A

Abandonment option: The option of terminating an investment earlier than originally planned.

Abnormal returns: Part of the return that is not due to systematic influences (market wide influences). In other words, abnormal returns are above those predicted by the market movement alone. Related: excess returns.
Absolute priority: Rule in bankruptcy proceedings whereby senior creditors are required to be paid in full before junior creditors receive any payment.
Accelerated cost recovery system (ACRS): Schedule of depreciation rates allowed for tax purposes.
Accelerated depreciation: Any depreciation method that produces larger deductions for depreciation in the early years of a project's life. Accelerated cost recovery system (ACRS), which is a depreciation schedule allowed for tax purposes, is one such example.
Accounting exposure: The change in the value of a firm's foreign currency denominated accounts due to a change in exchange rates.
Accounting earnings: Earnings of a firm as reported on its income statement.
Accounting insolvency: Total liabilities exceed total assets. A firm with a negative net worth is insolvent on the books.
Accounting liquidity: The ease and quickness with which assets can be converted to cash.
Accounts payable: Money owed to suppliers.
Accounts receivable: Money owed by customers.
Accounts receivable turnover: The ratio of net credit sales to average accounts receivable, a measure of how quickly customers pay their bills.
Accretion (of a discount): In portfolio accounting, a straight-line accumulation of capital gains on discount bond in anticipation of receipt of par at maturity.
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 accumulated coupon interest earned but not yet paid to the seller of a bond by the buyer (unless the bond is in default).
Accumulated Benefit Obligation (ABO): An approximate measure of the liability of a plan in the event of a termination at the date the calculation is performed. Related: projected benefit obligation.
Acid-test ratio: Also called the quick ratio, the ratio of current assets minus inventories, accruals, and prepaid items to current liabilities.
Acquiree: A firm that is being acquired.
Acquirer: A firm or individual that is acquiring something.
Acquisition of assets: A merger or consolidation in which an acquirer purchases the selling firm's assets.
Acquisition of stock: A merger or consolidation in which an acquirer purchases the acquiree's stock.
Act of state doctrine: This doctrine says that a nation is sovereign within its own borders and its domestic actions may not be questioned in the courts of another nation.
Active: A market in which there is much trading.
Active portfolio strategy: A strategy that uses available information and forecasting techniques to seek a better performance than a portfolio that is simply diversified broadly. Related: passive portfolio strategy.
Actuals: The physical commodity underlying a futures contract. Cash commodity, physical.
Additional hedge: A protection against borrower fallout risk in the mortgage pipeline.
Adjustable rate preferred stock (ARPS): Publicly traded issues that may be collateralized by mortgages and MBSs.
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.
Administrative pricing rules: IRS rules used to allocate income on export sales to a foreign sales corporation.
Advance commitment: A promise to sell an asset before the seller has lined up purchase of the asset. This seller can offset risk by purchasing a futures contract to fix the sales price.
Adverse selection: A situation in which market participation is a negative signal.
Affirmative covenant: A bond covenant that specifies certain actions the firm must take.
After-tax profit margin: The ratio of net income to net sales.
After-tax real rate of return: Money after-tax rate of return minus the inflation rate.
Agencies Federal: agency securities.
Agency bank: A form of organization commonly used by foreign banks to enter the U.S. market. An agency bank cannot accept deposits or extend loans in its own name; it acts as agent for the parent bank.
Agency basis: A means of compensating the broker of a program trade solely on the basis of commission established through bids submitted by various brokerage firms. agency incentive arrangement. A means of compensating the broker of a program trade using benchmark prices for issues to be traded in determining commissions or fees.
Agency cost view: The argument that specifies that the various agency costs create a complex environment in which total agency costs are at a minimum with some, but less than 100%, debt financing.
Agency costs: The incremental costs of having an agent make decisions for a principal.
Agency pass-throughs: Mortgage pass-through securities whose principal and interest payments are guaranteed by government agencies, such as the Government National Mortgage Association ("Ginnie Mae"), Federal Home Loan Mortgage Corporation ("Freddie Mac") and Federal National Mortgage Association(" Fannie Mae").
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 anther person, a principal.
Agent: The decision-maker in a principal-agent relationship.
Aggregation: Process in corporate financial planning whereby the smaller investment proposals of each of the firm's operational units are added up and in effect treated as a big picture.
Aging schedule: A table of accounts receivable broken down into age categories (such as 0-30 days, 30-60 days, and 60-90 days), which is used to see whether customer payments are keeping close to schedule.
AIBD: Association of International Bond Dealers.
All equity rate: The discount rate that reflects only the business risks of a project and abstracts from the effects of financing.
All or none: Requirement that none of an order be executed unless all of it can be executed at the specified price.
All-equity rate: The discount rate that reflects only the business risks of a project and abstracts from the effects of financing.
All-in cost: Total costs, explicit and implicit.
All-or-none underwriting: An arrangement whereby a security issue is canceled if the underwriter is unable to re-sell the entire issue.
Alpha: A measure of selection risk (also known as residual risk) of a mutual fund in relation to the market. A positive alpha is the extra return awarded to the investor for taking a risk, instead of accepting the market return. For example, an alpha of 0.4 means the fund outperformed the market-based return estimate by 0.4%. An alpha of -0.6 means a fund's monthly return was 0.6% less than would have been predicted from the change in the market alone. In a Jensen Index, it is factor to represent the portfolio's performance that diverges from its beta, representing a measure of the manager's performance.
Alpha equation: The alpha of a fund is determined as follows:
[ (sum of y) -((b)(sum of x)) ] / n
where: n =number of observations (36 months)
b = beta of the fund
x = rate of return for the S&P 500
y = rate of return for the fund
Alternative mortgage instruments: Variations of mortgage instruments such as adjustable-rate and variable-rate mortgages, graduated-payment mortgages, reverse-annuity mortgages, and several seldom-used variations.
American Depositary Receipts (ADRs): Certificates issued by a U.S. depositary bank, representing foreign shares held by the bank, usually by a branch or correspondent in the country of issue. One ADR may represent a portion of a foreign share, one share or a bundle of shares of a foreign corporation. If the ADR's are "sponsored," the corporation provides financial information and other assistance to the bank and may subsidize the administration of the ADRs. "Unsponsored" ADRs do not receive such assistance. ADRs carry the same currency, political and economic risks as the underlying foreign share; the prices of the two, adjusted for the SDR/ordinary ratio, are kept essentially identical by arbitrage. American depositary shares(ADSs) are a similar form of certification.
American option: An option that may be exercised at any time up to and including the expiration date. Related: European option
American shares: Securities certificates issued in the U.S. by a transfer agent acting on behalf of the foreign issuer. The certificates represent claims to foreign equities.
American Stock Exchange (AMEX): The second-largest stock exchange in the United States. It trades mostly in small-to medium-sized companies.
American-style option: An option contract that can be exercised at any time between the date of purchase and the expiration date. Most exchange-traded options are American style.
Amortization: The repayment of a loan by installments.
Amortization factor: The pool factor implied by the scheduled amortization assuming no prepayemts.
Amortizing interest rate swap: Swap in which the principal or national amount rises (falls) as interest rates rise (decline).
Analyst: Employee of a brokerage or fund management house who studies companies and makes buy-and-sell recommendations on their stocks. Most specialize in a specific industry.
Angels: Individuals providing venture capital.
Announcement date: Date on which particular news concerning a given company is announced to the public. Used in event studies, which researchers use to evaluate the economic impact of events of interest.
Annual fund operating expenses: For investment companies, the management fee and "other expenses," including the expenses for maintaining shareholder records, providing shareholders with financial statements, and providing custodial and accounting services. For 12b-1 funds, selling and marketing costs are included.
Annual percentage rate (APR): The periodic rate times the number of periods in a year. For example, a 5% quarterly return has an APR of 20%.
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. For example, a 1% per month rate has an APY of 12.68% (1.01^12).
Annual report: Yearly record of a publicly held company's financial condition. It includes a description of the firm's operations, its balance sheet and income statement. SEC rules require that it be distributed to all shareholders. A more detailed version is called a 10-K.
Annualized gain: If stock X appreciates 1.5% in one month, the annualized gain for that sock over a twelve month period is 12*1.5% = 18%. Compounded over the twelve month period, the gain is (1.015)^12 = 19.6%.
Annualized holding period return: The annual rate of return that when compounded t times, would have given the same t-period holding return as actually occurred from period 1 to period t.
Annuity: A regular periodic payment made by an insurance company to a policyholder for a specified period of time.
Annuity due: An annuity with n payments, wherein the first payment is made at time t = 0 and the last payment is made at time t = n - 1.
Annuity factor: Present value of $1 paid for each of t periods.
Annuity in arrears: An annuity with a first payment on full period hence, rather than immediately.
Anticipation: Arrangements whereby customers who pay before the final date may be entitled to deduct a normal rate of interest.
Antidilutive effect: Result of a transaction that increases earnings per common share (e.g. by decreasing the number of shares outstanding).
Appraisal ratio: The signal-to-noise ratio of an analyst's forecasts. The ratio of alpha to residual standard deviation.
Appraisal rights: A right of shareholders in a merger to demand the payment of a fair price for their shares, as determined independently.
Appropriation request: Formal request for funds for capital investment project.
Arbitrage: The simultaneous buying and selling of a security at two different prices in two different markets, resulting in profits without risk. Perfectly efficient markets present no arbitrage opportunities. Perfectly efficient markets seldom exist.
Arbitrage Pricing Theory (APT): An alternative model to the capital asset pricing model developed by Stephen Ross and based purely on arbitrage arguments.
Arbitrage-free option-pricing models: Yield curve option-pricing models.
Arbitrageurs: People who search for and exploit arbitrage opportunities.
Arithmetic average (mean) rate of return: Arithmetic mean return.
Arithmetic mean return: An average of the subperiod returns, calculated by summing the subperiod returns and dividing by he number of subperiods.
Arms index: Also known as a trading index (TRIN)= (number of advancing issues)/ (number of declining issues) (Total up volume )/ (total down volume). An advance/decline market indicator. Less than 1.0 indicates bullish demand, while above 1.0 is bearish. The index often is smoothed with a simple moving average.
Arm's length price: The price at which a willing buyer and a willing unrelated seller would freely agree to transact.
ARMs: Adjustable rate mortgage. A mortgage that features predetermined adjustments of the loan interest rate at regular intervals based on an established index. The interest rate is adjusted at each interval to a rate equivalent to the index value plus a predetermined spread, or margin, over the index, usually subject to per-interval and to life-of-loan interest rate and/or payment rate caps.
Articles of incorporation: Legal document establishing a corporation and its structure and purpose.
Asian currency units (ACUs): Dollar deposits held in Singapore or other Asian centers.
Asian option: Option based on the average price of the asset during the life of the option.
Ask: This is the quoted ask, or the lowest price an investor will accept to sell a stock. Practically speaking, this is the quoted offer at which an investor can buy shares of stock; also called the offer price.
Ask price: A dealer's price to sell a security; also called the offer price.
Asset: Any possession that has value in an exchange.
Asset/equity ratio: The ratio of total assets to stockholder equity.
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 activity ratios: Ratios that measure how effectively the firm is managing its assets.
Asset allocation decision: The decision regarding how an institution's funds should be distributed among the major classes of assets in which it may invest.
Asset-backed security: A security that is collateralized by loans, leases, receivables, or installment contracts on personal property, not real estate.
Asset-based financing: Methods of financing in which lenders and equity investors look principally to the cash flow from a particular asset or set of assets for a return on, and the return of, their financing.
Asset classes: Categories of assets, such as stocks, bonds, real estate and foreign securities.
Asset-coverage test: A bond indenture restriction that permits additional borrowing on if the ratio of assets to debt does not fall below a specified minimum.
Asset for asset swap: Creditors exchange the debt of one defaulting borrower for the debt of another defaulting borrower.
Asset pricing model: A model for determining the required rate of return on an asset.
Asset substitution: A firm's investing in assets that are riskier than those that the debtholders expected.
Asset substitution problem: Arises when the stockholders substitute riskier assets for the firm's existing assets and expropriate value from the debtholders.
Asset swap: An interest rate swap used to alter the cash flow characteristics of an institution's assets so as to provide a better match with its liabilities.
Asset turnover: The ratio of net sales to total assets.
Asset pricing model: A model, such as the Capital Asset Pricing Model (CAPM), that determines the required rate of return on a particular asset.
Assets: A firm's productive resources.
Assets requirements: A common element of a financial plan that describes projected capital spending and the proposed uses of net working capital.
Assignment: The receipt of an exercise notice by an options writer that requires the writer to sell (in the case of a call) or purchase (in the case of a put) the underlying security at the specified strike price.
Asymmetry: A lack of equivalence between two things, such as the unequal tax treatment of interest expense and dividend payments.
Asymmetric information: Information that is known to some people but not to other people.
Asymmetric taxes: A situation wherein participants in a transaction have different net tax rates.
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. For example, if xyz stock is trading at 54, then the xyz 54 option is at-the-money.
Attribute bias: The tendency of stocks preferred by the dividend discount model to share certain equity attributes such as low price-earnings ratios, high dividend yield, high book-value ratio or membership in a particular industry sector.
Auction markets: Markets in which the prevailing price is determined through the free interaction of prospective buyers and sellers, as on the floor of the stock exchange.
Auction rate preferred stock (ARPS): Floating rate preferred stock, the dividend on which is adjusted every seven weeks through a Dutch auction.
Auditor's report: A section of an annual report containing the auditor's opinion about the veracity of the financial statements.
Authorized shares: Number of shares authorized for issuance by a firm's corporate charter.
Autocorrelation: The correlation of a variable with itself over successive time intervals.
Automated Clearing House (ACH): A collection of 32 regional electronic interbank networks used to process transactions electronically with a guaranteed one-day bank collection float.
Automatic stay: The restricting of liability holders from collection efforts of collateral seizure, which is automatically imposed when a firm files for bankruptcy under Chapter 11.
Autoregressive: Using past data to predict future data.
Availability float: Checks deposited by a company that have not yet been cleared.
Average: An arithmetic mean of selected stocks intended to represent the behavior of the market or some component of it. One good example is the widely quoted Dow Jones Industrial Average, which adds the current prices of the 30 DJIA's stocks, and divides the results by a predetermined number, the divisor.
Average accounting return: The average project earnings after taxes and depreciation divided by the average book value of the investment during its life.
Average age of accounts receivable: The weighted-average age of all of the firm's outstanding invoices.
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 life: Also referred to as the weighted-average life (WAL). The average number of years that each dollar of unpaid principal due on the mortgage remains outstanding. Average life is computed as the weighted average time to the receipt of all future cash flows, using as the weights the dollar amounts of the principal paydowns.
Average maturity: The average time to maturity of securities held by a mutual fund. Changes in interest rates have greater impact on funds with longer average life.
Average (across-day) measures: An estimation of price that uses the average or representative price of a large number of trades.
Average rate of return (ARR): The ratio of the average cash inflow to the amount invested.
Average tax rate: Taxes as a fraction of income; total taxes divided by total taxable income.
Away: A trade, quote, or market that does not originate with the dealer in question, e.g., "the bid is 98-10 away from me."

B

Back fee: The fee paid on the extension date if the buyer wishes to continue the option.
Back office: Brokerage house clerical operations that support, but do not include, the trading of stocks and other securities. Includes all written confirmation and settlement of trades, record keeping and regulatory compliance.
Back-end loan fund: A mutual fund that charges investors a fee to sell (redeem) shares, often ranging from 4% to 6%. Some back-end load funds impose a full commission if the shares are redeemed within a designated time, such as one year. The commission decreases the longer the investor holds the shares. The formal name for the back-end load is the contingent deferred sales charge, or CDSC.
Back-to-back financing: An intercompany loan channeled through a bank.
Back-to-back loan: A loan in which two companies in separate countries borrow each other's currency for a specific time period and repay the other's currency at an agreed upon maturity.
Back-up: (1) When bond yields and prices fall, the market is said to back-up. (2) When an investor swaps out of one security into another of shorter current maturity he is said to back up.
Backwardation: A market condition in which futures prices are lower in the distant delivery months than in the nearest delivery month. This situation may occur in when the costs of storing the product until eventual delivery are effectively subtracted from the price today. The opposite of contango.
Baker Plan: A plan by U.S. Treasury Secretary James Baker under which 15 principal middle-income debtor countries (the Baker 15) would undertake growth-oriented structural reforms, to be supported by increased financing from the World Bank and continued lending from commercial banks.
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 of trade: Net flow of goods (exports minus imports) between countries.
Balance sheet: Also called the statement of financial condition, it is a summary of the assets, liabilities, and owners' equity.
Balance sheet exposure: See:accounting exposure.
Balance sheet identity: Total Assets = Total Liabilities + Total Stockholders' Equity
Balanced fund: An investment company that invests in stocks and bonds. The same as a balanced mutual fund.
Balanced mutual fund: This is a fund that buys common stock, preferred stock and bonds. The same as a balanced fund.
Balloon maturity: Any large principal payment due at maturity for a bond or loan with or without a a sinking fund requirement.
BAN (Bank anticipation notes): Notes issued by states and municipalities to obtain interim financing for projects that will eventually be funded long term through the sale of a bond issue.
Bane: In the words of Warren Buffet, Bill Bane Sr., is, "a great American and one of the last real traders around. I like to call him 'Salvo.'" His wife, Carol, is a huge NASCAR fan, and in her own words "delights in pulling the legs off central bankers." Cooper Bane, son number two, is a thriving artiste who specializes in making art that is much better than the stuff most folks are doing. Jackson, son number three, is a world renowned master chef and plans on opening a restaurant. Bill Bane Jr., son number one, plans on giving Mr. Monroe Trout a run for his money.
Bank collection float: The time that elapses between when a check is deposited into a bank account and when the funds are available to the depositor, during which period the bank is collecting payment from the payer's bank.
Bank discount basis: A convention used for quoting bids and offers for treasury bills in terms of annualized yield , based on a 360-day year.
Bank draft: A draft addressed to a bank.
Bank line: Line of credit granted by a bank to a customer.
Bank wire: A computer message system linking major banks. It is used not for effecting payments, but as a mechanism to advise the receiving bank of some action that has occurred, e.g. the payment by a customer of funds into that bank's account.
Banker's acceptance: A short-term credit investment created by a non-financial firm and guaranteed by a bank as to payment. Acceptances are traded at discounts from face value in the secondary market. These instruments have been a popular investment for money market funds. They are commonly used in international transactions.
Bank for International Settlements (BIS): An international bank headquartered in Basel, Switzerland, which serves as a forum for monetary cooperation among several European central banks, the Bank of Japan, and the U.S. Federal Reserve System. Founded in 1930 to handle the German payment of World War I reparations, it now monitors and collects data on international banking activity and promulgates rules concerning international bank regulation.
Bankruptcy: State of being unable to pay debts. Thus, the ownership of the firm's assets is transferred from the stockholders to the bondholders.
Bankruptcy cost view: The argument that expected indirect and direct bankruptcy costs offset the other benefits from leverage so that the optimal amount of leverage is less than 100% debt financing.
Bankruptcy risk: The risk that a firm will be unable to meet its debt obligations. Also referred to as default or insolvency risk.
Bankruptcy view: The argument that expected bankruptcy costs preclude firms from being financed entirely with debt.
Bar: Slang for one million dollars.
Barbell strategy: A strategy in which the maturities of the securities included in the portfolio are concentrated at two extremes.
Bargain-purchase-price option: Gives the lessee the option to purchase the asset at a price below fair market value when the lease expires.
BARRA's performance analysis (PERFAN): A method developed by BARRA, a consulting firm in Berkeley, Calif. It is commonly used by institutional investors applying performance attribution analysis to evaluate their money managers' performances.
Barrier options: Contracts with trigger points that, when crossed, automatically generate buying or selling of other options. These are very exotic options.
Base interest rate: Related: Benchmark interest rate.
Base probability of loss: The probability of not achieving a portfolio expected return.
Basic balance: In a balance of payments, the basic balance is the net balance of the combination of the current account and the capital account.
Basic business strategies: Key strategies a firm intends to pursue in carrying out its business plan.
Basic IRR rule: Accept the project if IRR is greater than the discount rate; reject the project is lower than the discount rate.
Basis: Regarding a futures contract, the difference between the cash price and the futures price observed in the market. Also, it is the price an investor pays for a security plus any out-of-pocket expenses. It is used to determine capital gains or losses for tax purposes when the stock is sold.
Basis point: In the bond market, the smallest measure used for quoting yields is a basis point. Each percentage point of yield in bonds equals 100 basis points. Basis points also are used for interest rates. An interest rate of 5% is 50 basis points greater than an interest rate of 4.5%.
Basis price: Price expressed in terms of yield to maturity or annual rate of return.
Basis risk: The uncertainty about the basis at the time a hedge may be lifted. Hedging substitutes basis risk for price risk.
Basket options: Packages that involve the exchange of more than two currencies against a base currency at expiration. The basket option buyer purchases the right, but not the obligation, to receive designated currencies in exchange for a base currency, either at the prevailing spot market rate or at a prearranged rate of exchange. A basket option is generally used by multinational corporations with multicurrency cash flows since it is generally cheaper to buy an option on a basket of currencies than to buy individual options on each of the currencies that make up the basket.
Basket trades: Related: Program trades.
Bear: An investor who believes a stock or the overall market will decline. A bear market is a prolonged period of falling stock prices, usually by 20% or more. Related: bull.
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.
Bear raid: A situation in which large traders sell positions with the intention of driving prices down.
Before-tax profit margin: The ratio of net income before taxes to net sales.
Beggar-thy-neighbor: An international trade policy of competitive devaluations and increased protective barriers where one country seeks to gain at the expense of its trading partners.
Beggar-thy-neighbor devaluation: A devaluation that is designed to cheapen a nation's currency and thereby increase its exports at other countries' expense and reduce imports. Such devaluations often lead to trade wars.
Bellwether issues: Related:Benchmark issues.
Benchmark: The performance of a predetermined set of securities, for comparison purposes. Such sets may be based on published indexes or may be customized to suit an investment strategy.
Benchmark error: Use of an inappropriate proxy for the true market portfolio.
Benchmark interest rate: Also called the base interest rate, it is the minimum interest rate investors will demand for investing in a non-Treasury security. It is also tied to the yield to maturity offered on a comparable-maturity Treasury security that was most recently issued ("on-the-run").
Benchmark issues: Also called on-the-run or current coupon issues or bellwether issues. In the secondary market, it's the most recently auctioned Treasury issues for each maturity.
Best-efforts sale: A method of securities distribution/ underwriting in which the securities firm agrees to sell as much of the offering as possible and return any unsold shares to the issuer. As opposed to a guaranteed or fixed price sale, where the underwriter agrees to sell a specific number of shares (with the securities firm holding any unsold shares in its own account if necessary).
Best-interests-of-creditors test: The requirement that a claim holder voting against a plan of reorganization must receive at least as much as he would have if the debtor were liquidated.
Beta (Mutual Funds): The measure of a fund's or stocks risk in relation to the market. A beta of 0.7 means the fund's total return is likely to move up or down 70% of the market change; 1.3 means total return is likely to move up or down 30% more than the market. Beta is referred to as an index of the systematic risk due to general market conditions that cannot be diversified away.
Beta equation (Mutual Funds):
The beta of a fund is determined as follows:
[(n) (sum of (xy)) ]-[ (sum of x) (sum of y)]
[(n) (sum of (xx)) ]-[ (sum of x) (sum of x)]
where: n = # of observations (36 months)
x = rate of return for the S&P 500 Index
y = rate of return for the fund
Beta equation (Stocks):
The beta of a stock is determined as follows:
[(n) (sum of (xy)) ]-[(sum of x) (sum of y)]
[(n) (sum of (xx)) ]-[(sum of x) (sum of x)]
where: n = # of observations (24-60 months)
x = rate of return for the S&P 500 Index
y = rate of return for the stock
Biased expectations theories: Related: pure expectations theory.
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. Related: Ask , offer.
Bid-asked spread: The difference between the bid and asked prices.
Bidder: A firm or person that wants to buy a firm or security.
Big Bang: The term applied to the liberalization in 1986 of the London Stock Exchange in which trading was automated with the use of computers.
Big Board: A nickname for the New York Stock Exchange. Also known as The Exchange. More than 2,000 common and preferred stocks are traded. Founded in 1792, the NYSE is the oldest exchange in the United States, and the largest. It is located on Wall Street in New York City.
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 market: An illegal market.
Black-Scholes option-pricing model: A model for pricing call options based on arbitrage arguments that uses the stock price, the exercise price, the risk-free interest rate, the time to expiration, and the standard deviation of the stock return.
Blanket inventory lien: A secured loan that gives the lender a lien against all the borrower's inventories.
Block house: Brokerage firms that help to find potential buyers or sellers of large block trades.
Block trade: A large trading order, defined on the New York Stock Exchange as an order that consists of 10,000 shares of a given stock or a total market value of $200,000 or more.
Block voting: A group of shareholders banding together to vote their shares in a single block.
Blocked currency: A currency that is not freely convertible to other currencies due to exchange controls.
Blow-off top: A steep and rapid increase in price followed by a steep and rapid drop. This is an indicator seen in charts and used in technical analysis of stock price and market trends.
Blue-chip company: Large and creditworthy company.
Blue-sky laws: State laws covering the issue and trading of securities.
Bogey: The return an investment manager is compared to for performance evaluation.
Boilerplate: Standard terms and conditions.
Bond: Bonds are debt and are issued for a period of more than one year. The U.S. government, local governments, water districts, companies and many other types of institutions sell bonds. When an investor buys bonds, he or she is lending money. The seller of the bond agrees to repay the principal amount of the loan at a specified time. Interest-bearing bonds pay interest periodically.
Bond agreement: A contract for privately placed debt.
Bond covenant: A contractual provision in a bond indenture. A positive covenant requires certain actions, and a negative covenant limits certain actions.
Bond equivalent yield: Bond yield calculated on an annual percentage rate method. Differs from annual effective yield.
Bond indenture: The contract that sets forth the promises of a corporate bond issuer and the rights of investors.
Bond indexing: Designing a portfolio so that its performance will match the performance of some bond index.
Bond points: A conventional unit of measure for bond prices set at $10 and equivalent to 1% of the $100 face value of the bond. A price of 80 means that the bond is selling at 80% of its face, or par value.
Bond value: With respect to convertible bonds, the value the security would have if it were not convertible apart from the conversion option.
Bond-equivalent basis: The method used for computing the bond-equivalent yield.
Bond-equivalent yield: The annualized yield to maturity computed by doubling the semiannual yield.
BONDPAR: A system that monitors and evaluates the performance of a fixed-income portfolio , as well as the individual securities held in the portfolio. BONDPAR decomposes the return into those elements beyond the manager's control--such as the interest rate environment and client-imposed duration policy constraints--and those that the management process contributes to, such as interest rate management, sector/quality allocations, and individual bond selection.
Boning: Charging a lot more for an asset than it's worth.
Book: A banker or trader's positions.
Book cash: A firm's cash balance as reported in its financial statements. Also called ledger cash.
Book profit: The cumulative book income plus any gain or loss on disposition of the assets on termination of the SAT.
Book runner: The managing underwriter for a new issue. The book runner maintains the book of securities sold.
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.
Book value per share: The ratio of stockholder equity to the average number of common shares. Book value per share should not be thought of as an indicator of economic worth, since it reflects accounting valuation (and not necessarily market valuation).
Book-entry securities: The Treasury and federal agencies are moving to a book-entry system in which securities are not represented by engraved pieces of paper but are maintained in computerized records at the Fed in the names of member banks, which in turn keep records of the securities they own as well as those they are holding for customers. In the case of other securities where a book-entry has developed, engraved securities do exist somewhere in quite a few cases. These securities do not move from holder to holder but are usually kept in a central clearinghouse or by another agent.
Bootstrapping: A process of creating a theoretical spot rate curve , using one yield projection as the basis for the yield of the next maturity.
Borrow: To obtain or receive money on loan with the promise or understanding that it will be repaid.
Borrower fallout: In the mortgage pipeline, the risk that prospective borrowers of loans committed to be closed will elect to withdraw from the contract.
Bottom-up equity management style: A management style that de-emphasizes the significance of economic and market cycles, focusing instead on the analysis of individual stocks.
Bought deal: Security issue where one or two underwriters buy the entire issue.
Bourse: A term of French origin used to refer to stock markets.
Bracket: A term signifying the extent an underwriter's commitment in a new issue, e.g., major bracket or minor bracket.
Brady bonds: Bonds issued by emerging countries under a debt reduction plan.
Branch: An operation in a foreign country incorporated in the home country.
Break: A rapid and sharp price decline.
Break-even analysis: An analysis of the level of sales at which a project would make zero profit.
Break-even lease payment: The lease payment at which a party to a prospective lease is indifferent between entering and not entering into the lease arrangement.
Break-even payment rate: The prepayment rate of a MBS coupon that will produce the same CFY as that of a predetermined benchmark MBS coupon. Used to identify for coupons higher than the benchmark coupon the prepayment rate that will produce the same CFY as that of the benchmark coupon; and for coupons lower than the benchmark coupon the lowest prepayment rate that will do so.
Break-even tax rate: The tax rate at which a party to a prospective transaction is indifferent between entering into and not entering into the transaction.
Break-even time: Related: Premium payback period.
Breakout: A rise in a security's price above a resistance level (commonly its previous high price) or drop below a level of support (commonly the former lowest price.) A breakout is taken to signify a continuing move in the same direction. Can be used by technical analysts as a buy or sell indicator.
Bretton Woods Agreement: An agreement signed by the original United Nations members in 1944 that established the International Monetary Fund (IMF) and the post-World War II international monetary system of fixed exchange rates.
Bridge financing: Interim financing of one sort or another used to solidify a position until more permanent financing is arranged.
British clearers: The large clearing banks that dominate deposit taking and short-term lending in the domestic sterling market.
Broker: An individual who is paid a commission for executing customer orders. Either a floor broker who executes orders on the floor of the exchange, or an upstairs broker who handles retail customers and their orders.
Broker loan rate: Related: Call money rate.
Brokered market: A market where an intermediary offers search services to buyers and sellers.
Bubble theory: Security prices sometimes move wildly above their true values.
Buck: Slang for one million dollars.
Budget: A detailed schedule of financial activity, such as an advertising budget, a sales budget, or a capital budget.
Budget deficit: The amount by which government spending exceeds government revenues.
Builder buydown loan: A mortgage loan on newly developed property that the builder subsidizes during the early years of the development. The builder uses cash to buy down the mortgage rate to a lower level than the prevailing market loan rate for some period of time. The typical buydown is 3% of the interest-rate amount for the first year, 2% for the second year, and 1% for the third year (also referred to as a 3-2-1 buydown).
Bull: An investor who thinks the market will rise. Related: bear.
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.
Bull spread: A spread strategy in which an investor buys an out-of-the-money put option, financing it by selling an out-of-the money call option on the same underlying.
Bulldog bond: Foreign bond issue made in London.
Bulldog market: The foreign market in the United Kingdom.
Bullet contract: A guaranteed investment contract purchased with a single (one-shot) premium. Related: Window contract.
Bullet loan: A bank term loan that calls for no amortization.
Bullet strategy: A strategy in which a portfolio is constructed so that the maturities of its securities are highly concentrated at one point on the yield curve.
Bullish, bearish: Words used to describe investor attitudes. Bullish refers to an optimistic outlook while bearish means a pessimistic outlook.
Bundling, unbundling: A trend allowing creation of securities either by combining primitive and derivative securities into one composite hybrid or by separating returns on an asset into classes.
Business cycle: Repetitive cycles of economic expansion and recession.
Business failure: A business that has terminated with a loss to creditors.
Business risk: The risk that the cash flow of an issuer will be impaired because of adverse economic conditions, making it difficult for the issuer to meet its operating expenses.
Busted convertible: Related: Fixed-income equivalent.
Butterfly shift: A non-parallel shift in the yield curve involving the height of the curve.
Buy: To purchase an asset; taking a long position.
Buy in: To cover, offset or close out a short position. Related: evening up, liquidation.
Buy limit order: A conditional trading order that indicates a security may be purchased only at the designated price or lower. Related: Sell limit order.
Buy on close: To buy at the end of the trading session at a price within the closing range.
Buy on margin: A transaction in which an investor borrows to buy additional shares, using the shares themselves as collateral.
Buy on opening: To buy at the beginning of a trading session at a price within the opening range.
Buy-and-hold strategy: A passive investment strategy with no active buying and selling of stocks from the time the portfolio is created until the end of the investment horizon.
Buydowns: Mortgages in which monthly payments consist of principal and interest, with portions of these payments during the early period of the loan being provided by a third party to reduce the borrower's monthly payments.
Buying the index: Purchasing the stocks in the S&P 500 in the same proportion as the index to achieve the same return.
Buyout: Purchase of a controlling interest (or percent of shares) of a company's stock. A leveraged buy-out is done with borrowed money.
Buy-back: Another term for a repo.
Buy-side analyst: A financial analyst employed by a non-brokerage firm, typically one of the larger money management firms that purchase securities on their own accounts.

C

Cable Exchange rate between British pounds sterling and the U.S.$.
Calendar List of new issues scheduled to come to market shortly.
Calendar effect The tendency of stocks to perform differently at different times, including such anomalies as the January effect, month-of-the-year effect, day-of-the-week effect, and holiday effect.
Call An option that gives the right to buy the underlying futures contract.
Call an option To exercise a call option.
Call date A date before maturity, specified at issuance, when the issuer of a bond may retire part of the bond for a specified call price.
Call money rate Also called the broker loan rate , the interest rate that banks charge brokers to finance margin loans to investors. The broker charges the investor the call money rate plus a service charge.
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.
Call premium Premium in price above the par value of a bond or share of preferred stock that must be paid to holders to redeem the bond or share of preferred stock before its scheduled maturity date.
Call price The price, specified at issuance, at which the issuer of a bond may retire part of the bond at a specified call date.
Call protection A feature of some callable bonds that establishes an initial period when the bonds may not be called.
Call price The price for which a bond can be repaid before maturity under a call provision.
Call provision An embedded option granting a bond issuer the right to buy back all or part of the issue prior to maturity.
Call risk The combination of cash flow uncertainty and reinvestment risk introduced by a call provision.
Call swaption A swaption in which the buyer has the right to enter into a swap as a fixed-rate payer. The writer therefore becomes the fixed-rate receiver/floating rate payer.
Callable A financial security such as a bond with a call option attached to it, i.e., the issuer has the right to call the security.
Canadian agencies Agency banks established by Canadian banks in the U.S.
Cap An upper limit on the interest rate on a floating-rate note.
Capital Money invested in a firm.
Capital account Net result of public and private international investment and lending activities.
Capital allocation decision Allocation of invested funds between risk-free assets versus the risky portfolio.
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.
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 long-term assets such as property, plant or equipment.
Capital flight The transfer of capital abroad in response to fears of political risk.
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 gains yield The price change portion of a stock's return.
Capital lease A lease obligation that has to be capitalized on the balance sheet.
Capital loss The difference between the net cost of a security and the net sale price, if that security is sold at a loss.
Capital market The market for trading long-term debt instruments (those that mature in more than one year).
Capital market efficiency Reflects the relative amount of wealth wasted in making transactions. An efficient capital market allows the transfer of assets with little wealth loss. See: efficient market hypothesis.
Capital market imperfections view The view that issuing debt is generally valuable but that the firm's optimal choice of capital structure is a dynamic process that involves the other views of capital structure (net corporate/personal tax, agency cost, bankruptcy cost, and pecking order), which result from considerations of asymmetric information, asymmetric taxes, and transaction costs.
Capital market line (CML) The line defined by every combination of the risk-free asset and the market portfolio.
Capital rationing Placing one or more limits on the amount of new investment undertaken by a firm, either by using a higher cost of capital, or by setting a maximum on parts of, and/or the entirety of, the capital budget.
Capital structure The makeup of the liabilities and stockholders' equity side of the balance sheet, especially the ratio of debt to equity and the mixture of short and long maturities.
Capital surplus Amounts of directly contributed equity capital in excess of the par value.
Capitalization The debt and/or equity mix that fund a firm's assets.
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.
Capitalization ratios Also called financial leverage ratios, these ratios compare debt to total capitalization and thus reflect the extent to which a corporation is trading on its equity. Capitalization ratios can be interpreted only in the context of the stability of industry and company earnings and cash flow.
Capitalization table A table showing the capitalization of a firm, which typically includes the amount of capital obtained from each source - long-term debt and common equity - and the respective capitalization ratios.
Capitalized Recorded in asset accounts and then depreciated or amortized, as is appropriate for expenditures for items with useful lives greater than one year.
Capitalized interest Interest that is not immediately expensed, but rather is considered as an asset and is then amortized through the income statement over time.
Car A loose quantity term sometimes used to describe a the amount of a commodity underlying one commodity contract; e.g., "a car of bellies." Derived from the fact that quantities of the product specified in a contract used to correspond closely to the capacity of a railroad car.
CARDs Certificates of Amortized Revolving Debt. Pass-through securities backed by credit card receivables.
Carry Related:net financing cost.
Carring costs Costs that increase with increases in the level of investment in current assets.
Carrying value Book value.
CARs Certificates of Automobile Receivables. Pass-through securities backed by automobile receivables.
Cash The value of assets that can be converted into cash immediately, as reported by a company. Usually includes bank accounts and marketable securities, such as government bonds and Banker's Acceptances. Cash equivalents on balance sheets include securities (e.g., notes) that mature within 90 days.
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 and carry Purchase of a security and simultaneous sale of a future, with the balance being financed with a loan or repo.
Cash and equivalents The value of assets that can be converted into cash immediately, as reported by a company. Usually includes bank accounts and marketable securities, such as government bonds and Banker's Acceptances. Cash equivalents on balance sheets include securities (e.g., notes) that mature within 90 days.
Cash commodity The actual physical commodity, as distinguished from a futures contract.
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 deficiency agreement An agreement to invest cash in a project to the extent required to cover any cash deficiency the project may experience.
Cash delivery The provision of some futures contracts that requires not delivery of underlying assets but settlement according to the cash value of the asset.
Cash discount An incentive offered to purchasers of a firm's product for payment within a specified time period, such as ten days.
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 equivalent A short-term security that is sufficiently liquid that it may be considered the financial equivalent of cash.
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 after interest and taxes Net income plus depreciation.
Cash flow coverage ratio The number of times that financial obligations (for interest, principal payments, preferred stock dividends, and rental payments) are covered by earnings before interest, taxes, rental payments, and depreciation.
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.
Cash flow matching Also called dedicating a portfolio, this is an alternative to multiperiod immunization in which the manager matches the maturity of each element in the liability stream, working backward from the last liability to assure all required cash flows.
Cash flow per common share Cash flow from operations minus preferred stock dividends, divided by the number of common shares outstanding.
Cash flow time-line Line depicting the operating activities and cash flows for a firm over a particular period.
Cash-flow break-even point The point below which the firm will need either to obtain additional financing or to liquidate some of its assets to meet its fixed costs.
Cash management bill Very short maturity bills that the Treasury occasionally sells because its cash balances are down and it needs money for a few days.
Cash markets Also called spot markets, these are markets that involve the immediate delivery of a security or instrument. Related: derivative markets.
Cash offer A public equity issue that is sold to all interested investors.
Cash ratio The proportion of a firm's assets held as cash.
Cash settlement contracts Futures contracts, such as stock index futures, that settle for cash, not involving the delivery of the underlying.
Cash transaction A transaction where exchange is immediate, as contrasted to a forward contract, which calls for future delivery of an asset at an agreed-upon price.
Cash-equivalent items Temporary investments of currently excess cash in short-term, high-quality investment media such as treasury bills and Banker's Acceptances.
Cash-surrender value An amount the insurance company will pay if the policyholder ends a whole life insurance policy.
Cashout Refers to a situation where a firm runs out of cash and cannot readily sell marketable securities.
CBOE Chicago Board Options Exchange. A securities exchange created in the early 1970s for the public trading of standardized option contracts.
CEDEL A centralized clearing system for eurobonds.
Certainty equivalent An amount that would be accepted in lieu of a chance at a possible higher, but uncertain, amount.
Certificate of deposit (CD) Also called a time deposit, this is a certificate issued by a bank or thrift that indicates a specified sum of money has been deposited. A CD bears a maturity date and a specified interest rate, and can be issued in any denomination. The duration can be up to five years.
CFAT Cash flow after taxes.
CFTC The Commodity Futures Trading Commission is the federal agency created by Congress to regulate futures trading. The Commodity Exchange Act of 1974 became effective April 21, 1975. Previously, futures trading had been regulated by the Commodity Exchange Authority of the USDA.
Characteristic line The market model applied to a single security. The slope of the line is a security's beta.
Changes in Financial Position Sources of funds internally provided from operations that alter a company's cash flow position: depreciation, deferred taxes, other sources, and capital expenditures.
Chartists Related: technical analysts.
Cheapest to deliver issue The acceptable Treasury security with the highest implied repo rate; the rate that a seller of a futures contract can earn by buying an issue and then delivering it at the settlement date.
Chicago Mercantile Exchange (CME) A not-for-profit corporation owned by its members. Its primary functions are to provide a location for trading futures and options, collect and disseminate market information, maintain a clearing mechanism and enforce trading rules.
Chinese wall Communication barrier between financiers (investment bankers) and traders. This barrier is erected to prevent the sharing of inside information that bankers are likely to have.
Churning Excessive trading of a client's \ account in order to increase the broker's commissions.
Circle Underwriters, actual or potential, often seek out and "circle" investor interest in a new issue before final pricing. The customer circled basically made a commitment to purchase the issue if it comes at an agreed-upon price. In the latter case, if the price is other than that stipulated, the customer supposedly has first offer at the actual price.
Circus swap A fixed rate currency swap against floating U.S. dollar LIBOR payments.
Claim dilution A reduction in the likelihood one or more of the firm's claimants will be fully repaid, including time value of money considerations.
Claimant A party to an explicit or implicit contract.
Clean opinion An auditor's opinion reflecting an unqualified acceptance of a company's financial statements.
Clean price Bond price excluding accrued interest.
Clear A trade is carried out by the seller delivering securities and the buyer delivering funds in proper form. A trade that does not clear is said to fail.
Clear a position To eliminate a long or short position, leaving no ownership or obligation.
Clearing House Automated Payments System (CHAPS) A computerized clearing system for sterling funds that began operations in 1984. It includes 14 member banks, nearly 450 participating banks, and is one of the clearing companies within the structure of the Association for Payment Clearing Services (APACS).
Clearing House Interbank Payments System (CHIPS) An international wire transfer system for high-value payments operated by a group of major banks.
Clearing member A member firm of a clearing house. Each clearing member must also be a member of the exchange. Not all members of the exchange, however, are members of the clearing organization. All trades of a non-clearing member must be registered with, and eventually settled through, a clearing member.
Clearinghouse An adjunct to a futures exchange through which transactions executed its floor are settled by a process of matching purchases and sales. A clearing organization is also charged with the proper conduct of delivery procedures and the adequate financing of the entire operation.
Clientele effect The grouping of investors who have a preference that the firm follow a particular financing policy, such as the amount of leverage it uses.
Close, the The period at the end of the trading session. Sometimes used to refer to closing price. Related: Opening, the.
Closed-end fund An investment company that sells shares like any other corporation and usually does not redeem its shares. A publicly traded fund sold on stock exchanges or over the counter that may trade above or below its net asset value. Related: Open-end fund.
Closed-end mortgage Mortgage against which no additional debt may be issued.
Closing purchase A transaction in which the purchaser's intention is to reduce or eliminate a short position in a stock, or in a given series of options.
Closing range Also known as the range. The high and low prices, or bids and offers, recorded during the period designated as the official close. Related: settlement price.
Closing sale A transaction in which the seller's intention is to reduce or eliminate a long position in a stock, or a given series of options.
Cluster analysis A statistical technique that identifies clusters of stocks whose returns are highly correlated within each cluster and relatively uncorrelated between clusters. Cluster analysis has identified groupings such as growth, cyclical, stable and energy stocks.
Coefficient of determination A measure of the goodness of fit of the relationship between the dependent and independent variables in a regression analysis; for instance, the percentage of variation in the return of an asset explained by the market portfolio return.
Coinsurance effect Refers to the fact that the merger of two firms decreases the probability of default on either firm's debt.
Collar An upper and lower limit on the interest rate on a floating-rate note.
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. Compare mortgage bond.
Collateralized mortgage obligation (CMO) A security backed by a pool of pass-throughs , structured so that there are several classes of bondholders with varying maturities, called tranches. The principal payments from the underlying pool of pass-through securities are used to retire the bonds on a priority basis as specified in the prospectus. Related: mortgage pass-through security.
Collection float The negative float that is created between the time when you deposit a check in your account and the time when funds are made available.
Collection fractions The percentage of a given month's sales collected during the month of sale and each month following the month of sale.
Collection policy Procedures followed by a firm in attempting to collect accounts receivables.
Collective wisdom The combination of all of the individual opinions about a stock's or security's value.
Comanger A bank that ranks just below a lead manager in a syndicated Eurocredit or international bond issue. Comanagers may assist the lead manger bank in the pricing and issue of the instrument.
Combination matching Also called horizon matching, a variation of multiperiod immunization and cash flow matching in which a portfolio is created that is always duration matched and also cash-matched in the first few years.
Combination strategy A strategy in which a put and with the same strike price and expiration are either both bought or both sold. Related: Straddle
Commercial draft Demand for payment.
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.
Commercial risk The risk that a foreign debtor will be unable to pay its debts because of business events, such as bankruptcy.
Commission The fee paid to a broker to execute a trade, based on number of shares, bonds, options, and/or their dollar value. In 1975, deregulation led to the creation of discount brokers, who charge lower commissions than full service brokers. Full service brokers offer advice and usually have a full staff of analysts who follow specific industries. Discount brokers simply execute a client's order -- and usually do not offer an opinion on a stock. Also known as a round-turn.
Commission broker A broker on the floor of an exchange acts as agent for a particular brokerage house and who buys and sells stocks for the brokerage house on a commission basis.
Commission house A firm which buys and sells future contracts for customer accounts. Related: futures commission merchant, omnibus account.
Commitment A trader is said to have a commitment when he assumes the obligation to accept or make delivery on a futures contract. Related: Open interest
Commitment fee A fee paid to a commercial bank in return for its legal commitment to lend funds that have not yet been advanced.
Committee, AIMR Performance Presentation Standards Implementation Committee The Association for Investment Management and Research (AIMR)'s Performance Presentation Standards Implementation Committee is charged with the responsibility to interpret, revise and update the AIMR Performance Presentation Standards (AIMR-PPS(TM)) for portfolio performance presentations.
Commodities Exchange Center (CEC) The location of five New York futures exchanges: Commodity Exchange, Inc. (COMEX), the New York Mercantile exchange (NYMEX), the New York Cotton Exchange, the Coffee, Sugar and Cocoa exchange (CSC), and the New York futures exchange (NYFE). common size statement A statement in which all items are expressed as a percentage of a base figure, useful for purposes of analyzing trends and the changing relationship between financial statement items. For example, all items in each year's income statement could be presented as a percentage of net sales.
Commodity A commodity is food, metal, or another physical substance that investors buy or sell, usually via futures contracts.
Common market An agreement between two or more countries that permits the free movement of capital and labor as well as goods and services.
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.
Common stock/other equity Value of outstanding common shares at par, plus accumulated retained earnings. Also called shareholders' equity.
Common stock equivalent A convertible security that is traded like an equity issue because the optioned common stock is trading high.
Common stock market The market for trading equities, not including preferred stock.
Common stock ratios Ratios that are designed to measure the relative claims of stockholders to earnings (cash flow per share), and equity (book value per share) of a firm.
Common-base-year analysis The representing of accounting information over multiple years as percentages of amounts in an initial year.
Common-size analysis The representing of balance sheet items as percentages of assets and of income statement items as percentages of sales.
Company-specific risk Related: Unsystematic risk
Comparative credit analysis A method of analysis in which a firm is compared to others that have a desired target debt rating in order to infer an appropriate financial ratio target.
Comparison universe The collection of money managers of similar investment style used for assessing relative performance of a portfolio manager.
Compensating balance An excess balance that is left in a bank to provide indirect compensation for loans extended or services provided.
Competence Sufficient ability or fitness for ones needs. Possessing the necessary abilities to be qualified to achieve a certain goal or complete a project.
Competition Intra- or intermarket rivalry between businesses trying to obtain a larger piece of the same market share.
Competitive bidding A securities offering process in which securities firms submit competing bids to the issuer for the securities the issuer wishes to sell.
Competitive offering An offering of securities through competitive bidding.
Complete capital market A market in which there is a distinct marketable security for each and every possible outcome.
Complete portfolio The entire portfolio, including risky and risk-free assets.
Completion bonding Insurance that a construction contract will be successfully completed.
Completion risk The risk that a project will not be brought into operation successfully.
Completion undertaking An undertaking either (1) to complete a project such that it meets certain specified performance criteria on or before a certain specified date or (2) to repay project debt if the completion test cannot be met.
Composition Voluntary arrangement to restructure a firm's debt, under which payment is reduced.
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.
Compounding frequency The number of compounding periods in a year. For example, quarterly compounding has a compounding frequency of 4.
Compounding period The length of the time period (for example, a quarter in the case of quarterly compounding) that elapses before interest compounds.
Comprehensive due diligence investigation The investigation of a firm's business in conjunction with a securities offering to determine whether the firm's business and financial situation and its prospects are adequately disclosed in the prospectus for the offering.
Concentration account A single centralized account into which funds collected at regional locations (lockboxes) are transferred.
Concentration services Movement of cash from different lockbox locations into a single concentration account from which disbursements and investments are made.
Concession agreement An understanding between a company and the host government that specifies the rules under which the company can operate locally.
Conditional sales contracts Similar to equipment trust certificates except that the lender is either the equipment manufacturer or a bank or finance company to whom the manufacturer has sold the conditional sales contract.
Confidence indicator A measure of investors' faith in the economy and the securities market. A low or deteriorating level of confidence is considered by many technical analysts as a bearish sign.
Confidence level The degree of assurance that a specified failure rate is not exceeded.
Confirmation The written statement that follows any "trade" in the securities markets. Confirmation is issued immediately after a trade is executed. It spells out settlement date, terms, commission, etc.
Conflict between bondholders and stockholders These two groups may have interests in a corporation that conflict. Sources of conflict include dividends, distortion of investment, and underinvestment. Protective covenants work to resolve these conflicts.
Conglomerate A firm engaged in two or more unrelated businesses.
Conglomerate merger A merger involving two or more firms that are in unrelated businesses.
Consensus forecast The mean of all financial analysts' forecasts for a company.
Consol A type of bond that has an infinite life but is not issued in the U.S. capital markets.
Consolidation The combining of two or more firms to form an entirely new entity.
Consortium banks A merchant banking subsidiary set up by several banks that may or may not be of the same nationality. Consortium banks are common in the Euromarket and are active in loan syndication.
Constant-growth model Also called the Gordon-Shapiro model, an application of the dividend discount model which assumes (1) a fixed growth rate for future dividends and (2) a single discount rate.
Consumer credit Credit granted by a firm to consumers for the purchase of goods or services. Also called retail credit.
Consumer Price Index The CPI, as it is called, measures the prices of consumer goods and services and is a measure of the pace of U.S. inflation. The U.S.Department of Labor publishes the CPI very month.
Contango A market condition in which futures prices are higher in the distant delivery months.
Contingent claim A claim that can be made only if one or more specified outcomes occur.
Contingent deferred sales charge (CDSC) The formal name for the load of a back-end load fund.
Contingent immunization An arrangement in which the money manager pursues an active bond portfolio strategy until an adverse investment experience drives the then-available potential return down to the safety- net level. When that point is reached, the money manager is obligated to pursue an immunization strategy to lock in the safety-net level return.
Contingent pension liability Under ERISA, the firm is liable to the plan participants for up to 39% of the net worth of the firm.
Continuous compounding The process of accumulating the time value of money forward in time on a continuous, or instantaneous, basis. Interest is earned continuously, and at each instant, the interest that accrues immediately begins earning interest on itself.
Continuous random variable A random value that can take any fractional value within specified ranges, as contrasted with a discrete variable.
Contract A term of reference describing a unit of trading for a financial or commodity future. Also, the actual bilateral agreement between the buyer and seller of a transaction as defined by an exchange.
Contract month The month in which futures contracts may be satisfied by making or accepting a delivery. Also called value managers, those who assemble portfolios with relatively lower betas, lower price-book and P/E ratios and higher dividend yields, seeing value where others do not.
Contribution margin The difference between variable revenue and variable cost.
Control 50% of the outstanding votes plus one vote.
Controlled disbursement A service that provides for a single presentation of checks each day (typically in the early part of the day).
Controlled foreign corporation (CFC) A foreign corporation whose voting stock is more than 50% owned by U.S. stockholders, each of whom owns at least 10% of the voting power.
Controller The corporate manager responsible for the firm's accounting activities.
Convenience yield The extra advantage that firms derive from holding the commodity rather than the future.
Convention statement An annual statement filed by a life insurance company in each state where it does business in compliance with that state's regulations. The statement and supporting documents show, among other things, the assets, liabilities, and surplus of the reporting company.
Conventional mortgage A loan based on the credit of the borrower and on the collateral for the mortgage.
Conventional pass-throughs Also called private-label pass-throughs, any mortgage pass-through security not guaranteed by government agencies. Compare agency pass-throughs.
Conventional project A project with a negative initial cash flow (cash outflow), which is expected to be followed by one or more future positive cash flows (cash inflows).
Convergence The movement of the price of a futures contract toward the price of the underlying cash commodity. At the start, the contract price is higher because of the time value. But as the contract nears expiration, the futures price and the cash price converge.
Conversion factors Rules set by the Chicago Board of Trade for determining the invoice price of each acceptable deliverable Treasury issue against the Treasury Bond futures contract.
Conversion parity price Related:Market conversion price
Conversion premium The percentage by which the conversion price in a convertible security exceeds the prevailing common stock price at the time the convertible security is issued.
Convertibility The degree of freedom to exchange a currency without government restrictions or controls.
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.
Conversion value Also called parity value, the value of a convertible security if it is converted immediately.
Convertible bonds Bonds that can be converted into common stock at the option of the holder.
Convertible eurobond A eurobond that can be converted into another asset, often through exercise of attached warrants.
Convertible exchangeable preferred stock Convertible preferred stock that may be exchanged, at the issuer's option, into convertible bonds that have the same conversion features as the convertible preferred stock.
Convertible preferred stock Preferred stock that can be converted into common stock at the option of the holder.
Convertible security A security that can be converted into common stock at the option of the security holder, including convertible bonds and convertible preferred stock.
Convex Bowed, as in the shape of a curve. Usually referring to the price/required yield relationship for option-free bonds.
Core competency Primary area of competence. Narrowly defined fields or tasks at which a company or business excels. Primary areas of specialty.
Corner A Market To purchase enough of the available supply of a commodity or stock in order to manipulate its price.
Corporate acquisition The acquisition of one firm by anther firm.
Corporate bonds Debt obligations issued by corporations.
Corporate charter A legal document creating a corporation.
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.
Corporate financial management The application of financial principals within a corporation to create and maintain value through decision making and proper resource management.
Corporate financial planning Financial planning conducted by a firm that encompasses preparation of both long- and short-term financial plans.
Corporate processing float The time that elapses between receipt of payment from a customer and the depositing of the customer's check in the firm's bank account; the time required to process customer payments.
Corporate tax view The argument that double (corporate and individual) taxation of equity returns makes debt a cheaper financing method.
Corporate taxable equivalent Rate of return required on a par bond to produce the same after-tax yield to maturity that the premium or discount bond quoted would.
Corporation A legal "person" that is separate and distinct from its owners. A corporation is allowed to own assets, incur liabilities, and sell securities, among other things.
Correlation See: Correlation coefficient.
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 company arrangement Arrangement whereby the shareholders of a project receive output free of charge but agree to pay all operating and financing charges of the project.
Cost of capital The required return for a capital budgeting project.
Cost of carry Related: Net financing cost
Cost of funds Interest rate associated with borrowing money.
Cost of lease financing A lease's internal rate of return.
Cost of limited partner capital The discount rate that equates the after-tax inflows with outflows for capital raised from limited partners.
Cost-benefit ratio The net present value of an investment divided by the investment's initial cost. Also called the profitability index.
Counter trade The exchange of goods for other goods rather than for cash; barter.
Counterpart items In the balance of payments, counterpart items are analogous to unrequited transfers in the current account. They arise because the double-entry system in balance of payments accounting and refer to adjustments in reserves owing to monetization or demonetization of gold, allocation or cancellation of SDRs, and revaluation of the various components of total reserves.
Counterparties The parties to an interest rate swap.
Counterparty Party on the other side of a trade or transaction.
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.
Country economic risk Developments in a national economy that can affect the outcome of an international financial transaction.
Country beta Covariance of a national economy's rate of return and the rate of return the world economy divided by the variance of the world economy.
Country financial risk The ability of the national economy to generate enough foreign exchange to meet payments of interest and principal on its foreign debt.
Country risk General level of political and economic uncertainty in a country affecting the value of loans or investments in that country.
Country selection A type of active international management that measures the contribution to performance attributable to investing in the better-performing stock markets of the world.
Coupon The periodic interest payment made to the bondholders during the life of the bond.
Coupon equivalent yield True interest cost expressed on the basis of a 365-day year.
Coupon payments A bond's interest payments.
Coupon rate In bonds, notes or other fixed income securities, the stated percentage rate of interest, usually paid twice a year.
Covariance A statistical measure of the degree to which random variables move together.
Covenants Provisions in a bond indenture or preferred stock agreement that require the bond or preferred stock issuer to take certain specified actions (affirmative covenants) or to refrain from taking certain specified actions (negative covenants).
Cover The purchase of a contract to offset a previously established short position.
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.
Covered call A short call option position in which the writer owns the number of shares of the underlying stock represented by the option contracts. Covered calls generally limit the risk the writer takes because the stock does not have to be bought at the market price, if the holder of that option decides to exercise it.
Covered call writing strategy A strategy that involves writing a call option on securities that the investor owns in his or her portfolio. See covered or hedge option strategies.
Covered interest arbitrage A portfolio manager invests dollars in an instrument denominated in a foreign currency and hedges his resulting foreign exchange risk by selling the proceeds of the investment forward for dollars.
Covered or hedge option strategies Strategies that involve a position in an option as well as a position in the underlying stock, designed so that one position will help offset any unfavorable price movement in the other, including covered call writing and protective put buying. Related: naked strategies
Covered Put A put option position in which the option writer also is short the corresponding stock or has deposited, in a cash account, cash or cash equivalents equal to the exercise of the option. This limits the option writer's risk because money or stock is already set aside. In the event that the holder of the put option decides to exercise the option, the writer's risk is more limited than it would be on an uncovered or naked put option.
Cramdown The ability of the bankruptcy court to confirm a plan of reorganization over the objections of some classes of creditors.
Crawling peg An automatic system for revising the exchange rate. It involves establishing a par value around which the rate can vary up to a given percent. The par value is revised regularly according to a formula determined by the authorities.
Credible signal A signal that provides accurate information; a signal that can be distinguish among senders.
Credit Money loaned.
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. Related: default risk
Credit enhancement Purchase of the financial guarantee of a large insurance company to raise funds.
Credit period The length of time for which the customer is granted credit.
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. Related: Default risk
Credit scoring A statistical technique wherein several financial characteristics are combined to form a single score to represent a customer's creditworthiness.
Credit spread Related:Quality spread
Crediting rate The interest rate offered on an investment type insurance policy.
Creditor Lender of money.
Cross default A provision under which default on one debt obligation triggers default on another debt obligation.
Cross hedging The practice of hedging with a futures contract that is different from the underlying being hedged.
Cross holdings One corporation holds shares in another firm.
Cross rates The exchange rate between two currencies expressed as the ratio of two foreign exchange rates that are both expressed in terms of a third currency.
Cross-border risk Refers to the volatility of returns on international investments caused by events associated with a particular country as opposed to events associated solely with a particular economic or financial agent.
Cross-sectional approach A statistical methodology applied to a set of firms at a particular point in time.
Crossover rate The return at which two alternative projects have the same net present value.
Crown jewel A particularly profitable or otherwise particularly valuable corporate unit or asset of a firm.
Cum dividend With dividend.
Cum rights With rights.
Cumulative abnormal return (CAR) Sum of the differences between the expected return on a stock and the actual return that comes from the release of news to the market.
Cumulative dividend feature A requirement that any missed preferred or preference stock dividends be paid in full before any common dividend payment is made.
Cumulative preferred stock Preferred stock whose dividends accrue, should the issuer not make timely dividend payments. Related: non-cumulative preferred stock.
Cumulative probability distribution A function that shows the probability that the random variable will attain a value less than or equal to each value that the random variable can take on.
Cumulative Translation Adjustment (CTA) account An entry in a translated balance sheet in which gains and/or losses from translation have been accumulated over a period of years. The CTA account is required under the FASB No. 52 rule.
Cumulative voting A system of voting for directors of a corporation in which shareholder's total number of votes is equal to his number of shares held times the number of candidates.
Currency arbitrage Taking advantage of divergences in exchange rates in different money markets by buying a currency in one market and selling it in another market.
Currency basket The value of a portfolio of specific amounts of individual currencies, used as the basis for setting the market value of another currency. It is also referred to as a currency cocktail.
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.
Currency risk Related: Exchange rate risk
Currency risk sharing An agreement by the parties to a transaction to share the currency risk associated with the transaction. The arrangement involves a customized hedge contract embedded in the underlying transaction.
Currency selection Asset allocation in which the investor chooses among investments denominated in different currencies.
Currency swap An agreement to swap a series of specified payment obligations denominated in one currency for a series of specified payment obligations denominated in a different currency.
Current account Net flow of goods, services, and unilateral transactions (gifts) between countries.
Current assets Value of cash, accounts receivable, inventories, marketable securities and other assets that could be converted to cash in less than 1 year.
Current coupon A bond selling at or close to par, that is, a bond with a coupon close to the yields currently offered on new bonds of a similar maturity and credit risk.
Current liabilities Amount owed for salaries, interest, accounts payable and other debts due within 1 year.
Current issue In Treasury securities, the most recently auctioned issue. Trading is more active in current issues than in off-the-run issues.
Current maturity Current time to maturity on an outstanding debt instrument.
Current / noncurrent method Under this currency translation method, all of a foreign subsidiary's current assets and liabilities are translated into home currency at the current exchange rate while noncurrent assets and liabilities are translated at the historical exchange rate, that is, the rate in effect at the time the asset was acquired or the liability incurred.
Current rate method Under this currency translation method, all foreign currency balance-sheet and income statement items are translated at the current exchange rate.
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.
Current yield For bonds or notes, the coupon rate divided by the market price of the bond.
Current-coupon issues Related: Benchmark issues
Cushion bonds High-coupon bonds that sell at only at a moderate premium because they are callable at a price below that at which a comparable non-callable bond would sell. Cushion bonds offer considerable downside protection in a falling market.
Custodial fees Fees charged by an institution that holds securities in safekeeping for an investor.
Customary payout ratios A range of payout ratios that is typical based on an analysis of comparable firms.
Customized benchmarks A benchmark that is designed to meet a client's requirements and long-term objectives.
Customs union An agreement by two or more countries to erect a common external tariff and to abolish restrictions on trade among members.