Financial Terms Morbidity Tables

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# Definition of Morbidity Tables

## Morbidity Tables

These are statistical tables used by life insurance companies showing the probability of disease of male and females at all ages.

# Related Terms:

## Input-output tables

tables that indicate how much each industry requires of the production of each other
industry in order to produce each dollar of its own output.

## Mortality tables

tables of probability that individuals of various ages will die within one year.

## Mortality Tables

This is a statistical table used by life insurance companies showing the probability of death of male and females at all ages.

## input-output coefficient

a number (prefaced as a multiplier
to an unknown variable) that indicates the rate at which each
decision variable uses up (or depletes) the scarce resource

## Full-Employment Output

The level of output produced by the economy when operating at the natural rate of unemployment.

GDP.

## Output Gap

The difference between full employment output and current output.

## Potential Output or Potential GDP

output produced when the economy is operating at its natural rate of unemployment.

## Mortality Rate

The death rates for various age groups of the population.

## economic components model

Abrams’ model for calculating DLOM based on the interaction of discounts from four economic components.
This model consists of four components: the measure of the economic impact of the delay-to-sale, monopsony power to buyers, and incremental transactions costs to both buyers and sellers.

## All equity rate

The discount rate that reflects only the business risks of a project and abstracts from the
effects of financing.

## All or none

Requirement that none of an order be executed unless all of it can be executed at the specified price.

## All-in cost

Total costs, explicit and implicit.

## All-or-none underwriting

An arrangement whereby a security issue is canceled if the underwriter is unable
to re-sell the entire issue.

## Asset allocation decision

The decision regarding how an institution's funds should be distributed among the
major classes of assets in which it may invest.

## At-the-money

An option is at-the-money if the strike price of the option is equal to the market price of the
underlying security. For example, if xyz stock is trading at 54, then the xyz 54 option is at-the-money.

## Average life

Also referred to as the weighted-average life (WAL). The average number of years that each
dollar of unpaid principal due on the mortgage remains outstanding. Average life is computed as the weighted average time to the receipt of all future cash flows, using as the weights the dollar amounts of the principal
paydowns.

## Balloon maturity

Any large principal payment due at maturity for a bond or loan with or without a a sinking
fund requirement.

## Base probability of loss

The probability of not achieving a portfolio expected return.

## Borrower fallout

In the mortgage pipeline, the risk that prospective borrowers of loans committed to be
closed will elect to withdraw from the contract.

## Builder buydown loan

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).

## Buy limit order

A conditional trading order that indicates a security may be purchased only at the designated
price or lower.
Related: Sell limit order.

Mortgages in which monthly payments consist of principal and interest, with portions of These
payments during the early period of the loan being provided by a third party to reduce the borrower's monthly
payments.

## Call

An option that gives the right to buy the underlying futures contract.

## Call an option

To exercise a call option.

## Call date

A date before maturity, specified at issuance, when the issuer of a bond may retire part of the bond
for a specified call price.

## Call money rate

Also called the broker loan rate , the interest rate that banks charge brokers to finance
margin loans to investors. The broker charges the investor the call money rate plus a service charge.

## Call option

An option contract that gives its holder the right (but not the obligation) to purchase a specified
number of shares of the underlying stock at the given strike price, on or before the expiration date of the
contract.
Premium in price above the par value of a bond or share of preferred stock that must be paid to
holders to redeem the bond or share of preferred stock before its scheduled maturity date.

## Call price

The price, specified at issuance, at which the issuer of a bond may retire part of the bond at a
specified call date.

## Call price

The price for which a bond can be repaid before maturity under a call provision.

## Call protection

A feature of some callable bonds that establishes an initial period when the bonds may not be
called.

## Call provision

An embedded option granting a bond issuer the right to buy back all or part of the issue prior
to maturity.

## Call risk

The combination of cash flow uncertainty and reinvestment risk introduced by a call provision.

## Call swaption

A swaption in which the buyer has the right to enter into a swap as a fixed-rate payer. The
writer therefore becomes the fixed-rate receiver/floating rate payer.

## Callable

A financial security such as a bond with a call option attached to it, i.e., the issuer has the right to
call the security.

## Capital allocation

decision allocation of invested funds between risk-free assets versus the risky portfolio.

## Chinese wall

Communication barrier between financiers (investment bankers) and traders. This barrier is
erected to prevent the sharing of inside information that bankers are likely to have.

## Coinsurance effect

Refers to the fact that the merger of two firms decreases the probability of default on
either firm's debt.

## Common stock/other equity

Value of outstanding common shares at par, plus accumulated retained
earnings. Also called shareholders' equity.

## Common-base-year analysis

The representing of accounting information over multiple years as percentages
of amounts in an initial year.
Common-size analysis The representing of balance sheet items as percentages of assets and of income
statement items as percentages of sales.

## Covered call

A short call option position in which the writer owns the number of shares of the underlying
stock represented by the option contracts. Covered calls generally limit the risk the writer takes because the
stock does not have to be bought at the market price, if the holder of that option decides to exercise it.

## Covered call writing strategy

A strategy that involves writing a call option on securities that the investor
owns in his or her portfolio. See covered or hedge option strategies.

## Cramdown

The ability of the bankruptcy court to confirm a plan of reorganization over the objections of
some classes of creditors.

## Cross-border risk

Refers to the volatility of returns on international investments caused by events associated
with a particular country as opposed to events associated solely with a particular economic or financial agent.

## Crown jewel

A particularly profitable or otherwise particularly valuable corporate unit or asset of a firm.

## Cumulative probability distribution

A function that shows the probability that the random variable will
attain a value less than or equal to each value that the random variable can take on.

## Day order

An order to buy or sell stock that automatically expires if it can't be executed on the day it is entered.

## Deferred call

A provision that prohibits the company from calling the bond before a certain date. During this
period the bond is said to be call protected.

## Deferred nominal life annuity

A monthly fixed-dollar payment beginning at retirement age. It is nominal
because the payment is fixed in dollar amount at any particular time, up to and including retirement.

## Dollar bonds

Municipal revenue bonds for which quotes are given in dollar prices. Not to be confused with
"U.S. dollar" bonds, a common term of reference in the Eurobond market.

## Dollar duration

The product of modified duration and the initial price.

## Dollar price of a bond

Percentage of face value at which a bond is quoted.

## Dollar return

The return realized on a portfolio for any evaluation period, including (1) the change in market
value of the portfolio and (2) any distributions made from the portfolio during that period.

## Dollar roll

Similar to the reverse repurchase agreement - a simultaneous agreement to sell a security held in a
portfolio with purchase of a similar security at a future date at an agreed-upon price.

## Dollar safety margin

The dollar equivalent of the safety cushion for a portfolio in a contingent immunization
strategy.

## Dollar-weighted rate of return

Also called the internal rate of return, the interest rate that will make the
present value of the cash flows from all the subperiods in the evaluation period plus the terminal market value
of the portfolio equal to the initial market value of the portfolio.

## Dow Jones industrial average

This is the best known U.S.index of stocks. It contains 30 stocks that trade on
the New York Stock Exchange. The Dow, as it is called, is a barometer of how shares of the largest
U.S.companies are performing. There are thousands of investment indexes around the world for stocks,
bonds, currencies and commodities.

## Down-and-in option

Barrier option that comes into existence if asset price hits a barrier.

## Down-and-out option

Barrier option that expires if asset price hits a barrier.

A classic negative change in ratings for a stock, and or other rated security.

## Dynamic asset allocation

An asset allocation strategy in which the asset mix is mechanistically shifted in
response to -changing market conditions, as in a portfolio insurance strategy, for example.

## Economic order quantity (EOQ)

The order quantity that minimizes total inventory costs.

## Effective call price

The strike price in an optional redemption provision plus the accrued interest to the
redemption date.

## Employee stock ownership plan (ESOP)

A company contributes to a trust fund that buys stock on behalf of
employees.

## End-of-year convention

Treating cash flows as if they occur at the end of a year as opposed to the date
convention. Under the end-of-year convention, the present is time 0, the end of year 1 occurs one year hence,
etc.

## Eurodollar

This is an American dollar that has been deposited in a European bank or an U.S. bank branch
located in Europe. It got there as a result of payments made to overseas companies for merchandise.

## Eurodollar bonds

Eurobonds denominated in U.S.dollars.

## European Monetary System (EMS)

An exchange arrangement formed in 1979 that involves the currencies
of European Union member countries.

## Extrapolative statistical models

Models that apply a formula to historical data and project results for a
future period. Such models include the simple linear trend model, the simple exponential model, and the
simple autoregressive model.

## Fallout risk

A type of mortgage pipeline risk that is generally created when the terms of the loan to be
originated are set at the same time as the sale terms are set. The risk is that either of the two parties, borrower
or investor, fails to close and the loan "falls out" of the pipeline.

## Federal Deposit Insurance Corporation (FDIC)

A federal institution that insures bank deposits.

## Federally related institutions

Arms of the federal government that are exempt from SEC registration and
whose securities are backed by the full faith and credit of the U.S. government (with the exception of the
Tennessee Valley Authority).

## Fill or kill order

A trading order that is canceled unless executed within a designated time period.
Related: open order.

## First-call

With CMOs, the start of the cash flow cycle for the cash flow window.

## Fixed-dollar obligations

Conventional bonds for which the coupon rate is set as a fixed percentage of the par value.

## Fixed-dollar security

A nonnegotiable debt security that can be redeemed at some fixed price or according to
some schedule of fixed values, e.g., bank deposits and government savings bonds.

## 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.

## GEMs (growing-equity mortgages)

Mortgages in which annual increases in monthly payments are used to
reduce outstanding principal and to shorten the term of the loan.

## Generally Accepted Accounting Principals (GAAP)

A technical accounting term that encompasses the
conventions, rules, and procedures necessary to define accepted accounting practice at a particular time.

## Glass-Steagall Act

A 1933 act in which Congress forbade commercial banks to own, underwrite, or deal in
corporate stock and corporate bonds.

## Goodwill

Excess of the purchase price over the fair market value of the net assets acquired under purchase
accounting.

## Graduated-payment mortgages (GPMs)

A type of stepped-payment loan in which the borrower's payments
are initially lower than those on a comparable level-rate mortgage. The payments are gradually increased over
a predetermined period (usually 3,5, or 7 years) and then are fixed at a level-pay schedule which will be
higher than the level-pay amortization of a level-pay mortgage originated at the same time. The difference
between what the borrower actually pays and the amount required to fully amortize the mortgage is added to
the unpaid principal balance.

## Guaranteed insurance contract

A contract promising a stated nominal interest rate over some specific time
period, usually several years.

## Hot money

Money that moves across country borders in response to interest rate differences and that moves
away when the interest rate differential disappears.

## Implied call

The right of the homeowner to prepay, or call, the mortgage at any time.

## Indicated dividend

Total amount of dividends that would be paid on a share of stock over the next 12 months
if each dividend were the same amount as the most recent dividend. Usually represent by the letter "e" in
stock Tables.

## Indicated yield

The yield, based on the most recent quarterly rate times four. To determine the yield, divide
the annual dividend by the price of the stock. The resulting number is represented as a percentage. See:
dividend yield.

## Industry

The category describing a company's primary business activity. This category is usually determined
by the largest portion of revenue.

## Installment sale

The sale of an asset in exchange for a specified series of payments (the installments).

## Insurance principle

The law of averages. The average outcome for many independent trials of an experiment
will approach the expected value of the experiment.

## Internally efficient market

Operationally efficient market.

## International Monetary Fund

An organization founded in 1944 to oversee exchange arrangements of
member countries and to lend foreign currency reserves to members with short-term balance of payment
problems.

## International Monetary Market (IMM)

A division of the CME established in 1972 for trading financial
futures. Related: Chicago Mercantile Exchange (CME).

## In-the-money

A put option that has a strike price higher than the underlying futures price, or a call option
with a strike price lower than the underlying futures price. For example, if the March COMEX silver futures
contract is trading at \$6 an ounce, a March call with a strike price of \$5.50 would be considered in-the-money
by \$0.50 an ounce.
Related: put.

## Investor fallout

In the mortgage pipeline, risk that occurs when the originator commits loan terms to the
borrowers and gets commitments from investors at the time of application, or if both sets of terms are made at closing.

## Irrational call option

The implied call imbedded in the MBS. Identified as irrational because the call is
sometimes not exercised when it is in the money (interest rates are below the threshold to refinance).
Sometimes exercised when not in the money (home sold without regard to the relative level of interest rates).

## Law of one price

An economic rule stating that a given security must have the same price regardless of the
means by which one goes about creating that security. This implies that if the payoff of a security can be
synthetically created by a package of other securities, the price of the package and the price of the security
whose payoff it replicates must be equal.

## Limit order

An order to buy a stock at or below a specified price or to sell a stock at or above a specified
price. For instance, you could tell a broker "Buy me 100 shares of XYZ Corp at \$8 or less" or to "sell 100
shares of XYZ at \$10 or better." The customer specifies a price and the order can be executed only if the
market reaches or betters that price. A conditional trading order designed to avoid the danger of adverse
unexpected price changes.

## Limit order book

A record of unexecuted limit orders that is maintained by the specialist. These orders are
treated equally with other orders in terms of priority of execution.

## Margin call

A demand for additional funds because of adverse price movement. Maintenance margin
requirement, security deposit maintenance
Margin of safety With respect to working capital management, the difference between 1) the amount of longterm
financing, and 2) the sum of fixed assets and the permanent component of current assets.

## Market order

This is an order to immediately buy or sell a security at the current trading price.

## Monetary gold

Gold held by governmental authorities as a financial asset.

## Monetary policy

Actions taken by the Board of Governors of the Federal Reserve System to influence the
money supply or interest rates.

## Monetary / non-monetary method

Under this translation method, monetary items (e.g. cash, accounts
payable and receivable, and long-term debt) are translated at the current rate while non-monetary items (e.g.
inventory, fixed assets, and long-term investments) are translated at historical rates.

## Money base

Composed of currency and coins outside the banking system plus liabilities to the deposit money banks.

## Money center banks

Banks that raise most of their funds from the domestic and international money markets, relying less on depositors for funds.

## Money management

Related: Investment management.

## Money manager

Related: Investment manager.

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