Business Glossary

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


A
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 earnings	Earnings of a firm as reported on itsincome 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.
Accrued interest	The accumulated interest earned but not yet paid to the seller of a bond or the issuer of a note by the buyer or borrower (unless the bond or note is in default).
Acid-test ratio	Also called the quick ratio, the ratio of current assets minus inventories, accruals, and prepaid items to current liabilities.
Acquisition of assets	A merger or consolidation in which an acquirer purchases the selling firm's assets.
Acquisition of stock	A merger or consolidation in which an acquirer purchases the acquiree's stock. A reverse subsidiary merger is the equivalent of a stock acquisition.
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 leveraged buy-out.
Administrative pricing rules	IRS rules used to allocate income on export sales to a foreign sales corporation.
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 theinflation rate.
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.
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.
American Depositary Receipts (ADRs)	Certificates issued by a U.S. depositary bank, representing foreign shares held by the bank, usually by a branch or correspondent in the country of issue. One ADR may represent a portion of a foreign share, one share or a bundle of shares of a foreign corporation.
American option	An option that may be exercised at any time up to and including the expiration date. Related: European option
American shares	Securities certificates issued in the U.S. by a transfer agent acting on behalf of the foreign issuer. The certificates represent claims to foreign equities.
American Stock Exchange (AMEX)	The second-largest stock exchange in the United States. It trades mostly in small-to medium-sized companies.
American-style option	An option contract that can be exercised at any time between the date of purchase and the expiration date. Most exchange-traded options are American style.
Amortization	The repayment of a loan by installments.
Angels	Individuals providing venture capital at the earliest stages.
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%.< /U >
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	<<p/>An annuity with a first payment on full period hence, rather than immediately./td>
Antidilutive effect	Result of a transaction that increases earnings per common share (e.g. by decreasing the number of shares outstanding).
Appraisal rights	A right of shareholders in a merger to demand the payment of a fair price for their shares, as determined independently.
Arithmetic mean return	An average of the subperiod returns, calculated by summing the subperiod returns and dividing by he number of subperiods.
Arm's length price	<<p/>The price at which a willing buyer and a willing unrelated seller would freely agree to transact./td>
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.
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.
Asset	Any possession or piece of property that has value in a sale or exchange.
Asset/equity ratio	The ratio of total assets to stockholder equity.
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 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.
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.
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.
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.

B
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.
Balance sheet	Also called the statement of financial condition, it is a summary of the assets, liabilities, and owners' equity.
Balloon maturity	Any large principal payment due at maturity for a bond or loan with or without a sinking fund requirement.
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 creditors.
Bargain-purchase-price option	Gives the lessee the option to purchase the asset at a price below fair market value when the lease expires.
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%.
Before-tax profit margin	The ratio of net income before taxes to net sales.
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).
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.
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-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.
Block voting	A group of shareholders banding together to vote their shares in a single block.
Blue-sky laws	State laws covering the issue and trading of securities.
Boilerplate	Standard terms and conditions.
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.
Break-even analysis	An analysis of the level of sales at which a project would make zero profit.
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.
Bridge financing	Interim financing of one sort or another used to solidify a position until more permanent financing is arranged.
Buyout	Purchase of a controlling interest (or percent of shares) of a company's stock. A leveraged buy-out is done with borrowed money.

C
Call	An option that gives the right to buy the underlying futures contract.
Call an option	To exercise a call option.
Call option	An option contract that gives its holder the right (but not the obligation) to purchase a specified number of shares of the underlying stock at the given strike price, on or before the expiration date of the contract.
Call premium	Premium in price above the par value of a bond or share of preferred stock that must be paid to holders to redeem the bond or share of preferred stock before its scheduled maturity date.
Call price	The price, specified at issuance, at which the issuer of a bond may retire part of the bond at a specified call date.
Call price	The price for which a bond can be repaid before maturity under a call provision.
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 budgeting	The process of choosing the firm's long-term capital assets.
Capital expenditures	Amount used during a particular period to acquire or improve long-term assets such as property, plant or equipment.
Capital 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 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 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 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.
Cashand 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 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 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-surrender value	An amount the insurance company will pay if the policyholder ends a whole life insurance policy.
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.
Clean opinion	An auditor's opinion reflecting an unqualified acceptance of a company's financial statements.
Collar	An upper and lower limit on the interest rate on a floating-rate note.
Collateral	Assets than can be repossessed if a borrower defaults.
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 equivalent	A convertible security that is traded like an equity issue because the optioned common stock is trading high.
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.
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.
Consolidation	The combining of two or more firms to form an entirely new entity.
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.
Contingent claim	A claim that can be made only if one or more specified outcomes occur.
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.
Contribution margin	<<p/>The difference between variable revenue and variable cost./td>
Control	50% of the outstanding votes plus one vote.
Controlled foreign corporation (CFC)	A foreign corporation whose voting stock is more than 50% owned by U.S. stockholders, each of whom owns at least 10% of the voting power.
Controller	The corporate manager responsible for the firm's accounting activities.
Convention statement	An annual statement filed by a life insurance company in each state where it does business in compliance with that state's regulations. The statement and supporting documents show, among other things, the assets, liabilities, and surplus of the reporting company.
Convertible price	The contractually specified price per share at which a convertible security can be converted into shares of common stock.
Conversion ratio	The number of shares of common stock that the security holder will receive from exercising the call option of a convertible security.
Conversion value	Also called parity value, the value of a convertible security if it is converted immediately.
Convertible exchangeable preferred stock	Convertible preferred stock that may be exchanged, at the issuer's option, into convertible bonds that have the same conversion features as the convertible preferred stock.
Convertible preferred stock	Preferred stock that can be converted into common stock at the option of the holder.
Convertible security	A security that can be converted into common stock at the option of the security holder, including convertible bonds and convertible preferred stock.
Corporate acquisition	The acquisition of one corporation by another corporation.
Corporate bonds	Debt obligations issued by corporations.
Corporate charter	A legal document creating a corporation generally including the articles of incorporation.
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.
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.
Cost of capital	The required return for a capital budgeting project.
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).
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 Put	A put option position in which the option writer also is short the corresponding stock or has deposited, in a cash account, cash or cash equivalents equal to the exercise of the option. This limits the option writer's risk because money or stock is already set aside. In the event that the holder of the put option decides to exercise the option, the writer's risk is more limited than it would be on an uncovered or naked put option.
Cramdown	The ability of the bankruptcy court to confirm a plan of reorganization over the objections of some classes of creditors.
Creditor	Lender of money.
Cross default	A provision under which default on one debt obligation triggers default on another debt obligation.
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 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.
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 liabilities	Amount owed for salaries, interest, accounts payable and other debts due within 1 year.
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.

D
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.
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.
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.
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 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 ratio	Total debt divided by total assets.
Debt service	Interest payment plus repayments of principal to creditors, that is, retirement of debt.
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.
Declaration date	The date on which a firm's directors meet and announce the date and amount of the next dividend.
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 or note.
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.
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.
Deficit	An excess of liabilities over assets, of losses over profits, or of expenditure over income.
Defined benefit plan	A pension plan in which the sponsor agrees to make specified dollar payments to qualifying employees. The pension obligations are effectively the debt obligation of the plan sponsor. Related: defined contribution plan
Defined contribution plan	A pension plan in which the sponsor is responsible only for making specified contributions into the plan on behalf of qualifying participants. Related: defined benefit plan
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.
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.
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).
Disclaimer of opinion	An auditor's statement disclaiming any opinion regarding the company's financial condition.
Discount factor	Present value of $1 received at a stated future date.
Discount period	The period during which a customer can deduct the discount from the net amount of the bill when making payment.
Discounted cash flow (DCF)	Future cash flows multiplied by discount factors to obtain present values.
Discounting	Calculating the present value of a future amount. The process is opposite to compounding.
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.
Diversification	Dividing investment funds among a variety of securities with different risk, reward, and correlation statistics so as to minimize unsystematic risk.
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 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 rights	A shareholders' rights to receive per-share dividends identical to those other shareholders receive.
Domestic International Sales Corporation (DISC)	A U.S. corporation that receives a tax incentive for export activities.
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.
Double-tax agreement	Agreement between two countries that taxes paid abroad can be offset against domestic taxes levied on foreign dividends.
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
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.
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 rate	A measure of the time value of money that fully reflects the effects of compounding.
Efficient capital market	A market in which new information is very quickly reflected accurately in share prices.
Emerging markets	The financial markets of developing economies.
Employee stock ownership plan (ESOP)	A company contributes to a trust fund that buys stock on behalf of employees.
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 kicker	Used to refer to warrants because they are usually issued attached to privately placed bonds.
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.
Equityholders	Those holding shares of the firm's equity.
Eurobond	A bond that is (1) underwritten by an international syndicate, (2) offered at issuance simultaneously to investors in a number of countries, and (3) issued outside the jurisdiction of any single country.
Euroclear	One of two principal clearing systems in the Eurobond market. It began operations in 1968, is located in Brussels, and is managed by Morgan Guaranty Bank.
Eurodollar	This is an American dollar that has been deposited in a European bank or an U.S. bank branch located in Europe. It got there as a result of payments made to overseas companies for merchandise.
European Currency Unit (ECU)	An index of foreign exchange consisting of about 10 European currencies, originally devised in 1979.
European Union (EU)	An economic association of European countries founded by the Treaty of Rome in 1957 as a common market for six nations. It was known as the European Community before 1993 and is comprised of 15 European countries. Its goals are a single market for goods and services without any economic barriers and a common currency with one monetary authority. The EU was known as the European Community until January 1, 1994.
European-style option	An option contract that can only be exercised on the expiration date.
Events of default	Contractually specified events that allow lenders to demand immediate repayment of a debt.
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.
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.
Exempt securities	Instruments exempt from the registration requirements of the Securities Act of 1933 or the margin requirements of the SEC Act of 1934. Such securities include government bonds, agencies, munis, commercial paper, and private placements.
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 value	The amount of advantage over a current market transaction provided by an in-the-money option.
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. The weighted average of a probability distribution.
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 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.
Export-Import Bank (Ex-Im Bank)	The U.S. federal government agency that extends trade credits to U.S. companies to facilitate the financing of U.S. exports.
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.
Extension	Voluntary arrangements to restructure a firm's debt, under which the payment date is postponed.
Extinguish	Retire or pay off debt.
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	Sale of a firm's accounts receivable to a financial institution known as a factor.
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.
FASB	Financial Accounting Standards Board. Sets accounting standards for U.S. firms.
Federal Deposit Insurance Corporation (FDIC)	A federal institution that insures bank deposits.
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 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.
Fedwire	A wire transfer system for high-value payments operated by the Federal Reserve System.
FHA prepayment experience	The percentage of loans in a pool of mortgages outstanding at the origination anniversary, based on annual statistical historic survival rates for FHA-insured mortgages.
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.
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.
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.
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).
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.
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.
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-rate note (FRN)	Note whose interest payment varies with short-term interest rates.
Floating-rate preferred	Preferred stock paying dividends that vary with short-term interest rates.
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.
Flow-through 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.
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.
Foreign Sales Corporation (FSC)	A special type of corporation created by the Tax Reform Act of 1984 that is designed to provide a tax incentive for exporting U.S.-produced goods.
Formula basis	A method of selling a new issue of common stock in which the SEC declares the registration statement effective on the basis of a price formula rather than on a specific range.
Forward looking multiple	A truncated expression for a P/E ratio that is based on forward (expected) earnings rather than on trailing earnings.
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 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.
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-service 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.
Funded debt	Debt maturing after more than one year.
Funding ratio	The ratio of a pension plan's assets to its liabilities.
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 value	The amount of cash at a specified date in the future that is equivalent in value to a specified sum today.
Futures contract	Agreement to buy or sell a set number of shares of a specific stock in a designated future month at a price agreed upon by the buyer and seller. The contracts themselves are often traded on the futures market. A futures contract differs from an option because an option is the right to buy or sell, whereas a futures contract is the promise to actually make a transaction. A future is part of a class of securities called derivatives, so named because such securities derive their value from the worth of an underlying investment.

G
General partner	A partner who has unlimited liability for the obligations of the partnership.
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.
Glass-Steagall Act	A 1933 act in which Congress forbade commercial banks to own, underwrite, or deal in corporate stock and corporate bonds.
Going-private transactions	Publicly owned stock in a firm is replaced with complete equity ownership by a private group. The shares are delisted from stock exchanges and can no longer be purchased in the open markets.
Golden parachute	Compensation paid to top-level management by a target firm if a takeover occurs.
Goodwill	Excess of the purchase price over the fair market value of the net assets acquired under purchase accounting.
Greenmail	Situation in which a large block of stock is held by an unfriendly company, forcing the target company to repurchase the stock at a substantial premium to prevent a takeover.
Greenshoe option	Option that allows the underwriter for a new issue to buy and resell additional shares.
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.
Growth stock	Common stock of a company that has an opportunity to invest money and earn more than the opportunity cost of capital.
Guaranteed insurance contract	A contract promising a stated nominal interest rate over some specific time period, usually several years.
Guaranteed investment contract (GIC)	A pure investment product in which a life company agrees, for a single premium, to pay the principal amount of a predetermined annual crediting (interest) rate over the life of the investment, all of which is paid at the maturity date.

H
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 period	Length of time that an individual holds a security.
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.
Human capital	The unique capabilities and expertise of individuals.
Hurdle rate	The required return in capital budgeting.
Hybrid	A package containing two or more different kinds of risk management instruments that are usually interactive.
Hybrid security	A convertible security whose optioned common stock is trading in a middle range, causing the convertible security to trade with the characteristics of both a fixed-income security and a common stock instrument.

I
Imputation tax system	Arrangement by which investors who receive a dividend also receive a tax credit for corporate taxes that the firm has paid.
Income beneficiary	One who receives income from a trust.
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 internal rate of return	IRR on the incremental investment from choosing a large project instead of a smaller project.
Indenture	Agreement between lender and borrower which details specific terms of the bond issuance. Specifies legal obligations of bond issuer and rights of bondholders.
Industrial revenue bond (IRB)	Bond issued by local government agencies on behalf of corporations.
Inflation-escalator 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.
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.
Insider information	Relevant information about a company that has not yet been made public. It is illegal for holders of this information to make trades based on it, however received.
Insider trading	Trading by officers, directors, major stockholders, or others who hold private inside information allowing them to benefit from buying or selling stock.
Insiders	These are directors and senior officers of a corporation -- in effect those who have access to inside information about a company. An insider also is someone who owns more than 10% of the voting shares of a company.
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.
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.
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.
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.
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.
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 management	Also called portfolio management and money management, the process of managing money.
Investor relations	The process by which the corporation communicates with its investors.
Involuntary liquidation preference	A premium that must be paid to preferred or preference stockholders if the issuer of the stock is forced into involuntary liquidation.
IRA/Keogh accounts	Special accounts where you can save and invest, and the taxes are deferred until money is withdrawn. These plans are subject to frequent changes in law with respect to the deductibility of contributions. Withdrawals of tax deferred contributions are taxed as income, including the capital gains from such accounts.
Issuer	An entity that issues a financial asset or security

J
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.

L
Last-In-First-Out (LIFO)	A method of valuing inventory that uses the cost of the most recent item in inventory first.
LEAPS	Long-term equity anticipation securities. Long-term options.
Legal capital	Value at which a company's shares are recorded in its books.
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.
Leverage	The use of debt financing.
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.
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 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.
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.
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.
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 partnership	A partnership that includes one or more partners who have limited liability.
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.
Liquid asset	Asset that is easily and cheaply turned into cash - notably cash itself and short-term securities.
Liquidating dividend	Payment by a firm to its owners from capital rather than from earnings.
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, offset liquidity.
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.
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 ratios	Ratios that measure a firm's ability to meet its short-term financial obligations on time.
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.
Long-term 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 liabilities	Amount owed for leases, bond repayment and other items due after 1 year.
Look-thru	A method for calculating U.S. taxes owed on income from controlled foreign corporations that was introduced by the Tax Reform Act of 1986.

M
Management buyout (MBO)	Leveraged buyout whereby the acquiring group is led by the firm's management.
Management'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.
Margin	This allows investors to buy securities by borrowing money from a broker. The margin is the difference between the market value of a stock and the loan a broker makes. Related: security deposit (initial).
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.
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 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.
Marketability	A negotiable security is said to have good marketability if there is an active secondary market in which it can easily be resold.
Master limited partnership (MLP)	A publicly traded limited partnership.
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.
Merger	(1) Acquisition in which all assets and liabilities are absorbed by the buyer. (2) More generally, any combination of two companies.
Money market	Money markets are for borrowing and lending money for three years or less. The securities in a money market can be U.S.government bonds, treasury bills and commercial paper from banks and companies.
Money market demand account	An account that pays interest based on short-term interest rates.
Money market fund	A mutual fund that invests only in short term securities, such as bankers' acceptances, commercial paper, repurchase agreements and government bills. The net asset value per share is maintained at $1. 00. Such funds are not federally insured, although the portfolio may consist of guaranteed securities and/or the fund may have private insurance protection.
Money purchase plan	A defined benefit contribution plan in which the participant contributes some part and the firm contributes at the same or a different rate. Also called and individual account plan.
Monthly income preferred security (MIP)	Preferred stock issued by a subsidiary located in a tax haven. The subsidiary relends the money to the parent.
Mortality tables	Tables of probability that individuals of various ages will die within one year.
Mortgage	A loan secured by the collateral of some specified real estate property which obliges the borrower to make a predetermined series of payments.
Mortgage pass-through security	Also called a passthrough, a security created when one or more mortgage holders form a collection (pool) of mortgages sells shares or participation certificates in the pool. The cash flow from the collateral pool is "passed through" to the security holder as monthly payments of principal, interest, and prepayments. This is the predominant type of MBS traded in the secondary market.
Mortgagee	The lender of a loan secured by property.
Mortgageror Mortgagor	The borrower of a loan secured by property.
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	Mutual funds are pools of money that are managed by an investment company. They offer investors a variety of goals, depending on the fund and its investment charter. Some funds, for example, seek to generate income on a regular basis. Others seek to preserve an investor's money. Still others seek to invest in companies that are growing at a rapid pace. Funds can impose a sales charge, or load, on investors when they buy or sell shares. Many funds these days are no load and impose no sales charge. Mutual funds are investment companies regulated by the Investment Company Act of 1940. Related: open-end fund, closed-end fund.

N
NASDAQ	National Association of Securities Dealers Automatic Quotation System. An electronic quotation system that provides price quotations to market participants about the more actively traded common stock issues in the OTC market.
Negative amortization	A loan repayment schedule in which the outstanding principal balance of the loan increases, rather than amortizing, because the scheduled monthly payments do not cover the full amount required to amortize the loan. The unpaid interest is added to the outstanding principal, to be repaid later.
Negative covenant	A bond covenant that limits or prohibits altogether certain actions unless the bondholders agree.
Negative pledge clause	A bond covenant that requires the borrower to grant lenders a lien equivalent to any liens that may be granted in the future to any other currently unsecured lenders.
Negotiated offering	An offering of securities for which the terms, including underwriters' compensation, have been negotiated between the issuer and the underwriters.
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 assets	The difference between total assets on the one hand and current liabilities and noncapitalized long-term liabilities on the other hand.
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 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 investment	Gross, or total, investment minus depreciation.
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 present value (NPV)	The present value of the expected future cash flows minus the cost.
Net profit margin	Net income divided by sales; the amount of each sales dollar left over after all expenses have been paid.
Net worth	Common stockholders' equity which consists of common stock, surplus, and retained earnings.
New York Stock Exchange (NYSE)	Also known as the Big Board or The Exhange. More than 2,000 common and preferred stocks are traded.
Non-cumulative preferred stock	Preferred stock whose holders must forgo dividend payments when the company misses a dividend payment. Related: Cumulative preferred stock
Noncash charge	A cost, such as depreciation, depletion, and amortization, that does not involve any cash outflow.
Nonrecourse	Without recourse, as in a non-recourse lease.
Note	Debt instruments with initial maturities greater than one year and less than 10 years.
Note agreement	A contract for privately placed debt.
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.
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. Also, referred to in the context of obtaining approval for the transfer of a government contract pursuant to a merger or acquisition.

O
Off-balance-sheet financing	Financing that is not shown as a liability in a company's balance sheet.
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.
Operating cash flow	Earnings before depreciation minus taxes. It measures the cash generated from operations, not counting capital spending or working capital requirements.
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 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.
Opinion shopping	A practice prohibited by the SEC which involves attempts by a corporation to obtain reporting objectives by following questionable accounting principles with the help of a pliable auditor willing to go along with the desired treatment.
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.
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.
Original issue discount debt (OID debt)	Debt that is initially offered at a price below par.
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.
Out-of-the-money option	A call option is out-of-the-money if the strike price is greater than the market price of the underlying security. A put option is out-of-the-money if the strike price is less than the market price of the underlying security.
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.
Overfunded pension plan	A pension plan that has a positive surplus (i.e., assets exceed liabilities).
Oversubscribed issue	Investors are not able to buy all of the shares or bonds they want, so underwriters must allocate the shares or bonds among investors. This occurs when a new issue is underpriced or in great demand because of growth prospects.
Over-the-counter market (OTC)	A decentralized market (as opposed to an exchange market) where geographically dispersed dealers are linked together by telephones and computer screens. The market is for securities not listed on a stock or bond exchange. The NASDAQ market is an OTC market for U.S. stocks.

P
Pac-Man strategy	Takeover defense strategy in which the prospective acquiree retaliates against the acquirer's tender offer by launching its own tender offer for the other firm.
Par value	Also called the maturity value or face value, the amount that the issuer agrees to pay at the maturity date. In terms of stock, it represents an assigned amount used to compute the dollar accounting value of the shares on the company’s balance sheet.
Partnership	Shared ownership among two or more individuals, some of whom may, but do not necessarily, have limited liability.
Payback	The length of time it takes to recover the initial cost of a project, without regard to the time value of money.
Payment-In-Kind (PIK) bond	A bond that gives the issuer an option (during an initial period) either to make coupon payments in cash or in the form of additional bonds.
Pension plan	A fund that is established for the payment of retirement benefits.
Performance shares	Shares of stock given to managers on the basis of perf