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Abnormal return  Part of return that is not due to marketwide price movements.
Absolute priority  Rule in bankruptcy proceedings whereby senior creditors are required to be paid in full before junior creditors receive any payment.
Accelerated depreciation  Any depreciation method that produces larger deductions for depreciation in the early years of a project's life.
Accounts payable (payables, trade debt)  Money owed to suppliers.
Accounts receivable (receivables, trade credit)  Money owed by customers.
Accrued interest  Interest that has been earned but not yet paid.
ACH  Automated Clearing House.
Acid-test ratio  Quick ratio.
Adjusted present value (APV)  Net present value of an asset if financed solely by equity plus the present value of any financing side effects.
ADR  American depository receipt.
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.
Affirmative covenant  Loan covenant specifying certain actions that the borrower must take.
Agency costs  Losses that arise when an agent (e.g., a manager) does not act solely in the interests of the principal (e.g., the shareholder).
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.
Aging schedule  Summary of age of receivables that are outstanding from each customer.
AIBD  Association of International Bond Dealers.
All-or-none underwriting  An arrangement whereby a security issue is canceled if the underwriter is unable to resell the entire issue.
Alpha  Measure of portfolio return adjusted for effect of market.
Alternative minimum tax (AMT)  A separately calculated minimum amount of tax that must be paid by corporations or individuals.
American depository receipt (ADR)  A certificate issued in the United States to represent shares of a foreign company.
American option  Option that can be exercised any time before the final exercise date (cf. European option).
Amex  American Stock Exchange.
Amortization  (1) Repayment of a loan by installments; (2) allowance for depreciation.
AMT  Alternative minimum tax.
Angel investor  Wealthy individual who provides capital for small start-up businesses.
Annual percentage rate (APR)  The interest rate per period (e.g., per month) multiplied by the number of periods in a year.
Annuity  Investment that produces a level stream of cash flows for a limited number of periods.
Annuity due  Annuity whose payments occur at the start of each period.
Annuity factor  Present value of $1 paid for each of t periods.
Anticipation  Arrangement whereby customers who pay before the final date may be entitled to deduct a normal rate of interest.
Appraisal rights  A right of shareholders in a merger to demand the payment of a fair price for their shares, as determined independently.
Appropriation request  Formal request for funds for a capital investment project.
APR  Annual percentage rate.
APT  Arbitrage pricing theory.
APV  Adjusted present value.
Arbitrage  Purchase of one security and simultaneous sale of another to give a risk-free profit.
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.
Arbitrage pricing theory (APT)  Model in which expected returns increase linearly with an asset's sensitivity to a small number of pervasive factors.
Arranger  Lead underwriter to a syndicated loan.
Articles of incorporation  Legal document establishing a corporation and its structure and purpose.
Asian currency units  Dollar deposits held in Singapore or other Asian centers.
Asian option  Option based on the average price of the asset during the life of the option.
Asked price (offered price)  Price at which a dealer is willing to sell (cf. bid price).
Asset-backed securities  Securities issued by a special-purpose company that holds a package of assets whose cash flows are sufficient to service the bonds.
Asset stripper  Acquirer who takes over firms in order to sell off a large part of their assets.
Asymmetric information  Difference in information available to two parties, e.g., a manager and investors.
At-the-money option  Option whose exercise price equals the current asset price (cf. in-the-money option, out-of-the-money option).
Auction market  Securities exchange in which prices are determined by an auction process, e.g., NYSE (cf. dealer market).
Auction-rate preferred  A variant of floating-rate preferred stock where the dividend is reset every 49 days by auction.
Authorized share capital  Maximum number of shares that a company can issue, as specified in the firm's articles of incorporation.
Automated Clearing House (ACH)  Private electronic system run by banks for high-volume, low-value payments.
Automatic debit  Direct payment.
Availability float  Checks deposited by a company that have not yet been cleared.
Aval  Bank guarantee for debt purchased by forfaiter.
B BA  Banker's acceptance.
Backdating  Discredited practice of using hindsight to select a grant date for at-the-money executive stock options when the stock price (and therefore exercise price) were unusually low.
Backwardation  Condition in which spot price of commodity exceeds price of future (cf. contango).
Balloon payment  Large final payment (e.g., when a loan is repaid in installments).
Bank discount  Interest deducted from the initial amount of a loan.
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).
Barrier option  Option whose existence depends on asset price hitting some specified barrier (cf. down-and-out option, down-and-in option).
Basel Accord  International agreement on the amount of capital to be maintained by large banks to support their risky loans.
Basis point (bp)  .01%.
Basis risk  Residual risk that results when the two sides of a hedge do not move exactly together.
Bearer security  Security for which primary evidence of ownership is possession of the certificate (cf. registered security).
Bear market  Widespread decline in security prices (cf. bull market).
Behavioral finance  Branch of finance that stresses aspects of investor irrationality.
Benchmark maturity  Maturity of a newly issued Treasury bond.
Benefit-cost ratio  One plus profitability index.
Bermuda option  Option that is exercisable on discrete dates before maturity.
Best-efforts underwriting  An arrangement whereby underwriters do not commit themselves to selling a security issue but promise only to use best efforts.
Beta  Measure of market risk.
Bid price  Price at which a dealer is willing to buy (cf. asked price).
Big Board  Colloquial term for the New York Stock Exchange.
Bill of exchange  General term for a document demanding payment.
Bill of lading  Document establishing ownership of goods in transit.
Binomial method  Method for valuing options that assumes there are only two possible changes in the asset price in any one period.
Blue-chip company  Large and creditworthy company.
Blue-sky laws  State laws covering the issue and trading of securities.
Boilerplate  Standard terms and conditions, e.g., in a debt contract.
Bond  Long-term debt.
Bond rating  Rating of the likelihood of bond's default.
Bookbuilding  The procedure whereby underwriters gather nonbinding indications of demand for a new issue.
Book entry  Registered ownership of stock without issue of stock certificate.
Book runner  The managing underwriter for a new issue. The book runner maintains the book of securities sold.
Bought deal  Security issue where one or two underwriters buy the entire issue.
BP  Basis point.
Bracket  A term signifying the extent of an underwriter's commitment in a new issue, e.g., major bracket, minor bracket.
Break-even analysis  Analysis of the level of sales at which a project would just break even.
Bridge loan  Short-term loan to provide temporary financing until more permanent financing is arranged.
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.
Bulldog bond  Foreign bond issue made in London.
Bullet payment  Single final payment, e.g., of a loan (in contrast to payment in installments).
Bull market  Widespread rise in security prices (cf. bear market).
Butterfly spread  The purchase of two call options with different exercise prices and simultaneous sale of two calls exercisable at the average of these two exercise prices. Provides a bet that the share price will stay within a narrow range.
Bund  Long-term German government bond.
Buyback  Repurchase agreement.
Cable  The exchange rate between U.S. dollars and sterling.
Call option  Option to buy an asset at a specified exercise price on or before a specified exercise date (cf. put option).
Call premium  (1) Difference between the price at which a company can call its bonds and their face value; (2) price of a call option.
Call provision  Provision that allows an issuer to buy back the bond issue at a stated price.
Cap  An upper limit on the interest rate on a floating-rate note.
CAPEX  Capital expenditure.
Capital asset pricing model (CAPM)  Model in which expected returns increase linearly with an asset's beta.
Capital budget  List of planned investment projects, usually prepared annually.
Capitalization  Long-term debt plus preferred stock plus net worth.
Capital lease  Financial lease.
Capital market  Financial market (particularly the market for long-term securities).
Capital market line  A plot of the set of portfolios with the highest Sharpe ratio. The line passes through the riskfree interest rate and the tangent efficient portfolio of risky assets.
Capital rationing  Shortage of funds that forces a company to choose between worthwhile projects.
Capital structure  Mix of different securities issued by a firm.
CAPM  Capital asset pricing model.
Captive finance company  Subsidiary whose function is to provide finance for purchases from the parent company.
Caput option  Call option on a put option.
CAR  Cumulative abnormal return.
CARDs (Certificates for Amortizing Revolving Debt)  Pass-through securities backed by credit card receivables.
Carried interest  A proportion of the profits to which private equity partnerships, etc. are entitled.
Carry trade  Borrowing in country with low interest rate to relend in another country with a higher rate.
CARs (Certificates of Automobile Receivables)  Pass-through securities backed by automobile receivables.
Carve-out  Public offering of shares in a subsidiary.
Cascade  Rational herding in which each individual deduces that previous decisions by others may have been based on extra information.
Cash and carry  Purchase of a security and simultaneous sale of a future, with the balance being financed with a loan or repo.
Cash budget  Forecast of sources and uses of cash.
Cash cow  Mature company producing a large free cash flow.
Cash cycle  The time from a firm's payment for raw materials until the payment for the finished product from the customer.
Cash-deficiency arrangement  Arrangement whereby a project's shareholders agree to provide the operating company with sufficient net working capital.
Catastrophe bond (CAT bond)  Bond whose payoffs are linked to a measure of catastrophe losses such as insurance claims.
CAT bond  Catastrophe bond.
CBD  Cash before delivery.
CD  Certificate of deposit.
CDS  Credit default swap.
CEO  Chief executive officer.
Certainty equivalent  A certain cash flow that has the same present value as a specified risky cash flow.
Certificate of deposit (CD)  A certificate providing evidence of a bank time deposit.
CFTC  Commodity Futures Trading Commission.
CFO  Chief financial officer.
Chaebol  A Korean conglomerate.
Chapter 7  Bankruptcy procedure whereby a debtor's assets are sold and the proceeds are used to repay creditors.
Chapter 11  Bankruptcy procedure designed to reorganize and rehabilitate defaulting firm.
Check conversion  When customer writes a check, information is automatically captured and his bank account immediately debited.
Check 21  Check Clearing for the 21st Century Act allows banks to process checks electronically.
CHIPS  Clearinghouse Interbank Payments System.
Chooser option  Holder decides whether it is a call option or put option.
Clean price (flat price)  Bond price excluding accrued interest (cf. dirty price).
Clearinghouse Interbank Payments System (CHIPS)  An international wire transfer system operated by a group of major banks for high-value dollar payments.
CLO  Collateralized loan obligation. Also CDO (collateralized debt obligation) and CMO (collateralized mortgage obligation).
Closed-end fund  Company whose assets consist of investments in a number of industrial and commercial companies.
Closed-end mortgage  Mortgage against which no additional debt may be issued (cf. open-end mortgage).
CMOs  Collateralized mortgage obligations.
COD  Cash on delivery.
Collar  An upper and lower limit on the interest rate on a floating-rate note.
Collateral  Assets that are given as security for a loan.
Collateralized loan obligation (CLO)  A security backed by a pool of loans and issued in tranches with different levels of seniority.
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.
Collateral trust bonds  Bonds secured by common stocks or other securities that are owned by the borrower.
Collection float  Customer-written checks that have not been received, deposited, and added to the company's available balance (cf. payment float).
Commercial draft (bill of exchange)  Demand for payment.
Commercial paper  Unsecured notes issued by companies and maturing within nine months.
Commitment fee  Fee charged by bank on an unused line of credit.
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.
Common stock  Security representing ownership of a corporation.
Company cost of capital  The expected return on a portfolio of all the firm's securities.
Compensating balance  Non-interest-bearing demand deposits to compensate banks for bank loans or services.
Competitive bidding  Means by which public utility holding companies are required to choose their underwriter (cf. negotiated underwriting).
Completion bonding  Insurance that a construction contract will be successfully completed.
Composition  Voluntary agreement to reduce payments on a firm's debt.
Compound interest  Reinvestment of each interest payment on money invested to earn more interest (cf. simple interest).
Compound option  Option on an option.
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.
Conditional sale  Sale in which ownership does not pass to the buyer until payment is completed.
Conglomerate merger  Merger between two companies in unrelated businesses (cf. horizontal merger, vertical merger).
Consol  Name of a perpetual bond issued by the British government. Sometimes used as a general term for perpetuity.
Contango  Condition in which spot price of a commodity is below that of the future (cf. backwardation).
Contingent claim  Claim whose value depends on the value of another asset.
Contingent project  Project that cannot be undertaken unless another project is also undertaken.
Continuous compounding  Interest compounded continuously rather than at fixed intervals.
Controller  Officer responsible for budgeting, accounting, and auditing in a firm (cf. treasurer).
Convenience yield  The extra advantage that firms derive from holding the commodity rather than the future.
Conversion price  Par value of a convertible bond divided by the number of shares into which it may be exchanged.
Conversion ratio  Number of shares for which a convertible bond may be exchanged.
Convertible bond  Bond that may be converted into another security at the holder's option. Similarly convertible preferred stock.
Convexity  In a plot of a bond's price against the interest rate, convexity measures the curvature of the line.
Corporate venturing  Practice by which a large manufacturer provides financial support to new companies.
Corporation  A business that is legally separate from its owners.
Correlation coefficient  Measure of the closeness of the relationship between two variables.
Cost company arrangement  Arrangement whereby the shareholders of a project receive output free of charge but agree to pay all operating and financing charges of the project.
Cost of (equity) capital  Opportunity cost of capital.
Counterparty  Party on the other side of a derivative contract.
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.
Covariance  Measure of the co-movement between two variables.
Covenant  Clause in a loan agreement.
Covered option  Option position with an offsetting position in the underlying asset.
Cramdown  Action by a bankruptcy court to enforce a plan of reorganization.
Credit default swap (CDS)  Credit derivative in which one party makes fixed payments while the payments by the other party depend on the occurrence of a loan default.
Credit derivative  Contract for hedging against loan default or changes in credit risk (e.g., credit default swap).
Credit rating  Debt rating assigned by a rating agency such as Moody's or Standard & Poor's.
Credit scoring  A procedure for assigning scores to borrowers on the basis of the risk of default.
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.
Cum dividend  With dividend.
Cum rights  With rights.
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.
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).
Current asset  Asset that will normally be turned into cash within a year.
Current liability  Liability that will normally be repaid within a year.
Current ratio  Current assets divided by current liabilities —a measure of liquidity.
Current yield  Bond coupon divided by price.
Data mining (data snooping)  Excessive search to find interesting (but probably coincidental) behavior in a body of data.
DCF  Discounted cash flow.
DDM  Dividend discount model.
Dealer market  Securities exchange in which dealers post offers to buy or sell, e.g., Nasdaq (cf. auction market).
Dealer paper  Commercial paper sold through a dealer rather than directly by the company.
Death spiral convertible  Convertible bond exchangeable for shares with a specified market value.
Debenture  Unsecured bond.
Debtor-in-possession financing (DIP financing)  Debt issued by a company in Chapter 11 bankruptcy.
Decision tree  Method of representing alternative sequential decisions and the possible outcomes from these decisions.
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.
Degree of operating leverage (DOL)  The percentage change in profits for a 1% change in sales.
Delta  Hedge ratio.
Depository transfer check (DTC)  Check made out directly by a local bank to a particular company.
Depreciation  (1) Reduction in the book or market value of an asset; (2) portion of an investment that can be deducted from taxable income.
Derivative  Asset whose value derives from that of some other asset (e.g., a future or an option).
Designated market maker  Member of NYSE responsible for market in specified securities (formerly called "specialist").
Diff  Differential swap.
Differential swap (diff, quanto swap)  Swap between two LIBOR rates of interest, e.g., yen LIBOR for dollar LIBOR. Payments are in one currency.
Digital option  Option paying fixed sum if asset price is the right side of exercise price, otherwise zero.
Dilution  Diminution in the proportion of income to which each share is entitled.
DIP financing  Debtor-in-possession financing.
Direct deposit  The firm authorizes its bank to deposit money in the accounts of its employees or shareholders.
Direct lease  Lease in which the lessor purchases new equipment from the manufacturer and leases it to the lessee (cf. sale and lease-back).
Direct payment (automatic debit, direct debit)  The firm's customers authorize it to debit their bank accounts for the amounts due (cf. direct deposit).
Direct quote  For foreign exchange, the number of U.S. dollars needed to buy one unit of a foreign currency (cf. indirect quote).
Dirty price  Bond price including accrued interest, i.e., the price paid by the bond buyer (cf. clean price).
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.
Discounted cash flow (DCF)  Future cash flows multiplied by discount factors to obtain present value.
Discount factor  Present value of $1 received at a stated future date.
Discount rate  Rate used to calculate the present value of future cash flows.
Discounted payback rule  Requirement that discounted values of cash flows should be sufficient to pay back initial investment within a specified time.
Discriminatory price auction  Auction in which successful bidders pay the price that they bid (cf. uniform price auction).
Disintermediation  Withdrawal of funds from a financial institution in order to invest them directly (cf. intermediation).
Dividend  Payment by a company to its stockholders.
Dividend discount model  Model showing that the value of a share is equal to the discounted value of future dividends.
Dividend reinvestment plan (DRIP)  Plan that allows shareholders to reinvest dividends automatically.
Dividend yield  Annual dividend divided by share price.
DOL  Degree of operating leverage.
Double-declining-balance depreciation  Method of accelerated depreciation.
Double-tax agreement  Agreement between two countries that taxes paid abroad can be offset against domestic taxes levied on foreign dividends.
Down-and-in option  Barrier option that comes into existence if asset price hits a barrier.
Down-and-out option  Barrier option that expires if asset price hits a barrier.
DRIP  Dividend reinvestment plan.
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.
DTC  Depository transfer check.
Dual-class equity  Shares with different voting rights.
Dual-currency bond  Bond with interest paid in one currency and principal paid in another.
DuPont formula  Formula expressing relationship between return on assets, sales-to-assets, profit margin, and measures of leverage.
Duration  The average number of years to an asset's discounted cash flows.
Dutch auction  In a Dutch auction investors submit the prices at which they are prepared to buy (or sell) the security. The purchase price is the lowest price that allows the firm to sell (or buy) the specified amount of the security.
EBIT  Earnings before interest and taxes.
EBITDA  Earnings before interest, taxes, depreciation, and amortization.
EBPP  Electronic bill presentment and payment.
Economic depreciation  Decline in present value of an asset.
Economic exposure  Risk that arises from changes in real exchange rates (cf. transaction exposure, translation exposure).
Economic income  Cash flow plus change in present value.
Economic rents  Profits in excess of the competitive level.
Economic value added (EVA)  A measure of residual income implemented by the consulting firm Stern Stewart.
Efficient market  Market in which security prices reflect information instantaneously.
Efficient portfolio  Portfolio that offers the lowest risk (standard deviation) for its expected return and the highest expected return for its level of risk.
EFT  Electronic funds transfer.
Electronic bill presentment and payment (EBPP)  Allows companies to bill customers and receive payments via the Internet.
Electronic funds transfer (EFT)  Transfer of money electronically (e.g., by Fedwire).
Employee stock ownership plan (ESOP)  A company contributes to a trust fund that buys stock on behalf of employees.
Entrenching investment  An investment that makes particular use of the skills of existing management.
EPS  Earnings per share.
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.
Equity  (1) Common stock and preferred stock. Often used to refer to common stock only. (2) Net worth.
Equity-linked bond  Bond whose payments are linked to a stock market index.
Equivalent annual cash flow (or cost)  Annuity with the same present value as the company's proposed investment.
ESOP  Employee stock ownership plan.
ETF  Exchange-traded fund.
Euribor  Euro interbank offered rate.
Euro interbank offered rate (Euribor)  The interest rate at which major international banks in Europe lend euros to each other.
Eurobond  Bond that is marketed internationally.
Eurocurrency  Deposit held outside the currency's issuing country (e.g., euroyen, or eurodollar deposit)
Eurodollar deposit  Dollar deposit with a bank outside the United States.
European option  Option that can be exercised only on final exercise date (cf. American option).
EVA  Economic value added.
Event risk  The risk that an unanticipated event (e.g., a takeover) will lead to a debt default.
Evergreen credit  Revolving credit without maturity.
Exchange of assets  Acquisition of another company by purchase of its assets in exchange for cash or shares.
Exchange of stock  Acquisition of another company by purchase of its stock in exchange for cash or shares.
Exchange-traded fund (ETF)  A stock designed to track a stock market index.
Ex dividend  Purchase of shares in which the buyer is not entitled to the forthcoming dividend (cf. with dividend, cum dividend).
Exercise price (strike price)  Price at which a call option or put option may be exercised.
Expectations theory  Theory that forward interest rate (forward exchange rate) equals expected spot rate.
Expected return  Average of possible returns weighted by their probabilities.
Ex rights  Purchase of shares that do not entitle the owner to buy shares in the company's rights issue (cf. with rights, cum rights, rights on).
Extendable bond  Bond whose maturity can be extended at the option of the lender (or issuer).
External finance  Finance that is not generated by the firm: new borrowing or an issue of stock (cf. internal finance).
Extra dividend  Dividend that may or may not be repeated (cf. regular dividend).
Face value  Par value.
Factoring  Arrangement whereby a financial institution buys a company's accounts receivable and collects the debt.
Fair price provision  Appraisal rights.
Fallen angel  Junk bond that was formerly investment grade.
FASB  Financial Accounting Standards Board.
FCIA  Foreign Credit Insurance Association.
FDIC  Federal Deposit Insurance Corporation.
Federal funds  Non-interest-bearing deposits by banks at the Federal Reserve. Excess reserves are lent by banks to each other.
Fedwire  A wire transfer system for high-value payments operated by the Federal Reserve System (cf. CHIPS).
Field warehouse  Warehouse rented by a warehouse company on another firm's premises (cf. public warehouse).
Financial assets  Claims on real assets.
Financial engineering  Combining or dividing existing instruments to create new financial products.
Financial lease (capital lease, full-payout lease)  Longterm, noncancelable lease (cf. operating lease).
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).
Firm commitment  Arrangement whereby the underwriter guarantees to sell the entire issue.
Fiscal agency agreement  An alternative to a bond trust deed. Unlike the trustee, the fiscal agent acts as an agent of the borrower.
Flat price  Clean price.
Flipping  Buying shares in an IPO and selling immediately.
Float  See availability float, collection float, payment float.
Floating lien  General lien against a company's assets or against a particular class of assets.
Floating-price convertible  Death spiral convertible.
Floating-rate note (FRN)  Note whose interest payment varies with the short-term interest rate.
Floating-rate preferred  Preferred stock paying dividends that vary with short-term interest rates.
Floor planning  Arrangement used to finance inventory. A finance company buys the inventory, which is then held in trust by the user.
Flow-to-equity method  Discounted value of cash flows to equityholders.
Foreign bond  A bond issued on the domestic capital market of another country.
Forex  Foreign exchange.
Forfaiter  Purchaser of promises to pay (e.g., bills of exchange or promissory notes) issued by importers.
Forward cover  Purchase or sale of forward foreign currency in order to offset a known future cash flow.
Forward exchange rate  Exchange rate fixed today for exchanging currency at some future date (cf. spot exchange rate).
Forward interest rate  Interest rate fixed today on a loan to be made at some future date (cf. spot interest rate).
Forward rate agreement (FRA)  Agreement to borrow or lend at a specified future date at an interest rate that is fixed today.
FRA  Forward rate agreement.
Free cash flow  Cash not required for operations or for reinvestment.
Free-rider problem  The temptation not to incur the costs of participating in a decision when one's influence on that decision is small.
FRN  Floating-rate note.
Full-payout lease  Financial lease.
Full-service lease (rental lease)  Lease in which the lessor promises to maintain and insure the equipment (cf. net lease).
Fundamental analysis  Security analysis that seeks to detect misvalued securities by an analysis of the firm's business prospects (cf. technical analysis).
Funded debt  Debt maturing after more than one year (cf. unfunded debt).
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 traded on organized exchanges and are marked to market daily.
GAAP  Generally accepted accounting principles.
Gamma  A measure of how the option delta changes as the asset price changes.
Gearing  Financial leverage.
General cash offer  Issue of securities offered to all investors (cf. rights issue).
Gilt  A British government bond.
Golden parachute  A large termination payment due to a company's officers if they lose their jobs as a result of a merger.
Goodwill  The difference between the amount paid for a firm in a merger and its book value.
Governance  The oversight of a firm's management.
Gray market  Purchases and sales of securities that occur before the issue price is set.
Greenmail  Situation in which a large block of stock is held by an unfriendly company, forcing the target company to repurchase the stock at a substantial premium to prevent a takeover.
Greenshoe option  Option that allows the underwriter for a new issue to buy and resell additional shares.
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).
Haircut  An additional margin of collateral for a loan.
Hedge fund  An investment fund charging a performance fee and open to a limited range of investors. Funds often follow complex strategies including short sales.
Hedge ratio (delta, option delta)  The number of shares to buy for each option sold 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.
Hedging  Buying one security and selling another to reduce risk. A perfect hedge produces a riskless portfolio.
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.
Highly leveraged transaction (HLT)  Bank loan to a highly leveraged firm (formerly needed to be separately reported to the Federal Reserve Board).
High-yield bond  Junk bond.
HLT  Highly leveraged transaction.
Holding company  Company whose sole function is to hold stock in the firm's subsidiaries.
Horizontal merger  Merger between two companies that manufacture similar products (cf. vertical merger, conglomerate merger).
Horizontal spread  The simultaneous purchase and sale of two options that differ only in their exercise date (cf. vertical spread).
Hurdle rate  Minimum acceptable rate of return on a project.
IBF  International banking facility.
IMM  International Monetary Market.
Immunization  The construction of an asset and a liability that have offsetting changes in value.
Implied volatility  The volatility implied by option prices.
Imputation tax system  Arrangement by which investors who receive a dividend also receive a tax credit for corporate taxes that the firm has paid.
Income bond  Bond on which interest is payable only if earned.
Income stock  Common stock with high dividend yield and few profitable investment opportunities (cf. growth stock).
Indenture  Formal agreement, e.g., establishing the terms of a bond issue.
Indexed bond  Bond whose payments are linked to an index, e.g., a consumer price index (see TIPS).
Index fund  Investment fund designed to match the returns on a stock market index.
Indirect quote  For foreign exchange, the number of units of a foreign currency needed to buy one U.S. dollar (cf. direct quote).
Industrial revenue bond (IRB)  Bond issued by local government agencies on behalf of corporations.
Initial public offering (IPO)  A company's first public issue of common stock.
Inside director  Director who is also employed by the company.
In-substance defeasance  Defeasance whereby debt is removed from the balance sheet but not canceled (cf. novation).
Intangible asset  Nonmaterial asset, such as technical expertise, a trademark, or a patent (cf. tangible asset).
Integer programming  Variant of linear programming whereby the solution values must be integers.
Interest cover  Times interest earned.
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.
Intermediation  Investment through a financial institution (cf. disintermediation).
Internal finance  Finance generated within a firm by retained earnings and depreciation (cf. external finance).
Internal growth rate  The maximum rate of firm growth without external finance (cf. sustainable growth rate).
Internal rate of return (IRR)  Discount rate at which investment has zero net present value.
International banking facility (IBF)  A branch that an American bank establishes in the United States to do eurocurrency business.
International Monetary Market (IMM)  The financial futures market within the Chicago Mercantile Exchange.
Interval measure  The number of days that a firm can finance operations without additional cash income.
In-the-money option  An option that would be worth exercising if it expired immediately (cf. out-of-the-money option).
Investment-grade bond  Bond rated at least Baa by Moody's or BBB by Standard and Poor's or Fitch.
IOSCO  International Organization of Securities Commissions.
IPO  Initial public offering.
IRB  Industrial revenue bond.
IRR  Internal rate of return.
IRS  Internal Revenue Service.
ISDA  International Swap and Derivatives Association.
ISMA  International Securities Market Association.
Issued share capital  Total amount of shares that are in issue (cf. outstanding share capital).
Junior debt  Subordinated debt.
Junk bond (high-yield bond)  Debt that is rated below an investment-grade bond.
Just-in-time  System of inventory management that requires minimum inventories of materials and very frequent deliveries by suppliers.
Keiretsu  A network of Japanese companies organized around a major bank.
LBO  Leveraged buyout.
Lease  Long-term rental agreement.
Legal capital  Value at which a company's shares are recorded in its books.
Legal defeasance  Novation.
Lessee  User of a leased asset (cf. lessor).
Lessor  Owner of a leased asset (cf. lessee).
Letter of credit  Letter from a bank stating that it has established a credit in the company's favor.
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.
Leverage  See financial leverage, operating leverage.
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.
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.
Liabilities, total liabilities  Total value of financial claims on a firm's assets. Equals (1) total assets or (2) total assets minus net worth.
LIBOR  London interbank offered rate.
Lien  Lender's claims on specified assets.
Limited liability  Limitation of a shareholder's losses to the amount invested.
Limited partnership  Partnership in which some partners have limited liability and general partners have unlimited liability.
Limit order  Order to buy (sell) securities within a maximum (minimum) price (cf. market order).
Linear programming (LP)  Technique for finding the maximum value of some objective function subject to stated linear constraints.
Line of credit  Agreement by a bank that a company may borrow at any time up to an established limit.
Liquid asset  Asset that is easily and cheaply turned into cash—notably cash itself and short-term securities.
Liquidating dividend  Dividend that represents a return of capital.
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.
Liquidity-preference theory  Theory that investors demand a higher yield to compensate for the extra risk of long-term bonds.
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.
Liquid yield option note (LYON)  Zero-coupon, callable, puttable, convertible bond.
Loan origination fee  Up-front fee charged by the lending bank.
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.
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.)
Long hedge  Purchase of a hedging instrument (e.g., a future) to hedge a short position in the underlying asset (cf. short hedge).
Longevity bonds  Bonds that pay a higher rate of interest if a high proportion of the population survives to a particular age.
Lookback option  Option whose payoff depends on the highest asset price recorded over the life of the option.
LP  Linear programming.
LYON  Liquid yield option note.
MACRS  Modified accelerated cost recovery system.
Maintenance margin  Minimum margin that must be maintained on a futures contract.
Majority voting  Voting system under which each director is voted upon separately (cf. cumulative voting).
Management buyout (MBO)  Leveraged buyout whereby the acquiring group is led by the firm's management.
Mandatory convertible  Bond automatically convertible into equity, usually with a limit on the value of stock received.
Margin  Cash or securities set aside by an investor as evidence that he or she can honor a commitment.
Marked to market  An arrangement whereby the profits or losses on a futures contract are settled up each day.
Market capitalization  Market value of outstanding share capital.
Market capitalization rate  Expected return on a security.
Market model  Model suggesting a linear relationship between actual returns on a stock and on the market portfolio.
Market order  Order to buy or sell securities at the prevailing market price (cf. limit order).
Market risk (systematic risk)  Risk that cannot be diversified away.
Market-to-book ratio  Ratio of market value to book value of firm's equity.
Market value added  Difference between market value and book value of firm's equity.
Maturity factoring  Factoring arrangement that provides collection and insurance of accounts receivable.
MBO  Management buyout.
MDA  Multiple-discriminant analysis.
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.
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.
MIP (Monthly income preferred security)  Preferred stock issued by a subsidiary located in a tax haven. The subsidiary relends the money to the parent.
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).
Modified accelerated cost recovery system (MACRS)  Schedule of depreciation deductions allowed for tax purposes.
Modified IRR  Internal rate of return calculated by first discounting later cash flows back to earlier periods so that there remains only one change in the sign of the cash flows.
Momentum  Characteristic of stocks showing persistent recent high returns.
Money center bank  A major U.S. bank that undertakes a wide range of banking activities.
Money market  Market for short-term safe investments.
Money-market deposit account (MMDA)  A bank account paying money-market interest rate.
Money-market fund  Mutual fund that invests solely in short-term safe securities.
Monoline  Insurance company that insures debtholders against the risk of default.
Monte Carlo simulation  Method for calculating the probability distribution of possible outcomes, e.g., from a project.
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.
Mortality bonds  Bonds that pay a higher rate of interest if there is a sharp rise in the death rate.
Mortgage bond  Bond secured against plant and equipment.
MTN  Medium-term note.
Multiple-discriminant analysis (MDA)  Statistical technique for distinguishing between two groups on the basis of their observed characteristics.
Mutual fund  Managed investment fund whose shares are sold to investors.
Mutually exclusive projects  Two projects that cannot both be undertaken.
Naked option  Option held on its own, i.e., not used for hedging a holding in the asset or other options.
Nasdaq  National Association of Security Dealers Automated Quote System. A U.S. stock exchange whose dealers tend to specialize in high-tech stocks.
Negative pledge clause  Clause under which the borrower agrees not to permit an exclusive lien on any of its assets.
Negotiated underwriting  Method of choosing an underwriter. Most firms may choose their underwriter by negotiation (cf. competitive bidding).
Net lease  Lease in which the lessee promises to maintain and insure the equipment (cf. full-service lease).
Net present value (NPV)  A project's net contribution to wealth— present value minus initial investment.
Net working capital  Current assets minus current liabilities.
Net worth  Book value of a company's common stock, surplus, and retained earnings.
Nominal interest rate  Interest rate expressed in money terms (cf. real interest rate).
Nonrefundable debt  Debt that may not be called in order to replace it with another issue at a lower interest cost.
NOPAT  Net operating profit after tax.
Normal distribution  Symmetric bell-shaped distribution that can be completely defined by its mean and standard deviation.
Note  Unsecured debt with a maturity of up to 10 years.
Novation (legal defeasance)  Defeasance whereby the firm's debt is canceled (cf. in-substance defeasance).
NPV  Net present value.
NYSE  New York Stock Exchange.
OAT (Obligation assimilable du Trésor)  French government bond.
Odd lot  A trade of less than 100 shares (cf. round lot).
Off-balance-sheet financing  Financing that is not shown as a liability in a company's balance sheet.
Offer price  Asked price.
OID debt  Original issue discount debt.
Old-line factoring  Factoring arrangement that provides collection, insurance, and finance for accounts receivable.
On the run  The most recently issued (and, therefore, typically the most liquid) government bond in a particular maturity range.
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.
Open-end mortgage  Mortgage against which additional debt may be issued (cf. closed-end mortgage).
Open interest  The number of currently outstanding futures contracts.
Operating cycle  The time from a firm's initial purchase of raw materials until the payment from the customer for the finished product.
Operating lease  Short-term, cancelable lease (cf. financial lease).
Operating leverage  Fixed operating costs, so called because they accentuate variations in profits (cf. financial leverage).
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.
Option  See call option, put option.
Option delta  Hedge ratio.
Original issue discount debt (OID debt)  Debt that is initially offered at a price below face value.
OTC  Over-the-counter.
Out-of-the-money option  An option that would not be worth exercising if it matured immediately (cf. in-the-money option).
Outstanding share capital  Issued share capital less the par value of shares that are held in the company's treasury.
Oversubscription privilege  In a rights issue, arrangement by which shareholders are given the right to apply for any shares that are not taken up.
Over-the-counter (OTC)  Informal market that does not involve a securities exchange.
Partnership  Joint ownership of business whereby general partners have unlimited liability.
Par value (face value)  Value of a security shown on the certificate.
Pass-through securities  Notes or bonds backed by a package of assets (e.g., mortgage pass-throughs, CARs, CARDs).
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.
Payables  Accounts payable.
Payback rule  Requirement that project should recover its initial investment within a specified time.
Pay-in-kind bond (PIK)  Bond that allows the issuer to choose to make interest payments in the form of additional bonds.
Payment float  Company-written checks that have not yet cleared (cf. availability float).
Payout ratio  Dividend as a proportion of earnings per share.
PBGC  Pension Benefit Guarantee Corporation.
P/E ratio  Share price divided by earnings per share.
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 that the investor receives.
Perpetuity  Investment offering a level stream of cash flows in perpetuity (cf. consol).
PIK  Pay-in-kind bond.
PN  Project note.
Poison pill  Includes a variety of takeover defenses, notably the right of existing shareholders to acquire stock at a discount if a bidder acquires a minimum number of shares.
Poison put  A covenant allowing the bond holder to demand repayment in the event of a hostile merger.
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).
Position diagram  Diagram showing the possible payoffs from a derivative investment.
Postaudit  Evaluation of an investment project after it has been undertaken.
Praecipium  Arrangement fee for syndicated loan.
Preemptive right  Common stockholder's right to anything of value distributed by the company.
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.
Prenegotiated bankruptcy  Chapter 11 bankruptcy where only principal creditors have agreed to the reorganization plan before filing (cf. prepackaged bankruptcy).
Prepack  Prepackaged bankruptcy.
Prepackaged bankruptcy (prepack)  Bankruptcy proceedings intended to confirm a reorganization plan that has already been agreed to informally.
Present value  Discounted value of future cash flows.
Present value of growth opportunities (PVGO)  Net present value of investments the firm is expected to make in the future.
PRIDE  Similar to a PERC except that as the equity price rises beyond a specified point, the investor shares in the stock appreciation.
Primary issue  Issue of new securities by a firm (cf. secondary issue).
Prime rate  Benchmark lending rate set by U.S. banks.
Principal  Amount of debt that must be repaid.
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.
Private equity  Equity that is not publicly traded and that is used to finance business start-ups, leveraged buyouts, etc.
Private placement  Issue of bonds or stock that is placed privately with a few investors and is not then publicly traded.
Privileged subscription issue  Rights issue.
Production payment  Loan in the form of advance payment for future delivery of a product.
Profitability index  Ratio of a project's NPV to the initial investment.
Pro forma  Projected.
Project finance  Debt that is largely a claim against the cash flows from a particular project rather than against the firm as a whole.
Project note (PN)  Note issued by public housing or urban renewal agencies.
Promissory note  Promise to pay.
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.
Prospectus  Summary of the registration statement providing information on an issue of securities.
Protective put  Put option that is combined with holding in the underlying asset.
Proxy vote  Vote cast by one person on behalf of another.
Public warehouse (terminal warehouse)  Warehouse operated by an independent warehouse company on its own premises (cf. field warehouse).
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).
Purchase fund  Resembles a sinking fund except that money is used only to purchase bonds if they are selling below their par value.
Put-call parity  The relationship between the prices of European put and call options.
Put option  Option to sell an asset at a specified exercise price on or before a specified exercise date (cf. call option).
PVGO  Present value of growth opportunities.
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.
q  Ratio of the market value of an asset to its replacement cost.
QIBs  Qualified institutional buyers.
Quadratic programming  Variant of linear programming whereby the equations are quadratic rather than linear.
Qualified Institutional buyers (QIBs)  Institutions that are allowed to trade unregistered stock among themselves.
Quanto swap  Differential swap.
Quick ratio (acid-test ratio)  Measure of liquidity: (cash + marketable securities + receivables) divided by current liabilities.
Range forward  A forward exchange rate contract that places upper and lower bounds on the cost of foreign exchange.
Ratchet bonds  Floating-rate bonds whose coupon can only be reset downward.
Rate-sensitive bonds  Bonds whose coupon rate changes as issuer's credit-rating changes.
Real assets  Tangible assets and intangible assets used to carry on business (cf. financial assets).
Real estate investment trust (REIT)  Trust company formed to invest in real estate.
Real interest rate  Interest rate expressed in terms of real goods, i.e., nominal interest rate adjusted for inflation.
Real option  The flexibility to modify, postpone, expand, or abandon a project.
Receivables  Accounts receivable.
Receiver  A bankruptcy practitioner appointed by secured creditors in the United Kingdom to oversee the repayment of debts.
Record date  Date set by directors when making dividend payment. Dividends are sent to stockholders who are registered on the record date.
Recourse  Term describing a type of loan. If a loan is with recourse, the lender has a general claim against the parent company if the collateral is insufficient to repay the debt.
Red herring  Preliminary prospectus.
Refunding  Replacement of existing debt with a new issue of debt.
Registered security  Security whose ownership is recorded by the company's registrar (cf. bearer security).
Registrar  Financial institution appointed to record issue and ownership of company securities.
Registration  Process of obtaining SEC approval for a public issue of securities.
Regression analysis  In statistics, a technique for finding the line of best fit.
Regular dividend  Dividend that the company expects to maintain in the future.
Regulation A issue  Small security issues that are partially exempt from SEC registration requirements.
REIT  Real estate investment trust.
Rental lease  Full-service lease.
Replicating portfolio  Package of assets whose returns exactly replicate those of an option.
Repo  Repurchase agreement.
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.
Residual income  After-tax profit less the opportunity cost of capital employed by the business (see also Economic Value Added).
Residual risk  Specific risk.
Retained earnings  Earnings not paid out as dividends.
Return on equity  Usually, equity earnings as a proportion of the book value of equity.
Return on investment (ROI)  Generally, book income as a proportion of net book value.
Revenue bond  Municipal bond that is serviced out of the revenues from a particular project.
Reverse convertible  Bond that gives the issuer the right to convert it into common stock.
Reverse FRN (yield curve note)  Floating-rate note whose payments rise as the general level of interest rates falls and vice versa.
Reverse split  Action by the company to reduce the number of outstanding shares by replacing two or more of its shares with a single, more valuable share.
Revolving credit  Legally assured line of credit with a bank.
Rights issue (privileged subscription issue)  Issue of securities offered to current stockholders (cf. general cash offer).
Rights on  With rights.
Risk premium  Expected additional return for making a risky investment rather than a safe one.
Road show  Series of meetings between a company and potential investors before the company decides on the terms of a new issue.
ROI  Return on investment.
Roll-over CD  A package of successive certificates of deposit.
Round lot  A trade of 100 shares (cf. odd lot).
RP  Repurchase agreement.
R squared (R 2)  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.
Rule 144a  SEC rule allowing qualified institutional buyers to buy and trade unregistered securities.
Sale and lease-back  Sale of an existing asset to a financial institution that then leases it back to the user (cf. direct lease).
Salvage value  Scrap or resale value of plant and equipment.
Samurai bond  A yen bond issued in Tokyo by a non- Japanese borrower (cf. bulldog bond, Yankee bond).
SBIC  Small Business Investment Company.
Scenario analysis  Analysis of the profitability of a project under alternative economic scenarios.
Season datings  Extended credit for customers who order goods out of the peak season.
Seasoned issue  Issue of a security for which there is an existing market (cf. unseasoned issue).
SEC  Securities and Exchange Commission.
Secondary issue  (1) Procedure for selling blocks of seasoned issues of stock; (2) more generally, sale of already issued stock.
Secondary market  Market in which one can buy or sell seasoned issues of securities.
Secured debt  Debt that, in the event of default, has first claim on specified assets.
Securitization  Substitution of tradable securities for privately negotiated instruments.
Security market line  Line representing the relationship between expected return and market risk.
Self-liquidating loan  Loan to finance current assets. The sale of the current assets provides the cash to repay the loan.
Self-selection  Consequence of a contract that induces only one group (e.g., low-risk individuals) to participate.
Semistrong-form efficient market  Market in which security prices reflect all publicly available information (cf. weak-form efficient market and strong-form efficient market).
Senior debt  Debt that, in the event of bankruptcy, must be repaid before subordinated debt receives any payment.
Sensitivity analysis  Analysis of the effect on project profitability of possible changes in sales, costs, and so on.
Serial bonds  Package of bonds that mature in successive years.
Series bond  Bond that may be issued in several series under the same indenture.
Shark repellant  Amendment to company charter intended to protect against takeover.
Sharpe ratio  Ratio of portfolio's risk premium to its risk (standard deviation).
Shelf registration  A procedure that allows firms to file one registration statement covering several issues of the same security.
Shogun bond  Dollar bond issued in Japan by a nonresident.
Short hedge  Sale of a hedging instrument (e.g., a future) to hedge a long position in the underlying asset (cf. long hedge).
Short sale  Sale of a security the investor does not own.
Sight draft  Demand for immediate payment (cf. time draft).
Signal  Action that demonstrates an individual's unobservable characteristics (because it would be unduly costly for someone without those characteristics to take the action).
Simple interest  Interest calculated only on the initial investment (cf. compound interest).
Simulation  Monte Carlo simulation.
Sinker  Sinking fund.
Sinking fund (sinker)  Fund established by a company to retire debt before maturity.
SIV (structured investment vehicle)  A fund that typically invested in mortgage-backed securities, which it financed by issuing senior and junior tranches of asset-backed commercial paper and longer-term notes.
Skewed distribution  Probability distribution in which an unequal number of observations lie below and above the mean.
SPE  Special-purpose entity.
Special dividend (extra dividend)  Dividend that is unlikely to be repeated.
Specialist  Designated market maker.
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.
Specific risk (residual risk, unique risk, unsystematic risk)  Risk that can be eliminated by diversification.
Spinning  The underwriter of an IPO unethically allots a portion of offering to senior management of a client company.
Spin-off  Distribution of shares in a subsidiary to the company's shareholders so that they hold shares separately in the two firms.
Spot exchange rate  Exchange rate on currency for immediate delivery (cf. forward exchange rate).
Spot price  Price of asset for immediate delivery (in contrast to forward or futures price).
Spot rate  Interest rate fixed today on a loan that is made today (cf. forward interest rate).
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.
Staggered board  Board whose directors are elected periodically, instead of at one time.
Standard deviation  Square root of the variance —a measure of variability.
Standard error  In statistics, a measure of the possible error in an estimate.
Standby agreement  In a rights issue, agreement that the underwriter will purchase any stock not purchased by investors.
Step-up bond  Bond whose coupon is stepped up over time (also step-down bond).
Stock dividend  Dividend in the form of stock rather than cash.
Stock split  Free issue of shares to existing shareholders.
Straddle  The combination of a put option and a call option with the same exercise price.
Straight-line depreciation  An equal dollar amount of depreciation in each period.
Strike price  Exercise price of an option.
Stripped bond (strip)  Bond that is subdivided into a series of zero-coupon bonds.
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).
Structured debt  Debt that has been customized for the buyer, often by incorporating unusual options.
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.
Subprime loans  The most risky category of loans.
Sum-of-the-years'-digits depreciation  Method of accelerated depreciation.
Sunk costs  Costs that have been incurred and cannot be reversed.
Supermajority  Provision in a company's charter requiring a majority of, say, 80% of shareholders to approve certain changes, such as a merger.
Sushi bond  A eurobond issued by a Japanese corporation.
Sustainable growth rate  Maximum rate of firm growth without increasing financial leverage (cf. internal growth rate).
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.
Swaption  Option on a swap.
Sweep program  Arrangement whereby bank invests a company's available cash at the end of each day.
Swingline facility  Bank borrowing facility to provide finance while the firm replaces U.S. commercial paper with eurocommercial paper.
Syndicated loan  A large loan provided by a group of banks.
Systematic risk  Market risk.
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.
Take-up fee  Fee paid to underwriters of a rights issue on any stock they are obliged to purchase.
Tangent efficient portfolio  The portfolio of risky assets offering the highest risk premium per unit of risk (standard deviation).
Tangible asset  Physical asset, such as plant, machinery, and offices (cf. intangible asset).
Tax-anticipation bill  Short-term bill issued by the U.S. Treasury that can be surrendered at face value in payment of taxes.
T-bill  Treasury bill.
Technical analysis  Security analysis that seeks to detect and interpret patterns in past security prices (cf. fundamental analysis).
TED spread  Difference between LIBOR and U.S. Treasury bill rate.
Tender offer  General offer made directly to a firm's shareholders to buy their stock.
10-K  Annual financial statements as filed with the SEC.
10-Q  Quarterly financial statements as filed with the SEC.
Tenor  Maturity of a loan.
Terminal warehouse  Public warehouse.
Term loan  Medium-term, privately placed loan, usually made by a bank.
Term structure of interest rates  Relationship between interest rates on loans of different maturities (cf. yield curve).
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.
Tick  Minimum amount the price of a security may change.
Time draft  Demand for payment at a stated future date (cf. sight draft).
Times-interest-earned (interest cover)  Earnings before interest and tax, divided by interest payments.
TIPS (Treasury Inflation Protected Securities)  U.S. Treasury bonds whose coupon and principal payments are linked to the Consumer Price Index.
Toehold  Small investment by a company in the shares of a potential takeover target.
Tolling contract  In project finance, arrangement whereby parent company promises to deliver materials to project for processing and then to repurchase them.
Tombstone  Advertisement listing the underwriters to a security issue.
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).
Trade credit  Accounts receivable.
Trade debt  Accounts payable.
Tranche  Portion of a new issue sold at a point in time different from the remainder or that has different terms.
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).
Transfer agent  Individual or institution appointed by a company to look after the transfer of securities.
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).
Treasurer  Principal financial manager (cf. controller).
Treasury bill (T-bill)  Short-term discount debt maturing in less than one year, issued regularly by the government.
Treasury stock  Common stock that has been repurchased by the company and held in the company's treasury.
Trust deed  Agreement between trustee and borrower setting out terms of a bond.
Trust receipt  Receipt for goods that are to be held in trust for the lender.
Tunneling  Actions by a controlling shareholder to transfer wealth out of the firm (e.g., by supplying goods at an inflated price).
Underpricing  Issue of securities below their market value.
Underwriter  Firm that buys an issue of securities from a company and resells it to investors.
Unfunded debt  Debt maturing within one year (cf. funded debt).
Uniform price auction  Auction in which all successful bidders pay the same price (cf. discriminatory price auction).
Unique risk  Specific risk.
Unseasoned issue  Issue of a security for which there is no existing market (cf. seasoned issue).
Unsystematic risk  Specific risk.
Value additivity  Rule that the value of the whole must equal the sum of the values of the parts.
Value at risk (VAR)  The probability of portfolio losses exceeding some specified proportion.
Value stock  A stock that is expected to provide steady income but relatively low growth (often refers to stocks with a low ratio of market-to-book value).
Vanilla issue  Issue without unusual features.
VAR  Value at risk.
Variable-rate demand bond (VRDB)  Floating-rate bond that can be sold back periodically to the issuer.
Variance  Mean squared deviation from the expected value; a measure of variability.
Variation margin  The daily gains or losses on a futures contract credited to the investor's margin account.
Vega  A measure of how the option price changes as the asset's volatility changes.
Venture capital  Capital to finance a new firm.
Vertical merger  Merger between a supplier and its customer (cf. horizontal merger, conglomerate merger).
Vertical spread  Simultaneous purchase and sale of two options that differ only in their exercise price (cf. horizontal spread).
VIX  A measure of the implied volatility of stocks in the S&P 500 Index.
VRDB  Variable rate demand bond.
WACC  Weighted-average cost of capital.
Warehouse receipt  Evidence that a firm owns goods stored in a warehouse.
Warrant  Long-term call option issued by a company.
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).
Weighted-average cost of capital (WACC)  Expected return on a portfolio of all the firm's securities. Used as hurdle rate for capital investment.
White knight  A friendly potential acquirer sought out by a target company threatened by a less welcome suitor.
Wi.  When issued.
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.
With dividend (cum dividend)  Purchase of shares in which the buyer is entitled to the forthcoming dividend (cf. ex dividend).
Withholding tax  Tax levied on dividends paid abroad.
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).
Working capital  Current assets and current liabilities. The term is commonly used as synonymous with net working capital.
Workout  Informal arrangement between a borrower and creditors.
Writer  Option seller.
xd  Ex dividend.
xr  Ex rights.
Yankee bond  A dollar bond issued in the United States by a non-U.S. borrower (cf. bulldog bond, Samurai bond).
Yield curve  Term structure of interest rates.
Yield curve note  Reverse FRN.
Yield to maturity  Internal rate of return on a bond.
Zero-coupon bond  Discount bond making no coupon payments.
Z-score  Measure of the likelihood of bankruptcy.





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