peril Example: tornado, windstorm, theft. The approximate or actual cause of loss. indemnity A person is entitled to compensation only to the extent that financial loss has been suffered. insurance transfering risk to another party, as opposed to gambling which creates a risk where none existed. The pooling of fortuitous losses by transfer of risks to insureres who agree to indemnify insureds for such losses, to provide other pecuniary benefits on their occurrence, or to render services connected with the risk. pure risk Such as death Results in either "loss" or "no loss". Three main types that can reduce the ability to earn income: dying too soon, living too long, accidents & illnesses. speculative risk Potential fluctuation in value of a house or stock after purchase subjective risk A particular person's perception of risk, that varies greatly among individuals. objective risk A concrete concept that does not depend on a particular person's perception: the relative variation of an actual loss from the expected loss. hazard A condition that creates or increases the likelihood of a loss occurring. There are three main types: moral, morale, and physical. moral hazard Expample: arson A character flaw or level of dishonesty an individual possesses that causes or increases the chance for loss. morale hazard Neglecting to lock doors because posessions are insured against theft. Indifference to a loss, due to the existence of insurance. physical hazard Poor lighting, icy roads Tangible conidtion that increases the liklihood of a peril occurring. adverse selection Example: someone who will need surgery goes out and buys health insurance. The tendency of higher than average risks (people who need insurance the most) to purchase or renew insurance policies insurable risk A risk of loss 1) a large number of people are exposed 2) the loss is accidental 3) the loss is measurable and determinable 4) premiums are affordable. insurance contracts Legally binding givent he following elements: 1) offer & acceptance 2) legal competency of all parties 3) legal consideration (each party provides something of value: premium & payout) 4) lawful purpose(can't insure drugs) subrogation clause Example: cannot collect from building's insurance company for a slip & fall injury then also sue the housekeeping company that left the floor wet. States that the insured cannot indemnify herself from both the insurance company and a third party on the same claim insurabe interest an insured must be subject to emotional or financial harship resulting from damage, loss or destruction. warranty A promise made by the insured to the insurer, such as maintaining a home security system. If the insured does not maintain the system and the home is burglarized, it is unlikely that the insurer will have to pay. representation Statements made by the insured to the insurer during the application process. concealment Occurs when the insured is silent about a fact that is material to the risk. adhesion A character of insurance that means the insurance is a "take it or leave it" contract. The insured must accept (or adhere to) the contract as written, without any bargaining over its terms and conditions. aleatory Example: the insured pays small premium and insurer pays large settlement. a character of insurance which means that monetary values exchanged by each party in an insurance agreement are unequal. unilateral Example: insured is not legally bound to pay premiums, but insurer is legally bound to make payment in case of loss (given that premiums are paid & on time) A character of insurance which means that only one party (the insurer) has a legally binding promise to pay the other. conditional Example: Insured does not have to pay premiums, but settlement is only paid by insurer on condition that the insured paid the premium. A character of insurance stating that the insurer's promise is only binding on condition that the insured paid premiums. riders Also known as endorsements. Written additions to an insurance contract that modify its original provisions. replacement cost Cost of replacing property with new materials of a like kind and quality. One of the three ways losses are valued in insurance policies. actual cash value Equal to replacement costs minus functional depreciation. One of the three ways insurance companies value losses. deductible A stated amount of money that the insured must pay on a loss before the insurer will make any payments under the policy conditions. co payments a loss-sharing agreement whereby the insured pays a percentage of the loss in excess of the deductible, and the insurance company pays the rest. coinsurance the percentage of financial responsibility that the insured and the insurer must uphold in order to achieve equity in rating. liability risk Example: malpractice One of two main perils that can destroy or deplete assets - legal payment insured must make due to inflicting injury upon another. balance sheet A report that presents a company's financial condition. income statement A report that summarizes a company's profit performance. financial statements The combination of income statement, balance sheet and cash flow. cash flow statement A report which summarizes a company's cash inflow and outflow for the year. sales revenue A total amount received or to be received as the result of sales of products or services for the year. cost of goods sold An expense that includes stolen or shoplifted items, write-offs and write-downs due to damage or obsolescense. depreciation expense Fraction of the original cost of long term operating assets such as buildings, machinery, tools, furnitue, etc. interest expense Total amount of interest on debt or interest bearing liabilities. income tax expense Expense due to the government on taxable income earned during the year. current assets Cash and other assets that will not be converted to cash during one operating cycle. accrued interest Interest on a loan that accumulates and is to be paid in installments at a later time (usually when the principal becomes due) rather than being paid from the time the loan is made. adjusted gross income Taxable income after all allowable deductions are made, such as IRA deductions, moving expenses, self-employment taxes and health insurance, Keogh retirement plans, and alimony paid. asset protection allowance A sum subtracted from a family's total assets when determining the "expected family contribution" to college costs. This provides a safety net for families, and the allowance increases with the age of the parents. collateral Something of value pledged as security for a loan. commercial bank An institution whose primary function is making loans to businesses. compounded interest Interest that is periodically added to a principal sum, resulting in a new principal balance which then triggers a new interest assessment. deferred interest Interest payments that are delayed while a borrower is not gainfully employed discretionary income Income that is available after all financial obligations, including taxes, have been accounted for. fixed interest A rate of interest that is set at the time a loan is negotiated and that remains constant over the life of the loan. prime rate The fluctuating interest rate that banks charge to their best business customers. promissory note A contract that legally binds a lender and a borrower. simple interest Interest computed only on the original amount of a loan. actuary A person professionally trained in the technical aspects of pensions, insurance and related fields. base rate sometimes referred to as the repo rate is the minimum rate at which banks are prepared to lend money - it acts as the benchmark for other interest rates, including personal loans and mortgages. absolute priority Rule in bankruptcy proceedings requiring senior creditors to be paid in full before junior creditors receive any payment. accelerated depriciation Any depreciation method that produces larger deductions for depreciation in the early years of a asset's life. account In the context of bookkeeping, refers to the ledger pages upon which various assets, liabilities, income, and expenses are represented. account balance Credits minus debits at the end of a reporting period. accounting exposure The change in the value of a firm's foreign currency-denominated accounts due to a change in exchange rates. insolvency Total liabilities exceed total assets. A firm with a negative net worth. accounting liquidity The ease and quickness with which assets can be converted to cash. accounts payable Money owed to suppliers. accounts receivables Money owed by customers. accounts receivables financing A short-term financing method in which accounts receivable are collateral for cash advances. accounts receivable turnover The ratio of net credit sales to average accounts receivable, which is a measure of how quickly customers pay their bills. accredited investor Refers to a wealthy investor (net worth $7 million or annual income >200,000) who does not count to the maximum of 35 people allowed to invest in a private limited partnership. accrual basis In the context of accounting, practice in which expenses and income are accounted for as if they are earned or incurred, whether or not they have been received or paid. Antithesis of cash basis accounting. accrued benefits The pension benefits earned by an employee accourding to the years of the employee's service. accrued interest Applies mainly to convertible securities. Interest that has accumulated between the most recent payment and the sale of a bond or other fixed-income security. accumulated dividend A dividend that has reached its due date, but is not paid out. accumulated profits tax A tax on earnings kept in a firm to prevent the higher personal income tax rate that would obtain if profits were paid out as dividends to the owners. accumulation In the context of corporate finance, refers to profits that are added to the capital base of the company rather than paid out as dividends. acid test ratio Also called the quick ratio, the ratio of current assets minus inventories, accruals, and prepaid items to current liabilities. adequacy of coverage A test that measures the extent to which the value of an asset is protected from potential loss either through insurance or hedging. adjustable rate mortgage A mortgage that features predetermined adjustments of the loan interest rate at regular intervals based on an established index. The interest rate is adjusted at each interval to a rate equivalent to the index value plus a predetermined spread, or margin, over the index, usually subject to per-interval and to life-of-loan interest rate and/or payment rate caps. adjusted balance method Method of calculating finance charges that uses the account balance remaining after adjusting for all transactions posted during the given billing period as its basis. adjusted basis Price from which to calculate and derive capital gains or losses upon sale of an asset. Account actions such as any stock splits that have occurred since the initial purchase must be accounted for. adjustment bond A bond issued in exchange for outstanding bonds when a corporation facing bankruptcy is recapitalized. advance commitment A promise to sell an asset before the seller has lined up purchase of the asset. This seller can offset risk by purchasing a futures contract to fix the sales price approximately. advisory letter A newsletter offering financial advice to its readers. affiliate Relationship between two companies when one company owns substantial interest, but less than a majority of the voting stock of another company, or when two companies are both subsidiaries of a third company. affiliated person An individual who possesses enough influence and control in a corporation as to be able to alter the actions of the corporation. aging schedule A table of accounts receivable broken down into age categories (such as 0-30 days, 30-60 days, and 60-90 days), which is used to determine if customer payments are keeping close to schedule. alien corporation A company incorporated under the laws of a foreign country regardless of where the company conducts its operations. amortization The repayment of a loan by installments. angels Individuals providing venture capital. annual basis The technique in statistics of taking a figure covering a period of less than one year and extrapolating it to cover a full one year period. The process is known as annualizing. annual report Yearly record of a publicly held company's financial condition. It includes a description of the firm's operations, as well as balance sheet, income statement, and cash flow statement information. SEC rules require that it be distributed to all shareholders. A more detailed version is called a 10-K. annuity A regular periodic payment made by an insurance company to a policyholder for a specified period of time. arbitrage The simultaneous buying and selling of a security at two different prices in two different markets, resulting in profits without risk. articles of incorporation Legal document establishing a corporation and its structure and purpose. asset based financing Methods of financing in which lenders and equity investors look principally to the cash flow from a particular asset or set of assets for a return on, and the return of, their financing. asset pricing model A model for determining the required or expected rate of return on an asset. asset swap An interest rate swap used to alter the cash flow characteristics of an institution's assets in order to provide a better match with its liabilities. at risk The exposure to the danger of economic loss. audit An examination of a company's accounting records and books conducted by an outside professional in order to determine whether the company is maintaining records according to generally accepted accounting principles. back taxes Due taxes that have not been paid on time. backwardation A market condition in which futures prices are lower in the distant delivery months than in the nearest delivery month. This may occur when the costs of storing the product until eventual delivery are effectively subtracted from the price today. The opposite of contango. balance sheet Also called the statement of financial condition, it is a summary of a company's assets, liabilities, and owners' equity. balanced budget A budget in which the income equals expenditure. bar Slang for one million dollars. barefoot pilgrim A slang term for an unsophisticated investor who has lost everything on the stock market. barometer Economic and market data that represent an overall trend. The Dow Jones Industrial Average is an example barter The trading/exchange of goods or services without using currency. basis point In the bond market, the smallest measure used for quoting yields. also are used for interest rates. An interest rate of 5% is 50 of these higher (1/100th). bear An investor who believes a stock or the overall market will decline. bear hug Often used in risk arbitrage. Hostile takeover attempt in which the acquirer offers an exceptionally large premium over the market value of the acquiree's share so as to as to squeeze the target into acceptance. beneficiary Term used to refer to the person who receives the benefits of a trust or the recipient of the proceeds of a life insurance policy. bill of lading A contract between an exporter and a transportation company in which the latter agrees to transport the goods under specified conditions that limit its liability. binder An amount of money paid to indicate good faith in a transaction before the transaction is completed. blanket fidelity bond SEC-required insurance coverage that brokerage firms are required to have in order to cover fraudulent trading by employees. blanket inventory lien A secured loan that gives the lender a lien against all the borrower's inventories. blind trust A trust in which a fiduciary third party has total discretion to make investments on behalf of a beneficiary while the beneficiary is uninformed about the holdings of the trust. blue chip company Used in the context of general equities. Large and creditworthy company. Company renowned for the quality and wide acceptance of its products or services, and for its ability to make money and pay dividends. boiler room Used to describe place or operation in which unscrupulous salespeople call and try to sell people speculative, even fraudulent, securities. bond Debt that is issued for a period of more than one year. boning Charging a lot more for an asset than its worth. book value A company's total assets minus intangible assets and liabilities, such as debt. broker An individual who is paid a commission for executing customer orders. bull An investor who thinks the market will rise. business cycle Repetitive cycles of economic expansion and recession. bylaws Rules and practices that govern management of an organization. capacity Credit grantors' measurement of a person's ability to repay loans. capital asset A long-term asset, such as land or a building, not purchased or sold in the normal course of business. capital expenditures Amount used during a particular period to acquire or improve long-term assets such as property, plant, or equipment. capital gains tax The tax levied on profits from the sale of capital assets. capital gains yield The price change portion of a stock's return. capital requirements Financing required for the operation of a business, composed of long-term and working capital plus fixed assets. capital stock Stock authorized by a firm's charter and having par value, stated value, or no par value. The number and the value of issued shares are usually shown, together with the number of shares authorized, in the capital accounts section of the balance sheet. capital structure The makeup of the liabilities and stockholders' equity side of the balance sheet, especially the ratio of debt to equity and the mixture of short and long maturities. capital turnover Calculated by dividing annual sales by average stockholder equity (net worth). The ratio indicates how much a company could grow its current capital investment level. Low capital turnover generally corresponds to high profit margins. capitalization ratios Also called financial leverage ratios, these ratios compare debt to total capitalization and thus reflect the extent to which a corporation is trading on its equity. capitalized Recorded in asset accounts and then depreciated or amortized, as is appropriate for expenditures for items with useful lives longer than one year cartel A group of businesses or nations that act together as a single producer to obtain market control and to influence prices in their favor by limiting production of a product. cash asset ratio Cash and marketable securities divided by current liabilities. cash and equivalents The value of assets that can be converted into cash immediately, as reported by a company. cash conversion cycle The length of time between a firm's purchase of inventory and the receipt of cash from accounts receivable. casualty insurance Insurance protecting a firm or homeowner against loss of property, damage, and other liabilities. casualty loss A financial loss caused by damage, destruction, or loss of property as a result of an unexpected or unusual event. central bank A country's main bank whose responsibilities include the issue of currency, the administration of monetary policy, open market operations, and engaging in transactions designed to facilitate healthy business interactions. certificate of deposit aka 'CD'. Also called a time deposit this is a certificate issued by a bank or thrift that indicates a specified sum of money has been deposited. Has a maturity date and a specified interest rate, and can be issued in any denomination certified financial statements Financial statements that include an accountant's opinion. board of directors Individuals elected by the shareholders of a corporation who carry out certain tasks established in the charter. chief executive officer A title held often by the Chairperson of the Board, or the president. The person principally responsible for the activities of a company. chief financial officer The officer of a firm is responsible for handling the financial affairs of a company. chief operating officer The officer of a firm responsible for day-to-day management, usually the president or an executive vice-president churning Excessive trading of a client's account in order to increase the broker's commissions. claim dilution A decrease in the likelihood that one or more of a firm's claimants will be fully repaid, including time value of money considerations. classified stock The division of stock into more than one class of common stock, usually called Class A and Class B. The specific features of each class, which are set out in the charter and bylaws, usually give certain advantages to the Class A shares, such as increased voting power. clearinghouse An adjunct to a futures exchange through which transactions executed on its floor are settled by a process of matching purchases and sales. closely held company A company who has a small group of controling shareholders. coefficient of determination A measure of the goodness of fit of the relationship between the dependent and independent variables in a regression analysis; for instance, the percentage of variation in the return of an asset explained by the market portfolio return. Also known as R-square. coinsurance effect Refers to the fact that the merger of two firms lessens the probability of default on either firm's debt. collateral Asset than can be repossessed if a borrower defaults. collection The presentation of a negotiable instrument for payment, or the conversion of any accounts receivable into cash. combined financial statement A financial statement that merges the assets, liabilities, net worth, and operating figures of two or more affiliated companies. commercial hedgers Companies that take futures positions in commodities so that they can guarantee prices at which they will buy raw materials or sell their products. commercial paper Short-term unsecured promissory notes issued by a corporation. commodity paper A loan or advance secured by commodities. common shares In general, a public corooration has two types of shares, this type and preferred. These type shares usually entitle the shareholders to vote at shareholders meetings. These shares have a discretionary dividend. common stock Securities that represent equity ownership in a company. company doctor An executive, usually appointed from outside, brought in to turn a company around and make it profitable. comparative statements Financial statements for different periods, that allo the comparson of figures to illustrate trends in a company's performance. compound interest Interest paid on previously earned interest as well as on the principal. compounding The process of accumulating the time value of money forward in time. For example, interest earned in one period earns additional interest during each subsequent time period. conglomerate A firm engaged in two or more unrelated businesses. conglomerate merger A merger involving two or more firms that are in unrelated businesses. consolidation The combining of two or more firms to form an entirely new entity. consumer durables Consumer products that are expected to last three years or more, such as an automobile or a home appliance. consumer price index The CPI, as it is called, measures the prices of consumer goods and services and is a measure of the pace of U.S. inflation. contingent claim A claim that can be made only if one or more specified outcomes occur convergence The movement of the price of a futures contract toward the price of the underlying cash commodity. At the start, the contract price is higher because of time value. But as the contract nears expiration, and time value decreases, the futures price and the cash price converge. convertibility The ability to exchange a currency without government restrictions or controls. cook the books To deliberately falsify the financial statements of a company. This is an illegal practice. cooling off period The period of time between the filing of a preliminary prospectus with the Securities and Exchange Commission and the actual public offering of the securities. corporation A legal entity that is separate and distinct from its owners. It's allowed to own assets, incur liabilities, and sell securities, among other things. correlation Statistical measure of the degree to which the movements of two variables (stock/option/convertible prices or returns) are related. correlation coefficient A standardized statistical measure of the dependence of two random variables, defined as the covariance divided by the standard deviations of two variables. correspondent An organization that performs services (acts as an intermediary) in a market for another organization that does not have access to that market. cost accounting A branch of accounting that provides information to help the management of a firm evaluate production costs and efficiency. cost benefit ratio The net present value of an investment divided by the investment's initial cost. Also called the profitability index. cost of goods sold The total cost of buying raw materials, and paying for all the factors that go into producing finished goods. cost plus contract A contract in which the selling price is based on the total cost of production plus a fixed percentage or fixed amount. countercyclical stocks Stocks whose price tends to rise when the economy is in recession or the market is bearish, and vice versa. covariance A statistical measure of the degree to which random variables move together. cramdown The ability of the bankruptcy court to confirm a plan of reorganization over the objections of some classes of creditors. credit union A not-for-profit institution that is operated as a cooperative and offers financial services such as low-interest loans, to its members. current assets Value of cash, accounts receivable, inventories, marketable securities and other assets that could be converted to cash in less than 1 year. current liabilities Amount owed for salaries, interest, accounts payable and other debts due within 1 year cyclical stock Stock that tends to rise quickly when the economy turns up and fall quickly when the economy turns down. Examples are housing, automobiles, and paper. day trading Establishing and liquidating the same position or positions within one day's trading. de facto Existing in actual fact although not by official recognition. death backed bonds Bonds backed by loans of a policyholder against a life insurance policy. The policyholder will repay the loans while alive or with the benefits from the insurance policy upon death. debit spread Applies to derivative products. Difference in the value of two options, when the value of the option bought exceeds the value of the one sold. debt Money borrowed. debt capacity Ability to borrow. The amount a firm can borrow up to the point where the firm value no longer increases. debt displacement The amount of borrowing that leasing displaces. debt ratio Total debt divided by total assets debt relief Reducing the principal and/or interest payments on Less developed country loans. debt retirement The complete repayment of debt. debt securities IOUs created through loan-type transactions-commercial paper, bank CDs, bills, bonds, and other instruments. debt service Interest payment plus repayments of principal to creditors (retirement of debt). debt service coverage The ratio of cash flow available to the borrower to the annual interest and principal payments on a loan or other debt. debtor in possession A firm that continues to operate under the Chapter 11 bankruptcy process. decision tree Schematic way of representing alternative sequential decisions and the possible outcomes from these decisions. deductive reasoning Using known fact to draw a conclusion about a specific situation. default Failure to make timely payment of interest or principal on a debt security default premium A differential in promised yield that compensates the investor for the risk inherent in purchasing a corporate bond that entails some risk of default. deferred account A type of account that delays taxes on that account until some later date. deferred annuities Tax-advantaged life insurance products. deferred charge An expenditure treated as an asset that carries forward until it becomes pertinent to the business at hand, e.g., advance rent payment. deferred compensation An amount that has been earned but is not actually paid until a later date, typically through a payment plan, pension, or stock option plan. deferred equity A common term for convertible bonds, which recognizes their equity component and the expectation that the bond will ultimately be converted into shares of common stock. deferred futures The most distant months of a futures contract. deferred payment annuity An annuity that stipulates payments be made to the annuitant at a later date, such as when the annuitant reaches a certain age. direct investment The purchase of a controlling interest in a company or at least enough interest to have enough influence to direct the course of the company. direct lease Contract in which a lessor purchases new equipment from the manufacturer and leases it to the lessee. disability income insurance An insurance policy that insures a worker in the event of an occupational mishap resulting in disability. Insurance benefits compensate the injured worker for lost pay. disbursement float A decrease in book cash but no immediate change in bank cash, generated by checks written by the firm. disclosure A company's release of all information pertaining to the company's business activity, regardless of how that information may influence investors. discretionary account Accounts over which an individual or organization, other than the person in whose name the account is carried, exercises trading authority or control. discretionary income The amount of income a consumer has available after purchasing essentials such as food and shelter. discretionary trust In the context of mutual funds, refers to a mutual fund or unit trust whose management decides on the best way to use the assets without restriction to a specific type of security. In the context of trusts, refers to a personal trust in which a trustee has the power of decision as to how much income or principal each beneficiary receives. divergence When two or more averages or indexes fail to show confirming trends. diversification Dividing investment funds among a variety of securities with different risk, reward, and correlation statistics so as to minimize unsystematic risk. dividend A portion of a company's profit paid to common and preferred shareholders. dividends per share Dividend paid for the past 12 months divided by the number of common shares outstanding, as reported by a company. doctrine of sovereign immunity Principle that a nation may not be tried in another country without its consent. dow jones industrial average The best known U.S. index of stocks. Aka 'The Dow' due dilengence An internal audit of a target frim by an acquiring firm. Offers are often made contingent upon resolution of the due diligence process. dumping In the context of general equities, offering large amounts of stock with little or no concern for price or market effect. ebidta Earnings Before Interest, Taxes, Depreciation, and Amortization earned income credit A tax credit for taxpayers with children. earnings Net income for the company during a period. Ebidta A financial measure defined as revenues less cost of goods sold and selling, general, and administrative expenses. In other words, operating and nonoperating profit before the deduction of interest and income taxes. Depreciation and amortization expenses are not included in the costs. economic dependence When the costs and/or revenues of one project depend on those of another. economic growth rate The annual percentage rate of change in the Gross National Product. economic indicators The key statistics of the economy that reveal the direction the economy is heading in; for example, the unemployment rate and the inflation rate. economic risk In project financing, the risk that the project's output will not be salable at a price that will cover the project's operating and maintenance costs and its debt service requirements. economic surplus For any entity, the difference between the market value of all its assets and the market value of its liabilities. economies of scale The decrease in the marginal cost of production as a firm's extent of operations expands. efficient market hypothesis States that all relevant information is fully and immediately reflected in a security's market price, thereby assuming that an investor will obtain an equilibrium rate of return. In other words, an investor should not expect to earn an abnormal return (above the market return) through either technical analysis or fundamental analysis. elasticity of demand and supply The degree of buyers' responsiveness to price changes. Elasticity is measured as the percent change in quantity divided by the percent change in price. A large value (greater than 1) of elasticity indicates sensitivity of demand to price, e.g., luxury goods. Goods with a small value of elasticity (less than 1) have a demand that is insensitive to price, e.g., food. electronic data interchange The direct exchange of information electronically, from one firm's computer to another firm's computer in a structured format. elliott wave theory Technical market timing strategy that predicts price movements on the basis of historical price wave patterns and their underlying psychological motives. employee stock fund A firm-sponsored program that enables employees to purchase shares of the firm's common stock on a preferential basis. endowment Gift of money or property to a specified institution for a specified purpose. endowment funds Investment funds established for the support of institutions such as colleges, private schools, museums, hospitals, and foundations. The investment income may be used for the operation of the institution and for capital expenditures. environmental fund A mutual fund that invests strictly in stocks of companies that are environmentally friendly and/or have the goal of environmental betterment. The investors are trying to support and profit from opportunities related to the environmental movement. equilibrium price The price when the supply of goods matches demand. equitable owner The beneficiary of a property held in a trust. equity Ownership interest in a firm. Also, the residual dollar value of a futures trading account, assuming its liquidation is at the going trade price. In real estate, dollar difference between what a property could be sold for and debts claimed against it. equity claim Also called a residual claim; a claim to a share of earnings after debt obligations have been satisfied. equity funding An investment consisting of a life insurance policy and a mutual fund. The insurance policy is paid by the collateral value of fund shares, give the investor the advantages of insurance protection with the growth potential of a mutual fund. erosion A negative impact on one or more of a firm's existing assets. escrow Property or money held by a third party until the agreed upon obligations of a contract are met. estate tax A federal or state tax imposed on an individual's assets inherited by heirs. event risk The risk that the ability of an issuer to make interest and principal payments will change because of rare, discontinuous, and very large, unanticipated changes in the market environment such as (1) a natural or industrial accident or some regulatory change or (2) a takeover, or corporate restructuring. evergreen credit Revolving credit without maturity. exim bank The U.S. federal government agency that extends trade credits to U.S. companies to facilitate the financing of U.S. exports. expropriation The official seizure by a government of private property. Any government has the right to seize such property, according to international law, if prompt and adequate compensation is given. external finance Funding that is not generated by a firm's operations: new borrowing or a stock issue. external funds Funds originating from a source outside the corporation to increase cash flow and to aid in expansion efforts, e.g., bank loan or bond offering. Factoring Sale of a firm's accounts receivable to a financial institution known as a factor. Fair rate of return The rate of return that state governments allow a public utility to earn on its investments and expenditures. Utilities then use these profits to pay investors and provide service upgrades to their customers. Fast market Excessively rapid trading in a specific security that causes a delay in the electronic updating of its last sale and market conditions, particularly in options. Favorable trade balance Condition that total exports of a nation exceed total imports, creating a net export. Federal agency securities Securities issued by corporations and agencies created by the U.S. government, such as the Federal Home Loan Bank Board and Ginnie Mae. Federal credit agencies Agencies of the federal government set up to supply credit to various classes of institutions and individuals, e.g., S&Ls, small business firms, students, farmers, and exporters. Federal Deposit Insurance Corporation A federal institution that insures bank deposits. Federal funds Noninterest-bearing deposits held in reserve for depository institutions at their district Federal Reserve Bank. Also, excess reserves lent by banks to each other. Federal funds rate The interest rate that banks with excess reserves at a Federal Reserve district bank charge other banks that need overnight loans. Federal gift tax A federal tax imposed on assets conveyed as gifts to individuals. Federal Housing Administration Federally sponsored agency chartered in 1934 whose stock is currently owned by savings institutions across the United States. The agency buys residential mortgages that meet certain requirements, sells these mortgages in packages, and insures the lenders against loss. Federal Land Bank A bank administered under the U.S. Farm Credit Administration that provides long-term mortgage credit to farmers for agriculture-related expenditures. Federal National Mortgage Association (Fannie Mae) A publicly owned, government-sponsored corporation chartered in 1938 to purchase mortgages from lenders and resell them to investors. Known by the nickname Fannie Mae, it packages mortgages backed by the Federal Housing Administration, but also sells some nongovernment-backed mortgages. Federal Open Market Committee (FOMC) The body that is responsible for setting the interest rates and credit policies of the Federal Reserve System. Federal Reserve Bank One of the 12 member banks constituting the Federal Reserve System that is responsible for overseeing the commercial and savings banks of its region to ensure their compliance with regulation. Federal Reserve Board The seven-member governing body of the Federal Reserve System, which is responsible for setting reserve requirements, and the discount rate, and making other key economic decisions. Federal Reserve System The monetary authority of the U.S., established in 1913, and governed by the Federal Reserve Board located in Washington, D.C. The system includes 12 Federal Reserve Banks and is authorized to regulate monetary policy in the U.S. as well as to supervise Federal Reserve member banks, bank holding companies, international operations of U.S. banks, and U.S. operations of foreign banks. Federal Savings and Loan Association An institution chartered by the federal government whose primary function is to collect savings deposits and to provide mortgage loans. Finance charge The total cost of credit a customer must pay on a consumer loan, including interest. Financial distress costs Legal and administrative costs of liquidation or reorganization. Also includes implied costs associated with impaired ability to do business (indirect costs). Financial intermediaries Institutions that provide the market function of matching borrowers and lenders or traders. Financial leverage ratios Common ratios are debt divided by equity a debt divided by the sum of debt plus equity. Financial objectives Goals related to returns that a firm will strive to accomplish during the period covered by its financial plan. Financial planning Evaluating the investing and financing options available to a firm. Planning includes attempting to make optimal decisions, projecting the consequences of these decisions for the firm in the form of a financial plan, and then comparing future performance against that plan. Financial position The account status of a firm's or individual's assets, liabilities, and equity positions as reflected on its financial statement. Financial pyramid A risk structure that spreads investor's risks across low-, medium-, and high-risk vehicles. The bulk of the assets are in safe, low-risk investments that provide a predictable return (base of the pyramid). Firewall The legal barrier between banking and broker/dealer operations within a financial institution created to prevent the exchange of inside information. Five C of credit Five characteristics that are used to form a judgment about a customer's creditworthiness: character, capacity, capital, collateral, and conditions. Fixed asset Long-lived property owned by a firm that is used by a firm in the production of its income. Tangible fixed assets include real estate, plant, and equipment. Intangible fixed assets include patents, trademarks, and customer recognition. Fixed cost A cost that is fixed in total for a given period of time and for given production levels. Fixed exchange rate A country's decision to tie the value of its currency to another country's currency, gold (or another commodity), or a basket of currencies. Flexible expenses Expenses for an individual or corporation that can be adjusted or completely dispessed with, e.g., luxury goods. Flipping Buying shares in an initial public offering (IPO), and then selling the shares immediately after the start of public trading to turn an immediate profit. Floating-rate contract An guaranteed investment instrument whose interest payment is tied to some variable (floating) interest rate benchmark, such as a specific-maturity Treasury yield. Forced conversion Occurs when a convertible security is called in by the issuer, usually when the underlying stock is selling well above the conversion price. The issuer thus assures the bonds will be retired without requiring any cash payment. Upon conversion into common, the carrying value of the bonds becomes part of a corporation's equity, thus strengthening the balance sheet and enhancing future debt capability. Forecasting Making projections about future performance on the basis of historical and current conditions data. Foreign Corrupt Practices Act An amendment to the Securities Exchange Act created to sanction bribery of foreign officials by publicly held U.S. companies. Foreign exchange risk The risk that a long or short position in a foreign currency might have to be closed out at a loss due to an adverse movement in exchange rates. Free float An exchange rate system characterized by the absence of government intervention. Friction costs Costs, both implied and direct, associated with a transaction. Such costs include time, effort, money, and associated tax effects of gathering information and making a transaction. Friendly takeover Merger when the target firm's management and board of directors is in favor of the takeover. Antithesis of hostile takeover. Fully depreciated An asset that has already been charged with the maximum amount of depreciation allowed by the IRS for accounting purposes. Fundamental analysis Security analysis that seeks to detect misvalued securities through an analysis of the firm's business prospects. Research often focuses on earnings, dividend prospects, expectations for future interest rates, and risk evaluation of the firm. Antithesis of technical analysis. In macroeconomic analysis, information such as interest rates, GNP, inflation, unemployment, and inventories is used to predict the direction of the economy, and therefore thestock market. In microeconomic analysis, information such as balance sheet, income statement, products, management, and other market items is used to forecast a company's imminent success or failure, and hence the future price action of the stock. Funded pension plan A pension plan in which all liabilities, including payments to be made to pensioners in the immediate future, are completely funded. Funding Used to describe the refinancing of a debt prior to its maturity (the same as refunding). In corporate finance refers to the floating of bonds to raise finance and levels of capital. Futures A term used to designate all contracts covering the sale of financial instruments or physical commodities for future delivery on a commodity exchange. Gap Financing that is required, but for which no provision has been made. The difference in total funding needed for a proposal and the amount of funding already made available. GDP implicit price deflator An economic technique used to account for inflation by comparing the current-dollar gross domestic product GDP to constant-dollar GDP as a ratio. The ratio accounts for price changes of goods and services that make up GDP and changes in the composite of GDP. General Agreement on Tariffs and Trade A treaty adopted by the United Nations aimed at elimination of international trade barriers between member countries. General mortgage A type of obligation that covers all a borrower's mortgageable properties, not just one specific property. General partner A participant who has unlimited liability for the obligations of a partnership. Generally Accepted Accounting Principals (GAAP) The overall conventions, rules, and procedures that define accepted accounting practice at a particular time in the U.S. Geographic risk Risk that arises when an issuer issues policies concentrated within certain geographic areas, such as the risk of damage from a hurricane or an earthquake. Geometric mean return Also called the time-weighted rate of return, a measure of the compound rate of growth of the initial portfolio market value during the evaluation period, assuming that all cash distributions are reinvested in the portfolio. It is computed by taking the geometric average of the portfolio subperiod returns. Gift tax A tax assessed on the giver of a property or asset as a gift. Glamor stock A popular stock characterized by high earnings growth rate and a price that rise is faster than the market average in a bull market. Global Depository Receipt A receipt denoting ownership of foreign-based corporation stock shares which are traded in numerous capital markets around the world. Glass-Steagall Act 1933 legislation prohibiting commercial banks to own, underwrite, or deal in corporate stock and corporate bonds. Globalization Tendency toward a worldwide investment environment, and the integration of national capital markets. Godfather offer An aggressive takeover technique in that the proposed offer of the acquiring company is so large that management of the target company cannot refuse, out of fear of lawsuits or shareholder revolt. Gold bond Bonds issued by gold-mining companies and backed by gold. The bonds make interest payments based on the level of gold prices. Gold bullion Investment-grade, pure gold, which may be smelted into gold coins or gold bars. Gold exchange standard A fixed exchange rate system adopted in the Bretton Woods agreement. It required the U.S. to peg the dollar to gold and other countries to peg their currencies to the dollar. Goodwill Excess of purchase price over fair market value of net assets acquired under the purchase method of accounting. Government obligations U.S. government-backed debt instruments, which are considered among the safest investments possible, including Treasury bonds, bills, and notes, and savings bonds. Grace period The time period stipulated in most loan contracts and insurance policies during which a late payment will not result in default or cancellation. Grandfather clause A provision included in a new rule or regulation that exempts a business that is already conducting business in the area addressed by the regulation from penalty or restriction. Gross domestic product The market value of goods and services produced over time including the income of foreign corporations and foreign residents working in the U.S., but excluding the income of U.S. residents and corporations overseas. Gross National Product Measures and economy's total income. It is equal to G.D.P. plus the income abroad accruing to domestic residents minus income generated in domestic market accruing to non-residents. Gross profit Sales minus the cost of goods sold. Gross sales Total sales calculated by summing all sales at invoice values, neglecting any adjustments such as customer discounts or returns. Growth phase A phase of development during which a company experiences rapid earnings growth as it produces new products and expands market share. Guarantee The assumption of responsibility for payment of a debt or performance of some obligation if the liable party fails to perform to expectations. Idiosyncratic Risk Unsystematic risk or risk that is uncorrelated to the overall market risk. In other words, the risk that is firm-specific and can be diversified through holding a portfolio of stocks. Illiquid In the context of finance. absence of cash flow needed to fulfill financial debts and meet obligations. In the context of investments, describes a lightly traded investment such as a stock or bond that is not easily converted into cash. Immunization strategy A bond portfolio strategy whose goal is to eliminate the portfolio's risk, in case of a general change in the rate of interest, through the use of duration. Impaired capital When a company's total capital is less than the par value of all its capital stock. Imputation tax system Arrangement by which investors who receive a dividend also receive a tax credit for corporate taxes that the firm has paid. Imputed interest Used in accounting to refer to interest that has effectively been paid to a bondholder, even though no money has actually been paid. Income bond A bond whose payment of interest is contingent on sufficient earnings. These bonds are commonly used during the reorganization of a failed or failing business. Income exclusion rule The IRS rule that excludes certain types of income from taxation, e.g., welfare payments. Income limited partnership A limited partnership whose main goal is income generation, e.g., real estate, oil equipment. Income statement (statement of operations) A statement showing the revenues, expenses, and income (the difference between revenues and expenses) of a corporation over some period of time. Incontestability clause Clause in a life insurance contract preventing the insurer from revoking the policy after it has been in force for a year or two if the life insurance company discovers any important facts that the policyholder may have concealed, such as experiencing a stroke. Incremental cash flows Difference between the firm's cash flows with and without a project. Indemnify Used in insurance policy agreements as to compensation for damage or loss. Hold harmless Indenture Agreement between lender and borrower that details specific terms of the bond issuance. Specifies legal obligations of bond issuer and rights of bondholders. Index Statistical composite that measures changes in the economy or in financial markets, often expressed in percentage changes from a base year or from the previous month. Index fund Investment fund designed to match the returns on a stock market index. Mutual fund whose portfolio matches that of a broad-based index such as the S&P 500 and whose performance therefore mirrors the market as represented by that index. Indicator Used in the context of general equities. Technical or fundamental measurement that securities analysts use to forecast the market's direction, such as investment advisory sentiment, volume of stock trading, direction of interest rates, and buying or selling by corporate insiders. Indifference curve The expression in a graph of a utility function, where the horizontal axis measures risk and the vertical axis measures expected return. The curve connects all portfolios with the same utility. Individual Retirement Account (IRA) A retirement account that may be established by an employed person. IRA contributions are tax deductible according to certain guidelines, and the gains in the account are tax-deferred. Individual Retirement Account rollover A provision of the law governing IRA's that enables a retiree or anyone receiving a lump-sum payment from a pension, profit-sharing, or salary reduction plan to transfer the amount into an IRA. Inductive reasoning The attempt to use information about a specific situation to draw a conclusion. Industrial revenue bond (IRB) A bond issued by local government agencies on behalf of corporations. Industrials General term used in the financial markets to refer to companies manufacturing, producing, or distributing goods and services. Inflation The rate at which the general level of prices for goods and services is rising. Inflation hedge Investments designed to hedge against inflation and the loss of purchasing power associated with it. Inflation risk Also called purchasing power risk, the risk that changes in the real return the investor will realize after adjusting for inflation will be negative Ingot A bar of metal such as the type that the Federal Reserve System uses to store gold reserves. Initial filing Has various meanings. It could refer to a form that is filed with the Securities and Exchange Commission in advance of a major event, such as a public offering or a share repurchase. It could also refer to filings that occur before legal inside transactions. Initial public offering A company's first sale of stock to the public. Insider information Material information about a company that has not yet been made public. It is illegal for holders of this information to make trades based on it, however received. Insider trading Trading by officers, directors, major stockholders, or others who hold private inside information allowing them to benefit from buying or selling stock. Insiders These are directors and senior officers of a corporation-in effect, those who have access to inside information about a company. Insolvent A firm that is unable to pay debts (its liabilities exceed its assets). Insured bond A municipal bond backed both by the credit of the municipal issuer and by commercial insurance policies. Intangible asset A legal claim to some future benefit, typically a claim to future cash. Goodwill, intellectual property, patents, copyrights, and trademarks are examples of intangible assets. Interest The price paid for borrowing money. It is expressed as a percentage rate over a period of time and reflects the rate of exchange of present consumption for future consumption. Also, a share or title in property. Interest expense Interest expense is the money the corporation or individual pays out in interest on loans. Interest rate parity theorem Expression that the interest rate differential between two countries is equal to the difference between the forward foreign exchange rate and the spot rate. Interest subsidy The value of a firm's deduction of the interest payments on its debt from its earnings before calculation of its tax bill under current tax law. Internal auditor An employee of a company who analyzes the company's accounting records to that the company is following and complying with all regulations. Internal growth rate Maximum rate a firm can expand without outside sources of funding. Growth generated by cash flows retained by company. International Finance Corporation (IFC) A corporation owned by the World Bank that produces a number of well-known stock indexes for emerging markets. Its major role is to provide financing for projects in less developed countries. International Monetary Fund (IMF) An organization founded in 1944 to oversee exchange arrangements of member countries and to lend foreign currency reserves to members with short-term balance of payment problems. Interpolation A method of approximating a price or yield that is unknown by using numbers that are known. Inventory For companies: Raw materials, items available for sale or in the process of being made ready for sale. They can be individually valued by several different means, including cost or current market value, and collectively by FIFO (First in, first out), LIFO (Last in, first out) or other techniques. The lower value of alternatives is usually used to preclude overstating earnings and assets. For securities firms: Securities bought and held by a broker or dealer for resale. Inventory financing Used in the context of factoring and general finance to refer to loans to consumer product producers that use inventory as collateral. Inventory turnover The ratio of annual sales to average inventory, which measures the speed at which inventory is produced and sold. Low turnover is an unhealthy sign, indicating excess stocks and/or poor sales. Investment advisory service A business that specializes in providing investment advice for a fee. All advisers of an advisory service must be registered with the Securities and Exchange Commission. Investment bank Financial intermediaries who perform a variety of services, including aiding in the sale of securities, facilitating mergers and other corporate reorganizations, acting as brokers to both individual and institutional clients, and trading for their own accounts. Investment company A firm that that invests the funds of investors in securities appropriate for their stated investment objectives in return for a management fee. Investment philosophy The style and general ideology of investment practiced by an investor. Certain investors favor small-capitalization stocks, while others prefer large blue-chip stocks, for example. Investment product line The line of required returns for investment projects as a function of beta (nondiversifiable risk). Investment software Computer software that helps investors make investment decisions by identifying situations that meet programmed parameters. Investment trust A closed-end fund regulated by the Investment Company Act of 1940. These funds have a fixed number of shares that are traded on the secondary markets, like corporate stock. Investor relations The process by which the corporation communicates with its investors. Invoice billing Billing system in which invoices are sent off at the time of customer orders and are all separate bills to be paid. Irredeemable bond A bond lacking a call feature or a right of redemption. Also refers to a perpetual bond. Irrelevance result The Modigliani and Miller theorem that a firm's capital structure is irrelevant to the firm's value. J-curve Theory that says a country's trade deficit will initially worsen after its currency depreciates because higher prices on foreign imports will more than offset the reduced volume of imports in the short run. Joint account An agreement between two or more firms to share risk and financing responsibility in purchasing or underwriting securities or an account owned jointly by two or more persons at a bank or brokerage house. Joint bond A bond that is guaranteed by the issuer and a party other than the issuer. Joint venture An agreement between two or more firms to undertake the same business strategy and plan of action. Jumbo loan Loans of $1 billion or more. Or, loans that exceed the statutory size limit eligible for purchase or securitization by the federal agencies. Junior debt (subordinate debt) Debt whose holders have a claim on the firm's assets only after senior debtholder's claims have been satisfied. Subordinated debt. Junk bond A bond with a speculative credit rating of BB (S&P) or Ba (Moody's) or lower. Junk or high-yield bonds offer investors higher yields than bonds of financially sound companies. Two agencies, Standard & Poors and Moody's Investor Services, provide the rating systems for companies' credit. Just-in-time inventory systems Systems that schedule materials to arrive exactly when they are needed in the production process. Key industry An industry that plays a critical role in a nation's economy. Kickback In the context of finance, refers to compensation of dealers by sales finance companies for discounting installment purchase paper. In the context of contracts, refers to secret payments made to insure that the contract goes to a specific firm. Lagging indicators Economic indicators that follow rather than precede the country's overall pace of economic activity. Laisse-faire Doctrine that a government should not interfere with business and economic affairs. Launder To move illegally acquired cash through financial systems so that it appears to be legally acquired. Leaseback A transaction that involves the sale of some property, and an agreement by the seller to lease the property back from the buyer after the sale. Ledger cash A firm's cash balance as reported in its financial statements. Also called book cash. Legislative risk The risk that new or changed legislation will have a large positive or negative effect on an investment. Lessor An entity that leases an asset to another entity. Lessee An entity that leases an asset from another entity. Letter of credit A form of guarantee of payment issued by a bank on behalf of a borrower that assures the payment of interest and repayment of principal on bond issues. Letter of intent An assurance by a mutual fund shareholder that a certain amount of money will be invested monthly, in exchange for lower sales charges. In mergers, a preliminary merger agreement between companies after significant negotiations. Leverage The use of debt financing, or property of rising or falling at a proportionally greater amount than comparable investments. For example, an option is said to have high leverage compared to the underlying stock because a given price change in the stock may result in a greater increase or decrease in the value of the option. Leveraged buyout (LBO) A transaction used to take a public corporation private that is financed through debt such as bank loans and bonds. Because of the large amount of debt relative to equity in the new corporation, the bonds are typically rated below investment-grade, properly referred to as high-yield bonds or junk bonds. Investors can participate in an L.B.O. through either the purchase of the debt (i.e., purchase of the bonds or participation in the bank loan) or the purchase of equity through an L.B.O. fund that specializes in such investments. Leveraged company A company that has debt in its capital structure. Leveraged lease A lease arrangement under which the lessor borrows a large proportion of the funds needed to purchase the asset. The lender has a lien on the assets and a pledge of the lease payments to secure the borrowing. Leveraged recapitalization Often used in risk arbitrage. A public company takes on significant additional debt with the purpose of either paying an extraordinary dividend or repurchasing shares, leaving the public shareholders with a continuing interest in a more financially leveraged company. Leveraged stock Stocks financed with credit, such as that purchased on a margin account. Liability insurance Insurance guarding against damage or loss that the policyholder, may cause another person in the form of bodily injury or property damage. Lien A security interest in one or more assets that lenders hold in exchange for secured debt financing. Limitation on liens A bond covenant that restricts in some way a firm's ability to grant liens on its assets. Limited liability Limitation of loss to what has already been invested. Limited partner A partner who has limited legal liability for the obligations of the partnership. Line of credit An informal loan arrangement between a bank and a customer allowing the customer to borrow up to a prespecified amount. Liquid asset Asset that is easily and cheaply turned into cash-notably, cash itself and short-term securities. Liquidation Occurs when a firm's business is terminated. Assets are sold, proceeds are used to pay creditors, and any leftovers are distributed to shareholders. Any transaction that offsets or closes out a long or short position. Liquidity risk The risk that arises from the difficulty of selling an asset in a timely manner. It can be thought of as the difference between the "true value" of the asset and the likely price, less commissions. Long-term debt An obligation having a maturity of more than one year from the date it was issued. Also called funded debt. Lump sum A large one-time payment of money. Macroeconomics Analysis of a country's economy as a whole. Maintenance fee A yearly charge to maintain brokerage accounts, such as asset management accounts or IRAs. Majority shareholder A shareholder who is part of a group that controls more than half the outstanding shares of a corporation. Marginal cost The increase or decrease in a firm's total cost of production as a result of changing production by one unit. Marginal revenue The change in total revenue as a result of producing one additional unit of output. Market capitalization The total dollar value of all outstanding shares. Computed as shares times current market price. Capitalization is a measure of corporate size. Market prices The amount of money that a willing buyer pays to acquire something from a willing seller, when a buyer and seller are independent and when such an exchange is motivated by only commercial consideration. Maturity For a bond, the date on which the principal is required to be repaid. In an interest rate swap, the date that the swap stops accruing interest. Member bank A national- or state-chartered bank that is a member of the Federal Reserve System. Merchant bank A a bank that specializes not in lending its own funds, but in providing various financial services such as accepting bills arising out of trade, underwriting new issues, and providing advice on acquisitions, mergers, foreign exchange, or `portfolio management. Merger (1) Acquisition in which all assets and liabilities are absorbed by the buyer. (2) More generally, any combination of two companies. Microeconomics Analysis of the behavior of individual economic units such as companies, industries, or households. Money market fund A mutual fund that invests only in short-term securities, such as banker's acceptances, commercial paper, repurchase agreements, and government bills. The Monopoly Market characterized by absolute control of all sales and distribution in the market by one firm, due to some barrier to entry of other firms, allowing the firm to sell at a higher price than the societally optimal price. Moral hazard The risk that the existence of a contract will change the behavior of one or both parties to the contract, e.g., an insured firm will take fewer fire precautions. Mutual company A corporation that is owned by a group of members and that distributes income in proportion to the amount of business that members do with the company. Mutual fund Pools of money that are managed by an investment company and regulated by the Investment Company Act of 1940. They offer investors a variety of goals, depending on the fund and its investment charter. Some funds seek to generate income on a regular basis. Others seek to preserve an investor's money. Still others seek to invest in companies that are growing at a rapid pace. Mutual savings bank A state-chartered savings bank that is owned by its depositors and managed by a fiduciary board of trustees. National bank A commercial bank approved by the U.S. Comptroller of the Currency, which is required to be a member of and purchase stocks in the Federal Reserve System. Near money Assets that are easily convertible into cash, such as money market accounts and bank deposits. Negative amortization A loan repayment schedule in which the outstanding principal balance of the loan increases, rather than amortizing, because the scheduled monthly payments do not cover the full amount required to amortize the loan. The unpaid interest is added to the outstanding principal, to be repaid later. Net assets The difference between total assets on the one hand and current liabilities and noncapitalized long-term liabilities on the other hand. Net book value The current book value of an asset or liability; that is, its original book value net of any accounting adjustments such as depreciation. Net cash balance Beginning cash balance plus cash receipts minus cash disbursements. Net current assets The difference between current assets and current liabilities, also known as working capital. Net income The company's total earnings, reflecting revenues adjusted for costs of doing business, depreciation, interest, taxes and other expenses. Nominal dollars Dollars that are not adjusted for inflation. Nominal income Income that has not been adjusted for inflation and decreasing purchasing power. Noncompete A provision in a number of employment contracts that prohibits an employee from working for a competing firm for a specified number of years after the employee leaves the firm. Off-balance-sheet financing Financing that is not shown as a liability on a company's balance sheet. Oligopoly A Market characterized by a small number of producers who often act together to control the supply of a particular good and its market price. Oligopsony A Market characterized by a small number of large buyers who control all purchases and therefore the market price of a good or service. 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 credit Revolving line of credit that is extended with every purchase or cash advance. Operating cash flow Earnings before depreciation minus taxes. Measures the cash generated from operations, not counting capital spending or working capital requirements. Operating profit (or loss) Revenue from a firm's regular activities less costs and expenses and before income deductions. Optimum capacity The amount of manufacturing output that creates the lowest cost per unit. Oral contract A contract not recorded on paper or on computer, buy made vocally which is usually enforceable. Other current assets Value of noncash assets, including prepaid expenses and accounts receivable, due within one year. Parallel loan A process whereby two companies in different countries borrow each other's currency for a specific period of time, and repay the other's currency at an agreed maturity for the purpose of reducing foreign exchange risk. Also referred to as back-to-back loans. Partnership Shared ownership among two or more individuals, some of whom may, but do not necessarily, have limited liability with respect to obligations of the group. Pension fund A fund set up to pay the pension benefits of a company's workers after retirement. Pension plan A fund that is established for the payment of retirement benefits. Per capita debt The total bonded debt of a municipality divided by the population of the municipality. Phillips Curve A graph that supposedly shows the relationship between inflation and unemployment. It is conjectured that there is a simple trade-off between inflation and unemployment (high inflation and low unemployment, and low inflation and high unemployment). Obviously, the relation between these important macroeconomic variables is more complicated than this simple graph would suggest Portfolio A collection of investments, real and/or financial. Positive yield curve When long-term debt interest rates are higher than short-term debt rates (because of the increased risk involved with long-term debt security). Power of attorney A written authorization allowing a person to perform certain acts on behalf of another, such as moving of assets between accounts or trading for a person's benefit. Preferred shares Give investors a fixed dividend from the company's earnings and entitle them to be paid before common shareholders. Preferred stock A security that shows ownership in a corporation and gives the holder a claim, prior to the claim of common stockholders, on earnings and also generally on assets in the event of liquidation. Prepackaged bankruptcy A bankruptcy in which a debtor and its creditors pre-negotiate a plan of reorganization and then file it along with the bankruptcy petition. Prepayment penalty A fee a borrower pays a lender when the borrower repays a loan before its scheduled time of maturity. President Highest-ranking officer in a corporation after the chief executive officer. Prime rate The interest rate at which banks lend to their best (prime) customers. More often than not, a bank's most creditworthy customers borrow at rates below this rate. Principal (1) The total amount of money being borrowed or lent. (2) The party affected by agent decisions in a principal-agent relationship. Pro forma capital structure analysis A method of analyzing the impact of alternative possible capital structure choices on a firm's credit statistics and reported financial results, especially to determine whether the firm will be able to use projected tax shield benefits fully. Pro forma financial statements A firm's financial statements as adjusted to reflect a projected or planned transaction. "What-if" analysis. Pro forma statement A financial statement showing the forecast or projected operating results and balance sheet. Profit Revenue minus cost. Projection The use of econometric models to forecast the future performance of a company, country, or other financial entity using historical and current information. Promissory note Written pledge to pay. Proprietorship An unincorporated business that is owned and operated by only one person who has complete liability for all assets, and complete rights to all profits. Proxy Authorization, whether written or electronic, that shareholders' votes may be cast by others. Proxy contest A battle for the control of a firm in which a dissident group seeks, from the firm's other shareholders, the right to vote those shareholders' shares in favor of the dissident group's slate of directors. Public debt Issues of debt by governments to compensate for a lack of tax revenues. Pyramid scheme An illegal, fraudulent scheme in which a con artist convinces victims to invest by promising an extraordinary return but instead simply uses newly invested funds to pay off any investors who insist on terminating their investment. Qualitative analysis An analysis of the qualities of a company that cannot be measured concretely, such as management quality or employee morale. Quantitative analysis An analysis of the mathematically measurable figures of a company, such as the value of assets or projected sales. Quid pro quo An arrangement allowing a firm to use research from another firm at no cost in exchange for executing all of its trades with the firm that provides the research. Quorum The minimum number of people who must be present or must provide a proxy to vote at a meeting in order to make a valid decision. Raw material Materials a manufacturer converts into a finished product. Real estate A piece of land and whatever physical property is on it. Real Estate Investment Trust (REIT) REITs invest in real estate or loans secured by real estate and issue shares in such investments. A REIT is similar to a closed-end mutual fund. Receivables turnover ratio Total operating revenues divided by average receivables. Used to measure how effectively a firm is managing its accounts receivable. Redemption Repayment of a debt security or preferred stock issue, at or before maturity, at par or at a premium price. Refinancing An extension and/or increase in amount of existing debt. Regression A mathematical technique used to explain and/or predict. The general form is Y = a + bX + u, where Y is the variable that we are trying to predict; X is the variable that we are using to predict Y, a is the intercept; b is the slope, and u is the regression residual. The a and b are chosen in a way to minimize the squared sum of the residuals. The ability to fit or explain is measured by the R-square. Reinsurance The spreading of risk and division of client premiums among insurance companies allowing the sharing of the burden of a large risk. Repatriation The return from abroad of the financial assets of an organization or individual. Replacement cost insurance Insurance that pays out the full amount required to replace damaged property with new property, without taking into account the depreciated value of the property. Reproducible assets A tangible asset with physical properties that can be matched or duplicated, such as a building or machinery. Repurchase agreement An agreement with a commitment by the seller (dealer) to buy a security back from the purchaser (customer) at a specified price at a designated future date. Required reserves The dollar amounts, based on reserve ratios, that banks are required to keep on deposit at a Federal Reserve Bank. Residual assets Assets that remain after sufficient assets are dedicated to meet all senior debtholders' claims in full. Residuals (1) Part of stock returns not explained by the explanatory variable (the market index return). Residuals measure the impact of firm-specific events during a particular period. (2) Remainder cash flows generated by pool collateral and those needed to fund bonds supported by the collateral. Residual value Usually refers to the value of a lessor's property at the time the lease expires. Restructuring The reorganization of a company in order to attain greater efficiency and to adapt to new markets. Retail Individual and institutional customers as opposed to dealers and brokers. Retained earnings Accounting earnings that are retained by the firm for reinvestment in its operations; earnings that are not paid out as dividends. Return on assets Indicator of profitability. Determined by dividing net income for the past 12 months by total average assets. Result is shown as a percentage. ROA can be decomposed into return on sales (net income/sales) multiplied by asset utilization (sales/assets). Return on equity Indicator of profitability. Determined by dividing net income for the past 12 months by common stockholder equity (adjusted for stock splits). Result is shown as a percentage. Investors use ROE as a measure of how a company is using its money. ROE may be decomposed into return on assets (ROA) multiplied by financial leverage (total assets/total equity). Return on investment Generally, book income as a proportion of net book value. Return on sales A measurement of operational efficiency equaling net pre-tax profits divided by net sales expressed as a percentage. Revenue bond A bond issued by a municipality to finance either a project or an enterprise in which the issuer pledges to the bondholders the revenues generated by the operation of the projects financed. Reverse stock split A proportionate decrease in the number of shares, but not the total value of shares of stock held by shareholders. Shareholders maintain the same percentage of equity as before the split. Revolving line of credit A bank line of credit on which the customer pays a commitment fee and can take and repay funds at will. Risk Often defined as the standard deviation of the return on total investment. Degree of uncertainty of return on an asset. Risk management The process of identifying and evaluating risks and selecting and managing techniques to adapt to risk exposures. Risk-reward ratio Relationship of substantial reward corresponding to the amount of risk taken; mathematically represented by dividing the expected return by the standard deviation. Royalty Payment for the right to use intellectual property or natural resources. Savings bank An institution that primarily accepts consumer savings deposits and to make home mortgage loans. Savings deposits Accounts that pay interest, typically at below-market interest rates, that do not have a specific maturity, and that usually can be withdrawn upon demand. Savings and loan association National- or state-chartered institution that accepts savings deposits and invests the bulk of the funds thus received in mortgages. Secured bond A bond backed by the pledge of collateral, a mortgage, or other lien, as opposed to an unsecured bond, called a debenture . Securities & Exchange Commission A federal agency that regulates the U.S. financial markets. Seed money The first contribution by a venture capitalist toward the financing of a new business, often using a loan or purchase of convertible bonds or preferred stock. Self-amortizing mortgage Mortgage whose entire principal is paid off in a specified period of time with regular interest and principal payments. Senior debt Debt whose terms in the event of bankruptcy, require it to be repaid before subordinated debt receives any payment. bonds Corporate bonds arranged so that specified principal amounts become due on specified dates. Share repurchase Program by which a corporation buys back its own shares in the open market. It is usually done when shares are undervalued. Since repurchase reduces the number of shares outstanding and thus increases earnings per share, it tends to elevate the market value of the remaining shares held by stockholders. Shareholders equity This is a company's total assets minus total liabilities. A company's net worth is the same thing. Shares Certificates or book entries representing ownership in a corporation or similar entity. Shares authorized The maximum number of shares of stock of a company allowed in the articles of incorporation, which may be changed only by a shareholder vote. Short-term Any investments with a maturity of one year or less. Sight draft Demand for immediate payment. Signature loan A good faith loan that is unsecured and requires only the borrower's signature on the loan application. Silent partner A partner in a business who has no role in management but shares in the liability, tax responsibility, and cash flow. Simple interest Interest calculated as a simple percentage of the original principal amount. Compare to compound interest. Simple rate of return The return from investments figured by dividing income plus capital gains by the amount of capital invested. The effect of compounding is not taken into account. Slippage The difference between estimated transactions costs and actual transactions costs. The difference usually represents revisions to price difference or spread and commission costs. Small-cap A stock with a small capitalization, meaning a total equity value of less than $500 million. Soft currency A money of a country that is expected to drop in value relative to other currencies. Soft dollars The value of research services that brokerage houses supply to investment managers "free of charge" in exchange for the investment manager's business commissions. Soft market A buyer's market in which supply exceeds demand, causing little trading activity and wide bid-ask spreads. Solvency Ability to meet obligations. Sovereign risk The risk that a central bank will impose foreign exchange regulations that will reduce or negate the value of FX contracts. Also refers to the risk of government default on a loan made to a country or guaranteed by it. Speculation Purchasing risky investments that present the possibility of large profits, but also pose a higher-than-average possibility of loss. A profitable strategy over the long term if undertaken by professionals who hedge their portfolios to control the amount of risk. Spin-off A company can create an independent company from an existing part of the company by selling or distributing new shares Split stock (1) Purchases or sales shared with others. (2) Division of the outstanding shares of a corporation into a large number of shares. Ordinarily, splits must be proposed by directors and approved by shareholders. Spot lending Originating mortgages by processing applications taken directly from prospective borrowers. Spot price The current market price of the actual physical commodity. Also called cash price. Stabilization The action undertakes a country when it buys and sells its own currency to protect its exchange value. Stakeholders All parties that have an interest, financial or otherwise, in a firm-stockholders, creditors, bondholders, employees, customers, management, the community, and the government. Statement billing Billing method in which the sales for a period such as a month (for which a customer also receives invoices) are collected into a single statement, and the customer must pay all the invoices represented on the statement. Stock Ownership of a corporation indicated by shares, which represent a piece of the corporation's assets and earnings. Stock dividend Payment of a corporate dividend in the form of stock rather than cash. Stock exchanges Formal organizations, approved and regulated by the Securities and Exchange Commission (SEC), that are made up of members who use the facilities to exchange certain common stocks. Stock index Index like the Dow Jones Industrial Average that tracks a portfolio of stocks. Stock market Also called the equity market, the market for trading equities. Stock split Occurs when a firm issues new shares of stock and in turn lowers the current market price of its stock to a level that is proportionate to pre-split prices. Stockholder equity Balance sheet item that includes the book value of ownership in the corporation. It includes capital stock, paid-in surplus, and retained earnings. Subperiod return The return of a portfolio over a shorter period of time than the evaluation period. Subsidiary A wholly or partially owned company that is part of a large corporation. Super Bowl indicator A theory that if a team from the old American Football League pre-1970 wins the Super Bowl, the stock market will decline during the coming year. If a team from the old pre-1990 National Football League wins the Super Bowl, stock prices will increase in the coming year. Supply-side economics A theory of economics that reductions in tax rates will stimulate investment and in turn will benefit the entire society. Sweep account Account providing that a bank invest all the excess available funds at the close of each business day for the firm. Takeover General term referring to transfer of control of a firm from one group of shareholders to another group of shareholders. Tangible asset An asset whose value depends on particular physical properties. These include reproducible assets such as buildings or machinery and non-reproducible assets such as land, a mine, or a work of art. Tax shelter Legal methods taxpayers can use to reduce tax liabilities. An example is the use of depreciation of assets. Taxable income Gross income less a variety of deductions. Term insurance Provides a death benefit only, no build up of cash value. Term life insurance A contract that provides a death benefit but no cash build up or investment component. The premium remains constant only for a specified term of years, and the policy is usually renewable at the end of each term. Term loan A bank loan, typically with a floating interest rate, for a specified amount that matures in between one and ten years, and requires a specified repayment schedule. Title insurance Insurance policy that protects a policyholder from future challenges to the title claim a property that may result in loss of the property. Toll revenue bond A municipal bond that is repaid with revenues from tolls that are paid by users of the public project built with the bond revenue. Transactions costs The time, effort, and money necessary, including such things as commission fees and the cost of physically moving the asset from seller to buyer. Translation exposure Risk of adverse effects on a firm's financial statements that may arise from changes in exchange rates. Treasurer The corporate officer responsible for designing and implementing a firm's financing and investing activities. Treasury The department within a corporation that oversees its financial operations including the issuance of new shares. Treasury bills Debt obligations of the U.S. Treasury that have maturities of one year or less. Maturities for T-bills are usually 91 days, 182 days, or 52 weeks. T-Rex Fund A large venture capital fund (over one billion dollars). Such funds are known for imposing strong discipline on the firms they fund. Trickle down An economic theory that the support of businesses that allows them to flourish will eventually benefit middle- and lower-income people, in the form of increased economic activity and reduced unemployment. Trough The transition point between economic recession and recovery. Trust A fiduciary relationship calling for a trustee to hold the title to assets for the benefit of the beneficiary. Undercapitalized A business has insufficient capital to carry out its normal functions. Underwrite To guarantee, as to guarantee the issuer of securities a specified price by entering into a purchase and sale agreement. Underwriter A firm, usually an investment bank, that buys an issue of securities from a company and resells it to investors. In general, A party that guarantees the proceeds to the firm from a security sale, thereby in effect taking ownership of the securities. Uninsured motorist insurance Insurance that covers the policyholder and family if they are injured by a hit-and-run or uninsured motorist, assuming the other driver is at fault. U.S. Treasury bill U.S. government debt with a maturity of less than a year. U.S. Treasury bond U.S. government debt with a maturity of more than 10 years. U.S. Treasury bond U.S. government debt with a maturity of more than 10 years. Usury laws Laws limiting the amount of interest that can be charged on loans. Venture capital An investment in a start-up business that is perceived to have excellent growth prospects but does not have access to capital markets. Type of financing sought by early-stage companies seeking to grow rapidly. Vertical acquisition Buying or taking over a firm in the same industry in which the acquired firm and the acquiring firm represent different steps in the production process. Waiting period Time during which the Securities and Exchange Commission (SEC) studies a firm's registration statement. During this time the firm may distribute a preliminary prospectus. Whistle blower A person who has knowledge of fraudulent activities inside a firm or government agency, who is protected from the employer's retribution by federal law. Whole life insurance A contract with both insurance and investment components: (1) It pays off a stated amount upon the death of the insured, and (2) it accumulates a cash value that the policyholder can redeem or borrow against. Wholly owned subsidiary A subsidiary whose parent company owns virtually 100% of its common stock. Working capital Defined as the difference between current assets and current liabilities (excluding short-term debt). World Bank A multilateral development finance agency created by the 1944 Bretton Woods, (New Hampshire) negotiations. It makes loans to developing countries for social overhead capital projects that are guaranteed by the recipient country. World Trade Organization A multilateral agency that administers world trade agreements, fosters trade relations among nations, and solves trade disputes among member countries. Write-down Reducing the book value of an asset if its is overstated compared to current market values. Write-off Charging an asset amount to expense or loss, such as through the use of depreciation and amortization of assets. Yield The percentage rate of return paid on a stock in the form of dividends, or the effective rate of interest paid on a bond or note.