Abnormal return | Part of return that is not due to systematic influences, e.g., marketwide price movements.
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Absolute priority | Rule in bankruptcy proceedings whereby senior creditors are required to be paid in full before junior creditors receive any payment.
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Accelerated depreciation | Any depreciation method that produces larger deductions for depreciation in the early years of a project's life.
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Accounts payable (payables, trade debt) | Money owed to suppliers.
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Accounts receivable (receivables, trade credit) | Money owed by customers.
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Accrued interest | Interest that has been earned but not yet paid.
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ACH | Automated Clearinghouse.
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Acid-test ratio | Quick ratio.
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Adjusted present value (APV) | Net present value of an asset if financed solely by equity plus the present value of any financing side effects.
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ADR | American depository receipt.
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Adverse selection | A situation in which a pricing policy causes only the less desirable customers to do business, e.g., a rise in insurance prices that leads only the worst risks to buy insurance.
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Affirmative covenant | Loan covenant specifying certain actions the borrower must take.
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Agency theory | Theory of the relationship between a principal, e.g., a shareholder, and an agent of the principal, e.g., the company's manager.
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AIBD | Association of International Bond Dealers.
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All-or-none underwriting | An arrangement whereby a security issue is canceled if the underwriter is unable to resell the entire issue.
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Alternative Minimum Tax (AMT) | A separately calculated minimum amount of tax that must be paid by corporations or individuals.
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American depository receipt (ADR) | A security issued in the United States to represent shares of a foreign company.
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American option | Option that can be exercised any time before the final exercise date (cf. European option).
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Amex | American Stock Exchange.
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Amortization | (1) Repayment of a loan by installments; (2) allowance for depreciation.
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AMT | Alternative Minimum Tax.
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Angel investor | Wealthy individual who provides capital for small start-up businesses.
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Annual percentage rate (APR) | Annual interest rate calculated using simple interest.
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Annuity | Investment that produces a level stream of cash flows for a limited number of periods.
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Annuity due | Annuity whose payments occur at the start of each period.
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Annuity factor | Present value of $1 paid for each of t periods.
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Anticipation | Arrangement whereby customers who pay before the final date may be entitled to deduct a normal rate of interest.
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Appraisal rights | A right of shareholders in a merger to demand the payment of a fair price for their shares, as determined independently.
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Appropriation request | Formal request for funds for a capital investment project.
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APR | Annual percentage rate.
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APT | Arbitrage pricing theory.
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APV | Adjusted present value.
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Arbitrage | Purchase of one security and simultaneous sale of another to give a risk-free profit.
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"Arbitrage" or "risk arbitrage" | Often used loosely to describe the taking of offsetting positions in related securities, e.g., at the time of a takeover bid.
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Arbitrage pricing theory (APT) | Model in which expected returns increase linearly with an asset's sensitivity to a small number of pervasive factors.
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Articles of incorporation | Legal document establishing a corporation and its structure and purpose.
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Asian currency units | Dollar deposits held in Singapore or other Asian centers.
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Asian option | Option based on the average price of the asset during the life of the option.
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Ask price (offer price) | Price at which a dealer is willing to sell (cf. bid price).
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Asset-backed securities | Securities issued by a special purpose company that holds a package of low-risk assets whose cash flows are sufficient to service the bonds.
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Asset stripper | Acquirer who takes over firms in order to sell off a large part of their assets.
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At-the-money option | Option whose exercise price equals the current asset price (cf. in-the-money option, out-of-themoney option).
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Auction-rate preferred | A variant of floating-rate preferred stock where the dividend is reset every 49 days by auction.
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Authorized share capital | Maximum number of shares that a company can issue, as specified in the firm's articles of incorporation.
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Automated Clearinghouse (ACH) | Private electronic system run by banks for high-volume, low-value payments.
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Availability float | Checks deposited by a company that have not yet been cleared.
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Aval | Bank guarantee for debt purchased by forfaiter.
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BA | Banker's acceptance.
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Backwardation | Condition in which spot price of commodity exceeds price of future (cf. contango).
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Balloon payment | Large final payment (e.g., when a loan is repaid in installments).
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Bank discount | Interest deducted from the initial amount of a loan.
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Banker's acceptance (BA) | Written demand that has been accepted by a bank to pay a given sum at a future date (cf. trade acceptance).
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Barrier option | Option whose existence depends on asset price hitting some specified barrier (cf. down-and-out option, down-and-in option).
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Basel Accord | International agreement on the amount of capital to be maintained by large banks to support their risky loans.
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Basis point (bp) | 0.01 percent.
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Basis risk | Residual risk that results when the two sides of a hedge do not move exactly together.
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Bearer security | Security for which primary evidence of ownership is possession of the certificate (cf. registered security).
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Bear market | Widespread decline in security prices (cf. bull market).
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Behavioral finance | Branch of finance that stresses aspects of investor irrationality.
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Benchmark maturity | Maturity of a newly issued Treasury bond.
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Benefit-cost ratio | One plus profitability index.
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Best-efforts underwriting | An arrangement whereby underwriters do not commit themselves to selling a security issue but promise only to use best efforts.
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Beta | Measure of market risk.
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Bid price | Price at which a dealer is willing to buy (cf. ask price).
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Big Board | Colloquial term for the New York Stock Exchange.
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Bill of exchange | General term for a document demanding payment.
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Bill of lading | Document establishing ownership of goods in transit.
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Blue-chip company | Large and creditworthy company.
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Blue-sky laws | State laws covering the issue and trading of securities.
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Boilerplate | Standard terms and conditions, e.g., in a debt contract.
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Bond | Long-term debt.
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Bond rating | Rating of the likelihood of bond's default.
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Bookbuilding | The procedure whereby underwriters gather nonbinding indications of demand for a new issue.
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Book entry | Registered ownership of stock without issue of stock certificate.
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Book runner | The managing underwriter for a new issue. The book runner maintains the book of securities sold.
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Bought deal | Security issue where one or two underwriters buy the entire issue.
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bp | Basis point.
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Bracket | A term signifying the extent of an underwriter's commitment in a new issue, e.g., major bracket, minor bracket.
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Break-even analysis | Analysis of the level of sales at which a project would just break even.
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Bridging loan | Short-term loan to provide temporary financing until more permanent financing is arranged.
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Bull-bear bond | Bond whose principal repayment is linked to the price of another security. The bonds are issued in two tranches: In the first the repayment increases with the price of the other security; in the second the repayment decreases with the price of the other security.
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Bulldog bond | Foreign bond issue made in London.
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Bullet payment | Single final payment, e.g., of a loan (in contrast to payment in installments).
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Bull market | Widespread rise in security prices (cf. bear market).
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Bund | Long-term German government bond.
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Buyback | Repurchase agreement.
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Cable | The exchange rate between U.S. dollars and sterling.
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Call option | Option to buy an asset at a specified exercise price on or before a specified exercise date (cf. put option).
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Call premium | (1) Difference between the price at which a company can call its bonds and its face value; (2) price of a call option.
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Call provision | Provision that allows an issuer to buy back the bond issue at a stated price.
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Cap | An upper limit on the interest rate on a floating-rate note.
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Capital asset pricing model | Model in which expected returns increase linearly with an asset's beta.
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Capital budget | List of planned investment projects, usually prepared annually.
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Capitalization | Long-term debt plus preferred stock plus net worth.
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Capital lease | Financial lease.
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Capital market | Financial market (particularly the market for long-term securities).
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Capital rationing | Shortage of funds that forces a company to choose between worthwhile projects.
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Capital structure | Mix of different securities issued by a firm.
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CAPM | Capital asset pricing model.
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Captive finance company | Subsidiary whose function is to provide finance for purchases from the parent company.
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CAR | Cumulative abnormal return.
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CARDs (Certificates for Amortizing Revolving Debt) | Passthrough securities backed by credit card receivables.
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Carried interest | Aproportion of the profits to which private equity partnerships, etc. are entitled.
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CARs (Certificates of Automobile Receivables) | Pass-through securities backed by automobile receivables.
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Carve-out | Public offering of shares in a subsidiary.
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Cascade | Rational herding in which each individual deduces that previous decisions by others may have been based on extra information.
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Cash and carry | Purchase of a security and simultaneous sale of a future, with the balance being financed with a loan or repo.
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Cash budget | Forecast of sources and uses of cash.
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Cash cow | Mature company producing a large free cash flow.
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Cash-deficiency arrangement | Arrangement whereby a project's shareholders agree to provide the operating company with sufficient net working capital.
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CAT bond | Catastrophe bond.
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Catastrophe bond (CAT bond) | Bond whose payoffs are linked to a measure of catastrophe losses such as insurance claims.
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CD | Certificate of deposit.
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CEO | Chief executive officer.
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Certainty equivalent | A certain cash flow that has the same present value as a specified risky cash flow.
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Certificate of deposit (CD) | A certificate providing evidence of a bank time deposit.
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CFTC | Commodity Futures Trading Commission.
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CFO | Chief financial officer.
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Chaebol | A Korean conglomerate.
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Chapter 7 | Bankruptcy procedure whereby a debtor's assets are sold and the proceeds are used to repay creditors.
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CHIPS | Clearinghouse Interbank Payments System.
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Chapter 11 | Bankruptcy procedure designed to reorganize and rehabilitate defaulting firm.
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Clean price (flat price) | Bond price excluding accrued interest (cf. dirty price).
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Clearinghouse Interbank Payments System (CHIPS) | An international wire transfer system operated by a group of major banks for high-value dollar payments.
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Closed-end fund | Company whose assets consist of investments in a number of industrial and commercial companies.
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Closed-end mortgage | Mortgage against which no additional debt may be issued (cf. open-end mortgage).
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CMOs | Collateralized mortgage obligations.
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COD | Cash on delivery.
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Collar | An upper and lower limit on the interest rate on a floating-rate note.
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Collateral | Assets that are given as security for a loan.
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Collateralized mortgage obligations (CMOs) | A variation on the mortgage pass-through security in which the cash flows from a pool of mortgages are repackaged into several tranches of bonds with different maturities.
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Collateral trust bonds | Bonds secured by common stocks or other securities that are owned by the borrower.
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Collection float | Customer-written checks that have not been received, deposited, and added to the company's available balance (cf. payment float).
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Commercial draft (bill of exchange) | Demand for payment.
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Commercial paper | Unsecured notes issued by companies and maturing within nine months.
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Commitment fee | Fee charged by bank on an unused line of credit.
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Common-size financial statements | Balance sheet where entries are expressed as proportion of total assets and income statement where entries are expressed as a proportion of revenues.
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Common stock | Security representing ownership of a corporation.
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Company cost of capital | The expected return on a portfolio of all the firm's securities.
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Compensating balance | Non-interest-bearing demand deposits to compensate banks for bank loans or services.
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Competitive bidding | Means by which public utility holding companies are required to choose their underwriters (cf. negotiated underwriting).
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Completion bonding | Insurance that a construction contract will be successfully completed.
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Composition | Voluntary agreement to reduce payments on a firm's debt.
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Compound interest | Reinvestment of each interest payment on money invested to earn more interest (cf. simple interest).
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Compound option | Option on an option.
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Concentration banking | System whereby customers make payments to a regional collection center. The collection center pays the funds into a regional bank account and surplus money is transferred to the company's principal bank.
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Conditional sale | Sale in which ownership does not pass to the buyer until payment is completed.
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Conglomerate merger | Merger between two companies in unrelated businesses (cf. horizontal merger, vertical merger).
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Consol | Name of a perpetual bond issued by the British government. Sometimes used as a general term for perpetuity.
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Contango | Condition in which spot price of a commodity is below that of the future (cf. backwardation).
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Contingent claim | Claim whose value depends on the value of another asset.
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Contingent project | Project that cannot be undertaken unless another project is also undertaken.
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Continuous compounding | Interest compounded continuously rather than at fixed intervals.
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Controller | Officer responsible for budgeting, accounting, and auditing in a firm (cf. treasurer).
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Convenience yield | The extra advantage that firms derive from holding the commodity rather than the future.
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Conversion price | Par value of a convertible bond divided by the number of shares into which it may be exchanged.
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Conversion ratio | Number of shares for which a convertible bond may be exchanged.
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Convertible bond | Bond that may be converted into another security at the holder's option. Similarly convertible preferred stock.
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Convexity | Term often used to describe the fact that the effect of an interest rate change on bond prices declines as the interest rate rises.
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Corporate venturing | Practice by which a large manufacturer provides financial support to new companies.
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Correlation coefficient | Measure of the closeness of the relationship between two variables.
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Corporation | A business that is legally separate from its owners.
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Cost company arrangement | Arrangement whereby the shareholders of a project receive output free of charge but agree to pay all operating and financing charges of the project.
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Cost of capital | Opportunity cost of capital.
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Counterparty | Party on the other side of a derivative contract.
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Coupon | (1) Specifically, an attachment to the certificate of a bearer security that must be surrendered to collect interest payment; (2) more generally, interest payment on debt.
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Covariance | Measure of the co-movement between two variables.
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Covenant | Clause in a loan agreement.
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Covered option | Option position with an offsetting position in the underlying asset.
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Cramdown | Action by a bankruptcy court to enforce a plan of reorganization.
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Credit derivative | Contract for hedging against loan default or changes in credit risk (see default swap, credit option).
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Credit option | Similar to a long-term insurance policy against loan default.
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Credit scoring | A procedure for assigning scores to borrowers on the basis of the risk of default.
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Cross-default clause | Clause in a loan agreement stating that the company is in default if it fails to meet its obligation on any other debt issue.
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Cum dividend | With dividend.
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Cum rights | With rights.
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Cumulative preferred stock | Stock that takes priority over common stock in regard to dividend payments. Dividends may not be paid on the common stock until all past dividends on the preferred stock have been paid.
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Cumulative voting | Voting system under which a stockholder may cast all of his or her votes for one candidate for the board of directors (cf. majority voting).
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Current asset | Asset that will normally be turned into cash within a year.
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Current liability | Liability that will normally be repaid within a year.
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Current ratio | Current assets divided by current liabilities—a measure of liquidity.
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Data mining (data snooping) | Excessive search to find interesting (but probably coincidental) behavior in a body of data.
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DCF | Discounted cash flow.
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DDM | Dividend discount model.
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Debenture | Unsecured bond.
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Death spiral convertible | Convertible bond exchangeable for shares with a specified market value.
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Debtor-in-possession financing (DIP financing) | Debt issued by a company in Chapter 11 bankruptcy.
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Decision tree | Method of representing alternative sequential decisions and the possible outcomes from these decisions.
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Default swap | Credit derivative in which one party makes fixed payments while the payments by the other party depend on the occurrence of a loan default.
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Defeasance | Practice whereby the borrower sets aside cash or bonds sufficient to service the borrower's debt. Both the borrower's debt and the offsetting cash or bonds are removed from the balance sheet.
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Delta | Hedge ratio.
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Depository transfer check (DTC) | Check made out directly by a local bank to a particular company.
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Depreciation | (1) Reduction in the book or market value of an asset; (2) portion of an investment that can be deducted from taxable income.
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Derivative | Asset whose value derives from that of some other asset (e.g., a future or an option).
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Diff | Differential swap.
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Differential swap (diff, quanto swap) | Swap between two LIBOR rates of interest, e.g., yen LIBOR for dollar LIBOR. Payments are in one currency.
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Dilution | Diminution in the proportion of income to which each share is entitled.
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DIP financing | Debtor-in-possession financing.
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Direct lease | Lease in which the lessor purchases new equipment from the manufacturer and leases it to the lessee (cf. sale and lease-back).
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Direct quote | For foreign exchange, the number of U.S. dollars needed to buy one unit of a foreign currency (cf. indirect quote).
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Dirty price | Bond price including accrued interest, i.e., the price paid by the bond buyer (cf. clean price).
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Discount bond | Debt sold for less than its principal value. If a discount bond pays no interest, it is called a "pure" discount, or zero-coupon, bond.
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Discounted cash flow (DCF) | Future cash flows multiplied by discount factors to obtain present value.
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Discount factor | Present value of $1 received at a stated future date.
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Discount rate | Rate used to calculate the present value of future cash flows.
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Discounted payback rule | Requirement that discounted values of cash flows should be sufficient to pay back initial investment within a specified time.
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Discriminatory price auction | Auction in which successful bidders pay the price they bid (cf. uniform price auction).
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Disintermediation | Withdrawal of funds from a financial institution in order to invest them directly (cf. intermediation).
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Dividend | Payment by a company to its stockholders.
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Dividend discount model | Model showing that the value of a share is equal to the discounted value of future dividends.
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Dividend reinvestment plan (DRIP) | Plan that allows shareholders to reinvest dividends automatically.
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Dividend yield | Annual dividend divided by share price.
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Double-declining-balance depreciation | Method of accelerated depreciation.
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Double-tax agreement | Agreement between two countries that taxes paid abroad can be offset against domestic taxes levied on foreign dividends.
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Down-and-in option | Barrier option that comes into existence if asset price hits a barrier.
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Down-and-out option | Barrier option that expires if asset price hits a barrier.
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DRIP | Dividend reinvestment plan.
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Drop lock | An arrangement whereby the interest rate on a floating-rate note or preferred stock becomes fixed if it falls to a specified level.
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DTC | Depository transfer check.
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Dual-class equity | Shares with different voting rights.
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Dual-currency bond | Bond with interest paid in one currency and principal paid in another.
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Duration | The average number of years to an asset's discounted cash flows.
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EBIT | Earnings before interest and taxes.
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EBITDA | Earnings before interest, taxes, depreciation, and amortization.
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Economic exposure | Risk that arises from changes in real exchange rates (cf. transaction exposure, translation exposure).
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Economic income | Cash flow plus change in present value.
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Economic rents | Profits in excess of the competitive level.
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Economic value added (EVA) | A measure of residual income implemented by the consulting firm Stern Stewart.
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Efficient market | Market in which security prices reflect information instantaneously.
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Efficient portfolio | Portfolio that offers the lowest risk (standard deviation) for its expected return and the highest expected return for its level of risk.
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EFT | Electronic funds transfer.
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Electronic funds transfer (EFT) | Transfer of money electronically (e.g., by Fedwire).
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Employee stock ownership plan (ESOP) | A company contributes to a trust fund that buys stock on behalf of employees.
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Entrenching investment | An investment that makes particular use of the skills of existing management.
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EPS | Earnings per share.
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Equipment trust certificate | Form of secured debt generally used to finance railroad equipment. The trustee retains ownership of the equipment until the debt is repaid.
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Equity | (1) Common stock and preferred stock. Often used to refer to common stock only. (2) Net worth.
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Equivalent annual cash flow (or cost) | Annuity with the same net present value as the company's proposed investment.
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ESOP | Employee stock ownership plan.
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Euribor | Euro Interbank Offered Rate.
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Euro Interbank offered rate (Euribor) | The interest rate at which major international banks in Europe lend euros to each other.
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Eurobond | Bond that is marketed internationally.
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Eurodollar deposit | Dollar deposit with a bank outside the United States.
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European option | Option that can be exercised only on final exercise date (cf. American option).
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EVA | Economic value added.
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Event risk | The risk that an unanticipated event (e.g. a takeover) will lead to a debt default.
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Evergreen credit | Revolving credit without maturity.
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Exchange of assets | Acquisition of another company by purchase of its assets in exchange for cash or shares.
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Exchange of stock | Acquisition of another company by purchase of its stock in exchange for cash or shares.
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Ex dividend | Purchase of shares in which the buyer is not entitled to the forthcoming dividend (cf. with dividend, cum dividend).
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Exercise price (striking price) | Price at which a call option or put option may be exercised.
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Expectations theory | Theory that forward interest rate (forward exchange rate) equals expected spot rate.
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Expected return | Average of possible returns weighted by their probabilities.
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Ex rights | Purchase of shares in which the buyer is not entitled to the rights to buy shares in the company's rights issue (cf. with rights, cum rights, rights on).
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Extendable bond | Bond whose maturity can be extended at the option of the lender (or issuer).
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External finance | Finance that is not generated by the firm: new borrowing or an issue of stock (cf. internal finance).
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Extra dividend | Dividend that may or may not be repeated (cf. regular dividend).
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Face value | Par value.
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Factoring | Arrangement whereby a financial institution buys a company's accounts receivable and collects the debt.
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Fair price provision | Appraisal rights.
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Fallen angel | Junk bond that was formerly investment grade.
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FASB | Financial Accounting Standards Board.
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FCIA | Foreign Credit Insurance Association.
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FDIC | Federal Deposit Insurance Corporation.
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Federal funds | Non-interest-bearing deposits by banks at the Federal Reserve. Excess reserves are lent by banks to each other.
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Fedwire | A wire transfer system for high-value payments operated by the Federal Reserve System (cf. CHIPS).
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Field warehouse | Warehouse rented by a warehouse company on another firm's premises (cf. public warehouse).
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Financial assets | Claims on real assets.
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Financial engineering | Combining or dividing existing instruments to create new financial products.
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Financial lease (capital lease, full-payout lease) | Longterm, noncancelable lease (cf. operating lease).
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Financial leverage (gearing) | Use of debt to increase the expected return on equity. Financial leverage is measured by the ratio of debt to debt plus equity (cf. operating leverage).
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Fiscal agency agreement | An alternative to a bond trust deed. Unlike the trustee, the fiscal agent acts as an agent of the borrower.
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Flat price | Clean price.
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Flipping | Buying shares in an IPO and selling immediately.
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Float | See availability float, collection float, payment float.
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Floating lien | General lien against a company's assets or against a particular class of assets.
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Floating-rate note (FRN) | Note whose interest payment varies with the short-term interest rate.
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Floating-rate preferred | Preferred stock paying dividends that vary with short-term interest rates.
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Floor planning | Arrangement used to finance inventory. A finance company buys the inventory, which is then held in trust by the user.
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Foreign bond | A bond issued on the domestic capital market of another country.
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Forex | Foreign exchange.
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Forfaiter | Purchaser of promises to pay (e.g., bills of exchange or promissory notes) issued by importers.
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Forward cover | Purchase or sale of forward foreign currency in order to offset a known future cash flow.
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Forward exchange rate | Exchange rate fixed today for exchanging currency at some future date (cf. spot exchange rate).
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Forward interest rate | Interest rate fixed today on a loan to be made at some future date (cf. spot interest rate).
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Forward rate agreement (FRA) | Agreement to borrow or lend at a specified future date at an interest rate that is fixed today.
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FRA | Forward rate agreement.
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Free cash flow | Cash not required for operations or for reinvestment.
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Free-rider problem | The temptation not to incur the costs of participating in a decision when one's influence on that decision is small.
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FRN | Floating-rate note.
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Full-payout lease | Financial lease.
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Full-service lease (rental lease) | Lease in which the lessor promises to maintain and insure the equipment (cf. net lease).
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Fundamental analysis | Security analysis that seeks to detect misvalued securities by an analysis of the firm's business prospects (cf. technical analysis).
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Funded debt | Debt maturing after more than one year (cf. unfunded debt).
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Futures contract | A contract to buy a commodity or security on a future date at a price that is fixed today. Unlike forward contracts, futures are generally traded on organized exchanges and are marked to market daily.
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GAAP | Generally accepted accounting principles.
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Gearing | Financial leverage.
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General cash offer | Issue of securities offered to all investors (cf. rights issue).
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Golden parachute | A large termination payment due to a company's officers if they lose their jobs as a result of a merger.
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Goodwill | The difference between the amount paid for a firm in a merger and its book value.
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Governance | The oversight of a firm's management.
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Gray market | Purchases and sales of eurobonds that occur before the issue price is set.
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Greenmail | Situation in which a large block of stock is held by an unfriendly company, forcing the target company to repurchase the stock at a substantial premium to prevent a takeover.
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Greenshoe option | Option that allows the underwriter for a new issue to buy and resell additional shares.
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Growth stock | Common stock of a company that has an opportunity to invest money to earn more than the opportunity cost of capital (cf. income stock).
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Haircut | An additional margin of collateral for a loan.
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Hedge ratio (delta, option delta) | The number of shares to buy for each option sold in order to create a safe position; more generally, the number of units of an asset that should be bought to hedge one unit of a liability.
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Hedging | Buying one security and selling another in order to reduce risk. A perfect hedge produces a riskless portfolio.
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Hell-or-high-water clause | Clause in a lease agreement that obligates the lessee to make payments regardless of what happens to the lessor or the equipment.
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Highly leveraged transaction (HLT) | Bank loan to a highly leveraged firm (formerly needed to be separately reported to the Federal Reserve Board).
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HLT | Highly leveraged transaction.
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Holding company | Company whose sole function is to hold stock in other companies or subsidiaries.
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Horizontal merger | Merger between two companies that manufacture similar products (cf. vertical merger, conglomerate merger).
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Horizontal spread | The simultaneous purchase and sale of two options that differ only in their exercise dates (cf. vertical spread).
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Hurdle rate | Minimum acceptable rate of return on a project.
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IBF | International banking facility.
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IMM | International monetary market.
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Immunization | The construction of an asset and a liability that are subject to offsetting changes in value.
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Imputation tax system | Arrangement by which investors who receive a dividend also receive a tax credit for corporate taxes the firm has paid.
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Income bond | Bond on which interest is payable only if earned.
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Income stock | Common stock with high dividend yield and few profitable investment opportunities (cf. growth stock).
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Indenture | Formal agreement, e.g., establishing the terms of a bond issue.
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Indexed bond | Bond whose payments are linked to an index, e.g., a consumer price index (see TIPs).
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Index fund | Investment fund designed to match the returns on a stockmarket index.
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Indirect quote | For foreign exchange, the number of units of a foreign currency needed to buy one U.S. dollar (cf. direct quote).
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Industrial revenue bond (IRB) | Bond issued by local government agencies on behalf of corporations.
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Initial public offering (IPO) | A company's first public issue of common stock.
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In-substance defeasance | Defeasance whereby debt is removed from the balance sheet but not canceled (cf. novation).
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Intangible asset | Nonmaterial asset, such as technical expertise, a trademark, or a patent (cf. tangible asset).
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Integer programming | Variant of linear programming whereby the solution values must be integers.
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Interest cover | Times interest earned.
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Interest rate parity | Theory that the differential between the forward exchange rate and the spot exchange rate is equal to the differential between the foreign and domestic interest rates.
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Intermediation | Investment through a financial institution (cf. disintermediation).
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Internal finance | Finance generated within a firm by retained earnings and depreciation (cf. external finance).
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Internal growth rate | The maximum rate of firm growth without external finance (cf. sustainable growth rate).
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Internal rate of return (IRR) | Discount rate at which investment has zero net present value.
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International banking facility (IBF) | A branch that an American bank establishes in the United States to do eurocurrency business.
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International monetary market (IMM) | The financial futures market within the Chicago Mercantile Exchange.
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Interval measure | The number of days that a firm can finance operations without additional cash income.
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In-the-money option | An option that would be worth exercising if it expired immediately (cf. out-of-the-money option).
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Inverse FRN | Floating-rate note whose payments rise as the general level of interest rates falls and vice versa.
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Investment-grade bond | Bond rated at least Baa by Moody's or BBB by Standard and Poor's or Fitch.
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IPO | Initial public offering.
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IRB | Industrial revenue bond.
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IRR | Internal rate of return.
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IRS | Internal Revenue Service.
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ISDA | International Swap and Derivatives Association.
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ISMA | International Securities Market Association.
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Issued share capital | Total amount of shares that are in issue (cf. outstanding share capital).
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Junior debt | Subordinated debt.
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Junk bond | Debt that is rated below an investment-grade bond.
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Just-in-time | System of inventory management that requires minimum inventories of materials and very frequent deliveries by suppliers.
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Keiretsu | A network of Japanese companies organized around a major bank.
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LBO | Leveraged buyout.
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Lease | Long-term rental agreement.
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Legal capital | Value at which a company's shares are recorded in its books.
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Legal defeasance | Novation.
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Lessee | User of a leased asset (cf. lessor).
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Lessor | Owner of a leased asset (cf. lessee).
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Letter of credit | Letter from a bank stating that it has established a credit in the company's favor.
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Letter stock | Privately placed common stock, so-called because the SEC requires a letter from the purchaser that the stock is not intended for resale.
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Leverage | See financial leverage, operating leverage.
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Leveraged buyout (LBO) | Acquisition in which (1) a large part of the purchase price is debt-financed and (2) the remaining equity is privately held by a small group of investors.
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Leveraged lease | Lease in which the lessor finances part of the cost of the asset by an issue of debt secured by the asset and the lease payments.
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Liabilities, total liabilities | Total value of financial claims on a firm's assets. Equals (1) total assets or (2) total assets minus net worth.
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LIBOR | London interbank offered rate.
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Lien | Lender's claims on specified assets.
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Limited liability | Limitation of a shareholder's losses to the amount invested.
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Limited partnership | Partnership in which some partners have limited liability and general partners have unlimited liability.
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Linear programming (LP) | Technique for finding the maximum value of some objective function subject to stated linear constraints.
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Line of credit | Agreement by a bank that a company may borrow at any time up to an established limit.
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Liquid asset | Asset that is easily and cheaply turned into cash—notably cash itself and short-term securities.
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Liquidating dividend | Dividend that represents a return of capital.
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Liquidator | Person appointed by unsecured creditors in the United Kingdom to oversee the sale of an insolvent firm's assets and the repayment of debts.
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Liquidity-preference theory | Theory that investors demand a higher yield to compensate for the extra risk of long-term bonds.
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Liquidity premium | (1) Additional return for investing in a security that cannot easily be turned into cash; (2) difference between the forward interest rate and the expected spot interest rate.
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Liquid yield option note (LYON) | Zero-coupon, callable, puttable, convertible bond.
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Lockbox system | Form of concentration banking. Customers send payments to a post office box. A local bank collects and processes the checks and transfers surplus funds to the company's principal bank.
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London interbank offered rate (LIBOR) | The interest rate at which major international banks in London lend to each other. (LIBID is London interbank bid rate; LIMEAN is mean of bid and offered rate.)
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Long hedge | Purchase of a hedging instrument (e.g., a future) to hedge a short position in the underlying asset (cf. short hedge).
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Lookback option | Option whose payoff depends on the highest asset price recorded over the life of the option.
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LP | Linear programming.
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LYON | Liquid yield option note.
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MACRS | Modified accelerated cost recovery system.
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Maintenance margin | Minimum margin that must be maintained on a futures contract.
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Majority voting | Voting system under which each director is voted upon separately (cf. cumulative voting).
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Management buyout (MBO) | Leveraged buyout whereby the acquiring group is led by the firm's management.
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Margin | Cash or securities set aside by an investor as evidence that he or she can honor a commitment.
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Marked to market | An arrangement whereby the profits or losses on a futures contract are settled up each day.
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Market capitalization rate | Expected return on a security.
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Market model | Model suggesting a linear relationship between actual returns on a stock and on the market portfolio.
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Market risk (systematic risk) | Risk that cannot be diversified away.
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Maturity factoring | Factoring arrangement that provides collection and insurance of accounts receivable.
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MBO | Management buyout.
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MDA | Multiple-discriminant analysis.
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Medium-term note (MTN) | Debt with a typical maturity of 1 to 10 years offered regularly by a company using the same procedure as commercial paper.
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Merger | (1) Acquisition in which all assets and liabilities are absorbed by the buyer (cf. exchange of assets, exchange of stock); (2) more generally, any combination of two companies.
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MIP (Monthly income preferred security) | Preferred stock issued by a subsidiary located in a tax haven. The subsidiary relends the money to the parent.
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Mismatch bond | Floating-rate note whose interest rate is reset at more frequent intervals than the rollover period (e.g., a note whose payments are set quarterly on the basis of the one-year interest rate).
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Modified accelerated cost recovery system (MACRS) | Schedule of depreciation deductions allowed for tax purposes.
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Modified IRR | Internal rate of return calculated by first discounting later cash flows back to earlier periods so there remains only one change in the sign of the cash flows.
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Money center bank | A major U.S. bank that undertakes a wide range of banking activities.
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Money market | Market for short-term safe investments.
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Money market deposit account (MMDA) | A bank account paying money-market interest rate.
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Money-market fund | Mutual fund that invests solely in short-term safe securities.
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Monte Carlo simulation | Method for calculating the probability distribution of possible outcomes, e.g., from a project.
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Moral hazard | The risk that the existence of a contract will change the behavior of one or both parties to the contract; e.g., an insured firm may take fewer fire precautions.
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Mortgage bond | Bond secured against plant and equipment.
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MTN | Medium-term note.
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Multiple-discriminant analysis (MDA) | Statistical technique for distinguishing between two groups on the basis of their observed characteristics.
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Mutual fund | Managed investment fund whose shares are sold to investors.
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Mutually exclusive projects | Two projects that cannot both be undertaken.
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Naked option | Option held on its own, i.e., not used for hedging a holding in the asset or other options.
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Nasdaq | National Association of Security Dealers Automated Quote System. A U.S. stock exchange, whose dealers tend to specialize in high-tech stocks.
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Negative pledge clause | Clause under which the borrower agrees not to permit an exclusive lien on any of its assets.
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Negotiated underwriting | Method of choosing an underwriter. Most firms may choose their underwriters by negotiation (cf. competitive bidding).
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Net lease | Lease in which the lessee promises to maintain and insure the equipment (cf. full-service lease).
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Net present value (NPV) | A project's net contribution to wealth - present value minus initial investment.
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Net working capital | Current assets minus current liabilities.
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Net worth | Book value of a company's common stock, surplus, and retained earnings.
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Nominal interest rate | Interest rate expressed in money terms (cf. real interest rate).
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Nonrefundable debt | Debt that may not be called in order to replace it with another issue at a lower interest cost.
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Normal distribution | Symmetric bell-shaped distribution that can be completely defined by its mean and standard deviation.
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Note | Unsecured debt with a maturity of up to 10 years.
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Novation (legal defeasance) | Defeasance whereby the firm's debt is canceled (cf. in-substance defeasance).
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NPV | Net present value.
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NYSE | New York Stock Exchange.
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Odd lot | A trade of less than 100 shares (cf. round lot).
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Off-balance-sheet financing | Financing that is not shown as a liability in a company's balance sheet.
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Offer price | Ask price.
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OID debt | Original issue discount debt.
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Old-line factoring | Factoring arrangement that provides collection, insurance, and finance for accounts receivable.
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On the run | The most recently issued (and, therefore, typically the most liquid) government bond in a particular maturity range.
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Open account | Arrangement whereby sales are made with no formal debt contract. The buyer signs a receipt, and the seller records the sale in the sales ledger.
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Open-end mortgage | Mortgage against which additional debt may be issued (cf. closed-end mortgage).
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Open interest | The number of currently outstanding futures contracts.
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Operating lease | Short-term, cancelable lease (cf. financial lease).
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Operating leverage | Fixed operating costs, so-called because they accentuate variations in profits (cf. financial leverage).
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Opportunity cost of capital (hurdle rate, cost of capital) | Expected return that is foregone by investing in a project rather than in comparable financial securities.
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Option | See call option, put option.
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Option delta | Hedge ratio.
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Original issue discount debt (OID debt) | Debt that is initially offered at a price below face value.
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OTC | Over-the-counter.
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Out-of-the-money option | An option that would not be worth exercising if it matured immediately (cf. in-the-money option).
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Outstanding share capital | Issued share capital less the par value of shares that are held in the company's treasury.
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Oversubscription privilege | In a rights issue, arrangement by which shareholders are given the right to apply for any shares that are not taken up.
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Over-the-counter (OTC) | Informal market that does not involve a securities exchange. Specifically used to refer to the Nasdaq dealer market for common stocks.
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Partnership | Joint ownership of business whereby general partners have unlimited liability.
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Par value (face value) | Value of a security shown on the certificate.
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Pass-through securities | Notes or bonds backed by a package of assets (e.g., mortgage pass-throughs, CARs, CARDs).
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Path-dependent option | Option whose value depends on the sequence of prices of the underlying asset rather than just the final price of the asset.
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Payables | Accounts payable.
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Payback rule | Requirement that project should recover its initial investment within a specified time.
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Pay-in-kind bond (PIK) | Bond that allows the issuer to choose to make interest payments in the form of additional bonds.
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Payment float | Company-written checks that have not yet cleared (cf. availability float).
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Payout ratio | Dividend as a proportion of earnings per share.
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PBGC | Pension Benefit Guarantee Corporation.
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P/E ratio | Share price divided by earnings per share.
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PERC (Preferred equity redemption cumulative stock) | Preferred stock that converts automatically into equity at a stated date. A limit is placed on the value of the shares the investor receives.
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Perpetuity | Investment offering a level stream of cash flows in perpetuity (cf. consol).
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PIK | Pay-in-kind bond.
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PN | Project note.
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Poison pill | An issue of securities that is convertible, in the event of a merger, into the shares of the acquiring firm or must be repurchased by the acquiring firm.
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Poison put | A covenant allowing the bondholder to demand repayment in the event of a hostile merger.
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Pooling of interest | Method of accounting for mergers (no longer available in the USA). The consolidated balance sheet of the merged firm is obtained by combining the balance sheets of the separate firms (cf. purchase accounting).
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Position diagram | Diagram showing the possible payoffs from a derivative investment.
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Postaudit | Evaluation of an investment project after it has been undertaken.
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Preemptive right | Common stockholder's right to anything of value distributed by the company.
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Preferred stock | Stock that takes priority over common stock in regard to dividends. Dividends may not be paid on common stock unless the dividend is paid on all preferred stock (cf. cumulative preferred stock). The dividend rate on preferred is usually fixed at time of issue.
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Prepack | Prepackaged bankruptcy.
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Prepackaged bankruptcy (prepack) | Bankruptcy proceedings intended to confirm a reorganization plan that has already been agreed to informally.
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Present value | Discounted value of future cash flows.
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Present value of growth opportunities (PVGO) | Net present value of investments the firm is expected to make in the future.
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PRIDE | Similar to a PERC except that as the equity price rises beyond a specified point, the investor shares in the stock appreciation.
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Primary issue | Issue of new securities by a firm (cf. secondary issue).
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Prime rate | Benchmark lending rate set by U.S. banks.
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Principal | Amount of debt that must be repaid.
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Principal-agent problem | Problem faced by a principal (e.g., shareholder) in ensuring that an agent (e.g., manager) acts on his or her behalf.
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Private equity | Equity that is not publicly traded and is used to finance business start-ups, leveraged buy-outs, etc.
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Privileged subscription issue | Rights issue.
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Production payment | Loan in the form of advance payment for future delivery of a product.
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Profitability index | Ratio of a project's NPV to the initial investment.
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Pro forma | Projected.
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Project finance | Debt that is largely a claim against the cash flows from a particular project rather than against the firm as a whole.
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Project note (PN) | Note issued by public housing or urban renewal agencies.
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Promissory note | Promise to pay.
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Prospect theory | A theory of asset pricing suggested by the observation of behavioral psychologists that investors have a particular aversion to losses even if very small.
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Prospectus | Summary of the registration statement providing information on an issue of securities.
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Proxy vote | Vote cast by one person on behalf of another.
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Public warehouse (terminal warehouse) | Warehouse operated by an independent warehouse company on its own premises (cf. field warehouse).
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Purchase accounting | Method of accounting for mergers. The assets of the acquired firm are shown at market value on the balance sheet of the acquirer (cf. pooling of interest).
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Purchase fund | Resembles a sinking fund except that money is used only to purchase bonds if they are selling below their par value.
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Put option | Option to sell an asset at a specified exercise price on or before a specified exercise date (cf. call option).
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PVGO | Present value of growth opportunities.
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Pyramid | Created by forming a holding company whose only asset is a controlling interest in a second holding company, which in turn has a controlling interest in an operating company.
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q | Ratio of the market value of an asset to its replacement cost.
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QIBs | Qualified institutional buyers.
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Quadratic programming | Variant of linear programming whereby the equations are quadratic rather than linear.
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Qualified Institutional buyers (QIBs) | Institutions that are allowed to trade unregistered stock among themselves.
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Quanto swap | Differential swap.
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Quick ratio (acid-test ratio) | Measure of liquidity: (current assets - inventory) divided by current liabilities.
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Range forward | A forward exchange rate contract that places upper and lower bounds on the cost of foreign exchange.
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Ratchet bonds | Floating-rate bonds whose coupon can only be reset downward.
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Rate-sensitive bonds | Bonds whose coupon rate changes as issuer's credit-rating changes.
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Real assets | Tangible assets and intangible assets used to carry on business (cf. financial assets).
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Real estate investment trust (REIT) | Trust company formed to invest in real estate.
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Real interest rate | Interest rate expressed in terms of real goods, i.e., nominal interest rate adjusted for inflation.
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Real option | The flexibility to modify, postpone, expand, or abandon a project.
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Receivables | Accounts receivable.
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Receiver | A bankruptcy practitioner appointed by secured creditors in the United Kingdom to oversee the repayment of debts.
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Record date | Date set by directors when making dividend payment. Dividends are sent to stockholders who are registered on the record date.
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Recourse | Term describing a type of loan. If a loan is with recourse, the lender has a general claim against the parent company if the collateral is insufficient to repay the debt.
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Red herring | Preliminary prospectus.
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Refunding | Replacement of existing debt with a new issue of debt.
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Registered security | Security whose ownership is recorded by the company's registrar (cf. bearer security).
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Registrar | Financial institution appointed to record issue and ownership of company securities.
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Registration | Process of obtaining SEC approval for a public issue of securities.
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Regression analysis | In statistics, a technique for finding the line of best fit.
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Regular dividend | Dividend that the company expects to maintain in the future.
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Regulation A issue | Small security issues that are partially exempt from SEC registration requirements.
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REIT | Real estate investment trust.
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Rental lease | Full-service lease.
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Repo | Repurchase agreement.
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Repurchase agreement (RP, repo, buy-back) | Purchase of Treasury securities from a securities dealer with an agreement that the dealer will repurchase them at a specified price.
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Residual income | After-tax profit less the opportunity cost of capital employed by the business (see also Economic Value Added).
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Residual risk | Unique risk.
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Retained earnings | Earnings not paid out as dividends.
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Return on equity | Usually, equity earnings as a proportion of the book value of equity.
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Return on investment (ROI) | Generally, book income as a proportion of net book value.
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Reverse convertible | Bond that gives the issuer the right to convert it into common stock.
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Revolving credit | Legally assured line of credit with a bank.
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Rights issue (privileged subscription issue) | Issue of securities offered to current stockholders (cf. general cash offer).
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Rights on | With rights.
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Risk premium | Expected additional return for making a risky investment rather than a safe one.
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ROI | Return on investment.
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Roll-over CD | A package of successive certificates of deposit.
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Round lot | A trade of 100 shares (cf. odd lot).
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RP | Repurchase agreement.
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R squared (R2) | Square of the correlation coefficient—the proportion of the variability in one series that can be explained by the variability of one or more other series.
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Rule 144a | SEC rule allowing qualified institutional buyers to buy and trade unregistered securities.
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Sale and lease-back | Sale of an existing asset to a financial institution that then leases it back to the user (cf. direct lease).
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Salvage value | Scrap value of plant and equipment.
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Samurai bond | A yen bond issued in Tokyo by a non-Japanese borrower (cf. bulldog bond, Yankee bond).
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SBIC | Small Business Investment Company.
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Scenario analysis | Analysis of the profitability of a project under alternative economic scenarios.
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Seasoned issue | Issue of a security for which there is an existing market (cf. unseasoned issue).
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Season datings | Extended credit for customers who order goods out of the peak season.
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SEC | Securities and Exchange Commission.
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Secondary issue | (1) Procedure for selling blocks of seasoned issues of stock; (2) more generally, sale of already issued stock.
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Secondary market | Market in which one can buy or sell seasoned issues of securities.
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Secured debt | Debt that, in the event of default, has first claim on specified assets.
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Securitization | Substitution of tradable securities for privately negotiated instruments.
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Security market line | Line representing the relationship between expected return and market risk.
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Self-liquidating loan | Loan to finance current assets. The sale of the current assets provides the cash to repay the loan.
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Self-selection | Consequence of a contract that induces only one group (e.g., low-risk individuals) to participate.
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Semistrong-form efficient market | Market in which security prices reflect all publicly available information (cf. weak-form efficient market and strong-form efficient market).
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Senior debt | Debt that, in the event of bankruptcy, must be repaid before subordinated debt receives any payment.
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Sensitivity analysis | Analysis of the effect on project profitability of possible changes in sales, costs, and so on.
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Serial bonds | Package of bonds that mature in successive years.
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Series bond | Bond that may be issued in several series under the same indenture.
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Shark repellant | Amendment to company charter intended to protect against takeover.
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Shelf registration | A procedure that allows firms to file one registration statement covering several issues of the same security.
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Shogun bond | Dollar bond issued in Japan by a nonresident.
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Short hedge | Sale of a hedging instrument (e.g., a future) to hedge a long position in the underlying asset (cf. long hedge).
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Short sale | Sale of a security the investor does not own.
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Sight draft | Demand for immediate payment (cf. time draft).
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Signal | Action that demonstrates an individual's unobservable characteristics (because it would be unduly costly for someone without those characteristics to take the action).
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Simple interest | Interest calculated only on the initial investment (cf. compound interest).
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Simulation | Monte Carlo simulation.
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Sinker | Sinking fund.
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Sinking fund (sinker) | Fund established by a company to retire debt before maturity.
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Skewed distribution | Probability distribution in which an unequal number of observations lie below and above the mean.
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SPE | Special purpose entity.
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Special dividend (extra dividend) | Dividend that is unlikely to be repeated.
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Special purpose entity | Partnerships established by companies to hold certain assets and obtain funding. May be used to obtain off-balance-sheet debt for the parent.
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Specific risk | Unique risk.
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Specialist | The individual who conducts the auction of a set of securities on the New York Stock Exchange.
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Spin-off | Distribution of shares in a subsidiary to the company's shareholders so they hold shares separately in the two firms.
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Spot exchange rate | Exchange rate on currency for immediate delivery (cf. forward exchange rate).
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Spot interest rate | Interest rate fixed today on a loan that is made today (cf. forward interest rate).
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Spot price | Price of asset for immediate delivery (in contrast to forward or futures price).
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Spread | 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.
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Standard deviation | Square root of the variance—a measure of variability.
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Standard error | In statistics, a measure of the possible error in an estimate.
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Standby agreement | In a rights issue, agreement that the underwriter will purchase any stock not purchased by investors.
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Step-up bond | Bond whose coupon is stepped up over time (also step-down bond).
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Stock dividend | Dividend in the form of stock rather than cash.
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Stock split | "Free" issue of shares to existing shareholders.
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Straddle | The combination of a put option and a call option with the same exercise price.
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Straight-line depreciation | An equal dollar amount of depreciation in each period.
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Striking price | Exercise price of an option.
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Stripped bond | Bond that is subdivided into a series of zero-coupon bonds.
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Strong-form efficient market | Market in which security prices reflect instantaneously all information available to investors (cf. weak-form efficient market and semistrong-form efficient market).
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Structured debt | Debt that has been customized for the buyer, often by incorporating unusual options.
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Subordinated debt (junior debt) | Debt over which senior debt takes priority. In the event of bankruptcy, subordinated debtholders receive payment only after senior debt is paid off in full.
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Sum-of-the-years'-digits depreciation | Method of accelerated depreciation.
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Sunk costs | Costs that have been incurred and cannot be reversed.
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Supermajority | Provision in a company's charter requiring a majority of, say, 80 percent of shareholders to approve certain changes, such as a merger.
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Sushi bond | A eurobond issued by a Japanese corporation.
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Sustainable growth rate | Maximum rate of firm growth without increasing financial leverage (cf. internal growth rate).
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Swap | An arrangement whereby two companies lend to each other on different terms, e.g., in different currencies, or one at a fixed rate and the other at a floating rate.
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Swaption | Option on a swap.
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Sweep program | Arrangement whereby bank invests a company's available cash at the end of each day.
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Swingline facility | Bank borrowing facility to provide finance while the firm replaces U.S. commercial paper with eurocommercial paper.
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Systematic risk | Market risk.
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Take-or-pay | In project finance, arrangement where parent company agrees to pay for output of project even if it chooses not to take delivery.
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Take-up fee | Fee paid to underwriters of a rights issue on any stock they are obliged to purchase.
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Tangible asset | Physical asset, such as plant, machinery, and offices (cf. intangible assets).
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Tax-anticipation bill | Short-term bill issued by the U.S. Treasury that can be surrendered at face value in payment of taxes.
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T-bill | Treasury bill.
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Technical analysis | Security analysis that seeks to detect and interpret patterns in past security prices (cf. fundamental analysis).
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TED spread | Difference between LIBOR and U.S. Treasury bill rate.
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Tender offer | General offer made directly to a firm's shareholders to buy their stock.
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Tenor | Maturity of a loan.
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Terminal warehouse | Public warehouse.
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Term loan | Medium-term, privately placed loan, usually made by a bank.
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Term structure of interest rates | Relationship between interest rates on loans of different maturities (cf. yield curve).
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Throughput arrangement | Arrangement by which shareholders of a pipeline company agree to make sufficient use of pipeline to enable the pipeline company to service its debt.
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Tick | Minimum amount the price of a security may change.
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Time draft | Demand for payment at a stated future date (cf. sight draft).
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Times interest earned (interest cover) | Earnings before interest and tax, divided by interest payments.
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TIPS (Treasury Inflation Protected Securities) | U.S. Treasury bonds whose coupon and principal payments are linked to the Consumer Price Index.
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Tolling contract | In project finance, arrangement whereby parent company promises to deliver materials to project for processing and then to repurchase them.
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Tombstone | Advertisement listing the underwriters to a security issue.
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Trade acceptance | Written demand that has been accepted by an industrial company to pay a given sum at a future date (cf. banker's acceptance).
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Trade credit | Accounts receivable.
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Trade debt | Accounts payable.
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Tranche | Portion of a new issue sold at a point in time different from the remainder or that has different terms.
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Transaction exposure | Risk to a firm with known future cash flows in a foreign currency that arises from possible changes in the exchange rate (cf. economic exposure, translation exposure).
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Transfer agent | Individual or institution appointed by a company to look after the transfer of securities.
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Translation exposure | Risk of adverse effects on a firm's financial statements that may arise from changes in exchange rates (cf. economic exposure, transaction exposure).
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Treasurer | Principal financial manager (cf. controller).
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Treasury bill (T-bill) | Short-term discount debt maturing in less than one year, issued regularly by the government.
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Treasury stock | Common stock that has been repurchased by the company and held in the company's treasury.
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Trust deed | Agreement between trustee and borrower setting out terms of bond.
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Trust receipt | Receipt for goods that are to be held in trust for the lender.
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Tunneling | Actions by a controlling shareholder to transfer wealth out of the firm (e.g., by supplying goods at an inflated price).
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Underpricing | Issue of securities below their market value.
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Underwriter | Firm that buys an issue of securities from a company and resells it to investors.
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Unfunded debt | Debt maturing within one year (cf. funded debt).
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Uniform price auction | Auction in which all successful bidders pay the same price (cf. discriminatory price auction).
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Unique risk (residual risk, specific risk, unsystematic risk) | Risk that can be eliminated by diversification.
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Unseasoned issue | Issue of a security for which there is no existing market (cf. seasoned issue).
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Unsystematic risk | Unique risk.
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Value additivity | Rule that the value of the whole must equal the sum of the values of the parts.
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Value-at-risk (VAR) | The probability of portfolio losses exceeding some specified proportion.
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Vanilla issue | Issue without unusual features.
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Variable-rate demand bond (VRDB) | Floating-rate bond that can be sold back periodically to the issuer.
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Variance | Mean squared deviation from the expected value—a measure of variability.
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Variation margin | The daily gains or losses on a futures contract credited to the investor's margin account.
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VAR | Value-at-risk.
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Venture capital | Capital to finance a new firm.
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Vertical merger | Merger between a supplier and its customer (cf. horizontal merger, conglomerate merger).
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Vertical spread | Simultaneous purchase and sale of two options that differ only in their exercise price (cf. horizontal spread).
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VRDB | Variable rate demand bond.
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WACC | Weighted-average cost of capital.
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Warehouse receipt | Evidence that a firm owns goods stored in a warehouse.
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Warrant | Long-term call option issued by a company.
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Weak-form efficient market | Market in which security prices instantaneously reflect the information in the history of security prices. In such a market security prices follow a random walk (cf. semistrong-form efficient market and strong-form efficient market).
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Weighted-average cost of capital (WACC) | Expected return on a portfolio of all the firm's securities. Used as hurdle rate for capital investment.
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White knight | A friendly potential acquirer sought out by a target company threatened by a less welcome suitor.
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Wi. | When issued.
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Winner's curse | Problem faced by uninformed bidders. For example, in an initial public offering uninformed participants are likely to receive larger allotments of issues that informed participants know are overpriced.
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With dividend (cum dividend) | Purchase of shares in which the buyer is entitled to the forthcoming dividend (cf. ex dividend).
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Withholding tax | Tax levied on dividends paid abroad.
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With rights (cum rights, rights on) | Purchase of shares in which the buyer is entitled to the rights to buy shares in the company's rights issue (cf. ex rights).
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Working capital | Current assets and current liabilities. The term is commonly used as synonymous with net working capital.
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Workout | Informal arrangement between a borrower and creditors.
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Writer | Option seller.
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xd | Ex dividend.
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xr | Ex rights.
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Yankee bond | A dollar bond issued in the United States by a non-U.S. borrower (cf. bulldog bond, Samurai bond).
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Yield curve | Term structure of interest rates.
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Yield to maturity | Internal rate of return on a bond.
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Zero-coupon bond | Discount bond making no coupon payments.
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Z-score | Measure of the likelihood of bankruptcy.
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