Accounts Payable (Payables): Money owed to suppliers.
Accounts Receivable (Receivables): Money owed by customers.
Acquisition See Mergers
ACRS (Accelerated Cost Recovery System) : Schedule of depreciation rates allowed for tax purposes.
Actuarial risk: A type of risk, typically associated with insurance.
American option: An option which can be exercised prior to its expiration date.
Annuity Investment: that generates a stream of equal cash flows.
Arb Arbitrage: See arbitrage
Arbitrage (risk arbitrage) :Simultaneous purchase of a security and sale of another to generate a risk-free profit.
Arbitrage: A transaction which generates a risk-free profit.
Arbitrage FreeModel A type of financial model which generates market scenarios which entail no arbitrage opportunities.
Arbitrageur: A person involved in arbitrage.
ARCH: A technique for projecting future implied volatilities.
Asian option: An option whose pay-off depends on the average value of an underlier over a specified period.
Asia Securities Industry & Financial Markets Association (ASIFMA): ASIFMA is a broadly based professional advocacy organization that seeks to promote the growth and development of Asia’s debt capital markets and their orderly integration into the global financial system. ASIFMA works to develop more open domestic capital markets, more standardized market practices and a more stable and transparent regulatory environment will help mobilize and redirect the region’s considerable financial savings to support Asia’s continued economic growth and development. ASIFMA is the Asia regional member of the Global Financial Markets Association (GFMA).
Ask: The highest price anyone wants to pay for the security at a given time.
Association for Financial Markets in Europe (AFME): The Association for Financial Markets in Europe advocates stable, competitive, and sustainable European financial markets that support economic growth and benefit society. It was formed on November 1st 2009 following the merger of LIBA (the London Investment Banking Association) and the European operation of SIFMA (the Securities Industry and Financial Markets Association). AFME represents a broad array of European and global participants in the wholesale financial markets, and its 197 members comprise all pan-EU and global banks as well as key regional banks, brokers, law firms, investors and other financial market participants. AFME provides members with an effective and influential voice through which to communicate the industry standpoint on issues affecting the international, European, and UK capital markets. AFME is the European regional member of the Global Financial Markets Association (GFMA).
Asset Allocation: The process of determining the optimal division of an investor's portfolio among different assets. Most frequently this refers to allocations between debt, equity, and cash.
asset/liability management A risk management technique for protecting an institution's capital.
asset-backed security A securitized interest in a pool of assets.
Assets: Anything that the firm owns.
At-the-money : A condition where the value of an option's underlier matches the option's strike price.
Average Maturity :The average time to maturity of securities held by a mutual fund. Changes in interest rates have greater impact on funds with longer average life.
Average option: An option whose pay-off depends on the average value of an underlier over a specified period.
Average Tax Rate: The rate calculated by dividing the total tax liability by the entity's taxable income.
Backwardation: A condition where spot prices exceed forward prices.
Balance Sheet: A basic accounting statement that represents the financial position of a firm on a given date.
Balanced Mutual Fund : This is a mutual fund that buys common stock, preferred stock and bonds.
Bankers' Acceptance : A draft drawn on a specific bank by a seller of goods to obtain payment of goods that have been sold to a customer. The customer maintains an account with that specific bank.
Barrier option : A type of path-dependent option.
Base currency : The currency in which a risk is quantified.
Basis Point: .01 percent. Used to measure changes in yields of bonds.
Basis Risk: Risk from changes in spreads.
Bear Market General decline in security prices.
Beginning Net Asset Value: The market value of a fund share on a predetermined start date.
Basel III:: BASEL III is a new global regulatory standard on bank capital adequacy and liquidity agreed upon by the members of the Basel Committee on Banking Supervision. The third of the Basel Accords was developed in a response to the deficiencies in financial regulation revealed by the global financial crisis. Basel III strengthens bank capital requirements and introduces new regulatory requirements on bank liquidity and bank leverage. The OECD estimates that the implementation of Basel III will decrease annual GDP growth by 0.05 to 0.15 percentage point.
The Basel III proposals sought to strengthen the regulatory regime applying to credit institutions in the following areas.
- Enhancing the quality and quantity of capital.
- Strengthening capital requirements for counterparty credit risk (and in CRD III for market risk) resulting in higher Pillar I requirements for both.
- Introducing a leverage ratio as a backstop to risk-based capital.
- Introducing two new capital buffers: one on capital conservation and one as a countercyclical capital buffer.
- Implementing an enhanced liquidity regime through the Net Stable Funding Ratio and Liquidity Coverage Ratio.
Beta: A relative (to a benchmark) measure of risk. Measures of an asset's non-diversifiable -- market-- risk. See also systematic risk.
Bid: The lowest price anyone wants to sell the security for at a given time. (See: Ask, and Bid-Ask Spread)
Bid-Ask Spread : The difference between the bid and the ask for a security at a given time.
Bilateral Netting : Netting between two parties.
Bill Debt: that has less than 1-year maturity at time of issue.
Binary Option: A type of option which features a discontinuous pay-off.
Black-Scholes Theory : The first successful theory for pricing financial options.
Bond Long-Term IOU : whereby the holder (lender or buyer) is promised to receive fixed payments over a pre-specified time period. Corporate bonds are one of the available instruments that companies can resort to for their financing needs.
Bond Par Value : The face value that is to be returned to a bondholder at maturity.
Book Value: The depreciated value of a company's assets (original cost less accumulated depreciation) less the outstanding liabilities.
Broker: A person who facilitates transactions (buy and sell) in the secondary market.
Brokerage Commission : The amount of money your brokerage house would charge for a given transaction (buy/sell). This is how these firms make their living.
Bull Market General : increase in security prices.
Bullish :One who believes the general market will rise. (See: Bear)
Buyback: When a firm repurchases its own stock from the public.
Call Option: An option to purchase an asset.
Call Premium : The difference between the call price and the security's value.
Call Provision: A provision that entitles the corporation to repurchase its bonds or preferred stock from their holders at stated prices over specified periods.
Callable Bond : A bond which may be terminated prior to maturity by its issuer.
Cap : A derivative instrument which is linked to interest rates.
Capital Asset : All property used in conducting a business other than assets held primarily for sale in the ordinary course of business or depreciable, and real property used in conducting a business.
Capital Asset Pricing Model (CAPM) : An equation relating an asset's relative riskiness (beta) to its required return.
Capital At Risk : A measure of market risk.
Capital Budgeting : The decision-making process with respect to investment in fixed-assets. It involves measuring the additional cash flows associated with investment proposals and evaluating the viability of those proposed investment.
Capital Gains or Loss : The profit or loss made when an asset is sold for more than the purchase price is a capital gain. If the sale price is less than the purchase price, this is a capital loss.
Capital Market Line : A line which describes the optimal relationship between risk and reward for an investment portfolio.
Capital Markets : Markets for long-term financial securities.
Capital Rationing : Shortage of funds that forces a company to choose between projects.
Capital Structure Mix of different securities issued by a company.
Capital Requirements Directives IV (CRD IV): : It “respects the balance and level of ambition of Basel III”.
The 1988 Accord, now referred to as Basel I, helped to strengthen the soundness and stability of the international banking system as a result of the higher capital ratios that it required. The Basel Accord was implemented in the European Union via the Capital Requirements Directive (CRD), which was designed to ensure the financial soundness of credit institutions (banks and building societies) and certain investment firms. The CRD framework was revised by the introduction of Basel II. The Basel II framework introduced the concept of three 'pillars'. The crisis in financial markets over 2008 and 2009 prompted a strengthening of the Basel rules to address the deficiencies exposed in the previous set of rules. The Basel III proposals will be implemented into EU law through changes to the existing CRD – referred to as CRD IV.
Capitalization: A company's amount of capital. Usually measured as the sum of a company's market value of equity and debt.
Cash Budget: A detailed plan of future cash flows. This budget is composed of four elements: cash receipts, cash disbursements, net change in cash for the period, and new financing needed.
CD (Certificate of Deposit): Receipts for funds deposited in bank or S&L for a fixed period. The funds earn a fixed interest rate.
Chaebols South Korea's industrial giants.
Change: This shows the change in price of a security from the previous day's closing price.
Characteristic Line : The line of "bet fit" through a series of historical returns for the firm's stock relative to the market returns. The slope of this line, called beta, represents the average movement of the firm's stock returns in response to a change in the market's returns.
Cheap : An asset is said to be cheap when it is worth (intrinsic value) more than its market value.
Closed-End Fund : An investment fund that does not stand ready to purchase its own shares from its owners. Its shares can trade on an exchange.
Closeout Netting A type of netting frequently used with OTC derivative instruments.
Closing Price (alternatively close) : The price at which the last trade took place on a given day in a particular security.
Collar A type of derivatives position.
Collateral Assets: that are used as security for a loan.
Collateralised Mortgage Obligation A type of mortgage-backed security.
Commercial Paper : Unsecured debt (IOU), issued by large corporations, with maturities (at time of issue) less than a year. They can be traded on OTC.
Commission : The broker's fee for purchasing or selling assets.
Commodity : A commodity is food, a metal or another physical substance that investors buy or sell, usually via futures contracts.
Common Shares : These are securities that represent equity ownership in a company. Common shares typically allow an investor to vote on such matters as the election of board of directors. They also give the holder a share in a company's profits via dividend payments or the capital appreciation of the security.
Competitive Bid : A mechanism to select a lead investment bank in which investment banks submit a bid representing their compensation. The issuing firm solicits bids on the underwriting and chooses the underwriter who offers the most favorable terms.
Compounding : A process whereby the value of an investment appreciates exponentially over time as interest is earned on interest.
Confidence Interval : A notion from statistics.
Confirmation : A written notice confirming the details of a transaction.
Conglomerate Merger : Merger between two corporations in unrelated business.
Consol : A perpetual bond issued by the British government. Sometimes used as a general term for perpetuity.
Constant Maturity Treasury : A type of yield index.
Consumer Price Index (CPI) : The CPI measures the prices of consumer goods and services and is a measure of the pace of Indian inflation.
Contingency : An event that may or may not occur.
Conversion Ratio : The number of shares of common stock for which a convertible security can be exchanged for.
Convertible Bond : Bond that can be converted to equity at a pre-specified conversion ratio.
convexity A measure of second-order exposure to interest rates.
Core Investor : A shareholder or a group of investors that holds enough shares to be able to influence management decisions.
Corporation : A legal entity that functions separate and apart from its owners.
correlated exposure. Exposure to a risk factor, taking into account the impact of correlated risk factors.
Correlation : A notion from probability.
Cost Budgets: Budgets prepared for every major expense category of the firm, such as administrative cost, financing cost, production cost, selling cost, and research and development.
Cost of Capital :The rate that must be earned by the company to satisfy all the firm's providers of capital. It is based on the opportunity cost of funds.
Cost of Funds Index A yield index.
CounterParty A party with whom one transacts business.
Coupon Interest Rate The Interest to be annually paid by the issuer of a bond as a percent of per value, which is specified in the contractual agreement.
Covariance : A measure of co-movement between two variables.
Credit Default Swap : A type of credit derivative.
Credit Derivative : A derivative instrument designed to transfer credit risk from one party to another.
Credit Enhancement: Any methodology that reduces the credit exposure of a transaction with a counterparty.
Credit Exposure : Exposure to possible default by a counterparty.
Credit Linked Note : A debt instrument with an imbedded credit derivative.
Credit Risk : The risk that a counterparty may fail to perform on its obligations.
Credit Scoring : A procedure for assigning scores to companies or individuals on the basis of the risk of default.
Credit Spread : A spread in prices or interest rates resulting from credit risk.
Cum dividend With dividend.
Cum Rights With rights.
Cumulative Voting : A shareholder may cast all his or her votes for one candidate for the board of directors. Also see majority voting.
Current Asset : Asset that is expected to be turned into cash within a year.
Current Liability : Liability that is expected to be paid in less than a year.
Custodian : A bank which holds securities on behalf of investors.
Cyclical Stock: The stock of a company whose fortunes are closely tied to the cyclical ups and downs of the economy in general. For example, General Motors is a cyclical stock since its business of selling autos is highly dependent on the general health of the economy.
Date of Record:The date on which a shareholder must officially own shares in order to be entitled to a dividend.
Day High:This is the highest price that a security has traded at during the day.
Day Low:This is the lowest price that a security has traded at during the day.
DCF: Discounted Cash Flows
Dealer:A person (or firm) who facilitates transactions in the secondary market. They make their living on the difference between the prices they pay for the assets in their inventory and what they sell them for.
Declaration Date:The date on which a firm announces a future dividend payment.
Default Risk Premium (DRP):The additional return lenders require to compensate them for default risk.
Default Risk:Uncertainty of a firm's ability to meet its debt obligations on time and in full.
Delta:A measure of exposure to an underlier.
Delta Hedge:A hedging position which causes a portfolio to be delta neutral.
Delta Neutral:Having no delta exposure.
Delta-Gamma Value At Risk:A method for estimating value at risk.
Depreciation:(1) Reduction in the book or market value of an asset.
(2) Portion of an investment that can be deducted from taxable income.
Derivative Instrument:A type of financial instrument which derives its value from the value of other financial instruments.
Derivative Security:A financial asset whose value is based on an underlying asset. Options and futures are examples.
Dilution:(1) A decrease in the proportion of income to which each shareholder is entitled,
(2) A decrease in the % ownership of individual shareholders.
Discount:(1) The amount by which a bond or preferred stock may sell below its par value.
(2) The notion that market prices "takes into account@ or include all publicly available relevant information.
Discount Bond:A bond that sells at value below par value.
Discounting:The inverse of compounding. This process is used to determine the present value of a cash flow.
Distribution Date:Date on which the payout of realized capital gains on securities in the fund portfolio occurred.
Diversifiable Risk:The components of an asset's risk that can be eliminated when the asset is combined in a well-diversified portfolio.
Diversification:A technique for managing risk where risk is divided among multiple, uncorrelated exposures.
Dividend:Distribution of wealth by firm to shareholders based on number of shares owned.
Dividend Yield Dividends per share divided by the price of the security.
Duration:A measure of exposure to interest rates.
Earnings At Risk:A measure of market risk.
Earnings Per Share (EPS):Company's earnings divided by the number of shares outstanding.
EarningsReport:A financial statement, also called Income Statement, issued by a company showing its earnings or losses over a given period.
Earnings vs. Value
EBIT:A company's Earnings Before Interest and Taxes.
Ending Net Asset Value:The market value of a fund share on a predetermined end date.
enterprise risk management The process whereby an organization optimizes the manner in which it takes risks.
EPS:See Earnings Per Share
Equity Risk:The risk of owning stock or having some other form of ownership interest.
ERM:See Exchange Rate Mechanism
Euribor:Euro Interbank Offered Rate.
Eurobonds:Bonds that are marketed internationally.
Eurodollar Future;A type of futures contract.
Eurodollar Market:A banking market in U.S. dollars outside the U.S.
European Financial Stability Facility (EFSF): It is a special purpose vehicle financed by members of the euro zone to combat the European sovereign debt crisis also aiming at preserving financial stability in Europe by providing financial assistance to euro zone states in economic difficulty.
European High Yield Association (EHYA): The European High Yield Association (EHYA), an affiliate of the Securities Industry and Financial Markets Association (SIFMA), is a trade association representing participants in the European leveraged finance market. A key purpose of the EHYA is to work with lawmakers and regulators in the European Union. EHYA lobbies for its members to promote efficient and appropriate regulation and constructive rulemaking processes.
European Market Infrastructure Regulation (EMIR): On 15 September 2010, the European Commission published its final proposal for a Regulation of the European Parliament and of the Council (also widely known as European Market Infrastructure Regulation – EMIR), which sets out to increase stability within OTC derivative markets. The Regulation introduces:
- a reporting obligation for OTC derivatives;
- a clearing obligation for eligible OTC derivatives;
- measures to reduce counterparty credit risk and operational risk for bilaterally cleared OTC derivatives;
- common rules for central counterparties (CCPs) and for trade repositories;
- Rules on the establishment of interoperability between CCPs.
- OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end-2012 at the latest.
- OTC derivative contracts should be reported to trade repositories.
- Non-centrally cleared contracts should be subject to higher capital requirements.
Evidence:Few Brokerage Firms Beat the Market Last Year
Exact:Both accurate and precise.
Exchange Rate Mechanism (ERM),: or the currency grid, is a system that limits currency fluctuations to a range of 15 percent in either direction.
Exchange Traded:Traded on an exchange, as opposed to being traded over the counter.
Ex-Dividend Date:The date which determines ownership of stock for the purpose of paying dividends. Owners purchasing shares on or after the ex-dividend date do not receive the dividends. Only owners before this date would be registered to receive the declared dividend. The date is set at four business days prior to the record date. Also see dividend.
Exercise Price:The price at which a call option or put may be exercised. Also called strike price.
Expected Credit Exposure:A measure of potential credit exposure.
Expected return:The average possible return for an investment.
Expected Value:The mean or average of a random variable.
Exposure:Sensitivity to a source of risk.
External Financing: Financing projects through new issues of securities; debt and/or equity.
Extra Dividend: Dividend that is not expected to be repeated.
Face Value: Value of security shown on certificate. Also called par value, which is typically $1,000.
factor sensitivity A measure of exposure to a single risk factor.
Family of Funds: Group of mutual funds managed by the same investment management company. Each fund typically has a different objective; one may be a growth-oriented stock fund, whereas another may be a bond fund or an index fund. Shareholders in one of the funds can usually switch their money into any of the family's other funds, sometimes at no charge.
Federal Housing Finance Agency (FHFA): The Federal Housing Finance Agency (FHFA) is an independent federal agency created as the successor regulatory agency resulting from the statutory merger of the Federal Housing Finance Board (FHFB), the Office of Federal Housing Enterprise Oversight (OFHEO), and the U.S. Department of Housing and Urban Development government-sponsored enterprise mission team, absorbing the powers and regulatory authority of both entities, with expanded legal and regulatory authority, including the ability to place government sponsored enterprises (GSEs) into receivership or conservatorship. With a very turbulent market facing our nation, the strengthening of the regulatory and supervisory oversight of the 14 housing-related GSEs is imperative. FHFA's mission is to provide effective supervision, regulation and housing mission oversight of Fannie Mae, Freddie Mac and the Federal Home Loan Banks to promote their safety and soundness, support housing finance and affordable housing, and support a stable and liquid mortgage market.
Financial Assets: Securities that have a claim on assets.
Financial Engineering:The design of financial portfolios to achieve specified goals.
Financial Intermediaries:Financial institutions that assist the transfer of savings from economic agents with excess savings to those that need capital for investments.
Financial Investment:Investment in financial assets.
Financial Risk:Additional risk borne by shareholders because of a firm's use of debt.
Financial Risk:Financial exposure to uncertainty.
Financial Risk Management:The process whereby an organization optimizes the manner in which it takes risks.
Firm Specific RiskUncertainty in returns due to factors specific to the company. See diversifiable risk.
Fixed Assets (overhead):A cost that is fixed for a given period of time. It is not dependent on the amount of goods and services produced during the period. Tangible fixed assets include real estate, plant and equipment. Intangible assets include patents, trademarks, and customer loyalty.
Float:The float is the number of shares of a security that are outstanding and available for trading by the public.
Floatation Cost:The underwriter's revenue associated with assisting a firm in issuing and marketing new securities.
Floater:A type of fixed income instrument.
Floor:A type of derivative instrument which is linked to interest rates.
Forward:An agreement to execute a transaction at some time in the future.
Forward Rate Agreement:A type of forward contract which is linked to interest rates.
FRA:Forward Rate Agreement
Free Cash Flow Value:The value of a firm based on the cash flow available for distributing to any of the providers of long-term capital to the firm. The free cash flows equal operating cash flow less any incremental investments made to support a firm's future growth.
Front Running refers to situations when a manager who has private information about the direction of movement of an asset takes a private position in the asset before purchasing it for the fund.
Full-Service Broker: Brokers who provide services in addition to assisting in buying and selling of securities in the secondary market. Services can include providing company profiles and investment strategy recommendations.
Future:An agreement to execute a transaction at some time in the future.
Futures Contract:This is an agreement that allows an investor to buy or sell a commodity, like gold or wheat, or a financial instrument, like a currency, at some time in future. A future is part of a class of securities called derivatives, so named because such securities derive their value from the worth of an underlying asset. These contracts trade on organized futures exchanges.
Futures Exchange:Traded contracts specifying a future date of delivery or receipt of a specific product or asset. The assets include agricultural products like, pork bellies and oranges; metal; and financial instruments and indices. They are used by firms to hedge against potentially unfavorable price changes, and by speculators who hope to benefit from betting on the direction or magnitude of change.
Futures Market:Where futures contracts are traded.
Gamma:A measure of second-order exposure to an underlier.
General arrangement to borrow (GAB): The arrangement set up in 1962 involving the members of the group of ten and Switzerland, then not a G-10 member, under which the countries concerned agreed to provide special credits to the IMF in their own currencies for G-10 member countries. The GAB needs the collective agreement of its members to be activated. The credits are separate from the IMF's normal resources and are only for use by a GAB member facing currency or payments difficulties.
GARCH:A technique for projecting future implied volatilities.
Golden Parachute.:A plan devised by existing management stipulating that an acquiring company has to pay executives of the acquired company a substantial sum of money in the event of removing the former.
Greeks:A set of factor sensitivities frequently used for measuring the exposures of derivative portfolios.
Greenmail:In a typical greenmail, the acquiring firm has already purchased a number of shares of the target firm's stock. Management of the target company offers to buy back the stock, at a price higher than the market.
Growth:Stocks Stocks of companies that have an opportunity to invest in projects that earn more that the required rate of return.
Hedge :To take offsetting risks.
Hedging :The purchase or sale of a derivative security (such as options or futures) in order to reduce or eliminate risk associated with undesirable price changes of another security.
Heteroscedasticity :Non-constant volatility.
High-Yield Bond :A bond which pays a high yield due to significant credit risk.
Historical Value At Risk A method for estimating value at risk.
Historical Volatility :An estimate of volatility based upon historical data.
Homoscedasticity : Constant volatility.
Horizontal Integration : When firms in the same industry merge. Also referred to as horizontal merger.
Horizontal Merger :Merger between two companies that produce similar products. Also referred to as horizontal integration.
Hostile Takeover :A merger or acquisition in which management resists the group initiating the transaction.
Hurdle Rate :The minimum required return on a project.
Hypothecation :The posting of collateral.
Implied Volatility :An estimate of volatility based upon option prices.
Income Stocks :Companies with high dividend yield or no NPV > 0 opportunities.
Incremental :Cash Flows
Indenture :The legal agreement between the firm issuing the bond and the bondholders, providing the specific terms of the loan agreement.
Index :A yardstick to measure change from a base year.
Index :Funds Mutual funds whose objective is to replicate the performance of an index. The most popular equity index is the BSE Sensex.
Inflation :A general increase in prices of goods and services.
Inflationary Premium (IP) :Additional compensation over the T-bill that levers require to compensation them for the risk of expected inflation.
Information : Largest IPOs In History
Inside Market :The highest bid and the lowest offer prices among all competing dealers in a Nasdaq security, i.e., the best bid and offer prices.
Insiders :These are directors and senior officers of a corporation -- in effect those who have access to inside information about a company. An insider also is a shareholer who owns more than 10 percent of the voting shares of a company.
Interest Rate Cap :A derivative instrument which is linked to interest rates.
Interest Rate Floor : A derivative instrument which is linked to interest rates.
Interest Rate Parity : A relationship which must hold between the interest rates of two countries.
Intermediaries : See Financial Intermediaries.
International Capital Market Association (ICMA) :The International Capital Market Association (ICMA) is a unique organisation and an influential voice for the global capital market. It represents a broad range of capital market interests including global investment banks and smaller regional banks, as well as asset managers, exchanges, central banks, law firms and other professional advisers.
Internal Financing :Financing projects through retained earnings.
International Securities Market Association (ISMA) :A self-regulatory organization and trade association originally located in Zürich, Switzerland, that encourages systematic and compliant trading in the international securities market. It also promotes the development of the Euromarkets and is acknowledged as a designated investment exchange by the Financial Services Authority, which regulates the financial services industry in the U.K. ISMA helped to establish standardized trading procedures in the international bond market. It had 430 members in 49 different countries, representing the major securities firms’ entire active in the secondary international debt market.
In July 2005, the ISMA and International Primary Market Association merged to become the International Capital Market Association.
in-the-money :A condition where an option has a positive intrinsic value.
In-the-money Options An option that would be worth exercising if it expired immediately. Also see out-of-the-money options.
Intrinsic Value :A component of the market value of an option.
Inverse Floater: A type of fixed income instrument.
Investment Banks are firms that assist companies in initial sale of securities in primary market.
Investment Company :A company that uses its capital to invest in other companies. There are two types: the closed-end and the open-end, or mutual fund.
Investment-Grade Bonds :Bonds rated Baa or above.
IO :A type of mortgage-backed security.
IP (Inflationary Premium) :Additional return required to compensate asset holders for inflation uncertainty.
IPO (Initial Public Offering) :Securities are offered for the first time to the public.
Junk bond A bond which pays a high yield due to significant credit risk.
Keiretsu Japan's industrial structure.
Key factor :A risk factor which is used in estimating value at risk.
Knock-In Option :A type of path-dependent option.
KnockOut Option :A type of path-dependent option.
Kurtosis A notion from statistics.
Legal Entity Identification (LEI) : Legal Entity Identification (LEI) for Financial Contracts, a Universal Standard for Identifying All Parties to Financial Contracts is a new standard to be established by U.S. Treasury - Office of Financial Research. It is a key element in the broader effort to understand and monitor systemic risk. Its creation will likely have exceptionally broad impact throughout the financial markets at a very fundamental level. The responsibility to building up the LEI has been given jointly to the Depository Trust & Clearing Corporation (DTCC) and SWIFT.
Liability-Driven Investment (LDI) :Liability-driven is a financial and actuarial term used to describe investment policies, and, more generally, asset management decisions, that are determined in large part by the sum of current and future liabilities attached to the investment-making entity, be it a household or an institutional investor. As it purports to associate constantly both sides of the balance sheet in the investment process, it has been called by some a ‘holistic’ investment methodology. LDI investment strategies have come to prominence in the UK as a result of changes in the regulatory and accounting framework.
Legal Risk :Risk relating to legal uncertainties
Leptokurtosis :A notion from statistics.
Letter of Credit :Letter from a bank stating that it has established credit in the company's favor.
Leverage The compounding of risks.
Leverage :Use of debt financing.
(LIBOR) London InterBank Offered Rate. :The lending rate among international banks in London.
Limit Order :When you instruct your broker to buy or sell a given security at a specific price.
Limited Liability :Limitation of a shareholder's losses to the amount invested.
Liquidation Value :The amount that could be realized if an asset were sold independently of the going concern.
Liquidity refers to an investor's ability to convert an asset into cash. The faster the conversion the more liquid the asset. Illiquidity is a risk in that an investor might not be able to convert the asset to cash when most needed. Moreover, having to wait for the sale of an asset can pose an additional risk if the price of the asset decreases while waiting to liquidate.
Liquidity Risk Premium (LP) :The additional return required by investors in securities that cannot be converted into cash at a reasonably predictable price or time.
Liquidity The ability to easily raise needed cash.
Listing :When a company's stock trades on an official exchange.
Load :A commission paid by an investor to a broker for the purchase or sale of a mutual fund.
Lognormal Distribution :A type of probability distribution.
Long Investors who go "long" own stock or another financial security. It is a term that means the opposite of "short." See short selling.
Long Ownership of securities. (See Long)
Long position :A position which entails ownership or effective ownership of an asset.
Long-term Gain :A gain on the sale of a capital asset where the holding period was six months or more and the profit was subject to the long-term capital gains tax.
LP (Liquidity Premium) :Additional return required to compensate investors for purchasing illiquid assets. Also see liquidity.
Macaulay Duration :A technique for calculating duration.
Maintenance Margin :Minimum margin that must be maintained on a futures contract.
Majority Voting :Voting system under which each board of director is voted upon separately. See cumulative voting.
Margin Cash or securities set aside by an investor as evidence for ability to honor a financial commitment.
Market Abuse Directive :In 2003, the Market Abuse Directive (MAD), a pioneering text in the then newly established Lamfalussy process, was presented as a cornerstone of the Financial Services Action Plan (FSAP) in view to ensuring financial market integrity within the European Union.
The directive aimed to introduce and implement dissuasive measures and appropriate sanctions in order to fight illicit behaviour such as insider dealing and market manipulation.
At the time, establishing a new legal framework had become an absolute priority in the sense that, apart from a previous directive on insider dealing (89/592/CEE), common European standards to combat market manipulation had hitherto been virtually non-existent.
On 28 June 2010, the European Commission launched a consultation on the revision of the Market Abuse Directive.
On 20 October 2011 the EU Commission released the draft for revision of the Market Abuse Directive (MAD). As expected, based on the previous consultation, this text envisages an expansion of the scope of instruments and places of negotiation covered.
Not only will it cover classical instruments like bonds or shares, but also derivatives, derivatives on commodities and emission allowances.
The two major new elements are:
The division into two legal instruments, a regulation and a directive,
The incorporation of an article defining EU minimum sanctions in case of market abusive behaviour.
A third item of interest is the dedicated regime for SME (Small and Medium Size Enterprises) that emphasises proportionality of measures and obligations.
Finally, the draft regulation envisages considering as abusive practice not only the act itself, but also the intent of abusing markets, and in the categories of market abusive practices feature three references to High Frequency Trading.
Transposed in Luxembourg by the Law of 9 May 2006 on market abuse, amended by the Law of 26 July 2010, the directive no longer reflects the specificities of today’s financial markets. The current revision of the directive is thus a key element in the European Commission’s strategy to strengthen the regulatory framework for financial services, with a view to reducing, until 2012, administrative burdens faced by EU companies by 25%.
Markets in Financial Instruments Directive (MiFID) :It is directive that aims to integrate the European Union's financial markets and to increase the amount of cross border investment orders. The main objectives of the Directive are to increase competition and consumer protection in investment services. The MiFID plans to implement new measures, such as pre- and post-trade transparency requirements and capital requirements that firms must hold. The directive officially took effect on November 1st, 2007. It represents the next step into fully integrating the EU's financial markets.
Markets in Financial Instruments Directive II (MiFID ii) :MiFID ii is the second version of the MiFID directive. The second version is intended to tackle some of the issues missed by the original document. It also addresses concerns over high frequency trading. MiFID imposed new rules for equity trading across 30 European countries when it became law on Nov. 1, 2007, but traders argued that it should be expanded. Some suggested regulators should focus on the over-the-counter (OTC) markets.
Marked-to-Market :An arrangement whereby the profits or losses on a futures contract are settled up each day.
Market Order :When an investor instructs his/her broker to buy or sell an asset at the price prevailing in the market. In such a case, the investor, unlike the case of the limit order, does not put any restrictions on price.
Market Portfolio : A theoretical portfolio which comprises all risky assets available to investors.
market risk Risk from changes in market prices.
Market Timing :Ability to determine the time occurrence of peaks and troughs of stock markets.
market value The value at which an asset trades, or would trade in the market.
Marketable Securities Security investments that the firm can quickly convert into cash balances.
mark-to-market credit exposure Credit exposure based upon the current market values of a counterpary's obligations.
Maturity Date :The date on which the last payment on a bond is due.
Maturity Matching :The practice of financing long-term projects with long-term assets, while financing short-term projects with short-term financing.
Maturity Risk Premium (MRP) :Risk associated with interest rate uncertainty. The longer the time to maturity, the higher the premium.
Maximum Credit Exposure : A measure of potential credit exposures.
Mean Reversion :A tendency for a stochastic variable to drift toward a long-term mean level.
mean The average or expected value of a random variable.
Medium-term Note Debt with a typical maturity of 1 to 10 years at the time of issue that is offered by a company.
Merger Acquisition in which all assets and liabilities of a company are absorbed by the buyer to form a combined business entity.
MM :Short-hand notation for "millions."
Model Risk Risk from the misuse of financial models.
Modern Portfolio Theory :A body of theory relating to how investors optimize portfolio selections.
Monitoring Costs An agency cost that arises when bondholders take steps to ensure that protective covenants in the bond indenture are adhered to by the firm. Similarly, shareholders take steps to ensure that management is acting in the best interest of the owners, i.e., that managers are maximizing the wealth of shareholders.
Monte Carlo Simulation :A technique of simulation which uses many randomly or "pseudo-randomly" generated scenarios.
Monte Carlo Value At Risk A technique for estimating value at risk.
Moral Hazard :Refers to human nature's increased incentive to take risk when insured.
Morbidity The rate at which people become sick.
Mortality: The rate at which people die.
Mortgage Backed Security :A security interest in a pool of mortgages.
Mutually Exclusive Projects :Two projects that cannot both be undertaken.
NAV (Net Asset Value) :The market value of a fund share, synonymous with a bid price. In the case of no-load funds, the NAV, market price, and offering price are all the same figure, which the public pays to buy shares; load fund market or offer prices are quoted after adding the sales charge to the net asset value. NAV is calculated by most funds after the close of the exchanges each day by taking the closing market value of all securities owned plus all other assets such as cash, subtracting all liabilities, then dividing the result (total net assets) by the total number of shares outstanding. The number of shares outstanding can vary each day depending on the number of purchases and redemptions.
Net Change :The difference between today's price of last trade and the previous day's last price. For mutual funds, it is the difference between today's closing Net Asset Value (NAV) and the previous day's closing.
Net Present Value (NPV) :A project's net contribution to shareholders wealth, which is determined by the present value of a project's cash flows less initial investment.
Net Worth Book value of a company's common stock, surplus, and retained earnings.
Netting : The reduction of offsetting obligations to a single "net" obligation.
Net Working Capital (NWC) :Current assets minus current liabilities.
New arrangement to borrow (NAB) :A collective agreement among 26 nations and financial institutions and the International Monetary Fund whereby the nations and institutions lend a certain amount of capital to the IMF. The IMF utilizes the funds of the NAB in case its normal funds fall short of its borrowers' needs. It was established following the Mexican economic crisis.
NL : No Load
No Load (NL): See Load
Nominal Interest :Rate Interest as expressed in money terms. See real interest rate
Non-Parallel Shifts :A type of yield curve shift.
Normal Distribution :A type of probability distribution.
Note :Unsecured debt with a maturity of up to 10 years at the time of issue.
Notional Amount :The quantity of an underlier to which a derivative contract applies.
OAS Option-adjusted spread.
Objectives of CRD IV
- Enhancing the quality of capital:
- increasing the quality and quantity of bank capital;
- emphasis on core tier 1;
- allowing deductions directly from core tier 1; and
- Simplifying capital structure (lesser tiers and removing gearing).
- Strengthening capital requirements for counterparty credit risk resulting in higher Pillar I requirements.
- Introducing a leverage ratio as a backstop to risk-based capital.
- Introducing new capital buffers: capital conservation and countercyclical.
- Implementing liquidity regime: Net Stable Funding Ratio and Liquidity Coverage Ratio.
- Introduction of harmonized capital ratios reporting (Common Reporting or COREP).
- Better disclosure (reconciliation of the balance sheet to regulatory disclosure).
Off-Balance-Sheet Financing :Financing that is not shows as a liability in a company's balance sheet.
OID Debt :Original Issue Discount Debt
Open Order :An order to buy or sell a security that remains in effect until it is either canceled by the customer or executed.
Open The price at which a security opens the trading day.
Open-End Fund A mutual fund that stands ready to redeem stocks and issue new stock. Also see closed-end funds.
Operating Leverage Amount of fixed operating costs.
Operational Risk :Risk from mistakes or failures in operations.
Operation Twist :The term operation twist comes from the early 1960’s, when the Fed decided to drive down the interest rate of long-term maturities, flattening the yield curve. These is done by selling short- term securities and use that money for buying securities with long term maturities without expanding the Fed’s balance sheet.
Opportunity Cost of Capital :The expected return that is foregone by investing in a project rather than a financial security with comparable risk.
Option A type of derivative instrument.
Option :The choice to take a specific action in the future. The action considered in finance are the purchase (call option) or sale (put option) of an asset.
Option-Adjusted Spread :A component of a fixed income instrument's yield.
Out-Of-The-Money :A condition where an option has no intrinsic value.
Out-Of-The-Money Option :An option that would not be worth exercising if it matured immediately. See in-the-money option.
outright position An actual, as opposed to effective, long or short position in an asset.
Overbought :Typically a reference to a security or the general market after it exhibits a sharp rise in prices.
Overlay Strategy :A type of derivatives strategy.
Over-Rewarded :A security whose expected (average) return is above its required return. Also called under-priced.
Oversold :Opposite of overbought.
Over-Valued :An asset whose market value is greater than its intrinsic (formula or theoretical) value.
P/E Ratio :Price to earnings ratio. The price of a share of stock divided by earnings per share of stock for a twelve-month period.
Par :A notion relating to fixed income instruments.
Parallel Shift :A type of yield curve shift.
Passive Management :An investment strategy that does not involve the periodic shuffling of a portfolio's components. A buy-and-hold strategy.
Path Dependence :Dependence on the actual path taken by an underlier over a specified period.
Patient Capital Investors interested in long-term value maximization.
Payment Date :Date on which dividends are paid to registered owners.
Payment Netting :Netting of cash flows.
Payout Ratio :Percent of earnings that is paid out as dividends.
Pension Fund :Assets held in trust to cover the costs of pension benefits to participants.
Pension Plan :A plan established by a firm, labor union, government, or other organization to provide for the payment of benefits to the plan participants over a period of years after retirement.
PIBOR :Paris Interbank Offered Rate.
Platykurtosis A notion from statistics.
PO :A type of mortgage-backed security.
Poison Pill :An anti-takeover plan devised to automatically be activated when the company gets bought over in an unfriendly takeover. A Golden Parachute is one such device. Another might be a plan whereby all the firm's debt becomes due if the current management is removed.
Policy Surrender The early termination of an insurance product by the policyholder.
Portfolio :A combination of assets.
Portfolio Theory :A body of theory relating to how investors optimize portfolio selections.
Potential Credit Exposure :Possible future credit exposure to a counterparty.
Preemptive Right Common shareholder's right to subscribe to any new issue of stock so as to maintain, undiminished, their fraction of total number of shares outstanding.
Preferred Stock Stock that takes priority over common stock in regard to dividend and liquidation. The dividend is usually fixed at time of issue.
Premium :(1) This generally refers to extra money an investor is willing to pay to buy something. (2) For a bond, a premium is the amount for which the security sells above its par value.
Prepayment :The payment of a debt prior to its being due.
Pre-Settlement Risk :The risk of counterparty default prior to the settlement date of an obligation.
Primary Instrument :A financial instrument whose value is not derived from that of another instrument, but instead is determined by the market.
Primary Market is where firms sell new financial assets typically with the assistance of an investment banker.
Prime Rate :The interest rate that banks charge their "best" clients, , i.e., those with the lowest possibility of default.
Principal :(1) Shareholders; (2) Amount of debt that must be paid at maturity.
Principal Orders Refers to activity by a broker/dealer when buying or selling for its own account and risk.
Private Placement :A direct sale, by the issuing firm, of newly issued securities to a small group of investors.
Probability Distribution :A graph that shows the different possible outcomes of a single variable and the probability of getting the outcome.
Probability Distribution :A notion from probability.
Profit :Taking Selling stock after a period of rising prices to realize the profit. The term is used to explain a downturn in the market.
Promissory Note (PN) : Promise to pay.
Prospectus :Summary of the registration statement providing information to investors on an issue of securities.
Protective Covenants Clauses in a loan agreement aimed at reducing default risk to the bondholders.
Proxy :Statement Information provided to stockholders in conjunction with the solicitation of proxies. (See: Proxy Vote)
Proxy Vote :Vote cast by one person on behalf of another at the company's annual meeting.
Put Option :Option to sell an asset at a specified excise price on or before a specified exercise date. Also see call option.
Put-Call Parity A formula that relates the price of a put to the price of a corresponding call.
Quanto :A type of derivative instrument.
Quantitative Easing :An unconventional monetary policy used by central banks to stimulate the national economy when conventional monetary policy has become ineffective, or in other words interest rates have been lowered to near 0 % and have failed to produce the desired effect.
A central bank implements quantitative easing by purchasing financial assets from banks, to inject a pre-determined quantity of money into the economy. This is distinguished from the more usual policy of buying or selling government bonds to keep market interest rates at a specified target value.
The major risk of quantitative easing is that, although more money is floating around, there is still a fixed amount of goods for sale. This will eventually lead to higher prices or inflation. The New Global Economy has witnessed a lot of QEs by Federal Reserve of US , Bank of England, and the European Central Bank.
Quantitative Easing 2 : In Quantitative Easing, the Fed will expand its balance sheet through purchases of long-term Treasury bonds. QE2 is often described as “printing money”, although a better description is "forcing loans on people who are reluctant to spend them", and the obvious risk is that the Fed could go too far and thus ignite inflation.
Quantitative Easing 3 : The debate is still raging on whether the US Economy is pulling out of recession, or it would be necessary for Fed to do a new round of Quantitative easing – QE3.
Quote The highest bid to buy and the lowest offer to sell a security at a given time. (See: Ask, and Bid)
Raiders Investors who attempt to acquire other firms in an unfriendly takeover.
Rally An increase in the price of a stock or the level of the market.
Range Forward :A type of derivatives hedge.
Rate Of Return :A measure of investment performance.
Rating Agency Companies that rate the likelihood of a firm to default on its debt obligations.
Real Assets Tangible assets include: plant and equipment; intangible include: technical expertise, trademarks & patents.
Real Interest Rate Interest :Rate that is adjusted for inflation.
Record Date: Date set by the company when dividends are declared. Owners who are registered on this date receive dividends. Also see ex-dividend date.
Red Herring :A preliminary prospectus.
Refunding :Replacement of existing debt with a new issue of debt.
Regression Analysis :A statistical technique for fitting best line through data.
Regular Dividend :Dividend that is expected to be maintained at regular time intervals.
Rehypothecation :Reuse of collateral received as security for an obligation.
Reinvestment Risk : Risk from uncertainty in the interest rate at which future cash flows may be invested.
Reorganization Financial restructuring of a firm under bankruptcy. Both the firm's assets and its financial structure are modified.
Replacement Cost :A measure of credit exposure.
Repo (Repurchase Agreement) :Purchase of Treasury securities from a securities dealer with an agreement that the dealer will repurchase them at a specified price.
Repurchase Agreement :An agreement to sell and repurchase an asset.
Required Return :Minimum return required by investors to compensate them for assuming risk.
Residual Dividend :An approach to dividends that suggests a firm pay dividends if and only if acceptable investment opportunities for those funds are currently unavailable.
Retained Earnings :Earnings not paid out as dividends.
Return on Equity :See ROE
Rreverse Repo : An agreement to purchase and resell an asset.
Rho :A measure of exposure to interest rates.
Risk :Exposure to uncertainty.
Risk Factor :A random variable whose uncertainty represents a source of risk.
Risk Limit : A procedural tool for managing risk.
Risk Neutrality :A theoretical condition where investors require no compensation for taking risk.
Risk Premium :Additional return, over the risk-free rate, to compensate investors for accepting (holding) risk.
Risk-Free-Rate :A theoretical interest rate at which an investment may earn interest without incurring any risk.
RiskMetrics :A free service offered by JP Morgan.
ROE (Return on Equity)
Round Lot :The purchase or sale of a quantity of stocks that is in multiples of 100, such as 200, 1,000, etc.
Salvage value :Scrap value of a plant or equipment.
Scenario :A possible set of future events.
Seasoned New Issue :Additional issue of shares.
Seat :A figure of speech for a membership on an exchange.
Secondary Market Where trading (exchange of ownership) of financial assets takes place.
Securities Industry and Financial Markets Association (SIFMA) :SIFMA was formed through a merger of the Bond Market Association and Securities Industry Association in 2006. It is a leading securities industry trade group representing securities firms, banks, and asset management companies in the U.S. and Hong Kong. It brings together the shared interests of hundreds of securities firms, banks and asset managers. SIFMA's mission is to develop policies and practices which strengthen financial markets and which encourage capital availability, job creation and economic growth while building trust and confidence in the financial industry.
Securities Lending :The lending of securities in exchange for a fee.
Securitization The creation of security interests in an asset.
Senior Debt :Debt which, in the event of liquidation, must be repaid before subordinated debt receives any payment. Also see Junior Debt.
Sensitivity :Exposure to a risk factor.
Settlement Risk Risk from possible default by a counterparty at the time an obligation is to be settled.
Share :A unit of measuring ownership in a company (i.e., if a firm has 1,000 shares outstanding and if you own 100 of them, then you have a 10% claim on the firm's net income (NI) and assets).
Shark Repellents :Legal anti-takeover mechanisms devised by management to deter potential takeovers.
Shelf Registration A procedure that allows firms to file one registration statement covering several future issues of the same security.
Shogan Bond Dollar-denominated bond issued in Japan by a non-resident.
Short Interest :The total number of shares of a security that have been sold short by customers and securities firms. (see Short Selling)
Short Sale Sale of an asset that the investor does not own or any sale that is completed by the delivery of a security borrowed by the seller. Short selling is a legitimate trading strategy. Short sellers assume the risk that they will be able to buy the stock at a more favorable price than the price at which they sold short.
Short Term Gain (Loss) The gain (loss) realized from the sale of securities or other capital assets held six months or less.
Simulation Analysis based on determining the consequences of possible scenarios.
Single Premium Deferred Annuity :A type of insurance product.
Single-Scenario Risk Measure :A risk measure which is based on projecting the consequences of one or a handful of possible scenarios.
Sinking Fund :A requirement specified in a bond indenture that obligates the firm to annually retire a specified portion of the debt.
Skewness :A notion from statistics.
Small Cap Stocks Stocks of companies that have small capitalization, i.e., those that are small in terms of market value.
Solvency II :The Solvency II Directive is an EU Directive that codifies and harmonizes the EU insurance regulation. Primarily this concerns the amount of capital that EU insurance companies must hold to reduce the risk of insolvency. AIM: EU insurance legislation aims to unify a single EU insurance market and enhance consumer protection. The third-generation Insurance Directives established an "EU passport" (single license) for insurers to operate in all member states if they fulfilled EU conditions. Many member states concluded the EU minima were not enough, and took up their own reforms, which still lead to differing regulations, hampering the goal of a single market.
Specific Risk :Risk which is unique to a particular asset or liability.
Spin-Off :A newly created company that used to be part of a parent company. Parent company shareholders receive a pro rata ownership in the new company.
Spot :For immediate delivery.
Spread Risk :Risk from changes in spreads.
Standard Deviation :A notion from probability.
Statistical Risk Measure :A risk measure which is based upon a probability distribution relating to a risk.
Stochastic Process A random process which evolves over time.
Stock Split An accounting transaction that increases the number of shares held by existing shareholders in proportion to the number of shares currently held.
Stocks Equity claims on the net income (NI) and assets of a corporation.
Stop-Loss Limit :A market risk limit which curtails losses as they occur.
Straddle :A type of derivatives positions.
Stress Test :A type of single-scenario risk measure.
Strike Price Exercise price of an option.
Strike Price One of the contractual specifications of an options contract.
Structured Note :A type of security.
Subordinated Debt (Junior debt) :Debt whose holders, in the event of liquidation, get paid only after senior debt is paid off in full. (Also see senior debt)
Sunk Cost Cost that has been incurred and cannot be recoverable.
Sukuk Islamic capital markets are made up of two components, stock markets and bond markets. Sukuk are securities structured to comply with Shariah principles, which prohibit the charging the interest. Sukuk includes short term and long term papers. These may be issued by the public or private sectors. Sukuk have become the Islamic alternative to conventional bills, bond.
Sushi Bond Eurodollar bonds issued by Japanese corporation.
Swap A type of derivative instrument.
Swaption An option on a swap.
Syndicate A group of investment bankers who together underwrite and market a new issue of securities or a large block of an outstanding issue.
Systematic Risk Risk which is common to an entire class of assets or liabilities.
Systemic Risk Risk which threatens an entire financial system.
Tax Risk :Risk from uncertainty in taxes.
T-Bill (Treasury Bill) :Debt issued by the RBI with maturity less than a year.
Term Structure of Interest Rates :See yield curve.
Theta A measure of how a portfolio's value changes as a consequence of the passage of time.
Time Value :A component of the market value of an option.
Today's High :The intra-day high trading price.
Today's Low The intra-day low trading price.
Tombstone Advertisement listing the issuing firm, type of security, its issuing price, number of securities to be issued, and names of underwriters of a new issue.
Total Return Swap :A type of credit derivative.
Transaction Costs :The costs of transacting trades.
Triple Witching Hour Slang used for the last hour of trading before the simultaneous expiration of stock options, index options, and index futures. This occurs four times a year on the third Friday of each quarter's end.
TROIKA (IMF, European Union, ECB-European Central Bank) If you follow financial and business news in Greece, the troika is mentioned in practically every article. The troika is a slang term for the three organizations which have the most power over Greece's financial future - or at least that future as it is defined within the European Union. The three groups are the European Commission (EC), the International Monetary Fund (IMF), and the European Central Bank (ECB). Although the word may conjure up the image of ancient Troy, it is not drawn directly from Greek. The modern word is from Russian, where it means a triad or three of a kind.
Tunnel A type of derivatives hedge.
Uncorrelated Exposure :Exposure to a risk factor, assuming that all other risk factors will remain constant.
Underlier :A primary instrument or variable upon which the value of a derivative instrument depends.
Under-Perform :A security whose expected (average) return is below its required return. Also called over-priced, over-valued, or under-rewarded.
Underpricing :Issue of securities below their market value.
Under-Rewarded : A security whose expected (average) return is below its required return. Also called over-priced.
Under-Valued :An asset that is selling at a price below its intrinsic (theoretical or formula) value.
Underwriter (Investment Banker) Firm that buys an issue from a company and resells it to investors; a primary market activity.
Underwriter Discount Underwriters buy the to be issued securities at a reduced (discounted) price. This discount is usually measured as a percent of the price of the issue.
Undiversifiable Risk See Market Risk.
Unfriendly Takeover See hostile takeover.
Value at Risk :A measure of market risk.
Variance :A measure of a variable's volatility relative to its average.
Vega :A measure of exposure to changes in volatility.
Venture Capital :Capital supplied to particularly high-risk projects, such as start-ups or to companies denied conventional financing.
Vertical Integration :Merger between a supplier and its customers. An example would be when an oil-refining firm acquires a firm that owns oil fields.
Vickers Report :Britain has jumped feet first into bank regulation with the release of a report by its Independent Commission on Banking (ICB), dubbed the "Vickers Report" after the last name of the commission's chair, Sir John Vickers. The report makes several key suggestions. First, banks build up more capital in order to absorb losses. Second, a bank's investment banking and retail banking operations be kept separate. Third, banks with both retail and investment banking operations put up a "ring fence" around retail operations in order to isolate domestic customers from a potential collapse
Visible Hand :The phrase comes from Adam Smith's "Invisible Hand," whereby markets alone do the job of resource allocation. With "visible hand" the government intervenes in the market, which suggests a belief in the market's failure in that particular area.
Volatility :The range of possible outcomes. A measure of risk of an individual asset when held in isolation, i.e., not as part of a portfolio.
Volatility :The variability of a random quantity.
Volume :The number of shares or contracts traded in a security or an entire market during a given period, typically a day.
Vulture Capital See Venture Capital
Warrant :A financial asset, issued by the firm, which gives its holder the right to purchase a fixed number of shares of common stock at a predetermined price.
Warrant :A long-term option.
White Knight: A firm that comes to the rescue of a corporation that is being taken over.
Worker's Compensation A type of insurance.
Working Capital Current assets minus current liabilities.
Worst-Case Credit Exposure A measure of potential credit exposure.
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Yield :A measure of a bond's potential return.
Yield Curve A description of yields for multiple horizons.
Yelling Markets Also referred to as "public outcry", refers to markets where transactions involve the yelling of prices and quantities, just as in the movies.
Yield Curve The return on debt securities with different maturities, for a level of default risk.
Yield to Maturity (YTM) :The market interest rate on a bond. It is the yield an investor would receive in the bond is held to maturity.
Yield to Maturity (YTM) The rate of return the investor will earn if the bond is held to maturity.
YTM See Yield to Maturity
Zero Coupon Bond :A bond that has no coupon payments. It pays only a single cash flow at maturity.