A
Accrued Interest
The accumulated interest due on a bond as of the last interest payment made by the issuer.
Agency
A debt security issued by a federal or federally sponsored agency. Federal agencies are backed by the full faith and credit of the U.S. Government. Federally sponsored agencies (FSAs) are backed by each particular agency with a market perception that there is an implicit government guarantee. An example of federal agency is the Government National Mortgage Association (GNMA). An example of a FSA is the Federal National Mortgage Association (FNMA).
Amortization
The systematic reduction of the amount owed on a debt issue through periodic payments of principal.
Asked
The price at which securities are offered.
Average Life
The average length of time that an issue of serial bonds and/or term bonds with a mandatory sinking fund feature is expected to be outstanding.
B
Bankers' Acceptance (BA)
A draft, bill or exchange accepted by a bank or trust company. The accepting institution guarantees payment of the bill, as well as the issuer.
Basis Point
A unit of measurement used in the valuation of fixed-income securities equal to 1/100 of 1 percent of yield, e.g., "1/4" of 1 percent is equal to 25 basis points.
Bid
The indicated price at which a buyer is willing to purchase a security or commodity.
Book Value
The value at which a security is carried on the inventory lists or other financial records of an investor. The book value may differ significantly from the security's current value in the market.
Broker
A broker brings buyer and sellers together for a commission.
C
Call Price
The price at which an issuer may redeem a bond prior to maturity. The price is usually at a slight premium to the bond's original issue price to compensate the holder for loss of income and ownership.
Call Risk
The risk to a bondholder that a bond may be redeemed prior to maturity.
Callable Bond
A bond issue in which all or part of its outstanding principal amount may be redeemed before maturity by the issuer under specified conditions.
Cash Sale/Purchase
A transaction, which calls for delivery and payment of securities on the same day that the transaction is initiated.
Certificate of Deposit (CD)
A time deposit with a specific maturity evidenced by a certificate. Large-denomination CDs are typically negotiable.
Collateralization
Process by which a borrower pledges securities, property, or other deposits for securing the repayment of a loan and/or security.
Commercial Paper
An unsecured short-term promissory note issued by corporations, with maturities ranging from 2 to 270 days.
Convexity
A measure of a bond's price sensitivity to changing interest rates. A high convexity indicates greater sensitivity of a bond's price to interest rate changes.
Coupon Rate
The annual rate of interest received by an investor from the issuer of certain types of fixed-income securities. Also known as the "interest rate".
Credit Quality
The measurement of the financial strength of a bond issuer. This measurement helps an investor to understand an issuer's ability to make timely interest payments and repay the loan principal upon maturity. Generally, the higher the credit quality of a bond issuer, the lower the interest rate paid by the issuer because the risk of default is lower. Credit quality ratings are provided by nationally recognized rating agencies.
Credit Risk
The risk to an investor that an issuer will default in the payment of interest and/or principal on a security.
Current Yield (Current Return)
A yield calculation determined by dividing the annual interest received on a security by the current market price of that security.
D
Dealer
A dealer, as opposed to a broker, acts as a principal in all transactions, buying and selling for his own account.
Debenture
A bond secured only by the general credit of the issuer.
Delivery Versus Payment (DVP)
A type of securities transaction in which the purchaser pays for the securities when they are delivered either to the purchaser or his/her custodian.
Derivative Security
Financial instrument created from, or whose value depends upon, one or more underlying assets or indexes of asset values.
Derivatives
For hedging purposes, common derivatives are options, futures, swaps and swaptions. All Collateralized Mortgage Obligations ("CMOs") are derivatives. (1) Financial instruments whose return profile is linked to, or derived from, the movement of one or more underlying index or security, and may include a leveraging factor, or (2) financial contracts based upon notional amounts whose value is derived from an underlying index or security (interest rates, foreign exchange rates, equities or commodities.
Discount
The amount by which the par value of a security exceeds the price paid for the security.
Discount Securities
Non-interest bearing money market instruments that are issued at a discount and redeemed at maturity for full face value, e.g. U.S. Treasury Bills.
Diversification
A process of investing assets among a range of security types by sector, maturity, and quality rating.
Duration
A measure of the timing of the cash flows, such as the interest payments and the principal repayment, to be received from a given fixed-income security. This calculation is based on three variables: term to maturity, coupon rate, and yield to maturity. The duration of a security is a useful indicator of its price volatility for given changes in interest rates.
F
Fair Value
The amount, at which an investment could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.
Federal Credit Agencies
Agencies of the Federal government set up to supply credit to various classes of institutions and individuals, e.g. S & Ls, small business firms, students, farmers, farm cooperatives and exporters.
Federal Deposit Insurance Corporation (FDIC)
A federal agency that insures bank deposits, currently up to $100,000 per deposit.
Federal Funds (Fed Funds)
Funds placed in Federal Reserve banks by depository institutions in excess of current reserve requirements. These depository institutions may lend fed funds to each other overnight or on a longer basis. They may also transfer funds among each other on a same-day basis through the Federal Reserve banking system. Fed funds are considered immediately available funds.
Federal Funds Rate
Interest rate charged by one institution lending federal funds to the other.
Federal Home Loan Banks (FHLB)
Government sponsored wholesale banks (currently 12 regional banks) which lend funds and provide correspondent banking services to member commercial banks, thrift institutions, credit unions and insurance companies. The mission of the FHLBs is to liquefy the housing related assets of its members who must purchase stock in their district Bank.
Federal National Mortgage Association (FNMA)
FNMA, like GNMA, was chartered under the Federal National Mortgage Association Act in 1938. FNMA is a federal corporation working under the auspices of the Department of Housing and Urban Development (HUD). It is the largest single provider of residential mortgage funds in the United States. Fannie Mae, as the corporation is called, is a private stockholder-owned corporation. The corporation's purchases include a variety of adjustable mortgages and second loans, in addition to fixed-rate mortgages. FNMA's securities are also highly liquid and are widely accepted. FNMA assumes and guarantees that all security holders will receive timely payment of principal and interest.
Federal Open Market Committee (FOMC)
Consists of seven members of the Federal Reserve Board and five of the twelve Federal Reserve Bank Presidents. The President of the New York Federal Reserve Bank is a permanent member, while the other Presidents serve on a rotating basis. The Committee periodically meets to set Federal Reserve guidelines regarding purchases and sales of Government Securities in the open market as a means of influencing the volume of bank credit and money.
Federal Reserve System
The central bank of the United States created by Congress and consisting of a seven member Board of Governors in Washington, D.C., 12 regional banks, and about 5,700 commercial banks that are members of the system.
G
Government National Mortgage Association (GNMA OR GINNIE MAE)
Securities influencing the volume of bank credit guaranteed by GNMA and issued by mortgage bankers, commercial banks, savings and loan associations, and other institutions. The security holder is protected by full faith and credit of the U. S. Government. Ginnie Mae securities are backed by the FHA, VA, or FMHM mortgages. The term "passthroughs" is often used to describe Ginnie Maes.
Government Securities
An obligation of the U.S. government, backed by the full faith and credit of the government. These securities are regarded as the highest quality of investment securities available in the U.S. securities market. See "Treasury Bills, Notes, Bonds, and SLGS."
I
Interest Rate
See "Coupon Rate".
Interest Rate Risk
The risk associated with declines or rises in interest rates which cause an investment in a fixed-income security to increase or decrease in value.
Internal Controls
An internal control structure designed to ensure that the assets of the entity are protected from loss, theft, or misuse. The internal control structure is designed to provide reasonable assurance that these objectives are met. The concept of reasonable assurance recognizes that 1) the cost of a control should not exceed the benefits likely to be derived and 2) the valuation of costs and benefits requires estimates and judgments by management. Internal controls should address the following points:
(1) - Collusion is a situation where two or more employees are working in conjunction to defraud their employer.
(2) - By separating the person who authorizes or performs the transaction from the people who record or otherwise account for the transaction, a separation of duties is achieved.
(3) - Securities purchased from any bank or dealer including appropriate collateral (as defined by state law) shall be placed with an independent third party for custodial safekeeping.
(4) - Book-entry securities are much easier to transfer and account for since actual delivery of a document never takes place. Delivered securities must be properly safeguarded against loss or destruction. The potential for fraud and loss increases with physically delivered securities.
(5) - Subordinate staff members must have a clear understanding of their authority and responsibilities to avoid improper actions. Clear delegation of authority also preserves the internal control structure that is contingent on the various staff positions and their respective responsibilities.
(6) - Due to the potential for error and improprieties arising from telephone and electronic transactions, all transactions should be supported by written communications and approved by the appropriate person. Written communications may be via fax if on letterhead and if the safekeeping institution has a list of authorized signatures.
(7) - The designated official should ensure that an agreement will be entered into and will address the following points: controls, security provisions, and responsibilities of each party making and receiving wire transfers.
Inverted Yield Curve
A chart formation that illustrates long-term securities having lower yields than short-term securities. This configuration usually occurs during periods of high inflation coupled with low levels of confidence in the economy and a restrictive monetary policy.
Investment
A security or other asset acquired primarily for the purpose of obtaining income or profit.
Investment Company Act of 1940- Federal legislation that sets the standards by which investment companies, such as mutual funds, are regulated in the areas of advertising, promotion, performance reporting requirements, and securities valuations.
Investment Policy
A concise and clear statement of the objectives and parameters formulated by an investor or investment manager for a portfolio of investment securities.
Investment-grade Obligations
An investment instrument suitable for purchase by institutional investors under the prudent person rule. Investment-grade is restricted to those obligations rated BBB or higher by a rating agency.
L
Letter of Credit
An obligation issued by a bank on behalf of a bank customer to a third party. There are many different kinds of letter of credit. The two most common are commercial letters and standby letters. A commercial or trade letter of credit is a bank promise to pay the third party for the purchase of goods by the bank's customer. A standby letter of credit is a bank promise to pay the third party in the event of some defined failure by the bank's customer, usually, but not always a failure to pay. Standby letters of credit are often used as credit enhancements for securities.
Liquidity
An asset that can be converted easily and quickly into cash.
Local Government Investment Pool (LGIP)
An investment by local governments in which their money is pooled as a method for managing local funds, (i.e., Florida State Board of Administration "SBA").
M
Market Risk
The risk that the value of a security will rise or decline as a result of changes in market conditions.
Market Value
Current market price of a security.
Mark-to-market
The process whereby the book value or collateral value of a security is adjusted to reflect its current market value.
Master Repurchase Agreement
A written contract covering all future transactions between parties to repurchase-reverse repurchase agreement that establishes each party's rights in the transactions. A master agreement will often specify, among other things, the right of the buyer-lender to liquidate the underlying securities in the event of default by the seller-borrower.
Maturity
The date on which payment of a financial obligation is due. The final stated maturity is the date on which the issuer must retire a bond and pay the face value to the bondholder. See "Weighted Average Maturity".
Money Market
The market in which short-term debt instruments (bills, commercial paper, bankers' acceptance, etc.) are issued and traded.
Money Market Mutual Fund
Mutual funds that invest solely in money market instruments (short-term debt instruments, such as Treasury bills, commercial paper, bankers' acceptances, repos and federal funds).
Mutual Fund
An investment company that pools money and can invest in a variety of securities, including fixed-income securities and money market instruments. Mutual funds are regulated by the Investment Company Act of 1940 and must abide by the following Securities and Exchange Commission (SEC) disclosure guidelines:
(1) Report standardized performance calculations.
(2) Disseminate timely and accurate information regarding the fund's holdings, performance, management and general investment policy.
(3) Have the fund's investment policies and activities supervised by a board of trustees, which are independent of the adviser, administrator or other vendor of the fund.
(4) Maintain the daily liquidity of the fund's shares.
(5) Value their portfolios on a daily basis.
(6) Have all individuals who sell SEC-registered products licensed with a self-regulating organization (SRO) such as the National Association of Securities Dealers (NASD).
(7) Have an investment policy governed by a prospectus which is updated and filed by the SEC annually.
Mutual Fund Statistical Services
Companies that track and rate mutual funds, e.g., IBC/Donoghue, Lipper Analytical Services, and Morningstar.
N
National Association of Securities Dealers (NASD)
A self-regulatory organization (SRO) of brokers and dealers in the over-the-counter securities business. Its regulatory mandate includes authority over firms that distribute mutual fund shares as well as other securities.
Net Asset Value
The market value of one share of an investment company, such as a mutual fund. This figure is calculated by totaling a fund's assets which includes securities, cash, and any accrued earnings, subtracting this from the fund's liabilities and dividing this total by the number of shares outstanding. This is calculated once a day based on the closing price for each security in the fund's portfolio. (See below.)
[(Total assets) - (Liabilities)]/(Number of shares outstanding)
No Load Fund
A mutual fund which does not levy a sales charge on the purchase of its shares.
Nominal Yield
The stated rate of interest that a bond pays its current owner, based on par value of the security. It is also known as the "coupon", "coupon rate", or "interest rate".
O
Offer
An indicated price at which market participants are willing to sell a security or commodity. Also referred to as the "Ask price".
Open Market Operations
Purchases and sales of government and certain other securities in the open market by the New York Federal Reserve Bank as directed by the FOMC in order to influence the volume of money and credit in the economy. Purchases inject reserves into the bank system and stimulate growth of money and credit; sales have the opposite effect. Open market operations are the Federal Reserve's most important and most flexible monetary policy tool.
P
Par
Face value or principal value of a bond, typically $1,000 per bond.
Portfolio
Collection of securities held by an investor.
Positive Yield Curve
A chart formation that illustrates short-term securities having lower yields than long-term securities.
Premium
The amount by which the price paid for a security exceeds the security's par value.
Prime Rate
A preferred interest rate charged by commercial banks to their most creditworthy customers. Many interest rates are keyed to this rate.
Principal
The face value or par value of a debt instrument. Also may refer to the amount of capital invested in a given security.
Prospectus
A legal document that must be provided to any prospective purchaser of new securities offering registered with the SEC. This can include information on the issuer, the issuer's business, the proposed use of proceeds, and the experience of the issuer's management, and certain certified financial statements.
Prudent Person Rule
An investment standard outlining the fiduciary responsibilities of public funds investors relating to investment practices.
Q
Qualified Public Depository
Per Florida Statute 280, means any bank, saving bank or savings association that:
(a) Is organized and exists under the laws of the United States, the laws of this state or any other state or territory of the United States;
(b) Has its principal place of business in this state or has a branch office in this state which is authorized under the laws of this state or of the United States to receive deposits in this state.
(c) Has deposit insurance under the provision of the Federal Deposit Insurance Act, as amended, 12 U.S.C. ss.1811 seq.
(d) Meets all requirements of F.S. 280
(e) Has been designed by the Treasurer as a qualified public depository.
R
Rate of Return
For fixed income securities (bonds and preferred stock), current yield, that is, the coupon or contractual dividend rate divided by the purchase price. For common stock, dividend yield, which is the annual dividend divided by the purchase price.
Regular Way Delivery
Securities settlement that calls for delivery and payment on the third business day following the trade date (T+3); payment on a T+1 basis is currently under consideration. Mutual funds are settled on a same day basis; government securities are settled on the next business day.
Reinvestment Risk
The risk that a fixed-income investor will be unable to reinvest income proceeds from a security holding at the same rate of return currently generated by that holding.
Repurchase Agreement (repo or RP)
An agreement of one party to sell securities at a specified price to a second party and a simultaneous agreement of the first party to repurchase the securities at a specified price or at a specified later date.
Reverse Repurchase Agreement (Reverse Repo)
An agreement of one party to purchase securities at a specified price from a second party and a simultaneous agreement by the first party to resell the securities at a specified price to the second party on demand or at a specified date.
Rule 2a-7 of the Investment Company Act
Applies to all money market mutual funds and mandates such funds to maintain certain standards, including a 13- month maturity limit and a 90-day average maturity on investments, to help maintain a constant net asset value of one dollar ($1.00).
S
Safekeeping
Holding of assets (e.g., securities) by a financial institution.
SEC RULE 15C3-1
See Uniform Net Capital Rule.
Secondary Market
A market made for the purchase and sale of outstanding issues following the initial distribution.
Securities & Exchanges Commission
Agency created by Congress to protect investors in securities transactions by administering securities legislation.
Security
A transferable financial instrument that evidences ownership or creditorship, whether in physical or book entry form.
Serial Bond
A bond issue, usually of a municipality, with various maturity dates scheduled at regular intervals until the entire issue is retired.
Sinking Fund
Money accumulated on a regular basis in a separate custodial account that is used to redeem debt securities or preferred stock issues.
Structured Notes
Notes issued by government sponsored enterprises (FHLB, FNMA, SLMA, etc.) and corporations which have imbedded options (e.g. call features, step-up coupons, floating rate coupons, derivative-based returns) into their debt structure. Their market performance is impacted by fluctuation of interest rates, the volatility of the imbedded options, and shifts in the shape of the yield curve.
Swap
Trading one asset for another.
T
Term Bond
Bonds comprising a large part or all of a particular issue which come due in a single maturity. The issuer usually agrees to make periodic payments into a sinking fund for mandatory redemption of term bonds before maturity.
Total Return
The sum of all investment income plus changes in the capital value of the portfolio. For mutual funds, return on an investment is composed of share price appreciation plus any realized dividends or capital gains. This is calculated by taking the following components during a certain time period. (Price Appreciation) + (Dividends paid) + (Capital gains) = Total Return
Treasury Bills
Short-term U.S. government non-interest bearing debt securities with maturities of no longer than one year and issued in minimum denominations of $10,000. Auctions of three- and six-month bills are weekly, while auctions of one-year bills are monthly. The yields on these bills are monitored closely in the money markets for signs of interest rate trends.
Treasury Bonds
Long-term U.S. government debt securities with maturities of ten years or longer and issued in minimum denominations of $1,000. Currently, the longest outstanding maturity for such securities is 30 years.
Treasury Notes
Intermediate U.S. government debt securities with maturities of one to 10 years and issued in denominations ranging from $1,000 to $1 million or more.
U
Uniform Net Capital Rule
SEC Rule 15C3-1 outlining capital requirements for broker/dealers.
V
Volatility
A degree of fluctuation in the price and valuation of securities.
Volatility Risk Rating
A rating system to clearly indicate the level of volatility and other non-credit risks associated with securities and certain bond funds. The ratings for bond funds range from those that have extremely low sensitivity to changing market conditions and offer the greatest stability of the returns ("AAA" by S&P; "V-1" by Fiche) to those that are highly sensitive with currently identifiable market volatility risk ("ccc-" by S&P, "V-10" by Fitch).
W
Weighted Average Maturity (WAM)
The average maturity of all the securities that comprise a portfolio. According to SEC rule 2a-7, the WAM for SEC registered money market mutual funds may not exceed 90 days and no one security may have a maturity that exceeds 397 days.
When Issued (WI)
A conditional transaction in which an authorized new security has not been issued. All "when issued" transactions are settled when the actual security is issued.
Y
Yield
The current rate of return on an investment security generally expressed as a percentage of the security's current price.
Yield Curve
A graph showing the relationship at a single point in time between the available maturities of a security or similar securities with essentially identical credit risk and the yields that can be earned for each of those available maturities. A graphical depiction of the term structure of interest rates at any given point in time. Yield curves may be constructed for different instruments.
Yield-to-call (YTC)
The rate of return an investor earns from a bond assuming the bond is redeemed (called) prior to its nominal maturity date. Yield Curve - A graphic representation that depicts the relationship at a given point in time between yields and maturity for bonds that are identical in every way except maturity. A normal yield curve may be alternatively referred to as a positive yield curve.
Yield-to-maturity
The rate of return yielded by a debt security held to maturity when both interest payments and the investor's potential capital gain or loss are included in the calculation of return.
Z
Zero-coupon Securities
Security that is issued at a discount and makes no periodic interest payments. The rate of return consists of a gradual accretion of the principal of the security and is payable at par upon maturity.
