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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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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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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