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It explains Glossary on Finance and related terms.Exhaustive list for MBA Students, Aspirants and business Professionals
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FINANCE GLOSSARY
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Terms and Concepts Accelerated Depreciation - Is an accounting technique which provides larger than straightline depreciation amounts in the early years and smaller than straight-line depreciation amounts in the later years. Abnormal returns - Part of the return that is not due to systematic influences. In other words, abnormal returns are above those predicted by the market movement alone. Accounts Payable - Amounts due from your business to your creditors. Generally these are short term liabilities (30-120 days), and are shown under the Current Liabilities section in the Balance Sheet. Accounts Receivable - Amounts due to your business from your customers. Generally these amounts are short term receivables (30-120 days), and are shown under Current Assets section in the Balance Sheet. Accounts Receivable Turnover - A measure used to determine a company's average collection period for receivables. Usually computed by dividing net sales (or net credit sales) by average accounts receivable. Accrual bond - A bond on which interest accrues, but is not paid to the investor during the time of accrual. The amount of accrued interest is added to the remaining principal of the bond and is paid at maturity. Accrued interest - The interest due on a bond since the last interest payment was made. Acid Test Ratio - A stringent test that indicates whether a firm has enough short-term assets to cover its immediate liabilities without selling inventory Adjusted present value (APV) - The net present value analysis of an asset if financed solely by equity (present value of un-levered cash flows), plus the present value of any financing decisions (levered cash flows). In other words, the various tax shields provided by the deductibility of interest and the benefits of other investment tax credits are calculated separately. This analysis is often used for highly leveraged transactions such as a leverage buy-out. Agency problem - Conflicts of interest among stockholders, bondholders, and managers. Agency theory - The analysis of principal-agent relationships, wherein one person, an agent, acts on behalf of another person, a principal. Aging Schedule - A schedule showing the length of time an invoice has been outstanding or held. Aging schedules are normally created for Accounts Payable and Accounts Receivable. For example, an aging schedule for accounts receivable can show how many days an invoice has been outstanding. Aging schedules can also be created for inventory. Alpha - Is a measure of the incremental reward (or loss) that an investor gained in relation to the market.
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American Depositary Receipt (ADR) – A security issued by a U.S. bank in place of the foreign shares held in trust by that bank, thereby facilitating the trading of foreign shares in U.S. markets. American option - An option that may be exercised at any time up to and including the expiration date. Amortization - Amortization (or amortisation) is the process of decreasing or accounting for, an amount over a period. Includes such practices as depreciation, depletion, write-off of intangibles, prepaid expenses and deferred charges. Angel Investor - An investor who provides financial backing for small start-ups or entrepreneurs Annual Percentage Rate (APR) - Also known as effective annual rate is used to put investments with varying interest compounding periods (daily, monthly, and semi-annually) on a common basis. It is computed as follows APR = (1 + r/m) m - 1.0 where r = the stated, nominal, or quoted rate, and m = the number of compounding periods per year. Annual percentage yield (APY) - The effective, or true, annual rate of return. The APY is the rate actually earned or paid in one year, taking into account the affect of compounding. The APY is calculated by taking one plus the periodic rate and raising it to the number of periods in a year. Annual report - The formal financial statement issued yearly by a corporation. The annual report shows assets, liabilities, revenues, expenses and earnings - how the company stood at the close of the business year, how it fared profit-wise during the year, as well as other information of interest to shareowners. Annuity - Contract under which a series of periodic payments are made during a certain period of time in consideration of a certain amount. There are a number of types of annuities, including deferred, indexed, life, and guaranteed annuities. Arbitrage - In economics and finance, arbitrage is the practice of taking advantage of a price difference between two or more markets - striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices Asian option - Option based on the average price of the asset during the life of the option. Ask price - A dealer's price to sell a security; also called the offer price. Assets - Everything a corporation owns or that is due to it - cash, investments, money due it, materials and inventories, which are called current assets; buildings and machinery, which are known as fixed assets; and patents and goodwill, called intangible assets
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Asset/liability management - Also called surplus management, the task of managing funds of a financial institution to accomplish the two goals of a financial institution - (1) to earn an adequate return on funds invested and (2) to maintain a comfortable surplus of assets beyond liabilities. Asset Backed Securities - Is a security backed by notes or receivables against assets other than real estate. Asset pricing model - A model, such as the Capital Asset Pricing Model (CAPM), that determines the required rate of return on a particular asset. At-the-money - An option is at-the-money if the strike price of the option is equal to the market price of the underlying security. Average collection period, or days' receivables - The ratio of accounts receivables to sales, or the total amount of credit extended per dollar of daily sales (average AR/sales * 365). Average cost of capital - A firm's required payout to the bondholders and to the stockholders expressed as a percentage of capital contributed to the firm. Average cost of capital is computed by dividing the total required cost of capital by the total amount of contributed capital. Average rate of return (ARR) - The ratio of the average cash inflow to the amount invested. Activity Based Budgeting - A method of budgeting in which the activities that incur costs in every functional area of an organization are recorded and their relationships are defined and analyzed. Activities are then tied to strategic goals, after which the costs of the activities needed are used to create the budget. Activity Based Costing - An accounting method that identifies the activities that a firm performs, and then assigns indirect costs to products. An activity based costing (ABC) system recognizes the relationship between costs, activities and products, and through this relationship assigns indirect costs to products less arbitrarily than traditional methods Balance of payments - A statistical compilation formulated by a sovereign nation of all economic transactions between residents of that nation and residents of all other nations during a stipulated period of time, usually a calendar year. Balance sheet - A condensed financial statement showing the nature and amount of a company's assets, liabilities and capital on a given date Balance sheet identity - Total Assets = Total Liabilities + Total Stockholders' Equity Bankruptcy - A legal proceeding involving a person or business that is unable to repay outstanding debts. Barbell strategy - A strategy in which the maturities of the securities included in the portfolio are concentrated at two extremes.
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Basic IRR rule - Accept the project if IRR is greater than the discount rate; reject the project is lower than the discount rate. Bear - An investor who believes a stock or the overall market will decline. A bear market is a prolonged period of falling stock prices Bearer bond - Bonds that are not registered on the books of the issuer. Such bonds are held in physical form by the owner, who receives interest payments by physically detaching coupons from the bond certificate and delivering them to the paying agent. Bear market - Any market in which prices are in a declining trend. Beta - Is a quantitative measure of a security, basket, or funds behaviour relative to the market or benchmark. Bid price - This is the quoted bid, or the highest price an investor is willing to pay to buy a security. Practically speaking, this is the available price at which an investor can sell shares of stock. Bid-asked spread - The difference between the bid and asked prices. Bill of exchange - General term for a document demanding payment. Bill of lading - A contract between the exporter and a transportation company in which the latter agrees to transport the goods under specified conditions which limit its liability. It is the exporter's receipt for the goods as well as proof that goods have been or will be received. Binomial option pricing model - An option pricing model in which the underlying asset can take on only two possible, discrete values in the next time period for each value that it can take on in the preceding time period. Black-Scholes Option Model - Is the seminal work about options pricing models. It was developed by Fisher Black and Myron Scholes. It initially focused on securities prices. Subsequently, it was refined by Fisher Black for the futures markets. Blue chip - A company known nationally for the quality and wide acceptance of its products or services, and for its ability to make money and pay dividends. Bond - A debt investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate. Bond covenant - A contractual provision in a bond indenture. A positive covenant requires certain actions, and a negative covenant limits certain actions. Book value - A company's book value is its total assets minus intangible assets and liabilities, such as debt. A company's book value might be more or less than its market value. Bootstrapping - A process of creating a theoretical spot rate curve , using one yield projection as the basis for the yield of the next maturity.
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Bridge Loan - Is a type of temporary financing which is extended until permanent financing is secured. At that time, funds from the new permanent financing are used to pay off the bridge loan. Budget deficit - The amount by which government spending exceeds government revenues. Bull - An investor who thinks the market will rise. Bull-bear bond - Bond whose principal repayment is linked to the price of another security. The bonds are issued in two tranches - in the first tranche repayment increases with the price of the other security, and in the second tranche repayment decreases with the price of the other security. Bull CD, Bear CD - A bull CD pays its holder a specified percentage of the increase in return on a specified market index while guaranteeing a minimum rate of return. A bear CD pays the holder a fraction of any fall in a given market index. Bull market - Any market in which prices are in an upward trend. Bullet - Is a type of credit security which repays the entire principal on the maturity date. Prior to the maturity or prepayment of the bond, interest payments are to be made in accordance with the payment schedule. Bullish, bearish - Words used to describe investor attitudes. Bullish refers to an optimistic outlook while bearish means a pessimistic outlook. Business cycle - Repetitive cycles of economic expansion and recession. Butterfly Option Spread - Is an options strategy which uses three strike prices for the same instrument and same expiration date. It can consist of the sale of two at-the-money options (puts or calls) and the purchase of one (put or call) at a higher strike price and the purchase of one (put or call) at a lower strike price. Call - An option that gives the right to buy the underlying futures contract. Call option - An option contract that gives its holder the right (but not the obligation) to purchase a specified number of shares of the underlying stock at the given strike price, on or before the expiration date of the contract. Capital account - Net result of public and private international investment and lending activities. Capital asset pricing model (CAPM) - An economic theory that describes the relationship between risk and expected return, and serves as a model for the pricing of risky securities. The CAPM asserts that the only risk that is priced by rational investors is systematic risk, because that risk cannot be eliminated by diversification. The CAPM says that the expected return of a security or a portfolio is equal to the rate on a risk-free security plus a risk premium.
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Capital budget - A firm's set of planned capital expenditures. Capital budgeting - The process of choosing the firm's long-term capital assets. Capital expenditures - Amount used during a particular period to acquire or improve longterm assets such as property, plant or equipment. Capital gain - When a stock is sold for a profit, it's the difference between the net sales price of securities and their net cost, or original basis. If a stock is sold below cost, the difference is a capital loss. Capital market line (CML) - The line defined by every combination of the risk-free asset and the market portfolio. Capitalization method - A method of constructing a replicating portfolio in which the manager purchases a number of the largest-capitalized names in the index stock in proportion to their capitalization. Cash budget - A forecasted summary of a firm's expected cash inflows and cash outflows as well as its expected cash and loan balances. Cash conversion cycle - The length of time between a firm's purchase of inventory and the receipt of cash from accounts receivable. Cash cow - A company that pays out all earnings per share to stockholders as dividends. Or, a company or division of a company that generates a steady and significant amount of free cash flow. Cash cycle - In general, the time between cash disbursement and cash collection. In net working capital management, it can be thought of as the operating cycle less the accounts payable payment period. Cash dividend - A dividend paid in cash to a company's shareholders. The amount is normally based on profitability and is taxable as income. A cash distribution may include capital gains and return of capital in addition to the dividend. Cash flow - In investments, it represents earnings before depreciation, amortization and non-cash charges. Sometimes called cash earnings. Cash flow from operations (called funds from operations) by real estate and other investment trusts is important because it indicates the ability to pay dividends. Cash flow from operations - A firm's net cash inflow resulting directly from its regular operations (disregarding extraordinary items such as the sale of fixed assets or transaction costs associated with issuing securities), calculated as the sum of net income plus non-cash expenses that were deducted in calculating net income.
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Certificate of deposit (CD) - A money market instrument characterized by its set date of maturity and interest rate. There are two basic types of CDs - traditional and negotiable. Traditional bank CDs typically incur an early-withdrawal penalty, while negotiable CDs have secondary market liquidity with investors receiving more or less than the original amount depending on market conditions. Collateral - Assets than can be repossessed if a borrower defaults. Collateral trust bonds - A bond in which the issuer (often a holding company) grants investors a lien on stocks, notes, bonds, or other financial asset as security. Commercial paper - Short-term unsecured promissory notes issued by a corporation. The maturity of commercial paper is typically less than 270 days; the most common maturity range is 30 to 50 days or less. Commodity - A commodity is food, metal, or another physical substance that investors buy or sell, usually via futures contracts. Common stock - These are securities that represent equity ownership in a company. Common shares let an investor vote on such matters as the election of directors. They also give the holder a share in a company's profits via dividend payments or the capital appreciation of the security. Compound interest - Interest paid on previously earned interest as well as on the principal. Compound option - Option on an option. Compounding - The process of accumulating the time value of money forward in time. For example, interest earned in one period earns additional interest during each subsequent time period. Consumer price index (CPI) - Measure of changes in the price of a “shopping basket” of items in order to estimate the inflation rate. The higher the CPI, the lower the purchasing power. The lower the CPI, the higher the purchasing power. Conventional mortgage - A loan based on the credit of the borrower and on the collateral for the mortgage. Convertible price - The contractually specified price per share at which a convertible security can be converted into shares of common stock. Conversion ratio - The number of shares of common stock that the security holder will receive from exercising the call option of a convertible security. Convertible bonds - Bonds that can be converted into common stock at the option of the holder.
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Corporate finance - One of the three areas of the discipline of finance. It deals with the operation of the firm (both the investment decision and the financing decision) from that firm's point of view. Correlation coefficient - A standardized statistical measure of the dependence of two random variables, defined as the covariance divided by the standard deviations of two variables. Cost of capital - The required return for a capital budgeting project. Cost of funds - Interest rate associated with borrowing money. Counterparty risk - The risk that the other party to an agreement will default. In an options contract, the risk to the option buyer that the option writer will not buy or sell the underlying as agreed. Coupon - The periodic interest payment made to the bondholders during the life of the bond. Coupon rate - In bonds, notes or other fixed income securities, the stated percentage rate of interest, usually paid twice a year. Covenants - A set of conditions agreed to in a formal debt agreement and designed to protect the lender's interests. Covenants may include restrictions on debt/equity ratio, working capital, or dividend payments. Coverage ratios - Ratios used to test the adequacy of cash flows generated through earnings for purposes of meeting debt and lease obligations, including the interest coverage ratio and the fixed charge coverage ratio. Credit analysis - The process of analyzing information on companies and bond issues in order to estimate the ability of the issuer to live up to its future contractual obligations. Credit risk - The risk that an issuer of debt securities or a borrower may default on his obligations, or that the payment may not be made on a negotiable instrument. Currency future - A financial future contract for the delivery of a specified foreign currency. Currency option - An option to buy or sell a foreign currency. Current account - Net flow of goods, services, and unilateral transactions (gifts) between countries. Current assets - Those assets of a company that are reasonably expected to be realized in cash, sold or consumed during one year. These include cash, U.S. Government bonds, receivables and money due usually within one year, as well as inventories. Current liabilities - Money owed and payable by a company, usually within one year.
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Current issue - In Treasury securities, the most recently auctioned issue. Trading is more active in current issues Current ratio - Indicator of short-term debt paying ability. Determined by dividing current assets by current liabilities. The higher the ratio, the more liquid the company. Cash flow - Reported net income of a corporation plus amounts charged off for depreciation, depletion, amortization, and extraordinary charges to reserves, which are bookkeeping deductions and not paid out in actual dollars and cents Debenture - A promissory note backed by the general credit of a company and usually not secured by a mortgage or lien on any specific property. Debt/equity ratio - Indicator of financial leverage. Compares assets provided by creditors to assets provided by shareholders. Determined by dividing long-term debt by common stockholder equity. Debt-service coverage ratio - Earnings before interest and income taxes plus one-third rental charges, divided by interest expense plus one-third rental charges plus the quantity of principal repayments divided by one minus the tax rate. Decision tree - Method of representing alternative sequential decisions and the possible outcomes from these decisions. Deep-discount bond - A bond issued with a very low coupon or no coupon and selling at a price far below par value. When the bond has no coupon, it's called a zero coupon bond. Default - Failure to make timely payment of interest or principal on a debt security or to otherwise comply with the provisions of a bond indenture. Default risk - Also referred to as credit risk, the risk that an issuer of a bond may be unable to make timely principal and interest payments. Deferred taxes - A non-cash expense that provides a source of free cash flow. Amount allocated during the period to cover tax liabilities that have not yet been paid. Deficit - An excess of liabilities over assets, of losses over profits, or of expenditure over income. Demand deposits - Checking accounts that pay no interest and can be withdrawn upon demand. Depreciation - Normally, charges against earnings to write off the cost less salvage value, of an asset over its estimated useful life. It is a bookkeeping entry and does not represent any cash outlay nor are any funds earmarked for the purpose. Derivative instruments - Contracts such as options and futures whose price is derived from the price of the underlying financial asset. Discount - Referring to the selling price of a bond, a price below its par value.
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Discount bond - Debt sold for less than its principal value. If a discount bond pays no interest, it is called a zero coupon bond. Discounted cash flow (DCF) - Future cash flows multiplied by discount factors to obtain present values. Discounted dividend model (DDM) - A formula to estimate the intrinsic value of a firm by figuring the present value of all expected future dividends. Discounting - Calculating the present value of a future amount. The process is opposite to compounding. Diversification - Dividing investment funds among a variety of securities with different risk, reward, and correlation statistics so as to minimize unsystematic risk. Dividend - The payment designated by the board of directors to be distributed pro rata among the shares outstanding. On preferred shares, it is generally a fixed amount. On common shares, the dividend varies with the fortunes of the company and the amount of cash on hand, and may be omitted if business is poor or the directors determine to withhold earnings to invest in plant and equipment Dividend discount model (DDM) - A model for valuing the common stock of a company, based on the present value of the expected cash flows. Dividend growth model - A model wherein dividends are assumed to be at a constant rate in perpetuity. Dividends per share - Dividends paid for the past 12 months divided by the number of common shares outstanding, as reported by a company. The number of shares often is determined by a weighted average of shares outstanding over the reporting term. Duration - A common gauge of the price sensitivity of an asset or portfolio to a change in interest rates. Earnings - Net income for the company during the period. Earnings before interest and taxes (EBIT) - A financial measure defined as revenues less cost of goods sold and selling, general, and administrative expenses. In other words, operating and non-operating profit before the deduction of interest and income taxes. Earnings per share (EPS) - EPS, as it is called, is a company's profit divided by its number of outstanding shares. Economic order quantity (EOQ) - The order quantity that minimizes total inventory costs. Economies of scale - The decrease in the marginal cost of production as a plant's scale of operations increases.
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Effective annual interest rate - An annual measure of the time value of money that fully reflects the effects of compounding. Effective annual yield - Annualized interest rate on a security computed using compound interest techniques. Effective duration - The duration calculated using the approximate duration formula for a bond with an embedded option, reflecting the expected change in the cash flow caused by the option. Measures the responsiveness of a bond's price taking into account the expected cash flows will change as interest rates change due to the embedded option. Efficient Market Hypothesis - In general the hypothesis states that all relevant information is fully and immediately reflected in a security's market price thereby assuming that an investor will obtain an equilibrium rate of return. In other words, an investor should not expect to earn an abnormal return (above the market return) through either technical analysis or fundamental analysis. Three forms of efficient market hypothesis exist - weak form (stock prices reflect all information of past prices), semi-strong form (stock prices reflect all publicly available information) and strong form (stock prices reflect all relevant information including insider information). Embedded option - An option that is part of the structure of a bond that provides either the bondholder or issuer the right to take some action against the other party, as opposed to a bare option, which trades separately from any underlying security. Employee stock ownership plan (ESOP) - A company contributes to a trust fund that buys stock on behalf of employees. Equity - Represents ownership interest in a firm. Eurobond - A bond that is (1) underwritten by an international syndicate, (2) offered at issuance simultaneously to investors in a number of countries, and (3) issued outside the jurisdiction of any single country. European option - Option that may be exercised only at the expiration date. Exchange rate - The price of one country's currency expressed in another country's currency. Exchange rate risk - Also called currency risk, the risk of an investment's value changing because of currency exchange rates. Exercise - To implement the right of the holder of an option to buy (in the case of a call) or sell (in the case of a put) the underlying security. Exercise price - The price at which the underlying future or options contract may be bought or sold. Exercising the option - The act buying or selling the underlying asset via the option contract.
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Expiration - The time when the option contract ceases to exist (expires). Expiration cycle - An expiration cycle relates to the dates on which options on a particular security expire. A given option will be placed in 1 of 3 cycles, the January cycle, the February cycle, or the March cycle. At any point in time, an option will have contracts with 4 expiration dates outstanding, 2 in near-term months and 2 in far-term months. Expiration date - The last day (in the case of American-style) or the only day (in the case of European-style) on which an option may be exercised. For stock options, this date is the Saturday immediately following the 3rd Friday of the expiration month; however, brokerage firms may set an earlier deadline for notification of an option holder's intention to exercise. If Friday is a holiday, the last trading day will be the preceding Thursday. Face value - The value of a bond that appears on the face of the bond, unless the value is otherwise specified by the issuing company. Face value is ordinarily the amount the issuing company promises to pay at maturity. Face value is not an indication of market value. Sometimes referred to as par value. Federal Deposit Insurance Corporation (FDIC) - A federal institution that insures bank deposits. Financial plan - A financial blueprint for the financial future of a firm. First-In-First-Out (FIFO) - A method of valuing the cost of goods sold that uses the cost of the oldest item in inventory first. Fisher effect - A theory that nominal interest rates in two or more countries should be equal to the required real rate of return to investors plus compensation for the expected amount of inflation in each country. Fiscal policy - The use of government spending and taxing for the specific purpose of stabilizing the economy. Five Cs of credit - Five characteristics that are used to form a judgement about a customer's creditworthiness - character, capacity, capital, collateral, and conditions. Fixed asset - Long-lived property owned by a firm that is used by a firm in the production of its income. Tangible fixed assets include real estate, plant, and equipment. Intangible fixed assets include patents, trademarks, and customer recognition. Fixed cost - A cost that is fixed in total for a given period of time and for given production levels. Fixed-annuities - Annuity contracts in which the insurance company or issuing financial institution pays a fixed dollar amount of money per period. Fixed-exchange rate - A country's decision to tie the value of its currency to another country's currency, gold (or another commodity), or a basket of currencies.
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Fixed-rate loan - A loan on which the rate paid by the borrower is fixed for the life of the loan. Flight to quality - The tendency of investors to move towards safer, government bonds during periods of high economic uncertainty. Floating exchange rate - A country's decision to allow its currency value to freely change. The currency is not constrained by central bank intervention and does not have to maintain its relationship with another currency in a narrow band. The currency value is determined by trading in the foreign exchange market. Force majeure risk - The risk that there will be an interruption of operations for a prolonged period after a project finance project has been completed due to fire, flood, storm, or some other factor beyond the control of the project's sponsors. Foreign bond - A bond issued on the domestic capital market of another company. Foreign bond market - That portion of the domestic bond market that represents issues floated by foreign companies to governments. Foreign currency option - An option that conveys the right to buy or sell a specified amount of foreign currency at a specified price within a specified time period. Foreign exchange risk - The risk that a long or short position in a foreign currency might have to be closed out at a loss due to an adverse movement in the currency rates. Futures and forward contracts - There are two types of contracts - futures and forward contracts. In both cases, the parties involved assume a legal obligation to buy or sell a specific quantity of an asset at a predetermined price and date. Futures and forward contracts are traded in a variety of commodities (grain, meat, etc.) and financial products (stock market indexes, bonds, common shares, etc.). Free cash flows - Cash not required for operations or for reinvestment. Often defined as earnings before interest (often obtained from operating income line on the income statement) less capital expenditure less the change in working capital. Free float - An exchange rate system characterized by the absence of government intervention. Also known as clean float. FOB - Free-On-Board Destination. The seller of merchandise bears the shipping costs and maintains ownership until the merchandise is delivered to the buyer. Full coupon bond - A bond with a coupon equal to the going market rate, thereby, the bond is selling at par. Future value - The amount of cash at a specified date in the future that is equivalent in value to a specified sum today.
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Futures - A term used to designate all contracts covering the sale of financial instruments or physical commodities for future delivery on a commodity exchange. Futures contract - Agreement to buy or sell a set number of shares of a specific stock in a designated future month at a price agreed upon by the buyer and seller. The contracts themselves are often traded on the futures market. 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. General obligation bonds - Municipal securities secured by the issuer's pledge of its full faith, credit, and taxing power. GAAP - Generally Accepting Accounting Principles. A priority listing made up of statements of accounting principles issued by the AICPA (American Institute of Certified Public Accountants) and FASB (Financial Accounting Standards Board) Gilts - British and Irish government securities. Greenshoe option - Option that allows the underwriter for a new issue to buy and resell additional shares. Gross domestic product (GDP) - The market value of goods and services produced over time including the income of foreign corporations and foreign residents working in the U.S., but excluding the income of U.S. residents and corporations overseas. Gross national product (GNP) - Measures and economy's total income. It is equal to GDP plus the income abroad accruing to domestic residents minus income generated in domestic market accruing to non-residents. Gross profit margin - Gross profit divided by sales, which is equal to each sales dollar left over after paying for the cost of goods sold. Growing perpetuity - A constant stream of cash flows without end that is expected to rise indefinitely. Hedge - A transaction that reduces the risk of an investment. Hedge fund - A fund that may employ a variety of techniques to enhance returns, such as both buying and shorting stocks based on a valuation model. Hedged portfolio - A portfolio consisting of the long position in the stock and the short position in the call option, so as to be riskless and produce a return that equals the risk-free interest rate. Hedging - A strategy designed to reduce investment risk using call options, put options, short selling, or futures contracts. A hedge can help lock in existing profits. Its purpose is to reduce the volatility of a portfolio, by reducing the risk of loss.
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Hypothecation - The pledging of securities as collateral - for example, to secure the debit balance in a margin account. Hybrid security - A convertible security whose optioned common stock is trading in a middle range, causing the convertible security to trade with the characteristics of both a fixedincome security and a common stock instrument. Immunization strategy - A bond portfolio strategy whose goal is to eliminate the portfolio's risk against a general change in the rate of interest through the use of duration. Income bond - A bond on which the payment of interest is contingent on sufficient earnings. These bonds are commonly used during the reorganization of a failed or failing business. Incremental cash flows - Difference between the firm's cash flows with and without a project. Incremental internal rate of return - IRR on the incremental investment from choosing a large project instead of a smaller project. Index option - A call or put option based on a stock market index. Indexed bond - Bond whose payments are linked to an index, e.g. the consumer price index. Indifference curve - The graphical expression of a utility function, where the horizontal axis measures risk and the vertical axis measures expected return. The curve connects all portfolios with the same utilities according to?and? . ? ? Inflation - The rate at which the general level of prices for goods and services is rising. Inflation risk - Also called purchasing-power risk, the risk that changes in the real return the investor will realize after adjusting for inflation will be negative. Initial public offering (IPO - A company's first sale of stock to the public. Securities offered in an IPO are often, but not always, those of young, small companies seeking outside equity capital and a public market for their stock. Investors purchasing stock in IPOs generally must be prepared to accept very large risks for the possibility of large gains. IPO's by investment companies (closed-end funds) usually contain underwriting fees which represent a load to buyers. Insolvency risk - The risk that a firm will be unable to satisfy its debts. Also known as bankruptcy risk. Insolvent - A firm that is unable to pay debts (liabilities are greater than assets).
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Institutional investors - Organizations that invest, including insurance companies, depository institutions, pension funds, investment companies, mutual funds, and endowment funds. Insured bond - A municipal bond backed both by the credit of the municipal issuer and by commercial insurance policies. Intangible asset - A legal claim to some future benefit, typically a claim to future cash. Goodwill, intellectual property, patents, copyrights, and trademarks are examples of intangible assets. Interest - The price paid for borrowing money. It is expressed as a percentage rate over a period of time and reflects the rate of exchange of present consumption for future consumption. Also, a share or title in property. Interest coverage ratio - The ratio of the earnings before interest and taxes to the annual interest expense. This ratio measures a firm's ability to pay interest. Interest rate risk - The risk that a security's value changes due to a change in interest rates. For example, a bond's price drops as interest rates rise. For a depository institution, also called funding risk, the risk that spread income will suffer because of a change in interest rates. Interest rate swap - A binding agreement between counterparties to exchange periodic interest payments on some predetermined dollar principal, which is called the notional principal amount. For example, one party will pay fixed and receive variable. International Depository Receipt (IDR) - A receipt issued by a bank as evidence of ownership of one or more shares of the underlying stock of a foreign corporation that the bank holds in trust. The advantage of the IDR structure is that the corporation does not have to comply with all the regulatory issuing requirements of the foreign country where the stock is to be traded. The U.S. version of the IDR is the American Depository Receipt (ADR). In-the-money - A put option that has a strike price higher than the underlying futures price, or a call option with a strike price lower than the underlying futures price. Intrinsic value of an option - The amount by which an option is in-the-money. An option which is not in-the- money has no intrinsic value. Inventory - Goods held for sale or resale Inventory Turnover Ratio - A measure of the management of inventory computed by dividing cost of goods sold (COGS) by the average inventory for a period of time. Invoice - An itemized list of goods shipped or services rendered with cost. Joint account - An agreement between two or more firms to share risk and financing responsibility in purchasing or underwriting securities.
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Junk bond - A bond with a speculative credit rating of BB (S&P) or Ba (Moody's) or lower is a junk or high yield bond. Such bonds offer investors higher yields than bonds of financially sound companies. Two agencies, Standard & Poors and Moody's investor Services, provide the rating systems for companies' credit. Journal - A book or original entry in a double-entry bookkeeping system. The journal lists all transactions and indicates the accounts to which they are posted. Journal Entry - A recording of a transaction where debits equal credits Last-In-First-Out (LIFO) - A method of valuing inventory that uses the cost of the most recent item in inventory first. Lessee - An entity that leases an asset from another entity. Lessor - An entity that leases an asset to another entity. Letter of credit (L/C) - A form of guarantee of payment issued by a bank used to guarantee the payment of interest and repayment of principal on bond issues. Level-coupon bond - Bond with a stream of coupon payments that are the same throughout the life of the bond. Leveraged beta - The beta of a leveraged required return; that is, the beta as adjusted for the degree of leverage in the firm's capital structure. Leveraged buyout (LBO) - A transaction used for taking a public corporation private financed through the use of debt funds - bank loans and bonds. Because of the large amount of debt relative to equity in the new corporation, the bonds are typically rated below investment grade, properly referred to as high-yield bonds or junk bonds. Investors can participate in an LBO through either the purchase of the debt (i.e., purchase of the bonds or participation in the bank loan) or the purchase of equity through an LBO fund that specializes in such investments. Liability - A financial obligation, or the cash outlay that must be made at a specific time to satisfy the contractual terms of such an obligation. LIBOR - The London Interbank Offered Rate; the rate of interest that major international banks in London charge each other for borrowings. Many variable interest rates in the U.S. are based on spreads off of LIBOR. There are many different LIBOR tenors. Limited partner - A partner who has limited legal liability for the obligations of the partnership. Limited Partnership - A limited partnership is one in which one or more partners (but not all) have limited liability up to their investment to creditors in the event of the failure of the business. The general partner manages the business. Limited partners are not involved in daily activities.
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Liquidation - The process of converting securities or other property into cash. The dissolution of a company, with cash remaining after sale of its assets and payment of all indebtedness being distributed to the shareholders. Loan syndication - Group of banks sharing a loan. Lockbox - A collection and processing service provided to firms by banks, which collect payments from a dedicated postal box that the firm directs its customers to send payment to. The banks make several collections per day, process the payments immediately, and deposit the funds into the firm's bank account. Long coupons - (1) Bonds or notes with a long current maturity. (2) A bond on which one of the coupon periods, usually the first, is longer than the other periods or the standard period. Long hedge - The purchase of a futures contract(s) in anticipation of actual purchases in the cash market. Used by processors or exporters as protection against an advance in the cash price. Long position - An options position where a person has executed one or more option trades where the net result is that they are an "owner" or holder of options (i. e. the number of contracts bought exceeds the number of contracts sold). Long-term debt - An obligation having a maturity of more than one year from the date it was issued. Also called funded debt. Letter of credit (L/C) - A form of guarantee of payment issued by a bank used to guarantee the payment of interest and repayment of principal on bond issues. Level-coupon bond - Bond with a stream of coupon payments that are the same throughout the life of the bond. Limited Partnership - A limited partnership is one in which one or more partners (but not all) have limited liability up to their investment to creditors in the event of the failure of the business. The general partner manages the business. Limited partners are not involved in daily activities. Line of credit - An informal arrangement between a bank and a customer establishing a maximum loan balance that the bank will permit the borrower to maintain. Liquidation - The process of converting securities or other property into cash. The dissolution of a company, with cash remaining after sale of its assets and payment of all indebtedness being distributed to the shareholders. Liquidity - A market is liquid when it has a high level of trading activity, allowing buying and selling with minimum price disturbance. Also a market characterized by the ability to buy and sell with relative ease. Loan syndication - Group of banks sharing a loan.
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Long-term debt - An obligation having a maturity of more than one year from the date it was issued. Also called funded debt. Macaulay duration - The weighted-average term to maturity of the cash flows from the bond, where the weights are the present value of the cash flow divided by the price. Managed float - Also known as "dirty" float, this is a system of floating exchange rates with central bank intervention to reduce currency fluctuations. Management buyout (MBO) - Leveraged buyout whereby the acquiring group is led by the firm's management. Margin - This allows investors to buy securities by borrowing money from a broker. The margin is the difference between the market value of a stock and the loan a broker makes.. Margin of safety - With respect to working capital management, the difference between 1) the amount of long- term financing, and 2) the sum of fixed assets and the permanent component of current assets. Mark-to-market - The process whereby the book value or collateral value of a security is adjusted to reflect current market value. Marked-to-market - An arrangement whereby the profits or losses on a futures contract are settled each day. Market Capitalization - The market value of a company, as calculated by multiplying the number of outstanding shares by the price per share. Market value fluctuates daily with the share price. It represents the price that would have to be paid to acquire 100% of the company’s capital. Market value - (1) The price at which a security is trading and could presumably be purchased or sold. (2) The value investors believe a firm is worth; calculated by multiplying the number of shares outstanding by the current market price of a firm's shares. Matching concept - The accounting principle that requires the recognition of all costs that are associated with the generation of the revenue reported in the income statement. Materials requirement planning - Computer-based systems that plan backward from the production schedule to make purchases in order to manage inventory levels. Merger - (1) Acquisition in which all assets and liabilities are absorbed by the buyer. (2) More generally, any combination of two companies. Modified duration - The ratio of Macaulay duration to (1 + y), where y = the bond yield. Modified duration is inversely related to the approximate percentage change in price for a given change in yield. Monetary policy - Actions taken by the Board of Governors of the Federal Reserve System to influence the money supply or interest rates.
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Monte Carlo simulation - An analytical technique for solving a problem by performing a large number of trail runs, called simulations, and inferring a solution from the collective results of the trial runs. Method for calculating the probability distribution of possible outcomes. Moral hazard - The risk that the existence of a contract will change the behaviour of one or both parties to the contract, e.g. an insured firm will take fewer fire precautions. Mortgage - A long-term debt instrument for the purchase of property by which the borrower uses the property itself for collateral. Mortgage bond - A bond in which the issuer has granted the bondholders a lien against the pledged assets. Collateral trust bonds Mortgage-backed securities - Securities backed by a pool of mortgage loans. Mortgagee - The lender of a loan secured by property. Mortgager - The borrower of a loan secured by property. Negative amortization - A loan repayment schedule in which the outstanding principal balance of the loan increases, rather than amortizing, because the scheduled monthly payments do not cover the full amount required to amortize the loan. The unpaid interest is added to the outstanding principal, to be repaid later. Negative convexity - A bond characteristic such that the price appreciation will be less than the price depreciation for a large change in yield of a given number of basis points. Net Present Value (NPV) - A measure of a project's future value in current dollars. Future income and expenses are summed and then discounted using a required rate of return to adjust for the time value of money. Net present value is, theoretically, the best method for evaluating projects. Net asset value - Usually used in connection with investment companies to mean net asset value per share. An investment company computes its assets daily, or even twice daily, by totalling the market value of all securities owned. All liabilities are deducted, and the balance is divided by the number of shares outstanding. The resulting figure is the net asset value per share Net assets - The difference between total assets on the one hand and current liabilities and noncapitalized long- term liabilities on the other hand. Net income - The company's total earnings, reflecting revenues adjusted for costs of doing business, depreciation, interest, taxes and other expenses. Net profit margin - Net income divided by sales; the amount of each sales dollar left over after all expenses have been paid.
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Net working capital - Current assets minus current liabilities. Often simply referred to as working capital. Net worth - Common stockholders' equity which consists of common stock, surplus, and retained earnings. Nominal interest rate - The interest rate unadjusted for inflation. Off-balance-sheet financing - Financing that is not shown as a liability in a company's balance sheet. Operating cash flow - Earnings before depreciation minus taxes. It measures the cash generated from operations, not counting capital spending or working capital requirements. Operating cycle - The average time intervening between the acquisition of materials or services and the final cash realization from those acquisitions. Operating profit margin - The ratio of operating margin to net sales. Operating risk - The inherent or fundamental risk of a firm, without regard to financial risk. The risk that is created by operating leverage. Also called business risk. Operating Leverage - The extent to which fixed costs are part of a company's cost structure; the higher the proportion of fixed costs, the faster income increases or decreases with sales volumes. Opportunity cost of capital - Expected return that is foregone by investing in a project rather than in comparable financial securities. Opportunity costs - The difference in the performance of an actual investment and a desired investment adjusted for fixed costs and execution costs. The performance differential is a consequence of not being able to implement all desired trades. Most valuable alternative that is given up. Option - Gives the buyer the right, but not the obligation, to buy or sell an asset at a set price on or before a given date. Investors, not companies, issue options. Investors who purchase call options bet the stock will be worth more than the price set by the option (the strike price), plus the price they paid for the option itself. Buyers of put options bet the stock's price will go down below the price set by the option. An option is part of a class of securities called derivatives, so named because these securities derive their value from the worth of an underlying investment. Option price - Also called the option premium, the price paid by the buyer of the options contract for the right to buy or sell a security at a specified price in the future. Out-of-the-money option - A call option is out-of-the-money if the strike price is greater than the market price of the underlying security. A put option is out-of-the-money if the strike price is less than the market price of the underlying security.
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Outstanding share capital - Issued share capital less the par value of shares that are held in the company's treasury. Outstanding shares - Shares that are currently owned by investors. Over-the-counter market (OTC) - A decentralized market (as opposed to an exchange market) where geographically dispersed dealers are linked together by telephones and computer screens. The market is for securities not listed on a stock or bond exchange. The NASDAQ market is an OTC market for U.S. stocks. Price-to-earnings ratio - A popular way to compare stocks selling at various price levels. The P/E ratio is the price of a share of stock divided by earnings per share for a 12-month period. Par value - Also called the maturity value or face value, the amount that the issuer agrees to pay at the maturity date. Perfectly competitive financial markets - Markets in which no trader has the power to change the price of goods or services. Perfect capital markets are characterized by the following conditions - 1) trading is costless, and access to the financial markets is free, 2) information about borrowing and lending opportunities is freely available, 3) there are many traders, and no single trader can have a significant impact on market prices. Perpetual warrants - Warrants that have no expiration date. Perpetuity - A constant stream of identical cash flows without end, such as a British consol. Poison pill - Any-takeover device that gives a prospective acquiree's shareholders the right to buy shares of the firm or shares of anyone who acquires the firm at a deep discount to their fair market value. Named after the cyanide pill that secret agents are instructed to swallow if capture is imminent. Political risk - Possibility of the expropriation of assets, changes in tax policy, restrictions on the exchange of foreign currency, or other changes in the business climate of a country. Portfolio - A collection of investments, real and/or financial. Portfolio internal rate of return - The rate of return computed by first determining the cash flows for all the bonds in the portfolio and then finding the interest rate that will make the present value of the cash flows equal to the market value of the portfolio. Preference stock - A security that ranks junior to preferred stock but senior to common stock in the right to receive payments from the firm; essentially junior preferred stock. Preferred habitat theory - A biased expectations theory that believes the term structure reflects the expectation of the future path of interest rates as well as risk premium. However, the theory rejects the assertion that the risk premium must rise uniformly with maturity. Instead, to the extent that the demand for and supply of funds does not match for a given maturity range, some participants will shift to maturities showing the opposite imbalances. As long as such investors are compensated by an appropriate risk premium whose magnitude will reflect the extent of aversion to either price or reinvestment risk.
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Preferred shares - Preferred shares give investors a fixed dividend from the company's earnings. And more importantly - preferred shareholders get paid before common shareholders. Preferred stock - A security that shows ownership in a corporation and gives the holder a claim, prior to the claim of common stockholders, on earnings and also generally on assets in the event of liquidation. Most preferred stock pays a fixed dividend that is paid prior to the common stock dividend, stated in a dollar amount or as a percentage of par value. This stock does not usually carry voting rights. The stock shares characteristics of both common stock and debt. Preferred stock agreement - A contract for preferred stock. Present value - The amount of cash today that is equivalent in value to a payment, or to a stream of payments, to be received in the future. Principal - (1) The total amount of money being borrowed or lent. (2) The party affected by agent decisions in a principal-agent relationship. Profit margin - Indicator of profitability. The ratio of earnings available to stockholders to net sales. Determined by dividing net income by revenue for the same 12-month period. Result is shown as a percentage. Profitability ratios - Ratios that focus on the profitability of the firm. Profit margins measure performance with relation to sales. Rate of return ratios measure performance relative to some measure of size of the investment. Project financing - A form of asset-based financing in which a firm finances a discrete set of assets on a stand- alone basis. Promissory note - Written promise to pay. Prospectus - The official selling circular that must be given to purchasers of new securities registered with the Securities and Exchange Commission Public offering - The sale of registered securities by the issuer (or the underwriters acting in the interests of the issuer) in the public market. Also called public issue. Pure-discount bond - A bond that will make only one payment of principal and interest. Also called a zero- coupon bond or a single-payment bond. Pure expectations theory - A theory that asserts that the forward rates exclusively represent the expected future rates. In other words, the entire term structure reflects the markets expectations of future short-term rates. For example, an increasing sloping term structure implies increasing short-term interest rates. Related biased expectations theories
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Put option - This security gives investors the right to sell (or put) fixed number of shares at a fixed price within a given time frame. An investor, for example, might wish to have the right to sell shares of a stock at a certain price by a certain time in order to protect, or hedge, an existing investment. Put price - The price at which the asset will be sold if a put option is exercised. Also called the strike or exercise price of a put option. Quick assets - Current assets minus inventories. Quick ratio - Indicator of a company's financial strength (or weakness). Calculated by taking current assets less inventories, divided by current liabilities. This ratio provides information regarding the firm's liquidity and ability to meet its obligations. Also called the Acid Test ratio. Rate of interest - The rate, as a proportion of the principal, at which interest is computed. Rate risk - In banking, the risk that profits may decline or losses occur because a rise in interest rates forces up the cost of funding fixed-rate loans or other fixed-rate assets. Real cash flow - A cash flow is expressed in real terms if the current, or date 0, purchasing power of the cash flow is given. Real exchange rates - Exchange rates that have been adjusted for the inflation differential between two countries. Real interest rate - The rate of interest excluding the effect of inflation; that is, the rate that is earned in terms of constant-purchasing-power dollars. Interest rate expressed in terms of real goods, i.e. nominal interest rate adjusted for inflation. Receivables turnover ratio - Total operating revenues divided by average receivables. Used to measure how effectively a firm is managing its accounts receivable. Red herring - A registration statement filed with but not yet approved by the Securities and Exchange Commission (SEC) REIT (real estate investment trust) - Real estate investment trust, which is similar to a closed-end mutual fund. REITs invest in real estate or loans secured by real estate and issue shares in such investments. Relative purchasing power parity (RPPP) - Idea that the rate of change in the price level of commodities in one country relative to the price level in another determines the rate of change of the exchange rate between the two countries' currencies. Repo - A agreement in which one party sells a security to another party and agrees to repurchase it on a specified date for a specified price. See - repurchase agreement. Reserve currency - A foreign currency held by a central bank or monetary authority for the purposes of exchange intervention and the settlement of inter-governmental claims.
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Retained earnings - Accounting earnings that are retained by the firm for reinvestment in its operations; earnings that are not paid out as dividends. Retention rate - The percentage of present earnings held back or retained by a corporation, or one minus the dividend payout rate. Also called the retention ratio. Return on Assets (ROA) - Net income for a time period divided by total assets. This ratio is often used to measure profitability or the efficiency with which assets are being employed. Higher values for this ratio indicate better financial performance. The specific value obtained for a business should be evaluated in relation to the returns that can be obtained from alternative investments of capital. Return on equity (ROE) - Indicator of profitability. Determined by dividing net income for the past 12 months by common stockholder equity (adjusted for stock splits). Result is shown as a percentage. Investors use ROE as a measure of how a company is using its money. ROE may be decomposed into return on assets (ROA) multiplied by financial leverage (total assets/total equity). Return on Investment (ROI) - A measure of operating performance and efficiency in using assets computed by dividing net income by average total assets. Return on total assets - The ratio of earnings available to common stockholders to total assets. Revenue bond - A bond issued by a municipality to finance either a project or an enterprise where the issuer pledges to the bondholders the revenues generated by the operating projects financed, for instance, hospital revenue bonds and sewer revenue bonds. Reverse repo - In essence, refers to a repurchase agreement. From the customer's perspective, the customer provides a collateralized loan to the seller. Risk premium - The reward for holding the risky market portfolio rather than the risk-free asset. The spread between Treasury and non-Treasury bonds of comparable maturity. Salvage Value - The scrap value of an asset. Acquisition cost minus salvage value yields the total amount that an asset is depreciated over its useful life. Samurai bond - A yen-denominated bond issued in Tokyo by a non-Japanese borrower. Securitization - The process of creating a passthrough, such as the mortgage pass-through security, by which the pooled assets become standard securities backed by those assets. Also, refers to the replacement of nonmarketable loans and/or cash flows provided by financial intermediaries with negotiable securities issued in the public capital markets. Security market line - Line representing the relationship between expected return and market risk. Shareholders' equity - This is a company's total assets minus total liabilities. A company's net worth is the same thing.
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Simple interest - Interest calculated only on the initial investment. Spin-off - A company can create an independent company from an existing part of the company by selling or distributing new shares in the so-called spinoff. Spot exchange rates - Exchange rate on currency for immediate delivery. Spot interest rate - Interest rate fixed today on a loan that is made today. Spread - (1) The gap between bid and ask prices of a stock or other security. (2) The simultaneous purchase and sale of separate futures or options contracts for the same commodity for delivery in different months. Also known as a straddle. (3) Difference between the price at which an underwriter buys an issue from a firm and the price at which the underwriter sells it to the public. (4) The price an issuer pays above a benchmark fixedincome yield to borrow money. Stated annual interest rate - The interest rate expressed as a per annum percentage, by which interest payment is determined. Statement of cash flows - A financial statement showing a firm's cash receipts and cash payments during a specified period. Stock - Ownership of a corporation which is represented by shares which represent a piece of the corporation's assets and earnings. Stock dividend - Payment of a corporate dividend in the form of stock rather than cash. The stock dividend may be additional shares in the company, or it may be shares in a subsidiary being spun off to shareholders. Stock dividends are often used to conserve cash needed to operate the business. Unlike a cash dividend, stock dividends are not taxed until sold. Stockholder equity - Balance sheet item that includes the book value of ownership in the corporation. It includes capital stock, paid in surplus, and retained earnings. Stockholder's equity - The residual claims that stockholders have against a firm's assets, calculated by subtracting total liabilities from total assets. Straight line depreciation - An equal dollar amount of depreciation in each accounting period. Strike price - The stated price per share for which underlying stock may be purchased (in the case of a call) or sold (in the case of a put) by the option holder upon exercise of the option contract time than the evaluation period. Subscription price - Price that the existing shareholders are allowed to pay for a share of stock in a rights offering. Sunk cost - Costs that have been incurred and cannot be reversed.
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Swap - Financial contract for the exchange of cash flows between investors, e.g. exchanging the floating interest rate of one security for the fixed interest rate of another financial instrument. Systematic risk - Also called undiversifiable risk or market risk, the minimum level of risk that can be obtained for a portfolio by means of diversification across a large number of randomly chosen assets. Tangible asset - An asset whose value depends on particular physical properties. These include reproducible assets such as buildings or machinery and non-reproducible assets such as land, a mine, or a work of art. Also called real assets. Tax shield - The reduction in income taxes that results from taking an allowable deduction from taxable income. Term bonds - Often referred to as bullet-maturity bonds or simply bullet bonds, bonds whose principal is payable at maturity. Time value of an option - The portion of an option's premium that is based on the amount of time remaining until the expiration date of the option contract, and that the underlying components that determine the value of the option may change during that time. Time value is generally equal to the difference between the premium and the intrinsic value. Time value of money - The idea that a dollar today is worth more than a dollar in the future, because the dollar received today can earn interest up until the time the future dollar is received. Total asset turnover - The ratio of net sales to total assets. Total debt to equity ratio - A capitalization ratio comparing current liabilities plus longterm debt to shareholders' equity. Transfer price - The price at which one unit of a firm sells goods or services to another unit of the same firm. Treasury bills - Debt obligations of the U.S. Treasury that have maturities of one year or less. Maturities for T- bills are usually 91 days, 182 days, or 52 weeks. Treasury bonds - debt obligations of the U.S. Treasury that have maturities of 10 years or more. Treasury notes - Debt obligations of the U.S. Treasury that have maturities of more than 2 years but less than 10 years. Treasury securities - Securities issued by the U.S. Department of the Treasury.
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Treasury stock - Stock issued by a company but later reacquired. It may be held in the company's treasury indefinitely, reissued to the public or retired. Treasury stock receives no dividends and has no vote while held by the company. Underlying asset - The asset that an option gives the option holder the right to buy or to sell. Underwriter - A party that guarantees the proceeds to the firm from a security sale, thereby in effect taking ownership of the securities. Or, stated differently, a firm, usually an investment bank, that buys an issue of securities from a company and resells it to investors. Unleveraged beta - The beta of an unleveraged required return (i.e. no debt) on an investment when the investment is financed entirely by equity. Unsecured debt - Debt that does not identify specific assets that can be taken over by the debtholder in case of default. Value-at-Risk model (VAR) - Procedure for estimating the probability of portfolio losses exceeding some specified proportion based on a statistical analysis of historical market price trends, correlations, and volatilities. Variable cost - A cost that is directly proportional to the volume of output produced. When production is zero, the variable cost is equal to zero. Venture capital - An investment in a start-up business that is perceived to have excellent growth prospects but does not have access to capital markets. Type of financing sought by early-stage companies seeking to grow rapidly. Warrants - Certificates giving the holder the right to purchase securities at a stipulated price within a specified time limit or perpetually. Sometimes a warrant is offered with securities as an inducement to buy. Weighted average cost of capital - Expected return on a portfolio of all the firm's securities. Used as a hurdle rate for capital investment. White knight - A friendly potential acquirer of a firm sought out by a target firm that is threatened by a less welcome suitor. Working Capital - Current Assets minus Current Liabilities. Some business owners like to think of assets being a use of working capital, and liabilities and capital contributions as being a source of working capital. Yankee bonds - Foreign bonds denominated in US$ issued in the United States by foreign banks and corporations. These bonds are usually registered with the SEC. For example, bonds issued by originators with roots in Japan are called Samurai bonds. Yield - Also known as return. The dividends or interest paid by a company expressed as a percentage of the current price
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Yield to maturity - The percentage rate of return paid on a bond, note or other fixed income security if you buy and hold it to its maturity date. The calculation for YTM is based on the coupon rate, length of time to maturity and market price. It assumes that coupon interest paid over the life of the bond will be reinvested at the same rate. Zero coupon bond - Such a debt security pays an investor no interest. It is sold at a discount to its face price and matures in one year or longer.
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doc_591558836.pdf
It explains Glossary on Finance and related terms.Exhaustive list for MBA Students, Aspirants and business Professionals
STUDY. LEARN. SHARE.
FINANCE GLOSSARY
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Terms and Concepts Accelerated Depreciation - Is an accounting technique which provides larger than straightline depreciation amounts in the early years and smaller than straight-line depreciation amounts in the later years. Abnormal returns - Part of the return that is not due to systematic influences. In other words, abnormal returns are above those predicted by the market movement alone. Accounts Payable - Amounts due from your business to your creditors. Generally these are short term liabilities (30-120 days), and are shown under the Current Liabilities section in the Balance Sheet. Accounts Receivable - Amounts due to your business from your customers. Generally these amounts are short term receivables (30-120 days), and are shown under Current Assets section in the Balance Sheet. Accounts Receivable Turnover - A measure used to determine a company's average collection period for receivables. Usually computed by dividing net sales (or net credit sales) by average accounts receivable. Accrual bond - A bond on which interest accrues, but is not paid to the investor during the time of accrual. The amount of accrued interest is added to the remaining principal of the bond and is paid at maturity. Accrued interest - The interest due on a bond since the last interest payment was made. Acid Test Ratio - A stringent test that indicates whether a firm has enough short-term assets to cover its immediate liabilities without selling inventory Adjusted present value (APV) - The net present value analysis of an asset if financed solely by equity (present value of un-levered cash flows), plus the present value of any financing decisions (levered cash flows). In other words, the various tax shields provided by the deductibility of interest and the benefits of other investment tax credits are calculated separately. This analysis is often used for highly leveraged transactions such as a leverage buy-out. Agency problem - Conflicts of interest among stockholders, bondholders, and managers. Agency theory - The analysis of principal-agent relationships, wherein one person, an agent, acts on behalf of another person, a principal. Aging Schedule - A schedule showing the length of time an invoice has been outstanding or held. Aging schedules are normally created for Accounts Payable and Accounts Receivable. For example, an aging schedule for accounts receivable can show how many days an invoice has been outstanding. Aging schedules can also be created for inventory. Alpha - Is a measure of the incremental reward (or loss) that an investor gained in relation to the market.
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American Depositary Receipt (ADR) – A security issued by a U.S. bank in place of the foreign shares held in trust by that bank, thereby facilitating the trading of foreign shares in U.S. markets. American option - An option that may be exercised at any time up to and including the expiration date. Amortization - Amortization (or amortisation) is the process of decreasing or accounting for, an amount over a period. Includes such practices as depreciation, depletion, write-off of intangibles, prepaid expenses and deferred charges. Angel Investor - An investor who provides financial backing for small start-ups or entrepreneurs Annual Percentage Rate (APR) - Also known as effective annual rate is used to put investments with varying interest compounding periods (daily, monthly, and semi-annually) on a common basis. It is computed as follows APR = (1 + r/m) m - 1.0 where r = the stated, nominal, or quoted rate, and m = the number of compounding periods per year. Annual percentage yield (APY) - The effective, or true, annual rate of return. The APY is the rate actually earned or paid in one year, taking into account the affect of compounding. The APY is calculated by taking one plus the periodic rate and raising it to the number of periods in a year. Annual report - The formal financial statement issued yearly by a corporation. The annual report shows assets, liabilities, revenues, expenses and earnings - how the company stood at the close of the business year, how it fared profit-wise during the year, as well as other information of interest to shareowners. Annuity - Contract under which a series of periodic payments are made during a certain period of time in consideration of a certain amount. There are a number of types of annuities, including deferred, indexed, life, and guaranteed annuities. Arbitrage - In economics and finance, arbitrage is the practice of taking advantage of a price difference between two or more markets - striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices Asian option - Option based on the average price of the asset during the life of the option. Ask price - A dealer's price to sell a security; also called the offer price. Assets - Everything a corporation owns or that is due to it - cash, investments, money due it, materials and inventories, which are called current assets; buildings and machinery, which are known as fixed assets; and patents and goodwill, called intangible assets
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Asset/liability management - Also called surplus management, the task of managing funds of a financial institution to accomplish the two goals of a financial institution - (1) to earn an adequate return on funds invested and (2) to maintain a comfortable surplus of assets beyond liabilities. Asset Backed Securities - Is a security backed by notes or receivables against assets other than real estate. Asset pricing model - A model, such as the Capital Asset Pricing Model (CAPM), that determines the required rate of return on a particular asset. At-the-money - An option is at-the-money if the strike price of the option is equal to the market price of the underlying security. Average collection period, or days' receivables - The ratio of accounts receivables to sales, or the total amount of credit extended per dollar of daily sales (average AR/sales * 365). Average cost of capital - A firm's required payout to the bondholders and to the stockholders expressed as a percentage of capital contributed to the firm. Average cost of capital is computed by dividing the total required cost of capital by the total amount of contributed capital. Average rate of return (ARR) - The ratio of the average cash inflow to the amount invested. Activity Based Budgeting - A method of budgeting in which the activities that incur costs in every functional area of an organization are recorded and their relationships are defined and analyzed. Activities are then tied to strategic goals, after which the costs of the activities needed are used to create the budget. Activity Based Costing - An accounting method that identifies the activities that a firm performs, and then assigns indirect costs to products. An activity based costing (ABC) system recognizes the relationship between costs, activities and products, and through this relationship assigns indirect costs to products less arbitrarily than traditional methods Balance of payments - A statistical compilation formulated by a sovereign nation of all economic transactions between residents of that nation and residents of all other nations during a stipulated period of time, usually a calendar year. Balance sheet - A condensed financial statement showing the nature and amount of a company's assets, liabilities and capital on a given date Balance sheet identity - Total Assets = Total Liabilities + Total Stockholders' Equity Bankruptcy - A legal proceeding involving a person or business that is unable to repay outstanding debts. Barbell strategy - A strategy in which the maturities of the securities included in the portfolio are concentrated at two extremes.
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Basic IRR rule - Accept the project if IRR is greater than the discount rate; reject the project is lower than the discount rate. Bear - An investor who believes a stock or the overall market will decline. A bear market is a prolonged period of falling stock prices Bearer bond - Bonds that are not registered on the books of the issuer. Such bonds are held in physical form by the owner, who receives interest payments by physically detaching coupons from the bond certificate and delivering them to the paying agent. Bear market - Any market in which prices are in a declining trend. Beta - Is a quantitative measure of a security, basket, or funds behaviour relative to the market or benchmark. Bid price - This is the quoted bid, or the highest price an investor is willing to pay to buy a security. Practically speaking, this is the available price at which an investor can sell shares of stock. Bid-asked spread - The difference between the bid and asked prices. Bill of exchange - General term for a document demanding payment. Bill of lading - A contract between the exporter and a transportation company in which the latter agrees to transport the goods under specified conditions which limit its liability. It is the exporter's receipt for the goods as well as proof that goods have been or will be received. Binomial option pricing model - An option pricing model in which the underlying asset can take on only two possible, discrete values in the next time period for each value that it can take on in the preceding time period. Black-Scholes Option Model - Is the seminal work about options pricing models. It was developed by Fisher Black and Myron Scholes. It initially focused on securities prices. Subsequently, it was refined by Fisher Black for the futures markets. Blue chip - A company known nationally for the quality and wide acceptance of its products or services, and for its ability to make money and pay dividends. Bond - A debt investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate. Bond covenant - A contractual provision in a bond indenture. A positive covenant requires certain actions, and a negative covenant limits certain actions. Book value - A company's book value is its total assets minus intangible assets and liabilities, such as debt. A company's book value might be more or less than its market value. Bootstrapping - A process of creating a theoretical spot rate curve , using one yield projection as the basis for the yield of the next maturity.
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Bridge Loan - Is a type of temporary financing which is extended until permanent financing is secured. At that time, funds from the new permanent financing are used to pay off the bridge loan. Budget deficit - The amount by which government spending exceeds government revenues. Bull - An investor who thinks the market will rise. Bull-bear bond - Bond whose principal repayment is linked to the price of another security. The bonds are issued in two tranches - in the first tranche repayment increases with the price of the other security, and in the second tranche repayment decreases with the price of the other security. Bull CD, Bear CD - A bull CD pays its holder a specified percentage of the increase in return on a specified market index while guaranteeing a minimum rate of return. A bear CD pays the holder a fraction of any fall in a given market index. Bull market - Any market in which prices are in an upward trend. Bullet - Is a type of credit security which repays the entire principal on the maturity date. Prior to the maturity or prepayment of the bond, interest payments are to be made in accordance with the payment schedule. Bullish, bearish - Words used to describe investor attitudes. Bullish refers to an optimistic outlook while bearish means a pessimistic outlook. Business cycle - Repetitive cycles of economic expansion and recession. Butterfly Option Spread - Is an options strategy which uses three strike prices for the same instrument and same expiration date. It can consist of the sale of two at-the-money options (puts or calls) and the purchase of one (put or call) at a higher strike price and the purchase of one (put or call) at a lower strike price. Call - An option that gives the right to buy the underlying futures contract. Call option - An option contract that gives its holder the right (but not the obligation) to purchase a specified number of shares of the underlying stock at the given strike price, on or before the expiration date of the contract. Capital account - Net result of public and private international investment and lending activities. Capital asset pricing model (CAPM) - An economic theory that describes the relationship between risk and expected return, and serves as a model for the pricing of risky securities. The CAPM asserts that the only risk that is priced by rational investors is systematic risk, because that risk cannot be eliminated by diversification. The CAPM says that the expected return of a security or a portfolio is equal to the rate on a risk-free security plus a risk premium.
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Capital budget - A firm's set of planned capital expenditures. Capital budgeting - The process of choosing the firm's long-term capital assets. Capital expenditures - Amount used during a particular period to acquire or improve longterm assets such as property, plant or equipment. Capital gain - When a stock is sold for a profit, it's the difference between the net sales price of securities and their net cost, or original basis. If a stock is sold below cost, the difference is a capital loss. Capital market line (CML) - The line defined by every combination of the risk-free asset and the market portfolio. Capitalization method - A method of constructing a replicating portfolio in which the manager purchases a number of the largest-capitalized names in the index stock in proportion to their capitalization. Cash budget - A forecasted summary of a firm's expected cash inflows and cash outflows as well as its expected cash and loan balances. Cash conversion cycle - The length of time between a firm's purchase of inventory and the receipt of cash from accounts receivable. Cash cow - A company that pays out all earnings per share to stockholders as dividends. Or, a company or division of a company that generates a steady and significant amount of free cash flow. Cash cycle - In general, the time between cash disbursement and cash collection. In net working capital management, it can be thought of as the operating cycle less the accounts payable payment period. Cash dividend - A dividend paid in cash to a company's shareholders. The amount is normally based on profitability and is taxable as income. A cash distribution may include capital gains and return of capital in addition to the dividend. Cash flow - In investments, it represents earnings before depreciation, amortization and non-cash charges. Sometimes called cash earnings. Cash flow from operations (called funds from operations) by real estate and other investment trusts is important because it indicates the ability to pay dividends. Cash flow from operations - A firm's net cash inflow resulting directly from its regular operations (disregarding extraordinary items such as the sale of fixed assets or transaction costs associated with issuing securities), calculated as the sum of net income plus non-cash expenses that were deducted in calculating net income.
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Certificate of deposit (CD) - A money market instrument characterized by its set date of maturity and interest rate. There are two basic types of CDs - traditional and negotiable. Traditional bank CDs typically incur an early-withdrawal penalty, while negotiable CDs have secondary market liquidity with investors receiving more or less than the original amount depending on market conditions. Collateral - Assets than can be repossessed if a borrower defaults. Collateral trust bonds - A bond in which the issuer (often a holding company) grants investors a lien on stocks, notes, bonds, or other financial asset as security. Commercial paper - Short-term unsecured promissory notes issued by a corporation. The maturity of commercial paper is typically less than 270 days; the most common maturity range is 30 to 50 days or less. Commodity - A commodity is food, metal, or another physical substance that investors buy or sell, usually via futures contracts. Common stock - These are securities that represent equity ownership in a company. Common shares let an investor vote on such matters as the election of directors. They also give the holder a share in a company's profits via dividend payments or the capital appreciation of the security. Compound interest - Interest paid on previously earned interest as well as on the principal. Compound option - Option on an option. Compounding - The process of accumulating the time value of money forward in time. For example, interest earned in one period earns additional interest during each subsequent time period. Consumer price index (CPI) - Measure of changes in the price of a “shopping basket” of items in order to estimate the inflation rate. The higher the CPI, the lower the purchasing power. The lower the CPI, the higher the purchasing power. Conventional mortgage - A loan based on the credit of the borrower and on the collateral for the mortgage. Convertible price - The contractually specified price per share at which a convertible security can be converted into shares of common stock. Conversion ratio - The number of shares of common stock that the security holder will receive from exercising the call option of a convertible security. Convertible bonds - Bonds that can be converted into common stock at the option of the holder.
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Corporate finance - One of the three areas of the discipline of finance. It deals with the operation of the firm (both the investment decision and the financing decision) from that firm's point of view. Correlation coefficient - A standardized statistical measure of the dependence of two random variables, defined as the covariance divided by the standard deviations of two variables. Cost of capital - The required return for a capital budgeting project. Cost of funds - Interest rate associated with borrowing money. Counterparty risk - The risk that the other party to an agreement will default. In an options contract, the risk to the option buyer that the option writer will not buy or sell the underlying as agreed. Coupon - The periodic interest payment made to the bondholders during the life of the bond. Coupon rate - In bonds, notes or other fixed income securities, the stated percentage rate of interest, usually paid twice a year. Covenants - A set of conditions agreed to in a formal debt agreement and designed to protect the lender's interests. Covenants may include restrictions on debt/equity ratio, working capital, or dividend payments. Coverage ratios - Ratios used to test the adequacy of cash flows generated through earnings for purposes of meeting debt and lease obligations, including the interest coverage ratio and the fixed charge coverage ratio. Credit analysis - The process of analyzing information on companies and bond issues in order to estimate the ability of the issuer to live up to its future contractual obligations. Credit risk - The risk that an issuer of debt securities or a borrower may default on his obligations, or that the payment may not be made on a negotiable instrument. Currency future - A financial future contract for the delivery of a specified foreign currency. Currency option - An option to buy or sell a foreign currency. Current account - Net flow of goods, services, and unilateral transactions (gifts) between countries. Current assets - Those assets of a company that are reasonably expected to be realized in cash, sold or consumed during one year. These include cash, U.S. Government bonds, receivables and money due usually within one year, as well as inventories. Current liabilities - Money owed and payable by a company, usually within one year.
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Current issue - In Treasury securities, the most recently auctioned issue. Trading is more active in current issues Current ratio - Indicator of short-term debt paying ability. Determined by dividing current assets by current liabilities. The higher the ratio, the more liquid the company. Cash flow - Reported net income of a corporation plus amounts charged off for depreciation, depletion, amortization, and extraordinary charges to reserves, which are bookkeeping deductions and not paid out in actual dollars and cents Debenture - A promissory note backed by the general credit of a company and usually not secured by a mortgage or lien on any specific property. Debt/equity ratio - Indicator of financial leverage. Compares assets provided by creditors to assets provided by shareholders. Determined by dividing long-term debt by common stockholder equity. Debt-service coverage ratio - Earnings before interest and income taxes plus one-third rental charges, divided by interest expense plus one-third rental charges plus the quantity of principal repayments divided by one minus the tax rate. Decision tree - Method of representing alternative sequential decisions and the possible outcomes from these decisions. Deep-discount bond - A bond issued with a very low coupon or no coupon and selling at a price far below par value. When the bond has no coupon, it's called a zero coupon bond. Default - Failure to make timely payment of interest or principal on a debt security or to otherwise comply with the provisions of a bond indenture. Default risk - Also referred to as credit risk, the risk that an issuer of a bond may be unable to make timely principal and interest payments. Deferred taxes - A non-cash expense that provides a source of free cash flow. Amount allocated during the period to cover tax liabilities that have not yet been paid. Deficit - An excess of liabilities over assets, of losses over profits, or of expenditure over income. Demand deposits - Checking accounts that pay no interest and can be withdrawn upon demand. Depreciation - Normally, charges against earnings to write off the cost less salvage value, of an asset over its estimated useful life. It is a bookkeeping entry and does not represent any cash outlay nor are any funds earmarked for the purpose. Derivative instruments - Contracts such as options and futures whose price is derived from the price of the underlying financial asset. Discount - Referring to the selling price of a bond, a price below its par value.
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Discount bond - Debt sold for less than its principal value. If a discount bond pays no interest, it is called a zero coupon bond. Discounted cash flow (DCF) - Future cash flows multiplied by discount factors to obtain present values. Discounted dividend model (DDM) - A formula to estimate the intrinsic value of a firm by figuring the present value of all expected future dividends. Discounting - Calculating the present value of a future amount. The process is opposite to compounding. Diversification - Dividing investment funds among a variety of securities with different risk, reward, and correlation statistics so as to minimize unsystematic risk. Dividend - The payment designated by the board of directors to be distributed pro rata among the shares outstanding. On preferred shares, it is generally a fixed amount. On common shares, the dividend varies with the fortunes of the company and the amount of cash on hand, and may be omitted if business is poor or the directors determine to withhold earnings to invest in plant and equipment Dividend discount model (DDM) - A model for valuing the common stock of a company, based on the present value of the expected cash flows. Dividend growth model - A model wherein dividends are assumed to be at a constant rate in perpetuity. Dividends per share - Dividends paid for the past 12 months divided by the number of common shares outstanding, as reported by a company. The number of shares often is determined by a weighted average of shares outstanding over the reporting term. Duration - A common gauge of the price sensitivity of an asset or portfolio to a change in interest rates. Earnings - Net income for the company during the period. Earnings before interest and taxes (EBIT) - A financial measure defined as revenues less cost of goods sold and selling, general, and administrative expenses. In other words, operating and non-operating profit before the deduction of interest and income taxes. Earnings per share (EPS) - EPS, as it is called, is a company's profit divided by its number of outstanding shares. Economic order quantity (EOQ) - The order quantity that minimizes total inventory costs. Economies of scale - The decrease in the marginal cost of production as a plant's scale of operations increases.
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Effective annual interest rate - An annual measure of the time value of money that fully reflects the effects of compounding. Effective annual yield - Annualized interest rate on a security computed using compound interest techniques. Effective duration - The duration calculated using the approximate duration formula for a bond with an embedded option, reflecting the expected change in the cash flow caused by the option. Measures the responsiveness of a bond's price taking into account the expected cash flows will change as interest rates change due to the embedded option. Efficient Market Hypothesis - In general the hypothesis states that all relevant information is fully and immediately reflected in a security's market price thereby assuming that an investor will obtain an equilibrium rate of return. In other words, an investor should not expect to earn an abnormal return (above the market return) through either technical analysis or fundamental analysis. Three forms of efficient market hypothesis exist - weak form (stock prices reflect all information of past prices), semi-strong form (stock prices reflect all publicly available information) and strong form (stock prices reflect all relevant information including insider information). Embedded option - An option that is part of the structure of a bond that provides either the bondholder or issuer the right to take some action against the other party, as opposed to a bare option, which trades separately from any underlying security. Employee stock ownership plan (ESOP) - A company contributes to a trust fund that buys stock on behalf of employees. Equity - Represents ownership interest in a firm. Eurobond - A bond that is (1) underwritten by an international syndicate, (2) offered at issuance simultaneously to investors in a number of countries, and (3) issued outside the jurisdiction of any single country. European option - Option that may be exercised only at the expiration date. Exchange rate - The price of one country's currency expressed in another country's currency. Exchange rate risk - Also called currency risk, the risk of an investment's value changing because of currency exchange rates. Exercise - To implement the right of the holder of an option to buy (in the case of a call) or sell (in the case of a put) the underlying security. Exercise price - The price at which the underlying future or options contract may be bought or sold. Exercising the option - The act buying or selling the underlying asset via the option contract.
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Expiration - The time when the option contract ceases to exist (expires). Expiration cycle - An expiration cycle relates to the dates on which options on a particular security expire. A given option will be placed in 1 of 3 cycles, the January cycle, the February cycle, or the March cycle. At any point in time, an option will have contracts with 4 expiration dates outstanding, 2 in near-term months and 2 in far-term months. Expiration date - The last day (in the case of American-style) or the only day (in the case of European-style) on which an option may be exercised. For stock options, this date is the Saturday immediately following the 3rd Friday of the expiration month; however, brokerage firms may set an earlier deadline for notification of an option holder's intention to exercise. If Friday is a holiday, the last trading day will be the preceding Thursday. Face value - The value of a bond that appears on the face of the bond, unless the value is otherwise specified by the issuing company. Face value is ordinarily the amount the issuing company promises to pay at maturity. Face value is not an indication of market value. Sometimes referred to as par value. Federal Deposit Insurance Corporation (FDIC) - A federal institution that insures bank deposits. Financial plan - A financial blueprint for the financial future of a firm. First-In-First-Out (FIFO) - A method of valuing the cost of goods sold that uses the cost of the oldest item in inventory first. Fisher effect - A theory that nominal interest rates in two or more countries should be equal to the required real rate of return to investors plus compensation for the expected amount of inflation in each country. Fiscal policy - The use of government spending and taxing for the specific purpose of stabilizing the economy. Five Cs of credit - Five characteristics that are used to form a judgement about a customer's creditworthiness - character, capacity, capital, collateral, and conditions. Fixed asset - Long-lived property owned by a firm that is used by a firm in the production of its income. Tangible fixed assets include real estate, plant, and equipment. Intangible fixed assets include patents, trademarks, and customer recognition. Fixed cost - A cost that is fixed in total for a given period of time and for given production levels. Fixed-annuities - Annuity contracts in which the insurance company or issuing financial institution pays a fixed dollar amount of money per period. Fixed-exchange rate - A country's decision to tie the value of its currency to another country's currency, gold (or another commodity), or a basket of currencies.
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Fixed-rate loan - A loan on which the rate paid by the borrower is fixed for the life of the loan. Flight to quality - The tendency of investors to move towards safer, government bonds during periods of high economic uncertainty. Floating exchange rate - A country's decision to allow its currency value to freely change. The currency is not constrained by central bank intervention and does not have to maintain its relationship with another currency in a narrow band. The currency value is determined by trading in the foreign exchange market. Force majeure risk - The risk that there will be an interruption of operations for a prolonged period after a project finance project has been completed due to fire, flood, storm, or some other factor beyond the control of the project's sponsors. Foreign bond - A bond issued on the domestic capital market of another company. Foreign bond market - That portion of the domestic bond market that represents issues floated by foreign companies to governments. Foreign currency option - An option that conveys the right to buy or sell a specified amount of foreign currency at a specified price within a specified time period. Foreign exchange risk - The risk that a long or short position in a foreign currency might have to be closed out at a loss due to an adverse movement in the currency rates. Futures and forward contracts - There are two types of contracts - futures and forward contracts. In both cases, the parties involved assume a legal obligation to buy or sell a specific quantity of an asset at a predetermined price and date. Futures and forward contracts are traded in a variety of commodities (grain, meat, etc.) and financial products (stock market indexes, bonds, common shares, etc.). Free cash flows - Cash not required for operations or for reinvestment. Often defined as earnings before interest (often obtained from operating income line on the income statement) less capital expenditure less the change in working capital. Free float - An exchange rate system characterized by the absence of government intervention. Also known as clean float. FOB - Free-On-Board Destination. The seller of merchandise bears the shipping costs and maintains ownership until the merchandise is delivered to the buyer. Full coupon bond - A bond with a coupon equal to the going market rate, thereby, the bond is selling at par. Future value - The amount of cash at a specified date in the future that is equivalent in value to a specified sum today.
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Futures - A term used to designate all contracts covering the sale of financial instruments or physical commodities for future delivery on a commodity exchange. Futures contract - Agreement to buy or sell a set number of shares of a specific stock in a designated future month at a price agreed upon by the buyer and seller. The contracts themselves are often traded on the futures market. 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. General obligation bonds - Municipal securities secured by the issuer's pledge of its full faith, credit, and taxing power. GAAP - Generally Accepting Accounting Principles. A priority listing made up of statements of accounting principles issued by the AICPA (American Institute of Certified Public Accountants) and FASB (Financial Accounting Standards Board) Gilts - British and Irish government securities. Greenshoe option - Option that allows the underwriter for a new issue to buy and resell additional shares. Gross domestic product (GDP) - The market value of goods and services produced over time including the income of foreign corporations and foreign residents working in the U.S., but excluding the income of U.S. residents and corporations overseas. Gross national product (GNP) - Measures and economy's total income. It is equal to GDP plus the income abroad accruing to domestic residents minus income generated in domestic market accruing to non-residents. Gross profit margin - Gross profit divided by sales, which is equal to each sales dollar left over after paying for the cost of goods sold. Growing perpetuity - A constant stream of cash flows without end that is expected to rise indefinitely. Hedge - A transaction that reduces the risk of an investment. Hedge fund - A fund that may employ a variety of techniques to enhance returns, such as both buying and shorting stocks based on a valuation model. Hedged portfolio - A portfolio consisting of the long position in the stock and the short position in the call option, so as to be riskless and produce a return that equals the risk-free interest rate. Hedging - A strategy designed to reduce investment risk using call options, put options, short selling, or futures contracts. A hedge can help lock in existing profits. Its purpose is to reduce the volatility of a portfolio, by reducing the risk of loss.
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Hypothecation - The pledging of securities as collateral - for example, to secure the debit balance in a margin account. Hybrid security - A convertible security whose optioned common stock is trading in a middle range, causing the convertible security to trade with the characteristics of both a fixedincome security and a common stock instrument. Immunization strategy - A bond portfolio strategy whose goal is to eliminate the portfolio's risk against a general change in the rate of interest through the use of duration. Income bond - A bond on which the payment of interest is contingent on sufficient earnings. These bonds are commonly used during the reorganization of a failed or failing business. Incremental cash flows - Difference between the firm's cash flows with and without a project. Incremental internal rate of return - IRR on the incremental investment from choosing a large project instead of a smaller project. Index option - A call or put option based on a stock market index. Indexed bond - Bond whose payments are linked to an index, e.g. the consumer price index. Indifference curve - The graphical expression of a utility function, where the horizontal axis measures risk and the vertical axis measures expected return. The curve connects all portfolios with the same utilities according to?and? . ? ? Inflation - The rate at which the general level of prices for goods and services is rising. Inflation risk - Also called purchasing-power risk, the risk that changes in the real return the investor will realize after adjusting for inflation will be negative. Initial public offering (IPO - A company's first sale of stock to the public. Securities offered in an IPO are often, but not always, those of young, small companies seeking outside equity capital and a public market for their stock. Investors purchasing stock in IPOs generally must be prepared to accept very large risks for the possibility of large gains. IPO's by investment companies (closed-end funds) usually contain underwriting fees which represent a load to buyers. Insolvency risk - The risk that a firm will be unable to satisfy its debts. Also known as bankruptcy risk. Insolvent - A firm that is unable to pay debts (liabilities are greater than assets).
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Institutional investors - Organizations that invest, including insurance companies, depository institutions, pension funds, investment companies, mutual funds, and endowment funds. Insured bond - A municipal bond backed both by the credit of the municipal issuer and by commercial insurance policies. Intangible asset - A legal claim to some future benefit, typically a claim to future cash. Goodwill, intellectual property, patents, copyrights, and trademarks are examples of intangible assets. Interest - The price paid for borrowing money. It is expressed as a percentage rate over a period of time and reflects the rate of exchange of present consumption for future consumption. Also, a share or title in property. Interest coverage ratio - The ratio of the earnings before interest and taxes to the annual interest expense. This ratio measures a firm's ability to pay interest. Interest rate risk - The risk that a security's value changes due to a change in interest rates. For example, a bond's price drops as interest rates rise. For a depository institution, also called funding risk, the risk that spread income will suffer because of a change in interest rates. Interest rate swap - A binding agreement between counterparties to exchange periodic interest payments on some predetermined dollar principal, which is called the notional principal amount. For example, one party will pay fixed and receive variable. International Depository Receipt (IDR) - A receipt issued by a bank as evidence of ownership of one or more shares of the underlying stock of a foreign corporation that the bank holds in trust. The advantage of the IDR structure is that the corporation does not have to comply with all the regulatory issuing requirements of the foreign country where the stock is to be traded. The U.S. version of the IDR is the American Depository Receipt (ADR). In-the-money - A put option that has a strike price higher than the underlying futures price, or a call option with a strike price lower than the underlying futures price. Intrinsic value of an option - The amount by which an option is in-the-money. An option which is not in-the- money has no intrinsic value. Inventory - Goods held for sale or resale Inventory Turnover Ratio - A measure of the management of inventory computed by dividing cost of goods sold (COGS) by the average inventory for a period of time. Invoice - An itemized list of goods shipped or services rendered with cost. Joint account - An agreement between two or more firms to share risk and financing responsibility in purchasing or underwriting securities.
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Junk bond - A bond with a speculative credit rating of BB (S&P) or Ba (Moody's) or lower is a junk or high yield bond. Such bonds offer investors higher yields than bonds of financially sound companies. Two agencies, Standard & Poors and Moody's investor Services, provide the rating systems for companies' credit. Journal - A book or original entry in a double-entry bookkeeping system. The journal lists all transactions and indicates the accounts to which they are posted. Journal Entry - A recording of a transaction where debits equal credits Last-In-First-Out (LIFO) - A method of valuing inventory that uses the cost of the most recent item in inventory first. Lessee - An entity that leases an asset from another entity. Lessor - An entity that leases an asset to another entity. Letter of credit (L/C) - A form of guarantee of payment issued by a bank used to guarantee the payment of interest and repayment of principal on bond issues. Level-coupon bond - Bond with a stream of coupon payments that are the same throughout the life of the bond. Leveraged beta - The beta of a leveraged required return; that is, the beta as adjusted for the degree of leverage in the firm's capital structure. Leveraged buyout (LBO) - A transaction used for taking a public corporation private financed through the use of debt funds - bank loans and bonds. Because of the large amount of debt relative to equity in the new corporation, the bonds are typically rated below investment grade, properly referred to as high-yield bonds or junk bonds. Investors can participate in an LBO through either the purchase of the debt (i.e., purchase of the bonds or participation in the bank loan) or the purchase of equity through an LBO fund that specializes in such investments. Liability - A financial obligation, or the cash outlay that must be made at a specific time to satisfy the contractual terms of such an obligation. LIBOR - The London Interbank Offered Rate; the rate of interest that major international banks in London charge each other for borrowings. Many variable interest rates in the U.S. are based on spreads off of LIBOR. There are many different LIBOR tenors. Limited partner - A partner who has limited legal liability for the obligations of the partnership. Limited Partnership - A limited partnership is one in which one or more partners (but not all) have limited liability up to their investment to creditors in the event of the failure of the business. The general partner manages the business. Limited partners are not involved in daily activities.
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Liquidation - The process of converting securities or other property into cash. The dissolution of a company, with cash remaining after sale of its assets and payment of all indebtedness being distributed to the shareholders. Loan syndication - Group of banks sharing a loan. Lockbox - A collection and processing service provided to firms by banks, which collect payments from a dedicated postal box that the firm directs its customers to send payment to. The banks make several collections per day, process the payments immediately, and deposit the funds into the firm's bank account. Long coupons - (1) Bonds or notes with a long current maturity. (2) A bond on which one of the coupon periods, usually the first, is longer than the other periods or the standard period. Long hedge - The purchase of a futures contract(s) in anticipation of actual purchases in the cash market. Used by processors or exporters as protection against an advance in the cash price. Long position - An options position where a person has executed one or more option trades where the net result is that they are an "owner" or holder of options (i. e. the number of contracts bought exceeds the number of contracts sold). Long-term debt - An obligation having a maturity of more than one year from the date it was issued. Also called funded debt. Letter of credit (L/C) - A form of guarantee of payment issued by a bank used to guarantee the payment of interest and repayment of principal on bond issues. Level-coupon bond - Bond with a stream of coupon payments that are the same throughout the life of the bond. Limited Partnership - A limited partnership is one in which one or more partners (but not all) have limited liability up to their investment to creditors in the event of the failure of the business. The general partner manages the business. Limited partners are not involved in daily activities. Line of credit - An informal arrangement between a bank and a customer establishing a maximum loan balance that the bank will permit the borrower to maintain. Liquidation - The process of converting securities or other property into cash. The dissolution of a company, with cash remaining after sale of its assets and payment of all indebtedness being distributed to the shareholders. Liquidity - A market is liquid when it has a high level of trading activity, allowing buying and selling with minimum price disturbance. Also a market characterized by the ability to buy and sell with relative ease. Loan syndication - Group of banks sharing a loan.
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Long-term debt - An obligation having a maturity of more than one year from the date it was issued. Also called funded debt. Macaulay duration - The weighted-average term to maturity of the cash flows from the bond, where the weights are the present value of the cash flow divided by the price. Managed float - Also known as "dirty" float, this is a system of floating exchange rates with central bank intervention to reduce currency fluctuations. Management buyout (MBO) - Leveraged buyout whereby the acquiring group is led by the firm's management. Margin - This allows investors to buy securities by borrowing money from a broker. The margin is the difference between the market value of a stock and the loan a broker makes.. Margin of safety - With respect to working capital management, the difference between 1) the amount of long- term financing, and 2) the sum of fixed assets and the permanent component of current assets. Mark-to-market - The process whereby the book value or collateral value of a security is adjusted to reflect current market value. Marked-to-market - An arrangement whereby the profits or losses on a futures contract are settled each day. Market Capitalization - The market value of a company, as calculated by multiplying the number of outstanding shares by the price per share. Market value fluctuates daily with the share price. It represents the price that would have to be paid to acquire 100% of the company’s capital. Market value - (1) The price at which a security is trading and could presumably be purchased or sold. (2) The value investors believe a firm is worth; calculated by multiplying the number of shares outstanding by the current market price of a firm's shares. Matching concept - The accounting principle that requires the recognition of all costs that are associated with the generation of the revenue reported in the income statement. Materials requirement planning - Computer-based systems that plan backward from the production schedule to make purchases in order to manage inventory levels. Merger - (1) Acquisition in which all assets and liabilities are absorbed by the buyer. (2) More generally, any combination of two companies. Modified duration - The ratio of Macaulay duration to (1 + y), where y = the bond yield. Modified duration is inversely related to the approximate percentage change in price for a given change in yield. Monetary policy - Actions taken by the Board of Governors of the Federal Reserve System to influence the money supply or interest rates.
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Monte Carlo simulation - An analytical technique for solving a problem by performing a large number of trail runs, called simulations, and inferring a solution from the collective results of the trial runs. Method for calculating the probability distribution of possible outcomes. Moral hazard - The risk that the existence of a contract will change the behaviour of one or both parties to the contract, e.g. an insured firm will take fewer fire precautions. Mortgage - A long-term debt instrument for the purchase of property by which the borrower uses the property itself for collateral. Mortgage bond - A bond in which the issuer has granted the bondholders a lien against the pledged assets. Collateral trust bonds Mortgage-backed securities - Securities backed by a pool of mortgage loans. Mortgagee - The lender of a loan secured by property. Mortgager - The borrower of a loan secured by property. Negative amortization - A loan repayment schedule in which the outstanding principal balance of the loan increases, rather than amortizing, because the scheduled monthly payments do not cover the full amount required to amortize the loan. The unpaid interest is added to the outstanding principal, to be repaid later. Negative convexity - A bond characteristic such that the price appreciation will be less than the price depreciation for a large change in yield of a given number of basis points. Net Present Value (NPV) - A measure of a project's future value in current dollars. Future income and expenses are summed and then discounted using a required rate of return to adjust for the time value of money. Net present value is, theoretically, the best method for evaluating projects. Net asset value - Usually used in connection with investment companies to mean net asset value per share. An investment company computes its assets daily, or even twice daily, by totalling the market value of all securities owned. All liabilities are deducted, and the balance is divided by the number of shares outstanding. The resulting figure is the net asset value per share Net assets - The difference between total assets on the one hand and current liabilities and noncapitalized long- term liabilities on the other hand. Net income - The company's total earnings, reflecting revenues adjusted for costs of doing business, depreciation, interest, taxes and other expenses. Net profit margin - Net income divided by sales; the amount of each sales dollar left over after all expenses have been paid.
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Net working capital - Current assets minus current liabilities. Often simply referred to as working capital. Net worth - Common stockholders' equity which consists of common stock, surplus, and retained earnings. Nominal interest rate - The interest rate unadjusted for inflation. Off-balance-sheet financing - Financing that is not shown as a liability in a company's balance sheet. Operating cash flow - Earnings before depreciation minus taxes. It measures the cash generated from operations, not counting capital spending or working capital requirements. Operating cycle - The average time intervening between the acquisition of materials or services and the final cash realization from those acquisitions. Operating profit margin - The ratio of operating margin to net sales. Operating risk - The inherent or fundamental risk of a firm, without regard to financial risk. The risk that is created by operating leverage. Also called business risk. Operating Leverage - The extent to which fixed costs are part of a company's cost structure; the higher the proportion of fixed costs, the faster income increases or decreases with sales volumes. Opportunity cost of capital - Expected return that is foregone by investing in a project rather than in comparable financial securities. Opportunity costs - The difference in the performance of an actual investment and a desired investment adjusted for fixed costs and execution costs. The performance differential is a consequence of not being able to implement all desired trades. Most valuable alternative that is given up. Option - Gives the buyer the right, but not the obligation, to buy or sell an asset at a set price on or before a given date. Investors, not companies, issue options. Investors who purchase call options bet the stock will be worth more than the price set by the option (the strike price), plus the price they paid for the option itself. Buyers of put options bet the stock's price will go down below the price set by the option. An option is part of a class of securities called derivatives, so named because these securities derive their value from the worth of an underlying investment. Option price - Also called the option premium, the price paid by the buyer of the options contract for the right to buy or sell a security at a specified price in the future. Out-of-the-money option - A call option is out-of-the-money if the strike price is greater than the market price of the underlying security. A put option is out-of-the-money if the strike price is less than the market price of the underlying security.
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Outstanding share capital - Issued share capital less the par value of shares that are held in the company's treasury. Outstanding shares - Shares that are currently owned by investors. Over-the-counter market (OTC) - A decentralized market (as opposed to an exchange market) where geographically dispersed dealers are linked together by telephones and computer screens. The market is for securities not listed on a stock or bond exchange. The NASDAQ market is an OTC market for U.S. stocks. Price-to-earnings ratio - A popular way to compare stocks selling at various price levels. The P/E ratio is the price of a share of stock divided by earnings per share for a 12-month period. Par value - Also called the maturity value or face value, the amount that the issuer agrees to pay at the maturity date. Perfectly competitive financial markets - Markets in which no trader has the power to change the price of goods or services. Perfect capital markets are characterized by the following conditions - 1) trading is costless, and access to the financial markets is free, 2) information about borrowing and lending opportunities is freely available, 3) there are many traders, and no single trader can have a significant impact on market prices. Perpetual warrants - Warrants that have no expiration date. Perpetuity - A constant stream of identical cash flows without end, such as a British consol. Poison pill - Any-takeover device that gives a prospective acquiree's shareholders the right to buy shares of the firm or shares of anyone who acquires the firm at a deep discount to their fair market value. Named after the cyanide pill that secret agents are instructed to swallow if capture is imminent. Political risk - Possibility of the expropriation of assets, changes in tax policy, restrictions on the exchange of foreign currency, or other changes in the business climate of a country. Portfolio - A collection of investments, real and/or financial. Portfolio internal rate of return - The rate of return computed by first determining the cash flows for all the bonds in the portfolio and then finding the interest rate that will make the present value of the cash flows equal to the market value of the portfolio. Preference stock - A security that ranks junior to preferred stock but senior to common stock in the right to receive payments from the firm; essentially junior preferred stock. Preferred habitat theory - A biased expectations theory that believes the term structure reflects the expectation of the future path of interest rates as well as risk premium. However, the theory rejects the assertion that the risk premium must rise uniformly with maturity. Instead, to the extent that the demand for and supply of funds does not match for a given maturity range, some participants will shift to maturities showing the opposite imbalances. As long as such investors are compensated by an appropriate risk premium whose magnitude will reflect the extent of aversion to either price or reinvestment risk.
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Preferred shares - Preferred shares give investors a fixed dividend from the company's earnings. And more importantly - preferred shareholders get paid before common shareholders. Preferred stock - A security that shows ownership in a corporation and gives the holder a claim, prior to the claim of common stockholders, on earnings and also generally on assets in the event of liquidation. Most preferred stock pays a fixed dividend that is paid prior to the common stock dividend, stated in a dollar amount or as a percentage of par value. This stock does not usually carry voting rights. The stock shares characteristics of both common stock and debt. Preferred stock agreement - A contract for preferred stock. Present value - The amount of cash today that is equivalent in value to a payment, or to a stream of payments, to be received in the future. Principal - (1) The total amount of money being borrowed or lent. (2) The party affected by agent decisions in a principal-agent relationship. Profit margin - Indicator of profitability. The ratio of earnings available to stockholders to net sales. Determined by dividing net income by revenue for the same 12-month period. Result is shown as a percentage. Profitability ratios - Ratios that focus on the profitability of the firm. Profit margins measure performance with relation to sales. Rate of return ratios measure performance relative to some measure of size of the investment. Project financing - A form of asset-based financing in which a firm finances a discrete set of assets on a stand- alone basis. Promissory note - Written promise to pay. Prospectus - The official selling circular that must be given to purchasers of new securities registered with the Securities and Exchange Commission Public offering - The sale of registered securities by the issuer (or the underwriters acting in the interests of the issuer) in the public market. Also called public issue. Pure-discount bond - A bond that will make only one payment of principal and interest. Also called a zero- coupon bond or a single-payment bond. Pure expectations theory - A theory that asserts that the forward rates exclusively represent the expected future rates. In other words, the entire term structure reflects the markets expectations of future short-term rates. For example, an increasing sloping term structure implies increasing short-term interest rates. Related biased expectations theories
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Put option - This security gives investors the right to sell (or put) fixed number of shares at a fixed price within a given time frame. An investor, for example, might wish to have the right to sell shares of a stock at a certain price by a certain time in order to protect, or hedge, an existing investment. Put price - The price at which the asset will be sold if a put option is exercised. Also called the strike or exercise price of a put option. Quick assets - Current assets minus inventories. Quick ratio - Indicator of a company's financial strength (or weakness). Calculated by taking current assets less inventories, divided by current liabilities. This ratio provides information regarding the firm's liquidity and ability to meet its obligations. Also called the Acid Test ratio. Rate of interest - The rate, as a proportion of the principal, at which interest is computed. Rate risk - In banking, the risk that profits may decline or losses occur because a rise in interest rates forces up the cost of funding fixed-rate loans or other fixed-rate assets. Real cash flow - A cash flow is expressed in real terms if the current, or date 0, purchasing power of the cash flow is given. Real exchange rates - Exchange rates that have been adjusted for the inflation differential between two countries. Real interest rate - The rate of interest excluding the effect of inflation; that is, the rate that is earned in terms of constant-purchasing-power dollars. Interest rate expressed in terms of real goods, i.e. nominal interest rate adjusted for inflation. Receivables turnover ratio - Total operating revenues divided by average receivables. Used to measure how effectively a firm is managing its accounts receivable. Red herring - A registration statement filed with but not yet approved by the Securities and Exchange Commission (SEC) REIT (real estate investment trust) - Real estate investment trust, which is similar to a closed-end mutual fund. REITs invest in real estate or loans secured by real estate and issue shares in such investments. Relative purchasing power parity (RPPP) - Idea that the rate of change in the price level of commodities in one country relative to the price level in another determines the rate of change of the exchange rate between the two countries' currencies. Repo - A agreement in which one party sells a security to another party and agrees to repurchase it on a specified date for a specified price. See - repurchase agreement. Reserve currency - A foreign currency held by a central bank or monetary authority for the purposes of exchange intervention and the settlement of inter-governmental claims.
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Retained earnings - Accounting earnings that are retained by the firm for reinvestment in its operations; earnings that are not paid out as dividends. Retention rate - The percentage of present earnings held back or retained by a corporation, or one minus the dividend payout rate. Also called the retention ratio. Return on Assets (ROA) - Net income for a time period divided by total assets. This ratio is often used to measure profitability or the efficiency with which assets are being employed. Higher values for this ratio indicate better financial performance. The specific value obtained for a business should be evaluated in relation to the returns that can be obtained from alternative investments of capital. Return on equity (ROE) - Indicator of profitability. Determined by dividing net income for the past 12 months by common stockholder equity (adjusted for stock splits). Result is shown as a percentage. Investors use ROE as a measure of how a company is using its money. ROE may be decomposed into return on assets (ROA) multiplied by financial leverage (total assets/total equity). Return on Investment (ROI) - A measure of operating performance and efficiency in using assets computed by dividing net income by average total assets. Return on total assets - The ratio of earnings available to common stockholders to total assets. Revenue bond - A bond issued by a municipality to finance either a project or an enterprise where the issuer pledges to the bondholders the revenues generated by the operating projects financed, for instance, hospital revenue bonds and sewer revenue bonds. Reverse repo - In essence, refers to a repurchase agreement. From the customer's perspective, the customer provides a collateralized loan to the seller. Risk premium - The reward for holding the risky market portfolio rather than the risk-free asset. The spread between Treasury and non-Treasury bonds of comparable maturity. Salvage Value - The scrap value of an asset. Acquisition cost minus salvage value yields the total amount that an asset is depreciated over its useful life. Samurai bond - A yen-denominated bond issued in Tokyo by a non-Japanese borrower. Securitization - The process of creating a passthrough, such as the mortgage pass-through security, by which the pooled assets become standard securities backed by those assets. Also, refers to the replacement of nonmarketable loans and/or cash flows provided by financial intermediaries with negotiable securities issued in the public capital markets. Security market line - Line representing the relationship between expected return and market risk. Shareholders' equity - This is a company's total assets minus total liabilities. A company's net worth is the same thing.
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Simple interest - Interest calculated only on the initial investment. Spin-off - A company can create an independent company from an existing part of the company by selling or distributing new shares in the so-called spinoff. Spot exchange rates - Exchange rate on currency for immediate delivery. Spot interest rate - Interest rate fixed today on a loan that is made today. Spread - (1) The gap between bid and ask prices of a stock or other security. (2) The simultaneous purchase and sale of separate futures or options contracts for the same commodity for delivery in different months. Also known as a straddle. (3) Difference between the price at which an underwriter buys an issue from a firm and the price at which the underwriter sells it to the public. (4) The price an issuer pays above a benchmark fixedincome yield to borrow money. Stated annual interest rate - The interest rate expressed as a per annum percentage, by which interest payment is determined. Statement of cash flows - A financial statement showing a firm's cash receipts and cash payments during a specified period. Stock - Ownership of a corporation which is represented by shares which represent a piece of the corporation's assets and earnings. Stock dividend - Payment of a corporate dividend in the form of stock rather than cash. The stock dividend may be additional shares in the company, or it may be shares in a subsidiary being spun off to shareholders. Stock dividends are often used to conserve cash needed to operate the business. Unlike a cash dividend, stock dividends are not taxed until sold. Stockholder equity - Balance sheet item that includes the book value of ownership in the corporation. It includes capital stock, paid in surplus, and retained earnings. Stockholder's equity - The residual claims that stockholders have against a firm's assets, calculated by subtracting total liabilities from total assets. Straight line depreciation - An equal dollar amount of depreciation in each accounting period. Strike price - The stated price per share for which underlying stock may be purchased (in the case of a call) or sold (in the case of a put) by the option holder upon exercise of the option contract time than the evaluation period. Subscription price - Price that the existing shareholders are allowed to pay for a share of stock in a rights offering. Sunk cost - Costs that have been incurred and cannot be reversed.
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Swap - Financial contract for the exchange of cash flows between investors, e.g. exchanging the floating interest rate of one security for the fixed interest rate of another financial instrument. Systematic risk - Also called undiversifiable risk or market risk, the minimum level of risk that can be obtained for a portfolio by means of diversification across a large number of randomly chosen assets. Tangible asset - An asset whose value depends on particular physical properties. These include reproducible assets such as buildings or machinery and non-reproducible assets such as land, a mine, or a work of art. Also called real assets. Tax shield - The reduction in income taxes that results from taking an allowable deduction from taxable income. Term bonds - Often referred to as bullet-maturity bonds or simply bullet bonds, bonds whose principal is payable at maturity. Time value of an option - The portion of an option's premium that is based on the amount of time remaining until the expiration date of the option contract, and that the underlying components that determine the value of the option may change during that time. Time value is generally equal to the difference between the premium and the intrinsic value. Time value of money - The idea that a dollar today is worth more than a dollar in the future, because the dollar received today can earn interest up until the time the future dollar is received. Total asset turnover - The ratio of net sales to total assets. Total debt to equity ratio - A capitalization ratio comparing current liabilities plus longterm debt to shareholders' equity. Transfer price - The price at which one unit of a firm sells goods or services to another unit of the same firm. Treasury bills - Debt obligations of the U.S. Treasury that have maturities of one year or less. Maturities for T- bills are usually 91 days, 182 days, or 52 weeks. Treasury bonds - debt obligations of the U.S. Treasury that have maturities of 10 years or more. Treasury notes - Debt obligations of the U.S. Treasury that have maturities of more than 2 years but less than 10 years. Treasury securities - Securities issued by the U.S. Department of the Treasury.
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Treasury stock - Stock issued by a company but later reacquired. It may be held in the company's treasury indefinitely, reissued to the public or retired. Treasury stock receives no dividends and has no vote while held by the company. Underlying asset - The asset that an option gives the option holder the right to buy or to sell. Underwriter - A party that guarantees the proceeds to the firm from a security sale, thereby in effect taking ownership of the securities. Or, stated differently, a firm, usually an investment bank, that buys an issue of securities from a company and resells it to investors. Unleveraged beta - The beta of an unleveraged required return (i.e. no debt) on an investment when the investment is financed entirely by equity. Unsecured debt - Debt that does not identify specific assets that can be taken over by the debtholder in case of default. Value-at-Risk model (VAR) - Procedure for estimating the probability of portfolio losses exceeding some specified proportion based on a statistical analysis of historical market price trends, correlations, and volatilities. Variable cost - A cost that is directly proportional to the volume of output produced. When production is zero, the variable cost is equal to zero. Venture capital - An investment in a start-up business that is perceived to have excellent growth prospects but does not have access to capital markets. Type of financing sought by early-stage companies seeking to grow rapidly. Warrants - Certificates giving the holder the right to purchase securities at a stipulated price within a specified time limit or perpetually. Sometimes a warrant is offered with securities as an inducement to buy. Weighted average cost of capital - Expected return on a portfolio of all the firm's securities. Used as a hurdle rate for capital investment. White knight - A friendly potential acquirer of a firm sought out by a target firm that is threatened by a less welcome suitor. Working Capital - Current Assets minus Current Liabilities. Some business owners like to think of assets being a use of working capital, and liabilities and capital contributions as being a source of working capital. Yankee bonds - Foreign bonds denominated in US$ issued in the United States by foreign banks and corporations. These bonds are usually registered with the SEC. For example, bonds issued by originators with roots in Japan are called Samurai bonds. Yield - Also known as return. The dividends or interest paid by a company expressed as a percentage of the current price
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Yield to maturity - The percentage rate of return paid on a bond, note or other fixed income security if you buy and hold it to its maturity date. The calculation for YTM is based on the coupon rate, length of time to maturity and market price. It assumes that coupon interest paid over the life of the bond will be reinvested at the same rate. Zero coupon bond - Such a debt security pays an investor no interest. It is sold at a discount to its face price and matures in one year or longer.
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doc_591558836.pdf