The great rise in the stock market during the last years of the 1990s led many investors to forget the inevitable link between risk and return. This is because they had the return first and had, until the Dotcom Bubble busted, yet to wake up to the risks. If history was anything to go by, and there was not an alternative guide available, it was likely that the market would fall sufficiently to affect people’s short-term attitude about the market. And that happened.
Today, more than ever there are more words and acronyms on Wall Street that leaves even the Pentagon in the dust. This is especially true in regard to many of the New York Stock Exchange’s procedures, operational departments and electronic trading vehicles. For your convenience some of these words and acronyms are reviewed below.
A corporate bond is a debt that a corporation has incurred to the holder of the bond. Bonds are a fixed sum of money and that the corporation promises to repay at a future date. Also, for use of this money, the corporation agrees to pay at specified intervals (usually twice a year) interest at a stated rate.
Underwriting municipal securities (bonds) issues is not without risk. To spread this potential risk, underwriters (investment bankers that bring new issues to market) form an underwriting syndicate. Underwriting syndicates are typically organized as joint ventures rather than partnerships (which further limits the risk of the participants).
Until the Tax Reform Act (TRA) of 1986 changed the favorable tax status of Uniform Gift to Minors Act (UGMA) and its successors, the Uniform Transfers to Minors Act (UTMA) adopted by the National Conference of Commissioners of Uniform State Laws in 1983. Many people used these accounts as a means of transferring highly taxable income and capital gains to a child in a lower tax bracket through gifts of money or securities.
Zero-coupon bonds do not have interest coupons attached (interest at a particular rate that is sent to the bondholder on a regular basis), nor do the issuers make annual interest payments. Investors who purchase them, therefore, do not receive interest. Instead, they purchase a bond at a price lower than the bond’s $1,000 par value and can redeem it for par on the maturity date. The “interest” earned on the bond is the difference between the price paid initially and the amount received at maturity.
The typical underwriting arrangement involves the purchase of a security issue from a corporation by an investment banking firm or a group of such firms (called an underwriting syndicate), and the sale of the issue to the general investing public, institutional investors as well as wealthy individuals. This procedure is followed in the case of bond issues of corporations as well as for stock issues which are not required by law or by decision of the board of directors to be offered first to old shareholders.