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Accreted Dividend - The amount of dividend included in the market price of a security - amount of unpaid dividend calculated since the last ex-dividend date. These securities are said to "trade flat", because the amount of the dividend is included in the market price. Securities that do not accrete dividend are said to trade "with accrued", where the amount of the dividend (or interest) is added separately to the net amount of a trade.
Adjustable Rate Preferred Security - A preferred security in which the dividend rate floats in relation to a benchmark. The dividend rate is generally set at the beginning of the period and reset at the beginning of the next period according to the terms set at the time of issuance. A quarterly pay preferred security generally resets the dividend rate at the beginning of the three-month period and generally at a spread based on the US treasury market or 3 month LIBOR.
Call Date - A date, prior to the maturity date, in which the issuer of the security is entitled to redeem the entire principal of the issue at a price and date set at the time of issuance. The redemption price is generally par.
Closed-End Fund (Public) - A registered fund that has a specific number of issued shares. Price movement is determined by supply and demand and the fund trades on an exchange or exchanges, similar to stocks. The shares are not redeemable but rather are bought and sold on stock exchanges or over-the-counter markets. The price per share may not equal the net asset value of a share. The difference between market price and the NAV is the premium or discount.
Convexity - The second approximation of a security's price change with respect to its yield. The convexity measure of a security can be used to approximate the change in price that is not explained by duration. Duration is the first approximation.
Cumulative Dividends - Usually applied to a preferred stock designated as cumulative preferred. Dividends must be declared and paid for current and previous years on such shares before common shares in the same company may receive dividends. (See also: Non-Cumulative Dividends)
Current Yield - The yield based on the annual dividend rate and current market price (Annual Dividend / Market Price). This yield is only accurate if the security is held in perpetuity. If the security is callable or has a stated maturity, the effective yield received by the investor may be very different from the current yield. (See also: Stripped Current Yield)
CUSIP Number - A security identifier. The Committee on Uniform Securities Identification Procedures number assigned by the CUSIP Service Bureau for U.S. and Canadian companies. It consists of nine alpha-numeric characters. The first six characters identify the issuer, the following two identify the issue, and the final character is a check digit.
Discount - The amount at which something is valued below its par or nominal value, as money or securities.
Dividend - The payment made to the shareholder of record from the profits of the issuing corporation. Traditional preferred stocks generally have a fixed dividend and are entitled to dividend payment before any distributions are made to common shareholders.
Dividend Received Deduction (DRD) - DRD is a tax credit for institutional holders on received dividends. DRD allows U.S. corporations to exclude taxes on 70% of dividends received from the preferred stocks of other corporations. DRD does not apply for individuals. Interest received is not eligible for the DRD, only dividends.
Duration (Modified Duration) - Duration is a measure of the approximate sensitivity of a bond's value to rate changes. It is the approximate percentage change in the price of a bond or bond portfolio for a 100 basis point (1%) change in rates. Duration is the first approximation of the percentage price change. Convexity is the second approximation.
Dutch Auction - A system in which the lowest price necessary to sell an entire offering becomes the price at which it is sold. Often used in Treasury auctions, and certain preferred stock auctions.
Ex-Dividend Date - The date on or after which the purchaser of the security is not entitled to the upcoming dividend or interest payment.
Hybrid preferreds are generally issued by a special purpose subsidiary formed exclusively to sell the securities and lend the proceeds to the parent company. They are generally not eligible for the dividends-recieved deduction (DRD).
Hybrid preferreds are referred to by several different names, such as:
Investment Grade - Description of securities that are rated Baa3 or above by Moody's or BBB- or above by Standard & Poor's or Fitch Investors Service.
Leverage - The act of taking on more risk in the form of debt or other borrowing to enhance the investing capacity and to magnify returns on a security or fund. Generally in the form of issuing debt or preferred stock. The additional proceeds from the issuance of debt are used to increase the investing capacity of the borrower. The returns are magnified whether good or bad.
London Interbank Offered Rate (LIBOR) - In England's Eurodollar market, the interest rate banks charge each other on short-term money. LIBOR is often used in the U.S. markets as a reference rate for valuing certain securities, derivatives, and setting coupons on certain floating-rate securities.
Maturity Date - The date on which the principal amount of an outstanding obligation becomes due and payable
Money Market Preferred Shares (MMPô) - An equity security with a dividend paid every 49 days, at which time the rate is reset to reflect the current market rate (through a Dutch Auction process). May be eligible for the DRD (See also: Dividend Received Deduction)
Non-Cumulative Dividends - In the event a corporation does not declare a dividend, the corporation is not obligated to ever pay the missed dividend. (See also: Cumulative)
Par Value - The stated amount of a security (face value). If a security is sold above the stated amount, it would be selling at a premium; if it sold below that amount, it would be selling at a discount. The par value for a stock share would be the stock certificate's face value.
Preference Stock - Stock that has priority over common stock issues (but not preferred stock) when dividends are paid, and when proceeds are distributed following liquidation.
Preferred Stock - Stock shares that represent a portion of ownership in a company, having priority over a corporation's common stock in the distributions of dividends and proceeds following liquidation. The shares may have voting rights, but only in limited situations.
Premium - The amount at which something is valued above its par or nominal value, as money or securities.
Qualified Dividend Income (QDI) - Income that is categorized as QDI is taxed at a 15% rate (or lower) rather than as ordinary income. The classification of QDI arose from the Jobs and Growth Tax Relief Reconciliation Act of 2003. Interest received is not eligible as QDI, only dividends, and only if certain conditions are met. Click here to read more about the 2003 Tax Act
Record Date - The date on which a holder of the security must be registered with the issuer in order to receive a coupon or dividend payment on the next payment date.
Sinking Fund - A fund accumulated to periodically redeem (purchase) a portion of an outstanding issue prior to maturity. Sinking funds typically have a pre-arranged schedule for making purchases, but the issuer can often choose to double the scheduled amount to be purchased.
Stripped Current Yield - The current yield on a security based on an adjusted market price after subtracting (stripping) the accreted dividend from the price (Annual Dividend / Stripped Price). Certain securities include any accreted dividend since the last dividend date in the market price. This amount is subtracted out to determine the adjusted price, and then the stripped current yield.
Yield to Call - The percentage rate of a bond or security if you were to buy and hold the security until the call date. This yield is valid only if the security is called prior to maturity. The calculation of yield to call is based on the coupon rate, length of time to the call, and market price.
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