Accrued Interest: The amount of interest due the seller, from the buyer, upon settlement of a bond trade. Also: Prorated interest due since the last interest payment date.
Amortization: The reduction of the value of an asset shown by prorating its cost over a period of years.
Agent: The role of a broker-dealer firm when it acts as an intermediary between two customers.
Asset Allocation: 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.
Balance Sheet: A condensed statement showing the nature and amount of a company's assets, liabilities, and capital on a given date.
Basis Point: One-hundredth of one percent. For example, a Treasury bill yielding 7.17 percent that changes in price to a yield of 7.10 percent is said to have declined seven basis points.
Bond: A debt investment in which an investor loans money to an entity for a defined period at a fixed interest rate. Bonds are used by companies and local, state, U.S. and foreign governments to finance a variety of projects and activities.
Book Value: The value at which an asset is carried on a balance sheet. Regarding investments, book value refers to the initial outlay at the time of purchase.
Call Protection: A term used to describe a bond without a call feature or a bond with a call feature that cannot be activated for a period.
Call Provision: A provision on a bond or other fixed-income instrument that allows the original user to repurchase and retire the bonds. If a call provision is in place, it typically will come with a time within which the bond can be called. A specific price bondholder will be paid and any accrued interest defined. Callable bonds will pay a higher yield than comparable non-callable bonds.
Capital Gain (Loss): The difference between an asset's purchase price and selling price including any transaction costs. This can also be stated as the profit (or loss) resulting from the sale of a security, adjusted for commissions.
Capital Markets: The markets in which corporate securities (equity and debt) are traded, as opposed to money markets in which short-term debt instruments are traded.
Cash Flow: Reported net income plus amounts charged off for depreciation, depletion, amortization, and other non-cash expenses.
Certificate of Deposit (CD): A negotiable money market instrument issued by commercial banks against money deposited with them for a specified period. CDs vary in size according to the amount of the deposit and the maturity period, and they may be redeemed before maturity only by sale in a secondary market.
Collateralized Mortgage Obligation (CMO): A pooled mortgage loan that is identified by issuer. CMOs are not assigned by pool numbers, but rather by a series designator, which differentiates each issue and the individual classes within the series. Each class (tranch) has a different coupon, maturity, and price.
Cost of Funds: The annualized ratio of dividend and interest expense divided by the average balance of total assets.
Coupon: The percentage of interest to be paid on a bond in the course of a year. The interest is usually payable semi-annually, though it can also be payable monthly, quarterly, and annually.
Credit Risk: The degree of probability that a borrower will default or not repay the principal loan balance. Credit risk is closely tied to the potential return of an investment. In other words, yields on bonds correlate strongly to their perceived credit risk.
Current Yield: The annual dollar amount of interest paid by a bond divided by its market price. Current yield represents the return an investor would expect if he or she purchased the bond and held it for a year.
Discount: A term used to describe debt instruments trading at a price below the par value. The discount equals the difference between the price paid for the security and the security's par value.
Diversification: Investing in a variety of investments to reduce risk.
Duration: A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. Duration is expressed as a number of years. Rising interest rates mean falling bond prices, while declining interest rates mean rising bond prices.
Effective Duration: A duration calculation for bonds with embedded options. Effective duration takes into account that expected cash flows will fluctuate as interest rates change. The greater the effective duration, the greater the risk.
Embedded Option: An asset or liability characteristic (such as coupon rate, coupon-rate formula, final maturity, or weighted-average life) that can change during the term of the asset or liability. Embedded options include call features, coupon-rate caps/floors, and prepayment features. All mortgage-backed securities have embedded options.
Face Value (Face): The redemption value of a bond unless that value is otherwise specified by the issuer. Also referred to as par value.
Fair Value: The price at which an investment could be either bought or sold in a normal arms-length transaction.
Federal Funds Rate: The interest rate at which a depository institution lends immediately available funds (balances at the Federal Reserve) to another depository institution overnight. The Federal Open Market Committee sets a target for this rate, but the actual rate itself is determined by the open market.
Fiduciary: A person or institution to which property is entrusted for the benefit of another.
Financial Industry Regulatory Authority (FINRA): An association of broker-dealers in over-the-counter (OTC) securities organized on a non-profit, non-stock-issuing basis. Its general aim is to protect investors in the OTC market. OTC securities are not traded on an exchange.
Gap: A measure of the mismatch between the amount of assets and the amount of liabilities that re-price or mature within a defined time.
Gap to Total Assets Ratio: The ratio of interest earning assets that re-price or mature within the next six months minus interest-bearing funds that re-price or mature within the next six months divided by total assets.
Gross Spread: Annualized net interest income divided by the average balance of total assets or asset yield minus cost of funds.
Implied Equity Duration: The average change in a credit union's fair value (expressed as a percentage of equity capital) per 100 basis point shift in market interest rates over a specific range of rate changes (e.g., +/-300 basis points).
Income Simulation: The projection of net interest income and net income under various interest rate scenarios to determine the impact on earnings and capital.
Interest: Regular payments constituting a charge for borrowing money — the "cost" of money.
Interest Income: Income from earning assets (loans and investments).
Interest Rate Risk: The risk that changes in market rates will adversely affect a credit union's earnings and capital.
Liquidity: The degree to which an asset or security can be bought or sold in the market without affecting the asset's price.
Liquidity Risk: The risk stemming from the lack of marketability of an investment that cannot be bought or sold quickly enough to prevent or minimize a loss.
Market Value: The price at which a security is trading and could be purchased or sold.
Maturity Date: The date on which a loan, bond, or debenture comes due; both principal and any accrued interest due must be paid.
Maturity Value: The amount an investor receives when a security is redeemed at maturity, not including any periodic interest payments. This value usually equals the par value, although on zero coupon, compound interest and multiplier bonds, the principal amount of the security at issuance plus the accumulated investment return on the security is included.
Mortgage-Backed Security (MBS): Type of asset-backed security that is secured by a mortgage or collection of mortgages.
Net Economic Value: The fair value of assets minus the fair value of liabilities.
Net Income: Income after deducting all expenses from all revenues. Also called net earnings.
Net Interest Income: The interest from loans and investments minus interest and dividend expenses.
Note: A debenture generally with a maturity of one to five years.
New Issue: A newly issued bond will be considered a primary market trade when the bonds are first purchased by investors directly from the underwriting investment bank. After that, any bonds traded will be on the secondary market, between investors. In the primary market, prices are often set beforehand, whereas in the secondary market, only basic forces like supply and demand determine the price of the security.
OAS (Option Adjusted Spread): This is a measurement tool for evaluating price differences between similar products with different embedded options. For example, a comparison may be made between a bond with a different call structure and a bond without any call. A larger OAS implies a great return for greater risks.
Option-Free Investment: A bond that has no call features.
Par Value: The redemption value of a bond unless that value is otherwise specified by the issuer. Bonds generally have a par value of $1,000. Also referred to as face value.
Portfolio: Holdings of securities by an individual or institution.
Premium: If a bond's price is higher than its par value, it is selling at a premium. This occurs because the interest rate of the bond is higher than the prevailing rates in the market, making the premium bond worth more than a bond paying a lower rate. For example, if a bond with a five percent coupon is selling at par (i.e. $1,000), it would be worth less than the bond paying seven percent. Therefore, the bond paying seven percent would have to be priced higher than par to equalize the attractiveness of the two bonds.
Present Value: The current worth of a future sum of money or stream of cash flows given a specified rate of return.
Prime Rate: The interest rate charged by a bank on loans made to its most creditworthy customers.
Principal: The role of a broker-dealer firm when it buys and sells for its own account. In a typical transaction, it buys from a market maker and sells to a customer at a fair and reasonable markup. If it buys from a customer and sells to the market maker at a higher price, the trade is called a markdown.
Principal Balance: The amount of a debt investment minus the interest. For a mortgage-backed security, it is the amortized value of the security multiplied by the price of the trade.
Prospectus: A document that contains material information for an impending offer of securities (containing most of the information included in the registration statement) and that is used for solicitation purposes by the issuer and underwriters.
Safekeeping: Financial institutions are required to have an outside specialist maintain securities. The safekeeping process involves an agent validating receipt and payment of the securities, interest received, and credit made from investor's account.
Secondary Market: A newly issued bond will be considered a primary market trade when the bonds are first purchased by investors directly from the underwriting investment bank. After that, any bonds traded will be on the secondary market, between investors. In the primary market, prices are often set beforehand, whereas in the secondary market only basic forces like supply and demand determine the price of the security.
Securities and Exchange Commission (SEC): A government agency responsible for the supervision and regulation of the securities industry.
Securities Investor Protection Corporation (SIPC): Formed by the Securities Investors Protection Act of 1970, a government-sponsored, private, nonprofit corporation that guarantees repayment of money and securities to customers in amounts up to $500,000 per customer in the event of a broker-dealer bankruptcy. SIPC covers up to a maximum of $500,000, of which only $100,000 may be cash.
Security: A transferable instrument providing evidence of ownership or creditorship, such as a note, stock or bond, evidence of debt, interest or participation in a profit-sharing agreement, investment contract, voting trust certificate, fractional undivided interest in oil, gas, or other mineral rights, or any warrant to subscribe to, or purchase, any of the foregoing or other similar instruments.
Security Ratings: Ratings set by rating services, such as Moody's, Standard & Poor's, or Fitch, denoting evaluations of the investment and credit risk attached to securities.
Settlement (Delivery) Date: The day on which certificates or payments involved in a transaction are due at the purchaser's office.
Suitability: The appropriateness of a strategy or transaction, in light of an investor's financial means and investment objectives.
Trade Date: The date a trade was entered into, as opposed to settlement date.
Treasury Bill: A federal bearer obligation issued in denominations of $10,000 to $1 million with a maturity date usually of three months to one year. It is fully marketable at a discount from face value (which determines the interest rate).
Treasury Bond: A federal registered or bearer obligation issued in denominations of $500 to $1 million with maturities ranging from 10 to 35 years, carrying a fixed interest rate and issued, quoted and traded as a percentage of its face value.
Treasury Note: A federal registered or bearer obligation issued in denominations of $1,000 to $500 million for maturities of one to 10 years, carrying a fixed rate of interest. These notes are issued, quoted, and traded at a percentage of their face value.
Variable Rate: Interest rate on a security that is subject to change, commonly in connection with the rates paid on selected issues of Treasury certificates. Also called floating rate.
Yield (Rate of Return): The percentage return on an investor's money in terms of current prices. It is the annual dividend/interest per share or bond, divided by the current market price of that security.
Yield Curve: Graph depicting the relation of interest rates to time: time is plotted on the x-axis (horizontal), and yields on the y-axis (vertical). The curve shows whether short-term interest rates are higher or lower than long-term rates. A positive yield curve results if short-term rates are lower, and a negative yield curve results if short-term rates are higher. A flat yield curve results if long- and short-term rates do not differ greatly. Generally, the yield curve is positive or upward sloping as investors are compensated for taking on more risk associated with longer term maturities.
Yield to call: The yield of a bond or note if bought and held until the call date. This yield is valid only if the security is called prior to maturity. The calculation of yield to call is based on the coupon rate, the length of time to the call date and the market price.
Yield to Maturity (YTM): The rate of return anticipated on a bond if it is held until the maturity date. YTM is considered a long-bond yield expressed as an annual rate. The calculation of YTM takes into account the current market price, par value, coupon interest rate, and time to maturity. It is also assumed that all coupons are reinvested at the same rate.
To put this service to work for your credit union, email an investment professional at
brokerage@catalystcorp.org or call 800.301.6196.
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