Financial Glossary C
Some employers offer cafeteria plans, more formally known as flexible spending plans, which give you the option of participating in a range of tax-saving benefit programs. If you enroll in the plan, you choose the percentage of your pretax income to be withheld from your paycheck, up to the limit the plan allows. You allocate your money to the parts of the plan you want to participate in.For example, you can set aside money to pay for medical expenses that aren’t covered by insurance, for child care, or for additional life insurance coverage. As you incur these kinds of expenses, you are reimbursed from the amount you have put into the plan.Since you owe no income tax on the money you contribute, you actually have more cash available for these expenses than if you were spending after-tax dollars. However, you must estimate the amount you’re going to contribute before the tax year begins, and you forfeit any money you’ve set aside but don’t spend. For example, if you’ve set aside $1,500 for medical expenses but spend only $1,400, you lose the $100.In some plans the deadline for spending the money in your flexible spending account is December 31. Other plans provide up to a three-month expension.
In the bond markets, a call is an issuer’s right to redeem bonds it has sold before the date they mature. With preferred stocks, the issuer may call the stock to retire it, or remove it from the marketplace. In either case, it may be a full call, redeeming the entire issue, or a partial call, redeeming only a portion of the issue.When a bank makes a secured loan, it reserves the right to demand full repayment of the loan — referred to as calling the loan — should the borrower default on interest payments. Finally, when the term refers to options contacts, holding a call gives you the right to buy the underlying instrument at a specific price by a specific date. Selling a call obligates you to deliver the underlying instrument if the call is exercised and you’re assigned to meet the call.
Buying a call option gives you, as owner, the right to buy a fixed quantity of the underlying product at a specified price, called the strike price, within a specified time period. For example, you might purchase a call option on 100 shares of a stock if you expect the stock price to increase but prefer not to tie up your investment principal by investing in the stock. If the price of the stock does go up, the call option will increase in value. You might choose to sell your option at a profit or exercise the option and buy the shares at the strike price. But if the stock price at expiration is less than the strike price the option will be worthless. The amount you lose, in that case, is the premium you paid to buy the option plus any brokerage fees. In contrast, you can sell a call option, which is known as writing a call. That gives the buyer the right to buy the underlying investment from you at the strike price before the option expires. If you write a call, you are obliged to sell if the option is exercised and you are assigned to meet the call.
A callable bond can be redeemed by the issuer before it matures if that provision is included in the terms of the bond agreement, or deed of trust. Bonds are typically called when interest rates fall, since issuers can save money by paying off existing debt and offering new bonds at lower rates. If a bond is called, the issuer may pay the bondholder a premium, or an amount above the par value of the bond.
A cap is a ceiling, or the highest level to which something can go. For example, an interest rate cap limits the amount by which an interest rate can be increased over a specific period of time. A typical cap on an adjustable rate mortgage (ARM) limits interest rate increases to two percentage points annually and six percentage points over the term of the loan. In a different example, the cap on your annual contribution to an individual retirement account (IRA) is $4,000 for 2006 and 2007 and $5,000 in 2008, provided you have earned at least that much. If you’re 50 or older, you can make an additional catch-up contribution of $1,000 each year.
Capital is money that is used to generate income or make an investment. For example, the money you use to buy shares of a mutual fund is capital that you’re investing in the fund. Companies raise capital from investors by selling stocks and bonds and use the money to expand, make acquisitions, or otherwise build the business. The term capital markets refers to the physical and electronic environments where this capital is raised, either through public offerings or private placements.
Any increase in a capital asset’s fair market value is called capital appreciation. For example, if a stock increases in value from $30 a share to $60 a share, it shows capital appreciation. Some stock mutual funds that invest for aggressive growth are called capital appreciation funds.
When you sell an asset at a higher price than you paid for it, the difference is your capital gain. For example, if you buy 100 shares of stock for $20 a share and sell them for $30 a share, you realize a capital gain of $10 a share, or $1,000 in total. If you own the stock for more than a year before selling it, you have a long-term capital gain. If you hold the stock for less than a year, you have a short-term capital gain.Most long-term capital gains are taxed at a lower rate than your other income while short-term gains are taxed at your regular rate. There are some exceptions, such as gains on collectibles, which are taxed at 28%. The long-term capital tax rates are 15% for anyone whose marginal federal tax rate is 25% or higher, and 5% for anyone whose marginal rate is 10% or 15%.You are exempt from paying capital gains tax on profits of up to $250,000 on the sale of your primary home if you’re single and up to $500,000 if you’re married and file a joint return, provided you meet the requirements for this exemption.
Capital gains distribution
When mutual fund companies sell investments that have increased in value, the profits, or capital gains, are passed on to their shareholders as capital gains distributions. These distributions are made on a regular schedule, often at the end of the year and are taxable at your regular rate unless the funds are held in a tax-deferred or tax-free account. Most funds offer the option of automatically reinvesting all or part of your capital gains distributions to buy more shares.
Capital gains tax (CGT)
A capital gains tax is due on profits you realize on the sale of a capital asset, such as stock, bonds, or real estate. Long-term gains, on assets you own more than a year, are taxed at a lower rate than ordinary income while short-term gains are taxed at your regular rate.The long-term capital gains tax rates on most investments is 15% for anyone whose marginal federal tax rate is 25% or higher, and 5% for anyone whose marginal rate is 10% or 15%. There are some exceptions. For example, long-term gains on collectibles are taxed at 28%.You are exempt from capital gains tax on profits of up to $250,000 on the sale of your primary home if you’re single and up to $500,000 if you’re married and file a joint return, provided you meet the requirements for this exemption.
When you sell an asset for less than you paid for it, the difference between the two prices is your capital loss. For example, if you buy 100 shares of stock at $30 a share and sell when the price has dropped to $20 a share, you will realize a capital loss of $10 a share, or $1,000. Although nobody wants to lose money on an investment, there is a silver lining: You can use capital losses to offset capital gains in computing your income tax. However, you must use short-term losses to offset short-term gains and long-term losses to offset long-term gains. If you have a net capital loss in any year — that is, your losses exceed your gains — you can usually deduct up to $3,000 of this amount from regular income on your tax return. You may also be able to carry forward net capital losses and deduct on future tax returns.
Capital markets are the physical and electronic markets where equity and debt securities, commodities, and other investments are sold to investors. When you place an order through a brokerage firm, trade online, or use a dividend reinvestment plan (DRIP), you’re participating in a capital market. Corporations use capital markets to raise money through public offerings of stocks and bonds or private placements of securities to institutional investors, such as mutual fund companies.
Capital preservation is a strategy for protecting the money you have available to invest by choosing insured accounts or fixed-income investments that promise return of principal. The downside of capital preservation over the long term is that by avoiding the potential risks of equity investing, you exposure yourself to inflation risk. That’s the case because your investments are unlikely to increase enough in value to offset the gradual loss of purchasing power that’s a result of even moderate inflation.
Car insurance covers theft of and damage to your car or damage that your car causes, plus liability protection in case you are sued as a result of an accident. Your state may require proof of insurance before you can register your car.As a car owner, you pay premiums set by the insurance company based on the value of your car and the risk the company believes you pose. The insurance company agrees to cover your losses, subject to a deductible and the limits specified in the contract.Some states have insurance pools that allow car owners who have been turned down elsewhere to obtain coverage.
Cash balance plan
A cash balance retirement plan is a defined benefit plan that has many of the characteristics of a defined contribution plan. The benefit that you’ll be entitled to builds up as credits to a hypothetical account. The hypothetical account is credited with hypothetical earnings, based on a percentage of your current pay. These plans are portable, which means you can roll them over from one employer to another when you change jobs. That makes them popular with younger and mobile workers. But they are often unpopular with older workers whose employers switch from a defined benefit to cash balance plan because their pensions may be less than with traditional defined benefit plans.
Cash basis accounting
Cash basis accounting is one of two ways of recording revenues and expenses. Using this method, a company records income on its books when it receives a payment and expenses when it makes a payment. In accrual accounting, by comparison, a company counts revenue as it’s earned and expenses as they’re incurred.For example, when a magazine company sells annual subscriptions, it receives the cash for the subscriptions at the beginning of the year, but it doesn’t earn the whole amount of the subscription cost until it has sent the subscriber a full year’s issues of the magazine. In cash basis accounting, paid subscriptions are recorded as revenue when the company receives the payments. In accrual accounting, the company records revenue only as the subscription is fulfilled. A $24 subscription for 12 monthly issues of a magazine would result in immediate revenue of $24 in cash basis accounting, versus an accrual of $2 of revenue each month under accrual accounting.
Short-term, low-risk investments, such as US Treasury bills or short-term certificates of deposit (CDs), are considered cash equivalents. The Financial Accounting Standards Board (FASB) defines cash equivalents as highly liquid securities with maturities of less than three months. Liquid securities typically are those that can be sold easily with little or no loss of value.
Cash flow is a measure of changes in a company’s cash account during an accounting period, specifically its cash income minus the cash payments it makes. For example, if a car dealership sells $100,000 worth of cars in a month and spends $35,000 on expenses, it has a positive cash flow of $65,000. But if it takes in only $35,000 and has $100,000 in expenses, it has a negative cash flow of $65,000. Investors often consider cash flow when they evaluate a company since without adequate money to pay its bills, it will have a hard time staying in business.You can calculate whether your personal cash flow is positive or negative the same way you would a company’s. You’d subtract the money you receive (from wages, investments, and other income) from the money you spend on expenses (such as housing, transportation, and other costs). If there’s money left over, your cash flow is positive. If you spend more than you have coming in, it’s negative.
In a cash market buyers pay the market price for securities, currency, or commodities “on the spot,” just as you would pay cash for groceries or other consumer products. Cash markets are also called spot markets. A cash market is the opposite of a futures market, where commodities or financial products are scheduled for delivery and payment at a set price at a specified time in the future.In a cash market, ownership is transferred promptly, and payment is made upon delivery.
To settle a futures contract where the underlying asset is a financial instrument, such as a stock index or interest rate rather than a physical commodity, you deliver cash. In contrast, when you settle a futures contract on other commodities, you deliver the physical product. But because index values or interest rates are intangible, physical delivery is not possible. The way you calculate the amount due is defined in the contract. When the underlying instrument is an index, this usually involves multiplying the value of the index times a fixed amount. For example, the cash settlement of a contract on the Standard & Poor’s MidCap 400 Index is determined by multiplying the value of the index times $500. However, in the vast majority of cases, futures contracts are offset before the settlement date, and no delivery is required.
Cash surrender value
The cash surrender value of a permanent life insurance policy is the amount you receive if you cancel or surrender your policy before you die. It’s a portion of the money that accumulates tax-deferred in your cash value account during the period you pay premiums on the policy, minus fees and expenses.Generally the only portion of the cash surrender value that’s subject to income tax is the amount that exceeds what you paid in premiums during the time the policy was in force, though you should check with your tax adviser.
Cash value is the amount that an account is worth at any given time. For example, the cash value of your 401(k) or IRA is what the account is worth at the end of a period, such as the end of a business day, or at the end of the plan year, often December 31. The cash value of an insurance policy is the amount the insurer will pay you, based on your policy’s cash reserve, if you cancel your policy. The cash value is the difference between the amount you paid in premiums and the actual cost of insurance plus other expenses.
Cash value account
If you have a permanent life insurance policy, part of each premium you pay goes into a tax-deferred account called the cash value account. You can borrow against the money that accumulates in this account, though any outstanding balance at the time of your death reduces the death benefit your beneficiary receives.If you cancel or surrender your policy, or if you stop paying the premiums, you are entitled to receive a portion of your cash value account. That amount is your cash surrender value.
Catastrophic illness insurance
Many health insurance policies cap, or limit, the amount they will pay to cover medical expenses. But you can buy catastrophic illness insurance to cover medical expenses above the maximum your regular health insurance will pay.
You are entitled to make an annual catch-up contribution to your employer sponsored retirement savings plan and individual retirement account (IRA) if you’re 50 or older. The catch-up amounts, which are larger for employer plans than for IRAs, increase from time to time based on the rate of inflation. You are eligible to make catch-up contributions whether or not you have contributed the maximum amount you were eligible for in the past. And if you participate in an employer plan and also put money in an IRA, you are entitled to use both catch-up options.Earnings on catch-up contributions accumulate tax deferred, just as other earnings in your account do. And when your primary contributions are tax deferred, so are your catch-up contributions.Health savings accounts (HSAs), which you’re eligible to open if you have a high deductible health plan (HDHP), allow catch-up contributions if you’re at least 55. Your eligibility to make any contributions to an HSA ends when you turn 65.
If there is an upper limit, or cap, on the interest rate you can be charged on an adjustable-rate loan, it’s known as a ceiling. Even if interest rates in general rise higher than the interest-rate ceiling on your loan, the rate you’re paying can’t be increased above the ceiling.However, according to the terms of some loans, lenders can add some of the interest they weren’t allowed to charge you because of the ceiling to the total amount you owe. This is known as negative amortization. That means, despite a ceiling, you don’t escape the consequences of rising rates, though repayment is postponed, often until the end of the loan’s original term.Ceiling can also refer to a cap on the amount of interest a bond issuer is willing to pay to float a bond. Or, it’s the highest price a futures contract can reach on any single trading day before the market locks up, or stops trading, that contract.
Most countries have a central bank, which issues the country’s currency and holds the reserve deposits of other banks in that country. It also either initiates or carries out the country’s monetary policy, including keeping tabs on the money supply. In the United States, the 12 regional banks that make up the Federal Reserve System act as the central bank. This multibank structure was deliberately developed to ensure that no single region of the country could control economic decision making.
Central Registration Depository (CRD)
The Central Registration Depository (CRD) is an automated database maintained by NASD. The database contains records and information about registered securities employees including employment history, licensing status, the firms that employ them, and any disciplinary actions taken against them. You can access some of the information about a broker’s regulatory background and registration in the database free of charge through NASD’s BrokerCheck service at www.nasd.com. You can generally obtain even more extensive information from the CRD through your state’s securities regulator.
Certificate of Accrual on Treasury Securities (CATS)
CATS are US Treasury zero-coupon bonds that are sold at deep discount to par, or face value. Like other zeros, the interest isn’t actually paid during the bond’s term but accumulates so that you receive face value at maturity. You can use CATS in your long-term portfolio to provide money for college tuition or retirement. For example, you may purchase them in a tax-deferred IRA or a tax-free Roth IRA or Coverdell Education Savings Account (ESA). As with other zeros, CATS prices can be volatile, so you risk losing some of your principal if you sell before maturity. And like other federal government issues, the interest is free of state and local income tax but subject to federal income tax.
Certificate of deposit (CD)
CDs are time deposits. When you purchase a CD from a bank, up to $100,000 is insured by the Federal Deposit Insurance Corporation (FDIC). You generally earn compound interest at a fixed rate, which is determined by the current interest rate and the CD’s term, which can range from a week to five years.However, rates can vary significantly from bank to bank. You usually face a penalty if you withdraw funds before your CD matures, often equal to the interest that has accrued up to the time you make the withdrawal.
When you deposit a check, your bank or other financial institution may delay crediting the money to your account during what’s called the check hold period. The number of days that your bank can legally hold your funds depends on the type of check you deposit and, at some banks, on the type of deposit slip you use. Under federal law, certain deposits must be available by the next business day, including checks payable by the US Treasury or a Federal Reserve Bank, US Postal Service money orders, cashier’s checks, and electronic payments. Other deposits can be subject to a check hold of one to five business days, depending on whether the check is drawn on a local or non-local bank, and the size of the deposit. The law does require banks to make the first $100 of your deposit available on the next business day. Your bank must inform you of its check hold policy, although keep in mind that banks can impose longer holds if your account has been open less than 30 days.
To process payments faster and more efficiently, many banks no longer transport paper checks, but replace them with digital images — called substitute checks — that can be transferred electronically, in a system called check truncation. When you receive your account statements, the bank may send you substitute checks in place of cancelled checks, each formatted on a separate piece of paper, with the words “This is a legal copy of your check” appearing next to the image. Most banks destroy original checks once they’ve archived the substitutes. However, many banks send out either a line item statement or an image statement with photocopies of multiple cancelled checks on each page. If you need to verify a payment, you can request a substitute check from your bank. There may be a fee for this service.
Checking accounts are transaction accounts that allow you to authorize the transfer money to another person or organization either by writing a check that includes the words “Pay to the order of” or by making an electronic transfer. Banks and credit unions provide transaction accounts, as do brokerage firms and other financial services companies that offering banking services. Money in transaction accounts is insured by the Federal Deposit Insurance Corporation (FDIC) up to $100,000 per depositor in each banking institution. However, the FDIC doesn’t insure money market mutual funds that offer check-writing privileges.
If a broker intentionally mishandles buying and selling securities in your investment account, it’s known as churning.The broker might buy and sell securities at an excessive rate, or at a rate that’s inconsistent with your investment goals or the amount of money you have invested.One indication of potential churning is that you’re paying more in commissions than you are earning on your investments. Churning is illegal but is often hard to prove.
After the stock market crash of 1987, stock and commodities exchanges established a system of trigger-point rules known as circuit breakers. They temporarily restrict trading in stocks, stock options, and stock index futures when prices fall too far, too fast.Currently, trading on the New York Stock Exchange (NYSE) is halted when the Dow Jones Industrial Average (DJIA) drops 10% any time before 2:30 p.m., sooner if the drop is 20%. But trading could resume, depending on the time of day the loss occurs. However, if the DJIA drops 30% at any point in the day, trading ends for the day. The actual number of points the DJIA would need to drop to hit the trigger is set four times a year, at the end of each quarter, based on the average value of the DJIA in the previous month.The only time the circuit breakers have been triggered was on October 27, 1997, when the DJIA fell 554 points, or 7.2%, and the shut-down level was lower. In fact, the DJIA has dropped as much as 10% in a single day only three times in its history.
You file an insurance claim when you send your insurance company paperwork asking the company to pay for any of the expenses your policy covers.
Clearance is the first half of the process that completes your order to buy or sell a security. During clearance, the details on both sides of the transaction are compared electronically to ensure that the order to buy and the order to sell correspond. For example, in a stock transaction, the Committee on Uniform Securities Identification Procedures (CUSIP) number, the number of shares, and the price per share must match.Next, transactions within each broker-dealer are netted down, or offset, by matching its clients’ buy orders against sell orders from others of its clients or among a group of affiliated firms. Their records are then updated to reflect the new ownership and account balances.Any unmatched orders are forwarded to the National Securities Clearing Corporation (NSCC), which instructs selling broker-dealers to provide the relevant securities and the buying broker-dealer to send the cash.
Clearing firms handle the back-office details of securities transactions between broker-dealers, making the settlement process streamlined and efficient. In brief, when a broker’s order to buy or sell a security has been filled, the clearing firm electronically compares and verifies the details of that trade. Then it nets down the trades to minimize the number of securities that must be received or delivered at settlement. Cleared trades are settled within a specific time after the trade date, based on the type of security being traded.
Clearing corporations, or clearinghouses, provide operational support for securities and commodities exchanges. They also help ensure the integrity of listed securities and derivatives transactions in the United States and other open markets. For example, when an order to buy or sell a futures or options contract is executed, the clearinghouse compares the details of the trade. Then it delivers the product to the buyer and ensures that payment is made to settle the transaction.
Closed-end mutual funds are actively managed funds that raise capital only once, by issuing a fixed number of shares. Like other mutual funds, however, fund managers buy and sell individual investments in keeping with their investment objectives.The shares are traded on an exchange and their prices fluctuate throughout the trading day, based on supply, demand, and the changing values of their underlying holdings. Most single country funds are closed-end funds.
A closely held corporation is one in which a handful of investors, often the people who founded the company, members of the founders’ families, or sometimes the current management team, own a majority of the outstanding stock.
When you purchase real estate, there are expenses — known as closing costs — you pay to finalize the transaction, over and above the cost of the property. In some cases, the seller may offer to pay certain closing costs to attract buyers or close the sale more quickly. Closing costs vary depending on the area where the property is located and are either prepaid or non-recurring. Prepaid costs are expenses that recur periodically, including home insurance premiums and real estate taxes. Non-recurring costs pay for securing a mortgage and transferring the property, and may include a filing fee to record the transfer of ownership, mortgage tax, attorneys’ fees, credit check fees, title search and title insurance expenses, home inspection fees, an appraisal fee, and any points, or up-front interest charges, you have agreed to pay the lender.The lender will give you a good faith estimate (GFE) of your closing costs before the closing date, so you’ll know approximately how much money you need to have available at closing — usually 5% to 10% of your mortgage. Many closing costs are tax deductible, so it’s a good idea to consult with your tax adviser.
The closing price of a stock, bond, option, or futures contract is the last trading price before the exchange or market on which it is traded closes for the day. With after-hours trading, however, the opening price at the start of the next trading day may be different from the closing price the day before. When a security is valued as part of an estate or charitable gift, its value is set at the closing price on the day of the valuation of the estate.
A closing statement, also called a HUD1 or settlement sheet, is a legal form your closing or settlement agent uses to itemize all of the costs you and the seller will have to pay at closing to complete a real estate transaction. Your total cost should be similar to the amount in the good faith estimate (GFE) provided by your lender.It’s important to review the closing statement with your real estate agent and settlement agent. Mistakes do occasionally happen, so be sure to ask questions if there are any charges you don’t understand.
When your healthcare insurance has a coinsurance provision, you and your insurer divide the responsibility for paying doctor and hospital bills by splitting the costs on a percentage basis.With an 80/20 coinsurance split, for example, your insurer would pay 80%, or $80 of a $100 medical bill, and you would pay 20%, or $20. Some policies set a cap on your out-of-pocket expenses, so that the insurance company covers 95% to 100% of the cost once you have paid the specified amount.Coinsurance may also apply when you buy insurance on your home or other real estate. In that case, insurers may require you to insure at least a minimum percentage of your property’s value — usually about 80% — and may reduce what they will cover if you file a claim but have failed to meet the coinsurance requirement. Coinsurance also describes a situation in which two insurers split the risk of providing coverage, often in cases when the dollar amount of the potential claims is larger than a single insurer is willing to handle. This type of coinsurance is also called reinsurance.
Assets with monetary value, such as stock, bonds, or real estate, which are used to guarantee a loan, are considered collateral. If the borrower defaults and fails to fulfill the terms of the loan agreement, the collateral, or some portion of it, may become the property of the lender. For example, if you borrow money to buy a car, the car is the collateral. If you default, the lender can repossess the car and sell it to recover the amount you borrowed. Loans guaranteed by collateral are also known as secured loans.
Collateralized mortgage obligation (CMO)
CMOs are fixed-income investments backed by mortgages or pools of mortgages. A conventional mortgage-backed security has a single interest rate and maturity date. In contrast, the pool of mortgages in a CMO is divided into four tranches, each with a different interest rate and term. Owners of the first three tranches receive regular interest payments and principal is repaid to reflect the order in which the tranches mature. The fourth tranche is usually a deep-discount zero coupon bond on which interest accrues until maturity, when the full face value is repaid. CMOs usually involve high-quality mortgages or those guaranteed by the government. Their yield may be lower than those of other mortgage-backed investments.However, the way in which they are repaid makes them especially attractive to institutional investors including insurance companies and pension funds. The risk, as with all mortgage-backed securities, is that a change in interest rates can affect the rate of repayment and the market value of the CMO.
When you invest in objects rather than in capital assets such as stocks or bonds, you are putting your money into collectibles. Collectibles can run the gamut from fine art, antique furniture, stamps, and coins to baseball cards and Barbie dolls. Their common drawback, as an investment, is their lack of liquidity. If you need to sell your collectibles, you may not be able to find a buyer who is willing to pay what you believe your investment is worth. In fact, you may not be able to find a buyer at all. On the other hand, collectibles can provide a sizable return on your investment if you have the right thing for sale at the right time.
CollegeSure® CDs are certificates of deposit designed to let you prepay future college costs at today’s rates, plus a premium based on the child’s age and the amount you invest.The CDs, which are issued by the College Savings Bank of Princeton (NJ), pay annual interest rates linked to increases in an index of average college costs and are available with terms from one to twenty-two years.While these CDs are insured by the Federal Deposit Insurance Corporation (FDIC), the interest they pay is taxable, unless you own them within a Coverdell education savings account (ESA), participating state 529 plan, or Roth IRA. With the Roth IRA option, the account must be open for at least five years and you must be at least 59 1/2 to qualify for tax-free withdrawals. CollegeSure® CDs are sold in whole or partial units. At maturity, each whole unit is guaranteed to pay the average cost of one year of tuition, fees, and room and board at a four-year private college. If you decide to purchase only a partial unit, it will be worth only that portion of the average yearly college cost at maturity. If the intended beneficiary decides not to go to college, you can get the entire principal and interest calculated at the guaranteed rate back when the CD matures and use it for any purpose.However, if you choose to cash in the CD before its maturity date, you’ll owe a penalty of 10% of the principal during the first three years of its term. The penalty drops to 5% for the remaining years of the CD’s term, except for the last year, which carries a 1% penalty.
Commercial banks offer a full range of retail banking products and services, such as checking and savings accounts, loans, credit cards, and lines of credit to individuals and businesses.Most commerical banks also sell certain investments and many offer full brokerage and financial planning services.
To help meet their immediate needs for cash, banks and corporations sometimes issue unsecured, short-term debt instruments known as commercial paper. Commercial paper usually matures within a year and is an important part of what’s known as the money market.It can be a good place for investors — institutional investors in particular — to put their cash temporarily. That’s because these investments are liquid and essentially risk-free, since they are typically issued by profitable, long-established, and highly regarded corporations.
Securities brokers and other sales agents typically charge a commission, or sales charge, on each transaction. With traditional, full-service brokers, the charge is usually a percentage of the total cost of the trade, though some brokers may offer favorable rates to frequent traders.Online brokerage firms, on the other hand, usually charge a flat fee for each transaction, regardless of the value of the trade. The flat fee may have certain limits, however, such as the number of shares being traded at one time.The commissions on some transactions, such as stock trades, are reported on your confirmation slip. But commissions on other transactions are not reported separately. In the case of cash value life insurance, for example, the commission may be as large as a year’s premium.
Committee on Uniform Securities Identifying Procedures (CUSIP)
The Committee on Uniform Securities Identifying Procedures (CUSIP) assigns codes and numbers to all securities traded in the United States. The CUSIP identification number is used to track the securities when they are bought and sold. You’ll find the CUSIP number on a confirmation statement from your broker, for example, and on the face of a stock certificate.
Commodities are bulk goods and raw materials, such as grains, metals, livestock, oil, cotton, coffee, sugar, and cocoa, that are used to produce consumer products. The term also describes financial products, such as currency or stock and bond indexes.Commodities are bought and sold on the cash market, and they are traded on the futures exchanges in the form of futures contracts. Commodity prices are driven by supply and demand: When a commodity is plentiful — tomatoes in August, for example — prices are comparatively low. When a commodity is scarce because of a bad crop or because it is out of season, the price will generally be higher.You can buy options on many commodity futures contracts to participate in the market for less than it might cost you to buy the underlying futures contracts. You can also invest through commodity funds.
Commodity Futures Trading Commission (CFTC)
The CFTC is the federal agency that regulates the US futures markets, as the Securities and Exchange Commission (SEC) regulates the securities markets. The agency’s five commissioners are appointed by the US president for staggered five-year terms. The agency is responsible for maintaining fair and orderly markets, enforcing market regulations, and ensuring that customers have the information they need to make informed decisions. Commodity exchanges also regulate themselves, but any changes they want to make must be approved by the CFTC before they go into effect.
When you own common stock, your shares represent ownership in the corporation and give you the right to vote for the company’s board of directors and benefit from its financial success. You may receive a portion of the company’s profits as dividend payments if the board of directors declares a dividend. You also have the right to sell your stock and realize a capital gain if the share value increases. But if the company falters and the price falls, your investment could lose some or all of its value.
In nine US states, any assets, investments, and income that are acquired during a marriage are considered community property, or owned jointly by the married couple. For example, if you’re married, live in one of these states, and buy stock, half the value of that stock belongs to your spouse even if you paid the entire cost of buying it. In a divorce, the value of the community property is divided equally. However, property you owned before you married or that you received as a gift is generally not considered community property. The community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
Competitive traders, also known as registered competitive traders or floor traders, buy and sell stocks for their own accounts on the floor of an exchange.Traders must follow very specific rules governing when they can buy and sell. But since they trade in large volumes and do not pay commissions on their transactions, they can profit from small differences between the prices at which they buy and sell.
Composite trading figures report end-of-day price changes, closing prices, and the daily trading volume for stocks, warrants, and options listed on a stock exchange. The New York Stock Exchange (NYSE) total also includes transactions on regional exchanges and listed securities traded over-the-counter. Since trading continues on some of those exchanges after the close of business in New York, the composite figures give a comprehensive picture of the day’s activities but do not include after-hours transactions.
When the interest you earn on an investment is added to form the new base on which future interest accumulates, it is compound interest. For example, say you earn 5% compound interest on $100 every year for five years. You’ll have $105 after one year, $110.25 after two years, $115.76 after three years, and $127.63 after five years.Without compounding, you earn simple interest, and your investment doesn’t grow as quickly. For example, if you earned 5% simple interest on $100 for five years, you would have $125. A larger base or a higher rate provide even more pronounced differences. Compound interest earnings are reported as annual percentage yield (APY), though the compounding can occur annually, monthly, or daily.
Compounding occurs when your investment earnings or savings account interest is added to your principal, forming a larger base on which future earnings may accumulate. As your investment base gets larger, it has the potential to grow faster. And the longer your money is invested, the more you stand to gain from compounding. For example, if you invested $10,000 earning 8% annually and reinvested all your earnings, you’d have $21,589 in your account after 10 years. If instead of reinvesting you withdrew the earnings each year, you would have collected $800 a year, or $8,000 over the 10 years. The $3,589 difference is the benefit of 10 years of compound growth.
Comptroller of the Currency
The Office of the Comptroller of the Currency, housed in the US Department of the Treasury, charters, regulates, and oversees national banks. The comptroller ensures bank integrity, fosters economic growth, promotes competition among banks, and guarantees that people have access to adequate financial services.The comptroller does this by enforcing the Community Reinvestment Act and federal fair lending laws, which mandate that access. The comptroller is appointed by the US president and confirmed by the Senate.
A conduit IRA is another name for a rollover IRA, which you establish with money you roll over from a 401(k), 403(b), or other retirement savings plan. Assets in a conduit IRA continue to be tax deferred until they are withdrawn and may be transferred into a new employer’s plan if the plan allows transfers.
When you buy or sell a stock or bond, your brokerage firm will send you a confirmation, or printed document, with the details of the transaction.Confirmations include the price, any fees, and the trade and settlement dates. Stock confirmations also include the commission if it applies. These documents are your back-up for calculating capital gains and losses.You’ll also receive a confirmation to reaffirm orders you place, such as a good ’til canceled order to buy or sell a certain stock at a stop or limit price. In addition, activity in your trading account, such as stock splits, spinoffs, or mergers will trigger a confirmation notice.
A conglomerate is a corporation whose multiple business units operate in different, often unrelated, areas. A conglomerate is generally formed when one company expands by acquiring other firms, which it brings together under a single management umbrella. In some, but not all, cases, the formerly independent elements of the conglomerate retain their brand identities, though they are responsible to the conglomerate’s management. Some conglomerates are successful, with different parts of the whole contributing the lion’s share of the profits in different phases of the economic cycle, offsetting weaker performance by other units. Other conglomerates are never able to meld the parts into a functioning whole. In those cases, the parent company may sell or spin off various divisions into new independent companies.
Conscience funds, also known as socially responsible funds, allow you to invest in companies whose business practices are in keeping with your personal values. For example, you can choose mutual funds that invest in companies that have exceptional environmental or social records, or that refuse to invest in companies that manufacture certain products or have certain employee benefit practices.Each fund explains the principles it follows in its prospectus and describes the screens, or set of criteria, it uses to identify its investments.
A consensus recommendation for an individual stock compiles ratings from a number of analysts who track that stock. The recommendation is expressed as either the mean or median of the separate recommendations. Calculating the consensus is a multi-step process that involves grouping the terms that analysts use to recommend buying, selling, or holding, generally into three or five categories, assigning a scale, and computing the result either by averaging the numbers for the mean or identifying the median, which is the point at which half the views are higher and half are lower.A consensus recommendation provides a snapshot of current thinking about a stock, so it can serve as a benchmark against which you can compare a single analyst’s opinion to gauge how mainstream it is. But like any statistical mean or median, a consensus recommendation can distort strong differences at either end of the scale. Further, if the report accompanying the consensus view doesn’t point out significant differences in the viewpoints of the various analysts it includes, you won’t be able to tell where the most respected analysts stand on the stock.In addition, you should be aware that the consensus recommendation for any given stock might differ from one research company to the next. This is because the mathematical formula that assigns weights to the individual recommendations will vary, based in part on how many levels of differentiation the research company uses and how it interprets the words that analysts use to express their opinions.
Consumer confidence index
The consumer confidence index is released each month by the Conference Board, an independent business research organization.It measures how a representative sample of 5,000 US households feel about the current state of the economy, and what they anticipate the future will bring. The survey focuses specifically on the participants’ impressions of business conditions and the job market. Economic observers follow the index because when consumer attitudes are positive they are more likely to spend money, contributing to the very economic growth they anticipate. But if consumers are worried about their jobs, they may spend less, contributing to an economic slowdown.
Consumer price index (CPI)
The consumer price index (CPI) is compiled monthly by the US Bureau of Labor Statistics and is a gauge of inflation that measures changes in the prices of basic goods and services.Some of the things it tracks are housing, food, clothing, transportation, medical care, and education.The CPI is used as a benchmark for making adjustments in Social Security payments, wages, pensions, and tax brackets to keep them in tune with the buying power of the dollar. It’s often incorrectly referred to as the cost-of-living index.
The price of a futures contract tends to reflect the cost of storage, insurance, financing, and other expenses incurred by the producer as the commodity awaits delivery. So typically the further in the future the maturity date, the higher the price of the contract. That relationship is described as contango.If the opposite is true, and the price of a longer-term contract is lower than the price of one with a closer expiration date, the relationship is described as backwardation.
A contingency order to buy or sell a security or other investment product is one that has strings attached. Specifically, it is an order, such as a stop order, a stop-limit order, or an all-or-none order, that is to be executed only if the condition or conditions that the order specifies are met.For example, if you gave a stop-limit order to sell a particular stock if the price fell to $30 — the stop price — but not to sell if the transaction price were less than $27 — the limit price — execution would be contingent on the stock price being between $27 and $30.Broker-dealers aren’t required to accept contingency orders, but if they do accept them they are required to abide by the terms of the order.
A contingent beneficiary receives the proceeds of an insurance policy, term-certain annuity, individual retirement account (IRA), employer-sponsored retirement savings plan, will, or trust if the primary beneficiary dies before the benefit is paid or if he or she declines to accept the benefit.For example, if you name your spouse as the primary beneficiary of your IRA, you might name your children as contingent beneficiaries. Then, if your spouse is not alive at your death, your children inherit your IRA directly. It’s often a good idea to name as contingent beneficiary someone who is younger than you and your primary beneficiary, increasing the chances that the contingent beneficiary will outlive you. Or, if you choose, you might name an institution or a trust as contingent beneficiary.You have the right to change your designation of contingent beneficiaries, except in the case of an irrevocable trust or a life insurance policy whose terms and conditions were established in a court ruling.A contingent beneficiary may also be someone who is entitled to inherit assets if he or she meets the terms of the will or trust granting those assets.
Contingent deferred sales load
A contingent deferred sales load, also called a back-end load, is a sales charge some mutual funds impose when you sell shares in the fund within a certain period of time after you buy them. These shares are typically identified as Class B shares, and the period that the load applies is often as long as seven to ten years, as determined by the fund. The charge is a percentage of the amount of the investment you’re liquidating. It typically begins at a certain level — say 7% — and drops by a percentage point each year until it disappears entirely. Information about the charge and how long it’s levied is provided in the fund’s prospectus.
Continuous net settlement
In continuous net settlement, most securities transactions are finalized, or cleared and settled, within a brokerage firm. The firm’s clients’ orders to buy and sell are offset, or matched against each other, so that at the end of the trading day only those positions that haven’t been offset internally remain to be settled. In a simplified example, all the shares of Stock A that a firm’s clients bought are netted against all of the shares that its clients sold by reallocating ownership on the firm’s books. Payment is handled in a similar fashion, as money is transferred from the buyers’ account to the sellers’. If the firm has more buys than sells or the other way around, as is likely, it either delivers shares or receives them and makes a payment or receives it.Clearing and settlement for transactions that aren’t offset are handled by an automated system through two branches of the Depository Trust & Clearing Corporation (DTCC), the National Securities Clearing Corporation (NSCC), and the Depository Trust Company (DTC).
An investor who marches to a different drummer is sometimes described as a contrarian. In other words, if most investors are buying large-cap growth stocks, a contrarian is concentrating on building a portfolio of small-cap value stocks. This approach is based, in part, on the idea that if everybody expects something to happen, it probably won’t.In addition, the contrarian believes that if other investors are fully committed to a certain type of investment, they’re not likely to have cash available if a better one comes along. But the contrarian would. Contrarian mutual funds use this approach as their investment strategy, concentrating on building a portfolio of out-of-favor, and therefore often undervalued, investments.
A conversion price is the predetermined price, set at the time of issue, at which you can exchange a convertible bond or other convertible security for common stock. The number of shares that you’ll receive at conversion is calculated by dividing the face value of the security by the conversion price. However, that number changes if the stock has split or has paid dividends.
Convertible bonds are corporate bonds that give you the alternative of converting their value into common stock of that company or redeeming them for cash when they mature. The details governing the conversion, such as the number of shares of stock you would receive, are set when the bonds are issued. A convertible bond has a double appeal for investors: Its market value goes up if the stock price rises, but falls only to what it would be as a conventional bond if the stock prices falls. In other words, the upside potential is considered greater than the downside risk. While convertible bonds typically provide lower yields than conventional bonds from the same issuer, they may provide higher yields than the underlying stock. You can buy convertibles through a broker or choose a mutual fund that invests in them.
When you use a convertible hedge, you buy a convertible bond, which you can exchange under certain circumstances for shares of the company’s common stock. At the same time, you sell short the common stock of the same company. As in any hedge, your goal is to make more money on one of the transactions than you lose on the other. For example, if the price of the stock falls, you’re in a position to make money on the short sale while at the same time knowing that the convertible bond will continue to be at least as valuable as other bonds the company has issued. On the other hand, if the stock gains value, you hope to be able to realize more profit from either selling the convertible or exchanging it for shares you can sell than it costs you to have borrowed and repaid the shares you sold short.There are no guarantees this strategy or any other hedging strategy will work, especially for an individual investor who faces the challenge of identifying an appropriate security to hedge and the appropriate time to act.
A convertible term life insurance policy can be converted into a permanent life policy at some point in the future without requiring you to pass a health screening exam. A convertible term policy is generally more expensive than a regular term policy from the same insurance provider.Like other term insurance policies, a convertible term policy remains in force for a specific period of time, or term, and can usually be renewed for an additional term, though the premiums typically increase with each renewal.
Cook the books
When a company cooks the books, it is deliberately — and illegally — providing false information about its financial situation to bolster its stock price, often by overstating profits and hiding losses. A company may also cook the books to reduce its tax liability, but then it stirs in the opposite direction by underreporting profits and overstating losses.
In the financial industry, a cooling-off period applies when a new issue is being brought to market. During this time, also known as the quiet period, investment bankers and underwriters aren’t permitted to discuss the issue with the public.In the consumer world, during a cooling-off period you can cancel your obligation to purchase a product or take a loan without penalty if you change your mind.Different kinds of transactions are governed by different cooling-off rules. For example, one federal rule allows you to cancel home improvement loans and second mortgages within three days of signing. Another gives you three days to return purchases you make at places other than a merchant’s usual place of business, such as at a trade show. The law governing your cooling-off rights, sometimes known as buyers’ remorse rules, is included in the fine print on any agreement you sign.
A co-op is a corporation that owns a particular residential property. The shareholders are the tenants who, instead of owning an individual unit, own shares in the corporation, which gives them the right to live in that unit.
If you have a managed-care health insurance plan, your copayment is the fixed amount you pay — often $10 to $25 — for each in-network doctor’s office visit or approved medical treatmentIn some plans the copayment to see a specialist to whom you’re referred is higher than the copayment to visit your primary care physician. Some plans may not require copayments for annual physicals and certain diagnostic tests.If you see an out-of-network provider, you are likely to be responsible for a percentage of the approved charge, called coinsurance, plus any amount above the approved charge.
Standard & Poor’s (S&P) developed the core earnings measure to give investors a more uniform way to compare earnings numbers. Otherwise, it may be difficult to compare numbers since companies often use different formulas to calculate their earnings.Core earnings differs in several ways from more traditional measures of earnings. Most notably, they treat company stock options as an expense and exclude any income that comes from the company’s pension fund investments.
Cornering the market
If someone tries to buy up as much of a particular investment as possible in order to control its price, that investor is trying to corner the market. Not only is it difficult to make this strategy work in a complex economic environment, but the practice is illegal in US markets.
Corporate bonds are debt securities issued by publicly held corporations to raise money for expansion or other business needs. Corporate bonds typically pay a higher rate of interest than federal or municipal government bonds but the interest you earn is generally fully taxable. You may be able to buy corporate bonds at issue through your brokerage firm, usually at the offering price of $1,000 per bond, though you may have to buy several bonds of the same issue rather than just one. You can buy bonds on the secondary market at their current market price, which may be higher or lower than par. However, most individual investors buy corporate bonds though a mutual fund that specializes in those issues.
A correction is a drop — usually a sudden and substantial one of 10% or more — in the price of an individual stock, bond, commodity, index, or the market as a whole. Market analysts anticipate market corrections when security prices are high in relation to company earnings and other indicators of economic health. When a market correction is greater than 10% and the prices do not begin to recover relatively promptly, some analysts point to the correction as the beginning of a bear market.
In investment terms, correlation is the extent to which the values of different types of investments move in tandem with one another in response to changing economic and market conditions. Correlation is measured on a scale of -1 to +1. Investments with a correlation of +.5 or more tend to rise and fall in value at the same time. Investments with a negative correlation of -.5 to -1 are more likely to gain or lose value in opposing cycles.
A correspondent is a financial institution, such as a bank or brokerage firm, that handles transactions on behalf of another financial institution that it can’t complete on its own.For example, if a US bank has a client who needs to make a payment to a supplier located overseas, the US bank would use its relationship with a correspondent bank in the supplier’s home country to credit the supplier’s bank account with money from its own client’s account that had been transferred through an international payment system.
The cost basis is the original price of an asset — usually the purchase price plus commissions. You use the cost basis to calculate capital gains and capital losses, depreciation, and return on investment. If you inherit assets, such as stocks or real estate, your cost basis is the asset’s value on the date the person who left it to you died (or the date on which his or her estate was valued). This new valuation is known as a step-up in basis.For example, if you buy a stock at $20 a share and sell it for $50 a share, your cost basis is $20. If you sell, you owe capital gains tax on the $30-a-share profit. If you inherit stock that was bought at $20 a share but valued at $50 a share when that person died, your cost basis would be $50 a share, and you’d owe no tax if you sold it at that price.
Cost-of-living adjustment (COLA)
A COLA results in a wage or benefit increase that is designed to help you keep pace with increased living costs that result from inflation. COLAs are usually pegged to increases in the consumer price index (CPI). Federal government pensions, some state pensions, and Social Security are usually adjusted annually, but only a few private pensions provide COLAs.
Council of Economic Advisors (CEA)
The Council of Economic Advisors’ job is to assist and advise the president of the United States on economic policy. The CEA differs from other government agencies in its academic orientation and emphasis on contemporary developments in economic thought.The Council consists of a chairman and two staff members, appointed by the president and confirmed by the Senate, plus a staff of about ten economists and ten younger scholars. The Council’s chairman frequently speaks on behalf of the administration on economic issues and policies.
Stocks described as countercyclical tend to continue to maintain their value and provide regular income when the economy is slowing down or staying flat and gain in value as the economy expands. Companies whose stocks fall into this category are those whose products are always in demand, such as food or utilities. They may also be companies whose services reduce the expenses of other companies, such as providers of temporary office help. Or they could be financial services companies that specialize in cash-equivalent or other stable value investments. By including some countercyclical stocks in your equity portfolio, you can balance the potential volatility of cyclical investments.
In any financial contract, the persons or institutions entering the contract on the opposite sides of the transaction are called the counterparties. For example, if you sign a contract to sell an item that you produce to a buyer, you and the buyer are counterparties to the contract.Similarly, the counterparties in financial transactions, known as forwards or swaps, are the banks or corporations that make deals between themselves to protect future cash flows or currency values.
Counterparty risk is the risk that the person or institution with whom you have entered a financial contract — who is a counterparty to the contract — will default on the obligation and fail to fulfill that side of the contractual agreement. In other words, counterparty risk is a type of credit risk. Counterparty risk is the greatest in contacts drawn up directly between two parties and least in contracts where an intermediary acts as counterparty. For example, in the listed derivatives market, the industry’s or the exchange’s clearinghouse is the counterparty to every purchase or sale of an options or futures contract. That eliminates the possibility that the buyer or seller won’t make good on the transaction. The clearinghouse, in turn, protects itself from risk by requiring market participants to meet margin requirements. In contrast, there is no such protection in the unlisted derivatives market where forwards and swaps are arranged.
Originally, bonds were issued with coupons, which you clipped and presented to the issuer or the issuer’s agent — typically a bank or brokerage firm — to receive interest payments. Bonds with coupons are also known as bearer bonds because the bearer of the coupon is entitled to the interest.Although most new bonds are electronically registered rather than issued in certificate form, the term coupon has stuck as a synonym for interest in phrases like the coupon rate. When interest accumulates rather than being paid during the bond’s term, the bond is known as a zero coupon.
The coupon rate is the interest rate that the issuer of a bond or other debt security promises to pay during the term of a loan. For example, a bond that is paying 6% annual interest has a coupon rate of 6%.The term is derived from the practice, now discontinued, of issuing bonds with detachable coupons. To collect a scheduled interest payment, you presented a coupon to the issuer or the issuer’s agent. Today, coupon bonds are no longer issued. Most bonds are registered, and interest is paid by check or, increasingly, by electronic transfer.
When you sell call options on stock that you own, they are covered options. That means if the option holder exercises the option, you can deliver your stock to meet your obligation if you are assigned to complete the transaction. Similarly, if you sell put options on stock and have enough cash on hand make the required purchase if the option holder exercises, the options are covered. Covered puts are also known as cash-secured puts. One appeal of selling a covered call is that you collect the premium but don’t risk potentially large losses. Otherwise, you may have to buy the stock at a higher market price in order to meet your obligation to deliver stock at the strike price if the option is exercised. The downside is that if your stock is called away from you, you’ll no longer be in a position to profit from any potential dividends or increases in price.
A crash is a sudden, steep drop in stock prices. The downward spiral is intensified as more and more investors, seeing the bottom falling out of the market, try to sell their holdings before these investments lose all their value.The two great US crashes of the 20th century, in 1929 and 1987, had very different consequences. The first was followed by a period of economic stagnation and severe depression. The second had a much briefer impact. While some investors suffered huge losses in 1987, recovery was well underway within three months.In the aftermath of each of these crashes, the federal government instituted a number of changes designed to reduce the impact of future crashes.
Credit generally refers to the ability of a person or organization to borrow money, as well as the arrangements that are made for repaying the loan and the terms of the repayment schedule. If you are well qualified to obtain a loan, you are said to be credit-worthy. Credit is also used to mean positive cash entries in an account. For example, your bank account may be credited with interest. In this sense, a credit is the opposite of a debit, which means money is taken from your account.
The three major credit bureaus — Equifax, Experian, and TransUnion — collect information about the way you use credit and make it available to anyone with a legitimate business need to see it, including potential lenders, landlords, and current or prospective employers. The bureaus keep records of the credit accounts you have, how much you owe, your payment habits, and the lenders and other businesses that have accessed your credit report.Credit bureaus, also known as credit reporting agencies, store other information about you as well, such as your present and past addresses, Social Security number, employment history, and information in the public record, including bankruptcies, liens, and any judgments against you. However, there are certain things, by law, your credit report can’t include, including your age, race, religion, political affiliation, or health records.You are entitled to a free copy of your credit report from each of the three major credit bureaus once a year, but you have to request them through the Annual Credit Report Request Service (www.annualcreditreport.com or 877-322-8228). If you’ve recently been denied credit, are unemployed, on public assistance, or have a reason to suspect identity theft or credit fraud, you’re also entitled to a free report. In those cases, you should contact the credit bureaus directly.
A credit limit, also known as a credit line, is the maximum amount of money you can borrow under a revolving credit agreement. For instance, if you have a credit card with a credit limit of $3,000, and you charge $1,000, you can spend $2,000 more before you reach your credit limit. And if you repay the $1,000 before the end of the month without making additional purchases, your credit limit is back up to $3,000 again. Most credit issuers charge additional fees or penalties if you exceed your credit limit.
A credit line, or line of credit, is a revolving credit agreement that allows you to write checks or make cash withdrawals of amounts up to your credit limit. When you use the credit — sometimes called accessing the line — you owe interest on the amount you borrow. But when that amount has been repaid you can borrow it again. A home equity line of credit (HELOC) is secured by your home, but other credit lines, such as an overdraft arrangement linked to your checking account, are unsecured. In general, the interest rate on a secured credit line is less than the rate on an unsecured line.
Your credit rating is an independent statistical evaluation of your ability to repay debt based on your borrowing and repayment history. If you always pay your bills on time, you are more likely to have good credit and therefore may receive favorable terms on a loan or credit card, such as relatively low finance charges. If your credit rating is poor because you have paid bills late or have defaulted on a loan, you are likely to get less favorable terms or may be denied credit altogether.A corporation’s credit rating is an assessment of whether it will be able to meet its obligations to bond holders and other investors. Credit rating systems for corporations generally range from AAA or Aaa at the high end to D (for default) at the low end.
A credit report is a summary of your financial history. Potential lenders will use your credit report to help them evaluate whether you are a good credit risk. The three major credit-reporting agencies are Experian, Equifax, and Transunion. These agencies collect certain types of information about you, primarily your use of credit and information in the public record, and sell that information to qualified recipients.As a provision of the Fair and Accurate Credit Transaction Act (FACT Act), you are entitled to a free copy of your credit report each year from each of the credit reporting agencies. You also have a right to see your credit report at any time if you have been turned down for a loan, an apartment, or a job because of poor credit. You may also question any information the credit reporting agency has about you and ask that errors be corrected. If the information isn’t changed following your request, you have the right to attach a comment or explanation, which must be sent out with future reports.
Your credit score is a number, calculated based on information in your credit report, that lenders use to assess the credit risk you pose and the interest rate they will offer you if they agree to lend you money. Most lenders use credit scores rather than credit reports since the scores reduce extensive, detailed information about your financial history to a single number. There are actually two competing credit scoring systems, FICO, which has been the standard, and VantageScore, which was developed by the three major credit bureaus.Their formulas give different weights to particular types of credit-related behavior, though both put the most emphasis on paying your bills on time. They also have different scoring systems, ranging from 300 to 850 for FICO to 501 to 999 for AdvantageScore. The best — or lowest — interest rates go to applicants with the highest scores.Because your credit score and credit report are based on the same information, it’s very unlikely that they will tell a different story. It’s smart to check your credit report at least once a year, which you can do for free at www.annualcreditreport.com or by calling 877-322-8228. It may be a good idea to review your score if you anticipate applying for a major loan, such as a mortgage, in the next six months to a year. That allows time to bring your score up if you fear it’s too low.
Credit unions are financial cooperatives set up by employee and community associations, labor unions, church groups, and other organizations. They provide affordable financial services to members of the sponsoring organization.In some cases, they’re created in rural or economically disadvantaged areas, where commercial banks may be scarce or prohibitively expensive.Because they are not-for-profit, credit unions tend to charge lower fees and interest rates on loans than commercial banks while paying higher interest rates on savings and investment accounts. The services offered at large credit unions can be as comprehensive as those at large banks. At smaller credit unions, however, services and hours may be more limited, and a few deposits may not be insured. Assets in most credit unions are insured by the National Credit Union Share Insurance Fund on the same terms that deposits in national and state banks are insured by the Federal Deposit Insurance Corporation (FDIC).
A person or company who provides credit to another person or company functions as a creditor. For example, if you take out a mortgage or car loan at your bank, then the bank is your creditor. But if you buy a bond issued by a corporation or other institution, you are the creditor because the money you pay to buy the bond is actually a loan to the issuer.
A market in a particular stock or option is described as crossed when a bid to buy that stock or option is higher than the offer to sell it, or when an offer to sell is lower than a bid to buy. A crossed market reverses the normal relationship of a stock quotation in which the bid price is always lower than the ask price, and it’s illegal for market makers to cross a market deliberately.It may occur when investors place after-hours market orders electronically for execution at opening, or when investors trade directly through an electronic communications network (ECN). NASD has introduced a set of pre-opening procedures for market makers on the Nasdaq Stock Market. They help prevent the confusion and potential inequalities in pricing that a crossed market can produce.
With this method of voting for a corporation’s board of directors, you may cast the total number of votes you’re entitled to any way you choose. Generally, you receive one for each share of company stock you own times the number of directors to be elected.For example, you can either split your votes equally among the nominees, or you can cast all of them for a single candidate. Cumulative voting is designed to give individual stockholders greater influence in shaping the board. They can designate all their votes for a single candidate who represents their interest instead of spreading their votes equally among the candidates, as is the case with statutory voting.
A currency has value, or worth, in relation to other currencies and those values change constantly. For example, if demand for a particular currency is high because investors want to invest in that country’s stock market or buy exports, the price of its currency will increase. Just the opposite will happen if that country suffers an economic slowdown, or investors lose confidence in its markets.While some currencies fluctuate freely against each other, such as the Japanese yen and the US dollar, others are pegged, or linked. They may be pegged to the value of another currency, such as the US dollar or the euro, or to a basket, or weighted average of currencies.
In a currency swap, the parties to the contract exchange the principal of two different currencies immediately, so that each party has the use of the different currency. They also make interest payments to each other on the principal during the contract term. In many cases, one of the parties pays a fixed interest rate and the other pays a floating interest rate, but both could pay fixed or floating rates. When the contract ends, the parties re-exchange the principal amount of the swap.Originally, currency swaps were used to give each party access to enough foreign currency to make purchases in foreign markets. Increasingly, parties arrange currency swaps as a way to enter new capital markets or to provide predictable revenue streams in another currency.
The global currency market, where roughly $1.9 trillion a day changes hands, is by far the largest financial market in the world. Banks, other financial institutions, and multinational corporations buy and sell currencies in enormous quantities to handle the demands of international trade. In some cases, traders seek profits from minor fluctuations in exchange rates or speculate on currency fluctuations.
Current return, also called current yield, is the amount of interest you earn on a bond in any given year, expressed as a percent of the current market price. The current return will, in most cases, not be the same as the coupon rate, or the interest rate the bond pays calculated as a percentage of its par value. For example, if the par, or face value, of a bond is $1,000 and the coupon rate is 5%, then the interest payments, or annual income, from the bond is $50 per year. If however the bond is trading at $900, then that $50 annual income is actually a current return of 5.5%.The current return does not take capital gains or losses into account, so it is not a reflection of the total return on your bond investment.
Current yield is a measure of your rate of return on an investment, expressed as a percentage. With a bond, current yield is calculated by dividing the interest you collect by the current market price.For example, if a bond paying 5% interest, or $50, is selling for $900, the current yield is 5.6%. If the market price is $1,200, the current yield is 4.2%. And if bond is selling exactly at par, or $1,000, the current yield is 5%, the same as the coupon rate. If you own a stock, its current yield is the annual dividend divided by its market price.
If you want to make investments on a minor’s behalf, or transfer property you own to that person, you can open a custodial account with a bank, brokerage firm, mutual fund company, or insurance company.You name an adult custodian for the account — either yourself or someone else — who is responsible for managing the account until the child reaches the age of majority. That age may be 18, 21, or 25 depending on the state and the type of account you choose. At majority, the child has the legal right to control the account and use the assets as he or she chooses.There may be some tax advantages in transferring assets to a minor. If the child is under 18, investment earnings above a specific level that Congress sets each year are taxed at the parents’ marginal tax rate. But if the child is 18 or older, all investment earnings are taxed at the child’s rate — again, typically the lowest rate. In addition, gifts you make to the account are no longer part of your estate, which may reduce vulnerability to estate taxes. However, it’s wise to review your plans with your legal and tax advisers.One drawback of a custodial account is that the assets are considered the property of the child, and may reduce the amount of financial aid the child qualifies for when he or she enrolls in a college or university.
A custodian is legally responsible for ensuring that an item or person is safe and secure. In investment terms, a custodian is the financial services company that maintains electronic records of financial assets or has physical possession of specific securities. The custodian’s client may be another institution, such as a mutual fund, a corporation, or an individual. For example, with an individual retirement account (IRA), the custodian is the bank, brokerage firm, or other financial services company that holds your account. Similarly, the Depository Trust Company, a subsidiary of the Depository Trust and Clearing Corporation (DTCC), is the custodian of millions of stock certificates held in its vaults.
Cyclical stocks tend to rise in value during an upturn in the economy and fall during a downturn. They usually include stock in industries that flourish in good times, including airlines, automobiles, and travel and leisure.In contrast, stock in industries that provide necessities such as food, electricity, gas, and health care products tend to be more price-stable.Companies that provide services that reduce the expenses of other companies also are usually more stable. Those stocks are sometimes called counter-cyclicals.
Last Updated: December 26th, 2014