GlossaryDefinitions of Common Terms:After-tax Rate of Return: The rate of return after all applicable taxes are deducted from an investor's gain. Annual Yield: The amount of interest or dividends paid over a year, usually calculated as a percentage of principal invested. Annuities: Contracts issued by life insurance companies that provide an income for a specified period of time, such as a number of years or for life. Earnings are tax deferred during the accumulation phase. Asset Allocation: The allocation of a portfolio's funds to classes of assets, such as cash equivalents, bonds and equities based on the objectives and level of risk tolerance of the investor. Bank Deposits: Money invested in FDIC insured bank accounts. Deposit types include checking accounts, savings accounts, money market accounts and certificates of deposit. Bank Money Market Accounts: FDIC insured bank accounts that pay money market interest rates. Federal regulations limit the number of monthly transactions that can be made from these accounts. Binder: A written agreement whereby one party agrees to insure another party pending receipt of, and final action upon, the application. Bond Funds: Mutual funds that primarily invest in bonds. Diversification comes from investing in a variety of bond types. Typical of all bonds, valuation increases as interest rates fall. Bonds: Long-term debt securities representing a contractual obligation on the part of the issuer of the bond to pay interest, as well as principal at the end of the bond term. Call: An option that grants the buyer the right to buy a fixed amount of the underlying security at a stated price within a specified period of time. Cash Equivalents Asset Class: Any short term highly liquid investments that can be easily convertible into cash (i.e., checking, savings, money market mutual funds). Certificates of Deposit (CDs): FDIC insured bank accounts that pay a specific rate of interest for a specified period. Early withdrawal is usually penalized. Checking Accounts: FDIC insured bank accounts, which usually permit unlimited withdrawals at any time. Commercial Paper: Represents unsecured short-term debt of a company. Commercial paper typically pays money market interest rates with maturities of 270 days or less. Common Stock: A type of equity security that represents shares of ownership in a corporation. Consumer Price Index (CPI): The government measure of the inflation rate. By tracking the value/cost of a group of common goods and services used by the average consumer, this measurement demonstrates any percentage changes over time. Corporate Bonds: Long-term debt securities of various types sold by corporations to raise capital. Earnings per Share (EPS): The net income of a corporation divided by the number of common shares outstanding. Equity Securities: The non-debt securities of a corporation representing an ownership interest. This includes issues of both common and preferred stock. (See also Stock.) FDIC Insured Accounts: Bank deposits insured by the Federal Deposit Insurance Corporation up to $100,000 per depositor. Deposits maintained in different categories of legal ownership (e.g. single, joint, testamentary and certain retirement accounts) are separately insured. Growth Funds: Stock mutual funds where the earnings of the underlying investments are expected to be significantly above average. These funds are usually in higher risk categories. Individual Retirement Account (IRA): A tax deferred retirement account that can be set up by working people and their spouses. Inflation Rate: Represents the rate of increase in the price of goods and services over a given period. The CPI is usually used to determine the rate of inflation. Inflation Risk: The risk that the rate of inflation will exceed the rate at which your investments grow or earn interest. Insurance: A contract protecting an individual, a corporation or other legal entity against a specified loss in exchange for premiums paid. Interest Rate: Payments where a borrower pays a lender for the use of its money. For example, the rate at which (a) banks pay depositors, (b) clients pay banks to borrow funds and (c) bonds pay semi-annual payments. Market Risk: The risk to stocks, bonds and other financial instruments resulting from a decline in the market. Money Market: The market for short term, highly liquid, low-risk debt instruments such as Treasury Bills and negotiable CDs. Municipal Bonds: Securities issued by political entities other than the federal government and its agencies, such as states, cities and airport authorities. Preferred Stock: An equity security with an intermediate claim on the firm's assets and earnings between the bondholders and the stockholders. Preferred stock usually pays a fixed dividend annually but has no voting privileges. Principal Risk: The possibility of losing an invested amount. Such risk is associated with products that are not covered by FDIC insurance. Prospectus: A document that provides information to potential buyers of new securities registered with the Securities & Exchange Commission. Rate of Return: The gain or loss generated from an investment over a specified period of time. Risk Averse: A person is risk averse if they choose to pursue conservative, safer investments. Risk Tolerance: Describes a person's comfort level to different levels of risk in the market. Savings Accounts: FDIC insured bank deposits that pay interest on the amount deposited. Settlement Date: The date agreed on for transferring funds to complete a transaction. For example, the date of delivery or payment for securities purchased. It's also the date on which payment is due in the event of dividends, interest or sales of securities. Shareholders: The owners of a company as represented by their ownership of shares of stock. Stock:Represents equity ownership in a company. (See also Equity Security.) Stock Funds: Mutual funds that invest largely in stocks. Usually specialize in a particular industry or class of stock (i.e. technology, growth, etc.). Tax Deferred: Investments where earnings are not taxed until some time in the future. US Treasury Securities: Debt instruments issued by the US Treasury and backed by the full faith and credit of the US Government to raise the money needed to operate the Federal government and to pay off maturing obligations. Treasury bills are short-term securities that mature in one year or less from their issue date and are sold at a discount. Thus, their interest is paid at maturity when they are redeemed for their face amount. Treasury notes and bonds are securities that pay a fixed rate of interest every six months until the security matures. Treasury notes mature in more than a year, but not more than 10 years from their issue date. Treasury bonds mature in more than 10 years from their issue date. Variable Annuities: Issued by insurance companies, they give the investor the flexibility to select from a variety of investment fund options. Earnings are tax deferred. Yield to Maturity: The indicated (promised) compounded rate of return an investor will receive from a bond purchased at the current market price and held to maturity. Zero Coupon Bonds: A bond sold at a discount with no coupons and redeemed for face value at maturity.
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