Glossary

A form of active short-term investment strategy which entails scheduling maturities on a systematic basis within the investment portfolio such that investments are spread out equally over the term of the ladder. Compare: Mismatching strategy, Matching strategy

Two assets with identical cash flows in the future, regardless of future events, should have the same price. Otherwise, an arbitrage opportunity exists.

The lead investment bank in a syndicate of investment banks and broker–dealers involved in a securities underwriting.

The broad criteria to decide between a finance lease and an operating lease is to determine if the benefits and risks of owning the leased asset have been transferred to the lessee. If it fulfils the criteria, it should be a finance lease. in particular, a sales-type lease for the lessor. Otherwise, it should be an operating lease for both ...

A mathematical method used to determine the best fitting line for a simple linear regression model. It works by minimizing the sum of the squared differences between the observed values and the predicted values of the dependent variable. In simple terms, the least squares method tries to find the line that best fits the data by minimizing the distance between ...

A distribution that has fatter tails than a normal distribution.

A method of credit enhancement whereby a third party promises to lend the shortfall amount to the issuing entity.

The probability of a Type I error in testing a hypothesis.

In the context of corporate finance, leverage is defined as the amount of fixed costs a firm has.  The higher the fixed costs, the higher the degree of leverage.   In some places, leverage is also referred to as gearing.

Ratios that compare the total outstanding debt held by a company against a profitability or investment figure. Examples: Debt-to-EBITDA ratio, FFO-to-Debt ratio, FCF-to-Debt ratio, Debt-to-Capital ratio

A type of private equity fund which acquire established private companies or publicly listed companies with a significant percentage of the purchase price financed through debt.   If the target is a publicly-listed company, it is taken private after the buyout. Two types of LBOs are management buyouts and management buy-ins.

Similar to participation instruments, a category of structured financial instruments that allows investors to participate in the return of an underlying asset. The returns from the underlying can be magnified by a leverage factor.   Example: Inverse floater

In many markets, traders can buy securities by borrowing some of the purchase price.   The amount of purchase that is financed by borrowing is called the margin loan. Such an arrangement is called a margin purchase, where the amount that is borrowed is financed by the broker.   The amount which is financed by the trader himself can be ...

Amounts owed to creditors and lenders.

An industry typically goes through 5 main stages. The embryonic stage, where the industry has just started.   The growth stage where the industry growth is rapid.   The shakeout stage where competition intensifies.   The mature stage where growth stagnates and firms consolidate.   And the decline stage where the industry growth is negative.

The liquidation of old, lower-priced inventory. This can result in artificially low COGS, inflating earnings for the period.

The last in, first out, method of accounting for inventory, which matches sales against the costs of items of inventory in the reverse order the items were placed in inventory (i.e., inventory produced or acquired last are assumed to be sold first). Compare: Specific identification method, FIFO method, Average cost method

The difference between the reported LIFO inventory value and the value that would have been reported if the FIFO method had been used. LIFO reserve = InventoryFIFO – InventoryLIFO

Limit order places a minimum execution price on sell orders, and a maximum execution price on buy orders. Compare: Market order See also: Limit order terminology

Terminology with regards to limit orders: Marketable – A limit buy order above the best ask, or a limit sell order below the best bid. At least part of the order is likely to execute immediately.  Make the market – A limit buy order at the best bid, or a limit sell order at the best ask. Order might not ...

Hedge Fund A hedge fund is usually set up as a limited partnership, with the investors as the limited partners, and the management firm as the general partner. A hedge fund partnership may be limited to just a prescribed number of investors, who must possess adequate wealth, sufficient liquidity, and an acceptable degree of investment sophistication.  Private Equity Like hedge ...

A limited partnership is a type of business structure where there are one or more general partners who manage the business and are personally responsible for its debts and obligations, and one or more limited partners who contribute capital to the business but are not involved in its management and are not personally responsible for its debts and obligations. One ...

Simple graphical plots of data points connected by lines. The data points are usually the closing price.

Analytical/visualisation tool to observe change in values of individual items over time. Shortcoming: Difficult to visualise the composition and the trend in total value

In corporate context, the ability of a company in meeting its short-term obligations. Such obligations include payments to vendors and suppliers, including staff salary and rent, interest payments to creditors, and repayment of debt that is due soon.   Liquidity management refers to the processes of a company to meet its liquidity needs.  This is especially crucial for companies which ...

An extra return that compensates investors/lenders for the risk of loss relative to an investment’s fair value if the investment needs to be converted to cash quickly.

Ratios that measure a firm’s ability to satisfy its short-term obligations. Such ratios evaluate if the amount of liquid assets are sufficient to satisfy the short term debt which are likely to be due within a year. They include: Current ratio, Quick ratio, Cash ratio, Cash conversion cycle, Defensive interval ratio Compare: Solvency ratio

A balance sheet which presents assets and liabilities in the order of liquidity. (Allowed only under IFRS) Compare: Classified balance sheet

The percentage of the value of the collateral real estate that is loaned to the borrower.  LTV = Loan amount / Value of property

The minimum holding period before investors are allowed to make withdrawals or redeem shares from a fund. See also: Notice period

A nonlinear scale often used when analysing a large range of quantities. Each interval is increased by a factor of the base of the logarithm. Advantage: A crash in an index can be more apparent on a log scale than on a linear scale.

LEVEL II Logistic regression is a statistical method used for binary classification problems. The goal of logistic regression is to model the probability of a certain class or event occurring given a set of input features. It does this by using a logistic function, which is a sigmoid function that outputs a probability value between 0 and 1. The logistic ...

Benchmark interest rate at which major global banks lend to one another in the international interbank market for short-term loans. LIBOR rates are published daily for several currencies (EUR, USD, GBP, JPY, CHF), and for different maturities of one day to one year. The rates are based on the rates for unsecured loans from one bank to another in the ...

Long-term debt-to-equity ratio = Long-term debt / Total equity

Tendency of investors to dislike a loss more than they like a gain of an equal amount. This theory is used by some to explain why some investors overreact to a fall in share price.  Don’t confuse this with risk aversion in traditional finance, which is a rational behaviour.   Loss aversion, on the other hand, is irrational as the dissatisfaction ...

An emotional bias that arises from feeling more pain from a loss than pleasure from an equal gain in magnitude. In financial markets, consequences of loss-aversion bias may include selling to avoid a loss, which may result in trading too much, which increases transaction costs and decreases returns, or incurring too much risk by continuing to hold on to assets ...

An estimate of the value a lender may lose if the borrower defaults. Loss severity can be stated as a monetary amount or as a percentage of a bond’s value.