AccFP 103

The ability to sell or redeem an investment quickly and at a known price, without a significant loss of principal.

The ability to sell an investment quickly in a readily identifiable market. (There is no consideration of whether there is a corresponding loss of principal at the time of sale.)

Deposits of $100,000 or more placed with commercial banks at a specified interest rate for a term of 14 days to 12 months. Because of their large denominations, negotiable CDs are bought most often by institutional investors, including money market mutual funds.

Short-term drafts drawn by a private company on a major bank used to finance imports and exports. They are typically traded at a discount from their face value in the secondary market.

Sometimes known as time deposits. Deposits made with a bank or savings and loan for a specified period, commonly one month to five years.

A short-term government security with a maturity not exceeding 52 weeks. Thus, it is clearly used as a cash equivalent.

A negotiable, short-term, unsecured promissory note used by large a corporation to finance accounts receivable and seasonal inventory gluts. This type of debt is usually issued in denomiations of $100,000 or more and is a substitute for the corporation undertaking short-term bank financing. Money market mutual funds are the primary purchasers of commercial paper.

Dealers in government securities use these. Also known as repos. To satisfy short-term liquidity needs, dealers will sell some of those securities to another dealer with an agreement to buy them back at a later date at an agreed upon price.

US dollar-denominated deposits at banks outside the United States. The average deposit is very large (in the millions) and have a maturity of mess than six months.

A mutual fund that invests in money market instruments, such as Treasury bills and negotiable CDs.

Established with a commercial bank or savings and loan and is a redeemable investment. The account usually has no minimum balances and features a penalty-free withdrawal of funds at any time. However, the account does not typically include a check writing priviledge and pays a relatively low interest rate. With the advent of interest bearing checking accounts, passbook savings accounts have drastically declined in popularity.

Also known as savings bonds. Cash equivalents. Paper bonds purchased at 50% of their face amount and range in face value from $50 to $10,000, therefore they may be purchased for as little as $25. Savings bonds continue to accrue interest after the stated maturity date until the Treasury announces discontinuance of the payments, generally after 30 years. The investor may defer payments of any federal income tax until he/she redeems the EE bond or may choose in accrue and pay the interest annually on his/her IRS form 1040. The interest earned on the bond is exempt from state and local income tax and there are special tax benefits available for bonds used in payment of higher educaiton expenses for the taxpayer, his or her spouse, or a dependent of the taxpayer. Fixed rate on issues after 2005.

No longer offered. No tax deferral election and must report the interest annually on his of her tax return.

3 purposes in the financial and investment planning process.

• 1. To articulate and confirm the investor's policy objectives and tolerance for risk.
• 2. To define how the portfolio will be monitored and how progress toward the stated investment objectives will be measured
• 3. To define the investor's target asset allocation, which studies have confirmed to be the single most important component in whether the client actually meets his or her investment planning goals.

A money market preferred stock instrument in which the dividend is reset every seven weeks through a Dutch auction process. In a Dutch auction, the bid price is gradually lowered until a ready buyer emerges. Treasury bills are often sold through Dutch auctions.

DARTS

Debt security obligating the issuer (i.e. federal governement, a municipality, or a corporation) to make periodic interest (coupon) payments (usually semi-annually) and to repay the principal at the time of maturity. Generally, a bond can be issued in either registered or bearer form. If the bond is issued in registered form, payments will be made to the owner of record. If the bond is issued in beaer form, payments will be made to whoever holds or posseses the bond.

The formal agreement, or contract, between the bond issuer and the trustee. Sometime the indenture will include a sinking fund, which is a separate fund established and funded each year by the bond issuer designed to accumulate an amount required to pay off the debt at maturity.

Face value of the bond, or the amount of principal that the bond owner or holder will receive at the time of maturity.

Assumed to be $1000 for exam purposes

The stated annual interest rate that will be paid each period for the term of the bond and is stated as a percentage of the par value of the bond. For example, a $1000 par value bond with a coupon rate of 8% will return an interest payment of $80 annually or $04 semiannually. Understand that the coupon rate of the bond never changes although the current yield of the bond will fluctuate on the basis of the direction and amount of change in market interest rates.

The average annualized rate of return (IRR) that an investor will earn if the bond is held to its maturity. This return takes into account both the market price of the bond and any capital gains (or losses) on the bond if it is held to maturity.