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Liquidity diversification Investing in a variety of maturities to reduce the price risk to which holding long
bonds exposes the investor.

Liquidity preference hypothesis The argument that greater liquidity is valuable, all else equal. Also, the
theory that the forward rate exceeds expected future interest rates.

Liquidity premium Forward rate minus expected future short-term interest rate.

Liquidity ratios Ratios that measure a firm's ability to meet its short-term financial obligations on time.

Liquidity risk The risk that arises from the difficulty of selling an asset. It can be thought of as the difference
between the "true value" of the asset and the likely price, less commissions.

Liquidity theory of the term structure A biased expectations theory that asserts that the implied forward
rates will not be a pure estimate of the market's expectations of future interest rates because they embody a
liquidity premium.

Listed stocks Stocks that are traded on an exchange.
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Load fund A mutual fund with shares sold at a price including a large sales charge -- typically 4% to 8% of
the net amount indicated. Some "no-load" funds have distribution fees permitted by article 12b-1 of the
Investment Company Act; these are typically 0. 25%. A "true no-load" fund has neither a sales charge nor
Freddie Mac program, the aggregation that the fund purchaser receives some investment advice or other
service worthy of the charge.

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

Loan amortization schedule The schedule for repaying the interest and principal on a loan.

Loan syndication Group of banks sharing a loan. See: syndicate.

Loan value The amount a policyholder may borrow against a whole life insurance policy at the interest rate
specified in the policy.

Local expectations theory A form of the pure expectations theory which suggests that the returns on bonds
of different maturities will be the same over a short-term investment horizon.

Lockbox A collection and processing service provided to firms by banks, which collect payments from a
dedicated postal box that the firm directs its customers to send payment to. The banks make several
collections per day, process the payments immediately, and deposit the funds into the firm's bank account.

Locked market A market is locked if the bid = ask price. This can occur, for example, if the market is
brokered and brokerage is paid by one side only, the initiator of the transaction.

Lock-out With PAC bond CMO classes, the period before the PAC sinking fund becomes effective. With
multifamily loans, the period of time during which prepayment is prohibited.

Lock-up CDs CDs that are issued with the tacit understanding that the buyer will not trade the certificate.
Quite often, the issuing bank will insist that the certificate be safekept by it to ensure that the understanding is
honored by the buyer.

Log-linear least-squares method A statistical technique for fitting a curve to a set of data points. One of the
variables is transformed by taking its logarithm, and then a straight line is fitted to the transformed set of data
points.

Lognormal distribution A distribution where the logarithm of the variable follows a normal distribution.
Lognormal distributions are used to describe returns calculated over periods of a year or more.

London International Financial Futures Exchange (LIFFE) A London exchange where Eurodollar futures
as well as futures-style options are traded.

Long One who has bought a contract(s) to establish a market position and who has not yet closed out this
position through an offsetting sale; the opposite of short.

Long bonds Bonds with a long current maturity. The "long bond" is the 30-year U.S. government bond.

Long coupons (1) Bonds or notes with a long current maturity. (2) A bond on which one of the coupon
periods, usually the first, is longer than the other periods or the standard period.

Long hedge The purchase of a futures contract(s) in anticipation of actual purchases in the cash market. Used
by processors or exporters as protection against an advance in the cash price. Related: Hedge, short hedge

Long position An options position where a person has executed one or more option trades where the net
result is that they are an "owner" or holder of options (i. e. the number of contracts bought exceeds the
number of contracts sold).
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Occurs when an individual owns securities. An owner of 1,000 shares of stock is said to be "Long the stock."
Related: Short position

Long run A period of time in which all costs are variable; greater than one year.

Long straddle A straddle in which a long position is taken in both a put and call option.

Long-term In accounting information, one year or greater.

Long-term assets Value of property, equipment and other capital assets minus the depreciation. This is an
entry in the bookkeeping records of a company, usually on a "cost" basis and thus does not necessarily reflect
the market value of the assets.

Long-term debt An obligation having a maturity of more than one year from the date it was issued. Also
called funded debt.

Long-term debt/capitalization Indicator of financial leverage. Shows long-term debt as a proportion of the
capital available. Determined by dividing long-term debt by the sum of long-term debt, preferred stock and
common stockholder equity.

Long-term debt ratio The ratio of long-term debt to total capitalization.

Long-term financial plan Financial plan covering two or more years of future operations.

Long-term liabilities Amount owed for leases, bond repayment and other items due after 1 year.

Long-term debt to equity ratio A capitalization ratio comparing long-term debt to shareholders' equity.

Look-thru A method for calculating U.S. taxes owed on income from controlled foreign corporations that
was introduced by the Tax Reform Act of 1986.

Lookback option An option that allows the buyer to choose as the option strike price any price of the
underlying asset that has occurred during the life of the option. If a call, the buyer will choose the minimal
price, whereas if a put, the buyer will choose the maximum price. This option will always be in the money.

Low-coupon bond refunding Refunding of a low coupon bond with a new, higher coupon bond.

Low price This is the day's lowest price of a security that has changed hands between a buyer and a seller.

Low price-earnings ratio effect The tendency of portfolios of stocks with a low price-earnings ratio to
outperform portfolios consisting of stocks with a high price-earnings ratio.

Macaulay duration The weighted-average term to maturity of the cash flows from the bond, where the
weights are the present value of the cash flow divided by the price.

Magic of diversification The effective reduction of risk (variance) of a portfolio, achieved without reduction
to expected returns through the combination of assets with low or negative correlations (covariances).
Related: Markowitz diversification

Mail float Refers to the part of the collection and disbursement process where checks are trapped in the postal
system.

Maintenance margin requirement A sum, usually smaller than -but part of the original margin, which must
be maintained on deposit at all times. If a customer's equity in any futures position drops to, or under, the
maintenance margin level, the broker must issue a margin call for the amount at money required to restore the
customer's equity in the account to the original margin level. Related: margin, margin call.
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Make a market A dealer is said to make a market when he quotes bid and offered prices at which he stands
ready to buy and sell.

Making delivery Refers to the seller's actually turning over to the buyer the asset agreed upon in a forward
contract.

Majority voting Voting system under which each director is voted upon separately. Related: cumulative
voting.

Managed float Also known as "dirty" float, this is a system of floating exchange rates with central bank
intervention to reduce currency fluctuations.

Management/closely held shares Percentage of shares held by persons closely related to a company, as
defined by the Securities and exchange commission. Part of these percentages often is included in
Institutional Holdings -- making the combined total of these percentages over 100. There is overlap as
institutions sometimes acquire enough stock to be considered by the SEC to be closely allied to the company.

Management buyout (MBO) Leveraged buyout whereby the acquiring group is led by the firm's
management.

Management fee An investment advisory fee charged by the financial advisor to a fund based on the fund's
average assets, but sometimes determined on a sliding scale that declines as the dollar amount of the fund
increases.

Mangement's discussion A report from management to the shareholders that accompanies the firm's
financial statements in the annual report. This report explains the period's financial results and enables
management to discuss other ideas that may not be apparent in the financial statements in the annual report.

Managerial decisions Decisions concerning the operation of the firm, such as the choice of firm size, firm
growth rates, and employee compensation.

Mandatory redemption schedule Schedule according to which sinking fund payments must be made.

Manufactured housing securities (MHSs) Loans on manufactured homes - that is, factory-built or
prefabricated housing, including mobile homes.

Margin This allows investors to buy securities by borrowing money from a broker. The margin is the
difference between the market value of a stock and the loan a broker makes. Related: security deposit (initial).

Margin account (Stocks) A leverageable account in which stocks can be purchased for a combination of
cash and a loan. The loan in the margin account is collateralized by the stock and, if the value of the stock
drops sufficiently, the owner will be asked to either put in more cash, or sell a portion of the stock. Margin
rules are federally regulated, but margin requirements and interest may vary among broker/dealers.

Margin call A demand for additional funds because of adverse price movement. Maintenance margin
requirement, security deposit maintenance

Margin of safety With respect to working capital management, the difference between 1) the amount of long-
term financing, and 2) the sum of fixed assets and the permanent component of current assets.

Margin requirement (Options) The amount of cash an uncovered (naked) option writer is required to
deposit and maintain to cover his daily position valuation and reasonably foreseeable intra-day price changes.

Marginal Incremental.

Marginal tax rate The tax rate that would have to be paid on any additional dollars of taxable income earned.
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Mark-to-market The process whereby the book value or collateral value of a security is adjusted to reflect
current market value.

Marked-to-market An arrangement whereby the profits or losses on a futures contract are settled each day.

Market capitalization The total dollar value of all outstanding shares. Computed as shares times current
market price. It is a measure of corporate size.

Market capitalization rate Expected return on a security. The market-consensus estimate of the appropriate
discount rate for a firm's cash flows.

Market clearing Total demand for loans by borrowers equals total supply of loans from lenders. The market,
any market, clears at the equilibrium rate of interest or price.

Market conversion priceAlso called conversion parity price, the price that an investor effectively pays for
common stock by purchasing a convertible security and then exercising the conversion option. This price is
equal to the market price of the convertible security divided by the conversion ratio.

Market cycle The period between the 2 latest highs or lows of the S&P 500, showing net performance of a
fund through both an up and a down market. A market cycle is complete when the S&P is 15% below the
highest point or 15% above the lowest point (ending a down market). The dates of the last market cycle are:
12/04/87 to 10/11/90 (low to low).

Market impact costs Also called price impact costs, the result of a bid/ask spread and a dealer's price
concession.

Market model This relationship is sometimes called the single-index model. The market model says that the
return on a security depends on the return on the market portfolio and the extent of the security's
responsiveness as measured, by beta. In addition, the return will also depend on conditions that are unique to
the firm. Graphically, the market model can be depicted as a line fitted to a plot of asset returns against
returns on the market portfolio.

Market order This is an order to immediately buy or sell a security at the current trading price.

Market overhang The theory that in certain situations, institutions wish to sell their shares but postpone the
share sales because large orders under current market conditions would drive down the share price and that
the consequent threat of securities sales will tend to retard the rate of share price appreciation. Support for this
theory is largely anecdotal.

Market portfolio A portfolio consisting of all assets available to investors, with each asset held -in
proportion to its market value relative to the total market value of all assets.

Market price of risk A measure of the extra return, or risk premium, that investors demand to bear risk. The
reward-to-risk ratio of the market portfolio.

Market prices The amount of money that a willing buyer pays to acquire something from a willing seller,
when a buyer and seller are independent and when such an exchange is motivated by only commercial
consideration.

Market return The return on the market portfolio.

Market risk Risk that cannot be diversified away. Related: systematic risk

Market sectors The classifications of bonds by issuer characteristics, such as state government, corporate, or
utility.
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Market segmentation theory or preferred habitat theory A biased expectations theory that asserts that the
shape of the yield curve is determined by the supply of and demand for securities within each maturity sector.

Market timer A money manager who assumes he or she can forecast when the stock market will go up and
down.

Market timing Asset allocation in which the investment in the market is increased if one forecasts that the
market will outperform T-bills.

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