Webster's new world finance and investment dictionary 9781849721486, 1849721483

Citation preview

FINANCE AND

INVESTMENT DICTIONARY Your guide

to the terms,

phrases,

and jargon

of the financial world

More THAN

3,500 entries, fully cross-referenced

BARBARA J. ETZEL

WE

DEFINE ^aamMu: ~i

YOUR WORLD

I

^

ALLEN,

DPT

COONTY PUB

,f!i««fe„,,,„

WEBSTER'S

NEWW#RLD

Digitized by the Internet Archive in

2010

http://www.archive.org/details/webstersnewworldOOetze

Webster's

NEW W#RLD FINANCE AND INVESTMENT DICTIONARY By

Barbara J. Etzel

Webster's

New World*

Copyright

©

Finance and Investment Dictionary

2003 by Wiley Publishing,

Published by Wiley Publishing,

Inc.,

Inc., Indianapolis,

Indiana

IndianapoHs, Indiana

Published simultaneously in Canada

No

part of this publication

may be

reproduced, stored in a retrieval system or transmitted

any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, except as permitted under Sections 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the PubHsher, or authoriza-

in

payment of the appropriate per-copy fee to the Copyright Clearance Drive, Danvers, 01923, (978) 750-8400, fax (978) 646-8700. Rosewood 222 Center, Requests to the Publisher for permission should be addressed to the Legal Department, tion through

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Limit of Liabihty/Disclaimer of Warranty: While the pubHsher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this

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For general information on our other products and services or to obtain technical support please contact our Customer Care Department within the U.S. at 800-762-2974, outside the U.S. at 317-572-3993 or fax 317-572-4002.

Wiley

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of America

is

available

from the publisher.

Dedication To for

Robert and Mary Jane, teaching me to finish what I start.

my

parents,

for their

encouragement, unfailing belief in me, and

About the author Barbara Etzel has been reporting on economic and financial markets since 1993 after receiving a Masters of Business Administration degree and a bachelor of science degree in journalism from the University of Kansas. She has written about international financial news

coming out of the U.S. Treasury, White House, Federal Reserve, and international agencies such as the International Monetary Fund and World Bank for Futures World News, a news wire now known as Oster Dow Jones Commodity News. Financial market coverage includes writing about the equity, bond, foreign exchange, and commodities markets for Jones. Economic coverJones, Reuters Pic, and news agencies including Oster

Dow

Dow

She also has covered investment banking as a senior editor for Investment Dealers' Digest. Ms. Etzel is the author of another book. Personal Information Management (Macmillan Press), which was published in 1996 as a guide to analyzing workflow and managing personal information in order to avoid inforage includes reporting on U.S. and U.K. economic

mation overload.

data.

The

Technical Editors on this book were George Farra,

CFA, and Donald

Woodley,

CFA.

Introduction world of finance and investment as innovative booms and busts have changed the financial planning strategies, tax law changes, and market so does the number of landscape for investors. Not surprisingly, as complexity heightens,

Complexity has increased tenfold

in the

terms that investors must understand. No doubt investors could benefit from an ally that helps them decipher what the terms mean and supplements their knowledge. That's exactly what Webster's New World Finance and definition of investment terms Investment Dictionary strives to do. Its goal is to provide a basic

new

in an easy-to-understand format

and then add context so readers comprehend the meaning

of the term.

of the 1990s gave investors a wild and profitable ride on the stock-market peak in wave as the value of the Dow Jones Industrial Average doubled from 1995 to its Chairman Alan 2000. As the market began its ascent into the clouds. Federal Reserve exuberance." "irrational Greenspan warned investors in December 1996 about the market's traThat comment sent the market reehng, momentarily before it returned to its former and vernacular the into Greenspan's comment introduced a new, often-cited term

The

later half

jectory

to learn. was just the beginning of the wave of new language that investors would need took off, market (IPO) As the market continued to rise, the initial public offering grapple with bestowing billions of dollars of gains upon investors. Now investors had to itself from a transforms understanding IPOs, which are stock offerings for a company that and alphabet soup private to a public company Internet companies soon got into the act, began to companies terms, such as B2B (business-to-business) became familiar as Internet companies shared in the exuberance, and sell goods to businesses over the Internet. Telecom that soon investors were talking about ARPU (average revenue per user), a financial measure

revenue each customer generated. Adding fuel to the fire were unrealistic earnings and revenues estimates that companies certain and the analysts that covered them espoused. Pro-forma earnings, or earnings "as-if" pushed and statements circumstances had existed, made their way onto companies' income

breaks

down how much

GAAP The

(Generally Accepted Accounting Principles) accounting aside. last, and the market put in and didn't tremendous ride couldn't

—

—

its last

hurrah

and left billions of dollars of losses began investigating, in their wake. Not surprisingly lawsuits commenced and regulators which introduced a whole new set of terms. Many explanations were offered for the tremendous run-up in the share price of IPOs, shares of hot IPOs resulting in a slew of new terms, such as laddering, which means allocating Laddering was trading. begins investors only after they promise to buy more stock once it

in 2000. The next several years erased the historic gains

to

gains seen in offered as a possible explanation for the unprecedented triple-digit one-day

the shares of IPOs.

Soon, regulators were taking aim

research analysts and investors began to hear about supposed to exist between a bank's objective research

at

the Chinese wall, the separation that is analysis about a company's prospects and

its

investment bankers

who

are pitching the bank's

IPOs and debt offerings. As companies lost money, accounting scandals emerged. In late 2001, Enron bankCorporation, which had been a top-rated company collapsed and ended up in the Monthly ruptcy heap. As the investigations mounted, new terms were introduced, such as that Enron Income Preferred Shares (MIPS), which was one of the aggressive accounting tools

services to lead

of

its

followed shortly behind

as

used to hide the

size

debt while simultaneously reducing its tax bill. WorldCom Inc. facts emerged about its massive accounting fraud.

VII

soon came under fire. Revelations about smoothing, an accounting companies manipulate when they record various expenses and assets, were made. Smoothing can reduce or increase debt or income levels, depending on com-

Accounting

technique that

practices lets

panies' needs for the quarter.

Congress soon began passing legislation, which introduced new terminology. The Sarbanes-Oxley Act was passed in 2002 with the intention to improve public companies' disclosure of financial and material information and eliminate conflicts of interest. In the process, the law popularized a whole new set of terms, such as corporate governance and board independence.

While corporations continued

money, terms such as reverse stock splits became number of shares each shareholder owns while retaining the proportional ownership in the company. Corporations undertook reverse stock splits in order to increase a company's share price and thus prevent it from being removed from the stock exchange. Venture capital, which many investors became quite familiar with during the stock market boom, introduced its own words, such as clawhack. A clawback is a refund that VCs are contractually bound to make if they pocketed more than their 20 percent share of a fund's overall profits based on early profits. In later years, if the fund loses money and the 20 percent threshold has been violated, some of those profits have to be returned to the limited to lose

popular. This financial technique reduces the

investors.

However, the more everything changes, the more it remains the same. Bull market and terms that have existed for several hundred years. While many understand that a bull market is a sharply rising market and a bear market is a falling market, few know the origin of the terms. This history is presented in the book. For people who like to crunch numbers, the Rule of 12 may sound familiar. But what is it? Very simply, it is a formula that calculates approximately how many years it takes to double money when compound interest is being paid. Terms such as these also are included. Similarly, leading indicators has a familiar ring. Each month this composite statistical index is released. Less easy to remember is that the leading indicators are ten economic statistics that typically indicate an economy's recovery before the recovery fully occurs. This dictionary explains what the leading indicators are. Exchange-traded funds, which are open-ended mutual funds that trade on a securities exchange and are designed to mimic the price movements of a specific index, have been around for some time. However, their profile rose with the stock market. Triple-witching periods, the simultaneous expiration of stock, index, and futures options, have occurred for many years. Now nearly all investors have heard of this quarterly phebear market are

nomenon, not just professional money managers. Whether a term is new or old, Webster's New World provides an easily understood definition that learning.

make

With

is

Finance and Investment Dictionary

presented with

a

context that encourages

increased understanding, investors can improve their

better and

more

profitable investment decisions.

your investments produce healthy returns.

VIM

My

wish

is

knowledge and thus

that this

book

will help

of the company's business, along with an income statement and balexplanation

ance sheet for the year. The 10-K report is due 90 days after the end of the company's fiscal year.

The name of a

10-Q

quarterly report that

companies must file with the and Exchange Commission (SEC). This report includes the income statement and the balance sheet, which are

public

1040 Form The basic form that is used by taxpayers to file their income tax returns. The form is on one double-sided piece of paper. Schedules may be attached to the form. For example, if mortgage itemized

and

and other expenses are deducted from income.

Schedule

A

attached

interest, medical,

Securities

not audited fiscal year.

to

Form

filed

each quarter.

modest amount of money and have uncomplicated tax situations can use Form 1040 EZ.

credits

a

A

Form

1116 form

who make

that

12b-l

is

A federal income tax form, used

to calculate estimated taxes that

must be

paid by individuals.

A

form used by individuals who have a simple income tax situation. Single and joint filers with no dependents can use Form 1040EZ.

1040EZ

1098

Form

federal

A

income

tax

tax statement prepared

by

a bank, mortgage lender, or the manager of a coop apartment building that shows how

much mortgage

interest

a

taxpayer paid

during the previous year. Mortgage interest can be deducted from income, which reduces the amount of income taxes that has to be paid. Individuals use Form 1098 to prepare their

1099

income

Form A

to the Internal

taxpayer

shows

by

a

Revenue Service and financial

how much

institution

the

and dividends, along

with other financial information. The taxpayer uses the form to returns with the Internal

10-K

income tax Revenue Service. file

The name of the annual

report that

companies must file with the Securities and Exchange Commission

public

(SEC). This

deducted from the fund's pay for marketing and dis-

such as brokers' commissions. They fall under the heading of annual operating expenses. Rule 12b-l fees are disclosed in a fund's prospectus and expenses,

tribution

typically are less than

IG

The

report

includes

a

1

percent.

generation of wireless techin the late 1970s and began nology, which lasted throughout the 1980s. These wireless communications systems used analog voice technology in comparison to 2G (second first

generation)

technology.

digital

generation) technology

is

3G

(third

wireless technol-

ogy that allows for transmission

of data

images and Internet access.

Shorthand for first

quarter,

often found

Companies report

financial results in quarterly periods.

stands for the

first

their

1Q03

quarter of 2003.

that

the taxpayer received in

interest, capital gains,

tax

Fees paid by mutual fund

fees

in analysts' reports.

tax statement mailed out

income

earned by individuals.

assets. These fees

IQ

tax returns.

U.S. federal

used to calculate foreign tax

investors that are

1040-ES

report must be filed

1040.

Business expenses for unincorporated business owners are included on Schedule C. Individuals

point in the company's

within 45 days of the close of the quarter. It is

is

at this

The 10-Q

thorough

2.5G technology

Short for two-and-a-

technology that is between second generation (2G) and third half generation, wireless

generation (3G).

The term came

into use

because of the delay in rolling out 3G technology and products. Instead of making

broad advances to

3G

technology, wireless

companies made incremental improvements in 2G technology.

2106 Form

Form

2106

A

federal

income

tax form,

used by employees to deduct unreimbursed business expenses.

Form

2441

A

income tax form, income tax filers to

federal

used by individual report and deduct child and dependent care expenses.

fund companies often are hired by corporations to manage the 401 (k) plan.

403(b) plan An individual retirement account that allows employees of qualifying non-profit organizations to save for retire-

ment on a tax-deferred basis. These plans work the same way as 401(k) plans. See also 40i(k)plan.

2G

The second

generation of wireless

4Q

wireless technology

communications technology. This phase of began in the 1990s and

found

continued into 2003. This technology offers encoding.

periods.

digital voice

Shorthand for fourth in

quarter,

often

Companies

reports.

analysts'

report their financial results in quarterly

4Q03

stands for the fourth quarter

of 2003.

2Q

Shorthand for second

found ple,

is

in analysts' reports.

often

quarter,

2Q03,

for

exam-

Revenue Service

the second quarter of 2003.

criteria

A

method of calculating interest that has accrued on a bond which uses 30day months and a 360-day year.

30/360

Another way

30-year paper

to refer to a

to receive

nization

it

ning.

technology

technology; wireless

innovation,

which

Short for third-generation

technology on the cusp of is

expected to

come

Shorthand for

found

third

in analysts' reports.

often

quarter,

Companies

typi-

cally report their financial results in quarters.

3Q03

is

the third quarter of fiscal year 2003.

401 (k) plan A retirement savings plan, established by an employer, that allows employees to send a percentage of their pre-tax compensation into a retirement account. Employers may match a percentage of the amount that the employee has withheld. If funds are withdrawn from a 401 (k) before the owner is age 59K, the proceeds are taxed at the individual's regu-

and a 10 percent penalty is assessed. 401 (k) plans allow employees to bor-

lar rate

Many row

against the

money

in the plan.

the

in

Internal

code that describes the

a

may be

may be such

One

501(c)(3)

status;

501(c)(3)

set as

up

such an orga-

organization.

to

promote

that

common

the environment or run-

advantage of being is

The

charitable or religious,

classified as a

donors can deduct their

contributions from their income taxes.

into

wider use over the next several years. 3G technology includes devices that can send high-speed data and video using wireless technology, cell phones with e-mail, paging, faxing, and Web browsing capabilities, and phones that can receive calls throughout North America, Europe, and Japan.

3Q

tax

tax-exempt

is

organization

or

section

an organization has to meet in order

interests,

30-year Treasury bond.

3G

The

501(c)(3)

Mutual

504 corporation Company.

504

Program

See

A

Certified

U.S.

Development

Small

Business

Administration program that awards loans to

small businesses. Loans

made through

program can be used to purchase real estate and heavy equipment, or to build facilities. For fiscal year 2003, up to $4.5 billion was authorized to be lent through the 504 Program. this

529 College Savings Plans Named for Section 529 of the Internal Revenue Service Code, College Savings Plans are qualified programs designed to help parents and invest to pay for their children's college education. 529 plans are created by state or local governments to let parents pre-pay the cost of tuition at an in-state or municituition save

529 plans are regulated just like municipal securities. A variety of investments can be chosen for 529 plans, with the money growing tax-deferred as pal university.

long

as

funds are kept in the plan.

8-K

Funds can be withdrawn

to

pay for qual-

has traded at during the

52-week low and the 52-week high

education expenses, such as tuition, dormitory fees, books, and suppHes. The

the

owner of the account can select the beneficiaries, and benefits can be transferred

prices.

ified

between one family member and another.

The

benefits apply regardless of the recipi-

ent's age.

The

funds

may be withdrawn

if

they aren't needed for educational expenswithdrawn funds are es, however, the subject to a tax and penalty.

The

52-week high security,

such

as a

the

highest price that a

the last year. Typically,

52-week high and the 52-week low

included

8-K

stock tables that

in

list

are

included in stock tables that Hst closing

are

closing

The form used by companies

to

comply with Securities and Exchange Commission requirements to report materdevelopments. Although much case law has been developed to determine exactly

ial

what

is

a

material

the

development,

means, in general, something that

stock or a mutual fund,

has traded at during

last year. Typically,

able

term

reason-

would likely consider making an investment deci-

shareholder

important to sion.

a

Some

material

events

include

a

out-of-the-ordinary

planned merger, an purchase, the sale of significant

assets,

the

resignation of the chief executive oflScer, the firing of the company's auditor, or a

prices.

52-week low

The

security such as

a stock or a mutual fund

lowest price that a

bankruptcy

filing.

of the

transfer the seat to another

firm's

employees.

ABC News/Money Magazine Consumer A survey, released week-

Comfort Index

A

shares 1. In a

mutual fund with multiple share

classes,

the mutual fund class that typi-

comes with

cally

2i

charge that

a sales

front-end load, is

paid

when

which

is

investing

in the fund.

denominated in local currency and traded on stock exchanges in Shanghai and Shenzhen. These markets have been closed to foreign investment since they

were

rate the national

established.

See bypass

trust

AAII

trust.

are asked if they agree

comments about

or negative

with positive

the economy.

The most positive score the index can have is +100 and the most negative is -100. The low impact on the financial markets. However, if confidence shows a multi-week decline, it is viewed as an indicator that consumer spending will index has

The

See American Association of Individual

Investors.

a relatively

Stands

for

aktiebolag,

which

is

a

Swedish company designation, similar to Inc. Companies with the AB designation can be publicly traded or privately held. designation also

abatement

The

is

used in Switzerland.

reduction or suspension

of payments. For example,

may

a

municipality

give a corporation tax abatements to

lure the corporation to the city.

ment event arises.

may be used

also

An

situation

An

agreement

outlines a brokerage firm's rights

purchases a

that

when

it

or membership, on the

seat,

New York

Stock Exchange for one of

employees.

The membership must be pur-

its

chased for the employee, and not for the

company, because

NYSE

own

an

ABC

agreement

only

from the options

individuals

that the

gotten

its

employee

name

who

is

is

calculated for four differ-

abeyance 1.

A

suspension of the

title

to real estate

while the rightful ownership

is

being

discovered. 2.

Temporarily setting

holding

abnormal

security

aside,

such

as

a plan in abeyance.

rate

that rate

A return on a from the market's

of return

differs

of return, or the return that

a

would normally produce.

ABS 1.

See asset-backed

security.

2. See automated bond system.

absolute priority rule A legal concept used in bankruptcy proceedings that says that creditors' claims are given priority over

when leaving the brokerage firm. The employee can a) keep the seat but buy another seat for a person named by

payout

the company; b)

been

given the seat has

sell

It is

may

membership. The term

may have

also

It

security

See also tax abatement.

agreement

not seasonally adjusted.

ent U.S. regions.

expected

ABC

is

abate-

in a contract in the

some extraordinary

that

data

broken down into responses by age, employment status, education, income, and gender.

AB

sale

cli-

decline.

A/B

The

economy, the buying

mate, and their personal financial condition,

and they

China, the shares of stock that are

2. In

that has information from interviews with about 1,000 adults nationwide that took place during the previous four weeks. Telephone survey respondents are asked to ly,

the seat and give the

proceeds to the brokerage firm; or

c)

shareholders' claims if a

company

is

liqui-

dated or reorganized. Shareholders receive a if anything is left after debtors have fully paid off.

accounts payable

be sold or

able to

Revenue Service

Hsts abusive shel-

and gives people using those shelters a limited time to propose setdement options. ters

abusive transactions involve inaccurately setting the price that an asset or business is acquired at in order to decrease

Some

the

amount of

zation, such as an advertising agency.

leased.

abusive tax shelter An investment that illegally. The is being used to avoid taxes Internal

for a professional services organi-

work

absorption rate In the real estate indusare try, the speed at which vacant properties

taxes that have to

Abusive tax shelters

may

be

paid.

involve contingent

matching

checkbook balance

a

statement. Charges

ACARS

See American

Corporate Accrual

act

of

its bank from the earned is

to

are subtracted

checkbook balance; interest added. Checks that haven't been cleared are added back into the checkbook balance.

When

these

steps

completed, the

are

checkbook balance and the balance shown on the bank statement should equal each other.

A highly trained professional

accountant

liabilities.

The

reconciliation

account

who

is

results

responsible for reporting financial for a company or individual in

Receipts.

accordance with governmental and profes-

acceleration clause A clause in a loan agreement that can be invoked by the lender when the borrower fails to make payments, files bankruptcy, or otherwise

sional regulations.

The

clause allows

that the

borrower pay

breaks a loan agreement. the lender to

demand

the outstanding loan balance or provide additional collateral.

A

policy of having low interest rates; a central bank is attempting to stimulate economic

growth by lowering short-term rates. If interest rates are

lower,

interest

more people

and businesses may borrow money, thus monetary interest

policy

policy,

rates.

may

also

a

person

has taken

The

opposite

is

a tight

which signifies increasing Accommodative monetary be referred to

as easy

mone-

certified

public accountant

who has passed a Hcensing test, a minimum number of college

and has met experience guidelines estabhshed by the state of residence. See

courses,

also certified public accountant.

accounting

A

organizes, and

accommodative monetary policy

stimulating growth.

is

A

system

financial

information about a specific business, government, or other entity.

The foundation

accounting equation

of the accounting system used in the United States, which states that assets equal liabihties plus owners' equity. The two sides of the equation must always be in balance.

accounting fraud

Knowingly

falsifying

accounting records, such as sales or cost records, in order to boost net

tary policy.

measures,

that

communicates

income or

Accounting fraud is illegal and subjects the company and the executives

sales figures.

account executive 1.

A person who sells securities and who

works for a brokerage firm. In order to be an account executive, a person must pass the Series 7 and Series 63 exams, which are administered by the National Association of Securities Administrators (NASD). Also called stock broker or a registered representative.

2.

In

companies other than brokerage

firms, salespeople, often salespeople

who

involved to

civil lawsuits.

Company

officials

may

resort to accounting fraud to reverse a

loss

or to ensure that they meet Wall Street's

earnings expectations.

accounts

payable

The

amount

ot

money that a company owes for goods and services received. The amount of accounts payable is listed on the company's balance sheet as a

liability.

accounts receivable

accounts

owed

to

Money

receivable

company by

a

Accounts receivable

are listed

balance sheet under

ny's

can be

with

set aside to

cushion

a

that

is

customer.

a

on

a

compa-

assets.

Reserves

provide the

company

in

event

the

the

that

accounts receivable are not paid. In order to

may

obtain quick cash, accounts receivable

be sold to another party that will provide the value of the receivables at a discount

what the

from

company would have

become

bearish and merger, acquisition,

and joint venture a

merger, acquisition, or joint venture must

be perceived

being accretive to earnings, or shareholders will not be supportive.

trast,

the cash method of accounting recognizes

money accounts receivable financing Obtaining by selling a company's accounts

funds

company

receivable. Typically, a

accounts receivable takes

amount

for

accounts.

The

are obtained

the

less

money owed on

advantage

now

that sells

than the

is

which

also allows

It

the

that the funds

rather than later,

eliminates credit risk.

full

com-

pany management to focus on business issues instead of on collecting payments.

as

accrual accounting A type of accounting system that records income when products or services are sold and recognizes expenses when they are incurred. In con-

and

expenses

received.

activity slows in response,

is

income when the

actual

received.

accrual basis accounting The most frequently used accounting method, it records income when it is earned and expenses

when they are the money is Guidelines

incurred, regardless of

received or spent.

actually

govern

when

the

of

timing

when

income and expenses must be recognized. This

which

with

contrasts

reports

accounting,

cash-basis

income and expenses when

they are received or paid.

accounts receivable turnover Net sales divided by average net accounts receivable. This financial measure shows the relative size of a company's accounts receivables and

how

company

doing at collecting the money it is owed. In order to be relevant, a company's turnover must be compared with others in the industry. well the

is

accredited investor A legal term defined by federal securities law to mean an

who

investor

An a

accredited investor

is

someone w^ho

with over $5 million in

managed by

a professional.

who

has

has a

total assets that

Another mea-

sure of an accredited investor

who

is

someone income

has had an individual annual

of $200,000 for the past 2 years or $300,000 for a married couple with reasonin excess

able

expectations of achieving the same

income

bond

See zero-coupon bond.

accrued benefit

Pension benefits that

have been earned by an employee based on

employment, but not yet paid. The benefits are paid to the employee upon leaving employment.

years of

accrued dividend by a company

issued hasn't

A that

been declared or

regular is

dividend

anticipated, but

paid.

financially knowledgeable.

net worth over $1 million, or

trust is

is

accrual

accrued interest a

Interest that

fixed-income security such

is

as

a

bond.

on bonds between regularly scheduled interest payments, which usually occur every six months. When a bond is Interest accrues

sold in the secondary market, the buyer pays

the price and the accrued interest and

reimbursed for

it

when

is

the issuer makes the

next interest payment. For corporate and

municipal bonds, accrued interest

in the current year.

owed on

is

calcu-

360-day year; for government bonds, accrued interest is calculated on an

lated using a

accretive

A

term commonly used

refer to a merger, acquisition, or joint

ture

to

ven-

be accretive to earnings, meaning that it is expected to add to earnings per share. When equity markets that

will

actual calendar-day basis. If a

bond

is

in

default, there is no accrued interest. Accrued interest also shows up as a current liability on a company's balance sheet.

adequacy

A

accumulated dividend

dividend that

has been declared, but hasn't yet been paid to stockholders.

ACH

See Automatic Clearing House.

The

ratio

acid-test

of current

ratio

to total current

minus inventories, liabiHties.This ratio shows assets,

how

well a

com-

short-term obligations. pany is It also indicates how much of a company's short-term debt could be paid off if the covering

company

sold

its

its

month

is

August, the

by one company to acquire control of another company, either through an agreed-upon deal or a hostile takeover.

An

act

Companies

also

may

God A

of

acts

phrase that

acreage report A yearly report, produced by the U.S. Department of Agriculture, that

them what

crops

they have planted that will be harvested in the fall. The report also provides the total acreage planted for each crop.

across-the-board An action or that affects a market or a group of people

event in

the same way. For instance, stocks may be rising across-the-board or a pay cut may be

made

across-the-board.

income

active

Income

that

is

actively

earned such as a salary, hourly wages, fees, and commissions. For tax purposes, the Internal Revenue Service distinguishes

between such

as

income and income from real active

passive income, estate

occupy more than 50 percent of

a person's time.

active

Heavy volume; can be

market

used for an exchange or a specific security. An active market is more liquid and has a smaller bid /ask spread,

ence between the

sell

which

is

the differ-

and purchase

prices.

active

month

month

In the futures market, the

month

the nearest base contract

that

is is

not the

month. For example,

if

in

and financing agreements that refers to events that are beyond either party's con-

legal

trol,

such

as

earthquakes, floods, or

A

method of

riots.

calculating the

earned on a bond. The actual number of days in each month and a 360-day year are used to calculate the interest

is

payments.

actual/actual A method of calculating the accrued interest that is earned on a bond. The actual number of days in each month and the actual number of days in the year are used to calculate the interest pay-

ments.

actuary A speciaHst in mathematics who is employed by an insurance company or other financial institution. For example, an insurance actuary reviews the data of claims

by poUcyholders to determine how risk should be priced. The actuary recommends the amount of premiums that should be charged, the amount of reserves that should be kept, and the amount of dividends paid. Actuaries in other companies

filed

attempt to project results and potential outcomes by analyzing numerical data.

ACUs

See Asian currency

ad valorem

current

units.

delivery

the current delivery

A

Latin term that

means

"according to the value." It frequently is used to refer to a way of assessing taxes on property or duties on goods in which a percentage of the value of the item is paid as

the tax or duty.

additional paid-in capital is

received from

capital infusion

active

found

limited

partnerships or other real estate activities that don't

is

acquire units

of a company, property, or other assets. Often used interchangeably with merger.

surveys farmers to ask

is

financial instruments. See also nearby month.

accrued interest that

acquisition

month

active

September. The August contract will be significantly less active because traders will be closing out their positions in order to avoid having to buy or sell the actual product or

actual/360

liquid assets.

of coverage

was

Capital that

investors after the initial

from when the company

established. Also called contributed capital

adequacy of coverage which the value of an

The

asset,

extent to

such

as

real

adjustable-rate mortgage

investment,

an

estate,

insulated

from

coverage

or

or

8

security,

a

is

through insurance hedging using futures

loss either

by

may be called cash (CAD) or funds

or

distribution

A

mortgage

adjustable-rate

distribution (FAD). To arrive at the adjusted

change every year, every 3 years, or every 5 years. Lenders peg to an index. the interest rate on an For example, a lender might use as a benchquently referred

from funds from operations which averages the tenant's fixed-rent payments over the life of the lease, and 2) routine expenses, such as

subtracted

mortgage

with an interest rate that will rise or fall over time as interest rates fluctuate. The interest rate of an ARM, as they are freto, will

ARM

interest rates that Treasury bills are

(FFO):

straight-Hne rents,

1)

carpeting,

which

painting,

are capitalized

deductions, such

index.

may develop

lender

Thanks

low

to

its

interest rates,

mortgages have grown in

adjustable-rate

popularity in recent years, enabling people to

buy homes

aflbrd.

normally couldn't

that they

If interest

rates

rise,

monthly payment of an

subtracted.

ARM

will rise in

U.S. Treasury

a

is

income before the

stan-

administrator

who

person

without son

these stock

2.

prices are less volatile than fixed-rate pre-

appointed by

who

a will. If there

who

A

is

settles

person

a

pro-

manage the settlement of an

of someone

estate

formula matched to benchmark such as the

bill rate. Typically,

A

bate court to

Preferred

a pre-set

in

AGI

exemptions are subtracted.

which the dividend changes

movements

tax liability after

however, the

adjustable-rate preferred stock

according to

income

dard or itemized deductions or personal

1.

in

and then

as IRu\ contributions, half of self-employment taxes, and health insurance and alimony payments, have been

kind.

stock

P^IT

gross income (AGI) The amount used in the calculation of an indi-

national or regional average cost of funds;

the

expenses,

leasing

adjusted

vidual or couple's

alternatively,

or

by the

amortized.

paying for the equivalent time frame or a

own

available for available for

funds from operations, two expenses are

contracts.

mark the

AFFO,

died is

the estate

or

intestate,

a will, the peris

who manages

an

executor.

an organiza-

tion, often a non-profit organization.

ferred stock. Adjustable-rate preferred stock is

quite rare.

stock

May

or floating

also

be called

variable rate

rate preferred stock.

The

adjusted basis

price of an asset or

that has been altered to reflect commissions paid, improvements made to

security

the

asset,

Adjusted

or stock basis

splits that

is

used

have occurred.

for

income

tax

purposes.

adoption credit A tax credit given by the Internal Revenue Service for expenses incurred in the adoption of a child. For

2002, the tax credit was $5,000 per child, unless the child has special needs, in case the credit

which

was $6,000.

adoption tax credit

A

tax credit of

up

$10,000 for expenses associated with the a child, such as attorneys' fees, travel expenses, and other qualifying to

adjusted

book value

asset that has

The

been adjusted to

value of an reflect

mar-

adoption of

ket prices. Also referred to simply as book

expenses.

value.

ADP

adjusted

funds

calculation used for

operations A Real Estate Investment

from

Trusts (P^ITs) that measures a real estate

company's cash flow generated from operations. This calculation is often referred to as

See Alternative Delivery Procedure.

ADR

American Depository Receipts, sometimes called American Depository These represent shares of a foreign company that can be purchased in the U.S., with transactions settled and dividends paid Shares.

after-hours trading

in

When

dollars.

ADR

shares,

an

investor

bank makes

the

purchases

affiliated

deposit

"affiUated

a

abroad to buy the actual shares of the foreign stock. Companies issuing ADRs have

and accounting

to follow U.S. regulatory rules.

advance refunding note with

a

bond or

Issuing a

longer maturity period than pay off that

the original issue in order to

original issue. Advance refunding

is

done

to

take advantage of decreased interest rates, which makes the new debt less expensive

company

The

has over another company, even though a relatively small percentage of stock may be held, such as 10 percent or 25 percent.

commonly used

to

that

ratio

is

determine the strength

An

index

aflfordability

A

of

company" will vary, depending on the context in which the term is used. One way that companies are considered affiUated is when one company owns less than the majority interest in another company. Companies also may be affiliated when they are subsidiaries of a third company. Another test of affiUation is the amount of effective control that a company

than the current debt. Also ca\[ed prefundin^.

advance/decline ratio

definition

index that mea-

sures how affordable housing is. Compiled by the National Association of Realtors, it

of a stock market. The ratio is the number of stocks whose price rose compared with the number of stocks whose price fell. The more rising stocks, the more buUish the

measures whether a family earning the median family income, as reported by the U.S. Bureau of the Census, could quafify for

stocks decHning, the less

priced at the national median.

market; the

more

bullish the market.

the declining volume.

By

looking

at

the vol-

of stocks advancing and comparing it to the volume of those stocks decHning, it is possible to determine how strong the mar-

ume

move

volume

was. Advancing

details are

published daily in financial newspapers.

opinion

adverse

An

opinion by an company's finan-

independent auditor that a cial statements are not accurate. opinion

which

is

says

worse than that

a

An

qualified

adverse opinion,

only some areas of the

reports are problematic. Adverse

financial

opinions occur infrequently and typically lead to investors selling their shares in the

company.

AFX

See Amsterdam Exchange Index.

A

sworn, written statement made in the presence of a notary pubUc or a person who is authorized to administer an oath. Affidavits are used in legal proceedings and may be submitted in lieu of having a

affidavit

mortgage loan on an existing

family

home

To make the

advancing volume A breakdown of the trading volume produced during a trading session on an exchange by those stocks whose prices rose, in contrast to that produced by the stocks that decHned, which is

ket

a

person appear in court.

calculation,

single-

prevailing

the

on existing homes from the Federal Housing Finance Board and HSH Associates is used. An index value of 100 means that the average family has exactly enough income

mortgage

interest rate

on

to quaUfy for a mortgage.

loans closed

An

index value

over 100 means that the family has more than enough income, while a value below 100 means that a family doesn't have

enough income

mortgage 20 percent

to qualify for a

The calculation assumes down payment and that the

loan.

a

loan doesn't

exceed 25 percent of the median family income. The index

is

calculated for fixed

mortgages, adjustable-rate mortgages, and composite mortgages.

afghani The currency unit ofAfghanistan, comprised of 100 puis.

clause A paragraph after-acquired found in a mortgage that says that any additional mortgages acquired after the first mortgage is obtained will be additional collateral for

the

after-hours

first

mortgage.

trading

The

securities after the official close

trading

of

of a market.

The proliferation of Internet trading sites has allowed individuals to trade after the

AG

10

markets have closed, which once was something only institutional investors could do.

Exchanges may have

own

their

trading services or traders

may

communications

(electronic

However, the which means

liquidity

electronic

use

may be

limited,

may not

the investor

that

ECNs

networks).

receive the best price after hours.

AG

Stands for

Inc.

which

aktiengesellschaft,

German company

is

a

designation, similar to

Aktiengesellschaft translates to "stock

corporation."

Germany,

In

publicly

all

traded companies are AG's, but not

all

AG's

Mae), Federal Home Loan Mortgage Corporation (Freddie Mac), and (Ginnie

Mortgage Association

National

Federal

Only the securities issued by Farm Credit Financial Assistance Corp.

(Fannie Mae). the

backed by the U.S. government. However, because of their special GSE status, the market doesn't demand as high of an interest rate as it would from an equivalent private sector issuer because of the perception that the government would step in to back the securities in the case of a default. However, the U.S. government does not actually back these debt issues. are

are publicly traded.

See American Gas Association.

A method

against actuals

futures contract that

who want

to

tions for cash,

is

of

settling a

exchange their futures posiinstead of delivering the actual financial instru-

A

contract or trade between

two brokers or dealers that remains unsettled after 30 days of the settlement date. The account can no longer be treated as an asset for the firm on the receiving end of the transaction.

An

agency

arrangement in which son, or agent, matches up buyers and and charges a commission.

agency broker

A

cross

acts as the

and the

seller.

trade

in

a

per-

sellers

agent for both the buyer

when

trade

a

order that

sell

agency trade

that

initiated

is

is

is

in contrast to

by the

directly

customer. If a customer has given

a

broker-

age firm discretion to manage his or her account, then any trades from that account

agency

trades.

A

aggressive growth fund small

mutual fund stock of

common

that invests primarily in

growth companies

that have potential

An

aggressive

growth fund does not attempt income through dividends.

to generate

for

appreciation.

capital

aging as

A

schedule

receivables that

such

which one

This typically occurs

a

buy or

brokerage firm on behalf of a

a

An

customer.

are

ment. Also called an exchange for physicals. fail

by

initiated

used by two hedgers

commodity or underlying

aged

A

agency trade

AGA

0—30

is

list

broken

days,

31—60

of accounts into groups

down days,

61—90

days,

and over 90 days from date of sale. A company uses an aging schedule to show how effectively

it

is

on

collecting

accounts

its

receivables.

broker receives orders from two different

customers for the same number of shares for the

same

security.

The

processed without sending

because both

parties

it

order can be to the

already

exchange

have been

identified.

Fixed-income securities that are issued by U.S. governmentsponsored entities (GSEs) that were started to reduce borrowing costs for students, farmers, and homeowners. Agency securities are issued by organizations such as Government National Mortgage Association

signed by

contract

underwriters

the

A

members of an

investment banking syndicate that has been established to

poration. defines

agency securities

among

agreement

sell,

It

sell

stock or bonds for a cor-

appoints the managing agents,

how much

each firm

outlines each firm's

how

costs will

is

allowed to

liability,

determines

be allocated, and

sets

other

rules as needed.

agricultural

futures

Futures

whose

underlying instruments are based on agricultural

commodities, such

as grains, cattle,

coffee, or butter. Agricultural futures have

amended

11

with the first contracts originating in 1865 on the Chicago Board of Trade. Wheat and corn futures and

had

long

a

history,

all-or-none A type of buy or sell order placed with a broker to indicate it cannot be partially filled. The broker must fill the

have traded since 1877 on the Chicago Board of Trade. Agricultural

entire order or not

futures are in contrast to financial futures,

be automatically canceled

options

which such

are based

on

financial instruments

the U.S. Treasury

as

bond

or stock

See American

Institute of Certified

Public Accountants.

AIMR

See Association Management and Research. air

A

pocket

Investment

for

sharp drop in the price of a

Often air pockets are indicated on a price chart by a discrepancy between the previous day's closing price and the next day's price.

The president of Allen, William M. Boeing Co. in 1945 when the U.S. government cancelled all of the company's World II

contracts, forcing

Boeing

to cut

its

workforce from 63,000 to 8,000 employees.

To

company

keep the

alive,

and put

options

A

combination of call options that produces

excessively high commissions, making it nearly impossible for an investor to make a profit. The term is so named because such a

combination, Hke an

alligator,

can eat an

order, an all-or-none order will not

or-kill

The total amount of costs that bank incurs when it creates and sells a

all-in cost

of deposit to

its

customers. These

costs include the interest rate

to the

CD

insurance Insurance

it

owner, the premium

from

if a

broker can't

fully right away.

fill it

The number of securities that each company in an underwriting syndicate

is

given to

sell.

allowance method A method of writing off bad debts in which uncollectible

method

with the

contrasts

direct

charge-off

directly debits an expense

method,

which

account

when bad

debts are discovered.

alpha A measure of the risk-adjusted performance of an investment that factors m the individual risk of the security and not the overall market risk. A large alpha indicates that the stock or mutual fund has performed better than would be predicted given its beta, which is a measurement of an investment's volatility.

Alternative Delivery Procedure

A

(ADP)

provision in a futures contract that allows

buyers and

sellers to

make and

take delivery

of the underlying product under terms or conditions that differ from those outhned by the contract. An ADP may be invoked at any time during the delivery period after long and short futures positions have been matched for the purpose of delivery. alternative federal

minimum

income

tax

(AMT)

the

Federal

Corp., and the cost

has to pay it

pays for

minimum

level

though the tax 20 percent.

to individuals varies,

corporation pays

is

it

incurs

amended

tax return

A

tax return, filed

1040X Form, that is filed because mistakes were made on the original tax return.

reserve requirements.

three years of the original filing date.

has to keep

rate a

Deposit

on

it

and

of tax. To arrive at AMT, certain items, such as passive losses from tax shelters, are added to adjusted gross income. The tax rate charged a

some of the money on deposit at the Federal Reserve in a noninterest bearing account in order to meet

because

A

tax provision that ensures

corporations pay

certificate

a^//-

that wealthy individuals, estates, trusts,

investor alive.

a

Unhke

Allen pushed

Boeing into the commercial aircraft market. Although Boeing remained in the defense business, producing the B-52 bomber, it also produced the first commercial jet airplane, the Boeing 707. alligator spread

at all.

accounts are expensed in the period when the related sales take place. The allowance

stock or a futures or option contract in response to unexpected negative news gaps.

War

fill it

allotment

market indices.

AICPA

tax return

a

Amended

returns have to be filed within

American Association of Individual Investors

American Association of Individual

A

Investors (AAII) nization

formed

in

not-for-profit orga-

1978 whose purpose

is

12

(AAII)

American Petroleum Institute (API) The primary U.S. oil industry trade association,

based

Washington, D.C. API

in

to educate investors about investing in a

conducts research and

of investment vehicles including and mutual funds. The AAII bonds, stocks, also provides information about tax plan-

from wellheads

variety

management, and retirement planning and offers guidelines about workning, portfolio

ing with a broker.

American Corporate Accrual Receipts (ACARS) The coupon, or interest payments, of corporate bonds that have been separated from the principal payments. It is

STRIPS, U.S. Treasury bonds whose inter-

bond

the corporate

which est

are

equivalent of

payments have been stripped from the

principal payments.

A popular bullion

American Eagle

coin

minted by the U.S. government. American Eagles are purchased by coin collectors and precious metals investors from that

is

secondary market. They are

traders in the

made of gold,

American The major

silver,

Gas

or platinum.

Association

natural gas industry trade associ-

ation, based in Alexandria, Virginia.

AGA

conducts technical research and helps create standards

equipment

for

and

products

involved in every facet of the natural gas industry.

It

also

compiles the

are considered to

statistics that

be industry standards. The

AGA's weekly report on how much natural gas is in storage is closely watched by traders. If gas supplies increase,

are likely to decline also creates

and vice

then prices versa.

AGA

outlooks for the industry and

compiles heating degree and cooling degree data.

See also heating degree day and

cooling

to retail outlets.

piles statistics that are

regarded

The

third largest

exchange

in

CPAs who

1887.

Membership is open to exam and agree to pur-

pass an

sue contmuing education, along with other

requirements.

The

organization promotes

continued learning, ethical behavior, and professionalism.

industry

United York Stock

in the

the New States, behind Exchange and the NASDAQ. It offers trading on equities, options, and exchange traded funds (ETFs). Companies with shares traded on the AMEX are generally smaller than those hsted on the New York

Stock Exchange. In 1993, it created the first domestic product market for ETFs and is listed 122 at the end of 2002. The

AMEX

exchange for most U.S.ETFs and a variety of listed securities including equity and

listing

registered derivative

index options.

The AMEX

is

the second largest options

exchange in the United States. It also lists over 100 closed-end funds ranging from

bond funds to global equity funds. The benchmark index is the AMEX Composite whose symbol is XAX. The AMEX also allows trading on NASDAQ-listed stocks. single-state tax-free

AMEX

was purchased by the In 1998, National Association of Securities Dealers

(NASD), which

operates

the

NASDAQ

An

option that

stock market.

American

formed

as

com-

American Stock Exchange (AMEX)

can be exercised

association of certified public accountants,

also

gasoline.

American-style option

of Certified Public Accountants (AICPA) The professional

It

benchmarks. A widely watched statistics is its weekly stock report that shows what crude oil inventories are and how much product has been imported. The API also reports data for derivative products, such as

degree day.

Institute

technical stan-

dards for industry equipment and products,

the

(AGA)

sets

ration date.

An

any time before its expiAmerican option contrasts at

European option, which can be executed on its expiration date only. (An

with

a

option gives the holder the right to purchase or sell a security during a specific

time and price.)

annual meeting

13

AMEX

analyst

See American Stock Exchange.

Amex Composite

A

Index

composite

of the stocks traded on the American Stock Exchange. The value of each stock in the American Stock Exchange is derived by multiplying the stock s market value of

all

price by the

The

number of shares

trading symbol

is

outstanding.

XAX.

A

Amivest Liquidity Ratio

liquidity

measure that calculates the dollar value of trading that would occur if prices changed percent. The Amivest Liquidity Ratio 1

how

shows

well a stock or investment

is

able to absorb trading volumes without a significant move in its price. A high ratio means that large amounts of stock can be

traded with Htde effect

on

prices.

amortization

An

accounting technique that reduces the cost of an intangible asset, such as goodwill, by assessing the charge against income over a specific amount of time. 1.

For

the term depreciation 2.

such

a tangible asset,

The

act

is

as

machinery,

used.

of reducing debt by making

regular principal and interest payments.

An

employee of a

A weighted arithmetic top

stocks

that

average index of the

are

traded

Amsterdam Stock Exchange. The

on

the

value of

the exchange was adjusted to 538.36 on January 4, 1999, after the euro was adopted.

AMT analog

alternative

minimum

tax.

In telecommunications terms, an

been superceded by digital technology. For example, to transmit sound in analog, as broadcast and telephone companies did, the frequency is altered by amplifying the early technology that frequently has

strength of the signal or varying the fre-

quency

in order to transmit information. In

contrast, digital,

which

is

technology, uses a series

now

the dominant of electronic data

represented by ones and zeros to store or transmit data.

(a

makes buy and sell recommendations on companies in a particular industry. Analysts also are employed by companies involved in commodities trading to recommend when customers should buy and sell futures contracts and suggest appropriate that

trading strategies.

A term used by Federal Reserve Governor Edward M. Gramlich in January 2003 to say that U.S. monetary poHcy needed an anchor, or a long-term strategy. He said that a clear strategy would help the Federal Reserve react to economic problems such as a surge in unemployment

anchor

without

riling financial markets.

angel

A wealthy individual who agrees to money with

invest

what

is

likely

a start-up

company

in

funding. Angels invest

its first

even before venture

capital

firms

do

so.

amount of money invested by smaller than the amount that

Typically, the

an angel is would be received from a venture capitalist, and may be $10,000 up to about $200,000. Angel also is used in the context of z fallen

which is a bond reduced to junk status.

Annan, Kofi

The

the United Nations,

as

that

has

been

secretary-general

of

this printing.

of

He

was awarded the Nobel Peace Prize for 2001.

annual meeting See

firm

Wall Street broker), a buy-side firm (a mutual fund or investment management company), or an independent research firm

angel,

Amsterdam Exchange Index (AEX)

sell-side

PubUc companies hold

an annual meeting once a year. During the meeting, members of the board of directors are elected, the selection of an auditor is

voted on, and shareholders may bring forth other issues. Shareholders unable to attend may vote through a proxy, which may be mailed in or transmitted over the Internet or telephone. In an annual meeting, the chief executive officer or chief financial officer typically will discuss the company's

performance during the its

outlook.

last

year as well as

14

annual percentage rate (APR)

annual percentage rate (APR) The interest expense a consumer pays for debt that

expressed in simple, annual-percentage

is

terms.

The

Federal Truth in Lending Act

requires that each

ment

includes the

consumer loan agree-

APR.

A

annuity

financial instrument that pays

out the investor's earnings on

for retirement. Annuities

person receiving

interest.

For instance,

compare two interest-bearing accounts: one pays 1 percent interest monthly and the other pays 3 percent interest

quarterly. The

account paying monthly interest will have a higher annual percentage yield than the account paying quarterly interest, because interest

is

frequently,

more

credited to the account

which

increases the

amounts of

funds in the account that interest

paid

is

upon.

annual report Once a panies summarize their

year, public

financial

com-

results,

tax-deferred, so the earnings from invest-

ments

in these accounts

liability until

annuitant dies before the time period the payments are

See

company. For instance, companies that are money may produce a plain report on white paper with black ink that is relatively inexpensive to print. Other companies that

and profitable are likely to produce magazine-quality reports with lots of design elements, photography, and the use are established

of color throughout.

annualized gain

The amount of

ciation of an investment during a

period. If an

appre-

12-month

investment appreciates

1.5

percent during one month, the annualized gain

by

is

18 percent, which

is

12 multiplied

that

falls

behind schedule.

annuity starting date The date on which annuity payments begin. The longer the annuitant waits to begin receiving pay-

ments, the higher the payments will be life expectancy period is short-

because the

ened and the insurance company paying the annuity has a longer time to invest the

money. Typically, people don't begin receiving an annuity until after 59K years of age because withdrawals before then are subject to a 10 percent penalty

Revenue

Service. See

from the Internal

also annuity.

anticipated growth rate An approximation of the annual rate of return that an investor can expect for bond mutual funds based on the maturity of the fund's bond portfolio. is

1.5 percent.

up,

is

to the beneficiary.

may be used to refer to periodic must be made by the annui-

arrears also

tant that

losing

made

annuity in arrears An annuity whose first payment occurs at the end of the year rather than at the beginning. Annuity in

and outline the various areas of their business and product lines to shareholders. Typically, financial results will go back over a multiyear period. The annual report is mailed to vary depending on the financial health of the

tax

also annuity.

payments

shareholders. Formats of the annual report

grow without

the benefits are paid out.

annuity certain A financial instrument which pays out the investor's earnings in a specific amount of money each month for a set amount of time, often ten years. If the

outline their competitive accomplishments,

all

may be paid for or may be set

life

of time. Annuities are

for a certain period

a

time.

Annuities typically are used to provide fimds the duration of a person's

annual percentage yield (APY) The effective interest rate from the standpoint of

regular,

a

amount of

periodic basis for a set

The

using the

calculated

average

anticipated

maturity

growth

fund's

rate

weighted-

and assumes that

all

annuitant A person who receives the from an annuity. When the owner

dividends and

benefits

The

decides to receive regular payments,

held until maturity and are not sold or

it

is

called annuitizing the policy or contract.

See

also annuity.

capital gains are reinvested.

calculation also assumes that

recalled early

by the

issuers.

bonds

are

arbitrage pricing theory

15

anticipated value at maturity Although this can be a generic term, for a mutual

countries.

expected redemption value of one share of a portfolio based on the portfolio's weighted-

important

bond fund

average maturities. There that the

reach

bond mutual

its

the

indicates

it

is

no guarantee

fund's share price will

meets periodically to discuss

It

economic and

trade issues as well as topics

to

international

the

API

See American Petroleum

The

appraisal

Institute.

evaluation of a property

anticipated value at maturity.

and assessment of its worth by an indepen-

See

dent professional. Typically, appraisals are done on property before a bank approves a

antidilution right

A

antitrust laws

dilution protection.

collection of different

laws and court rulings that have evolved over time to govern the anti-competitive

behavior of large business.

Some of

the

may be illegal are businesses, competing agreements among such as agreements on price or related matters; agreements to restrict output; group boycotts, which drive up prices; and agree-

business practices that

ments among

competitors to divide sales

territories or allocate customers.

The Sherman

mortgage. Appraisals also may be done on other assets, such as jewelry or a business.

The person conducting

the

appraisal

called an appraiser.

appreciation The increase in value, over time, of an asset, stock or investment. The opposite

apps that

is

depreciation.

is

Short for software applications; jdncgon often found in technology research

reports written

by Wall

Street analysts.

and combina-

APR

See annual percentage

rate.

would restrain trade or create a monopoly. The Act provides criminal

APY

See annual percentage

yield.

enforcement tool. The Clayton Antitrust Act of 1914 out-

ARA

An

tions that

penalties as an

laws exclusive dealing arrangements, tie-in price discrimination, and mergers that

and interlocking directorates. It carries only civil penalties and is enforced by both the Department of Justice and the Federal Trade Commission. The

would

abbreviation used in Europe,

usually in conjunction with the futures ket,

which

Clayton Act was significantly amended in 1 936 by the Robinson-Patman Act and in

1950 by the Celler-Kefauver Antimerger

Amsterdam.

Federal Trade

passed in 1914.

It

Commission Act was

created a governmental

agency whose responsibility is to protect consumers against illegal business practices

and may catch loopholes

in

the

other

statutes.

antitrust laws are enforced

by the

Commission and the Antitrust of the U.S. Department of Justice. Division Federal Trade

APAC

A

arbitrage

situation in

which

a trader

from minute differences the same security on different

attempts to profit in price for

stock

or

employ and use

futures

markets. Traders

that

this strategy are called arbitrageurs

specially designed

computer pro-

grams to identify price discrepancies.

Act.

The

mar-

stands for Antwerp, Rotterdam, and

restrain trade

The

is

Antitrust Act of 1890 pro-

hibits contracts, conspiracies,

sales,

capital

markets.

The

Advisory committee Committee is a governmental that includes representatives from Asia-Pacific Asia

Pacific

arbitrage pricing theory A mathematical theory that attempts to determine the expected or required rates of return on

on the asset's systemic relationship to more than one risk factor. The theory was developed by Stephen Ross in the early 1970s and was initially pubHshed in 1976. It assumes that capital markets are perfectly competitive and investors always prefer more wealth to less wealth, even if less wealth comes with more

risky assets based

certainty. In contrast,

another popular theory,

16

program (ATP)

arbitrage trading

the Capital Asset Pricing Model, focuses

on

a

single risk factor.

computer program

that traders rely

on

See Dutch

ARPU

Average revenue per user

auction.

is

calcu-

A

lated by dividing revenues by the subscriber

to

base.

program (ATP)

arbitrage trading

ARPS

indicate when stocks or investments should be bought or sold. Because many people use the same program, program trading often produces excessive volatility in the

market.

Non-service revenues, such

ment or other calculation.

sales,

The

as

equip-

included in the

are

definition often

is

used in

the telecom industry. User refers to one

customer, such

phone

as a cell

user.

of incorporation This is a document that is filed by a company with the Secretary of State in the state where the company wants to incorporate. The articles

articles

A

binding dispute-resolution process in v^hich an impartial person or group of people hear the facts and decides how the matter should be resolved. arbitration

include the names of the major shareholders,

number of authorized and describe the corporation's pur-

Arbitration has the effect of a court order.

the officers, and the

Many

shares,

brokerage firms require their clients to

sign agreements stating that they will use

pose. They also

arbitration, rather than take legal action, in

the business.

the event that there futures,

is

options

or

professional

a

disagreement. Stock,

exchanges, and

other

proceedings. Arbitration contrasts with medi-

which

ter,

isn't

binding on the

parties.

artificial

Medical

A

Savings

Account

(Archer MSA) up to pay qualified medical expenses of the account holder or a family member. It is used by employees who work for a small business, which is usually 50 employees or less, and contrasts with a Flexible Spending Plan, which is offered by large corporations. In order to use the Archer MSA, a company must have a high-deductible savings account that

is

set

health plan. For medical expenses to qualify

payment from an Archer MSA, they generally must be unreimbursed and could be deducted on Schedule A of the 1040 Income Tax Return form. for

Arpanet

The

first

generation

of the

Internet, which consisted of electronic mail and software that allowed users to transfer files. The second generation of the Internet is the World Wide Web, which allows people to connect to databases in addition to Arpanet services. Today, the third generation of the Internet allows people to connect directly to the Internet's computers via software.

the articles are approved

the corporation

transactions. An is

A

currency

actual currency that

rency

Archer

state,

the registered address for

is

issued a char-

or right to do business.

or regulatory associations are

often involved in administering arbitration

ation,

by the

list

Once

is

substitute for an

used in economic

example of an

artificial

the special drawing rights

cur-

(SDR)

were created by the International Monetary Fund (IMF). SDRs are used by that

the

members of the IMF

to pay their dues

between countries. The value of the SDR is computed using a grouping of currencies and adjusts as the and

transfer funds

prices of the underlying currencies change.

ascending tops In technical chart pattern in which the peaks rity's

in a secu-

price are increasingly higher than the

previous peaks. A descending top site

analysis, a

of an ascending

is

the oppo-

top.

ascending triangle

A price-chart pattern

market is consolidating and is about to break out to either the upside or downside. Ascending triangles are identified by charting the closing prices of that indicates that a

or other financial technique called technical

a stock, futures contract

instrument in

a

analysis.

ASEAN Nations.

Association of Southeast Asian

A

cooperative group formed in

and poHtical objective of

1967 that focuses on economic, cultural issues.

It

has a

social,

asset

17

regional peace and require

mon

member

but does not

stability,

countries to adopt

political views.

Member

com-

countries are

Brunei Darussalam, Cambodia, Indonesia,

Myanmar,

Malaysia,

Laos,

Philippines,

Singapore, Thailand, and Vietnam.

Dollar

deposits that are held in Asian financial cen-

such

as

places to invest.

option A specialized form of option whose payoff is connected to the average value of the underlying security on

Asian

Asian currency units (ACUs) ters,

emerging markets also begin to weaken. Although the situation has stabilized, the emerging Asian countries still haven't regained their former status as attractive in

Singapore. Dollar deposits are

An Asian

specific dates.

equal to either the lowest underlying

funds that have been deposited into a bank

is

outside of the United States.

security value

Asian

Financial

A

Crisis

of

chain

events that led to turmoil in the financial

expiration date.

more

was too highly valued given that country's financial situation. Thailand had a very large current account deficit, a growing foreign debt, and a governmental budget shortfall. To stop the baht from faUing, the

ask

latter half

baht,

Thai government used

its

currency reserves

The effort was short lived and had to let the baht government the Thai trade freely, instead of being hnked to the

to

buy

US.

baht.

option) or the highest

(call

underlying security value (put option) over a period of time that ends on the option

of 1997 and continued into 1998. The crisis began when traders decided that Thailand's currency, the

markets during the

option's strike price

An Asian

option

typically

is

expensive than a regular option. Also

called average rate option.

to

The

sell a

price at

which someone

is

willing

financial contract or security. Also

synonymous with

sell.

An acronym

Aspirin

Price Riskless

for Australian Stock

Indexed Notes. These are four-

zero-coupon bonds that are guaranteed by the Treasury of New South Wales. The bonds are repayable at face value plus a per-

year,

centage

increase

that

the Australian All

dollar.

As the baht weakened,

so, too,

did other

currencies in the region, particularly the Philippines'

peso,

Malaysia's

ringgit,

and

Ordinaries stock index rises above a prede-

termined assay

level

The

during the time period.

process of testing a metal or an

Indonesia's rupiah. Stock markets, such as

oil

Hong

often used in the context of metal and

Kong's market, posted sharp declines. South Korea was drawn into the turmoil when it spent much of its foreign currency reserves to protect the value

of the won.

to

The term

purity or quality.

is

energy products that are delivered against futures contracts on futures exchanges and to

meet

certain

minimum

requirements.

implement economic

reforms in order to continue receiving assistance. In particular, the

IMF

IMF wanted

to

reduce the country's use of crony capitalism, whereby many large businesses were controlled

its

which have

In January, attention turned to Indonesia,

which agreed

for

by members of the then-President

Suharto's family.

In March, the Thai baht and South Korean won begin to firm as investors confidence began to return to the markets. However, by May riots in Indonesia left Jakarta in ruins, and President Suharto resigned after 32 years in office. Currencies

assessed

valuation

The

value

that

is

assigned to a property by a state or

munic-

The

assessed

ipality in

valuation

order to

assess taxes.

of properties

municipal bond investors

is

important

when

are backed by the property by the governmental unit.

to

the bonds

taxes collected

Cash, accounts receivables, property, or equipment that has value and is hsted on

asset

company's balance sheet. An asset may be bought or sold and its price can range from hundreds of dollars to miUions of dollars. a

18

asset allocation

The

asset allocation

ment

allocation of invest-

between major

dollars

such

and

estate,

cash. Asset allocation

a highly

is

strategy because

recommended investment

between

lets investors diversify risk

it

classes

asset

as stocks, bonds, precious metals, real

ent investments. For example,

if

differ-

the stock

performing poorly, then it is likely that the fixed-income market is performing

market

is

well as investors shift

stocks to

in order to lock in a return. In this

bonds case,

money from

an investor with

a well-allocated port-

foho will lose money on stocks but gain money on bonds. Asset allocation is a way for investors to weather market downturns

by spreading their

risk.

allocation fund A mutual fund in a set mixture of equities, invests that fixed-income securities, and money market asset

instruments. These funds are required to

maintain a precise weighting in each asset class, unlike a flexible portfolio fund. See also flexible portfolio fund.

a

A type

mutual fund

asset allocation

of

mutual fund that divides its investment among stocks, bonds, and money

Second mortgages also are quent sources of asset financing.

fre-

inventory.

impairment Impairment occurs sum of the expected cash flows from the asset is less than the book value of

asset

when

the

Accounting practices require that long-term assets be evaluated for impairment. If a reduction is made in the carrying the

asset.

value because of impairment,

it is

recorded

as a loss.

management

asset

The

professional

management of financial assets by managers who make investment decisions for indipension

or

institutions,

viduals,

Although

asset

management

since the

early

1900s,

growth

strong

began to show Concerns

it

1970s.

the

in

funds. existed

has

about the solvency of the Social Security Administration increased individual's attenretirement

their

to

tion

The

planning.

Employment Retirement Income Security Act (ERISA), which passed in 1974, created private retirement plans called 401 (k) plans. Those changes paved the way for firms to speciahze in managing money for individuand

Also called and often

institutions.

dollars

als

market securities in order to maximize the return to investors and minimize risk.

used interchangeably with investment management. A professional referring to the job

he or she holds

A

class

asset

class

of investments that

similar characteristics, including risk

have

factors

how

and

bonds, real

returns are created. Stocks,

estate,

investment manager.

industry

of asset

management

A

schedule

depreciable

that

the

lives

Internal

of different

Business managers can select the

tem or may

(ADR)

Range

accepts for determining

Revenue Service the

assets.

ADR sys-

elect a straight-line depreciation

to

A

businesses

financing in

method

which lenders

at the cash flow from a particular asset and base a loan on the asset's expected rate of return. The asset secures the loan. Most common forms of asset financing are loans made against account receivables and

look

asset

industry.

brokerage house institution

vices

An

account

or other financial ser-

that

combines checking

account features and the ability to

make

investments including buying stocks, bonds,

and other investments. asset

A

play

stock

that

attractive

is

of the company's assets. Companies that are an asset play are a tempting target for takeovers because they

the

financing

available

Hkely to use the term

the

because the current price doesn't reflect

schedule.

asset

A person referring to

management account

asset

classes.

at a

Depreciation

System

itself is

Hkely to use the term

precious metals, and cash

are different types

Asset

is

true

value

are an inexpensive

guaranteeing asset

way

to

buy

stripper

company

thereby

a certain return.

A

type

takeover in which the buyer a

assets,

in order to

sell

of corporate is

taking over

the company's

Association for Investment IVIanagement and Research (AIMR)

19

assets.

The income from

the sale of the assets

pays for the debt incurred in funding the takeover. The buyer will profit if the value

the

exceeds

sold

assets

the

of

liabilities

incurred in acquiring the target company.

Net

turnover

sales

assets. Asset turnover measures each dollar of assets produced in

average total

how much

A

the underlying security at

sell

At

by

expiration, the

clearinghouse

or

the

assigns

futures or options contract to either a ran-

domly or

systematically chosen party.

The absorption by

new

public of a ratio calculated

telling a futures

has been exercised and that he or she must

purchase or

assimilation

sales.

asset/equity ratio

of

the specified strike price.

by

divided

act

or options writer that his or her contract

exchange asset

The

assignment

sold in

its

stock issue after

the

has been

it

by the underwriter.

entirety

dividing total assets by stockholder equity.

The

ratio

number

not important by

is

itself

and must be compared to other companies in the same industry to have relevance.

associated gas

an unsecured promis-

Commercial paper

is

sory note that

sold

is

by

has a fixed maturity of

1

usually sold at a discount

a corporation. It

270 days and is from face value.

to

asset-backed security (ABS) A fixedincome security that is collateralized, or backed by, mortgages, credit card or other receivables, installment contracts, or by some other type of asset. These securities have

become

increasingly popular during the

several

decades.

entities,

such

as

last

Government-sponsored Fannie

Mae and

Freddie

Mac, have issued an increasing amount of ABS securities that are backed by home mortgages. By removing those mortgages from their balance sheet, the agencies are

is

present

from

in a crude oil reservoir, either separate

the

or mixed in with

oil

may paper commercial asset-backed Commercial paper that is backed by assets of the issuer and is often abbreviated ABCP.

Natural gas that

Associated gas

it.

increase the value of the crude oil if the

cost involved in extracting the gas doesn't

exceed

its

value.

associated person A person engaged in the investment-banking or securities busi-

who

ness

or indirectly

either directly

is

by

controlled

member

a

of the

firm

National Association of Securities Dealers. It

doesn't matter

whether

NASD

with the

istered

An

registration.

this

person

is

reg-

or exempt from

associated person

also

is

every sole proprietor, partner, officer, direcor branch

tor,

manager of any

NASD

member. An associated person is also someone who is involved in business dealings with

member

a

firm

of the

National

Futures Assocation that requires the person to

be

registered

with

the

Commodity

Futures Trading Commission.

able to loan additional

Association for Investment Manage-

people can receive

ment

asset-for-asset

which

creditors

money so that more home mortgages.

swap

A

international,

situation

in

exchange the debt of one

defaulting borrower for the debt of another

defaulting

exchanged

borrower. Typically, for

new

debt

is

debt that reduces the

amount owed but increases the interest that is paid. Debt also may be swapped for additional equity.

assign

To

transfer

ownership from one

party to another by signing a contract. assignor gives

up ownership and the

becomes the owner.

and

The

assignee

An

Research

(AIMR)

nonprofit

organization

more than 50,000 investment

of

practitioners

and educators in over 100 countries. The organization was founded in January 1 990

when

Financial Analysts

the

Federation

of Chartered Financial Analysts (ICFA) merged. Its purpose is to educate and examine investment managers and analysts and to ensure that high standards of professional conduct and (FAF)

and

financial

the

analysis

Institute

are

followed.

AIMR

administers the Chartered Financial Analyst

(CFA) program, which is a three-year ing and study program to certify

test-

that

assumed

20

interest rate

investment management professionals are

CFA exam

qualified. Pass rates for the

1963, the

first

year

94 percent. That percent

was introduced, was decHned steadily to 54

it

rate

AIMR's members

2001.

in

strategists, consultants,

investment

specialists

are

managers,

portfoho

analysts,

securities

in

educators, and other

who work in

a variety

of financial services companies.

assumed

An

interest rate

interest rate

used by an insurance company to calculate the payout on an annuity contract. Typically, a monthly annuity payment correlates to the level of interest rates. See also

to the danger of loss. The

Exposed

at risk

used in limited partnerships in which the investor deducting a

concept of

at risk

must prove

loss

is

Revenue

to the Internal

chance of never Service that there was realizing any profit and that the investment a

may be

lost as well.

ATM 1.

See asynchronous transfer mode. Stands

2.

for

automatic

teller

machine,

which a consumer can use to withdraw funds from his or her bank account or to obtain a cash advance on a credit card.

annuity.

The

assumption

act

of taking responsi-

bihty for another person or corporation's

For example, a mortgage may be assumed by another buyer. In this case, the seller remains secondarily responsible for

Habilities.

the mortgage

payment

responsibilities

be executed

For example, in

merger

a

situation,

the parties involved in the deal have

knowledge than industry

is

more

their competitors that the

about to undergo

a significant

asynchronous transfer network

mode (ATM)

that divides messages into small

or fixed-size units, that establish a

switched connection between two

By

com-

separating the transmission into

small pieces, different types of signals (such

and audio) can be sent over a Hne without any one type dominat-

as data, voice,

single

ing

the

transmission.

It

provides

fast

transmission speeds. In trading jargon, a stock

at

sale "at" a certain price.

action the syntax at

par

inal,

to

On

at

the

cancelled. In this

type of all-or-none

futures is

and options

a closing period

approximately ten minutes at-the-close orders can be executed.

lasts

when

for

auction markets A securities market in which price is determined through the open and free interaction of buyers and sellers.

In contrast, electronic trade process-

ing systems are not auction markets.

change.

puters.

is

exchanges, there often

asymmetric information Information that is known to some people but not to others.

execution can't occur

a particular

it is

is

the closing price of the

then the order

respect,

that

cells,

at

security. If the

by the

See Australian Stock Exchange.

trade order for a

stock, futures, or options contract that

market order.

ASX

A

at-the-close order

is

lender.

A

arbitrage trading program.

See

close,

of those

reUeved

unless the seller

ATP

At

is

is

offered for

In a trading trans-

"quantity-at-price."

a price that

is

equal to the nom-

or face value, of a security.

auction rate preferred stock (ARPS) See Dutch

audit

auction.

The

process of verifying a

compa-

information. Auditors are ny's certified pubUc accountants who are independent of the corporation. An auditor financial

company's accounting books and records in order to determine whether the company is following appropriate account procedures. An auditor issues an

examines

a

opinion in financial

a report that says

statements

whether the

"present

fairly"

the

and its operacompany's tional results in accordance with Generally Accepted Accounting Principles (GAAP). financial position

Corporate financial statements once a year.

are audited

Autex

21

committee A coniniittee made up of some of the members of a company's

involved, and the time the transaction

audit

board of directors that is responsible for the overall management of the auditing process

and the auditors. The audit committee assists the board of directors in overseeing the integrity of the company's financial statements and also may be involved with and regulatory compliance, including the internal audit function. The board of directors appoints the audit committee. The audit committee also recommends whether shareholders should approve the choice of

legal

an independent auditor. Under the 2002 Sarbanes-Oxley tion,

members of an

audit

committee must

between their employer and the company on whose board they serve. The rules also require that the board of directors evaluate

board

a

member

on more than two companies' boards would impair an audit member's performance; membership on different audit boards must be disclosed in the company's proxy statement. In addition, the rules

one member have

sig-

nificant financial expertise, although exactly

what

constitutes significant financial exper-

tise is left

up

to the companies.

The Sarbanes-Oxley law

requires

com-

panies to have an internal audit function,

which may be outsourced to independent auditors. The audit committee also is required to have a charter that specifies the

purpose, duties, and evaluation procedures

of the committee. audit 1.

trail

The

Millie,

it is

papers that validate accounting trail

shows

how finan-

numbers and conclusions were

developed.

rude term applied to an unsophisticated investor by a market professional. If an investment interests Aunt

The

record of trading information

that identifies the brokers participating in each

simple and not too complicated.

Australasia

Australia

and the Far

East.

Australian All Ordinaries Index A market capitalization-weighted index comprised of the largest 500 companies listed on the Australian Stock Exchange. It was developed in 1979 with a base value of 500.

Australian Kangaroo A popular bullion coin that is minted by the Australian government. Kangaroos are purchased by coin collectors and precious metals investors from the Australian government or from traders in the secondary market.

made of gold,

silver,

They

are

or platinum.

Australian Stock Exchange (ASX) An exchange formed in 1987 by the Australian Parliament by consolidating six independent stock exchanges that had operated in the capital cities of the Australian states. Those individual exchanges had been in existence since the 19th century. In 1994, the first stage of an electronic clearing and settlement system (CHESS) was introduced and was fully implemented in 1996. During that same year, the ASX voted to demutualize, and phase two of CHESS was implemented, which allowed the shares of foreign companies to be setded. During the latter half of the 1990s, the number of finance, insurance, communications, and media companies increased market from its heavy concentration of mining and natural resources companies. Equities, fixed-income securities, and derivatives trade on the ASX. Its lead index is

2.

A

dramatically, thereby diversifying the stock

records. The audit cial

Millie

serving simulta-

neously

require that at least

Aunt

legisla-

be independent directors. This means those members cannot be company executives and they must limit business involvement

whether

occurred.

transaction, the firms clearing

the trade and

its

terms, the customers

the All Ordinaries Index,

which

is

com-

prised of the largest 500 companies.

Autex

An

automated trading system used by broker/dealers, exchanges, and others.

22

authentication

The

authentication a

bond

determine that

certificate to

genuine and not

process of validating it

is

a fraud.

authority bond A bond that is issued by a government entity to provide funds for revenue-producing agencies. The bond is paid for from revenues earned by the agency, or authority,

which may operate hubs such

roads, transportation

and ity

toll

bridges

as

airports, or public utilities. The author-

bond

contract

may

bonds

protections. Authority

which

revenue bonds,

taxing revenues of a

include bondholder are similar to

from the public agency are paid for

The number of stock company may issue as autho-

authorized shares shares that a

of incorporation or by not its shareholders. Often, a company does If a shares. stock authorized issue all of its

rized by

its

company

articles

has issued

and wants to

issue

all its

more

authorized shares shares,

it

usually

has to obtain permission from the board of directors and/or the shareholders.

authorized stock

The maximum num-

ber of shares of stock that a corporation is allowed to issue. If corporate management wants to exceed that hmit, typically they

have to obtain approval from shareholders in order to issue

more

automated bond system (ABS) An electronic bond information and trading Exchange

New

York Stock

allows subscriber firms to

that

automatically execute orders in corporate, agency. Treasury, and municipal securities.

Most of debt,

the trading occurs in corporate

including

convertible

bonds.

ABS

allows trading for over 2,000 debt securities.

automated order system

A

computer-

ized trading order-entry system that sends

single-order entries directly to the appropriate specialist

on the exchange

floor.

New York Stock Exchange's system Super

DOT. The

Philadelphia

is

The

called

Stock

PACE (Philadelphia Exchange uses Automated Communication and Execution System) and Market).

The

Autom (Automated Options

NASDAQ

Auto-Ex.

Automatic Clearing House (ACH)

A

nationwide electronic funds transfer net-

work

that lets financial institutions distribute

and debit entries to bank them. The ACH enables setde and accounts banks to setde accounts with other banks. electronic credit

extension The extension that is granted by the Internal Revenue Service to taxpayers giving them 90 additional days beyond the April 15 deadhne to

automatic

file

their tax returns.

automatic funds transfer The movement of funds from one account to another using electronic technology.

investment program An investment plan where money is added

automatic

automatically each

month

(or at another

checking account, savings account, mutual fund, or another investment

interval)

to

a

vehicle.

automatic rebalancing A portfoliomanagement process in which investments that have appreciated are sold in order to

shares.

system operated by the

Order Execution System (SOES), which automatically executes agency orders in NASDAQ SmallCap securities for 1,000 shares or less. Another system is the Small

stock market uses

take a profit and the profits are reinvested into sectors that are out of favor.

Automatic

rebalancing helps investors keep the asset allocation of their portfoUos in line with their stated investment goals. Often, auto-

used for managing mutual funds, retirement accounts and vari-

matic

rebalancing

is

able annuities.

automatic

stay

A

provision

under U.S. Bankruptcy law the

most

commencement

or

allowed

that prevents

continuation

of

judicial, administrative, or other pro-

ceedings against the debtor or the debtor's

bankruptcy is filed. The purpose behind an automatic stay is to give breathing room to a debtor filing a Chapter 1 1 or estate after

Chapter 13 bankruptcy and to give a Chapter 7 trustee the time and protection to administer the assets of the estate. The

average maturity

23

automatic stay also stops Chapter 7 debtors from being pressured by collection agen-

However, anyone who doesn't want to abide by the automatic stay can file a motion with the bankruptcy court and ask cies.

during the period. The average cost

puted by dividing the for sale.

The

com-

of goods

total cost

by the

available for sale

is

total units available

average unit cost

is

applied to

that credit card

companies

the units in ending inventory.

for an exception.

average daily balance

A

automatic withdrawal fund that

type of mutual 1.

shareholders receive a fixed

lets

payment from dividends on

owed by

quarterly basis.

2.

average A number arrived at by totaling a set of values and then dividing that sum by the number of values in the set. Averages, such as the Dow Jones Industrial Average (DJIA), are cited as a measure of the stock performance. To

market's

arrive

at

added and divided by an adjusted

are

divisor

whose value

printed daily in the

is

The

average accounting return is

is

calculated

average

on an investment.

It

calculated by taking the average projected

earnings after taxes and depreciation and dividing

them by

the average

the investment during

its

has

different uses,

While it

value of

term means

this

generally

compounded

annually

the

book

projected lifetime.

average annual return

many

would have been produced

return for a

that

mutual

fund or other investment's cumulative total returns if the performance had been constant over the entire period. Average annual return

is

used to smooth out variations in

fund's return

vidual

fiscal

and

is

not the same

as indi-

method used by

at dif-

ferent prices over a period of time.

savings

average days payable A ratio calculated by dividing 365 days by the payables turnover

ratio. Payables turnover ratio

is

cal-

change in inventory and dividing that number by average accounts payable. Average days payable gives an idea of how

much

time passes before a company pays

manufacturing context, the total amount of costs divided by the number

then the company

paying

may be having

difficulty

its bills.

average days' inventory on hand The number of days in the year divided by inventory turnover, which is cost of goods sold divided by average inventory. The ratio shows how many times inventory turns over during a year, which indicates how vibrant sales are.

average

down

When

See also average

average

An

investment strategy

of shares purprices are falling, then the

The

average

number of

life;

individuals typically

not. Also called weighted-average

maturity

The

life.

average

time

A

before bonds or other fixed-income invest-

the average

ments mature. Often cited as a measure in mutual fund portfolios. The longer the

method at

up.

calculate average

average

method of pricing inventory

life

shares.

before the principal of a debt or mortgage remains outstanding. Businesses

do

of units produced.

inventory

its

accounts payables. If the time increases,

years

2. In a

cost

bank or

same amount of money buys more

average cost of shares of a stock

cost

a

that reduces the average cost

year results.

or mutual fund that were bought

average

is

and loan to calculate how much interest is payable to the customer in the case of a savings account or interest-bearing checking account.

chased.

The

interest

a

average cost 1.

how much

customer.

culated by adding cost of goods sold to any

Wall Street Journal.

return that

A

a

the

DJIA, the prices of the 30 stocks in the

DJIA

method

use to calculate

monthly or

a

A

of goods that are available for

sale

24

average rate of return (ARR)

average

riiaturity,

ing interest

the greater the risk of ris-

tax rate

ferent

rates.

is

calculated by

combining the

weighted

rates

to

dif-

payment

the

in order to arrive at an average tax Corporations usually have an average tax rate of 35 percent to 40 percent. The rate dechnes if a company's profits fall and

amounts average i-ate of return (ARR) The ratio of the average cash flow received to the amount of funds invested.

average receivable collection period The amount of receivables turnover (net sales divided by average receivables) divided by the average receivables to calculate how many times during the year that accounts receivable turns over. Average receivables are equal to the sum of beginning receivables

and ending receivables, divided by two. The number alone doesn't provide much information.

It

niust

be compared to average periods

for

other

receivable

collection

companies

in the industry, as well as past

collection periods, to

fmd out

if

collection

times are increasing or decreasing.

rate.

it

often rises as profits increase.

average up An investment strategy used in a rising market that is designed to reduce the overall cost of purchasing securities. For example, purchasing equal amounts of shares at $40, $43, $45, and $49 means that the average share cost

is

$44.25.

away from the market a

situation in

In a limit order,

which an order

to

is

lower than the current market price for the security or in price, price.

is

which the

offer price, or sell

higher than the current market

The

opposite

is

in-line order.

from-the-market orders typically

The amount of taxes income. The average of percentage

buy

Away-

are held

average tax rate

for later execution, unless they are specified

paid

as fill-or-kill orders.

as a

B

1.

A

a

back-end load,

type of mutual fund share that has sales

a

charge that

money

deferred until the

withdrawn.

is

A

Chinese stock share that can be purchased by foreign investors.

A

type of corporate stock.

of these

acteristics

B

class

The

char-

shares will

among each company.

vary

B.T.U.

See

other financial instrument, that tive

of

See

filling in

with a par value of $1,000 or less. Baby bonds allow small investors to invest in bonds and give smaller corporations a chance to sell bonds. The

means

that large institutional

investors typically ignore this

debt

issue.

Because baby bonds are sold to a smaller market, they lack the liquidity of large corporate bond issues and thus have higher

inside a larger price

back months

Futures

contracts

that

have the longest time before expiration. In contrast to front month,

which

is

the futures

contract that will expire next. Typically the

month

office

Departments

that

manage

banks or financial companies' accounting, administrative, information technology,

trading

settlement

operations.

and

Those

departments support the firms' trading and underwriting activities but do not interact

with

clients.

Typically,

back

located in office space that

prime

real

headquarters

commission paid

sales

by an investor who purchases shares in a mutual fund or an annuity. Back-end loads are charged when the investor sells the investment. Often the sales charge, which is a

load, is

when

longer

the

decreases

held, until

some

the

point, often

the sales charge dis-

sales charge.

backstop

A

type of insurance. Under-

bond issue have a to make sure that the be purchased. To do so,

writers for a stock or

backstop in place security issue will

the underwriters assemble a group of sub-

underwriters, often institutional investors

who

are prepared to take a certain share

of

of underwriting deal may be called a backstopped deal or z firm-commitment undenmting

government agency or loan guarantee program that will deal.

Backstop

also refers to a

insure a company's debt or

its

credit line.

the most actively traded

is

futures contract.

back

A

back-end load

chart

the offering that remains unsold. This type

with them.

costs associated

on a price movement.

appears. vMso called redemption fee or deferred

A bond

small issue size

indica-

remain in but then fall

the space

several years out,

business-to-business.

isn't

a substantial trend; prices

a narrow^ range. Prices rise,

back,

called

British thermal units.

baby bond

front

fixed-

Price action, for a stock or

back-and-fill

investment

B2B

the

in

is

Mutual fund shares also have other classes of shares with different fee structures.

3.

term used

income market when prices fall and yields rise. Another use for this term occurs when an investor moves funds from a five-year note and puts them into a two-year note. This term is also used to refer to a market that reverses an upward trend and backs up.

share

2.

A

up

back

estate, are.

is

offices

are

away from

where the company's

backstopped deal A type of underwriting deal in which the underwriter offers a firm commitment to purchase the compathereby assuming the risk if poorly received by the market.

ny's securities,

the deal

The

is

underwriters' fee

is

the spread, the dif-

ference between the price

at

which the

were purchased from the company and the price at which they were sold securities

to the public. Also called firm-commitment

underwriting or bought deal.

26

backwardation

backwardation situation in which

liabilities

the price of the nearest,

company.

or active contract, is higher than the price of contracts further in the future. Typically, increase

prices

months

delivery

the

as

the

into

extend

Backwardation

future.

occurs because, as a commodity or financial instrument is held for a longer period of time,

storage

as

expenses, and insurance

charges), interest that have to

(such

charges

carries

it

be paid. Backwardation occurs

only in unusual circumstances. A current shortage of product is one situation in

which backwardation occurs. Accounts receivable

bad debt

unlikely to be paid.

write off bad debts,

Companies setting up

that

are

typically special

a

reserve account that they then charge. In a

recession

economic

or tough

times, the

fund A mutual fund that a mix of equity securities and

balanced invests in

bonds with the objective of conserving the principal, providing income, and achieving long-term growth of both principal and income.

The currency

balboa

unit of Panama,

comprised of 100 centesimos.

balloon mortgage A mortgage whose interest and principal payment won't result in the loan being paid in full at the end of the mortgage term. The final payment on the mortgage is significantly larger than the regular payment and is called a balloon payment. Balloon mortgages, as well as balloon

often

loans,

are

used

when

the

debtor

Companies,

expects either to refinance the loan closer

well as small business owners, can write

to maturity or expects a large cash infusion

amount of bad debt as

and shareholders' equity of the

In the futures market, a

bad debt

off the their

income

as a

increases.

business deduction

on

to pay

off"

the debt.

taxes.

bandwidth The currency

baht

unit

of Thailand,

comprised of 100 satang.

balance of payments

A

country's inter-

period, usually a quarter or a year.

It

tabu-

the inflows and outflows of goods,

and investment flows for Balance of payment includes 1) services,

a country. a

current

which primarily measures the flow of goods and services and earnings on investments; 2) a capital account, which account,

measures capital

transfers,

the transfer of

fixed assets, and inheritance taxes; and 3) a

which records

financial account, financial

such

owned

capital

assets in

purchase and

such

transfer

and non-financial

of

capital

U.S. -owned assets abroad, foreign-

as

as

the United States, and the

sale

patents,

franchises,

and

be transmitted over

that can

digital data

a

computer

network, or another communications device,

national transactions over a specific time

lates

The amount of

of non-produced trademarks,

assets

copyrights,

leases.

given time. Digital devices measure bandwidth in bits per second (bps) or

during

a

second (kbps). The term also may be used informally to refer to an ability to complete a project or task.

kilobits per

A

bank state

financial

business

chartered by

or federal government that takes in

deposits

from individuals and

businesses.

Banks then lend the money viduals and businesses that need cash. Banks also ofler a variety of financial and investment products, such as checking and savings accounts, certificates of deposit, loans, and mortgages. In recent years, banks have added onHne bill payment services and online banking. Accounts at banks are insured by the Federal Deposit Insurance Corp. to other indi-

(FDIC)

for

up

to

$100,000 per account.

balance sheet A financial statement that shows a company's level of assets, liabilities, and shareholders' equity. In the accounting

bank examination

system used in the U.S., the assets listed on a company's balance sheet equal both the

management; the quality of bank assets, especially loans; and the bank's compliance

and

A

periodic review

on

of

a bank's assets

its

balance sheet; the competence of bank

with

state

liabifities, as listed

or federal banking regulations.

bank supervision

27

conducted by the bank's supervisory agency in order to detect problems at a bank before they

Bank examinations

become

are

so serious as to result in the closure

of the bank and investors'

An

bank holding company owns or as

controls

of funds.

loss

entity that

one or more banks

The

insurance or brokerage firms.

we]l

as

Glass

Steagall Act of 1 933 prevented banks from owning brokerage firms or insurance com-

panies, but that law

was repealed in 1999

with the passage of the Financial Services Modernization Act. The 1999 law also did away with the prohibition against commerbanks engaging in underwriting cial activities such as raising debt and equity capital for their cHents.

The

of central bankers from the most developed countries. Through communication and research, the BIS attempts to create cooperation and set up the conditions for worldwide financial stabihty. In 1988, the BIS developed the risk-based capital standard, which classifies loans and other bank assets by risk. The risk-based capital standard was adopted by banks in the Group of 10 coun-

Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, the United Kingdom, and the United States. tries:

A

and an eleventh member name G-10 was

latecomer

Switzerland, however the

Board

Reserve

Federal

The BIS was

chartered in 1930 central banks and European of by a group has evolved since the 1960s into an influential institution that hosts periodic meetings countries.

of

retained.

has responsibility for regulating

Governors and supervising bank holding companies. Typically, supervision includes approving and inspecting the operations of such companies. The Federal Reserve still has authority even though a bank owned by a holding company may be under the pri-

acquisitions

of the Federal Deposit or Comptroller of (FDIC) Insurance Corp.

mary

supervision

Bank of Japan (BOJ) bank, which

is

Japan's

responsible for a variety of

monetary policy functions. pursue price

central

Its

mission

stability. It also is

is

to

responsible

maintaining an electronic settlement

for

system to transfer treasury funds, receiving tax payments, paying pubHc works expenditures,

and

handling

The BOJ

public

pension

provides accounting

the Currency.

accounts.

Bank of England

government agencies, issues banknotes (called Bank of Japan notes), and services

bank, which

money

The

British central

responsible

is

for England. In

for

printing

1998, the Bank,

1694 as the government's banker and debt manager, assumed

which was founded the

additional

interest rates,

in

for

responsibility

which makes

it

sets

one of the

Ministry of Finance.

Bank Secrecy Act

A

federal law requir-

record keeping that banks have to under-

newly created Financial Services

and was passed with the purpose of cracking down on money laundering of funds received through illegal means. Banks

take,

must designate an employee as a Bank Secrecy Compliance Officer. Complying with the Bank Secrecy Act is this person's responsibility.

The act of monitoring performance and operations

bank supervision

Bank of (BIS) An

International

Settlements

the financial

international

organization,

of banks in order to ensure that they are operating safely and soundly and following

based in Basel, Switzerland, that acts

bank

the foreign exchange market for the

Committee

Authority.

tral

out intervention policies

The Committee meets

once a month and releases its minutes two weeks after its last meeting. The Bank's goal is to focus on price stability while simultaneously supporting the government's policy of growth and employment. In 1998 the Bank's regulatory functions were transferred to a

in

also carries

government. The

ing banks to report cash transactions that are over $10,000. The law also increases the

Bank's Monetary PoHcy interest rates.

BOJ

securities for the

setting

world's oldest independent central banks.

The

issues

for

for the

as a

cen-

banks of major industrial

rules

and regulations. Bank supervision

is

bank

trust

28

department

conducted by governmental regulators and occurs in order to prevent bank failures.

debt, or

common Chapter

A

department in a bank that admmisters trusts and guardianships. Trust departments manage trust funds for their chents and decide what investments to make. Trust departments also may manage assets for businesses, such as

bank

trust

department

administering pension funds and acting as a trustee for corporate bonds or as a transfer Generally,

agent.

investments

made by

electronic

communica-

network owned by an association of banks. The bank wire transfers messages between subscribing banks and offers a check clearing service called Cashwire. The best-known bank wire is the Fed Wire, which is a high-speed computerized netconnects

all

of the

Federal

Reserve banks, their branches, and the U.S. Treasury.

lets

It

members

the

transfer

between themselves and make

reserves

transfers for business customers.

acceptance A short-term credit letter drawn on a bank that guarantees payment of a bill by the bank. Bankers'

bankers'

acceptance

generally

letters

are

accepted

when

a

a

more

acceptance

management changes, arrange unsecured financing, and wind down the business.

necessarily

reduce

a

Reserve.

A

proceeding initiated by an individual or company that is unable to pay its debts. A bankruptcy can either liquidate the debts or attempt to develop a

reorganization

legal

plan

and for

who want

not attempt to

to get rid of their debt

pay anything back

file

Chapter 7 bankruptcy.

who want

Individuals

reorganize

to

and pay back a portion file for a bankruptcy Typically, people Chapter who make this type of filing pay something each month for several years to the banktheir debts

13

ruptcy court, which distributes the funds to the creditors. When the payments are completed, the debtor's debts are discharged.

Chapter 13 bankruptcies allow individuals to hold onto more assets than Chapter 7 bankruptcies do.

Bankruptcies

fall

two

into

categories.

when

A

the debtor

bank writes on

of the bank and is subject to requirements from the Federal

bankruptcy

Individuals

petitions the court to begin a bankruptcy proceeding. An iiwoluntary bankruptcy occurs

liability

reserve

make

vohmtary bankruptcy occurs

bank's lending capacity, because the bank can raise funds by selHng the acceptance. The acceptance is nevertheless an outstand-

ing

is

court-appointed

a

given discretion to

are

traditional loan, a bankers'

doesn't

its

the

its

Unlike

allowed

instead of attempting to reorganize. In

Chapter 7 bankruptcy,

used in

agreement to pay it at maturity, using the word accepted. A bank may accept the draft for either the drawer or the holder.

draft

is

reorganizes

They

export and import transactions.

termed

it

of the debt. Some companies close down through a Chapter 7 bankruptcy (also called a Uquida-

tions

that

business

,

interim trustee

An

a

from attemptfrom a company that is in a Chapter 1 1 bankruptcy proceeding. In a Chapter 11 the debtor and creditors meet to draw up an agreement for repaying some

a

work

which

in

ing to collect debts

tiori),

bank wire

will

debts. Creditors are prevented

are intended to maintain existing wealth risk.

type

H,

be paid. The most of bankruptcy filing is it,

to continue running while

trustees are fairly conservative because they

and Hmit

some of

under which the

when

the creditors petition the court to put

The term chapof the bankruptcy

the debtor into bankruptcy. ter refers to the chapter

law where the provisions are outlined.

A

bar chart

movement Each a

in an easy-to-understand format.

day's price

vertical line

how low

chart that describes price

movement that

shows

is

represented by

how

the security traded.

high and

The

closing

price is indicated by a short horizontal Hne, called a tick mark, which runs through the

Sometimes the trading volume depicted below the price information as

vertical line. IS

horizontal line that rises or falls in accordance with the volume. At the very bottom

a

Basel Covergence Agreement

29

of the chart, open interest, which is the amount of futures or options contracts that are available for trading in the market, are

drawn

to

higher the

scale

using vertical

the higher the

line,

lines.

open

The

interest.

barometer

In the financial markets, an important economic statistic or stock index that indicates market direction or senti-

ment. Some of the more frequently cited barometers are the NASDAQ Composite

Dow

Jones Industrial Average, the U.S. unemployment rate, the rate of Index, the

barbell portfolio A bond portfoHo that has high concentrations of bonds in both short-term and long-term fixed-income instruments with only a few in intermediate-

term bonds. A barbell portfolio implements a

trading

strategy

that

concentrates

on

investments in the short- and long-term

end of bond

when

useful

A barbell

maturities.

short-term

interest

This

rates.

is

and long-term

interest rates are higher relative to

diate

strategy

interme-

strategy

allows

investors to earn higher overall yields while still retaining the desired time frame for the

bond

portfoHo.

barge

A

ship that

is

used to carry heavy

inflation,

and the consumer price index.

barrel

A

oil,

unit of

measurement used

gas, and other refined products.

barrel equals 42 U.S. gallons.

abbreviated

BBL

for

One

Sometimes

or BL.

barrier option An option with a payoff that depends on whether the underlying investment trades through a barrier price. If the option doesn't reach a certain price

There are many types of barrier options. Three types are: downand-out options, up-and-in options, and

level,

it

worthless.

is

early-exercise

trigger

CAPS

options.

Barrier

in rivers, lakes,

options are one type of trading strategy that

river barges that carry oil products typically

an options trader will use to create profits. Also called knock-in or knockout options.

and space-intensive products or other waterways. For example, inland hold 25,000 range in

size

ocean-going barges

barrels;

up

to 120,000 barrels.

Barings Bank collapse The financial collapse, in 1995, of one of the world's oldest banks. Barings Bank, which had been the banker to the British royal family. Nick Leeson, a Singapore-based trader for the bank, made a series of bad trades over a sev-

period that incurred substantial losses that produced the Barings failure. eral year

Bank was bought after the collapse by ING, a Dutch financial institution, for /^l.The Barings Bank collapse is an example of what can go wrong when a bank fails Barings

to properly supervise

its

employees and their

trading practices. Leeson took speculative positions (primarily in the futures market)

were linked to the Nikkei 225. He also took speculative positions in Japanese government bonds and options on the Nikkei. By the end of 1994, Leeson had lost £208

that

which created

;£827 million hole in the bank's balance sheet. By February 1995, half of the open interest in the Nikkei

million,

futures

a

and 85 percent of the open

interest

Government Bond

futures

in the Japanese

were attributed to Leeson.

barter To trade goods or services for other goods or services of equivalent value. Currency is not used. While bartering is often associated with undeveloped economies or thought of as a historical way of conducting commerce, it is still used in developed countries in certain circumstances.

Any

base metal

metal from the group of

metals that includes copper, aluminum, lead,

and zinc. Traders on the London Metal Exchange, as well as other exchanges, such as the New York Mercantile Exchange, trade futures contracts on base metals. Base

nickel, tin,

metals are in contrast to precious metals, such as

gold and

Basel

silver.

Convergence Agreement

international

common

agreement

An

implement

to

standards for funds that banks are

required to have on hand to maintain ade-

quate

capital.

The agreement

is

Basel, the city in Switzerland

named

for

where

the

Bank of International Setdements (BIS) is located. The BIS essentially is a central bank

30

Basel Standards for Market Risk

and is involved in developing many rules and regulations to ensure the safety of the international banking system.

for central banks

Basel Standards for Market Risk A set of capital requirements for banks that is intended to protect against financial market risk.

own minimum

are allowed to use their

Banks

model

internal risk

as

long

as

met.

capital standards are

when

for futures contracts or

talking about

movements of bonds and

price

loans. Also

used in the context of the Federal Reserve moving the federal funds rate or the dis-

count

by 25 or 50

rate

basis points.

batch In the oil industry, a specific amount of crude oil or refined product shipments that are sent through a pipeline. A batching sequence is the order in which shipments of crude

or refined products

oil

baseload The minimum amount of electric power that an electric company can

are sent

through

deliver over time at a steady rate. Baseload

BBX

See Bulletin Board Exchange.

capacity that

determined by the kind of stress generating equipment can it is operated on an around-the-

is

electric

handle clock

if

basis.

On

hot

a

demand

day,

for

more people turn on demand can baseload, resulting in power

electricity increases as

their

conditioning. This

air

overwhelm the

surges, blackouts, or grayouts.

debt.

company

If a

amount of those

bcf Billion cubic feet. Typically refers to an amount of natural gas that is in storage or been

that has

which

is

has

a

large

financial instruments out-

Sometimes

sold.

of cubic

billions

feet

bcf/d

is

used,

produced in

a day.

Someone who

bear

market will

basic earnings per share Earnings per share that are calculated without taking into account stock options, warrants, and convertible

a pipeline.

fall.

that

the

Contrasts with a bull,

who

believes

believes the opposite. See also bear market.

bear hug

An

that offers

such

uninvited takeover attempt a large

target's shares that the

the target

company

premium

for the

board of directors of

no

has

alternative but

standing, then diluted earnings per share

to vote in favor of the acquisition or face

provides a better measurement of the earn-

the wrath, and lawsuits, of shareholders.

ings that should

be allocated to each share

of stock. The diluted earnings per share calculation includes stock options, warrants

bear market other

A

financial

more. In contrast,

diluted earnings per share.

that

is

between the cash and

futures prices. For

instance, if cash prices for cotton typically are 5 cents

November

below the July basis

is

said

futures price, the to

under." Separately, basis also culate the

amount of capital

due on the basis

is

sale

be "5 cents is used to cal-

gains tax that

of an investment or

calculated

asset.

is

The

by taking the purchase

price and subtracting any commissions or

expenses.

point (bp)

basis

One-hundredth of

a

percentage point (1/100 of 1%). One percentage point equals 100 basis points. This

term

is

commonly used

in a trading

context

has

some traded

a bull

market

is

a

market

rapidly rising.

The term may In the futures market, the difference

that

sharply lower, usually falling 20 percent or

and convertible debt. Typically, companies report both basic earnings per share and

basis

stock market, or

market,

originate from an English

proverb that warns against selling the bear's

one has caught the bear, which might describe a situation in which a specskin before

ulator it

sells a

stock with the assumption that

can be bought

alternative origin

lower price. An come from a 1709

later at a

may

of the United Kingdom's satirical paper. The Tatler, which told a story about a noble gentleman who bought a bear, sight unseen, from another officer. The deal went bad, and it was said that someone who conissue

upon an imaginary thing is The different descriptions for and bear markets may also be derived

fers real

value

selling a bear. bull

from the

fact that a

bear attacks by coming

down on

its

prey while

prey by thrusting

its

a bull attacks its

horns upward.

The simultaneous purchase

bear spread

of a call option with a higher exercise price and the sale of an option with a lower exercise price. A bear spread also can be created by the simultaneous purchase of a put option with a higher exercise price and the sale of a put option with a lower exercise price. A trader who sets up a bear spread expects prices to go lower but

way

to limit the

wants

still

amount of money

purchasing options.

A

bear spread

a

spent is

the

opposite of a bull spread.

bear trap market (a

A

situation in

which

downward-moving

a

bear

market)

changes directions and prices rise. Bearish investors who expected the market to continue dechning will continue selling short

what they don't own). Eventually they are forced to buy their investments (seUing

higher price in order to avoid furThus, the bears are caught in a losses. ther

back

that

more jobs

be created. In

economic

worsen

this case,

both

for

situations

countries.

The study of behavbehavioral finance ior in market economies and businesses. Behavioral fmance models focus on observed psychological factors that influence decision making during periods of

economic uncertainty. For example, if a stock becomes highly sought after and its price rises sharply even though the company's fundamentals haven't changed, crowd

may be

work, according to behavioral fmance psychologists. Another example of behavioral fmance is when an investor is influenced to hold onto a stock that has decreased substantially because the investor wants to avoid admitting that he or psychology

at

she was wrong.

Beige Book An assessment of the economic performance of each of the 12 Federal

regional

bond

A

bond whose ownership is evidenced by whoever is holding it. The corporation that issued the bond pays the

bearer

bearer the interest payments and ownership

not otherwise recorded. This contrasts with a registered bond, whereby the comis

pany issuing the bond knows

owner

who

the

is.

employee's salary that

Beige Book

is

The

part of an

contributed to a

retirement plan before federal income taxes

deducted. Before-tax

contributions

reduce the taxpayer's gross income for federal tax purposes. A withdrawal from an

account funded with before-tax contributions becomes taxable at the time of withdrawal.

beggar-thy-neighbor policies Economic actions taken by one country to improve its economic situation that may have adverse effects on other economies. For example, a country on certain goods or push

may lower prices down the value of

currency to increase exports in the hope

is

Reserve

districts.

prepared by the

The

Federal

Reserve staff before the Federal Open Market Committee meeting, which happens eight times a year. The report examines

economic

activity, specifically

employment

and housing activity, consumer confidence, and any

trends, construction retail sales,

other

before-tax contribution

its

will

surrounding countries may be harmed by cheap imports flowing into their borders. Retaliatory actions may ensue, and thus

at a

trap.

are

Alexander Graham

Bell,

31

relevant

information.

The Beige

used by financial analysts as a Book descriptive measure of economic perforis

mance within

the

regions

of the

Financial analysts scrutinize the

U.S.

book

for

clues about the Fed's future monetary policy

decisions.

Belgian option An option that pays off on a partial basis as the underlying security moves from its initial cash price to the strike

price. If the

money

instrument

at expiration,

then

it

is

in-the-

also pays off

just as a regular option does.

Bell,

Alexander Graham

The

inventor

of the telephone. He patented the telephone on February 14, 1876, fiHng his appHcation on the same day as EHsha Gray of Western

32

bellwether

Union. help

He

refined the telephone with the

ofThomas Edison. He

contributed

also

of the deaf, by researching sound understandable, make to machine a which fed into his ideas about the telephone. to the education

A

bond, or bellwether other financial instrument that shows the direction of a market. Significant and widely owned stocks may become bellwethers of index,

stock,

market direction. In the Treasury bond market, the 10-year note is a bellwether.

A

benchmark

tool

evaluating the

for

performance of a company, department, or individual by comparing its performance to a set of standards. Benchmarks may be cited

of numbers, such as sales figures. They also may have to do with meeting

in terms

who

which can be exercised only

A

owner

person or company

has direct or indirect voting or invest-

ment power, according

to the Securities

and

Exchange Commission. A beneficial owner also is someone who has the benefits of ownership even though the title might be held in someone else's name. For instance, stock certificates

expiration.

Bernoulli

trial

is

may be

held in the

name

cally

owns the

random event

that has

Its

result

be a success or failure; the probability

must of a success must be the same for all trials, and the outcome of each trial must be independent of the other trial's outcomes. A coin toss would meet the requirements of a Bernoulli

trial.

best execution that

is

The

best price of a trade

A

reasonably available.

broker has

The

person

or

institution

who

used to refer to people or property through

receive the proceeds

a will, or

from

inherit

people

a life insur-

consider opportunities to get a better price than what is currently quoted, the speed of execution, and the likelihood that the trade

be executed. In doing so, the broker evaluates which markets, market makers, or electronic communications networks (ECNs) offer the most favorable terms of execution.

best practices The best method or approach to conducting business or trading. Best practices are customs that don't have the force of law. best-eflforts

underwriting

Underwriting

which the underwriter provides its efforts to get the deal done, whether

selling

best it

of an agent.

which the of the issue best-efforts

assumes the

If the issue can't

be sold

act

of giving

such

assets

as

cash, property, cars, or stocks to a beneficiary

through

lowered or the issue withdrawn and sold

beta of American

Bermuda of several

and

exercised

anytime

is

option with aspects

European

options.

on one

specific dates before expiration,

American

However,

An

options can be exercised

similar to

dates,

at

a later date.

a will.

Bermuda option

options

at

be

the desired price, the price will either

The

is

stock or debt. Contrasts with ^irm-

commitment underwriting, in underwriter assumes the risk being poorly received. In underwriting, the underwriter role

ance policy, annuity, or trust.

bequest

a

duty to obtain the best price, called an execution. When making a trade, a broker must

in

receives cash or an investment; typi-

money

who

actually

not the brokerage firm.

beneficiary

who

who

the person

certificate,

A

important characteristics.

three

of the brokerage firm, but the beneficial

owner

at

will

specific goals.

beneficial

options,

the

options,

up

which can be

until

flexibility

of

expiration.

Bermuda

limited to only several specific

which resembles European-style

A

volatility.

measure

The

Index has

of

Standard

relative

stock's

a

&

500 Stock of 1. The beta of

Poor's

a beta coefficient

individual stocks, mutual funds, or portfolios is

measured

in

comparison

For

a

high beta of 1.5

volatility has

50 percent more of the market.

example, a stock that has

and thus high

to this index.

movement than

the

rest

Although high betas can result gains, they also can produce

in

strong

substantial

Big Three

33

losses. Similarly, stocks

move

with

than the market

less

a

beta below

as a

1

began working more closely with each other. The Big Bang reached a so

.0

whole.

analysts

crescendo during the 1990s

bid 1.

The purchase

market reached historic highs. After the stock market began to fall sharply in the first half of 2000, investigations by regulators and legal authorities put a damper on

price of a stock, futures

The term

contract, or other investment.

used by market makers and other traders who are prepared to purchase an

is

investment. In contrast, ask

is

alleged conflicts of

the price

of a merger agreement

or attempted merger, bid indicates a pro-

posed

price.

bid-ask spread The difference between a bid and an ask price. The bid is what a trader or market maker is willing to pay to buy a stock or other investment and the ask price is what the trader is wiUing to sell it

bid-to-cover ratio tions, the ratio between the number of bids received and the number of bids accepted. The measurement indicates how strong

demand

higher the

ratio,

is

for U.S. Treasuries.

The

the stronger the demand.

Typically a ratio over 2.0

is

an indicator of

a strong auction.

A low ratio

demand and

said to have

indicates

exchange.

The reforms

cial

institutions

of

the

to

also

on the

stocks

allowed finan-

expand into

many

of financial services so that customers could deal with one bank for various investment purposes instead of deaUng

Japan experienced a Big Bang the foreign exchange market was

several.

deregulated in 1998.

Big Blue comes from

A

nickname

for

IBM

the color used in

Corp.

It

the compa-

ny's logo.

A

New

The They

four largest U.S. account-

Big Board

nickname for the York Stock Exchange (NYSE).

weak tail

&

Touche, International, and Ernst & Young, PricewaterhouseCoopers. The Big Four are

Deloitte

KPMG

yield).

result

to

refers

different areas

ing firms.

Big Bang

trade

rights

wide spread between the average and the high

to

exclusive

Big Four

long

Bang

occurred in 1987 and 1988, when a series of reforms of the London Stock Exchange were implemented; these reforms allowed investors to trade without going through market makers, or companies that were given

(a

is

a

they

as

deregulation of the financial markets that

when In U.S. Treasury auc-

relationship

interest.

the U.K., Big

In

with

for.

investor

working

close

the

of a stock or other investment that a market maker or trader is willing to sell an investment for. See also bid-ask spread. 2. In the context

the stock

as

A significant change, often as

legal or regulatory changes.

term has acquired many

a

The

different uses in

once were the Big Six, and before that the Big Eight, but mergers have reduced the number of competitors.

the financial markets. For example, in the U.S., a

Big Bang occurred

in

1975

stockbrokers stopped receiving fixed

when com-

which opened the way for the first discount brokerage firms to set up business. As investment banks earned smaller trading commissions, they began to look for other ways to generate income to support trading-

missions,

Ford Motor Co., General and Chrysler Corp. These Corp. Motors were the three large U.S. automotive companies. However, Chrysler was bought in 1998 by Germany's Daimler-Benz in a $37 billion deal, which at that time was the largest ever

Big Three

related services, such as research. Investment

takeover of a U.S. firm by a foreign company. The deal created DaimlerChrysler. Even

banking revenues replaced trading commissions as a way to pay for research analysts,

though Chrysler is no longer independent, the term Big Three is still used.

bill

pass

bill

pass

34

The purchase by

the Federal

Reserve (Fed) of Treasury bills in the open market from dealers. A bill pass injects money into the monetary system because the Fed pay cash to the sellers of the bills.

in yield betv\/een a Treasury bill

which

difference

and

a

bond,

the inverse of a bill-over-bond

is

that

is

complex

softw^are

used to determine

security should be sold

program

a price

at,

that a

indicate

what

trades should be done, or give the result a financial calculation.

The

of

inner workings

of a black box pricing formula are not

The

spread

bill-over-bond

A

black box

explained to the users or are very complex and hard to understand, so users refer to the end result as black box number.

spread.

binder 1.

Money

tract

to

that

paid

show good

transaction 2.

is

is

as

part of a conuntil

faith

the

completed.

In the insurance industry, a binder

provides proof to the insured that cover-

age has been approved until the actual insurance policy

is

delivered

and the

payment

is

submitted to the insurance

company.

A

binder

is

a letter

guarantee-

black knight A slang term for a company that makes a hostile takeover bid for another company. black market An illegal market, typically one that sells goods or services that are in short supply or that are prohibited by government policy Determined consumers seek out the goods on the black market, and purchase them at drastically inflated prices.

Black

Monday

ing insurance coverage.

October 29, 1929. Stock market volume was huge this day, with nearly 16.4 million shares of stock traded. Prices fell 1.

Birdseye, Clarence

The

originator of

United States. He invented quick-freeze machinery. Postum Company, a major food manufacturer, paid $22 million for the equipment and rights to the freezing the frozen food industry in the

process.

The purchase

created the basis for

General Foods Corporation and made frozen food a staple for Americans and others throughout the world. birr

The currency

unit of Ethiopia,

com-

drastically: For example. General Electric was off 48 points, Westinghouse was off 34 points. The big bankers of the time, such as J. P. Morgan, refused to do any-

thing to support prices. Instead, their

concern was

2.

October its

Dow BIS

See Bank of International

Settlements.

bi-weekly mortgage A mortgage on which payments are made every two weeks. Mortgages are typically paid monthly. The bi-weekly payment amount is calculated by dividing a monthly amount in two. However, 26 payments are made over the course of a year, because some months are longer than just the two bi-weekly pay-

ment periods. The payment schedule,

effect

is

an accelerated

which principal is paid down faster and the amount of interest paid over the life of the mortgage is decreased.

in

the

market remain

19, 1987.

On

the

this date,

U.S. stock market lost nearly one-fourth

of

prised of 100 cents.

that

orderly

value in a matter of hours. Industrial Average

Jones

percent, or 508 points,

day point

fall

22

biggest one-

to date.

Black Thursday

when

its

The

fell

October 25, 1929,

the U.S. stock market crashed and a

record volume of 12.9 million shares trad-

peak of 4 million. losses. This crash was exceeded by the crash that occurred on the following Monday, ed, beating the previous

Stocks

sustained

substantial

October 29, when prices fell again on record volume of 16.4 million shares.

Black Wednesday 16, 1992, the

Wednesday, September day the British government

blue sky law

35

A

withdrew the British pound from the Exchange Rate Mechanism (ERM), a European monetary agreement. The value of the pound was quickly decHning and the

blind pool

ERM

to the intended investments.

required

to remain within a price

it

range. The British

government

tried to stop

the price slide by purchasing steiHng in the market. However, the government spent a

amount of money and was not

significant

going to be able to continue its buying campaign. Instead, it decided to stop buying the pound, and thus had to withdraw from because the pound would no the

ERM

longer be in the prescribed trading range.

type of limited partnership

what kind of

that doesn't specifically state

investments the general partner will make. this limited partnership are Wind Those

m

blind trust A trust whose owner cannot be informed about which investments have been bought or sold. This kind of trust is created

when someone and gives

into a trust as

a

bank or

manager, complete his or her

asset

BHnd

often set up by

are

trusts

government

high-ranking

politicians

or

blackout period A period when a public company's directors, officers, and specified employees can't trade the company's stock.

officials as a

way of avoiding

Blackout periods occur prior to the release of annual or quarterly financial earnings information, and may extend for a time

benefit individual investments.

period

after

the

release

of the earnings

information. The company, not the Securities and Exchange Commission, sets the black-

out period. Rule 10b5-l of the SEC Act of 1934, however, creates a "safe harbor" in which officers, directors, and employees of

company, through the adoption of a trading plan, may trade a company's securities

a

even during

blackout period or other

they have knowledge of matenonpublic information. A trading plan

times rial

a

when

The purchase

block trade

futures,

options,

Although

by

a

tutes

a

about what consti-

definitions

block

trade

typically

vary,

over

10,000 shares or contracts or a trade with a value of $200,000 or more is considered a

block trade. Often the term is associated with the equity market; however, block trades can occur in any market.

A chart pattern identified in

blowoflf top

Blue Dog Coalition dog group of Democrats

a trading

system

attempts to determine future price

move-

which

patterns

ments by looking charts. A blowoff occurs at

tops

when

rally after a

and open

at

on

price

major market

prices suddenly stage a sharp

long advance. Trading volume

interest rise sharply.

A

budget watchin Congress who emphasize the necessity of reducing budget deficits.

Scholes.The Black-Scholes formula assumes that the primary factors affecting the price of an option are the value of the underlying

blue sky law

the exercise price of the option, the volatility of the underlying asset, the risk-

registration law, in 1911.

to expiration.

sale

investments.

other

or

Black-Scholes Option Pricing Model A formula to calculate the value of European style options. The formula was introduced in 1973 by Fischer Black and Myron

of interest, and the remaining time

or

wealthy individual, corporation, or institution of a large quantity of stocks, bonds,

technical analysis, in

free rate

potential con-

by investing on issues or flicts of creating government poHcies that could interest

might be an established employee stock ownership program that calls for a set number of shares of the company to be purchased each month. In general, a trading plan removes discretion for the sale or purchase of stock from the individual and creates an automatic program.

asset,

such

make investments on

authority to behalf.

puts his or her assets

a fiduciary party,

A

state

law that

is

designed

to protect the public against securities fraud. Kansas was the first state to enact a securities

When

announcing the legislation's passage, lawmakers said, "The State was the hunting ground of

company

blue-chip

36

of fraudulent enterprises... so barefaced... that it was stated they would sell

Boesky,

Ivan

speculator

who

building lots in the blue sky." Since then, state securities laws have been referred to as

strategically

blue sky laws.

es.

promoters

A company

company

blue-chip

that

is

very strong financially, with a solid track record of producing earnings and only a

amount of

moderate

company

A

debt.

also has a strong

name

blue-chip

in

its

indus-

try with dominant products or services. Typically, blue-chip companies are large

corporations that have been in business for

many

years

and

However,

stable.

be very no formal

are considered to

there

requirement for being

is

Often,

a blue chip.

Dow

blue-chip companies are found in the

Jones Industrial Average.

board independence

A

relatively

new

pendent from the company. Independence occurs when a board member has not been and is not currently employed by the company or its auditor and the board member's employer doesn't do a significant amount of business with the company. Each company creates its own definition of significant. Board independence was given legal defin-

and

direction

Sarbanes-Oxley the

in

legislation.

2002

the

in

Stock exchanges,

New York Stock Exchange and NASDAQ also passed their own rules

such

the

as

governing the companies.

behavior

of their

listed

The body that mancorporation. The board appoints

top managers, approves their compensation, votes to issue dividends, decides

approve

a

merger, and handles

big-picture issues.

used inside information to

buy and

stocks

sell

and

The

profit

from the mergers and takeovers of business-

He

remembered

is

for declaring that

"greed is healthy" in 1985 at a college commencement address. Just over a year later, in November 1986, Boesky pleaded guilty to

and agreed to pay a $100 million fine and to cooperate with the Securities and Exchange Commission's ongoing inside trading investigation. He insider trading charges

also received a three-year sentence. The fine

was by by the that

far the largest

SEC

settlement obtained

for insider-trading activity at

cooperation with federal

point. His

authorities also led to the convictions of others, including

junk-bond king Michael

Burnham Lambert. Boesky testified that he had gained his $200 million fortune using illegal inside information about impending mergers to trade stock in the companies involved. As a result

of Boesky's

subpoenas

confession,

were issued to some of the world's most famous financiers, including "Junk Bond King" Michael Milken. Boesky's testimony directed investigators to Milken and Drexel for

participation

their

schemes. As a result of

the

in

size

whether

many

of boards

to

other vary.

illegal

this insider trading

U.S. Congress increased the

scandal, the

penalties for securities violations.

boiler

A

room

stock brokerage firm that

targets unsophisticated or otherwise vulner-

able people in an attempt to pressure

board of directors ages a U.S.

stock

Milken and Boesky's employer, Drexel

concept in corporate governance that calls for a majority of board members to be inde-

ition

An American

F.

to purchase stock. for a boiler

room

The

brokers that

use sales tactics designed

to exert significant pressure

make them buy whether

it

is

them work

on people

to

stock without any regard to

a

wise investment for their

and investment goals. work for boiler rooms may

age, risk tolerance,

Brokers

who

Board of Trade Clearing Corporation

also lie or provide misleading

An

in order get the sale. Generally, the stocks

sible

that boiler

independent corporation that is responfor settling all of the trades at the Chicago Board of Trade. It is a guarantor

for

all

the trades

it

member

brokers

sell

are very risky

the

and likely will result in investors losing money. Boiler rooms operate out of inex-

firms daily

pensive, obscure locations that can be easily

clears. It reconciles

accounts of the clearing

room

information

and sets and adjusts clearing member firm margins when market conditions change.

bond valuation analysis

37

or abandoned. They generally oper-

moved

ate outside

BOJ

of the

law.

system for debt instruments. On January 11, 1999, the entire stock market migrated

See Bank ofJapan.

bolivar

The currency

unit ofVenezuela,

boliviano The comprised of 100 centavos.

A

technical

analysis

the

a

moving average

moving average and on itself.

Standard deviation

measures volatiHty, so these bands will be wider during increased volatility and narrower during decreased volatility. Tech-

beUeve that a market that approaches the upper band is overbought, while a market that approaches the lower analysts

nical

band

is

many

oversold. Overbought

means

that too

buyers have entered the market and

prices are likely to

fall.

Oversold

means

that

have sold, and the next price direction will likely be upward. too

many

sellers

The Spanish word exchange." One well-known

bolsa

for

"stock

bolsa

is

the

Bolsa de Madrid, Spain's largest regional stock exchange.

Bolsa de Madrid Spain's stock exchange, which is comprised of regional markets in Madrid, Bilbao, Barcelona, and Valencia. Stocks, bonds, and derivatives are trading on the exchange. The primary stock index is the

IBEX-35.

Mexicana de Valores (BMV) Mexico's stock exchange, which dates back to 1850, the year

were stock

first

Mexican mining

traded. In

trading

1975

with the

it

stocks

incorporated

Guadalajara

Monterrey exchanges. In 1995 the

and

BMV

introduced the electronic trading system for debt instruments,

BMV-SENTRA

Titulos

de Deuda, which was developed by the Bolsa. Debt market trades occur entirely on an electronic platform. The introduction of the electronic trading system for equities, Capitales, came in 1996.

via

the

The

System. is

the

Index.

Sensex India's benchmark stock index. The Sensex is a value-weighted index comprised of 30 companies whose

Bombay

beginning index value was set at 100 in April 1979. These companies account for about 20 percent of the market capitahzation of the Bombay Stock Exchange.

Bombay

(BSE)

Exchange

Stock

which began operations in 1875. There are more than 6,000 companies listed. Its benchmark India's largest stock exchange,

index

bond

Bombay

the

is

Sensex.

notes

anticipation

debt that

is

issued

by

cities

Short-term

or states

m order

to provide interim financing for projects that will

be funded by future bond

issues.

spreads The difference in interest rates between the yield on a corporate bond and the yield on a U.S. Treasury bond with similar maturities. Spreads also are calculated against Treasuries for federal agency

bond

debt, such as Fannie

Mae

notes, or other

government debt. For example, the spread on a 10-year corporate bond wiU trade 75 basis points over a

Bolsa

operated

Equities

main price index on the exchange

IPC

system that plots two standard deviations

above and below

market has

stock

BMV-SENTRA

currency unit of Bolivia,

bands

to the electronic trading system. Since then,

the

comprised of 100 centimos.

Bollinger

administer the operation of debt market and trading through the electronic trading

1

0-year Treasury note.

of Hquidating a current bond position while simultaneously buying a replacement issue that has similar attributes but increases the chance for a

bond swap

The

act

higher return. Swaps are done to increase the return, or yield. Other reasons to do a

swap may be to take advantage of shifts in interest rates or to reaHgn yield spreads to improve the quality of the portfolio.

bond

valuation analysis

A

strategy in

Bolsa subsidiary, Financial

which a bond portfolio manager attempts to buy bonds based on their intrinsic value. Using this strategy, the bond portfolio man-

Integration Services (SIF), was created to

ager compares the different characteristics

BMV-SENTRA In 1998 a

new

38

bonding

of bonds, such deferred

whether they have

as

feature,

call

other factors that

a

sinking fund, or

a

would

affect their yield

and price. When those characteristics are compared, some bonds will be better values than other bonds.

bonding

The

process of carefully check-

ing an employee's background and then taking out insurance to protect the

pany against

by

com-

whose employees handle cash are some of the firms that bond their employees.

panies

bond-over-bill spread The difference in yield between a specific bond and a Treasury bill. It is the inverse of a bill-overspread.

bond-over-stock ^varrant A warrant (a right to purchase a stock) in which the payout is based on the performance of a bond index. However, the payout will be reduced by the amount of return on the stock index that

is

used. Typically, bond-over-stock war-

on many

rants are issued

income and equity

No

actual certificate

is

given

to the owner.

and corporate bonds that are held on behalf of customers using only the brokerage firm's name. The brokerage firm keeps track of who the owners are. 2. Refers to stock certificates

com-

theft or fraud losses caused

that employee. Financial firms or other

bond

Federal Reserve Bank, or a financial institution.

different fixed-

indices.

book

book-entry callable corpus

(BECC)

Principal zero-coupon bonds that have been converted from paper to an electronic form. The term is often used in conjunction with written materials on bond mutual funds. The significance of the conversion is that the bonds can be wire transferred instead of physically delivered. The U.S. Department o{ the Treasury's Bureau of the PubHc Debt (BPD) also lets holders of the principal portions, or corpora, of U.S. Treasury bearer securities that have been stripped of some or all of their noncallable coupons to have an opportunity to convert their stripped corpora to bookentry form by using the Bearer Corpora Conversion System. Keeping the Treasuries in book-entry form makes them easier to transfer.

1.

A trsiders positions,

2.

A broker's

or

list

of investments.

or investment manager's

of clients, which

is

list

called a book of business.

bookkeeping financial

The

process of recording

transactions

and

pany's financial statements.

book

The

of transferring product or asset without

transfer

ownership of

a

act

maintaining

the financial records to support a

com-

Bookkeeping

is

only one small part of accounting, which is the overall examination of a company's financial results.

actually delivering the physical goods.

book value minus

its

A

company's

liabilities.

To

assets,

book company's book

calculate the

value per share, divide the

value by the

total

number of shares

outstanding.

book-to-bill A ratio that shows the relationship between semiconductor orders and billings. A book-to-bill of 1.28 means that $128 worth of new orders were received for every

month.

book-entry

$100 of product

A

San Jose, California-based trade Semiconductor Equipment and Materials International (SEMI), reports book-to-bill data monthly for North America using three-month moving averages. Companies in the semiconductor industry often release their own book-tobill ratios. The statistic is widely watched in association, the

1.

A method

used by the U.S. Treasury

and some agency issuers, such as Fannie Mae, to confer ownership of the bonds and notes. Book-entry consists of an entry on the computerized records of the U.S. Department of the Treasury, a

billed for the

boutique

39

how

the technology market to judge

well

investors begin to return to a market

when

after a sustained

semiconductor companies are performing.

downturn

that has

lowered

prices significantly. See also bottom fisher.

bootstrapping

bottom The act of an individual starting a company with very litde money and 1.

very litde credit and doing everything on

A

the cheap. litde its

money

way

company

start-up is

that has

said to be bootstrapping

from

to profitability. Originated

the expression "pulling yourself up by

your bootstraps," from a Horatio Alger story of moving from rags to riches. 2.

The

process of creating a theoretical

spot-rate curve

by using one yield pro-

jection as the basis for creating the yield of the next maturity. Traders use this

method

to determine

what various

inter-

be along the yield curve they have only one interest rate.

investments sharply.

when

Funds that eligible depository institutions, such as banks, obtain by borrowing from the Federal Reserve in order to meet minimum reserve

borrowed reserves

requirements. Typically, reserves

rowed only

other

a

market

rises after a

fallen

period

of a strong decline, traders say that the bottom fishers have come into the market. The term is borrowed from the sport of fishing and comes from fish such as catfish that sit on the bottom of a lake or river and feed on

and waste products that come floating down to the bottom.

food

particles

Another way of saying net income. It draws its name from the fact that net income is the bottom Hne on an

bottom

line

income statement.

for a short period

are

bor-

underwriting deal in which the underwriter offers a firm commitment to purchase the company's securithereby assuming the risk if the deal is poorly received by the market. The under-

ties,

writer's

borrower entity that

A

term for obtains funds from legal

a

fee

difference,

or spread,

the purchase price and the price

between Also

the

is

the instrument

of time.

An

bought deal

ket.

sells

for

on the open mar-

C2i\\ed firm-commitment underwriting.

person or

a business

or

individual for a specified period of time upon condition of promising to repay the

in a

When

who

trader or investor

among stocks or whose prices have

rates will

est

loan.

A

fisher

looks for bargains

The terms of the loan are spelled out written document that is signed by

bounce 1.

A quick, but moderate, upward rise

a

market that had

lower. Also called a dead

when

bounce

cat

price gains aren't expected to

in

traded

previously

last.

both the lender and the borrower. 2.

borsa

The

exchange."

Itahan

Italy's largest

the Borsa ItaUana, the

stock

word

for

"stock

stock exchange

exchange was

privatized.

See

a

check without having

ficient funds to cover

is

which was created when

To write

is

one

that has

it.

A

suf-

bounced check

been rejected by

a

bank

because there are insufficient funds in the checking account.

Borsa ItaUana.

Borsa

Italiana

Italy's

stock

exchange.

1997, the Borsa Itahana is Europe's fourth largest stock exchange. Its benchmark index is the Milan MIB 30, a market capitalization- weighted index of the

Privatized in

30 top

Italian

companies.

it

or another market.

Bargain hunting in a is

the stock, real estate,

Bottom feeding occurs

for is

"stock France's

national stock exchange, created in 1991.

boutique

A

small, speciaUzed brokerage

or financial firm that offers a limited

ber

bottom feeding market, whether

The French word exchange." The Paris Bourse

bourse

of services

and

boutiques are started

num-

products. Typically,

by people

who

leave

large Wall Street firms, either because of a desire to create their own company or as

Bowie bond

40

of losing their job through a downsizing or firing. A boutique typically employs anywhere from a few people to several hundred people, compared with a global financial company that employs several

a result

hundred thousand people.

Bowie bond

Asset-backed bonds whose payments are collaterprinciple and interest alized by the music publishing royalties of rock musician David Bowie. Originally $55 million of the bonds were sold in 1997. Since then, other asset-backed issues based

on

intellectual property

have been issued,

bond issues based on revenue from James Brown and the Isely Brothers. including

box spread and

arbitrage

which both

play

create a risk-free profit.

One

in

a bull

a bear spread are established in

the

spread

order to

spread includes

put options and the other includes call options. An arbitrage attempts to profit

from the difference markets. See also

they are also available to other countries.

Brady bonds

in prices

on two

arbitrage, bull spread,

different

and

bear

An

market's

sion and a large

if the

number of stocks

also rise,

market

rises,

but only a relatively small

number of stocks rise, the upward price movement is said to lack breadth. The same true of a declining market. Breadth often

measured by the advance- decline ratio, which compares the numbers of stocks rising against the number of those that are falling.

group.

down.

break A quick and sharp price term frequently used in trading.

breakaway gap

A

decline; a

chart pattern that

is

through technical analysis of It shows a pattern that is

identified

price patterns.

interrupted by a gap on the chart, which indicates

market spiking either up or

a

break-even point The point at which income equals costs. Typically, before invest-

basis point.

bracket creep The effect that inflation has on pushing incomes higher and, thus, into higher income tax brackets.

A bond

If

then the market has good breadth. Inversely,

is

Brady bond

upward or downward movement.

the stock market rises during a trading ses-

agreement among competitors to not have any dealings with a person, company, or organization. A boycott can violate the law if it is used to force another party to pay higher prices or in any way restrict competition. If boycotts are launched to prevent a company from entering a market, they are illegal. Often boycotts are used by consumer or social action groups to prompt a company to change its behavior or policies that are deemed harmful to the

See

The number of

stocks that are participating in either the

is

bp

trade today and can be

in

President George Bush's treasury secretary.

spread.

boycott

still

new instances of default. The bonds are named for Nicholas Brady, issued

breadth of the market

An

options market in

bonds give the commercial banks guarantees that principal and interest will be paid along with cash payments. The debtor governments benefit from having their principal, interest payments, and interest arrears reduced. The principal and some interest are collateralized by U.S. Treasury zero-coupon bonds and other high-grade instruments. Brady bonds are associated with Latin American countries, however,

issued as part of a

bailout plan launched in the early 1990s to

exchange commercial banks' loans to emerging market countries that were in default for new bonds. Developed in conjunction with the International Monetary Fund (IMF) and the World Bank, Brady

ing

in

business

a

equipment, analysis to

are

needed

or

new

plant

or

a company does a break-even determine what sales revenues

in order to cover costs. Sales

above the break-even point create profit. The break-even point also may be used to refer to the price at which an investment can be sold so that the investor neither profits

nor

loses

money.

broker loan rate

41

breakpoint

minimum investor

mutual funds amount of money

that

the

an

invest to earn a reduction in

must

sales charges.

sales,

In

As the amount invested

rises,

discounted even further. Typically breakpoints occur with Class A mutual funds shares, which have a front-end sales fees are

load.

crude

oil that

A

oil is

a

particular type

of

Ught, sweet oil produced

being be can Brent Europe. refined in Northwest thought of as a benchmark oil for Europe.

in the

North Sea with most of

it

Futures and options are traded primarily on Brent on the International Petroleum

London. Futures contracts also traded on the New York Mercantile

Exchange

in

Exchange.

Bretton the

junction with

An

summer of 1944,

agreement struck in

in

which the

U.K., and their wartime rules for the

up the monetary

set

allies

post- World War

U.S., the

II

bring-down comfort that updates the comfort

closing an initial

pubHc

comfort

gold banks.

on demand from foreign

central

The name Bretton Woods comes

from the wartime

city in allies

New

Hampshire where the

met.

bricks and mortar A term that came into vogue during the Internet boom of the late 1990s. It describes actual retail stores that

a person can

visit,

in contrast

with

retail

Web

sites.

Short-term financing used as a stop-gap measure until mediumor long-term funding can be arranged.

bridge financing

offering. The bring-

reconfirms

the

accounting principles. The bring-down comfort letter also says that no material changes have occurred since the financial reports were prepared. British thermal unit (B.T.U.) gas. Technically,

when is

it

A

unit

referring to natural

the quantity of heat

required to raise the temperature of one pound of water from 60 to 61 degrees

Fahrenheit

a

at

constant pressure of one

same way that ounces is unit of measure used when pric-

the typical

payments deficit by using dollars instead of gold. However, the U.S. also retained the responsibihty of converting dollars into

letter

issued prior to

unaudited financial data in the company's prospectus follows generally accepted

Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), which in the U.S. is more commonly known as the World Bank. The comprehensive agreement called for the participants to Umit the movement of their currencies, which were gold standard was maintained and the dollar retained its value of $35 to an ounce of gold. That standard allowed the U.S. to finance its balance of

letter

loan.

assurances given in the comfort letter that the accountants are comfortable that the

system. The meeting set the structure for the

set against the dollar. The

needs

A

letter

letter

atmosphere. In the

International

provided in con-

more time to close. Also called a bridge

of measure used

Woods

is

a deal that will provide the

long-term funding but

necessary

down

Brent crude

are

Often, bridge financing

ing

B.T.U.

gold,

is

used

when

pricing

natural gas.

broadband

A

digital

technology

gives users high-speed Internet access

that

where

data, e-mail, videos and music can be downloaded at speeds significantly faster than

those

through dial-up modems. broadband service is provided

available

Often,

from a cable telephone company. Another type of broadband connection, digital subscriber fines (DSL)

through cable

lines

provides high-speed broadband service using a special

broker

telephone

An

line.

individual or firm

who

acts as

an intermediary between a buyer and seller. A broker usually charges a commission for services. A broker also may be a person who sells insurance products ^ffered by different

companies or someone

broker

loan

rate

charged to brokers

who

who

An

sells real estate.

interest

rate

need funds to cover

the margin loans that they have extended to their customers. These loans can be called

with short notice, even within 24 hours.

brokered

CD

Interest rates

42

on broker loan

rates usually

are only about a percentage point above short-term interest rates like the federal funds rate. Also called call loan rate.

CDs

the

certificate

they offer often pay higher inter-

est rates than CDs issued by banks. Brokered CDs tend to be easier to sell than CDs bought from a bank directly because they can be sold on the open market. Unlike a bank CD, there is no penalty for selling a brokered CD before it matures. Because brokered CDs are originally issued by banks, they are insured by the Federal Deposit Insurance Corp. (FDIC) for up to

$100,000.

brokers' loan kers

Money borrowed by

from banks

Federal deficits are funded by issu-

may

ing government debt, which

form of bills, also

take the

notes, or bonds. Corporations

can have budget

deficits;

however, steps

are quickly taken to reduce the deficit

CD A

of deposit is bought from a brokerage firm rather than from a bank or savings and loan. Brokerage firms choose CDs from many banks around the country and as a result

brokered (CD) that

deficit.

in

order

to

bro-

pay

for

cutting costs or increasing

Buffett,

A

Warren

by

sales.

famed

who

investor

took over the management of Berkshire

Hathaway in 1964. Buffett shunned investments in technology during the bull market of the late 1990s. Although some pundits questioned whether Buffett had lost his touch, when the technology bubble burst, his strategy proved sound. Some of Buffett's investments include insurance companies Geico Corporation, General Re Corporation, and investments in the Washington Post Company. When Buffett buys companies, he looks for those that are undervalued, and he believes in keeping management in place. He is sometimes called "the sage of Omaha," after the city where his company is headquartered.

inventories of stock, finance the underwrit-

ing of corporate

or municipal

or

debt,

bulge

Typically, a

quick run-up in the

provide financing for their customers' mar-

price of a futures contract, although the

gin accounts.

term can be used

to refer to stocks, the

entire stock market, or another investment.

Brown, Gordon Exchequer

The Chancellor of

for the U.K.,

which

is

the

an equiv-

alent position to the U.S. Treasury Secretary, as

of this printing.

bubble Markets that rise significantly above what rational expectations would dictate.

Recently, the stock market run-up

in the late 1990s that

ended

in

2000

is

cited

a stock market bubble. Historically there have been many bubbles, such as the South Sea Bubble and the as

an example of

Dutch Tulip Bubble. See also Tulipmania and South Sea Company Bubble.

buck

A

slang

term used

to refer to

one

U.S. dollar; in traders' jargon, $1 million.

bulge bracket A loosely defined group of investment banks that dominate the industry. Those in the bulge bracket are Morgan Stanley, Goldman Sachs, MerriU Boston, First Suisse Lynch, Credit Citigroup, and Lehman Brothers. Because there are no formal membership requirements, other banks

deficit

The

difference

between

when expendiexceed income. The term is usually used in reference to the deficit of the U.S. government, or another government's expenditures and income, tures

that they, too,

are included.

The concept of bulge

bracket

came

when

a from the early part of the 1900s small group of investment banks cooperated, or colluded, in the market for investment-grade debt offerings. In the 1960s and 1970s, Frederick B.Whittemore, a syn-

dicate

budget

may argue

chief for

Morgan

who

Stanley

in

the

was known on Wall Street as Father Fred, was incredibly influential in deciding who was included in the bulge bracket. Since he retired, no one person, or Morgan Stanley, has had the clout to 1960s and 1970s

bund

43

determine who could declare themselves bulge bracket members and who should be excluded.

Bulge bracket described how the top firms' names on tombstones bulged out from the smaller underwriters listed on them. Tombstones are the ads that appear in newspapers and magazines that announce deals. In addition to prestige, the underwriters at the top of a

bond or

made

stock offering

money from the deal. Before the Morgan Stanley reinforced who was

the most 1970s,

able to participate

m

deals because

was

it

the dominant banker to the largest U.S. companies and didn't let other banks par-

co-managers. As the 1970s drew the status quo began to change as

ticipate as

to a close,

companies demanded

other bankers

that

and the banks own syndicate networks grew and the ironclad relationships that determined who

on

participate

their deals

corporations hired diminished.

Someone who beHeves

bull

ket will

rise.

mar-

Contrasts with a bear,

who

beheves the opposite. See also bull

A

market

other

sharply higher.

A

some

stock market, or

market,

financial

bull market.

that

traded

has

market up by approxi-

mately 20 percent

is

considered

a

bull

market, though that percentage can vary. One of the strongest bull markets ever

was the 1990s,

bull

when

until the

market

market in the

latter half

record gains were recorded

market peaked in 2000. in

is

of the

contrast

to

a

A

bull

bear market,

market that is trading sharply lower by at least 20 percent. The term bull market came into use in 1714 soon after the term "bear market" was introduced. One of its first uses was in

which

is

a

Charles Johnson's comic play, The Country Lasses. The citation was, "Instead of changing honest staple for Gold and Silver, you deal in Bears and Bulls." Another reference

was made Refusal

m

in

1721.

Colley

Cibber's

play

The

simultaneous purchase

of a call option with a lower exercise price and the sale of a call option with a higher exercise price. A bull spread also can be accomplished with the simultaneous sale of put option with a higher exercise price and the purchase of a put option with a lower exercise price. The trader using this

a

strategy expects the price of the underlying

security to rise

and wants to Hmit the cost

of purchasing options.

A

bond

bulldog

denominated bond poration

British

that

is

by a coraccounting

issued

maintains

that

pound-

its

records in another currency.

Bulletin

Board Exchange (BBX) will

the

replace

The

OTCBB

system that (Over-the-Counter Bulletin Board) system. It was scheduled to launch in the fourth quarter of 2003, pending approval by the Securities

that the

The

bull spread

(SEC).

and

BBX

dards than

Commission

Exchange

will have higher Hsting stan-

OTCBB. BBX

companies

will

have to meet many of the corporate governance requirements that NASDAQ-Hsted companies are required to meet. However,

no financial requirements for listing, which means that BBX companies will not have to meet minimum share there will be

price,

capitalization, or shareholder

market

equity requirements. Higher Hsting standards include requiring that a

engaged that

it

company be

in a legitimate, lawful business,

not be

a shell

and

company

BBX

companies wiU have to comply with the Securities Exchange Act of 1934 and be current with required fiHngs. They also will have to produce annual and quarterly reports

and

are required to adhere to

good practices for corporate governance and shareholder rights. See also OTC Bulletin Board.

A precious

bullion silver that

is

metal such

as

gold or

in a tradable form, typically a

bar or wafer.

bund

A German Treasury

security.

44

Bundesbank Bundesbank The German central bank. The Bundesbank is responsible for maintaining price stability, ensuring the orderly execution of domestic and foreign pay-

ments, and contributing to the stabihty of payment and clearing systems. The

Bundesbank

nine

has

regional

offices

companies with establishing their business. incubator provides below-market rent on office space and shared services such as teleconferencing equipment, a conference room, and secretarial services. Marketing, legal, and accounting services also may be provided. Private businesses and developers,

An

may

public agencies, or universities

throughout Germany.

operate

business incubators.

Two companies jointly selling complimentary products or serOne example of bundled services is

bundled similar,

vices.

when

telecom company

a

offers

its

phone service combined with company's mobile phone service.

fixed

another

ital

used frequently in the venture cap-

dividing see

Burn rate is calculated by total amount of cash on hand and

industry.

taking the it

by the monthly expenditures to

how many months

company could

The term was

stay in business.

during the Internet

business purpose is

the

An

often used

boom

organized

entity

to sell services or

tomers in order to earn

whose

goods to cus-

a profit for the

owners.

business cycle A long-term pattern of improvements and downturns in the econ-

omy.

A

stages:

business

cycle

typically

has four

expansion, prosperity, contraction,

and recession. Eventually a recession will be followed by expansion. A business cycle typically is tracked by looking at gross domestic product data. Employment levels, retail sales, and industrial productivity are some of the other economic indicators that show whether a business cycle is shifting from one stage to another. Business cycles may also be used in reference to an industry or company. business day ties

firms are

A

day that banks or securi-

open

business days are

for business. Typically,

Monday through

Friday,

excluding various national holidays.

business

incubator

A

business

owner who

attempting to obtain

is

venture capital financing,

bank

a

loan, or

other financing. The business plan is a blueprint for how the company intends to

burn rate A measure of how quickly a company will exhaust its cash or available liquidity,

business plan A comprehensive plan written by a potential or current small-

business,

perform.

It

must

spell

product or service, give

how

tory, explain

to

its

company

the

competition, and outHne

be successful in

to

its

for-profit or non-profit, that assists start-up

of its

is

how

his-

superior intends

it

target market. Sales

projections must be included in the busi-

performance statistics and future projections. The background, qualifications, and job functions for key players and managers also are included.

ness plan, along with financial

business

management

process

A

management technique that scrutinizes the processes that a company goes through to perform certain tasks. The intention is to create a more efficient way of working, thereby saving time and money.

A lesser-

business sales and inventories

watched economic statistic that is released monthly by the U.S. Department of

Commerce. The about

six

weeks

statistic is

after the

usually released

end of the

quarter that the data covers. sales and inventories

The

fiscal

business trends

statistic studies

in inventory accumulation. If inventories

accumulating quickly, that may indicate slowdown in business growth. If the

are a

inventories are declining, that business

is

it

may

indicate

improving and there

will

be

future growth.

business-to-business (B2B) business relationship in

either

out the company's a synopsis

An e-commerce

which

a

company's

B2B

busicustomers are other businesses. nesses sell goods and services online to other

companies, and are similar to wholesalers

buying climax

45

For example, stocks prices may rally ahead of the monthly unemployment report on the anticipation that employment will be weaker than expected. The weaker numbers

and distributors in the bricks-and-mortar marketplace. This term was frequently heard during the technology boom of the late 1990s.

See also

and

bricks

mortar.

are interpreted to

convertible

busted

A

security

con-

substantially

is

instance, if the strike price

is

$20 and the

trading at $5, there

is

no reason

stock

is

stock

into

security

convert the

is

ers a

$20.

at

Generally, a busted convertible security's value as a debt instrument or preferred

stock obligation

much

is

higher than

is

litde

likeUhood that

it

will

An

option strategy to sell several call options and at the same time buy several call options on the same secu-

The

rity or futures contract.

the actual

are released

and match the lower expecta-

tions, stocks

may

trade lower.

buy-and-hold

A

strategy

passive

purchasing bonds, whereby a manager selects a portfoHo of bonds aligned to his chent's objectives and intends to hold the

A

bonds to maturity.

be converted into equity. butterfly spread

However, unemployment numbers costs.

investment strategy, often associated with

its

conversion value. Thus, busted convertible securities trade like debt instruments

because there

is

company's borrowing

when

to

that the Federal

Hkely to cut interest rates, which a positive event for stocks because it low-

Reserve

whose current stock price below its strike price. For

vertible security

mean

options have

modified buy-and-hold

strategy follows this process; however, portfolio managers still actively look for

opportunities.

attractively-priced

and-hold strategy

also

may be

A

buy-

applied to

stock selection or other investments.

maturity dates and the exercise

different

underlying security makes no dramatic moves, the options trader hopes to make a profit by

buyback

income from the premiums. The strategy Hmits both risk and profit potential. For instance, one call is bought at the

that

differ. If the

price of the options will

1.

The purchase of a company's

stock by

company.

collecting

lowest strike price, $35 for stock. Then is

two

calls are

sold at $40,

the middle strike price.

bought

at

Company Then

call

is

$50, the highest stock price.

Buttonwood Agreement

A

1792 trade

comagreement munity out of the original 24 brokers in New York. The name comes from a Buttonwood tree that was their informal that created an investment

meeting

site

on Wall

Street.

the dips To take advantage of a pullhack, or temporarily lower prices, in order to purchase stocks or other invest-

buy on

ments

in a

market that

small

move downward

been

steadily rising.

buy the rumor,

is

rising.

A

dip

The purchase of a

previously established short position.

is

a

in prices that have

A

buydown

large,

unscheduled payment

borrower to a creditor in order to reduce some or all of the borrower's outstanding debt. If allowed by the terms of the loan, a buydown reduces the amount of the

made by

a

regular payment.

A

market

market situation in which there are plenty of goods or services available to choose from and buyers can afford to be selective. The availabihty of

buyer's

down

goods or services drives selling prices and can pressure the profits of the

The

seller.

which

market, in

opposite is a seller's there are few items available for sale and prices are driven upwards.

sell

the fact

A

phrase

buying cHmax in

a

often quoted by stock or futures traders that

rise

explains price declines that occur after an

market for

anticipated positive

position to offset a

A's

which

a

2.

event has happened.

The end

security, a

to a rapid price

commodity, or

type of asset, such

or bonds, characterized by

all

overall

as real estate

of the

likely

buying hedge

46

buyers jumping on the bandwagon. After a buying climax, the market will fall sharply.

the price level listed by the stop order. At

A

buy the

dramatic run-up on strong volume

sign of a

is

position that

estab-

is

in

order to protect against a possible increase in

the future cost of commodities. Also

called a long hedge.

that

available to

is

fund

a purchase.

Often

people will say that the dollar doesn't have

power

the buying

The term ing

all

also

is

did

it

many

years ago.

used in the context of tak-

the cash held in a brokerage account

and purchasing

securities

on margin.

buying the basis

Buying an investment in the cash markets, such as wheat or S&P 500 futures, and then selling a futures position in an attempt to profit from a narrowing of the

basis.

Also called cash-and

carry trade.

buy-side analyst A securities analyst who works in the research department of an institutional firm that (so-called

because

these

on

is

the buy-side

companies buy on behalf of

stocks and other securities

A A

their clients).

typical buy-side firm

is

a

mutual fund. buy-side analyst's research product is distributed only internally or to the

firm's

best

clients.

In

contrast,

the

(whose firm is selling its trading and investment banking services to clients) is widely distributed to research of a

the public

sell-side analyst

at

large

as

well as the firm's

it

is

to be

850 might use isn't

unless

it

buy-stop

a

S&P 500

may be

order

futures contract call-

bought

850. If the current

at

835, the order won't be executed

until

she

The amount of money

buying power

ing for price

market order to

a

security at the best price possible.

For instance,

by purchasing futures contracts

become

will

it

entered for a

A

buying hedge lished

a

buying climax.

that point

reached.

is

this

A

technical

trader

type of order because he or

willing to purchase the contract

reaches a certain point. Also called

suspended market

bylaws

order.

Rules written by

corporation

a

or non-profit organization that establish the policies

corporation

the

organization

or

Bylaws must be adopted by the board of directors. Such policies cover the will follow.

election

of

auditors,

how many

issued,

and other

bypass trust minimize estate

appointment of

the

officers,

shares of stock will be

topics.

A

trust that

taxes

is

by taking

created to full

when

tage of a tax credit available

advan-

the

first

dies. However, other estate planning must be used to minimize taxes when the second person dies. A bypass trust takes advantage of a per-

spouse tools

son's lifetime unified gift

which left

is

the

and

estate tax credit,

amount of money

that can

be

to beneficiaries without paying federal

estate taxes.

The

scheduled to

credit

is

$1 million and

is

million by

$3 married couple has $2.4 million of assets, the assets of the first spouse to die can be included in an estate that can give 2009. If

increase

to

a

$1 million tax free to the couple's children

clients.

or other beneficiaries. The living spouse can

buy-side trader A person who trades on behalf of an institutional investor such as a pension or mutual fund portfolio manager.

buy-stop order be executed

A

until the

also use the $1 million credit,

remaining $400,000

A /B

trust, a

ter trust.

buy order

that

market price

won't

rises to

is

and only the

taxed. Also

unified credit trust,

and

called

credit shel-

be special requirements surrounding the specific call-date features. Those will be spelled out in the bond's prospectus. If a

bond can be

called,

it is

a callable bond.

loan rate The interest rate on shortterm secured loans that can be called, or cancelled, by giving a 24-hour notice.

call

C

In a mutual fund with

shares

than one

class

of

shares,

cally those shares that sales

C

more

shares are typi-

have a permanent

charge component in the fee structure.

cabinet security on a major exchange but

Hsted

is

no longer

brokers

actively traded.

charged

cabinet trade A trade made in an inactive stock or bond. A cabinet trade also may

call

be an off-market transaction that is completed in order to close out a nearly w^orthless option contract because it is out

money

of the

The exchange rate between the U.S. doUar and the British pound sterling. The rate

cable

was transmitted over the transatlantic cable from 1866, and the initial novelty of the communication method gave the exchange rate this name. Cable also refers to sending a

CAC-40 Index

A

that measures the

performance of 40 top

companies

which

is

listed

stock market index

on the

Paris

Bourse,

the Paris stock exchange.

It

is

a

narrow-based capitalization-weighted index that was developed with a base level of 1,000 on

December

California

Public

31, 1987.

Employees RetireThe United pension fund; it man-

ment System (CALPERS) States' largest public

of $128 billion. It provides retirement and health benefits to nearly 1.4 miUion state and local pubHc employees

ages

assets

and their families. It also has become a major voice in corporate governance issues. call sell a

The

right,

but not the obUgation, to

security at a predetermined price.

date A specific date on which a bond can be redeemed before it reaches maturity. A bond typically can be redeemed at the discretion of the issuer at par (face call

value). In

some circumstances

there

is

may

to

obtained from banks

finance

flexible.

An

option

option that gives the pur-

chaser the right, but not the obHgation, to

purchase the underlying stock, commodity, or other financial instrument at a set time

and price from the writer of the call option. Typically, one option contract for a stock confers the right to buy 100 shares of the stock. A purchaser of a call option beheves that the price of the underlying security will rise and is willing to pay a premium for the right to be able to purchase it at a lower price in the future, thereby avoiding the

market price.

inflated

message electronically or transferring funds.

Money

margin loans. Generally, call money can be obtained by giving a two-day notice. The interest rate

or

A stock or bond that is

money

call

premium

call

A

premium

that

bond

must pay to purchasers of their bonds to compensate them for the fact that the bonds may be called before maturity and the bondholders may not receive as much interest over the life of the

issuers

callable

bond as anticipated. The call premium is amount above the value at maturity that

the

the

must pay to the bondholder for poscalling the bond.

issuer sibly

protection A situation in which a bond or note cannot be redeemed by the call

issuer prior to a certain date.

call

provision

A

provision in a

indenture that gives the

option to

call

the

bond

bond

for

bond

issuer the

redemption or

time (before the bond's stated maturity) or at a certain price. Also refund

at a specific

called redemption provision. call ratio

interest rate that

Korea

monetary poHcy. The call ratio is at which the Bank of Korea buys

uses to set

the rate

The key

48

call risk

short-term government securities. In the past Korea has had an expHcit inflation target between 2 and 4 percent.

and

sells

called, the

stockholder

entitled to receive

is

call premium, and part of the

the par value of the stock, a

any dividends in

arrears,

current period's dividend.

A

call risk

associated with premature

loss

of principal is

lender's potential opportunity

on

repayment

debt instrument. Call risk

a

a reinvestment risk,

because

usually

it is

away

called

Eliminating an underlying

by exercising

security position

A common

impossible to reinvest the funds in a similar

away

if a

instrument with an equal yield.

bond

position also

short

the issuer under

swaption

call

A

swaption

an option to

is

embedded

option

call

may be call

bond

in the

a call option.

may be

stock position

is

called

exercised.

A

away by

called

provisions that are

indenture.

enter into an interest rate swap at a specified future date with the call giving the pur-

CALPERS

chaser the right, but not the obligation, to

Retirement System.

receive a fixed interest rate.

short for swap option,

which

A is

swaption

is

an over-the-

tract

counter option on an interest rate swap.

A

bond that the issuer can call before maturity. The issuer can decide to redeem the bond and pay the investor the par, or face value, of the bond, or, in some callable

cap

sHght premium. If interest rates fall, companies often call bonds because they can issue new bonds at a lower interest rate and save money. If a bond is called it is

cases, a

See California Public Employees

A Hmit

on

outlined by a con-

a price

or other agreement. Adjustable rate

mortgages or adjustable often have a cap.

credit cards

rate

capacity utilization An economic statistic that shows what percentage of the capacity at U.S. manufacturing plants is being used. as

It is

cited as a percentage, such

75.6 percent. The data

monthly

is

included in the

industrial production statistics that

by the Federal Reserve Board each month around the 15th.

are released

referred to as called away.

A bond

callable

bond

demand

the investor return before

that the issuer can

stated

its

maturity date. The issuer repays the investor the principal amount. Because the purchaser

he or she would have received, if the bond can be

may

lose future interest

called that risk price.

payments

that

reflected in the bond's

is

Corporations

call

bonds when

at

a

called

lower interest

rate,

company money. This

is

and then reissued

which

saves

mortgages in order to advantage of lower interest rates.

stock that

capital expenditures.

1.

The amount of funds

that represent an

ownership stake in a business or new venture that can be used to create wealth. 2.

The

net worth of a business, or the

amount by which

assets

exceed

liabilities.

Accumulated wealth such stocks, and other investments. 3.

as

cash,

a similar process to

refinancing

callable

the

See

capital

inter-

have fallen below what they are currently paying on the outstanding bonds. est rates

The bonds can be

capex

take

at

the

adequacy

A

ratio that

can indi-

to maintain equity whenever depositors pay capital suflEicient to they demand their money and still have

cate

preferred stock Preferred can be retired or redeemed at the

option of the issuing corporation

capital a

bank's

enough funds

abiUty

to increase the bank's assets

stock based on the call price (redemption price), or can convert it into

through additional lending. Banks Hst their capital adequacy ratios in their financial reports. It is stated in terms of equity capital as a percent of assets. Capital requirements

common

imposed by regulators tend

price stated in the preferred stock contract.

The

investor can either receive cash for the

preferred

stock.

If

a

preferred

stock

is

to

be simple

capital lease

49

mechanical rules rather than appHcations of sophisticated risk models.

model (CAPM)

capital asset pricing

A

model

shows

that

the

relationship

between expected return and expected risk. CAPM shows that the return on an asset depends on 1) the time value of money (the total interest rate or return that can be earned on money over a period of time) 2) the reward for bearing systemic risk (the risks

inherent in a market, such

bihty of the stock market selling

the

amount of systemic

risk.

the possi-

as

The

and

off)

risk

is

3)

sys-

temic because even if a stock is purchased and the company performs well, poor per-

competitor in the same mean that the entire market

formance by

a

may

industry

trades sharply lower.

Because investors are

political or

economic turmoil. Funds

cally flee to a safe haven,

Treasury

bond market.

disruptive because itself.

That

turmoil,

is,

if

it

such

Capital flight

is

very

on

tends to multiply

one country

then

typi-

the U.S.

as

there

is

experiencing

danger

the

is

investors will pull their funds

that

from other

countries in the region to avoid potential

The term is associated with emerging market economies, such as Asia Pacific in 1997 and 1998, Russia in 1998, and countries in Latin America at

future losses. smaller,

many

different times. In contrast, an invest-

ment outflow indicates that money is leaving a country in a more orderly fashion.

The income

capital gain

derived from

selling

an investment for an amount of

money

greater than

purchase price. To be

its

risk-averse, they require higher rewards for

considered a capital gain, and not an ordi-

higher

nary gain, the investment must have been

risks.

A

budget

capital

budget used to plan

major, long-term, cash-intensive projects,

such

as

building a

new

plant or office build-

ing or funding long-term research. Several financial

can be

tools

used to

held for one year or longer. Capital gains are taxed at a lower rate than ordinary

income is taxed at. Capital gains can be off"set by capital losses in order to reduce the amount of the taxpayer's overall bill.

evaluate

capital

nal rate of return (IRR), a payback period, and a net present value analysis. See also

assessed

internal rate of return.

gains tax rate

consumption allowance

capital

The

percentage of the gross domestic product

due to depreciation. GDP minus capital consumption allowance equals net national product. The capital consumption allowance measures the amount of

(GDP)

that

is

expenditure that a country needs to undertake to simply maintain, as its

on investments or

12 months. The U.S. capital was lowered in 2003 to 15 percent by 20 percent, which is lower than the rate for ordinary income, which can be as much as 35 percent. For individuals in held for

at least

the 10-percent or 15-percent

cent,

down from

for

expected to

big-ticket last

(capex) items

Expenthat

are

several years. In the tele-

com and

technology markets, the amount of money companies spend on capital expenditures has a direct influence on the sales

growth

that their suppliers can expect.

capital flight

money from

a

is

tax

5 per-

10 percent. Unless Congress

takes further action, the

pre-2003

capital-

gains rates will reappear after 2008.

A lease

ically substantial

ditures

income

bracket, the capital gains tax rate

capital lease

expenditures

tax

that are

assets

opposed to grow,

productivity.

capital

An income

tax

gains

potential capital budget plans, such as inter-

The exodus of large sums of country that

is

experiencing

way

that in an

econom-

transfers nearly

all

of

the risk and rewards inherent in the leased

Payments for a capital lease should not be treated as a current expense, but rather should be capitalized by

property to the

lessee.

recording them on the balance sheet

as

both an asset and a liability. Under the "Statement of Financial Accounting Standards 13" criteria, a lease must be treated as a capital lease if it

four criteria:

(1)

meets one of the following the lease transfers owner-

ship of the property to the lessee

when

the

50

capital loss

lease

the lease has a purchase price discounted from the reg-

ends; (2)

option at a ular market price; (3) the length of the lease estimated ecois equal to 75 percent of the nomic Hfe of the leased property, although this isn't applicable if

the lease term begins

25 percent of the estimated and (4) the present value of economic the minimum lease payments equals or exceeds 90 percent of the fair value of the during the

final

life;

leased

property.

A

contrasts

lease

capital

with an operating lease, which does not meet any of those four criteria. An operating lease is an expense item and no asset or Hability

on

recorded

is

company's

the

financial statements.

The

capital loss

ment

cost is

of selling an invest-

less

than

its

purchase

and not an ordinary loss, the investment must have been held for one year or longer. Capital losses

considered a capital loss,

be

can offset capital gains in order to

reduce the amount of the taxpayer's overall

transportation, are privately tively

The

markets in which

debt and equity are raised and then traded in the secondary market. capital rationing

poration

takes

The

when

action that a corcapital

is

or expensive to obtain and many projects must compete for the limited capavailable. Companies ration capital ital increase

the

minimum

return required to fund a

new

project or

ically the

The long-term

financ-

ing arrangements that a corporation has

A

company's capital structure may include long-term debt, retained earnings, and common and preferred stocks. Capital structure contrasts with financial structure, which includes short-term debt

and accounts payable.

An economic

and business sysby giving successful individuals and companies the right to keep the profits from their activities.

tem

minor

role in

Index, the Wilshire 5000 Equity Index, the

Stock Exchange's Gold & Silver Sector Index, and the Utility Sector Index are examples of capitaHzationweighted indices. Also called market-value weighted

that rewards individual effort

indices.

Interest that

capitalized interest for a capital asset that

is

is

paid

treated as a regular

and amortized on the income

state-

over a multiyear period. Capitalized

interest contrasts is treated as

with

regular interest,

which

an expense in the current period

and charged against income.

CAPM

See

capital asset pricing model.

captive insurance

company

ance company that

owned

is

client firms. trolling

the

An

insur-

or controlled

number of concompany The owner insurance company helps to

by another insurer or

tive

capitalism

plays a

capitalization-weighted index A stock index in which each stock affects the index in proportion to its market value. The NASDAQ Composite Index, the S&P 500

a small

or

by having a capcompany. The arrangement also may

fulfill its

established.

government

directing business.

investment.

capital structure

raised in order to

is

fund activities and produce profits. Property and businesses are privately owned and typ-

either

difficult

when companies

operated in rela-

environments, where

competitive

their profits. Capital

ment markets

and communication systems

owned and

businesses and individuals seek to increase

asset bill.

capital

the land, factories, manufacturing,

Philadelphia

for a price that

price. To

Most of

provide

business objectives

some

tax advantages to the owner.

Capture Theory of Regulation ory developed by George Stigler

A

the-

that says

an industry can benefit from regulation

if it

can capture the regulatory agency involved.

This can happen

if

the industry's political

influence and technical knowledge makes the regulatory agency dependent on it. Pohtical appointees from the industry, along with the agency's need for informal coop-

from the industry, help create a situation in which the agency is captured. eration

cash flow

51

A

car

unit quantity of an item, such as a

contract, that

traded in the commodities

is

market. For example, a to

may refer The term

car of bellies

on pork

contract

a

belhes.

of the

firm.

cash

fact that quantities

can be packed into a railroad

and good management processes. He also bought steamships and railroads. He sold his steel company to J.P. Morgan's U.S. Steel Corporation for $492 milHon, which made him the world's richest man. He gave tions

fortune to charitable

and endowed throughout the United States.

libraries

organizations

The

carry rities.

A

interest cost

of financing secu-

when

the

return from a security exceeds the financ-

ing cost.

A

negative carry occurs

when

financing cost exceeds the return security that has

the

on the

been financed.

The commodity over

carrying charge

cost

physical

a

of storing

a

period of time,

cost.

The

portion of an

is

which

forces,

such

asset's

not depreciated. Also called

book value. Carrying value value,

selling the

See also

is

as

is

not market

determined by market stock prices.

assigns carrying value to

A

Many

United but

v^^estern countries,

States,

many

including the

have laws prohibiting

other countries don't.

cartels,

fiitures

contract.

for

available

is

distribution,

system

records

that

An

accounting

income when

received and records expenses

when

it

is

they are

most common account method records income when it is earned and expenses when they are incurred.

paid. In contrast, the

Items such

nego-

as cash,

tiable instruments, titles, securities, deposit

accounts, or other cash equivalents in

which

the debtor's estate and an entity other than

the estate have an interest. Cash collateral used, sold, or leased in the ordi-

nary course of business unless the creditor with an interest in the collateral consents or the court, after notice and a hearing, authorizes the transaction.

commodity

commodity

tels.

corresponding

mine how much cash

cash

A

in the

cash available for distribution A measure of a Real Estate Investment Trust's (P^IT) ability to generate cash and distribute dividends to shareholders. Put another way, it is the amount of money left over after the bills are paid. Normal monthly expenses, non-cash items, and one-time expenditures are subtracted from the funds received from operations in order to deter-

company

its assets.

group of countries or companies that work in concert to limit production of a product in order to influence the price of the product. OPEC, the Organization of Petroleum Exporting Countries, is one of the better-known carcartel

commodity

borrowed money while

arbitrage.

may not be

carrying value value that

includes the purchase of a

cash collateral

including storage, insurance, interest, and

opportunity

arbitrage transaction that

cash basis accounting

occurs

carry

positive

An

carry

cash market using

created his steel empire through acquisi-

his

&

car.

Carnegie, Andrew A day laborer who began his career earning $1.20 a week in a Pittsburgh Steel mill and became wealthy as the head of a steel empire. Carnegie's Union Iron Mills produced beams and plates for his bridge-building company. He

away much of

separate part of a company's

from turn it into a totally indeand the company pendent firm by selling shares in the new

product specified in the futures contract correspond to the capacity of goods that

comes from the

To

carve out

business, such as a product or division,

Also called

cash

The

actual

physical

underlying the futures contract. actuals

or spot commodity.

equivalent

A

readily

marketable

financial instrument that has a highly stable

value.

The

cash

flovs^

ness

generated

positive cash flow

ating

income

is

cash available to

a

busi-

from its operations. A means that the net oper-

sufficient to cover expenses.

52

cash flow coverage ratios

negative cash flow shows that expenses

Calculate cash flow to assets by subtracting

exceed revenues. A corporation issues a statement of cash flow with its quarterly and yearly earnings report. The statement shows

net cash flows from operating activities and dividing the resulting number by average

where the company received its funds from and where they were spent. A popular mea-

cash-generating efficiency using cash flow

surement of cash flow, especially among Wall

objective by using cash flows and cash flows

A

Street analysts,

flow

left

is

free cashflow,

which

is

cash

after expenses, capital expenditures,

dividends, and debt service has been paid, although some companies may slighdy vary

what comprises

free cash flow.

The concept

of free cash flow gained followers after the bear market that started in 2000 brought into question the quality of companies' financial statements.

was already subtracted to obtain net income. Because earnings and cash flow

may ratios

it

vary significantly, cash flow coverage

may be more important

indicators of a

company's financial condition than earnings. See also cashflow

to

to assets.

This ratio measures

Other

company's

a

accomplish

ratios

long-term debt

ratio.

a similar

to sales.

A

cash flow to long-term debt ratio

how

cash flow coverage ratio that measures

much

cash

is

debt. This

pay for long-term good indicator of

available to

ratio

a

is

potential bankruptcy.

To

arrive at the ratio,

compute cash flow by adding net income, depreciation

and

expense,

changes

the

in

amount by

deferred tax, then dividing that

cash flow coverage ratios Cash flow analysis tools that add back certain expenses that are normally deducted to arrive at net income, such as adding back interest expense because

total assets.

value of long-term debt.

book

A

cash flow to sales

how

measures

well a

generate cash from

its

financial ratio that

company

is

able to

current operations.

Calculate cash flow to sales by subtracting net cash flows from operating activities

and dividing the resulting number by net sales. This ratio measures a company's cashgenerating efficiency using cash flow to

Other ratios accomplish a similar objective by using cash flows and cash flows

sales.

cash flow from operations Cash flow (net income plus depreciation expense, which is a non-cash charge, and deferred taxes) adjusted by increases in accounts receivable and accounts payable. Increases in accounts receivable are a use of cash if the company didn't collect all of its sales or used cash to produce the increase. However, an increase in accounts payable or another current fiabifity account means that

some assets but hasn't them, which has the effect of

the firm acquired

paid for

to assets.

cash flow yield

how

measures

A

well a

ratio

financial

company

that

generates

current operations. Calculate cash flow yield by subtracting net cash flow from operating activities and dividing the cash from

number by

resulting

measures ciency

its

a

company's cash-generating

using

accomplish

net income. This ratio

cash

flow.

a similar objective

Other

effi-

ratios

by using cash

flows to sales and cash flows to

assets.

boosting cash.

cash flow

management

The

process of

planning a company's schedule for paying

and estimating when income is likely to be received. Cash flow management helps a company avoid damaging its relationship with creditors by not paying bills on time and being forced into bankruptcy.

bills

A

cash flow to assets measures

how

well a

generate cash from

its

financial ratio that

company

is

able to

current operations.

cash flows from financing activities Funds that a company receives through its financing activities. It is computed by taking the amount of funds received from financing (inflows) and subtracting outflows,

or the uses of financing, which come from paying down liability accounts or the paydividends. Inflows of cash from financing are created by increases in notes payables, long-term liabilities, and equity

ment of

accounts from stock and bond

issues.

cash-generating efficiency

53

cash

management account (CMA)

An account that is offered to consumers by a brokerage firm. A cash management account combines the abihty to trade securities while earning money market interest with the abihty to write checks and make deposits. initial

cash

A CMA

often requires a

minimum

deposit amount.

management

A

short-term,

Cash management bills may be issued before income tax payments are received, or before the government has to make a large payment of some sort. Cash management bills range in duration from as httle as four days to several months. They are issued on an as-needed basis, in short period of time.

to

a

regular

schedule

Treasury follows for issuing

its

instrument, such

contract, that

ing

obligation or finan-

as a futures

or options

paid for in cash. In a bank-

is

settlement

cash

transaction,

is

the

process of recording the debit and credit positions of the parties in the transaction

and making the respective cash

money

transfers. In

market, a transaction

is

a cash

been purchased are paid for by Federal Reserve funds on the same day the trade is made. settlement if the securities that have

fixed-income security issued by the U.S. Treasury to cover cash needs for a very

contrast

cial

the bill

An

cash settlement

that

other

bills

the

and

cash surrender value The amount of money the holder of a cash- value life insurance policy would receive from the life insurance

company

A

were cancelled.

if

the insurance policy

cash-value

life

insurance

pohcy, in addition to being a Hfe insurance policy,

an investment and savings

also

is

account whose value increases each year that it is held. PoHcyholders also can borrow

of the

notes.

against the value

market A market for an actual commodity or financial instrument, in contrast to the futures market. Commodity

cash-and-carry trade

an investment or index-equivalent position the cash market and an is purchased in

markets often have locations where buyers

equivalent futures contract

cash

and are

sellers meet, and where commodities bought or sold for immediate delivery

For example, there are actual sales locations cattle and oil are deHvered for sale. In contrast, a cash market for a financial instrument doesn't have a centralized meet-

where

ing place. Instead, transactions occur over a

computer system or the telephone. Also called spot market.

cash

rate

The key

interest

rate

that

monetary poHcy. The on overnight loans between banks. Australia uses an explicit inflation target, which in the past has been around 2 to 3 percent a year.

Australia uses to set

cash rate

is

the interest rate charged

is

basis.

Also called buying

to profit

A

a

is

trade in

which

sold. The

pur-

narrowing of the

the basis.

cash-balance pension plan A benefit that gives an employee a specific amount of money based on salary and years of service. The employer bears the invest-

plan

ment

risk.

Cash-balance pension plans have

come under criticism because often they pay more to a younger person leaving the company than to an older person nearing retirement age. In early 2003, regulations

were proposed to require pension plans converting to it

a

age-neutral.

lishes

a

cash-balance plan to

A

make

cash-balance plan estab-

hypothetical

employee and

cash ratio The most conservative liquidforjudging the financial stability of a company on a short-term basis. To calculate cash ratio, add the value of the company's cash and short-term marketable securities and divide the total by current liabilities. This ratio shows the ability of the company's cash on hand to fund short-term liabilities.

from

pose

policy.

credits

account for each the account with

hypothetical pay and interest credits.

ity ratio

cash-generating efficiency The ability of a company to generate cash from continuing operations. Three ratios measure a company's cash-generating efficiency: cash-flow yield, cash flows to sales, and cash flows to

assets.

54

cash-realization ratio

cash-realization ratio A financial ratio that is used in the telecom industry, among others.

calculated by dividing cash flow

It is

by net income. It measures how close a company's net income is to being realized in cash. Cash flow from operating activities is taken from the statement of cash flows. The net income figure taken from the income statement. is

from operating

Companies

activities

are less

that

risky have

exceed 1 .0, indicating that income may not be dependent on non-cash sources such as mark-to-market accounting valuations, which can be affected by aggressive valuation decisions by management. This ratio is considered a good measure of earnings quality. Cash-realization ratio is calculated by dividing cash flow activities

The

payments are tied to the insurance losses of a portfolio of property and casualty insurance contracts. Large losses from a hurricane or flood result in investors receiving smaller-than anticipated interest

payments;

if losses are small,

above-market

receive

Also called Act

oj

God

then investors

interest

payments.

bond.

cash

realization ratios that

from operating

often issued by an insurance company. interest

money

that can

additional

be contributed to

retirement plan that

is

a

401(k)

offered to employees.

The catch-up

contribution was allowed as of the Economic Growth and Tax Relief Reconciliation Act passed in 2001.

part

The law

allows employees age 50 and older

to contribute an extra $2,000 in

pre-tax

by net income.

The

catch-up contribution

The catch-up

basis.

2003 on

a

contribution

$1,000 per year until it reaches $5,000 in 2005. Many employers will not match the catch-up contribution, however.

will increase

insurance A life insurance policy that combines life insurance with the features of a savings and investment account. The gains from the investments accumulate tax-deferred and the cash value of the policy can be borrowed against. A cash-value

cash-value

life

life

insurance policy pays a death

named beneficiaries when the dies. The three primary types of

benefit to the

policyholder cash-value

A

life

whole

insurance are

which

lets

See

certificates

of accrual on treasury

securities.

A

and dogs

cats

refers to speculative

stock market term that

companies with

little

his-

tory of earnings or revenues. In a strong

market, traders wiU sometimes say that everything

insurance policy,

life

CATS

is

going up, even the

placements

cattle

the cash value of the policy accumulate

reported

depending on the return of the

by

the

cats

and dogs.

A

monthly statistic Department of monthly cattle-on-

U.S.

insur-

Agriculture

ance company's investments in stocks,

feed report.

bonds, and other financial instruments.

being put in feedlots in preparation to go to slaughter. The report is presented in terms of

A

variable

life

policy,

which

lets

life

the poli-

cyholder choose the investments for the life

insurance policy, selecting from a

variety of mutual fund or other invest-

ment

A

options.

universal

life

policy,

which

lets

investors

choose their investments among money market and Treasury securities; universal

were widely popular during the 1980s, when interest rates were high,

life

policies

but are

less

that

from

cattle are

For instance, the report will

placements are

down

1

percent

last year.

monthly report A cattle-on-feed report, produced by the U.S. Agriculture Department, that details the number of catbeing placed in feedlots as a precursor to going to market. Three stages of getting cattle to market are detailed by the report: The tle

first is

popular today.

It

a percentage.

say

of its shows how many

as part

placements,

which

are cattle that are

taken out of pastures, v/here they eat grass,

CAT bond bond.

CAT

Short for catastrophe-linked

bond

is

a

debt obligation that

is

and put on corn to start gaining weight. The second stage is cattle on feed, which is

certificate of deposit (CD)

55

the

number of cattle

that are eating

corn to

gain weight in preparation for slaughter; the

corn may be mixed with some extra protein, such as soymeal. The third stage is the number of marketed cattle, which are cattle that have been sent to slaughter.

The

cattle-on-feed report

stated in

is

percentage terms compared to the previous

For example, if cattle on feed are placed at 99 percent compared with a year ago, that means that placements are down one percentage point from a year ago.

include Sprint, PCS and its affiliates, Verizon Wireless, and Qwest Communications International Inc.

CDO

Stands for

tions; a

collateralized debt obliga-

collection of debt instruments that

have been grouped together to provide greater flexibility for the issuer and a

return for the investor.

year.

A

caveat

emptor

"let the

buyer beware."

reference to

Latin term that It is

consumer

A

caveat venditor "let the seller

means

typically used in

meaning

underlying

the

to stop unlawful behavior.

such

court or regu-

company or

Regulatory agen-

the Securities and

as

issue

official

Exchange

cease-and-desist

orders.

beware," in contrast to the

more widely known

saying caveat emptor

The

the buyer beware).

(let

principle of caveat

venditor cautions that the seller

is

responsi-

problem that the buyer might encounter with a service or product.

ble for any

CBO CBOE CBOT CCPU

col-

A

cease-and-desist order latory order that directs a

Commission can Latin term

assets

good

is

CDO.

cies

transactions.

by the

lateralized

Repayment

See Congressional Budget

Office.

See Chicago Board Options Exchange.

See Chicago Board of Trade. Short for

cash

cost

per user; the

average cost that a telecom carrier spends to

The currency

cedi

unit of

prised of 100 pesewas.

Central Africein

Economic and Monetary

Community A

monetary union

consist-

ing of six West African countries: Cameroon,

Central African Republic, Chad, Republic of Congo, Equatorial Guinea, and Gabon. These countries use the CFA franc, or the franc de la Cooperation Financiere Africaine, which is issued by the Banque des Etats de I'Afrique Centrale.

was pegged, or linked,

franc

franc starting 1947, but

retain current customers.

Ghana com-

The CFA

to the

French

became pegged

the euro

when

in 1999.

Only one devaluation

to

France adopted that currency

CD See of deposit. CDC See Community Development Corporation. CDCU See Community Development Credit

January 1994, the CFA was devalued to CFA 100 from CFA 50. The countries

Union.

using the

certificate

CDMA access;

a

for

code-division

bility

CFA

channel

available

CFA

franc have an arrangement

currency peg and to take the sole responsi-

and

second-generation

for

occupy

signals to

plexing.

multiple

technology used in wireless com-

third-generation wireless networks.

sion

during the history of the currency peg. In

with the French treasury to maintain their Short

munications

many

has occurred

in

is

a

allows

to

optimize

the

process called multi-

used in

guaranteeing

of

Economic and Monetary Union.

UHF

(ultra-high-

CEO

See chief executive

with

800-MHz and 1.9-GHz

a specific

interest rate.

bands. Wireless

CDMA technology

CDs from also

officer.

of deposit (CD)

certificate

frequency) cellular telephone systems in the

companies that use the

convertibility

a single transmis-

order

bandwidth,

CDMA

It

for

francs into euros. See also West African

maturity date and

Many

a

purchase

A

deposit

a specific

individual investors

buy

bank, although corporations

commercial

CDs

that

are

certificates of accrual

on treasury securities

CDs also are sold by savand credit unions. CDs sold ings and loans by banks or S&Ls that are Insured by the Federal Deposit Insurance Corp. are insured up to $100,000. Interest earned on CDs are taxable by federal and state governments. If the CDs mature in 1 year or less, they can be used as a cash reserve. extremely

large.

Management

of accrual on treasury secu(CATS) Zero-coupon instruments

rities

created by stripping U.S. Treasury securities.

Also

may be

called

STRIPS

or

Stripped

Treasury Securities, although zero-coupon bonds were created and issued by broker/ dealers before the U.S. Treasury Department started its STRIPS program m 1985. CATS were issued by Salomon Brothers, which is now part of Citigroup Inc.

A

check

check guaranteed by When the check is certified, it becomes a legal obligation of the bank. The bank immediately deducts the funds to cover it from the depositors account. A certified check cannot bounce. certified

the bank

it is

Certified

A

written on.

Development Company (CDC)

non-profit corporation that provides small

Consultants.

They must have

experience in the industry, adhere to a code of ethics, and satisfy continuing education requirements.

accountant (CPA) A type of qualified accountant. Although certified public

by

rules vary

for

certificates

56

state as to the

becoming

CPA,

a

requirements

generally speaking

CPA

must have 150 semester hours of college coursework, which may be a combination of undergraduate and graduate classes. A CPA must also pass a two-day exam that is administered by the Board of Examiners of the American Institute of Certified Pubfic Accountants (AICPA). a

Some

amount of

states also require a certain

work experience

CPA

before

certified stocks

a

as

status

is

accountant

public

achieved.

Stocks of a

commodity

been inspected and found to meet the quality requirements for commodities in that have

order to specified fied

the

fiilfill

by

a fiatures

stocks

are

delivery

requirements

exchange. When certi-

delivered,

they

must be

transported to one of half a dozen or so locations that the fiatures as

exchange has specified

delivery warehouses.

businesses with 10- or 20-year private Small

Business Administration financing.

CDCs

Also called 504

(SBA) guaranteed

SBA

must meet

guidelines.

corporation.

CFA

See

CFA

franc

chartered financial analyst.

West African certified

Certified

planner

financial

professional

Planner

Financial

(CFP)

A

by the Board of

given

designation

Standards to applicants

who

work on

six subjects:

investment planning,

financial

planning,

complete course

income

tax

employee benefits and estate planning; pass a two-day examination; and meet ethics and experience standards. Continuing education is also required. Those who want to help people plan their finances and invest their can obtain

certified

this qualification.

investment

currency used by

many

Economic and Monetary Union and Central African Economic and Monetary Community.

CFO

See chieffinancial

CFP

See

officer.

certified financial planner.

planning,

insurance planning, retirement planning, and

money

A

countries. See also West African

management

consultant (CIMC) A designation for a person who has completed certain course work and has passed exams that are administered by the Institute for Investment

CFTC

See

Commodity Futures Trading

Commission.

chaebol A South Korean conglomerate. South Korean banks sometimes work on a buddy system, making unsound loans to companies just because they are associated with the same chaebol. A chaebol often is controlled by one family or a small group of families.

chain store sales report of retail sales activity in the

A weekly report largest U.S. retail

Chapter 7 bankruptcy

57

stores.

The Bank of Tokyo-Mitsubishi

and UBS from stores

Ltd.

Warburg compile sales figures that have been open for one year

or longer, called same-store

sales.

The

seven

stores that are surveyed for their sales activity are Target,

Federated, JC Penney, Eckerd,

May Department Mart.

The

and Walindex shows a

Stores, Sears,

chain store

sales

percentage change from the previous week and previous year. It is timely and it closely tracks changes in ever,

its

consumer spending; howcan Hmit

volatility

its

impact, so the

sales number is more closely The importance of chain store

monthly chain watched.

sales increases

son.

The

morning

during the holiday

data

released

is

more or fewer jobs could be cut or saved. The data also time; if conditions change,

count workforce reductions that occur through retirement or voluntary res-

doesn't

ignations. The report after the

is

pubHshed one week

month

previous

end.

Chancellor of the Exchequer The United Kingdom equivalent of the U.S. Treasury Secretary.

change agent

A person

a holiday

during the

it is

likely to

be released

presides over board meetings.

Often one person may hold the positions of chairman and chief executive officer. Depending on the personality and clout of the chairman, the chairman

of power and authority or

may have a lot may take a dis-

tant back-seat to the chief executive officer

of the company. A chairman may be more of an honorary position for a long-term employee or another prominent person, large shareholder, or a member of the

founding family.

company

profits

when employee

data gives ity

positively

some

and tracks

impact corporate costs decrease.

The

sense of future layoff activlayoffs

by industry and

region, as well as providing reasons for the

However, the data has some limits: Layoffs are listed by the company headquarters, but the job cuts may be spread across the United States. The layoff data is gleaned from press reports and isn't a

layoffs.

that a

or industry.

channel A pattern in a technical analysis that shows a straight line occurring in an upward or downward "channel." It is a very occurring in

is

a

definite direction.

channel inventory tory that

is

The amount of invenof being made

in the process

end customer.

available for delivery to the

chaos theory

An

of mathematics

area

with non-linear dynamic systems. Although the results may seem to be ranthat deals

dom, they

actually arise

from

a deterministic

Chaotic systems have a fractal dimension and are highly dependent on initial conditions. Fractals are geometric

process.

structures that appear to

viewed

Challenger Report A monthly job cut report, produced by the recruiting firm Challenger, Gray and Christmas, that tallies the number of layoffs throughout the United States. The report has some effect on the stock market because job cuts can be expected to

company

wide-reaching changes within

initiates

strong chart pattern that

chairman Short for chairman of the board, this is the highest-ranking corporate officer. The chairman

or

every Tuesday

is

unless there

week, in which case on Wednesday.

selling sea-

comprehensive compilation. The workforce reduction may occur over a long period of

at a

wide

be similar

Chapter 11 bankruptcy ruptcy that allows

A type of bank-

a business to retain control

of its operations while it plans ganize its debts. Chapter 11

common

when

range of magnifications.

how is

to reor-

the most

type of bankruptcy. Creditors are

prevented from pursuing a

company

that

is

Chapter 11 proceeding. The debtor and creditors meet to draw up an agreement for repaying some of the debt. In a Chapter 7

in a

bankruptcy, in contrast, the

company

closes

doors and hquidates its business. See also Chapter 7 bankruptcy, Chapter 13 bankruptcy.

its

Chapter 7 bankruptcy A type of bankruptcy in which a business sells its remaining

assets, shuts its

doors, and goes

Chapter 13 bankruptcy

58

out of business. There is no attempt to reorganize in order to pay some of the debts

and remain

in business.

A

court-appointed

is given discretion to make management changes, arrange unsecured financing, and wind down the business.

interim trustee

can

Individuals

also

Chapter 7

for

file

bankruptcy. See also Chapter

chart of accounts A listing of all of a company's account names and numbers used in its general ledger, its accounting books. Typically

and the department or project the expense is

associated with.

Chapter 13 bankruptcy A type of bankruptcy used by individuals who want to reorganize their debts and pay back a

money

they

owe

to credi-

tors. The debtor pays something each month for several years to the bankruptcy

which

distributes the funds to the

When

A

chartered financial analyst (CFA)

may

be obtained by analysts or portfolio managers working for asset managers or pension designation

professional

court,

include

bankruptcy,

1 1

Chapter 13 bankruptcy.

portion of the

accounts

these

codes that indicate the type of transaction

The

funds.

that

designation takes at least three

and involves passing three

years to obtain tests that are

considered very

CFA

designation has

since

1999

grown

many people

as

difficult.

The

in popularity

have been laid

the payments are completed,

off and are looking for ways to increase

the debts are discharged. Chapter 13 bank-

their qualifications. Also, the criticism lev-

creditors.

allow

ruptcies

more which

individuals

hold onto

to

than Chapter 7 bankruptcies,

assets

involve total liquidation. See also

Chapter 7 bankruptcy, Chapter

eled at brokerage firms' research analysts for

of

their conflict

some people

interests has

encouraged

to obtain this qualification.

bankruptcy.

1 1

chartered financial consultant (ChFC)

A

charitable lead trust a

charity

income during the

receive

to

trust that allows

Upon

or donor's, lifetime.

grantor's,

death of the grantor, the balance

the

of the trust

A

qualification that

typically obtain, along life

ChFC years

reduces estate taxes while enabling the fam-

exam.

common An

charitable remainder trust

which

cable trust in

or

money

grantor,

is

irrevo-

property, investments,

donated to

a charity,

or donor, continues

to

but the use

the

property or receive income from the invest-

ments or money while still alive. Upon the death of the donor, the charity receives the balance of the trust. The trust is taxefficient

because the grantor avoids paying

capital gains tax

on the

assets in the trust

can deduct the earnings of the trust

also

removes

the

assets

trust.

and

The

from the

which reduces the amount that will be due after death.

grantor's estate,

of

obtain

to

chartered trust.

estate taxes

Often a charitable remainder trust is created by someone who doesn't have any family

members or

children that he or she needs to

support. See also charitable lead

trust.

with the chartered

The

designation typically takes several

to retain the assets. See also charitable

remainder

insurance agents

underwriter (CLU) designation.

goes to the grantor's beneficiaries. This trust

ily

life

life

and involves passing an

A

underwriter (CLU)

qualification

for

life

agents. Typically those holding a

insurance

CLU

hold

a chartered financial consultant

The

CLU

also

(ChFC).

designation typically takes several

and involves passing an exam and meeting ethical standards and continuing

years to obtain

education requirements.

check tiable

A

instrument drawn on a

payable on as

piece of paper that

demand

negobank and

is

a

to the person identified

the payee.

check kiting

Writing

a

check on an

account without sufficient funds to cover the amount of the check, then depositing a

check from

second account to cover the first check, and leaving the second account short of funds to cover its obligations. The a

process repeats

than

a

itself,

share game.

resulting in

Check

kiting

little is

more

illegal.

Chicago Board Options Exchange (CBOE)

59

An

checking account

to write drafts

chairman, 11

Checking accounts are insured by the U.S. government up to $100,000 per account through the Federal Deposit Insurance Corporation (FDIC). Interest earned on checking accounts is taxable. They are useful for keeping ready cash reserves.

cherry picking bankruptcy action, the process in which competitors purchase only the best assets and leave behind the rest. 1. In a

The

manager

action

of

a

new

portfolio

in selecting only the best in-

vestments from a predecessor's portfoHo.

member directors, 3 pubHc and the president. The exchange is managed by an executive staff headed by the president and chief executive officer. directors,

own

winning

trades to the trad-

account or the account of

a

See chartered financial

consultant.

Chicago Board of Trade The oldest futures exchange in which began trading

(CBOT) the United

futures

con-

tracts in 1865. The oldest continually traded

CBOT are corn and wheat since 1877. The CBOT traded both futures, contracts

on the

and options conand options tracts. include wheat, corn, oats, soybeans, soybean meal, soybean oil, and rough rice. Financial futures and options are traded on the U.S. Treasury bond, 10-year Treasury notes, 5trades a variety of futures

Agricultural

futures

year Treasury notes, 2-year Treasury notes,

and 30-day Fed Funds rate. Stock index futures and options are traded on the Dow Industrial

Average. Trading

occurs

Jones using open-outcry pit trading during regular trading hours. After hours, contracts can

be

traded

on the CBOT's Electronic

Trading System.

Exchange

Options

(CBOE) A subsidiary of the Chicago Board ofTrade that operates as an independent

entity, the

CBOE

trades options

on

1,500 equities and equity index futures. It was founded in 1973 to provide standardized, listed stock options as an alterover

native to options that

were unregulated and

Now

created

on an

CBOE

accounts for over half of

individual basis.

all

the

U.S.

options trading and 91 percent of index options trading. Tradmg began April 26, 1973, with 16

call

on 16 underlying added

in 1977.

options that were traded stocks.

The

first

indices was introduced

when

on March

(ticker

symbol

11, 1983,

& Poor's

OEX)

were

100

intro-

CBOE also trades options on Standard & Poor's 500 Index (SPX).

duced. the

Put options were option on stock

options on the Standard

The

were introduced in June 1989: options based on the 13-week U.S. Treasury bill yield and options on the 5-year, 10-year, and 30-year yields to maturity of U.S. Treasury notes and bonds. The underlying value of these options moves up or down as a result of Options on

favored client.

States,

Board

Chicago

Index 3. Assigning

ChFC

board of

of the transac-

they aren't useful as a way to save money. Banks, credit unions, and savings and loan checking accounts. offer institutions

er's

a

them

completely flexible. Typically, pay very low interest accounts checking rates, if they pay anything at all; therefore,

2.

governed by

is

deposits. The sizes

are

tions

CBOT

The

directors that includes a chairman, a vice

at investors that allows

and make

account targeted

shifts in

interest

rates

the U.S. Treasury yield curve.

CBOE

FLEX (flexible exchange) options on the S&P 100, S&P 500, and Russell 2000 mdices. FLEX In 1993, the

created

options allow institutional investors to customize the terms of an option contract, the expiration date (up to 5 years), the strike

and the exercise styde and settlement basis, with a minimum opening underlying contract value of $10 million. In 1997, price,

options

FLEX

on the

Dow

became

eligible for

trading.

Trading on sector indices began on the CBOE in October 1992. Options on sector indices in the automotive (AUX), banking

Chicago Fed National Activity Index

60

(CWX),

hogs, frozen pork bellies, milk, feeder cattle,

(BIX), chemical (CEX), software

environmental (EVX), gaming (GAX), gold (GOX), healthcare (HCX), mternet (INX), insurance (lUX), oil (OIX), retail (RLX),

and transportation

now

Hsted. In

(TRX)

industries

CBOE

1994, the

are

Mexico

Index (MEX), the Nikkei 300 Stock Index (NIK), and the CBOE Israel Index (ISX) were launched to give U.S. investors the ability to hedge the risks associated with holding stocks in foreign markets. In 1995,

new

CBOE

sector indices in

REITs (RIX)

and technology (TXX) were added.

Chicago Fed National Activity Index

A monthly economic

report prepared by the

Chicago Federal Reserve Bank that tracks economic activity in the 7th district, which comprised of Indiana, Iowa, lUinois, is Michigan, and Wisconsin. The Chicago Fed National Activity Index is a coincident indicator of broad economic activity that is a weighted average of 85 indicators based on economic data covering production and

and

live cattle.

CME

The

was founded as a not-for1889 as the Chicago Butter and Egg Board and became the Chicago Mercantile Exchange in 1919. At the time it was founded, the only futures traded were contracts based on butter and profit corporation in

eggs. In

the

December 2002,

first

regular trading hours.

GLOBEX,

ates

that

economy

the

potential.

its

indicates that the

growing below potential. The lag of about one month. It is a

is

data has a

a

growing above

A negative value

economy relatively

is

indicates

new

report that has not yet gained

Chicago Mercantile Exchange (CME)

A

futures

and options exchange

contracts in four

main

that trades

areas: interest rates,

stock indexes, foreign exchange, and

com-

modities. In 2002, a record 558.4 miUion contracts with a value of $328.6 trilHon

traded at the

CME, which

the

CME

says

is

the largest notional value traded that year

Among

the well-

on the

CME are

on any

futures exchange.

known

contracts that trade

and options on the S&P 500 index, Eurodollar, and currency futures.

CME

oper-

also

how

activity

is.

vibrant regional

An

index value

of 50 or higher indicates increasing busi-

below

that indicates decreasing

The index production, new

breaks out readings for

activity.

orders,

inventories, prices paid,

suppHer

backlog,

order

employment, and

The PMI

deliveries.

a

is

timely

of manufacturing industry in the Chicago Federal Reserve regions, which comprise Illinois, Iowa,

look

at

the

strength

Indiana, Michigan, and Wisconsin. The

new

orders and orders backlog indices are useful in predicting future

following in the financial markets.

The

an after-hours electronic

refers that indicates

ness activity;

value over

financial

Chicago Purchasing Managers Index (PMI) An index released monthly on the last business day of the month to which it

and orders. It is useful in tracking economic growth and identifying potential inflation. An index value of indicates that the economy is growing at its a

U.S.

trading system.

manufacturing

long-run potential;

traded

publicly

CME became

exchange when it launched an initial public offering of the Class A shares of its parent company, the Chicago Mercantile Exchange Holdings Inc. The shares trade under the ticker symbol CME. Trading is based on open-outcry pit trading during

income, employment, personal consumption, housing, manufacturing, trade sales, inventories,

the

production

activity.

The Chicago PMI draws much of influence from the fact that

its

released

is

it

one day before the ISM Index, which used be called the NAPM index, and is produced by the Institute for Supply Management. The Chicago PMI index, is perceived by market traders to be a good leading indicator for the ISM, which to

typically

affects

the

Shortcomings of the that

it is

financial

PMI

markets.

include the fact

only an opinion survey and

relies

futures

on

the

doesn't capture any technology improve-

Agricultural products traded include lean

people's perceptions, not data.

ments or increasing production

It

also

efficiencies

churn

61

that

might

and actual

expectations

alter

that the seller does not

meaning

sold bond. The hedge

results.

belief that the

Chicago School

Monetary

theories that

with Milton Friedman, a noted monetarist and long-time professor at the University of Chicago. The monetarist theories that the Chicago School

are closely linked

espouses say that the quantity of circulation

and

money

in

of growth deterof economic activity and

its

rate

mines the level whether inflation occurs.

will

fall.

A

is

own

the

undertaken on the

premium on the convertible hedge would be to short

typical

the stock and purchase the convertible. Also called reverse hedge.

Chinese Wall exist between

The

a bank's

department and

The

separation that should

separation

research analysts

investment banking

its

research

is

intended

who

department. to

protect

issue reports

about

from being

chief executive officer (CEO) The person responsible for running a corporation. The chairman of the board or the president may also hold the title CEO.

chief financial officer (CFO) The person responsible for the company's finances, whose duties include producing financial reports; signing checks; and devising longterm financial plans, including capital raising activities. The CFO may also hold multiple positions including treasurer or controller.

chief operating officer porate

executive

who

operations

day-to-day

Typically the

COO

(COO)

is

A

responsible

of the

corfor

company.

reports to the chief

executive officer.

child tax credit

who

A

tax credit of $600 for

younger than 17 years of age, as of this printing. The credit is phased out when adjusted gross income exceeds $110,000 for married couples filing jointly, $55,000 for married separate filers, and each child

$75,000 for

all

is

other taxpayers.

companies' financial situations influenced by investment bankers trying to

sell

merger

capital raising services to those

A

coin that

is

minted by the Chinese government from gold, silver, or platinum. Panda Bears are popular with coin collectors and investors. They can be purchased from the Chinese

government or from

traders in the secondary

market.

Chinese Hedge A hedge in which stock company is owned and a convertible bond in the same company is sold short, in a

are

same com-

record As the stock market gains in 2000, and regulators began looking at conflicts between investment banking and research, it became apparent that the Chinese Wall had developed some gaping fell after

panies.

holes.

chi-square test A statistical measure of the fit, independence, or homogeneity of data. The chi-square test can be used to determine whether a sample of data comes from a normally distributed population by comparing its frequency distribution with of the normal distribution. It can also be used to determine whether two variables are independent by comparing their observed joint occurrence with their expected joint occurrence. Finally, it can be used to determine whether categories of a that

same two or more populations.

single variable are represented in the

proportions in

churn

The

rate

tomer turnover.

China Mint Panda Bear

who

advisory services or

rate

of churn,

it

If

of subscriber or cusa company has a high

means the company may

number of customers but will typically lose them at a rapid rate. The churn rate measures the number of cus-

attract a large

tomers that discontinue service in a typical month, and often is expressed as a percentage of a company's average subscriber base for the time period. The term often is used in conjunction

with subscribers to wireless

telephone companies.

churning

62

churning The illegal large number of trades

practice of making a

GIF

See

CIMC

account commission.

in a client's

in order to increase the broker's

judge agrees to group them together because of their similar claims. In such a a

case, a lead

attorney for the

cost, insurance,

See

certified

and freight.

investment management

filed the

in

any eventual

fees. Class

action lawsuits

proliferated after the stock market

began its peak in 2000. Hundreds of class action lawsuits were filed against different companies, especially telecom and technology companies that had experidescent following

stock

appoint-

is

who

individual lawsuits also are allowed to share

consultant.

A

breaker

circuit

class

ed; however, the attorneys

circuit breaker in

a

or futures exchange works in the

same way as the circuit breakers in a home; both cut off electricity before the system becomes dangerously overloaded. Circuit

its

enced a disproportionate share of the gains from the bull market.

breakers are designed to stop the market

from going into

a free-fall

and

are intended

by helping rebalance the

to restore stability

number of sell and buy

orders. Separate cir-

cuit breakers are triggered

when

the

Dow

B

Class

Mutual funds

shares

typically

have a deferred

back-end

sales charge, that

shares

are

sales is

shares that

charge, or

when

assessed

redeemed. Typically

the

fee

Jones Industrial Average (DJIA) drops 10

declines the longer the investment

percent, 20 percent, and 30 percent; the

Definitions for each class vary with each

point value of each of these thresholds

fund. See also Class

is

calculated at the beginning of each quarter

by the

New

York Stock Exchange. The

amount of time that trading is halted depends upon the severity of the drop. Circuit breakwere instituted after Black Monday in October 1987, when the U.S. stock market crashed, and have been revised after various market sell-ofFs, including October 1989.

and Class

its

own

futures market also sets

individual circuit breakers. In the

future market, circuit breakers are referred to as price limits,

which

also limit

upward

movements. Trading collars limit index arbitrage trades by allowing those trades to be placed only if they are the opposite of the market's direction. For example, a buy order could be processed in a declining market. See also collar and price limits. Class

A

shares

Mutual funds

shares. Class

C

shares,

I shares.

Mutual funds shares that no up-front or back-end sales

shares

typically have

load, or sales charge. If the shares are held

ers

Each stock and

C

Class

A

held.

is

for a

minimum amount of

time there

is

no redemption

fee. However, they have the highest 12b-l fee (sales and marketing fee). This fee is paid each year by being deducted from the fund's

usually

likely will

assets.

Each mutual fund defines

C

definition Class shares, Class

Class

I

B

shares.

shares,

and Class

own

A

I shares.

Mutual funds

shares

its

See also Class

shares that

are sold only to institutional investors. Fees

and expenses for Class I shares vary widely. Depending on the fund, this type of share may be known by a different letter. See also Class A shares. Class B shares, and Class C

shares that shares.

typically charge investors a front-end load, sales charge assessed when the account is opened, that amounts to 1 percent to 5 percent of the total amount invested.

or

Definitions for each class vary with each fund. See also Class B shares, Class shares,

C

and Class

I shares.

file

A

court action in

similar lawsuits

and

A

word used

in

the venture

common

term found in partnership agreements. A clawback requires venture capitalists to refund capital industry to describe a

fees to their investors if it turns

venture

class action lawsuit

which many people

clawback

capitalists

received

out that the

more than

20 percent share of a fund's overall Clawbacks became common in occurring

when

a

their

profits.

2002,

venture capitaHst took

its

CLN

63

20 percent share of

ment

a fund's early invest-

fund later lost money. are used in other financing

success, but the

Clawbacks

also

contexts, such as private equity.

which they were drawn. This gives a credit to the bank where funds are deposited and corresponding debit to the account of the paying institution. The Federal Reserve a

operates a nationwide check-clearing sys-

An

Clayton Act

antitrust

1914

that prohibits a variety

tions,

such

law passed in

of pricing viola-

as discriminatory rebates,

pricing or

discounts that favor one group of customers over another. Section 7 of the Clayton Act prohibits mergers if the effect

would be

to

substantially lessen competition or to create

monopoly. Within that section, the HartScott-Rodino Act requires prior notification of mergers over $50 million to both the Federal Trade Commission (FTC) and the

a

Department, who are jointly charged with monitoring compUance. The $50 million will adjust beginning October

Justice

2004 to take into account changes in the U.S. economy, based on gross national product from the previous year. Although the Clayton Act was passed in 1914, it has been updated and amended, including the Hart-Scott-Rodino Act, which was passed 1,

in 1976.

clean-vehicle tax deduction A deduction of $2,000 (as of this printing) that is

for people

available

who buy

eligible

gasoline-electric hybrid vehicles.

tem. Clearing also

buyers and

used to signify matching

is

in

sellers

options transactions.

clearing member The member of a futures exchange who accepts responsibihty for all trades cleared, or setded, through him or her. The clearing member is responsible for sell

matching the buy orders with the

orders to

make

sure that the transactions

Clearing

are settled.

Describes

a

situation in

a

been matched with its appropriate buyer or seller, the payment has been made, and the product has been delivered. trade has

A

clear title

tide that doesn't have

any

Hens or other legal problems that call into question the ownership of the property. The term may apply to real estate or to personal property such as cars. In real estate transactions,

title

searches are conducted by

companies specializing in this service. After a title company has completed a search and

found no problems, the

tide

company

insurance certifying that the tide

is

offers clear.

The term/ree and dear also may be used mean that there is a clear title. clearing

bank the bank on

Moving checks from

where they were deposited

to

to

the

share sec-

members earn

clearing operation. Clearing

commissions for matching their cUents' trades with the counterparty, and they pay lower margins than non-clearing members and their customers. They must meet min-

imum

capital requirements.

A

clearinghouse

business

where mutual

between the accounts of member depository institutions. Banking claims are setded

manage

clearinghouses

fers.

A

check-clearing

along with electronic fund trans-

activities

assists

which

members

ondary responsibiUty for the liquidity of the

clearinghouse in the futures industry the transfer of funds and contracts

between members clear

and

stock, futures,

clearinghouse

is

who

execute trades.

A

a central point for deposit-

ing and paying out funds that need to be credited or debited into the accounts of its

member

firms.

A

futures clearinghouse also

guarantees the performance of the futures contract, despite

ber

may

do.

to

If

satisfy

Another

a

member

mem-

defaults,

the

of the members are the claim as necessary.

resources

collective

used

what the individual

role that a futures clearinghouse

undertakes

is

assigning and overseeing the

of future contracts at maturity. In order to be a member of a clearinghouse, a firm generally must be a member of the deliveries

futures exchange.

CLEC

CLN

See competitive See

local

credit-linked note.

exchange

carrier.

closed-end fund

64

A

closed-end fund

company

on

that are traded

same manner

number of shares exchange

a stock

as equities.

aged according to

and may

type of investment

that offers a set

The fund

in the

is

man-

investment objectives

its

invest in stocks, bonds, or a

amount of

public

In

offering.

funds are

shares through an initial

open-ended

contrast,

commonly

mutual funds.

called

Open-ended funds constantly offer new and redeem shares at the end

shares for sale

of any business day

price of net asset

at a

end of each trading day. Closed-end funds can be bought or sold throughout the business day at a market price that may be above or below their net asset value, which fluctuates according to demand. value that

is

calculated at the

A

Swap

swap based on a specific collateralized mortgage obligation (CMO). The swap transaction depends on the a spesuch

cific criteria,

A

coal

brown

dark

tion that

is

holders. Shares of such a available for trading in If

few share-

company

are not

any meaningful way.

an investor wants to

shares, the investor

a

corpora-

sell

market

what

closes.

needs to locate existing

The range of prices

as

the

Each exchange determines

precise time period the closing range

covers. Closing ranges are used in futures

trading because, as the trading session ends, it

takes time to

determine what the actual

closing price, called the settlement

CLU

See

cluster that

chartered

analysis

identifies

returns

are

life

A

price, is.

underwriter.

statistical

clusters

technique

whose

of stocks

highly correlated within the

However, the returns are uncorrected between clusters. cluster.

as

growth,

CMA CMBS

cyclical,

and

See cash management

See

commercial

Cluster

groups

stable stocks. account.

mortga