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Definition of PrincipalPrincipal1) The total amount of money being borrowed or lent. PrincipalThe original amount loaned, which is repaid plus interest. See face value. PrincipalThe obligation due under a debt instrument exclusive of interest.
Related Terms:Generally Accepted Accounting Principals (GAAP)A technical accounting term that encompasses the Notional principal amountIn an interest rate swap, the predetermined dollar principal on which the Principal-agent relationshipA situation that can be modeled as one person, an agent, who acts on the behalf Principal amountThe face amount of debt; the amount borrowed or lent. Often called principal. Principal AmountGenerally, refers to the face value of a debt. Principal of diversificationHighly diversified portfolios will have negligible unsystematic risk. In other Principal only (PO)A mortgage-backed security in which the holder receives only principal cash flows on Principal valueSee Par value. Remaining principal balanceThe amount of principal dollars remaining to be paid under the mortgage as of Value additivity principalPrevails when the value of a whole group of assets exactly equals the sum of the Accrual bondA bond on which interest accrues, but is not paid to the investor during the time of accrual. Agency costsThe incremental costs of having an agent make decisions for a principal. Agency pass-throughsMortgage pass-through securities whose principal and interest payments are Agency theoryThe analysis of principal-agent relationships, wherein one person, an agent, acts on behalf of AgentThe decision-maker in a principal-agent relationship. amortizationThis term has two quite different meanings. First, it may AmortizationThe reduction of debt by regular payments of interest and principal sufficient to pay off a loan by maturity. Amortization (Credit Insurance)Refers to the reduction of debt by regular payments of interest and principal in order to pay off a loan by maturity. Amortization ScheduleA schedule that shows precisely how a loan will be repaid. The schedule gives the required payment on each specific date and shows how much of it constitutes interest and how much constitutes repayments of principal. AmortizeTo liquidate on an instalment basis; an amortized loan is one on which the principal amount of the loan is repaid in instalments during the life of the loan. Amortizing interest rate swapSwap in which the principal or national amount rises (falls) as interest rates Asset-based financingMethods of financing in which lenders and equity investors look principally to the Average lifeAlso referred to as the weighted-average life (WAL). The average number of years that each Baker PlanA plan by U.S. Treasury Secretary James Baker under which 15 principal middle-income debtor Balloon maturityAny large principal payment due at maturity for a bond or loan with or without a a sinking BondBonds are debt and are issued for a period of more than one year. The U.S. government, local BondA long-term debt instrument in which the issuer (borrower) is BondUsually a fixed interest security under which the issuer contracts to pay the lender a fixed principal amount at a stated date in the future, and a series of interest payments, either semi-annually or annually. Interest payments may vary through the life of bond. Bull-bear bondBond whose principal repayment is linked to the price of another security. The bonds are BuydownsMortgages in which monthly payments consist of principal and interest, with portions of these Cash flow coverage ratioThe number of times that financial obligations (for interest, principal payments, Collateralized mortgage obligation (CMO)A security backed by a pool of pass-throughs , structured so that Commercial MortgageA loan made on real estate collateral, other than a residential property, in which a mortgage is given to secure payment of principal and interest. Compound interestInterest paid on previously earned interest as well as on the principal. Compound InterestInterest paid on principal and on interest earned in previous compound interesta method of determining interest in which interest that was earned in prior periods is added to the original investment so that, in each successive period, interest is earned on both principal and interest Compound InterestInterest earned on an investment at periodic intervals and added to principal and previous interest earned. Each time new interest earned is calculated it is on a combined total of principal and previous interest earned. Essentially, interest is paid on top of interest. concentration bankingSystem whereby customers make payments to a regional collection center which transfers funds to Continuous CompoundingThe process of continuously adding interest to a principal plus Corporate financial managementThe application of financial principals within a corporation to create and Country financial riskThe ability of the national economy to generate enough foreign exchange to meet Debt reliefReducing the principal and/or interest payments on LDC loans. Debt serviceInterest payment plus repayments of principal to creditors, that is, retirement of debt. Debt-service coverage ratioEarnings before interest and income taxes plus one-third rental charges, divided Debt service parity approachAn analysis wherein the alternatives under consideration will provide the firm DefaultFailure to make timely payment of interest or principal on a debt security or to otherwise comply DefaultThe failure by a debtor to make a principal or interest payment in a timely DefaultFailure of a debtor to make timely payments of principal and interest as they become due. Default riskAlso referred to as credit risk (as gauged by commercial rating companies), the risk that an Discount bondDebt sold for less than its principal value. If a discount bond pays no interest, it is called a Discrete CompoundingThe process of adding interest to a principal plus interest amount Dual-currency issuesEurobonds that pay coupon interest in one currency but pay the principal in a different EBDDT - Earnings before depreciation and deferred taxesThis measure is used principally by Effective Interest RateThe rate of interest actually earned on an investment. It is EuroclearOne of two principal clearing systems in the Eurobond market. It began operations in 1968, is Event riskThe risk that the ability of an issuer to make interest and principal payments will change because ExchangeThe marketplace in which shares, options and futures on stocks, bonds, commodities and indices Face valueThe maturity value of a security. Also known as par value, Face ValueThe payoff value of a bond upon maturity. Also called par value. See principal. FactoringType of financial service whereby a firm sells or transfers title to its accounts receivable to a factoring company, which then acts as principal, not as agent. Flat trades1) A bond in default trades flat; that is, the price quoted covers both principal and unpaid, Fully modified pass-throughsAgency pass-throughs that guarantee the timely payment of both interest and GEMs (growing-equity mortgages)Mortgages in which annual increases in monthly payments are used to GNMA-IMortgage-backed securities (MBS) on which registered holders receive separate principal and GNMA-IIMortgage-backed securities (MBS) on which registered holders receive an aggregate principal and Government National Mortgage Association (Ginnie Mae)A wholly owned U.S. government corporation Grace PeriodLength of time during which repayments of loan principal are excused. Usually occurs at the start of the loan period. Graduated-payment mortgages (GPMs)A type of stepped-payment loan in which the borrower's payments Guaranteed investment contract (GIC)A pure investment product in which a life company agrees, for a Interest-only strip (IO)A security based solely on the interest payments form a pool of mortgages, Treasury Interest paymentsContractual debt payments based on the coupon rate of interest and the principal amount. Interest rate swapA binding agreement between counterparties to exchange periodic interest payments on Letter of credit (L/C)A form of guarantee of payment issued by a bank used to guarantee the payment of Level payThe characteristic of the scheduled principal and interest payments due under a mortgage such that Loan amortization scheduleThe schedule for repaying the interest and principal on a loan. MaturityFor a bond, the date on which the principal is required to be repaid. In an interest rate swap, the MBS servicingThe requirement that the mortgage servicer maintain payment of the full amount of Modified pass-throughsAgency pass-throughs that guarantee (1) timely interest payments and (2) principal Mortgage pass-through securityAlso called a passthrough, a security created when one or more mortgage Negative amortizationA loan repayment schedule in which the outstanding principal balance of the loan Net Cash after OperationsCash flow available for debt service—the payment of interest and principal on loans. Generally calculated as cash provided by operating activities before interest Original face valueThe principal amount of the mortgage as of its issue date. Pass-through securitiesA pool of fixed-income securities backed by a package of assets (i.e. mortgages) Planned amortization class CMO1) One class of CMO that carries the most stable cash flows and the Pool factorThe outstanding principal balance divided by the original principal balance with the result PrepaymentsPayments made in excess of scheduled mortgage principal repayments. Present ValueThe amount due on an obligation less any interest on that obligation that would PSAA prepayment model based on an assumed rate of prepayment each month of the then unpaid principal Pure-discount bondA bond that will make only one payment of principal and interest. Also called a zerocoupon Rate of interestThe rate, as a proportion of the principal, at which interest is computed. Record date1) Date by which a shareholder must officially own shares in order to be entitled to a dividend. Regulatory accounting proceduresAccounting principals required by the FHLB that allow S&Ls to elect RemaindermanOne who receives the principal of a trust when it is dissolved. Repayment TermsThe length of time given a borrower by a lender to repay a debt and the frequency of principal payments which the borrower has to meet. return of capitalthe recovery of the original investment (or principal) in a project Scheduled cash flowsThe mortgage principal and interest payments due to be paid under the terms of the Serial bondsCorporate bonds arranged so that specified principal amounts become due on specified dates.
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