Ladder
A portfolio strategy where investors stagger the maturities of their bond holdings in order to provide regular income as the bonds come due and smooth out the effects of interest rate fluctuations. For those with enough assets allocated to bonds, we recommend putting equal amounts of money into Treasurys due to mature in one-, three-, five-, seven- and nine-year periods. That gives your portfolio an average maturity of five years. As the principal comes due every two years, you can reinvest that amount in bonds due to mature in 10 years. That way, you keep your portfolio's average maturity at five years or so. See "Laddering Your Bond Portfolio."
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Lagging economic indicators
Economic indicators that lag behind the overall pace of economic activity. The Commerce Department publishes the Index of Lagging Indicators monthly along with the Index of Leading Indicators and Index of Coincident Indicators. The six components of the lagging indicators are the unemployment rate, business spending, unit-labor costs, bank-loans outstanding, bank interest rates and book value of manufacturing and trade inventories.
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Large-capitalization stock
A share of a large publicly traded corporation, typically with a total market capitalization of greater than $5 billion. (Also called large-cap stocks, large caps and blue chips.) These companies play an especially significant role in driving the economy. The two most-watched indexes — the Dow Jones Industrial Average and the S&P 500 are both composed of large-cap stocks. The Dow tracks 30 of the biggest stocks on the New York Stock Exchange. The S&P tracks 500 companies with an average market value of $7.85 billion. Because of their sheer size, large caps tend to grow slower than small-capitalization stocks, but they also tend to be much more stable. See "The Large Caps."
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Leading economic indicators
A composite of 11 economic measurements developed to help forecast likely changes in the economy as a whole. It is compiled by the Conference Board. The components are: average work week, unemployment claims, orders for consumer goods, slower deliveries, plant and equipment orders, building permits, durable-order backlog, materials prices, stock prices, M2 money supply and consumer expectations.
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Letter of credit
A bank's promise that a shipment of goods will be paid for on arrival. It's used mostly in foreign trade but is also used domestically to guarantee payment of securities.
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Level-premium term insurance
Term life insurance on which premiums are projected or guaranteed level for a certain period, typically five, 10, 15 or 20 years.
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Leverage
The degree to which an investor or business is utilizing borrowed money. For companies, leverage is measured by the debt-to-equity ratio, which is calculated by dividing long-term debt by shareholders' equity. The more long-term debt there is, the greater the financial leverage and the greater the risk of the company falling on its face. For investors, leverage means buying on margin or using derivatives such as options, to enhance return on value without increasing investment. Leveraged investing can be extremely risky because you can lose not only your money but the money you borrowed as well. See "Long-Term Debt."
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Leveraged buyout
The purchase of a company by a small group of investors financed largely by debt, often in the form of junk bonds. Most often the target company's assets serve as security for the loans taken out by the acquiring firm, which repays the loans out of cash flow of the acquired company. The buyout firm maintains control by converting the acquired business from a public company to a private one.
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Liabilities
The claims against a corporation or other entity. They include accounts payable, wages and salaries, dividends, taxes and obligations such as bonds, debentures and bank loans. See current liabilities and total liabilities.
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Liability insurance
Insurance that pays if you are sued or legally responsible for a loss. Liability coverage, which also covers legal-defense costs, is typically included in auto and home-insurance policies.
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Life insurance illustration
A computer projection of how a policy might perform in future years. One prepared for an existing policy is called an in-force illustration.
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Life insurance trust
A trust set up to buy life insurance coverage or to become the owner of an existing policy. When a policy is owned by a trust, the death benefit is not counted as part of the insured person's estate for estate-tax purposes.
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Limit order
An order to buy or sell a stock at a specific price or better. The broker will execute the trade only within the price restriction. This type of trade provides more investment control than a market order, which will buy or sell the security at any price.
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Liquidation
The process of converting stock or other assets into cash. When a company is liquidated, the cash obtained is first used to pay debts and obligations to holders of bonds and preferred stock. Whatever cash remains is distributed on a per-share basis to the holders of common stock.
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Liquidity
The ease with which financial assets can be converted to cash without creating a substantial change in price or value. Liquidity is influenced by the amount of float in the security, investor interest and size of the investment being converted to cash. A blue-chip stock like Microsoft is liquid because it is actively traded so its share price won't be dramatically affected by a few buy or sell orders. Money-market funds and checking accounts provide instant liquidity because you can write a check on the assets.
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Living trust
A revocable trust formed while you are alive. It is often used to avoid probate or to provide for the orderly management of assets if you should become disabled or incompetent.
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Living will
A document indicating the type of care and degree of medical intervention you would want in the event of a life-threatening medical condition.
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Load
A sales charge for buying or selling a mutual fund. For initial, or front-end, loads, this figure is expressed as a percentage of the initial investment and is incurred upon purchase of fund shares. For back-end loads, the amount charged is based on the lesser of the initial or final value of the shares sold. See "Cost Control."
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Load factor
A measurement of business and efficiency for airlines. It is the percentage of available seats that are occupied.
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Load fund
A mutual fund that charges a sales commission, as opposed to a no-load fund, which doesn't levy a fee when you buy or sell. To compensate brokers, load funds usually charge either a front-end sales commission when you buy the fund or a back-end sales commission when you sell. In addition, many broker-sold funds charge an annual 12b-1 fee, which is also used to compensate brokers. The 12b-1 fee is included in the fund's expense ratio. In theory, the advantage of a load fund is that the broker/salesperson will provide you with financial advice, telling you when it is appropriate to sell the fund or buy more shares. See "Cost Control."
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Loan-participation fund
A fund that invests in loans that are made by banks to companies with low credit ratings. The loans are not investment grade, but they are secured by assets, which means they are the first to be paid off in the case of a bankruptcy. (And that makes them higher quality than junk bonds.) Because of the nature of their portfolio, the funds are able to offer higher yields than investment-grade and government-bond funds. Also, since the rates on these loans are reset every 30, 60 or 90 days to reflect changes in current interest rates, these funds have little interest-rate risk. That makes them fairly stable investment vehicles. Also called floating-rate funds. See "The Best Short-Term Investments."
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Loan syndication
A process in which banks resell portions of large loans to other banks.
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Loan-to-value ratio
The ratio of the principal balance of a home loan to the estimated market value. A $100,000 home with a $75,000 mortgage, for example, has a loan-to-value ratio of 75%. Few lenders will make a loan for the full value of a home; most have a maximum loan-to-value ratio of 75% to 90%.
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Lombard rate
In Germany, the interest rate charged by the central bank to other financial institutions. The Lombard rate is closely watched by the credit markets because it serves as a ceiling for short-term money-market rates.
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London Interbank Offered Rate (Libor)
This is the rate that the most creditworthy international banks dealing in Eurodollars charge each other for large loans. Libor is the eurodollar equivalent of the federal-funds rate.
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Long
The opposite of short selling, establishing a long position means to own a security with the expectation that it will appreciate. One would say "I'm long bank stocks but short semiconductor companies."
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Long bond
Slang for a 30-year Treasury bond. See "Types of Bonds."
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Long-term bonds
Treasury bonds with maturities of more than 10 years; corporate bonds with maturities more than 15 years. Long-term bonds pay higher yields but have greater inflation and credit risk. See "Types of Bonds."
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Long-term-care insurance
Insurance that provides some coverage for nursing-home stays and home health care for people with disabling conditions.
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Long-term debt
Debt that must be paid in a year or more. A company's long-term debt could be in the form of bank debt, mortgage bonds, debenture bonds or other obligations. Analysts examine long-term debt to see how much leverage a company has. See "Long-Term Debt."
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Long-Term Equity Anticipation Securities (LEAPS)
Options that won't expire for up to three years.
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