municipal bond fund
A mutual fund which invests in municipal bonds. These bond funds are popular among investors in high income tax brackets because they are exempt from federal taxes and, in some cases, from state taxes as well. As with U.S. government bond funds, the underlying securities in municipal bond fundsare backed by the government and thus are considered to have a high credit rating. However, municipalities have been known to declare bankruptcy on occasion, making these funds more riskythan U.S. government bonds. also called muni fund.
portfolio separation theorem
Observation that the construction of a diversified portfolio of risk-free investments and those with varying degree of risk is unaffected by the investor’s personal preferences. That is, an investor makes choices on the basis of the net present value of the projected returns and not on his or her level of risk tolerance. Since this behavior separates the decision about the type of investments from the decision about the acceptable level of risk, it is named portfolio separation theorem. Its implication is that acompany’s choice of debt-equity ratio is inconsequential. Also called Fisher’s Separation Theory after its proposer, the U.S. economist Irving Fisher (1876-1947).
The purchase of reinsurance by a reinsurance company. This limits the risk that a reinsurance company must face, since it has purchased insurance against an event that might affect a company that it had underwritten. If a reinsurance company continues to purchase insurance it might unknowingly buy back its own risk, known as “spiraling”.The voluntary act of returning property which had been previously “ceded” to its original holders. Examples include Washington, D.C. returning land to the state of Virginia in 1847, or the United Kingdom returning Hong Kong to China in 1997
A lease that meets one or more of the following criteria, meaning it is classified as a purchase by thelessee: the lease term is greater than 75% of the property’s estimated economic life; the lease contains an option to purchase the property for less than fair market value; ownership of the property is transferred to the lessee at the end of the lease term; or the present value of the lease paymentsexceeds 90% of the fair market value of the property.
A brokerage or bank that maintains a firm bid and ask price in a given security by standing ready, willing, and able to buy or sell at publicly quoted prices (called making a market). These firms display bid and offer prices for specific numbers of specific securities, and if these prices are met, they will immediately buy for or sell from their own accounts. Market makers are very important for maintainingliquidity and efficiency for the particular securities that they make markets in. At most firms, there is a strict separation of the market-making side and the brokerage side, since otherwise there might be anincentive for brokers to recommend securities simply because the firm makes a market in thatsecurity.
A need-based, low-interest loan available to students rather than their parents. The amount of the loan is determined by each college and is based on the expected family contribution. The student will beheld responsible for this loan, not the parent. Repayment doesn’t begin until after a student graduates,falls below half-time student status, or leaves college. After graduating, a student typically has a nine-month grace period during which interest doesn’t accrue. Perkins loans offer low interest rates to students and can be repaid within ten years.
The number of shares that are being offered for sale at the ask price, often expressed in terms of hundreds of shares. Some traders try to use the bid size and ask size to measure impending short term upward or downward pressure on the stock’s price. This can work for stocks on exchanges such as NYSE and AMEX, but is far less useful on Nasdaq, which has market makers ready to buy and sellshares, rather than specialists who balance books of buy and sell orders.
IPO lock up
A contract stipulation that most publically traded companies use, which prohibits majority shareholders or those within the organization from selling their shares soon after the company goes public. The restriction typically lasts 90 to 180 days. Also called lock up period.
An open-end mutual fund that has temporarily or permanently suspended sale of shares to newcustomers, usually due to rapid asset growth. Outstanding shares are still accepted for redemption by the fund, and existing shareholders may also buy shares in some cases. The primary reason forclosing a fund to new investors is that fund managers are concerned that if they increase the assetbase of the fund any further, their current investment strategy will become too difficult to achieve.
An indication of a company’s ability to meet short-term debt obligations; the higher the ratio, the moreliquid the company is. Current ratio is equal to current assets divided by current liabilities. If the currentassets of a company are more than twice the current liabilities, then that company is generally considered to have good short-term financial strength. If current liablities exceed current assets, then the company may have problems meeting its short-term obligations.
For example, if XYZ Company’s total current assets are $10,000,000, and its total current liabilities are $8,000,000, then its current ratio would be $10,000,000 divided by $8,000,000, which is equal to 1.25. XYZ Company would be in relatively good short-term financial standing.
liquidity preference theory
Observation that, all else being equal, people prefer to hold on to cash (liquidity) and that they willdemand a premium for investing in non-liquid assets such as bonds, stocks, and real estate. The theory suggests that the premium demanded for parting with cash increases as the period (term) for getting the cash back increases. The rate in the increase of this premium, however, slows down with the increase in term. In the language of financial trading, this theory is expressed as “forward ratesshould exceed the future spot rates.” This concept was first expressed by the U.K. preferencehypothesi
interest reserve account
Type of savings account created to pay off interest costs accrued from a long-term debt obligation. These accounts are more commonly used for large construction projects. The amount stored in aninterest reserve account can be calculated through various formulas depending on the size and scope of the underlying debt. For example, one method is to take the total loan value multiplied by the interestpercentage multiplied by the estimated length of time it will take to complete the project multiplied by the percentage of time for which the loan will be outstanding.
An individual or organization which holds or manages and invests assets for the benefit of another. The trustee is legally obliged to make all trust-related decisions with the beneficiary’s interests in mind, and may be liable for damages in the event of not doing so. Trustees may be entitled to a payment for theirservices, if specified in the trust deed. In the specific case of the bond market, a trustee administers abond issue for a borrower, and ensures that the issuer meets all the terms and conditions associated with the borrowing.
Is a debt security with one or more special features, such as making payments based on an underlyingindex. For instance, a structured note is a bond which, instead of paying the typical interest payments, will use an index, such as the S&P 500, to determine the amount of the interest payment. This type ofdebt security is complex and is used primarily by sophisticated investors. By hedging the security on an underlying asset, the investor is sometimes able to receive larger returns on the investment.
consumer reporting agency
An agency which collects and sells information about the creditworthiness of individuals. A creditreporting agency does not make any decisions about whether a specific person should be extended credit or not. Instead, it collects information that it considers relevant to a person’s credit habits and history, and uses this information to assign a credit score to indicate how creditworthy a person is. Prospective creditors purchase credit reports from credit bureaus about specific individuals, and then they use this information to decide how much credit, if any, to extend to the individual. also called credit bureau
qualified retirement plan
A plan that meets the requirements of Internal Revenue Code Section 401(a) and the Employee Retirement Income Security Act of 1974 (ERISA) and is thus eligible for favorable tax treatment. These plans offer several tax benefits: they allow employers to deduct annual allowable contributions for each participant; contributions and earnings on those contributions are tax-deferred until withdrawn for each participant; and some of the taxes can be deferred even further through a transfer into a different type of IRA. opposite of non-qualified retirement plan.
non-statutory stock option
A type of employee stock option which is less advantageous for the employer from a tax standpoint than an incentive stock option (ISO), but which is less restrictive and generally easier to set up and administer. The most important difference is that the exercise of ISO does not result in a tax burden, while the exercise of a non-qualified stock option does (except in very specific circumstances). also called non-qualified stock option.
A mutual fund whose aim is to achieve capital appreciation by investing in growth stocks. They focus on companies that are experiencing significant earnings or revenue growth, rather than companies thatpay outdividends. The hope is that these rapidly growing companies will continue to increase in value, thereby allowing the fund to reap the benefits of large capital gains. In general, growth funds are morevolatile than other types of funds, rising more than other funds in bull markets and falling more in bear markets.
The specified price on an option contract at which the contract may be exercised, whereby a call option buyer can buy the underlier or a put option buyer can sell the underlier. The buyer’s profit from exercising the option is the amount by which the strike price exceeds the spot price (in the case of a put), or the amount by which the spot price exceeds the strike price (in the case of a call). In general, the smaller the difference between spot and strike price, the higher the option premium. also calledexercise price.
The part of the economy concerned with providing basic government services. The composition of thepublic sector varies by country, but in most countries the public sector includes such services as the police, military, public roads, public transit, primary education and healthcare for the poor. The public sector might provide services that non-payer cannot be excluded from (such as street lighting), services which benefit all of society rather than just the individual who uses the service (such as public education), and services that encourage equal opportunity