Definition of Hypothecation

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Hypothecation

The pledge of property and assets to secure a loan. hypothecation does not transfer title, but it does provide the right to sell the hypothecated property in the event of default.

Related Terms:

Acquisition of assets

A merger or consolidation in which an acquirer purchases the selling firm's assets.

Appraisal rights

A right of shareholders in a merger to demand the payment of a fair price for their shares, as
determined independently.

Assets requirements

A common element of a financial plan that describes projected capital spending and the
proposed uses of net working capital.

Back-to-back loan

A loan in which two companies in separate countries borrow each other's currency for a
specific time period and repay the other's currency at an agreed upon maturity.

A mortgage loan on newly developed property that the builder subsidizes during the
early years of the development. The builder uses cash to buy down the mortgage rate to a lower level than the
prevailing market loan rate for some period of time. The typical buydown is 3% of the interest-rate amount
for the first year, 2% for the second year, and 1% for the third year (also referred to as a 3-2-1 buydown).

Bullet loan

A bank term loan that calls for no amortization.

Cross default

A provision under which default on one debt obligation triggers default on another debt
obligation.

Cum rights

With rights.

Current assets

Value of cash, accounts receivable, inventories, marketable securities and other assets that
could be converted to cash in less than 1 year.

Dealer loan

Overnight, collateralized loan made to a dealer financing his position by borrowing from a
money market bank.

Default

Failure to make timely payment of interest or principal on a debt security or to otherwise comply
with the provisions of a bond indenture.

Default premium

A differential in promised yield that compensates the investor for the risk inherent in
purchasing a corporate bond that entails some risk of default.

Default risk

Also referred to as credit risk (as gauged by commercial rating companies), the risk that an
issuer of a bond may be unable to make timely principal and interest payments.

Depository transfer check (DTC)

Check made out directly by a local bank to a particular firm or person.

Dividend rights

A shareholders' rights to receive per-share dividends identical to those other shareholders receive.

Electronic depository transfers

The transfer of funds between bank accounts through the Automated
Clearing House (ACH) system.

Equivalent loan

Given the after-tax stream associated with a lease, the maximum amount of conventional
debt that the same period-by-period after-tax debt service stream is capable of supporting.

Event risk

The risk that the ability of an issuer to make interest and principal payments will change because
of rare, discontinuous, and very large, unanticipated changes in the market environment such as (1) a natural
or industrial accident or some regulatory change or (2) a takeover or corporate restructuring.

Event study

A statistical study that examines how the release of information affects prices at a particular time.

Events of default

Contractually specified events that allow lenders to demand immediate repayment of a debt.

Exchange of assets

Acquisition of another company by purchase of its assets in exchange for cash or stock.

Ex-rights

In connection with a rights offering, shares of stock that are trading without the rights attached.

Ex-rights date

The date on which a share of common stock begins trading ex-rights.

Federal Home Loan Banks

The institutions that regulate and lend to savings and loan associations. The
Federal Home loan Banks play a role analogous to that played by the Federal Reserve Banks vis-à-vis
member commercial banks.

Financial assets

Claims on real assets.

Fixed-rate loan

A loan on which the rate paid by the borrower is fixed for the life of the loan.

Freddie Mac (Federal Home Loan Mortgage Corporation)

A Congressionally chartered corporation that
purchases residential mortgages in the secondary market from S&Ls, banks, and mortgage bankers and
securitizes these mortgages for sale into the capital markets.

Intercompany loan

loan made by one unit of a corporation to another unit of the same corporation.

Inventory loan

A secured short-term loan to purchase inventory. The three basic forms are a blanket
inventory lien, a trust receipt, and field warehousing financing.

Jumbo loan

loans of $1 billion or more. Or, loans that exceed the statutory size limit eligible for purchase or
securitization by the federal agencies.

Liquidation rights

The rights of a firm's securityholders in the event the firm liquidates.

Loan amortization schedule

The schedule for repaying the interest and principal on a loan.

Loan syndication

Group of banks sharing a loan. See: syndicate.

Loan value

The amount a policyholder may borrow against a whole life insurance policy at the interest rate
specified in the policy.

Long-term assets

Value of property, equipment and other capital assets minus the depreciation. This is an
entry in the bookkeeping records of a company, usually on a "cost" basis and thus does not necessarily reflect
the market value of the assets.

Multicurrency loans

Give the borrower the possibility of drawing a loan in different currencies.

Multifamily loans

loans usually represented by conventional mortgages on multi-family rental apartments.

Negative pledge clause

A bond covenant that requires the borrower to grant lenders a lien equivalent to any
liens that may be granted in the future to any other currently unsecured lenders.

Net assets

The difference between total assets on the one hand and current liabilities and noncapitalized longterm
liabilities on the other hand.

Non-reproducible assets

A tangible asset with unique physical properties, like a parcel of land, a mine, or a
work of art.

Official unrequited transfers

Include a variety of subsidies, military aid, voluntary cancellation of debt,
contributions to international organizations, indemnities imposed under peace treaties, technical assistance,
taxes, fines, etc.

Option seller

Also called the option writer , the party who grants a right to trade a security at a given price in
the future.

Other current assets

Value of non-cash assets, including prepaid expenses and accounts receivable, due
within 1 year.

Outright rate

Actual forward rate expressed in dollars per currency unit, or vice versa.
Outsourcing
he practice of purchasing a significant percentage of intermediate components from outside suppliers.

Parallel loan

A process whereby two companies in different countries borrow each other's currency for a
specific period of time, and repay the other's currency at an agreed maturity for the purpose of reducing
foreign exchange risk. Also referred to as back-to-back loans.

Preemptive right

Common stockholder's right to anything of value distributed by the company.

Private unrequited transfers

Refers to resident immigrant workers' remittances to their country of origin as
well as gifts, dowries, inheritances, prizes, charitable contributions, etc.

Project loan certificate (PLC)

A primary program of Ginnie Mae for securitizing FHA-insured and coinsured
multifamily, hospital, and nursing home loans.

Project loan securities

Securities backed by a variety of FHA-insured loan types - primarily multi-family
apartment buildings, hospitals, and nursing homes.

Project loans

Usually FHA-insured and HUD-guaranteed mortgages on multiple-family housing complexes,
nursing homes, hospitals, and other development types.

Property rights

rights of individuals and companies to own and utilize property as they see fit and to receive
the stream of income that their property generates.

Publicly traded assets

assets that can be traded in a public market, such as the stock market.

Quick assets

Current assets minus inventories.

Real assets

Identifiable assets, such as buildings, equipment, patents, and trademarks, as distinguished from a
financial obligation.

Reproducible assets

A tangible asset with physical properties that can be reproduced, such as a building or
machinery.

Residual assets

assets that remain after sufficient assets are dedicated to meet all senior debtholder's claims in full.

Return on assets (ROA)

Indicator of profitability. Determined by dividing net income for the past 12 months
by total average assets. Result is shown as a percentage. ROA can be decomposed into return on sales (net
income/sales) multiplied by asset utilization (sales/assets).

Return on total assets

The ratio of earnings available to common stockholders to total assets.

Right

A short-lived (typically less than 90 days) call option for purchasing additional stock in a firm, issued
by the firm to all its shareholders on a pro rata basis.

Rights offering

Issuance of "rights" to current shareholders allowing them to purchase additional shares,
usually at a discount to market price. Shareholders who do not exercise these rights are usually diluted by the
offering. rights are often transferable, allowing the holder to sell them on the open market to others who may
wish to exercise them. rights offerings are particularly common to closed end funds, which cannot otherwise
issue additional common stock.

Rights-on

Shares trading with rights attached to them.

Savings and Loan association

National- or state-chartered institution that accepts savings deposits and
invests the bulk of the funds thus received in mortgages.

Secured debt

Debt that, in the event of default, has first claim on specified assets.

Self-liquidating loan

loan to finance current assets, The sale of the current assets provides the cash to repay
the loan.

Sell hedge

Related: short hedge.

Sell limit order

Conditional trading order that indicates that a, security may be sold at the designated price or
higher. Related: buy limit order.

Selling group

All banks involved in selling or marketing a new issue of stock or bonds

Selling short

If an investor thinks the price of a stock is going down, the investor could borrow the stock from
a broker and sell it. eventually, the investor must buy the stock back on the open market. For instance, you
borrow 1000 shares of XYZ on July 1 and sell it for $8 per share. Then, on Aug 1, you purchase 1000 shares
of XYZ at $7 per share. You've made $1000 (less commissions and other fees) by selling short.

Sell-side analyst

Also called a Wall Street analyst, a financial analyst who works for a brokerage firm and
whose recommendations are passed on to the brokerage firm's customers.

Separation property

The property that portfolio choice can be separated into two independent tasks: 1)
determination of the optimal risky portfolio, which is a purely technical problem, and 2) the personal choice
of the best mix of the risky portfolio and the risk-free asset.

Short selling

Establishing a market position by selling a security one does not own in anticipation of the price
of that security falling.

Special drawing rights (SDR)

A form of international reserve assets, created by the IMF in 1967, whose
value is based on a portfolio of widely used currencies.

Term loan

A bank loan, typically with a floating interest rate, for a specified amount that matures in between
one and ten years and requires a specified repayment schedule.

Transaction loan

A loan extended by a bank for a specific purpose. In contrast, lines of credit and revolving
credit agreements involve loans that can be used for various purposes.

Transfer agent

ndividual or institution appointed by a company to look after the transfer of securities.

Transfer price

The price at which one unit of a firm sells goods or services to another unit of the same firm.

Transferable put right

An option issued by the firm to its shareholders to sell the firm one share of its
common stock at a fixed price (the strike price) within a stated period (the time to maturity). The put right is
"transferable" because it can be traded in the capital markets.

Unilateral transfers

Items in the current account of the balance of payments of a country's accounting books
that corresponds to gifts from foreigners or pension payments to foreign residents who once worked in the
country whose balance of payments is being considered.

Unsecured debt

Debt that does not identify specific assets that can be taken over by the debtholder in case of default.

Variable rate loan

loan made at an interest rate that fluctuates based on a base interest rate such as the
Prime Rate or LIBOR.

Voting rights

The right to vote on matters that are put to a vote of security holders. For example the right to
vote for directors.

With rights

Purchase of shares in which the buyer is entitled to the rights to buy shares in the company's
rights issue.

ASSETS

Anything of value that a company owns.

Current assets

Cash, things that will be converted into cash within a year (such as accounts receivable), and inventory.

PROPERTY AND EQUIPMENT

assets such as land, buildings, machinery, and equipment that the business will use for several
years to make the product or provide the service that it sells. They are shown at the cost a company paid to buy or build them minus the amount they’ve depreciated since they were bought or built. (Except for land, which is not depreciated.)

RATE OF RETURN ON TOTAL ASSETS

The percentage return or profit that management made on each dollar of assets. The formula is:
(Net income) / (Total assets)

SELLING EXPENSES

What was spent to run the sales part of a company, such as sales salaries, travel, meals, and lodging for salespeople, and advertising.

Assets

Things that the business owns.

Current assets

Amounts receivable by the business within a period of 12 months, including bank, debtors, inventory and prepayments.

Fixed assets

Things that the business owns and are part of the business infrastructure – fixed assets may be
tangible or intangible.

Intangible fixed assets

Non-physical assets, e.g. customer goodwill or intellectual property (patents and trademarks).

Optimum selling price

The price at which profit is maximized, which takes into account the cost behaviour of fixed and variable costs and the relationship between price and demand for a product/service.

Tangible fixed assets

Physical assets that can be seen and touched, e.g. buildings, machinery, vehicles, computers etc.

Transfer price

The price at which goods or services are bought and sold within divisions of the same organization, as opposed to an arm’s-length price at which sales may be made to an external customer.

Assets

Items owned by the company or expenses that have been paid for but have not been used up.

Intangible assets

assets owned by the company that do not possess physical substance; they usually take the form of rights and privileges such as patents, copyrights, and franchises.

Loans payable

Amounts that have been loaned to the company and that it still owes.

current assets

Current refers to cash and those assets that will be turned
into cash in the short run. Five types of assets are classified as current:
cash, short-term marketable investments, accounts receivable, inventories,
and prepaid expenses—and they are generally listed in this order in
the balance sheet.

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