Definition of FICA
FICA
The acronym for the Federal Insurance Contributions Act, also used to describe
the combined amount of Social Security and Medicare deductions from
an employee’s pay.
Related Terms:
Also called a time deposit, this is a certificate issued by a bank or thrift that
indicates a specified sum of money has been deposited. A CD bears a maturity date and a specified interest
rate, and can be issued in any denomination. The duration can be up to five years.
Dividing investment funds among a variety of securities with different risk, reward, and
correlation statistics so as to minimize unsystematic risk.
The organizing principle of modern portfolio theory, which maintains that any riskaverse
investor will search for the highest expected return for any level of portfolio risk.
Certificates issued by a trust that was formed to purchase an asset and lease it
to a lessee. When the last of the certificates has been repaid, title of ownership of the asset reverts to the
lessee.
First issued by Freddie Mac in 1975, GMCs, like PCs, represent
undivided interest in specified conventional whole loans and participations previously purchased by Freddie Mac.
The attempt to reduce risk by investing in the more than one nation. By
diversifying across nations whose economic cycles are not perfectly correlated, investors can typically reduce
the variability of their returns.
Investing in a variety of maturities to reduce the price risk to which holding long
bonds exposes the investor.
The effective reduction of risk (variance) of a portfolio, achieved without reduction
to expected returns through the combination of assets with low or negative correlations (covariances).
Related: Markowitz diversification
A strategy that seeks to combine assets a portfolio with returns that are less than
perfectly positively correlated, in an effort to lower portfolio risk (variance) without sacrificing return.
Related: naive diversification
A strategy whereby an investor simply invests in a number of different assets and
hopes that the variance of the expected return on the portfolio is lowered.
Related: Markowitz diversification.
A large-denomination CD, generally $1MM or more, that can be sold but
cannot be cashed in before maturity.
The day the option is either exercised or expires.
Highly diversified portfolios will have negligible unsystematic risk. In other
words, unsystematic risks disappear in portfolios, and only systematic risks survive.
A primary program of Ginnie Mae for securitizing FHA-insured and coinsured
multifamily, hospital, and nursing home loans.
Ownership interests in specified mortgages purchased
by Freddie Mac from a single seller in exchange for strip PCs representing interests in the same mortgages.
Stripped bond Bond that can be subdivided into a series of zero-coupon bonds.
Specific identification
A method of accounting for inventory.
Diversification
The process of spreading a portfolio over many investments to
avoid excessive exposure to any one source of risk
Portfolio Diversification
See diversification
functional classification
a separation of costs into groups based on the similar reason for their incurrence; it includes
cost of goods sold and detailed selling and administrative
expenses
Stock certificate
A document that identifies a stockholder’s ownership share in a corporation.
diversification
Strategy designed to reduce risk by spreading the portfolio across many investments.
Certificate of Deposit (CD)
A bank deposit that cannot be withdrawn for a specified period of time. See also term deposit.
Federal Employer Identification Number
A unique identification number issued
by the federal government used for payroll purposes to identify the company
when it deals with the Internal Revenue Service.
Federal Insurance Contributions Act of 1935 (FICA)
A federal Act authorizing the government to collect Social Security and Medicare payroll taxes.
Significant Influence
The extent of influence of an investor over the operating and financial
policies of an investee. Typically implied when an investor has a voting interest of between 20%
and 50% of an investee's voting shares. However, can be implied as a result of such factors as
board representation, participation in management, material intercompany transactions, and technological
dependency.
ABC inventory classification
A method for dividing inventory into classifications,
either by transaction volume or cost. Typically, category A includes that 20% of
inventory involving 60% of all costs or transactions, while category B includes
the next 20% of inventory involving 20% of all costs or transactions, and category
C includes the remaining 60% of inventory involving 20% of all costs or
transactions.
Nonsignificant part number
An identifying number assigned to a part that conveys
no other information.
Significant part number
An identifying number assigned to an item that conveys
additional embedded information.
Diversification
Investing so that all your eggs are not in the same basket. By spreading your investments over different kinds of investments, you cushion your portfolio against sudden swings in any one area. Segregated equity funds have become a popular and secure way for average investors to get the benefits of greater diversification.
diversification
An investment technique intended to minimize risk by utilizing a wide variety of investments within a portfolio. In a diversified portfolio, a decline in the value of one investment, for example, should be offset by the strength of other investments.
guaranteed investment certificate (GIC)
A GIC is an investment that gives you a guaranteed rate of return over a fixed period of time, usually between 30 days and 5 years. GICs are available from banks, trust companies, and other financial institutions.
PIN (personal identification number)
A secret code that you use to access your bank account at a bank machine or at a point of sale (POS) terminal. You may also have a PIN for banking by telephone.
Guaranteed Interest Certificate (GIC)
Interest bearing investment with fixed rate and term.
American Depositary Receipts (ADRs)
Certificates issued by a U.S. depositary bank, representing foreign
shares held by the bank, usually by a branch or correspondent in the country of issue. One ADR may
represent a portion of a foreign share, one share or a bundle of shares of a foreign corporation. If the ADR's
are "sponsored," the corporation provides financial information and other assistance to the bank and may
subsidize the administration of the ADRs. "Unsponsored" ADRs do not receive such assistance. ADRs carry
the same currency, political and economic risks as the underlying foreign share; the prices of the two, adjusted for the SDR/ordinary ratio, are kept essentially identical by arbitrage. American depositary shares(ADSs) are
a similar form of certification.
American shares
Securities certificates issued in the U.S. by a transfer agent acting on behalf of the foreign
issuer. The certificates represent claims to foreign equities.
Bearer bond
Bonds that are not registered on the books of the issuer. Such bonds are held in physical form by
the owner, who receives interest payments by physically detaching coupons from the bond certificate and
delivering them to the paying agent.
Bottom-up equity management style
A management style that de-emphasizes the significance of economic
and market cycles, focusing instead on the analysis of individual stocks.
Capital asset pricing model (CAPM)
An economic theory that describes the relationship between risk and
expected return, and serves as a model for the pricing of risky securities. The CAPM asserts that the only risk
that is priced by rational investors is systematic risk, because that risk cannot be eliminated by diversification.
The CAPM says that the expected return of a security or a portfolio is equal to the rate on a risk-free security
plus a risk premium.
CARDs
Certificates of Amortized Revolving Debt. Pass-through securities backed by credit card receivables.
CARs
Certificates of Automobile Receivables. Pass-through securities backed by automobile receivables.
Cash cow
A company that pays out all earnings per share to stockholders as dividends. Or, a company or
division of a company that generates a steady and significant amount of free cash flow.
Conditional sales contracts
Similar to equipment trust certificates except that the lender is either the
equipment manufacturer or a bank or finance company to whom the manufacturer has sold the conditional
sales contract.
Debenture bond
An unsecured bond whose holder has the claim of a general creditor on all assets of the
issuer not pledged specifically to secure other debt. Compare subordinated debenture bond, and collateral
trust bonds.
Debt leverage
The amplification of the return earned on equity when an investment or firm is financed
partially with borrowed money.
Economic union
An agreement between two or more countries that allows the free movement of capital,
labor, all goods and services, and involves the harmonization and unification of social, fiscal, and monetary
policies.
Expense ratio
The percentage of the assets that were spent to run a mutual fund (as of the last annual
statement). This includes expenses such as management and advisory fees, overhead costs and 12b-1
(distribution and advertising ) fees. The expense ratio does not include brokerage costs for trading the
portfolio, although these are reported as a percentage of assets to the SEC by the funds in a Statement of
Additional Information (SAI). the SAI is available to shareholders on request. Neither the expense ratio or the
SAI includes the transaction costs of spreads, normally incurred in unlisted securities and foreign stocks.
These two costs can add significantly to the reported expenses of a fund. The expense ratio is often termed an
Operating Expense Ratio (OER).
Expiration date
The last day (in the case of American-style) or the only day (in the case of European-style)
on which an option may be exercised. For stock options, this date is the Saturday immediately following the
3rd Friday of the expiration month; however, brokerage firms may set an earlier deadline for notification of
an option holder's intention to exercise. If Friday is a holiday, the last trading day will be the preceding
Thursday.
GNMA-I
Mortgage-backed securities (MBS) on which registered holders receive separate principal and
interest payments on each of their certificates, usually directly from the servicer of the MBS pool. GNMA-I
mortgage-backed securities are single-issuer pools.
GNMA-II
Mortgage-backed securities (MBS) on which registered holders receive an aggregate principal and
interest payment from a central paying agent on all of their certificates. Principal and interest payments are
disbursed on the 20th day of the month. GNMA-II MBS are backed by multiple-issuer pools or custom pools
(one issuer but different interest rates that may vary within one percentage point). Multiple-issuer pools are
known as "Jumbos." Jumbo pools are generally longer and offer certain mortgages that are more
geographically diverse than single-issuer pools. Jumbo pool mortgage interest rates may vary within one
percentage point.
GNMA Midget
A GNMA pass-through certificate backed by fixed rate mortgages with a 15 year maturity.
GNMA Midget is a dealer term and is not used by GNMA in the formal description of its programs.
Good delivery and settlement procedures
Refers to PSA Uniform Practices such as cutoff times on delivery
of securities and notification, allocation, and proper endorsement.
Hedging demands
Demands for securities to hedge particular sources of consumption risk, beyond the usual
mean-variance diversification motivation.
Last trading day
The final day under an exchange's rules during which trading may take place in a particular
futures or options contract. Contracts outstanding at the end of the last trading day must be settled by delivery
of underlying physical commodities or financial instruments, or by agreement for monetary settlement
depending upon futures contract specifications.
Lock-up CDs
CDs that are issued with the tacit understanding that the buyer will not trade the certificate.
Quite often, the issuing bank will insist that the certificate be safekept by it to ensure that the understanding is
honored by the buyer.
Market sectors
The classifications of bonds by issuer characteristics, such as state government, corporate, or utility.
Maximum price fluctuation
The maximum amount the contract price can change, up or down, during one
trading session, as fixed by exchange rules in the contract specification. Related: limit price.
Modern portfolio theory
Principles underlying the analysis and evaluation of rational portfolio choices
based on risk-return trade-offs and efficient diversification.
Mortgage duration
A modification of standard duration to account for the impact on duration of MBSs of
changes in prepayment speed resulting from changes in interest rates. Two factors are employed: one that
reflects the impact of changes in prepayment speed or price.
Mortgage pass-through security
Also called a passthrough, a security created when one or more mortgage
holders form a collection (pool) of mortgages sells shares or participation certificates in the pool. The cash
flow from the collateral pool is "passed through" to the security holder as monthly payments of principal,
interest, and prepayments. This is the predominant type of MBS traded in the secondary market.
Net asset value (NAV)
The value of a fund's investments. For a mutual fund, the net asset value per share
usually represents the fund's market price, subject to a possible sales or redemption charge. For a closed end
fund, the market price may vary significantly from the net asset value.
Nondiversifiable risk
Risk that cannot be eliminated by diversification.
Nonsystematic risk
Nonmarket or firm-specific risk factors that can be eliminated by diversification. Also
called unique risk or diversifiable risk. Systematic risk refers to risk factors common to the entire economy.
One-factor APT
A special case of the arbitrage pricing theory that is derived from the one-factor model by
using diversification and arbitrage. It shows the expected return on any risky asset is a linear function of a
single factor.
Outright rate
Actual forward rate expressed in dollars per currency unit, or vice versa.
Outsourcing
he practice of purchasing a significant percentage of intermediate components from outside suppliers.
Passive portfolio strategy
A strategy that involves minimal expectational input, and instead relies on
diversification to match the performance of some market index. A passive strategy assumes that the
marketplace will reflect all available information in the price paid for securities, and therefore, does not
attempt to find mispriced securities. Related: active portfolio strategy
Payout ratio
Generally, the proportion of earnings paid out to the common stockholders as cash dividends.
More specifically, the firm's cash dividend divided by the firm's earnings in the same reporting period.
Perfectly competitive financial markets
Markets in which no trader has the power to change the price of
goods or services. Perfect capital markets are characterized by the following conditions: 1) trading is costless,
and access to the financial markets is free, 2) information about borrowing and lending opportunities is freely
available, 3) there are many traders, and no single trader can have a significant impact on market prices.
Performance attribution analysis
The decomposition of a money manager's performance results to explain
the reasons why those results were achieved. This analysis seeks to answer the following questions: (1) What
were the major sources of added value? (2) Was short-term factor timing statistically significant? (3) Was
market timing statistically significant? And (4), Was security selection statistically significant?
Pivot
Price level established as being significant by market's failure to penetrate or as being significant when
a sudden increase in volume accompanies the move through the price level.
REMIC (real estate mortgage investment conduit)
A pass-through tax entity that can hold mortgages
secured by any type of real property and issue multiple classes of ownership interests to investors in the form
of pass-through certificates, bonds, or other legal forms. A financing vehicle created under the Tax Reform
Act of 1986.
Shares
Certificates or book entries representing ownership in a corporation or similar entity
SIC
Abbreviation for Standard Industrial Classification. Each 4-digit code represents a unique business activity.
Side effects Effects of a proposed project on other parts of the firm.
Size
Large in size, as in the size of an offering, the size of an order, or the size of a trade. Size is relative from
market to market and security to security. Context: "I can buy size at 102-22," means that a trader can buy a
significant amount at 102-22.
Split-fee option
An option on an option. The buyer generally executes the split fee with first an initial fee,
with a window period at the end of which upon payment of a second fee the original terms of the option may
be extended to a later predetermined final notification date.
Systematic risk
Also called undiversifiable risk or market risk, the minimum level of risk that can be
obtained for a portfolio by means of diversification across a large number of randomly chosen assets. Related:
unsystematic risk.
Time deposit
Interest-bearing deposit at a savings institution that has a specific maturity.
Related: certificate of deposit.
Type
The classification of an option contract as either a put or a call.
Unique risk
Also called unsystematic risk or idiosyncratic risk. Specific company risk that can be eliminated
through diversification. See: diversifiable risk and unsystematic risk.
Unit investment trust
Money invested in a portfolio whose composition is fixed for the life of the fund.
Shares in a unit trust are called redeemable trust certificates, and they are sold at a premium above net asset value.
Unsystematic risk
Also called the diversifiable risk or residual risk. The risk that is unique to a company
such as a strike, the outcome of unfavorable litigation, or a natural catastrophe that can be eliminated through diversification.
Related: Systematic risk
Variable rate CDs
Short-term certificate of deposits that pay interest periodically on roll dates. On each roll
date, the coupon on the CD is adjusted to reflect current market rates.
STOCK
Certificates that signify ownership in a corporation. A share of stock represents a claim on a portion of the company’s assets.
Activity-based costing
A method of costing that uses cost pools to accumulate the cost of significant business activities and then assigns the costs from the cost pools to products or services based on cost drivers.
Cost driver
The most significant cause of the cost of an activity, a measure of the demand for an activity
by each product/service enabling the cost of activities to be assigned from cost pools to products/services.
Job costing
A method of accounting that accumulates the costs of a product/service that is produced either
customized to meet a customer’s specification or in a batch of identical product/services.
statement of cash flows
One of the three primary financial statements
that a business includes in the periodic financial reports to its outside
shareowners and lenders. This financial statement summarizes the business’s
cash inflows and outflows for the period according to a threefold
classification: (1) cash flow from operating activities (cash flow from
profit), (2) cash flow from investing activities, and (3) cash flow from
financing activities. Frankly, the typical statement of cash flows is difficult
to read and decipher; it includes too many lines of information and
is fairly technical compared with the typical balance sheet and income
statement.
diluted earnings per share (EPS)
This measure of earnings per share
recognizes additional stock shares that may be issued in the future for
stock options and as may be required by other contracts a business has
entered into, such as convertible features in its debt securities and preferred
stock. Both basic earnings per share and, if applicable, diluted
earnings per share are reported by publicly owned business corporations.
Often the two EPS figures are not far apart, but in some cases the
gap is significant. Privately owned businesses do not have to report earnings
per share. See also basic earnings per share.
Asset-specific Risk
The amount of total risk that can be eliminated by diversification by
creating a portfolio. Also known as company-specific risk or
unsystematic risk.
Market Risk
The amount of total risk that cannot be eliminated by portfolio
diversification. The risk inherent in the general economy as a
whole. Also known as systemic risk.
Systematic Risk
The amount of total risk that cannot be eliminated by portfolio
diversification. The risk inherent in the general economy as a
whole. Also known as market risk.
Unsystematic Risk
The amount of total risk that can be eliminated by diversification by
creating a portfolio. Also known as asset-specific risk or
company-specific risk.
bill of materials
a document that contains information about
the product materials components and their specifications
(including quality and quantities needed)
coefficient of variation
a measure of risk used when the standard deviations for multiple projects are approximately
the same but the expected values are significantly different
cost table
a database providing information about the impact
on product costs of using different input resources,
manufacturing processes, and design specifications
decentralization
a management style that exists when top
management grants subordinate managers a significant degree
of autonomy and independence in operating and making
decisions for their organizational units
defective unit
a unit that has been rejected at a control inspection
point for failure to meet appropriate standards of
quality or designated product specifications; can be economically
reworked and sold through normal distribution channels
direct labor
the time spent by individuals who work specifically
on manufacturing a product or performing a service;
the cost of such time
flexible manufacturing system (FMS)
a production system in which a single factory manufactures numerous variations
of products through the use of computer-controlled
robots
focused factory arrangement
an arrangement in which a
vendor (which may be an external party or an internal corporate
division) agrees to provide a limited number of
products according to specifications or to perform a limited
number of unique services to a company that is typically
operating on a just-in-time system
job
a single unit or group of units identifiable as being produced
to distinct customer specifications
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