. government agency established by Congress to police and regulate the securities industry.

Securitization
A financial transaction in which assets such a mortgage loans are pooled and securities representing interests in the pool are issued.

Self-interest
The pursuit of personal gain.

Senior Debt
If the issuer of a debt security goes bankrupt, senior debt must be repaid before other creditors receive any payment. Senior debt is often secured by collateral on which the lender has a first lien.

Senior Secured Funding
Generally, refers to borrowing by a financial or nonfinancial firm that is secured by real (physical) assets and has prior claim to incoming cash flows before other debt.

Services
Actions that can satisfy people’s wants.

Shoeleather Costs
The figurative cost of replacing shoes more often due to the increase in the number of trips to the bank. This would occur during times of inflation when there is a real cost associated with holding currency in non-interest bearing checking accounts.

Short-run Aggregate Supply Curve
A graphical depiction of the relationship between the aggregate price level and the quantity of aggregate output supplied.

Short Selling
The selling of a stock or other security not owned by the seller. In effect, the seller is betting that the price of the security will fall. A “naked” short sale is an unhedged position.

Short-term Savings Goal
Goods or services to be bought within a short time, such as a few weeks or months.

Sit-in
A type of protest where people refuse to buy the business’s goods and services and block others from making purchases by taking all of the seats in a restaurant or blocking the entrance to a business.

Social Security Tax
A payroll tax that is part of FICA (Federal Insurance Contributions Act) and is collected from most employees and employers to fund Social Security, which provides old-age, survivors’ and disability income.

Specialization
Limiting production to fewer goods and services than consumed, perhaps those whose production entails the lower opportunity cost.

Special Purpose Vehicle (SPV)
A legal entity (usually a limited liability company) created to fulfill narrow or temporary objectives. The SPV exists to hold the assets and issue a new set of claims on the assets, making the SPV sponsor remote from any bankruptcy associated with the pool of assets. The SPV typically holds a portfolio of various assets such as mortgages, loans, or corporate bonds. This portfolio is sliced into different components (called tranches).

Spending
People using some or all of their income to buy the things they want now.

Standard Of Living
A measure of the goods and services available to each person in a country; a measure of economic well-being. Also known as per capita real GDP (gross domestic product).

Store Of Value
The ability to retain worth.

Stress Test
An assessment of capital adequacy conducted by U.S. Federal bank and thrift supervisors. The purpose of the stress test (formally, a capital assessment) is to determine if the largest U.S. banking organizations have sufficient capital buffers to withstand the impact of an economic environment that is more challenging than is currently anticipated.

Structural Unemployment
Long-term joblessness caused by a mismatch in the skills held by those looking for work and the skills demanded by those seeking workers.

Structured Investment Vehicle (SIV)
A special purpose entity that invests in a variety of financial assets and is funded by short or medium term borrowings, for example, asset backed commercial paper (ABCP).

Subordinate Financing
Any mortgage or other lien with lower priority than the first mortgage.

Subprime Mortgage Loan
The classification “subprime” generally is a lender-given designation for loans extended to borrowers with some sort of credit impairment, say, due to missing installment payments on debt or the lack of a credit history. Along with an individual’s credit rating, characteristics of the mortgage loan can contribute to a lender classifying a loan as subprime—features such as limited or no documentation about income or assets, high loan-to-value ratios or high payment-to-income ratios. Subprime loans typically have a FICO credit score of 620 or less.

Substitute
A similar good. With substitutes, the price of one and the demand for the other tend to move in the same
direction.

Supplementary Financing Program
A temporary U.S. Treasury Department program consisting of a series of sales of Treasury bills, apart from the Treasury’s current borrowing program that provides cash for use in the Federal Reserve initiatives. The value of these bills is listed on the liability side of the Federal Reserve’s balance sheet.

Supply
The quantity of a good or service that producers are willing and able to sell at all possible prices during a certain time period.

Systemic Risk
Risk that a disruption at a firm, in a market segment, to a settlement system, or in a similar setting will cause widespread difficulties at other firms, in other market segments, or in the financial system as a whole.

T

Tax Deductions
A fixed amount or percentage permitted by taxation authorities that a taxpayer could subtract from his or her gross income to reduce taxable income.

Taxes
Fees charged on business and individual income, activities, property or products by governments. People are required to pay taxes.

Tax Refund
Money owed to taxpayers when their total tax payments are greater than the total tax. Refunds are received from the government.

Technological Change
An advance in overall knowledge in a specific area. Also known as technological advance.

Term Asset-Backed Securities Lending Facility (TALF)
A Federal Reserve funding facility that supports the issuance of asset-backed securities (ABS) collateralized by student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration (SBA).  Under the TALF, the Federal Reserve Bank of New York (FRBNY) lends up to $200 billion on a non-recourse basis to holders of certain AAA-rated ABS backed by newly and recently originated consumer and small business loans.  The FRBNY lends an amount equal to the market value of the ABS less a “haircut,” secured at all times by the ABS.  The U.S. Treasury Department—under the Troubled Assets Relief Program (TARP) of the Emergency Economic Stabilization Act of 2008—provides $20 billion of credit protection to the FRBNY in connection with the TALF.

Term Auction Facility (TAF)
A Federal Reserve program that auctions term funds (typically funds of 28- or 84-day maturity) to depository institutions. All depository institutions that are eligible to borrow under the primary credit program are eligible to participate in TAF auctions. All advances must be fully collateralized.

Term Repurchase (repo) Agreements (transactions)
The sale of securities to an investor with an agreement to repurchase them at an agreed upon price and date. The FOMC uses repos of eligible securities to vary the quantity of banking system reserves as part of its implementation of monetary policy.

Term Securities Lending Facility (TSLF)
A Federal Reserve loan facility that promotes liquidity in Treasury and other collateral markets by offering Treasury securities held by the System Open Market Account (SOMA) for loan over a one-month term against other program-eligible general collateral. Securities loans are awarded to primary dealers based on a competitive single-price auction.

Term Securities Lending Options Facility (TOP)
A Federal Reserve lending program that offers options to the primary dealers to draw upon short-term, fixed rate Term Securities Lending Facility (TSLF) loans from the System Open Market Account (SOMA) portfolio in exchange for program-eligible collateral. The program is intended to enhance the effectiveness of TSLF by offering added liquidity over periods of heightened collateral market pressures, such as quarter-end dates.

The Truth In Lending Act
A federal law that requires the disclosure of information about the cost of credit. Both the finance charges and annual percentage rate (APR) must be displayed prominently on forms and statements.

Too-big-to-fail
Government practices that protect large banking organizations from the normal discipline of the marketplace because of concerns that such institutions are so important to markets and their positions so intertwined with those of other banks that their failure would be unacceptably disruptive, financially and economically.

Trade-off
Giving up some of one thing in order to gain some of something else.

Tranche
When mortgages are securitized, the bonds created are often divided into a number of tranches. Tranches are related bonds offered as part of the same transaction, where each bond is a different slice of the deal's risk. Transaction documentation defines the tranches as different “classes” of notes, each identified by letter (e.g., Class A, Class B and Class C securities). Bonds in the least risky class have first claim on the cash flow from the pool of underlying mortgages, then bonds in the next class are paid, and so on, up to the riskiest bonds, which have the residual claim. Bonds in riskier tranches typically pay higher interest.

Transfer Payments
Payments by governments to people who do not supply goods, services or labor in exchange for the payments.

Transfer Programs
Government programs designed to improve economic equity.

Tri-party Repurchase Agreement
A repurchase transaction involving three parties: an investor, a financial institution, and a clearing bank, which acts an intermediary. In these transactions, which usually involve large amounts of cash and securities, the investor deposits money with the clearing bank, which then lends it to another institution. For example, under the TSLF the Federal Reserve Bank of New York arranges the loan of Treasury securities to depository institutions through primary dealers.

Troubled Asset Relief Program (TARP)
The Emergency Economic Stabilization Act of 2008 authorized the Secretary of the Treasury to establish the Troubled Asset Relief Program (TARP) to purchase, and to make and fund commitments to purchase, troubled assets from financial institutions.

Troubled Assets
Under the Emergency Economic Stabilization Act, Congress authorized the Treasury to use up to $700 billion to purchase “troubled assets”: (1) residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before March 14, 2008, the purchase of which the Secretary of the Treasury determines promotes financial market stability; and (2) any other financial instrument that the Secretary, after consultation with the chairman of the Board of Governors of the Federal Reserve System, determines the purchase of which is necessary to promote financial market stability, but only upon transmittal of such determination, in writing, to the appropriate committees of Congress.

Truth-in-Lending Act (Regulation Z)
A federal law intended to promote the informed use of consumer credit by requiring disclosure about its terms and costs. Creditors are required to disclose the cost of credit as a dollar amount (the finance charge) and as an annual percentage rate (APR).

U

Unemployment
A condition where people at least 16 years old are without jobs and actively seeking work.

Unemployment Rate
The percentage of the labor force that is willing and able to work, does not currently have a job, and is actively looking for employment.

Unintended Consequences
The unexpected and unplanned results of a decision or action.

Unit Of Account
A common measurement used to compare the value of goods and services.

Unsecured Loan
A loan that is not backed by collateral.

Unsecured Loan
A loan not backed with collateral.

U.S. Treasury Securities
Bonds, notes and other debt instruments sold by the United States Treasury to finance United States government operations.

V

W

W-2 Form, Wage And Tax Statement
A summary of a person’s earnings and tax withholdings for an entire year. Employers must provide a W-2 to employees by the end of January for the previous year’s employment to report annual income and withholding on the employees’ tax returns.

W-4 Form, Employee’s Withholding Allowance Certificate
A form completed by the employee and used by the employer to determine the amount of income tax to withhold.

Wages
Income earned for providing human resources (labor) in the market. Wages are usually computed by multiplying an hourly pay rate by the number of hours worked.

Wants
Desires that can be satisfied by consuming goods and services.

Warrants
A security that entitles the holder to buy stock of the issuing company at a specified price on or after a specified date.

Wealth Effect
The effect on consumer spending caused by a change in the aggregate price level on the purchasing power of the consumers’ assets.

Wholesale
The selling of goods in large quantities to be retailed by others.

Withholding Allowance
The amount of money that an employer withholds from an employee’s paycheck. This money is deposited for the government on behalf of the individual taxpayer. (It will be credited against the employee’s tax liability when he or she files a tax return.) Employers withhold money for federal income taxes, Social Security taxes, and state and local income taxes in some states and localities.

Workout
A workout is a process where the terms of a loan are modified or the lender agrees to some forbearance in order to avoid, default, foreclosure or bankruptcy.

X

Y

Z


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