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Dictionary of Financial and Business Terms
Lico Reis “ Consultoria & Línguas
licoreis@terra.com.br
Book value A company's book value is its total assets minus intangible assets and liabilities, such as debt. A
company's book value might be more or less than its market value.

Book value per share The ratio of stockholder equity to the average number of common shares. Book value
per share should not be thought of as an indicator of economic worth, since it reflects accounting valuation
(and not necessarily market valuation).

Book-entry securities The Treasury and federal agencies are moving to a book-entry system in which
securities are not represented by engraved pieces of paper but are maintained in computerized records at the
Fed in the names of member banks, which in turn keep records of the securities they own as well as those they
are holding for customers. In the case of other securities where a book-entry has developed, engraved
securities do exist somewhere in quite a few cases. These securities do not move from holder to holder but are
usually kept in a central clearinghouse or by another agent.

Bootstrapping A process of creating a theoretical spot rate curve , using one yield projection as the basis for
the yield of the next maturity.

Borrow To obtain or receive money on loan with the promise or understanding that it will be repaid.

Borrower fallout In the mortgage pipeline, the risk that prospective borrowers of loans committed to be
closed will elect to withdraw from the contract.

Bottom-up equity management style A management style that de-emphasizes the significance of economic
and market cycles, focusing instead on the analysis of individual stocks.

Bought deal Security issue where one or two underwriters buy the entire issue.

Bourse A term of French origin used to refer to stock markets.

Bracket A term signifying the extent an underwriter's commitment in a new issue, e.g., major bracket or
minor bracket.

Brady bonds Bonds issued by emerging countries under a debt reduction plan.

Branch An operation in a foreign country incorporated in the home country.

Break A rapid and sharp price decline.

Break-even analysis An analysis of the level of sales at which a project would make zero profit.

Break-even lease payment The lease payment at which a party to a prospective lease is indifferent between
entering and not entering into the lease arrangement.

Break-even payment rate The prepayment rate of a MBS coupon that will produce the same CFY as that of
a predetermined benchmark MBS coupon. Used to identify for coupons higher than the benchmark coupon
the prepayment rate that will produce the same CFY as that of the benchmark coupon; and for coupons lower
than the benchmark coupon the lowest prepayment rate that will do so.

Break-even tax rate The tax rate at which a party to a prospective transaction is indifferent between entering
into and not entering into the transaction.

Break-even time Related: Premium payback period.

Breakout A rise in a security's price above a resistance level (commonly its previous high price) or drop
below a level of support (commonly the former lowest price.) A breakout is taken to signify a continuing
move in the same direction. Can be used by technical analysts as a buy or sell indicator.
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Dictionary of Finantial and Business Terms
Lico Reis “ Consultoria & Línguas
licoreis@terra.com.br
Bretton Woods Agreement An agreement signed by the original United Nations members in 1944 that
established the International Monetary Fund (IMF) and the post-World War II international monetary system
of fixed exchange rates.

Bridge financing Interim financing of one sort or another used to solidify a position until more permanent
financing is arranged.

British clearers The large clearing banks that dominate deposit taking and short-term lending in the domestic
sterling market.

Broker An individual who is paid a commission for executing customer orders. Either a floor broker who
executes orders on the floor of the exchange, or an upstairs broker who handles retail customers and their
orders.

Broker loan rate Related: Call money rate.

Brokered market A market where an intermediary offers search services to buyers and sellers.

Bubble theory Security prices sometimes move wildly above their true values.

Buck Slang for one million dollars.

Budget A detailed schedule of financial activity, such as an advertising budget, a sales budget, or a capital
budget.

Budget deficit The amount by which government spending exceeds government revenues.

Builder buydown loan A mortgage loan on newly developed property that the builder subsidizes during the
early years of the development. The builder uses cash to buy down the mortgage rate to a lower level than the
prevailing market loan rate for some period of time. The typical buydown is 3% of the interest-rate amount
for the first year, 2% for the second year, and 1% for the third year (also referred to as a 3-2-1 buydown).

Bull An investor who thinks the market will rise. Related: bear.

Bull-bear bond Bond whose principal repayment is linked to the price of another security. The bonds are
issued in two tranches: in the first tranche repayment increases with the price of the other security, and in the
second tranche repayment decreases with the price of the other security.

Bull CD, Bear CD A bull CD pays its holder a specified percentage of the increase in return on a specified
market index while guaranteeing a minimum rate of return. A bear CD pays the holder a fraction of any fall in
a given market index.

Bull market Any market in which prices are in an upward trend.

Bull spread A spread strategy in which an investor buys an out-of-the-money put option, financing it by
selling an out-of-the money call option on the same underlying.

Bulldog bond Foreign bond issue made in London.

Bulldog market The foreign market in the United Kingdom.

Bullet contract A guaranteed investment contract purchased with a single (one-shot) premium. Related:
Window contract.

Bullet loan A bank term loan that calls for no amortization.
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Dictionary of Finantial and Business Terms
Lico Reis “ Consultoria & Línguas
licoreis@terra.com.br
Bullet strategy A strategy in which a portfolio is constructed so that the maturities of its securities are highly
concentrated at one point on the yield curve.

Bullish, bearish Words used to describe investor attitudes. Bullish refers to an optimistic outlook while
bearish means a pessimistic outlook.

Bundling, unbundling A trend allowing creation of securities either by combining primitive and derivative
securities into one composite hybrid or by separating returns on an asset into classes.

Business cycle Repetitive cycles of economic expansion and recession.

Business failure A business that has terminated with a loss to creditors.

Business risk The risk that the cash flow of an issuer will be impaired because of adverse economic
conditions, making it difficult for the issuer to meet its operating expenses.

Busted convertible Related: Fixed-income equivalent.

Butterfly shift A non-parallel shift in the yield curve involving the height of the curve.

Buy To purchase an asset; taking a long position.

Buy in To cover, offset or close out a short position. Related: evening up, liquidation.

Buy limit order A conditional trading order that indicates a security may be purchased only at the designated
price or lower. Related: Sell limit order.

Buy on close To buy at the end of the trading session at a price within the closing range.

Buy on margin A transaction in which an investor borrows to buy additional shares, using the shares
themselves as collateral.

Buy on opening To buy at the beginning of a trading session at a price within the opening range.

Buy-and-hold strategy A passive investment strategy with no active buying and selling of stocks from the
time the portfolio is created until the end of the investment horizon.

BuydownsMortgages in which monthly payments consist of principal and interest, with portions of these
payments during the early period of the loan being provided by a third party to reduce the borrower's monthly
payments.

Buying the index Purchasing the stocks in the S&P 500 in the same proportion as the index to achieve the
same return.

Buyout Purchase of a controlling interest (or percent of shares) of a company's stock. A leveraged buy-out is
done with borrowed money.

Buy-back Another term for a repo.

Buy-side analyst A financial analyst employed by a non-brokerage firm, typically one of the larger money
management firms that purchase securities on their own accounts.

Cable Exchange rate between British pounds sterling and the U.S.$.

Calendar List of new issues scheduled to come to market shortly.
19
Dictionary of Finantial and Business Terms
Lico Reis “ Consultoria & Línguas
licoreis@terra.com.br
Calendar effect The tendency of stocks to perform differently at different times, including such anomalies as
the January effect, month-of-the-year effect, day-of-the-week effect, and holiday effect.

Call An option that gives the right to buy the underlying futures contract.

Call an option To exercise a call option.

Call date A date before maturity, specified at issuance, when the issuer of a bond may retire part of the bond
for a specified call price.

Call money rate Also called the broker loan rate , the interest rate that banks charge brokers to finance
margin loans to investors. The broker charges the investor the call money rate plus a service charge.

Call option An option contract that gives its holder the right (but not the obligation) to purchase a specified
number of shares of the underlying stock at the given strike price, on or before the expiration date of the
contract.

Call premium Premium in price above the par value of a bond or share of preferred stock that must be paid to
holders to redeem the bond or share of preferred stock before its scheduled maturity date.

Call price The price, specified at issuance, at which the issuer of a bond may retire part of the bond at a
specified call date.

Call protection A feature of some callable bonds that establishes an initial period when the bonds may not be
called.

Call price The price for which a bond can be repaid before maturity under a call provision.

Call provision An embedded option granting a bond issuer the right to buy back all or part of the issue prior
to maturity.

Call risk The combination of cash flow uncertainty and reinvestment risk introduced by a call provision.

Call swaption A swaption in which the buyer has the right to enter into a swap as a fixed-rate payer. The
writer therefore becomes the fixed-rate receiver/floating rate payer.

Callable A financial security such as a bond with a call option attached to it, i.e., the issuer has the right to
call the security.

Canadian agencies Agency banks established by Canadian banks in the U.S.

Cap An upper limit on the interest rate on a floating-rate note.

Capital Money invested in a firm.

Capital account Net result of public and private international investment and lending activities.

Capital allocation decision Allocation of invested funds between risk-free assets versus the risky portfolio.

Capital asset pricing model (CAPM) An economic theory that describes the relationship between risk and
expected return, and serves as a model for the pricing of risky securities. The CAPM asserts that the only risk
that is priced by rational investors is systematic risk, because that risk cannot be eliminated by diversification.
The CAPM says that the expected return of a security or a portfolio is equal to the rate on a risk-free security
plus a risk premium.

Capital budget A firm's set of planned capital expenditures.
20
Dictionary of Finantial and Business Terms
Lico Reis “ Consultoria & Línguas
licoreis@terra.com.br
Capital budgeting The process of choosing the firm's long-term capital assets.

Capital expenditures Amount used during a particular period to acquire or improve long-term assets such as
property, plant or equipment.

Capital flight The transfer of capital abroad in response to fears of political risk.

Capital gain When a stock is sold for a profit, it's the difference between the net sales price of securities and
their net cost, or original basis. If a stock is sold below cost, the difference is a capital loss.

Capital gains yield The price change portion of a stock's return.

Capital lease A lease obligation that has to be capitalized on the balance sheet.

Capital loss The difference between the net cost of a security and the net sale price, if that security is sold at a
loss.

Capital market The market for trading long-term debt instruments (those that mature in more than one year).

Capital market efficiency Reflects the relative amount of wealth wasted in making transactions. An efficient
capital market allows the transfer of assets with little wealth loss. See: efficient market hypothesis.

Capital market imperfections view The view that issuing debt is generally valuable but that the firm's
optimal choice of capital structure is a dynamic process that involves the other views of capital structure (net
corporate/personal tax, agency cost, bankruptcy cost, and pecking order), which result from considerations of
asymmetric information, asymmetric taxes, and transaction costs.

Capital market line (CML) The line defined by every combination of the risk-free asset and the market
portfolio.

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