GO TO BOTTOM OF GENERAL FINANCE TERMS

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A
Accelerated depreciation Any depreciation method that produces larger deductions for depreciation in the early years of a project's life; e.g., double-declining-balance depreciation, sum-of-the-years'-digits depreciation. *

Accounts payable (payables, trade debt) Money owed to suppliers.

Accounts receivable (receivables, trade credit) Money owed by customers.

Accrued-benefit cost method Method for estimating thenormal costs of a pension plan. Its principle is that that company should contribute each year the present value of any benefits that have accrued (cf. Level cost method).

Accrued interest Interest that has been earned but not yet paid.

Acid-test ratio Quick ratio.

Adjusted present value (APV) Net present value of an asset if financed solely by equity, plus the present value of any financing side affects.

Adverse selection A situation in which a pricing policy causes only the least desirable customers to do business, e.g., a rise in insurance prices that leads only the least-good risks to buy insurance.

Agency theory Theory concerning the relationship between principle, e.g. a shareholder, and an agent of the principal, e.g., the company's manager.

Aging schedule Record of the length of time that accounts receivable have been outstanding.

AIBD Association of International Bond Dealers.

All-or-none underwriting The security issue is canceled if the underwriter is unable to resell the entire issue.

American option An option that can be exercised any time before the final exercise date (cf. European option).

Amortization (1) Repayment of a loan by installments; (2) allowance for depreciation.

Annuity Investment that produces a level stream of cash flows for a limited number of periods.

Anticipation request Formal request for funds for a capital investment project.

APV Adjusted present value.

Arbitrage Purchase of one security and simultaneous sale of another to give a risk-free profit. "Arbitrage" or "risk arbitrage" often used loosely to describe the taking of positions in related securities, e.g., at the time of the takeover bid.

ATS accounts Automatic transfer from savings to demand deposit accounts.

Auction-rate preferred A variant of floating-rate preferred stock where the dividend is reset every 49 days by auction.

Authorized share capital Maximum number of shares that a company can issue, as specified in the firm's articles of incorporation.

Availability float Checks deposited by a company that have not yet been cleared.

Aval Bank guarantee for debt purchased by forfaiter.

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B

BA Banker's acceptance.

Balloon payment Large final payment (e.g., when loan is repaid in installments).

Banker's acceptance (BA) Written demand that has been accepted by a bank to pay a given sum at a future date (cf. Trade acceptance).

Basis point (bp) .01 percent (100 basis points = 1 percent or say 100 bp = 0.01 and therefore 1 bp = 0.0001 = 0.01%).

Bear Market Widespread decline in security prices (cf. Bull market).

Bearer security Security for which the primary evidence of ownership is possession of the certificate (cf. regis-tered security).

Benefit-cost ratio See Profitability index.

Best-efforts underwriting Underwriters do not commit themselves to selling a security issue but promise only to use best efforts.

Beta Measure of market risk.

Bill of exchange General term for a document demanding payment.

Bill of lading Document establishing ownership of goods in transit.

Blue-chip company Large and creditworthy company.

Blue-sky laws State laws covering the issue and trading of securities.

Boilerplate Standard terms and conditions, e.g., in a debt contract.

Bond Long-term debt.

Bonus (borrowers' options for notes and underwriting facilities) A borrowing facility that allows the firm to issue either eurnotes or U.S. domestic debt. Also called global note facility.

Bracket A term signifying the extent of an underwriter's commitment in a new issue, e.g., major bracket, minor bracket.

Break-even analysis Analysis of the level of sales at which a project would break even.

Bridging loan Short-term loan to provide temporary financing until more permanent financing is arranged.

Bull FRN See Reverse FRN.

Bull-bear bonds Bonds whose principle repayment is linked to the price of another security. The bonds are issued in two tranches: In the first the repayment increases with the price of the other security; in the second the repayment decreases with the price of the other security.

Bulldog bond Foreign bond issue made in London.

Bullet payment Single final payment, e.g., of a loan (in contrast to payment in installments).

Bull market Widespread rise in security prices (cf. Bear market).

Bunny bonds See Multiplier bonds.

Buy-back See Repurchase agreement.

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C

Call option Option to buy an asset at a specified exercise price on or before a specified exercise date (cf. Bear market)

Call premium (1) Difference between the price at which a company can call its bonds and their face value; (2) price of an option.

Cap An upper limit on the interest rate on a floating note.

Capital budget List of planned investment projects, usually prepared annually.

Capital lease See Financial lease.

Capital Market Financial market (particularly the market for long-term securities).

Capital rationing Shortage of funds that forces a company to choose between projects.

Capital structure Mix of different securities issued by a firm.

Capitalization Long-term debt, preferred stock plus net worth.

Cars (Certificates of Automobile Receivables) Raised through securities backed by automobile receivables.

Cards (Certificates for Amortizing Revolving Debt) Pass-through securities backed buy credit card receivables.

Career-average plan Pension plan offering a pension that depends on the employee's average compensation during his or her years of membership (a final average plan).

Cash and carry Purchase of a security and the multaneous sale of a future, with balance being financed with loan or repo.

Cash budget Forecast of sources and uses cash.

Cash-deficiency arrangement Arrangement whereby a project's shareholders agree to provide the operating company with sufficient net working capital.

Cat A U.S. Treasury bond reissued by Solomon Brothers as a series of zero coupon bonds.

CD See Certificate of deposit.

Cedel A centralized clearing system for eurobonds. Also Euroclear.

Certificate of Deposit (CD) A certificate providing evidence of a bank time deposit.

Closed-end mortgage Mortgage against which no additional debt may be issued. (cf. open-end mortgage).

Collar An upper and lower limit on the interest rate on a floating-rate note.

Collateral assets that are given security for a loan.

Collateral trust bonds Bonds secured by common stocks that are owned by the borrower.

Collection float Checks written by customers that have not been received, deposited, and added to the company's available balance. (cf. Payment float)

Commercial draft (bill of exchange) Demand for payment.

Commercial paper Unsecured notes issued by companies and maturing within 9 months.

Compensating balance Non-interest-bearing demand deposits to compensate banks for bank loans or services.

Competitive bidding Means by which public utilities holding companies are required to choose their underwriter (cf. negotiated underwriting).

Completion bonding Insurance that a construction contract will be successfully completed.

Compound interest Reinvestment of each interest payment on money invested, to earn more interest (cf. Simple interest).

Concentration banking A system whereby customers make payments to a regional collection center. The collection center pays the funds into a regional bank account and surplus money is transferred to the company's principle bank.

Conditional sales Sales in which ownership does not pass to the buyer until payment is completed.

Conglomerate merger Merger between two companies in unrelated businesses (cf. Horizontal merger, vertical merger).

Consol Name of a perpetual bond issued by the British government. Sometimes used as a general term for perpetuity.

Contingent project Project that can not be undertaken unless anther project is also undertaken.

Continuous compounding Interest compounded continuously rather than at fixed intervals.

Controller Officer responsible for budgeting, accounting, and auditing in a firm (cf. Treasurer).

Conversion price Par value of a convertible security divided by the number of shares into which it may be exchanged.

Conversion ratio Number of shares for which a convertible security may be exchanged.

Convertible security Bond or preferred stock that maybe converted into another security at the beholder's option.

Correlation coefficient Measure of the closeness of the relationship between two variables.

Cost company arrangement Arrangement whereby the shareholders of a project receive output free of charge but agree to pay all operating and finance charges of the project.

Cost of capital See Opportunity cost of capital.

Coupon (1) Specifically, a coupon attached to the certificate of a bearer bond that must be surrendered to collect the interest payment. (2) More generally, interest payment on debt.

Covariance Measure of the comovement between two variables.

Covenant Clause in a loan agreement.

Credit scoring A procedure for assignment scores to companies on the basis of the risk of default.

Cross-default clause Clause in the loan agreement stating that the company is in default if it fails to meet its obligation on any other debt issue.

Cum dividend See With dividend.

Cum rights See With rights.

Cumulative preferred stock Stock which takes priority over common stock in regard to dividend payments. Dividends may not be paid on the common stock until all past dividends on the preferred have been paid.

Cumulative voting A stockholder may cast all of his or her votes for one candidate for the board of directors (cf. Majority voting).

Current asset Asset that will normally be turned into cash within a year.

Current liability Liability that will normally be repaid within a year.

Current ratio Current assets divided by current liabilities-a measure of liquidity.

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D

DCF See Discounted cash flow.

Debenture Unsecured bond.

Decision tree Method of representing alternative sequential decisions and the possible outcomes from these decisions.

Dedicated portfolio Bond portfolio that provides the cash flows to meet a series of fixed pension obligations at minimum cost.

Defeasance Borrower sets aside cash or bonds sufficient to service the borrower's debt. Both the borrower's debt and the offsetting cash or bonds are removed from the balance sheet.

Delta See Hedge ratio.

Depository transfer check Check made out directly by a local bank to a particular company.

Depreciation (1) Reduction in the book or market value of an asset. (2) Portion of an investment that can be deducted from taxable income.

Dilution Diminution in the proportion of income to which each share is entitled.

Direct lease Lease in which the lessor purchases new equipment from the manufacturer and leases it to the lessee (cf. sale and lease-back).

Discount bond Debt sold for less than its principle value. If a discount bond pays no interest, it is called a "pure" discount bond.

Discount factor Present value of $1 received at a stated future date.

Discount rate Rate used to calculate the present value of future cash flows.

Discounted cash flow future cash flows multiplied by discount factors to obtain present values.

Disintermediation Withdrawal of funds from a financial institution in order to invest them directly (cf. Intermediation).

Dividend Payment by a company to its stockholders.

Dividend Yield Annual dividend divided by share price.

Dollar-weighted rate of return Internal rate of return (cf. Time-weighted rate of return)

Double-declining-Balance depreciation method of accelerated depreciation.

Double tax agreement Agreement between two countries that taxes paid abroad can be offset against domestic taxes levied on foreign dividends.

Drop lock An arrangement whereby the interest rate on a floating-rate note or preferred becomes fixed if it falls to a specified level.

Dual currency bond Bond with interest paid in one currency and principle paid in another.

Duration The average time to an asset's discounted cash flows.

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E

EBITDA Earnings before interest,taxes and depreciation amortization.

Economic income Cash flow plus change in present value.

Economic rents Profits in excess of the competitive level.

ECU See European Currency Unit.

Efficient market Market in which security prices reflect information instantaneously.

Efficient portfolio portfolio that offers the lowest risk (standard deviation) for its expected return and the highest expected return for its level of risk.

Employee Stock Ownership Plan (ESOP) Companies contribute to a trust fund that buys stock on behalf of its employees.

EPS Earnings per share.

Equipment trust certificate Form of secured debt generally used to finance railroad equipment. The trustee retains ownership of the equipment until the debt is repaid.

Equity (1) Common stock and preferred stock. Often used to refer to common stock only. (2) net worth.

Equivalent annual cash flow Annuity with the same net present value as the company's proposed investment.

ERISA Employee Retirement Income Security Act.

ESOP See Employee stock ownership plan.

Eurobond Bond that is marketed internationally.

Euroclear A centralized clearing system for euro-bonds. Also CEDEL.

Eurodollar deposit Dollar deposit with a bank outside the United States.

European Currency Unit (ECU) A basket of different European currencies.

European Option Option that can be exercised only on final exercise date (cf. American option).

Evergreen credit Revolving credit without maturity.

Exchange of assets Acquisition of another company by purchase of its assets in exchange for cash or shares.

Ex dividend Purchase of shares in which the buyer is not entitled to the dividend (cf. With dividend, cum dividend).

Ex rights Purchase of shares in which the buyer is not entitled to the rights to buy shares in the company's rights issue (cf. With rights, cum rights, rights on).

Exercise price (striking price) Price at which the call option or put option may be exercised.

Expected return Average of possible returns weighted by their probabilities.

Experience losses In a pension plan, losses resulting from any difference between expectations and experience (e.g., a decline in the value of a pensions fund's securities).

Extendable bond Bond whose maturity can be extended at the option of the lender (or issuer).

External finance finance that is not generated by the firm: new borrowing or an issue of stock (cf. Internal finance).

Extra dividend Dividend that may or may not be repeated (cf. Regular dividend).

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F

Face value See Par value.

Factoring Arrangement whereby a financial institution buys a company's accounts receivable and collects the debt.

FASB Financial Accounting Standards Board.

FCIA Foreign Credit Insurance association.

FDIC Federal Deposit Insurance Corporation.

Federal funds Non-interest bearing deposits by banks at the Federal Reserve. Excess reserves are lent by banks to each other.

Field warehouse warehouse rented by a warehouse company on another firm's premises (cf. Public warehouse).

Final-average plan Pension plan offering a pension that depends on the employee's average compensation in his or her final years of service (cf. career-average plan).

Financial assets Claims on real assets.

Financial lease (capital lease, full-payout lease) Long-term, noncancelable lease (cf. Operating lease).

Financial leverage (gearing) Use of debt to increase the expected return on equity. Financial leverage is measured by the ratio of debt to debt plus equity (cf. Operating leverage).

Fiscal agency agreement An alternative to a bond trust deed. Unlike the trustee, the fiscal agent acts as the agent of the borrower.

Flip-flop note Note which allows investors to switch backwards and forwards between two different types of debt.

Float See availability float, payment float.

Floating lien General lien against a company's assets or against a particular class of assets.

Floating-rate note (FRN) Note whose interest payments varies with the short-term interest rate.

Floating-rate preferred preferred stock paying dividends that vary with short term interest rates.

Floor planning Arrangement used to finance inventory. A finance company buys the inventory, which is then held in trust by the user.

Foreign bond A bond issued on the domestic capital market of another country.

Forex Foreign exchange.

Forfaiting Purchase of promise-to-pay (e.g., bills of exchange or promissory notes) issued by importers.

Forward cover Purchase or sale of forward foreign currency in order to offset a known future cash flow.

Forward exchange rate Exchange rate fixed today for changing currency at some future date (cf. Spot exchange rate).

Forward interest rate Interest rate fixed today on a loan to be made at some future date (cf. Spot interest rate).

Forward rate agreement (FRA) Agreement to borrow or lend at a specified future date at an interest rate that is fixed today.

FRA See Forward rate agreement.

Free cash flow Cash not required for operations or reinvestments.

FRN See Floating rate notes.

Full-payment lease See Financial lease.

Full-service lease (rental lease) Lease in which the lessor promises to maintain and insure the equipment
(cf. Net lease)

Funded debt Debt maturing after more than 1 year (cf. Unfunded debt).

Future A contract to buy a commodity or a security on a future date at a price that is fixed today. Unlike forward contracts futures are generally traded on organized exchanges and are market-to-market daily.

Future service costs Value of the pensions that are expected to accrue from employees' future service.

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G

Garnishment A procedure allowing debt to be paid off by deductions from the debtor's wages.

Gearing See Financial leverage.

General cash offer Issue of securities offered to all investors (cf. Rights issue).

Global Note Facility BONUS.

Golden parachute A large termination payment due to a company's management if they lose their jobs as a result of a merger.

Greenmail A large block of stock is held by an unfriendly company, which forces the target company to repurchase the stock at a substantial premium to prevent a takeover.

Grey market Purchases and sales of eurobonds that occur before the issue price is finally set.

Growth stocks stocks of companies that have an opportunity to invest money to earn more than the opportunity cost of capital (cf. Income stocks).

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H

Harmless warrant Warrant that allows the user to purchase a bond only by surrendering an existing bond with similar terms.

Heaven-and-hell bonds Dual currency bonds whose principle repayment is in a currency different from interest payments. The size of the principle payment is partially increased if the value of the currency falls, and vice versa.

Hedging Buying one security and selling another in order to reduce risk. A perfect hedge produces a riskless portfolio.

Hedge ratio (delta, option delta) The number of shares to buy for each option sold in order to create a safe position. More generally, the number of units of an asset that should be bought to hedge one unit of a liability.

Hell-or-high-water clause Clause in a lease that obliges the lessee to make payments regardless of what happens to the lessor or the equipment.

Holding company Company whose sole function is to in other companies subsidiaries.

Horizontal merger Merger between two companies that manufacture similar products (cf. Vertical merger, conglomerate merger).

Horizontal spread The simultaneous purchase and sale of two options that differ only in their exercise date (cf. Vertical spread).

Hurdle rate Minimum acceptable rate of return on a project.

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I

IBF See International Banking Facility.

ICON See Indexed currency option note.

IMM (International Monetary Market) The financial futures market within the Chicago Mercantile exchange.

Immunization the construction of an asset and a liability that are subject to offsetting changes in value.

Income bonds Bonds on which interest is paid only if earned.

Income stocks Stocks with high dividend yields (cf. Growth stocks)

Indenture Formal agreement, e.g., establishing the terms of a bond issue.

Indexed bonds Bonds whose payments are linked to an index, e.g., a consumer price index.

Individual Retirement Account (IRA) An IRS- approved pension plan for individuals.

Industrial revenue bond (IRB) Issued by local government agencies on behalf of corporations.

Intangible assets Nonmaterial assets such as technical expertise, trademarks, and patents (cf. tangible assets).

Integer programing Variant of linear programming where solution values must be integers.

Interest cover See Times interest earned.

Interest equalization tax Tax on foreign investment by residents of the United States (abolished 1974).

Interest-rate parity Theory that the differential between the forward exchange rate and the spot exchange rate is equal to the difference between the foreign and domestic interest rate.

Intermediation Investment through a financial institution (cf. Disintermediation).

Internal finance Finance generated within a firm by retained earnings and depreciation (cf. External finance).

Internal rate of return (dollar-weighted rate of return, IRR) Discounted rate at which investment has zero net present value.

International Banking facility (IBF) A branch that an American bank establishes in the United States to do eurocurrency business.

Indexed currency option note A eurobond providing a principle repayment that is linked to the value of the bond's currency (e.g., a dollar bond whose principle repayment declines if the dollar appreciates against the yen).

Interval measure The number of days that a firm can finance operations without additional cash income.

In-the-money option An option that would be worth exercising if it expired immediately (cf. Out-of-the-
money option).

Investment banker See Underwriter.

Investment-grade bonds Bonds rated Baa or above.

Investment tax credit Proportion of new capital investment that can be used to reduce a company's tax bill (abolished 1986).

IRA See Individual Retirement Account.

IRB See Industrial revenue bond.

IRR See Internal rate of return.

IRS See Internal Revenue Service.

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J

Junior debt Subordinated debt.

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K

Keogh plan An IRS-approved pension plan for the self-employed and owners of unincorporated businesses.

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L

Lease Long-term rental agreement.

Legal capital Value at which a company's shares are recorded in its books.

Lessee User of a leased asset (cf. lessor).

Lessor Owner of a leased asset (cf. Lessee).

Letter of credit Letter from a bank stating that it has established a credit in the company's favor.

Letter stock Privately placed common stock because the SEC requires a letter from the purchaser that the stock is not intended for resale.

Level cost method (projected-benefit cost method) Method for estimating the normal costs of a pension plan. Its principle is that the company should contribute each year an equal amount per employee or an equal proportion of its wage bill (cf. accured-benifit cost method).

Leverage See financial leverage, operating leverage.

Leveraged lease Lease in which the lessor finances
part of the cost of an asset by an issue of debt secured by the asset and the lease payments.

Liabilities, total liabilities Total value of financial claims on a firm's assets. Equals (1) total assets or (2) total assets minus net worth.

LIBOR (London Interbank Offered Rate) The interest rate at which major international banks in London lend to each other. (LIBID is London Interbank Bid Rate; LIMEAN is mean bid and offered rate).

Lien Lender's claims on specified assets.

Limited liability Limitation of a share holder's losses to the amount invested.

Linear programming (LP) Technique for finding the maximum value of some equation subject to stated linear constraints.

Line of credit Agreement by a bank that a company may borrow at any time up to an established limit.

Liquid assets Assets that are easily and cheaply turned into cash; notably cash itself and short-term securities.

Liquidating dividend Dividend that represents a return of capital.

Liquidity premium (1) Additional return for investing in a security that can not easily be turned into cash. (2) difference between the forward rate and the expected spot rate of interest.

Load-to-load Arrangement whereby the customer pays for the last delivery when the next one is received.

Lock-box system form of concentration banking. Customers send payments to a post office box. A local bank collects and processes the checks and transfers the funds to the company's principle bank.

LP Linear programming.

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M

Maintenance margin Minimum margin that must be maintained on a Futures contract.

Majority voting Voting system under which each director is voted upon separately (cf. cumulative voting).

Margin Cash or securities set aside by an investor as evidence that he or she can honor a commitment.

Market-to-market An arrangement whereby the profits or loses on a futures contract are settled up each day.

Market capitalization rate Expected return on a security.

Market risk (systematic risk) Risk that cannot be diversified that way.

Maturity factoring Factoring arrangement that provides collection and insurance of accounts receivable.

MDA Multiple discriminate analysis.

Merger Acquisition in which all assets and liabilities are absorbed by the buyer (cf. exchange of assets, exchange of stock). More generally, any combination of two companies.

Minimax bond floating-rate note whose interest payments are subject to a narrow collar.

Mismatch bond Floating-rate note whose interest rate is reset at more frequent intervals than the roll over period (e.g., a note whose payments are set quarterly on the basis of the 1-year interest rate).

MMDA (money-market deposit account) In return for maintaining a minimum balance, both interest on the account and limited checking privileges.

Money center bank A major bank in the United States that undertakes a wide range of banking activities.

Money market Market for short-term safe investments.

Money-market fund Mutual fund which invests solely in short-term safe securities.

Monte Carlo simulation Method for calculating the probability distribution of possible outcomes, e.g., from a project.

Moral hazard The risk that the existence of a contract will change the behavior of one or both parties to the contract; e.g., an insured firm may take fewer fire precautions.

Mortgage bond Bond secured against plant and equipment.

Multiple discriminate analysis (MDA) Statistical technique for distinguishing between two groups on the basis of their observed characteristics.

Multiplier bonds Bonds that provide the option of taking interest payment in the form of additional multiplier bonds. Also called bunny bonds.

Mutual fund Managed invest fund whose shares are sold to investors.

Mutually exclusive projects Two projects that can not both be undertaken.

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N

Naked option Option held on its own, i.e., not used to hedge a holding in the asset or other options.

NASD National Association of Security Dealers.

Negative pledge clause Clause under which the borrower agrees not to permit an exclusive lien on any of its assets.

Negotiated underwriting Method of choosing underwriters. Most firms may choose their underwriter by negotiation (cf. Competitive bidding).

Net lease Lease in which the lessee promises to maintain and insure the equipment (cf. Full-service lease).

Net present value A project's net contribution to wealth-present value minus initial value.

Net working capital Current assets minus current liabilities.

Net worth Book value of a company's common stock, surplus, and retained earnings.

NIF See Note issuance facility.

Nominal interest rate Interest rate expressed in money terms (cf. Real interest rate).

Nonrefundable debt Debt that may not be called in order to replace it with another issue at a lower interest cost.

Normal costs Stream of contributions to a pension plan that is required to cover future employee service.

Normal distribution Symmetric bell-shaped distribution that can be completely defined by its mean and standard deviation.

Note Unsecured debt with a maturity of up to 10 years.

Note issuance facility (NIF) In the eurocurrency market, a facility that guarantees the company the right to borrow from a group of banks up to some agreed maximum.

Now account "Negotiable order of withdrawal" account; a savings account that offers checking privileges.

NYSE New York Stock Exchange.

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O

Off-balance-sheet financing Financing that is not shown as a liability in a company's balance sheet.

OID debt Original issue discount debt.

Old-line factoring Factoring arrangement that provides collection, insurance, and finance for accounts receivable.

Open account Arrangement whereby sales are made with no formal debt contract. The buyer signs a receipt, and the seller records the sale of the sales in the ledger.

Open-end mortgage Mortgage against which additional debt may be issued (cf. Closed-end mortgage).

Operating lease Short-term, cancelable lease (cf.Financial lease).

Operating leverage Fixed operating costs, so called because they accentuate variations in profit (cf. Financial leverage).

Opportunity cost of capital (hurdle rate, cost of capital) Expected return that is forgone by investing in a project rather than in comparable financial securities.

Option See call option, put option.

Option delta See Hedge ratio.

Original issue discount debt (OID debt) Debt that is originally offered at a price below face value.

Out-of-the-money option An option that would not be worth exercising if it matured immediately (cf. In-the-money option).

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P

Par value (face value) Value of security shown on certificate.

Pass-through securities Notes or bonds back by a package of assets (e.g., mortgage pass-throughs, CARs, CARDs).

Payables See Accounts payable.

Payback period Time taken for a project to recover its initial investment.

Payment float checks written by a company that have not yet cleared (cf. Availability float).

Payout ratio Dividend as a proportion of earnings per share.

PBGC Pension Benefit Guarantee Corporation.

P/E ratio Share price divided by earnings per share

Perpetuity Investment offering a level stream of cash flows in perpetuity (cf. Consol).

PN Project note.

Poison pill An issue of securities that is convertible in the event of a merger into the shares of the acquiring firm or must be repurchased by the acquiring firm.

Pooling of interest Method of accounting for mergers. The consolidated balance sheet of the merged firm is obtained by combining the balance sheets of the separate firms.

Postaudit Evaluation of an investment project after it has been undertaken.

Preemptive right Common stockholder's right to anything of value distributed by the company.

Preferred stock Stock that takes priority over common stock in regard to dividends. Dividends may not be paid on common stock unless the dividend is paid on all preferred stock (cf. Cumulative preferred stock). The dividend rate on preferred is usually fixed at the time of issue.

Present value Discounted value of future cash flows.

Primary issue Issue of new securities by a firm (cf. secondary issue).

Prime rate Rate at which banks lend to their most favored customers.

Principal Amount of debt that must be repaid.

Privileged subscription issue See Rights issue.

Production payment Loan in the form of advanced payment for future delivery of a product.

Profitability index (benefit-cost ratio) Ratio of a project's present value to the initial investment.

Pro forma See Projected.

Project finance debt that is largely claimed against the cash flows from a particular project rather than against the firm as a whole.

Project note (PN) Note issued by the public housing agencies or urban renewal agencies.

Projected benefit cost method Level cost method.

Promissory note Promise to pay.

Prospectus Summary of the registration statement providing information on a issue of securities.

Proxy vote Vote cast by one person on behalf of another.

Public warehouse (terminal warehouse) Warehouse operated by an independent warehouse company on its own premises (cf. Field warehouse).

Put option Option to sell an asset at a specified exercise price on or before a specified exercise date (cf. Call option).

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Q

q The ratio of the market value of an asset to its replacement cost.

Quadratic programming Variant of linear programming where equations are quadratic rather then linear.

Quick ratio (acid-test ratio) Measure of liquidity: (current assets-inventory) divided by current liabilities.

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R

Real assets Tangible assets and intangible assets used to carry on business (cf. Financial assets).

Real interest rate Interest rate expressed in terms of real goods, i.e., nominal interest rate adjusted for inflation.

Receivables See Accounts receivable.

Record date Date set by directors when making dividend payment. Dividends are sent to stock holders who are registered on the record date.

Recourse Term describing a type of loan. If a loan is with recourse, the lender has a general claim against the parent company if the collateral is insufficient to pay the debt.

Red Herring Preliminary prospectus.

Refunding Replacement of existing debt with a new issue of debt.

Registered security Security whose ownership is recorded by the company's registrar (cf. Bearer security).

Registrar Financial institution appointed to record issue and ownership of company securities.

Registration The process of obtaining SEC approval for public issue of securities.

Regression analysis In statistics, a technique for finding the best line of fit.

Regular dividend Dividend that the company expects to maintain in the future.

Regulation A issue Security issues of under $400,000; exempt from SEC registration requirements.

Regulation Q Limit on the rate of interest that banks may pay on (small) deposits.

Rental lease See Full-service lease.

Repo See Repurchase agreement.

Repurchase agreement (RP, repo, buy-back) Purchase of Treasury securities from a securities dealer with an agreement that the dealer will repurchase the at a specified price.

Residual risk See Unique risk.

Retained earnings earnings not paid out as dividends.

Return on equity Usually, equity earnings as a proportion of the book value of equity.

Return on investment (ROI) Generally, book income as a proportion of net book value.

Reverse FRN (bull FRN, yield-curve note) Floating-rate note whose payments rise as the general level of interest rates falls, and vice versa.

Revolving credit legally assured line of credit with a bank.

Revolving underwriting facility (RUF) Issuance facility for short-term euronotes.

Rights issue (privileged subscription issue) Issue of securities that is offered to current stockholders (cf. General cash offer).

Rights on See With rights.

Risk premium Expected additional return for making a risky investment rather than a safe one.

ROI See Return on investment.

Roll-over CD A package of successive certificates of deposit.

RP See repurchase agreement.

R squared (R2) Square of the correlation coefficient-the proportion of the variability in one series that can be explained by the variability of one or more other series.

RUF Revolving underwriting facility.

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S

Sale and lease-back Sale of an existing asset to a financial institution that then leases it back to the user (cf. direct lease).

Salvage value Scrap value of plant and equipment.

Samurai bond A yen bond issued in Tokyo by a non-Japanese borrower (cf. Bulldog bond, Yankee bond).

SBIC Small Business Investment Company.

Season datings extended credit for customers who order goods out of the peak season.

Seasoned issue Issue of a security for which there is an existing market (cf. Unseasoned issue).

SEC Securities and Exchange Commission.

Secondary issue Procedure for selling blocks of seasoned issues of stock. More generally, sale of already issued stock.

Secondary market Market in which one can buy or sell seasoned issues of securities.

Secured debt Debt which, in the event of default, has first claim on specified assets.

Security market line Line representing the relationship between expected return and market risk.

Self-liquidating loan Loan to finance current assets. The sale of current assets provides the cash to repay the loan.

Self-selection Consequence of a contract that induces only one group (e.g., the low-risk individuals) to participate.

Semistrong-form efficient market Market in which security prices reflect all publicly available information (cf. weak-form efficient market and strong-form efficient market).

Senior debt Debt which, in the event of bankruptcy, must be repaid before subordinate debt receives any payment.

Sensitivity analysis Analysis of the effect on the project profitability of possible changes in sales, costs, and so on.

Serial bonds Package of bonds that mature in successive years.

Shark repellents Amendments to company charters intended to protect them from takeover.

Shelf registration A procedure that allows firms to file one registration statement covering several issues of the same security.

Shogun bond Dollar bond issued in Japan by a nonresident.

Short sale Sale of a security that the investor does not own.

Sight draft Demand for immediate payment (cf. time draft).

Signal Action that demonstrates an individual's unobservable characteristics (because it would be unduly costly for someone without those characteristics to take the action).

Simple interest Interest calculated only on the individual investment (cf. compound interest).

Simulation See Monte Carlo simulation.

Sinker See Sinking fund.

Sinking fund (sinker) Fund that established by a company to retire debt before maturity.

Skewed distribution Probability distribution in which an unequal number of observations lie above and below the mean.

Special dividend (extra dividend) Dividend that is unlikely to be repeated.

Specific risk See Unique risk.

Spot exchange rate exchange rate on currency for immediate delivery (cf. forward exchange rate).

Spread (underwriter's spread) The difference between the price at which an underwriter buys an issue from a firm and the price at which the underwriter sells it to the public.

Standard deviation square root of the variance-a measure a variability.

Standard error In statistics, a measure of the possible error in an estimate.

Standby agreement In a rights issue, agreement that the underwriter will purchase any stock that is not purchased by investors.

Step-up bond Bond whose coupon is stepped up over time. (Also step-down bonds.)

Stock dividend Dividend in the form of stock rather than cash.

Stock split "Free" issue of shares to existing shareholders.

Straddle The combination of a put option and a call option with the same exercise price.

Striking price Exercise price of an option.

Strippend bond A bond that can be subdivided into a series of zero coupon bond.

Strong-form efficient market Market in which security prices reflect instantaneously all information available to investors (cf. weak-form efficient market and semistrong-form efficiency market).

Subordinated debt (junior debt) Debt over which senior debt takes priority. In the event of bankruptcy, subordinated debtholders receive payment only after the senior debt is paid in full.

Sum-of-the-years'-digits depreciation Method of accelerated depreciation.

Sunk costs Costs which have been incurred and can be reversed.

Supermajority A provision in a company's charter requiring a majority of, say, 80 percent of shareholders to approve certain changes, such as a merger.

Super-NOW account Checking account with a specified minimum balance and on which interest is paid.

Supplemental liability Additional liability to a pension plan that results from an increase in promised benefits.

Sushi bond A eurobond issued by a Japanese corporation.

Swap An arrangement whereby two companies lend to each other on different terms, e.g., in different currencies, or one at a fixed rate and the other at a floating rate.

Swingline facility Bank borrowing facility to provide finance while the firm replaces U.S. commercial paper with eurocommercial paper.

Systematic risk See Market risk.

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T

Take-up fee Fee paid to underwriters of a rights issue on any stock that they are obliged to purchase.

Tangible assets Physical assets such as plant, machinery, and offices (cf. intangible assets).

Tax-anticipation bill Short-term bill issued by the U.S. Treasury that can be surrendered at face value in payment of taxes.

Tender offer General offer made directly to a firm's shareholders to by their stock.

Tender panel Panel of underwriting banks established to bid for notes issued under a note issuance facility.

Terminal warehouse See Public warehouse.

Term loans Medium-term, privately placed loans, usually made by banks.

Term structure of interest rates Relationship between interest rates on loans of different maturities (cf. yield curve).

Throughput arrangement Arrangement by which shareholders of a pipeline company agree to make sufficient use of the pipeline to enable the pipeline to service its debt.

TIGRS A U.S. Treasury bond reissued by Merrill Lynch as a series of zero coupon bonds.

Time draft Demand for payment at a stated future date (cf.sight draft).

Times interest earned (interest cover) Earnings before interest and tax, divided by interest payments.

Time-weighted rate of return rate of return that gives equal weight to each time period; used in investment performance measurement (cf. dollar-weighted rate of return).

Tombstone Advertisement listing the underwriters to a security issue.

Trade acceptance Written demand that has been accepted by an industrial company to pay a sum at a future date (cf. banker's acceptance).

Trade credit See Accounts receivable.

Trade debt Accounts payable.

Transfer agent Individual or institution appointed by a company to look after the transfer of securities.

Treasurer Principle financial manager (cf. controller).

Treasury bill Short-term discount debt maturing in less than 1 year, issued regularly by the government.

Treasury stock Common stock that has been repurchased by the company and held in the company's treasury.

Trust deed Agreement between trustee and borrower setting out terms of bond.

Trust receipt Receipt for goods that are to be held in trust for another.

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U

Underpricing Issue of securities below their market value.

Underwriter (investment banker) Firm which buys an issue of securities from a company and resells it to investors.

Unfunded debt Debt maturing within 1 year (cf. funded debt).

Unique risk (residual risk, specific risk, unsystematic risk) Risk that can be eliminated by diversification.

Unseasoned issue Issue of security for which there is no existing market (cf. seasonal issue).

Unsystematic risk See Unique risk.

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V

Value additivity Rule that the value of the whole must equal the sum of value of the parts.

Variance Mean squared deviation from the expected value-a measure of variability.

Variation margin The daily gains or losses on a futures contract that are credited to the investors margin account.

Venture capital Capital to finance a new firm.

Vertical merger Merger between a supplier and its customer (cf. horizontal merger, conglomerate merger).

Vertical spread The simultaneous purchase and sale of two options that differ only in their exercise price (cf. horizontal spread).

Vesting Employee's entitlement to all or part of a pension if he or she leaves before retirement.

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W

Warehouse receipt Evidence that a firm owns goods stored at a warehouse.

Warrant Long-term call option issued by a company.

Weak-form efficient market Market in which security prices instantaneously reflect the information in the past history of security prices. In such a market securities follow a random walk (cf. semistrong-form efficient market and strong-form efficient market).

Weighted-average cost of capital Expected return on a portfolio of all the firm's securities. Used as hurdle rate for capital investment.

White knight A friendly potential acquirer sought out by a target company threatened by a less welcome suitor.

With dividend (cum dividend) Term describing a purchase of shares by which the buyer is entitled to the forthcoming dividend (cf. ex dividend).

With rights (cum rights, rights on) Purchase of shares in which the buyer is entitled to buy shares in the company's rights issue (cf. ex rights).

Withholding tax Tax is levied on dividends paid abroad.

Working capital Current assets and current liabilities. The term is commonly used as synonymous with net working capital.

Writer Option seller.

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X

No Entries for X

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Y

Yankee bond A dollar bond issued in the United States by a non-U.S. borrower (cf. bulldog bond, Samurai bond).

Yield curve Term structure of interest rates.

Yield-curve note Reverse FRN.

Yield to maturity internal rate of return on a bond.

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Z

Zero coupon bond Discount bond making no coupon payments.


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