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Glossary

P

P&I (principal and interest)
The term used to refer to regularly scheduled payments or prepayments of principal and of interest on mortgage securities.
PAC (planned amortization class) tranche
A CMO tranche that uses a mechanism similar to a sinking fund to determine a fixed principal payment schedule that will apply over a range of prepayment assumptions. The effect of the prepayment variability that is removed from a PAC bond is transferred to a companion tranche.
Paired comparisons test
A statistical test for differences based on paired observations drawn from samples that are dependent on each other.
Paired observations
Observations that are dependent on each other.
Pairs arbitrage
A trade in two closely related stocks that involves buying the relatively undervalued stock and selling short the relatively overvalued stock.
Pairs arbitrage trade
A trade in two closely related stocks involving the short sale of one and the purchase of the other.
Panel data
Observations through time on a single characteristic of multiple observational units.
Panel method 
A method of capital market expectations setting that involves using the viewpoints of a panel of experts.
Parameter
A descriptive measure computed from or used to describe a population of data, conventionally represented by Greek letters.
Parameter instability
The problem or issue of population regression parameters that have changed over time.
Parametric test
Any test (or procedure) concerned with parameters or whose validity depends on assumptions concerning the population generating the sample.
Partial correlation 
In multivariate problems, the correlation between two variables after controlling for the effects of the other variables in the system.
Par
Price equal to the face amount of a security; 100%.
Par amount
The principal amount of a bond or note due at maturity. Also known as par value.
Parity debt
Securities issued or to be issued with equal and ratable claim on the same underlying security and source of payment for debt service. 
Partial fill 
Execution of a purchase or sale for fewer shares than was stipulated in the order.
Partial regression coefficients
The slope coefficients in a multiple regression. Synonyms: partial slope coefficients
Participate order 
A variant of the market-not-held order. The broker is deliberately low-key and waits for and responds to the initiatives of more active traders. Synonyms: do not initiate order
Partnership
A business owned and operated by more than one individual.
Passive investment approach 
An approach to portfolio construction in which portfolio composition does not react to changes in capital market expectations; includes indexing and buy-and-hold investing.
Passive management 
A buy-and-hold approach to investing in which an investor does not make portfolio changes based upon short-term expectations of changing market or security performance. Passive strategy
In reference to short-term cash management, it is an investment strategy characterized by simple decision rules for making daily investments.
Passive traders 
Traders that seek liquidity in their rebalancing transactions but are much more concerned with the cost of trading.
Payables turnover 
An activity ratio calculated as purchases divided by average trade payables.
Payer swaption
A swaption that allows the holder to enter into a swap as the fixed-rate payer and floating-rate receiver.
Participation
Principal amount of bonds to be underwritten by each syndicate member.
Party
One of two entities, in a traditional interest rate swap. In the municipal market a counterparty and a party can be a state or local government, a broker dealer, or a corporation.
Paying agent
The entity, usually a designated bank or the office of the treasurer of the issuer that pays the principal and interest of a bond.
Payment date
The date that actual principal and interest payments are paid to the record owner of a security.
Payment date
The day that the company actually mails out (or electronically transfers) a dividend payment.
Payment netting
A means of settling payments in which the amount owed by the first party to the second is netted with the amount owed by the second party to the first; only the net difference is paid.
Payoff
The value of an option at expiration.
Payout ratio
The percentage of total earnings paid out in dividends in any given year (in per-share terms, DPS/EPS).
Pecking order theory
The theory that managers take into account how their actions might be interpreted by outsiders and thus order their preferences for various forms of corporate financing. Forms of financing that are least visible to outsiders (e.g., internally generated funds) are most preferable to managers and those that are most visible (e.g., equity) are least preferable.
PEG
The P/E-to-growth ratio, calculated as the stock’s P/E divided by the expected earnings growth rate.
Pension surplus 
Pension assets at market value minus the present value of pension liabilities.
Per unit contribution margin
The amount that each unit sold contributes to covering fixed costs—that is, the difference between the price per unit and the variable cost per unit.
Percentage-of-completion
A method of revenue recognition in which, in each accounting period, the company estimates what percentage of the contract is complete and then reports that percentage of the total contract revenue in its income statement.
Percentage-of-portfolio rebalancing
Rebalancing is triggered based on set thresholds stated as a percentage of the portfolio’s value.
PBC
People’s Bank of China
PCAOB
Public Company Accounting Oversight Board
PE
Private Equity
PEPs
Politically Exposed Persons
Percentage-of-volume strategy
A logical participation strategy in which trading takes place in proportion to overall market volume (typically at a rate of 5–20 percent) until the order is completed.
Percentiles
Quantiles that divide a distribution into 100 equal parts.
Perfect collinearity
The existence of an exact linear relation between two or more independent variables or combinations of independent variables.
Perfect markets
Markets without any frictional costs.
Performance appraisal
The evaluation of risk-adjusted performance; the evaluation of investment skill.
Performance attribution 
A comparison of an account’s performance with that of a designated benchmark and the identification and quantification of sources of differential returns.
Performance evaluation 
The measurement and assessment of the outcomes of investment management decisions.
Performance guarantee
A guarantee from the clearinghouse that if one party makes money on a transaction, the clearinghouse ensures it will be paid.
Performance measurement
The calculation of returns in a logical and consistent manner.
Performance netting risk 
For entities that fund more than one strategy and have asymmetric incentive fee arrangements with the portfolio managers, the potential for loss in cases where the net performance of the group of managers generates insufficient fee revenue to fully cover contractual payout obligations to all portfolio managers with positive performance.
Performance
An investment’s return (usually total return), compared to a benchmark that is comparable to the risk level or investment objectives of the investment.
Performance-based fee 
Fees specified by a combination of a base fee plus an incentive fee for performance in excess of a benchmark’s.
Period costs
Costs (e.g., executives’ salaries) that cannot be directly matched with the timing of revenues and which are thus expensed immediately.
Periodic auction markets
Auction markets where multilateral trading occurs at a single price at a prespecified point in time.
Periodic rate
The quoted interest rate per period; the stated annual interest rate divided by the number of compounding periods per year.
Permanent differences
Differences between tax and financial reporting of revenue (expenses) that will not be reversed at some future date. These result in a difference between the company’s effective tax rate and statutory tax rate and do not result in a deferred tax item.
Permanent income hypothesis
The hypothesis that consumers’ spending behavior is largely determined by their long-run income expectations.
Permutation
An ordered listing.
Perpetuity
A perpetual annuity, or a set of never-ending level sequential cash flows, with the first cash flow occurring one period from now.
Personality typing 
The determination of an investor’s personality type.
Pet projects
Projects in which influential managers want the corporation to invest. Often, unfortunately, pet projects are selected without undergoing normal capital budgeting analysis.
Perpetual floating-rate note
A floating-rate note with no stated maturity date.
Plain vanilla swap
An interest rate swap in which one party pays a fixed rate and the other pays a floating rate, with both sets of payments in the same currency.
Plan sponsor 
An enterprise or organization—such as a business, labor union, municipal or state government, or not-for-profit organization—that sets up a pension plan.
Platykurtic
Describes a distribution that is less peaked than the normal distribution.
Pledging requirement 
With respect to banks, a required collateral use of assets.
Point estimate
A single numerical estimate of an unknown quantity, such as a population parameter.
Point of sale
Systems that capture transaction data at the physical location in which the sale is made.
Poison pill
A pre-offer takeover defense mechanism that makes it prohibitively costly for an acquirer to take control of a target without the prior approval of the target’s board of directors. Related Terms: Dead-hand provision
Poison puts
A pre-offer takeover defense mechanism that gives target company bondholders the right to sell their bonds back to the target at a prespecified redemption price, typically at or above par value; this defense increases the need for cash and raises the cost of the acquisition.
Policy portfolio
The portfolio resulting from strategic asset allocation considered as a process. Synonyms: strategic asset allocation
Policyholder reserves 
With respect to an insurance company, an amount representing the estimated payments to policyholders (as determined by actuaries) based on the types and terms of the various insurance policies issued by the company.
Plain-vanilla CMO
Or "sequential-pay CMO." The most basic type of CMO. All tranches receive regular interest payments, but principal payments are directed initially only to the first tranche until it is completely retired. Once the first tranche is retired, the principal payments are applied to the second tranche until it is fully retired, and so on. 
PO (principal-only) security
A tranche or security that pays investors principal only and not interest. PO securities are priced at a deep discount from their face value.
Point
Shorthand reference to 1%. In the context of a “bond,” a “point” means $10, since a “bond” with this reference means $1,000 (no matter what the actual denominations of the bonds of the issue). An issue or a security that is “discounted two points” is quoted at 98% of its par value.
Political risk
The risk of war, government collapse, political instability, expropriation, confiscation, or adverse changes in taxation. Synonyms: geopolitical risk
Pooled estimate
An estimate of a parameter that involves combining (pooling) observations from two or more samples.
Pooling of interests accounting method
A method of accounting in which combined companies were portrayed as if they had always operated as a single economic entity. Called pooling of interests under U.S. GAAP and uniting of interests under IFRS. (No longer allowed under U.S. GAAP or IFRS.)
Population
All members of a specified group.
Population mean
The arithmetic mean value of a population; the arithmetic mean of all the observations or values in the population.
Population standard deviation
A measure of dispersion relating to a population in the same unit of measurement as the observations, calculated as the positive square root of the population variance.
Population variance
A measure of dispersion relating to a population, calculated as the mean of the squared deviations around the population mean.
Portable
Moveable. With reference to a pension plan, one in which a plan participant can move his or her share of plan assets to a new plan, subject to certain rules, vesting schedules, and possible tax penalties and payments.
Portable alpha
A strategy involving the combining of multiple positions (e.g., long and short positions) so as to separate the alpha (unsystematic risk) from beta (systematic risk) in an investment.
Portfolio implementation problem
The part of the execution step of the portfolio management process that involves the implementation of portfolio decisions by trading desks.
Pool
A collection of mortgage loans assembled by an originator or master servicer as the basis for a security. In the case of Ginnie Mae, Fannie Mae, or Freddie Mac mortgage pass-through securities, pools are identified by a number assigned by the issuing agency.
Portfolio
The group of investments that an individual or institutional investor holds. 
Portfolio management process
An integrated set of steps undertaken in a consistent manner to create and maintain an appropriate portfolio (combination of assets) to meet clients’ stated goals.
Portfolio optimization
The combining of assets to efficiently achieve a set of return and risk objectives.
Portfolio performance attribution
The analysis of portfolio performance in terms of the contributions from various sources of risk.
Portfolio possibilities curve
A graphical representation of the expected return and risk of all portfolios that can be formed using two assets.
Portfolio segmentation 
The creation of subportfolios according to the product mix for individual segments or lines of business.
Portfolio selection composition problem
The part of the execution step of the portfolio management process in which investment strategies are integrated with expectations to select a portfolio of assets.
Portfolio trade
A trade in which a number of securities are traded as a single unit. Synonyms: program trade basket trade
Position a trade
To take the other side of a trade, acting as a principal with capital at risk.
Position trader
A trader who typically holds positions open overnight.
Positive active position 
An active position for which the account’s allocation to a security is greater than the corresponding weight of the same security in the benchmark.
Positive serial correlation
Serial correlation in which a positive error for one observation increases the chance of a positive error for another observation, and a negative error for one observation increases the chance of a negative error for another observation.
Posterior probability
An updated probability that reflects or comes after new information.
Post-trade transparency 
Degree to which completed trades are quickly and accurately reported to the public.
Potential credit risk
The risk associated with the possibility that a payment due at a later date will not be made.
Potential output 
The value of GDP if the economy were on its trend growth path.
Power of a test
The probability of correctly rejecting the null—that is, rejecting the null hypothesis when it is false.
Precautionary stocks
A level of inventory beyond anticipated needs that provides a cushion in the event that it takes longer to replenish inventory than expected or in the case of greater than expected demand.
Preferred return 
With respect to the compensation of private equity fund managers, a hurdle rate.
Pre-investing
The strategy of using futures contracts to enter the market without an immediate outlay of cash.
Prepackaged bankruptcy
A bankruptcy in which the debtor seeks agreement from creditors on the terms of a reorganization before the reorganization filing.
PRB
Prudential Regulation Board
PRC
Prudential Regulation Committee
Preferred stock
An equity security that is junior to the issuing entity’s debt obligations but senior to common stock in the payment of dividends and the liquidation of assets. The dividend can be fixed or floating and is usually stated as a percentage of par value. Preferred stock usually has no voting rights and frequently has a mandatory or optional redemption provision.
Preliminary official statement
The offering document for municipal securities, in preliminary form, which does not contain pricing information. It is also called a POS, or a red herring.
Premium
The amount by which the price of a security exceeds its principal amount.
Premium bond
Bonds priced greater than par.
Premium or discount price
When the dollar price of a bond is above its face value, it is said to be selling at a premium. When the dollar price is below face value, it is said to be selling at a discount.
Prepaid expense
A normal operating expense that has been paid in advance of when it is due.
Prepaid swap
A contract calling for payment today and delivery of the asset or commodity at multiple specified times in the future.
Present value
The present discounted value of future cash flows: For assets, the present discounted value of the future net cash inflows that the asset is expected to generate; for liabilities, the present discounted value of the future net cash outflows that are expected to be required to settle the liabilities. Synonyms: PV
Present value model
A model of intrinsic value that views the value of an asset as the present value of the asset’s expected future cash flows. Synonyms: discounted cash flow model
Present value of a basis point
The change in the bond price for a 1 basis point change in yield. Also called basis point value (BPV). Synonyms: price value of a basis point PVBP
Present value of growth opportunities
The difference between the actual value per share and the no-growth value per share. Synonyms: value of growth
Presentation currency
The currency in which financial statement amounts are presented.
Pretax margin
A profitability ratio calculated as earnings before taxes divided by revenue.
Pretrade transparency
Ability of individuals to quickly, easily, and inexpensively obtain accurate information about quotes and trades.
Prepayment
The unscheduled partial or complete repayment of the principal amount outstanding on a loan, such as a mortgage, before it is due.
Prepayment provision
Provision specifying that, and at what time and on what terms, repayment of the principal amount may be made by the issuer prior to the stated maturity. Includes “call,” but “prepayment” usually connotes less formal procedures than a call.
Prepayment risk
The risk that principal repayment will occur earlier than scheduled, forcing the investor to receive principal sooner than anticipated and reinvested at lower prevailing rates. The measurement of prepayment risk is a key consideration for investors in mortgage- and asset-backed securities.
Present value
The current value of a future payment or stream of payments, given a specified interest rate; also referred to as a discount rate.
Price
The dollar amount to be paid for a security, which may also be stated as a percentage of its face value or par in the case of debt securities. Bond prices are best reflected in their yields, which vary inversely with the dollar price. The price you pay for a bond is based on a host of variables, including interest rates, supply and demand, credit quality, maturity and call features, tax status, state of issuance, market events and the size of the transaction.
Price discovery
A feature of futures markets in which futures prices provide valuable information about the price of the underlying asset.
Price improvement
Execution at a price that is better than the price quoted at the time of order placement.
Price limits
Limits imposed by a futures exchange on the price change that can occur from one day to the next.
Price momentum
A valuation indicator based on past price movement.
Price multiple
The ratio of a stock’s market price to some measure of value per share.
Price relative
A ratio of an ending price over a beginning price; it is equal to 1 plus the holding period return on the asset.
Price to book value
A valuation ratio calculated as price per share divided by book value per share.
Price to cash flow
A valuation ratio calculated as price per share divided by cash flow per share.
Price to sales
A valuation ratio calculated as price per share divided by sales per share.
Price uncertainty
Uncertainty about the price at which an order will execute.
Price weighted
With respect to index construction, an index in which each security in the index is weighted according to its absolute share price.
Priced risk
Risk for which investors demand compensation for bearing (e.g. equity risk, company-specific factors, macroeconomic factors).
Price-setting option
The operational flexibility to adjust prices when demand varies from forecast. For example, when demand exceeds capacity, the company could benefit from the excess demand by increasing prices.
Primary risk factors
With respect to valuation, the major influences on pricing.
Prime brokerage
A suite of services that is often specified to include support in accounting and reporting, leveraged trade execution, financing, securities lending (related to short-selling activities), and start-up advice (for new entities).
Principal
The amount of funds originally invested in a project or instrument; the face value to be paid at maturity.
Principal trade
A trade with a broker in which the broker commits capital to facilitate the prompt execution of the trader’s order to buy or sell.
Prior probabilities
Probabilities reflecting beliefs prior to the arrival of new information.
Private equity
Ownership interests in non-publicly-traded companies.
Private equity funds
Pooled investment vehicles investing in generally highly illiquid assets; includes venture capital funds and buyout funds.
Private exchange
A method for handling undiversified positions with built-in capital gains in which shares that are a component of an index are exchanged for shares of an index mutual fund in a privately arranged transaction with the fund.
Primary market
The market for new issues.
Primary tax-exempt derivative products
These are based on bonds issued by state and local governments. Examples include inverse floater bonds; bonds with embedded swaps and caps; and bonds based on interest rate tax-exempt derivative products that are based on a custodial receipt, a trust certificate, or another security that is not directly issued by a state or local government. Examples include tender option bonds, trust certificates with interest rate swaps, and stripped interest rate bonds.
Prime rate
A commercial bank’s stated reference rate for lending. 
Principal
The face amount of a bond, exclusive of accrued interest and payable at maturity.
Principal transaction
A sale and purchase of bonds in which the dealer commits its own capital in effecting the transaction.
Prior charge
The claim that a bondholder may have on the assets of a company in the event of liquidation ahead of other asset holders.
PRIPs
Packaged Retail Investment Products
Private label
The term used to describe a mortgage security whose issuer is an entity other than a U.S. government agency or U.S. government-sponsored enterprise. Such issuers may be subsidiaries of investment banks, financial institutions or home builders, for example.
Private placement
The negotiated offering of new securities directly to investors, without a public underwriting.
Private placement memorandum
A document used to raise venture capital financing when funds are raised through an agent.
Probability
A number between 0 and 1 describing the chance that a stated event will occur.
Probability density function
A function with nonnegative values such that probability can be described by areas under the curve graphing the function.
Probability distribution
A distribution that specifies the probabilities of a random variable’s possible outcomes.
Probability function
A function that specifies the probability that the random variable takes on a specific value.
Probit model
A qualitative-dependent-variable multiple regression model based on the normal distribution.
Production-flexibility
The operational flexibility to alter production when demand varies from forecast. For example, if demand is strong, a company may profit from employees working overtime or from adding additional shifts.
Profitability ratios
Ratios that measure a company’s ability to generate profitable sales from its resources (assets).
Profit-sharing plans
A defined-contribution plan in which contributions are based, at least in part, on the plan sponsor’s profits.
Project sequencing
To defer the decision to invest in a future project until the outcome of some or all of a current project is known. Projects are sequenced through time so that investing in a project creates the option to invest in future projects.
Projected benefit obligation
Under U.S. GAAP, a measure used in estimating a defined-benefit pension plan’s liabilities, defined as “the actuarial present value as of a date of all benefits attributed by the pension benefit formula to employee service rendered prior to that date. The projected benefit obligation is measured using assumptions as to future compensation if the pension benefit formula is based on those future compensation levels.”
Proportionate consolidation
A method of accounting for joint ventures where the venturer’s share of the assets, liabilities, income, and expenses of the joint venture are combined on a line-by-line basis with similar items on the venturer’s financial statements.
Pro rata
Proportional distribution to all holders of the same class, based on ownership.
Prospect theory
The analysis of decision making under risk in terms of choices among prospects.
Prospectus
Documents provided to investors who are considering investing in financial instruments such as stocks, shares, bonds, bond funds, investment trusts, etc. The prospectus details the investment's objectives, the nature of the investment, past performance, information on the investment company or managers, etc. In the U.S., the Securities Exchange Commission (SEC) requires investment companies to issue and file with them a prospectus that explains the investment offer and provides other information that could help an individual investor decide whether the investment is appropriate.
Protective put
An option strategy in which a long position in an asset is combined with a long position in a put.
Provision
In accounting, a liability of uncertain timing or amount.
Proxy
The legal authority or means to permit a shareholder’s vote to be registered without their physical presence at an annual or special shareholder meeting. Proxy may also refer to a person empowered to act as an agent to vote on behalf of the shareholder. Shareholders may vote their proxy by mail, over the telephone or on the internet.
Proxy Card
A ballot by which shareholders can cast their vote on company policy proposals to be considered at an annual or special meeting. Shareholders receive and return the proxy card by mail, instead of casting their vote in person at the meeting.
Proxy fight
An attempt to take control of a company through a shareholder vote.
Proxy Statement 
Part of a proxy materials package, a document intended to provide an explanation of pending proposals that will be put to a vote. Issuers are required to send proxy statements to all shareholders under the Securities Exchange Act of 1934. 
Prudence trap
The tendency to temper forecasts so that they do not appear extreme; the tendency to be overly cautious in forecasting.
Pseudo-random numbers
Numbers produced by random number generators.
Psychological profiling
The determination of an investor’s psychological characteristics relevant to investing, such as his or her personality type.
Publicly-held company 
A company that has issued registered securities through an initial public offering (IPO) and is traded on at least one stock exchange. Shares can be owned by individual or institutional investors who may buy and sell their shares at will.
Public offering price
The aggregate value of securities in a unit investment trust fund, divided by the number of units, plus the applicable sales charge. This is the price at which units are offered for sale to the public.
Public good 
A good that is not divisible and not excludable (a consumer cannot be denied it).
Pull on liquidity
When disbursements are paid too quickly or trade credit availability is limited, requiring companies to expend funds before they receive funds from sales that could cover the liability.
Purchase method
A method of accounting for a business combination where the acquiring company allocates the purchase price to each asset acquired and liability assumed at fair value. If the purchase price exceeds the allocation, the excess is recorded as goodwill.
Purchased in-process research and development costs
The costs of research and development in progress at an acquired company.
Purchasing power gain
A gain in value caused by changes in price levels. Monetary liabilities experience purchasing power gains during periods of inflation.
Purchasing power loss
A loss in value caused by changes in price levels. Monetary assets experience purchasing power losses during periods of inflation.
Purchasing power parity
The theory that movements in an exchange rate should offset any difference in the inflation rates between two countries.
Pure discount instruments
Instruments that pay interest as the difference between the amount borrowed and the amount paid back.
Pure factor portfolio
A portfolio with sensitivity of 1 to the factor in question and a sensitivity of 0 to all other factors.
Pure sector allocation return
A component of attribution analysis that relates relative returns to the manager’s sector-weighting decisions. Calculated as the difference between the allocation (weight) of the portfolio to a given sector and the portfolio’s benchmark weight for that sector, multiplied by the difference between the sector benchmark’s return and the overall portfolio’s benchmark return, summed across all sectors.
Pure-play method
A method for estimating the beta for a company or project; it requires using a comparable company’s beta and adjusting it for financial leverage differences.
Put
An option that gives the holder the right to sell an underlying asset to another party at a fixed price over a specific period of time.
Put bond
A bond that gives the holder the right to require the issuer or the issuer’s agent to purchase the bonds at a price, usually at par, at some date or dates prior to the final stated maturity.
Put–call parity
An equation expressing the equivalence (parity) of a portfolio of a call and a bond with a portfolio of a put and the underlying, which leads to the relationship between put and call prices
Put–call–forward parity
The relationship among puts, calls, and forward contracts.
Put option
A put option allows the holder of a bond to “put,” or present, the bond to an issuer (or trustee) and demand payment at a stated time before the final stated maturity of the bond.
p-Value
The smallest level of significance at which the null hypothesis can be rejected; also called the marginal significance level.
PWG
President's Working Group
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