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Earnings per share (EPS) EPS, as it is called, is a company's profit divided by its number of outstanding
shares. If a company earned $2 million in one year had 2 million shares of stock outstanding, its EPS would
be $1 per share. The company often uses a weighted average of shares outstanding over the reporting term.

Earnings retention ratio Plowback rate.

Earnings surprises Positive or negative differences from the consensus forecast of earnings by institutions
such as First Call or IBES. Negative earnings surprises generally have a greater adverse affect on stock prices
than the reciprocal positive earnings surprise on stock prices.

Earnings yield The ratio of earnings per share after allowing for tax and interest payments on fixed interest
debt, to the current share price. The inverse of the price/earnings ratio. It's the Total Twelve Months earnings
divided by number of outstanding shares, divided by the recent price, multiplied by 100. The end result is
shown in percentage.

Economic assumptions Economic environment in which the firm expects to reside over the life of the
financial plan.

Economic defeasance See: in-substance defeasance.

Economic dependence Exists when the costs and/or revenues of one project depend on those of another.

Economic earnings The real flow of cash that a firm could pay out forever in the absence of any change in
the firm's productive capacity.

Economic exposure The extent to which the value of the firm will change because of an exchange rate
change.

Economic income Cash flow plus change in present value.

Economic order quantity (EOQ) The order quantity that minimizes total inventory costs.
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Dictionary of Finantial and Business Terms
Lico Reis “ Consultoria & Línguas
licoreis@terra.com.br
Economic rents Profits in excess of the competitive level.

Economic risk In project financing, the risk that the project's output will not be salable at a price that will
cover the project's operating and maintenance costs and its debt service requirements.

Economic surplus For any entity, the difference between the market value of all its assets and the market
value of its liabilities.

Economic union An agreement between two or more countries that allows the free movement of capital,
labor, all goods and services, and involves the harmonization and unification of social, fiscal, and monetary
policies.

Economies of scale The decrease in the marginal cost of production as a plant's scale of operations increases.

Economies of scope Scope economies exist whenever the same investment can support multiple profitable
activities less expensively in combination than separately.

EDGAR The Securities & Exchange Commission uses Electronic Data Gathering and Retrieval to transmit
company documents such as 10-Ks, 10-Qs, quarterly reports, and other SEC filings, to investors.

Edge corporations Specialized banking institutions, authorized and chartered by the Federal Reserve Board
in the U.S., which are allowed to engage in transactions that have a foreign or international character. They
are not subject to any restrictions on interstate banking. Foreign banks operating in the U.S. are permitted to
organize and own and Edge corporation.

Effective annual interest rate An annual measure of the time value of money that fully reflects the effects of
compounding.

Effective annual yield Annualized interest rate on a security computed using compound interest techniques.

Effective call price The strike price in an optional redemption provision plus the accrued interest to the
redemption date.

Effective convexity The convexity of a bond calculated with cash flows that change with yields.

Effective date In an interest rate swap, the date the swap begins accruing interest.

Effective duration The duration calculated using the approximate duration formula for a bond with an
embedded option, reflecting the expected change in the cash flow caused by the option. Measures the
responsiveness of a bond's price taking into account the expected cash flows will change as interest rates
change due to the embedded option.

Effective margin (EM) Used with SAT performance measures, the amount equaling the net earned spread, or
margin, of income on the assets in excess of financing costs for a given interest rate and prepayment rate
scenario.

Effective rate A measure of the time value of money that fully reflects the effects of compounding.

Effective spread The gross underwriting spread adjusted for the impact of the announcement of the common
stock offering on the firm's share price.

Efficiency Reflects the amount of wasted energy.

Efficient capital market A market in which new information is very quickly reflected accurately in share
prices.
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Dictionary of Finantial and Business Terms
Lico Reis “ Consultoria & Línguas
licoreis@terra.com.br
Efficient diversification The organizing principle of modern portfolio theory, which maintains that any risk-
averse investor will search for the highest expected return for any level of portfolio risk.

Efficient frontier The combinations of securities portfolios that maximize expected return for any level of
expected risk, or that minimizes expected risk for any level of expected return.

Efficient Market Hypothesis In general the hypothesis states that all relevant information is fully and
immediately reflected in a security's market price thereby assuming that an investor will obtain an equilibrium
rate of return. In other words, an investor should not expect to earn an abnormal return (above the market
return) through either technical analysis or fundamental analysis. Three forms of efficient market hypothesis
exist: weak form (stock prices reflect all information of past prices), semi-strong form (stock prices reflect all
publicly available information) and strong form (stock prices reflect all relevant information including insider
information).

Efficient portfolio A portfolio that provides the greatest expected return for a given level of risk (i.e. standard
deviation), or equivalently, the lowest risk for a given expected return.

Efficient set Graph representing a set of portfolios that maximize expected return at each level of portfolio
risk.

Either/or facility An agreement permitting a bank customer to borrow either domestic dollars from the
bank's head office or Eurodollars from one of its foreign branches.

Either-way market In the interbank Eurodollar deposit market, an either-way market is one in which the bid
and offered rates are identical.

Elasticity of an option Percentage change in the value of an option given a 1% change in the value of the
option's underlying stock.

Electronic data interchange (EDI) The exchange of information electronically, directly from one firm's
computer to another firm's computer, in a structured format.

Electronic depository transfers The transfer of funds between bank accounts through the Automated
Clearing House (ACH) system.

Eligible bankers' acceptances In the BA market, an acceptance may be referred to as eligible because it is
acceptable by the Fed as collateral at the discount window and/or because the accepting bank can sell it
without incurring a reserve requirement.

Embedded option An option that is part of the structure of a bond that provides either the bondholder or
issuer the right to take some action against the other party, as opposed to a bare option, which trades
separately from any underlying security.

Emerging markets The financial markets of developing economies.

Employee stock fund A firm-sponsored program that enables employees to purchase shares of the firm's
common stock on a preferential basis.

Employee stock ownership plan (ESOP) A company contributes to a trust fund that buys stock on behalf of
employees.

Endogenous variable A value determined within the context of a model.

Endowment funds Investment funds established for the support of institutions such as colleges, private
schools, museums, hospitals, and foundations. The investment income may be used for the operation of the
institution and for capital expenditures.
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Dictionary of Finantial and Business Terms
Lico Reis “ Consultoria & Línguas
licoreis@terra.com.br
End-of-year convention Treating cash flows as if they occur at the end of a year as opposed to the date
convention. Under the end-of-year convention, the present is time 0, the end of year 1 occurs one year hence,
etc.

Enhanced indexing Also called indexing plus, an indexing strategy whose objective is to exceed or replicate
the total return performance of some predetermined index.

Enhancement An innovation that has a positive impact on one or more of a firm's existing products.

Equilibrium market price of risk The slope of the capital market line (CML). Since the CML represents the
return offered to compensate for a perceived level of risk, each point on the line is a balanced market
condition, or equilibrium. The slope of the line determines the additional return needed to compensate for a
unit change in risk.

Equilibrium rate of interest The interest rate that clears the market. Also called the market-clearing interest
rate.

Equipment trust certificates Certificates issued by a trust that was formed to purchase an asset and lease it
to a lessee. When the last of the certificates has been repaid, title of ownership of the asset reverts to the
lessee.

Equity Represents ownership interest in a firm. Also the residual dollar value of a futures trading account,
assuming its liquidation at the going market price.

Equity cap An agreement in which one party, for an upfront premium, agrees to compensate the other at
specific time periods if a designated stock market benchmark is greater than a predetermined level.

Equity claim Also called a residual claim, a claim to a share of earnings after debt obligation have been
satisfied.

Equity collar The simultaneous purchase of an equity floor and sale of an equity cap.

Equity contribution agreement An agreement to contribute equity to a project under certain specified
conditions.

Equity floor An agreement in which one party agrees to pay the other at specific time periods if a specific
stock market benchmark is less than a predetermined level.

Equity kicker Used to refer to warrants because they are usually issued attached to privately placed bonds.

Equity market Related:Stock market

Equity multiplier Total assets divided by total common stockholders' equity; the amount of total assets per
dollar of stockholders' equity.

Equity options Securities that give the holder the right to buy or sell a specified number of shares of stock, at
a specified price for a certain (limited) time period. Typically one option equals 100 shares of stock.

Equity swap A swap in which the cash flows that are exchanged are based on the total return on some stock
market index and an interest rate (either a fixed rate or a floating rate). Related: interest rate swap.

Equity-linked policies Related: Variable life

Equityholders Those holding shares of the firm's equity.
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Dictionary of Finantial and Business Terms
Lico Reis “ Consultoria & Línguas
licoreis@terra.com.br
Equivalent annual annuity The equivalent amount per year for some number of years that has a present
value equal to a given amount.

Equivalent annual benefit The equivalent annual annuity for the net present value of an investment project.

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

Equivalent annual cost The equivalent cost per year of owning an asset over its entire life.

Equivalent bond yield Annual yield on a short-term, non-interest bearing security calculated so as to be
comparable to yields quoted on coupon securities.

Equivalent loan Given the after-tax stream associated with a lease, the maximum amount of conventional
debt that the same period-by-period after-tax debt service stream is capable of supporting.

Equivalent taxable yield The yield that must be offered on a taxable bond issue to give the same after-tax
yield as a tax-exempt issue.

Erosion An innovation that has a negative impact on one or more of a firm's existing assets.

Ethics Standards of conduct or moral judgement.

Euro CDs CDs issued by a U.S. bank branch or foreign bank located outside the U.S. Almost all Euro CDs
are issued in London.

Euro lines Lines of credit granted by banks (foreign or foreign branches of U.S. banks) for Eurocurrencies.

Euro straight A fixed-rate coupon Eurobond.

Eurobank A bank that regularly accepts foreign currency denominated deposits and makes foreign currency
loans.

Eurobond A bond that is (1) underwritten by an international syndicate, (2) offered at issuance
simultaneously to investors in a number of countries, and (3) issued outside the jurisdiction of any single
country.

Euroclear One of two principal clearing systems in the Eurobond market. It began operations in 1968, is
located in Brussels, and is managed by Morgan Guaranty Bank.

Eurocredits Intermediate-term loans of Eurocurrencies made by banking syndicates to corporate and
government borrowers.

Eurocurrency deposit A short-term fixed rate time deposit denominated in a currency other than the local
currency (i.e. US$ deposited in a London bank).

Eurocurrency market The money market for borrowing and lending currencies that are held in the form of
deposits in banks located outside the countries of the currencies issued as legal tender.

Eurodollar This is an American dollar that has been deposited in a European bank or an U.S. bank branch
located in Europe. It got there as a result of payments made to overseas companies for merchandise.

Eurodollar bonds Eurobonds denominated in U.S.dollars.
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Dictionary of Finantial and Business Terms
Lico Reis “ Consultoria & Línguas
licoreis@terra.com.br

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