1035
exchange
Section 1035
sets out provisions for the exchange of similar
(insurance related) assets without any tax
consequence upon the conversion. If the exchange
qualifies for like-kind exchange consideration,
income taxes are deferred until the new property or
asset is sold. The 1035 exchange provisions are only
available for a limited type of asset which includes
cash value life insurance policies and annuity
contracts.10K
An annual report filed by corporations each year as
required by the SEC. The 10K must be filed within 90
days after the end of the fiscal year and provides a
comprehensive overview of a company's business
practices and financial stability.
401(k) plan
A 401(k) plan is a tax-deferred defined contribution
retirement plan that gives eligible employees the
opportunity to defer a portion of their current
compensation into the plan. Amounts that are
deferred are excluded from the participant's gross
income for the year of the deferral. The plan may
provide for employer matching contributions and
discretionary profit-sharing contributions.
403(b) plan
Tax deferred annuity retirement plan available to
employees of public schools and colleges, and
certain non-profit hospitals, charitable, religious,
scientific and educational organizations.
457 plan
Non-qualified deferred compensation plans available
to employees of state and local governments and
tax-exempt organizations.
accelerated death benefits (adb's)
Some life insurance policies make a portion of the
death benefit available prior to the death of the
insured. Such benefits are usually available only
due to terminal illness or for long-term care
situations.
accidental death benefit
An accidental death benefit is a rider added to an
insurance policy which provides that an additional
death benefit will be paid in the event death is
caused by and accident. This rider is often called
"double indemnity."
accounts payable
A balance sheet item representing the amount of
money a company owes to its creditors.
accounts receivable
A balance sheet item representing the amount of
money a company is owed by its customers for goods
and services it has provided.
accrual basis
One of several methods of accounting. Requires that
all interest and income be included as it is earned
and that all expenses are included as incurred.
adjustable rate mortgage
(arm)
An adjustable Rate Mortgage offers an initial
interest rate that is usually lower than a fixed
rate, but that adjusts periodically according to
market conditions and financial indices. The rate
may go up and/or down, depending on economic
conditions. To limit the borrower's risk, the ARM
will almost always have a maximum interest rate
allowed, called a "rate cap."
amortization
The amortization of a debt is its systematic
repayment through installments of principal and
interest. An amortization schedule is a periodic
table illustrating payments, principal, interest,
and outstanding balance.
annual percentage rate (apr)
The Annual Percentage Rate is the cost of credit
expressed as a yearly rate. The APR is a means of
comparing loans offered by various lenders on equal
terms, taking into account interest rates, points,
and other finance charges. The federal
Truth-in-Lending Act requires disclosure of the APR.
annuitant
An individual who receives payments from an
annuity. The person whose life the annuity payments
are measured on or determined by.
annuity
A contract between an insurance company and an
individual which generally guarantees lifetime
income to the individual or whose life the contract
is based in return for either a lump sum or periodic
payment to the insurance company. Interest earned
inside an annuity is income tax-deferred until it is
paid out or withdrawn.
appraisal
An appraisal is an estimate of a property's value,
usually real estate, at a specific point in time and
as determined by a qualified professional appraiser.
appreciation
Appreciation is the increase in value of an asset.
The term "appreciation" may be applied to real
estate, stocks, bonds, etc.
arm's length
Acting at arm's length predicates that two parties
negotiate with opposing economic interests.
ask price
The price that a seller is willing to sell a
security or commodity for.
balance sheet
A balance sheet is a financial statement that is
divided into three major parts: assets, liabilities
and shareholders' equity.
balloon mortgage
The terms on a balloon mortgage are insufficient to
completely amortize the loan. A balloon, or lump
sum, payment is required at the maturity of the loan
to completely pay off the remaining principal.
Balloon mortgages often contain a contractual
opportunity to refinance when the balloon payment is
due at prevailing rates.
bank reserves
The amounts that banks are required to keep on
deposit at a Federal Reserve Bank, as determined by
reserve ratios. Funds in excess of these reserves
are loaned out or invested by the banks.
bankruptcy
A federal court proceeding in which a debtor who is
unable to continue to meet his/her financial
obligations may be relieved from the payment of
certain debts. This action seriously affects the
borrower's credit worthiness.
basis
An amount usually representing the actual cost of an
investment to the buyer. The basis amount of an
investment is important in calculating capital gains
and losses, depreciation, and other income tax
calculations.
basis points
Basis Points is a term used by investment
professionals to describe yields of bonds. One basis
point equals one 100 th
of 1%, or .01%. A bond yield increase from 10.0% to
10.1% represents an increase of 10 basis points.
bear market
A prolonged decline in overall stock prices
occurring over a period of months or even years.
beneficiary
The person who is designated to receive the benefits
of a contract.
beta
A statistically generated number that is used to
measure the volatility of a security or mutual fund
in comparison to the market as a whole.
bid price
The price that a buyer is willing to pay for a
security or commodity.
blue-chip stocks
The equity issues of financially stable,
well-established companies that usually have a
history of being able to pay dividends in bear and
bull markets.
bond
A certificate of indebtedness issued by a government
entity or a corporation, which pays a fixed cash
coupon at regular intervals. The coupon payment is
normally a fixed percentage of the initial
investment. The face value of the bond is repaid to
the investor upon maturity.
bonding requirement
The individual(s) that are appointed to run the
day-to-day operations of a qualified plan, as well
as the trustee(s) and investment managers must be
bonded. The bond is required to provide protection
to the plan against loss due to fraud, theft,
forgery or dishonesty.
book value
The value that belongs to a company's owners or
shareholders after total liabilities have been
subtracted from total assets. Also called
shareholders equity.
bull market
A prolonged
increase in overall stock prices usually occurring
over a period of months or even years.
buy-down
A buy-down refers to the payment of additional
discount points in return for a below market
interest rate (and therefore a lower monthly
payment) on a home mortgage.
buy-sell agreement
An agreement between shareholders or business
partners to purchase each others' shares in
specified circumstances.
capital markets
A general term encompassing all markets for
financial instruments with more than one year to
maturity.
capital stock
All ownership shares of a company, both common and
preferred listed at par value.
cash equivalents
Assets that can be quickly converted to cash. These
include receivables, treasury bills, short-term
commercial paper, short-term municipal and corporate
bonds and notes.
cash value
Permanent life insurance policies provide both a
death benefit and in an investment component called
a cash value. The cash value earns interest and
often appreciates. The policyholder may accumulate
significant cash value over the years and, in some
circumstances, "borrow" the appreciated funds
without paying taxes on the borrowed gains. As long
as the policy stays in force the borrowed funds do
not need to be repaid, but interest may be charged
to your cash value account.
certificate of deposit (cd)
A Certificate of Deposit is a low risk, often
federally guaranteed investment offered by banks. A
CD pays interest to investors for as long as five
years. The interest rate on a CD is fixed for the
duration of the CD term.
charitable remainder trust
(crt)
The Charitable Remainder Trust is an irrevocable
trust with both charitable and non-charitable
beneficiaries. The donor transfers highly
appreciated assets into the trust and retains an
income interest. Upon expiration of the income
interest, the remainder in the trust passes to a
qualified charity of the donor's choice. If properly
structured, the CRT permits the donor to receive
income, estate, and/or gift tax advantages. These
advantages often provide for a much greater income
stream to the income beneficiary than would be
available outside the trust.
closed-end fund
A fund whose value is held within a fixed number of
shares. Until the fund is wound up, shares can be
bought and sold on the stock exchange or the
over-the-counter market.
co-borrower
A co-borrower is individually or jointly obligated
to repay a loan entered into with a third party. The
co-borrower may or may not share in ownership of
loan collateral.
codicil
An instrument in writing executed by a testator for
adding to, altering, explaining or confirming a will
previously made by the testator; executed with the
same formalities as a will; and having the effect of
bringing the date of the will forward to the date of
codicil.
collateral
Assets pledged as security for a loan. If the
borrower defaults on payment, the lender may dispose
of the property pledged as security to raise money
to repay the loan.
commission
The fee a broker or insurance agent collects for
administering a trade or policy.
commodity
A commodity is a physical substance such as a food
or a metal which investors buy or sell on a
commodities exchange, usually via futures contracts.
common stock
A security that represents ownership in a
corporation.
compounding
The computation of interest paid using the principal
plus the previously earned interest.
conduit IRA
An individual who rolled over a total distribution
from a qualified plan into an IRA can later roll
over those assets into a new employer's plan. In
this case the IRA has been used as a holding account
(a conduit).
conforming loan
A mortgage loan that conforms to Federal National
Mortgage Association (FNMA) or Federal Home Loan
Mortgage Corporation (FHLMC) guidelines. Currently,
conforming first mortgages are under $275,000
($413,000 in Alaska and Hawaii).
construction loan
A construction loan is a short term loan applied to
the construction of a new home. The builder
gradually withdraws the loan proceeds and the home
serves as collateral on the loan.
consumer debt
Debt incurred for consumable or depreciating
non-investment assets. Items include credit card
debt, store-financed consumer purchases, car loans,
and family loans that will be repaid.
contrarian
An individual whose opinion is the opposite of the
majority.
conventional mortgage
A conventional mortgage is not insured, guaranteed
or funded by the Veterans Administration, the
Federal Housing Administration, or Rural Economic
Community Development.
convertible mortgage
A convertible mortgage is an adjustable mortgage
(ARM) that allows the borrower to convert to a fixed
rate mortgage during a specified period of time.
convertible term insurance
Term life insurance that can be converted to a
permanent or whole life policy without evidence of
insurability, subject to time limitations.
corporation
A legal business entity created under state law.
Because the corporation is a separate entity from
its owners, shareholders have no legal liability for
its debts.
correction
A sudden decline in stock or bond prices after a
period of market strength.
co-signer
An individual or party who agrees to assume a debt
obligation of a third party in the event the
principal borrower defaults on the terms of the
loan.
coupon rate
The rate of interest paid on a bond, expressed as a
percentage of the bond's par value.
credit cards
Cards such as Visa and MasterCard allow the holder
to charge purchases rather than pay cash.
credit bureau repositories
A credit bureau repository is an organization that
compiles credit history information directly from
lenders and creditors into credit summaries and
reports. These reports are made available to lenders
and creditors to assist them in gauging an
individual's credit worthiness.
critical illness insurance
Insurance protection designed to provide a
lump-sum payment equal to the full value of the
policy or a percentage of the policy depending upon
the product design, to the insured/policy owner upon
the diagnosis of a covered critical illness.
Typical illnesses covered include heart attack,
stroke, cancer, paralysis, renal failure and
Alzheimer's disease. Many policies offer a partial
payment for certain medical procedures such as
coronary bypass surgery or angioplasty. Some
policies offer a return of all premiums in the event
of death of the insured, others pay the full benefit
upon the insured's death.
currency risk
The level of risk when investing in international
markets, due to the fluctuations in exchange rates
of the various world currencies. Investing in any
foreign country should be preceded by a careful
estimation of how well its currency is likely to do
against the dollar.
custodian
A financial institution, usually a bank or trust
company, that holds a person or company's cash and
or securities in safekeeping.
cyclical companies
Companies that report strong earnings when the
overall economy is doing well and weaker earnings
when the economy is in recession.
debit cards
Debit cards allow the cost of a purchase to be
automatically deducted from the customer's bank
account and credited to the merchant.
debt markets
The fixed income sector of the capital markets
devoted to trading debt securities issued by
corporations and governments.
debt to income ratio
The ratio of a person's total monthly debt
obligations compared to their total monthly
resources is called their debt to income ratio. This
ratio is used to evaluate a borrower's capacity to
repay debts.
decedent
The term decedent refers to a person who has died.
decreasing term
A term life insurance featuring a decreasing death
benefit. Decreasing term is well suited to provide
for an obligation that decreases over the years such
as a mortgage.
deed of trust
A document used to convey title (ownership) to a
property used as collateral for a loan to a trustee
pending the repayment of the loan. The equivalent
of a mortgage.
deferral
A form of tax sheltering in which all earnings are
allowed to compound tax-free until they are
withdrawn at a future date. Placing funds in a
qualified plan, for example, triggers deductions
[not all qualified plans provide for tax deductions;
contributions may, however, be excluded from gross
income, i.e. 401(k) plans] for the current tax year
and postpones capital gains or other income taxes
until the funds are withdrawn from the plan.
deferred compensation
Income withheld by an employer and paid at some
future time, usually upon retirement or termination
of employment.
defined benefit plan
A defined benefit plan pays participants a specific
retirement benefit that is promised (defined) in the
plan document. Under a defined benefit plan benefits
must be definitely determinable. For example, a plan
that entitles a participant to a monthly pension
benefit for life equal to 30 percent of monthly
compensation is a defined benefit plan.
defined contribution plan
In a defined contribution plan, contributions are
allocated to individual accounts according to a
pre-determined contribution allocation. This type of
plan does not promise any specific dollar benefit to
a participant at retirement. Benefits received are
based on amounts contributed, investment performance
and vesting. The most common type of defined
contribution plan is the 401(k) profit-sharing plan.
deflation
A period in which the general price level of goods
and services is declining.
depreciation
Charges made against earnings to write off the cost
of a fixed asset over its estimated useful life.
Depreciation does not represent a cash outlay. It is
a bookkeeping entry representing the decline in
value of an asset over time.
direct deposit
A means of authorizing payment made by governments
or companies to be deposited directly into a
recipient's account. Used mainly for the deposit of
salary, pension and interest checks.
disability insurance
Insurance designed to replace a percentage of earned
income if accident or illness prevents the
beneficiary from pursuing his or her livelihood.
disposable income
After-tax income available for spending, saving or
investing.
diversification
Spreading investment risk among a number of
different securities, properties, companies,
industries or geographical locations.
Diversification does not assure against market loss.
dividend reinvestment plan
(drip)
An investment plan that allows shareholders to
receive stock in lieu of cash dividends.
dividends
A distribution of the earnings of a company to it's
shareholders. Dividends are "declared" by the
company based on profitability and can change from
time to time. There is a direct relationship between
dividends paid and share value growth. The most
aggressive growth companies do not pay a dividend,
and the highest dividend paying companies may not
experience dramatic growth.
dollar cost averaging
Buying a mutual fund or securities using a
consistent dollar amount of money each month (or
other period). More securities will be bought when
prices are low, resulting in lowering the average
cost per share.
Dollar cost averaging neither guarantees a profit
nor eliminates the risk of losses in declining
markets and you should consider your ability to
continue investing through periods of market
volatility and/or low prices.
down payment
The down payment on a property is the amount of cash
applied to the purchase, with the remainder of the
purchase accomplished through a mortgage or other
debt.
earnest money
Similar to a deposit, earnest money is the money
given by the buyer to the seller of a property as an
assurance of their intentions to purchase the
property.
earnings per share (eps)
Total net profits divided by the number of
outstanding common shares of a company.
economic cycle
Economic events are often felt to repeat a regular
pattern over a period of anywhere from two to eight
years. This pattern of events ends to be slightly
different each time, but usually has a large number
of similarities to previous cycles.
effective tax rate
The percentage of total income paid in federal and
state income taxes.
efficient market
The market in which all the available information
has been analyzed and is reflected in the current
stock price.
employee stock ownership
plans (esops)
An ESOP plan allows employees to purchase stock,
usually at a discount, that they can hold or sell.
ESOPs offer a tax advantage for both employer and
employee. The employer earns a tax deduction for
contributions of stock or cash used to purchase
stock for the employee. The employee pays no tax on
these contributions until they are distributed.
escrow funds
Escrow funds are funds accumulated and held in an
account for the periodic payment of property taxes
and insurance.
estate
A decedent's estate is equal to the total value of
their assets as of the date of death. The estate
includes all funds, personal effects, interest in
business enterprises, titles to property, real
estate, stocks, bonds and notes receivable.
estate planning
The orderly arrangement of one's financial affairs
to maximize the value transferred at death to the
people and institutions favored by the deceased,
with minimum loss of value because of taxes and
forced liquidation of assets.
excess distributions
An individual may have to pay a 15% tax on
distributions received from qualified plans in
excess of $150,000 during a single year. The tax,
however, does not apply to distributions due to
death, distributions that are rolled over, and
distributions of after-tax contributions.
executor
The person named in a will to manage the estate of
the deceased according to the terms of the will.
face amount
The face amount stated in a life insurance policy is
the amount that will be paid upon death, or policy
maturity. The face amount of a permanent insurance
policy may change with time as the cash value in the
policy increases.
fair market value
The fair market value of a property or other asset
is the price that a buyer and seller can establish
in an arms-length transaction where neither one is
compelled to buy or to sell.
family trust
An inter vivos trust established with family members
as beneficiaries.
federal housing
administration (fha)
The Federal Housing Administration (FHA) is a
government agency that sets standards for
underwriting residential mortgage loans made by
private lenders and insures such transactions.
federal national mortgage
association (fnma or fannie mae)
FNMA is a private corporation that acts as a
secondary market investor in buying and selling
mortgage loans.
fiduciary
An individual or institution occupying a position of
trust. An executor, administrator or trustee.
financial planner
A person who helps you plan and carry out your
financial future.
fixed investment
Any investment paying a fixed interest rate such as
a money market account, a certificate of deposit, a
bond, a note, or a preferred stock. A fixed
investment is the opposite of a variable investment.
fixed rate mortgage
With a fixed rate mortgage, your interest rate will
remain the same for the entire term of the loan.
Although the rate will begin slightly higher than a
comparable adjustable rate mortgage (ARM), the
interest rate you pay can never go up for as long as
you have the mortgage.
fluctuation
A variation in the market price of a security.
foreclosure
A foreclosure is the legal process by which a
borrower losses their ownership interest in a
collateralized property due to default on the
attached loan.
fund manager
A person who manages the assets of a mutual fund.
fundamental analysis
Fundamental analysis is a technique of estimating a
stock's future value based on the in-depth study of
the stock's underlying financial statements.
Fundamental analysis is the opposite of technical
analysis.
future value
The future worth of a payment, or stream of
payments, projected at a given interest rate for a
given period of time.
futures market
A market in which contracts for future delivery of a
commodity are bought and sold.
generally accepted accounting principals (gaap)
Conventions, rules and procedures that define
accepted accounting practices in the U.S.
grace period
A period (usually 31 days) following each premium
due date, other than the first due date, during
which an overdue premium may be paid, and during
which time all policy provisions remain in force and
effect.
group insurance
A form of insurance designed to insure classes of
persons rather than specific individuals.
growth stock
The common equity of a company that consistently
grows significantly faster than the economy.
guaranteed investment
certificate (gic)
A type of debt security sold to individuals by banks
and trust companies. They usually cannot be cashed
before the specified redemption date, and pay
interest at a fixed rate.
guarantor
A third party who agrees to repay any outstanding
balance on a loan if you fail to do so. A guarantor
is responsible for the debt only if the principal
debtor defaults on the loan.
guardian
A person or persons named to care for minor children
until they reach the age of majority. A will is the
best way to ensure that the person or persons whom
you wish to have care for your minor children are
legally empowered to do so in the event of your
death.
hazard insurance
Hazard insurance protects the insured from losses
arising due to physical property damage associated
with catastrophic hazards such as flood, fire,
earthquake, tornado, etc. Hazard insurance will
often be required by a lender to protect their
collateral from such risks.
home equity line of credit
(heloc)
A home equity line of credit allows a homeowner to
borrow against the equity in their home with
specific limits and terms. This is an open end loan
which allows the borrower to borrow and repay funds
as needed.
home equity loan
A home equity loan is a collateralized mortgage,
usually in a subordinate position, entered into by
the property owner under specific terms of
repayment.
illiquid
The description of a security for which it is
difficult to find a buyer or seller. An illiquid
investment is an investment that may be difficult to
sell quickly at a price close to its market value.
Examples include stock in private unlisted
companies, commercial real estate and limited
partnerships.
illustration
A life insurance illustration, or ledger, is a
reference tool used to illustrate how a given life
insurance policy underwritten by a specific insurer
is expected to perform over a period of years. The
insurance illustration assumes that conditions
remain unchanged over the period of time that the
policy is held.
income averaging
Income averaging allows individuals who were age 50
before January 1, 1986 to pay tax on a lump sum
distribution as though it had been received over a
five or ten year period, rather than all at once. By
using income averaging individuals may be able to
pay income tax at a more favorable rate.
income statement
A financial statement that shows the components of
profit, such as sales, expenses, taxes and net
profit.
income stocks
Stocks that have a consistent, stable, above-average
dividend yield.
individual retirement
account (ira)
An Individual Retirement Account (IRA) is a personal
savings plan that offers tax advantages to those who
set aside money for retirement. Depending on the
individual's circumstances, contributions to the IRA
may be deductible in whole or in part. Generally,
amounts in an IRA, including earnings and gains, are
not taxed until distributed to the individual.
inflation
A term used to describe the economic environment of
rising prices and declining purchasing power.
in-force policy
An in-force life insurance policy is simply a valid
policy. Generally speaking, a life insurance policy
will remain in-force as long as sufficient premiums
are paid, and for approximately 31 days thereafter.
(See Grace Period)
insurability
Insurability refers to the assessment of the
applicant's health and is used to gauge the level of
risk the insurer would potentially take by
underwriting a policy, and therefore the premium it
must charge.
insured
A life insurance policy covers the life of one or
more insured individuals.
interest rate
The simple interest rate attached to the terms of a
mortgage or other loan. This rate is applied to the
outstanding principal owed in determining the
portion of a payment attributable to interest and to
principal in any given payment.
interest rate risk
Is the uncertainty in the direction of interest
rates. Changes in interest rates could lead to
capital loss, or a yield less than that available to
other investors, Putting at risk the earnings
capacity of capital.
intestate
A term describing the legal status of a person who
dies without a will.
investment banker
A firm that engages in the origination,
underwriting, and distribution of new issues.
investment company
A corporation or trust whose primary purpose is to
invest the funds of its shareholders.
investment considerations
Choosing which investments are right for you will
depend on a number of factors, including; your
primary objectives, your time horizon and your risk
tolerance.
investment portfolio
A term used to describe your total investment
holdings.
investment risk
The chance that the actual returns realized on an
investment will differ from the expected return.
investment strategy
The method used to select which assets to include in
a portfolio and to decide when to buy and when to
sell those assets.
ira (individual retirement
account)
An Individual Retirement Account (IRA) is a personal
savings plan that offers tax advantages to those who
set aside money for retirement. Depending on the
individual's circumstances, contributions to the IRA
may be deductible in whole or in part. Generally,
amounts in an IRA, including earnings and gains, are
not taxed until distributed to the individual.
ira rollover
An individual may withdraw, tax-free, all or part of
the assets from one IRA, and reinvest them within 60
days in another IRA. A rollover of this type can
occur only once in any one-year period. The one-year
rule applies separately to each IRA the individual
owns. An individual must roll over into another IRA
the same property he/she received from the old IRA.
jumbo loan
A loan that is larger than the limits set for
conventional loans by the Federal National Mortgage
Association (FNMA) or Federal Home Loan Mortgage
Corportation (FHLMC). This limit is currently set at
$300,700.
junk bonds
A bond that pays an unusually higher rate of return
to compensate for a low credit rating.
keogh
A Keogh is a tax deferred retirement plan for
self-employed individuals and employees of
unincorporated businesses. A Keogh plan is similar
to an IRA but with significantly higher contribution
limits.
leverage
Using "leverage" is the process of investing using
borrowed funds. Leveraging your investments
magnifies your returns, both positive and negative.
leveraged buyout (lbo)
Leveraged buyouts are deals in which a company is
bought with mostly borrowed money, money frequently
raised through selling high-yield and high-risk junk
bonds.
liability risk
The risk that the legal system may assess punitive
damages against you if property damage or personal
injuries can be attributed to your carelessness or
negligence.
lien
A lien represents a claim against a property or
asset for the payment of a debt. Examples include a
mortgage, a tax lien, a court judgment, etc.
life expectancy
Life expectancy represents the average future time
an individual can expect to live. Life expectancies
have been increasing steadily over the past century
and may continue to increase in the future. As
people are living longer the cost of retirement is
increasing.
life insurance
A contract between you and a life insurance company
that specifies that the insurer will provide either
a stated sum or a periodic income to your designated
beneficiaries upon your death.
life settlement
Occurs when a person who does not have a
terminal or chronic illness sells his/her life
insurance policy to a third party for an amount that
is less than the full amount of the death benefit.
The buyer becomes the new owner and/or beneficiary
of the life insurance policy, pays all future
premiums, and collects the entire death benefit when
the the insured dies. Some states regulate the
purchase as a security while others may regulate it
as insurance.
liquidity
Liquidity is the measure of your ability to
immediately turn assets into cash without penalty or
risk of loss. Examples include a savings account,
money market account, checking account, etc.
living will
If you become incapacitated this document will
preserve your wishes and act as your voice in
medical decisions, if you are unable to speak for
yourself as a result of medical reasons.
loan-to-value ratio
A loan-to-value ratio represents the relationship
between all outstanding and proposed loans on a
property and the appraised value of the property.
For example, an $80,000 loan on a $100,000 property
would represent an 80% loan-to-value ratio. This
ratio assists a lender in determining the risk
associated with the loan. The higher this ratio, the
riskier the loan.
long position
A long position in an investment indicates a current
ownership in that investment which would increase in
value as the underlying asset(s) increase in value,
opposite of a short position.
margin
The amount of money supplied by an investor as a
portion of the total funds needed to buy or sell a
security, with the balance of required funds loaned
to the investor by a broker, dealer, or other
lender.
margin account
A special account set up by a broker for a client
who wants to buy and sell securities using margin.
margin call
A call from a broker to a client asking for more
money to back up a security purchased on margin when
such a security has declined in value. If more money
is not supplied, the broker usually sells the
security.
market order
An order to buy at the lowest price going, or sell
at the highest price possible.
market risk
Every investment carries some element of market
risk, the risk that the entire market will decline,
reducing the investment's value regardless of other
factors.
medical power of attorney
This special power of attorney document allows you
to designate another person to make medical
decisions on your behalf.
minimum distributions
An individual must start receiving distributions
from a qualified plan by April 1 of the year
following the year in which he/she reaches age 70 .
Subsequent distributions must occur by each December
31 st.
The minimum distributions can be based on the life
expectancy of the individual or the joint life
expectancy of the individual and beneficiary.
money purchase plan
A Money Purchase Plan has contributions that are a
fixed percentage of compensation and are not based
on the employer's profits. For example, if the plan
requires that contributions be 10% of the
participant's compensation, the plan is a Money
Purchase Pension Plan. With this type of plan, the
employer is committed to making contributions each
year even if the employer has no profits or is
experiencing cash flow problems. Employee
contributions are limited to 25% of compensation.
Employer contributions are limited to the smaller of
$30,000 or 25 percent of a participant's
compensation.
mortality
Mortality is the risk of death of a given person
based on factors such as age, health, gender, and
lifestyle.
mortgage
A legal instrument providing a loan to the mortgagee
to be used to purchase a real property in exchange
for a lien against the property.
mortgage broker
A mortgage broker acts as an intermediary between a
borrower and a lender. A broker's expertise is to
assist the borrower in identifying mortgage lenders
and products that they might not identify otherwise.
mortgage insurance (mi)
Mortgage insurance protects the lender against the
default of higher risk loans. Most lenders require
mortgage insurance on loans where the loan-to-value
ratio is higher than 80% (less than 20% equity).
municipal bonds
A bond offered by a state, county, city or other
political entity (such as a school district) to
raise public funds for special projects. The
interest received from municipal bonds is often
exempt from certain income taxes.
mutual funds
A mutual fund is a pooling of investor (shareholder)
assets, which is professionally managed by an
investment company for the benefit of the fund's
shareholders. Each fund has specific investment
objectives and associated risk. Mutual funds offer
shareholders the advantage of diversification and
professional management in exchange for a management
fee.
net asset value
The value of all the holdings of a mutual fund, less
the fund's liabilities [also describes the price at
which fund shares are redeemed].
net worth
Your net worth is the difference between your total
assets and total liabilities.
non-conforming loan
A loan that does not conform to Federal National
Mortgage Association (FNMA) or Federal Home Loan
Mortgage Corporation (FHLMC) guidelines. Such loans
include jumbo loan, sub-prime loans and high risk
loans.
note
A note is a legal document that acknowledges a debt
and the terms and conditions agreed upon by the
borrower.
odd lot
An uneven number of securities that represents less
than a board lot.
offer price
The price that a buyer is willing to pay for an
investment.
open-end fund
An open-end mutual fund continuously issues and
redeems units, so the number of units outstanding
varies from day to day. Most mutual funds are
open-end funds. The opposite of closed-end fund.
origination fee
The origination fee on a mortgage is usually the
amount charged by the lender for originating the
loan. Origination fees vary by lender and are
expressed in points where one point is equal to 1%
of the original loan balance.
over-the-counter (otc)
market
Market created by dealer trading as opposed to the
auction market, which prevails on most major
exchanges.
paper gain (loss)
Unrealized capital gain (loss) on securities held in
portfolio, based on a comparison of current market
price to original cost.
par bond
A bond selling at par.
payroll deduction
Payments made on your behalf by your employer. They
are automatically deducted from your pay check.
points
Points are charges added to a mortgage loan by the
lender and are based on the loan amount. One point
is equal to 1% of the original loan balance.
policy
A contractual arrangement between the insurer and
the insured describing the terms and conditions of
the life insurance contract.
policy loan
The policy owner can borrow from the cash value
component of many permanent insurance policies for
virtually any purpose. Any policy loans that are
outstanding at the time of death of the insured will
be deducted from the benefit paid to the
beneficiary.
political risk
Political risk is the risk that stock prices may
decline dramatically during periods of political
unrest or crisis.
power of attorney
A legal document authorizing one person to act on
behalf of another.
premium
The payment that the owner of a life insurance
policy makes to the insurer. In exchange for the
premium payment, the insurer assumes the financial
risk (as defined by the insurance policy) associated
with the death of the insured.
present value
The current worth of a future payment, or stream of
payments, discounted at a given interest rate over a
given period of time.
principal
The principal amount of a loan or mortgage is the
outstanding balance, excluding interest.
private mortgage insurance
Private mortgage insurance protects the lender
against the default of higher risk loans. Most
lenders require private mortgage insurance on loans
where the loan-to-value ratio is higher than 80%
(less than 20% equity).
probate
The process used to make an orderly distribution and
transfer of property from the deceased to a group of
beneficiaries. The probate process is characterized
by court supervision of property transfer, filing of
claims against the estate by creditors and
publication of a last will and testament.
profit sharing plan
A Profit-Sharing Plan is the most flexible and
simplest of the defined contribution plans. It
permits discretionary annual contributions that are
generally allocated on the basis of compensation.
The employer will determine the amount to be
contributed each year depending on the cash-flow of
the company. The deduction for contributions to a
Profit-Sharing Plan cannot be more than 15% of the
compensation paid to the employees participating in
the plan. Annual employer contributions to the
account of a participant cannot exceed the smaller
of $30,000 or 25 percent of a participant's
compensation.
prohibited ira transactions
Generally, a prohibited transaction is any improper
(self-dealing) use of the IRA by the account owner.
Some examples include borrowing money from an IRA,
using an IRA to secure a loan and selling property
to an IRA.
prospectus
A detailed statement prepared by an issuer and filed
with the SEC prior to the sale of a new issue. The
prospectus gives detailed information on the issue
and on the issuer's condition and prospects.
qualified retirement plan
A qualified retirement plan is a retirement plan
that meets certain specified tax rules contained
primarily in section 401(a) of the Internal Revenue
Code. These rules are called "plan qualification
rules". If the rules are satisfied the plan's trust
is exempt from taxes.
refinance
To refinance one's mortgage is to retire the
existing mortgage using the proceeds of a new
mortgage and using the same property as collateral.
This is usually done to secure a lower interest rate
mortgage or to access equity from the property.
registered representative
A registered representative is licensed with the
NASD (National Association of Securities Dealers),
through association with an NASD member broker /
dealer, to act as an account representative for
clients and collect commission income.
revolving debt
A debt or liability that does not have a fixed
principal balance or payment. Examples include
credit cards, home equity lines of credit, etc.
rider
A life insurance rider is an amendment to the
standard policy that expands or restricts the
policy's benefits. Common riders include a
disability waiver of premium rider and a children's
life coverage rider.
risk
Investment risk is the chance that the actual
returns realized on an investment will differ from
the expected return.
rule of 72
A way to determine the effect of compound interest.
Divide 72 by the expected return on your investment.
If your expected return is 8%, assuming that all
interest is reinvested, you will double your money
in 9 years.
safety of principal
Safety of principal is an objective that emphasizes
the security of the invested principal.
salary reduction simplified
employee pension (sarsep)
A SARSEP is a simplified alternative to a 401(k)
plan. It is a SEP that includes a salary reduction
arrangement. Under this special arrangement,
eligible employees can elect to have the employer
contribute part of their before-tax pay to their
IRA. This amount is called an "elective deferral".
SEC
The main regulatory body regulating the securities
industry is called the Securities and Exchange
Commission.
second mortgage
A mortgage on real property in a junior position to
a primary or first mortgage. The increased risk
associated with a second mortgage is often reflected
in a higher interest rate and a shorter term of
repayment.
securities
Stocks and bonds are traditionally referred to as
securities. More specifically, stocks are often
referred to as "equities" and bonds as "debt
instruments."
Securities and Exchange
Commission
The main regulatory body regulating the securities
industry is called the Securities and Exchange
Commission.
short position
A short position in an investment indicates a
position in an investment that would increase in
value as the underlying asset(s) decrease in value.
Opposite of a long position.
short sale
The sale of stock that you do not yet own in order
to take advantage of an expected share price
decline. If the stock declines in price, the stock
is purchased at the now lower price and the short
position is closed.
simplified employee pension
(sep)
A SEP provides employers with a "simplified"
alternative to a qualified profit-sharing plan.
Basically, a SEP is a written arrangement that
allows an employer to make contributions towards his
or her own and employees' retirement, without
becoming involved in a more complex retirement plan.
Under a SEP, IRAs are set up for each eligible
employee. SEP contributions are made to IRAs of the
participants in the plan. The employer has no
control over the employee's IRA once the money is
contributed.
small cap
A small cap stock is one issued by a company with
less than $1.7 billion in market capitalization.
smart card
A card with an embedded computer chip which stores
more information, performs more functions and is
more secure than a credit card or debit card.
spousal ira
An individual can set up and contribute to an IRA
for his/her spouse. This is called a "Spousal IRA"
and can be established if certain requirements are
met. In the case of a spousal IRA, the individual
and spouse must have separate IRAs. A jointly owned
IRA is not permitted.
stock
Stock certificates represent an ownership position
in a corporation. Stockholders are often entitled to
dividends, voting rights, and financial
participation in company growth.
stock dividends
The investor's share of the income earned by the
company issuing the stock.
stock exchange
A market for trading of equities, a public market
for the buying and selling of public stocks.
stop-loss order
This is when you tell your broker to sell the stock
if it drops to a certain price.
succession planning
Planning for a business to pass to the next
generation of owner/managers.
surrender value
When a policy owner surrenders his/her permanent
life insurance policy to the insurance company, he
or she will receive the surrender value of that
policy in return. The surrender value is the cash
value of the policy plus any dividend accumulations,
plus the cash value of any paid-up additions minus
any policy loans, interest, and applicable surrender
charges.
tax credit
An income tax credit directly reduces the amount of
income tax paid by offsetting other income tax
liabilities.
tax deduction
A reduction of total income before the amount of
income tax payable is calculated.
tax-deferred
The term tax deferred refers to the deferral of
income taxes on interest earnings until the interest
is withdrawn form the investment. Some vehicles or
products that enjoy this special tax treatment
include permanent life insurance, annuities, and any
investment held in IRA's.
technical analysis
Technical analysis is a technique of estimating a
stock's future value strictly by examining its
prices and volume of trading over time. Technical
analysis is the opposite of fundamental analysis.
tenants in common
Two or more people who own the same piece of
property, with the inherent condition that if one of
the tenants die, his interest automatically passes
on to his heirs.
term insurance
Term insurance is life insurance coverage that pays
a death benefit only if the insured dies within a
specified period of time. Term policies do not have
a cash value component and must be renewed
periodically as dictated by the insurance contract.
testamentary trust
A trust created under the terms of a will and that
takes effect upon the death of the testator.
ticker symbol
A ticker symbol is a combination of letters that
identifies a stock-exchange security.
title
A legal document establishing property ownership.
title search
A detailed examination of legal records to determine
the history and legal ownership of a property.
top heavy plans
Each year, a qualified plan must be tested to
determine whether it is "top-heavy". Generally, a
"top-heavy" plan is one in which more than 60
percent of the benefits under the plan are for key
employees (usually owners and officers). Additional
requirements apply to a top-heavy plan such as
faster vesting and mandatory employer contributions.
total disability
In order to make a disability claim a person must
meet the definition of disability set forth in the
insurance contract. There are two general
definitions of disability used in today's contracts.
The first definition is that the insured is unable
to perform all of the substantial and material
duties of his/her own occupation. The second, and
more restrictive, definition is that the insured is
unable to perform any occupation for which he/she is
reasonably suited by education, training, or
experience.
treasury bill
Treasury bills, often referred to as T-bills, are
short-term securities (maturities of less than one
year) offered and guaranteed by the federal
government. They are issued at a discount and pay
their full face value at maturity.
treasury bond
Treasury bonds are issued with maturities of more
than 10 years and are offered and guaranteed by the
U.S. Government. They are issued at a discount and
pay their full face value at maturity.
treasury note
Treasury notes are issued with maturities between
one and 10 years. These notes are offered and
guaranteed by the U.S. Government. They are issued
at a discount and pay their full face value at
maturity.
TSA (tax-sheltered
annuity)
Tax deferred annuity retirement plan available to
employees of public schools and colleges, and
certain non-profit hospitals, charitable, religious,
scientific and educational organizations.
underwriter (banking)
A person, banker or group that guarantees to furnish
a definite sum of money by a definite date in return
for an issue of bonds or stock.
underwriter (insurance)
The one assuming a risk in return for the payment of
a premium, or the person who assesses the risk and
establishes premium rates.
underwriter (investments)
In the bond/stock market means a brokerage firm or
group of firms that has promised to buy a new issue
of bonds/shares from a government or company at a
fixed discounted price, then arranges to resell them
to investors at full price.
unemployment rate
The number of people unemployed measured as a
percentage of the labor force.
universal life insurance
An adjustable Universal Life insurance policy
provides both a death benefit and an investment
component called a cash value. The cash value earns
interest at rates dictated by the insurer. The
policyholder may accumulate significant cash value
over the years and, in some circumstances, "borrow"
the appreciated funds without paying taxes on the
borrowed gains (taxes may be required if policy is
surrendered). As long as the policy stays in force
the borrowed funds do not need to be repaid, but
interest may be charged to your cash value account.
Premiums are adjustable by the policy owner.
variable investment
A variable investment is any investment whose value,
and therefore returns, fluctuates with market
conditions such as a common stock, a plot of raw
land, and a hard asset.
variable universal life
insurance
A Variable Life insurance policy provides both a
death benefit and an investment component called a
cash value. The owner of the policy invests the cash
value in subaccounts selected by the insurer. The
policyholder may accumulate significant cash value
over the years and "borrow" the appreciated funds
without paying taxes on the borrowed gains (taxes
may be required if policy is surrendered). As long
as the policy stays in force the borrowed funds do
not need to be repaid, but interest may be charged
to your cash value account.
variable rate mortgage (VRM)
A Variable Rate Mortgage offers an initial interest
rate that is usually lower than a fixed rate, but
that adjusts periodically according to market
conditions and financial indices. The rate may go up
and/or down, depending on economic conditions. To
limit the borrower's risk, the VRM will almost
always have a maximum interest rate allowed, called
a "rate cap."
venture capital
A common term for funds that are invested by a third
party in a business either as equity or as a form of
secondary debt. In the event of failure or business
wind-up, these funds rank behind all other secured
creditors.
vesting
The law requires that a qualified plan have a
schedule under which a participant earns an
ownership interest in employer provided
contributions based on his or her years of service
with the employer. Amounts contributed by the
participant are always 100% vested.
viatical settlement
Occurs when a person with terminal or chronic
illness sells his/her life insurance policy to a
third party for an amount that is less than the full
amount of the death benefit. The buyer becomes the
new owner and/or beneficiary of the life insurance
policy, pays all future premiums, and collects the
entire death benefit when the insured dies. Some
states regulate the purchase as a security while
others may regulate it as insurance.
waiver of premium
A waiver of premium rider on an insurance policy
sets for conditions under which premium payments are
not required to be made for a time. The most popular
waiver of premium rider is the disability waiver
under which the owner of the policy (also called the
policyholder) is not required to make premium
payments during a period of total disability.
whole life insurance
A traditional Whole Life insurance policy provides
both a death benefit and a cash value component. The
policy is designed to remain in force for a
lifetime. Premiums stay level and the death benefit
is guaranteed. Over time, the cash value of the
policy grows and helps keep the premium level.
Although the premiums start out significantly higher
than that of a comparable term life policy, over
time the level premium eventually is overtaken by
the ever-increasing premium of a term policy.
will
The most basic and necessary of estate planning
tools, a will is a legal document declaring a
person's wishes regarding the disposition of their
estate. A will ensures that the right people receive
the right assets at the right time. If an individual
dies without a will they are said to have died
intestate.
wrap account
An account offered by investment dealers whereby
investors are charged an annual management fee based
on the value of invested assets.
write-off
Any loan not expected to be recovered and is
recorded as a loan loss.
yield
The yield on an investment is the total proceeds
paid from the investment and is calculated as a
percentage of the amount invested.
zero-coupon bond
A zero-coupon bond is a bond sold without
interest-paying coupons. Instead of paying periodic
interest, the bond is sold at a discount and pays
its entire face amount upon maturity, which is
usually a one year period or longer.
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