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Glossary

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Laddering
A technique for reducing the impact of interest-rate risk by structuring a portfolio with different bond issues that mature at different dates.
Laddering strategy
A form of active strategy which entails scheduling maturities on a systematic basis within the investment portfolio such that investments are spread out equally over the term of the ladder.
Lagging economic indicators
Economic indicators of recent past economic activity.
Lagging indicators 
A set of economic variables whose values reach peaks and troughs after the aggregate economy.
Law of one price
The condition in a financial market in which two equivalent financial instruments or combinations of financial instruments can sell for only one price. Equivalent to the principle that no arbitrage opportunities are possible.
Leading dividend yield
Forecasted dividends per share over the next year divided by current stock price.
Leading economic indicator
A variable that varies with the business cycle but at a fairly consistent time interval before a turn in the business cycle.
Leading indicators
A set of economic variables whose values reach peaks and troughs in advance of the aggregate economy.
Leading P/E
A stock’s current price divided by the next year’s expected earnings. Synonyms: forward P/E prospective P/E
Legal and regulatory factors 
External factors imposed by governmental, regulatory, or oversight authorities that constrain investment decision making.
Legal risk
The risk that failures by company managers to effectively manage a company’s environmental, social, and governance risk exposures will lead to lawsuits and other judicial remedies, resulting in potentially catastrophic losses for the company; the risk that the legal system will not enforce a contract in case of dispute or fraud.
Legal opinion
An opinion concerning the validity of a securities issue with respect to statutory authority, constitutionality, procedural conformity and usually the exemption of interest from federal income taxes if this relates to a municipal bond issue. The legal opinion is usually rendered by a law firm recognized as specializing in public borrowings, often referred to as "bond counsel."
Legislative and regulatory risk
The risk that governmental laws and regulations directly or indirectly affecting a company’s operations will change with potentially severe adverse effects on the company’s continued profitability and even its long-term sustainability.
Leptokurtic
Describes a distribution that is more peaked than a normal distribution.
Lessee
The party obtaining the use of an asset through a lease.
Lessor
The owner of an asset that grants the right to use the asset to another party.
Level of significance
The probability of a Type I error in testing a hypothesis.
Leverage
In the context of corporate finance, leverage refers to the use of fixed costs within a company’s cost structure. Fixed costs that are operating costs (such as depreciation or rent) create operating leverage. Fixed costs that are financial costs (such as interest expense) create financial leverage.
Leverage-adjusted duration gap
A leverage-adjusted measure of the difference between the durations of assets and liabilities, which measures a bank’s overall interest rate exposure.
Leveraged buyout
A transaction whereby the target company management team converts the target to a privately held company by using heavy borrowing to finance the purchase of the target company’s outstanding shares. Synonyms: LBO
Leveraged floating-rate note
A floating-rate note or bond in which the coupon is adjusted at a multiple of a benchmark interest rate. Synonyms: leveraged floater
Leveraged recapitalization
A post-offer takeover defense mechanism that involves the assumption of a large amount of debt that is then used to finance share repurchases; the effect is to dramatically change the company’s capital structure while attempting to deliver a value to target shareholders in excess of a hostile bid.
Letter of credit (LOC)
A commitment, usually issued by a bank, used to guarantee the payment of principal and interest on debt issues. The LOC is drawn if the issuer is unable to make the principal and/or interest payments on a timely basis.
Level debt service
A debt service schedule where total annual principal plus interest is approximately the same throughout the life of the bond. This entails a maturity schedule with increasing principal amounts each year.
Level principal
A debt service schedule where total annual principal plus interest declines throughout the life of the bond. This entails a maturity schedule with the same amount of principal maturing each year, with a resulting smaller interest component each year. This is also called declining debt service.
Leverage
The use of borrowed money to increase investing power.
Liabilities
Present obligations of an enterprise arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits; creditors’ claims on the resources of a company.
Life annuity
An annuity that guarantees a monthly income to the annuitant for life.
LIFO layer liquidation
With respect to the application of the LIFO inventory method, the liquidation of old, relatively low-priced inventory; happens when the volume of sales rises above the volume of recent purchases so that some sales are made from relatively old, low-priced inventory. Synonyms: LIFO liquidation
LIFO method
The last in, first out method of accounting for inventory, which matches sales against the costs of items of inventory in the reverse order the items were placed in inventory (i.e., inventory produced or acquired last are assumed to be sold first).
LIFO reserve
The difference between inventory reported as FIFO and inventory reported as LIFO (FIFO inventory value less LIFO inventory value).
Likelihood
The probability of an observation, given a particular set of conditions.
Limit down
A limit move in the futures market in which the price at which a transaction would be made is at or below the lower limit.
Limit move
A condition in the futures markets in which the price at which a transaction would be made is at or beyond the price limits.
Limit order
An instruction to execute an order when the best price available is at least as good as the limit price specified in the order.
Limit up
A limit move in the futures mark
LIBOR (London Interbank Offered Rate)
The interest rate banks charge each other for short-term Eurodollar loans. LIBOR is frequently used as the base for resetting rates on floating-rate securities.
Limited partnership
An entity formed under state legislation that enables large numbers of investors to become limited partners of a partnership, owning an economic interest in the entity’s assets, but sharing in its liabilities only to the extent of their initial investment.
Limited tax bond
A bond secured by a pledge of a tax or category of taxes limited as to rate or amount.
Limited-liability company
A special-purpose company incorporated under special limited-liability company legislation enacted in many states and foreign countries. This type of entity is structured as a "pass-through" and treated like a partnership for tax purposes.
Line of credit
A commitment by a bank to provide funds to a borrower, if certain conditions have been met, or if certain conditions do not exist.
Linear association
A straight-line relationship, as opposed to a relationship that cannot be graphed as a straight line.
Linear interpolation
The estimation of an unknown value on the basis of two known values that bracket it, using a straight line between the two known values.
Linear programming
Optimization in which the objective function and constraints are linear.
Linear regression
Regression that models the straight-line relationship between the dependent and independent variable(s).
Linear trend
A trend in which the dependent variable changes at a constant rate with time.
Liquidation
To sell the assets of a company, division, or subsidiary piecemeal, typically because of bankruptcy; the form of bankruptcy that allows for the orderly satisfaction of creditors’ claims after which the company ceases to exist.
Liquidation value
The value of a company if the company were dissolved and its assets sold individually.
Liquidity
A company’s ability to satisfy its short-term obligations using assets that are most readily converted into cash; the ability to trade a futures contract, either selling a previously purchased contract or purchasing a previously sold contract. The ability to trade without delay at relatively low cost and in relatively large quantities.
Liquidity
The ability to trade without delay at relatively low cost and in relatively large quantities.
Liquidity discount
A reduction or discount to value that reflects the lack of depth of trading or liquidity in that asset’s market.
Liquidity event 
An event giving rise to a need for cash.
Liquidity premium
An extra return that compensates investors for the risk of loss relative to an investment’s fair value if the investment needs to be converted to cash quickly.
Liquidity ratios
Financial ratios measuring the company’s ability to meet its short-term obligations.
Liquidity requirement 
A need for cash in excess of new contributions (for pension plans and endowments, for example) or savings (for individuals) at a specified point in time.
Liquidity risk
The risk that a financial instrument cannot be purchased or sold without a significant concession in price due to the size of the market.
Liquidity-motivated traders
Traders that are motivated to trade based upon reasons other than an information advantage. For example, to release cash proceeds to facilitate the purchase of another security, adjust market exposure, or fund cash needs.
Local currency
The currency of the country where a company is located.
Lockbox system
A payment system in which customer payments are mailed to a post office box and the banking institution retrieves and deposits these payments several times a day, enabling the company to have use of the fund sooner than in a centralized system in which customer payments are sent to the company.
Locked limit
A condition in the futures markets in which a transaction cannot take place because the price would be beyond the limits.
Locked up
Said of investments that cannot be traded at all for some time.
Liquidation value
The amount a securities holder may receive in case of a liquidation of the issuer.
Liquidity (or marketability)
A measure of the relative ease and speed with which a security can be purchased or sold in the secondary market.
Liquidity ID
Liquidity Identity Card
Living Wills
Resolution Plans
Lockout
The period of time before a CMO investor will begin receiving principal payments.
Lock-up period
A minimum initial holding period for investments during which no part of the investment can be withdrawn.
Logical participation strategies
Protocols for breaking up an order for execution over time. Typically used by institutional traders to participate in overall market volumes without being unduly visible.
Logit model
A qualitative-dependent-variable multiple regression model based on the logistic probability distribution.
Log-linear model
With reference to time-series models, a model in which the growth rate of the time series as a function of time is constant.
Log-log regression model
A regression that expresses the dependent and independent variables as natural logarithms.
London Interbank Offer Rate
The Eurodollar rate at which London banks lend dollars to other London banks; considered to be the best representative rate on a dollar borrowed by a private, high-quality borrower. Synonyms: LIBOR
Long
The buyer of a derivative contract. Also refers to the position of owning a derivative.
Longevity risk 
The risk of outliving one’s financial resources.
Longitudinal data
Observations on characteristic(s) of the same observational unit through time.
Long-lived assets
Assets that are expected to provide economic benefits over a future period of time, typically greater than one year. Synonyms: long-term assets
Long
Securities that are owned by a dealer or investor.
Long-term contract
A contract that spans a number of accounting periods.
Long-term debt-to-assets ratio
The proportion of a company’s assets that is financed with long-term debt.
Long-term equity anticipatory securities
Options originally created with expirations of several years. Synonyms: LEAPS
Long-term liability
An obligation that is expected to be settled, with the outflow of resources embodying economic benefits, over a future period generally greater than one year.
Look-ahead bias
A bias caused by using information that was unavailable on the test date.
Losses
Asset outflows not directly related to the ordinary activities of the business.
Low P/E
A value investment substyle that focuses on shares selling at low prices relative to current or normal earnings.
Lower bound
The lowest possible value of an option.
Long-term debt
Debt which matures in more than one year.
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