Definition of Preliminary prospectus

Preliminary prospectus

A preliminary version of a prospectus.

Red herring

A preliminary prospectus containing information required by the SEC. It excludes the offering
price and the coupon of the new issue.

Waiting period

Time during which the SEC studies a firm's registration statement. During this time the firm
may distribute a preliminary prospectus.

Prospectus

Formal written document to sell securities that describes the plan for a proposed business
enterprise, or the facts concerning an existing one, that an investor needs to make an informed decision.
prospectuses are used by mutual funds to describe the fund objectives, risks and other essential information.

prospectus

Formal summary that provides information on an issue of securities.

Prospectus

A securities disclosure document which provides full, true and plain disclosure of all facts that may materially affect the market price or value of a company's securities (whether issued or proposed to be issued), and is prepared in accordance with the requirements of the governing securities legislation.

prospectus

A legal document that must be filed with securities regulators in order to distribute securities, including mutual funds. Mutual fund dealers are required by law to distribute this document to investors before the purchase of any units. It contains all key information, such as investment objectives and strategies, risk factors and financial highlights.

PPF (periodic perpetuity factor)

a generalization formula invented by Abrams that is the present value of regular but noncontiguous cash flows that have constant growth to perpetuity.

Adjustable rate preferred stock (ARPS)

Publicly traded issues that may be collateralized by mortgages and MBSs.

Annualized holding period return

The annual rate of return that when compounded t times, would have
given the same t-period holding return as actually occurred from period 1 to period t.

Auction rate preferred stock (ARPS)

Floating rate preferred stock, the dividend on which is adjusted every
seven weeks through a Dutch auction.

Average collection period, or days' receivables

The ratio of accounts receivables to sales, or the total
amount of credit extended per dollar of daily sales (average AR/sales * 365).

Best-interests-of-creditors test

The requirement that a claim holder voting against a plan of reorganization
must receive at least as much as he would have if the debtor were liquidated.

Brokered market

A market where an intermediary offers search services to buyers and sellers.

Comparative credit analysis

A method of analysis in which a firm is compared to others that have a desired
target debt rating in order to infer an appropriate financial ratio target.

Compounding period

The length of the time period (for example, a quarter in the case of quarterly
compounding) that elapses before interest compounds.

Consumer credit

Credit granted by a firm to consumers for the purchase of goods or services. Also called
retail credit.

Contingent deferred sales charge (CDSC)

The formal name for the load of a back-end load fund.

Convertible exchangeable preferred stock

Convertible preferred stock that may be exchanged, at the
issuer's option, into convertible bonds that have the same conversion features as the convertible preferred
stock.

Convertible preferred stock

Preferred stock that can be converted into common stock at the option of the holder.

Covered call

A short call option position in which the writer owns the number of shares of the underlying
stock represented by the option contracts. Covered calls generally limit the risk the writer takes because the
stock does not have to be bought at the market price, if the holder of that option decides to exercise it.

Covered call writing strategy

A strategy that involves writing a call option on securities that the investor
owns in his or her portfolio. See covered or hedge option strategies.

Covered interest arbitrage

A portfolio manager invests dollars in an instrument denominated in a foreign
currency and hedges his resulting foreign exchange risk by selling the proceeds of the investment forward for
dollars.

Covered or hedge option strategies

Strategies that involve a position in an option as well as a position in the
underlying stock, designed so that one position will help offset any unfavorable price movement in the other,
including covered call writing and protective put buying. Related: naked strategies

Covered Put

A put option position in which the option writer also is short the corresponding stock or has
deposited, in a cash account, cash or cash equivalents equal to the exercise of the option. This limits the
option writer's risk because money or stock is already set aside. In the event that the holder of the put option
decides to exercise the option, the writer's risk is more limited than it would be on an uncovered or naked put
option.

Credible signal

A signal that provides accurate information; a signal that can be distinguish among senders.

Credit

Money loaned.

Credit analysis

The process of analyzing information on companies and bond issues in order to estimate the
ability of the issuer to live up to its future contractual obligations. Related: default risk

Credit enhancement

Purchase of the financial guarantee of a large insurance company to raise funds.

Credit period

The length of time for which the customer is granted credit.

Credit risk

The risk that an issuer of debt securities or a borrower may default on his obligations, or that the
payment may not be made on a negotiable instrument. Related: Default risk

Credit scoring

A statistical technique wherein several financial characteristics are combined to form a single
score to represent a customer's creditworthiness.

Credit spread

Related:Quality spread

Crediting rate

The interest rate offered on an investment type insurance policy.

Creditor

Lender of money.

Cumulative preferred stock

Preferred stock whose dividends accrue, should the issuer not make timely
dividend payments. Related: non-cumulative preferred stock.

Deferred call

A provision that prohibits the company from calling the bond before a certain date. During this
period the bond is said to be call protected.

Deferred equity

A common term for convertible bonds because of their equity component and the
expectation that the bond will ultimately be converted into shares of common stock.

Deferred futures

The most distant months of a futures contract. A bond that sells at a discount and does not
pay interest for an initial period, typically from three to seven years. Compare step-up bond and payment-inkind
bond.

Deferred nominal life annuity

A monthly fixed-dollar payment beginning at retirement age. It is nominal
because the payment is fixed in dollar amount at any particular time, up to and including retirement.

Deferred taxes

A non-cash expense that provides a source of free cash flow. Amount allocated during the
period to cover tax liabilities that have not yet been paid.

Deferred-annuities

Tax-advantaged life insurance product. Deferred annuities offer deferral of taxes with the
option of withdrawing one's funds in the form of life annuity.

Demand line of credit

A bank line of credit that enables a customer to borrow on a daily or on-demand basis.

Discount period

The period during which a customer can deduct the discount from the net amount of the bill
when making payment.

Discounted payback period rule

An investment decision rule in which the cash flows are discounted at an
interest rate and the payback rule is applied on these discounted cash flows.

Eurocredits

Intermediate-term loans of Eurocurrencies made by banking syndicates to corporate and
government borrowers.

Evaluation period

The time interval over which a money manager's performance is evaluated.

Evergreen credit

Revolving credit without maturity.

Federal credit agencies

Agencies of the federal government set up to supply credit to various classes of
institutions and individuals, e.g. S&Ls, small business firms, students, farmers, and exporters.

Five Cs of credit

Five characteristics that are used to form a judgement about a customer's creditworthiness:
character, capacity, capital, collateral, and conditions.

Floating-rate preferred

Preferred stock paying dividends that vary with short-term interest rates.

Foreign tax credit

Home country credit against domestic income tax for foreign taxes paid on foreign
derived earnings.

Freddie Mac (Federal Home Loan Mortgage Corporation)

A Congressionally chartered corporation that
purchases residential mortgages in the secondary market from S&Ls, banks, and mortgage bankers and
securitizes these mortgages for sale into the capital markets.

Full faith-and-credit obligations

The security pledges for larger municipal bond issuers, such as states and
large cities which have diverse funding sources.

Government sponsored enterprises

Privately owned, publicly chartered entities, such as the Student Loan
Marketing Association, created by Congress to reduce the cost of capital for certain borrowing sectors of the
economy including farmers, homeowners, and students.

Holding period

Length of time that an individual holds a security.

Holding period return

The rate of return over a given period.

Insured bond

A municipal bond backed both by the credit of the municipal issuer and by commercial
insurance policies.

Insured plans

Defined benefit pension plans that are guaranteed by life insurance products. Related: noninsured plans

Investment tax credit

Proportion of new capital investment that can be used to reduce a company's tax bill
(abolished in 1986).

Letter of credit (L/C)

A form of guarantee of payment issued by a bank used to guarantee the payment of
interest and repayment of principal on bond issues.

Leveraged required return

The required return on an investment when the investment is financed partially by debt.

Line of credit

An informal arrangement between a bank and a customer establishing a maximum loan
balance that the bank will permit the borrower to maintain.

Line of credit

An informal arrangement between a bank and a customer establishing a maximum loan
balance that the bank will permit the borrower to maintain.

Mandatory redemption schedule

Schedule according to which sinking fund payments must be made.

Manufactured housing securities (MHSs)

Loans on manufactured homes - that is, factory-built or
prefabricated housing, including mobile homes.

Market segmentation theory or preferred habitat theory

A biased expectations theory that asserts that the
shape of the yield curve is determined by the supply of and demand for securities within each maturity sector.

Monthly income preferred security (MIP)

Preferred stock issued by a subsidiary located in a tax haven.
The subsidiary relends the money to the parent.

Multiperiod immunization

A portfolio strategy in which a portfolio is created that will be capable of
satisfying more than one predetermined future liability regardless if interest rates change.

Net period

The period of time between the end of the discount period and the date payment is due.

Neutral period

In the Euromarket, a period over which Eurodollars are sold is said to be neutral if it does not
start or end on either a Friday or the day before a holiday.

Non-cumulative preferred stock

Preferred stock whose holders must forgo dividend payments when the
company misses a dividend payment.
Related: Cumulative preferred stock

Non-insured plans

Defined benefit pension plans that are not guaranteed by life insurance products. Related:
insured plans

Nonredeemable

Not permitted, under the terms of indenture, to be redeemed.

Optimal redemption provision

Provision of a bond indenture that governs the issuer's ability to call the
bonds for redemption prior to their scheduled maturity date.

Preferred equity redemption stock (PERC)

Preferred stock that converts automatically into equity at a
stated date. A limit is placed on the value of the shares the investor receives.

Preferred habitat theory

A biased expectations theory that believes the term structure reflects the
expectation of the future path of interest rates as well as risk premium. However, the theory rejects the
assertion that the risk premium must rise uniformly with maturity. Instead, to the extent that the demand for
and supply of funds does not match for a given maturity range, some participants will shift to maturities
showing the opposite imbalances. As long as such investors are compensated by an appropriate risk premium
whose magnitude will reflect the extent of aversion to either price or reinvestment risk.

Preferred shares

Preferred shares give investors a fixed dividend from the company's earnings. And more
importantly: preferred shareholders get paid before common shareholders. See: preferred stock.

Preferred stock

A security that shows ownership in a corporation and gives the holder a claim, prior to the
claim of common stockholders, on earnings and also generally on assets in the event of liquidation. Most
preferred stock pays a fixed dividend that is paid prior to the common stock dividend, stated in a dollar
amount or as a percentage of par value. This stock does not usually carry voting rights. The stock shares
characteristics of both common stock and debt.

Preferred stock agreement

A contract for preferred stock.

R squared (R^2)

Square of the correlation coefficient proportion of the variability explained by the linear
regression model. For example, an r squared of 75% means that 75% of the variability observed in the
dependent variable is explained by the independent variable.

Redeemable

Eligible for redemption under the terms of the indenture.

Redemption charge

The commission charged by a mutual fund when redeeming shares. For example, a 2%
redemption charge (also called a "back end load") on the sale of shares valued at $1000 will result in payment of $980 (or 98% of the value) to the investor. This charge may decrease or be eliminated as shares are held for
longer time periods.

Redemption cushion

The percentage by which the conversion value of a convertible security exceeds the
redemption price (strike price).

Registered bond

A bond whose issuer records ownership and interest payments. Differs from a bearer bond
which is traded without record of ownership and whose possession is the only evidence of ownership.

Registered representative

A person registered with the CFTC who is employed by, and soliciting business
for, a commission house or futures commission merchant.

Registered trader

A member of the exchange who executes frequent trades for his or her own account.

Required reserves

The dollar amounts based on reserve ratios that banks are required to keep on deposit at a Federal Reserve Bank.

Required return

The minimum expected return you would require to be willing to purchase the asset, that is,
to make the investment.

Required yield

Generally referring to bonds, the yield required by the marketplace to match available returns
for financial instruments with comparable risk.

Retail credit

Credit granted by a firm to consumers for the purchase of goods or services.
See: consumer credit.

Revolving credit agreement

A legal commitment wherein a bank promises to lend a customer up to a
specified maximum amount during a specified period.

Revolving line of credit

A bank line of credit on which the customer pays a commitment fee and can take
down and repay funds according to his needs. Normally the line involves a firm commitment from the bank
for a period of several years.

R squared (R^2)

Square of the correlation coefficientthe proportion of the variability in one series that can be
explained by the variability of one or more other series.

Secured debt

Debt that, in the event of default, has first claim on specified assets.

Single-premium deferred annuity

An insurance policy bought by the sponsor of a pension plan for a single
premium. In return, the insurance company agrees to make lifelong payments to the employee (the
policyholder) when that employee retires.

Structured arbitrage transaction

A self-funding, self-hedged series of transactions that usually utilize
mortgage securities as the primary assets.

Structured debt

Debt that has been customized for the buyer, often by incorporating unusual options.

Structured portfolio strategy

A strategy in which a portfolio is designed to achieve the performance of some
predetermined liabilities that must be paid out in the future.

Structured settlement

An agreement in settlement of a lawsuit involving specific payments made over a
period of time. Property and casualty insurance companies often buy life insurance products to pay the costs
of such settlements.

Subperiod return

The return of a portfolio over a shorter period of time than the evaluation period.

T-period holding-period return

The percentage return over the T-year period an investment lasts.

Tax-deferred retirement plans

Employer-sponsored and other plans that allow contributions and earnings to
be made and accumulate tax-free until they are paid out as benefits.

Trade credit

Credit granted by a firm to another firm for the purchase of goods or services.

Unbiased predictor

A theory that spot prices at some future date will be equal to today's forward rates.

Uncovered call

A short call option position in which the writer does not own shares of underlying stock
represented by his option contracts. Also called a "naked" call, it is much riskier for the writer than a covered
call, where the writer owns the underlying stock. If the buyer of a call exercises the option to call, the writer
would be forced to buy the stock at market price.

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