Securities Terms

What is a certificate of deposit (CD)?

A bank deposit paying a stated or variable interest rate for a specified term; it may be FDIC-insured within applicable limits and ownership categories.

What is a brokered CD?

A bank CD purchased through a brokerage firm; it may be sold in a secondary market, where its price can fluctuate, and early sale may result in a loss.

What is a money market deposit account?

An interest-bearing bank deposit account that may offer limited transaction privileges and can qualify for FDIC insurance within applicable limits.

What is a money market mutual fund?

A mutual fund investing in short-term, high-quality debt instruments; it seeks a stable share price but is not a bank deposit and is not FDIC-insured.

What is commercial paper?

Short-term unsecured corporate debt used to meet near-term funding needs.

What is a repurchase agreement (repo)?

A transaction in which securities are sold with an agreement to repurchase them later at a specified price; economically similar to a collateralized short-term loan.

What is a Treasury bill?

A short-term U.S. government security generally issued at a discount and redeemed at face value.

What is a Treasury note?

A marketable U.S. government debt security with an original maturity generally from 2 to 10 years that pays periodic interest.

What is a Treasury bond?

A marketable U.S. government debt security with an original maturity generally longer than 10 years that pays periodic interest.

What is a municipal bond?

Debt issued by a state or local government or related authority to finance public projects or operations.

What is a general obligation (GO) bond?

A municipal bond backed by the issuer's taxing power and general credit, subject to applicable law.

What is a revenue bond?

A municipal bond whose repayment primarily depends on revenues from a specified project or system, such as tolls or utility charges.

What is a corporate bond?

Debt issued by a company; the investor lends money to the issuer in exchange for contractual payments.

What is a secured bond?

A bond backed by specified collateral that may be available to satisfy claims following default.

What is a debenture?

An unsecured corporate debt obligation backed by the issuer's general credit rather than specific collateral.

What is a subordinated debenture?

Unsecured debt that ranks behind specified senior claims in bankruptcy or liquidation.

What is a convertible bond?

A bond that can be exchanged for a specified number of the issuer's common shares under its terms.

What is a callable bond?

A bond that allows the issuer to redeem it before maturity under specified conditions.

What is a putable bond?

A bond that gives the investor the right to require redemption under specified conditions.

What is a zero-coupon bond?

A bond that pays no periodic coupon and is typically sold at a discount to face value.

What is a Treasury Inflation-Protected Security (TIPS)?

A U.S. Treasury security whose principal adjusts with changes in the Consumer Price Index; interest is based on the adjusted principal.

What is a mortgage-backed security (MBS)?

A security backed by a pool of mortgage loans, with investor cash flows derived from mortgage principal and interest payments.

What is a pass-through MBS?

A mortgage-backed security in which mortgage principal and interest collections, net of fees, are passed through to investors.

What is a collateralized mortgage obligation (CMO)?

A mortgage-backed structure that divides mortgage cash flows into classes or tranches with different payment priorities and risk characteristics.

What is prepayment risk in an MBS?

The risk that borrowers repay mortgages earlier than expected, often returning principal sooner when interest rates fall.

What is extension risk in an MBS?

The risk that mortgage repayments slow when interest rates rise, extending the security's expected life.

What is an asset-backed security (ABS)?

A security backed by a pool of assets such as auto loans, credit-card receivables, or student loans.

What is a collateralized debt obligation (CDO)?

A structured security backed by a pool of debt obligations and divided into tranches with different priorities and risks.

What is a unit investment trust (UIT)?

An investment company that generally holds a relatively fixed portfolio selected under a trust agreement, issues redeemable units, and has a specified termination date.

How does a UIT differ from an actively managed mutual fund?

A UIT generally holds a relatively fixed portfolio and does not actively trade investments in the same way as an actively managed mutual fund.

What is an open-end mutual fund?

An investment company that continuously issues and redeems shares, generally at the next calculated net asset value, adjusted for applicable charges.

What is a closed-end fund?

An investment company that generally issues a fixed number of shares, which investors trade with one another in the secondary market at market prices.

What is an exchange-traded fund (ETF)?

A pooled investment vehicle whose shares trade on an exchange throughout the trading day; market price may differ from net asset value.

What is a money market mutual fund?

A mutual fund that invests in short-term debt and seeks liquidity and stability; unlike a bank deposit, it is not FDIC-insured.

What is a target-date fund?

A fund that adjusts its asset allocation over time according to a target retirement or other date, usually becoming more conservative as the date approaches.

What is a fund of funds?

An investment fund that primarily invests in other investment funds rather than directly holding all underlying securities.

What is an index fund?

A fund designed to track the performance of a specified market index before fees and tracking differences.

What is a REIT?

A real estate investment trust that owns, operates, or finances income-producing real estate or related assets and meets applicable tax requirements.

What is a publicly traded REIT?

A REIT whose shares trade on a public securities exchange.

What is a non-traded REIT?

A REIT that does not trade on a public exchange; it may have limited liquidity and redemption restrictions.

What is a direct real estate investment?

Direct ownership of real property rather than ownership through a fund or security.

What is a limited partnership investment?

An investment in a partnership where general partners typically manage the business and limited partners generally have limited liability, subject to law.

What is a hedge fund?

A private pooled investment vehicle that may use leverage, short selling, derivatives, and other strategies, with risks and liquidity governed by its terms.

What is a private equity fund?

A private investment fund that invests in private companies or takes public companies private, typically with a longer investment horizon and limited liquidity.

What is a venture capital fund?

A fund that invests in early-stage or emerging businesses with high growth potential and significant risk.

What is a commodity?

A basic good such as oil, gold, natural gas, or wheat that can be traded physically or through financial contracts.

What is a commodity pool?

An investment vehicle that combines investor funds to trade commodity interests, such as futures and options on futures.

What is a real asset?

A tangible or asset-linked investment such as real estate, infrastructure, or commodities, often used to diversify exposures.

What is a derivative?

A financial contract whose value depends on an underlying asset, index, rate, or other reference measure.

What is a call option?

An option giving its buyer the right, but not the obligation, to buy the underlying asset at the strike price under the contract's terms.

What is a put option?

An option giving its buyer the right, but not the obligation, to sell the underlying asset at the strike price under the contract's terms.

What is a futures contract?

A standardized exchange-traded contract to buy or sell an underlying asset at a specified future date or under specified settlement terms.

What is a forward contract?

A privately negotiated agreement to buy or sell an asset at a specified price on a future date.

What is a swap?

A contract in which parties exchange cash flows according to agreed terms, often to manage interest-rate, currency, or other risks.

What is a warrant?

A security giving its holder the right to purchase shares of the issuer at a specified price under stated terms.

What is an exchange-traded note (ETN)?

An unsecured debt obligation linked to an index or benchmark; it carries issuer credit risk and is not the same as an ETF.

What is a structured product?

A financial instrument whose payoff is linked to an underlying asset, index, rate, or formula and depends on its contractual terms and issuer creditworthiness.

What is a fixed annuity?

An insurance contract providing interest or benefits under stated contractual terms, subject to the insurer's claims-paying ability.

What is a variable annuity?

An insurance contract whose investment value and benefits vary with the performance of selected investment subaccounts.

What is an equity-indexed annuity?

An insurance contract whose interest crediting is linked partly to an equity index, subject to contractual participation rates, caps, floors, and other terms.

What is a fixed-income investment?

An investment that generally provides contractual interest or other scheduled cash flows, such as bonds and certain debt securities; payments and principal are not always guaranteed.

What is a coupon rate?

The stated annual interest rate applied to a bond's face value to determine its scheduled coupon payments.

What is current yield?

Annual coupon interest divided by the bond's current market price.

What is yield to maturity (YTM)?

The annualized return implied by a bond's current price, coupon payments, face value, and time to maturity, assuming stated conventions and reinvestment assumptions.

What is yield to call (YTC)?

The yield calculated assuming a callable bond is redeemed on a specified call date at its call price.

What is the relationship between bond prices and market interest rates?

Existing fixed-rate bond prices generally fall when market interest rates rise and rise when rates fall, all else equal.

What is interest-rate risk?

The risk that changes in market interest rates will reduce an investment's value or affect its income.

What is credit risk?

The risk that an issuer or borrower will fail to make required payments.

What is reinvestment risk?

The risk that investment cash flows will have to be reinvested at lower rates than expected.

What is liquidity risk?

The risk that an investment cannot be sold promptly at a reasonable price.

What is inflation risk?

The risk that inflation will reduce the purchasing power of investment returns or future cash flows.

What is call risk for a bondholder?

The risk that an issuer redeems a callable bond early, potentially forcing reinvestment at lower rates.

What is duration?

A measure of a bond's sensitivity to interest-rate changes; modified duration approximates the percentage price change for a small change in yield.

What is the difference between a CD and a money market mutual fund?

A CD is a bank deposit that may be FDIC-insured within applicable limits; a money market mutual fund is a security and is not FDIC-insured.

What is the difference between a Treasury bill and a Treasury note?

A Treasury bill is short-term and generally sold at a discount without periodic coupon payments; a Treasury note has a longer maturity and pays periodic interest.

What is the difference between a Treasury bond and a corporate bond?

A Treasury bond is issued by the U.S. government; a corporate bond is issued by a company and generally carries company-specific credit risk.

What is the difference between a GO bond and a revenue bond?

A GO bond relies on the issuer's taxing power and general credit; a revenue bond relies primarily on specified project or system revenues.

What is the difference between an MBS and an ABS?

An MBS is backed by mortgage loans; an ABS is backed by other pooled assets such as auto loans or credit-card receivables.

What is the difference between a mutual fund and an ETF?

Mutual fund transactions generally occur at the next calculated NAV; ETF shares trade on an exchange throughout the day at market prices.

What is the difference between a UIT and a closed-end fund?

A UIT generally holds a relatively fixed portfolio under a trust agreement and has a termination date; a closed-end fund generally has exchange-traded shares and an ongoing management structure.

What is the difference between a stock and a bond?

Stock represents an ownership interest; a bond represents a debt obligation with contractual payment terms.

What is the difference between preferred stock and common stock?

Preferred stock generally has dividend and liquidation priority over common stock; common stock generally has voting rights and a residual claim.

What is the difference between a secured bond and a debenture?

A secured bond is backed by specified collateral; a debenture is unsecured and relies on the issuer's general credit.

What is the difference between a forward and a futures contract?

A forward is privately negotiated and customizable; a futures contract is standardized and exchange-traded.

What is the difference between a broker and a dealer?

A broker acts as agent for others; a dealer trades for its own account as principal.

What is the difference between a market order and a limit order?

A market order prioritizes prompt execution but does not guarantee price; a limit order specifies a price boundary but does not guarantee execution.

What is the difference between systematic and unsystematic risk?

Systematic risk affects broad markets and cannot be eliminated by diversification; unsystematic risk is specific to an issuer or investment and can be reduced through diversification.

What are the four official Series 65 subject areas?

Economic Factors and Business Information; Investment Vehicle Characteristics; Client Investment Recommendations and Strategies; Laws, Regulations and Guidelines Including Prohibition on Unethical Business Practices.

What is a business cycle?

Recurring fluctuations in economic activity, commonly described as expansion, peak, contraction, and trough.

What typically characterizes an economic expansion?

Rising economic output, employment, consumer spending, and business activity.

What typically characterizes a recession?

A significant decline in economic activity, often accompanied by falling output, employment, and spending.

What is monetary policy?

Federal Reserve actions affecting money supply, credit conditions, and interest rates to influence the economy.

What is fiscal policy?

Government decisions involving taxation and spending to influence economic activity.

What is expansionary monetary policy?

Policy intended to stimulate economic activity, typically through lower interest rates or easier credit conditions.

What is contractionary monetary policy?

Policy intended to restrain economic activity and inflation, typically through higher interest rates or tighter credit.

What is expansionary fiscal policy?

Increasing government spending or reducing taxes to stimulate aggregate demand.

What is contractionary fiscal policy?

Reducing government spending or increasing taxes to restrain aggregate demand.

What is inflation?

A sustained increase in the general price level that reduces purchasing power.

What is deflation?

A sustained decrease in the general price level.

How does unexpected inflation affect fixed-rate bondholders?

It reduces the purchasing power of fixed interest and principal payments.