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Homemade leverage Idea that as long as individuals borrow (or lend) on the same terms as the firm, they can
duplicate the affects of corporate leverage on their own. Thus, if levered firms are priced too high, rational
investors will simply borrow on personal accounts to buy shares in unlevered firms.

Homogeneity The degree to which items are similar.

Homogeneous Exhibiting a high degree of homogeneity.

Homogenous expectations assumption An assumption of Markowitz portfolio construction that investors
have the same expectations with respect to the inputs that are used to derive efficient portfolios: asset returns,
variances, and covariances.

Horizon analysis An analysis of returns using total return to assess performance over some investment
horizon.

Horizon return Total return over a given horizon.

Horizontal acquisition Merger between two companies producing similar goods or services.

Horizontal analysis The process of dividing each expense item of a given year by the same expense item in
the base year. This allows for the exploration of changes in the relative importance of expense items over time
and the behavior of expense items as sales change.

Horizontal merger A merger involving two or more firms in the same industry that are both at the same
stage in the production cycle; that is two or more competitors.

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

Host security The security to which a warrant is attached.

Hot money Money that moves across country borders in response to interest rate differences and that moves
away when the interest rate differential disappears.

Hubris An arrogance due to excessive pride and an insolence toward others.

Human capital The unique capabilities and expertise of individuals.

Hurdle rate The required return in capital budgeting.
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Hybrid A package containing two or more different kinds of risk management instruments that are usually
interactive.

Hybrid security A convertible security whose optioned common stock is trading in a middle range, causing
the convertible security to trade with the characteristics of both a fixed-income security and a common stock
instrument.

Idiosyncratic Risk Unsystematic risk or risk that is uncorrelated to the overall market risk. In other words,
the risk that is firm specific and can be diversified through holding a portfolio of stocks.

Immediate settlement Delivery and settlement of securities within five business days.

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

Immunization strategy A bond portfolio strategy whose goal is to eliminate the portfolio's risk against a
general change in the rate of interest through the use of duration.

Implied call The right of the homeowner to prepay, or call, the mortgage at any time.

Implied repo rate The rate that a seller of a futures contract can earn by buying an issue and then delivering
it at the settlement date. Related: cheapest to deliver issue

Implied volatility The expected volatility in a stock's return derived from its option price, maturity date,
exercise price, and riskless rate of return, using an option-pricing model such as Black/Scholes.

Import-substitution development strategy A development strategy followed by many Latin American
countries and other LDCs that emphasized import substitution - accomplished through protectionism - as the
route to economic growth.

Imputation tax system Arrangement by which investors who receive a dividend also receive a tax credit for
corporate taxes that the firm has paid.

Income beneficiary One who receives income from a trust.

Income bond A bond on which the payment of interest is contingent on sufficient earnings. These bonds are
commonly used during the reorganization of a failed or failing business.

Income fund A mutual fund providing for liberal current income from investments.

Income statement (statement of operations) A statement showing the revenues, expenses, and income (the
difference between revenues and expenses) of a corporation over some period of time.

Income stock Common stock with a high dividend yield and few profitable investment opportunities.

Incremental cash flows Difference between the firm's cash flows with and without a project.

Incremental costs and benefits Costs and benefits that would occur if a particular course of action were
taken compared to those that would occur if that course of action were not taken.

Incremental internal rate of return IRR on the incremental investment from choosing a large project
instead of a smaller project.

Indenture Agreement between lender and borrower which details specific terms of the bond issuance.
Specifies legal obligations of bond issuer and rights of bondholders.
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Independent project A project whose acceptance or rejection is independent of the acceptance or rejection of
other projects.

Index and Option Market (IOM) A division of the CME established in 1982 for trading stock index
products and options. Related: Chicago Mercantile Exchange (CME).

Index arbitrage An investment/trading strategy that exploits divergences between actual and theoretical
futures prices.

Index fund Investment fund designed to match the returns on a stockmarket index.

Index model A model of stock returns using a market index such as the S&P 500 to represent common or
systematic risk factors.

Index option A call or put option based on a stock market index.

Index warrant A stock index option issued by either a corporate or sovereign entity as part of a security
offering, and guaranteed by an option clearing corporation.

Indexed bond Bond whose payments are linked to an index, e.g. the consumer price index.

Indexing A passive instrument strategy consisting of the construction of a portfolio of stocks designed to
track the total return performance of an index of stocks.

Indicated dividend Total amount of dividends that would be paid on a share of stock over the next 12 months
if each dividend were the same amount as the most recent dividend. Usually represent by the letter "e" in
stock tables.

Indicated yield The yield, based on the most recent quarterly rate times four. To determine the yield, divide
the annual dividend by the price of the stock. The resulting number is represented as a percentage. See:
dividend yield.

Indifference curve The graphical expression of a utility function, where the horizontal axis measures risk and
the vertical axis measures expected return. The curve connects all portfolios with the same utilities according
to γ and σ .

Indirect quote For foreign exchange, the number of units of a foreign currency needed to buy one U.S.$.

Inductive reasoning The attempt to use information about a specific situation to draw a conclusion.

Industry The category describing a company's primary business activity. This category is usually determined
by the largest portion of revenue.

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

Inflation The rate at which the general level of prices for goods and services is rising.

Inflation risk Also called purchasing-power risk, the risk that changes in the real return the investor will
realize after adjusting for inflation will be negative.

Inflation uncertainty The fact that future inflation rates are not known. It is a possible contributing factor to
the makeup of the term structure of interest rates.

Inflation-escalator clause A clause in a contract providing for increases or decreases in inflation based on
fluctuations in the cost of living, production costs, and so forth.
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Information asymmetry A situation involving information that is known to some, but not all, participants.

Information Coefficient (IC) The correlation between predicted and actual stock returns, sometimes used to
measure the value of a financial analyst. An IC of 1.0 indicates a perfect linear relationship between predicted
and actual returns, while an IC of 0.0 indicates no linear relationship.

Information costs Transaction costs that include the assessment of the investment merits of a financial asset.
Related: search costs.

Information services Organizations that furnish investment and other types of information, such as
information that helps a firm monitor its cash position.

Information-content effect The rise in the stock price following the dividend signal.

Informational efficiency The speed and accuracy with which prices reflect new information.

Informationless trades Trades that are the result of either a reallocation of wealth or an implementation of an
investment strategy that only utilizes existing information.

Information-motivated trades Trades in which an investor believes he or she possesses pertinent
information not currently reflected in the stock's price.

Initial margin requirement When buying securities on margin, the proportion of the total market value of
the securities that the investor must pay for in cash. The Security Exchange Act of 1934 gives the board of
governors of the Federal Reserve the responsibility to set initial margin requirements, but individual
brokerage firms are free to set higher requirements. In futures contracts, initial margin requirements are set by
the exchange.

Initial public offering (IPO) A company's first sale of stock to the public. Securities offered in an IPO are
often, but not always, those of young, small companies seeking outside equity capital and a public market for
their stock. Investors purchasing stock in IPOs generally must be prepared to accept very large risks for the
possibility of large gains. IPO's by investment companies (closed-end funds) usually contain underwriting
fees which represent a load to buyers.

Input-output tables Tables that indicate how much each industry requires of the production of each other
industry in order to produce each dollar of its own output.

Insider information Relevant information about a company that has not yet been made public. It is illegal for
holders of this information to make trades based on it, however received.

Insider trading Trading by officers, directors, major stockholders, or others who hold private inside
information allowing them to benefit from buying or selling stock.

Insiders These are directors and senior officers of a corporation -- in effect those who have access to inside
information about a company. An insider also is someone who owns more than 10% of the voting shares of a
company.

Insolvency risk The risk that a firm will be unable to satisfy its debts. Also known as bankruptcy risk.

Insolvent A firm that is unable to pay debts (liabilities are greater than assets).

Installment sale The sale of an asset in exchange for a specified series of payments (the installments).

Institutional investors Organizations that invest, including insurance companies, depository institutions,
pension funds, investment companies, mutual funds, and endowment funds.
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Institutionalization The gradual domination of financial markets by institutional investors, as opposed to
individual investors. This process has occurred throughout the industrialized world.

Instruments Financial securities, such as money market instruments or capital market insturments.

Insurance principle The law of averages. The average outcome for many independent trials of an experiment
will approach the expected value of the experiment.

Insured bond A municipal bond backed both by the credit of the municipal issuer and by commercial
insurance policies.

Insured plans Defined benefit pension plans that are guaranteed by life insurance products. Related: non-
insured plans

Intangible asset A legal claim to some future benefit, typically a claim to future cash. Goodwill, intellectual
property, patents, copyrights, and trademarks are examples of intangible assets.

Integer programming Variant of linear programming whereby the solution values must be integers.

Intercompany loan Loan made by one unit of a corporation to another unit of the same corporation.

Intercompany transaction Transaction carried out between two units of the same corporation.

Interest The price paid for borrowing money. It is expressed as a percentage rate over a period of time and
reflects the rate of exchange of present consumption for future consumption. Also, a share or title in property.

Interest coverage ratio The ratio of the earnings before interest and taxes to the annual interest expense. This
ratio measures a firm's ability to pay interest.

Interest coverage test A debt limitation that prohibits the issuance of additional long-term debt if the issuer's
interest coverage would, as a result of the issue, fall below some specified minimum.

Interest equalization tax Tax on foreign investment by residents of the U.S. which was abolished in 1974.

Interest payments Contractual debt payments based on the coupon rate of interest and the principal amount.

Interest on interest Interest earned on reinvestment of each interest payment on money invested. See:
compound interest.

Interest-only strip (IO) A security based solely on the interest payments form a pool of mortgages, Treasury
bonds, or other bonds. Once the principal on the mortgages or bonds has been repaid, interest payments stop
and the value of the IO falls to zero.

Interest rate agreement An agreement whereby one party, for an upfront premium, agrees to compensate the
other at specific time periods if a designated interest rate (the reference rate) is different from a predetermined
level (the strike rate).

Interest rate cap Also called an interest rate ceiling, an interest rate agreement in which payments are made
when the reference rate exceeds the strike rate.

Interest rate ceiling Related: interest rate cap.

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