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Glossary

F

Face (or par value or principal value)
The principal amount of a security that appears on the face of the instrument.
Face value
The par value of a security, as distinct from its market value.
Factor
A decimal value reflecting the proportion of the outstanding principal balance of a mortgage security, which changes over time, in relation to its original principal value.
Face value
The amount of cash payable by a company to the bondholders when the bonds mature; the promised payment at maturity separate from any coupon payment.
Factor
A common or underlying element with which several variables are correlated.
Factor covariance matrix 
The covariance matrix of factors.
Factor push
A simple stress test that involves pushing prices and risk factors of an underlying model in the most disadvantageous way to estimate the impact of factor extremes on the portfolio’s value.
Factor risk premium
The expected return in excess of the risk-free rate for a portfolio with a sensitivity of 1 to one factor and a sensitivity of 0 to all other factors.
Factor sensitivity
A measure of the response of return to each unit of increase in a factor, holding all other factors constant.
Factor-model-based benchmark 
A benchmark that is created by relating one or more systematic sources of returns (factors or exposures) to returns of the benchmark.
Fair market value
The market price of an asset or liability that trades regularly.
Fair value
The amount at which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s-length transaction; the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.
Fallen angel
A corporate bond which when issued was investment-grade rated by credit rating agencies such as Standard & Poor's or Moody's but is now downgraded due to a deteriorated financial situation.
Family offices
Entities, typically organized and owned by a family for its benefit, that assume responsibility for services such as financial planning, estate planning, and asset management.
FASB
Financial Accounting Standards Board
FCAG
Financial Crisis Advisory Group
FCD
Financial Conglomerates Directive
FCM
Future Commissions Merchant
FDIA
Federal Deposit Insurance Act
Federal funds rate
The interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight. The target federal funds rate is set by the Federal Reserve Board's Federal Open Market Committee and is a principal tool of monetary policy. For more information, see www.federalreserve.gov.
Federal Reserve commercial paper composite
Calculated each day by the Federal Reserve Bank of New York by averaging the rate at which the five major commercial paper dealers offer "AA" industrial Commercial Paper for various maturities. Most CP-based floating-rate notes are reset according to the 30- and 90-day CP composites.
Fee cap
A limit on the total fee paid regardless of performance.
Fiduciary
A person or entity standing in a special relation of trust and responsibility with respect to other parties.
Fiduciary call
A combination of a European call and a risk-free bond that matures on the option expiration day and has a face value equal to the exercise price of the call.
FHLB
Federal Home Loan Bank
Final maturity date
The date on which the principal must be paid to investors, which is later than the expected maturity date. Also called legal maturity date.
Financial advisor
A consultant to an issuer of municipal securities who provides the issuer with advice with respect to the structure, timing, terms or other similar matters concerning a new issue of securities.
FIFO method
The first in, first out method of accounting for inventory, which matches sales against the costs of items of inventory in the order in which they were placed in inventory.
Finance lease
Essentially, the purchase of some asset by the buyer (lessee) that is directly financed by the seller (lessor). Synonyms: capital lease
Financial analysis
The process of selecting, evaluating, and interpreting financial data in order to formulate an assessment of a company’s present and future financial condition and performance.
Financial capital 
An individual investor’s investable wealth; total wealth minus human capital. Consists of assets that can be traded, such as cash, stocks, bonds, and real estate.
Financial distress
Heightened uncertainty regarding a company’s ability to meet its various obligations because of lower or negative earnings.
Financial and operations principal
A municipal securities employee who is required to meet qualifications standards established by the MSRB. The individual is the person designated to be in charge of the preparation and filing of financial reports to the SEC and other regulatory bodies.
Financial equilibrium models  
Models describing relationships between expected return and risk in which supply and demand are in balance.
Financial flexibility
The ability to react and adapt to financial adversities and opportunities.
Financial futures
Futures contracts in which the underlying is a stock, bond, or currency.
Financial leverage
The extent to which a company can effect, through the use of debt, a proportional change in the return on common equity that is greater than a given proportional change in operating income; also, short for the financial leverage ratio.
Financial leverage ratio
A measure of financial leverage calculated as average total assets divided by average total equity.
Financial reporting quality
The accuracy with which a company’s reported financials reflect its operating performance and their usefulness for forecasting future cash flows.
Financial risk
The risk that environmental, social, or governance risk factors will result in significant costs or other losses to a company and its shareholders; the risk arising from a company’s obligation to meet required payments under its financing agreements.
Financing activities
Activities related to obtaining or repaying capital to be used in the business (e.g., equity and long-term debt).
FINRA
Created in July 2007 through the consolidation of NASD and the member regulation, enforcement and arbitration functions of the New York Stock Exchange, FINRA is the largest non-governmental regulator for all securities firms doing business in the United States.
FINREP
Rules for Financial Reporting from IAS/IFRS
FIO
Federal Insurance Office
FIRA
Financial Institutions Regulatory Administration
Firm
Free option to buy securities for a stated time at a stated price.
First-differencing
A transformation that subtracts the value of the time series in period t - 1 from its value in period t.
First-order serial correlation
Correlation between adjacent observations in a time series.
Fiscal policy G
overnment activity concerning taxation and governmental spending.
Fixed annuity
A type of life annuity in which periodic payments are fixed in amount.
Fixed asset turnover
An activity ratio calculated as total revenue divided by average net fixed assets.
Fixed charge coverage
A solvency ratio measuring the number of times interest and lease payments are covered by operating income, calculated as (EBIT + lease payments) divided by (interest payments + lease payments).
Fixed costs
Costs that remain at the same level regardless of a company’s level of production and sales.
Fixed rate perpetual preferred stock
Nonconvertible, noncallable preferred stock that has a fixed dividend rate and no maturity date.
Fixed-income forward
A forward contract in which the underlying is a bond.
Fixed-rate payer
The party to an interest rate swap that is obligated to make periodic payments at a fixed rate.
Flip-in pill
A poison pill takeover defense that dilutes an acquirer’s ownership in a target by giving other existing target company shareholders the right to buy additional target company shares at a discount.
Flip-over pill
A poison pill takeover defense that gives target company shareholders the right to purchase shares of the acquirer at a significant discount to the market price, which has the effect of causing dilution to all existing acquiring company shareholders.
Fixed-rate bond
A long-term bond with a set interest rate to maturity.
Fixed-rate mortgage
A mortgage featuring level monthly payments, determined at the outset, which remain constant over the life of the mortgage.
Float
In the context of customer receipts, the amount of money that is in transit between payments made by customers and the funds that are usable by the company.
Float factor
An estimate of the average number of days it takes deposited checks to clear; average daily float divided by average daily deposit.
Flotation cost
Fees charged to companies by investment bankers and other costs associated with raising new capital.
Focus
The competitive strategy of seeking a competitive advantage within a target segment or segments of the industry, either on the basis of cost leadership (cost focus) or differentiation (differentiation focus).
Foreign currency transactions
Transactions that are denominated in a currency other than a company’s functional currency.
Formal tools
Established research methods amenable to precise definition and independent replication of results.
Forward contract
An agreement between two parties in which one party, the buyer, agrees to buy from the other party, the seller, an underlying asset at a later date for a price established at the start of the contract.
Forward curve
The set of forward or futures prices with different expiration dates on a given date for a given asset.
Forward discount
The forward rate less the spot rate divided by the spot rate; called the forward discount if negative, and forward premium if positive. Synonyms: forward premium
Forward hedging
Hedging that involves the use of a forward contract between the foreign asset’s currency and the home currency.
Forward integration
A merger involving the purchase of a target that is farther along the value or production chain; for example, to acquire a distributor.
Forward price
The fixed price or rate at which the transaction scheduled to occur at the expiration of a forward contract will take place. This price is agreed on at the initiation date of the contract. Synonyms: forward rate
Floating supply of shares
The number of shares outstanding that are actually available to investors.
Floating-rate loan
A loan in which the interest rate is reset at least once after the starting date.
Floating-rate payer
The party to an interest rate swap that is obligated to make periodic payments based on a benchmark floating rate.
Floor
A combination of interest rate put options designed to hedge a lender against lower rates on a floating-rate loan.
Floor broker
An agent of the broker who, for certain exchanges, physically represents the trade on the exchange floor.
Floor traders
Market makers that buy and sell by quoting a bid and an ask price. They are the primary providers of liquidity to the market.
Floored swap
A swap in which the floating payments have a lower limit.
Floorlet
Each component put option in a floor.
Floating-rate bond (or variable rate bond or adjustable rate bond)
A bond whose interest rate is adjusted periodically according to a predetermined formula; it is usually linked to an interest rate index such as LIBOR.
Floating-rate CMO
A CMO tranche which pays an adjustable rate of interest tied to a representative interest rate index such as the London Interbank Offered Rate (LIBOR), the Constant Maturity Treasury (CMT), or the Cost of Funds Index (COFI).
Floor
The lower limit for the interest rate on a floating-rate bond.
Flow of funds
Refers to the structure which is established in the bond resolution or the trust documents which sets forth the order in which funds generated by the enterprise will be allocated to various purposes.
Forward cap
An agreement to enter into a cap at some date in the future.
Forward floor
An agreement to enter into a floor at some date in the future.
Forward swap
An agreement to enter into a swap at some date in the future.
Forward rate agreement
A forward contract calling for one party to make a fixed interest payment and the other to make an interest payment at a rate to be determined at the contract expiration. Synonyms: FRA
Forward strip
Another name for the forward curve.
Forward swap
A forward contract to enter into a swap.
Foundations
Typically, grant-making institutions funded by gifts and investment assets.
Fourth market
A term occasionally used for direct trading of securities between institutional investors; the fourth market would include trading on electronic crossing networks.
Free cash flow
The actual cash that would be available to the company’s investors after making all investments necessary to maintain the company as an ongoing enterprise (also referred to as free cash flow to the firm); the internally generated funds that can be distributed to the company’s investors (e.g., shareholders and bondholders) without impairing the value of the company.
Free cash flow hypothesis
The hypothesis that higher debt levels discipline managers by forcing them to make fixed debt service payments and by reducing the company’s free cash flow.
Free cash flow to equity
The cash flow available to a company’s common shareholders after all operating expenses, interest, and principal payments have been made and necessary investments in working and fixed capital have been made.
Free cash flow to equity model
A model of stock valuation that views a stock’s intrinsic value as the present value of expected future free cash flows to equity.
Free cash flow to the firm
The cash flow available to the company’s suppliers of capital after all operating expenses have been paid and necessary investments in working capital and fixed capital have been made.
Free cash flow to the firm model
A model of stock valuation that views the value of a firm as the present value of expected future free cash flows to the firm.
Frequency distribution
A tabular display of data summarized into a relatively small number of intervals.
Frequency polygon
A graph of a frequency distribution obtained by drawing straight lines joining successive points representing the class frequencies.
Friendly transaction
A potential business combination that is endorsed by the managers of both companies.
Front office
The revenue generating functions at an investment firm, such as those pertaining to trading and sales.
Front-run
To trade ahead of the initiator, exploiting privileged information about the initiator’s trading intentions.
Full price
The price of a security with accrued interest.
Full replication
When every issue in an index is represented in the portfolio, and each portfolio position has approximately the same weight in the fund as in the index.
Fully funded plan
A pension plan in which the ratio of the value of plan assets to the present value of plan liabilities is 100 percent or greater.
FSA
UK Financial Supervisory Authority
FSB
Financial Stability Board (Financial Stability Forum)
FSOC/Council
Financial Services Oversight Council
FTC
Federal Trade Commission
Fully registered
A security that is registered as to principal and interest, payment of which is made only to or on the order of the registered owner.
Functional currency
The currency of the primary economic environment in which an entity operates.
Functional duration
The key rate duration. Synonyms: multifunctional duration
Fund of funds
A fund that invests in a number of underlying funds.
Fundamental beta
A beta that is based at least in part on fundamental data for a company.
Fundamental factor models
A multifactor model in which the factors are attributes of stocks or companies that are important in explaining cross-sectional differences in stock prices.
Fundamental law of active management
The relation that the information ratio of a portfolio manager is approximately equal to the information coefficient multiplied by the square root of the investment discipline’s breadth (the number of independent, active investment decisions made each year).
Fundamentals
Economic characteristics of a business, such as profitability, financial strength, and risk.
Funded status 
The relationship between the value of a plan’s assets and the present value of its liabilities.
Funding ratio 
A measure of the relative size of pension assets compared to the present value of pension liabilities. Calculated by dividing the value of pension assets by the present value of pension liabilities. Also referred to as the funded ratio or funded status.
Funding risk 
The risk that liabilities funding long asset positions cannot be rolled over at reasonable cost.
Future value
The amount to which a payment or series of payments will grow by a stated future date.
Future value
The value of an asset at a specified date in the future, calculated using a specified rate of return.
Futures
Financial futures are a contract agreeing to buy or sell a specified amount of an underlying financial instrument at a specific price on a specific day in the future. The price is agreed to at the time of the contract. Financial futures are usually of three main types: interest rate futures; stock index futures or currency futures. Because futures are complicated and risky, with the potential for losses not limited to your original investment, futures products are not suitable for many individual investors.
Futures commission merchants
Individuals or companies that execute futures transactions for other parties off the exchange.
Futures Contract
A variation of a forward contract that has essentially the same basic definition but with some additional features—such as a clearinghouse guarantee against credit losses, a daily settlement of gains and losses, and an organized electronic or floor trading facility.
Futures exchange
A legal corporate entity whose shareholders are its members. The members of the exchange have the privilege of executing transactions directly on the exchange.
Futures price
The price at which the parties to a futures contract agree to exchange the underlying.
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