Financial Glossary - A

Abandonment option: The option of terminating an investment earlier than originally planned.

Abnormal returns: Part of the return that is not due to systematic influences (market wide influences). In other words, abnormal returns are above those predicted by the market movement alone.

Absolute priority: Rule in bankruptcy proceedings whereby senior creditors are required to be paid in full before junior creditors receive any payment.

Accelerated cost recovery system (ACRS):
Schedule of depreciation rates allowed for tax purposes.

Accelerated depreciation:
Any depreciation method that produces larger deductions for depreciation in the early years of a project's life. Accelerated cost recovery system (ACRS), which is a depreciation schedule allowed for tax purposes, is one such example.

Acceptance Company Paper:
Short-term negotiable debt securities issued by finance companies to fund loans to consumers for items such as cars and appliances.

Accounting exposure:
The change in the value of a firm's foreign currency denominated accounts due to a change in exchange rates.

Accounting earnings: Earnings of a firm as reported on its income statement.

Accounting insolvency: Total liabilities exceed total assets. A firm with a negative net worth is insolvent on the books.

Accounting liquidity: The ease and quickness with which assets can be converted to cash.

Accounts payable: Money owed to suppliers. Debts of a company for goods or services purchased that must be paid within one year. These debts are listed as a current liability on the company's balance sheet.

Accounts receivable: Money owed by customers. Money owed to a company for goods and services it has sold. Payment is expected within one year. This money is listed as a current asset on the company's balance sheet.

Accounts receivable turnover:
The ratio of net credit sales to average accounts receivable, a measure of how quickly customers pay their bills.

Accreting Swap: A swap with a notional principal amount which decreases over time.

Accretion (of a discount):
In portfolio accounting, a straight-line accumulation of capital gains on discount bond in anticipation of receipt of par at maturity.

Accrual bond: A bond on which interest accrues, but is not paid to the investor during the time of accrual. The amount of accrued interest is added to the remaining principal of the bond and is paid at maturity.

Accrued interest: The accumulated coupon interest earned but not yet paid to the seller of a bond by the buyer (unless the bond is by default).

Accumulated Benefit Obligation (ABO):
An approximate measure of the liability of a plan in the event of a termination at the date the calculation is performed.

Acid-test ratio: Also called the quick ratio, the ratio of current assets minus inventories, accruals, and prepaid items to current liabilities.

Acquiree: A firm that is being acquired.

Acquirer: A firm or individual that is acquiring something.

Acquisition of assets: A merger or consolidation in which an acquirer purchases the selling firm's assets.

Acquisition of stock: A merger or consolidation in which an acquirer purchases the acquiree's stock.

Act of state doctrine: This doctrine says that a nation is sovereign within its own borders and its domestic actions may not be questioned in the courts of another nation.

Active: A market in which there is much trading.

Active portfolio strategy:
A strategy that uses available information and forecasting techniques to seek a better performance than a portfolio that is simply diversified broadly.

Actuals: The physical commodity underlying a futures contract. Cash commodity, physical.

Actuals: Refers to debt securities, currencies, physical commodities and equity securities (versus derivatives).

Additional hedge: A protection against borrower fallout risk in the mortgage pipeline.

Adjustable rate preferred stock (ARPS): Publicly traded issues that may be collateralized by mortgages and MBSs.

Adjusted present value (APV): The net present value analysis of an asset if financed solely by equity (present value of un-levered cash flows), plus the present value of any financing decisions (levered cash flows). In other words, the various tax shields provided by the deductibility of interest and the benefits of other investment tax credits are calculated separately. This analysis is often used for highly leveraged transactions such as a leveraged buy-out.

Administrative pricing rules:
IRS rules used to allocate income on export sales to a foreign sales corporation.

Advance commitment:
A promise to sell an asset before the seller has lined up a purchase of the asset. This seller can offset risk by purchasing a futures contract to fix the sales price.

Adverse selection: A situation in which market participation is a negative signal.

Affiliated Company:
A company with less than 50% of its stock owned by another corporation, or one whose stock, with that of another corporation, is owned by the same controlling interests.

Affirmative covenant: A bond covenant that specifies certain actions the firm must take.

After-tax profit margin: The ratio of net income to net sales.

After-tax real rate of return:
Money after-tax rate of return minus the inflation rate.

Agency bank: A form of organization commonly used by foreign banks to enter the U.S. market. An agency bank cannot accept deposits or extend loans in its own name; it an acts as an agent for the parent bank.

Agency basis: A means of compensating the broker of a program trade solely on the basis of the commission established through bids submitted by various brokerage firms.

Agency cost view: The argument that specifies that the various agency costs create a complex environment in which total agency costs are at a minimum with some, but less than 100%, debt financing.

Agency costs: The incremental costs of having an agent make decisions for a principal.

Agency incentive arrangement: A means of compensating the broker of a program trade using benchmark prices for issues to be traded in determining commissions or fees.

Agency pass-throughs: Mortgage pass-through securities whose principal and interest payments are guaranteed by government agencies, such as the Government National Mortgage Association ("Ginnie Mae"), Federal Home Loan Mortgage Corporation ("Freddie Mac") and Federal National Mortgage Association ("Fannie Mae").

Agency problem:
Conflicts of interest among stockholders, bondholders, and managers.

Agency theory: The analysis of principal-agent relationships, wherein one person, an agent, acts on behalf of another person, a principal.

Agent: An investment dealer operates as an agent when it acts on behalf of a buyer or a seller, and does not itself own title to the securities at any time during the transactions.

Aggregation: Process in corporate financial planning whereby the smaller investment proposals of each of the firm's operational units are added up and in effect treated as a big picture.

Aging schedule:
A table of accounts receivable broken down into age categories (such as 0-30 days, 30-60 days, and 60-90 days), which is used to see whether customer payments are keeping close to schedule.

AIBD: Association of International Bond Dealers.

All equity rate: The discount rate that reflects only the business risks of a project and abstracts from the effects of financing.

All or none: Requirement that none of an order is executed unless all of it can be executed at the specified price.

All-equity rate:
The discount that reflects only the business risks of a project and abstracts from the effects of financing.

All-in cost:
Total costs, explicit and implicit.

All-or-none underwriting: An arrangement whereby a security issue is canceled if the underwriter is unable to re-sell the entire issue.

All or Nothings: The option payout is a predetermined amount, which is paid out only if a trigger point is reached.

Alpha: A measure of selection risk (also known as residual risk) of a mutual fund in relation to the market. A positive alpha is an extra return awarded to the investor for taking a risk, instead of accepting the market return. For example, an alpha of 0.4 means the fund outperformed the market-based return estimate by 0.4%. An alpha of -0.6 means a fund's monthly return was 0.6% less than would have been predicted from the change in the market alone.

In a Jensen Index, it is a factor to represent the portfolio's performance that diverges from its beta, representing a measure of the manager's performance.

Alpha equation: The alpha of a fund is determined as follows:

[ (sum of y) -((b)(sum of x)) ] / n

where: n =number of observations (36 months)

b =beta of the fund

x = rate of return for the S&P 500

y = rate of return for the fund

Alternative mortgage instruments: Variations of mortgage instruments such as adjustable-rate and variable-rate mortgages, graduated-payment mortgages, reverse-annuity mortgages, and several seldom-used variations.

American Depositary Receipts (ADRs):
Certificates issued by a U.S. depositary bank, representing foreign shares held by the bank, usually by a branch or correspondent in the country of issue. One ADR may represent a portion of a foreign share, one share or a bundle of shares of a foreign corporation. If the ADR's are "sponsored," the corporation provides financial information and other assistance to the bank and may subsidize the administration of the ADRs. "Unsponsored" ADRs do not receive such assistance. ADRs carry the same currency, political and economic risks as the underlying foreign share; the prices of the two, adjusted for the SDR/ordinary ratio, are kept essentially identical by arbitrage. American depositary shares (ADSs) are a similar form of certification.

American option: An option that may be exercised at any time up to and including the expiration date.

American shares:
Securities certificates issued in the U.S. by a transfer agent acting on behalf of the foreign issuer. The certificates represent claims to foreign equities.

American Stock Exchange (AMEX): The second-largest stock exchange in the United States. It trades mostly in small-to medium-sized-companies.

American-style option: An option contract that can be exercised at any time between the date of purchase and the expiration date. Most exchange-traded options are American style.

Amortization: The repayment of a loan by installments.

Amortization factor: The pool factor implied by the scheduled amortization assuming no prepayments.

Amortization period: The actual number of years it will take to repay a mortgage in full.

Amortizing interest rate swap:
Swap in which the principal or national amount rises (falls) as interest rates rise (decline).

Analyst: Employee of a brokerage or fund management house who studies companies and makes buy-and-sell recommendations on their stocks. Most specialize in a specific industry.

Angels: Individuals providing venture capital.

Announcement date: Date on which particular news concerning a given company is announced to the public. Used in event studies, which researchers use to evaluate the economic impact of events of interest.

Annual fund operating expenses: For investment companies, the management fee and "other expenses," including the expenses for maintaining shareholder records, providing shareholders with financial statements, and providing custodial and accounting services. For 12b-1 funds, selling and marketing costs are included.

Annual percentage rate (APR):
The periodic rate times the number of periods in a year. For example, a 5% quarterly return has an APR of 20%.

Annual percentage yield (APY): The effective, or true, an annual rate of return. The APY is the rate an actually earned or paid in one year, taking into account the affect of compounding. The APY is calculated by taking one plus the periodic rate and raising it to the number of periods in a year. For example, a 1% per month rate has an APY of 12.68% (1.01^12).

Annual report:
A yearly record of a publicly held company's financial condition. It includes a description of the firm's operations, its balance sheet, and income statement. SEC rules require that it be distributed to all 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.

Annuities: Products issued by a life insurance company which provide a guaranteed monthly income for a fixed term or until death. Two main categories are registered annuities (purchased with money from an RRSP) and prescribed annuities (purchased with no- registered funds). When an RRSP is placed with a life insurance company, it is technically called a "deferred annuity".

Annuity: A regular periodic payment made by an insurance company to a policyholder for a specified period of time.

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 arrears: An 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.

Anti-dilutive 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 the residual standard deviation.

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 the 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.

The simultaneous purchase and sale of the same (or equivalent or related) securities to take advantage of price differences prevailing in separate markets. A pure arbitrage involves trading effectively the same instruments for different prices at the same time. The term is now used widely in connection with concurrent purchases and sales of securities of proposed acquiring and acquired companies in pending tender offers and other acquisitions.

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.

People who search for and exploit arbitrage opportunities.

Arithmetic mean return:
An average of the sub-period returns, calculated by summing the sub-period returns and dividing by the number of sub-periods.

Arms index:
Also known as a trading index (TRIN)= (number of advancing issues)/ (number of declining issues) (Total up the volume )/ (total down volume). An advance or 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 transact.

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.

Arrears: Interest or dividends which were not paid when due and are still owed.

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.

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 classes: The four main asset classes in investing are:

1. Short Term - savings accounts, Canada Savings Bonds, treasury bills, money market mutual funds.

2. Fixed Income - government and corporate bonds, GIC's and term deposits with over twelve months to maturity.

3. Real Estate

4. Equity Investments - representing ownership of companies through stocks or shares.

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-Liability Management:
Matching the amounts of assets and liabilities by term and interest rate type. Financial institutions carry out asset-liability management when they match the maturity of their deposits with the length of their loan commitments to keep from being adversely affected by rapid changes in interest rates.

Asset mix or asset allocation:
It refers to the distribution of investments into these various asset classes. Most investment professionals consider this the single most important decision an investor makes.

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 debt holders expected.

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

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 liabilities.

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.

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 at the specified strike price.

Associated Company:
A company owned jointly by two or more other companies.

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.

An order to buy or sell a financial instrument (e.g. futures, options, etc.) at whatever price the contract is trading when the order is executed.

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.

Attribution rules:
The various sections of the Income Tax Act which set the rules on transferring investment capital from one family member to another. In general, any investment income generated attributes back to the source of the capital, rather than the person to whom it has been transferred.

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.

Audit: Verifying the accuracy of accounting and financial records by a member of the Institute of Chartered Accountants. In some provinces Certified General Accountants and Certified Management Accountants may also act as company auditors.

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 firm files for bankruptcy under Chapter 11.

Autoregressive: Using past data to predict future data.

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

Average: An arithmetic mean of selected stocks intended to represent the behaviour 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 average time to the receipt of all future cash flows, using as the weights the dollar amounts of the principal pay downs.

Average maturity: The average time to maturity of securities held by a mutual fund. Changes in interest rates have the 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-style (or Asian) options:
The payoff of Average-Style options is based on the average price of the underlying interest over a period relative to the strike price. This contrasts with American and European style options which pay off based on prices as at a single date relative to the strike price.

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

Averages and Indexes or Indices:
Statistical tools that measure the state of the stock market or the economy, based on the performance of stocks, bonds or other components. The Dow Jones Industrial Average and the TSX Composite Index Composite Index are well-known examples.

Averaging Down: Buying more of a security at a lower price than the original investment. The aim of averaging down is to reduce the average cost per unit of the investment.

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."