Flashcards

A defined benefit plan is a type of qualified plan. Defined benefit plans are covered by the Pension Benefit Guaranty Corporation (PBGC). A defined benefit plan specifies the amount of money the employee will receive at retirement.

In a defined contribution plan is a type of qualified plan. In a defined contribution plan the employer and the employee may defer a percentage of the employee’s income annually towards retirement.

Deflation is when there is an overall decrease in prices. Deflation is usually found during an economic contraction.

Depreciation is used to write down (expense) over time fixed assets. Depreciation is a non-cash expense that has the effect of lowering a business’s taxable income, but not affecting their cash flow. Depreciation is found as an add-back item on a company’s statement of cash flow.

A depression is at least six consecutive quarters of decline in GDP (gross domestic product).

A derivative is a financial product that may or may not have value, depending upon the value of the underlying asset. Options, rights, warrants, LEAPS, futures, and forwards, are all derivatives.

Dilution is a decrease in an investor’s holdings, due to the issuance of additional shares.

A direct participation program is usually formed as a limited partnership. They are illiquid due to the fact they do not trade in the secondary market.

Directed brokerage may or may not be allowed by an investment adviser. If the investment adviser allows directed brokerage it can take place in one of two ways. Either the investment adviser directs the clients’ trades to be executed through a specific broker-dealer, or the investment adviser allows the client to tell the firm which broker-dealer they would like to use for execution.

A discount occurs when a bond is trading in the secondary market for less than par value because interest rates have gone up since the bond was originally issued.

The discount rate is the interest rate set by the Federal Reserve for a short-term loan from the Fed to a member bank. The loan is from the lending “window”.

A discretionary account is an account permitting a client to designate an individual such as a broker-dealer to exercise authority over the selection, timing, and amount of investment for the client. The authorization for the discretionary account must be in writing, and the account must be approved and accepted by a principal of the broker-dealer firm.

Diversification is the practice of spreading out investments among the securities of different companies and different industries. Diversification helps to reduce nonsystematic risk. An S&P 500 index fund offers a client broad diversification. To diversify by asset class is to invest some money in stocks, bonds, real estate, and gold (different asset classes). Diversifying by asset class helps to reduce systematic risk.

A diversified fund is a type of mutual fund that has most of its assets invested in many types of securities, many issuers of a single type of security, or both. The Investment Company Act of l940 defines a diversified fund as one where at least 75% of its assets are invested so that 5% of its total assets own no more than 10% of the total outstanding stock of any one company. Also known as the 75 – 5 – 10 rule.

A dividend is that portion of the earnings of a corporation declared by the board of directors to be paid to shareholders.  Each shareholder receives a pro-rata distribution based on the number of shares owned.  Corporations may pay dividends up to quarterly. Dividends are never guaranteed. Blue chip stocks are more likely to pay dividends than growth stocks. In a mutual fund, a dividend is a distribution of net investment income, usually paid quarterly. Dividends are taxable in the year of distribution, even when reinvested.

Mutual fund companies, along with many publicly traded companies, allow their investors to automatically use their dividend distribution to buy additional shares. The dividend distribution is taxable in the year of distribution, even when reinvested, increasing the investor’s cost basis.

Dollar cost averaging is a defensive method of investing that requires a specified amount of money to be invested, at regular intervals. By investing the same dollar amount, when shares are priced low, the investor will purchase more shares. When shares are priced high, fewer shares are purchased. Over time, when the market prices are fluctuating, the average cost per share may be lower than the average price paid.  DCA does not guarantee a profit.

The Dow is a price weighted index consisting of 30 large cap industrial stocks. It is the most widely used market indicator.

Due diligence is the duty of the underwriter, the issuer, and the attorneys that are involved in the new issue to conduct an inquiry into the circumstances surrounding the new offering.  The underwriter(s) or party charged with discovery must not be negligent in its attempt to discover and disclose relevant facts that would affect the offering. Neither the SEC nor the state performs due diligence.

A durable power of attorney is a document that grants either limited or full authority to a third party. The word durable ensures that the power of attorney survives a declaration of mental or physical incompetence of the grantor. A durable power of attorney ceases upon the grantor’s death.

Duration is a measurement of a bond’s market price volatility as interest rates change. Zero coupon bonds have the highest duration. A long-term bond would have a higher duration than a bond maturing in the near term.

Earnings per share takes the earnings available to common (after preferred stocks’ dividends have been paid) divided by the number of shares of common stock in the hands of the public. Earnings per share are found on a company’s income statement.

The effective date is the date that the registration of an issue of securities becomes effective with the SEC. Shares of a new issue can be sold as of the effective date.

The efficient market hypothesis has three forms: weak, semi-strong, and strong. In the weak form, fundamental analysis may produce excess returns. In the semi-strong form, trading on inside information may work to produce excess returns. In the strong form, there is no way to beat the market, it is best to build a broadly diversified portfolio and invest for the long run.

Employee stock options are designed to align the employee’s interests with those of the company by allowing the employee to buy shares of the company’s stock at specific prices, over time. Employee stock options may be qualified (incentive) or non-qualified.

With ESG investing a set of standards for a company’s operations is used to screen investments. ESG investing is a form of socially conscious investing.

An equipment trust certificate is a type of secured bond. It is backed by rolling stock, such as airplanes, fleet vehicles, or railroad cars. The title to the equipment is held by a trustee until the company pays off the bonds.

Stock (common or preferred) is sold to individuals and institutions. In return for the money paid, the individual or institution receives an ownership interest in the corporation.

An equity indexed annuity is a type of annuity issued by an insurance company. An equity indexed annuity has a minimum interest rate that it promises to pay to the annuitant, commonly referred to as the floor. It also has a cap rate, which is the most it can earn. Equity indexed annuities have a participation rate as well. The participation rate describes how much of the earnings of the index the account will be credited with and varies by insurance company and product offered. An equity indexed annuity is not considered a security. The only license required to sell an equity indexed annuity is a life insurance license.  This product is best for moderate and conservative investors. It has higher fees than a mutual fund.

A Eurobond is a long-term bond that is issued by either a government or corporation that is denominated in the currency of the issuer, but sold in another country.

Eurodollars are U.S. dollars that are held in banks that are outside of the United States.

The ex-dividend date is the date that the stock trades without the dividend attached. The price of the security is reduced by the amount of the dividend on the ex-date. Normally the ex-dividend date is the business day before the record date.

The exchange privilege is the right of an investor who has invested in one fund to transfer to another fund under the same management without incurring an additional sales charge.  The exchange is considered a sale and repurchase under the tax code.

An exchange traded fund (ETF) is a type of investment company that may track an index or may be actively managed. The ETF trades in the secondary market, at the market price, which may be more, less, or equal to the value of the underlying assets. ETFs may be shorted, purchased on margin, and may even have options that are written on them.

The exclusion allowance is the amount of money that the employer may withhold for the employee for the purchase of a (TSA) 403b tax-sheltered annuity.

The executor is the person named in a will to settle the financial affairs and distribute the assets of a deceased person.

An exempt security is a security that may be sold without registration, it is exempt from the Securities Act of 1933 and/or the Uniform Securities Act. U.S. Government securities and municipal securities are both exempt securities. Exempt securities are not required to file sales and advertising materials.

: An exempt transaction is a transaction that does not require registration or the filing of a registration statement. Exempt transactions include private placements, fiduciary transactions, unsolicited transactions, and institutional transactions.

The exercise price is the price found in an option contract or a warrant. On a call, the owner can buy shares from the seller at the exercise price. On a put, the owner can sell shares to the seller at the exercise price. The exercise price is also known as the strike price.

An expansion is also called a recovery. During an expansion, there is growth in the economy. It is one of the four phases of the business cycle. Expansions are followed by a peak and preceded by a trough.

Expansionary monetary policies are designed to grow the economy (get the economy out of a contraction). Expansionary policies include lowering interest rates, lowering banks’ reserve requirements, and buying U.S. government bonds. Expansionary policies increase the money supply and are used to fight deflation.

The expense guarantee is part of a variable annuity contract that guarantees that the amount of the net annuity payment will not be reduced by increased operating expenses of the company.

The expense ratio of a mutual fund takes the fund’s operating expenses divided by the net asset value of the fund. Actively managed funds have higher expense ratios than index funds due to the higher management fee paid to the investment adviser.

Face-amount certificate companies are a type of investment company. The FACC issue certificates, usually purchased on an installment basis at a discount, that mature after a period of years for the face amount.

The FDIC is a federal agency that provides deposit insurance for member banks. The FDIC protects the clients of insolvent banks.

Banks lend their excess reserves to other member banks, overnight, to meet reserve requirements, charging the federal funds rate. The federal funds rate is the most sensitive indicator of interest rate direction. The Federal Reserve sets a target for the federal funds rate.

The Federal Reserve Board is a federal governmental body responsible for the country’s monetary policy. There are seven members on the FRB, each appointed by a President and confirmed by the Senate.

A fiduciary is a person in a place of financial trust.  The custodian of a minor’s account is a fiduciary. The trustee of a trust is a fiduciary. Section 404(c) of ERISA, Safe Harbor Provisions, defines a fiduciary as a person who can exercise discretion or control in administering and/or managing/controlling a plan’s assets.   Investment advisers must act in a fiduciary capacity in making recommendations to clients, fully disclosing all conflicts of interest.

The final prospectus must be delivered to a client who is buying a new issue. It includes the price of the securities, the delivery date, and the underwriting spread.

Financial risk is a type of nonsystematic risk related to the financial health of the company that issued the security.  Financial risk is also known as credit risk or default risk.