Investment Terms
Active Investment Management
An investment approach that seeks to exceed the average returns of the financial markets. Active managers rely on research, market forecasts, and their own investment models and experience in selecting whether to buy or sell securities.
Agency Bonds
Debt (bonds) issued by federal agencies for various uses, including home mortgages. Although U.S. agency bonds are not a direct obligation of the U.S. Treasury, they are often AAA-quality rated.
Asset-Backed Securities
Public or private securities issued to finance a portfolio of receivables (usually consumer loans).
Asset Class
Various types of investments that are classified together based on their common characteristics, e.g., U.S. stocks, international stocks, taxable bonds, or cash.
Average Coupon
The average annual interest payment on bonds within a portfolio.
Average Maturity
The average length of time until the principal of the bonds within a portfolio is scheduled to be repaid to investors.
Banker’s Acceptance
A money market asset consisting of an order to a bank by a customer to pay a sum of money at a future date.
Beta
A statistical measure of the price volatility of a security in relation to the entire stock market’s volatility.
Bond (Fixed Income/Debt Instrument)
A certificate of debt issued by a corporation or a government guaranteeing payment of the original investment plus interest to the purchaser by a specified date.
Call Provision
A provision that gives an issuer the right to retire debt (a bond), fully or partially, before the scheduled maturity dates. A call provision is detrimental to investors who could lose a high-coupon bond when interest rates decline.
Capital Gains (Capital Losses)
The difference in the purchase price of a security versus the sale price of a security. If a security is sold at a higher price than it was purchased, the owner nets a capital gain; thus the investment was profitable. If a security is sold at a lower price than it was purchased, the owner nets a capital loss; thus the investment was not profitable.
Capitalization
Capitalization indicates the size of a company. A stock’s capitalization is the value of its shares outstanding in the market multiplied by the current price of the stock. General Electric and Coca-Cola are examples of large capitalization companies.
Commercial Paper
Short-term unsecured debt issued by large corporations (typically ranging in maturity from 1 to 270 days) that are sold at a discount at time of redemption. Prime quality commercial paper is rated A1/P1 or better.
Common Stock (Equity Security)
A security representing ownership rights in a public corporation. Stockholders are entitled to share in the company’s profits, some of which may be paid out as dividends. Stockholders are also effected by the price movements of the stock.
Corporate Bond
A direct obligation of a business or organization that has promised timely payment of both interest and principal to the investor. Maturities are from one to 100 years, but most are 10 years or less.
Correlation
In finance, correlation measures how closely different securities move in relation to each other. For example, if the values of a stock and a bond moves in the same direction, they are said to have a close correlation. The goal for an index fund is to be closely correlated to the benchmark that the fund is imitating.
Coupon Rate
A bond’s coupon is the periodic interest payment made to owners during the life of the bond.
Derivative
A financial contract whose value/return is linked to (”derived” from) an underlying asset, such as a group of stocks or bonds (e.g., an index). Futures contracts and options are examples of derivatives.
Discount Rate
The interest rate used in determining the present value of a security based on what the value is expected to be in the future.
Dividend
Payment to a shareholder of income generated by a fund’s securities. Dividends for bank collective funds are credited and reinvested into the fund for the benefit of all participants.
Duration
Duration reflects a bond’s price sensitivity to changes in interest rates. It represents the average time (in years) necessary to receive the present value of all future payments (coupon plus principal repayment).
Earnings Forecast
Analysts’ estimates of a stock’s future earnings.
Earnings Predictability
The extent that a stock’s actual earnings match the consensus estimate of those earnings.
Equilibrium
The normal relationship between asset classes.
Financial Futures
See Derivative.
Index
An unmanaged group of securities whose overall performance is used as a standard to measure investment performance of a managed group of securities typically within the same asset class. Often referred to as a“benchmark” for comparison purposes.
Index Fund
A pooled fund whose portfolio seeks to match that of a broad-based index such as Standard & Poor’s® and whose performance therefore attempts to mirror the market as a whole.
Investment Advisor
An organization that manages day-to-day decisions (buy or sell transactions) for the investments in a collective fund based on the fund’s objectives.
Investment-Grade Bond
A bond rated BBB or above by Moody’s rating service or rated Baa or above by Standard & Poor’s rating service. A bond rating considers default risk, liquidity, basic characteristics of the fixed income instrument, and solvency of the issuer.
Investment Return (Total Return)
A percentage change, over a specified period of time, in the unit value of a bank collective fund, takinginto account all fund transactions, including contributions to and withdrawals from the fund, dividend reinvestment, and realized capital gains, as well as appreciation of the underlying securities. Usually expressed as a percentage.
Investment Style
Strategies of investing in securities that have a specific approach, such as value or growth investing.
Liquidity
The speed and ease with which an asset can be converted to cash. For example, normally a large company’s stock is more liquid than a piece of real estate.
Money Market Instruments
Short-term, liquid investments (usually with a maturity of 13 months or less), which may include U.S. Treasury bills, bank certificates of deposit, repurchase agreements, commercial paper, and banker’s acceptances.
Mortgage-Backed Security
A type of fixed income security (bond) backed by a mortgage on real estate.
Non-convertible Bond
A corporate bond that will retain its character as a fixed income instrument. Convertible bonds have an option allowing the bondholder to exchange the bond for a specified number of shares of common stock in the corporation.
Optimization
Determining the ideal securities or asset classes in which to invest to provide the highest return with the lowest risk.
Passive Investment Management (Indexing)
A low-cost investment strategy typically designed to replicate the performance and characteristics of a specific stock or bond market index. Also called “indexing.”
Payout Ratio
The rate at which an investment pays income relative to the actual earnings.
Price/Book Ratio
The current stock price divided by the corporation’s book value per share.
Price/Earnings Ratio
The current price of a stock divided by its earnings per share.
Principal (Initial Investment)
Fixed Income Investment: The amount of money paid by an investor to purchase a bond. Upon the bond’s maturity the original amount paid (the principal) for the bond is returned to the investor. Equity Investment: The amount of money paid to purchase a stock. If the value of the stock increases, the investor keeps his or her principal, and the investment appreciates in value. If the value of the stock decreases, the investor loses principal in the investment.
Quantitative
An approach to data analysis that uses advanced econometric and mathematical valuation models.
Rating
A classification of a bond made by an independent rating agency. The classification reflects the creditworthiness, or ability to pay, of the bond issuer. AAA is the highest rating a bond can receive.
REIT (Real Estate Investment Trust)
REITs invest in real estate and issue shares for investors to purchase.
Replication
Investment approaches, such as indexing, that try to duplicate the performance or characteristics of a particular group of securities.
Repurchase Agreement
A contract in which a financial institution sells securities and agrees to repurchase the securities on a specific date (normally the next business day) and at a specific price.
Reset Rate Date
The date on which a bond’s coupon rate is redefined (reset) based on a predetermined benchmark. For example, a bond may be issued with a reset rate date of every six months at a rate equal to the yield on a six-month Treasury security. Thus, every six months, the bond’s coupon rate would be reset to equal that of the six-month Treasury security.
Risk Factor Model
A computer model that evaluates and analyzes the characteristics of securities to determine how risky they are as compared with other securities.
Risk Premium
The compensation (measured in terms of total return) for the risk taken in an investment.
Securities
Common stocks, bonds, money market instruments, and participating units in investment vehicles, such as a bank collective fund or a mutual fund.
Settlement Date
The day on which a security transaction is completed (i.e., proceeds from sales are released). For example, the settlement date for the Daily Liquidity Collective Funds is one day following the purchase or redemption of units.
Short-Term Corporate
A corporate bond with a final maturity (or average life) of less than five years. Typically, bank and finance bonds have shorter maturities, and industrial and utility bonds have longer maturities.
Stock
See Common Stock.
Tactical Asset Allocation (TAA)
An approach that allows active departures from the normal asset mix according to specified objective and relative measures of attractiveness.
Total Return
See Investment Return.
Tracking Error
The difference between the total return of an index (benchmark) and a passively managed index fund.
Treasury
A negotiable debt obligation (bond) of the U.S. government secured by its full faith and credit and issued at various schedules and maturities. The income from U.S. securities is exempt from state and local, but not federal, taxes.
Turnover
Buying and selling of securities in a portfolio.
Unit Value
A proportionate undivided interest in a collective fund that shares the income, profits, losses, and expenses of the fund on a pro rata basis.
Valuation
The appraisal of an asset/security. Valuation is key when one is considering whether to invest in a particular security, as the investor must determine whether the value of the asset/security is worth the price paid for it.
Volatility
Fluctuations in the price of a security. The greater the volatility, the greater the difference between the high and low prices of the fund or security. Often referred to as a measurement of risk. An investor who can tolerate wide fluctuations in the value of his or her investment is said to have a high risk/volatility tolerance. Stocks are typically more volatile (risky) than bonds; stock prices tend to fluctuate more than bond prices.
Yield (Dividend: Stocks)
The current annualized dividend paid on a share of common stock, expressed as a percentage of the current market price of the common stock. It is the return on an investor’s capital investment.
Yield (Interest: Bonds)
In the bond market, there are many ways to determine/describe the investment return on a bond, such as current yield, yield to call, yield to maturity, and yield to worst. See the definitions of each below.
Yield to Call
The return on a bond assuming the bond will be redeemed by the issuer at the first call date. See Call Provision for details on a callable bond.
Yield (Current)
The ratio of a bond’s coupon to its price.
Yield to Maturity
The return earned on a fixed income security based on the current market price and cash flows to the maturity date. (Yield to maturity provides a more accurate description of a bond’s investment return than current yield.)
Yield to Worst
The lower of the yield to call and yield to maturity.