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distribution.

Last trading day The final day under an exchange's rules during which trading may take place in a particular
futures or options contract. Contracts outstanding at the end of the last trading day must be settled by delivery
of underlying physical commodities or financial instruments, or by agreement for monetary settlement
depending upon futures contract specifications.

Last-In-First-Out (LIFO) A method of valuing inventory that uses the cost of the most recent item in
inventory first.

Law of large numbers The mean of a random sample approaches the mean (expected value) of the
population as the sample grows.

Law of one price An economic rule stating that a given security must have the same price regardless of the
means by which one goes about creating that security. This implies that if the payoff of a security can be
synthetically created by a package of other securities, the price of the package and the price of the security
whose payoff it replicates must be equal.

Lead Payment of a financial obligation earlier than is expected or required.

Lead manager The commercial or investment bank with the primary responsibility for organizing syndicated
bank credit or bond issue. The lead manager recruits additional lending or underwriting banks, negotiates
terms of the issue with the issuer, and assesses market conditions.

Leading economic indicators Economic series that tend to rise or fall in advance of the rest of the economy.

Leakage Release of information to some persons before official public announcement.

LEAPS Long-term equity anticipation securities. Long-term options.

Lease A long-term rental agreement, and a form of secured long-term debt.

Lease Rate The payment per period stated in a lease contract.
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Ledger cash A firm's cash balance as reported in its financial statements. Also called book cash.

Legal capital Value at which a company's shares are recorded in its books.

Legal bankruptcy A legal proceeding for liquidating or reorganizing a business.

Legal defeasance The deposit of cash and permitted securities, as specified in the bond indenture, into an
irrevocable trust sufficient to enable the issuer to discharge fully its obligations under the bond indenture.

Legal investments Investments that a regulated entity is permitted to make under the rules and regulations
that govern its investing.

Lend To provide money temporarily on the condition that it or its equivalent will be returned, often with an
interest fee.

Lessee An entity that leases an asset from another entity.

Lessor An entity that leases an asset to another entity.

Letter of comment A communication to the firm from the SEC that suggests changes to its registration
statement.

Letter of credit (L/C) A form of guarantee of payment issued by a bank used to guarantee the payment of
interest and repayment of principal on bond issues.

Letter stock Privately placed common stock, so-called because the SEC requires a letter from the purchaser
stating that the stock is not intended for resale.

Level pay The characteristic of the scheduled principal and interest payments due under a mortgage such that
total monthly payment of P&I is the same while characteristically the principal payment component of the
monthly payment becomes gradually greater while the monthly interest payment becomes less.

Level-coupon bond Bond with a stream of coupon payments that are the same throughout the life of the
bond.

Leverage The use of debt financing.

Leverage clientele A group of shareholders who, because of their personal leverage, seek to invest in
corporations that maintain a compatible degree of corporate leverage.

Leverage ratios Measures of the relative contribution of stockholders and creditors, and of the firm's ability
to pay financing charges. Value of firm's debt to the total value of the firm.

Leverage rebalancing Making transactions to adjust (rebalance) a firm's leverage ratio back to its target.

Leveraged beta The beta of a leveraged required return; that is, the beta as adjusted for the degree of
leverage in the firm's capital structure.

Leveraged buyout (LBO) A transaction used for taking a public corporation private financed through the use
of debt funds: bank loans and bonds. Because of the large amount of debt relative to equity in the new
corporation, the bonds are typically rated below investment grade, properly referred to as high-yield bonds or
junk bonds. Investors can participate in an LBO through either the purchase of the debt (i.e., purchase of the
bonds or participation in the bank loan) or the purchase of equity through an LBO fund that specializes in
such investments.
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Leveraged equity Stock in a firm that relies on financial leverage. Holders of leveraged equity face the
benefits and costs of using debt.

Leveraged lease A lease arrangement under which the lessor borrows a large proportion of the funds needed
to purchase the asset and grants the lender a lien on the assets and a pledge of the lease payments to secure the
borrowing.

Leveraged portfolio A portfolio that includes risky assets purchased with funds borrowed.

Leveraged required return The required return on an investment when the investment is financed partially
by debt.

Liability A financial obligation, or the cash outlay that must be made at a specific time to satisfy the
contractual terms of such an obligation.

Liability funding strategies Investment strategies that select assets so that cash flows will equal or exceed
the client's obligations.

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

LIBOR The London Interbank Offered Rate; the rate of interest that major international banks in London
charge each other for borrowings. Many variable interest rates in the U.S. are based on spreads off of LIBOR.
There are many different LIBOR tenors.

Lien A security interest in one or more assets that is granted to lenders in connection with secured debt
financing.

LIFO (Last-in-first-out) The last-in-first-out inventory valuation methodology. A method of valuing
inventory that uses the cost of the most recent item in inventory first.

Lifting a leg Closing out one side of a long-short arbitrage before the other is closed.

Limit order An order to buy a stock at or below a specified price or to sell a stock at or above a specified
price. For instance, you could tell a broker "Buy me 100 shares of XYZ Corp at $8 or less" or to "sell 100
shares of XYZ at $10 or better." The customer specifies a price and the order can be executed only if the
market reaches or betters that price. A conditional trading order designed to avoid the danger of adverse
unexpected price changes.

Limit order book A record of unexecuted limit orders that is maintained by the specialist. These orders are
treated equally with other orders in terms of priority of execution.

Limit price Maximum price fluctuation

Limitation on asset dispositions A bond covenant that restricts in some way a firm's ability to sell major
assets.

Limitation on liens A bond covenant that restricts in some way a firm's ability to grant liens on its assets.

Limitation on merger, consolidation, or sale A bond covenant that restricts in some way a firm's ability to
merge or consolidate with another firm.

Limitation on sale-and-leaseback A bond covenant that restricts in some way a firm's ability to enter into
sale and lease-back transactions.
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Limitation on subsidiary borrowing A bond covenant that restricts in some way a firm's ability to borrow at
the subsidiary level.

Limited liability Limitation of possible loss to what has already been invested.

Limited partner A partner who has limited legal liability for the obligations of the partnership.

Limited partnership A partnership that includes one or more partners who have limited liability.

Limited-liability instrument A security, such as a call option, in which the owner can only lose his initial
investment.

Limited-tax general obligation bond A general obligation bond that is limited as to revenue sources.

Line of credit An informal arrangement between a bank and a customer establishing a maximum loan
balance that the bank will permit the borrower to maintain.

Linear programming Technique for finding the maximum value of some equation subject to stated linear
constraints.

Linear regression A statistical technique for fitting a straight line to a set of data points.

Linter's observations John Lintner's work (1956) suggested that dividend policy is related to a target level of
dividends and the speed of adjustment of change in dividends.

Liquid asset Asset that is easily and cheaply turned into cash - notably cash itself and short-term securities.

Liquid yield option note (LYON) Zero-coupon, callable, putable, convertible bond invented by Merrill
Lynch & Co.

Liquidating dividend Payment by a firm to its owners from capital rather than from earnings.

Liquidation When a firm's business is terminated, assets are sold, proceeds pay creditors and any leftovers
are distributed to shareholders. Any transaction that offsets or closes out a Long or short position. Related:
buy in, evening up, offsetliquidity.

Liquidation rights The rights of a firm's securityholders in the event the firm liquidates.

Liquidation value Net amount that could be realized by selling the assets of a firm after paying the debt.

Liquidator Person appointed by unsecured creditors in the United Kingdom to oversee the sale of an
insolvent firm's assets and the repayment of its debts.

Liquidity A market is liquid when it has a high level of trading activity, allowing buying and selling with
minimum price disturbance. Also a market characterized by the ability to buy and sell with relative ease.

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.
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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.

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.
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Dictionary of Finantial and Business Terms
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