Glossary

Abnormal

return

(excess

return):

Difference

between

the

actual

returns

on

an

investment

and

the

expected

return

on

that

investment,

given

market

returns

and

investment's

risk..

Accelerated

depreciation:

A

depreciation

method

where

more

of

the

asset

is

written

off

in

earlier

years

and

less

in

later

years,

over

its

lifetime,

to

reflect

the

aging

of

the

asset.

Accounting

beta

:

Beta

estimated

using

accounting

earnings

for

a

firm

and

accounting

earnings

for

the

market,

rather

than

stock

prices.

Accrual

accounting:

Accounting

approach,

where

the

revenue

from

selling

a

good

or

service

is

recognized

in

the

period

in

which

the

good

is

sold

or

the

service

is

performed

(in

whole

or

substantially).

A

corresponding

effort

is

made

on

the

expense

side

to

match

expenses

to

revenues.

Acquisition

premium:

Difference

between

the

price

paid

to

acquire

a

firm

and

the

market

price

prior

to

the

acquisition.

Acquisition

price:

Price

that

will

be

paid

by

an

acquiring

firm

for

each

of

the

target

firm

?

s

shares.

Adjustable

rate

preferred

stock:

Preferred

stock

where

the

preferred

dividend

rate

is

pegged

to

an

external

index,

such

as

the

treasury

bond

rate.

Agency

costs:

Costs

arising

from

conflicts

of

interest

between

two

stakeholders;

examples

would

be

managers

&

stockholders

as

well

as

stockholders

&

bondholders.

Allocation:

Process

of

distributing

a

cost

that

cannot

be

directly

traced

to

a

revenue

center

across

different

units,

projects

or

divisions.

American

options:

An

option

that

can

be

exercised

any

time

until

maturity.

Amortizable

life

:

A

period

of

time

over

which

an

intangible

asset

is

written

off.

Annual

percentage

rate

(APR):

A

rate

that

has

to

be

cited

with

loans

and

mortgages

in

the

United

States.

The

rate

incorporates

an

amortization

of

any

fixed

charges

that

have

to

be

paid

up

front

for

the

initiation

of

the

loan.

Annuity:

A

stream

of

constant

cash

flows

that

occur

at

regular

intervals

for

a

fixed

period

of

time.

Arbitrage

position:

A

riskless

position

that

yields

a

return

that

exceeds

the

riskfree

rate.

Arbitrage

principle:

Assets

that

have

identical

cash

flows

cannot

sell

at

different

prices.

Asset

beta

:

The

beta

of

the

assets

of

investments

of

a

firm,

prior

to

financial

leverage.

Can

be

computed

from

the

regression

beta

(top-down)

or

by

taking

a

weighted

average

of

the

betas

of

the

different

businesses

(bottom-up).

Asset-backed

borrowing

:

Bonds

or

debt

secured

by

assets

of

any

type.

Mortgage

bonds

and

collateral

bonds

are

special

cases.

Assets-in-place:

The

existing

investments

of

a

firm.

Bad

debts:

Portion

of

loans

that

cannot

be

collected

(if

you

are

the

lender)

or

will

not

be

paid

(if

you

are

the

borrower).

Balance

sheet

:

A

summary

of

the

assets

owned

by

a

firm,

the

book

value

of

these

assets

and

the

mix

of

financing,

debt

and

equity,

used

to

finance

these

assets

at

a

point

in

time.

Balloon

payment

bonds:

Bonds

where

no

principal

repayment

is

made

during

the

life

of

the

bond

but

the

entire

principal

is

repaid

at

maturity.

Bankrupt:

The

state

in

which

a

firm

finds

itself

if

it

is

unable

to

meet

its

contractual

commitments.

Barrier

options:

An

option

where

the

payoff

on,

and

the

life

of,

the

option

are

a

function

of

whether

the

underlying

asset

price

reaches

a

certain

level

during

a

specified

period.

Baumol

model:

Model

for

estimating

an

optimal

cash

balance,

given

the

cost

of

selling

securities

and

the

interest

rate

that

can

be

earned

on

marketable

securities,

for

firms

with

certain

cash

inflows

and

outflows.

Best

efforts

guarantee:

Underwriting

agreement

on

a

security

issue

where

the

investment

banker

does

not

guarantee

a

fixed

offering

price

.

Beta:

A

measure

of

the

exposure

of

an

asset

to

risk

that

cannot

be

diversified

away

(also

called

market

risk).

It

is

standardized

around

1.

(Average

=

1,

Above

average

risk

>1)

Binomial

option

pricing

model:

Option

pricing

model

based

upon

the

assumption

that

stock

prices

can

move

to

only

one

of

two

levels

at

each

point

in

time.

Book

value:

Accounting

estimate

of

the

value

of

an

asset

or

liability,

usually

from

the

balance

sheet

of

the

firm.

Bottom-up

betas:

Beta

computed

by

taking

a

weighted

average

of

the

betas

of

the

businesses

that

a

firm

is

in.

These

betas,

in

turn,

are

estimated

by

looking

at

firms

that

operate

only

or

primarily

in

each

of

these

businesses.

Building

the

book:

Process

of

polling

institutional

investors

prior

to

pricing

an

initial

offering,

to

gauge

the

extent

of

the

demand

for

an

issue.

Call

market:

A

market

where

an

auctioneer

(or

a

market

maker)

holds

an

auction

at

certain

times

in

the

trading

day

and

sets

a

market-clearing

price,

based

upon

the

orders

grouped

together

at

that

time.

Callable

bonds

(debt):

Debt

(bonds),

where

the

borrower

has

the

right

to

pay

the

bonds

back

at

any

time.

The

option

to

pay

back

will

generally

be

used

if

interest

rates

decrease.

Cap:

The

maximum

interest

rate

on

a

floating

rate

bond.

Capital

expenses

:

Expenses

that

are

expected

to

generate

benefits

over

multiple

periods.

Accounting

rules

generally

require

that

these

expenses

be

depreciated

or

amortized

over

the

multiple

periods.

Capital

lease:

The

lessee

assumes

some

of

the

risks

of

ownership

and

enjoys

some

of

the

benefits.

Consequently,

the

lease,

when

signed,

is

recognized

both

as

an

asset

and

as

a

liability

(for

the

lease

payments)

on

the

balance

sheet.

Capital

rationing:

Situation

that

occurs

when

a

firm

is

unable

to

invest

in

projects

that

earn

returns

greater

than

the

hurdle

rates

because

it

has

limited

capital

(either

because

of

internal

or

external

constraints).

Capped

call:

A

call

where

the

payoff

is

restricted

on

the

upside.

If

the

price

rises

above

this

level,

the

call

owner

does

not

get

any

additional

payoff.

Cash

flow

to

equity

investors:

Cash

flows

generated

by

the

asset

after

all

expenses

and

taxes,

and

also

after

payments

due

on

the

debt.

Cash

flow

to

the

firm:

Cash

flows

generated

by

the

asset

for

both

the

equity

investor

and

the

lender.

This

cash

flow

is

before

debt

payments

but

after

operating

expenses

and

taxes.

Cash

slack:

Combination

of

excess

cash

and

limited

project

opportunities

in

a

firm.

Cashflow

return

on

investment

(CFROI)

:

Internal

rate

of

return

on

the

existing

investments

of

the

firm,

estimated

in

real

terms,

using

the

original

investment

in

the

assets,

their

remaining

life

and

expected

cash

flows.

Catastrophe

bond:

A

bond

that

allows

for

the

suspension

of

coupon

payments

and/or

the

reduction

of

principal,

in

the

event

of

a

specified

catastrophe.

Certainty

equivalent

(cash

flow):

A

guaranteed

cash

flow

that

you

would

agree

to

accept

in

exchange

for

a

much

larger

and

riskier

cash

flow.

Chapter

11

:

Legal

process

governing

bankruptcy

proceedings.

Clientele

effect:

Clustering

of

stockholders

in

companies

with

dividend

policies

that

match

their

preferences

for

dividends.

Collateral

bond:

Bond

secured

with

marketable

securities

Combination

leases:

A

lease

that

shares

characteristics

with

both

operating

and

capital

leases.

Commercial

paper

:

Short

term

notes

issued

by

corporations

to

raise

funds.

Commodity

bond:

A

bond

whose

coupon

rate

is

tied

to

commodity

prices.

Competitive

risk:

Risk

that

the

cash

flows

on

projects

will

vary

from

expectations

because

of

actions

taken

by

competitors.

Compound

options:

An

option

on

an

option.

Compounding

:

The

process

of

converting

cash

flows

today

into

cash

flows

in

the

future.

Concentration

banking:

System

where

firms

pick

banks

around

the

country

to

process

checks,

allowing

for

the

faster

clearing

of

checks

Consol

bond:

A

bond

with

a

fixed

coupon

rate

that

has

no

maturity

(infinite

life).

Consolidation

(in

mergers):

A

combination

of

two

firms

where

a

new

firm

is

created

after

the

merger,

and

both

the

acquiring

firm

and

target

firm

stockholders

receive

stock

in

this

firm.

Consolidation

(in

accounting

statements):

The

accounting

approach

used

to

show

the

income

from

ownership

of

securities

in

another

firm,

where

it

is

a

majority,

active

investment.

The

balance

sheets

of

the

two

are

merged

and

presented

as

one

balance

sheet.

The

income

statements,

likewise,

represent

the

combined

income

statements

of

the

two

firms.

Contingent

liabilities:

Potential

liabilities

that

will

be

incurred

under

certain

contingencies,

as

is

the

case,

for

instance,

when

a

firm

is

the

defendant

in

a

lawsuit.

Contingent

value

rights:

Securities

where

holders

receive

the

right

to

sell

the

shares

in

the

firm

at

a

fixed

price

in

the

future;

it

is

a

long

term

put

option

on

the

equity

of

the

firm.

Continuing

value

:

present

value

of

the

expected

cash

flows

from

continuing

an

existing

investment

through

the

end

of

its

life.

Continuous

market:

A

market

where

prices

are

determined

through

the

trading

day

as

buyers

and

sellers

submit

their

orders.

Continuous

price

process:

Price

process

where

price

changes

becoming

infinitesimally

small

as

time

periods

become

smaller.

Conversion

premium:

Excess

of

convertible

bond

market

value

over

its

conversion

value.

Convertible

bond:

Abond

that

can

be

converted

into

a

pre-determined

number

of

shares

of

the

common

stock,

at

the

discretion

of

the

bondholder

conversion

ratio

(in

convertible

bond):

Number

of

shares

of

stock

for

which

a

convertible

bond

may

be

exchanged.

Convertible

preferred

stock::

Preferred

stock

that

can

be

converted

into

common

equity,

at

the

discretion

of

the

preferred

stockholder.

Cost

of

capital

:

Weighted

average

of

the

costs

of

the

different

sources

of

financing

used

by

a

firm.

Cost

of

debt

(pre-tax):

Interest

rate,

including

a

default

spread,

that

a

borrower

has

to

pay

to

borrow

money.

Cost

of

debt

(after-tax):

Interest

rate,

including

a

default

spread,

that

a

borrower

has

to

pay

to

borrow

money,

adjusted

for

the

tax

deductibility

of

interest.

Cost

of

equity:

The

rate

of

return

that

equity

investors

in

a

firm

expect

to

make

on

their

investment,

given

its

riskiness.

Cumulative

abnormal

(excess)

returns

(cars):

Difference

between

the

actual

return

on

an

investment

and

the

expected

return,

given

market

returns

and

stock's

risk,

cumulated

over

a

period

surrounding

an

event

(such

as

an

earnings

announcement).

Current

assets:

Short-term

assets

of

the

firm,

including

inventory

of

both

raw

material

and

finished

goods,

receivables

(summarizing

moneys

owed

to

the

firm)

and

cash.

Current

PE

:

Ratio

of

price

per

share

to

earnings

per

share

in

most

recent

financial

year.

Debentures:

Unsecured

bonds

issued

by

firms

with

a

maturity

greater

than

15

years.

Debt

Exchangeable

for

Common

Stock

(decs).:

Debt

that

can

be

exchanged

for

common

stock,

with

the

conversion

rate

depending

upon

the

stock

price.

Debt:

Any

financing

vehicle

that

has

a

contractual

claim

on

the

cash

flows

and

assets

of

the

firm,

creates

tax

deductible

payments,

has

a

fixed

life,

and

has

priority

claims

on

the

cash

flows

in

both

operating

periods

and

in

bankruptcy.

Default

risk:

Risk

that

a

promised

cash

flow

on

a

bond

or

loan

will

not

be

delivered.

Default

spread

:

Premium

over

the

riskless

rate

that

you

would

pay

(if

you

were

a

borrower)

because

of

default

risk.

Deferred

tax

asset:

Asset

created

when

companies

pay

more

in

taxes

than

the

taxes

they

report

in

the

financial

statements.

Depreciation:

Accountingadjustments

to

the

book

value

of

an

asset

for

the

aging

and

subsequent

loss

of

earning

power

on

it.

Applies

when

you

have

a

capital

expenditure.

Direct

cost

of

bankruptcy:

Costs

include

the

legal

and

administrative

costs,

once

a

firm

declares

bankruptcy,

as

well

as

the

present

value

effects

of

delays

in

paying

out

the

cash

flows.

Cost

of

bankruptcy

(direct):

Costs

include

the

legal

and

administrative

costs,

once

a

firm

declares

bankruptcy,

as

well

as

the

present

value

effects

of

delays

in

paying

out

the

cash

flows.

Disbursement

float:

Lag

between

when

a

check

is

written

and

the

time

it

is

cleared,

when

the

firm

is

writing

the

check.

Discount

rate:

the

rate

used

to

move

cash

flows

from

the

future

to

the

present,

in

discounting,

or

from

the

present

to

the

future,

in

compounding.

Discounting:

the

process

of

converting

cash

flows

in

the

future

to

cash

flows

today.

Divestiture

value

:

Value

of

an

asset

to

the

highest

potential

bidder

for

it.

Divestiture:

Sale

of

asset,

assets

or

division

of

a

firm

to

third

party.

Dividend

capture

(arbitrage):

Strategy

ofbuying

stock

before

the

ex-dividend

day,

selling

it

after

it

goes

ex-dividend

and

collecting

the

dividend.

Dividend

declaration

date:

Date

on

which

the

board

of

directors

declares

the

dollar

dividend

that

will

be

paid

for

that

quarter

(or

period).

Dividend

payment

date:

Date

on

which

dividends

are

paid

to

stockholders.

Dividend

payout

ratio:

Ratio

of

dividends

to

net

income

(or

dividends

per

share

to

earnings

per

share).

Dividend

yield:

Ratio

of

dividends,

usually

annualized,

to

current

stock

price.

Down-and-out

option:

A

call

option

that

ceases

to

exist

if

the

underlying

asset

rises

above

a

certain

price.

Dual

currency

bond:

Bond

with

some

cash

flows

(eg.

Coupons)

in

one

currency

and

other

cash