Flashcards
A priori probability
A probability based on logical analysis rather than on observation or personal judgment
Abandonment option
The ability to terminate an investment at some future time if the financial results are disappointing.
Abnormal return
The amount by which a security’s actual return differs from its expected return, given the security’s risk and the market’s return.
Absolute advantage
A country’s ability to produce a good or service at a lower absolute cost than its trading partner.
Absolute dispersion
The amount of variability present without comparison to any reference point or benchmark.
Absolute frequency
The actual number of observations counted for each unique value of the variable (also called raw frequency).
Accelerated book build
An offering of securities by an investment bank acting as principal that is accomplished in only one or two days.
Accelerated methods
Depreciation methods that allocate a relatively large proportion of the cost of an asset to the early years of the asset’s useful life.
Accounting costs
Monetary value of economic resources used in performing an activity. These can be explicit, out-of-pocket, current payments, or an allocation of historical payments (depreciation)
for resources. They do not include implicit opportunity costs.
Accounting profit
Income as reported on the income statement, in accordance with prevailing accounting standards, before the provisions for income tax expense. Also called income before taxes or
pretax income.
Accounts payable
Amounts that a business owes to its vendors for goods and services that were purchased from them but which have not yet been paid.
Accrued expenses
Liabilities related to expenses that have been incurred but not yet paid as of the end of an accounting period—an example of an accrued expense is rent that has been incurred but
not yet paid, resulting in a liability “rent payable.” Also called accrued liabilities.
Accrued interest
Interest earned but not yet paid.
Acquisition method
A method of accounting for a business combination where the acquirer is required to measure each identifiable asset and liability at fair value. This method was the result of a joint
project of the IASB and FASB aiming at convergence in standards for the accounting of business combinations.
Action lag
Delay from policy decisions to implementation.
Active investment
An approach to investing in which the investor seeks to outperform a given benchmark.
Active return
The return on a portfolio minus the return on the portfolio’s benchmark.
Activity ratios
Ratios that measure how efficiently a company performs day-to-day tasks, such as the collection of receivables and management of inventory. Also called asset utilization ratios or
operating efficiency ratios.
Add-on rates
Bank certificates of deposit, repos, and indexes such as Libor and Euribor are quoted on an add-on rate basis (bond equivalent yield basis).
Addition rule for probabilities
A principle stating that the probability that A or B occurs (both occur) equals the probability that A occurs, plus the probability that B occurs, minus the probability that both A and B occur.
Agency bond
Quasi-government bondA bond issued by an entity that is either owned or sponsored by a national government. Also called agency bond.
Agency costs
Costs associated with the conflict of interest present between principals and agents when a company is managed by non-owners. Agency costs result from the inherent conflicts of
interest between managers, bondholders, and equity owners.
Agency costs of debt
Costs arising from conflicts of interest between managers and debtholders.
Agency costs of equity
The smaller the stake managers have in the company, the less their share in bearing the cost of excessive perquisite consumption—consequently, the less their desire to give their best efforts in running the company.
Agency RMBS
In the United States, securities backed by residential mortgage loans and guaranteed by a federal agency or guaranteed by either of the two GSEs (Fannie Mae and Freddie Mac).
Aggregate demand
The quantity of goods and services that households, businesses, government, and non-domestic customers want to buy at any given level of prices.
Aggregate demand curve
Inverse relationship between the price level and real output.
Aggregate income
The value of all the payments earned by the suppliers of factors used in the production of goods and services.
Aggregate output
The value of all the goods and services produced during a specified period.
Aggregate supply
The quantity of goods and services producers are willing to supply at any given level of price.
Aggregate supply curve
The level of domestic output that companies will produce at each price level.
All-or-nothing (AON) orders
An order that includes the instruction to trade only if the trade fills the entire quantity (size) specified.
Allocationally efficient
A characteristic of a market, a financial system, or an economy that promotes the allocation of resources to their highest value uses.
Alternative data
Non-traditional data types generated by the use of electronic devices, social media, satellite and sensor networks, and company exhaust.
Alternative hypothesis
The hypothesis that is accepted if the null hypothesis is rejected.
Alternative investment markets
Market for investments other than traditional securities investments (i.e., traditional common and preferred shares and traditional fixed income instruments). The term usually
encompasses direct and indirect investment in real estate (including timberland and farmland) and commodities (including precious metals); hedge funds, private equity, and other
investments requiring specialized due diligence.
Alternative trading systems
Trading venues that function like exchanges but that do not exercise regulatory authority over their subscribers except with respect to the conduct of the subscribers’ trading in their
trading systems. Also called electronic communications networks or multilateral trading facilities.
American depository receipt
A US dollar-denominated security that trades like a common share on US exchanges.
American depository share
The underlying shares on which American depository receipts are based. They trade in the issuing company’s domestic market.
American-style
Type of option contract that can be exercised at any time up to the option’s expiration date.
Amortisation
The process of allocating the cost of intangible long-term assets having a finite useful life to accounting periods; the allocation of the amount of a bond premium or discount to the
periods remaining until bond maturity.
Amortised cost
The historical cost (initially recognised cost) of an asset, adjusted for amortisation and impairment.
Amortizing bond
Bond with a payment schedule that calls for periodic payments of interest and repayments of principal.
Amortizing loans
Loans with a payment schedule that calls for periodic payments of interest and repayments of principal.
Analysis of variance (ANOVA)
The analysis that breaks the total variability of a dataset (such as observations on the dependent variable in a regression) into components representing different sources of variation.
With reference to regression, ANOVA provides the inputs for an F -test of the significance of the regression as a whole, as well as the inputs for the coefficient of determination and
the standard error of the estimate.
Analytical duration
The use of mathematical formulas to estimate the impact of benchmark yield-to-maturity changes on bond prices.
Anchoring and adjustment bias
An information-processing bias in which the use of a psychological heuristic influences the way people estimate probabilities.
Annual percentage rate
The cost of borrowing expressed as a yearly rate.
Annuity
A finite set of level sequential cash flows.
Annuity due
An annuity having a first cash flow that is paid immediately.
Anomalies
Apparent deviations from market efficiency.
Antidilutive
With reference to a transaction or a security, one that would increase earnings per share (EPS) or result in EPS higher than the company’s basic EPS—antidilutive securities are not
included in the calculation of diluted EPS.
Arbitrage
1) The simultaneous purchase of an undervalued asset or portfolio and sale of an overvalued but equivalent asset or portfolio, in order to obtain a riskless profit on the price
differential. Taking advantage of a market inefficiency in a risk-free manner. 2) The condition in a financial market in which equivalent assets or combinations of assets sell for two
different prices, creating an opportunity to profit at no risk with no commitment of money. In a well-functioning financial market, few arbitrage opportunities are possible. 3) A
risk-free operation that earns an expected positive net profit but requires no net investment of money.
Arbitrage-free pricing
The overall process of pricing derivatives by arbitrage and risk neutrality. Also called the principle of no arbitrage .
Arbitrageurs
Traders who engage in arbitrage. See arbitrage .
Arithmetic mean
The sum of the observations divided by the number of observations.
Artificial intelligence
Computer systems that exhibit cognitive and decision-making ability comparable (or superior) to that of humans.
Ask
The price at which a dealer or trader is willing to sell an asset, typically qualified by a maximum quantity (ask size). See offer.
Ask size
The maximum quantity of an asset that pertains to a specific ask price from a trader. For example, if the ask for a share issue is $30 for a size of 1,000 shares, the trader is offering to
sell at $30 up to 1,000 shares.
Asset allocation
The process of determining how investment funds should be distributed among asset classes.
Asset-backed securities
A type of bond issued by a legal entity called a special purpose entity (SPE) on a collection of assets that the SPE owns. Also, securities backed by receivables and loans other than
mortgages.
Asset-based valuation models
Valuation based on estimates of the market value of a company’s assets.
Asset beta
The unlevered beta; which reflects the business risk of the assets; the assets’ systematic risk.
Asset class
A group of assets that have similar characteristics, attributes, and risk–return relationships.
Asset swap
Converts the periodic fixed coupon of a specific bond to an MRR plus or minus a spread.
Asset utilization ratios
Ratios that measure how efficiently a company performs day-to-day tasks, such as the collection of receivables and management of inventory.
Assets
Resources controlled by an enterprise as a result of past events and from which future economic benefits to the enterprise are expected to flow.
Assignment of accounts receivable
The use of accounts receivable as collateral for a loan.
Asymmetric information
The differential of information between corporate insiders and outsiders regarding the company’s performance and prospects. Managers typically have more information about the
company’s performance and prospects than owners and creditors.
At the money
An option in which the underlying’s price equals the exercise price.
Auction
A type of bond issuing mechanism often used for sovereign bonds that involves bidding.
Autarkic price
The price of a good or service in an autarkic economy.
Autarky
A state in which a country does not trade with other countries.
Automatic stabilizer
A countercyclical factor that automatically comes into play as an economy slows and unemployment rises.
Availability bias
An information-processing bias in which people take a heuristic approach to estimating the probability of an outcome based on how easily the outcome comes to mind.
Available-for-sale
Under US GAAP, debt securities not classified as either held-to-maturity or held-for-trading securities. The investor is willing to sell but not actively planning to sell. In general,
available-for-sale debt securities are reported at fair value on the balance sheet, with unrealized gains included as a component of other comprehensive income.
Average fixed cost
Total fixed cost divided by quantity produced.
Average life
Weighted average lifeA measure that gives investors an indication of how long they can expect to hold the MBS before it is paid off; the convention-based average time to receipt of
all principal repayments. Also called average life.
Average product
Measures the productivity of inputs on average and is calculated by dividing total product by the total number of units for a given input that is used to generate that output.
Average revenue
Total revenue divided by quantity sold.
Average total cost
Total cost divided by quantity produced.
Average variable cost
Total variable cost divided by quantity produced.
Back-testing
With reference to portfolio strategies, the application of a strategy’s portfolio selection rules to historical data to assess what would have been the strategy’s historical performance.
Backfill bias
A bias introduced if a fund backfills its past performance data to the database when it first starts reporting actual performance.
Backtesting
With reference to portfolio strategies, the application of a strategy’s portfolio selection rules to historical data to assess what would have been the strategy’s historical performance.
Backup line of credit
A type of credit enhancement provided by a bank to an issuer of commercial paper to ensure that the issuer will have access to sufficient liquidity to repay maturing commercial
paper if issuing new paper is not a viable option.
Backwardation
A condition in the futures markets in which the spot price exceeds the futures price, the forward curve is downward sloping, and the convenience yield is high.
Balance of payments
A double-entry bookkeeping system that summarizes a country’s economic transactions with the rest of the world for a particular period of time, typically a calendar quarter or year.
Balance of trade deficit
When the domestic economy is spending more on non-domestic goods and services than non-domestic economies are spending on domestic goods and services.
Balance sheet
The financial statement that presents an entity’s current financial position by disclosing resources the entity controls (its assets) and the claims on those resources (its liabilities and
equity claims), as of a particular point in time (the date of the balance sheet). Also called statement of financial position or statement of financial condition.
Balance sheet ratios
Financial ratios involving balance sheet items only.
Balanced
With respect to a government budget, one in which spending and revenues (taxes) are equal.
Balloon payment
Large payment required at maturity to retire a bond’s outstanding principal amount.
Bar chart
A chart for plotting the frequency distribution of categorical data, where each bar represents a distinct category and each bar’s height is proportional to the frequency of the
corresponding category. In technical analysis, a bar chart that plots four bits of data for each time interval—the high, low, opening, and closing prices. A vertical line connects the
high and low prices. A cross-hatch left indicates the opening price and a cross-hatch right indicates the closing price.
Barter economy
An economy where economic agents as house-holds, corporations, and governments “pay” for goods and services with another good or service.
Base-rate neglect
A type of representativeness bias in which the base rate or probability of the categorization is not adequately considered.
Base rates
The reference rate on which a bank bases lending rates to all other customers.
Basic EPS
Net earnings available to common shareholders (i.e., net income minus preferred dividends) divided by the weighted average number of common shares outstanding.
Basis point
Used in stating yield spreads, one basis point equals one-hundredth of a percentage point, or 0.01%.
Basket of listed depository receipts
An exchange-traded fund (ETF) that represents a portfolio of depository receipts.
Bayes’ formula
The rule for updating the probability of an event of interest—given a set of prior probabilities for the event, information, and information given the event—if you receive new
information.
Bearer bonds
Bonds for which ownership is not recorded; only the clearing system knows who the bond owner is.
Bearish crossover
A technical analysis term that describes a situation where a short-term moving average crosses a longer-term moving average from above; this movement is considered bearish. A
death cross is a bearish crossover based on 50-day and 200-day moving averages.
Behavioral finance
A field of finance that examines the psychological variables that affect and often distort the investment decision making of investors, analysts, and portfolio managers.
Behind the market
Said of prices specified in orders that are worse than the best current price; e.g., for a limit buy order, a limit price below the best bid.
Benchmark
A comparison portfolio; a point of reference or comparison.
Benchmark issue
The latest sovereign bond issue for a given maturity. It serves as a benchmark against which to compare bonds that have the same features but that are issued by another type of
issuer.
Benchmark rate
Typically the yield-to-maturity on a government bond having the same or close to the same time-to-maturity.
Benchmark spread
The yield spread over a specific benchmark, usually measured in basis points.
Bernoulli random variable
A random variable having the outcomes 0 and 1.
Bernoulli trial
An experiment that can produce one of two outcomes.
Best bid
The highest bid in the market.
Best effort offering
An offering of a security using an investment bank in which the investment bank, as agent for the issuer, promises to use its best efforts to sell the offering but does not guarantee
that a specific amount will be sold.
Best-efforts offering
An ESG implementation approach that seeks to identify the most favorable companies in an industry based on ESG considerations.
Best offer
The lowest offer (ask price) in the market.
Beta
A measure of the sensitivity of a given investment or portfolio to movements in the overall market.
Bid
The price at which a dealer or trader is willing to buy an asset, typically qualified by a maximum quantity.
Bid–ask spread
The difference between the prices at which dealers will buy from a customer (bid) and sell to a customer (offer or ask). It is often used as an indicator of liquidity.
Bid–offer spread
The difference between the prices at which dealers will buy from a customer (bid) and sell to a customer (offer or ask). It is often used as an indicator of liquidity.
Bid size
The maximum quantity of an asset that pertains to a specific bid price from a trader.
Big Data
The vast amount of data being generated by industry, governments, individuals, and electronic devices that arises from both traditional and non-traditional data sources.
Bilateral loan
A loan from a single lender to a single borrower.
Bimodal
A distribution that has two most frequently occurring values.
Binomial model
A model for pricing options in which the underlying price can move to only one of two possible new prices.
Binomial random variable
The number of successes in n Bernoulli trials for which the probability of success is constant for all trials and the trials are independent.
Binomial tree
The graphical representation of a model of asset price dynamics in which, at each period, the asset moves up with probability p or down with probability (1 − p).
Bitcoin
A cryptocurrency using blockchain technology that was created in 2009.
Bivariate correlation
Pearson correlation A parametric measure of the relationship between two variables.
Block brokers
A broker (agent) that provides brokerage services for large-size trades.
Blockchain
A type of digital ledger in which information is recorded sequentially and then linked together and secured using cryptographic methods.
Blue chip
Widely held large market capitalization companies that are considered financially sound and are leaders in their respective industry or local stock market.
Bollinger Bands
A price-based technical analysis indicator consisting of a line representing the moving average, a higher line representing the moving average plus a set number of standard
deviations from the average (for the same number of periods as was used to calculate the moving average), and a lower line representing the moving average minus the same
number of standard deviations.
Bond
Contractual agreement between the issuer and the bondholders.
Bond equivalent yield
A calculation of yield that is annualized using the ratio of 365 to the number of days to maturity. Bond equivalent yield allows for the restatement and comparison of securities with
different compounding periods.
Bond indenture
The governing legal credit agreement, typically incorporated by reference in the prospectus. Also called trust deed.
Bond market vigilantes
Bond market participants who might reduce their demand for long-term bonds, thus pushing up their yields.
Bond yield plus risk premium approach
An estimate of the cost of common equity that is produced by summing the before-tax cost of debt and a risk premium that captures the additional yield on a company’s stock
relative to its bonds. The additional yield is often estimated using historical spreads between bond yields and stock yields.
Bonus issue of shares
A type of dividend in which a company distributes additional shares of its common stock to shareholders instead of cash.
Book building
Investment bankers’ process of compiling a “book” or list of indications of interest to buy part of an offering.
Book value
The net amount shown for an asset or liability on the balance sheet; book value may also refer to the company’s excess of total assets over total liabilities. Also called carrying
value.
Boom
An expansionary phase characterized by economic growth “testing the limits” of the economy.
Bootstrap
A resampling method that repeatedly draws samples with replacement of the selected elements from the original observed sample. Bootstrap is usually conducted by using
computer simulation and is often used to find standard error or construct confidence intervals of population parameters.
Bottom-up analysis
An investment selection approach that focuses on company-specific circumstances rather than emphasizing economic cycles or industry analysis.
Bottom-up analysis
An investment selection approach that focuses on company-specific circumstances rather than emphasizing economic cycles or industry analysis.
Box and whisker plot
A graphic for visualizing the dispersion of data across quartiles. It consists of a “box” with “whiskers” connected to the box.
Breakdown
A breakdown occurs when the price of an asset moves below a support level.
Breakeven point
The number of units produced and sold at which the company’s net income is zero (Revenues = Total cost); in the case of perfect competition, the quantity at which price, average
revenue, and marginal revenue equal average total cost.
Breakout
A breakout occurs when the price of an asset moves above a resistance level.
Bridge financing
Interim financing that provides funds until permanent financing can be arranged.
Broad money
Encompasses narrow money plus the entire range of liquid assets that can be used to make purchases.
Broker
1) An agent who executes orders to buy or sell securities on behalf of a client in exchange for a commission. 2) See futures commission merchants.
Broker–dealer
A financial intermediary (often a company) that may function as a principal (dealer) or as an agent (broker) depending on the type of trade.
Brokered market
A market in which brokers arrange trades among their clients.
Brownfield investment
Investing in existing infrastructure assets.
Bubble line chart
A line chart that uses varying-sized bubbles to represent a third dimension of the data. The bubbles are sometimes color-coded to present additional information.
Budget surplus/deficit
The difference between government revenue and expenditure for a stated fixed period of time.
Bullet bond
Bond in which the principal repayment is made entirely at maturity.
Bullish crossover
A technical analysis term that describes a situation where a short-term moving average crosses a longer-term moving average from below; this movement is considered bullish. A
golden cross is a bullish crossover based on 50-day and 200-day moving averages.
Business cycles
Are recurrent expansions and contractions in economic activity affecting broad segments of the economy.
Business risk
The risk associated with operating earnings. Operating earnings are uncertain because total revenues and many of the expenditures contributed to produce those revenues are
uncertain.
Buy-side firm
An investment management company or other investor that uses the services of brokers or dealers (i.e., the client of the sell side firms).
Buyback
A transaction in which a company buys back its own shares. Unlike stock dividends and stock splits, share repurchases use corporate cash.
Call
An option that gives the holder the right to buy an underlying asset from another party at a fixed price over a specific period of time.
Call market
A market in which trades occur only at a particular time and place (i.e., when the market is called).
Call money rate
The interest rate that buyers pay for their margin loan.
Call option
An option that gives the holder the right to buy an underlying asset from another party at a fixed price over a specific period of time.
Call protection
The time during which the issuer of the bond is not allowed to exercise the call option.
Callable bond
A bond containing an embedded call option that gives the issuer the right to buy the bond back from the investor at specified prices on pre-determined dates.
Calmar ratio
A comparison of the average annual compounded return to the maximum drawdown risk.
Candlestick chart
A price chart with four bits of data for each time interval. A candle indicates the opening and closing price for the interval. The body of the candle is shaded if the opening price
was higher than the closing price, and the body is white (or clear) if the opening price was lower than the closing price. Vertical lines known as wicks or shadows extend from the
top and bottom of the candle to indicate, respectively, the high and low prices for the interval.
Cannibalization
Cannibalization occurs when an investment takes customers and sales away from another part of the company.
Cap rate
A metric by which real estate managers are often judged; the annual rent actually earned (net of any vacancies) divided by the price originally paid for the property.
Capacity
The ability of the borrower to make its debt payments on time.
Capital account
A component of the balance of payments account that measures transfers of capital.
Capital allocation line
(CAL) A graph line that describes the combinations of expected return and standard deviation of return available to an investor from combining the optimal portfolio of risky assets
with the risk-free asset.
Capital allocation process
The process that companies use for decision making on capital investments—those projects with a life of one year or longer.
Capital asset pricing model
(CAPM) An equation describing the expected return on any asset (or portfolio) as a linear function of its beta relative to the market portfolio.
Capital consumption allowance
A measure of the wear and tear (depreciation) of the capital stock that occurs in the production of goods and services.
Capital deepening investment
Increases the stock of capital relative to labor.
Capital expenditure
Expenditure on physical capital (fixed assets).
Capital light
Capital light businesses require little incremental investment in fixed assets or working capital to enable revenue growth.
Capital loss ratio
The percentage of capital in deals that have been realized below cost, net of any recovered proceeds, divided by total invested capital.
Capital market expectations
An investor’s expectations concerning the risk and return prospects of asset classes.
Capital market line
(CML) The line with an intercept point equal to the risk-free rate that is tangent to the efficient frontier of risky assets; represents the efficient frontier when a risk-free asset is
available for investment.
Capital market securities
Securities with maturities at issuance longer than one year.
Capital markets
Financial markets that trade securities of longer duration, such as bonds and equities.
Capital rationing
A capital rationing environment assumes that the company has a fixed amount of funds to invest.
Capital restrictions
Controls placed on foreigners’ ability to own domestic assets and/or domestic residents’ ability to own foreign assets.
Capital stock
The accumulated amount of buildings, machinery, and equipment used to produce goods and services.
Capital structure
The mix of debt and equity that a company uses to finance its business; a company’s specific mixture of long-term financing.
Carry
The net of the costs and benefits of holding, storing, or “carrying” an asset.
Carrying amount
The amount at which an asset or liability is valued according to accounting principles.
Carrying value
The net amount shown for an asset or liability on the balance sheet; book value may also refer to the company’s excess of total assets over total liabilities. For a bond, the purchase price plus (or minus) the amortized amount of the discount (or premium).
Cartel
Participants in collusive agreements that are made openly and formally.
Cash collateral account
Form of external credit enhancement whereby the issuer immediately borrows the credit-enhancement amount and then invests that amount, usually in highly rated short-term
commercial paper.
Cash conversion cycle
A financial metric that measures the length of time required for a company to convert cash invested in its operations to cash received as a result of its operations; equal to days of
inventory on hand + days of sales outstanding – number of days of payables. Also called net operating cycle.
Cash flow additivity principle
The principle that dollar amounts indexed at the same point in time are additive.
Cash flow from operating activities
The net amount of cash provided from operating activities.
Cash flow from operations
The net amount of cash provided from operating activities.
Cash flow yield
The internal rate of return on a series of cash flows.
Cash market securities
Money market securities settled on a “same day” or “cash settlement” basis.
Cash markets
Spot markets Markets in which assets are traded for immediate delivery.
Cash prices
Spot prices The price of an asset for immediately delivery.
Cash-settled forwards
Non-deliverable forwards Cash-settled forward contracts, used predominately with respect to foreign exchange forwards. Also called contracts for differences.
Catch-up clause
A clause in an agreement that favors the GP. For a GP who earns a 20% performance fee, a catch-up clause allows the GP to receive 100% of the distributions above the hurdle rate
until she receives 20% of the profits generated, and then every excess dollar is split 80/20 between the LPs and GP.
Categorical data
Values that describe a quality or characteristic of a group of observations and therefore can be used as labels to divide a dataset into groups to summarize and visualize (also called
qualitative data ).
CBOE Volatility Index (VIX)
A measure of near-term market volatility as conveyed by S&P 500 stock index option prices.
Central bank funds market
The market in which deposit-taking banks that have an excess reserve with their national central bank can lend money to banks that need funds for maturities ranging from
overnight to one year. Called the Federal or Fed funds market in the United States.
Central bank funds rate
Interest rate at which central bank funds are bought (borrowed) and sold (lent) for maturities ranging from overnight to one year. Called Federal or Fed funds rate in the United
States.
Central banks
The dominant bank in a country, usually with official or semi-official governmental status.
Central limit theorem
The theorem that states the sum (and the mean) of a set of independent, identically distributed random variables with finite variances is normally distributed, whatever distribution
the random variables follow.
Certificate of deposit
An instrument that represents a specified amount of funds on deposit with a bank for a specified maturity and interest rate. CDs are issued in various denominations and can be
negotiable or non-negotiable.
Change in polarity principle
A tenet of technical analysis that states that once a support level is breached, it becomes a resistance level. The same holds true for resistance levels: Once breached, they become
support levels.
Change of control put
A covenant giving bondholders the right to require the issuer to buy back their debt, often at par or at some small premium to par value, in the event that the borrower is acquired.
Character
The quality of a debt issuer’s management.
Chartist
An individual who uses charts or graphs of a security’s historical prices or levels to forecast its future trends.
Chi-square test of independence
A statistical test for detecting a potential association between categorical variables.
Classical cycle
Refers to fluctuations in the level of economic activity when measured by GDP in volume terms.
Classified balance sheet
A balance sheet organized so as to group together the various assets and liabilities into subcategories (e.g., current and noncurrent).
Clawback
A requirement that the general partner return any funds distributed as incentive fees until the limited partners have received back their initial investment and a percentage of the
total profit.
Clearing
The process by which the exchange verifies the execution of a transaction and records the participants’ identities.
Clearing instructions
Instructions that indicate how to arrange the final settlement (“clearing”) of a trade.
Clearinghouse
An entity associated with a futures market that acts as middleman between the contracting parties and guarantees to each party the performance of the other.
Closed economy
An economy that does not trade with other countries; an autarkic economy .
Closed-end fund
A mutual fund in which no new investment money is accepted. New investors invest by buying existing shares, and investors in the fund liquidate by selling their shares to other
investors.
Cluster sampling
A procedure that divides a population into subpopulation groups (clusters) representative of the population and then randomly draws certain clusters to form a sample.
Clustered bar chart
Grouped bar chartA bar chart for showing joint frequencies for two categorical variables (also known as a clustered bar chart).
Co-investing
In co-investing, the investor invests in assets indirectly through the fund but also possesses rights (known as co-investment rights) to invest directly in the same assets. Through coinvesting, an investor is able to make an investment alongside a fund when the fund identifies deals.
Code of ethics
An established guide that communicates an organization’s values and overall expectations regarding member behavior. A code of ethics serves as a general guide for how
community members should act.
Coefficient of determination
The percentage of the variation of the dependent variable that is explained by the independent variable. Also referred to as the “ R-squared” or “R2.”
Coefficient of variation
The ratio of a set of observations’ standard deviation to the observations’ mean value.
Cognitive cost
The effort involved in processing new information and updating beliefs.
Cognitive dissonance
The mental discomfort that occurs when new information conflicts with previously held beliefs or cognitions.
Cognitive errors
Behavioral biases resulting from faulty reasoning; cognitive errors stem from basic statistical, information-processing, or memory errors.
Coincident economic indicators
Turning points that are usually close to those of the overall economy; they are believed to have value for identifying the economy’s present state.
Collateral
Assets or financial guarantees underlying a debt obligation that are above and beyond the issuer’s promise to pay.
Collateral manager
Buys and sells debt obligations for and from the CDO’s portfolio of assets (i.e., the collateral) to generate sufficient cash flows to meet the obligations to the CDO bondholders.
Collateral trust bonds
Bonds secured by securities, such as common shares, other bonds, or other financial assets.
Collateralized bond obligations
A structured asset-backed security that is collateralized by a pool of bonds.
Collateralized debt obligation
Generic term used to describe a security backed by a diversified pool of one or more debt obligations.
Collateralized loan obligations
A structured asset-backed security that is collateralized by a pool of loans.
Collateralized mortgage obligation
A security created through the securitization of a pool of mortgage-related products (mortgage pass-through securities or pools of loans).
Collaterals
Assets or financial guarantees underlying a debt obligation that are above and beyond the issuer’s promise to pay.
Combination
A listing in which the order of the listed items does not matter.
Combination formula (binomial formula)
The number of ways that we can choose r objects from a total of n objects, when the order in which the r objects are listed does not matter, is nCr=(nr)=n!(n−r)! r!.
Commercial paper
A short-term, negotiable, unsecured promissory note that represents a debt obligation of the issuer.
Committed (Regular) lines of credit
A bank commitment to extend credit up to a pre-specified amount; the commitment is considered a short-term liability and is usually in effect for 364 days (one day short of a full
year).
Committed capital
The amount that the limited partners have agreed to provide to the private equity fund.
Commodity swap
A swap in which the underlying is a commodity such as oil, gold, or an agricultural product.
Common market
Level of economic integration that incorporates all aspects of the customs union and extends it by allowing free movement of factors of production among members.
Common shares
A type of security that represent an ownership interest in a company.
Common-size analysis
The restatement of financial statement items using a common denominator or reference item that allows one to identify trends and major differences; an example is an income
statement in which all items are expressed as a percent of revenue.
Common stock
Common shares A type of security that represent an ownership interest in a company.
Company analysis
Analysis of an individual company.
Comparable company
A company that has similar business risk, usually in the same industry and preferably with a single line of business.
Comparative advantage
A country’s ability to produce a good or service at a lower relative cost, or opportunity cost, than its trading partner.
Competitive strategy
A company’s plans for responding to the threats and opportunities presented by the external environment.
Complement
The event not-S , written S C , given the event S. Note that P (S ) + P (S C ) = 1.
Complements
Goods that tend to be used together; technically, two goods whose cross-price elasticity of demand is negative.
Complete markets
Informally, markets in which the variety of distinct securities traded is so broad that any desired payoff in a future state-of-the-world is achievable.
Component cost of capital
The rate of return required by suppliers of capital for an individual source of a company’s funding, such as debt or equity.
Compounding
The process of accumulating interest on interest.
Comprehensive income
The change in equity of a business enterprise during a period from nonowner sources; includes all changes in equity during a period except those resulting from investments by
owners and distributions to owners; comprehensive income equals net income plus other comprehensive income.
Conditional expected value
The expected value of a stated event given that another event has occurred.
Conditional pass-through covered bonds
Covered bonds that convert to pass-through securities after the original maturity date if all bond payments have not yet been made and the sponsor is in default.
Conditional probability
The probability of an event given (conditioned on) another event.
Conditional variances
The variance of one variable, given the outcome of another.
Confidence level
The complement of the level of significance.
Confirmation bias
A belief perseverance bias in which people tend to look for and notice what confirms their beliefs, to ignore or undervalue what contradicts their beliefs, and to misinterpret
information as support for their beliefs.
Confusion matrix
A type of contingency table used for evaluating the performance of a classification model.
Conservatism bias
A belief perseverance bias in which people maintain their prior views or forecasts by inadequately incorporating new information.
Consolidation
The movement of a stock’s price within a well-defined range of trading levels for a period of time. The price consolidates between a support level and a resistance level.
Constant-yield price trajectory
A graph that illustrates the change in the price of a fixed-income bond over time assuming no change in yield-to-maturity. The trajectory shows the “pull to par” effect on the price
of a bond trading at a premium or a discount to par value.
Constituent securities
With respect to an index, the individual securities within an index.
Consumer surplus
The difference between the value that a consumer places on units purchased and the amount of money that was required to pay for them.
Contango
A condition in the futures markets in which the spot price is lower than the futures price, the forward curve is upward sloping, and there is little or no convenience yield.
Contingency provision
Clause in a legal document that allows for some action if a specific event or circumstance occurs.
Contingency table
A tabular format that displays the frequency distributions of two or more categorical variables simultaneously and is used for finding patterns between the variables. A contingency
table for two categorical variables is also known as a two-way table.
Contingent claim
A security whose value is based on some other underlying security.
Contingent claims
Derivatives in which the payoffs occur if a specific event occurs; generally referred to as options.
Contingent convertible bonds
Bonds that automatically convert into equity if a specific event or circumstance occurs, such as the issuer’s equity capital falling below the minimum requirement set by the
regulators. Also called CoCos .
Continuation pattern
A type of pattern used in technical analysis to predict the resumption of a market trend that was in place prior to the formation of a pattern.
Continuous data
Data that can be measured and can take on any numerical value in a specified range of values.
Continuous random variable
A random variable for which the range of possible outcomes is the real line (all real numbers between −∞ and +∞) or some subset of the real line.
Continuous trading market
A market in which trades can be arranged and executed any time the market is open.
Continuously compounded return
The natural logarithm of 1 plus the holding period return, or equivalently, the natural logarithm of the ending price over the beginning price.
Contra account
An account that offsets another account.
Contract rate
Mortgage rate The interest rate on a mortgage loan; also called contract rate or note rate .
Contraction
The period of a business cycle after the peak and before the trough; often called a recession or, if exceptionally severe, called a depression.
Contraction risk
The risk that when interest rates decline, the security will have a shorter maturity than was anticipated at the time of purchase because borrowers refinance at the new, lower
interest rates.
Contractionary
Tending to cause the real economy to contract.
Contractionary fiscal policy
A fiscal policy that has the objective to make the real economy contract.
Contracts for differences
Non-deliverable forwards Cash-settled forward contracts, used predominately with respect to foreign exchange forwards. Also called contracts for differences.
Contribution margin
The amount available for fixed costs and profit after paying variable costs; revenue minus variable costs.
Controlling shareholders
A particular shareholder or block of shareholders holding a percentage of shares that gives them significant voting power.
Convenience sampling
A procedure of selecting an element from a population on the basis of whether or not it is accessible to a researcher or how easy it is for a researcher to access the element.
Convenience yield
A non-monetary advantage of holding an asset.
Conventional bond
Plain vanilla bondBond that makes periodic, fixed coupon payments during the bond’s life and a lump-sum payment of principal at maturity. Also called conventional bond.
Conventional cash flows
A conventional cash flow pattern is one with an initial outflow followed by a series of inflows.
Convergence
The tendency for differences in output per capita across countries to diminish over time. In technical analysis, the term describes the case when an indicator moves in the same
manner as the security being analyzed.
Conversion premium
The difference between the convertible bond’s price and its conversion value.
Conversion price
For a convertible bond, the price per share at which the bond can be converted into shares.
Conversion ratio
For a convertible bond, the number of common shares that each bond can be converted into.
Conversion value
For a convertible bond, the current share price multiplied by the conversion ratio.
Convertible bond
Bond that gives the bondholder the right to exchange the bond for a specified number of common shares in the issuing company.
Convertible preference shares
A type of equity security that entitles shareholders to convert their shares into a specified number of common shares.
Convexity adjustment
For a bond, one half of the annual or approximate convexity statistic multiplied by the change in the yield-to-maturity squared.
Core inflation
Refers to the inflation rate calculated based on a price index of goods and services except food and energy.
Corporate governance
The system of internal controls and procedures by which individual companies are managed.
Correlation
A measure of the linear relationship between two random variables.
Correlation coefficient
A number between −1 and +1 that measures the consistency or tendency for two investments to act in a similar way. It is used to determine the effect on portfolio risk when two
assets are combined.
Cost averaging
The periodic investment of a fixed amount of money.
Cost of capital
The cost of financing to a company; the rate of return that suppliers of capital require as compensation for their contribution of capital.
Cost of carry
Carry The net of the costs and benefits of holding, storing, or “carrying” an asset.
Cost of debt
The cost of debt financing to a company, such as when it issues a bond or takes out a bank loan; the rate of return required by a company’s bondholders.
Cost of equity
The rate of return required by a company’s common stockholders.
Cost of preferred stock
The cost to a company of issuing preferred stock; the dividend yield that a company must commit to pay preferred stockholders.
Cost structure
The mix of a company’s variable costs and fixed costs.
Counterparty risk
The risk that the other party to a contract will fail to honor the terms of the contract.
Coupon rate
The interest rate promised in a contract; this is the rate used to calculate the periodic interest payments.
Cournot assumption
Assumption in which each firm determines its profit-maximizing production level assuming that the other firms’ output will not change.
Covariance
A measure of the co-movement (linear association) between two random variables.
Covariance matrix
A matrix or square array whose entries are covariances; also known as a variance–covariance matrix.
Covenants
The terms and conditions of lending agreements that the issuer must comply with; they specify the actions that an issuer is obligated to perform (affirmative covenant) or prohibited from performing (negative covenant).
Covered bond
Debt obligation secured by a segregated pool of assets called the cover pool. The issuer must maintain the value of the cover pool. In the event of default, bondholders have
recourse against both the issuer and the cover pool.
Covered bonds
Senior debt obligations issued by a financial institution and backed by a segregated pool of assets. Covered bond investors have recourse to both the underlying assets and the
financial institution.
Credit analysis
The evaluation of credit risk; the evaluation of the creditworthiness of a borrower or counterparty.
Credit default swap (CDS)
A type of credit derivative in which one party, the credit protection buyer who is seeking credit protection against a third party, makes a series of regularly scheduled payments to
the other party, the credit protection seller. The seller makes no payments until a credit event occurs.
Credit derivatives
A contract in which one party has the right to claim a payment from another party in the event that a specific credit event occurs over the life of the contract.
Credit enhancements
Provisions that may be used to reduce the credit risk of a bond issue.
Credit-linked coupon bond
Bond for which the coupon changes when the bond’s credit rating changes.
Credit-linked note (CLN)
Fixed-income security in which the holder of the security has the right to withhold payment of the full amount due at maturity if a credit event occurs.
Credit migration risk
The risk that a bond issuer’s creditworthiness deteriorates, or migrates lower, leading investors to believe the risk of default is higher. Also called downgrade risk.
Credit risk
The risk of loss caused by a counterparty’s or debtor’s failure to make a promised payment. Also called default risk.
Credit spread option
An option on the yield spread on a bond.
Credit tranching
A structure used to redistribute the credit risk associated with the collateral; a set of bond classes created to allow investors a choice in the amount of credit risk that they prefer to
bear.
Creditworthiness
The perceived ability of the borrower to pay its debt obligations in a timely manner; it represents the ability of a company to withstand adverse impacts on its cash flows.
Critical values
Values of the test statistic at which the decision changes from fail to reject the null hypothesis to reject the null hypothesis.
Cross-default
Covenant or contract clause that specifies a borrower is considered in default if they default on another debt obligation.
Cross-default provisions
Provisions whereby events of default, such as non-payment of interest on one bond, trigger default on all outstanding debt; implies the same default probability for all issues.
Cross-price elasticity of demand
The percentage change in quantity demanded for a given percentage change in the price of another good; the responsiveness of the demand for Product A that is associated with the
change in price of Product B.
Cross-sectional analysis
Analysis that involves comparisons across individuals in a group over a given time period or at a given point in time.
Cross-sectional data
A list of the observations of a specific variable from multiple observational units at a given point in time. The observational units can be individuals, groups, companies, trading
markets, regions, etc.
Crossing networks
Trading systems that match buyers and sellers who are willing to trade at prices obtained from other markets.
Crowding out
The thesis that government borrowing may divert private sector investment from taking place.
Cryptocurrency
An electronic medium of exchange that lacks physical form.
Cryptography
An algorithmic process to encrypt data, making the data unusable if received by unauthorized parties.
Cumulative absolute frequency
Cumulates (i.e., adds up) in a frequency distribution the absolute frequencies as one moves from the first bin to the last bin.
Cumulative distribution function
A function giving the probability that a random variable is less than or equal to a specified value.
Cumulative frequency distribution chart
A chart that plots either the cumulative absolute frequency or the cumulative relative frequency on the y-axis against the upper limit of the interval and allows one to see the number
or the percentage of the observations that lie below a certain value.
Cumulative preference shares
Preference shares for which any dividends that are not paid accrue and must be paid in full before dividends on common shares can be paid.
Cumulative relative frequency
A sequence of partial sums of the relative frequencies in a frequency distribution.
Cumulative voting
A voting process whereby shareholders can accumulate and vote all their shares for a single candidate in an election, as opposed to having to allocate their voting rights evenly
among all candidates.
Currencies
Monies issued by national monetary authorities.
Currency option bonds
Bonds that give bondholders the right to choose the currency in which they want to receive interest payments and principal repayments.
Currency swap
A swap in which each party makes interest payments to the other in different currencies.
Current account
A component of the balance of payments account that measures the flow of goods and services.
Current assets
Assets that are expected to be consumed or converted into cash in the near future, typically one year or less. Also called liquid assets .
Current cost
With reference to assets, the amount of cash or cash equivalents that would have to be paid to buy the same or an equivalent asset today; with reference to liabilities, the undiscounted amount of cash or cash equivalents that would be required to settle the obligation today.
Current government spending
With respect to government expenditures, spending on goods and services that are provided on a regular, recurring basis including health, education, and defense.
Current liabilities
Short-term obligations, such as accounts payable, wages payable, or accrued liabilities, that are expected to be settled in the near future, typically one year or less.
Current yield
The sum of the coupon payments received over the year divided by the flat price; also called the income or interest yield or running yield.
Curve duration
The sensitivity of the bond price (or the market value of a financial asset or liability) with respect to a benchmark yield curve.
Customs union
Extends the free trade area (FTA) by not only allowing free movement of goods and services among members, but also creating a common trade policy against nonmembers.
CVaR
Conditional VaR, a tail loss measure. The weighted average of all loss outcomes in the statistical distribution that exceed the VaR loss.
Cyclical
A cyclical company is one whose profits are strongly correlated with the strength of the overall economy.
Cyclical companies
Companies with sales and profits that regularly expand and contract with the business cycle or state of economy.
Daily settlement
Mark to marketThe revaluation of a financial asset or liability to its current market value or fair value.Marking to market
Daily settlement
Mark to market The revaluation of a financial asset or liability to its current market value or fair value.Marking to market
Dark pools
Alternative trading systems that do not display the orders that their clients send to them.
Data
A collection of numbers, characters, words, and text—as well as images, audio, and video—in a raw or organized format to represent facts or information.
Data mining
The practice of determining a model by extensive searching through a dataset for statistically significant patterns. Also called data snooping.
Data science
An interdisciplinary field that brings computer science, statistics, and other disciplines together to analyze and produce insights from Big Data.
Data snooping
The practice of determining a model by extensive searching through a dataset for statistically significant patterns.
Data table
see two-dimensional rectangular array .
Day order
An order that is good for the day on which it is submitted. If it has not been filled by the close of business, the order expires unfilled.
Days of inventory on hand
An activity ratio equal to the number of days in the period divided by inventory turnover over the period.
Dealers
A financial intermediary that acts as a principal in trades.
Dealing securities
Securities held by banks or other financial intermediaries for trading purposes.
Death cross
Bearish crossover A technical analysis term that describes a situation where a short-term moving average crosses a longer-term moving average from above; this movement is
considered bearish. A death cross is a bearish crossover based on 50-day and 200-day moving averages.
Debentures
Type of bond that can be secured or unsecured.
Debt rating
An independent measure of the quality and safety of a company’s debt based upon an analysis of the company’s ability to pay the promised cash flows in full and on time. It
includes an analysis of any indentures.
Debt-rating approach
A method for estimating a company’s before-tax cost of debt based on the yield on comparably rated bonds for maturities that closely match that of the company’s existing debt.
Debt tax shield
The tax benefit from interest paid on debt being tax deductible from income, equal to the marginal tax rate multiplied by the value of the debt.
Debt-to-assets ratio
A solvency ratio calculated as total debt divided by total assets.
Debt-to-capital ratio
A solvency ratio calculated as total debt divided by total debt plus total shareholders’ equity.
Debt-to-equity ratio
A solvency ratio calculated as total debt divided by total shareholders’ equity.
Deciles
Quantiles that divide a distribution into 10 equal parts.
Declaration date
The day that the corporation issues a statement declaring a specific dividend.
Decreasing returns to scale
When a production process leads to increases in output that are proportionately smaller than the increase in inputs.
Deductible temporary differences
Temporary differences that result in a reduction of or deduction from taxable income in a future period when the balance sheet item is recovered or settled.
Deep learning
Machine learning using neural networks with many hidden layers.
Deep learning nets
Machine learning using neural networks with many hidden layers.
Default probability
The probability that a borrower defaults or fails to meet its obligation to make full and timely payments of principal and interest, according to the terms of the debt security. Also
called default risk.
Default risk
The probability that a borrower defaults or fails to meet its obligation to make full and timely payments of principal and interest, according to the terms of the debt security. Also
called default probability.
Default risk premium
An extra return that compensates investors for the possibility that the borrower will fail to make a promised payment at the contracted time and in the contracted amount.
Defensive companies
Companies with sales and profits that have little sensitivity to the business cycle or state of the economy.
Defensive interval ratio
A liquidity ratio that estimates the number of days that an entity could meet cash needs from liquid assets; calculated as (cash + short-term marketable investments + receivables)
divided by daily cash expenditures.
Deferred coupon bond
Bond that pays no coupons for its first few years but then pays a higher coupon than it otherwise normally would for the remainder of its life. Also called split coupon bond.
Deferred income
A liability account for money that has been collected for goods or services that have not yet been delivered; payment received in advance of providing a good or service.
Deferred revenue
A liability account for money that has been collected for goods or services that have not yet been delivered; payment received in advance of providing a good or service.
Deferred tax assets
A balance sheet asset that arises when an excess amount is paid for income taxes relative to accounting profit. The taxable income is higher than accounting profit and income tax
payable exceeds tax expense. The company expects to recover the difference during the course of future operations when tax expense exceeds income tax payable.
Deferred tax liabilities
A balance sheet liability that arises when a deficit amount is paid for income taxes relative to accounting profit. The taxable income is less than the accounting profit and income
tax payable is less than tax expense. The company expects to eliminate the liability over the course of future operations when income tax payable exceeds tax expense.
Defined benefit pension plans
Plans in which the company promises to pay a certain annual amount (defined benefit) to the employee after retirement. The company bears the investment risk of the plan assets.
Defined contribution pension plans
Individual accounts to which an employee and typically the employer makes contributions during their working years and expect to draw on the accumulated funds at retirement.
The employee bears the investment and inflation risk of the plan assets.
Deflation
Negative inflation.
Degree of confidence
The probability that a confidence interval includes the unknown population parameter.
Degree of financial leverage
(DFL) The ratio of the percentage change in net income to the percentage change in operating income; the sensitivity of the cash flows available to owners when operating income changes.
Degree of operating leverage
(DOL) The ratio of the percentage change in operating income to the percentage change in units sold; the sensitivity of operating income to changes in units sold.
Degree of total leverage
The ratio of the percentage change in net income to the percentage change in units sold; the sensitivity of the cash flows to owners to changes in the number of units produced and
sold.
Degrees of freedom
The number of independent variables used in defining sample statistics, such as variance, and the probability distributions they measure.
Delta
The sensitivity of the derivative price to a small change in the value of the underlying asset.
Demand curve
Graph of the inverse demand function. A graph showing the demand relation, either the highest quantity willingly purchased at each price or the highest price willingly paid for
each quantity.
Demand function
A relationship that expresses the quantity demanded of a good or service as a function of own-price and possibly other variables.
Demand shock
A typically unexpected disturbance to demand, such as an unexpected interruption in trade or transportation.
Dependent
With reference to events, the property that the probability of one event occurring depends on (is related to) the occurrence of another event.
Dependent variable
The variable whose variation about its mean is to be explained by the regression; the left-side variable in a regression equation. Also referred to as the explained variable .
Depository bank
A bank that raises funds from depositors and other investors and lends it to borrowers.
Depository institutions
Commercial banks, savings and loan banks, credit unions, and similar institutions that raise funds from depositors and other investors and lend it to borrowers.
Depository receipt
A security that trades like an ordinary share on a local exchange and represents an economic interest in a foreign company.
Depreciation
The process of systematically allocating the cost of long-lived (tangible) assets to the periods during which the assets are expected to provide economic benefits.
Derivative pricing rule
A pricing rule used by crossing networks in which a price is taken (derived) from the price that is current in the asset’s primary market.
Derivatives
A financial instrument whose value depends on the value of some underlying asset or factor (e.g., a stock price, an interest rate, or exchange rate).
Descriptive statistics
Measures that summarize central tendency and spread variation in the data’s distribution.
Diffuse prior
The assumption of equal prior probabilities.
Diffusion index
Reflects the proportion of the index’s components that are moving in a pattern consistent with the overall index.
Diluted EPS
The EPS that would result if all dilutive securities were converted into common shares.
Diluted shares
The number of shares that would be outstanding if all potentially dilutive claims on common shares (e.g., convertible debt, convertible preferred stock, and employee stock options)
were exercised.
Diminishing balance method
An accelerated depreciation method, i.e., one that allocates a relatively large proportion of the cost of an asset to the early years of the asset’s useful life.
Diminishing marginal productivity
Describes a state in which each additional unit of input produces less output than previously.
Direct format
With reference to the cash flow statement, a format for the presentation of the statement in which cash flow from operating activities is shown as operating cash receipts less
operating cash disbursements. Also called direct method.
Direct investing
Occurs when an investor makes a direct investment in an asset without the use of an intermediary.
Direct method
Direct formatWith reference to the cash flow statement, a format for the presentation of the statement in which cash flow from operating activities is shown as operating cash
receipts less operating cash disbursements. Also called direct method.
Direct taxes
Taxes levied directly on income, wealth, and corporate profits.
Direct write-off method
An approach to recognizing credit losses on customer receivables in which the company waits until such time as a customer has defaulted and only then recognizes the loss.
Discount
To reduce the value of a future payment in allowance for how far away it is in time; to calculate the present value of some future amount. Also, the amount by which an instrument
is priced below its face (par) value.
Discount margin
Required margin.
Discount rates
In general, the interest rates used to calculate present values. In the money market, however, a discount rate is a specific type of quoted rate.
Discounted cash flow models
Valuation models that estimate the intrinsic value of a security as the present value of the future benefits expected to be received from the security.
Discouraged worker
A person who has stopped looking for a job or has given up seeking employment.
Discrete data
Numerical values that result from a counting process; therefore, practically speaking, the data are limited to a finite number of values.
Discrete random variable
A random variable that can take on at most a countable number of possible values.
Discriminatory pricing rule
A pricing rule used in continuous markets in which the limit price of the order or quote that first arrived determines the trade price.
Diseconomies of scale
Increase in cost per unit resulting from increased production.
Dispersion
The variability of a population or sample of observations around the central tendency.
Display size
The size of an order displayed to public view.
Disposition effect
As a result of loss aversion, an emotional bias whereby investors are reluctant to dispose of losers. This reluctance results in an inefficient and gradual adjustment to deterioration in fundamental value.
Distributed ledger
A type of database that may be shared among entities in a network.
Distributed ledger technology
Technology based on a distributed ledger.
Divergence
In technical analysis, a term that describes the case when an indicator moves differently from the security being analyzed.
Diversification ratio
The ratio of the standard deviation of an equally weighted portfolio to the standard deviation of a randomly selected security.
Dividend
A distribution paid to shareholders based on the number of shares owned.
Dividend discount model
(DDM) A present value model that estimates the intrinsic value of an equity share based on the present value of its expected future dividends.
Dividend payout ratio
The ratio of cash dividends paid to earnings for a period.
Divisor
A number (denominator) used to determine the value of a price return index. It is initially chosen at the inception of an index and subsequently adjusted by the index provider, as necessary, to avoid changes in the index value that are unrelated to changes in the prices of its constituent securities.
Doji
In the Japanese terminology used in candlestick charting, the doji signifies that after a full day of trading, the positive price influence of buyers and the negative price influence of
sellers exactly counteracted each other—with opening and closing prices that are virtually equal—which suggests that the market under analysis is in balance.
Domestic content provisions
Stipulate that some percentage of the value added or components used in production should be of domestic origin.
Double bottom
In technical analysis, a reversal pattern that is formed when the price reaches a low, rebounds, and then declines back to the first low level. A double bottom is used to predict a
change from a downtrend to an uptrend.
Double coincidence of wants
A prerequisite to barter trades, in particular that both economic agents in the transaction want what the other is selling.
Double declining balance depreciation
An accelerated depreciation method that involves depreciating the asset at double the straight-line rate. This rate is multiplied by the book value of the asset at the beginning of the
period (a declining balance) to calculate depreciation expense.
Double top
In technical analysis, a reversal pattern that is formed when an uptrend reverses twice at roughly the same high price level. A double top is used to predict a change from an uptrend to a downtrend.
Down transition probability
The probability that an asset’s value moves down in a model of asset price dynamics.
Downgrade risk
The risk that a bond issuer’s creditworthiness deteriorates, or migrates lower, leading investors to believe the risk of default is higher. Also called credit migration risk.
Downside risk
Risk of incurring returns below a specified value.
Downtrend
A pattern that occurs when the price of an asset moves lower over a period of time.
Drag on liquidity
When receipts lag, creating pressure from the decreased available funds.
Drawdown
A percentage peak-to-trough reduction in net asset value.
Dual-currency bonds
Bonds that make coupon payments in one currency and pay the par value at maturity in another currency.
DuPont analysis
An approach to decomposing return on investment, e.g., return on equity, as the product of other financial ratios.
Duration
A measure of the approximate sensitivity of a security to a change in interest rates (i.e., a measure of interest rate risk).
Duration gap
A bond’s Macaulay duration minus the investment horizon.
Dutch Book Theorem
A result in probability theory stating that inconsistent probabilities create profit opportunities.
Early repayment option
Prepayment option Contractual provision that entitles the borrower to prepay all or part of the outstanding mortgage principal prior to the scheduled due date when the principal
must be repaid. Also called early repayment option .
Earnings per share
The amount of income earned during a period per share of common stock.
Earnings surprise
The portion of a company’s earnings that is unanticipated by investors and, according to the efficient market hypothesis, merits a price adjustment.
Economic costs
All the remuneration needed to keep a productive resource in its current employment or to acquire the resource for productive use; the sum of total accounting costs and implicit opportunity costs.
Economic indicator
A variable that provides information on the state of the overall economy.
Economic loss
The amount by which accounting profit is less than normal profit.
Economic profit
Equal to accounting profit less the implicit opportunity costs not included in total accounting costs; the difference between total revenue (TR) and total cost (TC). Also called
abnormal profit or supernormal profit .
Economic stabilization
Reduction of the magnitude of economic fluctuations.
Economic union
Incorporates all aspects of a common market and in addition requires common economic institutions and coordination of economic policies among members.
Economies of scale
Reduction in cost per unit resulting from increased production.
Effective annual rate
The amount by which a unit of currency will grow in a year with interest on interest included.
Effective convexity
A curve convexity statistic that measures the secondary effect of a change in a benchmark yield curve on a bond’s price.
Effective duration
The sensitivity of a bond’s price to a change in a benchmark yield curve.
Effective interest rate
The borrowing rate or market rate that a company incurs at the time of issuance of a bond.
Efficient market
A market in which asset prices reflect new information quickly and rationally.
Elastic
Said of a good or service when the magnitude of elasticity is greater than one.
Elasticity
The percentage change in one variable for a percentage change in another variable; a general measure of how sensitive one variable is to a change in the value of another variable.
Elasticity of demand
A measure of the sensitivity of quantity demanded to a change in a product’s own price: %∆Q D/%∆ P .
Elasticity of supply
A measure of the sensitivity of quantity supplied to a change in price: %∆Q S /%∆ P .
Electronic communications networks
Alternative trading systems Trading venues that function like exchanges but that do not exercise regulatory authority over their subscribers except with respect to the conduct of the
subscribers’ trading in their trading systems. Also called electronic communications networks or multilateral trading facilities.
Embedded option
Contingency provisions that provide the issuer or the bondholders the right, but not the obligation, to take action. These options are not part of the security and cannot be traded
separately.
Emotional biases
Behavioral biases resulting from reasoning influenced by feelings; emotional biases stem from impulse or intuition.
Empirical duration
The use of statistical methods and historical bond prices to estimate the price–yield relationship for a specific bond or portfolio of bonds.
Empirical probability
The probability of an event estimated as a relative frequency of occurrence.
Employed
The number of people with a job.
Endowment bias
An emotional bias in which people value an asset more when they hold rights to it than when they do not.
Engagement/active ownership
An ESG investment approach that uses shareholder power to influence corporate behavior through direct corporate engagement (i.e., communicating with senior management
and/or boards of companies), filing or co-filing shareholder proposals, and proxy voting that is directed by ESG guidelines.
Enterprise risk management
An overall assessment of a company’s risk position. A centralized approach to risk management sometimes called firmwide risk management.
Enterprise value
A measure of a company’s total market value from which the value of cash and short-term investments have been subtracted.
Equal weighting
An index weighting method in which an equal weight is assigned to each constituent security at inception.
Equipment trust certificates
Bonds secured by specific types of equipment or physical assets.
Equity
Assets less liabilities; the residual interest in the assets after subtracting the liabilities.
Equity risk premium
The expected return on equities minus the risk-free rate; the premium that investors demand for investing in equities.
Equity swap
A swap transaction in which at least one cash flow is tied to the return to an equity portfolio position, often an equity index.
Error term
The difference between an observation and its expected value, where the expected value is based on the true underlying population relation between the dependent and independent
variables. Also known simply as the error.
ESG
An acronym that encompasses environmental, social, and governance.
ESG integration
An ESG investment approach that focuses on systematic consideration of material ESG factors in asset allocation, security selection, and portfolio construction decisions for the
purpose of achieving the product’s stated investment objectives. Used interchangeably with ESG investing .
ESG investing
The consideration of environmental, social, and governance factors in the investment process. Used interchangeably with ESG integration .
Estimate
The particular value calculated from sample observations using an estimator.
Estimated parameters
With reference to a regression analysis, the estimated values of the population intercept and population slope coefficients in a regression.
Estimator
An estimation formula; the formula used to compute the sample mean and other sample statistics are examples of estimators.
Ethical principles
Beliefs regarding what is good, acceptable, or obligatory behavior and what is bad, unacceptable, or forbidden behavior.
Ethics
The study of moral principles or of making good choices. Ethics encompasses a set of moral principles and rules of conduct that provide guidance for our behavior.
Eurobonds
Type of bond issued internationally, outside the jurisdiction of the country in whose currency the bond is denominated.
European-style
Said of an option contract that can only be exercised on the option’s expiration date.
Event
Any outcome or specified set of outcomes of a random variable.
Ex-dividend date
The first date that a share trades without (i.e., “ex”) the dividend.
Excess kurtosis
Degree of kurtosis (fatness of tails) relative to the kurtosis of the normal distribution.
Exchanges
Places where traders can meet to arrange their trades.
Execution instructions
Instructions that indicate how to fill an order.
Exercise
The process of using an option to buy or sell the underlying.
Exercise price
The fixed price at which an option holder can buy or sell the underlying. Also called strike price , striking price , or strike .
Exercise value
The value obtained if an option is exercised based on current conditions. Also known as intrinsic value.
Exhaustive
Covering or containing all possible outcomes.
Expansion
The period of a business cycle after its lowest point and before its highest point.
Expansionary
Tending to cause the real economy to grow.
Expansionary fiscal policy
Fiscal policy aimed at achieving real economic growth.
Expected inflation
The level of inflation that economic agents expect in the future.
Expected loss
Default probability times loss severity given default.
Expected return on the portfolio
(E(Rp)) The weighted average of the expected returns ( R1 to Rn) on the component securities using their respective weights (w 1 to w n).
Expected value
The probability-weighted average of the possible outcomes of a random variable.
Expenses
Outflows of economic resources or increases in liabilities that result in decreases in equity (other than decreases because of distributions to owners); reductions in net assets
associated with the creation of revenues.
Export subsidy
Paid by the government to the firm when it exports a unit of a good that is being subsidized.
Exports
Goods and services that an economy sells to other countries.
Extension risk
The risk that when interest rates rise, fewer prepayments will occur because homeowners are reluctant to give up the benefits of a contractual interest rate that now looks low. As a
result, the security becomes longer in maturity than anticipated at the time of purchase.
Externalities
Spillover effects of production and consumption activities onto others who are not directly involved in a particular transaction, activity, or decision.
Externality
An effect of a market transaction that is borne by parties other than those who transacted.
Extra 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.
Extreme value theory
A branch of statistics that focuses primarily on extreme outcomes.
Face value
The amount of cash payable by a company to the bondholders when the bonds mature; the promised payment at maturity separate from any coupon payment.
Factoring arrangement
When a company sells its accounts receivable to a lender (known as a factor) who assumes responsibility for the credit granting and collection process.
Fair value
The amount at which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s-length transaction; the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between market participants.
False discovery approach
An adjustment in the p-values for tests performed multiple times.
False discovery rate
The rate of Type I errors in testing a null hypothesis multiple times for a given level of significance.
Fat-Tailed
Describes a distribution that has fatter tails than a normal distribution (also called leptokurtic).
Fed funds rate
The US interbank lending rate on overnight borrowings of reserves.
Fiat money
Money that is not convertible into any other commodity.
Fiduciary
An entity designated to represent the rights and responsibilities of a beneficiary whose assets they are managing, such as a bond trustee acting on behalf of fixed-income investors.
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.
Fill or kill
Immediate or cancel order 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. Also called fill or kill.
Finance lease
From the lessee perspective, under US GAAP, a type of lease which is more akin to the purchase of an asset by the lessee. From the lessor perspective, under IFRS, a lease which
“transfers substantially all the risks and rewards incidental to ownership of an underlying asset.”
Financial account
A component of the balance of payments account that records investment flows.
Financial distress
Heightened uncertainty regarding a company’s ability to meet its various obligations because of diminished earnings power or actual current losses.
Financial flexibility
The ability to react and adapt to financial adversity and opportunities.
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
operating income; also, short for the financial leverage ratio.
Financial leverage ratio
A measure of financial leverage calculated as average total assets divided by average total equity.
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).
Fintech
Technological innovation in the design and delivery of financial services and products in the financial industry.
Firm commitment offering
Underwritten offeringA type of securities issue mechanism in which the investment bank guarantees the sale of the securities at an offering price that is negotiated with the issuer.
Also known as firm commitment offering .
First-degree price discrimination
Where a monopolist is able to charge each customer the highest price the customer is willing to pay.
First lien debt
Debt secured by a pledge of certain assets that could include buildings, but it may also include property and equipment, licenses, patents, brands, etc.
First mortgage debt
Debt secured by a pledge of a specific property.
Fiscal multiplier
The ratio of a change in national income to a change in government spending.
Fiscal policy
The use of taxes and government spending to affect the level of aggregate expenditures.
Fisher effect
The thesis that the real rate of interest in an economy is stable over time so that changes in nominal interest rates are the result of changes in expected inflation.
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-for-floating interest rate swap
An interest rate swap in which one party pays a fixed rate and the other pays a floating rate, with both sets of payments in the same currency. Also called plain vanilla swap or
vanilla swap .
Fixed-rate perpetual preferred stock
Nonconvertible, noncallable preferred stock that has a fixed dividend rate and no maturity date.
Flag
A technical analysis continuation pattern formed by parallel trendlines, typically over a short period.
Flat price
The full price of a bond minus the accrued interest; also called the quoted or clean price.
Float-adjusted market-capitalization weighting
An index weighting method in which the weight assigned to each constituent security is determined by adjusting its market capitalization for its market float.
Floaters
Floating-rate notes Notes on which interest payments are not fixed but instead vary from period to period depending on the current level of a reference interest rate.
Floating-rate notes
Notes on which interest payments are not fixed but instead vary from period to period depending on the current level of a reference interest rate.
Flotation cost
Fees charged to companies by investment bankers and other costs associated with raising new capital.
Foreclosure
Allows the lender to take possession of a mortgaged property if the borrower defaults and then sell it to recover funds.
Foreign currency reserves
Holding by the central bank of non-domestic currency deposits and non-domestic bonds.
Foreign direct investment
Direct investment by a firm in one country (the source country) in productive assets in a foreign country (the host country).
Foreign exchange gains (or losses)
Gains (or losses) that occur when the exchange rate changes between the investor’s currency and the currency that foreign securities are denominated in.
Foreign portfolio investment
Shorter-term investment by individuals, firms, and institutional investors (e.g., pension funds) in foreign financial instruments such as foreign stocks and foreign government bonds.
Forward commitments
Class of derivatives that provides the ability to lock in a price to transact in the future at a previously agreed-upon price.
Forward contract
An agreement between two parties in which one party, the buyer, agrees to buy from the other party, the seller, an underlying asset at a later date for a price established at the start
of the contract.
Forward curve
A series of forward rates, each having the same time frame.
Forward market
For future delivery, beyond the usual settlement time period in the cash market.
Forward price
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 initiation date of the contract.
Forward rate
The interest rate on a bond or money market instrument traded in a forward market. A forward rate can be interpreted as an incremental, or marginal, return for extending the time to-maturity for an additional time period.
Forward rate agreements
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.
Fractile
A value at or below which a stated fraction of the data lies. Also called quantile.
Fractional reserve banking
Banking in which reserves constitute a fraction of deposits.
Framing bias
An information-processing bias in which a person answers a question differently based on the way in which it is asked (framed).
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 company’s free cash flow.
Free-cash-flow-to-equity models
Valuation models based on discounting expected future free cash flow to equity.
Free float
The number of shares that are readily and freely tradable in the secondary market.
Free trade
When there are no government restrictions on a country’s ability to trade.
Free trade areas
One of the most prevalent forms of regional integration, in which all barriers to the flow of goods and services among members have been eliminated.
Frequency distribution
A tabular display of data constructed either by counting the observations of a variable by distinct values or groups or by tallying the values of a numerical variable into a set of
numerically ordered bins (also called a one-way table).
Frequency polygon
A graph of a frequency distribution obtained by drawing straight lines joining successive points representing the class frequencies.
Frequency table
A representation of the frequency of occurrence of two discrete variables.
Full price
The price of a security with accrued interest; also called the invoice or dirty price.
Fund investing
In fund investing, the investor invests in assets indirectly by contributing capital to a fund as part of a group of investors. Fund investing is available for all major alternative
investment types.
Fundamental analysis
The examination of publicly available information and the formulation of forecasts to estimate the intrinsic value of assets.
Fundamental value
The underlying or true value of an asset based on an analysis of its qualitative and quantitative characteristics. Also called intrinsic value.
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.
Funds of hedge funds
Funds that hold a portfolio of hedge funds, more commonly shortened to funds of funds .
Fungible
Freely exchangeable, interchangeable, or substitutable with other things of the same type. Money and commodities are the most common examples.
Future value (FV)
The amount to which a payment or series of payments will grow by a stated future date.
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 losses, and an organized electronic or floor trading facility.
Futures price
The agreed-upon price of a futures contract.
FX swap
The combination of a spot and a forward FX transaction.
G-spread
The yield spread in basis points over an actual or interpolated government bond.
Gains
Asset inflows not directly related to the ordinary activities of the business.
Game theory
The set of tools decision makers use to incorporate responses by rival decision makers into their strategies.
Gamma
A numerical measure of how sensitive an option’s delta (the sensitivity of the derivative’s price) is to a change in the value of the underlying.
Gap opening
A gap is an area of a chart where a security’s price either rises or falls from the previous day’s close with no trading occurring in between. A gap opening is the start of a new
trading session with a gap.
GDP deflator
A gauge of prices and inflation that measures the aggregate changes in prices across the overall economy.
General partner (GP)
The partner that runs the business and theoretically bears unlimited liability for the business’s debts and obligations.
Geometric mean
A measure of central tendency computed by taking the nth root of the product of n non-negative values.
Giffen goods
Goods that are consumed more as the price of the good rises because it is a very inferior good whose income effect overwhelms its substitution effect when price changes.
Gilts
Bonds issued by the UK government.
Global depository receipt
A depository receipt that is issued outside of the company’s home country and outside 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.
Gold standard
With respect to a currency, if a currency is on the gold standard a given amount can be converted into a prespecified amount of gold.
Golden Cross
Bullish crossover A technical analysis term that describes a situation where a short-term moving average crosses a longer-term moving average from below; this movement is
considered bullish. A golden cross is a bullish crossover based on 50-day and 200-day moving averages.
Good-on-close
An execution instruction specifying that an order can only be filled at the close of trading. Also called market on close.
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 equivalent yield
A yield that restates a yield-to-maturity based on a 30/360 day count to one based on actual/actual.
Green bonds
Bonds used in green finance whereby the proceeds are earmarked toward environmental-related products.
Green finance
A type of finance that addresses environmental concerns while achieving economic growth.
Green loans
Any loan instruments made available exclusively to finance or re-finance, in whole or in part, new and/or existing eligible green projects. Green loans are commonly aligned in the
market with the Green Loan Principles.
Greenfield investment
Investing in infrastructure assets that are to be constructed.
Grey market
The forward market for bonds about to be issued. Also called “when issued” market.
