Library of Informative Articles

Glossary of Financial Terms

This glossary is based upon terms found in the Investment Funds Institute of Canada's mutual fund course.

Annuity: A contract that guarantees a series of payments in exchange for a lump sum investment.

Back-end load: A sales charge levied when mutual funds are redeemed.

Bank Rate: The rate at which the Bank of Canada makes short-term loans to chartered banks and other financial institutions, and the benchmark for prime rates set by financial institutions.

Closed-end fund: A fund company that issues a fixed number of shares. Its shares are not redeemable, but are bought and sold on stock exchanges or the -counter market.

Compounding: Process by which income is earned on income that has been previously earned. The end value of the investment includes both the original amount invested and the reinvested income.

Consumer Price Index: A statistical device that measures the change in cost of living for consumers. It is used to illustrate the extent that prices have risen or the amount of inflation that has taken place.

Current Yield: The annual rate of return that an investor purchasing a security at its market price would realize. This is the annual income from a security dividend by the current price of the security. It is also known as the return on investment.

Deferred Profit Sharing Plan: A plan that allows an employer to set aside a portion of company profits for the benefit of employees. A Corporation makes a contribution to the plan on behalf of an employee.

Defined Benefit Pension Plan: A registered pension plan that guarantees a specific income at retirement, based on earnings and the number of years worked.

Defined Contribution Pension Plan: A registered pension plan that does not promise an employee a specified benefit upon retirement. Benefits depend on the performance of investments made with contributions to the plan.

Distributions: Payments to investors by a mutual fund from income or from profit realized from sales of securities.

Dividend: A per -share payment designated by a company's board of directors to be distributed among shareholders. For preferred shares, it is generally a fixed amount. For common shares, the dividend varies with the fortunes of the company and the amount of cash on hand. It may be omitted if business is poor or the directors withhold earning to invest in plan and equipment.

Dividend Fund: A mutual fund that invests in common shares or senior Canadian corporations with history of regular dividend payments at above average rates, as well as preferred shares.

Face Value: The principle amount, or value at maturity, of a debt obligation. Also known as the par value or denomination.

Fair Market Value: The price a willing buyer would pay a willing seller if neither were under compulsion to buy or sell. The standard at which property is valued for a deemed disposition.

Fixed Dollar Withdrawal Plan: A plan that provided the mutual fund investor with fixed-dollar payments at specified intervals, usually monthly or quarterly.

Front-end load: A sales charge levied on the purchase of mutual fund investor with fixed-dollar payments at specified intervals, usually monthly or quarterly.

Guaranteed Investment Certificate (GIC): A deposit instrument paying a predetermined rate of interest for a specified term, available from banks, trust companies and other financial institutions.

Life Annuity: An annuity under which payments are guaranteed for the life of the annuitant.

Life Expectancy Adjusted Withdrawal Plan: A plan through which a mutual fund investor's holdings are fully depleted while providing maximum periodic income over the investor's lifetime.

Money Purchase Pension Plan: Another term for defined contribution pension plan.

Mutual Fund: An investment entity that pools shareholder or unitholder funds and invests in various securities. The units or shares are redeemable by the fund on demand by the investor. The value of the underlying assets of the fund influences the current price of the units.

No-load fund: A mutual fund that does not charge a fee for buying or selling its shares.

Open-end Fund: An open-end mutual fund continuously issues and redeems units, so the number of units outstanding varies from day to day. Most mutual funds are open-end funds.

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