Financial Glossary I
Identity theft is the unauthorized use of your personal information, such as your name, address, Social Security number, or credit account information. People usually steal your identity to make purchases or obtain credit, though they may also use the data to apply for a driver’s license or other form of official identification.
You buy an immediate annuity contract with a lump-sum purchase. You begin receiving income from the annuity either right away or within 13 months. A fixed immediate annuity guarantees the amount of income you’ll receive in each payment, based on the claims paying ability of the insurance company selling the contract. A variable immediate annuity pays income based on the performance of the annuity funds, or subaccounts, you select from those available through the contract.Immediate annuities appeal to people who want to convert a sum of money to a source of regular income, either for themselves or for another person. One way they’re frequently used is as a source of retirement income.
Imputed interest is interest you are assumed to have collected even if that interest was not paid. For example, you pay income tax on the imputed interest of a zero-coupon bond you hold in a taxable account even though the interest is not paid until the bond matures.Similarly, you may be required to pay income tax on imputed interest if you make an interest-free loan, even if that loan is to your children or another member of your family. The government’s position, in this case, is that you should have charged interest even though you didn’t do so.
An option is in-the-money at any point up to expiration if the exercise price is below the market price of a call option or above the market price of a put option. That means an in-the-money option has value.For example, if you hold an equity call option with a strike price of $50, and the current market price of the stock is $52, the option is in-the-money. As the option holder, you could buy the stock at $50 and either sell it at $52 or add it to your portfolio. Or, if you preferred, you could sell the option, potentially at a profit. In-the-money options are generally among the most actively traded, especially as the expiration date approaches.
Incentive stock option (ISO)
Corporate executives may be granted incentive stock options (ISOs), also called qualifying stock options. These options aren’t taxed when they’re granted or exercised, but only when the underlying shares are sold.If, after exercising the options, participating executives keep the shares for the required period, any earnings from selling the shares are taxed at the owner’s long-term capital gains rate. However, stock option transactions may make sellers vulnerable to the alternative minimum tax (AMT).
An income annuity, sometimes called an immediate annuity, pays an annual income, usually in monthly installments. Your income is based on the annuity’s price, your age (and your joint annuitant’s age if you name one), the term length, and the specific details of the contract. It’s also dependent on the annuity provider’s ability to meet its obligations.You might buy an income annuity with assets from your 401(k) plan, or your plan may buy an income annuity on your behalf. In that case, the annuity provider guarantees an income that will satisfy your minimum required distribution.
Income funds are mutual funds whose investment objective is to produce current income rather than long-term growth, typically by investing in bonds or sometimes a combination of bonds and preferred stock. Investors, especially those who have retired or are about to retire, may prefer income funds to potentially more volatile growth funds.The amount of income a fund may generate is related to the risk posed by the investments that the fund makes and the return they generate. A fund that buys lower-grade bonds may provide substantially more income than a fund buying investment-grade bonds. But the same fund may also put your principal, or investment amount, at substantial risk.
Income in respect of a decedent
Any income your beneficiary receives after your death that would have gone to you if you were still alive is described as income in respect of a decedent. One example is the income your beneficiary gets as a minimum required distribution from your 401(k) or IRA. In this case, your beneficiary pays tax on that income at his or her ordinary rate, as you would have.
An income statement, also called a profit and loss statement, shows the revenues from business operations, expenses of operating the business, and the resulting net profit or loss of a company over a specific period of time.In assessing the overall financial condition of a company, you’ll want to look at the income statement and the balance sheet together, as the income statement captures the company’s operating performance and the balance sheet shows its net worth.
Stock that pays income in the form of regular dividends over an extended period is often described as income stock.The advantage of owning income stock is that it can supplement your budget or provide new capital to invest. Unless you own the stock in a tax-deferred or tax-free account, you’ll owe income tax each year on the dividends you receive.But dividends on qualifying stock, including most US stock and some international stock, are usually taxed at your lower long-term capital gains rate. Income stock is an important component of most equity income funds and growth and income funds.
When a business incorporates, it receives a state or federal charter to operate as a corporation. A corporation has a separate and distinct legal and tax identity from its owners. In fact, in legal terms, a corporation is considered an individual — it can own property, earn income, pay taxes, incur liabilities, and be sued.Incorporating can offer many advantages to a business, among them limiting the liability of the company’s owners. This means that shareholders are not personally responsible for the company’s debts. Another advantage is the ability to issue shares of stock and sell bonds, both ways to raise additional capital.You know that a business is a corporation if it includes the word “Incorporated” — or the short form, “Inc.” — in its official name.
An indemnity insurance policy pays up to a fixed amount when you make a claim, often on a per day basis. The premiums on health insurance indemnity plans may be lower than on other heathcare plans, but the fixed payments may cover only a portion of your medical bills. Some people use indemnity plans as supplements to, rather than substitutes for, more comprehensive health insurance. Others use low-cost indemity plans for short-term coverage.
An indenture is a written contract between a bond issuer and bond holder that is proof of the bond issuer’s indebtedness and specifies the terms of the arrangement, including the maturity date, the interest rate, whether the bond is convertible to common stock, and, if so, the price or ratio of the conversion. The indenture, which may be called a deed of trust, also includes whether the bond is callable — or can be redeemed by the issuer before it matures — what property, if any, is pledged as security, and any other terms.
The independent 401(k) — also known as a solo 401(k), indy-k, or uni-k — is a variation of the 401(k) designed for people who are self-employed or operate a small business with a partner, spouse, or with other immediate family members. The annual contribution limit is the same as it is for other 401(k) plans, and catch-up contributions are allowed for participants 50 and older.The plans are easier and less expensive to administer than traditional 401(k)s, and they have certain potential advantages over other retirement plans for small businesses as well, including high contribution limits, access to tax-free loans, and the ability to roll over savings from most other retirement plans.Most business entities qualify to set up an independent 401(k), including partnerships, corporations, S-corporations, limited liability partnerships (LLPs), limited liability companies (LLCs), and sole proprietorships.
An index reports changes up or down, usually expressed as points and as a percentage, in a specific financial market, in a number of related markets, or in an economy as a whole.Each index — and there are a large number of them — measures the market or economy it tracks from a specific starting point. That point might be as recent as the previous day or many years in the past. For those reasons, indexes are often used as performance benchmarks against which to measure the return of investments that resemble those tracked by the index.A market index may be calculated arithmetically or geometrically. That’s one reason two indexes tracking similar markets may report different results. Further, some indexes are weighted and others are not.Weighting means giving more significance to some elements in the index than to others. For example, a market capitalization weighted index is more influenced by price changes in the stock of its largest companies than by price changes in the stock of its smaller companies.
An index fund is designed to mirror the performance of a stock or bond index, such as Standard & Poor’s 500 Index (S&P 500) or the Russell 2000 Index.To achieve that goal, the fund purchases all of the securities in the index, or a representative sample of them, and adds or sells investments only when the securities in the index change. Each index fund aims to keep pace with its underlying index, not outperform it.This strategy can produce strong returns during a bull market, when the index reflects increasing prices. But it may produce disappointing returns during economic downturns, when an actively managed fund might take advantage of investment opportunities if they arise to outperform the index.Because the typical index fund’s portfolio is not actively managed, most index funds have lower-than-average management costs and smaller expense ratios. However, not all index funds tracking the same index provide the same level of performance, in large part because of different fee structures.
Index of Leading Economic Indicators
This monthly composite of ten economic measurements was developed to track and help forecast changing patterns in the economy. It is compiled by The Conference Board, a business research group. The components are adjusted from time to time to help improve the accuracy of the index. In the past, it has successfully predicted major downturns, although it has also warned of some that did not materialize.Consumer-related components include the number of building permits issued, manufacturers’ new orders for consumer goods, and the index of consumer expectations.Financial components include stock prices of 500 common stocks, the real money supply, and the interest rate spread. Business-related components include the average work week in the manufacturing sector, average initial claims for unemployment benefits, nondefense plant and equipment orders, and vendor perfomance, which reflects how quickly companies receive deliveries from suppliers.
Index options are puts and calls on a stock index rather than on an individual stock. They give investors the opportunity to hedge their portfolios or speculate on gains or losses in a segment of the market. For example, if you own a group of technology stocks but think technology stocks are going to fall, you might buy a put option on a technology index rather than selling short a number of different technology stocks. If the value of the index does fall, you could exercise the option and collect cash to partially offset a drop in the value of your portfolio.However, to use this strategy successfully, the index you choose must perform the way the portion of the portfolio you’re trying to hedge performs. And since changes in an index are difficult to predict, index options tend to be volatile. The more time there is until an index option expires, the more volatile the option tends to be.
An indexed annuity is a deferred annuity whose return is tied to the performance of a particular equity market index. Your investment principal is usually protected against severe market downturns, in that you may have an annual return of 0% but not less than 0%. However, earnings are generally capped at a fixed percentage, so any index gains that are above the cap are not reflected in your annual return. Indexed annuity contracts generally require you to commit your assets for a particular term, such as 5, 10, or 15 years. Some but not all contracts limit your participation rate, which means that only a percentage of your premium has a potential to earn a rate higher than a guaranteed rate.
Individual retirement account (IRA)
Individual retirement accounts (IRAs) provide tax incentives to encourage people who earn income to invest for retirement. You open an IRA with a financial services firm, such as a bank, brokerage firm, or investment company, as custodian. The accounts are self-directed, which means you can choose among the investments available through your custodian.There are two types of IRAs, tax-deferred tradtional accounts and tax-free Roth accounts. With either type you usually can’t make withdrawals without penalty before you turn 59 1/2. With a traditional IRA you must begin to take minimum required distributions (MRD) by April 1 of the year you turn 70 1/2. Earnings and deductible contributions are taxed at your regular rate as you withdraw.There are no required distributions from a Roth IRA, and all withdrawals are free of federal income tax if you’re at least 59 1/2 and your account has been open at least five years.You can contribute to a traditional IRA regardless of your income, and you may qualify to deduct your contribution if your modified adjusted gross income is less than the ceiling for your tax filing status. You also qualify if you’re not eligible to participate in an employer sponsored plan where you work.You qualify for a Roth if your modified adjusted gross income is less than the ceiling for your filing status.
Individual retirement annuity
An individual retirement annuity is one type of individual retirement arrangement.It resembles the better-known individual retirement account in most ways, such as annual contribution limits, catch-up provisions if you’re 50 or older, and withdrawal requirements. In addition, the two share a common acronym — IRA — and come in three varieties: traditional nondeductible, traditional deductible, and Roth. The key difference between the two is that with an individual retirement account you may invest your contributions in any of the alternatives available through your account custodian. With an individual retirement annuity, your money goes into either a fixed or variable annuity offered by an insurance company.
individual retirement arrangement (IRA)
An individual retirement arrangement (IRA), which may be set up as either an account or an annuity, allows people with earned income to contribute to a tax-deferred traditional IRA or a tax-free Roth IRA.Your contribution is a portion of your earnings, up to an annual cap, though it can’t be more than you earn. The cap is $4,000 for 2006 and 2007, and $5,000 for 2008. If you are 50 or older, you can make an additional catch-up contribution of $1,000 a year.If you open a traditional IRA, you usually can’t withdraw without penalty before you turn 59 1/2 and you must begin minimum required distributions (MRDs) by April 1 of the year following the year you turn 70 1/2. Income taxes figured at your regular rate are due on your earnings and on any contributions you deducted on your tax return in the year you made them.If you qualify for a Roth IRA because your modified adjusted gross income is less than the ceiling for your filing status, you make after-tax contributions but your withdrawals are free of federal income tax provided you’re at least 59 1/2 and your account has been open at least five years. There are no required withdrawals from Roth IRAs.
In an inefficient market, investors may not have enough information about the securities in that market to make informed decisions about what to buy or the price to pay. Markets in emerging nations may be inefficient, since securities laws may not require issuing companies to disclose relevant information. In addition, few analysts follow the securities being traded there. Similarly, there can be inefficient markets for stocks in new companies, particularly for new companies in new industries that aren’t widely analyzed.An inefficient market is the opposite of an efficient one, where enormous amounts of information are available for investors who choose to use it.
Inflation is a persistent increase in prices, often triggered when demand for goods is greater than the available supply or when unemployment is low and workers can command higher salaries.Moderate inflation typically accompanies economic growth. But the US Federal Reserve Bank and central banks in other nations try to keep inflation in check by decreasing the money supply, making it more difficult to borrow and thus slowing expansion.Hyperinflation, when prices rise by 100% or more annually, can destroy economic, and sometimes political, stability by driving the price of necessities higher than people can afford. Deflation, in contrast, is a widespread decline in prices that also has the potential to undermine the economy by stifling production and increasing unemployment.
The inflation rate is a measure of changing prices, typically calculated on a month-to-month and year-to-year basis and expressed as a percentage.For example, each month the Bureau of Labor Statistics calculates the inflation rate that affects average urban US consumers, based on the prices for about 80,000 widely used goods and services. That figure is reported as the Consumer Price Index (CPI).
Inflation-adjusted return is what you earn on an investment after accounting for the impact of inflation. For example, if you earn 7% on a bond during a period when the inflation rate averages 3%, your inflation-adjusted return is 4%. Inflation-adjusted return is also known as real return.Since inflation diminishes the buying power of your money, it’s important that the rate of return on your overall investment portfolio be greater than the rate of inflation. That way, your money grows rather than shrinks in value over time.
Inflation-protected security (TIPS)
US Treasury inflation-protected securities (TIPS) adust the principal twice a year to reflect inflation or deflation measured by the Consumer Price Index (CPI). The interest rate is fixed and is paid twice a year on the adjusted principal. So if your principal is larger because of inflation you earn more interest. If it’s lower because of deflation, you earn less.You can buy TIPS with terms of 5, 10, or 20 year at issue using a TreasuryDirect account or in the secondary market. At maturity you receive either the adjusted principal or par value, whichever is greater. You owe federal income tax on the interest you earn and on inflation adjustments in each year they’re added even though you don’t receive the increases until the security matures. However, TIPS earnings are exempt from state and local income taxes.These securities provide a safeguard against deflation as well as against inflation since they guarantee that you’ll get back no less than par, or face value, at maturity.
An inherited IRA is an IRA that passes to a beneficiary at the death of the IRA owner. If you name your spouse as the beneficiary of your IRA, your spouse inherits the IRA at your death. At that point, it is your spouse’s property. But if you name anyone other than your spouse, that beneficiary inherits the rights to income from your IRA, which continues to be registered in your name, but not the IRA itself.
Initial public offering (IPO)
When a company reaches a certain stage in its growth, it may decide to issue stock, or go public, with an initial public offering (IPO). The goal may be to raise capital, to provide liquidity for the existing shareholders, or a number of other reasons. Any company planning an IPO must register its offering with the Securities and Exchange Commission (SEC). In most cases, the company works with an investment bank, which underwrites the offering. That means buying all the shares at a set price and reselling them to the public with the expectation of making a profit.
If management of a publicly held company, members of its board of directors, or anyone who holds more than 10% of the company trades its shares, it’s considered insider trading.This type of trading is perfectly legal, provided it’s based on information available to the public. It’s only illegal if the decision is based on knowledge of corporate developments, such as executive changes, earnings reports, or acquisitions or takeovers that haven’t yet been made public.It is also illegal for people who are not part of the company, but who gain access to private corporate information, to trade the company’s stock based on this inside information. The list includes lawyers, investment bankers, journalists, or relatives of company officials.
Instinet is the world’s largest agency brokerage firm. As an agency firm, it doesn’t trade stock for its own account as traditional brokerage houses do. That way, it doesn’t bid against the mutual funds, insurance companies, pension funds, and other institutional investors who are its primary clients.Using Instinet’s sophisticated electronic network, these investors can trade directly and anonymously with each other in more than 40 global markets. Or, using Instinet brokers, the investors can place orders on all US exchanges and many overseas exchanges, including those that aren’t automated.
An institutional fund is a mutual fund that’s available to large investors, such as pension funds and not-for-profit organizations, with substantial amounts to invest.Typical institutional funds have higher minimum investments but lower fees than the retail funds that are available to the general public. Among the reasons institutional funds may cost less to operate is that they tend to have low turnover rates and their investors redeem shares less often than retail investors.
Institutional investors buy and sell securities in large volume, typically 10,000 or more shares of stock, or bonds worth $200,000 or more, in a single transaction.In most cases, the investors are organizations with large portfolios, such as mutual funds, banks, university endowment funds, insurance companies, pension funds, and labor unions.Institutional investors may trade their own assets or assets that they are managing for other people.
If you don’t have enough money available in your checking account to cover the checks you’ve written or electronic debits you’ve authorized, you have insufficient funds (ISF) or nonsufficient funds (NSF).A check written against insufficient funds is informally called a returned check, a bounced check, or a bad check. If you write one, your account is considered overdrawn. Unless you have overdraft protection, which is a line of credit linked to your checking account, your bank will charge you an NSF fee, usually $20 to $35 per check.The check or an electronic copy is returned unpaid to the person who deposited it. The payee’s bank may also charge a fee for depositing a check written against insufficient funds.
You set up an insurance trust to own a life insurance policy on your life. When you die, the face value of the policy is paid to the trust. That keeps the insurance payment out of your estate, while making money available to the beneficiary of the trust to pay any estate tax that may be due, or to use for any other purpose.If you’re married, you may set up an insurance trust to buy a second-to-die policy, which pays the face value of the policy at the death of the second spouse. That allows the first to die to leave all assets to the other, postponing potential estate tax until the survivor dies. At that point, the insurance benefit is available to pay any tax that might be due.
An insured bond is a municipal bond whose interest and principal payments are guaranteed by a triple-A rated bond insurer. Insurance protects municipal bondholders against default by the issuer and protects bonds in case they’re downgraded by ratings agencies, which can decrease market value. Insured bonds generally offer a slightly lower rate of interest than uninsured bonds.
Integrated pension plan
In an integrated pension plan, your employer counts part of your Social Security benefit in the defined benefit pension you’re entitled to and takes that amount out of your income.You still collect from both sources, but you receive less from your employer than you would if your plan wasn’t integrated. There is some protection, though. By law, an employer using an integrated pension plan can’t reduce your private pension by more than 50%.
Interest is what you pay to borrow money using a loan, credit card, or line of credit. It is calculated at either a fixed or variable rate that’s expressed as a percentage of the amount you borrow, pegged to a specific time period. For example, you may pay 1.2% interest monthly on the unpaid balance of your credit card.Interest also refers to the income, figured as a percentage of principal, that you’re paid for purchasing a bond, keeping money in a bank account, or making other interest-paying investments. If it is simple interest, earnings are figured on the principal. If it is compound interest, the earnings are added to the principal to form a new base on which future income is calculated.Interest is also a share or right in a property or asset. For example, if you are half-owner of a vacation home, you have a 50% interest.
Interest rate is the percentage of the face value of a bond or the balance in a deposit account that you receive as income on your investment. If you multiply the interest rate by the face value or balance, you find the annual amount you receive. For example, if you buy a bond with a face value of $1,000 with a 6% interest rate, you’ll receive $60 a year. Similarly, the percentage of principal you pay for the use of borrowed money is the loan’s interest rate. If there are no other costs associated with borrowing the money, the interest rate is the same as the annual percentage rate (APR).
With an interest-only mortgage loan, you pay only the interest portion of each scheduled payment for a fixed term, often five to seven years. After that, your payments increase, often substantially, to cover the accumulated unpaid principal plus the balance of the loan and the interest. Before the higher payments begin, you may renegotiate your loan at the current interest rate or pay off the outstanding balance. However, it’s possible that interest rates may have risen, in which case you will end up paying a higher rate on the entire unpaid principal. If you have regularly invested the principal you weren’t repaying and realized a return higher than the loan’s interest rate, you could come out ahead. However, many borrowers don’t invest the savings.One risk with interest-only loans is that you may not be able to meet the higher payments once full repayment begins, especially if the interest-only payments themselves were a stretch.
Interest-rate risk describes the impact that a change in current interest rates is likely to have on the value of your investment portfolio. You face interest-rate risk when you own long-term bonds or bond mutual funds because their market value will drop if interest rates increase. That loss of value occurs because investors will be able to buy bonds with a new, higher interest rate, so they won’t pay full price for an older bond paying a lower interest rate.
Intermediate-term bonds mature in two to ten years from the date of issue. Typically, the interest on these bonds is greater than that on short-term bonds of similar quality but less than that on comparably rated long-term bonds. Intermediate-term bonds work well in an investment strategy known as laddering. Laddering involves buying bonds with different maturity dates so that portions of your fixed income portfolio mature in a stepped pattern over a number of years.
Internalization occurs when a securities trade is executed within a brokerage firm rather than though an exchange. For example, if you give your broker an order to buy, the brokerage firm, acting as dealer, sells you shares it holds in its own account. Similarly, if you give an order to sell, the firm buys your shares. The transaction is reported to the exchange or market where the stock is listed but the trade is settled within the firm.Your broker might choose an internalized trade, sometimes called a principal transaction, because it results in the fastest trade at the best price. The firm keeps the spread, which is the difference between the price the buyer pays and the amount the seller receives. But if the spread is smaller than it would be with a different execution, you, as buyer or seller, benefit.Your broker may also execute your order by going directly to another firm. In that case, the transaction is reported to the appropriate market just as an internalized trade is, but the recordkeeping and financial arrangements are handled between the firms.
This type of mutual fund invests in stocks, bonds, or cash equivalents that are traded in overseas markets, or in indexes that track international markets. Like other funds, international funds have investment objectives and strategies, and pose some level of risk, such as the risk that currency fluctuations may greatly affect the fund’s value.Some international funds focus on countries with established economies, some on emerging markets, and some on a mix of the two. US investors may buy funds that invest in other markets to diversify their portfolios, since owning a fund is usually simpler than investing in individual securities abroad. A different group of funds, called global or world funds, also invest in overseas markets but typically keep a substantial portion of their portfolios in US securities.
International Monetary Fund (IMF)
The IMF was set up as a result of the United Nations Bretton Woods Agreement of 1944 to help stabilize world currencies, lower trade barriers, and help developing nations pay off debt. The IMF’s activities are funded by developed nations and are sometimes the subject of intense criticism, either by the nations the IMF is designed to help, the nations footing the bill, or both.
A person who dies without a will is said to have died intestate. In this case, the probate court in the person’s home state — sometimes known as surrogate’s court or orphan’s court — determines who has the right to inherit the person’s assets and who should be named guardian of any minor children. The process, known as administration, can be time consuming and expensive, and the outcome may or may not reflect what the intestate person would have wanted.
A company’s intrinsic value, or underlying value, is used to calculate its projected worth. You determine intrinsic value by subtracting long-term debt from anticipated future assets, including profits, the potential for increased efficiency, and the sale of new stock. Another approach is to calculate intrinsic value by dividing the company’s estimated future earnings by the number of its existing shares. This method weighs the current price of a stock against its future worth. Critics of using intrinsic worth as a way to evaluate potential investments point out that all of the numbers except debt are hypothetical.The term is also used in options trading to indicate the amount by which an option is in-the-money. For example, an equity call option with a strike price of 35 has an intrinsic value of $4 if the market price of the underlying stock is $39. But if the market price drops to $34, the option has no intrinsic value.
Introducing broker (IB)
An introducing broker (IB) is a person or firm that takes orders to buy or sell futures contracts from clients and passes those orders to a futures commission merchant (FCM) for execution. Payment is handled by the FCM, not the introducing broker. Guaranteed introducing brokers refer clients to just one futures commission merchant while independent introducing brokers can refer clients to any registered FCM.
An investment bank is a financial institution that helps companies take new bond or stock issues to market, usually acting as the intermediary between the issuer and investors. Investment banks may underwrite the securities by buying all the available shares at a set price and then reselling them to the public. Or the banks may act as agents for the issuer and take a commission on the securities they sell.Investment banks are also responsible for preparing the company prospectus, which presents important data about the company to potential investors. In addition, investment banks handle the sales of large blocks of previously issued securities, including sales to institutional investors, such as mutual fund companies. Unlike a commercial bank or a savings and loan company, an investment bank doesn’t provide retail banking services to individuals.
If you’re part of an investment club, you and the other members jointly choose the investments the club makes and decide on the amount each of you will contribute to the club’s account. Among the reasons that clubs are popular is that they allow investors to commit only modest amounts, share in a diversified portfolio, and benefit from each other’s research.Clubs may also pay lower commissions, as a result of arrangements they make with a brokerage firm or through the National Association of Investors Corporation (NAIC).NAIC provides information on how to start an investment club and provides support services to existing clubs.
An investment company is a firm that offers open-end funds, called mutual funds, closed-end funds, sometimes called investment trusts, or exchange traded funds to the public. By describing a company offering the funds as an investment company, it’s easier to distinguish the company from the funds that it offers.For example, a single investment company might offer an aggressive-growth fund, a growth and income fund, a US Treasury bond fund, and a money market fund. Or a closed-end investment company might offer an international fund focused on a single country, such as Ireland, or a region, such as Latin America.
When a bond is rated investment grade, its issuer is considered able to meet its obligations, exposing bondholders to minimal default risk.Most US corporate and municipal bonds are rated by independent services such as Moody’s Investors Service and Standard & Poor’s (S&P). The ratings are based on a number of criteria, including the likelihood that the bond issuer will be able to make interest payments and repay the principal in full and on time.The four categories of bonds rated BBB and higher by S&P or Baa and higher by Moody’s are considered investment grade.
Your investment horizon is the point in time when you hope to achieve a particular investment goal. That horizon, sometimes called your time frame, may be fixed or flexible, depending on the nature of the goal and the investment decisions you take.For example, paying for college is often a fixed goal because most students enroll the year they graduate from high school. Retirement may be a more flexible goal if you have the choice about when you will stop working.The landscape can be more complicated if you have more than one investment goal, and therefore there’s more than one horizon in the picture.
Investment income — sometimes called unearned income — is the money that you collect from your investments. It may include stock dividends, mutual fund distributions, and interest from CDs, interest-bearing bank accounts, bonds, and other debt instruments. You may also have rental income from real estate or other assets you own for investment purposes. Capital gains you realize from selling investments for more than you paid to acquire them may also be considered investment income. Your net investment income is what you have left over after you subtract your investment expenses, such as fees and commissions.
An investment objective is a financial goal that helps determine the type of investments you make. For example, if you want a source of regular income, you might select a portfolio of high-rated bonds and dividend-paying stocks. Each mutual fund describes its investment objective in its prospectus, along with the strategy the fund manager follows to meet that objective. Mutual fund investors often look for funds whose stated objectives are compatible with their own goals.
If you move assets from an existing individual retirement account (IRA) or an employer sponsored retirement plan to an IRA, you’ve completed an IRA rollover. You owe no income tax on the money you move if you deposit the full amount into the new IRA within 60 days or arrange a direct transfer from the existing account to the new account. If you’re moving money from an employer’s retirement plan to a rolllover IRA yourself, the plan administrator is required to withhold 20% of the total.That amount is refunded after you file your income tax return, provided you’ve deposited the full amount into the new account on time, including the 20% that’s been withheld. Any amount you don’t deposit within the 60-day period is considered an early withdrawal and you’ll have to pay tax on it.You might also have to pay a penalty for early withdrawal if you’re younger than 59 1/2. But if you arrange a direct transfer from your plan to the rollover IRA nothing is withheld.
An irrevocable trust is a legal agreement whose terms cannot be changed by the creator or grantor who establishes the trust without the consent of the beneficiary or beneficiaries. The trust document names a trustee who is responsible for managing the assets in the best interests of the beneficiary or beneficiaries and carrying out the wishes the creator has expressed.You typically use an irrevocable trust for the tax benefits it can provide by removing assets permanently from your estate. In addition, through the terms of the trust you can exert continuing control over the way your property is distributed to your beneficiaries. Trusts have the additional advantages of being more difficult to contest than a will and more private.If you establish an irrevocable trust while you’re still alive, it’s called a living or inter vivos trust. If you establish the trust in your will, so that it takes effect at the time of your death, it’s called a testamentary trust.
When a corporation offers a stock or bond for sale, or a government offers a bond, the security is known as an issue, and the company or government is the issuer.
An issuer is a corporation, government, agency, or investment trust that sells securities, such as stocks and bonds, to investors. Issuers sell the securities through an underwriter as part of a public offering or as a private placement.
Last Updated: December 26th, 2014