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Faizan
Some Basic Financial Terms and Definitions
Credit Risk
Credit risk is the risk of default of a security. The higher the risk, the higher the yield of the security has to be to be attractive to investors.
Liquidity
Liquidity is measured according to how easily a security can be converted into cash.
Tax Status
The tax status of an investor matters when investing in securities. The higher the tax bracket of the investor, the more taxes need to be paid on the gains/yield of a security.
Term to Maturity
The term to maturity is a specified term of time (days, months, years) that a security needs to exist to mature.
Call Feature
The call feature is an option that allows the issuer of a bond to buy bonds before the maturity date back, at a specified price.
Conversion Feature
The convertibility clause allows investors to convert bonds into shares of common stock. This is beneficial if the market price of a bond decreases, because an investor will have an additional option of converting the bonds into a specified number of shares of common stock, rather than selling the bonds in the market.
Common Instruments of a Money Market Fund
Treasury Bills
Treasury bills are highly liquid, short-term securities issued by the government to borrow funds from investors. Treasury bills are typically sold through auctioning on a weekly basis; however treasury bills with a one year maturity term are issued monthly. The lowest amount of a treasury bill (par value) is $1000 and thereafter in multiples of $1000 and is sold at a discount rate of the par value whereas at the maturity of the treasury bill, the investor receives the par value and therefore has a profit between the par value and the discount price he/she purchased the treasury bill at. A benefit of treasury bills is that they are free of credit default risk, because they are backed by the government.
Credit Risk
Credit risk is the risk of default of a security. The higher the risk, the higher the yield of the security has to be to be attractive to investors.
Liquidity
Liquidity is measured according to how easily a security can be converted into cash.
Tax Status
The tax status of an investor matters when investing in securities. The higher the tax bracket of the investor, the more taxes need to be paid on the gains/yield of a security.
Term to Maturity
The term to maturity is a specified term of time (days, months, years) that a security needs to exist to mature.
Call Feature
The call feature is an option that allows the issuer of a bond to buy bonds before the maturity date back, at a specified price.
Conversion Feature
The convertibility clause allows investors to convert bonds into shares of common stock. This is beneficial if the market price of a bond decreases, because an investor will have an additional option of converting the bonds into a specified number of shares of common stock, rather than selling the bonds in the market.
Common Instruments of a Money Market Fund
Treasury Bills
Treasury bills are highly liquid, short-term securities issued by the government to borrow funds from investors. Treasury bills are typically sold through auctioning on a weekly basis; however treasury bills with a one year maturity term are issued monthly. The lowest amount of a treasury bill (par value) is $1000 and thereafter in multiples of $1000 and is sold at a discount rate of the par value whereas at the maturity of the treasury bill, the investor receives the par value and therefore has a profit between the par value and the discount price he/she purchased the treasury bill at. A benefit of treasury bills is that they are free of credit default risk, because they are backed by the government.
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