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