Glossary (See related pages) < Abnormal return   Part of return that is not due to systematic influences, e.g., marketwide price movements. Absolute priority   Rule in bankruptcy proceedings whereby senior creditors are required to be paid in full before junior creditors receive any payment. Accelerated depreciation   Any depreciation method that produces larger deductions for depreciation in the early years of a project's life. Accounts payable (payables, trade debt)   Money owed to suppliers. Accounts receivable (receivables, trade credit)   Money owed by customers. Accrued interest   Interest that has been earned but not yet paid. ACH   Automated Clearinghouse. Acid-test ratio   Quick ratio. Adjusted present value (APV)   Net present value of an asset if financed solely by equity plus the present value of any financing side effects. ADR   American depository receipt. Adverse selection   A situation in which a pricing policy causes only the less desirable customers to do business, e.g., a rise in insurance prices that leads only the worst risks to buy insurance. Affirmative covenant   Loan covenant specifying certain actions the borrower must take. Agency theory   Theory of the relationship between a principal, e.g., a shareholder, and an agent of the principal, e.g., the company's manager. AIBD   Association of International Bond Dealers. All-or-none underwriting   An arrangement whereby a security issue is canceled if the underwriter is unable to resell the entire issue. Alternative Minimum Tax (AMT)   A separately calculated minimum amount of tax that must be paid by corporations or individuals. American depository receipt (ADR)   A security issued in the United States to represent shares of a foreign company. American option   Option that can be exercised any time before the final exercise date (cf. European option). Amex   American Stock Exchange. Amortization   (1) Repayment of a loan by installments; (2) allowance for depreciation. AMT   Alternative Minimum Tax. Angel investor   Wealthy individual who provides capital for small start-up businesses. Annual percentage rate (APR)   Annual interest rate calculated using simple interest. Annuity   Investment that produces a level stream of cash flows for a limited number of periods. Annuity due   Annuity whose payments occur at the start of each period. Annuity factor   Present value of $1 paid for each of t periods. Anticipation   Arrangement whereby customers who pay before the final date may be entitled to deduct a normal rate of interest. Appraisal rights   A right of shareholders in a merger to demand the payment of a fair price for their shares, as determined independently. Appropriation request   Formal request for funds for a capital investment project. APR   Annual percentage rate. APT   Arbitrage pricing theory. APV   Adjusted present value. Arbitrage   Purchase of one security and simultaneous sale of another to give a risk-free profit. "Arbitrage" or "risk arbitrage"   Often used loosely to describe the taking of offsetting positions in related securities, e.g., at the time of a takeover bid. Arbitrage pricing theory (APT)   Model in which expected returns increase linearly with an asset's sensitivity to a small number of pervasive factors. Articles of incorporation   Legal document establishing a corporation and its structure and purpose. Asian currency units   Dollar deposits held in Singapore or other Asian centers. Asian option   Option based on the average price of the asset during the life of the option. Ask price (offer price)   Price at which a dealer is willing to sell (cf. bid price). Asset-backed securities   Securities issued by a special purpose company that holds a package of low-risk assets whose cash flows are sufficient to service the bonds. Asset stripper   Acquirer who takes over firms in order to sell off a large part of their assets. At-the-money option   Option whose exercise price equals the current asset price (cf. in-the-money option, out-of-themoney option). Auction-rate preferred   A variant of floating-rate preferred stock where the dividend is reset every 49 days by auction. Authorized share capital   Maximum number of shares that a company can issue, as specified in the firm's articles of incorporation. Automated Clearinghouse (ACH)   Private electronic system run by banks for high-volume, low-value payments. Availability float   Checks deposited by a company that have not yet been cleared. Aval   Bank guarantee for debt purchased by forfaiter. BA   Banker's acceptance. Backwardation   Condition in which spot price of commodity exceeds price of future (cf. contango). Balloon payment   Large final payment (e.g., when a loan is repaid in installments). Bank discount   Interest deducted from the initial amount of a loan. Banker's acceptance (BA)   Written demand that has been accepted by a bank to pay a given sum at a future date (cf. trade acceptance). Barrier option   Option whose existence depends on asset price hitting some specified barrier (cf. down-and-out option, down-and-in option). Basel Accord   International agreement on the amount of capital to be maintained by large banks to support their risky loans. Basis point (bp)   0.01 percent. Basis risk   Residual risk that results when the two sides of a hedge do not move exactly together. Bearer security   Security for which primary evidence of ownership is possession of the certificate (cf. registered security). Bear market   Widespread decline in security prices (cf. bull market). Behavioral finance   Branch of finance that stresses aspects of investor irrationality. Benchmark maturity   Maturity of a newly issued Treasury bond. Benefit-cost ratio   One plus profitability index. Best-efforts underwriting   An arrangement whereby underwriters do not commit themselves to selling a security issue but promise only to use best efforts. Beta   Measure of market risk. Bid price   Price at which a dealer is willing to buy (cf. ask price). Big Board   Colloquial term for the New York Stock Exchange. Bill of exchange   General term for a document demanding payment. Bill of lading   Document establishing ownership of goods in transit. Blue-chip company   Large and creditworthy company. Blue-sky laws   State laws covering the issue and trading of securities. Boilerplate   Standard terms and conditions, e.g., in a debt contract. Bond   Long-term debt. Bond rating   Rating of the likelihood of bond's default. Bookbuilding   The procedure whereby underwriters gather nonbinding indications of demand for a new issue. Book entry   Registered ownership of stock without issue of stock certificate. Book runner   The managing underwriter for a new issue. The book runner maintains the book of securities sold. Bought deal   Security issue where one or two underwriters buy the entire issue. bp   Basis point. Bracket   A term signifying the extent of an underwriter's commitment in a new issue, e.g., major bracket, minor bracket. Break-even analysis   Analysis of the level of sales at which a project would just break even. Bridging loan   Short-term loan to provide temporary financing until more permanent financing is arranged. Bull-bear bond   Bond whose principal repayment is linked to the price of another security. The bonds are issued in two tranches: In the first the repayment increases with the price of the other security; in the second the repayment decreases with the price of the other security. Bulldog bond   Foreign bond issue made in London. Bullet payment   Single final payment, e.g., of a loan (in contrast to payment in installments). Bull market   Widespread rise in security prices (cf. bear market). Bund   Long-term German government bond. Buyback   Repurchase agreement. Cable   The exchange rate between U.S. dollars and sterling. Call option   Option to buy an asset at a specified exercise price on or before a specified exercise date (cf. put option). Call premium   (1) Difference between the price at which a company can call its bonds and its face value; (2) price of a call option. Call provision   Provision that allows an issuer to buy back the bond issue at a stated price. Cap   An upper limit on the interest rate on a floating-rate note. Capital asset pricing model   Model in which expected returns increase linearly with an asset's beta. Capital budget   List of planned investment projects, usually prepared annually. Capitalization   Long-term debt plus preferred stock plus net worth. Capital lease   Financial lease. Capital market   Financial market (particularly the market for long-term securities). Capital rationing   Shortage of funds that forces a company to choose between worthwhile projects. Capital structure   Mix of different securities issued by a firm. CAPM   Capital asset pricing model. Captive finance company   Subsidiary whose function is to provide finance for purchases from the parent company. CAR   Cumulative abnormal return. CARDs (Certificates for Amortizing Revolving Debt)   Passthrough securities backed by credit card receivables. Carried interest   Aproportion of the profits to which private equity partnerships, etc. are entitled. CARs (Certificates of Automobile Receivables)   Pass-through securities backed by automobile receivables. Carve-out   Public offering of shares in a subsidiary. Cascade   Rational herding in which each individual deduces that previous decisions by others may have been based on extra information. Cash and carry   Purchase of a security and simultaneous sale of a future, with the balance being financed with a loan or repo. Cash budget   Forecast of sources and uses of cash. Cash cow   Mature company producing a large free cash flow. Cash-deficiency arrangement   Arrangement whereby a project's shareholders agree to provide the operating company with sufficient net working capital. CAT bond   Catastrophe bond. Catastrophe bond (CAT bond)   Bond whose payoffs are linked to a measure of catastrophe losses such as insurance claims. CD   Certificate of deposit. CEO   Chief executive officer. Certainty equivalent   A certain cash flow that has the same present value as a specified risky cash flow. Certificate of deposit (CD)   A certificate providing evidence of a bank time deposit. CFTC   Commodity Futures Trading Commission. CFO   Chief financial officer. Chaebol   A Korean conglomerate. Chapter 7   Bankruptcy procedure whereby a debtor's assets are sold and the proceeds are used to repay creditors. CHIPS   Clearinghouse Interbank Payments System. Chapter 11   Bankruptcy procedure designed to reorganize and rehabilitate defaulting firm. Clean price (flat price)   Bond price excluding accrued interest (cf. dirty price). Clearinghouse Interbank Payments System (CHIPS)   An international wire transfer system operated by a group of major banks for high-value dollar payments. Closed-end fund   Company whose assets consist of investments in a number of industrial and commercial companies. Closed-end mortgage   Mortgage against which no additional debt may be issued (cf. open-end mortgage). CMOs   Collateralized mortgage obligations. COD   Cash on delivery. Collar   An upper and lower limit on the interest rate on a floating-rate note. Collateral   Assets that are given as security for a loan. Collateralized mortgage obligations (CMOs)   A variation on the mortgage pass-through security in which the cash flows from a pool of mortgages are repackaged into several tranches of bonds with different maturities. Collateral trust bonds   Bonds secured by common stocks or other securities that are owned by the borrower. Collection float   Customer-written checks that have not been received, deposited, and added to the company's available balance (cf. payment float). Commercial draft (bill of exchange)   Demand for payment. Commercial paper   Unsecured notes issued by companies and maturing within nine months. Commitment fee   Fee charged by bank on an unused line of credit. Common-size financial statements   Balance sheet where entries are expressed as proportion of total assets and income statement where entries are expressed as a proportion of revenues. Common stock   Security representing ownership of a corporation. Company cost of capital   The expected return on a portfolio of all the firm's securities. Compensating balance   Non-interest-bearing demand deposits to compensate banks for bank loans or services. Competitive bidding   Means by which public utility holding companies are required to choose their underwriters (cf. negotiated underwriting). Completion bonding   Insurance that a construction contract will be successfully completed. Composition   Voluntary agreement to reduce payments on a firm's debt. Compound interest   Reinvestment of each interest payment on money invested to earn more interest (cf. simple interest). Compound option   Option on an option. Concentration banking   System whereby customers make payments to a regional collection center. The collection center pays the funds into a regional bank account and surplus money is transferred to the company's principal bank. Conditional sale   Sale in which ownership does not pass to the buyer until payment is completed. Conglomerate merger   Merger between two companies in unrelated businesses (cf. horizontal merger, vertical merger). Consol   Name of a perpetual bond issued by the British government. Sometimes used as a general term for perpetuity. Contango   Condition in which spot price of a commodity is below that of the future (cf. backwardation). Contingent claim   Claim whose value depends on the value of another asset. Contingent project   Project that cannot be undertaken unless another project is also undertaken. Continuous compounding   Interest compounded continuously rather than at fixed intervals. Controller   Officer responsible for budgeting, accounting, and auditing in a firm (cf. treasurer). Convenience yield   The extra advantage that firms derive from holding the commodity rather than the future. Conversion price   Par value of a convertible bond divided by the number of shares into which it may be exchanged. Conversion ratio   Number of shares for which a convertible bond may be exchanged. Convertible bond   Bond that may be converted into another security at the holder's option. Similarly convertible preferred stock. Convexity   Term often used to describe the fact that the effect of an interest rate change on bond prices declines as the interest rate rises. Corporate venturing   Practice by which a large manufacturer provides financial support to new companies. Correlation coefficient   Measure of the closeness of the relationship between two variables. Corporation   A business that is legally separate from its owners. Cost company arrangement   Arrangement whereby the shareholders of a project receive output free of charge but agree to pay all operating and financing charges of the project. Cost of capital   Opportunity cost of capital. Counterparty   Party on the other side of a derivative contract. Coupon   (1) Specifically, an attachment to the certificate of a bearer security that must be surrendered to collect interest payment; (2) more generally, interest payment on debt. Covariance   Measure of the co-movement between two variables. Covenant   Clause in a loan agreement. Covered option   Option position with an offsetting position in the underlying asset. Cramdown   Action by a bankruptcy court to enforce a plan of reorganization. Credit derivative   Contract for hedging against loan default or changes in credit risk (see default swap, credit option). Credit option   Similar to a long-term insurance policy against loan default. Credit scoring   A procedure for assigning scores to borrowers on the basis of the risk of default. Cross-default clause   Clause in a loan agreement stating that the company is in default if it fails to meet its obligation on any other debt issue. Cum dividend   With dividend. Cum rights   With rights. Cumulative preferred stock   Stock that takes priority over common stock in regard to dividend payments. Dividends may not be paid on the common stock until all past dividends on the preferred stock have been paid. Cumulative voting   Voting system under which a stockholder may cast all of his or her votes for one candidate for the board of directors (cf. majority voting). Current asset   Asset that will normally be turned into cash within a year. Current liability   Liability that will normally be repaid within a year. Current ratio   Current assets divided by current liabilities—a measure of liquidity. Data mining (data snooping)   Excessive search to find interesting (but probably coincidental) behavior in a body of data. DCF   Discounted cash flow. DDM   Dividend discount model. Debenture   Unsecured bond. Death spiral convertible   Convertible bond exchangeable for shares with a specified market value. Debtor-in-possession financing (DIP financing)   Debt issued by a company in Chapter 11 bankruptcy. Decision tree   Method of representing alternative sequential decisions and the possible outcomes from these decisions. Default swap   Credit derivative in which one party makes fixed payments while the payments by the other party depend on the occurrence of a loan default. Defeasance   Practice whereby the borrower sets aside cash or bonds sufficient to service the borrower's debt. Both the borrower's debt and the offsetting cash or bonds are removed from the balance sheet. Delta   Hedge ratio. Depository transfer check (DTC)   Check made out directly by a local bank to a particular company. Depreciation   (1) Reduction in the book or market value of an asset; (2) portion of an investment that can be deducted from taxable income. Derivative   Asset whose value derives from that of some other asset (e.g., a future or an option). Diff   Differential swap. Differential swap (diff, quanto swap)   Swap between two LIBOR rates of interest, e.g., yen LIBOR for dollar LIBOR. Payments are in one currency. Dilution   Diminution in the proportion of income to which each share is entitled. DIP financing   Debtor-in-possession financing. Direct lease   Lease in which the lessor purchases new equipment from the manufacturer and leases it to the lessee (cf. sale and lease-back). Direct quote   For foreign exchange, the number of U.S. dollars needed to buy one unit of a foreign currency (cf. indirect quote). Dirty price   Bond price including accrued interest, i.e., the price paid by the bond buyer (cf. clean price). Discount bond   Debt sold for less than its principal value. If a discount bond pays no interest, it is called a "pure" discount, or zero-coupon, bond. Discounted cash flow (DCF)   Future cash flows multiplied by discount factors to obtain present value. Discount factor   Present value of $1 received at a stated future date. Discount rate   Rate used to calculate the present value of future cash flows. Discounted payback rule   Requirement that discounted values of cash flows should be sufficient to pay back initial investment within a specified time. Discriminatory price auction   Auction in which successful bidders pay the price they bid (cf. uniform price auction). Disintermediation   Withdrawal of funds from a financial institution in order to invest them directly (cf. intermediation). Dividend   Payment by a company to its stockholders. Dividend discount model   Model showing that the value of a share is equal to the discounted value of future dividends. Dividend reinvestment plan (DRIP)   Plan that allows shareholders to reinvest dividends automatically. Dividend yield   Annual dividend divided by share price. Double-declining-balance depreciation   Method of accelerated depreciation. Double-tax agreement   Agreement between two countries that taxes paid abroad can be offset against domestic taxes levied on foreign dividends. Down-and-in option   Barrier option that comes into existence if asset price hits a barrier. Down-and-out option   Barrier option that expires if asset price hits a barrier. DRIP   Dividend reinvestment plan. Drop lock   An arrangement whereby the interest rate on a floating-rate note or preferred stock becomes fixed if it falls to a specified level. DTC   Depository transfer check. Dual-class equity   Shares with different voting rights. Dual-currency bond   Bond with interest paid in one currency and principal paid in another. Duration   The average number of years to an asset's discounted cash flows. EBIT   Earnings before interest and taxes. EBITDA   Earnings before interest, taxes, depreciation, and amortization. Economic exposure   Risk that arises from changes in real exchange rates (cf. transaction exposure, translation exposure). Economic income   Cash flow plus change in present value. Economic rents   Profits in excess of the competitive level. Economic value added (EVA)   A measure of residual income implemented by the consulting firm Stern Stewart. Efficient market   Market in which security prices reflect information instantaneously. Efficient portfolio   Portfolio that offers the lowest risk (standard deviation) for its expected return and the highest expected return for its level of risk. EFT   Electronic funds transfer. Electronic funds transfer (EFT)   Transfer of money electronically (e.g., by Fedwire). Employee stock ownership plan (ESOP)   A company contributes to a trust fund that buys stock on behalf of employees. Entrenching investment   An investment that makes particular use of the skills of existing management. EPS   Earnings per share. Equipment trust certificate   Form of secured debt generally used to finance railroad equipment. The trustee retains ownership of the equipment until the debt is repaid. Equity   (1) Common stock and preferred stock. Often used to refer to common stock only. (2) Net worth. Equivalent annual cash flow (or cost)   Annuity with the same net present value as the company's proposed investment. ESOP   Employee stock ownership plan. Euribor   Euro Interbank Offered Rate. Euro Interbank offered rate (Euribor)   The interest rate at which major international banks in Europe lend euros to each other. Eurobond   Bond that is marketed internationally. Eurodollar deposit   Dollar deposit with a bank outside the United States. European option   Option that can be exercised only on final exercise date (cf. American option). EVA   Economic value added. Event risk   The risk that an unanticipated event (e.g. a takeover) will lead to a debt default. Evergreen credit   Revolving credit without maturity. Exchange of assets   Acquisition of another company by purchase of its assets in exchange for cash or shares. Exchange of stock   Acquisition of another company by purchase of its stock in exchange for cash or shares. Ex dividend   Purchase of shares in which the buyer is not entitled to the forthcoming dividend (cf. with dividend, cum dividend). Exercise price (striking price)   Price at which a call option or put option may be exercised. Expectations theory   Theory that forward interest rate (forward exchange rate) equals expected spot rate. Expected return   Average of possible returns weighted by their probabilities. Ex rights   Purchase of shares in which the buyer is not entitled to the rights to buy shares in the company's rights issue (cf. with rights, cum rights, rights on). Extendable bond   Bond whose maturity can be extended at the option of the lender (or issuer). External finance   Finance that is not generated by the firm: new borrowing or an issue of stock (cf. internal finance). Extra dividend   Dividend that may or may not be repeated (cf. regular dividend). Face value   Par value. Factoring   Arrangement whereby a financial institution buys a company's accounts receivable and collects the debt. Fair price provision   Appraisal rights. Fallen angel   Junk bond that was formerly investment grade. FASB   Financial Accounting Standards Board. FCIA   Foreign Credit Insurance Association. FDIC   Federal Deposit Insurance Corporation. Federal funds   Non-interest-bearing deposits by banks at the Federal Reserve. Excess reserves are lent by banks to each other.