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Glossary

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Acquiring company
The company in a merger or acquisition that is acquiring the target.
Acquisition
The purchase of some portion of one company by another; the purchase may be for assets, a definable segment of another entity, or the purchase of an entire company.
Acquisition method
A method of accounting for a business combination where the acquirer is required to measure each identifiable asset and liability at fair value. This method was the result of a joint project of the IASB and the FASB aiming at convergence in standards for the accounting of business combinations.
Active factor risk
The contribution to active risk squared resulting from the portfolio’s different-than-benchmark exposures relative to factors specified in the risk model.
Active investment approach 
An approach to portfolio construction in which portfolio composition responds to changes in the portfolio manager’s expectations concerning asset returns.
Active investment managers
Managers who hold portfolios that differ from their benchmark portfolio in an attempt to produce positive risk-adjusted returns.
Active management
An approach to investing in which the portfolio manager seeks to outperform a given benchmark portfolio.
Active return
The return on a portfolio minus the return on the portfolio’s benchmark.
Accrued interest
Interest deemed to be earned on a security but not yet paid to the investor. 
Add-on interest
A procedure for determining the interest on a bond or loan in which the interest is added onto the face value of a contract.
Adjusted beta
Historical beta adjusted to reflect the tendency of beta to be mean reverting.
Adjusted present value (APV)
As an approach to valuing a company, the sum of the value of the company, assuming no use of debt, and the net present value of any effects of debt on company value.
Agency problem
A conflict of interest that arises when the agent in an agency relationship has goals and incentives that differ from the principal to whom the agent owes a fiduciary duty.
Agency transaction
A sale and purchase of bonds in which the dealer places bonds with the buyer on a commission basis rather than selling bonds that the dealer owns.
Algorithmic trading 
Automated electronic trading subject to quantitative rules and user-specified benchmarks and constraints.
Allocation/selection interaction return 
A measure of the joint effect of weights assigned to both sectors and individual securities; the difference between the weight of the portfolio in a given sector and the portfolio’s benchmark for that sector, times the difference between the portfolio’s and the benchmark’s returns in that sector, summed across all sectors.
All or none (AON)
Where the offeror of a block of bonds will only sell all of the available bonds and not only a portion of them.
Allotment
  Distribution of bonds to syndicate members by the book running manager.
Amortization
  Liquidation of a debt through installment payments.
Allowance for bad debts
An offset to accounts receivable for the amount of accounts receivable that are estimated to be uncollectible.
Alpha
The return on an asset in excess of the asset’s required rate of return; the risk-adjusted return.
Alpha and beta separation 
An approach to portfolio construction that views investing to earn alpha and investing to establish systematic risk exposures as tasks that can and should be pursued separately.
Alpha research
  Research related to capturing excess risk-adjusted returns by a particular strategy; a way investment research is organized in some investment management firms.
Alternative hypothesis
The hypothesis accepted when the null hypothesis is rejected.
Alternative investments
Groups of investments with risk and return characteristics that differ markedly from those of traditional stock and bond investments.
American option
An option contract that can be exercised at any time until its expiration date.
Amortization
The process of allocating the cost of intangible long-term assets having a finite useful life to accounting periods; the allocation of the amount of a bond premium or discount to the periods remaining until bond maturity.
Amortizing and accreting swaps
A swap in which the notional principal changes according to a formula related to changes in the underlying.
Angel investor
An accredited individual investing chiefly in seed and early-stage companies.
Annual percentage rate
The cost of borrowing expressed as a yearly rate.
Annuity
A finite set of level sequential cash flows.
Annuity due
An annuity having a first cash flow that is paid immediately.
Anticipation stock
Excess inventory that is held in anticipation of increased demand, often because of seasonal patterns of demand.
Antidilutive
With reference to a transaction or a security, one that would increase earnings per share (EPS) or result in EPS higher than the company’s basic EPS. Antidilutive securities are not included in the calculation of diluted EPS.
Annual Meeting or Annual General Meeting (AGM)
: A yearly convention of the management and shareholders of a company to elect the Board of Directors, provide an update on and/or consider corporate policy requiring input or a vote by shareholders. Policy considerations may include executive compensation, the issuance of stock, major transactions or amendments to by-laws. All publicly-traded corporations are required to hold at least one meeting of shareholders per year. Special meetings may also be called as needs arise.
All or none (AON)
Where the offeror of a block of bonds will only sell all of the available bonds and not only a portion of them.
Allotment
  Distribution of bonds to syndicate members by the book running manager.
Amortization
Liquidation of a debt through installment payments.
Appraisal data
Valuation data based on appraised rather than market values.
Arbitrage
(1) The simultaneous purchase of an undervalued asset or portfolio and sale of an overvalued but equivalent asset or portfolio in order to obtain a riskless profit on the price differential; taking advantage of a market inefficiency in a risk-free manner. (2) A trading strategy designed to generate a guaranteed profit from a transaction that requires no capital commitment or risk bearing on the part of the trader. A simple example of an arbitrage trade would be the simultaneous purchase and sale of the same security in different markets at different prices. (3) The condition in a financial market in which equivalent assets or combinations of assets sell for two different prices, creating an opportunity to profit at no risk with no commitment of money. In a well-functioning financial market, few arbitrage opportunities are possible. (4) A risk-free operation that earns an expected positive net profit but requires no net investment of money.
Arbitrage opportunity
An opportunity to conduct an arbitrage; an opportunity to earn an expected positive net profit without risk and with no net investment of money.
Arbitrage portfolio
The portfolio that exploits an arbitrage opportunity.
Arithmetic mean
The sum of the observations divided by the number of observations.
Arrears swap
A type of interest rate swap in which the floating payment is set at the end of the period and the interest is paid at that same time.
Articles of Association
A document that specifies the regulations for a company's operations. The articles of association define the company's purpose and lays out how tasks are to be accomplished within the organization, including the process for appointing directors and how financial records will be handled.
Ascending, or positive, yield curve
The interest rate structure which exists when long-term interest rates exceed short-term interest rates.
Asian call option
A European-style option with a value at maturity equal to the difference between the stock price at maturity and the average stock price during the life of the option, or $0, whichever is greater.
Ask price
The price at which a dealer will sell a specified quantity of a security.
Ask size
The quantity associated with the ask price.
Assets
Assets are anything tangible or intangible of economic value owned by a business or individual. In reference to securitized debt, often assets refer to specific collateral, such as credit-card receivables, car loans, equipment, or real estate.
Asset allocation
Asset allocation is an investment strategy in which an investor divides his/her assets among different broad categories of investments (such as bonds) to reduce risk in an investment portfolio while maximizing return. The percentages allocated to each investment category at any given time depend on individual investor needs and preferences including investment goals, risk tolerance, market outlook, and how much money there is to invest.
Asset allocation reviews
A periodic review of the appropriateness of a portfolio’s asset allocation.
Asset class
A category or type of investment which has similar characteristics and behave similarly when subject to particular market forces. Broad financial asset classes are stocks (or equity), bonds (fixed income) and cash. Real estate, precious metals and commodities can also be viewed as asset classes.
Asset swap
An exchange of assets. In reference to the debt market, exchanging fixed rate debt to floating rate debt to change the cash flow of a firm's assets to provide a more favorable payment stream. For example, to swap the fixed flow of payments of the guaranteed cash flows on a U.S. Government Bond, with a floating investment, such as an index like LIBOR. Asset swaps can provide yield enhancement, change interest-rate sensitivity, and customize assets.
Asset swap spread
The asset swap spread (also called the gross spread) is the aggregate price that bondholders would receive by exchanging fixed rate bonds for floating rate bonds using the swaps market, mainly used to reduce interest rate risk. The asset swap spread is one widely used metric to determine relative value of one bond against other bonds of the same currency. Asset swaps can be a tool to understand which bond or bonds maximize the spread or price over a reference interest rate benchmark, almost always LIBOR, the London InterBank Offered Rate.
Asset-backed bonds or securities (ABS)
Asset-backed securities, called ABS, are bonds or notes backed by financial assets other than residential or commercial mortgages—an investor is purchasing an interest in pools of loans or other financial assets. Typically these assets consist of receivables other than mortgage loans, such as credit card receivables, auto loans and consumer loans. As the underlying loans are paid off by the borrowers, the investors in ABS receive payments of interest and principal over time. The ABS market is for institutional investors and is not suitable for individual investors.
Auction
Sealed-bid public sale of securities; method of determining the price, rate or yield.
Authority
A separate state or local governmental issuer expressly created to issue bonds or run an enterprise, or to do both. Certain authorities issue bonds on their own behalf, such as transportation or power authorities. Authorities that issue bonds on the behalf of qualified nongovernmental issuers include health facilities and industrial development authorities.
Authorizing resolution
Issuer document which states the legal basis for debt issuance, and states the general terms of the financing.
Average annual yield
Average annual yield is the average yearly income on an investment, such as a bond, expressed in percentage terms. To calculate average annual yield, add all the income from an investment and divide that total amount by the number of years in which the money was invested. For example, if you receive $10 interest on a $1,000 bond each year for ten years, the average annual yield is 1% ($10 ÷ $1,000 = 0.01 or 1%).
Average life
On a mortgage security, the average length of time that each principal dollar is expected to be outstanding, based on certain assumptions about prepayment speeds.
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