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Back-to-back transaction
A transaction where a dealer enters into offsetting transactions with different parties, effectively serving as a go-between.
Backward integration
A merger involving the purchase of a target ahead of the acquirer in the value or production chain, for example, to acquire a supplier.
A condition in the futures markets in which the benefits of holding an asset exceed the costs, leaving the futures price less than the spot price. Related Terms: Contango
Balance of payments
An accounting of all cash flows between residents and nonresidents of a country.
Balance sheet
The financial statement that presents an entity’s current financial position by disclosing resources the entity controls (its assets) and the claims on those resources (its liabilities and equity claims) as of a particular point in time (the date of the balance sheet).
Balance sheet ratios
Financial ratios involving balance sheet items only.
Balance-sheet-based accruals ratio
The difference between net operating assets at the end and the beginning of the period compared to the average net operating assets over the period.
Balance-sheet-based aggregate accruals
The difference between net operating assets at the end and the beginning of the period.
Balance of trade
The difference between the value of a region's imports and exports during a specific period of time. If the coutry imports more than it exports, it has a trade deficit; if the country exports more than it imports it has a trade surplus.
Barbell strategy
Barbell strategy is used as a way to earn more interest without taking more risk when investing in bonds. In a barbell strategy, an investor invests in short-term bonds, say perhaps some maturing in one to two years and long-term bonds such as those maturing in 30 years. When shorter-term bonds come due, the investor replaces them with other short-term bonds, thus keeping a balance between short and long term bonds. The goal is to earn more interest without taking more risk than having a portfolio of intermediate term bonds only.
Basis point
One one-hundredth (.01) of a percentage point. For example, eight percent would be equal to 800 basis points. Yield differences are often quoted in basis points (bps).
Basis price
The price of a security expressed in yield, or percentage of return on the investment. Price differentials in municipal bonds are usually expressed in multiples of 5/100 of 1%, or “05."
Bargain purchase
When a company is acquired and the purchase price is less than the fair value of the net assets. The current treatment of the excess of fair value over the purchase price is different under IFRS and U.S. GAAP. The excess is never accounted for as negative goodwill.
Basic EPS
Net earnings available to common shareholders (i.e., net income minus preferred dividends) divided by the weighted average number of common shares outstanding.
The difference between the cash price and the futures price.
Basis point value
Also called present value of a basis point or price value of a basis point (PVBP), the change in the bond price for a 1 basis point change in yield.
Basis risk 
The risk that the basis will change in an unpredictable way.
Basis swap
(1) An interest rate swap involving two floating rates. (2) A swap in which both parties pay a floating rate.
Bayes’ formula
A method for updating probabilities based on new information.
Basel Committee on Banking Supervision
Bearer bond
A physical bond that does not identify its owner and is presumed to be owned by the person who holds it. In the United States, it has not been legal to issue bearer bonds in the municipal or corporate markets since 1982. As a result, the only bearer bonds that still exist in the secondary market are long-dated maturities issued prior to 1982, which are becoming increasingly scarce. Among the disadvantages of bearer securities are that you must actually clip the coupons and present them to the issuer's trustee in order to receive your interest; and if the bonds are called, you will not automatically be alerted by the issuer or trustee as they do not know who the owners are.
Bear hug
A tactic used by acquirers to circumvent target management’s objections to a proposed merger by submitting the proposal directly to the target company’s board of directors.
Bear spread
An option strategy that involves selling a put with a lower exercise price and buying a put with a higher exercise price. It can also be executed with calls.
Behavioral finance
An approach to finance based on the observation that psychological variables affect and often distort individuals’ investment decision making.
A comparison portfolio; a point of reference or comparison.
Benchmark value of the multiple
In using the method of comparables, the value of a price multiple for the comparison asset; when we have comparison assets (a group), the mean or median value of the multiple for the group of assets.
Bernoulli random variable
A random variable having the outcomes 0 and 1.
Bernoulli trial
An experiment that can produce one of two outcomes.
Best efforts order
A type of order that gives the trader’s agent discretion to execute the order only when the agent judges market conditions to be favorable.
A standardized measure of systematic risk based upon an asset’s covariance with the market portfolio.
Behavioral finance
Behavioral finance is the study of why investors act the way they do and how such behavior affects the markets. Behavioral finance theorists use the disciplines of economics and psychology to suggest that the investor behavior that affects market prices may be not be based on such “rational” factors as analysis of the strength or performance of a company.
A bond whose terms are used for comparison with other bonds of similar maturity. The global financial market typically looks to U.S Treasury securities as benchmarks.
Beneficial owner
One who benefits from owning a security, even if the security’s title of ownership is in the name of a broker or bank ("street name").
Price at which a buyer is willing to purchase a security.
Bid price
The price at which a dealer will buy a specified quantity of a security.Synonyms: bid
Bid size
The quantity associated with the bid price.
Bid–ask spread
The difference between the current bid price and the current ask price of a security.
Bill-and-hold basis
Sales on a bill-and-hold basis involve selling products but not delivering those products until a later date.
Binary credit options
Options that provide payoffs contingent on the occurrence of a specified negative credit event.
Binomial model
A model for pricing options in which the underlying price can move to only one of two possible new prices.
Binomial random variable
The number of successes in n Bernoulli trials for which the probability of success is constant for all trials and the trials are independent.
Binomial tree
The graphical representation of a model of asset price dynamics in which, at each period, the asset moves up with probability p or down with probability (1 – p).
Orders to buy or sell that are too large for the liquidity ordinarily available in dealer networks or stock exchanges.
Block order
An order to sell or buy in a quantity that is large relative to the liquidity ordinarily available from dealers in the security or in other markets.
Bid list
Schedule of bonds distributed by holder or broker to dealer in order to get a bid, or current price, on the bonds.
A short-term direct obligation of the U.S. Treasury that has a maturity of not more than one year (for example, 13-, 26- or 52-week maturity).
Bank for International Settlements
Blended yield to maturity
The combination and average of two points on the yield curve to find a yield at the midpoint.
Board of Directors 
Group of elected members (directors) who jointly oversee the activities of a company or organization and have a fiduciary duty to represent the best interests of shareholders. 
Bank of England
(1) The written evidence of debt, bearing a stated rate or stated rates of interest, or stating a formula for determining that rate, and maturing on a date certain, on which date and upon presentation a fixed sum of money plus interest (usually represented by interest coupons attached to the bond) is payable to the holder or owner. A municipal bond issue is usually comprised of many bonds that mature over a period of years; (2) For purposes of computations tied in to “per bond,” a $1,000 increment of an issue (no matter what the actual denominations are); (3) Bonds are long-term securities with a maturity of greater than one year.
Bond counsel
A lawyer or law firm that delivers a legal opinion which deals with the issuer’s authorization to issue bonds and the tax-exempt nature of the bond. Bond counsel is retained by the issuer.
Bond equivalent yield
An adjustment to a CMO yield which reflects its greater present value, created because CMOs pay monthly or quarterly interest, unlike most other types of bonds, which pay interest semiannually.
Bond equivalent yield
A calculation of yield that is annualized using the ratio of 365 to the number of days to maturity. Bond equivalent yield allows for the restatement and comparison of securities with different compounding periods.
Bond indenture
A legal contract specifying the terms of a bond issue.
Bond option
An option in which the underlying is a bond; primarily traded in over-the-counter markets.
Bond yield plus risk premium approach
An estimate of the cost of common equity that is produced by summing the before-tax cost of debt and a risk premium that captures the additional yield on a company’s stock relative to its bonds. The additional yield is often estimated using historical spreads between bond yields and stock yields.
Bond-equivalent basis
A basis for stating an annual yield that annualizes a semiannual yield by doubling it.
Bond-equivalent yield
The yield to maturity on a basis that ignores compounding.
Bonding costs
Costs borne by management to assure owners that they are working in the owners’ best interest (e.g., implicit cost of noncompete agreements).
Book value equity per share
The amount of book value (also called carrying value) of common equity per share of common stock—calculated by dividing the book value of shareholders’ equity by the number of shares of common stock outstanding.
Book value of equity
Shareholders’ equity (total assets minus total liabilities) minus the value of preferred stock; common shareholders’ equity.
Bootstrapping earnings
An increase in a company’s earnings that results as a consequence of the idiosyncrasies of a merger transaction itself rather than because of resulting economic benefits of the combination.
Bond fund
An investment vehicle, which invests in a portfolio of bonds that is professionally managed. Types of bond funds include open-ended mutual funds, closed-end mutual funds, and exchange traded funds.
Bond insurance
Legal commitment by insurance company to make scheduled payment of interest and principal of a bond issue in the event that the issuer is unable to make those payments on time. The cost of insurance is usually paid by the issuer in case of a new issue of bonds, and the insurance is not purchased unless the cost is far more than offset by the lower interest rate that can be incurred by the use of the insurance. Individual investors cannot buy bond insurance.
Bond insurers and reinsurers
Specialized insurance firms serving the fixed-income market that guarantee the timely payment of principal and interest on bonds they insure in exchange for a fee.
Bond purchase agreement (BPA)
The contract between the issuer and the underwriter setting forth the terms of the sale, including the price of the bonds, the interest rate or rates which the bonds are to bear and the conditions to closing. It is also called the purchase contract.
Bond resolution
Issuer legal document which details the mechanics of the bond issuer, security features, covenants, events of default and other key features of the issue’s legal structure. Indentures and trust agreements are functionally similar types of documents, and the use of each depends on the individual issue and issuer.
Bond swap
The sale of a block of bonds and the purchase of another block of similar market value. Swaps may be made to achieve many goals, including establishing a tax loss, upgrading credit quality, extending or shortening maturity, etc.
Bond year
An element in calculating average life of an issue and in calculating net interest cost and net interest rate on an issue. A bond year is the number of 12-month intervals between the dated date of the bond and its maturity date, measured in $1,000 increments. For example, the “bond years” allocable to a $5,000 bond dated April 1, 2000, and maturing June 1, 2001, is 5.830 [1.166 (14 months divided by 12 months) x 5 (number of $1,000 increments in $5,000 bond)]. Usual computations include “bond years” per maturity or per an interest rate, and total “bond years” for the issue.
Book entry
A method of recording and transferring ownership of securities electronically, eliminating the need for physical certificates.
Bottom-up analysis
With reference to investment selection processes, an approach that involves selection from all securities within a specified investment universe (i.e., without prior narrowing of the universe on the basis of macroeconomic or overall market considerations).
Bottom-up forecasting approach
A forecasting approach that involves aggregating the individual company forecasts of analysts into industry forecasts and finally into macroeconomic forecasts.
Bottom-up investing
An approach to investing that focuses on the individual characteristics of securities rather than on macroeconomic or overall market forecasts.
Bought deals
GSE-issued securities sold through negotiated direct placements or competitive bids, with terms and size determined by the immediate needs of the GSE.
Box spread
An option strategy that combines a bull spread and a bear spread having two different exercise prices, which produces a risk-free payoff of the difference in the exercise prices.
Break point
In the context of the weighted average cost of capital (WACC), a break point is the amount of capital at which the cost of one or more of the sources of capital changes, leading to a change in the WACC.
Breakeven point
The number of units produced and sold at which the company’s net income is zero (revenues = total costs).
Breakup value
The value that can be achieved if a company’s assets are divided and sold separately.
Broad market indexes
An index that is intended to measure the performance of an entire asset class. For example, the S&P 500 Index, Wilshire 5000, and Russell 3000 indexes for U.S. common stocks.
An agent who executes orders to buy or sell securities on behalf of a client in exchange for a commission rather than for its own account.
The business of acting as agents for buyers or sellers, usually in return for commissions.
Brokered markets
Markets in which transactions are largely effected through a search-brokerage mechanism away from public markets.
Episodes in which asset market prices move to extremely high levels in relation to estimated intrinsic value.
With respect to style index construction, rules for maintaining the style assignment of a stock consistent with a previous assignment when the stock has not clearly moved to a new style.
Build-up approach
Synonym for the risk premium approach. Build-up method
A method for determining the required rate of return on equity as the sum of risk premiums in which one or more of the risk premiums is typically subjective rather than grounded in a formal equilibrium model.
Bull spread
An option strategy that involves buying a call with a lower exercise price and selling a call with a higher exercise price. It can also be executed with puts.
Bullet portfolio
A portfolio made up of maturities that are very close to the investment horizon.
Business cycle
Fluctuations in GDP in relation to long-term trend growth, usually lasting 9–11 years.
Business risk
The risk associated with operating earnings. Operating earnings are uncertain because total revenues and many of the expenditures contributed to produce those revenues are uncertain.
Banking Supervision Committee
Bullet bond/ bullet maturity
A bond that pays regular interest, but that does not repay principal until maturity.
Bureau of Consumer Financial Protection
Butterfly spread
An option strategy that combines two bull or bear spreads and has three exercise prices.
Buy side 
Investment management companies and other investors that use the services of brokerages.
Buy-side analysts
Analysts who work for investment management firms, trusts, bank trust departments, and similar institutions.
Buy-side traders
Professional traders that are employed by investment managers and institutional investors.
Buy and hold
A strategy for investing in which investors buy a bond and hold the bond until the date of maturity when the investor receives principal back and interest, if any.
Written rules developed by a corporation to establish its internal operations and procedures.  (See also Articles of Association)
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