Face value
Just like it sounds: The value a bond has printed on its face, usually $1,000. Also known as par value, it represents the amount of principal owed at maturity. The bond's actual market value may be higher or lower. When a bond's market price fluctuates, it has an impact on its yield. If the price drops below the bond's face value, its yield goes up. If the price rises above face value, the yield goes down. See "When Yield Goes Up, Price Goes Down."
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Factors
Companies that buy accounts receivable, which are debts for merchandise or services bought on credit. Factors assume the job of collecting the money due.
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Farm Credit System
The government-sponsored enterprise that finances farm loans by selling bonds and notes.
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Federal budget deficit
The amount of money the federal government owes because it spent more than it received in revenue for the past year. To cover the shortfall, the government usually borrows from the public by floating long- and short-term bonds. Federal deficits, which started to rise in the 1970s, exploded to hundreds of billions of dollars per year in the 1980s and 1990s. Some economists think massive federal deficits can lead to high interest rates and inflation, since they compete with private borrowing from consumers and businesses, but such was not the case during the 1980s and 1990s. The cumulative unpaid debt of all past deficits is called the federal debt or national debt.
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Federal debt
The total amount the federal government owes because of past deficits. The federal debt is made up of such debt obligations as Treasury bills, Treasury notes and Treasury bonds. Congress imposes a ceiling on federal debt, which has been increased on occasion, when accumulated deficits near the ceiling. In the mid-1990s, the federal debt was more than $5 trillion. The interest dues on the federal debt is one of the major expenses of the federal government. The federal debt, which is the total debt accumulated by the government over many years, should not be confused with the federal budget deficit, which is the excess of spending over income by the federal government in one fiscal year.
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Federal funds
Funds deposited by commercial banks at Federal Reserve district banks. Designed to enable banks temporarily short of their reserve requirement to borrow reserves from banks having excess reserves. See federal-funds rate.
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Federal-funds rate
The interest rate that banks charge each other for the use of federal funds. This rate is used for overnight loans to banks that need more cash to meet bank reserve requirements. It changes daily and is the most sensitive indicator of general interest rate trends. The rate is not set directly by the Federal Reserve, but fluctuates in response to changes in supply and demand for funds. It is reported daily in the business section of most newspapers.
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Federal Home Loan Bank System
A network of regional Federal Home Loan Banks that provides loans to savings banks, savings and loans and other institutions that are important providers of mortgage loans.
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Federal Home Loan Mortgage Corporation
Nicknamed "Freddie Mac," the Federal Home Loan Mortgage Corporation is a government sponsored enterprise that buys residential mortgages from financial institutions and repackages them to sell as investment securities. Freddie Mac was established to enhance the liquidity of residential mortgages by assisting in the development of a secondary market for conventional mortgages. It accomplishes this by purchasing mortgages from a mortgage originator and holding them as investments in its portfolio, or securitizing them. Shares of Freddie Mac stock are traded on the New York Stock Exchange. Bonds issued by Freddie Mac are called agency bonds, which are almost as safe as Treasurys, but pay better yields. See "Smoothing Out the Ride."
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Federal National Mortgage Association
Nicknamed "Fannie Mae", the Federal National Mortgage Association is a government-sponsored enterprise that buys mortgages from the Federal Housing Administration and other financial institutions and packages them as investment securities. Its purpose is to improve liquidity in the secondary market for such mortgages. Shares of Fannie Mae stock are traded on the New York Stock Exchange. Bonds issued by Fannie Mae are called agency bonds, which are almost as safe as Treasurys, but pay better yields. See "Smoothing Out the Ride."
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Federal Open Market Committee
The policy-making arm of the Federal Reserve Board. It sets monetary policy to meet the Fed's objectives of regulating the money supply and credit. The FOMC's chief tool is the purchase and sale of government securities, which increase or decrease the money supply, respectively. It also sets key interest rates, such as the discount rate. The FOMC has 12 members. Seven are the members of the Federal Reserve Board, appointed by the president of the United States. The other five are presidents of the 12 regional Federal Reserve banks.
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Federal Reserve
The central bank of the U.S. that sets monetary policy. The Federal Reserve oversees money supply, interest rates and credit with the goal of keeping the U.S. economy and currency stable. Governed by a seven-member board, the system includes 12 regional Federal Reserve Banks, 25 branches and all national and state banks that are part of the system. Also called the Fed.
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Financial Accounting Standards Board
Also called the FASB, the Financial Accounting Standards Board is an independent board responsible for establishing and interpreting generally accepted accounting principles (or GAAP). U.S. companies that adhere to GAAP are said to be more transparent and easier to analyze financially than companies in many foreign countries. In fact, the differences in accounting standards makes it difficult to compare the earnings of companies in different countries.
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Financial planner
A type of financial adviser, ideally with broad knowledge of all areas of personal finance. Fee-only planners are paid solely by their clients — that is, they do not receive sales commissions or compensation from other sources. Fee-plus-commission planners charge fees for advice and other services, and also receive commissions on the sale of investment and insurance products. When choosing a financial planner, see that he has a certified financial planner or CFP designation. It is the best known financial planning designation, requiring that the adviser be certified by the CFP Board of Standards. See "Five Easy Pieces."
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Fiscal year
The 12-month period that a corporation or government uses for bookkeeping purposes. A company's fiscal year is often, but not necessarily, the same as the calendar year. A seasonal business will frequently select a fiscal rather than a calendar year so that its year-end figures will show it in its most liquid condition, which also means having less inventory to verify physically. The fiscal year of the U.S. government ends September 30. Abbreviated as FY.
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Fixed assets
Tangible property used in the operations of a business but not expected to be consumed or converted into cash in the ordinary course of events. Plant, machinery and equipment, furniture and fixtures and leasehold improvements comprise the fixed assets of most companies. Companies with a lot of fixed assets can be accurately valued with the price-to-book ratio. See "Price/Book Value."
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Fixed-income security
A security that pays a fixed rate of return. This usually refers to government, corporate or municipal bonds, which pay a fixed rate of interest until the bonds mature, and to preferred stock, paying a fixed dividend. Since fixed-income investments guarantee you an annual payout, they are inherently less risky than stocks, which do not. See "What Exactly Is A Bond?"
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Fixed-rate mortgage
A type of mortgage where the interest rate does not fluctuate with general market conditions. Fixed-rate mortgages tend to have higher original interest rates than adjustable-rate mortgages (or ARMs) do because lenders are not protected against a rise in the cost of money when they make a fixed-rate loan.
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Flexible spending account
An employee benefit offered by many companies that allows employees to have pretax dollars withheld from their salaries to pay for unreimbursed medical expenses and dependent-care expenses, such as babysitting or elder care. If you know you have certain fixed medical expenses every year (such as pharmaceutical or psychiatric expenses) that are not covered by your health insurance plan, you should definitely take advantage of your flexible spending account.
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Float
The number of outstanding shares in a corporation available for trading by the public. A small float means the stock will be more volatile, since a large order to buy or sell shares can influence the stock's price dramatically. A large float will mean a stock is less volatile. Since small-capitalization stocks tend to have less shares outstanding than larger companies, their float is smaller and they tend to be more volatile. The same is true for closely-held companies. Also see liquidity.
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Floater
An insurance policy that covers specific items of personal property, such as jewelry.
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Floating an issue
Offering stocks or bonds to the public for the first time. It can be an initial public offering or an offering of issues by companies that are already public.
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F. O. B.
The practice of the buyer paying all delivery costs for an item. An abbreviation for free on board.
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Force majeure
A condition that permits a company to depart from the strict terms of a contract because of an event or effect that can't be reasonably anticipated or controlled.
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Foreign exchange
Money instruments used to make payments between countries.
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Foreign exchange market
Market in which foreign currencies are bought and sold and exchange rates between currencies are determined. The exchange rate is the price at which one country's currency can be converted into another. Some exchange rates are fixed by agreement, but most are determined by supply and demand on the exchange market.
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Forward exchange rate
A currency exchange contract that traders have agreed upon for a future date. The forward rate is usually for one, two, three or six months and referred to as 30-day forward, 60-day forward, etc.
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Forward trading
Trade, usually at the current price, in which actual delivery and settlement is made at a future date. Forward trade occurs in the commodity, foreign exchange, stock, bond and futures markets.
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Friendly takeover
An acquisition of one company by another in which the boards of both companies agree to the terms of the transaction.
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FT-SE 100
Index of 100 large companies, on a capitalization basis, on the London Stock Exchange. The FT-SE 250 is an index of the largest 250 companies after the top 100. Also called the Financial Times-Stock Exchange 100-Share Index.
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Full-service brokers
Brokers who execute buy and sell orders, research investments, help investors develop and meet investment goals and give advice to investors. They charge commissions for their work. During a bull market, when stocks are going up consistently, good ideas are a dime a dozen. But when the markets turn choppy, solid advice can save you. Some full-service firms offer a range of good mutual funds, estate-planning services and tax advice. A broker will set up a financial profile for you — based on your assets, income and goals — and advise you appropriately. All of this, of course, will cost you a lot more than using a bare bones discount broker. See "Power to the People."
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Fundamental analysis
Fundamental analysis asserts that a stock's price is determined by the future course of its earnings and dividends. The fundamental analyst tries to determine what the intrinsic value of a stock's underlying business is by looking at its financial statements and its competitive position within its industry. If this intrinsic value is greater than the market price of the stock, the stock is said to be undervalued. In other words, the company has greater earning potential than its stock price would indicate. Fundamental analysis is the antithesis of technical analysis, which focuses on stock-price movements instead of underlying earnings potential.
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Fund company
Fund companies are business entities that manage, sell and market mutual funds to the public. They typically offer a wide variety of funds, investing in both the equity and fixed-income markets. Companies also perform administrative tasks, such as fund accounting and customer service, although these responsibilities are sometimes contracted out. Some of the larger fund companies are Fidelity, Vanguard, Franklin-Templeton and T. Rowe Price. In many cases, investors may move their assets from one fund to another within a fund company at little or no cost. Also called fund family.
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Futures
An agreement to buy or sell a set amount of a commodity or security in a designated future month at a price agreed upon today by the buyer and seller. A futures contract differs from an option because an option is the right to buy or sell, whereas a futures contract is the promise to actually make a transaction. A future is part of a class of securities called derivatives, so named because such securities derive their value from the worth of an underlying investment.
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Futures option
An option on a futures contract.
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