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Investment jargon, much like medical or legal jargon, can be very confusing. Moreover, as the world of investing becomes increasingly complex, the jargon continues to frazzle the most sophisticated investor. Needless to say the mountain of words and phrases can be overwhelmingly annoying. Although the following list is not a comprehensive dictionary, it will help clarify the vocabulary that is pertinent to any investor.
A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
Accrued Interest: The amount of interest due on a bond since the last interest payment was made. A bond buyer pays the market price plus accrued interest.
Agency Backed Securities: Congress authorizes certain agencies of the federal government to issue to issue marketable debt securities including: Federal Farm Credit System (FFCS); Government National Mortgage Association (GNMA); Federal Home Loan Mortgage Corporation; Federal Home Loan Bank/ Federal National Mortgage Association; Student Loan Marketing Association. Securities issued by these agencies can be simply short-term discount notes; interest-bearing notes (maturities of less than 1 year); bonds (maturities of 1 to 10 years); or more complex securities including MBS/CMOs.
Agency Issue: A debt security issued by an authorized agency of the federal government. Such an issue is backed by the issuing agency itself, not by the full faith and credit of the U.S. Government (except GNMA and Federal Import Export Bank issues).
Aggressive Investment Strategy: A method of portfolio allocation and management aimed at achieving maximum return. Aggressive investors place a high percentage of their investable assets in equity securities and a far lower percentage in safer debt securities and cash equivalents, and they pursue aggressive policies including margin trading, arbitrage and option trading.
All or None Order (AON): An order that instructs the floor broker to execute the entire order in one transaction; if the order cannot be executed in its entirety, it is allowed to expire.
Alternative Minimum Tax (AMT): A federal income tax calculated on specific tax benefits or preferences, such as interest income received from certain municipal bonds. To ensure that individuals taking advantage of such benefits pay at least a minimum amount of tax, the AMT applies whenever it is greater than a person's taxes calculated without these benefits.
American Depositary Receipt (ADR): A negotiable certificate representing a given number of shares of stock in a foreign corporation. It is bought and sold in the American securities markets, just as stock is traded. Syn. American depositary share.
American Stock Exchange (AMEX): A private, not-for-profit corporation located in New York City that handles approximately one-fifth of all securities trades within the United States.
Annuitize: To change an annuity contract from the accumulation (pay-in) stage to the distribution (pay-out) stage.
Annuity: A contract between an insurance company and an individual in which a sum of money is deposited for a specified period of time. During the accumulation phase, the funds grow tax deferred. During the income phase, income is paid for a specified period of time.
Asked Price: The current price at which a security may be bought. It is the lowest price any seller will accept at a given time. In the case of a mutual fund, it is the net asset value plus the sales charge, if any. Also known as the offer price.
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Back-End Load: A commission or sales fee that is charged when mutual fund shares or variable annuity contracts are redeemed. It declines annually, decreasing to zero over an extended holding period - up to eight years - as described in the prospectus. Syn. contingent-deferred sales load.
Balanced Investment Strategy: A method of portfolio allocation and management aimed at balancing risk and return. A balanced portfolio may combine stocks, bonds, packaged products and cash equivalents.
Beta Coefficient: A means of measuring the volatility of a security or a portfolio of securities in comparison with an index as a whole. A beta of 1 indicates that the security's price will move with the market. A beta greater than 1 indicates that the security's price will be more volatile than the market. A beta less than 1 means that it will be less volatile than the market.
Bid Price: The current price at which a security may be sold. It is the highest price anyone will pay for a security at a given time.
Blue Chip: The common stock of a company known nationally for the quality of its products or services and having a long history of sustained earnings and dividend payments.
Bond: A debt instrument in which the issuing authority promises to pay the bondholders a specified amount of interest for a specified length of time and to repay the principal invested on a given maturity date.
Bond Insurance: Insurance purchased by an issuer for either an entire issue or specific maturities, which guarantees the payment of principal and/or interest.
Bond Rating: An evaluation of the possibility of a bond issuer's default, based on an analysis of the issuer's financial condition and profit potential. Standard & Poor's, Moody's Investors Service and Fitch Investors Service, among others, provide bond rating services.
Bond Yield: The annual rate of return on a bond investment. Types of yield include nominal yield, current yield, yield to maturity and yield to call. Their relationships vary according to whether the bond in question is at a discount, at a premium or at par.
Bond-Entry Security: A security sold without delivery of a certificate. Evidence of ownership is maintained on records kept by a central agency; for example, the Treasury keeps records of Treasury Bill purchasers. Transfer of ownership is recorded by entering the change on the books or electronic files.
Breakpoint: The schedule of sales charge discounts a mutual fund offered for lump-sum or cumulative investments.
Buy Stop Order: An order to buy a security that is entered at a price above the current offering price and that is triggered when the market price touches or goes through the buy stop price.
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Call: A right to buy a specific asset at a predetermined price until a certain date. In the case of a bond, it is the issuer's right to repurchase an issue of bonds at a certain price on or after a specific date before the maturity date.
Callable Bond: A type of bond issued with a provision allowing the issuer to redeem the bond before maturity at a predetermined price.
Callable Preferred Stock: A type of preferred stock issued with a provision allowing the corporation to call in the stock at a certain price and retire it.
Capital Gain or Loss: Profit or loss from the sale of an investment.
Cash Dividend: Money paid to a corporation's stockholders out of the corporations' current earnings or accumulated profits. The board of directors must declare all dividends.
Certificate of Deposit: Time deposit investments issued by a bank or thrift with a stated date of maturity and interest rate.
Closed-End Fund: A type of mutual fund with a fixed number of shares that trade on an exchange or over the counter.
Collateralized Mortgage Obligation (CMO): A mortgage-backed security collateralized by residential mortgages that are commonly guaranteed by government agencies and government-sponsored enterprises. (See also mortgage-backed security.)
Committee on Uniform Securities Identification Procedures (CUSIP): A committee that assigns identification numbers and codes to all securities, to be used when recording all buy and sell orders.
Common Stock: Securities that represent an ownership interest in a corporation. Shareholders have the right to vote on major decisions. This class of stock has no preference to dividends or any distribution of assets. (See also stock.)
Confirmation: Written acknowledgment of a security trade detailing the security, price, commission or fee, and trade date of the transaction.
Consumer Price Index (CPI): A measure of price changes in consumer goods and services used to identify periods of inflation or deflation.
Convertible Bond: A debit security, usually in the form of a debenture that can be exchanged for equity securities of the issuing corporation at specified prices or rates.
Convertible Preferred Stock: An equity security that can be exchanged for common stock at specified prices or rates. Dividends may be cumulative or non-cumulative.
Corporate Bond: A bond issued by a corporation with a stated interest rate and maturity.
Coupon or "Bearer" Bond: A non-registered bond in which the interest coupons are attached to the certificate, to be clipped as they come due and presented by the holder for payment of interest.
Cost Basis: The price paid for an asset, including any commissions or fees, used to calculate capital gains or losses when the asset is sold.
Coupon Bond: A debt obligation with attached coupons representing semiannual interest payments. The holder submits the coupons to the trustee to receive the interest payments. The issuer keeps no record of the purchaser, and the purchaser's name is not printed on the certificate. Syn. bearer bond.
Current Yield: The annual rate of return on an investment based on the income received during a year compared with the investment's current price.
CUSIP Number: The individual identification number assigned to most securities in the United States.
Custodial Account: An account in which a custodian enters trades on behalf of the beneficial owner, often a minor.
Custodian: An institution or a person responsible for making all investment, management and distribution decisions in an account maintained in the best interests of another.
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Day Order: An order that is valid only until the close of trading on the day it is entered; if it is not executed by the close of trading, it is canceled.
Derivative: A contract or payment exchange agreement whose value is derived from an underlying asset, reference rate or index.
Discount: The amount by which a bond is priced below its par value. (See also premium.)
Discount Rate: The interest rate charged by the 12 Federal Reserve Banks for short-term loans made to member banks.
Diversification: A risk management technique that mixes a wide variety of investments within a portfolio, thus minimizing the impact of any one security on overall portfolio performance.
Dividend: The payment designated by the board of directors to be distributed pro rata among the shares outstanding of common or preferred stock or a mutual fund.
Dollar Cost Averaging: A system of purchasing securities at regular intervals, usually each month, with a fixed dollar amount. This results in the purchase of more shares when prices are low and fewer shares when prices rise. However, it does not guarantee profit, nor protect against a loss.
Dow Jones Industrial Average (DJIA): The most widely recognized market indicator, made up of 30 large and actively traded industrial stocks.
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Estate: All assets a person possesses at the time of death, such as securities, real estate, interests in business, physical possessions and cash.
Exchange: A system for the organized trading of securities. The major U.S. exchanges are the New York Stock Exchange, American Stock Exchange and Chicago Board Options Exchange. There are also regional exchanges throughout the country.
Ex-dividend: "Without dividend"; the buyer of a stock selling ex-dividend does not receive the recently declared dividend. After the ex-dividend date, the stock tables include the symbol "x" following the stock name.
Expense Ratio: A ratio for comparing a mutual fund's efficiency by dividing the fund's expenses by its net assets.
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Federal Home Loan Mortgage Corporation (FHLMC): A publicly traded corporation that promotes the nationwide secondary market in mortgages by issuing mortgage-backed pass-through debt certificates. Syn. Freddie Mac
Federal National Mortgage Association (FNMA): A publicly held corporation that purchases conventional mortgages and mortgages from governments agencies, including the Federal Housing Administration, Department of Veterans Affairs and Farmers Home Administration. Syn. Fannie Mae.
Federal Reserve System: The central bank system of the Untied States. Its primary responsibility is to regulate the flow of money and credit. The system includes 12 regional banks, 24 branch banks and hundreds of national and state banks. Syn. Fed.
Fixed Annuity: An annuity policy in which the issuing insurance company guarantees a fixed interest rate for a specified period of time.
401(k) Plan: A tax-deferred defined contribution retirement plan offered by an employer.
403(b) Plan: A tax-deferred annuity retirement plan available to employees of public schools and certain nonprofit organizations.
Front-End Load: A mutual fund commission or a sales fee that is charged at the time shares are purchased. The load is added to the share's net asset value when calculating the public offering price.
Futures: Contracts traded on an exchange specifying a future date of delivery or receipt of a specific commodity.
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Ginnie Mae: A mortgage-backed security issued and backed by the Government National Mortgage Association (GNMA), an agency of the federal government. (See also Mortgage-Backed Security.)
Government Bond: A direct debt obligation of the U.S. Government, including Treasury bonds, notes, bills and savings bonds.
Government National Mortgage Association (GNMA): A wholly government-owned corporation that issues pass-through mortgage debt certificates backed by the full faith and credit of the U.S. Government. Syn. Ginnie Mae.
Growth Stock: A relatively speculative issue that is believed to offer significant potential for capital gains. It often pays low dividends and sells at a high price-earnings ratio.
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Hold in Street Name: A securities transaction settlement and delivery procedure whereby a customer's securities are transferred into the broker-dealer's name and held by the broker-dealer. Although the broker-dealer is the nominal owner, the customer is the beneficial owner.
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Immediate Annuity: An insurance contract purchased for a single premium that starts to pay the annuitant immediately following its purchase.
Individual Retirement Account (IRA): An account that allows individuals to set aside earned income in a tax-deferred retirement plan. For some individuals, contributions are deductible from taxable income.
Initial Public Offering (IPO): A corporation's first sale of common stock to the public.
Interest: Payments a borrower makes a lender for use of the lender's money (e.g., a corporation pays interest to its bondholders).
IRA Rollover: The reinvestment of assets that an individual receives as a distribution from a qualified tax-deferred retirement plan into an individual retirement account within 60 days of receiving the distribution. The individual may reinvest either the entire sum or a portion of the sum, although any portion not reinvested is taxed as ordinary income.
IRA Transfer: The direct reinvestment of retirement assets from one qualified tax-deferred retirement plan to an individual retirement account. The account owner never takes possession of the assets, but directs that they be transferred directly from the existing plan custodian to the new plan custodian.
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Joint Account: An account in which two or more individuals possess some form of control over the account and may transact business in the account. The account must be designated as either joint tenants in common or joint tenants with rights of survivorship.
Joint Tenants in Common (JTIC): A form of joint ownership of an account whereby a deceased tenant's fractional interest in the account is retained by his estate. Syn. tenants in common.
Joint Tenants with Rights of Survivorship (JTWROS): A form of joint ownership of an account whereby a deceased tenant's fractional interest in the account passes to the surviving tenant(s). It is used almost exclusively by husbands and wives.
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Keogh Plan: A qualified tax-deferred retirement plan for persons who are self-employed and un-incorporated or who earn extra income through personal services aside form their regular employment.
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Last In, First Out (LIFO): An accounting method used to assess a corporation's inventory in which it is assumed that the last goods acquired are the first to be sold. The method is used to determine cost basis for tax purposes; the IRS designates last in, first out as the order in which sales or withdrawals from an investment are made.
Letter of Intent (LOI): A signed agreement allowing an investor to buy mutual fund shares at a lower overall sales charge, based on the total dollar amount of the intended investment. A letter of intent is valid only if the investor completes the terms of the agreement within 13 months of signing the agreement. A letter of intent may be backdated 90 days. Syn. statement of intention.
Level Load: A mutual fund sales fee charged annually based on the new asset value of a share. A 12b-1 asset-based fee is an example of a level load.
Life Insurance: An insurance company contract that provides for payment to the beneficiary upon the death of the insured. Some life insurance policies provide a tax-deferred cash buildup that can be accessed by the policy owner.
Limit Order: An order to buy or sell a stated amount of a security at a specified price (the limit) or better. A limit order to buy would be at the limit price or lower and a limit order to sell would be at the limit price or higher.
Limited Partnership: An organization made up of a general partner, who manages the partnership, and limited partners, who invest money but have limited liability to the organization's creditors.
Listed Security: A stock, a bond or another security that satisfies certain minimum requirements and is traded on a regional or national securities exchange such as s the New York Stock Exchange.
Long: Signifies a net ownership position in a particular security.
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Market Order: An order to buy or sell a stated amount of a security at the best price available when the order reaches the marketplace.
Margin: Purchasing securities "on credit" by using other securities as collateral.
Market Price: The last price or current quote at which a security trades in the secondary market.
Maturity: The date on which the issuer of a bond or CD is scheduled to repay the principal to the bondholder or CD holder.
Mortgage-Backed Security: A bond that represents a share in a pool of mortgages issued by government agencies, government-sponsored enterprises or mortgage lenders. Investors receive regular (normally monthly) interest payments and the principal is returned incrementally over the life of the investment. (See also CMO and Ginnie Mae.)
Municipal Bond: A bond issued by a state or political subdivision that pays interest, which is usually free from federal, and sometimes state, taxes. (See also alternative minimum tax.)
Mutual Fund: An investment that allows a group of people to pool their assets in a diversified portfolio of stocks or bonds or a combination of both. An investment company then professionally manages the assets in the portfolio in an effort to achieve a specified investment objective, such as growth or income. (See also back-end load, front-end load, and level load.)
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National Association of Securities Dealers, Inc. (NASD): The self-regulatory organization for the over-the-counter market. The NASD was organized under the provisions of the 1938 Maloney Act.
Net Asset Value (NAV): The per share value of a mutual fund figured by taking the total market value of a fund's assets and dividing the figure by the total number of shares outstanding. Also, the price at which you sell mutual fund shares.
New Issue: The first offering to the public of a stock, bond or mutual fund.
New York Stock Exchange (NYSE): The largest stock exchange in the United States. It is a corporation, operated by a board of directors, responsible for setting policy, supervising Exchange and member activities, listing securities, overseeing the transfer of members' seats on the Exchange and judging whether an applicant is qualified to be a specialist.
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Odd Lot: An amount of a security that is less than the normal unit of trading for that security. Generally, an odd lot is fewer than 100 shares of stock or five bonds. See also round lot.
Offer Price: See asked price.
Official Statement: The document that provides key information regarding a new municipal bond issue.
Option: A contract that allows an investor to buy or sell an asset at a fixed price until a specific date. An option to purchase an asset is a call and an option to sell an asset is a put.
Over-the-Counter (OTC): A highly sophisticated communications network on which dealers trade securities that are not listed on any exchange. All government bonds and all other non-listed stocks and bonds are traded on the over-the-counter network.
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Par Value: The dollar amount on which a bond's interest is calculated and the amount paid to bondholders at maturity. Also known as face value.
Preferred Stock: A class of stock that entitles holders to receive dividends before dividends are paid to common stockholders; dividends are usually fixed. Should the company liquidate, preferred stockholders have prior claim on assets over common stockholders. (See also stock.)
Premium: The amount by which a bond sells above its par value. (See also discount.)
Price-Earnings Ratio (P/E): The current price of a share of stock divided by the earnings per share of the issuing firm. The P/E is used to compare the value of stocks selling at different price levels.
Principal: The amount of invested dollars.
Prospectus: The official document highlighting the key information about securities registered with the Securities and Exchange Commission.
Put: (1) An option contract giving the owner the right to sell a certain amount of an underlying security at a specified price within a specified time. (2) The act of exercising a put option.
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Qualified Retirement Plan: A corporate retirement plan that meets the standards set by the Employee Retirement Income Security act of 1974. Contributions to a qualified plan are tax deductible. Syn. approved plan.
Quote: The price or bid offered for a particular security.
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Rating: A rating assigned to debt securities by independent rating services based on the issuer's ability to meet interest and principal payments.
Real Estate Investment Trust (REIT): A company that owns and manages a portfolio of real estate properties. REITs serve as conduits through which rental income is passed from real estate holdings to shareholders.
Reverse Split: A reduction in the number of a corporation's shares outstanding that increases the par value of its stock or its earnings per share. The market value of the total number of shares remains the same.
Roth Individual Retirement Account (Roth IRA): A new investment vehicle designed for retirement savings. The Roth IRA offers the opportunity to achieve tax-free growth of investment earnings and make tax-free withdrawals of the assets at retirement or earlier for special purposes.
Round Lot: A security's normal unit of trading, which is generally 100 shares of stock or five bonds. See also odd lot.
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Securities Investor Protection Corporation (SIPC): A nonprofit organization created by an act of Congress. SIPC provides funds for use, if necessary, to protect customers' cash and securities that are on deposit with a SIPC member firm in the event the firm fails and is liquidated. SIPC currently provides $500,000 in protection for investors' accounts (which does not protect against market losses).
Sell: To convey ownership of a security or another asset for money or value. This includes giving or delivering a security with or as a bonus for a purchase of securities, a gift of assessable stock, and selling or offering a warrant or right to purchase or subscribe to another security. Not included in the definition is a bona fide pledge or loan or a stock dividend if nothing of value is given by the stockholders for the dividend. Syn. sale.
Sell Stop Order: An order to sell a security that is entered at a price below the current market price and that is triggered when the market price touches or goes through the sell stop price.
Settlement Date: The date by which either cash (for a buyer) or a security (for a seller) must be delivered in order to complete a securities transaction.
Short: A net investment position in a security in which the security has been borrowed and sold but not yet replaced.
Simplified Employee Pension Plan (SEP): A non-qualified retirement plan designed for employers with 25 or fewer employees. Contributions made to each employee's individual retirement account grow tax deferred until withdrawal.
Single Account: An account in which only one individual has control over the investments and may transact business.
Standard & Poor's 500 Stock Index (S&P 500): A broad-based weighted index based on the average performance of 500 common stocks.
Stock: A share of ownership in a company. Shareholders are entitled to a "share" in the profits of the company (paid in dividends). (See also common stock or preferred stock.)
Stock Symbol: The unique identification symbol given to every corporation whose stock is traded on a stock exchange or the NASDAQ over-the-counter market.
Stock Split: An increase in the number of a corporation's outstanding shares, which decreases its stock's par value. The market value of the total number of shares remains the same. The proportional reductions in orders held on the books for a split stock are calculated by dividing the stock's market price by the fraction that represents the split.
Stop Limit Order: A customer order that becomes a limit order when the market price of the security reaches or passes a specific price. See also limit order, stop order.
Stop Order: (1) A directive from the SEC that suspends the sale of new issue securities to the public when fraud is suspected or filing materials are deficient. (2) A customer order that becomes a market order when the market price of the security reaches or passes a specific price. See also limit order; market order; stop limit order.
Street Name: Securities registered in the name of the brokerage firm but credited to the account of a client. A security is held in street name to simplify trading because no certificate delivery or signature is required. In margin accounts, securities must be held in street name.
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Taxable-Equivalent Yield: The yield an investor would need to obtain on a taxable bond to equal the tax-free yield on a municipal bond.
Total Return: The total earnings from an investment, including dividends or interest and any profit or loss realized on the liquidation of the investment.
Trade Date: The date on which a transaction is executed.
Traditional Individual Retirement Account (Traditional IRA): An investment vehicle designed for retirement savings. A Traditional IRA presents the opportunity for tax-deductible annual contributions and tax-deferred growth of investment earnings.
Trust: Fiduciary relationship in which a person, called a trustee, holds title to property for the benefit of another person, called a beneficiary.
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Uniform Gifts to Minors Act (UGMA): Legislation that permits a gift of money or securities to be given to a minor and held in a custodial account that an adult manages for the minor's benefit. Income and capital gains transferred to a minor's name are taxed at a lower rate. See also Uniform Transfers to Minors Act.
Uniform Transfers to Minors Act (UTMA): Legislation adopted in some states that permits a gift of money or securities to be given to a minor and held in a custodial account that an adult manages for the minor's benefit until the minor reaches a certain age (not necessarily the age of majority). See also Uniform Gifts to Minors Act.
Unit Investment Trust: An investment company that invests in a professionally selected portfolio of bonds and/or stocks. Unlike a mutual fund, the portfolio's investments are fixed over the life of the trust, are not managed, and have a stated or known maturity. Units of the trust's investment portfolio are sold to investors as a pro rata share.
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Warrant: A security that gives the holder the right to purchase securities from the warrant issuer at a stipulated subscription price. Warrants are usually long-term instruments, with expiration dates years in the future.
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Yield: Also known as return; the dividends or interest paid on a security calculated as a percent of the price paid. In the case of a bond, this figure is known as current return.
Yield to Maturity: The yield on a bond, taking into account the interest rate, the purchase price in relation to the par value and the number of years left to maturity. For example, if an investor purchases a $1,000 bond for $800, the $200 profit ($1,000 - $800) the owner will receive at maturity will be added to the interest earned when calculating yield to maturity.
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Zero Coupon Bond: A bond that pays no interest to its owner but is issued at a fraction of its par value. The money invested in the bond grows at a fixed rate as the interest automatically compounds within the investment. The investor could eventually receive a maturity payment equaling the par value of the investment.
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