Definition of Regulation Q

Regulation Q

Fed regulation imposing caps on the rates that banks may pay on savings and time deposits.
Currently time deposits with a denomination of $100,000 or more are exempt from Reg Q.

Accounts payable

Money owed to suppliers.

Aggregation

Process in corporate financial planning whereby the smaller investment proposals of each of the
firm's operational units are added up and in effect treated as a big picture.

Autoregressive

Using past data to predict future data.

Balance of payments

A statistical compilation formulated by a sovereign nation of all economic transactions
between residents of that nation and residents of all other nations during a stipulated period of time, usually a
calendar year.

Break-even lease payment

The lease payment at which a party to a prospective lease is indifferent between
entering and not entering into the lease arrangement.

Break-even payment rate

The prepayment rate of a MBS coupon that will produce the same CFY as that of
a predetermined benchmark MBS coupon. Used to identify for coupons higher than the benchmark coupon
the prepayment rate that will produce the same CFY as that of the benchmark coupon; and for coupons lower
than the benchmark coupon the lowest prepayment rate that will do so.

Break-even time

Related: Premium payback period.

Cash flow time-line

Line depicting the operating activities and cash flows for a firm over a particular period.

Clearing House Automated Payments System (CHAPS)

A computerized clearing system for sterling funds
that began operations in 1984. It includes 14 member banks, nearly 450 participating banks, and is one of the
clearing companies within the structure of the Association for payment Clearing Services (APACS).

Clearing House Interbank Payments System (CHIPS)

An international wire transfer system for high-value
payments operated by a group of major banks.

Consortium banks

A merchant banking subsidiary set up by several banks that may or may not be of the
same nationality. Consortium banks are common in the Euromarket and are active in loan syndication.

Coupon payments

A bond's interest payments.

Cross rates

The exchange rate between two currencies expressed as the ratio of two foreign exchange rates
that are both expressed in terms of a third currency.

Customary payout ratios

A range of payout ratios that is typical based on an analysis of comparable firms.

Date of payment

Date dividend checks are mailed.

Delivery versus payment

A transaction in which the buyer's payment for securities is due at the time of
delivery (usually to a bank acting as agent for the buyer) upon receipt of the securities. The payment may be
made by bank wire, check, or direct credit to an account.

Demand deposits

Checking accounts that pay no interest and can be withdrawn upon demand.

Discounted payback period rule

An investment decision rule in which the cash flows are discounted at an
interest rate and the payback rule is applied on these discounted cash flows.

Dividend payout ratio

Percentage of earnings paid out as dividends.

Exempt securities

Instruments exempt from the Registration requirements of the Securities Act of 1933 or the
margin requirements of the SEC Act of 1934. Such securities include government bonds, agencies, munis,
commercial paper, and private placements.

Feasible target payout ratios

payout ratios that are consistent with the availability of excess funds to make
cash dividend payments.

Federal agency securities

Securities issued by corporations and agencies created by the U.S. government,
such as the Federal Home Loan Bank Board and Ginnie Mae.

Federal credit agencies

Agencies of the Federal government set up to supply credit to various classes of
institutions and individuals, e.g. S&Ls, small business firms, students, farmers, and exporters.

Federal Deposit Insurance Corporation (FDIC)

A Federal institution that insures bank deposits.

Federal Financing Bank

A Federal institution that lends to a wide array of Federal credit agencies funds it
obtains by borrowing from the U.S. Treasury.

Federal funds

Non-interest bearing deposits held in reserve for depository institutions at their district Federal
Reserve Bank. Also, excess reserves lent by banks to each other.

Federal funds market

The market where banks can borrow or lend reserves, allowing banks temporarily
short of their required reserves to borrow reserves from banks that have excess reserves.

Federal funds rate

This is the interest rate that banks with excess reserves at a Federal Reserve district bank
charge other banks that need overnight loans. The Fed Funds rate, as it is called, often points to the direction
of U.S. interest rates.

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.

Federal Reserve System

The central bank of the U.S., established in 1913, and governed by the Federal
Reserve Board located in Washington, D.C. The system includes 12 Federal Reserve banks and is authorized
to Regulate monetary policy in the U.S. as well as to supervise Federal Reserve member banks, bank holding
companies, international operations of U.S.banks, and U.S.operations of foreign banks.

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).

Fedwire

A wire transfer system for high-value payments operated by the Federal Reserve System.

FHA prepayment experience

The percentage of loans in a pool of mortgages outstanding at the origination
anniversary, based on annual statistical historic survival rates for FHA-insured mortgages.

First-pass regression

A time series Regression to estimate the betas of securities portfolios.

Fixed-rate payer

In an interest rate swap the counterparty who pays a fixed rate, usually in exchange for a
floating-rate payment.

Floating-rate payer

In an interest rate swap, the counterparty who pays a rate based on a reference rate,
usually in exchange for a fixed-rate payment

Forward Fed funds

Fed funds traded for future delivery.

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.

Full-payout lease

See: financial lease.

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.

Growth rates

Compound annual growth rate for the number of full fiscal years shown. If there is a negative
or zero value for the first or last year, the growth is NM (not meaningful).

Interest payments

Contractual debt payments based on the coupon rate of interest and the principal amount.

Just-in-time inventory systems

Systems that schedule materials/inventory to arrive exactly as they are
needed in the production process.

Lag response of prepayments

There is typically a lag of about three months between the time the weighted
average coupon of an MBS pool has crossed the threshold for refinancing and an acceleration in prepayment
speed is observed.

Level pay

The characteristic of the scheduled principal and interest payments due under a mortgage such that
total monthly payment of P&I is the same while characteristically the principal payment component of the
monthly payment becomes gradually greater while the monthly interest payment becomes less.

Linear regression

A statistical technique for fitting a straight line to a set of data points.

Market timer

A money manager who assumes he or she can forecast when the stock market will go up and down.

Money center banks

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

Multiple rates of return

more than one rate of return from the same project that make the net present value
of the project equal to zero. This situation arises when the IRR method is used for a project in which negative
cash flows follow positive cash flows. For each sign change in the cash flows, there is a rate of return.

Multiple regression

The estimated relationship between a dependent variable and more than one explanatory variable.

Payable through drafts

A method of making payment that is used to maintain control over payments made
on behalf of the firm by personnel in noncentral locations. The payer's bank delivers the payable through draft
to the payer, which must approve it and return it to the bank before payment can be received.

Payables

Related: Accounts payable.

Payback

The length of time it takes to recover the initial cost of a project, without Regard to the time value of money.

Paydown

In a Treasury refunding, the amount by which the par value of the securities maturing exceeds that
of those sold.

Payment date

The date on which each shareholder of record will be sent a check for the declared dividend.

Payment float

Company-written checks that have not yet cleared.

Payments netting

Reducing fund transfers between affiliates to only a netted amount. Netting can be done on
a bilateral basis (between pairs of affiliates), or on a multi-lateral basis (taking all affiliates together).

Payments pattern

escribes the lagged collection pattern of receivables, for instance the probability that a
72-day-old account will still be unpaid when it is 73-days-old.

Payout ratio

Generally, the proportion of earnings paid out to the common stockholders as cash dividends.
more specifically, the firm's cash dividend divided by the firm's earnings in the same reporting period.

Pay-up

The loss of cash resulting from a swap into higher price bonds or the need/willingness of a bank or
other borrower to pay a higher rate of interest to get funds.

Payment-In-Kind (PIK)

bond A bond that gives the issuer an option (during an initial period) either to make
coupon payments in cash or in the form of additional bonds.

Prepayment speed

Also called speed, the estimated rate at which mortgagors pay off their loans ahead of
schedule, critical in assessing the value of mortgage pass-through securities.

Prepayments

payments made in excess of scheduled mortgage principal repayments.

Production payment financing

A method of nonrecourse asset-based financing in which a specified
percentage of revenue realized from the sale of the project's output is used to pay debt service.

Real exchange rates

Exchange rates that have been adjusted for the inflation differential between two countries.

Real time

A real time stock or bond quote is one that states a security's most recent offer to sell or bid (buy).
A delayed quote shows the same bid and ask prices 15 minutes and sometimes 20 minutes after a trade takes place.

Regional fund

A mutual fund that invests in a specific geographical area overseas, such as Asia or Europe.

Registered bond

A bond whose issuer records ownership and interest payments. Differs from a bearer bond
which is traded without record of ownership and whose possession is the only evidence of ownership.

Registered representative

A person Registered with the CFTC who is employed by, and soliciting business
for, a commission house or futures commission merchant.

Registered trader

A member of the exchange who executes frequent trades for his or her own account.

Registrar

Financial institution appointed to record issue and ownership of company securities.

Registration statement

A legal document that is filed with the SEC to Register securities for public offering.

Regression analysis

A statistical technique that can be used to estimate relationships between variables.

Regression equation

An equation that describes the average relationship between a dependent variable and a
set of explanatory variables.

Regression toward the mean

The tendency for subsequent observations of a random variable to be closer to its mean.

Regular way settlement

In the money and bond markets, the Regular basis on which some security trades are
settled is that the delivery of the securities purchased is made against payment in Fed funds on the day
following the transaction.

Regulation A

The securities Regulation that exempts small public offerings, those valued at less than
$1.5MM, from most Registration requirements with the SEC.

Regulation D

Fed Regulation Currently that required member banks to hold reserves against their net
borrowings from foreign offices of other banks over a 28-day averaging period. Regulation D has been
merged with Regulation M.

Regulation M

Fed Regulation Currently requiring member banks to hold reserves against their net borrowings
from their foreign branches over a 28-day averaging period. Reg M has also required member banks to hold
reserves against Eurodollars lent by their foreign branches to domestic corporations for domestic purposes.

Regulatory accounting procedures

Accounting principals required by the FHLB that allow S&Ls to elect
annually to defer gains and losses on the sale of assets and amortize these deferrals over the average life of the
asset sold.

Regulatory pricing risk

Risk that arises when Regulators restrict the premium rates that insurance companies
can charge.

Regulatory surplus

The surplus as measured using Regulatory accounting principles (RAP) which may allow
the non-market valuation of assets or liabilities and which may be materially different from economic surplus.

Savings and Loan association

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

Savings deposits

Accounts that pay interest, typically at below-market interest rates, that do not have a
specific maturity, and that usually can be withdrawn upon demand.

Second pass regression

A cross-sectional Regression of portfolio returns on betas. The estimated slope is the
measurement of the reward for bearing systematic risk during the period analyzed.

Shelf registration

A procedure that allows firms to file one Registration statement covering several issues of
the same security.

Short-term tax exempts

Short-term securities issued by states, municipalities, local housing agencies, and
urban renewal agencies.

Simple linear regression

A Regression analysis between only two variables, one dependent and the other explanatory.

Single-payment bond

A bond that will make only one payment of principal and interest.

Small issues exemption

Securities issues that involve less than $1.5 million are not required to file a
Registration statement with the SEC. Instead, they are governed by Regulation A, for which only a brief
offering statement is needed.

Spot exchange rates

Exchange rate on currency for immediate delivery. Related: forward exchange rate.

Take-or-pay contract

A contract that obligates the purchaser to take any product that is offered to it (and pay
the cash purchase price) or pay a specified amount if it refuses to take the product.

Target payout ratio

A firm's long-run dividend-to-earnings ratio. The firm's policy is to attempt to pay out a
certain percentage of earnings, but it pays a stated dollar dividend and adjusts it to the target as base-line
increases in earnings occur.

Tax-exempt sector

The municipal bond market where state and local governments raise funds. Bonds issued
in this sector are exempt from Federal income taxes.

Term Fed Funds

Fed Funds sold for a period of time longer than overnight.

Time decay

Related: theta.

Time deposit

Interest-bearing deposit at a savings institution that has a specific maturity.
Related: certificate of deposit.

Time draft

Demand for payment at a stated future date.

Time premium

Also called time value, the amount by which the option price exceeds its intrinsic value. The
value of an option beyond its current exercise value representing the optionholder's control until expiration,
the risk of the underlying asset, and the riskless return.

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