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Investment Basics


Asset Allocation the distribution of assets across different asset classes to create a portfolio with the desired risk and return characteristics
Asset Class a group of securities that exhibit similar characteristics and behave similarly in different market conditions Cash, Bonds, Stocks
Capital Gains Yield the change in price during a period divided by the beginning price
Coupon Rate the interest rate paid to bondholders for ‘lending’ their money to the bond issuer
Credit Quality a rating of a bond issuer’s ability to repay interest and principal
Current Yield the current rate of return on an investment calculated by dividing its expected income payments by its current market price
Dollar Return the gain or loss, in dollars, on an investment owned over a period of time
Discount the amount by which the market price of a bond is below the principal amount due at maturity
Income Yield income received for holding the investment expressed as a percentage of the beginning price
Liquidity an asset that can be sold quickly without a significant price concession
Issuer a legal entity that sells securities for the purpose of financing its operations
Maturity the length of time until the principal amount of a bond must be repaid
Nominal Yield the interest rate to be paid by the issuer on the face value of the bond
Par the face value of a bond (i.e. the dollar amount assigned to the bond when its first issued)
Premium the amount by which the market price of a bond is above the principal amount due at maturity
Principal original amount borrowed on a bond
Rate of Return aka Total Return (%) the return on an investment measured as a percentage of the originally invested sum that accounts for all cash flows and capital gains or losses; allows for comparison among different types of investments
“Risk-Free” Rate the rate of return earned on short-term debt issued by the United States Government (Treasury Bills)
Risk Premium the differential over the risk free rate of return paid to compensate investors for risk exposure
Time Value of Money growth of an investment at the “risk-free” rate; compensation for ‘waiting’
Total Market Capitalization (“Market Cap”) stock price multiplied by the number of outstanding shares of a stock, or the total value of the company’s stock
Volatility the amount and frequency of fluctuations in the price of a security , commodity, or a market index within a specified time period
Yield to Maturity (YTM) the rate of return on a bond if it is held until maturity
Created by: gregt864