Glossary

Definitions of Common Financial Terms

 

Unsure about the meaning of financial term? Find the answer (and increase your vocabulary) with our online glossary.

A

Administrator
the individual or institution appointed by a court to oversee the settlement of the estate of a person who has died without a will.

 

Alpha
measures a fund's risk-adjusted performance and represents the difference between a fund's actual performance and its expected performance, given its level of risk.

 

Amortization
gradual debt reduction. Normally, the reduction is made according to a pre-determined schedule for installment payments.

 

Annual Potfolio Turnover
a measure of how frequently assets within a fund are bought and sold.

 

Annuity
an interest-bearing contract between an individual and a life insurance company that guarantees periodic payments to the indivdual during a specific time period.

 

Appreciation
an increase in value, the opposite of depreciation.

 

Average Maturity
is the weighted average of maturities of the of debt securities in a fund portfolio. It is the average amount of time until the debt securities mature and is used to determine sensitivity to interest changes.

 

B

Basis Points (bps)
is a unit of measure in quoting yields, changes in yields or differences between yields; 100 basis points is equal to 1%.

 

Beneficiary
an individual named as the recipient of the income or principal of an estate or trust.

 

Beta
represents the systematic risk of a portfolio and measures its sensitivity to a benchmark.

 

Blue Chip Stocks
high-quality, common stock of well-known companies with extended records of earnings and dividends, well-respected management, and prospects for continued strong performance. Generally, these stocks are the choice of investors seeking long-term growth.

 

Bond
a debt instrument that is a "promise to pay" issued by corporations, federal and state goverments, and municipalities to raise capital. The bond issuer promises to pay the holder of the bond the principal amount of the loan when the bond matures and a fixed rate of interest periodically during the term of the bond.

 

Book Value to Price
a ratio used to compare a stock's book value to its market value. It is calculated by dividing the latest quarter's book value per share to the current price of the stock.

 

Borrower
one who receives funds in the form of a loan with the obligation of repaying the loan in full with interest.

 

Brent Crude
is a grade of crude oil used as a benchmark to price European, African and Middle Eastern oil that is exported to the West.

 

Bull/Bear
terms frequently used to describe the outlook for short-and long-term market performance:

·         bull refers to the belief that stock prices are likely to rise;

·         bear refers to the expectation that prices will decline.

C

Capital Gains
the difference between the cost basis and the amount for which you sold the stock.

 

Capital Gains and Losses

·         for tax purposes, the difference between the purchase price and selling price.

·         profit or loss that occurs when an investor sells an asset. If the asset's sale price is greater than the original purchase price, a capital gain results. If the asset is sold for less than the original price the investor experiences a capital loss.

 

Certificate of Deposit
an arrangement between an investor and a financial institution which calls for the financial institution to pay a specific rate of interest over a set period of time. Certain deposits are FDIC insured up to applicable limits.

 

Common Stock
units of ownership that give voting rights to shareholders. (See Preferred Stock.)

 

Consumer Price Index
is a measure that examines the weighted average of prices of a fixed basket of consumer goods and services (such as food, transportation, shelter, utilities, and medical care), and is widely used as a cost-of-living benchmark.

 

Consumer Sentiment Index
is a statistical measurement of consumers/investors opinions of the overall health of the economy.

 

Cost Basis
the purchase price, including commissions and other expenses, used to determine capital gains and capital losses for tax purposes.

 

Cyclical Stocks
stocks whose earnings fluctuate according to the business cycle.

D

Death Taxes
a general term used to refer to taxes against property or the transfer of assets upon the death of the owner, including all estate and inheritance taxes. Sometimes referred to as estate taxes.

 

Debt-To-Income Ratio
debt expenses as a percentage of monthly income. Lenders use this ratio to qualify borrowers for mortgage loans, typically setting a maximum debt-to-income ratio of 36 percent.

 

Deduction
for tax purposes, the portion of an estate that does not generate tax (such as a marital deduction).

 

Delta
measures the sensitivity of a derivative (such as an option or convertible bond) to the underlying asset (such as a stock).

 

Discount Broker
as opposed to full service brokers, a discount broker charges a lower fee for executing buy and sell orders at the direction of the investor. Generally, discount brokers do not provide investment advice.

 

Diversification
the practice of investing among several categories of investments (including different industries, countries, or investment vehicles) to enhance return and reduce risk.

 

Dividend
periodic distribution of earnings to stockholders, in the form of cash or additional shares of stock.

 

Donee/Donor
the recipient of a gift; the giver of a gift.

 

Dow Jones Industrial Average
the average performance of certain blue chip stocks, generally regarded as an indication of how the market at large is performing.

 

Down Market Capture
a measure of a manager's performance in down markets relative to the market.

E

Effective Duration
measures percent change in price for 100 basis point parallel shift.

 

Environmental, Social and Governance (ESG)
three factors used to evaluate sustainability and ethical impact of an investment in a company or business.

 

Excess Return
measures how much the fund returns exceed its benchmark index.

 

Executor
the individual named in a will charged with carrying out the provisions specified in the will. A co-executor serves as executor along with one or more designated individuals.

F

Fair Market Value
the price at which property is transferred between a willing buyer and a willing seller, each of whom has reasonable knowledge of all pertinent facts and neither being under any compulsion to buy or sell.

 

Federal Housing Administration (FHA)
a division of the Department of Housing and Urban Development. Its main activity is the insuring of residential mortgage loans made by private lenders.

 

Federal Home Loan Mortgage Corporation (FHLMC)
a private corporation created by Congress to support the secondary mortgage market. It sells participation certificates secured by pools of conventional mortgage loans; principal and interest is guaranteed by the federal government through the FHLMC. Popularly known as Freddie Mac.

 

Federal National Mortgage Association (FNMA)
a private corporation created by Congress to support the secondary mortgage market. FNMA sells mortgage-backed securities backed by pools of conventional loans. Payment of principal and interest on these securities is backed by the US Government. Popularly known as Fannie Mae.

 

Fiduciary
an individual or institution responsible for acting in the best interests of another party. A fiduciary is bound by law and duty to put aside personal interests and act in good faith when making decisions for the benefit of another.

 

First Mortgage
a real estate loan that creates a primary claim against real property.

 

Fixed-Income Securities
debt obligations issued by corporations, goverments, or goverment agencies which pay a fixed rate of interest over a defined time period. Bonds and certain mortgage-backed securities are the most common examples of fixed-income investments.

G

Grantor
an individual who gives property outright or in a trust.

 

Gross Domestic Product (GDP)
is the market value of the finished goods and services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis. GDP includes consumer and government spending, private domestic investments, and net exports of goods and services.

 

Gross Monthly Income
the amount of consistent and stable income that an individual receives each month, averaged over a period of time. This amount includes overtime pay, bonuses, commissions and income from dividends or interest, provided that the individual can show a consistent history of receiving such income.

 

Growth Stock
stock of a corporation with a record of faster-than-average sales and earnings. Growth stock typically appeals to investors who seek a long-term increase in value.

 

Guardian
an individual or institution named by a court to manage the property of a person who is adjudged incapable of handling his or her own affairs.

H

Heir
one who inherits from the estate of a person who has died.

 

Historical 5-Year Earnings Growth
the weighted average of the growth in earnings for each stock in the fund's portfolio.

I

Income Stock
common stock that pays dividends at a higher-than-average rate, resulting in a higher yield for stockholders. Income stock frequently in preferred by investors who seek current income in addition to growth.

 

Index
any of a number of composites that reflect movement in financial markets, indicating market prices and shares outstanding of companies included in the index. Examples are: the Down Jones Industrial Index, the Russell 2000 Index, Standard & Poor's 500 Composite Stock Index, and the EAFE Index.

 

Index Fund
a fund managed with the objective of duplicating the performance of securities in a broad-based index by investing in all or most of the securities included in that index.

 

Individual Retirement Account (IRA)
a method of planning for retirement that enables individuals to save up to $2,000 annually. These funds, called contributions, are in addition to any retirement plan already in place by the individual's employer. In addition, if an individual's employer has adopted a Savings Incentive Match Plan for Employees, the employee will be able to make a pre-tax elective contribution to an IRA of up to $6,000 annually. IRA funds are tax-deferred, that is, not subject to tax until withdrawals are made, when the individual may be in a lower tax bracket. (See Tax-Deferred Investment).

 

Individual Retirement Account "Rollover"
a special IRA that is established specifically for taxable funds distributing from a tax-qualified retirement plan. As in the case of a regular IRA, funds are not subject to tax until they are withdrawn from the account.

 

Information Ratio
a measure of risk-adjusted relative return.

 

Interest

·         earnings paid by any fixed-income security (a bond, a certificate of deposit, or an annuity, for example.)

·         money paid for the use of money -- that is, paid for a loan.

 

Interest Coverage Ratio
is operating earnings divided by interest expense; it is one way to examine a company’s ability to service its debt.

 

Investment Management Account
an account whereby a financial institution is given discretionary power with regard to investment decisions on behalf of the investor. Fees for this service vary, but usually are based on a percentage of the overall value of the funds under management.

 

Irrevocable Trust
a type of trust that cannot be revoked or changed in any way.

 

Invasion of a Trust
refers to a distribution of assets made from the principal of a trust.

J

Joint Ownership
also called joint tenancy, this phrase refers to ownership of property by two or more persons, generally with right of survivorship (upon the death of one owner, the surviving owner or owners assume ownership).

K

No listed terms for K

L

Last Will
literally, the will last executed by an individual, which revokes any former existing wills.
 

Liquidity
the flexibility of being able to obtain the cash value of investments without incurring significant loss.

 

Living Trust
a trust that takes effect while the settlor is still alive.

 

Living Will
a legal document in which an individual states, in advance of final illness or injury, his or her wishes regarding procedures and equipment designed to extend life.

 

Load
a sales charge associated with buying shares in some mutual funds. (See No-Load Fund.)

 

Loan-To-Value Ratio
the relationship between the amount of a home loan and the total value of the property. For example, if you receive a loan of $95,000 on a home that costs $100,000, the loan-to-value ratio is 95 percent.

 

Lock-In-Rate
a commitment from a lender to make a loan at a preset interest rate at some future date, usually for not more than 60 days. A fee may be charged to "lock-in" a rate.

M

Market Value
the highest price that a willing buyer would pay and the lowest a willing seller would accept.

 

Maximum Drawdown
This is the maximum loss (compounded, not annualized) that the manager ever incurred during any subperiod of the entire time period. Conceptually, the calculation looks at all subperiods of the time period in question and calculates the compound return of the manager over that period. The maximum drawdown is the minimum of zero and all these compound returns.

 

Mean
The mean or average of the return series is the sum of the returns divided by their numbers.

 

Money Market
the market for short-term debt instruments. Money market investments include Treasury bills, short-term certificates of deposit, commercial paper, and other, similar instrumets.

 

Money Market expense ratio
Money Market expense ratio assumes the use of NTI’s money market funds. The client’s fee may vary based on the specific money market fund in which the client is invested.

 

Money Market Funds
refers to mutual funds investing solely in money market instruments.

 

Mortgage
an interest in real property given as security for the payment of an obligation.

 

Mortgage Insurance
a policy that allows mortgage lenders to recover part of their financial losses from an insurance company if a borrower fails to fully re-pay a loan. Mortgage insurance makes it possible for consumers to buy a home with as little as 5 percent down.

 

Mortgage Investor
any person or institution that invests in mortgages. By buying mortgage loans from lenders, the mortgage investor gives the lender funds that can be used for more lending.

 

Mortgage Life Insurance
a type of term life insurance. The amount of coverage decreases as the mortgage balance declines. In the event that the borrower dies while the policy is in force, the debt is automatically paid by insurance proceeds.

 

Mutual Fund
an investment company that enables investors to pool their funds in order to invest in a managed portfolio of securities.  

N

Net Asset Value
represents the fund's or portfolio's total asset base, net of fees and expenses.

 

No-Load Fund
a mutual fund that does not involve a sales charge when shares are purchased

 

Number of Up and Down Periods
The number of up periods for a given return series is the number of positive returns in the series.  Similarly, the number of down periods is the number of zero and negative returns in the series.

O

Omega
compares the count and scale of individual return points above a minimum accepted return threshold (MAR) against the count and scale of individual return points below the MAR threshold.

 

Option-adjusted spread
measures the yield spread between similar securities (typically bonds) with different options, such as prepayment or call options, which are very interest rate sensitive.

 

Organisation for Economic Co-operation and Development (OECD)
is an international economic organization of 34 countries founded to promote policies that will improve the economic and social well-being of people around the world.

P

Pain Index
is the mean value of the drawdowns over the entire analysis period.

 

Pain Ratio
is the analogue to the Sharpe Ratio, with the pain index used instead of the standard deviation.

 

Personal Consumption Expenditures Index (PCE)
is a measure of price changes in consumer goods and services; it includes data pertaining to durables, non-durables and services.

 

PITI
Principal, Interest, Taxes, and Insurance are the components of a mortgage payment.

 

Point
a dollar amount paid to a lender for making a loan. A point is 1 percent of the loan amount. Also called discount points.

 

Portfolio
the combined investment holdings of an individual or an institution.

 

Power of Appointment
the power given by an individual to another in a will or trust document to determine which persons will receive an interest in his or her estate.

 

Power of Attorney
a legal document authorizing one individual to act as the agent or "attorney" for another (the "principal"). If the attorney is authorized to act in behalf of another for all matters, he or she has general power of attorney. Authority to act solely regarding specified situations is special power of attorney. If the authority granted extends beyond the disability of the principal, the attorney has durable power of attorney.

 

Preferred Stock
a class of stock that has preference over common stock in the event of the liquidation of a company's assets. Typically, preferred stockholders do not have voting rights. (See Common Stock.)

 

Price-to-Book Ratio
is a ratio used to compare a stock's market value to its book value. It is calculated by dividing the current price of the stock by the latest quarter's book value per share.

 

Price-to-Earnings (P/E) Ratio
A company's P/E ratio is a way of gauging whether the stock price is high or low compared to the past or to other companies. The ratio is calculated by dividing the current stock price by the current earnings per share. Earnings per share are calculated by dividing the earnings for the past 12 months by the number of common shares outstanding.

 

Price-to-Sales Ratio
is calculated by dividing a stock’s current price by its sales per share over the trailing 12 months.

 

Prime Rate
the basic rate of interest on loans charged by commercial banks.

 

Principal

·         the original balance of money loaned, excluding interest. Also, the remaining balance of a loan, excluding interest.

·         refers to the assets included in a trust that yield income. In an agency relationship, this word refers to the individual who gives authority to the agent to act on his or her behalf.

 

Probate
the process through which a will is proved to be valid.

 

Prospectus
a booklet that provides full disclosure of relevant information about a security being offered for sale.

 

"Prudent Investor" Rule
legal term that refers to the duty of the fiduciary to invest and manage assets in the best interests of another.

 

Purchasing Managers’ Index (PMI)
is a measure of the overall performance of the manufacturing sector, based on a survey conducted with purchasing managers to determine changes in economic conditions. A reading of 50 indicates no change, a reading of greater than 50 indicates an expanding economy and a reading below 50 indicates a contracting economy.

Q

No terms listed for Q.

R

Remainderman
in the case of a trust, this term refers to the individual who will receive the principal of a trust when final distribution takes place.

 

RESPA (Real Estate Settlement Procedures Act)
RESPA is a federal law that requires lenders to provide home mortgage borrowers with information about known or estimated settlement costs.

 

Return
profit earned by a capital investment or other type of security.

 

Return-on-Equity (ROE)
is net income as a percentage of a company's shareholder equity.

 

Revocable Trust
a type of trust that can be terminated by the settler (the opposite of an irrevocable trust).

 

Risk
the chance that an investment could lose or fail to maintain value.

 

R-squared
A measure of how much of a portfolio's performance can be explained by the returns from the overall market (or a benchmark index). If a portfolio's total return precisely matched that of the overall market or benchmark, its R-squared would be 100.00. If a portfolio's return bore no relationship to the market's returns, its R-squared would be 0.

S

Servicer
after a mortgage loan closes, the loan servicer collects the payments, manages escrow accounts, pays escrowed taxes and insurance, and manages delinquent payments. Lenders often "release" servicing to another business, which means that a home buyer will not necessarily send house payments to the original lender.

 

Settlement
the closing of a mortgage loan.

 

Settlor
an individual who establishes a trust in order to transfer property. (See Grantor)

 

Share
an individual unit of ownership in a publicly owned corporation or mutual fund.

 

Sharpe Ratio
A measure of risk-adjusted return. To calculate a Sharpe ratio, an asset's excess returns (its return in excess of the return generated by risk-free assets such as Treasury bills) is divided by the asset's standard deviation.

 

Sortino Ratio
The Expected return of a portfolio divided by the Downside Risk of a portfolio.  It is a risk-adjusted measure of return using Downside Risk as risk.

 

10-year Sovereign Yield
is the interest rate a sovereign entity (e.g. U.S., Germany) is required to pay to borrow for a 10-year period.

 

Standard Deviation
Standard deviation of return measures the average deviations of a return series from its mean and is often used as a measure of risk.  A large standard deviation implies that there have been large swings in the return series of the manager.  The standard deviation of the return series is measured as the square root of the variance.

 

Step Up In Basis
the change in the value of an asset inherited upon the owner's death. The taxable gain is calculated based on the fair market value at the time of death, not the fair market value at the time the asset was purchased.

 

Stock Split
a method of reducing stock price by allocating newly issued stock to shareholders according to their current holdings.

 

Stress Test
Stress Testing is a risk management process of applying historical or Northern Trust defined scenarios to a current portfolio to determine how the portfolio will react to the selected stress event if it were to happen today, using BarraOne, Zephyr, and Northern Trust’s proprietary methodology.

 

Successor Trustee or Executor
an individual or institution taking the place of a trustee or executor unable to continue the responsibilities designated in the trust agreement or will.

T

Tax-Deferred Investments
an investment whose earnings are not subject to state or federal tax until the investor assumes possession of them. Individual Retirment Accounts are common examples.

 

T-statistic (test statistic)
a statistical measure of confidence, it is calculated based on a sample and is the basis for accepting or rejecting a given hypothesis.

 

Tracking Error
Also known as the standard deviation of excess return. Tracking Error is the variance and standard deviation applied to the excess return series and measures the deviations of the excess return series from its mean.

 

Trailing 12-month Price-to-Earnings Ratio
the sum of a company's price-to-earnings. Calculated by taking the current stock price and dividing it by the current earnings per share for the past 12 months.

 

Trust
a legal, fiduciary relationship in which an individual or institution (the trustee) holds legal title to property with the responsibility for keeping or managing this property for the benefit of another person or beneficiary.

 

Trust Agreement
a legal document that establishes a trust and outlines the rules and guidelines affecting its management and disposition.

 

Trust Fund
property held in trust. This term originally applied only to money held in trust, but is frequently used when referring to all property held in trust.

 

Trustee
the individual or institution with responsibility for management of property placed in trust for the benefit of another individual.  

U

Uncertainty Indicator
(or policy-related economic uncertainty) uses two components comprising key newspaper coverage of economic uncertainty as well as disagreement among economic forecasters.

 

Unified Credit
a federal tax credit that offsets gift and estate tax liability.

 

Up/Down Capture Ratio
is a measure of how well a manager was able to replicate or improve on phases of positive benchmark returns, and how badly the manager was affected by phases of negative benchmark returns.

 

Up Market Capture
a measure of a manager's performance in up markets relative to the market.

 

U.S. Treasury Securities
debt obligations secured by the full faith and credit of the U.S. government. Income generated by these securities is subject to federal tax, but exempt from state and local tax.

V

Value at Risk (VaR)
Based on a probability distribution, Value at Risk (VaR) quantifies the expected loss under extreme market conditions. It measures the potential loss in value of a risky asset or portfolio over a specified period for a given confidence interval, typically 95% or 99%.

 

Veterans Administration (VA)
an independent agency of the federal government created in 1930. The VA home loan guaranty program is designed to encourage lenders to offer long-term, low downpayment mortgages to eligible veterans by guaranteeing the lender against loss.

W

Weighted Average
The weighted average of the gross expense ratios of the funds and/or ETFs used in the portfolio.

 

Weighted Average of Net Expense Ratio
The weighted average of the net expense ratios of the funds and/or ETFs used in the portfolio. The fund net expense ratios reflect fee waivers by the underlying fund management companies, which may not be permanent.

 

West Texas Intermediate (WTI)
is a grade of crude oil used as a benchmark in oil pricing. It is the underlying commodity for the futures contracts on the Chicago Mercantile Exchange and the New York Mercantile Exchange.

 

Will
a legal document expressing the wishes of an individual regarding distribution of his or her property after death.

 X

No listed terms for X.

Y

Yield
is an indication of the current estimated dividends and interest vs. the current market value of the holdings. The yield represents the current amount of income that is being generated from the portfolio without liquidating the principal or capital gains on the portfolio. However, the yield will fluctuate daily and current or past performance is not a guarantee of future results.

 

Yield-to-maturity
is the rate of return anticipated on a bond if it is held until the maturity date.

 

Yield-to-worst
lowest potential bond yield received without the issuer defaulting, it assumes the worst-case scenario, or earliest redemption possible under terms of the bond.

Z

Zoning
city or county laws specifying how property may be used in specific areas.