Term
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Definition
| financial instruments that are longer-term and considered more risky than those found in money markets. Among teh securities found are fixed-income (bond), equity (stock), and option and futures products (derivatives). |
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Term
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Definition
| fixed-income securities in teh form of debt capital. The issuer agrees to make fixed, periodic payments (usually semiannual) during teh bond's term, as well as the par value at or before maturity. |
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Term
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Definition
| debt securities that are obligations of the U.S. Treasury looking to finance the needs and obligations of teh government. T-notes can mature in any period between 2 and 10 years; T-bonds have maturities beyond 10 years. Sold in minimum denominations of $1,000 at preannounced auction dates, it is this process which sets teh initial coupon rates and yields. All are noncallable today and are taxable at teh holder's federal income tax level. |
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Term
| STRIPS (Separate Trading of Registered Interest and Principal Securities) |
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Definition
| coupons that are stripped under a U.S. Treasury program that allows for longer-term coupon notes and bonds (zeros) to e broken down into different cash flows to be redeemed in a series of individual securities. For example, a 20-year zero-coupon bond would have 40 semiannual coupons attached and each one would be considered a separate instrument; the last payment of principal due would be separated from these individual coupon payments. CUSIP numbers to identify each are assigned for security and trading purposes. |
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Term
| "Treasury Zero-coupon Bonds" |
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Definition
| an original issue discounted bond that has no coupn payments attached to it and, therefore, no regular cash flows during the life prior to maturity. ALl gains from them are in teh form of price appreciation. T-bill are a type of short-term zero, as teh puchaser obtains the bill at a discounted price, receives no coupon payment, and redeems it for the full face value at maturity. |
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Term
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Definition
| the interest that accumulates between coupon payment periods. When a bond purchas occurs between payment dates, the seller is entitled to the accumulated interest that is reflected in teh coupon rate. Bond price quotes do NOT include teh accrued interest that may be due |
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Term
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Definition
| tax-exempt instruments (general obligation and revenue bonds) issued by state and local governments whose interest is exempt from federal income tax. A bond's interest is also exempt from state adn local taxation if issued in teh state of origin. Capital gains taxes do apply. |
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Term
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Definition
| occurs when a municipality or corporation sells an entire issue to an institutional investor (such as a bank or mutual fund) or to a small group of buyers |
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Term
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Definition
| fixed-income securities, usually long term, that promise the holder a predetermined amount of interest each year and whose creditworthiness is linked to teh corporation's financial condition. |
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Term
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Definition
| the financial contract or agreement that spells out the payment schedule as well as any provisions dealing with issuer restrictions and obligations that protect bondholder rights. Known as protective covenants, issues such as bond collateral and additional borrowing rights are discussed in an attempt to help market the bonds and advertise their safety level. |
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Term
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Definition
| bonds that are traded without any registration issued to them. Since there is no true record of ownership, their mere possession constitutes ownership. These bonds are more prevalent in Europe today than in the U.S. |
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Term
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Definition
| at the time of issuance, the originator of teh bond records who has purchased it, and records who reeives periodic interest payments. Taxing authorities are then able to track more accurately the taxable income stream of taxpayers. |
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Term
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Definition
| bond issues that mature on a predetermined date. Distinguished from serial bonds that have multiple maturities and are paid off at that time. |
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Term
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Definition
| the issuer of these bonds sells them with staggered maturity dates and no call provisions. No sinking fund for repuchase of some portion o fhte issue is therefore required. Trading these bonds may be more expensive, as each bond has a different maturity date thereby reducing liquidity. |
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Term
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Definition
| bonds using real property or mortgage notes as collateral. As such, they are considered safer than bonds offering no security backing against possible default. |
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Term
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Definition
| unsecured bonds that offer no collateral but rely on teh reputation and earning power of the company. These bonds will offer higher rates than those offering collateral as security. |
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Term
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Definition
| junior bonds that are more speculative and offer a higher rate of interest than original debentures. Investment grade is "junk" status and teh market for these issues is narrow |
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Term
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Definition
| securites giving the holder the right to convert them into a fixed number of shares of stock at some predetermined price. |
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Term
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Definition
| a longer term (usually 3 - 5 years) call option on the stock of a firm and often issued with a bond. When exercised, the firm issues new shares of the stock, which increases teh number of those outstanding and is often dilutive in nature. |
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Term
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Definition
| Bonds taht can be repurchased by teh issuing firm at a specified price during a specified period |
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Term
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Definition
| an amount above par value that is paid to the bondholder for having redeemed teh bond prior to maturity |
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Term
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Definition
| speculative grade bonds that pay high interest and are below investment grade (below BB by Standard & Poor's). Some bonds may have originally been issued with investment grade status ("fallen angels"). Since around 1977, firms have issued original-issue junk bonds as another means to finance operations. |
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Term
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Definition
| fixed-income securites that are sold in national markets other than that of the issuing country. Bonds in the Eurodollar market are not subject to U.S. regulations since the market for Eurodollars lies outside of teh U.S. Presently, London is the largest market for these types of bonds. |
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Term
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Definition
| issues sold in countries other than the one in which the bond was originated by the borrower. An example of a foreign bond transaction is when a British corporation sells a dollar-denominated bond in teh U.S. ("Bulldog" bonds). |
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Term
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Definition
| securitized bonds permitting U.S. banks to transfer high-risk loans to underdeveloped countries for bonds backed by those same loans. The creditworthiness of these loans is enhanced by partially collateralizing them with Treasury bonds. Should default occur, Brady bondholders claim to teh Treasury bonds. |
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Term
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Definition
| debt securities offering higher interest rates, one reason being teh collateral backing teh U.S. Treasury bonds has been removed, and teh creditworthiness of the less developed country replacing Treasuries. Brady bonds may be converted back into this type security, as teh credit rating of the LDC (less developed country) is enhanced. |
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Term
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Definition
| an investment, in teh form of partial ownership (shares), of a public corporation. COmmon stockholder may or may not be entitled to dividends, but they are entitled to vote for the board of directors. The potential reward of owning common stock is virtually limitless, but the risk of loss is limited downside to the original amount invested. |
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Term
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Definition
| one of the features of common stock. It means that if a corporation goes bankrupt, holders of common stock are teh last to be paid, after all of teh more senior claimants such as employees and bond holders. |
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Term
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Definition
| a feature of common stock that refers to the limited risk of loss for shareholders. If a corporation goes bankrupt and its losses are far greater than all of the claims against it, common stockholders cannot be held responsible for any amount over their original investment. |
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Term
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Definition
| corporations that have two types of stock: Class A adn Class B shares. The difference between them is teh kind of votin rights they are assigned. One class might be entitled to one vote per share, while the other only a fraction of a vote. The fraction of teh board they can elect might also be different (e.g., Class A shareholders elect 30% of the board, while Class B shareholders elect 70%). |
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Term
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Definition
| refers to elections for the board of directors where all directors who aer up for election are voted on at the same time rather than having separate elections for each seat. Shareholders can vote for as many candidates as tehy desire, and teh candidates who garner teh highest number of votes are elected. |
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Term
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Definition
| a form that is used as a ballot in an election where teh shareholder who is voting is not able to vote in person |
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Term
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Definition
| not issued by all public corporations. Its owners are not guaranteeddividends and are not in a position to take legal action if they are not paid teh dividends they are accustomed to getting periodically. Preferred stockholders are paid before common stockholders (but still after all other debt holders have been paid). Unlike common stockholders, preferred stockholders do not have voting rights in almost all cases. |
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Term
| Nonparticipating Preferred Stock |
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Definition
| refers to the reality that for most preferred stock, the amount of the dividend is not a reflection of teh corporation's profits; it is fixed. |
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Term
| Cumulative Preferred Stock |
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Definition
| refers to a feature that entitles preferred stockholders to be paid any dividend payments that have gone into arrears before common stockholders are paid their dividends |
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Term
| Participating Preferred Stock |
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Definition
| preferred stock that may pay a divident higher than the stated dividend. The higher dividend is based on profits or on teh common dividend payment. |
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Term
| Noncumulative Preferred Stock |
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Definition
| when a preferred stock is not cumulative, missed dividends do not go into arrears and will never be paid. Such stocks would usually not be attractive unless they have special features. |
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Term
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Definition
| the markets where corporations sell new issues of securites, usually with the help of investment bankers. |
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Term
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Definition
| in the underwriting process, the term used for the guaranteed price for which the investment bank (the underwriter) purchases shares of a corporation. |
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Term
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Definition
| the difference between teh guaranteed amount the underwriter pays for shares of stock and the amount that underwriter then charges the institutional and retail investors who purchase the share in the secondary markets. |
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Term
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Definition
| when an underwritng investment bank invites other investment banks to help with the sale of a new issue, the entire group is a syndicate |
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Term
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Definition
| in some states, when new shares of stock are issued by a corporation, current stockholders are entitled to purchase them before non-stockholders. Each stockholder is entitled to an amount that will maintain that individual's percentage of stock before the new shares were created, and teh shares are generally offered at a slightly discounted price. |
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Term
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Definition
| before a new issue reaches the secondary markets, it must be registered with the SEC. This is when the corporation must disclose all information about the firm. A red herring prospectus is the name for the initial prospectus that is created during the registration process and which describes the new issue. It is given to potential buyers of the issue. this is not the official prospectus, as the registration has not yet been completed. |
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Term
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Definition
| refers to a corporation's filing of a master registration statement with the SEC that allows it to offer multiple issues of stock for up to two years. When the corporation decides to issue shares and teh SEC approves a short form, the shares are referred to as being taken "off the shelf." |
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Term
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Definition
| are those in which retail investors buy and sell shares. Some example are teh New York Stock Exchange, which is a physical place located in Manhattan, and the National Association of Securities Dealers Automated Quotation (NASDAQ) system, which is a purely electronic marketplace without a trading floow. |
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Term
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Definition
| their function on the floor of an exchange is to establish the fair market value of the stock to which they are assigned. Also known as market makers, it is their job to stabilize the price of their stock, by buying and selling the stock, during times of volatility. |
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Term
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Definition
| the term used in the trading process for an order that a broker places to a market specialist to purchase shares of the stock he is assigned at the best price available when he reaches his post on the floor |
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Term
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Definition
| the term used in the trading process for an order that a broker places to a floor or commission broker to purchase shares of stock at a specific price. The floor broker will often enter a request for teh order with the specialist, who will conduct teh trade if teh stock's price equals teh price specified. |
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Term
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Definition
| refers to the buying and selling -at the same time - of a group of at least 15 different stocks with a total value of at least $1 million. This type of trading, including when it will occur, is done by computer. |
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Term
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Definition
| A stock's P/E ratio is a number used to compare teh value of stock's relative to one another. It is reached by dividing the stock's closing price by its earnings per share over the previous year. The higher the resulting ratio, the higher rate at which the earnings of the stock are expected to grow. |
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Term
| NASDAQ (National Association of Securities Dealers Automated Quotation) |
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Definition
| a secondary marketplace that is completely electroic, eaning that it does not have a physical trading space. In recent years, it has overtaken teh NYSE and has the largest share volune, the highest dollar volume, and the largest number of issues. |
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Term
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Definition
applies to the degree to which prices of securites adjust themselves based on interest rates and based on news about the corporations they represent.
3 theories: weak form, semi-strong form, and strong form |
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Term
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Definition
| securities that are actually agreements between buyers and sellers to purchase (or sell) existing securities at a specific time and for a specific price. |
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Term
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Definition
| a contractual agreement between a buyer and a seller of an asset, where the transaction is conducted immediately (as opposed to at some point in the future) |
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Term
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Definition
| an agreement between a party who would like to buy an asset and the seller of that asset, where the transaction is to be conducted (i.e., exchange the asset for a specified, fixed amount of cash) at some point in the future. That point is determined in advance and is the end of the contract. |
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Term
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Definition
| an agreement between a party who would like to buy an asset and the seller of that asset, where the actual transactino will take place at a specific time in the future for a price that is determined in advance. During the life of the contract, the price continuously fluctuates with the futures market and is settled daily. |
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Term
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Definition
| a feature of the futures contract which is another way of saying that its price is adjusted daily to reflect the changes in the futures market. |
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Term
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Definition
| the percentage of a futures contract that an investor must post in his account in order to conduct the transaction. |
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Term
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Definition
| refers to the percentager of the original margin (usualy 75%) that must be kept in the account in order to continue conducting transactions. If the account falls below that level, the owner gets a margin call, which means he must deposit sufficient funds to restore teh maintenance margin. |
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Term
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Definition
| when an investor places an order to purchase a futures contract |
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Term
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Definition
| when an investor places an order to sell a futures contract |
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Term
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Definition
| in futures trading, it's the department of a futures exchange that guarantees that all obligations will be met. makes sure there is a buyer for every seller and vice versa. |
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Term
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Definition
| a contract that represents the right to buy or sell an asset at a specific price for a specific period of time. the party who purchases the contract ot buy or sell is not obligated to conduct that transaction; the option give that party the right to if he chooses. |
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Term
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Definition
| gives the holder of that option the right to exercise that option at any time during the life of the contract, including on the date of expiration. the majority of options that are traded are these. |
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Term
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Definition
| gives the holder of that option the right to exercise that option on the date of expiration only. S&P 500 Index options are these. |
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Term
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Definition
| an option cnotract that gives the buyer of the contract the right to exercise his or her option to purchase the underlying security at a price and at a time that is specified in advance. |
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Term
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Definition
| the price for the underlying security that the buyer and teh seller (also known as teh writer) of the option agree to in advance. |
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Term
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Definition
| the up-front fee that the call option buyer must pay to the call option seller (also known as the writer) of the option agree to in advance. |
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Term
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Definition
| refers to when the price of the option is less than that of the underlying security. When an option is "in the money," the buyer is in a position to immediately exercise the option and promptly sell it at teh current price and make a profit (minus the call premium) |
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Term
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Definition
| refers to when the price of the option is greater than teh price of the underlying security. When it's "out of the money," the buyer would not benefit from exercising the option, and it would expire without having been exercised. If that is the case, the buyer has paid the call premium, which is the extent of his loss. |
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Term
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Definition
| refers to when the price of teh option is equal to the price of teh underlying security. When it's "at the money," the buyer would not benefit from exercising the option, and it would expire without having been exercised. If that is the case, the buyer has paid teh call premium, which is the extent of his cost. |
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Term
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Definition
| an option contract that gives the buyer of the contract the right to exercise his or her option to sell the underlying security at a price and at a time that is specified in advance. |
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Term
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Definition
| the up-front fee that teh put option buyer must pay to the put option seller (also known as teh writer of the option) for the right to purchase the underlying security. |
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Term
| Intrinsic Value of an Option |
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Definition
| the difference between teh price of the asset that is underlying that option and teh exercise price of the option. Essentially, the intrinsic value is what the option would be worth if it were exercised. |
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Term
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Definition
| the difference between the price that is paid for the option (i.e., its premium) and the intrinsic value of the option. The closer an option gets to expiration, the closer teh time value gets to zero. |
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Term
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Definition
| options contracts that have the stock of a public company as their underlying assets. Generally speaking, a single option represents 100 shares of the stock of the underlying company. |
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Term
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Definition
| options contracts that have the value of a stock market index as their underlying asset. The holder settles the contract with cash, instead of with the purchase (or sale) of the index that underlies the contract, as teh name suggests. |
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Term
| Options on Futures Contracts |
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Definition
| options that have futures contracts as their underlying assets. These futures can involve: interest rates, stock index futures, or the exchange rate of a foreign currency. |
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Term
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Definition
| agreements to which two parties (known as counterparties) commit, involving the exchange of a specific and periodic cash flow at some point in the future, and that exchange is based on an underlying price or instrument. There are five types of swaps: those based on commodities, credit risk, currency, interest rate, and equity. |
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Term
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Definition
| represent the largest portion of the swap market and are essentially strings of forward contracts of interest rate payments that are based on a specified principal amount (i.e., the notional principal), to be paid on specific and periodic dates. It is an effective tool to hedge an investor's exposure to interest rate risk. |
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Term
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Definition
| an agreement between counterparties (i.e., the two parties involved) to exchange notes of opposing currency in order to reduce the risk associated with the movement of exchange rates. It is most often used when the assets and liabilities of a firm are not teh same currency (i.e., they are mismatched), causing exposure to exchange rate risk. |
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Term
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Definition
| a derivative security that can be purchased by a financial institution to hedge its exposrue to interest rate risk. it is esentially a call option (or multiple call options) that has interest rates on a notional principal as its underlying instrument. A transaction might look like this: Firm A buys a cap from Firm B, which means it pays a premium up front regarding a specific interest rate (called a cap rate), for a specific period of time, which could consist of multiple exercist dates. If interest rates reach a piont above teh cap rate, FIrm A is compensated by Firm B |
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Term
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Definition
| a derivative security that can be thought of (from teh buyer's point of view) as a put option with interset rates as their focal point. THe buyer of the floor pays teh seller and up-front premium in exchagne for the right to compensation in the event that interest rates reach a point below the predetermined interest rate. Floors are similar to caps in that they have multiple exercise dates. |
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Term
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Definition
| a derivative security that most often refers to a firm buying a cap at the same time as selling a floor. In other words, the firm positions itself to hedge against rising rates while simultaneously positioning itself to cover teh cap's cost by using the premium form teh floor to finance the premium of the cap. |
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