Glossary

A B C D E F G H I J K L M
N O P Q R S T U V W X Y Z

A

Accelerated depreciation
A method of depreciation that results in greater depreciation expenses in the earlier years of an asset's life.

Accounting profit

The difference between revenues and expenses of a business enterprise, determined according to a set of accounting principles (e.g., in the U.S., accounting profit is determined according to generally accepted accounting principles, GAAP).

Accounts payable

Amounts due to suppliers for goods or services purchased on credit.

Accounts receivable

Amounts due from customers arising from the extension of trade credit.

Accounts receivable turnover

The ratio of net credit sales to accounts receivables; a measure of the number of times in a period that credit sales have been created and collected.

Accumulated depreciation

The sum of depreciation taken for physical assets in the firm's possession.

Activity ratio

A ratio that relates information on a firm's ability to manage its resources efficiently.
Addition paid-in capital
An amount paid for shares of stock in excess of the par or stated value of the shares.

Add-on interest

An interest arrangement in which interest is added to the loaned amount, and the principal (amount borrowed) and interest are repaid in equal, periodic payments.

Adjustable rate mortgage

A loan, secured by real estate, with an interest rate that varies according to some other, specified rate.

Agency relationship

A relation between two parties in which one party (the agent) is authorized by the other party (the principal) to make decisions or take actions for the benefit of the authorizing party.

Agent

A person authorized by another person (the principal) to act for him.

Amortized

A present value that has been transformed into an equivalent series of cash flows considering the time value of money.

Annualized rate

A rate of interest stated on an annual basis (i.e., as a rate per year).

Annual percentage rate, APR

A standard for reporting interest rates, in accordance to the Truth in Lending Act, that results in a simplified manner of annualizing and comparing rates. The interest rate per compound period is multiplied by the number of compound periods in a year, producing an annualized rate of interest.

Annual percentage yield, APY

An annualized rate that considers the effects of compounding with the year. See also EAR.

Annuity

A series of even cash flows that occur at even intervals of time.

Annuity due

A series of periodic, even cash flows in which the first cash flow occurs today.

APR

See annual percentage rate.

Arbitrage

The process of buying and selling identical assets in different markets at different prices until the asset have the same price everywhere.

Arbitrage Pricing Model

A model of asset prices that states that the expected return on an asset is the sum of the risk free rate and the expected return associated with unanticipated factors.

Arbitrage Pricing Theory

An asset pricing theory developed by Stephen Ross that is based on the idea that identical assets in different markets should be priced identically.

Articles of incorporation

A document that is filed with the state by a business entity that seeks incorporation; the document describes the business and the rights and responsibilities of its owners.

Asset

Property, either real, personal, tangible, or intangible.

Asset-backed security

A security created by pooling together assets (e.g., home mortgages, credit card accounts receivable) and selling interests in these assets.
Assumable mortgage
A mortgage that allows the borrower to sell the property to another party and this party assumes the debt obligation.
Average tax rate
The average rate of tax on a dollar of taxable income, calculated as the ratio of taxes to taxable income. The tax rate paid, on average, per dollar of taxable income.

B

Balance sheet
A statement of assets, liabilities, and net worth at a point in time. Also referred to as the statement of financial position.

Basic earnings per share (Basic EPS)

Net income, less preferred dividends, divided by the number of shares of stock outstanding.

Basic earning power ratio

The ratio of a firm's operating income to its total assets; a measure of the return on a firm's investment in assets.

Beta

A measure of the sensitivity of an asset's returns to the changes in the returns on the market portfolio.

Blind trust

A trust in which the grantor has no influence or information regarding the decisions of the trustee.

Board of directors

The governing body of a corporation that is elected by and makes decisions in the interest of the corporation's owners.

Bond

An agreement between a lender (the issuer) and a borrower(the investor).

Book value of equity

The value of the ownership interest in a company according to the accounting conventions applied; the sum of the par value of equity, additional paid in capital, retained earnings, less treasury stock.

Book value of equity per share

The ratio of the book value of shareholders' equity to the number of shares of stock outstanding.

Bond

A debt obligation in which the borrower promises to repay the amount of the borrowed loan at a specified point of time in the future, plus (if agreed upon) pay interest on the borrowed funds.

Bonding costs

Costs incurred by an agent in an agency relationship to ensure that he/she will act in the best intersts of the principals.

Bonds and notes

Promises to repay borrowed funds and to make periodic interest payments.

Budget

A written plan that organizes actual and projected cash inflows and outflows over a period of time.
Budgeting
The process of organizing, projecting, monitoring and controlling future cash inflows and outflows.

Business cycle

Economic activity that spans temporary phases of activity of expansion, recession and recovery, producing a wave-like pattern of economic activity.

Business risk

The uncertainty associated with the operating cash flows of business enterprise.

Bylaws

The rules of governance of an organization; for a corporation, the bylaws (along with the articles of incorporation) become part of its corporate charter.

C

Call risk

The uncertainty regarding whether a callable security (e.g., callable bond) will be called (i.e., purchased) from the investor by the issuer.

Capital

A firm's resources; funds raised from long-term sources, such as bonds and stocks.

Capital asset pricing model, CAPM

A theory of how assets are priced, where the expected return on an asset is the sum of the risk free rate of interest and a premium for bearing market risk.

Capital budgeting

The process of identifying and selecting investments in long-lived assets.

Capital gain

A gain (profit) on the sale of an asset used in business, which may receive preferential tax treatment through an exclusion of a portion of the gain from taxation or simply from a lower tax rate.

Capitalization rate

The discount rate that translates a future series of cash flows into a present value.

Capital lease

A rental obligation that is considered a long-term debt.

Capital market line

The preferred set of portfolios for risk averse investors that are a combination of the optimal portfolio (i.e., market portfolio) and either borrowing or lending opportunities.

Capital rationing

A situation in which there is a limit on the amount of spending on long-term investment projects.

Capital recovery period

See payback period

Cash flow from financing activities

Cash flows arising from the issuance, retirement, or repurchase of debt and equity securities.

Cash flow from investing activities

Cash flows related to the purchase or sale of physical assets.

Cash flow from operating activities

Cash flows of the firm arising from day-to-day operations.

Cash flow interest coverage ratio

The ratio of a firm's cash flow available to pay interest to its interest expense; a measure of a firm's use of financial leverage.

Cash flow risk

The uncertainty associated with the amount and timing of future cash flows from an investment.

Cash flow statement

A summary of cash inflows and outflows. For an individual using the cash basis of accounting, this statement is a summary of income (i.e., cash inflows) and expenses (i.e., cash outflows) during a period of time (e.g., a year). Also referred to as the income and expenditures statement and the income statement.
Certified Financial Planner Board
A non-profit professional regulatory organization that regulates financial planners by means of the trademark law, licensing individuals who meet its certification requirements to use the registered CFP marks.
Commercial bank
A corporation that is chartered under federal and state regulations to provide financial services to both individual and business customers.

Common stock

The residual (last-in-line) ownership of a corporation, represented by shares of stock.

Common-size analysis

The study of financial statements that have been restated such that each item is reported as a percentage of a base, where the base for the balance sheet is total assets and the base for the income statement is sales revenues.

Community property

Property owned by both parties to a marriage. In states with community property laws, any property acquired after marriage becomes community property.

Compounding

Translating a value today into a future value, considering that interest is earned on interest.

Compound interest

The payment of interest both on the principal amount and accumulated, earned interest.

Consensus forecast

A measure of the forecasts about a particular item, such as gross domestic product or a company's earnings; in the case of analysts' earnings forecasts, the average of the available forecasts is often used as the consensus forecast.

Consumer credit

Debt that is created when consumers are given an extenstion in the time to pay for goods or services.
Consumer price index (CPI)
A measure of prices or the cost of living published by the Bureau of Labor Statistics of the U.S. Department of Labor. The index is constructed to track the price level of a group of goods and services.

Consumer Credit Protection Act

See Truth in Lending Act

Continuous compounding

An arrangement in which interest paid on interest such that the compounding period is the smallest unit of time possible; compounding in which there are an infinite number of compounding peiods.

Conventional mortgage

A loan, secured by a home, that has a fixed interest rate and is typically not insured or guarenteed by a governmental agency.
Convertible security
A bond or stock that can be exchanged for another security of the issuer.
Corporation
A business entity created by law that is capable of entering into contracts, incurring liabilities and carrying out business.

Correlation

Association of two variables.

Correlation coefficient

A statistical measure of the association between two variables that is bounded by -1 (perfect negative correlation) and +1 (perfect positive correlation); the ratio of the covariance between two variables to the product of the standard deviations of the two variables.

Cost of capital

The cost of funds to a business enterprise, usually stated in percentage terms; the weighted average of the cost of debt and equity of a firm.

Coupon

The interest on a debt.

Coupon rate

The annual interest on an interest-bearing debt obligation, expressed as a percentage of the security's face value.

Covariance

A statistical measure of the association between two variables.

Coverage ratio

A measure of a firm's ability to satisfy particular obligations (e.g., current ratio is a measure of a firm's ability to satisfy its current liabilities).

Credit risk

The uncertainty regarding the timely payment of amounts owed.

Credit union

A non-profit cooperative that pools depositors' (members') funds and make loans to members. Members have a common bond (e.g., same employer).

Cross-over rate

The discount rate at which the net present values of two projects are equal; the internal rate of return of the differences in the cash flows of two projects.

Currency risk

The uncertainty associated with changes in the relative value of currencies.

Current asset

An asset that can reasonbly be expected to be liquidated (i.e., turned into cash) within one operating cycle (which is usually one year).

Current liability

A debt obligation that is due within one year.

Current ratio

The ratio of a firm's current assets to its current liabilities; a coverage ratio.

D

Debentures
Debt backed only by the general credit of the issuer.

Declining balance method

A method of depreciation that applies a constant rate to a declining, undepreciated balance of an asset's book value.

Default risk

The uncertainty associated with the payment of required cash flows of a security (that is, the interest or principal of a bond) when promised.

Deferred annuity

A series of level cash flows that occur at regular intervals, though the first cash flow occurs after the end of the first interval.

Deferred taxes

A tax obligation that is expected in the future, but for which the expense has been deducted from income for financial reporting purposes.

Degree of financial leverage, DFL

The sensitivity of net income to owners to changes in operating income.

Degree of operating leverage, DOL

The sensitivity of operating earnings to change in unit sales.

Degree of total leverage, DTL

The sensitivity of net income to owners to changes in unit sales; the product of the degree of operating leverage and the degree of financial leverage.

Depreciation

The allocation of the cost of an asset over its useful life.

Depreciation tax shield

the amount of tax that is eliminated because of the tax-deductibility of the depreciation expense for the determination of taxes.

Depression

A severe recession, marked by high unemployment, low prices, and severally decreased economic activity.

Derivative securities

Securities in which the value is determined (derived) from another security or asset.

Diluted earnings per share (Diluted EPS)

Net income, divided by the number of shares outstanding considering all dilutive securities.

Discount bond

A bond that is selling for less than its face or par value; a bond whose coupon rate is less than the bond's yield-to-maturity.

Discounted payback period

The time it takes for the initial investment to be paid back in terms of discounted future cash flows, where future cash flows are discounted at the project's cost of capital.

Discounting

The process of translating a future value (i.e., a value at some future point in time) into a current, present value (i.e., a value at the current point in time, today).

Discount interest

An interest rate on a loan arrangement in which the interest is "paid up front"; that is, the funds available to the borrower are equal to the amount of the loan, less the discount (specified as percentage of the loaned amount).

Diversifiable risk

Risk that can be eliminated by combining assets whose returns are not perfectly, positively correlated with one another.
Diversification
The reduction of risk through the inclusion of different securities whose returns are not perfectly positively correlated with one another.

Dividends received deduction

The deduction of a portion (specified in tax law) of dividends received by a corporation from another corporation.

Dividend payout ratio

The ratio of dividends to earnings; the percentage of earnings that are paid out to owners in the form of dividends.

Dividends per share

The ratio of dividends paid to the number of shares of stock outstanding.

Dividend valuation model (DVM)

A model that relates the price of a share of stock to expected next period dividends, the expected growth rate of future dividends, and the required rate of return.

Du Pont system

A method of decomposing return ratios into components, the mosts common use of which is to break return ratios in the profit margin and turnover components.

E

Earnings per share (EPS)
The net income of a company, divided by the number of shares outstanding.

Earnings surprise

The deviation of actual earnings from expected earnings; actual earnings per share less expected or forecasted earnings per share.

Economic life

The estimate of the length of time that an asset will provide benefits to a firm. Also referred to as the useful life.

Economic profit

The difference between revenues and costs, where costs include the opportunity cost of invested funds and normal profits.

Economic value added, EVA

Another name for economic profit; EVA is a trademarked designation of Stern Stewart for the concept of economic profit.

Effective annual rate, EAR

An annualized rate that considers compound interest; also known as the effective annual rate of interest and the effective rate of interest.

Efficient frontier

The set of possible portfolios that dominate other portfolios in terms of risk and return.

Efficient market

A market in which information is reflected rapidly into asset prices.

Estate planning

The process by which clients ensure that the maximum portion of their estate will be left to their heirs and beneficiaries.

Expected return

The anticipated return; regarding a probability distribution, the weighted average of the possible outcomes, with the weights being the probabilities.

Externalties

Effects of an action by one party on another party not directly involved in the action.

F

Fiduciary duty
The responsibility to act in another's best interest.

Fiduciary relation

A relation that is founded on the trust or confidence of one party in the fidelity or integrity of another party.
Financial analysis
The evaluation of the financial condition and operating performance of a business enterprise.

Financial distress

The situation in which a business enterprise is having difficulty satisfying immediate and near-term obligations, which may result in non-optimal financing and investment decisions in an attempt to meet these obligations.

Financial leverage

The use of debt to finance a business which, because of the fixed financing expenses associated with debt, results in a "leveraging" or accentuating effect on the returns to owners; also referred to as gearing.

Financial leverage ratio

A ratio that reflects the extent to which a firm has financed its assets with debt.

Financial management

The management of the cash flows of a business to make a profit for the firm's owners.

Financial plan

A set of strategies and products that are available to meet the client's objectives.
Financial planning
Planning that includes the key aspects of a client's financial affairs and is targeted to achieve the client's financial goals.

Fisher effect

The decomposition of the nominal interest rate into the inflation rate, the real return, and the cross-product of the inflation rate and the real return.

Fixed asset turnover

The ratio of sales to fixed assets; a measure of the firm's ability to put fixed assets to work to generate sales.

Fixed charge coverage ratio

The ratio of a firm's income available to cover fixed financing obligations to its fixed financing obligation; a measure of a firm's use of financial leverage.

Futures contract

A security that represents an arrangement to buy or sell an asset at a fixed price at a fixed time in the future.

Future value

The value at some time in the future of a current value or a series of cash flows.

Future value annuity factor

The sum of compound factors that is used to translate an annuity (i.e., a series of even, periodic cash flows) into a value in the future.

G

General partnership
A partnership in which each partner is liable for the debts of the business (partner referred to as a general partner). Each partner is liable for the debts of the partnership: "joint and several" liability.

Geometric average

The nth root of the product of a series of n values; with respect to returns or interest rates, geometric average rate = [(1 + i1)(1 + i2) ... (1 + in)]1/n - 1

, where ii is the interest rate or return for the ith item or time period.

Golden parachute

A compensation package that provides a significant benefit to an employee that loses his or her job in the event of a change in control of a business.

Gross domestic product, GDP

A measure of the value of all goods and services produced by workers and capital in the U.S.

Gross plant and equipment

The total cost of physical assets in the possession of the business.

Gross profit margin

The ratio of gross profit (i.e., sales less cost of goods sold) to sales; a measure of a firm's profitability.

Growth rate

The rate of change in the value of an asset, generally stated on an annual basis.

H

Half-year convention

In tax law, one half year's depreciation is taken in the first year of an asset's life no matter when in the year the asset is placed in service.

Home equity loan

A loan that uses the home as security (i.e., collateral), usually based on the difference between the market value of the home and the amount due on the existing mortgage.

I

Illegal insider trading
Trading on material, non-public information.
Income and expenditures statement
See cash flow statement.

Income statement

A financial statement that conveys the revenues and expenses of a business enterprise.

Independent projects

In the context of capital budgeting, projects in which the acceptance of one does not preclude the acceptance of another.

Inflation

The increase in the general level of prices for goods and services.
Installment credit
Credit that is repaid in two or more payments.
Insurable interest
What an insured person must stand to lose something if there is a loss associated with the property. In the case of an insurable interest, the insured cannot lose more than his/her financial interest in the property.

Intangible asset

An asset that has no physical existence, such as a patent or a trademark.

Interest

The compensation for the opportunity cost of funds and the uncertainty of repayment of the amount borrowed.

Interest coverage ratio

The ratio of a firm's operating income (i.e., earnings before interest and taxes) to its interest obligation; a measure of a firm's use of financial leverage.

Interest rate risk

The sensitivity of a security's price to a change in market yields.

Internal rate of return (IRR)

The return that equates the present value of an investment's inflows with the present value of the investment's outflows; the return or interest rate that equates the cost of the investment with the present value of the investment's future cash flows.

Inter vivos trust

See living trust.

Inventory

Raw materials and work-in-process used in the production of goods, as well as finished goods held for sale.

Inventory turnover

The ratio of the cost of goods sold to inventory; a measure of how many times the investment in inventory "turns over" or completely cycles through the firm from raw materials to sold finished goods.

Investing

The process of purchasing securities for the long-term in the expectation of receiving future benefits in terms of price appreciation and/or cash dividends.

Investment grade debt

Debt that has a credit quality rating of BBB (using Standard and Poor's system) or Baa (using Moody's system) or better.

Investment policy

A statement that specifies, in general terms, the goals or objectives of the financial plan considering the client's return objectives, risk tolerance, liquidity needs, time horizon, tax situation, and estate goals.

Investment tax credit

A credit against taxes payable as a specific percentage of an asset's cost.

Investment profile

See net present value profile.

J

Joint and several liability

A liability in which a creditor may sue one or more parties to a liability separately or all together.

Joint tenants with rights to survivorship

A form of ownership where the person shares the asset equally with one or more joint owners and at an owner's death the assets automatically trnsfer to the other joint owner(s). In this form of title, if one of the parties dies, the other joint owners have title to the property and the property does not get tied up in probate and an owner cannot generaly sell property without the consent of the other joint owners.

Joint venture

A partnership or a corporation that is formed by two or more entities for a specific business purpose.

Junk bond

See speculative grade debt.

K

L

Liability
Debt obligation.

Liability insurance

Insurance that protects the insured against losses from legal actions.

Limited liability company (LLC)

A form of business permitted in some (but not all) states that is a hybrid of the partnership and corporate forms. The LLC is taxed as a partnership (that is, the business' taxable income flows through to the owners' income), yet has limited liability similar to a corporation.

Limited partnership

A partnership in which one or more of the partners has limited liability.

Liquidity ratio

A ratio that conveys the ability of a business to satisfy its immediate obligations.

Living trust

A trust created during the lifetime of the grantor, with assets being transferred to the trust during the grantor's lifetime.

Loan amortization

The process of determining the payments necessary to pay off a loan, considering the compounding of interest.

Loan credit

Credit (borrowing) created by a financial institution.

Long term debt to assets ratio

The ratio of a firm's long-term debt (i.e., debt due beyond one year) to its total assets; a measure of a firm's financial leverage.

Long term debt to equity ratio

The ratio of a firm's long-term debt (i.e., debt obligations due beyond one year) to its shareholders' equity.

Long-term liabilities

Debt obligations that are due beyond one year into the future.

M

MACRS

See modified accelerated cost recovery system.

Marginal tax rate

The rate of tax on next dollar of taxable income.

Marketable securities

Securities that may be readily sold.

Market capitalization

The value of the equity interest; the product of the market price per share of stock and the number of shares of stock outstanding.

Market equilibrium

A situation in a market where assets are bought and sold such that buying and selling are in balance.

Market portfolio

The portfolio of assets that includes all investable assets; often proxied by the Standard and Poor's 500 stock index.

Market risk

Non-diversifiable risk; the risk that is systematic across assets.

Market risk premium

The additional compensation required by investors for bearing market risk.

Market value

The current price of an asset, as determined in a market.

Market value added

the difference between the market value of a firm's capital and

Market value of equity

The current value of the ownership interest. In the case of a corporation, the product of the market price of a share of stock and the number of shares outstanding.

Master limited partnership

A limited partnership in which the ownership units are traded in the public security market.

Modern portfolio theory

The collection of theories that address the reduction of risk that results from the combination of investments in a portfolio whose returns are not perfectly, positively correlated with one another.

Modified accelerated cost recovery system (MACRS)

A depreciation system used in U.S. tax law that is based on a double declining balance system with a half-year convention and no salvage value.

Modified internal rate of return, MIRR

The return or yields on an investment that considers the reinvestment of any cash flows generated from the investment at a specified rate.

Monitoring costs

Costs incurred by an principal in an agency relationship for monitoring the actions of an agent.

Mortgage

A loan secured by real estate.
Municipal bond
A debt security issued by a state or local government.

Mutual fund

An investment company that raises funds by selling stock to the public and then investing the proceeds in other securities. The value of the stock of the mutual fund fluctuates with the value of the individual securities that make up its investment portfolio.

Mutual savings bank

A financial institution that is owned by its members (its depositors) and that provides consumer loans and accepts interest earning savings accounts.

Mutually exclusive projects

In the context of capital budgeting, projects in which the acceptance of one precludes the acceptance of the other(s).

N

Net cash flow (NCF)

In the context of capital budgeting, the sum of the investment cash flow and operating cash flow for a given period.

Net operating cycle

The length of time that it takes for a business to turn its investment of cash in goods and services back into cash considering that both sales and purchases are made on credit.

Net operating loss

An excess of deductions over gross income from business operations.

Net plant and equipment

The difference between the gross plant and equipment and the accumulated depreciation; the book value of physical assets.

Net present value

The difference between the present value of the future cash inflows and the present value of the cash outflows of a project, where all cash flows are discounted at the cost of capital for the project.

Net present value profile

A graphical representation of the net present value of a project for different discount rates. Also referred to as the investment profile.

Net profit margin

The ratio of net income to sales; a measure of a firm's profitability.

Net working capital to sales ratio

The ratio of net working capital (i.e., current assets minus current liabilities) to sales; a measure of liquidity.

Nominal interest rate

A rate of interest that is quoted without regard to compounding of interest within the specified period of time (e.g., within a year); also known as the stated rate.

Nominal return

See nominal interest rate.

Non-investment grade debt

See speculative grade debt.

Normal profit

The minimum return suppliers of capital demand for the use of their funds.

Notes payable

Debt obligations of a business evidenced by promissory notes.

Number of days of inventory

The number of days worth of inventory on hand, on average, throughout the period; the ratio of the balance in inventory to the average day's cost of goods sold.

Number of days of payables

The number of days of payables due, on average, throughout the period; the ratio of the balance in accounts payable to the average day's purchases.

Number of days of receivables

The number of days of receivables, on average, throughout the period; the ratio of the balance in accounts receivable to the average day's credit sales.

O

Operating cycle The length of time it takes to turn the investment of cash in goods and services back into cash in terms of collections from customers.

Operating profit margin

The ratio of operating income (i.e., earnings before interest and taxes) to sales; a measure of a firm's profitability.

Option

The right to buy (call option) or sell (put option) a specified asset at a specified price within a specified period of time.
Ordinary annuity
A set of periodic, even cash flows in which the first cash flow occurs one period in the future.

P

Partnership
A business enterprise owned by two or more persons who share the income and liability of the business.

Par value

Face value of a security; for a share of stock, a nominal amount assigned per share according to the company's charter; for a debt obligation, the amount owed.

Payback period

The number of periods in which it takes the original investment to be paid off in terms of expected future cash flows. Also referred to as the capital recovery period and the payoff period.

Payoff period

See payback period.

Perpetuity

A series of even cash flows that continue ad infinitum (i.e., forever).

Plant assets

Assets that have a physical existence, such as a building or a piece of equipment.

Portfolio

A collection of investments.
Pour-over trust
A trust that combines aspects of the living and testamentary trust; the trust is created during the life of the grantor, yet the trust receives assets at the time of the granotr's death (e.g., life insurance proceeds).

Prepayment risk

The uncertainty regarding whether a loan will be paid off early, resulting in an immediate need to reinvest the loan proceeds in another investment vehicle.

Premium bond

A bond that has a price below the par or face value; bonds whose coupon rate is greater than the yield-to-maturity on the bond.

Present value

The current value of a cash flow or a series of cash flows.

Present value annuity factor

The sum of discount factors that is used to translate an annuity (i.e., a series of even, periodic cash flows) into a value today.

Price-earnings ratio (P/E)

The ratio of the market price per share of stock to the earnings per share of a corporation.

Primary market

A market in which a security is first sold, raising funds for the issuer.
Principal
In a loan situation, the amount borrowed. In an agency relationship, the party that gives another party (the agent) authority to act in the principal's interest.

Probability distribution

The possible outcomes to an uncertain event and their respective likelihoods of occurence.

Principle of indemnity

The concept that an insured party cannot be compensated for more than the economic loss suffered.

Professional corporation

A corporation in which the owners have unlimited liability.

Profitability ratio

A ratio of income to sales; example: the net profit margin is the ratio of net profit to sales.

Profitability index

The ratio of the present value of a project's cash inflows to the present value of a project's cash outflows.

Property insurance

Insurance that protects against losses of real or personal property from event such as fire, wind, and theft.

Purchasing power risk

The uncertainty associated with unanticipated changes in inflation (and, hence, purchasing power).

Q

Quick ratio

The ratio of current assets less inventory to current liabilities; a measure of the firm's ability to meet its most immediate obligations.

R

Range

A statistical measure of dispersion that is the difference between the highest and lowest valued observations or outcomes.

Real return

The return or yield on an investment after taking out the effects of inflation.

Recapture of depreciation

The difference between the lesser of an asset's original cost or sales price and its book value for tax purposes, which is taxed as ordinary income for tax purposes.

Recession

A decline in business activity (output, employment, income and trade), that typically lasts from six months to a year and is usually accompanied by contractions in the economy.

Recovery

In the context of economic conditions, a period of time in which levels of production, employment, and sales begin to improve.

Registered Investment Adviser

An individual who provides investment advice and is required by the Investment Adviser Act to register with the Securities and Exchange Commission.

Reinvestment rate risk

The uncertainty associated with the yield on the reinvestment of intermediate cash flows (e.g., the interest earned on a bond).

  Required rate of return

The return that shareholders demand to compensate themm for the time value of money tied up in their investment and the uncertainty of the future cash flows from this investment.

Residual loss

The implicit cost in an agency relationship that remains after monitoring and bonding efforts, resulting from the misalignment of managers and owners' interests.

Residual value

The expected value of an asset at the end of its useful life. Also referred to as the salvage value.

Retained earnings

In a balance sheet, the accumulation of prior periods' earnings, less any paid dividends; in an income statement, the amount of earnings for the period not paid out in dividends.

Return

The income on an investment, generally stated as a percentage of the original investment or beginning of year value.

Return on assets

The ratio of net income to total assets; a measure of a firm's return on its investment in total assets.

Return on common equity

The ratio of earnings available to common shareholders to common shareholders' equity; a measure of common shareholdes' return on their investment.

Return on equity

The ratio of net income to shareholders' equity; a measure of shareholders' return on their investment.

Return ratio

A measure of the net benefit from the employment of resources, expressed as a ratio of the net benefit to the amount of resources expended.

Reverse mortgage

A loan, secured by real estate, that provides periodic payments to the homeowner from the financial institution, increasing the amount loan over time.
Right of subrogation
The right of the insurer to seek reimbursement from the party that caused the loss (or from the person's insurance company).
Risk
In insurance, a danger or a hazard of a loss of the insured property. The chance of deviating from the average or expected value.

Risk aversion

An individual's dislike for risk such that the individual must be compensated for bearing risk.

Risk neutral

Indifferent towards risk.

Risk preferent

A desire to take on risk; a willingness to pay to take on risk.

Risk tolerance

An individual's ability to emotionally and financially deal with the exposure to a financial loss.

Rule of 72

A rule of thumb that can be used to determine the length of time it takes for an amount to double. The product of the number of periods and the interest rate (as a whole number) is equal to 72 for the doubling of an amount.

Rule of 78

A method of determining the proportions of paid installments that are interest and repayments of principal, and is, effectively, a penalty for early repayment of the loan.

S

Sales credit
Credit created by the seller of the goods or services.

Sales risk

The uncertainty associated with the number of units to be sold and the price at which these units will be sold.

Salvage value

The expected value of an assetat the end of its useful life. Also referred to as the residual value.

Savings and loan association

A financial institution that accepts savings deposits and provides home loans.
Secondary market
A market in which assets are sold among investors (e.g., NYSE).

Secured debt or secured loan

Debt backed by collateral; in the event of non-payment of interest and/or principal, the specified asset can be sold and the proceeds used to pay the creditor.

Security market line

The relationship between the expected return on a security and the security's beta.

Shareholder ratio

A ratio that restates financial data in terms of a share of stock.

Simple interest

An interest arrangement on a loan such that interest is calculated based on the loaned amount only.

Sole proprietorship

A business enterprise owned by one person.

Speculative grade debt

Debt that is rated BB -- using Standard and Poor's system (or Ba using Moody's system) -- or less; non-investment grade debt; also referred to as junk bond.

Standard deviation

A statistical measure of dispersion; the square root of the variance.

Stakeholders

Persons who have an interest in the well-being of a company; the shareholders, employees, community, and customers of a company.

Statement of cash flows

A financial statement that summarizes the cash flows from operating activities, the cash flows from (or for) financing activities, and the cash flows from (or for) investing activities.

Stated value

A nominal amount assigned to a share of stock for accounting purposes.

Statement of financial position

See Balance sheet.

Straight coupon

Interest specified as a fixed percentage of the security's face value.

Straight line depreciation

A method of depreciation that expenses the same amount of an asset's cost each year of the asset's life.

Subchapter S corporation ("Sub S")

A corporation that qualifies for a special tax status that allows the corporation to be treated as a partnership for tax purposes, bringing any losses directly to the owners' individual tax returns.

Sum of years' digits

A method of depreciation that expenses an amount equal to ratio of the years remaining in the asset's life to the sum of the years' of an assets's life.

Systematic risk

See market risk.

T

Testamentary trust

A trust established at the time of the death of the grantor.

Tax credit

A credit against taxes payable, which reduces taxes paid dollar-for-dollar.
Tenants in common
A form of ownership in which each owner's share can be sold, deeded, or given away without the other owners' consent.

Tenants by the entirety

A form of ownership reserved for married persons in which the property is owned jointly but the consent of the other spouse is required to divide or sell the property.

Terminal value

In the context of capital budgeting, the future value of an investment that includes both the cash flows generated from the investment and the returns from reinvesting any intermediate cash flows.

Term life insurance

An insurance policy in which the insurer agrees to pay a specified amount of money in he event of the death of the insured during the policy period. There is no savings aspect to term insurance and the specified amount may be fixed throughout the policy period (straight term insurance) or decreasing throughout the policy period (decreasing term insurance).

Total debt to assets ratio

The ratio of a firm's total debt (i.e., current and long term debt) to its total assets; a measure of a firm's financial leverage.

Treasury stock

The value of the shares of a corporation's own stock that is bought and held by the corporation.

Trusts

A legal document that transfer the property and/or income of one party to another party/parties.

Truth in Lending Act

A law that is intended to assure that every consumer who has the need for consumer credit is given meaningful information with respect to the cost of credit. Also referred to as the Consumer Credit Protection Act.

Turnover ratio

A measure of the gross benefit from the employment of resources, expressed as a ratio of this gross benefit (e.g., sales revenue) to resources (e.g. total assets).

U

Unsystematic risk

The risk of an asset's returns that is unrelated to changes in the returns of the market in general; also referred to as company-specific risk.

V

W

Whole life insurance

An insurance policy in which the insurer agrees to pay a specified amount of money in the event of the death of the insured. Whole life policies also have a saving feature such that there is a cash value of a policy, based on earnings on paid-in premiums, which increases throughout the life of the policy.

X

Y

Yield
The amount earned on a security over a period of time, generally stated as a percentage of the value of the security at the beginning of the period.
Yield curve
A representation of interest rates for different time remaining to maturity.

Yield to call

The return on a callable security calculated assuming that the security will be called (that is, bought back by the security issuer) at a specific point in time at a specified call price; usually calculated using the first available call.

Yield to maturity

The yield or return calculated assuming that the investor buys the security and holds it to maturity.

Z

Zero-coupon bond

A debt obligation that does not pay explicit interest.