Macaulay duration

A measurement of the price sensitivity of a fixed income security to changes in interest rates.  Macaulay duration is measured in years and is the weighted average of the security’s cash flows.

Management Fee

The compensation paid to the investment advisor / manager by a mutual fund or Investment Company or investors for the services rendered.

Margin

1) In futures trading refers to a required performance bond tendered by a party to a futures contract.  2)Purchasing stocks with borrowed money is known as buying on margin

Market maker

Also known as a dealer.  A party that makes a market in an instrument by offering to both buy and sell the instrument.  The market maker profits from the difference between its bid and ask prices.

Market risk

Often used interchangeably with price risk including interest-rate, exchange-rate, commodity and equity risk.

Marking-to-market

1) The practice of periodically adjusting a margin account by adding or subtracting funds based on changes in market value.  The practice has long been employed in futures trading and for writers of options.  2) The revaluation of a financial instrument or portfolio based on current market rate(s) and the current make up of the portfolio.

Maturity date

1) The date a fixed income security matures and the issuer repays the principal to the investor.  2)  In options, the maturity refers to the expiration date of the contract.    

Medium term notes

Fixed income securities that are not traditionally underwritten but offered through a shelf registration that is filed with the SEC.  After SEC approval, the company can issue notes of any size and with any coupon or maturity, for up to two years after the filing.

Mismatch risk

The risk to a portfolio from failing to precisely match the risks associated with the underlying portfolio. For example, a swap book may mismatch maturities or notional principals and will be exposed to the respective risks. 

Modified duration

A modified form of duration obtained by dividing the duration measure developed by Macaulay’s duration by 1 plus the yield divided by the frequency of the coupon payments.

Money market instruments

Debt instruments having a maturity of less than one year.

Money market yield

Also known as money market basis and yield basis.  A method of calculating the yield on certain money market instruments.  The method uses actual days over 360 in the yield calculation. Some countries use a 365-day basis for their money market calculations.

Monte Carlo Simulation

A simulation that attempts to simulate the future using an uncertain variable.  For example, to simulate the future stock price, a simulation may use an algorithm using the current price, mean/average of the stock and volatility/standard deviation. The simulation will randomly generate a term that will change the volatility resulting in a single simulated future price. However, the Monte Carlo method refers to the simulation being run hundreds if not thousands of times with each simulation referred to as a path. In this simplistic example, the future price is determined by taking the average of all of the prices. 

Customary way to value MBS and other securities with embedded options.  Monte Carlo simulations generate numerous random interest rate paths, present valuing the cash flows of the security under each path while taking the option into account, to derive the value of the security.

Mortgage-Backed Securities

Known by the acronym MBS.  Any securities backed by whole mortgages or by mortgage pass-through certificates.  Mortgage pass-through certificates are themselves mortgage-backed securities. 

Municipal Bonds

 Often known as ‘munis”.  Bonds issued by state and local governments, often known as general obligation bonds.  The credit worthiness is based on the credit of the municipality.  Special Revenue bonds are issued by agencies or authorities of state and local governments for specific public work projects. The cash flows of these projects secure the bond.  The coupons paid to investors are tax-exempt from Federal taxes and often tax-exempt from the issuing State’s income taxes and/or local municipality.  For example, a Muni issued by New York City may exempt a NYC resident from paying city, state and Federal taxes.

Muni’s

 See Municipal Bonds

Mutual Fund

A type of security which pools investors’ monies together, investing in specific sectors of the equity or fixed income market, managed by professional asset managers.  Mutual funds offer the individual investor diversification that they generally cannot get on their own.  The investor buys shares in the fund and participates in the fund’s gain or loss on a pro-rata basis.