Glossary

Accrued Interest: The interest accumulated on a security since the issue date or since the last coupon payment. The buyer of the security pays the market price plus accrued interest. 

Active Market: A securities market in which a high volume of trading activity takes place. 

Advancing Market: A market in which prices are generally rising.

Agent: Executes an order for or acts on behalf of someone else, the principal. The agent, whether a firm or an individual, is subject to the control of the principal and does not have title to the principal’s property. The agent may charge a fee or commission for this service.

American Stock Exchange: A leading securities exchange located in New York City. Also called AMEX or ASE.

Arbitrage: Effecting sales and purchases simultaneously in the same or related securities to take advantage of a market inefficiency.

At the Market: A trading term for the buying or selling of securities at the current market price rather than at a predetermined price.

At-the-Opening Order: A trading term for an order that is to be executed at the opening of the market or not at all. 

Averaging Up or Down: The practice of purchasing the same security at various prices to arrive at a higher or lower average cost. 

Balloon Maturity: Describes a bond issue in which bonds that come due close to the maturity date of the issue have a substantially larger value than those bonds that came due earlier in the issue. Very often, a provision is made for the redemption of part or all of these bonds by purchase or call prior to maturity.

Basis Point: One-hundredth of 1 percent. One hundred basis points equals 1 percent. 

Bearer Form: A negotiable instrument format that has no registered owner. The instrument is therefore payable to the person who has physical possession of the security.

Bearer Security: A security that does not have the name of the owner or owner’s agent registered on the books of the issuer. This allows the proceeds (principal as well as interest) to be paid to the current holder of the security.

Bear Market: A period of generally pessimistic attitudes and declining market prices. Compare Bull Market.

Below the Market: A price below the current market price for a particular security.

Big Board: The New York Stock Exchange (NYSE).

Blue-Chip Stocks: The securities of major companies known nationally for their record of earnings, dividend payments, and general price stability. This term denotes high esteem on the part of investors.

Bond: An interest-bearing security issued by a corporation, government, governmental agency, or other body. It is a form of debt with an interest rate, maturity, and face value, and it is usually secured by specific assets. Most bonds have a maturity of greater than one year and generally pay interest semiannually. See Debenture. 

Bond Discount: The difference between a bond’s face value and a selling price, when the selling price is lower than the face value. 

Bond Rating: The classification of a bond’s investment quality. See Rating.

Broker: An intermediary who brings buyers and sellers together and handles their orders, generally charging a commission for this service. In contrast to a principal or a dealer, the broker does not own or take a position in securities. 

Bull Market: A period of generally optimistic attitudes and increasing market prices. Compare Bear Market.

Buyer’s Market: A market in which supply is greater than demand, giving buyers an advantage.

Call: An option to buy a specific asset at a certain price within a certain period of time. 

Callable: A bond or preferred stock that may be redeemed by the issuer before maturity for a call price specified at the time of issuance. 

Call Date: The date before maturity on which a bond may be redeemed at the option of the issuer. 

Called Bonds: Bonds redeemed before maturity.

Call Premium: The excess paid for a bond or security over its face value. 

Call Price: The price paid for a security when it is called. The call price is equal to the face value of the security plus the call premium, if any. 

Call Provision: The details by which a bond may be redeemed by the issuer, in whole or in part, prior to maturity. A security with such a provision will usually have a higher interest rate than comparable noncallable securities. 

Capital Gain/Loss: The amount that is made or lost, depending upon the difference between the sale price and the purchase price of any capital asset or security. 

Capital Market: The market in which buyers and sellers, including institutions, banks, governments, corporations, and individuals, trade debt and equity securities. 

Carry: The cost incurred in interest charges for financing and holding a securities inventory. See Positive Carry; Negative Carry. 

CMO Class: A group of bonds within a collateralized mortgaged obligation (CMO) issue. Each class has a specific rate and principal-redemption schedule. Also referred to as a tranche.

Collateral: Securities or other property that a borrower pledges as security for the repayment of a loan. Also refers to securities pledged by a bank to secure deposits of public monies.

Commercial Paper: Short-term, unsecured, negotiable promissory notes issued by businesses.

Commission: Broker’s or agent’s fee for purchasing or selling securities for a client.

Convertible: A feature of certain bonds, debentures, or preferred stocks that allows them to be exchanged for another class of securities. A convertible bond contains a provision that permits conversion to the issuer’s common stock at some fixed exchange ratio. 

Coupon Rate: The annual rate of interest that the issuer of a bond promises to pay to the holder of the bond.

Coupons: Certificates attached to a bond that indicate the interest due on a payment date. The coupons are detached as they come due (usually semiannually) and are presented for payment of interest. The term Coupon also refers to the rate of interest the issuer promises to pay the issue holder.

Coupon Yield: The annual interest rate of a bond, divided by the bond’s face value and stated as a percentage. This usually is not equal to the bond’s current yield or its yield to maturity.

Coverage Ratio: The ratio of income available to pay a specific obligation versus the total amount obligated. This is a measure of a firm’s financial stability.

Covering: Buying back a security previously sold short, in order to eliminate one’s short position (see Short Sale). Also refers to the rate of return on a bondholder’s investment. 

Credit Analysis: A critical review and appraisal of the economic and financial condition of a government agency or corporation. Evaluates the issuing entity’s ability to meet its debt obligations, and the suitability of such obligations underwriting or investment. 

Current Maturity: The amount of time left until an obligation matures. For example, a oneyear bill issued nine months ago has a current maturity of three months. 

Current Yield: The coupon payments on a security as a percentage of the security’s market price. In many instances the price should be gross of accrued interest, particularly on instruments where no coupon is left to be paid until maturity. 

CUSIP: The Committee on Uniform Security Identification Procedures, which was established under the auspices of the American Bankers Association to develop a uniform method of identifying municipal, U.S. government, and corporate securities. 

Debenture: A bond secured only by the general credit of the issuer rather than by a specific lien on property, as is a mortgage bond. Agency bonds are frequently called debentures.

Debt Coverage: The margin of safety for payment of debt, reflecting how much the earnings for a certain period of time exceed the debt payable during that same period. Normally used in connection with revenue bonds and corporate bonds.

Debt Instrument: A written pledge to repay debt, such as a bill, a note, or a bond.

Debt Limit, or Debt Ceiling: The maximum amount of debt that can legally be acquired under the debt-incurring power of astate or municipality.

Debt Service: Interest and principal obligation on an outstanding debt. This is usually for a one-year period. 

Default: Failure to pay principal or interest promptly when it is due.

Demand Loan: A loan that has no fixed maturity date but that is payable upon demand.

Direct Placement: Selling a new issue not by offering it for sale publicly but by placing it with one or several institutional investors. 

Discount: The reduction in the price of a security; the difference between its selling price and its face value at maturity. A security may sell below face value in return for such things as prompt payment and quantity purchase. “At a discount” refers to a security selling at less than the face value, as opposed to “at a premium,” when it sells for more than the face value. 

Discount Window: A facility provided by the Federal Reserve Bank. 

Discretionary Order: A securities transaction offer placed by a broker who is empowered to act on behalf of a customer with regard to price and timing. 

Downside Risk: The maximum amount that can be lost in an investment.

Dumping: Selling large amounts of securities without regard to the effect on the marketplace. 

Exempt Securities: Securities that are exempt from the registration requirements of the Securities and Exchange Commission. 

Face Amount: The par value (i.e., principal or maturity value) of a security appearing on the face of the instrument.

Fannie Mae: Trade name for the Federal National Mortgage Association (FNMA).

Fiduciary: An individual or group, such as a bank or trust company, that acts for the benefit of another party or to which property is given to hold in trust.

Fill or Kill : The instructions to fill an entire order immediately or kill (cancel) the entire order. 

Fiscal Year: An accounting or tax period comprising any 12-month period. The federal government’s fiscal year starts October 1; the fiscal year of national chartered banks begins on January 1.

Floating-Rate Note/Bond: A note or bond with a fluctuating interest rate. The rate is adjusted periodically according to a predetermined formula, based upon specific market indicators. Thus, it provides the investor with a rate of return comparable to the rate prevailing in the current market environment.

Freddie Mac: Trade name for the Federal Home Loan Mortgage Corporation (FHLMC).

Full Faith and Credit: Indicator that the unconditional guarantee of the United States government backs the repayment of a debt. 

General Obligation Bonds (GOs): Bonds secured by the pledge of the municipal issuer’s full faith and credit, which usually includes unlimited taxing power. 

General Property Taxes: Taxes that are placed on real estate and personal property. 

Ginnie Mae: Trade name for the Government National Mortgage Association (GNMA). 

Good `till Canceled (GTC) Order: An order for securities that may be limited in terms of price but not in terms of time.  

Government Bonds: Securities issued by the federal government; they are obligations of the US. Treasury. Also known as”governments.”

Gross Yield: The percentage of return on a security, determined by dividing the dollar price into the annual interest payment and calculating the return to maturity. Also, the return on an investment before deduction of costs.

Guaranteed Bond: A bond in which repayment is guaranteed by someone other than the debtor. 

Hedging: A method used by traders to minimize losses resulting from price fluctuations in the money market. The method involves counterbalancing a present sale or purchase with the purchase or sale of a similar or different security, usually for delivery at some future date. The desired result is that the profit or loss on a current sale or purchase will be offset by the loss or profit on the future purchase or sale. 

Holder: The person or entity that has possession of a negotiable instrument. 

Income Bonds: Bonds on which the payment of interest is due only when the issuer has attained sufficient income. There is no guaranteed return. In some cases, unpaid interest may accumulate as a claim against the issuer when the principal comes due. 

Indebtedness: The obligation assumed by a borrower, guarantor, or endorser to repay funds that have been or will be paid out on the borrower’s behalf.

Indenture: A written agreement used in connection with a security issue. The document sets the maturity date, interest rate, security, and other terms for the issue holder, the issuer, and (when appropriate) the trustee. 

Interest: Compensation paid or to be paid for the use of money. The rate of interest is generally expressed as an annual percentage. 

Interest Rate: The interest payable each year on borrowed funds, expressed as a percentage of the principal. 

Investment Portfolio: A collection of securities held by a bank, individual, institution, or government agency for investment purposes. 

Investment Securities: Securities purchased for an investment portfolio, as opposed to those purchased for resale to customers. 

Investor: A person who purchases securities with the intention of holding them to make a profit. 

Issue: A group of identical securities, or the marketing and selling of such securities.

Issue Price: The price at which a new group of identical securities (new issue) is put on the market. 

Issuer: Any corporation or governmental unit that borrows money through the sale of securities. 

Liquidity: The ease at which a security can be bought or sold (converted to cash) in the market. A large number of buyers and sellers and a high volume of trading activity are important components of liquidity. 

Listed Securities: Securities that have been admitted for trading on a recognized securities exchange. Unlisted securities are usually sold over the counter. 

London Interbank Offered Rate (LIBOR): The interest rate on Eurodollar deposits traded between banks. The rate depends on the maturity of the deposit as well as on which bank quotes the rate.

Margin: The difference between the collateral pledged to secure a loan and the amount of the loan itself. Federal Reserve Board requirements for margin on stocks have ranged from 40 to 100 percent of the purchase price. 

Marketability: The ease with which a security can be sold in the secondary market. 

Market Order: An order to buy or sell securities at the market’s prevailing bid or asked price. 

Market Value: The price at which a security is currently being sold in the market. 

Maturity: The date that the principal or stated value of a debt instrument becomes due and payable. Also used to denote the length of time between the issue date and the due date. 

Money Market Instruments: Private and government obligations with maturities of one year or less. 

Money Market Securities: Short-term securities with market prices more closely tied to the current interest rate than to a company’s standing or to general business conditions. 

Mortgage Bond: A bond secured by a mortgage on property. The value of the property used as collateral usually exceeds that of the mortgage bond issued against it. 

Municipals: Securities, usually bonds, issued by a state or its agencies. The interest on “munis” is usually exempt from federal income taxes and state and local income taxes in the state of issuance. Municipal securities may or may not be backed by the issuing agency’s taxation powers. 

Municipal Securities Rulemaking Board (MSRB): Registered under the Maloney Act in 1975, MSRB is designed to create rules and regulations for municipal bond trading among brokers, dealers, and banks. 

National Association of Securities Dealers (NASD): A self-regulatory organization that regulates the over-the-counter market. 

Negative Carry: Negative carry occurs when the cost of borrowing to finance the holding of securities is in excess of the income on those securities. Compare also Positive Carry. 

New Issue: The first offering of a security. 

New Issue Market: The market for new issues of securities, as opposed to the secondary market, in which securities that have already been issued are sold. 

New York Stock Exchange: A corporation operated by a board of directors responsible for setting policy, supervising exchange and member activities, listing securities, overseeing the transfer of members’ seats on the exchange, and judging whether an applicant is qualified to be a specialist. 

Noncallable: Describes a security that does not contain a call provision.

Note: A written document that contains a promise to pay a specified amount to a certain entity on a particular date. 

Obligation: A responsibility for repaying a debt. 

Odd Lot: A securities holding that contains less than the normal trading unit. Compare Round Lot. 

Offer: The price at which an owner is willing to sell a security. 

Offering: The means by which securities are sold to buyers. Usually states the price and terms. 

Offering Price: The price at which members of an underwriting syndicate for a new issue will offer securities to investors. 

Open Order: An order to buy or sell a security at a designated price, usually within a certain time limit. See Good ’till Canceled Order. 

Option: The right to trade a security during a certain period of time. 

Overbought/Oversold: Describes a security or a market that has undergone a sharp rise or fall due to vigorous buying or selling. Being overbought or oversold indicates that such buy ing or selling may have left prices temporarily too high or too low. 

Over the Counter: A securities market in which dealers negotiate directly, as opposed to an organized securities exchange auction system. The market for U.S. government and municipal bonds is primarily an over-the-counter market. 

Paper Gain/Loss: Unrealized capital gain or loss on securities held in portfolio, based on a comparison of current market price and the original cost of the securities. Actual appreciation or depreciation is realized when the security is sold. Compare Realized Gain/Loss. 

Par Value: The value of a security expressed as a specific dollar amount marked on the face of the security, or the amount of money due at maturity. Par value should not be confused with market value. 

Pool: A collection of mortgages assembled by an originator or master servicer as the basis for a security. Pools are identified by a number.

Portfolio: A collection of securities held by an individual or institution. 

Positive Carry: A condition in which the yield on a security is greater than the cost of borrowing funds to hold it. Compare Negative Carry. 

Premium: The amount by which the price paid for a security exceeds the par value of the security. Also, the amount that must be paid over the par value to call or refund an issue before maturity. 

Prepayment: An unscheduled principal payment on a mortgage or mortgage-backed security that forms part of the collateral for a mortgage-backed security. This usually occurs when homeowners sell their homes or otherwise prepay their mortgage loans prior to maturity. Prepayments may significantly affect the weighted average life and yield of mortgage-backed bonds. 

Principal: The face or par value of a security. It does not include accrued interest. 

Pro Forma Statement: A financial statement based on assumptions usually made on the basis of past account relationships, how these relationships might change in the future, and likely financial developments. A pro forma would be used, for example, to determine the amount and timing of a company’s future cash requirements. 

Prospectus: A document issued by a company prior to the sale of a new issue of securities. The prospectus gives detailed information about the company, the offering, the prospects, and the risks, as required by the Securities and Exchange Commission. 

Prudent Man Rule: A long-standing common-law rule that requires a trustee who is investing for another to behave in the same way as a prudent individual of reasonable discretion and intelligence who is seeking a reasonable income and preservation of capital. 

Public Offering: The offering of securities for sale to the public. 

Quotation, or Quote: The highest bid to buy or the lowest offer to sell a security in any market at a particular time. See Bid and Asked. 

Rally: A brisk rise in the price of a security or a recovery in the market. 

Rating: The designation used by investors’ services to rate a security. Moody’s ratings range from Aaa (the highest) through Aa,

A, Baa, Ba, B, and so on. Standard and Poor’s ratings range from AAA (the highest) through AA, A, BBB, BB, B, and so on. 

Realized Gain/Loss: Actual profit or loss experienced upon the sale of a security. Compare Paper Gain/Loss. 

Redemption: Liquidating debt by retiring an outstanding obligation. This may occur at maturity but usually occurs at the issuer’s option, such as when a bond issue is retired before its maturity date. 

Redemption Fund: A fund created for the purpose of retiring a callable obligation that matures in stages or for purchasing such an obligation as funds become available. 

Redemption Price: The price at which a bond may be redeemed, at the issuer’s option, before maturity. 

Refinancing: Rolling over the principal on securities that have reached maturity or replacing them with the sale of new issues. The object may be to save interest costs or to extend the maturity of the loan.  

Revenue Bond: A state or local bond secured by revenues derived from the operations of specific public enterprises, such as bridges, toll roads, or utilities. Such bonds are not generally backed by the taxation power of the issuer unless otherwise specified in the bond indenture.

Rights: The privilege extended by an issuer to the holder of a security to subscribe to new or additional securities, sometimes at a price lower than the subscription price. This allows current stockholders the opportunity to avoid diluting their percentage of ownership. 

Roll Over: To reinvest in a new issue of the same or a similar security after receiving funds from a matured security. 

Round Lot: The normal minimum unit of trading for a particular issue or type of security. Compare Odd Lot. 

Safekeeping: Holding securities in a bank’s vaults for protection. This is a service banks offer to customers for a fee. 

Sallie Mae: Trade name for the Student Loan Marketing Association (SLMA). 

Secondary Distribution, or Offering: The redistribution of a large block of securities previously sold by the issuer or underwriting group in an initial or primary offering. See Primary Distribution. 

Secondary Market: The market in which previously issued securities are traded, as compared to the new issue market. Also, the purchase or sale of securities in a special offering or through a means other than the regular channel of trading. 

Secured Deposit: Bank deposits of state or local government funds that, under the laws of certain jurisdictions, must be secured by the pledge of acceptable securities. 

Secured Loan: A loan that is secured by marketable securities or other marketable valuables. Secured loans may be either time or demand loans. 

Securities: Investment instruments such as stocks and bonds. 

Securities and Exchange Commission (SEC): An agency created by Congress to regulate securities issuance and trading. The SEC enforces various securities acts that are intended to protect investors. 

Senior Securities: Securities that have priority over other obligations for claims on the issuer’s assets and earnings. 

Short Covering: Buying back securities that were previously sold, to make delivery on a short sale. 

Short Sale: The sale of a security that is not owned by the seller on the expectation that the security can be bought or borrowed from a broker in time to be delivered to the buyer. The short seller’s intent is to profit by buying the security at a lower price than it sold for. 

Sinking Fund: A reserve fund set aside over a period of time for the purpose of liquidating or retiring an obligation, such as a bond issue, at maturity. 

Spread: The difference between two figures or percentages. For example, the difference between the bid and asked prices of a quote or between the amount paid when a security is bought and the amount received when it is sold. 

Subscription: An agreement to purchase a certain offering for a specific price. The offer is not binding unless it is accepted by the properly authorized representatives of the issuer. Also refers to the order made for the purchase of new securities. 

Swap: The sale of a block of securities and the purchase of another block with similar market value. May be made to achieve many goals, including establishing a tax loss, upgrading credit quality, or extending or shortening maturity. 

Tax-Exempt Bonds: Bonds for which the interest paid is usually exempt from federal taxes and, in some cases, from state and local taxes in state of issuance. The interest rate paid on these bonds is generally lower than rates on securities that are not tax-exempt. 

Terms: The conditions of the sale or purchase of a security.

Thin Market: A market in which trading volume is low, with very few bids to buy or offers to sell. 

Trade Date: The date when a security transaction is executed. 

Trader: Someone who buys and sells securities for a personal account or a firm’s account for the purpose of short -term profit. 

Trading Market: The secondary market for bonds that have already been issued. See Secondary Market. 

Treasury Bill (T Bill): An obligation of the U.S. government with a maturity of one year or less. T -bills bear no interest but are sold at a discount. 

Treasury Bonds and Notes: Obligations of the U.S. government that bear interest. Notes have maturities of one to ten years; bonds have longer maturities. 

Underwriter: A bank or other financial institution that arranges for the sale and distribution of securities and assumes the responsibility for paying the net purchase price. In most instances, the underwriter deals in new issues and with the issuing entity. An investment underwriter guarantees the sale of a securities issue by purchasing the entire issue from the company and then selling it to the public. Underwriting is one function of an investment banker.  

Yield: The annual rate of return on an investment, expressed as a percentage of the investment. Income yield is obtained by dividing the current dollar income by the current market price for the security. Net yield, or yield to maturity, is the current income yield minus any premium above par or plus any discount from par in the purchase price, with the adjustment spread over the period from the date of purchase to the date of maturity of the bond. 

Yield to Call: The average annual yield on a security, assuming it is a callable security and held until the call date; equal to the rate at which all principal and interest payments would be discounted to produce a present value equal to the purchase price of the bond. 

Yield to Maturity: The average annual yield on a security, assuming it is held to maturity; equal to the rate at which all principal and interest payments would be discounted to produce a present value equal to the purchase price of the bond. Also called net yield.

Yield to Worst: When a security is callable, the worst of either the Yield to Maturity or Yield to Call. 

Zero Coupon Bonds: Zeros do not pay periodic coupon payments. They are sold at a discount from face value. Interest income, which is received at maturity, is the difference between the purchase price and the amount at maturity.