Accelerated cost recovery system (ACRS)
Schedule of depreciation rates allowed for tax purposes.
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.
Earnings of a firm as reported on itsincome statement.
Total liabilities exceed total assets. A firm with a negative net worth is insolvent on the books.
The ease and quickness with which assets can be converted to cash.
Money owed to suppliers.
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.
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).
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.
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.
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.
Total costs, explicit and implicit.
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.
An option that may be exercised at any time up to and including the expiration date. Related: European option
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.
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.
The repayment of a loan by installments.
Individuals providing venture capital at the earliest stages.
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.
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.
A regular periodic payment made by an insurance company to a policyholder for a specified period of time.
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.
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>
Result of a transaction that increases earnings per common share (e.g. by decreasing the number of shares outstanding).
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>
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.
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.
Any possession or piece of property that has value in a sale or exchange.
The ratio of total assets to stockholder equity.
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.
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.
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.
A section of an annual report containing the auditor’s opinion about the veracity of the financial statements.
Number of shares authorized for issuance by a firm’s corporate charter.
The restricting of liability holders from collection efforts of collateral seizure, which is automatically imposed when a firm files for bankruptcy under Chapter 11.
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.
Also called the statement of financial condition, it is a summary of the assets, liabilities, and owners’ equity.
Any large principal payment due at maturity for a bond or loan with or without a sinking fund requirement.
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.
State of being unable to pay debts. Thus, the ownership of the firm’s assets is transferred from the stockholders to the creditors.
Gives the lessee the option to purchase the asset at a price below fair market value when the lease expires.
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.
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.
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).
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.
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.
A group of shareholders banding together to vote their shares in a single block.
State laws covering the issue and trading of securities.
Standard terms and conditions.
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.
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.
Interim financing of one sort or another used to solidify a position until more permanent financing is arranged.
Purchase of a controlling interest (or percent of shares) of a company’s stock. A leveraged buy-out is done with borrowed money.
An option that gives the right to buy the underlying futures contract.
Call an option
To exercise a 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.
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.
The price, specified at issuance, at which the issuer of a bond may retire part of the bond at a specified call date.
The price for which a bond can be repaid before maturity under a call provision.
An upper limit on the interest rate on a floating-rate note.
Money invested in a firm.
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.
The process of choosing the firm’s long-term capital assets.
Amount used during a particular period to acquire or improve long-term assets such as property, plant or equipment.
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.
A lease obligation that has to be capitalized on the balance sheet.
The difference between the net cost of a security and the net sale price, if that security is sold at a loss.
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.
Amounts of directly contributed equity capital in excess of the par value.
The debt and/or equity mix that fund a firm’s assets.
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.
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.
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.
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.
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.
An auditor’s opinion reflecting an unqualified acceptance of a company’s financial statements.
An upper and lower limit on the interest rate on a floating-rate note.
Assets than can be repossessed if a borrower defaults.
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.
Interest paid on previously earned interest as well as on the principal.
Option on an option.
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.
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.
A claim that can be made only if one or more specified outcomes occur.
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.
<<p/>The difference between variable revenue and variable cost./td>
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.
The corporate manager responsible for the firm’s accounting activities.
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.
The contractually specified price per share at which a convertible security can be converted into shares of common stock.
The number of shares of common stock that the security holder will receive from exercising the call option of a convertible security.
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.
A security that can be converted into common stock at the option of the security holder, including convertible bonds and convertible preferred stock.
The acquisition of one corporation by another corporation.
Debt obligations issued by corporations.
A legal document creating a corporation generally including the articles of incorporation.
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.
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.
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).
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.
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.
The ability of the bankruptcy court to confirm a plan of reorganization over the objections of some classes of creditors.
Lender of money.
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.
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.
Value of cash, accounts receivable, inventories, marketable securities and other assets that could be converted to cash in less than 1 year.
Amount owed for salaries, interest, accounts payable and other debts due within 1 year.
Indicator of short-term debt paying ability. Determined by dividing current assets by current liabilities. The higher the ratio, the more liquid the company.
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.
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.
Indicator of financial leverage. Compares assets provided by creditors to assets provided by shareholders. Determined by dividing long-term debt by common stockholder equity.
Ability to borrow. The amount a firm can borrow up to the point where the firm value no longer increases.
The amplification of the return earned on equity when an investment or firm is financed partially with borrowed money.
A bond covenant that restricts in some way the firm’s ability to incur additional indebtedness.
Total debt divided by total assets.
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.
New debt obtained by a firm during the Chapter 11 bankruptcy process.
The date on which a firm’s directors meet and announce the date and amount of the next dividend.
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.
A differential in promised yield that compensates the investor for the risk inherent in purchasing a corporate bond that entails some risk of default.
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.
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.
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
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.
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.
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.
Present value of $1 received at a stated future date.
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.
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.
Dividing investment funds among a variety of securities with different risk, reward, and correlation statistics so as to minimize unsystematic risk.
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%.
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.
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.
Method of accelerated depreciation.
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.
Agreement between two countries that taxes paid abroad can be offset against domestic taxes levied on foreign dividends.
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.
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.
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.
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.
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.
Represents ownership interest in a firm. Also the residual dollar value of a futures trading account, assuming its liquidation at the going market price.
Used to refer to warrants because they are usually issued attached to privately placed bonds.
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.
Those holding shares of the firm’s equity.
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.
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.
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.
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.
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.
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.
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.
The price at which the underlying future or options contract may be bought or sold.
The amount of advantage over a current market transaction provided by an in-the-money option.
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.
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.
The time when the option contract ceases to exist (expires).
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.
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.
Voluntary arrangements to restructure a firm’s debt, under which the payment date is postponed.
Retire or pay off debt.
This literally means “without dividend.” The buyer of shares when they are quoted ex-dividend is not entitled to receive a declared dividend.
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.
In connection with a rights offering, shares of stock that are trading without the rights attached.
The date on which a share of common stock begins trading ex-rights.
A financial institution that buys a firm’s accounts receivables and collects the debt.
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.
Financial Accounting Standards Board. Sets accounting standards for U.S. firms.
Federal Deposit Insurance Corporation (FDIC)
A federal institution that insures bank deposits.
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.
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.
Long-term, non-cancelable lease.
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.
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.
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.
A cost that is fixed in total for a given period of time and for given production levels.
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.
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.
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.
Preferred stock paying dividends that vary with short-term interest rates.
Government bonds that are acceptable at par in payment of federal estate taxes when owned by the decedent at the time of death.
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.
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.
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.
Debt maturing after more than one year.
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.
The amount of cash at a specified date in the future that is equivalent in value to a specified sum today.
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.
A partner who has unlimited liability for the obligations of the 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.
A 1933 act in which Congress forbade commercial banks to own, underwrite, or deal in corporate stock and corporate bonds.
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.
Compensation paid to top-level management by a target firm if a takeover occurs.
Excess of the purchase price over the fair market value of the net assets acquired under purchase accounting.
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.
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.
The fraction of the gross proceeds of an underwritten securities offering that is paid as compensation to the underwriters of the offering.
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.
A corporation that owns enough voting stock in another firm to control management and operations by influencing or electing its board of directors.
Length of time that an individual holds a security.
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.
The unique capabilities and expertise of individuals.
The required return in capital budgeting.
A package containing two or more different kinds of risk management instruments that are usually interactive.
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.
Imputation tax system
Arrangement by which investors who receive a dividend also receive a tax credit for corporate taxes that the firm has paid.
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.
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.
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.
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.
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.
Trading by officers, directors, major stockholders, or others who hold private inside information allowing them to benefit from buying or selling stock.
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.
The risk that a firm will be unable to satisfy its debts. Also known as bankruptcy risk.
A firm that is unable to pay debts (liabilities are greater than assets).
The sale of an asset in exchange for a specified series of payments (the installments).
Organizations that invest, including insurance companies, depository institutions, pension funds, investment companies, mutual funds, and endowment funds.
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.
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.
A secured short-term loan to purchase inventory. The three basic forms are a blanket inventory lien, a trust receipt, and field warehousing financing.
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.
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.
Also called portfolio management and money management, the process of managing money.
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.
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.
An entity that issues a financial asset or security
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.
A method of valuing inventory that uses the cost of the most recent item in inventory first.
Long-term equity anticipation securities. Long-term options.
Value at which a company’s shares are recorded in its books.
An entity that leases an asset from another entity.
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.
The use of debt financing.
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.
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.
A financial obligation, or the cash outlay that must be made at a specific time to satisfy the contractual terms of such an obligation.
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.
A security interest in one or more assets that is granted to lenders in connection with secured debt financing.
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.
Limitation of possible loss to what has already been invested.
A partner who has limited legal liability for the obligations of the 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.
Asset that is easily and cheaply turned into cash – notably cash itself and short-term securities.
Payment by a firm to its owners from capital rather than from earnings.
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.
The rights of a firm’s securityholders in the event the firm liquidates.
Net amount that could be realized by selling the assets of a firm after paying the debt.
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.
Ratios that measure a firm’s ability to meet its short-term financial obligations on time.
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.
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.
An obligation having a maturity of more than one year from the date it was issued. Also called funded debt.
Amount owed for leases, bond repayment and other items due after 1 year.
A method for calculating U.S. taxes owed on income from controlled foreign corporations that was introduced by the Tax Reform Act of 1986.
Management buyout (MBO)
Leveraged buyout whereby the acquiring group is led by the firm’s management.
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.
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.
The process whereby the book value or collateral value of a security is adjusted to reflect current market value.
The total dollar value of all outstanding shares. Computed as shares times current market price. It is a measure of corporate size.
(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.
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.
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.
(1) Acquisition in which all assets and liabilities are absorbed by the buyer. (2) More generally, any combination of two companies.
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.
Tables of probability that individuals of various ages will die within one year.
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.
The lender of a loan secured by property.
The borrower of a loan secured by property.
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 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.
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.
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.
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.
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.
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.
The company’s total earnings, reflecting revenues adjusted for costs of doing business, depreciation, interest, taxes and other expenses.
Gross, or total, investment minus depreciation.
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.
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
A cost, such as depreciation, depletion, and amortization, that does not involve any cash outflow.
Without recourse, as in a non-recourse lease.
Debt instruments with initial maturities greater than one year and less than 10 years.
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.
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.
Financing that is not shown as a liability in a company’s balance sheet.
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.
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.
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.
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.
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.
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.
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.
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.
Shares that are currently owned by investors.
Overfunded pension plan
A pension plan that has a positive surplus (i.e., assets exceed liabilities).
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.
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.
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.
Shared ownership among two or more individuals, some of whom may, but do not necessarily, have limited liability.
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.
A fund that is established for the payment of retirement benefits.
Shares of stock given to managers on the basis of performance as measured by earnings per share and similar criteria. A control device used by shareholders to tie management to the self-interest of shareholders.
Warrants that have no expiration date.
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.
Plan for reorganization
A plan for reorganizing a firm during the Chapter 11 bankruptcy process.
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.
The smallest unit of price change quoted or, one one-hundredth of a percent.
Anit-takeover device that gives a prospective acquiree’s shareholders the right to buy shares of the firm or shares of anyone who acquires the firm at a deep discount to their fair market value.
Possibility of the expropriation of assets, changes in tax policy, restrictions on the exchange of foreign currency, or other changes in the business climate of a country.
Pooling of interests
A now-defunct accounting method for reporting acquisitions accomplished through the use of equity.
A type of corporation permitted under the U.S. tax code whereby a branch operation in a U.S. possessions can obtain tax benefits as though it were operating as a foreign subsidiary.
Common stockholder’s right to purchase new securities issued by the company.
Preferred equity redemption stock (PERC)
Preferred stock that converts automatically into common equity at a stated date. A limit is placed on the value of the shares the investor receives.
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 give investors a fixed dividend from the company’s earnings. And more importantly: preferred shareholders get paid before common shareholders.
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, unless it is convertible into common. The stock shares characteristics of both common stock and debt.
A bankruptcy in which a debtor and its creditors pre-negotiate a plan or reorganization and then file it along with the bankruptcy petition.
Payments made in excess of scheduled mortgage principal repayments.
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.
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.
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.
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.
(1) The total amount of money being borrowed or lent. (2) The party affected by agent decisions in a principal-agent relationship.
A situation that can be modeled as one person, an agent, who acts on the behalf of another person, the principal.
The face amount of debt; the amount borrowed or lent. Often called principal.
The sale of a bond or other security directly to a limited number of investors.
Pro forma financial statements
Financial statements as adjusted to reflect a projected or planned transaction.
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.
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.
Written promise to pay.
Rights of individuals and companies to own and utilize property as they see fit and to receive the stream of income that their property generates.
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.
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.
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.
The sale of registered securities by the issuer (or the underwriters acting in the interests of the issuer) in the public market.
Warehouse operated by an independent warehouse company on its own premises.
Method of accounting now used for all mergers and acquisitions 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.
An option granting the right to sell the underlying futures contract. Opposite of a call.
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.
Current assets minus inventories.
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.
The bid and offered prices a dealer is willing to buy or sell at.
RAMs (Reverse-annuity mortgages)
Mortgages in which the bank makes a loan for an amount equal to a percentage of the appraisal value of the home. The loan is then paid to the homeowner in the form of an annuity.
The high and low prices, or high and low bids and offers recorded during a specified time.
An agreement between the mortgage banker and the loan applicant guaranteeing a specified interest rate for a designated period, usually 60 days.
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.
An evaluation of credit quality Moody’s, S&P, and Fitch Investors Service give to companies used by investors and analysts.
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.
Receivables turnover ratio
Total operating revenues divided by average receivables. Used to measure how effectively a firm is managing its accounts receivable.
A bankruptcy practitioner appointed by secured creditors in the United Kingdom to oversee the repayment of debts.
(1) Date by which a shareholder must officially own shares in order to be entitled to a dividend. For example, a firm might declare a dividend on Nov 1, payable Dec 1 to holders of record Nov 15. Once a trade is executed an investor becomes the “owner of record” on settlement, which currently takes 5 business days for securities, and one business day for mutual funds. Stocks trade ex-dividend the fourth day before the record date, since the seller will still be the owner of record and is thus entitled to the dividend. (2) The date that determines who is entitled to payment of principal and interest due to be paid on a security. The record date for most MBSs is the last day of the month, however the last day on which they may be presented for the transfer is the last business day of the month. The record date for CMOs and asset-backed securities vary with each issue.
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.
A preliminary prospectus containing information required by the SEC. It excludes the offering price and the coupon of the new issue.
Eligible for redemption under the terms of the indenture.
The commission charged by a mutual fund when redeeming shares. For example, a 2% redemption charge (also called a “back end load”) on the sale of shares valued at $1000 will result in payment of $980 (or 98% of the value) to the investor. This charge may decrease or be eliminated as shares are held for longer time periods.
A benchmark ‘interest rate (such as LIBOR), used to specify conditions of an interest rate swap or an interest rate agreement.
REIT (real estate investment trust)
Real estate investment trust, which is similar to a closed-end mutual fund. REITs invest in real estate or loans secured by real estate and issue shares in such investments.
REMIC (real estate mortgage investment conduit)
A pass-through tax entity that can hold mortgages secured by any type of real property and issue multiple classes of ownership interests to investors in the form of pass-through certificates, bonds, or other legal forms. A financing vehicle created under the Tax Reform Act of 1986.
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.
An accounting entry that properly reflects the contingent liabilities.
A method of allocating the purchase price for the acquisition of another firm among the acquired assets.
Provisions that place constraints on the operations of borrowers, such as restrictions on working capital, fixed assets, future borrowing, and payment of dividend.
Accounting earnings that are retained by the firm for reinvestment in its operations; earnings that are not paid out as dividends.
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.
A bond issued by a municipality to finance either a project or an enterprise where the issuer pledges to the bondholders the revenues generated by the operating projects financed, for instance, hospital revenue bonds and sewer revenue bonds.
Reverse stock split
A proportionate decrease in the number of shares, but not the value of shares of stock held by shareholders. Shareholders maintain the same percentage of equity as before the split. For example, a 1-for-3 split would result in stockholders owning 1 share for every 3 shares owned before the split. After the reverse split, the firm’s stock price is, in this example, worth three times the pre-reverse split price. A firm generally institutes a reverse split to boost its stock’s market price and attract investors.
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.
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 common stock.
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.
The rate earned on a riskless investment, typically the rate earned on the 90-day U.S. Treasury Bill.
SEC rule allowing qualified institutional buyers to buy and trade unregistered securities.
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 lease-back
Sale of an existing asset to a financial institution that then leases it back to the user.
A key input to a firm’s financial planning process. External sales forecasts are based on historical experience, statistical analysis, and consideration of various macroeconomic factors.
Small Business Investment Company.
The Securities and Exchange Commission, the primary federal regulatory agency of the securities industry.
(1) Procedure for selling blocks of seasoned issues of stocks. (2) More generally, sale of already issued stock.
The market where securities are traded after they are initially offered in the primary market. Most trading is done in the secondary market. The New York stock Exchange, as well as all other stock exchanges, the bond markets, etc., are secondary markets. Seasoned securities are traded in the secondary market.
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.
Piece of paper that proves ownership of stocks, bonds and other investments.
Loan to finance current assets, The sale of the current assets provides the cash to repay the loan.
If an investor thinks the price of a stock is going down, the investor could borrow the stock from a broker and sell it. Eventually, the investor must buy the stock back on the open market. For instance, you borrow 1000 shares of XYZ on July 1 and sell it for $8 per share. Then, on Aug 1, you purchase 1000 shares of XYZ at $7 per share. You’ve made $1000 (less commissions and other fees) by selling short.
Debt that, in the event of bankruptcy, must be repaid before subordinated debt receives any payment.
The date on which payment is made to settle a trade. For stocks traded on US exchanges, settlement is currently 3 business days after the trade. For mutual funds, settlement usually occurs in the U.S. the day following the trade. In some regional markets, foreign shares may require months to settle.
A figure determined by the closing range which is used to calculate gains and losses in futures market accounts. Settlement prices are used to determine gains, losses, margin calls, and invoice prices for deliveries. Related: closing range.
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.
This is a company’s total assets minus total liabilities. A company’s net worth is the same thing.
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.
Certificates or book entries representing ownership in a corporation or similar entity
Amendment to company charter intended to protect it against takeover.
A procedure that allows firms to file one registration statement covering several issues of the same security.
Occurs when a person sells stocks he or she does not yet own. Shares must be borrowed, before the sale, to make “good delivery” to the buyer. Eventually, the shares must be bought to close out the transaction. This technique is used when an investor believes the stock price will go down.
Selling a security that the seller does not own but is committed to repurchasing eventually. It is used to capitalize on an expected decline in the security’s price.
Establishing a market position by selling a security one does not own in anticipation of the price of that security falling.
Abbreviation for Standard Industrial Classification. Each 4-digit code represents a unique business activity.
Interest calculated only on the initial investment.
Single-premium deferred annuity
An insurance policy bought by the sponsor of a pension plan for a single premium. In return, the insurance company agrees to make lifelong payments to the employee (the policyholder) when that employee retires.
Small issues exemption
Securities issues that involve less than $1.5 million are not required to file a registration statement with the SEC. Instead, they are governed by Regulation A, for which only a brief offering statement is needed.
A business owned by a single individual. The sole proprietorship pays no corporate income tax but has unlimited liability for business debts and obligations.
A company can create an independent company from an existing part of the company by selling or distributing new shares in the so-called spinoff.
Sometimes, companies split their outstanding shares into a larger number of shares. If a company with 1 million shares did a two-for-one split, the company would have 2 million shares. An investor with 100 shares before the split would hold 200 shares after the split. The investor’s percentage of equity in the company remains the same, and the price of the stock he owns is one-half the price of the stock on the day prior to the split.
(1) The gap between bid and ask prices of a stock or other security. (2) The simultaneous purchase and sale of separate futures or options contracts for the same commodity for delivery in different months. Also known as a straddle. (3) Difference between the price at which an underwriter buys an issue from a firm and the price at which the underwriter sells it to the public. (4) The price an issuer pays above a benchmark fixed-income yield to borrow money.
The square root of the variance. A measure of dispersion of a set of data from their mean.
In a rights issue, agreement that the underwriter will purchase any stock not purchased by investors.
Contracts where the bidding firm in a takeover attempt agrees to limit its holdings another firm.
Stated annual interest rate
The interest rate expressed as a per annum percentage, by which interest payment is determined.
Stated conversion price
At the time of issuance of a convertible security, the price the issuer effectively grants the security holder to purchase the common stock, equal to the par value of the convertible security divided by the conversion ratio.
Statement of cash flows
A financial statement showing a firm’s cash receipts and cash payments during a specified period.
A method of cash budgeting that is organized along the lines of the statement of cash flows.
Ownership of a corporation which is represented by shares which represent a piece of the corporation’s assets and earnings.
Payment of a corporate dividend in the form of stock rather than cash. The stock dividend may be additional shares in the company, or it may be shares in a subsidiary being spun off to shareholders. Stock dividends are often used to conserve cash needed to operate the business. Unlike a cash dividend, stock dividends are not taxed until sold.
Formal organizations, approved and regulated by the Securities and Exchange Commission (SEC), that are made up of members that use the facilities to exchange certain common stocks. The two major national stock exchanges are the New York Stock Exchange (NYSE) and the American Stock Exchange (ASE or AMEX). Five regional stock exchanges include the Midwest, Pacific, Philadelphia, Boston, and Cincinnati. The Arizona stock exchange is an after hours electronic marketplace where anonymous participants trade stocks via personal computers.
A firm’s repurchase of outstanding shares of its common stock.
Balance sheet item that includes the book value of ownership in the corporation. It includes capital stock, paid in surplus, and retained earnings.
The residual claims that stockholders have against a firm’s assets, calculated by subtracting total liabilities from total assets.
An order to sell a stock when the price falls to a specified level.
Purchase or sale of an equal number of puts and calls with the same terms at the same time.
Describes securities held by a broker on behalf of a client but registered in the name of the Wall Street firm.
The stated price per share for which underlying stock may be purchased (in the case of a call) or sold (in the case of a put) by the option holder upon exercise of the option contract.
An agreement in settlement of a lawsuit involving specific payments made over a period of time. Property and casualty insurance companies often buy life insurance products to pay the costs of such settlements.
Subject to opinion
An auditor’s opinion reflecting acceptance of a company’s financial statements subject to pervasive uncertainty that cannot be adequately measured, such as information relating to the value of inventories, reserves for losses, or other matters subject to judgment.
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.
A provision in a bond indenture that restricts the issuer’s future borrowing by subordinating the new lender’s claims on the firm to those of the existing bond holders.
Special category of foreign-source “unearned” income that is currently taxed by the IRS whether or not it is remitted to the U.S.
Provision in a company’s charter requiring a majority of, say, 80% of shareholders to approve certain changes, such as a merger.
An arrangement whereby two companies lend to each other on different terms, e.g. in different currencies, and/or at different interest rates, fixed or floating.
The sale of an interest rate swap by one counterparty to the other, effectively ending the swap.
Account in which the bank takes all of the excess available funds at the close of each business day and invests them for the firm.
General term referring to transfer of control of a firm from one group of shareholder’s to another group of shareholders.
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.
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 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.
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-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.
A merger or consolidation that is not a tax-fee acquisition. The selling shareholders are treated as having sold their shares.
Gross income less a set of deductions.
Any transaction that is not tax-free to the parties involved, such as a taxable acquisition.
General offer made publicly and directly to a firm’s shareholders to buy their stock at a price well above the current market price.
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.
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.
A bank loan, typically with a floating interest rate, for a specified amount that matures in between one and ten years and requires a specified repayment schedule.
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.
Total debt to equity ratio
A capitalization ratio comparing current liabilities plus long-term debt to shareholders’ equity.
One of several related securities offered at the same time. Tranches from the same offering usually have different risk, reward, and/or maturity characteristics.
The time, effort, and money necessary, including such things as commission fees and the cost of physically moving the asset from seller to buyer.
Individual or institution appointed by a company to look after the transfer of securities.
The price at which one unit of a firm sells goods or services to another unit of the same firm.
The corporate officer responsible for designing and implementing many of the firm’s financing and investing activities.
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.
debt obligations of the U.S. Treasury that have maturities of 10 years or more.
Debt obligations of the U.S. Treasury that have maturities of more than 2 years but less than 10 years.
Securities issued by the U.S. Department of the Treasury.
Common stock that has been repurchased by the company and held in the company’s treasury.
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.
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).
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.
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.
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.
A whole life insurance product whose investment component pays a competitive interest rate rather than the below-market crediting rate.
Full liability for the debt and other obligations of a legal entity. The general partners of a partnership have unlimited liability.
Debt that does not identify specific assets that can be taken over by the debtholder in case of default.
Method of indirect taxation whereby a tax is levied at each stage of production on the value added at that specific stage.
Annuity contracts in which the issuer pays a periodic amount linked to the investment performance of an underlying portfolio.
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.
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.
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.
Weighted average cost of capital
Expected return on a portfolio of all the firm’s securities. Used as a hurdle rate for capital investment.
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.
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.
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 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.
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.
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.
A type of game wherein one player can gain only at the expense of another player.