Ladder (Laddered Portfolio): Laddering is a strategy in which a portfolio is constructed so that securities have staggered maturities, thereby reducing interest rate risk.Letter of Credit: A letter of credit is a document issued by a bank which guarantees the payment of a customer’s drafts up to a specified amount and for a specified period of time.
Leverage: Leverage is the act of borrowing money to buy securities, intending that the security value will exceed the cost of borrowing.
Liability: Liability refers to the claims by creditors against a corporation or individual.
Liability Date: The liability date is a term used in calculating arbitrage rebate payments on tax-exempt bond issues. The liability date is the date on which a payment is due to the Internal Revenue Service, which is generally every five years.
LIBOR (London Inter-Bank Offered Rate): In England’s Eurodollar market, LIBOR is the interest rate that banks charge each other on short-term money. The LIBOR is roughly equivalent to the Federal Funds rate in the United States. In the U.S. markets, the LIBOR frequently serves as a floating rate index.
Liquid Asset: A liquid asset is an asset that can easily be converted into cash. Examples include money market fund shares, Treasury bills, and bank deposits. In the money market, a security is said to be liquid if a buyer can be easily found.
Liquidity: Liquidity is the characteristic of an asset that allows it to be converted easily and rapidly into cash without a substantial loss of value. Investment pools and money market funds are considered to be "fully liquid," because they can always be converted to cash on demand. Typically, the shorter the maturity, the more liquid the asset. Treasury securities are considered to be the most liquid of all securities, due to a continuously traded and efficient market.
Liquidity Risk: Liquidity risk relates to whether an investment can be sold quickly at a fair market price when cash is needed. For example, long-term Treasury bonds are publicly traded and have excellent liquidity. On the other hand, limited partnerships are not often publicly traded and their sale may take longer than for long-term Treasury bonds, thus their liquidity risk is higher.
Load: In buying and selling mutual funds, load refers to the sales charge.
Local Government Investment Pool: A local government investment pool is a professionally managed pool of funds composed of cash deposits from a large group of cities, counties, school districts or local governments. In Texas, the ability to pool assets was created under the Interlocal Cooperation Act. The investment pool manager purchases a portfolio of securities with the deposits and each pool participant owns a pro rata share in the portfolio.
Low Load Fund: A low load fund is a mutual fund that assesses a front-end sales charge on the purchase of the mutual fund.
Margin: A margin is the amount of collateral above 100% that a buyer deposits with a broker when borrowing money to buy securities (referred to as "buying on margin"). (Purchasing securities on margin is not a permitted activity for school districts under the Public Funds Investment Act)
Margin Account: A margin account is a brokerage firm account that permits an investor to buy securities by borrowing a percentage of the purchase price. (Purchasing securities on margin is not a permitted activity for school districts under the Public Funds Investment Act)
Market (the Markets): A market exists for the exchange of capital and credit. Financial markets include the stock market, bond market, commodities market and foreign exchange market. (Stocks and commodities are not authorized investments for school districts under the Public Funds Investment Act)
Market Index: A market index is an interest rate that reflects the average performance or average interest rate for a market.
Market Interest Rate: Market interest rate is a general term used to describe the prevailing rate of interest available at any point in time for a given maturity in low risk securities such as Federal agencies or investment pools.
Market Price: The market price of a security is the current quote or the last reported price at which it was sold.
Market Price Risk: (See Market Risk)
Market Rate of Interest: (See Market Interest Rate)
Market Rate of Return: Market rate of return is a general term referring to the approximate interest rate that could be earned by an investor in a specific maturity range at any given point in time. For example: an investor seeking to earn a "market rate of return" while maintaining a investment portfolio with an average maturity of 30 days would hope to earn approximately the same rate as a one month Federal agency note. If the investor earns a rate much higher than this, it might signal an inappropriately high level of risk.
Market Return: (See Market Rate of Return)
Market Risk: Market risk is the risk that the price of a security will decrease with an overall decline in the market. This risk cannot be diversified away, but can be minimized by purchasing securities with shorter maturity dates. A decline in the market value of a security may not be considered a problem if that security can be held to maturity.
Market Value: Market value is the current value of a security, which is determined by multiplying its par (face) value by the current market price. The unrealized gain or loss on a security can be calculated by subtracting the book value from the market value.
Market Yield: Market yield is a general term referring to the approximate yield that could be earned by an investor in a specific maturity range at any given point in time. For example: an investor seeking to earn a "market yield" while maintaining an investment portfolio with an average maturity of 30 days would hope to earn approximately the same yield as a one month Federal agency note. If the investor earns much higher than this, it might signal an inappropriately high level of risk.
Marketability: Marketability is the ease at which a security can be bought and sold in the market. The marketability of a security is enhanced by an actively traded market.
Master Repurchase (Repo) Agreement: A master repurchase agreement is a written contract that covers all repurchase transactions between two parties with respect to the repurchase agreements that have established each party’s rights in these transactions. Repurchase agreements are investment agreements involving the purchase of a security and a simultaneous agreement to repurchase that security at a specified price and date. A master repurchase agreement will often specify, among other things, the right of the buyer or lender to liquidate the underlying securities in the event of a default by the seller or borrower.
Maturity: Maturity refers to the date on which a debt becomes due for payment (its maturity date).
Maturity Date: A maturity date is the date on which the principal amount of a loan, bond or other debt instrument is due to be paid in full.
Money Market: (See Money Market Mutual Fund)
Money Market Account: A money market account is a savings account that generally earns interest at a higher rate than a regular savings account. Money market accounts have a required minimum balance and other restrictions.
Money Market Fund: A money market fund is a mutual fund that is invested in short-term investments (See Money Market Mutual Funds)
Money Market Mutual Funds: Money market mutual funds are a specific type of mutual fund that invests only in money market instruments (i.e., short-term debt instruments such as Treasury bills, commercial paper, bankers acceptances, repurchase agreements and federal funds) as defined and registered with the Securities and Exchange Commission. Money market mutual funds are regulated by the Investment Company Act of 1940 as 2a-7 funds. They strive to maintain a $1 net asset value for participants. There are three types of money market mutual funds: (1) Treasury, (2) governmental and (3) prime. Prime money market mutual funds are permitted to invest in commercial paper and other non-government securities. Money market mutual funds are designed to provide both safety and liquidity. A no-load money market mutual fund is an authorized investment under the Public Funds Investment Act if the fund meets the requirements specified in section 2256.014 of the Texas Government Code.
Moody’s Investor Service: Moody’s Investor Service is a credit rating agency that publishes credit opinions, ratings and research on securities and other credit obligations. Credit ratings can be used by investors to examine the credit risks associated with fixed-income securities.
Mortgage-Backed Security: A mortgage-backed security is a security backed by pools of home loan mortgages. Investors in mortgaged-backed securities receive monthly payments derived from the interest and principal of the underlying mortgages. A standard mortgage-backed security is referred to as a "pass-through." When a number of pass-through securities are combined and subsequently divided into separate classes of new securities with unique investment characteristics, these are called "collateralized mortgage obligations," or CMOs.
Municipal Bonds: Municipal bonds are bonds issued by state or local governments in order to finance their municipal needs or special projects. They may also be referred to as revenue bonds. The Public Funds Investment Act, section 2256.009 Government Code, allows governmental entities to invest in the municipal obligations of states, agencies, counties, cities and other political subdivisions of any state rated as to investment quality by a nationally recognized investment rating firm not less than A or its equivalent.
Municipality: A municipality is a city, town or other district incorporated for the purpose of local self-government.
Mutual Funds: Mutual funds are a professionally managed portfolio of assets made up of deposits from a large number of individual investors who jointly own shares in the fund. All of the shareholders participate in the gains or losses of the fund. The value of a share is calculated based on the market value of the portfolio. This value will fluctuate, depending upon the level of risk the mutual fund assumes. Since mutual funds have longer average maturities, they typically expose the investor to more market risk than money market mutual funds. Due to the potential risk of this investment type, the Public Funds Investment Act specifically restricts the maximum percentage that a public entity may invest in mutual funds that are not money market mutual funds to 15 percent of the entity’s monthly average fund balance, as defined in section 2256.014 of the Texas Government Code. A school district may not invest any portion of bond proceeds, reserves and funds held for debt service in mutual funds that are not money market mutual funds.
National Association of Securities Dealers (NASD): The National Association of Securities Dealers is a self-regulating association of U.S. securities brokers and dealers. This association was created by the Maloney Act of 1933 in order to establish the rules of fair market practice. This association enforces, on a self-regulated basis, the rules of the Securities and Exchange Commission. All brokers or dealers who transact business with public entities are required to be members in good standing with the National Association of Securities Dealers.
NASDAQ (National Association of Securities Dealers Automated Quotations System) Composite Index: The NASDAQ is a stock market index that measures the performance of all NASDAQ domestic and foreign stocks. This index is a market-value-weighted index. (Stocks are not authorized investments for school districts under the Public Funds Investment Act)
Negative Arbitrage: Negative arbitrage is the term used to describe an investment of bond proceeds at a yield (return) less than the yield on the bond issue. For example, if a tax-exempt bond issue is sold at a yield of 6.00% and the proceeds are invested in taxable securities of 5.50%, negative arbitrage of 0.50% (5.50% — 6.00%) is being earned.
Negative Yield Curve: (See Inverted Yield Curve)
Net Asset Value (NAV): Net asset value is the value of a mutual fund share at the end of the business day. Net asset value is calculated by adding the market value of all of the securities in an investment portfolio, deducting expenses and dividing this total by the number of outstanding shares.
Net Asset Value Funds (NAV Funds): A net asset value fund is a mutual fund whose share values fluctuate with changes in market prices. A net asset value fund seeks to offer a higher yield than a constant dollar fund (money market fund) by purchasing longer maturing securities. These net asset value funds experience market fluctuations due to the risk of the longer securities. These fluctuations will subject the investor to a higher level of market price and volatility risk than a constant dollar fund.
New York Federal Reserve Bank: The New York Federal Reserve Bank is one of twelve regional reserve banks that are part of the Federal Reserve System. It is the largest of the federal reserve banks in terms of assets and volume of activity.
New York Stock Exchange: The New York Stock Exchange is the oldest and largest stock exchange in the United States. It is located on Wall Street in New York City. (Stocks are not authorized investments for school districts under the Public Funds Investment Act)
No Load Mutual Fund (No Load Fund): A no load fund is a mutual fund that is offered by an investment company that does not include a sales charge (or "load") in the purchase of shares in the fund. A no-load money market mutual fund and a no-load mutual fund can be authorized investments under the Public Funds Investment Act if they meet the requirements of section 2256.014 of the Texas Government Code.
Note: A note is a short-term debt security, usually with a maturity of five years or less.
Offer Price: An offer price is the price asked by a seller of securities. It is the price at which a security will be sold to an investor.
Off-the-Run Securities: Off-the-run securities are previously-issued U.S. Treasury securities that are generally not used for benchmarking or pricing purposes. They tend to be somewhat less active and less liquid than the most recent U.S. Treasury issues, but may offer more attractive yields as a result.
On-the-Run Securities: On-the-run securities are the most recently issued U.S. Treasury security in each maturity range. They are often used as benchmarks. A Treasury yield curve will generally include on-the-run U.S. Treasury securities.
Open Market Operations: Open market operations are the purchase and sale of government and certain other securities in the open market by the New York Federal Reserve Bank, as directed by the Federal Open Market Committee. These operations in turn influence the volume of money and credit in the national economy. This is the primary tool that the Federal Reserve uses to raise and lower interest rates.
Opportunity Cost: Opportunity cost is the difference between a current investment return and an alternative investment offering a higher return. For example, an investor might buy a safer U.S. Treasury security yielding 6.00% instead of commercial paper yielding 6.75%. The 0.75% difference in yield between these two options is referred to as the opportunity cost.
Overnight Investment: Overnight investment is a term used to describe an investment that matures the day after it is purchased.
Overnight Repurchase Agreements (Repos): Overnight repurchase agreements are a type of repurchase agreement that is negotiated or renegotiated (rolled over) each day at a new market rate. This type of investment is frequently used by a number of investment pools in Texas. The daily repo rate tracks very closely with the federal funds rate.
Overnight Sweep Account: An overnight sweep account is a bank account that automatically invests available cash balances at the end of the day into overnight investments. (See Overnight Investments)
Par Value: Par value is the face value of a security. It equals the amount of principal on the security due at maturity, or the principal amount on which interest on the security is calculated.
Pledged Asset: Pledged assets are bank-owned securities used as collateral for government deposits. The authorized collateral that can be used is defined in Texas by the Public Funds Collateral Act, codified at Chapter 2257, Texas Government Code.
Pool: (See Local Government Investment Pool)
Pooled Fund Group: Under the Public Funds Investment Act, a pooled fund group is two or more accounts combined for investment purposes.
Pool Rate: A pool rate is the interest rate currently being paid on an investment in a local government investment pool. The pool rate changes on a daily basis.
Portfolio: A portfolio is the holdings of stocks, bonds, cash equivalents or other assets by an individual, corporation or institution.
Positive Arbitrage: (See Arbitrage)
Positive Spread: Positive spread is achieved when an investor earns a higher rate on securities purchased than the rate they have paid to borrow the money. Example: a school district issues bonds at 6% and purchases securities that yield 6.50% with the bond proceeds. In this instance, the district has earned 0.50% (6.50% - 6%) in positive spread.
Positive Yield Curve: A positive yield curve is a type of yield curve in which securities with progressively longer maturities pay progressively higher yields. A positive yield curve is also referred to as a normal yield curve.
Premium: In investing, a premium refers to: (1) the difference between a security’s price and its par (face) value, if the security is selling above its par (face) value; (2) the amount that must be paid above par (face) value in order to call or refund an issue; or (3) the price paid for an option.
Prepayment: Prepayment occurs when homeowners make additional payments against their home mortgages.
Prepayment Risk: Prepayment risk relates to the risk that a drop in mortgage lending rates will allow home owners to refinance their loans, causing mortgage-backed securities to return principal payments faster than anticipated, in turn causing the anticipated maturity of mortgage-backed securities to be shortened. Homeowners prepay all or part of a mortgage when interest rates decline in order to refinance at a lower cost. This causes money to be returned to the owner of the mortgage-backed security, who must then reinvest at a lower rate.
Primary Dealer: Primary dealers are a group of government securities dealers who submit daily reports of market activity and monthly financial statements to the Federal Reserve Bank of New York, which provides formal oversight. Primary dealers may include securities brokers or dealers registered with the Securities and Exchange Commission as well as banks. Primary dealers must "make the market" for U.S. Treasuries; i.e., they must buy U.S. Treasuries if they are offered, therefore providing liquidity for the treasuries. There are 30 primary dealers as of May 2000. Examples of primary dealers include Merrill Lynch, Salomon Smith Barney, Lehman Brothers and Morgan Stanley Dean Witter. For a current list of primary dealers see http://www.ny.frb.org/pihome/news/announce/
Prime Rate: The prime rate is the rate of interest at which a commercial bank offers to lend money to its most creditworthy customers.
Principal: Principal is the face value of a debt instrument that is separate from interest.
Private Activity Bond: A private activity bond is a type of tax-exempt bond that differs from government bonds issued by school districts because at least ten (10) percent of the proceeds from the sale of the bonds benefits private individuals or corporations rather than the general public. For example, a bond issue used to build an airport terminal is a private activity bond because it directly benefits the airlines that use the terminal.
Proceeds: Proceeds are the money received from the sale of a security or from a bond issue.
Proceeds Reinvestment Yield: Proceeds reinvestment yield is the yield on investments purchased with proceeds of a bond issue.
Producer Price Index: The Producer Price Index is a measure of wholesale prices. The monthly Producer Price Index is released at mid-month. It measures changes in inflation at the producer level. If this number is higher than expected, market yields will typically rise in response.
Promissory Note: A promissory note is an unconditional signed written promise to pay a specific sum of money on demand at a fixed time.
Pro Rata: Pro rata is a term used to describe an allocation method whereby interest, profits or ownership is allocated in proportion to the balance of each fund divided by the balance of the total portfolio.
Prospectus: A prospectus is an official document that describes the purpose of a security or mutual fund, along with the financial condition of the organization or fund. In the case of mutual funds, such information as authorized investments, stated purpose, management objectives and conditions for redemption will be included. The Public Funds Investment Act requires that any mutual fund must provide a prospectus.
Prudent Person Rule: The prudent person rule is an investment safety standard used by most government investors. The prudent person rule states that investments will be made under circumstances that persons of discretion and intelligence would purchase, not for speculation, but for investment, recognizing the probable return of principal as well as the return on that specific investment.
Public Funds Collateral Act: The Public Funds Collateral Act is Chapter 2257 of the Texas Government Code. The Act contains state law governing collateral for public funds. (http://www.capitol.state.tx.us/statutes/go/go225700toc.html)
Public Funds Investment Act: The Public Funds Investment Act is Chapter 2256 of the Texas Government Code. The Act contains state law governing the investment of public funds. (http://www.capitol.state.tx.us/statutes/go/go225600toc.html)
Put: A put is an option that gives the holder of a security the right to sell a portion of the security back to the issuer (called the put holder) at a specified time and price.
Rate of Return: A rate of return is a performance measurement that considers the total income a security or portfolio receives, along with any realized gain as well as any change in unrealized gain or loss. Depending on market volatility, the rate of return on a portfolio could differ significantly from its average yield.
Rating Agency: A rating agency is an independent company that performs analyses on securities and investment companies to determine the creditworthiness of their debt.
Realized Gain/Loss: A realized gain or loss is the true gain (profit) or loss of principal that results from the sale of a security. It is based on the difference between the security’s book value and its market value. (See also Unrealized Gain/Loss)
Rebate Payment: (See Arbitrage Rebate)
Reconciliation: Reconciliation is the act of comparing two separate financial reports to determine if variances exist. Example: comparing a monthly bank statement to the general ledger.
Redemption: Redemption is the return of an investor’s principal in a security.
Regular Settlement: Regular settlement refers to paying for an investment security one day after the trade date.
Reinvestment: Reinvestment is the placement of cash proceeds resulting from either matured or called securities back into a new security.
Reinvestment Risk: Reinvestment risk is the risk that funds will have to be reinvested in a lower interest rate security if the original security is called away.
Relative Value: Relative value refers to a comparative analysis between two or more assets.
Repo: (See Repurchase Agreement)
Repurchase Agreement (Repo): A repurchase agreement is the purchase of a security with an agreement to repurchase that security at a specific price and date. Repurchase agreements may be used to earn income on idle cash at or near the federal funds market rate. A holder of securities sells them to an investor with a repurchase agreement. The buyer is in effect lending the seller money for the period of the agreement. The terms of the repurchase agreement are structured to compensate the buyer. Dealers often use repurchase agreements to finance their positions. The exception occurs when the Fed is said to be doing repurchase agreements, in this instance it is lending money; i.e., increasing bank reserves. Fully collateralized repurchase agreements can be an authorized investment under the Public Funds Investment Act if the repurchase agreement meets the requirements specified in Section 2256.011 of the Texas Government Code.
Reserve: (See Federal Reserve)
Reset date: A reset date is the date on which a floating security’s (floater’s) rate or value is reset, based upon an established index and schedule.
Revenue: Revenue is a term used to describe income.
Revenue Bonds: Revenue bonds are securities issued by governmental entities that are secured by the revenue stream from the project being built or supported, such as a municipal water treatment facility or sewage plant.
Reverse Repurchase Agreement (Reverse Repo): A reverse repurchase agreement is an agreement under which an investor sells securities to a broker/dealer/bank and agrees to buy the securities back at a pre-determined price on a pre-determined date. Essentially, this is a form of "securities lending," whereby an investor receives cash from the broker/dealer/bank and agrees to pay the money back, along with a set rate of interest after a certain period of time. An investor who is able to reinvest the cash at a more favorable rate can earn incremental income for his or her portfolio. Irresponsible use of reverse repurchase agreements may result in exposure to extreme market risk through leverage. The Public Funds Investment Act, section 2256.011 Government Code, limits the term of a reverse repurchase agreement to 90 days.
Risk: In investing, risk is a measure of the probability of financial loss. People view investment risk in a number of ways that may involve a variety of different factors.
Risk Tolerance: Risk tolerance is the amount of risk that an individual investor is willing to assume or tolerate.
Safe Harbor: A safe harbor is the shifting of financial assets to less volatile areas in order to reduce risk. For example, when the stock market crashes, fearful investors sell their stock and invest the proceeds in the "safe harbor" offered by the United States Treasury market. This is also referred to as a "flight to quality."
Safekeep Account: A safekeep account is an account wherein securities can be deposited and withdrawn.
Safekeeping Bank or Location: Safekeeping is a service offered by banks for a fee in which securities and other valuables are held in the bank’s vaults for protection.
Safety: As it relates to the investment of public funds, safety is the primary investment objective intended to prevent loss of the principal amount invested.
Secondary Market: The secondary market is a market for the purchase and sale of outstanding issues following their initial distribution.
Securities and Exchange Commission (SEC): The Securities and Exchange Commission is a government commission that maintains the integrity of the United States’ securities markets.
Security: A security is an instrument that represents investment ownership; for example, a Treasury bill, agency note or commercial paper.
Security Accounting: The process of accounting for the purchase, sale and interest income associated with an investment.
Security Sale: The liquidation or sale of an investment by a willing seller to a willing buyer.
Self-Regulatory Organization: A self-regulatory organization is a stock exchange, securities or commodities organization that is registered with the Securities and Exchange Commission (SEC) and is responsible for ensuring that its members obey SEC rules and regulations.
Settlement: A settlement is the conclusion of a securities transaction, as evidenced by the seller delivering the security and the buyer paying for the security. Most, but not all, securities settle within three business days.
Settlement Date: A settlement date is the purchase or sales date during which money actually changes hands. (See also Trade Date)
Short: "Short" refers to having sold a security without owning the security, in anticipation of subsequently purchasing the security at a lower price and making a profit. (This practice is not permitted by governmental entities)
Short-Term Investment: A short-term investment is generally described as an investment with a maturity date of one year or less.
Simple Interest: Simple interest is a procedure for calculating interest wherein the interest rate is applied only to the original principal. For example, if $100 is deposited in a bank account at 10 percent interest, the depositor will be credited with $110 at the end of the first year and an additional $10 each year thereafter. In contrast, with compound interest, if $100 is deposited in a bank account at 10 percent interest, the depositor will be credited with $110 at the end of the first year but the 10 percent interest will applied to $110 in their second year, so the balance will rise to $121.
Skip Day Settlement: A skip day settlement is settlement one day after the normal settlement; e.g., a two day settlement.
SLUGS (State and Local Government Series): State and Local Government Series (SLUGS) securities are generally used in escrow accounts for the advance refund of bond issues and for certain other funds. Yield for SLUGS is restricted by the Internal Revenue Service’s arbitrage regulations. SLUGS are also non-marketable securities issued by the U.S. Treasury directly to the issuer as a tool to manage yield-restricted bond proceeds. The interest rate on SLUGS is selected by the purchaser (e.g., school district) based upon a maximum rate scale published daily by the U.S. Treasury. This allows the purchaser to structure an overall rate of return on the escrow that is less than or equal to the yield on the bond issue so that there is no violation of arbitrage restrictions. The most frequent use of SLUGS is in advance refunding transactions in which the yield on the escrow being created to defease old bonds must not be greater than the yield on the refunding bonds sold to fund the escrow. By using SLUGS, the bond issuer can create an optimal structure in an escrow that yields less than the bond yield.
Spend-down: (See Draw Schedule)
Spread: A spread may be defined as: (1) the difference between any two prices or measures; (2) the difference between the current bid and the current ask price of a given security or between yields on similar securities; or (3) the additional yield that may be earned on a security over and above a U.S. Treasury obligation with a comparable maturity. When buying an agency security, the offer will typically be presented in terms of the "spread to the comparable Treasury issue." For example, a two-year agency bullet may be offered at "plus 50 to the Treasury," which means that if the two-year Treasury note was yielding 6.25%, the agency bullet would be offered for 50 basis points higher in order to yield 6.75%.
Spreadsheet: A spreadsheet is computer software that will allow the user to place financial data into a matrix and perform calculations on the data.
Standard and Poor’s Index: Standard and Poor’s is a market-weighted stock index that determines the movement of widely held common stocks. It is used by many investment professionals to measure stock portfolio performance. (Stocks are not authorized investments for school districts under the Public Funds Investment Act)
Standard of Care: A standard of care is the basis for prudent investing. Under this standard, investments are made with judgment and care, under prevailing circumstances, that a person of prudence, discretion and intelligence would exercise in the management of the person's own affairs, not for speculation, but for investment, considering the probable safety of capital and the probable income to be derived. The Public Funds Investment Act, section 2256.006 Government Code, requires that investments by public entities be made with this standard of care.
Stock: A stock is ownership in a corporation as evidenced by shares, which are a claim by the owner of the stock on the corporation’s earnings and assets. Stocks may also be referred to as equity. (Stocks are not authorized investments for school districts under the Public Funds Investment Act)
Stock Split: A stock split is an increase in the number of outstanding shares of a corporation’s stock that does not affect its total market value. (Stocks are not authorized investments for school districts under the Public Funds Investment Act)
Strip: A strip is a security from which the interest coupons have been removed, leaving only the principal. The new "strip" is a deeply discounted security that pays no interest, but returns all of its principal at maturity.
Student Loan Marketing Association (Sallie Mae): The Student Loan Marketing Association is a publicly-owned corporation that purchases student loans from financial institutions and packages them for sale in the secondary markets. Sallie Mae securities are generally considered agency securities, since Sallie Mae was established under a federal government charter. Student Loan Marketing Association securities are authorized investments under the Public Funds Investment Act.
Swap: Swap refers to trading one security for another with the objective of increasing overall return while maintaining similar risk and maturity characteristics in the new security. A typical swap may involve the sale of U.S. Treasury securities, which become expensive as they near maturity and the subsequent purchase of higher-yielding discount notes or commercial paper.
Sweep Account: A sweep account is a bank account whose cash balance is automatically transferred into an interest-bearing investment such as a money market fund.
Taxable Market: The taxable market is defined as securities that are not exempt from federal, state and or local taxes.
Tax-Exempt Market: The tax-exempt market is defined as securities that are exempt from federal, state and or local taxes.
Termination Date: The termination date is the date on which an investment agreement ends. For example, if the final estimated draw from a flexible repurchase agreement is August 1, 2005, the termination date of the agreement will be August 1, 2005.
Term Repurchase Agreement: A term repurchase agreement is a type of repurchase agreement with a defined maturity date that exceeds one day.
Texas Education Code (TEC): The Texas Education Code is Texas state law pertaining to public education.
Third Party Safekeeping Account: A third party safekeeping account is a safekeeping account held at a financial institution independent from the firm who sold the investment.
Time Deposit: A time deposit is a certificate of deposit or savings account that is held in a financial institution (e.g., bank) for a set amount of time. The funds cannot be withdrawn until the depositor gives the financial institution notice. A certificate of deposit (CD) is an example of a time deposit.
Trade Date: A trade date is the date on which the agreement to buy or sell a security is made. (See also Settlement Date)
Trade Ticket: A trade ticket is a single page document, produced internally, that describes all relevant information about a security transaction.
Transaction: A transaction occurs when securities are bought or sold.
Transaction Confirmation: A document produced by a broker/dealer and sent to an investor that details specific information on all security transactions. This confirmation can be compared to internal reports to determine accuracy.
Treasuries: A general term referring to U.S. Treasury securities.
Treasury Bill (T-bill): A Treasury or t-bill is a short-term U.S. Government debt security that is issued at a discount from its par (face) value. Treasury bills may be auctioned by the U.S. Treasury with maturities of 90 days, 180 days or 365 days.
Treasury Bond: A Treasury bond is a long-term fixed interest U.S. Government debt security with a maturity of more than 10 years.
Treasury Note (T-note): A Treasury note is a medium-term fixed interest U.S. Government debt security that is issued at a fixed interest rate and an original maturity of two to ten years.
Treasury Yield Curve: (See Yield Curve)
Trust: A trust is an equitable right or interest in a property that is separate from legal ownership of the property. There are several types of trusts, including charitable trusts and living trusts.
Trust Indenture: A trust indenture is one of the primary legal documents associated with the sale of a municipal bond issue. This document provides the terms of the legal issuance of the bonds, including the authorization for the issuance, redemption provisions, default provisions, covenants of the issuer, covenants of the trustee and investment provisions.
Underwriter: An underwriter is the firm that agrees to buy an issue of securities on a given date and at a given price and who will then usually resell the securities through a distribution network. Underwriters act as the initial purchasers of a bond issue. Underwriters take the risk with respect to reselling the bonds in a secondary market.
United States Treasuries: Securities issued by the United States Department of the Treasury. U.S. Treasury securities include Treasury bills, notes and bonds.
Unrealized Gain/Loss: An unrealized gain or loss is the amount of gain (profit) or loss that would be reflected on the sale of a security if that security were sold. The gain or loss is calculated by taking the difference between the book value and the market value of the security at a given point in time.
Variable Rate Certificate of Deposit: A variable rate certificate of deposit is a short-term certificate of deposit with an interest rate that is reset at periodic intervals based upon a predefined index.
Variable Rate Investment Instrument: Any security containing a coupon that changes over the life of an investment.
Volatility: Volatility is a characteristic of a security, commodity or market in terms of rising or falling sharply in price within a short period.
Volatility Risk: Volatility risk is the risk that a specific security price will increase or decrease by greater increments than the general market.
Wasting Asset: An asset that has a limited life and therefore decreases in value over time.
Weighted Average Coupon (WAC): The average coupon rate of a group of securities or mortgage loans.
Weighted-Average Maturity (WAM): A common term, usually expressed in number of days, which represents a weighted average of the remaining term to maturity of all of the assets in an investment pool or securities portfolio. A longer weighted-average maturity is generally indicative of more market risk. The maximum weighted-average maturity for AAA-rated money market pools in Texas is 60 days. A Securities and Exchange Commission money market fund may have a 90-day weighted-average maturity.
Window: Window is a term for the electronic bulletin board on which U.S. agencies sell their securities. The agencies are said to "open their windows" for the initial offering of a security. Window may also refer to the period in the life of a collateralized mortgage obligation during which time principal payments are being received.
Yield: Yield is the return, expressed as a percentage, that a security will earn as a result of both the coupon rate and any discount or premium paid. A yield will exceed the coupon if purchased at a discount (and vice-versa).
Yield Burning: Yield burning is an illegal activity whereby a security provider charges more than the fair market price for a security, lowering the yield, thereby diverting arbitrage away from the Internal Revenue Service.
Yield Curve: A yield curve is the relationship between yields and maturity dates for a set of similar bonds, usually U.S. Treasury bonds, at any given point in time. A yield curve is a standard measure of risk and return and answers the question, "how much additional yield will I earn if I extend my maturity and assume additional market risk?"
Yield to Call: Yield to call measures the rate of return on a callable bond. It is the yield on a callable bond that assumes redemption of the bond by the issuer at the first possible call date, as stated in the indenture agreement.
Yield to Maturity: Yield to maturity measures the rate of return on a bond’s acquisition costs and its value at maturity. This ratio accounts for any interest income from the bond. It assumes that the bond is held and redeemed at maturity.
Zero Coupon: (See Zero Coupon Bonds)
Zero Coupon Bonds: Zero coupon bonds are bonds that do not pay interest, but instead are sold at a deep discount. At maturity, the full face amount of the bond is payable. The difference between the amount paid and the face amount at maturity represents the income earned by the investor. Examples of zero coupon bonds include Treasury strips, Treasury bills and agency discount notes.