Glossary of terms. As used in this article, the following terms shall
have the meanings indicated:
ACCRUED INTEREST
The accumulated interest due on a bond as of the last interest
payment made by the issuer.
AGENCY
A debt security issued by a federal or federally sponsored
agency. Federal agencies are backed by the full faith and credit of
the United States government. Federally sponsored agencies (FSAs)
are backed by each particular agency with a market perception that
there is an implicit government guarantee. An example of a federal
agency is the Government National Mortgage Association (GNMA). An
example of an FSA is the Federal National Mortgage Association (FNMA).
AMORTIZATION
The process of paying the principal amount of an issue of
bonds by periodic payments either directly to bondholders or to a
sinking fund for the benefit of bondholders.
ARBITRAGE
Usually refers to the difference between the interest paid
on the tax-exempt securities and the interest earned by investing
the proceeds in higher-yielding taxable securities. Internal Revenue
Service regulations govern arbitrage (reference I.R.S. Reg. 1.103-13
through 1.103-15).
ARBITRAGE BONDS
Bonds which are deemed by the I.R.S. to violate federal arbitrage
regulations. The interest on such bonds becomes taxable, and the bondholders
must include this interest as part of gross income for federal income
tax purposes (I.R.S. Reg. 1.103-13 through 1.103-15).
ASKED
The price at which securities are offered.
ASSESSED VALUE
An annual determination of the just or fair market value
of property for purposes of ad valorem taxation.
AVERAGE LIFE
The average length of time that issues of serial bonds and/or
term bonds with a mandatory sinking fund feature is expected to be
outstanding.
BANKERS' ACCEPTANCE (BA)
A draft or bill or exchange accepted by a bank or trust company.
The accepting institution guarantees payment of the bill, as well
as the issuer.
BID
The indicated price at which a buyer is willing to purchase
a security or commodity.
BOND
Written evidence of the issuer's obligation to repay a specified
principal amount on a date certain, together with interest at a stated
rate, or according to a formula for determining that rate.
BOND ANTICIPATION NOTES (BANS)
Short-term, interest-bearing notes issued by a government
in anticipation of bonds to be issued at a later date. The notes are
retired from proceeds of the bond issue to which they are related.
BROKER
A broker brings buyers and sellers together for a commission
paid by the initiator of the transaction or by both sides; he does
not position (take ownership of securities). In the money market,
brokers are active in markets in which banks buy and sell money in
interdealer markets.
CALLABLE BOND
A bond which permits or requires the issuer to redeem the
obligation before the stated maturity date at a specified price, the
call price, usually at or above par value.
CASH SALE/PURCHASE
A transaction which calls for delivery and payment of securities
on the same day that the transaction is initiated.
COLLATERALIZATION
Process by which a borrower pledges securities, property,
or other deposits for the purpose of securing the repayment of a loan
and/or security. Also, refers to securities pledged by a bank to secure
deposits of public monies.
COMMERCIAL PAPER
Very short-term, unsecured promissory notes issued in either
registered or bearer form, and usually backed by a line of credit
with a bank.
COMPREHENSIVE ANNUAL FINANCIAL REPORT (CAFR)
The official annual report for the Village of Bannockburn.
In addition to a combined, combining (assembling of data for all funds
within a type), and individual balance sheet, the following are also
presented as appropriate on a combined, combining, and individual
basis:
(1)
Statement of revenues, expenditures, and changes in fund balance
(all funds);
(2)
Statement of revenues, expenditures, and changes in fund balances,
budget and actual (for government fund types);
(3)
Statement of revenues, expenses, and changes in retained earnings
(for proprietary funds); and
(4)
Statement of changes in financial position (for proprietary
funds).
CONVEXITY
A measure of a bond's price sensitivity to changing interest
rates. A high convexity indicates greater sensitivity of a bond's
price to interest rate changes.
COUPON
(1)
The annual rate of interest that a bond's issuer promises to
pay the bondholder on the bond's face value.
(2)
A certificate attached to a bond evidencing interest due on
a payment date.
COUPON RATE
The annual rate of interest payable on a coupon bond (a bearer
bond or bond registered as to principal only, carrying coupons evidencing
future interest payments), expressed as a percentage of the principal
amount.
CREDIT RISK
The risk to an investor that an issuer will default in the
payment of interest and/or principal on a security.
CURRENT YIELD (CURRENT RETURN)
A yield calculation determined by dividing the annual interest
received on a security by the current market price of that security.
DEALER
A dealer, as opposed to a broker, acts as a principal in
all transactions, buying and selling securities from an inventory
on hand.
DEBENTURE
A bond secured only by the general credit of the issuer.
When the Village issues bonds of this, they are termed "general obligation"
(G.O.).
DELIVERY VERSUS PAYMENT
There are two methods of delivery of securities: delivery
versus payment and delivery versus receipt (also called "free"). "Delivery
versus payment" is delivery of securities with an exchange of money
for the securities. "Delivery versus receipt" is delivery of securities
with an exchange of signed receipt for the securities.
DERIVATIVE SECURITY
Financial instrument created from, or whose value depends
upon, one or more underlying assets or indexes of asset values.
DISCOUNT
The amount by which the par value of a security exceeds the
price paid for the security.
DISCOUNT SECURITIES
Non-interest-bearing money market instruments that are issued
at a discount and redeemed at maturity for full face value: e.g.,
United States Treasury bills, zero coupon bonds.
DIVERSIFICATION
A process of investing assets among a range of security types
by sector, maturity, and quality rating. The purpose of diversification
is to minimize risk from default or market fluctuations.
DURATION
A measure of the timing of the cash flows, such as the interest
payments and the principal repayment, to be received from a given
fixed-income security. This calculation is based on three variables:
term to maturity, coupon rate and yield to maturity. The duration
of a security is a useful indicator of its price volatility for given
changes in interest rates.
ENTERPRISE FUNDS
Funds that are financed and operated in a manner similar
to private business, in that goods and services provided are financed
primarily through user charges.
FEDERAL CREDIT AGENCIES
Agencies of the federal government set up to supply credit
to various classes of institutions and individuals; e.g., S&Ls,
small business firms, students, farmers, farm cooperatives, and exporters.
FEDERAL DEPOSIT INSURANCE CORPORATION
A federal agency that insures deposits and retirement accounts
in member accounts for up to $250,000, protecting depositors in the
event of bank failure.
FEDERAL FUNDS (FED FUNDS)
Funds placed in Federal Reserve banks by depository institutions
in excess of current reserve requirements. These depository institutions
may lend fed funds to each other overnight or on a longer basis. They
may also transfer funds among each other on a same-day basis through
the Federal Reserve banking system. Fed funds are considered to be
immediately available funds.
FEDERAL FUNDS RATE
Interest rate charged by one institution lending federal
funds to the other.
FEDERAL HOME LOAN BANK
The FHLB system now primarily focuses on increasing the amount
of loanable funds available for affordable housing and community development
projects. It continues to have a material impact on housing and development
financing, offering funds to member institutions at rates that are
usually lower than commercially competitive prices.
FEDERAL NATIONAL MORTGAGE ASSOCIATION
The FNMA, commonly known as "Fannie Mae," is a government-sponsored
enterprise that is the largest purchaser and guarantor of home mortgages
in the country. Headquartered in Washington, D.C., Fannie Mae buys
mortgages from such lenders as banks and savings and loans, packages
them, and resells them on the open market, thus creating fluidity
and lessening lenders' risk. Fannie Mae's creation of this secondary
mortgage market enables low- and middle-income individuals and families
to obtain mortgages and purchase homes. The corporation was founded
(1938) by the federal government to buy and sell mortgages insured
by the Federal Housing Administration or guaranteed by the Veterans
Administration (now the Veterans Affairs Department).
FEDERAL RESERVE SYSTEM
The seven-member Board of Governors of the Federal Reserve
System determines the reserve requirements of the member banks within
statutory limits, reviews and determines the discount rates established
by the 12 Federal Reserve banks, with each one serving member banks
in its own district. This system, supervised by the Federal Reserve
Board, has broad regulatory powers over the money supply and the credit
structure.
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
GNMA or "Ginnie Mae," which is administered by the Department
of Housing and Urban Development and helps to finance public housing.
Fannie Mae's corporate credibility was damaged by revelations (2004)
that it manipulated its earnings from 1998 to 2004, in part to maximize
bonus payments to its corporate executives. Problems in the housing
and mortgage industry that began in 2007 led in 2008 to increasing
losses at and concern about a possible bankruptcy of Fannie Mae and
especially Freddie Mac (the Federal Home Loan Mortgage Corporation),
and resulted in a federal takeover of the two mortgage guarantors.
GOVERNMENT SECURITIES
An obligation of the United States government, backed by
the full faith and credit of the government. These securities are
regarded as the highest quality of investment securities available
in the United States securities market.
INTEREST RATE RISK
The risk associated with declines or rises in interest rates
which cause an investment in a fixed-income security to increase or
decrease in value.
LIQUIDITY
An asset that can be converted easily and quickly into cash.
MARKET RISK
The risk that the value of a security will rise or decline
as a result of changes in market conditions.
MARKET-TO-MARKET
The process whereby the book value or collateral value of
a security is adjusted to reflect its current market value.
MATURITY
The date upon which the principal of a municipal bond becomes
due and payable to bondholders.
NET ASSET VALUE
The market value of one share of an investment company, such
as a mutual fund. This figure is calculated by totaling a fund's assets,
which include securities, cash, and any accrued earnings, subtracting
this from the fund's liabilities, and dividing this total by the number
of shares outstanding.
NET INTEREST COST (NIC)
The traditional method of calculating bids for new issues
of municipal securities. The total dollar amount of interest over
the life of the bonds is adjusted by the amount of premium or discount
bid, and then reduced to an average annual rate. The other method
is known as the "true interest cost" (see "true interest cost").
PRINCIPAL
The face amount or par value of a bond or issue of bonds
payable on stated dates of maturity.
PRUDENT PERSON RULE
An investment standard outlining the fiduciary responsibilities
of public funds investors relating to investment practices.
RATINGS
Evaluations of the credit quality of notes and bonds, usually
made by independent rating services, which generally measure the probability
of the timely repayment of principal and interest on municipal bonds.
REPURCHASE AGREEMENT (RP or REPO)
An agreement of one party to sell securities at a specified
price to a second party and a simultaneous agreement of the first
party to repurchase the securities at a specified price or at a specified
later date. The security "buyer" in effect lends the "seller" money
for the period of the agreement, and terms of the agreement are structures
to compensate him. Dealers use RP extensively to finance their positions.
Exception: When the Fed is said to be doing RP, it is lending money;
this is, increasing bank reserves.
SAFEKEEPING
A service to customers rendered by banks for a fee, whereby
securities and valuables of all types and descriptions are held in
the bank's vaults for protection.
SEC RULE 15C3-1
See definition of "uniform net capital rule" in this subsection.
SECONDARY MARKET
A market made for the purchase and sale of outstanding issues
following the initial distribution.
SECURITIES AND EXCHANGE COMMISSION
Federal agency created by the Securities Exchange Act of
1934 to administer that Act and the Securities Act of 1933, formerly carried out by the Federal Trade Commission.
The SEC supervises the exchange of securities so as to protect investors
against malpractice.
SHORT-TERM DEBT
Any debt incurred whose final maturity is three years or
less.
SWAP
Trading one asset for another.
TOTAL RETURN
The sum of all investment income plus changes in the capital
value of the portfolio.
TREASURY BILLS
A short-term obligation of the United States Treasury having
a maturity period of one year or less and sold at a discount from
face value. The return to the investor who holds it to maturity is
the difference between the price paid and the face value at maturity.
TREASURY BOND
A long-term obligation of the United States Treasury having
a maturity period of more than 10 years and paying interest semiannually.
TREASURY NOTES
An intermediate-term obligation of the United States Treasury
having a maturity period of one to 10 years and paying interest semiannually.
UNIFORM NET CAPITAL RULE (NET CAPITAL RULE AND NET CAPITAL RATIO)
Securities and Exchange Commission requirement that member
firms as well as nonmember broker/dealers in securities maintain a
maximum ratio of indebtedness to liquid capital of 15:1. Indebtedness
covers all money owed to a firm, including margin loans and commitments
to purchase securities, one reason new public issues are spread among
members of underwriting syndicates. Liquid capital includes cash and
assets easily converted into cash.
VOLATILITY
A degree of fluctuation in the price and valuation of securities.
YIELD
The current rate of return on an investment security generally
expressed as a percentage of the security's current price.
(1)
"Income yield" is obtained by dividing the current dollar income
by the current market price for the security;
(2)
"Net yield" or "yield to maturity" is the current income yield
minus any premium above par or plus any discount from par in purchase
price, with the adjustment spread over the period from the date of
purchase to the date of maturity of the bond.
YIELD TO MATURITY
The rate of return to the investor earned from payments of
principal and interest, with interest compounded semiannually and
assuming that interest paid is reinvested at the same rate.
ZERO COUPON BOND
A bond which pays no interest, but is issued at a deep discount
from par, appreciating to its full value at maturity.