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Dictionary of Financial and Business Terms
Lico Reis “ Consultoria & Línguas
licoreis@terra.com.br




The Author
Roberto de Paula Lico Júnior is a lecturer in English as a Foreign
Language and he has considerable expertise in the field of Overseas
Trade, having designed and taught a number of classes related to
International Law and Overseas Trade. He has a SRVWJUDGXDWH
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3
Dictionary of Financial and Business Terms
Lico Reis “ Consultoria & Línguas
licoreis@terra.com.br

Abandonment option::The option of terminating an investment earlier than originally planned.

Abnormal returns:Part of the return that is not due to systematic influences (market wide influences). In
other words, abnormal returns are above those predicted by the market movement alone. Related: excess
returns.

Absolute priority :Rule in bankruptcy proceedings whereby senior creditors are required to be paid in full
before junior creditors receive any payment.

Accelerated cost recovery system (ACRS):Schedule of depreciation rates allowed for tax purposes.

Accelerated depreciation:Any depreciation method that produces larger deductions for depreciation in the
early years of a project's life. Accelerated cost recovery system (ACRS), which is a depreciation schedule
allowed for tax purposes, is one such example.

Accounting exposure:The change in the value of a firm's foreign currency denominated accounts due to a
change in exchange rates.

Accounting earnings:Earnings of a firm as reported on its income statement.

Accounting insolvency:Total liabilities exceed total assets. A firm with a negative net worth is insolvent on
the books.

Accounting liquidity:The ease and quickness with which assets can be converted to cash.

Accounts payable:Money owed to suppliers.

Accounts receivable:Money owed by customers.

Accounts receivable turnover:The ratio of net credit sales to average accounts receivable, a measure of how
quickly customers pay their bills.

Accretion (of a discount) :In portfolio accounting, a straight-line accumulation of capital gains on discount
bond in anticipation of receipt of par at maturity.

Accrual bond :A bond on which interest accrues, but is not paid to the investor during the time of accrual.
The amount of accrued interest is added to the remaining principal of the bond and is paid at maturity.

Accrued interest :The accumulated coupon interest earned but not yet paid to the seller of a bond by the
buyer (unless the bond is in default).

Accumulated Benefit Obligation (ABO) :An approximate measure of the liability of a plan in the event of a
termination at the date the calculation is performed. Related: projected benefit obligation.

Acid-test ratio :Also called the quick ratio, the ratio of current assets minus inventories, accruals, and prepaid
items to current liabilities.

Acquiree :A firm that is being acquired.

Acquirer :A firm or individual that is acquiring something.

Acquisition of assets :A merger or consolidation in which an acquirer purchases the selling firm's assets.

Acquisition of stock :A merger or consolidation in which an acquirer purchases the acquiree's stock.
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Dictionary of Financial and Business Terms
Lico Reis “ Consultoria & Línguas
licoreis@terra.com.br
Act of state doctrine :This doctrine says that a nation is sovereign within its own borders and its domestic
actions may not be questioned in the courts of another nation.

Active :A market in which there is much trading.

Active portfolio strategy :A strategy that uses available information and forecasting techniques to seek a
better performance than a portfolio that is simply diversified broadly. Related: passive portfolio strategy

Actuals :The physical commodity underlying a futures contract. Cash commodity, physical.

Additional hedge :A protection against borrower fallout risk in the mortgage pipeline.

Adjustable rate preferred stock (ARPS) :Publicly traded issues that may be collateralized by mortgages and
MBSs.

Adjusted present value (APV) The net present value analysis of an asset if financed solely by equity
(present value of un-levered cash flows), plus the present value of any financing decisions (levered cash
flows). In other words, the various tax shields provided by the deductibility of interest and the benefits of
other investment tax credits are calculated separately. This analysis is often used for highly leveraged
transactions such as a leverage buy-out.

Administrative pricing rules IRS rules used to allocate income on export sales to a foreign sales corporation.

Advance commitment A promise to sell an asset before the seller has lined up purchase of the asset. This
seller can offset risk by purchasing a futures contract to fix the sales price.

Adverse selection A situation in which market participation is a negative signal.

Affirmative covenant A bond covenant that specifies certain actions the firm must take.

After-tax profit margin The ratio of net income to net sales.

After-tax real rate of return Money after-tax rate of return minus the inflation rate.

Agencies Federal agency securities.

Agency bank A form of organization commonly used by foreign banks to enter the U.S. market. An agency
bank cannot accept deposits or extend loans in its own name; it acts as agent for the parent bank.

Agency basis A means of compensating the broker of a program trade solely on the basis of commission
established through bids submitted by various brokerage firms. agency incentive arrangement. A means of
compensating the broker of a program trade using benchmark prices for issues to be traded in determining
commissions or fees.

Agency cost viewThe argument that specifies that the various agency costs create a complex environment in
which total agency costs are at a minimum with some, but less than 100%, debt financing.

Agency costs The incremental costs of having an agent make decisions for a principal.

Agency pass-throughs Mortgage pass-through securities whose principal and interest payments are
guaranteed by government agencies, such as the Government National Mortgage Association (" Ginnie Mae
"), Federal Home Loan Mortgage Corporation (" Freddie Mac") and Federal National Mortgage Association
(" Fannie Mae").

Agency problem Conflicts of interest among stockholders, bondholders, and managers.
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Dictionary of Financial and Business Terms
Lico Reis “ Consultoria & Línguas
licoreis@terra.com.br
Agency theory The analysis of principal-agent relationships, wherein one person, an agent, acts on behalf of
anther person, a principal.

Agent The decision-maker in a principal-agent relationship.

Aggregation Process in corporate financial planning whereby the smaller investment proposals of each of the
firm's operational units are added up and in effect treated as a big picture.

Aging schedule A table of accounts receivable broken down into age categories (such as 0-30 days, 30-60
days, and 60-90 days), which is used to see whether customer payments are keeping close to schedule.

AIBD Association of International Bond Dealers.

All equity rate The discount rate that reflects only the business risks of a project and abstracts from the
effects of financing.

All or none Requirement that none of an order be executed unless all of it can be executed at the specified
price.

All-equity rateThe discount rate that reflects only the business risks of a project and abstracts from the
effects of financing.

All-in cost Total costs, explicit and implicit.

All-or-none underwriting An arrangement whereby a security issue is canceled if the underwriter is unable
to re-sell the entire issue.

Alpha A measure of selection risk (also known as residual risk) of a mutual fund in relation to the market. A
positive alpha is the extra return awarded to the investor for taking a risk, instead of accepting the market
return. For example, an alpha of 0.4 means the fund outperformed the market-based return estimate by 0.4%.
An alpha of -0.6 means a fund's monthly return was 0.6% less than would have been predicted from the
change in the market alone. In a Jensen Index, it is factor to represent the portfolio's performance that
diverges from its beta, representing a measure of the manager's performance.

Alpha equationThe alpha of a fund is determined as follows:

[ (sum of y) -((b)(sum of x)) ] / n

where: n =number of observations (36 months)

b = beta of the fund

x = rate of return for the S&P 500

y = rate of return for the fund

Alternative mortgage instruments Variations of mortgage instruments such as adjustable-rate and variable-
rate mortgages, graduated-payment mortgages, reverse-annuity mortgages, and several seldom-used
variations.

American Depositary Receipts (ADRs) Certificates issued by a U.S. depositary bank, representing foreign
shares held by the bank, usually by a branch or correspondent in the country of issue. One ADR may
represent a portion of a foreign share, one share or a bundle of shares of a foreign corporation. If the ADR's
are "sponsored," the corporation provides financial information and other assistance to the bank and may
subsidize the administration of the ADRs. "Unsponsored" ADRs do not receive such assistance. ADRs carry
the same currency, political and economic risks as the underlying foreign share; the prices of the two, adjusted
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Dictionary of Financial and Business Terms
Lico Reis “ Consultoria & Línguas
licoreis@terra.com.br
for the SDR/ordinary ratio, are kept essentially identical by arbitrage. American depositary shares(ADSs) are
a similar form of certification.

American option An option that may be exercised at any time up to and including the expiration date.
Related: European option

American shares Securities certificates issued in the U.S. by a transfer agent acting on behalf of the foreign
issuer. The certificates represent claims to foreign equities.

American Stock Exchange (AMEX) The second-largest stock exchange in the United States. It trades
mostly in small-to medium-sized companies.

American-style option An option contract that can be exercised at any time between the date of purchase and
the expiration date. Most exchange-traded options are American style.

Amortization The repayment of a loan by installments.

Amortization factor The pool factor implied by the scheduled amortization assuming no prepayemts.

Amortizing interest rate swap Swap in which the principal or national amount rises (falls) as interest rates
rise (decline).

Analyst Employee of a brokerage or fund management house who studies companies and makes buy-and-sell
recommendations on their stocks. Most specialize in a specific industry.

Angels Individuals providing venture capital.

Announcement date Date on which particular news concerning a given company is announced to the public.
Used in event studies, which researchers use to evaluate the economic impact of events of interest.

Annual fund operating expenses For investment companies, the management fee and "other expenses,"
including the expenses for maintaining shareholder records, providing shareholders with financial statements,
and providing custodial and accounting services. For 12b-1 funds, selling and marketing costs are included.

Annual percentage rate (APR) The periodic rate times the number of periods in a year. For example, a 5%
quarterly return has an APR of 20%.

Annual percentage yield (APY) The effective, or true, annual rate of return. The APY is the rate actually
earned or paid in one year, taking into account the affect of compounding. The APY is calculated by taking
one plus the periodic rate and raising it to the number of periods in a year. For example, a 1% per month rate
has an APY of 12.68% (1.01^12).

Annual report Yearly record of a publicly held company's financial condition. It includes a description of the
firm's operations, its balance sheet and income statement. SEC rules require that it be distributed to all

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