Dated Date: A dated date is the date from which interest accrues on a newly issued security. The dated date for a security may differ from the issue date for the security, which has the potential to cause accrual discrepancies.Dealer: A dealer (as opposed to a broker) acts as a principal in all investment transactions. A dealer buys and sells securities for his or her own investment account. A dealer maintains an investment portfolio and can trade securities from that portfolio. Oftentimes, a broker will also act in a dealer capacity when selling securities owned by his or her brokerage firm.
Debenture: A debenture is a bond that is based on the good credit of a corporation, but is not secured by a specific asset. A debenture is secured only by the general credit of the issuer. U.S. government agency notes are an example of debentures.
Debit: An accounting entry that results in either an increase in assets, or a decrease in liabilities or net worth.
Debt: Debt is a common name for bonds and other forms of paper that indicate the amount owed by a borrower and whether the amount owed is payable on a specific date or payable on demand.
Debt Issuance: (See Bond Issuance)
Debt Service: Debt service refers to the semi-annual amount of money needed to pay the interest and principal payments on a bond issue.
Deep Discount: The term deep discount refers to a security that trades substantially below its face value, usually more than 20% less than its face value.
Default: Default occurs when a debtor fails to make timely payments of principal and/or interest on a debt.
Defeasance: (See Advanced Refunding)
Deflation: Deflation occurs when there is a drop in the price of goods and services. It is the opposite of inflation. In a deflationary environment, fixed income securities become very desirable, which pushes bond prices up and yield prices down.
Delivery versus Payment: There are two methods for delivery of investment securities, one of which is delivery versus payment, the other is delivery versus receipt. Delivery versus payment occurs when securities are delivered before payment is made, which secures the assets for the buyer. This is considered a secure method of delivery.
Delivery versus Receipt: There are two methods for delivery of investment securities, one of which is delivery versus receipt, the other is delivery versus payment. Delivery versus receipt occurs when securities are delivered via the exchange of a signed receipt for the securities. This is considered to be less secure than delivery versus payment.
Denominate: To denominate is to issue securities in terms of a given monetary unit; e.g., securities that are denominated in yen.
Depository Bank: A depository bank is a bank that holds funds or securities that are deposited by other individuals or entities.
Depository Contract: A depository contract is a formal written agreement between a bank, or other type of financial institution, and a school district (or other entity) that describes the terms and obligations of both parties as they relate to banking services.
Depository Trust Company: A depository trust company is a firm through which the members can use a computer to arrange for investment securities to be delivered to other members via computer, thus there is no physical delivery of the securities. A depository trust company uses computerized debit and credit entries. Depository trust companies are members of the Federal Reserve System. The national system of depository trust companies mirrors the FedWire system and is designed to reduce the load on the FedWire system. When settling an investment that is Depository Trust Company-eligible, the delivering dealer will request the Depository Trust Company number of the safekeeping agent.
Derivative(s): (See Derivative Security)
Derivative Security: A derivative security, also referred to as a derivative, is a financial security whose value is based on, and determined by another security or benchmark. Examples of derivative securities include mortgage-backed securities whose value is partly determined by their underlying mortgage loans, and callable agency securities, whose value is influenced by their embedded call options. Depending upon its characteristics, a derivative security may be considered safer or more risky than a non-derivative security. Examples of derivative securities include all classes of collateralized mortgage obligations, Student Loan Marketing Association floaters, callable agencies and structured notes.
Discount: A discount is the difference between the purchase price of a security and its par (face) value. This discount represents the income to be earned on the security and will be accreted over the life of the security.
Discount Note: A discount note is a type of zero-coupon, AAA-rated, Federal agency security that is issued at a discount and matures in one year or less.
Discount Rate: A discount rate is the interest rate that member banks pay to borrow funds from the Federal Reserve. The Federal Reserve discount rate does not have a direct effect on market yields.
Discount Securities: Discount securities are non-interest bearing money market securities that are issued at a discount and redeemed at maturity for their full face value. Examples of discount securities include U.S. Treasury bills and U.S. agency discount notes.
Discrete Call Option: A discrete call option is a type of option, contained or embedded within a callable bond, whereby the investor has sold the issuer the right to repurchase the bond back from the investor, but only on specified interest payment dates, or other predetermined dates as per a formal call schedule. A discrete call option is more certain, making it more attractive to an investor. As a result, the bond yield is typically less than that of a bond containing a continuous call option.
Diversification: Diversification refers to spreading one’s investments over a large number of financial securities. Diversification is done in order to reduce financial risk. It is also the process of putting various types of securities with different maturities into an investment portfolio, in order to reduce market and credit risk. In this manner, a specific event, such as the decline in value of one security, will have less effect on the investor’s total portfolio than if the investor had all their money in a single security. Diversification follows the adage of not putting all of your eggs in one basket. An example of diversification would be a laddered portfolio containing securities that mature monthly for eighteen months, with security types divided equally among treasuries, agencies, commercial paper and investment pools.
Dividend: A dividend is the distribution of the earnings of a company to its stockholders. (Stocks are not authorized investments for school districts under the Public Funds Investment Act)
DK: "DK", an acronym for "Don’t Know", is a term used in the securities clearance process when one party to a trade does not recognize the security being delivered. When a securities transaction does not match up, a DK notice is sent to the other party. When a security is sent back because it was not recognized, the trade has been "DK’ed".
Dollar Weighted Maturity: (See Weighted Average Maturity)
Dow Jones Industrial Average: The Dow Jones Industrial Average is a stock index that is composed of 30 widely-held New York Stock Exchange listed stocks. It provides an indication of how the stock market is performing. (Stocks are not authorized investments for school districts under the Public Funds Investment Act)
Draw: A draw is the transfer of cash from the sale or maturity of an investment to pay expenditures.
Draw Schedule (Drawdown Schedule): A draw schedule is an estimate of the dates and amounts that expenditures on a project will be paid. Draw schedules represent estimated cash flow requirements. They are important in determining the amount of available funds to invest.
Duration: Duration is a measure of the price volatility of a bond. It is equal to the weighted-average term to maturity of the bond’s cash flows. The greater the duration of the bond, the greater its price volatility. The duration of an investment portfolio is roughly equivalent to the average maturity of the portfolio and will vary depending on the size of the cash flows. If there are no actual cash flows, as in the case of portfolios consisting of zero coupon Treasury bills or discount notes, the duration will equal the average maturity. Duration will increase less than average maturity as the weighted average coupon of a portfolio increases.
Early Withdrawal Penalty: An early withdrawal penalty is the amount charged to an individual when they withdraw money from a fixed-term investment before its maturity date. For example, if an investor bought a Certificate of Deposit with a one year maturity, the investor would be assessed an early withdrawal penalty if he or she withdrew all of the money from the Certificate of Deposit after eight months.
Earnings Credit Rate: An earnings credit rate is the rate used by a bank to determine the allowable credit that the bank will provide for the use of a customer’s balance on deposit with the bank.
Equity: Equity refers to the ownership by shareholders in a corporation. Equity is another name for "stock." (Stocks are not authorized investments for school districts under the Public Funds Investment Act)
Escrow: (See Escrow Account)
Escrow Account: An escrow account is an account established to hold securities purchased for specific expenditure requirements. Generally, escrows are used to hold securities that are purchased to defease outstanding bonds. The securities are held by a bank until they mature, at which time the cash is used to pay debt service on the issue. An important element of an escrow account is that once the funds are deposited, a school district may not use them for any other purpose.
Expenditure: An expenditure is a payment, or the promise of a future payment.
Face Value: Face value refers to the par, or maturity value of a security.
Fair Market Price: (See Fair Market Value)
Fair Market Value: The fair market value of a security is the price a willing buyer would pay to purchase the security from a willing seller in a bona fide, arm’s length transaction.
Fed (the Fed): (See Federal Reserve System)
Federal Deposit Insurance Corporation (FDIC): The Federal Deposit Insurance Corporation is the federal agency that insures bank deposits. Deposits are currently insured up to $100,000 per deposit, as identified by taxpayer identification code.
Federal Funds Rate: The federal funds rate is the rate of interest at which banks with excess reserves charge banks lacking these reserves for overnight loans, in order for the latter to meet their reserve requirements. This important overnight rate determines, in large part, the rate at which overnight repurchase agreements will trade. When the Federal Reserve "raises rates," the target federal funds rate is increased and other short-term security yields will follow. Since investment pools and money market funds are heavily invested in short-term securities, their interest rates often approximate the federal funds rate at any given point in time.
Federal Home Loan Bank (FHLB): A federal home loan bank is a banking institution that regulates and lends money to savings and loan associations, cooperative banks and other mortgage lenders in a manner that is similar to the Federal Reserve’s relationship with commercial banks. The Federal Home Loan Bank System is made up of 12 regional federal home loan banks. The Federal Home Loan Bank System raises money by issuing notes and bonds. It lends money to savings and loans and other mortgage lenders, based on the amount of collateral the borrowing institution can provide. The Federal Home Loan Bank issues both callable and non-callable agency securities as well as discount notes. Federal Home Loan Bank securities carry AAA ratings and are authorized investments for school districts under the Public Funds Investment Act.
Federal Home Loan Mortgage Corporation ("Freddie Mac"): The Federal Home Loan Mortgage Corporation is a publicly chartered agency that buys qualifying residential mortgages from lenders. It repackages these pooled mortgages into new securities that are backed by the pooled mortgages. The Federal Home Loan Mortgage Corporation provides certain guarantees and then resells the securities in the open market. The Federal Home Loan Mortgage Corporation issues both callable and non-callable agency securities as well as discount notes. Federal Home Loan Mortgage Corporation securities carry AAA ratings and are authorized investments for school districts under the Public Funds Investment Act.
Federal Housing Administration (FHA): The Federal Housing Administration is the federally sponsored agency that insures lenders against loss on residential mortgages.
Federal National Mortgage Association ("Fannie Mae"): The Federal National Mortgage Association is a federal corporation that operates under the auspices of the United States Department of Housing and Urban Development (HUD). This corporation is the largest single provider of residential mortgage funds in the United States. It is a private stockholder-owned corporation that purchases a variety of adjustable mortgages and second loans in addition to fixed-rate mortgages. It purchases conventional and insured mortgages from governmental agencies such as the Federal Housing Administration and the Veterans Administration. Its securities are highly liquid and widely accepted. The Federal National Mortgage Association issues both callable and non-callable agency securities as well as discount notes. Federal National Mortgage Association securities carry AAA ratings and are authorized investments for school districts under the Public Funds Investment Act.
Federal Open Market Committee: The Federal Open Market Committee consists of seven members from the Federal Reserve Board and five members from the nation’s twelve Federal Reserve Bank Presidents. The President of the New York Federal Reserve Bank is a permanent member of this committee. The other Federal Reserve Bank presidents serve as members on a rotating basis. The Federal Open Market Committee meets eight times per year to set United States monetary policy.
Federal Reserve Bank: A federal reserve bank is any one of 12 banks established by the U.S. Congress to maintain reserves, issue bank notes and lend money to member banks.
Federal Reserve Board: The Federal Reserve Board is the governing body of the Federal Reserve System. The Federal Reserve Board is composed of seven members appointed by the President of the United States, subject to confirmation by the U.S. Senate. The Federal Reserve Board sets monetary policy for the country. It has authority to determine bank reserve requirements, set the discount rate, regulate the availability of credit and control the purchase of securities on margin.
Federal Reserve System (the Fed): The Federal Reserve System is a national system established by the U.S. Congress to establish and enforce bank regulations and manage the nation’s monetary and banking system. The Federal Reserve System, which is governed by the Federal Reserve Board, is divided into twelve regions. National banks are the stockholders of the Federal Reserve Bank within their region. The Federal Reserve System regulates the national supply of money, sets bank reserve requirements, controls the printing of currency and acts as a clearinghouse for the transfer of funds throughout the banking system.
FedWire System: The FedWire System is a national payment system operated by the United States Federal Reserve System as a private wire network for transfers between financial institutions having accounts at the Federal Reserve Bank.
Final Maturity: Final maturity is defined as the date on which a security is due and payable. The final maturity date will be stated on the face of a security.
Financial Accounting Foundation (FAF): The Financial Accounting Foundation is composed of members from eight sponsoring associations: the American Accounting Association; American Institute of Certified Public Accountants; Association for Investment Management and Research; Financial Executives Institute; Government Finance Officers Association; Institute of Management Accountants; National Association of State Auditors, Comptrollers and Treasurers; and Securities Industry Association. The foundation raises funds for both the Government Accounting Standards Board and its private sector counterpart, the Financial Accounting Standards Board. The Financial Accounting Foundation operates for charitable, educational, scientific and literary purposes as authorized by the Internal Revenue Code.
Financial Accounting Standards Board (FASB): The Financial Accounting Standards Board is a private sector board that establishes standards for financial accounting and reporting. The standards set by the Financial Accounting Standards Board govern the preparation of financial reports.
Fixed Asset: A fixed asset is an asset owned by an entity that is generally not intended for sale in the normal course of business. Examples of fixed assets include buildings, machinery, furniture and equipment.
Fixed Income Investment: A fixed income investment is a security with a set (or fixed) interest or coupon rate. This term generally relates to government, corporate or municipal bonds that pay a fixed rate of interest until the bonds mature.
Fixed Interest Rate: A fixed interest rate is an unchanging interest rate.
Fixed Rate Investment Instrument: A fixed rate investment instrument is an investment instrument in which the interest rate does not change.
Fixed Rate Security: A fixed rate security is a security in which the interest rate does not change.
Flex Bidding: Flex bidding is the process of obtaining competitive bids on an investment in a flexible repurchase agreement. (See Flexible Repurchase Agreement and Bidding Agent)
Flexible Repurchase Agreement (Flex Repo): A flexible repurchase agreement is an investment agreement involving the purchase of a security with a simultaneous agreement to repurchase that security at a specified price and date. Flexible repurchase agreements are used primarily for the investment of bond proceeds. They have a maturity date that corresponds to the last expected construction draw for a bond project. Flexible repurchase agreements pay a fixed rate of interest. They allow for cash withdrawals at the buyer’s discretion during the life of the agreement.
Floater (floating security): A floater is a security whose value or coupon is determined by the performance of an index, such as a 1 month LIBOR (London Inter-Bank Offered Rate) or a security such as the 91-day Treasury bill. The Student Loan Marketing Association issues a regular six-month security with a coupon that changes weekly, based on the 91-day Treasury bill yield plus a basis point spread that varies by issue. Since a security of this type has a short term to maturity and always reflects a current market rate of interest, it is generally considered to be a low risk investment.
Floating Rate Index: A floating rate index is a general interest rate, used for indication purposes, that periodically moves up or down in step with a specified market rate of interest.
Front-End Load (Front-End Sales Charge): A security with a front-end load is one where the sales charge is deducted at the time of sale. For example, if a front-end load mutual fund has a 5% load, an investor who invests $1,000 would have $950 after the $50 sales charge, or load (5% of $1,000) is deducted.
Full Faith and Credit: Full faith and credit is a term used to describe a security for which a government agency pledges its full taxing and borrowing power, plus revenue other than taxes to support the payment of interest and repayment of principal. For example, U.S. Treasury securities are backed by the full faith and credit of the United States government.
Fully Accrued Interest: (See Accrued Interest)
Generally Accepted Accounting Principles (GAAP): Generally accepted accounting principles are established by the American Institute of Certified Public Accountants. Generally accepted accounting principles are detailed accounting policies, rules and procedures that are widely accepted. They are based upon pronouncements issued by accounting entities such as the Financial Accounting Standards Board.
Government Accounting Standards Board (GASB): The Government Accounting Standards Board was established in 1984 as an arm of the Financial Accounting Foundation. It is responsible for developing standards of financial accounting and reporting with respect to the activities of state and local governments.
Government National Mortgage Association (GNMA): The Government National Mortgage Association is a federal corporation, which operates under the auspices of the United States Department of Housing and Urban Development (HUD). GNMA buys Veterans Administration, Farmers Home Administration and Federal Housing Administration mortgages, then issues bonds that are secured by pools of these mortgages. An investor in this type of bond receives monthly payments of principal and interest that represent monthly mortgage payments by homeowners. These bonds are guaranteed by the full faith and credit of the United States Government, unlike other agency mortgage-backed securities.
Guaranteed Investment Contract (GIC): A guaranteed investment contract is a fixed rate, fixed maturity investment contract that is similar to a bond. However, unlike a bond, a GIC is always valued at par (face) value. This occurs because the company issuing the GIC, usually an insurance company, guarantees the investment by agreeing to pay the difference between the market value and book value for the GIC if the investor decides to sell it. A guaranteed investment contract may be structured in a manner similar to a flexible repurchase agreement, whereby the investor is able to draw down the balance upon written request throughout the life of the contract. A GIC can be an authorized investment for bond proceeds under the Public Funds Investment Act if the GIC meets the requirements of section 2256.015 of the Government Code.
Holding Company: A holding company is a corporation that owns enough voting stock in another company to control its management and operations by influencing or electing its board of directors.
Illiquid: Illiquid is a term used to describe investments such as stocks and bonds that cannot be easily converted into cash. A security becomes illiquid when it is hard to sell without taking a substantial loss. Some assets such as real estate may also be described as illiquid if there are no ready buyers.
Indenture Agreement: An indenture agreement is a written contract, also referred to as a Deed of Trust, under which bonds and other securities are issued. The indenture agreement defines the security’s maturity date, interest rate, redemption rights, call privileges and other terms.
Inflation: Inflation is caused by the rising price of goods and services. Rising inflation rates will decrease the value of fixed income securities and push yields higher. The Federal Reserve seeks to control inflation by raising interest rates in order to slow the national economy. The national inflation rate is generally measured by the Consumer Price Index.
Instrumentality (Instrumentalities): Instrumentalities are obligations of government agencies that are backed by the full faith and credit of the U.S. Government; however, these obligations are not direct obligations of the federal government. Examples of instrumentalities include those issued by the Student Loan Marketing Association, Federal Intermediate Credit and Federal Land Banks. Typically, an instrumentality is referred to by the more general term of "agency." Examples of instrumentalities or agencies include the Federal National Mortgage Association and the Federal Home Loan Bank. An instrumentality may also be referred to as a government-sponsored enterprise.
Interest: Interest is the dollar cost that a borrower pays to a lender for the use of the lender’s money.
Interest-Bearing: Interest-bearing refers to something that pays interest; for example, an interest-bearing bond.
Interest Rate: The interest rate is the rate of interest (dollar cost) that is charged by lending institutions for the use of their money. It is generally expressed as an annual rate. With respect to bonds, a bond’s issuer promises to pay the bondholder an interest rate based on the bond’s face value.
Interest Rate Risk: Interest rate risk is a type of investment risk in which changes in interest rates negatively affect the value of an investment portfolio. For example, the value of a bond holding which pays 5 percent interest will decline if interest rates increase to 10 percent.
Internal Revenue Code: Federal tax law. Title 26 of the U.S. Code.
Inverse Floater: An inverse floater is a type of security with a coupon that periodically resets at a higher rate when market interest rates fall and resets at a lower rate when market interest rates rise.
Inverted Yield Curve: An inverted yield curve is a graph representing an unusual economic situation in which short-term interest rates are higher than long-term interest rates. Normally, lenders receive a higher yield when committing their money for longer periods of time.
Investment: An investment is an asset or security purchased for the purpose of gaining future income or profit.
Investment Advisers Act: The Investment Advisers Act is a federal law passed by the U.S. Congress in 1940 that requires investment advisors to register with the Securities and Exchange Commission. The intent of this act is to protect investors from fraud or misrepresentation by investment advisors.
Investment Indexes: Investment indexes are calculations of the rise and fall of the stock, bond and commodities markets through tracking of market prices and outstanding shares for companies that comprise the investment index. Examples of investment indexes include the Dow Jones Industrial Average, the NASDAQ Composite Index and the American Stock Exchange.
Investment Instrument: (See Security)
Investment Pool: (See Local Government Investment Pool)
Investment Portfolio: (See Portfolio)
Investment Rating Firm: (See Rating Agency)
Investment Risk: Investment risk is the total of all risks associated with an investment security. See also Section 5 of this Web site, "Learn how to manage risk."
IRS Rebate: (See Arbitrage Rebate)
Israeli Bond: Israeli bonds are securities offered for sale by the State of Israel. These securities are backed by the full faith and credit of the Government of Israel. They may be bought through the Development Corporation for Israel, which is a New York corporation and National Association of Securities Dealer-registered broker/dealer. Israeli bonds are authorized investments under the Public Funds Investment Act pursuant to section 2256.009 of the Texas Government Code.
Issuance: Issuance is the process of issuing new securities.
Issue: Issue is the process by which new securities are sold and distributed.
Issue Date: An issue date, as defined by the Internal Revenue Service, is the date on which the proceeds from the sale of a bond issue are received and the bonds are delivered to investors.
Issuer: An issuer is a company or a municipality that offers securities for sale to investors.