GLOSSARY OF TERMS

A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z

1035 Exchange
Named after the section 1035 (a) of the tax code, this allows the transfer of funds from one annuity to another (NOT transferring within subaccounts of the same annuity). Usually, there is no tax on this type of transfer.

401 (k)
A retirement plan that allows employees in private companies to make contributions of pre-tax dollars to a company pool that is then invested in stocks, bonds, or money markets.

403 (b)
A tax-deferred annuity retirement savings plan similar to a 401 (k) but aimed at teachers and employees of some non-profit organizations. Participants contribute to either annuity contracts (often called a TSA) with insurance companies, or directly with mutual fund companies.

10% Penalty Tax

A penalty imposed by the IRS for withdrawing untaxed money (pre-tax contributions or earned interest) from an annuity prior to age 591/2.

408A

Roth IRA. Special IRA which accepts only nondeductible annual contributions. See Roth IRA.

457 Plan

State and local governments can establish 457 plans that allow their employees to defer compensation on a tax-favored basis. Available to states, political subdivisions of states or any state agency or instrumentality.

501(c)(3) Organization

Certain tax-exempt organizations as specified in the Internal Revenue Code section that can have a 403(b) plan. A corporation, community chest, fund, or foundation that is organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes; for fostering national or international amateur sports competition; or for the prevention of cruelty to children or animals will probably qualify for 501(c)(3) status.

529 Plan

A savings plan by which earnings and withdrawals for qualified higher education expenses are free from federal tax (through 2010 unless extended by Congress).

A

accrued interest
Accrued interest is the amount of interest that has been earned since the last interest payment date. When a bond trades, the buyer pays the seller the accrued interest – a pro rata portion of the next interest payment, which will be paid to the buyer of the bond.

Adjustable Rate Mortgage (ARM)
A mortgage loan with an interest rate that increases or decreases periodically during the time it takes you to pay the loan back.

amortization
A repayment method in which the amount you borrow is repaid gradually through regular monthly payments of principal and interest for a predetermined length of time. During the first few years, most of each payment is applied toward the interest owed. During the final years of the loan, payment amounts are applied almost exclusively to the remaining principal.

amortization schedule
A timetable for payment of a mortgage loan. An amortization schedule shows the amount of each payment applied to interest and principal and shows the remaining balance after each payment is made.

amortization term
The amount of time required to pay off the mortgage loan. The amortization term is expressed as a number of months. For example, for a 30-year fixed-rate mortgage, the amortization term is 360 months.

asset allocation:
A financial strategy for investing money in a variable annuity into various asset classes — such as stocks, bonds and cash — based upon your financial goals, risk tolerance and time horizon. Asset allocation has two main advantages: it can help increase investment returns and reduce risk.

asset allocation decision
The decision regarding how an institutions funds should be distributed among the major classes of assets in which it may invest.

asset classes
Categories of assets, such as stocks, bonds, real estate and foreign securities.

B

bankrupt
A person, firm, or corporation that, through a court proceeding, is relieved from the payment of all debts after the surrender of all assets to a court-appointed trustee. bond
A debt security issued by a company, municipality, or government agency. The purchaser of a bond is lending money to the issuer. In exchange, the issuer promises to repay the amount of the loan on a specified maturity date. The issuer is also obligated to pay the bondholder periodic, fixed-interest payments over the life of the loan.

Beneficiary
Generally, the person(s) who receive(s) money upon the death of the annuity’s contract owner or annuitant. The contract owner decides who the beneficiary will be. The person designated to receive payments due upon the death of the annuity owner or the annuitant. Person chosen by the annuitant to receive the proceeds from the annuity in case of the annuitant’s death.

bond
A debt instrument secured by a lien on some or all of the issuing organization’s property (as opposed to a stock, which is an equity, or ownership, share in the issuing company). Typically, either a bond is payable to the bearer, and coupons representing annual or semi-annual payments of interest are attached (these are called coupon bonds), or it is registered in the name of the owner as the principal only (registered bonds). The word bond is sometimes used in a broader sense to signify an unsecured debt instrument, with the interest obligation limited or tied to the corporate earnings for the year. Participating bonds are another variation of debt instrument, with the interest obligation arranged so that holders are entitled to receive additional amounts from excess earnings or from excess distributions, depending on the terms of the participating bond. Bonds are often described according to the issuing body (U.S. government, state, municipal, or corporate bonds); the currency in which the bonds will be paid (dollars, gold, etc.); any special privileges (participatory or convertible bonds); the types of liens that are the subject of the bond (junior, first or second mortgage bonds); the bond’s investment grade (safe versus high-yield or “junk” bonds); or its maturity (long- or short-term).

bond fund (tax-exempt)
A portfolio of municipal bonds sponsored by registered investment companies that offer shares to investors either through (1) closed-end funds or unit investment trusts, which offer shares of a fixed portfolio of municipal bonds; or (2) open-end or managed funds, which offer shares in a managed portfolio of municipal bonds whose size will vary as shares are purchased or redeemed.

bond indenture:
A legal document that spells out in detail the rights of both the bondholders and the issuing organization.

bond ratings:
Since the early 1900’s bonds have been assigned a quality rating which reflects the bonds probability of defaulting.

broker
A firm or person who acts as an intermediary by buying and selling securities to dealers on an agency basis rather than for its own account.

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C

cap
The top interest rate that can be paid on a floating-rate security.

certificate of deposit (CD)
A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified interest rate, and can be issued in any denomination. CDs are generally issued by commercial banks.

certificate of ownership
Proof of ownership; a document issued to shareholders by a trustee of a unit investment trust.

Co-insurance
Co-insurance refers to money that an individual is required to pay for services, after a deductible has been paid. In some health plans, coinsurance is called a “co-payment.” Co-insurance is often specified by a percentage. For example, the employee pays 20% toward the charges for a service and the employer or insurance company pays 80%.

Co-payment
Another way of sharing medical costs. You pay a flat fee every time you receive a medical service (for example, $5 for every visit to the doctor). The insurance company pays the rest.

collar
Upper and lower limits (cap and floor, respectively) on the interest rate of a floating-rate security.

Collateralized Mortgage Obligation (CMO)
A multiclass bond backed by a pool of mortgage pass-through securities or mortgage loans.

commission
The fee paid to a dealer when the dealer acts as agent in a transaction, as opposed to when the dealer acts as a principal in a transaction (see “net price”).

common stock
A share representing participation in the ownership of an enterprise, generally with the right to participate in dividends and in most cases to vote on major matters affecting stockholder interests.

confirmation
A written document confirming an oral transaction in municipal securities that provides pertinent information to the buyer and seller concerning the securities and the terms of the transaction.

cost of Funds Index (COFI)
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.

coupon rate The specified annual interest rate payable to the bond or note holder as printed on the bond. This term is still used even though there are no coupon bonds anymore.

credit ratings
Designations used by ratings services to give relative indications of credit quality.

custodial care
Custodial care is also known as personal care. This coverage is needed when you need help performing activities of your daily routine, activities which include: assistance with bathing, eating, dressing, using the toilet, continence and mobility help. It is less complicated type of care than skilled care and can be provided in many settings, including at home, at nursing homes and adult day care centers.

custodian
An independent organization (usually a bank) that keeps custody of securities and other assets of a mutual fund.
D
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 sold or delivered at some other date.

dealer
An independent organization (usually a bank) that keeps custody of securities and other assets of a mutual fund.

dealer bank
Department of commercial bank that engages in the underwriting, trading and sale of municipal (or other) securities.

death benefit
The guarantee that if you die before you convert your variable annuity into regular income payments, the beneficiary will receive the higher of the account value or an amount specified in the annuity.

debt limit
Statutory or constitutional limit on the principal amount of debt that an issuer may incur (or that it may have outstanding at any one time).

debt ratio
The ratio of the issuer’s general obligation debt to a measure of value, such as real property valuations, personal income, general fund resources, or population.

debt service reserve fund
The fund into which are paid monies which are required by the trust agreement or indenture as a reserve against a temporary interruption in the receipt of the revenues or other amounts which are pledged for the payment of the bonds. A common deposit requirement for a “debt service reserve fund” is six months or one-year’s debt service on the bonds. The “debt service reserve fund” may be initially funded out of bond proceeds, over a period of time from revenues, or by a combination of the above.

default
Failure to pay principal or interest when due. Defaults can also occur for failure to meet nonpayment obligations, such as reporting requirements, or when a material problem occurs for the issuer, such as a bankruptcy.

default risk
Possibility that a bond issuer will fail to pay principal or interest when due.

delivery
For bonds bought or sold in the secondary market, delivery – and payment – must be in three business days. For new issues, the time when payment is made to, and the executed bonds and notes are received from, the issuer. New-issue delivery takes place several weeks after the sale to allow the bonds and notes to be printed and signed.

direct rollover
A transfer that qualifies as a rollover, but is done directly from one company to another. Usually, it is from a qualified plan into an IRA annuity. It is reportable, but not taxable. The annuitant can avoid having taxes taken out of the eligible distribution by having a direct rollover. derivative
A financial product that derives its value from an underlying security. In the tax-exempt market, there are primary and secondary derivative products.

discount
(1) Amount (stated in dollars or a percent) by which the selling or purchase price of a security is less than its face amount; (2) Amount by which the amount bid for an issue is less than the aggregate principal amount of that issue.

discount bond
A bond sold at less than par.

discount margin
The effective spread to maturity of a floating-rate security after discounting the yield value of a price other than par over the life of the security.

discount note
Short-term obligations issued at discount from face value, with maturities ranging from overnight to 360 days. They have no periodic interest payments; the investor receives the note’s face value at maturity.

discount rate
The rate the Federal Reserve charges on loans to member banks.

Diversification
The policy of all mutual funds to spread investments among a number of different securities markets to reduce the risks inherent in investing.

double and triple tax-exemption
Securities that are exempt from state and local as well as federal income taxes are said to have double or triple tax-exemption.

downgrade risk
Possibility that a bond’s rating will be lowered because the issuer’s financial condition, or the financial condition of a party to the financial transaction, deteriorates.

duration
A common gauge of the price sensitivity of a fixed income asset or portfolio to a change in interest rates.

E

equity
A homeowner’s financial interest in a property. Equity is the difference between the fair market value of the property and the amount still owed on its mortgage.

escrow fund
A fund that contains monies that only can be used to pay debt service.

Estate Taxes:
An estate tax imposed by the federal government and some state governments on the transfer of assets to heirs.

expected maturity date
The date on which principal is projected to be paid to investors. It is based on assumptions about collateral performance.

expenses
What you spend money on each month, usually bills such as utility, grocery, medical, auto, insurance payments, etc..

F

face value
Underlying principal amount of a security. The value of a bond that appears on the face of the certificate. It is almost always the maturity value of the bond. It is not an indication of current market value.

factor
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.

final maturity date
The date on which the principal must be paid to investors, which is later than the expected maturity date. Also called legal maturity date.

financial advisor
Generally a bank, investment-banking company or independent consulting firm that advises the issuer on all financial matters pertaining to a proposed issue and is not part of the underwriting syndicate.

forbearance
A temporary postponement or reduction of a student’s loan payments, which may be granted if the lender determines that the borrower has a financial hardship. The interest charges, however, will continue to accrue, even on subsidized loans.

G

good-faith funds
Security deposit on new securities, ranging from 1% to 5% of the par amount, provided to the issuer at the time of a competitive bid by each underwriting syndicate. Also called good-faith check, if delivered as a check, or good-faith deposit.

H

HMO: You pay a monthly premium and the specific plan HMO covers your physician visit(s), hospital stay(s), emergency and other medical treatments. You must use the physicians and hospitals designated by the HMO. The insurance provider will give you a list of physicians to choose from. For further visits with specialists or test you will need to go to a primary care physician and get a referral.

I

income
The amount of money you earn by working.

index ratio
For any particular date and any particular inflation-indexed security, the Reference CPI-U applicable to such date divided by the Reference CPI-U applicable to the original issue date (or dated date, when the dated date is different from the original issue date).

inheritance
A tax imposed on the property that one inherits.

Inheritance Gaurdian:
One who has been entrusted by the law for the care of another person or for his estate or for both.

interest
the compensation paid or to be paid for the use of money, usually expressed as an annual percentage rate. Interest rates change in response to a number of things including revised expectations about inflation, and such changes in the prevailing level of interest rates affects the value of all outstanding bonds.

investment grade
Bonds considered suitable for preservation of invested capital; ordinarily, those rated Baa3 or better by Moody’s Investors Service, or BBB- or better by Standard & Poor’s Corporation (see “ratings”).

issue
The issue description includes the name of the issuer of the bonds. If a municipal bond, the issuer is typically a state, political subdivision, agency or authority which borrows money through the sale of bonds or notes. Corporate bonds are issued by private corporations.

issuer
The entity (government or corporation) that borrowed the capital and is responsible for repaying the bondholder.

J

junk bond
These are the lowest quality bonds. Since they are riskier, they yield more. Other, more flattering names for them are “high yield” or “non-investment-grade” bonds.

L

limit order
An order that is restricted in price.

line of credit
A commitment by a bank to provide funds to a borrower, if certain conditions have been met, or if certain conditions do not exist.

LIVING TRUST
A living trust is a legal means of assuring that a decedent’s property and assets are transferred to his or her heirs according to the decedent’s wishes.

long term bond
One that matures in more than 10 years.

lockout
The period of time before an investor will begin receiving principal payments.

M

marketability
A measure of the ease with which a security can be sold in the primary and secondary market without an undue price concession.

market price or market value
For securities traded through an exchange, the last reported price at which a security was sold; for securities traded “over-the-counter,” the current price of the security in the market.

maturity
is the point in time at which your fixed income investment comes to an end and your principal or face value is returned to you.

maturity date
Usually used for bonds. Date that the bond finishes and is paid off. Date on which the principal amount of a note, draft, acceptance, bond, or other debt instrument becomes due and payable.

moody’s rating
Method of credit analysis. A guide of relative bond value. Investment grade securities are those bonds rated from AAA-BBB. Speculative grade securities are BB-C.

mortgage
A legal document that pledges a property to the lender as security for payment of a debt

mortgage disability insurance
A disability insurance policy which will pay the monthly mortgage payment in the event of a covered disability of an insured borrower for a specified period of time.

mortgage insurance (MI)
Insurance written by an independent mortgage insurance company protecting the mortgage lender against loss incurred by a mortgage default. Usually required for loans with an LTV of 80.01% or higher.

mortgagee
The person or company who receives the mortgage as a pledge for repayment of the loan. The mortgage lender.

mortgagor
The mortgage borrower who gives the mortgage as a pledge to repay.

municipal bond
Bonds issued by any of the 50 states, the territories and their subdivisions, counties, cities, towns, villages and school districts, agencies, such as authorities and special districts created by the states, and certain federally sponsored agencies such as local housing authorities. Historically, the interest paid on theses bonds has been exempt from federal income taxes and is generally exempt from state and local taxes in the state of issuance.

mutual fund
A pooling of many investors’ money for specific investment purposes. The fund is managed by a management company, which is responsible for adhering to the purpose of the fund.

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N

net order
Bond sold to investors at the price or yield shown in the re-offering scale. This is the price with no concessions.

net price
Price paid to a dealer for bonds when the dealer acts as principal in a transaction, i.e., the dealer sells bonds that he owns, as opposed to an agency transaction (see “agency transaction”).

O

odd lot
Bonds traded at the less than normal trading units.

over-the-counter market (OTC)
Comprised of a network of telephone and telecommunication systems over which unlisted securities and other issues trade.

owner trust
An amortizing structure that permits significant cash-flow engineering, which is generally prohibited with grantor trusts. Owner trusts are often used with auto loans, equipment leases and student loans.

P

P&I (principal and interest)
The term used to refer to regularly scheduled payments or prepayments of principal and of interest on mortgage securities.

portfolio
The different securities owned in an account of client.

PPO
You pay a monthly premium and can choose a physician from primary to specialist without getting a referral first. When you use the doctors and hospitals that are part of the PPO, you can have a larger part of your medical bills covered.

premium
What you lend. This value is returned to you at the bond’s maturity date.

price
The dollar amount to be paid for a security, stated as a percentage of its face value, or par. Bond prices are best reflected in their yields, which vary inversely with the dollar price. The price you pay for a bond is based on a host of variables, including interest rates, supply and demand, credit quality, maturity and call features, tax status, state of issuance, market events and the size of the transaction.

price risk
Price risk is the risk that a debt security’s price may change due to a rise or fall in the prevailing level of interest rates.

prime rate
A commercial bank’s stated reference rate for lending.

principal
The face amount of a bond, exclusive of accrued interest and payable at maturity.

R

real estate
A piece of land, including the air above it and the ground below it, and any buildings or structures on it. also called realty.

real estate agent
A licensed salesperson working for a real estate broker. If the agent sells a house successfully, then he/she receives a portion of the sale price as a commission. In the U.S., all real estate agents have to be licensed by the state they work for.

Real Estate Investment Trust
A corporation or trust that uses the pooled capital of many investors to purchase and manage income property and/or mortgage loans.

redemption value
Most securities pay 100% of face value (par) at maturity. Some may pay more or less at redemption, depending upon call and put terms for the issue. These amounts would be paid on corresponding call and/or put dates. Redemption value is that amount which is paid to redeem the securities.

risk
Degree of uncertainty of return on an asset.

S

safekeep
For a fee, bankers will hold in their vault, clip coupons on, and present for payment at maturity bonds and money market instruments.

sales forecast
A key input to a firms financial planning process. External sales forecasts are based on historical experience, statistical analysis, and consideration of various macroeconomic factors.

secondary market
The market in which securities are traded after the initial (or primary) offering. Gauged by the number of issues traded. The over-the-counter market is the largest secondary market.

secured debt
Debt backed by specific assets or revenues of the borrower. In the event of default, secured lenders can force the sale of such assets to meet their claims.

security
Specific revenue sources or assets pledged by an issuer to the bondholder to secure repayment of the bond.

sell order
An order to sell a security.

settlement
When payment is made for a trade.

skilled care
Skilled care is needed for medical conditions that require care by a skilled medical person, such as a doctor or a registered nurse. This care is usually provided by the order of a physician, 24 hours a day. This care involves a treatment plan made by your doctor. Skilled care is generally provided in a nursing home, but may also be provided the patient’s home with help from visiting medical persons.

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T

taxable municipal bond
Taxed private-purpose bonds issued by the state or local government to finance prohibited projects such as sports stadiums.

time deposit
Interest-bearing deposit at a savings institution that has a specific maturity.

trade
A trade is a transaction. A trade has a buyer and a seller as well as a price and quantity.

tranche
One of several related securities offered at the same time. Tranches from the same offering usually have different risk, reward, and/or maturity characteristics.

transfer
The process by which securities are reregistered to new owners. The old securities are canceled and new ones issued to the new registrants.

Treasury Bonds (T Bonds)
Mature in 10 to 30 years. Interest is paid semiannually and they can be purchased in minimum denominations of $1,000 or multiples thereof. The 30-year, or “bellwether” bond, is the key measure of interest rates.

trustee
A bank designated by the issuer as the custodian of funds and official representative of bondholders. Trustees are appointed to ensure compliance with the bond documents and to represent bondholders in enforcing their contract with the issuer.

U

underwrite
The purchase of a bond or note issue from an issuer to resell it to investors.
underwriter
The securities dealer who purchases a bond or note issue from an issuer and resells it to investors. If a syndicate or selling group is formed, the underwriter who coordinates the financing and runs the group is called the senior or lead manager.

V

volatility
A relative measure of how rapidly the price of a security falls or rises within a short period of time.

Y

yield
The rate of return on an annuity, generally expressed as a percentage of the current price.

yield spread
The difference in yield between two bonds or bond indexes.

yield to call
The percentage rate of a Bond or Note if the Investor buys and holds the security until the Call date. This yield is valid only if the security is called prior to maturity. Generally Bonds are Callable over several years and normally are called at a slight premium. The calculation of Yield to call is based on Coupon rate, length of time to call, and Market price.

yield to maturity
The percentage Rate of return paid On a bond, note, or other fixed income security if the Investor buys and holds it to its maturity date. The calculation for YTM is based on the Coupon rate, length of time to maturity, and Market price. It assumes that coupon Interest paid over the life of the Bond will be reinvested at the same rate.

yield to worst
The Bond yield computed by using the lower of either the Yield to maturity or the yield to Call on every possible call date.

Z

zero-coupon bond
A bond that pays no interest throughout its life. Zero Coupon Bonds (Zeros) sell at a discount to maturity value. The discount represents the return on the original investment, if the bond is held to its maturity date. The bonds are usually created using interest payment dates of a regular issue.

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FINDING A FINANCIAL ADVISOR
A financial advisor can ensure you’re saving enough to meet all your immediate and retirement needs. Find out what’s best for you and your retirement goals! Learn more about the different asset allocation types, explore the areas above and fill out our online form to find a certified financial advisor in your area.