This glossary covers a range of financial terms, input variables, and parameters used in structuring, negotiating, analyzing, and reporting Trade Finance transactions.

Defined terms within this glossary that are used in the definition of other terms are in italics. Terms necessary to complete the understanding of another term are cross referenced by a link. The term "notes" is used as a generic term to denote a range of negotiable instruments such as bills of exchange, acceptances, discounted and interest-bearing notes, payment obligations, and payments under letters of credit.

Agent    An entity acting on behalf of a party to a transaction with the authority to act on the party's behalf. See also Broker.

Agreed …    It is understood that the various interest rates result from agreement among the parties involved, regardless of inclusion of "agreed".

Applicable Law    The law(s), regulations, or conflict resolution rules (arbitration or mediation, for example) applying to issues arising from a Sale. While the reference may be to a legal jurisdiction, that in not necessarily where the issues are to be heard. See also Jurisdiction.

Availability Date    Date by which all conditions pursuant to a sale have been met, including availability of documentation and instruments, so that the sale can be executed, excluding any points of reservation that invoke a later date.

Aval    An unconditional guarantee of payment by an organization, usually a bank, in addition to that of the Issuer of an instrument by endorsement on its Face or reverse. Similar in effect to a documentary credit confirmation although the legal basis and practice are different. In other cases, a separate document carries the guarantee and accompanies the Notes.

All-in Rate    A total rate used in calculation of Interest, Discount, or Premium. It consists of a Base Rate representing cost of funds plus a Margin intended to be earned by the Note holder. The rate is applied to the Gross Proceeds or Principal of a Note to calculate the discount or interest respectively.

Amount Due    Amount to be repaid by a note Issuer or Guarantor on the Due Date. For Floating Rate Notes, it may consist of interest, principal or both".

Aval    An unconditional guarantee of payment by an organization, usually a bank, in addition to that of the Issuer of an instrument by endorsement on its Face or reverse. Similar in effect to a documentary credit confirmation although the legal basis and practice are different. In other cases, a separate document carries the guarantee and accompanies the Notes.

Average Life.     The average time from a reference date to the Due Date of a series of payments weighted by the amount of the payment. The payments can include the notes of a specific deal, interest payments, or those in an entire Portfolio. For Notes, the reference date is usually a single Discount Date for all Notes but could be an Issue Date, transaction, or an as of date. Usually expressed in 365-day years.

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.

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 depends on the total Principal outstanding during the period from the previous note’s maturity to its own maturity.

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.

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. Also see Notes.

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 that 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.

Bought On Date    The value date for a sale (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 some contexts.

Breakeven Amount    The value of a sale that will 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.

Broker    An intermediary that performs some functions as a part of a potential sale, but is not authorized to act on behalf of a party to the sale. Even where a party has authorized a Broker to take some action, responsibility remains with the party. See also Agent

Business Day    Not a Holiday

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.

Commitment    A commitment to buy represents a buyer's promise to purchase a note 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.

Commitment Date    Date on which a potential buyer binds itself to the purchase of a sale at a later date. Day on which a Commitment Fee begins accruing.

Commitment Fee    The amount of money, expressed either as an amount or a percentage of Face value, usually earned 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 typically 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.

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 Date    Date on which transaction terms have been approved by Buyer and Seller.

Contract Amount    See Principal.

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.

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 sale date.

Discount    An amount subtracted from the Face of a note before advancing funds. The discount is interest that will be earned by the Discounter over the term of the note.

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 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    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.

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.

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.

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.

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 specified explicitly 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 organization that purchases discounted, negotiable, without-recourse instruments.

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. This does not change the maturity date of the note.

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.

Holiday Day    A date when all institutions required to effect a payment are not available. This may include legal holidays or religious worship days of the parties to a transacton, or those of a third country involved in the payment chain.

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 accrual.

Issuer    Primary note obligor. The borrower. It could also be an entity that has taken over the role of the issuer such as a bankruptcy trustee.

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.

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.

Jurisdiction    Political entity, usually implying a court system, where issues arising from a sale are to be resolved. See also Applicable Law

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

LIBOR    London Interbank Offering Rate: a set of rates, published daily, for terms up to one year. Often, but not necessarily, used as a surrogate cost of funds when pricing notes.

Margin    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 amounts.

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 note payment in the event of a default, except in the case of fraud or misrepresentation.

Note    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.

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    A party such as a guarantor, indemnifier, or other party that has some responsibility to pay an amount due for redemption of a traded instrument.

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.

Party    A participant in a sale including the Buyer and Seller and other entities providing guarantees, indemnities, or other commitments necessary to complete a sale. The several entities are included because each may shape the terms, may be called upon to make payments, and may generate issues requiring resolution.

Points of Reserve    Provisions agreed by the parties that allow a trade, or commitment to trade, to move forward pending a necessary step, receipt of documents, regulatory approval, completion of an underlying business transaction, or other external event.

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.

Present Value    The discounted value of a note as of any date given an Internal Rate of Return and using conventional Present Value formulas. It should not be confused with a discounted note's value using other methods.

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

Primary Forfaiter    A Primary Discounter.

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

Primary Obligor    Issuer of notes or other instruments being traded, or party that has taken over that obligation. It is distinguished from a guarantor, indemnifier, or some other entity that may have fulfilled some other condition necessry to complete a sale.

Principal    The value of a note on which explicit Issuer Interest is calculated.

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

Promissory Notes    Purely financial instruments issued by a borrower, perhaps and importer, in exchange for goods or services. Sometimes called pNotes or PNs.

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

Repayment Schedule    Payment 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.

Sale    The non-recourse sale/purchase of a financial instrument or the right to receive a payment (under a letter of credit, for example). Sometimes called a transaction. The sale involves a change in ownership and compensation to the seller in the form of money, goods, or other object of value.

Sale 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.

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 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    Use of the terms "settlement" and "settlement date" is not recommended, to avoid confusion with their different meanings in the context of registered security trades.

Spread    See Margin

Straight Discount Rate    An interest rate charged on the Face value of a discounted note to determine the amount of Discount Interest.

Tenor    Total outstanding duration of a note.

Trade    A sale. Use not recommended, to avoid confusion with the commercial trade being financed.

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 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.

Underlying Transaction    The sale of goods and services being financed by the traded instrument. The terms applying to the business transaction are usually totally separate from those for the trade of debt instrument except for a condition relating to the status of the Underlying Transaction such as a requirment that the goods have been shipped.

Uplift    Old English term for Markup.

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