A debt security issued by face amount. The holder makes payments periodically
to the issues, and the issuer promises to pay the purchaser the face value
at maturity or the surrendered value if the security is presented by the maturity
specified in the certificate.
A statistical procedure that seeks to explain a certain phenomenon, such as the return on a common stock, in terms of the behavior of a set of predictive factors.
The return attributable to a particular
common factor. We decompose asset returns into a
common factor component, based on the asset's exposures to common factors times the
factor returns, and a specific return.
A deal is said to fail if on the settlement date either the seller does not deliversecurities in proper form or the buyer does not to deliver funds in proper form.
The rate of return that state governments allow a public utility to earn on its investments and expenditures. Utilities then use these profits to pay investors and provide service upgrades to their customers.
In the context of general equities, may not be able to produce as indicated in one's advertised market, due to less help (than anticipated) from other parties or due to changing market conditions.
A type of mortgage pipeline risk that is generally created when the terms of the loan to be originated are set at the same time the sale terms are established. The risk is that either of the two parties, borrower or investor, fails to close and the loan "falls out" of the pipeline.
U.S. accounting standard that requires US firms to translate their foreign
affiliates' accounts by the temporal
method; that is reporting gains and losses from currency
fluctuations in current income. It was in effect between 1975 and 1981 and
became the most controversial accounting standard in the US It was replaced
by FASB No. 52 in 1981.
The US accounting standard that replaced FASB
No. 8. US companies are required to translate foreign accounts in terms
of the current rate and report
the changes from currency fluctuations in a cumulative translation adjustment
account in the equity section of the balance
sheet.
Excessively rapid trading in a specific security that causes a delay in the electronic updating of its last sale and market conditions, particularly in options.
Agencies of the federal government set up to supply credit to various classes of institutions and individuals, e.g., S&Ls, small business firms, students, farmers, and exporters.
An institution created by the government with the purpose of uniting the financing activities of the federal land banks, the federal intermediate credit banks, and the banks for cooperatives. See: Federal Farm Credit System.
A system chartered in 1971 through the farm credit act providing farmers with credit services through a federal land bank, a federal intermediate credit bank, and a bank for cooperatives. See: Federal Farm Credit Bank.
The institutions that regulate and lend to savings and loan associations. The Federal Home Loan Banks play a role analogous to that played by the Federal Reserve Banks vis-à-vis member commercial banks.
Federally sponsored agency chartered in 1934 whose stock is currently owned by savings institutions across the United States. The agency buys residential mortgages that meet certain requirements, sells these mortgages in packages, and insures the lenders against loss.
A publicly owned, government-sponsored corporation chartered in 1938 to purchase mortgages from lenders and resell them to investors. Known by the nickname Fannie Mae, it packages mortgages backed by the Federal Housing Administration, but also sells some nongovernment-backed mortgages.
One of the 12 member banks constituting the Federal Reserve System that is responsible for overseeing the commercial and savings banks of its region to ensure their compliance with regulation.
Issues by the US government to the public
through the Federal Reserve Banks and their member banks. They represent money
owed by the government to the public. Currently, the item "Federal Reserve
notes amounts outstanding" consists of new series issues. The Federal
Reserve note is the only class of currency currently issued.
The monetary authority of the US, established in 1913, and governed by the
Federal Reserve Board located in Washington, D.C. The system includes 12 Federal
Reserve Banks and is authorized to regulate monetary
policy in the US as well as to supervise Federal Reserve member banks,
bank holding companies, international operations of US banks, and US operations
of foreign banks.
Arms of the federal government exempt from SEC
registration whose securities are backed
by the full faith and credit of the US government (with the exception of the
Tennessee Valley Authority).
An equation where the output becomes the input in the next iteration. This is
much like a public address system where the microphone is placed next to the speakers
generating feedback as the signal is looped through the PA system.
The percentage of loans in a pool of mortgagesoutstanding at the origination anniversary, based on annual statistical historic survival rates for FHA-insured mortgages.
A margin account's credit balance. Fictitious credit exists after the proceeds from a short sale are accounted for with respect to the margin requirement. The proceeds from the short sale are reflected as a credit, but must stay in the account to serve as security for the loan of securities made in a short sale, and are therefore inaccessible to the client for withdrawal.
Calculating the yield at which a future money market (one available some period hence) is purchased when that future security is created by buying an existing instrument and financing the initial portion of its life with a term repo.
A tradingorder
that is canceled unless executed
within a designated time period. A market
or limited price order that
is to be executed in its entirety as soon
as it is represented in the trading crowd, and, if not so executed, is to
be treated as canceled. For purposes of this
definition, a stop is considered an execution.
Equivalent to AON and IOC
simultaneously.
A discipline concerned with determining value and making decisions. The finance function allocates resources, including the acquiring, investing, and managing of resources.
Also called securities analysts
and investment analysts. Professionals
who analyze financial statements, interview corporate executives, and attend
trade shows, in order to write reports recommending either purchasing, selling,
or holding various stocks.
Legal and administrative costs of liquidation or reorganization. Also includes implied costs associated with impaired ability to do business (indirect costs).
An enterprise such as a bank whose primary business and function is to collect money from the public and invest it in financial assets such as stocks and bonds.
A method of establishing the amount of life insurance required by an individual by estimating the financial needs of dependents in the event of the individual's death.
Evaluating the investing and financing options available to a firm. Planning includes attempting to make optimal decisions, projecting the consequences of these decisions for the firm in the form of a financial plan, and then comparing future performance against that plan.
Criteria describing a corporation's choices regarding its debt/equity
mix, currencies of denomination, maturity
structure, method of financing investment
projects, and hedging decisions with a goal
of maximizing the value of the firm to some set of stockholders.
A risk structure that spreadsinvestor's risks across low-, medium-, and high-risk vehicles. The bulk of the assets are in safe, low-risk investments that provide a predictable return (base of the pyramid). At the top of the pyramid are a few high-risk ventures that have a modest chance of success.
The result of dividing one financial statement item by another. Ratios help analysts interpret financial statements by focusing on specific relationships.
The risk that the cash flow of an issuer will not be adequate to
meet its financial obligations. Also referred to as the additional risk that a firm's stockholder bears when the firm uses debt and equity.
Share price indexes for U.K. companies The denominator in the index
formula is the market capitalization at the base date, adjusted for all capital
changes affecting the particular index since the base date. See: Footsie
(FTSE) (pronounced footsie).
The financial futures and options division of the New York Cotton Exchange (NYCE), with a trading floor in Dublin, FINEX Europe, creating a 24-hour market in most FINEX contracts.
An underwriting in which an investment banking firm commits to buy and sell an entire issue of stock and assumes all financial responsibility for any unsold shares.
In the context of general equities, prices at which a security can actually be bought or sold in decent sizes, as compared to an inside market with very little depth. See: Actual market.
In the context of general equities, (1) order to buy or sell for the proprietary account of the broker-dealer firm; (2) buy or sell order not conditional upon the customer's confirmation.
The first day, varying by contracts and exchanges, on which notices of intent to deliver actual financial instruments or physical commodities against futures are authorized.
Accounting period covering 12 consecutive months over which a company determines earnings and profits. The fiscal year serves as a period of reference for the company and does not necessarily correspond to the calendar year.
A theory that nominal interest rates in two or more countries should be equal to the required realrate of return to investors plus compensation for the expected amount of inflation in each country.
The notion that a firm's choice of investments is separate from its owner's
attitudes toward investments. Also referred to as portfolio
separation theorem.
Used in the context of general equities. Chronological listing of trades in a security showing the price, size, exchange, and time (to the second) of the trades; obtained by hitting "#M" on Quotron.
Long-lived property owned by a firm that is used by a firm in the production of its income. Tangible fixed assets include real estate, plant, and equipment. Intangible fixed assets include patents, trademarks, and customer recognition.
A measure of a firm's ability to meet its fixed-charge obligations: the ratio of (net earnings before taxes plus interest charges paid plus long-term lease payments) to (interest charges paid plus long-term lease payments).
A nonnegotiable debtsecurity that can be redeemed at some fixed price or according to some schedule of fixed values, e.g., bank deposits and government savings bonds.
A pattern reflecting price fluctuations within a narrow range, generating a rectangular area on a graph both prior to and after sharp rises or declines.
Value of a security displayed, or flashed across the tape, when the tape display cannot keep up with volume on an exchange and lags the current price is lagged more than approximately five minutes.
Convertibles: Earning interest on the date of payment only.
General: Having neither a short nor a long position in a stock. Clean. Market: Characterized by horizontal price movement, usually the result of low activity.
Equities: To execute without commission or markup.
A budget that shows how costs vary with different rates of output or at different levels of sales volume and projects revenue based on these different output levels.
Currency: Exchange rate policy that does not limit the range of the market rate.
Equities: Number of shares of a corporation that are outstanding and available for trading by the public, excluding insiders or restricted stock on a when-issued basis. A stock's volatility is inversely correlated to its float.
A country's decision to allow its currency value to change freely. The currency is not constrained by central bank intervention and does not have to maintain its relationship with another currency in a narrow band. The currency value is determined by trading in the foreign exchange market.
The area of a stock exchange where active trading occurs. Also the price at which a stop order is activated (when the price drops low enough to activate such an order).
Summary of a stock or commodities exchangeorder ticket by the registered representative on receipt of a buy or sell order from a client; gives the floor broker the information needed to execute a securities transaction.
A stock exchange member who generally trades only for his own account or
for an account controlled by him, or who has such a trade made for him. Also referred to as a "local."
The costs associated with creating capital through the issue of new stocks or bonds, including the compensation earned by the investment banker plus legal, accounting and printing expenses.
An account for an investment credit to show all income statement benefits of the credit in the year of acquisition, rather than spreading them over the life of the asset.
The limit created by the commodityexchange that halts trading on a future if the price of the future changes, in either direction, more than a previously set amount.
Used in the context of general equities. Investment banks published list of buy and sell recommendations from its research department; signified by a flashing "F" on Quotron.
Used in the context of general equities. Conjunctions used in an order, market summary, or trade recap that signify a bid or an offer, respectively. See: On.
Used in the context of general equities. Implies that the quantity mentioned is not his total but instead is only approximate, and to open him up more will obligate one to participate.
The risk that there will be prolonged interruption of operations for a project finance enterprise due to fire, flood, storm, or some other factor beyond the control of the project's sponsors.
Occurs when a convertible security is called in by the issuer, usually when the underlyingstock is selling well above the conversion price. The issuer thus assures the bonds will be retired without requiring any cash payment. Upon conversion into common, the carrying value of the bonds becomes part of a corporation's equity, thus strengthening the balance sheet and enhancing future debt capability.
Process by which the holder of a mortgage seizes the property of a homeowner who has not made interest and/or principal payments on time as stipulated in the mortgage contract.
A foreign affiliate that is legally a part of the parent firm. According to the U.S. tax code, foreign branch income is taxed as it is earned in the foreign country.
A corporation conducting business in another country from the one it is chartered in and that abides by the laws of another country. See: Alien corporation.
Standardized and easily transferable obligation between two parties to exchange currencies at a specified rate during a specified delivery month; standardized contract on specified underlying currencies, in multiples of standard amounts. Purchased and traded on a regulated exchange on which margins are posted.
An option that conveys the right (but not the obligation) to buy or sell a specified amount of foreign currency at a specified price within a specified time period.
The process of restating foreign currency accounts of subsidiaries into the reporting currency of the parent company in order to prepare consolidated financial statements.
Various forms of controls imposed by a government on the purchase/sale of foreign currencies by residents or on the purchase/sale of local currency by nonresidents.
A firm or individual that buys foreign exchange from one party and then sells it to another party. The dealer makes the difference between the buying and selling prices, or the spread.
Central governments of foreign countries, including all departments and agencies of national governments; central banks, exchange authorities, and all fiscal agents of foreign national governments that undertake activities similar to those of a treasury, central bank, or stabilization fund; diplomatic and consular establishments of foreign national governments; and any international or regional organization, including subordinate and affiliate agencies, created by treaty or convention between sovereign states.
Foreign official institutions; the corporations and agencies of foreign central governments, including development banks and institutions, and other agencies that are majority owned by the central government or its departments; and state, provincial and local governments of foreign countries and their departments and agencies.
Notes sold between October 1984 and February 1986 to foreign institutions,
foreign branches of US institutions, foreign central banks or monetary authorities,
and to international organizations in which the United States held membership.
Sold as companion issues, they could be converted to domestic (normal) Treasury
notes with the same maturity and interest
rates. Interest was paid annually.
All institutions and individuals living outside the United States, including
US citizens living abroad, and branches, subsidiaries, and other affiliates
abroad of US banks and business concerns; also central governments, central
banks, and other official institutions of countries other than the United
States, and international and regional organizations, wherever located. Also
refers to persons in the United States to the extent that they are known by
reporting institutions to be acting for foreigners.
A form of factoring that involves selling large, medium to long-term receivables to buyers (forfaiters) who are willing and able to bear the costs and risks of credit and collections.
The form required by the SEC for a change in the holdings of an individual owning 10% or more of the outstandingstock or in the holdings of a company officer.
A form required by the SEC and the stock exchange from all holders of 10% or more of a company's stock and all directors and officers, which details securities owned.
A method of selling a new issue of common
stock in which the SEC declares the registration
statement effective on the basis of a price formula rather than on a specific
range.
PSA Uniform Practices requirement that all pool information in a to
be announced (TBA) transaction be communicated by the seller to the buyer
before 3 p.m. EST on the business day 48 hours prior to the agreed-upon trade
date.
A method of calculating taxes on a lump-sum distribution from a qualified retirement plan that enables the tax payer to pay less than the current tax rate.
A contract that specifies the price and quantity of an asset to be delivered on in the future. Forward contracts are not standardized and are not traded on organized exchanges
The purchase in the cash market of the difference between what you are obligated to deliver in a forward contract and the amount of the asset you own. For example, if you agreed to sell 100,000 bushels of corn in September in a forward contract, but you only have 60,000, you need to purchase 40,000 to cover your obligation.
An agreement to buy or sell a country's currency at a specific price, usually 30, 60, or 90 days in the future. This guarantees an exchange rate on a given date.
A method for hedging price risk that involves an agreement between a lender and an investor to sell particular kinds of loans at a specified price and future time.
An object in which the parts are in some way related to the whole. That is,
the individual components are "self-similar." An example is the branching
network in a tree. While each branch, and each successive smaller branching is different,
they are qualitatively similar to the structure of the whole tree.
A number that quantitatively describes how an object fills its space. In Euclidean, or Plane geometry, objects are solid
and continuous. That is, they have no holes or gaps. As such, they have integer
dimensions. Fractals are rough and often
discontinuous, like a wiffle ball, and so have fractional, or fractal dimensions.
A probability
density function that is statistically self-similar. That is, in different increments of
time, the statistical characteristics remain the same.
The fractal market hypothesis states that (1) a market consists of many investors with different investment horizons, and (2)
the information set that is important to each investment horizon is different. As long as
the market maintains this fractal structure, with
no characteristic time scale, the market remains
stable. When the market's investment horizon
becomes uniform, the market becomes unstable because everyone is trading based upon
the same information set. Theory due to Ed Peters.
A type of order that gives the broker discretion to alter the price, up or down, within a specific fractional range in order to guarantee an execution.
Contract by which a domestic company (franchisor) licenses its trade name and/or business system and practices for a fee to an independent company (franchisee) in a foreign market.
Provision of a specialized sales or service strategy, support assistance, and possibly an initial investment in the franchise in exchange for periodic fees.
A Congressionally chartered corporation that purchases residential mortgages
in the secondary market from S&Ls,
banks, and mortgage bankers and securities
these mortgages for sale in the capital
markets.
Implies that distribution services like transport and handling performed on goods up to the customs frontier (of the economy from which the goods are classed as merchandise.) are included in the price.
Cash not required for operations or for reinvestment. Often defined as earnings before interest (often obtained from the operating income line on the income statement) less capital expenditures less the change in working capital. In terms of a formula:
Free cash flows =
Sales (Revenues from operations)
- COGS (Cost of goods sold-labor, material, book depreciation) - SG&A (Selling, general administrative costs)
EBIT (Earnings before interest and taxes or Operating Earnings) - Taxes (Cash taxes)
EBIAT (Earnings before interest after taxes)
+ DEP (Book depreciation)
- CAPX (Capital expenditures) - ChgWC (Change in working capital)
C (Free cash flows)
There is an issue as to whether you want to define the FCFs to the firm as a whole (the cash
flow to all of its security holders), or the FCFs only to the firm's equity
holders. For firm valuation, you want the former; for stock valuation you want the
latter.
To value the firm, calculate the stream of FCFs to the firm and discount this stream
by the firm's WACC (Weighted average cost of capital). This will give you the value
of a levered firm, including the tax benefits of debt financing. Alternatively, you
can discount the firm's FCFs by its unlevered cost of capital and add separately the
present value of the tax benefits.
To value the firm's equity, you can either take the above number and subtract the
market value of all outstanding debt (liabilities) or you can
calculate the FCFs to the firm's equity holders and discount this stream by the
firm's levered equity cost of capital.
Notice that changes in working capital have the same effect on free cash flows as do changes
in physical capital, i.e., capital expenditures. For example, suppose you had
to spend $XX to increase the capacity of your plant. This expenditure would be
a reduction in free cash flow in the year it was made. Likewise, if you had to
increase the level of your cash balance, inventory or receivables by $XX to
accommodate greater sales, then this too would result in a like reduction in
free cash flows in the year the level of working capital was increased.
[Definition and discussion courtesy of Professor Michael Bradley.]
Securities industry procedure whereby delivery of securities sold is made to the buying customer's bank without requiring immediate payment; thus a credit agreement of sorts. Antithesis of delivery vs. payment.
A follower who avoids the cost and expense of finding the best course of action simply by mimicking the behavior of a leader who made these investments.
Used in the context of general equities. Not subject to any internal (restricted list) or external restrictions on trading; hence, the trader is free to solicit interest.
Costs, both implied and direct, associated with a transaction. Such costs include time, effort, money, and associated tax effects of gathering information and making a transaction.
The "stickiness" involved in making transactions; the total process including time, effort, money, and tax effects of gathering information and making a transaction such as buying a stock or borrowing money.
Entering into options or futures contracts with advance knowledge of a block transaction that will influence the price of the underlying security to capitalize on the trade. This practice is expressly forbidden by the SEC.
Used in the context of general equities. Said of a stock that has reached a price at which analysts think the underlying company's fundamental earnings power has been fully recognized by the market.
As defined by FASB No. 52, an affiliate's functional currency is the currency of the primary economic environment in which the affiliate generates and expends cash.
Set of funds with different investment objectives offered by one management company. In many cases, investors may move their assets from one fund to another within the family at little or no cost.
The person whose responsibility it is to oversee the allocation of the pool of money invested in a particular mutual fund. The fund manager is charged with investing the money to attain the returns and level of risk of the mutual fundinvestors.
Security analysis that seeks to detect
misvalued securities through an analysis
of the firm's business prospects. Research often focuses on earnings,
dividend prospects, expectations for future
interest rates, and risk
evaluation of the firm. Antithesis of
technical analysis. In macroeconomic analysis, information such as interest
rates, GNP, inflation, unemployment,
and inventories is used to predict the direction of the economy, and therefore
the stock market. In microeconomic
analysis, information such as balance sheet, income statement, products, management,
and other market items is used to forecast
a company's imminent success or failure, and hence the future price action
of the stock.
The product of a statistical model to predict the fundamental risk of a security using not only price data but also other market-related and financial data.
In the model for calculating fundamental beta, ratios in risk indexes other than market variability, which rely on financial data other than price data.
Information relating to the economic state of a company or economy. In market analysis, fundamental information
is related to the earnings prospects of the firm
only.
Used by real estate and other investment trusts to define the cash flow from trust operations; earnings with depreciation and amortization added back. A similar term increasingly used is funds available for distribution (FAD), which is FFO less capital investments in trust property and the amortization of mortgages.
A firm or person engaged in soliciting or accepting and handling orders for the purchase or sale of futures contracts, subject to the rules of a futures exchange and, who, in connection with such solicitation or acceptance of orders, accepts any money or securities to provide margin for any resulting trades or contracts. The FCM must be licensed by the CFTC. Related: Commission house, omnibus account.
A legally binding agreement to buy or sell a commodity or financial instrument in a designated future month at a price agreed upon today by the buyer and seller. Futures contracts are standardized according to the quality, quantity, and delivery time and location for each commodity. A futures contract differs from an option because an option is the right to buy or sell, while a futures contract is the promise to actually make a transaction. 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 investment.
A system which mathematically models complex relationships which are
usually handled in a vague manner by language. Under the title of "Fuzzy
Logic" falls formal fuzzy logic (a multi-valued form of logic), and fuzzy sets. Fuzzy
sets measure the similarity between an object and a group of objects. A member of a
fuzzy set can belong to both the set, and its compliment. Fuzzy sets can more closely
approximate human reasoning than traditional "crisp" sets. See: Crisp sets.