Bart Ward

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.

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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.

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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).

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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.

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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.

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Last week’s column covered a little history on John Pierpont Morgan, otherwise known as J.P. Morgan. Here is a little background on his company.

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This month marks the 101st year since the death of John Pierpont Morgan and recently the 2012 mini series “The Men Who Built America” was rerun. The series features a number of late 18th and early 20th century industrialists and financiers including Morgan.

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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.

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Investment banking is the process by which new securities are brought to market in order to raise capital for businesses. In a broad sense, investment banking embraces all the institutions by which capital formation takes place, including: (1) the transfer of ownership of a corporate entity through investment banks which are usually brokerage houses; (2) security substitution, such as is involved in the issuance of securities by investment companies; and (3) security management, or the decision as to where investors’ funds are to be placed.

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