CFA Level 1 Glossary Terms

Capital allocation line

(CAL) A graph line that describes the combinations of expected return and standard deviation of return available to an investor from combining the optimal portfolio of risky assets with the risk-free asset.

Capital asset pricing model

(CAPM) An equation describing the expected return on any asset (or portfolio) as a linear function of its beta relative to the market portfolio.

Capital market line

(CML) The line with an intercept point equal to the risk-free rate that is tangent to the efficient frontier of risky assets; represents the efficient frontier when a risk-free asset is available for investment.

Coefficient of variation

(CV) The ratio of a set of observations' standard deviation to the observations' mean value.

Dividend discount model

(DDM) A present value model that estimates the intrinsic value of an equity share based on the present value of its expected future dividends.

Degree of financial leverage

(DFL) The ratio of the percentage change in net income to the percentage change in operating income; the sensitivity of the cash flows available to owners when operating income changes.

Degree of operating leverage

(DOL) The ratio of the percentage change in operating income to the percentage change in units sold; the sensitivity of operating income to changes in units sold.

Initial public offering

(IPO) The first issuance of common shares to the public by a formerly private corporation.

Investment policy statement

(IPS) A written planning document that describes a client's investment objectives and risk tolerance over a relevant time horizon, along with constraints that apply to the client's portfolio.

Internal rate of return

(IRR) The discount rate that makes net present value equal 0; the discount rate that makes the present value of an investment's costs (outflows) equal to the present value of the investment's benefits (inflows).

Leveraged buyout

(LBO) A transaction whereby the target company management team converts the target to a privately held company by using heavy borrowing to finance the purchase of the target company's outstanding shares.

Moving-average convergence/divergence oscillator

(MACD) A momentum oscillator that is constructed based on the difference between short-term and long-term moving averages of a security's price.

Management buyout

(MBO) An event in which a group of investors consisting primarily of the company's existing management purchase all of its outstanding shares and take the company private.

Modern portfolio theory

(MPT) The analysis of rational portfolio choices based on the efficient use of risk.

Net present value

(NPV) The present value of an investment's cash inflows (benefits) minus the present value of its cash outflows (costs).

Price to earnings ratio

(P/E ratio or P/E) The ratio of share price to earnings per share.

Separately managed account

(SMA) An investment portfolio managed exclusively for the benefit of an individual or institution.

Security market line

(SML) The graph of the capital asset pricing model.

Value at risk

(VaR) A money measure of the minimum value of losses expected during a specified time period at a given level of probability.

Statement of changes in equity

(statement of owners' equity) A financial statement that reconciles the beginning-of-period and end-of-period balance sheet values of shareholders' equity; provides information about all factors affecting shareholders' equity. Also called statement of owners' equity.

Broker

1) An agent who executes orders to buy or sell securities on behalf of a client in exchange for a commission. 2) Seefutures commission merchants.

Arbitrage

1) The simultaneous purchase of an undervalued asset or portfolio and sale of an overvalued but equivalent asset or portfolio, in order to obtain a riskless profit on the price differential. Taking advantage of a market inefficiency in a risk-free manner. 2) The condition in a financial market in which equivalent assets or combinations of assets sell for two different prices, creating an opportunity to profit at no risk with no commitment of money. In a well-functioning financial market, few arbitrage opportunities are possible. 3) A risk-free operation that earns an expected positive net profit but requires no net investment of money.

Kondratieff wave

A 54-year long economic cycle postulated by Nikolai Kondratieff.

Single price auction

A Dutch auction variation, also involving a single price, is used in selling US Treasury securities.

Asian call option

A European-style option with a value at maturity equal to the difference between the stock price at maturity and the average stock price during the life of the option, or $0, whichever is greater.

American depository receipt

A US dollar-denominated security that trades like a common share on US exchanges.

Deferred tax assets

A balance sheet asset that arises when an excess amount is paid for income taxes relative to accounting profit. The taxable income is higher than accounting profit and income tax payable exceeds tax expense. The company expects to recover the difference during the course of future operations when tax expense exceeds income tax payable.

Deferred tax liabilities

A balance sheet liability that arises when a deficit amount is paid for income taxes relative to accounting profit. The taxable income is less than the accounting profit and income tax payable is less than tax expense. The company expects to eliminate the liability over the course of future operations when income tax payable exceeds tax expense.

Classified balance sheet

A balance sheet organized so as to group together the various assets and liabilities into subcategories (e.g., current and noncurrent).

Unclassified balance sheet

A balance sheet that does not show subtotals for current assets and current liabilities.

Committed lines of credit

A bank commitment to extend credit up to a pre-specified amount; the commitment is considered a short-term liability and is usually in effect for 364 days (one day short of a full year).

Depository bank

A bank that raises funds from depositors and other investors and lends it to borrowers.

Target independent

A bank's ability to determine the definition of inflation that they target, the rate of inflation that they target, and the horizon over which the target is to be achieved.

Operational independence

A bank's ability to execute monetary policy and set interest rates in the way it thought would best meet the inflation target.

Histogram

A bar chart of data that have been grouped into a frequency distribution.

Look-ahead bias

A bias caused by using information that was unavailable on the test date.

Callable bond

A bond containing an embedded call option that gives the issuer the right to buy the bond back from the investor at specified prices on pre-determined dates.

Restricted payments

A bond covenant meant to protect creditors by limiting how much cash can be paid out to shareholders over time.

Syndicated offering

A bond issue that is underwritten by a group of investment banks.

Non-sovereign bonds

A bond issued by a government below the national level, such as a province, region, state, or city.

Non-sovereign government bonds

A bond issued by a government below the national level, such as a province, region, state, or city.

Sovereign bonds

A bond issued by a national government.

Sovereigns

A bond issued by a national government.

Supranational bonds

A bond issued by a supranational agency such as the World Bank.

Quasi-government bonds

A bond issued by an entity that is either owned or sponsored by a national government. Also called agency bond.

Treasury Inflation-Protected Securities

A bond issued by the United States Treasury Department that is designed to protect the investor from inflation by adjusting the principal of the bond for changes in inflation.

Duration gap

A bond's Macaulay duration minus the investment horizon.

Extreme value theory

A branch of statistics that focuses primarily on extreme outcomes.

Aging schedule

A breakdown of accounts into categories of days outstanding.

Personal income

A broad measure of household income that includes all income received by households, whether earned or unearned; measures the ability of consumers to make purchases.

Block brokers

A broker (agent) that provides brokerage services for large-size trades.

Sell-side firm

A broker or dealer that sells securities to and provides independent investment research and recommendations to investment management companies.

Passive investment

A buy and hold approach in which an investor does not make portfolio changes based on short-term expectations of changing market or security performance.

Marketable limit order

A buy limit order in which the limit price is placed above the best offer, or a sell limit order in which the limit price is placed below the best bid. Such orders generally will partially or completely fill right away.

Bond equivalent yield

A calculation of yield that is annualized using the ratio of 365 to the number of days to maturity. Bond equivalent yield allows for the restatement and comparison of securities with different compounding periods.

Capital rationing

A capital rationing environment assumes that the company has a fixed amount of funds to invest.

Margin bond

A cash deposit required by the clearinghouse from the participants to a contract to provide a credit guarantee. Also called a performance bond.

Subordinated debt

A class of unsecured debt that ranks below a firm's senior unsecured obligations.

Support tranche

A class or tranche in a CMO that protects the PAC tranche from prepayment risk.

Fiduciary call

A combination of a European call and a risk-free bond that matures on the option expiration day and has a face value equal to the exercise price of the call.

Statutory voting

A common method of voting where each share represents one vote.

Factor

A common or underlying element with which several variables are correlated.

Global registered share

A common share that is traded on different stock exchanges around the world in different currencies.

Multinational corporation

A company operating in more than one country or having subsidiary firms in more than one country.

Comparable company

A company that has similar business risk; usually in the same industry and preferably with a single line of business.

Non-cyclical

A company whose performance is largely independent of the business cycle.

Target capital structure

A company's chosen proportions of debt and equity.

Competitive strategy

A company's plans for responding to the threats and opportunities presented by the external environment.

Operating profit

A company's profits on its usual business activities before deducting taxes. Also called operating income.

Payout policy

A company's set of principles guiding payouts.

Relative strength analysis

A comparison of the performance of one asset with the performance of another asset or a benchmark based on changes in the ratio of the securities' respective prices over time.

Benchmark

A comparison portfolio; a point of reference or comparison.

Simulation trial

A complete pass through the steps of a simulation.

Current account

A component of the balance of payments account that measures the flow of goods and services.

Capital account

A component of the balance of payments account that measures transfers of capital.

Financial account

A component of the balance of payments account that records investment flows.

Index of Leading Economic Indicators

A composite of economic variables used by analysts to predict future economic conditions.

Locked limit

A condition in the futures markets in which a transaction cannot take place because the price would be beyond the limits.

Liquidity trap

A condition in which the demand for money becomes infinitely elastic (horizontal demand curve) so that injections of money into the economy will not lower interest rates or affect real activity.

Excess supply

A condition in which the quantity ready to be supplied is greater than the quantity demanded.

Equilibrium condition

A condition necessary for the forces within a system to be in balance.

Budget constraint

A constraint on spending or investment imposed by wealth or income.

Normal distribution

A continuous, symmetric probability distribution that is completely described by its mean and its variance.

Credit derivatives

A contract in which one party has the right to claim a payment from another party in the event that a specific credit event occurs over the life of the contract.

Long-term contract

A contract that spans a number of accounting periods.

Conventional cash flow

A conventional cash flow pattern is one with an initial outflow followed by a series of inflows.

Medium-term note

A corporate bond offered continuously to investors by an agent of the issuer, designed to fill the funding gap between commercial paper and long-term bonds.

Menu costs

A cost of inflation in which businesses constantly have to incur the costs of changing the advertised prices of their goods and services.

Sunk cost

A cost that has already been incurred.

Quasi-fixed cost

A cost that stays the same over a range of production but can change to another constant level when production moves outside of that range.

Automatic stabilizer

A countercyclical factor that automatically comes into play as an economy slows and unemployment rises.

Small country

A country that is a price taker in the world market for a product and cannot influence the world market price.

Absolute advantage

A country's ability to produce a good or service at a lower absolute cost than its trading partner.

Comparative advantage

A country's ability to produce a good or service at a lower relative cost, or opportunity cost, than its trading partner.

Change of control put

A covenant giving bondholders the right to require the issuer to buy back their debt, often at par or at some small premium to par value, in the event that the borrower is acquired.

Effective convexity

A curve convexity statistic that measures the secondary effect of a change in a benchmark yield curve on a bond's price.

Marginal value curve

A curve describing the highest price consumers are willing to pay for each additional unit of a good.

Long-run industry supply curve

A curve describing the relationship between quantity supplied and output prices when no costs are considered fixed.

Indifference curve

A curve representing all the combinations of two goods or attributes such that the consumer is entirely indifferent among them.

Credit curve

A curve showing the relationship between time to maturity and yield spread for an issuer with comparable bonds of various maturities outstanding, usually upward sloping.

Experience curve

A curve that shows the direct cost per unit of good or service produced or delivered as a typically declining function of cumulative output.

Over-the-counter (OTC) markets

A decentralized market where buy and sell orders initiated from various locations are matched through a communications network.

Global depository receipt

A depository receipt that is issued outside of the company's home country and outside of the United States.

Straight-line method

A depreciation method that allocates evenly the cost of a long-lived asset less its estimated residual value over the estimated useful life of the asset.

Units-of-production method

A depreciation method that allocates the cost of a long-lived asset based on actual usage during the period.

Parameter

A descriptive measure computed from or used to describe a population of data, conventionally represented by Greek letters.

Tree diagram

A diagram with branches emanating from nodes representing either mutually exclusive chance events or mutually exclusive decisions.

Dividend

A distribution paid to shareholders based on the number of shares owned.

Univariate distribution

A distribution that specifies the probabilities for a single random variable.

Probability distribution

A distribution that specifies the probabilities of a random variable's possible outcomes.

Extra dividend

A dividend paid by a company that does not pay dividends on a regular schedule, or a dividend that supplements regular cash dividends with an extra payment.

Special dividend

A dividend paid by a company that does not pay dividends on a regular schedule, or a dividend that supplements regular cash dividends with an extra payment.

Liquidating dividend

A dividend that is a return of capital rather than a distribution from earnings or retained earnings.

Balance of payments

A double-entry bookkeeping system that summarizes a country's economic transactions with the rest of the world for a particular period of time, typically a calendar quarter or year.

Maturity structure

A factor explaining the differences in yields on similar bonds; also called term structure.

Management fee

A fee based on assets under management or committed capital, as applicable. Also called base fee.

Behavioral finance

A field of finance that examines the psychological variables that affect and often distort the investment decision making of investors, analysts, and portfolio managers.

Intermarket analysis

A field within technical analysis that combines analysis of major categories of securities—namely, equities, bonds, currencies, and commodities—to identify market trends and possible inflections in a trend.

Debt incurrence test

A financial covenant made in conjunction with existing debt that restricts a company's ability to incur additional debt at the same seniority based on one or more financial tests or conditions.

Option

A financial instrument that gives one party the right, but not the obligation, to buy or sell an underlying asset from or to another party at a fixed price over a specific period of time. Also referred to as contingent claim or option contract.

Derivatives

A financial instrument whose value depends on the value of some underlying asset or factor (e.g., a stock price, an interest rate, or exchange rate).

Broker-dealer

A financial intermediary (often a company) that may function as a principal (dealer) or as an agent (broker) depending on the type of trade.

Dealers

A financial intermediary that acts as a principal in trades.

Cash conversion cycle

A financial metric that measures the length of time required for a company to convert cash invested in its operations to cash received as a result of its operations; equal to days of inventory on hand + days of sales outstanding - number of days of payables. Also called net operating cycle.

Profit and loss (P&L) statement

A financial statement that provides information about a company's profitability over a stated period of time.

Statement of operations

A financial statement that provides information about a company's profitability over a stated period of time.

Income statement

A financial statement that provides information about a company's profitability over a stated period of time. Also called statement of operations or profit and loss statement.

Statement of cash flows

A financial statement that reconciles beginning-of-period and end-of-period balance sheet values of cash; provides information about an entity's cash inflows and cash outflows as they pertain to operating, investing, and financing activities. Also called cash flow statement.

Statement of retained earnings

A financial statement that reconciles beginning-of-period and end-of-period balance sheet values of retained income; shows the linkage between the balance sheet and income statement.

Statement of owners' equity

A financial statement that reconciles the beginning of-period and end-of-period balance sheet values of shareholders' equity; provides information about all factors affecting shareholders' equity. Also called statement of changes in shareholders' equity.

Annuity

A finite set of level sequential cash flows.

Underwriter

A firm, usually an investment bank, that takes the risk of buying the newly issued securities from the issuer, and then reselling them to investors or to dealers, thus guaranteeing the sale of the securities at the offering price negotiated with the issuer.

Contractionary fiscal policy

A fiscal policy that has the objective to make the real economy contract.

Arms index

A flow of funds indicator applied to a broad stock market index to measure the relative extent to which money is moving into or out of rising and declining stocks.

TRIN

A flow of funds indicator applied to a broad stock market index to measure the relative extent to which money is moving into or out of rising and declining stocks.

Laddering strategy

A form of active strategy which entails scheduling maturities on a systematic basis within the investment portfolio such that investments are spread out equally over the term of the ladder.

Repo

A form of collateralized loan involving the sale of a security with a simultaneous agreement by the seller to buy the same security back from the purchaser at an agreed-on price and future date. The party who sells the security at the inception of the repurchase agreement and buys it back at maturity is borrowing money from the other party, and the security sold and subsequently repurchased represents the collateral.

Repurchase agreement

A form of collateralized loan involving the sale of a security with a simultaneous agreement by the seller to buy the same security back from the purchaser at an agreed-on price and future date. The party who sells the security at the inception of the repurchase agreement and buys it back at maturity is borrowing money from the other party, and the security sold and subsequently repurchased represents the collateral.

Intergenerational data mining

A form of data mining that applies information developed by previous researchers using a dataset to guide current research using the same or a related dataset.

Technical analysis

A form of security analysis that uses price and volume data, which is often displayed graphically, in decision making.

Forward rate agreements

A forward contract calling for one party to make a fixed interest payment and the other to make an interest payment at a rate to be determined at the contract expiration.

Joint probability function

A function giving the probability of joint occurrences of values of stated random variables.

Cumulative distribution function

A function giving the probability that a random variable is less than or equal to a specified value.

Probability function

A function that specifies the probability that the random variable takes on a specific value.

Probability density function

A function with non-negative values such that probability can be described by areas under the curve graphing the function.

Venture capital fund

A fund for private equity investors that provides financing for development-stage companies.

Buyout fund

A fund that buys all the shares of a public company so that, in effect, the company becomes private.

GDP deflator

A gauge of prices and inflation that measures the aggregate changes in prices across the overall economy.

Implicit price deflator for GDP

A gauge of prices and inflation that measures the aggregate changes in prices across the overall economy.

Money

A generally accepted medium of exchange and unit of account.

Veblen good

A good that increases in desirability with price.

Normal good

A good that is consumed in greater quantities as income increases.

Giffen good

A good that is consumed more as the price of the good rises.

Inferior goods

A good whose consumption decreases as income increases.

Frequency polygon

A graph of a frequency distribution obtained by drawing straight lines joining successive points representing the class frequencies.

Constant-yield price trajectory

A graph that illustrates the change in the price of a fixed-income bond over time assuming no change in yield-to-maturity. The trajectory shows the "pull to par" effect on the price of a bond trading at a premium or a discount to par value.

Investment opportunity schedule

A graphical depiction of a company's investment opportunities ordered from highest to lowest expected return. A company's optimal capital budget is found where the investment opportunity schedule intersects with the company's marginal cost of capital.

Momentum oscillators

A graphical representation of market sentiment that is constructed from price data and calculated so that it oscillates either between a high and a low or around some number.

Asset class

A group of assets that have similar characteristics, attributes, and risk/return relationships.

Peer group

A group of companies engaged in similar business activities whose economics and valuation are influenced by closely related factors.

Industry

A group of companies offering similar products and/or services.

Neo-Keynesians

A group of dynamic general equilibrium models that assume slow-to-adjust prices and wages.

New Keynesians

A group of dynamic general equilibrium models that assume slow-to-adjust prices and wages.

Sector

A group of related industries.

Indifference curve map

A group or family of indifference curves, representing a consumer's entire utility function.

t-Test

A hypothesis test using a statistic (t-statistic) that follows at-distribution.

Hedge portfolio

A hypothetical combination of the derivative and its underlying that eliminates risk.

Synthetic lease

A lease that is structured to provide a company with the tax benefits of ownership while not requiring the asset to be reflected on the company's financial statements.

Precautionary stocks

A level of inventory beyond anticipated needs that provides a cushion in the event that it takes longer to replenish inventory than expected or in the case of greater than expected demand.

Safety stock

A level of inventory beyond anticipated needs that provides a cushion in the event that it takes longer to replenish inventory than expected or in the case of greater than expected demand.

Deferred income

A liability account for money that has been collected for goods or services that have not yet been delivered; payment received in advance of providing a good or service.

Deferred revenue

A liability account for money that has been collected for goods or services that have not yet been delivered; payment received in advance of providing a good or service.

Unearned revenue

A liability account for money that has been collected for goods or services that have not yet been delivered; payment received in advance of providing a good or service. Also called deferred revenue or deferred income.

Limit up

A limit move in the futures market in which the price at which a transaction would be made is at or above the upper limit.

Limit down

A limit move in the futures market in which the price at which a transaction would be made is at or below the lower limit.

Standing limit orders

A limit order at a price below market and which therefore is waiting to trade.

Current ratio

A liquidity ratio calculated as current assets divided by current liabilities.

Defensive interval ratio

A liquidity ratio that estimates the number of days that an entity could meet cash needs from liquid assets; calculated as (cash + short-term marketable investments + receivables) divided by daily cash expenditures.

Chart of accounts

A list of accounts used in an entity's accounting system.

Combination

A listing in which the order of the listed items does not matter.

Bilateral loan

A loan from a single lender to a single borrower.

Interest-only mortgage

A loan in which no scheduled principal repayment is specified for a certain number of years.

Mortgage loan

A loan secured by the collateral of some specified real estate property that obliges the borrower to make a predetermined series of payments to the lender.

Asset-based loan

A loan that is secured with company assets.

Trend

A long-term pattern of movement in a particular direction.

Order-driven markets

A market (generally an auction market) that uses rules to arrange trades based on the orders that traders submit; in their pure form, such markets do not make use of dealers.

Oversold

A market condition in which market sentiment is thought to be unsustainably bearish.

Overbought

A market condition in which market sentiment is thought to be unsustainably bullish.

Efficient market

A market in which asset prices reflect new information quickly and rationally.

Informationally efficient market

A market in which asset prices reflect new information quickly and rationally.

Brokered market

A market in which brokers arrange trades among their clients.

Quote-driven market

A market in which dealers acting as principals facilitate trading.

Strong-form efficient market

A market in which security prices reflect all public and private information.

Semi-strong-form efficient market

A market in which security prices reflect all publicly known and available information.

Continuous trading market

A market in which trades can be arranged and executed any time the market is open.

Call market

A market in which trades occur only at a particular time and place (i.e., when the market is called).

Imperfect competition

A market structure in which an individual firm has enough share of the market (or can control a certain segment of the market) such that it is able to exert some influence over price.

Perfect competition

A market structure in which the individual firm has virtually no impact on market price, because it is assumed to be a very small seller among a very large number of firms selling essentially identical products.

Utility function

A mathematical representation of the satisfaction derived from a consumption basket.

Covariance matrix

A matrix or square array whose entries are covariances; also known as a variance-covariance matrix.

Winsorized mean

A mean computed after assigning a stated percent of the lowest values equal to one specified low value, and a stated percent of the highest values equal to one specified high value.

Trimmed mean

A mean computed after excluding a stated small percentage of the lowest and highest observations.

Market

A means of bringing buyers and sellers together to exchange goods and services.

Enterprise value

A measure of a company's total market value from which the value of cash and short-term investments have been subtracted.

Geometric mean

A measure of central tendency computed by taking the nth root of the product of n non-negative values.

Spearman rank correlation coefficient

A measure of correlation applied to ranked data.

Population standard deviation

A measure of dispersion relating to a population in the same unit of measurement as the observations, calculated as the positive square root of the population variance.

Population variance

A measure of dispersion relating to a population, calculated as the mean of the squared deviations around the population mean.

Financial leverage ratio

A measure of financial leverage calculated as average total assets divided by average total equity.

CBOE Volatility Index

A measure of near-term market volatility as conveyed by S&P 500 stock index option prices.

Treynor ratio

A measure of risk-adjusted performance that relates a portfolio's excess returns to the portfolio's beta.

Duration

A measure of the approximate sensitivity of a security to a change in interest rates (i.e., a measure of interest rate risk).

Covariance

A measure of the co-movement (linear association) between two random variables.

Modified duration

A measure of the percentage price change of a bond given a change in its yield-to-maturity.

Money duration

A measure of the price change in units of the currency in which the bond is denominated given a change in its yield-to-maturity.

Income elasticity of demand

A measure of the responsiveness of demand to changes in income, defined as the percentage change in quantity demanded divided by the percentage change in income.

Beta

A measure of the sensitivity of a given investment or portfolio to movements in the overall market.

Vega

A measure of the sensitivity of an option's price to changes in the underlying's volatility.

Elasticity of supply

A measure of the sensitivity of quantity supplied to a change in price.

Operating cycle

A measure of the time needed to convert raw materials into cash from a sale; it consists of the number of days of inventory and the number of days of receivables.

Capital consumption allowance

A measure of the wear and tear (depreciation) of the capital stock that occurs in the production of goods and services.

M2

A measure of what a portfolio would have returned if it had taken on the same total risk as the market index.

Weighted average life

A measure that gives investors an indication of how long they can expect to hold the MBS before it is paid off; the convention-based average time to receipt of all principal repayments. Also called average life.

Nominal scale

A measurement scale that categorizes data but does not rank them.

Ratio scales

A measurement scale that has all the characteristics of interval measurement scales as well as a true zero point as the origin.

Interval scale

A measurement scale that not only ranks data but also gives assurance that the differences between scale values are equal.

Ordinal scale

A measurement scale that sorts data into categories that are ordered (ranked) with respect to some characteristic.

Vote by proxy

A mechanism that allows a designated party—such as another shareholder, a shareholder representative, or management—to vote on the shareholder's behalf.

If-converted method

A method for accounting for the effect of convertible securities on earnings per share (EPS) that specifies what EPS would have been if the convertible securities had been converted at the beginning of the period, taking account of the effects of conversion on net income and the weighted average number of shares outstanding.

Treasury stock method

A method for accounting for the effect of options (and warrants) on earnings per share (EPS) that specifies what EPS would have been if the options and warrants had been exercised and the company had used the proceeds to repurchase common stock.

Debt-rating approach

A method for estimating a company's before-tax cost of debt based upon the yield on comparably rated bonds for maturities that closely match that of the company's existing debt.

Pure-play method

A method for estimating the beta for a company or project; it requires using a comparable company's beta and adjusting it for financial leverage differences.

Acquisition method

A method of accounting for a business combination where the acquirer is required to measure each identifiable asset and liability at fair value. This method was the result of a joint project of the IASB and FASB aiming at convergence in standards for the accounting of business combinations.

Key rate duration

A method of measuring the interest rate sensitivities of a fixed-income instrument or portfolio to shifts in key points along the yield curve.

Completed contract

A method of revenue recognition in which the company does not recognize any revenue until the contract is completed; used particularly in long-term construction contracts.

Cost recovery method

A method of revenue recognition in which the seller does not report any profit until the cash amounts paid by the buyer—including principal and interest on any financing from the seller—are greater than all the seller's costs for the merchandise sold.

Percentage-of-completion

A method of revenue recognition in which, in each accounting period, the company estimates what percentage of the contract is complete and then reports that percentage of the total contract revenue in its income statement.

Target balance

A minimum level of cash to be held available—estimated in advance and adjusted for known funds transfers, seasonality, or other factors.

Price floor

A minimum price for a good or service, typically imposed by government action and typically above the equilibrium price.

Binomial model

A model for pricing options in which the underlying price can move to only one of two possible new prices.

Return-generating model

A model that can provide an estimate of the expected return of a security given certain parameters and estimates of the values of the independent variables in the model.

Multi-factor model

A model that explains a variable in terms of the values of a set of factors.

Change in quantity supplied

A movement along a given supply curve.

Closed-end fund

A mutual fund in which no new investment money is accepted. New investors invest by buying existing shares, and investors in the fund liquidate by selling their shares to other investors.

No-load fund

A mutual fund in which there is no fee for investing in the fund or for redeeming fund shares, although there is an annual fee based on a percentage of the fund's net asset value.

Load fund

A mutual fund in which, in addition to the annual fee, a percentage fee is charged to invest in the fund and/or for redemptions from the fund.

Open-end fund

A mutual fund that accepts new investment money and issues additional shares at a value equal to the net asset value of the fund at the time of investment.

Negative externality

A negative effect (e.g., pollution) of a market transaction that is borne by parties other than those who transacted; a spillover cost.

Deadweight loss

A net loss of total (consumer and producer) surplus.

Convenience yield

A non-monetary advantage of holding an asset.

Special purpose entity

A non-operating entity created to carry out a specified purpose, such as leasing assets or securitizing receivables; can be a corporation, partnership, trust, limited liability, or partnership formed to facilitate a specific type of business activity. Also called special purpose vehicle or variable interest entity.

Prepaid expense

A normal operating expense that has been paid in advance of when it is due.

Floating-rate notes

A note on which interest payments are not fixed, but instead vary from period to period depending on the current level of a reference interest rate.

Divisor

A number (denominator) used to determine the value of a price return index. It is initially chosen at the inception of an index and subsequently adjusted by the index provider, as necessary, to avoid changes in the index value that are unrelated to changes in the prices of its constituent securities.

Probability

A number between 0 and 1 describing the chance that a stated event will occur.

Correlation

A number between −1 and +1 that measures the comovement (linear association) between two random variables.

Correlation coefficient

A number between −1 and +1 that measures the consistency or tendency for two investments to act in a similar way. It is used to determine the effect on portfolio risk when two assets are combined.

Gamma

A numerical measure of how sensitive an option's delta (the sensitivity of the derivative's price) is to a change in the value of the underlying.

Parallel shift

A parallel yield curve shift implies that all rates change by the same amount in the same direction.

Lockbox system

A payment system in which customer payments are mailed to a post office box and the banking institution retrieves and deposits these payments several times a day, enabling the company to have use of the fund sooner than in a centralized system in which customer payments are sent to the company.

Defined-benefit plan

A pension plan that specifies the plan sponsor's obligations in terms of the benefit to plan participants.

Defined-contribution plan

A pension plan that specifies the sponsor's obligations in terms of contributions to the pension fund rather than benefits to plan participants.

Recession

A period during which real GDP decreases (i.e., negative growth) for at least two successive quarters, or a period of significant decline in total output, income, employment, and sales usually lasting from six months to a year.

Perpetuity

A perpetual annuity, or a set of never-ending level sequential cash flows, with the first cash flow occurring one period from now. A bond that does not mature.

Household

A person or a group of people living in the same residence, taken as a basic unit in economic analysis.

Voluntarily unemployed

A person voluntarily outside the labor force, such as a jobless worker refusing an available vacancy.

Underemployed

A person who has a job but has the qualifications to work a significantly higher-paying job.

Discouraged worker

A person who has stopped looking for a job or has given up seeking employment.

Security characteristic line

A plot of the excess return of a security on the excess return of the market.

Security market index

A portfolio of securities representing a given security market, market segment, or asset class.

Short position

A position in an asset or contract in which one has sold an asset one does not own, or in which a right under a contract can be exercised against oneself.

Long position

A position in an asset or contract in which one owns the asset or has an exercisable right under the contract.

Positive externality

A positive effect (e.g., improved literacy) of a market transaction that is borne by parties other than those who transacted; a spillover benefit.

Outcome

A possible value of a random variable.

Double coincidence of wants

A prerequisite to barter trades, in particular that both economic agents in the transaction want what the other is selling.

Candlestick chart

A price chart with four bits of data for each time interval. A candle indicates the opening and closing price for the interval. The body of the candle is shaded if the opening price was higher than the closing price, and the body is clear if the opening price was lower than the closing price. Vertical lines known as wicks or shadows extend from the top and bottom of the candle to indicate the high and the low prices for the interval.

Bar chart

A price chart with four bits of data for each time interval—the high, low, opening, and closing prices. A vertical line connects the high and low. A cross-hatch left indicates the opening price and a cross-hatch right indicates the close.

Laspeyres index

A price index created by holding the composition of the consumption basket constant.

Bollinger Bands

A price-based technical analysis indicator consisting of a moving average plus a higher line representing the moving average plus a set number of standard deviations from average price (for the same number of periods as used to calculate the moving average) and a lower line that is a moving average minus the same number of standard deviations.

Derivative pricing rule

A pricing rule used by crossing networks in which a price is taken (derived) from the price that is current in the asset's primary market.

Discriminatory pricing rule

A pricing rule used in continuous markets in which the limit price of the order or quote that first arrived determines the trade price.

Addition rule for probabilities

A principle stating that the probability that A or B occurs (both occur) equals the probability that A occurs, plus the probability that B occurs, minus the probability that both Aand B occur.

A priori probability

A probability based on logical analysis rather than on observation or personal judgment.

Multivariate normal distribution

A probability distribution for a group of random variables that is completely defined by the means and variances of the variables plus all the correlations between pairs of the variables.

Multivariate distribution

A probability distribution that specifies the probabilities for a group of related random variables.

Subjective probability

A probability drawing on personal or subjective judgment.

Discount interest

A procedure for determining the interest on a loan or bond in which the interest is deducted from the face value in advance.

Systematic sampling

A procedure of selecting every kth member until reaching a sample of the desired size. The sample that results from this procedure should be approximately random.

Securitization

A process that involves moving assets into a special legal entity, which then uses the assets as guarantees to secure a bond issue.

Mutual fund

A professionally managed investment pool in which investors in the fund typically each have a pro-rata claim on the income and value of the fund.

Return on total capital

A profitability ratio calculated as EBIT divided by the sum of short- and long-term debt and equity.

Pretax margin

A profitability ratio calculated as earnings before taxes divided by revenue.

Return on equity (ROE)

A profitability ratio calculated as net income divided by average shareholders' equity.

Return on assets (ROA)

A profitability ratio calculated as net income divided by average total assets; indicates a company's net profit generated per dollar invested in total assets.

Operating profit margin

A profitability ratio calculated as operating income (i.e., income before interest and taxes) divided by revenue. Also called operating margin.

Stackelberg model

A prominent model of strategic decisionmaking in which firms are assumed to make their decisions sequentially.

Skewness

A quantitative measure of skew (lack of symmetry); a synonym of skew.

Measures of location

A quantitative measure that describes the location or distribution of data; includes not only measures of central tendency but also other measures such as percentiles.

Measure of central tendency

A quantitative measure that specifies where data are centered.

Statistic

A quantity computed from or used to describe a sample of data.

Sample statistic

A quantity computed from or used to describe a sample.

Random variable

A quantity whose future outcomes are uncertain.

Stated annual interest rate

A quoted interest rate that does not account for compounding within the year. Also called quoted interest rate.

Quoted interest rate

A quoted interest rate that does not account for compounding within the year. Also called stated annual interest rate.

Bank discount basis

A quoting convention that annualizes, on a 360-day year, the discount as a percentage of face value.

Continuous random variable

A random variable for which the range of possible outcomes is the real line (all real numbers between −∞ and +∞ or some subset of the real line).

Bernoulli random variable

A random variable having the outcomes 0 and 1.

Discrete random variable

A random variable that can take on at most a countable number of possible values.

Nominal rate

A rate of interest based on the security's face value.

Interest rate

A rate of return that reflects the relationship between differently dated cash flows; a discount rate.

Price relative

A ratio of an ending price over a beginning price; it is equal to 1 plus the holding period return on the asset.

Price multiple

A ratio that compares the share price with some sort of monetary flow or value to allow evaluation of the relative worth of a company's stock.

Drawdown

A reduction in net asset value (NAV).

Reverse stock split

A reduction in the number of shares outstanding with a corresponding increase in share price, but no change to the company's underlying fundamentals.

Market model

A regression equation that specifies a linear relationship between the return on a security (or portfolio) and the return on a broad market index.

Demand function

A relationship that expresses the quantity demanded of a good or service as a function of own-price and possibly other variables.

Reverse repo

A repurchase agreement viewed from the perspective of the cash lending counterparty.

Reverse repurchase agreement

A repurchase agreement viewed from the perspective of the cash lending counterparty.

Margin call

A request for the short to deposit additional funds to bring their balance up to the initial margin.

Clawback

A requirement that the GP return any funds distributed as incentive fees until the LPs have received back their initial investment and a percentage of the total profit.

Valuation allowance

A reserve created against deferred tax assets, based on the likelihood of realizing the deferred tax assets in future accounting periods.

Inverse demand function

A restatement of the demand function in which price is stated as a function of quantity.

Dutch Book theorem

A result in probability theory stating that inconsistent probabilities create profit opportunities.

Statistically significant

A result indicating that the null hypothesis can be rejected; with reference to an estimated regression coefficient, frequently understood to mean a result indicating that the corresponding population regression coefficient is different from 0.

Total probability rule for expected value

A rule explaining the expected value of a random variable in terms of expected values of the random variable conditional on mutually exclusive and exhaustive scenarios.

Total probability rule

A rule explaining the unconditional probability of an event in terms of probabilities of the event conditional on mutually exclusive and exhaustive scenarios.

Sample skewness

A sample measure of degree of asymmetry of a distribution.

Sample excess kurtosis

A sample measure of the degree of a distribution's peakedness in excess of the normal distribution's peakedness.

Sample kurtosis

A sample measure of the degree of a distribution's peakedness.

Sample variance

A sample measure of the degree of dispersion of a distribution, calculated by dividing the sum of the squared deviations from the sample mean by the sample size minus 1.

Total factor productivity

A scale factor that reflects the portion of growth that is not accounted for by explicit factor inputs (e.g. capital and labor).

Linear scale

A scale in which equal distances correspond to equal absolute amounts. Also called arithmetic scale.

Logarithmic scale

A scale in which equal distances represent equal proportional changes in the underlying quantity.

Measurement scales

A scheme of measuring differences. The four types of measurement scales are nominal, ordinal, interval, and ratio.

Second lien

A secured interest in the pledged assets that ranks below first lien debt in both collateral protection and priority of payment.

Organized exchange

A securities marketplace where buyers and seller can meet to arrange their trades.

Collateralized mortgage obligation

A security created through the securitization of a pool of mortgage-related products (mortgage pass-through securities or pools of loans).

Mortgage pass-through security

A security created when one or more holders of mortgages form a pool of mortgages and sell shares or participation certificates in the pool.

Depository receipt

A security that trades like an ordinary share on a local exchange and represents an economic interest in a foreign company.

Spot rates

A sequence of market discount rates that correspond to the cash flow dates; yields-to-maturity on zero-coupon bonds maturing at the date of each cash flow.

Fibonacci sequence

A sequence of numbers starting with 0 and 1, and then each subsequent number in the sequence is the sum of the two preceding numbers. In Elliott Wave Theory, it is believed that market waves follow patterns that are the ratios of the numbers in the Fibonacci sequence.

Spot curve

A sequence of yields-to-maturity on zero-coupon bonds. Sometimes called zero or strip curve because coupon payments are "stripped" off of the bonds.

Par curve

A sequence of yields-to-maturity such that each bond is priced at par value. The bonds are assumed to have the same currency, credit risk, liquidity, tax status, and annual yields stated for the same periodicity.

Forward curve

A series of forward rates, each having the same timeframe.

Change in supply

A shift in the supply curve.

Commercial paper

A short-term, negotiable, unsecured promissory note that represents a debt obligation of the issuer.

Point estimate

A single numerical estimate of an unknown quantity, such as a population parameter.

Interest coverage

A solvency ratio calculated as EBIT divided by interest payments.

Debt-to-assets ratio

A solvency ratio calculated as total debt divided by total assets.

Debt-to-capital ratio

A solvency ratio calculated as total debt divided by total debt plus total shareholders' equity.

Debt-to-equity ratio

A solvency ratio calculated as total debt divided by total shareholders' equity.

Fixed charge coverage

A solvency ratio measuring the number of times interest and lease payments are covered by operating income, calculated as (EBIT + lease payments) divided by (interest payments + lease payments).

Consumption basket

A specific combination of the goods and services that a consumer wants to consume.

Consumption bundle

A specific combination of the goods and services that a consumer wants to consume.

Stress testing

A specific type of scenario analysis that estimates losses in rare and extremely unfavorable combinations of events or scenarios.

Order

A specification of what instrument to trade, how much to trade, and whether to buy or sell.

Trade credit

A spontaneous form of credit in which a purchaser of the goods or service is financing its purchase by delaying the date on which payment is made.

Measure of value

A standard for measuring value; a function of money.

Autarky

A state in which a country does not trade with other countries.

Credit scoring model

A statistical model used to classify borrowers according to creditworthiness.

Paired comparisons test

A statistical test for differences based on paired observations drawn from samples that are dependent on each other.

Acid-test ratio

A stringent measure of liquidity that indicates a company's ability to satisfy current liabilities with its most liquid assets, calculated as (cash + short-term marketable investments + receivables) divided by current liabilities.

Quick ratio

A stringent measure of liquidity that indicates a company's ability to satisfy current liabilities with its most liquid assets, calculated as (cash + short-term marketable investments + receivables) divided by current liabilities.

Credit tranching

A structure used to redistribute the credit risk associated with the collateral; a set of bond classes created to allow investors a choice in the amount of credit risk that they prefer to bear.

Collateralized bond obligations

A structured asset-backed security that is collateralized by a pool of bonds.

Collateralized loan obligations

A structured asset-backed security that is collateralized by a pool of loans.

Simple random sample

A subset of a larger population created in such a way that each element of the population has an equal probability of being selected to the subset.

Sample

A subset of a population.

Currency swap

A swap in which each party makes interest payments to the other in different currencies.

Total return swap

A swap in which one party agrees to pay the total return on a security. Often used as a credit derivative, in which the underlying is a bond.

Commodity swap

A swap in which the underlying is a commodity such as oil, gold, or an agricultural product.

Interest rate swap

A swap in which the underlying is an interest rate. Can be viewed as a currency swap in which both currencies are the same and can be created as a combination of currency swaps.

Equity swap

A swap transaction in which at least one cash flow is tied to the return to an equity portfolio position, often an equity index.

Frequency distribution

A tabular display of data summarized into a relatively small number of intervals.

Tax loss carry forward

A taxable loss in the current period that may be used to reduce future taxable income.

Point and figure chart

A technical analysis chart that is constructed with columns of X's alternating with columns of O's such that the horizontal axis represents only the number of changes in price without reference to time or volume.

Flags

A technical analysis continuation pattern formed by parallel trendlines, typically over a short period.

Pennants

A technical analysis continuation pattern formed by trendlines that converge to form a triangle, typically over a short period.

Put/call ratio

A technical analysis indicator that evaluates market sentiment based upon the volume of put options traded divided by the volume of call options traded for a particular financial instrument.

Relative strength index

A technical analysis momentum oscillator that compares a security's gains with its losses over a set period.

Dead cross

A technical analysis term that describes a situation where a short-term moving average crosses from above a longer-term moving average to below it; this movement is considered bearish.

Golden cross

A technical analysis term that describes a situation where a short-term moving average crosses from below a longer-term moving average to above it; this movement is considered bullish.

Elliott wave theory

A technical analysis theory that claims that the market follows regular, repeated waves or cycles.

Change in polarity principle

A tenet of technical analysis that once a support level is breached, it becomes a resistance level. The same holds true for resistance levels; once breached, they become support levels.

Growth cyclical

A term sometimes used to describe companies that are growing rapidly on a long-term basis but that still experience above-average fluctuation in their revenues and profits over the course of a business cycle.

Two-sided hypothesis test

A test in which the null hypothesis is rejected in favor of the alternative hypothesis if the evidence indicates that the population parameter is either smaller or larger than a hypothesized value.

Two-tailed hypothesis test

A test in which the null hypothesis is rejected in favor of the alternative hypothesis if the evidence indicates that the population parameter is either smaller or larger than a hypothesized value.

One-sided hypothesis test

A test in which the null hypothesis is rejected only if the evidence indicates that the population parameter is greater than (smaller than) θ0. The alternative hypothesis also has one side.

One-tailed hypothesis test

A test in which the null hypothesis is rejected only if the evidence indicates that the population parameter is greater than (smaller than) θ0. The alternative hypothesis also has one side.

Out-of-sample test

A test of a strategy or model using a sample outside the time period on which the strategy or model was developed.

Nonparametric test

A test that is not concerned with a parameter, or that makes minimal assumptions about the population from which a sample comes.

Planning horizon

A time period in which all factors of production are variable, including technology, physical capital, and plant size.

Voluntary export restraint

A trade barrier under which the exporting country agrees to limit its exports of the good to its trading partners to a specific number of units.

Pairs arbitrage trade

A trade in two closely related stocks involving the short sale of one and the purchase of the other.

Buyback

A transaction in which a company buys back its own shares. Unlike stock dividends and stock splits, share repurchases use corporate cash.

Share repurchase

A transaction in which a company buys back its own shares. Unlike stock dividends and stock splits, share repurchases use corporate cash.

Short selling

A transaction in which borrowed securities are sold with the intention to repurchase them at a lower price at a later date and return them to the lender.

Standardizing

A transformation that involves subtracting the mean and dividing the result by the standard deviation.

Asset-backed securities

A type of bond issued by a legal entity called a special purpose entity (SPE) on a collection of assets that the SPE owns. Also, securities backed by receivables and loans other than mortgages.

Auction

A type of bond issuing mechanism often used for sovereign bonds that involves bidding.

Refinancing rate

A type of central bank policy rate.

Credit default swap (CDS)

A type of credit derivative in which one party, the credit protection buyer who is seeking credit protection against a third party, makes a series of regularly scheduled payments to the other party, the credit protection seller. The seller makes no payments until a credit event occurs.

Backup lines of credit

A type of credit enhancement provided by a bank to an issuer of commercial paper to ensure that the issuer will have access to sufficient liquidity to repay maturing commercial paper if issuing new paper is not a viable option.

Sponsored

A type of depository receipt in which the foreign company whose shares are held by the depository has a direct involvement in the issuance of the receipts.

Unsponsored

A type of depository receipt in which the foreign company whose shares are held by the depository has no involvement in the issuance of the receipts.

Bonus issue of shares

A type of dividend in which a company distributes additional shares of its common stock to shareholders instead of cash.

Stock dividend

A type of dividend in which a company distributes additional shares of its common stock to shareholders instead of cash.

Inflation Reports

A type of economic publication put out by many central banks.

Preference shares

A type of equity interest which ranks above common shares with respect to the payment of dividends and the distribution of the company's net assets upon liquidation. They have characteristics of both debt and equity securities. Also calledpreferred stock.

Income trust

A type of equity ownership vehicle established as a trust issuing ownership shares known as units.

Convertible preference shares

A type of equity security that entitles shareholders to convert their shares into a specified number of common shares.

Direct financing leases

A type of finance lease, from a lessor perspective, where the present value of the lease payments (lease receivable) equals the carrying value of the leased asset. The revenues earned by the lessor are financing in nature.

Sales-type leases

A type of finance lease, from a lessor perspective, where the present value of the lease payments (lease receivable) exceeds the carrying value of the leased asset. The revenues earned by the lessor are operating (the profit on the sale) and financing (interest) in nature.

Inverse floater

A type of leveraged structured financial instrument. The cash flows are adjusted periodically and move in the opposite direction of changes in the reference rate.

Muni

A type of non-sovereign bond issued by a state or local government in the United States. It very often (but not always) offers income tax exemptions.

Municipal bonds

A type of non-sovereign bond issued by a state or local government in the United States. It very often (but not always) offers income tax exemptions.

Reversal patterns

A type of pattern used in technical analysis to predict the end of a trend and a change in direction of the security's price.

Continuation patterns

A type of pattern used in technical analysis to predict the resumption of a market trend that was in place prior to the formation of a pattern.

Underwritten offering

A type of securities issue mechanism in which the investment bank guarantees the sale of the securities at an offering price that is negotiated with the issuer. Also known as firm commitment offering.

Common shares

A type of security that represent an ownership interest in a company.

Guarantee certificate

A type of structured financial instrument that provides investors capital protection. It combines a zero-coupon bond and a call option on some underlying asset.

Credit-linked note (CLN)

A type of structured financial instrument that provides investors yield enhancement. It is a bond that pays regular coupons but whose redemption value depends on the occurrence of a well-defined credit event, such as a rating downgrade or the default of an underlying asset.

Harmonic mean

A type of weighted mean computed by averaging the reciprocals of the observations, then taking the reciprocal of that average.

Demand shock

A typically unexpected disturbance to demand, such as an unexpected interruption in trade or transportation.

Supply shock

A typically unexpected disturbance to supply.

Utils

A unit of utility.

Price to book value

A valuation ratio calculated as price per share divided by book value per share.

Price to cash flow

A valuation ratio calculated as price per share divided by cash flow per share.

Price to sales

A valuation ratio calculated as price per share divided by sales per share.

Fractile

A value at or below which a stated fraction of the data lies.

Quantile

A value at or below which a stated fraction of the data lies. Also called fractile.

Economic indicator

A variable that provides information on the state of the overall economy.

Futures contract

A variation of a forward contract that has essentially the same basic definition but with some additional features, such as a clearinghouse guarantee against credit losses, a daily settlement of gains and losses, and an organized electronic or floor trading facility.

Price value of a basis point

A version of money duration, it is an estimate of the change in the full price of a bond given a 1 basis point change in the yield-to-maturity.

Weighted average cost of capital

A weighted average of the aftertax required rates of return on a company's common stock, preferred stock, and long-term debt, where the weights are the fraction of each source of financing in the company's target capital structure.

Captive finance subsidiary

A wholly-owned subsidiary of a company that is established to provide financing of the sales of the parent company.

Promissory note

A written promise to pay a certain amount of money on demand.

CD equivalent yield

A yield on a basis comparable to the quoted yield on an interest-bearing money market instrument that pays interest on a 360-day basis; the annualized holding period yield, assuming a 360-day year.

Money market yield

A yield on a basis comparable to the quoted yield on an interest-bearing money market instrument that pays interest on a 360-day basis; the annualized holding period yield, assuming a 360-day year.

Government equivalent yield

A yield that restates a yield-to-maturity based on 30/360 day-count to one based on actual/actual.

Monetary policy

Actions taken by a nation's central bank to affect aggregate output and prices through changes in bank reserves, reserve requirements, or its target interest rate.

Risk shifting

Actions to change the distribution of risk outcomes.

Risk transfer

Actions to pass on a risk to another party, often, but not always, in the form of an insurance policy.

Financing activities

Activities related to obtaining or repaying capital to be used in the business (e.g., equity and long-term debt).

Operating activities

Activities that are part of the day-to-day business functioning of an entity, such as selling inventory and providing services.

Investing activities

Activities which are associated with the acquisition and disposal of property, plant, and equipment; intangible assets; other long-term assets; and both long-term and short-term investments in the equity and debt (bonds and loans) issued by other companies.

Variation margin

Additional margin that must be deposited in an amount sufficient to bring the balance up to the initial margin requirement.

Rebalancing

Adjusting the weights of the constituent securities in an index.

Reorganization

Agreements made by a company in bankruptcy under which a company's capital structure is altered and/or alternative arrangements are made for debt repayment; US Chapter 11 bankruptcy. The company emerges from bankruptcy as a going concern.

Personal consumption expenditures

All domestic personal consumption; the basis for a price index for such consumption called the PCE price index.

Population

All members of a specified group.

Economic costs

All the remuneration needed to keep a productive resource in its current employment or to acquire the resource for productive use; the sum of total accounting costs and implicit opportunity costs.

Foreclosure

Allows the lender to take possession of a mortgaged property if the borrower defaults and then sell it to recover funds.

Dark pools

Alternative trading systems that do not display the orders that their clients send to them.

Principal amount

Amount that an issuer agrees to repay the debt holders on the maturity date.

Principal value

Amount that an issuer agrees to repay the debt holders on the maturity date.

Trade receivables

Amounts customers owe the company for products that have been sold as well as amounts that may be due from suppliers (such as for returns of merchandise) Also called commercial receivables or accounts receivable.

Commercial receivables

Amounts customers owe the company for products that have been sold as well as amounts that may be due from suppliers (such as for returns of merchandise). Also called trade receivables or accounts receivable.

Accounts receivable

Amounts customers owe the company for products that have been sold as well as amounts that may be due from suppliers (such as for returns of merchandise). Also calledcommercial receivables or trade receivables.

Notes payable

Amounts owed by a business to creditors as a result of borrowings that are evidenced by (short-term) loan agreements.

Other receivables

Amounts owed to the company from parties other than customers.

Accounts payable

Amounts that a business owes to its vendors for goods and services that were purchased from them but which have not yet been paid.

Trade payables

Amounts that a business owes to its vendors for goods and services that were purchased from them but which have not yet been paid.

Double declining balance depreciation

An accelerated depreciation method that involves depreciating the asset at double the straight-line rate. This rate is multiplied by the book value of the asset at the beginning of the period (a declining balance) to calculate depreciation expense.

Diminishing balance method

An accelerated depreciation method, i.e., one that allocates a relatively large proportion of the cost of an asset to the early years of the asset's useful life.

Contra account

An account that offsets another account.

Matching strategy

An active investment strategy that includes intentional matching of the timing of cash outflows with investment maturities.

Mismatching strategy

An active investment strategy whereby the timing of cash outflows is not matched with investment maturities.

Inventory turnover

An activity ratio calculated as cost of goods sold divided by average inventory.

Number of days of inventory

An activity ratio equal to the number of days in a period divided by the inventory ratio for the period; an indication of the number of days a company ties up funds in inventory.

Number of days of payables

An activity ratio equal to the number of days in a period divided by the payables turnover ratio for the period; an estimate of the average number of days it takes a company to pay its suppliers.

Days of inventory on hand

An activity ratio equal to the number of days in the period divided by inventory turnover over the period.

Tax expense

An aggregate of an entity's income tax payable (or recoverable in the case of a tax benefit) and any changes in deferred tax assets and liabilities. It is essentially the income tax payable or recoverable if these had been determined based on accounting profit rather than taxable income.

Operating lease

An agreement allowing the lessee to use some asset for a period of time; essentially a rental.

Forward contract

An agreement between two parties in which one party, the buyer, agrees to buy from the other party, the seller, an underlying asset at a later date for a price established at the start of the contract.

Swap contract

An agreement between two parties to exchange a series of future cash flows.

Random number generator

An algorithm that produces uniformly distributed random numbers between 0 and 1.

General equilibrium analysis

An analysis that provides for equilibria in multiple markets simultaneously.

Semiannual bond basis yield

An annual rate having a periodicity of two; also known as asemiannual bond equivalent yield.

Effective annual yield (EAY)

An annualized return that accounts for the effect of interest on interest; EAY is computed by compounding 1 plus the holding period yield forward to one year, then subtracting 1.

Annuity due

An annuity having a first cash flow that is paid immediately.

Ordinary annuity

An annuity with a first cash flow that is paid one period from the present.

Dividend discount model based approach

An approach for estimating a country's equity risk premium. The market rate of return is estimated as the sum of the dividend yield and the growth rate in dividends for a market index. Subtracting the risk-free rate of return from the estimated market return produces an estimate for the equity risk premium.

DuPont analysis

An approach to decomposing return on investment, e.g., return on equity, as the product of other financial ratios.

Monte Carlo simulation

An approach to estimating a probability distribution of outcomes to examine what might happen if particular risks are faced. This method is widely used in the sciences as well as in business to study a variety of problems.

Active investment

An approach to investing in which the investor seeks to outperform a given benchmark.

New classical macroeconomics

An approach to macroeconomics that seeks the macroeconomic conclusions of individuals maximizing utility on the basis of rational expectations and companies maximizing profits.

Economic order quantity-reorder point (EOQ-ROP)

An approach to managing inventory based on expected demand and the predictability of demand; the ordering point for new inventory is determined based on the costs of ordering and carrying inventory, such that the total cost associated with inventory is minimized.

Mean-variance analysis

An approach to portfolio analysis using expected means, variances, and covariances of asset returns.

Direct write-off method

An approach to recognizing credit losses on customer receivables in which the company waits until such time as a customer has defaulted and only then recognizes the loss.

Direct debit program

An arrangement whereby a customer authorizes a debit to a demand account; typically used by companies to collect routine payments for services.

Underlying

An asset that trades in a market in which buyers and sellers meet, decide on a price, and the seller then delivers the asset to the buyer and receives payment. The underlying is the asset or other derivative on which a particular derivative is based. The market for the underlying is also referred to as the spot market.

Second price sealed bid

An auction (also known as a Vickery auction) in which bids are submitted in sealed envelopes and opened simultaneously. The winning buyer is the one who submitted the highest bid, but the price paid is equal to the second highest bid.

Ascending price auction

An auction in which an auctioneer calls out prices for a single item and potential buyers bid directly against each other, with each subsequent bid being higher than the previous one.

Sealed bid auction

An auction in which bids are elicited from potential buyers, but there is no ability to observe bids by other buyers until the auction has ended.

First price sealed bid auction

An auction in which envelopes containing bids are opened simultaneously and the item is sold to the highest bidder.

Descending price auction

An auction in which the auctioneer begins at a high price, then lowers the called price in increments until there is a willing buyer for the item being auctioned.

Dutch auction

An auction in which the auctioneer begins at a high price, then lowers the called price in increments until there is a willing buyer for the item being auctioned.

Common value auction

An auction in which the item being auctioned has the same value to each auction participant, although participants may be uncertain as to what that value is.

Private value auction

An auction in which the value of the item being auctioned is unique to each bidder.

Weighted mean

An average in which each observation is weighted by an index of its relative importance.

Ricardian equivalence

An economic theory that implies that it makes no difference whether a government finances a deficit by increasing taxes or issuing debt.

Monetary union

An economic union in which the members adopt a common currency.

Closed economy

An economy that does not trade with other countries; anautarkic economy.

Open economy

An economy that trades with other countries.

Barter economy

An economy where economic agents as house-holds, corporations, and governments "pay" for goods and services with another good or service.

Externality

An effect of a market transaction that is borne by parties other than those who transacted.

Arc elasticity

An elasticity based on two points, in contrast with (point) elasticity. With reference to price elasticity, the percentage change in quantity demanded divided by the percentage change in price between two points for price.

Unit elastic

An elasticity with a magnitude of 1.

Unitary elastic

An elasticity with a magnitude of 1.

Automated Clearing House (ACH)

An electronic payment network available to businesses, individuals, and financial institutions in the United States, US Territories, and Canada.

Giro system

An electronic payment system used widely in Europe and Japan.

Clearinghouse

An entity associated with a futures market that acts as middleman between the contracting parties and guarantees to each party the performance of the other.

Lender of last resort

An entity willing to lend money when no other entity is ready to do so.

Put-call parity

An equation expressing the equivalence (parity) of a portfolio of a call and a bond with a portfolio of a put and the underlying, which leads to the relationship between put and call prices.

Partial equilibrium analysis

An equilibrium analysis focused on one market, taking the values of exogenous variables as given.

Historical equity risk premium approach

An estimate of a country's equity risk premium that is based upon the historical averages of the risk-free rate and the rate of return on the market portfolio.

Float factor

An estimate of the average number of days it takes deposited checks to clear; average daily float divided by average daily deposit.

Net operating cycle

An estimate of the average time that elapses between paying suppliers for materials and collecting cash from the subsequent sale of goods produced.

Bond yield plus risk premium approach

An estimate of the cost of common equity that is produced by summing the before-tax cost of debt and a risk premium that captures the additional yield on a company's stock relative to its bonds. The additional yield is often estimated using historical spreads between bond yields and stock yields.

Sovereign yield spread

An estimate of the country spread (country equity premium) for a developing nation that is based on a comparison of bonds yields in country being analyzed and a developed country. The sovereign yield spread is the difference between a government bond yield in the country being analyzed, denominated in the currency of the developed country, and the Treasury bond yield on a similar maturity bond in the developed country.

Survey approach

An estimate of the equity risk premium that is based upon estimates provided by a panel of finance experts.

Estimator

An estimation formula; the formula used to compute the sample mean and other sample statistics are examples of estimators.

Basket of listed depository receipts

An exchange-traded fund (ETF) that represents a portfolio of depository receipts.

Market-on-close

An execution instruction specifying that an order can only be filled at the close of trading.

Good-on-close

An execution instruction specifying that an order can only be filled at the close of trading. Also called market on close.

Good-on-open

An execution instruction specifying that an order can only be filled at the opening of trading.

Quantitative easing

An expansionary monetary policy based on aggressive open market purchase operations.

Boom

An expansionary phase characterized by economic growth "testing the limits" of the economy.

Bernoulli trial

An experiment that can produce one of two outcomes.

Quantity equation of exchange

An expression that over a given period, the amount of money used to purchase all goods and services in an economy, M × V, is equal to monetary value of this output,P × Y.

Risk premium

An extra return expected by investors for bearing some specified risk.

Inflation premium

An extra return that compensates investors for expected inflation.

Maturity premium

An extra return that compensates investors for the increased sensitivity of the market value of debt to a change in market interest rates as maturity is extended.

Default risk premium

An extra return that compensates investors for the possibility that the borrower will fail to make a promised payment at the contracted time and in the contracted amount.

Liquidity premium

An extra return that compensates investors for the risk of loss relative to an investment's fair value if the investment needs to be converted to cash quickly.

Notional principal

An imputed principal amount.

Wealth effect

An increase (decrease) in household wealth increases (decreases) consumer spending out of a given level of current income.

Paasche index

An index formula using the current composition of a basket of products.

Price return index

An index that reflects only the price appreciation or percentage change in price of the constituent securities. Also called price index.

Total return index

An index that reflects the price appreciation or percentage change in price of the constituent securities plus any income received since inception.

Equal weighting

An index weighting method in which an equal weight is assigned to each constituent security at inception.

Fundamental weighting

An index weighting method in which the weight assigned to each constituent security is based on its underlying company's size. It attempts to address the disadvantages of market-capitalization weighting by using measures that are independent of the constituent security's price.

Float-adjusted market-capitalization weighting

An index weighting method in which the weight assigned to each constituent security is determined by adjusting its market capitalization for its market float.

Market-capitalization weighting

An index weighting method in which the weight assigned to each constituent security is determined by dividing its market capitalization by the total market capitalization (sum of the market capitalization) of all securities in the index. Also called value weighting.

Price weighting

An index weighting method in which the weight assigned to each constituent security is determined by dividing its price by the sum of all the prices of the constituent securities.

Profit margin

An indicator of profitability, calculated as net income divided by revenue; indicates how much of each dollar of revenues is left after all costs and expenses.

Return on sales

An indicator of profitability, calculated as net income divided by revenue; indicates how much of each dollar of revenues is left after all costs and expenses.

Net profit margin

An indicator of profitability, calculated as net income divided by revenue; indicates how much of each dollar of revenues is left after all costs and expenses. Also calledprofit margin or return on sales.

Increasing-cost industry

An industry in which per-unit costs and output prices are higher when industry output is increased in the long run.

Decreasing-cost industry

An industry in which per-unit costs and output prices are lower when industry output is increased in the long run.

Certificate of deposit

An instrument that represents a specified amount of funds on deposit with a bank for a specified maturity and interest rate. It is issued in small or large denominations, and can be negotiable or non-negotiable.

Goodwill

An intangible asset that represents the excess of the purchase price of an acquired company over the value of the net assets acquired.

Fixed-for-floating interest rate swap

An interest rate swap in which one party pays a fixed rate and the other pays a floating rate, with both sets of payments in the same currency. Also called plain vanilla swap orvanilla swap.

Official policy rate

An interest rate that a central bank sets and announces publicly; normally the rate at which it is willing to lend money to the commercial banks.

Policy rate

An interest rate that a central bank sets and announces publicly; normally the rate at which it is willing to lend money to the commercial banks.

Official interest rate

An interest rate that a central bank sets and announces publicly; normally the rate at which it is willing to lend money to the commercial banks. Also called official policy rate or policy rate.

Retail method

An inventory accounting method in which the sales value of an item is reduced by the gross margin to calculate the item's cost.

Weighted average cost method

An inventory accounting method that averages the total cost of available inventory items over the total units available for sale.

Specific identification method

An inventory accounting method that identifies which specific inventory items were sold and which remained in inventory to be carried over to later periods.

IRR rule

An investment decision rule that accepts projects or investments for which the IRR is greater than the opportunity cost of capital.

NPV rule

An investment decision rule that states that an investment should be undertaken if its NPV is positive but not undertaken if its NPV is negative.

Private investment in public equity

An investment in the equity of a publicly traded firm that is made at a discount to the market value of the firm's shares.

Buy-side firm

An investment management company or other investor that uses the services of brokers or dealers (i.e., the client of the sell side firms).

Indexing

An investment strategy in which an investor constructs a portfolio to mirror the performance of a specified index.

Capital market expectations

An investor's expectations concerning the risk and return prospects of asset classes.

Random number

An observation drawn from a uniform distribution.

Seasoned offering

An offering in which an issuer sells additional units of a previously issued security.

Best effort offering

An offering of a security using an investment bank in which the investment bank, as agent for the issuer, promises to use its best efforts to sell the offering but does not guarantee that a specific amount will be sold.

Accelerated book build

An offering of securities by an investment bank acting as principal that is accomplished in only one or two days.

Public offering

An offering of securities in which any member of the public may buy the securities. Also called public offer.

Allowance for bad debts

An offset to accounts receivable for the amount of accounts receivable that are estimated to be uncollectible.

Accumulated depreciation

An offset to property, plant, and equipment (PPE) reflecting the amount of the cost of PPE that has been allocated to current and previous accounting periods.

Sales returns and allowances

An offset to revenue reflecting any cash refunds, credits on account, and discounts from sales prices given to customers who purchased defective or unsatisfactory items.

At the money

An option in which the underlying's price equals the exercise price.

Credit spread option

An option on the yield spread on a bond.

Protective put

An option strategy in which a long position in an asset is combined with a long position in a put.

Covered call

An option strategy involving the holding of an asset and sale of a call on the asset.

Call

An option that gives the holder the right to buy an underlying asset from another party at a fixed price over a specific period of time.

Call option

An option that gives the holder the right to buy an underlying asset from another party at a fixed price over a specific period of time.

Put

An option that gives the holder the right to sell an underlying asset to another party at a fixed price over a specific period of time.

Put option

An option that gives the holder the right to sell an underlying asset to another party at a fixed price over a specific period of time.

Stop order

An order in which a trader has specified a stop price condition. Also called stop-loss order.

Iceberg order

An order in which the display size is less than the order's full size.

Good-till-cancelled order

An order specifying that it is valid until the entity placing the order has cancelled it (or, commonly, until some specified amount of time such as 60 days has elapsed, whichever comes sooner).

All-or-nothing (AON) orders

An order that includes the instruction to trade only if the trade fills the entire quantity (size) specified.

Hidden order

An order that is exposed not to the public but only to the brokers or exchanges that receive it.

Day order

An order that is good for the day on which it is submitted. If it has not been filled by the close of business, the order expires unfilled.

Immediate or cancel order

An order that is valid only upon receipt by the broker or exchange. If such an order cannot be filled in part or in whole upon receipt, it cancels immediately. Also called fill or kill.

Permutation

An ordered listing.

Enterprise risk management

An overall assessment of a company's risk position. A centralized approach to risk management sometimes called firmwide risk management.

Unlimited funds

An unlimited funds environment assumes that the company can raise the funds it wants for all profitable projects simply by paying the required rate of return.

Posterior probability

An updated probability that reflects or comes after new information.

Company analysis

Analysis of an individual company.

Strategic analysis

Analysis of the competitive environment with an emphasis on the implications of the environment for corporate strategy.

Cross-sectional analysis

Analysis that involves comparisons across individuals in a group over a given time period or at a given point in time.

Scenario analysis

Analysis that shows the changes in key financial quantities that result from given (economic) events, such as the loss of customers, the loss of a supply source, or a catastrophic event; a risk management technique involving examination of the performance of a portfolio under specified situations. Closely related to stress testing.

Sensitivity analysis

Analysis that shows the range of possible outcomes as specific assumptions are changed.

Dividend yield

Annual dividends per share divided by share price.

Yield to maturity

Annual return that an investor earns on a bond if the investor purchases the bond today and holds it until maturity. It is the discount rate that equates the present value of the bond's expected cash flows until maturity with the bond's price. Also called yield-to-redemption or redemption yield.

Back simulation

Another term for the historical method of estimating VAR. This term is somewhat misleading in that the method involves not a simulation of the past but rather what actually happened in the past, sometimes adjusted to reflect the fact that a different portfolio may have existed in the past than is planned for the future.

Historical simulation

Another term for the historical method of estimating VAR. This term is somewhat misleading in that the method involves not a simulation of the past but rather what actually happened in the past, sometimes adjusted to reflect the fact that a different portfolio may have existed in the past than is planned for the future.

Medium of exchange

Any asset that can be used to purchase goods and services or to repay debts; a function of money.

Event

Any outcome or specified set of outcomes of a random variable.

Parametric test

Any test (or procedure) concerned with parameters or whose validity depends on assumptions concerning the population generating the sample.

Structural subordination

Arises in a holding company structure when the debt of operating subsidiaries is serviced by the cash flow and assets of the subsidiaries before funds can be passed to the holding company to service debt at the parent level.

Volatility

As used in option pricing, the standard deviation of the continuously compounded returns on the underlying asset.

Quantity theory of money

Asserts that total spending (in money terms) is proportional to the quantity of money.

Gains

Asset inflows not directly related to the ordinary activities of the business.

Losses

Asset outflows not directly related to the ordinary activities of the business.

Intangible assets

Assets lacking physical substance, such as patents and trademarks.

Equity

Assets less liabilities; the residual interest in the assets after subtracting the liabilities.

Shareholders' equity

Assets less liabilities; the residual interest in the assets after subtracting the liabilities.

Collaterals

Assets or financial guarantees underlying a debt obligation above and beyond the issuer's promise to pay.

Current assets

Assets that are expected to be consumed or converted into cash in the near future, typically one year or less. Also called liquid assets.

Non-current assets

Assets that are expected to benefit the company over an extended period of time (usually more than one year).

Long-lived assets

Assets that are expected to provide economic benefits over a future period of time, typically greater than one year. Also called long-term assets.

Securitized assets

Assets that are typically used to create asset-backed bonds; for example, when a bank securitizes a pool of loans, the loans are said to be securitized.

Quick assets

Assets that can be most readily converted to cash (e.g., cash, short-term marketable investments, receivables).

Cournot assumption

Assumption in which each firm determines its profit-maximizing production level assuming that the other firms' output will not change.

Warrant

Attached option that gives its holder the right to buy the underlying stock of the issuing company at a fixed exercise price until the expiration date.

Add-on rates

Bank certificates of deposit, repos, and indices such as Libor and Euribor are quoted on an add-on rate basis (bond equivalent yield basis).

Fractional reserve banking

Banking in which reserves constitute a fraction of deposits.

Sample selection bias

Bias introduced by systematically excluding some members of the population according to a particular attribute—for example, the bias introduced when data availability leads to certain observations being excluded from the analysis.

Index-linked bond

Bond for which coupon payments and/or principal repayment are linked to a specified index.

Credit-linked coupon bond

Bond for which the coupon changes when the bond's credit rating changes.

Step-up coupon bond

Bond for which the coupon, which may be fixed or floating, increases by specified margins at specified dates.

Bond market vigilantes

Bond market participants who might reduce their demand for long-term bonds, thus pushing up their yields.

Spread risk

Bond price risk arising from changes in the yield spread on credit-risky bonds; reflects changes in the market's assessment and/or pricing of credit migration (or downgrade) risk and market liquidity risk.

Convertible bond

Bond that gives the bondholder the right to exchange the bond for a specified number of common shares in the issuing company.

Plain vanilla bond

Bond that makes periodic, fixed coupon payments during the bond's life and a lump-sum payment of principal at maturity. Also called conventional bond.

Deferred coupon bond

Bond that pays no coupons for its first few years but then pays a higher coupon than it otherwise normally would for the remainder of its life. Also called split coupon bond.

Amortizing bond

Bond with a payment schedule that calls for periodic payments of interest and repayments of principal.

Bearer bonds

Bonds for which ownership is not recorded; only the clearing system knows who the bond owner is.

Registered bonds

Bonds for which ownership is recorded by either name or serial number.

Gilts

Bonds issued by the UK government.

Secured bonds

Bonds secured by assets or financial guarantees pledged to ensure debt repayment in case of default.

Collateral trust bonds

Bonds secured by securities such as common shares, other bonds, or other financial assets.

Equipment trust certificates

Bonds secured by specific types of equipment or physical assets.

Contingent convertible bonds

Bonds that automatically convert into equity if a specific event or circumstance occurs, such as the issuer's equity capital falling below the minimum requirement set by the regulators. Also called CoCos.

Zero-coupon bonds

Bonds that do not pay interest during the bond's life. It is issued at a discount to par value and redeemed at par. Also called pure discount bonds.

Currency option bonds

Bonds that give the bondholder the right to choose the currency in which he or she wants to receive interest payments and principal repayments.

Putable bonds

Bonds that give the bondholder the right to sell the bond back to the issuer at a predetermined price on specified dates.

Dual-currency bonds

Bonds that make coupon payments in one currency and pay the par value at maturity in another currency.

Perpetual bonds

Bonds with no stated maturity date.

Prime brokers

Brokers that provide services including custody, administration, lending, short borrowing, and trading.

Collateral manager

Buys and sells debt obligations for and from the CDO's portfolio of assets (i.e., the collateral) to generate sufficient cash flows to meet the obligations to the CDO bondholders.

Implied forward rates

Calculated from spot rates, an implied forward rate is a break-even reinvestment rate that links the return on an investment in a shorter-term zero-coupon bond to the return on an investment in a longer-term zero-coupon bond.

Zero volatility spread (Z-spread)

Calculates a constant yield spread over a government (or interest rate swap) spot curve.

Turn-of-the-year effect

Calendar anomaly that stock market returns in January are significantly higher compared to the rest of the months of the year, with most of the abnormal returns reported during the first five trading days in January.

January effect

Calendar anomaly that stock market returns in January are significantly higher compared to the rest of the months of the year, with most of the abnormal returns reported during the first five trading days in January. Also called turn-of-the-year effect.

Cannibalization

Cannibalization occurs when an investment takes customers and sales away from another part of the company.

Payout

Cash dividends and the value of shares repurchased in any given year.

Non-deliverable forwards

Cash-settled forward contracts, used predominately with respect to foreign exchange forwards. Also called contracts for differences.

Market anomaly

Change in the price or return of a security that cannot directly be linked to current relevant information known in the market or to the release of new information into the market.

Forward commitments

Class of derivatives that provides the ability to lock in a price to transact in the future at a previously agreed-upon price.

Contingency provision

Clause in a legal document that allows for some action if a specific event or circumstance occurs.

Herding

Clustered trading that may or may not be based on information.

London interbank offered rate (Libor)

Collective name for multiple rates at which a select set of banks believe they could borrow unsecured funds from other banks in the London interbank market for different currencies and different borrowing periods ranging from overnight to one year.

Depository institutions

Commercial banks, savings and loan banks, credit unions, and similar institutions that raise funds from depositors and other investors and lend it to borrowers.

Putable common shares

Common shares that give investors the option (or right) to sell their shares (i.e., "put" them) back to the issuing company at a price that is specified when the shares are originally issued.

Horizontal analysis

Common-size analysis that involves comparing a specific financial statement with that statement in prior or future time periods; also, cross-sectional analysis of one company with another.

Vertical analysis

Common-size analysis using only one reporting period or one base financial statement; for example, an income statement in which all items are stated as percentages of sales.

Defensive companies

Companies with sales and profits that have little sensitivity to the business cycle or state of the economy.

Cyclical companies

Companies with sales and profits that regularly expand and contract with the business cycle or state of economy.

Multi-market indices

Comprised of indices from different countries, designed to represent multiple security markets.

Simulation

Computer-generated sensitivity or scenario analysis that is based on probability models for the factors that drive outcomes.

CVaR

Conditional VaR, a tail loss measure. The weighted average of all loss outcomes in the statistical distribution that exceed the VaR loss.

Conspicuous consumption

Consumption of high status goods, such as a luxury automobile or a very expensive piece of jewelry.

Embedded option

Contingency provisions that provide the issuer or the bondholders the right, but not the obligation, to take action. These options are not part of the security and cannot be traded separately.

Bond

Contractual agreement between the issuer and the bondholders.

Prepayment option

Contractual provision that entitles the borrower to prepay all or part of the outstanding mortgage principal prior to the scheduled due date when the principal must be repaid. Also called early repayment option.

Capital restrictions

Controls placed on foreigners' ability to own domestic assets and/or domestic residents' ability to own foreign assets.

Asset swap

Converts the periodic fixed coupon of a specific bond to a Libor plus or minus a spread.

Period costs

Costs (e.g., executives' salaries) that cannot be directly matched with the timing of revenues and which are thus expensed immediately.

Search costs

Costs incurred in searching; the costs of matching buyers with sellers.

Variable costs

Costs that fluctuate with the level of production and sales.

Fixed costs

Costs that remain at the same level regardless of a company's level of production and sales.

Maintenance covenants

Covenants in bank loan agreements that require the borrower to satisfy certain financial ratio tests while the loan is outstanding.

Exhaustive

Covering or containing all possible outcomes.

Production opportunity frontier

Curve describing the maximum number of units of one good a company can produce, for any given number of the other good that it chooses to manufacture.

Settlement date

Date when the buyer makes cash payment and the seller delivers the security.

Held-to-maturity

Debt (fixed-income) securities that a company intends to hold to maturity; these are presented at their original cost, updated for any amortization of discounts or premiums.

Available-for-sale

Debt and equity securities not classified as either held-to-maturity or held-for-trading securities. The investor is willing to sell but not actively planning to sell. In general, available-for-sale securities are reported at fair value on the balance sheet.

Secured debt

Debt in which the debtholder has a direct claim—a pledge from the issuer—on certain assets and their associated cash flows.

Covered bond

Debt obligation secured by a segregated pool of assets called the cover pool. The issuer must maintain the value of the cover pool. In the event of default, bondholders have recourse against both the issuer and the cover pool.

Mortgage-backed securities

Debt obligations that represent claims to the cash flows from pools of mortgage loans, most commonly on residential property.

Held for trading

Debt or equity financial assets bought with the intention to sell them in the near term, usually less than three months; securities that a company intends to trade. Also calledtrading securities.

Mezzanine financing

Debt or preferred shares with a relationship to common equity due to a feature such as attached warrants or conversion options and that is subordinate to both senior and high yield debt. It is referred to as mezzanine because of its location on the balance sheet.

First mortgage debt

Debt secured by a pledge of a specific property.

First lien debt

Debt secured by a pledge of certain assets that could include buildings, but may also include property and equipment, licenses, patents, brands, etc.

Unsecured debt

Debt which gives the debtholder only a general claim on an issuer's assets and cash flow.

Expected loss

Default probability times Loss severity given default.

Excess kurtosis

Degree of peakedness (fatness of tails) in excess of the peakedness of the normal distribution.

Action lag

Delay from policy decisions to implementation.

Accelerated methods

Depreciation methods that allocate a relatively large proportion of the cost of an asset to the early years of the asset's useful life.

Contingent claims

Derivatives in which the payoffs occur if a specific event occurs; generally referred to as options.

Platykurtic

Describes a distribution that is less peaked than the normal distribution.

Leptokurtic

Describes a distribution that is more peaked than a normal distribution.

Mesokurtic

Describes a distribution with kurtosis identical to that of the normal distribution.

Semilogarithmic

Describes a scale constructed so that equal intervals on the vertical scale represent equal rates of change, and equal intervals on the horizontal scale represent equal amounts of change.

Diminishing marginal productivity

Describes a state in which each additional unit of input produces less output than previously.

Money multiplier

Describes how a change in reserves is expected to affect the money supply; in its simplest form, 1 divided by the reserve requirement.

Permanent differences

Differences between tax and financial reporting of revenue (expenses) that will not be reversed at some future date. These result in a difference between the company's effective tax rate and statutory tax rate and do not result in a deferred tax item.

Foreign direct investment

Direct investment by a firm in one country (the source country) in productive assets in a foreign country (the host country).

New-issue DRP

Dividend reinvestment plan in which the company meets the need for additional shares by issuing them instead of purchasing them.

Scrip dividend schemes

Dividend reinvestment plan in which the company meets the need for additional shares by issuing them instead of purchasing them.

Open-market DRP

Dividend reinvestment plan in which the company purchases shares in the open market to acquire the additional shares credited to plan participants.

Node

Each value on a binomial tree from which successive moves or outcomes branch.

Keynesians

Economists who believe that fiscal policy can have powerful effects on aggregate demand, output, and employment when there is substantial spare capacity in an economy.

Monetarists

Economists who believe that the rate of growth of the money supply is the primary determinant of the rate of inflation.

Natural rate of unemployment

Effective unemployment rate, below which pressure emerges in labor markets.

Non-accelerating inflation rate of unemployment

Effective unemployment rate, below which pressure emerges in labor markets.

Broad money

Encompasses narrow money plus the entire range of liquid assets that can be used to make purchases.

Abnormal profit

Equal to accounting profit less the implicit opportunity costs not included in total accounting costs; the difference between total revenue (TR) and total cost (TC).

Supernormal profit

Equal to accounting profit less the implicit opportunity costs not included in total accounting costs; the difference between total revenue (TR) and total cost (TC).

Economic profit

Equal to accounting profit less the implicit opportunity costs not included in total accounting costs; the difference between total revenue (TR) and total cost (TC). Also calledabnormal profit or supernormal profit.

Personal disposable income

Equal to personal income less personal taxes.

Ordinary shares

Equity shares that are subordinate to all other types of equity (e.g., preferred equity). Also called common stock orcommon shares.

Finance lease

Essentially, the purchase of some asset by the buyer (lessee) that is directly financed by the seller (lessor). Also calledcapital lease.

Day's sales outstanding

Estimate of the average number of days it takes to collect on credit accounts.

Days in receivables

Estimate of the average number of days it takes to collect on credit accounts.

Number of days of receivables

Estimate of the average number of days it takes to collect on credit accounts.

Net realisable value

Estimated selling price in the ordinary course of business less the estimated costs necessary to make the sale.

Anticipation stock

Excess inventory that is held in anticipation of increased demand, often because of seasonal patterns of demand.

Capital expenditure

Expenditure on physical capital (fixed assets).

Risk

Exposure to uncertainty. The chance of a loss or adverse outcome as a result of an action, inaction, or external event.

Customs union

Extends the free trade area (FTA) by not only allowing free movement of goods and services among members, but also creating a common trade policy against nonmembers.

Flotation cost

Fees charged to companies by investment bankers and other costs associated with raising new capital.

Primary dealers

Financial institutions that are authorized to deal in new issues of sovereign bonds and that serve primarily as trading counterparties of the office responsible for issuing sovereign bonds.

Structured financial instruments

Financial instruments that share the common attribute of repackaging risks. Structured financial instruments include asset-backed securities, collateralized debt obligations, and other structured financial instruments such as capital protected, yield enhancement, participation and leveraged instruments.

Investment banks

Financial intermediaries that provide advice to their mostly corporate clients and help them arrange transactions such as initial and seasoned securities offerings.

Capital markets

Financial markets that trade securities of longer duration, such as bonds and equities.

Balance sheet ratios

Financial ratios involving balance sheet items only.

Liquidity ratios

Financial ratios measuring the company's ability to meet its short-term obligations.

Non-renewable resources

Finite resources that are depleted once they are consumed, such as oil and coal.

Expansionary fiscal policy

Fiscal policy aimed at achieving real economic growth.

Money market securities

Fixed-income securities with maturities at issuance of one year or less.

Credit-linked note

Fixed-income security in which the holder of the security has the right to withhold payment of the full amount due at maturity if a credit event occurs.

Convexity adjustment

For a bond, one half of the annual or approximate convexity statistic multiplied by the change in the yield-to-maturity squared.

Money convexity

For a bond, the annual or approximate convexity multiplied by the full price.

Conversion value

For a convertible bond, the current share price multiplied by the conversion ratio.

Conversion ratio

For a convertible bond, the number of common shares that each bond can be converted into.

Conversion price

For a convertible bond, the price per share at which the bond can be converted into shares.

Cost of goods sold

For a given period, equal to beginning inventory minus ending inventory plus the cost of goods acquired or produced during the period.

n Factorial

For a positive integer n, the product of the first n positive integers; 0 factorial equals 1 by definition. n factorial is written as n!.

Cumulative relative frequency

For data grouped into intervals, the fraction of total observations that are less than the value of the upper limit of a stated interval.

Forward market

For future delivery, beyond the usual settlement time period in the cash market.

Letter of credit

Form of external credit enhancement whereby a financial institution provides the issuer with a credit line to reimburse any cash flow shortfalls from the assets backing the issue.

Surety bond

Form of external credit enhancement whereby a rated and regulated insurance company guarantees to reimburse bondholders for any losses incurred up to a maximum amount if the issuer defaults.

Cash collateral account

Form of external credit enhancement whereby the issuer immediately borrows the credit-enhancement amount and then invests that amount, usually in highly rated short-term commercial paper.

Overcollateralization

Form of internal credit enhancement that refers to the process of posting more collateral than needed to obtain or secure financing.

Reserve accounts

Form of internal credit enhancement that relies on creating accounts and depositing in these accounts cash that can be used to absorb losses. Also called reserve funds.

Subordination

Form of internal credit enhancement that relies on creating more than one bond tranche and ordering the claim priorities for ownership or interest in an asset between the tranches. The ordering of the claim priorities is called a senior/subordinated structure, where the tranches of highest seniority are called senior followed by subordinated or junior tranches. Also called credit tranching.

Incentive fee (or performance fee)

Funds distributed by the general partner to the limited partner(s) based on realized profits.

Funds of hedge funds

Funds that hold a portfolio of hedge funds.

Foreign exchange gains (or losses)

Gains (or losses) that occur when the exchange rate changes between the investor's currency and the currency that foreign securities are denominated in.

Sales

Generally, a synonym for revenue; "sales" is generally understood to refer to the sale of goods, whereas "revenue" is understood to include the sale of goods or services.

Collateralized debt obligation

Generic term used to describe a security backed by a diversified pool of one or more debt obligations.

Intermediate goods and services

Goods and services purchased for use as inputs to produce other goods and services.

Imports

Goods and services that a domestic economy (i.e., house-holds, firms, and government) purchases from other countries.

Exports

Goods and services that an economy sells to other countries.

Store of wealth

Goods that depend on the fact that they do not perish physically over time, and on the belief that others would always value the good.

Trade protection

Government policies that impose restrictions on trade, such as tariffs and quotas.

Quotas

Government policies that restrict the quantity of a good that can be imported into a country, generally for a specified period of time.

Demand curve

Graph of the inverse demand function.

Strategic groups

Groups sharing distinct business models or catering to specific market segments in an industry.

Monopolistic competition

Highly competitive form of imperfect competition; the competitive characteristic is a notably large number of firms, while the monopoly aspect is the result of product differentiation.

Foreign currency reserves

Holding by the central bank of non-domestic currency deposits and non-domestic bonds.

Horizontal demand schedule

Implies that at a given price, the response in the quantity demanded is infinite.

Vertical demand schedule

Implies that some fixed quantity is demanded, regardless of price.

Nonconventional cash flow

In a nonconventional cash flow pattern, the initial outflow is not followed by inflows only, but the cash flows can flip from positive (inflows) to negative (outflows) again (or even change signs several times).

Cash

In accounting contexts, cash on hand (e.g., petty cash and cash not yet deposited to the bank) and demand deposits held in banks and similar accounts that can be used in payment of obligations.

Saving

In economics, income not spent.

Price stability

In economics, refers to an inflation rate that is low on average and not subject to wide fluctuation.

Spread

In general, the difference in yield between different fixed income securities. Often used to refer to the difference between the yield-to-maturity and the benchmark.

Discount rates

In general, the interest rate used to calculate a present value. In the money market, however, discount rate is a specific type of quoted rate.

Portfolio company

In private equity, the company that is being invested in.

Monopoly

In pure monopoly markets, there are no substitutes for the given product or service. There is a single seller, which exercises considerable power over pricing and output decisions.

Historical cost

In reference to assets, the amount paid to purchase an asset, including any costs of acquisition and/or preparation; with reference to liabilities, the amount of proceeds received in exchange in issuing the liability.

Active strategy

In reference to short-term cash management, an investment strategy characterized by monitoring and attempting to capitalize on market conditions to optimize the risk and return relationship of short-term investments.

Passive strategy

In reference to short-term cash management, it is an investment strategy characterized by simple decision rules for making daily investments.

Triangle patterns

In technical analysis, a continuation chart pattern that forms as the range between high and low prices narrows, visually forming a triangle.

Line chart

In technical analysis, a plot of price data, typically closing prices, with a line connecting the points.

Support

In technical analysis, a price range in which buying activity is sufficient to stop the decline in the price of a security.

Resistance

In technical analysis, a price range in which selling activity is sufficient to stop the rise in the price of a security.

Retracement

In technical analysis, a reversal in the movement of a security's price such that it is counter to the prevailing longerterm price trend.

Head and shoulders pattern

In technical analysis, a reversal pattern that is formed in three parts: a left shoulder, head, and right shoulder; used to predict a change from an uptrend to a downtrend.

Double top

In technical analysis, a reversal pattern that is formed when an uptrend reverses twice at roughly the same high price level; used to predict a change from an uptrend to a downtrend.

Triple tops

In technical analysis, a reversal pattern that is formed when the price forms three peaks at roughly the same price level; used to predict a change from an uptrend to a downtrend.

Triple bottoms

In technical analysis, a reversal pattern that is formed when the price forms three troughs at roughly the same price level; used to predict a change from a downtrend to an uptrend.

Double bottoms

In technical analysis, a reversal pattern that is formed when the price reaches a low, rebounds, and then sells off back to the first low level; used to predict a change from a downtrend to an uptrend.

Divergence

In technical analysis, a term that describes the case when an indicator moves differently from the security being analyzed.

Agency RMBS

In the United States, securities backed by residential mortgage loans and guaranteed by a federal agency or guaranteed by either of the two GSEs (Fannie Mae and Freddie Mac).

Non-agency RMBS

In the United States, securities issued by private entities that are not guaranteed by a federal agency or a GSE.

Premium

In the case of bonds, premium refers to the amount by which a bond is priced above its face (par) value. In the case of an option, the amount paid for the option contract.

Leverage

In the context of corporate finance, leverage refers to the use of fixed costs within a company's cost structure. Fixed costs that are operating costs (such as depreciation or rent) create operating leverage. Fixed costs that are financial costs (such as interest expense) create financial leverage.

Float

In the context of customer receipts, the amount of money that is in transit between payments made by customers and the funds that are usable by the company.

Transactions motive

In the context of inventory management, the need for inventory as part of the routine production-sales cycle.

Break point

In the context of the weighted average cost of capital (WACC), a break point is the amount of capital at which the cost of one or more of the sources of capital changes, leading to a change in the WACC.

Real income

Income adjusted for the effect of inflation on the purchasing power of money.

Accounting profit

Income as reported on the income statement, in accordance with prevailing accounting standards, before the provisions for income tax expense. Also called income before taxes orpretax income.

Economic union

Incorporates all aspects of a common market and in addition requires common economic institutions and coordination of economic policies among members.

Decreasing returns to scale

Increase in cost per unit resulting from increased production.

Diseconomies of scale

Increase in cost per unit resulting from increased production.

Income

Increases in economic benefits in the form of inflows or enhancements of assets, or decreases of liabilities that result in an increase in equity (other than increases resulting from contributions by owners).

Capital deepening investment

Increases the stock of capital relative to labor.

Independent projects

Independent projects are projects whose cash flows are independent of each other.

Sector indices

Indices that represent and track different economic sectors—such as consumer goods, energy, finance, health care, and technology—on either a national, regional, or global basis.

Defined contribution pension plans

Individual accounts to which an employee and typically the employer makes contributions, generally on a tax-advantaged basis. The amounts of contributions are defined at the outset, but the future value of the benefit is unknown. The employee bears the investment risk of the plan assets.

Complete markets

Informally, markets in which the variety of distinct securities traded is so broad that any desired payoff in a future state-of-the-world is achievable.

Inelastic

Insensitive to price changes.

Clearing instructions

Instructions that indicate how to arrange the final settlement ("clearing") of a trade.

Execution instructions

Instructions that indicate how to fill an order.

Limit order

Instructions to a broker or exchange to obtain the best price immediately available when filling an order, but in no event accept a price higher than a specified (limit) price when buying or accept a price lower than a specified (limit) price when selling.

Market order

Instructions to a broker or exchange to obtain the best price immediately available when filling an order.

Validity instructions

Instructions which indicate when the order may be filled.

Pure discount instruments

Instruments that pay interest as the difference between the amount borrowed and the amount paid back.

Accrued interest

Interest earned but not yet paid.

Central bank funds rates

Interest rates at which central bank funds are bought (borrowed) and sold (lent) for maturities ranging from overnight to one year. Called Federal or Fed funds rates in the United States.

Bridge financing

Interim financing that provides funds until permanent financing can be arranged.

Aggregate demand curve

Inverse relationship between the price level and real output.

Distressed investing

Investing in securities of companies in financial difficulties. Private equity funds typically buy the debt of mature companies in financial difficulties.

Book building

Investment bankers' process of compiling a "book" or list of indications of interest to buy part of an offering.

Venture capital

Investments that provide "seed" or start-up capital, early-stage financing, or mezzanine financing to companies that are in the early stages of development and require additional capital for expansion.

Other comprehensive income

Items of comprehensive income that are not reported on the income statement; comprehensive income minus net income.

Balloon payment

Large payment required at maturity to retire a bond's outstanding principal amount.

Indenture

Legal contract that describes the form of a bond, the obligations of the issuer, and the rights of the bondholders. Also called the trust deed.

Common market

Level of economic integration that incorporates all aspects of the customs union and extends it by allowing free movement of factors of production among members.

Management buy-ins

Leveraged buyout in which the current management team is being replaced and the acquiring team will be involved in managing the company.

Accrued expenses

Liabilities related to expenses that have been incurred but not yet paid as of the end of an accounting period—an example of an accrued expense is rent that has been incurred but not yet paid, resulting in a liability "rent payable." Also called accrued liabilities.

Price limits

Limits imposed by a futures exchange on the price change that can occur from one day to the next.

Non-recourse loan

Loan in which the lender does not have a shortfall claim against the borrower, so the lender can look only to the property to recover the outstanding mortgage balance.

Recourse loan

Loan in which the lender has a claim against the borrower for any shortfall between the outstanding mortgage balance and the proceeds received from the sale of the property.

Amortizing loan

Loan with a payment schedule that calls for periodic payments of interest and repayments of principal.

Syndicated loans

Loans from a group of lenders to a single borrower.

Statistical inference

Making forecasts, estimates, or judgments about a larger group from a smaller group actually observed; using a sample statistic to infer the value of an unknown population parameter.

Alternative investment markets

Market for investments other than traditional securities investments (i.e., traditional common and preferred shares and traditional fixed income instruments). The term usually encompasses direct and indirect investment in real estate (including timberland and farmland) and commodities (including precious metals); hedge funds, private equity, and other investments requiring specialized due diligence.

Oligopoly

Market structure with a relatively small number of firms supplying the market.

Labor markets

Markets for labor services.

Goods markets

Markets for the output of production.

Factor markets

Markets for the purchase and sale of factors of production.

Traditional investment markets

Markets for traditional investments, which include all publicly traded debts and equities and shares in pooled investment vehicles that hold publicly traded debts and/or equities.

Spot markets

Markets in which assets are traded for immediate delivery.

Secondary bond markets

Markets in which existing bonds are traded among investors.

Primary bond markets

Markets in which issuers first sell bonds to investors to raise capital.

Limitations on liens

Meant to put limits on how much secured debt an issuer can have.

Price return

Measures only the price appreciation or percentage change in price of the securities in an index or portfolio.

Price elasticity of demand

Measures the percentage change in the quantity demanded, given a percentage change in the price of a given product.

Total return

Measures the price appreciation, or percentage change in price of the securities in an index or portfolio, plus any income received over the period.

Marginal product

Measures the productivity of each unit of input and is calculated by taking the difference in total product from adding another unit of input (assuming other resource quantities are held constant).

Average product

Measures the productivity of inputs on average and is calculated by dividing total product by the total number of units for a given input that is used to generate that output.

Just-in-time (JIT) method

Method of managing inventory that minimizes in-process inventory stocks.

Development capital

Minority equity investments in more mature companies that are looking for capital to expand or restructure operations, enter new markets, or finance major acquisitions.

Transactions money balances

Money balances that are held to finance transactions.

Margin loan

Money borrowed from a broker to purchase securities.

Precautionary money balances

Money held to provide a buffer against unforeseen events that might require money.

Cash market securities

Money market securities settled on a "same day" or "cash settlement" basis.

Fiat money

Money that is not convertible into any other commodity.

Speculative money balances

Monies held in anticipation that other assets will decline in value.

Currencies

Monies issued by national monetary authorities.

Prepayment penalty mortgages

Mortgages that stipulate a monetary penalty if a borrower prepays within a certain time period after the mortgage is originated.

Mutually exclusive projects

Mutually exclusive projects compete directly with each other. For example, if Projects A and B are mutually exclusive, you can choose A or B, but you cannot choose both.

Say's law

Named for French economist J.B. Say: All that is produced will be sold because supply creates its own demand.

Minsky moment

Named for Hyman Minksy: A point in a business cycle when, after individuals become overextended in borrowing to finance speculative investments, people start realizing that something is likely to go wrong and a panic ensues leading to asset sell-offs.

Deflation

Negative inflation.

Inventory investment

Net change in business inventory.

Basic EPS

Net earnings available to common shareholders (i.e., net income minus preferred dividends) divided by the weighted average number of common shares outstanding.

Real interest rate

Nominal interest rate minus the expected rate of inflation.

Fixed rate perpetual preferred stock

Nonconvertible, noncallable preferred stock that has a fixed dividend rate and no maturity date.

Skewed

Not symmetrical.

Pseudo-random numbers

Numbers produced by random number generators.

Option-adjusted spread

OAS = Z-spread - Option value (in basis points per year).

Non-current liabilities

Obligations that broadly represent a probable sacrifice of economic benefits in periods generally greater than one year in the future.

Time-series data

Observations of a variable over time.

Longitudinal data

Observations on characteristic(s) of the same observational unit through time.

Cross-sectional data

Observations over individual units at a point in time, as opposed to time-series data.

Paired observations

Observations that are dependent on each other.

Panel data

Observations through time on a single characteristic of multiple observational units.

Fixed price tender offer

Offer made by a company to repurchase a specific number of shares at a fixed price that is typically at a premium to the current market price.

Pari passu

On an equal footing.

Free trade areas

One of the most prevalent forms of regional integration, in which all barriers to the flow of goods and services among members have been eliminated.

Out of the money

Options that, if exercised, would require the payment of more money than the value received and therefore would not be currently exercised.

Out-of-the-money

Options that, if exercised, would require the payment of more money than the value received and therefore would not be currently exercised.

In the money

Options that, if exercised, would result in the value received being worth more than the payment required to exercise.

In-the-money

Options that, if exercised, would result in the value received being worth more than the payment required to exercise.

Expenses

Outflows of economic resources or increases in liabilities that result in decreases in equity (other than decreases because of distributions to owners); reductions in net assets associated with the creation of revenues.

Export subsidy

Paid by the government to the firm when it exports a unit of a good that is being subsidized.

Cartel

Participants in collusive agreements that are made openly and formally.

Limited partners

Partners with limited liability. Limited partnerships in hedge and private equity funds are typically restricted to investors who are expected to understand and to be able to assume the risks associated with the investments.

Interest

Payment for lending funds.

Rent

Payment for the use of property.

Accounting (or explicit) costs

Payments to non-owner parties for services or resources they supply to the firm.

Unemployed

People who are actively seeking employment but are currently without a job.

Exchanges

Places where traders can meet to arrange their trades.

Defined benefit pension plans

Plan in which the company promises to pay a certain annual amount (defined benefit) to the employee after retirement. The company bears the investment risk of the plan assets.

Loss severity

Portion of a bond's value (including unpaid interest) an investor loses in the event of default.

Cumulative preference shares

Preference shares for which any dividends that are not paid accrue and must be paid in full before dividends on common shares can be paid.

Non-cumulative preference shares

Preference shares for which dividends that are not paid in the current or subsequent periods are forfeited permanently (instead of being accrued and paid at a later date).

Non-participating preference shares

Preference shares that do not entitle shareholders to share in the profits of the company. Instead, shareholders are only entitled to receive a fixed dividend payment and the par value of the shares in the event of liquidation.

Participating preference shares

Preference shares that entitle shareholders to receive the standard preferred dividend plus the opportunity to receive an additional dividend if the company's profits exceed a pre-specified level.

Liabilities

Present obligations of an enterprise arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits; creditors' claims on the resources of a company.

Total revenue

Price times the quantity of units sold.

Seniority ranking

Priority of payment of various debt obligations.

Priority of claims

Priority of payment, with the most senior or highest ranking debt having the first claim on the cash flows and assets of the issuer.

Hedge funds

Private investment vehicles that typically use leverage, derivatives, and long and short investment strategies.

Prior probabilities

Probabilities reflecting beliefs prior to the arrival of new information.

Objective probabilities

Probabilities that generally do not vary from person to person; includes a priori and objective probabilities.

Matrix pricing

Process of estimating the market discount rate and price of a bond based on the quoted or flat prices of more frequently traded comparable bonds.

Price takers

Producers that must accept whatever price the market dictates.

Stock-out losses

Profits lost from not having sufficient inventory on hand to satisfy demand.

Quota rents

Profits that foreign producers can earn by raising the price of their goods higher than they would without a quota.

Investment property

Property used to earn rental income or capital appreciation (or both).

Production function

Provides the quantitative link between the level of output that the economy can produce and the inputs used in the production process.

Sinking fund arrangement

Provision that reduces the credit risk of a bond issue by requiring the issuer to retire a portion of the bond's principal outstanding each year.

Credit enhancements

Provisions that may be used to reduce the credit risk of a bond issue.

Cross-default provisions

Provisions whereby events of default such as non-payment of interest on one bond trigger default on all outstanding debt; implies the same default probability for all issues.

Percentiles

Quantiles that divide a distribution into 100 equal parts.

Quintiles

Quantiles that divide a distribution into five equal parts.

Quartiles

Quantiles that divide a distribution into four equal parts.

Average revenue

Quantity sold divided into total revenue.

Notching

Ratings adjustment methodology where specific issues from the same borrower may be assigned different credit ratings.

Accounts receivable turnover

Ratio of sales on credit to the average balance in accounts receivable.

Profitability ratios

Ratios that measure a company's ability to generate profitable sales from its resources (assets).

Solvency ratios

Ratios that measure a company's ability to meet its long-term obligations.

Asset utilization ratios

Ratios that measure how efficiently a company performs day-to-day tasks, such as the collection of receivables and management of inventory.

Operating efficiency ratios

Ratios that measure how efficiently a company performs day-to-day tasks, such as the collection of receivables and management of inventory.

Activity ratios

Ratios that measure how efficiently a company performs day-to-day tasks, such as the collection of receivables and management of inventory. Also called asset utilization ratios or operating efficiency ratios.

Valuation ratios

Ratios that measure the quantity of an asset or flow (e.g., earnings) in relation to the price associated with a specified claim (e.g., a share or ownership of the enterprise).

Per capita real GDP

Real GDP divided by the size of the population, often used as a measure of the average standard of living in a country.

Economies of scale

Reduction in cost per unit resulting from increased production.

Increasing returns to scale

Reduction in cost per unit resulting from increased production.

Economic stabilization

Reduction of the magnitude of economic fluctuations.

Producer price index

Reflects the price changes experienced by domestic producers in a country.

Wholesale price index

Reflects the price changes experienced by domestic producers in a country.

Diffusion index

Reflects the proportion of the index's components that are moving in a pattern consistent with the overall index.

Price index

Represents the average prices of a basket of goods and services.

Assets

Resources controlled by an enterprise as a result of past events and from which future economic benefits to the enterprise are expected to flow.

Renewable resources

Resources that can be replenished, such as a forest.

Net revenue

Revenue after adjustments (e.g., for estimated returns or for amounts unlikely to be collected).

Accrued revenue

Revenue that has been earned but not yet billed to customers as of the end of an accounting period.

Unbilled revenue

Revenue that has been earned but not yet billed to customers as of the end of an accounting period. Also called accrued revenue.

Priced risk

Risk for which investors demand compensation for bearing (e.g. equity risk, company-specific factors, macroeconomic factors).

Systematic risk

Risk that affects the entire market or economy; it cannot be avoided and is inherent in the overall market. Systematic risk is also known as non diversifiable or market risk.

Non-financial risks

Risks that arise from sources other than changes in the external financial markets, such as changes in accounting rules, legal environment, or tax rates.

Safety-first rules

Rules for portfolio selection that focus on the risk that portfolio value will fall below some minimum acceptable level over some time horizon.

Secondary precedence rules

Rules that determine how to rank orders placed at the same time.

Perfectly inelastic

Said of a good or service that is completely insensitive to a change in the value of a specified variable (e.g., price).

Perfectly elastic

Said of a good or service that is infinitely sensitive to a change in the value of a specified variable (e.g., price).

Elastic

Said of a good or service when the magnitude of elasticity is greater than one.

Liquid market

Said of a market in which traders can buy or sell with low total transaction costs when they want to trade.

Operationally efficient

Said of a market, a financial system, or an economy that has relatively low transaction costs.

Allocationally efficient

Said of a market, a financial system, or an economy that promotes the allocation of resources to their highest value uses.

Monopolist

Said of an entity that is the only seller in its market.

American-style

Said of an option contract that can be exercised at any time up to the option's expiration date.

Bermuda-style

Said of an option contract that can be exercised on specified dates up to the option's expiration date.

European-style

Said of an option contract that can only be exercised on the option's expiration date.

At-the-money

Said of an option in which the underlying's price equals the exercise price.

Time value decay

Said of an option when, at expiration, no time value remains and the option is worth only its exercise value.

Complements

Said of goods which tend to be used together; technically, two goods whose cross-price elasticity of demand is negative.

Behind the market

Said of prices specified in orders that are worse than the best current price; e.g., for a limit buy order, a limit price below the best bid.

Transparency

Said of something (e.g., a market) in which information is fully disclosed to the public and/or regulators.

Inelastic supply

Said of supply that is insensitive to the price of goods sold.

Substitutes

Said of two goods or services such that if the price of one increases the demand for the other tends to increase, holding all other things equal (e.g., butter and margarine).

Gross margin

Sales minus the cost of sales (i.e., the cost of goods sold for a manufacturing company).

Gross profit

Sales minus the cost of sales (i.e., the cost of goods sold for a manufacturing company).

Off-the-run

Seasoned government bonds are off-the-run securities; they are not the most recently issued or the most actively traded.

Trading securities

Securities held by a company with the intent to trade them. Also called held-for-trading securities.

Dealing securities

Securities held by banks or other financial intermediaries for trading purposes.

Private equity securities

Securities that are not listed on public exchanges and have no active secondary market. They are issued primarily to institutional investors via non-public offerings, such as private placements.

Capital market securities

Securities with maturities at issuance longer than one year.

Electronic communications networks

See alternative trading systems.

Multilateral trading facilities

See alternative trading systems.

Principle of no arbitrage

See arbitrage-free pricing.

Cost of carry

See carry.

Common stock

See common shares.

Depression

See contraction.

Running yield

See current yield.

Cyclical

See cyclical companies.

Data snooping

See data mining.

Split coupon bond

See deferred coupon bond.

Direct method

See direct format.

Intrinsic value

See exercise value.

Capital lease

See finance lease.

Floaters

See floating-rate notes.

Fill or kill

See immediate or cancel order.

Indirect method

See indirect format.

Linker

See inflation-linked bond.

Partial duration

See key rate duration.

Performance bond

See margin bond.

Daily settlement

See mark to market and marking to market.

Required rate of return

See market discount rate.

Required yield

See market discount rate.

Term structure

See maturity structure.

Contract rate

See mortgage rate.

Note rate

See mortgage rate.

Cash-settled forwards

See non-deliverable forwards.

Contracts for differences

See non-deliverable forwards.

Option contract

See option.

Conventional bond

See plain vanilla bond.

Preferred stock

See preference shares.

Early repayment option

See prepayment option.

Public offer

See public offering.

Agency bonds

See quasi-government bond.

Haircut

See repo margin.

Discount margin

See required margin.

Spread over the benchmark

See required yield spread.

Reserve funds

See reserve accounts.

Semiannual bond equivalent yield

See semiannual bond basis yield.

Special purpose vehicle

See special purpose entity.

Cash markets

See spot markets.

Cash prices

See spot prices.

Stop-loss order

See stop order.

Firm commitment offering

See underwritten offering.

VaR

See value at risk.

Average life

See weighted average life.

Redemption yield

See yield to maturity.

Yield to redemption

See yield to maturity.

Pure discount bonds

See zero-coupon bonds.

Callable common shares

Shares that give the issuing company the option (or right), but not the obligation, to buy back the shares from investors at a call price that is specified when the shares are originally issued.

Treasury shares

Shares that were issued and subsequently repurchased by the company.

Treasury stock

Shares that were issued and subsequently repurchased by the company.

Current liabilities

Short-term obligations, such as accounts payable, wages payable, or accrued liabilities, that are expected to be settled in the near future, typically one year or less.

Foreign portfolio investment

Shorter-term investment by individuals, firms, and institutional investors (e.g., pension funds) in foreign financial instruments such as foreign stocks and foreign government bonds.

Variable-rate note

Similar to a floating-rate note, except that the spread is variable rather than constant.

Legal tender

Something that must be accepted when offered in exchange for goods and services.

Risk-neutral pricing

Sometimes said of derivatives pricing, uses the fact that arbitrage opportunities guarantee that a risk-free portfolio consisting of the underlying and the derivative must earn the risk-free rate.

Import license

Specifies the quantity of a good that can be imported into a country.

Domestic content provisions

Stipulate that some percentage of the value added or components used in production should be of domestic origin.

Term maturity structure

Structure for a bond issue in which the bond's notional principal is paid off in a lump sum at maturity.

Serial maturity structure

Structure for a bond issue in which the maturity dates are spread out during the bond's life; a stated number of bonds mature and are paid off each year before final maturity.

Point of sale (POS)

Systems that capture transaction data at the physical location in which the sale is made.

Direct taxes

Taxes levied directly on income, wealth, and corporate profits.

Indirect taxes

Taxes such as taxes on spending, as opposed to direct taxes.

Tariffs

Taxes that a government levies on imported goods.

Deductible temporary differences

Temporary differences that result in a reduction of or deduction from taxable income in a future period when the balance sheet item is recovered or settled.

Taxable temporary differences

Temporary differences that result in a taxable amount in a future period when determining the taxable profit as the balance sheet item is recovered or settled.

Contractionary

Tending to cause the real economy to contract.

Expansionary

Tending to cause the real economy to grow.

Technology of production

The "rules" that govern the transformation of inputs into finished goods and services.

Diluted EPS

The EPS that would result if all dilutive securities were converted into common shares.

Fed funds rate

The US interbank lending rate on overnight borrowings of reserves.

Federal funds rate

The US interbank lending rate on overnight borrowings of reserves.

Capacity

The ability of the borrower to make its debt payments on time.

Liquidity

The ability to purchase or sell an asset quickly and easily at a price close to fair market value. The ability to meet short-term obligations using assets that are the most readily converted into cash.

Financial flexibility

The ability to react and adapt to financial adversities and opportunities.

Matching principle

The accounting principle that expenses should be recognized when the associated revenue is recognized.

Double-entry accounting

The accounting system of recording transactions in which every recorded transaction affects at least two accounts so as to keep the basic accounting equation (assets = liabilities + owners' equity) in balance.

Capital stock

The accumulated amount of buildings, machinery, and equipment used to produce goods and services.

Human capital

The accumulated knowledge and skill that workers acquire from education, training, or life experience and the corresponding present value of future earnings to be generated by said skilled individual.

Income tax paid

The actual amount paid for income taxes in the period; not a provision, but the actual cash outflow.

Free cash flow

The actual cash that would be available to the company's investors after making all investments necessary to maintain the company as an ongoing enterprise (also referred to as free cash flow to the firm); the internally generated funds that can be distributed to the company's investors (e.g., shareholders and bondholders) without impairing the value of the company.

Yield

The actual return on a debt security if it is held to maturity.

Marginal value

The added value from an additional unit of a good.

Total product

The aggregate sum of production for the firm during a time period.

Futures price

The agreed-upon price of a futures contract.

Capital budgeting

The allocation of funds to relatively long-range projects or investments.

Fair value

The amount at which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's-length transaction; the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.

Carrying amount

The amount at which an asset or liability is valued according to accounting principles.

Tax base

The amount at which an asset or liability is valued for tax purposes.

Contribution margin

The amount available for fixed costs and profit after paying variable costs; revenue minus variable costs.

Abnormal return

The amount by which a security's actual return differs from its expected return, given the security's risk and the market's return.

Effective annual rate

The amount by which a unit of currency will grow in a year with interest on interest included.

Economic loss

The amount by which accounting profit is less than normal profit.

Revenue

The amount charged for the delivery of goods or services in the ordinary activities of a business over a stated period; the inflows of economic resources to a company over a stated period.

Quantity

The amount of a product that consumers are willing and able to buy at each price level.

Quantity demanded

The amount of a product that consumers are willing and able to buy at each price level.

Marginal revenue product

The amount of additional revenue received from employing an additional unit of an input.

Face value

The amount of cash payable by a company to the bondholders when the bonds mature; the promised payment at maturity separate from any coupon payment.

Relative dispersion

The amount of dispersion relative to a reference value or benchmark.

Principal

The amount of funds originally invested in a project or instrument; the face value to be paid at maturity.

Earnings per share

The amount of income earned during a period per share of common stock.

Option premium

The amount of money a buyer pays and seller receives to engage in an option transaction.

Margin

The amount of money that a trader deposits in a margin account. The term is derived from the stock market practice in which an investor borrows a portion of the money required to purchase a certain amount of stock. In futures markets, there is no borrowing so the margin is more of a down payment or performance bond.

Productivity

The amount of output produced by workers in a given period of time—for example, output per hour worked; measures the efficiency of labor.

Par value

The amount of principal on a bond.

Risk tolerance

The amount of risk an investor is willing and able to bear to achieve an investment goal.

Disbursement float

The amount of time between check issuance and a check's clearing back against the company's account.

Absolute dispersion

The amount of variability present without comparison to any reference point or benchmark.

Per unit contribution margin

The amount that each unit sold contributes to covering fixed costs—that is, the difference between the price per unit and the variable cost per unit.

Initial margin

The amount that must be deposited in a clearinghouse account when entering into a futures contract.

Committed capital

The amount that the limited partners have agreed to provide to the private equity fund.

Salvage value

The amount the company estimates that it can sell the asset for at the end of its useful life. Also called residual value.

Future value (FV)

The amount to which a payment or series of payments will grow by a stated future date.

Industry analysis

The analysis of a specific branch of manufacturing, service, or trade.

Screening

The application of a set of criteria to reduce a set of potential investments to a smaller set having certain desired characteristics.

Macaulay duration

The approximate amount of time a bond would have to be held for the market discount rate at purchase to be realized if there is a single change in interest rate. It indicates the point in time when the coupon reinvestment and price effects of a change in yield-to- maturity offset each other.

Population mean

The arithmetic mean value of a population; the arithmetic mean of all the observations or values in the population.

Periodicity

The assumed number of periods in the year, typically matches the frequency of coupon payments.

Diffuse prior

The assumption of equal prior probabilities.

Complete preferences

The assumption that a consumer is able to make a comparison between any two possible bundles of goods.

Homogeneity of expectations

The assumption that all investors have the same economic expectations and thus have the same expectations of prices, cash flows, and other investment characteristics.

Risk averse

The assumption that an investor will choose the least risky alternative.

Non-satiation

The assumption that the consumer could never have so much of a preferred good that she would refuse any more, even if it were free; sometimes referred to as the "more is better" assumption.

Transitive preferences

The assumption that when comparing any three distinct bundles, A, B, and C, if A is preferred to B and simultaneously B is preferred to C, then it must be true thatA is preferred to C.

Unit labor cost

The average labor cost to produce one unit of output.

Moving average

The average of the closing price of a security over a specified number of periods. With each new period, the average is recalculated.

Mean excess return

The average rate of return in excess of the risk-free rate.

Sharpe ratio

The average return in excess of the risk-free rate divided by the standard deviation of return; a measure of the average excess return earned per unit of standard deviation of return.

Target semivariance

The average squared deviation below a target value.

Semivariance

The average squared deviation below the mean.

Weak-form efficient market hypothesis

The belief that security prices fully reflect all past market data, which refers to all historical price and volume trading information.

Survivorship bias

The bias resulting from a test design that fails to account for companies that have gone bankrupt, merged, or are otherwise no longer reported in a database.

Limit order book

The book or list of limit orders to buy and sell that pertains to a security.

Effective interest rate

The borrowing rate or market rate that a company incurs at the time of issuance of a bond.

Macroeconomics

The branch of economics that deals with aggregate economic quantities, such as national output and national income.

Microeconomics

The branch of economics that deals with markets and decision making of individual economic units, including consumers and businesses.

Theory of the consumer

The branch of microeconomics that deals with consumption—the demand for goods and services—by utility-maximizing individuals.

Theory of the firm

The branch of microeconomics that deals with the supply of goods and services by profit-maximizing firms.

Principal business activity

The business activity from which a company derives a majority of its revenues and/or earnings.

Long

The buyer of a derivative contract. Also refers to the position of owning a derivative.

Performance measurement

The calculation of returns in a logical and consistent manner.

Free cash flow to equity (FCFE)

The cash flow available to a company's common shareholders after all operating expenses, interest, and principal payments have been made, and necessary investments in working and fixed capital have been made.

Free cash flow to the firm (FCFF)

The cash flow available to the company's suppliers of capital after all operating expenses have been paid and necessary investments in working capital and fixed capital have been made.

Incremental cash flow

The cash flow that is realized because of a decision; the changes or increments to cash flows resulting from a decision or action.

Total comprehensive income

The change in equity during a period resulting from transaction and other events, other than those changes resulting from transactions with owners in their capacity as owners.

Comprehensive income

The change in equity of a business enterprise during a period from nonowner sources; includes all changes in equity during a period except those resulting from investments by owners and distributions to owners; comprehensive income equals net income plus other comprehensive income.

Marginal revenue

The change in total revenue divided by the change in quantity sold; simply, the additional revenue from selling one more unit.

Constant returns to scale

The characteristic of constant per-unit costs in the presence of increased production.

FX swap

The combination of a spot and a forward FX transaction.

Market structure

The competitive environment (perfect competition, monopolistic competition, oligopoly, and monopoly).

Unanticipated (unexpected) inflation

The component of inflation that is a surprise.

Unexpected inflation

The component of inflation that is a surprise.

Time-weighted rate of return

The compound rate of growth of one unit of currency invested in a portfolio during a stated measurement period; a measure of investment performance that is not sensitive to the timing and amount of withdrawals or additions to the portfolio.

Law of one price

The condition in a financial market in which two equivalent financial instruments or combinations of financial instruments can sell for only one price. Equivalent to the principle that no arbitrage opportunities are possible.

Market equilibrium

The condition in which the quantity willingly offered for sale by sellers at a given price is just equal to the quantity willingly demanded by buyers at that same price.

Income constraint

The constraint on a consumer to spend, in total, no more than his income.

Annual percentage rate

The cost of borrowing expressed as a yearly rate.

Cost of debt

The cost of debt financing to a company, such as when it issues a bond or takes out a bank loan.

Marginal cost

The cost of producing an additional unit of a good.

Cost of preferred stock

The cost to a company of issuing preferred stock; the dividend yield that a company must commit to pay preferred stockholders.

Pass-through rate

The coupon rate of a mortgage pass-through security.

Replication

The creation of an asset or portfolio from another asset, portfolio, and/or derivative.

Time tranching

The creation of classes or tranches in an ABS/MBS that possess different (expected) maturities.

Long-run average total cost curve

The curve describing average total costs when no costs are considered fixed.

Short-run average total cost curve

The curve describing average total costs when some costs are considered fixed.

Date of book closure

The date that a shareholder listed on the corporation's books will be deemed to have ownership of the shares for purposes of receiving an upcoming dividend; two business days after the ex-dividend date.

Date of record

The date that a shareholder listed on the corporation's books will be deemed to have ownership of the shares for purposes of receiving an upcoming dividend; two business days after the ex-dividend date.

Holder-of-record date

The date that a shareholder listed on the corporation's books will be deemed to have ownership of the shares for purposes of receiving an upcoming dividend; two business days after the ex-dividend date.

Owner-of-record date

The date that a shareholder listed on the corporation's books will be deemed to have ownership of the shares for purposes of receiving an upcoming dividend; two business days after the ex-dividend date.

Record date

The date that a shareholder listed on the corporation's books will be deemed to have ownership of the shares for purposes of receiving an upcoming dividend; two business days after the ex-dividend date.

Shareholder-of-record date

The date that a shareholder listed on the corporation's books will be deemed to have ownership of the shares for purposes of receiving an upcoming dividend; two business days after the ex-dividend date.

Repurchase date

The date when the party who sold the security at the inception of a repurchase agreement buys the security back from the cash lending counterparty.

Payable date

The day that the company actually mails out (or electronically transfers) a dividend payment.

Payment date

The day that the company actually mails out (or electronically transfers) a dividend payment.

Declaration date

The day that the corporation issues a statement declaring a specific dividend.

Tactical asset allocation

The decision to deliberately deviate from the strategic asset allocation in an attempt to add value based on forecasts of the near-term relative performance of asset classes.

Structural (or cyclically adjusted) budget deficit

The deficit that would exist if the economy was at full employment (or full potential output).

Risk aversion

The degree of an investor's inability and unwillingness to take risk.

Inflation uncertainty

The degree to which economic agents view future rates of inflation as difficult to forecast.

Portfolio demand for money

The demand to hold speculative money balances based on the potential opportunities or risks that are inherent in other financial instruments.

Speculative demand for money

The demand to hold speculative money balances based on the potential opportunities or risks that are inherent in other financial instruments. Also called portfolio demand for money.

Working capital

The difference between current assets and current liabilities.

Budget surplus/deficit

The difference between government revenue and expenditure for a stated fixed period of time.

Net income

The difference between revenue and expenses; what remains after subtracting all expenses (including depreciation, interest, and taxes) from revenue.

Market bid-ask spread

The difference between the best bid and the best offer.

Time value

The difference between the market price of the option and its intrinsic value, determined by the uncertainty of the underlying over the remaining life of the option.

Repo margin

The difference between the market value of the security used as collateral and the value of the loan. Also calledhaircut.

Range

The difference between the maximum and minimum values in a dataset.

Sampling error

The difference between the observed value of a statistic and the quantity it is intended to estimate.

Bid-ask spread

The difference between the prices at which dealers will buy from a customer (bid) and sell to a customer (offer or ask). It is often used as an indicator of liquidity.

Bid-offer spread

The difference between the prices at which dealers will buy from a customer (bid) and sell to a customer (offer or ask). It is often used as an indicator of liquidity.

LIFO reserve

The difference between the reported LIFO inventory carrying amount and the inventory amount that would have been reported if the FIFO method had been used (in other words, the FIFO inventory value less the LIFO inventory value).

Interquartile range

The difference between the third and first quartiles of a dataset.

Producer surplus

The difference between the total revenue sellers receive from selling a given amount of a good and the total variable cost of producing that amount.

Net exports

The difference between the value of a country's exports and the value of its imports (i.e., value of exports minus imports).

Consumer surplus

The difference between the value that a consumer places on units purchased and the amount of money that was required to pay for them.

Required yield spread

The difference between the yield-to-maturity on a new bond and the benchmark rate; additional compensation required by investors for the difference in risk and tax status of a bond relative to a government bond. Sometimes called thespread over the benchmark.

Total surplus

The difference between total value to buyers and the total variable cost to sellers; made up of the sum of consumer surplus and producer surplus.

Sampling distribution

The distribution of all distinct possible values that a statistic can assume when computed from samples of the same size randomly drawn from the same population.

Prospectus

The document that describes the terms of a new bond issue and helps investors perform their analysis on the issue.

Central banks

The dominant bank in a country, usually with official or semi-official governmental status.

Type II error

The error of not rejecting a false null hypothesis.

Type I error

The error of rejecting a true null hypothesis.

Risk budgeting

The establishment of objectives for individuals, groups, or divisions of an organization that takes into account the allocation of an acceptable level of risk.

Linear interpolation

The estimation of an unknown value on the basis of two known values that bracket it, using a straight line between the two known values.

Credit analysis

The evaluation of credit risk; the evaluation of the creditworthiness of a borrower or counterparty.

Performance appraisal

The evaluation of risk-adjusted performance; the evaluation of investment skill.

Fundamental analysis

The examination of publicly available information and the formulation of forecasts to estimate the intrinsic value of assets.

Owners' equity

The excess of assets over liabilities; the residual interest of shareholders in the assets of an entity after deducting the entity's liabilities. Also called shareholders' equity.

Equity risk premium

The expected return on equities minus the risk-free rate; the premium that investors demand for investing in equities.

Variance

The expected value (the probability-weighted average) of squared deviations from a random variable's expected value.

Terminal value

The expected value of a share at the end of the investment horizon—in effect, the expected selling price.

Terminal stock value

The expected value of a share at the end of the investment horizon—in effect, the expected selling price. Also calledterminal value.

Conditional expected value

The expected value of a stated event given that another event has occurred.

Financial leverage

The extent to which a company can effect, through the use of debt, a proportional change in the return on common equity that is greater than a given proportional change in operating income; also, short for the financial leverage ratio.

Statement of financial condition

The financial statement that presents an entity's current financial position by disclosing resources the entity controls (its assets) and the claims on those resources (its liabilities and equity claims), as of a particular point in time (the date of the balance sheet).

Statement of financial position

The financial statement that presents an entity's current financial position by disclosing resources the entity controls (its assets) and the claims on those resources (its liabilities and equity claims), as of a particular point in time (the date of the balance sheet).

Balance sheet

The financial statement that presents an entity's current financial position by disclosing resources the entity controls (its assets) and the claims on those resources (its liabilities and equity claims), as of a particular point in time (the date of the balance sheet). Also called statement of financial position or statement of financial condition.

Ex-date

The first date that a share trades without (i.e. "ex") the dividend.

Ex-dividend date

The first date that a share trades without (i.e. "ex") the dividend.

FIFO method

The first in, first out, method of accounting for inventory, which matches sales against the costs of items of inventory in the order in which they were placed in inventory.

Exercise price

The fixed price at which an option holder can buy or sell the underlying. Also called strike price, striking price, or strike.

Forward price

The fixed price or rate at which the transaction scheduled to occur at the expiration of a forward contract will take place. This price is agreed on at the initiation date of the contract.

Grey market

The forward market for bonds about to be issued. Also called "when issued" market.

Flat price

The full price of a bond minus the accrued interest; also called the quoted or clean price.

Fisher index

The geometric mean of the Laspeyres index.

Trust deed

The governing legal credit agreement, typically incorporated by reference in the prospectus. Also called bond indenture.

Bond indenture

The governing legal credit agreement, typically incorporated by reference in the prospectus. Also called trust deed.

Supply curve

The graph of the inverse supply function.

Markowitz efficient frontier

The graph of the set of portfolios offering the maximum expected return for their level of risk (standard deviation of return).

Binomial tree

The graphical representation of a model of asset price dynamics in which, at each period, the asset moves up with probability p or down with probability (1 - p).

Best bid

The highest bid in the market.

Peak

The highest point of a business cycle.

Reservation prices

The highest price a buyer is willing to pay for an item or the lowest price at which a seller is willing to sell it.

High water marks

The highest value, net of fees, which a fund has reached. It reflects the highest cumulative return used to calculate an incentive fee.

Amortised cost

The historical cost (initially recognised cost) of an asset, adjusted for amortisation and impairment.

National income

The income received by all factors of production used in the generation of final output. National income equals gross domestic product (or, in some countries, gross national product) minus the capital consumption allowance and a statistical discrepancy.

Income tax payable

The income tax owed by the company on the basis of taxable income.

Manufacturing resource planning (MRP)

The incorporation of production planning into inventory management. A MRP analysis provides both a materials acquisition schedule and a production schedule.

Core inflation

The inflation rate calculated based on a price index of goods and services except food and energy.

Headline inflation

The inflation rate calculated based on the price index that includes all goods and services in an economy.

Risk management framework

The infrastructure, process, and analytics needed to support effective risk management in an organization.

Simple interest

The interest earned each period on the original investment; interest calculated on the principal only.

Forward rate

The interest rate on a bond or money market instrument traded in a forward market. A forward rate can be interpreted as an incremental, or marginal, return for extending the time-to-maturity for an additional time period.

Mortgage rate

The interest rate on a mortgage loan; also called contract rate or note rate.

Repo rate

The interest rate on a repurchase agreement.

Two-week repo rate

The interest rate on a two-week repurchase agreement; may be used as a policy rate by a central bank.

Coupon rate

The interest rate promised in a contract; this is the rate used to calculate the periodic interest payments.

Call money rate

The interest rate that buyers pay for their margin loan.

Horizon yield

The internal rate of return between the total return (the sum of reinvested coupon payments and the sale price or redemption amount) and the purchase price of the bond.

Money-weighted return

The internal rate of return on a portfolio, taking account of all cash flows.

Cash flow yield

The internal rate of return on a series of cash flows.

True yield

The internal rate of return on cash flows using the actual calendar including weekends and bank holidays.

Impact lag

The lag associated with the result of actions affecting the economy with delay.

Recognition lag

The lag in government response to an economic problem resulting from the delay in confirming a change in the state of the economy.

LIFO method

The last in, first out, method of accounting for inventory, which matches sales against the costs of items of inventory in the reverse order the items were placed in inventory (i.e., inventory produced or acquired last are assumed to be sold first).

Benchmark issue

The latest sovereign bond issue for a given maturity. It serves as a benchmark against which to compare bonds that have the same features but that are issued by another type of issuer.

Lead underwriter

The lead investment bank in a syndicate of investment banks and broker-dealers involved in a securities underwriting.

Notice period

The length of time (typically 30 to 90 days) in advance that investors may be required to notify a fund of their intent to redeem.

Normal profit

The level of accounting profit needed to just cover the implicit opportunity costs ignored in accounting costs.

Aggregate supply curve

The level of domestic output that companies will produce at each price level.

Expected inflation

The level of inflation that economic agents expect in the future.

Potential GDP

The level of real GDP that can be produced at full employment; measures the productive capacity of the economy.

Yield-to-worst

The lowest of the sequence of yields-to-call and the yield-to-maturity.

Best offer

The lowest offer (ask price) in the market.

Trough

The lowest point of a business cycle.

Lower bound

The lowest possible value of an option.

Working capital management

The management of a company's short-term assets (such as inventory) and short-term liabilities (such as money owed to suppliers).

Maintenance margin requirement

The margin requirement on any day other than the first day of a transaction.

Initial margin requirement

The margin requirement on the first day of a transaction as well as on any day in which additional margin funds must be deposited.

Money market

The market for short-term debt instruments (one-year maturity or less).

Central bank funds market

The market in which deposit-taking banks that have an excess reserve with their national central bank can loan money to banks that need funds for maturities ranging from overnight to one year. Called the Federal or Fed funds market in the United States.

Interbank market

The market of loans and deposits between banks for maturities ranging from overnight to one year.

Interbank money market

The market of loans and deposits between banks for maturities ranging from overnight to one year.

Price

The market price as established by the interactions of the market demand and supply factors.

Gross domestic product

The market value of all final goods and services produced within the economy in a given period of time (output definition) or, equivalently, the aggregate income earned by all households, all companies, and the government within the economy in a given period of time (income definition).

Primary capital markets (primary markets)

The market where securities are first sold and the issuers receive the proceeds.

Primary market

The market where securities are first sold and the issuers receive the proceeds.

Secondary market

The market where securities are traded among investors.

Ask size

The maximum quantity of an asset that pertains to a specific ask price from a trader. For example, if the ask for a share issue is $30 for a size of 1,000 shares, the trader is offering to sell at $30 up to 1,000 shares.

Bid size

The maximum quantity of an asset that pertains to a specific bid price from a trader.

Performance evaluation

The measurement and assessment of the outcomes of investment management decisions.

Maintenance margin

The minimum amount that is required by a futures clearinghouse to maintain a margin account and to protect against default. Participants whose margin balances drop below the required maintenance margin must replenish their accounts.

Lockup period

The minimum period before investors are allowed to make withdrawals or redeem shares from a fund.

Cost structure

The mix of a company's variable costs and fixed costs.

Capital structure

The mix of debt and equity that a company uses to finance its business; a company's specific mixture of long-term financing.

Mode

The most frequently occurring value in a set of observations.

On-the-run

The most recently issued and most actively traded sovereign securities.

Continuously compounded return

The natural logarithm of 1 plus the holding period return, or equivalently, the natural logarithm of the ending price over the beginning price.

Cash flow from operating activities

The net amount of cash provided from operating activities.

Cash flow from operations

The net amount of cash provided from operating activities.

Operating cash flow

The net amount of cash provided from operating activities.

Book value

The net amount shown for an asset or liability on the balance sheet; book value may also refer to the company's excess of total assets over total liabilities. Also calledcarrying value.

Carrying value

The net amount shown for an asset or liability on the balance sheet; book value may also refer to the company's excess of total assets over total liabilities. For a bond, the purchase price plus (or minus) the amortized amount of the discount (or premium).

Carry

The net of the costs and benefits of holding, storing, or "carrying" an asset.

Standard normal distribution

The normal density with mean (μ) equal to 0 and standard deviation (σ) equal to 1.

Unit normal distribution

The normal density with mean (μ) equal to 0 and standard deviation (σ) equal to 1.

Narrow money

The notes and coins in circulation in an economy, plus other very highly liquid deposits.

Degrees of freedom (df)

The number of independent observations used.

Absolute frequency

The number of observations in a given interval (for grouped data).

Open interest

The number of outstanding contracts in a clearinghouse at any given time. The open interest figure changes daily as some parties open up new positions, while other parties offset their old positions.

Employed

The number of people with a job.

Market float

The number of shares that are available to the investing public.

Free float

The number of shares that are readily and freely tradable in the secondary market.

Diluted shares

The number of shares that would be outstanding if all potentially dilutive claims on common shares (e.g., convertible debt, convertible preferred stock, and employee stock options) were exercised.

Binomial random variable

The number of successes in n Bernoulli trials for which the probability of success is constant for all trials and the trials are independent.

Breakeven point

The number of units produced and sold at which the company's net income is zero (revenues = total costs); in the case of perfect competition, the quantity where price, average revenue, and marginal revenue equal average total cost.

Operating breakeven

The number of units produced and sold at which the company's operating profit is zero (revenues = operating costs).

Settlement price

The official price, designated by the clearinghouse, from which daily gains and losses will be determined and marked to market.

Arbitrage-free pricing

The overall process of pricing derivatives by arbitrage and risk neutrality. Also called the principle of no arbitrage.

Lessor

The owner of an asset that grants the right to use the asset to another party.

Residual claim

The owners' remaining claim on the company's assets after the liabilities are deducted.

Estimate

The particular value calculated from sample observations using an estimator.

General partner

The partner that runs the business and theoretically bears unlimited liability.

Lessee

The party obtaining the use of an asset through a lease.

Credit-worthiness

The perceived ability of the borrower to pay what is owed on the borrowing in a timely manner; it represents the ability of a company to withstand adverse impacts on its cash flows.

Cross-price elasticity of demand

The percent change in quantity demanded for a given small change in the price of another good; the responsiveness of the demand for Product A that is associated with the change in price of Product B.

Inflation rate

The percentage change in a price index—that is, the speed of overall price level movements.

Elasticity

The percentage change in one variable for a percentage change in another variable; a measure of how sensitive one variable is to a change in the value of another variable.

Own-price elasticity of demand

The percentage change in quantity demanded for a percentage change in own price, holding all other things constant.

Inflation

The percentage increase in the general price level from one period to the next; a sustained rise in the overall level of prices in an economy.

Expansion

The period of a business cycle after its lowest point and before its highest point.

Contraction

The period of a business cycle after the peak and before the trough; often called a recession or, if exceptionally severe, called a depression.

Cost averaging

The periodic investment of a fixed amount of money.

Shutdown point

The point at which average revenue is less than average variable cost.

Global minimum-variance portfolio

The portfolio on the minimum-variance frontier with the smallest variance of return.

Minimum-variance portfolio

The portfolio with the minimum variance for each given level of expected return.

Earnings surprise

The portion of a company's earnings that is unanticipated by investors and, according to the efficient market hypothesis, merits a price adjustment.

Taxable income

The portion of an entity's income that is subject to income taxes under the tax laws of its jurisdiction.

Labor force

The portion of the working age population (over the age of 16) that is employed or is available for work but not working (unemployed).

Semideviation

The positive square root of semivariance (sometimes calledsemistandard deviation).

Target semideviation

The positive square root of target semivariance.

Sample standard deviation

The positive square root of the sample variance.

Standard deviation

The positive square root of the variance; a measure of dispersion in the same units as the original data.

Time-period bias

The possibility that when we use a time-series sample, our statistical conclusion may be sensitive to the starting and ending dates of the sample.

Data mining

The practice of determining a model by extensive searching through a dataset for statistically significant patterns. Also called data snooping.

Present value (PV)

The present discounted value of future cash flows: For assets, the present discounted value of the future net cash inflows that the asset is expected to generate; for liabilities, the present discounted value of the future net cash outflows that are expected to be required to settle the liabilities.

Bid

The price at which a dealer or trader is willing to buy an asset, typically qualified by a maximum quantity.

Offer

The price at which a dealer or trader is willing to sell an asset, typically qualified by a maximum quantity (ask size).

Ask

The price at which a dealer or trader is willing to sell an asset, typically qualified by a maximum quantity (ask size). See offer.

Market value

The price at which an asset or security can currently be bought or sold in an open market.

Repurchase price

The price at which the party who sold the security at the inception of the repurchase agreement buys the security back from the cash lending counterparty.

Autarkic price

The price of a good or service in an autarkic economy.

Own-price

The price of a good or service itself (as opposed to the price of something else).

Full price

The price of a security with accrued interest; also called theinvoice or dirty price.

Relative price

The price of a specific good or service in comparison with those of other goods and services.

Spot prices

The price of an asset for immediately delivery.

World price

The price prevailing in the world market.

Law of supply

The principle that a rise in price usually results in an increase in the quantity supplied.

Law of demand

The principle that as the price of a good rises, buyers will choose to buy less of it, and as its price falls, they will buy more.

Cash flow additivity principle

The principle that dollar amounts indexed at the same point in time are additive.

Rule of 72

The principle that the approximate number of years necessary for an investment to double is 72 divided by the stated interest rate.

Price priority

The principle that the highest priced buy orders and the lowest priced sell orders execute first.

Time value of money

The principles governing equivalence relationships between cash flows with different dates.

Level of significance

The probability of a Type I error in testing a hypothesis.

Empirical probability

The probability of an event estimated as a relative frequency of occurrence.

Conditional probability

The probability of an event given (conditioned on) another event.

Marginal probability

The probability of an event not conditioned on another event.

Unconditional probability

The probability of an event not conditioned on another event.

Likelihood

The probability of an observation, given a particular set of conditions.

Power of a test

The probability of correctly rejecting the null—that is, rejecting the null hypothesis when it is false.

Joint probability

The probability of the joint occurrence of stated events.

Default risk

The probability that a borrower defaults or fails to meet its obligation to make full and timely payments of principal and interest, according to the terms of the debt security. Also called default probability.

Default probability

The probability that a borrower defaults or fails to meet its obligation to make full and timely payments of principal and interest, according to the terms of the debt security. Also called default risk.

Degree of confidence

The probability that a confidence interval includes the unknown population parameter.

Down transition probability

The probability that an asset's value moves down in a model of asset price dynamics.

Up transition probability

The probability that an asset's value moves up.

Expected value

The probability-weighted average of the possible outcomes of a random variable.

Simple random sampling

The procedure of drawing a sample to satisfy the definition of a simple random sample.

Technology

The process a company uses to transform inputs into outputs.

Money creation

The process by which changes in bank reserves translate into changes in the money supply.

Market mechanism

The process by which price adjusts until there is neither excess supply nor excess demand.

Clearing

The process by which the exchange verifies the execution of a transaction and records the participants' identities.

Compounding

The process of accumulating interest on interest.

Amortisation

The process of allocating the cost of intangible long-term assets having a finite useful life to accounting periods; the allocation of the amount of a bond premium or discount to the periods remaining until bond maturity.

Portfolio planning

The process of creating a plan for building a portfolio that is expected to satisfy a client's investment objectives.

Asset allocation

The process of determining how investment funds should be distributed among asset classes.

Risk management

The process of identifying the level of risk an entity wants, measuring the level of risk the entity currently has, taking actions that bring the actual level of risk to the desired level of risk, and monitoring the new actual level of risk so that it continues to be aligned with the desired level of risk.

Sampling

The process of obtaining a sample.

Security selection

The process of selecting individual securities; typically, security selection has the objective of generating superior risk-adjusted returns relative to a portfolio's benchmark.

Depreciation

The process of systematically allocating the cost of long-lived (tangible) assets to the periods during which the assets are expected to provide economic benefits.

Exercise

The process of using an option to buy or sell the underlying.

Revaluation model

The process of valuing long-lived assets at fair value, rather than at cost less accumulated depreciation. Any resulting profit or loss is either reported on the income statement and/or through equity under revaluation surplus.

Settlement

The process that occurs after a trade is completed, the securities are passed to the buyer, and payment is received by the seller.

Monetary transmission mechanism

The process whereby a central bank's interest rate gets transmitted through the economy and ultimately affects the rate of increase of prices.

Marginal propensity to consume

The proportion of an additional unit of disposable income that is consumed or spent; the change in consumption for a small change in income.

Marginal propensity to save

The proportion of an additional unit of disposable income that is saved (not spent).

Consumption

The purchase of final goods and services by individuals.

Greenmail

The purchase of the accumulated shares of a hostile investor by a company that is targeted for takeover by that investor, usually at a substantial premium over market price.

Open market operations

The purchase or sale of bonds by the national central bank to implement monetary policy. The bonds traded are usually sovereign bonds issued by the national government.

Collateral

The quality and value of the assets supporting an issuer's indebtedness.

Character

The quality of a debt issuer's management.

Robust

The quality of being relatively unaffected by a violation of assumptions.

Store of value

The quality of tending to preserve value.

Position

The quantity of an asset that an entity owns or owes.

Labor productivity

The quantity of goods and services (real GDP) that a worker can produce in one hour of work.

Aggregate supply

The quantity of goods and services producers are willing to supply at any given level of price.

Aggregate demand

The quantity of goods and services that households, businesses, government, and foreign customers want to buy at any given level of prices.

Supply function

The quantity supplied as a function of price and possibly other variables.

Marginal rate of substitution

The rate at which one is willing to give up one good to obtain more of another.

Market rate of interest

The rate demanded by purchases of bonds, given the risks associated with future cash payment obligations of the particular bond issue.

Sustainable growth rate

The rate of dividend (and earnings) growth that can be sustained over time for a given level of return on equity, keeping the capital structure constant and without issuing additional common stock.

Sustainable rate of economic growth

The rate of increase in the economy's productive capacity or potential GDP.

Neutral rate of interest

The rate of interest that neither spurs on nor slows down the underlying economy.

Market discount rate

The rate of return required by investors given the risk of the investment in a bond; also called the required yield or therequired rate of return.

Component cost of capital

The rate of return required by suppliers of capital for an individual source of a company's funding, such as debt or equity.

Hurdle rate

The rate of return that must be met for a project to be accepted.

Cost of capital

The rate of return that suppliers of capital require as compensation for their contribution of capital.

Fiscal multiplier

The ratio of a change in national income to a change in government spending.

Loan-to-value ratio

The ratio of a property's purchase price to the amount of its mortgage.

Dividend payout ratio

The ratio of cash dividends paid to earnings for a period.

Gross profit margin

The ratio of gross profit to revenues.

Activity ratio

The ratio of the labor force to total population of working age. Also called participation ratio.

Degree of total leverage

The ratio of the percentage change in net income to the percentage change in units sold; the sensitivity of the cash flows to owners to changes in the number of units produced and sold.

Terms of trade

The ratio of the price of exports to the price of imports, representing those prices by export and import price indices, respectively.

Diversification ratio

The ratio of the standard deviation of an equally weighted portfolio to the standard deviation of a randomly selected security.

Unemployment rate

The ratio of unemployed to the labor force.

Base rates

The reference rate on which a bank bases lending rates to all other customers.

Put-call-forward parity

The relationship among puts, calls, and forward contracts.

Moneyness

The relationship between the price of the underlying and an option's exercise price.

Term structure of credit spreads

The relationship between the spreads over the "risk-free" (or benchmark) rates and times-to-maturity.

Term structure of yield volatility

The relationship between the volatility of bond yields-to-maturity and times-to-maturity.

Net book value

The remaining (undepreciated) balance of an asset's purchase cost. For liabilities, the face value of a bond minus any unamortized discount, or plus any unamortized premium.

Option-adjusted yield

The required market discount rate whereby the price is adjusted for the value of the embedded option.

Reserve requirement

The requirement for banks to hold reserves in proportion to the size of deposits.

Common-size analysis

The restatement of financial statement items using a common denominator or reference item that allows one to identify trends and major differences; an example is an income statement in which all items are expressed as a percent of revenue.

Active return

The return on a portfolio minus the return on the portfolio's benchmark.

Holding period return

The return that an investor earns during a specified holding period; a synonym for total return.

Holding period yield (HPY)

The return that an investor earns during a specified holding period; holding period return with reference to a fixed-income instrument.

Profit

The return that owners of a company receive for the use of their capital and the assumption of financial risk when making their investments.

Mark to market

The revaluation of a financial asset or liability to its current market value or fair value.

Business risk

The risk associated with operating earnings. Operating earnings are uncertain because total revenues and many of the expenditures contributed to produce those revenues are uncertain.

Operating risk

The risk attributed to the operating cost structure, in particular the use of fixed costs in operations; the risk arising from the mix of fixed and variable costs; the risk that a company's operations may be severely affected by environmental, social, and governance risk factors.

Credit risk

The risk of loss caused by a counterparty's or debtor's failure to make a promised payment. Also called default risk.

Operational risk

The risk of loss from failures in a company's systems and procedures.

Downgrade risk

The risk that a bond issuer's creditworthiness deteriorates, or migrates lower, leading investors to believe the risk of default is higher. Also called credit migration risk.

Credit migration risk

The risk that a bond issuer's creditworthiness deteriorates, or migrates lower, leading investors to believe the risk of default is higher. Also called downgrade risk.

Liquidity risk

The risk that a financial instrument cannot be purchased or sold without a significant concession in price due to the size of the market.

Solvency risk

The risk that an entity does not survive or succeed because it runs out of cash, even though it might otherwise be solvent.

Market risk

The risk that arises from movements in interest rates, stock prices, exchange rates, and commodity prices.

Financial risk

The risk that environmental, social, or governance risk factors will result in significant costs or other losses to a company and its shareholders; the risk arising from a company's obligation to meet required payments under its financing agreements.

Shortfall risk

The risk that portfolio value will fall below some minimum acceptable level over some time horizon.

Counterparty risk

The risk that the other party to a contract will fail to honor the terms of the contract.

Market liquidity risk

The risk that the price at which investors can actually transact—buying or selling—may differ from the price indicated in the market.

Contraction risk

The risk that when interest rates decline, the security will have a shorter maturity than was anticipated at the time of purchase because borrowers refinance at the new, lower interest rates.

Extension risk

The risk that when interest rates rise, fewer prepayments will occur because homeowners are reluctant to give up the benefits of a contractual interest rate that now looks low. As a result, the security becomes longer in maturity than anticipated at the time of purchase.

Multiplication rule for probabilities

The rule that the joint probability of events A and B equals the probability of A given B times the probability of B.

Short-run supply curve

The section of the marginal cost curve that lies above the minimum point on the average variable cost curve.

Short

The seller of an asset or derivative contract. Also refers to the position of being short an asset or derivative contract.

Effective duration

The sensitivity of a bond's price to a change in a benchmark yield curve.

Curve duration

The sensitivity of the bond price (or the market value of a financial asset or liability) with respect to a benchmark yield curve.

Yield duration

The sensitivity of the bond price with respect to the bond's own yield-to-maturity.

Delta

The sensitivity of the derivative price to a small change in the value of the underlying asset.

Rho

The sensitivity of the option price to the risk-free rate.

Strategic asset allocation

The set of exposures to IPS-permissible asset classes that is expected to achieve the client's long-term objectives given the client's investment constraints.

Rebalancing policy

The set of rules that guide the process of restoring a portfolio's asset class weights to those specified in the strategic asset allocation.

Sampling plan

The set of rules used to select a sample.

Game theory

The set of tools decision makers use to incorporate responses by rival decision makers into their strategies.

Real risk-free interest rate

The single-period interest rate for a completely risk-free security if no inflation were expected.

Display size

The size of an order displayed to public view.

Minimum efficient scale

The smallest output that a firm can produce such that its long run average cost is minimized.

Law of diminishing returns

The smallest output that a firm can produce such that its long run average costs are minimized.

Quoted margin

The specified yield spread over the reference rate, used to compensate an investor for the difference in the credit risk of the issuer and that implied by the reference rate.

Life-cycle stage

The stage of the life cycle: embryonic, growth, shakeout, mature, declining.

Tracking error

The standard deviation of the differences between a portfolio's returns and its benchmark's returns; a synonym of active risk.

Tracking risk

The standard deviation of the differences between a portfolio's returns and its benchmark's returns; a synonym of active risk. Also called tracking error.

Risk exposure

The state of being exposed or vulnerable to a risk. The extent to which an entity is sensitive to underlying risks.

Kurtosis

The statistical measure that indicates the peakedness of a distribution.

Revolving credit agreements

The strongest form of short-term bank borrowing facilities; they are in effect for multiple years (e.g., 3-5 years) and may have optional medium-term loan features.

Demand and supply analysis

The study of how buyers and sellers interact to determine transaction prices and quantities.

Descriptive statistics

The study of how data can be summarized effectively.

Economics

The study of the production, distribution, and consumption of goods and services; the principles of the allocation of scarce resources among competing uses. Economics is divided into two broad areas of study: macroeconomics and microeconomics.

Total invested capital

The sum of market value of common equity, book value of preferred equity, and face value of debt.

Simple yield

The sum of the coupon payments plus the straight-line amortized share of the gain or loss, divided by the flat price.

Current yield

The sum of the coupon payments received over the year divided by the flat price; also called the income or interest yield or running yield.

Arithmetic mean

The sum of the observations divided by the number of observations.

Nominal risk-free interest rate

The sum of the real risk-free interest rate and the inflation premium.

Sample mean

The sum of the sample observations, divided by the sample size.

Total costs

The summation of all costs, where costs are classified according to fixed or variable.

Total fixed cost

The summation of all expenses that do not change when production varies.

Total variable cost

The summation of all variable expenses.

Economic rent

The surplus value that results when a particular resource or good is fixed in supply and market price is higher than what is required to bring the resource or good onto the market and sustain its use.

Payments system

The system for the transfer of money.

Net tax rate

The tax rate net of transfer payments.

Convergence

The tendency for differences in output per capita across countries to diminish over time; in technical analysis, a term that describes the case when an indicator moves in the same manner as the security being analyzed.

Winner's curse

The tendency for the winner in certain competitive bidding situations to overpay, whether because of overestimation of intrinsic value, emotion, or information asymmetries.

Loss aversion

The tendency of people to dislike losses more than they like comparable gains.

Covenants

The terms and conditions of lending agreements that the issuer must comply with; they specify the actions that an issuer is obligated to perform (affirmative covenant) or prohibited from performing (negative covenant).

Consumer choice theory

The theory relating consumer demand curves to consumer preferences.

Two-fund separation theorem

The theory that all investors regardless of taste, risk preferences, and initial wealth will hold a combination of two portfolios or funds: a risk-free asset and an optimal portfolio of risky assets.

Money neutrality

The thesis that an increase in the money supply leads in the long-run to an increase in the price level, while leaving real variables like output and employment unaffected.

Crowding out

The thesis that government borrowing may divert private sector investment from taking place.

Fisher effect

The thesis that the real rate of interest in an economy is stable over time so that changes in nominal interest rates are the result of changes in expected inflation.

Call protection

The time during which the issuer of the bond is not allowed to exercise the call option.

Tenor

The time-to-maturity for a bond or derivative contract. Also called term to maturity.

Risk governance

The top-down process and guidance that directs risk management activities to align with and support the overall enterprise.

Total expenditure

The total amount spent over a time period.

Information cascade

The transmission of information from those participants who act first and whose decisions influence the decisions of others.

Prepayment risk

The uncertainty that the timing of the actual cash flows will be different from the scheduled cash flows as set forth in the loan agreement due to the borrowers' ability to alter payments, usually to take advantage of interest rate movements.

Fundamental value

The underlying or true value of an asset based on an analysis of its qualitative and quantitative characteristics. Also calledintrinsic value.

American depository share

The underlying shares on which American depository receipts are based. They trade in the issuing company's domestic market.

Asset beta

The unlevered beta; reflects the business risk of the assets; the asset's systematic risk.

Inventory

The unsold units of product on hand.

Assignment of accounts receivable

The use of accounts receivable as collateral for a loan.

Electronic funds transfer (EFT)

The use of computer networks to conduct financial transactions electronically.

Operating leverage

The use of fixed costs in operations.

Trust receipt arrangement

The use of inventory as collateral for a loan. The inventory is segregated and held in trust, and the proceeds of any sale must be remitted to the lender immediately.

Inventory blanket lien

The use of inventory as collateral for a loan. Though the lender has claim to some or all of the company's inventory, the company may still sell or use the inventory in the ordinary course of business.

Warehouse receipt arrangement

The use of inventory as collateral for a loan; similar to a trust receipt arrangement except there is a third party (i.e., a warehouse company) that supervises the inventory.

Fiscal policy

The use of taxes and government spending to affect the level of aggregate expenditures.

Exercise value

The value obtained if an option is exercised based on current conditions. Also known as intrinsic value.

Aggregate output

The value of all the goods and services produced in a specified period of time.

Aggregate income

The value of all the payments earned by the suppliers of factors used in the production of goods and services.

Nominal GDP

The value of goods and services measured at current prices.

Real GDP

The value of goods and services produced, measured at base year prices.

Option-adjusted price

The value of the embedded option plus the flat price of the bond.

Median

The value of the middle item of a set of items that has been sorted into ascending or descending order; the 50th percentile.

Opportunity cost

The value that investors forgo by choosing a particular course of action; the value of something in its best alternative use.

Dispersion

The variability around the central tendency.

Conditional variances

The variance of one variable, given the outcome of another.

Implied volatility

The volatility that option traders use to price an option, implied by the price of the option and a particular option-pricing model.

Demand

The willingness and ability of consumers to purchase a given amount of a good or service at a given price.

Supply

The willingness of sellers to offer a given quantity of a good or service for a given price.

G-spread

The yield spread in basis points over an actual or interpolated government bond.

I-spread

The yield spread of a specific bond over the standard swap rate in that currency of the same tenor.

Interpolated spread

The yield spread of a specific bond over the standard swap rate in that currency of the same tenor.

Benchmark spread

The yield spread over a specific benchmark, usually measured in basis points.

Required margin

The yield spread over, or under, the reference rate such that an FRN is priced at par value on a rate reset date.

Continuous time

Time thought of as advancing in extremely small increments.

Project sequencing

To defer the decision to invest in a future project until the outcome of some or all of a current project is known. Projects are sequenced through time, so that investing in a project creates the option to invest in future projects.

Shareholder wealth maximization

To maximize the market value of shareholders' equity.

Discount

To reduce the value of a future payment in allowance for how far away it is in time; to calculate the present value of some future amount. Also, the amount by which an instrument is priced below its face (par) value.

Liquidation

To sell the assets of a company, division, or subsidiary piecemeal, typically because of bankruptcy; the form of bankruptcy that allows for the orderly satisfaction of creditors' claims after which the company ceases to exist.

Average total cost

Total costs divided by quantity.

Average fixed cost

Total fixed cost divided by quantity.

Average variable cost

Total variable cost divided by quantity.

Information-motivated traders

Traders that trade to profit from information that they believe allows them to predict future prices.

Arbitrageurs

Traders who engage in arbitrage. See arbitrage.

Crossing networks

Trading systems that match buyers and sellers who are willing to trade at prices obtained from other markets.

Alternative trading systems

Trading venues that function like exchanges but that do not exercise regulatory authority over their subscribers except with respect to the conduct of the subscribers' trading in their trading systems. Also called electronic communications networks or multilateral trading facilities.

Coincident economic indicators

Turning points that are usually close to those of the overall economy; they are believed to have value for identifying the economy's present state.

Lagging economic indicators

Turning points that take place later than those of the overall economy; they are believed to have value in identifying the economy's past condition.

Leading economic indicators

Turning points that usually precede those of the overall economy; they are believed to have value for predicting the economy's future state, usually near-term.

Eurobonds

Type of bond issued internationally, outside the jurisdiction of the country in whose currency the bond is denominated.

Debentures

Type of bond that can be secured or unsecured.

Inflation-linked bond

Type of index-linked bond that offers investors protection against inflation by linking the bond's coupon payments and/or the principal repayment to an index of consumer prices. Also called linkers.

Capital-indexed bonds

Type of index-linked bond. The coupon rate is fixed but is applied to a principal amount that increases in line with increases in the index during the bond's life.

Demand-pull

Type of inflation in which increasing demand raises prices generally, which then are reflected in a business's costs as workers demand wage hikes to catch up with the rising cost of living.

Cost-push

Type of inflation in which rising costs, usually wages, compel businesses to raise prices generally.

Shelf registration

Type of public offering that allows the issuer to file a single, all-encompassing offering circular that covers a series of bond issues.

Private placement

Typically a non-underwritten, unregistered offering of securities that are sold only to an investor or a small group of investors. It can be accomplished directly between the issuer and the investor(s) or through an investment bank.

Benchmark rate

Typically the yield-to-maturity on a government bond having the same, or close to the same, time-to-maturity.

Sales risk

Uncertainty with respect to the quantity of goods and services that a company is able to sell and the price it is able to achieve; the risk related to the uncertainty of revenues.

Unearned fees

Unearned fees are recognized when a company receives cash payment for fees prior to earning them.

Nonsystematic risk

Unique risk that is local or limited to a particular asset or industry that need not affect assets outside of that asset class.

Basis point

Used in stating yield spreads, one basis point equals one-hundredth of a percentage point, or 0.01%.

Asset-based valuation models

Valuation based on estimates of the market value of a company's assets.

Free-cash-flow-to-equity models

Valuation models based on discounting expected future free cash flow to equity.

Market multiple models

Valuation models based on share price multiples or enterprise value multiples.

Multiplier models

Valuation models based on share price multiples or enterprise value multiples.

Discounted cash flow models

Valuation models that estimate the intrinsic value of a security as the present value of the future benefits expected to be received from the security.

Present value models

Valuation models that estimate the intrinsic value of a security as the present value of the future benefits expected to be received from the security. Also called discounted cash flow models.

Exogenous variables

Variables whose equilibrium values are determined outside of the model being considered.

Endogenous variables

Variables whose equilibrium values are determined within the model being considered.

Cash equivalents

Very liquid short-term investments, usually maturing in 90 days or less.

Cumulative voting

Voting that allows shareholders to direct their total voting rights to specific candidates, as opposed to having to allocate their voting rights evenly among all candidates.

Weighted average coupon rate

Weighting the mortgage rate of each mortgage loan in the pool by the percentage of the mortgage outstanding relative to the outstanding amount of all the mortgages in the pool.

Weighted average maturity

Weighting the remaining number of months to maturity for each mortgage loan in the pool by the amount of the outstanding mortgage balance.

Risk-neutral probabilities

Weights that are used to compute a binomial option price. They are the probabilities that would apply if a risk-neutral investor valued an option.

Transfer payments

Welfare payments made through the social security system that exist to provide a basic minimum level of income for low-income households.

Stagflation

When a high inflation rate is combined with a high level of unemployment and a slowdown of the economy.

Accounting loss

When accounting profit is negative.

Pull on liquidity

When disbursements are paid too quickly or trade credit availability is limited, requiring companies to expend funds before they receive funds from sales that could cover the liability.

Constant-cost industry

When firms in the industry experience no change in resource costs and output prices over the long run.

Drag on liquidity

When receipts lag, creating pressure from the decreased available funds.

Trade diversion

When regional integration results in lower-cost imports from non-member countries being replaced with higher-cost imports from members.

Trade creation

When regional integration results in the replacement of higher cost domestic production by lower cost imports from other members.

Balance of trade deficit

When the domestic economy is spending more on foreign goods and services than foreign economies are spending on domestic goods and services.

Second-degree price discrimination

When the monopolist charges different per-unit prices using the quantity purchased as an indicator of how highly the customer values the product.

Third-degree price discrimination

When the monopolist segregates customers into groups based on demographic or other characteristics and offers different pricing to each group.

Trade surplus (deficit)

When the value of exports is greater (less) than the value of imports.

Free trade

When there are no government restrictions on a country's ability to trade.

Nash equilibrium

When two or more participants in a non-coop-erative game have no incentive to deviate from their respective equilibrium strategies given their opponent's strategies.

First-degree price discrimination

Where a monopolist is able to charge each customer the highest price the customer is willing to pay.

Increasing marginal returns

Where the marginal product of a resource increases as additional units of that input are employed.

Blue chip

Widely held large market capitalization companies that are considered financially sound and are leaders in their respective industry or local stock market.

Mean absolute deviation

With reference to a sample, the mean of the absolute values of deviations from the sample mean.

Antidilutive

With reference to a transaction or a security, one that would increase earnings per share (EPS) or result in EPS higher than the company's basic EPS—antidilutive securities are not included in the calculation of diluted EPS.

Unstable

With reference to an equilibrium, one in which price, when disturbed away from the equilibrium, tends not to return to it.

Stable

With reference to an equilibrium, one in which price, when disturbed away from the equilibrium, tends to converge back to it.

Relative frequency

With reference to an interval of grouped data, the number of observations in the interval divided by the total number of observations in the sample.

Realizable (settlement) value

With reference to assets, the amount of cash or cash equivalents that could currently be obtained by selling the asset in an orderly disposal; with reference to liabilities, the undiscounted amount of cash or cash equivalents expected to be paid to satisfy the liabilities in the normal course of business.

Current cost

With reference to assets, the amount of cash or cash equivalents that would have to be paid to buy the same or an equivalent asset today; with reference to liabilities, the undiscounted amount of cash or cash equivalents that would be required to settle the obligation today.

Indirect format

With reference to cash flow statements, a format for the presentation of the statement which, in the operating cash flow section, begins with net income then shows additions and subtractions to arrive at operating cash flow. Also calledindirect method.

Value investors

With reference to equity investors, investors who are focused on paying a relatively low share price in relation to earnings or assets per share.

Growth investors

With reference to equity investors, investors who seek to invest in high-earnings-growth companies.

Market-oriented investors

With reference to equity investors, investors whose investment disciplines cannot be clearly categorized as value or growth.

Consistent

With reference to estimators, describes an estimator for which the probability of estimates close to the value of the population parameter increases as sample size increases.

Independent

With reference to events, the property that the occurrence of one event does not affect the probability of another event occurring.

Dependent

With reference to events, the property that the probability of one event occurring depends on (is related to) the occurrence of another event.

Interval

With reference to grouped data, a set of values within which an observation falls.

Modal interval

With reference to grouped data, the most frequently occurring interval.

Bottom-up analysis

With reference to investment selection processes, an approach that involves selection from all securities within a specified investment universe, i.e., without prior narrowing of the universe on the basis of macroeconomic or overall market considerations.

Top-down analysis

With reference to investment selection processes, an approach that starts with macro selection (i.e., identifying attractive geographic segments and/or industry segments) and then addresses selection of the most attractive investments within those segments.

Back-testing

With reference to portfolio strategies, the application of a strategy's portfolio selection rules to historical data to assess what would have been the strategy's historical performance.

Hypothesis

With reference to statistical inference, a statement about one or more populations.

Estimation

With reference to statistical inference, the subdivision dealing with estimating the value of a population parameter.

Hypothesis testing

With reference to statistical inference, the subdivision dealing with the testing of hypotheses about one or more populations.

Direct format

With reference to the cash flow statement, a format for the presentation of the statement in which cash flow from operating activities is shown as operating cash receipts less operating cash disbursements. Also called direct method.

Grouping by nature

With reference to the presentation of expenses in an income statement, the grouping together of expenses by similar nature, e.g., all depreciation expenses.

Grouping by function

With reference to the presentation of expenses in an income statement, the grouping together of expenses serving the same function, e.g. all items that are costs of goods sold.

Gold standard

With respect to a currency, if a currency is on the gold standard a given amount can be converted into a prespecified amount of gold.

Balanced

With respect to a government budget, one in which spending and revenues (taxes) are equal.

Constituent securities

With respect to an index, the individual securities within an index.

Behavioral equations

With respect to demand and supply, equations that model the behavior of buyers and sellers.

Credit

With respect to double-entry accounting, a credit records increases in liability, owners' equity, and revenue accounts or decreases in asset accounts; with respect to borrowing, the willingness and ability of the borrower to make promised payments on the borrowing.

Debit

With respect to double-entry accounting, a debit records increases of asset and expense accounts or decreases in liability and owners' equity accounts.

Solvency

With respect to financial statement analysis, the ability of a company to fulfill its long-term obligations.

Current government spending

With respect to government expenditures, spending on goods and services that are provided on a regular, recurring basis including health, education, and defense.

Standard cost

With respect to inventory accounting, the planned or target unit cost of inventory items or services.

Self-investment limits

With respect to investment limitations applying to pension plans, restrictions on the percentage of assets that can be invested in securities issued by the pension plan sponsor.

Independently and identically distributed (IID)

With respect to random variables, the property of random variables that are independent of each other but follow the identical probability distribution.

Installment method

With respect to revenue recognition, a method that specifies that the portion of the total profit of the sale that is recognized in each period is determined by the percentage of the total sales price for which the seller has received cash.

Installment sales

With respect to revenue recognition, a method that specifies that the portion of the total profit of the sale that is recognized in each period is determined by the percentage of the total sales price for which the seller has received cash.

LIFO layer liquidation

With respect to the application of the LIFO inventory method, the liquidation of old, relatively low-priced inventory; happens when the volume of sales rises above the volume of recent purchases so that some sales are made from relatively old, low-priced inventory. Also called LIFO liquidation.

Order precedence hierarchy

With respect to the execution of orders to trade, a set of rules that determines which orders execute before other orders.

Single-step format

With respect to the format of the income statement, a format that does not subtotal for gross profit (revenue minus cost of goods sold).

Multi-step format

With respect to the format of the income statement, a format that presents a subtotal for gross profit (revenue minus cost of goods sold).

Account

With the accounting systems, a formal record of increases and decreases in a specific asset, liability, component of owners' equity, revenue, or expense.

Redemptions

Withdrawals of funds by investors.

Street convention

Yield measure that neglects weekends and holidays; the internal rate of return on cash flows assuming payments are made on the scheduled dates, even when the scheduled date falls on a weekend or holiday.

Property

plant, and equipment,Tangible assets that are expected to be used for more than one period in either the production or supply of goods or services, or for administrative purposes.