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Glossary D through F D Debenture A bond that is backed only by the general credit of the issuer. Debt The amount owed to creditors. Debt securities Securities that provide interest payments as compensation for the use of an investor's (i.e., lender's) funds. These payments usually last for a specific period. The principal (original loan amount) is usually paid at the end of this period. Some debt securities are backed by the credit of the issuer (i.e., Treasury bonds are backed by the credit of the U.S. government). However, other debt securities are backed by specific assets of the issuer. These securities are known as asset-backed bonds. Declaration Descriptive material in insurance policies relating to the subjects covered, persons injured, premiums charged, period of coverage, policy limits, and warranties or promises made by the insured regarding the nature and control of various hazards. Deductible Amounts not covered by an insurance policy. The deductible is paid by the insured or by another insurance policy. Deferred annuity An annuity in which payments to the annuitant (or named beneficiary) are to begin either at a stated number of years in the future or when the annuitant reaches a certain age. During the accumulation period, the cash values of the annuity accumulate on a tax-deferred basis. Deferred compensation Arrangement through which the compensation to the employee for past or current services is postponed until some future date. Defined-benefit plan A pension plan under which the benefit the employee is to receive in the future is predetermined. (Example: $10 per month income at retirement for each year employed.) The amount of the required annual employer contributions depends on the level of benefits to be provided and the estimated number of years in the accumulation period. Defined-contribution plan A pension plan under which the amount of the employee's retirement benefit is determined by contributions, not a pre-determined formula. The amount of the employee's benefit equals the accumulated contributions plus earnings the fund will produce in terms of a retirement income or lump-sum payment. Depreciation A form of tax deduction that permits the recovery of the cost of an asset over its useful life in the form of tax savings. It is a bookkeeping entry and does not represent a cash outlay. The simplest method is straight-line depreciation, which allocates a constant amount each year during an asset's life. For example, an asset with a useful life of 10 years and no salvage value would generate a deduction of 10% of its cost annually. Accelerated depreciation is a method that permits deduction of a greater percentage of the cost of an asset in the early years of the asset's useful life with smaller deductions in later years. Examples of accelerated depreciation are the double-declining balance and the sum of the years-digits method. A recent method put into use is the Accelerated Cost Recovery System (ACRS), which applies accelerated methods of cost recovery over statutory periods. Derivative security A financial security whose value is determined, in part, from the value and characteristics of another security. Disability insurance Insurance designed to provide the insured person with specified payments for a specified period of time to replace income if the person is unable to work as a result of a covered illness or injury. Diversification The combination in a portfolio of assets which have dissimilar behavior. Dividends (investments) The portion of a corporation's earnings that it distributes among its stockholders, in proportion to the number and kind of shares they own. The decision to pay dividends is made by the board of directors, and they usually are paid quarterly, in the form of cash, stock, or rarely, some other property. Preferred stock dividends usually are fixed over a period of time, whereas common stock dividends are more dependent on the company's earnings and current cash position. Dollar cost averaging A system of buying a fixed dollar amount of securities at regular intervals. The investor thus buys more shares when the price is low and fewer shares when it rises. The average price per share is thus lower than it would have been had the investor periodically bought a fixed number of shares. Double indemnity A rider to a life insurance policy which provides the beneficiary with an amount equal to twice the face amount of the policy if the insured dies an accidental death. E Earnings Something earned, especially wages. As a financial term, earnings also refers to the balance of revenue after deducting costs and expenses. Earnings income Interest or dividends that are credited or paid to an investor. See "income." Efficient portfolio A portfolio that minimizes historical portfolio risk for a given potential return, or maximizes portfolio potential return for a given level of historical risk. Employee stock ownership (ESOP) A plan for profit sharing by employees in the companies for which they work. A company introducing an ESOP subscribes cash for common stock (shares) of the company which are deposited with a trust for the benefit of all participating employees. The stock does not immediately become the property of the employees but is vested with them gradually over five or fifteen years. Endorsement Document used with insurance policies that modifies the policy by adding special provisions. Equity An owner's interest in property or business; the market value of the property or business, less all claims and liens upon it. Estate The assets and liabilities of a deceased person. Estate planning Planning for the orderly handling, disposition, and administration of an estate when the owner dies. Estate planning includes drawing up a will, setting up trusts, and minimizing estate taxes, perhaps by passing property to heirs before death or by setting up a testamentary trust. Exclusion Item or loss exposure not covered in a particular insurance policy. Exclusions reduce the broad coverage provided in the insurance policy. F Federal Home Loan Mortgage Corporation (FHLMC) A publicly chartered agency that buys qualifying residential mortgages from lenders, packages them into new securities backed by those pooled mortgages, provides certain guarantees, and then resells the securities on the open market. The corporation's stock is owned by savings institutions across the U.S. and is held in trust by the Federal Home Loan Bank System. The corporation, nicknamed Freddie Mac, has created a secondary market, which provides more funds for mortgage lending and allows investors to buy high-yielding securities backed by federal guarantees. Federal National Mortgage Association (FNMA) A publicly-owned, government-sponsored corporation chartered in 1938 to purchase mortgages from lenders and resell them to investors. The agency, known by the nickname Fannie Mae, mostly packages mortgages backed by the Federal Housing Administration, but also sells some non-governmentally backed mortgages. Shares of FNMA itself, known as Fannie Maes, are traded on the New York Stock Exchange. Fee simple form of ownership The ownership of property where the owner is entitled to the entire property without conditions or limitations. Financial risk Risk related to the amount of debt used in financing a company. Fixed annuity An annuity that guarantees a set payment to be made in a lump sum or in periodic installments for life or for a specified term. Fixed-income investment A security that pays a set rate of interest over the duration of the investment term (i.e., a bond). 401(k) plan Plan that allows an employee to contribute pre-tax dollars to a fund, which is invested in stocks, bonds, or money market instruments. Also known as a cash or deferred arrangement. An employee can contribute up to certain limits of gross salary and the capital and earnings compound tax-deferred until the employee retires or leaves the company. 403(b) plan A Tax-Deferred Annuity (TDA) plan which meets the requirements of Section 403(b) of the Internal Revenue Code. Only certain non-profit organizations which are described in Section 501(c)(3) of the Internal Revenue Code and public educational institutions qualify for the use of such plans. The plan allows an employee to contribute pre-tax dollars to a fixed or variable account. Since the employer pays no income tax, each individual employee benefiting from the plan is able to defer all contributions and interest or investment gains made on his or her behalf. This deferral includes either employer contributions and/or contributions required by the employee. 457 plan See "deferred compensation." Front-load fund An open- or closed-end investment company that charges a fee upon the purchase of its shares. This fee, called "the load," is deducted from the amount invested. Fund A portfolio of stocks, bonds and/or cash equivalents. The portfolio manager buys and sells securities. Funded pension plan In this type of retirement plan, the employer puts aside enough money each year to cover the cost of currently promised pension benefits. Futures contract A contract providing for the delivery or receipt of financial assets at a specified date and price. #40030