Yield Spread

The difference between yields on differing debt instruments, calculated by deducting the yield of one instrument from another. The higher the yield spread, the greater the difference between the yields offered by each instrument. The spread can be measured between debt instruments of differing maturities, credit ratings and risk.

For example, if the five-year Treasury bond is at 5% and the 30-year Treasury bond is at 6%, the yield spread between the two debt instruments is 1% (6% - 5%). If the yield spread has historically been closer to 5%, the investor is much more likely to invest in the five-year bond compared to the 30-year bond (as it should be trading around 1% instead of 6%).

Banker's Acceptance - BA

A short-term debt instrument issued by a firm that is guaranteed by a commercial bank. Banker's acceptances are issued by firms as part of a commercial transaction. These instruments are similar to T-Bills and are frequently used in money market funds. Banker's acceptances are traded at a discount from face value on the secondary market, which can be an advantage because the banker's acceptance does not need to be held until maturity. Banker's acceptances are regularly used financial instruments in international trade.

Banker's acceptances vary in amount, according to the size of the commercial transaction. The date of maturity typically ranges between 30 and 180 days from the date of issue. However, banks or investors often trade the instruments on the secondary market before the acceptances reach maturity. Banker's acceptances are considered to be relatively safe investments, since the bank and the borrower are liable for the amount that is due when the instrument matures.

Offsetting Transaction

In trading, an activity that exactly cancels the risks and benefits of another instrument in the portfolio. An offsetting transaction is used when it is not possible to simply close the original transaction as desired. This frequently occurs with options and other more complex financial instruments. In this way, a trader does not have to agree to close the option contract with the party on the other side of the options trade, but can simply cancel the net affect by entering into an offsetting transaction.

The most basic example of an offsetting transaction occurs in options trading. Suppose you have sold a call option on 100 shares with a strike price of $35 and expiration in three months. To close this transaction before three months is over; you can buy a call option with exactly the same features, thus exactly offsetting the exposure to the original call option. 

Financial Instrument

A real or virtual document representing a legal agreement involving some sort of monetary value. In today's financial marketplace, financial instruments can be classified generally as equity based, representing ownership of the asset, or debt based, representing a loan made by an investor to the owner of the asset. Foreign exchange instruments comprise a third, unique type of instrument. Different subcategories of each instrument type exist, such as preferred share equity and common share equity, for example.

Financial instruments can be thought of as easily tradable packages of capital, each having their own unique characteristics and structure. The wide array of financial instruments in today's marketplace allows for the efficient flow of capital amongst the world's investors.

Commercial Cards

Credit or charge Cards issued to businesses to cover expenses such as travel, entertainment, and procurement. Includes purchasing cards, business cards, corporate cards and multi-utility fleet cards. Visa and MasterCard have special procedures for passing billing information back to the card issuing bank for display on card holder statements.

Money Market Account Extra - MMAX

An account structure that provides depositors with the ability to secure FDIC insurance on large deposits that would otherwise exceed the normal insurance limit of $250,000. The MMAX structure allows banks to attract large depositors, including retail, commercial and public entities. Through the program, banks can accept deposits well above the FDIC-insurance limit from any one retail or commercial customer in money market deposits. The funds are then distributed into deposit accounts among multiple banks in IDC's Deposit Network. No more than $250,000 can be deposited in any one bank.

The advantage of MMAX accounts is that instead of being covered only up to the FDIC deposit-insurance amount, the individual can have more funds insured. For example, if Arthur had $500,000, he could use the MMAX structure to have two banks each hold $250,000; thus, the FDIC would insure the full $500,000.

Money Market Account

An interest-bearing account that typically pays a higher interest rate than a savings account, and which provides the account holder with limited check-writing ability. A money market account thus offers the account holder benefits typical of both savings and checking accounts. This type of account is likely to require a higher balance than a savings account, and is FDIC insured.

Money market accounts are widely available, and are offered by banks and other financial institutions. They are able to offer a higher interest rate by requiring a higher minimum balance, and by placing restrictions on the number of withdrawals the account holder may take over a given period of time. This restriction makes them less liquid than a checking account, but more liquid than bonds.