Glossary

F = MSR / MSE To calculate the F-statistic in a simple linear regression study, follow these steps to create the ANOVA table: To interpret the F-statistic, compare it to a critical value from an F-table or a p-value from a statistical software package. If the F-statistic is significantly large, it indicates that the regression model is significantly better than ...

Used for hypothesis tests concerning the equality of variances between two normally distributed populations and independent samples.

Amount of cash that will be paid by issuer to the bondholder on the maturity date.

The amount at which an asset could be sold to informed, willing parties in an arm’s-length transaction. The price that would be received to sell an asset in an orderly transaction between market participants.

Used to value investment property in a company’s balance sheet. The investment property is recorded at fair value. It is NOT depreciated.  Any change in fair value is recognised directly in the income statement.

When reporting the carrying value of a bond liability on the balance sheet, issuers have the irrevocable option of reporting the debt at fair value (i.e. market price of the bond) instead of amortised value.

A multifactor model that estimate the sensitivity of security returns to three factors: the excess return on the market portfolio, firm size, and the firm’s book value to market value ratio.  Compare: Carhart Model

Compared to timberland, there is little flexibility in the harvesting for farm products as they must be harvested when ripe.  However, this makes farm product prices have close correlation with inflation.  This makes farmland a viable hedge against inflation.

FCF-to-Debt = FCFF / Total debt A type of leverage ratio which measures a firm’s free cash flow to its total debt. A higher ratio indicates more cash flow to service debt, and hence lower credit risk.

An alternative to Dividend Discount Model, the FCFE Model is often used to valuate growth companies that pay little or no dividend. FCFE is an appropriate alternative as it represents the amount of cash collected during the period, that is available for distribution to common shareholders.  That is, FCFE reflects the firm’s capacity to pay dividends.  

The US interbank lending rate on overnight borrowings of reserves. This rate influences the interest rates of many short-term debt securities.

FFO-to-Debt = FFO / Total debt A type of leverage ratio which measures a firm’s FFO to its total debt. A higher ratio indicates more cash flow to service debt, and hence lower credit risk.

Issued by insurers, which will pay for losses that result from employee theft or misconduct.

A combination of a call option and a risk-free bond that matures on the option expiration day and has a face value equal to the exercise price of the call option. Used in the derivation of put-call parity. See also: Protective put

The first in, first out, method of accounting for inventory, which matches sales against the costs of items of inventory in the order in which they were placed in inventory. Compare: Specific identification method, LIFO method, Average cost method

In essence, a finance lease is equivalent to the purchase of an asset that is financed with debt. For lessor, a finance lease can be treated as either a sales-type lease, or a direct financing lease (US GAAP only). At inception, a lease receivable, equal to the present value of the lease payments, is created in the lessor’s balance sheet. ...

A component of the balance of payments account that records investment flows. Financial accounts are subdivided into financial assets abroad, and foreign-owned financial assets within the country. A country’s assets abroad are further divided into official reserve assets, government assets, and private assets.  These assets include gold, foreign currencies, securities, direct foreign investment, and claims on foreign entities. Foreign-owned assets ...

The major accounting standard setting body in the US. It establishes US GAAP, the financial reporting standard adopted by most firms in the US. Compare: IASB

Costs of financial distress refer not just to the explicit costs of company default and bankruptcy, but also the implicit costs due to the stresses of lower earnings or losses that precede such events. Even before having to file for bankruptcy, companies under stress may lose customers, suppliers, and valuable employees. Another important aspect to consider is the probability of ...

Financial leverage = Avg Total assets / Avg Total equity

On top of business risk, the additional risk to a firm’s shareholders when it uses debt financing. See also: Degree of Financial Leverage

 A generic framework for financial statement analysis.

The participants in the financial system are primarily individuals, firms, and governments. The three main functions of the financial system are to: Help these participants achieve their purposes in using the financial system. Determine the returns that equate the total supply of savings with the total demand for borrowing. Allocate capital to its most efficient uses.

Activities that involve obtaining or repaying capital. The two primary ways of obtaining capital are to issue shares to shareholders, and debt or bonds to creditors. Cash flows are recorded as CFF. Compare: Operating activities, Investing activities

The ratio of a change in national income to a change in government spending. See also: MPC

A government’s use of spending and taxation to meet macroeconomic goals. Fiscal policy is the responsibility of the government, and the primary goal is economic stability.  Compare: Monetary policy

The Fisher effect states that the real rate of interest in an economy is stable over time so that changes in nominal interest rates are the result of changes in expected inflation. Thus, the nominal interest rate in an economy is the sum of the required real rate of interest, and the expected rate of inflation.   This is consistent ...

CPIFisher = (CPILaspeyres x CPIPaasche)½ A form of CPI that fixes the substitution bias in Laspeyres index. See also: Laspeyres index, Paasche Index

Measures the efficiency of a firm in generating revenue using its net fixed assets. Fixed asset turnover = Revenue / Net Fixed Assets See also: Total asset turnover, Working capital turnover

Cash used in the acquisition and maintenance of long-term assets. (e.g. purchase PP&E, equipment maintenance) Compare: Working Capital Investments

Expenses that are the same regardless of production/sales. These fixed costs may be fixed operating expenses, such as rents and leases, depreciation, and wages for salaried employees, or fixed financing costs, such as interest payments on debt. Compare: Variable costs

A solvency ratio and coverage ratio that measures the number of times a company’s earnings can cover the company’s interest and lease payments. Fixed-charge coverage ratio = (EBIT + Lease payments) / (Interest payments + Lease payments)

The full price of a bond/security minus the accrued interest. This is the price quoted by bond dealers. Flat price = Full price – Accrued interest

An index weighting method in which the weight of each security is its float adjusted market cap as a proportion of the total float adjusted market cap of all the securities in the index. See also: Market cap weighting

A fixed income instrument where interest payments are not fixed, but vary according to a reference interest rate. An interest margin is usually added to compensate the lender for the credit risk that the lender undertakes. A floating-rate note can be viewed as a type of participation instrument.   Its payoff can be viewed as a regular fixed coupon note, ...

Fees charged to companies by investment bankers and other costs associated with raising new equity. The fees for preferred stock and debt are usually not considered as they are usually quite insignificant.  

An integral part of the complete set of financial statements. Such notes provide additional information about the items presented.  They can sometimes allow an analyst to make more in-depth analysis of the company’s financial performance.  

An agreement between two parties in which the LONG agrees to buy from the SHORT an underlying asset at a fixed settlement date for a price established at the start of the contract. Most forwards are custom contracts. Traded in OTC markets. Types: Cash-settled forward contract, Deliverable forward See also: Forward valuation Compare: Futures contract

A currency exchange rate for an exchange to be done in the future, which can be 30 days, 60 days, 90 days, 180 days or one year. When a firm buys or longs a currency forward, it is obliged to exchange a specific amount of the base currency for a specific amount of price currency on a future date specified ...

Borrowing/lending rate for a loan to be made at some future date. The notation to label a particular forward rate is to specify the time from today to the commencement of the loan, followed by the length of the loan. e.g. 2y3y rate refers to a loan that will commence in 2 years, and the loan will mature 3 years ...

A forward contract to borrow/lend money at a certain rate at some future date. Usually requires one party to make a fixed interest payment and the other party to make a floating rate payment (determined at the contract expiration). LIBOR is often used as the underlying rate.

Forward Rate Parity (FRP) states that the forward exchange rate between two currencies should be equal to the expected future spot exchange rate, adjusted for the difference in interest rates between the two countries. In other words, FRP states that the cost of borrowing in one currency, exchanging it for another currency, and investing in a foreign country should be ...

The value of a forward contract to the LONG varies at initiation, during the life of the contract, and at expiration. At initiation, V0(T) = 0 During the life of the contract, Vt(T) = St – F0(T)/(1+Rf)T-t + PVt(Costs) – PVt(Benefits) At expiration, VT(T) = ST – F0(T) The value to the SHORT is the negative of the value to ...

Banking system where a bank holds a proportion of deposits in reserve. In most countries, banks are only required to hold a minimum percentage of deposits, known as the reserve requirement, so they are legally allowed to lend out the excess.  

An information-processing bias in which a person answers a question differently based on the way in which it is asked or framed. Investment managers must take care to avoid framing bias when creating questions to assess an investor’s risk tolerance.

The cash flow available to a company’s common shareholders after all operating expenses, interest, and principal payments have been made, and necessary investments in working and fixed capital have been made. FCFE = CFO – FCInv + Net borrowing See also: FCFF

The cash flow available to the company’s suppliers of capital (shareholders and creditors) after all operating expenses have been paid and necessary investments in working capital and fixed capital have been made. FCFF = CFO – FCInv + Int(1-T) FCFF = Net Income + NCC – WCInv – FCInv + Int(1-T) See also: FCFE

In the shipping process, the point where the customer is deemed to have received the goods. As revenue is typically recorded when the customer has received the goods, choosing the free-on-board point at the source means that the revenue will be recognised earlier.  Conversely, choosing the free-on-board point at the destination means that the revenue is recognised later.

A tabular display of data summarised into a relatively small number of intervals.

A graph of a frequency distribution obtained by drawing straight lines joining successive points representing the class frequencies.

Type of unemployment that is due to the time lag necessary to match job seekers with employers.

The price of a bond/security with accrued interest. Usually has a zig-zag chart pattern where there are sharp drops in price on coupon payment dates. Full price = Flat price + Accrued interest

Type of mortgage loan where the principal is fully repaid by the maturity of loan. Each payment includes both an interest payment, and a repayment of some of the loan principal. Compare: Partially amortising loan, Interest-only loan

An investment company that invests in hedge funds, giving investors diversification among hedge fund strategies. May allow smaller investors to access hedge funds in which they may not be able to invest directly. 

The examination of publicly available information and the formulation of forecasts to estimate the intrinsic value of assets. Compare: Technical analysis

An index weighting method in which the weight assigned to each constituent security is based on firm fundamentals, such as earnings, dividends, or cash flow. Compare: Price weighting, Market cap weighting, Equal weighting

FFO = Net Income (from continuing ops) + Depreciation & Amortisation + Other Non-cash Items FFO is similar to CFO except that it excludes changes in working capital. Drawback: Does not adjust for capital expenditures and working capital investments. Cash used for these purposes are not available to pay off debts.

Amount to which a payment/investment grows into after one or more compounding periods. FV = PV (1 + r)N PV: present value r: discount rate N: number of periods

An agreement between two parties in which the LONG agrees to buy from the SHORT an underlying asset at a fixed settlement date for a price established at the start of the contract. Traded in central exchange through clearinghouse. Most futures are standard contracts. See also: Open interest, Settlement price, Initial margin, Maintenance margin, Margin account Compare: Forward contract

The agreed-upon price of a futures (or forward) contract. The LONG is required to pay this price to the SHORT for the underlying asset at this price on the settlement date. Compare: Spot price

Under IFRS 9, available-for-sale securities should be valued at fair value through other comprehensive income. The unrealised gains and losses are reported as other comprehensive income. Compare: FVPL

Under IFRS 9, trading securities (securities that have reliable market values and are bought with the intent to profit over the near term) should be valued at fair value through profit and loss. The unrealised gains and losses are reported on the income statement. Compare: FVOCI