Glossary Group: Investment Terms

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

The annual percentage rate of return earned on a bond calculated by dividing the coupon interest by its purchase price.

YIELD CURVE

A line tracing relative yields on a type of bond over a spectrum of maturities ranging from three months to 30 years.

YIELD SPREAD

The difference in yield between two bonds or bond indexes.

YIELD TO CALL

The yield on a bond calculated by dividing the value all interest payments that will be paid until the call date, plus interest on interest, by the principal amount received on the call date at the call price, taking into consideration whatever gain or loss is realized from the bond at the call date. Example: You pay $900 for a five year bond with a face value of $1000. The bond pays an annual coupon of ten percent. This bond is called at year three for $1,100. The yield to call of this bond is 18.4 percent. This reflects the three years of coupon payments and the difference between the price paid and the call price. Had the bond not been called, the yield to maturity would have been 12.8 percent. Bond calculators are available on this website: www.investinginbonds.com.

YIELD TO MATURITY

The yield on a bond calculated by dividing the value of all the interest payments that will be paid until the maturity date, plus interest on interest, by the principal amount received at the maturity date, taking in to consideration whatever gain or loss is realized from the bond at the maturity date. Example: You pay $900 for a five year bond at a face value of $1000. The bond pays an annual coupon of ten percent. Here the yield to maturity is 12.8 percent. This reflects the coupon payments and the difference between the price and the face value of the bond. Bond calculators are available on this website, www.investinginbonds.com.

In a CMO security, the period of time between the expected first payment of principal and the expected last payment of principal.

VIX is the ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index, a measure of the implied volatility of S&P500 index options. A high value corresponds to a volatile market and therefore means options will be more costly. Often referred to as the fear index or fear gauge, it is a measure of expected volatility over the next 30 days. The VIX was below 30 for most of the time in the 15 years up to 2008. Global financial crisis drove it close to 90 in October 2008.

VARIABLE RATE BOND

A long-term bond the interest rate of which is adjusted periodically typically based upon specific market indicators.

VARIABLE-RATE DEMAND OBLIGATION (VRDO)

A bond which bears interest at a variable, or floating, rate established at specified intervals (e.g., flexible, daily, weekly, monthly or annually). It contains a put option permitting the bondholder to tender the bond for purchase when a new interest rate is established. VRDOs are also referred to as VRDNs (N=Notes), VRDBs (B=Bonds) or low floaters.

VENTURE CAPITAL

Venture capital funds or firms invest in small start-up companies or in the expansion of existing private, unlisted companies. Their investments are high risk; the returns can be high but so can the failure rate. Venture capital firms obtain their funding from private investors or institutional investors. Profits are often taken when the company is floated in an initial public offering (IPO).

VOLATILITY

The propensity of a security’s price to rise or fall sharply.
Volatility describes the degree to which the value of a security changes over time. High volatility means that the value changes dramatically, usually due to great market uncertainty. Traders thrive on market volatility because it presents opportunities to earn a profit. Low volatility means values change minimally, such as when all news has been priced into a market. Professional investors tend to benefit from low volatility because they are better able to lock in stable returns. Financial markets distinguish between historical volatility and implied volatility. Historical volatility is a measure of volatility based on past price or yield behavior, while implied volatility is an estimation of future behavior, implied by the price of an option.

IMPLIED VOLATILITY

The volatility the market expects in the price of a security. It is a measure of the extent, but not the direction, of the future price movements. It tends to increase in bearish markets and fall in bullish ones. It is expressed as an annualized percentage.

A floating-rate note with no stated maturity date (see also “perpetual floating-rate note”).

UNDERWRITER

The securities dealer who purchases a bond or note issue from an issuer and resells it to investors. If a syndicate or selling group is formed, the underwriter who coordinates the financing and runs the group is called the senior or lead manager.
The difference between the offering price to the public by the underwriter and the purchase price the underwriter pays to the issuer. The underwriter’s expenses and selling costs are usually paid from this amount.

UNIT

A fractional, undivided interest in a unit investment trust.

UNIT INVESTMENT TRUST

An investment fund created with a fixed portfolio of investments to provide a steady, periodic flow of income to investors.

UNLIMITED TAX BOND

A bond secured by the pledge of taxes that are not limited by rate or amount.

UNSECURED DEBT

Debt with a claim for repayment that ranks last after all other forms of debt securities in the event of a corporate liquidation.

UNWEIGHTED/WEIGHTED INDICES

Stock indices are calculated in two ways, weighted or unweighted. Unweighted indices are simple arithmetic or geometric averages. With weighted indices certain stocks carry a greater weighting than others, usually based on their market value or capitalization.

UPSTREAM

An oil industry term refers to the exploration for and production of crude oil and natural gas, in contrast with the downstream refining and marketing of oil products.

U.S. SAVINGS BOND

A non-marketable bond issued by the U.S. Treasury in face value denominations designed for individual investors. Since savings bonds are direct obligations of the U.S. Government, the credit quality is the highest available. Each bond is a registered security for which a record is maintained by the Bureau of the Public Debt. Interest from savings bonds are exempt from state and local taxes, and unlike most investments no federal tax is due until the bond is redeemed. Two categories of bonds are currently available for purchase-Series EE and series I. For more information on purchasing savings bonds go to www.treasurydirect.gov.

Are issued by states or local governmental units to finance current operations in anticipation of future tax receipts. TRANS are notes that are issued in anticipation of both taxes and revenues.

TAKEOVER BID

The initial offer by a company seeking to buy another. The bid can be in cash shares or a combination. Bids usually have a closing date for acceptance. The bid can be hostile (without the acceptance or cooperation of the target company), or friendly (accepted by the target).

TAXABLE MUNICIPAL BOND

A municipal bond whose interest is not excluded from the gross income of its owners for federal income tax purposes. Certain municipal bonds are taxable because they are issued for purposes which the federal government deems not to provide a significant benefit to the public at large.

TAX-BACKED BOND

A broad category of bonds that are secured by taxes levied by the obligor. The taxes are not necessarily unlimited as to rate or amount, so while all general obligation bonds are tax backed, not all tax-backed bonds are general obligations. Examples of tax-backed bonds include moral obligations and appropriation-backed bonds. This category is also known as tax-supported.

TAX BASE

The total property and resources subject to taxation. (See “assessed valuation.”)

TAX-EXEMPT BOND

A common term for municipal bonds. The interest on the bond is excluded from the gross income of its owners for federal income tax purposes under Section 103 of the Internal Revenue Code of 1954, as amended. Municipal bonds that are also exempt from state and local as well as federal income taxes are said to have double or triple tax exemption.

TAX-EXEMPT COMMERCIAL PAPER

A short-term promissory note issued for periods up to 270 days, often used in lieu of fixed-rate BANs, TANs and RANs because of the greater flexibility offered in setting both maturities and determining rates. The purpose for issuing TECP or TXCP can be the same as that for BANs, TANs and RANs.

TAX-EXEMPT/TAXABLE YIELD EQUIVALENT FORMULA

A formula which converts the lower yield of a tax-exempt security into the higher yield of a taxable security. The tax-exempt yield is divided by 100% less the investor’s marginal tax rate, and the resulting quotient is expressed as a percentage. This allows investors to compare equivalent yields on the two securities.

T-BILL RATE

The weekly average auction rate of the three-month Treasury bill stated as the bond equivalent yield.

TECHNICAL ANALYSIS

Technical analysis claims to be able to forecast future market movements solely through the study of past market price and volume data. It contrasts with market forecasts based on the analysis of the fundamental factors influencing supply and demand for shares, currencies or commodities, so-called fundamental analysis. Technical analysts, also known as technicians or chartists, try to identify price patterns and trends in financial markets and exploit them. They search for chart patterns such as head and shoulders or double top reversal patterns, study indicators such as moving averages and look for chart support and resistance levels. Major investment banks and brokerages normally employ technical as well as fundamental analysts. The Random Walk Theory developed by Burton Malkiel, an American economics professor, casts doubt on the validity of the claims made by technical analysis. The theory is described in Malkiel’s book ‘A Random Walk Down Wall Street’ and holds that prices follow a random and unpredictable path and that past performance cannot be used to forecast future direction.

TED SPREAD

The Treasury/Eurodollar spread is the difference between the yield on the three month U.S. Treasury Bill and the three month Eurodollar LIBOR rate. It is a measure of the premium over ultra-safe U.S. Treasury Bills that banks demand for lending to each other. Normally around 20 to 40 basis points, the TED spread ballooned to nearly 500 basis points in the autumn of 2008 at the height of the panic over the stability of the global financial system.

TENDER OFFER

A public offer by a company to the shareholders of another company to buy their shares, usually at a premium to the current market price. Tender offers are often part of a takeover bid and are usually made subject to the bidder obtaining a minimum number of shares and the automatic expiry of the offer after a certain number of shares have been acquired.

TERM FUNDING

A financing done to meet specific cash-flow needs for a specific period of time.

THIN MARKET

A market where there is little buying or selling interest, with low volume or activity.

TIER ONE CAPITAL

A bank’s tier one capital comprises equity, disclosed reserves and retained earnings. Under capital adequacy standards set for commercial banks by the Bank for International Settlements (BIS) at least half of the 8 percent of capital required to be set against risk-weighted assets must be tier one or core capital. Supplementary capital, or tier two, constitutes the rest. This includes undisclosed reserves, general provisions against loan losses, subordinated term debt and hybrid capital instruments with the characteristics of debt and equity.

TIME VALUE

The component of an option premium, which takes into consideration the time to expiry and the volatility of the underlying instrument.

TOTAL RETURN

Total return is the dividend plus any capital gains or losses achieved by investing in a stock expressed as an annualized percentage of the amount invested.
Investment performance measure over a stated time period which includes coupon interest, interest on interest, and any realized and unrealized gains or losses.

TRADE DATE

The date upon which a security is purchased or sold.

TRADING RANGE

The high and low trading points of a security over a period of time. Sometimes referred to as the high/low; technical analysts watch to see if the price breaks above or below the high or low since this can be a signal about its future trend

TRANCHE

The French word for “slice”, tranche usually refers to part, segment or portion of an investment issue such as a specific class of bond or mortgage backed security within an offering in which each tranche offers different terms including varying degrees of risk. Tranche may also refer to the segment of the bond offering being distributed in different geographical areas.

TTRANSFER AGENT

The party appointed by an issuer to maintain records of bondholders, cancel and issue certificates, and address issues arising from lost, destroyed or stolen certificates.

TRANSPARENCY

The concept of disseminating price, volume and other information to the public about transactions in the municipal market.

TREASURY INFLATION-INDEXED SECURITIES (TIIS)

Securities designed to protect investors and the future value of their fixed-income investments from the adverse effects of inflation. Using the Consumer Price Index as a guide, the value of the securities’ principal is adjusted to reflect the effects of inflation. Also known as Treasury Inflation Protected Securities (TIPS).

TREASURY SECURITIES

U.S. Treasury securities are debt obligations of the U.S. government. These include bills, notes, bonds, TIPS, and Savings Bonds. When you buy a Treasury security, you are lending money to the federal government for a specified period of time. Treasury bills are short-term instruments with maturities of no more than one year. Treasury notes are intermediate- to long-term investments, typically issued in maturities of two, three, five, seven and ten years. Treasury bonds cover terms of more than ten years and are currently issued in 30-year maturities. Interest is paid semi-annually. For more information on buying Treasury securities see the government’s website www.treasurydirect.gov.

TRANSACTION FEES

Charges paid by an investor to a broker for the purchase and sale of securities.

TRIGGER

The market interest rate at which the terms of a security might change. Triggers are common on index amortization notes and range securities.

TRIPLE-A CLAIMS-PAYING RATING

Designation for insurers offering superior security on both an absolute and a relative basis. Such insurers have been judged to possess the highest safety and have the capacity to meet policyholder obligations.

TRIPLE TOP

A triple top or triple bottom is a price pattern in technical analysis formed when a market rises or falls three times to a similar level and then reverses. It is a signal that strong support or resistance exists at those levels and that a change in market trend is likely.

TRUE INTEREST COST

A method of calculating bids for new issues of municipal securities that takes into consideration the time value of money (see “net interest cost”).
It is called a true-sale opinion from a law firm before the securities can receive a rating higher than that of the sponsor.

TRUE YIELD

The rate of return to the investor taking into account the payment of capital gains at maturity on a bond bought at a discount.

TRUST AGREEMENT

Agreement between the issuer and the trustee (1) authorizing and securing the bonds; (2) containing the issuer’s covenants and obligations with respect to the project and payment of debt service; (3) specifying the events of default; and (4) outlining the trustee’s fiduciary responsibilities and bondholders’ rights. Generally does not include an assignment to the trustee of collateral to secure the payment of debt service.

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.

The storage and protection of customers’ securities, typically held in a vault, provided as a service by a bank or institution acting as agent for the customer.

SCENARIO ANALYSIS

An analysis examining the likely performance of an investment under a wide range of possible interest rate environments.

SEASONAL ADJUSTMENT

An adjustment made to economic indicators to allow for predictable rises and falls in their value caused by seasonal factors. Seasonal adjustments make it easier to discern the underlying trend of the indicator. Adjustment is made by deducting an average of the change in a set number of previous years from the latest change, showing whether a rise or fall is unusual or purely seasonal.

SECONDARY MARKET

Market for issues previously offered or sold.

SECTION 501(C) (3)

The section of the Internal Revenue Code under which not-for-profit organizations receive their tax-exempt status.

SECTOR

The grouping of securities into a category, based upon similarities that they share. Typically, securities found in a distinct industry are grouped together.

SECURED BOND

Debt backed by specific assets or revenues of the borrower. In the event of default, secured lenders can force the sale of such assets to meet their claims.

SECURITIES AND EXCHANGE COMMISSION

The U.S. regulatory body responsible for overseeing and administering rules governing all sectors of the securities industry. Its purpose is to protect investors and maintain the integrity of financial markets.

SECURITIZATION

Securitization may be broadly defined as the process of issuing new securities backed by a pool of existing assets such as loans, residential or commercial mortgages, credit card debt, or other assets. These securities, which are generally referred to as “mortgage or asset-backed securities” are issued and sold to investors (principally institutions) and the cash flows or economic values following the assets are redirected to them. Securitization includes a diverse array of assets, such as residential and commercial mortgage loans, trade receivables, credit card balances, consumer loans, lease receivables, automobile loans, insurance receivables, commercial bank loans, health care receivables, and obligations of purchasers to natural gas producers, future rights to entertainment royalty payments and other consumer and business receivables.

SECURITY

A certificate issued by a company, government or other organization giving proof that money has been invested in the stock, bonds, debt, options or other derivatives or instruments issued or sold by it. Securities are increasingly held in electronic rather than paper form.

SERIAL BONDS

All or a portion of an issue with stated maturities in consecutive years (as opposed to mandatory sinking fund redemption amounts).

SERIES EE SAVINGS BONDS

Series EE bonds are safe low risk savings bonds issued by U.S. Treasury. Series EE bonds issued after April 2005 earn a fixed interest rate based on 10-year Treasury note market yields that is set each May 1 and November 1. Series EE bonds issued from May 1997 to April 2005 accrued interest according to a floating rate (90% of the average market yields on 5-year Treasury securities for the previous six months). The holder doesn’t receive the interest until the bonds are cashed in. If the bonds are redeemed less than five years from the time they are purchased, the holder must sacrifice three-month’ interest. The Treasury guarantees that Series EE bonds will mature at full face value in no more than 17 years. If you want to hold them longer, they will continue to accrue interest for 30 years.

SERIES I SAVINGS BONDS

Series I savings bonds have a built-in inflation adjustment. They are issued in the same denominations as Series EE bonds but pay interest according to an earning rate that is partly a fixed rate of return and partly adjusted for inflation. Interest, if any, is added to the bond monthly and is paid when the bond is redeemed. These bonds can now be issued electronically.

SERVICING

The collection and pooling of principal, interest and escrow payments on mortgage loans and mortgage pools; accounting, bookkeeping, insurance, tax records, loan payment follow-up, delinquency loan follow-up and loan analysis. The party providing the servicing receives a fee, the servicing fee, as compensation.

SERVICING FEE

The amount retained by the mortgage servicer from monthly interest payments made on a mortgage loan.

SETTLEMENT DATE

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

SHARE

A share is a unit of ownership in a corporation, or a mutual fund or an interest in a partnership. In the US, the term stock is often used instead of share, although an investor actually owns shares of stock.

SHARPE RATIO

A method of assessing whether returns are produced by intelligent investment decisions or by accepting too much risk. It measures the return of an investment compared with investments in government bonds, which are regarded as virtually risk free. The ratio is calculated by subtracting the rate of return on government securities from the rate of return on a portfolio and then dividing the difference by the standard deviation of the portfolio’s returns.

SHORT

Borrowing and then selling securities that one does not own, in anticipation of a price decline. When prices fall, the short is “covered” by buying the securities back and returning them to the lender.

SHORT COVERING

The buying back of a security or asset previously sold so as to close out a short position. Also known as bear covering. See also: Short, Short-Selling, and Short Squeeze

SHORT SQUEEZE

A short squeeze occurs when investors holding short positions find that the market has not fallen as they hoped but has risen just as they have to make good on their obligation to deliver securities or a physical commodity. The sudden increase in demand exceeds immediately available supplies. It leaves them at the mercy of those in possession of supplies and forces them to compete against each other to obtain them, driving prices sharply higher.

SHORT-TERM DEBT

Generally, debt which matures in one year or less. However, certain securities that mature in up to three years may be considered short-term debt.

SOLVENT

The ability of a company or other organization to meet its debts as they fall due; having assets that are in excess of liabilities.

SPOT

A trade or transaction conducted for immediate settlement which in most markets is within two working days.

SPOT MARKET

A market where trades are delivered and settled within two working days. The spot market is also called the cash market because trades are settled in cash at current market prices, as opposed to forward prices.

SPECIAL-PURPOSE VEHICLE (SPV)

A bankruptcy-remote entity set up to insulate the issuer of ABS (the trust) from the sponsor, or originator, of the assets. Also called special-purpose corporation (SPC).

SPREAD

The word spread has several different meanings: 1) the difference in a price quotation between the bid, the price at which a dealer is prepared to buy, and the ask, the price at which a dealer will sell. A large spread usually means the market lacks liquidity. When that happens, dealers often cannot buy and sell quickly and so they widen the spread to avoid being caught on the wrong side of the market. 2) Spread can also be used to express the difference in yields between two fixed income securities of the same quality but different maturities, or of different quality but the same maturities. 3) It can also refer to the difference in yield between a bond and a reference government bond, which is regarded as relatively risk-free. 4) A futures spread is the difference in prices between delivery months in the same or different markets. 5) Spread can also refer to the difference between borrowing and lending rates by which a financial intermediary makes profits.

SPREAD TO TREASURY

The difference between the yield on a fixed-income security and the yield on a Treasury security of comparable maturity. For example, the spread between a 10-year Treasury yielding 4.75% and a 10-year corporate yielding 5.25% is 50 basis points.

STAGFLATION

A state in which an economy experiences high inflation accompanied by stagnant economic activity, i.e. low growth and high unemployment.

STATE RATING

Indicates the general obligation bond (G.O.) credit rating a rating agency may apply to a state. The rating on a specific municipal bond issue or issuer located with the state may differ from the state rating.

STOCK SPLIT

The breakup of a share into smaller units without affecting either the total share capital or reserves. The main effect is to reduce the unit price of each quoted share, making them easier to trade in small lots and more attractive to small investors. Opposite of a reverse stock split.

STOCKBROKER

A company or individual, executing trades and/or providing investment advice to individual and institutional customers, but not acting as a principal.

STRIKE PRICE

The price at which the security underlying a call option can be bought or the price at which the security underlying a put option can be sold. Also known as the exercise price.

STOCK INDEX FUTURE

A futures contract based on a stock market index

STRIPS

Separate Trading of Registered Interest and Principal of Securities. The Treasury Department’s program under which eligible securities are authorized to be separated into principal and interest components, and transferred separately. These components are maintained in book-entry accounts and transferred in TRADES (Treasury/Reserve Automated Debt Entry System).

STRUCTURED PRODUCTS

Many different types of products are “structured” to some extent. “Structuring” usually refers to any type of obligation that is not a straightforward secured or unsecured government or corporate obligation. Although these types of transactions are usually issued through special purpose vehicles, this is not always the case. For example, securitizations are one type of structured product. Another type of structured product refers to a packaging or repackaging of bonds together with various types of interest rate swaps and/or credit derivatives to change the interest and principal payment stream, in order to provide an investor with a particular risk profile that they want. In some cases, these products are also called “structured credit” if they involve products with some type of corporate or asset-related credit risks. Due to the complexity of structured products, they are rarely part of traditional retail investor portfolios or fund offerings.

SUBORDINATED BOND

A type of debt that places the investor in a lien position behind or subordinated to a company’s primary creditors. Bonds issued as subordinated debt will pay interest and principal but only after all interest that is due and payable has been paid on any and all senior debt.

SURETY BOND

A bond that backs the performance of another. In the ABS market, a surety bond is an insurance policy typically provided by a rated and regulated monoline insurance company to guarantee securities holders against default.

SWAP

A transaction in which an investor sells one security and simultaneously buys another with the proceeds, usually for about the same price and frequently for tax purposes.

SYNDICATE

A group of underwriters formed for the purpose of participating jointly in the initial public offering of a new issue of municipal securities. The terms under which a “syndicate” is formed and operates are typically set forth in an “agreement among underwriters.” One or more underwriters will act as manager of the “syndicate” and one of the managers will act as lead manager and “run the books.” A “syndicate” is also often referred to as an “account” or “underwriting account.”

Abbreviation for Return on Assets. A company’s ability to operate profitably can be measured directly by calculating its return in three ways: 1. Return on total assets = a ratio of the attributable profits for the last 12 months to total assets (fixed and current) for the same period, expressed as a percentage. It measures how effectively a company can generate earnings from its assets. 2. Return on fixed assets = the ratio of attributable profits to fixed assets alone, expressed as a percentage. It measures how effectively a company can generate earnings from its long-term assets such as land and machinery. 3. Return on capital employed (ROCE) = the ratio of operating profit to capital employed, expressed as a percentage. Capital employed equals shareholders’ funds plus long-term liabilities, in other words all the long-term funds used by the company. The ratio measures the return on all sources of finance used by the company (i.e. equity plus debt) and is very similar to return on assets (which includes current liabilities).

RATINGS

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

REAL YIELD

For an inflation-indexed security, the yield based on the payment stream in constant dollars, i.e., before adjustment by the index ratio.

RECESSION

A downturn in economic activity on a large scale, such as in the U.S. economy. The Commerce Department defines a recession as two or more quarters of decline in output, as measured by Gross National Product (GNP) or Gross Domestic Product (GDP).

RECIPROCAL IMMUNITY DOCTRINE

The doctrine that many believe provides the constitutional basis for the exemption from federal taxation of the interest earned on municipal securities. The doctrine holds that the states are immune from taxation by the federal government and vice versa. The advocates of tax-exemption for bonds believe that a tax on the interest income a taxpayer receives constitutes a tax on the issuer of the bonds.

RECORD DATE

The date for determining the owner entitled to the next scheduled payment of principal or interest on a security.

REDEMPTION

The paying off or buying back of a bond by the issuer; also, repurchase of investment trust units by the trustee, at the bid price.

RED HERRING

A preliminary official statement.

REFUNDING

Sale of a new issue, the proceeds of which are to be used, immediately or in the future, to retire an outstanding issue by, essentially, replacing the outstanding issue with the new issue. Refundings are done to save interest cost, extend the maturity of the debt, or to relax existing restrictive covenants.

REGISTERED BOND

A bond whose owner is registered with the issuer or its agent. Transfer of ownership can only be accomplished if the bonds are properly endorsed by the registered owner.

REGISTERED OWNER

The name in which a security is registered, as stated on the certificate or on the books of the paying agent. P&I payments are made to the registered owner on the record date.

REINVESTMENT RISK

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

RELATIVE STRENGTH INDEX

A technical analysis tool that compares the magnitude of price rises of a security with the magnitude of price falls so as to identify overbought and oversold signals. It acts as a warning when there is a divergence between movements in the Relative Strength Index and movements in the security’s price. For example, the RSI may be rising when the price of the security is falling, giving a buy signal

REMIC (REAL ESTATE MORTGAGE INVESTMENT CONDUIT)

A pass-through investment vehicle which issues multiclass mortgage-backed securities that have certain tax and accounting advantages for issuers and investors due to the Tax Reform Act of 1986. Currently, most CMOs are issued in REMIC form and the terms “REMIC” and “CMO” are now used interchangeably.

REPURCHASE AGREEMENTS (REPOS)

Repurchase agreements (repos) are widely used as a source of financing by primary dealers, other securities firms, banking firms, and institutional investors, among others. A repo involves an agreement between a seller and a buyer, typically of U.S. government securities but increasingly involving other types of securities and financial assets as well, whereby the seller “sells” the securities to the buyer, with a simultaneous agreement to repurchase the securities at an agreed upon price at a future point in time. A reverse repurchase agreement is the flip side of the transaction, with the buyer “buying” the securities from the seller and simultaneously agreeing to resell them at a future point in time. The outstanding volume of repos and reverse repos is enormous.

REQUEST FOR PROPOSALS

Widely referred to as an “RFP.” A series of questions sent by a potential issuer to evaluate the qualification of potential underwriters of their negotiated issues. Written and sometimes oral (the “orals”) responses to questions may include a marketing plan for the bonds, the plan of finance, and estimated costs. Also referred to as “Request for Qualifications,” or “RFQs.”

RESIDENTIAL MORTGAGE BACKED SECURITIES (RMBS)

Mortgage backed securities represent an ownership interest in mortgage loans made by financial institutions (savings and loans, commercial banks or mortgage companies) to finance the borrower’s purchase of a home or other residential real estate as opposed to commercial real estate. Mortgage securities are created when these loans are packaged, or “pooled,” by issuers or servicers for sale to investors. As the underlying mortgage loans are paid off by the homeowners, the investors receive payments of interest and principal.

Investors may purchase mortgage securities when they are issued or afterward in the secondary market. Investments in mortgage securities are typically made by large institutions when the securities are issued. These securities may ultimately be redistributed by dealers in the secondary market.

RESISTANCE

Resistance is a level, usually identified on a price chart, where selling interest is strong enough to overcome buying pressure with the result that prices rise no further. Each time a level of resistance is penetrated it will create a new level of support.

RETAINED EARNINGS

Earnings not paid out as dividends by a company. Retained earnings are typically reinvested back into the business and are an important component of shareholders’ equity

RETAIL INVESTORS

Individual investors who invest smaller amounts of money in the markets than institutional investors.

REVENUE ANTICIPATION NOTE (RAN)

RANs are issued in anticipation of sources of future revenue other than taxes. This may include intergovernmental aid.

REVENUE BOND

A municipal bond payable from income derived from tolls, charges or rents paid by users of the facility constructed with the proceeds of the bond issue.

REVOLVING TRUST

A securitization structure frequently used for assets with high turnover rates, such as credit card, trade and dealer floor-plan receivables. It is characterized by having a revolving period and an accumulation (or controlled-amortization) period.

RISK

A measure of the degree of uncertainty and/or of financial loss inherent in an investment or decision. There are many different risks, including:

1. Call risk
   —the risk that declining interest rates may accelerate the redemption of a callable security, causing an investor’s principal to be returned sooner than expected. As a consequence, investors may have to reinvest their principal at a lower rate of interest.
2. Credit risk
   —the risk that the issuer of the bonds will be unable to make debt service payments due to a weakening of their credit.
3. Event risk
   —the risk that an issuer’s ability to make debt service payments will change because of unanticipated changes, such as a corporate restructuring, a regulatory change or an accident, in their environment.
4. Market risk
   —potential price fluctuations in a bond due to changes in the general level of interest rates.
5. Underwritting risk
   —the risk of pricing and underwriting securities and then ultimately not being able to sell them to the investor.

ROUND LOT

Block of bonds $100,000 or higher.

RUNNING YIELD OR SIMPLE YIELD OR INCOME YIELD

The coupon of a bond expressed as a percent of the price of the bond. An example is a 20-year bond with a coupon of 6% selling at 120 has a simple yield of 5% (6 x 100/120).

Quantitative easing involves the purchase, normally by a central bank, of assets such as government or corporate bonds in order to increase the supply of money in an economy in an attempt to prevent deflation. The assets are paid for by the electronic creation of money which is then credited to the accounts of the companies from which they were bought. This extra money boosts spending and helps prices to rise. Central banks normally introduce quantitative easing after cuts in official interest rates close to zero have failed to cause prices to rise. The risk associated with quantitative easing is that inflation may result.

The term used to refer to regularly scheduled payments or prepayments of principal and of interest on mortgage securities.

PAR

Price equal to the face amount of a security; 100%.

PARTICIPATION

Principal amount of bonds to be underwritten by each syndicate member.

PARTY

One of two entities, in a traditional interest rate swap. In the municipal market a counterparty and a party can be a state or local government, a broker dealer, or a corporation.

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.

PAYMENT DATE

The date that actual principal and interest payments are paid to the record owner of a security.

PBGC

Pension Benefit Guarantee Corp. The PBGC is a guarantee fund, established by ERISA, which covers all defined benefit pension plans. Companies with a defined benefit plan must pay premiums into this fund according to the number of employees in the plan and the current ratio of assets to liabilities in the plan.

PLAN ADMINISTRATOR

The individual, group or corporation named in the plan document as responsible for day to day operations. The plan sponsor is generally the plan administrator if no other entity is named.

PLAN SPONSOR

The entity (generally the employer) responsible for establishing and maintaining the plan.

PLAN VENDOR

Companies that administer service and/or sell 401k plans. They are generally employed by the plan sponsor.

PERFORMANCE

An investment’s return (usually total return), compared to a benchmark that is comparable to the risk level or investment objectives of the investment.

PERPETUAL FLOATING-RATE NOTE

A floating-rate note with no stated maturity date.

PLAIN-VANILLA CMO

Or “sequential-pay CMO.” The most basic type of CMO. All tranches receive regular interest payments, but principal payments are directed initially only to the first tranche until it is completely retired. Once the first tranche is retired, the principal payments are applied to the second tranche until it is fully retired, and so on.

PO (PRINCIPAL-ONLY) SECURITY

A tranche or security that pays investors principal only and not interest. PO securities are priced at a deep discount from their face value

POINT

Shorthand reference to 1%. In the context of a “bond,” a “point” means $10, since a “bond” with this reference means $1,000 (no matter what the actual denominations of the bonds of the issue). An issue or a security that is “discounted two points” is quoted at 98% of its par value.

POOL

A collection of mortgage loans assembled by an originator or master servicer as the basis for a security. In the case of Ginnie Mae, Fannie Mae, or Freddie Mac mortgage pass-through securities, pools are identified by a number assigned by the issuing agency.

PORTFOLIO

The group of investments that an individual or institutional investor holds.

POSITION

The net balance of outstanding purchases and sales held by a trader. The term can refer to a trader’s net balance in a particular security or market or in all the ones in which he is active.

POSITIVE CARRY

Where the financing cost of a position is lower than the income received from it. Positive carry trades are often made in the currency market where the interest received by investors in one currency is higher than what has to be paid to borrow in another. Negative carry is when it costs more to finance a position than it earns.

PREFERRED STOCK

An equity security that is junior to the issuing entity’s debt obligations but senior to common stock in the payment of dividends and the liquidation of assets. The dividend can be fixed or floating and is usually stated as a percentage of par value. Preferred stock usually has no voting rights and frequently has a mandatory or optional redemption provision.

PREMIUM

The amount by which the price of a security exceeds its principal amount.

Premium or discount price

When the dollar price of a bond is above its face value, it is said to be selling at a premium. When the dollar price is below face value, it is said to be selling at a discount.

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 reinvested 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.

PRICE

The dollar amount to be paid for a security, which may also be stated as a percentage of its face value or par in the case of debt securities. Bond prices are best reflected in their yields, which vary inversely with the dollar price. The price you pay for a bond is based on a host of variables, including interest rates, supply and demand, credit quality, maturity and call features, tax status, state of issuance, market events and the size of the transaction.

PRICE TO BOOK RATIO

Price to book ratio is a comparison between a company’s market value and its book value. It can be calculated either dividing market capitalization by total book value or by dividing the share price by the book value per share. The ratio should be higher than one. If not it means that a company’s assets are valued by the market at less than their replacement value. This could mean that the shares are undervalued or that the company is facing very considerable problems.

PRIME RATE

A commercial bank’s stated reference rate for lending.

PRINCIPAL

The face amount of a bond, exclusive of accrued interest and payable at maturity.

PRINCIPAL TRANSACTION

A sale and purchase of securities in which the dealer commits its own capital in effecting the transaction.

PRIVATE PLACEMENT

The negotiated offering of new securities directly to investors, without a public underwriting.

PRO RATA

Proportional distribution to all holders of the same class, based on ownership.

PROGRAM-TRADING

Computer-based trading techniques based on the flow of trading and price levels, rather than on fundamental supply and demand factors. Program trading often aims to exploit arbitrage possibilities between particular securities.

PROSPECTUS

Documents provided to investors who are considering investing in financial instruments such as stocks, shares, bonds, bond funds, investment trusts, etc. The prospectus details the investment’s objectives, the nature of the investment, past performance, information on the Investment Company or managers, etc. In the U.S., the Securities Exchange Commission (SEC) requires investment companies to issue and file with them a prospectus that explains the investment offer and provides other information that could help an individual investor decide whether the investment is appropriate.

PUT BOND

A bond that gives the holder the right to require the issuer or the issuer’s agent to purchase the bonds at a price, usually at par, at some date or dates prior to the final stated maturity.

PUT CALL PARITY

Put call parity refers to the principle of a static price relationship between the prices of a put option and a call option on the same underlying instrument with the same strike price and expiry date. If they are not the same then there is room for arbitrage. Put call parity applies only to European-style options which can be exercised only on expiration and not before. American-style options can be exercised at any time during the life of the contract.

PUT OPTION

A put option allows the holder of a bond to “put,” or present, the bond to an issuer (or trustee) and demand payment at a stated time before the final stated maturity of the bond.