A debt in which the creditor has limited claims on the loan in the event of default. Limited recourse debt sits in between secured bonds and unsecured bonds in terms of the backing behind the loan. Often a limited recourse debt contract is structured so that the debt transitions to unsecured, or "non-recourse", debt pending the completion of a specific event. That event may be the completion of a project or the establishment of a specific revenue stream for which the debt was issued. |||For example, terms for limited recourse debt for a large project such as a power plant could mean that a creditor is guaranteed to receive 25% of the principal in the event of a default up until completion of the power plant.Limited recourse debt will typically pay a lower rate than standard issue unsecured bonds because of its relative safety. Claims on limited recourse debt sit above both stockholders and unsecured bondholders in terms of payout hierarchy.
A graphical representation of various maturities of the London Interbank Offered Rate (LIBOR), which is the short-term floating rate at which large banks with high credit ratings lend to each other. The LIBOR curve is usually depicted for short-term periods of less than one year. |||The LIBOR curve and the Treasury yield curve are the most widely-used proxies for the risk-free interest rates. Although not theoretically risk-free, LIBOR is considered a good proxy against which to measure the risk/return tradeoff for other short-term floating rate instruments. The LIBOR curve can be predictive of longer-term interest rates and is especially important in the pricing of interest rate swaps.
A type of bond issued by the U.S. government during World War I. Liberty bonds were introduced as a means of financing the war effort in Europe. Bonds that were sold under the same name were reissued after the September 11, 2001, terrorist attacks to finance the rebuilding of "ground zero" and other damaged areas. Watch: Understanding Bonds |||The law that Congress passed to introduce the liberty bonds still stands as the legislation that allows the issue of all U.S. Treasury securities. Their issuance represents a major milestone in the awakening of the American investing public to individual securities. However, the first issue of these bonds was not completely sold, which embarrassed the Treasury Department greatly. In response, they launched a massive public awareness campaign using posters, movie stars and other outlets when they issued their second offering in late 1917.
Former bond trader and former vice chairman of Salomon Brothers who is credited with introducing securitization to the financial world. Initially, mortgage-backed securities (MBS) were only acknowledged by a handful of states as legitimate investments, but Ranieri's actions eventually led to federal government measures that supported these securities as a valid investment asset class, leading to the development of the bond market. |||In 1977, savings and loans banks were feeling the financial difficulties involved with funding short-term, higher interest demand deposits with longer term, low-interest mortgages. As a result, banks did not want to hold onto too many mortgages. By creating five- and 10-year bonds from 30 year mortgages, Ranieri attracted a larger crowd of investors to mortgage-backed securities, which ultimately caused all sorts of debts (such as credit card debt) to be rolled into bonds.
A letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. In the event that the buyer is unable to make payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase. |||Letters of credit are often used in international transactions to ensure that payment will be received. Due to the nature of international dealings including factors such as distance, differing laws in each country and difficulty in knowing each party personally, the use of letters of credit has become a very important aspect of international trade. The bank also acts on behalf of the buyer (holder of letter of credit) by ensuring that the supplier will not be paid until the bank receives a confirmation that the goods have been shipped.
A type of zero-coupon Treasury bond issued by the U.S. government through Lehman Brothers. Lehman Investment Opportunity Notes (LIONs), were created as a new breed of security that separated principal and interest and were issued at a discount. LIONs made no regular interest payments to bondholders; the return on investment came from realizing the difference between the discounted issue price and the par value received at maturity. |||LIONs are one of three types of "feline" securities (along with TIGRs and CATS) issued between 1982 and 1986. The U.S. government introduced its own direct version of this bond in 1986 with zero-coupon STRIPS. This effectively rendered the previous private issues obsolete, although they still trade on the secondary market.
The administration aspect of a loan from the time the proceeds are dispersed until the loan is paid off. This includes sending monthly payment statements and collecting monthly payments, maintaining records of payments and balances, collecting and paying taxes and insurance (and managing escrow and impound funds), remitting funds to the note holder, and following up on delinquencies. |||Loan servicers are compensated by retaining a relatively small percentage of each periodic loan payment known as the servicing fee or servicing strip. This is usually 0.25% to 0.5% of the periodic interest payment. For example, if the outstanding balance on a mortgage is $100,000 and the servicing fee is 0.25%, the servicer is entitled to retain ((.0025 / 12) x 100,000) = $20 of the next period payment before passing the remaining amount to the note holder. Loan servicing trades in the secondary market much like mortgage-backed securities (MBS). The valuation of mortgage servicing is similar to the valuation of MBS IO strips. Servicing strips are subject to a great deal of prepayment risk and tend to show negative convexity.
A fixed-income security that permits investors to buy portions of an outstanding loan or package of loans. LPN holders participate, on a pro rata basis, in collecting interest and principal payments. Banks or other financial institutions often enter into loan participation agreements with local businesses, and also offer loan participation notes as a type of short-term investment. |||To meet the needs of local borrowers and to increase loan income, many community banks use loan participation agreements in which one or more banks share in the ownership of a loan. Community banks have also formed lending consortiums, such as the Community Investment Corporation of North Carolina (CICNC), an affordable housing loan consortium that provides long-term, permanent financing for the development of low- and moderate-income multifamily and elderly housing throughout North and South Carolina.
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