Discovering Finance.pdf

DISCOVERING FINANCE A Dictionary of Financial Jargons Mohammad Riaz Uddin B.B.A. Major in Finance Dept. of Finance & Banking University of Dhaka.

Md. Shafiul Alam (Shamol) B.B.A. Major in Finance Dept. of Finance & Banking University of Dhaka.

Md. Shareef Mahmood Khan Mohammad Faisal Ahammad B.B.A. Major in Finance B.B.A. Major in Finance Dept. of Finance & Banking Dept. of Finance & Banking University of Dhaka. University of Dhaka.

Reviewers: Mr. Md. Atiqur Rahman Khan B.B.S.(Hons); M.B.A.(Finance) University of Rajshahi.

Mr. M. Azizur Rahman Shuman B.Sc.(Civil Engr.); BIT, Chittagong M.B.A.(Finance); IBA, University of Dhaka.

Prasnanir Publications 1/3 Girda Urdu Road, Bakshi Bazar, Dhaka - 1211. Phone: 9668386, 9672572.

Published By:

Prasnanir Publications 1/3 Girda Urdu Road, Bakshi Bazar, Dhaka - 1211. Phone: 9668386, 9672572. 2002 by Prasnanir Publications. Dhaka. All rights reserved by the authors & the publisher. No part of this book can be reproduced in any form, by mimeograph or any other means, without permission in writing by them.

First Edition - July 2002. Edited By: Md. Nasir Uddin

Price: Tk. 120.00 (One Hundred Twenty) only.

Preface Discovering Finance is our first publication but not the last one. Students and professionals in the field of finance are the target groups of this dictionary. The purpose of the dictionary is to enable the readers to find quickly a definition of a topic of finance without having to seek for it among the mass of materials in a number of textbooks. We have divided the whole job into five broad divisions. The dictionary will help the readers to have knowledge about abbreviations and equations related to finance along with terminologies. Besides, they will have an idea about the Nobel Laureates in Economics (Finance). Moreover, the last part will provide them an insight into the financial institutions of Bangladesh. We feel gratitude to Mr. Al-haz M. A. Salam for publishing our dictionary. We gratefully acknowledge Mr. Md. Atiqur Rahman Khan of Prime Bank Limited and Mr. M. Azizur Rahman Shuman of Premier Bank Limited because they have been at great pains to work as reviewer inspite of their busy time. We would also like to acknowledge the help of Mr. Fakhruddin Ahmed Patwary of Bangladesh Bank, Mr. Q. A. F. M. Serazul Islam of Shadharon Bima Corporation, Mr. M. Mustafizur Rahman Bhuiyan of Janata Insurance Company Limited and Kazi Arifuzzaman of Uttara Finance and Investments Limited. We can’t but remind our heartiest and most honorable teacher Mr. Muhammad Mujibul Kabir for his instantaneous help and assistance in every aspect. We accept that our reviewers cannot be held liable for any errors. Such errors are entirely of our own making, though we will undoubtly blame each other for them. Suggestions, comments, criticisms, and corrections from the readers are welcomed. The Authors [email protected]

Contents @ A-Z @ @ @ @ @

Abbreviations and Acronyms Frequently Used Equations Nobel Laureates in Economics (finance) Financial Institutions of Bangladesh Bibliography

DISCOVERING FINANCE

A Abandonment value The value of a project if the project’s assets were sold externally; or alternatively its opportunity value if the assets were employed else where in the same firm. ABC method of inventory control Method that controls expensive inventory items more closely than less expensive items. Abnormal return The difference between an actual return and a benchmark or expected return or normal return based on the market’s return and concern security’s relationship with the market. Absolute form of purchasing power parity A theory that prices of products of two different countries should be equal when measured by a common currency. Also called the "law of one price." Absorption costing The process of costing products or activities by taking into account the total costs incurred in producing the products or services. Accelerated depreciation The method of depreciation that writes off the cost of a capital asset faster than the write-off under straight-line depreciation method. The three principal methods of accelerated depreciation are (a) sum-ofyears’-digits, (b) double declining balance, and (c) units of production. Acceleration clause A clause found in an installment financing agreement, which gives the lender the right to demand immediate payment for any unpaid balance of debt if a certain event occurs, such as when the borrower fails to make a timely installment payment. Accession The right of an owner to have the advantages of property ownership, which includes air rights, mineral rights, and manmade improvements. It can be a natural process, such as a changing river course adding land or through the purchase of adjacent land. 1

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Accounting profit A firm’s net income as reported on its income statement. Accounting rate of return Calculated by dividing the average income after taxes by the initial outlay of a project. Accounts payable The amounts due to suppliers of goods and services of an organization. Accounts receivable turnover The ratio of net credit sales to average accounts receivable, which is a measure of how quickly customers pay their bills. Accounts receivable Amounts of money owed to a firm by customers who have bought goods or services on credit. A current asset, the accounts receivable amount is also called receivables. Accreting swap An interest rate swap in which the notional principal amount increases in a predetermined way over time. Accrual accounting A method of accounting in which revenue is recognized when earned and expenses are recognized when incurred without regard to the timing of cash receipts and expenditures. Antithesis of cash basis accounting. Accruals Liabilities for services received for which payment has yet to be made. Examples include accrued wages, accrued taxes, and accrued interest. Accrued expenses Amounts owed but not yet paid for wages, taxes, interests, and dividends. The accrued expenses account is a short-term or current liability. Accumulated benefit obligation An approximate measure of the liability of a pension plan in the event of a termination at the date the calculation is performed. Accumulated profits tax A tax on earnings kept in a firm to prevent the higher personal income tax rate that would obtain if profits were paid out as dividends to the owners. 2

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Accumulation In the context of corporate finance, refers to profits that are added to the capital base of the company rather than paid out as dividends. See Accumulated profits tax. In the context of investments, refers to the purchase by an institutional broker of a large number of shares over a period of time in order to avoid pushing the price of that share up. In the context of mutual funds, refers to the regular investing of a fixed amount while reinvesting dividends and capital gains. Acid test ratio A measure of liquidity, defined as current assets less inventories divided by current liabilities. It is a variation of current ratio. Also called quick ratio. Acquiree A firm that is being acquired. Acquirer A firm or individual that is acquiring something. Acquisition cost The price (including the closing costs) to purchase another company or property. In the context of investments, it refers to price plus brokerage commissions, of a security, or the sales charge applied to load funds. Acquisition financing Financing to buy own or another company. 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. Acquisition When a firm buys another firm. Active investment strategy A strategy of regular buying and selling assets that is based on the belief that they are mispriced by and in the market where they are traded. 3

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Active management Attempts to identify mispriced securities, or to forecast broad market trends. Active portfolio strategy A strategy that uses available information and forecasting techniques to seek better performance than a buy and hold portfolio. Actual growth rate The rate of sales growth during a given year in conformity with the previous year. Actuary A professional who is specialized in the field of insurance. Additional funds needed Funds that a firm must raise externally through borrowing or by selling new stock. Additions to net working capital Component of cash flow of firm, along with operating cash flow and capital spending. Add-on clause In financing agreements, a clause in a security agreement that allows the lender to attach future-acquired assets as security (collateral) for an existing obligation without further action on the part of the lender. Adjustable rate mortgage Mortgage that requires payments that adjust periodically according to market interest rates. Adjusted income statement approach An approach to cash flows in generating the cash forecast in which the forecast starts with projected net income on an accrual basis and adjusts to a cash basis. Adjusted present value The sum of the discounted value of a project’s operating cash flows (assuming equity financing) plus the value of any tax-shield benefits of interest associated with the project’s financing minus any flotation costs. So, APV= Unlevered project value + Value of project financing. Advance commitment A promise to sell an asset before the seller has lined up purchase of the asset. This seller can offset risk by purchasing a futures contract to fix the sales price. 4

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After market The market for a new security offering immediately after it is sold to the public. After-tax cash flow Total cash generated by an investment annually, defined as profit after tax plus depreciation or equivalently, operating income after tax plus the tax rate times depreciation. After-tax cost of debt The relevant cost of new debt, taking into account the tax deductibility of interest; used to calculate the WACC. Agency costs Costs of resolving the conflicts of interest among stockholders, bondholders, and managers. They include the costs of providing managers with an incentive to maximize shareholders’ wealth and then monitoring their behaviour, and the cost of protecting bondholders from shareholders. Agency costs borne by stockholders. Agency problem Conflicts of interest among stockholders, bondholders, and managers. Agency theory The theory of the relationship between principals and agents. It involves the nature of the costs of resolving conflicts of interest between principals and agents. Agent A person who sells or ‘places’ an asset for another party. An agent works on a commission or fee basis. Investment bankers sometimes act as agents for their clients. Aggregate demand Total demand (for goods and services) in an economy for a given price level. In an open economy (with government) it is modeled as AD = C + I + G + (X-M). Where C = Consumption, I = Investment, G = Government Expenditure, X = Exports, M = Imports. An aggregate demand curve is negatively sloped, i.e. the higher the price, the lower the demand.

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Aggregate supply Total supply (of goods and services) in an economy that firms produce for given price levels. The elasticity of a supply curve may vary at different levels of output, i.e. at low levels of output, an economy might have spare capacity, hence can produce more easily for increased demand. At higher levels of output, however (perhaps as the economy nears full employment), aggregate supply might be less responsive to higher demand, as there is less capacity (e.g. shortages). 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. Aggressive financing strategy Plan by which the firm finances its seasonal needs with short-term funds and its permanent needs with long-term funds. Aging accounts receivable The process of classifying accounts receivable by their age outstanding as of a given date. Allotment The number of securities assigned to each of the participants in an underwriting syndicate. Alpha Measure of risk-adjusted performance. An alpha is usually generated by regressing the security or mutual fund's excess return on the S&P 500 excess return. The beta adjusts for the risk (the slope coefficient). The alpha is the intercept. For example, suppose the mutual fund has a return of 25%, and the short-term interest rate is 5% (excess return is 20%). During the same time, the market excess return is 9%. Suppose the beta of the mutual fund is 2.0 (twice as risky as the S&P 500). The expected excess return given the risk is 2 × 9%=18%. The actual excess return is 20%. Hence, the alpha is 2% or 200 basis points. Alpha is also known as the Jensen Index. Related Risk-adjusted return. Alternative mortgage instruments Variations of mortgage instruments such as adjustable-rate and variable-rate mortgages, graduated-payment mortgages, reverseannuity mortgages, and several seldom-used variations. 6

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Altman Z-score Predicts whether or not a company is likely to enter into bankruptcy within one or two years. Edward Altman developed the "Altman Zscore" by examining 85 manufacturing companies. Later, additional "Z-Scores" were developed for private manufacturing companies (ZScore - Model A) and another for general/service firms (Z-Score Model B). Venture Line selects the "Z-Score" appropriate for each firm based upon the questionnaire input from the listing company. A "ZScore" is only as valid as the data from which it was derived i.e. if a company has altered or falsified their financial records/books, a "ZScore" derived from those "cooked books" is of lesser use.  Original "Z-score" [For Public Manufacturer] If the "ZScore" is 3.0 or above - bankruptcy is not likely. If the "ZScore" is 1.8 or less - bankruptcy is likely. A score between 1.8 and 3.0 is the gray area.  Model A "Z-score" [For Private Manufacturer] "Model A" of Altman's Z-Score is appropriate for a private manufacturing firm. "Model A" should not be applied to other companies. A "Z-Score of 2.90 or above indicates that bankruptcy is not likely, but a "Z-Score" of 1.23 or below is a strong indicator that bankruptcy is likely.  Model B "Z-score" [For Private General Firm] Edward Altman developed this version of the "Altman Z-Score" to predict the likelihood of a privately owned non-manufacturing company going bankrupt within one or two years. "Model B" of Altman's "Z-Score" is appropriate for a private general (non-manufacturing) firm. Model B should not be applied to other companies. A "Z-Score" of 1.10 or lower indicates that bankruptcy is likely, while a score of 2.60 or above can be an indicator that bankruptcy is not likely. A score between the two is the gray area. Amalgamation The joining of two or more businesses, also called merger. American option An option that may be exercised at any time up to and including the expiration date. See also European option. 7

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American Stock Exchange Stock exchange with the third highest volume of trading in the US Located at 86 Trinity Place in downtown Manhattan. The bulk of trading on AMEX consists of index options (computer technology index, institutional index, major market index) and shares of small to medium-sized companies are predominant. Recently merged with NASDAQ. Amortization schedule The printed table of the payments to be made on an amortized loan showing the date and amount of each payment; the amount of each payment which will be applied to interest and to principal and the balance of principal still outstanding on the loan after the payment is made. Amortization Process of writing off or liquidating an asset or loan periodically on an installment basis. Amortized mortgage Mortgage where the interest and principal have been fully repaid by the mortgage. Amortizing interest rate swap Swap in which the principal or notional amount rises (falls) as interest rates rise (decline). Anaconda mortgage A specific kind of mortgage containing a clause that states that it secures all debts owed to the mortgagee by the mortgagor and applies to rules of the mortgage to all such debts. Analysis of variance The technique for conducting a test which provides the inputs for an Ftest on the hypothesis that all of the coefficients in the regression model are simultaneously equal. Analyst Employee of a brokerage or fund management house who studies companies and makes buy-and-sell recommendations on stocks of these companies. Angel investor A private wealthy individual that has no association with a venture capital firm, investment fund, etc. The "angel" invests private money into what he/she believes to be promising opportunities i.e. normally start-up companies. 8

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Annual clean ups The requirement that for a certain number of days annually, borrowers under a line of credit carry a zero loan balance (i.e. owe the bank nothing). Annual effective yield Synonymous to annual percentage yield. Annual meeting Meeting of stockholders held once in a year at which the managers of a company report to the stockholders on the year's results. Annual percentage rate A measure of the effective rate on a loan. It is the periodic rate times the number of periods in a year. For example, a 2.5% quarterly return has an APR of 10%. Annual percentage yield The effective, or true, annual rate of return. The APY is the rate actually earned or paid in one year, taking into account the effect of compounding. The APY is calculated by taking one plus the periodic rate and raising it to the number of periods in a year. Annual rate of return There are many ways of calculating the annual rate of return. If the rate of return is calculated on a monthly basis, we sometimes multiply this by 12 to express an annual rate of return. This is often called the annual percentage rate (APR). Annual report Yearly record of a publicly held company's financial condition. It includes a description of the firm's operations, as well as balance sheet, income statement, and cash flow statement information. SEC rules require that it will be distributed to all shareholders. Annualize A statistical technique whereby figures covering a period of less than one year are extended to cover a 12-month period. The technique, to be accurate, must take seasonal variations into consideration. 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. 9

DISCOVERING FINANCE

Annuitant An individual who receives benefits from an annuity. Annuity due An annuity with n payments, where 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 Tk.1 paid for each of t periods. Annuity in advance An annuity with an immediate initial payment. Annuity in arrears An annuity with a first payment one full period hence, rather than immediately. i.e., the first payment occurs on date 1 rather than on date 0. Annuity starting date The date when an annuitant starts receiving payments from an annuity. Annuity A series of uniform receives (payments) for a specific number of years, which results from an initial deposit (receipts). Anomalies Security price relationships that appear to contradict a well-regarded hypothesis; in this case, the efficient market hypothesis. Anticipated holding period The period of time an individual expects to hold an asset. Anticipation transfers A method of reducing the float within the transfer process. The transfer is initiated based on anticipated (not actual) balances in the depository bank. Appraisal right A right of shareholders in a merger to demand the payment of a fair price for their shares, as determined independently. Appreciation Increase in the value of an asset. Arbitrage activity In the securities industry, the purchasing of undervalued shares and the resale of these shares for a higher profit when the price is overvalued or value is more than the purchasing price. 10

DISCOVERING FINANCE

Arbitrage Pricing Theory An alternative model to the Capital Asset Pricing Model (CAPM) developed by Stephen Ross and based purely on arbitrage arguments. The APT implies that there are multiple risk factors that need to be taken into account rather than single risk factor when calculating riskadjusted performance or alpha. 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, but, arbitrage opportunities are often precluded because of transaction costs. Arbitrageur One who profits from the differences in price, when the same or extremely similar security, currency, or commodity is traded on two or more markets. The arbitrageur profits by simultaneously purchasing and selling these securities to take advantage of pricing differentials (spreads) created by market conditions. See also Risk arbitrage, convertible arbitrage, index arbitrage, and international arbitrage. Arithmetic mean A measure of mean annual rates of return equal to the sum of annual holding period rates of return divided by the number of years. Arrearage Overdue payment; frequently, omitted dividends on preferred stocks. Articles of incorporation A document that establishes a corporation and specifies the rights and limitations of the business entity. Articles of partnership An agreement between the partners in a business that specifies the ownership interest of each, the method of distributing profits, and the means for withdrawing from the partnership. Asian call option A call option exercisable only at maturity and having a strike price equal to the average value of the underlying stock price during the life of the option. Ask price Price at which a broker is willing to sell a specific security. 11

DISCOVERING FINANCE

Asset allocation The process of deciding how to distribute an investor’s wealth among different asset classes for investment purposes. Asset depreciation range The expected physical life of an asset. Generally the midpoint of the ADR is utilized to determine what class an asset falls into for depreciation purpose. Asset management account Brokerage account involving various services for investors, such as investment of cash balances and check-writing privileges. Asset management ratios A set of ratios that measures how effectively a firm is managing its assets. Asset plays Firms that have valuable assets not currently reflected in the stock price. Asset pricing model A model for determining the required or expected rate of return on an asset. See Also Capital Asset Pricing Model and Arbitrage Pricing Theory. Asset requirements A common element of a financial plan that describes projected capital spending and the proposed uses of net working capital. Asset securitization The process by which a financial institution pools loan and sells securities backed by those loans. Asset stripping A strategy of acquiring a firm, breaking it into divisions, segmenting the divisions, and then selling them separately. Asset swap The use of an interest rate swap to change the cash flow characteristics of assets. Asset utilization ratios A group of ratios that measures the speed at which the firm is turning over or utilizing its assets. We measure inventory turnover, fixed asset turnover, total asset turnover, and the average time it takes to collect accounts receivable. 12

DISCOVERING FINANCE

Asset/liability management The task of managing the 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. Also called surplus management. Asset Anything owned by an individual or a business, which has commercial or exchange value. Assets may consist of specific property or claims against others, in contrast to obligations due others. Asset-backed securities Public offerings against some type of asset-linked debts bundled together, such as credit card receivables or mortgages. Assignment of mortgage The transfer of a mortgage from the old owner to the new owner. Assignment A relatively inexpensive way of liquidating a failing firm that does not involve going through the courts. Asymmetric information Information that is known to some people but not to other people. At the money A special case of an option where the exercise price and the price of the underlying asset are identical. At-firm float The time a check spends at the firm before it is forwarded to the bank. ATM A computerized machine that enables customers to withdraw cash from their current accounts, especially outside normal banking hours. Attribution analysis An assessment technique designed to establish whether a manager’s performance relative to a benchmark resulted from market timing or security selection skills. 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. 13

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Auctioneer A market participant who facilitates trades by seeking bids from buyers and sellers that establish the market-clearing amount to be traded and the price that makes amount demanded equal amount offered. Audit An examination of a company's accounting and financial records and supporting documents by an accounting professional, such as a CPA or FCA or ACA. Auditor's report A section of an annual report that includes the auditor's opinion about the veracity of the financial statements. Autarky Absence of a cross-border trade in models of international trade. Authority bond A bond issued by a government agency or a corporation created to manage a revenue-producing public enterprise. The difference between an authority bond and a municipal bond is that margin protections may be incorporated in the authority bond contract as well as in the legislation that enables the authority. Authorized shares Number of shares authorized for issuance by a firm's corporate charter. Autocorrelation test A test of the efficient market hypothesis that compares security price changes over time to check for predictable correlation patterns. Autocorrelation The correlation between members of series of observations of a variable over successive time intervals. Sometimes called serial correlation. Automated bond system The computerized system that records bids and offers for inactively traded bonds until they are cancelled or executed on the NYSE. Automated clearing house A collection of regional electronic inter-bank networks used to process transactions electronically with a guaranteed one-day bank collection float. 14

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Automated clearinghouse electronic transfer Electronic version of the depository transfer check, and can be used between banks that participate in the automated clearinghouse system. Auto-Regressive Conditional Heteroskedasticity (ARCH) A nonlinear stochastic process, where the variance is time-varying, and a function of the past variance. ARCH processes have frequency distributions which have high peaks at the mean and fat-tails, much like fractal distributions. The Generalized ARCH (GARCH) model is also widely used. Average collection period Average amount of time required to collect an account receivable. Also referred to as day’s sales outstanding. Average cost of capital A firm’s required payout to the bondholders and 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 rate of return Synonymous to accounting rate of return. Average tax rate Tax paid divided by taxable income.

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B Back office The folks behind the scenes in brokerages and trading houses. These teams support the day-to-day trading operations (e.g. trade settlement, trade confirmation, legal compliance, record keeping and daily profit and loss calculation). Back testing A method of testing a quantitative model in which computers are used to examine the composition and returns of portfolios based on historical data to determine if the selected strategy would have worked in the past. Back-end load fund A mutual fund that charges investors a fee to sell (redeem) shares often ranges from 4% to 6%. Some back-end load funds impose a full commission if the shares are redeemed within a designated length of 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-end load A redemption or exit fee incurred when one sells his or her shares. 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. Backup Line of Credit A bank assurance of funds obtained by an issuer of commercial paper to protect the CP investor from default. The issuer pays a commitment fee to the bank. Backwardation A market condition in which futures prices are lower in the distant delivery months than in the nearest delivery month. This may occur when the costs of storing the product until eventual delivery are effectively subtracted from the price today. The opposite of contango. 16

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Bad debt An open account balance or loan receivable that has proven to be uncollectible and is written off. Balance of payments All transactions involving a country's trade in goods and services, as well as all capital transactions (borrowing, lending) between one country and the rest of the world over a given period of time. The balance of payment includes all transactions, i.e. individuals, companies and the public sector. Balance of trade Part of a country's balance of payments that covers trade in goods and services (imports and exports) with the rest of the world over a given period of time. If exports are higher than imports, there is a trade surplus. If exports are less than imports, there is a trade deficit. Balance sheet A financial snapshot, taken at a point in time of all the assets the company owns and all the claims against those assets. The amounts shown on a balance sheet are generally the historic cost of items and not their current values. Balanced budget multiplier The concept, which is concerned with the aggregate economic effects that derive from changes in tax collections and in governmental exhaustive expenditures in the same direction and by the same amount. Balloon payment mortgage Mortgage that requires payments for a three to five year period; at the end of the period, full payment of the principal. Balloon payment A payment on debt that is much larger than other payments. The ultimate balloon payment is the entire principal at maturity. Bank discount method An annualized interest rate assuming simple interest, a 360-day year and using the face value of the security rather than the purchase price to compute return per taka invested. Bank holding company A firm that owns one or more banks, usually by holding all or most of the equity shares of those banks. 17

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Bank reconciliation The verification of a bank statement balance and the depositor’s checkbook balance. Bank run Surprise simultaneous (and usually large) cash withdrawals from a bank brought about by loss in depositor confidence, and fear that the bank will close. A run on a bank can quite easily force closure given that reserve requirements (i.e. deposits banks are obliged to hold in reserve) are usually a small proportion of total deposits received. Banker’s acceptance The short-term promissory notes for which a bank (by having “accepted” them) promises to pay the holder the face amount at maturity. Bankruptcy costs Costs related to the use of the bankruptcy mechanism. Bankruptcy risk The risk that a firm will be unable to meet its debt obligations. Also referred to as default or insolvency risk. Bankruptcy The legal mechanism by which creditors take the lead over a company after that company could not meet it's debt commitments. Bar chart A plot of daily stock price plotted against time. Barbell strategy A fixed income strategy in which the maturity's of the securities included in the portfolio are concentrated at two extremes. Barefoot pilgrim A slang term for an unsophisticated investor who has lost everything on the stock market. Bargain-purchase price option An option which gives the lessee the right to purchase the asset at a price below fair market value when the lease expires. Barter A form of trading where the parties are accepting goods as payment rather than cash. 18

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Base period A particular period of time used for comparative purposes when measuring economic data. Basis earnings per share Earnings per share unadjusted for dilution. Basis rate swap An interest rate swap in which both parties exchange floating-rate payments based on a different money market reference rate. Basis risk Risk attributable to uncertain movements in the spread between a futures price and a spot price. Basis The difference between the spot price of the underlying asset and the futures contract price at any point in time. Baumol model The model used to address temporary investment decisions where the firm is assumed to receive cash periodically but to pay out cash continuously at a steady rate. BCG product portfolio matrix A tool for strategic planning and resource allocation that analyses firms/products on the basis of relative market share and industry growth rate. It classifies products/firms into four broad categories Stars, Question marks, Cash Cows, and Dogs. Bear hug Hostile takeover attempt in which the acquirer offers an exceptionally large premium over the market value of the acquiree's share so as to squeeze (hug) the target into acceptance. Bear market Any market in which prices exhibit a declining trend. For a prolonged period, usually falling by 20% or more. 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. 19

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Bearer bond An unregistered bond for which ownership is determined by possession. The holder receives interest payments by clipping coupons attached to the security and sending them to the issuer for payment. Bearer securities Securities that are not registered on the books of the issuing corporation. Payments are made to whoever presents the appropriate coupon. Bearer securities facilitate tax avoidance. Behavioral finance The study of investment behavior, based on the belief that investors do not always act rationally. Benchmark error Situation where an inappropriate or incorrect benchmark is used to compare and assess portfolio returns and management. Benchmark portfolio A comparison standard of risk and assets included in the policy statement and similar to the investor’s risk preference and investment needs, which can be used to evaluate the investment performance of the portfolio manager. Benchmark risk-adjusted discount rate method A method used to reflect either total risk or systematic risk through determining the appropriate risk premium by comparing the risk of the marginal cash flow with that of traded assets and employing the market’s required returns for traded assets of comparable risk. Beneficiary The person in whose favor a letter of credit is issued or a draft is drawn. Benefit-cost ratio Synonymous to profitability index. Beranek model The model used to address temporary investment decisions where the firm is hypothesized to receive cash steadily but to pay out cash periodically. Best effort offering A security offering in which the investment bankers agree to use only their best efforts to sell the issuer’s securities. The investment bankers do not commit to purchase any unsold securities. 20

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Best-efforts agreement Arrangement in which the investment banking firm does not guarantee a price on securities to be issued by a corporation, but states only that it will give its best effort to sell the securities at a reasonable price. Beta coefficient A measure of the extent to which the returns on a specific stock move with the stock market. Beta The measure of an asset's risk in relation to the market (for example, the S&P500) or to an alternative benchmark or factors. Roughly speaking, a security with a beta of 1.5, will have move, on average, 1.5 times the market return. More precisely, that stock's excess return (over and above a short-term money market rate) is expected to move 1.5 times the market excess return. According to asset pricing theory, beta represents the systematic risk that cannot be diversified away. When using beta, there are a number of issues that you need to be aware of (1) betas may change through time; (2) betas may be different depending on the direction of the market (i.e. betas may be greater for down moves in the market rather than up moves); (3) the estimated beta will be biased if the security does not frequently trade; (4) the beta is not necessarily a complete measure of risk (you may need multiple betas). Also, note that the beta is a measure of co-movement, not volatility. It is possible for a security to have a zero beta and higher volatility than the market. Bid price The price at which the specialist or dealer offers to buy shares. Bid-ask spread The difference between a dealer's bid and asked price. Bidder A firm or person that wants to buy a firm or security. Bidding buyer In the context of general equities, a nonaggressive buyer who prefers to await a natural seller in the hope of paying a lower price. Bidding through the market In the context of general equities, aggressive willingness to purchase a security at a premium to the inside market. 21

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Big bang theory The theory that the larger the relative revision in expected cash flows, the larger the security price revaluation implication of the information release. Big bang Deregulatory event in London in 1986 that allowed investment firms trading in the United States and Japan to trade in London and eliminated the fixed commission structure on security transactions. Big bath The practice that once management encounters a loss year, additional steps are taken to add to the magnitude of the loss, for example, by further writing down of assets or by creating provisions for possible future losses. Bill of exchange A negotiable instrument where three parties are involved one party draws an order on the second party to pay a sum certain to a third party at a stated future time. A check is a bill of exchange payable on demand one party writes a check directing a bank (second party) to pay the payee (third party) sum certain on demand. Bill of lading The contract between the owner of the goods and the cargo carrier to move the goods to a specified destination. A clean bill of lading is issued by the carrier verifying receipt of the merchandise in apparent good condition (without visually apparent damage or defect). Bills of lading can sometimes be made to cover the whole trip, or separate bills of lading can be prepared for each carrier. Ocean shipments generally require an Inland Bill of Lading covering land transportation to the port and an Ocean Bill of Lading covering the ship portion. Bills of lading are negotiable while cargo is in transit. Binomial option pricing model A valuation equation that assumes the price of the underlying asset changes through a series of discrete upward or downward movements. Black economy All economic activity that is not officially recorded, i.e. not declared for tax purposes. It tends to be more prevalent in the service sectors of economies. Black economies tend to grow in situations of significant state intervention, often as a response to economic crisis. In countries 22

DISCOVERING FINANCE

with large black economies, state (official) statistics tend to be inaccurate. The black economy sometimes referred to as the shadow economy. Black Friday A precipitous drop in a financial market. The original Black Friday occurred on September 24, 1869, when prospectors attempted to corner the gold market. Black knight A person or firm that makes an unwelcome takeover bid for a company. Black market An illegal market. Black Monday Refers to October 19, 1987, when the Dow Jones Industrial Average fell 508 points on the heels of sharp drops the previous week. On Monday, October 27, 1997, the Dow dropped 554 points. While the point drop set a new record, the percentage decline was substantially less than in 1987. Black Thursday October 24 1929, the day of Wall Street crash. Black Wednesday Wednesday 16 September 1992, when Sterling left the Exchange Rate Mechanism, which led to a 15% fall in its value against the Deutschmark. The Chancellor of the Exchequer and the Prime Minister, having previously described this measure as ‘a betrayal of our future’, were called upon to resign, but not do so. Black-Scholes option-pricing model A valuation equation that assumes the price of the underlying asset changes continuously through the option’s expiration date by a statistical process known as ‘geometric Brownian motion’. It was developed by Fischer Black and Myron Scholes in 1973. Blanket inventory lien A secured loan that gives the lender a lien against all the borrower’s inventories. Blanket mortgage A mortgage where one loan is secured against more than one parcel of land. 23

DISCOVERING FINANCE

Block transactions Large transactions in which at least 10,000 shares of stock are bought or sold. Blue chip company Large and creditworthy company. Used in the context of general equities. Company renowned for the quality and wide acceptance of its products or services, and for its ability to make money and pay dividends. Blue Sky Laws State laws aimed at regulating the sale of securities within the state and thereby protecting investors. Bona fide In good faith; without dishonesty; sincere; with integrity Bond agreement A contract for privately placed debt. Bond equivalent yield Bond yield calculated using simple rather than compound interest. Bond indenture A legal document specifying the rights and obligations of both the issuing firm and the bondholders. Bond price volatility The percentage changes in bond prices over time. Bond rating A rating based on the possibility of default by a bond issuer. The ratings range from AAA (highly unlikely to default) to D (in default). Bond swap An active bond portfolio management strategy that exchanges one position for another to take advantage of some difference between them. Bond A security that obligates the issuer to make specified payments to the holder over a period of time. Bonded warehouse A warehouse authorized by customs officials for the storage of goods on which payment of duty is deferred until the goods are removed. 24

DISCOVERING FINANCE

Bonding Generally used by service companies as a guarantee to their clients that they have the necessary ability and financial tracking to meet their obligations. Bonds are also used to guarantee payment of duty for government’s customs entry. Bonus shares Dividend paid in the form of equity shares and not in cash. Book cash A firm's cash balance as reported in its financial statements. Book runner The managing underwriter for a new issue. The book runner maintains the book of securities sold. Book value per share Per share accounting equity value of a firm. Total accounting equity divided by the number of outstanding shares. Book value The reported stockholders equity of a company, less the liquidating value of any preferred shares. Book-entry transaction A transaction in which no actual paper or certificate is created. All transactions simply take place on the books via computer entries. Bootstrap The start-up of a company with very little capital. Bottom up approach An investment strategy that first seeks individual companies with attractive investment potential, then proceeds to consider the larger economic and industry trends affecting those companies. Bought deal An underwriting arrangement whereby an investment banking firm or group of firms offers to buy an entire issue from the issuer. Breadth A measure of the extent to which movement in a market index is reflected widely in the price movements of all the stocks in the market. The common measure of breadth is the spread between the number of stocks that advance and decline in price. If advances outnumber 25

DISCOVERING FINANCE

declines by a wide margin, then the market is viewed as being stronger because the rally is widespread. These breadth numbers also are reported daily in the Wall Street Journal. Break-even analysis An analytical technique for studying the relationship among fixed cost, variable cost, profits and sales volume. Break-even lease payment The lease payment at which a party to a prospective lease is indifferent between entering and not entering into a lease arrangement. Break-even point The sales volume required so that total revenues and total costs are equal; may be expressed in units or in sales taka. Breakthrough innovation A new product with some technological changes. Break-up value The value one could realize by dividing a multibusiness company into a number of separate enterprises and disposing of each individually. Bridge loan Funds provided as temporary financing until other sources of long term funds can be obtained; commonly provided by securities firms to firms experiencing leveraged buyouts. Also called bridge finance. Broad money An informal name of M3. 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. Also, person who acts as an intermediary between a buyer and seller, usually charging a commission. A "broker" who specializes in stocks, bonds, commodities, or options acts as an agent and must be registered with the exchange where the securities are traded. Antithesis of dealer. Brokered market A market in which an intermediary offers search services to buyers and sellers. Bubble theory Theory states that security prices sometimes move wildly above their true values, or the price falls sharply until the "bubble bursts". 26

DISCOVERING FINANCE

Bucket shop An illegal brokerage firm that accepts customer orders but does not attain immediate executions. A bucket shop broker promises the customer a certain price, but waits until a price discrepancy is present and the trade is advantageous to the firm and then keeps the difference as profit. Alternatively, the broker may never fill the customer's order but keep the money. Budget deficit The amount by which spending exceeds revenues. Budget mortgage A mortgage in which the borrower is required to make periodic payments not only for interest and principal, but also for insurance premiums and realty tax installments. Budget surplus The amount by which revenues exceed spending. Budget Projected financial statements used to compare with actual performance to stimulate improvements in the use of company resources in a planning and control process. Budgeting The process of planning future operations and controlling operations by comparing actual results with planned expectations. Bulge-bracket firms Investment banking firms that because of their size, reputation, presence in key markets, and customer base are viewed as the premier firms. Bull market Any market in which prices are in an upward trend. Bull A dealer on a stock exchange, currency market, or commodity market who expects prices to rise. Bullet bond A bond where no principal payments are made until maturity date. Bullet loan Loan structured so that interest payments and the loan principal are to be paid off in one lump sum at a specified future date. 27

DISCOVERING FINANCE

Bullet payment The final repayment of a loan, which consists of the whole of sum borrowed. Bullet strategy A fixed income strategy in which a portfolio is constructed so that the maturities of its securities are highly concentrated at one point on the yield curve. Bullet swap An interest rate swap in which the notional principal amount does not vary over the life of the swap. Bullet A security, offering a fixed interest and maturing on a fixed date. Bullion Gold, silver, or some other precious metal used in bulk, i.e. in the form of bars or ingots rather than in coin. Central bank of a country uses gold bullion in the settlement of international debts. Bullish An optimistic outlook of an investor, while bearish means a pessimistic outlook. Bundling Combining more than one security into a composite security. Burn rate The rate at which a start-up company expends venture capital to finance overhead costs prior to the generation of positive cash flow. Business combination Synonymous to merger. Business cycle A recurrent cycle of growth, decline, recession, and recovery in the economic activity of a capitalist country. Business failure A business that has terminated with a loss to creditors. Business finance The art and science of managing money. It is the act or process of accumulation and utilization of funds to accomplish a firm’s ultimate goal. 28

DISCOVERING FINANCE

Business plan A written plan used to chart a new or ongoing business strategies, sales projections, and key personnel in order to obtain financing and / or to provide a strategic foundation under which a business can grow. Business risk The risk related to the inability of the firm to hold its competitive position and maintain stability and growth in earnings. Bust-up takeover A leveraged buyout in which the buyer sells off the assets of the target company to repay the debt that financed the takeover. Buy limit order A conditional trading order that indicates a security may be purchased only at the designated price or lower. Buy on close Buying at the end of the trading session at a price within the closing range. Buy on opening Buying at the beginning of a trading session at a price within the opening range. Buy order An order to a broker to purchase a specific quantity of a security. Buy stop order A buy order not to be executed until the market price rises to the stop price. Once the security has broken through that price, the order is then treated as a market order. Also known as a suspended market order. 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. Buy-and-write strategy An option strategy that calls for the purchase of stocks and the writing of covered call options on them. Buyers over A market in which the sellers have sold all they wish to sell but there are still buyers. This is clearly a strong market, with an inclination for prices to rise. 29

DISCOVERING FINANCE

Buying on margin A transaction in which an investor borrows to buy shares using the shares themselves, as collateral. Buy-side analyst A financial analyst employed by a nonbrokerage firm, typically one of the larger money management firms that purchases securities on its own account.

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C Call feature Part of the indenture agreement between the bond issuer and buyer describing the schedule and price of redemptions prior to maturity. Call market A market in which trading for individual stocks takes place only at specified times. All the bids and asks available at the time are combined and the market administrators specify a single price that will possibly clear the market at that time. Call money rate The interest rate banks charge a broker for the funding of loans to investors who buy on margin. Also known as the broker loan rate. Call money Money put into the money market that can be called at short notice. Call option A contract that gives the holder the right to purchase a specified quantity of the underlying asset at a predetermined price (the exercise price) on or before a fixed expiration date. Call premium Difference between a bond’s call price and its par value. Call price of a bond Amount at which a firm has the right to repurchase its bonds or debentures before the stated maturity date. The call price is always set at equal to or more than the par value. Call protected Describes a bond that is not allowed to be called, usually for a certain early period in the life of the bond. Call provision A written agreement between an issuing corporation and its bondholders that gives the corporation the option to redeem the bond at a specified price before the maturity date. Call risk The disadvantages associated with the early retirement of a bond issue. 31

DISCOVERING FINANCE

Call A demand for a payment due on nil or partly paid stocks. Callable bond A bond that is subject to be repurchased at a stated call price before maturity. Calling refunding A procedure by which a company issues a bond with a high coupon rate when market interest rates are high, and if interest rates later fall, it retires the high-coupon debt and issue new bonds at a lower coupon rate to reduce interest payments. CAMEL rating A system that assigns a numerical rating to bank based on examiner judgment regarding the bank’s capital adequacy (C), asset condition (A), management quality (M) , earnings record (E) and liquidity position (L). CAPEX An acronym for capital expenditure. Capital adequacy The ability of a bank to meet the needs of their depositors and other creditors in terms of available finds. Capital allocation line A line showing the maximum expected return for a given level of risk for all portfolios containing both risk-free asset and risky assets, given the portfolio manager’s assumptions about expected returns and the variances and covariances of expected returns. Capital appreciation funds A mutual fund designed for maximum capital appreciation that places its money in companies with high growth rates. Capital asset pricing model (CAPM) An economic theory that describes the relationship between risk and expected return, and serves as a model for the pricing of risky securities. The CAPM asserts that the only risk that is priced by rational investors is systematic risk, because that risk cannot be eliminated by diversification. The CAPM says that the expected return of a security or a portfolio is equal to the rate on a risk-free security plus a risk premium multiplied by the assets systematic risk. The theory was developed by William Sharpe (1964) and John Lintner (1965). 32

DISCOVERING FINANCE

Capital asset A long-term asset that is not purchased or sold in the normal course of business. Generally, it includes fixed assets, e.g., land, buildings, equipment, fixtures and furniture. Capital budget The estimated amount planned to be expended for capital items in a given fiscal period. Capital items are fixed assets such as facilities and equipment, the cost of which is normally written off over a number of fiscal periods. The capital budget, however, is limited to the expenditures that will be made within the fiscal year comparable to the related operating budgets. Capital budgeting The process of identifying analyzing and selecting investment projects whose returns (cash flows) are expected to extend beyond one year. Capital component One of the types of capital used by firms to raise money. Capital consumption adjustment Adjustment to historical-cost depreciation to correct for understatement during inflation. Capital expenditure Outlay required for acquiring a fixed asset from which benefits would be available beyond one year. Capital gain An increase in the capital value of an asset between the time of its acquisition by its owner and its sale by that owner. Capital lease A lease that does not usually provide for maintenance services, is not cancellable, and is fully amortized over its life. Capital loss A loss arising from the disposal, loss, or destruction of a capital asset or firm a long-term liability. Capital market line The line from the intercept point that represents the risk-free rate tangent to the original efficient frontier; it becomes the new efficient frontier since investments on this line dominate all the portfolios on the original Markowitz efficient frontier. 33

DISCOVERING FINANCE

Capital market A financial market involving institutions that deals with securities with a life of more than one year. Capital outflow uncertainty The uncertainty regarding the timing of cash disbursements related to the firm’s major capital expenditure and construction programs. Capital rationing A situation in which due to financial constraints, the limited funds are allocated to a number of mutually exclusive capital budgeting projects. Capital stock The ownership shares of a corporation authorized by its articles of incorporation, including preferred and common stock. Capital structure theory A theory that addresses the relative importance of debt and equity in the overall financing of the firm. Capital structure The mix of the liabilities and stockholders' equity side of the balance sheet, especially the ratio of debt to equity and the mixture of short and long maturities. Capital The total amount of money or other resources owned or used to acquire future income or benefits. Capitalization rate Synonymous to discount rate. Capitalization The statement of capital within the firm - either in the form of cash, common stock, long-term debt, or in some combination of all three. It is possible to have too much capital (in which case the firm is overcapitalized) or too little capital (in which case the firm is undercapitalized). See also Market capitalization. Caption An option on an interest rate cap. Captive finance subsidiary Wholly owned subsidiary of finance company whose primary purpose is to finance sales of each parent company’s products and purchase receivables of the parent company. 34

DISCOVERING FINANCE

Carry-back; carry forward For income tax purposes, losses that can be carried back or forward to reduce average taxable income. Carrying cost The cost to hold an asset, usually inventory. For inventory, carrying costs include such items as interest, warehousing costs, insurance and material-handling expenses. Cash & equivalents All cash, marketable securities, and other near-cash items excluding sinking funds. Cash account A brokerage account that settles transactions on a cash-basis rather than credit-basis. Cash basis of accounting The accounting basis in which revenue and expenses are recorded in the period they are actually received or expended in cash. Use of the cash basis generally is not considered to be in conformity with generally accepted accounting principles (GAAP) and is therefore used only in selected situations, such as for very small businesses and (when permitted) for income tax reporting. See also Accrual basis. Cash before delivery Under this term of sale the customer is required to pay before the delivery of the goods or services. Cash bonus Bonus money paid to management for meeting stated performance goals. Cash budget A forecasted summary of a firm's expected cash inflows and cash outflows as well as its expected cash and loan balances. Cash concentration The movement of cash from lockbox or field banks into the firm’s central cash pool residing in a concentration bank. Cash conversion cycle The length of time between a firm's purchase of inventory and the receipt of cash from accounts receivable. Also called cash cycle. 35

DISCOVERING FINANCE

Cash cow A company or division of a company that generates a steady and significant amount of free cash flow. This type of company pays out most of its earnings per share to stockholders as dividends. Cash cycle The amount of time elapsed from the point when an outlay is made to purchase raw materials to the point when cash is collected from the sale of the finished product using the raw material. Cash discount period The period of time during which a cash discount can be taken for early payment. Cash discount A percentage (%) reduction in sales or purchase price allowed for early payment of invoices. It is an incentive for credit customers to pay invoices in a timely fashion. Cash flow coverage ratio The number of times that financial obligations (for example interests, principal payments, preferred stock dividends, and rental payments) are covered by earnings before interest, taxes, rental payments, and depreciation. Cash flow cycle The periodic transformation of cash through working capital and fixed assets back to cash. Cash flow forecast An estimation of the flows in and out of the firm’s cash account over a particular period of time, usually a quarter, month, week, or day. Cash flow from financing activities Cash flow that is generated (or reduced) from the sale or repurchase of securities or the payment of cash dividends. It is the third section presented in the statement of cash flows. Cash flow from investing activities Cash flow that is generated (or reduced) from sale or purchase of longterm securities or plant and equipments. It is the second section presented in the statement of cash flows. 36

DISCOVERING FINANCE

Cash flow from operating activities Cash flow information that is determined by adjusting net income for such items as depreciation expense, changes in current assets and liabilities, and other items. It is the first section presented in the statement of cash flows. Cash flow matching Matching cash flows from a fixed-income portfolio with an obligation. Cash flow principle Principle of investment evaluation stating that only actual movements of cash are relevant and should be listed on the date they move. Cash flow statement Simply expands and rearranges the sources and uses statement, placing each source or use into one of three broad categories – financing, investments, and operations. Cash flow time line Line depicting the operating activities and cash flows for a firm over a particular period. Cash flow underwriting Method by which insurance companies adopt insurance premiums to interest rates. Cash flow The movement of money into or out of a cash account over a specific period of time. Cash forecast Synonymous to cash budget. Cash management The efficient management of cash in a business in order to put the cash to work more quickly and to keep the cash in applications that produce income, such as the use of lock boxes for payments. Cash offer Proposal, either hostile or friendly, to acquire a target company through the payment of cash for the stock of the target. Cash on delivery The term of sale in which cash is required to be paid upon delivery of goods or services. Under this term of sale, no credit is offered. 37

DISCOVERING FINANCE

Cash out A situation where a firm runs out of cash and cannot readily sell marketable securities. Cash ratio Synonymous to liquidity ratio. Cash turnover The number of times per year the firm’s cash is turned to a marketable product and then back into cash. Cash The ready currency to which all liquid assets can be reduced. Central liquidity facility Facility that acts as a lender for credit unions to accommodate seasonal funding and specialized needs or to boost liquidity. Central-bank rate The rate at which the central bank will buy securities from or make loans to the discount houses. CEO An acronym for Chief Executive Officer. The CEO is the principal individual responsible for the activities of a company. Certainty-equivalent An amount that would be accepted today (risk free) in lieu of a chance to receive a possibly higher, but uncertain amount in future. Certificates of deposit Instruments issued by banks that require minimum deposits for specified terms and that pay higher rates of interest than deposit accounts. Ceteris paribus Simply means "all other things being equal". CFO An acronym for Chief Financial Officer. The CFO is the officer in a corporation responsible for handling funds, signing checks, the keeping of financial records, and financial planning for the company. Characteristic line The line relating the expected return on a security to different returns on the market portfolio. The slope of this line is beta. 38

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Chartered Financial Analyst An experienced financial analyst who has passed examinations in economics, financial accounting, portfolio management, security analysis, and standards of conduct given by the Institute of Chartered Financial Analysts. Chartist A technical analyst who charts the patterns of stocks, bonds, and commodities to find trends in patterns of trading used to advise clients. Related technical analysts. Chattel mortgage A lien on specifically identified personal property (assets other than real estate) backing a loan. Cheap money A monetary policy in which loans are easy to obtain with a lower rate of interest. Checking account A bank account upon which checks can be drawn. Cheque A printed form on which instructions are given to a bank to pay a stated sum to a named recipient. Chinese wall A notional information barrier between the parts of a business, especially between the market-making part of a stockbroking firm and the broking part. It would clearly not be in investors' interest for brokers to persuade their clients to buy investments from them for no other reason than that the market makers in the firm, expecting a fall in price, were anxious to sell them. Chip card A type of debit card that incorporates a microchip in order to store information regarding the transactions for which it is used. Circuit breaker Measures instituted by stock exchanges to stop trading temporarily when the market has fallen by a certain percentage in a specified period. They are intended to prevent a market free fall by permitting buy and sell orders to rebalance. 39

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Classified stock The division of stock into more than one class of common stock, usually called Class A and Class B. The specific features of each class, which are set out in the charter and bylaws, usually give certain advantages to the Class A shares, such as increased voting power. Clearing fee The sum charged by the agency affiliated to a commodity exchange for settling the exchange's transaction. Clearing float The delay between the deposit of a check by the payee and the actual availability of the funds. Clearing House Inter-bank Payments System An automated clearing system used primarily for international payments. The British counterpart is known as CHAPS. Clearing The exchanging of checks, and balancing of accounts between banks. Clientele effect The theory that a firm will attract stockholders whose preferences with respect to the payment and stability of dividends correspond to the payment pattern and stability of the firm itself. Close off the top Financial jargon meaning to foreclose the possibility of additional debt financing. Close price The price of a share or commodity when the margin between the bid and offer prices is narrow. Closed end fund An investment company that sells shares like any other corporation and usually does not redeem its shares. Closely owned stock All common stock of a firm owned by a small group of investors such as a family. Coefficient of determination Square of the correlation coefficient, measuring the percentage of the variance in the dependent variable that is explained by the independent variable. 40

DISCOVERING FINANCE

Coefficient of variation A relative measure of dispersion equal to the standard deviation divided by the mean. Coincident indicators A set of economic variables whose values reach peaks and troughs at about the same time as the aggregate economy. Co-insurance effect Refers to the fact that the merger of two firms decreases the probability of default on either's debt. Collar A derivative that limits the effects of (foreign currency or interest rate) fluctuations beyond a predetermined range. Collateral mortgage obligation A debt security based on a pool of mortgage loans that provides a relatively stable stream of payments for a relatively predictable term. Collateral trust bond A bond secured by stocks, notes, bonds, or other kinds of financial instruments. Collateral Security which is offered to the lender by the borrower, usually in the form of an asset such as accounts receivable or inventory. Collection float The delay between the time when a payer or customer deducts a payment from the checking account ledger and the time when the payee or vendor actually receives the funds in a spendable form. Collection period A ratio measure of control of accounts receivable, defined as accounts receivable divided by credit sales per day. Collection policies The procedures for collecting a firm’s accounts receivable when they are due. Collection rate uncertainty The uncertainty regarding the firm’s actual future collection patterns of receivables. 41

DISCOVERING FINANCE

Combined cost of capital Synonymous to cost of capital. Combined enterprise An accounting entity that results from a business combination. Combined leverage The total or combined impact of operating and financial leverage. Combinee A constituent company other than the combinor in a business combination. Combinor A constituent company entering into a combination whose owners as a group ends up with control of the ownership interests in the combined enterprise. Commercial bank A financial institution that accepts deposits and may use the proceeds of those deposits to make loans. Commercial paper Short-term, unsecured promissory note, generally issued by large corporations with credit standing in the open market that represents the obligation of issuing company. Commercial property As opposed to residential or industrial property. Property zoned, designed or intended for use retail, office, or similar users. Commingled funds Investment pools managed by banks and insurance companies for trust or retirement accounts that are too small to warrant managing on a separate basis. Commission broker A broker on the floor of an exchange who acts as agent for a particular brokerage house and buys and sells stocks for the brokerage house on a commission basis. Commitment fee A fee charged by the lender for agreeing to hold credit available. Commitment letter An agreement that the lender sends to a mortgage loan applicant that commits the lender to provide funds to the applicant. 42

DISCOVERING FINANCE

Committed costs Costs that must be incurred in order for a firm to accomplish its longrange organizational goals. These costs can't be easily modified from one year to the next. Commodity swap A swap transaction in which one of the cash flows is tied to a fixed price for a commodity and the other is based on a fluctuating commodity index level. Common size financial statement A statement in which all items are expressed as a percentage of a base figure in order to control size differences and it is useful for the purposes of analyzing trends and changing relationship among financial statement items. For example, all items in each year's income statement could be presented as a percentage of net sales. Common stock equity The ownership interest in the firm. It may be represented by new shares or retained earnings. The same as net worth. Common stock equivalent Warrants, options, and any convertible securities that pay less than twothirds of the average Aa bond yield at the time of issue. Comparable Entity that is used for comparisons and has similarity at least in supply side, demand side, capital market attributes or legal ownership. Compensating balance Non-interest-bearing demand deposits that must be maintained by a firm to compensate a bank for services provided credit lines, or loans. Competitive bidding underwriting An underwriting arrangement in which the issuer announces the terms of the issue, and interested parties submit bids for the entire issue. Competitive market A market that brings about the efficient production of a good or service at the lowest possible cost. Competitive offer Method of selecting an investment banker for a new issue by offering the securities to the underwriter bidding highest. 43

DISCOVERING FINANCE

Complete portfolio The entire portfolio, including risky and risk-free assets. Complexity The property of an asset that represents a combination of two or more simpler assets. Composite (risk adjusted) measures of portfolio performance Portfolio performance measures that combine return and risk into one calculation. Composite cost of capital Synonymous to cost of capital. Composite indexes of general economic activity Leading, coincident, and lagging indicators of economic activity. Composition An informal method of reorganization that voluntarily reduces creditor’s claims on the debtor firm. Compound interest Interest paid on any previous interest earned, as well as on the principal borrowed (lent). Compounded method A financial forecasting method that is used when a particular financial variable is expected to grow at a steady growth rate over time. Compounded semi-annually A compounding method that compounds every six months. For example, a five year investment in which interest is compounded semiannually would indicate an n value equal to 10 and an i value at onehalf the annual rate. Compounding The process of determining the value of a cash flow or series of cash flows some time in the future when compound interest is applied. Comprehensive budget A series of budgets for all activities of a firm for the budget period, generally one year. Comptroller The corporate manager responsible for the firm's accounting activities. Sometimes referred to as the controller (which means the same thing). 44

DISCOVERING FINANCE

Concave curve A figure where a straight line connecting any two points on the curve lies entirely under the curve. Concentration account A single centralized account into which funds collected at regional locations (lockboxes) are transferred. Concentration banking The use of decentralized collection centers to speed up the collection of receivables. Concentration bank A larger bank to which a firm channels fund from its local collection banks which operates lockboxes. Concentration ratio Concentration margin divided by total sales revenue. Concentration services Movement of cash from different lockbox locations into a single concentration account from which disbursements and investments are made. Conditional sales contract An arrangement whereby the firm retains legal ownership of the goods until the customer has completed payment. Conduits Entities that pool mortgages and sell interests in these pools to investors. Confidence Index Ratio of the yield of top-rated corporate bonds to the yield on intermediate grade bonds. Confidence indicator Measures of investors’ faith in a market or economy. A weakening confidence indicator supposedly suggests bearishness. Conforming mortgage A mortgage loan that meets the underwriting standards allowing an agency to include it in a pool of mortgages that is collateral for a mortgage pass-through security. 45

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Conglomerate acquisition An acquisition where the acquiring firm and the acquired firm are not related to each other. The acquisition of a food products firm by a computer firm would be considered a conglomerate acquisition. Conglomerate diversification Ownership of operations in a number of functionally unrelated business activities. Conglomerate A corporation that is made up of many diverse, often unrelated divisions. This form of organization is thought to reduce risk, but may create problems of coordination. Consensus forecast The mean of all financial analysts' forecasts for a company. Conservative financing strategy Plan by which the firm finances all projected funds needs with longterm funds and uses short-term financing only for emergencies or unexpected outflows. Consol A bond that never matures; perpetuity in the form of bond. Consolidated tax return An income tax return that combines the income statement of several affiliated firms. Consolidation The combination of two or more firms into an entirely new firm. The old firm ceases to exist. Though technically different, the terms merger (where firm survives) and consolidation tend to be used interchangeably. Consortium Combination of two or more large companies formed on a temporary basis to quote for a large project. Constant amortization mortgage loan A mortgage loan in which the payments on CAMs are determined first by computing a constant amount of each monthly payment and then interest is computed on the monthly loan balance and added to the monthly amount of amortization. 46

DISCOVERING FINANCE

Constant growth dividend discount model A form of the dividend discount model that assumes dividends will grow at a constant rate. Constant payment mortgage loan A mortgage loan in which the payments on CPMs are determined by computing a constant monthly payment on the original loan amount at a fixed rate of interest for a given time period. Constant purchasing power The amount of a currency required over time to purchase a stable basket of physical assets. Constituent companies The business enterprises that enter into a combination. Construction loan A structured, short-term loan to a builder or developer to allow for the development of land. Funds are advanced at certain stages of the development project to pay for specific expenses, fees or costs. Consumer credit Credit granted to consumers for purchasing goods. Consumer finance companies Finance companies that concentrate on direct loans to consumers. Consumer price index An index measure of the price level equal to the sum of prices of a number of commodities purchased by consumers weighted by the proportion each represents in a typical consumer’s budget. Consumer surplus A measure of welfare that consumers derive from the consumption of goods and services, or the benefits they derive from the exchange of goods. Consumer surplus is calculated as the difference between what consumers are willing to pay for a good or service (indicated by the position of the demand curve) and what they actually pay (the market price). The level of consumer surplus is indicated by the area below the demand curve and above the existing price in the market. Contagion effects Adverse effects of a single firm that become contagious throughout the industry. 47

DISCOVERING FINANCE

Contango A situation in a futures market where the current contract price is greater than the current spot price for the underlying asset. Contingency An event that may (or may not) happen in the future, a condition that must be fulfilled before a contract becomes firm and binding. Contingent claim Claim whose value is directly dependent on or is contingent on the value of its underlying assets. Contingent immunization A strategy that immunizes a portfolio if necessary to guarantee a minimum acceptable return but otherwise allows active management. Contingent liability Debt obligations that will not come due unless certain events occur (such as borrower default or the exercise of product warranties). Contingent obligation A financial instrument whose issuer pledges to pay if certain events (such as default on a loan) occur; for example, federal deposit insurance is a contingent obligation of the US government, payable if a bank fails. Continuous compounding Compounding of interest an infinite number of times per year at intervals of microsecond. Contra brokers The brokers on the buy side of a sell order or the sell side of a buy order. Contribution margin An amount available to cover fixed costs for the period and provide a profit or net income. Mathematically, contribution margin is the difference between sales revenue per unit and variable costs per unit. Control ratio Ratio indicating management’s control of a particular current asset or liability. Controlled disbursement A system in which the firm directs checks to be drawn on a bank (or branch bank) that is able to give early or mid-morning notification of the total taka amount of checks that will be presented against its account that day. 48

DISCOVERING FINANCE

Controller Synonymous to comptroller. Controlling The process of comparing actual results with plans and taking corrective action where necessary, when results differ significantly from the plan. Conventional investment project One in which an initial outlay is followed by a series of cash inflows. Conventional mortgage A mortgage loan based solely on the credit of the borrower and on the collateral for the mortgage. Convergence property The convergence of futures prices and spot prices at the maturity of the futures contract. Conversion premium The excess of the market value of the convertible security over its equity value if immediately converted into common stock. It is typically expressed as a percentage of the equity value. Conversion price Applies mainly to convertible securities. Taka value at which convertible bonds, debentures, or preferred stock can be converted into common stock, as specified when the convertible is issued. Conversion ratio Relationship that determines how many shares of common stock will be received in exchange for each convertible bond or preferred stock when a conversion takes place. It applies mainly to convertible securities. Conversion value The value of a convertible security if it is converted immediately. Also called stock value. Conversion In the context of securities, the exchange of a convertible security such as a bond into stock. In the context of mutual funds, the free exchange of mutual fund shares from one fund to another in a single family. 49

DISCOVERING FINANCE

Convertibility clause Provision that allows investors to convert a bond into a specified number of common shares. Convertibility The ability to exchange a currency without government restrictions or controls. Convertible arbitrage A practice, usually of buying a convertible bond and shorting a percentage of the equivalent underlying common shares, to create a positive cash flow position (with expected returns above the riskless rate) in a static environment and benefits from capital appreciation should the convertible's premium. This form of investing is far from riskless and requires constant monitoring. Convertible bond Bond that can be converted into another form of security, typically common stock, at the option of the holder at a specified price for a specified period of time. Convertible preferred stock Preferred stock that can be converted into common stock at the option of the holder. Convertible price The contractually specified price per share at which a convertible security can be converted into shares of common stock. Convertible security A security that can be converted into common stock at the option of the security holder; includes convertible bonds and convertible preferred stock. Convex curve A figure where a straight line connecting any two points lies totally above the curve. Convexity A measure of the degree to which the relationship between a bond’s price and yield departs from a straight line. Corporate bond Long-term debt issued by private corporations typically paying semiannual coupons and returning the face value of the bond at maturity. 50

DISCOVERING FINANCE

Corporate finance One of the three areas of the discipline of finance. It deals with the operation of the firm (both the investment decision and the financing decision) from the firm's point of view. Corporate restructuring Any major episodic change in a company’s capital or ownership structure. Corporate stock repurchase A corporation may repurchase its shares in the market as an alternative to paying a cash dividend. Earnings per will grow up, and, if the priceearnings ratio remains the same, the stockholder will receive the same taka benefit as through a cash dividend. A corporation may also justify the repurchase of its stock because it is at a very low price or to maintain constant demand for the shares. Reacquired shares may be used for employee options or as part of a tender offer in a merger or acquisition. Firms may also reacquire part of their shares as protective device against being taken over as a merger candidate. Corporation tax The tax payable by corporations. Corporation Form of business organization that is created as a distinct “legal person” composed of one or more individuals or legal entities. Major features of a corporation include limited liability, ease of ownership transfer, and perpetual succession. Correlation coefficient A standardized statistical measure of the dependence of two random variables, defined as the covariance divided by the standard deviations of two variables. Correspondent bank A bank having communications and business links with the seller's bank. Cost accounting A branch of accounting that provides information to help the management of a firm to evaluate production costs and efficiency. Cost of capital The minimum required rate of return to leave the market price of shares unchanged. A weighted average cost of the firm’s individual sources of capital. 51

DISCOVERING FINANCE

Cost of contracting The cost of analyzing and arranging a contract for the performance of certain tasks. Cost of equity capital The required return on the company’s common stock in capital markets. It is also called the equity holders’ required rate of return because it is what equity holders can expect to obtain in the capital market. It is a cost from the firm’s perspective. Cost of goods sold The total cost of buying raw materials, and paying for all the factors that go into producing finished goods. Cost of ordering The cost component in the inventory decision model that represents the expenditure for acquiring new inventory. Cost of preferred stock The rate of return investors require on the firm’s preferred stock. It is calculated as the preferred dividend divided by the net issuing price. Cost of retained earnings The rate of return required by stockholders or a firm’s common stock. Cost-benefit analysis The method of measuring the benefits anticipated from a decision by determining the cost of the decision, then deciding whether the benefit outweighs the cost of that decision. Cost-of-living lease A lease where yearly increases are tied to the cost of living index. Cost-push inflation A rise in prices of goods by the firms in order to maintain or protect profit margins after their costs have gone up. Cost-volume-profit analysis A technique for evaluating the effect of changes in cost and volume on profit. Country risk Uncertainty due to the possibility of major political or economic change in the country where an investment is located. It is also called political risk. 52

DISCOVERING FINANCE

Coupon bond A bond featuring coupons that must be presented to the issuer in order to receive interest payments. Coupon rate The interest rate specified on interest coupons attached to bonds. Annual interest received equals coupon rate times the par value of bonds. Coupon reinvestment risk The component of interest rate risk due to the uncertainty of the rate at which coupon payments will be reinvested. Coupon Indicates the interest payment on a debt security. It is the coupon rate times the par value that indicates the interest payments on a debt security. Covariance matrix A matrix or square array whose entries are covariances, noting that variance is a special case of covariance. Covariance A statistical measure of the degree to which random variables move together. Covariance becomes positive when positive and negative deviations exist at similar times and vice versa. Covariance becomes zero when deviations are unrelated. Covenant (protective covenant) Provision in a debt agreement requiring the borrower to do, or not to do, something. Coverage ratios Ratios used to test the adequacy of cash flows generated through earnings for the purposes of meeting debt and lease obligations, including the interest coverage ratio and the fixed-charge coverage ratio. Covered call A strategy involving the sale of a call option to supplement a long position in an underlying asset. Covered interest arbitrage Act of capitalizing on higher foreign interest rates while covering the position with a simultaneous forward sale. 53

DISCOVERING FINANCE

Credit agency ratings Ratings based on buyer’s financial strength and payment to seller, issued by firms engaged in the business of collecting and selling creditrelated information to seller. Credit analysis The process of determining whether a credit applicant meets the firm’s standard and what amount of credit the applicant should receive. Credit bureau An organization that gathers financial information about individuals and businesses. More specifically, the credit history, character, and reputation of borrowers are collected and furnished to subscribers (merchants and financial institutions) upon request. Credit card A card enabling the holder to obtain goods and services on credit at specified suppliers including travel, meals, and hotel accommodation, up to a specified maximum amount, payment being made monthly to the issuer of the card. Cards are issued, after the applicant’s creditworthiness has been considered. The main advantage of credit cards is that they economise the use of cash, and so can be regarded as the latest stage in the development of money. Credit crunch A period during which banks are less willing to extend credit; normally results from an increased probability that some borrowers will default on loans. Credit instrument Device by which a firm offers credit, such as an invoice, a promissory note, or a conditional sales contract. Credit investigation problem The problem associated with the amount of information that should be gathered on each applicant regarding credit-granting decision. Credit management The decision about the terms of sale and granting credit. It starts where the management of inventory ends and ends where the management of cash begins. Synonymous to accounts receivable management. Credit period The total length of time over which credit is extended to a customer. 54

DISCOVERING FINANCE

Credit rating Rating of an issued bond based on the perceived likelihood of default as assigned by commercial rating companies. It is also called quality rating. Credit risk The risk that an issuer of debt securities or a borrower may default on his or her obligations or that the payment may not be made on a negotiable instrument. Credit risk-based capital guidelines Capital requirements for a depository institution that are based on the credit risk of its assets. Credit sale without discount The term of sale in which goods or services are sold on credit but no discount is offered for timely repayments of the loan. Credit standard The minimum quality of credit worthiness of a credit applicant that is acceptable to the firm. Credit terms The repayment provisions that are parts of a credit arrangement. An example would be a 2/10, net 30 arrangement in which the customer may deduct 2 percent from the invoice price if payment takes place in the first 10 days; otherwise, the full amount is due. Credit union A not-for-profit institution that is operated as a cooperative and offers financial services such as low-interest loans, to its members. Credit with discount Under this term of sale, a cash discount is offered if payments are made within a designated time or otherwise net amount must be paid within the rest of the credit period. Thus the credit term stands something like this 2/10-n/30 (read as two ten net thirty) which means a 2% cash discount will be given if payments are made within 10 days or otherwise payments shall be made in net amount in 30 days. Credit-granting decision Determining which of the selling firm’s credit applicants will be allowed to purchase goods and services on credit, which will be required to pay cash. 55

DISCOVERING FINANCE

Credit-scoring system The use of a discriminant equation to classify loan applicants according to the probability of their repaying their loans, based on customer characteristics (such as their credit rating or length of employment). Creditworthiness Eligibility of an individual or firm to borrow money. Cross hedge A trading strategy in which the price volatility of a commodity or security position is hedged with a forward or futures contract based on a different underlying asset or different settlement terms. Cross rates The relationship between two foreign currencies expressed in terms of a third currency. Cross sectional analysis Analysis where comparisons of one entity with other entities are made at the same point in time. Crossover price The price at which the yield to maturity equals the yield to call. Above this price, yield to call is the appropriate yield measure; below this price, yield to maturity is the appropriate yield measure. Cross-sectional data Observations over individual units at a point in time, as opposed to time-series data. Crowding-out effect Phenomenon that occurs when insufficient loanable funds are available for potential borrowers, such as corporations and individuals, as a result of excessive borrowing by the Treasury, because limited loanable funds are available to satisfy all borrowers, interest rates rise in response to the increased demand for funds, which crowds some potential borrowers out to the market. Crown jewels An anti takeover tactic in which major assets (the crown jewels) are sold by a firm when faced with a takeover threat. Cum dividend With dividend. 56

DISCOVERING FINANCE

Cumulative abnormal return Sum of the differences between the expected return on a stock (systematic risk multiplied by the realized market return) and the actual return often used to evaluate the impact of news on a stock price. Cumulative dividend Dividend on preferred stock that takes priority over dividend payments on common stock. Dividends may not be paid on the common stock until all past dividends on the preferred stock have been paid. Cumulative preferred stock Preferred stock containing the requirement that any unpaid preferred dividends accumulate and be paid in full before common dividends may be distributed. Cumulative voting A system of voting for directors of a corporation in which shareholder's total number of votes is equal to the number of shares held times the number of candidates. Currency call option Contract that grants the owner the right to purchase a specified currency for a specified price, within a specified period of time. Currency futures contract Standardized contract that specifies an amount of a particular currency to be exchanged on a specified date and at a specified exchange rate. Currency put option Contract that grants the owner the right to sell a specified currency for a specified price, within a specified period of time. Currency swap An agreement that allows the periodic swap of one currency for another at specified exchange rates; it essentially represents a series of forward contacts. Current assets Assets of a company that are reasonably expected to be realized in cash, or sold, or consumed during the normal operating cycle of the business (usually one year). Such assets include cash, accounts receivable and money due usually within one year, short-term investments, government bonds, inventories, and prepaid expenses. 57

DISCOVERING FINANCE

Current cost accounting One of two methods of inflation-adjusted accounting approved by the FASB in 1979. Financial statements are adjusted to the present, using current cost data, rather than an index. This optional information may be shown in the firm’s annual report. Current liability Amount owed for salaries, interest, accounts payable and other debts due within 1 year. Current portion of long-term debt The portion of long-term debt that is payable within one year. Current ratio Indicator of short-term debt-paying ability, determined by dividing current assets by current liabilities. The higher the ratio, the more liquid the firm is. Current yield The yearly taka interest or dividend payment divided by the current market price. Current-dollar accounting System of inflation accounting in which historical-cost items are restated to adjust for changes in the price of a specific item. Currently available standards Standards that allow for the fact that some inefficiency is inescapable. Cut-off point In the capital budgeting process, the minimum rate of return on acceptable investment opportunities. Cyclical industries Industries with above-average sensitivity to the state of the economy. Cyclical stock A stock with a high beta; its gains typically exceed those of a rising market and its losses typically exceed those of a falling market. Cyclicals Firms with sales and profits that regularly expand and contract along with the business cycle.

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D Data mining The practice of finding forecasting models by extensive searching through databases for patterns or trading rules; repeatedly “drilling” in the same data until statistical significance is “discovered”. Date of record Date on which holders of record in a firm's stock ledger are designated as the recipients of either dividends or stock rights. Dates convention Treating cash flows as being received on exact dates - date 0, date 1, and so forth - as opposed to the end-of-year convention. Day traders Traders of financial futures contacts who close out their contracts on the same day that they initiate them. Day's sales in cash A measure of management’s control of cash balances, defined as cash dividend divided by sales per day. Day's sales outstanding The ratio calculated by dividing accounts receivable by average sales per day; indicating the average length of time it takes the firm to collect for credit sales. Dealer market A market where traders specializing in particular assets buy and sell for their own accounts. The spread between dealers’ buy (or “bid”) prices and sell (or “ask”) prices are the source of profit. Dealer paper A form of commercial paper that is distributed to lenders through an intermediate dealer network. It is normally sold by industrial companies, utility firms, or financial companies that too small to have their own selling network. Dealers Participants in the market who transact security trades over the counter from their own inventory of stocks and bonds. Since they stand ready to 59

DISCOVERING FINANCE

buy and sell their securities at quoted prices, they are often referred to as market makers. Dealing rate Synonymous to central bank rate. Dear money A monetary policy in which loans are difficult to obtain and only available at high rates of interest. Debenture bond A bond not secured by a specific pledge of property, but giving the bondholder the claim of general creditors on all assets of the issuer not pledged specifically to secure other debt. Debentures Bonds that promise payments of interest and principal but pledge no specific assets. Holders of a debenture have first claim on the issuer’s income and unpledged assets. These bonds are known as unsecured bonds also. Debit card A payment mechanism that allows for payment of a purchase by an immediate charge against the purchaser’s account at the financial institution that sponsors the card. Debt (liability) An obligation to pay cash or other goods or to provide services to another. Debt capacity The maximum amount of debt (and other fixed-charge financing) that a firm can adequately service. Debt instrument An asset requiring fixed taka payments, such as a government or corporate bond. Debt ratio The ratio of total debt to total assets. It is a measure of the proportion of total assets provided by the firm’s creditors. Debt rescheduling A negotiation concerning outstanding loans in which the debtor has repayment difficulties. 60

DISCOVERING FINANCE

Debt service Interest payments plus repayments of principal to creditors, that is, retirement of debt. Debt swap The exchange of an outstanding loan to a third party between one bank and another. Debt utilization ratios A group of ratios that indicates to what extent debt is being used and the prudence with which it is being managed. Calculations include debt to total assets, times interest earned, and fixed charge coverage. Debtor-in-possession A company that files for protection under the bankruptcy acts and continues to operate its business under the supervision of court. Debt-to-assets ratio A measure of financial leverage of a firm defined as long-term debt divided by total assets. Debt-to-equity ratio A benchmark indicator of financial leverage of a firm. It is derived by dividing long-term debt by common stockholders' equity. Deciles Quantiles that divide the data into 10 equal parts. Decision tree A tabular or graphical analysis that lays out the sequence of decisions that are to be made and highlights the differences between choices. The presentation resembles branches on a tree. Declaration date Date on which the board of directors passes a resolution to payout a dividend of a specified amount to all qualified holders of record on specified date. Declining-balance depreciation method An accelerated depreciation method in which an asset's book value is multiplied by a constant depreciation rate (such as double the straightline percentage, in the case of double-declining-balance.). Unlike the straight line and the sum of the digits methods, both of which use the original basis to calculate the depreciation each year, the double 61

DISCOVERING FINANCE

declining balance uses a fixed percentage of the prior year's basis to calculate depreciation. The percentage rate is 2/N where N is the life of the asset. With this method, the basis never becomes zero. Consequently, it is standard practice to switch to another depreciation method as the basis decreases. Usually the taxpayer will convert to the straight line method when the annual depreciation from the declining balance becomes less than the straight line. Dedicated capital Total par value (number of shares issued multiplied by the par value of each share). Also called dedicated value. Dedication A portfolio management technique in which the portfolio’s cash flows are used to retire a set of liabilities over time. Also known as cash flow matching. Deep discount bond A bond issued with a very low coupon or no coupon and selling at a price far below par value. When the bond has no coupon, it is also called a pure discount or original-issue-discount bond. Deep pockets A person or an organization having substantial financial resources. Default premium The increment to promised yield that compensates the investor for default risk. Default risk The risk of failing to make a contractually promised payment. Default To fail to make a payment when due. Defeasance A debt-restructuring tool that enables a firm to remove debt from its balance sheet by establishing an irrevocable trust that will generate future cash flows sufficient to service the decreased debt. Defensive companies Firms whose future earnings are likely to withstand an economic downturn. Defensive industries Industries with below average sensitivity to the state of the economy. 62

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Defensive open market operations Operations implemented to offset the impact of other market conditions that affect the level of funds. Defensive stock A stock whose return is not expected to decline as much as that of the overall market during a bear market. Deferred annuity An annuity that will not begin until some time in the future. Deferred callable bonds Bonds that have a period of call protection. That is, there is an initial time during which these bonds are not callable. Deferred income tax Liability that estimates future tax payable if the tax basis of income measurement 'catches up' to the accounting basis. Deferred tax liability An estimated amount of future income taxes that may become payable from income already earned but not yet recognized for tax reporting purpose. Deferred taxes A liability that represents the accumulated difference between the income tax expense reported on the firms books and income tax actually paid. It arises because depreciation is calculated differently for financial reporting than for tax reporting. Deficit units Individual, corporate, or government units that need to borrow funds. Defined benefit plan Pension plan in which contributions are dictated by the benefits that will eventually be provided. Deflation A general fall in the level of prices of goods and services throughout an economy. Antithesis of inflation. Deflationary gap A situation when the overall level of national income falls well below the economy's potential output, and is often accompanied by recession and a falling rate of inflation. 63

DISCOVERING FINANCE

Degree of financial leverage The percent change in EPS that results from a given percent change in EBIT. Degree of operating leverage The percentage change in net operating income (NOI) associated with a given percentage change in sales. Degree of total leverage The percent change in EPS resulting from a change in sales. Delta The relationship between an option price and the underlying futures contract or stock price when trading securities. In general usage, it is the difference between two empirical data points, e.g. the delta between 4 and 6 is 2. Demand deposit A checking account that pays no interest and can be withdrawn upon demand. Demand shock An event that affects the demand for goods and services in the economy. Demand-pull inflation A rise in the prices of goods & services caused by an excess demand for goods and services over supply in the economy as a whole. This comes about as a result of high (excessive) growth in aggregate demand. Denomination The size, in units of money, of a loan or debt security. Dependent (contingent) project A project whose acceptance depends on the one or more other projects. Deposit computation period The period over which a bank must calculate its actual reserves in order to determine whether it has met the required reserve ratio. Deposit transfer Procedure of handling failures of savings institutions; the deposits of a failing institutions are transferred to a healthy depository institutions for a fee. 64

DISCOVERING FINANCE

Depository institutions Financial institutions that acquire a bulk of their funds by offering their liabilities to the public in the form of deposits. Depository transfer check A non-negotiable check payable to a single company account at a concentration bank. Depreciation tax shield Portion of an investment that can be deducted from taxable income. Depreciation The systematic allocation of the cost of a capital asset over a period of time for financial reporting purposes, tax purposes or bond. Depression A prolonged period of sluggish economic activity that is characterized by little productivity, little or no amounts of new capital investment, large number of business failures, extensive unemployment, deflation, and a very low income level among workers. Derivative security An instrument whose market value ultimately depends upon, or derives from, the value of a more fundamental investment vehicle called the underlying asset or security. Examples of derivatives are futures, warrants, options, swaps etc. Devaluation A deliberate downward adjustment in the official exchange rate that is managed or pegged by the authorities against a specified benchmark, such as another currency or basket of currencies. Development financing Financing to rapidly expand the business. Differential cash flow Synonymous to incremental cash flow. Differential disclosure Arises when there are differences in the content or timing of information provided to individual recipients. For example, firm has to provide detailed & updated information to lenders than to shareholders. Differential return measure Jensen’s measure of portfolio performance calculated as the difference between what the portfolio actually earned and what it was expected to earn given its level of systematic risk. 65

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Diluted earnings per share Earnings per share, including common stock, preferred stock, unexercised stock options, and some convertible debt. Diluted earnings per share are usually a more accurate reflection of the company's real earning power. Dilution The reduction in any per share item (such as earning per share or book value per share) due to an increase in the number of shares outstanding either through new issue or conversion of outstanding securities. Direct cost The portion of cost that is directly expended in providing a product or service for sale and is included in the calculation of cost of goods sold, e.g. labor and inventory. Direct expense The portion of expense that is directly expended in providing a product or service for sale and is included in the calculation of cost of goods sold, e.g. labor and inventory. Direct investments The investments made by financial intermediaries; these assets can be loans or securities. Direct lease A lease under which a lessor buys equipment form a manufacturer and leases it to a lessee. Direct paper Synonymous to finance paper. Direct search market A least organized market where buyers and sellers must seek each other out directly. Dirty float System whereby exchange rates are market determined without boundaries, but subject to government interventions. Disbursement float The delay between the time when a firm deducts a payment from it’s checking account ledger and the time when funds are actually withdrawn from it’s account. 66

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Disbursement management Efficient paying out of the concentrated cash. Disclosure regulation The regulation that requires issuers of securities to make public a large amount of financial information to actual and potential investors. Discount broker A brokerage house that typically, only executes buy and sell orders for his or her customers, with reduced commissions. The major difference between a full-service and discount broker is that the former provides opinions, guidance, and other investment-related services while the later usually does not. Discount rate Interest rate used to convert future values to present value (capitalization rate). Discount window A method by which a central bank supplies a banking system with short-term funds, either by purchasing Treasury bills or by making secured loans. Discounted cash flow method A technique of analyzing a series of future payments or receipts or both by using present value analysis. Discounted cash flow rate of return Synonymous to internal rate of return (IRR). Discounted cash flow A sum of money today having the same value as a future stream of cash receipts or disbursements. Discounted loan A loan in which the calculated interest payment is subtracted or discounted in advance. Because this lowers the amount of available funds and effective interest rate is increased. Discounting Process of finding the present value of a future cash flow or a series of cash flows; the reverse of compounding. Discrete theory of seasonality Theory for the computation of interim net income for firms with seasonality where each interim period is treated as an independent reporting period. See also Integral theory. 67

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Discriminant analysis A statistical process that links the probability of default to a specified set of financial ratios. Diseconomies of scale A situation when a firm’s costs are more than double in response to a doubling of output. Disinflation A levelling off or slowdown of price increases. Disintermediation Process in which savers transfer funds from intermediaries to alternative Investments with market-determined rates. Distribution Starting with data on relatively long periods and breaking it down into smaller periods. Diversifiable risk The portion of an asset’s risk attributable to firm-specific, random events that can be eliminated through diversification. Diversification benefits Benefits occurring when portfolio standard deviation of return can be reduced without decreasing expected return. Diversification Dividing investment funds among a variety of securities with different risk, reward, and correlation statistics so as to minimize unsystematic risk. Diversified activity merger Combination of at least two totally unrelated firms. See also Conglomerate diversification. Divestiture The divestment of a portion of the enterprise or the firm as a whole. Dividend capitalization Since most closely held companies do not pay dividends, when using dividend capitalization valuators must first determine dividend-paying capacity of a business. Dividend paying capacity based on average net income and on average cash flow is used. To determine dividendpaying capacity, near term capital needs, expansion plans, debt 68

DISCOVERING FINANCE

repayment, operation cushion, contractual requirements, past dividend paying history of a business and dividends of a comparable company should be investigated. After analyzing these factors, percent of average net income and of average cash flow that can be used for the payment of dividends can be estimated. What also must be determined is the dividend yield, which can best be determined by analyzing comparable companies. As with the price earnings ratio method, this usually produces a subjective result. Dividend capture Synonymous to dividend rollover plan. Dividend clientele A group of shareholders who prefer that the firm follows a particular dividend policy. Such a preference may be based on comparable tax situations. Dividend decision Concerns with the percentage of earning paid to stockholders in cash dividends, the stability of absolute dividends over time, stock dividends, and the repurchase of stock. This decision simply states the distribution of return of investment in a business. Dividend discount model A model for determining the estimated price of a stock by discounting all future dividends. Dividend growth model An approach that assumes dividends grow at a constant rate in perpetuity. The value of the stock equals next year's dividends divided by the difference between the required rate of return and the assumed constant growth rate in dividends. Dividend mandate A document in which a shareholder of a company notifies the company to whom dividends are to be paid. Dividend payment date The day on which a stockholder of record will receive his or her dividend. Dividend payout ratio A measure of the level of dividends distributed by a firm, defined as dividends divided by earnings. 69

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Dividend per share Amount of cash paid to share holders expressed as taka per share. Dividend reinvestment plans Plans that provide the stockholders with an opportunity to buy additional shares of stock with cash dividends paid by the company. Dividend rollover plan An investment strategy that entails the purchase and selling of a stock right before its ex-dividend date in order to collect the dividends paid out by the stock and capture a trade profit. Dividend valuation model Synonymous to dividend discount model. Dividend yield The percentage returns that a stockholder will receive on dividends alone. It equals dividend per share divided by current market price per share. Dividends The portion of a corporation's earnings which is paid to the stockholders. Divisibility The property of an asset that allows it to be divided into small units. Double declining depreciation method An accounting methodology in which depreciation is accelerated to twice the rate of annual depreciation by the straight-line method. Dow Jones Industrial Average A price-weighted average of stock prices of 30 large U.S. firms such as AT&T, IBM, and Coca-Cola etc. Dow Theory A technique that attempts to discern long and short-term trends in stock market prices. Downtick A price decline in a transaction price compared to the previous transaction price. Draft A signed, written order by which the first party (drawer) instructs a second party (drawee) to pay a specified amount of money to a third party (payee). The drawer and payee are often one and the same. 70

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Dual banking system Regulatory framework of the banking system composed of federal and state regulators. Dual trading Exists when common stock of one security is traded on more than one stock exchange. This practice is quite common between NYSE-listed companies and regional exchanges. Dual-rate mortgage A mortgage design in which the mortgage payments are lower than for a traditional mortgage but then rise smoothly at the rate of inflation, if any, achieving mortgage payments approximately level in terms of purchasing power. Also called inflation-proof mortgage. Due diligence Duty of an underwriter to assure that there are no misstatement or omissions of fact in the registration statement or prospectus. In other sense, it refers to an internal audit of a target firm by an acquiring firm. Dummy variable A variable which takes on the value of 1 if a particular condition is true and 0 if that condition, is false. Dumping The selling of merchandise in a foreign country at, or, below cost in order to seize market share. Duopoly A form of imperfect competition where there are only two producers of a commodity. Duopsony A market in which there are only two buyers for a commodity or service. Dupont analysis An analysis of profitability that breaks down return on assets between the profit margin and asset turnover. The second or modified version shows how return on assets is translated into return on equity through the amount of debt that the firm has. Actually return on assets is divided by to arrive at return on equity. Dupont chart A chart designed to show the relationships among return on investment, asset turnover, the profit margin, and leverage. 71

DISCOVERING FINANCE

Duration gap Difference between the average duration of a bank’s assets versus its liabilities. Duration A measure of the effective maturity of a bond, defined as the weighted average of the times until each payment, with weights proportional to the present value of the payment. Dutch auction preferred stock A preferred stock security that matures every seven weeks and is sold (reauctioned) at a subsequent bidding. The concept of Dutch auction means the stock is issued to the bidder willing to accept the lowest yield and then to the next lowest bidder and so on until all the preferred stock is sold. Dutch auction An auction process for a new offering of securities in which bidders indicate the amount they are willing to buy and winning bidders agree to pay the lowest accepted bid price (or equivalently, the highest accepted bid yield). Dynamic asset allocation Switching between risky and low-risk investment positions over time in response to changing expectations. Dynamic inventory problem The problem associated with the goods that have value beyond the initial period; they do not lose their value completely over time. Inventory situation such as that faced by a service station in determining how much gasoline to purchase are dynamic inventory problem. Dynamic open market operations Operations implemented to increase or decrease the level of funds.

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E E/P ratio The reciprocal of the P/E ratio. EAFE index The Europe, Australia, and Far East Index, a value weighted index of the equity performance of major foreign markets. Early stage financing One of the first financings obtained by a company. Earning power Permanent income of a firm free of unusual, extraordinary or nonrecurring items. Earnings (income, net income, net profit, profit) The excess of revenues over all related expenses for a given period. Earnings multiplier The P/E ratio for a stock. Earnings per share A measure of common shares’ claim on earnings, defined as the total earnings available for a firm’s common stockholders divided by the number of shares of common stock outstanding. Earnings surprises The difference between a firm’s actual earnings and its expected earnings. Earnings yield Earnings per share divided by stock price. Easy money Synonymous to cheap money. Econometrics The quantitative science of predicting the economy. Economic assumption Economic environment in which the firm expects to reside over the life of the financial plan. 73

DISCOVERING FINANCE

Economic income States cash flow plus change in present value. Economic order quantity The quantity of an inventory item to order so that total inventory costs are minimized over the firm’s planning period. Economic risk Synonymous to business risk. Economic value added A technique for focusing on a firm’s return on capital in order to determine if stockholders are being rewarded. Suppose a division produces a 11% return on capital invested. Given the risk of the division's business line would have. If investors would usually require 13% on capital invested, the division destroyed shareholder value by the EVA metric. Economies of scale The benefits of size in which the average unit cost falls as volume increases. Economies of scope Occurs when one firm produces two outputs than two specialized firms could produce. Effective duration A duration that allows for the fact that the cash flow might change when interest rates change. Effective interest rate The actual rate of interest earned (paid) after adjusting the nominal rate for factors such as the number of compounding periods per year. Efficient frontier The set of portfolios on the minimum variance frontier, but with maximum expected return for each given level of standard deviation. Efficient market hypothesis The theory that the public availability of relevant information about issuers of securities will lead to a correct pricing of those securities if they are freely traded in properly functioning markets. It states three opinions-i) the prices of securities fully reflect available information. ii) Investors buying bonds and stocks in an efficient market should expect to obtain an equilibrium rate if return. iii) Firms should expect to receive the fair value for the securities they sell. 74

DISCOVERING FINANCE

Efficient market A market in which asset prices instantaneously reflect new information. Efficient portfolio A portfolio with the highest level of expected return for a given level of risk or a portfolio with the lowest risk for a given level of expected return. Efficient set The set of portfolios generated by Markowitz portfolio model. Elective expensing Writing off an asset in the year of purchase for tax purposes rather than depreciating it over the life of the asset. This procedure is primarily beneficial to small business because its availability is phased out when asset purchases become large. Electronic commerce The exchange of business information in an electronic (non-paper) format. Electronic data interchange The movements of business data electronically in a structured, computer-readable format. Electronic funds transfer The electronic movements of information between two depository institutions resulting in a value (money) transfer. Embedded option An option in a bond issue granted to either the bondholder or the issuer. Emerging markets Markets of less developed countries, characterized by high risks and potentially large returns. End of month Indicates the credit period for all purchases made within a given month begins on the first day of the month immediately following. Entrepreneur The person who assumes the financial risk of the initiation, operation and management of a given business or undertaking. He/She is primarily a financial and/or professional risk taker almost to the extreme. 75

DISCOVERING FINANCE

EPS Indifference point The level of sales at which EPS will be the same whether the firm uses debt or common stock financing. Equally weighted index An index computed from a simple average of returns. Equilibrium interest rate The rate at which the amount investors wish to borrow is equal to the amount investors wish to lend. Equipment loan A loan used for the purchase of capital equipment. Equipment trust certificate A form of borrowing secured by property such that title to the property is held in trust until the debt obligation is paid off. Equity (owners’ equity, net worth, shareholders’ equity) Ownership interest of common and preferred stockholders in a company. On a balance sheet, equity equals total assets less all liabilities. Equity carve-out The public sale of stock in a subsidiary in which the parent usually retains majority control. Equity multiplier (TA/Equity) A measure of the Assets owned by the company divided by the claims of the owners (Equity). The equity multiplier shows the amount of assets owned by the firm for each taka of owner claims held by stockholders. The equity multiplier is also called financial leverage. The equity multiplier shows the amount of assets owned by the firm for each taka of owner claims held by stockholders. Equity risk premium The difference between stock’s return and the risk-free rate. Equity swap Swap arrangement involving the exchange of interest payment for payments linked to the degree of change in a stock index. Equity-derivative securities Securities that derive their value in whole or in part by having a claim on the underlying common stock. 76

DISCOVERING FINANCE

Equivalent annual cost The net present value of cost divided by an annuity factor that has the same life as the investment. Equivalent loan The amount of the loan that makes leasing equivalent to buying with debt financing in terms of debt capacity reduction. Equivalent taxable yield The yield that must be offered on a taxable bond in order to realize a certain tax-exempt yield. Erosion cash-flow amount transferred to a new project from customers and sales of other products of the firm. Estate The entire group of assets owned by an individual at the time of his or her death. The estate includes all funds, personal effects, interests in business enterprises, titles to property-real estate and chattels, and evidences of ownership such as stocks, bonds and mortgages owned, notes receivable, etc. All claims against an estate must be duly filed with the Executor or Administrator of the estate, and approved by the court of law under which the will is being probated or the line of heritage is being determined before the indebtedness may be satisfied. Euro credit market Market in which banks provide medium –term loans in foreign currencies. Eurobonds Bonds denominated in a currency not native to the country in which they are issued. Euro-commercial paper Securities issued in Europe without the backing of a bank syndicate. Eurocurrency market Market made up of several banks that accept large deposits and provide short-term loans in foreign currencies. Eurodollar deposit A U.S. dollar denominated deposit with a bank outside the United States. 77

DISCOVERING FINANCE

European option An option contract that can only be exercised on its expiration date. Event risk An increase in the perceived risk of default on bonds resulting from the restructuring of debt or an acquisition. Event study An empirical analysis of stock price behavior surrounding a particular event. Ex rights date The date at which stock purchase rights are no longer transferred to the purchaser of the stock. Ex-ante real interest rate Real interest rate that is anticipated (equal to the nominal interest rate minus the expected inflation rate). Ex-ante Analyzing or forecasting what will happen. Excess reserves The amount of a bank’s reserves that is in excess of its required reserves. Excess return The extra return that investors receive for the risk taken. Exchange rate mechanism The methodology by which members of the EMS maintain their currency exchange rates within an agreed-upon range with respect to other member countries. Exchange rate risk The risk that an investment's value will change because of currency exchange rates. Exchange rate The rate at which domestic currency can be converted into foreign currency. Excise tax A tax on the manufacture, sale, or consumption of specified commodities. 78

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Exclusionary self tender A tender offer whereby a firm makes a tender offer for a given amount of its own stock while excluding targeted stockholders. Ex-dividend date Date four business days before the date of record for a security. An individual purchasing stock before the ex-dividend date will receive the current dividend. Ex-dividend Purchase of shares in which the buyer is not entitled to the forthcoming dividend. The ex-rights or ex-dividend date is generally four business days before the date of record. Execution costs The difference between the execution price of a stock and the price that would have existed in the absence of the trade. It includes market ( or price) impact and market timing costs. Exercise date The date on which the holder of a traded option can be called on to implement the option contact. It is normally after three, six, or nine months. Exercise price Price at which the holder of an option can buy (in the case of a call option) or sell (in the case of a put option) the underlying stock; also known as the striking price. Exotic option Designed to have payoffs that differ from those of standard contract options. Three such non-standard contracts are Asian, lookback, and digital options. Expectations theory A theory of the determination of term structure of interest rate which holds that the differences in per-period required returns among securities of various maturity dates reflect expectations that inflation will change over time. Expected return The return that is expected on a risky asset, given a probability distribution for the possible rates of return. Expected return equals some risk-free rate (generally the prevailing Treasury note or bond rate) 79

DISCOVERING FINANCE

plus a risk premium (the difference between the historic market return, based upon a well diversified index such as the S&P 500 and the historic Treasury bond) multiplied by the assets beta. The conditional expected return varies through time as a function of current market information. Expected value A representative value from a probability distribution arrived at by multiplying each outcome by the associated probability and summing up the values. Expense stop A contract whereby the lessor of a lease agreement is required to pay operating expenses up to a specified amount. Expiration date Generally the date an option expires. Explicit bankruptcy costs Specific costs incurred during the bankruptcy process such as legal fees, court costs, consultants' fees, and document preparation expenses. Ex-post real interest rate Real interest rate that occurred in a previous period (normal interest rate minus the inflation rate in that period) Ex-post Analyzing or understanding what already happened. Expropriate The action of a country in taking away or modifying the property rights of a corporation or individual. Ex-right Synonymous to ex-dividend. Extendable swap Swap of fixed payments for floating payments that contains an extendable feature allowing the party making fixed payments to extend the swap period if desired. Extension An out-of-court settlement in which creditors agree to allow the firm more time to meet its financial obligations. A new repayment schedule will be developed, subject to the acceptance of creditors. 80

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External finance Funding that is not generated by a firm's operations rather new borrowing or stock issue. External funds Funds originating from a source outside the corporation for the purpose of increasing cash flow and aiding expansion efforts, e.g., bank loan or bond offering. External reorganization Reorganization under the formal bankruptcy laws, in which a merger partner is found for the distressed firm. Ideally, the distressed firm should be merged with a strong firm in its own industry, although this is not always possible. Externalities Economic actions undertaken by producers and consumers that exert external economic effect on other producers or consumers which escape the price mechanism. Such nonprice effects are also called spillovers or neighborhood effects. Extinguishment of debt Retire or pay off debt. Extra or special dividend A dividend that is paid in addition to a firm's established or expected quarterly dividend. Extra-ordinary items Unusual and unexpected one-time events that must be explained to shareholders in an annual or quarterly report, e.g., write down for a discontinued operation, employee fraud, a lawsuit, or other one-time events. Results are often presented with and without these items. The logic of excluding these items is that investors a better notion of future performance if one-time events are excluded.

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F Face value The amount that an issuer agrees to pay at the maturity date. Synonymous to maturity value or par value. Factor model Used to depict the behavior of security prices by identifying major factors in the economy that affect large numbers of securities. Factor Firm that purchases accounts receivable at a discount and is responsible for processing and collecting on the balances of these accounts; finance companies commonly have subsidiaries that serve as factors. Factoring accounts receivable The outright sale of account receivable at a discount to a factor or other financial institution in order to obtain funds, e.g., if somebody owes you Tk.12,000 payable within a year, a factoring lender may pay you Tk.10,000 for the debt. You receive Tk.10,000 cash quickly, but at the cost of the Tk.2,000 discount. Fair market value Amount at which common stock would change hands between a willing buyer and a willing seller, both having knowledge of the relevant facts. Synonymous to market price. Fallout risk A type of mortgage pipeline risk that is generally created when the terms of the loan to be originated are set at the same time the sale terms are established. The risk is that either of the two parties, borrower or investor fails to close and the loan "falls out" of the pipeline. Fama, Eugene F. Finance professor at the University of Chicago. Developer of the Efficient Markets Hypothesis. Also developed the three-factor asset pricing model in 1992. Farm mortgage A mortgage secured against agricultural land. Fast growers Small and aggressive new firms with annual growth rates in the neighbourhood of 20% to 25%. 82

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Feasible portfolio A portfolio that an investor can construct, given the assets available. Federal Reserve System An independent U.S. government agency responsible for the nation’s money and banking system. Fee simple estate An estate whose holder can divide up the fee into lesser estates and sell, lease or borrow against them. Fiat money Nonconvertible paper money. Fictitious credit A margin account's credit balance. Fictitious credit exists after the proceeds from a short sale are accounted for with respect to the margin requirement. The proceeds from the short sale are reflected as a credit, but must stay in the account to serve as security for the loan of securities made in a short sale, and are therefore inaccessible to the client for withdrawal. Fidelity bond A contract under which a bonding company agrees to reimburse a firm if a specified manager’s dishonest act results in a financial loss to the firm. Field warehouse receipts A method of financing inventories in which a warehouse is established at the place of business of the borrowing firm. It happens when the inventory subject to collateral is of such nature as to be considered difficult to remove (coal for example) from the place of the borrower. Fill or kill order An order to buy or sell shares that must be executed immediately or be cancelled. Filter rule A rule for buying and selling stocks according to the stock’s price movements. Finance company A company whose business and primary function is to make loans to individuals, while not receiving deposits like a bank. 83

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Finance paper A form of commercial paper that is sold directly to the lender by the finance company. It is also referred to as direct paper. Finance The art and science of managing money which is concerned with the process, institutions, markets and instruments involved in the transfer of money among and between individuals, businesses, and governments. Financial Accounting Standards Board (FASB) Official rulemaking body in the accounting profession. Financial accounting The area of accounting concerned with reporting financial information to interested external parties. Financial analysis Synonymous to financial statement analysis. Financial assets Claims on real assets or the income generated by them. Examples of financial assets are stocks, bonds etc. Financial break-even analysis A method of determining the operating income (EBIT) the firm needs to just cover all of its fixed financing costs and produce earrings per share equal to zero. Financial break-even point The point at which earning per share (EPS) equals zero. Financial capital Common stock, preferred stock, and retained earnings. Financial capital appears on the corporate balance sheet under long-term liabilities and equity. Financial control The phase in which financial plans are implemented; control deals with the feedback and adjustment process required to ensure adherence to plans and modification of unforeseen changes. Financial disclosures Presentations of financial information to the investment community. 84

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Financial distress costs Legal and administrative costs of liquidation or reorganization (direct costs); an impaired ability to do business and an incentive toward selfish strategies such as taking large risks, under investing, and milking the property (indirect cost). Financial distress Severe liquidity problems that cannot be resolved without a sizeable rescaling of the entity's operations or structure. Financial EDI (FEDI) The movement of financially related electronic information between a company and its bank or between banks. Financial engineering Combining or carving up existing instruments to create new financial products. Financial equilibrium A situation where the ending balance of liquidities of a firm is positive. Ending balance of liquidities is the sum of beginning balance of liquidities and change of liquidities during a year. Financial flexibility The ability to raise sufficient capital to meet company needs under a wide variety of future contingencies. Financial forecasting The estimation of the future level of a financial variable, often a cash flow, asset level, or liability level. Financial futures Futures contracts on financial assets. Financial institution A financial enterprise that may perform one of several financial services such as accepting deposits, brokering securities, managing funds, or underwriting securities. Financial intermediaries Institutions that connect borrowers and lenders by accepting funds from lenders and loaning funds to borrowers. These financial intermediaries include banks, investment companies, insurance companies, or credit unions. Financial intermediaries issue their own securities to raise funds to purchase securities of other corporations. 85

DISCOVERING FINANCE

Financial lease Synonymous to capital lease. Financial leverage Extent to which a firm relies on debt. Financial leverage is measured by the ratio of long -term debt to long-term debt plus equity. Financial management Deals with acquisition and allocation of resources among the firm's present and potential activities and projects. Financial manager A person who actively manages the financial affairs of any type of business, whether financial or non-financial, private or public, profitseeking or not-for-profit. Financial market The system in which communication networks, financial institutions and relevant rules and regulations are established and activated in order to facilitate smooth flow of funds and corresponding financial instruments/assets. Alternatively, financial market is a mechanism designed to facilitate the exchange of financial assets by bringing buyers and sellers of securities together. Financial planning The projection of sales, income and assets based on alternative production and marketing strategies, as well as the determination of the resources needed to achieve these projections. Financial ratio An index that relates two accounts numbers and is obtained dividing one number by the other. Financial risk management Managing future income variability due to the company’s financing. Also, managing the uncertainty due to possible losses in the financial markets. Financial risk The uncertainty of future incomes due to the company’s financing. Financial statement analysis The study of relationships within a set of financial statements at a point in time and with trends in these relationships over time. 86

DISCOVERING FINANCE

Financial statements The principal published financial data about a company, primarily the balance sheet and income statement. Financial structure Synonymous to capital structure. Financial sweetener Usually refers to equity options, such as warrants or conversion privileges, attached to a debt security. The sweetener lowers the interest cost to the corporation. Financial system A system which deals with the supply and utilization of funds to different economic units in most efficient manner within the institutional framework on most favorable terms and conditions. Financial year Any year connected with finance, such as a company's accounting period or a year for which budgets are made up. Financing decision Concerns with determining the best financing mix or capital structure for the firm. An optimal financing mix should exist in which market price per share could be maximized. Finished goods inventory Items that have been produced but not yet sold. Firm commitment The procedure by which the issuing firm sells the securities to the underwriting syndicate for the public offering price less a spread that serves as compensation to the underwriters. First mortgage bond Bond that has first claim on specified assets as collateral. First principle of investment decision making An investment project is worth undertaking only if is increases the range of choices in the financial markets. To do this, it must be at least as desirable as what is available to shareholders in the financial markets. First-differencing The procedure of subtracting the value of the time series in the first prior period from the current value of the time series. 87

DISCOVERING FINANCE

First-in, first-out An inventory cost flow whereby the first goods purchased are assumed to be the first goods sold so that the ending inventory consists of the most recently purchased goods. Fiscal policy Government spending and taxing for the specific purpose of stabilizing the economy. Fiscal year The declared accounting year for a company, but it is not necessarily in conformance to a calendar year (January through December). However, it does cover twelve months, 52 weeks, 365 days. For example, the Bangladesh Government fiscal year ends June 30, i.e. July 1 through June 30 is the fiscal or accounting year. Fisher effect Proposition that the nominal rate of interest should approximately equal the real rate of interest plus a premium for expected inflation. Fisher’s separation theorem Theory that the value of an investment to an individual is not dependent on consumption preferences. That is, investors will want to accept or reject the same investment projects by using the NPV rule, regardless of personal preference. Also referred to as portfolio separation theorem. Five Cs of credit Five characteristics that are used to form a judgment about a customer's creditworthiness character, capacity, capital, collateral, and conditions. Five-transaction strategy A strategy for investing the funds which involves one deposit and four withdrawals from the investment account. Fixed assets turnover ratio The ratio of sales to net fixed assets. Fixed assets The assets of a permanent nature required for the normal conduct of a business, and which will not normally be converted into cash during the ensuring fiscal period. For example, furniture, fixtures, land, and buildings are all fixed assets. However, accounts receivable and inventory are not. 88

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Fixed charge coverage ratio The ratio expands the TIE ratio to include the firm’s annual long-term lease payments and sinking fund payments. Fixed cost Any cost that does not vary over the observation period with change in volume. Fixed rate mortgage Mortgage that requires payments based on a fixed interest rate. Fixed rate The interest rate, which is not allowed to vary. Fixed-income securities Securities that promise either a fixed stream of income or a stream of income that is determined according to a specified formula. For example, a corporate bond typically would promise that the bondholder would receive a fixed amount of interest each year. Flat lease A lease where the cost is fixed for a specific period of time. Float The difference between bank cash and book cash. Float represents the net effect of check in the process of collection, or clearing. Positive float means the firm’s bank cash is greater than its book cash until the check’s presentation. The sum of disbursement float and collection float is net float. Floating lien A lender’s claim on the borrower’s general inventory as collateral for a secured loan, i.e., it does not specify any asset to be used as security collateral. Floating rate notes Short to intermediate term bonds with regularly scheduled coupon payments linked to a variable interest rate, most often LIBOR. Floating rate The interest rate, which is allowed to float or vary. Floor agreement A contract that on each settlement date, pays the holder the greater of the difference between the floor rate and the reference rate or zero; it is equivalent to a series of put options on the reference rate. 89

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Floor brokers Independent members of an exchange who act as brokers for other members. Floor planning Arrangement used to finance inventory. A finance company buys the inventory, which is then held in trust by the user. Floor traders Members of a futures exchange who trade futures contracts for their own account. Floor value Usually equal to the pure bond value. A convertible bond will not sell at less than its floor value even when its conversion value is below the pure bond value. Flotation cost The cost associated with issuing securities such as underwriting, legal, listing and printing fees. Flow-of-funds accounts Reports on the amount of funds channeled to and from various sectors. Forcing conversion Strategy in which a company forces owners of a convertible security to convert by calling the security at a time when its call price is below its conversion value. Forecasting Making projections about future performance on the basis of historical and current condition’s data. Foreclosure The legal right of a lender of money if the borrower fails to repay the money or part of it on the due date. Foreign exchange exposure The risk that unexpected changes in exchange rates will impose a loss of some kind on the exposed party. With transaction exposure, the loss is to reported income; with accounting exposure, the loss is to net worth; and with economic exposure, the loss is to the market value of the entity.

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Foreign market A classification of the global financial market. It is the financial market of a country where the securities of issuers not domiciled in the country are sold and traded. It is part of the internal or national market. Formal sources of fund Synonymous to institutional sources of fund. Forms of pricing efficiency Types of pricing efficiency determined by the various types of information believed to be impounded or imbedded in the prices of publicly traded securities; known as the weak form, the semi-strong form, and the strong form. Forward contract An agreement between two counterparties that requires the exchange of a commodity or security at a fixed time in the future at a predetermined price. Forward market A market that facilitates the trade of some commodity, security, or foreign exchange at a fixed price for future delivery. Forward rate In the context of term structure of interest rates, the market’s forecast of the future interest rate. In the context of foreign exchange, the exchange rate at which a specified currency can be purchased or sold for a specified future point of time. Forward swap Involves an exchange of interest payments that does not begin until a specified future point in time. Founders’ shares Stock owned by the original founders of a company. It often carries special voting rights that allow the founders to maintain voting privileges in excess of their proportionate ownership. Fourth market The direct trading of stocks between two transactors without the use of a broker. Franchising Allowing another party to use a product or service under the owner’s name. 91

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Free cash flow The cash flow available to a company after financing all worth-while investments; defined as operating income after tax plus depreciation less investment. The presence of large free cash flow is said to be attractive to a corporate raider. Free market A market that is free from government interference, prices rising and falling in accordance with supply and demand. Free rider When a person is not excluded from the benefits given by the government for which he or she did not pay voluntarily, that person is said to be a free rider. Alternatively, a follower who avoids the cost and expense of finding the best course of action simply by mimicking the behavior of a leader who made these investments. Freehold estate An estate which doesn't have any termination period. Freely floating system System whereby exchange rates are market determined, without any government intervention. Freeze-out Pressure applied to minority shareholders of a company that has been taken over, to sell their stock to the new owners. French, Kenneth R. Developed the three-factor asset pricing model in 1992. Finance Professor in MIT. Front-end load A commission or sales charge paid, when one purchase the shares. Fronting loan A parent company’s loan to a foreign subsidiary channeled through a financial intermediary, usually a large international bank. The bank fronts for the parent in extending the loan to the foreign affiliate. Frozen convertible Convertible security that has been outstanding for several years and whose holders cannot be forced to convert because its conversion value is below its call price. See also Forcing conversion. 92

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Full service broker A broker who provides clients an all-inclusive selection of services such as advice on security selection and financial planning. Full-payout lease Synonymous to financial lease. Full-service lease Synonymous to net lease. Fund manager (investment manager) An employee of one of the larger institutions, such as an insurance company, investment trust, or pension fund, who manages its investment fund. The fund manager decides which investments the fund shall hold, in accordance with the specified aims of the fund, e.g. high income, maximum growth, etc. Fundamental analysis A form of security analysis that seeks to determine the intrinsic value of securities based on underlying economic factors. According to this analysis, the market price of a share is dependent upon certain fundamental or key factors such as the earnings, dividends, capital structure, firm size, risk, growth potential and so on. Fundamental beta The product of a statistical model to predict the fundamental risk of a security using not only price data but also other market-related and financial data. Fundamental descriptors In the model for calculating fundamental beta, ratios in risk indexes other than market variability, which rely on financial data other than price data. Fundamental forecasting Forecasting based on fundamental relationships between economic variables and exchange rates. Fundamental information Information relating to the economic state of a company or economy. In market analysis, fundamental information is related to the earnings prospects of the firm only.

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Funds Any means of payment. Along with cash flow, fund is one of the most frequently misused words in finance. Future value of annuity The sum of the future value of a series of consecutive equal payments. Future value The value at some future time of a present amount of money, or a series of payments evaluated at a given interest rate. Futures contract An agreement that provides for the future exchange of a particular asset at a specified delivery date in exchange for a specified payment at the time of delivery. The long position is held by the trader who commits to purchase. The short position is held by the trader who commits to sell. Futures differ from forward contract in their standardization, exchange trading, margin requirements, and daily settling (marking to market). Futures margin The earnest money deposit made by a transactor to ensure the completion of a contract.

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G Gains to net debtors Increase in debtor’s wealth due to a decline in the purchasing power of liabilities. Gap ratio The value of rate-sensitive assets divided by the value of rate-sensitive liabilities. Gap The rate-sensitive assets minus rate-sensitive liabilities. Gearing The proportion of the capital employed of a company which is financed by lenders rather than shareholders General cash offer A public issue of a security that is sold to all interest investors, rather than only to existing shareholders. General obligation bonds Bonds that provide payments that are supported by the municipal government’s ability to tax. Generally accepted accounting principles Accounting principles formulated by the Financial Accounting Standards Board and used to construct financial statements. Geometric mean An average obtained by calculating the nth root of a set of n numbers. Global crowding out Situation in which excessive government borrowing in one country can cause higher interest rates in other countries. Global fund A mutual fund that can invest anywhere in the world, including the U.S. Global minimum variance portfolio Portfolio that has the lowest risk of any feasible portfolio. 95

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Goal congruence A concept under which the segment managers’ goals are in conformity with the goals of the company as a whole. Going private transactions Publicly owned stock in a firm is replaced with complete equity ownership by a private group. Going-concern value The amount at which a firm can be sold for as a continuing operating business. Gold card A credit card that enables its holder to various benefits in addition to those offered to standard cardholders. These cards are associated with higher annual charges. Golden handshake A lump sum tax-free payment made by a company to an executive who is forced to retire before the expiry of a service contract, as a result of merger, takeover, or any other reason. Golden parachute Compensation paid to top level management by a target firm if a takeover attempts. Goodwill The intangible possession which enables a business to continue to earn a profit that is in excess of the normal or basic rate of profit earned by other businesses of similar type. Goodwill of a business may be due to a particularly favorable location, its reputation in the community, or the quality of its employer and employees. The evidence that goodwill exists is the proven ability to earn excess profits. Goodwill is created on the books of a newly purchased company to the extent that the purchase price of the company is greater than the value of its net tangible assets. Gordon model A valuation model in which the value of a firm is equal to the present value of all future dividends expected over the life of the firm. Graduated payment mortgage loan A mortgage loan in which the payments are lower in the initial years of the loan and then gradually increase at a predetermined rate as borrower incomes are expected to rise over time. 96

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Graduated-payment mortgage Mortgage that allows borrowers to initially make small payments on the mortgage; the payments are increased on a graduated basis. Greenmail The purchase of a large number of shares in a company, which are then sold back to the company at a premium over the market price in return for a promise not to launch a bid for the company. It is sometimes called ‘graymail’. Gross domestic product The market value of goods and services produced over time including the income of foreign corporations and foreign residents working in the country, but excluding the income of residents and corporations overseas. Gross interest expense Interest paid on deposits and on other borrowed funds. Gross interest income Interest income generated from all assets. Gross lease A lease agreement where all the operating expenses are paid by the lessor, and he or she bears the risk of all unexpected changes in operating expenses. Gross national product Measurement of the total income of an economy. It is equal to G.D.P. plus the income abroad accruing to domestic residents minus income generated in domestic market accruing to non-residents. Gross profit margin Gross profit divided by sales, which is equal to each sales taka left over after paying for the cost of goods sold. Gross profit Total profit before expenses have been deducted. Gross rent multiplier The ratio of sale price of a property to monthly rental income. Gross spread (or underwriter discount) The difference between the price at which a security is reoffered to the public and the price paid by the underwriter to the issuer. 97

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Gross working capital The firm’s investment in current assets (like cash and marketable securities, receivables, and inventory). Ground lease A lease of land, as opposed to a lease of a building. Growing-equity mortgage Mortgage where the initial monthly payments are low and increase over time. Synonymous to GPM. Growth company A company that consistently has the opportunities and ability to invest in projects that provide rates of return that exceed the firm’s cost of capital. Earnings of this company are higher than those of average firms. Growth funds Mutual funds containing stock of firms that are expected to grow at a higher than average rate; for investors who are willing to accept a moderate degree of risk. Growth industries Industries with expected earnings growth significantly above the average of all industries. Guarantee mortgage A land loan that has a third party added to provide added assurance that the obligations under the loan will be met. Guaranteed investment contract A product sold by a life insurance company, which obliges the company to guarantee an interest rate, or a specific amount of investment, up to some specific maturity date.

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H Hard currency A freely convertible currency that is not expected to depreciate in value in the foreseeable future. Harvesting Selling the business outright to either an employee or outsider. Hedge ratio The ratio of options written to shares of stock held long in a riskless portfolio. Hedge A strategy to offset investment risk. A perfect hedge is one that eliminates all possibility of gain or loss due to future movements of the hedged variable. Hedged portfolio A portfolio consisting of a long position in the stock and a long position in the put option on the stock, so as to be riskless and produce a return that equals the risk-free interest rate. Hedgers Participants in financial futures markets who take positions in contracts to reduce their exposure to risk. Hedging (maturity matching) approach A method of financing where each asset would be offset with a financing instrument of same approximate maturity. Hedging A strategy that negates, in whole or in part, the risk associated with a decision. Highly leveraged transaction Credit provided that results in a debt-to-assets ratio of at least 75 percent. High-tech stocks Stocks of companies operating in high-technology fields.

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High-yield funds Mutual funds composed of bonds that offer high yields and have a relatively high degree of credit risk. Hire purchase A buying method in which the purchaser takes possession of goods as soon as an initial installment of the price has been paid, and ownership is obtained after all the subsequent installments have been completed. Historical cost accounting An accounting principle requiring all financial statement items to be based on original cost. It is usually based upon the taka amount originally exchanged in an arm's-length transaction; an amount assumed to reflect the fair market value of an item at the transaction date. Historical-cost depreciation Depreciation based on the amount originally paid for the asset. Holder-of-record date Stockholders owning the stock on the holder-of-record date are entitled to receive a dividend. In order to be listed as an owner on the corporate books, the investor must have bought the stock before it went exdividend. Holding company A corporation that owns enough voting stock in another firm to control management and operations by influencing or electing its board of directors. Holding period return The total return from an investment, including all sources of income, for a given period of time. Holding period yield The total return from income and capital appreciation over a stated holding period; the holding period return on a bond. Holding period Length of time that an individual holds a security. Homemade dividend Indicates that an individual investor can undo corporate dividend policy by re-investing excess dividends or selling of shares of stock to receive a desired cash flow. 100

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Homemade leverage The use of leverage directly by investors in place of corporate leverage. Here the idea is that as long as individuals borrow (or lend) on the same terms as the firm, they can duplicate the effects of corporate leverage on their own. Thus, if levered firms are priced too high, rational investors will simply borrow on personal accounts to buy shares in unlevered firms. Homemade leverage is part of the initial Modigliani and Miller approach. Homogeneous expectations Idea that all individuals have the same beliefs concerning future investments, profits and dividends. Horizon analysis Forecast of bond returns based largely on a prediction of the yield curve at the end of the investment horizon. Horizon return Bond returns to be earned based on assumptions about reinvestment rates. Horizontal acquisition An acquisition of a firm in the same industry as the acquiring firm. The firms compete with each other in their product market. Horizontal integration The acquisition of a competitor. Horizontal merger A merger involving two or more firms in the same industry that are both at the same stage in the production cycle; that is, two or more competitors. Horizontal price movement Stock price movement within a narrow price range over an extended period of time that creates the appearance of a relatively straight line on a graph of the stock's price. Horizontal spread The simultaneous purchase and sale of two options that differ only in their expiration dates. Hostile takeover A takeover of a company against the wishes of the current management and the board of directors by an acquiring company or raider. 101

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Hot money Money that moves across country borders in response to interest rate differences and that moves away when the interest rate differential disappears. Human capital The unique capabilities and expertise of individuals. Humped yield curve A yield curve in which intermediate rates are higher than both shortand long-term rates. Hurdle rate The minimum required rate of return on an investment in a discounted cash flow analysis; the rate at which the project is acceptable. Hybrid instrument A package containing two or more different kinds of risk management instruments that are usually interactive. Hybrid mortgage A form of mortgage in which the compensation to the lender may include receiving income directly from the use of the property. Hybrid security A convertible security whose optioned common stock is trading in a middle range, causing the convertible security to trade with the characteristics of both a fixed income security and a common stock instrument. Hypothecation The pledging of securities to brokers as collateral for loans made to cover short sales or purchase securities. In banking, it is one kind of continuous credit where the title of goods belongs to the bank but the possession of goods belongs to the borrower.

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I Ideal standards Standards that can be achieved only with absolute peak performance and efficiency under perfect conditions. Immunization A bond portfolio management technique to make worth unaffected by interest rate movements. Impact lag Time lag between the time when a policy is implemented by the government and the time when the policy has an effect on the economy. Imperfect markets Markets in which buyers and sellers of securities do not have full access to information and cannot always break down securities to the precise size they desire. Implementation lag Time lag between the time when the government recognizes a problem and the time when it implements a policy to resolve the problem. In the money Describes a call option whose premium is above the exercise price or a put option whose premium is below the exercise price. Income bonds Debentures that stipulate interest payments only if the issuer earns the income to make the payments by specified dates. Income funds Mutual funds composed of bonds that offer periodic coupon payments. Income smoothing The practice that the management recognizes losses or defers gains in a good year and the management defers losses or recognizes gains in a bad year. Income statement A summary of a firm’s revenues and expenses over a specified period, ending with net income or loss for the period, according to accepted accounting principles. 103

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Incremental cash flows Changes in cash flows, usually resulting from a decision. Incremental cost of capital The average cost of the additional capital raised during a period of time. Incremental depreciation The depreciation on a new asset minus the depreciation on an old asset. Incremental depreciation is multiplied times the tax rate to determine its tax shield benefit. Incremental IRR IRR on the incremental investment from choosing a larger project instead of a smaller project. Indenture A complex and lengthy legal agreement, also called the deed of trust, between the corporation issuing bonds and the bondholders, establishing the terms of the bond issue and naming the trustee. Independent project A project whose acceptance or rejection is independent of the acceptance or rejection of other projects. Index analysis An analysis of percentage financial statements where all balance sheet or income statement figures for a base year equal 100% and subsequent financial statement items are expressed as percentages of their values in the base year. Index arbitrage An investment/trading strategy that exploits divergences between actual and theoretical futures prices. An example is the simultaneous buying (selling) of stock index futures (i.e., S&P 500) while selling (buying) the underlying stocks of that index, capturing as profit the temporarily inflated basis between these two baskets. Index fund Investment fund designed to match the returns on a stock market index whose portfolio matches that of a broad-based index such as the S&P 500 and whose performance therefore mirrors the market as represented by that index. 104

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Index Statistical composite that measures changes in the economy or in financial markets, often expressed in percentage changes from a base year or from the previous month. Indexes measure the ups and downs of stock, bond, and some commodities markets, in terms of market prices and weighting of companies of the index. Indexed lease A rental agreement where the amount of the rent to be paid changes in accordance with changes in a specified index (i.e. the cost of living index). Indexed loan Any loan whose interest rate is adjusted in accordance with a rate published by an independent third party (an "index"). Indexing A passive bond portfolio management strategy that seeks to match the composition, and therefore the performance, of a selected market index. Indifference curve The expression in a graph of a utility function, where the horizontal axis measures risk and the vertical axis measures expected return. The curve connects all portfolios with the same utility. Indirect investment An investment that an investor has by holding a claim on a financial intermediary that has made direct investment. Industry life cycle Stages through which firms typically pass as they mature. Industry A group of firms whose products are perfect substitutes for each other to a common group of buyers and which are very poor substitutes for all other products in the economy. Inefficient portfolio Group of assets dominated by at least one other portfolio under the mean variance rule. For example, if A has both lower return and higher volatility than B, we say A is dominated by B. Infant industry argument Argument that industries in the developing and emerging sectors of the economy need protection against international competition in order to establish themselves. 105

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Inflation escalator clause A clause in a contract providing for increases or decreases in inflation based on fluctuation in the cost of living, production cost, and so forth. Inflation premium An extra return required as compensation for expected inflation. Inflation rate The rate at which the general level of prices for goods and services is rising throughout an economy. Inflationary gap Occurs when aggregate demand exceeds output potential. This often results in higher prices (inflation) as well as a worsening trade balance (as goods are imported). Informal line of credit Financing arrangement that allows a business to borrow up to a specified amount within a specified period of time. Informal sources of fund Synonymous to non-institutional sources of fund. Information asymmetry Condition that information is known to some, but not all participants. Information content of dividends This theory of dividends assumes that dividends provide information about the financial health and economic expectations of the company. If this is true, corporations must actively manage their dividends to provide the market with information. Information costs Costs associated with assessing the value of a financial asset. Initial margin A margin deposit established by a customer with a brokerage firm before a transaction can be executed. Initial public offering The mechanism of offering shares of a specific firm for the first time for public subscription. Inside information Non public knowledge about a corporation possessed by corporate officers, major owners, or other individuals with privileged access to information about the firm. 106

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Insider trading The purchase and sale of a firm’s securities by its officers (among others) who are seeking to benefit from their knowledge of non-public information about the firm’s financial prospects. Insolvency The condition of having debts greater than the realizable value of one’s assets. Installment loans Loans to individuals to finance purchases of cars and household products. Instinet An electronic trading network, part of the fourth market. Institutional investors Large investors who manage large portfolios of securities such as pension funds or mutual funds, investment companies, bank trust departments, life insurance companies, and so forth. Institutional mortgage A loan secured against real property offered to the landowner by a bank, credit union, trust company or other accredited financial organization. Antithesis to private mortgage. Institutional sources of fund These are the components of the formal financial market, for example commercial banks, Investment banks, insurance companies, capital market, specialized institutions etc. Insurance Guarding against property loss or damage making payments in the form of premiums to an insurance company, which pays an agreed-upon sum to the insured in the event of loss. Insured mortgage A loan secured against land for which an insurance policy exists promising to compensate the lender for all losses and costs resulting from the borrower's failure to meet her obligations under the loan agreement. Insured plans Pension plans that are used to purchase annuity policies so that the life insurance companies can provide benefits to employees upon retirement. 107

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Integer programming Variant of linear programming in which the solution values must be integers. Integral theory of seasonality Theory for the computation of interim net income for firms with seasonality where each interim period is treated as an integral part of the fiscal year. See also Discrete theory. Intellectual property rights Patents, copyrights, and proprietary technologies and processes that may be the basis of a company's competitive advantage. Inter-bank market A market for funds in which only banks participate. Interest factor The tabular value to insert into the various present value and future value formulas. It is based on the number of periods (n) and the interest rate (i). Interest on interest The process by which bond coupons are reinvested to earn interest. Interest rate cap Ceiling interest rate imposed on a loan designed to protect the borrower from an unacceptable rise in the interest cost of a loan. Interest rate collar The purchase of an interest rate cap and the simultaneous sale of an interest rate floor; puts brackets around the movement of a loan rate so that it cannot rise above the cap or fall below the floor. Interest rate floor Minimum interest rate below which the interest cost of a loan normally cannot fall, thus protecting the lender from additional lost revenue if market interest rates move lower. Interest rate futures Financial futures contracts on debt securities such as Treasury bill, notes payables, or bonds. Interest rate options Option contracts on fixed-income securities such as treasury bonds. 108

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Interest rate parity Theory that suggests the forward discount (on premium) is dependent on the interest rate differential between the two countries of concern. Interest rate risk The uncertainty of returns on an investment due to possible changes in interest rates over time for the change of economic condition of a country drastically. Interest rate swap An agreement calling for the periodic exchange of cash flows, one based on an interest rate that remains fixed for the life of the contract and the other that is linked to a variable-rate index. Interest subsidy A firm’s deduction of the interest payments on its debt from its earnings before it calculates its tax bill under tax law. Interest Money paid (earned) for the use of money. Interest-on-interest Bond income from reinvestment of coupon payments. Interest-sensitive industries Industries particularly sensitive to expectations about changes in interest rates. Interim dividend The declaration and payment of a dividend prior to annual earnings determination. Interim financing A short-term loan made to a company on the condition that a takeout will follow with long-term or intermediate financing. Interim statement A financial statement that reflects only a limited period of a company's financial statement, not the entire fiscal year. Inter-market spread swap Switching from one segment of the bond market to another. Inter-market trading system An electronic system that is part of the national market system and that displays the court posted on the exchanges where a stock is listed, as well as OTC market, and provides for inter-market executions. 109

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Internal financing Funds that come from internally generated cash flow. It equals net income plus depreciation minus dividend. Internal market A classification of a global financial market composed of two parts the domestic market and the foreign market. Also called national market. Internal rate of return The rate of return that equates the present value of future cash flows to the initial investment on the project. Internal reorganization Reorganization under the formal bankruptcy laws. New management may be brought in and a redesign of the capital structure may be implemented. Internal sources of financing The funds that originate from business operation. These may originate from a variety of forms such as retained earnings, general reserve, sinking fund, depreciation provision etc. International arbitrage Simultaneous buying and selling of foreign securities to capture the profit potential created by time, currency, and settlement inconsistencies that varies across international borders. International diversification Achieving diversification through many different foreign investments that are influenced by a variety of factors. International Finance Corporation An affiliate of the World Bank established with the sole purpose of providing partial seed capital for private ventures around the world. Whenever a multinational company has difficulty raising equity capital due to lack of adequate private risk capital, the firm may explore the possibility of selling equity or debt (totally up to 25 percent) to the International Finance Corporation. International mutual fund Portfolio of international stock created and managed by financial institution; individuals can invest in international stock by purchasing shares of an international mutual fund. 110

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Interpolation Estimation of an unknown number that lies somewhere between two known numbers. Intrinsic value The present value of a firm's expected future net cash flows discounted by the required rate of return. Inventory profits Profits generated as a result of an inflationary economy, in which old inventory is sold at large profits because of increasing prices. This is particularly prevalent under FIFO accounting. Inventory turnover ratio The ratio calculated by dividing cost of goods sold by inventories. It tells, how many times inventory is turned over into receivables through sales during the year. Investment banks Financial intermediaries who perform a variety of services, including aiding in the sale of securities, facilitating mergers and other corporate reorganizations, acting as brokers to both individual and institutional clients, and trading for their own accounts. Investment club A group of investors who, by pooling their resources, are able to make more frequent and larger investments on a stock exchange often being able to reduce brokerage and to spread the risk of serious loss. The popularity of investment clubs has waned with the rise of unit trusts and investment trusts, both of which have the advantages of professional management. Investment company A firm that sells shares of the company and uses the proceeds to buy stocks, bonds, or other financial instruments. Investment decision Concerns with the allocation of capital to investment proposals, whose benefits are to be realized in the future. It also includes the reallocation of capital when an asset no longer economically justifies the capital committed to it. 111

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Investment focus Decisions taken by shareholders & other investors where the emphasis is put on choosing a portfolio of securities that is consistent with the preferences of the investors for risk, return, dividend yield, liquidity & so on. Investment grade bond A bond rated BBB and above by Standard and Poor’s, or Baa and above by Moody's. Investment grade securities Securities those are rated as medium quality or higher by rating agencies. Investment opportunity schedule (IOS) A graph of the firm’s investment opportunities ranked in order of the project’s internal rates of return. Investment policy The first step in the portfolio management process, involving investor’s objectives, constraints and preferences. Investment software Computer software that helps investors make investment decisions by identifying situations that meet programmed parameters. Investment tax credit Proportion of new capital investment that could be used to reduce a company's tax bill. Investment trust A company that invests the funds provided by shareholders in a wide variety of securities. It makes its profits from the income and capital gains provided by these securities. Also called Investment Company. Investment valuation model The basic mathematical technique of finance that calculates the value of an investment as the present value of all future cash flows expected to be generated by the investment. Investment The current commitment of taka for a period of time in order to derive future payments that will compensate the investor for the time the funds are committed, the expected rate of inflation, and the uncertainty of future payments. 112

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Invoice Bill prepared by a seller of goods or services and submitted to the purchaser. It lists the items bought, prices, and terms of sale. IRR rule An investment decision rule that accepts an investment for which the IRR is greater than the opportunity cost of capital. It is wise to also consider net present value for project evaluation. Irrelevance result The MM theorem that a firm’s capital structure is irrelevant to the firm’s value. Issued share capital Total amount of shares that have been issued. Issued stock Shares of common stock put forth into circulation which may be more in number than shares of outstanding stock. Issuer An entity that puts a financial asset in the marketplace. Issuing house A financial institution, usually a merchant bank that specializes in the flotation of private companies’ securities on a stock exchange.

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J January effect Refers to the historical pattern that stock prices rise in the first few days of January. Studies have suggested, this holds only for smallcapitalization stocks. In recent years, there is less evidence of a January effect. Jensen measure An absolute measure of a portfolio’s risk-adjusted performance, computed as the intercept in a regression equation where the excess returns to a manager’s portfolio and the market index are the dependent and independent variables respectively. Jensen, Michael C. Eugene Fama's graduate student, and published "The Performance of Mutual Funds in the Period 1945-1965," in the Journal of Finance, 1965. This was the first study of actively managed mutual funds that documented their investment professionals' failure to outperform the appropriate market indexes. Also developed the idea of the Agency Theory and Free Cash Flow. Finance professor at the Harvard University. Job lot A collection of diverse things, such as stocks or shares, sold together as one lot one all-inclusive price. Jobber A term for a market maker. Jobber’s turn The difference between the price at which the jobber is prepared to buy and the price at which the jobber is prepared to sell. Also called spread. Johnson, Ramon E. Developer of the idea of Leasing. Finance professor at the University of Utah. Joint stock company A form of business organization that falls between a corporation and a partnership. The company sells stock, and its shareholders are free to 114

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sell their stocks, but shareholders are not liable for all debts of the company. Joint venture Two or more companies forming a new company. Jumbo loan A mortgage loan that is nonconforming because the amount of the loan is greater than the maximum permissible loan specified by an agency. Junior bonds Synonymous to subordinate bonds. Junior lien A lien subordinated to a previous lien. Junior mortgage An overlying mortgage that is subordinate to a prior mortgage in the order of priority. Junk bond A high-risk, high-yield (often unsecured) bond rated below investment grade. Junk commercial paper Low-rated commercial paper that are issued by the companies facing financial distress. Just in time An approach to inventory management and control in which inventories are acquired and inserted in production at the exact times they are needed.

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K Kerb market Any informal market, such as one for dealing in securities not listed on a stock exchange. Keynesian growth model Model in which a long run growth path for an economy is traced out by the relations between saving, investing and the level of output. Keynesian macroeconomics The theory that shows how a market-based capitalist economy may reach equilibrium with large scale unemployment and how government spending may be used to raise it out of this to a new equilibrium at the full-employment level of output. Keynesian theory Theory that suggests how the government can improve economic conditions as related to monetary policy; the theory explains how the money supply can be adjusted to affect interest rates and the economy. Kicker An additional feature of a debt obligation that increases its marketability and attractiveness to investors. Killer bees Those who aid a company in fending off a takeover bid, usually investment bankers who devise strategies to make the target less attractive or more difficult to acquire. Kiting The practice of depositing and drawing checks at two or more banks and taking advantage of the time it takes for the second bank to collect funds from the first bank. Also refers to illegally increasing the face value of a check by changing the numbers on the check. In the context of securities, refers to the manipulation and inflation of stock prices. Knock-out option An option that is worthless at expiration if the underlying commodity or currency price reaches a specific price level.

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Know your customer An ethical foundation of securities brokers that an adviser who recommends the purchase or sale of any security to a customer, must believe that the recommendation is suitable for the customer, given the customer's financial situation. Kurtosis Measures the fatness of the tails of a probability distribution. A fattailed distribution has higher-than-normal chances of a big positive or negative realization. Kurtosis should not be confused with skewness, which measures the fatness of one tail. Kurtosis is sometimes referred to as the volatility of volatility.

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L Lagrangian multiplier The Lagrange multiplier lambda () approximates the marginal impact on the objective function caused by a small change in the constant of the constraint. Laissez-faire Doctrine that a government should not interfere with business and economic affairs. 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 in, first out Inventory costing method whereby last items into inventory are first items out. Law of large numbers The mean of a random sample approaches the mean (expected value) of the population as sample size increases. Law of one price An economic rule stating that a given security must have the same price no matter how the security is created. If the payoff of a security can be synthetically created by a package of other securities, the implication is that the price of the package and the price of the security whose payoff it replicates must be equal. If it is unequal, an arbitrage opportunity would present itself. Lead manager The commercial or investment bank with the primary responsibility for organizing syndicated bank credit or bond issued. The lead manager recruits additional lending or underwriting banks, negotiates terms of the issue with the issuer, and assesses market conditions. Lead time The difference in the time between the time an order is placed and the time it is received. 118

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Leader A stock or group of stocks that is the first to move in a market upsurge or downturn. Lease renewal option Agreement specified in the lease, which provides the tenant the option to renew the lease for a given time period upon the expiration of the initial lease. Most lease options include the landlord's right to increase the rent upon renewal. Lease with option to purchase A lease agreement containing an option for the lessee to purchase the leased property. Lease A contractual arrangement whereby the owner of any asset allows the other party to the agreement to use the full services & benefits of the said asset in exchange of some periodic payments. Leasehold estate An estate which has a specific termination period. Leasehold mortgage Mortgage collateralized by a tenant's interest, usually structural improvements, in a lease parcel of property. A leasehold mortgage is subordinate to the landlord's land lease since it is a second lien by order of priority on the property. Ledger cash A firm’s cash balance as reported in its financial statements. Also called book cash. Legal bankruptcy A legal proceeding for liquidation or reorganizing a business. Legislative risk Risk associated with the changes in the regulatory environment in which markets operate. Lemon An investment with poor results. Leptokurtosis The condition of a probability density curve to have fatter tails and a higher peak at the mean than the normal distribution. 119

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Lessee The receiver of the services of the assets under a lease contract. Lessor The owner of assets that are being leased. Letter of credit A letter from one bank to anther authorizing the payment of a certain sum to the person named in the letter on certain specific requirements. It is frequently used to guarantee payment of an obligation. 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 production Equal monthly production used to smooth out production schedules and employ manpower and equipment more efficiently and at a lower cost. Leverage buyout Takeover of a company by using borrowed funds, usually by a group including some members of existing management. Leverage measure Measure of financial leverages; defined as assets divided by equity. Leverage ratio Measures of the relative value of stockholders, capitalization, and creditors obligations, and of the firm's ability to pay financing charges. Value of firm's debt to the total value of the firm (debt plus stockholder capitalization). Leverage The use of fixed costs in an attempt to increase (or lever up) profitability. 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 where the lessee contracts to make periodic payments over the basic lease period while the lessor’s asset is partly financed by a long-term lender or lenders. The lessor, however, is the borrower. 120

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Liability An obligatory payment to a supplier of a good, a service or funds. LIBOR Lending rate among banks in the London market. Lien The legal right to keep somebody else’s property as security for a debt. Life estate A limited right in a property, to use or occupy the property for the life of the person holding the estate after which title reverts to the grantor or a named third party. Life insurance policy The contract that sets out the terms of life insurance coverage. Life insurance An insurance policy that pays a monetary benefit to the insured or the insured person's survivors after death. 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 Tk.55 or less" or "sell 100 shares of XYZ at Tk.65 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. Limited partnership A special form of partnership to limit liability for most of the partners. Under this arrangement, one or more partners are designated as general partners and have unlimited liability for the debts of the firm, while the other partners are designated as limited partners and only liable for their initial contribution. Line of credit An arrangement whereby a financial institution (bank or insurance company) commits itself to lend up to a specified maximum amount of funds during a specified period. Linear programming Technique for finding the maximum value of some equation, subject to stated linear constraints. 121

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Linear regression A statistical technique for fitting a straight line to a set of data points. Linter's observations John Linter'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 An asset that can be easily converted into cash without significant loss of its original value. Liquidating dividend Payment by a firm to its owners from capital rather than from earnings. Liquidation value The amount of money that could be realized if an asset or a group of assets (e.g., a firm) is sold separately from its operating organization. Liquidation Termination of the firm as a going concern. Liquidation involves selling the assets of the firm for salvage value. Liquidity preference theory The theory that, all else equal, lenders prefer to make short-term loans rather than long-term loans; hence they will lend short-term funds at lower rates than long-term funds. Liquidity premium theory Theory that suggests the yield to maturity is higher for liquid securities, other things being equal. Liquidity premium A premium added to the rate on a security if the security cannot be converted to cash on short notice and at close to the original cost. Liquidity ratios Ratios that measure a firm's ability to meet its short-term financial obligations on time, such as the ratio of current assets to current liabilities. Liquidity risk The risk that arises from the difficulty of selling an asset in a timely manner. It can be thought of as the difference between the "true value" of the asset and the likely price, less commissions. 122

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Liquidity The ability of an asset to be converted into cash without a significant price concession. Listing rules Requirements, including minimum shares outstanding, market value, and income, that are laid down by an exchange for any stock to be listed for trading. Load funds Mutual funds that have a sales charge imposed by brokerage firms that sell the funds. Load A sales commission charged on a mutual fund. Loan commitment fee An amount paid to a lender for the purpose of making funds available over a specified period of time at a certain rate of interest. Loan commitment Written promise to make a loan, outlining amount and terms, by lending institution to borrower. Loan loss provision A reserve account established by bank in anticipation of loan losses in the future. Loan participation Arrangement in which several banks pool funds to provide a loan to a corporation. Loan Money lent on condition that it is repayable, either in installments or all at once, on agreed dates usually with an agreed rate of interest. Loanable funds theory Theory that suggests the market interest rate is determined by the factors that control the supply and demand for loanable funds. Loan-to-value ratio Ratio of loan amount requested and the estimated property value.

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Locational arbitrage Arbitrage intended to capitalize on a price (such as foreign exchange rate quote) discrepancy between two locations. Lock in A restriction on a shareholder to sell the share at a time. Lockbox system An arrangement to speed up collection of receivables through decentralization. Lockbox A post office box maintained by a firm’s bank that is used as a receiving point for customer remittances. Long bond Bond with a long current maturity. The "long bond" is the 30-year US Treasury bond. Long hedge A long position in a forward or futures contract used to offset the price volatility of a short position in the underlying asset. Long position The buyer of a commodity or security or, for a forward contract, the counterparty who will be the eventual buyer of the underlying asset. Long-term debt ratio The ratio of long-term debt to total capitalization. Long-term debt An obligation having a maturity of more than one year from the date it was issued. Long-term equity anticipations Stock options with relatively long-term expiration dates. Long-term funds The sum of the firm’s long-term debt and shareholders equity. Lots In the context of general equities, these blocks or portions of trades express a specific transaction in a stock at a certain time, often implying execution at the same price (e.g., "I traded 40m in two lots of 10 and four lots of 5."). 124

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Low coupon bonds Bonds that pay low coupon payments; most of the expected return to investors is attributed to the large discount in the bond’s price. Low-load fund A mutual fund that imposes a moderate front-end sales charge when the investor buys the fund, typically about 3 to 4 percent. Lump sum A sum of money paid at once, rather than in installments. Lumpy assets Assets that cannot be acquired in small increments; instead, they must be obtained in large, discrete amounts.

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M M1 Definition of the money supply; composed of currency held by the public plus checking accounts. M2 Definition of the money supply; composed of M1 plus savings accounts, small time deposits, money market deposit account and some other items. M3 Definition of the money supply; composed of M2 plus large time deposits and other items. Macaulay duration A measure of the weighted average time to maturity of a bond. Macroeconomics The helicopter, top-down view of an economy, i.e. the study of the economy as a whole. Mail float The delay between the time when a payer mails a payment and the time when the payee receives it. Maintenance margin The required proportion that the investor’s equity value must be to the total market value of the stock. If the proportion drops below this percent, the investor will receive a margin call. Majority voting The system whereby, in the election of the board of directors, each stockholder is entitled to one vote for each share of stock owned, and he or she can vote all shares for each director. Make a market The obligation of a specialist to offer to buy and sell shares of assigned stocks. It is assumed that this makes the market liquid because the specialist assumes the role of a buyer or investor if they wish to sell and seller if they wish to buy. 126

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Managed fund An investment portfolio of one or more clients entrusted to a manager who decides how to invest it. Management buyout A leverage buyout (LBO) in which pre-buyout management ends up with a substantial equity position. Management by exception A concept used in responsibility accounting under which management concentrates its time and effort in exceptional (or problems) situations. Management A collective group of individuals who direct the operations of an entity. Managerial (real) option Management flexibility to make future decisions that affect a project’s expected cash flow's life or future acceptance. Managerial finance The area of finance concerned with the duties of the financial manager in the business firm. Managing investment banker An investment banker who is responsible for the pricing, prospectus development, and legal work involved in the sale of a new issue of securities. Manipulation An illegal operation. Buying or selling a security for the purpose of creating a false or misleading appearance of active trading or for the purpose of raising or depressing the price to induce purchase or sale by others. Margin account A leverageable account in which stocks can be purchased for a combination of cash and a loan. The loan in the margin account is collateralized by the stock; if the value of the stock drops sufficiently, the owner will be asked to either put in more cash, or sell a portion of the stock. Margin call Call from a broker to participants in futures contracts (or other investments) informing them that they must increase their margin. 127

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Margin of safety The difference in sales between the present sales volume and the sales volume at the break-even point. It may be calculated either in sales taka or units. Margin requirement The proportion of invested funds that can be borrowed versus paid in cash; set by the central bank. Margin The percent of cost a buyer pays in cash for a security, borrowing the balance from the broker. Marginal cost of capital schedule A graph that relates the firm’s weighted average cost of each taka of capital to the total amount of new capital raised. Marginal cost of capital Synonymous to incremental cost of capital. Marginal principle of retained earnings The principle that a corporation must be able to earn higher return on its retained earnings than a stockholder would receive after payment of taxes on the distributed dividends. Marginal tax rate The tax applicable to the last unit of income. Marked to market The daily settlement of obligations on futures positions. Market anomalies Techniques or strategies that appear to be contrary to an efficient market. Market capacity Synonymous to market capitalization. Market capitalization rate The market-consensus estimate of the appropriate discount rate for a firm’s cash flows. Market capitalization Price per share of stock multiplied by the number of shares outstanding. Market data Primarily stock price and volume information. 128

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Market efficiency Markets are considered to be efficient when (1) prices adjust rapidly to new information; (2) there is a continuous market, in which each successive trade is made at a price close to the previous price (the faster the price responds to new information and the smaller the differences in price changes, the more efficient the market); and (3) the market can absorb large taka amounts of securities without destabilizing the prices. Market extension merger Combination of at least two firms with similar products in different geographic markets. Market failure The inability of a competitive market to remain so without the help of government, or the inability of an uncompetitive market, if not aided by government, to become competitive. Market impact cost A form of execution resulting from the bid as spread and price concession demanded by dealers in the stock to mitigate their risks that an investor's demand for the stock is motivated by information that the investor may have that is not embodied in the stock’s price. Market index A market measure that consists of weighted values of the components that make up certain list of companies. A stock market tracks the performance of certain stocks by weighting them according to their prices and the number of outstanding shares by a particular formula. Market makers Individuals who facilitate the trading of stocks by standing ready to buy or sell specific stocks in response to customer orders made through a telecommunication network. Market micro-structure Process by which securities are traded. Market model The model that states that the return on a security depends on the return on the market portfolio and the extent of the security's responsiveness as measured by beta. The return also depends on conditions that are unique to the firm. The market model can be graphed as a line fitted to a plot of asset returns against returns on the market portfolio. This relationship is sometimes called the single-index model. 129

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Market order An order to buy or sell shares immediately at the best available price. Market portfolio A portfolio consisting of all assets available to investors, with each asset held in proportion to its market value relative to the total market value of all assets. Market price The amount of money that a willing buyer pays to acquire something from a willing seller, when a buyer and seller are independent and when such an exchange is motivated by only commercial consideration. Market risk premium Synonymous to risk premium. Market risk Risk that the stock market experiences lower prices in response to adverse economic condition or pessimistic expectation. Market segmentation theory The theory that each borrower and lender has a preferred maturity and that the slope of the yield curve depends on the supply of and demand for funds in the long-term market relative to the short-term market. Market to book value ratio The ratio of a stock’s market price to its book value. Market value maximization The concept of maximizing the wealth of shareholders. This calls for recognition not only of earnings per share but also how they will be valued in the marketplace. Market value ratios A set of ratios that relate the firm’s stock price to its earnings and book value per share. Market value The price at which willing buyers and sellers trade a firm's asset. Market A mechanism where buyers and sellers buy and sell their resources, and goods and services. Marketability (or liquidity) The ability to sell a significant volume of securities in a short period of time in the secondary market without significant price concession. 130

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Marketable securities Short term, interest earning, money market instruments used by the firm to obtain a return on temporarily idle funds. Market-based forecasting Process of developing forecasting from market indicators. Marketed claims Claims that can be bought and sold in financial markets, such as those of stockholders and bondholders. Marking the market The daily settlement of obligations on futures positions. Markowitz decision rule A decision rule for choosing between two investments based on their means and variances. Markowitz diversification A strategy that seeks to combine in a portfolio assets with returns that are less than perfectly positively correlated, in an effort to lower portfolio risk (variance) without sacrificing return. See also naive diversification. Markowitz efficient frontier The graphical depiction of the Markowitz efficient set of portfolios representing the boundary of the set of feasible portfolios that have the maximum return for a given level of risk. Any portfolio above the frontier cannot be achieved. Any below the frontier are dominated by Markowitz efficient portfolios. Markowitz efficient portfolio A portfolio that has the highest expected return at a given level of risk. Also called a mean-variance efficient portfolio. Markowitz, Harry M. Nobel laureate in economics. Father of modern portfolio theory. Master budget Synonymous to comprehensive budget. 131

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Matched funding Strategy in which investment decisions are made with the objective of matching planned outflow payments. Mathematical programming An operations research technique that solves problems in which an optimal value is sought subject to specified constraints. Mathematical programming models include linear programming, quadratic programming, and dynamic programming. Maturity preference theory A theory of the determination of term structure of interest rate, which holds that the shape of the yield curve is merely a reflection of the differences in interest rate risk among maturities. Maturity risk premium A premium that reflects interest rate risk bonds with longer maturity have greater interest rate risk. Maturity strategy A portfolio management strategy employed to reduce the interest rate risk of a bond portfolio by matching the maturity of the portfolio with its investment horizon. For example, if the investment horizon is 5 years, the portfolio manager would construct a portfolio that will mature in 5 years. Mean The expected value of a random variable. Mean-variance analysis Analysis of investment opportunities based on their means, variances and covariances. Mechanistic hypothesis of equity valuation A hypothesis that states that the capital market is fixated on reported earnings, without any consideration paid to the accounting methods used to compute reported earnings, or the sources of gain or loss underlying reported earnings. Meckling, William H. Developed the Agency Theory in 1976. Finance Professor at the University of Rochester. Median The middle number or the arithmetic mean of the middle two numbers in a set of numbers arranging in an ascending or descending scale. 132

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Medium of exchange The monetary or financial item that is generally accepted in payment for goods, services, and capital transactions, and that serves as a store of value. Merchant banks Banks that provide not only all the consumer and commercial services a regular bank provides but also offer credit, investment, and consulting services in an attempt to satisfy all the financial-service needs of their clients. Merger premium The part of a buyout or exchange offer that represents a value over and above the market value of the acquired firm. Merger The combination of two or more companies in which only one firm survives as a legal entity. Microeconomics Analysis of the behavior of individual economic units such as companies, industries, or households. Milking the property A selfish investment strategy where extra dividend or other distribution is paid out in times of financial distress, leaving less in the firm for the bond holders. Miller and Modigliani's irrelevance proposition Theory that if financial markets are perfect, corporate financial policy (including hedging policy) is irrelevant. Miller, Merton Nobel Laureate and co-author of the famous Miller-Modigliani theorems. Finance professor at the University of Chicago. Miller-Orr model The model used to address temporary investment decisions where it is assumed that net cash flows are normally distributed with a mean of zero, that there is no correlation of the cash flows across time. Mineral lease A contract between the owner of a property and another party allowing the other party to explore and exploit any mineral deposits found on the property for a limited period of time in return for a periodic payment. 133

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Minimum variance portfolio The portfolio of risky assets with the lowest possible variance. By definition, this portfolio must have the lowest possible standard deviation. Minimum-guaranteed percentage lease A lease whereby the landlord is paid periodic rent as a percentage of the gross (or net) sales of the tenant of the premises but where the tenant agrees that the rental payments shall not drop below a specified amount. Minimum-variance frontier Graph of the lowest possible portfolio variance that is attainable for a given portfolio expected return. Minimum-variance portfolio The portfolio of risky assets with lowest variance. Minority interest The interest or percentage ownership of a group of stockholders who, in total, own less than 50% of the shares in the corporation. Mixed cost Cost that contains both fixed and variable elements. Mixed forecasting The use of a combination of forecasting techniques, resulting in a weighted average of the various forecasts developed. MM proposition I (with corporate taxes) A proposition of Modigliani and Miller (MM), which states that the value of the firm is the value of an all-equity firm plus the tax rate times the value of the debt. MM Proposition I (without corporate tax) A proposition of Modigliani and Miller (MM) which states that a firm cannot change the total value of it's outstanding securities by changing its capital structure proportions. Also called an irrelevance result. MM Proposition II (with corporate taxes) A proposition of Modigliani and Miller (MM), which states that there is a positive relation between the expected return on equity and leverage. MM Proposition II (without corporate tax) A proposition of Modigliani and Miller (MM) that states that the cost of equity is a linear function of firm's debt-equity ratio. 134

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Modern quantity theory of money Theory that suggests an increase in the quantity of money leads to a predicable increase in the value of goods produced. Modified accelerated cost recovery system A system that specifies the allowable depreciation recovery period for different types of assets. The normal recovery period is generally shorter than the physical life of the asset. Momentum investing Investing on the basis of recent movements in the price of a stock. Monetarists Economists who advocate a stable low growth in the money supply. Monetary aggregate A sum of monetary items that helps to measure the amount of money available to the economy at any time. Monetary base The most basic monetary aggregate, also termed high-powered money, defined as currency in circulation (or coins and bank notes held by the public) plus the total reserves in the banking system. Monetary policy Management of the money supply and the resultant interest rates by the central bank of a country. Monetize Establish as legal tender, or, to purchase public or private debt and thereby free moneys for other uses that money that would have been devoted to debt service. Monetizing the debt Action of the central bank to increase the money supply to offset any increased demand for funds resulting from a larger budget deficit. Money at call and short notice Interest-earning secured loan that is repayable on demand or short notice. Money market deposit account Deposit account that pays interest and allows limited checking and does not specify a maturity. 135

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Money market instruments All government securities and short-term corporate obligations. Money market mutual fund A type of mutual fund that sells its shares to buy short-term securities (portfolio of various popular marketable securities, having instant liquidity, competitive yields, and low transaction costs) and then converts the profits into additional shares for its shareholders. Money market preferred stock Preferred stock having a dividend rate that is reset at auction after certain intervals (e.g. every 49 days). Money market yield An yield equal to the annualized holding period yield, assuming a 360day year, rMM = HPY * (360/t). Money market A financial market that facilitates the flow of short-term funds. Money A medium of exchange that functions as a unit of account and a store of value. Monitoring receivables Mechanism for assessing the accuracy and stability of the estimates used in making the terms of sale and credit-granting decisions. Monopolistic competition Market structure similar to perfect competition but individual firm has some degree of monopoly power in price-setting. Such a market is characterized by many sellers - each producing differentiated products (that are not perfect substitutes for one another). There is freedom of entry and exit, but only in the long run. Monopoly In the case of a perfect monopoly, the firm has full market share, i.e. a single seller of a product in a given market. In reality, a firm which has more than 25% of total market share is more or less considered to be a monopoly. Monopsony A market where a dominant or single buyer can influence the prices significantly at which he or she purchases factor inputs. A monopsony 136

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can occur in different kinds of markets, e.g. in the labour market, there could be a situation of one firm which dominates hiring and firing. Monte Carlo method A sensitivity analysis of the effects of using random combinations of probabilities applicable to two or more factors that affect the outcomes of business decisions. Month-to-month lease A leasing arrangement whereby no written lease obligates the lessee to a fixed term, although appropriate notice of moving or eviction may still apply. Mortgage bonds Bonds that pledge specific assets such as buildings and equipment. The proceeds from the sale of these assets are used to pay off bondholders in case of bankruptcy. Mortgage company A company authorized to engage in the business of creating mortgages and selling them to investors. Mortgage instrument A written mortgage document which states the terms of the mortgage including the interest rate, length of payments, payment dates and remedies the bank is entitled to in the event of the mortgagor's failure to pay as required including late charges. Mortgage market A collection of markets, which includes a primary market, or origination market, and a secondary market where mortgages trade. Mortgage originator In a mortgage loan transaction, this is the original lender. Mortgage REIT Type of real estate investment trust (REIT) that does not own property but gives construction or permanent mortgage loans for major projects. Mortgage servicing Activities including collecting monthly payments from mortgagors and forwarding proceeds to owners of the loan, sending payment notices to mortgagors, reminding mortgagors when payments are overdue, maintaining records of mortgage balances, furnishing tax information 137

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to mortgagors, administering an escrow account for real estate taxes and insurance purposes, and if necessary, initiating foreclosure proceedings. Mortgage A loan secured by the collateral of some specified real estate property, which obliges the borrower to make a predetermined series of payments. Mortgage-backed securities Securities backed by mortgages that are commonly sold and purchased by savings institutions. Mortgagee The lender/investor in a mortgage loan. Mortgagor The borrower in a mortgage loan. Moving average The continually recalculating average of security prices for a period, often 200 days, to serve as an indication of the general trend of prices and also as a benchmark price. Multinational corporation A firm doing business across its national borders. Some definitions require a minimum percentage (often 30 percent or more) of a firm’s business activities to be carried on outside its national borders. Multiple dependencies A financial forecasting technique where the variable is thought to depend on more than one factor; not just sales or some other variable but a combination of several variables. Multiple IRRs The situation in which a project has two or more IRRs. Multiple listing The listing of a stock on an exchange in its home country and on an exchange in at least one other country. Multiple regressions The estimated relationship between a dependent variable and more than one explanatory variable. 138

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Multiple-discriminant analysis (MDA) Statistical technique for distinguishing between two groups on the basis of their observed characteristics. Multiples Synonymous to price earnings ratio. Municipal bond index futures Futures contract allowing for the future purchase or sale of municipal bonds at a specified price. Municipal bonds Tax-exempt bonds issued by state and local governments. Mutual company A corporation that is owned by a group of members and that distributes income in proportion to the amount of business that members do with the company. Mutual fund theorem A result associated with the CAPM, asserting that investors will choose to invest their entire risky portfolio in a market-index or mutual fund. Mutual fund An investment company that pools money from shareholders and invests in a variety of securities, including stocks, bonds, and money market securities. A mutual fund ordinarily stands ready to buy back (redeem) its shares at their current net asset value, which depends on the market value of the fund's portfolio of securities at the time. Mutual funds generally continuously offer new shares to investors. Mutual to stock conversion Procedure by savings institutions to shift the ownership structure from depositors to shareholders. Mutually exclusive project A project whose acceptance precludes the acceptance of one or more alternative projects. Acceptance of one project will rule out the acceptance of the other. Myopic hypothesis of equity valuation A hypothesis that states that the capital market has a short-run focus on the current quarter’s or the current year’s reported earnings, rather than a focus on a multiyear horizon period. 139

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N Naive diversification A strategy whereby an investor simply invests in a number of different assets in the hope that the variance of the expected return on the portfolio is lowered. In contrast, mathematical programming can be used to select the best possible investment weights. See also Markowitz diversification. Narrow money An informal name for M1, or sometimes M2. NASDAQ The computer-linked price quotation system for the OTC market. Near money An asset that is immediately transferable and may be used to settle some but not all debts, for example, bill of exchange. Negative amortization When the periodic payments on a loan are not sufficient to pay the interest which has accumulated during the previous period resulting in an increase rather than a decrease in the amount owing on the mortgage. Negative covenant Part of the indenture or loan agreement that limits or prohibits actions that the company may take. Negotiable certificate of deposit A large-denomination investment in a negotiable time deposit at a commercial bank or savings institution paying a fixed or variable rate of interest for a specified time period. Negotiable order of withdrawal (NOW) accounts Deposit accounts that allow unlimited checking and pay interest. Negotiated market A market involving dealers, such as the OTC. Negotiated offer The issuing firm negotiates a deal with one underwriter to offer a new issue rather than taking competitive bidding. 140

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Net asset value per share The market value of an investment company’s assets after deducting liabilities, divided by the number of shares outstanding. Net cash balance Beginning cash balance plus cash receipts minus cash disbursements. Net cash flow The cash, a business generates, as distinct from the earnings - a laudable objective. Net change in cash Calculated by adding cash from operating, investing, and financing activities and foreign exchange effects from the statement of cash flows. Net exposure In the context of futures markets, the difference between asset and liability position. Net float The difference in taka between the balance shown in a firm’s (or individual’s) checkbook balance and the balance on the bank’s books. Net income approach States that it is assumed the firm can raise all the funds it desires at a constant cost of debt and equity. Since debt tends to have a lower cost than equity, the more debt utilized, the lower the overall cost of capital and the higher the valuation of the firm. Net interest margin Estimated as interest revenues minus interest expenses, divided by assets. Net investment Gross, or total investment minus depreciation. Net lease A rental agreement wherein the tenant pays a portion of the expenses of the property in addition to the rent set out in the agreement; the landlord receives the full amount of the rent paid with no liability for expenses. Net national product The gross national product less depreciation during a specified period. 141

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Net present value The difference between the present value of future cash flows associated with a project and the present value of the initial investments to acquire that project. Net profit margin Ratio that measures net income per taka of sales; it is calculated by dividing net income by sales. Net profit The profit of an organization when all receipts and expenses have been taken into account. Net working capital The portion of firm’s current assets financed with long term funds. It equals current asset minus current liabilities. Net worth The value of an organization when its liabilities have been deducted from the value of its assets. Net-net-net lease A lease agreement where the tenant is required to pay for property taxes, insurance and maintenance in addition to rent. In this case, the tenant bears the entire risk of unexpected changes in operating expenses. Netting Reducing transfers of funds between subsidiaries or separate companies to a net amount. Neutrality A principle which is defined in terms of the imposition taxes in such a manner that they do not charge private sector, allocational behavior. Nikkei 225 Stock Average A market index based on 225 of the largest companies on the Tokyo Stock Exchange. Noise traders Uniformed investors whose buy and sell positions push the stock price away from its fundamental value. 142

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Noise trading Theory used to explain that stock prices may deviate from their fundamental values as a result of the buy and sell; positions of informed investors (called “noise traders”); a market correction may not eliminate the discrepancy if the informed traders are unwilling to capitalize on the discrepancy (because of uncertainty surrounding the stock’s fundamental value). No-load fund A mutual fund that does not impose a sales commission. Nominal (stated) interest rate A rate of interest quoted for a year that has not been adjusted for frequency of compounding. If interest is compounded more than once a year, the effective interest rate will be higher than the nominal rate. Nominal cash flow A cash flow expressed in nominal terms if the actual taka to be received are given. Nominal GDP GDP in current taka without any inflationary adjustment. Nominal yield A return equal to the coupon rate on a bond. Nonconforming mortgage A mortgage that does not meet the underwriting standards for inclusion in a pool that is collateral for a mortgage pass-through security issued or guaranteed by an agency. Non-depository financial institutions Financial institutions that generate funds from sources other than deposits such as by issuing securities, and then lend the funds to individuals and small businesses. Non-diversifiable risk The relevant portion of an asset’s risk attributable to factors that affect all firms; it cannot be eliminated through diversification. Non-financial corporation A firm not in the banking or financial service industry. The term would primarily apply to manufacturing, wholesaling, and retail firms. 143

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Non-institutional sources of fund No existence of formal financial market. These are family members, relatives, friends, professional lenders, spontaneous financing and so on. Non-interest expenses Expenses those are unrelated to interest payments on deposits or borrowed funds, such as salaries and office equipments. Non-interest income Income resulting from fees charged or services provided. Nonlinear break-even analysis Break-even analysis based on the assumption that cost and revenue relationships to quantity may vary at different levels of operation. Non-marketed claims Claims that cannot be easily bought and sold in financial markets such as those of the government and litigants in lawsuits. Nonproductive loan A loan that increases spending power, but is used in business that does not directly increase the economy's output, such as a leveraged buyout loan. Nonpublic information Information about a company that is not known by the general public, which will have a definite impact on the stock price when released. See Insider trading. Non-recourse Antithesis of recourse. Non-systematic risk Risk attributable to factors unique to a security. Normal distribution Symmetric bell-shaped frequency distribution that can be defined by its mean and standard deviation. Normal yield curve An upward-sloping yield curve that shows the long-term interest rates are higher than short-term rates. Normality The way things are under normal circumstances. 144

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Normalization of earnings The process of determining the earning power of a firm. For having an idea about the earning power of a firm, reported net income should be examined for possible adjustments. Normalized income Earnings that have been adjusted in order to take into account the effect of cycles in the economy. Normative economics Deals with the problem of which system works the best. Nostro account A bank account conducted by a local bank with a bank in another country, usually in the currency of the country. Note issuance facility Commitment in which a bank agrees to purchase the commercial paper of a firm if the firm cannot place its paper in the market at an acceptable interest rate. Notes payable A trade credit financing arrangement where the buyer is asked to sign a note that evidences his debt to the seller. This arrangement is employed where the seller wants the buyer to recognize his debt formally. Notes to the financial statements A detailed set of notes immediately following the financial statements in an annual report that explain and expand on the information in the financial statements. Notional income Income that is not received as such, but nevertheless has a value, which can be converted into cash terms for taxation purposes. Notional principal Value to which interest rates from interest rate swaps are applied to determine the interest payments involved. NPV profile A graph showing the relationship between a project’s NPV and the discount rate employed. NPV rule An investment decision rule that accepts an investment if the investment’s NPV is positive. 145

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O Odd lot A trading order for less than 100 shares of stock. Compare round lot. Odd-lot dealers Brokers who combine odd lots of securities from multiple buy or sell orders into round lots and execute transactions in those round lots. Odd-lot theory The theory that net buying of small investors is a bearish signal for a stock. Off-balance sheet financing Hidden form of debt without being shown as a liability. Old-line factoring Factoring arrangement that provides collection, insurance, and finance for accounts receivable. Oligopoly A market that is dominated by a few producers each of which has some influence/control over the market. Notable is interdependence of price and output decisions between these companies. If one company wishes to raise prices, it has to consider how the other dominant players will react. Oligopsony A market characterized by a small number of large buyers who control all purchases and therefore the market price of a good or service. Open account A trade credit financing arrangement where the seller ships goods to the buyer along with an invoice that specifies the goods shipped, the price, the total amount due, and the terms of the sale. The main feature of open account credit is that the buyer doesn’t sign a formal debt instrument evidencing the amount that he owes the seller. The seller extends the credit based upon his credit investigation of the buyer. Open economy An economy that is exposed to open to international trade in goods and services, as well as international capital flows, i.e. it has liberalized current and capital accounts. 146

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Open market desk Division of the New York Federal District Bank that is responsible for conducting open market operations. Open market operations The purchase and sale of government and other securities by a central bank in order to influence domestic liquidity conditions. An open market purchase injects liquidity; an open market sale reduces liquidity. Open order Order to buy or sell shares remains in effect until the broker is notified otherwise. Also known as good till cancelled. Open-end fund Mutual fund that continually creates new shares on demand. Mutual fund shareholders buy the funds at net asset value and may redeem them at any time at the prevailing market prices. Operating activities Sequence of events and decisions that create the firm’s cash inflows and cash outflows. These activities include buying and payment for raw materials, manufacturing and selling a product, and collecting cash. Operating assets Another term for working capital. Operating break-even analysis A method of determining the point at which sales will just cover operating costs; that is, the point at which the firm’s production and sales operations will break even. Operating break-even point The level of production and sales where operating income is zero; it is the point where revenues from sales just equal total operating costs. Operating cash flows Earnings before depreciation minus taxes. Measures the cash generated from operations, not counting capital spending or working capital requirements. Operating cycle The average time between the acquisition of materials or services and the final cash realization from that acquisition; or, the time interval between the arrival of inventory stock and the date when cash is collected from receivables. 147

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Operating leverage The existence of fixed operating costs, such that a change in sales will produce a larger change in operating income (EBIT). Operational lease A cancelable contractual arrangement whereby the lessee agrees to make the periodic payments to the lessor for five or fewer years for an asset’s services. Operational risk The risk of losses because of inadequate management or controls. Opportunity cost of float The lost opportunity for investment, caused by mail float, at-firm float, clearing float, is called the opportunity cost of capital. It is determined by multiplying the total float in taka times the required rate of return. Opportunity cost The cost associated with opportunities that are foregone by not putting the firm’s resources to their highest value use. Opportunity set The possible expected return-standard deviation parts of all portfolios that can be constructed from a given set of assets. Also called feasible set. Optimal portfolio The portfolio on the efficient frontier that has the highest utility for a given investor. It lies at the point of tangency between the efficient frontier and the curve with the investor’s highest possible utility. Optimal social allocation Point for the society where marginal cost equal to average revenues. Optimum capital structure A capital structure with the best possible mix of debt, preferred stock and common equity. The optimum mix should provide the lowest possible cost of capital to the firm. Optimum terms of sale A set of terms of sale for a product or service that results in the highest possible net present value to the selling from that product or service. Option premium Price paid for an option contract. 148

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Option An agreement that gives one party the unilateral right to buy (call option) or sell (put option) a specified quantity at a specified price (the exercise price) until a specified maturity date. Order point The order quantity to which inventory must fall in order to signal that an order must be placed to replenish an item. Order Instruction to a broker/dealer to buy, sell, deliver, or receive securities or commodities that commits the issuer of the "order" to the terms specified. Ordinary innovation A new product with little technological change. Organized exchange Visible marketplace for secondary market transactions. Original issue discount bonds Synonymous to zero-coupon bond. Origination fee A fee expressed in points that a mortgage originator charges the borrower for originating the loan. Origination Decisions by a firm (with the help of a securities firm) on how much stock or bonds to issue, the type of stock (or bonds) to be issued, and the price at which the stock (or bonds) should be sold. Out of the money A call option whose premium is below the exercise price or a put option whose premium is above the exercise price. Outlier An observation which appears to be inconsistent with the reminder of that set of data. Outsourcing Subcontracting a certain business operation to an outside firm instead of doing it ‘in-house’. Outstanding stock Shares of common stock currently under ownership of the firm’s shareholders. 149

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Over subscribed issue Investors are not able to buy all the shares they want, so underwriters must allocate the shares among investors. This occurs when a new issue is underpriced. Over subscription privilege Allows shareholders to purchase unsubscribed shares in rights offering at the subscription price Over the counter market Market used to facilitate transactions of securities not listed on organized exchanges. Overdraft A method of borrowing from a bank where the borrower is given permission by his/her banker to draw checks for an agreed sum for a specified period in excess of the amount standing to the credit of his/her account. Overhead The costs associated with providing and maintaining a manufacturing or working environment. For example, renting the building, heating and lighting the working area, supervision costs and maintenance of the facilities. It includes indirect labor and indirect material costs. Overly optimistic Firms that disclose information more than mandated which has a chance of being false or misleading. Overnight loan A loan made by a bank to a bill broker to enable the broker to take up bill of exchange. Initially the loan will be repayable the following day but it is usually renewable. If it is not, the broker must turn to the lender of last resort, i.e. the Bangladesh Bank. Overnight repo A method of overcoming a short-term shortage of funds on the money market using repurchase agreement on an overnight basis.

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P Package mortgage A mortgage on a house and property in the house. Pac-man strategy A form of tender offer under which the firm under attack becomes the attacker. Paid-in capital Capital received from investors in exchange for stock, but not stock from capital generated from earnings or donated. This account includes capital stock and contributions of stockholders credited to accounts other than capital stock. It would also include surplus resulting from recapitalization. Par value A relatively useless value arbitrarily placed on stock in the corporate charter. It is the stated, face or nominal value of a security. Parallel bonds Fixed income instruments denominated in the respective currencies of the countries where they are placed. Parallel loan A process whereby two companies in different countries borrow each other's currency for a specific period of time, and repay the other's currency at an agreed maturity for the purpose of reducing foreign exchange risk. Also referred to as back-to-back loans. Parameter A model is a combination of variables, such as GDP growth, and coefficients which multiply these variables. The coefficients are often estimated from the data. These coefficients are called parameters. Parent company A company that controls subsidiaries through its ownership of voting stock, as well as runs its own business. Pareto efficiency An allocation of goods and services in which one person must be made worse off in order to make another person better off. 151

DISCOVERING FINANCE

Parking Putting money into safe investments such as money market investments while deciding where to invest the money. Participating convertible preferred stock Preferred stock that can be converted into common stock at the option of the holder. In contrast, to the usual preferred stock, the value of the preferred stock is refunded to the holder. That is, one gets conversion plus the value of the stock. Participating dividend Dividend received from ownership of participating preferred stock. Participating life insurance policy Life insurance that pays dividends to policyholders depending on the company's success as provided by few claims and profitable underwritings and investments. Participating preferred stock Preferred stock that provides the holder with a specified dividend plus the right to additional earnings under specified conditions. Participation certificates Certificates sold by the Federal Home Loan Mortgage Association; the proceeds are used to purchase conventional mortgages from financial institutions. Participation loan A large loan made by a group of lenders, that enables a borrower to obtain financing above the legal lending limit of an individual lender. Partner Business associate who shares equity in a firm. Partnership Shared ownership among two or more individuals, some of whom may, but do not necessarily, have limited liability with respect to obligations of the group. Pass through securities Pools of loans (such as home mortgage loans) sold in one package. Owners of pass through receive all of the principal and interest payments made by the borrowers. Passive bond A bond without any interest yield. 152

DISCOVERING FINANCE

Passive investment strategy Investment strategy that takes market prices of securities as set rather than attempting to beat the market by exploiting superior information or insight. Passive managers act to maintain an appropriate risk-return balance given market opportunities. Passive management Buying and holding a diversified portfolio without attempting to identify mispriced securities. Pass-through coupon rate The interest rate paid on a securitized pool of assets, which is less than the rate paid on the underlying loans by an amount equal to the servicing and guaranteeing fees. Patent Grants holder protection from others making, using, or selling similar idea. Pay back period The period of time required for cumulative expected cash flows from an investment project to equal the initial cash outflow. It does not consider the time-value-of-money concept. Pay out ratio The percentage share of earnings paid out to the shareholders in the form of cash dividend. Payable through draft A check-like instrument that is drawn against the payor and not against a bank as is a check. After a PTD is presented to a bank, the payor gets to decide whether to honor or refuse payment. Payment mechanism A financial arrangement by which the buyer of a commodity pays the seller with some form of money. Payment pattern approach A receipt forecasting method where the analyst determines (using historical data) the proportion of customers that pay at various times after the date of sale, and from this information he/she forecasts future receipts. Payment pattern Describes the lag collection pattern of receivables, for instance the probability that a 72-day-old account will still be unpaid when it is 73 days old. 153

DISCOVERING FINANCE

Payment-in-kind bond A form of deferred coupon structure that gives the issuer an option to pay cash at a coupon payment date or to give the bond holder a similar bond. Payment-to-income ratio Ratio of the monthly payment on the loan amount being applied for plus other housing expenses and the borrower's income. Peak The transition from the end of an expansion to the start of a contraction. Pecking-order view (of capital structure) The argument that external financing transactions costs, especially those associated with the problem of adverse selection, create a dynamic environment in which firms have a preference, or peckingorder of preferred sources of financing, when all else is equal. Internally generated funds are the most preferred, followed by new debt, and debt-equity hybrids. Finally, new equity is at the least preferred source. Peer group comparison A method of measuring portfolio performance by collecting the returns produced by a representative universe of investors over a specific period of time and displaying them in a simple box plot format. Pegging Making transactions in a security, currency, or commodity in order to stabilize or target its value through market intervention. Pension fund A fund set up to pay the pension benefits of a company's workers after retirement. Percentage lease A rental agreement in which the tenant's monthly payment is a percentage of the gross sales of the tenant's business (although a minimum payment is usually set out in the agreement). Percentiles Quantiles that divide the data into 100 equal parts.

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Perfect competition A competitive marketplace where there are many competing firms producing homogeneous (similar) products and barriers to entry and exit in the long run are absent. Perfect competition is characterized by the absence of any one firm that may be large enough to exert an influence on the market price and conditions. In the long-run equilibrium, only normal profits are made. Perfect market assumptions Conditions under which the law of one price holds. The assumptions include frictionless markets, rational investors, and equal access to market prices and information. Perfect markets Markets in which all information about any securities for sale would be freely and continuously available to investors. Furthermore, all securities for sale could be broken down into any size desired by investors, and transaction costs would be nonexistent. Performance attribution A part of portfolio evaluation that seeks to determine why success or failure occurred. Performance presentation standards A comprehensive set of reporting guidelines created by the Association for Investment Management and Research (AIMR), in an effort to fulfil the call for uniform, accurate, and consistent performance reporting. Performance report A document that shows budgeted expectations, actual results, and deviations from the budget for some segment of the firm. Performance shares Shares of stock given to management as a result of meeting stated performance goals. Permanent current assets Current assets that will not be reduced or converted to cash within the normal operating cycle of the firm. Even if from a strict accounting standpoint the assets should be removed from the current assets category, they generally are not. 155

DISCOVERING FINANCE

Permanent need Financing requirements for the firm’s fixed assets plus the permanent portion of the firm’s current needs. Permanent working capital The amount of current assets required to meet a firm’s long-term minimum needs. Perpetual preferred stock Preferred stock that does not have any maturity date. Perpetuity An annuity with an infinite life, making continual annual payments. Perquisites Management amenities such as big office, a company car, or expenseaccount meals. Perks are agency costs of equity, because managers of the firm are agents of the stockholders. Petty cash The amount of cash that an organization keeps in notes or coins on its premises to pay small items of expense. Physical capital Capital that has physical existence and used for long-term investment decision, such as land, machinery etc. Pie model of capital structure A model of the debt-equity ratio of a firm, graphically depicted in slices of a pie that represents the value of the firm in the capital markets. Pink Sheets The US National Quotation Bureau publications listing the bid and ask prices of the securities available on the over-the-counter markets. Pipeline risk In mortgage lending, the risk associated with originating mortgages. Plain vanilla swap The periodic exchanges of fixed-rate payments for floating-rate payments. Planning horizon The length of time it takes to conceive, develop, and complete a project and to recover the cost of the project on a discounted cash flow basis. 156

DISCOVERING FINANCE

Pledge The use of a firm’s assets (A/C receivable) as security, or collateral, to obtain a short-term loan. Plowback ratio The proportion of the firm's earning that is reinvested in the business. Plug A variable that handles financial slack in the financial plan. Point-and-figure chart A plot of stock prices showing only significant price changes. Point-of-sales terminals Computer terminals in retail stores that either allow digital input or use optical scanners. The terminals may be used for inventory control or other purposes. Poison pill A device used by a company to make itself less attractive as a takeover candidate. Its poison, so to speak, is released when the buyer takes a sufficient bite of the target firm. Poison puts Provisions allowing bondholders to cash in certain takeover situations. Pooling of interest Accounting method of reporting acquisitions under which the balance sheets of the two companies are simply added together item by item. Portfolio insurance Program trading combined with the trading of stock index future to hedge against market movements. Portfolio management The second step in the investment decision process, involving the management of a group of assets (i.e., a portfolio) as a unit. Portfolio weights Percentages of portfolio funds invested in each security, summing to 1. Portfolio Holding of more than one stock, bond, real estate asset or other asset by an investor.

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Position traders Traders of financial futures contracts who maintain their futures positions for relatively long periods before closing them out. Positive covenants Part of the indenture or loan agreement that specifies the actions that the company must abide by. Positive economics Deals with the cause and effect statements. It is a tool used in normative economics. Post Particular place on the floor of an exchange where transactions in stocks listed on the exchange occur. Postaudit Evaluation of an investment project after it has been undertaken. Pre-authorized debit The transfer of funds from a payor’s bank account on a specified date to the payee’s bank account; the transfer is limited by the payee with the payor’s advance authorization. Precautionary motive A desire to hold cash in order to be able to deal effectively with unexpected events that require cash outlay. Pre-emptive right Priority given to a particular group of people to purchase newly issued stock before other investors are given the opportunity to purchase the stock. Preferred habitat theory A biased expectations theory which believes that the term structure reflects the expectation of the future path of interest rates as well as risk premium. The theory rejects the assertion that the risk premium must rise uniformly with maturity, but instead profits that to the extent that the demand for and supply of funds do not match for a given maturity range, some participants will shift to maturities showing the opposite imbalances, as long as they are compensated by an appropriate risk premium whose magnitude will reflect the extent of aversion to either price or reinvestment risk. 158

DISCOVERING FINANCE

Preferred stock A special form of stock having a fixed periodic dividend that must be paid prior to payment of any common stock dividends. Prepayment clause A provision in a promissory note, mortgage, or deed of trust allowing the borrower the privilege of providing payment full before maturity without penalty. Prepayment penalty Penalty that is imposed to the borrower, if the borrower desires to prepay the loan. Prepayment risk The risk that the loan will be prepaid when interest rates fall below the loan contract rate. Present value interest factor Factor that represents the present value of Tk.1 for a specified period and interest rate. Present value The current value of a future amount of money, or a series of payments, evaluated at a given interest rate. Price / sales ratio A company’s total market value divided by its sales. Price discovery process An economic function of financial markets that signals how the funds in the economy should be allocated among financial assets. Price earning ratio The ratio of the price per share to earnings per share; shows the taka amount investors will pay for Tk.1 of current earnings. Price level adjusted mortgage An adjustable or variable payment loan that uses the rate of inflation as an index. Price pegging A process, by which an underwriting syndicate places orders to buy an underwritten security in order to keep the demand for the issue, and therefore the price at the desired level. 159

DISCOVERING FINANCE

Price takers Individuals who respond to rates and prices by acting as though they have no influence on them. Price to book value ratio The ratio of stock price to per share stockholders’ equity. Price-level-adjusted mortgage Similar to the traditional mortgage except that monthly payments are designed to be level in purchasing power rather than in nominal terms, and that the fixed rate is the real rate rather than the nominal rate. Price-weighted series An indicator series calculated as an arithmetic average of the current prices of the sampled securities. Primary market Financial market in which securities are initially issued; the only market in which the issuer is directly involved in the transaction. Prime rate The lowest interest rate charged by lending banks for business loans to their most important and reliable business borrowers. Principal The amount of money on which interest is paid. Private placement A new issue sold directly to a small group of investors; usually institutions without using underwriting services. Privatization Process of converting government ownership of business to private ownership. Probability distribution A function that describes all the values a random variable can take and the probability associated with each. Also called a probability function. Probit and logit models Models that estimate the probability of a zero-one discrete outcome, given the values of the independent variables used to explain that outcome. Processing float The delay between the receipt of a check by the payee and its deposit in the firm’s account. 160

DISCOVERING FINANCE

Producer surplus Difference between price at which producers are willing and able to supply a good (indicated by the position of the supply curve) and the price they actually receive when selling it. Surplus represented by area above the supply curve and below the market price. Product extension merger Combination of two firms with non-competing products. Production opportunities The return available within an economy from investment in productive (cash-generating) assets. Profit maximization One of the objectives of Financial Management. Here profit maximization means accounting profit maximization. But, nevertheless, it is not the ultimate objective of a firm. Profitability index The ratio of a project’s future net cash flows to the project’s initial cash outflow. Profitability ratios A group of ratios showing the effect of liquidity, asset management, and debt management on operating results. Profitability The relationship between revenues and costs. Program (or basket) trading The computer-assisted and simultaneous sale (or purchase) of shares in a large number of stocks. Progressive taxes Tax system under which the proportion of income paid in tax rises as income rises. Direct taxes are hence progressive taxes. With a progressive tax, the marginal rate of tax exceeds the average rate of tax. One of the effects of a progressive tax is that it makes the post tax distribution less dispersed than the pre-tax distribution. Project financing A variety of financing arrangements for large individual investment projects.

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Projective funding Strategy that offers pension fund managers some flexibilities in constructing a pension portfolio that can benefit from expected market and interest rate movements. Promissory note An unconditional promise between a maker and a payee whereby the maker agrees to pay a certain sum of money either on demand or on a specific date. Synonymous to notes payable. Proportion of another account A forecasting technique that is used to project financial variables that are expected to vary directly with the level of another variable. Proportional taxes Tax system under which the proportion of income paid in tax remains constant as income changes. With proportional taxes, the marginal rate of tax equals the average rate of tax. Prospectus A pamphlet that discloses relevant financial data on the firm and provisions applicable to the security. Protectionism Notion that governments should protect domestic industry from import competition by means of tariffs, quotas, and other trade barriers. Protective covenants Restrictions enforced by a bond indenture that protect the bondholders from an increase in risk; such restrictions may include limits on the dividends paid, the salaries paid, and the additional debt the firm can issue. Protective put A strategy in which a put option is purchased as a supplement to a long position in an underlying asset or portfolio of assets. Proximate cause The dominant and effective cause for an event or chain of events that results in a claim on an insurance policy. Proxy battle/contest The attempt by a management group to gain control of management of a firm through the solicitation of a sufficient number of corporate votes. 162

DISCOVERING FINANCE

Proxy statement A statement conferring the votes of a stockholder or stockholders to another party or parties. Proxy A grant of authority by the shareholder to transfer his or her voting rights to someone else. Prudence concept A principle of accounting designed to ensure that unrealized profits are not distributed to shareholders by way of dividend. According to this principle, unrealized profits are not taken account of until they realized; on the other hand foreseeable losses are taken account of as soon as they can be foreseen. Public bond A long-term, fixed-obligation debt security in a convenient, affordable denomination for sale to individuals and financial institutions. Public finance markets Markets in which national, state, and local governments raise money for highways, education, welfare, and other public activities. Public finance The financing of the goods and services provided by national and local government through taxation and other means. Public order An order to buy or sell shares of an exchange listed stock that a member firm is executing for one of its customers. Public placement The sale of securities to the public through the investment bankerunderwriter process. Public placements must be registered with the Securities and Exchange Commission. Public warehousing A financing arrangement for inventory management in which inventory, used as collateral, is stored with and controlled by an independent warehousing company. Purchase accounting Method of reporting acquisitions requiring that the assets of the acquired firm be reported at their fair market value on the books of the acquiring firm. 163

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Purchasing power parity Theory that suggests exchange rates adjust, on average, by a percentage that reflects the inflation differential between the two countries of concern. Purchasing power risk The risk attached to potential purchasing power of the expected cash flow. Also called inflation risk. Pure expectation theory Theory suggesting that the shape of the yield curve is determined solely by interest rates. Pure play An investment concentrated in one line of business. The extreme opposite of a pure play would be an investment in a conglomerate. Pure yield pickup swap Moving to higher-yield bonds, usually with longer maturities. Pure-play technique Finding a firm engaged solely in the line of business represented by the project and then using that firm’s beta as an estimate of the nondiversifiable risk of the project. Put bond A bond that the holder may choose either to exchange for par value at some date or to extend for a given number of years. Put option The right to sell an asset at a specified exercise price on or before a specified expiration date. Put/call ratio Ratio of put options to call options outstanding on a stock. Putable bonds Bonds that grant the bondholder the right to sell the issue back to the issuer at par value on designated dates. Putable swap Swap of fixed-rate payments for floating rate payments whereby the party making floating-rate payments has the right to terminate the swap. Put-call parity The relationships that must exist in an efficient market between the prices for put and call options having the same underlying asset, exercise price, and expiration date. 164

DISCOVERING FINANCE

Q Q ratio Market value of firm's assets divided by replacement value of firm's assets. Also known as Tobin’s Q ratio. Quality of earnings The degree of conservatism in a firm’s reported earnings. For example, increased earnings due to increased sales and cost controls, as compared to artificial profits created by inflation of inventory or other asset prices. Quantile In a frequency distribution, the value at or below which a stated fraction of the data lies. Quantitative analysis An assessment of specific measurable securities or investment factors, such as cost of capital, value of assets; and projections of sales, costs, earnings, and profits. Combined with more subjective or qualitative considerations (such as management effectiveness), quantitative analysis can enhance investment decisions and portfolios. Quantitative research Use of advanced econometric and mathematical valuation models to identify the firms with the best possible prospectives. Antithesis of qualitative research. Quarterly compounding Compounding of interest over four periods within the year. Quartiles Quantiles that divide the data into 4 equal parts. Quasi-contract A legally binding obligation that one party has to another, as determined by a court, although no formal contract exists between them. Quid pro quo An arrangement allowing a firm to use research from another firm at no cost in exchange for executing all of its trades with the firm that provides the research. 165

DISCOVERING FINANCE

Quintiles Quantiles that divide the data into 5 equal parts. Quote price Price at which a broker is willing to sell.

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R Random walk Theory that states that the price of a stock follows a random walk, meaning that, security price changes from one period to next are independent and identically distributed. That is, the behavior of stock market prices is unpredictable and that there is no relationship between the present price of a stock and its future price. It is also known as efficient market theory. Range of earnings chart Graph relating earnings per share (EPS) to earnings before interest and taxes (EBIT) under alternative financing options. Range The high and low prices, or high and low bids and offers, recorded during a specified time. Ratchet effect An irreversible change to an economic variable, such as prices, wages, exchange rates, etc. For example, once a price or wage has been forced up by some temporary economic pressure, it is unlikely to fall back when the pressures is reduced. This rise may be reflected in parallel sympathetic rises throughout the economy, this fuelling inflation. Rate anticipation swap A switch made in response to forecasts of interest rate changes. Ratio analysis A way of expressing relationships between a firm's accounting numbers and their trends over time that analysts use to establish values and evaluate risks. Raw materials inventory Items purchased by the firm for use in the manufacture of a finished product. Ready cash Synonymous to debit card. Real assets Assets used to produce goods and services. Examples of real assets are land, buildings, machines, knowledge etc. 167

DISCOVERING FINANCE

Real estate agent A trained professional involved in the purchase, sale and marketing of real property. The "listing agent" acts for the vendor, the "selling agent" for the successful purchaser. Real estate broker A real estate professional who is licensed to run a real estate firm, to hold trust funds, etc. Real estate commission The fee paid to the real estate agents after a transaction. Real estate investment trusts Investment funds that hold portfolios of real estate investments. Real estate Term for land and all fixtures to land, including buildings and other improvements. Real GDP Inflation adjusted GDP stated in current taka. Real rate of interest Minimum rate of interest that must be earned to allure the investor to invest the resources. Alternatively it is the nominal interest rate adjusted for inflation. Real rate of return The rate of return that an investor demands for giving up the current use of his or her funds on a noninflation-adjusted basis. It is payment for forgoing current consumption. Realized compound yield Yield earned based on actual reinvestment rates. Realized gain/loss A capital gain or loss on securities held in a portfolio that has become actual by the sale or other type of surrender of one or many securities. Realized income The earning or income related to a transaction as distinguished from a paper gain. 168

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Rebalancing Realigning the proportions of assets in a portfolio as needed. As interest rates and asset durations continually change, managers must rebalance that is change the composition of the portfolio of fixed– income assets to realign its duration with the duration to the obligation. Re-capitalization An alternation of a firm’s capital structure. For example, a firm may sell bonds in order to acquire cash necessary to repurchase some of its outstanding common stock. Receipts and disbursements approach An approach to cash flows in generating the cash forecast where the amounts of cash expected to be received and disbursed by the firm over the periods chosen for the forecast. Recognition lag Lag time between when a problem arises and when it is recognized by the government. Recourse The basis on which accounts receivables are sold to a factor with the understanding that the factor shall not bear credit risks on the purchased accounts. Red herring A preliminary prospectus that must be filed by the firm attempting to sell the securities to the Securities and Exchange Commission, describing the issue and the prospects of the company. Redeemable Eligible for redemption under the terms of an indenture. Redemption charge The commission a mutual fund charges an investor who is redeeming shares. For example, a 2% redemption charge (also called a back end load) on the sale of shares valued at Tk.100 will result in payment of Tk.98 (or 98% of the value) to the investor. This charge may decline or be eliminated as shares are held for longer time periods. Redemption date The date on which a bond matures or is redeemed. Redemption Repayment of a debt security or preferred stock issue, at or before maturity, at par or at a premium price. 169

DISCOVERING FINANCE

Refunding The process of replacing outstanding bonds, typically to issue new securities at a lower interest rate than those replaced. Registered bonds Bonds that require the issuer to maintain records of who owns the bonds and automatically send coupon payments. Registered competitive market makers Members of an exchange who are allowed to use their memberships to buy or sell for their own account within the specific trading obligations set down by the exchange. Registrar The appointed agent of a company whose task is to keep a register of a share and stockholders of that company. The functions of registrar are often performed by a subsidiary company of a bank Registration fee Small fees charged by a company whose shares are quoted on a stock exchange when it is requested to register the name of a new owner of shares. Regressive taxes Tax system for which the proportion of income paid in tax decreases as income rises. In the case of a regressive tax, those in lower income groups tend to face a higher tax burden than those in higher income groups. Indirect taxes are an example. Regular cash dividend Cash payment by firm to its shareholders. Regulation Q Bank regulation that limits the interest rate banks could pay on deposit. Regulatory risk The risk that regulators will change the rules so as to impact the earnings of financial institutions unfavourably. Reimbursement To pay back to someone, e.g. to pay an employee for travel expenses that was paid by the employee out of that employees own personal funds.

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Reinsurance Manner by which insurance companies can allocate a portion of their return and risk to other insurance companies, which share in insuring large policies. Reinvestment rate risk The risk that a decline in interest rates will lead to lower income when bonds mature and funds are reinvested. Reinvestment rate The rate of return at which cash flows from an investment are reinvested. Relative strength Recent performance of a given stock or industry compared to that of a broader market index. Relevant cost Cost that is pertinent to the decision being made. Remainder A future interest in property which only takes effect either at a certain time or upon the occurrence of a certain event, commonly the death of the life tenant; a future interest that is effective and enjoyable after the termination of another estate. For example, Polok conveys land to Riaz for life, remainder to Shamol and his heirs. Remote disbursement A system in which the firm directs checks to be drawn on a bank that is geographically remote from its customer so as to maximize checkclearing time. Rental The periodic payments made by the lessee to the lessor for using the lessor’s asset. Reorder point The level of inventory at which order for its replenishment should be placed. Re-organization Financial restructuring of a failed firm. Both the firm's asset structure and its financial structure are changed to reflect their true value and claims are settled. 171

DISCOVERING FINANCE

Repatriation earnings Earnings returned to the multinational parent company in the form of dividends. Replacement decision The capital budgeting decision on whether to replace an old asset with a new one. Replacement value The cost of replacing all assets of a company. Repurchase agreement An agreement with a commitment by the seller (dealer) to buy a security back from the purchaser (customer) at a specified price at a designated future date. Also called a Repo, it represents a collateralized short-term loan for which, where the collateral may be a Treasury security, money market instrument or mortgage-backed security. Required rate of return The return that compensates investors for their time, the expected rate of inflation, and the uncertainty of the return. Reserve borrowing capacity The ability to borrow money at a reasonable cost when good investment opportunities arise; firms often use less debt than specified by the MM optimal capital structure to ensure that they can obtain debt capital later if they need to do so. Reserve price The price below which a seller is not prepared to sell, especially at an auction. Reserve requirement ratio Percentage of deposit that commercial banks must maintain as required reserves. This ratio is sometimes used by the central bank as monetary policy tool. Reserve requirements The percentage of deposits that, by central banks rules, depository institutions must keep in the form of cash or deposits in central bank. Reserves The sum of the cash and deposits in the central bank that a depository institution holds for the purpose of meeting reserve requirements. 172

DISCOVERING FINANCE

Residual claim Claim to a share of earnings after debt obligations have been satisfied. Residual dividend approach An approach that suggests a firm to pay dividends if and only if acceptable investment opportunities for those funds are currently unavailable. Residual income security A security that has last claim on company income. Usually the beneficiary of company growth. Residual profits An alternative to return on investment as a measure of profit centre performance, defined as income less the annual cost of the capital employed by the profit centre. Resistance level A price level above which, it is supposedly unlikely for a stock or stock index to rise. Responsibility accounting A system under which managers are given decision making authority and responsibility for each activity occurring within a specific area of the company. Restrictive covenants Provisions that place constraints on the operations of borrowers, such as restriction on working capital, fixed assets, future borrowing and payment of dividend. Restructuring The changes in the capital structure (liability and equity on the balance sheet), the selling of low-profit-margin divisions with the proceeds reinvested in better investment opportunities. Sometimes it involves the removal of the current management team to large reduction in the workforce. Restructuring has also included mergers and acquisitions. Retail banking Mass-market banking in which personal and domestic customers use local branches of the commercial banks. It typically offers a wide range of such services as personal loans, mortgages, pensions, and insurance as well as providing current accounts and savings accounts. 173

DISCOVERING FINANCE

Retail price index The measurement of the change in prices of a sample of retail goods and services in an economy. The sample chosen is aimed at being representative of the retail sector. In the calculation of indices, thousands of prices are taken for each period and indexed. A weighted average of these indices then makes up the overall price index. Weightings are calculated according to retail sector patterns. Retail repo A repurchase agreement involving a loan to a bank rather than to a company or an individual Retained earnings The amount of earnings retained and reinvested in a business and not distributed to stockholder as dividends. This fund is typically used for further expansion of business. Retention rate The percentage of present earnings held back or retained by a corporation, or one minus the dividend payout rate. Also called the retention ratio. Return on assets A measure of the productivity of assets, defined as income divided by total assets. A superior but less common definition includes interest expense and preferred dividends in the numerator. Return on equity Indicator of profitability. Determined by dividing net income by common stockholder equity. Result is shown as a percentage. Investors use ROE as a measure of how a company is using its money. ROE may be decomposed into return on assets (ROA) multiplied by financial leverage (total assets/total equity). Return on invested capital A fundamental measure of the earning power of a company that is unaffected by the way the company is financed. It is equal to earnings before interest and tax times 1 minus the tax rate, all divided by debt plus equity. Return on investment The productivity of an investment or a profit center, defined as income divided by book value of investment or profit center. 174

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Revenue bond A bond issued by a municipality to finance either a project or an enterprise in which the issuer pledges to the bondholders the revenues generated by the operation of the projects financed. Examples are hospital revenue bonds and sewer revenue bonds. Reverse repo The purchase of securities by one party from another with an agreement to sell them in the future. Reverse stock split A method used to raise the market price of a firm’s stock by exchanging a certain number of outstanding shares for a one new share of stock. Reversibility The property of the costs of buying and selling an asset that determines how quickly an investor can buy it and turn it back into cash. Reversion The right to possession (or any other interest) of the remainder of an estate for a transferor (grantor or testator) commencing upon the expiration or termination of such estate; the right of a transferor of real property to repossess it. For example, Rasel leases a home to Polok. Polok’s interest in the property is leasehold and Rasel’s interest is reversion. Upon expiration or termination of the lease, Rasel has the right to possession (reversion). Revolving collateral Accounts receivable or inventory that changes from day to day. Revolving credit agreement A formal, legal commitment to extend credit up to some maximum amount over a stated period. Revolving credit loan Synonymous to revolving L/C. Revolving line of credit In commercial banking, it is a contractual agreement between a bank and, usually, a company where the bank agrees to provide loans up to a specified maximum over a specified period, usually a year or more. In consumer banking, it is a loan account requiring monthly payments less than the full amount of the loan, and the balance is carried forward with a finance charge on that balance. 175

DISCOVERING FINANCE

Reward-to-variability ratio Sharpe’s measure of portfolio performance calculated as the ratio of excess portfolio return to the standard deviation. Reward-to-volatility ratio Treynor’s measure of portfolio performance calculated as the ratio of excess portfolio return to beta. Rights of absolute priority Specification in bankruptcy law stating that each class of claimants with a prior claim on assets in liquidation will be paid off in full before any junior claimants receive anything. Rights offering Sale of new securities where existing stockholders are given preference in purchasing new securities up to the proportion of common shares that they already owned. Rights-on The situation in which the purchase of a share of common stock includes a right attached to the stock. Risk arbitrage Traditionally, the simultaneous purchase of stock in a company being acquired and the sale of stock of the acquirer. Modern risk arbitrage focuses on capturing the spreads between the market value of an announced takeover target and the eventual price at which the acquirer will buy the target's shares. Risk averse Seeking to avoid risk. Risk aversion An unwillingness to bear risk without compensation of some form. Risk free rate The rate of return one would earn on a virtually riskless investment such as a government bond. Risk neutrality Means that investors are indifferent to whether risk is high, low or even absent. Risk premium The excess return on the risky asset that is the difference between expected return on risky assets and the return on risk free assets. 176

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Risk transfer The act of hedging a financial position so as to move some risk to another party. Risk The chance that actual outcomes may differ from those expected. Risk-adjusted discount rate A required return (discount rate) that is increased relative to the firm’s overall cost of capital for projects or groups showing greater than average risk and decreased for projects or groups showing less that average risk. Risk-return trade-off A phenomena stating assets with higher expected returns have greater risk and vice-versa. Roll-over CD A package of successive certificates of deposit. Roll-over debt A medium or long term bank loan in which the rate of interest varies with short term money market rates (such as LIBOR) because the bank has raised the loan by short term money market or inter-bank market borrowing. Ross, Stephen Developer of the Arbitrage Pricing Theory. Finance professor at MIT. Round lot Typically, 100 shares of a stock. Roundtripping A transaction that enables a company to borrow money from one source and lend it at a profit to another, by taking advantage of shortterm rise interest rates. Royalty A payment for the right to use intellectual property or natural resources. Running broker A bill broker who does not himself discount bills of exchange but acts between bill owners and discount houses or banks for a commission.

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S Safety (of principal) The likelihood of getting back the same amount of taka one originally invested (principal). Safety stock The minimum level of inventory that provides a caution against the possibility of being out -of- stock because of change in demand. Sale & lease back An arrangement whereby a firm sells its existing assets to a financial company that then leases them back to the firm. This is often done to generate cash. Sales (revenue) The inflow of resources to a business for a period from sale of goods or provision of services. Sales finance companies Finance companies that concentrate on purchasing credit contracts from retailers and dealers. Sales forecast A forecast of a firm's unit and taka sales for some future period; generally based on recent sales trends plus forecasts of the economic prospects for the nation, region, industry and so forth. Sales mix The combination of a firm's products, each expressed as a percentage of total sales taka. Salvage value The value of a capital asset at the end of a specified period. It is the current market price of an asset being considered for replacement in a capital budgeting problem. Saturday night special A merger tender offer that is made just before the market closes for the weekend and takes the target company’s officers by surprise. Savings deposit An account that pays interest, does not have a specific maturity, and can usually be withdrawn upon demand. 178

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Savings institutions Depository institutions which offer deposits accounts to surplus units, and they transfer deposited funds to deficit units by providing loans. Scale enhancing A project that is in the same risk class as the whole firm. Scenario analysis Analysis of the effect on the project of different scenarios, each scenario involving a confluence of factors. Schedule transfers system A system for frequent transfer in which firm decides a predetermined time pattern of transfers from the depository bank to the concentration bank. Scheduling Starting with data on relatively short periods and aggregating into longer periods. Scorched earth The disposal, by sale or by spin-off to shareholders, of one or more business segments. Search costs Costs in locating counterparty to a transaction. Seasonal dating Credit terms that encourage the buyer of seasonal products to take delivery before the peak sales period and to defer payment until after the peak sales period. Seasonal need Financing requirements for temporary current assets. Seasoned new issue New issues of stock after the company’s securities have previously been issued. A seasoned new issue of common stock can be made by using a cash offer or a rights offer. Seat on an exchange Term for membership in an organized stock exchange. Secondary market Financial market in which already issued securities (securities of primary markets that are not new issues) are traded. 179

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Secondary public offering A new stock offering by a specific firm that already has stock outstanding. Secondary trading The buying and selling of publicly owned securities in secondary markets, such as the New York Stock Exchange and the over-thecounter markets. Secured creditor A creditor whose obligation is backed by the pledge of some assets. In liquidation, the secured creditor receives the cash from the sale of the pledged assets to the extent of his or her loan. Secured debt A general category of debt that indicates the loan was obtained by pledging assets as collateral. It has many forms and usually offers some protective features to a given class of bondholders. Securities and Exchange Commission Government agency that regulates securities market. Securities firms Firms that provide brokerage services and investment banking services. Securitization Pooling loans into standardized securities backed by those loans, which can then be traded like any other security. Security (collateral) Asset(s) pledged by a borrower to ensure repayment of a loan. If the borrower defaults, the lender may sell the security to pay off the loan. Security analysis The first part of the investment decision process, involving the valuation and analysis of individual securities. Security market line The line that shows the relationship between risks as measured by beta and required rate of return for individual securities. SML E(r) = Rf + [E (Rm) – Rf]   where  is the market factor sensitivity and E (Rm) – Rf is the market risk premium. 180

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Security return variability The ratio between the abnormal return of a security in a specified period and the variance of abnormal return in a non-announcement period. Security Selection Decision that includes choice of specific securities within each asset class. Seed capital Usually a relatively small amount of funds needed to prove concepts and finance feasibility studies. Segmented market theory Theory that suggests investors and borrowers choose securities with maturities that satisfy their forecasted cash needs. Self financing Denotes a company that is able to finance its capital expenditure from undistributed profit rather than borrowing. Self-amortizing mortgage loan A loan which will be paid off by the end of its term, such that its term equals its amortization period. Self-liquidating assets Assets that are converted to cash within the normal operating cycle of the firm. An example is the purchase and sale of seasonal inventory. Self-liquidating loan A loan in which the use of funds will ensure a built-in or automatic repayment scheme. Sell-off The sale of a division of a company, known as a partial sell-off, or the company as a whole, known as a voluntary liquidation. Semiannual compounding Compounding of interest over two periods within the year. Semi-strong form efficiency Efficient market hypothesis that states that stock prices already reflect all publicly available information. Semi-variable costs Costs that are partially fixed but still change somewhat as volume changes. Examples are ‘utilities’ and ‘repairs and maintenance’. 181

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Semi-variance A measure of dispersion which is obtained by calculating the average of the squared deviations below the mean. Senior creditor Any creditor with a claim on income or assets prior to that of general creditors. Senior debt/note Loan or debt securities that have a claim prior to junior obligations and equity on a corporation’s assets in the event of liquidation. Seniority The order of repayment. In the event of bankruptcy, senior debt must be repaid before subordinate debt receives any payment. Sensitivity analysis A method of estimating the effect of variation in individual input variable on important outcome variables. Sensitivity analysis involves asking “what if” questions regarding the effect of one variable in a financial situation. Separation principle/property The property, introduced by James Tobin (1958), that portfolio choice can be divided into two independent tasks - (1) Determination of the optimal risky portfolio, which is a purely mathematical problem, and (2) the personal choice of the best mix of the optimal risky portfolio and the risk-free asset, which depends on a person's degree of risk aversion. Separation theorem Synonymous to two fund separation theorem. Serial bond A bond issue in which specified principal amounts become due on specified date. Share premium The difference between the higher prices paid for a share of stock and the stock’s face amount when it was issued. Shared appreciation mortgage A mortgage under which the lender receives an agreed upon percentage of the appreciation in the value of the home used as collateral for the loan. 182

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Shareholder activism Actions taken by the shareholders to correct a firm’s deficiencies so that the stock price may improve. Shareholder wealth maximization Maximization of the wealth of the firm’s shareholders through achieving the highest possible value for the firm in the marketplace. It is the overriding or primary objective of the firm and should influence all decisions of financial managers. Shark repellent Defences employed by a company to ward off potential takeover bidders-the “sharks”. Shelf registration A procedure whereby a company is permitted to register securities it plans to sell over the next two years. These securities then are sold piecemeal whenever the company chooses. Shirking The tendency to do less work when the return is smaller. Owners may have more incentive to shirk if they issue equity as opposed to debt, because they retain less ownership interest in the company and therefore, may receive a smaller return. Thus shirking is considered agency cost of equity. Short hedge The sale of financial futures contracts to hedge against a possible increase in interest rates. Short interest theory The theory that a large interest in short positions in stocks will precede a rise in the market prices, because the short positions must eventually be covered by purchases of the stock. Short interest The total number of shares currently sold short in the market. Short position The seller of a commodity or security or for a forward contract, the counterparty who will be the eventual seller of the underlying asset. Short run operating activities Events and decisions concerning the short-term finance of a firm, such as how much inventory to order and whether to offer cash terms or credit terms to customer. 183

DISCOVERING FINANCE

Short sale The sale of borrowed securities with the intention of repurchasing them later at a lower price and earning the difference. Short settlement Trade settlement made prior to the standard five-day period due to customer request. Short term financing Short term fund arrangement whose maturity period is or less than one year. Side effects Effects of a proposed project on other parts of the firm. Sight draft A commercial draft demanding immediate payment. Signal An action taken by a firm’s management that provides clues to investors about how management views the firm’s prospects. Signalling approach (on dividend policy) The argument that dividend changes are important signals to investors about changes in management's expectation about future earnings. Signalling approach Approach to the determination of optimal capital structure asserting that insiders in a firm have information that the market does not; therefore the choice of capital structure by insiders can signal information to outsiders and change the value of the firm. This theory is also called the asymmetric information approach. Signature loan A loan secured by the borrower with nothing more than the signature of that borrower. Simple interest Interest paid (earned) on only the original amount, or principal, borrowed (lent). Simulation analysis A method of assessing the total risk (variability) of outcomes based on variation in all the uncertain input variables taken simultaneously. 184

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Simulation A statistical based approach used to get a feel for risk by applying predetermined probability distributions and random numbers to estimate risky outcomes. Single index model A model that relates returns on each security to the returns on a market index. Single-country fund Investment companies, primarily closed-end funds, concentrating on the securities of a single country. Sinking fund requirement/provision A condition included in some corporate bond indentures that requires the issuer to retire a specified portion of debt each year. Sinking fund A fund to which money is added on a regular basis that is used to ensure investors confidence that promised payments will be made and that is used to redeem debt securities or preferred stock issues. Sinking-fund factor Reciprocal of interest factor for compounding annuities. Size effect The observed tendency for smaller firms to have higher stock returns than large firms. Skewed distribution Probability distribution in which an unequal number of observations lie below (negative skew) or above (positive skew) the mean. Skewness Negative skewness means there is a substantial probability of a big negative return. Positive skewness means that there is a greater-thannormal probability of a big positive return. Slow growers Large and aging companies that grow only slightly faster than the broad economy. Small card A plastic card that contains electronically stored information enabling its user to access to a system, usually for obtaining cash from an ATM. 185

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Smoothing See income smoothing. Society of Worldwide Inter-bank Financial Telecommunications (SWIFT) The major international financial telecommunications network that transmits international payment instructions as well as other financial messages. Soft costs Those extraneous costs that are not readily foreseen or budgeted for example legal fees, loan fees and interest, etc. Soft currency Currency of a country that is expected to drop in value relative to other currencies. Sole proprietorship A form of business organization. The distinguishing characteristics of a sole proprietorship include only one owner for the business (hence, "sole") and the business is unincorporated. Specialists Individuals who facilitate the trading of stock on the SEC by taking positions in specific stock; they stand ready to buy or sell these stocks on the trading floor. Speculation Purchasing risky investments that present the possibility of large profits, but also pose a higher-than-average possibility of loss. A profitable strategy over the long period if undertaken by professionals who hedge their portfolios to control the amount of risk. Speculative grade bond A bond rated BB or lower by Standard and Poor’s, or Ba or lower by Moody's, or an unrated bond. Speculative motive A desire to hold cash in order to be poised to exploit any attractive investment opportunity requiring a cash expenditure that might arise. Speculator One who attempts to anticipate price changes and, through buying and selling contracts, aims to make profits. A speculator does not use the market in connection with the production, processing, marketing, or handling of a product. 186

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Spin-off A form of divestiture resulting in a subsidiary or division becoming an independent company. Ordinarily, shares in the new company are distributed to the parent company’s shareholders on a pro rata basis. Spontaneous financing Financing that arises from the normal operations of the firm. The two major short-term sources are accounts payable and accruals. Spot commodity A commodity traded with the expectation that it will actually be delivered to the buyer, as contrasted with to a future contract that will usually expire without any physical delivery actually taking place. Spot commodities are traded in the spot market. Spot exchange rate Exchange rate between two currencies for immediate delivery. Spot market The market in which a financial asset trades for immediate delivery. Also called cash market. Spot method A financial forecasting method where it is assumed that the variable to be forecast is independent of all other variables or predetermined. Spot trade An agreement on the exchange rate today for settlement in two days. Spread income A depository institution’s margin of profit which is the difference between the rate earned on assets (loans & securities) and the cost of funds (deposits & other resources). Spread (1) The gap between bid and ask prices of a stock or other security. (2) The simultaneous purchase and sale of separate futures or options contracts for the same commodity for delivery in different months. (3) Difference between the price at which an underwriter buys an issue from a firm and the price at which the underwriter sells it to the public. (4) The price an issuer pays above a benchmark fixed-income yield to borrow money. Stag A person who applies for shares in new issues in the hope that the price when trading begins will be higher than the issue price. 187

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Stalwarts Large, well-known firms, who grow faster than the slow growers, but are not in the very rapid growth start-up stage. Stand-alone principle Investment principle that states a firm should accept or reject a project by comparing it with securities in the same risk class. Standard and Poor’s (S&P) 500 A value-weighted index of 500 large-capitalization common stocks selected from a broad cross section of U.S. industry groups. Standard cost The expected cost of producing one unit. It is, in effect a budget for one unit. Standard deviation A measure of dispersion which is simply the square root of variance of data. Standard industrial classification A worldwide used classification of business by type of economic activity. A one-to-four digit code number is assigned depending upon how narrowly the business is defined. Standardized unexpected earnings A variable used in the selection of common stocks, calculated as the ratio of unexpected earnings to standardization factor. Standby fee Amount paid to an underwriter who agrees to purchase any stock that is not subscribed to the public investor in a right offering. Standby letter of credit Agreement that backs a customer’s financial obligation. Standby underwriting An agreement whereby an underwriter agrees to purchase any stock that is not purchased by the public investors. Standstill agreement An agreement between to countries in which a debt owed by one to the other is held in abeyance until a specified date in the future. Start-up capital Financing that involved in developing and selling some initial products to determine if commercial sales are feasible. 188

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Stated interest rate Synonymous to nominal interest rate. Statement of retained earnings A statement reporting the change in the firm's retained earnings as a result of the income generated and retained during the year. The balance sheet figure for retained earnings is the sum of the earnings retained for each year the firm has been in business. Statement of sources and uses of fund Statement with the sources & the uses of financial funds during a certain period. This statement is drawn up conform to corrected accounting principles. Static inventory problem The problem related to the goods that have a one-period life; there can be no carryover of goods from one period to the next. For example, decision involve the number of newspaper to print is static inventory problem. Static theory of capital structure Theory that the firm's capital structure is determined by a trade-off of the value of tax shields against the costs of bankruptcy. Statutory lien An involuntary lien, which is created by law rather than by contract. Statutory liens include tax liens, judgment liens, etc. Statutory meeting A meting held in accordance with the Companies Act 1994. Statutory report A report required to be made by statute. This normally refers to be laid before the members of a company by the Companies Act 1994. Step lease A type of lease that outlines or stipulates the expected annual increases in the tenant's base rent based on an approximation of what the landlord believes what the landlord’s expenses may be. Stepped preference share A preference share that earns a predetermined income, which rises steadily by a set amount each year to the winding-up date; there is also a predetermined capital growth. 189

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Step-up bond A form of deferred coupon structure in which the coupon rate is low for an initial period and then increases to a higher coupon rate thereafter. Step-variable cost One that changes as a particular activity changes, but not in direct proportion to changes in the activity. Stewardship focus Decisions taken by shareholders & other investors where the emphasis is put on monitoring the behavior of management & attempting to affect its behavior in a way deemed appropriate. Stock dividend Payment of a dividend in the form of stock rather than cash. A stock dividend comes from treasury stock, increasing the number of shares outstanding and reduces the value of each share. Stock exchanges Secondary markets where already-issued securities are bought and sold by members. Stock index option Provides the right to trade a specified stock index at a specified price by specified expiration date. Stock options Incentive allowing management to purchase stock at a given fixed price. Stock out cost Cost incurred when immediate service is required but inventory is unavailable. Stock out Not having enough items in inventory to fill an order. Stock split An increase in the number of shares outstanding by reducing the par value of the stock; for example, a 2-for-1 stock split where par value per share is reduced by one-half. 190

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Stockholders The true owners of the firm by virtue of their equity in the form of common or preferred stock. Stone model The model used to address temporary investment decisions where a transaction is made if the sum of the current balance and the expected future cash flows falls outside the inner control limits; otherwise the transaction is foregone. Stop basis Refers to over-the-counter trading. Method of entering an OTC trade into the trader's position without reporting the trade on the OTC tape. Stop loss order An order to buy or sell at the market when a definite price is reached, either above (on a buy) or below (on a sell) the price that prevailed when the order was given. Stop-limit order A stop order that designates a price limit. Unlike the stop order, which becomes a market order once the stop is reached, the stop-limit order becomes a limit order. Straddle Purchase or sale of an equal number of puts and calls with the same terms at the same time. See also Spread. Straight voting A voting system where the shareholder may cast all of his or her votes for each candidate for the board of directors. Straight-line depreciation Amortizing or apportioning an equal amount of depreciation in each accounting period. Stranded plant A cost that has been incurred, but can not be reversed. Usually referred to as a sunk cost. Strategic alliance An agreement between two or more independent firms to cooperate in order to achieve some specific commercial objectives.

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Strategic planning The activity of defining what you want to accomplish in your business and then identifying the path that will allow you to reach your goal in the most efficient and sensible manner. Stretching accounts payable Paying bills as late as possible without damaging one’s credit rating. Such a strategy can reduce the cost of forgoing a cash discount. Although this strategy is financially attractive, it may cause a firm to violate the stated agreement. Striking price Price at which the put option or call option can be exercised. Also called the exercise price. Strip A triple option on a share or commodity market, consisting of one call option and two put options at the same price and for the same period. Stripped bond A bond that can be subdivided into a series of zero-coupon bonds. Stripper A successful raider who, once the target is acquired, sell off some of the assets of the target company. Strong-form efficiency Theory that suggests that a security price reflects all relevant information including inside information. See also Semi strong-form efficiency, weak-form efficiency. Style analysis An attempt to explain the variability in the observed returns to a security portfolio in terms of the movements in the returns to a series of benchmark portfolios designed to capture the essence of a particular security characteristic such as size, value and growth. Style grid A graph used to classify and display the investment style that best defines the nature of a security portfolio. Sublease Lease agreement between the lessee (one who leases property from another) of an original lease and a new lessee. The new lessee is the subtenant because he is renting from the original tenant rather than the owner. 192

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Sublet In real estate, it refers to the leasing of space within a leased facility by the original lessee. Subordinate bond Determines that, in case of default, entitle holders to claims on the issuer’s assets only after the claims of holders of senior debentures and mortgage bonds are satisfied. Subordinate debt A debt where there is a pecking order determining the sequence in which a company will pay off its debt instruments, subordinate (or junior) issues will not be repaid until unsubordinated (or senior) debt has been repaid in full. Subordination clauses Restrictions on additional firm borrowing that stipulate that senior bondholders will be paid first in the event of bankruptcy. Subordination All subsequent or less important creditors agree to wait until all claims of the senior debt are satisfied prior to having their claims satisfied. Subsidiary A company which has more than half of its voting shares owned by another company (the parent company). Substitution swap Exchange of one bond for a bond with similar attributes but more attractively priced. Subvention The provision of assistance or financial support such as an endowment or a subsidy from a government or foundation. Sum-of-the-years digits (SYD) The accelerated depreciation method in which a constant balance (cost minus salvage value) is multiplied by a declining depreciation rate. Sunk cost A cost that has already occurred and cannot be recovered. Because sunk costs are in the past, such costs should be ignored when deciding whether to accept or reject a project. 193

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Super DOT An electronic order-routing system for NYSE-listed securities. Super majority amendment A defensive tactic that requires 80 percent of the shareholders to approve a merger. Supermajority Provision in a company’s charter requiring a majority of, say, 80 percent of shareholders to approve certain changes, such as a merger. Supernormal growth Superior growth a firm may achieve during its early years, before leveling off to normal growth. Supernormal growth is often achieved by firms in emerging industries. Supply shock An event that influences production capacity and costs in the economy. Support level A price level below which, it is supposedly unlikely for a stock or stock index to fall. Sustainable growth rate The maximum rate at which company sales can increase without depleting financial resources. In other words, sustainable growth rate is the only growth rate possible with preset values for variables like profit margin, payout ratio, debt-equity ratio, and asset utilization ratio, if the firm issues no new equity. Swap assignment Synonymous to swap sale. Swap book A swap bank's portfolio of swaps, usually arranged by currency and maturity. Swap buy back The sale of an interest rate swap by one counterparty to the other, effectively ending the swap. Swap fund See Exchange fund Swap option See swaption. Related Quality option. 194

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Swap rate The difference between the sale price and the price to repurchase it in a swap. Swap reversal A secondary market transaction in the swap market in which a party that wants to close out a swap position arranges for an additional swap in which the maturity on the new swap is equal to the time remaining of the original swap. Swap sale A secondary market transaction in the swap market in which a party that wishes to close out the original swap finds another party that is willing to accept its obligations under the swap. Also called a swap assignment. Swap An arrangement in which two entities lend to each other on different terms, e.g., in different currencies, and/or at different interest rates, fixed or floating. Swaption Options on interest rate swaps. The buyer of a swaption has the right to enter into an interest rate swap agreement by some specified date in the future. The swaption agreement will specify whether the buyer of the swaption will be a fixed-rate receiver or a fixed-rate payer. The writer of the swaption becomes the counterparty to the swap if the buyer exercises. Sweat equity An increase in equity created by the labour of the owner. Sweep account Account providing that a bank invests all the excess available funds at the close of each business day for the firm. Sweetener A feature of a security that makes it more attractive to potential purchasers. Symmetric information The situation in which investors and managers have identical information about the firm’s prospects. 195

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Syndicate A group of investment banking companies that agrees to cooperate in a joint venture to underwrite an offering of securities for resale to the public. Syndicated loan A very large loan made to one borrower by a group of banks headed by one lead bank, which usually takes only a small percentage of the loan itself, syndicating the rest to other bank and financial institutions. The loans are usually made on a small margin. The borrower can reserve the right to know the names of all the members of the syndicate. If the borrower states which banks are to be included it is known as a club deal. Synergy Economies realized in a merger where the performance of the combined firm exceeds that of its previously separate parts. The “2+2=5” effect. Systematic risk Risk that is attributable to market movements and cannot be diversified away.

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T Take a bath To sustain a loss on either a speculation or an investment. Take a position To buy or sell short; that is to own or to owe some amount on an asset or derivative security. Take over The acquisition of another company that may (from the viewpoint of the acquired firm’s management) take the form of a ‘friendly’ or ‘unfriendly’ merger. Take-or-pay contract An agreement that obligates the purchaser to take any product that is offered (and pay the cash purchase price) or pays a specified amount if the product is not taken. Tangible asset An asset whose value depends on particular physical properties. These include reproducible assets such as buildings or machinery and nonreproducible assets such as land, a mine, or a work of art. Also called real assets. Converse of Intangible asset. Target cash balance Optimal amount of cash for a firm to hold, considering the trade-off between the opportunity costs of holding too much cash and the trading costs of holding too little. Target firm The acquired firm in the context of merger and acquisition. Target payout ratio A firm’s long-run dividend to earnings ratio. The firm’s policy is to attempt to pay out a certain percentage of earnings, but it pays a stated taka dividend and adjusts it to the target as increases in earnings occur. Targeted repurchase The firm buys back its own stock from a potential bidder, usually at a substantial premium, to forestall a takeover attempt. 197

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Tax credit A direct reduction in tax allowed for expenses such as child care and R&D for building low-income housing. Tax holiday A period during which a company is excused from paying taxes as an export incentive or an incentive to start up a new industry. Tax loss carry-back & carry-forward Losses that can be carried backward or forward in time to offset taxable income in a given year. Tax shield The reduction in a company's tax bills caused by an increase in a taxdeductible expense, usually depreciation or interest. The magnitude of the tax shield equals the tax rate times increase in the tax deductible expense. Tax status The exposure of gains or payments from an asset to taxation by various governmental units. Tax swap Swapping two similar bonds to receive a tax benefit. Tax A levy imposed by the government or its designated agencies upon any individual or enterprise for the goods or services supplied or facilitate development or for authorizing to do some act under the authority of that government. Taxable income Gross income minus exemptions and allowable deductions as set forth in the Income Tax Ordinance. Teaser rate A lower interest rate charged on an adjustable or variable rate mortgage for a brief, introductory period as an inducement to the borrower to accept the loan from the lender. Technical analysis A form of security analysis which attempts to forecasts the movements in the prices of securities based primarily on historical price and volume trends in those securities. This theory assumes that past patterns of price behavior in industrial securities will tend to recur in future. 198

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Technical analyst Investor who follows a strategy of selecting stocks solely on the basis of price patterns of trading volume. Also called chartist. Technical insolvency Business failure that occurs when a firm is unable to pay its liabilities as they due. Technological Innovation A new product with significant technological advancement. Temporary working capital The amount of current assets that varies with seasonal requirement. Tenant A lessee, possessing property under a rental agreement. Tender offer An offer to buy current shareholders’ stock at a specified price, often with the objective of gaining control of the company. The offer is often made by another company and usually for more than the present market value. Tenor Maturity of a loan. Term life insurance A contract that provides a death benefit but no cash build up or investment component. The premium remains constant only for a specified term of years, and the policy is usually renewable at the end of each term. Term loan A bank loan, typically with a floating interest rate, for a specified amount that matures in between one and ten years and requires a specified repayment schedule. Term structure of interest rates The term structure that shows the relative level of short-term and longterm interest rates at a point in time. Terminal warehouse receipt A receipt for the deposit of goods in a public warehouse that a lender holds as collateral for a loan. 199

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Terms of exchange The buyout ratio or terms of trade in a merger or an acquisition. Thickness A term referring to the frequency of transactions in a particular asset. Thin market A market where an asset is the subject of few trades on a regular or continuing basis. Third market Term for the trading of shares or listed stocks on the OTC market. Three fund separation theorem Theory which states that investors will hold portfolios chosen from three funds the riskless asset, the market portfolio, and a portfolio chosen so that its returns are perfectly negatively correlated with the riskless asset. The third fund is necessary to hedge against unforeseen changes in the future risk-free rate. Three-sector economy The economy consists of three sectors - business, government, and house holds. Typically, households have been major suppliers of funds, while business and government have been users of funds. Three-transaction strategy A strategy for investing the funds which involves one investment transaction and two disinvestment transaction. Tick The minimum price movement for the asset underlying a forward or futures contract; for Treasury bonds, one tick equals 1/32 of 1 percent of par value. Tight money A term to indicate time periods in which financing may be difficult to find and interest rates may be quite high by normal standards. Synonymous to dear money. Time deposit An interest-paying account that has a fixed maturity date, often called a certificate of deposit. 200

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Time-interest earned ratio A coverage ratio computed by dividing earnings before interest and tax (EBIT) by interest charges; measures the ability of the firm to meet its annual interest payments. Time-series analysis Analysis where comparisons of one entity are made at different points in time. Time-series data Observations of a variable over time. Time-weighted rate of return Measures the actual rate of return earned by the portfolio manager. Title Documents, records, and acts that prove ownership. Tobin's Q Market value of assets divided by replacement value of assets. A Tobin's Q ratio greater than 1 indicates the firm has done well with its investment decisions. Named after James Tobin, Yale University economist. Top down approach An investment approach that first seeks to define major economic and industry trends, and then proceeds to identify specific companies that are likely to benefit from those trends. Total assets turnover ratio The ratio calculated by dividing sales by total assets. Total market capitalization The total market value of all of a firm's outstanding securities. Total risk The total variability of returns from a decision. Trade acceptance Written demand that has been accepted by an industrial company to pay a given sum at a future date. Trade credit Inter-firm debt arising through credit sales and recorded as an account receivable by the seller and as an account payable by the buyer. 201

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Trade liabilities Money owed to suppliers. Trademark A distinguishing word, name, or symbol used to identify a product. Trading volume activity The ratio between number of shares of a firm traded and number of shares of that firm outstanding during a specified period. Trading volume The number of shares transacted every day. As there is a seller for every buyer, one can think of the trading volume as half of the number of shares transacted. That is, if A sells 100 shares to B, the volume is 100 shares. Trading Buying and selling of securities. Traditional approach to cost of capital States that the cost of capital initially declines with the increased use of low-cost debt but it eventually goes up due to the greater risk associated with increasing debt. Traditional approach to the credit-granting decision An approach where the analyst synthesize all information that has been collected and reach a judgment regarding the applicant’s creditworthiness. Traditional view (of dividend policy) An argument that, "within reason," investors prefer higher dividends to lower dividends because the dividend is sure but future capital gains are uncertain. Tranches Related securities that are offered at the same time but have different risk, reward, and/or maturity. Transaction costs The time, effort, and money necessary, including such things as commission fees and the cost of physically moving the asset from seller to buyer. Transaction costs should also include the bid/ask spread as well as price impact costs (for example a large sell order could lower the price). 202

DISCOVERING FINANCE

Transaction exposure Foreign exchange gains and losses resulting from actual international transactions. These may be hedged through the foreign exchange market, the money market, or the currency futures market. Transaction motive A desire to hold cash in order to conduct cash-based transactions. Transactions balances Cash balances held to pay for planned corporate expenditures such as supplies, payrolls and taxes, as well as the infrequent acquisitions of long-term fixed assets. Transfer payment A payment made or income received in which no goods or services are being paid for. Pensions, unemployment benefits, subsidies to framers etc, are transfer payments; they are excluded in calculating gross national product. Translation exposure The foreign-located assets and liabilities of a multinational corporation which are denominated in foreign currency units and are exposed to losses and gains due to changing exchange rates. It is also called accounting exposure. Treasurer The corporate officer responsible for designing and implementing a firm's financing and investing activities. Treasury bills (T-bills) Short-term, non-interest-bearing obligations of the government treasury issued at a discount and redeemed at maturity for full face value. Treasury bonds Long-term (more than 10 years’ original maturity) obligations of the government treasury. Treasury notes Medium-term (2-10 years’ original maturity) obligations of the government treasury. Treasury stock Common stock that has been repurchased and is held by the issuing company. 203

DISCOVERING FINANCE

Trend analysis An analysis of a firm’s financial ratios over time; used to determine the improvement or deterioration in its financial situation. Trend line A technical chart line that depicts the past movement of a security and that is used in an attempt to help predict future price movements. Trend statement Choosing one year as a base and then expressing the statement items of subsequent years relative to their value in the base year. Trend The general direction of the market. Treynor Index A measure of the excess return per unit of risk, where excess return is defined as the difference between the portfolio's return and the risk-free rate of return over the same evaluation period and where the unit of risk is the portfolio's beta. Named after Jack Treynor. Trigger point system A system in which the firm transfers all or part of the balance once the balance of collected funds in the depository bank reaches some predetermined level. Trimming A technique where the sample is made free from outlier problem by deleting the top N and the bottom N observations. Trough The transition point between recession and recovery. True interest rate Synonymous to effective interest rate. Trust receipts A security device acknowledging that the borrower holds specifically identified inventory and proceeds from its sale in trust for the lender. Trustee A paid individual, corporation, or commercial bank trust department that acts as the third party to a bond indenture in order to ensure that the issuer does not default on its contractual responsibilities to the bondholders. 204

DISCOVERING FINANCE

Turnaround cost The total cost of buying and later selling an asset. Also called the round trip cost. Turnarounds Firms that are in bankruptcy or soon might be. If they can recover from what might appear to be imminent disaster, they can offer tremendous investment returns. Turnkey contract A project that allows a lessee or purchaser of an investment, building, machinery, etc, to begin business or operation by merely “turning the key” to the front door or to start the machinery; a ready-to-occupy or ready-to-operate condition. Turnover method Forecasting methodology in which it is assumed that receivables will all be collected based on the average turnover of the receivables of the firm. Turnover The total sales figure of an organization for a stated period. 12b-1 fee A fee charged by some funds, named after the SEC rule that permits it. Such fees pay for distribution costs, such as advertising, or for brokers’ commissions. The fund’s prospectus details any 12b-1 charges that apply. Two finger approach Putting consecutive two-year balance sheet of a firm side-by-side and quickly run away two fingers down the columns in search of big changes. It gives an essence of sources & uses statement. Two fund separation theorem Theory which states that each investor will have a utility-maximizing portfolio that is a combination of the risk-free asset and a portfolio (or fund) of risky assets that is determined by the line drawn from the riskfree rate of return tangent to the investor’s efficient set of risky assets. Two-stage dividend discount model A variation of the constant growth dividend discount model in which a short-term supernormal growth period is followed by a long-term constant growth period. 205

DISCOVERING FINANCE

Two-state option pricing model A pricing equation allowing an underlying asset to assume only two possible (discrete) values in the next time period for each value it can take on in the preceding time period. Also called the binomial option pricing model. Two-step buyout An acquisition plan in which the acquiring company attempts to gain control by offering a very high cash price for 51 % of the shares of the target company. At the same time, the acquiring company announces a second lower price that will be paid, either in cash, stocks, or bonds, at a subsequent point in time. Two-transaction strategy A strategy for investing the funds which involves one investment of funds and one disinvestment of funds.

206

DISCOVERING FINANCE

U Uberrima fides The basis of all insurance contracts meaning utmost good faith. Ultra vires Act of an official or corporation for which there is no authority. Unbundling Breaking up and allocating the cash flows from one security to create several new securities. Uncovered call A short call option position, in which the writer does not own shares of underlying stock represented by his option contracts. Riskier for the writer than a covered call, in which he or she owns the underlying stock. If the purchaser of the call exercises the option, the writer would be forced to buy the stock at market price. Uncovered put A short put option position, in which the writer does not have a corresponding short stock position or has not deposited, in a cash account, cash or cash equivalents equal to the exercise value of the put. In this case, the writer of the put is obliged to purchase the stock at a pre-set price if the option buyer chooses to exercise it. In this case, the writer's risk is unlimited. Under-pricing Issuing of securities below the fair market value. Underwriters Investment bankers that purchase securities from the issuing company and resell them. Underwriting spread The difference between the price that a selling corporation receives for an issue of securities and the price at which the issue is sold to the public. This is the fee that investment bankers and others receive for selling securities. Underwriting syndicate A group of investment bankers that is formed to share the risk of a security offering and also to facilitate the distribution of the securities. 207

DISCOVERING FINANCE

Underwriting A process by which investment banker purchases shares from an issuer and sells it to the public. Unit investment trusts Pools of money invested in a portfolio that is fixed for the life of the fund. Universal life insurance A whole life insurance product whose investment component pays a competitive interest rate rather than the below-market crediting rate. Unquoted company A company whose securities are not normally available to the public on a stock exchange. Unrealized income Profit which has been made but not yet realized or collected through a transaction, such as a stock which has risen in value but is still being held. Also called unrealized gain or unrealized profit or paper gain or book profit. Unseasoned new issue Also called initial public offering (IPO). Unsecured creditor A person who is owed money by an organization but who has not arranged that in the event of non-payment, specific assets would be available as a fund out of which that person could be paid in priority to other creditors. Unsecured debt A debt that is not covered by any kind of collateral. Unsystematic risk The risk that is unique to a company such as a strike, the outcome of unfavourable litigation, or a natural catastrophe that can be eliminated through diversification. Also called the diversifiable risk or residual risk. Upstairs market The informal but extensive arrangement employing electronic communication system that institutional investors and securities firms have developed to accommodate their typically large trades. 208

DISCOVERING FINANCE

Utility function A mathematical expression that assigns a value to all possible choices. In portfolio theory, the utility function expresses the preferences of economic entities with respect to perceived risk and expected return.

209

DISCOVERING FINANCE

V Valium holiday A colloquial name for a non-trading day on a stock exchange or other commercial market i.e. money market. Value added tax (VAT) A consumption tax where taxes are levied at each step of a manufacturing process where value is added to that product at that point in the manufacturing cycle; as well as at the point where the consumer purchases the end product. Value analysis Developing a new idea by evaluating the worth of aspects of ideas. Value The worth of a thing. The term is usually preceded by the word, or words such as 'fair" or "fair market", and it is usually defined in the document where it is found. Not all value for an item is the same, i.e. value is usually perceived. Value-weighted series An indicator series calculated as the total market value of the securities in the sample. Variable costs Costs that change in total in direct proportion to changes in specific activity. Variable life insurance policy A whole life insurance policy that provides a death benefit dependent on the insured's portfolio market value at the time of death. Variable rate bonds Bonds whose coupon rates adjust to market interest rates over time. Variance A measure of dispersion of a set of data points around their mean value. The mathematical expectation of the average squared deviations from the mean. The square root of the variance is the standard deviation. 210

DISCOVERING FINANCE

Vault cash Cash kept on hand in a bank or depository institution's vault in order to meet day-to-day business needs. It can be considered as part of the institution's required reserves. Venture capital A professionally managed pool of equity capital used for early-stage financing and managed by professional management bodies. Vertical acquisition Buying or taking over a firm in the same industry in which the acquired firm and the acquiring firm represent different steps in the production process. The acquisition by an airline company of a travel agency would be a vertical acquisition. Vertical merger A merger involving two or more firms in the same industry but at different stages in the production cycle. For example, the firm being acquired serves as a supplier to the firm doing the acquiring. Vertical spread Simultaneous purchase and sale of two options that differ only in their exercise price. See horizontal spread. Voluntary bankruptcy The legal proceedings that follows a petition of bankruptcy. Voluntary disclosure Disclosure of financial statements information not mandated by the regulatory forces. Voluntary liquidation Liquidation proceedings that are supported by the company's shareholders. Vostro account A bank account held by foreign bank with a local bank. Voting shares Shares of a company that entitle their owner to vote at the annual general meeting and any extraordinary meeting of the company.

211

DISCOVERING FINANCE

W Waiting period Time during which the Securities and Exchange Commission studies a firm’s registration statement. During this time the firm may distribute a preliminary prospectus. Warehouse fee Charge to a borrower to cover the costs of the lender taking short-term loans from other lenders to cover the borrower's mortgage. Warehouse receipt loan A lending arrangement under which the lender receives control of the pledged collateral which is warehoused by a designated agent in the lender’s behalf. Warehouse A large building used for receiving and storing goods, materials or merchandise. Warehousing The process of assembling mortgages for sale to the secondary mortgage market. Warrant A security that gives the holder the right but not obligation to buy shares of common stock directly from a company at a fixed price for a given time period. Weak market A market with few buyers and many sellers and a declining trend in prices. Weak-form efficiency Theory that suggests that a security price reflects all market-related data, such as historical security price movements and volume of securities traded. See also Semi strong-form efficiency, strong-form efficiency. Wealth maximization Maximization of the value of the shareholders. Value is represented by the market price of the company’s common stock, which, in turn, is a reflection of the firm’s investment, financing & dividend decisions. 212

DISCOVERING FINANCE

Weighted average cost of capital A weighted average of the after-tax required rates of return on the firm’s common stock, preferred stock, and long-term debt where the weights are the fraction of each source of financing in the firm’s target capital structure. Weighted average maturity A measure of the level of interest rate risk calculated by weighting cash flows by the time to receipt and multiplying by the fraction of total present value represented by the cash flow at that time. White knight A person or firm that makes a welcome takeover bid for a company on improved terms to replace an unacceptable and unwelcome bid from a black knight. If a company is the target for a takeover bid from a source of which it does not approve or on terms that it does not find attractive, it will often seek a white knight, whom it sees as a more suitable owner for the company, in the hope that a more attractive bid will be made . Whole life Insurance A contract with both insurance and investment components (1) it pays off a stated amount upon the death of the insured, and (2) it accumulates a cash value that the policyholder can redeem or borrow against. Wholesale deposit A large deposit obtained by a bank, financial institution or large corporate business. Wholly owned subsidiary An entity whose parent owns virtually 100% of its common stock. Window dressing Trading activity near the end of a quarter or fiscal year that is designed to improve the appearance of a portfolio to be presented to clients or shareholders. For example, a portfolio manager may sell losing positions so as to display only positions that have gained in value. Window An opportunity to borrow or invest that may be only temporary and should therefore be taken while it is available. Winner’s curse Problem faced by uninformed bidders. For example, in an initial public offering, uninformed participants are likely to receive larger allotments of issues that informed participants know are overpriced. 213

DISCOVERING FINANCE

Winsorizing A technique where the sample is made free from outlier problem by changing the value of the extreme observations to the value of the nearest observation not viewed as 'suspect'. WIP An acronym for Work in Process/Progress. Usually refers to inventory that has value added from labor or additional processing. When considered for inventory value, the value of the raw material plus the value added component is accounted for in determining the value of that inventory at that point in the process. Wire transfer A generic term for electronic funds transfer using a two-way communications system, like Fed wire. Work in process inventory All items currently in production. Working capital cycle The loop which starts at the cash and marketable securities account, goes through the current accruals accounts as direct labor and materials are purchased and used to produce inventory, which is in turn sold and generates accounts receivable, which are finally collected to replenish cash. Working capital management The management of the firm’s short-term assets and liabilities, individually and in aggregate. Credit management, cash management, inventory management, accounts payable management, all are parts of the management of working capital. Working capital ratio Working capital expressed as a percentage of sales. Working capital turnover Shows how efficiently working capital is employed, measuring the amount of net revenue generated per taka of working capital. Working capital The difference between current assets and current liabilities (excluding short-term debt). Current assets may or may not include cash and cash equivalents, depending on the company. 214

DISCOVERING FINANCE

Wrap account An investment consulting relationship for management of a client's funds by one or more money managers, that bills all fees and commissions in one comprehensive fee charged quarterly. Writ An order issued by a court. Write out The procedure used when a specialist makes a trade involving his own inventory, on one hand, and a floor broker's order, on the other. The broker must first complete the trade with the specialist, who then transacts a separate trade with the customer. Write-off Charging an asset amount to expense or loss, such as through the use of depreciation and amortization of assets. Writer The seller of an option contract. Written-down value The value of an asset for accounting purposes after deducting amounts for depreciation or in the case of tax computations, for capital allowances.

215

DISCOVERING FINANCE

Y Yield curve Curve depicting the relationship between yields and maturities of securities. A normal yield curve is upward sloping. Yield illusion The erroneous expectation that a bond will provide its stated yield to maturity without recognizing the implicit reinvestment assumption related to coupon payments. Yield spread The difference between the promised yields of alternative bond issues or market segments at a given time relative to yields on treasury issues of equal maturity. Yield to maturity A measure of the average rate of return that will be earned on a bond if held to maturity. The term is used interchangeably with market rate of interest. Yield The promised rate of return on an investment under certain assumptions. Yo-Yo stock A volatile stock that rises and falls quickly.

216

DISCOVERING FINANCE

Z Zebra A discounted zero coupon bond in which the accrued income is taxed annually rather than on redemption. Zero balance account A corporate checking account in which a zero balance is maintained. The account requires a master (parent) account from which funds are drawn to cover negative balances or to which excess balances are sent. Zero coupon convertible debenture/security A zero coupon bond that is convertible into the common stock of the issuing company after the common stock reaches a certain price. Zero-coupon bond or pure discount bonds A bond that pays its par value at maturity, but no periodic interest payments. Its yield is determined by the difference between its par value and its discounted purchase price. ZETA A risk evaluation model developed by Zeta Services Inc. The ZETA SCORE tells a user how much a company resembles firms that have been poor credit risks, i.e. firms that have recently filed bankruptcy petitions. Z-scoring Synonymous to Altman Z-score.

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AB B R E V I AT I O N S & AC R O N Y M S ABO ABS ACA ACH ACMA ACT ADFC ADR AFN AGI AGM AICPA AIMR AM AMEX AMU ANOVA APR APT APV APY AR ARCH ARM ARPS ARR ASB AST AT&T ATM AUM BAs BCG BG BHBFC

: Accumulated Benefit Obligation : Automated Bond System : Associate of Chartered Accountants : Automated Clearing House : Associate of Cost & Management Accountants : Advance Corporation Tax : Agricultural Development Finance Corporation : Asset depreciation range : Additional Funds Needed : Adjusted Gross Income : Annual General Meeting : American Institute of Certified Public Accountants : Association of Investment Management & Research : Arithmetic Mean : American Stock Exchange : Asian Monetary Unit : Analysis of Variance : Annual Percentage Rate : Arbitrage Pricing Theory : Adjusted Present Value : Annual Percentage Yield : Abnormal Return : Auto-Regressive Conditional Heteroskedasticity : Adjustable Rate Mortgage : Adjustable-Rate Preferred Stock : Accounting Rate of Return : Accounting Standard Board : Automated Screen Trading : American Telephone & Telegraph : Automated Teller Machine : Assets Under Management : Bankers’ Acceptance : Boston Consulting Group : Bank Guarantee : Bangladesh House Building Finance Corporation 219

DISCOVERING FINANCE

BIBM BIS BKB BMRE BRDB BSB BSBL BSCIC BSRS BSTI BV/ME C&F CA CAD CAGR CAL CAM CAMEL CAMPS CAP Rate CAP CAPEX CAPM CAR CARDs CATS CBA CBD CBD CCA CCI CDs CDSC CE CEO

: Bangladesh Institute of Bank Management : Bank for International Settlements : Bangladesh Krishi Bank : Balancing, Modernizing, Replacement & Expansion : Bangladesh Rural Development Board : Bangladesh Shilpa Bank : Bangladesh Samabaya Bank Limited : Bangladesh Small & Cottage Industries Corporation : Bangladesh Shilpa Rin Shangstha : Bangladesh Standard and Testing Institute : Book Value to Market Equity : Cost and Freight : Consumers’ Association : Cash Against Documents : Compound Annual Growth Rate : Capital Allocation Line : Constant Amortization Mortgage : Capital adequacy, Asset quality, Management, Earnings, and Liquidity : Cumulative Auction Market Preferred Stocks : Capitalization Rate : Common Agricultural Policy : Capital Expenditure : Capital Asset Pricing Model : Compound Annual Return or Cumulative Abnormal Return : Certificates for Amortizing Revolving Debt : Certificates of Accrual on Treasury Securities : Collective Bargaining Agent : Cash Before Delivery : Central Business District : Current-Cost Accounting : Controller of Capital Issues : Certificates of Deposit : Contingent Deferred Sales Charge : Certainty Equivalent : Chief Executive Officer 220

DISCOVERING FINANCE

CET CFA CFAT CFBT CFC CFF CFI CFM CFO CFO CFP CGT CHAPS ChFC CHIPS CIB CIF CIO CISCO CLO CML CMO CNAR COD COGS CP CPI CPM CPM CQS CRD CREF CRF CRISL CRP CRSP CRV

: Common External Tariff : Chartered Financial Analyst : Cash flow after taxes : Cash flow before taxes : Common Fund for Commodities : Cash Flow from Financing : Cash Flow from Investments : Certified in Financial Management : Cash Flow from Operations : Chief Financial Officer : Certified Financial Planner : Capital-Gains Tax : Clearing House Automated Payments System : Chartered Financial Consultant : Clearing House Interbank Payments System : Credit Information Bureau : Cost, Insurance and Freight : Chief Information Officer : City Group for Smaller Companies : Commercial Loan Officer : Capital Market Line : Collateralized Mortgage Obligation : Compounded Net Annual Rate : Cash on Delivery : Cost of Goods Sold : Commercial Paper : Consumer Price Index : Constant Payment Mortgage : Critical Path Method : Consolidated Quotation Service : Central Registration Depository : Commingled Real Estate Fund. : Clean Report on Funding : Credit Rating & Investment Services Ltd : Certified Risk Professionals : Center for Research in Security Prices : Certificate of Reasonable Value 221

DISCOVERING FINANCE

CSE CSS CTA CTM CU CV CVP DA DCF DCR DDM DFL DJIA DOL DPP DPS DRIP DSE DSO DSP DSR DTC EAT EBIT EBT EC ECN ECP EDI EFT EFTA EGM EIN EIR EMH EMS EMT

: Chittagong Stock Exchange : Credit Scoring System : Cumulative Translation Adjustment : Corporate Treasury Manager : Credit Union. : Coefficient of Variation : Cost-Volume-Profit (analysis) : Discretionary Account : Discounted Cash Flows : Debt Coverage Ratio. : Dividend Discount Model : Degree of Financial Leverage : Dow Jones Industrial Average : Degree of Operating Leverage : Direct Participation Program : Dividend per Share : Dividend Reinvestment Plan : Dhaka Stock Exchange : Day’s Sales Outstanding : Direct Stock Purchase : Debt Service Ratio : Depository Transfer Checks : Earning After Tax : Earning Before Interest & Tax : Earning Before Tax : Electronic Commerce : Electronic Communications Network : Euro Commercial Paper : Electronic Data Interchange : Electronic Fund Transfer : European Free Trade Association : Extra-ordinary General Meeting : Employee Identification Number : Effective Interest Rate : Efficient Market Hypothesis : European Monetary System : Efficient Market Theory 222

DISCOVERING FINANCE

EMU ENAR EOM EOMAD EOQ EPP EPS ERM ESOP ESPP EU EVA FASB FC FCA FCIA FCMA FDI FDIC FDR FECDBA FEDI FERA FHA FIBOR FIFO FOB FOK FOM FOR FRA FRC FRCD FRM FRN FRS

: European Monetary Union : Equivalent Nominal Annual Rate : End of Month : End of Month after Delivery : Economic Order Quantity : Executive Pension Plan : Earning Per Share : Exchange Rate Mechanism : Employee Stock Ownership Plan : Employee Stock Purchase Plan : European Union. : Economic Value Added : Financial Accounting Standard Board : Floatation Cost : Fellow of Chartered Accountants : Foreign Credit Insurance Association : Fellow of Cost & Management Accountants : Foreign Direct Investment : Federal Deposit Insurance Corporation. : Fixed Deposit Receipt : Foreign Exchange and Currency Deposit Brokers’ Association : Financial EDI : Foreign Exchange Regulation Act : Federal Housing Administration : Frankfurt Interbank Offer Rate : First-in, First-out : Free on Board : Fill or Kill order : Finnish Options Market : Free on Rail : Forward Rate Agreement : Financial Reporting Council : Floating–Rate Certificate of Deposit : Fixed Interest Rate Mortgage : Floating Rate Note : Federal Reserve System. 223

DISCOVERING FINANCE

FSA FSA FSBR FSRP FSS FTEY FV FVA FVIF FVIFA FX FXA FYE GAAP GAB GARP GATT GDP GEM GIC GIM GM GNMA GNP GO GPM GPPS HLT HPR HPY HRM IAS IASC IBEL IBES

: Forward Spread Agreement : Flexible Spending Account : Financial Statement and Budget Report : Financial Sector Reform Program : Financial Spread Sheet : Fully Taxable Equivalent Yield : Future Value : Future (compounded) Value of an (ordinary) Annuity : Future Value Interest Factor : Future Value Interest Factor of an (ordinary) Annuity : Foreign Exchange : Foreign Exchange Agreement : Fiscal Year End : Generally Accepted Accounting Principles : General Arrangement to Borrow : Global Association for Risk Professionals : General Agreement on Tariffs and Trade : Gross Domestic Product : Growing-Equity Mortgage : Guaranteed Investment Contract : Gross Income Multiplier. : Geometric Mean : Government National Mortgage Association : Gross National Product : General Obligation : Graduated Payment Mortgage : Global Performance Presentation Standards : Highly Leveraged Transaction : Holding Period Return : Holding Period Yield : Human Resource Management : International Accounting Standards : International Accounting Standards committee : Interest Bearing Eligible Liabilities : Institutional Brokers Estimate System 224

DISCOVERING FINANCE

IBF IBRD

: International Banking Facility : International Bank for Reconstruction and Development IC : Information Coefficient ICAEW : Institute of Chartered Accountants of England & Wales ICB : Investment Corporation of Bangladesh ICC : International Chamber of Commerce ICFA : Institute of Chartered Financial Analysts IDLC : Industrial Development Leasing Company IDR : International Depository Receipt IF : Interest Factor IFA : Independent Financial Adviser IFC : International Finance Corporation IM : Information Memorandum IMF : International Monetary Fund IMM : International Monetary Market IMRO : Investment Management Regulatory Organization IOC order : Immediate or Canceled Order IOM : Index and Option Market IOS : Investment Opportunity Schedule IOSCO : International Organization of Securities Commissions IOU : I Owe to You IPDCB : Industrial Promotion & Development Company of Bangladesh IPL : Investment Product Line IPO : Initial Public Offerings IRA : Individual Retirement Account IRB : Industrial Revenue Bond IRR : Internal Rate of Return IRRRL : Interest Rate Reduction Reliance Loans. IRS : Internal Revenue Service ISDA : International Swap Dealers Association ISE : International Stock Exchange ISMA : International Security Market Association ISO : International Standards Organization 225

DISCOVERING FINANCE

ITM IVM JIT L/C LBO LCM LESPs LIBID LIBOR LIFO LLC LP LP LRA LRR LYON M&A MACRS MBO MCT ME MIP MIP MKT MLR MMC MMDA MMFs MMP MOC MPT MQP MRP MRS MRT MRTS

: In-the-Money : Investment Valuation Model : Just In Time : Letter of Credit : Leverage Buyout : Lower of Cost or Market : Long-term Equity Anticipations : London Inter-bank Bid Rate : London Inter-bank Offer Rate : Last-in, First-out : Limited Liability Company : Linear Programming : Liquidity Premium : Lending Risk Analysis : Lagged Reserve Requirement : Liquid Yield Option Note : Merger and Acquisition : Modified Accelerated Cost Recovery System : Management Buyout : Mainstream Corporate Tax : Market value of Equity : Marine Insurance Policy : Monthly Investment Plan or Maximum Investment Plan : Market Order : Minimum Lending Rate : Monopolies and Mergers Commission : Money-Market Deposit Account : Money Market Mutual Funds : Money Market Preferred Stock : Market on Close order : Marginal Propensity to Tax : Mandatory Quote Period : Maturity Risk Premium : Marginal Rate of Substitution : Marginal Rate of Transformation : Marginal Rate of Technical Substitution 226

DISCOVERING FINANCE

MTFA MTN MVA NASD NASDAQ NAV NBR NCBs NCD NCREIF NDP NDTS NGO NIC NIR NIT NMS NMS NOI NOM NOW NP NPD NPM NPV NRV NSB NSC NSCC NWC NYSE OCC OCC OECD OID

: Medium Term Financial Assistance : Medium Term Loan : Market Value Added : National Association of Security Dealers : National Association of Securities Dealers Automatic Quotation : Net Asset Value : National Board of Revenue : Nationalized Commercial Banks : Negotiable Certificates of Deposit : National Council of Real Estate Investment Fiduciaries. : Net Domestic Product : Non-Debt Tax-Shields : Non Government Organization : Net Interest Cost : Note Insurance Facility : Negative Income Tax : National Market System : Normal Market Size : Net Operating Income. : Net Operating Margin : Negotiable Order of Withdrawal : Nominal Payments : Nominal Payments Deflated. : Net Profit Margin : Net Present Value : Net Realizable Value : National Savings Bank : National Savings Certificate : National Securities Clearing Corporation : Net Working Capital : New York Stock Exchange : Office of the Comptroller of the Currency. : Option Clearing Corporation : Organization for Economic Development : Original Issue Discount 227

DISCOVERING FINANCE

OMX OPM OTC OTM OTT P/B P/E P/S PBO PBP PCBs PEP PERC PERT PI PIBOR PIC PIK PIN PINC PLAM PMT PN POH POM POSB PPBS PPI PPI PPP PPS PSBR PSI PTD PV PVA PVGO

: Option Market Index : Option Pricing Model : Over the Counter market : Out of the Money (options) : Over the Top (warrant) : Price/Book Ratio : Price/Earning Ratio : Price/Sales Ratio : Projected Benefit Obligation : Payback Period : Private Commercial Banks : Pension Equity Plan : Preferred Equity Redemption Cumulative stock : Program Evaluation Review Technique : Profitability Index : Paris Inter-bank Offer Rate : Public Limited Companies : Pay-in-kind bond : Personal Identification Number : Property Income Certificate : Price Level Adjusted Mortgage : Post Market Trading : Project Note : Pecking-Order Hypothesis : Public Order Member : Post Office Savings Bank : Planning-Programming-Budgeting Systems : Producer Price Index : Policy Proof of Interest : Purchase Power Parity : Performance Presentation Standards : Public Sector Borrowing Requirement : Pre-Shipment Inspection : Payable Through Draft : Present Value : Present Value of an (ordinary) Annuity : Present Value of Growth Opportunities 228

DISCOVERING FINANCE

PVIF PVIFA QUIPS RADR RAKUB RCMMs RCY REIT RFR RFT RIE RJSC ROA ROCE ROE ROI ROIC ROT RP RP RPB RSI RPI RPs RUF RVAR RVOL S&L SAFE SAM SAS SAYE SCM SEAQ SEATS SEBI SEC SER SFF SGM SHRM SIB SIC SML SOES

: Present Value Interest Factor : Present Value Interest Factor of Annuity : Quarterly Income Preferred Securities : Risk-Adjusted Discount Rate : Rajshahi Krishi Unnayan Bank : Registered Competitive Market Makers : Realized Compound Yield : Real Estate Investment Trust : Risk Free Rate : Registered Floor Trader : Recognized Investment Exchange : Registrar of Joint Stock Companies : Return on Assets : Return on Capital Employed : Return on Equity : Return on Investment : Return on Invested Capital : Registered Options Trader : Real Payments : Risk Premium : Recognized Professional Body : Relative Strength Indicator (technical analysis) : Retail Price Index : Repurchase Agreements (repos) : Revolving Underwriting Facilities : Reward-to-variability ratio : Reward-to-volatility ratio : Savings and Loan association : Simulation Analysis of Financial Exposure : Shared Appreciation Mortgage. : Statement for Auditing Standards : Save As You Earn : Smaller Companies Market : Stock Exchange Automated Quotations system : Stock Exchange Alternative Trading Service : Securities & Exchange Board of India : Securities & Exchange Commission : Securities and Exchange Rules : Sinking-Fund Factor : Statutory General Meeting : Strategic Human Resource Management : Securities and Investment Board : Standard Industrial Classification : Security Market Line : Small Order Execution System 229

DISCOVERING FINANCE

SPACE SPAM SPSS SRO SRO SRV SSAP STD STMS SVE SWIFT

ULC ULS UPC USM UTA VA VAT VLA VRDB VRM WACC WC WDV WIP WTO XD YTC YTM

: Strategic position and action evaluation. : Standard Portfolio Analysis of Margin : Statistical Package for Social Science : Self Regulating Organization : Statutory Regulatory Order : Security Return Variability : Statements of Standard Accounting Practice : Short Term Deposit : Short Time Monetary Support : Standardized Unexpected Earnings : Society for Worldwide Interbank Financial Telecommunications : Strengths, Weaknesses, Opportunities & Threats : Sum-of-the-years digits : Traveler’s Cheque : Total Interest Carry. : Treasury Investment Growth Receipts : Total Loan Factor. : Tax and Price Index : Total quality Management : Total Return : Trading Volume Activity : Time-Weighted rate of Return : Uniform Commercial Code : Uniform Customs and Practices for Documentary Credit : United Leasing Company : Unsecured Loans : Utility Possibility Curve : Unlisted Security Market : Unit Trust Association : Veterans Affairs : Value Added Tax : Value Line Arithmetic index : Valuable Rate Demand Bond : Variable Rate Mortgage : Weighted Average Cost of Capital : Working Capital : Written Down Value : Work in Progress / Work in Process : World Trade Organization : Ex Dividend : Yield to Call : Yield to Maturity

ZBA

: Zero Balance Account

SWOT SYD TC TIC TIGRs TLF TPI TQM TR TVA TWR UCC UCPDC

230

DISCOVERING FINANCE

FRE Q UE NTLY US E D E Q U ATI O NS Time Value of Money: 1.

FVn  PV(1  i) n  PV(FVIFi ,n ) n

2. 3.

 1  n PV  FVn    FVn (1  i)  FVn (PVIFi ,n )  1 i  1 PVIFi ,n  FVIFi ,n

6.

(1  i) n  1 i 1 1 (1  i) n P VIFAi ,n  i FVA n  PMT(FVIFAi ,n )

7.

FVA n ,DUE  PMT[FVIFA i ,n (DUE) ]  PMT[(FVIFA i ,n )(1  i)]

8.

PVAn  PMT(PVIFAi,n )

9.

PVAn ,DUE  PMT[PVIFAi,n (DUE)]  PMT[(PVIFAi ,n )(1  i)]

4.

5.

FVIFA i ,n 

10. PVPERPETUITY 

Payment PMT  Interestrate i t

n n  1  11. PVUnevenstream   CFt     CFt (PVIFi ,t ) 1 i  t 1 t 1

n

n

12. FVUnevenstream   CFt (1  i) n t   CFt (FVIFi ,n t ) t 1

 i  13. FVn  PV1  SIMPLE  m  

t 1

mn

m

 i  14. Effective annual rate  1  SIMPLE   1 m   iSIMPLE 15. Periodic rate  i PER  m 16. iSIMPLE  APR  Periodicrate  m

   

17. FVn  PV ein

18. PV  FVn e in

231

DISCOVERING FINANCE

Valuation of long-term securities: Bond: 

VPerpetual Bond   t 1

I I  (1  k d ) t k d 

VFinite maturity Bond   t 1

I MV   I(PVIFAk d ,n )  MV(PVIFk d ,n ) (1  k d ) t (1  k d ) n

MV VZero CouponBond   MV(PVIFkd ,n ) (1  k d ) n VSemiannual compounding  

I2  kd  1   2  

t



MV  kd  1   2  

2n

Preferred stock: 

VNotCallable   t 1



VCallable   t 1

Dp (1  k p ) Dp

(1  k p ) t



t

Dp kp

call price (1  k p ) n



Common Stock: No growth: V 

D1 ke 

Constant growth: V   t 1

D0 (1  g) t D1  (1  k e ) t (k e  g)

Equilibrium formulae: 1.

SML: R j  R F  (RPM )  j  R F  E(R M )  R F  j

2.

CML: E(R P )  R F 

E(R M )  R F (R P ) (R M )

Portfolio formulae: n

1.

Expected rate of return, E(X i )   Pij R ij

2.

Variance, i   pij (R ij  R i )

3.

Risk premium for stock j = RPj  RPM   j

j1

2

2

232

DISCOVERING FINANCE

Y2  Y1  Slope coefficient in RPj  RPM   j X 2  X1

4.

Beta,  

5.

Beta of the portfolio, P   w j j

n

j1

6.

7. 8.

Standard deviation,  

Covariance, Covij =



n

 p (R i

i 1

i

 R)2



 Ri  Ri R j  R j



N  Correlation coefficient, ik  ik i  k N

9.

Portfolio return, R p   w i R i i 1

10. Portfolio risk,  p 

N

N

  w i w jij i 1 j1

11. Coefficient of variation, CV 

 R

12. Semi-variance, SV   pi (R i  R )2

Capital budgeting techniques formulae: 1.

2.

3.

Net Present Value, n CFt CF1 CF2 CFn NPV CF0    ...   1 2 n (1  k ) (1  k ) (1  k ) ( 1  k) t t 0 Internal Rate of Return, IRR: CF1 CF2 CFn CF0    ...  0 (1  IRR)1 (1  IRR) 2 (1  IRR) n Payback period =

 Unrecovered cost at start year   Year before full recoveryof originalinvestment   Total cash flow duringyear 

4.

Profitability Index/Benefit cost ratio, BCR 

Valuation of firms: 1.

Without tax, VL  VU

2. 3.

With corporate tax, VL  VU  TC BL With corporate and personal taxes,  (1  TC )(1  Tg )  VL  VU  BL 1   (1  TP )   233

PVB I

DISCOVERING FINANCE

Others: 1.

2. 3. 4. 5.

Average daily sales, ADS = AnnualSales UnitsSold Sales Price  360 360 Receivables Days Sales Outstanding, DSO = ADS Annual Savings = Credit sales per day × Decrease in collection delays × Opportunity cost Total cost of cash balances = Holding costs + Transaction costs Net Income Earning per share, EPS = Number of shares outstan ding

Total Dividend Number of shares outstan ding

6.

Dividend per share, DPS =

7.

Dividend payout ratio =

8.

Financial leverage multiplier =

9.

Interest Expense Rate =

DP S EP S

Total Asset Common Equity

Interest Expense Total Assets

 Income Taxes   10. Tax retention rate = 100%  Net Before tax   Dividend 11. Dividend yield = Market price of share 12. Holding period return, HPR = EndingPrice  BeginningPrice  Cash Dividend BeginningPrice 13. Equivalent pretax yield on a taxable Yieldon tax - free investment investment  1 - Marginaltax rate 14. Yield on a tax-free investment 

Pretax yieldon a taxable investment 1 - Marginaltax rate

15. Full capacity sales 

Sales level Percentageof capacityused to generatesales level

16. Degree of operating leverage  234

Percentagechangein NOI Percentagechangein Sales

DISCOVERING FINANCE

17. Degree of financial leverage 

Percentagechangein EPS Percentagechangein EBIT

18. Degree of total leverage = DOL × DFL 19. Mean absolute deviation, MAD  p ii R i  R 20. Range, R g  R h  R l 21. Economic Order Quantity, EOQ 

2O T C PP

22. Reorder Point = (Lead time in weeks × Weekly usage) – Goods in transit

Symbols used in equations VL  Market value of levered firm VU  Market value of unlevered firm TC  Corporate tax rate

BL  Market value of debt TP  Personal tax rate

Tg  Capital gain tax n



=The sum of all elements from 1 to n

i 1

O = Fixed cost of placing and receiving an order T = Annual sales in units C = Annual carrying costs expressed as a percentage of average inventory value PP = Purchase price of per unit of raw materials PVB = Present value of benefits I = Initial investment CML = Capital market line SML = Security market line Rj = Return on security j RPj  Risk premium on the jth stock 235

DISCOVERING FINANCE

RPM  E(R M )  R F   Market risk premium

 j  Beta coefficient of the jth stock

 p  Beta of the portfolio w j  Proportion of each security in a portfolio

i, k  Correlation between security i and k i, k  Covariance between security i and k i  Standard deviation of security i k  Standard deviation of security k

CF0 = Initial cash flow Ri = Actual return on security i

E(R M )  Required rate of return on a portfolio consisting of all stocks which is also the market portfolio.

R F = Risk-free rate of return. R h  Highest possible outcome R l  Lowest possible outcome p i  Probability associated with the ith outcome

R

Arithmetic average

(R i  R )  (R i  R ) when R i  R and 0 when R i  R EPS = Earning Per Share EBIT = Earning Before Interest & Tax NOI = Net operating income DOL = Degree of Operating Leverage DFL = Degree of Financial Leverage Kd = Before-tax cost of debt Ke = Cost of equity capital Ki = After-tax cost of debt Ko = Overall cost of capital Kp = Cost of preferred stock 236

DISCOVERING FINANCE

n = Number of Periods r = Interest Rate of Return g = Growth Rate FVn = Future value in n years FVAn = Future (compounded) value of an (ordinary) annuity for n years FVIF = Future value interest factor for a lump sum FVIFA = Future value interest factor for an (ordinary) annuity PV = Present Value i = Interest rate PVIF = Present value interest factor for a lump sum PVIFA = Present value interest factor for an (ordinary) annuity PMT = Payment PVAn = Present (compounded) value of an (ordinary) annuity for n years CFt = Cash flow in period t APR = Annual percentage rate MV = Market value of security Dp = Dividend on preferred stock D0 = Dividend on base year D1 = Dividend after one year

237

DISCOVERING FINANCE

Common Financial Ratios: Liquidity Name Current Ratio Quick Ratio

Formula Current Asset Current Liabilities Current Asset  Inventories Current Liabilities

Interpretation Measures ability to meet current debts with current assets Measures ability to meet current debts with mostliquid current assets Measures the ability to

Cash Ratio

Cash & MarketableSecurities meet current debts with Current Liabilities the most liquid cash and

marketable securities

Leverage Name

Formula

Debt-toEquity Ratio

Total Debt Shareholders' Equity

Debt-toTotal Asset

Total Debt Total Assets

Interpretation Indicates the extent to which debt financing is used relative to equity financing Shows the extent to which the firm is using borrowed money

Coverage Name Interest Coverage Ratio

Formula EBIT Interest Expense

Interpretation Indicates ability to cover interest charges; tells number of times interest is earned

Activity Name

Formula

Receivable Turnover

Annualnet credit sales Re ceivables

Average Collection Period

365 Re ceivablesTurnover

238

Interpretation Measures how many times the receivables have been turned over (into cash) during the year; provides into quality of the receivables Average number of days receivables are outstanding before being collected

DISCOVERING FINANCE

Inventory Turnover Ratio

Average Inventory Processing Period Payables Turnover Ratio Payable Payment Period

Cost of goodssold Inventory

365 InventoryTurnover

Cost of goods sold Average trade payables 365 PayablesTurnover

Total Asset Turnover

Net sales Total Assets

Fixed Asset Turnover

Net sales Average Net Fixed Assets

Equity Turnover

Net sales Average Equity

Measures how many times the inventory has been turned over (sold) during the year; provides insight into liquidity of inventory and tendency to overstock Average number of days the inventory is held before it is turned into accounts receivables through sales Measures how many times the payables have been turned over Indicates how many days a firm gets to pay it's payables Measures relative efficiency of total assets to generate sales Measures relative efficiency of total fixed assets to generate sales Measures the ability to generate sales from its average equity invested

Profitability Name Gross Profit Margin Operating Profit Margin

Formula Gross profit Net sales Operatingprofit Net sales

Net Profit Margin

Net profit after taxes Net sales

Return on Investment

Net profit after taxes Total Assets

239

Interpretation Indicates the basic cost structure of the firm Indicates the business risk for a firm Measures profitability with respect to sales generated; net income per taka of sales Measures overall effectiveness in generating profits with

DISCOVERING FINANCE

Return on Equity Return on Owner's Equity

Net profit after taxes Shareholders Equity

Net Income - Preferred Dividend Shareholders Equity

240

available assets; earning power of invested capital Measures earning power on shareholders' bookvalue investment Reflects the rate of return on the equity capital provided by the owners; measurement of financial risk assumed by the common stockholders

DISCOVERING FINANCE

NO BE L L AU RE ATE S I N E CO NOM I CS ( FI N AN CE ) Nobel Laureate

Year

Awarded for Empirical macroeconomic theories where he analyses financial markets

Tobin, James

1981

and their relations to expenditure decisions, employment, production and prices

Modigliani, Franco

1985

Markowitz, Harry M.

1990

Miller, Merton H.

1990

Sharpe, William F.

1990

Merton, Robert

1997

Analysis of household savings and financial markets Pioneering theories on managing investment portfolios and corporate finances Pioneering contribution to economic sciences by developing a

Scholes, Myron S.

1997

new method of determining the value of derivatives

Ackerlof, George A.

2001

Spence, A. Michael

2001

Stiglitz, Joseph E.

2001

Analysis of markets with asymmetric information

241

DISCOVERING FINANCE

F I N AN C I AL I N S T I T U T I O N S O F B AN G L AD E S H Central Bank: Bangladesh Bank Nationalized Commercial Banks: 1. 2. 3. 4. 5.

Agrani Bank Bank of Small Industries & Commerce Bangladesh Limited Janata Bank Rupali Bank Limited Sonali Bank

Private Commercial Banks (Local): 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21.

Al-Arafa Islami Bank Limited Al-Baraka Bank Bangladesh Limited Arab Bangladesh Bank Limited Bangladesh Commerce Bank Limited Bank Asia Limited BRAC Bank Limited Dhaka Bank Limited Dutch-Bangla Bank Limited Eastern Bank Limited Export Import Bank of Bangladesh Limited First Security Bank Limited International Finance Investment & Commerce Bank Limited Islami Bank Bangladesh Limited Jamuna Bank Limited Mercantile Bank Limited Mutual Trust Bank Limited National Bank Limited National Credit & Commerce Bank Limited One Bank Limited Prime Bank Limited Pubali Bank Limited 242

DISCOVERING FINANCE

22. 23. 24. 25. 26. 27. 28. 29. 30.

Shahjalal Bank Limited Social Investment Bank Limited South East Bank Limited Standard Bank Limited The City Bank Limited The Premier Bank Limited The Trust Bank Limited United Commercial Bank Limited Uttara Bank Limited

Private Commercial Banks (Foreign): 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

American Express Bank Limited Citi Bank NA Credit Agricole Indosuez (The Bank) Habib Bank Limited Hanvit Bank Muslim Commercial Bank Limited National Bank of Pakistan Samil Bank of Bahrain EC (Islamic Bankers) Standard Chartered Bank Standard Chartered Grindlays Bank Limited State Bank of India The Hong Kong & Shanghai Banking Corporation Limited

Specialized Banks: 1. 2. 3. 4.

Bangladesh Krishi Bank Bangladesh Shilpa Bank Bangladesh Shilpa Rin Sangstha Rajshahi Krishi Unnayan Bank

Specialized Financial Institutions: 1. 2. 3.

Ansar VDP Unnayan Bank Bangladesh House Building Finance Corporation Bangladesh Samabaya Bank Limited 243

DISCOVERING FINANCE

4. 5. 6. 7. 8.

Chittagong Stock Exchange Limited Dhaka Stock Exchange Limited Grameen Bank Investment Corporation of Bangladesh Karmasangsthan Bank

General Insurance Companies: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27.

Agrani Insurance Company Limited Asia Insurance Limited Asia Pacific General Insurance Company Limited Bangladesh General Insurance Company Limited Bangladesh National Insurance Company Limited Central Insurance Company Limited City General Insurance Company Limited Continental Insurance Limited Co-operative Insurance Company Limited Crystal Insurance Company Limited Desh General Insurance Company Limited Eastern Insurance Company Limited Eastland Insurance Company Express Insurance Limited Federal Insurance Company Limited Global Insurance Limited Green Delta Insurance Company Limited Islami Commercial Insurance Company Limited Islami Insurance Company Limited Janata Insurance Company Limited Karnafuli Insurance Company Limited Meghna Insurance Company Limited Mercantile Insurance Company Limited Nitol Insurance Company Limited Northern General Insurance Company Limited Paramount Insurance Company Limited Peoples Insurance Company Limited 244

DISCOVERING FINANCE

28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43.

Phoenix Insurance Company Limited Pioneer Insurance Company Limited Prabhati Insurance Company Limited Pragati Insurance Limited Prime Insurance Company Limited Purabi General Insurance Company Limited Reliance Insurance Limited Republic Insurance Company Limited Rupali Insurance Company Limited Shadharon Bima Corporation (Nationalized) Sonar Bangla Insurance Limited South Asia Insurance Company Limited Standard Insurance Limited The Lloyds Insurance Company Limited Union Insurance Company Limited United Insurance Company Limited

Life Insurance Companies: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18.

American Life Insurance Company Baira Life Insurance Company Limited Delta Life Insurance Company Limited Fareast Life Insurance Company Limited Golden Life Insurance Company Limited Homeland Life Insurance Company Limited Jibon Bima Corporation (Nationalized) Meghna Life Insurance Company Limited National Life Insurance Company Limited Padma Life Insurance Company Limited Popular Life Insurance Company Limited Pragati Life Insurance Company Limited Prime Life Insurance Company Limited Progressive Life Insurance Company Limited Rupali Life Insurance Company Limited Sandhani Life Insurance Company Limited Sun Life Insurance Company Limited Sunflower Life Insurance Company Limited 245

DISCOVERING FINANCE

Leasing Institutions: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29.

Bahrain Bangladesh Finance and Investment Company Limited Bangladesh Finance and Investment Company Limited Bangladesh House Building Finance Corporation Bangladesh Industrial Finance Company Limited Bay Leasing and Investment Limited Delta-BRAC Housing Finance Company Limited Fareast Finance and Investment Limited Fidelity Assets & Securities Company Limited First Lease International Limited GSP Finance Company (Bangladesh) Limited Industrial and Infrastructure Development Finance Company Limited Industrial Development Leasing Company of Bangladesh Limited (IDLC) Industrial Promotion and Development Company of Bangladesh Limited (IPDC) Infrastructure Development Company Limited International Leasing and Financial Services Limited Islamic Finance and Investment Limited MIDAS Financing Limited National Housing Finance and Investments Limited Oman Bangladesh Leasing & Finance Ltd. Peoples Leasing and Financial Services Limited Phoenix Leasing Company Limited Premier Leasing International Limited Prime Finance and Investment Limited Saudi-Bangladesh Industrial and Agricultural Investment Company Limited The UAE-Bangladesh Investment Limited Union Capital Limited United Leasing Company Limited Uttara Finance and Investment Limited Vanik Bangladesh Limited

246

DISCOVERING FINANCE

247

DISCOVERING FINANCE

248

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Institutional & Legal Infrastructure of Securities Market in Bangladesh: Market /

Market

Segments

Players

1. Securities market

Stock

Regulators SEC

Exchanges

Laws Securities & Exchange Ordinance, 1969 Securities & Exchange Rules, 1987

2. Issuers

Unlisted

SEC

companies

Companies Act, 1994 Securities & Exchange Ordinance, 1969

Listed

SEC, DSE

Companies Act, 1994

companies

& CSE

Securities & Exchange Ordinance, 1969 Securities & Exchange Rules, 1987

3. Market

Stock Dealers

intermediaries

SEC, DSE

Articles of Association

& CSE

of DSE Securities & Exchange Rules, 1987 SEC (Stock Dealers, Stock Brokers & Sub Brokers) Regulation, 1994

Stock Brokers

SEC, DSE

Do

& CSE Sub Brokers /

Stock

Authorized

Dealers,

representatives

Stock Brokers, SEC, DSE & CSE 249

Do

DISCOVERING FINANCE

4. Financial

Underwriters

SEC

intermediaries

SEC Act, 1993 SEC (Merchant Banker & Portfolio Manager) Regulations, 1996

Issue managers

SEC

Do

Portfolio

SEC

Do

SEC

Do

SEC

SEC Act, 1993

managers Investment Advisers Investment Companies

SEC (Mutual Funds) Regulations, 1996

5. Investors

Custodians

SEC

Do

Trustees

SEC

Do

Bankers to the

Bangladesh

Bank Companies Act,

issue

Bank &

1991

SEC

SEC Act, 1993

Foreign funds /

Bangladesh

Foreign Exchange

Institution

Bank

Regulations Act, 1947

& SEC

Income Tax Ordinance, 1984

Local funds /

Bangladesh

Bank Companies Act,

Institutions

Bank

1991

Controller

Insurance Act, 1938

of

Trusts Act, 1981

Insurance General public

-

Income Tax Ordinance, 1984

250

DISCOVERING FINANCE

B I B L I O G R AP H Y 1. 2. 3. 4. 5. 6.

7.

8.

9.

10.

11.

12. 13. 14.

Bilas, Richard A., 1972, Microeconomic Theory, 2nd edition, McGraw-Hill Book Company. Block, Stanley B. and Geoffrey A. Hirt, 2000, Foundations of Financial Management, 9th edition, Irwin/McGraw-Hill. Bodie, Zvi, Alex Kane, and Alan J. Marcus, 1995, Essentials of Investments, 2nd edition, Irwin/McGraw-Hill. Brealey, Richard A. and Stewart C. Myers, 2000, Principles of Corporate Finance, 6th edition. New York: McGraw-Hill. Brueggeman, William D., 1997, Real Estate and Investments, 10th edition, Irwin/McGraw-Hill. Chandra, Prasanna, 1995, Projects: Planning, Analysis, Selection, Implementation and Review, 4th edition Tata McGraw-Hill Publishing Company Limited, New Delhi. Copeland, Thomas E. and J. Fred Weston, 1988, Financial Theory and Corporate Policy, 3rd edition, Addison-Wesley Publishing Company. Defusco, Richard A., Mcleavey, Dennis W., Pinto, Jerald E., and Runkle, David E., 2001, Quantitative Methods for Investment Analysis, Association for Investment Management and Research. Dowling, Edward T., 1980, Schaum’s Outline of Theory and Problems of Introduction to Mathematical Economics, 2nd edition, McGraw-Hill, Inc. Elton, Edwin J. and Martin J. Gruber, 2001, Modern Portfolio Theory and Investment Analysis, 5th edition, John Wiley & Sons, Inc. Fabozzi, Frank J., Franco Modigliani and Michael G. Ferri, 1998, Foundations of Financial Markets & Institutions, 2nd edition, Prentice-Hall International, Inc., New Jersey. Foster, George, 1986, Financial Statement Analysis, 2nd edition, Prentice-Hall International, Inc. Functions of Banks & Financial Institutions, 2001-2002, Ministry of Finance. Higgins, Robert C., 2000, Analysis for Financial Management, 6th edition, Irwin McGraw-Hill. 251

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15. Hisrich, Robert D., and Michael P. Peters, 1998, Entrepreneurship, 4th edition, Tata McGraw-Hill Publishing Company Limited, New Delhi. 16. Jones, Charles P., 2000, Investments: Analysis and Management, 7th edition, John Wiley & Sons, Inc. 17. Khan, M.Y. and P.K. Jain, 1992, Financial Management, 2nd edition, Tata McGraw-Hill Publishing Company Limited, New Delhi. 18. Lawrence J. Gitman, 1988, Principles of Managerial Finance, 5th edition, Harper Collins Publishers. 19. Levy, Haim, Marshall Sarnat, 1994, Capital Investment and Financial Decisions, 5th edition, Prentice-Hall International, Inc., New Jersey. 20. Madura, Jeff, 2001, Financial Markets and Institutions, 5th Edition, South-Western College Publishing, Thomson Learning. 21. Mugrave, R.A. & Musgrave, 1989, Public Finance in Theory and Practice, 5th edition, McGraw-Hill. 22. Pindyck, Robert S., and Daniel L. Rubinfield, 1995, Microeconomics, 3rd edition, Prentice Hall of India Private Limited. 23. Prime Bank Limited, Credit Division, Head Office, Dhaka. 24. Reilly, Frank K. and Keith C. Brown, 2000, Investment Analysis and Portfolio Management, 6th edition. Fort Worth. Tx. Dryden. 25. Rose, Peter, 1996, Commercial Bank Management, 3rd edition, Irwin/McGraw-Hill. 26. Rosen, Harvey S., Public Finance, 6th edition, Irwin/McGrawHill. 27. Ross, Stephen A., Randolph W. Westerfield, and Jeffrey Jaffe, 1996, Corporate Finance, 4th edition, Irwin/McGraw-Hill. 28. Scherr, Fredeick C., 1989, Modern Working Capital Management: Text and Cases, Prentice-Hall International, Inc. 29. The Modern Theory of Corporate Finance, edited by: Clifford W. Smith, 1990, Jr., 2nd edition, McGraw-Hill Publishing Company. 252

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30. The Revolution in Corporate Finance, edited by: Joel M. Stern and Donald H. Chew, Jr, 1998, 3rd edition, Blackwell Publishers Ltd. 31. Titard, Pierre L., 1983, Managerial Accounting: An Introduction, The Dryden Press. 32. Vaish, M.C., 1996, Money, Banking, Trade and Public Finance, 3rd edition (updated), New Age International. 33. Van Horne, James C., 1980, Financial Management and Policy, 5th edition, Prentice-Hall, Inc, Englewood Cliffs, New Jersey. 34. Van Horne, James C. and John M. Wachowicz, Jr., 1998, Fundamentals of Financial Management, 10th edition, Prentice Hall of India. 35. Weigandt, Jerry J., Donald E. Keiso, and Walter G. Kell, 1996, Accounting Principles, 4th edition, John Wiley & Sons, Inc. 36. Weston, J. Fred and Eugene F. Brigham, 1982, Essentials of Managerial Finance, 6th edition, Dryden Press. 37. Weston, J. Fred, Eugene F. Brigham and Besley Scott, 1996, Essentials of Managerial Finance, 11th edition, Dryden Press. 38. White, Gerald I., Ashwinpaul Sondhi, and Dov Fried, 1998, 2nd edition, John Wiley & Sons, Inc. Journals: 1. Bank Parikrama, Volume XIX, Various Issues. 2. Dhaka University Journal of Business Studies, Volume XII, XVIII and XXI, Various Issues. 3. Finance and Banking: The Journal of the Department of Finance and Banking, University of Dhaka, Volume 1, 2, 4 and 5, Various Issues. 4. Islamic University Studies (Part-C), Volume1. No.2. December 1998,Various Issues. 5. Samar Roy, Merchant Bank Goolo Jebhebe Chalche, Daily Ittefaq, March 11, 2001.

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Dictionary: 1. A dictionary of Finance, Oxford University Press, Walton Street, Oxford. 1996 2. Henson J. L., 1987, A Dictionary of Economics and Commerce, 6th edition, McDonald and Evans. 3. Richards, Robert William, 1986, The Dow Jones-Irwin dictionary of Financial Planning, Dow Jones-Irwin. 4. www.biz.yahoo.com 5. www.bizmove.com/finance 6. www.bloomberg.com 7. www.buyersresource.com 8. www.duke.edu 9. www.foreignword.com 10. www.homeglossary.com 11. www.homeowners.com 12. www.infoplease.com 13. www.investopedia.com 14. www.money.cnn.com 15. www.moneyextra.com 16. www.prou.net 17. www.quicken.com 18. www.ventureline.com 19. www.ventureline.com 20. www.websiteupgrades.com

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