Palmer Leasing – A glossary of common leasing and finance terms.

“A” Round : A financing event whereby venture capitalists invest in a company that was previously financed by founders and/or angels. The “A” is from Series “A” Preferred stock. See “B” round.

Abnormal returns :Part of the return that is not due to systematic influences (market wide influences). In other words, abnormal returns are above those predicted by the market movement alone. Related: excess returns.

Absolute priority : Rule in bankruptcy proceedings whereby senior creditors are required to be paid in full before junior creditors receive any payment.

Accelerated cost recovery system (ACRS): Schedule of depreciation rates allowed for tax purposes.

Accelerated depreciation: Any depreciation method that produces larger deductions for depreciation in the early years of a project’s life. Accelerated cost recovery system (ACRS), which is a depreciation schedule allowed for tax purposes, is one such example.

Accounting exposure: The change in the value of a firm’s foreign currency denominated accounts due to a change in exchange rates.

Accounting earnings : Earnings of a firm as reported on its income statement.

Accounting insolvency: Total liabilities exceed total assets. A firm with a negative net worth is insolvent on the books.

Accounting liquidity: The ease and quickness with which assets can be converted to cash.

Accounts payable : Money owed to suppliers.

Accounts receivable: Money owed by customers.

Accounts receivable turnover: The ratio of net credit sales to average accounts receivable, a measure of how quickly customers pay their bills.

Accredited Investor: Defined by Rule 501 of Regulation D, an individual (i.e. non-corporate) “accredited investor” is either a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase OR a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year. For the complete definition of accredited investor, see the SEC website.

Accretion (of a discount): In portfolio accounting, a straight-line accumulation of capital gains on discount bond in anticipation of receipt of par at maturity.

Accrual bond: A bond on which interest accrues, but is not paid to the investor during the time of accrual. The amount of accrued interest is added to the remaining principal of the bond and is paid at maturity.

Accrued interest: The accumulated coupon interest earned but not yet paid to the seller of a bond by the buyer (unless the bond is in default).

Accrued Interest: The interest due on preferred stock or a bond since the last interest payment was made.

Accumulated Benefit Obligation (ABO): An approximate measure of the liability of a plan in the event of a termination at the date the calculation is performed. Related: projected benefit obligation.

Acid-test ratio: Also called the quick ratio, the ratio of current assets minus inventories, accruals, and prepaid items to current liabilities.

Acquiree: A firm that is being acquired.

Acquirer : A firm or individual that is acquiring something.

Acquisition: The process of gaining control, possession or ownership of a private portfolio company by an operating company or conglomerate.

Acquisition of assets: liability of a plan in the event of a termination at the date the calculation is performed. Related: projected benefit obligation.

Acid-test ratio: Also called the quick ratio, the ratio of current assets minus inventories, accruals, and prepaid items to current liabilities.

ACRS: Accelerated Cost Recovery System. The IRS approved method of calculating depreciation expense for tax purposes. Also known as Accelerated Depreciation.

Act of state doctrine: This doctrine says that a nation is sovereign within its own borders and its domestic actions may not be questioned in the courts of another nation.

Active: A market in which there is much trading.

Active portfolio strategy: A strategy that uses available information and forecasting techniques to seek a better performance than a portfolio that is simply diversified broadly. Related: passive portfolio strategy

Actuals: The physical commodity underlying a futures contract. Cash commodity, physical.

Additional hedge: A protection against borrower fallout risk in the mortgage pipeline.

Adjustment Condition: An adjustment condition occurs if the company does not close on an equity investment in the company for a minimum of $xxx, net of brokerage fees, on or before a series of other predetermined events, i.e. delivery of term sheet to preferred stockholders.

Adjustable rate preferred stock (ARPS): Publicly traded issues that may be collateralized by mortgages and MBSs.

Adjusted present value (APV): The net present value analysis of an asset if financed solely by equity (present value of un-levered cash flows), plus the present value of any financing decisions (levered cash flows). In other words, the various tax shields provided by the deductibility of interest and the benefits of other investment tax credits are calculated separately. This analysis is often used for highly leveraged transactions such as a leverage buy-out.

Administrative pricing rules: IRS rules used to allocate income on export sales to a foreign sales corporation.

ADR: American Depositary Receipt (ADR’s). A security issued by a U.S. bank in place of the foreign shares held in trust by that bank, thereby facilitating the trading of foreign shares in U.S. markets.

Advance commitment: A promise to sell an asset before the seller has lined up purchase of the asset. This seller can offset risk by purchasing a futures contract to fix the sales price.

Adverse selection: A situation in which market participation is a negative signal.

Advisory Board: A group of external advisors to a private equity group or portfolio company. Advice provided varies from overall strategy to portfolio valuation. Less formal than a Board of Directors.

Affirmative covenant: A bond covenant that specifies certain actions the firm must take.

After-tax profit margin: The ratio of net income to net sales.

After-tax real rate of return: Money after-tax rate of return minus the inflation rate.

Agencies: Federal agency securities.

Agency bank: A form of organization commonly used by foreign banks to enter the U.S. market. An agency bank cannot accept deposits or extend loans in its own name; it acts as agent for the parent bank.

Agency basis: A means of compensating the broker of a program trade solely on the basis of commission established through bids submitted by various brokerage firms. agency incentive arrangement. A means of compensating the broker of a program trade using benchmark prices for issues to be traded in determining commissions or fees.

Agency cost view : The argument that specifies that the various agency costs create a complex environment in which total agency costs are at a minimum with some, but less than 100%, debt financing.

Agency costs: The incremental costs of having an agent make decisions for a principal.

Agency pass-throughs: Mortgage pass-through securities whose principal and interest payments are guaranteed by government agencies, such as the Government National Mortgage Association (” Ginnie Mae “), Federal Home Loan Mortgage Corporation (” Freddie Mac”) and Federal National Mortgage Association (” Fannie Mae”).

Agency problem: Conflicts of interest among stockholders, bondholders, and managers.

Agency theory: The analysis of principal-agent relationships, wherein one person, an agent, acts on behalf of anther person, a principal.

Agent: The decision-maker in a principal-agent relationship.

Aggregation: Process in corporate financial planning whereby the smaller investment proposals of each of the firm’s operational units are added up and in effect treated as a big picture.

Aging schedule: A table of accounts receivable broken down into age categories (such as 0-30 days, 30-60 days, and 60-90 days), which is used to see whether customer payments are keeping close to schedule.

AIBD: Association of International Bond Dealers.

All equity rate: The discount rate that reflects only the business risks of a project and abstracts from the effects of financing.

All or none: Requirement that none of an order be executed unless all of it can be executed at the specified price.

All-equity rate: The discount rate that reflects only the business risks of a project and abstracts from the effects of financing.

All-in cost: Total costs, explicit and implicit.

All-or-none underwriting: An arrangement whereby a security issue is canceled if the underwriter is unable to re-sell the entire issue.

Allocation: The amount of securities assigned to an investor, broker, or underwriter in an offering. An allocation can be equal to or less than the amount indicated by the investor during the subscription process depending on market demand for the securities.

Alpha: A measure of selection risk (also known as residual risk) of a mutual fund in relation to the market. A positive alpha is the extra return awarded to the investor for taking a risk, instead of accepting the market return. For example, an alpha of 0.4 means the fund outperformed the market-based return estimate by 0.4%. An alpha of -0.6 means a fund’s monthly return was 0.6% less than would have been predicted from the change in the market alone.

In a Jensen Index, It is factor to represent the portfolio’s performance that diverges from its beta, representing a measure of the manager’s performance.

Alpha equation: The alpha of a fund is determined as follows:

[ (sum of y) -((b)(sum of x)) ] / n
where: n =number of observations (36 months)
b = beta of the fund
x = rate of return for the S&P 500
y = rate of return for the fund

Alternative Assets: This term describes non-traditional asset classes. They include private equity, venture capital, hedge funds and real estate. Alternative assets are generally more risky than traditional assets, but they should, in theory, generate higher returns for investors.

American option: An option that may be exercised at any time up to and including the expiration date. Related:

Amortization: The repayment of a loan by installments.

Amortization: An Accounting procedure that gradually reduces the book value of a tangible or a definite intangible asset through periodic charges to income.

Amortization factor: The pool factor implied by the scheduled amortization assuming no prepayemts.

Amortizing interest rate swap: Swap in which the principal or national amount rises (falls) as interest rates rise (decline).

AMT: Alternative Minimum Tax. A tax designed to prevent wealthy investors from using tax shelters to avoid income tax. The calculation of the AMT takes into account tax preference items.

Analyst: Employee of a brokerage or fund management house who studies companies and makes buy-and-sell recommendations on their stocks. Most specialize in a specific industry.

Angels: Individuals providing venture capital.

Angel Financing: Capital raised for a private company from independently wealthy investors. This capital is generally used as seed financing.

Angel Groups: Organizations, funds and networks formed for the specific purpose of facilitating angel investments in start-up companies.

Angel Investor : A person who provides backing to very early-stage businesses or business concepts. Angel investors are typically entrepreneurs who have become wealthy, often in technology-related industries.

Announcement date : Date on which particular news concerning a given company is announced to the public. Used in event studies, which researchers use to evaluate the economic impact of events of interest.

Annual fund operating expenses: For investment companies, the management fee and “other expenses,” including the expenses for maintaining shareholder records, providing shareholders with financial statements, and providing custodial and accounting services. For 12b-1 funds, selling and marketing costs are included.

Annual percentage rate (APR): The periodic rate times the number of periods in a year. For example, a 5% quarterly return has an APR of 20%.

Annual percentage yield (APY): The effective, or true, annual rate of return. The APY is the rate actually earned or paid in one year, taking into account the affect of compounding. The APY is calculated by taking one plus the periodic rate and raising it to the number of periods in a year. For example, a 1% per month rate has an APY of 12.68% (1.01^12).

Annual report: Yearly record of a publicly held company’s financial condition. It includes a description of the firm’s operations, its balance sheet and income statement. SEC rules require that it be distributed to all shareholders. A more detailed version is called a 10-K.

Annualized gain: If stock X appreciates 1.5% in one month, the annualized gain for that sock over a twelve month period is 12*1.5% = 18%. Compounded over the twelve month period, the gain is (1.015)^12 = 19.6%.

Annualized holding period return: The annual rate of return that when compounded t times, would have given the same t-period holding return as actually occurred from period 1 to period t.

Annuity: A regular periodic payment made by an insurance company to a policyholder for a specified period of time.

Annuity due: An annuity with n payments, wherein the first payment is made at time t = 0 and the last payment is made at time t = n – 1.

Annuity factor: Present value of $1 paid for each of t periods.

Annuity in arrears: An annuity with a first payment on full period hence, rather than immediately.

Anticipation: Arrangements whereby customers who pay before the final date may be entitled to deduct a normal rate of interest.

Antidilution provisions: Contractual measures that allow investors to keep a constant share of a firm’s equity in light of subsequent equity issues. These may give investors preemptive rights to purchase new stock at the offering price. [See Full Ratchet and weighted Average]

Antidilutive effect: Result of a transaction that increases earnings per common share (e.g. by decreasing the number of shares outstanding).

Appraisal ratio: The signal-to-noise ratio of an analyst’s forecasts. The ratio of alpha to residual standard deviation.

Appraisal rights: A right of shareholders in a merger to demand the payment of a fair price for their shares, as determined independently.

Appropriation request: Formal request for funds for capital investment project.

Arbitrage: The simultaneous buying and selling of a security at two different prices in two different markets, resulting in profits without risk. Perfectly efficient markets present no arbitrage opportunities. Perfectly efficient markets seldom exist.

Arbitrage Pricing Theory (APT): An alternative model to the capital asset pricing model developed by Stephen Ross and based purely on arbitrage arguments.

Arbitrage-free option-pricing models: Yield curve option-pricing models.

Arbitrageurs: People who search for and exploit arbitrage opportunities.

Archangel : Usually an outsider hired by a syndicate of angel investors to perform due diligence on investment opportunities and coordinate allotment of investment duties among members. Archangels typically have no financial commitment to the syndicate.

Arithmetic average (mean) rate of return: Arithmetic mean return.

Arithmetic mean return: An average of the subperiod returns, calculated by summing the subperiod returns and dividing by he number of subperiods.

Arms index: Also known as a trading index (TRIN)= (number of advancing issues)/ (number of declining issues) (Total up volume )/ (total down volume). An advance/decline market indicator. Less than 1.0 indicates bullish demand, while above 1.0 is bearish. The index often is smoothed with a simple moving average.

Arm’s length price: The price at which a willing buyer and a willing unrelated seller would freely agree to transact.

ARMs: Adjustable rate mortgage. A mortgage that features predetermined adjustments of the loan interest rate at regular intervals based on an established index. The interest rate is adjusted at each interval to a rate equivalent to the index value plus a predetermined spread, or margin, over the index, usually subject to per-interval and to life-of-loan interest rate and/or payment rate caps.

Articles of incorporation: Legal document establishing a corporation and its structure and purpose.

Asian currency units (ACUs): Dollar deposits held in Singapore or other Asian centers.

Asian option: Option based on the average price of the asset during the life of the option.

Ask: This is the quoted ask, or the lowest price an investor will accept to sell a stock. Practically speaking, this is the quoted offer at which an investor can buy shares of stock; also called the offer price.

Ask price: A dealer’s price to sell a security; also called the offer price.

Asset: Any possession that has value in an exchange.

Asset-backed loan: Loan, typically from a commercial bank, that is backed by asset collateral, often belonging to the entrepreneurial firm or the entrepreneur.

Asset/equity ratio: The ratio of total assets to stockholder equity.

Asset/liability management: Also called surplus management, the task of managing funds of a financial institution to accomplish the two goals of a financial institution: (1) to earn an adequate return on funds invested and (2) to maintain a comfortable surplus of assets beyond liabilities.

Asset activity ratios: Ratios that measure how effectively the firm is managing its assets.

Asset allocation decision: The decision regarding how an institution’s funds should be distributed among the major classes of assets in which it may invest.

Asset-backed security: A security that is collateralized by loans, leases, receivables, or installment contracts on personal property, not real estate.

Asset-based financing: Methods of financing in which lenders and equity investors look principally to the cash flow from a particular asset or set of assets for a return on, and the return of, their financing.

Asset classes: Categories of assets, such as stocks, bonds, real estate and foreign securities.

Asset-coverage test: A bond indenture restriction that permits additional borrowing on if the ratio of assets to debt does not fall below a specified minimum.

Asset for asset swap: Creditors exchange the debt of one defaulting borrower for the debt of another defaulting borrower.

Asset pricing model: A model for determining the required rate of return on an asset.

Asset substitution: A firm’s investing in assets that are riskier than those that the debtholders expected.

Asset substitution problem: Arises when the stockholders substitute riskier assets for the firm’s existing assets and expropriate value from the debtholders.

Asset swap: An interest rate swap used to alter the cash flow characteristics of an institution’s assets so as to provide a better match with its iabilities.

Asset turnover: The ratio of net sales to total assets.

Asset pricing model: A model, such as the Capital Asset Pricing Model (CAPM), that determines the required rate of return on a particular asset.

Assets: A firm’s productive resources.

Assets requirements: A common element of a financial plan that describes projected capital spending and the proposed uses of net working capital.

Assignment: The receipt of an exercise notice by an options writer that requires the writer to sell (in the case of a call) or purchase (in the case of a put) the underlying security at the specified strike price.

Asymmetry: A lack of equivalence between two things, such as the unequal tax treatment of interest expense and dividend payments.

Asymmetric information: Information that is known to some people but not to other people.

Asymmetric taxes: A situation wherein participants in a transaction have different net tax rates.

At-the-money: An option is at-the-money if the strike price of the option is equal to the market price of the underlying security. For example, if xyz stock is trading at 54, then the xyz 54 option is at-the-money.

Attribute bias: The tendency of stocks preferred by the dividend discount model to share certain equity attributes such as low price-earnings ratios, high dividend yield, high book-value ratio or membership in a particular industry sector.

Auction markets: Markets in which the prevailing price is determined through the free interaction of prospective buyers and sellers, as on the floor of the stock exchange.

Auction rate preferred stock (ARPS): Floating rate preferred stock, the dividend on which is adjusted every seven weeks through a Dutch auction.

Auditor’s report: A section of an annual report containing the auditor’s opinion about the veracity of the financial statements.

Authorized shares: Number of shares authorized for issuance by a firm’s corporate charter.

Autocorrelation: The correlation of a variable with itself over successive time intervals.

Automated Clearing House (ACH): A collection of 32 regional electronic interbank networks used to process transactions electronically with a guaranteed one-day bank collection float.

Automatic conversion: Immediate conversion of an investor’s priority shares to ordinary shares at the time of a company’s underwriting before an offering of its stock on an exchange.

Automatic stay: The restricting of liability holders from collection efforts of collateral seizure, which is automatically imposed when a firm files for bankruptcy under Chapter 11.

Autoregressive: Using past data to predict future data.

Availability float: Checks deposited by a company that have not yet been cleared.

Average: An arithmetic mean of selected stocks intended to represent the behavior of the market or some component of it. One good example is the widely quoted Dow Jones Industrial Average, which adds the current prices of the 30 DJIA’s stocks, and divides the results by a predetermined number, the divisor.

Average accounting return: The average project earnings after taxes and depreciation divided by the average book value of the investment during its life.

Average age of accounts receivable: The weighted-average age of all of the firm’s outstanding invoices.

Average collection period, or days’ receivables: The ratio of accounts receivables to sales, or the total amount of credit extended per dollar of daily sales (average AR/sales * 365).

Average cost of capital: A firm’s required payout to the bondholders and to the stockholders expressed as a percentage of capital contributed to the firm. Average cost of capital is computed by dividing the total required cost of capital by the total amount of contributed capital.

Average IRR: The arithmetic mean of the internal rate of return.

Average life: Also referred to as the weighted-average life (WAL). The average number of years that each dollar of unpaid principal due on the mortgage remains outstanding. Average life is computed as the weighted average time to the receipt of all future cash flows, using as the weights the dollar amounts of the principal paydowns.

Average maturity: The average time to maturity of securities held by a mutual fund. Changes in interest rates have greater impact on funds with longer average life.

Average (across-day) measures: An estimation of price that uses the average or representative price of a large number of trades.

Average rate of return (ARR): The ratio of the average cash inflow to the amount invested.

Average tax rate: Taxes as a fraction of income; total taxes divided by total taxable income.

Away: A trade, quote, or market that does not originate with the dealer in question, e.g., “the bid is 98-10 away from me.”

“B” Round: A financing event whereby professional investors such as venture capitalists are sufficiently interested in a company to provide additional funds after the “A” round of financing. Subsequent rounds are called “C”, “D”, and so on.

Back fee: The fee paid on the extension date if the buyer wishes to continue the option.

Back office: Brokerage house clerical operations that support, but do not include, the trading of stocks and other securities. Includes all written confirmation and settlement of trades, record keeping and regulatory compliance.

Back-end loan fund: A mutual fund that charges investors a fee to sell (redeem) shares, often ranging from 4% to 6%. Some back-end load funds impose a full commission if the shares are redeemed within a designated time, such as one year. The commission decreases the longer the investor holds the shares. The formal name for the back-end load is the contingent deferred sales charge, or CDSC.

Back-to-back financing: An intercompany loan channeled through a bank.

Back-to-back loan: A loan in which two companies in separate countries borrow each other’s currency for a specific time period and repay the other’s currency at an agreed upon maturity.

Back-up: (1) When bond yields and prices fall, the market is said to back-up. (2) When an investor swaps out of one security into another of shorter current maturity he is said to back up.

Backwardation: A market condition in which futures prices are lower in the distant delivery months than in the nearest delivery month. This situation may occur in when the costs of storing the product until eventual delivery are effectively subtracted from the price today. The opposite of contango.

Baker Plan: A plan by U.S. Treasury Secretary James Baker under which 15 principal middle-income debtor countries (the Baker 15) would undertake growth-oriented structural reforms, to be supported by increased financing from the World Bank and continued lending from commercial banks.

Balance of payments: A statistical compilation formulated by a sovereign nation of all economic transactions between residents of that nation and residents of all other nations during a stipulated period of time, usually a calendar year.

Balance of trade: Net flow of goods (exports minus imports) between countries.

Balance sheet: Also called the statement of financial condition, it is a summary of the assets, liabilities, and owners’ equity.

Balance Sheet: A condensed financial statement showing the nature and amount of a company’s assets, liabilities, and capital on a given date.

Balance sheet exposure: See:accounting exposure.

Balance sheet identity: Total Assets = Total Liabilities + Total Stockholders’ Equity

Balanced fund: An investment company that invests in stocks and bonds. The same as a balanced mutual fund.

Balanced mutual fund: This is a fund that buys common stock, preferred stock and bonds. The same as a balanced fund.

Balloon maturity: Any large principal payment due at maturity for a bond or loan with or without a a sinking fund requirement.

BAN (Bank anticipation notes): Notes issued by states and municipalities to obtain interim financing for projects that will eventually be funded long term through the sale of a bond issue.

Bank collection float: The time that elapses between when a check is deposited into a bank account and when the funds are available to the depositor, during which period the bank is collecting payment from the payer’s bank.

Bank discount basis: A convention used for quoting bids and offers for treasury bills in terms of annualized yield , based on a 360-day year.

Bank draft: A draft addressed to a bank.

Bank line: Line of credit granted by a bank to a customer.

Bank wire: A computer message system linking major banks. It is used not for effecting payments, but as a mechanism to advise the receiving bank of some action that has occurred, e.g. the payment by a customer of funds into that bank’s account.

Banker’s acceptance: A short-term credit investment created by a non-financial firm and guaranteed by a bank as to payment. Acceptances are traded at discounts from face value in the secondary market. These instruments have been a popular investment for money market funds. They are commonly used in international transactions.

Bankruptcy: State of being unable to pay debts. Thus, the ownership of the firm’s assets is transferred from the stockholders to the bondholders.

Bankruptcy: An inability to pay debts. Chapter 11 of the bankruptcy code deals with reorganization, which allows the debtor to remain in business and negotiate for a restructuring of debt.

Bankruptcy cost view: The argument that expected indirect and direct bankruptcy costs offset the other benefits from leverage so that the optimal amount of leverage is less than 100% debt financing.

Bankruptcy risk: The risk that a firm will be unable to meet its debt obligations. Also referred to as default or insolvency risk.

Bankruptcy view: The argument that expected bankruptcy costs preclude firms from being financed entirely with debt.

Bar: Slang for one million dollars.

Barbell strategy: A strategy in which the maturities of the securities included in the portfolio are concentrated at two extremes.

Barbell Strategy: Investment strategy by limited partners that primarily make commitments to buyout firms on (1) the micro/small and (2) the large/mega ends of the market; while mostly eschewing the vast array of middle-market opportunities.

Bargain-purchase-price option: Gives the lessee the option to purchase the asset at a price below fair market value when the lease expires.

Base interest rate: Related: Benchmark interest rate.

Base probability of loss: The probability of not achieving a portfolio expected return.

Basic balance: In a balance of payments, the basic balance is the net balance of the combination of the current account and the capital account.

Basic business strategies: Key strategies a firm intends to pursue in carrying out its business plan.

Basic IRR rule: Accept the project if IRR is greater than the discount rate; reject the project is lower than the discount rate.

Basis: Regarding a futures contract, the difference between the cash price and the futures price observed in the market. Also, it is the price an investor pays for a security plus any out-of-pocket expenses. It is used to determine capital gains or losses for tax purposes when the stock is sold.

Basis point: In the bond market, the smallest measure used for quoting yields is a basis point. Each percentage point of yield in bonds equals 100 basis points. Basis points also are used for interest rates. An interest rate of 5% is 50 basis points greater than an interest rate of 4.5%.

Basis price: Price expressed in terms of yield to maturity or annual rate of return.

Basis risk: The uncertainty about the basis at the time a hedge may be lifted. Hedging substitutes basis risk for price risk.

Basket options: Packages that involve the exchange of more than two currencies against a base currency at expiration. The basket option buyer purchases the right, but not the obligation, to receive designated currencies in exchange for a base currency, either at the prevailing spot market rate or at a prearranged rate of exchange. A basket option is generally used by multinational corporations with multicurrency cash flows since it is generally cheaper to buy an option on a basket of currencies than to buy individual options on each of the currencies that make up the basket.

Basket trades: Related: Program trades.

BATNA (best alternative to a negotiated agreement): A no-agreement alternative reflecting the course of action a party to a negotiation will take if the proposed deal is not possible.

Bear: An investor who believes a stock or the overall market will decline. A bear market is a prolonged period of falling stock prices, usually by 20% or more. Related: bull.

Bearer bond: bonds that are not registered on the books of the issuer. Such bonds are held in physical form by the owner, who receives interest payments by physically detaching coupons from the bond certificate and delivering them to the paying agent.

Bear Hug: An offer made directly to the Board of Directors of a target company. Usually made to increase the pressure on the target with the threat that a tender offer may follow.

Bear market: Any market in which prices are in a declining trend.

Bear raid: A situation in which large traders sell positions with the intention of driving prices down.

Before-tax profit margin: The ratio of net income before taxes to net sales.

Beggar-thy-neighbor: An international trade policy of competitive devaluations and increased protective barriers where one country seeks to gain at the expense of its trading partners.

Beggar-thy-neighbor devaluation: A devaluation that is designed to cheapen a nation’s currency and thereby increase its exports at other countries’ expense and reduce imports. Such devaluations often lead to trade wars.

Bellwether issues: Related:Benchmark issues.

Benchmark: The performance of a predetermined set of securities, for comparison purposes. Such sets may be based on published indexes or may be customized to suit an investment strategy.

Benchmarking: Comparing returns of a portfolio to the returns of its peers; in private equity, fund performance is benchmarked against a sample of funds formed in the same vintage year with the same investment focus.

Benchmark error: Use of an inappropriate proxy for the true market portfolio.

Benchmark interest rate: Also called the base interest rate, it is the minimum interest rate investors will demand for investing in a non-Treasury security. It is also tied to the yield to maturity offered on a comparable-maturity Treasury security that was most recently issued (“on-the-run”).

Benchmark issues: Also called on-the-run or current coupon issues or bellwether issues. In the secondary market, it’s the most recently auctioned Treasury issues for each maturity.

Best Efforts: An offering in which the investment banker agrees to distribute as much of the offering as possible, and return any unsold shares to the issuer.

Best-efforts sale: A method of securities distribution/ underwriting in which the securities firm agrees to sell as much of the offering as possible and return any unsold shares to the issuer. As opposed to a guaranteed or fixed price sale, where the underwriter agrees to sell a specific number of shares (with the securities firm holding any unsold shares in its own account if necessary).

Best-interests-of-creditors test: The requirement that a claim holder voting against a plan of reorganization must receive at least as much as he would have if the debtor were liquidated.

Beta (Mutual Funds): The measure of a fund’s or stocks risk in relation to the market. A beta of 0.7 means the fund’s total return is likely to move up or down 70% of the market change; 1.3 means total return is likely to move up or down 30% more than the market. Beta is referred to as an index of the systematic risk due to general market conditions that cannot be diversified away.

Beta equation (Mutual Funds): The beta of a fund is determined as follows:

[(n) (sum of (xy)) ]-[ (sum of x) (sum of y)]
[(n) (sum of (xx)) ]-[ (sum of x) (sum of x)]
where: n = # of observations (36 months)
x = rate of return for the S&P 500 Index
y = rate of return for the fund

Beta equation (Stocks): The beta of a stock is determined as follows:

[(n) (sum of (xy)) ]-[(sum of x) (sum of y)]
[(n) (sum of (xx)) ]-[(sum of x) (sum of x)]
where: n = # of observations (24-60 months)
x = rate of return for the S&P 500 Index
y = rate of return for the stock

Biased expectations theories: Related: pure expectations theory.

Bid price: This is the quoted bid, or the highest price an investor is willing to pay to buy a security. Practically speaking, this is the available price at which an investor can sell shares of stock. Related: Ask , offer.

Bid-asked spread: The difference between the bid and asked prices.

Bidder: A firm or person that wants to buy a firm or security.

Bill of exchange: General term for a document demanding payment.

Bill of lading: A contract between the exporter and a transportation company in which the latter agrees to transport the goods under specified conditions which limit its liability. It is the exporter’s receipt for the goods as well as proof that goods have been or will be received.

Binomial option pricing model: An option pricing model in which the underlying asset can take on only two possible, discrete values in the next time period for each value that it can take on in the preceding time period.

Black market: An illegal market.

Black-Scholes option-pricing model: A model for pricing call options based on arbitrage arguments that uses the stock price, the exercise price, the risk-free interest rate, the time to expiration, and the standard deviation of the stock return.

Blanket inventory lien: A secured loan that gives the lender a lien against all the borrower’s inventories.

Block house: Brokerage firms that help to find potential buyers or sellers of large block trades.

Block trade: A large trading order, defined on the New York Stock Exchange as an order that consists of 10,000 shares of a given stock or a total market value of $200,000 or more.

Block voting: A group of shareholders banding together to vote their shares in a single block.

Blocked currency: A currency that is not freely convertible to other currencies due to exchange controls.

Blow-off top: A steep and rapid increase in price followed by a steep and rapid drop. This is an indicator seen in charts and used in technical analysis of stock price and market trends.

Blue-chip company: Large and creditworthy company.

Bluesky laws: State laws covering the issue and trading of securities.

Blue Sky Laws: A common term that refers to laws passed by various states to protect the public against securities fraud. The term originated when a judge ruled that a stock had as much value as a patch of blue sky.

Bogey: The return an investment manager is compared to for performance evaluation.

Boilerplate: Standard terms and conditions.

Bond: Bonds are debt and are issued for a period of more than one year. The U.S. government, local governments, water districts, companies and many other types of institutions sell bonds. When an investor buys bonds, he or she is lending money. The seller of the bond agrees to repay the principal amount of the loan at a specified time. Interest-bearing bonds pay interest periodically.

Bond agreement: A contract for privately placed debt.

Bond covenant: A contractual provision in a bond indenture. A positive covenant requires certain actions, and a negative covenant limits certain actions.

Bond equivalent yield: Bond yield calculated on an annual percentage rate method. Differs from annual effective yield.

Bond indenture: The contract that sets forth the promises of a corporate bond issuer and the rights of investors.

Bond indexing: Designing a portfolio so that its performance will match the performance of some bond index.

Bond points: A conventional unit of measure for bond prices set at $10 and equivalent to 1% of the $100 face value of the bond. A price of 80 means that the bond is selling at 80% of its face, or par value.

Bond value: With respect to convertible bonds, the value the security would have if it were not convertible apart from the conversion option.

Bond-equivalent basis: The method used for computing the bond-equivalent yield.

Bond-equivalent yield: The annualized yield to maturity computed by doubling the semiannual yield.

BONDPAR: A system that monitors and evaluates the performance of a fixed-income portfolio , as well as the individual securities held in the portfolio. BONDPAR decomposes the return into those elements beyond the manager’s control–such as the interest rate environment and client-imposed duration policy constraints–and those that the management process contributes to, such as interest rate management, sector/quality allocations, and individual bond selection.

Boning: Charging a lot more for an asset than it’s worth.

Book: A banker or trader’s positions.

Book cash: A firm’s cash balance as reported in its financial statements. Also called ledger cash.

Book profit: The cumulative book income plus any gain or loss on disposition of the assets on termination of the SAT.

Book runner: The managing underwriter for a new issue. The book runner maintains the book of securities sold.

Book value: A company’s book value is its total assets minus intangible assets and liabilities, such as debt. A company’s book value might be more or less than its market value.

Book Value: Book value of a stock is determined from a company’s balance sheet by adding all current and fixed assets and then deducting all debts, other liabilities and the liquidation price of any preferred issues. The sum arrived at is divided by the number of common shares outstanding and the result is book value per common share.

Book value per share: The ratio of stockholder equity to the average number of common shares. Book value per share should not be thought of as an indicator of economic worth, since it reflects accounting valuation (and not necessarily market valuation).

Book-entry securities: The Treasury and federal agencies are moving to a book-entry system in which securities are not represented by engraved pieces of paper but are maintained in computerized records at the Fed in the names of member banks, which in turn keep records of the securities they own as well as those they are holding for customers. In the case of other securities where a book-entry has developed, engraved securities do exist somewhere in quite a few cases. These securities do not move from holder to holder but are usually kept in a central clearinghouse or by another agent.

Bootstrapping: A process of creating a theoretical spot rate curve , using one yield projection as the basis for the yield of the next maturity.

Bootstrapping: Means of financing a small firm by employing highly creative ways of using and acquiring resources without raising equity from traditional sources or borrowing money from the bank.

Borrow: To obtain or receive money on loan with the promise or understanding that it will be repaid.

Borrower fallout: In the mortgage pipeline, the risk that prospective borrowers of loans committed to be closed will elect to withdraw from the contract.

Bottom-up equity management style: A management style that de-emphasizes the significance of economic and market cycles, focusing instead on the analysis of individual stocks.

Bought deal: Security issue where one or two underwriters buy the entire issue.

Bourse: A term of French origin used to refer to stock markets.

Bracket: A term signifying the extent an underwriter’s commitment in a new issue, e.g., major bracket or minor bracket.

Brady bonds: Bonds issued by emerging countries under a debt reduction plan.

Branch: An operation in a foreign country incorporated in the home country.

Break: A rapid and sharp price decline.

Breakeven analysis: An analysis of the level of sales at which a project would make zero profit.

Break-even lease payment: The lease payment at which a party to a prospective lease is indifferent between entering and not entering into the lease arrangement.

Breakeven payment rate: The prepayment rate of a MBS coupon that will produce the same CFY as that of a predetermined benchmark MBS coupon. Used to identify for coupons higher than the benchmark coupon the prepayment rate that will produce the same CFY as that of the benchmark coupon; and for coupons lower than the benchmark coupon the lowest prepayment rate that will do so.

Break-even tax rate: The tax rate at which a party to a prospective transaction is indifferent between entering into and not entering into the transaction.

Break-even time: Related: Premium payback period.

Breakout: A rise in a security’s price above a resistance level (commonly its previous high price) or drop below a level of support (commonly the former lowest price.) A breakout is taken to signify a continuing move in the same direction. Can be used by technical analysts as a buy or sell indicator.

Bretton Woods Agreement: An agreement signed by the original United Nations members in 1944 that established the International Monetary Fund (IMF) and the post-World War II international monetary system of fixed exchange rates.

Bridge financing: Interim financing of one sort or another used to solidify a position until more permanent financing is arranged.

Bridge Financing: A limited amount of equity or short-term debt financing typically raised within 6-18 months of an anticipated public offering or private placement meant to “bridge” a company to the next round of financing.

British clearers: The large clearing banks that dominate deposit taking and short-term lending in the domestic sterling market.

Broad-Based Weighted Average Ratchet: A type of anti-dilution mechanism. A weighted average ratchet adjusts downward the price per share of the preferred stock of investor A due to the issuance of new preferred shares to new investor B at a price lower than the price investor A originally received. Investor A’s preferred stock is repriced to a weighed average of investor A’s price and investor B’s price. A broad-based ratchet uses all common stock outstanding on a fully diluted basis (including all convertible securities, warrants and options) in the denominator of the formula for determining the new weighted average price. Compare Narrow-Based Weighted Average ratchet and Chapter 2.9.4.d.ii of the Encyclopedia.

Broker: An individual who is paid a commission for executing customer orders. Either a floor broker who executes orders on the floor of the exchange, or an upstairs broker who handles retail customers and their orders.

Brokers: Private individuals or firms retained by early-stage companies to raise funds for a finder’s fee. (compare, broker-dealer)

Brokered market: A market where an intermediary offers search services to buyers and sellers.

Bubble theory: Security prices sometimes move wildly above their true values.

Buck: Slang for one million dollars.

Budget: A detailed schedule of financial activity, such as an advertising budget, a sales budget, or a capital budget.

Budget deficit: The amount by which government spending exceeds government revenues.

Builder buydown loan: A mortgage loan on newly developed property that the builder subsidizes during the early years of the development. The builder uses cash to buy down the mortgage rate to a lower level than the prevailing market loan rate for some period of time. The typical buydown is 3% of the interest-rate amount for the first year, 2% for the second year, and 1% for the third year (also referred to as a 3-2-1 buydown).

Bull: An investor who thinks the market will rise. Related: bear.

Bull-bear bond: Bond whose principal repayment is linked to the price of another security. The bonds are issued in two tranches: in the first tranche repayment increases with the price of the other security, and in the second tranche repayment decreases with the price of the other security.

Bull CD, Bear CD: A bull CD pays its holder a specified percentage of the increase in return on a specified market index while guaranteeing a minimum rate of return. A bear CD pays the holder a fraction of any fall in a given market index.

Bull market: Any market in which prices are in an upward trend.

Bull spread: A spread strategy in which an investor buys an out-of-the-money put option, financing it by selling an out-of-the money call option on the same underlying.

Bulldog bond: Foreign bond issue made in London.

Bulldog market: The foreign market in the United Kingdom.

Bullet contract: A guaranteed investment contract purchased with a single (one-shot) premium. Related: Window contract.

Bullet loan: A bank term loan that calls for no amortization.

Bullet strategy: A strategy in which a portfolio is constructed so that the maturities of its securities are highly concentrated at one point on the yield curve.

Bullish, bearish: Words used to describe investor attitudes. Bullish refers to an optimistic outlook while bearish means a pessimistic outlook.

Bundling, unbundling: A trend allowing creation of securities either by combining primitive and derivative securities into one composite hybrid or by separating returns on an asset into classes.

Burn Out / Cram Down: Extraordinary dilution, by reason of a round of financing, of a non-participating investor’s percentage ownership in the issuer.

Burn Rate: The rate at which a company expends net cash over a certain period, usually a month.

Business Development Company (BDC): A vehicle established by Congress to allow smaller, retail investors to participate in and benefit from investing in small private businesses as well as the revitalization of larger private companies.

Business cycle: Repetitive cycles of economic expansion and recession.

Business failure: A business that has terminated with a loss to creditors.

Business Plan: A document that describes the entrepreneur’s idea, the market problem, proposed solution, business and revenue models, marketing strategy, technology, company profile, competitive landscape, as well as financial data for coming years. The business plan opens with a brief executive summary, most probably the most important element of the document due to the time constraints of venture capital funds and angels.

Business risk: The risk that the cash flow of an issuer will be impaired because of adverse economic conditions, making it difficult for the issuer to meet its operating expenses.

Busted convertible: Related: Fixed-income equivalent.

Butterfly shift: A non-parallel shift in the yield curve involving the height of the curve.

Buy: To purchase an asset; taking a long position.

Buy in: To cover, offset or close out a short position. Related: evening up, liquidation.

Buyout: Purchase of a controlling interest (or percent of shares) of a company’s stock. A leveraged buy-out is done with borrowed money.

Buy-back: Another term for a repo.

– C –

Cable: Exchange rate between British pounds sterling and the U.S.$

CAGR: Compound Annual Growth Rate. The year over year growth rate applied to an investment or other aspect of a firm using a base amount.

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 Option: The right to buy a security at a given price (or range) within a specific time period.

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 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 (or Assets) Under Management: The amount of capital available to a fund management team for venture investments.

Capital budget: A firm’s set of planned capital expenditures.

Capital budgeting: The process of choosing the firm’s long-term capital assets.

Capital Call: Also known as a draw down – When a venture capital firm has decided where it would like to invest, it will approach its investors in order to “draw down” the money. The money will already have been pledged to the fund but this is the actual act of transferring the money so that it reaches the investment target.

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: The difference between an asset’s purchase price and selling price, when the selling price is greater. Long-term capital gains (on assets held for a year or longer) are taxed at a lower rate than ordinary income.

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.

Capitalization Table: Also called a “Cap Table”, this is a table showing the total amount of the various securities issued by a firm. This typically includes the amount of investment obtained from each source and the securities distributed — e.g. common and preferred shares, options, warrants, etc. — and respective capitalization ratios.

Capitalize: To record an outlay as an asset (as opposed to an Expense), which is subject to depreciation or amortization.

Captive funds: A venture capital firm owned by a larger financial institution, such as a bank.

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.

Carried Interest: The portion of any gains realized by the fund to which the fund managers are entitled, generally without having to contribute capital to the fund. Carried interest payments are customary in the venture capital industry, in order to create a significant economic incentive for venture capital fund managers to achieve capital gains.

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.

Carring costs: Costs that increase with increases in the level of investment in current assets.

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 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 Position: The amount of cash available to a company at a given point in time. Claim Dilution A reduction in the likelihood that one or more of the firm’s claimants will be fully repaid, including time value of money considerations.

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.

Catch-up: This is a common term of the private equity partnership agreement. Once the general partner provides its limited partners with their preferred return, if any, it then typically enters a catch-up period in which it receives the majority or all of the profits until the agreed upon profit-split, as determined by the carried interest, is reached.

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.

Chapter 11: The part of the Bankruptcy Code that provides for reorganization of a bankrupt company’s assets.

Chapter 7: The part of the Bankruptcy Code that provides for liquidation of a company’s assets.

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.

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.

Chinese wall: A barrier against information flows between different divisions or operating groups within banks and securities firms. Examples include a policy barrier between the trust department from making investment decisions based on any substantive inside information that may come into the possession of other bank departments. The term also refers to barriers against information flows between corporate finance and equity research and trading operations.

Churning: Excessive trading of a client’s \ account in order to increase the broker’s commissions.

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.

Clawback: A clawback obligation represents the general partner’s promise that, over the life of the fund, the managers will not receive a greater share of the fund’s distributions than they bargained for. Generally, this means that the general partner may not keep distributions representing more than a specified percentage (e.g., 20%) of the fund’s cumulative profits, if any. When triggered, the clawback will require that the general partner return to the fund’s limited partners an amount equal to what is determined to be “excess” distributions.

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.

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 Fund: A type of fund that has a fixed number of shares outstanding, which are offered during an initial subscription period, similar to an initial public offering. After the subscription period is closed, the shares are traded on an exchange between investors, like a regular stock. The market price of a closed-end fund fluctuates in response to investor demand as well as changes in the values of its holdings or its Net Asset Value. Unlike open-end mutual funds, closed-end funds do not stand ready to issue and redeem shares on a continuous basis.

Closed-end mortgage: Mortgage against which no additional debt may be issued.

Closing: An investment event occurring after the required legal documents are implemented between the investor and a company and after the capital is transferred in exchange for company ownership or debt obligation.

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.

Co-investment: The syndication of a private equity financing round or an investment by an individuals (usually general partners) alongside a private equity fund in a financing round.

Co-Sale Provisions or Rights: Allows investors to sell their shares of stock in the same proportions and for the same terms as the founders, managers, or other investors, should any of those parties receive an offer.

Collar: An upper and lower limit on the interest rate on a floating-rate note.

Collar Agreement: Agreed upon adjustments in the number of shares offered in a stock-for-stock exchange to account for price fluctuations before the completion of the deal.

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.

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.

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.

Committed Capital: The total dollar amount of capital pledged to a private equity fund.

Committed Funds or Raised Funds: Capital committed by investors. Cash to the maximum of these commitments may be requested or drawn down by the private equity managers usually on a deal-by-deal basis. This amount is different from invested funds for three reasons. First, most partnerships will initially invest only between 80% and 95% of committed funds (possibly even less). Second, it may be necessary in early years to deduct the annual management fee that is used to cover the cost of operation of a fund. Third, payback to investors usually begins before the final draw down of commitments has taken place. To the extent that capital invested does not equal capital committed, limited partners will have their private equity returns diluted by the much lower cash returns earned on the uninvested portion. Avoiding this situation is the main reason for the Partners Group over-commitment model, which aims to keep Partners Group products as close 100% invested as possible.

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 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: A unit of ownership of a corporation. In the case of a public company, the stock is traded between investors on various exchanges. Owners of common stock are typically entitled to vote on the selection of directors and other important events and in some cases receive dividends on their holdings. Investors who purchase common stock hope that the stock price will increase so the value of their investment will appreciate. Common stock offers no performance guarantees. Additionally, in the event that a corporation is liquidated, the claims of secured and unsecured creditors and owners of bonds and preferred stock take precedence over the claims of those who own common stock.

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 buy-back: The redemption of private of restricted holdings by the portfolio company itself. In essence the company is buying out the VC’s interest.

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 type of bond that has an infinite life but is not issued in the U.S. capital markets.

Consolidation: The combining of two or more firms to form an entirely new entity.

Consolidation: Also called a leveraged rollup, this is an investment strategy in which a leveraged buyout (LBO) firm acquires a series of companies in the same or complementary fields, with the goal of becoming a dominant regional or nationwide player in that industry. In some cases, a holding company will be created to acquire the new companies. In other cases, an initial acquisition may serve as the platform through which the other acquisitions will be made.

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).

Controller: The corporate manager responsible for the firm’s accounting activities.

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 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.

Conversion Ratio: The number of shares of stock into which a convertible security may be converted. The conversion ration equals the par value of the convertible security divided by the conversion price.

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 Rights: Rights by which preferred stock “converts” into common stock. Usually, one has this right at any time after making an investment. Company may want rights to force a conversion upon an IPO; upon hitting of certain sales or earnings’ targets, or upon a majority or supermajority vote of the preferred stock. Conversion rights may carry with them anti-dilution protections.

Conversion value: Also called parity value, the value of a convertible security if it is converted immediately.

Convertibility: The degree of freedom to exchange a currency without government restrictions or controls.

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 price: The contractually specified price per share at which a convertible security can be converted into shares of common stock.

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.

Convertible Security: A bond, debenture or preferred stock that is exchangeable for another type of security (usually common stock) at a pre-stated price. Convertibles are appropriate for investors who want higher income, or liquidation preference protection, than is available from common stock, together with greater appreciation potential than regular bonds offer. (See Common Stock, Dilution, and 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 Charter: The document prepared when a corporation is formed. The Charter sets forth the objectives and goals of the corporation, as well as a complete statement of what the corporation can and cannot do while pursuing these goals.

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.

Corporate Venturing: Venture capital provided by [in-house investment funds of] large corporations to further their own strategic interests.

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.

Corporation: A legal, taxable entity chartered by a state or the federal government. Ownership of a corporation is held by the stockholders. Two forms: “C Corp.” and “S Corp.” – the latter of which provides flow-through taxation.

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 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.

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.

Covenant: A protective clause in an agreement.

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 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.

Cramdown: The ability of the bankruptcy court to confirm a plan of reorganization over the objections of some classes of creditors.

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 creditworthiness.

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.

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.

Cumulative Dividends: Dividends that accrue at a fixed rate until paid are “Cumulative Dividends” which are payments to shareholders made with respect to an investor’s Preferred Stock. Generally, holders of Preferred Shares are contractually entitled to receive dividends prior to holders of Common Stock. Dividends can accumulate at a fixed rate (for example 8%) or simply be payable as and when determined by a company’s Board of Directors in such amount as determined by the board. Because venture backed companies typically need to conserve cash, the use of Cumulative Dividends is customary with the result that the Liquidation Preference increases by an amount equal to the Cumulative Dividends. Cumulative Dividends are often waived if the Preferred Stock converts to Common Stock prior to an IPO but may be included in the aggregate value of Preferred Stock applied to the Conversion Ratio for other purposes. Dividends that are not cumulative are generally called “when, as and if declared dividends.”

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 Preferred Stock: A stock having a provision that if one or more dividend payments are omitted, the omitted dividends (arrearage) must be paid before dividends may be paid on the company’s common 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 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.

Cumulative Voting Rights: When shareholders have the right to pool their votes to concentrate them on an election of one or more directors rather than apply their votes to the election of all directors. For example, if the company has 12 openings to the Board of Directors, in statutory voting, a shareholder with 10 shares casts 10 votes for each opening (10×12= 120 votes). Under the cumulative voting method however, the shareholder may opt to cast all 120 votes for one nominee (or any other distribution he might choose).

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.

Currentcoupon 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.

– D –

Date of payment: Date dividend checks are mailed.

Date of record: Date on which holders of record in a firm’s stock ledger are designated as the recipients of either dividends or stock rights.

Dates convention: Treating cash flows as being received on exact dates – date 0, date 1, and so forth – as opposed to the end-of-year convention.

Day order: An order to buy or sell stock that automatically expires if it can’t be executed on the day it is entered.

Day trading: Refers to establishing and liquidating the same position or positions within one day’s trading.

Days in receivables: Average collection period.

Days’ sales in inventory ratio: The average number of days’ worth of sales that is held in inventory.

Days’ sales outstanding: Average collection period.

DCF: See: Discounted cash flows.

De facto: Existing in actual fact although not by official recognition.

Dead cat bounce: A small upmove in a bear market.

Deal Flow: The measure of the number of potential investments that a fund reviews in any given period.

Deal Structure: An Agreement made between the investor and the company defining the rights and obligations of the parties involved. The process by which one arrives at the final term and conditions of the investment.

Debenture bond: An unsecured bond whose holder has the claim of a general creditor on all assets of the issuer not pledged specifically to secure other debt. Compare subordinated debenture bond, and collateral trust bonds.

Debt/equity ratio: Indicator of financial leverage. Compares assets provided by creditors to assets provided by shareholders. Determined by dividing long-term debt by common stockholder equity.

Debt: Money borrowed.

Debt capacity: Ability to borrow. The amount a firm can borrow up to the point where the firm value no longer increases.

Debt displacement: The amount of borrowing that leasing displaces. Firms that do a lot of leasing will be forced to cut back on borrowing.

Debt instrument: An asset requiring fixed dollar payments, such as a government or corporate bond.

Debt leverage: The amplification of the return earned on equity when an investment or firm is financed partially with borrowed money.

Debt limitation: A bond covenant that restricts in some way the firm’s ability to incur additional indebtedness.

Debt market: The market for trading debt instruments.

Debt ratio: Total debt divided by total assets.

Debt relief: Reducing the principal and/or interest payments on LDC loans.

Debt securities: IOUs created through loan-type transactions – commercial paper, bank CDs, bills, bonds, and other instruments.

Debt service: Interest payment plus repayments of principal to creditors, that is, retirement of debt.

Debt service parity approach: An analysis wherein the alternatives under consideration will provide the firm with the exact same schedule of after-tax debt payments (including both interest and principal).

Debt-service coverage ratio: Earnings before interest and income taxes plus one-third rental charges, divided by interest expense plus one-third rental charges plus the quantity of principal repayments divided by one minus the tax rate.

Debt swap: A set of transactions (also called a debt-equity swap) in which a firm buys a country’s dollar bank debt at a discount and swaps this debt with the central bank for local currency that it can use to acquire local equity.

Debtor in possession: A firm that is continuing to operate under Chapter 11 bankruptcy process.

Debtor: In-possession financing: New debt obtained by a firm during the Chapter 11 bankruptcy process.

Decile rank: Performance over time, rated on a scale of 1-10.1 indicates that a mutual fund’s return was in the top 10% of funds being compared, while 3 means the return was in the top 30%. Objective Rank compares all funds in the same investment strategy category. All Rank compares all funds.

Decision tree: Method of representing alternative sequential decisions and the possible outcomes from these decisions.

Declaration date: The date on which a firm’s directors meet and announce the date and amount of the next dividend.

Dedicated capital: Total par value (number of shares issued, multiplied by the par value of each share). Also called dedicated value.

Dedication strategy: Refers to multi-period cash flow matching..

Deductive reasoning: The use of general fact to provide accurate information about a specific situation.

Deep: Discount bond: A bond issued with a very low coupon or no coupon and selling at a price far below par value. When the bond has no coupon, it’s called a zero coupon bond.

Default: Failure to make timely payment of interest or principal on a debt security or to otherwise comply with the provisions of a bond indenture.

Default premium: A differential in promised yield that compensates the investor for the risk inherent in purchasing a corporate bond that entails some risk of default.

Default risk: Also referred to as credit risk (as gauged by commercial rating companies), the risk that an issuer of a bond may be unable to make timely principal and interest payments.

Defeasance: Practice whereby the borrower sets aside cash or bonds sufficient to service the borrower’s debt. Both the borrower’s debt and the offestting cash or bonds are removed from the balance sheet.

Deferred call: A provision that prohibits the company from calling the bond before a certain date. During this period the bond is said to be call protected.

Deferred equity: A common term for convertible bonds because of their equity component and the expectation that the bond will ultimately be converted into shares of common stock.

Deferred futures: The most distant months of a futures contract. A bond that sells at a discount and does not pay interest for an initial period, typically from three to seven years. Compare step-up bond and payment-in-kind bond.

Deferred nominal life annuity: A monthly fixed-dollar payment beginning at retirement age. It is nominal because the payment is fixed in dollar amount at any particular time, up to and including retirement.

Deferred taxes: A non-cash expense that provides a source of free cash flow. Amount allocated during the period to cover tax liabilities that have not yet been paid.

Deferredannuities: Tax-advantaged life insurance product. Deferred annuities offer deferral of taxes with the option of withdrawing one’s funds in the form of life annuity.

Deficiency Letter: A letter sent by the SEC to the issuer of a new issue regarding omissions of material fact in the registration statement.

Delta: Also called the hedge ratio, the ratio of the change in price of a call option to the change in price of the underlying stock.

Delta hedge: A dynamic hedging strategy using options with continuous adjustment of the number of options used, as a function of the delta of the option.

Delta neutral: The value of the portfolio is not affected by changes in the value of the asset on which the options are written.

Demand deposits: Checking accounts that pay no interest and can be withdrawn upon demand.

Demand line of credit: A bank line of credit that enables a customer to borrow on a daily or on-demand basis.

Demand master notes: Short-term securities that are repayable immediately upon the holder’s demand.

Demand Rights: Contemplate that the company must initiate and pursue the registration of a public offering including, although not necessarily limited to, the shares proffered by the requesting shareholder(s).

Demand shock: An event that affects the demand for goods in services in the economy.

Dependent: Acceptance of a capital budgeting project contingent on the acceptance of another project.

Depository transfer check (DTC): Check made out directly by a local bank to a particular firm or person.

Depository Trust Company (DTC): DTC is a user-owned securities depository which accepts deposits of eligible securities for custody, executes book-entry deliveries and records book-entry pledges of securities in its custody, and provides for withdrawals of securities from its custody.

Depreciate: To allocate the purchase cost of an asset over its life.

Depreciation: A non-cash expense that provides a source of free cash flow. Amount allocated during the period to amortize the cost of acquiring Long term assets over the useful life of the assets.

Depreciation: An expense recorded to reduce the value of a long-term tangible asset. Since it is a non-cash expense, it increases free cash flow while decreasing the amount of a company’s reported earnings.

Depreciation tax shield: The value of the tax write-off on depreciation of plant and equipment.

Derivative instruments: Contracts such as options and futures whose price is derived from the price of the underlying financial asset.

Derivative markets: Markets for derivative instruments.

Derivative security: A financial security, such as an option, or future, whose value is derived in part from the value and characteristics of another security, the underlying security.

Detachable warrant: A warrant entitles the holder to buy a given number of shares of stock at a stipulated price. A detachable warrant is one that may be sold separately from the package it may have originally been issued with (usually a bond).

Deterministic models: Liability-matching models that assume that the liability payments and the asset cash flows are known with certainty. Related: Compare stochastic models

Detrend: To remove the general drift, tendency or bent of a set of statistical data as related to time.

Devaluation: A decrease in the spot price of the currency.

Difference from S&P: A mutual fund’s return minus the change in the Standard & Poors 500 Index for the same time period. A notation of -5.00 means the fund return was 5 percentage points less than the gain in the S&P, while 0.00 means that the fund and the S&P had the same return.

Dilution: Diminution in the proportion of income to which each share is entitled.

Dilution: A reduction in the percentage ownership of a given shareholder in a company caused by the issuance of new shares.

Dilutive effect: Result of a transaction that decreases earnings per common share.

Dilution Protection: Applies to convertible securities. Standard provision whereby the conversion ratio is changed accordingly in the case of a stock dividend or extraordinary distribution to avoid dilution of a convertible bondholder’s potential equity position. Adjustment usually requires a split or stock dividend in excess of 5% or issuance of stock below book value. Share Purchase Agreements also typically contain anti-dilution provisions to protect investors in the event that a future round of financing occurs at a valuation that is below the valuation of the current round.

Direct estimate method: A method of cash budgeting based on detailed estimates of cash receipts and cash disbursements category by category.

Direct lease: Lease in which the lessor purchases new equipment from the manufacturer and leases it to the lessee.

Direct paper: Commercial paper sold directly by the issuer to investors.

Direct placement: Selling a new issue not by offering it for sale publicly, but by placing it with one of several institutional investors.

Direct search market: Buyers and sellers seek each other directly and transact directly. Present value of $1 received at a stated future date.

Director: Person elected by shareholders to serve on the board of directors. The directors appoint the president, vice president and all other operating officers, and decide when dividends should be paid (among other matters).

Disbursement: The investments by funds into their portfolio companies.

Disclosure Document: A booklet outlining the risk factors associated with an investment.

Discount period: The period during which a customer can deduct the discount from the net amount of the bill when making payment.

Discount rate: The interest rate that the Federal Reserve charges a bank to borrow funds when a bank is temporarily short of funds. Collateral is necessary to borrow, and such borrowing is quite limited because the Fed views it as a privilege to be used to meet short-term liquidity needs, and not a device to increase earnings.

Discounted basis: Selling something on a discounted basis is selling below what its value will be at maturity, so that the difference makes up all or part of the interest.

Discounted cash flow (DCF): Future cash flows multiplied by discount factors to obtain present values.

Discounted dividend model (DDM): A formula to estimate the intrinsic value of a firm by figuring the present value of all expected future dividends.

Discounted payback period rule: An investment decision rule in which the cash flows are discounted at an interest rate and the payback rule is applied on these discounted cash flows.

Discounting: Calculating the present value of a future amount. The process is opposite to compounding.

Discrete compounding: Compounding the time value of money for discrete time intervals.

Discrete random variable: A random variable that can take only a certain specified set of discrete possible values – for example, the positive integers 1, 2, 3, . . .

Discretionary account: Accounts over which an individual or organization, other than the person in whose name the account is carried, exercises trading authority or control.

Discretionary cash flow: Cash flow that is available after the funding of all positive NPV capital investment projects; it is available for paying cash dividends, repurchasing common stock, retiring debt, and so on.

Discriminant analysis: A statistical process that links the probability of default to a specified set of financial ratios.

Disintermediation: Withdrawal of funds from a financial institution in order to invest them directly.

Distressed debt: Corporate bonds of companies that have either filed for bankruptcy or appear likely to do so in the near future. The strategy of distressed debt firms involves first becoming a major creditor of the target company by snapping up the company’s bonds at pennies on the dollar. This gives them the leverage they need to call most of the shots during either the reorganization, or the liquidation, of the company. In the event of a liquidation, distressed debt firms, by standing ahead of the equity holders in the line to be repaid, often recover all of their money, if not a healthy return on their investment. Usually, however, the more desirable outcome is a reorganization, which allows the company to emerge from bankruptcy protection. As part of these reorganizations, distressed debt firms often forgive the debt obligations of the company, in return for enough equity in the company to compensate them. (This strategy explains why distressed debt firms are considered to be private equity firms.)

Distribution: Disbursement of realized cash or stock to a venture capital fund’s limited partners upon termination of the fund.

Distributed: After a Treasury auction, there will be many new issues in dealer’s hands. As those issues are sold, it is said that they are distributed.

Distributions: Payments from fund or corporate cash flow. May include dividends from earnings, capital gains from sale of portfolio holdings and return of capital. Fund distributions can be made by check or by investing in additional shares. Funds are required to distribute capital gains (if any) to shareholders at least once per year. Some Corporations offer Dividend Reinvestment Plans (DRP).

Divergence: When two or more averages or indices fail to show confirming trends.

Diversification: Dividing investment funds among a variety of securities with different risk, reward, and correlation statistics so as to minimize unsystematic risk.

Diversification: The process of spreading investments among various different types of securities and various companies in different fields.

Dividend: A dividend is a portion of a company’s profit paid to common and preferred shareholders. A stock selling for $20 a share with an annual dividend of $1 a share yields the investor 5%.

Dividend: The payments designated by the Board of Directors to be distributed pro-rata among the shares outstanding. On preferred shares, it is generally a fixed amount. On common shares, the dividend varies with the fortune of the company and the amount of cash on hand and may be omitted if business is poor or if the Directors determine to withhold earnings to invest in capital expenditures or research and development. Dividends can be paid either in cash or in kind, i.e. additional shares of stock.

Cumulative – Missed dividend payments that continue to accrue.
Non-cumulative – Missed dividend payments that do not accrue.
Participating – Dividends which share (participate) with common stock.
Non-participating – Dividends which do not share with common stock.

Dividend clawback: With respect to a project financing, an arrangement under which the sponsors of a project agree to contribute as equity any prior dividends received from the project to the extent necessary to cover any cash deficiencies.

Dividend clientele: A group of shareholders who prefer that the firm follow a particular dividend policy. For example, such a preference is often based on comparable tax situations.

Dividend discount model (DDM): A model for valuing the common stock of a company, based on the present value of the expected cash flows.

Dividend growth model: A model wherein dividends are assumed to be at a constant rate in perpetuity.

Dividend limitation: A bond covenant that restricts in some way the firm’s ability to pay cash dividends.

Dividend payout ratio: Percentage of earnings paid out as dividends.

Dividends per share: Amount of cash paid to shareholders expressed as dollars per share.

Dividend policy: An established guide for the firm to determine the amount of money it will pay as dividends.

Dividend rate: he fixed or floating rate paid on preferred stock based on par value.

Dividend reinvestment plan (DRP): Automatic reinvestment of shareholder dividends in more shares of a company’s stock, often without commissions. Some plans provide for the purchase of additional shares at a discount to market price. Dividend reinvestment plans allow shareholders to accumulate stock over the Long term using dollar cost averaging. The DRP is usually administered by the company without charges to the holder.

Dividend rights: A shareholders’ rights to receive per-share dividends identical to those other shareholders receive.

Dividend yield (Funds): Indicated yield represents return on a share of a mutual fund held over the past 12 months. Assumes fund was purchased 1 year ago. Reflects effect of sales charges (at current rates), but not redemption charges.

Dividend yield (Stocks): Indicated yield represents annual dividends divided by current stock price.

Dividends per share: Dividends paid for the past 12 months divided by the number of common shares outstanding, as reported by a company. The number of shares often is determined by a weighted average of shares outstanding over the reporting term.

Documented discount notes: Commercial paper backed by normal bank lines plus a letter of credit from a bank stating that it will pay off the paper at maturity if the borrower does not. Such paper is also referred to as LOC (letter of credit) paper.

Double-declining-balance depreciation: Method of accelerated depreciation.

Double-dip lease: A cross-border lease in which the disparate rules of the lessor’s and lessee’s countries let both parties be treated as the owner of the leased equipment for tax purposes.

Doubling option: A sinking fund provision that may allow repurchase of twice the required number of bonds at the sinking fund call price.

Dow Jones industrial average: This is the best known U.S.index of stocks. It contains 30 stocks that trade on the New York Stock Exchange. The Dow, as it is called, is a barometer of how shares of the largest U.S.companies are performing. There are thousands of investment indexes around the world for stocks, bonds, currencies and commodities.

Downgrade: A classic negative change in ratings for a stock, and or other rated security.

Down Round: Issuance of shares at a later date and a lower price than previous investment rounds.

Draft: An unconventional order in writing – signed by a person, usually the exporter, and addressed to the importer – ordering the importer or the importer’s agent to pay, on demand (sight draft) or at a fixed future date (time draft), the amount specified on its face.

DragAlong Rights: A majority shareholders’ right, obligating shareholders whose shares are bound into the shareholders’ agreement to sell their shares into an offer the majority wishes to execute.

Dropthe: With the dollar roll transaction the difference between the sale price of a mortgage-backed pass-through, and its re-purchase price on a future date at a predetermined price.

Drop lock: An arrangement whereby the interest rate on a floating rate note or preferred stock becomes fixed if it falls to a specified level.

Dual syndicate equity offering: An international equity placement where the offering is split into two tranches – domestic and foreign – and each tranche is handled by a separate lead manager.

Due bill: An instrument evidencing the obligation of a seller to deliver securities sold to the buyer. Occasionally used in the bill market.

Due Diligence: A process undertaken by potential investors — individuals or institutions — to analyze and assess the desirability, value, and potential of an investment opportunity.

Dupont system of financial control: Highlights the fact that return on assets (ROA) can be expressed in terms of the profit margin and asset turnover.

Duration: A common gauge of the price sensitivity of an asset or portfolio to a change in interest rates.

Dutch auction: Auction in which the lowest price necessary to sell the entire offering becomes the price at which all securities offered are sold. This technique has been used in Treasury auctions.

Dynamic asset allocation: An asset allocation strategy in which the asset mix is mechanistically shifted in response to -changing market conditions, as in a portfolio insurance strategy, for example.

– E –

Early Stage: A state of a company that typically has completed its seed stage and has a founding or core senior management team, has proven its concept or completed its beta test, has minimal revenues, and no positive earnings or cash flows.

Earning power: Earnings before interest and taxes (EBIT) divided by total assets.

Earnings: Net income for the company during the period.

Earnings before interest and taxes (EBIT): A financial measure defined as revenues less cost of goods sold and selling, general, and administrative expenses. In other words, operating and non-operating profit before the deduction of interest and income taxes.

Earnings per share (EPS): EPS, as it is called, is a company’s profit divided by its number of outstanding shares. If a company earned $2 million in one year had 2 million shares of stock outstanding, its EPS would be $1 per share. The company often uses a weighted average of shares outstanding over the reporting term.

Earnings yield: The ratio of earnings per share after allowing for tax and interest payments on fixed interest debt, to the current share price. The inverse of the price/earnings ratio. It’s the Total Twelve Months earnings divided by number of outstanding shares, divided by the recent price, multiplied by 100. The end result is shown in percentage.

EBITDA: “Earnings Before Interest, Taxes, Depreciation and Amortization”: A measure of cash flow calculated as: Revenue – Expenses (excluding tax, interest, depreciation and amortization). EBITDA looks at the cash flow of a company. By not including interest, taxes, depreciation and amortization, we can clearly see the amount of money a company brings in. This is especially useful when one company is considering a takeover of another because the EBITDA would cover any loan payments needed to finance the takeover.

Economic assumptions: Economic environment in which the firm expects to reside over the life of the financial plan.

Economic defeasance: See: in-substance defeasance.

Economic dependence: Exists when the costs and/or revenues of one project depend on those of another.

Economic earnings: The real flow of cash that a firm could pay out forever in the absence of any change in the firm’s productive capacity.

Economic exposure: The extent to which the value of the firm will change because of an exchange rate change.

Economic income: Cash flow plus change in present value.

Economic order quantity (EOQ): The order quantity that minimizes total inventory costs.

Economic rents: Profits in excess of the competitive level.

Economic risk: In project financing, the risk that the project’s output will not be salable at a price that will cover the project’s operating and maintenance costs and its debt service requirements.

Economic surplus: For any entity, the difference between the market value of all its assets and the market value of its liabilities.

Economies of scale: The decrease in the marginal cost of production as a plant’s scale of operations increases.

Economies of Scale: Economic principle that as the volume of production increases, the cost of producing each unit decreases.

Economies of scope: Scope economies exist whenever the same investment can support multiple profitable activities less expensively in combination than separately.

EDGAR: The Securities & Exchange Commission uses Electronic Data Gathering and Retrieval to transmit company documents such as 10-Ks, 10-Qs, quarterly reports, and other SEC filings, to investors.

Effective annual interest rate: An annual measure of the time value of money that fully reflects the effects of compounding.

Effective annual yield: Annualized interest rate on a security computed using compound interest techniques.

Effective call price: The strike price in an optional redemption provision plus the accrued interest to the redemption date.

Effective convexity: The convexity of a bond calculated with cash flows that change with yields.

Effective date: In an interest rate swap, the date the swap begins accruing interest.

Effective duration: The duration calculated using the approximate duration formula for a bond with an embedded option, reflecting the expected change in the cash flow caused by the option. Measures the responsiveness of a bond’s price taking into account the expected cash flows will change as interest rates change due to the embedded option.

Effective margin (EM): Used with SAT performance measures, the amount equaling the net earned spread, or margin, of income on the assets in excess of financing costs for a given interest rate and prepayment rate scenario

Effective rate: A measure of the time value of money that fully reflects the effects of compounding.

Effective spread: The gross underwriting spread adjusted for the impact of the announcement of the common stock offering on the firm’s share price.

Efficiency: Reflects the amount of wasted energy.

Efficient capital market: A market in which new information is very quickly reflected accurately in share prices.

Efficient diversification: The organizing principle of modern portfolio theory, which maintains that any risk-averse investor will search for the highest expected return for any level of portfolio risk.

Efficient frontier: The combinations of securities portfolios that maximize expected return for any level of expected risk, or that minimizes expected risk for any level of expected return.

Efficient Market Hypothesis: In general the hypothesis states that all relevant information is fully and immediately reflected in a security’s market price thereby assuming that an investor will obtain an equilibrium rate of return. In other words, an investor should not expect to earn an abnormal return (above the market return) through either technical analysis or fundamental analysis. Three forms of efficient market hypothesis exist: weak form (stock prices reflect all information of past prices), semi-strong form (stock prices reflect all publicly available information) and strong form (stock prices reflect all relevant information including insider information).

Efficient portfolio: A portfolio that provides the greatest expected return for a given level of risk (i.e. standard deviation), or equivalently, the lowest risk for a given expected return.

Efficient set: Graph representing a set of portfolios that maximize expected return at each level of portfolio risk.

Elasticity of an option: Percentage change in the value of an option given a 1% change in the value of the option’s underlying stock.

Electronic data interchange (EDI): The exchange of information electronically, directly from one firm’s computer to another firm’s computer, in a structured format.

Electronic depository transfers: The transfer of funds between bank accounts through the Automated Clearing House (ACH) system.

Elevator Pitch: An extremely concise presentation of an entrepreneur’s idea, business model, company solution, marketing strategy, and competition delivered to potential investors. Should not last more than a few minutes, or the duration of an elevator ride.

Eligible bankers’ acceptances: In the BA market, an acceptance may be referred to as eligible because it is acceptable by the Fed as collateral at the discount window and/or because the accepting bank can sell it without incurring a reserve requirement.

Embedded option: An option that is part of the structure of a bond that provides either the bondholder or issuer the right to take some action against the other party, as opposed to a bare option, which trades separately from any underlying security.

Employee Stock Option Plan (ESOP): A plan established by a company whereby a certain number of shares is reserved for purchase and issuance to key employees. Such shares usually vest over a certain period of time to serve as an incentive for employees to build long term value for the company.

Employee Stock Ownership Plan: A trust fund established by a company to purchase stock on behalf of employees.

Endogenous variable: A value determined within the context of a model.

End-of-year convention: Treating cash flows as if they occur at the end of a year as opposed to the date convention. Under the end-of-year convention, the present is time 0, the end of year 1 occurs one year hence, etc.

Enhanced indexing: Also called indexing plus, an indexing strategy whose objective is to exceed or replicate the total return performance of some predetermined index.

Enhancement: An innovation that has a positive impact on one or more of a firm’s existing products.

Equilibrium market price of risk: The slope of the capital market line (CML). Since the CML represents the return offered to compensate for a perceived level of risk, each point on the line is a balanced market condition, or equilibrium. The slope of the line determines the additional return needed to compensate for a unit change in risk.

Equilibrium rate of interest: The interest rate that clears the market. Also called the market-clearing interest rate.

Equity: Represents ownership interest in a firm. Also the residual dollar value of a futures trading account, assuming its liquidation at the going market price.

Equity: Ownership interest in a company, usually in the form of stock or stock options.

Equity cap: An agreement in which one party, for an upfront premium, agrees to compensate the other at specific time periods if a designated stock market benchmark is greater than a predetermined level.

Equity Carveout: A clause present in deal documentation that reserves a percentage or fixed amount of preferred proceeds for a particular holder. The carve-out can be assigned any seniority and thus any position within the preference distribution stack.

Equity claim: Also called a residual claim, a claim to a share of earnings after debt obligation have been satisfied.

Equity collar: The simultaneous purchase of an equity floor and sale of an equity cap.

Equity contribution agreement: An agreement to contribute equity to a project under certain specified conditions.

Equity floor: An agreement in which one party agrees to pay the other at specific time periods if a specific stock market benchmark is less than a predetermined level.

Equity kicker: Used to refer to warrants because they are usually issued attached to privately placed bonds.

Equity Kicker: Option for private equity investors to purchase shares at a discount. Typically associated with mezzanine financings where a small number of shares or warrants are added to what is primarily a debt financing.

Equity market: Related:Stock market

Equity multiplier: Total assets divided by total common stockholders’ equity; the amount of total assets per dollar of stockholders’ equity.

Equity options: Securities that give the holder the right to buy or sell a specified number of shares of stock, at a specified price for a certain (limited) time period. Typically one option equals 100 shares of stock.

Equity swap: A swap in which the cash flows that are exchanged are based on the total return on some stock market index and an interest rate (either a fixed rate or a floating rate). Related: interest rate swap.

Equity-linked policies: elated: Variable life

Equityholders: Those holding shares of the firm’s equity.

Equivalent annual annuity: The equivalent amount per year for some number of years that has a present value equal to a given amount.

Equivalent annual benefit: The equivalent annual annuity for the net present value of an investment project.

Equivalent annual cash flow: Annuity with the same net present value as the company’s proposed investment.

Equivalent annual cost: The equivalent cost per year of owning an asset over its entire life.

Equivalent bond yield: Annual yield on a short-term, non-interest bearing security calculated so as to be comparable to yields quoted on coupon securities.

Equivalent loan: Given the after-tax stream associated with a lease, the maximum amount of conventional debt that the same period-by-period after-tax debt service stream is capable of supporting.

Equivalent taxable yield: The yield that must be offered on a taxable bond issue to give the same after-tax yield as a tax-exempt issue.

ERISA: ERISA shall mean the United States Employee Retirement Income Security Act of 1974, as amended, including the regulations promulgated thereunder.

ERISA Significant Participation Test: A test that is satisfied if the General Partner determines in its reasonable discretion that Persons that are “benefit plan investors” within the meaning of Section (f)(2) of the Final Regulation constitute or are expected to constitute at least 25 percent in interest of the Limited Partners. Note that the test is 25% of the interests of all the limited partners, which means 20% (+/-) in the partnership as a whole, taking into account the general partner’s interest.

Erosion: An innovation that has a negative impact on one or more of a firm’s existing assets.

Ethics: Standards of conduct or moral judgement.

Evaluation period: The time interval over which a money manager’s performance is evaluated.

Evening up: Buying or selling to offset an existing market position.

Event risk: The risk that the ability of an issuer to make interest and principal payments will change because of rare, discontinuous, and very large, unanticipated changes in the market environment such as (1) a natural or industrial accident or some regulatory change or (2) a takeover or corporate restructuring.

Event study: A statistical study that examines how the release of information affects prices at a particular time.

Events of default: Contractually specified events that allow lenders to demand immediate repayment of a debt.

Evergreen credit: Revolving credit without maturity.

Evergreen Promise: This occurs when the company agrees to pay an employee’s salary for a number of years, regardless of when termination occurs, the day after he or she is employed or 10 years after.

Ex post return: Related: Holding period return

Exact matching: A bond portfolio management strategy that involves finding the lowest cost portfolio generating cash inflows exactly equal to cash outflows that are being financed by investment.

Exante return: The expected return of a portfolio based on the expected returns of its component assets and their weights.

Except for opinion: An auditor’s opinion reflecting the fact that the auditor was unable to audit certain areas of the company’s operations because of restrictions imposed by management or other conditions beyond the auditor’s control.

Excess reserves: Any excess of actual reserves above required reserves.

Excess return on the market portfolio: The difference between the return on the market portfolio and the riskless rate.

Excess returns: Also called abnormal returns, returns in excess of those required by some asset pricing model.

Exchange of assets: Acquisition of another company by purchase of its assets in exchange for cash or stock.

Exchange of stock: Acquisition of another company by purchase of its stock in exchange for cash or shares.

Exchange offer: An offer by the firm to give one security, such as a bond or preferred stock, in exchange for another security, such as shares of common stock.

Exchangeable Security: Security that grants the security holder the right to exchange the security for the common stock of a firm other than the issuer of the security.

Exclusionary selftender: The firm makes a tender offer for a given amount of its own stock while excluding targeted stockholders.

Execution: The process of completing an order to buy or sell securities. Once a trade is executed, it is reported by a Confirmation Report; settlement (payment and transfer of ownership) occurs in the U.S. between 1 (mutual funds) and 5 (stocks) days after an order is executed. Settlement times for exchange listed stocks are in the process of being reduced to three days in the U. S.

Execution costs: The difference between the execution price of a security and the price that would have existed in the absence of a trade, which can be further divided into market impact costs and market timing costs.

Exercise: To implement the right of the holder of an option to buy (in the case of a call) or sell (in the case of a put) the underlying security.

Exercise price: The price at which the underlying future or options contract may be bought or sold.

Exercise price: The price at which an option or warrant can be exercised.

Exercise value: The amount of advantage over a current market transaction provided by an in-the-money option.

Exercising the option: The act buying or selling the underlying asset via the option contract.

Exit Strategy: A fund’s intended method for liquidating its holdings while achieving the maximum possible return. These strategies depend on the exit climates including market conditions and industry trends. Exit strategies can include selling or distributing the portfolio company’s shares after an initial public offering (IPO), a sale of the portfolio company or a recapitalization.

Exiting climates: The conditions that influence the viability and attractiveness of various exit strategies.

Exits (AKA divestments or realizations): The means by which a private equity firm realizes a return on its investment. Private equity investors generally receive their principal returns via a capital gain on the sale or flotation of investments. Exit methods include a trade sale (most common), flotation on a stock exchange (common), a share repurchase by the company or its management or a refinancing of the business (least common). A Secondary purchase of the LP interest by another private equity firm are becoming an increasingly common phenomenon.

Exogenous variable: A variable whose value is determined outside the model in which it is used. Also called a parameter.

Expectations hypothesis theories: Theories of the term structure of interest rates which include the pure expectations theory, the liquidity theory of the term structure, and the preferred habitat theory. These theories hold that each forward rate equals the expected future interest rate for the relevant period. These three theories differ, however, on whether other factors also affect forward rates, and how.

Expectations theory of forward exchange rates: A theory of foreign exchange rates that holds that the expected future spot foreign exchange rate t periods in the future equals the current t-period forward exchange rate.

Expected future cash flows: Projected future cash flows associated with an asset of decision.

Expected future return: The return that is expected to be earned on an asset in the future. Also called the expected return.

Expected return: The return expected on a risky asset based on a probability distribution for the possible rates of return. Expected return equals some risk free rate (generally the prevailing U.S. Treasury note or bond rate) plus a risk premium (the difference between the historic market return, based upon a well diversified index such as the S&P500 and historic U.S. Treasury bond) multiplied by the assets beta.

Expected return on investment: The return one can expect to earn on an investment. See: capital asset pricing model.

Expected return-beta relationship: Implication of the CAPM that security risk premiums will be proportional to beta.

Expected value: The weighted average of a probability distribution.

Expected value of perfect information: The expected value if the future uncertain outcomes could be known minus the expected value with no additional information.

Expense ratio: The percentage of the assets that were spent to run a mutual fund (as of the last annual statement). This includes expenses such as management and advisory fees, overhead costs and 12b-1 (distribution and advertising ) fees. The expense ratio does not include brokerage costs for trading the portfolio, although these are reported as a percentage of assets to the SEC by the funds in a Statement of Additional Information (SAI). the SAI is available to shareholders on request. Neither the expense ratio or the SAI includes the transaction costs of spreads, normally incurred in unlisted securities and foreign stocks. These two costs can add significantly to the reported expenses of a fund. The expense ratio is often termed an Operating Expense Ratio (OER).

Expensed: Charged to an expense account, fully reducing reported profit of that year, as is appropriate for expenditures for items with useful lives under one year.

Expiration: The time when the option contract ceases to exist (expires).

Expiration cycle: An expiration cycle relates to the dates on which options on a particular security expire. A given option will be placed in 1 of 3 cycles, the January cycle, the February cycle, or the March cycle. At any point in time, an option will have contracts with 4 expiration dates outstanding, 2 in near-term months and 2 in far-term months.

Expiration date: The last day (in the case of American-style) or the only day (in the case of European-style) on which an option may be exercised. For stock options, this date is the Saturday immediately following the 3rd Friday of the expiration month; however, brokerage firms may set an earlier deadline for notification of an option holder’s intention to exercise. If Friday is a holiday, the last trading day will be the preceding Thursday.

Expropriation: The official seizure by a government of private property. Any government has the right to seize such property, according to international law, if prompt and adequate compensation is given.

Extendable bond: Bond whose maturity can be extended at the option of the lender or issuer.

Extendable notes: Note the maturity of which can be extended by mutual agreement of the issuer and investors.

Extension: Voluntary arrangements to restructure a firm’s debt, under which the payment date is postponed.

Extension date: The day on which the first option either expires or is extended.

Extension swap: Extending maturity through a swap, e.g. selling a 2-year note and buying one with a slightly longer current maturity.

External efficiency: Related: pricing efficiency.

External finance: Finance that is not generated by the firm: new borrowing or a stock issue.

External market: Also referred to as the international market, the offshore market, or, more popularly, the Euromarket, the mechanism for trading securities that (1) at issuance are offered simultaneously to investors in a number of countries and (2) are issued outside the jurisdiction of any single country. Related: internal market

Extinguish: Retire or pay off debt.

Extra or special dividends: A dividend that is paid in addition to a firm’s “regular” quarterly dividend.

Extraordinary positive value: A positive net present value.

Extrapolative statistical models: Models that apply a formula to historical data and project results for a future period. Such models include the simple linear trend model, the simple exponential model, and the simple autoregressive model.

Ex-dividend: This literally means “without dividend.” The buyer of shares when they are quoted ex-dividend is not entitled to receive a declared dividend.

Ex-dividend date: The first day of trading when the seller, rather than the buyer, of a stock will be entitled to the most recently announced dividend payment. This date set by the NYSE (and generally followed on other US exchanges) is currently two business days before the record date. A stock that has gone ex-dividend is marked with an x in newspaper listings on that date.

Ex-rights: In connection with a rights offering, shares of stock that are trading without the rights attached.

Ex-rights date: The date on which a share of common stock begins trading ex-rights.

– F – 

Factor: A financial institution that buys a firm’s accounts receivables and collects the debt.

Factoring: A procedure in which a firm can sell its accounts receivable invoices to a factoring firm, which pays a percentage of the invoices immediately, and the remainder (minus a service fee) when the accounts receivable are actually paid off by the firm’s customers.

Factor analysis: A statistical procedure that seeks to explain a certain phenomenon, such as the return on a common stock, in terms of the behavior of a set of predictive factors.

Factor model: A way of decomposing the factors that influence a security’s rate of return into common and firm-specific influences.

Factor portfolio: A well-diversified portfolio constructed to have a beta of 1.0 on one factor and a beta of zero on any other factors.

Factoring: Sale of a firm’s accounts receivable to a financial institution known as a factor.

Fail: A trade is said to fail if on settlement date either the seller fails to deliver securities in proper form or the buyer fails to deliver funds in proper form.

Fair game: An investment prospect that has a zero risk premium.

Fair market price: Amount at which an asset would change hands between two parties, both having knowledge of the relevant facts. Also referred to as market price.

Fair price: The equilibrium price for futures contracts. Also called the theoretical futures price, which equals the spot price continuously compounded at the cost of carry rate for some time interval.

Fair price provision: See:appraisal rights.

Fairandequitable test: A set of requirements for a plan of reorganization to be approved by the bankruptcy court.

Fallout risk: A type of mortgage pipeline risk that is generally created when the terms of the loan to be originated are set at the same time as the sale terms are set. The risk is that either of the two parties, borrower or investor, fails to close and the loan “falls out” of the pipeline.

FASB: Financial Accounting Standards Board. Sets accounting standards for U.S. firms.

FASB No. 13: Accounting for leases in the United States per Dmitry regulated by the Financial Accounting Standards Board (FASB) by the Financial Accounting Standards Number 13. These standards were effective as of January 1, 1977. These standards are currently under discussion for changes in FASB Topic 840, and implementation of new standards is not expected before 2012. [1]

Feasible portfolio: A portfolio that an investor can construct given the assets available.

Feasible set of portfolios: The collection of all feasible portfolios.

Feasible target payout ratios: Payout ratios that are consistent with the availability of excess funds to make cash dividend payments.

Federal agency securities: Securities issued by corporations and agencies created by the U.S. government, such as the Federal Home Loan Bank Board and Ginnie Mae.

Federal credit agencies: Agencies of the federal government set up to supply credit to various classes of institutions and individuals, e.g. S&Ls, small business firms, students, farmers, and exporters.

Federal Deposit Insurance Corporation (FDIC): A federal institution that insures bank deposits.

Federal Financing Bank: A federal institution that lends to a wide array of federal credit agencies funds it obtains by borrowing from the U.S. Treasury.

Federal funds: Non-interest bearing deposits held in reserve for depository institutions at their district Federal Reserve Bank. Also, excess reserves lent by banks to each other.

Federal funds market: The market where banks can borrow or lend reserves, allowing banks temporarily short of their required reserves to borrow reserves from banks that have excess reserves.

Federal funds rate: This is the interest rate that banks with excess reserves at a Federal Reserve district bank charge other banks that need overnight loans. The Fed Funds rate, as it is called, often points to the direction of U.S. interest rates.

Federal Home Loan Banks: The institutions that regulate and lend to savings and loan associations. The Federal Home Loan Banks play a role analogous to that played by the Federal Reserve Banks vis-à-vis member commercial banks.

Federal Reserve System: The central bank of the U.S., established in 1913, and governed by the Federal Reserve Board located in Washington, D.C. The system includes 12 Federal Reserve Banks and is authorized to regulate monetary policy in the U.S. as well as to supervise Federal Reserve member banks, bank holding companies, international operations of U.S.banks, and U.S.operations of foreign banks.

Federally related institutions: Arms of the federal government that are exempt from SEC registration and whose securities are backed by the full faith and credit of the U.S. government (with the exception of the Tennessee Valley Authority).

Field warehouse: Warehouse rented by a warehouse company on another firm’s premises.

Figuring the tail: Calculating the yield at which a future money market (one available some period hence) is purchased when that future security is created by buying an existing instrument and financing the initial portion of its life with a term repo.

Fill: The price at which an order is executed.

Fill or kill order: A trading order that is canceled unless executed within a designated time period. Related: open order.

Filter: A rule that stipulates when a security should be bought or sold according to past price action.

Final Regulation: An ERISA term, it is the United States Department of Labor’s Final Regulation relating to the definition of “plan assets” in (29 C.F.R. §2510.3-101).

Finance: A discipline concerned with determining value and making decisions. The finance function allocates resources, which includes acquiring, investing, and managing resources.

Financial analysts: Also called securities analysts and investment analysts, professionals who analyze financial statements, interview corporate executives, and attend trade shows, in order to write reports recommending either purchasing, selling, or holding various stocks.

Financial assets: Claims on real assets.

Financial control: The management of a firm’s costs and expenses in order to control them in relation to budgeted amounts.

Financial distress: Events preceding and including bankruptcy, such as violation of loan contracts.

Financial distress costs: Legal and administrative costs of liquidation or reorganization. Also includes implied costs associated with impaired ability to do business (indirect costs).

Financial engineering: Combining or dividing existing instruments to create new financial products.

Financial future: A contract entered into now that provides for the delivery of a specified asset in exchange for the selling price at some specified future date.

Financial intermediaries: Institutions that provide the market function of matching borrowers and lenders or traders.

Financial lease: Long-term, non-cancelable lease.

Financial leverage: Use of debt to increase the expected return on equity. Financial leverage is measured by the ratio of debt to debt plus equity.

Financial leverage clientele: A group of investors who have a preference for investing in firms that adhere to a particular financial leverage policy.

Financial leverage ratios: Related: capitalization ratios.

Financial market: An organized institutional structure or mechanism for creating and exchanging financial assets.

Financial objectives: Objectives of a financial nature that the firm will strive to accomplish during the period covered by its financial plan.

Financial plan: A financial blueprint for the financial future of a firm.

Financial planning: The process of evaluating the investing and financing options available to a firm. It includes attempting to make optimal decisions, projecting the consequences of these decisions for the firm in the form of a financial plan, and then comparing future performance against that plan.

Financial press: That portion of the media devoted to reporting financial news.

Financial ratio: The result of dividing one financial statement item by another. Ratios help analysts interpret financial statements by focussing on specific relationships.

Financial risk: The risk that the cash flow of an issuer will not be adequate to meet its financial obligations. Also referred to as the additional risk that a firm’s stockholder bears when the firm utilizes debt and equity.

Financing decisions: Decisions concerning the liabilities and stockholders’ equity side of the firm’s balance sheet, such as the decision to issue bonds.

Finder: A person who helps to arrange a transaction.

Firm: Refers to an order to buy or sell that can be executed without confirmation for some fixed period. Also, a synonym for company.

Firm commitment underwriting: An undewriting in which an investment banking firm commits to buy the entire issue and assumes all financial responsibility for any unsold shares.

Firm’s net value of debt: Total firm value minus total firm debt.

First-In-First-Out (FIFO): A method of valuing the cost of goods sold that uses the cost of the oldest item in inventory first.

First Close: An early close of part of a round financing upon the agreement of all parties. This is often used as part of a “Rolling closing” strategy.

First Refusal Rights : A negotiated obligation of the company or existing investors to offer shares to the company or other existing investors at fair market value or a previously negotiated price, prior to selling shares to new investors.

Five Cs of credit: Five characteristics that are used to form a judgement about a customer’s creditworthiness: character, capacity, capital, collateral, and conditions.

Fixed asset: Long-lived property owned by a firm that is used by a firm in the production of its income. Tangible fixed assets include real estate, plant, and equipment. Intangible fixed assets include patents, trademarks, and customer recognition.

Fixed asset turnover ratio: The ratio of sales to fixed assets.

Fixed cost: A cost that is fixed in total for a given period of time and for given production levels.

Fixed-annuities: Annuity contracts in which the insurance company or issuing financial institution pays a fixed dollar amount of money per period.

Fixed-charge coverage ratio: A measure of a firm’s ability to meet its fixed-charge obligations: the ratio of (net earnings before taxes plus interest charges paid plus long-term lease payments) to (interest charges paid plus long-term lease payments).

Fixed-dates: In the Euromarket the standard periods for which Euros are traded (1 month out to a year out) are referred to as the fixed dates.

Fixed-dollar obligations: Conventional bonds for which the coupon rate is set as a fixed percentage of the par value.

Fixed-dollar security: A nonnegotiable debt security that can be redeemed at some fixed price or according to some schedule of fixed values, e.g., bank deposits and government savings bonds.

Fixed-income equivalent: Also called a busted convertible, a convertible security that is trading like a straight security because the optioned common stock is trading low.

Fixed-income instruments: Assets that pay a fixed-dollar amount, such as bonds and preferred stock.

Fixed-income market: The market for trading bonds and preferred stock.

Fixed price basis: An offering of securities at a fixed price.

Fixed-price tender offer: A one-time offer to purchase a stated number of shares at a stated fixed price, usually a premium to the current market price.

Fixed-rate loan: A loan on which the rate paid by the borrower is fixed for the life of the loan.

Fixed-rate payer: In an interest rate swap the counterparty who pays a fixed rate, usually in exchange for a floating-rate payment.

Flat benefit formula: Method used to determine a participant’s benefits in a defined benefit plan by multiplying months of service by a flat monthly benefit.

Flat price risk: Taking a position either long or short that does not involve spreading.

Flat trades: (1) A bond in default trades flat; that is, the price quoted covers both principal and unpaid, accrued interest. (2) Any security that trades without accrued interest or at a price that includes accrued interest is said to trade flat.

Flattening 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 decreased. Compare steepening of the yield curve and butterfly shift.

Flat price (also clean price): The quoted newspaper price of a bond that does not include accrued interest. The price paid by purchaser is the full price.

Flight to quality: The tendency of investors to move towards safer, government bonds during periods of high economic uncertainty.

Flipping: The act of buying shares in an IPO and selling them immediately for a profit. Brokerage firms underwriting new stock issues tend to discourage flipping, and will often try to allocate shares to investors who intend to hold on to the shares for some time. However, the temptation to flip a new issue once it has risen in price sharply is too irresistible for many investors who have been allocated shares in a hot issue.

Flip-flop note: Note that allows investors to switch between two different types of debt.

Float: The number of shares that are actively tradable in the market, excluding shares that are held by officers and major stakeholders that have agreements not to sell until someone else is offered the stock.

Flotation: When a firm’s shares start trading on a formal stock exchange, such as the NASDAQ or the NYSE. This is probably the most profitable exit route for entrepreneurs and their financial backers.

Floater: Floating rate bond.

Floating exchange rate: A country’s decision to allow its currency value to freely change. The currency is not constrained by central bank intervention and does not have to maintain its relationship with another currency in a narrow band. The currency value is determined by trading in the foreign exchange market.

Floating lien: General lien against a company’s assets or against a particular class of assets.

Floating supply: The amount of securities believed to be available for immediate purchase, that is, in the hands of dealers and investors wanting to sell.

Floatingrate contract: A guaranteed investment contract where the credit rating is tied to some variable (“floating”) interest rate benchmark, such as a specific-maturity Treasury yield.

Floating-rate note (FRN): Note whose interest payment varies with short-term interest rates.

Floating-rate payer: In an interest rate swap, the counterparty who pays a rate based on a reference rate, usually in exchange for a fixed-rate payment

Floating-rate preferred: Preferred stock paying dividends that vary with short-term interest rates.

Floor broker: A member who is paid a fee for executing orders for clearing members or their customers. A floor broker executing customer orders must be licensed by the CFTC.

Floor planning: Arrangement used to finance inventory. A finance company buys the inventory, which is then held in trust by the user.

Floor trader: A member who generally trades only for his own account, for an account controlled by him or who has such a trade made for him. Also referred to as a “local”.

Flower bond: Government bonds that are acceptable at par in payment of federal estate taxes when owned by the decedent at the time of death.

Flowthrough basis: An account for the investment credit to show all income statement benefits of the credit in the year of acquisition, rather than spreading them over the life of the asset acquired.

Flowthrough method: The practice of reporting to shareholders using straight-line depreciation and accelerated depreciation for tax purposes and “flowing through” the lower income taxes actually paid to the financial statement prepared for shareholders.

Follow-on funding: Companies often require several rounds of funding. If a private equity firm has invested in a particular company in the past, and then provides additional funding at a later stage, this is known as ‘follow-on funding’.

Force majeure risk: The risk that there will be an interruption of operations for a prolonged period after a project finance project has been completed due to fire, flood, storm, or some other factor beyond the control of the project’s sponsors.

Forced Buyback: Redemption of convertible debt, convertible preferred stock or common stock on pre-specified terms in situations where the company’s value has not appreciated according to the agreed upon plan.

Forced conversion: Use of a firm’s call option on a callable convertible bond when the firm knows that the bondholders will exercise their option to convert.

Form 10-K: This is the annual report that most reporting companies file with the Commission. It provides a comprehensive overview of the registrant’s business. The report must be filed within 90 days after the end of the company’s fiscal year.

Form 10-KSB: This is the annual report filed by reporting “small business issuers.” It provides a comprehensive overview of the company’s business, although its requirements call for slightly less detailed information than required by Form 10-K. The report must be filed within 90 days after the end of the company’s fiscal year.

Form S-1: The form can be used to register securities for which no other form is authorized or prescribed, except securities of foreign governments or political sub-divisions thereof.

Form S-2: This is a simplified optional registration form that may be used by companies that have been required to report under the ’34 Act for a minimum of three years and have timely filed all required reports during the 12 calendar months and any portion of the month immediately preceding the filing of the registration statement. Unlike Form S-1, it permits incorporation by reference from the company’s annual report to stockholders (or annual report on Form 10-K) and periodic reports. Delivery of these incorporated documents as well as the prospectus to investors may be required.

Form SB-2: This form may be used by “small business issuers” to register securities to be sold for cash. This form requires less detailed information about the issuer’s business than Form S-1.

Forward interest rate: Interest rate fixed today on a loan to be made at some future date.

Forward looking multiple: A truncated expression for a P/E ratio that is based on forward (expected) earnings rather than on trailing earnings.

Forward market: A market in which participants agree to trade some commodity, security, or foreign exchange at a fixed price for future delivery.

Forward premium: A currency trades at a forward premium when its forward price is higher than its spot price.

Forward rate: A projection of future interest rates calculated from either the spot rates or the yield curve.

Forward rate agreement (FRA): Agreement to borrow or lend at a specified future date at an interest rate that is fixed today.

Forward sale: A method for hedging price risk which involves an agreement between a lender and an investor to sell particular kinds of loans at a specified price and future time.

Forward trade: A transaction in which the settlement will occur on a specified date in the future at a price agreed upon the trade date.

Founder Vesting: A term imposed on founders of seed and early stage deals in which the founder ownership is subject to a vesting schedule with nothing up front and linear vesting over, typically, four years. The first twelve months ownership is often “cliff” vested after the first year with monthly vesting thereafter. For more mature companies, vesting credit can be applied at the time of investment. The purpose of this term is to protect investors from an early, unplanned exit by the founder and to provide investors with the equity necessary to attract a new management team.

Founders’ Shares: Shares owned by a company’s founders upon its establishment.

Fourth market: Direct trading in exchange-listed securities between investors without the use of a broker.

Free cash flow: The cash flow of a company available to service the capital structure of the firm. Typically measured as operating cash flow less capital expenditures and tax obligations.

Free cash flows: Cash not required for operations or for reinvestment. Often defined as earnings before interest (often obtained from operating income line on the income statement) less capital expenditures less the change in working capital.

Free float: An exchange rate system characterized by the absence of government intervention. Also known as clean float.

Free on board: Implies that distributive services like transport and handling performed on goods up to the customs frontier of the economy from which the goods are classed as merchandise.

Free reserves: Excess reserves minus member bank borrowings at the Fed.

Free rider: A follower who avoids the cost and expense of finding the best course of action and by simply mimicking the behavior of a leader who made these investments.

Frequency distribution: The organization of data to show how often certain values or ranges of values occur.

Friction costs: Costs, both implied and direct, associated with a transaction. Such costs include time, effort, money, and associated tax effects of gathering information and making a transaction.

Frictions: The “stickiness” in making transactions; the total hassle including time, effort, money, and tax effects of gathering information and making a transaction such as buying a stock or borrowing money.

Front fee: The fee initially paid by the buyer upon entering a split-fee option contract.

Full faith-and-credit obligations: The security pledges for larger municipal bond issuers, such as states and large cities which have diverse funding sources.

Full coupon bond: A bond with a coupon equal to the going market rate, thereby, the bond is selling at par.

Full price: Also called dirty price, the price of a bond including accrued interest. Related: flat price.

Fullpayout lease: See: financial lease.

Full Ratchet Antidilution: The sale of a single share at a price less than the favored investors paid reduces the conversion price of the favored investors’ convertible preferred stock “to the penny”. For example, from $1.00 to 50 cents, regardless of the number of lower priced shares sold.

Fullservice lease: Also called rental lease. Lease in which the lessor promises to maintain and insure the equipment leased.

Fully diluted earnings per shares: Earnings per share expressed as if all outstanding convertible securities and warrants have been exercised.

Fully Diluted Earnings Per Share: Earnings per share expressed as if all outstanding convertible securities and warrants have been exercised.

Fully Diluted Outstanding Shares: The number of shares representing total company ownership, including common shares and current conversion or exercised value of the preferred shares, options, warrants, and other convertible securities.

Fund age: The age of a fund (in years) from its first takedown to the time an IRR is calculated.

Fund Focus: The indicated area of specialization of a venture capital fund usually expressed as Balanced, Seed and Early Stage, Later Stage, Mezzanine or Leveraged Buyout (LBO).

Fund of funds: A fund set up to distribute investments among a selection of private equity fund managers, who in turn invest the capital directly. Fund of funds are specialist private equity investors and have existing relationships with firms. They may be able to provide investors with a route to investing in particular funds that would otherwise be closed to them. Investing in fund of funds can also help spread the risk of investing in private equity because they invest the capital in a variety of funds.

Fund Size: The total amount of capital committed by the investors of a venture capital fund.

Fundamental analysis: Security analysis that seeks to detect misvalued securities by an analysis of the firm’s business prospects. Research analysis often focuses on earnings, dividend prospects, expectations for future interest rates, and risk evaluation of the firm.

Fundamental beta: The product of a statistical model to predict the fundamental risk of a security using not only price data but other market-related and financial data.

Fundamental descriptors: In the model for calculating fundamental beta, ratios in risk indexes other than market variability, which rely on financial data other than price data.

Funded debt: Debt maturing after more than one year.

Funding ratio: The ratio of a pension plan’s assets to its liabilities.

Funding risk: Related: interest rate risk

Funds From Operations (FFO): Used by real estate and other investment trusts to define the cash flow from trust operations. It is earnings with depreciation and amortization added back. A similar term increasingly used is Funds Available for Distribution (FAD), which is FFO less capital investments in trust property and the amortization of mortgages.

Future: A term used to designate all contracts covering the sale of financial instruments or physical commodities for future delivery on a commodity exchange.

Future investment opportunities: The options to identify additional, more valuable investment opportunities in the future that result from a current opportunity or operation.

Future value: The amount of cash at a specified date in the future that is equivalent in value to a specified sum today.

Futures: A term used to designate all contracts covering the sale of financial instruments or physical commodities for future delivery on a commodity exchange.

– G –

GAAP: Generally Accepted Accounting Principles. The common set of accounting principles, standards and procedures. GAAP is a combination of authoritative standards set by standard-setting bodies as well as accepted ways of doing accounting.

Gamma: The ratio of a change in the option delta to a small change in the price of the asset on which the option is written.

Gatekeeper : Specialist advisers who assist institutional investors in their private equity allocation decisions. Institutional investors with little experience of the asset class or those with limited resources often use them to help manage their private equity allocation. Gatekeepers usually offer tailored services according to their clients’ needs, including private equity fund sourcing and due diligence through to complete discretionary mandates.

GDR’s: Global Depositary Receipt (GDR’s). Receipts for shares in a foreign based corporation traded in capital markets around the world. While ADR’s permit foreign corporations to offer shares to American citizens, GDR’s allow companies in Europe, Asia and the US to offer shares in many markets around the world.

Gearing: Financial leverage.

General cash offer: A public offering made to investors at large.

General obligation bonds: Municipal securities secured by the issuer’s pledge of its full faith, credit, and taxing power.

General partner:   A partner who has unlimited liability for the obligations of the partnership.

General Partner (GP): The partner in a limited partnership responsible for all management decisions of the partnership. The GP has a fiduciary responsibility to act for the benefit of the limited partners (LPs), and is fully liable for its actions.

General partner clawback: This is a common term of the private equity partnership agreement. To the extent that the general partner receives more than its fair share of profits, as determined by the carried interest, the general partner clawback holds the individual partners responsible for paying back the limited partners what they are owed.

General Partner Contribution: The amount of capital that the fund manager contributes to its own fund in the same way that a limited partner does. This is an important way in which limited partners can ensure that their interests are aligned with those of the general partner. While the U.S. Department of Treasury has removed the legal requirement of the general partner to contribute at least 1 percent of fund capital. A 1 percent general partner contribution remains standard practice, particularly among venture capital funds.

General partnership: A partnership in which all partners are general partners.

Generally Accepted Accounting Principals (GAAP): A technical accounting term that encompasses the conventions, rules, and procedures necessary to define accepted accounting practice at a particular time.

Geographic risk: Risk that arises when an issuer has policies concentrated within certain geographic areas, such as the risk of damage from a hurricane or an earthquake.

Geometric mean return: Also called the time weighted rate of return, a measure of the compounded rate of growth of the initial portfolio market value during the evaluation period, assuming that all cash distributions are reinvested in the portfolio. It is computed by taking the geometric average of the portfolio subperiod returns.

Give up: The loss in yield that occurs when a block of bonds is swapped for another block of lower-coupon bonds. Can also be referred to as “after-tax give up” when the implications of the profit or loss on taxes are considered.

Glass-Steagall Act: A 1933 act in which Congress forbade commercial banks to own, underwrite, or deal in corporate stock and corporate bonds.

Golden Handcuffs: This occurs when an employee is required to relinquish unvested stock when terminating his employment contract early.

Golden Parachute: Employment contract of upper management that provides a large payout upon the occurrence of certain control transactions, such as a certain percentage share purchase by an outside entity or when there is a tender offer for a certain percentage of a company’s shares.

Goodwill: Excess of the purchase price over the fair market value of the net assets acquired under purchase accounting.

Government bond: See: Government securities.

Gross interest: Interest earned before taxes are deducted.

Gross national product (GNP): Measures and economy’s total income. It is equal to GDP plus the income abroad accruing to domestic residents minus income generated in domestic market accruing to non-residents.

Gross profit margin: Gross profit divided by sales, which is equal to each sales dollar left over after paying for the cost of goods sold.

Gross spread: The fraction of the gross proceeds of an underwritten securities offering that is paid as compensation to the underwriters of the offering.

Growing perpetuity: A constant stream of cash flows without end that is expected to rise indefinitely.

Growth phase: A phase of development in which a company experiences rapid earnings growth as it produces new products and expands market share.

Growth rates: Compound annual growth rate for the number of full fiscal years shown. If there is a negative or zero value for the first or last year, the growth is NM (not meaningful).

– H –

Haircut: The margin or difference between the actual market value of a security and the value assessed by the lending side of a transaction (ie. a repo).

Harvest: Reaping the benefits of investment in a privately held company by selling the company for cash or stock in a publicly held company, also known as an “exit strategy”.

Hedge: A transaction that reduces the risk of an investment.

Hedge fund: A fund that may employ a variety of techniques to enhance returns, such as both buying and shorting stocks based on a valuation model.

Hedge Fund: A fund, usually used by wealthy individuals and institutions, which is allowed to use aggressive strategies that are unavailable to mutual funds, including selling short, leverage, program trading, swaps, arbitrage, and derivatives. Hedge funds are exempt from many of the rules and regulations governing other mutual funds, which allows them to accomplish aggressive investing goals. They are restricted by law to no more than 100 investors per fund, and as a result most hedge funds set extremely high minimum investment amounts, ranging anywhere from $250,000 to over $1 million. As with traditional mutual funds, investors in hedge funds pay a management fee; however, hedge funds also collect a percentage of the profits (usually 20%).

Hedge ratio (delta): The ratio of volatility of the portfolio to be hedged and the return of the volatility of the hedging instrument.

Hedged portfolio: A portfolio consisting of the long position in the stock and the short position in the call option, so as to be riskless and produce a return that equals the risk-free interest rate.

Hedging: A strategy designed to reduce investment risk using call options, put options, short selling, or futures contracts. A hedge can help lock in existing profits. Its purpose is to reduce the volatility of a portfolio, by reducing the risk of loss.

Hockey Stick Projections: The general shape and form of a chart showing revenue, customers, cash, or some other financial or operational measure that increases dramatically at some point in the future. Entrepreneurs often develop business plans with hockey stick charts to impress potential investors.

Holding company: A corporation that owns enough voting stock in another firm to control management and operations by influencing or electing its board of directors.

Holding Company: A corporation that owns the securities of another, in most cases with voting control.

Holding Period: The amount of time an investor has held an investment. The period begins on the date of purchase and ends on the date of sale, and determines whether a gain or loss is considered short-term or long-term, for capital gains tax purposes.

Homogeneity: The degree to which items are similar.

Homogeneous: Exhibiting a high degree of homogeneity.

Homogenous expectations assumption: An assumption of Markowitz portfolio construction that investors have the same expectations with respect to the inputs that are used to derive efficient portfolios: asset returns, variances, and covariances.

Horizon analysis: An analysis of returns using total return to assess performance over some investment horizon.

Horizon return: Total return over a given horizon.

Horizontal acquisition: Merger between two companies producing similar goods or services.

Horizontal analysis: The process of dividing each expense item of a given year by the same expense item in the base year. This allows for the exploration of changes in the relative importance of expense items over time and the behavior of expense items as sales change.

Horizontal merger: A merger involving two or more firms in the same industry that are both at the same stage in the production cycle; that is two or more competitors.

Horizontal spread: The simultaneous purchase and sale of two options that differ only in their exercise date.

Hot Issue: A newly issued stock that is in great public demand. Technically, it is when the secondary market price on the effective date is above the new issue offering price. Hot issues usually experience a dramatic rise in price at their initial public offering because the market demand outweighs the supply.

Hurdle rate: The required return in capital budgeting.

Hurdle Rate: The internal rate of return that a fund must achieve before its general partners or managers may receive an increased interest in the proceeds of the fund. Often, if the expected rate of return on an investment is below the hurdle rate, the project is not undertaken.

Hybrid: A package containing two or more different kinds of risk management instruments that are usually interactive.

– I –

Idiosyncratic Risk: Unsystematic risk or risk that is uncorrelated to the overall market risk. In other words, the risk that is firm specific and can be diversified through holding a portfolio of stocks.

Immediate settlement: Delivery and settlement of securities within five business days.

Immunization: The construction of an asset and a liability that are subject to offsetting changes in value.

Income statement (statement of operations): A statement showing the revenues, expenses, and income (the difference between revenues and expenses) of a corporation over some period of time.

Income stock: Common stock with a high dividend yield and few profitable investment opportunities.

Incremental cash flows: Difference between the firm’s cash flows with and without a project.

Incremental costs and benefits: Costs and benefits that would occur if a particular course of action were taken compared to those that would occur if that course of action were not taken.

Incremental internal rate of return: IRR on the incremental investment from choosing a large project instead of a smaller project.

Incubator: An entity designed to nurture business concepts or new technologies to the point that they become attractive to venture capitalists. An incubator typically provides both physical space and some or all of the services-legal, managerial, and/or technical-needed for a business concept to be developed. Incubators often are backed by venture firms, which use them to generate early-stage investment opportunities.

Indenture: Agreement between lender and borrower which details specific terms of the bond issuance. Specifies legal obligations of bond issuer and rights of bondholders.

Independent project: A project whose acceptance or rejection is independent of the acceptance or rejection of other projects.

Indicated dividend: Total amount of dividends that would be paid on a share of stock over the next 12 months if each dividend were the same amount as the most recent dividend. Usually represent by the letter “e” in stock tables.

Indicated yield: The yield, based on the most recent quarterly rate times four. To determine the yield, divide the annual dividend by the price of the stock. The resulting number is represented as a percentage. See: dividend yield.

Indifference curve: The graphical expression of a utility function, where the horizontal axis measures risk and the vertical axis measures expected return. The curve connects all portfolios with the same utilities according to and .

Inductive reasoning: The attempt to use information about a specific situation to draw a conclusion.

Inflation: The rate at which the general level of prices for goods and services is rising.

Inflation risk: Also called purchasing-power risk, the risk that changes in the real return the investor will realize after adjusting for inflation will be negative.

Inflation uncertainty: The fact that future inflation rates are not known. It is a possible contributing factor to the makeup of the term structure of interest rates.

Inflationescalator clause: A clause in a contract providing for increases or decreases in inflation based on fluctuations in the cost of living, production costs, and so forth.

Information asymmetry: A situation involving information that is known to some, but not all, participants.

Information Coefficient (IC): The correlation between predicted and actual stock returns, sometimes used to measure the value of a financial analyst. An IC of 1.0 indicates a perfect linear relationship between predicted and actual returns, while an IC of 0.0 indicates no linear relationship.

Information costs: Transaction costs that include the assessment of the investment merits of a financial asset. Related: search costs.

Information Rights: Rights granting access to company’s information, i.e. inspecting the company books and receiving financial statements, budgets and executive summaries.

Initial public offering (IPO): A company’s first sale of stock to the public. Securities offered in an IPO are often, but not always, those of young, small companies seeking outside equity capital and a public market for their stock. Investors purchasing stock in IPOs generally must be prepared to accept very large risks for the possibility of large gains. IPO’s by investment companies (closed-end funds) usually contain underwriting fees which represent a load to buyers.

Initial Public Offering (IPO): The sale or distribution of a stock of a portfolio company to the public for the first time. IPOs are often an opportunity for the existing investors (often venture capitalists) to receive significant returns on their original investment. During periods of market downturns or corrections the opposite is true.

Insolvency risk: The risk that a firm will be unable to satisfy its debts. Also known as bankruptcy risk.

Insolvent: A firm that is unable to pay debts (liabilities are greater than assets).

Installment sale: The sale of an asset in exchange for a specified series of payments (the installments).

Institutional investors: Organizations that invest, including insurance companies, depository institutions, pension funds, investment companies, mutual funds, and endowment funds.

Institutional Investors: Organizations that professionally invest, including insurance companies, depository institutions, pension funds, investment companies, mutual funds, and endowment funds.

Intangible asset: A legal claim to some future benefit, typically a claim to future cash. Goodwill, intellectual property, patents, copyrights, and trademarks are examples of intangible assets.

Integer programming: Variant of linear programming whereby the solution values must be integers.

Intellectual property: A venture’s legally protectable intangible assets. The major forms of intellectual property are utility patents, design patents, plant patents, copyrights, mask works, trade names, domain names, rights of personality, trade secrets and trademarks/servicemarks. These rights vary from country to country in both term and scope.

Intercompany loan: Loan made by one unit of a corporation to another unit of the same corporation.

Intercompany transaction: Transaction carried out between two units of the same corporation.

Interest: The price paid for borrowing money. It is expressed as a percentage rate over a period of time and reflects the rate of exchange of present consumption for future consumption. Also, a share or title in property.

Interest coverage ratio: The ratio of the earnings before interest and taxes to the annual interest expense. This ratio measures a firm’s ability to pay interest.

Interest coverage test: A debt limitation that prohibits the issuance of additional long-term debt if the issuer’s interest coverage would, as a result of the issue, fall below some specified minimum..

Interest payments: Contractual debt payments based on the coupon rate of interest and the principal amount.

Interest-only strip (IO): A security based solely on the interest payments form a pool of mortgages, Treasury bonds, or other bonds. Once the principal on the mortgages or bonds has been repaid, interest payments stop and the value of the IO falls to zero.

Interest rate agreement: An agreement whereby one party, for an upfront premium, agrees to compensate the other at specific time periods if a designated interest rate (the reference rate) is different from a predetermined level (the strike rate).

Interest rate cap: Also called an interest rate ceiling, an interest rate agreement in which payments are made when the reference rate exceeds the strike rate.

Interest rate ceiling: Related: interest rate cap.

Interest rate floor: An interest rate agreement in which payments are made when the reference rate falls below the strike rate.

Interest rate on debt: The firm’s cost of debt capital.

Interest rate parity theorem: Interest rate differential between two countries is equal to the difference between the forward foreign exchange rate and the spot rate.

Interest rate risk: The risk that a security’s value changes due to a change in interest rates. For example, a bond’s price drops as interest rates rise. For a depository institution, also called funding risk, the risk that spread income will suffer because of a change in interest rates.

Interest tax shield: The reduction in income taxes that results from the tax-deductibility of interest payments..

Internal growth rate: Maximum rate a firm can expand without outside source of funding. Growth generated by cash flows retained by company.

Internal measure: The number of days that a firm can finance operations without additional cash income.

Internal rate of return: Dollar-weighted rate of return. Discount rate at which net present value (NPV) investment is zero. The rate at which a bond’s future cash flows, discounted back to today, equals its price.

Intrinsic value of a firm: The present value of a firm’s expected future net cash flows discounted by the required rate of return.

Inventory: For companies: Raw materials, items available for sale or in the process of being made ready for sale. They can be individually valued by several different means, including cost or current market value, and collectively by FIFO, LIFO or other techniques. The lower value of alternatives is usually used to preclude overstating earnings and assets. For security firms: securities bought and held by a broker or dealer for resale.

Inventory loan: A secured short-term loan to purchase inventory. The three basic forms are a blanket inventory lien, a trust receipt, and field warehousing financing.

Inventory turnover: The ratio of annual sales to average inventory which measures the speed that inventory is produced and sold. Low turnover is an unhealthy sign, indicating excess stocks and/or poor sales.

Inverse floating rate note: A variable rate security whose coupon rate increases as a benchmark interest rate declines.

Investment bank: Financial intermediaries who perform a variety of services, including aiding in the sale of securities, facilitating mergers and other corporate reorganizations, acting as brokers to both individual and institutional clients, and trading for their own accounts. Underwriters.

Investment Bankers: Representatives of financial institutions engaged in the issue of new securities, including management and underwriting of issues as well as securities trading and distribution.

Investment Company Act of 1940: Investment Company Act shall mean the Investment Company Act of 1940, as amended, including the rules and regulations promulgated thereunder.

Investment decisions: Decisions concerning the asset side of a firm’s balance sheet, such as the decision to offer a new product.

Investment Letter: A letter signed by an investor purchasing unregistered long securities under Regulation D, in which the investor attests to the long-term investment nature of the purchase.  These securities must be held for a minimum of 1 year before they can be sold.

Investment tax credit: Proportion of new capital investment that can be used to reduce a company’s tax bill (abolished in 1986).

IRA Rollover: The reinvestment of assets received as a lump-sum distribution from a qualified tax-deferred retirement plan. Reinvestment may be the entire lump sum or a portion thereof. If reinvestment is done within 60 days, there are no tax consequences.

IRR: Internal Rate of Return. A typical measure of how VC Funds measure performance. IRR is a technically a discount rate: the rate at which the present value of a series of investments is equal to the present value of the returns on those investments.

Irrelevance result: The Modigliani and Miller theorem that a firm’s capital structure is irrelevant to the firm’s value.

ISO: Incentive Stock Option. Plan which qualifying options are free of tax at the date of grant and the date of exercise. Profits on shares sold after being held at least 2 years from the date of grant or 1 year from the date of exercise are subject to favorable capital gains tax rate.

Issue Price: The price per share deemed to have been paid for a series of Preferred Stock. This number is important because Cumulative Dividends, the Liquidation Preference and Conversion Ratios are all based on Issue Price. In some cases, it is not the actual price paid. The most common example is where a company does a bridge financing (a common way for investors to provide capital without having to value the Company as a whole) and sells debt that is convertible into the next series of Preferred Stock sold by the Company at a discount to the Issue Price.

Issued Shares: The amount of common shares that a corporation has sold (issued).

Issuer: Refers to the organization issuing or proposing to issue a security.

– J –

J-curve: Theory that says a country’s trade deficit will initially worsen after its currency depreciates because higher prices on foreign imports will more than offset the reduced volume of imports in the short-run.

J-Curve Effect: The curve realized by plotting the returns generated by a private equity fund against time (from inception to termination). The common practice of paying the management fee and start-up costs out of the first draw-down does not produce an equivalent book value. As a result, a private equity fund will initially show a negative return. When the first realizations are made, the fund returns start to rise quite steeply. After about three to five years, the interim IRR will give a reasonable indication of the definitive IRR. This period is generally shorter for buyout funds than for early-stage and expansion funds.

Jensen index: An index that uses the capital asset pricing model to determine whether a money manager outperformed a market index. The “alpha” of an investment or investment manager.

Junk bond: A bond with a speculative credit rating of BB (S&P) or Ba (Moody’s) or lower is a junk or high yield bond. Such bonds offer investors higher yields than bonds of financially sound companies. Two agencies, Standard & Poors and Moody’s investor Services, provide the rating systems for companies’ credit.

Junior debt (subordinate debt): Debt whose holders have a claim on the firm’s assets only after senior debtholder’s claims have been satisfied. Subordinated debt.

Just-in-time inventory systems: Systems that schedule materials/inventory to arrive exactly as they are needed in the production process.

– K –

Key Employees: Professional management attracted by the founder to run the company. Key employees are typically retained with warrants and ownership of the company.

Key man clause: If a specified number of key named executives cease to devote a specified amount of time to the Partnership, which may also include time spent on other funds managed by the manager, during the commitment period, the “key man” clause provides that the manager of the fund is prohibited from making any further new investments (either automatically or if so determined by investors) until such a time that new replacement key executives are appointed. The manager will, however, usually be permitted to make any investments that had already been agreed to be made prior to such date.

– L –

Ladder strategy: A bond portfolio strategy in which the portfolio is constructed to have approximately equal amounts invested in every maturity within a given range.

Last-In-First-Out (LIFO): A method of valuing inventory that uses the cost of the most recent item in inventory first.

Later Stage: A fund investment strategy involving financing for the expansion of a company that is producing, shipping and increasing its sales volume. Later stage funds often provide the financing to help a company achieve critical mass in order to position its shareholders for an Exit Event, e.g. an IPO on strategic sale of the company.

Law of large numbers: The mean of a random sample approaches the mean (expected value) of the population as the sample grows.

Law of one price: An economic rule stating that a given security must have the same price regardless of the means by which one goes about creating that security. This implies that if the payoff of a security can be synthetically created by a package of other securities, the price of the package and the price of the security whose payoff it replicates must be equal.

Lead: Payment of a financial obligation earlier than is expected or required.

Lead Investor: Also known as a bell cow investor. Member of a syndicate of private equity investors holding the largest stake, in charge of arranging the financing and most actively involved in the overall project.

Lead manager: The commercial or investment bank with the primary responsibility for organizing syndicated bank credit or bond issue. The lead manager recruits additional lending or underwriting banks, negotiates terms of the issue with the issuer, and assesses market conditions.

Leading economic indicators: Economic series that tend to rise or fall in advance of the rest of the economy.

Lease: A long-term rental agreement, and a form of secured long-term debt.

Lease Rate: The payment per period stated in a lease contract.

Ledger cash: A firm’s cash balance as reported in its financial statements. Also called book cash.

Legal capital: Value at which a company’s shares are recorded in its books.

Legal bankruptcy: A legal proceeding for liquidating or reorganizing a business.

Legal defeasance: The deposit of cash and permitted securities, as specified in the bond indenture, into an irrevocable trust sufficient to enable the issuer to discharge fully its obligations under the bond indenture.

Legal investments: Investments that a regulated entity is permitted to make under the rules and regulations that govern its investing.

Lehman Formula:  A formula used by investment banks for the raising of capital, either in public offerings or private placements. It deals with amounts greater than a million dollars. Below this mark, brokerage services and investment banks usually offer a set of tiered fees, or set-rate trading prices (such as $9.95 per trade).

Above a million dollars, the following is the Lehman Formula as originally described:

• 5% of the first million dollars involved in the transaction
• 4% of the second million involved in the transaction
• 3% of the third million involved in the transaction
• 2% of the fourth million involved in the transaction
• 1% of everything above 4 million dollars.

In recent years, due to inflation, the formula is often used as a multiple.[1]

Lemon: An investment that has a poor or negative rate of return. An old venture capital adage claims that “lemons ripen before plums.”

Lend: To provide money temporarily on the condition that it or its equivalent will be returned, often with an interest fee.

Lessee: An entity that leases an asset from another entity.

Lessor: An entity that leases an asset to another entity.

Letter of comment: A communication to the firm from the SEC that suggests changes to its registration statement.

Letter of credit (L/C): A form of guarantee of payment issued by a bank used to guarantee the payment of interest and repayment of principal on bond issues.

Letter stock: Privately placed common stock, so-called because the SEC requires a letter from the purchaser stating that the stock is not intended for resale.

Level pay: The characteristic of the scheduled principal and interest payments due under a mortgage such that total monthly payment of P&I is the same while characteristically the principal payment component of the monthly payment becomes gradually greater while the monthly interest payment becomes less.

Level: Coupon bond: Bond with a stream of coupon payments that are the same throughout the life of the bond.

Leverage: The use of debt financing.

Leverage clientele: A group of shareholders who, because of their personal leverage, seek to invest in corporations that maintain a compatible degree of corporate leverage.

Leverage ratios: Measures of the relative contribution of stockholders and creditors, and of the firm’s ability to pay financing charges. Value of firm’s debt to the total value of the firm.

Leverage rebalancing: Making transactions to adjust (rebalance) a firm’s leverage ratio back to its target.

Leveraged beta: The beta of a leveraged required return; that is, the beta as adjusted for the degree of leverage in the firm’s capital structure.

Leveraged buyout (LBO): A transaction used for taking a public corporation private financed through the use of debt funds: bank loans and bonds. Because of the large amount of debt relative to equity in the new corporation, the bonds are typically rated below investment grade, properly referred to as high-yield bonds or junk bonds. Investors can participate in an LBO through either the purchase of the debt (i.e., purchase of the bonds or participation in the bank loan) or the purchase of equity through an LBO fund that specializes in such investments.

Leveraged Buyout (LBO): A takeover of a company, using a combination of equity and borrowed funds. Generally, the target company’s assets act as the collateral for the loans taken out by the acquiring group. The acquiring group then repays the loan from the cash flow of the acquired company. For example, a group of investors may borrow funds, using the assets of the company as collateral, in order to take over a company. Or the management of the company may use this vehicle as a means to regain control of the company by converting a company from public to private. In most LBOs, public shareholders receive a premium to the market price of the shares.

Leveraged equity: Stock in a firm that relies on financial leverage. Holders of leveraged equity face the benefits and costs of using debt.

Leveraged lease: A lease arrangement under which the lessor borrows a large proportion of the funds needed to purchase the asset and grants the lender a lien on the assets and a pledge of the lease payments to secure the borrowing.

Leveraged portfolio: A portfolio that includes risky assets purchased with funds borrowed.

Leveraged required return: The required return on an investment when the investment is financed partially by debt.

Liability: A financial obligation, or the cash outlay that must be made at a specific time to satisfy the contractual terms of such an obligation.

Liability funding strategies: Investment strategies that select assets so that cash flows will equal or exceed the client’s obligations.

Liability swap: An interest rate swap used to alter the cash flow characteristics of an institution’s liabilities so as to provide a better match with its assets.

LIBOR: The London Interbank Offered Rate; the rate of interest that major international banks in London charge each other for borrowings. Many variable interest rates in the U.S. are based on spreads off of LIBOR. There are many different LIBOR tenors.

Lien: A security interest in one or more assets that is granted to lenders in connection with secured debt financing.

Lifestyle firms : Catagory comprising around 90 percent of all start-ups. These firms merely afford a reasonable living for their founders, rather than incurring the risks associated with high growth. These ventures typically have growth rates below 20 percent annually, have five-year revenue projections below $10 million, and are primarily funded internally-only very rarely with outside equity funds.

LIFO (Last-in-first-out): The last-in-first-out inventory valuation methodology. A method of valuing inventory that uses the cost of the most recent item in inventory first.

Limited liability: Limitation of possible loss to what has already been invested.

Limited partner: A partner who has limited legal liability for the obligations of the partnership.

Limited Partner (LP): An investor in a limited partnership who has no voice in the management of the partnership. LP’s have limited liability and usually have priority over GP’s upon liquidation of the partnership.

Limited partner clawback: This is a common term of the private equity partnership agreement. It is intended to protect the general partner against future claims, should the general partner of the limited partnership become the subject of a lawsuit. Under this provision, a fund’s limited partners commit to pay for any legal judgment imposed upon the limited partnership or the general partner. Typically, this clause includes limitations in the timing or amount of the judgment, such as that it cannot exceed the limited partners’ committed capital to the fund.

Limited partnership: A partnership that includes one or more partners who have limited liability.

Limited Partnerships: An organization comprised of a general partner, who manages a fund, and limited partners, who invest money but have limited liability and are not involved with the day-to-day management of the fund. In the typical venture capital fund, the general partner receives a management fee and a percentage of the profits (or carried interest). The limited partners receive income, capital gains, and tax benefits.

Limited-liability instrument: A security, such as a call option, in which the owner can only lose his initial investment.

Limited-tax general obligation bond: A general obligation bond that is limited as to revenue sources.

Line of credit: An informal arrangement between a bank and a customer establishing a maximum loan balance that the bank will permit the borrower to maintain.

Linear programming: Technique for finding the maximum value of some equation subject to stated linear constraints.

Linear regression: A statistical technique for fitting a straight line to a set of data points.

Linter’s observations: John Lintner’s work (1956) suggested that dividend policy is related to a target level of dividends and the speed of adjustment of change in dividends.

Liquid asset: Asset that is easily and cheaply turned into cash – notably cash itself and short-term securities.

Liquidation: When a firm’s business is terminated, assets are sold, proceeds pay creditors and any leftovers are distributed to shareholders. Any transaction that offsets or closes out a Long or short position. Related: buy in, evening up, offsetliquidity.

Liquidation: 1) The process of converting securities into cash. 2) The sale of the assets of a company to one or more acquirers in order to pay off debts. In the event that a corporation is liquidated, the claims of secured and unsecured creditors and owners of bonds and preferred stock take precedence over the claims of those who own common stock.

Liquidation Preference: The amount per share that a holder of a given series of Preferred Stock will receive prior to distribution of amounts to holders of other series of Preferred Stock of Common Stock. This is usually designated as a multiple of the Issue Price, for example 2X or 3X, and there may be multiple layers of Liquidation Preferences as different groups of investors buy shares in different series. For example, holders of Series B Preferred Stock may be entitled to receive 3X their Issue Price, and then if any money is left, holders of Series A Preferred Stock may be entitled to receive 2X their Issue Price and then holders of Common Stock receive whatever is left. The trigger for the payment of the Liquidation Preference is a sale or liquidation of the company, such as a merger or other transaction where the company stockholders end up with less than half of the ownership of the new entity or a liquidation of the company.

Liquidation rights: The rights of a firm’s securityholders in the event the firm liquidates.

Liquidation value: Net amount that could be realized by selling the assets of a firm after paying the debt.

Liquidator: Person appointed by unsecured creditors in the United Kingdom to oversee the sale of an insolvent firm’s assets and the repayment of its debts.

Liquidity: A market is liquid when it has a high level of trading activity, allowing buying and selling with minimum price disturbance. Also a market characterized by the ability to buy and sell with relative ease.

Liquidity diversification: Investing in a variety of maturities to reduce the price risk to which holding long bonds exposes the investor.

Liquidity Event: An event that allows a VC to realize a gain or loss on an investment. The ending of a private equity provider’s involvement in a business venture with a view to realizing an internal return on investment. Most common exit routes include Initial Public Offerings [IPOs], buy backs, trade sales and secondary buy outs. See also: Exit strategy

Liquidity preference hypothesis: The argument that greater liquidity is valuable, all else equal. Also, the theory that the forward rate exceeds expected future interest rates.

Liquidity premium: Forward rate minus expected future short-term interest rate.

Liquidity ratios: Ratios that measure a firm’s ability to meet its short-term financial obligations on time.

Liquidity risk: The risk that arises from the difficulty of selling an asset. It can be thought of as the difference between the “true value” of the asset and the likely price, less commissions.

Liquidity theory of the term structure: A biased expectations theory that asserts that the implied forward rates will not be a pure estimate of the market’s expectations of future interest rates because they embody a liquidity premium.

Listed stocks: Stocks that are traded on an exchange.

LLC – Limited liability company : A company owned by “members” who either manage the business themselves or appoint “managers” top run it for them. All members and managers have the benefit of limited liability, and, in most cases, are taxed in the same way as a subchapter S corporation, i.e. flow-through taxation, without having to conform to the S Corporation restrictions.

Loan amortization schedule: The schedule for repaying the interest and principal on a loan.

Loan syndication: Group of banks sharing a loan. See: syndicate.

Loan value: The amount a policyholder may borrow against a whole life insurance policy at the interest rate specified in the policy.

Lockbox: A collection and processing service provided to firms by banks, which collect payments from a dedicated postal box that the firm directs its customers to send payment to. The banks make several collections per day, process the payments immediately, and deposit the funds into the firm’s bank account.

Lock-up Period: The period of time that certain stockholders have agreed to waive their right to sell their shares of a public company. Investment banks that underwrite initial public offerings generally insist upon lockups of at least 180 days from large shareholders (1% ownership or more) in order to allow an orderly market to develop in the shares. The shareholders that are subject to lockup usually include the management and directors of the company, strategic partners and such large investors. These shareholders have typically invested prior to the IPO at a significantly lower price to that offered to the public and therefore stand to gain considerable profits. If a shareholder attempts to sell shares that are subject to lockup during the lockup period, the transfer agent will not permit the sale to be completed.

Log-linear least-squares method: A statistical technique for fitting a curve to a set of data points. One of the variables is transformed by taking its logarithm, and then a straight line is fitted to the transformed set of data points.

Lognormal distribution: A distribution where the logarithm of the variable follows a normal distribution. Lognormal distributions are used to describe returns calculated over periods of a year or more.

Long: One who has bought a contract(s) to establish a market position and who has not yet closed out this position through an offsetting sale; the opposite of short.

Long run: A period of time in which all costs are variable; greater than one year. In accounting information, one year or greater.

Longterm assets: Value of property, equipment and other capital assets minus the depreciation. This is an entry in the bookkeeping records of a company, usually on a “cost” basis and thus does not necessarily reflect the market value of the assets.

Long-term debt: An obligation having a maturity of more than one year from the date it was issued. Also called funded debt.

Long-term debt/capitalization: Indicator of financial leverage. Shows long-term debt as a proportion of the capital available. Determined by dividing long-term debt by the sum of long-term debt, preferred stock and common stockholder equity.

Long-term debt ratio: The ratio of long-term debt to total capitalization.

Long-term financial plan: Financial plan covering two or more years of future operations.

Long-term liabilities: Amount owed for leases, bond repayment and other items due after 1 year.

Long-term debt to equity ratio: A capitalization ratio comparing long-term debt to shareholders’ equity.

Lower quartile: The point at which 75% of all returns in a group are greater and 25% are lower.

– M –

Magic of diversification: The effective reduction of risk (variance) of a portfolio, achieved without reduction to expected returns through the combination of assets with low or negative correlations (covariances). Related: Markowitz diversification

Mail float: Refers to the part of the collection and disbursement process where checks are trapped in the postal system.

Majority voting: Voting system under which each director is voted upon separately. Related: cumulative voting.

Management buy-out (MBO): A private equity firm will often provide financing to enable current operating management to acquire or to buy at least 50 per cent of the business they manage. In return, the private equity firm usually receives a stake in the business. This is one of the least risky types of private equity investment because the company is already established and the managers running it know the business – and the market it operates in – extremely well.

Management/closely held shares: Percentage of shares held by persons closely related to a company, as defined by the Securities and exchange commission. Part of these percentages often is included in Institutional Holdings — making the combined total of these percentages over 100. There is overlap as institutions sometimes acquire enough stock to be considered by the SEC to be closely allied to the company.

Management buyout (MBO): Leveraged buyout whereby the acquiring group is led by the firm’s management.

Management fee: An investment advisory fee charged by the financial advisor to a fund based on the fund’s average assets, but sometimes determined on a sliding scale that declines as the dollar amount of the fund increases.

Management Fee: Compensation for the management of a venture fund’s activities, paid from the fund to the general partner or investment advisor. This compensation generally includes an annual management fee.

Mangement’s discussion: A report from management to the shareholders that accompanies the firm’s financial statements in the annual report. This report explains the period’s financial results and enables management to discuss other ideas that may not be apparent in the financial statements in the annual report.

Management Team: The persons who oversee the activities of a venture capital fund.

Managerial decisions: Decisions concerning the operation of the firm, such as the choice of firm size, firm growth rates, and employee compensation.

Mandatory Redemption: is a right of an investor to require the company to repurchase some or all of an investor’s shares at a stated price at a given time in the future. The purchase price is usually the Issue Price, increased by Cumulative Dividends, if any. Mandatory Redemption may be automatic or may require a vote of the series of Preferred Stock having the redemption right.

Mandatory redemption schedule: Schedule according to which sinking fund payments must be made.

Margin of safety: With respect to working capital management, the difference between 1) the amount of long-term financing, and 2) the sum of fixed assets and the permanent component of current assets.

Marginal tax rate: The tax rate that would have to be paid on any additional dollars of taxable income earned.

Mark-to-market: The process whereby the book value or collateral value of a security is adjusted to reflect current market value.

Marked-to-market: An arrangement whereby the profits or losses on a futures contract are settled each day.

Market capitalization: The total dollar value of all outstanding shares. Computed as shares times current market price. It is a measure of corporate size.

Market Capitalization: The total dollar value of all outstanding shares. Computed as shares multiplied by current price per share. Prior to an IPO, market capitalization is arrived at by estimating a company’s future growth and by comparing a company with similar public or private corporations. (See also Pre-Money Valuation)

Market capitalization rate: Expected return on a security. The market-consensus estimate of the appropriate discount rate for a firm’s cash flows.

Market price of risk: A measure of the extra return, or risk premium, that investors demand to bear risk. The reward-to-risk ratio of the market portfolio.

Market prices: The amount of money that a willing buyer pays to acquire something from a willing seller, when a buyer and seller are independent and when such an exchange is motivated by only commercial consideration.

Market return: The return on the market portfolio.

Market risk: Risk that cannot be diversified away. Related: systematic risk

Market sectors: The classifications of bonds by issuer characteristics, such as state government, corporate, or utility.

Market segmentation theory or preferred habitat theory: A biased expectations theory that asserts that the shape of the yield curve is determined by the supply of and demand for securities within each maturity sector.

Market Standoff Agreement: Similar to Lock-Up Agreements and prevents selling company stock for number of predetermined days after a previous stock offering by the company.

Market timer: A money manager who assumes he or she can forecast when the stock market will go up and down.

Market timing: Asset allocation in which the investment in the market is increased if one forecasts that the market will outperform T-bills.

Market timing costs: Costs that arise from price movement of the stock during the time of the transaction which is attributed to other activity in the stock.

Market value: (1) The price at which a security is trading and could presumably be purchased or sold. (2) The value investors believe a firm is worth; calculated by multiplying the number of shares outstanding by the current market price of a firm’s shares.

Market value ratios: Ratios that relate the market price of the firm’s common stock to selected financial statement items.

Market value-weighted index: An index of a group of securities computed by calculating a weighted average of the returns on each security in the index, with the weights proportional to outstanding market value.

Market-book ratio: Market price of a share divided by book value per share.

Market-if-touched (MIT): A price order, below market if a buy or above market if a sell, that automatically becomes a market order if the specified price is reached.

Marketability: A negotiable security is said to have good marketability if there is an active secondary market in which it can easily be resold.

Marketed claims: Claims that can be bought and sold in financial markets, such as those of stockholders and bondholders.

Marketplace price efficiency: The degree to which the prices of assets reflect the available marketplace information. Marketplace price efficiency is sometimes estimated as the difficulty faced by active management of earning a greater return than passive management would, after adjusting for the risk associated with a strategy and the transactions costs associated with implementing a strategy.

Markowitz diversification: A strategy that seeks to combine assets a portfolio with returns that are less than perfectly positively correlated, in an effort to lower portfolio risk (variance) without sacrificing return. Related: naive diversification

Markowitz efficient frontier: The graphical depiction of the Markowitz efficient set of portfolios representing the boundary of the set of feasible portfolios that have the maximum return for a given level of risk. Any portfolios above the frontier cannot be achieved. Any below the frontier are dominated by Markowitz efficient portfolios.

Markowitz efficient portfolio: Also called a mean-variance efficient portfolio, a portfolio that has the highest expected return at a given level of risk.

Markowitz efficient set of portfolios: The collection of all efficient portfolios, graphically referred to as the Markowitz efficient frontier.

Master limited partnership (MLP): A publicly traded limited partnership.

Matador market: The foreign market in Spain.

Match fund: A bank is said to match fund a loan or other asset when it does so by buying (taking) a deposit of the same maturity. The term is commonly used in the Euromarket.

Matched book: A bank runs a matched book when the distribution of maturities of its assets and liabilities are equal.

Matching concept: The accounting principle that requires the recognition of all costs that are associated with the generation of the revenue reported in the income statement.

Materials requirement planning: Computer-based systems that plan backward from the production schedule to make purchases in order to manage inventory levels.

Mathematical programming: An operations research technique that solves problems in which an optimal value is sought subject to specified constraints. Mathematical programming models include linear programming, quadratic programming, and dynamic programming.

Mature: To cease to exist; to expire.

Maturity: For a bond, the date on which the principal is required to be repaid. In an interest rate swap, the date that the swap stops accruing interest.

Maturity factoring: Factoring arrangement that provides collection and insurance of accounts receivable.

Maturity phase: A phase of company development in which earnings continue to grow at the rate of the general economy. Related: Three-phase DDM.

Maturity spread: The spread between any two maturity sectors of the bond market.

Maturity value: Related: par value.

Maximum price fluctuation: The maximum amount the contract price can change, up or down, during one trading session, as fixed by exchange rules in the contract specification. Related: limit price.

Mean: The expected value of a random variable.

Mean of the sample: The arithmetic average; that is, the sum of the observations divided by the number of observations.

Mean-variance analysis: Evaluation of risky prospects based on the expected value and variance of possible outcomes.

Mean-variance criterion: The selection of portfolios based on the means and variances of their returns. The choice of the higher expected return portfolio for a given level of variance or the lower variance portfolio for a given expected return.

Mean-variance efficient portfolio: Related: Markowitz efficient portfolio

Measurement error: Errors in measuring an explanatory variable in a regression that leads to biases in estimated parameters.

Merchant bank: A British term for a bank that specializes not in lending out its own funds, but in providing various financial services such as accepting bills arising out of trade, underwriting new issues, and providing advice on acquisitions, mergers, foreign exchange, portfolio management, etc.

Merchant banking: An activity that includes corporate finance activities, such as advice on complex financings, merger and acquisition advice (international or domestic), and at times direct equity investments in corporations by the banks.

Merger: (1) Acquisition in which all assets and liabilities are absorbed by the buyer. (2) More generally, any combination of two companies.

Merger: Combination of two or more corporations in which greater efficiency is supposed to be achieved by the elimination of duplicate plant, equipment, and staff, and the reallocation of capital assets to increase sales and profits in the enlarged company.

Mezzanine Financing: Refers to the stage of venture financing for a company immediately prior to its IPO. Investors entering in this round have lower risk of loss than those investors who have invested in an earlier round. Mezzanine level financing can take the structure of preferred stock, convertible bonds or subordinated debt.

Middle-Market Firms: Firms with growth prospects of more than 20 percent annually and five-year revenue projections between $10 million and $50 million. Less than 10 percent of all start-ups annually, these entrepreneurial firms are the backbone of the U.S. economy.

Mimic: An imitation that sends a false signal.

Minimum-variance frontier: Graph of the lowest possible portfolio variance that is attainable for a given portfolio expected return.

Minimum-variance portfolio: The portfolio of risky assets with lowest variance.

Minority interest: An outside ownership interest in a subsidiary that is consolidated with the parent for financial reporting purposes.

Modeling: The process of creating a depiction of reality, such as a graph, picture, or mathematical representation.

Modern portfolio theory: Principles underlying the analysis and evaluation of rational portfolio choices based on risk-return trade-offs and efficient diversification.

Modigliani and Miller Proposition I: A proposition by Modigliani and Miller which states that a firm cannot change the total value of its outstanding securities by changing its capital structure proportions. Also called the irrelevance proposition.

Modigliani and Miller Proposition II: A proposition by Modigliani and Miller which states that the cost of equity is a linear function of the firm’s debt_equity_ratio.

Money supply:

M1-A: Currency plus demand deposits
M1-B: M1-A plus other checkable deposits.
M2: M1-B plus overnight repos, money market funds, savings, and small (less than $100M) time deposits.
M3: M-2 plus large time deposits and term repos.
L: M-3 plus other liquid assets.

Monte Carlo simulation: An analytical technique for solving a problem by performing a large number of trail runs, called simulations, and inferring a solution from the collective results of the trial runs. Method for calculating the probability distribution of possible outcomes.

Money factor: An APR can also be represented by a money factor (also known as the lease factor, lease rate, or factor). The money factor is usually given as a decimal, for example .0030. To find the equivalent APR, the money factor is multiplied by 2400. A money factor of .0030 is equivalent to a monthly interest rate of 0.6% and an APR of 7.2%.[6]

Moral hazard: The risk that the existence of a contract will change the behavior of one or both parties to the contract, e.g. an insured firm will take fewer fire precautions.

Moving average: Used in charts and technical analysis, the average of security or commodity prices constructed in a period as short as a few days or as Long as several years and showing trends for the latest interval. As each new variable is included in calculating the average, the last variable of the series is deleted.

Multifactor CAPM: A version of the capital asset pricing model derived by Merton that includes extra-market sources of risk referred to as factor.

Multiple rates of return: More than one rate of return from the same project that make the net present value of the project equal to zero. This situation arises when the IRR method is used for a project in which negative cash flows follow positive cash flows. For each sign change in the cash flows, there is a rate of return.

Multiple regression: The estimated relationship between a dependent variable and more than one explanatory variable.

Multiples: Another name for price/earnings ratios.

Multiple-discriminant analysis (MDA): Statistical technique for distinguishing between two groups on the basis of their observed characteristics.

Municipal bond: State or local governments offer muni bonds or municipals, as they are called, to pay for special projects such as highways or sewers. The interest that investors receive is exempt from some income taxes.

Mutual Fund: A mutual fund, or an open-end fund, sells as many shares as investor demand requires. As money flows in, the fund grows. If money flows out of the fund the number of the fund’s outstanding shares drops. Open-end funds are sometimes closed to new investors, but existing investors can still continue to invest money in the fund. In order to sell shares an investor usually sells the shares back to the fund. If an investor wishes to buy additional shares in a mutual fund, the investor must buy newly issued shares directly from the fund. (See Closed-end Funds)

Mutually exclusive investment decisions: Investment decisions in which the acceptance of a project precludes the acceptance of one or more alternative projects.

– N –
Naive diversification: A strategy whereby an investor simply invests in a number of different assets and hopes that the variance of the expected return on the portfolio is lowered. Related: Markowitz diversification.

Narrow-based weighted average ratchet: A type of anti-dilution mechanism. A weighted average ratchet adjusts downward the price per share of the preferred stock of investor A due to the issuance of new preferred shares to new investor B at a price lower than the price investor A originally received. Investor A’s preferred stock is repriced to a weighed average of investor A’s price and investor B’s price. A narrow-based ratchet uses only common stock outstanding in the denominator of the formula for determining the new weighed average price. Compare Broad-Based Weighted Average Ratchet and Chapter 2.9.4.d.ii of the Encyclopedia for specific examples.

NASD: The National Association of Securities Dealers. An mandatory association of brokers and dealers in the over the counter securities business. Created by the Maloney Act of 1938, an amendment to the Securities Act of 1934.

NASDAQ: An automated information network which provides brokers and dealers with price quotations on securities traded over the counter.

Natural logarithm: Logarithm to the base e (approximately 2.7183).

NDA (Non-disclosure agreement): An agreement issued by entrepreneurs to potential investors to protect the privacy of their ideas when disclosing those ideas to third parties.

Net adjusted present value: The adjusted present value minus the initial cost of an investment.

Net advantage to leasing: The net present value of entering into a lease financing arrangement rather than borrowing the necessary funds and buying the asset.

Net advantage to merging: The difference in total post- and pre-merger market value minus the cost of the merger.

Net asset value (NAV): The value of a fund’s investments. For a mutual fund, the net asset value per share usually represents the fund’s market price, subject to a possible sales or redemption charge. For a closed end fund, the market price may vary significantly from the net asset value.

Net Asset Value (NAV): NAV is calculated by adding the value of all of the investments in the fund and dividing by the number of shares of the fund that are outstanding. NAV calculations are required for all mutual funds (or open-end funds) and closed-end funds. The price per share of a closed-end fund will trade at either a premium or a discount to the NAV of that fund, based on market demand. Closed-end funds generally trade at a discount to NAV.

Net assets: The difference between total assets on the one hand and current liabilities and noncapitalized long-term liabilities on the other hand.

Net benefit to leverage factor: A linear approximation of a factor, T*, that enables one to operationalize the total impact of leverage on firm value in the capital market imperfections view of capital structure.

Net book value: The current book value of an asset or liability; that is, its original book value net of any accounting adjustments such as depreciation.

Net cash balance: Beginning cash balance plus cash receipts minus cash disbursements.

Net change: This is the difference between a day’s last trade and the previous day’s last trade.

Net errors and omissions: In balance of payments accounting, net errors and omissions record the statistical discrepancies that arise in gathering balance of payments data.

Net financing cost: Also called the cost of carry or, simply, carry, the difference between the cost of financing the purchase of an asset and the asset’s cash yield. Positive carry means that the yield earned is greater than the financing cost; negative carry means that the financing cost exceeds the yield earned.

Net Financing Cost: Also called the cost of carry or, simply, carry, the difference between the cost of financing the purchase of an asset and the asset’s cash yield. Positive carry means that the yield earned is greater than the financing cost; negative carry means that the financing cost exceeds the yield earned.

Net income: The company’s total earnings, reflecting revenues adjusted for costs of doing business, depreciation, interest, taxes and other expenses.

Net income: The net earnings of a corporation after deducting all costs of selling, depreciation, interest expense and taxes.

Net investment: Gross, or total, investment minus depreciation.

Net IRR: IRR if a portfolio or fund taking into account the effect of management fees and carried interest.

Net lease: A lease arrangement under which the lessee is responsible for all property taxes, maintenance expenses, insurance, and other costs associated with keeping the asset in good working condition.

Net operating losses: Losses that a firm can take advantage of to reduce taxes.

Net operating margin: The ratio of net operating income to net sales.

Net period: The period of time between the end of the discount period and the date payment is due.

Net Present Value: An approach used in capital budgeting where the present value of cash inflow is subtracted from the present value of cash outflows. NPV compares the value of a dollar today versus the value of that same dollar in the future after taking inflation and return into account.

Net present value (NPV): The present value of the expected future cash flows minus the cost.

Net present value (NPV): A firm or project’s net contribution to wealth. This is the present value of current and future income streams, minus initial investment.

Net present value of growth opportunities: A model valuing a firm in which net present value of new investment opportunities is explicitly examined.

Net present value of future investments: The present value of the total sum of NPVs expected to result from all of the firm’s future investments.

Net present value rule: An investment is worth making if it has a positive NPV. Projects with negative NPVs should be rejected.

Net profit margin: Net income divided by sales; the amount of each sales dollar left over after all expenses have been paid.

Net salvage value: The after-tax net cash flow for terminating the project.

Net working capital: Current assets minus current liabilities. Often simply referred to as working capital.

Net worth: Common stockholders’ equity which consists of common stock, surplus, and retained earnings.

Netting out: To get or bring in as a net; to clear as profit.

New Issue: A stock or bond offered to the public for the first time. New issues may be initial public offerings by previously private companies or additional stock or bond issues by companies already public. New public offerings are registered with the Securities and Exchange Commission. (See Securities and Exchange Commission and Registration).

Newco: The typical label for any newly organized company, particularly in the context of a leveraged buyout.

Nexus (of contracts): A set or collection of something.

No Shop, No Solicitation Clauses: A no shop, no solicitation, or exclusivity, clause requires the company to negotiate exclusively with the investor, and not solicit an investment proposal from anyone else for a set period of time after the term sheet is signed. The key provision is the length of time set for the exclusivity period.

No-fault divorce: A “no fault divorce” clause permits investors at a time after the final closing date, to remove the general partner of a fund and either terminate the Partnership or appoint a new general partner. This clause covers situations where the general partner has not defaulted or breached the terms and conditions of the Limited Partnership Agreement. Either an ordinary consent or a special consent may be required to effectuate the removal of the general partner and this clause will usually be subject to the general partner receiving compensation for its removal.

Noise: Price and volume fluctuations that can confuse interpretation of market direction.

Nominal: In name only. Differences in compounding cause the nominal rate to differ from the effective interest rate. Inflation causes the purchasing power of money to differ from one time to another.

Nominal annual rate: An effective rate per period multiplied by the number of periods in a year.

Nominal cash flow: A cash flow expressed in nominal terms if the actual dollars to be received or paid out are given.

Nominal exchange rate: The actual foreign exchange quotation in contrast to the real exchange rate that has been adjusted for changes in purchasing power.

Nominal interest rate: The interest rate unadjusted for inflation.

Nominal price: Price quotations on futures for a period in which no actual trading took place.

Non-Compete Clause: An agreement often signed by employees and management whereby they agree not to work for competitor companies or form a new competitor company within a certain time period after termination of employment. Governed by state law.

Non-cumulative preferred stock: Preferred stock whose holders must forgo dividend payments when the company misses a dividend payment. Related: Cumulative preferred stock

Non-financial services: Include such things as freight, insurance, passenger services, and travel.

Non-reproducible assets: A tangible asset with unique physical properties, like a parcel of land, a mine, or a work of art.

Nonaccredited: An investor not considered accredited for a Regulation D offering. (Accredited Investor)

Noncash charge: A cost, such as depreciation, depletion, and amortization, that does not involve any cash outflow.

Noncompetitive bid: In a Treasury auction, bidding for a specific amount of securities at the price, whatever it may turn out to be, equal to the average price of the accepted competitive bids.

Nondiversifiability of human capital: The difficulty of diversifying one’s human capital (the unique capabilities and expertise of individuals) and employment effort.

Nondiversifiable risk: Risk that cannot be eliminated by diversification.

Nonmarketed claims: Claims that cannot be easily bought and sold in the financial markets, such as those of the government and litigants in lawsuits.

Nonrecourse: Without recourse, as in a non-recourse lease.

Nonredeemable: Not permitted, under the terms of indenture, to be redeemed.

Nonrefundable: Not permitted, under the terms of indenture, to be refundable.

Nonsystematic risk: Nonmarket or firm-specific risk factors that can be eliminated by diversification. Also called unique risk or diversifiable risk. Systematic risk refers to risk factors common to the entire economy.

Normal random variable: A random variable that has a normal probability distribution.

Normalizing method: The practice of making a charge in the income account equivalent to the tax savings realized through the use of different depreciation methods for shareholder and income tax purposes, thus washing out the benefits of the tax savings reported as final net income to shareholders.

Note: Debt instruments with initial maturities greater than one year and less than 10 years.

Note agreement: A contract for privately placed debt.

Note issuance facility (NIF): An agreement by which a syndicate of banks indicates a willingness to accept short-term notes from borrowers and resell these notes in the Eurocurrency markets.

Notes to the financial statements: A detailed set of notes immediately following the financial statements in an annual report that explain and expand on the information in the financial statements.

Notice day: A day on which notices of intent to deliver pertaining to a specified delivery month may be issued. Related: delivery notice.

Notification date: The day the option is either exercised or expires.

Notional principal amount: In an interest rate swap, the predetermined dollar principal on which the exchanged interest payments are based.

Novation: Defeasance whereby the firm’s debt is canceled.

NPV: See: Net present value.

NPV profile: A graph of NPV as a function of the discount rate.

NYSE: The New York Stock Exchange. Founded in 1792, the largest organized securities market in the United States. The Exchange itself does not buy, sell, own or set prices of stocks traded there. The prices are determined by public supply and demand. Also known as the Big Board.

– O – 
Offbalance: Sheet financing: Financing that is not shown as a liability in a company’s balance sheet.

Offer: Indicates a willingness to sell at a given price. Related: bid

Offering memorandum: A document that outlines the terms of securities to be offered in a private placement.

Offshore finance subsidiary: A wholly owned affiliate incorporated overseas, usually in a tax haven country, whose function is to issue securities abroad for use in either the parent’s domestic or its foreign business.

Old-line factoring: Factoring arrangement that provides collection, insurance, and finance for accounts receivable.

Open-end Fund: An open-end fund, or a mutual fund, generally sells as many shares as investor demand requires. As money flows in, the fund grows. If money flows out of the fund the number of the fund’s outstanding shares drops. Open-end funds are sometimes closed to new investors, but existing investors can still continue to invest money in the fund. In order to sell shares an investor generally sells the shares back to the fund. If an investor wishes to buy additional shares in a mutual fund, the investor generally buys newly issued shares directly from the fund.

Operating cash flow: Earnings before depreciation minus taxes. It measures the cash generated from operations, not counting capital spending or working capital requirements.

Operating cycle: The average time intervening between the acquisition of materials or services and the final cash realization from those acquisitions.

Operating exposure: Degree to which exchange rate changes, in combination with price changes, will alter a company’s future operating cash flows.

Operating profit margin: The ratio of operating margin to net sales.

Operating lease: Short-term, cancelable lease. A type of lease in which the period of contract is less than the life of the equipment and the lessor pays all maintenance and servicing costs.

Operating leverage: Fixed operating costs, so-called because they accentuate variations in profits.

Operating risk: The inherent or fundamental risk of a firm, without regard to financial risk. The risk that is created by operating leverage. Also called business risk.

Operationally efficient market: Also called an internally efficient market, one in which investors can obtain transactions services that reflect the true costs associated with furnishing those services.

Opportunity cost of capital: Expected return that is foregone by investing in a project rather than in comparable financial securities.

Opportunity costs: The difference in the performance of an actual investment and a desired investment adjusted for fixed costs and execution costs. The performance differential is a consequence of not being able to implement all desired trades. Most valuable alternative that is given up.

Opportunity set: The possible expected return and standard deviation pairs of all portfolios that can be constructed from a given set of assets.

Optimal portfolio: An efficient portfolio most preferred by an investor because its risk/reward characteristics approximate the investor’s utility function. A portfolio that maximizes an investor’s preferences with respect to return and risk.

Option: Gives the buyer the right, but not the obligation, to buy or sell an asset at a set price on or before a given date. Investors, not companies, issue options. Investors who purchase call options bet the stock will be worth more than the price set by the option (the strike price), plus the price they paid for the option itself. Buyers of put options bet the stock’s price will go down below the price set by the option. An option is part of a class of securities called derivatives, so named because these securities derive their value from the worth of an underlying investment.

Option Pool: The number of shares set aside for future issuance to employees of a private company.

Options contract: A contract that, in exchange for the option price, gives the option buyer the right, but not the obligation, to buy (or sell) a financial asset at the exercise price from (or to) the option seller within a specified time period, or on a specified date (expiration date).

Original Issue Discount: OID. A discount from par value of a bond or debt-like instrument. In structuring a private equity transaction, the use of a preferred stock with liquidation preference or other clauses that guarantee a fixed payment in the future can potentially create adverse tax consequences. The IRS views this cash flow stream as, in essence, a zero coupon bond upon which tax payments are due yearly based on “phantom income” imputed from the difference between the original investment and “guaranteed” eventual payout. Although complex, the solution is to include enough clauses in the investment agreements to create the possibility of a material change in the cash flows of owners of the preferred stock under different scenarios of events such as a buyout, dissolution or IPO.

OTC: Over-the-Counter. A market for securities made up of dealers who may or may not be members of a formal securities exchange. The over-the-counter market is conducted over the telephone and is a negotiated market rather than an auction market such as the NYSE.

Other capital: In the balance of payments, other capital is a residual category that groups all the capital transactions that have not been included in direct investment, portfolio investment, and reserves categories. It is divided into long-term capital and short-term capital and, because of its residual status, can differ from country to country. Generally speaking, other long-term capital includes most non-negotiable instruments of a year or more like bank loans and mortgages. Other short-term capital includes financial assets of less than a year such as currency, deposits, and bills.

Other current assets: Value of non-cash assets, including prepaid expenses and accounts receivable, due within 1 year.

Other long term liabilities: Value of leases, future employee benefits, deferred taxes and other obligations not requiring interest payments that must be paid over a period of more than 1 year.

Other sources: Amount of funds generated during the period from operations by sources other than depreciation or deferred taxes. Part of Free cash flow calculation.

Outright rate: Actual forward rate expressed in dollars per currency unit, or vice versa.

Outsourcing: The practice of purchasing a significant percentage of intermediate components from outside suppliers.

Outstanding share capital: Issued share capital less the par value of shares that are held in the company’s treasury.

Outstanding shares: Shares that are currently owned by investors.

Outstanding Stock: The amount of common shares of a corporation which are in the hands of investors. It is equal to the amount of issued shares less treasury stock.

Oversubscription: Occurs when demand for shares exceeds the supply or number of shares offered for sale. As a result, the underwriters or investment bankers must allocate the shares among investors. In private placements, this occurs when a deal is in great demand because of the company’s growth prospects.

Oversubscription Privilege: In a rights issue, arrangement by which shareholders are given the right to apply for any shares that are not purchased.

– P – 

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.

Paid-in Capital: The amount of committed capital a limited partner has actually tranferred to a venture fund. Also known as the cumulative takedown amount.

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.

Pari Passu: At an equal rate or pace, without preference.

Participating fees: The portion of total fees in a syndicated credit that go to the participating banks.

Participating Preferred: A preferred stock in which the holder is entitled to the stated dividend, and also to additional dividends on a specified basis upon payment of dividends to the common stockholders. The preferred stock entitles the owner to receive a predetermined sum of cash (usually the original investment plus accrued dividends) if the company is sold or has an IPO. The common stock represents additional continued ownership in the company.

Participation: Describes a right of a holder of Preferred Stock to enjoy both the rights associated with the Preferred Stock and also participate in any benefit available to Common Stock, without converting to Common Stock. This may occur with Liquidation Preferences, for example, a series of Preferred Stock may have the right to receive its Liquidation Preference and then also share in whatever money is left to be distributed to the holders of Common Stock. Dividends may also be “Participating” where after a holder of Preferred Stock receives its Cumulative Dividend it also receives any dividend paid on the Common Stock.

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.

Partnership: A nontaxable entity in which each partner shares in the profits, loses and liabilities of the partnership. Each partner is responsible for the taxes on its share of profits and loses.

Partnership agreement: The contract that specifies the compensation and conditions governing the relationship between investors (LP’s) and the venture capitalists (GP’s) for the duration of a private equity fund’s life.

Pay to Play: A “Pay to Play” provision is a requirement for an existing investor to participate in a subsequent investment round, especially a Down Round. Where Pay to Play provisions exist, an investor’s failure to purchase its pro-rata portion of a subsequent investment round will result in conversion of that investor’s Preferred Stock into Common Stock or another less valuable series of Preferred Stock.

Payback: The length of time it takes to recover the initial cost of a project, without regard to the time value of money.

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.

Penny Stocks: Low priced issues, often highly speculative, selling at less than $5/share.

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.

Perpetuity: A constant stream of identical cash flows without end.

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.

Piggyback Registration: A situation when a securities underwriter allows existing holdings of shares in a corporation to be sold in combination with an offering of new public shares.

PIK Debt Securities: (Payment in Kind) PIK Debt are bonds that may pay bondholders compensation in a form other than cash.

PIV: Pooled Investment Vehicle. A legal entity that pools various investor’s capital and deploys it according to a specific investment strategy.

Placement Agent: A company that specializes in finding institutional investors that are willing and able to invest in a private equity fund or company issuing securities. Sometimes the “issuer” will hire a placement agent so the fund partners can focus on management issues rather than on raising capital. In the U.S., these companies are regulated by the NASD and SEC.

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 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:

Plug: A variable that handles financial slack in the financial plan.

Plum: An investment that has a very healthy rate of return. The inverse of an old venture capital adage (see Lemons) claims that “plums ripen later than lemons.”

Poison Pill: A right issued by a corporation as a preventative antitakeover measure. It allows rightholders to purchase shares in either their company or in the combined target and bidder entity at a substantial discount, usually 50%. This discount may make the takeover prohibitively expensive.

Pooled IRR: A method of calculating an aggregate IRR by summing cash flows together to create a portfolio cash flow. The IRR is subsequently calculated on this portfolio cash flow.

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 Companies: Companies in which a given fund has invested.

Post-Money Valuation: The valuation of a company immediately after the most recent round of financing. For example, a venture capitalist may invest $3.5 million in a company valued at $2 million “pre-money” (before the investment was made). As a result, the startup will have a post-money valuation of $5.5 million.

Pre-Money Valuation: The valuation of a company prior to a round of investment. This amount is determined by using various calculation models, such as discounted P/E ratios multiplied by periodic earnings or a multiple times a future cash flow discounted to a present cash value and a comparative analysis to comparable public and private companies.

Preemptive Right: A shareholder’s right to acquire an amount of shares in a future offering at current prices per share paid by new investors, whereby his/her percentage ownership remains the same as before the offering.

Preference shares: Shares of a firm that encompass preferential rights over ordinary common shares, such as the first right to dividends and any capital payments.

Preferred Dividend: A dividend ordinarily accruing on preferred shares payable where declared and superior in right of payment to common dividends.

Preferred return (AKA Hurdle Rate): The minimum return to investors to be achieved before a carry is permitted. A hurdle rate of 10% means that the private equity fund needs to achieve a return of at least 10% per annum before the profits are shared according to the carried interest arrangement.

Preferred Stock: A class of capital stock that may pay dividends at a specified rate and that has priority over common stock in the payment of dividends and the liquidation of assets. Many venture capital investments use preferred stock as their investment vehicle. This preferred stock is convertible into common stock at the time of an IPO.

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 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.

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.

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.

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 amount: The face amount of debt; the amount borrowed or lent. Often called principal.

Private Equity: Equity securities of companies that have not “gone public” (are not listed on a public exchange). Private equities are generally illiquid and thought of as a long-term investment. As they are not listed on an exchange, any investor wishing to sell securities in private companies must find a buyer in the absence of a marketplace. In addition, there are many transfer restrictions on private securities. Investors in private securities generally receive their return through one of three ways: an initial public offering, a sale or merger, or a recapitalization.

Private investment in public equities (PIPES): Investments by a hedge fund or private equity fund in unregistered (restricted) securities of a publicly traded company, usually at a discount to the then-prevailing price of the company’s registered common stock.

Private placement: The sale of a bond or other security directly to a limited number of investors.

Private Placement : Also known as a Reg. D offering. The sale of a security (or in some cases, a bond) directly to a limited number of investors. Avoids the need for S.E.C. registration if the securities are purchased for investment as opposed to being resold.  The size of the issue is not limited, but its sale is limited to a maximum of thirty-five nonaccredited investors.

Private Placement Memorandum : Also known as an Offering Memorandum or “PPM”. A document that outlines the terms of securities to be offered in a private placement. Resembles a business plan in content and structure. A formal description of an investment opportunity written to comply with various federal securities regulations. A properly prepared PPM is designed to provide specific information to the buyers in order to protect sellers from liabilities related to selling unregistered securities. Typically PPMs contain: a complete description of the security offered for sale, the terms of the sales, and fees; capital structure and historical financial statements; a description of the business; summary biographies of the management team; and the numerous risk factors associated with the investment. In practice, the PPM is not generally used in angel or venture capital deals, since most sophisticated investors perform thorough due diligence on their own and do not rely on the summary information provided by a typical PPM.

Private Securities: Private securities are securities that are not registered and do not trade on an exchange. The price per share is set through negotiation between the buyer and the seller or issuer.

Prospectus: A formal written offer to sell securities that provides an investor with the necessary information to make an informed decision. A prospectus explains a proposed or existing business enterprise and must disclose any material risks and information according to the securities laws. A prospectus must be filed with the SEC and be given to all potential investors. Companies offering securities, mutual funds, and offerings of other investment companies including Business Development Companies are required to issue prospectuses describing their history, investment philosophy or objectives, risk factors and financial statements. Investors should carefully read them prior to investing.

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.

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.

Productionflow 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.

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 financing: A form of asset-based financing in which a firm finances a discrete set of assets on a stand-alone basis.

Promissory note: Written promise to pay.

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.

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.

Productionflow 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.

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 financing: A form of asset-based financing in which a firm finances a discrete set of assets on a stand-alone basis.

Promissory note: Written promise to pay.

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.

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.

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.

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.

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.

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

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 option: The right to sell a security at a given price (or range) within a given time period.

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.

Putcall 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).

– Q –

Q ratio or Tobin’s Q ratio: Market value of a firm’s assets divided by replacement value of the firm’s assets.

QPAM: Qualified professional asset manager as defined by ERISA.

Quadratic programming: Variant of linear programming whereby the equations are quadratic rather than linear.

Quick assets: Current assets minus inventories.

Quick ratio: Indicator of a company’s financial strength (or weakness). Calculated by taking current assets less inventories, divided by current liabilities. This ratio provides information regarding the firm’s liquidity and ability to meet its obligations. Also called the Acid Test ratio.

– R –

R squared (R2): Square of the correlation coefficient proportion of the variability explained by the linear regression model. For example, an r squared of 75% means that 75% of the variability observed in the dependent variable is explained by the independent variable.

Random variable: A function that assigns a real number to each and every possible outcome of a random experiment.

Random walk: Theory that stock price changes from day to day are at random; the changes are independent of each other and have the same probability distribution. Many believers of the random walk theory believe that it is impossible to outperform the market consistently without taking additional risk.

Randomized strategy: A strategy of introducing into the decision-making process a random element that is designed to reduce the information content of the decision-maker’s observed choices.

Range: The high and low prices, or high and low bids and offers recorded during a specified time.

Range forward: A forward exchange rate contract that places upper and lower bounds on the cost of foreign exchange.

Ratchet : Ratchets reduce the price at which venture capitalists can convert their debt into preferred stock, which effectively increases their percentage of equity. Often referred to as an “antidilution adjustment.” See Anti-dilution, full ratchet and weighted average.

Rate of interest: The rate, as a proportion of the principal, at which interest is computed.

Rate of return ratios: Ratios that are designed to measure the profitability of the firm in relation to various measures of the funds invested in the firm.

Rate risk: In banking, the risk that profits may decline or losses occur because a rise in interest rates forces up the cost of funding fixed-rate loans or other fixed-rate assets.

Ratings: An evaluation of credit quality Moody’s, S&P, and Fitch Investors Service give to companies used by investors and analysts.

Rational expectations: The idea that people rationally anticipate the future and respond to what they see ahead.

Raw material supply agreement: As used in connection with project financing, an agreement to furnish a specified amount per period of a specified raw material.

Real assets: Identifiable assets, such as buildings, equipment, patents, and trademarks, as distinguished from a financial obligation.

Real capital: Wealth that can be represented in financial terms, such as savings account balances, financial securities, and real estate.

Real cash flow: A cash flow is expressed in real terms if the current, or date 0, purchasing power of the cash flow is given.

Real interest rate: The rate of interest excluding the effect of inflation; that is, the rate that is earned in terms of constant-purchasing-power dollars. Interest rate expressed in terms of real goods, i.e. nominal interest rate adjusted for inflation.

Realized return: The return that is actually earned over a given time period.

Recapitalization: The reorganization of a company’s capital structure. A company may seek to save on taxes by replacing preferred stock with bonds in order to gain interest deductibility. Recapitalization can be an alternative exit strategy for venture capitalists and leveraged buyout sponsors. (See Exit Strategy and Leveraged Buyout)

Receivables balance fractions: The percentage of a month’s sales that remain uncollected (and part of accounts receivable) at the end of succeeding months.

Receivables turnover ratio: Total operating revenues divided by average receivables. Used to measure how effectively a firm is managing its accounts receivable.

Receiver: A bankruptcy practitioner appointed by secured creditors to oversee the repayment of debts.

Reclamation: A claim for the right to return or the right to demand the return of a security that has been previously accepted as a result of bad delivery or other irregularities in the delivery and settlement process.

Reconfirmation: The act a broker/dealer makes with an investor to confirm a transaction.

Recourse: Term describing a type of loan. If a loan is with recourse, the lender has a general claim against the parent company if the collateral is insufficient to repay the debt.

Red Herring: The common name for a preliminary prospectus, due to the red SEC required legend on the cover. (See Prospectus)

Redeemable Preferred Stock: Redeemable preferred stock, also known as exploding preferred, at the holder’s option after (typically) five years, which in turn gives the holders (potentially converting to creditors) leverage to induce the company to arrange a liquidity event. The threat of creditor status can move the founders off the dime if a liquidity event is not occurring with sufficient rapidity.

Redemption: The right or obligation of a company to repurchase its own shares.

Redemption Right: Rights to force the company to purchase shares (a “put”) and more infrequently the company’s right to force investor to sell their shares (a “call”). A Put allows one to liquidate an investment in the event an IPO or public merger becomes unlikely. One may also negotiate a Put effective when the company defaults or fails to make payments upon a key employee’s death, etc.

Reference rate: A benchmark ‘interest rate (such as LIBOR), used to specify conditions of an interest rate swap or an interest rate agreement.

Registration: The SEC’s review process of all securities intended to be sold to the public. The SEC requires that a registration statement be filed in conjunction with any public securities offering. This document includes operational and financial information about the company, the management and the purpose of the offering. The registration statement and the prospectus are often referred to interchangeably. Technically, the SEC does not “approve” the disclosures in prospectuses.

Registration Rights: Provisions in the investment agreement that allow investors to sell stock via the public market. Means by which one can transfer shares in compliance with the securities laws subject to Lock-Up and Market Stand-off Agreements.

Long-form Demand: Demand registration before the company becomes public. Usually starts one-three years after making an investment and may involve one or two demands for a percentage of stock. Company will use the SEC’s long-form S-1.

Short-form Demand: Demand made after the company is publicly traded and is eligible to use SEC’s Form S-3.

Piggyback – Company is registering stock either for itself or other stockholders and one can “piggyback” a portion of shares for registration onto the company’s registration. Usually have these rights for up to five years after the company becomes public, but cannot exercise them for mergers or employee offerings.

Regression analysis: A statistical technique that can be used to estimate relationships between variables.

Regression equation: An equation that describes the average relationship between a dependent variable and a set of explanatory variables.

Regression toward the mean: The tendency for subsequent observations of a random variable to be closer to its mean.

Regulation A: SEC provision for simplified registration for small issues of securities. A Reg. A issue may require a shorter prospectus and carries lesser liability for directors and officers for misleading statements. The conditional small issues securities exemption of the Securities Act of 1933 is allowed if the offering is a maximum of $5,000,000 U.S. Dollars.

Regulation C: The regulation that outlines registration requirements for Securities Act of 1933.

Regulation D: Regulation D, is the rule (Reg. D is a “regulation” comprising a series of “rules”) that allow for the issuance and sale of securities to purchasers if they qualify as accredited investors.

Regulation D Offering: (See Private Placement)

Regulation S: The rules relating to offers and sales made outside the U.S. without SEC Registration.

Regulation S-B: Reg. S-B of the Securities Act of 1933 governs the Integrated Disclosure System for Small Business Issuers.

Regulation S-K: The Standard Instructions for Filing Forms Under Securities Act of 1933, Securities Exchange Act of 1934 and Energy Policy and Conservation Act of 1975.

Regulation S-X: The regulation that governs the requirements for financial statements under the Securities Act of 1933, and the Securities Exchange Act of 1934.

Reorganization: Creating a plan to restructure a debtor’s business and restore its financial health.

Reorganization or Corporate Reorganization: Reorganizations are significant changes in the equity base of a company such as converting all outstanding shares to Common Stock, or combining outstanding shares into a smaller number of shares (a reverse split). A Reorganization is frequently done when a company has already had a few rounds of venture financing but has not been able to successfully increase the value of the company and therefore is doing a Down Round that is essentially a restart of the company.

Replacement cost: Cost to replace a firm’s assets.

Replacement cycle: The frequency with which an asset is replaced by an equivalent asset.

Replacement value: Current cost of replacing the firm’s assets.

Replacementchain problem: Idea that future replacement decisions must be taken into account in selecting among projects.

Reproducible assets: A tangible asset with physical properties that can be reproduced, such as a building or machinery.

Repurchase agreement: An agreement with a commitment by the seller (dealer) to buy a security back from the purchaser (customer) at a specified price at a designated future date. Also called a repo, it represents a collateralized short-term loan, where the collateral may be a Treasury security, money market instrument, federal agency security, or mortgage-backed security. From the purchaser (customer) perspective, the deal is reported as a reverse Repo.

Repurchase of stock: Device to pay cash to firm’s shareholders that provides more preferable tax treatment for shareholders than dividends. Treasury stock is the name given to previously issued stock that has been repurchased by the firm. A repurchase is achieved through either a dutch auction, open market, or tender offer.

Required reserves: The dollar amounts based on reserve ratios that banks are required to keep on deposit at a Federal Reserve Bank.

Required return: The minimum expected return you would require to be willing to purchase the asset, that is, to make the investment.

Required yield: Generally referring to bonds, the yield required by the marketplace to match available returns for financial instruments with comparable risk.

Reserve: An accounting entry that properly reflects the contingent liabilities.

Reserve ratios: Specified percentages of deposits, established by the Federal Reserve Board, that banks must keep in a non-interest-bearing account at one of the twelve Federal Reserve Banks.

Reserve requirements: The percentage of different types of deposits that member banks are required to hold on deposit at the Fed.

Residuals: (1) Parts of stock returns not explained by the explanatory variable (the market-index return). They measure the impact of firm-specific events during a particular period. (2) Remainder cash flows generated by pool collateral and those needed to fund bonds supported by the collateral.

Residual assets: Assets that remain after sufficient assets are dedicated to meet all senior debtholder’s claims in full.

Residual losses: Lost wealth of the shareholders due to divergent behavior of the managers.

Residual method: A method of allocating the purchase price for the acquisition of another firm among the acquired assets.

Residual risk: Related: unsystematic risk

Residual value: Usually refers to the value of a lessor’s property at the time the lease expires.

Resistance level: A price level above which it is supposedly difficult for a security or market to rise.

Restricted Securities: Public securities that are not freely tradable due to SEC regulations. (See Securities and Exchange Commission)

Restricted Shares: Shares acquired in a private placement are considered restricted shares and may not be sold in a public offering absent registration, or after an appropriate holding period has expired. Non-affiliates must wait one year after purchasing the shares, after which time they may sell less than 1% of their outstanding shares each quarter. For affiliates, there is a two-year holding period.

Restrictive covenants: Provisions that place constraints on the operations of borrowers, such as restrictions on working capital, fixed assets, future borrowing, and payment of dividend.

Retained earnings: Accounting earnings that are retained by the firm for reinvestment in its operations; earnings that are not paid out as dividends.

Retention rate: The percentage of present earnings held back or retained by a corporation, or one minus the dividend payout rate. Also called the retention ratio.

Retire: To extinguish a security, as in paying off a debt.

Retracement: A price movement in the opposite direction of the previous trend.

Return: The change in the value of a portfolio over an evaluation period, including any distributions made from the portfolio during that period.

Return on assets (ROA): Indicator of profitability. Determined by dividing net income for the past 12 months by total average assets. Result is shown as a percentage. ROA can be decomposed into return on sales (net income/sales) multiplied by asset utilization (sales/assets).

Return on equity (ROE): Indicator of profitability. Determined by dividing net income for the past 12 months by common stockholder equity (adjusted for stock splits). Result is shown as a percentage. Investors use ROE as a measure of how a company is using its money. ROE may be decomposed into return on assets (ROA) multiplied by financial leverage (total assets/total equity).

Return on investment (ROI): Generally, book income as a proportion of net book value.

Return on total assets: The ratio of earnings available to common stockholders to total assets.

Revlon Duties: The legal principle that actions, such as anti-takeover measures, that promote the value of an auction process are allowable, whereas those that thwart the value of an auction process are not allowed. The duty is triggered when a company is in play as a target acquisition.

Revolving credit agreement: A legal commitment wherein a bank promises to lend a customer up to a specified maximum amount during a specified period.

Revolving line of credit: A bank line of credit on which the customer pays a commitment fee and can take down and repay funds according to his needs. Normally the line involves a firm commitment from the bank for a period of several years.

Right of First Refusal: The right of first refusal gives the holder the right to meet any other offer before the proposed contract is accepted.

Rights Offering: Issuance of “rights” to current shareholders allowing them to purchase additional shares, usually at a discount to market price. Shareholders who do not exercise these rights are usually diluted by the offering. Rights are often transferable, allowing the holder to sell them on the open market to others who may wish to exercise them. Rights offerings are particularly common to closed-end funds, which cannot otherwise issue additional ordinary shares.

Risk: Typically defined as the standard deviation of the return on total investment. Degree of uncertainty of return on an asset.

Risk: The chance of loss on an investment due to many factors including inflation, interest rates, default, politics, foreign exchange, call provisions, etc. In Private Equity, risks are outlined in the Risk Factors section of the Placement Memorandum.

Riskadjusted profitability: A probability used to determine a “sure” expected value (sometimes called a certainty equivalent) that would be equivalent to the actual risky expected value.

Risk arbitrage: Speculation on perceived mispriced securities, usually in connection with merger and acquisition deals. Mike Donatelli, John Demasi, Frank Cohane, and Scott Lewis are all hardcore arbs. They had a huge BT/MCI position in the summer of 1997, and came out smelling like roses.

Risk averse: A risk-averse investor is one who, when faced with two investments with the same expected return but two different risks, prefers the one with the lower risk.

Risk classes: Groups of projects that have approximately the same amount of risk.

Risk controlled arbitrage: A self-funding, self-hedged series of transactions that generally utilize mortgage securities as the primary assets.

Risk indexes: Categories of risk used to calculate fundamental beta, including (1) market variability, (2) earnings variability, (3) low valuation, (4) immaturity and smallness, (5) growth orientation, and (6) financial risk.

Risk management: The process of identifying and evaluating risks and selecting and managing techniques to adapt to risk exposures.

Risk premium: The reward for holding the risky market portfolio rather than the risk-free asset. The spread between Treasury and non-Treasury bonds of comparable maturity.

Risk premium approach: The most common approach for tactical asset allocation to determine the relative valuation of asset classes based on expected returns.

Riskless rate: The rate earned on a riskless investment, typically the rate earned on the 90-day U.S. Treasury Bill.

Riskless rate of return: The rate earned on a riskless asset.

Riskless arbitrage: The simultaneous purchase and sale of the same asset to yield a profit.

Riskless or risk-free asset: An asset whose future return is known today with certainty. The risk free asset is commonly defined as short-term obligations of the U.S. government.

Risk-adjusted return: Return earned on an asset normalized for the amount of risk associated with that asset.

Risk-free asset: An asset whose future return is known today with certainty.

Risk-free rate: The rate earned on a riskless asset.

R squared (R2): Square of the correlation coefficientthe proportion of the variability in one series that can be explained by the variability of one or more other series.

Rule 144: Rule 144 provides for the sale of restricted stock and control stock. Filing with the SEC is required prior to selling restricted and control stock, and the number of shares that may be sold is limited.

Rule 144A: A safe harbor exemption from the registration requirements of Section 5 of the 1933 Act for resales of certain restricted securities to qualified institutional buyers, which are commonly referred to as “QIBs.” In particular, Rule 144A affords safe harbor treatment for reoffers or resales to QIBs – by persons other than issuers – of securities of domestic and foreign issuers that are not listed on a U.S. securities exchange or quoted on a U.S. automated inter-dealer quotation system. Rule 144A provides that reoffers and resales in compliance with the rule are not “distributions” and that the reseller is therefore not an “underwriter” within the meaning of Section 2(a)(11) of the 1933 Act. If the reseller is not the issuer or a dealer, it can rely on the exemption provided by Section 4(1) of the 1933 Act. If the reseller is a dealer, it can rely on the exemption provided by Section 4(3) of the 1933 Act.

Rule 147: Provides an exemption from the registration requirements of the Securities Act of 1933 for intrastate offerings, if certain requirements are met. One requirement is that 100% of the purchasers must be from within one state.

Rule 501: Rule 501 of Regulation D defines Accredited Investor.

Rule 504: Company can raise up to $1 million in any 12-month period from any number or investors provided that the company does not advertise the sale. There are restricitions on the resale of the securities, but there is no requirement of disclosure. Investors need not to be sophisticated nor is any formal private offering memorandum required. However, offering is subject to the general antifraud provisions of the federal securites laws requiring that all material information be accurately presented to purchasers.

Rule 505: Rule 505 of Regulation D is an exemption for limited offers and sales of securities not exceeding $5,000,000. Company can raise up to $5 million in a 12-month period. Security sales can be made to an unlimited number of accredited investor plus 35 additional investors. Disclosure documents, i.e. a private placement memorandum, must be delivered to all non-accredited investors. If dealing with accredited investors, the number of these is unlimited, but there is no advertising allowed.

Rule 506: Rule 506 of Regulation D is considered a “safe harbor” for the private offering exemption of Section 4(2) of the Securities Act of 1933. Companies using the Rule 506 exemption can raise an unlimited amount of money if they meet certain exemptions. No more than 35 non-accredited investors can be involved, and all must be sophisticated. Sellers are restricted from general solicitation and advertising of the sale.

– S – 

S Corporation: A corporation that limits its ownership structure to 100 shareholders and disallows certain types of shareholders [e.g. partnerships cannot hold shares in a S corporation.] An S corporation does not pay taxes, rather, similar to a partnership, its owners pay taxes on their proportion of the corporation’s profits at their individual tax rates.

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.

Sale and leaseback: Sale of an existing asset to a financial institution that then leases it back to the user. Related: lease.

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.

SBIC: Small Business Investment Company. A company licensed by the Small Business Administration to receive government leverage in order to raise capital to use in venture investing.

SBIR: Small Business Innovation Research Program. See Small Business Innovation Development Act of 1982.

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.

Secondary funds: Partnerships that specialize in purchasing the portfolios of investee company investments of an existing venture firm. This type of partnership provides some liquidity for the original investors. These secondary partnerships, expecting a large return, invest in what they consider to be undervalued companies. The big difference is that they are buying their interests in a fund after the fund has been at least partially deployed in underlying portfolio companies. Unlike fund of fund managers, which generally invest in blind pools, secondary buyers can evaluate the underlying companies that they are indirectly investing in.

Secondary Market: The market for the sale of partnership interests in private equity funds. Sometimes limited partners chose to sell their interest in a partnership, typically to raise cash or because they cannot meet their obligation to invest more capital according to the takedown schedule. Certain investment companies specialize in buying these partnership interests at a discount.

Secondary Sale: The sale of private or restricted holdings in a portfolio company to other investors. See secondary market definition.

Secured debt: Debt that, in the event of default, has first claim on specified assets.

Securities Act of 1933: The federal law covering new issues of securities. It provides for full disclosure of pertinent information relating to the new issue and also contains antifraud provisions.

Securities Act of 1934: The federal law that established the Securities and Exchange Commission. The act outlaws misrepresentation, manipulation and other abusive practices in the issuance of securities.

Securities & Exchange Commission: The SEC is a federal agency that regulates the markets.

Securities and Exchange Commission: The SEC is an independent, nonpartisan, quasi-judicial regulatory agency that is responsible for administering the federal securities laws. These laws protect investors in securities markets and ensure that investors have access to all material information concerning publicly traded securities. Additionally, the SEC regulates firms that trade securities, people who provide investment advice, and investment companies.

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 deposit: Synonymous with the term margin. A cash amount of funds that must be deposited as a guarantee.  It is not considered as part payment or purchase.

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.

Seed Money: The first round of capital for a start-up business. Seed money usually takes the structure of a loan or an investment in preferred stock or convertible bonds, although sometimes it is common stock. Seed money provides startup companies with the capital required for their initial development and growth. Angel investors and early-stage venture capital funds often provide seed money.

Seed Stage Financing: An initial state of a company’s growth characterized by a founding management team, business plan development, prototype development, and beta testing.

Series A – first round of institutional investment capital

Series B – second round of institutional investment capital

Series C – third round of institutional investment capital

Senior debt: Debt that, in the event of bankruptcy, must be repaid before subordinated debt receives any payment.

Senior Securities: Securities that have a preferential claim over common stock on a company’s earnings and in the case of liquidation.  Generally, preferred stock and bonds are considered senior securities.

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.

Series A Preferred Stock: The first round of stock offered during the seed or early stage round by a portfolio company to the venture investor or fund. This stock is convertible into common stock in certain cases such as an IPO or the sale of the company. Later rounds of preferred stock in a private company are called Series B, Series C and so on.

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’ 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

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.

Shell Corporation: A corporation with no assets and no business. Typically, shell corporations are designed for the purpose of going public and later acquiring existing businesses. Also known as Specified Purpose Acquisition Companies (SPACs).

Shortrun 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.

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.

Singleindex model: Related: market model

Skewed distribution: Probability distribution in which an unequal number of observations lie below and above the mean.

Small Business Administration (SBA): Provides loans to small business investment companies (SBICs) that supply venture capital and financing to small businesses.

Small Business Innovation Development Act of 1982: The Small Business Innovation Research (SBIR) program is a set-aside program (2.5% of an agency’s extramural budget) for domestic small business concerns to engage in Research/Research and Development (R/R&D) that has the potential for commercialization. The SBIR program was established under the Small Business Innovation Development Act of 1982 (P.L. 97-219), reauthorized until September 30, 2000 by the Small Business Research and Development Enhancement Act (P.L. 102-564), and reauthorized again until September 30, 2008 by the Small Business Reauthorization Act of 2000 (P.L. 106-554).

Special purpose vehicle: A special company, usually outside the United States, established by a company to meet a specific financial problem, often to pay lower taxes (e.g., a reinvoicing subsidiary or offshore insurance company).

Spin out: A division or subsidiary of a company that becomes an independent business. Typically, private equity investors will provide the necessary capital to allow the division to “spin out” on its own; the parent company may retain a minority stake.

Staggered Board: This is an antitakeover measure in which the election of the directors is split in separate periods so that only a percentage (e.g. one-third) of the total number of directors come up for election in a given year. It is designed to make taking control of the board of directors more difficult.

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.

Statutory Voting: A method of voting for members of the Board of Directors of a corporation. Under this method, a shareholder receives one vote for each share and may cast those votes for each of the directorships. For example: An individual owning 100 shares of stock of a corporation that is electing six directors could cast 100 votes for each of the six candidates. This method tends to favor the larger shareholders. Compare Cumulative Voting.

Stochastic models: Liability-matching models that assume that the liability payments and the asset cash flows are uncertain. Related: Deterministic models.

Stock Options: 1) The right to purchase or sell a stock at a specified price within a stated period. Options are a popular investment medium, offering an opportunity to hedge positions in other securities, to speculate on stocks with relatively little investment, and to capitalize on changes in the market value of options contracts themselves through a variety of options strategies. 2) A widely used form of employee incentive and compensation. The employee is given an option to purchase its shares at a certain price (at or below the market price at the time the option is granted) for a specified period of years.

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.

Stockholder’s equity: The residual claims that stockholders have against a firm’s assets, calculated by subtracting total liabilities from total assets.

Straight line depreciation: An equal dollar amount of depreciation in each accounting period.

Strategic Investors: Corporate or individual investors that add value to investments they make through industry and personal ties that can assist companies in raising additional capital as well as provide assistance in the marketing and sales process.

Structured debt: Debt that has been customized for the buyer, often by incorporating unusual options.

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.

Subordinated Debt: Debt with inferior liquidation privileges to senior debt in case of a bankruptcy; sub debt will carry higher interest rates than senior debt, to which it is subordinated, to compensate for the added risk, and will typically have attached warrants or equity conversion features.

Subscription Agreement: The application submitted by an investor wishing to join a limited partnership. All prospective investors must be approved by the General Partner prior to admission as a partner.

Sweat Equity: Ownership of shares in a company resulting from work rather than investment of capital–usually founders receive “sweat equity”.

Syndicate: Underwriters or broker/dealers who sell a security as a group. (See Allocation).

Syndication : A number of investors offering funds together as a group on a particular deal. A lead investor often coordinates such deals and represents the group’s members. Within the last few years, syndication among angel investors (an angel alliance) has become more common, enabling them to fund larger deals closer to those typifying a small venture capital fund.

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.

– T –

T-period holding-period return: The percentage return over the T-year period an investment lasts.

Tactical Asset Allocation (TAA): An asset allocation strategy that allows active departures from the normal asset mix based upon rigorous objective measures of value. Often called active management. It involves forecasting asset returns, volatilities and correlations. The forecasted variables may be functions of fundamental variables, economic variables or even technical variables.

Tag-Along Rights / Rights of Co-Sale: A minority shareholder protection affording the right to include their shares in any sale of control and at the offered price.

Tail: (1) The difference between the average price in Treasury auctions and the stopout price. (2) A future money market instrument (one available some period hence) created by buying an existing instrument and financing the initial portion of its life with a term repo. (3) The extreme end under a probability curve. (4) The odd amount in a MBS pool.

Take: (1) A dealer or customer who agrees to buy at another dealer’s offered price is said to take that offer. (2) Also, Euro bankers speak of taking deposits rather than buying money.

Take a position: To buy or sell short; that is, to have some amount that is owned or owed on an asset or derivative security.

Take-or-pay contract: A contract that obligates the purchaser to take any product that is offered to it (and pay the cash purchase price) or pay a specified amount if it refuses to take the product.

Take-out: A cash surplus generated by the sale of one block of securities and the purchase of another, e.g. selling a block of bonds at 99 and buying another block at 95. Also, a bid made to a seller of a security that is designed (and generally agreed) to take him out of the market.

Take-up fee: A fee paid to an underwriter in connection with an underwritten rights offering or an underwritten forced conversion as compensation for each share of common stock he underwriter obtains and must resell upon the exercise of rights or conversion of bonds.

Takedown Schedule: A takedown schedule means the timing and size of the capital contributions from the limited partners of a venture fund.

Takeover: General term referring to transfer of control of a firm from one group of shareholder’s to another group of shareholders.

Taking a view: A London expression for forming an opinion as to where market prices are headed and acting on it.

Taking delivery: Refers to the buyer’s actually assuming possession from the seller of the asset agreed upon in a forward contract or a futures contract.

Tandem programs: Under Ginnie Mae, mortgage funds provided at below-market rates to residential mortgage buyers with FHA Section 203 and 235 loans and to developers of multifamily projects with Section 236 loans initially and later with Section 221(d)(4) loans.

TANs (tax anticipation notes): Tax anticipation notes issued by states or municipalities to finance current operations in anticipation of future tax receipts.

Tangible asset: An asset whose value depends on particular physical properties. These i nclude reproducible assets such as buildings or machinery and non-reproducible assets such as land, a mine, or a work of art. Also called real assets. Related: Intangible asset

Target cash balance: Optimal amount of cash for a firm to hold, considering the trade-off between the opportunity costs of holding too much cash and the trading costs of holding too little cash.

Target firm: A firm that is the object of a takeover by another firm.

Target Multiples: The desired return on investment of private investors in early stage companies, defined in a multiple of the original investment.

Target payout ratio: A firm’s long-run dividend-to-earnings ratio. The firm’s policy is to attempt to pay out a certain percentage of earnings, but it pays a stated dollar dividend and adjusts it to the target as base-line increases in earnings occur.

Target zone arrangement: A monetary system under which countries pledge to maintain their exchange rates within a specific margin around agreed-upon, fixed central exchange rates.

Targeted repurchase: The firm buys back its own stock from a potential bidder, usually at a substantial premium, to forestall a takeover attempt.

Tax-free reorganizations: Types of business combinations in which shareholders do not incur tax liabilities. There are four types-A, B, C, and D reorganizations. They differ in various ways in the amount of stock/cash that can be offered. See Internal Revenue Code Section 368.

Tax anticipation bills (TABs): Special bills that the Treasury occasionally issues that mature on corporate quarterly income tax dates and can be used at face value by corporations to pay their tax liabilities.

Tax books: Set of books kept by a firm’s management for the IRS that follows IRS rules. The stockholder’s books follow Financial Accounting Standards Board rules.

Tax clawback agreement: An agreement to contribute as equity to a project the value of all previously realized project-related tax benefits not already clawed back to the extent required to cover any cash deficiency of the project.

Tax differential view ( of dividend policy): The view that shareholders prefer capital gains over dividends, and hence low payout ratios, because capital gains are effectively taxed at lower rates than dividends.

Tax-exempt sector: The municipal bond market where state and local governments raise funds. Bonds issued in this sector are exempt from federal income taxes.

Tax free acquisition: A merger or consolidation in which 1) the acquirer’s tax basis in each asset whose ownership is transferred in the transaction is generally the same as the acquiree’s, and 2) each seller who receives only stock does not have to pay any tax on the gain he realizes until the shares are sold.

Tax haven: A nation with a moderate level of taxation and/or liberal tax incentives for undertaking specific activities such as exporting or investing.

Tax Reform Act of 1986: A 1986 law involving a major overhaul of the U.S. tax code.

Tax shield: The reduction in income taxes that results from taking an allowable deduction from taxable income.

Tax swap: Swapping two similar bonds to receive a tax benefit.

Tax deferral option: The feature of the U.S. Internal Revenue Code that the capital gains tax on an asset is payable only when the gain is realized by selling the asset.

Tax-deferred retirement plans: Employer-sponsored and other plans that allow contributions and earnings to be made and accumulate tax-free until they are paid out as benefits.

Tax-timing option: The option to sell an asset and claim a loss for tax purposes or not to sell the asset and defer the capital gains tax.

Taxable acquisition: A merger or consolidation that is not a tax-fee acquisition. The selling shareholders are treated as having sold their shares.

Taxable income: Gross income less a set of deductions.

Taxable transaction: Any transaction that is not tax-free to the parties involved, such as a taxable acquisition.

TBA (to be announced): A contract for the purchase or sale of a MBS to be delivered at an agreed-upon future date but does not include a specified pool number and number of pools or precise amount to be delivered.

Technical analysis: Security analysis that seeks to detect and interpret patterns in past security prices.

Technical analysts: Also called chartists or technicians, analysts who use mechanical rules to detect changes in the supply of and demand for a stock and capitalize on the expected change.

Technical condition of a market: Demand and supply factors affecting price, in particular the net position, either long or short, of the dealer community.

Technical descriptors: Variables that are used to describe the market on a technical basis.

Technical insolvency: Default on a legal obligation of the firm. For example, technical insolvency occurs when a firm doesn’t pay a bill.

Technician: Related: technical analysts

TED spread: Difference between U.S. Treasury bill rate and eurodollar rate; used by some traders as a measure of investor/trader anxiety.

Temporal method: Under this currency translation method, the choice of exchange rate depends on the underlying method of valuation. Assets and liabilities valued at historical cost (market cost) are translated at the historical (current market) rate.

Tender: To offer for delivery against futures.

Tender offer: General offer made publicly and directly to a firm’s shareholders to buy their stock at a price well above the current market price.

Tender offer: An offer to purchase stock made directly to the shareholders. One of the more common ways hostile takeovers are implemented.

Tender offer premium: The premium offered above the current market price in a tender offer.

10-K: Annual report required by the SEC each year. Provides a comprehensive overview of a company’s state of business. Must be filed within 90 days after fiscal year end. A 10Q report is filed quarterly.

Tenor: Maturity of a loan.

Term bonds: Often referred to as bullet-maturity bonds or simply bullet bonds, bonds whose principal is payable at maturity. Related: serial bonds.

Term bonds: Often referred to as bullet-maturity bonds or simply bullet bonds, bonds whose principal is payable at maturity. Compare to: Serial bonds.

Term Fed Funds: Fed Funds sold for a period of time longer than overnight.

Term insurance: Provides a death benefit only, no build-up of cash value.

Term life insurance: A contract that provides a death benefit but no cash build-up or investment component. The premium remains constant only for a specified term of years, and the policy is usually renewable at the end of each term.

Term to maturity: The time remaining on a bond’s life, or the date on which the debt will cease to exist and the borrower will have completely paid off the amount borrowed. See: Maturity.

Term premiums: Excess of the yields to maturity on long-term bonds over those of short-term bonds.

Term repo: A repurchase \agreement with a term of more than one day.

Terms of sale: Conditions on which a firm proposes to sell its goods services for cash or credit.

Term Sheet: Term sheet for equity offering.

Terms of trade: The weighted average of a nation’s export prices relative to its import prices.

Term trust: A closed-end fund that has a fixed termination or maturity date.

Terminal value: The value of a bond at maturity, typically its par value, or the value of an asset (or an entire firm) on some specified future valuation date.

Theoretical futures price: Also called the fair price, the equilibrium futures price.

Theoretical spot rate curve: A curve derived from theoretical considerations as applied to the yields of actually traded Treasury debt securities because there are no zero-coupon Treasury debt issues with a maturity greater than one year. Like the yield curve, this is a graphical depiction of the term structure of interest rates.

Theta: Also called time decay, the ratio of the change in an option price to the decrease in time to expiration.

Thin market: A market in which trading volume is low and in which consequently bid and asked quotes are wide and the liquidity of the instrument traded is low.

Thinly traded: Infrequently traded.

Third market: Exchange-listed securities trading in the OTC market.

Threephase DDM: A version of the dividend discount model which applies a different expected dividend rate depending on a company’s life-cycle phase, growth phase, transition phase, or maturity phase.

Threshold for refinancing: The point when the WAC of an MBS is at a level to induce homeowners to prepay the mortgage in order to refinance to a lower-rate mortgage, generally reached when the WAC of the MBS is 2% or more above currently available mortgage rates.

Throughput agreement: An agreement to put a specified amount of product per period through a particular facility. For example, an agreement to ship a specified amount of crude oil per period through a particular pipeline.

Tick: Refers to the minimum change in price a security can have, either up or down. Related: point.

Tick indicator: A market indicator based on the number of stocks whose last trade was an uptick or a downtick. Used as an indicator of market sentiment or psychology to try to predict the market’s trend.

Ticktest rules: SEC-imposed restrictions on when a short sale may be executed, intended to prevent investors from destabilizing the price of a stock when the market price is falling. A short sale can be made only when either (1) the sale price of the particular stock is higher than the last trade price (referred to as an uptick trade) or (2) if there is no change in the last trade price of the particular stock, the previous trade price must be higher than the trade price that preceded it (referred to as a zero uptick).

Tight market: A tight market, as opposed to a thin market, is one in which volume is large, trading is active and highly competitive, and spreads between bid and ask prices are narrow.

Tilted portfolio: An indexing strategy that is linked to active management through the emphasis of a particular industry sector, selected performance factors such as earnings momentum, dividend yield, price-earnings ratio, or selected economic factors such as interest rates and inflation.

Time decay: Related: theta.

Time deposit: Interest-bearing deposit at a savings institution that has a specific maturity. Related: certificate of deposit.

Time draft: Demand for payment at a stated future date.

Time premium: Also called time value, the amount by which the option price exceeds its intrinsic value. The value of an option beyond its current exercise value representing the optionholder’s control until expiration, the risk of the underlying asset, and the riskless return.

Time until expiration: The time remaining until a financial contract expires. Also called time to maturity.

Time to maturity: The time remaining until a financial contract expires. Also called time until expiration.

Time value of an option: The portion of an option’s premium that is based on the amount of time remaining until the expiration date of the option contract, and that the underlying components that determine the value of the option may change during that time. Time value is generally equal to the difference between the premium and the intrinsic value. Related: in-the-money.

Time value of money: The idea that a dollar today is worth more than a dollar in the future, because the dollar received today can earn interest up until the time the future dollar is received.

Time Value of Money: The basic principle that money can earn interest, therefore something that is worth $1 today will be worth more in the future if invested. This is also referred to as future value.

Time-weighted rate of return: Related: Geometric mean return.

Times-interest-earned ratio: Earnings before interest and tax, divided by interest payments.

Timing option: For a Treasury Bond or note futures contract, the seller’s choice of when in the delivery month to deliver.

Tobin’s Q: Market value of assets divided by replacement value of assets. A Tobin’s Q ratio greater than 1 indicates the firm has done well with its investment decisions.

Tolling agreement: An agreement to put a specified amount of raw material per period through a particular processing facility. For example, an agreement to process a specified amount of alumina into aluminum at a particular aluminum plant.

Tom next: In the interbank market in Eurodollar deposits and the foreign exchange market, the value (delivery) date on a Tom next transaction is the next business day. Refers to “tomorrow next.”

Tombstone: Advertisement listing the underwriters to a security issue.

Top-down equity management style: A management style that begins with an assessment of the overall economic environment and makes a general asset allocation decision regarding various sectors of the financial markets and various industries. The bottom-up manager, in contrast, selects the specific securities within the favored sectors.

Total asset turnover: The ratio of net sales to total assets.

Total debt to equity ratio: A capitalization ratio comparing current liabilities plus long-term debt to shareholders’ equity.

Total dollar return: The dollar return on a nondollar investment, which includes the sum of any dividend/interest income, capital gains or losses, and currency gains or losses on the investment. See also: total return.

Total return: In performance measurement, the actual rate of return realized over some evaluation period. In fixed income analysis, the potential return that considers all three sources of return (coupon interest, interest on interest, and any capital gain/loss) over some i nvestment horizon.

Total revenue: Total sales and other revenue for the period shown. Known as “turnover” in the UK.

Tracking error: In an indexing strategy, the difference between the performance of the benchmark and the replicating portfolio.

Trade: A verbal (or electronic) transaction involving one party buying a security from another party. Once a trade is consummated, it is considered “done” or final. Settlement occurs 1-5 business days later.

Trade acceptance: Written demand that has been accepted by an industrial company to pay a given sum at a future date. Related: banker’s acceptance.

Trade credit: Credit granted by a firm to another firm for the purchase of goods or services.

Trade date: In an interest rate swap, the date that the counterparties commit to the swap. Also, the date on which a trade occurs. Trades generally settle (are paid for) 1-5 business days after a trade date. With stocks, settlement is generally 3 business days after the trade.

Trade debt: Accounts payable.

Trade draft: A draft addressed to a commercial enterprise. See:draft.

Trade on top of: Trade at a narrow or no spread in basis points relative to some other bond yield, usually Treasury bonds.

Trade house: A firm which deals in actual commodities.

Trade sale: The sale of the equity share of a portfolio company to another company.

Traders: Persons who take positions in securities and their derivatives with the objective of making profits. Traders can make markets by trading the flow. When they do that, their objective is to earn the bid/ask spread. Traders can also be of the sort who take proprietary positions whereby they seek to profit from the directional movement of prices or spread positions.

Trading: Buying and selling securities.

Trading costs: Costs of buying and selling marketable securities and borrowing. Trading costs include commissions, slippage, and the bid/ask spread. See: transaction costs.

Trading halt: Trading of a stock, bond, option or futures contract can be halted by an exchange while news is being broadcast about the security.

Trading paper: CDs purchased by accounts that are likely to resell them. The term is commonly used in the Euromarket.

Trading posts: The posts on the floor of a stock exchange where the specialists stand and securities are traded.

Trading range: The difference between the high and low prices traded during a period of time; with commodities, the high/low price limit established by the exchange for a specific commodity for any one day’s trading.

Traditional view (of dividend policy): An argument that “within reason,” investors prefer large dividends to smaller dividends because the dividend is sure but future capital gains are uncertain.

Tranche: One of several related securities offered at the same time. Tranches from the same offering usually have different risk, reward, and/or maturity characteristics.

Tranche: Funds flowing from investors to a company that represent a partial round or an “early close.” Subsequent funds of the single round are generally under the same terms and conditions as the first tranche (or early close), however, those funding the early tranches may recive bonus warrant coverage, in consideration of the additional risk. (a French word meaning a slice or cutting)

Transaction exposure: Risk to a firm with known future cash flows in a foreign currency that arises from possible changes in the exchange rate. Related:translation exposure.

Transactions costs: The time, effort, and money necessary, including such things as commission fees and the cost of physically moving the asset from seller to buyer. Related: Round-trip transaction costs, Information costs, search costs.

Transaction loan: A loan extended by a bank for a specific purpose. In contrast, lines of credit and revolving credit agreements involve loans that can be used for various purposes.

Transaction demand (for money): The need to accommodate a firm’s expected cash transactions.

Transactions motive: A desire to hold cash for the purpose of conducting cash based transactions.

Transfer agent: Individual or institution appointed by a company to look after the transfer of securities.

Transfer price: The price at which one unit of a firm sells goods or services to another unit of the same firm.

Transferable put right: An option issued by the firm to its shareholders to sell the firm one share of its common stock at a fixed price (the strike price) within a stated period (the time to maturity). The put right is “transferable” because it can be traded in the capital markets.

Transition phase: A phase of development in which the company’s earnings begin to mature and decelerate to the rate of growth of the economy as a whole. Related: three-phase DDM.

Translation exposure: Risk of adverse effects on a firm’s financial statements that may arise from changes in exchange rates. Related: transaction exposure.

Treasurer: The corporate officer responsible for designing and implementing many of the firm’s financing and investing activities.

Treasurer’s check: A check issued by a bank to make a payment. Treasurer’s checks outstanding are counted as part of a bank’s reservable depostits and as part of the money supply.

Treasuries: Related: treasury securities.

Treasury bills: Debt obligations of the U.S. Treasury that have maturities of one year or less. Maturities for T-bills are usually 91 days, 182 days, or 52 weeks.

Treasury bonds: debt obligations of the U.S. Treasury that have maturities of 10 years or more.

Treasury notes: Debt obligations of the U.S. Treasury that have maturities of more than 2 years but less than 10 years.

Treasury securities: Securities issued by the U.S. Department of the Treasury.

Treasury stock: Common stock that has been repurchased by the company and held in the company’s treasury.

Treasury Stock: Stock issued by a company but later reacquired. It may be held in the company’s treasury indefinitely, reissued to the public, or retired. Treasury stock receives no dividends and does not carry voting power while held by the company.

Trend: The general direction of the market.

Treynor Index: A measure of the excess return per unit of risk, where excess return is defined as the difference between the portfolio’s return and the risk-free rate of return over the same evaluation period and where the unit of risk is the portfolio’s beta.

Triangular arbitrage: Striking offsetting deals among three markets simultaneously to obtain an arbitrage profit.

Triple witching hour: The four times a year that the S&P futures contract expires at the same time as the S&P 100 index option contract and option contracts on individual stocks.

Trough: The transition point between economic recession and recovery.

True interest cost: For a security such as commercial paper that is sold on a discount basis, the coupon rate required to provide an identical return assuming a coupon-bearing instrument of like maturity that pays interest in arrears.

True lease: A contract that qualifies as a valid lease agreement under the Internal Revenue code.

Trust deed: Agreement between trustee and borrower setting out terms of bond.

Trust receipt: Receipt for goods that are to be held in trust for the lender.

TT&L account: Treasury tax and loan account at a bank.

Turnaround: Securities bought and sold for settlement on the same day. Also, when a firm that has been performing poorly changes its financial course and improves its performance.

Turnaround time: Time available or needed to effect a turnaround.

Turnkey construction contract: A type of construction contract under which the construction firm is obligated to complete a project according to prespecified criteria for a price that is fixed at the time the contract is signed.

Turnover: Mutual Funds: A measure of trading activity during the previous year, expressed as a percentage of the average total assets of the fund. A turnover ratio of 25% means that the value of trades represented one-fourth of the assets of the fund. Finance: The number of times a given asset, such as inventory, is replaced during the accounting period, usually a year. Corporate: The ratio of annual sales to net worth, representing the extent to which a company can growth without outside capital. Markets: The volume of shares traded as a percent of total shares listed during a specified period, usually a day or a year. Great Britain: total revenue.

12B-1 fees: The percent of a mutual fund’s assets used to defray marketing and distribution expenses. The amount of the fee is stated in the fund’s prospectus. The SEC has recently proposed that 12B-1 fees in excess of 0.25% be classed as a load. A true ” no load” fund has neither a sales charge nor 12b-1 fee.

12b-1 funds: Mutual funds that do not charge an upfront or back-end commission, but instead take out up to 1.25% of average daily fund assets each year to cover the costs of selling and marketing shares, an arrangement allowed by the SEC’s Rule 12b-I (passed in 1980).

Two-factor model: Black’s zero-beta version of the capital asset pricing model.

Two-fund separation theorem: The theoretical result that all investors will hold a combination of the risk-free asset and the market portfolio.

Two-sided market: A market in which both bid and asked prices, good for the standard unit of trading, are quoted.

Two-state option pricing model: An option pricing model in which the underlying asset can take on only two possible (discrete) values in the next time period for each value it can take on in the preceding time period. Also called the binomial option pricing model.

Two-tier tax system: A method of taxation in which the income going to shareholders is taxed twice. Type: The classification of an option contract as either a put or a call.

– U – 

UBTI: UBTI, Unrelated Business Taxable Income, is a concern to tax exempt investors in a hedge fund because the receipt of UBTI requires the tax exempt entity to file a tax return that it would not otherwise have to file and pay taxes on income that would otherwise be exempt, at the corporate rate. UBTI includes most business operations income and does not include interest, dividends and gains from the sale or exchange of capital assets. Hedge Funds trade their own securities and therefor the tax exempt investor’s share of such income of the hedge fund is not UBTI and not subject to federal income tax. However, hedge funds may subject tax exempt entities to UBTI under certain circumstances where the hedge fund is borrowing or purchasing securities on margin. Such transactions may subject the tax exempt to UBTI tax.

ULPA: Uniform Limited Partnership Act, see also the RULPA, Revised Uniform Limited Partnership Act U.L.P.A. § 101 et seq. (1976), as amended in 1985 (R.U.L.P.A.).

Unbiased predictor: A theory that spot prices at some future date will be equal to today’s forward rates.

Unbundling: When a multinational firm unbundles its transfer of funds into separate flows for specific purposes. See: bundling.

Uncovered call: A short call option position in which the writer does not own shares of underlying stock represented by his option contracts. Also called a “naked” call, it is much riskier for the writer than a covered call, where the writer owns the underlying stock. If the buyer of a call exercises the option to call, the writer would be forced to buy the stock at market price.

Uncovered put: A short put option position in which the writer does not have a corresponding short stock position or has not deposited, in a cash account, cash or cash equivalents equal to the exercise value of the put. Also called “naked” puts, the writer has pledged to buy the stock at a certain price if the buyer of the options chooses to exercise it. The nature of uncovered options means the writer’s risk is unlimited.

Underfunded pension plan: A pension plan that has a negative surplus (i.e., liabilities exceed assets).

Underinvestment problem: The mirror image of the asset substitution problem, wherein stockholders refuse to invest in low-risk assets to avoid shifting wealth from themselves to the debtholders.

Underlying: The “something” that the parties agree to exchange in a derivative contract.

Underlying asset: The asset that an option gives the option holder the right to buy or to sell.

Underlying security: Options: the security subject to being purchased or sold upon exercise of an option contract. For example, IBM stock is the underlying security to IBM options. Depository receipts: The class, series and number of the foreign shares represented by the depository receipt.

Underperform: When a security is expected to appreciate at a slower rate than the overall market.

Underpricing: Issue of securities below their market value.

Underwrite: To guarantee, as to guarantee the issuer of securities a specified price by entering into a purchase and sale agreement. To bring securities to market.

Underwriter: A party that guarantees the proceeds to the firm from a security sale, thereby in effect taking ownership of the securities. Or, stated differently, a firm, usually an investment bank, that buys an issue of securities from a company and resells it to investors.

Underwriting: Acting as the underwriter in a purchase and sale.

Underwriting fee: The portion of the gross underwriting spread that compensates the securities firms that underwrite a public offering for their underwriting risk.

Underwriting income: For an insurance company, the difference between the premiums earned and the costs of settling claims.

Underwriting syndicate: A group of investment banks that work together to sell new security offerings to investors. The underwriting syndicate is led by the lead underwriter. See also: lead underwriter.

Underwritten offering: A purchase and sale.

Undiversifiable risk: Related: Systematic risk

Unemployment rate: The ratio of the number of people classified as unemployed to the total labor force.

Unfunded debt: Debt maturing within one year (short-term debt). See: funded debt.

Unilateral transfers: Items in the current account of the balance of payments of a country’s accounting books that corresponds to gifts from foreigners or pension payments to foreign residents who once worked in the country whose balance of payments is being considered.

Unique risk: Also called unsystematic risk or idiosyncratic risk. Specific company risk that can be eliminated through diversification. See: diversifiable risk and unsystematic risk.

Unit benefit formula: Method used to determine a participant’s benefits in a defined benefit plan by multiplying years of service by the percentage of salary.

Unit investment trust: Money invested in a portfolio whose composition is fixed for the life of the fund. Shares in a unit trust are called redeemable trust certificates, and they are sold at a premium above net asset value.

Universal life: A whole life insurance product whose investment component pays a competitive interest rate rather than the below-market crediting rate.

Unleveraged beta: The beta of an unleveraged required return (i.e. no debt) on an investment when the investment is financed entirely by equity.

Unleveraged required return: The required return on an investment when the investment is financed entirely by equity (i.e. no debt).

Unlimited liability: Full liability for the debt and other obligations of a legal entity. The general partners of a partnership have unlimited liability.

Unmatched book: If the average maturity of a bank’s liabilities is less than that of its assets, it is said to be running an unmatched book. The term is commonly used with the Euromarket. Term also refers to the condition when a firm enters into OTC derivatives contracts and chooses to hedge that risk by not making trades in the opposite direction to another financial intermediary. In this case, the firm with an unmatched book hedges its net market risk with futures and options, usually. Related expressions: open book and short book.

Unseasoned issue: Issue of a security for which there is no existing market. See: seasoned issue.

Unsecured debt: Debt that does not identify specific assets that can be taken over by the debtholder in case of default.

Unsterilized intervention: Foreign exchange market intervention in which the monetary authorities have not insulated their domestic money supplies from the foreign exchange transactions.

Unsystematic risk: Also called the diversifiable risk or residual risk. The risk that is unique to a company such as a strike, the outcome of unfavorable litigation, or a natural catastrophe that can be eliminated through diversification. Related: Systematic risk

Upper quartile: The point at which 25% of all returns in a group are greater and 75% are lower.

Upstairs market: A network of trading desks for the major brokerage firms and institutional investors that communicate with each other by means of electronic display systems and telephones to facilitate block trades and program trades.

Uptick: A term used to describe a transaction that took place at a higher price than the preceding transaction involving the same security.

Uptick trade: Related:Tick-test rules

U.S. Treasury bill: U.S. government debt with a maturity of less than a year.

U.S. Treasury bond: U.S. government debt with a maturity of more than 10 years.

U.S. Treasury note: U.S. government debt with a maturity of one to 10 years.

Utility: The measure of the welfare or satisfaction of an investor or person.

Utility value: The welfare a given investor assigns to an investment with a particular return and risk.

Utility function: A mathematical expression that assigns a value to all possible choices. In portfolio theory the utility function expresses the preferences of economic entities with respect to perceived risk and expected return.

– V – 

Value-added tax: Method of indirect taxation whereby a tax is levied at each stage of production on the value added at that specific stage.

Value-at-Risk model (VAR): Procedure for estimating the probability of portfolio losses exceeding some specified proportion based on a statistical analysis of historical market price trends, correlations, and volatilities.

Value additivity principal: Prevails when the value of a whole group of assets exactly equals the sum of the values of the individual assets that make up the group of assets. Stated differently, the principle that the net present value of a set of independent projects is just the sum of the net present values of the individual projects.

Value date: In the market for Eurodollar deposits and foreign exchange, value date refers to the delivery date of funds traded. Normally it is on spot transactions two days after a transaction is agreed upon and the future date in the case of a forward foreign exchange trade.

Value dating: Refers to when value or credit is given for funds transferred between banks.

Value manager: A manager who seeks to buy stocks that are at a discount to their “fair value” and sell them at or in excess of that value. Often a value stock is one with a low price to book value ratio.

Vanilla issue: A security issue that has no unusual features.

Variable: A value determined within the context of a model. Also called endogenous variable.

Variable annuities: Annuity contracts in which the issuer pays a periodic amount linked to the investment performance of an underlying portfolio.

Variable cost: A cost that is directly proportional to the volume of output produced. When production is zero, the variable cost is equal to zero.

Variable life insurance policy: A whole life insurance policy that provides a death benefit dependent on the insured’s portfolio market value at the time of death. Typically the company invests premiums in common stocks, and hence variable life policies are referred to as equity-linked policies.

Variable price security: A security, such as stocks or bonds, that sells at a fluctuating, market-determined price.

Variable rate CDs: Short-term certificate of deposits that pay interest periodically on roll dates. On each roll date, the coupon on the CD is adjusted to reflect current market rates.

Variable rated demand bond (VRDB): Floating rate bond that can be sold back periodically to the issuer.

Variable rate loan: Loan made at an interest rate that fluctuates based on a base interest rate such as the Prime Rate or LIBOR.

Variance: A measure of dispersion of a set of data points around their mean value. The mathematical expectation of the squared deviations from the mean. The square root of the variance is the standard deviation.

Variance minimization approach to tracking: An approach to bond indexing that uses historical data to estimate the variance of the tracking error.

Variance rule: Specifies the permitted minimum or maximum quantity of securities that can be delivered to satisfy a TBA trade. For Ginnie Mae, Fannie Mae, and Feddie Mac pass-through securities, the accepted variance is plus or minus 2.499999 percent per million of the par value of the TBA quantity.

Variation margin: An additional required deposit to bring an investor’s equity account up to the initial margin level when the balance falls below the maintenance margin requirement.

Venture capital: An investment in a start-up business that is perceived to have excellent growth prospects but does not have access to capital markets. Type of financing sought by early-stage companies seeking to grow rapidly.

Venture Capital Financing: An investment in a startup business that is perceived to have excellent growth prospects but does not have access to capital markets. Type of financing sought by early-stage companies seeking to grow rapidly.

Venture Capitalist: A financial institution specializing in the provision of equity and other forms of long-term capital to enterprises, usually to firms with a limited track record but with the expectation of substantial growth. The venture capitalist may provide both funding and varying degrees of managerial and technical expertise.

Vertical acquisition: Acquisition in which the acquired firm and the acquiring firm are at different steps in the production process.

Vertical analysis: The process of dividing each expense item in the income statement of a given year by net sales to identify expense items that rise faster or slower than a change in sales.

Vertical merger: A merger in which one firm acquires another firm that is in the same industry but at another stage in the production cycle. For example, the firm being acquired serves as a supplier to the firm doing the acquiring.

Vertical spread: Simultaneous purchase and sale of two options that differ only in their exercise price. See: horizontal spread.

Vesting schedules: Timetables for stock grants and options mandating that entrepreneurs earn (vest) their equity stakes over a number of years, rather than upon conversion of the stock options. This guarantees to investors and the market that the entrepreneurs will stick around, rather than converting and cashing in their shares.

Vintage Year: The year in which the venture firm began making investments. Often, those funds with “vintage years” at the top of the market will have lower than average returns because portfolio company valuations were high, e.g an Internet Fund started in vintage year 1998.

Virtual currency option: A new option contract introduced by the PHLX in 1994 that is settled in US$ rather than in the underlying currency. These options are also called 3-Ds (dollar denominated delivery).

Visible supply: New muni bond issues scheduled to come to market within the next 30 days.

Volatility: A measure of risk based on the standard deviation of investment fund performance over 3 years. Scale is 1-9; higher rating indicates higher risk. Also, the standard deviation of changes in the logarithm of an asset price, expressed as a yearly rate. Also, volatility is a variable that appears in option pricing formulas. In the option pricing formula, it denotes the volatility of the underlying asset return from now to the expiration of the option.

Std Deviation    Rating              Std Deviation    Rating
up to 7. 99        1                     20. 00-22. 99     6
8. 00-10. 99       2                     23. 00-25. 99     7
11. 00-13. 99     3                     26. 00-28. 99     8
14. 00-16. 99     4                     29. 00 and up    9
17. 00-19. 99     5

Volatility risk: The risk in the value of options portfolios due to the unpredictable changes in the volatility of the underlying asset.

Volume: This is the daily number of shares of a security that change hands between a buyer and a seller.

Voluntary Redemption: is the right of a company to repurchase some or all of an investors’ outstanding shares at a stated price at a given time in the future. The purchase price is usually the Issue Price, increased by Cumulative Dividends.

Voting Right: The common stockholders’ right to vote their stock in the affairs of the company. Preferred stock usually has the right to vote when preferred dividends are in default for a specified amount of time. The right to vote may be delegated by the stockholder to another person.

Voting rights: The right to vote on matters that are put to a vote of security holders. For example the right to vote for directors.

– W – 

WACC: See: Weighted average cost of capital.

Waiting period: Time during which the SEC studies a firm’s registration statement. During this time the firm may distribute a preliminary prospectus.

Wall Street: Generic term for firms that buy, sell, and underwrite securities.

Wall Street analyst: Related: Sell-side analyst.

Wallflower: Stock that has fallen out of favor with investors; tends to have a low P/E (price to earnings ratio).

Wanted for cash: A statement displayed on market tickers indicating that a bidder will pay cash for same day settlement of a block of a specified security.

Warehouse receipt: Evidence that a firm owns goods stored in a warehouse.

Warehousing: The interim holding period from the time of the closing of a loan to its subsequent marketing to capital market investors.

Warrant: A security entitling the holder to buy a proportionate amount of stock at some specified future date at a specified price, usually one higher than current market. This “warrant” is then traded as a security, the price of which reflects the value of the underlying stock. Warrants are issued by corporations and often used as a “sweetener” bundled with another class of security to enhance the marketability of the latter. Warrants are like call options, but with much longer time spans — sometimes years. In addition, warrants are offered by corporations whereas exchange traded call options are not issued by firms.

Warrant: A type of security that entitles the holder to buy a proportionate amount of common stock or preferred stock at a specified price for a period of years. Warrants are usually issued together with a loan, a bond or preferred stock –and act as sweeteners, to enhance the marketability of the accompanying securities. They are also known as stock-purchase warrants and subscription warrants.

Wash: Gains equal losses.

WashOut Round: A financing round whereby previous investors, the founders, and management suffer significant dilution. Usually as a result of a washout round, the new investor gains majority ownership and control of the company. Also known as burn-out or cram-down rounds.

Wasting asset: An asset which has a limited life and thus, decreases in value (depreciates) over time. Also applied to consumed assets, such as gas, and termed “depletion.”

Watch list: A list of securities selected for special surveillance by a brokerage, exchange or regulatory organization; firms on the list are often takeover targets, companies planning to issue new securities or stocks showing unusual activity.

Weak form efficiency: A form of pricing efficiency where the price of the security reflects the past price and trading history of the security. In such a market, security prices follow a random walk. Related: Semistrong form efficiency, strong form efficiency.

Weekend effect: The common recurrent low or negative average return from Friday to Monday in the stock market.

Weighted Average Antidilution: The investor’s conversion price is reduced, and thus the number of common shares received on conversion increased, in the case of a down round; it takes into account both: (a) the reduced price and, (b) how many shares (or rights) are issued in the dilutive financing. See Broad-Based Ratchet and Narrow-Based Ratchet definitions.

Weighted average cost of capital: Expected return on a portfolio of all the firm’s securities. Used as a hurdle rate for capital investment.

Weighted average coupon: The weighted average of the gross interest rate of the mortgages underlying the pool as of the pool issue date, with the balance of each mortgage used as the weighting factor.

Weighted average life: See:Average life.

Weighted average maturity: The WAM of a MBS is the weighted average of the remaining terms to maturity of the mortgages underlying the collateral pool at the date of issue, using as the weighting factor the balance of each of the mortgages as of the issue date.

Weighted average remaining maturity: The average remaining term of the mortgages underlying a MBS.

Weighted average portfolio yield: The weighted average of the yield of all the bonds in a portfolio.

Well diversified portfolio: A portfolio spread out over many securities in such a way that the weight in any security is small. The risk of a well-diversified portfolio closely approximates the systemic risk of the overall market, the unsystematic risk of each security having been diversified out of the portfolio.

White knight: A friendly potential acquirer of a firm sought out by a target firm that is threatened by a less welcome suitor.

Whole life insurance: A contract with both insurance and investment components: (1) It pays off a stated amount upon the death of the insured, and (2) it accumulates a cash value that the policyholder can redeem or borrow against.

Wholesale mortgage banking: The purchasing of loans originated by others, with the servicing rights released to the buyer.

Wi: When issued.

Wi wi: Treasury bills trade on a wi basis between the day they are auctioned and the day settlement is made. Bills traded before they are auctioned are said to be traded wi wi.

Wild card option: The right of the seller of a Treasury Bond futures contract to give notice of intent to deliver at or before 8:00 p.m. Chicago time after the closing of the exchange (3:15 p.m. Chicago time) when the futures settlement price has been fixed. Related: Timing option.

Williams Act of 1968: An amendment of the Securities and Exchange Act of 1934 that regulates tender offers and other takeover related actions such as larger share purchases.

Window contract: A guaranteed investment contract purchased with deposits over some future designated time period (the “window”), usually between 3 and 12 months. All deposits made are guaranteed the same credit rating. Related: bullet contract.

Winners’s curse: Problem faced by uninformed bidders. For example, in an initial public offering uninformed participants are likely to receive larger allotments of issues that informed participants know are overpriced.

Wire house: A firm operating a private wire to its own branch offices or to other firms, commission houses or brokerage houses.

With dividend: Purchase of shares in which the buyer is entitled to the forthcoming dividend. Related: ex-dividend.

With rights: Purchase of shares in which the buyer is entitled to the rights to buy shares in the company’s rights issue.

Withdrawal plan: The ability to establish automatic periodic mutual fund redemptions and have proceeds mailed directly to the investor.

Withholding tax: A tax levied by a country of source on income paid, usually on dividends remitted to the home country of the firm operating in a foreign country. Tax levied on dividends paid abroad.

Without: If 70 were bid in the market and there was no offer, the quote would be “70 bid without.” The expression “without” indicates a one-way market.

Without recourse: Without the lender having any right to seek payment or seize assets in the event of nonpayment from anyone other than the party (such as a special-purpose entity) specified in the debt contract.

Woody: Sexual slang for a market moving strongly upward, as in, “This market has a woody.”

Working capital: Defined as the difference in current assets and current liabilities (excluding short-term debt). Current assets may or may not include cash and cash equivalents, depending on the company.

Working capital management: The management of current assets and current liabilities to maximize short-term liquidity.

Working capital ratio: Working capital expressed as a percentage of sales.

Workout: Informal arrangement between a borrower and creditors.

Workout: A negotiated agreement between the debtors and its creditors outside the bankruptcy process.

Workout period: Realignment period of a temporary misaligned yield relationship that sometimes occurs in fixed income markets.

World Bank: A multilateral development finance agency created by the 1944 Bretton Woods, New Hampshire negotiations. It makes loans to developing countries for social overhead capital projects, which are guaranteed by the recipient country. See: International Bank for Reconstruction and Development.

World investible wealth: The part of world wealth that is traded and is therefore accessible to investors.

Writedown: Decreasing the book value of an asset if its book value is overstated compared to current market values.

Writeoff: The act of changing the value of an asset to an expense or a loss. A write-off is used to reduce or eliminate the value an asset and reduce profits.

Write-up/Write-down: An upward or downward adjustment of the value of an asset for accounting and reporting purposes. These adjustments are estimates and tend to be subjective; although they are usually based on events affecting the investee company or its securities beneficially or detrimentally.

Writer: The seller of an option, usually an individual, bank, or company, that issues the option and consequently has the obligation to sell the asset ( if a call) or to buy the asset (if a put) on which the option is written if the option buyer exercises the option.

W-type bottom: A double bottom where the price or indicator chart has the appearance of a W. See: technical analysis.


Yankee bonds: Foreign bonds denominated in US$ issued in the United States by foreign banks and corporations. These bonds are usually registered with the SEC. For example, bonds issued by originators with roots in Japan are called Samurai bonds.

Yankee CD: A CD issued in the domestic market, typically New York, by a branch of a foreign bank.

Yankee market: The foreign market in the United States.

Yard: Slang for one billion dollars. Used particularly in currency trading, e.g. for Japanese yen since on billion yen only equals approximately US$10 million. It is clearer to say, ” I’m a buyer of a yard of yen,” than to say, “I’m a buyer of a billion yen,” which could be misheard as, “I’m a buyer of a million yen.”

Yield: The percentage rate of return paid on a stock in the form of dividends, or the effective rate of interest paid on a bond or note.

Yield curve: The graphical depiction of the relationship between the yield on bonds of the same credit quality but different maturities. Related: Term structure of interest rates. Harvey (1991) finds that the inversions of the yield curve (short-term rates greater than long term rates) have preceded the last five U.S. recessions. The yield curve can accurately forecast the turning points of the business cycle.

Yield curve optionpricing models: Models that can incorporate different volatility assumptions along the yield curve, such as the Black-Derman-Toy model. Also called arbitrage-free option-pricing models.

Yield curve strategies: Positioning a portfolio to capitalize on expected changes in the shape of the Treasury yield curve.

Yield ratio: The quotient of two bond yields.

Yield spread strategies: Strategies that involve positioning a portfolio to capitalize on expected changes in yield spreads between sectors of the bond market.

Yield to call: The percentage rate of a bond or note, if you were to buy and hold the security until the call date. This yield is valid only if the security is called prior to maturity. Generally bonds are callable over several years and normally are called at a slight premium. The calculation of yield to call is based on the coupon rate, length of time to the call and the market price.

Yield to maturity: The percentage rate of return paid on a bond, note or other fixed income security if you buy and hold it to its maturity date. The calculation for YTM is based on the coupon rate, length of time to maturity and market price. It assumes that coupon interest paid over the life of the bond will be reinvested at the same rate.

Yield to worst: The bond yield computed by using the lower of either the yield to maturity or the yield to call on every possible call date.


Z bond: Also known as an accrual bond or accretion bond; a bond on which interest accretes interest but is not paid currently to the i nvestor but rather is accrued, with accrual added to the principal balance of the Z and becoming payable upon satisfaction of all prior bond classes.

Z score: Statistical measure that quantifies the distance (measured in standard deviations) a data point is from the mean of a data set. Separately, z score is the output from a credit-strength test that gauges the likelihood of bankruptcy.

Zero coupon bond: Such a debt security pays an investor no interest. It is sold at a discount to its face price and matures in one year or longer.

Zero prepayment assumption: The assumption of payment of scheduled principal and interest with no payments.

Zero uptick: Related: tick-test rules.

Zerobalance account (ZBA): A checking account in which zero balance is maintained by transfers of funds from a master account in an amount only large enough to cover checks presented.

Zero-beta portfolio: A portfolio constructed to represent the risk-free asset, that is, having a beta of zero.

Zero-coupon bond: A bond in which no periodic coupon is paid over the life of the contract. Instead, both the principal and the interest are paid at the maturity date.

Zero-investment portfolio: A portfolio of zero net value established by buying and shorting component securities, usually in the context of an arbitrage strategy.

Zero-one integer programming: An analytical method that can be used to determine the solution to a capital rationing problem.

Zero-sum game: A type of game wherein one player can gain only at the expense of another player.

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