CFA #2 Flashcards
Excess reserves
A bank’s actual reserves minus its desired reserves.
Exchange for physicals (EFP)
A permissible delivery procedure used by futures market participants, in which the long and short arrange a delivery procedure other than the normal prodedures stipulated by the futures exchange.
Exchange ratio
The number of shares that target stockholders are to receive in exchange for each of their shares in the target company.
Exchanges
Places where traders can meet to arrange their trades.
Ex-dividend
Trading ex-dividend refers to shares that no longer carry the right to the next dividend payment.
Ex-dividend date
The first date that a share trades without (i.e. “ex”) the dividend.
Execution instructions
Instructions that indicate how to fill an order.
Exercise date
The day that employees actually exercise the options and convert them to stock.
Exercise or excercising the option
The process of using an option to buy or sell the underlying.
Exercise price (strike price, striking price, or strike)
The fixed price at which an option holder can buy or sell the underlying.
Exercise rate or strike rate
The fixed rate at which the holder of an interest rate option can buy or sell the underlying.
Exercise value
The value obtained if an option is exercised based on current conditions.
Exhaustive
Covering or containing all possible outcomes.
Expected value
The probability-weighted average of the possible outcomes of a random variable.
Expensed
Taken as a deduction in arriving at net income.
Expenses
Outflows of economic resources or increases in liabilities that result in decreasees in equity (other than decreases because of distributions to owners); reductions in net assets associated with the creation of revenues.
Experience cuve
A curve that shows the direct cost per unit of good or service produced or delivered as a typically declining function of cumulative output.
Expiration date
The date on which a derivative contract expires.
Exposure to foreign exchange risk
The risk of a change in value of an asset or liability denominated in a foreign currency due to a change in exchange rates.
External diseconomies
Factors outside the control of a firm that rase the firm’s cost as the industry produces a larger output.
External economies
Factors beyond the control of a firm that lower the firm’s costs as the industry produces a larger output.
External growth
Company growth in output of sales that is achieved by buying the necessary resources externally (i.e., achieved through mergers and acquisitions).
Externality
The effect of an investment on other things besides the investment itself.
Extra or special dividend
A dividend paid by a company that does not pay dividends on a regular schedule, or a dividend that supplements regular cash dividends with an extra payment.
Face value (also principal, par value, stated value, or maturity value)
The amount of cash payable by a company to bondholders when the bonds mature; the promised payment at maturity separate from any coupon payment.
Factor
A common or underlying element with which several variables are correlated.
Factor risk premium (or factor price)
The expected return in excess of the risk-free rate for a portfolio with a sensitivity of 1 to one factor and sensitivity of 0 to all other factors.
Factor sensitivity (also factor betas or factor loadings)
A measure of the response of return to each unit of increase in a factor, holding all other factors constant.
Fair market value
The market price of an asset or liability that trades regularly.
Fair value
The amount at which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s-lenth transaction; the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction betwen market participants.
Federal budget
The annual statement of the outlays and tax revenues of the government of the United States, together with the laws and regulations that approve and support those outlays and taxes.
Federal funds rate
The interest rate that the banks charge each other on overnight loans.
Federal Open Market Committee
The main policy-making organ of the Federal Reserve System.
Federal Reserve System (the Fed)
The central bank of the United States.
Fibonacci sequence
A sequence of numbers starting with 0 and 1, and then each subsequent number in the sequence is the sum of the two preceding numbers. In Elliott Wave Theory, it is believed that market waves follow patterns that are the ratios of the numbers in the Fibonacci sequence.
Fiduciary call
A combination of a European call and a risk-free bond that matures on the option expiration day and has a face value equal to the exercise price of the call.
FIFO method
The first in, first out, method of accounting for inventory, which matches sales against the costs of items of inventory in the order in which they were placed in inventory.
Finance lease (capital lease)
Essentially, the purchase of some asset by the buyer (lessee) that is directly financed by the seller (lessor).
Financial analysis
The process of selecting, evaluating, and interpreting financial data in order to formulate an assessment of a company’s present and future financial condition and performance.
Financial distress
Heightened uncertainty regarding a company’s ability to meet its various obligations because of lower or negative earnings.
Financial flexibility
The ability to react and adapt to financial adversities and opportunities.
Financial futures
Futures contracts in which the underlying is a stock, bond, or currency.
Financial leverage
The extent to which a company can effect, through the use of debt, a proportional change in the return on common equity that is greater than a given proportional change in the operating income; also, short for the financial leverage ratio.
Financial risk
The risk that environmental, social, or governance risk factors will result in significant costs or other losses to a company and its shareholders; the risk arising from a company’s obligation to meet required payments under its financing agreements.
Financing activities
Activities related to obtaining or repaying capital to be used in the business (e.g., equity and long-term debt).
Firm
An economic unit that hires factors of production and organizes that factors to produce and sell goods and services.
First-differencing
A transofrmation that subtracts the value of the time series in period t-1 from its value in period t.
First-order serial correlation
Correlation between adjacent obervations in a time series.
Fiscal imbalance
The present value of the government’s commitments to pay benefits minus the present value of its tax revenues.
Fiscal policy
The government’s attempt to achieve macroeconomic objectives such as full employment, sustained long-term economic growth, and price level stability by setting and changing tax rates, making transfer payments, and purchasing goods and services.
Fixed asset turnover
An activity ratio calculated as total revenue divided by average net fixed assets.
Fixed charge coverage
A solvency ratio measuring the number of times interest and lease payments are covered by operating income, calculated as (EBIT + lease payments) divided by (interest payments + lease payments).
Fixed costs
Costs that remain at the same level regardless of a company’s level of production and sales.
Fixed price tender offer
Offer made by a company to repurchase a specific number of shares at a fixed price that is typically at a premium to the current market price.
Fixed rate perpetual preferred stock
Nonconvertible, noncallable preferred stock that has a fixed dividend rate and no maturity date.
Fixed-income forward
A forward contract in which the underlying is a bond.
Flags
A technical analysis continuation pattern formed by parallel trendlines, typically over a short period.
Flating-rate loan
A loan in which the interest rate is reset at least once after the starting date.
Flip-in pill
A poison pill takeover defense that dilutes an acquirer’s ownership in a target by giving other existing target company shareholders the right to buy additional target company shares at a discount.
Float
In the context of customer receipts, the amount of money that is in transit between payments made by customers and the funds that are usable by the company.
Float factor
An estimate of the average number of days it takes deposited checks to clear; average daily float divided by average daily deposit.
Float-adjusted market-capitalization weighting
An index weighting method in which the weight assigned to each constituent security is determined by adjusting its market capitaliation for its market float.
Floation cost
Fees charged to companies by investment bankers and other costs associated with raising new capital.
Floor
A combination of interset rate put options designed to hedge a lender against lower rates on a floating-rate loan.
Floor traders or locals
Market makers that buy and sell by quoting a bid and an ask price. They are the primary providers of liquidity to the market.
Floored swap
A swap in which the floating payments have a lower limit.
Floorlet
Each component put option in a floor.
Foreign currency transaction
Transactions that are denominated in a currency other than a company’s functional currency.
Foreign exchange gains (or losses)
Gains (or losses) that occur when the exchange rate changes between the investor’s currency and currency that foreign securities are denominated in.
Forward contract
An agreement between two parties in which one party, the buyer, agrees to buy from the other party, the seller, an underlyying asset at a later date for a price established at the stat of the contract.
Forward integration
A merger involving the purchase of a target that is farther along the value or production chain; for example, to acquire a distributor.
Forward price or forward rate
The fixed price or rate at which the transaction scheduled to occur at the expiration of a forward contract will take place. This price is agreed on at the intial date of the contract.
Forward rate agreements (FRA)
A forward contract calling for one party to make a fixed interest payment and the other to make an interest payment at a rate to be determined at the contract expiration.
Forward swap
A forward contract to enter into a swap.
Four-firm concentration ratio
A measure of market power that is calclated as the percentage of the value of sales acounted for by the four largest firms in an industry.
Free cash flow
The actual cash that would be available to the company’s investors after making all investments necessary to maintain the company as an ongoing enterprise (also referred to as free cash flow to the firm); the internally generated funds that can be distributed to the company’s investors (e.g., shareholders and bondholders) without impairing the value of the company.
Free cash flow hypothesis
The hypothesis that higher debt levels discipline managers by forcing them to make fixed debt service payments and by reducing the copmany’s free cash flow.
Free cash flow to equity
The cash flow available to a company’s common shareholders after all operating expenses, interest, and principal payments have been made, and necessary investments in working and fixed capital have been made.
Free cash flow to the firm
The cash flow available to the company’s suppliers of capital after all operating expenses have been paid and necessary investments in working capital and fixed capital have been made.
Free float
The number of shares that are readily and freely tradable in the secondary market.
Free-cash-flow-to-equity models
Valuation models based on discounting expected future free cash flow to equity.
Frequency distribution
A tabular display of data summarized into a relatively small number of intervals.
Frequency polygon
A graph of a frequency distribution obtained by drawing straight lines joining successive points representing the class frequencies.
Frictional unemployment
The unemployment that arises from normal labor turnover–from people entering and leaving the labor force and from the ongoing creation and destruction of jobs.
Friendly transaction
A potential business combination that is endorsed by the managers of both companies.
Full empolyment
A situation in which the quantity of labor demanded equals the quantity supplied. At full employment, there is no cyclical unemployemnt–all unemployment is frictional and structural.
Full price
The price of a security with accrued interest.
Full-employment equilibrium
A macroeconomic equilibrium in which real GDP equals potential GDP.
Functional currency
The currency of the primary economic environment in which an entity operates.
Fundamental (or intrinsic) value
The underlying or true value of an asset based on an analysis of its qualitative and quantitative characteristics.
Fundamental analysis
The examination of publicly available information and the forumulation of forecasts to estimate the intrinsic value of assets.
Fundamental factor models
A multifactor model in which the factors are attributes of stocks or companies that are important in explaining cross-sectional differences in stock prices.
Fundamental weighting
An index weighting method in which the weight assigned to each constituent security is based on its underlying company’s size. It attempts to address the disadvantages of market-capitalization weighting by using measures that are independent of the constituent security’s price.
Fundmental beta
A beta that is based at least in part on fu ndamental data for a company.
Future value (FV)
The amount to which a payment or series of payments will grow by a stated future date.
Futures commission merchants (FCMs)
Individuals or companies that execute futures transactions for other parties off the exchange.
Futures contract
A variation of a forward contract that has essentially the same basic definition but with some additional features, such as a clearinghouse guarantee against credit losses, a daily settlement of gains and loses, and an organized electronic or floor trading facility.
Futures exchange
A legal corporate entity whose shareholders are its members. The members of the exchange have the privilege of executing transactions directly on the exchange.
Gains
Asset inflows not directly related to the ordinary activities of the business.
Game theory
A tool that economists use to analyze strategic behavior–behavior that takes into account the expected behavior of others and the recognition of mutual interdependence.
Gamma
A numerical measure of how sensitive an option’s delta is to a change in the underlying.
Generalized least squares
A regression estimation technique that addresses heteroskedasticity of the error term.
Generational accounting
An accounting system that measures the lifetime tax burden and benefits of each generation.
Generational imbalance
The division of the fiscal imbalance between the current and future generations, assuming that the current generation will enjoy the existing levels of taxes and benefits.
Geometric mean
A measure of central tendency computed by taking the nth root of the product of n non-negative values.
Giro system
An electronic payment system used widely in Europe and Japan.
Global depository receipt
A depository receipt that is issued outside of the company’s home country and ouside of the United States.
Global minimum-variance portfolio
The portfolio on the minimum-variance frontier with the smallest variance of return.
Global registered share
A common share that is traded on different stock exchanges around the world in different currencies.
Golden cross
A technical analysis term that describes a situation where a short-term moving average crosses from below a longer-term moving average to above it; this movement is considered bullish.
Good-on-close (market on close)
An execution instruction specifying that an order can only be filled at the close of trading.
Good-on-open
An execution instruction specifying that an order can only be filled at the opening of trading.
Good-till-cancelled order
An order specifying that it is valid until the entity placing the order has cancelled it (or, commonly, until some specified amount of time such as 60 days has elapsed, whichever comes sooner).
Goodwill
An intangible asset that represents the excess of the purchase price of an acquired company over the value of the net assets acquired.
Government debt
The total amount that the government has borrowed. It equals the sum of past budget deficits minus the sum of past budget surpluses.
Government expenditure multiplier
The magnification effect of a change in government expenditure on goods and services on equilibrium expenditure and real GDP.
Grant date
The day that options are granted to employees; usually the date that compensation expense is measured if both the number of shares and option price are known.
Greenmail
The purchase of the accumulated shares of a hostile investor by a company that is targeted for takeover by that investor, usually at a substantial premium over market price.
Gross profit (gross margin)
Sales minus the cost of sales (i.e., the cost of goods sold for a manufacturing company.
Gross profit margin
The ratio of gross profit to revenues.
Grouping by function
With reference to the presentation of expenses in an income statement, the grouping together of expenses servicing the same function, e.g. all items that are costs of goods sold.
Grouping by nature
With reference to the presentation of expenses in an income statement, the groupoing together of expenses by similar nature, e.g., all depreciation expenses.
Growth cyclical
A term sometimes used to describe companies that are growing rapidly on a long-term basis but that will experience above-average fluctuation in their revenues and profits over the course of a business cycle.
Growth investors
With reference to equity investors, investors who seek to invest in high-earnings-growth companies.
Growth option or expansion option
The ability to make additional investments in a project at some future time if the financial results are strong.
Harmonic mean
A type of weighted mean computed by averaging the reciprocals of the observations, then taking the reciprocal of that average.
Head and shoulders pattern
In technical analysis, a reversal pattern that is formed in three parts: a left shoulder, head, and right shoulder; used to predict a change from an uptrend to a downtrend.
Hedge fund
A historically loosely regulated, pooled investment vehicle that may implement various investment stategies.
Hedge funds
Private investment vehicles that typically use leverage, derivatives, and long and short investment strategies.
Hedge ratio
The relationship of the quantity of an asset being hedged to the quantity of the derivative used for hedging.
Hedging
A general strategy usually thought of as reducing, if not eliminating, risk.
Herding
Clustered trading that may or may not be based on information.
Herfindahl-Hirschman Index
A measure of market concentration that is calculated by summing the squared market shares for competing companies in an industry; high HHI readings or mergers that would result in large HHI increases are more likely to result in regulatory challenges.
Heteroskedastic
With reference to the error term of a regression, having a variance that differs across observations.
Heteroskedasticity
The property of having a nonconstant variance; refers to an error term with the property that its variance differs across observations.
Heteroskedasticity-consistent standard errors
Standard errors of the estimated parameters of a regression that correct for the presence of heteroskedasticity in the regression’s error term.
Hidden order
An order that is exposed not to the public but only to the brokers or exchanges that receive it.
Histogram
A bar chart of data that have been grouped into a frequency distribution.
Historical cost
In reference to assets, the amount paid to purchase an asset, including any costs of acquisition and/or preparation, with reference to liabilities, the amount of proceeds received in exchange in issuing the liability.
Historical equity risk premium approach
An estimate of a country’s equity risk premium that is based upon the historical averages of the risk-free rate and the rate of return on the market portfolio.
Historical exchange rates
For accounting purposes, the exchange rates that existed when the assets and liabilities were initially recorded.
Historical method
A method of estimating VAR that uses data from the returns of the portfolio over a recent past period and compiles this data in the form of a histogram.
Historical simulation (or back simulation)
Another term for the historical method of estimating VAR. This term is somewhat misleading in that the method involves not a simulation of the past but rather what actually happened in the past, sometimes adjusted to reflect the fact that a different portfolio may have existed in the past than is planned for the future.
Holder-of-record date
The date that a shareholder listed on the corporation’s books will be deeemed to have ownership of the shares for purposes of receiving an upcoming dividend; two business days after the ex-dividend date.
Holding period return
The return that an investor earns during a specified holding period; a synonym for total return.
Holding period yield (HPY)
The return that an investor earns during a specified holding period; holding period return with reference to a fixed-income instrument.
Homogeneity of expectations
The assumption that all investors have the same economic expectations and thus have the same expectations of prices, cash flows, and other investment characteristics.
Homogenization
Creating a contract with standard and generally accepted terms, which makes it more acceptable to a broader group of participants.
Homoskedasticity
The property of having a constant variance; refers to an error term that is constant across observations.
Horizontal analysis
Common-size analysis that involves comparing a specific financial statement with the statement in prior or future time periods; also, cross-sectional analysis of one company with another.
Horizontal common-size analysis
A form of common-size analysis in which the accounts in a given period are used as the benchmark or base period, and every account is restated in subsequent periods as a percentage of the base period’s same account.
Horizontal merger
A merger involving companies in the same line of business, usually as competitors.
Hostile transaction
An attempt to acquire a company against the wishes of the target’s managers.
Hurdle rate
The rate of return that must be met for a project to be accepted.
Hypothesis
With reference to statistical inference, a statement about one or more populations.
Hypothesis testing
With reference to statistical inference, the subdivision dealing with the testing of hypothesis about one or more populations.
Iceberg order
An order in which the display size is less than the order’s full size.
Identifiable intangible
An intangible that can be acquired singly and is typically linked to specific rights or privileges having finite benefit periods (e.g., a patent or trademark).
If-converted method
A method for accounting for the effect of convertible securities on earnings per share (EPS) that specifies what EPS would have been if the convertible securities had been converted at the beginning of the period, taking account of the effects of conversion on net income and the weighted average number of shares outstanding.
Immediate or cancel order (fill or kill)
An order that is valid only upon receipt by the broker or exchange. If such an order cannot be filled in part or in whole upon receipt, it cancels immediately.
Impairment
Diminishment in value as a result of carrying (book) value exceeding fair value and/or recoverable value.
Impairment of capital rule
A legal restruction that dividends cannot exceed retained earnings.
Implicit rental rate
The firm’s opportunity cost of using its own capital.
Implied repo rate
The rate of return from a cash-and-carry transaction implied by the futures price relative to the spot price.
Implied volatility
The volatility that option traders use to price an option, implied by the price of the option and a particular option-pricing model.
Implied yield
A measure of the yield on the underlying bond of a futures contract implied by pricing it as though the underlying will be delivered at the futures expiration.
Imputation
In reference to corporate taxes, a system that imputes, or attributes, taxes at only one level of taxation. For countries using an imputation tax system, taxes on dividends are effectively levied only at the shareholder rate. Taxes are paid at the corporate level but they are attributed to the shareholder. Shareholders deduct from their tax bill their portion of taxes paid by the company.
Incentive system
A method of organizing production that uses a market-like mechanism inside the firm.
Income
Increases in economic benefits in the form of inflows or enhancements of assets, or decreases of liabilities that result in an increase in equity (other than increases resulting from contributions by owners).
Income elasticity of demand
The responsiveness of demand to a change in income, other things remaining the same. It is calculated as the percentage change in the quantity demanded divided by the percentage change in income.
Income statement (statement of operations or profit and loss statement)
A financial statement that provides information about a company’s profitability over a stated period of time.
Income tax paid
The actual amount paid for income taxes in the period; not a provision, but the actual cash outflow.
Income tax payable
The income tax owed by the company on the basis of taxable income.
Income tax recoverable
The income tax expected to be recovered, from the taxing authority, on the basis of taxable income. It is a recovery of previously remitted taxes or future taxes owed by the company.
Income trust
A type of equity ownership vehicle established as a trust issuing ownership shares known as units.
Incremental cash flow
The cash flow that is realized because of a decision; the changes or increments to cash flows resulting from a decision or action.
Independent
With reference to events, the property that the occurrence of one event does not affect the probability of another event occurring.
Independent and identically distributed (IID)
With respect to random variables, the property of random variables that are independent of each other but follow the identical probability distribution.
Independent projects
Independent projects are projects whose cash flows are independent of each other.
Independent variable
A variable used to explain the dependent variable in a regression; a right-hand-side variable in a regression equation.
Index amortizing swap
An interest rate swap in which the notional principal is indexed to the level of interest rates and declines with the level of interest rates according to a predefined schedule. This type of swap is frequently used to hedge securities that are prepaid as interest rates decline, such as mortgage-backed securities.
Index option
An option in which the underlying is a stock index.
Indexing
An investment strategy in which an investor constructs a portfolio to mirror the performance of a specified index.
Indifference curve
The graph of risk-return combinations that an investor would be willing to accept to maintain a given level of utility.
Indirect format (indirect method)
With reference to cash flow statements, a format for the presentation of the statement which, in the operating cash flow section, begins with net income then shows additions and subtractions to arrive at operating cash flows.
Induced taxes
Taxes that vary with real GDP.
Industry
A group of companies offering similar products and/or services.
Industry analysis
The analysis of a specific branch of manufacturing, service, or trade.
Inelastic demand
A demand with a price elasticity between 0 and 1; the percentage change in the quantity demanded is less than the percentage change in price.
Inflation premium
An extra return that compensates invesetors for expected inflation.
Inflation rate
The annual percentage change in the price level.
Inflation rate targeting
A monetary policy strategy in which the central bank makes a public commitment to achieve an explicit inflation rate and to explain how its policy actions will acieve that target.
Inflationary gap
The amount by which real GDP exceeds potential GDP.
Information cascade
The transmission of information from those participants who act first and whose decision influence the decisions of others.
Information ratio (IR)
Mean active return divided by active risk.
Informationally efficient market
A market in which asset prices reflect new information quickly and rationally.
Information-motivated traders
Traders that trade to profit from information that they believe allows them to preduct futures prices.
Initial margin
The amount that must be deposited in a clearinghouse account when entering into a futures contract.
Initial margin requirement
The margin requirement on the first day of a transaction as well as on any day in which additional margin funds must be deposited.
Initial public offering (IPO)
The first issuance of common shares to the public by a formerly private corporation.
