Glossary

Backfill bias can be introduced when new funds are added to a benchmark index.   Since funds that are newly added to an index tend be those that have performed better than average, including their returns for prior years tends to bias the index returns upward.

In order to get an acceptable credit rating from the ratings services on their commercial paper, corporations maintain backup lines of credit with banks. These are sometimes referred to as liquidity enhancement or backup liquidity lines. The bank agrees to provide the funds when the paper matures, if needed, except in the case where the company’s financial situation has deteriorated ...

 If the convenience yield is high, futures prices may be less than spot prices.  This is known as backwardation. In a backwardation situation, the roll yield for the commodity is positive. Compare: Contango

Receivables that may not be collectable. The bad debt reserve is an offset to accounts receivable. For each period, the management  adjusts this reserve according to its estimates of bad debt. Such reserve accounts are sometimes used by management to manipulate earnings. A decrease in the reserve for bad debt will increase net receivables reported on the balance sheet.  This ...

A bookkeeping system that summarises a country’s economic transactions with the rest of the world for a particular period.   The balance of payments is composed of the current account that measures the flow of goods and services, the capital account that measures transfers of capital, and the financial account that records investment flows. These accounts are further disaggregated into ...

A snapshot of a firm’s financial position. It is a disclosure of the firm’s assets, liabilities, and owner’s equity. It is called the balance sheet because the amount of assets must always be equal to the sum of liabilities and owner’s equity. Assets = Liabilities + Owner’s equity

 A large payment due at the end of a loan. See also: Balloon risk

The risk that a borrower defaults from making balloon payment.

One method of expressing yield (annualised), assuming simple interest. Typically used for zero-coupon bonds (e.g. US T-bills). BDY = Discount / Face value x 360/t Compare: Holding Period Yield, Money Market Yield, Effective Annual Yield, Bond Equivalent Yield

A method of credit enhancement whereby a bank promises to make up any shortfall in the cash available to service a debt. Compare: Surety bond

Show not just the closing price, but also the opening price and the range for that time period.

A type of representativeness bias in which the base rate or probability of the categorization is not adequately considered. See also: Sample-size neglect

See also: Diluted EPS

Used in stating yield spreads, one basis point equals one-hundredth of a percentage point, or 0.01%. e.g. 45bp = 0.45%

When a number of depository receipts are pooled into a portfolio and securitised as an exchange-traded fund, this is known as a basket of listed depository receipts (BLDR).  BLDRs trade in markets just like common stock and any other ETFs.  

Formula that describes how to update the probability of an event given that another event (info) has occured. P(Event | Info) = P(Info | Event) x P(Event) / P(Info)

A type of bonds for which ownership is not recorded. Ownership is evidenced simply by possessing the bonds. Compare: Registered bonds

A form of cognitive error in behavioural finance which reflect an irrational reluctance to change prior beliefs and decisions. Belief perseverance bias include conservatism bias, confirmation bias, representativeness bias, illusion of control bias, and hindsight bias. Compare: Information-processing bias, Emotional bias

The latest sovereign bond issue for a given maturity. It serves as a benchmark against non-sovereign and corporate bond issues which have the same maturity, coupon structure, and currency denomination. See also: On-the-run bonds

The yield spread over a specific benchmark, usually measured in basis points. The chosen benchmark should have a time-to-maturity that is very close to the bond. For example, a USD-denominated corporate bond with 3 years to maturity should choose an on-the-run US T-note with 3 years to maturity as its benchmark. Compare: G-spread, I-spread

The base rate for fixed income securities, often a government bond yield. The benchmark yield is affected by macroeconomic factors like the expected rate of inflation, general economic growth and the business cycle, foreign exchange rates, and the impact of monetary and fiscal policy. See also: Risk-free rate

A random variable having two mutually exclusive outcomes (pass/fail, success/failure, up/down, 0/1, etc.).

A type of public offering that is very similar to an underwritten offering, except that the investment banks do not commit to purchase the whole issue.  Rather, the investment banks sell the bonds on a commission basis.  If the bond issue is undersubscribed, the issuer will not raise the full amount that it needs.

An ESG investment style that focuses on sectors, companies, or projects selected for ESG performance relative to industry peers. This approach seeks to identify companies within each industry group with the best ESG practices.  Such an approach does not exclude any industry, but instead focus on finding the best representation within each sector. This allows portfolio managers to maintain sector ...

The price at which a dealer or trader is willing to buy an asset.

Difference between the bid price and ask price. For bonds, it is often expressed in basis points. Large bid-ask spread may be indicate low liquidity.

Widely-used expression that refers to all the potentially useful information that is generated in the economy. This includes not only data from traditional sources, such as financial markets, company financial reports, and economic data, but also alternative data from non-traditional sources like: Individuals who generate usable data such as social media posts, online reviews, emails, and web searches. Business processes ...

A loan from a single bank to a single borrower. Compare: Syndicated loans

Manufacturer sells the goods, and issues an invoice, but the customer does not actually need to receive the goods yet. The manufacturer keeps the goods at its location, but records the sale on its income statement.  A form of earnings manipulation.

Number of successes of a Bernoulli random variable. Assumptions: probability of success is constant for all trials, and trials are independent. p(x) = P(X=x) = nCxpx(1-p)n-x E(X) = np Var(X) = np(1-p) p: probability of success n: number of trials X: number of successes

A model for pricing options in which the underlying price can move to only one of two possible new prices. Use Risk-neutral pseudo probability to estimate the probability of up and down move.

A broker that provides brokerage services for large trades. Typically, large trades are difficult to place without moving the market. For example, a large sell order might cause a security’s price to decrease before the order can be fully executed. Block brokers help conceal their clients’ intentions so that the market does not move against them.

A distributed ledger that records transactions sequentially into blocks and links these blocks in a chain. Each block has a cryptographically secured “hash” that links it to the previous block. In order to add a new block to the chain, the consensus mechanism requires miners to solve a cryptographic problem.  The solution has to be verified by all the other ...

A moving average plus a higher line representing the moving average plus a set number of standard deviations from average price, and a lower line that is a moving average minus the same number of standard deviations.

A type of public offering where primary dealers bid for government issued bonds.

A measure of a bond’s interest rate risk or sensitivity of its full price to a change in its yield. The higher the duration, the more sensitive is a bond’s full price is to its yield. Types: Macaulay duration, Modified duration, Approximate modified duration, Effective duration, Key rate duration

Most bonds are semi-annual coupon paying bonds, so we calculate the semi-annual yield (EAY½-1) and then multiply by 2 to get the bond-equivalent yield. Semi-Annual Yield = EAY½-1 Bond Equivalent Yield = Semi-Annual Yield x 2 Note: Under corporate finance BEY = Discount/Price x 365/t Compare: Bank Discount Yield, Holding Period Yield, Money Market Yield, Effective Annual Yield

Legal contract that describes the structure of a bond, the obligations of the issuer, and the rights of the bondholders. The indenture states the basic features of the bond issue: Issuer Maturity date Face value Coupon rate Currency Funding sources for the interest payments and principal repayments Any collaterals, credit enhancements, covenants

The process of gathering a list of indications of interest to buy part of and IPO. In London, the book builder is referred to as the book runner. In Europe, an accelerated book build occurs when securities must be issued quickly. 

The value of an asset reflected in a firm’s balance sheet. Should NOT be interpreted as market value of equity or intrinsic value.

The difference between the total assets and total liabilities of a firm.  The more net income that is earned and retained, the greater is the book value of equity. Because management’s decisions directly influence a company’s net income, they also directly influence its book value of equity. The book value of equity can be seen as a reflection of a ...

BVPS = (Total shareholder equity – Preferred equity) / Total number of outstanding shares  When calculating book value per share, some analysts also choose to remove goodwill from the calculation. This may improve comparability between companies.

A box and whisker plot, also known as a box plot, is a graphical representation of a dataset that displays the distribution of the data. It is particularly useful for comparing the distribution of data between different groups or conditions. The plot consists of a box, which represents the middle 50% of the data, and whiskers, which extend from the ...

The number of units a firm needs to produce and sell in order to fully cover all of its variable and fixed costs. See also: Operating breakeven point

LEVEL II The Breusch-Godfrey test is a statistical test that is used to detect autocorrelation in the residuals of a linear regression model. It helps to detect autocorrelation at different lags and it’s applicable to both linear and non-linear models. The test starts with an initial regression where we record down all the residuals for each time period. The residual ...

LEVEL II The Breusch-Pagan test is a statistical test used to detect the presence of heteroskedasticity in a linear regression model. It is based on the idea that if heteroskedasticity is present, the variance of the error term should be related to the predictor variables in the model. The test involves regressing the squared residuals of the original regression model ...

Represents an entire given equity market and typically includes stocks representing more than 90% of the selected market. (e.g. Wilshire 5000 index)

An agent who executes orders to buy or sell securities on behalf of a client in exchange for a commission. When the trade size is very big, block brokers help with the placement of such trades. Investment banks are also considered a form of brokers as they help corporations sell common stock, preferred stock, and bonds to investors.

A financial intermediary that may function as a dealer or as broker, depending on the type of trade. When a client enters an order, broker-dealers can choose to broker a deal with a counterparty, or buy or sell the security directly from the client.     However, there is an inherent conflict of interest.  As a broker, it should seek ...

A type of secondary market in which brokers arrange trades among their clients. This service is usually for assets that are unique or illiquid, like very large blocks of stock, real estate, and artwork.  Compare: Quote-driven Market, Order-driven Market

Investing in existing investable infrastructure. Compare: Greenfield investments

A bond where the principal is repaid as one lump sum on the maturity date.

The risk associated with operating income. Operating income is uncertain because total revenues and many of the expenditures contributed to produce those revenues are uncertain. See also: Operating risk, Sales risk