About Money 101

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Safe harbor lease A lease to transfer tax benefits of ownership (depreciation and debt tax shield) from the lessee, if the lessee could not use them, to a lessor that could use them. Safekeep For a fee, bankers will hold in their vault, clip coupons on, and present for payment at maturity bonds and money market instruments. Safety cushion In a contingent immunization strategy, the difference between the initially available immunization level and the safety-net return. Safety-net return The minimum available return that will trigger an immunization strategy in a contingent immunization strategy. Sale and lease-back Sale of an existing asset to a financial institution that then leases it back to the user. Related: lease. Sales charge The fee charged by a mutual fund when purchasing shares, usually payable as a commission to marketing agent, such as a financial advisor, who is thus compensated for his assistance to a purchaser. It represents the difference, if any, between the share purchase price and the share net asset value. Sales forecast A key input to a firm's financial planning process. External sales forecasts are based on historical experience, statistical analysis, and consideration of various macroeconomic factors. Sales-type lease An arrangement whereby a firm leases its own equipment, such as IBM leasing its own computers, thereby competing with an independent leasing company. Salvage value Scrap value of plant and equipment. Samurai bond A yen-denominated bond issued in Tokyo by a non-Japanese borrower. Related: bulldog bond and Yankee bond. Samurai market The foreign market in Japan. Savings and Loan association National- or state-chartered institution that accepts savings deposits and invests the bulk of the funds thus received in mortgages. Savings deposits Accounts that pay interest, typically at below-market interest rates, that do not have a specific maturity, and that usually can be withdrawn upon demand. SBIC Small Business Investment Company. Scale A bank that offers to pay different rates of interest on CDs of varying rates is said to "post a scale." Commercial paper dealers also post scales. Scale enhancing Describes a project that is in the same risk class as the whole firm. Scale in When a trader or investor gradually takes a position in a security or market over time. Scalp To trade for small gains. It normally involves establishing and liquidating a position quickly, usually within the same day. Scenario analysis The use of horizon analysis to project bond total returns under different reinvestment rates and future market yields. Scheduled cash flows The mortgage principal and interest payments due to be paid under the terms of the mortgage not including possible prepayments. Search costs Costs associated with locating a counterparty to a trade, including explicit costs (such as advertising) and implicit costs (such as the value of time). Related:information costs. Seasoned datings Extended credit for customers who order goods in periods other than peak seasons. Seasoned issue Issue of a security for which there is an existing market. Related: Unseasoned issue. Seasoned new issue A new issue of stock after the company's securities have previously been issued. A seasoned new issue of common stock can be made by using a cash offer or a rights offer. SEC The Securities and Exchange Commission, the primary federal regulatory agency of the securities industry. Second pass regression A cross-sectional regression of portfolio returns on betas. The estimated slope is the measurement of the reward for bearing systematic risk during the period analyzed. Secondary issue (1) Procedure for selling blocks of seasoned issues of stocks. (2) More generally, sale of already issued stock. Secondary market The market where securities are traded after they are initially offered in the primary market. Most trading is done in the secondary market. The New York stock Exchange, as well as all other stock exchanges, the bond markets, etc., are secondary markets. Seasoned securities are traded in the secondary market. Sector Refers to a group of securities that are similar with respect to maturity, type, rating, industry, and/or coupon. Section 482 United States Department of Treasury regulations governing transfer prices. Secured debt Debt that, in the event of default, has first claim on specified assets. Securities & Exchange Commission The SEC is a federal agency that regulates the U.S.financial markets. Securities analysts Related:financial analysts Securitization The process of creating a passthrough, such as the mortgage pass-through security, by which the pooled assets become standard securities backed by those assets. Also, refers to the replacement of nonmarketable loans and/or cash flows provided by financial intermediaries with negotiable securities issued in the public capital markets. Security Piece of paper that proves ownership of stocks, bonds and other investments. Security characteristic line A plot of the excess return on a security over the risk-free rate as a function of the excess return on the market. Security deposit (initial) Synonymous with the term margin. A cash amount of funds that must be deposited with the broker for each contract as a guarantee of fulfillment of the futures contract. It is not considered as part payment or purchase. Related: margin Security deposit (maintenance) Related:Maintenance margin security market line (SML). A description of the risk return relationship for individual securities, expressed in a form similar to the capital market line. Security market line Line representing the relationship between expected return and market risk. Security market plane A plane that shows the equilibrium between expected return and the beta coefficient of more than one factor. Security selection See: security selection decision. Security selection decision Choosing the particular securities to include in a portfolio. Self-liquidating loan Loan to finance current assets, The sale of the current assets provides the cash to repay the loan. Self-selection Consequence of a contract that induces only one group (e.g. low risk individuals) to participate. Sell hedge Related: short hedge. Sell limit order Conditional trading order that indicates that a, security may be sold at the designated price or higher. Related: buy limit order. Selling group All banks involved in selling or marketing a new issue of stock or bonds Selling short If an investor thinks the price of a stock is going down, the investor could borrow the stock from a broker and sell it. Eventually, the investor must buy the stock back on the open market. For instance, you borrow 1000 shares of XYZ on July 1 and sell it for $8 per share. Then, on Aug 1, you purchase 1000 shares of XYZ at $7 per share. You've made $1000 (less commissions and other fees) by selling short. Sell-side analyst Also called a Wall Street analyst, a financial analyst who works for a brokerage firm and whose recommendations are passed on to the brokerage firm's customers. Semi-strong form efficiency A form of pricing efficiency where the price of the security fully reflects all public information (including, but not limited to, historical price and trading patterns). Compare weak form efficiency and strong form efficiency. Senior debt Debt that, in the event of bankruptcy, must be repaid before subordinated debt receives any payment. Seniority The order of repayment. In the event of bankruptcy, senior debt must be repaid before subordinated debt is repaid. Sensitivity analysis Analysis of the effect on a project's profitability due to changes in sales, cost, and so on. Separation property The property that portfolio choice can be separated into two independent tasks: 1) determination of the optimal risky portfolio, which is a purely technical problem, and 2) the personal choice of the best mix of the risky portfolio and the risk-free asset. Separation theorem The value of an investment to an individual is not dependent on consumption preferences. All investors will want to accept or reject the same investment projects by using the NPV rule, regardless of personal preference. Serial bonds Corporate bonds arranged so that specified principal amounts become due on specified dates. Related: term bonds. Serial covariance The covariance between a variable and the lagged value of the variable; the same as autocovariance. Series bond Bond that may be issued in several series under the same indenture. Series Options: All option contracts of the same class that also have the same unit of trade, expiration date, and exercise price. Stocks: shares which have common characteristics, such as rights to ownership and voting, dividends, par value, etc. In the case of many foreign shares, one series may be owned only by citizens of the country in which the stock is registered. Set of contracts perspective View of corporation as a set of contracting relationships, among individuals who have conflicting objectives, such as shareholders or managers. The corporation is a legal contrivance that serves as the nexus for the contracting relationships. Settlement When payment is made for a trade. Settlement date The date on which payment is made to settle a trade. For stocks traded on US exchanges, settlement is currently 3 business days after the trade. For mutual funds, settlement usually occurs in the U.S.the day following the trade. In some regional markets, foreign shares may require months to settle. Settlement price A figure determined by the closing range which is used to calculate gains and losses in futures market accounts. Settlement prices are used to determine gains, losses, margin calls, and invoice prices for deliveries. Related: closing range. Settlement rate The rate suggested in Financial Accounting Standard Board (FASB) 87 for discounting the obligations of a pension plan. The rate at which the pension benefits could be effectively settled off the pension plan wished to terminate its pension obligation. Seykota, Ed Ed Seykota is interviewed by Jack Schwager in Schwager's book, Market Wizards. Seykota was graduated from MIT in the early 1970s, and went on to develop the first commercially sold commodities trading system. Seykota went into business for himself, and in the years 1974-1989, managed to grow a $5,000 trading account to over $15 million dollars. Mr. Seykota is a trading genius who has been able to identify robust patterns of price action that repeat themselves in different markets. His quantitative and systematic approach to trading has been an inspiration for many. Mr. Seykota is also a genius when it comes to understanding human psychology. Share repurchase Program by which a corporation buys back its own shares in the open market. It is usually done when shares are undervalued. Since it reduces the number of shares outstanding and thus increases earnings per share, it tends to elevate the market value of the remaining shares held by stockholders. Shareholders Person or entity that owns share in a corporation. Shareholders' equity This is a company's total assets minus total liabilities. A company's net worth is the same thing. Shareholders' letter A section of an annual report where one can find jargon-free discussions by management of successful and failed strategies which provides guidance for the probing of the rest of the report. Shares Certificates or book entries representing ownership in a corporation or similar entity Shark repellant Amendment to company charter intended to protect it against takeover. Sharpe benchmark A statistically created benchmark that adjusts for a managers' index-like tendencies. Sharpe ratio A measure of a portfolio's excess return relative to the total variability of the portfolio. Related: treynor index Shelf registration A procedure that allows firms to file one registration statement covering several issues of the same security. Shirking The tendency to do less work when the return is smaller. Owners may have more incentive to shirk if they issue equity as opposed to debt, because they retain less ownership interest in the company and therefore may receive a smaller return. Thus, shirking is considered an agency cost of equity. Shogun bond Dollar bond issued in Japan by a nonresident. Shop Wall Street jargon for a firm. Shopping Seeking to obtain the best bid or offer available by calling a number of dealers and/or brokers. Short One who has sold a contract to establish a market position and who has not yet closed out this position through an offsetting purchase; the opposite of a long position. Related: Long. Short bonds Bonds with short current maturities. Short book See: unmatched book. Short hedge The sale of a futures contract(s) to eliminate or lessen the possible decline in value ownership of an approximately equal amount of the actual financial instrument or physical commodity.Related: Long hedge. Short interest This is the total number of shares of a security that investors have borrowed, then sold in the hope that the security will fall in value. An investor then buys back the shares and pockets the difference as profit. Short position Occurs when a person sells stocks he or she does not yet own. Shares must be borrowed, before the sale, to make "good delivery" to the buyer. Eventually, the shares must be bought to close out the transaction. This technique is used when an investor believes the stock price will go down. Short sale Selling a security that the seller does not own but is committed to repurchasing eventually. It is used to capitalize on an expected decline in the security's price. Short selling Establishing a market position by selling a security one does not own in anticipation of the price of that security falling. Short squeeze A situation in which a lack of supply tends to force prices upward. Short straddle A straddle in which one put and one call are sold. Shortage cost Costs that fall with increases in the level of investment in current assets. Shortfall risk The risk of falling short of any investment target. Short-run operating activities Events and decisions concerning the short-term finance of a firm, such as how much inventory to order and whether to offer cash terms or credit terms to customers. Short-term financial plan A financial plan that covers the coming fiscal year. Short-term investment services Services that assist firms in making short-term investments. Short-term solvency ratios Ratios used to judge the adequacy of liquid assets for meeting short-term obligations as they come due, including (1) the current ratio, (2) the acid-test ratio, (3) the inventory turnover ratio, and (4) the accounts receivable turnover ratio. Short-term tax exempts Short-term securities issued by states, municipalities, local housing agencies, and urban renewal agencies. SIC Abbreviation for Standard Industrial Classification. Each 4-digit code represents a unique business activity. Side effects Effects of a proposed project on other parts of the firm. Sight draft Demand for immediate payment. SIMEX (Singapore International Monetary Exchange) A leading futures and options exchange in Singapore. Simple prospect An investment opportunity where a certain initial wealth is placed at risk and only two outcomes are possible. Single country fund A mutual fund that invests in individual countries outside the United States. Single factor model A model of security returns that acknowledges only one common factor. See: factor model. Single index model A model of stock returns that decomposes influences on returns into a systematic factor, as measured by the return on the broad market index, and firm specific factors. Signal The process of conveying information through a firm's actions. Signaling approach Approach to the determination of the optimal capital structure asserting that insiders in a firm have information that the market does not have; therefore, the choice of capital structure by insiders can signal information to outsiders and change the value of the firm. This theory is also called the asymmetric information approach. Signaling view (on dividend policy) The argument that dividend changes are important signals to investors about changes in management's expectation about future earnings. Simple compound growth method A method of calculating the growth rate by relating the terminal value to the initial value and assuming a constant percentage annual rate of growth between these two values. Simple interest Interest calculated only on the initial investment. Related:compound interest. Simple linear regression A regression analysis between only two variables, one dependent and the other explanatory. Simple linear trend model An extrapolative statistical model that asserts that earnings have a base level and grow at a constant amount each period. Simple moving average The mean, calculated at any time over a past period of fixed length. Simulation The use of a mathematical model to imitate a situation many times in order to estimate the likelihood of various possible outcomes. See: Monte Carlo simulation. Single-index model Related: market model Single-payment bond A bond that will make only one payment of principal and interest. Single-premium deferred annuity An insurance policy bought by the sponsor of a pension plan for a single premium. In return, the insurance company agrees to make lifelong payments to the employee (the policyholder) when that employee retires. Sinker Sinking fund. Sinking fund requirement A condition included in some corporate bond indentures that requires the issuer to retire a specified portion of debt each year. Any principal due at maturity is called the balloon maturity. Size Large in size, as in the size of an offering, the size of an order, or the size of a trade. Size is relative from market to market and security to security. Context: "I can buy size at 102-22," means that a trader can buy a significant amount at 102-22. Skewed distribution Probability distribution in which an unequal number of observations lie below and above the mean. Skip-day settlement The trade is settled one business day beyond what is normal. Slippage The difference between estimated transaction costs and actual transaction costs. The difference is usually composed of revisions to price difference or spread and commission costs. Small-firm effect The tendency of small firms (in terms of total market capitalization) to outperform the stock market (consisting of both large and small firms). Small issues exemption Securities issues that involve less than $1.5 million are not required to file a registration statement with the SEC. Instead, they are governed by Regulation A, for which only a brief offering statement is needed. Smithsonian agreement A revision to the Bretton Woods international monetary system which was signed at the Smithsonian Institution in Washington, D.C., U.S.A., in December 1971. Included were a new set of par values, widened bands to +/- 2.25% of par, and an increase in the official value of gold to US$38.00 per ounce. Society for Worldwide Interbank Financial Telecommunications (SWIFT) A dedicated computer network to support funds transfer messages internationally between over 900 member banks worldwide. "Soft" Capital Rationing Capital rationing that under certain circumstances can be violated or even viewed as made up of targets rather than absolute constraints. Soft currency A currency that is expected to drop in value relative to other currencies. Soft dollars The value of research services that brokerage houses supply to investment managers "free of charge" in exchange for the investment manager's businesscommissions. Sole proprietorship A business owned by a single individual. The sole proprietorship pays no corporate income tax but has unlimited liability for business debts and obligations. Sovereign risk The risk that a central bank will impose foreign exchange regulations that will reduce or negate the value of FX contracts. Also refers to the risk of government default on a loan made to it or guaranteed by it. Span To cover all contingencies within a specified range. Special dividend Also referred to as an extra dividend. Dividend that is unlikely to be repeated. Special drawing rights (SDR) A form of international reserve assets, created by the IMF in 1967, whose value is based on a portfolio of widely used currencies. Specialist On an exchange, the member firm that is designated as the market maker (or dealer for a listed common stock). Only one specialist can be designated for a given stock, but dealers may be specialists for several stocks. In contrast, there can be multiple market makers in the OTC market. Specific issues market The market in which dealers reverse in securities they wish to short. Specific risk See:unique risk. Spectail A dealer that does business with retail but that concentrates more on acquiring and financing its own speculative positions. Speculative demand (for money) The need for cash to take advantage of investment opportunities that may arise. Speculative grade bond Bond rated Ba or lower by Moody's, or BB or lower by S&P, or an unrated bond. Speculative motive A desire to hold cash for the purpose of being in a position to exploit any attractive investment opportunity requiring a cash expenditure that might arise. Speculator One, who attempts to anticipate price changes and, through buying and selling contracts, aims to make profits. A speculator does not use the market in connection with the production, processing, marketing or handling of a product.See: trader. Speed Related:prepayment speed Spin-off A company can create an independent company from an existing part of the company by selling or distributing new shares in the so-called spinoff. Split Sometimes, companies split their outstanding shares into a larger number of shares. If a company with 1 million shares did a two-for-one split, the company would have 2 million shares. An investor with 100 shares before the split would hold 200 shares after the split. The investor's percentage of equity in the company remains the same, and the price of the stock he owns is one-half the price of the stock on the day prior to the split. Split-fee option An option on an option. The buyer generally executes the split fee with first an initial fee, with a window period at the end of which upon payment of a second fee the original terms of the option may be extended to a later predetermined final notification date. Split-rate tax system A tax system that taxes retained earnings at a higher rate than earnings that are distributed as dividends. Spot exchange rates Exchange rate on currency for immediate delivery. Related: forward exchange rate. Spot futures parity theorem Describes the theoretically correct relationship between spot and futures prices. Violation of the parity relationship gives rise to arbitrage opportunities. Spot interest rate Interest rate fixed today on a loan that is made today. Related: forward interest rates. Spot lending The origination of mortgages by processing applications taken directly from prospective borrowers. Spot markets Related: cash markets Spot month The nearest delivery month on a futures contract. Spot price The current marketprice of the actual physical commodity. Also called cash price. Spot rate The theoretical yield on a zero-coupon Treasury security. Spot rate curve The graphical depiction of the relationship between the spot rates and maturity. Spot trade The purchase and sale of a foreign currency, commodity, or other item for immediate delivery. Spread (1) The gap between bid and ask prices of a stock or other security. (2) The simultaneous purchase and sale of separate futures or options contracts for the same commodity for delivery in different months. Also known as a straddle. (3) Difference between the price at which an underwriter buys an issue from a firm and the price at which the underwriter sells it to the public. (4) The price an issuer pays above a benchmark fixed-income yield to borrow money. Spread income Also called margin income, the difference between income and cost. For a depository institution, the difference between the assets it invests in (loans and securities) and the cost of its funds (deposits and other sources). Spread strategy A strategy that involves a position in one or more options so that the cost of buying an option is funded entirely or in part by selling another option in the same underlying. Also called spreading. Spreadsheet A computer program that organizes numerical data into rows and columns on a terminal screen, for calculating and making adjustments based on new data. Stakeholders All parties that have an interest, financial or otherwise, in a firm - stockholders, creditors, bondholders, employees, customers, management, the community, and the government. Stand-alone principle Investment principle that states a firm should accept or reject a project by comparing it with securities in the same risk class. Standard deviation The square root of the variance. A measure of dispersion of a set of data from their mean. Standard error In statistics, a measure of the possible error in an estimate. Standardized normal distribution A normal distribution with a mean of 0 and a standard deviation of 1. Standardized value Also called the normal deviate, the distance of one data point from the mean, divided by the standard deviation of the distribution. Staamplusy agreement In a rights issue, agreement that the underwriter will purchase any stock not purchased by investors. Staamplusy fee Amount paid to an underwriter who agrees to purchase any stock that is not subscribed to the public investor in a rights offering. Standstill agreements Contracts where the bidding firm in a takeover attempt agrees to limit its holdings another firm. Stated annual interest rate The interest rate expressed as a per annum percentage, by which interest payment is determined. Stated conversion price At the time of issuance of a convertible security, the price the issuer effectively grants the security holder to purchase the common stock, equal to the par value of the convertible security divided by the conversion ratio. Stated maturity For the CMO tranche, the date the last payment would occur at zero CPR. Statement billing Billing method in which the sales for a period such as a month (for which a customer also receives invoices) are collected into a single statement and the customer must pay all of the invoices represented on the statement. Statement of cash flows A financial statement showing a firm's cash receipts and cash payments during a specified period. Statement-of-cash-flows method A method of cash budgeting that is organized along the lines of the statement of cash flows. Statement of Financial Accounting Standards No. 8 This is a currency translation standard previously in use by U.S. accounting firms. See: Statement of Accounting Standards No. 52. Statement of Financial Accounting Standards No. 52 This is the currency translation standard currently used by U.S. firms. It mandates the use of the current rate method. See: Statement of Financial Accounting Standards No. 8. Static theory of capital structure Theory that the firm's capital structure is determined by a trade-off of the value of tax shields against the costs of bankruptcy. Statutory surplus The surplus of an insurance company determined by the accounting treatment of both assets and liabilities as established by state statutes. Steady state As the MBS pool ages, or four to six months after it was passed at least once through the threshold for refinancing, the prepayment speed tends to stabilize within a fairly steady range. Steepening of the yield curve A change in the yield curve where the spread between the yield on a long-term and short-term Treasury has increased. Compare flattening of the yield curve and butterfly shift. Step-up To increase, as in step up the tax basis of an asset. Step-up bond A bond that pays a lower coupon rate for an initial period which then increases to a higher coupon rate. Related: Deferred-interest bond, Payment-in-kind bond Sterilized intervention Foreign exchange market intervention in which the monetary authorities have insulated their domestic money supplies from the foreign exchange transactions with offsetting sales or purchases of domestic assets. Stochastic models Liability-matching models that assume that the liability payments and the asset cash flows are uncertain. Related: Deterministic models. Stock Ownership of a corporation which is represented by shares which represent a piece of the corporation's assets and earnings. Stock dividend Payment of a corporate dividend in the form of stock rather than cash. The stock dividend may be additional shares in the company, or it may be shares in a subsidiary being spun off to shareholders. Stock dividends are often used to conserve cash needed to operate the business. Unlike a cash dividend, stock dividends are not taxed until sold. Stock exchanges Formal organizations, approved and regulated by the Securities and Exchange Commission (SEC), that are made up of members that use the facilities to exchange certain common stocks. The two major national stock exchanges are the New York Stock Exchange (NYSE) and the American Stock Exchange (ASE or AMEX). Five regional stock exchanges include the Midwest, Pacific, Philadelphia, Boston, and Cincinnati. The Arizona stock exchange is an after hours electronic marketplace where anonymous participants trade stocks via personal computers. Stock repurchase A firm's repurchase of outstanding shares of its common stock. Stock selection An active portfolio management technique that focuses on advantageous selection of particular stocks rather than on broad asset allocation choices. Stockholder equity Balance sheet item that includes the book value of ownership in the corporation. It includes capital stock, paid in surplus, and retained earnings. Stock index option An option in which the underlying is a common stock index. Stock index Index like the Dow Jones Industrial Average that tracks a portfolio of stocks. Stock market Also called the equity market, the market for trading equities. Stock option An option in which the underlying is the common stock of a corporation. Stock replacement strategy A strategy for enhancing a portfolio's return, employed when the futures contract is expensive based on its theoretical price, involving a swap between the futures, treasury bills portfolio and a stock portfolio. Stock right Another terminology for a stock . Stock split Occurs when a firm issues new shares of stock but in turn lowers the current market price of its stock to a level that is proportionate to pre-split prices. For example, if IBM trades at $100 before a 2-for-1 split, after the split it will trade at $50 and holders of the stock will have twice as many shares than they had before the split. See: split. Stock ticker This is a lettered symbol assigned to securities and mutual funds that trade on U.S.financial exchanges. Stockholder Holder of equity shares in a firm. Stockholder's books Set of books kept by firm management for its annual report that follows Financial Accounting Standards Board rules. The tax books follow IRS tax rules. Stockholder's equity The residual claims that stockholders have against a firm's assets, calculated by subtracting total liabilities from total assets. Stockout Running out of inventory. Stop-loss order An order to sell a stock when the price falls to a specified level. Stop order (or stop) An order to buy or sell at the market when a definite price is reached, either above (on a buy) or below (on a sell) the price that prevailed when the order was given. Stopping curve A curve showing the refunding rates for different points in time at which the expected value of refunding immediately equals the expected value of waiting to refund. Stopping curve refunding rate A refunding rate that falls on the stopping curve. Stop-limit order A stop order that designates a price limit. In contrast to the stop order, which becomes a market order once the stop is reached, the stop-limit order becomes a limit order. Straddle Purchase or sale of an equal number of puts and calls with the same terms at the same time. Related: spread Straight line depreciation An equal dollar amount of depreciation in each accounting period. Straight value Also called investment value, the value of a convertible security without the con-version option. Straight voting A shareholder may cast all of his votes for each candidate for the board of directors. Stratified equity indexing A method of constructing a replicating portfolio in which the stocks in the index are classified into stratum, and each stratum is represented in the portfolio. Stratified sampling approach to indexing An approach in which the index is divided into cells, each representing a different characteristic of the index, such as duration or maturity. Stratified sampling bond indexing A method of bond indexing that divides the index into cells, each cell representing a different characteristic, and that buys bonds to match those characteristics. Street Brokers, dealers, underwriters, and other knowledgeable members of the financial community; from Wall Street financial community. Street name Describes securities held by a broker on behalf of a client but registered in the name of the Wall Street firm. Strike index For a stock index option, the index value at which the buyer of the option can buy or sell the underlying stock index. The strike index is converted to a dollar value by multiplying by the option's contract multiple. Related: strike price Strike price The stated price per share for which underlying stock may be purchased (in the case of a call) or sold (in the case of a put) by the option holder upon exercise of the option contract. Strip mortgage participation certificate (strip PC) Ownership interests in specified mortgages purchased by Freddie Mac from a single seller in exchange for strip PCs representing interests in the same mortgages. Stripped bond Bond that can be subdivided into a series of zero-coupon bonds. Stripped mortgage-backed securities (SMBSs) Securities that redistribute the cash flows from the underlying generic MBS collateral into the principal and interest components of the MBS to enhance their use in meeting special needs of investors. Strip, strap Variants of a straddle. A strip is two puts and one call on a stock, a strap is two calls and one put on a stock. In both cases, the puts and calls have the same strike price and expiration date. Strong-form efficiency Pricing efficiency, where the price of a, security reflects all information, whether or not it is publicly available. Related:Weak form efficiency, semi strong form efficiency Structured arbitrage transaction A self-funding, self-hedged series of transactions that usually utilize mortgage securities as the primary assets. Structured debt Debt that has been customized for the buyer, often by incorporating unusual options. Structured portfolio strategy A strategy in which a portfolio is designed to achieve the performance of some predetermined liabilities that must be paid out in the future. Structured settlement An agreement in settlement of a lawsuit involving specific payments made over a period of time. Property and casualty insurance companies often buy life insurance products to pay the costs of such settlements. Subject Refers to a bid or offer that cannot be executed without confirmation from the customer. Subject to opinion An auditor's opinion reflecting acceptance of a company's financial statements subject to pervasive uncertainty that cannot be adequately measured, such as information relating to the value of inventories, reserves for losses, or other matters subject to judgment. Subjective probabilities Probabilities that are determined subjectively (for example, on the basis of judgement rather than using statistical sampling). Subordinated debenture bond An unsecured bond that ranks after secured debt, after debenture bonds, and often after some general creditors in its claim on assets and earnings. Related: Debenture bond, mortgage bond, collateral trust bonds. Subordinated debt Debt over which senior debt takes priority. In the event of bankruptcy, subordinated debtholders receive payment only after senior debt claims are paid in full. Subordination clause A provision in a bond indenture that restricts the issuer's future borrowing by subordinating the new lender's claims on the firm to those of the existing bond holders. Subpart F Special category of foreign-source "unearned" income that is currently taxed by the IRS whether or not it is remitted to the U.S. Subperiod return The return of a portfolio over a shorter period of time than the evaluation period. Subscription price Price that the existing shareholders are allowed to pay for a share of stock in a rights offering. Subsidiary A foreign-based affiliate that is a separately incorporated entity under the host country's law. Substitute sale A method for hedging price risk that utilizes debt-market instruments, such as interest rate futures, or that involves selling borrowed securities as the primary assets. Substitution swap A swap in which a money manager exchanges one bond for another bond that is similar in terms of coupon, maturity, and credit quality, but offers a higher yield. Sum-of-the-years'-digits depreciation Method of accelerated depreciation. Sunk costs Costs that have been incurred and cannot be reversed. Supermajority Provision in a company's charter requiring a majority of, say, 80% of shareholders to approve certain changes, such as a merger. Supply shock An event that influences production capacity and costs in an economy. Support level A price level below which it is supposedly difficult for a security or market to fall. Surplus funds Cash flow available after payment of taxes in the project. Surplus management Related: asset management Sushi bond A eurobond issued by a Japanese corporation. Sustainable growth rate Maximum rate of growth a firm can sustain without increasing financial leverage. Swap An arrangement whereby two companies lend to each other on different terms, e.g. in different currencies, and/or at different interest rates, fixed or floating. Swap assignment Related: swap sale. Swap buy-back The sale of an interest rate swap by one counterparty to the other, effectively ending the swap. Swap option See:Swaption. Related: Quality option. Swap rate The difference between spot and forward rates expressed in points, e.g., $0.0001 per pound sterling. Swap reversal An interest rate swap designed to end a counterparty's role in another interest rate swap, accomplished by counterbalancing the original swap in maturity, reference rate, and notional amount. Swap sale Also called a swap assignment, a transaction that ends one counterparty's role in an interest rate swap by substituting a new counterparty whose credit is acceptable to the other original counterparty. Swaption Options on interest rate swaps. The buyer of a swaption has the right to enter into an interest rate swap agreement by some specified date in the ' future. The swaption agreement will specify whether the buyer of the swaption will be a fixed-rate receiver or a fixed-rate payer. The writer of the swaption becomes the counterparty to the swap if the buyer exercises. Sweep account Account in which the bank takes all of the excess available funds at the close of each business day and invests them for the firm. Swingline facility Bank borrowing facility to provide finance while the firm replaces U.S. commercial paper with eurocommercial paper. Swissy Jargon for the Swiss Franc. Switching Liquidating an existing position and simultaneously reinstating a position in another futures contract of the same type. Symmetric cash matching An extension of cash flow matching that allows for the short-term borrowing of funds to satisfy a liability prior to the liability due date, resulting in a reduction in the cost of funding liabilities. Symmetric cash matching An extension of cash flow matching that allows for the short-term borrowing of funds to satisfy a liability prior to the liability due date, resulting in a reduction in the cost of funding liabilities. Synchronous data Data available at the same time. In testing option-pricing models, the price of the option and of the underlying should be synchronous, representing the same moment in the market. Syndicate A group of banks that acts jointly, on a temporary basis, to loan money in a bank credit (syndicated credit) or to underwrite a new issue of bonds. Synergistic effect A violation of value-additivity whereby the value of the combination is greater than the sum of the individual values. Synthetics Customized hybrid instruments created by blending an underlying price on a cash instrument with the price of a derivative instrument. Systematic Common to all businesses. Systematic risk Also called undiversifiable risk or market risk, the minimum level of risk that can be obtained for a portfolio by means of diversification across a large number of randomly chosen assets. Related: unsystematic risk. Systematic risk principle Only the systematic portion of risk matters in large, well-diversified portfolios. The, expected returns must be related only to systematic risks.

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