Agencies represent all bonds issued by the federal government, except for those issued by the Treasury (i.e. bonds issued by other agencies of the federal government). Examples include the Federal National Mortgage Association (FNMA), and the Guaranteed National Mortgage Association (GNMA).
Arbitrage: The trading of securities (stocks, bonds, derivatives, currencies, and other securities) to profit from a temporary difference between the price of security in one market and the price in another (also called "risk-free arbitrage"). This temporary difference is often called a "market" inefficiency. Distinguish from "risk arbitrage".
Asset management: Basically, this is exactly what it sounds like. Investment banks take money given to them by pension funds and individual investors, and invest it. For wealthy individuals ("private clients"), the investment bank will set up an individual account and manage the account; for the less well-endowed, the bank will offer mutual funds. Investment banks are compensated for asset management primarily by taking a percentage each year from the total assets managed. (They may also charge an upfront "load," or commission, or a few percent of the initial money invested.) Asset management is considered a less volatile business than trading or investment banking, providing a steadier source of revenues.
Beauty contest: When investment banks want to land a deal, they usually have to make a pitch. Some of their selling points when competing with other investment banks for a deal: "Look how strong our research department is in this industry. Our analyst in the industry is a real market mover, so if you go public with us, you'll be sure to get a lot of attention from her." Or: "We are the top-ranking firm in this type of issuance, as you will see by these league tables."
Bloomberg: Computer terminals providing real time quotes, news, and analytical tools, often used by traders and investment bankers.
Bond spreads: The difference between the yield of a corporate bond and a U.S. Treasury security of similar time to maturity.
Bulge bracket: The top 10 firms on Wall Street (including Goldman Sachs, Morgan Stanley Dean Witter, Merrill Lynch, Salomon Smith Barney, Lehman Brothers, and Credit Suisse First Boston).
Buy-side: The clients of investment banks (mutual funds, pension funds) that buy the stocks, bonds and securities sold by the investment banks. (The investment banks that sell these products to investors are known as the "sell-side.")
Commercial bank: A bank that lends, rather than raises money. For example, if a company wants $30 million to open a new production plant, it can approach a commercial bank like Chase Manhattan or Citibank for a loan. (Increasingly, commercial banks are also providing investment banking services to clients.)
Commercial paper: Short-term corporate debt, typically maturing in nine months or less.
Commodities: Assets (usually agricultural products or metals) that are generally interchangeable with one another and therefore share a common price. For example, corn, wheat, and rubber generally trade at one price on commodity markets worldwide.
Common stock: Also called common equity, common stock represents an ownership interest in a company. (As opposed to preferred stock, see below.) The vast majority of stock traded in the markets today is common, as common stock enables investors to vote on company matters. An individual with 51 percent or more of shares owned controls a company's decisions and can appoint anyone he/she wishes to the board of directors or to the management team.
Comparable company analysis ("Comps"): The primary tool of the corporate finance analyst. Comps include a list of financial data, valuation data and ratio data on a set of companies in an industry. Comps are used to value private companies or better understand a how the market values and industry or particular player in the industry.
Consumer Price Index: The CPI measure the percentage increase in a standard basket of goods and services. CPI is a measure of inflation for consumers.
Convertible preferred stock: This is a relatively uncommon type of equity issued by a company; convertible preferred stock is often issued when it cannot successfully sell either straight common stock or straight debt. Preferred stock pays a dividend, similar to how a bond pays coupon payments, but ultimately converts to common stock after a period of time. It is essentially a mix of debt and equity, and most often used as a means for a risky company to obtain capital when neither debt nor equity works.
Non-convertible preferred stock: Sometimes companies issue non-convertible preferred stock, which remains outstanding in perpetuity and trades like stocks. Utilities represent the best example of non-convertible preferred stock issuers.
Convertible bonds: Bonds that can be converted into a specified number of shares of stock.
Derivatives: An asset whose value is derived from the price of another asset. Examples include call options, put options, futures, and interest-rate "swaps."
Discount rate: A widely followed short-term interest rate, set by the Federal Reserve to cause market interest rates to rise or fall, thereby causing the U.S. economy to grow more quickly or less quickly. (More technically, the discount rate is the rate at which federal banks lend money to each other on overnight loans.) Today, the discount rate can be directly moved by the Fed, but maintains a largely symbolic role.
Dividend: A payment by a company to shareholders of its stock, usually as a way to distribute some or all of the profits to shareholders.
Equity: In short, stock. Equity means ownership in a company that is usually represented by stock.
The Fed: The Federal Reserve, which gently (or sometimes roughly), manages the country's economy by setting interest rates.
Federal funds rate: The rate domestic banks charge one another on overnight loans to meet federal reserve requirements. This rate tracks very closely to the discount rate, but is usually slightly higher.
Fixed income: Bonds and other securities that earn a fixed rate of return. Bonds are typically issued by governments, corporations and municipalities.
Float: The number of shares available for trade in the market times the price. Generally speaking, the bigger the float, the greater the stock's liquidity.
Floating rate: An interest rate that is benchmarked to other rates (such as the rate paid on U.S. Treasuries), allowing the interest rate to change as market conditions change.
Floor traders: Traders for an investment bank located in the firm's offices. Floor traders spend most of the day seated at their desks observing market action on their computer screens.
Glass-Steagall Act: Part of the legislation passed during the Depression (Glass-Steagall was passed in 1933) designed to help prevent future bank failure -- the establishment of the F.D.I.C. was also part of this movement. The Glass-Steagall Act split America's investment banking (issuing and trading securities) operations from commercial banking (lending). For example, J.P. Morgan was forced to spin off its securities unit as Morgan Stanley. Since the late 1980s, the Federal Reserve has steadily weakened the act, allowing commercial banks such as NationsBank and Bank of America to buy investment banks like Montgomery Securities and Robertson Stephens.
Gross Domestic Product: GDP measures the total domestic output of goods and services in the United States. Generally, when the GDP grows at a rate of less than 2 percent, the economy is considered to be in recession.
Hedge: To balance a position in the market in order to reduce risk. Hedges work like insurance: a small position pays off large amounts with a slight move in the market.
High grade corporate bond: A corporate bond with a rating above BB. Also called investment grade debt.
High-yield debt (a.k.a. Junk bonds): Corporate bonds that pay high interest rates (to compensate investors for high risk of default). Credit rating agencies such as Standard & Poor's rate a company's (or a municipality's) bonds based on default risk. Junk bonds rate below BB.