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shareholders. A more detailed version is called a 10-K.

Annualized gain If stock X appreciates 1.5% in one month, the annualized gain for that sock over a twelve
month period is 12*1.5% = 18%. Compounded over the twelve month period, the gain is (1.015)^12 = 19.6%.

Annualized holding period return The annual rate of return that when compounded t times, would have
given the same t-period holding return as actually occurred from period 1 to period t.

Annuity A regular periodic payment made by an insurance company to a policyholder for a specified period
of time.
Dictionary of Financial and Business Terms
Lico Reis “ Consultoria & Línguas
Annuity due An annuity with n payments, wherein the first payment is made at time t = 0 and the last
payment is made at time t = n - 1.

Annuity factor Present value of $1 paid for each of t periods.

Annuity in arrearsAn annuity with a first payment on full period hence, rather than immediately.

Anticipation Arrangements whereby customers who pay before the final date may be entitled to deduct a
normal rate of interest.

Antidilutive effect Result of a transaction that increases earnings per common share (e.g. by decreasing the
number of shares outstanding).

Appraisal ratio The signal-to-noise ratio of an analyst's forecasts. The ratio of alpha to residual standard

Appraisal rights A right of shareholders in a merger to demand the payment of a fair price for their shares, as
determined independently.

Appropriation request Formal request for funds for capital investment project.

Arbitrage The simultaneous buying and selling of a security at two different prices in two different markets,
resulting in profits without risk. Perfectly efficient markets present no arbitrage opportunities. Perfectly
efficient markets seldom exist.

Arbitrage Pricing Theory (APT) An alternative model to the capital asset pricing model developed by
Stephen Ross and based purely on arbitrage arguments.

Arbitrage-free option-pricing models Yield curve option-pricing models.

Arbitrageurs People who search for and exploit arbitrage opportunities.

Arithmetic average (mean) rate of return Arithmetic mean return.

Arithmetic mean return An average of the subperiod returns, calculated by summing the subperiod returns
and dividing by he number of subperiods.

Arms index Also known as a trading index (TRIN)= (number of advancing issues)/ (number of declining
issues) (Total up volume )/ (total down volume). An advance/decline market indicator. Less than 1.0 indicates
bullish demand, while above 1.0 is bearish. The index often is smoothed with a simple moving average.

Arm's length price The price at which a willing buyer and a willing unrelated seller would freely agree to

ARMs Adjustable rate mortgage. A mortgage that features predetermined adjustments of the loan interest rate
at regular intervals based on an established index. The interest rate is adjusted at each interval to a rate
equivalent to the index value plus a predetermined spread, or margin, over the index, usually subject to per-
interval and to life-of-loan interest rate and/or payment rate caps.

Articles of incorporation Legal document establishing a corporation and its structure and purpose.

Asian currency units (ACUs) Dollar deposits held in Singapore or other Asian centers.

Asian option Option based on the average price of the asset during the life of the option.
Dictionary of Financial and Business Terms
Lico Reis “ Consultoria & Línguas
Ask This is the quoted ask, or the lowest price an investor will accept to sell a stock. Practically speaking, this
is the quoted offer at which an investor can buy shares of stock; also called the offer price.

Ask price A dealer's price to sell a security; also called the offer price.

Asset Any possession that has value in an exchange.

Asset/equity ratio The ratio of total assets to stockholder equity.

Asset/liability management Also called surplus management, the task of managing funds of a financial
institution to accomplish the two goals of a financial institution: (1) to earn an adequate return on funds
invested and (2) to maintain a comfortable surplus of assets beyond liabilities.

Asset activity ratios Ratios that measure how effectively the firm is managing its assets.

Asset allocation decision The decision regarding how an institution's funds should be distributed among the
major classes of assets in which it may invest.

Asset-backed security A security that is collateralized by loans, leases, receivables, or installment contracts
on personal property, not real estate.

Asset-based financing Methods of financing in which lenders and equity investors look principally to the
cash flow from a particular asset or set of assets for a return on, and the return of, their financing.

Asset classes Categories of assets, such as stocks, bonds, real estate and foreign securities.

Asset-coverage test A bond indenture restriction that permits additional borrowing on if the ratio of assets to
debt does not fall below a specified minimum.

Asset for asset swap Creditors exchange the debt of one defaulting borrower for the debt of another
defaulting borrower.

Asset pricing model A model for determining the required rate of return on an asset.

Asset substitution A firm's investing in assets that are riskier than those that the debtholders expected.

Asset substitution problem Arises when the stockholders substitute riskier assets for the firm's existing
assets and expropriate value from the debtholders.

Asset swap An interest rate swap used to alter the cash flow characteristics of an institution's assets so as to
provide a better match with its iabilities.

Asset turnover The ratio of net sales to total assets.

Asset pricing model A model, such as the Capital Asset Pricing Model (CAPM), that determines the required
rate of return on a particular asset.

Assets A firm's productive resources.

Assets requirements A common element of a financial plan that describes projected capital spending and the
proposed uses of net working capital.

Assignment The receipt of an exercise notice by an options writer that requires the writer to sell (in the case
of a call) or purchase (in the case of a put) the underlying security at the specified strike price.
Dictionary of Financial and Business Terms
Lico Reis “ Consultoria & Línguas
Asymmetry A lack of equivalence between two things, such as the unequal tax treatment of interest expense
and dividend payments.

Asymmetric information Information that is known to some people but not to other people.

Asymmetric taxes A situation wherein participants in a transaction have different net tax rates.

At-the-money An option is at-the-money if the strike price of the option is equal to the market price of the
underlying security. For example, if xyz stock is trading at 54, then the xyz 54 option is at-the-money.

Attribute bias The tendency of stocks preferred by the dividend discount model to share certain equity
attributes such as low price-earnings ratios, high dividend yield, high book-value ratio or membership in a
particular industry sector.

Auction markets Markets in which the prevailing price is determined through the free interaction of
prospective buyers and sellers, as on the floor of the stock exchange.

Auction rate preferred stock (ARPS) Floating rate preferred stock, the dividend on which is adjusted every
seven weeks through a Dutch auction.

Auditor's report A section of an annual report containing the auditor's opinion about the veracity of the
financial statements.

Authorized shares Number of shares authorized for issuance by a firm's corporate charter.

Autocorrelation The correlation of a variable with itself over successive time intervals.

Automated Clearing House (ACH) A collection of 32 regional electronic interbank networks used to
process transactions electronically with a guaranteed one-day bank collection float.

Automatic stay The restricting of liability holders from collection efforts of collateral seizure, which is
automatically imposed when a firm files for bankruptcy under Chapter 11.

Autoregressive Using past data to predict future data.

Availability float Checks deposited by a company that have not yet been cleared.

Average An arithmetic mean of selected stocks intended to represent the behavior of the market or some
component of it. One good example is the widely quoted Dow Jones Industrial Average, which adds the
current prices of the 30 DJIA's stocks, and divides the results by a predetermined number, the divisor.

Average accounting return The average project earnings after taxes and depreciation divided by the average
book value of the investment during its life.

Average age of accounts receivable The weighted-average age of all of the firm's outstanding invoices.

Average collection period, or days' receivables The ratio of accounts receivables to sales, or the total
amount of credit extended per dollar of daily sales (average AR/sales * 365).

Average cost of capital A firm's required payout to the bondholders and to the stockholders expressed as a
percentage of capital contributed to the firm. Average cost of capital is computed by dividing the total
required cost of capital by the total amount of contributed capital.

Average life Also referred to as the weighted-average life (WAL). The average number of years that each
dollar of unpaid principal due on the mortgage remains outstanding. Average life is computed as the weighted
Dictionary of Financial and Business Terms
Lico Reis “ Consultoria & Línguas
average time to the receipt of all future cash flows, using as the weights the dollar amounts of the principal

Average maturity The average time to maturity of securities held by a mutual fund. Changes in interest rates
have greater impact on funds with longer average life.

Average (across-day) measures An estimation of price that uses the average or representative price of a
large number of trades.

Average rate of return (ARR) The ratio of the average cash inflow to the amount invested.

Average tax rate Taxes as a fraction of income; total taxes divided by total taxable income.

Away A trade, quote, or market that does not originate with the dealer in question, e.g., "the bid is 98-10
away from me."

Back fee The fee paid on the extension date if the buyer wishes to continue the option.

Back officeBrokerage house clerical operations that support, but do not include, the trading of stocks and
other securities. Includes all written confirmation and settlement of trades, record keeping and regulatory

Back-end loan fund A mutual fund that charges investors a fee to sell (redeem) shares, often ranging from
4% to 6%. Some back-end load funds impose a full commission if the shares are redeemed within a
designated time, such as one year. The commission decreases the longer the investor holds the shares. The
formal name for the back-end load is the contingent deferred sales charge, or CDSC.

Back-to-back financing An intercompany loan channeled through a bank.

Back-to-back loan A loan in which two companies in separate countries borrow each other's currency for a
specific time period and repay the other's currency at an agreed upon maturity.

Back-up (1) When bond yields and prices fall, the market is said to back-up. (2) When an investor swaps out
of one security into another of shorter current maturity he is said to back up.

Backwardation A market condition in which futures prices are lower in the distant delivery months than in
the nearest delivery month. This situation may occur in when the costs of storing the product until eventual
delivery are effectively subtracted from the price today. The opposite of contango.

Baker Plan A plan by U.S. Treasury Secretary James Baker under which 15 principal middle-income debtor
countries (the Baker 15) would undertake growth-oriented structural reforms, to be supported by increased
financing from the World Bank and continued lending from commercial banks.

Balance of payments A statistical compilation formulated by a sovereign nation of all economic transactions
between residents of that nation and residents of all other nations during a stipulated period of time, usually a
calendar year.

Balance of trade Net flow of goods (exports minus imports) between countries.

Balance sheet Also called the statement of financial condition, it is a summary of the assets, liabilities, and
owners' equity.

Balance sheet exposure See:accounting exposure.

Balance sheet identity Total Assets = Total Liabilities + Total Stockholders' Equity
Dictionary of Financial and Business Terms
Lico Reis “ Consultoria & Línguas
Balanced fund An investment company that invests in stocks and bonds. The same as a balanced mutual

Balanced mutual fund This is a fund that buys common stock, preferred stock and bonds. The same as a
balanced fund.

Balloon maturity Any large principal payment due at maturity for a bond or loan with or without a a sinking
fund requirement.

BAN (Bank anticipation notes) Notes issued by states and municipalities to obtain interim financing for
projects that will eventually be funded long term through the sale of a bond issue.

Bane In the words of Warren Buffet, Bill Bane Sr., is, "a great American and one of the last real traders
around. I like to call him 'Salvo.'" His wife, Carol, is a huge NASCAR fan, and in her own words "delights in
pulling the legs off central bankers." Cooper Bane, son number two, is a thriving artiste who specializes in
making art that is much better than the stuff most folks are doing. Jackson, son number three, is a world
renowned master chef and plans on opening a restaurant. Bill Bane Jr., son number one, plans on giving Mr.
Monroe Trout a run for his money. [Bill Bane, Jr. helped Professor Harvey put the hypertextual glossary
together while an MBA student at Duke University.]

Bank collection float The time that elapses between when a check is deposited into a bank account and when
the funds are available to the depositor, during which period the bank is collecting payment from the payer's


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