Money Dictionary

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

 

A

Abandonment Value: The amount that can be realized by liquidating a project before its economic life has ended.

Accelerated Depreciation: Depreciation methods that write off the cost of an asset at a faster rate than the write-off under the straight line method. The three principal methods
of accelerated depreciation are. (1) sum-of-years’-digits, (2) double declining balance, and (3) units of production.

Accruals: Continually recurring short-term liabilities. Examples are accrued wages, accrued taxes, and accrued interest.

Aging Schedule: A report showing how long accounts receivable have been outstanding.
Amortization The repayment of the principal amount of a loan in installments during the
life of the loan.

Annuity: A series of payments of a fixed amount for a specified number of years.

Arbitrage: The process of selling overvalued and buying undervalued assets so as to bring about an equilibrium where all assets are properly valued. One who engages in arbitrage is called ail arbitrageur.

Arrearage:
Overdue payment; frequently, omitted dividends on preferred stocks.
Assignment: A relatively inexpensive way of liquidating a failing firm that does not involve going through the courts.

All or none order: A market or limited price order that is to be executed in its entirety or not at all.

Alternative or either/or order:
An order to do either of two alternatives-e.g., sell (buy) at a limit price or sell (buy) on stop.

At the close order: A market order to be executed at or as near the close as practicable .

At the opening order: A market or limited price order to be executed at the opening of the stock or not at all.

 

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Bankers Acceptance: A promissory note by a business debtor arising out of a business
transaction; a bank, by endorsing, assumes the obligation of payment at the due date. The debtor has a deposit at the bank that will be charged for the amount plus interest.

Bankers Acceptance: A promissory note by a business debtor arising out of a business
transaction; a bank, by endorsing, assumes the obligation of payment at the due date. The debtor has a deposit at the bank that will be charged for the amount plus interest.

Bankruptcy: A legal procedure for formally liquidating a business, carried out under the
jurisdiction of courts of law.

Bankruptcy: A legal procedure for formally liquidating a business, carried out under the
jurisdiction of courts of law.

Beta Coefficient: Measures the extent to which the returns on a given investment move
with the stock market.

Bond: A long-term debt instrument.

Book Value: The accounting value of an asset. The book value of a share of common stock is equal to the net worth (common stock plus retained earnings) of the corporation divided by the number of shares of stock outstanding.

Beta Coefficient: Measures the extent to which the returns on a given investment move
with the stock market.

Bond: A long-term debt instrument.

Book Value:
The accounting value of an asset. The book value of a share of common stock is equal to the net worth (common stock plus retained earnings) of the corporation divided by the number of shares of stock outstanding.

Bid and ask: prices at which a security dealer offers to buy and sell stock.

“Big board: the New York Stock Exchange.

Bond: a long-term liability with a specified amount of interest and maturity
date.

Book value: a firm’s total assets minus its total liabilities; equity (frequently
expressed in per share terms).

Broke: an agent who handles buy and sell orders for an investor.

Bull market: a market of rising security prices.

Bullish: an expectation that prices will rise.

Business Risk: The basic risk inherent in a firm’s operations. Business risk plus
financial risk resulting from the use of debt equals total corporate risk.

Buy, sell, or hold: a brokerage firm’s recommendations as to investment strategies for a particular security.

Buy “minus” order: A market or limited price order to buy a stated amount of a stock provided that the price is not higher than the last sale if the last sale was a “minus” or “zero minus” tick, and is not higher than the last sale minus the minimum fractional change in the stock if the last sale was a “plus” or “zero plus” tick.

Bylaws: a document specifying the relationship between a corporation and its
stockholders.

 

 

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Call: (1) An option to buy (or “call”) a share of stock at a specified price within a specified period. (2) The process of redeeming a bond or preferred stock issue
before its normal maturity.

Call Premium: The amount in excess of par value that a company must pay when it calls a security.

Call Price: The price that must be paid when a security is called. The call price is equal to the par value plus the call premium.

Call Privilege: A provision incorporated into a bond or a share of preferred stock that gives the issuer the right to redeem (call) the security at a specified price.

Capital gain: an increase in value of a capital asset, such as a stock.

CBOE:
Chicago Board Options Exchange; the first organized secondary market in
puts and calls.

Certificate of deposit (CD): a time deposit with a specified maturity date.

Charter: a document specifying the relationship between a firm and the state in
which it is incorporated.

Capital Asset: An asset with a life of more than one year that is not bought and
sold in the ordinary course of business.

Capital Budgeting: The process of planning expenditures on assets whose returns are expected to extend beyond one year.

Capital Gains: Profits on the sale of capital assets held for six months or more.

Capital Losses: Losses on the sale of capital assets.

Capital Market Line: A graphical representation of the relationship between risk and the required rate of return on an efficient portfolio.

Capital Markets: Financial transactions involving instruments with maturities greater than one year.

Capital Rationing: A situation where a constraint is placed on the total size of
the capital investment during a particular period.

Capital Structure: The permanent long-term financing of the firm represented by long-term debt, preferred stock, and net worth (net worth consists of capital, capital surplus, and retained earnings). Capital structure is distinguished from financial structure, which includes short-term debt plus all reserve accounts.

Capitalization Rate: A discount rate used to find the present value of a series of future cash receipts; sometimes called discount rate.

Carry-back; Carry-forward: For income tax purposes, losses that can be carried backward or forward to reduce federal income taxes.

Cash Budget: A schedule showing cash flows (receipts, disbursements, and net cash) for a firm over a specified period.

Cash Cycle: The length of time between the purchase of raw materials and the collection of accounts receivable generated in the sale of the final product.

Certainty Equivalents: The amount of cash (or rate of return) that someone would require with certainty to make him indifferent between this certain sum (or rate of return) and a particular uncertain, risky sum (or rate of return).

Certificate of Deposit (CD): A form of savings deposit which cannot be withdrawn before its maturity date. However, CD’s are negotiable and are sold in an active secondary market before their maturity date.

Characteristic Line: A linear least-squares regression line that shows the relationship between an individual security’s return and returns on “the market.” The slope of the characteristic line is the beta coefficient.

Characteristic tine: A linear least-squares regression line that shows the relationship between an individual security’s return and returns on the market. The slope of the
characteristic line is the beta coefficient.

Chartists: Technical stock market analysts who believe that observations of the historical pattern of price or returns behavior can lead to trading rules for achieving superior performance.

Chattel Mortgage: A mortgage on personal property (not real estate). A mortgage on
equipment would be a chattel mortgage.

Closed-end investment company: an investment company with a fixed number of
shares that are bought and sold in the secondary security markets.
Commissions: fees charged by brokers for executing orders.

Coefficient of Variation (CV): Standard deviation divided by the mean.

Collateral: Assets that are used to secure a loan.

Combined Leverage Effect (CLE): The combination of financial and operating leverage which indicates the effect on EPS of a given change in sales.

Commercial Paper: Unsecured, short-term promissory notes of large firms. The rate of interest on commercial paper is typically somewhat below the prime rate of interest.

Commitment Fee: The fee paid to a lender for a formal line of credit.

Compensating Balance: A required minimum checking account balance that a firm must

Common stock: a security representing ownership in a corporation.

Compound sum of an annuity: the future value of a series of equal annual payments.

Composition: An informal method of reorganization that voluntarily reduces creditors’
claims on the debtor firm.

Compound Interest: An interest rate that is applicable when interest in succeeding periods is earned not only on the initial principal but also on the accumulated interest of prior periods. Compound interest is contrasted to simple interest, in which returns are not earned on interest received.

Compounding: the process by which interest is paid on interest that has been
previously earned.

Conditional Sales Contract: A method of financing new equipment by paying it off in installments over a one-to-five-year period. The seller retains title to the equipment until

Condominium: an apartment that is owned instead of rented.

Conglomerate: a diversified firm with interest in unrelated areas of business.

Consolidated balance sheet: a parent company’s balance sheet, which summarizes and combines the balance sheets of the firm’s various subsidiaries.

Convertible bond: a bond that may be exchanged for (i.e., converted into) common stock.

Consol Bond: A perpetual bond issued by England in 1814 to consolidate past debts; by
extension, any perpetual bond.

Consolidated Tax Return: An income tax return that combines the income statement of several affiliated firms.

Continuous Compounding (Discounting): As opposed to discrete compounding, interest is added continuously rather than at discrete points in time.

Contribution Margin: The difference between sales price per unit and variable costs per
unit.

Conversion Price: The effective price paid for common stock when the stock is obtained
by converting either convertible preferred stocks or convertible bonds. For example, if a $1,000 bond is convertible into 20 shares of stock, the conversion price is $50 ($1,000/20).

Convertible preferred stock: preferred stock that may be exchanged for (i.e., converted into) common stock.

Cost of debt: the interest rate adjusted for any tax savings.

Coupon: the specified interest rate or amount of interest paid by a bond.

Coupon
bond: a bond with coupons attached that are removed and presented for
payment of interest when due.

Covered option: an option for which the seller has the securities.

Covering: the buying of securities or commodities to close a short position.

Credit union: a savings union that borrows from and lends to its members only.

Cross-sectional analysis: an analysis of several firms in the same industry.

Cumulative preferred stock: a preferred stock whose dividends accumulate if they
are not paid.

Cumulative Dividends: A protective feature on preferred stock that requires all past preferred dividends to be paid before any common dividends are paid.

Cut-off Point: In the capital budgeting process, the minimum rate of return on acceptable investment opportunities.

Current asset: an asset that should be converted into cash within 12 months.

Current liability: a liability that has to be paid within the next 12 months.

Current ratio: current assets divided by current liabilities; a measure of liquidity.

Current yield: annual income divided by the current price of the security; annual
return.

 

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Day order: An order to buy or sell which, if not executed, expires at the end of the trading day on which it was entered.

Debenture: A long-term debt instrument that is not secured by a mortgage on specific property.

Debt Ratio: Total debt divided by total assets.

Decision Tree: A device for setting forth graphically the pattern of relationship
between decisions and chance events.

Default: The failure to fulfill a contract. Generally, default refers to the failure to pay interest or principal on debt obligations.

Degree of Leverage: The percentage increase in profits resulting from a given
percentage increase in sales. The degree of leverage may be calculated for financial leverage, operating leverage, or both combined.

Devaluation: The process of reducing the value of a country’s currency stated in terms of other currencies; e.g., the British pound might be devalued from $2.30 for one pound to $2.00 for one pound.

Discount Rate: The interest rate used in the discounting process; sometimes called capitalization rate.

Discounted Cash Flow Techniques: Methods of ranking investment proposals. Included are (I) internal rate of return method, (2) net present value method, and (3) profitability index or benefit/cost ratio.

Discounting of Accounts Receivable: Short-term financing where accounts receivable are used to secure the loan. The lender does not buy the accounts receivable but simply uses them as collateral for the loan. Also called assigning accounts receivable.

Discounting: The process of finding the present value of a series of future cash flows. Discounting is the reverse of compounding.

Dividend Yield: The ratio of the current dividend to the current price of a share of stock.

Do not reduce (DNR) order: A limited order to buy or a stop limit order to sell a round lot or odd lot or a stop order to sell an odd lot that may not be reduced by the amount of an ordinary cash dividend on the ex-dividend date.

Du Pont System: A system of planning and control that emphasizes analysis of investments and cost elements for their effects on return on investment, asset turnover, and profit margins.

 

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EBIT: Acronym for earnings before interest and taxes Also, net operating income (NOI).

Economical Ordering Quantity (EOQ): The optimum size of order which results in the least cost of purchasing and holding inventories

Edge Act Corporations: Subsidiaries of U.S. banks which can conduct all forms of international banking, including investing in the equities of other companies.

Efficient Market Hypothesis: The theory that historical data on prices or returns plus other publicly available data are already reflected in current prices of assets or securities

Efficient Portfolio: A portfolio which provides the highest expected return for a given level of risk, or the lowest amount of risk for a given level of expected return.

Equity (S): The net worth of a business, consisting of capital stock, capital (or paid-in)
surplus, earned surplus (or retained earnings), and occasionally, certain net worth
reserves Common equity is that part of the total net worth belonging to the common stockholders. Total equity would include preferred stockholders. The terms net worth and common equity are frequently used interchangeably.

EPS: Acronym for “earnings per share.”

Equity: The net worth of a business, consisting of capital stock, capital (or paid in) surplus, earned surplus (or retained earnings), and occasionally, certain net worth reserves. Common equity is that part of the total net worth belonging to the common stockholders. Total equity would include preferred stockholders. The terms “common stock:’ “net worth,” and “common equity” are frequently used interchangeably (5).

Eurocurrency: Refers to bank deposits in one country denominated in the currency of
another country-for example, U.S. dollar deposits in a French bank.

Ex Dividend Date: The date on which the right to the current dividend no longer accompanies a stock. (For listed stock, the ex dividend date is four working days prior to

Ex Rights: The date on which stock purchase rights are no longer transferred to the purchaser of the stock.

Exchange Rate: The rate at which one currency can be exchanged for another-for
example, $2.30 for one British pound.

Excise Tax: A tax on the manufacture, sale, or consumption of specified commodities.

Exercise Price: The price that must be paid for an asset when an option is exercised.

Expected Return: The mean value of the probability distribution of possible returns, the sum of the anticipated dividend yield and capital gains.

Extension: An informal method of reorganization in which the creditors voluntarily postpone the date of required payment on past-due obligations.

External Funds: Funds acquired through borrowing or by selling new common or preferred stock

Extra dividend: a dividend that is in addition to the firm’s regular dividend.

 

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Face value: the amount of a debt; the principal.

Factoring: A method of financing accounts receivable under which a firm sells its ac-
counts receivable (generally without recourse) to a financial institution (the factor)

Federal agency bonds: debt issued by divisions (i.e., agencies) of the federal government.

Federal Funds: Deposits of member banks in the Federal Reserve Bank to meet reserve
requirements. Sales of federal funds represent loans from one member bank to another, usually for overnight or over a weekend.

Federal Reserve: the central bank of the United States.

Fill or kill order: A market or limited price order to be executed in its entirety as soon as it is represented in the crowd and if not so executed is to be treated as canceled.

Financial goal(s): the purpose(s) of investing.

Financial intermediary: a financial institution that borrows from one group and
lends to another (e.g., a commercial bank).

Financial leverage: the use of borrowed funds to acquire an asset; the use of debt
financing.

Financial planning: the programs for meeting financial goals.

Flat: a description of a bond that trades without accrued interest.

Forecasting: the processes of predicting the future.

Floating Exchange: Rates Exchange rates may be fixed by government policy (pegged”) or allowed to “float” up or down in accordance with supply and demand. When market forces are allowed to function, exchange rates are said to be floating.

Flotation Cost: The cost of issuing new stocks or bonds.

Foreign exchange: foreign moneys or currencies.

Full-disclosure laws: the federal and state laws requiring publicly owned firms to
disclose financial and other information that may affect the value of their securities.

Fundamental approach: the analysis of economic and financial information to
identify assets for purchase.

Funded Debt: Long-term debt.

Funding: The process of replacing short-term debt with long-term securities (stocks or bonds).

Futures contract: an agreement for the future delivery of a commodity at a
specified price.

Futures price: the price for the future delivery of a commodity.

 

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General obligation bond: a bond whose interest does not depend on the revenue
of a specific project; government bonds supported by the full faith and credit of
the issuer.

General Purchasing Power Reporting: A proposal by the FASB that the current values of nonmonetary items in financial statements be adjusted by a general
price index.

GNP: gross national product; the value of a nation’s final goods and services
produced during a year.

Good till canceled (GTC) or open order: An order to buy or sell that remains in effect until executed or canceled.

Good-till-canceled order: an order placed with a broker that remains in effect
until it is executed by the broker or canceled by the investor.

Gross profit margin: sales revenues minus the cost of goods sold.

Growth stock: shares of a company whose earnings are expected to grow at an
above average rate.

Goodwill: Intangible assets of a firm established by the excess of the price paid for the going concern over its book value.

 

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Head-and-shoulder pattern: a pattern of security prices that resembles ahead and a shoulder.

Hedging: the simultaneous buying and selling to reduce risk.

Hidden asset: an asset that has appreciated in value but is carried on the balance
sheet at a lower value (e.g., at cost).

Holder-of-Record Date: The date on which a company closes its stock transfer books and makes up a list of the stockholders as of that date, to receive a future dividend payment.

Holding Company: A corporation operated for the purpose of owning the common stocks of other corporations.

Holding company: a firm that owns securities of other companies.

Hurdle Rate: In capital budgeting, the minimum acceptable rate of return on a project; if the expected rate of return is below the hurdle rate, the project is not accepted. The hurdle rate should be the marginal cost of capital.

 

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Immediate or cancel order: A market or limited price order to be executed in whole or in part as soon as such order is represented in the trading crowd; the portion not executed is to be treated as canceled.

Improper Accumulation: Earnings retained by a business for the purpose of enabling stockholders to avoid personal income taxes.

Improved land: land that has been cleared or has had improvements (e.g., curbs,

Income Bond: A bond that pays interest only if the current interest is earned.

Income bond: a bond whose interest is paid only if it is earned by the firm.

Income-in-kind: non-monetary income (e.g., services received in lieu of cash).

Income statement: a statement of profit or loss; a summation of revenues and
expenses for a specified time period.

Income: the flow of money or its equivalent produced by an asset (e.g., dividends, interest).

Incremental Cash Flow: Net cash flow attributable to an investment project.

Incremental Cost of Capital: The weighted cost of the increment of capital raised during a specified time period.

Incremental Cash Flow: Net cash flow attributable to an investment project.

Incremental Cost of Capital: The average cost of the increment of capital raised during a given year.

Indenture: A formal agreement between the issuer of a bond and the bondholders.

Indenture: the document that specifies the terms of a bond issue.

Index fund: a mutual fund whose portfolio seeks to duplicate an index of stockprices.

Inheritance tax: a tax on what an individual receives from an estate.

Insolvency: The inability to meet maturing debt obligations.

Insolvency: The inability to meet maturing debt obligations.

Interest Factor (IF): Numbers found in compound interest and annuity tables.

Internal Financing: Funds made available for capital budgeting and working capital expansion through the normal operations of the firm; internal financing is approximately equal to retained earnings plus depreciation.

Interest Rate Parity Theorem: States that the ratio of domestic forward to spot exchange rates expressed in foreign currency units per one domestic currency unit will
equal the ratio of one plus foreign to one plus domestic interest rates.

Internal Rate of Return (IRR): The rate of return on an asset investment. The internal rate of return is calculated by finding the discount rate that equates the present value of future cash flows to the cost of the investment.

Intrinsic Value: That value which, in the mind of the analyst, is justified by the facts. It is often used to distinguish between the “true value” of an asset (the intrinsic value) and the asset’s current market price.

Investment Banker: One who underwrites and distributes new investment securities; more broadly, one who helps business firms to obtain financing.

Investment Tax Credit: Business firms can deduct as a credit against their income taxes a specified percentage of the dollar amount of new investments in each of certain categories of assets.

 

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Legal List: A list of securities in which mutual savings banks, pensions funds, insurance companies, and other fiduciary institutions are permitted to invest.

Leverage Factor: The ratio of debt to total assets or debt to equity

Lien: A lender’s claim on assets that are pledged for a loan.

Limit, limited, or limited price order: An order to buy or sell a stated amount of a security at a specified price, or at a better price, if obtainable after the order is represented in the trading crowd.

Line of Credit: An arrangement whereby a financial institution (bank or insurance company) commits itself to lend up to a specified maximum amount of funds during
a specified period.

Liquidating Value: The amount that could be realized if an asset or group of assets (the entire assets of a firm, for example) are sold separately from the organization that has
been using them.

 

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Market order: An order to buy or sell at the most advantageous price obtainable after the order is represented in the trading crowd.

Mutual savings bank: a savings bank owned by its depositors.

 

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Naked option: an option that is sold for which the seller does not have the securities.

NASDAQ: National Association of Security Dealers Automatic Quotation system; quotation system for over-the-counter securities.

Net asset value: the asset value of a share in an investment company; total assets minus total liabilities divided by the number of shares outstanding.

Net profit margin: a ratio of earnings before interest and taxes to sales.

Net worth: equity; book value.

No-load fund: a mutual fund that does not charge a fee for selling shares.

NOW account: a savings account against which negotiable orders of withdrawal
may be written.

Not held order: A market or limited price order marked “not held,” “disregard tape,” “take time,” or any such qualifying notation.

NYSE index: New York Stock Exchange index; an index of prices of all stocks
listed on the exchange.

 

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Odd lot: a unit of trading that is smaller than the general unit of sale (e.g., 32 shares).

Open market operations: the buying and selling of government securities by the
Federal Reserve.

Open-end investment company: a mutual fund; an investment company from
which individuals buy shares and to which they resell them.

Opportunity Cost: The rate of return on the best alternative investment that is available. It is the highest return that will not be earned if the funds are invested in a particular project. For example, the opportunity cost of not investing in bond A yielding 8 percent might be 7.99 percent, which could be earned on bondB.

Options: Contracts that give their holder the right to buy (or sell) an asset at a predetermined time for a given period of time.

Order good until a specified time: A market or limited price order to be represented in the trading crowd until a specified time, after which such order or any portion not executed is to be canceled.

Ordinary Income: Income from the normal operations of a firm. Operating income specifically excludes income from the sale of capital assets.

Organized exchange: a formal market for buying and selling securities or commodities.

Organized Security Exchanges: Formal organizations having tangible, physical locations. Organized exchanges conduct an auction market in designated (“listed”) investment securities. For example, the New York Stock Exchange is an organized exchange.

Originating house: an investment banker that makes an agreement with a firm to sell anew issue and that forms the syndicate to sell the securities.

Overdraft System: A system where a depositor may write checks in excess of his balance, with his bank automatically extending a loan to cover the shortage.

Over-the-counter market (OTC): All facilities that provide for trading in unlisted securities; that is, those not listed on organized exchanges. The over-the-counter market is typically a “telephone market,” as most business is conducted over the telephone.

 

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Paper profits: price appreciation that has not been realized.

Par Value: The nominal or face value of a stock or bond.

Partnership: an unincorporated business owned by two or more individuals.

Payout ratio: the ratio of dividends to earnings.

Payback Period: The length of time required for the net revenues of an investment to return the cost of the investment.

Payout Ratio: The percentage of earnings paid out in the form of dividends.

Pegging: A market stabilization action taken by the manager of an underwriting group during the offering of new securities. He does this by continually placing orders to buy at a specified price in the market.

PE ratio: the ratio of the price of a stock to the earnings per share.

Perpetual bond: a debt instrument with no maturity date.

Perpetuity: A stream of equal future payments expected to continue forever.

Pledging of Accounts Receivable: Short-term borrowing from financial institutions where the loan is secured by accounts receivable.

Pooling of Interest: An accounting method for combining the financial statements of firms that merge. Under the pooling-of-interest procedure, the assets of the merged firms are simply added to form the balance sheet of the surviving corporation. This method is different from the “purchase” method, where goodwill is put on the balance sheet to reflect a premium (or discount) paid in excess of book value.

Portfolio Effect: The extent to which the variation in returns on a combination of assets (a “portfolio”) is less than the sum of the variations of the individual assets.

Portfolio risk: the total risk associated with owning a portfolio; the sum of
systematic and unsystematic risk.

Portfolio Theory: Deals with the selection of optimal portfolios; i.e., portfolios that provide the highest possible return for any specified degree of risk.

Preemptive Right: A provision contained in the corporate charter and bylaws that gives holders of common stock the right to purchase on a pro rata basis new issues of common stock (or securities convertible into common stock).

Present Value (PV): The value today of a future payment, or stream of payments, discounted at the appropriate discount rate.

Portfolio: a combination of assets owned by an investor.

Preemptive rights: the right of current stockholders to maintain their proportionate ownership in the firm.

Preferred stock: a class of stock (i.e., equity) that has a prior claim to common
stock on the firm’s earnings.

Premium of a bond: the extent to which a bond’s price exceeds the face amount of
the debt.

Premium of an option: the amount paid for an option that exceeds the option’s
intrinsic value.

Present value: the current worth of a sum to be received in the future.

Present value of an annuity: the present worth of a series of equal payments.

Principal: the amount owed; the face value of debt.

Private placement: the sale of securities to a financial institution.

Progressive tax: tax whose rate increases as the tax base increases.

Project note: a short-term tax-exempt note issued through the Department of
Housing and Urban Development to finance urban renewal.

 

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Refunding: Sale of new debt securities to replace an old debt issue.

Regression Analysis: A statistical procedure for predicting the value of one variable (dependent variable) on the basis of knowledge about one or more other variables
(independent variables).

Reinvestment Rate: The rate of return at which cash flows from an investment are reinvested. The reinvestment rate mayor may not be constant from year to year.

Reorganization: When a financially troubled firm goes through reorganization, its assets
are restated to reflect their current market value, and its financial structure is restated downward to reflect reductions on the asset side of the statement. Under a reorganization, the firm continues in existence; this is contrasted to bankruptcy, in which the firm is liquidated and ceases to exist

Replacement Cost Accounting: A requirement under SEC release no.190 (1976) that large companies disclose the replacement costs of inventory items and depreciable plant.

Required Rate of Return: The rate of return that stockholders expect to receive on common stock investments.

Residual Value: The value of leased property at the end of the lease term.

Retained Earnings: That portion of earnings not paid out in dividends. The figure that appears on the balance sheet is the sum of the retained earnings for each year throughout the company’s history.

Right: A short-term option to buy a specified number of shares of a new issue of securities at a designated “subscription” price.

Rights Offering: A securities flotation offered to existing stockholders.

Risk: The probability that actual future returns will be below expected returns. Measured by standard deviation or coefficient of variation of expected returns.

Risk-adjusted Discount Rates: The discount rate applicable for a particular risky (uncertain) stream of income: the riskless rate of interest plus a risk premium appropriate to the level of risk attached to the particular income stream.

Risk Premium: The difference between the required rate of return on a particular risky asset and the rate of return on a riskless asset with the same expected life.

Risk-Return: Tradeoff Function (See Security Market Line.)

 

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Safety Stock: An amount added to inventory holdings as a precautionary measure in the
face of uncertainty as to delivery times and usage rates, and the cost of stock-outs.

Sale and Leaseback: An operation whereby a firm sells land, buildings, or equipment to a financial institution and simultaneously executes an agreement to lease the property back for a specified period under specific terms.

Salvage Value: The value of a capital asset at the end of a specified period. It is the current market price of an asset being considered for replacement in a capital budgeting problem.

Securities and Exchange Commission (SEC): A federal government agency with which a registration statement must be filed on new issues of securities and which supervises the operation of securities exchanges and related aspects of the securities business.

Securities, Junior: Securities that have lower priority in claims on assets and income than other securities (senior securities). For example, preferred stock is junior to debentures, but debentures are junior to mortgage bonds. Common stock is the most junior of all corporate securities.

Securities, Senior: Securities having claims on income and assets that rank higher than certain other securities (junior securities). For example, mortgage bonds are senior to debentures, but debentures are senior to common stock.

Security Market Line: A graphic representation of the relation between the required return on a security and the product of its risk times a normalized market measure of risk. Risk-return relationships for individual securities or investments.

Selling Group: A group of stock brokerage firms formed for the purpose of distributing a new issue of securities; part of the investment banking process.

Serial bond: an issue of bonds in which specified bonds mature each year.

Series E and EE bonds: savings bonds issued by the federal government in small
denominations.

Series Hand HH bonds: income bonds issued by the federal government.

Settlement date: the date on which an investor must pay for a security purchase.

Short position: owing assets for possible price deterioration; being short in a security.

Short sale: the sale of borrowed securities in anticipation of a price decline.

Short term: a period of time less than one year.

Sinking fund: a series of periodic payments to retire a bond issue.

SIPC: Security Investors Protection Corporation, which insures investors against
failures by brokerage firms.

Specialist: a market maker on the New York Stock Exchange who maintains an
orderly market in the security.

Speculator: an individual who is willing to accept substantial risk for the possibility of a large return.

Spot price: the current price of a commodity.

spread the difference between the bid and ask prices.

Standard & Poor’s 500 stock index: an index of prices of 500 stocks.

stock dividend: a dividend paid in stock.

Stock split: recapitalization that affects the number of shares outstanding, their
par value, the earnings per share, and the price of the stock.

Stockholders’ equity: equity; stockholders’ investment in a firm; the sum of
stock, paid-in capital, and retained earnings.

Stop loss order: a purchase or sell order designed to limit an investor’s loss on a
position in a security.

Street name: the registration of securities in the broker’s name instead of in the
buyer’s name.

Supply of money: the sum of cash, currency, and demand deposits outstanding.

Syndicate: a selling group assembled to market an issue of securities.

Systematic risk: risk associated with fluctuations in security prices (i.e., the market as a whole).

Synergy: The improved performance of a firm that has resulted from a merger is greater
than would be the simple sum of the individual pre-merger entities; derives from the interdependency of the activities of the firms

Systematic Risk: That part of a security’s risk that cannot be eliminated by diversification.

Semilogarithmic paper: graph paper on which one axis is expressed in logarithms.

 

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Tangible Assets: Physical assets (as opposed to intangible assets such as goodwill and the stated value of patents).

Tender Offers: An offer to buy the stock of a firm at a specified price. Sometimes the offer is submitted for approval to the board of directors of the target company; or the offer may be made directly to the shareholders of the company.

T�account: an abbreviated balance sheet.

Tax credit: a credit against one’s tax liabilities, which reduces the amount of taxes owed.

Tax-exempt bond: a bond whose interest is excluded from federal income taxation.

Tax-exempt fund: a mutual fund that specializes in tax-exempt securities.

Technical approach: an analysis of past volume and price behavior to identify
assets for purchase.

Tender offer: a formal offer by a firm to buy shares at a specified price.

10-K report:
a required annual report filed with the Securities and Exchange Commission by a publicly owned firm.

10-Q report: a required quarterly report filed with the Securities and Exchange
Commission by a publicly owned firm.

Term Loan: A loan generally obtained from a bank or an insurance company with a maturity greater than one year. Term loans are generally amortized; periodic repayments are made to reduce the outstanding amount of the loan over its life.

Term Structure of Interest Rates: The relationship between interest rates and loan maturity.

Terminal Value: The value of an asset at a future time. The value of an asset today is the
present value of its terminal value discounted at the appropriate rate

Theoretical value as debt: the value of a convertible bond as a debt instrument.

Theoretical value as stock: the value of an option in terms of stock.

Thin issue: an issue of securities with either a small number of securities in them hands of the general public or a small volume of transactions.

Trade Credit: Interfirm debt arising through credit sales and recorded as an account receivable by the seller and as an account payable by the buyer.

Transfer Price: The price used within a firm to record the “sale” of products or assets by
one division to another.

Treasury Stock: Common stock that has been repurchased by the issuing firm.

Trust Receipt: An instrument acknowledging that the borrower holds certain goods in
trust for the lender. Trust receipt financing is used in connection with the financing of inventories for automobile dealers, construction equipment dealers, appliance dealers, and other dealers in expensive durable goods.

Treasury Stock: Common stock that has been repurchased by the issuing firm.

Trust Receipt: An instrument acknowledging that the borrower holds certain goods in trust for the lender. Trust receipt financing is used in connection with the financing of inventories for automobile dealers, construction equipment dealers, appliance dealers, and other dealers in expensive durable goods.

Trustee: The representative of bondholders who acts in their interest and facilitates
communication between them and the issuer. Typically these duties are handled by a department of a commercial bank.

Trustee: The representative of bondholders who acts in their interest and facilitates communication between them and the issuer. Typically these duties are handled by a department of a commercial bank.

 

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Underwriting (1): The entire process of issuing new corporate securities. (2) The insurance function of bearing the risk of adverse price fluctuations during the period in which anew issue of stock or bonds is being distributed.

Underwriting (I): The entire process of issuing new corporate securities. (2) The insurance function of bearing the risk of adverse price fluctuations during the period in
which anew issue of stock or bonds is being distributed.

Underwriting Syndicate: A syndicate of investment firms formed to spread the risk associated with the purchase and distribution of anew issue of securities. The larger
the issue, the more firms typically are involved in the syndicate.

Underwriting Syndicate: A syndicate of investment firms formed to spread the risk associated with the purchase and distribution of anew issue of securities. The larger the issue, the more firms typically are involved in the syndicate.

Unlisted Securities: Securities that are traded in the over-the-counter market.

Unlisted Securities: Securities that are traded in the over-the-counter market.

Unsystematic Risk: That part of a security’s risk associated with random events;
unsystematic risk can be eliminated by proper diversification.

Unsystematic Risk: That part of a security’s risk associated with random events; unsystematic risk can be eliminated by proper diversification

Utility Theory: A body of theory dealing with the relationships among money income,
utility (or satisfaction), and the willingness to accept risk”.

Utility Theory: A body of theory dealing with the relationships among money income, utility (or “happiness”), and the willingness to accept risks.

 

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Value Additivity Principle: Neither fragmenting cash flows nor recombining them will affect the resulting values of the cash flows.

Variable Budget: A system whereby budget projections of inflows and outflows have different relationships at different levels of activity of the unit.

 

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Warrant: A long-term option to buy a stated number of shares of common stock at a specified price. The specified price is generally called the “exercise price.”

Weighted Cost of Capital: A weighted average of the component costs of debt, preferred stock, and common equity. Also called the “composite cost of capital.”

Working Capital: Refers to a firm’s investment in short-term assets-cash, short-term securities, accounts receivable, and inventories. Gross working capital is defined as a firm’s total current assets. Net working capital is defined as current assets minus current liabilities. If the term “working capital” is used without further qualification, it generally refers to gross working capital.

 

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Yield: The rate of return on an investment; the internal rate of return.

 

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