Definition of Tontine

Tontine

A type of life insurance or annuity first introduced by Lorenzo Tonti, a Neopolitan banker, in France in the 17th century. It consisted of a fund to which a group of persons contribute, the benefits ultimately accruing to the last survivor or to those surviving after a specified time, in equal shares. The only insurance plans available today which we are aware of that display characteristics of a tontine are some children's Registered Educational Savings Plans (RESP's). These plans generally stipulate that if the child who is covered under the plan does not use the accumulated savings to attend an accredited university, then only the principal invested is returned. All growth in the plan is held to be distributed to other plan holders who do go on to attend university.

ADF (annuity discount factor)

the present value of a finite stream of cash flows for every beginning $1 of cash flow.

Gordon model

present value of a perpetuity with growth.
The end-ofyear gordon model formula is: 1/(r - g)
and the midyear formula is: SQRT(1 + r)/(r - g).

Abandonment option

The option of terminating an investment earlier than originAlly planned.

Accumulated Benefit Obligation (ABO)

An approximate measure of the liability of a plan in the event of a
termination at the date the calculation is performed. Related: projected benefit obligation.

Act of state doctrine

This doctrine says that a nation is sovereign within its own borders and its domestic
actions may not be questioned in the courts of another nation.

After-tax profit margin

The ratio of net income to net sales.

After-tax real rate of return

Money after-tax rate of return minus the inflation rate.

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.

American shares

Securities certificates issued in the U.S. by a transfer agent acting on behalf of the foreign
issuer. The certificates represent claims to foreign equities.

Annual fund operating expenses

For investment companies, the management fee and "other expenses,"
including the expenses for maintaining shareholder records, providing shareholders with financial statements,
and providing custodial and accounting services. For 12b-1 funds, selling and marketing costs are included.

Annuity

A regular periodic payment made by an insurance company to a policyholder for a specified period
of time.

Annuity due

An annuity with n payments, wherein the first payment is made at time t = 0 and the last
payment is made at time t = n - 1.

Annuity factor

Present value of $1 paid for each of t periods.

Annuity in arrears

An annuity with a first payment on full period hence, rather than immediately.

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.

Authorized shares

Number of shares authorized for issuance by a firm's corporate charter.

Automated Clearing House (ACH)

A collection of 32 regional electronic interbank networks used to
process transactions electronicAlly with a guaranteed one-day bank collection float.

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.

Baker Plan

A plan by U.S. Treasury Secretary James Baker under which 15 principal middle-income debtor
countries (the Baker 15) would undertake growth-oriented structural reforms, to be supported by increased
financing from the World Bank and continued lending from commercial banks.

Balanced fund

An investment company that invests in stocks and bonds. The same as a balanced mutual fund.

Balanced mutual fund

This is a fund that buys common stock, preferred stock and bonds. The same as a
balanced fund.

Balloon maturity

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

Banker's acceptance

A short-term credit investment created by a non-financial firm and guaranteed by a
bank as to payment. Acceptances are traded at discounts from face value in the secondary market. These
instruments have been a popular investment for money market funds. They are commonly used in
international transactions.

Bellwether issues

Related:Benchmark issues.

Beta (Mutual Funds)

The measure of a fund's or stocks risk in relation to the market. A beta of 0.7 means
the fund's total return is likely to move up or down 70% of the market change; 1.3 means total return is likely
to move up or down 30% more than the market. Beta is referred to as an index of the systematic risk due to
general market conditions that cannot be diversified away.

Beta equation (Mutual Funds)

The beta of a fund is determined as follows:
[(n) (sum of (xy)) ]-[ (sum of x) (sum of y)]
[(n) (sum of (xx)) ]-[ (sum of x) (sum of x)]
where: n = # of observations (36 months)
x = rate of return for the S&P 500 Index
y = rate of return for the fund

Block house

Brokerage firms that help to find potential buyers or sellers of large block trades.

Borrower fallout

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

Break-even time

Related: Premium payback period.

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).

Bulldog bond

Foreign bond issue made in London.

Bulldog market

The foreign market in the United Kingdom.

Buydowns

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.
CAll premium
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.

Cash flow after interest and taxes

Net income plus depreciation.

Cash flow time-line

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

Chicago Mercantile Exchange (CME)

A not-for-profit corporation owned by its members. Its primary
functions are to provide a location for trading futures and options, collect and disseminate market information,
maintain a clearing mechanism and enforce trading rules.

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.

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.

Clearing house / Clearinghouse

An adjunct to a futures exchange through which transactions executed its floor are settled by a
process of matching purchases and sales. A clearing organization is also charged with the proper conduct of
delivery procedures and the adequate financing of the entire operation.

Closed-end fund

An investment company that sells shares like any other corporation and usuAlly does not
redeem its shares. A publicly traded fund sold on stock exchanges or over the counter that may trade above or
below its net asset value. Related: Open-end fund.

Coinsurance effect

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

Collective wisdom

The combination of All of the individual opinions about a stock's or security's value.

Commission house

A firm which buys and sells future contracts for customer accounts. Related: futures
commission merchant, omnibus account.

Common stock/other equity

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

Completion undertaking

An undertaking either (1) to complete a project such that it meets certain specified
performance criteria on or before a certain specified date or (2) to repay project debt if the completion test
cannot be met.

Conflict between bondholders and stockholders

These two groups may have interests in a corporation that
conflict. Sources of conflict include dividends, distortion of investment, and underinvestment. Protective
covenants work to resolve These conflicts.

Constant-growth model

Also cAlled the gordon-Shapiro model, an application of the dividend discount
model which assumes (1) a fixed growth rate for future dividends and (2) a single discount rate.

Contango

A market condition in which futures prices are higher in the distant delivery months.

Continuous random variable

A random value that can take any fractional value within specified ranges, as
contrasted with a discrete variable.

Corporate financial planning

Financial planning conducted by a firm that encompasses preparation of both
long- and short-term financial plans.

Cost of funds

Interest rate associated with borrowing money.

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.

Covered interest arbitrage

A portfolio manager invests dollars in an instrument denominated in a foreign
currency and hedges his resulting foreign exchange risk by selling the proceeds of the investment forward for
dollars.

Covered or hedge option strategies

Strategies that involve a position in an option as well as a position in the
underlying stock, designed so that one position will help offset any unfavorable price movement in the other,
including covered cAll writing and protective put buying. Related: naked strategies

Covered Put

A put option position in which the option writer also is short the corRESPonding stock or has
deposited, in a cash account, cash or cash equivalents equal to the exercise of the option. This limits the
option writer's risk because money or stock is already set aside. In the event that the holder of the put option
decides to exercise the option, the writer's risk is more limited than it would be on an uncovered or naked put
option.

Cramdown

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

Crown jewel

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

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.

Defined benefit plan

A pension plan in which the sponsor agrees to make specified dollar payments to
qualifying employees. The pension obligations are effectively the debt obligation of the plan sponsor.
Related: defined contribution plan

Defined contribution plan

A pension plan in which the sponsor is RESPonsible only for making specified
contributions into the plan on behalf of qualifying participants. Related: defined benefit plan
Delayed issuance pool Refers to MBSs that at the time of issuance were collateralized by seasoned loans
originated prior to the MBS pool issue date.

Discount window

Facility provided by the Fed enabling member banks to borrow reserves against collateral
in the form of governments or other acceptable paper.

Discrete random variable

A random variable that can take only a certain specified set of discrete possible
values - for example, the positive integers 1, 2, 3, . . .

Distributed

after a Treasury auction, there will be many new issues in dealer's hands. As those issues are
sold, it is said that they are distributed.

Dividend growth model

A model wherein dividends are assumed to be at a constant rate in perpetuity.

Dividend reinvestment plan (DRP)

Automatic reinvestment of shareholder dividends in more shares of a
company's stock, often without commissions. some plans provide for the purchase of additional shares at a
discount to market price. Dividend reinvestment plans Allow shareholders to accumulate stock over the Long
term using dollar cost averaging. The DRP is usuAlly administered by the company without charges to the
holder.

Dividend yield (Funds)

Indicated yield represents return on a share of a mutual fund held over the past 12
months. Assumes fund was purchased 1 year ago. Reflects effect of sales charges (at current rates), but not
redemption charges.

Doctrine of sovereign immunity

doctrine that says a nation may not be tried in the courts of another country
without its consent.

Documented discount notes

Commercial paper backed by normal bank lines plus a letter of credit from a
bank stating that it will pay off the paper at maturity if the borrower does not. Such paper is also referred to as
LOC (letter of credit) paper.

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.

Domestic International Sales Corporation (DISC)

A U.S. corporation that receives a tax incentive for
export activities.

Domestic market

Part of a nation's internal market representing the mechanisms for issuing and trading
securities of entities domiciled within that nation. Compare external market and foreign market.

Don't know (DK, Dked)

"don't know the trade." A Street expression used whenever one party lacks
knowledge of a trade or receives conflicting instructions from the other party.

Double-declining-balance depreciation

Method of accelerated depreciation.

Double-dip lease

A cross-border lease in which the disparate rules of the lessor's and lessee's countries let
both parties be treated as the owner of the leased equipment for tax purposes.

Double-tax agreement

Agreement between two countries that taxes paid abroad can be offset against
domestic taxes levied on foreign dividends.

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