An Average Rate may also be calculated to produce the same total discount on a set of notes as individual rates that use rates selected for each note’s tenor. In such a case, the Average Rate will not produce the same discount on each note as would the selected rate because of rate compounding, but will produce the same discount as for the whole set.

Back to Back Credit  A Letter of Credit  that becomes the effective beneficiary of another Letter of Credit.  May be used by a middleman with limited credit to secure an L/C in favor of the ultimate beneficiary.

Backwards Calculated     Indicates that an interest rate has been derived from the Face and Proceeds and Tenor for a Note, or Average Life for a Note Set.

Balance Method    An Issuer Interest calculation method whereby the interest carried by each note of a set depends on the total Principal outstanding on the set during the period from the previous note’s maturity to its own maturity. See Note-by-Note Interest

Base Rate    An interest rate that represents cost of funds, whether purchased from others or internally generated, to which a Margin is added to determine an All-in interest rate. Often LIBOR is used as a surrogate cost of funds. The Base Rate generally increases for longer periods, according to a rate curve that depends on economic factors.

The Base Rate may differ across notes within a Note Set according to maturity or may be a single rate applied to all notes, often chosen to be a cost of funds rate at the Average Life of a Note Set.

Basis Days    See Days Basis.

Basis Point  One hundreth of a percent.  A ratio of 12345:1 is equivalent to 1.2345 basis points

Beneficiary.  The party named to receive the proceeds of a finanical instrument, such as the seller of goods or services. Depending on the deal terms the named beneficiary can designate others to recieve part of the proceeds.

Bill of Exchange     A demand for payment, or draft, written by a goods supplier (exporter) to a goods Buyer (importer) that can become a negotiable instrument after acceptance by the importer and possibly avalization by a Guarantor. Although it initially "flows" in the opposite direction to a Promissory Note, upon maturity it is similarly submitted for payment. The draft may call for immediate payment (sight draft) or payment due on a later date (term draft). Also see Notes.

Bill of Lading  A legal docment issued by a goods carrier acknowledging receipt of (possession) and responsibility for a shipment of goods.  It may include responsibility of a single carrier for one link in a supply chain or multiple carriers covering multiple links.

Book Value    The aggregate amount on an oganization’s balance sheet related to a note or group of notes as of a given date. For a particular discounted note, the amount will depend on the method used to to account for the value of earned but not received discount. It will grow during the holding period and approach the Face amount at maturity. For an interest bearing note, it will include the Principal plus any unamortized premiums, but not interest earned but not received.

The Book Value amount will also depend on the accounting treatment of fees. Fees incidental to a transaction will generally be earned on the transaction date and will not be included. Large fees may be deemed to be earned over some period.

Treatment of interest due is handled differently for discounted and interest bearing notes because the interest to be earned on the former has already affected the amount paid out (initial Book Value or Gross Proceeds) while for the latter it has not.

Breakeven Amount  The value of a sale that will exactly offset the Book Value of a note or group of notes on a given date. A sale for this amount will not incur any Trading Gain or loss.

Breakeven Rate  The rate expressed as a percentage that produces the Breakeven Amount when applied in the same manner as the interest rates on discounted notes. For a floating rate note, the Breakeven Rate will produce the net difference between the Principal and Book Value.

Bought On Date  The value date for a purchase of a note and the date on which ownership is accepted in exchange for payment. Same as the general Transaction Date, or Disbursement Date, or Purchase Date used in special contexts.

Broker.   An intermediary between the Buyer and seller of financial instruments or goods and services.  The broker expects to earn a fee paid by the Buyer and/or seller but cannot act for either as could an Agent. 

Business Day  Any day on which a payment can be made in the country of the beneficiary through the banking system, assuming of course that the transaction is not settled by a bag of cash.  Interest may be earned, however, on calendar days so that the investor earns interest whether the banks are open.

Buy On Date  Future date on which a Buyer will buy a note.

Buyer  Identifies either the Buyer of goods or services such as an importer, or the Buyer (acquirer) of a financial instrument, such as an investor or forfaiter.  The seller of goods such as exporter may acquire the financial instrument in payment, but the financial transaction and the underlying business transaction are not necessarily linked.

Cash Paid    Amount paid to obtain rights to a note. For a discounted Note, Cash Paid is Net Proceeds (Face less Discount interest less Fees). For a Floating Rate Note, Cash Paid is Principal plus Premiums less Fees. Seller Interest is excluded since it considered a right to receive an interest payment earned by another, rather than a component of the note.

Clean ...  A financial document that is not encumbered by commercial or other external conditions.

Collecting Bank  The bank responsible for obtaining a payment directly from a Buyer.  May be part of a collection chain of banks.

Commercial Risk  Risk that a commercial Issuer of a financial instrument or its Guarantors do not meet a payment obligation because of inability or unwillingness,

Commitment    There are two meanings in Notes trading, neither of which are the same as when used in a loan or bond trading environment. First, a commitment to buy represents a contract, an agreement to purchase, if and only if certain terms are met such as: availability of documentation, shipment of goods, completion of a commercial contract, or satisfaction of other obligations. It may be that a commitment to buy refers to an instrument that does not yet exist. Therefore, a commitment cannot be considered an asset, and must be placed in a special, contingent balance sheet category.

Second, a commitment to buy may also involve accrual of a fee between a Commitment Date and Disbursement Date.

Commitment Date    Date on which a potential Buyer binds itself to the purchase of the right to an instrument at a later date. First day of Commitment Fee.

Commitment Fee    The amount of money, expressed either as an amount or a percentage of (typically) Face value, from the Commitment Date to the Disbursement Date, for committing to a deal. Ostensibly intended to cover the interest cost of setting aside funds or to guarantee a deal rate, it can actually be used for any purpose. The fee may be collected in installments before, on, or after disbursement or may be financed over the life of the instrument.

Commitment Fee Rate    The annual rate charged as simple interest from the Commitment Date to the Disbursement Date. This simple interest rate is applied to the Face of each note where the Commitment Fee is to be financed. The resulting fee is deducted from Gross Proceeds to yield the Net Proceeds.

Composite Rate    See Equivalent Rate.

Compounding Date   Interest is computed at each Compounding Date for the preceding period, which interest is added to the previous outstanding amount as the starting balance for the next period. The Compounding Date for discount interest is an anniversary of the Disbursement Date. Compounding Dates are an anniversary of Issue Dates for Issuer Interest for both discounted and interest bearing notes. The anniversary dates may be adjusted for short months, and Compounding Methods.

Compounding Methods    Specifies how the lengths of interest compounding periods are determined and the method of applying the interest and discount rates. "Round" is the forfaiting industry standard where successive semiannual periods of 183 and 182 days are used. "Actual" uses compounding dates on periodic anniversaries, extended to business days if so specified. This results in allocation of interest to calendar-based accounting periods. "Equal" divides a year’s interest into equal parts (such as 182½ or 91.25), corresponding to what might be obtained using a compound interest table.

If Internal Rate of Return (IRR) is selected, the Discount is calculated using an exponential Present Value formula.

If Straight Discount Rate is selected, the rate is applied to the Face amount of each note, without compounding, conventionally for a 365-day year.

Confirmation  (1) A written notice from the deal Seller to the Buyer containing all transaction terms.  The notice becomes effective upon execution and return by the Buyer which becomes the confirmation date. (2)  An additional guarantee of payment from a Confirming Bank, usually the Advising Bank.

Contract Base Rate     Same as Issuer Base Rate.

Contract Margin Rate    Same as Issuer Margin.

Contract Price    The amount of a contract between a supplier and importer, which may include some financing costs in addition to goods and services. If explicit interest is charged to the importer on the Contract Price of a discounted note, the Contract Price is the same as Principal.

Contract Rate    Issuer Base Rate plus Issuer Margin. Same as Issuer All-in Rate.

Countertrade  Barter deals in which some portion of a payment is in goods or services.

Credit Support   A document or effect of law that defines the obligation of an entity other than the Primary Obligor to make payment if the payment is not received as from the Primary.

Currency Risk  The possibility that conversion from a local currency becomes unavailable or that the rate ratios will change.

Days Basis    The number of days considered to be in a year when calculating a daily interest rate by dividing the nominal rate by the Days Basis. Values may be 365 or 360. When used to compute interest, Days Basis is used in the denominator and the number of days over which the interest is calculated such as actual days or a standard 30 days per calendar month is used in the numerator.

Differential Interest    The rate difference between the (greater) desired margin and the margin being paid by an Issuer is used to calculate a Differential Interest adjustment (discount) to the price of a floating rate note. As interest is paid at the Contract Rate during the remaining life of the note, the note Buyer achieves his desired rate of return by having paid (less) than par to purchase the note. See also Premium.

Disbursement Date    Date on which good funds are available to the seller of a note for its purchase. The date also marks the transfer of ownership, a settlement date for certain instruments.

Discount    An amount subtracted from the Face of a financial instrument, such as a promissory note or acceptance, before advancing funds. The discount is interest that will be earned by the Discounter over the term of the note.  The instrument may or may not be interest bearing.

Discount Base Rate    An interest rate representing the cost of funds or an interbank rate such as London Interbank Offering Rate (LIBOR). Usually added to a Margin or Spread rate to form the All-in Rate charged to a note Issuer.

Discount Date    Purchase Date of a discounted note, and date on which note Buyer begins earning Discount Interest. A Disbursement Date. Marks the transfer of ownership.

Discounter    Any organization or individual that purchases notes at a discount. May also include purchasers of interest-bearing notes or other negotiable instruments.

Discounting   The process of buying and selling a financial obligation at a discount.

Discounting Floating Rate Premiums    A process whereby adjustments (premiums or discounts) to the price of a Floating Rate Note are discounted to the Purchase Date from the date on which the payment would have been due if the sale had not taken place.

Discount Interest    Amount of interest charged on a discounted note, and deducted from the Face amount before paying the proceeds to the borrower.

Discount Margin    An interest rate representing a note Buyer's desired Earning Rate. Usually added to a base rate to form the All-in Rate charged to a note issuer.

Discount Rate   Nominal All-in Rate used to calculate Discount Interest. When applied to the proceeds to a borrower, it is described as a Discount-to-Yield Rate.

Discount-to-Yield Rate (DtY)    Interest rate charged on Gross Proceeds, not Face, to yield the Discount amount. The sum of the Gross Proceeds and the Discount amount equal the Face amount of the note. It is a way of calculating a discount using a rate that yields the specified rate of return on the discounted amount.

Draft  A written demand for payment by one entity to another without an underlying credit instrument such as a promissory note.  If the document had been acknowledged (endorsed) by the payee, whether a bank or commercial entity, it is called an acceptance.

Drawee  Party from whom payment is demanded by a draft.

Drawor  Party demanding (receiving) payment under a draft.

Due Date  Date on which an interest or Principal payment is due to be paid.

Earning Rate    The effective Margin or Spread being earned on a note. This is either the margin used in discounting, or the target rate used to calculate a Differential Interest adjustment when purchasing a Floating Rate Note. It may differ from the Contract Rate being paid by an Issuer because an adjustment made to the purchase price. See Premium.

ECA  Any of several government-backed Export Credit Agencies that facilitate exports by means of loans and guarantees.

Effective Rate    The annual percentage rate (APR). The annually compounded rate being charged. With more frequent compounding, the Effective Rate will be higher than the Nominal Rate.

Enforceable  Any term or obligation that for which legal recourse is available.

Equivalent Rate    A single rate that produces the same total discount or interest for a set of notes as the individual rates on each note within the set. A composite rate applied to each note may produce a different distribution of interest across the set, but produce the same total. Some obsolete systems calculated the Equivalent Rate, then applied that rate to each note, producing the same overall financing price to an entity that held all notes to maturity, but distorting the return over time. In a normal rate curve environment this practice prices short-term notes higher than would be appropriate, and, long-term notes lower, and so interferes with the ability to trade individual notes.

Face    The amount written on the face of a note. The Face of a discounted note will be the amount to be repaid at maturity, and includes both Principal and some amount of Discount Interest. An interest-bearing note with multiple interest payments will have a Face value of the Principal amount.

Factoring  The process whereby a Factor buys receivables from a Supplier.  The Factor becomes responsible for losses and collection costs.   It additionally differs from Forfaiting in that it depends on the goods Buyer's general credit rather than the issue of a debt obligation such as a promissory note or Letter of Credit,  the Supplier rather than the Buyer incurrs the explicit financing cost, the financing may or may not be visible to the Buyer, and the Buyer's payment may be linked to commercial risk.

Fees    Fees to cover closing costs, purchased services, or compensate for an inappropriate interest rate, may be included in a note's price. For discounted notes, fees are usually deducted from Gross Proceeds to produce Net Proceeds, the payout amount.

Fixed Rate Note    A note with all rates explicitly quantified before purchase.

Floating Rate Note    An interest bearing note whose Issuer Base Rate is set at the beginning of each interest period, usually defined as beginning the day after an Interest Payment Date on a multi-payment note. Since future Issuer Base Rates are not known at time of a purchase, these notes are priced using a method that considers only margins above the unavailable base rates.

Floating Rate Note Price    The Price of a Floater may be the sum of its Principal and any of four types of payments discounted to the Transaction Date from their Due Dates. The four types of payments, also called adjustments, are: Seller Interest, Differential Interest, Base Rate Adjustment, and Residual Adjustment. The last three adjustments, are called Premiums, or sometimes if negative, Discounts.

Since the payments are due in the future but are usually settled on the Transaction Date, the amounts due are discounted to the Transaction Date. Common options discount at an Agreed Base Rate between Buyer and seller or an Agreed Base Rate plus Transaction Margin, using simple interest or semi-annual compounded interest.

Forfaiter   An entity that purchases discounted, negotiable, non-recourse instruments.

Forfaiting  The puchase of promissory notes or other negotiable, irrevocable, non-recourse instruments generally supporting an international trade deal. The instruments are usually pure (clean) transactions that stand on thier own regardless of any issues arising out of the underlying commercial transaction.

Gain    See Trading Gain

Grace Days    A number of days added to the holding period of a discounted note when calculating Discount Interest. Either calendar or business days can be specified. They do not change the Maturity Date or Average Life of notes.  Ostensibly a grace period is to protect the lender from delays in internation payments.  But it may be used to increase the effective interest rate.

Grace Interest     An amount added to discount interest to cover anticipated collection delays through banks or other sticky channels. When calculating discount interest, the number of Grace Days is added to the number of days from disbursement to maturity, which may result in a greater discount than if the interest were calculated separately for the two periods and added. In effect, an increase in the effective discount rate.

Gross Proceeds     Amount disbursed before deduction of Fees or Seller Interest. Face less Discount of a discounted note. When Discount to Yield interest is used, Gross Proceeds is the amount on which interest is calculated. Amount borrowed.

Guarantor     Party that will repay a note upon default of Issuer. Guarantee may be provided by an Aval or separate document.

IFA Guidelines  A set of procedures and code of ethics issued by the International Forfaiting Association.  See http://www.Forfaiters.org

Interest Bearing Note     A note with financing cost as an explicit, separate interest charge, stated either as an amount or a rate. An Interest Bearing note, with either a fixed or floating rate, can also be discounted. A discounted note with a Face amount determined by adding Issuer Interest to a Principal or Contract Price would not be considered interest bearing.

Interest Earned    Accrued interest over some specified period, whether collected or not.

Interest Receivable    Earned interest Amount Due as of a given date.

Internal Rate of Return    The compound interest rate that discounts a series of future amounts to a single amount on an earlier date, given dates and compounding periods.

Issue Date    Date on which a borrower issues a note and becomes obligated for payments according to agreed terms. Usually marks the beginning of interest or discount accrual.

Issuer    Underlying note obligor. The borrower.

Issuer Base Rate    During a specified period, the rate charged a note issuer, which rate stands for the basic market rate for an lender's cost of funds. LIBOR is commonly used. See Issuer Margin.

Issuer Interest    Explicit interest charged on Principal of a discounted or interest bearing note.   Distinguished from any implicit financing cost included in a Seller's Contract Price.

Issuer Margin    An interest rate added to the Issuer Base Rate, that provides for income to the lender. Together, the base and margin form the all-in rate paid by the Issuer on the amount borrowed.

Issuing Bank  Finanacial institution that issues (opens) a Letter of Credit (but not a Standby) or  similar instrument on behalf of a goods Buyer.  The payment obligation therefore depends on the bank's ability and willingness to pay rather than than the borrower's.  The process can be considered the purchase of a credit rating in return for a fee.

Last Fix Date    The most recent date on which the Issuer Base Rate was set on a Floating Rate Note.

Letter of Credit  A written commitment by (usually) a bank to pay an amount to a beneficiary on behalf of an Applicant upon presentation of specified documents.  It is called a documentary credit because payment is conditioned only on the appearance of the required documents without regard to underlying events, actions, or regulations.

LIBOR    London Interbank Offered Rates is a standard set of interest rates published daily by a group of British clearing banks, for loans from one bank to another for terms up to one year.  But they are often used as an accepted surrogate cost of funds when pricing notes, regardless of actual cost of funds.

Margin    Spread.  See Discount Margin and Issuer Margin.

Markup    Percentage of a note's (or note set's) Principal or Contract Price over its Net Proceeds. The increase is caused by inclusion of Fees or implicit issuer interest. The Markup covers cost of goods and services plus some portion of financing cost.

Maturity Date    Due date of Principal amount.

Negotiable Instrument    A purely financial agreement representing a claim on funds, such as a Promissory Note, that can be traded.

Net Proceeds    Amount paid for a Note, remitted to borrower or seller of the note, after deduction of fees or commissions from Gross Proceeds. The amount paid to a beneficiary or note seller at Disbursement Date. Net Proceeds is sometimes referred to as present value, which is not the same as Present Value of an Internal Rate of Return (IRR) calculation.

Nominal Rate    Interest rate before effects of compounding and use of a Day Basis different from actual number of days in a year. May be lower than Effective Rate or annual percentage rate.

Non-Recourse    Or "without recourse". Contract term under which a note owner cannot look to a previous owner for compensation in the event of a default, except in the case of fraud, misreprensentation, or similar situation.

Nostro Account  An account containing funds owned by one bank on deposit at another bank.  Depending on local regulations, the account may be denominated in either a hard or local currency.  See Vostro Account.

Note    (1) The term is used here as shorthand for discounted, interest bearing and floating rate notes, or other negotiable instruments, whether labeled Promissory Note, Bill of Exchange, trade acceptance, bank acceptance, trade paper, draft under letter of credit, or loan. (2) It is also used for government issues with terms between one and ten years,

Note by Note Interest    Arrangement under which interest on a note is based on Face or Principal of that note alone. Distinguished from the Balance Method where interest due along with a note's Principal is based on total outstanding for a set of notes.

Note Set    A collection of Notes issued by one Issuer related by common dates or purchase of particular goods or services, or more strongly linked by the same amounts or parameters. May be traded in a single deal or broken up and sold as individual notes.

Obligor  Any party along the chain of potential payees that may be responsible for payment on a negotiable instrument such as a fortaited note.

Open Account  A Supplier's receivables account for items shipped to a Buyer without a free-standing financial instrument.  Commercial contract terms may include a 30, 60, or 90 day payment delay after goods shipment.  Since no other parties are involved, all risks are born by the Supplier.

Par    Face value of a note. See also Premium

Parameter    A value, such as Days Basis, that remains constant over some set of calculations. Distinguished from a variable, such as an interest rate, that varies.

Payment Claim  Demand for payment made by a beneficiary under his rights under a financial instrument such as promissory note, Letter of Credit, or Acceptance.

Point of Reserve  A conditional term whereby a Buyer can void or otherwise alter an agreement if a Seller has not met the condition by a particular date.

Premium    Amount paid for an asset above its Face amount. A negative premium is a Discount. The total premium paid may comprise components derived in different ways and amortized over different periods: Differential Interest, Base Rate Adjustment, and Residual Premium, which see.

Premium Remaining    The amount of Premium remaining to be amortized as of a given date.

Primary Discounter (Forfaiter)    The party that buys discounted notes directly from the Issuer.

Primary Market    The market where Primary Discounters and Forfaiters buy notes directly from Issuers, sometimes with the involvement of Brokers.

Principal    The value of a note on which explicit Issuer Interest is calculated.  It may be labeled Proceeds, Principal, or be invisible.

Proceeds    Either the Gross or Net amount paid upon purchase of a note.

Promissory Note    Purely financial instrument issued by a borrower, perhaps an importer, in exchange for goods or services. Sometimes called pNotes.  pNotes may be traded in a secondary market, which establishes discount or interest market rates.

Purchase Date    Effective date of a note purchase. Disbursement Date.

Repayment Schedule    Repayment dates and amounts can be arbitrary but several patterns are common. Face amounts, Principal, or Net Proceeds can be held constant over a set of notes, interest may be calculated Note by Note or the Balance Methods, etc. The models may look like discounted notes, loans, or leases.

Residual Premium    An agreed premium amount paid on a floating rate note that does not fit the pattern for Differential Interest or Base Rate Adjustment. Other.

Secondary Market     Market in which financial entities trade Negotiable Instruments.

Sell-By Date    Date by which a trading organization must sell a held note, according to its policy.

Seller  The party selling or passing ownership of goods, services, or a financial instrument.  See Buyer.

Seller Interest (Adjustment)    The amount of interest earned by a selling noteholder from the last note fixing to a sale date. The amount may have been earned during or before the seller's holding period. If before, the seller is presumed to have paid an appropriate amount out to the preceding holder.

Set Rate(s)    An interest rate charged on each note of a set which result in the same interest or discount amount as that resulting from various individual rates charged on each note.

Settlement Date  The day on which payment for a financial instrument is due.  Depending on the type of instrument this may or may not be the day on which ownership changes.

Spread    See Margin

Standby Letter of Credit  A secondary guarantee issued by a bank to pay a specified amount in the event of others' failures.  So named because at one time United States banks were prohibited from issuing guarantees, so of course as law abiding entities, they didn't;  they issued Standbys.

Straight Discount Rate    An interest rate charged on the Face value of a discounted note to determine the amount of Discount Interest usually on a 365-day, uncompounded basis.

Support Documentation  Any document or agreement other than those required of a financial transaction, that provide information or comfort, such as those relating to an underlying deal.

SWIFT  An organization serving only banks by processing interbank payments and messages, and providing some related services.

Tenor    Total outstanding duration of a note.

Trading Gain  Amount received from note sale above the Seller's Book Value.

Transaction Date  The closing date, disbursement date, purchase date or sale date, all of which are used interchangeably. It is the value date on which rights to an obligation changes hands and payment is effective. The term "Settlement Date" is not used with forfaited notes because of its different meaning in securities trading contexts. The tie between transfer of an asset and payment for it reflects its bank finance origins rather than registered securities clearing mechanisms.

Transaction Margin    The margin to be earned by an Interest Bearing Note Buyer. A rate higher than being paid by the Issuer will be achieved by reducing the amount paid by the Buyer when purchasing the note.

Underlying ...  Business Deal or Transaction being financed by a financial instrument.  The financial transaction may or may not be totally separate from the Underlying one.

Uplift    Old English term for Markup.

Vostro Account  A bank account at a bank containing funds owned by another bank.  It may be denominated in a hard currency, or some other currency if not prohibited by banking regulations.

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