Accrued Income – Earned, not yet received. (eg: Investment Certificate. Interest accrues annually, but paid at maturity) Interest is taxable annually. Interest could be accrued annually or semi-annually, but is paid only at maturity.
Accrued Interest – Interest received from security’s last coupon payment date, up to the settlement date. (AI = Principal x coupon x elapsed days / 365).
Accrued Interest 30/360 – An interest formula used for municipal, corporate and agency bonds, where interest accrues as if the year has 360 days and the month has 30 days.
Adjustable-Rate Bond. See Variable Rate Bond.
AGI – Adjusted Gross Income.
Amortize – Gradual debt reduction or elimination through periodic payments to a creditor.
Annuity – A vehicle designed to accept investor funds and provide predictable payments at a later point in time. Primarily used to secure a continuous income stream during retirement years.
APR (Annual Percentage Rate) – Interest is a cost of borrowing money. Interest and APR are shown as percentages of a loan. APR includes interest and additional costs within a loan. A mortgage APR includes closing costs, origination fees, and points. TILA requires lenders to display APR when offering a loan. Borrowers should compare APRs, not interest rates.
APY (Annual Percentage Yield) – The yearly amount one earns on savings, including compounded interest. APR does not include compounded interest. Compare APY when shopping savings accounts and investment products.
Ascending Yield Curve- Indicates short-term yields are forecast to be smaller than long-term. Also known as positive yield curve.
Ask Price – When buying a bond or stock, this is price at which another investor will sell it.
Asset Allocation – A term describing a portfolio invested among three main investment types:: Cash equivalents (T-bills, CDs); Long-term securities (bonds) and Equities. An investor’s asset allocation depends on objectives, age, time horizon and risk tolerance.
Balanced Approach – Strategy balancing investments between stocks and bonds with less emphasis on short-term investments.
Basis Point- One 1/100 of a percent (.001). 100 basis points equal 1%.
Bearer Bond – A bond in which possession equals ownership, and right to payment.
Benchmark – Standard by which investments are measured. (eg: 30-year U.S. Treasury).
Bid Price – Price an investor is willing to pay for a security.
Bond – Interest bearing government or corporate security obligating issuer to pay holder a specified sum (usually quarterly) and to repay original amount at maturity.
Bond Ladder – A purchase strategy for investors to realize higher rates (or dividend payments) of longer-term investments, combined with a protection against interest rate risks. A ladder contains multiple vehicles, with staggered maturities, having equal time frames between maturity.
Book Value – Company’s net asset value, calculated by total assets minus accumulated depreciation and goodwill. Shareholders theoretically receive this if company is liquidated.
Bull Call Spread – Options strategy to purchase an investment’s “long” position, while offsetting some of that cost by selling (writing) the same investment at a higher strike price.
Call Date – Specified date a bond may be bought back..
Call Premium – Difference between Call price and face value of instrument.
Call Price – Established price (above face value) an issuer must pay if a bond is called.
Call Provision – Provision in an agreement, allowing issuer to retire debt before maturity date.
Capital Gain – Profit resulting from sale of “capital” asset for more than its cost.
Capital Loss – Loss resulting from selling a “capital” asset for less than its acquisition cost.
Capital Preservation (Diversification Approach) – Investor’s portfolio focuses on income generation through bonds and other short-term investments rather than equities.
Cash Flow – An accounting term; defining cash coming into a business (or family), and used (spent, invested) within a specific time period. Also called “money available.”
Collateralized Mortgage Obligation (CMO or CDO) – A mortgage-backed security providing protection against prepayment risk while still offering high yields.
Compoound Interest – Interest earned and added to an account balance so it, too, earns interest. Compounding expands earnings. As balances increase, new interest payments are based on larger balances.
Consumer Price Index (CPI) – Average change — measured over time — in prices paid by urban consumers for a market basket of consumer goods and services.
Contango – When a commodity’s futures price exceeds future spot prices, Speculators are willing to pay a premium in the future, than the commodity’s currently-expected price.
Contingent Value Right (CVR) – An option issued by buyer of a company. It specifies an event, which, if triggered, lets sellers acquire more shares in the target company.
Coupon Bond – One which contains actual coupons to be submitted to issuer for payment.
Coupon Rate – The annual, generated percent, which is multiplied by underlying principal (over a 12-month period) to arrive at yearly coupon payment.
Credit Risk – Risk to investor, that issuer of security may default. Also known as default risk
Credit Score – A three-digit number assigned by credit-reporting agencies for predicting the likelihood, borrower will repay a loan or credit charge. It differs from a credit report, which is a detailed record of a consumer’s credit history.
Current Yield – Calculation that relates a security’s annual interest to a market price. Calculations don’t account for capital gains and losses.
CUSIP – Unique identification code assigned to investment securities.
Default Risk – Risk to investor, that issuer of a security may default. See Credit Risk.
Defined Benefit (Plan) – Tax deferred contribution plan offers employees annuity at retirement. It’s riskier (than Defined) because employee bears risk of under performing assets and longevity. Risk is muted if employees use assets to purchase annuities after retirement.
Defined Contribution (Plan) – Retirement benefits depend on contributions to – and investment performance of – assets in account (rather than service years or earnings history). Employees have control over how contributions are invested. Examples: 401(k), 403(b) and 457 plans.
Descending Yield Curve – A shape indicating short-term yields are forecast to be greater than long-term. Also known as negative, or Inverted Yield Curve.
Discount – Term when a bond or fund is offered at a price below its face value.
Discount Note – Type of Government-sponsored issue, that is a short-term obligation, with maturity ranging from “overnight” to 365 days.
Diversification – Investing in a variety of securities (geographic, stocks, bonds, commodities) to minimize portfolio risk or sudden loss in any one investment category.
Dollar Cost Averaging – Strategy where one enters an environment by investing similar amounts regularly (monthly), so investor averages purchase price of investment.
Don’t Fight the Fed – Implies inverse correlation between asset prices and Federal Reserve policy direction (tighter money = lower equity and bond prices). Concept correct 70% of time.
Dutch Auction – System in which item’s price is gradually lowered until it meets a responsive bid.
ECN – (Electronic Communication Network) A computerized system that eliminates role of a third party, in execution of orders entered through an over-the-counter market maker.
ETF – (Exchange Traded Funds) Traded like stocks; similar to indexed Mutual Funds. ETF follows performance of an index (S&P 500, Russell 2000, NASDAQ). Buying ETFs is same as buying shares of a portfolio that tracks yield and return of its native index.
Eurodollars – U.S. currency held (mostly) in European banks and commonly used for settling international transactions.
Ex-Dividend – The day after which a stock purchaser would not be entitled to receive a recently declared dividend. (Must buy stock one day before Ex-Div date to qualify for dividend.)
Exchange Rate – Rate at which one currency can be traded for another.
Expense Ratio – Operating expenses of owning a Mutual Fund or ETF. Expense Ratios are found in investment vehicle’s disclosure statement, listed as a percentage.
Face Value – Investment at maturity, or stated value of vehicle. (eg: Corporate bonds have face values of $1,000; federal: $10,000. Life insurance policy’s net value paid upon death.)
Factor – Decimal value reflecting proportion of a security’s outstanding balance, which changes over time, in relation to its original principal value.
FAFSA Application – Free Application for Student Aid (form) required for any government aid program; used to determine expected family contribution, based on family financial situation.
Fair Market Value – Price or value at which buyers and sellers would agree in an unrestricted market, assuming both parties are knowledgeable and under no compulsion.
Fallen Angel – Former blue chip company undergoing problems; may issue higher-yield debt.
Fannie Mae (FNMA – Federal National Mortgage Association) – Similar to Freddie Mac; Government entity designed to maintain an active, secondary market for mortgages.
Federal Direct Loans – The government provides subsidized and unsubsidized loans for eligible students pursuing education at post secondary schools, trade and technical schools.
FHLB (Federal Home Loan Bank System) – Eleven government-sponsored banks provide reliable liquidity to member, financial institutions. It is responsible for stabilizing the flow of mortgage credit to the public and providing funds for low-income housing programs
Fibonacci Retracement – A technical / analytical term referring to areas of support or resistance, using an asset’s original price and subsequent moves, to predict future gains or losses.
Financial Instrument / Vehicle – Document or tactic providing monetary value (eg: check, stock, bond, contract, futures option).
Fixed Income Security – Provides predictable income; typically bonds and dividend-producing equities. May include partnership shares which are legally required to provide dividends at fixed intervals.
Fixed Rate Capital Security – Hybrid security combining features of bonds and preferred stock
Flat Yield Curve – A graph shape indicating short-term yields; forecasted to be consistent with long-term yields; where long-term instruments typically earn higher yields.
Floating Rate Bond – Coupon rates change periodically based on a predetermined benchmark, such as spread above a six-month Treasury yield.
Freddie Mac (FHLMC – Federal Home Loan Mortgage Corp) – A publicly owned, government sponsored enterprise, created to increase mortgage credit availability. It raises funds by maintaining an active secondary market for residential mortgages.
Ginnie Mae (GNMA – Government National Mortgage Association) – A government owned entity designed to ensure U.S. mortgage funds are available through guarantees.
High Interest Vehicle / Instrument – A financial product (bond, equity, preferred security) providing reliable, above-average, interest or dividend payment on a periodic basis (quarterly, annually).
High Yield Bond – A corporate bond (“junk bond”) rated below investment grade by one or all the nation’s rating agencies.
Hybrid Security (Fixed Rate Capital Security) – A security combining features of corporate bonds and preferred stocks.
Inflation Risk – A risk, that inflation will be greater than a yield’s payback, over an investment’s term..
Intermediate Term – Loosely defined as securities with maturities of about five to 12 years.
Internal Rate of Return – Interest rate assumption at which net present value of all cash flow (in an enterprise) equals zero. A calculation to evaluate attractiveness of an outside project.
Inverted Yield Curve – A graph shape indicating short-term yields are forecast to be greater than long-term. Also known as Negative or Descending Yield Curve.
Investment Objective – Results desired by investor that serves to determine an optimal portfolio mix based on goals, net worth, time horizon, existing net income and risk tolerance.
Issuer – A government, corporation or agency that issues a security in order to raise capital. The issuer is the primary determinant of a bond’s value characteristics.
Junk Bond – A higher-yielding, corporate bond, rated below investment grade by one, or all of nation’s rating agencies.
Leverage – The practice of investing with borrowed money to increase potential profit. Leverage works both ways: If investment loses money, leverage magnifies losses.
LIBOR (London Interbank Offered Rate) – The rate most credit worthy international banks charge each other for large Eurodollar loans.
Liquidity – Immediate marketability of transactional shares or bonds, at a reasonable price.
Liquidity Risk – Risk that investor may be unable to sell an instrument, at or near its face value.
Lockout Period – Predetermined period which an investor (in a debt obligation, or an initial public offering) is restricted from selling shares, or receiving a return of principal.
Long-Term – Loosely defined as investments with a maturity longer than 12 months (for tax consideration), or “decades” for income objectives.
Marginal Tax Rate – Top income tax rate charged to individuals on their last dollar of earnings.
Maturity – Date a bond’s principal can be redeemed along with remaining interest payments.
Maturity Value – Similar to face value, except it may include accumulated interest income.
Moody’s – Organization that assigns rating opinions to help investors assess credit risk.
Mortgage-Backed Securities (MBS) – Represents a mortgage loan investment. An MBS investor owns an interest in a pool of mortgages, which serves as the underlying asset.
Mutual Fund – A professionally-managed “basket” of equities, commodities, or bonds, providing investors an opportunity to own shares in multiple, diversified companies.
Net Asset Value (NAV) – A liquidation price for shares of a unit investment trust, or a mutual fund’s price of investments, divided by shares owned by investors.
Net Worth – Assets minus liabilities. It represents value of owned assets after subtracting loans.
Offer / Offer Price – Price at which another investor, or entity, will sell a bond or equity.
Opportunity Cost – Value of what one gives up (cost), to attain that which is desired. If one quits a $100K job to resume schooling, the Opportunity Cost is $100K she would have made, had she kept working at that job.
Over-The-Counter (OTC) – Dealer network which makes markets in both fixed income and equity securities, and sets fair and orderly prices (often, very small-cap equities or instruments).
Passive Portfolio Strategy – Investment selections replicating existing, reliable, predetermined indexes (eg: S&P 500, S&P Financial Index, Russell 2000, etc).
Pass Through – A tax treatment, in which business owners pay taxes of their (Sole Proprietor, LLC, or Sub-Chapter S) companies, rather than face double taxation, with business paying a tax on profits. Also, a type of mortgage-backed security where issuer collects payments, then passes on a share of the principal and interest to the investor.
Pell Grant – US government aid disbursed to post secondary students ($400 to $4,731 annually) based on family’s financial need, determined by FAFSA application process.
Portfolio – A group of selected securities an individual, a mutual fund, or a UIT owns.
Preferred Stock – A class of stock paying dividends at a specified rate; holding preference over common stock, in dividend and asset-liquidation payments.
Premium – Term indicating cost (above face value) of a purchased bond or equity
Prepayment Rate – Rate at which refinanced mortgages are connected to interest rate movements.
Prime Rate – Interest rate banks charge most creditworthy customers. Rates are pegged off the Federal Reserve Funds rate. Some rates are expressed as “prime plus.”
Principal – The amount of a loan, excluding interest. Original amount / value of an investment.
Prospectus – A document provided investors before buying mutual funds or new-issue investments. It describes product, investing objectives, performance, management, risks, tax considerations, fees, and other data to help make an informed investment decision.
Putable Bond / Equity – An instrument allowing investors to sell a security back to the issuer, at par value, on specified dates.
Quantitative Easing (QE) – Central Bank increases credit by creating new money to buy bonds or other assets to add liquidity to economy. Often called “printing money.”
Rebalancing – As portfolio investments expand or shrink, allocations change. These changes may require investors to buy or sell (rebalance) instruments, to get portfolios back in line with original investment strategies.
Risk Tolerance – Indication of how much investment risk an investor is willing to accept.
ROTH IRA – An Individual Retirement Account which allows taxpayers (within income limitations), to save money and allow savings to grow tax-free. Withdrawals are not taxed if monies are held five years and account holder is at least 59 ½.
S&P (Standard & Poors Corp.) – Organization that assigns independent rating opinions to help investors assess credit risk of companies, or other economic entities.
Short-Term – Loosely defined as securities with maturities of less than two years (one year for tax purposes).
Simple IRA – Small-business plan allows employees (or self employed) to contribute part of pretax compensation to the plan, and may require employer to make matching contribution for eligible employees.
Sallie Mae (Originally, Student Loan Marketing Assoc.) – Once, a government sponsored enterprise providing liquidity for programs such as the Federal Guaranteed Student Loan and Heath Education Assistance Programs. It now provides private student loans, as government now lends directly to students (eg: Federal Direct Loans, Direct PLUS Loans; Perkins Loans).
Syllabus – A document professors write and distribute, to provide students with an overview of a college course; usually distributed on the first day of class.
Tax Credits vs Deductions – Deductions and credits reduce tax liability, but in different ways. Deductions reduce taxable income; their value depends on taxpayers’ marginal tax rate. They don’t reduce taxable income below zero. Tax credits directly reduce tax liability and have the same value for all taxpayers. Some credits are refundable. Tax deductions make most sense for reductions in ability to pay tax. Credits are more appropriate for subsidies via the tax system.
Tranche – A fund pool into which portions of cash flow, from CMOs, are segregated in order to provide investors level of payment predictability.
Treasury Bill (T-Bill) – A short-term government security with a maturity from 30 to 364 days; generally sells at a discount to face value based on current interest rates.
Unit Investment Trust (UIT) – Fixed portfolio of professionally-selected securities. Investors purchase units that represent a percentage ownership in the entire portfolio.
Warrant (Stock Warrant) – Corporate security that gives holder the right to purchase a given amount of common stock at a predetermined price.
Yield – Effective annual rate of return expressed as percentage; calculated by using a number of factors including instrument’s principal and maturity.
Yield Curve – A graphical tool demonstrating relationship between yield and maturity, for a set of similar securities.