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Principal only (PO)

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Definition of Principal only (PO)

Principal Only (PO) Image 1

Principal only (PO)

A mortgage-backed security in which the holder receives only principal cash flows on
the underlying mortgage pool. The principal-only portion of a stripped MBS. For po securities, all of the
principal distribution due from the underlying collateral pool is paid to the registered holder of the stripped
MBS based on the current face value of the underlying collateral pool.



Related Terms:

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.


Accounting exposure

The change in the value of a firm's foreign currency denominated accounts due to a
change in exchange rates.


Active portfolio strategy

A strategy that uses available information and forecasting techniques to seek a
better performance than a portfolio that is simply diversified broadly. Related: passive portfolio strategy


American Depositary Receipts (ADRs)

Certificates issued by a U.S. depositary bank, representing foreign
shares held by the bank, usually by a branch or correspondent in the country of issue. One ADR may
represent a portion of a foreign share, one share or a bundle of shares of a foreign corporation. If the ADR's
are "sponsored," the corporation provides financial information and other assistance to the bank and may
subsidize the administration of the ADRs. "Unsponsored" ADRs do not receive such assistance. ADRs carry
the same currency, political and economic risks as the underlying foreign share; the prices of the two, adjusted for the SDR/ordinary ratio, are kept essentially identical by arbitrage. American depositary shares(ADSs) are
a similar form of certification.


Annual report

Yearly record of a publicly held company's financial condition. It includes a description of the
firm's operations, its balance sheet and income statement. SEC rules require that it be distributed to all
shareholders. A more detailed version is called a 10-K.


Articles of incorporation

Legal document establishing a corporation and its structure and purpose.


Auditor's report

A section of an annual report containing the auditor's opinion about the veracity of the
financial statements.


Principal Only (PO) Image 2

Balance sheet exposure

See:accounting exposure.


Basis point

In the bond market, the smallest measure used for quoting yields is a basis point. Each percentage
point of yield in bonds equals 100 basis points. Basis points also are used for interest rates. An interest rate of
5% is 50 basis points greater than an interest rate of 4.5%.


Bond points

A conventional unit of measure for bond prices set at $10 and equivalent to 1% of the $100 face
value of the bond. A price of 80 means that the bond is selling at 80% of its face, or par value.


Cash-flow break-even point

The point below which the firm will need either to obtain additional financing
or to liquidate some of its assets to meet its fixed costs.


Certificate of deposit (CD)

Also called a time deposit, this is a certificate issued by a bank or thrift that
indicates a specified sum of money has been deposited. A CD bears a maturity date and a specified interest
rate, and can be issued in any denomination. The duration can be up to five years.


Changes in Financial Position

Sources of funds internally provided from operations that alter a company's
cash flow position: depreciation, deferred taxes, other sources, and capital expenditures.


Clear a position

To eliminate a long or short position, leaving no ownership or obligation.


Collection policy

Procedures followed by a firm in attempting to collect accounts receivables.


Complete portfolio

The entire portfolio, including risky and risk-free assets.


Composition

Voluntary arrangement to restructure a firm's debt, under which payment is reduced.


Compound interest

Interest paid on previously earned interest as well as on the principal.


Compound option

Option on an option.


Compounding

The process of accumulating the time value of money forward in time. For example, interest
earned in one period earns additional interest during each subsequent time period.


Compounding frequency

The number of compounding periods in a year. For example, quarterly
compounding has a compounding frequency of 4.


Compounding period

The length of the time period (for example, a quarter in the case of quarterly
compounding) that elapses before interest compounds.


Continuous compounding

The process of accumulating the time value of money forward in time on a
continuous, or instantaneous, basis. Interest is earned continuously, and at each instant, the interest that
accrues immediately begins earning interest on itself.


Controlled foreign corporation (CFC)

A foreign corporation whose voting stock is more than 50% owned
by U.S. stockholders, each of whom owns at least 10% of the voting power.


Corporate acquisition

The acquisition of one firm by anther firm.


Corporate bonds

Debt obligations issued by corporations.


Corporate charter

A legal document creating a corporation.


Corporate finance

One of the three areas of the discipline of finance. It deals with the operation of the firm
(both the investment decision and the financing decision) from that firm's point of view.


Corporate financial management

The application of financial principals within a corporation to create and
maintain value through decision making and proper resource management.


Corporate financial planning

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


Corporate processing float

The time that elapses between receipt of payment from a customer and the
depositing of the customer's check in the firm's bank account; the time required to process customer
payments.


Corporate tax view

The argument that double (corporate and individual) taxation of equity returns makes
debt a cheaper financing method.


Corporate taxable equivalent

Rate of return required on a par bond to produce the same after-tax yield to
maturity that the premium or discount bond quoted would.


Corporation

A legal "person" that is separate and distinct from its owners. A corporation is allowed to own
assets, incur liabilities, and sell securities, among other things.


Coupon

The periodic interest payment made to the bondholders during the life of the bond.


Coupon equivalent yield

True interest cost expressed on the basis of a 365-day year.


Coupon payments

A bond's interest payments.


Coupon rate

In bonds, notes or other fixed income securities, the stated percentage rate of interest, usually
paid twice a year.


Current coupon

A bond selling at or close to par, that is, a bond with a coupon close to the yields currently
offered on new bonds of a similar maturity and credit risk.


Current-coupon issues

Related: Benchmark issues


Debtor in possession

A firm that is continuing to operate under Chapter 11 bankruptcy process.


Debtor-in-possession financing

New debt obtained by a firm during the Chapter 11 bankruptcy process.


Dedicating a portfolio

Related: cash flow matching.


Delivery points

Those points designated by futures exchanges at which the financial instrument or
commodity covered by a futures contract may be delivered in fulfillment of such contract.


Demand deposits

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


Depository transfer check (DTC)

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


Depository Trust Company (DTC)

DTC is a user-owned securities depository which accepts deposits of
eligible securities for custody, executes book-entry deliveries and records book-entry pledges of securities in
its custody, and provides for withdrawals of securities from its custody.


Devaluation A decrease in the spot price of the currency



Discrete compounding

Compounding the time value of money for discrete time intervals.


Dividend policy

An established guide for the firm to determine the amount of money it will pay as dividends.


Domestic International Sales Corporation (DISC)

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


Dupont system of financial control

Highlights the fact that return on assets (ROA) can be expressed in terms
of the profit margin and asset turnover.


Earning power

Earnings before interest and taxes (EBIT) divided by total assets.


Economic exposure

The extent to which the value of the firm will change because of an exchange rate change.


Edge corporations

Specialized banking institutions, authorized and chartered by the Federal Reserve Board
in the U.S., which are allowed to engage in transactions that have a foreign or international character. They
are not subject to any restrictions on interstate banking. Foreign banks operating in the U.S. are permitted to
organize and own and Edge corporation.


Efficient Market Hypothesis

In general the hypothesis states that all relevant information is fully and
immediately reflected in a security's market price thereby assuming that an investor will obtain an equilibrium
rate of return. In other words, an investor should not expect to earn an abnormal return (above the market
return) through either technical analysis or fundamental analysis. Three forms of efficient market hypothesis
exist: weak form (stock prices reflect all information of past prices), semi-strong form (stock prices reflect all
publicly available information) and strong form (stock prices reflect all relevant information including insider
information).


Efficient portfolio

A portfolio that provides the greatest expected return for a given level of risk (i.e. standard
deviation), or equivalently, the lowest risk for a given expected return.
Efficient set Graph representing a set of portfolios that maximize expected return at each level of portfolio
risk.


Electronic depository transfers

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


Equity-linked policies

Related: Variable life


Eurocurrency deposit

A short-term fixed rate time deposit denominated in a currency other than the local
currency (i.e. US$ deposited in a London bank).


Ex post return

Related: Holding period return


Excess return on the market portfolio

The difference between the return on the market portfolio and the
riskless rate.


Expectations hypothesis theories

Theories of the term structure of interest rates which include the pure
expectations theory, the liquidity theory of the term structure, and the preferred habitat theory. These theories
hold that each forward rate equals the expected future interest rate for the relevant period. These three theories
differ, however, on whether other factors also affect forward rates, and how.
Expectations theory of forward exchange rates A theory of foreign exchange rates that holds that the
expected future spot foreign exchange rate t periods in the future equals the current t-period forward exchange
rate.


Export-Import Bank (Ex-Im Bank)

The U.S. federal government agency that extends trade credits to U.S.
companies to facilitate the financing of U.S. exports.


Exposure netting

Offsetting exposures in one currency with exposures in the same or another currency,
where exchange rates are expected to move in such a way that losses or gains on the first exposed position
should be offset by gains or losses on the second currency exposure.


Extraordinary positive value

A positive net present value.


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.


Factor portfolio

A well-diversified portfolio constructed to have a beta of 1.0 on one factor and a beta of
zero on any other factors.


Feasible portfolio

A portfolio that an investor can construct given the assets available.


Feasible set of portfolios

The collection of all feasible portfolios.


Federal Deposit Insurance Corporation (FDIC)

A federal institution that insures bank deposits.


Fiscal policy

The use of government spending and taxing for the specific purpose of stabilizing the economy.


Foreign Sales Corporation (FSC)

A special type of corporation created by the Tax Reform Act of 1984 that
is designed to provide a tax incentive for exporting U.S.-produced goods.


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 coupon bond

A bond with a coupon equal to the going market rate, thereby, the bond is selling at par.


Future investment opportunities

The options to identify additional, more valuable investment opportunities
in the future that result from a current opportunity or operation.


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.


Gestation repo

A reverse repurchase agreement between mortgage firms and securities dealers. Under the
agreement, the firm sells federal agency-guaranteed MBS and simultaneously agrees to repurchase them at a
future date at a fixed price.


Government sponsored enterprises

Privately owned, publicly chartered entities, such as the Student Loan
Marketing Association, created by Congress to reduce the cost of capital for certain borrowing sectors of the
economy including farmers, homeowners, and students.


Growth opportunity

Opportunity to invest in profitable projects.


Hedged portfolio

A portfolio consisting of the long position in the stock and the short position in the call
option, so as to be riskless and produce a return that equals the risk-free interest rate.


High-coupon bond refunding

Refunding of a high-coupon bond with a new, lower coupon bond.


Implied repo rate

The rate that a seller of a futures contract can earn by buying an issue and then delivering
it at the settlement date. Related: cheapest to deliver issue


Import-substitution development strategy

A development strategy followed by many Latin American
countries and other LDCs that emphasized import substitution - accomplished through protectionism - as the
route to economic growth.


Initial public offering (IPO)

A company's first sale of stock to the public. Securities offered in an Ipo are
often, but not always, those of young, small companies seeking outside equity capital and a public market for
their stock. Investors purchasing stock in Ipos generally must be prepared to accept very large risks for the
possibility of large gains. Ipo's by investment companies (closed-end funds) usually contain underwriting
fees which represent a load to buyers.


Interest-only strip (IO)

A security based solely on the interest payments form a pool of mortgages, Treasury
bonds, or other bonds. Once the principal on the mortgages or bonds has been repaid, interest payments stop
and the value of the IO falls to zero.


International Depository Receipt (IDR)

A receipt issued by a bank as evidence of ownership of one or more
shares of the underlying stock of a foreign corporation that the bank holds in trust. The advantage of the IDR
structure is that the corporation does not have to comply with all the regulatory issuing requirements of the
foreign country where the stock is to be traded. The U.S. version of the IDR is the American Depository
Receipt (ADR).


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-coupon bond

Bond with a stream of coupon payments that are the same throughout the life of the bond.


Leveraged portfolio

A portfolio that includes risky assets purchased with funds borrowed.


Liquidity preference hypothesis

The argument that greater liquidity is valuable, all else equal. Also, the
theory that the forward rate exceeds expected future interest rates.


Long coupons

1) Bonds or notes with a long current maturity.
2) A bond on which one of the coupon periods, usually the first, is longer than the other periods or the standard period.


Long position

An options position where a person has executed one or more option trades where the net
result is that they are an "owner" or holder of options (i. e. the number of contracts bought exceeds the
number of contracts sold).
Occurs when an individual owns securities. An owner of 1,000 shares of stock is said to be "Long the stock."
Related: Short position


Low-coupon bond refunding

Refunding of a low coupon bond with a new, higher coupon bond.


Leveraged portfolio

A portfolio that includes risky assets purchased with funds borrowed.


Limitation on asset dispositions

A bond covenant that restricts in some way a firm's ability to sell major assets.


Long coupons

1) Bonds or notes with a long current maturity.
2) A bond on which one of the coupon
periods, usually the first, is longer than the other periods or the standard period.


Market portfolio

A portfolio consisting of all assets available to investors, with each asset held -in
proportion to its market value relative to the total market value of all assets.


Markowitz efficient portfolio

Also called a mean-variance efficient portfolio, a portfolio that has the highest
expected return at a given level of risk.


 

 

 

 

 

 

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