Investment Planning Definitions Flashcards
1
Q
ACCELERATION CLAUSE
A
The clause in a note
2
Q
ACCREDITED INVESTOR
A
An individual whose net worth exceeds $1 million or whose income exceeds $200
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.
4
Q
ACCUMULATION PHASE
A
Lifecycle stage in which the client is saving and investing for the future.
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.
6
Q
ACTUARIAL RISK
A
Risk an insurance underwriter covers in exchange for premiums
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.
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.
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.
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.
11
Q
AMERICAN STYLE OPTIONS
A
Options that may be exercised any time on or before the expiration date.
12
Q
AMORTIZE
A
To pay off a debt by periodic payments set aside for the purpose
13
Q
ANNUAL EXCLUSION
A
A federal gift tax exclusion of $10
14
Q
ANNUAL REPORT
A
The formal financial statement issued yearly by a corporation.
15
Q
ANNUITANT
A
A person who receives the benefits on an annuity.
16
Q
ANNUITY
A
A series of payments of a fixed amount for a specified number of years.
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.
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.
19
Q
ARBITRAGE
A
The simultaneous purchase and sale of an asset in order to profit on a difference in price.
20
Q
ASKED PRICE
A
The price at which securities are offered to potential buyers; or the price sellers offer to take.
21
Q
ASSESSED VALUE
A
Value assigned to property by a public body for property tax purposes.
22
Q
ASSET ALLOCATION
A
Is the process of determining the proportions of various types of assets to include in a portfolio.
23
Q
ASSET-BACKED SECURITIES
A
Debt-type securities that are secured by a pool of similar debt obligations or receivables.
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.’
25
BALANCE SHEET
A statement of the financial position of a business entity at a given time
26
BALLOON PAYMENT
The balance due on a debt instrument at maturity that is in excess of a regular principal payment.
27
BANKERS ACCEPTANCES
Short-term (thirty to 360 days) drafts drawn on a major bank that are typically used to finance international import/export transactions.
28
BANKRUPTCY
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.
29
BARBELL STRATEGY
A bond portfolio which is invested in long and short term maturity bonds with none of intermediate term.
30
BASIS POINT
Equal to 1/100 of 1 percent.
31
BASIS
The original cost of an investment including commissions.
32
BEAR MARKET
A declining market.
33
BEAR
Someone who believes that the stock market will decline.
34
BEARER BOND
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.
35
BEHAVIORAL FINANCE
The study of how investors actually make decisions.
36
BENCHMARK
A standard by which the performance of a manager or portfolio can be compared.
37
BENEFICIARY
The recipient of funds
38
BETA
A risk measure that quantifies an asset's relative volatility against an index such as the S&P 500.
39
BID PRICE
The price buyers offer to pay for securities; the price at which sellers may dispose of them.
40
BIG BOARD
A popular term for the New York Stock Exchange.
41
BLACK-SCHOLES OPTION PRICING MODEL
A model developed to estimate the price of call option. The call option value is a function of the current stock price
42
BLUE CHIP
A company known nationally for the quality and wide acceptance of its products or services
43
BLUE LIST
The trade offering sheets of bond dealers
44
BOND
An IOU or promissory note of a corporation or governmental body
45
BOOK VALUE
The net amount (i.e.
46
BROKER
An agent who handles the public's orders to buy and sell securities
47
BULL MARKET
An advancing market.
48
BULL
A person who believes that the stock market will rise.
49
BUSINESS RISK
Economic or operating risk reflected in the variability of a firm's earnings.
50
BUSINESS-DEVELOPMENT COMPANY
An investment vehicle created to help finance small companies in the initial stages of their development.
51
CALENDAR SPREAD
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
52
CALL OPTION
An option to buy (or 'call') shares of stock at a specified price for a set period of time.
53
CALL RISK
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.
54
CALL
The process of redeeming a bond or preferred stock issue before its scheduled maturity.
55
CAPITAL ASSET PRICING MODEL
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.
56
CAPITAL GAIN or CAPITAL LOSS
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.
57
CAPITAL STOCK
All shares representing ownership of a business
58
CAPITALIZATION
The total amount of all the securities issued by a corporation.
59
CASH FLOW
The amount of cash generated over time from an investment
60
CERTIFICATE OF DEPOSIT
A debt instrument issued by a commercial bank
61
CERTIFICATE
The actual piece of paper that is evidence of ownership of stock in a corporation
62
CHARITABLE DEDUCTION
A deduction allowed for a reportable gift to a charitable organization.
63
CLOSED END FUND
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
64
CLOSING
The conclusion or consummation of a real estate transaction where all documents are signed and a deed or land contract
65
COLLAR
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.
66
COLLATERALIZED MORTGAGE OBLIGATION
A type of mortgage-backed security that creates separate pools of holdings (called tranches) for different classes of debt holders.
67
COLLECTIBLE
From an investment standpoint
68
COMMERCIAL PAPER
Unsecured
69
COMMODITY POOL
A diversified portfolio of commodity futures with professional management
70
COMMODITY
A purchase that represents ownership of a definite physical item such as oil
71
Common Shares
Payment is made on a pro rata basis; however
72
COMMON STOCK
Securities that represent an ownership interest in a corporation.
73
CONCENTRATED ACCOUNT
When one position accounts for a significant proportion of the entire balance in the account.
74
CONGLOMERATE
A corporation that has diversified its operations usually by acquiring enterprises in widely varied industries.
75
CONSOLIDATION PHASE
Lifecycle stage in which the client's income outpaces expenses and wealth accumulates rapidly.
76
CONSTRUCTIVE SALE
Tax treatment where the authorities treat a transaction (typically options related) as if the underlying security had been sold.
77
CONVERSION PREMIUM
Of a convertible bond is defined as the percentage difference between its current market price and its theoretical minimum value absent the conversion option.
78
CONVERTIBLE
A bond
79
CONVEXITY
Measures the curvature of the relationship between bond yields and prices.
80
CORPORATION
A legal unit organized under state laws that has a continuous life span independent from its ownership.
81
CORRELATION
Is a normalized version of covariance where values can range from -1 (perfect negative covariance) to +1 (perfect positive covariance).
82
COUNTRY RISK
The risk that a country will not be able to honor its financial commitments.
83
COUPON BOND
A bond with interest coupons attached.
84
COUPON RATE
The stated rate of interest on a bond.
85
COUPON
Evidence of interest due on a bond
86
COVARIANCE
A measure of the degree to which two variables move in a systematic or predictable way
87
COVERED OPTION
An option on stock is covered if the individual who
88
CREDIT RISK
The risk of loss resulting from the failure of a borrower to satisfy the terms on a loan.
89
CUMULATIVE PREFERRED
A preferred stock having a provision that if one or more dividends are omitted
90
CURRENCY RISK
The potential gain (or loss) on an investment denominated in a foreign currency due to fluctuations in exchange rates.
91
CURRENT YIELD
The percentage relation of the annual interest received to the current price of a bond
92
DEALER
A person or firm acting as a principal in buying and selling securities.
93
DEBENTURE
A promissory note backed by the general credit of a company and usually not secured by a mortgage or lien on any specific property.
94
DEBT SERVICE
The amount of cash needed to cover periodic mortgage payments or bond interest
95
DEFAULT
Failure to pay principal or interest promptly when due.
96
DERIVATIVE
A financial asset whose value is derived or dependent upon the value of one or more other assets.
97
DISCOUNT
The amount by which a preferred stock or bond may sell below its par value.
98
Dividend Reinvestment Plan
A plan whereby a shareholder may have his dividends used to purchase additional shares automatically.
99
Dividend Yield
The ratio of the current dividend to the current price of a share of stock.
100
DIVIDEND
A payment made from earnings to the stockholders of a corporation.
101
Documentation Risk
The risk of loss due to an inadequacy or other unforeseen aspect involving the legal documentation of the financial contract.
102
Dollar Cost Averaging
A system of buying securities at regular intervals with a fixed dollar amount of capital.
103
Dollar-Weighted Annual Return
The rate of return that discounts an investment's or portfolio's terminal value and interim cash flows back to its initial value.
104
Domicile
A location legally regarded as the main place of residence of an individual or business entity.
105
Donee
The recipient of a gift. The term also is used to refer to the recipient of a power of appointment.
106
Donor
The person who makes a gift. The term also refers to the person who grants a power of appointment to another.
107
Due Diligence
The careful investigation of a potential investment or investment manager.
108
Duration
The weighted average time until receipt of all of a bond's cash flows.
109
Earnings Per Share (EPS)
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.
110
Efficient-Market Hypothesis
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.
111
Enhanced-Income Notes
Debt instruments that promise to pay a coupon or yield higher than the underlying asset which can be a single stock
112
Equity Long/Short
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.
113
Equity REIT
A type of Real Estate Investment Trust that acquires ownership interests in commercial
114
Equity-Index Annuity
Annuities with a crediting rate (return) that is tied to an index such as the S&P 500 stock index.
115
Equity-Participation Loan
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.
116
Estate Tax
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
117
Estate
An interest in real property. All assets owned by an individual.
118
Eurodollar Investments
Time deposits denominated in U.S. dollars
119
European Option
Options that may only be exercised on the expiration date.
120
Event-Driven Funds
A type of hedge fund that invests in securities of corporations involved in special situations such as bankruptcy
121
Exchange-Traded Fund
A security representing a basket of stocks or bonds
122
Exchange-Traded Note
An unsecured debt security issued by an underwriting bank that promises to pay based on the performance of some underlying index.
123
Expiration Date
The last day on which an option (call or put) can be exercised.
124
Extra Dividend
A dividend in the form of stock or cash in addition to the regular or usual dividend a company has been paying.
125
Fiduciary
A person occupying a position of trust
126
Financial Risk
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
127
Fixed-Period Annuity
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.
128
Floating-Rate Bond
A bond on which the interest rate is adjusted
129
Foreign Exchange Risk
The risk that foreign holdings may change in value as the value of currency changes.
130
Formula Investing
A strategy that seeks to limit the role of emotions in investing by adhering to a strict set of rules.
131
Forward Contract
A customized contract calling for future delivery of a specified number or notional value of a specified asset
132
Free Cash Flow to Equity
A company's operating cash flow
133
Free Cash Flow to the Firm
The cash flow available to all capital providers
134
Fund of Funds
A hedge fund that takes positions across several hedge fund managers.
135
Fundamental Analysis
The security selection process that examines company-specific factors such as profitability
136
Futures Contract
A standardized contract calling for future delivery of a specified number or notional value of a specified asset
137
General Obligation Bond
A municipal bond backed by the general taxing power of its issuer.
138
General Partnership
A general partnership is one in which two or more individuals join together for investment purposes. Usually
139
Gift
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
Global Macro
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
Government Bonds
Obligations of the United States Government; regarded as the highest grade issues in existence.
142
Growth Stock
Stock of a company with a record of rapid growth in earnings.
143
Guaranteed Investment Contract
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
Health Savings Account (HSA)
A tax-advantaged savings/investment account used in conjunction with high-deductible medical plans to accumulate funds to pay unreimbursed medical expenses.
145
Hedge Fund
A professionally managed pool of capital that is largely unregulated and available only to sophisticated (accredited) investors.
146
HEDGING
The act of balancing the risk of a position with an offsetting position in another security.
147
HIGH-DEDUCTIBLE MEDICAL PLAN
A medical insurance plan that meets certain IRS guidelines regarding the minimum deductible for its plan participants that
148
HOLDING-PERIOD RETURN
The total return for a specified period over which an investment is held.
149
HYBRID REIT
A type of Real Estate Investment Trust that combines the features of both equity and mortgage REITs.
150
IMMUNIZATION
Selecting a portfolio of bonds such that interest rate risk is offset by reinvestment risk.
151
IN-THE-MONEY
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
INCOME STATEMENT
A statement that summarizes the revenues and expenses of a business for a specified period of time.
153
INDENTURE
A written agreement under which bonds and debentures are issued
154
INDEX FUNDS
Mutual funds that try to match the performance of some market index by creating a portfolio that replicates the index.
155
INDUSTRY RISK
The risk related to uncertainties caused by particular features of the industry sector in which a company operates.
156
INFORMATION RATIO
A risk-adjusted return measure that in the numerator has the return on the asset or portfolio minus the return on its benchmark
157
INITIAL PUBLIC OFFERING
The first time the stock of a private company is sold to the public.
158
INTEREST RATE RISK
The risk associated with the fluctuation in bond prices as interest rates change.
159
INTEREST
Payments a borrower pays a lender for the use of money. A corporation pays interest on its bonds to its bondholders.
160
INTERNAL RATE OF RETURN
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
INTERVIVOS TRUST
A trust created during the settlor's lifetime. It becomes operative during one's lifetime as opposed to a trust under a will
162
INVESTMENT POLICY STATEMENT
A document used to guide overall investment decisions. It should be developed in accordance with the client's objectives and constraints.
163
INVESTMENT
The use of money for the purpose of making more money in order to gain income
164
JENSEN'S ALPHA
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
JOINT SURVIVORSHIP
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
JOINT TENANCY
The holding of property by two or more persons in such a manner that
167
JUNK BONDS
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
KURTOSIS
Measures the degree of 'fatness' in the tails of a distribution.
169
LADDER PORTFOLIO
An investment in a portfolio of bonds with staggered maturities.
170
LESSEE
The party to whom a lease is granted.
171
LESSOR
The party who grants a lease.
172
LETTER STOCK
A stock or bond that is not registered with the Securities and Exchange Commission (SEC) and
173
LEVERAGE
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
LEVERAGED LEASE
One in which the lessor finances a portion of the purchase price of the leased property with debt.
175
LEVERAGED PARTICIPATION NOTES
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
LIEN
A claim against property that has been pledged or mortgaged to secure the performance of an obligation.
177
LIFE ANNUITY
A type of annuity that the company promises that payouts will continue for as long as the annuitant (or annuitants) lives.
178
LIFECYCLE FUND
A mutual fund that automatically shifts towards a more conservative mix of investments as it approaches a particular year in the future
179
LIMIT ORDER
An order to purchase or sell securities at a set price determined by the customer.
180
LIMITED LIABILITY CORPORATION
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
LIMITED PARTNERSHIP
A specialized form of business organization in which one general partner manages and operates the business
182
LIQUID ASSETS
Cash or assets that can readily be converted into cash without a serious loss of capital.
183
LISTED STOCK
The stock of a company that is traded on an organized securities exchange.
184
LOAD
The portion of the offering price of shares of a mutual fund that covers sales commissions and all other costs of distribution.
185
LONG TERM EQUITY ANTICIPATION SECURITIES
Options with original expiration terms as long as thirty-nine months.
186
LONG-TERM CAPITAL GAIN HOLDING PERIOD
The more-than-one-year period necessary to qualify a capital gain as long-term.
187
LONGEVITY RISK
The risk that a person will live longer than the period his income can support.
188
MAINTENANCE MARGIN
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
MARGIN
The buying of stocks or bonds on credit (known as 'buying on margin').
190
MARK TO MARKET
The process of settling an account each day to reflect changes in the value of the assets.
191
MARKET NEUTRAL STRATEGY
One in which the fund manager balances long and short positions to ensure a zero (or minimal market exposure).
192
MARKET ORDER
An order by a customer to buy or sell securities at the best obtainable price.
193
MARKET PRICE
In the case of a security
194
MARKET TIMING
An investment strategy that attempts to anticipate the market's broad direction and individual security prices
195
MARKETABILITY
The ease or difficulty with which a security or other asset can be sold in the secondary market.
196
MASTER LIMITED PARTNERSHIP
An investment that combines the tax benefits of a limited partnership with the liquidity of publicly traded securities.
197
MATURITY
The date on which a loan
198
Median
The point in a probability distribution where there is a 50 percent chance that realized returns will fall below (or above) that value.
199
Mezzanine Financing
An intermediate stage of the venture capital process. It comes after the initial stage of venture capital funding
200
Modern Portfolio Theory
A theory on how investors can construct portfolios to optimize or maximize expected return based on a level of risk
201
Modified Duration
Measures the approximate relative change in the bond price for every one-hundred basis point (1 percent) change in annual interest rates.
202
Modified Endowment Contract (MEC)
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
Modified Internal Rate of Return
Internal rate of return methods that adjust cash flows for realistic assumptions regarding reinvestment rates
204
Money Market
Financial markets in which funds are borrowed or loaned for short periods
205
Money-Market Fund
A type of mutual fund that invests in short-term government securities
206
Monte Carlo Simulation
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
Mortgage Bond
A bond backed by a lien on a specific property.
208
Mortgage REIT
A type of Real Estate Investment Trust that invests in real estate indirectly by lending funds for construction and/or permanent mortgages.
209
Mortgage
A pledge of property designated as security for a loan.
210
Mortgagee
One who lends funds on the security of specific property (mortgage).
211
Mortgagor
The borrower who uses specific property as collateral for a loan.
212
Municipal Bond
A bond issued by a state or a political subdivision
213
Municipal Paper
Short-term debt issued by state
214
Mutual Fund
An investment company that uses the proceeds from the sale of its shares in order to invest in the securities of other companies.
215
Net Asset Value
A term used in connection with mutual funds
216
Net Present Value
The difference between the present value of all future benefits of an investment and the present value of all capital contributions.
217
New Issue
Securities offered to the public for the first time.
218
No-Load Fund
A mutual fund on which no sales commission is paid.
219
Nominal Return
The actual returns earned over a given period computed without accounting for changes in the purchasing power of the dollar.
220
Nominal Yield
The interest rate stated on the bond.
221
Normal Distribution
A distribution of outcomes in which both sides of the distribution are mirror images of each other. Also known as a bell curve.
222
Odd Lot
An amount of a security less than the established 'round lot.'
223
Offshore Fund
A hedge fund structured under foreign law or located outside the U.S.
224
Open Interest
The number of futures contracts of a particular type at a point in time that have not been closed out
225
Over the Counter
Unlisted securities; those not traded on a major exchange.
226
Par Value
The nominal or face value of a bond (or a stock).
227
Partnership
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
Pass-Through Certificates
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
Passive Investing
A strategy that seeks to mimic the returns on a benchmark index
230
Pay-Back Period
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
Pay-Out Ratio
The percentage of earnings paid out in the form of dividends.
232
Performance-Participation Notes
Debt instruments in which the returns are tied to an underlying asset and are designed to track that underlying asset.
233
Political Risk
Risk that government legislation or action will have an adverse effect on investment.
234
Portfolio
Securities held by an individual or institution. A portfolio may consist of bonds
235
Preferred Stock
A class of stock with a claim on the company's earnings before payment may be made on the common stock
236
Premium
The amount by which a bond (or preferred stock) may sell above its par value.
237
Prepayment Assumption
Necessary to value mortgage backed securities
238
Price-Earnings Ratio
The price of a share of stock divided by earnings per share for a twelve-month period.
239
Primary Market
The market for new issues of stocks or bonds.
240
Principal-Protected Notes
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
Principal
The property comprising the estate or fund that has been set aside in trust
242
Private Equity
Any type of equity investment made in a firm that is not listed on an organized exchange.
243
Private Limited Partnership
Limited partnerships having no more than thirty-five limited partners
244
Private Placement
Occurs when new securities (stocks or bonds) are sold directly to a single buyer
245
Private-Purpose Bonds
A type of municipal bond issued to finance certain activities that do not constitute the normal activities or functions of government.
246
Probability Distribution
A function that describes the likelihood of obtaining the possible values that a random variable can take.
247
Promissory Note
A simple legal document that can be used in a wide range of lender-borrower relationships. Signed by both parties
248
Proprietorship
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
Prospectus
A document issued for the purpose of describing a new security issue.
250
Protective Put
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
Proxy
Written authorization given by a shareholder to someone else to represent him and vote his shares at a stockholders' meeting.
252
Public Limited Partnership
A limited partnership that is registered with the SEC and which is offered to the general public through broker/dealers.
253
Put Option
An option to sell (or 'put') a particular security at a specified price within a designated period of time.
254
R-Squared
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
Rating
A formal opinion by an outside professional service on the credit reputation of an issuer and the investment quality of its securities.
256
Real Estate Investment Trust (REIT)
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
Real Estate
Land and the buildings and improvements on land. Real estate includes natural assets
258
Real Rate of Return
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
Rebalancing
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
Refund Annuity
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.
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Refunding
Redeeming an existing bond issue by selling a new bond issue
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Registered Bond
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.
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Reinvestment Risk
The risk that interest payments from a bond cannot be reinvested at as high an interest rate as when the bond was purchased.
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Relative Value Funds
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.
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Revenue Bond
A municipal bond backed by revenues produced from a particular project
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Reverse Leverage
When the cost of servicing the debt (both interest and principal) exceeds the total return (both cash flow and appreciation).
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Revocable Trust
A trust that can be changed or terminated during the grantor's lifetime and the property recovered.
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Rights
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.
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Risk Tolerance
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
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Risk-Adjusted Return Measures
Measures developed to help investors gauge how much return they were getting per unit of risk. Four popular measures include the Sharpe measure
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Risk-Free Asset
An asset whose future return can be predicted with near certainty. The typical example is a 3-month Treasury bill
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Risk
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.
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Round Lot
A unit of trading or multiple thereof. On the NYSE the unit of trading is generally 100 shares in stocks and $10
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Secondary Market
Where existing issues are bought and sold. It may be either an over-the-counter market or through an organized exchange.
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Security Valuation
The use of analytical methods to estimate the intrinsic value (as opposed to the observed market price) of a security.
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Semivariance
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
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Sensitivity Analysis
A technique used to determine how different inputs will impact an output under a given set of assumptions.
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Separately-Managed Account
An individual investment account that is managed by a professional money manager.
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Serial Bond
A part of an issue that matures in relatively small amounts at periodic stated intervals.
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Settlement Date
The date on which money and securities are exchanged (usually three business days after the trade was executed
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Sharpe Ratio
A risk-adjusted return measure that in the numerator has an asset (or portfolio) return in excess of the risk-free rate
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Short Sale Against the Box
A short sale of securities that are also held long by the investor.
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Short Sale
The act of selling securities that are not currently owned with the intention of subsequently repurchasing them in the future at a lower price.
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Sinking Fund
Money set aside by the issuer to be used to retire a bond issue.
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Skewness
Measures the coefficient of asymmetry of a distribution. In contrast with the normal distribution
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Specialist
A member of a stock exchange whose function is to maintain an orderly market in certain stocks.
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Spending Phase
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.
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Spread
The difference between what a dealer pays for a security and the price at which he offers to sell it.
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Standard Deduction
The amount set forth in the Internal Revenue Code that may be deducted (along with personal exemptions) by a taxpayer who does not itemize.
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Standard Deviation
A statistical measure defined as the square root of the variance of returns.
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Stock Dividend
A dividend paid in shares of stock rather than cash.
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Stock Exchange
A central market place where securities are traded.
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Stock Split
A corporate action in which a company divides its existing shares into multiple shares to boost the liquidity of trading in its shares.
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STOCK SPLIT
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.
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STOP-LOSS ORDER
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.
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STRADDLE
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).
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STRANGLE
A variation of a straddle. Instead of buying or selling an at-the-money call and a put
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STRATEGIC ASSET ALLOCATION
The process of determining which assets classes to include in a client's portfolio and in what proportion.
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STRIKING PRICE
The price at which an option can be exercised.
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STRUCTURED PRODUCTS
Financial assets that consist of various components combined to generate a risk-return profile that is specific to an investor's needs.
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SYNDICATE
A group of investment bankers and/or banks that underwrite a bond or stock issue and offer it for public sale.
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SYNTHETIC SECURITY
Created by combining positions in securities in order to mimic the properties of another security.
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SYSTEMATIC RISK
A widespread or economy-wide risk that influences a large number of assets. Examples of systematic risk are political events
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SYSTEMATIC WITHDRAWAL
An arrangement where a mutual fund automatically liquidates sufficient shares to pay an investor a predetermined amount of money at regular intervals.
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TACTICAL ASSET ALLOCATION
A short term adjustment (or tilt) to the long-term strategic asset allocation based on expected relative short-term performance of different asset classes.
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TAX CREDIT
A direct reduction of income tax liability based on items such as investments
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TAX SHELTER
A tax avoidance transaction as classified by the IRS (i.e.
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TAXABLE YEAR
A twelve-month period (usually the calendar year in the case of individuals) that is used in the calculation of taxable income.
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TECHNICAL ANALYSIS
The security selection process that studies market information such as price and volume to identify important trends and opportunities.
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TEMPORARY LIFE ANNUITY
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.
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TERM BOND
Part of a bond issue that has a single maturity.
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TERM LIFE INSURANCE
Insurance that can be maintained for a specified period of time such as one year
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TIME-WEIGHTED ANNUAL RETURN
The geometric (compounded) annual return measured on the basis of periodic market valuations of assets.
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TIMING RISK
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.
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TRACKING RISK
The risk associated with failure of managers of indexed funds to accurately
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TRANCHE
A class or pool of holdings that collateralized mortgage obligations are divided into. Tranche is the French word for slice.
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TRANSFER AGENT
A professional agency (typically a bank) employed by a corporation to handle the issuance and transfer of securities
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TREASURY BILL
Short-term certificate issued by the U.S. federal government that typically mature in three months to one year.
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TREASURY BOND
A long-term debt security issued by the U.S. federal government. They are issued with a fixed maturity of thirty years.
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TREASURY INFLATION-PROTECTED SECURITIES
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).
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TREASURY NOTES
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.
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TREYNOR RATIO
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.
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UNDERWRITER
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.
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UNDERWRITING RISK
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.
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UNIFORMED MANAGED ACCOUNT
An extension of a separately managed account that holds subaccounts with multiple managers.
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UNSYSTEMATIC RISK
An idiosyncratic risk that affects a particular company or security
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VARIABLE ANNUITY
An annuity contract under which the annuity holder has the ability to allocate the annuity premiums among several available investment choices. The annuity holder
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VARIABLE LIFE INSURANCE
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.
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VARIABLE UNIVERSAL LIFE INSURANCE
A variation of a permanent life insurance policy is a hybrid of universal life and variable life insurance.
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VENTURE CAPITAL
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.
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VENTURE-CAPITAL LIMITED PARTNERSHIP
A limited partnership that is formed to invest in small startup businesses.
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VOLATILITY INDEX
The CBOE Volatility Index® (VIX®) is a measure of market expectations of near-term volatility derived from S&P 500 stock index option prices.
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WARRANT
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.
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WARRANTY DEED
A deed by which a grantor conveys and guarantees good title to real property; the safest form of deed for the buyer.
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WASH SALE
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
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WEIGHTED AVERAGE LIFE
A prepayment assumption commonly used in the secondary mortgage market as a measure of the effective maturity of a mortgage pool.
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WHOLE LIFE INSURANCE
Traditional permanent life insurance policy
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YIELD TO CALL
The internal rate of return from holding a bond assuming the bond is called at the earliest time possible.
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YIELD TO MATURITY
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
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YIELD
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).
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ZERO-COUPON BOND
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
