Note Buyers Guide 101

acceleration clause A provision in a mortgage that gives the lender the right to demand payment of the entire principal balance if a monthly payment is missed. acceptance An offeree’s consent to enter into a contract and be bound by the terms of the offer. additional principal payment A payment by a borrower of more than the scheduled principal amount due in order to reduce the remaining balance on the loan. adjustable-rate mortgage (ARM) A mortgage that permits the lender to adjust its interest rate periodically on the basis of changes in a specified index. adjusted basis The original cost of a property plus the value of any capital expenditures for improvements to the property minus any depreciation taken. adjustment date The date on which the interest rate changes for an adjustable-rate mortgage (ARM). adjustment period The period that elapses between the adjustment dates for an adjustable-rate mortgage (ARM). administrator A person appointed by a probate court to administer the estate of a person who died intestate. affordability analysis A detailed analysis of your ability to afford the purchase of a home. An affordability analysis takes into consideration your income, liabilities, and available funds, along with the type of mortgage you plan to use, the area where you want to purchase a home, and the closing costs that you might expect to pay. amenity A feature of real property that enhances its attractiveness and increases the occupant’s or user’s satisfaction although the feature is not essential to the property’s use. Natural amenities include a pleasant or desirable location near water, scenic views of the surrounding area, etc. Human-made amenities include swimming pools, tennis courts, community buildings, and other recreational facilities. amortization The gradual repayment of a mortgage loan by installments. amortization schedule A timetable for payment of a mortgage loan. An amortization schedule shows the amount of each payment applied to interest and principal and shows the remaining balance after each payment is made. amortization term The amount of time required to amortize the mortgage loan. The amortization term is expressed as a number of months. For example, for a 30-year fixed-rate mortgage, the amortization term is 360 months. amortize To repay a mortgage with regular payments that cover both principal and interest. annual mortgagor statement A report sent to the mortgagor each year. The report shows how much was paid in taxes and interest during the year, as well as the remaining mortgage loan balance at the end of the year. annual percentage rate (APR) The cost of a mortgage stated as a yearly rate; includes such items as interest, mortgage insurance, and loan origination fee (points). annuity An amount paid yearly or at other regular intervals, often on a guaranteed dollar basis. application A form used to apply for a mortgage loan and to record pertinent information concerning a prospective mortgagor and the proposed security. appraisal A written analysis of the estimated value of a property prepared by a qualified appraiser. Contrast with home inspection. appraised value An opinion of a property's fair market value, based on an appraiser's knowledge, experience, and analysis of the property. appraiser A person qualified by education, training, and experience to estimate the value of real property and personal property. appreciation An increase in the value of a property due to changes in market conditions or other causes. The opposite of depreciation. assessed value The valuation placed on property by a public tax assessor for purposes of taxation. assessment The process of placing a value on property for the strict purpose of taxation. May also refer to a levy against property for a special purpose, such as a sewer assessment. assessment rolls The public record of taxable property. assessor A public official who establishes the value of a property for taxation purposes. asset Anything of monetary value that is owned by a person. Assets include real property, personal property, and enforceable claims against others (including bank accounts, stocks, mutual funds, and so on). assignment The transfer of a mortgage from one person to another. assumable mortgage A mortgage that can be taken over (assumed) by the buyer when a home is sold. assumption The transfer of the seller’s existing mortgage to the buyer. See assumable mortgage. assumption clause A provision in an assumable mortgage that allows a buyer to assume responsibility for the mortgage from the seller. The loan does not need to be paid in full by the original borrower upon sale or transfer of the property. assumption fee The fee paid to a lender (usually by the purchaser of real property) resulting from the assumption of an existing mortgage. attorney-in-fact One who holds a power of attorney from another to execute documents on behalf of the grantor of the power. A/P See Accounts Payable. A/R See Accounts Receivable Accounting Manipulations Accounts Payable (Payables) Money owed to suppliers. Accounts Receivable (Receivables) Money owed by customers. Acquisition See Mergers ACRS (Accelerated Cost Recovery System) Schedule of depreciation rates allowed for tax purposes. ADR (American Depository Receipts) A security, created by a U.S. bank, that evidences ownership to a specified number of shares of a foreign security held in a depositary in the issuing company's country of domicile. The certificate, transfer, and settlement practices for ADRs are identical to those for U.S. securities. U.S. investors often prefer ADRs to direct purchase of foreign shares because of the ready availability of price information, lower transaction costs, and timely dividend distribution. More info. Agency Costs Costs to the firm associated with the potential for conflict of interest between management and shareholders when these two groups are different. Agency Theory Theory concerning the relationship between a principal (shareholder) and an agent of the principal (company's managers). It involves the nature of the costs of resolving conflicts between the principals and agents. AMEX American Stock Exchange. Amortized Loans Loans that are paid off in equal periodic payments. Annuity Investment that generates a stream of equal cash flows. Anti-takeover Tactics Arb Arbitrage See arbitrage Arbitrage (risk arbitrage) Simultaneous purchase of a security and sale of another to generate a risk-free profit. Arbitrageur A person involved in arbitrage. Arrearage An overdue payment, generally referring to omitted preferred stock dividends. Ask The highest price anyone wants to pay for the security at a given time. Asset Allocation The process of determining the optimal division of an investor's portfolio among different assets. Most frequently this refers to allocations between debt, equity, and cash. Assets Anything that the firm owns. Asymmetric Information One group has more information about, say, on the well being of the company, than another. An example would be managers having more intimate knowledge about the company than a typical shareholder. Average Maturity The average time to maturity of securities held by a mutual fund. Changes in interest rates have greater impact on funds with longer average life. Average Tax Rate The rate calculated by dividing the total tax liability by the entity's taxable income. B balance sheet A financial statement that shows assets, liabilities, and net worth as of a specific date. balloon mortgage A mortgage that has level monthly payments that will amortize it over a stated term but that provides for a lump sum payment to be due at the end of an earlier specified term. balloon payment The final lump sum payment that is made at the maturity date of a balloon mortgage. bankrupt A person, firm, or corporation that, through a court proceeding, is relieved from the payment of all debts after the surrender of all assets to a court-appointed trustee. bankruptcy A proceeding in a federal court in which a debtor who owes more than his or her assets can relieve the debts by transferring his or her assets to a trustee. before-tax income Income before taxes are deducted. beneficiary The person designated to receive the income from a trust, estate, or a deed of trust. bequeath To transfer personal property through a will. betterment An improvement that increases property value as distinguished from repairs or replacements that simply maintain value. bill of sale A written document that transfers title to personal property. binder A preliminary agreement, secured by the payment of an earnest money deposit, under which a buyer offers to purchase real estate. biweekly payment mortgage A mortgage that requires payments to reduce the debt every two weeks (instead of the standard monthly payment schedule). The 26 (or possibly 27) biweekly payments are each equal to one-half of the monthly payment that would be required if the loan were a standard 30-year fixed-rate mortgage, and they are usually drafted from the borrower’s bank account. The result for the borrower is a substantial savings in interest. blanket insurance policy A single policy that covers more than one piece of property (or more than one person). blanket mortgage The mortgage that is secured by a cooperative project, as opposed to the share loans on individual units within the project. bona fide In good faith, without fraud. bond An interest-bearing certificate of debt with a maturity date. An obligation of a government or business corporation. A real estate bond is a written obligation usually secured by a mortgage or a deed of trust. breach A violation of any legal obligation. bridge loan A form of second trust that is collateralized by the borrower's present home (which is usually for sale) in a manner that allows the proceeds to be used for closing on a new house before the present home is sold. Also known as swing loan broker A person who, for a commission or a fee, brings parties together and assists in negotiating contracts between them. See mortgage broker. budget A detailed plan of income and expenses expected over a certain period of time. A budget can provide guidelines for managing future investments and expenses. budget category A category of income or expense data that you can use in a budget. You can also define your own budget categories and add them to some or all of the budgets you create. Rent is an example of an expense category. Salary is a typical income category. building code Local regulations that control design, construction, and materials used in construction. Building codes are based on safety and health standards. buydown account An account in which funds are held so that they can be applied as part of the monthly mortgage payment as each payment comes due during the period that an interest rate buydown plan is in effect. buydown mortgage A temporary buydown is a mortgage on which an initial lump sum payment is made by any party to reduce a borrower’s monthly payments during the first few years of a mortgage. A permanent buydown reduces the interest rate over the entire life of a mortgage. bad Things that individuals prefer to avoid if possible, i.e., would accept only if they are compensated for accepting. For example, rational investors would not invest in risky assets unless they get compensated an amount that it commensurate with the riskiness of the asset. Thus, risk is said to be bad. Another example would be pollution. Balance Sheet A basic accounting statement that represents the financial position of a firm on a given date. Balanced mutual fund This is a mutual fund that buys common stock, preferred stock and bonds. Bankers' Acceptance A draft drawn on a specific bank by a seller of goods to obtain payment of goods that have been sold to a customer. The customer maintains an account with that specific bank. Bankruptcy Re-organization under Chapter 11 Basis Point .01 percent. Used to measure changes in yields of bonds. Bear Market General decline in security prices. Beginning Net Asset Value The market value of a fund share on a predetermined start date. Best Ask The lowest quoted offer of all competing Market Makers to sell a particular stock at any given time. Best Bid The highest quoted bid of all competing Market Makers to buy a particular stock at any given time. Best Effort Purchase A method of selling newly issued securities whereby the underwriters are expected to sell as many securities as possible. They are not obligated to sell the entire subscription. Also see firm commitment Beta A relative (to a benchmark) measure of risk. Measures of an asset's non-diversifiable -- market-- risk. See also systematic risk. Bid The lowest price anyone wants to sell the security for at a given time. (See: Ask, and Bid-Ask Spread) Bid-Ask Spread The difference between the bid and the ask for a security at a given time. Big Board refers to the New York Stock Exchange (NYSE). Bill Debt that has less than 1-year maturity at time of issue. Blue Chips The stocks in the Dow Jones Industrial Average. Bond Long-Term IOU whereby the holder (lender or buyer) is promised to receive fixed payments over a pre-specified time period. Corporate bonds are one of the available instruments that companies can resort to for their financing needs. Bond Par Value The face value ($1,000) that is to be returned to a bondholder at maturity. Bond Covenants Book to Bill This is the semiconductor book to bill ratio. It reports on the amount of semiconductor chips that are booked for delivery as compared with those that companies already have billed for. Book Value The depreciated value of a company's assets (original cost less accumulated depreciation) less the outstanding liabilities. Broker A person who facilitates transactions (buy and sell) in the secondary market. Brokerage Commission The amount of money your brokerage house would charge for a given transaction (buy/sell). This is how these firms make their living. Brokers Calls Individuals who buy stocks on margin borrow part of the funds to pay for the stocks they buy from their broker. The broker in turn may borrow the funds from a bank, agreeing to repay the bank immediately (on call) if the bank requests it. The rate paid on such loans is usually about 1% higher than the rate on short-term Treasury bills. Bubbles See Efficient Market Hypothesis (EMH) Bull Market A market with the general prices advancing. Bullish One who believes the general market will rise. (See: Bear) Buyback When a firm repurchases its own stock from the public. C call option A provision in the mortgage that gives the mortgagee the right to call the mortgage due and payable at the end of a specified period for whatever reason. cap A provision of an adjustable-rate mortgage (ARM) that limits how much the interest rate or mortgage payments may increase or decrease. See lifetime payment cap, periodic payment cap, and periodic rate cap. capital (1) Money used to create income, either as an investment in a business or an income property. (2) The money or property comprising the wealth owned or used by a person or business enterprise. (3) The accumulated wealth of a person or business. (4) The net worth of a business represented by the amount by which its assets exceed liabilities. capital expenditure The cost of an improvement made to extend the useful life of a property or to add to its value. capital improvement Any structure or component erected as a permanent improvement to real property that adds to its value and useful life. cash-out refinance A refinance transaction in which the amount of money received from the new loan exceeds the total of the money needed to repay the existing first mortgage, closing costs, points, and the amount required to satisfy any outstanding subordinate mortgage liens. In other words, a refinance transaction in which the borrower receives additional cash that can be used for any purpose. certificate of deposit A document written by a bank or other financial institution that is evidence of a deposit, with the issuer’s promise to return the deposit plus earnings at a specified interest rate within a specified time period. certificate of deposit index An index that is used to determine interest rate changes for certain ARM plans. It represents the weekly average of secondary market interest rates on six-month negotiable certificates of deposit. See adjustable-rate mortgage (ARM). Certificate of Eligibility A document issued by the federal government certifying a veteran’s eligibility for a Department of Veterans Affairs (VA) mortgage. Certificate of Reasonable Value (CRV) A document issued by the Department of Veterans Affairs (VA) that establishes the maximum value and loan amount for a VA mortgage. certificate of title A statement provided by an abstract company, title company, or attorney stating that the title to real estate is legally held by the current owner. chain of title The history of all of the documents that transfer title to a parcel of real property, starting with the earliest existing document and ending with the most recent. change frequency The frequency (in months) of payment and/or interest rate changes in an adjustable-rate mortgage (ARM). chattel Another name for personal property. clear title A title that is free of liens or legal questions as to ownership of the property. closing A meeting at which a sale of a property is finalized by the buyer signing the mortgage documents and paying closing costs. Also called settlement closing cost item A fee or amount that a home buyer must pay at closing for a single service, tax, or product. Closing costs are made up of individual closing cost items such as origination fees and attorney's fees. Many closing cost items are included as numbered items on the HUD-1 statement. closing costs Expenses (over and above the price of the property) incurred by buyers and sellers in transferring ownership of a property. Closing costs normally include an origination fee, an attorney's fee, taxes, an amount placed in escrow, and charges for obtaining title insurance and a survey. Closing costs percentage will vary according to the area of the country; lenders or realtors® often provide estimates of closing costs to prospective homebuyers. closing statement See HUD-1 statement. cloud on title Any conditions revealed by a title search that adversely affect the title to real estate. Usually clouds on title cannot be removed except by a quitclaim deed, release, or court action. coinsurance A sharing of insurance risk between the insurer and the insured. Coinsurance depends on the relationship between the amount of the policy and a specified percentage of the actual value of the property insured at the time of the loss. coinsurance clause A provision in a hazard insurance policy that states the amount of coverage that must be maintained -- as a percentage of the total value of the property -- for the insured to collect the full amount of a loss. collateral An asset (such as a car or a home) that guarantees the repayment of a loan. The borrower risks losing the asset if the loan is not repaid according to the terms of the loan contract. collection The efforts used to bring a delinquent mortgage current and to file the necessary notices to proceed with foreclosure when necessary. co-maker A person who signs a promissory note along with the borrower. A co-maker's signature guarantees that the loan will be repaid, because the borrower and the co-maker are equally responsible for the repayment. See endorser. commission The fee charged by a broker or agent for negotiating a real estate or loan transaction. A commission is generally a percentage of the price of the property or loan. commitment letter A formal offer by a lender stating the terms under which it agrees to lend money to a home buyer. Also known as a loan commitment common area assessments Levies against individual unit owners in a condominium or planned unit development (PUD) project for additional capital to defray homeowners' association costs and expenses and to repair, replace, maintain, improve, or operate the common areas of the project. common areas Those portions of a building, land, and amenities owned (or managed) by a planned unit development (PUD) or condominium project's homeowners' association (or a cooperative project's cooperative corporation) that are used by all of the unit owners, who share in the common expenses of their operation and maintenance. Common areas include swimming pools, tennis courts, and other recreational facilities, as well as common corridors of buildings, parking areas, means of ingress and egress, etc. common law An unwritten body of law based on general custom in England and used to an extent in the United States. Community Home Improvement Mortgage Loan® An alternative financing option that allows low- and moderate-income home buyers to obtain 95 percent financing for the purchase and improvement of a home in need of modest repairs. The repair work can account for as much as 30 percent of the appraised value. Community Land Trust Mortgage Loan An alternative financing option that enables low- and moderate-income home buyers to purchase housing that has been improved by a nonprofit Community Land Trust and to lease the land on which the property stands. community property In some western and southwestern states, a form of ownership under which property acquired during a marriage is presumed to be owned jointly unless acquired as separate property of either spouse. Community Seconds® An alternative financing option for low- and moderate-income households under which an investor purchases a first mortgage that has a subsidized second mortgage behind it. The second mortgage may be issued by a state, county, or local housing agency, foundation, or nonprofit organization. Payment on the second mortgage is often deferred and carries a very low interest rate (or no interest rate at all). Part of the debt may be forgiven incrementally for each year the buyer remains in the home. comparables An abbreviation for comparable properties; used for comparative purposes in the appraisal process. Comparables are properties like the property under consideration; they have reasonably the same size, location, and amenities and have recently been sold. Comparables help the appraiser determine the approximate fair market value of the subject property. compound interest Interest paid on the original principal balance and on the accrued and unpaid interest. condemnation The determination that a building is not fit for use or is dangerous and must be destroyed; the taking of private property for a public purpose through an exercise of the right of eminent domain. condominium A real estate project in which each unit owner has title to a unit in a building, an undivided interest in the common areas of the project, and sometimes the exclusive use of certain limited common areas. condominium conversion Changing the ownership of an existing building (usually a rental project) to the condominium form of ownership. condominium hotel A condominium project that has rental or registration desks, short-term occupancy, food and telephone services, and daily cleaning services and that is operated as a commercial hotel even though the units are individually owned. construction loan A short-term, interim loan for financing the cost of construction. The lender makes payments to the builder at periodic intervals as the work progresses. consumer reporting agency (or bureau) An organization that prepares reports that are used by lenders to determine a potential borrower's credit history. The agency obtains data for these reports from a credit repository as well as from other sources. contingency A condition that must be met before a contract is legally binding. For example, home purchasers often include a contingency that specifies that the contract is not binding until the purchaser obtains a satisfactory home inspection report from a qualified home inspector. contract An oral or written agreement to do or not to do a certain thing. conventional mortgage A mortgage that is not insured or guaranteed by the federal government. Contrast with government mortgage. convertibility clause A provision in some adjustable-rate mortgages (ARMs) that allows the borrower to change the ARM to a fixed-rate mortgage at specified timeframes after loan origination. convertible ARM An adjustable-rate mortgage (ARM) that can be converted to a fixed-rate mortgage under specified conditions. cooperative (co-op) A type of multiple ownership in which the residents of a multiunit housing complex own shares in the cooperative corporation that owns the property, giving each resident the right to occupy a specific apartment or unit. cooperative corporation A business trust entity that holds title to a cooperative project and grants occupancy rights to particular apartments or units to shareholders through proprietary leases or similar arrangements. cooperative mortgages Mortgages related to a cooperative project. This usually refers to the multifamily mortgage covering the entire project but occasionally describes the share loans on the individual units. cooperative project A residential or mixed-use building wherein a corporation or trust holds title to the property and sells shares of stock representing the value of a single apartment unit to individuals who, in turn, receive a proprietary lease as evidence of title. corporate relocation Arrangements under which an employer moves an employee to another area as part of the employer's normal course of business or under which it transfers a substantial part or all of its operations and employees to another area because it is relocating its headquarters or expanding its office capacity. cost of funds index (COFI) An index that is used to determine interest rate changes for certain adjustable-rate mortgage (ARM) plans. It represents the weighted-average cost of savings, borrowings, and advances of the 11th District members of the Federal Home Loan Bank of San Francisco. See adjustable-rate mortgage (ARM). covenant A clause in a mortgage that obligates or restricts the borrower and that, if violated, can result in foreclosure. credit An agreement in which a borrower receives something of value in exchange for a promise to repay the lender at a later date. credit history A record of an individual's open and fully repaid debts. A credit history helps a lender to determine whether a potential borrower has a history of repaying debts in a timely manner. credit life insurance A type of insurance often bought by mortgagors because it will pay off the mortgage debt if the mortgagor dies while the policy is in force. creditor A person to whom money is owed. credit report A report of an individual's credit history prepared by a credit bureau and used by a lender in determining a loan applicant's creditworthiness. See merged credit report. credit repository An organization that gathers, records, updates, and stores financial and public records information about the payment records of individuals who are being considered for credit. C/A Current Assets C/L See Current Liability Call Option See Option Call Premium The difference between then call price and the security's value. Call Provision A provision that entitles the corporation to repurchase its bonds or preferred stock from their holders at stated prices over specified periods. Callable Bond A bond that the issuing company has the right to buy back at a pre-specified price. Cap See Capitalization Capital Asset All property used in conducting a business other than assets held primarily for sale in the ordinary course of business or depreciable, and real property used in conducting a business. Capital Asset Pricing Model (CAPM) An equation relating an asset's relative riskiness (beta) to its required return. Capital Budget List of planned investment projects, usually prepared annually. Capital Budgeting The decision-making process with respect to investment in fixed-assets. It involves measuring the additional cash flows associated with investment proposals and evaluating the viability of those proposed investment. Capital Gains or Loss The profit or loss made when an asset is sold for more than the purchase price is a capital gain. If the sale price is less than the purchase price, this is a capital loss. Capital Gains Distribution Payments to mutual fund shareholders of profits from the sale of securities in a fund's portfolio. Capital gains distributions (if any) are usually made annually. Capital Markets Markets for long-term financial securities. Capital Rationing. Shortage of funds that forces a company to choose between projects. Capital Structure Mix of different securities issued by a company. Capitalization A company's amount of capital. Usually measured as the sum of a company's market value of equity and debt. CAPM See Capital Asset Pricing Model. Cash Budget A detailed plan of future cash flows. This budget is composed of four elements: cash receipts, cash disbursements, net change in cash for the period, and new financing needed. Cash Flow CD (Certificate of Deposit) Receipts for funds deposited in bank or S&L for a fixed period. The funds earn a fixed interest rate. Chaebols South Korea's industrial giants. Change This shows the change in price of a security from the previous day's closing price. For instance, -1 means the security has fallen $1.00. Characteristic Line The line of bet fit through a series of historical returns for the firm's stock relative to the market returns. The slope of this line, called beta, represents the average movement of the firm's stock returns in response to a change in the market's returns. Cheap An asset is said to be cheap when it is worth (intrinsic value) more than its market value. Circuit Breakers Closed-End Fund An investment fund that does not stand ready to purchase its own shares from its owners. Its shares can trade on an exchange. Closing Price (alternatively close) The price at which the last trade took place on a given day in a particular security. Collar An upper and lower limit on the interest rate on a floating-rate note. Collateral Assets that are used as security for a loan. Commercial Paper Unsecured debt (IOU), issued by large corporations, with maturities (at time of issue) less than a year. They can be traded on OTC. Commission The broker=s fee for purchasing or selling assets. Commodity A commodity is food, a metal or another physical substance that investors buy or sell, usually via futures contracts. Common Shares These are securities that represent equity ownership in a company. Common shares topically allow an investor to vote on such matters as the election of board of directors. They also give the holder a share in a company's profits via dividend payments or the capital appreciation of the security. Competitive Bid A mechanism to select a lead investment bank in which investment banks submit a bid representing their compensation. The issuing firm solicits bids on the underwriting and chooses the underwriter who offers the most favorable terms. Compounding The process of determining the future value of a payment or a series of payments when applying the concept of compounding interest. This process is the opposite of discounting. Conglomerate Merger Merger between two corporations in unrelated business. Consol A perpetual bond issued by the British government. Sometimes used as a general term for perpetuity. Consumer Price Index (CPI) The CPI measures the prices of consumer goods and services and is a measure of the pace of U.S. inflation. The U.S. Department of Labor publishes the CPI every month. Conversion Ratio The number of shares of common stock for which a convertible security can be exchanged for. Convertible Bond Bond that can be converted to equity at a pre-specified conversion ratio. Core Investor A shareholder or a group of investors that holds enough shares to be able to influence management decisions. Corporation A legal entity that functions separate and apart from its owners. Coupon Interest payment on debt. Cost Budgets Budgets prepared for every major expense category of the firm, such as administrative cost, financing cost, production cost, selling cost, and research and development. Cost of Capital The rate that must be earned by the company to satisfy all the firm's providers of capital. It is based on the opportunity cost of funds. Coupon Interest Rate The Interest to be annually paid by the issuer of a bond as a percent of par value, which is specified in the contractual agreement. Covariance A measure of co-movement between two variables. Covenants See Bond Covenants CP See commercial paper Credit Scoring A procedure for assigning scores to companies or individuals on the basis of the risk of default. Credit Union is an agency providing some financial services to its members. Cum dividend With dividend. Cum Rights With rights. Cumulative Voting A shareholder may cast all his or her votes for one candidate for the board of directors. Also see majority voting. Current Asset Asset that is expected to be turned into cash within a year. Current Liability Liability that is expected to be paid in less than a year. Cyclical Stock The stock of a company whose fortunes are closely tied to the cyclical ups and downs of the economy in general. For example, General Motors is a cyclical stock since its business of selling autos is highly dependent on the general health of the economy. D debt An amount owed to another. See installment loan and revolving liability. deed The legal document conveying title to a property. deed-in-lieu A deed given by a mortgagor to the mortgagee to satisfy a debt and avoid foreclosure. Also called a voluntary conveyance deed of trust The document used in some states instead of a mortgage; title is conveyed to a trustee. default Failure to make mortgage payments on a timely basis or to comply with other requirements of a mortgage. delinquency Failure to make mortgage payments when mortgage payments are due. deposit A sum of money given to bind the sale of real estate, or a sum of money given to ensure payment or an advance of funds in the processing of a loan. See earnest money deposit. depreciation A decline in the value of property; the opposite of appreciation. discount points See point. dower The rights of a widow in the property of her husband at his death. down payment The part of the purchase price of a property that the buyer pays in cash and does not finance with a mortgage. due-on-sale provision A provision in a mortgage that allows the lender to demand repayment in full if the borrower sells the property that serves as security for the mortgage. due-on-transfer provision This terminology is usually used for second mortgages. See due-on-sale provision. Date of Record The date on which a shareholder must officially own shares in order to be entitled to a dividend. Day High This is the highest price that a security has traded at during the day. Day Low This is the lowest price that a security has traded at during the day. DCF Discounted Cash Flows Dealer A person (or firm) who facilitates transactions in the secondary market. They make their living on the difference between the prices they pay for the assets in their inventory and what they sell them for. Debentures Unsecured debt Debt IOU, such as bank loans, bonds, commercial paper, government bonds and bills. Declaration Date The date on which a firm announces a future dividend payment. Default Risk Uncertainty of a firm's ability to meet its debt obligations on time and in full. Default Risk Premium (DRP) The additional return lenders require to compensate them for default risk. Deleted A security is no longer included in The Nasdaq Stock Market. Depreciation (1) Reduction in the book or market value of an asset. (2) Portion of an investment that can be deducted from taxable income. Derivative Security A financial asset whose value is based on an underlying asset. Options and futures are examples. Discount (1) The amount by which a bond or preferred stock may sell below its par value. (2) The notion that market prices takes into account or include all publicly available relevant information. Discount Bond A bond that sells at value below par value. Discount Broker Brokerage services provided at a cost lower than full-service brokers. Discounting The inverse of compounding. This process is used to determine the present value of a cash flow. Discount Rate (1) The interest rate used in calculating the present value of cash flows. The rate reflects the time value of money and risk of the cash flows. (2) The interest rate charged by the twelve Federal Reserve Banks for short-term loans made to member banks. Distribution Date Date on which the payout of realized capital gains on securities in the fund portfolio occurred. Diversifiable Risk The components of an asset's risk that can be eliminated when the asset is combined in a well-diversified portfolio. Divestiture A division of a company that is sold out to new investors. Dividend Distribution of wealth by firm to shareholders based on number of shares owned. Dividend Yield Dividends per share divided by the price of the security. DJIA (Dow Jones Industrial Average) This is the best known U.S. index of stocks. It contains 30 stocks that trade on the New York Stock Exchange. The Dow, as it is called, is a barometer of how shares of the largest U.S. companies are performing DRP See Default Risk Premium. Duration A measure of a bond price's sensitivity to a 100-basis point change in interest rates. A duration of 7 would mean that, given a 100-basis point change up/down in rates, a bond's price would move up/down by 7%. E earnest money deposit A deposit made by the potential home buyer to show that he or she is serious about buying the house. easement A right of way giving persons other than the owner access to or over a property. effective age An appraiser’s estimate of the physical condition of a building. The actual age of a building may be shorter or longer than its effective age. effective gross income Normal annual income including overtime that is regular or guaranteed. The income may be from more than one source. Salary is generally the principal source, but other income may qualify if it is significant and stable. eminent domain The right of a government to take private property for public use upon payment of its fair market value. Eminent domain is the basis for condemnation proceedings. Employer-assisted housing A special Fannie Mae housing initiative that offers several different ways for employers to work with local lenders to develop plans to assist their employees in purchasing homes. encroachment An improvement that intrudes illegally on another’s property. encumbrance Anything that affects or limits the fee simple title to a property, such as mortgages, leases, easements, or restrictions. endorser A person who signs ownership interest over to another party. Contrast with co-maker. Equal Credit Opportunity Act (ECOA) A federal law that requires lenders and other creditors to make credit equally available without discrimination based on race, color, religion, national origin, age, sex, marital status, or receipt of income from public assistance programs. equity A homeowner's financial interest in a property. Equity is the difference between the fair market value of the property and the amount still owed on its mortgage. escrow An item of value, money, or documents deposited with a third party to be delivered upon the fulfillment of a condition. For example, the deposit by a borrower with the lender of funds to pay taxes and insurance premiums when they become due, or the deposit of funds or documents with an attorney or escrow agent to be disbursed upon the closing of a sale of real estate. escrow account The account in which a mortgage servicer holds the borrower’s escrow payments prior to paying property expenses. escrow analysis The periodic examination of escrow accounts to determine if current monthly deposits will provide sufficient funds to pay taxes, insurance, and other bills when due. escrow collections Funds collected by the servicer and set aside in an escrow account to pay the borrower’s property taxes, mortgage insurance, and hazard insurance. escrow disbursements The use of escrow funds to pay real estate taxes, hazard insurance, mortgage insurance, and other property expenses as they become due. escrow payment The portion of a mortgagor’s monthly payment that is held by the servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due. Known as impounds or reserves in some states. estate The ownership interest of an individual in real property. The sum total of all the real property and personal property owned by an individual at time of death. eviction The lawful expulsion of an occupant from real property. examination of title The report on the title of a property from the public records or an abstract of the title. exclusive listing A written contract that gives a licensed real estate agent the exclusive right to sell a property for a specified time, but reserving the owner’s right to sell the property alone without the payment of a commission. executor A person named in a will to administer an estate. The court will appoint an administrator if no executor is named. Executrix is the feminine form. Earnings Per Share (EPS) Company's earnings divided by the number of shares outstanding. Earnings Report A financial statement, also called Income Statement, issued by a company showing its earnings or losses over a given period. Earnings Announcement EBIT A company's Earnings Before Interest and Taxes. EDGAR (Electronic Data Gathering, Analysis, and Retrieval) An electronic system implemented by the SEC that is used by companies to transmit all documents required to be filed with the SEC in relation to corporate offerings and ongoing disclosure obligations. EDGAR became fully operational mid 1995. Efficient Market A market in which information is instantaneously reflected in the price. Efficient Market Hypothesis (EMH) A hypothesis that U.S. equity markets are efficient. Economic Investment Investment in real assets: plant, equipment, and intangible assets. EMH See Efficient Market Hypothesis Ending Net Asset Value The market value of a fund share on a predetermined end date. EPS See Earnings Per Share ERM See Exchange Rate Mechanism Eurobonds Bonds that are marketed internationally. Eurodollar Market A banking market in U.S. dollars outside the U.S. Exercise Price The price at which a call option or put may be exercised. Also called strike price. Exchange There are three main U.S. stock exchanges on which securities are traded. The American Stock Exchange (AMEX), Nasdaq is the National Association of Securities Dealers, and the New York Stock Exchange ( NYSE). Exchange Rate Mechanism (ERM), or the currency grid, is a system that limits currency fluctuations to a range of 15 percent in either direction. Ex-Dividend Date The date which determines ownership of stock for the purpose of paying dividends. Owners purchasing shares on or after the ex-dividend date do not receive the dividends. Only owners before this date would be registered to receive the declared dividend. The date is set at four business days prior to the record date. Also see dividend. External Financing Financing projects through new issues of securities; debt and/or equity. Extra Dividend Dividend that is not expected to be repeated. F Fair Credit Reporting Act A consumer protection law that regulates the disclosure of consumer credit reports by consumer/credit reporting agencies and establishes procedures for correcting mistakes on one's credit record. fair market value The highest price that a buyer, willing but not compelled to buy, would pay, and the lowest a seller, willing but not compelled to sell, would accept. Fannie Mae Fannie Mae is a New York Stock Exchange company and the largest non-bank financial services company in the world. It operates pursuant to a federal charter and is the nation's largest source of financing for home mortgages. Over the past 30 years, Fannie Mae has provided nearly $2.5 trillion of mortgage financing for over 30 million families. Fannie Mae's Community Home Buyer's ProgramSM An income-based community lending model, under which mortgage insurers and Fannie Mae offer flexible underwriting guidelines to increase a low- or moderate-income family's buying power and to decrease the total amount of cash needed to purchase a home. Borrowers who participate in this model are required to attend pre-purchase home-buyer education sessions. Fannie 97® A financing option for a fixed-rate mortgage that offers home buyers a 3 percent down payment loan with either a 25- or 30-year term. The mortgage features a loan-to-value (LTV) percentage of 97 percent, and is designed to expand homeownership opportunities for people with modest incomes. Borrowers must take a pre-purchase home-buyer education session to qualify for a Fannie 97 mortgage. Federal Housing Administration (FHA) An agency of the U.S. Department of Housing and Urban Development (HUD). Its main activity is the insuring of residential mortgage loans made by private lenders. The FHA sets standards for construction and underwriting but does not lend money or plan or construct housing. fee simple The greatest possible interest a person can have in real estate. fee simple estate An unconditional, unlimited estate of inheritance that represents the greatest estate and most extensive interest in land that can be enjoyed. It is of perpetual duration. When the real estate is in a condominium project, the unit owner is the exclusive owner only of the air space within his or her portion of the building (the unit) and is an owner in common with respect to the land and other common portions of the property. FHA coinsured mortgage A mortgage (under FHA Section 244) for which the Federal Housing Administration (FHA) and the originating lender share the risk of loss in the event of the mortgagor's default. FHA mortgage A mortgage that is insured by the Federal Housing Administration (FHA). Also known as a government mortgage. finder's fee A fee or commission paid to a mortgage broker for finding a mortgage loan for a prospective borrower. firm commitment A lender’s agreement to make a loan to a specific borrower on a specific property. first mortgage A mortgage that is the primary lien against a property. fixed installment The monthly payment due on a mortgage loan. The fixed installment includes payment of both principal and interest. fixed-rate mortgage (FRM) A mortgage in which the interest rate does not change during the entire term of the loan. fixture Personal property that becomes real property when attached in a permanent manner to real estate. flood insurance Insurance that compensates for physical property damage resulting from flooding. It is required for properties located in federally designated flood areas. foreclosure The legal process by which a borrower in default under a mortgage is deprived of his or her interest in the mortgaged property. This usually involves a forced sale of the property at public auction with the proceeds of the sale being applied to the mrotgage debt. forfeiture The loss of money, property, rights, or privileges due to a breach of legal obligation. fully amortized ARM An adjustable-rate mortgage (ARM) with a monthly payment that is sufficient to amortize the remaining balance, at the interest accrual rate, over the amortization term. Face Value Value of security shown on certificate. Also called par value, which is typically $1,000. Family of Funds Group of mutual funds managed by the same investment management company. Each fund typically has a different objective; one may be a growth-oriented stock fund, whereas another may be a bond fund or an index fund. Shareholders in one of the funds can usually switch their money into any of the family's other funds, sometimes at no charge. Fed (Federal Reserve Bank) Refers to the U.S. Central Bank, whose functions include interest rate policy, regulation of banks, and stabilization of foreign exchange (FX). Federal Funds Non-interest-bearing deposits of banks with the Federal Reserve. Banks lend excess reserves out to each other. Federal Funds Rate Rate at which banks charge each other for lending out excess reserves. Federal Home Loan Bank A Federally chartered, privately owned company charged with regulating the S&L industry. FHLB See Federal Home Loan Bank. Financial Assets Securities that have a claim on assets. Financial Distress Financial Investment Investment in financial assets. Financial Intermediaries Financial institutions that assist the transfer of savings from economic agents with excess savings to those that need capital for investments. Financial Markets Markets or exchanges where financial assets are traded. The largest two in the U.S. are the NYSE and Nasdaq. Finance By Example (Archives): Inside the Black Box: A Roller Coaster Financial Risk Additional risk borne by shareholders because of a firm's use of debt. Firm Commitment Agreement between a company and its lead investment banker in which the latter is obligated to sell all the shares to be issued. Firm Specific Risk Uncertainty in returns due to factors specific to the company. See diversifiable risk. Fixed Assets (overhead) A cost that is fixed for a given period of time. It is not dependent on the amount of goods and services produced during the period. Tangible fixed assets include real estate, plant and equipment. Intangible assets include patents, trademarks, and customer loyalty. Float The float is the number of shares of a security that are outstanding and available for trading by the public. Floatation Cost The underwriter's revenue associated with assisting a firm in issuing and marketing new securities. FNMA Fannie Mae Federal National Mortgage Association. A publicly owned corporation sponsored by the federal government that provides liquidity in the mortgage market. It buys mortgages from mortgage underwriters financed by issuing bonds. Footnote A To be used if the fund's return to shareholders may differ due to capital gains or losses. This footnote applied to money market funds only. Footnote B To be used if there are any sales charges or account charges which impact yield. This footnote applies to money market funds only. Footnote C Capital gains figure includes return of capital. Footnote D To be used on any day that a mutual fund's net asset value is reduced by a capital gains distribution. Footnote F To be used by any type of fund that reports quotations as of the day prior to the day of reporting Footnote G To be used if the fund's capital gains figure includes short-term gains Footnote N To be used by mutual funds when the fund does not have a sales load, i.e. there is no front-end and no contingent deferred sales load. Footnote P To be used by mutual funds if the fund has adopted a rule 12(b)1 distribution plan under which a specific charge is made against the net assets of the fund Footnote R To be used by mutual funds with redemption fees, contingent deferred sales charges, or other charges deducted from net asset value upon redemption other than charges for special services such as wire transfer). Footnote S To be used on the ex-date for stock splits or stock dividends Footnote T To be used if the fund began reporting prices to Nasdaq during the current year. Footnote X To be used by mutual funds on any day a fund goes ex-dividend. Foreign A non-U.S. company with securities trading on Nasdaq. Free Cash Flow Value The value of a firm based on the cash flow available for distributing to any of the providers of long-term capital to the firm. The free cash flows equal operating cash flow less any incremental investments made to support a firm's future growth. Front Running refers to situations when a manager who has private information about the direction of movement of an asset takes a private position in the asset before purchasing it for the fund. Full-Service Broker Brokers who provide services in addition to assisting in buying and selling of securities in the secondary market. Services can include providing company profiles and investment strategy recommendations. Fund Supermarkets Mutual fund supermarkets, the likes of Charles Schwab and Fidelity Investments, are financial services companies that sponsor mutual funds, i.e., they provide investors with easy access to a broad range of mutual funds. Futures Contract This is an agreement that allows an investor to buy or sell a commodity, like gold or wheat, or a financial instrument, like a currency, at some time in future. A future is part of a class of securities called derivatives, so named because such securities derive their value from the worth of an underlying asset. These contracts trade on organized futures exchanges. Futures Exchange Traded contracts specifying a future date of delivery or receipt of a specific product or asset. The assets include agricultural products like, pork bellies and oranges; metal; and financial instruments and indices. They are used by firms to hedge against potentially unfavorable price changes, and by speculators who hope to benefit from betting on the direction or magnitude of change. Futures Market Where futures contracts are traded. G government mortgage A mortgage that is insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs (VA) or the Rural Housing Service (RHS). Contrast with conventional mortgage. Government National Mortgage Association A government-owned corporation within the U.S. Department of Housing and Urban Development (HUD). Created by Congress on September 1, 1968, GNMA assumed responsibility for the special assistance loan program formerly administered by Fannie Mae. Popularly known as Ginnie Mae. grantee The person to whom an interest in real property is conveyed. grantor The person conveying an interest in real property. ground rent The amount of money that is paid for the use of land when title to a property is held as a leasehold estate rather than as a fee simple estate. group home A single-family residential structure designed or adapted for occupancy by unrelated developmentally disabled persons. The structure provides long-term housing and support services that are residential in nature. growing-equity mortgage (GEM) A fixed-rate mortgage that provides scheduled payment increases over an established period of time, with the increased amount of the monthly payment applied directly toward reducing the remaining balance of the mortgage. guarantee mortgage A mortgage that is guaranteed by a third party. guaranteed loan Also known as a government mortgage. Ginnie Mae. See GNMA. GNMA See Government National Mortgage Association. Golden Parachute. A plan devised by existing management stipulating that an acquiring company has to pay executives of the acquired company a substantial sum of money in the event of removing the former. Government National Mortgage Association (Ginnie Mae). A government-owned corporation that purchases mortgages and re-packages them as pass-through securities. The holder of a pass-through bond owns a portion of the underlying mortgages. Greenmail In a typical greenmail, the acquiring firm has already purchased a number of shares of the target firm's stock. Management of the target company offers to buy back the stock, at a price higher than the market. Growth Stocks Stocks of companies that have an opportunity to invest in projects that earn more that the required rate of return. H hazard insurance Insurance coverage that compensates for physical damage to a property from fire, wind, vandalism, or other hazards. Home Equity Conversion Mortgage (HECM) A special type of mortgage that enables older home owners to convert the equity they have in their homes into cash, using a variety of payment options to address their specific financial needs. Unlike traditional home equity loans, a borrower does not qualify on the basis of income but on the value of his or her home. In addition, the loan does not have to be repaid until the borrower no longer occupies the property. Sometimes called a reverse mortgage. home equity line of credit A mortgage loan, which is usually in a subordinate position, that allows the borrower to obtain multiple advances of the loan proceeds at his or her own discretion, up to an amount that represents a specified percentage of the borrower's equity in a property. home inspection A thorough inspection that evaluates the structural and mechanical condition of a property. A satisfactory home inspection is often included as a contingency by the purchaser. Contrast with appraisal. HomeKeeperSM Fannie Mae's adjustable-rate conventional reverse mortgage, which allows older homeowners to borrow against the value of their homes and receive the proceeds according to the payment option they select. The amount available is based on the number of borrowers and their ages and the adjusted property value. Anyone 62 years or older who either owns his or her own home free and clear or has very low mortgage debt is eligible. homeowners' association A nonprofit association that manages the common areas of a planned unit development (PUD) or condominium project. In a condominium project, it has no ownership interest in the common elements. In a PUD project, it holds title to the common elements. homeowner's insurance An insurance policy that combines personal liability insurance and hazard insurance coverage for a dwelling and its contents. homeowner's warranty (HOW) A type of insurance that covers repairs to specified parts of a house for a specific period of time. It is provided by the builder or property seller as a condition of the sale. HomeStyle® Mortgage Loan A mortgage that enables eligible borrowers to obtain financing to remodel, repair, and upgrade their existing homes or homes that they are purchasing. The financing takes the form of a conventional second mortgage or a Federal Housing Administration (FHA) Section 203(k) first mortgage. housing expense ratio The percentage of gross monthly income that goes toward paying housing expenses. HUD median income Median family income for a particular county or metropolitan statistical area (MSA), as estimated by the Department of Housing and Urban Development (HUD). HUD-1 statement A document that provides an itemized listing of the funds that are payable at closing. Items that appear on the statement include real estate commissions, loan fees, points, and initial escrow amounts. Each item on the statement is represented by a separate number within a standardized numbering system. The totals at the bottom of the HUD-1 statement define the seller's net proceeds and the buyer's net payment at closing. The blank form for the statement is published by the Department of Housing and Urban Development (HUD). The HUD-1 statement is also known as the closing statement or settlement sheet. Hurdle Rate The minimum required return on a project. Hedging The purchase or sale of a derivative security (such as options or futures) in order to reduce or eliminate risk associated with undesirable price changes of another security. Horizontal Merger Merger between two companies that produce similar products. Also referred to as horizontal integration. Horizontal Integration When firms in the same industry merge. Also referred to as horizontal merger Hostile Takeover A merger or acquisition in which management resists the group initiating the transaction. I income property Real estate developed or improved to produce income. index A number used to compute the interest rate for an adjustable-rate mortgage (ARM). The index is generally a published number or percentage, such as the average interest rate or yield on Treasury bills. A margin is added to the index to determine the interest rate that will be charged on the ARM.. This interest rate is subject to any caps that are associated with the mortgage. in-file credit report An objective account, normally computer-generated, of credit and legal information obtained from a credit repository. inflation An increase in the amount of money or credit available in relation to the amount of goods or services available, which causes an increase in the general price level of goods and services. Over time, inflation reduces the purchasing power of a dollar, making it worth less. initial interest rate The original interest rate of the mortgage at the time of closing. This rate changes for an adjustable-rate mortgage (ARM). Sometimes known as start rate or teaser. installment The regular periodic payment that a borrower agrees to make to a lender. installment loan Borrowed money that is repaid in equal payments, known as installments. A furniture loan is often paid for as an installment loan. insurable title A property title that a title insurance company agrees to insure against defects and disputes. insurance A contract that provides compensation for specific losses in exchange for a periodic payment. An individual contract is known as an insurance policy, and the periodic payment is known as an insurance premium. insurance binder A document that states that insurance is temporarily in effect. Because the coverage will expire by a specified date, a permanent policy must be obtained before the expiration date. insured mortgage A mortgage that is protected by the Federal Housing Administration (FHA) or by private mortgage insurance (MI). If the borrower defaults on the loan, the insurer must pay the lender the lesser of the loss incurred or the insured amount. interest The fee charged for borrowing money. interest accrual rate The percentage rate at which interest accrues on the mortgage. In most cases, it is also the rate used to calculate the monthly payments, although it is not used for an adjustable-rate mortgage (ARM) with payment change limitations. interest rate The rate of interest in effect for the monthly payment due. interest rate buydown plan An arrangement wherein the property seller (or any other party) deposits money to an account so that it can be released each month to reduce the mortgagor's monthly payments during the early years of a mortgage. During the specified period, the mortgagor's effective interest rate is bought down below the actual interest rate. interest rate ceiling For an adjustable-rate mortgage (ARM), the maximum interest rate, as specified in the mortgage note. interest rate floor For an adjustable-rate mortgage (ARM), the minimum interest rate, as specified in the mortgage note. investment property A property that is not occupied by the owner. IRA (Individual Retirement Account) A retirement account that allows individuals to make tax-deferred contributions to a personal retirement fund. Individuals can place IRA funds in bank accounts or in other forms of investment such as stocks, bonds, or mutual funds. Income Stocks Companies with high dividend yield or no NPV > 0 opportunities. Incremental Cash Flows Indenture The legal agreement between the firm issuing the bond and the bondholders, providing the specific terms of the loan agreement. Index A yardstick to measure change from a base year. Index Funds Mutual funds whose objective is to replicate the performance of an index. The most popular equity index is the S&P 500. Inflation A general increase in prices of goods and services. Inflationary Premium (IP) Additional compensation over the T-bill that levers require to compensation them for the risk of expected inflation. Inflation-Indexed Bonds Inside Market The highest bid and the lowest offer prices among all competing dealers in a Nasdaq security, i.e., the best bid and offer prices. Insiders These are directors and senior officers of a corporation -- in effect those who have access to inside information about a company. An insider also is a shareholder who owns more than 10 percent of the voting shares of a company. Interest Rates Interlocking Directors When competing companies (say, IBM and Apple) have a common Board of Directors. This is illegal in the US but is common practice in Japan. Intermediaries See Financial Intermediaries Internal Financing Financing projects through retained earnings. International Diversification In-the-money Options An option that would be worth exercising if it expired immediately. Also see out-of-the-money options. Investment Banks are firms that assist companies in initial sale of securities in primary market. Investment Company A company that uses its capital to invest in other companies. There are two types: the closed-end and the open-end, or mutual fund. Investment-Grade Bonds Bonds rated Baa or above. IP (Inflationary Premium) Additional return required to compensate asset holders for inflation uncertainty. IPO (Initial Public Offering) Securities are offered for the first time to the public. J joint tenancy A form of co-ownership that gives each tenant equal interest and equal rights in the property, including the right of survivorship. judgment A decision made by a court of law. In judgments that require the repayment of a debt, the court may place a lien against the debtor's real property as collateral for the judgment's creditor. judgment lien A lien on the property of a debtor resulting from the decree of a court. judicial foreclosure A type of foreclosure proceeding used in some states that is handled as a civil lawsuit and conducted entirely under the auspices of a court. jumbo loan A loan that exceeds Fannie Mae’s legislated mortgage amount limits. Also called a nonconforming loan. Junk Bond A bond that is not of investment quality, with rating below BBB. K Keiretsu Japan's industrial structure. L late charge The penalty a borrower must pay when a payment is made a stated number of days (usually 15) after the due date. lease A written agreement between the property owner and a tenant that stipulates the conditions under which the tenant may possess the real estate for a specified period of time and rent. leasehold estate A way of holding title to a property wherein the mortgagor does not actually own the property but rather has a recorded long-term lease on it. lease-purchase mortgage loan An alternative financing option that allows low- and moderate-income home buyers to lease a home from a nonprofit organization with an option to buy. Each month's rent payment consists of principal, interest, taxes and insurance (PITI) payments on the first mortgage plus an extra amount that is earmarked for deposit to a savings account in which money for a downpayment will accumulate. legal description A property description, recognized by law, that is sufficient to locate and identify the property without oral testimony. liabilities A person's financial obligations. Liabilities include long-term and short-term debt, as well as any other amounts that are owed to others. liability insurance Insurance coverage that offers protection against claims alleging that a property owner's negligence or inappropriate action resulted in bodily injury or property damage to another party. lien A legal claim against a property that must be paid off when the property is sold. lifetime payment cap For an adjustable-rate mortgage (ARM), a limit on the amount that payments can increase or decrease over the life of the mortgage. See cap. lifetime rate cap For an adjustable-rate mortgage (ARM), a limit on the amount that the interest rate can increase or decrease over the life of the loan. See cap. line of credit An agreement by a commercial bank or other financial institution to extend credit up to a certain amount for a certain time to a specified borrower. See home equity line of credit. liquid asset A cash asset or an asset that is easily converted into cash. loan A sum of borrowed money (principal) that is generally repaid with interest. loan commitment See commitment letter. loan origination The process by which a mortgage lender brings into existence a mortgage secured by real property. loan-to-value (LTV) percentage The relationship between the principal balance of the mortgage and the appraised value (or sales price if it is lower) of the property. For example, a $100,000 home with an $80,000 mortgage has a LTV percentage of 80 percent. lock-in A written agreement in which the lender guarantees a specified interest rate if a mortgage goes to closing within a set period of time. The lock-in also usually specifies the number of points to be paid at closing. lock-in period The time period during which the lender has guaranteed an interest rate to a borrower. See lock-in. LEAP A LEAP is a long-term option contract for a company's stock. They usually run for one year or more and are available on several U.S. exchanges. Letter of Credit Letter from a bank stating that it has established credit in the company's favor. LBO (Leverage Buyout) A corporate restructuring where the existing shareholders sell their shares to a small group of investors. The purchasers of the stock sue the firm's unused bet capacity to borrow the funds to pay for the stock. Typically the company becomes private. Leverage Use of debt financing. LIBOR London InterBank Offered Rate. The lending rate among international banks in London. Limit Order When you instruct your broker to buy or sell a given security at a specific price. Limited Liability Limitation of a shareholder's losses to the amount invested. Liquidity refers to an investor's ability to convert an asset into cash. The faster the conversion the more liquid the asset. Illiquidity is a risk in that an investor might not be able to convert the asset to cash when most needed. Moreover, having to wait for the sale of an asset can pose an additional risk if the price of the asset decreases while waiting to liquidate. Liquidity Risk Premium (LP) The additional return required by investors in securities that cannot be converted into cash at a reasonably predictable price or time. Liquidation Value The amount that could be realized if an asset were sold independently of the going concern. Listing When a company's stock trades on an official exchange. LLC (Limited Liability Company) also called Limited Liability Partnership (LLP) It a new type of partnership that is now permitted in many states. Unlike a regular and limited partnership, in an LLC, all partners enjoy limited liability with regard to business's liabilities, and, in that regard, they are similar to shareholders in a corporation. LLP See LLC Load A commission paid by an investor to a broker for the purchase or sale of a mutual fund. Long Investors who go long own stock or another financial security. It is a term that means the opposite of short. See short selling. Long Ownership of securities. (See Long) Long-term Gain A gain on the sale of a capital asset where the holding period was six months or more and the profit was subject to the long-term capital gains tax. LP (Liquidity Premium) Additional return required to compensate investors for purchasing illiquid assets. Also see liquidity. M margin For an adjustable-rate mortgage (ARM), the amount that is added to the index to establish the interest rate on each adjustment date, subject to any limitations on the interest rate change. master association A homeowners' association in a large condominium or planned unit development (PUD) project that is made up of representatives from associations covering specific areas within the project. In effect, it is a second-level association that handles matters affecting the entire development, while the first-level associations handle matters affecting their particular portions of the project. maturity The date on which the principal balance of a loan, bond, or other financial instrument becomes due and payable. maximum financing A mortgage amount that is within 5 percent of the highest loan-to-value (LTV) percentage allowed for a specific product. Thus, maximum financing on a fixed-rate mortgage would be 90 percent or higher, because 95 percent is the maximum allowable LTV percentage for that product. merged credit report A credit report that contains information from three credit repositories. When the report is created, the information is compared for duplicate entries. Any duplicates are combined to provide a summary of a your credit. modification The act of changing any of the terms of the mortgage. money market account A savings account that provides bank depositors with many of the advantages of a money market fund. Certain regulatory restrictions apply to the withdrawal of funds from a money market account. money market fund A mutual fund that allows individuals to participate in managed investments in short-term debt securities, such as certificates of deposit and Treasury bills. monthly fixed installment That portion of the total monthly payment that is applied toward principal and interest. When a mortgage negatively amortizes, the monthly fixed installment does not include any amount for principal reduction. monthly payment mortgage A mortgage that requires payments to reduce the debt once a month. mortgage A legal document that pledges a property to the lender as security for payment of a debt. mortgage banker A company that originates mortgages exclusively for resale in the secondary mortgage market. mortgage broker An individual or company that brings borrowers and lenders together for the purpose of loan origination. Mortgage brokers typically require a fee or a commission for their services. mortgagee The lender in a mortgage agreement. mortgage insurance A contract that insures the lender against loss caused by a mortgagor's default on a government mortgage or conventional mortgage. Mortgage insurance can be issued by a private company or by a government agency such as the Federal Housing Administration (FHA). Depending on the type of mortgage insurance, the insurance may cover a percentage of or virtually all of the mortgage loan. See private mortgage insurance (MI). mortgage insurance premium (MIP) The amount paid by a mortgagor for mortgage insurance, either to a government agency such as the Federal Housing Administration (FHA) or to a private mortgage insurance (MI) company. mortgage life insurance A type of term life insurance often bought by mortgagors. The amount of coverage decreases as the principal balance declines. In the event that the borrower dies while the policy is in force, the debt is automatically satisfied by insurance proceeds. mortgagor The borrower in a mortgage agreement. multidwelling units Properties that provide separate housing units for more than one family, although they secure only a single mortgage. multifamily mortgage A residential mortgage on a dwelling that is designed to house more than four families, such as a high-rise apartment complex. Maintenance Margin Minimum margin that must be maintained on a futures contract. Majority Voting Voting system under which each board of director is voted upon separately. See cumulative voting. Margin Cash or securities set aside by an investor as evidence for ability to honor a financial commitment. Margin Account When an investor borrows from his/her broker to finance the purchase of an asset. The Fed determines what the maximum borrowing rate is. Marginal Tax Rate The tax rate that would be applied to the next dollar of income. Marked-to-Market An arrangement whereby the profits or losses on a futures contract are settled up each day. Market Makers The exchange member firms that use their own capital to represent a stock and compete with each other to buy and sell the stocks they represent. There are over 500 member firms that act as NASDAQ market makers. One of the major differences between The NASDAQ Stock Market and other major markets in the US is Nasdaq's structure of competing market makers. Each market maker competes for customer order flow by displaying buy and sell quotations for a guaranteed number of shares. Once an order is received, the market maker will immediately purchase for or sell from its own inventory, or seek the other side of the trade until it is executed, often in a matter of seconds. Market Cap This is the company's market capitalization. If a company has 1 million shares and the company's shares are selling for $10, the market cap is $10 million. Also called Market Capitalization. Market Order When an investor instructs his/her broker to buy or sell an asset at the price prevailing in the market. In such a case, the investor, unlike the case of the limit order, does not put any restrictions on price. Market Risk Uncertainty from factors influencing a large number of stocks, such as inflation, interest rates, oil-shocks, etc. Market Portfolio A conceptual construct of a value-weighted index of all securities. In practice, the S&P 500 index is used as a proxy, to represent the average investor's return. Market Timing Ability to determine the time occurrence of peaks and troughs of stock markets. Market Value The value observed in the market place, whereby buyers and sellers negotiate mutually acceptable price for the asset. Marketable Securities Security investments that the firm can quickly convert into cash balances. Material News News released by a NASDAQ company that might reasonably be expected to affect the value of a company's securities or influence investors' decisions. Material news includes information regarding corporate events of an unusual and non-recurring nature, news of tender offers, unusually good or bad earnings reports, and a stock split or stock dividend. (See also Trading Halt.) Maturity Matching The practice of financing long-term projects with long-term assets, while financing short-term projects with short-term financing. Maturity Date The date on which the last payment on a bond is due. Maturity Risk Premium (MRP) Risk associated with interest rate uncertainty. The longer the time to maturity, the higher the premium. MBO (Management Buyout) An LBO with the new investor group is the firm's management. MBS (Mortgage Backed Securities) Mortgage pass-through securities. Medium-term Note Debt with a typical maturity of 1 to 10 years at the time of issue that is offered by a company.. Merger Acquisition in which all assets and liabilities of a company are absorbed by the buyer to form a combined business entity. MITI Japan's Ministry of International Trade & Industry. Monitoring Costs An agency cost that arises when bondholders take steps to ensure that protective covenants in the bond indenture are adhered to by the firm. Similarly, shareholders take steps to ensure that management is acting in the best interest of the owners, i.e., that managers are maximizing the wealth of shareholders. Moral Hazard Refers to human nature's increased incentive to take risk when insured. MRP (Maturity Risk Premium) Risk associated with interest rate uncertainty. The longer the time to maturity, the higher the premium. Municipal Bond (Muni) State or local government offer muni bonds, as they are called, to finance special projects such as highways or sewers. The interest that investors receive is exempt from some income taxes. Mutually Exclusive Projects Two projects that cannot both be undertake as they perform essentially the same task. Mutual Fund Managed investment fund whose shares are sold to investors Mutually Exclusive Projects Two projects that cannot both be undertaken. N negative amortization A gradual increase in mortgage debt that occurs when the monthly payment is not large enough to cover the entire principal and interest due. The amount of the shortfall is added to the remaining balance to create negative amortization. net cash flow The income that remains for an investment property after the monthly operating income is reduced by the monthly housing expense, which includes principal, interest, taxes, and insurance (PITI) for the mortgage, homeowners' association dues, leasehold payments, and subordinate financing payments. net worth The value of all of a person's assets, including cash, minus all liabilities. no cash-out refinance A refinance transaction in which the new mortgage amount is limited to the sum of the remaining balance of the existing first mortgage, closing costs (including prepaid items), points, the amount required to satisfy any mortgage liens that are more than one year old (if the borrower chooses to satisfy them), and other funds for the borrower's use (as long as the amount does not exceed 1 percent of the principal amount of the new mortgage). nonliquid asset An asset that cannot easily be converted into cash. note A legal document that obligates a borrower to repay a mortgage loan at a stated interest rate during a specified period of time. note rate The interest rate stated on a mortgage note. notice of default A formal written notice to a borrower that a default has occurred and that legal action may be taken. NAV (Net Asset Value) The market value of a fund share, synonymous with a bid price. In the case of no-load funds, the NAV, market price, and offering price are all the same figure, which the public pays to buy shares; load fund market or offer prices are quoted after adding the sales charge to the net asset value. NAV is calculated by most funds after the close of the exchanges each day by taking the closing market value of all securities owned plus all other assets such as cash, subtracting all liabilities, then dividing the result (total net assets) by the total number of shares outstanding. The number of shares outstanding can vary each day depending on the number of purchases and redemptions. NASD National Association of Securities Dealers. NASDAQ National Association of Securities Dealers Automated Quote. Nasdaq SmallCap Market The Nasdaq SmallCap Market comprises of over 1,400 companies that want the sponsorship of market makers, have applied for listing and meet specific and financial requirements. Once a company is approved and listed on this market, market makers are able to quote and trade the company's securities through a sophisticated electronic trading and surveillance system. The Nasdaq SmallCap Market operates from 9:30 A.M. to 4:00 P.M. EST., with extended trading in SelectNet from 8:00 A.M. to 9:30 A.M. EST and from between 4:00 P.M. and 5:15 P.M. EST. Negotiated Underwriting/Deal A means by which firms choose the underwriter for a new security issue. See competitive bidding. Net Asset Value (NAV) The market value of a fund share, synonymous with a bid price. In the case of no-load funds, the NAV, market price, and offering price are all the same figure, which the public pays to buy shares; load fund market or offer prices are quoted after adding the sales charge to the net asset value. NAV is calculated by most funds after the close of the exchanges each day by taking the closing market value of all securities owned plus all other assets such as cash, subtracting all liabilities, then dividing the result (total net assets) by the total number of shares outstanding. The number of shares outstanding can vary each day depending on the number of purchases and redemptions. Net Change The difference between today's price of last trade and the previous day's last price. For mutual funds, it is the difference between today's closing Net Asset Value (NAV) and the previous day's closing. The previous day's close on the Nasdaq web site, for example, is updated at 3:30 A.M. Net Present Value (NPV) A project's net contribution to shareholders wealth, which is determined by the present value of a project's cash flows less initial investment. New Working Capital (NWC) Current assets minus current liabilities. Net Worth Book value of a company's common stock, surplus, and retained earnings. NL No Load No Load (NL) See Load Nominal Interest Rate Interest as expressed in money terms. See real interest rate Note Unsecured debt with a maturity of up to 10 years at the time of issue. NPVGO Net Present Value of Growth Opportunities. A firm valuation model where NPV of investment opportunities is explicitly examined. NWC Net Working Capital is the difference between current assets and current liabilities. NYSE New York Stock Exchange. O original principal balance The total amount of principal owed on a mortgage before any payments are made. origination fee A fee paid to a lender for processing a loan application. The origination fee is stated in the form of points. One point is 1 percent of the mortgage amount. owner financing A property purchase transaction in which the property seller provides all or part of the financing. Odd Lot refers to buying stocks in a quantity that is not a multiple of 100. Off-Balance-sheet Financing Financing that is not shows as a liability in a company's balance sheet. OID Debt Original Issue Discount Debt Open The price at which a security opens the trading day. Open-End Fund A mutual fund that stands ready to redeem stocks and issue new stock. Also see closed-end funds. Open Order An order to buy or sell a security that remains in effect until it is either canceled by the customer or executed. Operating Leverage Amount of fixed operating costs. Opportunity Cost of Capital The expected return that is foregone by investing in a project rather than a financial security with comparable risk. Option The choice to take a specific action in the future. The action considered in finance are the purchase (call option) or sale (put option) of an asset. Out-of-the-money Option An option that would not be worth exercising if it matured immediately. See in-the-money option. OTC (Over The Counter Market). Financial markets that are not located in a single physical area. NASDAQ is an example. Organized Market A central physical location where exchange of securities takes place under a set of rules and regulations. This type of market is also referred to as Auction Market. Over-Rewarded A security whose expected (average) return is above its required return. Also called under-priced. Over-Valued An asset whose market value is greater than its intrinsic (formula or theoretical) value. Overbought Typically a reference to a security or the general market after it exhibits a sharp rise in prices. Oversold Opposite of overbought. P partial payment A payment that is not sufficient to cover the scheduled monthly payment on a mortgage loan. payment change date The date when a new monthly payment amount takes effect on an adjustable-rate mortgage (ARM) or a graduated-payment adjustable-rate mortgage (GPARM). Generally, the payment change date occurs in the month immediately after the adjustment date. periodic payment cap For an adjustable-rate mortgage (ARM), a limit on the amount that payments can increase or decrease during any one adjustment period. See cap. periodic rate cap For an adjustable-rate mortgage (ARM), a limit on the amount that the interest rate can increase or decrease during any one adjustment period, regardless of how high or low the index might be. See cap. personal property Any property that is not real property. PITI See principal, interest, taxes, and insurance (PITI). PITI reserves A cash amount that a borrower must have on hand after making a down payment and paying all closing costs for the purchase of a home. The principal, interest, taxes, and insurance (PITI) reserves must equal the amount that the borrower would have to pay for PITI for a predefined number of months. planned unit development See PUD. point A one-time charge by the lender for originating a loan. A point is 1 percent of the amount of the mortgage. power of attorney A legal document that authorizes another person to act on one’s behalf. A power of attorney can grant complete authority or can be limited to certain acts and/or certain periods of time. prearranged refinancing agreement A formal or informal arrangement between a lender and a borrower wherein the lender agrees to offer special terms (such as a reduction in the costs) for a future refinancing of a mortgage being originated as an inducement for the borrower to enter into the original mortgage transaction. preforeclosure sale A procedure in which the investor allows a mortgagor to avoid foreclosure by selling the property for less than the amount that is owed to the investor. prepayment Any amount paid to reduce the principal balance of a loan before the due date. Payment in full on a mortgage that may result from a sale of the property, the owner's decision to pay off the loan in full, or a foreclosure. In each case, prepayment means payment occurs before the loan has been fully amortized. prepayment penalty A fee that may be charged to a borrower who pays off a loan before it is due. pre-qualification The process of determining how much money a prospective home buyer will be eligible to borrow before he or she applies for a loan. prime rate The interest rate that banks charge to their preferred customers. Changes in the prime rate influence changes in other rates, including mortgage interest rates. principal The amount borrowed or remaining unpaid. The part of the monthly payment that reduces the remaining balance of a mortgage. principal balance The outstanding balance of principal on a mortgage. The principal balance does not include interest or any other charges. See remaining balance. principal, interest, taxes, and insurance (PITI) The four components of a monthly mortgage payment. Principal refers to the part of the monthly payment that reduces the remaining balance of the mortgage. Interest is the fee charged for borrowing money. Taxes and insurance refer to the amounts that are paid into an escrow account each month for property taxes and mortgage and hazard insurance. private mortgage insurance (MI) Mortgage insurance that is provided by a private mortgage insurance company to protect lenders against loss if a borrower defaults. Most lenders generally require MI for a loan with a loan-to-value (LTV) percentage in excess of 80 percent. promissory note A written promise to repay a specified amount over a specified period of time. public auction A meeting in an announced public location to sell property to repay a mortgage that is in default. PUD - Planned Unit Development A project or subdivision that includes common property that is owned and maintained by a homeowners' association for the benefit and use of the individual PUD unit owners. purchase and sale agreement A written contract signed by the buyer and seller stating the terms and conditions under which a property will be sold. purchase money transaction The acquisition of property through the payment of money or its equivalent. PA (Professional Association) A type of corporation that provides most of the benefits of incorporation but do not relieve the participants of professional (malpractice) liability. This type of organization is common among accountants, doctors, and lawyers. Also called Professional Corporation (PC). PC (Professional Corporation) See PA. P/E Ratio Price to earnings ratio. The price of a share of stock divided by earnings per share of stock for a twelve-month period. PacMan The name comes from the video game. It is another takeover repellent devised by management. For example, Bendix Corp. tried to take control of Martin-Marietta by a tender offer. When the takeover effort failed, Martin-Marietta counterattacked by buying Bendix stock in an attempt to take control of Bendix. Thus, Martin-Marietta became the PacMan. To counter, Bendix successfully courted Allied Corporation to come to its rescue. Allied bought Bendix so that Martin-Marietta could not buy enough control. In this case Allied was a White Knight. Par Value (1) A stock's par value is the minimum price at which more shares can be issued. (2) A bond's par value = $1,000 to be paid at maturity. Also see principal. Partnership A form of organization with two or more persons associate to conduct a non-corporate business. Its main disadvantage is unlimited liability. The tax treatment of a partnership is similar to that for a proprietorship, in that the business avoids corporate taxes. Also see LLC, and PA Passive Management An investment strategy that does not involve the periodic shuffling of a portfolio's components. A buy-and-hold strategy. Patient Capital Investors interested in long-term value maximization. Payment Date Date on which dividends are paid to registered owners. Payout Ratio Percent of earnings that is paid out as dividends. Pension Fund Assets held in trust to cover the costs of pension benefits to participants. Pension Plan Sponsor A group of employees with a pension plan under management. The California Public Employees' Retirement System (Calipers) is an example. Pension Plan A plan established by a firm, labor union, government, or other organization to provide for the payment of benefits to the plan participants over a period of years after retirement. Poison Pill An anti-takeover plan devised to automatically be activated when the company gets bought over in an unfriendly takeover. A Golden Parachute is one such device. Another might be a plan whereby all the firm's debt becomes due if the current management is removed. Portfolio A combination of assets. Portfolio Insurance Preemptive Right The right of a shareholder to purchase newly issued shares of the company before the general public. Premium (1) This generally refers to extra money an investor is willing to pay to buy something. (2) For a bond, a premium is the amount for which the security sells above its par value. Primary Market is where firms sell new financial assets typically with the assistance of an investment banker. Principal Orders Refers to activity by a broker/dealer when buying or selling for its own account and risk. Preemptive Right Common shareholder's right to subscribe to any new issue of stock so as to maintain, undiminished, their fraction of total number of shares outstanding. Preferred Stock Stock that takes priority over common stock in regard to dividend and liquidation. The dividend is usually fixed at time of issue. Prime Rate The interest rate that banks charge their best clients, , i.e., those with the lowest possibility of default. Principal (1) Shareholders; (2) Amount of debt that must be paid at maturity. Private Placement A direct sale, by the issuing firm, of newly issued securities to a small group of investors. Probability Distribution A graph that shows the different possible outcomes of a single variable and the probability of getting the outcome. Professional Association (PA) See PA. Professional Corporation (PC) See PA. Profit Taking Selling stock after a period of rising prices to realize the profit. The term is used to explain a downturn in the market. Pro Forma Projected Promissory Note (PN) Promise to pay. Prospectus Summary of the registration statement providing information to investors on an issue of securities. Protective Covenants Clauses in a loan agreement aimed at reducing default risk to the bondholders. Proxy Statement Information provided to stockholders in conjunction with the solicitation of proxies. (See: Proxy Vote) Proxy Vote Vote cast by one person on behalf of another at the company's annual meeting. Put Option Option to sell an asset at a specified excise price on or before a specified exercise date. Also see call option. Q qualifying ratios Calculations that are used in determining whether a borrower can qualify for a mortgage. They consist of two separate calculations: a housing expense as a percent of income ratio and total debt obligations as a percent of income ratio. quitclaim deed A deed that transfers without warranty whatever interest or title a grantor may have at the time the conveyance is made. Quant Finance Quants are the rocket scientists of Wall Street. They use Quantitative techniques to solve financial problems. Quote The highest bid to buy and the lowest offer to sell a security at a given time. (See: Ask, and Bid) R radon A radioactive gas found in some homes that in sufficient concentrations can cause health problems. rate-improvement mortgage A fixed-rate mortgage that includes a provision that gives the borrower a one-time option to reduce the interest rate (without refinancing) during the early years of the mortgage term. rate lock A commitment issued by a lender to a borrower or other mortgage originator guaranteeing a specified interest rate for a specified period of time. See lock-in. real estate agent A person licensed to negotiate and transact the sale of real estate on behalf of the property owner. Real Estate Settlement Procedures Act (RESPA) A consumer protection law that requires lenders to give borrowers advance notice of closing costs. real property Land and appurtenances, including anything of a permanent nature such as structures, trees, minerals, and the interest, benefits, and inherent rights thereof. Realtor® A real estate broker or an associate who holds active membership in a local real estate board that is affiliated with the National Association of Realtors®. recission The cancellation or annulment of a transaction or contract by the operation of a law or by mutual consent. Borrowers usually have the option to cancel a refinance transaction within three business days after it has closed. recorder The public official who keeps records of transactions that affect real property in the area. Sometimes known as a Registrar of Deeds or County Clerk. recording The noting in the registrar’s office of the details of a properly executed legal document, such as a deed, a mortgage note, a satisfaction of mortgage, or an extension of mortgage, thereby making it a part of the public record. refinance transaction The process of paying off one loan with the proceeds from a new loan using the same property as security. rehabilitation mortgage A mortgage created to cover the costs of repairing, improving, and sometimes acquiring an existing property. remaining balance The amount of principal that has not yet been repaid. See principal balance. remaining term The original amortization term minus the number of payments that have been applied. rent loss insurance Insurance that protects a landlord against loss of rent or rental value due to fire or other casualty that renders the leased premises unavailable for use and as a result of which the tenant is excused from paying rent. rent with option to buy See lease-purchase mortgage loan. repayment plan An arrangement made to repay delinquent installments or advances. Lenders' formal repayment plans are called relief provisions. replacement reserve fund A fund set aside for replacement of common property in a condominium, PUD, or cooperative project -- particularly that which has a short life expectancy, such as carpeting, furniture, etc. revolving liability A credit arrangement, such as a credit card, that allows a customer to borrow against a preapproved line of credit when purchasing goods and services. The borrower is billed for the amount that is actually borrowed plus any interest due. right of first refusal A provision in an agreement that requires the owner of a property to give another party the first opportunity to purchase or lease the property before he or she offers it for sale or lease to others. right of ingress or egress The right to enter or leave designated premises. right of survivorship In joint tenancy, the right of survivors to acquire the interest of a deceased joint tenant. Rural Housing Service (RHS) An agency within the Department of Agriculture, which operates principally under the Consolidated Farm and Rural Development Act of 1921 and Title V of the Housing Act of 1949. This agency provides financing to farmers and other qualified borrowers buying property in rural areas who are unable to obtain loans elsewhere. Funds are borrowed from the U.S. Treasury. Raiders Investors who attempt to acquire other firms in an unfriendly takeover. Rally An increase in the price of a stock or the level of the market. Rating Agency Companies that rate the likelihood of a firm to default on its debt obligations. Real Assets Tangible assets include: plant and equipment; intangible include: technical expertise, trademarks & patents. Real Interest Rate Interest Rate that is adjusted for inflation. Record Date Date set by the company when dividends are declared. Owners who are registered on this date receive dividends. Also see ex-dividend date. Red Herring A preliminary prospectus. Refunding Replacement of existing debt with a new issue of debt. Regression Analysis A statistical technique for fitting best line through data. Regular Dividend Dividend that is expected to be maintained at regular time intervals. Reorganization Financial restructuring of a firm under bankruptcy. Both the firm's assets and its financial structure are modified. Repo (Repurchase Agreement) Purchase of Treasury securities from a securities dealer with an agreement that the dealer will repurchase them at a specified price. Required Return Minimum return required by investors to compensate them for assuming risk. Residual Dividend An approach to dividends that suggests a firm pay dividends if and only if acceptable investment opportunities for those funds are currently unavailable. Retained Earnings Earnings not paid out as dividends. Return on Equity See ROE Risk Premium Additional return, over the risk-free rate, to compensate investors for accepting (holding) risk. Risk Aversion The dislike of risk. For risk averse investors, the pain from losing $1 is greater than the pleasure of winning $1. Thus, such investors have to be compensated with additional return to induce them to hold risky assets. ROE (Return on Equity) Round Lot The purchase or sale of a quantity of stocks that is in multiples of 100, such as 200, 1,000, etc. Russell 2000 An equity index comprising 2000 mid-capitalization U.S. listed stocks. S sale-leaseback A technique in which a seller deeds property to a buyer for a consideration, and the buyer simultaneously leases the property back to the seller. second mortgage A mortgage that has a lien position subordinate to the first mortgage. secondary mortgage market The buying and selling of existing mortgages. secured loan A loan that is backed by collateral. security The property that will be pledged as collateral for a loan. seller take-back An agreement in which the owner of a property provides financing, often in combination with an assumable mortgage. See owner financing. servicer An organization that collects principal and interest payments from borrowers and manages borrowers’ escrow accounts. The servicer often services mortgages that have been purchased by an investor in the secondary mortgage market. servicing The collection of mortgage payments from borrowers and related responsibilities of a loan servicer. settlement See closing. settlement sheet See HUD-1 statement. special deposit account An account that is established for rehabilitation mortgages to hold the funds needed for the rehabilitation work so they can be disbursed from time to time as particular portions of the work are completed. standard payment calculation The method used to determine the monthly payment required to repay the remaining balance of a mortgage in substantially equal installments over the remaining term of the mortgage at the current interest rate. step-rate mortgage A mortgage that allows for the interest rate to increase according to a specified schedule (i.e., seven years), resulting in increased payments as well. At the end of the specified period, the rate and payments will remain constant for the remainder of the loan. subdivision A housing development that is created by dividing a tract of land into individual lots for sale or lease. subordinate financing Any mortgage or other lien that has a priority that is lower than that of the first mortgage. subsidized second mortgage An alternative financing option known as the Community Seconds® mortgage for low- and moderate-income households. An investor purchases a first mortgage that has a subsidized second mortgage behind it. The second mortgage may be issued by a state, county, or local housing agency, foundation, or nonprofit corporation. Payment on the second mortgage is often deferred and carries a very low interest rate (or no interest rate). Part of the debt may be forgiven incrementally for each year the buyer remains in the home. survey A drawing or map showing the precise legal boundaries of a property, the location of improvements, easements, rights of way, encroachments, and other physical features. sweat equity Contribution to the construction or rehabilitation of a property in the form of labor or services rather than cash. S&P 500 Standard and Poor's stock price index comprising the 500 largest companies in the US Sallie Mae See Student Loan Marketing. Salvage value Scrap value of a plant or equipment. Seasoned New Issue Additional issue of shares. Seat A figure of speech for a membership on an exchange. SEC (Securities and Exchange Commission) The federal agency created by the Securities Exchange Act of 1934 to enforce federal securities laws. Secondary Market Where trading (exchange of ownership) of financial assets takes place. Seesaw Finance Issues related to daily movements in stock prices. Selling Group A collection of investment bankers who participate in the distribution of new issues to potential investors. Senior Debt Debt which, in the event of liquidation, must be repaid before subordinated debt receives any payment. Also see Junior Debt. Settlement Date In US financial markets, an investor must pay for the purchase of shares by the third business day after securities are bought. An investor is also obligated to deliver an investment that he or she has sold by the third business day after the transaction. Share A unit of measuring ownership in a company (i.e., if a firm has 1,000 shares outstanding and if you own 100 of them, then you have a 10% claim on the firm's net income (NI) and assets). Shareholder Activism Shark Repellents Legal anti-takeover mechanisms devised by management to deter potential takeovers. Shelf Registration A procedure that allows firms to file one registration statement covering several future issues of the same security. Shogan Bond Dollar-denominated bond issued in Japan by a non-resident. Short Interest The total number of shares of a security that have been sold short by customers and securities firms. (See Short Selling) Short Sale Sale of an asset that the investor does not own or any sale that is completed by the delivery of a security borrowed by the seller. Short selling is a legitimate trading strategy. Short sellers assume the risk that they will be able to buy the stock at a more favorable price than the price at which they sold short. Short Term Gain (Loss) The gain (loss) realized from the sale of securities or other capital assets held six months or less. Sinking Fund A requirement specified in a bond indenture that obligates the firm to annually retire a specified portion of the debt. SML (Security Market Line) Line representing the relationship between required return and beta. Small Cap Stocks Stocks of companies that have small capitalization, i.e., those that are small in terms of market value. Sole Proprietorship A business owned by a single individual. The sole proprietor pays no corporate income tax but has unlimited liability for business debt and obligations. SPDRs Spiders The acronym for Standard & Poor's Depository Receipts. It is a basket of the 500 stocks in the S&P 500 index. Special Dividend See extra dividend. Spin-Off A newly created company that used to be part of a parent company. Parent company shareholders receive a pro rata ownership in the new company. Stock Split An accounting transaction that increases the number of shares held by existing shareholders in proportion to the number of shares currently held. Stocks Equity claims on the net income (NI) and assets of a corporation. Stock Symbol A unique four- or five-letter symbol assigned to a Nasdaq security. If a fifth letter appears, it identifies the issue as other than a single issue of common stock or capital stock. Stock Ticker This is a lettered symbol assigned to securities and mutual funds that trade on US financial exchanges. Strike Price Exercise price of an option. Student Loan Marketing A privately owned, government-sponsored corporation that provides a secondary market for government-guaranteed student loans. It issues bonds to raise funds necessary for the purchase of student loans from financial institutions. Subordinated Debt (Junior debt) Debt whose holders, in the event of liquidation, get paid only after senior debt is paid off in full. (Also see senior debt) Sunk Cost Cost that has been incurred and cannot be recoverable. Sushi Bond Eurodollar bonds issued by Japanese corporation. Syndicate A group of investment bankers who together underwrite and market a new issue of securities or a large block of an outstanding issue. Systematic Risk. See market risk T tenancy by the entirety A type of joint tenancy of property that provides right of survivorship and is available only to a husband and wife. Contrast with tenancy in common. tenancy in common A type of joint tenancy in a property without right of survivorship. Contrast with tenancy by the entirety and with joint tenacy. tenant-stockholder The obligee for a cooperative share loan, who is both a stockholder in a cooperative corporation and a tenant of the unit under a proprietary lease or occupancy agreement. third-party origination A process by which a lender uses another party to completely or partially originate, process, underwrite, close, fund, or package the mortgages it plans to deliver to the secondary mortgage market. See mortgage broker. title A legal document evidencing a person's right to or ownership of a property. title company A company that specializes in examining and insuring titles to real estate. title insurance Insurance that protects the lender (lender's policy) or the buyer (owner's policy) against loss arising from disputes over ownership of a property. title search A check of the title records to ensure that the seller is the legal owner of the property and that there are no liens or other claims outstanding. total expense ratio Total obligations as a percentage of gross monthly income. The total expense ratio includes monthly housing expenses plus other monthly debts. trade equity Equity that results from a property purchaser giving his or her existing property (or an asset other than real estate) as trade as all or part of the down payment for the property that is being purchased. transfer of ownership Any means by which the ownership of a property changes hands. Lenders consider all of the following situations to be a transfer of ownership: the purchase of a property subject to the mortgage, the assumption of the mortgage debt by the property purchaser, and any exchange of possession of the property under a land sales contract or any other land trust device. In cases in which an inter vivos revocable trust is the borrower, lenders also consider any transfer of a beneficial interest in the trust to be a transfer of ownership. transfer tax State or local tax payable when title passes from one owner to another. Treasury index An index that is used to determine interest rate changes for certain adjustable-rate mortgage (ARM) plans. It is based on the results of auctions that the U.S. Treasury holds for its Treasury bills and securities or is derived from the U.S. Treasury's daily yield curve, which is based on the closing market bid yields on actively traded Treasury securities in the over-the-counter market. See adjustable-rate mortgage (ARM). Truth-in-Lending A federal law that requires lenders to fully disclose, in writing, the terms and conditions of a mortgage, including the annual percentage rate (APR) and other charges. two-step mortgage An adjustable-rate mortgage (ARM) that has one interest rate for the first five or seven years of its mortgage term and a different interest rate for the remainder of the amortization term. two- to four-family property A property that consists of a structure that provides living space (dwelling units) for two to four families, although ownership of the structure is evidenced by a single deed. trustee A fiduciary who holds or controls property for the benefit of another. T-Bill (Treasury Bill) Debt issued by the U.S. Treasury with maturity less than a year. T-Bond (Treasury Bond) US Treasury debt with maturities of more than 30 years. T-Note (Treasury Note) Debt issued by the US Treasury with maturity between a year and 15 years. Tender Offer Offer made directly to a firm's shareholders to buy their shares. Term Structure of Interest Rates See yield curve. Tick This refers to a change in the price of a security. An uptick occurs when the last trade in a security takes place at a higher price than the prior trade. A downtick occurs when the last trade in a security takes place at a lower price than the prior trade. An indicator may be fashioned from the difference between the number of NYSE issues showing upticks on the last trade and the number of NYSE issues showing downticks on the last trade. This indicator is known as the TICK, and is found on many quote screens. A TICK of +236 means 236 more NYSE issues last traded on upticks than those trading on downticks. Today's High The intra-day high trading price. Today's Low The intra-day low trading price. Tombstone Advertisement listing the issuing firm, type of security, its issuing price, number of securities to be issued, and names of underwriters of a new issue. Trading Halt The temporary suspension of trading in a Nasdaq security, usually for 30 minutes, while material news from the issuer is being disseminated over the news wires. A trading halt gives all investors equal opportunity to evaluate news and make buy, sell, or hold decisions on that basis. NASDAQ or the SEC may also impose a trading halt for purely regulatory reasons. Transaction Costs The cost of buying or selling financial securities. More! Treasury Stock Shares that are re-purchased by the issuing company. They are equivalent to unissued stock. Triple Witching Hour Slang used for the last hour of trading before the simultaneous expiration of stock options, index options, and index futures. This occurs four times a year on the third Friday of each quarter's end. TSE Tokyo Stock Exchange or the Toronto Stock Exchange. U underwriting The process of evaluating a loan application to determine the risk involved for the lender. Underwriting involves an analysis of the borrower's creditworthiness and the quality of the property itself. unsecured loan A loan that is not backed by collateral. Under-Perform A security whose expected (average) return is below its required return. Also called over-priced, over-valued, or under-rewarded. Under-Rewarded A security whose expected (average) return is below its required return. Also called overpriced Under-Valued An asset that is selling at a price below its intrinsic (theoretical or formula) value. Underpricing Issue of securities below their market value. Underwriter (Investment Banker) Firm that buys an issue from a company and resells it to investors; a primary market activity. Underwriter Discount Underwriters buy the to be issued securities at a reduced (discounted) price. This discount is usually measured as a percent of the price of the issue. Undiversifiable Risk See Market Risk. Unfriendly Takeover See hostile takeover. V VA mortgage A mortgage that is guaranteed by the Department of Veterans Affairs (VA). Also known as a government mortgage. vested Having the right to use a portion of a fund such as an individual retirement fund. For example, individuals who are 100 percent vested can withdraw all of the funds that are set aside for them in a retirement fund. However, taxes may be due on any funds that are actually withdrawn. Department of Veterans Affairs (VA) An agency of the federal government that guarantees residential mortgages made to eligible veterans of the military services. The guarantee protects the lender against loss and thus encourages lenders to make mortgages to veterans. Value of a Firm Variance A measure of a variable's volatility relative to its average. Venture Capital Capital supplied to particularly high-risk projects, such as start-ups or to companies denied conventional financing. Vertical Integration Merger between a supplier and its customers. An example would be when an oil-refining firm acquires a firm that owns oil fields. Visible Hand The phrase comes from Adam Smith's Invisible Hand, whereby markets alone do the job of resource allocation. With visible hand the government intervenes in the market, which suggests a belief in the market's failure in that particular area. Volatility The range of possible outcomes. A measure of risk of an individual asset when held in isolation, i.e., not as part of a portfolio. Volume The number of shares or contracts traded in a security or an entire market during a given period, typically a day. Vulture Capital See Venture Capital W what-if analysis An affordability analysis that is based on a what-if scenario. A what-if analysis is useful if you do not have complete data or if you want to explore the effect of various changes to your income, liabilities, or available funds or to the qualifying ratios or down payment expenses that are used in the analysis. what-if scenario A change in the amounts that is used as the basis of an affordability analysis. A what-if scenario can include changes to monthly income, debts, or down payment funds or to the qualifying ratios or down payment expenses that are used in the analysis. You can use a what-if scenario to explore different ways to improve your ability to afford a house. wraparound mortgage A mortgage that includes the remaining balance on an existing first mortgage plus an additional amount requested by the mortgagor. Full payments on both mortgages are made to the wraparound mortgagee, who then forwards the payments on the first mortgage to the first mortgagee. Warrant A financial asset, issued by the firm, which gives its holder the right to purchase a fixed number of shares of common stock at a predetermined price. White Knight A firm that comes to the rescue of a corporation that is being taken over. Wilshire 5000 An equity index comprising more than 6000 US listed stocks. The index originally included only 5000 companies, thus the number in the name. Working Capital. Current assets minus current liabilities. X X or XD - A symbol used by newspapers to signify that a stock is trading ex-dividend, or that a bond is trading without interest, or that a mutual fund recently paid a capital gain or dividend. XR - A symbol used by newspapers to signify that a stock is trading without rights attached. Those rights remain with the seller. XW - A symbol used by newspapers to signify that a stock is ex-warrants. Y Yankee Bond A dollar-denominated bond issued in the US by a non-U.S. borrower. Yelling Markets Also referred to as public outcry, refers to markets where transactions involve the yelling of prices and quantities, just as in the movies. Yield to Maturity (YTM) The rate of return the investor will earn if the bond is held to maturity. Yield Curve The return on debt securities with different maturities, for a level of default risk. Yield to Maturity (YTM) The market interest rate on a bond. It is the yield an investor would receive in the bond is held to maturity. YTM See Yield to Maturity. Z Zero Coupon Bond A bond that has no coupon payments. It pays only a single cash flow at maturity. # 12(b)-1 Fee Fee assessed to shareholders by the mutual fund for some of its promotional expenses. A 12b-1 fee must be specifically registered as such with the Securities and Exchange Commission and the fact that such charges are levied must be disclosed. 30-Year T-Bonds Bonds issued by the Treasury that have a maturity of 30 years at time of issue. 401(k)/403(b) An employer-sponsored investment plan that allows individuals to set aside tax-deferred income for retirement or emergency purposes. 401(k) plans are provided by employers that are private corporations. 403(b) plans are provided by employers that are not for profit organizations. 401(k)/403(b) loan Some administrators of 401(k)/403(b) plans allow for loans against the monies you have accumulated in these plans -- monies must be repaid to avoid serious penalty charges. 90-Day T-Bill Bills issued by T (Treasury), with maturity of 90 days at time of issue.