Some Basic Financial Products and Definitions
Here are some basic financial products an investor may encounter, along with clear definitions of what they are:
Municipal bond: a pledge or binding agreement made to the holder of the bond to pay a fixed sum of money on a definite date, at a fixed rate of interest. A municipal bond is normally issued by a state, city, county, school district, government agency or government authority.
Tax-free Municipal Bond: issued by states, cities and local governments and government entities to raise funds for large capital expenses and improvements such as parks, downtown restorations, schools, highways and airports. Tax-free municipal bonds pay interest that is free of Federal income taxes. The interest may also be free of state and local taxes under certain circumstances.
Industrial Development Bond: a municipal bond in which a local government entity seeks to raise money for a public company with no obvious public benefit. Industrial Development Bonds could be issued forprivate industrial projects.
Zero Coupon Bond: an investment vehicle that defers interest and principal payments until maturity. A zero coupon bond is purchased at a significant discount, and at maturity the investor receives one payment that is equal to the principal invested, plus the interest compounded semiannually, at a stated yield.
Collateralized Mortgage Obligation (CMO): a fixed-income investment backed by mortgages or pools of mortgages. Investors in a CMO are divided into classes, each with a different interest rate and anticipated life.
REIT (Real Estate Investment Trust): a company that owns—and in most cases operates—income-producing real estate. To be a REIT, a company must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends.
Mutual Fund: a company that brings together money from a large group of individual investors, and invests it in stocks, bonds or other assets. The combined holdings that the fund owns are known as its portfolio. Each investor in the fund owns shares of the company which is run by a team paid to manage the portfolio.
While these are some of the basic financial instruments available, there are many more. In deciding where to invest money, it is very sound advice for an investor to fully understand at least the instruments into which funds might be placed. Definitions can be found in financial dictionaries or even free online.
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Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates,Inc