Our Glossary of Business and financial terms is designed to help you better understand the business process. Whether you're starting a business, buying or selling a business, financing a business or operating a business, you have to understand the terms that professionals frequently use. If there is a business term that you've heard that we haven't listed, please let us know, and we'll add it to the MergerPlace.com 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 Other
Square of the correlation coefficient. The proportion of the variability in one series that can be explained by the variability of one or more other series a regression model. A measure of the quality of fit. 100% R-square means perfect predictability.
Close monitoring of trading patterns in a company's stock by senior managers to uncover unusual buying activity that might signal a takeover attempt.
Individual or corporate investor who intends to take control of a company (often ostensibly for greenmail) by buying a controlling interest in its stock and installing new management. Raiders who accumulate 5% or more of the outstanding shares in the target company must report their purchases to the SEC, the exchange of listing, and the target itself.
A valuable employee, manager or subcontracted person who brings new business to a company.
A function that assigns a real number to each and every possible outcome of a random experiment.
A strategy of introducing into the decision-making process a chance element that is designed to confound the information content of the decision-maker's observed choices.
The value of a regulated public utility and its operations as defined by its regulators and on which the company is allowed to earn a particular rate of return.
A provision governing a municipal revenue project financed by a revenue bond issue, which establishes the rates to be charged users of the new facility.
An agreement between the mortgage banker and the loan applicant guaranteeing a specified interest rate for a designated period, usually 60 days.
The rate, as a proportion of the principal, at which interest is computed.
Calculated as the (value now minus value at time of purchase) divided by value at time of purchase. For equities, we often include dividends with the value now.
Ratios that measure the profitability of a firm in relation to various measures of investment in the firm.
In banking, the risk that profits may drop or losses occur because a rise in interest rates forces up the cost of funding fixed-rate loans or other fixed-rate assets.
An evaluation of credit quality of a company's debt issue by Thomson Financial BankWatch, Moody's, S&P, and Fitch Investors Service. Investors and analysts use ratings to assess the riskness of an investment.
A way of expressing relationships between a firm's accounting numbers and their trends over time that analysts use to establish values and evaluate risks.
The idea that people rationally anticipate the future and respond today to what they see ahead. This concept was pioneered by Nobel Laureate, Robert E. Lucas, Jr.
Materials a manufacturer converts into a finished product.
As used in connection with project financing, an agreement to furnish a specified amount per period of a specified raw material.
The ability of a tax shelter or limited partnership to deduct certain costs and expenses at the end of the year that were incurred throughout the entire year.
A change in the purchasing power of a currency.
Identifiable assets, such as land and buildings, equipment, patents, and trademarks, as distinguished from a financial investment.
Wealth that can be represented in financial terms, such as savings account balances, financial securities, and real estate.
Income expressed in current purchasing power terms.
The purchasing power in today's currency of future nominal currency to be disbursed or received.
Exchange rates that have been adjusted for the inflation differential between two countries.
A gain or loss adjusted for increasing prices by an inflation index such as the CPI.
Inflation-adjusted measure of Gross Domestic Product.
The income of an individual, group, or country adjusted for inflation.
The rate of interest excluding the effect of expected inflation; that is, the rate that is earned in terms of constant-purchasing-power dollars. Interest rate expressed in terms of real goods, i.e. nominal interest rate adjusted for expected inflation.
An option or option-like feature embedded in a real investment opportunity.
Land plus all other property that is in some way attached to the land.
The percentage return on some investments that has been adjusted for inflation.
The actual payback on an investment after removing the effect of inflation.
The return that is actually earned over a given time period.
A method of calculating required minimum distributions from a retirement plan using life expectancy tables. Unisex data tables allow a plan holder to determine the applicable life expectancy each year a distribution is required.
Often used in risk arbitrage. Plan by a target company to restructure its capitalization (debt and equity) in a way to ward off a hostile or potential suitor.
A provision in a contract that allows one party to recover (recapture) some degree of possession of an asset, such as a share of the profits derived from some property.
Funds collected from selling land, capital, or services, as well as collections from the public (budget receipts), such as taxes, fines, duties, and fees.
The percentage of a month's sales that remains uncollected (and part of accounts receivable) at the end of succeeding months.
Total operating revenues divided by average receivables. Used to measure how effectively a firm is managing its accounts receivable.
A bankruptcy practitioner appointed by secured creditors to oversee the repayment of debts.
A debt instrument issued by a receiver and serving as a lien on the property, which provides funding to continue operations or to protect assets in receivership.
A temporary downturn in economic activity, usually indicated by two consecutive quarters of a falling GDP.
A strategic alliance in which two companies agree to comarket each other's products. Production rights may or may not be transferred.
(1) Date by which a shareholder must officially own shares in order to be entitled to a dividend. For example, a firm might declare a dividend on Nov. 1, payable Dec. 1 to holders of record Nov. 15. Once a trade is executed, an investor becomes the "owner of record" on settlement, which currently takes five business days for securities and one business day for mutual funds. Stocks trade ex-dividend the fourth day before the record date, since the seller will still be the owner of record and is thus entitled to the dividend. (2) The date that determines who is entitled to payment of principal and interest due to be paid on a security. The record date for most MBS is the last day of the month, although the last day on which an MBS may be presented for the transfer is the last business day of the month. The record dates for CMOs and asset-backed securities vary with each issue.
Term describing a type of loan. If a loan is with recourse, the lender has a general claim against the parent company if the collateral is insufficient to repay the debt.
The use of depreciation of assets to offset costs; or a new period of rising securities prices after a period of declining security values.
A preliminary prospectus providing information submitted to the SEC. It excludes the offering price and the coupon of the new issue.
Eligible for redemption under the terms of an indenture.
Repayment of a debt security or preferred stock issue, at or before maturity, at par or at a premium price.
The percentage by which the conversion value of a convertible security exceeds the redemption price (strike price).
The date on which a bond matures or is redeemed.
Right of the issuer to force holders on a certain date to redeem their convertibles for cash. The objective usually is to force holders to convert into common prior to the redemption deadline. Typically, an issue is not called away unless the conversion price is 15%-25% below the current level of the common. An exception might occur when an issuer's tax rate is high, and the issuer could replace it with debt securities at a lower after-tax cost.
An extension and/or increase in amount of existing debt.
Government monetary action that causes a reversal of deflation.
To retire existing bond issues through the sale of a new bond issue, usually to reduce the interest rate being paid.
Eligible for refunding under the terms of a bond indenture.
Redeeming a bond with proceeds received from issuing lower-cost debt obligations with ranking equal to or superior to the debt to be redeemed.
A bond whose issuer records ownership and interest payments. Differs from a bearer bond, which is traded without record of ownership and whose possession is the only evidence of ownership.
A check issued and guaranteed by a bank for a customer who provides funds for payment of the check.
A company that is listed with the SEC after submission of a required statement and compliance with disclosure requirements.
A reoffering of a large block of securities, previously publicly issued, by the holder of a large portion of some corporation through an investment firm.
Used in the context of general equities. Securities whose owner's name is recorded on the books of the issuer or the issuer's agent, called a registrar.
Financial institution appointed to record issue and ownership of company securities.
In the securities market describes process set up pursuant to the Securities Exchange Acts of 1933 and 1934 whereby securities that are to be sold to the public are reviewed by the SEC.
A legal document filed with the SEC to register securities for public offering that details the purpose of the proposed public offering. The statement outlines financial details, a history of the company's operations and management, and other facts of importance to potential buyers.
A mathematical technique used to explain and/or predict. The general form is Y = a + bX + u, where Y is the variable that we are trying to predict; X is the variable that we are using to predict Y, a is the intercept; b is the slope, and u is the regression residual. The a and b are chosen in a way to minimize the squared sum of the residuals. The ability to fit or explain is measured by the R-square.
A statistical technique that can be used to estimate relationships between variables.
Term yielded by regression analysis that indicates the sensitivity of the dependent variable to a particular independent variable.
An equation that describes the average relationship between a dependent variable and a set of explanatory variables.
The tendency that a random variable will ultimately have a value closer to its mean value.
A tax system that provides that average tax rates decrease with increases in individuals' income brackets.
A Federal Reserve Board regulation that exempts small public offerings from most registration requirements with the SEC.
Federal Reserve Board regulation that currently requires member banks to hold reserves against their net borrowings from foreign offices of other banks over a 28-day averaging period. Regulation D has been merged with Regulation M.
U.S. SEC regulation whose purpose is to ensure that select groups of investors are not privy to firm-specific information before other investors. Executives are not allowed to reveal nonpublic information during their communications with analysts and select shareholders. If information is inadvertently released, they must take steps to broaden the dissemination of the information within 24 hours of discovering the disclosure.
Federal Reserve Board regulation imposing caps on the rates that banks may pay on savings and time deposits. Currently time deposits with a denomination of $100,000 or more are exempt from Reg Q.
Federal Reserve Board regulation that deals with granting credit to customers by securities brokers, dealers, and exchange member as far as initial margin requirements and securities that are covered under the rules.
Federal Reserve Board limit on how much credit a bank can allow a customer for the purchase and carrying of margin securities.
Rules specifying the appropriate behavior of agencies, organizations or individuals in the securities industry.
Use of investment income to buy additional securities.
The impact of a change in interest rates on the reinvestment rate.
A shareholder's right to reinvest dividends and buy more shares in the corporation.
The rate at which an investor assumes interest payments made on a debt security can be reinvested over the life of that security.
The risk that proceeds received in the future may have to be reinvested at a lower potential interest rate.
The attractiveness measured in terms of risk, liquidity, and return of one instrument relative to another, or, for a given instrument, of one maturity relative to another.
A mortgage provision that releases a pledged asset after a certain portion of the total payments has been made.
One who receives the principal of a trust when it is dissolved.
The length of time remaining until a bond comes due
To pay for purchases by cash, check, or electronic transfer.
Technique that involves writing checks drawn on banks in remote locations so as to maximize disbursement float.
A policy for a stated period that may be renewed if desired at the end of the term.
Placement of a day order identical to one not completed on the previous day.
Regular payments to an owner for the use of some leased property.
Creation of a plan to restructure a debtor's business and restore its financial health.
A bond issued by a company undergoing a reorganization process.
The return from abroad of the financial assets of an organization or individual.
A concept that views a capital investment as an indefinite commitment to a specific type of technology. The replacement chain concept can be used to allow the comparison of mutually exclusive investments with unequal lives.
Cost to replace a firm's assets.
An accounting method that includes as part of depreciation the difference between the original purchase price of an asset and the current replacement cost.
Insurance that pays out the full amount required to replace damaged property with new property, without taking into account the depreciated value of the property.
The frequency with which an asset is replaced by an equivalent asset.
Current cost of replacing the firm's assets.
Idea that future replacement decisions must be taken into account in selecting among projects.
The currency in which the parent firm prepares its own financial statements; that is, US dollars for a US company.
A tangible asset with physical properties that can be matched or duplicated, such as a building or machinery.
Technique to pay cash to firm's shareholders that provides more preferential tax treatment for shareholders than dividends. Treasury stock is the name given to previously issued stock that has been repurchased by the firm. A repurchase is achieved through either a Dutch auction, open market, purchase, or tender offer.
The minimum expected yield by investors require in order to select a particular investment.
The minimum expected return you would need in order to purchase an asset, that is, to make the investment.
Generally referring to bonds; the yield required by the marketplace to match available expected returns for financial instruments with comparable risk.
Bank loans that are usually altered to have longer maturities in order to assist the borrower in making the necessary repayments.
To cancel a contract because of misrepresentation, fraud, or illegal procedure.
Development of new products and services by a company in order to obtain a competitive advantage.
The price below or above which a seller or purchaser is unwilling to go.
An accounting entry that properly reflects contingent liabilities.
The percentage of different types of deposits that member banks are required to hold on deposit at the Fed.
Bonds that allow the initial interest rates to be adjusted on specific dates in order that the bonds trade at the value they had when they were issued.
The frequency with which the floating rate changes.
Assets that remain after sufficient assets are dedicated to meet all senior debtholders' claims in full.
An approach that suggests that a firm pay dividends if and only if acceptable investment opportunities for those funds are currently unavailable.
A method of allocating the purchase price for the acquisition of another firm among the acquired assets.
Return independent of the benchmark.
Usually refers to the value of a lessor's property at the time the lease expires.
Speed with which new orders respond to a change in prices.
A document that records a decision or action by a board of directors, or a bond resolution by a government entity authorizing a bond issue.
Stock that must be traded in compliance with special SEC regulations concerning its purchase and resale. These restrictions generally result from affiliate ownership, M&A activity, and underwriting activity.
A portion of retained earnings not allowed by law to be used for the payment of dividends.
Provisions that place constraints on the operations of borrowers, such as restrictions on working capital, fixed assets, future borrowing, and payment of dividends.
An endorsement signature on the back of a check that specifies the conditions under which the check can be transferred or paid out.
The reorganization of a company in order to attain greater efficiency and to adapt to new markets. Major corporate restructuring transactions include mergers, acquisitions, tender offers, leveraged buyouts, divestitures, spin-offs, equity carve-outs, liquidations and reorganizations.
The total price charged for a product sold to a customer, which includes the manufacturer's cost plus a retail markup.
Accounting earnings that are retained by the firm for reinvestment in its operations; earnings that are not paid out as dividends.
A statement of all transactions affecting the balance of a company's retained earnings account.
The percentage of present earnings held back or retained by a corporation, or one minus the dividend payout rate. Also called the retention ratio.
To extinguish a security, as in paying off a debt.
A cash distribution resulting from the sale of a capital asset, or securities, or tax breaks from depreciation.
Indicator of profitability. Determined by dividing net income for the past 12 months by total average assets. Result is shown as a percentage. ROA can be decomposed into return on sales (net income/sales) multiplied by asset utilization (sales/assets).
Indicator of profitability. Determined by dividing net income for the past 12 months by common stockholder equity (adjusted for stock splits). Result is shown as a percentage. Investors use ROE as a measure of how a company is using its money. ROE may be decomposed into return on assets (ROA) multiplied by financial leverage (total assets/total equity).
Generally, book income as a proportion of net book value.
A measurement of operational efficiency equaling net pre-tax profits divided by net sales expressed as a percentage.
The ratio of earnings available to common stockholders to total assets.
An increase in the foreign exchange value of a currency that is pegged to other currencies or gold.
The percentage split between the general partner and limited partners of profits and losses resulting from the operation of the involved business.
Occurs when the interest on borrowings exceeds the return on investment of the funds that were borrowed.
Bringing back into publicly traded status a company that had been privatized by way of a leveraged buyout.
A proportionate decrease in the number of shares, but not the total value of shares of stock held by shareholders. Shareholders maintain the same percentage of equity as before the split. For example, a 1-for-3 split would result in stockholders owning one share for every three shares owned before the split. After the reverse split, the firm's stock price is, in this example, three times the pre-reverse split price. A firm generally institutes a reverse split to boost its stock's market price. Some think this supposedly attracts investors.
Bank loan for an amount equal to a percentage of the appraisal value of the home. The loan is then paid to the homeowner in the form of an annuity.
Assurance of funds issued by a bank that can be canceled at any time without prior notification to the beneficiary.
A legal commitment in which a bank promises to lend a customer up to a specified maximum amount during a specified period.
A bank line of credit on which the customer pays a commitment fee and can take and repay funds at will. Normally a revolving LOC involves a firm commitment from the bank for a period of several years.
Ratio of excess return to portfolio standard deviation.
Term for a security whose price seems too high in light of its price history.
Stands for Racketeer Influenced and Corrupt Organization Act. Legislation under/which inside traders may be convicted.
Privilege granted shareholders of a corporation to subscribe to shares of a new issue of common stock before it is offered to the public. Such a right, which normally has a life of two to four weeks, is freely transferable and entitles the holder to buy the new common stock below the public offering price.
The right of a person or company to purchase some thing before the offering is made to others.
The right to recover property that has been attached by paying off the deb .
The right to void a contract without any penalty within three days as provided in the Consumer Credit Protection Act of 1968.
An agreement defining each party's rights should one party default on its obligation. A setoff is common in parallel loan arrangements.
Issuance to shareholders that allows them to purchase additional shares, usually at a discount to market price. Holdings of shareholders who do not exercise rights are usually diluted by the offering. Rights are often transferable, allowing the holder to sell them on the open market to others who may wish to exercise them. Rights offerings are particularly common to closed-end funds, which cannot otherwise issue additional common stock.
Often defined as the standard deviation of the return on total investment.
Groups of projects that have approximately the same amount of risk.
The process of identifying and evaluating risks and selecting and managing techniques to adapt to risk exposures.
A common approach for tactical asset allocation to determine the relative valuation of asset classes based on expected returns.
The slope of a line graphed according to the value of an underlying asset on the x-axis and the value of a position exposed to risk in the underlying asset on the y-axis. Also used with changes in value.
A mapping of the change in value or profits and losses to which an organization has exposure.
Investor who likes to take risk and is even willing to pay for it. Also called risk lover.
An investor's ability or willingness to accept declines in the prices of investments while waiting for them to increase in value..
The shifting of risk through insurance or securitization of debt because of risk aversion.
A probability used to determine a "sure" expected value (sometimes called a certainty equivalent) that would be equivalent to the actual risky expected value.
Often we subtract from the rate of return on an asset a rate of return from another asset that has similar risk. This gives an abnormal rate of return that shows how the asset performed over and above a benchmark asset with the same risk. We can also use the beta against the benchmark to calculate an alpha, which is also risk-adjusted performance.
Return earned on an asset normalized for the amount of risk associated with that asset.
Describes an investor who, when faced with two investments with the same expected return but different risks, prefers the one with the lower risk.
Bank requirement that there be a minimum ratio of estimated total capital to estimated risk-weighted asset.
An asset whose future normal return is known today with certainty.
The rate earned on a riskless asset.
Insensitive to risk.
Willing to pay money to assume risk from others.
The tendency for potential risk to vary directly with potential return, so that the more risk involved, the greater the potential return, and vice versa.
The basic concept that higher expected returns accompany greater risk, and vice versa.
Relationship of substantial reward corresponding to the amount of risk taken; mathematically represented by dividing the expected return by the standard deviation.
An asset whose future return is known today with certainty. The risk-free asset is commonly defined as short-term obligations of the US government.
The rate earned on a riskless investment, typically the rate earned on the 90-day US Treasury Bill.
An asset whose future return is uncertain.
A promotional presentation by an issuer of securities to potential buyers about the desirable qualities of the investments.
The founder of MergerPlace.
Return on Investment.
To reinvest funds received from a maturing security in a new issue of the same or a similar security.
Individual Retirement Account that allows contributors to invest up to $2,000 per year, and to withdraw the principal and earnings totally tax-free under certain conditions.
Payment for the right to use intellectual property or natural resources.
A check that bounces for lack of funds.
Often used in risk arbitrage. Requirement under Section 13-d of the Securities Act of 1934 that a form must be filed with the SEC within ten business days of acquiring direct or beneficial ownership of 5% or more of any class of equity securities in a publicly held corporation. The purchaser of such stock must also file a 13-d with the stock exchange on which the shares are listed (if any) and the company itself. Required information includes the way the shares were acquired, the purchaser's background, and future plans regarding the target company. The law is designed to protect against insidious takeover attempts and to keep the investing public aware of information that could affect the price of their stock.
Often used in risk arbitrage. Regulations and restrictions covering public tender offers and related disclosure requirements.
SEC rule allowing qualified institutional buyers to buy and trade unregistered securities.
Permits corporations to file a registration for securities they intend to issue in the future when market conditions are favorable. Shelf registration.
A formula used to determine the amount of time it will take for invested money to double at a given compound interest rate, which is 72 divided by the interest rate.
A condition of bankruptcy proceedings under which junior (subordinated) claim holders can receive no payment until senior (priority) claim holders are paid in full.
Rules established by the NASD that lay down guidelines for just and equitable principles of trade and business in securities markets.
A term combining the words "rumor" and arbitrage, used to describe trading that occurs on the basis of rumors of a takeover.
Usually used in the context of a merger or acquisition. A group of shareholders who refuse to tender their shares for a merger or acquisition. In a merger of Company A and Company B for example, if a sufficient number of Company B shareholders do not tender their shares, the new company will not be able to access the cash flows of Company B.
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