Series 6 & 63 Glossary of Term Flashcards

Terms Definitions
ACCRETION OF A DISCOUNT
An accounting process by which the book value of a security purchased at a discount from par is increased during the security's holding period. The accretion reflects the increase in the security's holding value as it approaches the redemption date. Under a "straight line" accretion method, the amount of the yearly accretion is the same for all years, and is equal to the product of the total amount of the discount divided by the number of years to redemption. * (See Tax Drill #2 in the chapter on Taxes)
ACCREDITED INVESTOR
An investor who meets certain suitability tests and therefore (in the eyes of the SEC) is not in need of the full protection of the securities laws. This term has relevance only when referring to private placements under Regulation D. It includes institutional purchasers and individuals with a net worth (including spouse) of at least $1,000,000 or net income of $200,000 for each of the past two (2) years ($300,000 if including spouse).
ACCRUED INTEREST
Interest dollars added to the contract price of a bond from the last interest payment date. It is always computed up to, but not including the settlement date.
ACCUMULATION ACCOUNT
An account established by the sponsor of a unit investment trust into which securities purchased for the portfolio of the trust are placed until they are formally deposited into the trust and the trust is formally created. *
ACCUMULATION UNIT
Unit used to measure the value of the separate account of an annuity during the pay-in (accumulation phase). Similar to a mutual fund share in that this is the value of one unit (i.e., share) in the annuity separate account. Usually valued on a daily basis, and will fluctuate in value based on the performance of the investments chosen or directed into the separate account. (See "Annuity" and "Annuity Unit.")
ADDITIONAL BONDS TEST
The earnings test which must be satisfied under the provisions of a revenue bond contract before bonds of an additional issue having the same lien on a pledged revenue source can be issued. Typically, the test would require that historical revenues plus future estimated revenues (in some cases) exceed projected debt service requirements for both the existing issue and the proposed issue by a certain ratio. *
ADJUSTMENT BONDS
See "Income (Adjustment) Bonds."
ADMINISTRATOR
(1) A person or institution named by the court to take charge of settling an estate when the person who died did not name an executor, or left no valid will or named an executor who cannot serve. This is considered a fiduciary. (2) Under State (blue sky) Laws, the person in charge of securities enforcement.
ADR
See "American Depository Receipt (ADR)."
AD VALOREM TAX
A direct tax calculated "according to value" of property. Such tax is based on an assigned valuation (market or assessed) of real property and, in certain cases, on a valuation of tangible or intangible personal property. In virtually all jurisdictions, the tax is a lien on the property enforceable by seizure and sale of the property. An ad valorem tax is normally the one substantial tax which may be raised or lowered by a local governing body without the sanction of superior levels of government (although general restrictions (e.g., rate limitations) may exist on the exercise of this right); hence, ad valorem taxes often function as the balancing element in local budgets. *
ADVANCE-DECLINE THEORY
A market theory that uses the relative number of advances versus declines in relation to total issues traded on the NYSE to make buying and/or selling decision. This theory measures the BREADTH of the market.
ADVANCE REFUNDING
A procedure whereby outstanding securities are refinanced by the proceeds of a new issue of securities prior to the date on which the outstanding securities become due or are callable. Accordingly, for a period of time, both the issue being refunded and the refunding issue are outstanding. The proceeds of the refunding securities are generally invested in U.S. Government or federal agency securities (although other instruments such as bank certificates of deposit are occasionally used), with principal and interest from these securities being used to pay principal and interest on the refunded securities (or, in some cases, interest on the refunding securities and subsequently principal on the refunded securities). Securities are "escrowed to maturity" when the proceeds of the refunding securities are deposited in escrow for investment in an amount sufficient to pay the principal of and interest on the issue being refunded on the original interest payment and maturity dates. Securities are considered "pre-refunded" when the refunding issue's proceeds are escrowed only until a call date or dates on the refunded issue, with the refunded issue redeemed at that time. *
ADVISER
The organization which is employed by a mutual fund to give professional advice on its investments and management of its assets.
AFFILIATED PERSON
Anyone in a position to influence decisions made in a corporation, including officers, directors, principal stockholders, and members of their immediate families. Their shares are often referred to as "Control Stock".
AFTERMARKET
A market for a security either over the counter or on an exchange after an initial public offering has been made. (See "Free-Riding & Withholding," "Hot Issue," "Stabilization," "Withholding.")
AGENCIES
A colloquial term for securities issued by one of the federal agencies (e.g., the Federal National Mortgage Association or the Government National Mortgage Association). *
AGENT
The role of a broker/dealer firm when it acts as an intermediary, or broker, between its customer and a market-maker or contra broker. For this service the firm receives a stated commission or fee.
AGREEMENT AMONG UNDERWRITERS
An agreement among members of an underwriting syndicate specifying the syndicate manager, his duties, and his privileges, among other things. (See "Underwriting Agreement," "Underwriter's Retention.")
AGREEMENT OF LIMITED PARTNERSHIP
Contractual agreement between the limited partners and the general partner(s).
ALL-OR-NONE OFFERING
A "best-efforts" offering of newly issued securities in which the corporation instructs the investment banker to cancel the entire offering (sold and unsold) if all of it cannot be distributed.
ALL-OR-NONE (AON) ORDER
An order to buy or sell more than one round lot at one time and at a designated price or better. It must not be executed until both of these conditions can be satisfied simultaneously.
ALTERNATIVE MINIMUM TAX (AMT)
This is a part of the Internal Revenue Code which is intended to make sure that clever individuals and others who benefit from tax preference items such as long-term capital gains, accelerated depreciation, intangible drilling costs and depletion pay at least some federal income tax. If you have preference items, you calculate your taxes using your regular method and then use the AMT method (which puts a 26% tax rate on those items) and pay the amount (if any) by which the AMT exceeds the regular tax.
AMBAC (AMBAC INDEMNITY CORPORATION)
A wholly owned subsidiary of MGIC Investment Corporation which offers non-cancelable insurance contracts by which it agrees to pay a securityholder all, or any part, of scheduled principal and interest payments on the securities as they become due and payable, in the event that the issuer is unable to pay. Bonds insured by AMBAC are currently granted a Standard & Poor's rating of AAA. *
AMERICAN DEPOSITORY RECEIPT (ADR)
A receipt evidencing shares of a foreign corporation held on deposit or under the control of a U.S. banking institution; it is used to facilitate transactions and expedite transfer of beneficial ownership for a foreign security in the U.S. Everything is done in dollars and in English. Essentially the same as an American Depository Share.
AMERICAN STOCK EXCHANGE PRICE CHANGE INDEX
An "Unweighted" market index for all common stocks listed on the ASE, prepared hourly.
AMERICAN STYLE EXERCISE
Option can be exercised at any point prior to expiration. (See "European Style Exercise.")
AMORTIZATION OF A PREMIUM
An accounting process by which the book value of a security purchased at a premium above par is decreased during the security's holding period. The amortization reflects the decrease in the security's holding value as it approaches the redemption date. Under a "straight line" amortization method, the amount of the yearly amortization is the same for all years, and is equal to the product of the total amount of the premium divided by the number of years to redemption. Compare: Accretion of a Discount. *
AMORTIZATION OF DEBT
The process of paying the principal amount of an issue of securities by periodic payments either directly to securityholders or to a sinking fund for the benefit of securityholders.
AMT BOND
Certain Private Purpose municipal bonds pay tax-exempt interest which is subject to the alternative minimum tax. They are called private purpose rather than public purpose because 10% or more of the proceeds goes to private activities. Examples are bonds used to fund airports, docks, wharves and government-owned solid-waste disposal facilities. MSRB rules require that confirmations indicate if the bond is subject to the AMT.
"AND INTEREST"
A bond transaction in which the buyer pays the seller a contract price plus interest accrued since the issuer's last interest payment. Virtually all interest bearing bonds always trade "and interest".
ANNUAL REPORT
A formal statement issued yearly by a corporation to its shareowners. It shows assets, liabilities, equity revenues, expenses, and so forth. It is a reflection of the corporation's condition at the close of the business year (balance sheet) and earnings performance (income statement).
ANNUITIZE
The time or process in which an annuity holder elects to begin his pay-out of income. This payout will follow the accumulation phase and will normally occur at retirement age. Once the annuitant elects to begin this payout he must select the settlement option in which he desires to receive payments. At this time, all control over the contract is surrendered to the insurance company. (See "Settlement Options.")
ANNUITY
An investment product in which an investor contributes money into a plan and then elects to receive pay-out in a fixed or variable amount, usually at retirement. Two important features of this product that you will need to know are: (1) Tax deferred growth of earnings during the accumulation period. However, it is important to note that when you elect to receive payment you will be taxed at ordinary income rates on everything exceeding the cost basis. (2) The annuity will provide lifetime retirement income for the annuitant through the mortality guarantee. (See "Mortality Guarantee.")
ANNUITY UNIT
Unit used to value the separate account of an annuity during the pay-out (annuity) phase. The number of annuity units is a fixed amount designated when electing to annuitize. With a variable annuity, the value of the units will vary according to the performance of the investments in the separate account, while in a fixed annuity the value remains constant. (See "Annuity" and "Accumulation Unit.")
AON ORDER
See "All-or-None (AON) Order."
ARBITRAGE
The simultaneous purchase and sale of the same or equal securities, such as convertible securities, in such a way as to take advantage of price differences prevailing in separate markets. The risk is usually minimal and the profit correspondingly small. (See "Risk Arbitrage.")
ARBITRATION
A system offered under SRO rules for resolving disputes, under which two parties who have a disagreement involving a securities transaction may submit the disagreement to an impartial panel for resolution. Securities dealers may be compelled to arbitrate disputes; customers cannot be compelled to arbitrate disputes involving securities law claims, although they can be forced to resolve general contractual disputes through arbitration if a valid arbitration agreement had been previously executed. Decisions of an arbitration panel are binding on the parties to the claim. *
ASK PRICE
(1) The price at which a mutual fund's shares can be purchased. The ask or offering price means the net asset value per share plus sales charge. (2) The offer side of a quote.
ASSESSED VALUATION
The appraised worth of property as set by a taxing authority for purposes of ad valorem taxation. It is important to note that the method of establishing assessed valuation varies from state to state, with the method generally specified by state law. For example, in certain jurisdictions, the assessed valuation is equal to the full or market value of the property; in other jurisdictions, the assessed valuation is equal to a set percentage of full or market value. *
ASSET ALLOCATION
Apportioning of the investment portfolio among categories of assets, such as money market instruments, stocks, bonds, put and call options, possibly tangible assets like precious metals, real estate and collectibles. The portfolio manager of an asset allocation mutual fund has more latitude than that of any other.
ASSETS
Everything of value that a company owns or has due: cash, investments, money due, materials, inventories--which are called current assets: buildings and machinery--fixed assets; and patents and good will--intangible assets.
ASSIGNMENT
The form imprinted on a registered securities certificate which, when completed and signed by the registered owner, authorizes the transfer of the security into the name of a new owner (designated on the form as the "assignee"). The assignment also usually provides for the granting by the registered owner of power of attorney to another person (usually the new owner or someone acting on his or her behalf) to accomplish the transfer. Assignments are often executed by the registered owner "in blank", with the name of the assignee and the person granted power of attorney filled in subsequently. *
ASSOCIATED PERSON
Any partner, officer, director or other employee of a broker or dealer other than persons whose functions are solely clerical or administrative; in the case of a bank dealer, the term refers only to persons who are involved in the bank's dealer activities (or have some control over them). Associated persons are most often (but not always) registered as representatives or principals.*
ASSUMED INTEREST RATE (AIR)
A rate stated in a variable annuity which is merely an actuarial assumption of what the separate account will earn during the payout period. The FIRST annuity payout check will be based upon the AIR, thereafter the monthly checks will fluctuate upward and downward based upon how the actual investment results of the separate account compare to that assumed rate. If the actual results are the same as the AIR, then monthly payments remain the same. If the actual results are better than assumed, the following month's check will be greater and if the actual return is less, the following month's check will be lower. AIR is only a factor during the payout period...there are NO assumptions during the accumulation period.
AT-RISK LIMITATIONS
The at-risk limitations (rules) affect investor basis and are, therefore, highly important since investor basis establishes an upper limit on deductions. For those investments that are affected by the at-risk limitations, the investor is only allowed to include recourse debt in his basis. In real estate programs, qualified non-recourse financing can also be included in investor basis.
AT-THE-CLOSE ORDER
An order to be executed at the market at the close of trading for the day.
AT-THE-MONEY
An option is at-the-money if the underlying security is selling for the same price as the exercise price of the option.
AT-THE-OPENING ORDER
An order to buy or sell at a limit price on the initial transaction of the day for a given security; if unsuccessful, it is automatically canceled.
AUCTION MARKET
A market for securities, typically found on a national securities exchange, in which trading in a particular security is conducted at a specific location with all qualified persons at that post able to bid or offer securities against orders via outcry. Compare: Over-the-counter Market. *
AUTHORITY
A unit or agency of government established to perform specialized functions, usually financed by service charges, fees or tolls, although it may also have taxing powers. In many cases, authorities have the power to issue debt which is secured by the lease rental payments made by a governmental unit using the facilities constructed with bond proceeds. An authority may function independently of other governmental units, or it may depend upon other units for its creation, funding or administrative oversight. Examples of authorities include health facilities authorities, industrial development authorities and housing authorities. *
AUTHORIZED STOCK
The maximum number of shares permitted by the State Secretary to be issued by a newly chartered corporation.
AUTOMATIC REINVESTMENT
The option available to mutual fund shareholders whereby fund income dividends and capital gains distributions are automatically put back into the fund to buy new shares, always at net asset value.
BACKDATING
The predating of a letter of intent (by as much as ninety days) to allow an investor to incorporate recent large deposits for the purpose of qualifying for a load discount by reaching breakpoint on a purchase of open-end investment company shares.
BALANCED FUND
Investment companies that strive to minimize market risks while at the same time earning reasonable current income with varying percentages of bonds and preferred and common stocks.
BALANCE SHEET
A condensed statement showing the nature and amount of a company's assets, liabilities, and capital on a given date. It shows in dollar amounts what the company owns, what it owes, and the ownership interest (shareholders' equity).
BALLOON MATURITY
A maturity within a serial issue of securities (usually a later maturity) which contains a disproportionately large percentage of the principal amount of the original issue. A balloon maturity is generally distinguished from a term bond by the presence of serial maturities in the years immediately preceding the balloon maturity. Compare: Term Bonds. *
BANKERS ACCEPTANCES
Low-interest bills of exchange guaranteed (accepted) by a bank or trust company for payment within one to nine months, (180 days), to provide manufacturers and exporters with capital to operate between the time of manufacturing (or exporting) and payment by purchasers. Bids and offers in the secondary marketplace are at prices discounted from the face value.
BANKS FOR COOPERATIVES (COOP)
An agency under the supervision of the Farm Credit Administration that makes and services loans for farmers' cooperative financing.
BANs
Notes issued by a governmental unit, usually for capital projects, which are paid from the proceeds of the issuance of long-term bonds. *
BASIS
Property basis is the original cost adjusted by charges (such as deductions for depreciation) or credits (such as capitalized expenditures for improvements); it sets the base for calculating depreciation and assists in establishing the gain or loss on sale of the property. An investor's basis establishes the gain or loss on sale of the investor's unit(s) and sets an upper limit on his ability to take any losses generated by a property.
BASIS BOOK
A book of mathematical tables used to convert yields to equivalent dollar prices and vice versa. The factors contained in the book are time redemption, interest rate, yield (or basis) and dollar price. The basis book is used to find the dollar price when yield is known for a given interest rate and time, or to find the yield for a given dollar price when interest rate and time are known. *
BASIS POINT
1/100 of 1 percent of yield. If a yield increases from 8.25% to 8.50%, the difference is referred to as a 25 basis point increase. Compare: Point. *
BASIS PRICE
A price of a security expressed in terms of the yield to maturity to be realized by the purchaser. Compare: Dollar Bond. *
BEAR MARKET
A declining securities market in terms of prices. (See "Bull Market.")
BEARER BONDS
Bonds that do not have the owner's name registered on the books of the issuing corporation and that are payable to the bearer, frequently called coupon bonds. None have been issued since 1984.
BEARISH APPROACH
The strategy an investor employs when it is thought that a security's price will decline.
BENEFICIAL OWNER
The owner of securities who receives all the benefits, even though they are registered in the "street name" of a brokerage firm or nominee name of a bank handling his account.
BEST-EFFORTS OFFERING
An offering of newly issued securities in which the investment banker acts merely as an agent of the corporation, promising only his "best efforts" in making the issue a success, but not guaranteeing the corporation its money for an unsold portion. (See "All-or-None (AON) Offering.")
BID AND ASK (QUOTATION OR QUOTE)
The bid is the highest price anyone has declared that he wants to pay for a security at a given time; the asked is the lowest price anyone will accept at the same time. (See "Offer.")
BID FORM
A document, generally included with the notice of sale, to be completed by underwriters interested in submitting a bid on a new issue of municipal securities to be sold at a competitive sale. A bidding underwriter will state on the bid form its proposed interest rate(s) on the issue and the price it would be willing to pay for the new issue (subject to any conditions stated by the issuer in the notice of sale), and may be asked to propose a structure for the issue. (See "Competitive Bidding.") *
BID OR REDEMPTION PRICE
The price at which a mutual fund's shares are redeemed (bought back) by the fund. The bid or redemption price usually means the net asset value per share.
BLIND POOL
An investment fund in which the investors are unaware of the specific properties which will be purchased by the partnership at the time they make their partnership contributions.
BLUE CHIP
The common stock of a large, well-known corporation with a relatively stable record of earnings and dividend payments over a period of many years.
BLUE LIST, THE
The daily publication (The Blue List of Current Municipal Offerings) listing municipal bonds and notes being offered by dealers in the inter-dealer market. The par value, issuer, interest rate, maturity date, price or yield, and offering dealer are indicated for each security offered. *
BLUE LIST TOTAL
The total of the par values of all municipal securities (except zero coupon bonds) offered for sale in The Blue List. The Blue List Total, as a measure of the supply of municipal securities available for purchase, is considered to be an indicator of the status of the secondary market for municipal securities. *
BLUE-SKYING THE ISSUE
The efforts of the underwriters' lawyers to analyze and investigate state laws regulating the distribution of securities and to register particular issues under these laws.
BOARD OF GOVERNORS
The governing body of the NASD, comprised of persons elected by the general membership.
BOND
A certificate representing creditorship in an issuer and issued to raise long-term funds. The issuer pays interest, usually semi-annually, plus principal when due. (See "Bearer Bond," "Collateral Trust Bond," "Equipment Trust Bond," "Income Bond," "Mortgage Bond," "Serial Bond," "Tax-Exempt Securities," "United States Government Securities.")
BOND BUYER, THE
A trade paper of the municipal securities industry published each business day, which contains advertisements for offerings of new issues of municipal securities, notices of bond redemptions, statistical analyses of market activity, results of previous bond sales, and articles relating to financial markets and public finance. A second publication, Credit Markets, provides similar information on a weekly basis. Also contains new issue worksheets for computing bids. *
BOND BUYER INDEXES
Indicators published on a periodic basis by The Bond Buyer showing the price levels for various groups of municipal securities. Three of the indexes represent weekly averages, based upon estimates from municipal securities underwriters, of the yields which would be offered to investors if an issuer were to bring certain types of securities to market at par on a given day. These indexes are named after the number of issuers used in each index (the same issuers are used each week): 11 Bond Index - An estimation of the yield which would be offered on 20-year general obligation bonds with a composite rating of approximately "Aa" or "AA." The 11 issuers which comprise this index are also included in the 20 Bond Index. 20 Bond Index - An estimation of the yield which would be offered on 20-year general obligation bonds with a composite rating of approximately "A". 25 Bond Index or Revdex - An estimation of the yield which would be offered on 30-year revenue bonds. The 25 issuers used for this index cover a broad range of types of issues (transportation, housing, hospitals, water and sewer, pollution control, etc.) and vary in ratings from Moody's Baa to Aaa and Standard and Poor's A to AAA, for a composite rating of Moody's A1 or Standard and Poor's A+. The fourth index, the Bond Buyer Municipal Bond Index, represents an average of the prices, adjusted to an 8.00 yield, of 40 recently issued securities, based on quotations obtained from five municipal securities broker's brokers. The 40 component issues are selected according to defined criteria and are replaced by newer issues on a periodic basis. This index is published daily and serves as the basis of a commodities futures contract. *
BOND COUNSEL
An attorney (or firm of attorneys) retained by the issuer to give a legal opinion that the issuer is authorized to issue proposed securities, the issuer has met all legal requirements necessary for issuance, and interest on the proposed securities will be exempt from federal income taxation and, where applicable, from state and local taxation. Typically, bond counsel may prepare, or review and advise the issuer regarding authorizing resolutions or ordinances, trust indentures, official statements, validation proceedings and litigation. The bond counsel may also be referred to as the "bond attorney," the "bond approving attorney", or the "bond approving counsel". *
BOND EQUIVALENT YIELD
The return on a discounted security figured on a basis which permits comparison with interest-bearing securities. On a short-term (under six months) discounted security, the bond equivalent yield is an annualized rate of return: on a longer term discounted security, the bond equivalent yield is determined by a computation which adjusts for the absence of periodic payments over the life of the security. *
BOND POWER
See "Stock (or Bond) Power."
BOND YEAR
$1000 of debt outstanding for one year. The number of "bond years" in an issue is equal to the product of the number of bonds (1 bond equals $1,000 regardless of actual certificate denomination) and the number of years from the dated date (or other stated date) to the stated maturity. The total number of bond years is used in calculating the average life of an issue and its net interest cost. Computations are often made of bond years for each maturity or for each coupon rate, as well as total bond years for an entire issue.*
BOOK-ENTRY
A system for the transfer of ownership of securities through entries on the records of a centralized agency. The centralized agency holds securities on behalf of their owners; when the securities are sold, ownership is transferred by bookkeeping entry from the seller to the purchaser. In the case of U.S. Government securities, securities certificates are not issued, and ownership of the securities is evidence in computer records maintained by the Federal Reserve System. For other types of securities, book-entry clearance is made available through linked or interfaced systems maintained by four securities depositories, which hold securities and act on behalf of their participants. *
BOOK VALUE
The net asset value of a corporation's common stock. This is calculated by dividing the net tangible assets of the company (minus the par value of any preferred stock the company has) by the number of common shares outstanding.
BREAKPOINT
The dollar level of investment necessary to qualify a purchaser for a discounted sales charge on a quantity purchase of open-end management company shares. (See "Backdating," "Letter of Intent.")
BREAKPOINT SALES
The soliciting of mutual fund orders in dollar amounts just below the breakpoint level; this practice is considered contrary to equitable principles of trade.
BROKER
(See "Agent.")
BROKER/DEALER
A general term for a securities firm which is engaged in both buying and selling securities on behalf of customers and also buying and selling on behalf of its own account. The term would not be used to refer to a dealer bank or a municipal securities broker's broker. *
BROKER'S BROKER OR MUNICIPAL SECURITIES BROKER'S BROKER
A broker that deals exclusively with other municipal securities brokers and dealers and not with public investors. The services of a broker's broker are available, generally at a standard fee established by each broker's broker, only to certain municipal securities professionals that are selected by the broker's broker. Broker's brokers do not take inventory positions in municipal issues. *
BULL MARKET
A rising securities market in terms of price. (See "Bear Market.")
BULLISH APPROACH
The strategy an investor employs when it is thought that a security's price will increase.
BUY STOP ORDER
A stop order to buy at the market only when someone else executes an order at or above the stop price. It is frequently used as a protective device for a short position.
BUYER OF AN OPTION
One who purchases the call or put. This is a long position. Sometimes called the holder.
BUYER'S OPTION CONTRACT
A securities contract in which the seller's delivery of the certificates is due at the purchaser's office on the date specified at the time of the transaction. For example, "Buyer's 10", means delivery is due ten calendar days after the transaction date. (See "Cash Contract," "Regular Way Contract," "Seller's Option Contract," "When Issued/When Distributed Contract.")
BUYING POWER
The amount of marginable securities an investor may purchase with the SMA in a margin account. The formula is SMA divided by Regulation T. Selling (shorting) power is the same computation.
BUY-IN
On any day after a prescribed settlement date, the purchasing firm who has failed to receive the certificates can give written notice to the selling firm that the contract is in default. (See "Sellout Procedure.")
CALLABLE
See "Call Feature."
CALL FEATURE
(1) A feature of preferred stock through which it may be retired at the corporation's option by paying a price equal to or slightly higher than either the par or market value. (2) A bond feature, by which all or part of an issue may be redeemed by the corporation before maturity and under certain specified conditions. The call price is usually a premium (never below par) which declines reaching par shortly before maturity.
CALL LOAN
A broker's loan from a commercial bank using margin account customer's securities as the bank's protection. (Usually the securities are worth about one-third more than the amount of the loan.) It is sometimes referred to as a "call" loan because either party can terminate it on twenty-four hours' notice. (See "Call Money Rate.")
CALL MONEY RATE
The percentage of interest a broker/dealer pays on a broker's collateral loan, usually a bit lower than prime.
CALL OPTION
The right to buy a stated number of shares or other units of an underlying security at the exercise price, within a stated period of time.
CALL PRICE
The price, as established in the bond contract, at which securities will be redeemed, if called. The call price is generally at or above par (although it may be at or above the "compound accreted value" on certain types of securities) and is stated as a percentage of the principal amount called. *
CALL PROTECTION
The aspects of the redemption provisions of an issue of callable securities which partially protect an investor against an issuer's call of the securities or act as a disincentive to the issuer's exercise of its call privileges. These features include restrictions on an issuer's right to call securities for a period of time after issuance (for example, an issue that cannot be called for ten years after its issuance is said to have "ten years call protection"), or requirements that an issuer pay a premium redemption price for securities called within a certain period of time after issuance. The term may also be used to refer to market factors which would discourage an issuer from calling the securities (for example, a security callable at par which has a current trading market value of 70 is said to have "30 points of call protection"). *
CANADIAN INTEREST COST or C
I.C.. See "True Interest Cost." *
CAPITAL GAIN (OR LOSS)
Profit (or loss) from the sale of a capital asset. Capital gains may be short term (12 months or less) and long term (more than 12 months). Capital losses are used to offset capital gains to establish a net position for tax purposes. Short term gains are taxed at the same rate as ordinary income while long term gains are taxed at a maximum rate of 20%.
CAPITAL GAINS DISTRIBUTIONS
Payments to mutual fund shareholders of gains realized on the sale of the fund's portfolio securities. These amounts, if any, are paid once a year and, if reinvested, are done so at NAV. They are taxable in the year realized by the fund.
CAPITAL MARKET
The market for equity securities (stocks) and debt obligations with maturities in excess of one year. *
CAPITALIZATION
The monetary total of the securities (bonds, preferred stocks, and common stocks) issued or authorized by a corporation. Total capitalization also includes retained earnings.
CAPPING
Form of market manipulation in which a broker/dealer with an established short position in calls sells large blocks of the underlying security in an attempt to force the price down and lower the loss potential on the naked calls.
CAPS (CAPPED INDEX OPTIONS)
Limit the gain/loss potential from trades in index options. For example, the holder of an OEX 330 call with a 30 point cap would only realize a 30 point maximum gain even if the index closed at 390. Likewise, the writer has a maximum loss of the cap minus premium.
CASH CONTRACT
A securities contract by which delivery of the certificates is due at the purchaser's office the same day as the date of the trade. If the trade is made prior to 2:00 p.m., settlement occurs at 2:30 p.m. Otherwise, settlement occurs in 30 minutes. (See "Buyer's Option Contract," "Regular Way Contract," "Seller's Option Contract," "When Issued/When Distributed Contract.")
CASH FLOW
Reported net income of a corporation plus amounts charged off for depreciation, depletion, amortization, and extraordinary charges to reserve accounts for the particular year under consideration. All of these additional items are bookkeeping deductions and are not paid out in actual dollars and cents.
CASHIERING DEPARTMENT
A department of a broker/dealer organization responsible for the physical handling of securities and money, delivery and receipt, collateral loans, borrowing, lending, and transfer of securities, and other financial transactions.
CDs
See "Certificates of Deposit (CDs)."
CERTIFICATE
The actual piece of paper that is evidence of ownership or creditorship in a corporation. Watermarked certificates are finely engraved with delicate etchings to discourage forgery. Misplacement of a certificate by its holder will cause at least great inconvenience and at worst financial loss.
CERTIFICATE OF DEPOSIT (CDs)
Negotiable securities issued by commercial banks against money deposited with them for a specified period of time. They vary in size according to amount of deposit and maturity period and may be redeemed before maturity only by sale in a secondary market. Sometimes called "Jumbo CDs, the usual minimum size is $100,000. These are unsecured by any specific bank asset.
CERTIFICATE OF INCORPORATION (CHARTER)
A state validated certificate recognizing a business organization as a legal corporate entity.
CERTIFICATE OF LIMITED PARTNERSHIP
The legal document used to form the limited partnership, usually filed with the appropriate state government. Two or more persons must sign the certificate, although as a practical matter, the limited partners often execute a power of attorney authorizing the general partner to act on their behalf in filing the certificate.
CHURNING
A practice, in violation of SRO and SEC rules, in which a salesperson effects a series of transactions in a customer's account which are excessive in size and/or frequency in relation to the size and investment objectives of the account. A salesperson churning an account is normally seeking to maximize the income (in commissions, sales credits or mark-ups) derived from the account. *
CLASS OF OPTIONS
Options of the same type (call or put) covering the same underlying security.
CLEARING CORPORATION
An organization registered as a clearing agency with the Securities and Exchange Commission which provides specialized comparison, clearance and settlement services for its members, but which does not safekeep securities on their behalf. Clearing corporations typically offer services such as envelope delivery systems, automated comparison systems, and transaction netting systems. The four registered clearing corporations are the Midwest Clearing Corporation (Chicago), the National Securities Clearing Corporation (New York), the Pacific Clearing Corporation (Los Angeles/San Francisco), and the Stock Clearing Corporation of Philadelphia. *
CLEARING HOUSE FUNDS
Funds drawn on one commercial bank which are deposited in another commercial bank. It may take one of more days after the date of deposit for payments presented in this form to be credited and available to the recipient. Compare: Federal Funds. *
CLOSE-OUT PROCEDURE
The procedure taken by either party to a transaction when the contra broker defaults. The disappointed purchaser may "buy in" and the rejected seller may "sell out", or liquidate. (See "Reclamation," "Rejection.")
CLOSED-END MANAGEMENT COMPANY
An investment company whose equity capitalization remains constant. In other words, a fixed number of shares is outstanding. The shares trade based on supply and demand, either on an exchange or Nasdaq, and are not redeemable.
CLOSED-END PROVISION
A mortgage bond provision in the indenture that, in the event of default or liquidation, entitles first bondholders to a claim upon assets senior to second and subsequent bondholders, whenever the same real assets are used as collateral for more than one issue of debt.
CLOSING PURCHASE ORDER
A transaction in which an investor wishes to buy an option having exactly the same terms as an option which he had previously sold, thus terminating his obligation.
CLOSING SALE
A transaction in which an investor wishes to liquidate an open position as an option holder by selling an option having the same terms as the option originally purchased.
CMO
See "Collateralized Mortgage Obligation."
COD TRANSACTION
A purchase of securities in behalf of a customer promising full payment immediately upon delivery of the certificates to an agent bank or broker/dealer, to be settled no later than the 35th calendar day. Also known as DVP (delivery versus payment.)
CODE OF ARBITRATION
Rules established and maintained by the NASD Board of Governors to regulate arbitration of intramember and customer/member disputes involving securities transactions. All intra-industry disputes, other than those involving statutory discrimination claims, must go to arbitration.
CODE OF PROCEDURE
Rules established and maintained by the NASD Board of Governors for the administration of disciplinary proceedings stemming from infractions of the Conduct Rules.
COLLATERAL TRUST BOND
A bond issue that is protected by a portfolio of securities held in trust by a commercial bank. The bond usually requires immediate redemption if the market value of the securities drops below or close to the value of the issue.
COLLATERALIZED MORTGAGE OBLIGATION (CMO)
A debt security backed by mortgages. These mortgage pools are usually separated into different maturity classes called tranches (from the French word for "slice"). These securities are issued by private issuers as well as the Federal Home Loan Mortgage Corporation (Freddie Mac). As the mortgages are usually government-guaranteed, CMOs usually carry a AAA rating. The early versions of CMOs were known as "plain vanilla," but more recent developments in the industry have given us PACs (Planned Amortization Certificates) and TACs (Targeted Amortization Certificates). These are all variations on how principal repayments in advance of maturity date are treated.
COMBINATION
An option strategy combining a call and a put (either both long or both short).
COMBINATION PROGRAM
A combination of the major types of oil and gas programs - exploration, development and income programs - diversified to reduce risk.
COMMERCIAL BANK
A bank established primarily to accept demand deposits which can be withdrawn at any time, such as checking account deposits, and to make short-term loans to businesses.
COMMERCIAL PAPER
Unsecured, short-term (usually a maximum of 270 days) obligations in denominations from $100,000 to $1 million, issued principally by industrial corporations. It is usually traded in the securities market at a price discounted from face value.
COMMISSION
A broker's fee for handling transactions for a client in an agency capacity.
COMMISSION BROKER
A member of the NYSE executing orders in behalf of his own organization and its customers.
COMMITTEE ON UNIFORM SECURITY IDENTIFICATION PROCEDURES (CUSIP)
An agency of the NASD responsible for issuing identification numbers for virtually all publicly owned stock and bond issues.
COMMON STOCK
Owners of this kind of stock exercise greater control, and therefore benefit more from dividends and capital appreciation, than owners of preferred stock or bonds. They are paid, however, only after preferred stocks and bondholders, and their interest in the assets in the event of liquidation are junior to all others.
COMMON STOCK FUND
A mutual fund whose portfolio consists primarily of common stocks. The emphasis of such funds is usually on growth.
COMPARISON
A term used to refer to an inter-dealer confirmation. (See "Confirmation.") *
COMPETITIVE BIDDING
A method of submitting proposals for the purchase of a new issue of municipal securities by which the securities are awarded to the underwriting syndicate presenting the best bid according to stipulated criteria set forth in the notice of sale. The underwriting of securities in this manner is also referred to as a competitive or public sale.
CONCESSION
(1) In the sale of a new issue of municipal securities, the amount of reduction from the public offering price a syndicate grants to a dealer not a member of the syndicate, expressed as a percentage of par value. (See "Spread.") (2) In the secondary market, bonds are usually offered to other dealers "less a concession, "that is, at a price expressed in terms of a net offering price (in basis or dollar price terms) minus a differential (in points or dollars per security) granted between professionals; this differential is called the "concession". *
CONDUCT RULES
A set of rules established and maintained by the NASD Board of Governors regulating the ethics employed by members in the conduct of their business.
CONFIRMATION (COMPARISON)
A written summary of a transaction involving the purchase or sale of securities, which a broker or dealer provides to the contra-party. The confirmation must contain certain information describing the securities and the parties to the transaction. *
CONTINIUING EDUCATION REQUIREMENTS
See "Firm Element"; "Regulatory Element"
CONTRA-PARTY
The securities professional or customer to whom a person has sold securities or from whom a person has purchased securities. *
CONTRACT SIZE
Number of units of an underlying security covered by the option contract. The usual size on equity contracts is 100 shares.
CONTRACTUAL (PERIODIC PAYMENT) PLAN
An investment plan for a mutual fund by which an investor agrees to invest a fixed sum of money at specified intervals over an extended period.
CONVERSION
(1) A bond feature by which the owner may exchange his bonds for a specified number of shares of stock. Interest paid on such bonds is lower than the usual interest rate for straight debt issue. (See "Conversion Parity," "Conversion Price.") (2) A feature of some preferred stock by which the owner is entitled to exchange his preferred for common stock of the same company in accordance with the terms of the issue. (3) A feature of some mutual fund offering's allowing an investor to exchange his shares for comparable value in another fund with different objectives handled by the same management group. (See "Exchange Privilege.")
CONVERSION PARITY
The equal dollar relationship between a convertible security and the underlying stock.
CONVERSION PRICE
In the case of convertible bonds, this is used to determine the number of shares to be obtained by converting. Divide $1,000 par by the conversion price.
CONVERTIBLES
Bonds or preferred stock with a convertible privilege attached at the time of issuance. The privilege usually gives the holder, for a certain period, the right of exchanging his security for common stock issued by the same company, on a fixed or sliding scale of exchange.
COUPON
(1) A detachable part of a bond which evidences interest due. The coupon specifies the date, place, and dollar amount of interest payable, among other matters. Coupons may be redeemed (usually semi-annually) by detaching them from bonds and presenting them to the issuer's paying agent for payment or to a bank for collection. (2) The term is also used colloquially to refer to a security's interest rate. *
COUPON BOND
A bearer bond, or a bond registered as to principal only, carrying coupons as evidence of future interest payments. Prior to June 30, 1983, most bonds were issued in coupon form. However, I.R.C. §103(j) essentially provides that, subsequent to that date, all long-term bonds must be issued in registered form. *
COUPON RATE
See "Nominal Yield."
COVENANTS OR BOND COVENANTS
The issuer's enforceable promise to perform or refrain from performing certain actions. With respect to municipal securities, covenants are generally stated in the bond contract. Covenants commonly made in connection with a bond issue include covenants to charge fees sufficient to provide required pledged revenues (called a "rate covenant"); to maintain casualty insurance on the project; to complete, maintain, and operate the project; not to sell or encumber the project; not to issue parity bonds unless certain earnings tests are met (called an "additional bonds covenant"); and, not to take actions which would cause the bonds to be arbitrage bonds. *
COVERED CALL WRITER
A seller of a call option who owns the underlying security upon which the option is written. A call writer is also considered to be covered if he holds, on a share-for-share basis, a call of the same class as the call written where the exercise price of the call held is equal to or less than the exercise price of the call written.
COVERED PUT WRITER
The OCC considers a writer of put options covered only when the writer also holds a long put of the same class, with an equal or higher exercise price.
CUMULATIVE PREFERRED
Preferred stock issue that allows for the accumulation of any dividends not paid in prior years due to insufficient earnings. Note that these dividends will accrue and be paid in full in any year that the company wishes to pay common stockholders.
CUMULATIVE VOTING
Method of voting ones shares of common stock that allows the minority (small) shareholder to obtain a better representation on the Board of Directors. This representation is achieved by allowing the shareholder to cast his votes in any manner desired. To illustrate this, let's assume ownership of 100 shares of XYZ and an election for 3 directors' positions is being held. We would have a total of 300 votes which could be cast in any manner. Thus, we could cast all 300 votes for one director's position if we desired, or in any other way. This contrasts with the regular (statutory) voting method where we would have to distribute our votes evenly, meaning 100 votes for each of the 3 positions to be filled.
CURRENT ASSETS
Cash plus any other assets that will be sold, converted into cash, or used during the company's "manufacturing cycle" - the cycle of cash to raw material to finished product back to cash. Most commonly included with cash are marketable securities, accounts receivable and inventory.
CURRENT LIABILITIES
As a rule, debts or obligations that must be met within a year.
CURRENT YIELD
On a stock, the annual dividend divided by the current ask price; on a bond, the annual interest dividend by the current market value. In other words, "What you get, divided by what you pay."
CUSIP NUMBER (COMMITTEE ON UNIFORM SECURITIES IDENTIFICATION PROCEDURES)
An identification number assigned to each maturity of an issue, which is usually printed on the face of each individual certificate of the issue. The CUSIP numbers are intended to help facilitate the identification and clearance of securities. *
CUSTODIAN
A commercial bank or trust company with certain qualifications that holds in safekeeping monies and securities owned by an investment company.
DATED DATE
The date of an issue, printed on each security, from which interest on the issue usually starts to accrue, even though the issue may actually be delivered at some later date. *
DAY ORDER
A transaction order that remains valid only for the remainder of the trading day on which it is entered.
DEALER
An individual or firm in the securities business acting as a principal rather than as an agent. Dealers earn their profits from mark-up and mark-down, never commission. (See "Agent," "Principal.")
DEALER BANK
A bank which is engaged in the business of buying and selling government securities, municipal securities, and/or certain money market instruments for its own account. *
DEATH BENEFIT PROVISION
Provision of an annuity that allows for the payment to a beneficiary the greater of the value of the contributions or the value of the separate account at date of death. This provision is only effective during the accumulation period of the annuity, meaning if the annuitant dies before reaching the annuity (payout) phase.
DEBENTURE
An unsecured long-term debt offering by a corporation, promising only the general assets ("full faith and credit") as protection for these creditors.
DEBT LIMIT
The maximum amount of debt which an issuer of municipal securities is permitted to incur under constitutional, statutory or charter provisions. The debt limit is usually expressed as a percentage of assessed valuation. *
DEBT RATIOS
Comparative statistics showing the relationship between the issuer's outstanding debt and such factors as its tax base, income or population. Such ratios are often used in the process of determining credit quality of an issue, primarily on general obligation bonds. Some of the more commonly used ratios are (a) net overall debt to assessed valuation, (b) net overall debt to estimated full valuation, and (c) net overall debt per capita. *
DEBT SERVICE
The amount of money necessary to pay interest on an outstanding debt, the principal of maturing serial bonds and the required contributions to a sinking fund for term bonds. Debt service on bonds may be calculated on a calendar year, fiscal year, or bond fiscal year basis. (See "Level Debt Service.") *
DEBT SERVICE RESERVE FUND
The fund in which moneys are placed which may be used to pay debt service if pledged revenues are insufficient to satisfy the debt service requirements. The debt service reserve fund may be entirely funded with bond proceeds, or it may only be partly funded at the time of issuance and allowed to reach its full funding requirement over time, due to the accumulation of pledged revenues. If the debt service reserve fund is used in whole or part to pay debt service, the issuer usually is required to replenish the funds from the first available funds or revenues. A typical reserve requirement might be the maximum aggregate annual debt service requirement for any year remaining until the bonds reach maturity. The size and investment of the reserve may be subject to arbitrage regulations. Under a typical revenue pledge this fund is the third to be funded out of the revenue fund. (See "Flow of Funds.") *
DECLARATION DATE
The time set for the corporate board of directors' meeting at which a dividend distribution is announced. (See "Ex-dividend Date.")
DEFAULT
Breach of some covenant, promise to duty imposed by the bond contract. The most serious default occurs when the issuer fails to pay principal, interest, or both, when due. Other, "technical" defaults result when specifically defined events of default occur, such as failure to perform covenants. Technical defaults may include failing to charge rates sufficient to meet rate covenants or failing to maintain insurance on the project. If the issuer defaults in the payment of principal, interest, or both, or if a technical default is not cured within a specified period of time, the bondholders or trustee may exercise legally available rights and remedies for enforcement of the bond contract. *
DEFENSIVE STOCK
A stock which, because of the nature of the business represented, is believed likely to hold up relatively well in declining markets. Examples include public utilities and basic food stuffs.
DEFERRED ANNUITY
An annuity in which the annuitant wishes to allow earnings received into the separate account during the accumulation phase to accrue tax deferred until some future time. (See "Single Payment Deferred," "Periodic Payment Deferred.")
DELIVERY DATE
See "Settlement (Delivery) Date."
DELIVERY VS
PAYMENT or DVP. A method of settling transactions whereby payment on the transaction is made when the securities involved in the transaction are delivered and accepted. The term is often used to refer specifically to a transaction settled in this manner where a customer (typically an institutional investor) has purchased securities from a dealer. The term is also used generally to refer to all types of transactions settled in this way. *
DENOMINATION
The par value amount represented by a particular securities certificate. Bearer bonds are typically issued in denominations of $1,000 or (more commonly) $5,000 par value per certificate. Registered bonds are typically issued in variable denominations, multiples of $1,000 up to $100,000 or more per certificate (although denominations of larger than $100,000 are not acceptable for delivery purposes between dealers unless specifically identified as such at the time of trade). Notes are typically issued in denominations of $25,000 or more per certificate. *
DEPARTMENT OF ENFORCEMENT
A division of NASDR charged with the responsibility of enforcing the rules. This department investigates complaints to determine whether or not they should go to the Office of Hearing Officers for a hearing.
DEPLETION
An accounting concept that allows for the recovery of wasting assets of natural resources. There are two types of depletion: cost depletion and percentage depletion.
DEPOSITORY
A clearing agency registered with the Securities and Exchange Commission which provides immobilization, safekeeping, and book-entry settlement services to its participants. The four registered depositories are The Depository Trust Company (New York), the Midwest Securities Trust Company (Chicago), the Pacific Securities Depository Trust Company (San Francisco), and the Philadelphia Depository Trust Company. Compare: Clearing Corporation. *
DEPRECIATION
The continuous decline in the value of a company's buildings and equipment in the course of its operations. It is an item of expense through which the money paid for the plant and equipment is shown as having been spent in installments over the productive lifetime of the plant or equipment.
DESIGNATED ORDER
An order for securities held in a syndicate which is submitted by an account member on behalf of a buyer on which all or a portion of the takedown is to be credited to certain members of the syndicate. The buyer directs who will receive the designation and what percentage of the total designation each member will receive. Generally, two or more syndicate members will be designated to receive a portion of the credit. (See "Priority Provisions.") *
DEVELOPMENT OIL WELL
A type of oil program where wells are drilled in addition to the discovery well on a lease. An existing oil field with proven reserves is developed into production.
DIRECT DEBT
The sum of the total bonded debt and any short-term debt of the issuer. Direct debt may be incurred in the issuer's own name or assumed through the annexation of territory or consolidation with another governmental unit. *
DIRECT PARTICIPATION PROGRAM (DP PROGRAM; DPP)
A group investment structured so that investors are direct recipients of all tax consequences. Also known as a Tax-Advantaged Investment (TAI).
DISCOUNT
The percentage or dollar amount below net asset value at which a closed-end company may sell (opposite of Premium).
DISCOUNT BOND
Any bond that sells in the marketplace at a price below its face amount, usually because interest rates have risen since its issuance. Of course, a decline in the credit standing of the issuer will frequently cause the bond's price to drop as well. Some bonds are originally offered at a discount (OID). (See "Premium Bond.")
DISCRETIONARY ACCOUNT
An account in which the customer authorizes in writing a registered representative to use his judgement (completely, or within certain limits) in buying and selling securities including selection, timing, amount, and price. However, judgement as to time and/or price only is not considered discretion.
DISCRETIONARY ORDER
An order that empowers a registered representative with a discretionary account to use his own judgement an the customer's behalf with respect to choice of security, quantity of security and whether any such transaction should be a purchase or sale. (See "Discretionary Accounts.")
DISPROPORTIONATE SHARING AGREEMENT
An oil and gas sharing arrangement in which the sponsor puts up none or some part of the initial costs and receives a large portion of the benefits.
DISSOLUTION (OR LIQUIDATION)
Refers to the sequence of payouts when corporations go bankrupt. The order is as follows: 1. Internal Revenue Service 2. secured creditors including senior bond holders 3. unsecured creditors including junior bonds (debentures) 4. preferred stock holders 5. common stock holders
DISTRIBUTOR
A person or company that purchases open-end investment company shares directly from the issuer for re-sale to others. (See "Sponsor," "Underwriter.")
DIVERSIFICATION
Investment in a number of different security issues for the purpose of spreading and reducing the risks inherent in all investing.
DIVERSIFIED COMMON STOCK FUND
A diversified management company that invests substantially all of its assets in a portfolio of common stocks in a wide variety of industries.
DIVERSIFIED MANAGEMENT COMPANY
A management company that has at least 75 percent of its assets arranged so as to not own securities of one issuer having a value greater than 5 percent of the management company's total assets and to not own more than 10 percent of the voting securities of any corporation. There are no restrictions placed upon the other 25 percent of the company's assets. Therefore, as much as 30 percent of assets could be in one stock.
DIVIDENDS
Distributions to stockholders earned and declared by the corporate board of directors.
DIVIDED ACCOUNT (WESTERN ACCOUNT)
A method for determining liability stated in the agreement among underwriters in which each member of an underwriting syndicate is liable only for the amount of its participation in the issue, and not for any unsold portion of the participation amounts allocated to the other underwriters. * (See "Undivided Account," "Western Account.")
D
K.. A slang expression for "Don't Know", used commonly throughout the financial community to signify a lack of knowledge or understanding about a securities transaction or related activity.
DNR
See "Do Not Reduce (DNR) Order."
DOLLAR BOND
A colloquial term for a bond which is usually quoted and traded in terms of dollar price rather than yield. Dollar bonds are generally more actively traded securities from larger, term issues rather than securities from serial issues. *
DOLLAR COST AVERAGING
Investing equal amounts of money at regular intervals regardless of whether the stock market is moving upward or downward. This reduces average share costs by automatically acquiring more shares in periods of lower securities prices and fewer shares in periods of higher prices. This does not assure a profit or protect against depreciation in declining markets.
DO NOT REDUCE (DNR) ORDER
A buy limit or a sell stop order that is not to be reduced by the amount of a cash dividend on the ex-dividend date as the customer specifically so requested.
DOUBLE-BARRELED BOND
A G.O. bond secured by both a defined source of revenue (other than property taxes) plus the full faith and credit of an issuer which has taxing powers. The term is occasionally, although erroneously, used in reference to bonds secured by any two sources of pledged revenue. *
DOW JONES AVERAGE
A market average indicator consisting (individually) of thirty industrial, twenty transportation, or fifteen public utility common stocks; the composite average includes these sixty-five stocks collectively.
DOW THEORY
A theory predicated on the belief that the rise or fall of stock prices as measured by the Dow Jones Industrial average is both a mirror and a forecaster of business activities.
DUE BILL
A legal document that evidences the transfer of title to stock and/or dividends. It must be attached to certificates delivered too late for effective transfer, and will ensure distribution of dividends to the new and rightful owner.
DUE DILIGENCE MEETING
A meeting between corporation officials and the underwriting group to discuss and review detailed information in the registration statement, prepare a final prospectus, and begin negotiation for a formal underwriting agreement. This meeting is held shortly before the anticipated effective date.
DVP TRANSACTION
See "COD Transaction," "Delivery vs. Payment."
EARNED SURPLUS
Income that has been kept in the business, not distributed to the owners. It is also referred to as retained income and as earnings retained in the business.
EASTERN ACCOUNT
See "Undivided Account."
EFFECTIVE DATE
The date on which a security can be offered publicly, if no deficiency letter is submitted to the issuer by the SEC. It is generally no earlier than the twentieth calendar day after filing the registration statement.
EITHER/OR ORDER
An order consisting of a limit and a stop for the same security at different prices. Execution of one order will cancel the other.
EQUIPMENT TRUST BOND
A bond collateralized by machinery and/or equipment of the issuing corporation, many times used by railroads to finance the purchase of their rolling stock.
EQUITY
The ownership interest of common and preferred stockholders in a company. The term also refers to the excess of value of securities over the debit balance in a margin (general) account.
EUROPEAN STYLE EXERCISE
Option can only be exercised the day prior to expiration. (See "American Style Exercise.")
EX-DIVIDEND DATE
A date set on which a given stock will begin trading in the marketplace without the value of a pending dividend included in the contract price. It is normally 2 business days before the record date, except on mutual funds.
EX-LEGAL
A term which refers to the absence of a legal opinion. An "ex-legal" delivery is a delivery of municipal securities in the secondary market without a copy of the legal opinion being provided. (See "Good Delivery.") *
EX-RIGHTS
A term applied to stocks trading in the marketplace for which the value of the subscription privilege has already been deducted and which, therefore, no longer bears such a right; it is literally trading "rights off".
EXCHANGE PRIVILEGE
The right to exchange the shares of one open-end fund, or class of fund, for those of another under the same sponsorship, at nominal cost or at a reduced sales charge. For tax purposes, such an exchange is considered a sale and new purchase.
EXECUTOR
A person or institution named in a will to take charge of settling the estate and carrying out the provisions of the will. This is a fiduciary relationship.
EXEMPTED SECURITY
A security exempt from the registration provisions of the Securities Exchange Act of 1933. Among exempt securities would be Government and municipal bonds, private placements and intra-state issues.
EXERCISE
To place into effect the option rights held by an option buyer. To request the writer to deliver stock at the stated price (call), or to pay the stated price for stock delivered to him (put).
EXERCISE NOTICE
An irrevocable written statement, tendered by a clearing member in whose account with the OCC an option is held, that states an option holder's intention to exercise the option.
EXERCISE PRICE
The price per unit at which the holder of an option may purchase (in the case of a call option) or sell (in the case of a put option) the indicated underlying security. Also called the striking price.
EXPIRATION DATE
The final date on which an option may be exercised is referred to as the expiration date. The Saturday after the third Friday in an expiration month is the final date on which equity options, index options, and most debt options can be exercised. After the expiration date, the option is worthless.
EXPIRATION MONTH
The month in which an option ceases to exist.
EXPLORATORY WELLS
Wells drilled outside known oil or gas-producing areas (also called wildcat wells); may produce a 10-to-1 or higher risk/reward ratio.
FACE-AMOUNT CERTIFICATE COMPANY
An investment company that issues a debt instrument obligation itself to pay a stated sum of money (face amount) on a date fixed more than twenty-four months after issuance, usually in return for deposits made by an investor in periodic installments.
FACE VALUE
The redemption value of a bond or preferred stock, sometimes referred to as par value.
FAIL
A transaction between two securities brokers or dealers on which delivery does not take place on the settlement date. A transaction in which a dealer has yet to deliver securities is referred to as a "fail to deliver"; a transaction in which a dealer has not yet received securities is referred to as a "fail to receive." *
FEASIBILITY STUDY
A report detailing the economic practicality and the need for a proposed capital program. The feasibility study may include estimates of revenues that will be generated and details of the physical, operating, economic, or engineering aspects of the proposed project. *
FEDERAL FUNDS
Immediately available funds representing non-interest-bearing deposits at Federal Reserve banks. Federal funds are actively traded among commercial bank members of the Federal Reserve system. Federal funds are the primary payment mode for government securities and are often used to pay for new issues of municipal securities and for secondary market transactions in certain types of securities. Compare: Clearing House Funds. *
FEDERAL HOME LOAN BANKS (FHLB)
A government-sponsored agency that finances the home-building industry with mortgage loans from monies raised on offerings of bond issues.
FEDERAL HOME LOAN MORTGAGE CORPORATION or FHLMC or FREDDIE MAC
A federally created corporation established to facilitate the financing of single-family residential housing by creating and maintaining an active secondary market for conventional home mortgages. The Corporation finances its mortgage purchases through the issuance of two types of securities: guaranteed mortgage certificates (GMCs), which represent undivided interests in mortgages underwritten by the Corporation, and which pay interest semi-annually and return principal amounts annually; and, mortgage participation certificates (PCs), which are pass-through instruments, guaranteed by the Corporation, under which a pro rata share of principal and interest collections are paid monthly to each holder. *
FEDERAL INTERMEDIATE CREDIT BANKS (FICB)
A government-sponsored agency that makes loans to agricultural credit and production associations, with revenues derived from bond issues. Maturities are up to 10 years.
FEDERAL LAND BANKS (FLB)
A Government-sponsored association that arranges primary mortgages on farm properties for general agricultural purposes.
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA)
A publicly owned, government-sponsored corporation that purchases and sells mortgages issued by the Federal Housing Administration (FHA) or guaranteed by the Veterans' Administration (VA).
FGIC (FINANCIAL GUARANTY INSURANCE COMPANY)
A wholly owned subsidiary of FGIC Corporation which offer non-cancelable insurance guarantying the full and timely payment of principal and interest due on securities on stated maturity, mandatory sinking fund, and interest payment dates. FGIC writes insurance on (1) new issue tax-exempt securities which may be insured partially or entirely and (2) unit investment trusts. In the case of unit investment trusts, individual issues may be insured for their entire life or until an issue is sold out of the trust. Bonds insured by FGIC are currently rated AAA by Standard & Poor's and Aaa by Moody's Investors Service, Inc. *
FIDUCIARY
A person who is vested with legal rights and powers to be exercised for the benefit of another person.
FILL-OR-KILL (FOK) ORDER
An order that requires immediate purchase or sale of a specified amount of stock. If the order cannot be filled immediately, it is automatically canceled (killed).
FINANCIAL ADVISER
With respect to a new issue of municipal securities, a consultant who advises the issuer on matters pertinent to the issue, such as structure, timing, marketing, fairness of pricing, terms and bond ratings. A financial adviser may also be employed to provide advice on subjects unrelated to a new issue of municipal securities, such as advising on cash flow and investment matters. The financial adviser is sometimes referred to as a "fiscal consultant" or fiscal agent." MSRB Rule G-23 provides that a firm or bank which has acted in a financial advisory capacity with respect to a new issue of municipal securities (pursuant to a written contract) may underwrite the new issue (a) on a negotiated basis after making certain disclosures, obtaining the consent of the issuer and terminating the financial advisory relationship; or, (b) on a competitive basis if the issuer gives written consent before the financial adviser's bid is submitted. *
FIRM or FIRM PRICE
A designation that a quotation (a bid or an offering price) will not be changed for a specified period of time and will be the price of any transaction executed with the party to whom the quotation is given during that period. The dealer giving a firm quotation also commits itself not to effect a transaction in the securities with any other party during that period. For example, a dealer may give another dealer an offering price on specified securities that is "firm for one hour;" if the second dealer wishes to purchase those securities at that price, it would contact the first dealer during that time period and execute the transaction. Firm quotations may sometimes be subject to a "recall", either immediately upon notice or after a specified period. For example, a dealer may give another dealer an offering price that is "firm for one hour with a five-minute recall." In this case, the quoting dealer has the right to contact the second dealer and inform it that the offering price will no longer be valid if the second dealer does not execute a transaction against the price within five minutes. *
FIRM COMMITMENT
An underwriting where the underwriter buys the entire issue from the issuer at an agreed upon price and then proceeds to sell the issue. The issuer has a firm commitment because the entire issue is sold to the underwriter.
FIRM ELEMENT
That portion of the continuing education requirements calling for each registered person having public contact to receive annual training relevant to that person's needs.
FIRM MARKET
In the OTC market, a quotation on a given security rendered by a market-maker at which he stands ready and able to trade immediately for 100 shares (a round lot) unless otherwise specified.
FISCAL YEAR
The 12-month period over which a company balances its books. The term is ordinarily used only when the 12-month period is not a regular calendar year. The U.S. Government's fiscal year, for example, runs from October 1 through September 30.
FITCH INVESTORS SERVICE
An independent service company based in New York City which provides ratings for municipal securities and other financial information to investors. (See "Ratings.") *
FIXED ANNUITY
Insurance product that provides for lifetime retirement income in designated (fixed) monthly installments. Due to the fixed payout, the investor has purchased an effective hedge against deflation, but will have no hedge against inflation. Both the investment risk (the risk that earnings will not be enough to provide the fixed payout) and the mortality risk (the risk that payments may continue even if the money in the account is exhausted) will be assumed by the company that issues the policy. Under both state and federal laws, this is not considered to be a security. (See "Annuity" and "Variable Annuity.")
FIXED-INCOME SECURITY
A preferred stock or a debt security with a stated percentage or dollar income return.
FLAT
A transaction involving bonds (most income bonds and all obligations for which interest is not currently being paid) in which accrued interest is not added to the contract price. Also known as trading flat.
FLAT YIELD CURVE
See "Yield Curve. *
FLOATER
A colloquial term for a security with a floating or variable interest rate. (See "Floating Rate.") *
FLOATING RATE or VARIABLE RATE
An interest rate on a security which changes at intervals according to an index or a formula or other standard of measurement as stated in the bond contract. One common method is to calculate the interest rate as a percentage of the rate paid on selected issues of Treasury securities on specified dates. *
FLOW OF FUNDS
The order and priority of handling, depositing, and disbursing pledged revenues, as set forth in the bond contract. Generally, the revenues are deposited, as received, into a general collection account or revenue fund for disbursement into the other accounts established by the bond contract. Such other accounts generally provide for payment of the costs of debt service, operation and maintenance costs, debt service reserve deposits, redemption, renewal and replacement and other requirements. (See "Pledged Revenues.") *
FLOWER BOND
A type of treasury bond selling at a discount with a special privilege attached permitting redemption after the death of the owner at par value in satisfaction of his federal estate taxes. These bonds were issued prior to April 1, 1971 and will be in circulation up to final maturity in 1998.
FOK ORDER
See "Fill-or-Kill (FOK) Order."
FORWARD PRICING
The means of determination of purchase or redemption price after receipt of a mutual fund or variable annuity order from a customer. All bid and asked prices are based on the next computed net asset value after receipt of the order.
FREE-RIDING & WITHHOLDING
The failure of a broker/dealer to make a bona-fide public offer of a hot issue also called "withholding."
FRONT-END LOAD
Funds paid at the outset of the direct participation program that do not contribute materially to the actual investment vehicle. Front-end load typically consists of distributions to general partners, organizational fees, acquisition fees, etc. The NASD limits the load to 15%.
FRONT-RUNNING
Form of market manipulation where a broker/dealer delays processing of a large customer trade in an underlying security until the firm can execute an options trade in that security in anticipation of the client's trade impact on the underlying security.
FROZEN ACCOUNT
A cash account in which a customer fails to pay for a purchase within the allowable time under Regulation T and no extension has been obtained. Prior payment is required before any further purchase executions for ninety days thereafter. Margin accounts are never frozen.
FULL FAITH AND CREDIT BOND
See "General Obligation Bond." *
FULLY REGISTERED
A security which has been registered as to both principal and interest. Such securities are payable only to the owner, or to order of the owner, whose name is noted on records of the issuer or its agent. *
FUNCTIONAL ALLOCATION SHARING ARRANGEMENT
Arrangement in which the sponsor of an oil and gas program puts up the non-deductible tangible costs and the investors put up the deductible intangible costs, giving the investors a substantial tax write-off; also known as a special allocation and the tangible/intangible method. (See "Intangible Drilling Costs.")
FUNDAMENTAL ANALYSIS
This type of analysis uses a quantitative (using numbers) approach to market forecasting based on an analysis of corporate balance sheets and income statements. A corporation's strengths and weaknesses, as shown by arithmetic formulas and other measurements of economic and industry trends, are used to predict future price movements of its stocks and bonds. (See "Technical Analysis.")
GENERAL ACCOUNT
(1) See "Margin (General) Account." (2) The term describing the account into which premium revenues received by an insurance company are deposited. These funds are usually invested in high quality safe instruments (See "Separate Account.")
GENERAL OBLIGATION BOND or GO. BOND.
A bond which is secured by the full faith and credit of an issuer with taxing power. General obligation bonds issued by local units of government are typically secured by a pledge of the issuer's ad valorem taxing power; general obligation bonds issued by states are generally based upon appropriations made by the state legislature for the purposes specified. Ad valorem taxes necessary to pay debt service on general obligation bonds are often not subject the constitutional property tax millage limits. Such bonds constitute debts of the issuer and normally require approval by election prior to issuance. In the event of default, the holders of general obligation bonds have the right to compel a tax levy or legislative appropriation, by mandamus or injunction, in order to satisfy the issuer's obligation on the defaulted bonds. *
GOOD DELIVERY
Proper delivery by a selling firm to the purchaser's office of certificates that are negotiable without additional documentation and that are in units acceptable under the Uniform Practice Code.
GOOD DELIVERY - MUNICIPAL SECURITIES
The presentation by a seller of securities previously sold to a purchaser which are in acceptable form for delivery purposes as defined in MSRB Rules G-12(e) (with respect to inter-dealer deliveries) and G-15(c) (with respect to deliveries to customers). The delivery standards specified in those rules cover such matters as the criteria for fundability of securities; denominations; the attachment of legal opinions and other required documents; the presentation of interest payment checks in certain circumstances; and, other similar matters. (See "Ex-legal," "Settlement.") *
GOOD FAITH DEPOSIT
A sum of money provided to an issuer of a new issue of municipal securities sold at competitive bid by an underwriter or underwriting syndicate as an assurance of performance on its bid. The good faith deposit is usually in an amount from 1% to 5% of the par value of the issue, and generally is provided in the form of a certified or cashier's check. The check is returned to the bidder if its bid is not accepted, but the check of the successful bidder is retained by the issuer until the issue is delivered. In the event the winning bidder fails to pay for the new issue on the delivery date, the check is usually retained by the issuer as full or partial liquidated damages. *
GOOD 'TIL CANCELED (GTC, OR OPEN) ORDER
A limit order that remains valid indefinitely, until executed or canceled by the customer. These are reconfirmed every six months on the last business days of April and October.
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA)
A wholly-owned government corporation operated by the Department of Housing and Urban Development that provides primary mortgages through bond issuances. A very safe security that pays principal and interest on a monthly basis.
GROSS PLEDGE or GROSS REVENUE PLEDGE
See "Pledged Revenues." *
GROUP NET ORDER
An order submitted to an underwriting syndicate for a new municipal issue which, if allocated, is allocated at the public offering price without deducting the concession or takedown. A group net order benefits all members of the syndicate according to their percentage participation in the account, and consequently is normally accorded the highest priority of all orders received during the order period. (See "Priority Provisions.") *
GROUP SALES
Sales of securities by a syndicate manager to institutional purchasers.
GROWTH AND INCOME FUND
A mutual fund whose aim is to provide for a degree of both income and long-term growth.
GROWTH FUND
A mutual fund whose primary investment objective is long-term growth of capital. It invests principally in common stocks with growth potential.
GROWTH STOCK
A stock that has shown better than average growth in earnings and is expected to continue to do so through discoveries of additional resources, development of new products, or expanding markets.
GTC
See "Good 'til Canceled (GTC, or Open) Order."
HEAD-AND-SHOULDERS
A technical theory founded on the belief that a market trend may be predicted by plotting price fluctuations of securities on graph paper. A "top" indicates a bearish future as prices have topped, while a "bottom" is bullish as the market has bottomed.
HEDGE
To offset. Also, a security that has offsetting qualities. Thus, one attempts to "hedge" against inflation by the purchase of securities whose values should respond to inflationary developments. Securities having these qualities are "inflation hedges." Purchase of a call option may be used as a hedge on a short sale.
HEDGE FUND
A mutual fund or investment company which, as a regular policy, "hedges" its market commitments. It does this by holding securities it believes are likely to increase in value and at the same time is "short" other securities it believes are likely to decrease in value. The sole objective is capital appreciation. This type of fund is highly aggressive.
HOT ISSUE
A security that is expected to trade in the aftermarket at a premium over the public offering price. (See "Free Riding.")
HYPOTHECATION
The pledging of securities as collateral for a loan.
IDB
See "Industrial Development Bond." *
IDR
See "Industrial Development Bond." *
IMMEDIATE ANNUITY
See "Single Payment Immediate Annuity."
IMMEDIATE OR CANCEL (IOC) ORDER
An order that requires immediate execution at a specified price of all or part of a specified amount of stock, with the unexecuted portion required to be canceled by the broker.
IN-THE-MONEY
A option is said to be in-the-money when it has intrinsic value. A call option is in-the-money if the underlying security's price is greater than the option's exercise price. A put option is in-the-money if the underlying security's price is lower than the option's exercise price. It is important to note that this term only refers to the option, not the investor.
INCOME (ADJUSTMENT) BONDS
In the event of financial difficulty, long-term debt obligations are offered in which the interest will be paid by the corporation only when, as, and if earned.
INCOME FUND
An investment company that stresses higher than average current income distributions.
INDENTURE
A written agreement between issuer and creditors by which the terms of a debt issue are set forth, such as rate of interest, means of payment, maturity date, terms of prior payment of principal, collateral, priorities of claims, trustee.
INDEX
A stock market indicator, derived in the same way as an average, but from a broader sampling of securities.
INDEX MULTIPLIER
The amount specified in the option contract by which the in-the-money difference of the option is multiplied to arrive at the cash settlement upon exercise.
INDICATION OF INTEREST
An expression of consideration by an underwriter's customers for investment in a new security expected to be offered soon, generated from the dissemination of a Red Herring prospectus, not a binding commitment on the customer or the underwriter.
INDIVIDUAL PROPRIETORSHIP
The simplest, most common form of business organization, typified by the personal management of one individual.
INDUSTRIAL DEVELOPMENT BOND or IDB
In general, securities issued by a state, a local government or development agency to finance the construction or purchase of industrial, commercial or manufacturing facilities to be purchased by or leased to a private user. IDBs are backed by the credit of the private user and generally are not considered liabilities of the governmental issuer (although in some jurisdictions they may also be backed by an issuer with taxing power). *
INFLATION
A persistent upward movement in the general price level of goods and services which results in a decline in the purchasing power of money.
INSIDE MARKET
The inside market is normally the highest bid and the lowest asked prices and is displayed on Level One of Nasdaq.
INSIDER TRADING
The act, in violation of SEC Rule 10b-5 and the Insiders Trading and Securities Fraud Enforcement Act of 1988, of purchasing or selling securities (or derivative instruments based on those securities) based on information known to the party purchasing or selling the securities in his capacity as an insider (e.g., as an employee of the issuer of the securities) or as a result of information illicitly provided to him by an insider. Extensive case law exists concerning the varieties of acts which may be considered to be insider trading or the circumstances in which a person may be considered to be an insider or to be trading illegally on the basis of inside information. *
INSTITUTIONAL SALES
Sales of securities to banks, financial institutions, mutual funds, insurance companies or other business organizations (institutional investors) which possess or control considerable assets for large scale investing. *
INTANGIBLE DRILLING COSTS
In an oil and gas program, those costs of drilling, shooting, clearing ground, draining and the like which have no salvage value; IDCs include wages, fuel, repairs, supplies, and hauling. These costs can be either deducted from gross income as an expense or can be capitalized and amortized over the useful life of the well. Electing to currently deduct IDCs can provide high initial deductibility.
INTERMARKET
Properly referred to as the Nasdaq InterMarket. This is the trading of listed stocks on Nasdaq. Formerly called Third Market.
INTERPOSITIONING
An unethical and unfair practice by a broker/dealer of needlessly employing a third party between the customer and the best available market so that the customer pays more on a purchase or receives less on a sale than he should.
INTESTATE
Term applied to a person who died leaving no valid will. A person who does leave a proper will is said to have died testate.
INTRASTATE EXEMPTION
An exemption under '33 Act from SEC registration for offerings whose issuer, offerees, and purchasers are in one state and meet certain other requirements. (See "Rule 147.")
INTRINSIC VALUE
A call option is said to have intrinsic value when the market price of the underlying security is greater than the exercise price. A put option is said to have intrinsic value when the market price of the underlying security falls below the exercise price. (See "In-the-money.")
INVESTMENT ADVISER
A person in the business of rendering advice or analysis regarding securities for compensation. Persons meeting this definition must register as advisers with the SEC under the Investment Adviser's Act of 1940. The term does NOT include attorneys and accountants giving advice as an incidental part of their professional practice. (See "Adviser.")
INVESTMENT BANKER
A broker/dealer organization that provides a service to industry through counseling, and underwriting of securities.
INVESTMENT COMPANY
An institution engaged primarily in the business of investing and trading in securities for others including face amount certificate companies, unit trust companies and management companies, both open-end and closed-end.
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