Back-end load or Deferred Service Charge: Refers to the commission structure on many mutual funds that are distributed through commission-based financial advisors. No commission is deducted from the initial investment, but a diminishing "deferred sales charge" is applied if withdrawals are made before the Back-end Load has expired (typically 5 to 9 years). The sales person, nonetheless, gets paid up front.
Back fee: The fee paid on the extension date if the buyer wishes to continue the option.
Back office: Brokerage house clerical operations that support, but do not include, the trading of stocks and other securities. Includes all written confirmation and settlement of trades, record keeping, and regulatory compliance.
Back-end loan fund: A mutual fund that charges investors a fee to sell (redeem) shares, often ranging from 4% to 6%. Some back-end load funds impose a full commission if the shares are redeemed within a designated time, such as one year. The commission decreases the longer the investor holds the shares. The formal name for the back-end load is the contingent deferred sales charge or CDSC.
Back-to-back financing: An intercompany loan channeled through a bank.
Back-to-back loan: A loan in which two companies in separate countries borrow each other's currency for a specific time period and repay the other's currency at an agreed upon maturity.
Back-up: (1) When bond yields and prices fall, the market is said to back-up. (2) When an investor swaps out of one security into another of shorter current maturity he is said to back up.
Backwardation: A market condition in which futures prices are lower in the distant delivery months than in the nearest delivery month. This situation may occur in when the costs of storing the product until eventual delivery are effectively subtracted from the price today. The opposite of contango.
Baker Plan: A plan by U.S. Treasury Secretary James Baker under which 15 principal middle-income debtor countries (the Baker 15) would undertake growth-oriented structural reforms, to be supported by increased financing from the World Bank and continued lending from commercial banks.
Balance of payments: A statistical compilation formulated by a sovereign nation of all economic transactions between residents of that nation and residents of all other nations during a stipulated period of time, usually a calendar year.
Balance of trade: The net flow of goods (exports minus imports) between countries.
Balance sheet: Also called the statement of financial condition, it is a summary of the assets, liabilities, and owners' equity.
Balance sheet identity: Total Assets = Total Liabilities Total Stockholders’ Equity
Balanced fund: An investment company that invests in stocks and bonds. The same as a balanced mutual fund.
Balanced mutual fund: This is a fund that buys common stock, preferred stock and bonds. The same as a balanced fund.
Balloon maturity: Any large principal payment due at maturity on a bond or loan with or without a sinking fund requirement.
BAN (Bank anticipation notes): Notes issued by states and municipalities to obtain interim financing for projects that will eventually be funded long term through the sale of a bond issue.
Bank: A federally regulated financial institution that, in general, engages in the business of taking deposits, lending and providing other financial services.
Bank Act: Federal legislation governing the structure and operation of banks in Canada.
Bank collection float: The time that elapses between when a check is deposited into a bank account and when the funds are available to the depositor, during which period the bank is collecting payment from the payer's bank.
Bank discount basis: A convention used for quoting bids and offers for treasury bills in terms of annualized yield, based on a 360-day year.
Bank draft: A draft addressed to a bank.
Bank line: Line of credit granted by a bank to a customer.
Bank of Canada: Canada's central bank. It is responsible for Canadian monetary policy, issuing bank notes, regulating and supporting Canada's principal systems for clearing and settling payments, and acting as fiscal agent for federal government debt.
Bank rate: The minimum lending rate of the Bank of Canada. It is applied to advances to institutions that are members of the Canadian Payments Association, and to purchase and resale transactions with key investment dealers in the money market. It is also the primary indicator of Bank of Canada monetary policy. A bank rate is an important tool because it is seen as the trend-setter for other short-term interest rates. Changes in the bank rate often lead to changes in the prime rate, which is the rate of interest that commercial banks charge their lowest-risk customers. Other rates can be affected, including those for mortgages, cars, and business loans, as well as rates paid to savers on deposits and investment certificates.
Bank wire: A computer message system linking major banks. It is used not for effecting payments, but as a mechanism to advise the receiving bank of some action that has occurred, e.g. the payment by a customer of funds into that bank's account.
Bank for International Settlements (BIS): An international bank headquartered in Basel, Switzerland, which serves as a forum for monetary cooperation among several European central banks, the Bank of Japan, and the U.S. Federal Reserve System. Founded in 1930 to handle the German payment of World War I reparations, it now monitors and collects data on international banking activity and promulgates rules concerning international bank regulation.
Banker's acceptance: A short-term credit investment created by a non-financial firm and guaranteed by a bank as to payment. Acceptances are traded at discounts from face value in the secondary market. These instruments have been a popular investment for money market funds. They are commonly used in international transactions.
Banking Group: A group of investment dealers, each of which individually assumes financial responsibility for part of an underwriting of a new issue of securities for a corporation.
Bankrupt: The legal status of an individual or company which is unable to pay its creditors and whose assets are therefore administered for its creditors by a trustee in bankruptcy.
Bankruptcy: State of being unable to pay debts. Thus, the ownership of the firm's assets is transferred from the stockholders to the bondholders.
Bankruptcy cost view: The argument that expected indirect and direct bankruptcy costs offset the other benefits from leverage so that the optimal amount of leverage is less than 100% debt financing.
Bankruptcy risk: The risk that a firm will be unable to meet its debt obligations. Also referred to as default or insolvency risk.
Bankruptcy view: The argument that expected bankruptcy costs preclude firms from being financed entirely with debt.
Bar: Slang for one million dollars.
Barbell strategy: A strategy in which the maturities of the securities included in the portfolio are concentrated at two extremes.
Bargain-purchase-price option: Gives the lessee the option to purchase the asset at a price below fair market value when the lease expires.
BARRA's performance analysis (PERFAN): A method developed by BARRA, a consulting firm in Berkeley, Calif. It is commonly used by institutional investors applying performance attribution analysis to evaluate their money managers' performances.
Barrier options: Contracts with trigger points that, when crossed, automatically generate buying or selling of other options. These are very exotic options.
Barrier options: These options operate in the same way as standard options, except that payout or receipt only occurs if certain thresholds in the related reference rate or index are or are not exceeded during the exercise period. Barrier options include Knock-in options and Knock-out options.
Base probability of loss: The probability of not achieving a portfolio expected return.
Basic balance: In a balance of payments, the basic balance is the net balance of the combination of the current account and the capital account.
Basic business strategies: Key strategies a firm intends to pursue in carrying out its business plan.
Basic IRR rule: Accept the project if IRR is greater than the discount rate; reject the project is lower than the discount rate.
Basis: Regarding a futures contract, the difference between the cash price and the futures price observed in the market. Also, it is the price an investor pays for a security plus any out-of-pocket expenses. It is used to determine capital gains or losses for tax purposes when the stock is sold.
Basis: The difference between a futures contract price for an item and the current spot price of the same item.
Basis point: In the bond market, the smallest measure used for quoting yields is a basis point. Each percentage point of yield in bonds equals 100 basis points. Basis points also are used for interest rates. An interest rate of 5% is 50 basis points greater than an interest rate of 4.5%.
Basis price: Price expressed in terms of yield to maturity or an annual rate of return.
Basis risk: The uncertainty about the basis at the time a hedge may be lifted. Hedging substitutes basis risk for price risk.
Basket options: Packages that involve the exchange of more than two currencies against a base currency at expiration. The basket option buyer purchases the right, but not the obligation, to receive designated currencies in exchange for a base currency, either at the prevailing spot market rate or at a prearranged rate of exchange. A basket option is generally used by multinational corporations with multicurrency cash flows since it is generally cheaper to buy an option on a basket of currencies than to buy individual options on each of the currencies that make up the basket.
Bear: An investor who believes a stock or the overall market will decline. A bear market is a prolonged period of falling stock prices, usually by 20% or more.
Bear market: Any market in which prices are in a declining trend.
Bear raid: A situation in which large traders sell positions with the intention of driving prices down.
Bearer bond: Bonds that are not registered on the books of the issuer. Such bonds are held in physical form by the owner, who receives interest payments by physically detaching coupons from the bond certificate and delivering them to the paying agent.
Bearer Security: A stock or bond which does not have the owner's name recorded in the books of the issuing company or on the security certificate itself. The holder of the certificate is the owner. Interest, dividends or any profits from sales are payable to the holder.
Before-tax profit margin: The ratio of net income before taxes to net sales.
Beggar-thy-neighbour: An international trade policy of competitive devaluations and increased protective barriers where one country seeks to gain at the expense of its trading partners.
Beggar-thy-neighbour devaluation: A devaluation that is designed to cheapen a nation's currency and thereby increase its exports at other countries' expense and reduce imports. Such devaluations often lead to trade wars.
Benchmark: The performance of a predetermined set of securities, for comparison purposes. Such sets may be based on published indexes or may be customized to suit an investment strategy.
Benchmark error: Use of an inappropriate proxy for the true market portfolio.
Benchmark interest rate: Also called the base interest rate, it is the minimum interest rate investors will demand to invest in a non-Treasury security. It is also tied to the yield to maturity offered on a comparable-maturity Treasury security that was most recently issued ("on-the-run").
Benchmark issues: Also called on-the-run or current coupon issues or bellwether issues. In the secondary market, it's the most recently auctioned Treasury issues for each maturity.
Benchmarking: Comparing information of one entity to like information of another entity or composite group for the purpose of determining areas for potential improvement and to identify the best practices.
Beneficial owner: The real owner of a security. An investor may have securities registered in the name of a broker, trustee or bank to facilitate the transfer or to preserve anonymity, but the investor is the beneficial owner and will receive any dividends, interest or profits from sales.
Best-efforts sale: A method of securities distribution/ underwriting in which the securities firm agrees to sell as much of the offering as possible and return any unsold shares to the issuer. As opposed to a guaranteed or fixed price sale, where the underwriter agrees to sell a specific number of shares (with the securities firm holding any unsold shares in its own account if necessary).
Best efforts Underwriting: The underwriter agrees to use his or her best efforts to sell a new issue of securities, but does not guarantee to the issuing company that any or all of the issue will be sold. The underwriter acts as an agent for the issuer in distributing the issue to his clients.
Best-interests-of-creditors test: The requirement that a claim holder voting against a plan of reorganization must receive at least as much as he would have if the debtor were liquidated.
Beta (Mutual Funds): The measure of a fund's or stocks risk in relation to the market. A beta of 0.7 means the fund's total return is likely to move up or down 70% of the market change; 1.3 means total return is likely to move up or down 30% more than the market. Beta is referred to as an index of the systematic risk due to general market conditions that cannot be diversified away.
Beta equation (Mutual Funds):
The beta of a fund is determined as follows:
[(n) (sum of (xy)) ]-[ (sum of x) (sum of y)]
[(n) (sum of (xx)) ]-[ (sum of x) (sum of x)]
where: n = # of observations (36 months)
x = rate of return for the S&P 500 Index
y = rate of return for the fund
Beta equation (Stocks):
The beta of a stock is determined as follows:
[(n) (sum of (xy)) ]-[(sum of x) (sum of y)]
[(n) (sum of (xx)) ]-[(sum of x) (sum of x)]
where: n = # of observations (24-60 months)
x = rate of return for the S&P 500 Index
y = rate of return for the stock
Bid price: This is the quoted bid or the highest price an investor is willing to pay to buy a security. Practically speaking, this is the available price at which an investor can sell shares of stock.
Bid-asked spread: The difference between the bid and asked prices.
Bidder: A firm or person that wants to buy a firm or security.
Big Bang: The term applied to the liberalization in 1986 of the London Stock Exchange in which trading was automated with the use of computers.
Big Board: A nickname for the New York Stock Exchange. Also known as The Exchange. More than 2,000 common and preferred stocks are traded. Founded in 1792, the NYSE is the oldest exchange in the United States and the largest. It is located on Wall Street in New York City.
Bill of exchange: General term for a document demanding payment.
Bill of lading: A contract between the exporter and a transportation company in which the latter agrees to transport the goods under specified conditions which limit its liability. It is the exporter's receipt for the goods as well as proof that goods have been or will be received.
Binomial option pricing model: An option pricing model in which the underlying asset can take on only two possible, discrete values in the next time period for each value that it can take on in the preceding time period.
Black market: An illegal market.
Black-Scholes Formula: An option valuation formula based on the principle that an option can be priced by combining it with its underlying asset into a riskless hedge portfolio.
Black-Scholes option-pricing model: A model for pricing call options based on arbitrage arguments that use the stock price, the exercise price, the risk-free interest rate, the time to expiration, and the standard deviation of the stock return.
Blanket inventory lien: A secured loan that gives the lender a lien against all the borrower's inventories.
Block house: Brokerage firms that help to find potential buyers or sellers of large block trades.
Block trade: A large trading order, defined on the New York Stock Exchange as an order that consists of 10,000 shares of a given stock or a total market value of $200,000 or more.
Block voting: A group of shareholders banding together to vote their shares in a single block.
Blocked currency: A currency that is not freely convertible to other currencies due to exchange controls.
Blow-off top: A steep and rapid increase in price followed by a steep and rapid drop. This is an indicator seen in charts and used in technical analysis of stock price and market trends.
Blue-chip company: Large and creditworthy company.
Blue Chip Stocks: Nationally-known common stock, usually with a continuous dividend payment record in good times and bad and other strong investment qualities. These stocks are usually high-priced but have a tendency to be low-yielding.
Blue Sky: A slang term for laws that various Canadian provinces and American states have enacted to protect the public against securities frauds. The term "blue skyed" indicates that a new issue has been cleared by a securities commission and may be sold to the public.
Blue-sky laws: State laws covering the issue and trading of securities.
Board Lot: A regular trading unit which has been decided upon by the stock exchanges. For example, one board lot on the Toronto Stock Exchange equals 1000 shares for shares priced at10 cents each, 500 shares for shares priced between 10 cents and 99 cents, and 100 shares for shares of $1 and over.
Bogey: The return an investment manager is compared to for performance evaluation.
Boilerplate: Standard terms and conditions.
Bond: Bonds are debt obligations issued by governments (and corporations). When an investor purchases a bond, the investor is loaning his money to the issuer of the bond. The bond guarantees regular payment of a certain interest rate and a return of principal on the maturity date.
Bond: Bonds are debt and are issued for a period of more than one year. The U.S. government, local governments, water districts, companies and many other types of institutions sell bonds. When an investor buys bonds, he or she is lending money. The seller of the bond agrees to repay the principal amount of the loan at a specified time. Interest-bearing bonds pay interest periodically.
Bond agreement: A contract for privately placed debt.
Bond covenant: A contractual provision in a bond indenture. A positive covenant requires certain actions, and a negative covenant limits certain actions.
Bond-equivalent basis: The method used for computing the bond equivalent yield.
Bond equivalent yield: Bond yield calculated on an annual percentage rate method. Differs from annual effective yield.
Bond indenture: The contract that sets forth the promises of a corporate bond issuer and the rights of investors.
Bond indexing: Designing a portfolio so that its performance will match the performance of some bond index.
Bond points: A conventional unit of measure for bond prices set at $10 and equivalent to 1% of the $100 face value of the bond. A price of 80 means that the bond is selling at 80% of its face, or par value.
Bond value: With respect to convertible bonds, the value the security would have if it were not convertible apart from the conversion option.
BONDPAR: A system that monitors and evaluates the performance of a fixed-income portfolio, as well as the individual securities held in the portfolio. BONDPAR decomposes the return into those elements beyond the manager's control--such as the interest rate environment and client-imposed duration policy constraints--and those that the management process contributes to, such as interest rate management, sector/quality allocations, and individual bond selection.
Boning: Charging a lot more for an asset than it's worth.
Book: A banker or trader’s positions.
Book cash: A firm's cash balance as reported in its financial statements. Also called ledger cash.
Book profit: The cumulative book income plus any gain or loss on disposition of the assets on termination of the SAT.
Book runner: The managing underwriter for a new issue. The book runner maintains the book of securities sold.
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 being 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: An entire issue of new stocks or bonds bought from the issuer by an investment dealer, frequently acting alone, for resale to its clients. The dealer risks its own money in a bought deal, and in the event that the price has to be lowered to sell out the issue, the dealer absorbs the loss.
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 an 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.
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.
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.
Broadened Base Earnings: A concept whereby the earnings per share of a company are computed to include a pro rata share of the earnings of all unconsolidated subsidiaries and associated companies.
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.
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 a 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.
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 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: A market in which prices are rising. A "bull" is a person who expects that the market or the price of a particular security will rise.
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.
Bullet loan: A bank term loan that calls for no amortization.
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 an 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 day: Those days when most corporate and government offices are open for business, usually any day except Saturday, Sunday and legal holidays.
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.
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.
Buy limit order: A conditional trading order that indicates a security may be purchased only at the designated price or lower.
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.
Buydowns: Mortgages 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