Glossary of Terms
Select the first letter of the word from the list above to jump to appropriate section of the glossary.
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Accredited Investor
To qualify as an accredited investor based on your net worth, you must have a net worth of $1 million or more. Net worth= assets – liabilities, excluding primary residence as an asset in the calculation. To qualify as an accredited investor based on your annual income, you must have had an annual income of $200,000 or greater (or $300,000 or greater combined income with your spouse) for the prior two years and have a reasonable expectation of the same or greater income in the current year(Rule 501 of Regulation D of the Securities Act of 1933).
Accrued Interest
Interest deemed to be earned on a security but not yet paid to the investor.
Advance Refunding
A financing structure under which new bonds are issued to repay an outstanding bond issue prior to its first call date. Generally, the proceeds of the new issue are invested in government securities, which are placed in escrow. The interest and principal repayments on these securities are then used to repay the old issue, usually on the first call date.
Alternative Minimum Tax (AMT)
An alternative minimum tax (AMT) is a tax that ensures that taxpayers pay at least the minimum. The AMT recalculates income tax after adding certain tax preference items back into adjusted gross income. AMT uses a separate set of rules to calculate taxable income after allowed deductions
Ask Price
The price at which a seller offers to sell a security (also referred to as offer price).
Asset
An asset is a resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide a future benefit. Assets are reported on a company’s balance sheet and are bought or created to increase a firm’s value or benefit the firm’s operations. An asset can be thought of as something that, in the future, can generate cash flow, reduce expenses, or improve sales, regardless of whether it’s manufacturing equipment or a patent.
Asset Allocation
Asset allocation is an investment strategy that aims to balance risk and reward by apportioning a portfolio’s assets according to an individual’s goals, risk tolerance, and investment horizon.
Average Effective Maturity
For a single bond, the average effective maturity (AEM) is a measure of maturity that takes into account the possibility that a bond might be called back by the issuer. For a portfolio of bonds, average effective maturity is the weighted average of the maturities of the underlying bonds.
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BANs (Bond Anticipation Notes)
A Bond Anticipation Note (BAN) is a short-term interest-bearing security issued in advance of a larger, future bond issue. Bond anticipation notes are smaller short-term bonds that are issued by corporations and governments, such as local municipalities, wishing to generate funds for upcoming projects.
Basis Point
One one-hundredth (.01) of a percentage point. For example, eight percent would be equal to 800 basis points.
Bearer Security
A security that is not registered in the name of an owner. As a result, it is presumed to be owned by the bearer or the person who holds it. Bearer securities are freely and easily negotiable, since ownership can be quickly transferred from seller to buyer.
Bid Price
The price at which a buyer offers to purchase a security.
Bond Fund
An investment vehicle which invests in a portfolio of bonds that is professionally managed. Types of bond funds include open-ended mutual funds, closed-end mutual funds, and exchange traded funds.
Bond Swap
The sale of a block of bonds and the purchase of another block of similar market value. Swaps may be made to achieve many goals, including establishing a tax loss, upgrading credit quality, extending or shortening maturity, etc.
Bond Call
The terms of the bond contract, sometimes referred to as “call or prepayment provisions,” giving the issuer the right to redeem or call (an “optional redemption”), or requiring the issuer to redeem or call (a “mandatory redemption”), all (an “in-whole redemption”) or a portion (a “partial redemption”) of an outstanding issue of bonds prior to its stated date of maturity. Bonds may be redeemed at a specified price, usually at par or accreted value in the case of original issue discount bonds or zero coupon bonds (a “par call”) or above par or accreted value (a “premium call”), plus any accrued interest to the redemption date. Issuers may be limited to redeeming bonds on interest payment dates (an “any-interest-date redemption”) or may be permitted to redeem bonds on any date (an “any time or continuous call”).
Bond Put Option
Obligations, also known as “put bonds” or “puttable securities,” that grant the bondholder the right to require the issuer or a specified third party acting as agent for the issuer (e.g., a tender agent) to purchase the bonds, usually at par, at a certain time or times prior to maturity or upon the occurrence of specified events or conditions. The put option or tender option right is typically available to the investor on a periodic (e.g., daily, weekly or monthly) basis. Typically, these securities are floating or variable rate securities, with the put option exercisable on dates on which the floating rate changes. These latter securities are often called “variable rate demand obligations,” or, colloquially, “lower floaters.”
Book-entry
A method of recording and transferring ownership of securities electronically, eliminating the need for physical certificates.
Buy/Sellback
A form of secured, short-term investment in which a security is purchased with a simultaneous agreement to sell it back to the seller at a future date. The purchase and sales agreements are simultaneous but the settlement dates for the transactions are not. The purchase is a cash transaction while the return sale is a forward transaction since it occurs at a future date. A buy/sellback is very similar to a reverse repurchase agreement, except that in a buy/sellback the investor is compensated by the difference between the purchase price and sales price rather than by interest. Unlike a reverse repurchase agreement, a buy/sellback probably does not include a haircut or collateral margin. Furthermore, the buy/sellback may be treated differently in the event of the buyer’s bankruptcy. Every transaction that is a buy/sellback from the buyer/lender’s point of view is, by definition, a sell/buyback from the seller/borrower’s point of view.
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Call
A one-way option of the issuer (not the investor) that allows the issuer to retire bonds by paying investors a stated price, usually a premium above the par value. Many high-yield bonds allow issuers to call bonds after the first five years.
Callable Bonds
Bonds that are redeemable by the issuer prior to the specified maturity date at a specified price at or above par.
Call Premium
The dollar amount over par that an issuer pays to an investor when a bond is called for redemption prior to maturity. Usually stated as a percentage of the principal amount called.
Cap
The maximum interest rate that may be paid on a floating-rate security.
Capital Gain
A profit from the sale of property or an investment.
Capital Gains Distribution
A capital gains distribution is a payment by a mutual fund or an exchange-traded fund (ETF) of a portion of the proceeds from the fund’s sales of stocks and other assets. It is the investor’s share of the proceeds from the fund’s transactions. It is not a share of the fund’s overall profit. The fund may gain or lose money over the course of a year, and your balance will rise or fall accordingly. But if the fund gained from the sale of any of its stocks during that year, it will make capital gains distributions to its shareholders.Mutual funds are required by law to make regular capital gains distributions to their shareholders. The owners of mutual fund shares have the option to take the capital gains distribution in the form of immediate payments or to reinvest it in additional fund shares. The capital gains distribution will be identified as a long-term capital gain or a short-term capital gain and is taxable as such.
Capital Loss
A capital loss is the loss incurred when a capital asset, such as an investment or real estate, decreases in value. This loss is not realized until the asset is sold for a price that is lower than the original purchase price.
Capitalization Ratio
A measure of a corporation’s reliance on long-term debt. Similar to the debt-to-worth ratio but not the same. This ratio is calculated by dividing long-term debt by the sum of long-term debt plus equity.
Cinderella Bonds
A bond initially issued on a taxable basis and that will convert to tax-exempt status upon the occurrence of a specified condition precedent (e.g., volume cap allocation becoming available or certain refundings).
Convertible Bonds
A bond that includes a provision allowing the holder to exchange the bond for a quantity of the issuer’s common stock at some fixed exchange ratio. An otherwise-normal corporate bond that has a fixed maturity date that pays coupon interest and repays principal at maturity. It is issued with an option to exchange the bond for a fixed number of shares of common stock at the option of the bondholder, thereby allowing the convertible bond to share in the growth potential of the underlying common stock. It is senior to stock within the corporate equity structure, although probably junior to other corporate debt. Convertible bonds are often callable.
Coupon Rate
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a year divided by the face value of the bond in question).
Covenant(s)
Contractual obligations set forth in a bond contract. Covenants commonly made in connection with a bond issue may 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 or other indebtedness unless certain tests are met (“additional bonds” or “additional indebtedness” covenant); and not to take actions that would cause tax-exempt interest on the bonds to become taxable or otherwise become arbitrage bonds (“tax covenants”). A covenant whereby a party is affirmatively obligated to undertake a duty in order to protect the interests of bondholders (e.g., to maintain insurance) is referred to as an “affirmative” or “protective covenant.” A covenant whereby the issuer obligates itself to refrain from performing certain actions (e.g., not to sell the project) is referred to as a “negative covenant.”
Credit Rating
A formal evaluation of a company’s financial health and ability to repay debt obligations, conducted by a rating agency such as Standard & Poor’s, Moody’s and Fitch Ratings. The agency’s evaluation is summarized in a rating, such as BB.
Credit Rating Agency
A company that analyzes the credit worthiness of a company or security, and indicates that credit quality by means of a grade, or credit rating.
Current Yield
The ratio of the interest rate payable on a bond to the actual market price of the bond, stated as a percentage. For example, a bond with a current market price of par ($1,000) that pays eight percent ($80) per year in interest would have a current yield of eight percent.
Current Refunding
A financing structure under which old bonds are called or mature within 90 days of the issuance of new refunding bonds.
Current Yield (CY)
A calculation of the annual interest payment from a bond divided by the current market price of the bond.
CUSIP
The Committee on Uniform Security Identification Procedures, which was established under the auspices of the American Bankers Association to develop a uniform method of identifying municipal, U.S. government, and corporate securities. When issued, each bond is assigned a unique CUSIP number consisting of nine alphanumeric characters.
Custodian
A custodian is a financial institution that holds customers’ securities for safekeeping in order to minimize the risk of their theft or loss.
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Dated date (or issue date)
The date of a bond issue from which the bondholder is entitled to receive interest, even though the bonds may actually be delivered at some other date.
Debt Capacity Maximization
“Debt Capacity Maximization” refers to the amount of debt service for the year in which the greatest amount of debt service payments are required and is often used in calculating required reserves and in additional debt tests.
Debt Reserve Pledge
The funds obligated for the payment of debt service and the making of other deposits required by the bond contract.
Debt Service
A term used to refer to the amount of principal and interest payments required by a borrower’s loans or securities issued. Also used as a verb to describe making such payments.
Debt Service Coverage Ratio
A simple comparison of the cash available to make principal and interest payments to the bank or to bond holders with the amount of those required principal and interest payments. Debt service coverage is expressed as a ratio with the annual net income divided by the annual debt service requirement.
Debt Service Reserve Fund
A fund in which funds are placed to be applied 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 at the time of issuance, may be funded over time through the accumulation of pledged revenues, may be funded with a surety or other type of guaranty policy (described below), or may be funded only upon the occurrence of a specified event (e.g., upon failure to comply with a covenant in the bond contract) (a “springing reserve”). Issuers may sometimes authorize the provision of a surety bond or letter of credit to satisfy the debt service reserve fund requirement in lieu of cash. If the debt service reserve fund is used in whole or part to pay debt service, the issuer usually is required to replenish the fund from the first available revenues, or in periodic repayments over a specified period of time.
Debt Tranches
Tranches in a multi-class security that have seniority ranking, for repayment, ahead of equity trances. See collateralized debt obligation (CDO), equity tranche and waterfall.
Default
A borrower’s failure to make timely payments of interest and principal when due or to meet other requirements related to the bonds, such as maintenance of collateral or financial covenants.
Derivatives
Financial instruments whose value depends upon the values of underlying assets, interest rates, currency exchange rates, or indexes. Various authorities define derivative instruments in broad, inclusive terms or narrow, exclusive terms. It is a common misconception that all derivatives are high-risk, speculative instruments.
Direct Loans
A loan to a municipal issuer from a banking institution or another lender. The obligations may constitute municipal securities.
Discount
The amount by which the par value of a security exceeds its purchase price. For example, a $1,000 par amount bond which is currently valued at $980 would be said to be trading at a two percent discount.
Discount Note
Short-term obligations issued at a discount from face value, with maturities ranging from one to 360 days. Discount notes have no periodic interest payments; the investor receives the note’s face value at maturity. For example, a one year, $1,000 face value discount note purchased at issue at a price of $950, would yield $50 or 5.26 percent ($50/$950).
Discount Rate
The interest rate the Federal Reserve charges on loans to member banks.
Dividend Reinvest NAV
When dividend payments are reinvested, the shareholder receives either additional shares or a fraction of an additional share in place of the cash payment. The NAV still declines by the amount that is distributed, but the total value of the fund investment for the investor stays the same.
Dividend Yield
The dividend yield is the estimated one-year return of an investment in a stock-based only on the dividend payment. Note that many stocks do not pay dividends.
Double Exemption
Bonds that are exempt from both state and federal income taxes.
Dow Jones Industrial Average (Dow)
The Dow Jones Industrial Average (DJIA) is an index that tracks 30 large, publicly-owned blue chip companies trading on the New York Stock Exchange (NYSE) and the NASDAQ. The Dow Jones is named after Charles Dow, who created the index back in 1896, along with his business partner Edward Jones.
Draw-down Bank Bonds
A loan to a municipal issuer from a banking institution or another lender using estimated expenditures to be made from bond proceeds and other available funds on a construction project that show periodic payments or “Draws” to the contractor at progressive stages of completion of the project.
Duration
The weighted maturity of a bond’s cash flows, used in the estimation of its price sensitivity for a given change in interest rates.
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Earn-out
An earn-out is a contractual provision stating that the seller of a business is to obtain additional compensation in the future if the business achieves certain financial goals, which are usually stated as a percentage of gross sales or earnings.
EBITDA
Earnings before interest, tax, depreciation and amortization (EBITDA) is a measure of a company’s operating performance. Essentially, it’s a way to evaluate a company’s performance without having to factor in financing decisions, accounting decisions or tax environments.
Entrance Fee Redemption Bonds
A process by which the issuer repays to the bondholder of an outstanding security the principal amount thereof (plus, in certain cases, an additional amount representing a redemption premium) and any accrued interest on the security to the date of redemption using entrance fees for the repayment. Although the term is normally used in connection with the issuer exercising a right under the bond contract to repay the security prior to its scheduled maturity date (often referred to as a “call”), the payment of a bond at maturity is also a redemption. Redemption provisions in the bond contract for a security may provide the issuer the right to retire the debt fully or partially before the scheduled maturity date.
ETF (Exchange Traded Fund)
An exchange-traded fund (ETF) is a type of security that involves a collection of securities—such as stocks—that often tracks an underlying index, although they can invest in any number of industry sectors or use various strategies. ETFs are in many ways similar to mutual funds; however, they are listed on exchanges and ETF shares trade throughout the day just like ordinary stock.
Exchange
An exchange is a marketplace where securities, commodities, derivatives and other financial instruments are traded. The core function of an exchange is to ensure fair and orderly trading and the efficient dissemination of price information for any securities trading on that exchange. Exchanges give companies, governments, and other groups a platform from which to sell securities to the investing public.
Expense Ratio
The expense ratio (ER), also sometimes known as the management expense ratio (MER), measures how much of a fund’s assets are used for administrative and other operating expenses. An expense ratio is determined by dividing a fund’s operating expenses by the average dollar value of its assets under management (AUM).
Extraordinary Redemption
This redemption is different from optional redemption or mandatory redemption in that it occurs under an unusual circumstance such as destruction of the facility financed
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Face Amount
The par value (i.e., principal or maturity value) of a security appearing on the face of the instrument.
Federal Funds Rate (Fed Funds Rate)
The federal funds rate refers to the interest rate that banks charge other banks for lending to them excess cash from their reserve balances on an overnight basis. By law, banks must maintain a reserve equal to a certain percentage of their deposits in an account at a Federal Reserve bank. Any money in their reserve that exceeds the required level is available for lending to other banks that might have a shortfall.
Federal Reserve Board (The Fed)
The Board of Governors of the Federal Reserve System, commonly known as the Federal Reserve Board, is the main governing body of the Federal Reserve System. It is charged with overseeing the Federal Reserve Banks and with helping implement the monetary policy of the United States. Governors are appointed by the President of the United States and confirmed by the Senate for staggered 14-year terms.
FHA (Federal Housing Administration)
An agency within the Department of Housing and Urban Development (HUD) that provides insurance for single-family and multifamily residential mortgages.
FHA Loans
An FHA loan is a mortgage issued by an FHA-approved lender and insured by the Federal Housing Administration (FHA). Designed for low-to-moderate-income borrowers, FHA loans require a lower minimum down payments and credit scores than many conventional loans.
FINRA
The Financial Industry Regulatory Authority (FINRA) is an independent regulator securities firms doing business in the United States. Securities are financial instruments, such as stocks or bonds, that can be traded freely on the open market.
Fitch Ratings
Fitch Ratings is an international credit rating agency based out of New York City and London. Investors use the company’s ratings as a guide as to which investments will not default and subsequently yield a solid return. Fitch bases the ratings on factors, such as what kind of debt a company holds and how sensitive it is to systemic changes like interest rates.
Fixed Rate
A fixed rate bond is a bond that pays the same level of interest over its entire term. An investor who wants to earn a guaranteed interest rate for a specified term could purchase a fixed rate Treasury bond, corporate bond, or municipal bond. Fixed rate bonds can be contrasted with floating or variable rate bonds.
Floating Rate
A floating interest rate is an interest rate that moves up and down with the rest of the market or along with an index. … This contrasts with a fixed interest rate, in which the interest rate of a debt obligation stays constant for the duration of the loan’s term.
Floating-rate Bond
A bond whose interest rate is adjusted periodically according to a predetermined formula; it is usually linked to an interest rate index such as LIBOR.
Floor
The lower limit for the interest rate on a floating rate bond.
Forward Delivery
The transfer of commodities or foreign exchange at a specified date subsequent to the date of the contract that provides for the transfer.
The value of an asset at a specified date in the future, calculated using a specified rate of return
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Growth Investing
Growth investing is an investment style and strategy that is focused on increasing an investor’s capital. Growth investors typically invest in growth stocks—that is, young or small companies whose earnings are expected to increase at an above-average rate compared to their industry sector or the overall market.
Growth Stock
In finance, a growth stock is a stock of a company that generates substantial and sustainable positive cash flow and whose revenues and earnings are expected to increase at a faster rate than the average company within the same industry.
Growth-style Funds
A growth fund is a diversified portfolio of stocks that has capital appreciation as its primary goal, with little or no dividend payouts. The portfolio mainly consists of companies with above-average growth that reinvest their earnings into expansion, acquisitions, and/or research and development (R&D).
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High Grade Bonds
A phrase used to describe investments with the highest quality ratings — usually AAA or AA.
High Yield Bonds
High-yield bonds are bonds that pay higher interest rates because they have lower credit ratings than investment-grade bonds. High-yield bonds are more likely to default, so they must pay a higher yield than investment-grade bonds to compensate investors.
(HUD) Department of Housing and Urban Development
The United States Department of Housing and Urban Development (HUD) is a Cabinet department in the Executive branch of the United States federal government. Although its beginnings were in the House and Home Financing Agency, it was founded as a Cabinet department in 1965, as part of the “Great Society” program of President Lyndon Johnson, to develop and execute policies on housing and metropolises.The department was established on September 9, 1965, when Lyndon B. Johnson signed the Department of Housing and Urban Development Act[1] into law. It stipulated that the department was to be created no later than November 8, sixty days following the date of enactment. The actual implementation was postponed until January 14, 1966, following the completion of a special study group report on the federal role in solving urban problems. HUD is administered by the United States Secretary of Housing and Urban Development. Its headquarters is located in the Robert C. Weaver Federal Building.”HUD.
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(Market) Index
A market index is a metric that tracks the performance of a group of stocks. Some indices are designed to indicate the overall performance of the market, while others follow a particular sector.
Investment-grade Bond (or high grade bond)
Bonds rated Baa3 or BBB- or above, whose higher credit ratings indicate a lower risk of default. These bonds tend to issue at lower yields than less creditworthy bonds.
Interest
The amount of compensation charged by an investor for the use of assets, generally expressed as a percentage rate of par.
Issuer
The entity obligated to pay principal and interest on a bond it issues(
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Large-cap
Historically, market capitalization, defined as the value of all outstanding shares of a corporation, has an inverse or opposite relationship to both risk and return. On average, large-cap corporations—those with market capitalizations of US$10 billion and greater—tend to grow more slowly than mid-cap companies. Mid-cap companies are those with capitalization between $2 and $10 billion, while small-cap corporations have between $300 million and $2 billion. These definitions of large cap and small cap differ slightly between the brokerage houses, and the dividing lines have shifted over time. The differing definitions are relatively superficial and only matter for the companies that are on the borderlines.
Legal opinion
A letter from a law firm concerning the validity of a municipal bond with respect to statutory authority, constitutionality, procedural conformity and usually the exemption of interest from federal income taxes. The legal opinion is usually rendered by a law firm recognized as specializing in public borrowings, often referred to as “bond counsel.”
LIBOR (London Interbank Offered Rate)
The rate banks charge each other for short-term eurodollar loans. LIBOR is frequently used as the base for resetting rates on floating-rate securities.
Limited Tax Bond
A bond secured by a pledge of a tax or category of taxes limited as to rate or amount.
Liquidity or Marketability
Both the capacity and the perceived capacity to meet all obligations whenever due and to take advantage of business opportunities important to the future of the enterprise. The capacity and the perceived ability to meet known near-term and projected long-term funding commitments while supporting selective business expansion.
Loan-to-Value Ratio
The name used to refer to a credit analysis ratio that measures collateral coverage. To calculate the LTV ratio, the total amount of the borrower’s obligations to the bank is divided by the total calculated value for the collateral. For example, if the total collateral value is estimated to be $1,000,000 and the total amount of the borrower’s obligations to the bank is $800,000, then the LTV ratio is 0.80 or 80 percent.
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Marketability
A measure of the ease with which a security can be sold.
Market Capitalization
Refers to the total dollar market value of a company’s outstanding shares of stock. Commonly referred to as “market cap,” it is calculated by multiplying the total number of a company’s outstanding shares by the current market price of one share. As an example, a company with 10 million shares selling for $100 each would have a market cap of $1 billion. The investment community uses this figure to determine a company’s size, as opposed to using sales or total asset figures.
Master Trust Indenture
A trust indenture is an agreement in a bond contract made between a bond issuer and a trustee that represents the bondholder’s interests by highlighting the rules and responsibilities that each party must adhere to. It may also indicate where the income stream for the bond is derived from.
Maturity Date
The date a financial instrument’s contractual term expires. The date on which the principal or last principal payment on a debt is due and payable. Also the end of the life of a security.
Maturity Distribution
The breakdown of a portfolio’s assets based on the time frame when the investments will mature.
Median Market Cap
The midpoint of market capitalization (market price multiplied by the number of shares outstanding) of the stocks in a portfolio, where half the stocks have higher market capitalization and half have lower.
Mezzanine Debt
Occurs when a hybrid debt issue is subordinated to another debt issue from the same issuer. Mezzanine debt has embedded equity instruments attached, often known as warrants, which increase the value of the subordinated debt and allow greater flexibility when dealing with bondholders.
Mid-cap
The market capitalization of the stocks of companies with market values between $3 to $10 billion.
Moody’s
Moody’s Investors Service, often referred to as Moody’s, is the bond credit rating business of Moody’s Corporation, representing the company’s traditional line of business and its historical name. Moody’s Investors Service provides international financial research on bonds issued by commercial and government entities. Moody’s, along with Standard & Poor’s and Fitch Group, is considered one of the Big Three credit rating agencies.
Moral Obligation Bond
A revenue bond which, in addition to its primary source of security, possesses a structure whereby an issuer pledges to make up shortfalls in a debt service reserve fund, subject to legislative appropriation. While the issuer does not have a legal obligation to make such a payment, the failure of the issuer to honor the moral pledge would have negative consequences for its creditworthiness.
Municipal Bond
A municipal bond is a debt security issued by a state, municipality or county to finance its capital expenditures, including the construction of highways, bridges or schools.
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NASDAQ
National Association of Securities Dealers Automated Quotations system, which is owned and operated by the National Association of Securities Dealers. NASDAQ is a computerized system that provides brokers and dealers with price quotations for securities traded over-the-counter as well as for many New York Stock Exchange-listed securities.
Net Asset Value Per Share (NAV)
The current dollar value of a single mutual fund share; also known as share price. The fund’s NAV is calculated daily by taking the fund’s total assets, subtracting the fund’s liabilities, and dividing by the number of shares outstanding. The NAV does not include the sales charge. The process of calculating the NAV is called pricing.
Non-rated Bonds
Bonds with issuers that have not received a credit rating from one or more of the major credit rating agencies. A bond may be nonrated for a number of reasons, including simply not wishing to pay the fee to the credit rating agency. yield.
Short-term bonds to pay specified amounts of money, secured by specified sources of future revenues, such as taxes, federal and state aid payments and bond proceeds.
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Offer Price (or Ask; Asking price)
The price at which members of an underwriting syndicate for a new issue will offer securities to investors.
Official Statement
The disclosure document prepared by the issuer that gives in detail security and financial information about the issuer and the bonds or notes.
Optional Redemption
A right of the issuer, at its option, to retire all or part of an issue prior to the stated maturity during a specified period of years, often at a premium.
Original Issue Discount
A bond, issued at a dollar price less than par which qualifies for special treatment under federal tax law. Under that law, the difference between the issue price and par is treated as tax-exempt income rather than a capital gain, if the bonds are held to maturity.
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P/B Ratio
The P/B ratio compares a company’s market capitalization, or market value, to its book value. Specifically, it compares the company’s stock price to its book value per share (BVPS). The market capitalization (company’s value) is its share price multiplied by the number of outstanding shares.
P/E Ratio
The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings (EPS). The price-to-earnings ratio is also sometimes known as the price multiple or the earnings multiple.
Par Value
The nominal value of a bond, share of stock, or a coupon as indicated in writing on the document or specified by charter.
Paying Agent
The entity, usually a designated bank or the office of the treasurer of the issuer, that pays the principal and interest of a bond.
PMP – Prevailing Market Price
Prevailing Market Price is the arithmetic average of the Common Stock VWAP on each of the 20 consecutive trading days ending on and including the trading day immediately preceding the date as of which the PMP price is to be determined
Preferred Stock
The term “stock” refers to ownership or equity in a firm. There are two types of equity – common stock and preferred stock. Preferred stockholders have a higher claim to dividends or asset distribution than common stockholders. The details of each preferred stock depend on the issue.
Preferred Equity
Preferred equity is equity and depends more on the cash flow generated by the underlying project for its return. When preferred equity is being used as a financing tool (i.e. not meant to be a long-term part of the capital stack), the holder of the preferred equity often has the option to “put” the preferred equity back to the owners. At the same time, the owner will have an option to “call” (i.e. repay) the investment on certain terms, usually by providing the holder with a certain investment return. This gives both the owner and the preferred equity investor the ability to exit the investment on terms agreed to between the parties.
Preliminary Offering Statement (Preliminary Official Statement or POS)
A version of the official statement prepared by or for an issuer of municipal securities for potential customers prior to the availability of the final official statement. Under the securities laws, offers for the sale of or acceptance of securities are not made on the basis of the preliminary official statement and a statement to that effect appears on the face of the document generally in red print, which gives the document its nickname, “red herring.”
Premium
The amount by which the price of a bond exceeds its principal amount.
Present Value
The current value of a future payment or stream of payments, given a specified interest rate, also referred to as a discount rate.
Price-to-Earnings (P/E) Ratio
The ratio for valuing a company that measures its current share price relative to its per-share earnings (EPS). The price-to-earnings ratio is also sometimes known as the price multiple or the earnings multiple.
Primary Market
The market for new issues.
Principal
The face amount of a bond, exclusive of accrued interest and payable at maturity (see par value).
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QIB – Qualified Institutional Buyer
An investor is dubbed a qualified institutional buyer (QIB) if they are thought to require less regulatory protection than unsophisticated investors. QIB’s can be a corporation that the SEC’s Rule 501 of Regulation D classifies as an accredited investor, banks, trust funds, pension plans or any entity comprised of sophisticated investors.
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Rating
A rating is an assessment tool assigned by an analyst or rating agency to a stock or bond. The rating assigned indicates the stock or bond’s level of investment opportunity. For a stock, an analyst may assign a buy, hold or sell rating and an explanation of why they recommend this action for the stock. For a bond, a ratings agency will assess the bond’s relative safety based upon the issuing entity’s fundamental financial picture which scrutinizes the issuer’s ability to repay principal and make interest payments.
Recession
A downturn in economic activity on a large scale, such as in the U.S. economy. The Commerce Department defines a recession as two or more quarters of decline in output, as measured by Gross National Product (GNP) or Gross Domestic Product (GDP).
Recovery Rate
The percentage of money recovered from the original bond in the case of an issuer default.
Registered Bond
A bond whose owner is registered with the issuer or its agent. Transfer of ownership can only be accomplished if the bonds are properly endorsed by the registered owner.
Registered Investment Advisor (RIA)
A person or firm who advises high-net-worth individuals on investments and manages their portfolios. RIAs have a fiduciary duty to their clients, which means they have a fundamental obligation to provide investment advice that always acts in their clients’ best interests.
Reinvestment Income
Reinvestment is when income distributions received from an investment are plowed back into that investment instead of receiving cash.
Reinvestment Risk
The risk that interest income or principal repayments will have to be reinvested at lower rates in a declining rate environment.
Risk
The measurable probability that an actual return will be different than expected. There are many types of risk such as market risk, credit risk, interest rate risk, exchange rate, liquidity risk, and political risk.
Risk Tolerance
The degree of variability in investment returns that an investor is willing to withstand in their financial planning. There are many types of risk such as market risk, credit risk, interest rate risk, exchange rate, liquidity risk, and political risk.
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Secondary Market
Market for issues previously offered or sold.
Secured Bond
A bond that is backed by collateral.
Security
A fungible, negotiable financial instrument that holds some type of monetary value. It represents an ownership position in a publicly-traded corporation—via stock—a creditor relationship with a governmental body or a corporation—represented by owning that entity’s bond—or rights to ownership as represented by an option.
Securities and Exchange Commission (SEC)
An independent federal government agency responsible for protecting investors, maintaining fair and orderly functioning of the securities markets, and facilitating capital formation. It was created by Congress in 1934 as the first federal regulator of the securities markets. The SEC promotes full public disclosure, protects investors against fraudulent and manipulative practices in the market, and monitors corporate takeover actions in the United States.
Seed Capital
Seed capital is the initial funding used to begin creating a business or a new product. Obtaining seed capital is the first of four funding stages required for a startup to become an established business.
Senior Debt
Obligations of an issuer for which repayment has contractually been given a priority that is higher than the repayment priority of other debts of the same obligor. This arrangement may arise from either a specific subordination agreement or a public issuance of subordinated debt instruments.
Serial Bond
A serial bond is a bond issue that is structured so that a portion of the outstanding bonds mature at regular intervals until all of the bonds have matured. Because the bonds mature gradually over a period of years, these bonds are used to finance projects that provide a consistent income stream for bond repayment.
Settlement Date
The date for the delivery of bonds and payment of funds agreed to in a transaction.
Sharpe Ratio
The Sharpe ratio was developed by Nobel laureate William F. Sharpe and is used to help investors understand the return of an investment compared to its risk. The ratio is the average return earned in excess of the risk-free rate per unit of volatility or total risk.
Sims HUD Plus®:
Under Sims HUD Plus®, clients can leverage up to 92.5% of the market value of their project with HUD-approved secondary financing.
Sinking Fund
Money set aside by an issuer of bonds on a regular basis, for the specific purpose of redeeming debt. Bonds with such a feature are known as “sinkers.”
SIPC
The Securities Investor Protection Corporation (SIPC) is a nonprofit corporation created by an act of Congress to protect the clients of brokerage firms that are forced into bankruptcy. Members to the SIPC include all brokers and dealers registered under the Securities Exchange Act of 1934, all members of securities exchanges and most NASD members. SIPC coverage protects members in the event the firm fails.
Small-cap
A term used to classify companies with relatively small market capitalization. A company’s market capitalization is the market value of its outstanding shares. The definition of small cap can vary among brokerages, but it is generally a company with a market capitalization of between US$300 million and $2 billion.
Special Tax Bond
A bond secured by a special tax, such as a gasoline tax.
Standards & Poor’s 500
The S&P 500 or Standard & Poor’s 500 Index is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies. The index is widely regarded as the best gauge of large-cap U.S. equities. Other common U.S. stock market benchmarks include the Dow Jones Industrial Average or Dow 30 and the Russell 2000 Index, which represents the small-cap index.
Subordinated Bond
A bond that has a lower priority than another bond’s claim to the same assets.
Subordinate Debt/Loan
Also known as a subordinated debenture is an unsecured loan or bond that ranks below other, more senior loans or securities with respect to claims on assets or earnings.
Swap Rate
The sale of one or more securities in order to purchase one or more different securities with the proceeds from the sale. Bond swaps are usually done to take advantage of changes in market conditions or more favorable investment characteristics. For example, swaps are often done to lengthen or shorten maturities when investors change their outlook for future rates.
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Tax-exempt Income
Exempt income refers to certain types or amounts of income not subject to federal income tax. Some types of income may also be exempt from state income tax. The IRS determines which types of income are exempt from federal income tax as well as the circumstances for each. Congressional action plays a role as well, as what is exempted and the threshold amounts are often tweaked or changed entirely.
Tax Swap
The sale of a security at a loss and the simultaneous purchase of another similar security. By creating a loss, the tax swap reduces the investor’s current tax liability. The tax swap may also serve purposes similar to those of other types of swaps. There are specific Internal Revenue Service regulations governing tax swaps.
Term Bond
A term bond refers to bonds from the same issue with the same maturity dates. In effect, term bonds mature on a specific date in the future and the bond face value must be repaid to the bondholder on that date. The term of the bond is the amount of time between bond issuance and bond maturity.
Total Return
A measure of bond investment return that includes both interest and price change. The total return on investments is generally expressed as an annualized rate, and it assumes reinvestment of all interest back into the investment.
Trade Date
The date upon which a bond is purchased or sold.
Transfer Agent
The party appointed by an issuer to maintain records of bondholders, to cancel and issue certificates, and to address issues arising from lost, destroyed or stolen certificates.
Treasury Inflation-protected Security
Treasury Inflation-protected Security (TIPS) is a Treasury bond that is indexed to an inflationary gauge to protect investors from the decline in the purchasing power of their money.
Trustee
An entity designated by the issuer as the custodian of funds and official representative of bondholders. Trustees are appointed to ensure compliance with the trust indenture and represent bondholders to enforce their contract with the issuers.
Treasury Bill
A short-term U.S. government debt obligation backed by the Treasury Department with a maturity of one year or less. Treasury bills are usually sold in denominations of $1,000. However, some can reach a maximum denomination of $5 million in non-competitive bids. These securities are widely regarded as low-risk and secure investments.
Treasury Bond
A government debt security that earns interest until maturity, at which point the owner is also paid a par amount equal to the principal. Treasury bonds are part of the larger category of government bonds, a type of bond issued by a national government with a commitment to pay period interest payments known as coupon payments as well as the principal upon maturity. Treasury bonds are marketable, fixed-interest U.S. government debt securities with a maturity of more than 10 years. As is true for other government bonds, Treasury bonds make interest payments semiannually, and the income received is only taxed at the federal level. T-bonds are known in the market as primarily risk-free; they are issued by the U.S. government with very little risk of default.
Treasury Note
A treasury note is a marketable U.S. government debt security with a fixed interest rate and a maturity between one and 10 years. Treasury notes are available from the government with either a competitive or noncompetitive bid.
Treasury Security
Securities issued by the U.S. Treasury Department and backed by the U.S. government.
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Unlimited Tax Bond
A bond secured by the pledge of taxes that are not limited by rate or amount.
Unsecured Bond
Unsecured bonds or debentures are bonds that are not backed by some type of collateral. In other words, the bond is only secured by the bond issuer’s good credit standing. There are no building, equipment, vehicles, or other assets backing up the bond.
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Variable Rate Bond
A long-term bond the interest rate of which is adjusted periodically, typically based upon specific market indicators.
Volatility
The propensity of a security’s price to rise or fall sharply.
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Weighted Average Market Cap
Weighted average market capitalization refers to a type of stock market index construction that is based on the market capitalization of the index’s constituent stocks. Large companies would thus account for a greater portion of an index than small-cap stocks. This means the movement of an index would depend on a small set of stocks.
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Yield
Yield refers to the earnings generated and realized on an investment over a particular period of time, and is expressed in terms of percentage based on the invested amount or on the current market value or on the face value of the security. It includes the interest earned or dividends received from holding a particular security.
Yield curve
A line tracing relative yields on a type of bond over a spectrum of maturities ranging from three months to 30 years.
Yield to Call
The yield on a bond calculated by dividing the value all interest payments that will be paid until the call date, plus interest on interest, by the principal amount received on the call date at the call price, taking into consideration whatever gain or loss is realized from the bond at the call date.
Yield to Maturity
The annual percentage yield of a security calculated in a specific manner. The yield-to-maturity is the single discount rate that, when applied to all future interest and principal payments, produces a net present value equal to the purchase price of the security.
Yield to Maturity Distribution
YTM is the discount rate at which the sum of all future cash flows from the bond (coupons and principal) is equal to the current price of the bond. The YTM is often given in terms of Annual Percentage Rate (APR), but more often market convention is followed.
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Zero-coupon Bond
A bond for which no periodic interest payments are made. The investor receives one payment at maturity. The maturity value an investor receives is equal to the principal invested plus interest earned compounded semiannually at the original interest rate to maturity. (See “Discount note.”)
Glossary
Select the first letter of the word from the list above to jump to appropriate section of the glossary.
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Accrued Interest
Interest deemed to be earned on a security but not yet paid to the investor.
Advance Refunding
A financing structure under which new bonds are issued to repay an outstanding bond issue prior to its first call date. Generally, the proceeds of the new issue are invested in government securities, which are placed in escrow. The interest and principal repayments on these securities are then used to repay the old issue, usually on the first call date.
Ask Price
The price at which a seller offers to sell a security (also referred to as offer price).
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BANs (Bond Anticipation Notes)
A short-term interest-bearing security issued in advance of a larger, future bond issue.
Basis Point
One one-hundredth (.01) of a percentage point. For example, eight percent would be equal to 800 basis points.
Bearer Security
A security that is not registered in the name of an owner. As a result, it is presumed to be owned by the bearer or the person who holds it. Bearer securities are freely and easily negotiable, since ownership can be quickly transferred from seller to buyer.
Bid Price
The price at which a buyer offers to purchase a security.
Bond Fund
An investment vehicle which invests in a portfolio of bonds that is professionally managed. Types of bond funds include open-ended mutual funds, closed-end mutual funds, and exchange traded funds.
Bond Swap
The sale of a block of bonds and the purchase of another block of similar market value. Swaps may be made to achieve many goals, including establishing a tax loss, upgrading credit quality, extending or shortening maturity, etc.
Bond Call
The terms of the bond contract, sometimes referred to as “call or prepayment provisions,” giving the issuer the right to redeem or call (an “optional redemption”), or requiring the issuer to redeem or call (a “mandatory redemption”), all (an “in-whole redemption”) or a portion (a “partial redemption”) of an outstanding issue of bonds prior to its stated date of maturity. Bonds may be redeemed at a specified price, usually at par or accreted value in the case of original issue discount bonds or zero coupon bonds (a “par call”) or above par or accreted value (a “premium call”), plus any accrued interest to the redemption date. Issuers may be limited to redeeming bonds on interest payment dates (an “any-interest-date redemption”) or may be permitted to redeem bonds on any date (an “any time or continuous call”).
Bond Put Option
Obligations, also known as “put bonds” or “puttable securities,” that grant the bondholder the right to require the issuer or a specified third party acting as agent for the issuer (e.g., a tender agent) to purchase the bonds, usually at par, at a certain time or times prior to maturity or upon the occurrence of specified events or conditions. The put option or tender option right is typically available to the investor on a periodic (e.g., daily, weekly or monthly) basis. Typically, these securities are floating or variable rate securities, with the put option exercisable on dates on which the floating rate changes. These latter securities are often called “variable rate demand obligations,” or, colloquially, “lower floaters.”
Book-entry
A method of recording and transferring ownership of securities electronically, eliminating the need for physical certificates.
Buy/Sellback
A form of secured, short-term investment in which a security is purchased with a simultaneous agreement to sell it back to the seller at a future date. The purchase and sales agreements are simultaneous but the settlement dates for the transactions are not. The purchase is a cash transaction while the return sale is a forward transaction since it occurs at a future date. A buy/sellback is very similar to a reverse repurchase agreement, except that in a buy/sellback the investor is compensated by the difference between the purchase price and sales price rather than by interest. Unlike a reverse repurchase agreement, a buy/sellback probably does not include a haircut or collateral margin. Furthermore, the buy/sellback may be treated differently in the event of the buyer’s bankruptcy. Every transaction that is a buy/sellback from the buyer/lender’s point of view is, by definition, a sell/buyback from the seller/borrower’s point of view.
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Call
A one-way option of the issuer (not the investor) that allows the issuer to retire bonds by paying investors a stated price, usually a premium above the par value. Many high-yield bonds allow issuers to call bonds after the first five years.
Callable Bonds
Bonds that are redeemable by the issuer prior to the specified maturity date at a specified price at or above par.
Call Premium
The dollar amount over par that an issuer pays to an investor when a bond is called for redemption prior to maturity. Usually stated as a percentage of the principal amount called.
Cap
The maximum interest rate that may be paid on a floating-rate security.
Capitalization Rate
A measure of a corporation’s reliance on long-term debt. Similar to the debt-to-worth ratio but not the same. This ratio is calculated by dividing long-term debt by the sum of long-term debt plus equity.
Cinderella Bonds
A bond initially issued on a taxable basis and that will convert to tax-exempt status upon the occurrence of a specified condition precedent (e.g., volume cap allocation becoming available or certain refundings).
Convertible Bonds
A bond that includes a provision allowing the holder to exchange the bond for a quantity of the issuer’s common stock at some fixed exchange ratio. An otherwise-normal corporate bond that has a fixed maturity date that pays coupon interest and repays principal at maturity. It is issued with an option to exchange the bond for a fixed number of shares of common stock at the option of the bondholder, thereby allowing the convertible bond to share in the growth potential of the underlying common stock. It is senior to stock within the corporate equity structure, although probably junior to other corporate debt. Convertible bonds are often callable.
Coupon
The rate of interest received by the holder of a security. Not necessarily the same as the yield realized by the holder.
Covenant(s)
Contractual obligations set forth in a bond contract. Covenants commonly made in connection with a bond issue may 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 or other indebtedness unless certain tests are met (“additional bonds” or “additional indebtedness” covenant); and not to take actions that would cause tax-exempt interest on the bonds to become taxable or otherwise become arbitrage bonds (“tax covenants”). A covenant whereby a party is affirmatively obligated to undertake a duty in order to protect the interests of bondholders (e.g., to maintain insurance) is referred to as an “affirmative” or “protective covenant.” A covenant whereby the issuer obligates itself to refrain from performing certain actions (e.g., not to sell the project) is referred to as a “negative covenant.”
Credit Rating
A formal evaluation of a company’s financial health and ability to repay debt obligations, conducted by a rating agency such as Standard & Poor’s, Moody’s and Fitch Ratings. The agency’s evaluation is summarized in a rating, such as BB.
Credit Rating Agency
A company that analyzes the credit worthiness of a company or security, and indicates that credit quality by means of a grade, or credit rating.
Current Yield
The ratio of the interest rate payable on a bond to the actual market price of the bond, stated as a percentage. For example, a bond with a current market price of par ($1,000) that pays eight percent ($80) per year in interest would have a current yield of eight percent.
Current Refunding
A financing structure under which old bonds are called or mature within 90 days of the issuance of new refunding bonds.
Current Yield (CY)
A calculation of the annual interest payment from a bond divided by the current market price of the bond.
CUSIP
The Committee on Uniform Security Identification Procedures, which was established under the auspices of the American Bankers Association to develop a uniform method of identifying municipal, U.S. government, and corporate securities. When issued, each bond is assigned a unique CUSIP number consisting of nine alphanumeric characters.
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Dated date (or issue date)
The date of a bond issue from which the bondholder is entitled to receive interest, even though the bonds may actually be delivered at some other date.
Debt Capacity Maximization
“Debt Capacity Maximization” refers to the amount of debt service for the year in which the greatest amount of debt service payments are required and is often used in calculating required reserves and in additional debt tests.
Debt Reserve Pledge
The funds obligated for the payment of debt service and the making of other deposits required by the bond contract.
Debt Service
A term used to refer to the amount of principal and interest payments required by a borrower’s loans or securities issued. Also used as a verb to describe making such payments.
Debt Service Coverage Ratio
A simple comparison of the cash available to make principal and interest payments to the bank or to bond holders with the amount of those required principal and interest payments. Debt service coverage is expressed as a ratio with the annual net income divided by the annual debt service requirement.
Debt Service Reserve Fund
A fund in which funds are placed to be applied 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 at the time of issuance, may be funded over time through the accumulation of pledged revenues, may be funded with a surety or other type of guaranty policy (described below), or may be funded only upon the occurrence of a specified event (e.g., upon failure to comply with a covenant in the bond contract) (a “springing reserve”). Issuers may sometimes authorize the provision of a surety bond or letter of credit to satisfy the debt service reserve fund requirement in lieu of cash. If the debt service reserve fund is used in whole or part to pay debt service, the issuer usually is required to replenish the fund from the first available revenues, or in periodic repayments over a specified period of time.
Debt Tranches
Tranches in a multi-class security that have seniority ranking, for repayment, ahead of equity trances. See collateralized debt obligation (CDO), equity tranche and waterfall.
Derivatives
Financial instruments whose value depends upon the values of underlying assets, interest rates, currency exchange rates, or indexes. Various authorities define derivative instruments in broad, inclusive terms or narrow, exclusive terms. It is a common misconception that all derivatives are high-risk, speculative instruments.
Default
A borrower’s failure to make timely payments of interest and principal when due or to meet other requirements related to the bonds, such as maintenance of collateral or financial covenants.
Direct Loans
A loan to a municipal issuer from a banking institution or another lender. The obligations may constitute municipal securities.
Discount
The amount by which the par value of a security exceeds its purchase price. For example, a $1,000 par amount bond which is currently valued at $980 would be said to be trading at a two percent discount.
Discount Note
Short-term obligations issued at a discount from face value, with maturities ranging from one to 360 days. Discount notes have no periodic interest payments; the investor receives the note’s face value at maturity. For example, a one year, $1,000 face value discount note purchased at issue at a price of $950, would yield $50 or 5.26 percent ($50/$950).
Discount Rate
The interest rate the Federal Reserve charges on loans to member banks.
Double Exemption
Bonds that are exempt from both state and federal income taxes.
Draw-down Bank Bonds
A loan to a municipal issuer from a banking institution or another lender using estimated expenditures to be made from bond proceeds and other available funds on a construction project that show periodic payments or “Draws” to the contractor at progressive stages of completion of the project.
Duration
The weighted maturity of a bond’s cash flows, used in the estimation of its price sensitivity for a given change in interest rates.
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Earn-out
An earn-out is a contractual provision stating that the seller of a business is to obtain additional compensation in the future if the business achieves certain financial goals, which are usually stated as a percentage of gross sales or earnings.
EBITDA
Earnings before interest, tax, depreciation and amortization (EBITDA) is a measure of a company’s operating performance. Essentially, it’s a way to evaluate a company’s performance without having to factor in financing decisions, accounting decisions or tax environments.
Entrance Fee Redemption Bonds
A process by which the issuer repays to the bondholder of an outstanding security the principal amount thereof (plus, in certain cases, an additional amount representing a redemption premium) and any accrued interest on the security to the date of redemption using entrance fees for the repayment. Although the term is normally used in connection with the issuer exercising a right under the bond contract to repay the security prior to its scheduled maturity date (often referred to as a “call”), the payment of a bond at maturity is also a redemption. Redemption provisions in the bond contract for a security may provide the issuer the right to retire the debt fully or partially before the scheduled maturity date.
Extraordinary Redemption
This redemption is different from optional redemption or mandatory redemption in that it occurs under an unusual circumstance such as destruction of the facility financed.
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Face Amount
The par value (i.e., principal or maturity value) of a security appearing on the face of the instrument.
Federal Funds Rate
The interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight. The target federal funds rate is set by the Federal Reserve Board’s Federal Open Market Committee and is a principal tool of monetary policy.
FHA (Federal Housing Administration)
An agency within the Department of Housing and Urban Development (HUD) that provides insurance for single-family and multifamily residential mortgages.
FHA Loans
An FHA insured loan is a US Federal Housing Administration mortgage insurance backed mortgage loan which is provided by an FHA-approved lender.
Fixed Rate
A fixed interest rate loan is a loan where the interest rate doesn’t fluctuate during the fixed rate period of the loan. This allows the borrower to accurately predict their future payments. Variable rate loans, by contrast, are anchored to the prevailing discount rate.
Floating Rate
A floating interest rate, also known as a variable or adjustable rate, refers to any type of debt instrument, such as a loan, bond, mortgage, or credit, that does not have a fixed rate of interest over the life of the instrument. Floating interest rates typically change based on a reference rate.
Floating-rate Bond
A bond whose interest rate is adjusted periodically according to a predetermined formula; it is usually linked to an interest rate index such as LIBOR.
Floor
The lower limit for the interest rate on a floating rate bond.
Future Value
The value of an asset at a specified date in the future, calculated using a specified rate of return.
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(HUD) Department of Housing and Urban Development
A department of the U.S. government that promotes private and public housing. FHA and GNMA are agencies within HUD.
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Investment-grade Bond (or high grade bond)
Bonds rated Baa3 or BBB- or above, whose higher credit ratings indicate a lower risk of default. These bonds tend to issue at lower yields than less creditworthy bonds.
Interest
The amount of compensation charged by an investor for the use of assets, generally expressed as a percentage rate of par.
Issuer
The entity obligated to pay principal and interest on a bond it issues.
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Legal opinion
A letter from a law firm concerning the validity of a municipal bond with respect to statutory authority, constitutionality, procedural conformity and usually the exemption of interest from federal income taxes. The legal opinion is usually rendered by a law firm recognized as specializing in public borrowings, often referred to as “bond counsel.”
LIBOR (London Interbank Offered Rate)
The rate banks charge each other for short-term eurodollar loans. LIBOR is frequently used as the base for resetting rates on floating-rate securities.
Limited Tax Bond
A bond secured by a pledge of a tax or category of taxes limited as to rate or amount.
Liquidity or Marketability
A measure of the relative ease and speed with which a security can be purchased or sold in a secondary market.
Loan-to-Value Ratio
The name used to refer to a credit analysis ratio that measures collateral coverage. To calculate the LTV ratio, the total amount of the borrower’s obligations to the bank is divided by the total calculated value for the collateral. For example, if the total collateral value is estimated to be $1,000,000 and the total amount of the borrower’s obligations to the bank is $800,000, then the LTV ratio is 0.80 or 80 percent.
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Marketability
A measure of the ease with which a security can be sold.
Master Trust Indenture
Master Trust Indentures or “MTIs” have historically been implemented by hospitals and health systems as a way to pool the credit of multiple entities (the members of the “obligated group”) and create a “master trust” consisting of revenues or other assets pledged by the obligated group members under the MTI.
Maturity
The date when the principal amount of a security is due to be repaid. Also the end of the life of a security.
Moral Obligation Bond
A revenue bond which, in addition to its primary source of security, possesses a structure whereby an issuer pledges to make up shortfalls in a debt service reserve fund, subject to legislative appropriation. While the issuer does not have a legal obligation to make such a payment, the failure of the issuer to honor the moral pledge would have negative consequences for its creditworthiness.
Municipal Bond
Municipal bonds are debt obligations issued by states, cities, counties and other governmental entities, which use the money to build schools, highways, hospitals, sewer systems and many other projects for the public good.
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Notes
Short-term bonds to pay specified amounts of money, secured by specified sources of future revenues, such as taxes, federal and state aid payments and bond proceeds.
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Offer Price (or Ask; Asking price)
The price at which members of an underwriting syndicate for a new issue will offer securities to investors.
Official Statement
The disclosure document prepared by the issuer that gives in detail security and financial information about the issuer and the bonds or notes.
Optional Redemption
A right of the issuer, at its option, to retire all or part of an issue prior to the stated maturity during a specified period of years, often at a premium.
Original Issue Discount
A bond, issued at a dollar price less than par which qualifies for special treatment under federal tax law. Under that law, the difference between the issue price and par is treated as tax-exempt income rather than a capital gain, if the bonds are held to maturity.
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Par Value
The principal amount of a bond due at maturity.
Paying Agent
The entity, usually a designated bank or the office of the treasurer of the issuer, that pays the principal and interest of a bond.
Preferred Equity
Preferred equity is equity and depends more on the cash flow generated by the underlying project for its return. When preferred equity is being used as a financing tool (i.e. not meant to be a long-term part of the capital stack), the holder of the preferred equity often has the option to “put” the preferred equity back to the owners. At the same time, the owner will have an option to “call” (i.e. repay) the investment on certain terms, usually by providing the holder with a certain investment return. This gives both the owner and the preferred equity investor the ability to exit the investment on terms agreed to between the parties.
Premium
The amount by which the price of a bond exceeds its principal amount.
Present Value
The current value of a future payment or stream of payments, given a specified interest rate, also referred to as a discount rate.
Primary Market
The market for new issues.
Principal
The face amount of a bond, exclusive of accrued interest and payable at maturity (see par value).
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Ratings
Designations used by credit rating agencies to give relative indications as to opinions of credit quality.
Recession
A downturn in economic activity on a large scale, such as in the U.S. economy. The Commerce Department defines a recession as two or more quarters of decline in output, as measured by Gross National Product (GNP) or Gross Domestic Product (GDP).
Recovery Rate
The percentage of money recovered from the original bond in the case of an issuer default.
Registered Bond
A bond whose owner is registered with the issuer or its agent. Transfer of ownership can only be accomplished if the bonds are properly endorsed by the registered owner.
Reinvestment Risk
The risk that interest income or principal repayments will have to be reinvested at lower rates in a declining rate environment.
Risk
The measurable probability that an actual return will be different than expected. There are many types of risk such as market risk, credit risk, interest rate risk, exchange rate, liquidity risk, and political risk.
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Secondary Market
Market for issues previously offered or sold.
Secured Bond
A bond that is backed by collateral.
Security
Collateral pledged by a bond issuer (debtor) to an investor (lender) to secure repayment of the loan.
Seed Capital
Seed money, sometimes known as seed funding or seed capital, is a form of securities offering in which an investor invests capital in a startup company in exchange for an equity stake in the company.
Senior Debt
Obligations of an issuer for which repayment has contractually been given a priority that is higher than the repayment priority of other debts of the same obligor. This arrangement may arise from either a specific subordination agreement or a public issuance of subordinated debt instruments.
Settlement Date
The date for the delivery of bonds and payment of funds agreed to in a transaction.
Sims HUD Plus®:
Under Sims HUD Plus®, clients can leverage up to 92.5% of the market value of their project with HUD-approved secondary financing.
Sinking Fund
Money set aside by an issuer of bonds on a regular basis, for the specific purpose of redeeming debt. Bonds with such a feature are known as “sinkers.”
Special Tax Bond
A bond secured by a special tax, such as a gasoline tax.
Subordinated Bond
A bond that has a lower priority than another bond’s claim to the same assets.
Subordinate Debt/Loan
Also known as a subordinated debenture is an unsecured loan or bond that ranks below other, more senior loans or securities with respect to claims on assets or earnings.
Swap Rate
The sale of one or more securities in order to purchase one or more different securities with the proceeds from the sale. Bond swaps are usually done to take advantage of changes in market conditions or more favorable investment characteristics. For example, swaps are often done to lengthen or shorten maturities when investors change their outlook for future rates.
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Tax Swap
The sale of a security at a loss and the simultaneous purchase of another similar security. By creating a loss, the tax swap reduces the investor’s current tax liability. The tax swap may also serve purposes similar to those of other types of swaps. There are specific Internal Revenue Service regulations governing tax swaps.
Total Return
A measure of bond investment return that includes both interest and price change. The total return on investments is generally expressed as an annualized rate, and it assumes reinvestment of all interest back into the investment.
Trade Date
The date upon which a bond is purchased or sold.
Transfer Agent
The party appointed by an issuer to maintain records of bondholders, to cancel and issue certificates, and to address issues arising from lost, destroyed or stolen certificates.
Trustee
An entity designated by the issuer as the custodian of funds and official representative of bondholders. Trustees are appointed to ensure compliance with the trust indenture and represent bondholders to enforce their contract with the issuers.
- U -
Unlimited Tax Bond
A bond secured by the pledge of taxes that are not limited by rate or amount.
Unsecured Bond
A bond that is not secured by collateral.
- V -
Variable Rate Bond
A long-term bond the interest rate of which is adjusted periodically, typically based upon specific market indicators.
Volatility
The propensity of a security’s price to rise or fall sharply.
- Z -
Zero-coupon Bond
A bond for which no periodic interest payments are made. The investor receives one payment at maturity. The maturity value an investor receives is equal to the principal invested plus interest earned compounded semiannually at the original interest rate to maturity. (See “Discount note.”)