finance important terms

Package provision -- an optional mortgage clause that allows the borrower to finance chattels such as major household appliances, carpeting, drapery and equipment under the original home mortgage and make a single monthly payment for the entire package.

Paper profit -- an increase in the value of property or a security still held. Paper profits become realized profits only when the property or security is sold.

Par -- the situation in which the face value of a security equals its actual selling price: sold "at par."

Parity -- equality in amount, status or character. In futures trading, it is the situation in which cash and futures contracts are selling at equivalent yields.

Parity clause -- a provision in a mortgage contract stating that all notes are equally secured and that no holder of the collateral will receive preferential treatment in the event of default or foreclosure.

Partially amortizing loan -- a loan in which the periodic payments cover all of the interest charges but only part of the principal, therefore leaving an unpaid principal balance when the loan matures.

Participation -- (1) ownership by two or more lenders or investors of all or a portion of a single mortgage or a package of mortgages. (2) the cooperative origination by two or more lenders of a single (usually large) mortgage loan.

Participation certificate (PC) -- a document setting forth the description of a package of loans and the share of the package that is being bought or sold.

Participation loan -- a loan made or owned by more than one lender; the joint investors share profits and losses in proportion to how much of the loan each owns.

partnership -- a form of business organization in which two or more persons join in a business or commercial enterprise, sharing profits, risks and losses according to the terms set forth in their partnership contract.

Party wall -- a wall built on a line between two adjoining properties and used by both owners.

Par value -- (1) the value assigned to a share of stock by the issuer at the time the stock is first offered for sale. The par value may be more or less than the market value. (2) the value of a bond or note at maturity. (3) the face value of a security.

Passbook -- a small book in ledger form in which are recorded all deposits, withdrawals and earnings of a customer's savings account.

Passbook account -- a savings account that normally requires no minimum balance, no minimum term, no specified frequency of deposits, and no notice or penalty for withdrawals. Passbook accounts, once the most widely used form of thrift savings account, have been largely replaced by statement accounts that provide a monthly statement mailed to the depositor.

Passbook loan -- a loan secured by funds in a savings account on deposit with the same institution originating the loan. The pledged funds may not be withdrawn during the life of the loan.

Pass-through security -- a security granting the holder an interest in a pool of mortgages. A portion of the payments of principal and interest from the underlying mortgages are passed through to the holder of the security.

Past due -- the status of a scheduled loan payment that has not been paid on time.

Past due loan -- a loan on which payment in full is 30 to 60 days past due, but partial payments are being made. See delinquent loan and nonaccruing loan.

Patent -- in real estate, a patent is the original document issued for the purpose of granting public land to an individual.

Pay -- to compensate, reimburse, or satisfy an obligation by giving over something of value, such as money.

Payables -- a bookkeeping term for the costs of purchases or other obligations made but not yet paid.

Payee -- the person or organization to whom a check, draft, or note is payable. The payee's name follows the words: "Pay to the order of."

Payer -- the person or organization who is responsible for paying the amount stated on the face of a negotiable instrument.

Payment -- that which is paid. The sum of money or other item(s) of value that is transferred from one party to another.

Payoff -- the complete repayment of loan principal, interest and any other sums due; payoff occurs either over the scheduled full term of the loan, or through one or more prepayments.

Payoff statement -- a document prepared when a loan payoff is being considered. It shows the current status of the loan account, all sums due and the daily rate of interest. Also referred to as a letter of demand.

Penalty clause -- (1) a provision in a promissory note specifying a penalty for late payments. (2) a clause in a savings certificate specifying a penalty for premature withdrawal of funds.

Penny stocks -- low-priced issues, often highly speculative, selling at less than $1 a share.

Pension fund -- a fund set up to collect regular premiums from employees and their employers, invest those funds safely and profitably, and pay out a monthly income to employees who reach a specified age and retire.

Percentage interest margin -- a ratio that compares the net interest margin to total assets.

Percolation test -- a test given to soil to determine the soil's water seepage capacity, when the use of a septic tank is contemplated.

Perfecting a title -- the elimination of any claims against a title.

Performance bond -- a bond issued to guarantee performance of certain specified acts, such as the completion of construction of a property.

Performance code -- a building code that specifies construction requirements according to performance criteria rather than to specific building materials, products, or methods of construction. See specification code, and prescriptive code.

Performing loan -- a loan on which payments of principal and interest are less than 90 days past due.

Period certain -- a predetermined amount of time during which a participant receives allowable distributions from an IRA. A period certain may be any length of time so long as the period is less than the participant's life expectancy. The longer the period of payments, the less each payment amounts to.

Period of redemption -- the period of time during which a mortgagor may reclaim the title and possession of his or her property by paying the debt the property secures.

Permanent lender -- a lender that provides long-term financing for projects after construction has been completed.

Permanent loan -- a long-term loan of not less than 10 years that is fully amortized and made to purchase, rather than to construct, real property.

Perpetual preferred stock -- preferred stock that has no fixed maturity date and that cannot be redeemed at the option of the holder. Cumulative perpetual preferred stock accumulates dividends from one dividend period to the next.

Personal check -- a check drawn on a depository institution by an individual against the individual's own funds.

Personal identification number (PIN) -- a number or code used by an account holder in conjunction with a credit or debit card to verify the user's identity to an automated teller machine.

Personal loan -- an unsecured loan usually made for the purpose of debt consolidation, vacation or the purchase of durable goods. Also called a signature loan.

Personal property -- any property that is not real property. While state laws vary on the definition of personal property, it is generally thought of as the movable items that a person owns. They can be tangible, such as furniture and other merchandise, or intangible, such as stocks and bonds.

Pipeline -- an expression referring to loan applications in process up until closing or until the mortgage is sold. What's in the pipeline is taken into account when analyzing mortgage loan inventory and commitments on new mortgages.

PITI -- stands for principal, interest, taxes and insurance. These elements generally are included in the borrower's monthly loan payment.

Planned amortization class -- see collateralized mortgage obligation.

Planned unit development (PUD) -- a type of residential, commercial, or industrial land development that provides more planning flexibility than traditional zoning and lot layout. Buildings are often clustered on smaller lots, permitting the preservation of natural features in common areas or open park-like areas. The development maintains the same or slightly greater density than is permitted by conventional zoning methods. Individual properties are owned in fee with the common areas owned jointly or deeded to the local government.

Plat -- a map that shows land subdivided into lots with streets, boundaries, easements and dimensions drawn to scale.

Pledged account mortgage (PAM) -- a type of mortgage loan in which the borrower's payments are supplemented by payments from a savings account pledged as additional collateral for the loan. The savings account is established with part of the down payment.

Pledged loan -- a mortgage loan that has been identified and set aside as security for borrowing by the holder of the mortgage; particularly a loan that has been pledged as security for an advance from a Federal Home Loan Bank.

Point -- an amount equal to one percent of the principal amount of an investment or a loan. Points are a one time charge assessed at closing by the lender to increase the lender's earnings on mortgage loans.

Ponzi scheme -- an operation intended to defraud investors in which no new wealth is produced and creditors are paid off by borrowing ever larger amounts from new investors.

Pool -- a large group of mortgages that back a mortgage security.

Portfolio -- all of the income-producing assets held by an individual or institution, such as the income-earning securities and mortgage loans of a savings institution.

Position -- a market commitment to go long (buy) or short (sell) a security or commodity. It also refers to the amount of securities or commodities owned (long position) or owed (short position).

Postal money order -- an instrument, like a check, sold by United States post offices providing for the payment of a specified sum of money to the individual or firm designated by the purchaser of the money order.

Posting -- the process of transferring journal entries to the general ledger.

Power of attorney -- a document that authorizes one person to legally act as the agent for, or in place of, another person in performing various actions under specified conditions. Full power may be granted, or authority may be limited to certain functions.

Preexisting use -- a land use that existed prior to and does not comply with a newly established zoning classification. See nonconforming land use.

Preauthorized payment -- a system established by a written agreement under which a financial institution is authorized by the customer to debit the customer's account in order to pay bills or make loan payments.

Prefabricated housing -- housing with structural or mechanical components manufactured and assembled away from the construction site.

Preferred debt -- any obligation that has precedence over another debt. A senior or first mortgage is an example of a preferred debt.

Preferred stock -- a stock that yields a fixed-dollar income. The stock represents equity, or ownership, in the company but generally carries no voting rights. The stockholder has a claim to the issuing firm's earnings and assets ahead of the holder of common stock, but behind the holder of a bond.

Preliminary examination response kit (PERK) -- a package sent by OTS to a financial institution prior to the start of an on-site examination. The package contains forms and instructions to the institution for gathering various information and documents. The PERK also indicates the expected date of the examination, requests that the institution arrange various logistics details and asks the institution to have basic information ready for the arrival of the examination staff. Also called the advance package.

Premium -- (1) the amount, often stated as a percentage, paid in addition to the face value of a note or bond. (2) a fee charged for the granting of a loan. (3) the price paid for an insurance contract. (4) a product given free or sold at discount, offered as an inducement to the public to open or add to a savings account, or to purchase other specified products or services.

Prepayment -- a payment made before its scheduled due date.

Prepayment clause -- a provision in a promissory note stating the amount a borrower may repay ahead of schedule without incurring a penalty.

Prepayment penalty -- a fee assessed by a lender on a borrower who repays all or part of the principal of a loan before it is due. The prepayment penalty compensates the lender for the loss of interest that would have been earned had the loan remained in effect for its full term.

Prescriptive code -- a building code that specifies construction requirements according to particular materials and construction methods, rather than to performance criteria. Same as a specification code. See performance code.

Present value cost -- the cost in currently valued dollars of funds to be expended over a period of time, usually a number of years, less the net of any funds to be repaid. It is adjusted to compensate for the loss or gain of the opportunity to invest the funds rather than spend them -- that is, compensate for the dollars' estimated earning potential in alternative uses. For example, the present value cost is reduced by the amount of income the funds are expected to earn until they are disbursed and increased to compensate for the loss of earnings thereafter, or until such time as the funds are repaid. Present value cost is used by federal regulators to estimate the impact on the thrift insurance fund of alternative solutions to troubled thrift institutions.

Preservation of capital -- one of several objectives of investing, the goal being to prevent the loss of any capital invested by avoiding high-risk investments.

Price -- the amount of money a seller receives for the goods or services sold. Price is the amount of money actually received by the seller, not necessarily the amount originally asked for. In the buying and selling of bonds and mortgages, price represents the difference -- expressed as a percentage -- between the amount paid for an instrument and the face value of that instrument. For example, if sold at par, the price is 100 percent of the face value; a premium price could be 105 percent; and a discount price could be 95 percent of face value.

Price-level-adjusted mortgage (PLAM) -- a form of home loan in which payments are adjusted for inflation not by changing the interest rate but by changing the amount of outstanding principal. The loan is fully amortized, meaning the principal is repaid in a fixed number of years. Initial payments are low because the real rate of interest -- typically between 3 and five percent -- does not include a factor for inflation. Instead, inflation or deflation increases or decreases the amount of outstanding principal, and correspondingly, the amount of the monthly payment. The payment is adjusted each month based on a predetermined index, such as the Consumer Price Index. It is assumed that the value of the home and the borrower's income increases or decreases in tandem with fluctuations in the amount of unpaid principal. A PLAM offers monthly payments that are substantially lower and less volatile than mortgages with adjustable interest rates, while assuring the lender will be repaid all the principal, plus interest, plus whatever inflation eats away.

Prima facie -- at first view; that which appears to be true and is accepted as being true as long as contrary evidence is not detected.

Primary dealer -- a securities firm that makes a market in government debt securities, acting as a principal in the trades. Federal Home Loan Bank System discount notes are sold through a group of primary dealers.

Primary market -- the market in which lenders make mortgage loans directly to borrowers, as opposed to the secondary market in which the original lenders sell those mortgage loans to investors.

Prime rate -- the interest rate charged by leading banks to their best, most secure customers. It tends to be a yardstick for general trends in interest rates.

Principal -- (1) the capital sum of a loan. The amount of borrowed funds to be repaid. (2) an individual or firm buying or selling for his (her/its) own account.

Principal balance -- the portion of a loan not yet repaid, exclusive of interest or other charges.

principal basis -- the sale of securities through a dealer or group of dealers who buy and sell the securities at least initially for their own portfolios, assuming the market risk of holding the securities, and then selling the securities from their own inventory to their customers at a markup. See agency basis.

Principal office -- see home office.

Principal only (PO) -- see stripped mortgage-backed securities.

Prior lien -- a mortgage that ranks ahead of another.

Private enterprise -- an economy in which the production of goods and services is carried out by businesses owned and operated by people risking their investment of capital and/or labor in the hope of making a profit.

Private mortgage insurance (PMI) -- insurance policies written by private companies insuring lenders against loss resulting from defaults on mortgages.

private placement -- the sale of a debt security to one buyer or a few buyers, as opposed to offering the security to the public through a group of dealers. See direct placement.

Private sector -- that portion of the economy composed of businesses and households, and excluding government. See public sector.

probate -- the process of proving before a court of law that a document offered for official recognition as the last will and testament of a deceased person is genuine and the process of determining and resolving all issues concerning the will.

Problem institution -- a savings association or savings bank that: (1) is subject to special regulatory controls or restrictions; (2) poses particular supervisory concerns to its federal or state regulator; (3) fails to meet its regulatory capital requirement; and/or has a composite MACRO rating of 4 or 5.

Profit -- the excess of income over all costs and expenses.

Profit and loss statement -- a summary listing a firm's total revenues and expenses within a specified period of time. Synonymous with income and expense statement.

profit center accounting -- a method of accounting that identifies various segments of a business that are responsible for both revenues and expenses, as a way of measuring each segment's contribution to the profit of the company as a whole.

Pro forma statement -- from Latin meaning "according to form." A pro forma statement is a financial statement projecting anticipated income, expenses and cash flow for some specified future period.

Program trading -- computer-triggered, simultaneous buying and selling of securities in different exchanges to take advantage of price differences in two or more markets.

Progress payment -- see draw.

Promissory note -- a written promise to pay a stipulated sum of money to a specified party under conditions mutually agreed upon. Also called a note, promise, or bond.

Property -- something that is owned or possessed. Property may be real (land), personal, tangible (touchable), or intangible (such as the interest in a play or other creative work).

Property assessment -- the determination of the value of real property upon which taxes will be imposed.

Pro rata -- Latin, meaning "according to the rate." Pro rata refers to dividing something (costs, income, profits, assessments, proceeds from a liquidation, etc.) among participants according to a rate in which each participant's share is in proportion to the part of the whole owned or claimed by the participant.

Prorate -- to allocate between two or more parties, the proportionate share of each. For example, the payment of property taxes or insurance premiums may be prorated between buyer and seller.

Prospectus -- a written offer to sell property or a security, providing a detailed description of what is being sold, including its characteristics and quality.

Proxy -- (l) the authority or power to act for another. (2) a document giving such authority. (3) The person authorized to act for another.

Public sector -- that portion of the economy composed of all levels of government, and excluding businesses and households. See private sector.

PUD -- see planned unit development.

Punch list -- a record of incomplete or unsatisfactory construction items covered by a contract, usually prepared by an architect or engineer, before certifying project completion.

Purchase accounting -- a method of accounting when one enterprise is acquired by another. The surviving enterprise records as its cost the market value of the acquired assets less liabilities assumed. The difference between that market value and the total price paid is recorded as an asset called goodwill. See goodwill.

Purchase agreement -- a signed document stating the purchaser's agreement to buy and the seller's agreement to sell a specified property under stated terms and conditions.

Purchased credit card relationships (PCCR) -- the premium paid to acquire established credit card accounts from a financial institution. Buyers pay a premium over the dollar value of the credit card accounts themselves in order to acquire the customer loyalty in an established line of business. The premium is listed on the books as an intangible asset.

Purchased mortgage servicing rights (PMSR) -- the right, acquired from another, to service a mortgage and collect a fee. The value of that right is listed on the books as an intangible asset. See mortgage servicing.

Purchase-money mortgage -- a mortgage given to the seller, with the mortgage constituting all or part of the compensation received for the sale of property. Such a mortgage is used when the seller is also the lender. Most purchase-money mortgages are one or two years in length or, in some cases, up to five years.

Purchase option -- a clause in a lease granting the lessee an option to purchase the leased property on or before the lease termination date, usually at a specified price.

Purchasing power -- the value of money measured by the amount of goods and services it can buy.

Put -- a contract giving the holder the right to sell a specific security at a specified price during a designated period. A put is purchased by someone who thinks the price of the underlying security will go down and who wants to lock in a higher selling price. Opposite of call.