Monthly Archives: June 2012

Term of the Day

municipal bond fund

mutual fund which invests in municipal bonds. These bond funds are popular among investors in high income tax brackets because they are exempt from federal taxes and, in some cases, from state taxes as well. As with U.S. government bond funds, the underlying securities in municipal bond fundsare backed by the government and thus are considered to have a high credit rating. However, municipalities have been known to declare bankruptcy on occasion, making these funds more riskythan U.S. government bonds. also called muni fund.

absorption costing

method of costing a product in which all fixed and variable costs are apportioned to cost centers where they are accounted for using absorption rates. This method ensures that all incurred costs are recovered from the selling price of a good or service. Also called full absorption costing. See also direct costingmarginal costing.

portfolio separation theorem

Observation that the construction of a diversified portfolio of risk-free investments and those with varying degree of risk is unaffected by the investor’s personal preferences. That is, an investor makes choices on the basis of the net present value of the projected returns and not on his or her level of risk tolerance. Since this behavior separates the decision about the type of investments from the decision about the acceptable level of risk, it is named portfolio separation theorem. Its implication is that acompany’s choice of debt-equity ratio is inconsequential. Also called Fisher’s Separation Theory after its proposer, the U.S. economist Irving Fisher (1876-1947).


The purchase of reinsurance by a reinsurance company. This limits the risk that a reinsurance company must face, since it has purchased insurance against an event that might affect a company that it had underwritten. If a reinsurance company continues to purchase insurance it might unknowingly buy back its own risk, known as “spiraling”.The voluntary act of returning property which had been previously “ceded” to its original holders. Examples include Washington, D.C. returning land to the state of Virginia in 1847, or the United Kingdom returning Hong Kong to China in 1997

solvency ratios

Mathematical comparisons of different components of an entity’s financial statements to determine its solvencyCommonsolvency ratios are (1) Current liabilities to inventory ratio, (2) Current liabilities to net worth ratio, (3) Current ratio, (4) Fixed assets to net worth ratio, (5) Quick ratio, and (6) Total liabilities to net worth Ratio.

capital lease

lease that meets one or more of the following criteria, meaning it is classified as a purchase by thelessee: the lease term is greater than 75% of the property’s estimated economic life; the lease contains an option to purchase the property for less than fair market valueownership of the property is transferred to the lessee at the end of the lease term; or the present value of the lease paymentsexceeds 90% of the fair market value of the property.

pro rata

Proportionate allocation or distribution of a quantity (such as costsincomeshares, taxes) on the basis of a commonfactor. For example, profit is generally divided among several stockholders (shareholders) on the basis of the amount ofstock (number of shares) held by each. Latin for, according to the rate.

market maker

brokerage or bank that maintains a firm bid and ask price in a given security by standing ready, willing, and able to buy or sell at publicly quoted prices (called making a market). These firms display bid and offer prices for specific numbers of specific securities, and if these prices are met, they will immediately buy for or sell from their own accounts. Market makers are very important for maintainingliquidity and efficiency for the particular securities that they make markets in. At most firms, there is a strict separation of the market-making side and the brokerage side, since otherwise there might be anincentive for brokers to recommend securities simply because the firm makes a market in thatsecurity.


Commodities trading: Control by commodity exchanges of price fluctuations by tying the daily trading limits to the previous trading day’s settlement (close) price. Currency trading: Control of exchange rate fluctuations by a government through (1) tying a currency’s value to the value of a stronger currency, (2) buying and selling own currency to increase or decrease itsdemandSecurities trading: Manipulation of a new issue’s market price by its underwriter through large purchases on the stockmarket. Similar manipulation of already issued securities is illegal.

Perkins loan

A need-based, low-interest loan available to students rather than their parents. The amount of the loan is determined by each college and is based on the expected family contribution. The student will beheld responsible for this loan, not the parent. Repayment doesn’t begin until after a student graduates,falls below half-time student status, or leaves college. After graduating, a student typically has a nine-month grace period during which interest doesn’t accrue. Perkins loans offer low interest rates to students and can be repaid within ten years.

bear market

Period in which prices of securities or commodities fall by 20 percent or more. During such periods (1) investment interest is generally limited, (2) concerns about the state of the economy abound, and (3) dealers or speculators are more inclined inselling their investment portfolios than to increase their risk by holding. See also bull market.

ask size

The number of shares that are being offered for sale at the ask price, often expressed in terms of hundreds of shares. Some traders try to use the bid size and ask size to measure impending short term upward or downward pressure on the stock’s price. This can work for stocks on exchanges such as NYSE and AMEX, but is far less useful on Nasdaq, which has market makers ready to buy and sellshares, rather than specialists who balance books of buy and sell orders.


Legal procedure for liquidating a business (or property owned by an individual) which cannot fully pay its debts out of itscurrent assets. Bankruptcy can be brought upon itself by an insolvent debtor (called ‘voluntary bankruptcy‘) or it can be forced on court orders issued on creditors‘ petition (called ‘involuntary bankruptcy’). Two major objectives of a bankruptcy are (1) fair settlement of the legal claims of the creditors through an equitable distribution of debtor’s assets, and (2) to providethe debtor an opportunity for fresh start. Bankruptcy amounts to a business-failure, but voluntary winding up does not. See also insolvency

IPO lock up

A contract stipulation that most publically traded companies use, which prohibits majority shareholders or those within the organization from selling their shares soon after the company goes public. The restriction typically lasts 90 to 180 days. Also called lock up period.

closed fund

An open-end mutual fund that has temporarily or permanently suspended sale of shares to newcustomers, usually due to rapid asset growthOutstanding shares are still accepted for redemption by the fund, and existing shareholders may also buy shares in some cases. The primary reason forclosing a fund to new investors is that fund managers are concerned that if they increase the assetbase of the fund any further, their current investment strategy will become too difficult to achieve.

mezzanine financing

Non-conventional funding that shares characteristics of both debt and equity. It comprises of equity-based options (such aswarrants) and lower-priority (subordinate) debt, and is used commonly in financing acquisitions and buyoutsConvertible debentures (see convertible loan) are also an example of mezzanine financing. Also called mezzanine debt

dividend yield

Annual rate of return on common stock (ordinary shares) or preferred stock (preference shares), computed by dividing the annual dividend by the shares‘ market price. Dividend yield reflects the return on the current ‘opportunity value,’ and not on the historical cost of the investment. As the price of the shares declines, the dividend yield goes up indicating that the shares are priced cheaply and are a ‘good buy.’ Such shares usually attract risk averse investors.

current ratio

An indication of a company’s ability to meet short-term debt obligations; the higher the ratio, the moreliquid the company is. Current ratio is equal to current assets divided by current liabilities. If the currentassets of a company are more than twice the current liabilities, then that company is generally considered to have good short-term financial strength. If current liablities exceed current assets, then the company may have problems meeting its short-term obligations.
For example, if XYZ Company’s total current assets are $10,000,000, and its total current liabilities are $8,000,000, then its current ratio would be $10,000,000 divided by $8,000,000, which is equal to 1.25. XYZ Company would be in relatively good short-term financial standing.

liquidity preference theory

Observation that, all else being equal, people prefer to hold on to cash (liquidity) and that they willdemand a premium for investing in non-liquid assets such as bondsstocks, and real estate. The theory suggests that the premium demanded for parting with cash increases as the period (term) for getting the cash back increases. The rate in the increase of this premium, however, slows down with the increase in term. In the language of financial trading, this theory is expressed as “forward ratesshould exceed the future spot rates.” This concept was first expressed by the U.K. preferencehypothesi


Recognizable and distinctive graphic design, stylized name, unique symbol, or other device for identifying an organization. It is affixed, included, or printed on all advertisingbuildingscommunications, literature, productsstationery, and vehicles. Not to be confused with a brand, which identifies a product or family of products. Also called logotype

interest reserve account

Type of savings account created to pay off interest costs accrued from a long-term debt obligation. These accounts are more commonly used for large construction projects. The amount stored in aninterest reserve account can be calculated through various formulas depending on the size and scope of the underlying debt. For example, one method is to take the total loan value multiplied by the interestpercentage multiplied by the estimated length of time it will take to complete the project multiplied by the percentage of time for which the loan will be outstanding.

theory of the firm

Behavior of a firm in pursuit of profit maximization, analyzed in terms of (1) what are its inputs, (2) what productiontechniques are employed, (3) what is the quantity produced, and (4) what prices it charges. The theory suggest that firms generate goods to a point where marginal cost equals marginal revenue, and use factors of production to the point where their marginal revenue product is equal to the costs incurred in employing the factors.


An individual or organization which holds or manages and invests assets for the benefit of another. The trustee is legally obliged to make all trust-related decisions with the beneficiary’s interests in mind, and may be liable for damages in the event of not doing so. Trustees may be entitled to a payment for theirservices, if specified in the trust deed. In the specific case of the bond market, a trustee administers abond issue for a borrower, and ensures that the issuer meets all the terms and conditions associated with the borrowing.

TED Spread

Treasuries Over Euro Dollar SpreadWall Street term for the gap between interest rates (yields) on the US government securities (treasury bills) and the dollars-deposits held outside of the US (eurodollars). Futures contracts based on TED spread are actively traded on the futures markets by speculators who bet on the narrowing or widening of the gap. It is also used as an indicator of investor confidence in the US federal government finances and the US financial system: a narrow spread indicates high confidence, and a wide spread reflects diminished confidence.

structured note

Is a debt security with one or more special features, such as making payments based on an underlyingindex. For instance, a structured note is a bond which, instead of paying the typical interest payments, will use an index, such as the S&P 500, to determine the amount of the interest payment. This type ofdebt security is complex and is used primarily by sophisticated investors. By hedging the security on an underlying asset, the investor is sometimes able to receive larger returns on the investment.


Grouping of large Japanese financial and industrial corporations through historical associations and cross-shareholdings. In a keiretsu each firm maintains its operational independence while retaining very close commercial relationships with other firms in the group. Horizontal keiretsus (such as Mitubishi Corp. and Sumitomo Corp.) involve firms in different industrieswhereas vertical keiretsus (such as Toyota Corp. and Sony Corp.) involve firms upstream and downstream of amanufacturing process. Keiretsu is Japanese for a headless combine and used to be written as zaibatsu.

consumer reporting agency

An agency which collects and sells information about the creditworthiness of individuals. A creditreporting agency does not make any decisions about whether a specific person should be extended credit or not. Instead, it collects information that it considers relevant to a person’s credit habits and history, and uses this information to assign a credit score to indicate how creditworthy a person is. Prospective creditors purchase credit reports from credit bureaus about specific individuals, and then they use this information to decide how much credit, if any, to extend to the individual. also called credit bureau


GeneralExcess over apparent worth. Banking: Fee charged for advancing a loan (see points). CommerceMerchandiseoffered free or at reduced price to make a combined offer (see bundling) more attractive to the customerMutual funds:Closed-end mutual fund’s market price above its net asset valueSecuritiesAmount by which a security is selling at above its par value.

qualified retirement plan

A plan that meets the requirements of Internal Revenue Code Section 401(a) and the Employee Retirement Income Security Act of 1974 (ERISA) and is thus eligible for favorable tax treatment. These plans offer several tax benefits: they allow employers to deduct annual allowable contributions for each participant; contributions and earnings on those contributions are tax-deferred until withdrawn for each participant; and some of the taxes can be deferred even further through a transfer into a different type of IRA. opposite of non-qualified retirement plan.


Customer level of approval when comparing a product’s perceived performance with his or her expectations. Also could refer to dischargeextinguishment, or retirement of an obligation to the acceptance of the obligor, or fulfillment of a claim. While satisfaction is sometimes equated with performance, it implies compensation or substitution whereas performance denotes doing what was actually promised. See also accord and satisfaction

non-statutory stock option

A type of employee stock option which is less advantageous for the employer from a tax standpoint than an incentive stock option (ISO), but which is less restrictive and generally easier to set up and administer. The most important difference is that the exercise of ISO does not result in a tax burden, while the exercise of a non-qualified stock option does (except in very specific circumstances). also called non-qualified stock option.

scientific management

An early 20th century school of management thought concerned primarily with the physical efficiency of an individualworker. Scientific management is based on the work of the US engineer Frederick Winslow Taylor (1856-1915) who in his 1911 book The Principles Of Scientific Management laid down the fundamental principles of large-scale manufacturingthrough assembly-line factories. It emphasizes rationalization and standardization of work through division of labortime and motion studieswork measurement, and piece-rate wages. See also Taylorism

growth fund

mutual fund whose aim is to achieve capital appreciation by investing in growth stocks. They focus on companies that are experiencing significant earnings or revenue growth, rather than companies thatpay outdividends. The hope is that these rapidly growing companies will continue to increase in value, thereby allowing the fund to reap the benefits of large capital gains. In general, growth funds are morevolatile than other types of funds, rising more than other funds in bull markets and falling more in bear markets.

life cycle cost

Sum of all recurring and one-time (non-recurring) costs over the full life span or a specified period of a good, service,structure, or system. In includes purchase priceinstallation costoperating costsmaintenance and upgrade costs, and remaining (residual or salvage) value at the end of ownership or its useful life.

strike price

The specified price on an option contract at which the contract may be exercised, whereby a call option buyer can buy the underlier or a put option buyer can sell the underlier. The buyer’s profit from exercising the option is the amount by which the strike price exceeds the spot price (in the case of a put), or the amount by which the spot price exceeds the strike price (in the case of a call). In general, the smaller the difference between spot and strike price, the higher the option premium. also calledexercise price.


Profiting from differences in prices or yields in different markets. ‘Arbitrageurs‘ buy a commoditycurrencysecurity or any other financial instrument in one place and immediately sell it at a higher price to a ready buyer at another place completing both ends of the transaction usually within a few seconds. Arbitrage is a sophisticated form of non-speculative, risk-freebetting because it involves dealings where returns and prices are definite, fixed, and known. See also speculation.

public sector

The part of the economy concerned with providing basic government services. The composition of thepublic sector varies by country, but in most countries the public sector includes such services as the police, military, public roads, public transit, primary education and healthcare for the poor. The public sector might provide services that non-payer cannot be excluded from (such as street lighting), services which benefit all of society rather than just the individual who uses the service (such as public education), and services that encourage equal opportunity


Exploration of the World Wide Web by following one interesting link to another, usually with a definite objective and a planned search strategy. In comparison surfing is exploration definite in objective but not in strategy, and browsing is exploration without a definite objective or search strategy.
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Posted by on June 14, 2012 in Study and Read