Glossary

Firms often provide earnings guidance before the financial statements are released. Such guidance are usually announced slightly ahead of the actual release of the financial statements, so an analyst may find its usefulness somewhat limited.

Per-share earnings available to common shareholders. Firms with simple capital structure need only report basic EPS. Firms with complex capital structure need to report both Basic EPS and Diluted EPS.

Earnings Before Interest, Taxes, Depreciation, and Amortisation. EBITDA = Operating Income (EBIT) + Depreciation & Amortisation Approximation of the cash a company generates from its day-to-day operations available to repay its debts. Drawback: Does not adjust for capital expenditures and working capital investments. Cash used for these purposes are not available to pay off debts.

Classical approach to inventory management, based on expected demand and the predictability of demand.  If demand is constant, and the lead time for orders is also constant,  the level of inventory at which to order new inventory can be determined. Companies which adopt this method  often factor in safety stocks.   This is a level of inventory beyond anticipated needs, ...

How much interest is effectively being paid in a whole year. EAR = (1 + r)N – 1 r: interest rate per period N: number of periods Similar to: Effective annual yield

One method of expressing yield (annualised), assuming compound interest. Effective Annual Yield = (1+HPR)365/t – 1 Similar to: Effective annual rate Compare: Bank Discount Yield, Holding Period Yield, Money Market Yield, Bond Equivalent Yield

An estimate of the convexity of the price-benchmark yield relation of a bond. Effective convexity = (V–+ V+  – 2V0) / (V0x Δcurve2) Δcurve: parallel shift in benchmark yield curve Compare: Approximate convexity

Approximate percentage change in a bond’s price for a 1% change in the benchmark yield. More appropriate than ModDur for bonds with embedded options. Effective duration = (V– – V+) / (2 x V0 x Δcurve) Δcurve: parallel shift in benchmark yield curve Compare: Modified duration

Used for bond discount amortisation or premium amortisation, the interest expense is equal to the book value of the bond liability at the beginning of the period, multiplied by the bond’s effective interest rate at issuance. This method is required under IFRS and preferred under US GAAP.

The borrowing rate that a company incurs at the time of issuance of a bond. Interest rate that equates the present value of the future cash flows with the issue price.

Tax rate of that a company pays as derived from its income statement. Effective tax rate = Tax expense / Accounting profit Compare: Statutory tax rate

These portfolios at the top half of the minimum variance frontier. These portfolios have the greatest expected return for each level of risk, and they make up the efficient frontier. 

An efficient market is one in which asset prices reflect new information quickly and rationally.   If we look at it from the perspective of statistics, this means that current market prices are unbiased estimates of their values.  The expected return on any asset is just the equilibrium return necessary to compensate investors for the risk regarding its future cash ...

In general, the percentage change in one variable for a percentage change in another variable. A measure of how sensitive one variable is to a change in the value of another variable. Elastic: when elasticity > 1 Inelastic: when elasticity < 1 Perfectly elastic: when elasticity = ∞ Perfectly inelastic: when elasticity = 0 Unitary elastic: when elasticity = 1 ...

Market cycle theory that explains price movements in cycles of 8 waves.  In an uptrend, this can be broken up into a pattern of 5 waves moving up, labeled 1 to 5, and a pattern of 3 waves moving down, labeled A, B, and C.   The 5 waves moving up is called the impulse wave, and the 3 waves ...

Contingency provisions that provide the issuer or the bondholders the right, but not the obligation, to take a specific action. These options are an integral part of the bond indenture and cannot be traded separately. Bonds that do not have any embedded options are referred to as straight bonds, or option-free bonds.   Examples: Call provision, Put provision, Convertibility provision

Emotional biases are not related to conscious thought. Rather, they stem from feelings, impulses, or intuition. As such, they are difficult to overcome and may have to be accommodated. Emotional biases include loss-aversion bias, overconfidence bias, self-control bias, status quo bias, endowment bias, and regret-aversion bias. Compare: Belief perseverance bias, Information-processing bias

An emotional bias that occurs when an asset is perceived as special and more valuable simply because it is already owned, and has special meaning to the holder. For example, a spouse may hold on to securities the deceased spouse purchased, for reasons like sentiment that are unrelated to the current merits of the securities. Market participants who exhibit endowment ...

EV = Market value of common stock + Market value of preferred stock + Market value of debt – (Cash + ST investments) Enterprise value is a measure of the total value of a company.  It is often viewed as the cost to acquire the company.   See also: Enterprise value multiple

EV multiple = EV / EBITDA A multiplier model used in equity valuation. Compare the EV multiple to industry average.

An index weighting method in which an equal weight is assigned to each constituent security at inception. Compare: Price weighting, Market cap weighting, Fundamental weighting

Secured bonds backed by specific types of equipment or physical assets. Compare: Collateral trust bonds

LEVEL II The equity method of accounting is used when an investor has significant influence on the investee, and reflects the economic reality of this relationship. This video explains the accounting principles involved in the equity method of accounting. Equity Method for Ownership Interest between 20% to 50% When the ownership interest is between 20% to 50%, the investor generally ...

In a CDO, the subordinated tranche that only receives payment after the obligations to senior tranche and mezzanine tranche are fulfilled. See also: Mezzanine tranche

ESG factors are integrated into traditional security and industry analysis. The focus of ESG integration is to identify risks and opportunities arising from ESG factors, and to determine whether a company is properly managing its ESG resources in a sustainable manner. See also: ESG investing

The consideration of environmental, social, and governance factors in the investment process. See also: ESG integration

A bond that is issued in the Eurobond market. It is issued outside the jurisdiction of any country, typically less regulated, and usually issued as a bearer bond.

Eurocommercial paper is issued in several countries and can be denominated in any currency.  The maturity can be as long as 364 days. 

Type of option contract that can only be exercised on its expiration date.

The first date that a share trades without the dividend. If you buy the share on or after this date, you will not receive the dividend. The share price will drop by the amount of dividend paid at the opening of the ex-dividend date.  See also: Declaration date, Holder-of-record date, Payment date

A sample measure of the degree of a distribution’s kurtosis in excess of the normal distribution’s kurtosis. Excess kurtosis = Sample kurtosis – 3

ETFs are closed-end funds where the shares are issued in the primary market, and traded in secondary markets.  Unlike closed-end mutual funds, their market price is actually quite close to the net asset value of the portfolio.  This is because ETFs have special provisions that allow some authorised participants to convert their shares into individual portfolio securities when the price ...

The fixed (contract) price at which a call option holder can buy the underlying. The fixed (contract) price at which a put option holder can sell the underlying. See also: Option contract

Include all possible outcomes. For random variables A and B that are both mutually exclusive and exhaustive, P(A) + P(B) = 1.

Expected Loss = Loss Severity x Default risk (can be stated as a monetary amount or as a percentage of a bond’s value)

E(X) = ∑P(Xi) Xi

Outflows of economic resources in the process of generating revenue, depreciation of assets, and incurrence of liabilities that decrease equity.

Paid by the government to the firm when it exports a unit of a good that is being subsidised. See also: Tariffs, Quotas, Voluntary Export Restraints

A type of prepayment risk that when interest rates rise, fewer prepayments will occur because homeowners are reluctant to give up the benefits of a contractual interest rate that now looks low. As a result, the security becomes longer in maturity than anticipated at the time of purchase. Compare: Contraction risk

In capital budgeting, the effects the acceptance of a project may have on other firm cash flows. The primary one is a negative externality called cannibalisation, which occurs when a new project takes sales from an existing product.   

A material transaction or event that is both unusual and infrequent in occurrence.   (e.g. losses from an expropriation of assets, uninsured losses from natural disasters) Extraordinary items are reported separately in the income statement, net of tax, after income from continuing operations. Classification of extraordinary items is prohibited under IFRS.  For reporting periods after December 2015, extraordinary items is ...