Financial Terms

Sustainable Withdrawal Rate

A safe withdrawal rate is defined as the quantity of money, expressed as a percentage of the initial investment, which can be withdrawn per year for a given quantity of time, including adjustments for inflation, and not lead to portfolio failure; failure being defined as a 95% probability of depletion to zero at any time within the specified period.

Usage :  Typically, SWR is utilized as an approximation of the probability that a given portfolio can support a given annual spending component for a required period, with a reasonable confidence. To do this, variables such as the allocation of assets within a model portfolio, the beginning balance, and/or the number of years expected in retirement are varied, a model is applied, and results of these alterations in the variables are observed and compared, in order to optimize for the maximum.

Leveraged Buyout - LBO

The acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition. Often, the assets of the company being acquired are used as collateral for the loans in addition to the assets of the acquiring company. The purpose of leveraged buyouts is to allow companies to make large acquisitions without having to commit a lot of capital. 

Junk Bond

A junk bond is a fixed-income security that is rated below investment grade by one or more of the major bond ratings agencies. 

Example:

A junk bond works the same as most other bonds -- an investor purchases a bond from a bond issuer with the assumption that the money will be paid back when the bond reaches its maturity date. The difference between an "investment grade" bond and a "junk" bond is that the junk bond issuer may not be able to repay the original principal.

Bonds often receive this type of low rating when the corporation, municipality or other entity that issued the bond is facing financial trouble. In these cases, the credit risk on the bonds is fairly high -- in other words, there is a relatively decent chance that the junk bond issuer will have trouble fulfilling its repayment obligations (including interest and principal). However, many junk bonds also pay higher yields than investment-grade bonds in order to attract investors.

Maintenance Bonds

A maintenance bond is a type of bond that is used in the construction industry. Contractors can purchase this type of bond in order to protect themselves against liability after a project is completed. This type of bond is designed to protect the contractor from having to come up with any money after the fact.

Maintenance Bonds

This type of bond is valid for a limited time after a project is complete. The contractor will purchase a bond for a certain amount of money, and it will protect the contractor for a specific time period. If anything goes wrong with the project during that time, the bond company will step in and pay for the problem to be fixed. 

What It Covers

A maintenance bond could protect the contractor from a number of things that could go wrong. If there is some type of defect in a product that the contractor used during construction, the maintenance bond could cover this. The bond can also cover against problems with the workmanship on the project. If you are a contractor working on a big project, this type of bond can significantly lower your overall liability on the project once you are finished.

Hands-On Investor

An investor who holds a large portion of a company's shares and takes an active management role. A hands-on investor can also be called a majority shareholder, or activist shareholder. Such investors see their ownership stake in a firm as the reason to become actively engaged in the firm's decision making process. 

The majority shareholders are usually hands-on investors and have a great influence on the company's management decisions. This may or may not lead to tension with company managers, who typically prefer not to be directed by single shareholders, especially when such shareholders do not have the same level of experience or business acumen as company management. 

Balloon Mortgage

A type of short-term mortgage. Balloon mortgages require borrowers to make regular payments for a specific interval, then pay off the remaining balance within a relatively short time. Some types of balloon mortgages can be interest-only for 10 years, and the final "balloon" payment to pay off the balance comes as one large installment at the end of the term. 

Balloon mortgages have the option for early repayment or can be set up similar to a 30-year fixed-rate mortgage with the embedded option. The total debt repayment of these loans is lower than that of conventional fixed-rate mortgages. Balloon mortgages take the form of interest-only loans or partially amortizing mortgages. 

Quantitative Easing

An unconventional monetary policy in which a central bank purchases government securities or other securities from the market in order to lower interest rates and increase the money supply. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity. Quantitative easing is considered when short-term interest rates are at or approaching zero, and does not involve the printing of new banknotes.

Typically, central bank’s target the supply of money by buying or selling government bonds. When the bank seeks to promote economic growth, it buys government bonds, which lowers short-term interest rates and increases the money supply. This strategy loses effectiveness when interest rates approach zero, forcing banks to try other strategies in order to stimulate the economy. QE targets commercial bank and private sector assets instead, and attempts to spur economic growth by encouraging banks to lend money. However, if the money supply increases too quickly, quantitative easing can lead to higher rates of inflation. This is due to the fact that there is still a fixed amount of goods for sale when more money is now available in the economy. Additionally, banks may decide to keep funds generated by quantitative easing in reserve rather than lending those funds to individuals and businesses. 

Daisy Chain

In finance, a daisy chain is an investment scam whereby a group of fraudulent investors inflate the price of a security and then sell it at a profit.

Example:

In a daisy chain scenario, an investor or group of investors holding a long position in a low-price, small-cap stock unfoundedly publicize the stock as a promising opportunity. Susceptible, credulous investors subsequently purchase shares, which collectively lead to a rise in the stock's price because of heightened, demand.

Once the original perpetrators have decided that the price of the stock has peaked, they sell off the entirety of their positions for a profit. Subsequently, the false advertising campaign ends and the stock price returns to its original level.