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

P&L Profit and loss statement for a trader. P&S Purchase and sale statement. A statement provided by the broker showing change in the customer's net ledger balance after the offset of a previously established position(s). P/E See Price/Earnings ratio. P/E ratio Assume XYZ Co. sells for $25.50 per share and has earned $2.55 per share this year; $25. 50 = 10 times $2. 55 XYZ stock sells for 10 times earnings. P/E = Current stock price divided by trailing annual earnings per share or expected annual earnings per share. P/E effect That portfolios with low P/E stocks have exhibited higher average risk-adjusted returns than high P/E stocks. PSA A prepayment model based on an assumed rate of prepayment each month of the then unpaid principal balance of a pool of mortgages. PSA is used primarily to derive an implied prepayment speed of new production loans, a 100% PSA assumes a prepayment rate of 2% per month in the first month following the date of issue, increasing at 2% per month thereafter until the 30th month. Thereafter, 100% PSA is the same as 6% CPR. Pac-Man strategy Takeover defense strategy in which the prospective acquiree retaliates against the acquirer's tender offer by launching its own tender offer for the other firm. Pairoff A buy-back to offset and effectively liquidate a prior sale of securities. Paper Money market instruments, commercial paper and other. Paper gain (loss) Unrealized capital gain (loss) on securities held in portfolio, based on a comparison of current market price to original cost. Par value Also called the maturity value or face value, the amount that the issuer agrees to pay at the maturity date. Parallel loan A process whereby two companies in different countries borrow each other's currency for a specific period of time, and repay the other's currency at an agreed maturity for the purpose of reducing foreign exchange risk. Also referred to as back-to-back loans. Parallel shift in the yield curve A shift in the yield curve in which the change in the yield on all maturities is the same number of basis points. In other words, if the 3 month T-bill increases 100 basis points (one percent), then the 6 month, 1 year, 5 year, 10 year, 20 year, and 30 year rates increase by 100 basis points as well. Related: Non-parallel shift in the yield curve. Parameter A representation that characterizes a part of a model (e.g. a growth rate), the value of which is determined outside of the model. See: exogenous variable. Parity value Related:conversion value Participating GIC A guaranteed investment contract where the policyholder is not guaranteed a crediting rate, but instead receives a return based on the actual experience of the portfolio managed by the life company. Participating fees The portion of total fees in a syndicated credit that go to the participating banks. Partner Business associate who shares equity in a firm. Partnership Shared ownership among two or more individuals, some of whom may, but do not necessarily, have limited liability. See: general partnership, limited partnership, and master limited partnership. Passive portfolio strategy A strategy that involves minimal expectational input, and instead relies on diversification to match the performance of some market index. A passive strategy assumes that the marketplace will reflect all available information in the price paid for securities, and therefore, does not attempt to find mispriced securities. Related: active portfolio strategy Pass-through rate The net interest rate passed through to investors after deducting servicing, management, and guarantee fees from the gross mortgage coupon. Pass-through securities A pool of fixed-income securities backed by a package of assets (i.e. mortgages) where the holder receives the principal and interest payments. Related: mortgage pass-through security Pass-through coupon rate The interest rate paid on a securitized pool of assets, which is less than the rate paid on the underlying loans by an amount equal to the servicing and guaranteeing fees. Passive investment strategy See: passive management. Passive investment management Buying a well-diversified portfolio to represent a broad-based market index without attempting to search out mispriced securities. Passive portfolio A market index portfolio. Path dependent option An option whose value depends on the sequence of prices of the underlying asset rather than just the final price of the asset. Payable through drafts A method of making payment that is used to maintain control over payments made on behalf of the firm by personnel in noncentral locations. The payer's bank delivers the payable through draft to the payer, which must approve it and return it to the bank before payment can be received. Payables Related: Accounts payable. Payback The length of time it takes to recover the initial cost of a project, without regard to the time value of money. Paydown In a Treasury refunding, the amount by which the par value of the securities maturing exceeds that of those sold. Payment date The date on which each shareholder of record will be sent a check for the declared dividend. Payment float Company-written checks that have not yet cleared. Payments netting Reducing fund transfers between affiliates to only a netted amount. Netting can be done on a bilateral basis (between pairs of affiliates), or on a multi-lateral basis (taking all affiliates together). Payments pattern Describes the lagged collection pattern of receivables, for instance the probability that a 72-day-old account will still be unpaid when it is 73-days-old. Payout ratio Generally, the proportion of earnings paid out to the common stockholders as cash dividends. More specifically, the firm's cash dividend divided by the firm's earnings in the same reporting period. Pay-up The loss of cash resulting from a swap into higher price bonds or the need/willingness of a bank or other borrower to pay a higher rate of interest to get funds. Payment-In-Kind (PIK) bond A bond that gives the issuer an option (during an initial period) either to make coupon payments in cash or in the form of additional bonds. Peak The transition from the end of an economic expansion to the start of a contraction. Pecking-order view (of capital structure) The argument that external financing transaction costs, especially those associated with the problem of adverse selection, create a dynamic environment in which firms have a preference, or pecking-order of preferred sources of financing, when all else is equal. Internally generated funds are the most preferred, new debt is next, debt-equity hybrids are next, and new equity is the least preferred source. Pension Benefit Guaranty Corporation (PBGC) A federal agency that insures the vested benefits of pension plan participants (established in 1974 by the ERISA legislation). Pension plan A fund that is established for the payment of retirement benefits. Pension sponsors Organizations that have established a pension plan. Perfect capital market A market in which there are never any arbitrage opportunities. Perfect competition An idealized market environment in which every market participant is too small to affect the market price by acting on its own. Perfect hedge A financial result in which the profit and loss from the underlying asset and the hedge position are equal. Perfect market view (of capital structure) Analysis of a firm's capital structure decision, which shows the irrelevance of capital structure in a perfect capital market. Perfect market view (of dividend policy) Analysis of a decision on dividend policy, in a perfect capital market environment, that shows the irrelevance of dividend policy in a perfect capital market. Perfectly competitive financial markets Markets in which no trader has the power to change the price of goods or services. Perfect capital markets are characterized by the following conditions: 1) trading is costless, and access to the financial markets is free, 2) information about borrowing and lending opportunities is freely available, 3) there are many traders, and no single trader can have a significant impact on market prices. Perfected first lien A first lien that is duly recorded with the cognizant governmental body so that the lender will be able to act on it should the borrower default. Performance attribution analysis The decomposition of a money manager's performance results to explain the reasons why those results were achieved. This analysis seeks to answer the following questions: (1) What were the major sources of added value? (2) Was short-term factor timing statistically significant? (3) Was market timing statistically significant? And (4), Was security selection statistically significant? Performance evaluation The evaluation of a manager's performance which involves, first, determining whether the money manager added value by outperforming the established benchmark (performance measurement) and, second, determining how the money manager achieved the calculated return (performance attribution analysis). Performance measurement The calculation of the return realized by a money manager over some time interval. Performance shares Shares of stock given to managers on the basis of performance as measured by earnings per share and similar criteria. A control device used by shareholders to tie management to the self-interest of shareholders. Periodic rate The monthly effective interest rate. For example, the periodic rate on a credit card with an 18% annual percentage rate 1.5% per month. Perpetual warrants Warrants that have no expiration date. Perpetuity A constant stream of identical cash flows without end, such as a British consol. Perquisites Personal benefits, including direct benefits, such as the use of a firm car or expense account for personal business, and indirect benefits, such as up-to-date office décor. Personal tax view (of capital structure) The argument that the difference in personal tax rates between income from debt and income from equity eliminates the disadvantage from the double taxation (corporate and personal) of income from equity. Personal trust An interest in an asset held by a trustee for the benefit of another person. Philadelphia Stock Exchange (PHLX) A securities exchange where American and European foreign currency options on spot exchange rates are traded. Phone switching In mutual funds, the ability to transfer shares between funds in the same family by telephone request. There may be a charge associated with these transfers. Phone switching is also possible among different fund families if the funds are held in street name by a participating broker/dealer. PIBOR (Paris Interbank Offer Rate) The deposit rate on interbank transactions in the Eurocurrency market quoted in Paris. Pickup The gain in yield that occurs when a block of bonds is swapped for another block of higher-coupon bonds. Picture The bid and asked prices quoted by a broker for a given security. Pie model of capital structure A model of the debt/equity ratio of the firms, graphically depicted in slices of a pie that represent the value of the firm in the capital markets. Pit A specific area of the trading floor that is designed for the trading of commodities, individual futures, or option contracts. Pit committee A committee of the exchange that determines the daily settlement price of futures contracts. Pivot Price level established as being significant by market's failure to penetrate or as being significant when a sudden increase in volume accompanies the move through the price level. Placement A bank depositing Eurodollars with (selling Eurodollars to) another bank is often said to be making a placement. Plain vanilla A term that refers to a relatively simple derivative financial instrument, usually a swap or other derivative that is issued with standard features. Plan for reorganization A plan for reorganizing a firm during the Chapter 11 bankruptcy process. Plan sponsors The entities that establish pension plans, including private business entities acting for their employees; state and local entities operating on behalf of their employees; unions acting on behalf of their members; and individuals representing themselves. Planned amortization class CMO (1) One class of CMO that carries the most stable cash flows and the lowest prepayement risk of any class of CMO. Because of that stable cash flow, it is considered the least risky CMO. (2) A CMO bond class that stipulates cash-flow contributions to a sinking fund. With the PAC, principal payments are directed to the sinking fund on a priority basis in accordance with a predetermined payment schedule, with prior claim to the cash flows before other CMO classes. Similarly, cash flows received by the trust in excess of the sinking fund requirement are also allocated to other bond classes. The prepayment experience of the PAC is therefore very stable over a wide range of prepayment experience. Planned capital expenditure program Capital expenditure program as outlined in the corporate financial plan. Planned financing program Program of short-term and long-term financing as outlined in the corporate financial plan. Planning horizon The length of time a model projects into the future. Plowback rate Related: retention rate. Plug A variable that handles financial slack in the financial plan. Plus Dealers in government bonds normally give price quotes in 32nds. To quote a bid or offer in 64ths, they use pluses; a dealer who bids 4+ is bidding the handle plus 4/32 + 1/64, which equals the handle plus 9/64. Point The smallest unit of price change quoted or, one one-hundredth of a percent. Related: minimum price fluctuation and tick. Point and figure chart A price-only chart that takes into account only whole integer changes in price, i.e., a 2-point change. Point and figure charting disregards the element of time and is solely used to record changes in price. Poison pill Anit-takeover device that gives a prospective acquiree's shareholders the right to buy shares of the firm or shares of anyone who acquires the firm at a deep discount to their fair market value. Named after the cyanide pill that secret agents are instructed to swallow if capture is imminent. Poison put A covenant allowing the bondholder to demand repayment in the event of a hostile merger. Policy asset allocation A long-term asset allocation method, in which the investor seeks to assess an appropriate long-term "normal" asset mix that represents an ideal blend of controlled risk and enhanced return. Political risk Possibility of the expropriation of assets, changes in tax policy, restrictions on the exchange of foreign currency, or other changes in the business climate of a country. Pool factor The outstanding principal balance divided by the original principal balance with the result expressed as a decimal. Pool factors are published monthly by the Bond Buyer newspaper for Ginnie Mae, Fannie Mae, and Freddie Mac(Federal Home Loan Mortgage Corporation) MBSs. Pooling of interests An accounting method for reporting acquisitions accomplished through the use of equity. The combined assets of the merged entity are consolidated using book value, as opposed to the purchase method, which uses market value. The merging entities' financial results are combined as though the two entities have always been a single entity. Portfolio A collection of investments, real and/or financial. Portfolio insurance A strategy using a leveraged portfolio in the underlying stock to create a synthetic put option. The strategy's goal is to ensure that the value of the portfolio does not fall below a certain level. Portfolio internal rate of return The rate of return computed by first determining the cash flows for all the bonds in the portfolio and then finding the interest rate that will make the present value of the cash flows equal to the market value of the portfolio. Portfolio opportunity set The expected return/standard deviation pairs of all portfolios that can be constructed from a given set of assets. Portfolio management Related: Investment management Portfolio manager Related: Investment manager Portfolio separation theorem An investor's choice of a risky investment portfolio is separate from his attitude towards risk. Related:Fisher's separation theorem. Portfolio turnover rate For an investment company, an annualized rate found by dividing the lesser of purchases and sales by the average of portfolio assets. Portfolio variance Weighted sum of the covariance and variances of the assets in a portfolio. Position A market commitment; the number of contracts bought or sold for which no offsetting transaction has been entered into. The buyer of a commodity is said to have a long position and the seller of a commodity is said to have a short position . Related: open contracts Position diagram Diagram showing the possible payoffs from a derivative investment. Positive carry Related:net financing cost Positive convexity A property of option-free bonds whereby the price appreciation for a large upward change in interest rates will be greater (in absolute terms) than the price depreciation for the same downward change in interest rates. Positive covenant (of a bond) A bond covenant that specifies certain actions the firm must take. Also called and affirmative covenant. Positive float See:float. Possessions corporation A type of corporation permitted under the U.S. tax code whereby a branch operation in a U.S. possessions can obtain tax benefits as though it were operating as a foreign subsidiary. Post Particular place on the floor of an exchange where transactions in stocks listed on the exchange occur. Post-audit A set of procedures for evaluating a capital budgeting decision after the fact. Postponement option The option of postponing a project without eliminating the possibility of undertaking it. Posttrade benchmarks Prices after the decision to trade. Preauthorized checks (PACs) Checks that are authorized by the payer in advance and are written either by the payee or by the payee's bank and then deposited in the payee's bank account. Preauthorized electronic debits (PADs) Debits to its bank account in advance by the payer. The payer's bank sends payment to the payee's bank through the (ACH)Automated Clearing Housesystem. Precautionary demand (for money) The need to meet unexpected or extraordinary contingencies with a buffer stock of cash. Precautionary motive A desire to hold cash in order to be able to deal effectively with unexpected events that require cash outlay. Preemptive right Common stockholder's right to anything of value distributed by the company. Preferred equity redemption stock (PERC) Preferred stock that converts automatically into equity at a stated date. A limit is placed on the value of the shares the investor receives. Preference stock A security that ranks junior to preferred stock but senior to common stock in the right to receive payments from the firm; essentially junior preferred stock.  Preferred habitat theory A biased expectations theory that believes the term structure reflects the expectation of the future path of interest rates as well as risk premium. However, the theory rejects the assertion that the risk premium must rise uniformly with maturity. Instead, to the extent that the demand for and supply of funds does not match for a given maturity range, some participants will shift to maturities showing the opposite imbalances. As long as such investors are compensated by an appropriate risk premium whose magnitude will reflect the extent of aversion to either price or reinvestment risk. Preferred shares Preferred shares give investors a fixed dividend from the company's earnings. And more importantly: preferred shareholders get paid before common shareholders. See: preferred stock. Preferred stock A security that shows ownership in a corporation and gives the holder a claim, prior to the claim of common stockholders, on earnings and also generally on assets in the event of liquidation. Most preferred stock pays a fixed dividend that is paid prior to the common stock dividend, stated in a dollar amount or as a percentage of par value. This stock does not usually carry voting rights. The stock shares characteristics of both common stock and debt. Preferred stock agreement A contract for preferred stock. Preliminary prospectus A preliminary version of a prospectus. Premium (1) Amount paid for a bond above the par value. (2) The price of an option contract; also, in futures trading, the amount the futures price exceeds the price of the spot commodity. Related: inverted market premium payback period. Also called break-even time, the time it takes to recover the premium per share of a convertible security. Premium bond A bond that is selling for more than its par value. Prepackaged bankruptcy A bankruptcy in which a debtor and its creditors pre-negotiate a plan or reorganization and then file it along with the bankruptcy petition. Prepayment speed Also called speed, the estimated rate at which mortgagors pay off their loans ahead of schedule, critical in assessing the value of mortgage pass-through securities. Prepayments Payments made in excess of scheduled mortgage principal repayments. Prerefunded bond Refunded bond. Present value The amount of cash today that is equivalent in value to a payment, or to a stream of payments, to be received in the future. Present value factor Factor used to calculate an estimate of the present value of an amount to be received in a future period. Present value of growth opportunities (NPV) Net present value of investments the firm is expected to make in the future. Presold issue An issue that is sold out before the coupon announcement. Pre-trade benchmarks Prices occurring before or at the decision to trade. Price/book ratio Compares a stock's market value to the value of total assets less total liabilities (book value). Determined by dividing current stock price by common stockholder equity per share (book value), adjusted for stock splits. Also called Market-to-Book. Price/earnings ratio Shows the "multiple" of earnings at which a stock sells. Determined by dividing current stock price by current earnings per share (adjusted for stock splits). Earnings per share for the P/E ratio is determined by dividing earnings for past 12 months by the number of common shares outstanding. Higher "multiple" means investors have higher expectations for future growth, and have bid up the stock's price. Price/sales ratio Determined by dividing current stock price by revenue per share (adjusted for stock splits). Revenue per share for the P/S ratio is determined by dividing revenue for past 12 months by number of shares outstanding. Price compression The limitation of the price appreciation potential for a callable bond in a declining interest rate environment, based on the expectation that the bond will be redeemed at the call price. Price discovery process The process of determining the prices of the assets in the marketplace through the interactions of buyers and sellers. Price elasticities The percentage change in the quantity divided by the percentage change in the price. Price impact costs Related: market impact costs Price momentum Related: Relative strength Price persistence Related: Relative strength Price risk The risk that the value of a security (or a portfolio) will decline in the future. Or, a type of mortgage-pipeline risk created in the production segment when loan terms are set for the borrower in advance of terms being set for secondary market sale. If the general level of rates rises during the production cycle, the lender may have to sell his originated loans at a discount. Price takers Individuals who respond to rates and prices by acting as though they have no influence on them. Priced out The market has already incorporated information, such as a low dividend, into the price of a stock. Price value of a basis point (PVBP) Also called the dollar value of a basis point, a measure of the change in the price of the bond if the required yield changes by one basis point. Prices Price of a share of common stock on the date shown. Highs and lows are based on the highest and lowest intraday trading price. Price-specie-flow mechanism Adjustment mechanism under the classical gold standard whereby disturbances in the price level in one country would be wholly or partly offset by a countervailing flow of specie (gold coins) that would act to equalize prices across countries and automatically bring international payments back in balance. Price-volume relationship A relationship espoused by some technical analysts that signals continuing rises and falls in security prices based on accompanying changes in volume traded. Pricing efficiency Also called external efficiency, a market characteristic where prices at all times fully reflect all available information that is relevant to the valuation of securities. Primary dealer Usally refers to the select list of securities firm that are authorized to deal in new issues of government bonds. Primary market The first buyer of a newly issued security buys that security in the primary market. All subsequent trading of those securities is done in the secondary market. Primary offering A firm selling some of its own newly issued shares to investors. Primitive security An instrument such as a stock or bond for which payments depend only on the financial status of the issuer. Prime rate The interest rate at which banks lend to their best (prime) customers. Much more often than not, a bank's most creditworthy customers borrow at rates below the prime rate. Principal (1) The total amount of money being borrowed or lent. (2) The party affected by agent decisions in a principal-agent relationship. Principal of diversification Highly diversified portfolios will have negligible unsystematic risk. In other words, unsystematic risks disappear in portfolios, and only systematic risks survive. Principal-agent relationship A situation that can be modeled as one person, an agent, who acts on the behalf of another person, the principal. Principal amount The face amount of debt; the amount borrowed or lent. Often called principal. Principal only (PO) A mortgage-backed security in which the holder receives only principal cash flows on the underlying mortgage pool. The principal-only portion of a stripped MBS. For PO securities, all of the principal distribution due from the underlying collateral pool is paid to the registered holder of the stripped MBS based on the current face value of the underlying collateral pool. Private Export Funding Corporation (PEFCO) Company that mobilizes private capital for financing the export of big-ticket items by U.S. firms by purchasing at fixed interest rates the medium- to long-term debt obligations of importers of U.S. products. Private-label pass-throughs Related: Conventional pass-throughs. Private placement The sale of a bond or other security directly to a limited number of investors. Private unrequited transfers Refers to resident immigrant workers' remittances to their country of origin as well as gifts, dowries, inheritances, prizes, charitable contributions, etc. Privatization The act of returning state-owned or state-run companies back to the private sector, usually by selling them. Pro forma capital structure analysis A method of analyzing the impact of alternative capital structure choices on a firm's credit statistics and reported financial results, especially to determine whether the firm will be able to use projected tax shield benefits fully. Pro forma financial statements Financial statements as adjusted to reflect a projected or planned transaction. Pro forma statement A financial statement showing the forecast or projected operating results and balance sheet, as in pro forma income statements, balance sheets, and statements of cash flows. Probability The relative likelihood of a particular outcome among all possible outcomes. Probability density function The probability function for a continuous random variable. Probability distribution Also called a probability function, a function that describes all the values that the random variable can take and the probability associated with each. Probability function A function that assigns a probability to each and every possible outcome. Product cycle The time it takes to bring new and/or improved products to market. Product risk A type of mortgage-pipeline risk that occurs when a lender has an unusual loan in production or inventory but does not have a sale commitment at a prearranged price. Production payment financing A method of nonrecourse asset-based financing in which a specified percentage of revenue realized from the sale of the project's output is used to pay debt service. Production-flow commitment An agreement by the loan purchaser to allow the monthly loan quota to be delivered in batches. Profit margin Indicator of profitability. The ratio of earnings available to stockholders to net sales. Determined by dividing net income by revenue for the same 12-month period. Result is shown as a percentage. Profitability index The present value of the future cash flows divided by the initial investment. Also called the benefit-cost ratio. Profitability ratios Ratios that focus on the profitability of the firm. Profit margins measure performance with relation to sales. Rate of return ratios measure performance relative to some measure of size of the investment. Pro forma financial statements Financial statements as adjusted to reflect a projected or planned transaction. Program trades Also called basket trades, orders requiring the execution of trades in a large number of different stocks at as near the same time as possible. Related: block trade Program trading Trades based on signals from computer programs, usually entered directly from the trader's computer to the market's computer system and executed automatically. Progress review A periodic review of a capital investment project to evaluate its continued economic viability. Progressive tax system A tax system wherein the average tax rate increases for some increases in income but never decreases with an increase in income. Project loan certificate (PLC) A primary program of Ginnie Mae for securitizing FHA-insured and co-insured multifamily, hospital, and nursing home loans. Project loan securities Securities backed by a variety of FHA-insured loan types - primarily multi-family apartment buildings, hospitals, and nursing homes. Project loans Usually FHA-insured and HUD-guaranteed mortgages on multiple-family housing complexes, nursing homes, hospitals, and other development types. Project notes (PNs) Project notes are issued by municipalities to finance federally sponsored programs in urban renewal and housing and are guaranteed by the U.S. Department of Housing and Urban Development. Project financing A form of asset-based financing in which a firm finances a discrete set of assets on a stand-alone basis. Projected benefit obligation (PBO) A measure of a pension plan's liability at the calculation date assuming that the plan is ongoing and will not terminate in the foreseeable future. Related:accumulated benefit obligation. Projected maturity date With CMOs, final payment at the end of the estimated cash flow window. Promissory note Written promise to pay. Property rights Rights of individuals and companies to own and utilize property as they see fit and to receive the stream of income that their property generates. Prospectus Formal written document to sell securities that describes the plan for a proposed business enterprise, or the facts concerning an existing one, that an investor needs to make an informed decision. Prospectuses are used by mutual funds to describe the fund objectives, risks and other essential information. Protectionism Protecting domestic industry from import competition by means of tariffs, quotas, and other trade barriers. Protective covenant A part of the indenture or loan agreement that limits certain actions a company takes during the term of the loan to protect the lender's interests. Protective put buying strategy A strategy that involves buying a put option on the underlying security that is held in a portfolio. Related: Hedge option strategies Provisional call feature A feature in a convertible issue that allows the issuer to call the issue during the non-call period if the price of the stock reaches a certain level. Proxy Document intended to provide shareholders with information necessary to vote in an informed manner on matters to be brought up at a stockholders' meeting. Includes information on closely held shares. Shareholders can and often do give management their proxy, representing the right and responsibility to vote their shares as specified in the proxy statement. Proxy contest A battle for the control of a firm in which the dissident group seeks, from the firm's other shareholders, the right to vote those shareholder's shares in favor of the dissident group's slate of directors. Also called proxy fight. Proxy vote Vote cast by one person on behalf of another. Public offering The sale of registered securities by the issuer (or the underwriters acting in the interests of the issuer) in the public market. Also called public issue. Public Securities Administration (PSA) The trade association for primary dealers in U.S. government securities, including MBSs. Public warehouse Warehouse operated by an independent warehouse company on its own premises. Publicly traded assets Assets that can be traded in a public market, such as the stock market. Puke Slang for a trader selling a position, usually a losing position, as in, "When in doubt, puke it out." Purchase To buy, to be long, to have an ownership position. Purchase accounting Method of accounting for a merger in which the acquirer is treated as having purchased the assets and assumed liabilities of the acquiree, which are all written up or down to their respective fair market values, the difference between the purchase price and the net assets acquired being attributed to goodwill. Purchase agreement As used in connection with project financing, an agreement to purchase a specific amount of project output per period. Purchase and sale A method of securities distribution in which the securities firm purchases the securities from the issuer for its own account at a stated price and then resells them, as contrasted with a best-efforts sale. Purchase fund Resembles a sinking fund except that money is used only to purchase bonds if they are selling below their par value. Purchase method Accounting for an acquisition using market value for the consolidation of the two entities' net assets on the balance sheet. Generally, depreciation/amortization will increase for this method compared with pooling and will result in lower net income. Purchasing power parity The notion that the ratio between domestic and foreign price levels should equal the equilibrium exchange rate between domestic and foreign currencies. Purchasing-power risk Related: inflation risk Pure-discount bond A bond that will make only one payment of principal and interest. Also called a zero-coupon bond or a single-payment bond. Pure expectations theory A theory that asserts that the forward rates exclusively represent the expected future rates. In other words, the entire term structure reflects the markets expectations of future short-term rates. For example, an increasing sloping term structure implies increasing short-term interest rates. Related: biased expectations theories Pure index fund A portfolio that is managed so as to perfectly replicate the performance of the market portfolio. Pure yield pickup swap Moving to higher yield bonds. Put An option granting the right to sell the underlying futures contract. Opposite of a call. Put an option To exercise a put option. Put bond A bond that the holder may choose either to exchange for par value at some date or to extend for a given number of years. Put option This security gives investors the right to sell (or put) fixed number of shares at a fixed price within a given time frame. An investor, for example, might wish to have the right to sell shares of a stock at a certain price by a certain time in order to protect, or hedge, an existing investment. Put price The price at which the asset will be sold if a put option is exercised. Also called the strike or exercise price of a put option. Put provision Gives the holder of a floating-rate bond the right to redeem his note at par on the coupon payment date. Put swaption A financial tool in which the buyer has the right, or option, to enter into a swap as a floating-rate payer. The writer of the swaption therefore becomes the floating-rate receiver/fixed-rate payer. Put-call parity relationship The relationship between the price of a put and the price of a call on the same underlying security with the same expiration date, which prevents arbitrage opportunities. Holding the stock and buying a put will deliver the exact payoff as buying one call and investing the present value (PV) of the exercise price. The call value equals C=S+P-PV(k). Pyramid scheme An illegal, fraudulent scheme in which a con artist contrives victims to invest by promising an extraordinary return but simply uses newly invested funds to pay off any investors who insist on terminating their investment.

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