Interests in MSR Represents agreements to purchase all, or a component of, net servicing cash flows. Interest Rate Risk The risk that an investment’s value will change due to a change in the absolute level of interest rates, in the spread between two rates, in the shape of the yield curve or in any other interest rate relationship. As market interest rates rise, the value of current fixed income investment holdings declines. Diversifying, deleveraging and hedging techniques are utilized to mitigate this risk. Interest rate risk is a form of market risk. Interest Rate Swap A binding agreement between counterparties to exchange periodic interest payments on some predetermined dollar principal, which is called the notional principal amount. For example, one party will pay fixed and receive a variable rate. Interest Rate Swaption Options on interest rate swaps. The buyer of a swaption has the right to enter into an interest rate swap agreement at some specified date in the future. The swaption agreement will specify whether the buyer of the swaption will be a fixed-rate receiver or a fixed-rate payer. International Swaps and Derivatives Association (“ISDA”) Master Agreement Standardized contract developed by ISDA used as an umbrella under which bilateral derivatives contracts are entered into. Inverse IO Bond An interest-only bond whose coupon is determined by a formula expressing an inverse relationship to a benchmark rate, such as SOFR. As the benchmark rate changes, the IO coupon adjusts in the opposite direction. When the benchmark rate is relatively low, the IO pays a relatively high coupon payment, and vice versa. Investment/Market Risk Risk to earnings, capital or business resulting in the decline in value of our assets caused from changes in market variables, such as interest rates, which affect the values of Residential Securities and other investment instruments. Investment Advisers Act Refers to the Investment Advisers Act of 1940, as amended. Investment Company Act Refers to the Investment Company Act of 1940, as amended. L Leverage The use of borrowed money to increase investing power and economic returns. Leverage Ratio (GAAP Leverage Ratio or Debt-toEquity Ratio) Calculated as total debt to total stockholders’ equity. For purposes of calculating this ratio total debt includes repurchase agreements, other secured financing, debt issued by securitization vehicles, participations issued, and U.S. Treasury securities sold, not yet purchased. Debt issued by securitization vehicles and participations issued and mortgages payable are non-recourse to us. LIBOR (London Interbank Offered Rate) A rate previously used as a benchmark for financial transactions. All tenors of LIBOR relevant to us are either no longer published or are no longer representative. Liquidity Risk Risk to earnings, capital or business arising from our inability to meet our obligations when they come due without incurring unacceptable losses because of inability to liquidate assets or obtain adequate funding. Long-Term CPR Our projected prepayment speeds for certain Agency mortgage-backed securities using third party model and market information. Our prepayment speed projections incorporate underlying loan characteristics (e.g., coupon, term, original loan size, original loan-to-value ratio, etc.) and market data, including interest rate and home price index forecasts. Changes to model assumptions, including interest rates and other market data, as well as periodic revisions to the model will cause changes in the results. Long-Term Debt Debt which matures in more than one year. M Market Agreed Coupon (“MAC”) Interest Rate Swap An interest rate swap contract structure with pre-defined, market agreed terms, developed by SIFMA and ISDA with the purpose of promoting liquidity and simplified administration. Monetary Policy Action taken by the Federal Open Market Committee of the Federal Reserve System to influence the money supply or interest rates. ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis 84
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