The terms provided in this section are intended to empower the user to interact with a trained/licensed individual in an informed manner. The terms are not designed to replace the service of these individuals. The ECSRC strongly recommends that the user seeks professional advice before taking action on any investment matter.
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Annualize means to convert a rate of return from a periodic basis to on an annual basis. In the case of the interest rate earned on an investment, if the monthly rate is 1%, the investment would earn 12% (simple interest) on an annualized basis. This may simply be derived by multiplying the monthly return by 12. A rate quoted on a periodic (monthly or otherwise) is annualized so as to facilitate yearly comparisons.
Annualized Holding Period Yield
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The annualized holding period yield, also known as the effective annual yield, is a yield measure used to facilitate comparison with other investments. The Holding Period Yield (HPY) is a compounded rate of return. Thus the calculation for converting the HPY on an annualized basis differs from the calculation for a simple interest rate.
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An asset means anything having commercial or exchange value that is owned by a business, institution, or individual. Financial instruments, in the form of securities, are classified as capital/financial assets.
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A bond is an interest bearing or discounted government or corporate debt security that obligates the issuer (corporate or government entity) to pay the bondholder (investor): 1) a specified sum of money , usually at specific intervals during the term of the investment, in the form of?coupon payments; and 2) the loaned amount (principal amount invested)at?maturity. In essence, the investor loans money to the bond issuer for a specified period of time, usually at a fixed rate of return. Thus, the investor as the bond holder has an IOU from the issuing entity. A bond holder has no corporate ownership privileges, as stock holders do, in the case of a corporate issuer. An issuer may offer secured or unsecured bonds for sale. A secured bond is backed by collateral which may be sold by the bond holder to satisfy a claim if the bond's issuer fails to repay the coupon payments and principal amount invested to bond holders when they fall due. An unsecured bond or debenture is backed by the full faith and credit of the issuer, as opposed to any specific collateral.
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Callable refers to a bond that may be redeemable by the issuer before the scheduled maturity date. The issuer may offer to pay bondholders a premium price if the bond is retired early. Bonds with a callable provision are usually called when interest rates fall so significantly that the issuer can save money by floating new bonds in the market at lower rates.
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The call date is the date on which a bond may be redeemed before maturity. If called, the bond may be redeemed at par or at a slight premium to par. For example, a bond may be scheduled to mature in 10 years but may have a provision that it can be called in 5 years if it is advantageous for the issuer to refinance the issue. The date 5 years from the issue date is the call date. When investing in a callable bond, it is important for investors to note the bond's call date as one cannot be assured that interest will be received from the bond beyond the call date.
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Call Protection is the length of time during which a security cannot be redeemed by the issuer. It is the period before the first?call date?specified in the?indenture agreement.
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Capital Gain refers to the increase in the value of a financial asset. It is, thus, the positive difference between an assets purchase price and selling price.
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Capital Gains Yield is the positive change in the price of an asset (capital gain) divided by the purchase price, expressed as a percentage.
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Capital loss is the amount by which the proceeds from the sale of a capital asset are less than the price paid to acquire the asset. It is the decrease in the value of the capital asset.
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In investment securities, cash flows represents cash revenues (cash inflows) and cash expenses (cash outflows), excluding non-cash items such as depreciation and unrealized gains or losses. Net cash flow is the difference between cash revenues less cash expenses.
Compound Average Annual Rate of Return
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The compound annual average rate of return or compound annual growth rate is the year-over-year growth rate of an investment over a specified period of time.
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The coupon represents the interest rate on a debt security the issuer promises to pay to the holder until maturity, expressed as a percentage of the bond's face value. For instance a bond with a 6% coupon will pay $6 per $100 of the face value amount per year, which may be usually paid in semi-annual installments.
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Current Yield is the annual interest on a bond divided by the current market price of the bond. It is the actual income rate of return as opposed to the?coupon rate?or the?yield to maturity. For example, if a 10% coupon rate bond with a face (or par) value of $1000 can be bought at a market price of $900, and the annual income (coupon payment) is $100; the current yield of the bond is 11.1% ($100/$900).
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Reference is made to?cash flows?in investment securities. Discounted cash flows refer to the value of future or expected cash revenues or expenditures at a common date. Where the common date is today's date, the value of the discounted cash flow represents its present value.
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Dividend yield is the annual percentage of return earned by an investor on a common or preferred stock. The yield is determined by dividing the amount of the annual dividends per share by the current market price of the share.
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Dividend is the distribution of corporate earnings to investors, prorated by class of security, and may be paid in the form of money, stock or scrip. The amount paid is decided by the company's board of directors and is usually paid on a semi-annual or quarterly basis. In securities business, scrip is a temporary document issued by a corporation that is a fractional share of stock resulting from a split, exchange of stock or spin off. Scrip certificates may be aggregated or applied towards the purchase of full shares. Scrip dividends have historically been paid in lieu of cash dividends by companies short of cash.
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Expected return or mean return is the average of all the likely returns of the investments comprising a portfolio of securities.
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Face value is the par or nominal value of a bond, note or other security. Although bonds may fluctuate in price from the time of issuance until redemption, they are redeemed at maturity at their?face value, unless the issuer defaults. If the bonds are redeemed before maturity, bondholders normally receive a slight premium over face value. The?face value?is the amount on which interest payments are calculated. Thus a 10% coupon bond with a face value of $1000 pays bond investors $100 per year. See also?Par Value.
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The financial health of a firm or individual speaks to the state of a firm or an individual's personal financial situation. In the case of an individual, the scope of his/her financial health includes the amount of savings, the value of his / her retirement portfolio, and how much income is spent on fixed (unavoidable) expenses. While there are standard guidelines set by financial experts to assess an individual's financial health, each person's situation is different. For this reason, it is worthwhile to develop a personal financial plan to ensure that you are on track with your financial goals, and you are not exposed to undue financial risk if the unexpected occurs.
