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A priori probability

A probability based on logical analysis rather than on observation or personal judgement

Abandonment Option

The ability to terminate a project at some future time if the financial results are disappointing

Abnormal return

The amount by which a security's actual return differs from its expected return given the security's risk and the market's return

absolute advantage

A country's ability to produce a good or service at a lower absolute cost than its trading partner

absolute frequency

The # of observatioins in a given interval (for grouped data)

accelerated book build

an offering of securities by an investment bank acting as principal that is accomplished in only 1 or 2 days

accelerated methods of depreciation

depreciation mehtods that allocate a relatively large proportion of the cost of an asset to the early years of the asset's useful life


with the accounting systems, a formal record of increases and decreases in a specific asset, liability, component of owners' equity, revenue, or expense

account format

a method of presentation of accounting transactions in which effects on assets appear at the left and effects on liabilities and equity appear at the right of a central dividing line; also known as T-account format

accounting (or explicit) costs

Payments to non-owner parties for services or resources they supply ot the firm

account loss

when accounting profit is negative

accounting profit (income before taxes or pretax income)

income as reported on the income statement, in accordance with prevailing accounting standards, before the provisions for income tax expense

accounting risk

the risk associated with accounting standards that vary from country to country or with any uncertainty about how certain transactions should be recorded

accounts payable (trade payables)

accounts that a business owes to its vendors for goods and services that were purchased from them but which have not yet been paid

accounts receivable turnover

ratio of sales on credit to the average balance in accounts receivable

accrual basis

method of accounting in which the ffect of transactions on financial condition and income are recorded when they occur, not when they are settled in cash

Accrued expenses (accrued liabilities)

liabilities related to expenses that have been incurred but not yet paid as of the end of an accounting preiod- an example of an accrued expense is rent that has been incurred but not yet paid, resulting in a liability "rent payable"

accrued interest

interest earned but not yet paid

accumulated benefit obligation

under US GAAP, a measue used in estimating a defined-benefit pension plan's liabilities, defined as "the actuarial present value of benefits(whether vested or non-vested) attributed by the pension benefit formula to employee service rendered before a specified date and based on employee service and compensation (if applicable) prior to that date


the purchase of some portion of one company by another; the purchase may be fore assets, a definable segment of another entity or the purchase of an entire company

Acquisition method

a method of accounting for a business combination where the acquirer is required to measue each identifiable asset and liability at fair value

Action lag

delay from policy decisions to implementation

Active factor risk

the contribution to active risk squared resulting from the portfolio's different-than-benchmark exposures relative to factors specified in the risk model

Active investment

an approach to investing in which the investor seeks to outperform a given benchmark

active return

return on portfoli minus return on portfolio's benchmark

active risk

standard deviation of active returns

activity ratios

ratios that measure how efficiently a company performs day-to-day tasks such as collections of receivables and management of inventory

Add-on interest

a procedure for determining the interest on a bond or loan in which the interest is added onto the face value of a contract

Adjusted R^2

measure of goodness-of-fit of a regression that is adjusted for degrees of freedom and does not automatically increase when another independent variable is added to a regression

Agency costs

costs associated with the conflict of interest present when a company is managed by non-owners. Agency costs result from the conflicts of interest between managers and equity owners

Alternative hypothesis

the hypothesis ACCEPTED when the null is rejected

alternative investment markets

market for investments other than traditional securities investments (i.e. tradictional common and preferred shares and fixed income). The term usually includes direct and indirect investments in real estate (including timberland and farmland) and commodies, hedge funds, private equity, etc

alternative trading system

A trading system that is not regulated as an exchange but math the buy and sell orders of its subscribers. Designed for people who trade in very large quantities

American depository receipt

A U.S. dollar-denominated security that trades like a common share on US exchanges

Amortizing and accreting swaps

a swap in which the notional principal changes according to a formula related to changes in the underlying

Analysis of variance (ANOVA)

The analysis of the total variability of a dataset into components representing different sources of variation; with reference to regression, ANOVA provides the inputs for an F-test of the significane of the regression as a whole

anticipation stock

excess inventoryheld in anticipation of increased demand, often because of seasonal patterns of demand


with reference to a transaction or a security, one that would increase EPS or result in EPS higher than the company's basic EPS - antidilutive securities are not included in the calculation of diluted EPS


1) The simultaneous purchase of an undervalued asset or portfolio and sale of an overvalued but equivalent asset or portfolio, in order to obtrain a riskless profit on the price differential. Taking advantage of a market inefficiency in a risk-free manner.
2) The condition in a financial market in which equivalent assets or combinations of assets sell for 2 different prices, creating an opportunity to profit at no risk with no commitment of money. In a well functioning market, few arbitrage opportunities are possible.
3) A risk free operation that earns an expected positive net profit but requires no net investment of money


traders who engage in arbitrage

Arc elasticity

An elasticity based on 2 points, in contrast with (point) elasticity. Arc elasticity can look at the elasticity between 2 different prices (the percent change in quantity demanded divided by the percentage change in price between 2 points for price)

Arms index (TRIN)

A flow of funds indicator applied to a braod market index to measure the relative extent to which money is moving into or out of rising and declinging stocks

Arrears swap

A type of interest rate swap in which the floating payment is set at the end of the period and the interest is paid at that same time

Ascending price auction

an auction where the auctioneer calls out prices for a single item and buyers bid directly against each other, with each bid being higher than the previous one

Asian call option

A European-style option with a value at maturity equal to the difference between the stock price at maturity and the average stock price during the life of the option, or $0, whichever is greater

Ask size

The maximum quantity of an asset that pertains to a specific ask price from a trader. E.G. If the ask for a share is $30 for a size of 1,000 shares, the trader is offereing to sell at $30 up to 1,000 shares

Asset allocation

The process of determining how investment funds should be distributed among asset classes

Asset-based loan

a loan that is secured with company assets

Asset-based valuation models

Valuation based on estimates of the market value of a company's assets

Asset beta

The unlevered beta; reflects the business risk of the assets; the asset's systematic risk

Asset class

A group of assets that have similar characteristics, attributes, and risk/return relationships

Asset retirement obligations (ARO's)

The fair value of the costs to be incurred at the end of an asset's useful life. The fair value of the cost is determined on the basis of discounted cash flows

Assignment of accounts receivable

the use of accounts receivable as collateral for a loan

asymmetric information

the differential of information between corporate insiders and outsiders regarding the company's performance and prospects. Managers typically have more information about the company's performance and prospects than owners and creditors

Automated clearing house

an electronic payment network available to businesses, individuals and financial institutions in the US, US terriroties, and Canada

Automatic stabilizer

a countercyclical factor that automatically comes into play as an economy slows and unemployment rises

Autoregressive (AR) model

A time series regressed on its own past values, in which the independent variable is a lagged value of the dependent variable

Average product

Measures the productivity of inputs on average and is calculated by dividing total product by the total number of units for a given input that is used to generate that output

balance of payments

a double-entry bookkeeping system that summarizes a country's economic transactions with the rest of the world for a particular period of time, typically a calendar quarter or year

balance of trade deficit

when the domestic economy is spending more on foreign goods and services than foreign economies are spedning on domestic goods and services

balance sheet

AKA statement of financial position or statement of financial condition. The financial statement that shows the company's current financial position by disclosing resources the entity controls (its assets) and the claims on those resources (its liabilities and equity claims), as a particular point in time (the date of the balance sheet)

balance-sheet-based accruals ratio

the difference between net operating assets at the end and the beginning of the period compared to the average net operating assets over the period

balance sheet based aggregate accruals

difference between net operating assets at the end and the beginning of the period

bargain purchase

when a company is acquired and the purchase price is less than the fair value of the net assets. The excess is never accounted for as negative goodwill

base rates

the reference rate on which a bank bases lending rates to all other customers

basis swap

1) an interest rate swap involving 2 floating rates
2) A swap in which both parties pay a floating rate

Basket of listed depository receipts

An exchange-trade fund (ETF) that represents a portfolio of depository receipts

Bayes formula

A method for updating probabilites based on new information

bear hug

a tactic used by acquirers to circumvent target management's objection to a proposed merger by submitting the proposal directly to the target company's board of directors

behind the market

said of prices specified in orders that are worse than the best current price; EG: for a limit buy order, a limit price below the best bid

bernoulli random variable

a variable having the outcomes 0 and 1

best bid

the highest bid in the market

best efforts offering

an offering of a security using an investment bank in which the investment bank, as agent for the issuer, promises to use its best efforts to sell the offering but does not guarantee that a specific amount will be sold

best offer

The lowest offer (ask price) in the market

binomial model

a model for pricing options in which the underlying price can move to only one of two possible new prices

binomial random variable

the number of successes in n Bernoulli trials for which the probabilty of success is constant for all trials and the trials are independent


orders to buy or sell that are too large for the liquidity ordinarily availble in dealer networks or stock exchanges

block brokers

a broker (agent) that provides brokerage services for large-size trades

bollinger bands

a price-based technical analysis indicator consisting of a moving average plus a higher line representing the moving average plus a set number of standard deviations from average price and a lower line that is a moving average minus the same number of standard deviations

bond-equivalent basis

a basis for stating an annual yield that annualizes a semiannual yield by doubling it

bond equivalent yield

the yield to maturity on a basis that ignores compounding

bond market vigilantes

bond market participants who might reduce their demand for long-term bonds, thus pushing up their yields

bonding costs

Costs borne by management to assure owners that they are working in the owners' best interest. EG. Implicit costs of non-compete agreements, so basically implicit costs

book building

investment bankers' process of compiling a "book" or list of indications of interest to buy part of an offering

bootstrapping earnings

an increase in a company's earnings that results as a consequence of the idiosyncrasies(distinctive features) of a merger transaction itself rather than because of resulting economic benefits of the combination

bottom up analysis

with reference to investment selection processes, an approach that involves selection from all securities within a specified investment universe. i.e., without prior narrowing of the universe on the basis of macroeconomic or overall market considerations

box spread

an option strategy that combines a bull spread with a bear spread. This produces a risk-free payoff of the difference in the exercise prices

break point

in the context of the WACC, a break point is the amount of capital at which the cost of one or more of the sources of capital changes, leading to a change in the WACC

breapup value

the value that can be achieved if a company's assets are divided and sold separately

breusch-pagan test

a test for conditional heteroskedasticity in the error term of a regression


a financial intermediary that may function as a principal (dealer) or as an agent (broker) depedning on the type of trade

brokered market

a market in which brokers arrange trades among their clients

business risk

the risk associated with operating earnings. Operating earnings are uncertain because total revenues and many of the expenditures contributed to produce those revenues are uncertain

buy side firm

an investment management company or investor that uses the services of brokers or dealers. EG. The client of the sell side firms (are responsible for looking at research and recommending the stock whereas as sell-side does the research)

buyout fund

a fund that buys all the shares of a public company so that, in effect, the company becomes private

call market

a market where 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 (basically the interest rate you pay for buying on margin)

candlestick chart

a price chart with 4 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. Vertical lines known as wicks or shadows extend from the top and bottom of the candle to indicate the high and low prices for the interval

capital budgeting

the allocation of funds to relatively long-range projects or investments

capital consumption allowance

1) a measure of the wear and tear (depreciation) of the capital stock that occurs in the production of goods and services
2) The percentage of the GDP which is due to depreciation. GDP minus capital consumption allowance equals net national product. The capital consumption allowance measures the amount of expenditure that a country needs to undertake to simply maintain, as opposed to grow, its productivity.

capital deepening investment

when the amount produced per worker increases

Capital Market expectations

an investor's expectations concerning the risk and return prospects of asset classes

capital rationing

a capital rationing environment assumes that the company has a fixed amount of funds to invest

capital stock

the accumulated amount of buildings, machinery, and equipment used to produce goods and services

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 condiditon, and the allocated portion of fixed production overhead costs

capped swap

a swap where 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)

amount at which an asset or liability is valued according to accounting principles

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


an entity associated with a futures market that acts as middleman between the contracting parties and guarantees to each party the other will pay whatever they owe from a trade

clientele effect

the preference some investors have for shares that exhibit certain characteristics

closeout netting

netting the market values of all derivative contracts between 2 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


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

common market

level of economic integration that incorporates all aspects of the customs union and extends it by allowing free movement of factors of production among members

company fundamental factors

factors related to the company's internal performance, such as factors relating to earnings growth, earnings variability, earnings, and earnings momentum

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

comparative advantage

a country's ability to produce a good or service at a lower RELATIVE cost, or opportunity cost, than its trading partner

complete markets

markets where the variety of securities is so wide that and desired payoff in a future state-of-the-world is achievable

complete preferences

the assumption that a consumer is able to make a comparison between any two possible bundles of goods


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 heteroskedasticity

heteroskedasticity in the error variance that is correlated with the values of the independent variable(s) in the regression

conditional probability

the probabilty of an event given another event

conditional variances

the variance of one variable, given the outcome of another

conglomerate merger

a merger involving companies that are in unrelated businesses


is when the probability of estimates close to the value of the population parameter increases as sample size increases


combining 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 intercompany transactions

conspicuous consumption

consumption of high status goods, such as a luxury automobile or a very expensive piece of jewelry

constant-cost industry

when firms in the industry experience no change in resource costs and output prices over the long run

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 US T-note with a constant maturity. A CMT exists for various yearis in the range of 2 to 10

constant returns to scale

having constant per-unit costs in the presence of increased production

constituent securities

with respect to an index, the individual securities within an index

consumer surplus

the difference between the amount a consumer is willing to pay for an item and the amount they actually paid

consumption bundle or consumption basket

a specific combination of the goods and services that a consumer wants to consume

contingent claims

derivatives in which the payoffs occur if a specific event occurs; generally referred to as options

continous 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

contra account

an account that offsets another account

contractionary fiscal policy

a fiscal policy that has the objective to make the real economy contract

controlling interest

an investment where the investor exerts control over the investee, typically by having a greater than 50% 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


the tendency for differences in output per capita across countries to diminish over time; 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

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