A comprehensive A-to-Z listing of 2,500 financial terms
- Abandonment option
- The option of terminating an
investment earlier than originally planned.
- Abnormal returns
- Part of the return that is not
due to systematic influences (market wide influences). In other words,
abnormal returns are above those predicted by the market movement alone.
Related: excess returns.
- Absolute priority
- Rule in bankruptcy proceedings
whereby senior creditors are required to be paid in full before junior
creditors receive any payment.
- Accelerated cost recovery
- Schedule of depreciation
rates allowed for tax purposes.
- Accelerated depreciation
- Any depreciation method that
produces larger deductions for depreciation in the early years of a
project's life. Accelerated cost recovery system (ACRS), which is a
depreciation schedule allowed for tax purposes, is one such example.
- Accounting exposure
- The change in the value of a firm's foreign currency denominated
accounts due to a change in
- Accounting earnings
- Earnings of a firm as
reported on its
- Accounting insolvency
- Total liabilities exceed total
assets. A firm with a negative
net worth is insolvent on the
- Accounting liquidity
- The ease and quickness with which assets
can be converted to cash.
- Accounts payable
- Money owed to suppliers.
- Accounts receivable
- Money owed by customers.
- Accounts receivable turnover
- The ratio of net credit sales to
average accounts receivable, a measure of how quickly customers
pay their bills.
- Accretion (of a discount)
- In portfolio accounting, a straight-line accumulation of
capital gains on
discount bond in
anticipation of receipt of par
- Accrual bond
- A bond on which interest accrues, but is not paid to the investor during the time of accrual. The amount of accrued interest is added to the remaining
principal of the bond and is paid
- Accrued interest
- The accumulated coupon
interest earned but not yet paid to the seller of a
bond by the buyer
(unless the bond is in default).
- Accumulated Benefit Obligation (ABO)
- An approximate measure of the liability of a plan in the event of a termination at the date the calculation is performed. Related: projected benefit obl
- Acid-test ratio
- Also called the quick ratio, the ratio of
current assets minus
inventories, accruals, and prepaid items to
- A firm that is being acquired.
- A firm or individual that is acquiring something.
- When a firm buys another firm.
- Acquisition of assets
- A merger or
consolidation in which an
acquirer purchases the selling firm's assets.
- Acquisition of stock
- A merger or
in which an acquirer purchases the acquiree's
- Act of state doctrine
- This doctrine says that a nation is sovereign within its own
borders and its domestic actions may not be questioned in the
courts of another nation.
- A market in which there is much
- Active portfolio strategy
- A strategy that uses available information and forecasting
techniques to seek a better performance than a
that is simply diversified broadly. Related:
- The physical commodity
underlying a futures contract.
Cash commodity, physical.
- Additional hedge
- A protection against borrower fallout risk in the
- Adjustable rate preferred stock (ARPS)
- Publicly traded issues that may be
mortgages and MBSs.
- Adjusted present value (APV)
- The net present value analysis of an asset if financed solely
by equity (present value of un-levered cash flows), plus the
present value of any
financing decisions (levered cash flows). In other words, the
various tax shields provided by the deductibility of interest
and the benefits of other investment tax credits are calculated
separately. This analysis is often used for highly leveraged
transactions such as a
- Administrative pricing rules
- IRS rules used to allocate income on export sales to a foreign
- Advance commitment
- A promise to sell an asset before the seller
has lined up purchase of the asset. This seller can offset risk by
purchasing a futures
contract to fix the sales price.
- Adverse selection
- A situation in which market participation is a negative
- Affirmative covenant
- A bond covenant that specifies
certain actions the firm must take.
- After-tax profit margin
- The ratio of net income to net
- After-tax real rate of return
- Money after-tax rate of return minus the
- Federal agency
- Agency bank
- A form of organization commonly used by foreign banks to enter the
U.S. market. An agency bank cannot accept deposits or extend loans in
its own name; it acts as agent for the parent bank.
- Agency basis
- A means of compensating the broker of a program
trade solely on the basis of
commission established through
bids submitted by various brokerage firms. agency incentive
arrangement. A means of compensating the broker of a program trade
prices for issues to be traded in
determining commissions or fees.
- Agency cost view
- The argument that specifies that the various
agency costs create a complex
environment in which total agency costs are at a minimum with some,
but less than 100%, debt financing.
- Agency costs
- The incremental costs of having an agent make decisions for a
- Agency pass-throughs
pass-through securities whose principal and
interest payments are guaranteed by
government agencies, such as the Government National Mortgage Association
(" Ginnie Mae "), Federal Home Loan Mortgage Corporation
(" Freddie Mac") and Federal National Mortgage Association
(" Fannie Mae").
- Agency problem
- Conflicts of interest among stockholders, bondholders, and managers.
- Agency theory
- The analysis of
principal-agent relationships, wherein one person, an
agent, acts on behalf of anther person, a
- The decision-maker in a
- Process in corporate
financial planning whereby the smaller investment proposals of
each of the firm's operational units are added up and in effect
treated as a big picture.
- Aging schedule
- A table of accounts receivable
broken down into age categories (such as 0-30 days, 30-60 days,
and 60-90 days), which is used to see whether customer payments are
keeping close to schedule.
- Association of International Bond Dealers.
- All equity rate
- The discount rate
that reflects only the
business risks of a project and abstracts from the effects of
- All or none
- Requirement that none of an order be executed unless all of it
can be executed at the specified price.
- All-equity rate
- The discount rate that
reflects only the business risks of a project and abstracts from the
effects of financing.
- All-in cost
- Total costs, explicit and implicit.
- All-or-none underwriting
- An arrangement whereby a security issue is canceled if the
underwriter is unable to re-sell
the entire issue.
- A measure of selection risk (also known as residual risk) of
a mutual fund in relation to the
market. A positive alpha is the extra
return awarded to the investor
for taking a risk, instead of accepting the market return. For example,
an alpha of 0.4 means the fund outperformed the market-based
return estimate by 0.4%. An alpha of
-0.6 means a fund's monthly return was 0.6% less than would have been
predicted from the change in the market alone.
In a Jensen Index, it is factor
to represent the portfolio's performance that diverges from its beta,
representing a measure of the manager's performance.
- Alpha equation
- The alpha of a fund is determined
- [ (sum of y) -((b)(sum of x)) ] / n
- where: n =number of observations (36 months)
- b = beta of the fund
- x = rate of return for the
- y = rate of return for the fund
- Alternative mortgage
- Variations of
mortgage instruments such as adjustable-rate and variable-rate
mortgages, graduated-payment mortgages, reverse-annuity mortgages,
and several seldom-used variations.
- American Depositary Receipts
- Certificates issued by a U.S. depositary bank, representing foreign
shares held by the bank, usually by a
branch or correspondent in the country of issue. One ADR may represent
a portion of a foreign share, one share or a bundle of shares of a
foreign corporation. If the ADR's are "sponsored," the
corporation provides financial information and other assistance to the
bank and may subsidize the administration of the ADRs.
"Unsponsored" ADRs do not receive such assistance. ADRs carry
the same currency, political and economic risks as the underlying foreign
share; the prices of the two,
adjusted for the SDR/ordinary ratio, are kept essentially identical
by arbitrage. American depositary
shares(ADSs) are a similar form of certification.
- American option
- An option that may be exercised
at any time up to and including the
Related: European option
- American shares
- Securities certificates issued in the U.S. by a
acting on behalf of the foreign issuer. The certificates represent
claims to foreign equities.
- American Stock Exchange (AMEX)
- The second-largest stock exchange
in the United States. It trades mostly in small-to medium-sized
- American-style option
- An option
contract that can be exercised at
any time between the date of purchase and the
expiration date. Most
exchange-traded options are American style.
- The repayment of a loan by installments.
- Amortization factor
- The pool factor
implied by the scheduled amortization
assuming no prepayemts.
- Amortizing interest rate swap
- Swap in which the principal
or national amount rises (falls) as interest rates rise (decline).
- Employee of a brokerage or fund management house who studies
companies and makes buy-and-sell recommendations on their stocks.
Most specialize in a specific industry.
- Individuals providing
- Announcement date
- Date on which particular news concerning a given company is
announced to the public. Used in event studies, which researchers use
to evaluate the economic impact of events of interest.
- Annual effective yield
- Same as percentage yield.
- Annual fund operating expenses
- For investment companies, the
management fee and "other expenses," including the
expenses for maintaining shareholder records, providing shareholders
with financial statements, and providing custodial and accounting
services. For 12b-1 funds, selling and marketing costs are included.
- Annual percentage rate (APR)
- The periodic rate times the
number of periods in a year. For example, a 5% quarterly return has
an APR of 20%.
- Annual percentage yield (APY)
- The effective, or true, annual
rate of return. The APY is the rate actually earned or paid in one
year, taking into account the affect of compounding. The APY is
calculated by taking one plus the periodic rate and raising it to the
number of periods in a year. For example, a 1% per month rate has an
APY of 12.68% (1.01^12).
- Annual rate of return
- There are many ways of calculating the annual rate of return. If the rate of return is calculated on monthly basis, we somtimes multiply this by 12 to express an annual rate of return. This is often c
alled the annual percentage rate . You can also compound and this called the annual percentage yield .
- Annual report
- Yearly record of a publicly held company's financial condition. It
includes a description of the firm's operations, its balance sheet and
SEC rules require that it be distributed
to all shareholders. A more detailed version is called a
- Annualized gain
- If stock X appreciates 1.5% in one month, the annualized gain for
that sock over a twelve month period is 12*1.5% = 18%.
Compounded over the twelve month
period, the gain is (1.015)^12 = 19.6%.
- Annualized holding period return
- The annual rate of return that when
compounded t times, would
have given the same t-period holding return as actually
occurred from period 1 to period t.
- A regular periodic payment made by an insurance company to a
policyholder for a specified period of time.
- Annuity due
- An annuity with n payments, wherein the first payment is
made at time t = 0 and the last payment is made at time
t = n - 1.
- Annuity factor
- Present value of $1 paid
for each of t periods.
- Annuity in arrears
- An annuity with a first payment on full period hence, rather than
- Arrangements whereby customers who pay before the final date may be
entitled to deduct a normal rate
- Antidilutive effect
- Result of a transaction that increases
earnings per common share
(e.g. by decreasing the number of shares outstanding).
- Appraisal ratio
- The signal-to-noise ratio of an analyst's forecasts. The ratio of
alpha to residual
- Appraisal rights
- A right of shareholders in a
merger to demand the payment of a
fair price for their shares,
as determined independently.
- Appropriation request
- Formal request for funds for capital investment project.
- The simultaneous buying and selling of a
security at two different
prices in two different markets,
resulting in profits without risk. Perfectly efficient markets present
no arbitrage opportunities. Perfectly
- Arbitrage Pricing Theory (APT)
- An alternative model to the capital
asset pricing model developed by
Stephen Ross and based purely on
- Arbitrage-free option-pricing models
- Yield curve option-pricing
- People who search for and exploit arbitrage opportunities.
- Arithmetic average (mean)
rate of return
Arithmetic mean return.
- Arithmetic mean return
- An average of the subperiod
returns, calculated by summing the subperiod returns and dividing by
he number of subperiods.
- Arms index
- Also known as a trading index (TRIN)= (number of advancing issues)/
(number of declining issues)
(Total up volume )/
(total down volume). An advance/decline market indicator. Less than
1.0 indicates bearish demand, while above 1.0 is bullish. The index
often is smoothed with a simple moving
- Arm's length price
- The price at which a willing buyer and a willing unrelated seller
would freely agree to transact.
- Adjustable rate mortgage. A mortgage that features predetermined adjustments of
the loan interest rate at regular intervals based on an established
index. The interest rate is
adjusted at each interval to a rate equivalent to the index value plus
a predetermined spread, or margin, over the index, usually subject to
per-interval and to life-of-loan interest rate and/or payment rate
- Articles of incorporation
- Legal document establishing a corporation and its structure and
- Asian currency units (ACUs)
- Dollar deposits held in Singapore or other Asian centers.
- Asian option
- Option based on the average price
of the asset during the life of the option.
- This is the quoted ask, or the lowest price an
investor will accept to sell a
stock. Practically speaking, this is the quoted offer at which an
investor can buy
shares of stock; also called the
- Ask price
- A dealer's price to sell a security; also called the offer price.
- Any possession that has value in an exchange.
- Asset/equity ratio
- The ratio of total assets to
- Asset/liability management
- Also called surplus management, the task of managing funds of a
financial institution to accomplish the two goals of a financial
institution: (1) to earn an adequate
return on funds invested and (2) to
maintain a comfortable surplus of assets beyond liabilities.
- Asset activity ratios
- Ratios that measure how
effectively the firm is managing its assets.
- Asset allocation decision
- The decision regarding how an institution's funds should be
distributed among the major classes of assets in which it may invest.
- Asset-backed security
- A security that is collateralized by loans,
leases, receivables, or installment
contracts on personal property, not real estate.
- Asset-based financing
- Methods of financing in which lenders and equity investors look
principally to the cash flow
from a particular asset or set of assets for a return on, and the
return of, their financing.
- Asset classes
- Categories of assets, such as stocks, bonds,
real estate and foreign securities.
- Asset-coverage test
- A bond indenture restriction
that permits additional borrowing on if the ratio of assets to debt
does not fall below a specified minimum.
- Asset for asset swap
- Creditors exchange the debt of one defaulting borrower for the
debt of another defaulting borrower.
- Asset pricing model
- A model for determining the required rate of
return on an asset.
- Asset substitution
- A firm's investing in assets that are riskier than those that the
- Asset substitution problem
- Arises when the stockholders substitute riskier assets for the
firm's existing assets and expropriate value from the debtholders.
- Asset swap
interest rate swap used to alter the
cash flow characteristics of an
institution's assets so as to provide a better match with its
- Asset turnover
- The ratio of net sales to total assets.
- Asset pricing model
- A model, such as the
Capital Asset Pricing Model (CAPM), that determines the required
rate of return on a particular asset.
- A firm's productive resources.
- Assets requirements
- A common element of a financial plan that describes projected
capital spending and the proposed uses of net
- The receipt of an exercise
notice by an options writer that
requires the writer to sell (in the case of a call) or purchase
(in the case of a put) the
underlying security at the specified
- A lack of equivalence between two things, such as the unequal tax
treatment of interest expense and dividend payments.
- Asymmetric information
- Information that is known to some people but not to other people.
- Asymmetric taxes
- A situation wherein participants in a transaction have different
net tax rates.
- An option is at-the-money if the
strike price of the option is
equal to the market price of the
For example, if xyz stock is trading at 54, then the xyz 54
option is at-the-money.
- Attribute bias
- The tendency of stocks preferred by the
dividend discount model
to share certain equity attributes
such as low price-earnings ratios, high dividend yield, high book-value
ratio or membership in a particular
- Auction markets
- Markets in which the prevailing price is determined through the
free interaction of prospective buyers and sellers, as on the floor
of the stock exchange.
- Auction rate preferred stock (ARPS)
- Floating rate preferred
stock, the dividend on which is
adjusted every seven weeks through a Dutch auction.
- Auditor's report
- A section of an annual report
containing the auditor's opinion about the veracity of the
- Authorized shares
- Number of shares authorized for issuance by a firm's corporate
- The correlation of a variable
with itself over successive time intervals.
- Automated Clearing House (ACH)
- A collection of 32 regional electronic interbank networks used to
process transactions electronically with a guaranteed one-day bank
- Automatic stay
- The restricting of liability holders from collection efforts of
collateral seizure, which is automatically imposed when a firm files
for bankruptcy under Chapter 11.
- Using past data to predict future data.
- Availability float
- Checks deposited by a company that have not yet been cleared.
- An arithmetic mean of selected
stocks intended to represent the behavior of the market or some
component of it. One good example is the widely quoted Dow Jones
Industrial Average, which adds the current
prices of the 30 DJIA's stocks, and
divides the results by a predetermined number, the divisor.
- Average accounting return
- The average project earnings
after taxes and depreciation divided by the average
book value of the investment
during its life.
- Average age of accounts receivable
- The weighted-average age of all of the firm's outstanding invoices.
- Average collection period, or days' receivables
- The ratio of accounts receivables
to sales, or the total amount of
credit extended per dollar of daily sales (average AR/sales * 365).
- Average cost of capital
- A firm's required payout to the bondholders and to the stockholders
expressed as a percentage of capital contributed to the firm. Average
cost of capital is computed by dividing the total required cost of
capital by the total amount of contributed capital.
- Average life
- Also referred to as the weighted-average life (WAL).
The average number of years that each dollar of unpaid
principal due on the
mortgage remains outstanding.
Average life is computed as the weighted average time to the receipt
of all future cash flows, using as the weights the dollar amounts of
the principal paydowns.
- Average maturity
- The average time to maturity of
securities held by a mutual fund.
Changes in interest rates have
greater impact on funds with longer average life.
- Average (across-day) measures
- An estimation of price that uses the
average or representative price of a large number of trades.
- Average rate of return (ARR)
- The ratio of the average cash inflow to the amount invested.
- Average tax rate
- Taxes as a fraction of income; total taxes divided by total taxable
- A trade, quote, or market that does not originate with the dealer
in question, e.g., "the bid is
98-10 away from me."