Glossary
A
-
The current value of a zero-coupon municipal bond, considering interest that has been accumulating and automatically reinvested in the bond.
-
Interest deemed to be earned on a security, but not yet paid to the investor.
-
A CMO tranche that is currently paying principal payments to investors.
-
The AMT is a secondary income tax system, which has its own set of rates and rules, separate from regular income tax. Taxpayers are required to determine their tax liability under both the regular income tax and the AMT and to pay whichever is greater. Under the AMT certain deductions and exemptions are disallowed, including the exemption for interest on private activity municipal bonds.
-
Liquidation of a debt through installment payments.
-
The price at which a seller is willing to sell a security (also known as offer price).
-
The average length of time that each principal dollar is expected to be outstanding on a mortgage security, based on certain assumptions about prepayment speeds.
↑ Back to top
B
-
One one-hundredth (.01) of a percentage point Yield differences are often quoted in basis points (bps).
-
The Tax Reform Act of 1982 ended the issuance of new bearer bonds in the United States. These bonds had no name printed on them, and had coupons attached. Anonymous and highly negotiable, bearer bonds were virtually equivalent to cash.
-
One who benefits from owning a security, even if the security's title of ownership is in the name of a broker or bank.
-
The price at which a buyer is willing to purchase a security.
-
A debt security in which the issuer pays to the investor the principal amount plus interest due on a specific date.
-
An adjustment to a CMO yield that reflects its Greater present value, created because CMOs pay monthly or quarterly interest unlike most types of bonds, which pay interest semiannually.
-
A professionally managed investment vehicle, which invests primarily in bonds. Types of bond funds include open-ended mutual funds, closed-end mutual funds, and exchange traded funds.
-
Specialized insurance firms serving the fixed-income market that guarantee the timely payment of principal and interest on bonds they insure in exchange for a fee.
-
A method of recording and transferring ownership of securities electronically, eliminating the need for physical certificates.
-
A bond that pays regular interest, but that does not repay principal until maturity (also known as bullet maturity).
↑ Back to top
C
-
A multiclass bond backed by a pool of mortgage pass-through securities or mortgage loans. See REMIC.
-
A series of indexes of various maturities (one, three, five, seven, or 10 years) published by the Federal Reserve Board and based on the average yield of a range of Treasury securities adjusted to a constant maturity corresponding to that of the index.
-
A bank index reflecting the weighted average interest rate paid by savings institutions on their sources of funds. There are national and regional COFI indexes.
-
Also known as conditional prepayment rate. The percentage of outstanding mortgage loan principal that prepays in one year, based on an annualized Single Monthly Mortality (SMM), which reflects the outstanding mortgage loan principal that prepays in one month.
-
CUSIP numbers are unique nine-character alphanumeric identifiers assigned to each series of securities. The Committee on Uniform Security Identification Procedures was established by the American Bankers Association to develop a uniform method of identifying securities.
-
The dollar amount paid to the investor by the issuer for exercising a call provision that is usually stated as a percentage of the principal amount called.
-
Bonds may have a redemption, or call, provision that allows or requires the issuer to redeem the bonds at a specified price and date before maturity. For example, bonds may be called when interest rates have dropped significantly from the time the bond was issued.
-
For a CMO, the risk that declining interest rates may accelerate mortgage loan prepayment speeds, causing an investor's principal to be returned sooner than expected. Therefore, investors may have to reinvest their principal at a lower rate of interest.
-
Bonds that are redeemable by the issuer prior to the maturity date, at a specified price at or above par.
-
The maximum interest rate that may be paid on a floating-rate security.
-
A type of defined benefit plan that credits your account with a percentage of your salary each month, plus a set interest rate.
-
A mutual fund created with a fixed number of shares via a public offering, which is traded as listed securities on a stock exchange.
-
Upper and lower limits (cap and floor, respectively) on the interest rate of a floating-rate security.
-
Securities or property pledged by a borrower to secure payment of a loan. If the borrower fails to repay the loan, the lender may take ownership of the collateral. Collateral for CMOs consists primarily of mortgage pass-through securities or mortgage loans, but may also encompass letters of credit, insurance policies, or other credit enhancements.
-
Bonds in denominations as low as $20-to investors to encourage private sector investment in the local community.
-
A CMO tranche that absorbs a higher level of the impact of collateral prepayment variability to stabilize the principal payment schedule for a PAC or TAC tranche in the same offering.
-
Interest that is calculated on the initial principal and previously paid interest (also known as "interest on interest").
-
A document used by securities dealers and banks to state, in writing, the terms and execution of a verbal arrangement to buy or sell a security.
-
A mortgage loan that is based solely on real estate as security, is not insured or guaranteed by a government agency, and is eligible for purchase or insurance by Fannie Mae or Freddie Mac.
-
A bond that can be exchanged, at the option of the holder, for a specific number of shares of the issuing company's stock. Because a convertible bond is a bond with a stock option built into it, it will usually offer a lower than prevailing interest rate.
-
The feature of a bond that denotes the interest rate (coupon rate) it will pay and the date on which the interest payment will be made.
-
The actual dollar amount of interest paid to an investor. The amount is calculated by multiplying the interest rate of the bond by its face value.
-
The interest rate on a bond, expressed as a percentage of the bond's face value. Typically, it is expressed on a semi-annual basis.
-
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.
-
Crowdfunding is a form of peer-to-peer lending and investing that connects an entrepreneur to a large number of investors, often contributing relatively small amounts, to amass operating capital.
-
The current remaining principal on a mortgage security. Current face is computed by multiplying the original face value of the security by the current principal balance factor.
-
The ratio of the interest rate payable on a bond to the actual market price of the bond, stated as a percentage.
↑ Back to top
D
-
The date of a bond issue from which a bond begins to accrue interest (also known as issue date).
-
A failure by an issuer to: (i) pay principal or interest when due, (ii) meet non-payment obligations, such as reporting requirements or (iii) comply with certain covenants in the document authorizing the issuance of a bond (an indenture).
-
An investment pool that pays benefits to retired workers based upon factors like years of service to the employer and individual salary levels. Defined benefit plans are tied to a specific employer (or other entity, such as a state or union). Contributions to the pension fund is made by the employer or plan sponsors, with the overall pension plan managed by other parties. Upon retirement, the retiree receives a fixed payment for the rest of their life.
-
A financial contract whose value is based on, or derived from, a traditional security (such as a stock or bond), an asset (such as a commodity) or a market index.
-
The amount by which the par (or face) value of a security exceeds its purchase price.
-
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.
-
Allows investors to convert their dividends into additional shares of stock.
-
A payment made by a company to its shareholders, usually quarterly, from profits or cash reserves.
↑ Back to top
E
-
A provision that gives the issuer or bondholder an option, but not the obligation, to take an action unilaterally. The most common embedded option is a call option, giving the issuer the right to call, or redeem, the principal of a bond before the scheduled maturity date.
-
Employers voluntarily establish and promote these plans to help their workers build assets for a secure retirement. Together with Social Security and individual savings, these plans produce significant retirement benefits.
-
Designed to be a permanent source of capital that helps fund institutions of higher learning for the long-term.
-
Makes funders actual investors in the company, offering them an ownership stake in return for their investment, with the hope of future returns if the company grows and prospers.
-
Represents the sale of ownership in a company to raise funds for the business.
-
An ETF is a type of fund that is an exchange traded security, experiencing price changes throughout the day as they are bought and sold ETFs own underlying assets that typically track an index.
-
The risk that investors' principal will be committed for a longer period of time than expected In the context of mortgage- or asset-backed securities, this may be due to rising interest rates or other factors that slow the rate at which loans are repaid.
↑ Back to top
F
-
The principal amount of a security that appears on the face of the bond (also known as par or principal).
-
A decimal value reflecting the proportion of the outstanding principal balance of a mortgage security, which changes over time, in relation to its original principal value.
-
Refers to the interest rate banks charge each other.
-
The Federal Reserve uses this target rate as one of its tools to influence inflation and employment.
-
A seven-member board appointed by the president and confirmed by the Senate. This board, supported by a staff of economists and administrative professionals, works as an independent agency to oversee all Fed operations.
-
The two primary goals of monetary policy are to achieve maximum employment and stable prices within the economy.
-
The central bank of the United States, which in its own words "provides the nation with a safer, more flexible, and more stable monetary and financial system."
-
A wide range of knowledge and skills necessary for informed decision-making at every stage of life. Standard financial literacy topics include budgeting, saving, investing, borrowing, insurance and taxes.
-
A bond with a set interest rate to maturity.
-
A bond with an interest rate that is adjusted periodically according to a predetermined formula; it is usually linked to a benchmark interest rate (also known as variable rate bond or adjustable rate bond).
-
The lower limit for the interest rate on a floating-rate bond.
-
Investors send orders to numerous trading venues that all compete with each other for order flow.
-
The value of an asset at a specified date in the future, calculated using a specified rate of return.
-
Create an obligation to buy or sell a certain asset at a specified price and time. Futures trade on exchanges and create obligations for some time in the future, typically ranging from months up to a year or so.
↑ Back to top
G
-
Debt securities issued with the goal of protecting the environment and mitigating climate change.
↑ Back to top
H
-
A commitment or investment made with the intention of minimizing the impact of adverse price movements in an asset or liability, offsetting potential losses.
-
Bonds rated Ba (by Moody's) or BB (by S&P and Fitch) or below, whose lower credit ratings indicate a higher risk of default. Due to the increase risk of default, these bonds typically offer a higher yield than more creditworthy bonds (also known as junk bonds).
↑ Back to top
I
-
A security or tranche that pays only interest and not principal. IO securities are priced at a deep discount to the "notional" amount of principal used to calculate the amount of interest due.
-
Investments that aim to generate both financial return and positive social and/or environmental impact
-
When a company decides to raise capital by selling its stock to the public, which means individual investors as well as institutional investors, like mutual funds and retirement funds; allows the business owners to raise equity financing.
-
Compensation paid or to be paid for the use of assets.
-
A CMO tranche that pays an adjustable rate of interest that moves in the opposite direction from movements in a representative interest rate index such as the London Interbank Offered Rate (LIBOR), the Constant Maturity Treasury (CMT), or the Cost of Funds Index (COFI).
-
(or high grade bond) Bonds rated Baa (by Moody's) or BBB (by S&P and Fitch) or above, whose higher credit ratings indicate a lower risk of default. These bonds tend to offer a lower yield than less creditworthy bonds.
-
The date on which a security is deemed to be issued and begins to accrue interest.
-
The entity obligated to pay principal and interest on a bond.
↑ Back to top
L
-
(London Interbank Offered Rate) A benchmark interest rate some banks charge each other for short-term loans. LIBOR is set daily in five currencies (US dollar, Euro, pound sterling, Japanese yen and Swiss franc) for seven different maturities (overnight , on week, and 1, 2, 3, 6 and 12 months). LIBOR is frequently used as the basis for resetting rates on floating-rate securities, as well as currency and interest rate swaps.
-
A technique for reducing the impact of interest-rate risk by structuring a portfolio with
-
A measure of the relative ease and speed with which a security can be purchased or sold in a secondary market (also known as or marketability).
-
The period before a CMO investor will begin receiving principal payments.
-
Federally distributed and allow financing partners to enjoy a federal tax credit in return for investing in a low-income housing project.
↑ Back to top
M
-
The date when the principal amount of a security is due to be repaid.
-
A legal instrument that creates a lien upon real estate securing the payment of a specific debt.
-
A loan secured by a mortgage.
-
A type of mortgage-backed security representing a direct interest in a pool of mortgage loans. The pass-through issuer or servicer collects payments on the loans in the pool and "passes through" the principal and interest to the security holders on a pro rata basis.
-
A self-regulatory organization chartered by Congress to regulate municipal securities firms, banks and municipal advisors. It's governed by a 21-member board of directors and subject to SEC oversight, with the mission of promoting a fair and efficient municipal securities market to protect investors, government entities, and the public interest.
-
Municipal bonds represent a long-term debt obligation, at a relatively low rate of interest, which can be paid back over years. That long-term debt structure means infrastructure projects can move forward without placing a heavy burden on taxpayers.
-
An investment vehicle that invests pooled cash of many investors to meet the fund's stated investment objective.
↑ Back to top
N
-
A tax credit program designed to encourage investment into business development, real estate projects, charter schools and other projects in low-income communities.
-
A bond that cannot be called for redemption by the issuer before its specified maturity date.
-
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.
↑ Back to top
O
-
The price at which a seller is willing to sell a security.
-
The disclosure document prepared by the issuer that gives detailed security and financial information about the issuer and the securities being issued (also known as official statement or prospectus).
-
Open-end mutual funds stand ready to sell and redeem their shares at any time at the fund's current net asset value: total fund assets, less any liabilities, divided by the number of shares outstanding.
-
Gives the buyer the right (but not the obligation) to buy or sell an underlying asset at a specified price and time.
-
The face value or original principal amount of a security on its issue date.
↑ Back to top
P
-
The term used to refer to regularly scheduled payments or prepayments of principal and of interest on mortgage securities.
-
A CMO tranche that uses a mechanism similar to a sinking fund to determine a fixed principal payment schedule that will apply over a range of prepayment assumptions. The effect of the prepayment variability that is removed from a PAC bond is transferred to a companion tranche.
-
A tranche or security that pays investors principal only and not interest. PO securities are priced at a deep discount from their face value.
-
A model that estimates the prepayment rate of loans that collateralize an MBS.
-
Price equal to the face amount of a security; 100%.
-
Outcomes-based impact investing; enabling governments, nonprofits, and impact investors to enter into public-private partnerships that rigorously evaluate social service interventions so that only the highest-quality programs are expanded, and taxpayers only pay for what works.
-
The entity, usually a designated bank or the office of the treasurer of the issuer, that pays the principal and interest of a bond.
-
The date that principal and interest payments are paid to the record owner of a security.
-
A collection of mortgage loans assembled to serve as the collateral for a security. In the case of Gennie Mae, Fannie Mae, or Freddie Mac mortgage pass-through securities, pools are identified by a number assigned by the issuing agency.
-
The amount by which the price of a bond exceeds its par value.
-
The unscheduled partial or complete repayment of the principal amount outstanding on a loan, such as a mortgage, before it is due.
-
The risk that principal repayment will occur earlier than scheduled, forcing the investor to receive principal sooner than anticipated and reinvest at lower prevailing rates. The measurement of prepayment risk is a key consideration for investors in mortgage- and asset-backed securities.
-
The current value of a future payment or stream of payments, given a specified interest rate; also referred to as a discount rate.
-
The dollar amount to be paid for a security, which may also be stated as a percentage of its face value or par in the case of debt securities. Bond prices are re?ected in their yields, which vary inversely with the dollar price.
-
The market for new issuances.
-
The face amount of a bond, payable at maturity. With mortgage-backed securities, the amount of debt outstanding on the underlying mortgage loans.
-
A PAB is a type of municipal bond that is issued by a government entity where more than 10 percent of the proceeds are used by a private business and more than 10 percent of the debt service is secured by a private business. In general, the interest on PABs cannot be tax-exempt unless the transaction meets certain criteria established in tax law. PABs are generally used in the context of public-private partnership transactions, for certain housing and economic development purposes, and other qualified uses.
-
The term used to describe a mortgage security whose issuer is an entity other than a U.S. government agency or U.S. government-sponsored enterprise. Such issuers may be banks, subsidiaries of investment banks, other financial institutions, or home builders, for example.
-
Proportional distribution to all holders of the same class, based on ownership.
↑ Back to top
Q
-
Buying and selling of long term securities to affect long-term interest rates and thereby, economic activity.
↑ Back to top
R
-
A pass-through investment vehicle, which issues multiclass mortgage-backed securities that have certain tax and accounting advantages for issuers and investors due to the Tax Reform Act of 1986. Currently, most CMOs are issued in REMIC form and the terms "REMIC" and "CMO" are now used interchangeably.
-
Designations used by credit rating agencies to give relative indications as to opinions of credit quality.
-
The date for determining the owner entitled to the next scheduled payment of principal or interest on a mortgage security.
-
A bond whose owner is registered with the issuer or its agent either as to both principal and interest or as to principal only. Transfer of ownership can only be accomplished when the securities are properly endorsed by the registered owner.
-
The risk that interest income or principal repayments will have to be reinvested at lower rates in a declining interest rate environment.
-
Give broker-dealer firms a way to reach out to state securities regulators or the appropriate parties in a given jurisdiction to investigate exploitation. They also allow the broker-dealer to put a hold on a transaction to permit time for an investigation to take place.
-
In a CMO, the residual is that tranche, which collects any cash flow from the collateral that remains after obligations to the other tranches have been met.
-
Offers funders a reward for donating toward a designated goal.
-
The chance that an actual return will be different than expected, including losing some or all of the invested amount. There are many types of risk such as market risk, credit risk, interest rate risk, exchange rate risk, liquidity risk, and political risk.
-
Taxes are paid upfront and contributions are not tax-deductible; withdrawals are tax-free.
-
Taxes are paid upfront and contributions are not tax-deductible; withdrawals are tax-free. You are not required to take minimum distributions at 70.5.
↑ Back to top
S
-
Documents that companies must file with the Securities and Exchange Commission (SEC) in order to list their shares on a U.S. stock exchange
-
The percentage of outstanding mortgage loan principal that prepays in one month.
-
Market for previously issued securities.
-
A process that occurs when a group of similar financial assets are pooled together as collateral for securities.
-
Collateral pledged by a bond issuer (debtor) to an investor (lender) to secure repayment of the loan.
-
A bond that has a higher priority than other bond's claim to the same class of assets.
-
The most basic type of CMO. All tranches receive regular interest payments, but principal payments are directed initially only to the first tranche until it is completely retired. Once the first tranche is retired, the principal payments are applied to the second tranche until it is fully retired, and so on. Also known as a 'plain vanilla' or 'clean' CMO.
-
The process of collecting and remitting payments and recoveries on mortgage loans that make up a mortgage pool; accounting; bookkeeping; insurance; tax records; and default management.
-
The amount retained by the mortgage servicer from monthly interest payments made on a mortgage loan.
-
The date on which the transfer of cash and securities agreed to in a transaction is completed.
-
Separate accumulation of cash or investments (including earnings on investments) in a fund in accordance with the terms of a trust agreement or indenture, funded by periodic deposits by the issuer (or other entity responsible for debt service), for assuring timely availability of moneys for payment of debt service. Usually used in connection with term bonds. Bonds with such a feature are known as "sinkers."
-
A bond that has a lower priority than another bond's claim to the same assets.
-
A principal-only security structured as a companion bond.
-
A floating-rate CMO tranche whose rate is based on a formulaic relationship to a representative interest rate index.
-
A commitment to economic, social and environmental well-being for both the present and the future, balancing society's needs today with the demands of tomorrow.
-
Create an obligation to buy or sell; swaps are ongoing obligations over a period of years and in many cases involve the periodic exchange of cash flows over time.
↑ Back to top
T
-
Targeted amortization class tranche. A TAC tranche uses a mechanism like a sinking fund to determine a fixed principal payment schedule based on an assumed prepayment rate. The effect of prepayment variability that is removed from the TAC tranche is transferred to a companion tranche.
-
Allows a developer to get tax-exempt interest on the mortgage for a property.
-
A local community gives a long-term break on property taxes in exchange for completing a redevelopment project; gives the project additional cash flow, which can be financed and rolled into a mortgage.
-
The date upon which a bond is purchased or sold.
-
Your savings will grow tax-deferred until withdrawn, and contributions may be tax deductible. You may begin withdrawing without penalty at age 59.5 and will be required to take minimum distributions at age 70.5.
-
The French word for "slice", tranche usually refers to part, segment or portion of an investment issue such as a specific class of bond or mortgage backed security within an offering in which each tranche offers different terms including varying degrees of risk. Tranche may also refer to the segment of the bond offering being distributed in different geographical areas.
-
Also known as the bond registrar and is the party appointed by an issuer to maintain records of bondholders, and transfers ownership when bonds are acquired or sold.
-
TIPS carry interest rates that are indexed to the consumer price index in order to protect investors from inflation. Interest on TIPS is paid semiannually
-
Short-term securities mature in no longer than one year and can be used to hold money that investors need to access quickly. Investors buy a bill at a discount from the face value and then receive the entire amount once it matures.
-
These securities cover periods of time lasting longer than 10 years and mature in around 30 years. Interest is paid semiannually.
-
Medium- to long-term investments are normally issued in two, three, five, seven and ten year categories. Interest is paid semiannually.
-
An entity designated by the issuer as the custodian of funds and official representative of bondholders. Trustees are appointed to ensure compliance with the pooling and servicing agreement or trust indenture and represent bondholders to enforce their contract with the issuers.
↑ Back to top
U
-
In general, investors may buy $10,000 in bonds per year and can redeem the securities at any point after one year (with penalties). After five years, there is no penalty for redemption.
-
An investment fund created with a fixed portfolio of investments.
-
A bond repayment that is not secured by collateral.
↑ Back to top
V
-
A long-term bond with a periodically adjusted interest rate, typically based on specific market indicators.
-
The propensity of a security's price to rise or fall sharply.
↑ Back to top
W
-
The weighted average interest rate of the underlying mortgage loans or pools that serve as collateral for a security, weighted by the size of the principal loan balances.
-
The weighted average number of months since the date of the origination of the mortgages (i.e., the age of the loans) that collateralize a security, weighted by the size of the principal loan balances.
-
The weighted average number of months to the final payment of each loan backing a mortgage security weighted by the size of the principal loan balances. Also known as weighted average remaining maturity (WARM) and weighted average remaining term (WART).
-
In a CMO security, the period between the expected first payment of principal and the expected last payment of principal.
↑ Back to top
Y
-
A line tracing yields on a type of bond over a spectrum of maturities.
-
The yield to call is a calculation of the total return of a bond if held to the call date. It takes into account the value of all the interest payments that will be paid until the call date, plus interest on earned on those payments (using the current yield), the principal amount to be received on the call date and any gain or loss from the purchase price expressed as an annual rate.
-
The yield to maturity is a calculation of the total return of a bond if held to maturity. It takes into account the value of all the interest payments that will be paid until the maturity date, plus interest on earned on those payments (using the current yield), the principal amount to be received and any gain or loss from the purchase price expressed as an annual rate.
↑ Back to top
Z
-
Often the last tranche in a CMO, the Z-tranche receives no cash payments for an extended period of time until the previous tranches are retired. While the other tranches are outstanding, the Z-tranche receives credit for periodic interest payments that increase its face value but are not paid out. When the other tranches are retired, the Z-tranche begins to receive cash payments that include both principal and continuing interest.
-
A bond that does not make periodic interest payments before it matures. Instead, the investor receives one payment, which includes principal and interest, at redemption (call or maturity).
↑ Back to top
4
-
An employer-sponsored retirement savings plan where your employer may make a contribution on a percentage of your earnings and where you can make pre-tax contributions. You may begin withdrawing without penalty at age 59.5 if the plan permits in-service withdrawals, and you will be required to take minimum distributions at age 70.5, if you are not working.
↑ Back to top
5
-
allows a saver to choose from a range of investments, such as equity or bond mutual funds or other investments aimed at capital appreciation
↑ Back to top
