Investment Glossary

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Debenture

a corporate bond that may or may not be secured by specific assets.

Debt

money owed.

Deep-discount bond

a long-term debt security that, because of a low coupon rate of interest compared with current rates of interest, sells at a substantial discount from face value.

Default

Situation where a borrower is has not met the repayment terms of the loan agreement.

Deferred annuity

an annuity that is not scheduled to begin payments until a given date in the future. These annuities may be purchased with a single payment, or, as is more often the case, with a series of periodic payments. Deferred annuities are most commonly purchased by people who wish to make periodic payments during their working lives in order to receive monthly or annual income payments from the annuities later, during their retirement.

Deflation

a reduction in consumer or wholesale prices. The term generally applies to more than just a temporary decline. See Consumer price index (CPI)

Derivative instrument

a security that derives its value from another security. For example, an option is a derivative instrument that obtains value from the security that can be purchased with the option. Futures contracts are another form of derivative security.

Discount bond

a bond selling at a price that is less than its par value. In addition to semi-annual interest payments, a discount bond offers investors additional appreciation if the security is held until maturity.

Discount rate

the rate of return or interest rate at which the present value is calculated from a future value or values.

Discounted cash flow

a mathematical method of estimating an investment's current value based on the discounting of projected future revenues and costs. The answer derived from the technique is only as accurate as the estimates used for cashflows and the discount rate. The market price of a bond is calculated using this method.

Diversification

1. the acquisition of a group of assets in which returns on the assets have relatively low correlation. 2. the inclusion of several investments or securities in a portfolio. Proper investment diversification, reduces the risk inherent in particular securities or securities markets.

Dividend

a share of a company's net profits distributed by the company to a class of its shareholders. The dividend is paid in a fixed amount for each share held. Dividends also may be in the form of property, scrip or shares.

Dividend discount model

a model for determining the price at which a security should sell based on the discounted value of estimated future dividend payments. Dividend discount models are used to determine if a security is a good buy (ie one selling at a lower current price than the model says it should sell) or a bad buy (ie one selling at a higher current price than the model says it should sell).

Dividend yield

the annual dividends per share divided by the market price per share. If Telecom shares trade at a price of $5 per share, its $0.59 dividend provides a dividend yield of $0.59/$5 or 11.8%. this figure measures the current return on a particular share, but does not take into account potential gains and losses in the security's value.

Dollar-cost-averaging

investment of an equal amount of money at regular intervals, usually each month. This process results in the purchase of extra shares or fund units during market downturns and more units during market upturns. Dollar-cost averaging is based on the belief that the market or a particular share will rise in price over the long term and that it is not worthwhile (or even possible) to identify intermediate highs and lows.

Double taxation

taxation of the same income twice by the same taxing authority. This is generally used to refer to the taxation of dividends which are taxed once at the corporate level (as income before dividends are declared) and again at the personal level (when the dividends are received). In New Zealand, this is avoided via the imputation credit system.

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