Ladder strategy: A bond portfolio strategy in which the portfolio is constructed to have approximately equal amounts invested in every maturity within a given range.
Lag: Payment of a financial obligation later than is expected or required, as in lead and lag. Also, the number of periods that an independent variable in a regression model is "held back" in order to predict the dependent variable.
Lag response of prepayments: There is typically a lag of about three months between the time the weighted average coupon of an MBS pool has crossed the threshold for refinancing and an acceleration in prepayment speed is observed.
Lagging Indicators: These are market indicators that often continue an upward trend after the peak of the economy has been signalled by other economic indicators - or continue a downward trend after a rise has been signalled. These indicators include business expenditures for new plants and equipment, consumers' installment credit, short-term business loans and the overall value of manufacturing and trade inventories. For example, it is often difficult to cancel contracts on short notice, so although sales have slowed for a retail store, the business cannot refuse supplies ordered prior to the downturn, but delivered after the peak in sales. These lagging indicators can confirm or deny the trend shown by the leading indicators.
Lambda: The ratio of a change in the option price to a small change in the option volatility. It is the partial derivative of the option price with respect to the option volatility.
Last split: After a stock split, the number of shares distributed for each share held and the date of the 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.
Ledger cash: A firm's cash balance as reported in its financial statements. Also called book cash.
Legal and regulatory risk: The effect on a company due to new or changing laws affecting its normal course of business.
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.
Legal risks: These risks result when companies transact with counterparties in foreign countries, which are subject to different legal and regulatory frameworks.
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: The effect of fixed charges such as debt interest or preferred dividends on per-share earnings of common stock. Increases or decreases in income before fixed charges result in magnified percentage increases or decreases in earnings per common share. Leverage also applies to seeking magnified percentage returns on an investment by using borrowed funds, margin accounts or buying securities which require payment of only a fraction of the underlying security's value, such as rights, warrants or options.
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 swaps: These swap arrangements can be structured in a variety of ways but have as a common characteristic a variable rate payment stream that adjusts at a multiple of the actual change in market rates.
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.
Leveraged buyout (LBO): A takeover financed to a large degree by debt that is secured, serviced and repaid through the cash flow and assets of the acquired company. Typically, an LBO is financed predominantly by bank debt and low quality bonds, and to a minimum degree by equity. Its extreme leverage makes an LBO dependent upon a stable economy and stable interest rates, as well as a stable cash flow from the acquired company for its success.
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.
Life and health insurance company: A financial institution that offers life and health insurance products and a range of other financial products and services, such as annuities and Registered Retirement Savings Plans. The federal and provincial governments share jurisdiction over life and health insurers. In general, the provinces regulate licensing and marketing, while the Office of the Superintendent of Financial Institutions conducts prudential reviews of the companies to determine their financial soundness. Federal supervision covers Canadian-owned insurers and branches of foreign companies that hold more than 90% of industry assets.
Life Annuity: A contract which guarantees the plan holder a regular monthly income for life in exchange for an amount of money in a Registered Retirement Savings Plan (RRSP).
Life insurance: An insurance policy that pays a set amount to those named in the policy (the "beneficiaries") when the policy-holder dies.
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.
Limits: Arbitrary price and/or quantity barriers imposed on traders or positions.
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.
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 Liability: When "limited" is at the end of a Canadian company's name, the company's shareholders' responsibility for the debts of the company is limited to the amount of money they paid to buy the shares. In contrast, ownership of a company by a sole proprietor or partnership carries unlimited personal legal responsibility for debts incurred by the business.
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, put-able, 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.
Liquidation rights: The rights of a firm's security holders 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: Refers to the "cashability" or "saleability" of a particular investment. Any investment that is locked in for a period of time, such as a non- redeemable GIC, is illiquid. Publicly traded instruments, such as stocks and government bonds, are "usually" highly liquid. The investor's need for liquidity is an important consideration when determining asset mix.
Liquidity: The ease with which assets or investments can be converted into cash — that is, made "liquid." Liquid investments include savings accounts, Canada Savings Bonds, Treasury bills and money market mutual funds. In contrast, a home is not considered a liquid investment because it cannot be easily transformed into cash.
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.
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: The stock of a company which is traded on a stock exchange. Companies pay fees to the exchange to be listed and must abide by the rules and regulations set out by the exchange to maintain listing privileges.
Listing Statement: A stock exchange document published when a company's shares are accepted for listing. It provides basic information on the company, its business, management, assets, capitalization and financial status.
Load: A charge added to mutual funds which covers sales commissions and all other costs of distribution. The load, usually a percentage of the money invested in the fund, may be charged as a front-end, on the purchase of the fund, or as a back-end, when the fund is sold or redeemed.
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 company: A financial institution that operates under either provincial or federal legislation and conducts lending activities similar to those of a bank.
Loan syndication: Group of banks sharing a loan.
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 In: When an investor has a profit on a security owned, but does not sell because of either the absence of a market or some legal restriction on the sale of the security. Also refers to an investor holding a security which has declined below the purchase price who cannot sell without incurring a loss.
Locked-in Registered Retirement Savings Plan: A Registered Retirement Savings Plan set up to receive funds transferred from a registered pension plan on the condition that it is used solely for retirement income purposes. The pension monies are usually "locked in" (unless otherwise permitted by the legislation of the province in which the employer is registered). A locked-in RRSP can also be an investment bought through a financial institution, with the monies locked in for a specific period as agreed by both parties (the financial institution and the client) at the time of the purchase.
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 safe kept by it to ensure that the understanding is honoured 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.
Long coupons: (1) Bonds or notes with a long current maturity. (2) A bond on which one of the coupon periods, usually the first, is longer than the other periods or the standard period.
Long hedge: The purchase of a futures contract(s) in anticipation of actual purchases in the cash market. Used by processors or exporters as protection against an advance in the cash price.
Long position: An options position where a person has executed one or more option trades where the net result is that they are an "owner" or holder of options (i. e. the number of contracts bought exceeds the number of contracts sold). Occurs when an individual owns securities. An owner of 1,000 shares of stock is said to be "Long the stock."
Long run: A period of time in which all costs are variable; greater than one year.
Long straddle: A straddle in which a long position is taken in both a put and call option.
Long-term: In accounting information, one year or greater.
Long-term assets: Value of property, equipment and other capital assets minus the depreciation. This is an entry in the bookkeeping records of a company, usually on a "cost" basis and thus does not necessarily reflect the market value of the assets.
Long-term debt: An obligation having a maturity of more than one year from the date it was issued. Also called funded debt.
Long-term debt/capitalization: Indicator of financial leverage. Shows long-term debt as a proportion of the capital available. Determined by dividing long-term debt by the sum of long-term debt, preferred stock and common stockholder equity.
Long-term debt ratio: The ratio of long-term debt to total capitalization.
Long-term financial plan: Financial plan covering two or more years of future operations.
Long-term liabilities: Amount owed for leases, bond repayment and other items due after 1 year.
Long-term debt to equity ratio: A capitalization ratio comparing long-term debt to shareholders' equity.
Look-bank option: An option that allows the buyer to choose as the option strike price any price of the underlying asset that has occurred during the life of the option. If a call, the buyer will choose the minimal price, whereas if a put, the buyer will choose the maximum price. This option will always be in the money.
Look-thru: A method for calculating U.S. taxes owed on income from controlled foreign corporations that was introduced by the Tax Reform Act of 1986.
Low: This is the lowest price paid for a stock during a certain period. For example, the low for the day was $15, but the low for the year was $7.50.
Low-coupon bond refunding: Refunding of a low coupon bond with a new, higher coupon bond.
Low-fee account: Eight banks in Canada have each signed a memorandum of understanding (MOU) with the federal government, agreeing to offer a standard low-fee account to their customers. The names and features of the accounts differ by bank, but the accounts all meet certain standards, including: a low monthly fee; the availability of some in-branch transactions; no charge for deposits; and a free monthly statement or passbook. Negotiating MOUs with the banks is an approach the government has taken to ensure that Canadians have access to an account at an affordable price. The eight banks are the Bank of Montreal, Royal Bank of Canada, National Bank of Canada, HSBC Bank Canada, Laurentian Bank of Canada, Canadian Imperial Bank of Commerce, Bank of Nova Scotia and TD Canada Trust.
Low price: This is the day's lowest price of a security that has changed hands between a buyer and a seller.
Low price-earnings ratio effect: The tendency of portfolios of stocks with a low price-earnings ratio to outperform portfolios consisting of stocks with a high price-earnings ratio.