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CFP - Steps in the Financial Planning Process > Investment Planning Definitions > Flashcards

Investment Planning Definitions Flashcards

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1
Q

ACCELERATION CLAUSE

A

The clause in a note

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2
Q

ACCREDITED INVESTOR

A

An individual whose net worth exceeds $1 million or whose income exceeds $200

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3
Q

ACCRUED INTEREST

A

Interest accrued on a bond or other debt obligation since the last interest payment was made. The buyer of a bond pays the market price plus accrued interest. Exceptions include bonds that are in default and income bonds.

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4
Q

ACCUMULATION PHASE

A

Lifecycle stage in which the client is saving and investing for the future.

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5
Q

ACTIVE INVESTING

A

An investment strategy that assumes the market is inefficient or that inefficiencies within the market can be profitably exploited. A great deal of time and effort is expended in security selection and the timing of purchases and sales.

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6
Q

ACTUARIAL RISK

A

Risk an insurance underwriter covers in exchange for premiums

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7
Q

ADJUSTABLE-RATE MORTGAGE

A

A mortgage in which the applicable interest rate payable is adjusted periodically (usually annually) as the ‘money market’ dictates.

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8
Q

AGENCY RISK

A

The risk associated when a principal delegates decisions to an agent who may not always act in the principal’s best interest.

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9
Q

ALPHA

A

The excess rate of return on a security or portfolio over and above what would be anticipated by a pricing model like the capital asset pricing model.

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10
Q

AMERICAN DEPOSITORY RECEIPTS

A

Securities issued by a U.S. bank on foreign securities purchased by the bank through a foreign correspondent bank and held in trust for the benefit of the ADR holder.

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11
Q

AMERICAN STYLE OPTIONS

A

Options that may be exercised any time on or before the expiration date.

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12
Q

AMORTIZE

A

To pay off a debt by periodic payments set aside for the purpose

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13
Q

ANNUAL EXCLUSION

A

A federal gift tax exclusion of $10

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14
Q

ANNUAL REPORT

A

The formal financial statement issued yearly by a corporation.

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15
Q

ANNUITANT

A

A person who receives the benefits on an annuity.

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16
Q

ANNUITY

A

A series of payments of a fixed amount for a specified number of years.

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17
Q

ANOMALY

A

Evidence that a certain investment strategy can systematically outperform on a risk adjusted basis. Examples of anomalies include the January effect and the size effect.

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18
Q

ARBITRAGE PRICING THEORY

A

A theoretical model that posits that the expected return on any asset is a result of that security’s exposure to multiple risk factors.

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19
Q

ARBITRAGE

A

The simultaneous purchase and sale of an asset in order to profit on a difference in price.

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20
Q

ASKED PRICE

A

The price at which securities are offered to potential buyers; or the price sellers offer to take.

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21
Q

ASSESSED VALUE

A

Value assigned to property by a public body for property tax purposes.

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22
Q

ASSET ALLOCATION

A

Is the process of determining the proportions of various types of assets to include in a portfolio.

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23
Q

ASSET-BACKED SECURITIES

A

Debt-type securities that are secured by a pool of similar debt obligations or receivables.

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24
Q

ASSIGNMENT

A

The act of transferring any interest in property to another party. The one who transfers the right is the ‘assignor;’ the receiver of the right is the ‘assignee.’

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25
Q

BALANCE SHEET

A

A statement of the financial position of a business entity at a given time

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26
Q

BALLOON PAYMENT

A

The balance due on a debt instrument at maturity that is in excess of a regular principal payment.

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27
Q

BANKERS ACCEPTANCES

A

Short-term (thirty to 360 days) drafts drawn on a major bank that are typically used to finance international import/export transactions.

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28
Q

BANKRUPTCY

A

The condition of a business or individual that has been declared insolvent (unable to pay debts) by a court proceeding and whose financial matters are being administered by the court through a receiver or trustee.

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29
Q

BARBELL STRATEGY

A

A bond portfolio which is invested in long and short term maturity bonds with none of intermediate term.

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30
Q

BASIS POINT

A

Equal to 1/100 of 1 percent.

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31
Q

BASIS

A

The original cost of an investment including commissions.

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32
Q

BEAR MARKET

A

A declining market.

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33
Q

BEAR

A

Someone who believes that the stock market will decline.

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34
Q

BEARER BOND

A

A bond that does not have the owner’s name registered on the books of the issuing company and that is payable to the holder.

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35
Q

BEHAVIORAL FINANCE

A

The study of how investors actually make decisions.

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36
Q

BENCHMARK

A

A standard by which the performance of a manager or portfolio can be compared.

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37
Q

BENEFICIARY

A

The recipient of funds

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38
Q

BETA

A

A risk measure that quantifies an asset’s relative volatility against an index such as the S&P 500.

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39
Q

BID PRICE

A

The price buyers offer to pay for securities; the price at which sellers may dispose of them.

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40
Q

BIG BOARD

A

A popular term for the New York Stock Exchange.

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41
Q

BLACK-SCHOLES OPTION PRICING MODEL

A

A model developed to estimate the price of call option. The call option value is a function of the current stock price

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42
Q

BLUE CHIP

A

A company known nationally for the quality and wide acceptance of its products or services

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43
Q

BLUE LIST

A

The trade offering sheets of bond dealers

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44
Q

BOND

A

An IOU or promissory note of a corporation or governmental body

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45
Q

BOOK VALUE

A

The net amount (i.e.

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46
Q

BROKER

A

An agent who handles the public’s orders to buy and sell securities

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47
Q

BULL MARKET

A

An advancing market.

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48
Q

BULL

A

A person who believes that the stock market will rise.

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49
Q

BUSINESS RISK

A

Economic or operating risk reflected in the variability of a firm’s earnings.

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50
Q

BUSINESS-DEVELOPMENT COMPANY

A

An investment vehicle created to help finance small companies in the initial stages of their development.

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51
Q

CALENDAR SPREAD

A

A kind of option strategy. The most common type of calendar spread consists of opposing positions in two options of the same type (either both puts or both calls) that have the same exercise price

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52
Q

CALL OPTION

A

An option to buy (or ‘call’) shares of stock at a specified price for a set period of time.

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53
Q

CALL RISK

A

The risk borne by the holder of a callable bond that a bond issuer will take advantage of the callable bond feature and redeem the security prior to maturity.

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54
Q

CALL

A

The process of redeeming a bond or preferred stock issue before its scheduled maturity.

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55
Q

CAPITAL ASSET PRICING MODEL

A

An asset valuation model that posits that the expected return on an individual asset should be the risk-free rate plus a premium for the systematic or undiversifiable risk of that asset.

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56
Q

CAPITAL GAIN or CAPITAL LOSS

A

Profit or loss from the sale of a capital asset. A capital gain is either short-term or long-term. Capital gain is short-term if the asset was held for one year or less; the gain is long-term if the asset was held for more than 1 year.

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57
Q

CAPITAL STOCK

A

All shares representing ownership of a business

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58
Q

CAPITALIZATION

A

The total amount of all the securities issued by a corporation.

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59
Q

CASH FLOW

A

The amount of cash generated over time from an investment

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60
Q

CERTIFICATE OF DEPOSIT

A

A debt instrument issued by a commercial bank

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61
Q

CERTIFICATE

A

The actual piece of paper that is evidence of ownership of stock in a corporation

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62
Q

CHARITABLE DEDUCTION

A

A deduction allowed for a reportable gift to a charitable organization.

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63
Q

CLOSED END FUND

A

Similar to mutual funds in that they use the proceeds from the sale of its shares in order to invest in the securities of other companies

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64
Q

CLOSING

A

The conclusion or consummation of a real estate transaction where all documents are signed and a deed or land contract

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65
Q

COLLAR

A

An options strategy where an investor sells an out of the money call option and uses the premium received to purchase an out of the money put option both on a security they currently hold.

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66
Q

COLLATERALIZED MORTGAGE OBLIGATION

A

A type of mortgage-backed security that creates separate pools of holdings (called tranches) for different classes of debt holders.

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67
Q

COLLECTIBLE

A

From an investment standpoint

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68
Q

COMMERCIAL PAPER

A

Unsecured

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69
Q

COMMODITY POOL

A

A diversified portfolio of commodity futures with professional management

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70
Q

COMMODITY

A

A purchase that represents ownership of a definite physical item such as oil

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71
Q

Common Shares

A

Payment is made on a pro rata basis; however

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72
Q

COMMON STOCK

A

Securities that represent an ownership interest in a corporation.

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73
Q

CONCENTRATED ACCOUNT

A

When one position accounts for a significant proportion of the entire balance in the account.

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74
Q

CONGLOMERATE

A

A corporation that has diversified its operations usually by acquiring enterprises in widely varied industries.

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75
Q

CONSOLIDATION PHASE

A

Lifecycle stage in which the client’s income outpaces expenses and wealth accumulates rapidly.

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76
Q

CONSTRUCTIVE SALE

A

Tax treatment where the authorities treat a transaction (typically options related) as if the underlying security had been sold.

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77
Q

CONVERSION PREMIUM

A

Of a convertible bond is defined as the percentage difference between its current market price and its theoretical minimum value absent the conversion option.

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78
Q

CONVERTIBLE

A

A bond

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79
Q

CONVEXITY

A

Measures the curvature of the relationship between bond yields and prices.

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80
Q

CORPORATION

A

A legal unit organized under state laws that has a continuous life span independent from its ownership.

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81
Q

CORRELATION

A

Is a normalized version of covariance where values can range from -1 (perfect negative covariance) to +1 (perfect positive covariance).

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82
Q

COUNTRY RISK

A

The risk that a country will not be able to honor its financial commitments.

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83
Q

COUPON BOND

A

A bond with interest coupons attached.

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84
Q

COUPON RATE

A

The stated rate of interest on a bond.

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85
Q

COUPON

A

Evidence of interest due on a bond

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86
Q

COVARIANCE

A

A measure of the degree to which two variables move in a systematic or predictable way

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87
Q

COVERED OPTION

A

An option on stock is covered if the individual who

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88
Q

CREDIT RISK

A

The risk of loss resulting from the failure of a borrower to satisfy the terms on a loan.

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89
Q

CUMULATIVE PREFERRED

A

A preferred stock having a provision that if one or more dividends are omitted

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90
Q

CURRENCY RISK

A

The potential gain (or loss) on an investment denominated in a foreign currency due to fluctuations in exchange rates.

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91
Q

CURRENT YIELD

A

The percentage relation of the annual interest received to the current price of a bond

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92
Q

DEALER

A

A person or firm acting as a principal in buying and selling securities.

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93
Q

DEBENTURE

A

A promissory note backed by the general credit of a company and usually not secured by a mortgage or lien on any specific property.

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94
Q

DEBT SERVICE

A

The amount of cash needed to cover periodic mortgage payments or bond interest

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95
Q

DEFAULT

A

Failure to pay principal or interest promptly when due.

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96
Q

DERIVATIVE

A

A financial asset whose value is derived or dependent upon the value of one or more other assets.

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97
Q

DISCOUNT

A

The amount by which a preferred stock or bond may sell below its par value.

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98
Q

Dividend Reinvestment Plan

A

A plan whereby a shareholder may have his dividends used to purchase additional shares automatically.

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99
Q

Dividend Yield

A

The ratio of the current dividend to the current price of a share of stock.

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100
Q

DIVIDEND

A

A payment made from earnings to the stockholders of a corporation.

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101
Q

Documentation Risk

A

The risk of loss due to an inadequacy or other unforeseen aspect involving the legal documentation of the financial contract.

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102
Q

Dollar Cost Averaging

A

A system of buying securities at regular intervals with a fixed dollar amount of capital.

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103
Q

Dollar-Weighted Annual Return

A

The rate of return that discounts an investment’s or portfolio’s terminal value and interim cash flows back to its initial value.

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104
Q

Domicile

A

A location legally regarded as the main place of residence of an individual or business entity.

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105
Q

Donee

A

The recipient of a gift. The term also is used to refer to the recipient of a power of appointment.

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106
Q

Donor

A

The person who makes a gift. The term also refers to the person who grants a power of appointment to another.

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107
Q

Due Diligence

A

The careful investigation of a potential investment or investment manager.

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108
Q

Duration

A

The weighted average time until receipt of all of a bond’s cash flows.

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109
Q

Earnings Per Share (EPS)

A

The earnings available to common stockholders divided by the number of common shares outstanding. It is considered to be a measure of how well a company is doing by its common shareholders.

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110
Q

Efficient-Market Hypothesis

A

The theory that securities markets immediately impound new information. This implies that new information about a security is quickly (almost instantaneously) reflected in its price.

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111
Q

Enhanced-Income Notes

A

Debt instruments that promise to pay a coupon or yield higher than the underlying asset which can be a single stock

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112
Q

Equity Long/Short

A

A category of investment style in which managers purchase the securities of common stocks they expect to appreciate in value while short-selling common stocks they expect to fall in value.

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113
Q

Equity REIT

A

A type of Real Estate Investment Trust that acquires ownership interests in commercial

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114
Q

Equity-Index Annuity

A

Annuities with a crediting rate (return) that is tied to an index such as the S&P 500 stock index.

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115
Q

Equity-Participation Loan

A

A type of real estate financing in which the lender agrees to a fixed or only moderately adjustable interest rate on the condition that upon the sale of the property he will share in the gain realized.

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116
Q

Estate Tax

A

A tax imposed upon the right of a person to transfer property at death. This type of tax is imposed not only by the federal government

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117
Q

Estate

A

An interest in real property. All assets owned by an individual.

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118
Q

Eurodollar Investments

A

Time deposits denominated in U.S. dollars

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119
Q

European Option

A

Options that may only be exercised on the expiration date.

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120
Q

Event-Driven Funds

A

A type of hedge fund that invests in securities of corporations involved in special situations such as bankruptcy

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121
Q

Exchange-Traded Fund

A

A security representing a basket of stocks or bonds

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122
Q

Exchange-Traded Note

A

An unsecured debt security issued by an underwriting bank that promises to pay based on the performance of some underlying index.

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123
Q

Expiration Date

A

The last day on which an option (call or put) can be exercised.

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124
Q

Extra Dividend

A

A dividend in the form of stock or cash in addition to the regular or usual dividend a company has been paying.

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125
Q

Fiduciary

A

A person occupying a position of trust

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126
Q

Financial Risk

A

Risk related to the mix of debt and equity used by a firm to raise capital. The more debt in a firm’s capital structure

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127
Q

Fixed-Period Annuity

A

An annuity contract in which the company promises to pay stipulated amounts for a fixed or guaranteed period of time independent of the survival of the annuitant.

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128
Q

Floating-Rate Bond

A

A bond on which the interest rate is adjusted

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129
Q

Foreign Exchange Risk

A

The risk that foreign holdings may change in value as the value of currency changes.

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130
Q

Formula Investing

A

A strategy that seeks to limit the role of emotions in investing by adhering to a strict set of rules.

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131
Q

Forward Contract

A

A customized contract calling for future delivery of a specified number or notional value of a specified asset

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132
Q

Free Cash Flow to Equity

A

A company’s operating cash flow

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133
Q

Free Cash Flow to the Firm

A

The cash flow available to all capital providers

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134
Q

Fund of Funds

A

A hedge fund that takes positions across several hedge fund managers.

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135
Q

Fundamental Analysis

A

The security selection process that examines company-specific factors such as profitability

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136
Q

Futures Contract

A

A standardized contract calling for future delivery of a specified number or notional value of a specified asset

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137
Q

General Obligation Bond

A

A municipal bond backed by the general taxing power of its issuer.

138
Q

General Partnership

A

A general partnership is one in which two or more individuals join together for investment purposes. Usually

139
Q

Gift

A

Property or property rights or an interest gratuitously passed on or transferred for less than an adequate and full consideration in money or money’s worth to another - whether the transfer is in trust or otherwise

140
Q

Global Macro

A

The broadest investment style in the hedge fund universe. These funds invest based upon macroeconomic factors and have virtually no limitations on the asset classes

141
Q

Government Bonds

A

Obligations of the United States Government; regarded as the highest grade issues in existence.

142
Q

Growth Stock

A

Stock of a company with a record of rapid growth in earnings.

143
Q

Guaranteed Investment Contract

A

A contract issued by an insurance company that guarantees the owner both principal repayment and a fixed or floating rate of interest for a set period of time.

144
Q

Health Savings Account (HSA)

A

A tax-advantaged savings/investment account used in conjunction with high-deductible medical plans to accumulate funds to pay unreimbursed medical expenses.

145
Q

Hedge Fund

A

A professionally managed pool of capital that is largely unregulated and available only to sophisticated (accredited) investors.

146
Q

HEDGING

A

The act of balancing the risk of a position with an offsetting position in another security.

147
Q

HIGH-DEDUCTIBLE MEDICAL PLAN

A

A medical insurance plan that meets certain IRS guidelines regarding the minimum deductible for its plan participants that

148
Q

HOLDING-PERIOD RETURN

A

The total return for a specified period over which an investment is held.

149
Q

HYBRID REIT

A

A type of Real Estate Investment Trust that combines the features of both equity and mortgage REITs.

150
Q

IMMUNIZATION

A

Selecting a portfolio of bonds such that interest rate risk is offset by reinvestment risk.

151
Q

IN-THE-MONEY

A

Description of a call option when the stock price is above the striking price of the call. Description of a put option when the stock price is below the striking price of the put.

152
Q

INCOME STATEMENT

A

A statement that summarizes the revenues and expenses of a business for a specified period of time.

153
Q

INDENTURE

A

A written agreement under which bonds and debentures are issued

154
Q

INDEX FUNDS

A

Mutual funds that try to match the performance of some market index by creating a portfolio that replicates the index.

155
Q

INDUSTRY RISK

A

The risk related to uncertainties caused by particular features of the industry sector in which a company operates.

156
Q

INFORMATION RATIO

A

A risk-adjusted return measure that in the numerator has the return on the asset or portfolio minus the return on its benchmark

157
Q

INITIAL PUBLIC OFFERING

A

The first time the stock of a private company is sold to the public.

158
Q

INTEREST RATE RISK

A

The risk associated with the fluctuation in bond prices as interest rates change.

159
Q

INTEREST

A

Payments a borrower pays a lender for the use of money. A corporation pays interest on its bonds to its bondholders.

160
Q

INTERNAL RATE OF RETURN

A

The discount rate at which the present value of all the future benefits an investor will receive from an investment exactly equals the present value of all the capital contributions the investor will be required to make.

161
Q

INTERVIVOS TRUST

A

A trust created during the settlor’s lifetime. It becomes operative during one’s lifetime as opposed to a trust under a will

162
Q

INVESTMENT POLICY STATEMENT

A

A document used to guide overall investment decisions. It should be developed in accordance with the client’s objectives and constraints.

163
Q

INVESTMENT

A

The use of money for the purpose of making more money in order to gain income

164
Q

JENSEN’S ALPHA

A

A risk-adjusted return measure that is measured as the portfolio’s return in excess of that predicted by the capital asset pricing model.

165
Q

JOINT SURVIVORSHIP

A

A type of life insurance policy that covers two individuals and is not payable until the death of the second (or last) of the insureds.

166
Q

JOINT TENANCY

A

The holding of property by two or more persons in such a manner that

167
Q

JUNK BONDS

A

Bonds that do not qualify for ‘investment grade’ ratings by the major credit rating agencies. They generally pay a higher rate of interest than investment grade or higher-rated bonds due to their greater risk of default on interest and principal payments.

168
Q

KURTOSIS

A

Measures the degree of ‘fatness’ in the tails of a distribution.

169
Q

LADDER PORTFOLIO

A

An investment in a portfolio of bonds with staggered maturities.

170
Q

LESSEE

A

The party to whom a lease is granted.

171
Q

LESSOR

A

The party who grants a lease.

172
Q

LETTER STOCK

A

A stock or bond that is not registered with the Securities and Exchange Commission (SEC) and

173
Q

LEVERAGE

A

The use of funds borrowed at a fixed rate in an attempt to reinvest them at a higher rate. Borrowing against the established equity.

174
Q

LEVERAGED LEASE

A

One in which the lessor finances a portion of the purchase price of the leased property with debt.

175
Q

LEVERAGED PARTICIPATION NOTES

A

Debt instruments that pay a multiple of the return on the underlying asset. Examples include leveraged ETFs or ETNs that pay off with a levered or inverse relationship to an index.

176
Q

LIEN

A

A claim against property that has been pledged or mortgaged to secure the performance of an obligation.

177
Q

LIFE ANNUITY

A

A type of annuity that the company promises that payouts will continue for as long as the annuitant (or annuitants) lives.

178
Q

LIFECYCLE FUND

A

A mutual fund that automatically shifts towards a more conservative mix of investments as it approaches a particular year in the future

179
Q

LIMIT ORDER

A

An order to purchase or sell securities at a set price determined by the customer.

180
Q

LIMITED LIABILITY CORPORATION

A

Noncorporate entities under which neither the owners (known as members) nor those managing the business are personally liable for the Limited Liability Corporation’s obligations.

181
Q

LIMITED PARTNERSHIP

A

A specialized form of business organization in which one general partner manages and operates the business

182
Q

LIQUID ASSETS

A

Cash or assets that can readily be converted into cash without a serious loss of capital.

183
Q

LISTED STOCK

A

The stock of a company that is traded on an organized securities exchange.

184
Q

LOAD

A

The portion of the offering price of shares of a mutual fund that covers sales commissions and all other costs of distribution.

185
Q

LONG TERM EQUITY ANTICIPATION SECURITIES

A

Options with original expiration terms as long as thirty-nine months.

186
Q

LONG-TERM CAPITAL GAIN HOLDING PERIOD

A

The more-than-one-year period necessary to qualify a capital gain as long-term.

187
Q

LONGEVITY RISK

A

The risk that a person will live longer than the period his income can support.

188
Q

MAINTENANCE MARGIN

A

The minimum level of equity relative to the market value of the investment. The maintenance margin requirement generally is lower than the initial margin requirement.

189
Q

MARGIN

A

The buying of stocks or bonds on credit (known as ‘buying on margin’).

190
Q

MARK TO MARKET

A

The process of settling an account each day to reflect changes in the value of the assets.

191
Q

MARKET NEUTRAL STRATEGY

A

One in which the fund manager balances long and short positions to ensure a zero (or minimal market exposure).

192
Q

MARKET ORDER

A

An order by a customer to buy or sell securities at the best obtainable price.

193
Q

MARKET PRICE

A

In the case of a security

194
Q

MARKET TIMING

A

An investment strategy that attempts to anticipate the market’s broad direction and individual security prices

195
Q

MARKETABILITY

A

The ease or difficulty with which a security or other asset can be sold in the secondary market.

196
Q

MASTER LIMITED PARTNERSHIP

A

An investment that combines the tax benefits of a limited partnership with the liquidity of publicly traded securities.

197
Q

MATURITY

A

The date on which a loan

198
Q

Median

A

The point in a probability distribution where there is a 50 percent chance that realized returns will fall below (or above) that value.

199
Q

Mezzanine Financing

A

An intermediate stage of the venture capital process. It comes after the initial stage of venture capital funding

200
Q

Modern Portfolio Theory

A

A theory on how investors can construct portfolios to optimize or maximize expected return based on a level of risk

201
Q

Modified Duration

A

Measures the approximate relative change in the bond price for every one-hundred basis point (1 percent) change in annual interest rates.

202
Q

Modified Endowment Contract (MEC)

A

A life insurance policy that has failed the seven-pay test of Code section 7702A. Distributions (including loans) from a MEC are taxed less favorably than distributions from a life insurance policy that has met the requirements of the seven-pay test.

203
Q

Modified Internal Rate of Return

A

Internal rate of return methods that adjust cash flows for realistic assumptions regarding reinvestment rates

204
Q

Money Market

A

Financial markets in which funds are borrowed or loaned for short periods

205
Q

Money-Market Fund

A

A type of mutual fund that invests in short-term government securities

206
Q

Monte Carlo Simulation

A

A method used to assess the likelihood of an expected outcome. A computer program randomly chooses returns from an expected distribution of returns for each period. Each run results in an ending expected portfolio value. The process is run many times to achieve a distribution of ending values.

207
Q

Mortgage Bond

A

A bond backed by a lien on a specific property.

208
Q

Mortgage REIT

A

A type of Real Estate Investment Trust that invests in real estate indirectly by lending funds for construction and/or permanent mortgages.

209
Q

Mortgage

A

A pledge of property designated as security for a loan.

210
Q

Mortgagee

A

One who lends funds on the security of specific property (mortgage).

211
Q

Mortgagor

A

The borrower who uses specific property as collateral for a loan.

212
Q

Municipal Bond

A

A bond issued by a state or a political subdivision

213
Q

Municipal Paper

A

Short-term debt issued by state

214
Q

Mutual Fund

A

An investment company that uses the proceeds from the sale of its shares in order to invest in the securities of other companies.

215
Q

Net Asset Value

A

A term used in connection with mutual funds

216
Q

Net Present Value

A

The difference between the present value of all future benefits of an investment and the present value of all capital contributions.

217
Q

New Issue

A

Securities offered to the public for the first time.

218
Q

No-Load Fund

A

A mutual fund on which no sales commission is paid.

219
Q

Nominal Return

A

The actual returns earned over a given period computed without accounting for changes in the purchasing power of the dollar.

220
Q

Nominal Yield

A

The interest rate stated on the bond.

221
Q

Normal Distribution

A

A distribution of outcomes in which both sides of the distribution are mirror images of each other. Also known as a bell curve.

222
Q

Odd Lot

A

An amount of a security less than the established ‘round lot.’

223
Q

Offshore Fund

A

A hedge fund structured under foreign law or located outside the U.S.

224
Q

Open Interest

A

The number of futures contracts of a particular type at a point in time that have not been closed out

225
Q

Over the Counter

A

Unlisted securities; those not traded on a major exchange.

226
Q

Par Value

A

The nominal or face value of a bond (or a stock).

227
Q

Partnership

A

An association of two or more individuals to carry on a business for profit. The life span of the partnership is directly linked to that of the owners. Technically

228
Q

Pass-Through Certificates

A

A type of mortgage-backed security in which investors own a share of the pooled mortgages. The stream of income generated by payments of principal and interest on mortgage loans is passed through to the investor.

229
Q

Passive Investing

A

A strategy that seeks to mimic the returns on a benchmark index

230
Q

Pay-Back Period

A

Measures the relative periods of time investors needed to recover their invested capital (income benefits received after the pay-back period will be considered gain).

231
Q

Pay-Out Ratio

A

The percentage of earnings paid out in the form of dividends.

232
Q

Performance-Participation Notes

A

Debt instruments in which the returns are tied to an underlying asset and are designed to track that underlying asset.

233
Q

Political Risk

A

Risk that government legislation or action will have an adverse effect on investment.

234
Q

Portfolio

A

Securities held by an individual or institution. A portfolio may consist of bonds

235
Q

Preferred Stock

A

A class of stock with a claim on the company’s earnings before payment may be made on the common stock

236
Q

Premium

A

The amount by which a bond (or preferred stock) may sell above its par value.

237
Q

Prepayment Assumption

A

Necessary to value mortgage backed securities

238
Q

Price-Earnings Ratio

A

The price of a share of stock divided by earnings per share for a twelve-month period.

239
Q

Primary Market

A

The market for new issues of stocks or bonds.

240
Q

Principal-Protected Notes

A

Debt instruments issued by a financial firm that promise to pay a return based on the performance of an underlying stock index such as an S&P

241
Q

Principal

A

The property comprising the estate or fund that has been set aside in trust

242
Q

Private Equity

A

Any type of equity investment made in a firm that is not listed on an organized exchange.

243
Q

Private Limited Partnership

A

Limited partnerships having no more than thirty-five limited partners

244
Q

Private Placement

A

Occurs when new securities (stocks or bonds) are sold directly to a single buyer

245
Q

Private-Purpose Bonds

A

A type of municipal bond issued to finance certain activities that do not constitute the normal activities or functions of government.

246
Q

Probability Distribution

A

A function that describes the likelihood of obtaining the possible values that a random variable can take.

247
Q

Promissory Note

A

A simple legal document that can be used in a wide range of lender-borrower relationships. Signed by both parties

248
Q

Proprietorship

A

A type of business owned by one person (also known as a ‘sole proprietorship’). It raises money based on the owner’s personal credit.

249
Q

Prospectus

A

A document issued for the purpose of describing a new security issue.

250
Q

Protective Put

A

A long position in a stock along with a long position in a put which enables the investor to sell the stock at a specified price.

251
Q

Proxy

A

Written authorization given by a shareholder to someone else to represent him and vote his shares at a stockholders’ meeting.

252
Q

Public Limited Partnership

A

A limited partnership that is registered with the SEC and which is offered to the general public through broker/dealers.

253
Q

Put Option

A

An option to sell (or ‘put’) a particular security at a specified price within a designated period of time.

254
Q

R-Squared

A

The R-squared of a fund is a measure of what proportion of a security’s or portfolio’s total variability is explained by its relationship to a benchmark or index and how much is its independent risk unrelated to the benchmark or index.

255
Q

Rating

A

A formal opinion by an outside professional service on the credit reputation of an issuer and the investment quality of its securities.

256
Q

Real Estate Investment Trust (REIT)

A

An organization similar to a mutual fund in which investors pool funds that are invested in real estate or used to make construction or mortgage loans.

257
Q

Real Estate

A

Land and the buildings and improvements on land. Real estate includes natural assets

258
Q

Real Rate of Return

A

Represents the return adjusted for changes in the general level of the prices of goods and services that investors could purchase if they liquidated their investments.

259
Q

Rebalancing

A

The process of selling positions in an asset class that has outperformed and adding to positions asset classes that have underperformed to get back to the target strategic asset allocation.

260
Q

Refund Annuity

A

An annuity that promises to pay the difference between the amount invested in the contract (generally the total of the premiums paid) and the annuity payments actually paid out before the death of the annuitant.

261
Q

Refunding

A

Redeeming an existing bond issue by selling a new bond issue

262
Q

Registered Bond

A

A bond that is registered on the books of the issuing company in the name of the owner. It can be transferred only when endorsed by the registered owner.

263
Q

Reinvestment Risk

A

The risk that interest payments from a bond cannot be reinvested at as high an interest rate as when the bond was purchased.

264
Q

Relative Value Funds

A

Attempt to identify securities and positions that have the same risk and return characteristics and purchase the underpriced securities and sell the overpriced securities. Also known as arbitrage funds.

265
Q

Revenue Bond

A

A municipal bond backed by revenues produced from a particular project

266
Q

Reverse Leverage

A

When the cost of servicing the debt (both interest and principal) exceeds the total return (both cash flow and appreciation).

267
Q

Revocable Trust

A

A trust that can be changed or terminated during the grantor’s lifetime and the property recovered.

268
Q

Rights

A

Issued when a corporation plans to raise funds by selling additional shares of common stock to the public. Every current stockholder is typically given one right for each one share of stock they own.

269
Q

Risk Tolerance

A

The volatility in investment returns that an individual is willing to bear. A function of both an individual’s ability and willingness to accept risk

270
Q

Risk-Adjusted Return Measures

A

Measures developed to help investors gauge how much return they were getting per unit of risk. Four popular measures include the Sharpe measure

271
Q

Risk-Free Asset

A

An asset whose future return can be predicted with near certainty. The typical example is a 3-month Treasury bill

272
Q

Risk

A

The risk associated with the collection and accuracy of financial data and with the proper use and application of that data for estimating future company or security values.

273
Q

Round Lot

A

A unit of trading or multiple thereof. On the NYSE the unit of trading is generally 100 shares in stocks and $10

274
Q

Secondary Market

A

Where existing issues are bought and sold. It may be either an over-the-counter market or through an organized exchange.

275
Q

Security Valuation

A

The use of analytical methods to estimate the intrinsic value (as opposed to the observed market price) of a security.

276
Q

Semivariance

A

A measure of downside risk - the risk of realizing an outcome below the expected return. Semivariance is similar to variance except that in making this calculation

277
Q

Sensitivity Analysis

A

A technique used to determine how different inputs will impact an output under a given set of assumptions.

278
Q

Separately-Managed Account

A

An individual investment account that is managed by a professional money manager.

279
Q

Serial Bond

A

A part of an issue that matures in relatively small amounts at periodic stated intervals.

280
Q

Settlement Date

A

The date on which money and securities are exchanged (usually three business days after the trade was executed

281
Q

Sharpe Ratio

A

A risk-adjusted return measure that in the numerator has an asset (or portfolio) return in excess of the risk-free rate

282
Q

Short Sale Against the Box

A

A short sale of securities that are also held long by the investor.

283
Q

Short Sale

A

The act of selling securities that are not currently owned with the intention of subsequently repurchasing them in the future at a lower price.

284
Q

Sinking Fund

A

Money set aside by the issuer to be used to retire a bond issue.

285
Q

Skewness

A

Measures the coefficient of asymmetry of a distribution. In contrast with the normal distribution

286
Q

Specialist

A

A member of a stock exchange whose function is to maintain an orderly market in certain stocks.

287
Q

Spending Phase

A

Lifecycle stage in which earned income (such as wages) ends and investment income is needed from accumulated retirement and non-retirement funds to meet living expenses.

288
Q

Spread

A

The difference between what a dealer pays for a security and the price at which he offers to sell it.

289
Q

Standard Deduction

A

The amount set forth in the Internal Revenue Code that may be deducted (along with personal exemptions) by a taxpayer who does not itemize.

290
Q

Standard Deviation

A

A statistical measure defined as the square root of the variance of returns.

291
Q

Stock Dividend

A

A dividend paid in shares of stock rather than cash.

292
Q

Stock Exchange

A

A central market place where securities are traded.

293
Q

Stock Split

A

A corporate action in which a company divides its existing shares into multiple shares to boost the liquidity of trading in its shares.

294
Q

STOCK SPLIT

A

A corporate action in which an existing share of stock is divided into multiple shares. The main reason for stock splits is to lower the stock’s price per share in order to make it more affordable.

295
Q

STOP-LOSS ORDER

A

An order to sell a security when it reaches a certain price. The intent of a stop loss order is to limit an investor’s loss to a set amount.

296
Q

STRADDLE

A

A purchase of a call and a put option with the same strike price (long straddle) or a sale of a call and a put option with the same strike price (short straddle).

297
Q

STRANGLE

A

A variation of a straddle. Instead of buying or selling an at-the-money call and a put

298
Q

STRATEGIC ASSET ALLOCATION

A

The process of determining which assets classes to include in a client’s portfolio and in what proportion.

299
Q

STRIKING PRICE

A

The price at which an option can be exercised.

300
Q

STRUCTURED PRODUCTS

A

Financial assets that consist of various components combined to generate a risk-return profile that is specific to an investor’s needs.

301
Q

SYNDICATE

A

A group of investment bankers and/or banks that underwrite a bond or stock issue and offer it for public sale.

302
Q

SYNTHETIC SECURITY

A

Created by combining positions in securities in order to mimic the properties of another security.

303
Q

SYSTEMATIC RISK

A

A widespread or economy-wide risk that influences a large number of assets. Examples of systematic risk are political events

304
Q

SYSTEMATIC WITHDRAWAL

A

An arrangement where a mutual fund automatically liquidates sufficient shares to pay an investor a predetermined amount of money at regular intervals.

305
Q

TACTICAL ASSET ALLOCATION

A

A short term adjustment (or tilt) to the long-term strategic asset allocation based on expected relative short-term performance of different asset classes.

306
Q

TAX CREDIT

A

A direct reduction of income tax liability based on items such as investments

307
Q

TAX SHELTER

A

A tax avoidance transaction as classified by the IRS (i.e.

308
Q

TAXABLE YEAR

A

A twelve-month period (usually the calendar year in the case of individuals) that is used in the calculation of taxable income.

309
Q

TECHNICAL ANALYSIS

A

The security selection process that studies market information such as price and volume to identify important trends and opportunities.

310
Q

TEMPORARY LIFE ANNUITY

A

One which provides for fixed payments until the earlier of the death of the annuitant(s) or the end of a specified number of years.

311
Q

TERM BOND

A

Part of a bond issue that has a single maturity.

312
Q

TERM LIFE INSURANCE

A

Insurance that can be maintained for a specified period of time such as one year

313
Q

TIME-WEIGHTED ANNUAL RETURN

A

The geometric (compounded) annual return measured on the basis of periodic market valuations of assets.

314
Q

TIMING RISK

A

Investors run the risk of investing when security prices hit their peak. They also take the risk that they may need to sell their investments for a loss during a market setback because they need to fund a planned or unplanned expense.

315
Q

TRACKING RISK

A

The risk associated with failure of managers of indexed funds to accurately

316
Q

TRANCHE

A

A class or pool of holdings that collateralized mortgage obligations are divided into. Tranche is the French word for slice.

317
Q

TRANSFER AGENT

A

A professional agency (typically a bank) employed by a corporation to handle the issuance and transfer of securities

318
Q

TREASURY BILL

A

Short-term certificate issued by the U.S. federal government that typically mature in three months to one year.

319
Q

TREASURY BOND

A

A long-term debt security issued by the U.S. federal government. They are issued with a fixed maturity of thirty years.

320
Q

TREASURY INFLATION-PROTECTED SECURITIES

A

A type of bond issued by the U.S. federal government in which interest payments and the principal value are adjusted every six months to reflect changes in inflation as measured by the Consumer Price Index (CPI).

321
Q

TREASURY NOTES

A

A medium-term debt security issued by the U.S. federal government. They have a fixed maturity date greater than one year and can extend for up to 10 years from the date of issue.

322
Q

TREYNOR RATIO

A

A risk adjusted return measure that in the numerator has an asset (or portfolio) return in excess of the risk-free rate and in the denominator has the beta of that asset or portfolio.

323
Q

UNDERWRITER

A

The investment banker (or bankers) who buys the entire issue of securities from the issuer and then sell the securities to individual and institutional investors.

324
Q

UNDERWRITING RISK

A

The risk taken by an investment banker that a new issue of securities purchased outright will not be bought by the public and/or that the market price will drop during the offering period.

325
Q

UNIFORMED MANAGED ACCOUNT

A

An extension of a separately managed account that holds subaccounts with multiple managers.

326
Q

UNSYSTEMATIC RISK

A

An idiosyncratic risk that affects a particular company or security

327
Q

VARIABLE ANNUITY

A

An annuity contract under which the annuity holder has the ability to allocate the annuity premiums among several available investment choices. The annuity holder

328
Q

VARIABLE LIFE INSURANCE

A

Is like a traditional whole life insurance contract in that it has fixed premiums and a minimum guaranteed death benefit. The difference is that the investment risk and return is shifted to the policyowner.

329
Q

VARIABLE UNIVERSAL LIFE INSURANCE

A

A variation of a permanent life insurance policy is a hybrid of universal life and variable life insurance.

330
Q

VENTURE CAPITAL

A

A source of financing typically made available to startup firms and small businesses with strong growth potential. It is in generally in the form of an equity investment provided by venture capital funds.

331
Q

VENTURE-CAPITAL LIMITED PARTNERSHIP

A

A limited partnership that is formed to invest in small startup businesses.

332
Q

VOLATILITY INDEX

A

The CBOE Volatility Index® (VIX®) is a measure of market expectations of near-term volatility derived from S&P 500 stock index option prices.

333
Q

WARRANT

A

A right or option to buy a stated number of shares of stock at a specified price over a given period of time. It is usually of longer duration than a call option.

334
Q

WARRANTY DEED

A

A deed by which a grantor conveys and guarantees good title to real property; the safest form of deed for the buyer.

335
Q

WASH SALE

A

Occurs when investors sell or trade stock or securities at a loss and within 30 days before or after the sale investors: (1) buy substantially identical stock or securities; (2) acquire substantially identical stock or securities in a fully taxable trade

336
Q

WEIGHTED AVERAGE LIFE

A

A prepayment assumption commonly used in the secondary mortgage market as a measure of the effective maturity of a mortgage pool.

337
Q

WHOLE LIFE INSURANCE

A

Traditional permanent life insurance policy

338
Q

YIELD TO CALL

A

The internal rate of return from holding a bond assuming the bond is called at the earliest time possible.

339
Q

YIELD TO MATURITY

A

The average annualized rate of return that an investor will receive if a bond is held until its maturity date. It differs from ‘yield’ or ‘current yield’ in that it takes into consideration the increase to par of a bond bought at a discount

340
Q

YIELD

A

Also known as return. The dividends or interest paid by a company expressed as a percentage of the current price. A stock with a current market value of $25 per share paying dividends at a rate of $2.50 is said to return 10 percent ($2.50 ÷ $25.00).

341
Q

ZERO-COUPON BOND

A

A bond that pays no interest during the life of the bond and that is normally issued at a substantial discount from par. The face amount of the bond

CFP - Steps in the Financial Planning Process (9 decks)

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