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174 Cards in this Set

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Call
An option that gives the holder the right to buy an underlying asset from another party at a fixed price over a specific period of time.
Call market
A market in which trades occur only at a particular time and place (i.e., when the market is called).
Call money rate
The interest rate that buyers pay for their margin loan.
Callable (or redeemable) common shares
Shares that give the issuing company the option (or right), but not the obligation, to buy back the shares from investors at a call price that is specified when the shares are originally issued.
Candlestick chart
A price chart with four bits of data for each time interval. A candle indicates the opening and closing price for the interval. The body of the candle is shaded if the opening price was higher than the closing price, and the body is clear if the opening price was lower than the closing price. Vertical lines known as wicks or shadows extend from the top and bottom of the candle to indicate the high and the low prices for the interval.
Cannibalization
Cannibalization occurs when an investment takes customers and sales away from another part of the company.
Cap
1) A contract on an interest rate, whereby at periodic payment dates, the writer of the cap pays the difference between the market interest rate and a specified cap rate if, and only if, this difference is positive. This is equivalent to a stream of call options on the interest rate.
2) A combination of interest rate call options designed to hedge a borrower against rate increases on a floating-rate loan.
Capital allocation line (CAL)
A graph line that describes the combinations of expected return and standard deviation of return available to an investor from combining the optimal portfolio of risky assets with the risk-free asset.
Capital asset pricing model (CAPM)
An equation describing the expected return on any asset (or portfolio) as a linear function of its beta relative to the market portfolio.
Capital budgeting
The allocation of funds to relatively long-range projects or investments.
Capital market expectations
An investor’s expectations concerning the risk and return prospects of asset classes.
Capital market line (CML)
The line with an intercept point equal to the risk-free rate that is tangent to the efficient frontier of risky assets; represents the efficient frontier when a risk-free asset is available for investment.
Capital markets
Financial markets that trade securities of longer duration, such as bonds and equities.
Capital rationing
A capital rationing environment assumes that the company has a fixed amount of funds to invest.
Capital structure
The mix of debt and equity that a company uses to finance its business; a company’s specific mixture of long- term financing.
Capitalized inventory costs
Costs of inventories including costs of purchase, costs of conversion, other costs to bring the inventories to their present location and condition, and the allocated portion of fixed production overhead costs.
Caplet
Each component call option in a cap.
Capped swap
A swap in which the floating payments have an upper limit.
Captive finance subsidiary
A wholly-owned subsidiary of a company that is established to provide financing of the sales of the parent company.
Carrying amount (book value)
The amount at which an asset or liability is valued according to accounting principles.
Cartel
A group of firms that has entered into a collusive agree- ment to restrict output and increase prices and profits.
Cash
In accounting contexts, cash on hand (e.g., petty cash and cash not yet deposited to the bank) and demand deposits held in banks and similar accounts that can be used in payment of obligations.
Cash basis
Accounting method in which the only relevant transactions for the financial statements are those that involve cash.
Cash conversion cycle (net operating cycle)
A financial metric that measures the length of time required for a company to convert cash invested in its operations to cash received as a result of its operations; equal to days of inventory on hand
Cash equivalents
Very liquid short-term investments, usually maturing in 90 days or less.
Cash flow additivity principle
The principle that dollar amounts indexed at the same point in time are additive.
Cash flow at risk (CFAR)
A variation of VAR that reflects the risk of a company’s cash flow instead of its market value.
Cash flow from operations (cash flow from operating activities or operating cash flow)
The net amount of cash provided from operating activities.
Cash flow statement (statement of cash flows)
A financial state- ment that reconciles beginning-of-period and end-of-period balance sheet values of cash; consists of three parts: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities.
Cash offering
A merger or acquisition that is to be paid for with cash; the cash for the merger might come from the acquiring company’s existing assets or from a debt issue.
Cash price or spot price
The price for immediate purchase of the underlying asset.
Cash ratio
A liquidity ratio calculated as (cash
Cash settlement
A procedure used in certain derivative transac- tions that specifies that the long and short parties engage in the equivalent cash value of a delivery transaction.
Cash-flow-statement-based accruals ratio
The difference between reported net income on an accrual basis and the cash flows from operating and investing activities compared to the average net operating assets over the period.
Cash-flow-statement-based aggregate accruals
The difference between reported net income on an accrual basis and the cash flows from operating and investing activities.
CBOE Volatility Index
A measure of near-term market volatility as conveyed by S&P 500 stock index option prices.
Central bank
A bank’s bank and a public authority that regulates the nation’s depository institutions and controls the quantity of money.
Central limit theorem
A result in statistics that states that the sample mean computed from large samples of size n from a population with finite variance will follow an approximate normal distribution with a mean equal to the population mean and a variance equal to the population variance divided by n.
Centralized risk management or companywide risk management
When a company has a single risk management group that monitors and controls all of the risk-taking activities of the organization. Centralization permits economies of scale and allows a company to use some of its risks to offset other risks. (See also enterprise risk management.)
Chain rule of forecasting
A forecasting process in which the next period’s value as predicted by the forecasting equation is substituted into the right-hand side of the equation to give a predicted value two periods ahead.
Change in polarity principle
A tenet of technical analysis that once a support level is breached, it becomes a resistance level. The same holds true for resistance levels; once breached, they become support levels.
Chart of accounts
A list of accounts used in an entity’s accounting system.
Cheapest to deliver
A bond in which the amount received for delivering the bond is largest compared with the amount paid in the market for the bond.
Cherry-picking
When a bankrupt company is allowed to enforce contracts that are favorable to it while walking away from con- tracts that are unfavorable to it.
Classical
A macroeconomist who believes that the economy is self- regulating and that it is always at full employment.
Classified balance sheet
A balance sheet organized so as to group together the various assets and liabilities into subcategories (e.g., current and noncurrent).
Clean-surplus accounting
The bottom-line income reflects all changes in shareholders’ equity arising from other than owner transactions. In the absence of owner transactions, the change in shareholders’ equity should equal net income. No adjustments such as translation adjustments bypass the income statement and go directly to shareholders equity.
Clearing instructions
Instructions that indicate how to arrange the final settlement (“clearing”) of a trade.
Clearinghouse
An entity associated with a futures market that acts as middleman between the contracting parties and guarantees to each party the performance of the other.
Clientele effect
The preference some investors have for shares that exhibit certain characteristics.
Closed-end fund
A mutual fund in which no new investment money is accepted. New investors invest by buying existing shares, and investors in the fund liquidate by selling their shares to other investors.
Closeout netting
Netting the market values of all derivative con- tracts between two parties to determine one overall value owed by one party to another in the event of bankruptcy.
Coefficient of variation (CV)
The ratio of a set of observations’ standard deviation to the observations’ mean value.
Cointegrated
Describes two time series that have a long-term financial or economic relationship such that they do not diverge from each other without bound in the long run.
Collar
An option strategy involving the purchase of a put and sale of a call in which the holder of an asset gains protection below a certain level, the exercise price of the put, and pays for it by giving up gains above a certain level, the exercise price of the call. Collars also can be used to provide protection against rising interest rates on a floating-rate loan by giving up gains from lower interest rates.
Collusive agreement
An agreement between two (or more) producers to restrict output, raise the price, and increase profits.
Combination
A listing in which the order of the listed items does not matter.
Command system
A method of allocating resources by the order (command) of someone in authority. In a firm a managerial hierarchy organizes production.
Commercial paper
Unsecured short-term corporate debt that is characterized by a single payment at maturity.
Committed lines of credit
A bank commitment to extend credit up to a pre-specified amount; the commitment is considered a short-term liability and is usually in effect for 364 days (one day short of a full year).
Commodity forward
A contract in which the underlying asset is oil, a precious metal, or some other commodity.
Commodity futures
Futures contracts in which the underlying is a traditional agricultural, metal, or petroleum product.
Commodity option
An option in which the asset underlying the futures is a commodity, such as oil, gold, wheat, or soybeans.
Commodity swap
A swap in which the underlying is a commodity such as oil, gold, or an agricultural product.
Common shares
A type of security that represent an ownership interest in a company.
Common size statements
Financial statements in which all elements (accounts) are stated as a percentage of a key figure such as revenue for an income statement or total assets for a balance sheet.
Common-size analysis
The restatement of financial statement items using a common denominator or reference item that allows one to identify trends and major differences; an example is an income statement in which all items are expressed as a percent of revenue.
Company analysis
Analysis of an individual company.
Company fundamental factors
Factors related to the company’s internal performance, such as factors relating to earnings growth, earnings variability, earnings momentum, and financial leverage.
Company share-related factors
Valuation measures and other factors related to share price or the trading characteristics of the shares, such as earnings yield, dividend yield, and book-to- market value.
Comparable company
A company that has similar business risk; usually in the same industry and preferably with a single line of business.
Competitive strategy
A company’s plans for responding to the threats and opportunities presented by the external environment.
Complement
In probability, with reference to an event S, the event that S does not occur; in economics, a good that is used in conjunction with another good.
Complete markets
Informally, markets in which the variety of distinct securities traded is so broad that any desired payoff in a future state-of-the-world is achievable.
Completed contract
A method of revenue recognition in which the company does not recognize any revenue until the contract is completed; used particularly in long-term construction contracts.
Component cost of capital
The rate of return required by suppliers of capital for an individual source of a company’s funding, such as debt or equity.
Compounding
The process of accumulating interest on interest.
Comprehensive income
The change in equity of a business enterprise during a period from nonowner sources; includes all changes in equity during a period except those resulting from investments by owners and distributions to owners; comprehensive income equals net income plus other comprehensive income.
Conditional expected value
The expected value of a stated event given that another event has occurred.
Conditional heteroskedasticity
Heteroskedasticity in the error variance that is correlated with the values of the independent variable(s) in the regression.
Conditional probability
The probability of an event given (conditioned on) another event.
Conditional variances
The variance of one variable, given the out- come of another.
Confidence interval
A range that has a given probability that it will contain the population parameter it is intended to estimate.
Conglomerate merger
A merger involving companies that are in unrelated businesses.
Consistency
A desirable property of estimators; a consistent estimator is one for which the probability of estimates close to the value of the population parameter increases as sample size increases.
Consistent
With reference to estimators, describes an estimator for which the probability of estimates close to the value of the population parameter increases as sample size increases.
Consolidation
The combining of the results of operations of subsidiaries with the parent company to present financial statements as if they were a single economic unit. The asset, liabilities, revenues and expenses of the subsidiaries are combined with those of the parent company, eliminating inter- company transactions.
Constant maturity swap or CMT swap
A swap in which the floating rate is the rate on a security known as a constant maturity treasury or CMT security.
Constant maturity treasury or CMT
A hypothetical U.S. Treasury note with a constant maturity. A CMT exists for various years in the range of 2 to 10.
Constant returns to scale
Features of a firm’s technology that lead to constant long-run average cost as output increases. When constant returns to scale are present, the LRAC curve is horizontal.
Constituent securities
With respect to an index, the individual securities within an index.
Consumer Price Index (CPI)
An index that measures the average of the prices paid by urban consumers for a fixed “basket” of the consumer goods and services.
Consumer surplus
The value (or marginal benefit) of a good minus the price paid for it, summed over the quantity bought.
Contango
A situation in a futures market where the current futures price is greater than the current spot price for the underlying asset.
Contestable market
A market in which firms can enter and leave so easily that firms in the market face competition from potential entrants.
Contingent claims
Derivatives in which the payoffs occur if a specific event occurs; generally referred to as options.
Continuation patterns
A type of pattern used in technical analysis to predict the resumption of a market trend that was in place prior to the formation of a pattern.
Continuous market
A market where stocks are priced and traded continuously by an auction process or by dealers when the market is open.
Continuous random variable
A random variable for which the range of possible outcomes is the real line (all real numbers between -∞ and +∞ or some subset of the real line).
Continuous time
Time thought of as advancing in extremely small increments.
Continuous trading market
A market in which trades can be arranged and executed any time the market is open.
Continuously compounded return
The natural logarithm of 1 plus the holding period return, or equivalently, the natural logarithm of the ending price over the beginning price.
Contra account
An account that offsets another account.
Contribution margin
The amount available for fixed costs and profit after paying variable costs; revenue minus variable costs.
Controlling interest
An investment where the investor exerts control over the investee, typically by having a greater than 50 percent ownership in the investee.
Convenience yield
The nonmonetary return offered by an asset when the asset is in short supply, often associated with assets with seasonal production processes.
Conventional cash flow
A conventional cash flow pattern is one with an initial outflow followed by a series of inflows.
Convergence
In technical analysis, a term that describes the case when an indicator moves in the same manner as the security being analyzed.
Conversion factor
An adjustment used to facilitate delivery on bond futures contracts in which any of a number of bonds with different characteristics are eligible for delivery.
Convertible debt
Debt with the added feature that the bond- holder has the option to exchange the debt for equity at prespecified terms.
Convertible preference shares
A type of equity security that entitles shareholders to convert their shares into a specified number of common shares.
Cooperative equilibrium
The outcome of a game in which the players make and share the monopoly profit.
Core inflation rate
A measure of inflation based on the core CPI—the CPI excluding food and fuel.
Corporate governance
The system of principles, policies, procedures, and clearly defined responsibilities and accountabilities used by stakeholders to overcome the conflicts of interest inherent in the corporate form.
Corporate raider
A person or organization seeking to profit by acquiring a company and reselling it, or seeking to profit from the takeover attempt itself (e.g. greenmail).
Corporation
A legal entity with rights similar to those of a person. The chief officers, executives, or top managers act as agents for the firm and are legally entitled to authorize corporate activities and to enter into contracts on behalf of the business.
Correlation
A number between +1 and -1 that measures the co- movement (linear association) between two random variables.
Correlation analysis
The analysis of the strength of the linear relationship between two data series.
Correlation coefficient
A number between –1 and +1 that measures the consistency or tendency for two investments to act in a similar way. It is used to determine the effect on portfolio risk when two assets are combined.
Cost averaging
The periodic investment of a fixed amount of money.
Cost of capital
The rate of return that suppliers of capital require as compensation for their contribution of capital.
Cost of carry
The cost associated with holding some asset, including financing, storage, and insurance costs. Any yield received on the asset is treated as a negative carrying cost.
Cost of carry model
A model for pricing futures contracts in which the futures price is determined by adding the cost of carry to the spot price.
Cost of debt
The cost of debt financing to a company, such as when it issues a bond or takes out a bank loan.
Cost of goods sold
For a given period, equal to beginning inventory minus ending inventory plus the cost of goods acquired or produced during the period.
Cost of preferred stock
The cost to a company of issuing preferred stock; the dividend yield that a company must commit to pay preferred stockholders.
Cost recovery method
A method of revenue recognition in which the seller does not report any profit until the cash amounts paid by the buyer—including principal and interest on any financing from the seller—are greater than all the seller’s costs for the merchandise sold.
Cost structure
The mix of a company’s variable costs and fixed costs.
Cost-push inflation
An inflation that results from an initial increase in costs.
Council of Economic Advisers
The President’s council whose main work is to monitor the economy and keep the President and the public well informed about the current state of the economy and the best available forecasts of where it is heading.
Counterparty risk
The risk that the other party to a contract will fail to honor the terms of the contract.
Coupon rate
The interest rate promised in a contract; this is the rate used to calculate the periodic interest payments.
Covariance
A measure of the co-movement (linear association) between two random variables.
Covariance matrix
A matrix or square array whose entries are covariances; also known as a variance–covariance matrix.
Covariance stationary
Describes a time series when its expected value and variance are constant and finite in all periods and when its covariance with itself for a fixed number of periods in the past or future is constant and finite in all periods.
Covered call
An option strategy involving the holding of an asset and sale of a call on the asset.
Covered interest arbitrage
A transaction executed in the foreign exchange market in which a currency is purchased (sold) and a forward contract is sold (purchased) to lock in the exchange rate for future delivery of the currency. This transaction should earn the risk-free rate of the investor’s home country.
Credit
With respect to double-entry accounting, a credit records increases in liability, owners’ equity, and revenue accounts or decreases in asset accounts; with respect to borrowing, the willingness and ability of the borrower to make promised payments on the borrowing.
Credit analysis
The evaluation of credit risk; the evaluation of the creditworthiness of a borrower or counterparty.
Credit derivatives
A contract in which one party has the right to claim a payment from another party in the event that a specific credit event occurs over the life of the contract.
Credit risk or default risk
The risk of loss caused by a counter- party’s or debtor’s failure to make a promised payment.
Credit scoring model
A statistical model used to classify borrowers according to creditworthiness.
Credit spread option
An option on the yield spread on a bond.
Credit swap
A type of swap transaction used as a credit derivative in which one party makes periodic payments to the other and receives the promise of a payoff if a third party defaults.
Credit VAR, Default VAR, or Credit at Risk
A variation of VAR that reflects credit risk.
Credit-linked notes
Fixed-income securities in which the holder of the security has the right to withhold payment of the full amount due at maturity if a credit event occurs.
Credit-worthiness
The perceived ability of the borrower to pay what is owed on the borrowing in a timely manner; it represents the ability of a company to withstand adverse impacts on its cash flows.
Cross elasticity of demand
The responsiveness of the demand for a good to a change in the price of a substitute or complement, other things remaining the same. It is calculated as the percentage change in the quantity demanded of the good divided by the percentage change in the price of the substitute or complement.
Crossing networks
Trading systems that match buyers and sellers who are willing to trade at prices obtained from other markets.
Cross-product netting
Netting the market values of all contracts, not just derivatives, between parties.
Cross-sectional analysis
Analysis that involves comparisons across individuals in a group over a given time period or at a given point in time.
Cross-sectional data
Observations over individual units at a point in time, as opposed to time-series data.
Crowding-out effect
The tendency for a government budget deficit to decrease investment.
Cumulative distribution function
A function giving the probability that a random variable is less than or equal to a specified value.
Cumulative preference shares
Preference shares for which any dividends that are not paid accrue and must be paid in full before dividends on common shares can be paid.
Cumulative relative frequency
For data grouped into intervals, the fraction of total observations that are less than the value of the upper limit of a stated interval.
Cumulative voting
Voting that allows shareholders to direct their total voting rights to specific candidates, as opposed to having to allocate their voting rights evenly among all candidates.
Currency
The notes and coins held by individuals and businesses.
Currency drain ratio
The ratio of currency to deposits.
Currency forward
A forward contract in which the underlying is a foreign currency.
Currency option
An option that allows the holder to buy (if a call) or sell (if a put) an underlying currency at a fixed exercise rate, expressed as an exchange rate.
Currency swap
A swap in which each party makes interest payments to the other in different currencies.
Current assets, or liquid assets
Assets that are expected to be consumed or converted into cash in the near future, typically one year or less.
Current cost
With reference to assets, the amount of cash or cash equivalents that would have to be paid to buy the same or an equivalent asset today; with reference to liabilities, the undiscounted amount of cash or cash equivalents that would be required to settle the obligation today.
Current credit risk
The risk associated with the possibility that a payment currently due will not be made.
Current exchange rate
For accounting purposes, the spot exchange rate on the balance sheet date.
Current liabilities
Short-term obligations, such as accounts payable, wages payable, or accrued liabilities, that are expected to be settled in the near future, typically one year or less.
Current rate method
Approach to translating foreign currency financial statements for consolidation in which all assets and liabilities are translated at the current exchange rate. The current rate method is the prevalent method of translation.
Current ratio
A liquidity ratio calculated as current assets divided by current liabilities.
Current taxes payable
Tax expenses that have been recognized and recorded on a company’s income statement but which have not yet been paid.
Cyclical company
A company whose profits are strongly correlated with the strength of the overall economy.
Cyclical stock
The shares (stock) of a company whose earnings have above-average sensitivity to the business cycle.
Cyclical surplus or deficit
The actual surplus or deficit minus the structural surplus or deficit.
Cyclical unemployment
The fluctuating unemployment over the business cycle.