Definitions C


In a charge-off, a bank's books are adjusted to reflect the judgment that a loan is unlikely to be repaid. That is, a charge-off is the act of recognizing the loss from a bad loan.

From the Federal Reserve:

“Charge-offs, which are the value of loans removed from the books and charged against loss reserves”


“Charge-off: When a debt is considered uncollectible and is removed from active accounts, and when the balance due is removed from the record of the creditor’s assets. Payment may be demanded in full or negotiated to a lesser amount, or the account may be sold to a collections agency.”

Civilian labor force

The civilian labor force (CLF) is made up of

  • everyone 16 and over
  • who is not institutionalized or in the military,
  • and is either
    • employed, or
    • not employed and actively (within the last 4 weeks) seeking work.

From the BLS:

“Civilian noninstitutional population (Current Population Survey): Included are persons 16 years of age and older residing in the 50 States and the District of Columbia who are not inmates of institutions … and who are not on active duty in the Armed Forces. …

Employed persons (Current Population Survey): Persons 16 years and over in the civilian noninstitutional population who, during the reference week, (a) did any work at all (at least 1 hour) as paid employees; worked in their own business, profession, or on their own farm, or worked 15 hours or more as unpaid workers in an enterprise operated by a member of the family; and (b) all those who were not working but who had jobs or businesses from which they were temporarily absent because of vacation, illness, bad weather, childcare problems, maternity or paternity leave, labor-management dispute, job training, or other family or personal reasons, whether or not they were paid for the time off or were seeking other jobs. Each employed person is counted only once, even if he or she holds more than one job. Excluded are persons whose only activity consisted of work around their own house (painting, repairing, or own home housework) or volunteer work for religious, charitable, and other organizations. …

Labor force (Current Population Survey): The labor force includes all persons classified as employed or unemployed in accordance with the definitions contained in this glossary. …

Unemployed persons (Current Population Survey): Persons aged 16 years and older who had no employment during the reference week, were available for work, except for temporary illness, and had made specific efforts to find employment sometime during the 4-week period ending with the reference week. Persons who were waiting to be recalled to a job from which they had been laid off need not have been looking for work to be classified as unemployed.”


“The civilian labor force comprises all civilians 16 years of age and over classified as employed or unemployed. Employed persons are (a) all civilians who, during the reference week, did any work at all as paid employees, in their own business, profession, or on their own farm, or who worked 15 hours or more as unpaid workers in an enterprise operated by a member of the family, and (b) all those who were not working but who had jobs or businesses from which they were temporarily absent because of illness, bad weather, vacation, child-care problems, maternity or paternity leave, labor-management disputes, job training, or other family or personal reasons, whether or not they were paid for the time off or were seeking other jobs. Each person is counted only once, even if he or she holds more than one job.”

Collateralized Debt Obligation

Collateralized debt obligations (CDOs) grew out of the market for, and are a special case of, asset-backed securities.

The innovation in CDOs is that the risk is not evenly spread. The income from the assets is spread across a number of tranches with ranked risk. Investors in the higher-risk (or junior) tranches receive higher rates but are also the first to absorb any losses (e.g. from defaults by borrowers). Investors in the lower-risk (or senior) tranches receive lower rates but do not take any losses until the higher-risk tranches have been completely wiped out.

CDOs are structured as companies, and thus can be as flexible as desired. Hence the ability to build CDOs from derivatives, and to have CDOs comprised of CDOs that have invested in CDOs.

One type of CDO is the Collateralized Loan Obligation (CLO), where the assets backing the CLO are leveraged loans for corporate buyouts.

From the International Monetary Fund's Global Financial Stability Report, April 2008, p57 and 118:

“Collateralized debt obligation (CDO) A structured credit security backed by a pool of securities, loans, or credit default swaps, where securitized interests in the security are divided into tranches with differing repayment and interest earning streams. The pool can be either managed within preset parameters or static. If the CDO is backed by other structured credit securities, it is called a structured finance CDO, and if it is backed solely by other CDOs, it is called a CDO-squared. ”

From Wikipedia:

“Collateralized debt obligations (CDOs) are a type of structured asset-backed security (ABS) whose value and payments are derived from a portfolio of fixed-income underlying assets. CDOs securities are split into different risk classes, or tranches, whereby “senior” tranches are considered the safest securities. Interest and principal payments are made in order of seniority, so that junior tranches offer higher coupon payments (and interest rates) or lower prices to compensate for additional default risk.”

Combined loan-to-value

The combined loan-to-value (CLTV) is defined as the combined remaining principal owed on all loans, divided by the current value of the property. It is used by lenders to determine the risk of default when more than one loan is used.

From Investopedia:

“In general, lenders are willing to lend at CLTV ratios of 80% and above to borrowers with a high credit rating.”


“A ratio that indicates the risk of a homeowner going into default if a home purchase is funded by multiple mortgages. It is calculated by dividing the total value of the combined mortgages by the value of the property. High values (75-85%) are usually required by creditors before they extend a second mortgage or refinancing option to a homeowner, although lower values indicate that there is less risk of default (the loan value is a smaller percentage of the overall home value).”

Commercial real estate

From the Federal_Reserve_Bank_of_Cleveland.

“Commercial mortgages are those that have been secured by property owned or occupied by business enterprises or more than four families. Typically, bank balance sheets break these loans into four categories: property loans secured by farms; loans secured by “multifamily” properties, such as apartment buildings or condos; construction and land development loans, which are used to acquire land and build new commercial structures; and nonfarm, nonresidential loans, which are often associated with already-constructed industrial and office buildings.”

Compound Annual Growth Rate

In laymen's terms, the average annual percentage change. To be slightly more technical, it is the annual percentage change that, with compounding, would give the longer or shorter term rate. For example, if one were to earn 10% one year and 20% the next on some investment, the compound two year rate would be 32%, since 1.1*1.2 = 1.32, and the compound annual growth rate would be 14.89%, since 1.1489 * 1.1489 = 1.32. This is only a little different from the arithmetic average of the two annual rates, but over longer periods there can be a larger difference.

From wikipedia:

“Compound Annual Growth Rate (CAGR) is a business and investing specific term for the geometric mean growth rate on an annualized basis.


   V(t_0)     = start value, 
   V(t_n)     = finish value, and
   t_n - t_0  = number of years"

Consumer Price Index

The Consumer Price Index (CPI) is a measure of the cost of goods and services for consumers, and how that cost changes over time.

From Bureau of Labor Statistics:

“The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.”

“The CPI reflects spending patterns for each of two population groups: all urban consumers and urban wage earners and clerical workers. The all urban consumer group represents about 87 percent of the total U.S. population. It is based on the expenditures of almost all residents of urban or metropolitan areas, including professionals, the self-employed, the poor, the unemployed, and retired people, as well as urban wage earners and clerical workers. Not included in the CPI are the spending patterns of people living in rural nonmetropolitan areas, farm families, people in the Armed Forces, and those in institutions, such as prisons and mental hospitals.”

From Wikipedia:

“The US Consumer Price Index (CPI) is a time series measure of the price level of consumer goods and services. The Bureau of Labor Statistics, which started the statistic in 1919, publishes the CPI on a monthly basis. The CPI is calculated by observing price changes among a wide array of products in urban areas and weighing these price changes by the share of income consumers spend purchasing them. The resulting statistic, measured as of the end of the month for which it is published, serves as one of the most popular measures of United States inflation; however, the CPI focuses on approximating a cost-of-living index not a general price index.”

Core inflation

In the news, “core inflation” almost always means either the Consumer Price Index or the Personal Consumption Expenditures inflation index, adjusted by removing the components for food and energy. There is actually no agreed definition of core inflation more generally – economists and central bankers argue about both what it should be and how it should be measured.

From Wikipedia:

“Core inflation is a measure of inflation which excludes certain items that face volatile price movements, notably food and energy.”

From a recent economics paper by Mark Wynne:

“The common point of departure for almost all analyses of core inflation is the idea that there is a well-defined concept of monetary inflation that ought to be of concern to monetary policy-makers and that this type of inflation, being conceptually different from the cost of living, is not adequately captured by the standard price statistics. Thus it is argued that central banks ought to target a price index whose rate of increase corresponds to the inflation that generates the costs that central banks are seeking to avoid by focusing on an inflation-control objective.”

From Federal Reserve Bank of Atlanta President Dennis Lockhart:

“Attempts to measure the aggregate rate of price change—no matter how sophisticated—remain imperfect. As a result, when it comes to measuring inflation, judgment is needed to distinguish persistent price movements that underlie overall inflation from the relative price adjustments. Separating the inflation signal from noise involves much uncertainty—especially when making decisions in real time. Discerning accurately the underlying trend is difficult.”

Cost of living adjustment

A cost of living adjustment (COLA) is an increase in wages to compensate for increased cost of living due to inflation.

From, COLA is:

“A periodic increase in wages or salaries, to compensate for loss in purchasing power of money due to inflation. Rate of COLA is commonly pegged to a general index such as consumer price index (CPI). Also called cost of living allowance.”


In bankruptcy court, a cramdown is a court-ordered reduction of the secured balance due on a home mortgage loan in which the outstanding balance is divided into two parts: a secured loan equal to the current appraised value of the home which the homeowner will continue to pay, and an unsecured loan that covers the rest, the unpaid portion of which is discharged at the end of the payment plan. The court may order the secured loan to be amortized over the remaining life of the loan, thus reducing monthly payments.

From Wikipedia:

“Under current United States law, bankruptcy courts are not allowed to perform cram downs (i.e., reduce the principal amount or change the interest rate or other terms) on mortgages of bankruptcy filers' primary residences. As a potential solution to the subprime mortgage crisis, legislators and consumer advocates have advanced a proposal to allow cram downs on these loans, and legislation to that effect was introduced for potential inclusion in the Emergency Economic Stabilization Act of 2008.

However, the financial industry strongly voiced opposition to such a measure, claiming that it would create additional uncertainty as to the value of mortgage loans (and by extension, the collateralized debt obligations into which they are bundled). While the provision ultimately was not included in the bill passed into law, the concept still has advocates and new legislation allowing for first-mortgage cram downs may appear in the future.”

Credit Default Swap

A credit default swap (CDS) is basically an insurance contract on a bond. In the simple case a bond owner pays a regular premium to an insurer, in return for a payout in the event of default. The premium is usually specified in terms of basis points; e.g. if the CDS is priced at 50 bp, the insured pays one half of one percent of the insured amount annually.

Financial Times, 10 Apr 2007, p25:

“CDS contracts provide a kind of insurance against non-payment of corporate debt and have to be settled when a default or other 'credit event' takes place. The iTraxx indices are, essentially, baskets of these. Strictly, after a credit event, the buyer of CDS protection hands over the relevant corporate bonds to the seller of protection, who in return pays out the original face value of the debt. The seller then recoups whatever recovery value, if any, remains in the bonds. [But a simple cash settlement is also possible.]”


“A credit derivative contract between two counterparties, whereby the buyer (seller of risk) makes periodic payments to the seller (buyer of risk) in exchange for the right to a payoff if there is a default or other credit event in respect of a third party called reference entity.”


“The “spread” of a CDS is the annual amount the protection buyer must pay the protection seller over the length of the contract, expressed as a percentage of the notional amount. For example, if the CDS spread of Risky Corp is 50 basis points, or 0.5% (1 basis point = 0.01%), then an investor buying $10 million worth of protection from AAA-Bank must pay the bank $50,000 per year. These payments continue until either the CDS contract expires or Risky Corp defaults.”

Currency swap

Two kinds of swaps are defined here, the two having equivalent effect but slightly different form:

(1) In an FX swap, two parties exchange currencies at the current spot rate, with the agreement that they will swap back at an agreed future date, at the current value of the forward rate.

(2) In a basis swap, two parties exchange currencies at the current spot rate, with the agreement (a) to pay certain agreed interest payments on the swapped amounts, and (b) at the end to swap back at the same rate as at the beginning.

Of course the basis swap can be combined with a normal interest rate swap to exchange floating for fixed rate interest.

From the BIS:

“The basic mechanics of FX swaps and cross-currency basis swaps. by Naohiko Baba, Frank Packer and Teppei Nagano”

“An FX swap agreement is a contract in which one party borrows one currency from, and simultaneously lends another to, the second party. Each party uses the repayment obligation to its counterparty as collateral and the amount of repayment is fixed at the FX forward rate as of the start of the contract. Thus, FX swaps can be viewed as FX risk-free collateralised borrowing/lending. The … fund flows involved in a euro/US dollar swap as an example. At the start of the contract, A borrows X·S USD from, and lends X EUR to, B, where S is the FX spot rate. When the contract expires, A returns X·F USD to B, and B returns X EUR to A, where F is the FX forward rate as of the start. …

A cross-currency basis swap agreement is a contract in which one party borrows one currency from another party and simultaneously lends the same value, at current spot rates, of a second currency to that party. The parties involved in basis swaps tend to be financial institutions, either acting on their own or as agents for non-financial corporations. The chart below illustrates the flow of funds involved in a euro/US dollar swap. At the start of the contract, A borrows X·S USD from, and lends X EUR to, B. During the contract term, A receives EUR 3M Libor+ α from, and pays USD 3M Libor to, B every three months, where α is the price of the basis swap, agreed upon by the counterparties at the start of the contract. When the contract expires, A returns X·S USD to B, and B returns X EUR to A, where S is the same FX spot rate as of the start of the contract. Though the structure of cross-currency basis swaps differs from FX swaps, the former basically serve the same economic purpose as the latter, except for the exchange of floating rates during the contract term.”

Current Population Survey

The CPS is a monthly survey of households, mainly about employment, carried out by Census for the BLS. The results most familiar to the average investor are the various measures of unemployment (e.g. U3, U6 and “Part time for economic reasons).

From the Census website:

“The Current Population Survey (CPS) is a monthly survey of about 50,000 households conducted by the Bureau of the Census for the Bureau of Labor Statistics. The survey has been conducted for more than 50 years.

The CPS is the primary source of information on the labor force characteristics of the U.S. population. The sample is scientifically selected to represent the civilian noninstitutional population. Respondents are interviewed to obtain information about the employment status of each member of the household 15 years of age and older. However, published data focus on those ages 16 and over. The sample provides estimates for the nation as a whole and serves as part of model-based estimates for individual states and other geographic areas.

Estimates obtained from the CPS include employment, unemployment, earnings, hours of work, and other indicators. They are available by a variety of demographic characteristics including age, sex, race, marital status, and educational attainment. They are also available by occupation, industry, and class of worker. Supplemental questions to produce estimates on a variety of topics including school enrollment, income, previous work experience, health, employee benefits, and work schedules are also often added to the regular CPS questionnaire.”

See also: