About Money 101

A.B.C.D.E.F.G.H.I.J.K.L.M.N.O.P.Q.R.S.T.U.V.W.X.Y.Z

Cable Exchange rate between British pounds sterling and the U.S.$. Calendar List of new issues scheduled to come to market shortly. Calendar effect The tendency of stocks to perform differently at different times, including such anomalies as the January effect, month-of-the-year effect, day-of-the-week effect, and holiday effect. Call An option that gives the right to buy the underlying futures contract. Call an option To exercise a call option. Call date A date before maturity, specified at issuance, when the issuer of a bond may retire part of the bond for a specified call price. Call money rate Also called the broker loan rate , the interest rate that banks charge brokers to finance margin loans to investors. The broker charges the investor the call money rate plus a service charge. Call option An option contract that gives its holder the right (but not the obligation) to purchase a specified number of shares of the underlying stock at the given strike price, on or before the expiration date of the contract. Call premium Premium in price above the par value of a bond or share of preferred stock that must be paid to holders to redeem the bond or share of preferred stock before its scheduled maturity date. Call price The price, specified at issuance, at which the issuer of a bond may retire part of the bond at a specified call date. Call protection A feature of some callable bonds that establishes an initial period when the bonds may not be called. Call price The price for which a bond can be repaid before maturity under a call provision. Call provision An embedded option granting a bond issuer the right to buy back all or part of the issue prior to maturity. Call risk The combination of cash flow uncertainty and reinvestment risk introduced by a call provision. Call swaption A swaption in which the buyer has the right to enter into a swap as a fixed-rate payer. The writer therefore becomes the fixed-rate receiver/floating rate payer. Callable A financial security such as a bond with a call option attached to it, i.e., the issuer has the right to call the security. Canadian agencies Agency banks established by Canadian banks in the U.S. Cap An upper limit on the interest rate on a (FRN) floating-rate note. Capital Money invested in a firm. Capital account Net result of public and private international investment and lending activities. Capital allocation decision Allocation of invested funds between risk-free assets versus the risky portfolio. Capital asset pricing model (CAPM) An economic theory that describes the relationship between risk and expected return, and serves as a model for the pricing of risky securities. The CAPM asserts that the only risk that is priced by rational investors is systematic risk, because that risk cannot be eliminated by diversification. The CAPM says that the expected return of a security or a portfolio is equal to the rate on a risk-free security plus a risk premium. Capital budget A firm's set of planned capital expenditures. Capital budgeting The process of choosing the firm's long-term capital assets. Capital expenditures Amount used during a particular period to acquire or improve long-term assets such as property, plant or equipment. Capital flight The transfer of capital abroad in response to fears of political risk. Capital gain When a stock is sold for a profit, it's the difference between the net sales price of securities and their net cost, or original basis. If a stock is sold below cost, the difference is a capital loss. Capital gains yield The price change portion of a stock's return. Capital lease A lease obligation that has to be capitalized on the balance sheet. Capital loss The difference between the net cost of a security and the net sale price, if that security is sold at a loss. Capital market The market for trading long-term debt instruments (those that mature in more than one year). Capital market efficiency Reflects the relative amount of wealth wasted in making transactions. An efficient capital market allows the transfer of assets with little wealth loss. See: efficient market hypothesis. Capital market imperfections view The view that issuing debt is generally valuable but that the firm's optimal choice of capital structure is a dynamic process that involves the other views of capital structure (net corporate/personal tax, agency cost, bankruptcy cost, and pecking order), which result from considerations of asymmetric information, asymmetric taxes, and transaction costs. Capital market line (CML) The line defined by every combination of the risk-free asset and the market portfolio. Capital rationing Placing one or more limits on the amount of new investment undertaken by a firm, either by using a higher cost of capital, or by setting a maximum on parts of, and/or the entirety of, the capital budget. Capital structure The makeup of the liabilities and stockholders' equity side of the balance sheet, especially the ratio of debt to equity and the mixture of short and long maturities. Capital surplus Amounts of directly contributed equity capital in excess of the par value. Capitalization The debt and/or equity mix that fund a firm's assets. Capitalization method A method of constructing a replicating portfolio in which the manager purchases a number of the largest-capitalized names in the index stock in proportion to their capitalization. Capitalization ratios Also called financial leverage ratios, these ratios compare debt to total capitalization and thus reflect the extent to which a corporation is trading on its equity. Capitalization ratios can be interpreted only in the context of the stability of industry and company earnings and cash flow. Capitalization table A table showing the capitalization of a firm, which typically includes the amount of capital obtained from each source - long-term debt and common equity - and the respective capitalization ratios. Capitalized Recorded in asset accounts and then depreciated or amortized, as is appropriate for expenditures for items with useful lives greater than one year. Capitalized interest Interest that is not immediately expensed, but rather is considered as an asset and is then amortized through the income statement over time. Car A loose quantity term sometimes used to describe a the amount of a commodity underlying one commodity contract; e.g., "a car of bellies." Derived from the fact that quantities of the product specified in a contract used to correspond closely to the capacity of a railroad car. CARDs Certificates of Amortized Revolving Debt. Pass-through securities backed by credit card receivables. Carry Related:net financing cost. Carring costs Costs that increase with increases in the level of investment in current assets. Carrying value Book value. CARs Certificates of Automobile Receivables. Pass-through securities backed by automobile receivables. Cash The value of assets that can be converted into cash immediately, as reported by a company. Usually includes bank accounts and marketable securities, such as government bonds and Banker's Acceptances. Cash equivalents on balance sheets include securities (e.g., notes) that mature within 90 days. Cash budget A forecasted summary of a firm's expected cash inflows and cash outflows as well as its expected cash and loan balances. Cash and carry Purchase of a security and simultaneous sale of a future, with the balance being financed with a loan or repo. Cash and equivalents The value of assets that can be converted into cash immediately, as reported by a company. Usually includes bank accounts and marketable securities, such as government bonds and Banker's Acceptances. Cash equivalents on balance sheets include securities (e.g., notes) that mature within 90 days. Cash commodity The actual physical commodity, as distinguished from a futures contract. Cash conversion cycle The length of time between a firm's purchase of inventory and the receipt of cash from accounts receivable. Cash cow A company that pays out all earnings per share to stockholders as dividends. Or, a company or division of a company that generates a steady and significant amount of free cash flow. Cash cycle In general, the time between cash disbursement and cash collection. In net working capital management, it can be thought of as the operating cycle less the accounts payable payment period. Cash deficiency agreement An agreement to invest cash in a project to the extent required to cover any cash deficiency the project may experience. Cash delivery The provision of some futures contracts that requires not delivery of underlying assets but settlement according to the cash value of the asset. Cash discount An incentive offered to purchasers of a firm's product for payment within a specified time period, such as ten days. Cash dividend A dividend paid in cash to a company's shareholders. The amount is normally based on profitability and is taxable as income. A cash distribution may include capital gains and return of capital in addition to the dividend. Cash equivalent A short-term security that is sufficiently liquid that it may be considered the financial equivalent of cash. Cash flow In investments, it represents earnings before depreciation , amortization and non-cash charges. Sometimes called cash earnings. Cash flow from operations (called funds from operations ) by real estate and other investment trusts is important because it indicates the ability to pay dividends. Cash flow after interest and taxes Net income plus depreciation. Cash flow coverage ratio The number of times that financial obligations (for interest, principal payments, preferred stock dividends, and rental payments) are covered by earnings before interest, taxes, rental payments, and depreciation. Cash flow from operations A firm's net cash inflow resulting directly from its regular operations (disregarding extraordinary items such as the sale of fixed assets or transaction costs associated with issuing securities), calculated as the sum of net income plus non-cash expenses that were deducted in calculating net income. Cash flow matching Also called dedicating a portfolio, this is an alternative to multiperiod immunization in which the manager matches the maturity of each element in the liability stream, working backward from the last liability to assure all required cash flows. Cash flow per common share Cash flow from operations minus preferred stock dividends, divided by the number of common shares outstanding. Cash flow time-line Line depicting the operating activities and cash flows for a firm over a particular period. Cash-flow break-even point The point below which the firm will need either to obtain additional financing or to liquidate some of its assets to meet its fixed costs. Cash management bill Very short maturity bills that the Treasury occasionally sells because its cash balances are down and it needs money for a few days. Cash markets Also called spot markets, these are markets that involve the immediate delivery of a security or instrument. Related: derivative markets. Cash offer A public equity issue that is sold to all interested investors. Cash ratio The proportion of a firm's assets held as cash. Cash settlement contracts Futures contracts, such as stock index futures, that settle for cash, not involving the delivery of the underlying. Cash transaction A transaction where exchange is immediate, as contrasted to a forward contract, which calls for future delivery of an asset at an agreed-upon price. Cash-equivalent items Temporary investments of currently excess cash in short-term, high-quality investment media such as treasury bills and Banker's Acceptances. Cash-surrender value An amount the insurance company will pay if the policyholder ends a whole life insurance policy. Cashout Refers to a situation where a firm runs out of cash and cannot readily sell marketable securities. CBOE Chicago Board Options Exchange. A securities exchange created in the early 1970s for the public trading of standardized option contracts. CEDEL A centralized clearing system for eurobonds. Certainty equivalent An amount that would be accepted in lieu of a chance at a possible higher, but uncertain, amount. Certificate of deposit (CD) Also called a time deposit, this is a certificate issued by a bank or thrift that indicates a specified sum of money has been deposited. A CD bears a maturity date and a specified interest rate, and can be issued in any denomination. The duration can be up to five years. CFAT Cash flow after taxes. CFTC The Commodity Futures Trading Commission is the federal agency created by Congress to regulate futures trading. The Commodity Exchange Act of 1974 became effective April 21, 1975. Previously, futures trading had been regulated by the Commodity Exchange Authority of the USDA. Characteristic line The market model applied to a single security. The slope of the line is a security's beta. Changes in Financial Position Sources of funds internally provided from operations that alter a company's cash flow position: depreciation, deferred taxes, other sources, and capital expenditures. Chartists Related: technical analysts. Cheapest to deliver issue The acceptable Treasury security with the highest implied repo rate; the rate that a seller of a futures contract can earn by buying an issue and then delivering it at the settlement date. Chicago Mercantile Exchange (CME) A not-for-profit corporation owned by its members. Its primary functions are to provide a location for trading futures and options, collect and disseminate market information, maintain a clearing mechanism and enforce trading rules. Chinese wall Communication barrier between financiers (investment bankers) and traders. This barrier is erected to prevent the sharing of inside information that bankers are likely to have. Churning Excessive trading of a client's \ account in order to increase the broker's commissions. Circle Underwriters, actual or potential, often seek out and "circle" investor interest in a new issue before final pricing. The customer circled basically made a commitment to purchase the issue if it comes at an agreed-upon price. In the latter case, if the price is other than that stipulated, the customer supposedly has first offer at the actual price. Circus swap A fixed rate currency swap against floating U.S. dollar LIBOR payments. Claim dilution A reduction in the likelihood one or more of the firm's claimants will be fully repaid, including time value of money considerations. Claimant A party to an explicit or implicit contract. Clean opinion An auditor's opinion reflecting an unqualified acceptance of a company's financial statements. Clean price Bond price excluding accrued interest. Clear A trade is carried out by the seller delivering securities and the buyer delivering funds in proper form. A trade that does not clear is said to fail. Clear a position To eliminate a long or short position, leaving no ownership or obligation. Clearing House Automated Payments System (CHAPS) A computerized clearing system for sterling funds that began operations in 1984. It includes 14 member banks, nearly 450 participating banks, and is one of the clearing companies within the structure of the Association for Payment Clearing Services (APACS). Clearing House Interbank Payments System (CHIPS) An international wire transfer system for high-value payments operated by a group of major banks. Clearing member A member firm of a clearing house. Each clearing member must also be a member of the exchange. Not all members of the exchange, however, are members of the clearing organization. All trades of a non-clearing member must be registered with, and eventually settled through, a clearing member. Clearinghouse An adjunct to a futures exchange through which transactions executed its floor are settled by a process of matching purchases and sales. A clearing organization is also charged with the proper conduct of delivery procedures and the adequate financing of the entire operation. Clientele effect The grouping of investors who have a preference that the firm follow a particular financing policy, such as the amount of leverage it uses. Close, the The period at the end of the trading session. Sometimes used to refer to closing price. Related: Opening, the. Closed-end fund An investment company that sells shares like any other corporation and usually does not redeem its shares. A publicly traded fund sold on stock exchanges or over the counter that may trade above or below its net asset value. Related: Open-end fund. Closed-end mortgage Mortgage against which no additional debt may be issued. Closing purchase A transaction in which the purchaser's intention is to reduce or eliminate a short position in a stock, or in a given series of options. Closing range Also known as the range. The high and low prices, or bids and offers, recorded during the period designated as the official close. Related: settlement price. Closing sale A transaction in which the seller's intention is to reduce or eliminate a long position in a stock, or a given series of options. Cluster analysis A statistical technique that identifies clusters of stocks whose returns are highly correlated within each cluster and relatively uncorrelated between clusters. Cluster analysis has identified groupings such as growth, cyclical, stable and energy stocks. Coefficient of determination A measure of the goodness of fit of the relationship between the dependent and independent variables in a regression analysis; for instance, the percentage of variation in the return of an asset explained by the market portfolio return. Coinsurance effect Refers to the fact that the merger of two firms decreases the probability of default on either firm's debt. Collar An upper and lower limit on the interest rate on a floating-rate note (FRN). Collateral Assets than can be repossessed if a borrower defaults. Collateral trust bonds A bond in which the issuer (often a holding company) grants investors a lien on stocks, notes, bonds, or other financial asset as security. Compare mortgage bond. Collateralized mortgage obligation (CMO) A security backed by a pool of pass-through rates , structured so that there are several classes of bondholders with varying maturities, called tranches. The principal payments from the underlying pool of pass-through securities are used to retire the bonds on a priority basis as specified in the prospectus. Related: mortgage pass-through security Collection float The negative float that is created between the time when you deposit a check in your account and the time when funds are made available. Collection fractions The percentage of a given month's sales collected during the month of sale and each month following the month of sale. Collection policy Procedures followed by a firm in attempting to collect accounts receivables. Collective wisdom The combination of all of the individual opinions about a stock's or security's value. Comanger A bank that ranks just below a lead manager in a syndicated Eurocredit or international bond issue. Comanagers may assist the lead manger bank in the pricing and issue of the instrument. Combination matching Also called horizon matching, a variation of multiperiod immunization and cash flow matching in which a portfolio is created that is always duration matched and also cash-matched in the first few years. Combination strategy A strategy in which a put and with the same strike price and expiration are either both bought or both sold. Related: Straddle Commercial draft Demand for payment. Commercial paper Short-term unsecured promissory notes issued by a corporation. The maturity of commercial paper is typically less than 270 days; the most common maturity range is 30 to 50 days or less. Commercial risk The risk that a foreign debtor will be unable to pay its debts because of business events, such as bankruptcy. Commission The fee paid to a broker to execute a trade, based on number of shares, bonds, options, and/or their dollar value. In 1975, deregulation led to the creation of discount brokers, who charge lower commissions than full service brokers. Full service brokers offer advice and usually have a full staff of analysts who follow specific industries. Discount brokers simply execute a client's order -- and usually do not offer an opinion on a stock. Also known as a round-turn. Commission broker A broker on the floor of an exchange acts as agent for a particular brokerage house and who buys and sells stocks for the brokerage house on a commission basis. Commission house A firm which buys and sells future contracts for customer accounts. Related: futures commission merchant, omnibus account. Commitment A trader is said to have a commitment when he assumes the obligation to accept or make delivery on a futures contract. Related: Open interest Commitment fee A fee paid to a commercial bank in return for its legal commitment to lend funds that have not yet been advanced. Committee, AIMR Performance Presentation Standards Implementation Committee The Association for Investment Management and Research (AIMR's) Performance Presentation Standards Implementation Committee is charged with the responsibility to interpret, revise and update the AIMR Performance Presentation Standards (AIMR-PPS(TM) for portfolio performance presentations. Commodities Exchange Center (CEC) The location of five New York futures exchanges: Commodity Exchange, Inc. (COMEX), the New York Mercantile exchange (NYMEX), the New York Cotton Exchange, the Coffee, Sugar and Cocoa exchange (CSC), and the New York futures exchange (NYFE). common size statement A statement in which all items are expressed as a percentage of a base figure, useful for purposes of analyzing trends and the changing relationship between financial statement items. For example, all items in each year's income statement could be presented as a percentage of net sales. Commodity A commodity is food, metal, or another physical substance that investors buy or sell, usually via futures contracts. Common market An agreement between two or more countries that permits the free movement of capital and labor as well as goods and services. Common shares In general, there are two types of shares, common and preferred stock. The common shares usually entitle the shareholders to vote at shareholders meetings. The common shares have a discretionary dividend. Common stock These are securities that represent equity ownership in a company. Common shares let an investor vote on such matters as the election of directors. They also give the holder a share in a company's profits via dividend payments or the capital appreciation of the security. Common stock/other equity Value of outstanding common shares at par, plus accumulated retained earnings. Also called shareholders' equity. Common stock equivalent A convertible security that is traded like an equity issue because the optioned common stock is trading high. Common stock market The market for trading equities, not including preferred stock. Common stock ratios Ratios that are designed to measure the relative claims of stockholders to earnings (cash flow per share), and equity (book value per share) of a firm. Common-base-year analysis The representing of accounting information over multiple years as percentages of amounts in an initial year. Common-size analysis The representing of balance sheet items as percentages of assets and of income statement items as percentages of sales. Company-specific risk Related: Unsystematic risk Comparative credit analysis A method of analysis in which a firm is compared to others that have a desired target debt rating in order to infer an appropriate financial ratio target. Comparison universe The collection of money managers of similar investment style used for assessing relative performance of a portfolio manager. Compensating balance An excess balance that is left in a bank to provide indirect compensation for loans extended or services provided. Competence Sufficient ability or fitness for ones needs. Possessing the necessary abilities to be qualified to achieve a certain goal or complete a project. Competition Intra- or intermarket rivalry between businesses trying to obtain a larger piece of the same market share. Competitive bidding A securities offering process in which securities firms submit competing bids to the issuer for the securities the issuer wishes to sell. Competitive offering An offering of securities through competitive bidding. Complete capital market A market in which there is a distinct marketable security for each and every possible outcome. Complete portfolio The entire portfolio, including risky and risk-free assets. Completion bonding Insurance that a construction contract will be successfully completed. Completion risk The risk that a project will not be brought into operation successfully. Completion undertaking An undertaking either (1) to complete a project such that it meets certain specified performance criteria on or before a certain specified date or (2) to repay project debt if the completion test cannot be met. Composition Voluntary arrangement to restructure a firm's debt, under which payment is reduced. Compound interest Interest paid on previously earned interest as well as on the principal. Compound option Option on an option. Compounding The process of accumulating the time value of money forward in time. For example, interest earned in one period earns additional interest during each subsequent time period. Compounding frequency The number of compounding periods in a year. For example, quarterly compounding has a compounding frequency of 4. Compounding period The length of the time period (for example, a quarter in the case of quarterly compounding) that elapses before interest compounds. Comprehensive due diligence investigation The investigation of a firm's business in conjunction with a securities offering to determine whether the firm's business and financial situation and its prospects are adequately disclosed in the prospectus for the offering. Concentration account A single centralized account into which funds collected at regional locations (lockboxes) are transferred. Concentration services Movement of cash from different lockbox locations into a single concentration account from which disbursements and investments are made. Concession agreement An understanding between a company and the host government that specifies the rules under which the company can operate locally. Conditional sales contracts Similar to equipment trust certificates except that the lender is either the equipment manufacturer or a bank or finance company to whom the manufacturer has sold the conditional sales contract. Confidence indicator A measure of investors' faith in the economy and the securities market. A low or deteriorating level of confidence is considered by many technical analysts as a bearish sign. Confidence level The degree of assurance that a specified failure rate is not exceeded. Confirmation The written statement that follows any "trade" in the securities markets. Confirmation is issued immediately after a trade is executed. It spells out settlement date, terms, commission, etc. Conflict between bondholders and stockholders These two groups may have interests in a corporation that conflict. Sources of conflict include dividends, distortion of investment, and underinvestment. Protective covenants work to resolve these conflicts. Conglomerate A firm engaged in two or more unrelated businesses. Conglomerate merger A merger involving two or more firms that are in unrelated businesses. Consensus forecast The mean of all financial analysts' forecasts for a company. Consol A government bond with no maturity . Popular in Great Britain. The formula for valuing these bonds is simple. The consol payment divided by yield to maturity is the price of the bond. Consolidation The combining of two or more firms to form an entirely new entity. Consortium banks A merchant banking subsidiary set up by several banks that may or may not be of the same nationality. Consortium banks are common in the Euromarket and are active in loan syndication. Constant-growth model Also called the Gordon-Shapiro model, an application of the dividend discount model which assumes (1) a fixed growth rate for future dividends and (2) a single discount rate. Consumer credit Credit granted by a firm to consumers for the purchase of goods or services. Also called retail credit. Consumer Price Index The CPI, as it is called, measures the prices of consumer goods and services and is a measure of the pace of U.S. inflation. The U.S.Department of Labor publishes the CPI very month. Contango A market condition in which futures prices are higher in the distant delivery months. Contingent claim A claim that can be made only if one or more specified outcomes occur. Contingent deferred sales charge (CDSC) The formal name for the load of a back-end load fund. Contingent immunization An arrangement in which the money manager pursues an active bond portfolio strategy until an adverse investment experience drives the then-available potential return down to the safety-net level. When that point is reached, the money manager is obligated to pursue an immunization strategy to lock in the safety-net level return. Contingent pension liability Under ERISA, the firm is liable to the plan participants for up to 39% of the net worth of the firm. Continuous compounding The process of accumulating the time value of money forward in time on a continuous, or instantaneous, basis. Interest is earned continuously, and at each instant, the interest that accrues immediately begins earning interest on itself. Continuous random variable A random value that can take any fractional value within specified ranges, as contrasted with a discrete variable. Contract A term of reference describing a unit of trading for a financial or commodity future. Also, the actual bilateral agreement between the buyer and seller of a transaction as defined by an exchange. Contract month The month in which futures contracts may be satisfied by making or accepting a delivery. Also called value managers, those who assemble portfolios with relatively lower betas, lower price-book and P/E ratios and higher dividend yields, seeing value where others do not. Contribution margin The difference between variable revenue and variable cost. Control 50% of the outstanding votes plus one vote. Controlled disbursement A service that provides for a single presentation of checks each day (typically in the early part of the day). Controlled foreign corporation (CFC) A foreign corporation whose voting stock is more than 50% owned by U.S. stockholders, each of whom owns at least 10% of the voting power. Controller The corporate manager responsible for the firm's accounting activities. Convenience yield The extra advantage that firms derive from holding the commodity rather than the future. Convention statement An annual statement filed by a life insurance company in each state where it does business in compliance with that state's regulations. The statement and supporting documents show, among other things, the assets, liabilities, and surplus of the reporting company. Conventional mortgage A loan based on the credit of the borrower and on the collateral for the mortgage. Conventional pass-throughs Also called private-label pass-throughs, any mortgage pass-through security not guaranteed by government agencies. Compare agency pass-throughs. Conventional project A project with a negative initial cash flow (cash outflow), which is expected to be followed by one or more future positive cash flows (cash inflows). Convergence The movement of the price of a futures contract toward the price of the underlying cash commodity. At the start, the contract price is higher because of the time value. But as the contract nears expiration, the futures price and the cash price converge. Conversion factors Rules set by the Chicago Board of Trade for determining the invoice price of each acceptable deliverable Treasury issue against the Treasury Bond futures contract. Conversion parity price Related:Market conversion price Conversion premium The percentage by which the conversion price in a convertible security exceeds the prevailing common stock price at the time the convertible security is issued. Convertibility The degree of freedom to exchange a currency without government restrictions or controls. Convertible price The contractually specified price per share at which a convertible security can be converted into shares of common stock. Conversion ratio The number of shares of common stock that the security holder will receive from exercising the call option of a convertible security. Conversion value Also called parity value, the value of a convertible security if it is converted immediately. Convertible bonds Bonds that can be converted into common stock at the option of the holder. Convertible eurobond A eurobond that can be converted into another asset, often through exercise of attached warrants. Convertible exchangeable preferred stock Convertible preferred stock that may be exchanged, at the issuer's option, into convertible bonds that have the same conversion features as the convertible preferred stock. Convertible preferred stock Preferred stock that can be converted into common stock at the option of the holder. Convertible security A security that can be converted into common stock at the option of the security holder, including convertible bonds and convertible preferred stock. Convex Bowed, as in the shape of a curve. Usually referring to the price/required yield relationship for option-free bonds. Core competency Primary area of competence. Narrowly defined fields or tasks at which a company or business excels. Primary areas of specialty. Corner A Market To purchase enough of the available supply of a commodity or stock in order to manipulate its price. Corporate acquisition The acquisition of one firm by anther firm. Corporate bonds Debt obligations issued by corporations. Corporate charter A legal document creating a corporation. Corporate finance One of the three areas of the discipline of finance. It deals with the operation of the firm (both the investment decision and the financing decision) from that firm's point of view. Corporate financial management The application of financial principals within a corporation to create and maintain value through decision making and proper resource management. Corporate financial planning Financial planning conducted by a firm that encompasses preparation of both long- and short-term financial plans. Corporate processing float The time that elapses between receipt of payment from a customer and the depositing of the customer's check in the firm's bank account; the time required to process customer payments. Corporate tax view The argument that double (corporate and individual) taxation of equity returns makes debt a cheaper financing method. Corporate taxable equivalent Rate of return required on a par bond to produce the same after-tax yield to maturity that the premium or discount bond quoted would. Corporation A legal "person" that is separate and distinct from its owners. A corporation is allowed to own assets, incur liabilities, and sell securities, among other things. Correlation See: Correlation coefficient. Correlation coefficient A standardized statistical measure of the dependence of two random variables, defined as the covariance divided by the standard deviations of two variables. Cost company arrangement Arrangement whereby the shareholders of a project receive output free of charge but agree to pay all operating and financing charges of the project. Cost of capital The required return for a capital budgeting project. Cost of carry Related: Net financing cost Cost of equity The required rate of return for an investment of 100% equity. Cost of funds Interest rate associated with borrowing money. Cost of lease financing A lease's internal rate of return. Cost of limited partner capital The discount rate that equates the after-tax inflows with outflows for capital raised from limited partners. Cost-benefit ratio The net present value of an investment divided by the investment's initial cost. Also called the profitability index. Counter trade The exchange of goods for other goods rather than for cash; barter. Counterpart items In the balance of payments, counterpart items are analogous to unrequited transfers in the current account. They arise because the double-entry system in balance of payments accounting and refer to adjustments in reserves owing to monetization or demonetization of gold, allocation or cancellation of SDRs, and revaluation of the various components of total reserves. Counterparties The parties to an interest rate swap. Counterparty Party on the other side of a trade or transaction. Counterparty risk The risk that the other party to an agreement will default. In an options contract, the risk to the option buyer that the option writer will not buy or sell the underlying as agreed. Country economic risk Developments in a national economy that can affect the outcome of an international financial transaction. Country beta Covariance of a national economy's rate of return and the rate of return the world economy divided by the variance of the world economy. Country financial risk The ability of the national economy to generate enough foreign exchange to meet payments of interest and principal on its foreign debt. Country risk General level of political and economic uncertainty in a country affecting the value of loans or investments in that country. Country selection A type of active international management that measures the contribution to performance attributable to investing in the better-performing stock markets of the world. Coupon The periodic interest payment made to the bondholders during the life of the bond. Coupon equivalent yield True interest cost expressed on the basis of a 365-day year. Coupon payments A bond's interest payments. Coupon rate In bonds, notes or other fixed income securities, the stated percentage rate of interest, usually paid twice a year. Covariance A statistical measure of the degree to which random variables move together. Covenants Provisions in a bond indenture or preferred stock agreement that require the bond or preferred stock issuer to take certain specified actions (affirmative covenants) or to refrain from taking certain specified actions (negative covenants). Cover The purchase of a contract to offset a previously established short position. Coverage ratios Ratios used to test the adequacy of cash flows generated through earnings for purposes of meeting debt and lease obligations, including the interest coverage ratio and the fixed charge coverage ratio. Covered call A short call option position in which the writer owns the number of shares of the underlying stock represented by the option contracts. Covered calls generally limit the risk the writer takes because the stock does not have to be bought at the market price, if the holder of that option decides to exercise it. Covered call writing strategy A strategy that involves writing a call option on securities that the investor owns in his or her portfolio. See covered or hedge option strategies. Covered interest arbitrage A portfolio manager invests dollars in an instrument denominated in a foreign currency and hedges his resulting foreign exchange risk by selling the proceeds of the investment forward for dollars. Covered or hedge option strategies Strategies that involve a position in an option as well as a position in the underlying stock, designed so that one position will help offset any unfavorable price movement in the other, including covered call writing and protective put buying. Related: naked strategies Covered Put A put option position in which the option writer also is short the corresponding stock or has deposited, in a cash account, cash or cash equivalents equal to the exercise of the option. This limits the option writer's risk because money or stock is already set aside. In the event that the holder of the put option decides to exercise the option, the writer's risk is more limited than it would be on an uncovered or naked put option. Cramdown The ability of the bankruptcy court to confirm a plan of reorganization over the objections of some classes of creditors. Crawling peg An automatic system for revising the exchange rate. It involves establishing a par value around which the rate can vary up to a given percent. The par value is revised regularly according to a formula determined by the authorities. Credible signal A signal that provides accurate information; a signal that can be distinguish among senders. Credit Money loaned. Credit analysis The process of analyzing information on companies and bond issues in order to estimate the ability of the issuer to live up to its future contractual obligations. Related: default risk Credit enhancement Purchase of the financial guarantee of a large insurance company to raise funds. Credit period The length of time for which the customer is granted credit. Credit risk The risk that an issuer of debt securities or a borrower may default on his obligations, or that the payment may not be made on a negotiable instrument. Related: Default risk Credit scoring A statistical technique wherein several financial characteristics are combined to form a single score to represent a customer's credit worthiness. Credit spread Related:Quality spread Crediting rate The interest rate offered on an investment type insurance policy. Creditor Lender of money. Cross default A provision under which default on one debt obligation triggers default on another debt obligation. Cross hedging The practice of hedging with a futures contract that is different from the underlying being hedged. Cross holdings One corporation holds shares in another firm. Cross rates The exchange rate between two currencies expressed as the ratio of two foreign exchange rates that are both expressed in terms of a third currency. Cross-border risk Refers to the volatility of returns on international investments caused by events associated with a particular country as opposed to events associated solely with a particular economic or financial agent. Cross-sectional approach A statistical methodology applied to a set of firms at a particular point in time. Crossover rate The return at which two alternative projects have the same net present value. Crown jewel A particularly profitable or otherwise particularly valuable corporate unit or asset of a firm. Cum dividend With dividend. Cum rights With rights. Cumulative abnormal return (CAR) Sum of the differences between the expected return on a stock and the actual return that comes from the release of news to the market. Cumulative dividend feature A requirement that any missed preferred or preference stock dividends be paid in full before any common dividend payment is made. Cumulative preferred stock Preferred stock whose dividends accrue, should the issuer not make timely dividend payments. Related: non-cumulative preferred stock. Cumulative probability distribution A function that shows the probability that the random variable will attain a value less than or equal to each value that the random variable can take on. Cumulative Translation Adjustment (CTA) account An entry in a translated balance sheet in which gains and/or losses from translation have been accumulated over a period of years. The CTA account is required under the FASB No. 52 rule. Cumulative voting A system of voting for directors of a corporation in which shareholder's total number of votes is equal to his number of shares held times the number of candidates. Currency Money. Currency arbitrage Taking advantage of divergences in exchange rates in different money markets by buying a currency in one market and selling it in another market. Currency basket The value of a portfolio of specific amounts of individual currencies, used as the basis for setting the market value of another currency. It is also referred to as a currency cocktail. Currency future A financial future contract for the delivery of a specified foreign currency. Currency option An option to buy or sell a foreign currency. Currency risk Related: Exchange rate risk Currency risk sharing An agreement by the parties to a transaction to share the currency risk associated with the transaction. The arrangement involves a customized hedge contract embedded in the underlying transaction. Currency selection Asset allocation in which the investor chooses among investments denominated in different currencies. Currency swap An agreement to swap a series of specified payment obligations denominated in one currency for a series of specified payment obligations denominated in a different currency. Current account Net flow of goods, services, and unilateral transactions (gifts) between countries. Current assets Value of cash, accounts receivable, inventories, marketable securities and other assets that could be converted to cash in less than 1 year. Current coupon A bond selling at or close to par, that is, a bond with a coupon close to the yields currently offered on new bonds of a similar maturity and credit risk. Current liabilities Amount owed for salaries, interest, accounts payable and other debts due within 1 year. Current issue In Treasury securities, the most recently auctioned issue. Trading is more active in current issues than in off-the-run issues. Current maturity Current time to maturity on an outstanding debt instrument. Current / noncurrent method Under this currency translation method, all of a foreign subsidiary's current assets and liabilities are translated into home currency at the current exchange rate while noncurrent assets and liabilities are translated at the historical exchange rate, that is, the rate in effect at the time the asset was acquired or the liability incurred. Current rate method Under this currency translation method, all foreign currency balance-sheet and income statement items are translated at the current exchange rate. Current ratio Indicator of short-term debt paying ability. Determined by dividing current assets by current liabilities. The higher the ratio, the more liquid the company. Current yield For bonds or notes, the coupon rate divided by the market price of the bond. Current-coupon issues Related: Benchmark issues Cushion bonds High-coupon bonds that sell at only at a moderate premium because they are callable at a price below that at which a comparable non-callable bond would sell. Cushion bonds offer considerable downside protection in a falling market. Custodial fees Fees charged by an institution that holds securities in safekeeping for an investor. Customary payout ratios A range of payout ratios that is typical based on an analysis of comparable firms. Customized benchmarks A benchmark that is designed to meet a client's requirements and long-term objectives. Customs union An agreement by two or more countries to erect a common external tariff and to abolish restrictions on trade among members.

Glossary created by Campbell R. Harvey, Professor of Finance,
Fuqua School of Business at Duke University