403(b) plan:
A defined-contribution retirement plan available to employees of public schools, certain tax-exempt entities (including churches), and educational institutions. Allows an employee to contribute pretax dollars to a company pool that is invested in stocks, bonds, or money market instruments. Named after the section of the Internal Revenue Code that created it.

annuity:
A series of fixed-amount payments paid at regular intervals over the period of the annuity.

asset allocation:
Dividing your investment portfolio among the major asset categories. The most important decision you will make.

bond amortization:
Each year a portion of the original issue discount must be accrued and included in gross income.

callable bond:
A bond that can be redeemed by the issuer prior to its maturity. Usually a premium is paid to the bond owner when the bond is called.

compound sum of an annuity:
Constant payments are made at equally spaced time periods and grow to a future value.

deep discount bond:
A bond that has a coupon rate far below rates currently available on investments and whose value is at a significant discount from par value.

default risk:
The risk that a company will be unable to pay the contractual interest or principal on its debt obligations.

defined-benefit plan:
Plan that promises to pay a specified amount to each person who retires after a set number of years of service. Such plans pay no taxes on their investments. Employees contribute to them in some cases; in others, all contributions are made by the employer.

defined-contribution plan:
A type of retirement plan where the ultimate benefits that are paid out depend on the level of contributions made to the plan and the investment performance of those contributions.

diversification:
The process of accumulating securities in different investments, types of industries, risk categories, and companies in order to reduce the potential harm of loss from any one investment.

duration:
A maturity measure which accounts for the dates on which interest is paid and the amount of interest along with the redemption date. It is the time-weighted present value of all cash flows divided by the bond price.

financial planner:
An investment professional generalist who helps individuals delineate financial plans with specific objectives and helps coordinate various financial concerns.

Individual Retirement Account (IRA):
Personal retirement account that an employed person can set up with a deposit that is tax deductible up to $2,000 per year. Such deposits qualify as a deduction against income earned in that year and interest accumulates tax-deferred until the funds are withdrawn at age 59 1/2 or later. Early withdrawals are subject to a 10% penalty.

investment adviser:
A person who manages assets, making portfolio composition and individual security selection decisions, for a fee, usually a percentage of assets invested.

Keogh:
A tax-deferred pension account designated for employees of unincorporated businesses or for persons who are self-employed (either full-time or part-time). The Keogh plan allows all investment earnings to grow tax deferred until capital is withdrawn, as early as age 59 1/2 and starting no later than age 70 1/2. Almost any investment except precious metals or collectibles can be used for a Keogh account.

lump-sum distribution:
A single payment to a beneficiary covering the entire amount of an agreement. Participants in Individual Retirement Accounts (IRAs), pension plans, profit-sharing, and executive stock option plans generally can opt for a lump-sum distribution if the taxes are not too burdensome when they become eligible.

pension:
Fund set up by a corporation, labor union, governmental entity, or other organization to pay the pension benefits of retired workers. Pension funds invest billions of dollars annually in the stock and bond markets, and are therefore a major factor in the supply-demand balance of the markets.

profit-sharing plan:
an agreement between a corporation and its employees that allows the employees to share in company profits. Annual contributions are made by the company, when it has profits, to a profit-sharing account for each employee, either in cash or in a deferred plan, which may be invested in stocks, bonds, or cash equivalents. The funds in a profit-sharing account generally accumulate tax deferred until the employee retires or leaves the company. Many plans allow employees to borrow against profit-sharing accounts for major expenditures such as purchasing a home or financing children's education. Because corporate profit-sharing plans have custody over billions of dollars, they are major institutional investors in the stock and bond markets.