Glossary

A B C D E F G H I L M N O P Q R S T U Y Z 4 5

A

  • Accrued interest

    Interest deemed to be earned on a security, but not yet paid to the investor.
  • Ask price

    The price at which a seller is willing to sell a security (also known as offer price).
  • Average life

    The average length of time that each principal dollar is expected to be outstanding on a mortgage security, based on certain assumptions about prepayment speeds.

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B

  • Basis point

    One one-hundredth (.01) of a percentage point Yield differences are often quoted in basis points (bps).
  • Bid price

    The price at which a buyer is willing to purchase a security.
  • Bond fund

    A professionally managed investment vehicle, which invests primarily in bonds. Types of bond funds include open-ended mutual funds, closed-end mutual funds, and exchange traded funds.
  • Bond insurers and reinsurers

    Specialized insurance firms serving the fixed-income market that guarantee the timely payment of principal and interest on bonds they insure in exchange for a fee.
  • Book-entry

    A method of recording and transferring ownership of securities electronically, eliminating the need for physical certificates.
  • Bullet bond

    A bond that pays regular interest, but that does not repay principal until maturity (also known as bullet maturity).

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C

  • Call premium

    The dollar amount paid to the investor by the issuer for exercising a call provision that is usually stated as a percentage of the principal amount called.
  • Call provision

    The issuer retains the right to retire (that is, redeem) the debt, fully or partially, before the scheduled maturity date.
  • Callable bonds

    Bonds that are redeemable by the issuer prior to the maturity date, at a specified price at or above par.
  • Cap

    The maximum interest rate that may be paid on a floating-rate security.
  • Cash balance plan

    A type of defined benefit plan that credits your account with a percentage of your salary each month, plus a set interest rate.
  • Closed-end mutual fund

    A mutual fund created with a fixed number of shares via a public offering, which is traded as listed securities on a stock exchange.
  • Collar

    Upper and lower limits (cap and floor, respectively) on the interest rate of a floating-rate security.
  • Community investment notes

    Bonds in denominations as low as $20-to investors to encourage private sector investment in the local community.
  • Compound interest

    Interest that is calculated on the initial principal and previously paid interest (also known as "interest on interest").
  • Convertible bond

    A bond that can be exchanged, at the option of the holder, for a specific number of shares of the issuing company's stock. Because a convertible bond is a bond with a stock option built into it, it will usually offer a lower than prevailing interest rate.
  • Coupon

    The feature of a bond that denotes the interest rate (coupon rate) it will pay and the date on which the interest payment will be made.
  • Coupon payment

    The actual dollar amount of interest paid to an investor. The amount is calculated by multiplying the interest rate of the bond by its face value.
  • Coupon rate

    The interest rate on a bond, expressed as a percentage of the bond's face value. Typically, it is expressed on a semi-annual basis.
  • Credit rating agency

    A company that analyzes the credit worthiness of a company or security, and indicates that credit quality by means of a grade, or credit rating.
  • Crowdfunding

    Crowdfunding is a form of peer-to-peer lending and investing that connects an entrepreneur to a large number of investors, often contributing relatively small amounts, to amass operating capital.
  • Current yield

    The ratio of the interest rate payable on a bond to the actual market price of the bond, stated as a percentage.

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D

  • Dated date

    The date of a bond issue from which a bond begins to accrue interest (also known as issue date).
  • Default

    A failure by an issuer to: (i) pay principal or interest when due, (ii) meet non-payment obligations, such as reporting requirements or (iii) comply with certain covenants in the document authorizing the issuance of a bond (an indenture).
  • Defined benefits plan

    An investment pool that pays benefits to retired workers based upon factors like years of service to the employer and individual salary levels. Defined benefit plans are tied to a specific employer (or other entity, such as a state or union). Contributions to the pension fund is made by the employer or plan sponsors, with the overall pension plan managed by other parties. Upon retirement, the retiree receives a fixed payment for the rest of their life.
  • Derivative

    A financial contract whose value is based on, or derived from, a traditional security (such as a stock or bond), an asset (such as a commodity) or a market index.
  • Discount

    The amount by which the par (or face) value of a security exceeds its purchase price.
  • Discount note

    Short-term obligations issued at a discount from face value, with maturities ranging from one to 360 days. Discount notes have no periodic interest payments; the investor receives the note's face value at maturity.
  • Dividend Reinvestment Plan

    Allows investors to convert their dividends into additional shares of stock.
  • Dividends

    A payment made by a company to its shareholders, usually quarterly, from profits or cash reserves.

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E

  • Embedded option

    A provision that gives the issuer or bondholder an option, but not the obligation, to take an action unilaterally. The most common embedded option is a call option, giving the issuer the right to call, or redeem, the principal of a bond before the scheduled maturity date.
  • Employer provided retirement savings plans

    Employers voluntarily establish and promote these plans to help their workers build assets for a secure retirement. Together with Social Security and individual savings, these plans produce significant retirement benefits.
  • Endowments

    Designed to be a permanent source of capital that helps fund institutions of higher learning for the long-term.
  • Equity crowdfunding

    Makes funders actual investors in the company, offering them an ownership stake in return for their investment, with the hope of future returns if the company grows and prospers.
  • Equity financing

    Represents the sale of ownership in a company to raise funds for the business.
  • Exchange-traded fund (ETF)

    An ETF is a type of fund that is an exchange traded security, experiencing price changes throughout the day as they are bought and sold ETFs own underlying assets that typically track an index.
  • Extension risk

    The risk that investors' principal will be committed for a longer period of time than expected In the context of mortgage- or asset-backed securities, this may be due to rising interest rates or other factors that slow the rate at which loans are repaid.

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F

  • Face

    The principal amount of a security that appears on the face of the bond (also known as par or principal).
  • Federal funds rate

    Refers to the interest rate banks charge each other.
  • Federal funds target rate

    The Federal Reserve uses this target rate as one of its tools to influence inflation and employment.
  • Federal reserve board of governors

    A seven-member board appointed by the president and confirmed by the Senate. This board, supported by a staff of economists and administrative professionals, works as an independent agency to oversee all Fed operations.
  • Federal reserve dual mandate

    The two primary goals of monetary policy are to achieve maximum employment and stable prices within the economy.
  • Federal reserve system

    The central bank of the United States, which in its own words "provides the nation with a safer, more flexible, and more stable monetary and financial system."
  • Financial literacy

    A wide range of knowledge and skills necessary for informed decision-making at every stage of life. Standard financial literacy topics include budgeting, saving, investing, borrowing, insurance and taxes.
  • Fixed rate bond

    A bond with a set interest rate to maturity.
  • Floating rate bond

    A bond with an interest rate that is adjusted periodically according to a predetermined formula; it is usually linked to a benchmark interest rate (also known as variable rate bond or adjustable rate bond).
  • Floor

    The lower limit for the interest rate on a floating-rate bond.
  • Fragmented market

    Investors send orders to numerous trading venues that all compete with each other for order flow.
  • Future value

    The value of an asset at a specified date in the future, calculated using a specified rate of return.
  • Futures

    Create an obligation to buy or sell a certain asset at a specified price and time. Futures trade on exchanges and create obligations for some time in the future, typically ranging from months up to a year or so.

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G

  • Green bonds

    Debt securities issued with the goal of protecting the environment and mitigating climate change.

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H

  • High-yield bond

    Bonds rated Ba (by Moody's) or BB (by S&P and Fitch) or below, whose lower credit ratings indicate a higher risk of default. Due to the increase risk of default, these bonds typically offer a higher yield than more creditworthy bonds (also known as junk bonds).

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I

  • Impact investments

    Investments that aim to generate both financial return and positive social and/or environmental impact
  • Initial public offerings (IPOs)

    When a company decides to raise capital by selling its stock to the public, which means individual investors as well as institutional investors, like mutual funds and retirement funds; allows the business owners to raise equity financing.
  • Interest

    Compensation paid or to be paid for the use of assets.
  • Investment-grade bond

    (or high grade bond) Bonds rated Baa (by Moody's) or BBB (by S&P and Fitch) or above, whose higher credit ratings indicate a lower risk of default. These bonds tend to offer a lower yield than less creditworthy bonds.
  • Issuer

    The entity obligated to pay principal and interest on a bond.

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L

  • LIBOR

    (London Interbank Offered Rate) A benchmark interest rate some banks charge each other for short-term loans. LIBOR is set daily in five currencies (US dollar, Euro, pound sterling, Japanese yen and Swiss franc) for seven different maturities (overnight , on week, and 1, 2, 3, 6 and 12 months). LIBOR is frequently used as the basis for resetting rates on floating-rate securities, as well as currency and interest rate swaps.
  • Liquidity

    A measure of the relative ease and speed with which a security can be purchased or sold in a secondary market (also known as or marketability).
  • Low income housing tax credits

    Federally distributed and allow financing partners to enjoy a federal tax credit in return for investing in a low-income housing project.

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M

  • Maturity

    The date when the principal amount of a security is due to be repaid.
  • Mortgage pass through security

    A type of mortgage-backed security representing a direct interest in a pool of mortgage loans. The pass-through issuer or servicer collects payments on the loans in the pool and "passes through" the principal and interest to the security holders on a pro rata basis.
  • Municipal bonds

    Municipal bonds represent a long-term debt obligation, at a relatively low rate of interest, which can be paid back over years. That long-term debt structure means infrastructure projects can move forward without placing a heavy burden on taxpayers.
  • Mutual fund

    An investment vehicle that invests pooled cash of many investors to meet the fund's stated investment objective.

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N

  • New Markets Tax Credits

    A tax credit program designed to encourage investment into business development, real estate projects, charter schools and other projects in low-income communities.
  • Non-callable bond

    A bond that cannot be called for redemption by the issuer before its specified maturity date.

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O

  • Offering document

    The disclosure document prepared by the issuer that gives detailed security and financial information about the issuer and the securities being issued (also known as official statement or prospectus).
  • Open-end mutual fund

    Open-end mutual funds stand ready to sell and redeem their shares at any time at the fund's current net asset value: total fund assets, less any liabilities, divided by the number of shares outstanding.
  • Option contract

    Gives the buyer the right (but not the obligation) to buy or sell an underlying asset at a specified price and time.

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P

  • Pay for success

    Outcomes-based impact investing; enabling governments, nonprofits, and impact investors to enter into public-private partnerships that rigorously evaluate social service interventions so that only the highest-quality programs are expanded, and taxpayers only pay for what works.
  • Paying agent

    The entity, usually a designated bank or the office of the treasurer of the issuer, that pays the principal and interest of a bond.
  • Premium

    The amount by which the price of a bond exceeds its par value.
  • Prepayment

    The unscheduled partial or complete repayment of the principal amount outstanding on a loan, such as a mortgage, before it is due.
  • Prepayment risk

    The risk that principal repayment will occur earlier than scheduled, forcing the investor to receive principal sooner than anticipated and reinvest at lower prevailing rates. The measurement of prepayment risk is a key consideration for investors in mortgage- and asset-backed securities.
  • Present value

    The current value of a future payment or stream of payments, given a specified interest rate; also referred to as a discount rate.
  • Primary market

    The market for new issuances.

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Q

  • Quantitative easing

    Buying and selling of long term securities to affect long-term interest rates and thereby, economic activity.

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R

  • Ratings

    Designations used by credit rating agencies to give relative indications as to opinions of credit quality.
  • Reinvestment risk

    The risk that interest income or principal repayments will have to be reinvested at lower rates in a declining interest rate environment.
  • Report and hold laws

    Give broker-dealer firms a way to reach out to state securities regulators or the appropriate parties in a given jurisdiction to investigate exploitation. They also allow the broker-dealer to put a hold on a transaction to permit time for an investigation to take place.
  • Reward based crowdfunding

    Offers funders a reward for donating toward a designated goal.
  • Risk

    The chance that an actual return will be different than expected, including losing some or all of the invested amount. There are many types of risk such as market risk, credit risk, interest rate risk, exchange rate risk, liquidity risk, and political risk.
  • Roth 401(k)

    Taxes are paid upfront and contributions are not tax-deductible; withdrawals are tax-free.
  • Roth IRA

    Taxes are paid upfront and contributions are not tax-deductible; withdrawals are tax-free. You are not required to take minimum distributions at 70.5.

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S

  • S-1s

    Documents that companies must file with the Securities and Exchange Commission (SEC) in order to list their shares on a U.S. stock exchange
  • Secondary market

    Market for previously issued securities.
  • Securitization

    A process that occurs when a group of similar financial assets are pooled together as collateral for securities.
  • Securitization

    Securitization transforms illiquid assets into more liquid assets and allows lenders and originators to obtain more capital for lending.
  • Senior bond

    A bond that has a higher priority than other bond's claim to the same class of assets.
  • Settlement date

    The date for the delivery of bonds and payment of funds agreed to in a transaction.
  • Subordinated bond

    A bond that has a lower priority than another bond's claim to the same assets.
  • Sustainability

    A commitment to economic, social and environmental well-being for both the present and the future, balancing society's needs today with the demands of tomorrow.
  • Swaps

    Create an obligation to buy or sell; swaps are ongoing obligations over a period of years and in many cases involve the periodic exchange of cash flows over time.

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T

  • Tax exempt conduit bonds

    Allows a developer to get tax-exempt interest on the mortgage for a property.
  • Tax increment financing

    A local community gives a long-term break on property taxes in exchange for completing a redevelopment project; gives the project additional cash flow, which can be financed and rolled into a mortgage.
  • Trade date

    The date upon which a bond is purchased or sold.
  • Traditional IRA

    Your savings will grow tax-deferred until withdrawn, and contributions may be tax deductible. You may begin withdrawing without penalty at age 59.5 and will be required to take minimum distributions at age 70.5.
  • Transfer agent

    Also known as the bond registrar and is the party appointed by an issuer to maintain records of bondholders, and transfers ownership when bonds are acquired or sold.
  • Treasury Inflation Protected Securities (TIPS)

    TIPS carry interest rates that are indexed to the consumer price index in order to protect investors from inflation. Interest on TIPS is paid semiannually
  • Treasury bills

    Short-term securities mature in no longer than one year and can be used to hold money that investors need to access quickly. Investors buy a bill at a discount from the face value and then receive the entire amount once it matures.
  • Treasury bonds

    These securities cover periods of time lasting longer than 10 years and mature in around 30 years. Interest is paid semiannually.
  • Treasury notes

    Medium- to long-term investments are normally issued in two, three, five, seven and ten year categories. Interest is paid semiannually.
  • Trustee

    An institution, usually a bank, designated by the issuer as the custodian of funds and official representative of bondholders. Trustees are appointed to ensure compliance with the trust indenture and represent bondholders to enforce their contract with the issuers.

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U

  • U.S. savings bonds

    In general, investors may buy $10,000 in bonds per year and can redeem the securities at any point after one year (with penalties). After five years, there is no penalty for redemption.
  • Unit investment trust

    An investment fund created with a fixed portfolio of investments.
  • Unsecured bond

    A bond repayment that is not secured by collateral.

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Y

  • Yield curve

    A line tracing yields on a type of bond over a spectrum of maturities.
  • Yield to call

    The yield to call is a calculation of the total return of a bond if held to the call date. It takes into account the value of all the interest payments that will be paid until the call date, plus interest on earned on those payments (using the current yield), the principal amount to be received on the call date and any gain or loss from the purchase price expressed as an annual rate.
  • Yield to maturity

    The yield to maturity is a calculation of the total return of a bond if held to maturity. It takes into account the value of all the interest payments that will be paid until the maturity date, plus interest on earned on those payments (using the current yield), the principal amount to be received and any gain or loss from the purchase price expressed as an annual rate.

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Z

  • Zero-coupon bond

    A bond that does not make periodic interest payments; instead, the investor receives one payment, which includes principal and interest, at redemption (call or maturity)

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4

  • 401(k)

    An employer-sponsored retirement savings plan where your employer may make a contribution on a percentage of your earnings and where you can make pre-tax contributions. You may begin withdrawing without penalty at age 59.5 if the plan permits in-service withdrawals, and you will be required to take minimum distributions at age 70.5, if you are not working.

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5

  • 529 College Savings Plan

    allows a saver to choose from a range of investments, such as equity or bond mutual funds or other investments aimed at capital appreciation

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