A

Absolute Priority- The bankruptcy principle that senior creditors have to be fully paid before junior creditors and stockholders receive any payment. In other words, this specifies the pecking order. Shareholders are the last people to get paid if a company goes under. In contrast, senior creditors always get first grabs at the proceeds from liquidation. This is also known at the liquidation preference.

Analyst - A financial analyst tracks the performance of a number of companies or industries, evaluates their potential value as investments, and makes recommendations to buy, sell, or hold specific securities. When the most highly respected analysts express a strong opinion about a stock, there is often an immediate impact on that stock's price as investors rush to follow the advice. Some analysts work for financial institutions, such as mutual fund companies, brokerage firms, and banks. Others work for analytical services, such as Value Line, Inc., Morningstar, Inc., Standard & Poor's, or Moody's Investors Service, or as independent evaluators. Zacks and First Call make reports from hundreds of different analysts available on their websites, and analysts' commentaries appear regularly in the financial press, and on radio, television, and the Internet.

Ask - The ask price (a shortening of asked price) is the price at which a market maker or broker offers to sell a security or commodity. The price another market maker or broker is willing to pay for that security is called the bid price, and the difference between the two prices is called the spread.
Bid and ask prices are typically reported to the media for commodities and over-the-counter (OTC) transactions. In contrast, last, or closing, prices are reported for exchange-traded and national market securities. With open-end mutual funds, the ask price is the net asset value (NAV), or the price you get if you sell, plus the sales charge, if one applies.

Assets - Assets are everything you own that has any monetary value, plus any money you are owed. They include money in your checking account, your stocks, bonds, and mutual funds, your equity in real estate, the value of your life insurance policy, and any personal property that people would pay to own. When you figure your net worth, you subtract the amount you owe, or your liabilities, from your assets.
Similarly, a company's assets include the value of its physical plant, its inventory, and less tangible elements, such as its reputation.

B

Bankrupt - When a person or firm is unable to repay debts. Thus, the ownership of the firm's assets are transferred from the stockholders to the bondholders. Shareholders are the last people to get paid if a company goes bankrupt. Secure creditors always get first grabs at the proceeds from liquidation.

Bear market - A bear market is sometimes described as a period of falling securities prices and sometimes, more specifically, as the point at which prices have fallen 20% or more from a high. A bear market in stocks is triggered by investors selling off shares because they anticipate worsening economic conditions and falling profits. A bear market in bonds is usually brought on by rising interest rates.

Bid - The bid is the price a market maker or broker is willing to pay for a security, such as a stock or bond, at a particular time. In the real estate market, a bid is the amount a buyer offers to pay for a property.

Board of directors - Individuals elected by stockholders to establish corporate management policies. A board of directors makes decisions on major company issues and controls when dividends will be paid to stockholders. These are the people who make decisions on behalf of the company you are invested in. Every public company must have a board of directors.

Bond fund - Bond mutual funds invest in bonds to produce income. Unlike individual bonds, bond funds have no fixed maturity date and no guaranteed interest rate. Nor do they promise to return your principal. Their appeal is that you can usually invest a much smaller amount of money than you would need to buy a portfolio of bonds on your own, making it easier to diversify your fixed-income investments. There is a great variety of bond funds, each with a specific investment strategy. For example, some funds invest in long-term, and others in short-term, bonds. Some buy government bonds, while others buy corporate bonds or municipal bonds. Finally, some buy investment-grade bonds, while others focus on high-yield bonds. In other words, you could buy a long-term, investment-grade municipal bond fund, a short-term, high-yield corporate bond fund-or almost any other combination.

Bull market - A prolonged period when stock prices as a whole are moving upward is called a bull market, although the rate at which those increases occur can vary widely from bull market to bull market. So can the length of time a bull market lasts. Well-known bull markets began in 1923, 1949, 1982, and 1990.

Bond rating - Independent agencies, such as Standard & Poor's (S&P) and Moody's Investors Service, assess the likelihood that bond issuers — whether corporations or governments — are likely to default on their loans or interest payments. Ratings systems differ from one agency to another but usually have at least 10 categories, ranging from a high of AAA (or Aaa) to a low of D. Bonds ranked BBB (or Baa) or higher are considered investment-grade bonds.

C

Callable bond - A callable bond can be redeemed by the issuer before it matures if that provision is included in the terms of the bond agreement, or deed of trust. Bonds are typically called when interest rates fall, and issuers can save money by paying off existing debt and offering new bonds at lower rates. If a bond is called, the issuer may pay the bondholder a premium, or an amount above the par value of the bond.

Capital gain - When you sell an asset at a higher price than you paid for it, the difference is your capital gain. For example, if you buy 100 shares of stock for $20 a share and sell them for $30 a share, you realize a capital gain of $10 a share, or $1,000 in total. If you own the stock for more than a year before selling it, you have a long-term capital gain. If you hold the stock for less than a year, you have a short-term capital gain. Long-term capital gains are taxed at a lower rate than your other income while short-term gains are taxed at your regular rate. The long-term capital tax rates are 20% for anyone whose marginal federal tax rate is 27% or higher, and 10% for anyone whose marginal rate is 15%. Even lower rates apply to gains on assets purchased in 2001 or later and held at least five years for taxpayers in the 27% bracket or higher and to any assets held at least five years for taxpayers in the 15% bracket. You are exempt from paying capital gains tax on profits of up to $250,000 on the sale of your primary home if you're single and up to $500,000 if you're married and file a joint return, provided you meet the requirements for this exemption.

Common stock - When you own common stock, you own shares in a corporation. Your shares represent ownership in the corporation and give you the right to vote for company's board of directors and benefit from its success through dividend payments or increases in share value. Unlike holders of preferred stock, you are not guaranteed dividend payments. However, common stock has historically produced a stronger long-term total return than any other investment category through a combination of dividend payments and increases in value (known as capital appreciation).

Compounding - When interest is paid on interest in addition to the principal, it is called compounding. For example, if you deposit $100 at 10% interest, you will have $110 at the end of one year ($100 + $10 interest). The following year, you will earn 10% interest on the $110 you earned the previous year for a total of $121($110 + $11 interest) and so on.

Coupon rate - The coupon rate is the interest rate that the issuer of a bond or other debt security promises to pay during the term of a loan. For example, a bond that is paying 6% annual interest has a coupon rate of 6%. The term is derived from the practice, now discontinued, of issuing bonds with detachable coupons. To collect a scheduled interest payment, you presented a coupon to the issuer or the issuer's agent. Today, coupon bonds are no longer issued. Most bonds are registered, and interest is paid by check or, increasingly, by electronic transfer.

D

Default risk - The risk that a company or individual will be unable to pay the contractual interest or principal on its debt obligations.

Demand - A consumer's desire and willingness to pay for a good or service. Think of demand as what you want. For example, market demand is the total of what everybody in the market wants.

Derivative - Derivatives are hybrid investments, such as futures contracts, options, and mortgage-backed securities, whose value is based on the value of an underlying investment. For example, the changing value of a crude oil futures contract depends on the upward or downward movement of oil prices.
Certain investors, called hedgers, are interested in the underlying investment. For example, a baking company might buy wheat futures to help estimate the cost of producing its bread in the months to come. Other investors, called speculators, are concerned with the profit to be made by buying and selling the contract at the most opportune time. Derivatives are traded on exchanges, over the counter (OTC), and in private transactions.

Discount Broker - A stockbroker who charges a reduced commission, but provides no investment advice. It used to be that only the wealthy could afford a broker and access to the stock market. The internet brought an explosion of discount brokers that let you trade at a smaller fee. However, it is important to remember that discount brokers don't provide personalized advice. Because of discount brokers, nearly anybody can afford to invest in the market. For those who wish to do their own research or don't invest a lot of money, a discount broker is an excellent way to invest.

Dividend - Corporations may pay out part of their earnings as dividends to you and other shareholders as a return on your investment. Stock dividends, which are often paid quarterly, are usually in the form of cash, but may be additional shares or scrip. You may be able to reinvest dividends to buy additional shares if the company offers a dividend reinvestment program (DRIP). Dividends are ordinarily taxable unless you own the investment through a tax-deferred account, such as an employer sponsored retirement plan or individual retirement account (IRA).

Dividend reinvestment plan (DRIP) - Many publicly held companies allow shareholders to reinvest their dividends in the company's stock as well as purchase additional shares of the stock through dividend reinvestment plans, or DRIPs. Enrolling in a DRIP enables you to build your investment gradually, taking advantage of dollar cost averaging and usually paying only a minimal transaction fee for each purchase. Many DRIPs will also buy back shares at any time you want to sell, in most cases for a minimal sales charge.

Due Diligence - An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to a sale.  Offers are usually made dependent upon the due diligence. It includes reviewing all financial records plus anything else deemed material to the sale.

Dot-Com - A company that embraces the internet as the key component in its business.  The dotcoms took the world by storm in the late '90s - rising faster than any industry in recent memory. Despite the fact that the majority of Internet companies were losing money hand over fist, they were given huge valuations on the stock market. But it didn't last for long. The Nasdaq hit it's high in March, 2000, and within a few years most of the dotcom sector was wiped out.

E

Earnings - From a corporate perspective, earnings are profits, or net income, after the company has paid income taxes and bond interest. In the case of an individual, earnings include salary and other compensation for work you do, as well as interest, dividends, and increases in the value of your investments.

Earnings Season - The months where a majority of quarterly corporate earnings are released to the public. Earnings season is the month after the quarter has ended: January, April, July, or October.

Equity - In the broadest sense, equity means ownership. If you own stock, you have equity in, or own a portion — however small — of the company that issued the stock. Having equity is the opposite of owning a bond or commercial paper, which is a debt the company must repay to you. Equity also means the difference between the asset's current market value — the amount it could be sold for — and any debt or claim against it. For example, if you own a home currently valued at $300,000 but still owe $200,000 on your mortgage, your equity in the home is $100,000.

G

Gross domestic product (GDP) - The total value of all the goods and services produced within a country's borders is described as its gross domestic product. When that figure is adjusted for inflation, it is called the real gross domestic product, and it's generally used to measure the growth of the country's economy. In the US, the GDP is calculated and released quarterly by the Department of Commerce.

I

In Default - A corporation or government is in default if it fails to meet the interest payments on debt securities it has issued or does not repay the principal at maturity. When the issuer defaults, the bondholders may try to recover what they're owed by making claims against the issuer's assets. There's an elaborate hierarchy for determining the order in which the claimants are paid.
Similarly, if you fail to pay principal and interest that you owe on a loan, you are in default. The lender may attempt to recover the loss by claiming any property of yours that was offered as collateral, or security for the loan, or by taking other legal measures.

Initial public offering (IPO) - When a company reaches a certain stage in its growth, it may decide to issue stock, or go public, with an initial public offering (IPO). The goal may be to raise capital, to provide liquidity for the existing shareholders, or a number of other reasons. Any company planning an IPO must register its offering with the Securities and Exchange Commission (SEC). In most cases, the company works with an investment bank, which underwrites the offering. That means buying all the shares at a set price and reselling them to the public with the expectation of making a profit.

Institutional investor - Institutional investors buy and sell securities in large volume, typically 10,000 or more shares of stock, or $200,000 or more worth of bonds, in a single transaction. In most cases, the investors are organizations with large portfolios, such as mutual funds, banks, university endowment funds, insurance companies, pension funds, and labor unions. Institutional investors may trade their own assets, or assets that they are managing for other people.

Interest rate - Interest rate is the percentage of the face value of a bond or the balance in a deposit account that you receive as income on your investment. If you multiply the interest rate by the face value or balance, you find the annual amount you receive. For example, if you buy a bond with a face value of $1,000 with a 6% interest rate, you'll receive $60 a year. Similarly, the percentage of principal you pay for the use of borrowed money is the loan's interest rate. If there are no other costs associated with borrowing the money, the interest rate is the same as the annual percentage rate (APR).

Issuer - An issuer is a corporation, government, agency, or investment trust that sells securities, such as stocks and bonds, to investors, either through an underwriter as part of a public offering or as a private placement.

J

Junk bond - Junk bonds carry a higher-than-average risk of default, which means that the bond issuer may not be able to meet interest payments or repay the loan when it matures. Except for bonds that are already in default, junk bonds have the lowest ratings, usually Caa or CCC, assigned by rating services such as Moody's Investors Service and Standard & Poor's (S&P).
Issuers offset the higher risk of default on junk bonds by offering substantially higher interest rates than are being paid on investment-grade bonds. That's why junk bonds are also known, more positively, as high-yield bonds.

L

Liquidation - 1. When a business or firm is terminated or bankrupt, its assets are sold and the proceeds pay creditors. Any leftovers are distributed to shareholders. Creditors liquidate assets to try and get as much of the money owed to them as possible. They have first priority to whatever is sold off. After creditors are paid, the shareholders get whatever is left with preferred shareholders having preference over common shareholders.

Lump-sum payment - A lump sum is an amount of money you pay or receive all at once rather than in increments over a period of time. For example, you buy an immediate annuity with a single lump-sum payment. Similarly, if you receive the face value of a life insurance policy when the insured person dies, or get a check for the full value of the assets in your retirement account, those payments are also lump sums.

M

Market capitalization - Market capitalization is a measure of the value of a company, calculated by multiplying the number of existing shares, or shares the company has issued, by the current price per share. For example, a company with 100 million shares of stock with a current market value of $25 a share would have a market capitalization of $2.5 billion.
Market capitalization, or cap, is one of the criteria investors use to choose stocks, which are often categorized as small-, mid-, and large-cap. Generally, large-cap stocks are considered the least volatile, and small-caps the most volatile. The term market capitalization is sometimes used interchangeably with market value.

Market maker - A dealer in an electronic market, such as the Nasdaq Stock Market (Nasdaq), who is prepared to buy or sell a specific security — such as a bond or at least one round lot of a stock — at its publicly quoted price, is called a market maker. Typically, there are several market makers in each security. On the floor of an exchange, such as the New York Stock Exchange (NYSE), however, the dealer who handles buying and selling a particular stock is called a specialist, and there is only one specialist in each stock. Brokerage firms that maintain an inventory of a particular security to sell to their own clients, or to brokers at other firms for resale, are also called market makers.

Maturity date - A bond comes due on its maturity date. On that date, the full face value of the bond (and sometimes the final interest payment) must be paid in full to the bondholder. Certificates of deposit (CDs) also have maturity dates on which you may withdraw the principal and interest without penalty or roll the money over into a new CD.

MBA - Master of Business Administration

Money market  - The money market isn't a place. It's the continual buying and selling of short-term liquid investments, including Treasury bills, certificates of deposit (CDs), commercial paper, and other debt issued by corporations and governments. These investments are also known as money market instruments.

Mortgage - A mortgage is a long-term loan used to finance the purchase of real estate. As the borrower, or mortgager, you repay the lender, or mortgagee, the loan principal plus interest, gradually building your equity in the property. While the mortgage is in force, you have the use of the property, but not the title to it. When the loan is repaid in full, the property is yours. But if you default, or fail to repay, the mortgagee can exercise its lien on the property and take possession of it.

O

Outstanding shares - The number of shares of stock that a corporation has issued are described as its outstanding or existing shares. A corporation's market capitalization is figured by multiplying its outstanding shares by the market price of a share.
The number of outstanding shares is also used to derive all of the financial information that's provided on a per-share basis, such as earnings per share or sales per share.

P

Partnerships - A business organization in which two or more individuals manage and operate the business. Both owners are equally and personally liable for its debts.  Partnership does not just mean 2 people. There are many large partnerships who have thousands of partners.

Par value - Par value is the face value, or named value, of a stock or bond. With stocks, the par value, which is frequently set at $1, is used as an accounting device but has no relationship to the actual market value of the stock. But with bonds, par value, usually $1,000, is the amount you pay to purchase at issue and receive when the bond is redeemed at maturity. Par is also the basis on which the interest you earn on a bond is figured. For example, if you are earning 6% annual interest on a bond with a par value of $1,000, that means you receive 6% of $1,000, or $60. While the par value of a bond remains constant for its term, its market value does not. That is, a bond may trade at a premium (more than par) or at a discount (less than par) in the secondary market, based on changes in the interest rate, its rating, or other factors.

Penny stock - Stocks that trade for less than $1 a share are often described as penny stocks. Penny stocks change hands over the counter (OTC) and tend to be extremely volatile. Their prices may spike up one day and drop dramatically the next, reflecting the unsettled nature of the companies that issue them and the relatively small number of shares in the marketplace.
While some penny stocks may produce big returns over the long term, many turn out to be worthless. Institutional investors tend to avoid penny stocks, and brokerage firms typically warn individual investors of the risks involved before handling transactions in these stocks. However, penny stocks are sometimes marketed aggressively to unsuspecting investors.

Preferred stock - Some corporations issue preferred as well as common stock. Preferred stocks can be attractive because they often pay a fixed dividend on a regular schedule, and their share prices tend to remain stable. They also take precedence over common stocks if the issuing corporation liquidates, or sells, its assets to repay its creditors and investors.
What preferred stock doesn't generally offer is the opportunity to share in the corporation's potential for increased profits, which are reflected in higher prices for the common stock and sometimes an increased dividend payment.
One category of preferred shares, called convertible preferred shares, can be exchanged for a specific number of common shares at an agreed-upon price, similar to the way that a convertible bond can be exchanged for common stock.

Price-to-earnings ratio (P/E) - The P/E is the relationship between a company's earnings and its share price, and is calculated by dividing the current price per share by the earnings per share. A stock's P/E, also known as its multiple, gives you a sense of what you are paying for a stock in relation to its earning power. For example, a stock with a P/E of 30 is trading at a price 30 times higher than its earnings, while one with a P/E of 15 is trading at 15 times its earnings. If earnings falter, there is usually a sell-off, which drives the price down. But if the company is successful, the share price and the P/E can climb even higher. Similarly, a low P/E can be the sign of an undervalued company whose price hasn't caught up with its earnings potential or, conversely, a clue that the market considers the company a poor investment risk. Stocks with higher P/Es, which are typical of companies that are expected to grow rapidly in value, are often more volatile than stocks with lower P/Es because it can be more difficult for the company's earnings to satisfy investor expectations. The P/E can be calculated two ways. A trailing P/E, the figure reported in newspaper stock tables, uses earnings for the last four quarters. A forward P/E generally uses earnings for the past two quarters and an analyst's projection for the coming two.

Principal - Principal can refer to an amount of money you invest, the face amount of a bond, or the balance you owe on a debt, aside from the interest. The principal is also a person for whom a broker carries out a trade, or a person who executes a trade on his or her own behalf.

Probate - Probate is the legal process of validating a will, supervising the administration of a will, and making distribution of estate assets to beneficiaries. The probate process can be very complex and time consuming and costly.

Profit - Also called net income or earnings, profit is the money a business has left after it pays its operating expenses, taxes, and other current bills. In regard to investments, profit is the amount you make when you sell an asset for a higher price than you paid for it. For example, if you buy a stock at $20 a share and sell it at $30 a share, your profit is $10 a share (minus sales commission and capital gains tax).

Public companies - The stock of a public company is owned and traded by individual and institutional investors. In contrast, in a privately held company, the stock is held by company founders, employees, and sometimes venture capitalists. Many privately held companies eventually go public to help raise capital to finance growth.

Q

Quarter - The financial world splits up its calendar into four quarters, each three months long. If January to March is the first quarter, April to June is the second quarter, and so on, though a company's first quarter does not have to begin in January. The Securities and Exchange Commission (SEC) requires all publicly held US companies to publish a quarterly report, officially known as Form 10-Q, describing their financial results for the quarter. These reports and the predictions that market analysts make about them often have an impact on a company's stock price. For example, if analysts predict that a certain company will have earnings of 55 cents a share in a quarter, and the results beat those expectations, the price of the company's stock may increase. But if the earnings are less than expected, even by a penny or two, the stock price characteristically drops, at least for a time.

R

Risk/return Tradeoff - The balance an investor must decide on between the desire for low risk and high returns, since low levels of uncertainty (low risk) are associated with low potential returns and high levels of uncertainty (high risk) are associated with high potential returns.

S

Shareholders - If you own stock in a corporation, you are a shareholder of that corporation. You're considered a majority shareholder if you (alone or in combination with other shareholders) own more than half the company's outstanding shares, which allows you to control the outcome of a corporate vote. Otherwise, you are considered a minority shareholder.
In practice, however, it is possible to gain control by owning less than 51% of the shares, especially if there are a large number of shareholders.

Shares - Same as Stock or Equity

Shares Outstanding - The number of shares of stock that a corporation has issued are described as its outstanding or existing shares. A corporation's market capitalization is figured by multiplying its outstanding shares by the market price of a share.
The number of outstanding shares is also used to derive all of the financial information that's provided on a per-share basis, such as earnings per share or sales per share.

Short selling - Selling short is a trading strategy that takes advantage of an anticipated drop in a stock's price. To sell short, you borrow shares from your broker, sell them, and keep the proceeds until the stock price drops. If it does, you then buy back the shares at a lower price, return the borrowed shares to your broker (plus interest and commission), and pocket the difference. Suppose, for example, you sell short 100 shares of stock priced at $10 a share. When the price drops, you buy 100 shares at $7.50 a share, give them back to your broker, and keep the $2.50-per-share profit (minus commission). Of course, if the share price rises instead of falls, you may have to buy back the shares at a higher price and suffer the loss.

Small-capitalization (small-cap) stock - Shares of relatively small publicly traded corporations, with a total market value, or capitalization, of less than $500 million, are typically considered small-capitalization, or small-cap, stocks.
Small-cap stocks, which are tracked by the Russell 2000 Index, tend to be volatile in the short term, since they are issued by young, potentially fast-growing companies whose successes can't be guaranteed. Over the long term — though not in every period — small-cap stocks as a group have produced stronger returns than any other investment category. Mutual funds that invest in this type of stock are known as small-cap funds.

Specialist - A specialist or specialist unit maintains a fair and orderly market in a specific security or securities on the floor of an exchange. Typically, that means acting both as agent and principal. As agent, the specialist handles transactions for floor brokers who want to buy or sell one of the securities, collecting a percentage of the commission the client pays for the transaction.
As principal, the specialist buys for his or her own account to help maintain a stable market in a security. For example, if the spread, or difference, between the bid and ask (the highest price offered by a buyer and the lowest price asked by a seller) gets too wide, and trading in the security hits a lull, the specialist might buy, sell, or sell short shares to narrow the spread and stimulate trading.

Spread - In the most general sense, a spread is the difference between two similar measures. In the stock market, for example, the spread is the difference between the highest price offered and the lowest price asked.
With fixed-income securities, such as bonds, the spread is the difference between the yields on securities having the same investment grade but different maturity dates. For example, if the yield on a long-term Treasury bond is 6%, and the yield on a Treasury bill is 4%, the spread is 2%.
The spread is also the difference in yields on securities that have the same maturity date but are of different investment quality. For example, there is a 3% spread between a high-yield bond paying 9% and a Treasury bond paying 6% that both come due on the same date.

Sole proprietorship - A business organization which is unincorporated and has only one owner.

Spot price - The spot, or cash, price is the price of commodities and foreign currencies that are being sold for immediate delivery with payment in cash.

Stock - Stock is an equity investment that represents part ownership in a corporation and entitles you to part of that corporation's earnings and assets. Common stocks give shareholders voting rights but no guarantee of dividend payments. Preferred stocks provide no voting rights but usually guarantee a dividend payment.
In the past, shareholders received a paper stock certificate — called a security — verifying the number of shares they owned. Today, share ownership is usually recorded electronically, and the shares are held in street name by your brokerage firm.

Street name - If you have a brokerage account, you can either have your stocks registered in your own name or in the name of the brokerage firm, which is called street name. The advantage of having your stocks registered in street name is that shares can be traded more easily. That's because you don't have to sign and deliver the stock certificates before a sale can be completed.
In addition, having your broker hold your stocks in street name is often safer because it reduces the risk of losing or misplacing the certificates.

supply - The total amount of a good or service available for purchase by consumers. Think of supply for a good as the total amount that all companies produce.

T

Ticker tape - While the stock markets are in session, there is a running record of trading activity in each individual stock. Today's computerized system, still referred to as the ticker or ticker tape, actually replaces the scrolling paper tape of the past.
 

V

Volatile - In general, volatility is a statistical measure of the tendency of a market or security to rise or fall sharply within a short period of time. Volatility is typically measured by the variance or annualized standard deviation of the price or return. A highly volatile market means that prices have huge swings in very short-periods of time. A measure of the relative volatility of a stock to the market is its beta.
 

W

Wall Street - The collective name for the financial institutions in New York City. Including stock exchanges, banks, commodity markets, money markets, etc. It is also where the street in New York where the New York Stock Exchange (NYSE) is located.

Y

Yield - Yield is the rate of return on an investment, paid in dividends or interest and expressed as a percent. Yield is usually calculated by dividing the amount you receive annually in dividends or interest by the amount you spent to buy the investment.
In the case of stocks, yield is the dividend you receive per share divided by the stock's price per share. With bonds, it is the interest divided by the price you paid. Current yield, in contrast, is the interest divided by the current market price.
In the case of bonds, the yield on your investment and the interest rate your investment pays are sometimes, but by no means always, the same. If the price you pay for a bond is higher or lower than par, the yield will be different from the interest rate. For example, if you pay $950 for a bond with a par value of $1,000 that pays 6% interest, or $60 a year, your yield is 6.3% ($60 ÷ $950 = 0.0631). But if you paid $1,100 for the same bond, your yield would be only 5.5% ($60 ÷ $1,100 = 0.0545).

Yield to maturity (YTM) - Yield to maturity is the most precise measure of a bond's anticipated return. It takes into account the interest rate in relation to the price, the purchase or discount price in relation to the par value, and the years remaining until the bond matures. Although YTM figures are complex to calculate, brokers will supply this information if you ask, or you can use a calculator programmed to provide YTM figures.
 

Z

Zero coupon bonds (Zeros) - Zero coupon bonds are issued at a deep discount to par value and pay no interest during their term. At redemption, the bondholder receives par value, which includes the interest that has accrued since issue. For example, you may purchase a zero coupon bond with a six-year term for $13,500, and collect $20,000 at maturity. One advantage of zeros is that you can invest relatively small amounts and choose maturity dates to coincide with times you know you'll need the money — for example, when college tuition bills will come due. One drawback of zeros, however, is that income taxes are due annually on the interest that accrues, even though you don't receive the actual payment until the bond matures. The exception occurs if you buy tax-exempt municipal zeros, on which no tax is due either during the term or at maturity. Another drawback is that zero coupon bonds are volatile in the secondary market, so if you have to sell before maturity, you might have a loss. These bonds get their name — zero coupon — from the fact that coupon means interest in bond terminology, and there's no periodic interest.

Home | Investing | Stocks | Bonds | Money Markets | Mutual Funds | Options | Futures | Real Estate | Retirement | Life Insurance | Credit Cards

Search | Bookshelf |  Financial Calculator | Glossary | Jokes & Quotes | Poker | Asthma | Mesquite, NV | E-Mail: webmaster@moneysitter.com

Copyright © 2004-2011, MoneySitter.com.  All rights reserved.