PAC band or range
A range of constant prepayment speeds defined by a minimum and maximum under which the PAC's scheduled repayment will remain unchanged. There can be multiple levels of PACs in a REMIC, each having successively narrower PAC bands. The widest band PACs are PAC Is; the next are PAC IIs.
PAC schedule
The planned monthly principal balances of a PAC class in which the underlying securities prepay at a constant prepayment rate within the stated PAC band.
PAC window
The time period during which a PAC class is scheduled to receive principal payments.
Par
The face value of a security. 100 percent of face value. For example, a bond selling at par is worth the same dollar amount for which it was issued or at which it will be redeemed at maturity.
Par value
Current principal amount of a fixed-income security. In the mortgage-backed securities industry, face value and par value are used interchangeably.
Parity bonds
Two or more issues having the same priority of claim or lien against pledged revenues.
Paying agent
Place where principal and interest are payable - usually a designated bank or the office of the treasurer of the issuer. Entity responsible for payments of interest and principal to securities holders. Ginnie Mae uses various paying agents for its securities programs, all of whose payments are guaranteed by the full faith and credit of the United States.
Payment-In-Kind (PIK) program
A government program in which farmers who comply with a voluntary acreage-control program and set aside an additional percentage of acreage specified by the government receive certificates that can be redeemed for government-owned stocks of grain.
Payment date
The date that principal and interest payments are paid to the recorded owner of a security.
Performance bond margin
The amount of money deposited by both buyer and seller of a futures contract or an options seller to ensure performance of the term of the contract. Margin in commodities is not a payment of equity or down payment on the commodity itself, but rather it is a security deposit. Within the futures industry, the performance bond margin is a financial guarantee required of both buyers and sellers of futures contracts and sellers of options contracts to ensure the fulfillment of contract obligations. FCMs are responsible for overseeing customer margin accounts. Margins are determined on the basis of market risk and contract value. Financial safeguards to ensure that clearing members (usually companies or corporations) perform on their customers' open futures and options contracts. Clearing margins are distinct from customer margins that individual buyers and sellers of futures and options contracts are required to deposit with brokers.
Perpetual floating-rate note
A floating-rate note with no stated maturity date.
Plain vanilla
(See sequential class)
Planned Amortization Class (PAC) tranche
A REMIC tranche that uses a mechanism similar to a sinking fund to determine a fixed principal payment schedule that will apply over a range of prepayment assumptions. The effect of the prepayment variability that is removed from a PAC bond and is transferred to a companion tranche.
Point
An abbreviation for one percentage point. For a bond, a point is $10 per $1,000 bond.
Point-and-figure charts
Charts that show price changes of a minimum amount regardless of the time period involved.
Pool
A collection of mortgage loans assembled by an originator or master servicer as the basis for a security. In the case of Ginnie Mae, Fannie Mae or Freddie Mac mortgage pass-through securities, pools are identified by a number assigned by the issuing agency. A pool is also acollection of mortgage loans sharing common characteristics in terms of class of property, interest rate and maturity assembled by an originator or servicer to back an MBS.
Portfolio
A group of investments.
Position
A market commitment. The status of an investor's securities. A buyer of a futures contract is said to have a long position and, conversely, a seller of futures contracts is said to have a short position. It can also refer to the purchasing of a block of securities.
Position day
According to Chicago Board of Trade rules, the position day is the first day in the process of making or taking delivery of the actual commodity on a futures contract. The clearing firm representing the seller notifies the Board of Trade Clearing Corporation that its short customers want to deliver on a futures contract.
Position limit
The maximum number of speculative futures contracts one can hold as determined by the Commodity Futures Trading Commission and/or the exchange upon which the contract is traded. Also referred to as trading limit.
Position trader
An approach to trading in which the trader either buys or sells contracts and holds them for an extended period of time.
Posted since
The date the offerings were put on the system.
Pre-refund
Bonds that will be called on the stated call (pre-refunded) date. The monies used to call the bonds are on deposit in an irrevocable escrow account from the proceeds of a more recent bond issue from the same issuer. Bonds are pre-refunded in order to take advantage of the lower interest rates, thus lowering the issuer's interest expense.
Preferred stock
Stock which provides a specific dividend that is paid before any dividends are paid to common stock holders, and which takes precedence over common stock in the event of a liquidation. Usually does not carry voting rights.
Pre-foreclosure sale
A procedure in which the borrower is allowed to sell his or her property for an amount less than what is owed on it to avoid a foreclosure. This sale fully satisfies the borrower's debt.
Premium
The additional payment allowed by exchange regulation for delivery of higher-than-required standards or grades of a commodity against a futures contract. In terms of price relationships between different delivery months of a given commodity, one is said to be "trading at a premium" over another when its price is greater than that of the other. For financial instruments, the dollar amount by which a security trades above its principal value, which decreases the effective yield of the security below the coupon rate. The price of an option, i.e., the sum of money that the option buyer pays and the option seller receives for the rights granted by the option.
Premium bond
A bond with a price above the par value.
Premium call
A provision for a bond allowing the issuer to call the bond prior to the maturity date at a price above the par value of the bond.
Prepayment
The unscheduled payment of all or part of the outstanding principal of a mortgage loan or other debt, including voluntary payments by the borrower as well as liquidations from foreclosures, condemnations, or casualty, before it is due.
Prepayment risk
The risk that falling interest rates will lead to heavy prepayments of mortgage or other loans - forcing the investor to reinvest at lower prevailing rates. The possibility that the mortgages underlying the security are repaid faster or slower than expected.
Present value
The current value of an amount or amounts to be paid or received in the future, discounted at a specified interest rate (discount rate). See discount rate.
Price
The amount paid for a security, usually stated as a percentage of its face value. A par price is 100 percent, a premium price is higher than par, and a discount price is lower than par.
Price discovery
The generation of information about "future" cash market prices through the futures markets.
Price limit
The maximum advance or decline - from the previous day's settlement - permitted for a contract in one trading session by the rules of the exchange. According to the Chicago Board of Trade rules, an expanded allowable price range set during volatile markets.
Price limit order
A customer order that specifies the price at which a trade can be executed.
Pricing supplement
A document that provides details about a specific security issuance, including the CUSIP number, settlement and maturity dates, principal amount, coupon or formula, frequency of interest payments, interest payment dates, and underwriters.
Primary dealer
A designation given by the Federal Reserve System to commercial banks or broker/dealers who meet specific criteria. Among the criteria are capital requirements and meaningful participation in the Treasury auctions.
Primary market
The market for new issuances of securities. After bonds are traded here, they are then traded on the secondary market.
Prime floating-rate notes
Floating-rate notes whose interest rate is adjusted periodically according to a prime rate-based index.
Prime rate
Interest rate charged by major banks to their most creditworthy customers. Used frequently as a benchmark for consumer lending, prime rate composite statistics are compiled and reported by the Federal Reserve.
Prime/LIBOR spread notes
Floating-rate notes whose interest rate is adjusted periodically according to the difference between the prime rate less LIBOR, plus a fixed percentage.
Principal
The remaining balance of a security or loan, exclusive of accrued interest.
Principal and Interest (P&I)
Regularly scheduled payments or prepayments of principal and interest on securities.
Principal Only (PO)
A security that usually does not bear interest and is entitled to receive only payments of principal from the underlying assets. Rising interest rates will have an adverse effect on POs.
Principal Only (PO) Class
A REMIC class that does not bear interest and is entitled to receive only payments of principal. Rising interest rates will have an adverse effect on POs.
Principal Only (PO) security
In the case of a REMIC, a tranche created deliberately to pay investors principal only and not interest. PO securities are priced at a deep discount from their face value.
Principal trade
A means of compensating the broker of a bond trade solely on the basis of a mark up or spread established through purchasing a bond, holding it in inventory, and reselling the bond at market rates.
Private label
The term used to describe a mortgage security whose issuer is an entity other than a U.S. government agency or U.S. government-sponsored enterprise. Such issuers may be subsidiaries of investment banks, financial institutions or home builders.
Proceeds
The money received by a bond issuer at the close of the sell.
Producer Price Index (PPI)
An index that shows the cost of resources needed to produce manufactured goods during the previous month.
Profit and Loss (P&L)
Profit and loss statement for a trader.
Prospectus and prospectus supplement
The legal documents that outline all material details of an investment.
Protective covenants
The agreements imposing obligations on the bond issuer to protect the bondholders. Requirements include segregation of funds and adequate debt service coverage among others.
Provisional rating
A temporary credit rating of an issuer by a credit rating agency. The provisional rating is revised when the agency receives the complete financial information on the issuer.
Prudent Man Rule
This is a code of conduct to guide fiduciaries in investing responsibly. The rule holds that an investor should work to preserve capital and avoid speculative investments.
PSA prepayment speed
A measure of the rate of prepayment of mortgage loans developed by the PSA. This model represents an assumed rate of prepayment each month of the then-outstanding principal balance of a pool of new mortgage loans. A 100-percent PSA assumes prepayment rates of 0.2 percent per annum of the then unpaid principal balance of mortgage loans in the first month after origination and an increase of an additional 0.2 percent per annum in each month until the 30th month. Beginning in the 30th month and in each month thereafter, 100 percent PSA assumes a constant annual prepayment rate (CPR) of 6 percent. Multiples are calculated from this prepayment rate; for example, 150 percent PSA assumes annual prepayment rates will be 0.3 percent in month one, 0.6 percent in month two, reaching 9 percent in month 30, and remaining constant at 9 percent thereafter. A zero percent PSA assumes no prepayments. The use of PSA prepayment speed allows the mortgage-backed securities industry to make consistent assumptions.
PSA standard prepayment model
A model based on historical mortgage prepayment rates that is used to estimate prepayment rates on mortgage securities. The PSA model is based on the Constant Prepayment Rate (CPR), or the amount of outstanding principal that is prepaid in a month. Projected and historical prepayment rates are often expressed as a "percentage of PSA." See PSA Prepayment speed.
Public Housing Authority bonds
Tax-exempt bonds that are backed by the federal government and issued by local housing authorities to finance public housing. No new bonds of this type have been issued since 1974.
Public offering
The sale of securities to general investors. Corporate securities are listed with the Securities and Exchange Commission. Municipal securities are usually filed with the Municipal Securities Rulemaking Board.
Public offering price
The aggregate value of securities in a unit investment trust fund, divided by the number of units, plus the applicable sales charge. This is the price at which units are offered for sale to the public.
Public Securities Association (PSA)
A national trade organization of dealers, brokers, and bankers who underwrite and trade securities offerings consisting of U.S. Treasury, federal agency, municipal, mortgage, corporate and money market issues.
Pulpit
A raised structure adjacent to, or in the center of, the pit or ring at a futures exchange where market reporters, employed by the exchange, record price changes as they occur in the trading pit.
Purchase and sell statement
A statement sent by a commission house to a customer when his futures or options on futures position has changed, showing the number of contracts bought or sold, the prices at which the contracts were bought or sold, the gross profit or loss, the commission charges, and the net profit or loss on the transaction.
Purchasing hedge or long hedge
Buying futures contracts to protect against a possible price increase of cash commodities that will be purchased in the future. When the cash commodities are bought, the open futures position is closed by selling futures contracts equal in number and type to those that were initially purchased. Hedging is the practice of offsetting the price risk inherent in any cash market position by taking an equal but opposite position in the futures market. Hedgers use the futures markets to protect their business from adverse price changes. Also referred to as a buying hedge.
Put bond
A bond that is redeemable by the holder at his option or upon certain circumstances.
Put option
An option that gives the option buyer the right but not the obligation to sell (go "short") the underlying futures contract at the strike price on or before the expiration date. An option granting the holder the right to sell the underlying asset at a specified price on (or before) a specified date.