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Glossary

D

Daily settlement
See marking to market.
Data mining
The practice of determining a model by extensive searching through a dataset for statistically significant patterns.
Data-mining bias
Bias that results from repeatedly “drilling” or searching a dataset until some statistically significant pattern is found.
Dated date (or issue date)
The date of a bond issue from which a bond begins to accrue interest.
Daycount
The convention used to calculate the number of days in an interest payment period. A 30/360 convention assumes 30 days in a month and 360 days in a year. An actual/360 convention assumes the actual number of days in the given month and 360 days in the year. An actual/ actual convention uses the actual number of days in the given interest period and year.
Day trader
A trader holding a position open somewhat longer than a scalper but closing all positions at the end of the day.
Days of inventory on hand (DOH)
An activity ratio equal to the number of days in the period divided by inventory turnover over the period.
Days of sales outstanding (DSO)
An activity ratio equal to the number of days in period divided by receivables turnover.
Dead-hand provision
A poison pill provision that allows for the redemption or cancellation of a poison pill provision only by a vote of continuing directors (generally directors who were on the target company’s board prior to the takeover attempt).
Dealer
A securities firm or department of a commercial bank that engages in the underwriting, trading and sale of municipal (or other) securities.
Dealer bank
Department of commercial bank that engages in the underwriting, trading and sale of municipal (or other) securities.
Dealing securities 
Securities held by banks or other financial intermediaries for trading purposes.
Debenture
Unsecured debt obligation, issued against the general credit of a corporation, rather than against a specific asset. 
Debit
With respect to double-entry accounting, a debit records increases of asset and expense accounts or decreases in liability and owners’ equity accounts.
Debt covenants
Agreements between the company as borrower and its creditors.
Debt incurrence test
A financial covenant made in conjunction with existing debt that restricts a company’s ability to incur additional debt at the same seniority based on one or more financial tests or conditions.
Debt rating approach
A method for estimating a company’s before-tax cost of debt based upon the yield on comparably rated bonds for maturities that closely match that of the company’s existing debt.
Debt ratings
An objective measure of the quality and safety of a company’s debt based upon an analysis of the company’s ability to pay the promised cash flows, as well as an analysis of any indentures.
Debt with warrants
Debt issued with warrants that give the bondholder the right to purchase equity at prespecified terms.
Debt-to-assets ratio
A solvency ratio calculated as total debt divided by total assets.
Debt-to-capital ratio
A solvency ratio calculated as total debt divided by total debt plus total shareholders’ equity.
Debt-to-equity ratio
A solvency ratio calculated as total debt divided by total shareholders’ equity.
Debt limit
Statutory or constitutional limit on the principal amount of debt that an issuer may incur (or that it may have outstanding at any one time).
Debt service
Principal and interest.
Debt service coverage
The ratio of net revenues to the debt service requirements.
Debt service requirements
Amounts required to pay debt service, often expressed in the context of a time frame (such as “annual debt service requirements”).
Debt service reserve fund
The fund into which are paid monies which are required by the trust agreement or indenture as a reserve against a temporary interruption in the receipt of the revenues or other amounts which are pledged for the payment of the bonds. A common deposit requirement for a “debt service reserve fund” is six months or one-year’s debt service on the bonds. The “debt service reserve fund” may be initially funded out of bond proceeds, over a period of time from revenues, or by a combination of the above.
Decentralized risk management
A system that allows individual units within an organization to manage risk. Decentralization results in duplication of effort but has the advantage of having people closer to the risk be more directly involved in its management.
Deciles
Quantiles that divide a distribution into 10 equal parts.
Declaration date
The day that the corporation issues a statement declaring a specific dividend.
Dedication strategies
Specialized fixed-income strategies designed to accommodate specific funding needs of the investor.
Deductible temporary differences
Temporary differences that result in a reduction of or deduction from taxable income in a future period when the balance sheet item is recovered or settled.
Deep in the money
Options that are far in-the-money.
Deep out of the money
Options that are far out-of-the-money.
Default risk 
The risk of loss if an issuer or counterparty does not fulfill its contractual obligations.
Default risk premium
An extra return that compensates investors for the possibility that the borrower will fail to make a promised payment at the contracted time and in the contracted amount.
Default swap 
A contract in which the swap buyer pays a regular premium; in exchange, if a default in a specified bond occurs, the swap seller pays the buyer the loss due to the default.
Defaultable debt
Debt with some meaningful amount of credit risk.
Defensive interval ratio
A liquidity ratio that estimates the number of days that an entity could meet cash needs from liquid assets; calculated as (cash + short-term marketable investments + receivables) divided by daily cash expenditures.
Deferred swap 
A swap with terms specified today but for which swap payments begin at a later date than for an ordinary swap.
Deferred tax assets
A balance sheet asset that arises when an excess amount is paid for income taxes relative to accounting profit. The taxable income is higher than the accounting profit, and income tax payable exceeds tax expense. The company expects to recover the difference during the course of future operations when tax expense exceeds income tax payable.
Deferred tax liabilities
A balance sheet liability that arises when a deficit amount is paid for income taxes relative to accounting profit. The taxable income is less than the accounting profit, and income tax payable is less than tax expense. The company expects to eliminate the liability over the course of future operations when income tax payable exceeds tax expense.
Defined-benefit pension plans
Plans in which the company promises to pay a certain annual amount (defined benefit) to employees after retirement. The company bears the investment risk of the plan assets.
Defined-contribution pension plans
Individual accounts to which an employee and typically the employer makes contributions, generally on a tax-advantaged basis. The amounts of contributions are defined at the outset, but the future value of the benefit is unknown. The employee bears the investment risk of the plan assets.
Definitive merger agreement
A contract signed by both parties to a merger that clarifies the details of the transaction— including the terms, warranties, conditions, termination details, and the rights of all parties.
Deflation
A decrease in the general level of prices; an increase in the purchasing power of a unit of currency.
Deep discount
A discount greater than traditional market discounts of 3%.
Default
A failure by an issuer to: (i) pay principal or interest when due, (ii) meet non-payment obligations, such as reporting requirements, or (iii) comply with certain covenants in the document authorizing the issuance of a bond (an indenture).
Default risk
Possibility that a bond issuer will fail to pay principal or interest when due.
Defeasance
Termination of the rights and interests of the trustee and bondholders under a trust agreement or indenture upon final payment or provision for payment of all debt service and premiums, and other costs, as specifically provided for in the trust instrument.
Deflation
A sustained drop in the prices of goods and services.
Degree of financial leverage
The ratio of the percentage change in net income to the percentage change in operating income; the sensitivity of the cash flows available to owners when operating income changes. Synonyms: DFL
Degree of operating leverage
The ratio of the percentage change in operating income to the percentage change in units sold; the sensitivity of operating income to changes in units sold. Synonyms: DOL
Degree of total leverage
The ratio of the percentage change in net income to the percentage change in units sold; the sensitivity of the cash flows to owners to changes in the number of units produced and sold.
Degrees of freedom
The number of independent observations used. Synonyms: DF
Delay costs
Implicit trading costs that arise from the inability to complete desired trades immediately due to order size or market liquidity. Synonyms: slippage
Delivery
A process used in a deliverable forward contract in which the long pays the agreed-upon price to the short, which in turn delivers the underlying asset to the long.
Delivery option
The feature of a futures contract giving the short the right to make decisions about what, when, and where to deliver.
Delta
The relationship between the option price and the underlying price, which reflects the sensitivity of the price of the option to changes in the price of the underlying.
Delta hedge
An option strategy in which a position in an asset is converted to a risk-free position with a position in a specific number of options. The number of options per unit of the underlying changes through time, and the position must be revised to maintain the hedge.
Demand deposit 
A deposit that can be drawn upon without prior notice, such as a checking account.
Demutualizing
The process of converting an insurance company from stock to mutual form.
Dependent
With reference to events, the property that the probability of one event occurring depends on (is related to) the occurrence of another event.
Dependent variable
The variable whose variation about its mean is to be explained by the regression; the left-hand-side variable in a regression equation.
Depreciation
The process of systematically allocating the cost of long-lived (tangible) assets to the periods during which the assets are expected to provide economic benefits.
Derivative
A financial instrument whose value depends on the value of some underlying asset or factor (e.g., a stock price, an interest rate, or an exchange rate).
Derivatives dealers
Commercial and investment banks that make markets in derivatives.
Descriptive statistics
The study of how data can be summarized effectively.
Designated fair value instruments
Financial instruments that an entity chooses to measure at fair value per IAS 39 or SFAS 159. Generally, the election to use the fair value option is irrevocable.
Denomination
The face amount, or par value, of a bond or note that the issuer promises to pay on the maturity date. Most municipal bonds are issued in a minimum denomination of $5,000.
DGS
Deposit Guarantee Schemes
Differential expectations
Expectations that differ from consensus expectations.
Differential returns

Returns that deviate from a manager’s benchmark.
Differentiation
The competitive strategy of offering unique products or services along some dimensions that are widely valued by buyers so that the firm can command premium prices.
Diffuse prior
The assumption of equal prior probabilities.
Diffusion index
An index that measures how many indicators are pointing up and how many are pointing down.
Diffusion index for stocks
An indicator of the number of stocks rising during a specified period of time relative to the number of stocks declining and not changing price.
Diluted EPS
The EPS that would result if all dilutive securities were converted into common shares.
Diluted shares
The number of shares that would be outstanding if all potentially dilutive claims on common shares (e.g., convertible debt, convertible preferred stock, and employee stock options) were exercised.
Diminishing balance method
An accelerated depreciation method (i.e., one that allocates a relatively large proportion of the cost of an asset to the early years of the asset’s useful life).
Direct commodity investment
Commodity investment that involves cash market purchase of physical commodities or exposure to changes in spot market values via derivatives, such as futures.
Direct debit program
An arrangement whereby a customer authorizes a debit to a demand account; typically used by companies to collect routine payments for services.
Direct financing lease
A type of finance lease, from a lessor perspective, where the present value of the lease payments (lease receivable) equals the carrying value of the leased asset. The revenues earned by the lessor are financing in nature.
Direct format
With reference to the cash flow statement, a format for the presentation of the statement in which cash flow from operating activities is shown as operating cash receipts less operating cash disbursements. Synonyms: direct method
Direct market access
Platforms sponsored by brokers that permit buy-side traders to directly access equities, fixed income, futures, and foreign exchange markets, clearing via the broker.
Direct quotation
Quotation in terms of domestic currency/foreign currency.
Direct write-off method
An approach to recognizing credit losses on customer receivables in which the company waits until such time as a customer has defaulted and only then recognizes the loss.
Dirty surplus items
Items that affect comprehensive income but which bypass the income statement.
Dirty-surplus accounting
Accounting in which some income items are reported as part of stockholders’ equity rather than as gains and losses on the income statement; certain items of comprehensive income bypass the income statement and appear as direct adjustments to shareholders’ equity.
Dirty price
Price of a bond including accrued interest. May also be called the all-in price.
Dirty-surplus items
Direct adjustments to shareholders’ equity that bypass the income statement.
Disbursement float
The amount of time between check issuance and a check’s clearing back against the company’s account.
Discount
To reduce the value of a future payment in allowance for how far away it is in time; to calculate the present value of some future amount. Also, the amount by which an instrument is priced below its face value.
Discount interest
A procedure for determining the interest on a loan or bond in which the interest is deducted from the face value in advance.
Discounted cash flow analysis
In the context of merger analysis, it is an estimate of a target company’s value found by discounting the company’s expected future free cash flows to the present.
Discounted cash flow models
Valuation models that express the idea that an asset’s value is the present value of its (expected) cash flows. Synonyms: DCF models
Discrete random variable
A random variable that can take on at most a countable number of possible values.
Discrete time
Time thought of as advancing in distinct finite increments.
Discriminant analysis
A multivariate classification technique used to discriminate between groups, such as companies that either will or will not become bankrupt during some time frame.
Disintermediation
To withdraw funds from financial intermediaries for placement with other financial intermediaries offering a higher return or yield. Or, to withdraw funds from a financial intermediary for the purposes of direct investment, such as withdrawing from a mutual fund to make direct stock investments.
Discos
Agency bond no-coupon discount notes (“discos”) issued by federal agencies to meet short-term financing needs that are issued at a discount to par value. Investors who sell such discos prior to maturity may lose money.
Discount 
The amount by which the par value of a security exceeds its purchase price. For example, a $1,000 par amount bond which is currently valued at $980 would be said to be trading at a two percent discount.
Discount bond
A bond sold at less than par.
Discount margin
The effective spread to maturity of a floating-rate security after discounting the yield value of a price other than par over the life of the security.
Discount note
Short-term obligations issued at a discount from face value, with maturities ranging from one to 360 days. Discount notes have no periodic interest payments; the investor receives the note's face value at maturity. For example, a one year, $1,000 face value discount note purchased at issue at a price of $950, would yield $50 or 5.26 percent ($50/$950).
Discount rate
The key interest rates central banks charge on overnight loans to commercial and member banks. In the U.S., the interest rate used by the Federal Reserve on loans to its member banks. Changes in the rate by the Federal Reserve generally indicate future changes in monetary policy. In Europe, the European Central bank focuses on three key interest rates for the Euro area as its way to manage inflation and the economy: the main short term lending interest rate on the main refinancing operations (MRO); the rate on the deposit facility which banks may use to make overnight deposits; the rate on the marginal lending facility, which offers overnight credit to banks. The rates are closely watched by markets as setting these rates are a prime way for a central bank to manage inflation. Commercial banks use the discount rate as a benchmark for the interest rates they charge on other financial instruments and products, including commercial and consumer loans.
Discounting
The opposite of compounding, discounting allows an investor to multiply an amount by a discount rate to compute the present or discounted value of an investment. As an example $1,000 compounded at an annual interest rate of 10% will be $1,610.51 in five years. The present value of $1,610.51 realized after five years of investment is $1,000, when discounted at an annual rate of 10%.
Dispersion
The variability around the central tendency.
Distressed debt arbitrage 
A distressed securities investment discipline that involves purchasing the traded bonds of bankrupt companies and selling the common equity short.
Distressed securities
Securities of companies that are in financial distress or near bankruptcy; the name given to various investment disciplines employing securities of companies in distress.
Distribution of principal
Return of principal to unit trust shareholders, usually when a bond in the portfolio reaches maturity, is called or, if necessary, is sold prior to maturity.
Diversification
A strategy by which an investor distributes investments among different asset classes and within each asset class among different types of instruments in order to protect the value of the overall portfolio in case of changes in market conditions or market downturn and reduce exposure to risk. For example, a diversified bond portfolio might include different types of bonds and/or bond funds with different maturities and coupons.
Divided account 
Account structure that is divided as to liability, and not as to sales. Also called “Western” account.
Diversification effect 
In reference to VAR across several portfolios (for example, across an entire firm), this effect equals the difference between the sum of the individual VARs and total VAR.
Divestiture
The sale, liquidation, or spin-off of a division or subsidiary.
Dividend discount model
A present value model of stock value that views the intrinsic value of a stock as the present value of the stock’s expected future dividends.
Dividend discount model based approach
An approach for estimating a country’s equity risk premium. The market rate of return is estimated as the sum of the dividend yield and the growth rate in dividends for a market index. Subtracting the risk-free rate of return from the estimated market return produces an estimate for the equity risk premium.
Dividend displacement of earnings
The concept that dividends paid now displace earnings in all future periods.
Dividend payout policy
The strategy a company follows with regard to the amount and timing of dividend payments.
Dividend payout ratio
The ratio of cash dividends paid to earnings for a period.
Dividend rate
The most recent quarterly dividend multiplied by four.
Dividend recapitalization 
A method by which a buyout fund can realize the value of a holding; involves the issuance of debt by the holding to finance a special dividend to owners.
Dividends per share
The dollar amount of cash dividends paid during a period per share of common stock.
Dollar bond
A bond that is quoted and traded in dollar prices rather than in terms of yield.
Dollar duration
A measure of the change in portfolio value for a 100 bps change in market yields.
Double declining balance depreciation
An accelerated depreciation method that involves depreciating the asset at double the straight-line rate. This rate is multiplied by the book value of the asset at the beginning of the period (a declining balance) to calculate depreciation expense.
Double taxation
Corporate earnings are taxed twice when paid out as dividends. First, corporate earnings are taxed regardless of whether they will be distributed as dividends or retained at the corporate level; second, dividends are taxed again at the individual shareholder level.
Double-entry accounting
The accounting system of recording transactions in which every recorded transaction affects at least two accounts so as to keep the basic accounting equation (assets = liabilities + owners’ equity) in balance.
Double-barreled bond
A bond is said to be “double-barreled” when it is secured by the pledge of two (or more) sources of payment. In some states a bond secured in the first instance by a user charge, e.g., water or sewer, may be additionally secured by ad valorem taxes if the user charges don't bring enough revenue.
Downgrade risk
Possibility that a bond’s rating will be lowered because the issuer’s financial condition, or the financial condition of a party to the financial transaction, deteriorates.
Down transition probability
The probability that an asset’s value moves down in a model of asset price dynamics.
Downside deviation 
A measure of volatility using only rate of return data points below the investor’s minimum acceptable return.
Downside risk 
Risk of loss or negative return.
Downstream
A transaction between two affiliates, an investor company and an associate company, such that the investor company records a profit on its income statement. An example is a sale of inventory by the investor company to the associate.
Drag on liquidity
When receipts lag, creating pressure from the decreased available funds.
Due diligence
Investigation and analysis in support of a recommendation; the failure to exercise due diligence may sometimes result in liability according to various securities laws.
Dummy variable
A type of qualitative variable that takes on a value of 1 if a particular condition is true and 0 if that condition is false.
DuPont analysis
An approach to decomposing return on investment (e.g., return on equity) as the product of other financial ratios.
Dual-currency bonds
Dual-currency bonds are bonds in which principal payments are in one currency and coupon payments are in another currency. This type of bond is used for foreign bonds, when an issuer issues bonds in a foreign country and makes coupon payments in that country's currency, but principal payments are made in the currency of the issuer's country of residence.
Duration
The effect that each 1% change in interest rates has on a bond's market value. Duration takes into account a bond's interest payments in measuring bond price volatility and is stated in years. As an example, a 5-year duration means that a bond will decrease in value by 5% if interest rates rise 1% and increase in value by 5% if interest rates fall 1%.
Duration risk
The duration of a bond is a measure of its price sensitivity to interest rates movements, based on the average time to maturity of its interest and principal cash flows. Duration enables investor to more easily compare bonds with different maturities and coupon rates by creating a simple rule: with every percentage change in interest rates, the bond's value will decline by its modified duration, stated as a percentage. Modified duration is the approximate percentage change in a bond's price for each 1% change in yield assuming yield changes do not change the expected cash flows. For example, an investment with a modified duration of 5 years will rise 5% in value for every 1% decline in interest rates and fall 5% in value for every 1% increase in interest rates. Bond duration measurements help quantify and measure exposure to interest rate risks. Bond portfolio managers increase average duration when they expect rates to decline, to get the most benefit, and decrease average duration when they expect rates to rise, to minimize the negative impact. The most commonly used measure of interest rate risk is duration.
Duration
A measure of an option-free bond’s average maturity. Specifically, the weighted average maturity of all future cash flows paid by a security in which the weights are the present value of these cash flows as a fraction of the bond’s price. A measure of a bond’s price sensitivity to interest rate movements.
Dutch Book theorem
A result in probability theory stating that inconsistent probabilities create profit opportunities.
Dynamic approach
With respect to strategic asset allocation, an approach that accounts for links between optimal decisions at different points in time.
Dynamic hedging
A strategy in which a position is hedged by making frequent adjustments to the quantity of the instrument used for hedging in relation to the instrument being hedged.
Dutch auction
In reference to debt securities, a type of auction when a competitive bidding process establishes the interest rate on a security (typically municipal or corporate bond). Through broker/dealers, bidders specify the number of shares and the lowest interest rate they are willing to accept for a security. The lowest bid rate which all shares can be sold at par determines the interest rate. This is the rate paid for entire issue during a given period. A Dutch auction is also used in Treasury auctions, allowing each successful competitive bidder and noncompetitive bidder to be awarded securities at the price equivalent to the highest accepted rate or yield. Differing from other types of Dutch auctions, Treasury accepts various prices, taking the highest bids first and working through progressively lower bids until an issue is completely sold
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