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Glossary of Financial Terms — I 







A process for designing fixed income portfolios to obtain a target rate of return over a specified time period, within a narrow range, despite market conditions.


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Implied Yield

A forecasted yield derived from present yields and based on the theory that the yield curve on one day is an excellent prediction of itself in the future.


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In and Out

Denotes a transaction quickly turned over. A security has been bought and sold (or vice versa) on the same day.


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Money earned on a security from interest or dividends.


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Income Bond

A bond which is guaranteed as to principal but for which interest payments are a contingent obligation, required only if earned and then consented to by the board of directors. Failure to pay interest does not constitute default. Income bonds trade flat.


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Incomes Policy

Any governmental policy to directly influence or regulate prices, wages, profits, or dividends. Methods may range from gentle “jawboning” to rigid price and wage freezes.


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In Competition

A situation in which two or more dealers compete for the purchase, sale or swap of bonds by an account, with implicit agreement that the execution will be awarded to the dealer who provides the most advantageous price to the account. Ties are generally decided by the flip of a coin or by resubmission of proposals.


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For debt securities, the contract that specifies all legal obligations of the issuer with respect to the securities and any qualifications or restrictions that may exist. The indenture names a trustee which holds the indenture, supervises payments of principal and interest to the security holders, and acts on behalf of the holders in the event of a default or other violation of the indenture’s provisions.


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A statistical yardstick composed of a basket of securities with a set of characteristics. An example of this would include the “S&P 500” which is an index of 500 stocks.


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Index Fund

An account comprised of securities; the characteristics of which will produce a return which will replicate a designated securities index. (i.e., Stocksplus and S&P 500).


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Index-Linked Bond

A bond whose coupon payments are a function of some index. For example, coupons on index-linked gilts are linked to the Retail Price Index.


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Industry Standards for Institutional Trade Communication

A group of U.S. banks and investment managers formed to develop and maintain standards used for securities message communication among participants in the U.S. securities.


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A general rise in prices, usually measured by changes in prices of major indices, such as the Consumer Price Index. An increase in a particular price may or may not be inflationary, depending on how it affects other prices and on how promptly it brings to market additional supplies of a product. As of December 2001, the year-over-year percentage change in the CPI was 1.9 %, which in historical terms is a modest rate of inflation.


Core Inflation
Core inflation is most often calculated by taking the Consumer Price Index (CPI) and excluding certain items from the index, usually energy and food products. Other methods of calculation include the outliers method, which removes the products that have had the largest price changes. Core inflation is thought to be an indicator of underlying long-term inflation.


Headline inflation
The raw inflation figure as reported through the Consumer Price Index (CPI) that is released monthly by the Bureau of Labor Statistics. The CPI calculates the cost to purchase a fixed basket of goods as a way of determining how much inflation is occurring in the broad economy. The CPI uses a base year and indexes current year prices based on the base year’s values.


The headline figure is not adjusted for seasonality or for the often volatile elements of food and energy prices, which are removed in the Core CPI. Headline inflation will usually be quoted on an annualized basis, meaning that a monthly headline figure of 4% inflation equates to a monthly rate that, if repeated for 12 months, would create 4% inflation for the year. Comparisons of headline inflation are typically made on a year-over-year basis.


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Inflation Index Bond

Fixed income securities whose principal value is periodically adjusted according to the rate of inflation. The interest rate on these bonds is fixed at issuance, but over the life of the bond this interest is paid on an increasing principal value, which has been adjusted for inflation.


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Inflation Linked Bonds

An inflation-linked bond is a bond that provides protection against inflation. Most inflation-linked bonds, the British “Inflation-linked Gilt” (ILG) and the new U.S. Treasury “inflation-protected security” (IPS) are principal indexed. This means their principal is increased by the change in inflation over a period. In most countries, the Consumer Price Index (CPI) or its equivalent is used as an inflation proxy. As the principal amount increases with inflation, the interest rate is applied to this increased amount. This causes the interest payment to increase over time. At maturity, the principal is repaid at the inflated amount. In this fashion, an investor has complete inflation protection, as long as the investor’s inflation rate equals the CPI.


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Information Ratio

A risk adjusted measure of return relative to the benchmark. High information ratio (e.g. 0.65 for a 10 year track record) suggests high probability that results were not due to chance, but rather due to manager competence.


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In Hand

An expression having the same meaning as “firm” when applied to an offering or bid.


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Initial Margin

The amount of margin required in order to establish a position in a futures contract.


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Inside Market

The market defined by the highest actual bid and the lowest actual offering. An inside market may be tighter than a particular trader’s market.


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In Syndicate

Refers to a new issue that is still subject to the price and trading restrictions as set forth in the Agreement Among Underwriters.


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Institutional (Sales, Clients)

Professional fund managers, pension plan fiduciaries, foundation managers, etc. overseeing assets on behalf of businesses, philanthropies, or large group beneficiaries, as opposed to intermediary or individual investors overseeing personal wealth.


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Institutional Investors

Organizations whose primary purpose is to invest their own assets or those entrusted to them by others. The most common are employee pension funds, insurance companies, mutual funds, university endowments, and banks.


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An amount charged to a borrower by a lender for the use of money, normally expressed in terms of an annual percentage rate of the principal or face amount.


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Interest Calculations

Current Yield: this is simply the annual coupon rate divided by the clean price of the bond.


ISMA Yield: a standard yield to maturity calculation recommended by the ISMA (formerly AIBD). Yield is compounded annually regardless of the coupon frequency.

SABE: Semi-Annual Bond Equivalent Yield; a method of converting yields and other measures of value in order to place them on a comparable basis. This method assumes interest is reinvested semi-annually. SABE is often applied to discount securities in order to compare their rate of return to the yield to maturity on coupon bonds.


Simple Yield: a modified version of the current yield that accounts for a deviation in a bond’s clean price from par. Any capital gain or loss is assumed to occur uniformly over the life of the bond.


U.S. Street Method: The standard yield to maturity calculation used in the United States by market participants other than the U.S. Treasury. Yield is compounded semi-annually regardless of the coupon frequency. If the value date does not fall on a coupon date, the present value of the bond on the next coupon date is discounted over the fractional period with compound interest.


U.S. Treasury Method: The yield to maturity used by the U.S. Treasury to price bonds at auction. Partial periods are discounted using simple rather than compound interest.

Yield to Average Life: A yield which assumes the entire issue amount matures on the average life date rather than the maturity date. This is a quick-and-dirty method for comparing bonds with sinking funds with straight issues.


Yield to Equivalent Life: The discount rate that equates the present value of the future cash flows to the dirty price where the cash flows take into account the bond’s amortization schedule. This calculation is appropriate for sinking funds; however, it is rarely used because of its complexity.


Yield to Maturity: The yield if the bond is held to maturity. This is the most frequently used measure of value for a bond. Generally, the calculation is a function of coupon payments, dirty price, and the method for discounting coupons and the redemption value. However, the exact functional form is determined by market or dealer conventions.


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Interest Rate (Coupon Rate)

The percentage paid for the use of money, expressed as an annual percentage of the principal or face amount. Interest rates are set by the issuer of a security or loan based on a variety of factors including the credit risk of the borrower, economic environment, inflation, supply and demand. Interest rates may be fixed for the life of the loan/investment, or vary with the market based pre-set terms.


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Interest-Rate Risk

The degree to which the price of an asset rises and falls with the market level of interest rates. When interest rates rise, the market value of fixed-income securities (such as bonds) declines. Similarly, when interest rates decline, the market value of fixed-income securities increases.


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Interest Rate Swaps

Interest rate swaps are simply the exchange of one set of cash flows (based on interest rate specifications) for another. Interest rate swaps often exchange a fixed payment for a floating payment that is linked to an interest rate (most often the LIBOR).


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Interest Receivable

Interest income impacts the portfolio as soon as it is earned. Income is posted to cash automatically on payment date except in the case of mortgage a pass-through, where we post based on actual bank receipts.


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Interest Yield Equivalent

A measurement of the rate of return on a security sold on a discount basis that assumes actual days to maturity and a 360-day year.


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Interim Experience

The rate of prepayments that are made between two specific points in time after a pass-through security has been issued- for example, the experience for the latest three months.


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Interim Financing

Financing during the time from project commencement to closing of a permanent loan, usually in the form of a construction loan and/or development loan.


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A bond with a maturity of intermediate length. Depending on the particular market, the range for this length may vary. In the corporate bond market, and intermediate would have a maturity between 1 and 12 years.


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Intrinsic Value

The value of an asset based upon measurable factors such as net income, patents, and plant/equipment. Variables such as brand name, trademarks, and copyrights are often difficult to calculate and sometimes not accurately reflected in the market price. Market price represents what investors are willing to pay for the company, and intrinsic value represents what the company is really worth, to the extent that the value of intangible assets such as those listed above can be accurately measured.


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Inventory Valuation Adjustment

A statistical estimate of what part of the national increase in the book value of inventories results merely from replacing identical items at higher or lower cost. The IVA is subtracted from the book value increase to obtain the inventory change component of the GNP.


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The utilization of money in the expectation of future returns in the form of income or capital gain.


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Investment Banker

An individual or firm engaged in the financing of capital. The investment banker is the middleman between the issuer of new securities and the investor. He/she facilitates the conversion of savings into investment. Normally one or more investment banks buy the new issue of securities from the issuing company for a negotiated price. The company walks away with this new supply of capital, while the investment banks form a syndicate and resell the issue to their customer base and the investing public. Investment banks perform a variety of other financial services, such as merger and acquisition advice and market analysis.


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Investment Company

A company or trust that uses its capital to invest in other companies. There are two principal types: the closed end and the open end, also known as a mutual fund. Shares of closed-end investment companies, most of which are listed on the NYSE, are readily transferable in the open market and are bought and sold like shares of stock. Capitalization of these companies remains the same unless action is taken to change, which is rare. Open-end funds sell their own new shares to investors, stand ready to buy back their old shares, and are not listed. Open-end funds are so called because their capitalization is not fixed; they issue more shares as people want them.


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Investment Company Act of 1940 (‘40 Act’)

Legislation passed by the U.S. Congress to define the responsibilities and limitations on fund companies that offer investments to the public. Includes requirements for financial disclosure and fiduciary duties of open-end, closed-end, and exchange-trade fund companies.


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Investment Grade

Bonds rated in the top four rating categories (AAA, AA, A, BBB) are commonly known as investment grade securities and are considered eligible for bank investment under present commercial bank regulations issued by Comptroller of the Currency.


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Issue Bid

A bid to purchase securities at the initial offering price.


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The organization that issues a bond because it wants to raise finance.


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Information contained herein is believed to be reliable, but the accuracy and completeness of this material cannot be guaranteed.


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