Flashcards

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”.

Discounted cash flow is used to determine the present value of an investment’s future cash flow.

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.

A return of part of the premium on participating insurance to reflect the difference between the premium charged and the combination of actual mortality, expense, and investment experience. Dividends are not considered to be taxable distributions because they are interpreted as a refund of a portion of the premium paid.

The dividend payout rate looks at the amount per share of common stock that was paid out versus the amount that could have been paid.

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.

A domestic insurer is one whose home office is in this state. The domestic insurer is doing business in this state.

A double-barreled bond is a bond that is backed by two sources of income (e.g., a city revenue bond may also be backed by a general obligation bond of the county). Double-barreled bonds are good for the safety of the principal.

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

A list of prescription drugs covered by a prescription drug plan or another insurance plan offering prescription drug benefits. Also called a formulary.

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.

A dwelling property policy protects the physical structure of a home (walls, roof) and sometimes other structures on the property, like a garage, from covered perils like fire, wind, hail, and vandalism, often using DP-1, DP-2, or DP-3 forms with varying levels of named peril or open peril (DP-3) coverage.

Earned income includes the income derived from active participation in a trade or business. Earned income includes wages, tips, salary, commission, and bonuses. An individual must have earned income to contribute to an Individual Retirement Account (IRA).

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.

Earthquake insurance is a form of property insurance that pays the policyholder in the event of an earthquake that causes damage to the property. Most homeowners’ and dwelling fire insurance policies do not include earthquake damage. The deductible on earthquake insurance is expressed as a percentage of the policy limit.

The date on which an insurance policy becomes effective.

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 effective tax rate is the overall tax rate paid by a taxpayer. The effective tax rate will always be less than the marginal tax rate.

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.

The EMMA website is funded and operated by the Municipal Securities Rulemaking Board (MSRB), the self-regulatory organization charged by Congress with promoting a fair and efficient municipal securities market. The SEC designated the EMMA website as the official repository for municipal securities disclosures in 2009. EMMA houses hundreds of thousands of municipal disclosure documents that provide information about municipal securities. These include offering documents, called official statements, for most new offerings of municipal bonds, notes, 529 savings plans, ABLE programs, and other municipal securities issued since 1990. EMMA also provides access to advance refunding documents, which detail arrangements made when new bonds are issued to establish escrows to pay off existing bonds (usually to refinance the old debt at a lower interest rate). Also available are continuing disclosure documents that describe material information throughout the life of a bond and must be provided by municipal bond issuers.

There are four elements required to have a legal contract: C – O – A – L. Consideration, offer, acceptance, and legal purpose and capacity.

Not all risks are insurable. Pure risk involves no chance of gain. Pure risk is insurable. Speculative risk, like gambling, involves a chance of gain or chance of loss. Speculative risk is not insurable.

The elimination period, or waiting period, is the amount of time that a person is unable to work before the coverage kicks in. The elimination period begins when the person meets the policy’s definition of totally disabled. The longer the elimination period, the lower the premium.

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.

Employment practices liability insurance is insurance protection for employers to cover the cost of loss caused by, or due to a liability claim from an employee for such offenses as discrimination, sexual harassment, wrongful termination or other employment related claims.

Endorsements are added to insurance contracts to modify the terms of the contract. Endorsements may add, delete, remove, or change coverage. Endorsements are also called riders.

The entire contract is admissible in court. The entire contract includes the policy and anything else attached at issue, such as the application and any riders. The entire contract clause protects both the insurer and the insured. No changes may be made to the policy after issuance unless both parties agree to the change.

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.

Equipment breakdown insurance is commonly referred to as boiler and machinery insurance. It covers the costly physical and financial damage that can result from equipment breakdown. Equipment breakdown insurance can pay for: direct property loss (the cost to repair or replace damaged equipment), lost business income and costs for temporary replacement equipment, other expenses incurred to limit the loss or speed restoration of operations, loss value of spoiled products or materials, and business recovery expenses.

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 fixed deferred annuity that combines a minimum guaranteed interest rate with the ability to be credited with additional earnings depending upon the performance of an index.

A type of professional liability insurance that protects an insurance producer from claims arising from services provided (or those not provided). E&O does not cover criminal acts.

A set of 10 categories of services health insurance plans must cover under the Affordable Care Act. These include doctors’ services, inpatient and outpatient hospital care, prescription drug coverage, pregnancy and childbirth, mental health services, and more. Some plans cover more services. All plans must offer dental coverage for children. Dental benefits for adults are optional. Specific services may vary based on each state’s requirements.

The quantity of wealth or property at an individual’s death.

Due within 9 months of a person’s death, estate tax is only owed on the amount over the current year’s estate tax exclusion. When a married person dies their assets pass in their entirety to the surviving spouse. Estate taxes are not due until the death of the second spouse (if owed at all).

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.

European style options can only be exercised at expiration, if in the money.

A statement or proof of your health, finances, or job, which helps the insurer decide if you are an acceptable risk for life insurance.

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.