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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A comprehensive evaluation of an investor's current and future financial state is undertaken during financial planning. A financial plan enables an investor to estimate or determine future cash flows, asset values and withdrawal plans. While there is no specific template for a financial plan, most licensed professionals will include knowledge and considerations of an investor's future life goals, future wealth transfer plans and future expense levels in developing the plan. A good financial plan can alert an investor to changes that must be made to ensure a smooth transition through life's financial phases, such as decreasing spending or changing asset allocation. Financial plans should also be fluid, with occasional updates when financial changes occur.
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The future value concept is the reverse of the?present value?method. Future value refers to the value of an asset or cash at a specified date in the future that is equivalent in value to a specified sum today. This core principle of finance holds that any amount of money is worth more the sooner it is received due to its potential earning capacity (interest).
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Holding period refers to the length of time an asset is held by its owner.
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An indenture is a formal agreement, also called a Deed of Trust, between an issuer of bonds and the bond holder covering such considerations as: 1) form of bond; 2) amount of the issue; 3) property pledged, if not a debenture issue; 4) protective covenants including any provision for a sinking fund; 5) working capital and current ratio; and 6) redemption rights or call provisions. An indenture agreement also has a provision for the appointment of a trustee to act on behalf bond holders.
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The internal rate of return is a discount rate at which the present value of all future payments would equal the present price of an investment. When used in capital budgeting, it is the discount rate that makes the net present value of all cash flows from a particular project equal to zero.?See also?Yield to Maturity.
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An issuer is a legal entity that has the power to issue and distribute a security (debt, equity, etc.). Issuers may include corporations, governments and their agencies. Issuers of stocks are responsible for reporting on corporate developments and matters to shareholders; and paying dividends once declared. Issuers of bonds are committed to making timely payments of interest and principal to bondholders.
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A liability is a claim on the assets of a company or individual, excluding ownership equity.?Liabilities?are generally characterised by: 1) A transfer of assets or services at a specified or determinable date. 2) The firm or individual has little or no discretion to avoid the transfer. 3) The event causing the obligation has already occurred.
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A lump sum is a large payment of money received, or made, at one point in time instead of in periodic payments.
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When referring to debt securities, maturity signifies reaching the date at which a debt instrument is due and payable.
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Net worth represents the amount by which assets exceed liabilities. For a corporation, net worth is also known as stockholders' equity or net assets. For an individual, net worth is the total value of all possessions, such as a house, stocks, bonds, other securities; minus all outstanding debts, such as mortgage, credit cards and other loans. In order to qualify for certain high risk investments, brokerage firms require that an individual's net worth must be at or above a certain dollar amount.
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In terms of common stocks, par value may represent: 1) the original investment behind each share of stock; or 2) the assigned value derived from the dollar accounting value of common stock on a company's balance sheet. Par value has no relation to market value or market price. See also?Face Value. A bond selling at par for instance is worth the same dollar amount it was issued for or at which it will be redeemed at maturity.
Per-Dollar-Invested-Basis
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Any measure calculated on a per-dollar-invested basis, such as the holding period yield indicates the percentage return of each dollar invested. See also?Holding Period Yield Calculator[KSO1]?.
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A personal balance sheet is an individual's account of his/her assets and liabilities at a stated point in time.
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Present value refers to the value today of a future payment or stream of payments, discounted at some compound interest or discount rate. In securities investments, the present value method is used to determine how much money should be invested today to result in a certain sum at a future date.
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To redeem an investment in stocks or bonds means to exchange or cash in your holdings for money. The redemption or repayment of a debt security or preferred stock issue may occur at or before maturity, at par or at a premium price.
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A security is an investment instrument that signifies: 1) an ownership position in a corporation, in the case of stocks or shares; 2) a creditor relationship with a corporation or government body, in the case of debt securities such as a bond; or 3) rights to ownership such as that those presented by an option, subscription right, and subscription warrant.
Shares (also referred to as stocks)
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A share or stock is a financial instrument in the form of equity ownership. It represents a share of the ownership of a corporation which acts as a claim on the corporation's assets and earnings. Common stocks (or ordinary shares) usually entitle the shareholder to vote (in person /by proxy) in the election of directors and other corporate matters taken up at shareholder meetings. Preferred stocks generally do not confer voting rights but the holders of preferred shares have a prior claim on the assets and earnings of the company in comparison to common stockholders. For instance, dividends must be paid to prefer stockholders before any can be paid to common shareholders.
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The tenor of an investment refers to the period of time during which the conditions or terms of the contractual agreement are to be carried out. For instance, this represents the period of time in which the coupon or interest payments will be made on a bond investment.
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Generally, yield refers to the return on an investor's capital investment. In terms of debt securities, such as bonds, an investor may wish to determine the?Current Yield,?Yield to Maturity?or?Yield to Call?on a bond. For instance, the current yield on a bond is the coupon rate of interest divided by the purchase price of the bond. If a bond is sold for $1000 with a 10% coupon, it offers a 10% current yield. If that same bond were selling for $500, however, it would offer a 20% yield to an investor who bought it for $500. See also?Yield to Maturity; Yield to Call.
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Yield to call is the yield on a bond assuming the bond will be redeemed by the issuer at the first?call date?specified in the?indenture agreement. Essentially, Yield-to-call (YTC) is the interest rate that investors would receive if they held the bond until the call date. The period until the first call is referred to as the?call protection?period. YTC is the rate that would make the bond's present value equal to the full price of the bond. For a sample calculation of this yield measure refer to the?Bond Yield Calculator?[KSO2]
