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- AIMR
- The Association for
Investment Management and Research, a world-wide, though North
American dominated, organization of financial analysts.
- after-tax
- The amount left to
the investor after payment of taxes: if a dividend payment
is $1.00 and the investor's marginal
tax rate for dividends is 32.9%, the after-tax value
of the dividend is $0.671.
- CFA
Charter
- CFA Charters are
issued by AIMR.
CFA stands for "Chartered Financial Analyst". The charter
is awarded after the successful completion of three annual examinations
(which are prepared for through home study) and relevent experience
in the financial industry. The CFA Charter is usually regarded
as being roughly equivalent to an MBA with a specialization in
finance.
- cash
and equivalents
- Cash held in a demand
account at a financial institution, or currency, or a financial
instrument issued by a financially strong institution with a very
short term and great liquidity in the market-place, so that it
may readily be turned into an amount of cash known with great
precision. An example would be Government of Canada Treasury bills
with a term-to-maturity
of three months or less.
- cost yield
- The complete set of options available to the issuer and the investor is considered and a value assigned to each option. These option values are incorporated into an over-all yield evaluation. Very similar to curve yield but with a different method of calculation of the value of each option.
- credit rating
- A measure of the issuer's ability to meet the terms of the investment by paying interest or dividends in the agreed manner, as well a repaying the principal of the investment at maturity. These ratings are issued by credit rating agencies (for a fee paid by the issuer) and are explicitly not investment recommendations in the buy/sell/hold sense. Most institutional fixed-income investors will not hold issues without a credit rating.
- current yield
- This is the yield reported in newspaper listings. It is simply the annual dividends payable divided by the current price of the security.
- curve yield
- Very similar to cost yield but with a different method of calculation of the value of each option.
- discount
- The amount by which
the price under consideration (market price, redemption price,
etc.) is under the issue price. An instrument issued at $25 and
trading at $24 has a discount of $1. The opposite of "discount"
is premium.
- FCSI
- Fellow of the Canadian
Securities Institute.
- fill
- The completion of
an order. An investor who put in an order to buy 200 shares and
actually bought 200 shares has been filled; if he actually bought
only 100 shares, he has been partially filled; if no shares were
purchased he has not been filled.
- friction
- Friction is used
to denote the costs of a performing a trade. These costs include
dealers commissions, settlement fees and capital gains taxes.
Of these, the first two will always work against a decision to
trade, as they always work against the investor. Capital gains
taxes may work in the investor's favour if the instrument to be
sold is trading at a loss and the investor currently has a taxable
capital gain - in this case, the fact that performing the trade
will reduce the amount of tax already payable will work in favour
of a decision to trade.
For example, consider
the case of an investor who owns 1000 shares of TRP.PR.X, bought
at $45 and currently trading at $44. These shares are virtually
identical to TRP.PR.Y. The investor has (through other investments)
a taxable capital gain of $1000, on which tax will be paid at
a rate of 32.9%, or $329. If the investor sells TRP.PR.X to
buy TRP.PR.Y at the same price, then his portfolio will, in
terms of expected future returns, be almost unchanged by the
trade, but the fact that a $1000 capital loss was realized will
eliminate his current capital gain and reduce his tax by $329.
There is no free
lunch: when the TRP.PR.Y are sold later on, the capital
gain will be greater by the same $1000 and taxes will be correspondingly
greater. Transaction costs also must be considered. However,
the fact that these taxes will be payable further into the future
than would otherwise be the case (in many ways equivalent to
an interest-free loan from the tax-man) increases the attractiveness
of the trade.
This particular
example is an example of tax-loss
selling.
- hard
retraction
- The ability of the
investor to demand cash from the issuing company in exchange for
his shares. The amount of cash, notice
period and time at which this right may be excercised
being specified in the prospectus
at time of issue.
- hit
- To sell shares at
the indicated bid price.
- inefficient
- A market is inefficient
if information regarding the value of a particular investment
is not communicated rapidly to its market price. If, for example,
a listed company existed which had as its sole business the holding
of particular common shares, we would expect changes in the prices
of those shares to be instantaneously reflected in the price of
the holding company's shares. The market is "inefficient"
to the extent that this effect is delayed, or not reflected at
all.
Another example
would be two series of bonds issued by the same company, which
had identical terms, issue sizes and distribution of holders.
The market would be inefficient to the extent that the prices
of these bonds on the market was not identical.
- issue
price
- The price at which
the instrument was issued, that is, sold to investors directly
by the company. This is the primary
market for the shares; subsequent trading between investors
is referred to as the secondary
market. The issue price is normally equal to the par
value of the shares; the few exceptions to this rule
are usually deferred
preferred shares.
- lift
- To buy shares at
the indicated offering price. cf. hit.
- limit
order
- An order to execute
a trade only at a certain price or better. This may result in
obtaining only a partial fill
or perhaps not executing the trade at all.
cf. market
order.
- liquidity
- The ability to trade
in an investment without affecting the market price. It may be
possible, for instance, to buy 100 shares of Royal Bank at $50
instantly, but a large investor seeking to buy 100,000 shares
immediately might have to pay $51 in order to have his order filled.
If the larger investor had put in a limit
order for 100,000 shares at $50, he might end the day
with a fill
of fewer shares, if any, than he wanted to buy.
- market
order
- An order to execute
a trade at whatever price is available in the market. This can
often have fearsome consequences. If 100 shares of Royal Bank
are offered at $50 and the only other offer on the exchanges books
is for 100 shares at $60, it is entirely possible that a market
order to buy 200 shares will lift
both offers, resulting in an average cost of $55 per share. The
investor has been filled,
but perhaps at a cost much greater than he intended or expected.
cf. limit
order.
- maturity
- The date on which
the issuer is compelled to return the invested funds to the investor.
- marginal
tax rate
- The tax rate payable
on income beyond a certain base: if an investor has a base
income of $100,000 p.a., on which taxes of $35,000 are payable,
but additional income is taxed at 50%, then the marginal tax rate
is 50%.
- notice
period
- The period which
elapses between one party (either the investor or the issuer)
irrevocably declaring that a particular right will be exercised
and the effects of that exercise occuring. For example, issuers
are usually required to provide thirty days notice of redemptions.
- par Value
- The face value of the shares. This is usually equal to the issue price, and reflected as a liability on the books of the issuer.
- portfolio yield
- In this approach, each scenario of events is considered and a probability assigned to the occurrence of each. The yield calculation considers the results of each scenario weighted by its probability.
- preferred
share
- Preferred shares
are issued by corporations to raise funds for their activities.
Very similar to bonds, the terms of investment are set in advance;
dividends are usually paid quarterly. With a few exceptions, dividend
payments are either fixed or floating rate (some, known as fixed-floaters,
will pay a fixed rate for an initial term, after which the rate
floats). A floating-rate preferred will usually pay dividends
at some fixed percentage of the banking prime rate, although some
will have the percentage itself adjusted in a pre-determined manner
in an effort to maintain the market price at or near the issue
price.
Preferred shares
benefit from a favourable tax treatment on dividends from Canadian
companies; for an investor in Ontario's top marginal tax bracket,
dividends are taxed at an effective rate of 32.9%, as opposed
to a rate of 48.8% on interest income and dividends on preferred
securities (rates as of September, 2001).
Preferred shares
can be subject to a bewildering array of features: redemptions,
retractions and exchanges are the most common modifiers.
- premium
- The amount by which
the price under consideration (market price, redemption price,
etc.) exceeds the issue price. An instrument issued at $25 and
redeemable
at $26 has a redemption premium of $1. The opposite of "premium"
is discount.
- primary
market
- This refers to the
initial sale of investments by the company, with proceeds (less
dealer fees and expenses) received by the issuing company, in
contrast to the secondary
market.
- quantitative
investing
- Quantitative investing
examines potential investments through the application of generalized
rules to arrive at an unequivocal indication of whether or not
a particular trade is attractive. This is usually done nowadays
through use of computers to examine how well these rules have
worked in the past.
The rule of thumb
which states bank stocks should be bought when their dividend
yield exceeds 60% of the yield of a 10-year bond is an example
(albeit a simple one) of quantitative investing.
One might expect
this phrase to be contrasted with qualitative investing, but
this term is not used. The phrase "Quantitative investing"
is usually used to indicate a high degree of reliance on complex
rules with the assistance of computers.
- redeem
- An issue is redeemed
when the issuer returns the invested cash to the investor, sometimes
with a premium.
If the date of this action was known and fixed at the time of
issue, this date may be known as the maturity
date. If there are varying dates (and usually varying premia)
on which the issuer may, at its option, redeem the issue, the
issue is referred to as redeemable.
If there is a date on which the investor may demand redemption,
at the investor's option, the issue is referred to a retractible.
- redeemable
- An issue is redeemable
(referred to as callable
in the bond markets) if the issuer has the right to return the
issue price of the instrument on certain dates, sometimes with
a premium
payable as well. These dates and premia are specified at the time
of issue of the instrument. There may be multiple dates or periods
allowed for potential redemption, usually with premia that decline
to $0 (that is, ONLY the initial investment is returned).
- retractible
- An issue is retractible
if the investor has the right on a given date (or in a given period)
to demand the redemption for his shares. If this redemption will
be for cash, the retraction is hard;
if for common shares of the issuing company, the retraction is
soft.
Soft retractions are usually equivalent to investing the issue
price of the shares in the common at a 5% discount
to the common's market value.
- secondary
market
- This refers to dealings
between investors, with the issuing company not being involved,
on contrast to the primary
market.
- segmentation
- This refers to the preference for certain investors for certain attributes of their investments. For example, a pension fund may prefer (or allocate a fixed percentage of its portfolio to) long term bonds, while other entities may prefer other investments according to their business needs. Segmentation is usually used to refer to maturity preferences, but can refer to others, such as credit ratings or industry groups.
- soft
retraction
- A retraction
in which the issuer issues common shares in exchange for the redeemed
instrument, instead of exchanging it for cash (hard
retraction).
- tax-loss
selling
- The sale of instrument
motivated largely by a desire to realize a capital loss for tax
purposes. This can be a valuable tool to defer taxes, provided
equivalent investments are available. See friction
for an example.
- term-to-maturity
- The time until the
instrument becomes due. An instrument due to be redeemed
on October 1, 20xx, has a term-to-maturity of one month on September
1, 20xx
- yield
- A measure of the expected income from an investment relative to its cost. Hymas Investment Management Inc. uses no less than five different calculation methodologies in the course of preferred share valuation analysis:
- yield-to-worst
- This is the most conservative method for evaluating yield. It considers all the options available to the company (as modified by options available to the investor, which may be pre-emptive) and performs a yield calculation based on the scenario which is worst for the investor.
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