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G-1

Glossary
Abandonment option The option to terminate an investment All-or-nothing (AON) orders An order that includes the
at some future time if the financial results are disappointing. instruction to trade only if the trade fills the entire quan-
Abnormal return The amount by which a security’s actual tity (size) specified.
return differs from its expected return, given the security’s Allocationally efficient A characteristic of a market, a financial
risk and the market’s return. system, or an economy that promotes the allocation of
Absolute dispersion The amount of variability present without resources to their highest value uses.
comparison to any reference point or benchmark. Altcoin A cryptocurrency other than Bitcoin.
Accelerated book build An offering of securities by an invest- Alternative data Data that are generated from non-traditional
ment bank acting as principal that is accomplished in only sources, such as social media and sensor networks.
one or two days. Alternative hypothesis The hypothesis that is accepted if the
Accounting profit Income as reported on the income state- null hypothesis is rejected.
ment, in accordance with prevailing accounting standards, Alternative investment markets Market for investments other
before the provisions for income tax expense. Also called than traditional securities investments (i.e., traditional
income before taxes or pretax income. common and preferred shares and traditional fixed income
Accredited investors Investors that meet certain minimum instruments). The term usually encompasses direct and
regulatory net worth or other requirements in order to indirect investment in real estate (including timberland
invest in certain types of alternative assets. and farmland) and commodities (including precious met-
Accrued interest The amount of interest in currency or par als); hedge funds, private equity, and other investments
value terms of a fixed-income instrument that accumulates requiring specialized due diligence.
from the last coupon payment until the trade settlement Alternative trading systems Trading venues that function like
date. The amount is paid by the buyer to the seller. exchanges but that do not exercise regulatory authority
Action lag Delay from policy decisions to implementation. over their subscribers except with respect to the conduct
Active investment An approach to investing in which the of the subscribers’ trading in their trading systems. Also
investor seeks to outperform a given benchmark. called electronic communications networks or multilateral
Active return The return on a portfolio minus the return on trading facilities.
the portfolio’s benchmark. American depository receipt A US dollar-denominated secu-
Activist Short for “activist shareholder.” Managers secure suf- rity that trades like a common share on US exchanges.
ficient equity holdings to allow them to seek a position American depository share The underlying shares on which
in a company’s board and influence corporate policies or American depository receipts are based. They trade in the
direction. issuing company’s domestic market.
Activity ratios Ratios that measure how well a company is American options Options that may be exercised at any time
managing key current assets and working capital over time. from contract inception until maturity.
Ad hoc committee A small group of lenders or bondholders American-style Type of option contract that can be exercised
who negotiate with an issuer on debt restructuring and at any time up to the option’s expiration date.
refinancing before the issuer submits a final proposal to Amortization The process of allocating the cost of intangible
the wider group of all lenders and bondholders. long-term assets having a finite useful life to accounting
Add-on pricing A pricing approach based on high-margin periods; the allocation of the amount of a bond premium
optional features, customizations, and additional content. or discount to the periods remaining until bond maturity.
Add-on rate A yield or pricing convention for money market Amortizing debt A loan or bond with a payment schedule
instrument quotations. It is the interest earned on an that calls for periodic payments of interest and repayments
instrument, derived from the difference between the price of principal.
and face value, expressed as a percentage of the price and Analysis of variance (ANOVA) A table that presents the sums of
multiplied by the periodicity of the annual rate. squares, degrees of freedom, mean squares, and F-statistic
Agency costs Direct and indirect costs borne by the princi- for a regression model.
pal in a principal-agent relationship owing primarily to Analytical duration Estimates of duration using mathematical
information asymmetries. Agency costs include the costs formulas. Estimates of the impact of yield changes on bond
of monitoring and assessing the agent as well as missed prices using analytical duration implicitly assume that
opportunities. benchmark yields and spreads are independent variables
Agency RMBS Securities created by the pooling of residential and are uncorrelated.
mortgage-backed securities in the United States by either Anchoring and adjustment bias An information-processing
the Federal National Mortgage Association (Fannie Mae) bias in which the use of a psychological heuristic influences
or the Federal Home Loan Mortgage Corporation (Freddie the way people estimate probabilities.
Mac). These RMBS carry the full faith and credit of the Annual general meeting (AGM) A yearly meeting of the cor-
government, essentially a guarantee with respect to timely porate board of directors and shareholders, typically held
payment of interest and repayment of principal. in person and digitally, during which votes on directors,
compensation plans, shareholder resolutions, and any
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G-2 Glossary

other matters properly brought forward at the meeting At-the-money Describes a unique situation in which the price
are held. Issuer management may also make presentations of the underlying is equal to an option’s exercise price. Like
and hold events. an out-of-the-money option, the intrinsic value is zero.
Anomalies Apparent deviations from market efficiency. Auction/reverse auction models Pricing models that establish
Antidilutive With reference to a transaction or a security, one prices through bidding (by sellers in the case of reverse
that would increase earnings per share (EPS) or result in auctions).
EPS higher than the company’s basic EPS—antidilutive Autarky Countries seeking political self-sufficiency with little
securities are not included in the calculation of diluted EPS. or no external trade or finance. State-owned enterprises
Arbitrage 1) The simultaneous purchase of an undervalued control strategic domestic industries.
asset or portfolio and sale of an overvalued but equivalent Automatic stabilizer A countercyclical factor that automat-
asset or portfolio, in order to obtain a riskless profit on the ically comes into play as an economy slows and unem-
price differential. Taking advantage of a market inefficiency ployment rises.
in a risk-free manner. 2) The condition in a financial market Availability bias An information-processing bias in which
in which equivalent assets or combinations of assets sell for people take a heuristic approach to estimating the prob-
two different prices, creating an opportunity to profit at no ability of an outcome based on how easily the outcome
risk with no commitment of money. In a well-functioning comes to mind.
financial market, few arbitrage opportunities are possible. Available-for-sale Under US GAAP, debt securities not classi-
3) A risk-free operation that earns an expected positive net fied as either held-to-maturity or held-for-trading securi-
profit but requires no net investment of money. ties. The investor is willing to sell but not actively planning
Arbitrageurs Traders who engage in arbitrage. See arbitrage. to sell. In general, available-for-sale debt securities are
Arithmetic mean The sum of the observations divided by the reported at fair value on the balance sheet, with unrealized
number of observations. gains included as a component of other comprehensive
Artificial intelligence (AI) Computer systems that are capable income.
of performing tasks that previously required human intelli- Average revenue (AR) Total revenue divided by quantity sold.
gence. AI methods are sometimes better suited to identify Backfill Bias A problem whereby certain surviving hedge funds
complex, non-linear relationships than are traditional may be added to databases and various hedge fund indexes
quantitative and statistical methods. only after they are initially successful and start to report
Ask The price at which a dealer or trader is willing to sell their returns. Also see survivorship bias.
an asset, typically qualified by a maximum quantity (ask Backup line of credit A type of credit enhancement provided
size). See offer. by a bank to an issuer of commercial paper to ensure that
Ask size The maximum quantity of an asset that pertains to a the issuer will have access to sufficient liquidity to repay
specific ask price from a trader. For example, if the ask for maturing commercial paper if issuing new paper is not a
a share issue is $30 for a size of 1,000 shares, the trader is viable option.
offering to sell at $30 up to 1,000 shares. Backwardation A downward-sloping, or inverted, forward
Asset allocation The process of determining how investment curve in a futures market.
funds should be distributed among asset classes. Balance sheet ratios Financial ratios involving balance sheet
Asset class A group of assets that have similar characteristics, items only.
attributes, and risk–return relationships. Balanced With respect to a government budget, one in which
Asset utilization ratios Ratios that measure how efficiently a spending and revenues (taxes) are equal.
company performs day-to-day tasks, such as the collection Balloon payment A large payment required at maturity to
of receivables and management of inventory. retire a bond’s outstanding principal amount.
Asset-backed commercial paper Secured form of commercial Base rates The reference rate on which a bank bases lending
paper issuance. Loans or receivables are sold to a special rates to all other customers.
purpose entity that issues the ABCP and makes interest Base-rate neglect A type of representativeness bias in which
and principal payments to investors from asset cash flows. the base rate or probability of the categorization is not
Asset-backed securities (ABS) A type of bond issued by a adequately considered.
legal entity called a special purpose entity created solely Basic EPS Net earnings available to common shareholders
to own assets such as loans, receivables, and mortgages (i.e., net income minus preferred dividends) divided by the
and to distribute cash flows to ABS investors. Generally, weighted average number of common shares outstanding.
ABS backed by mortgages are known as mortgage-backed Basis risk The possibility that the expected value of a derivative
securities (MBS) while ABS refer to non-mortgage ABS. differs unexpectedly from that of the underlying.
Asset-backed token A token that represents the ownership of Basket of listed depository receipts (BLDR) An
a physical asset that does not exist on the blockchain and exchange-traded fund (ETF) that represents a portfolio
whose value is based on the underlying asset. of depository receipts.
Asset-based valuation models Valuation based on estimates Bayes’ formula The rule for updating the probability of an
of the market value of a company’s assets. event of interest—given a set of prior probabilities for the
Asymmetric information Also known as information asym- event, information, and information given the event—if
metry; the differential of information between corporate you receive new information.
insiders and outsiders regarding the company’s perfor- Bearer bonds Bonds for which ownership is not recorded;
mance and prospects. Managers typically have more infor- only the clearing system knows who the bond owner is.
mation about the company’s performance and prospects Behavioral finance A field of finance that examines the psy-
than owners and creditors. chological variables that affect and often distort the invest-
ment decision making of investors, analysts, and portfolio
managers.
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Glossary G-3

Behind the market Said of prices specified in orders that are Bondholders Investors in an entity’s securitized debt claims,
worse than the best current price; e.g., for a limit buy order, such as commercial paper, notes, and bonds. Common
a limit price below the best bid. types of bondholders include investment funds and insti-
Benchmark A bond used to compare against another bond to tutional investors.
discern attributes, often a government bond with the same Bonds Contractual agreements between an issuer and
or similar time-to-maturity as the bond under analysis. bondholders.
Benchmark spread The difference in yield-to-maturity between Bonus issue of shares A type of dividend in which a com-
a bond and that of a benchmark bond. pany distributes additional shares of its common stock to
Best bid The highest bid in the market. shareholders instead of cash.
Best effort offering An offering of a security using an invest- Book building Investment bankers’ process of compiling a
ment bank in which the investment bank, as agent for the “book” or list of indications of interest to buy part of an
issuer, promises to use its best efforts to sell the offering offering.
but does not guarantee that a specific amount will be sold. Book value The net amount shown for an asset or liability
Best offer The lowest offer (ask price) in the market. on the balance sheet; book value may also refer to the
Best-in-class An ESG implementation approach that seeks to company’s excess of total assets over total liabilities. Also
identify the most favorable companies and sectors based called carrying value.
on ESG considerations. Also called positive screening. Boom An expansionary phase characterized by economic
Beta A measure of the sensitivity of a given investment or growth “testing the limits” of the economy.
portfolio to movements in the overall market. Bootstrap A resampling method that repeatedly draws sam-
Bid The price at which a dealer or trader is willing to buy an ples with replacement of the selected elements from the
asset, typically qualified by a maximum quantity. original observed sample. Bootstrap is usually conducted
Bid size The maximum quantity of an asset that pertains to a by using computer simulation and is often used to find
specific bid price from a trader. standard error or construct confidence intervals of pop-
Big data The vast amount of information being generated by ulation parameters.
both traditional sources—for example, stock exchanges, Bottom-up analysis An investment selection approach that
companies, governments—and non-traditional sources— focuses on company-specific circumstances rather than
for example, electronic devices, social media, sensor net- emphasizing economic cycles or industry analysis.
works, and company exhaust. Box and whisker plot A graphic for visualizing the dispersion
Bilateralism The conduct of political, economic, financial, or of data across quartiles. It consists of a box with “whiskers”
cultural cooperation between two countries. Countries connected to the box.
engaging in bilateralism may have relations with many Breakeven point Represents the price of the underlying in a
different countries but in one-at-a-time agreements without derivative contract in which the profit to both counter-
multiple partners. Typically, countries exist on a spectrum parties would be zero.
between bilateralism and multilateralism. Bridge financing Interim financing that provides funds until
Bimodal A distribution that has two most frequently occur- permanent financing can be arranged.
ring values. Broker An agent who executes orders to buy or sell securities
Bitcoin A cryptocurrency using blockchain technology that on behalf of a client in exchange for a commission.
was created in 2009. Brokered market A market in which brokers arrange trades
Bivariate correlation Also known as Pearson correlation. among their clients.
A parametric measure of the relationship between two Broker–dealer A financial intermediary (often a company)
variables. that may function as a principal (dealer) or as an agent
Black swan risk An event that is rare and difficult to predict (broker) depending on the type of trade.
but has an important impact. Brownfield investments The third stage of development of
Block brokers A broker (agent) that provides brokerage ser- an infrastructure asset. Brownfield investments involve
vices for large-size trades. expanding existing facilities and may involve privatization
Blockchain A type of digital ledger in which information is of public assets or a sale leaseback of completed greenfield
recorded sequentially and then linked together and secured projects. They are characterized by a shorter investment
using cryptographic methods. period with immediate cash flows and an operating history.
Blue chip Widely held large market capitalization companies Budget surplus/deficit The difference between government
that are considered financially sound and are leaders in revenue and expenditure for a stated fixed period of time.
their respective industry or local stock market. Bullet bond A bond whose principal repayment is made
Board of directors A body or individual selected by a lim- entirely at maturity.
ited company’s member(s) or shareholder(s), in a manner Bundling A pricing approach that refers to combining multiple
determined by the company’s charter, that manages the products or services so that customers are incentivized or
company. Typically, for larger companies, boards of direc- required to buy them together.
tors appoint and oversee executive management. Business cycles Are recurrent expansions and contractions in
Bond equivalent yield A money market interest rate quoted economic activity affecting broad segments of the economy.
on a 365-day add-on rate basis. Business model A concise description of how a business works
Bond indenture A legal document between a bond issuer and makes revenues and profits, including its customers,
and investors that governs each party’s rights and products or services, channels for reaching customers,
responsibilities. and pricing.
Bond market vigilantes Bond market participants who might Businesses Organization entities formed and managed for the
reduce their demand for long-term bonds, thus pushing purpose of providing a return or economic benefits to its
up their yields. investors and owners.
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G-4 Glossary

Buy-side firm An investment management company or other Capital structure The mix of debt and equity that a company
investor that uses the services of brokers or dealers (i.e., uses to finance its business; a company’s specific mix of
the client of the sell side firms). long-term financing.
Buyback A transaction in which a company buys back its Capital-indexed bond A type of index-linked bond for which
own shares. Unlike stock dividends and stock splits, share changes in the index are captured with adjustments to
repurchases use corporate cash. the principal. A common example is Treasury Inflation
Cabotage The right to transport passengers or goods within a Protected Securities (TIPS) issued by the United States
country by a foreign firm. Many countries—including those government.
with multilateral trade agreements—impose restrictions Capital-intensive businesses Companies or business activi-
on cabotage across transportation subsectors, meaning ties that are characterized by a relatively low fixed asset
that shippers, airlines, and truck drivers are not allowed turnover, a high percentage of capital expenditures to sales,
to transport goods and services within another country’s or a high net-working-capital-to-sales ratio.
borders. Capital-light businesses Also known as asset light businesses,
Call market A market in which trades occur only at a particular companies or business activities characterized by relatively
time and place (i.e., when the market is called). high fixed asset turnover, a low percentage of capital expen-
Call money rate The interest rate that buyers pay for their ditures to sales, or a low net-working-capital-to-sales ratio.
margin loan. Carried interest A performance fee (also referred to as an
Call option The right to buy an underlying. incentive fee, or carry) that is applied based on excess
Call period The time during which the issuer of a callable bond returns above a hurdle rate.
can exercise the call option. Carrying Investing and holding an asset for a period of time.
Call price The price at which the issuer of a callable bond has Carrying amount The amount at which an asset or liability is
the right to purchase the bond from investors. valued according to accounting principles.
Call protection period The time during which the issuer of Carrying value Of a fixed-income instrument is the purchase
a callable bond is not allowed to exercise the call option. price plus (minus) the amortized amount of the discount
Call risk The uncertain maturity and limited price appreciation (premium) if the bond is purchased at a price below (above)
associated with callable bonds. par value.
Callable bond A bond containing an embedded call option Cartel Participants in collusive agreements that are made
that gives the issuer the right to buy the bond back from openly and formally.
the investor at specified prices on predetermined dates. Cash conversion cycle The amount of time between an issuer
Cannibalization A transfer of sales or market share from one paying its suppliers in cash and receiving cash from its
product to another product owned by the same company. customers.
It tends to occur when the two products are actual or Cash flow additivity principle The principle that dollar
perceived substitutes. amounts indexed at the same point in time are additive.
Capacity The ability of the borrower to make its debt pay- Cash flow from operations A cash profit measure over a period
ments on time. for an issuer’s primary business activities. It includes cash
Capital Other company resources available that reduce reli- from customers as well as interest and dividends received
ance on debt from financial investments, less cash paid to employees
Capital allocation The process that companies use for decision and suppliers as well as taxes paid to governments and
making on capital investments—those projects with a life interest paid to lenders.
of one year or longer. Cash flow hedge Refers to a specific hedge accounting clas-
Capital allocation line (CAL) A graph line that describes the sification in which a derivative is designated as absorbing
combinations of expected return and standard deviation of the variable cash flow of a floating-rate asset or liability,
return available to an investor from combining the optimal such as foreign exchange, interest rates, or commodities.
portfolio of risky assets with the risk-free asset. Cash markets Markets in which specific assets are exchanged
Capital asset pricing model (CAPM) An equation describing at current prices. Cash markets are often referred to as
the expected return on any asset (or portfolio) as a linear spot markets.
function of its beta relative to the market portfolio. Cash prices The current prices prevailing in cash markets.
Capital expenditure Expenditure on physical capital (fixed Cash ratio A measure of liquidity that is the ratio of cash and
assets). marketable securities to current liabilities.
Capital investments An expenditure for an asset or resource Catch-up clause A clause in an agreement that favors the GP.
with a useful life of more than one year. For a GP who earns a 20% performance fee, a catch-up
Capital market expectations (CME) Expectations concerning clause allows the GP to receive 100% of the distributions
the risk and return prospects of asset classes. above the hurdle rate until she receives 20% of the prof-
Capital market line (CML) The line with an intercept point its generated, and then every excess dollar is split 80/20
equal to the risk-free rate that is tangent to the efficient between the LPs and GP.
frontier of risky assets; represents the efficient frontier CDS credit spread Reflects the credit spread of a credit default
when a risk-free asset is available for investment. swap (CDS) derivative contract. As with cash bonds, CDS
Capital market securities Fixed-income securities with orig- credit spreads depend on the probability of default (POD)
inal maturities greater than one year. and the loss given default (LGD).
Capital markets Financial markets that trade securities of Central bank digital currencies (CBDCs) A tokenized version
longer duration, such as bonds and equities. of the currency issued by the central bank, such as a digital
Capital restrictions Controls placed on foreigners’ ability to bank note or coin, and a digital liability of the central bank.
own domestic assets and/or domestic residents’ ability to
own foreign assets.
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Glossary G-5

Central bank funds market The market in which deposit-taking Code of ethics An established guide that communicates an
banks that have an excess reserve with their national cen- organization’s values and overall expectations regarding
tral bank can lend money to banks that need funds for member behavior. A code of ethics serves as a general
maturities ranging from overnight to one year. Called the guide for how community members should act.
federal or fed funds market in the United States. Coefficient of determination (R2) The percentage of the vari-
Central bank funds rate The interest rate at which central bank ation of the dependent variable that is explained by the
funds are bought (borrowed) and sold (lent) for maturities independent variable. It is a measure of goodness of fit of
ranging from overnight to one year. Called federal or fed a regression model.
funds rate in the United States. Coefficient of variation The ratio of a set of observations’
Central clearing mandate A requirement instituted by global standard deviation to the observations’ mean value.
regulatory authorities following the 2008 global financial Cognitive cost The effort involved in processing new infor-
crisis that most over-the-counter (OTC) derivatives be mation and updating beliefs.
cleared by a central counterparty (CCP). Cognitive dissonance The mental discomfort that occurs when
Central counterparty (CCP) An economic entity that assumes new information conflicts with previously held beliefs or
the counterparty credit risk between derivative counter- cognitions.
parties, one of which is typically a financial intermediary. Cognitive errors Behavioral biases resulting from faulty
CCPs provide clearing and settlement for most derivative reasoning; cognitive errors stem from basic statistical,
contracts. information-processing, or memory errors.
Central limit theorem The theorem that states the sum (and Coincident economic indicators Turning points that are usu-
the mean) of a set of independent, identically distributed ally close to those of the overall economy; they are believed
random variables with finite variances is normally distrib- to have value for identifying the economy’s present state.
uted, whatever distribution the random variables follow. Collateral Assets or financial guarantees underlying a debt
Certificate of deposit (CD) An instrument that represents a obligation that are above and beyond the issuer’s promise
specified amount of funds on deposit with a bank for a spec- to pay.
ified maturity and interest rate. CDs are issued in various Collateral manager Buys and sells debt obligations for and
denominations and can be negotiable or non-negotiable. from the CDO’s collateral pool to generate sufficient cash
Channels Venues where a company markets and/or delivers flows to meet the obligations to the CDO bondholders.
its products and services. Collateralized bond obligations (CBOs) CDOs backed by
Character The quality of a debt issuer’s management. high-yield corporate and emerging market bonds.
Checking accounts Bank deposits with no stated maturity Collateralized debt obligations (CDOs) Securities backed by
available for transactional purposes that pay little or no a diversified pool of one or more debt obligations. CDOs
interest. Also known as a demand deposit. can be backed by a broad range of debt.
Circuit breaker A pause in intraday trading for a brief period Collateralized loan obligations (CLOs) CDOs backed by lev-
if a price limit is reached. eraged bank loans.
Classical cycle Refers to fluctuations in the level of economic Collateralized mortgage obligations Securitize mortgage
activity when measured by GDP in volume terms. pass-through securities or multiple pools of loans. CMOs
Clawback A requirement that the general partner return any are structured to redistribute the cash flows to different
funds distributed as incentive fees until the limited partners bond classes or tranches and create securities that have
have received their initial investment and a percentage of different exposures to prepayment risk.
the total profit. Commercial paper (CP) Short-term, negotiable, unsecured
Clearing An exchange’s process of verifying the execution of promissory note that represents a debt obligation of the
a transaction, exchange of payments, and recording of issuer.
participants. Committed (regular) lines of credit Bank commitments to
Clearing instructions Instructions that indicate how to arrange extend credit; the commitment is considered a short-term
the final settlement (“clearing”) of a trade. liability and is usually in effect for 364 days (one day short
Clearinghouse An entity associated with a futures market of a full year).
that acts as middleman between the contracting parties Committed capital The amount that the limited partners have
and guarantees to each party the performance of the other. agreed to provide to the private equity fund.
Closed-end fund A mutual fund in which no new investment Commodities A product or service from a firm that is indis-
money is accepted. New investors invest by buying existing tinguishable from products or services of competing
shares, and investors in the fund liquidate by selling their firms, usually conforming to a common standard or grade
shares to other investors. imposed by convention or regulation.
Cluster sampling A procedure that divides a population into Commoditization A process by which competing products
subpopulation groups (clusters) representative of the pop- become less differentiated over time and become inter-
ulation and then randomly draws certain clusters to form changeable “commodities” in the eyes of customers. This
a sample. process is typically associated with declining profitability
Co-investing In co-investing, the investor invests in assets indi- for the selling firms.
rectly through the fund but also possesses rights (known Commodity producers A firm that makes and/or sells
as co-investment rights) to invest directly in the same commodities.
assets. Through co-investing, an investor is able to make an Commodity swap A type of swap involving the exchange of
investment alongside a fund when the fund identifies deals. payments over multiple dates as determined by specified
reference prices or indexes relating to commodities.
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G-6 Glossary

Common market Level of economic integration that incorpo- Contingent claim A type of derivative in which one of the
rates all aspects of the customs union and extends it by counterparties determines whether and when the trade will
allowing free movement of factors of production among settle. An option is a common type of contingent claim.
members. Contingent convertible bonds Bonds that automatically con-
Common shares A type of security that represents an own- vert to equity if a specific event or circumstance occurs,
ership interest in a company. Also called common stock. such as the issuer’s equity capital falling below the mini-
Common stock A type of security that represents an ownership mum requirement set by regulators.
interest in a company. Also called common shares. Continuous trading market A market in which trades can
Common-size analysis The restatement of financial statement be arranged and executed any time the market is open.
items using a common denominator or reference item Continuously compounded return The natural logarithm of 1
that allows one to identify trends and major differences; plus the holding period return, or equivalently, the natural
an example is an income statement in which all items are logarithm of the ending price over the beginning price.
expressed as a percent of revenue. Contract manufacturers Companies that make products for
Companies Organization entities formed and managed for the other companies that meet specific terms and specifications.
purpose of providing a return or economic benefits to its Contract size Amount(s) used for calculation to price and
investors and owners. value the derivative. The contract size is often referred to
Company research report A document that presents an as “notional amount or notional principal.”
analyst’s investment recommendation on an issuer and Contraction The period of a business cycle after the peak and
its securities, supported by financial modeling, industry before the trough; often called a recession or, if exceptionally
overviews and competitive analyses, valuation scenarios, severe, called a depression.
ESG considerations, and investment risks. Contraction risk The risk that the borrower repays the principal
Complete markets Informally, markets in which the variety or a portion of the principal in a shorter period of time than
of distinct securities traded is so broad that any desired the contractually agreed scheduled payment, reducing the
payoff in a future state-of-the-world is achievable. amount of future payments the investor receives.
Concession agreement A legal agreement in infrastructure Contractionary Tending to cause the real economy to contract.
investing that governs the investor’s obligations to con- Contractionary fiscal policy A fiscal policy that has the objec-
struct and maintain infrastructure as well as the exclusive tive to make the real economy contract.
right to operate and earn fees for a pre-determined period. Contribution margin A profitability measure using variable
Conditional expected value The expected value of a stated costs: unit price less unit variable cost. It can also be
event given that another event has occurred. expressed as a percentage of price or sales.
Conditional pass-through covered bonds Convert to Controlling shareholder An individual or entity that owns a
pass-through securities after the original maturity date if majority of the voting rights in a corporation.
all bond payments have not yet been made. Convenience sampling A procedure of selecting an element
Conditional variances The variance of one variable, given the from a population on the basis of whether or not it is
outcome of another. accessible to a researcher or how easy it is for a researcher
Conditions The general economic, competitive, and business to access the element.
environment faced by all borrowers that may affect their Convenience yield A non-cash benefit of holding a physical
ability to service or refinance debt. commodity versus a derivative.
Confidence level The complement of the level of significance. Conversion price For a convertible bond, the price per share
Confirmation bias A belief perseverance bias in which people at which the bond can be converted into shares.
tend to look for and notice what confirms their beliefs, to Conversion ratio For a convertible bond, the number of com-
ignore or undervalue what contradicts their beliefs, and mon shares that each bond can be converted into.
to misinterpret information as support for their beliefs. Conversion value For a convertible bond, the value of the
Consensus protocol A set of rules governing how blocks can bond if it is converted at the market price of the shares.
join the blockchain that is designed to resist attempts at Also called parity value.
malicious manipulation up to a certain level of security; it Convertible bond A bond that gives the bondholder the right
can be either a proof of work or a proof of stake. to exchange the bond for a specified number of common
Conservatism bias A belief perseverance bias in which people shares in the issuing company.
maintain their prior views or forecasts by inadequately Convertible debt A debt instrument that gives the holder the
incorporating new information. right to exchange the instrument for a specified number
Constant yield-price trajectory A graphical depiction of of common shares in the issuing company.
the relationship between time to maturity and a bond Convertible preference shares A type of equity security that
price, assuming no default, that shows that a bond price entitles shareholders to convert their shares into a specified
approaches par as time passes. number of common shares.
Constituent securities With respect to an index, the individual Convexity Used to describe the curved, non-linear shape of
securities within an index. the price/yield relationship of fixed-income instruments
Contango Refers to spot price below forward price in a futures as well as a measure that is used to complement modified
market. duration, sometimes called the convexity adjustment, to
Contingency provision Clause in a legal document that allows capture the second-order effect of yield changes on a
for some action if a specific event or circumstance occurs. bond’s price.
Contingency table A table of the frequency distribution
of observations classified on the basis of two discrete
variables.
 © CFA Institute. For candidate use only. Not for distribution.
Glossary G-7

Convexity adjustment A measure that is used to complement Counterparty risk The risk that the other party to a contract
modified duration to capture the second-order effect of will fail to honor the terms of the contract.
yield changes on a bond’s price. It is equal to the annual Country The geopolitical environment as well as the legal and
convexity statistic times one-half times the given change political system faced by all issuers in a jurisdiction that
in the yield-to-maturity squared. may affect debt payment.
Convexity bias Refers to the difference in price changes for Coupon Periodic interest payments paid by a bond issuer to
a given change in yield between interest rate futures and investors, typically expressed as a percentage of par on
interest rate forward contracts. That is, interest rate for- an annual basis.
wards exhibit a non-linear or convex relationship between Cournot assumption Assumption in which each firm deter-
price and yield, while the price–yield relationship is linear mines its profit-maximizing production level assuming
for interest rate futures. that the other firms’ output will not change.
Cooperation The process by which countries work together Covariance A measure of the co-movement (linear association)
toward some shared goal or purpose. These goals may, and between two random variables.
often do, vary widely—from strategic or military concerns, Covenants The terms and conditions of lending agreements
to economic influence, to cultural preferences. that the issuer must comply with; they specify the actions
Cooperative country A country that engages and recipro- that an issuer is obligated to perform (affirmative covenant)
cates in rules standardization; harmonization of tariffs; or prohibited from performing (negative covenant).
international agreements on trade, immigration, or regu- Credit default swap (CDS) A type of credit derivative in which
lation; and allowing the free flow of information, including one party, the credit protection buyer who is seeking
technology transfer. credit protection against a third party, makes a series of
Core real estate strategies Strategies with exposure to regularly scheduled payments to the other party, the credit
well-leased, high-quality commercial and residential real protection seller. The seller makes no payments until a
estate in the best markets, generally offered by open-end credit event occurs.
funds. Investors expect core real estate to deliver stable Credit enhancements Provisions or methods that allow a
returns, primarily from income from the property. borrower improve their creditworthiness in a structured
Core-plus real estate strategies Value-add investments that transaction.
require modest redevelopment or upgrades to lease any Credit event An event that defines a payout in a credit deriv-
vacant space together with possible alternative use of ative. Events are usually defined as bankruptcy, failure to
the underlying properties. Compared to core real estate pay an obligation, or an involuntary debt restructuring.
strategies, these may be appealing for investors seeking Credit facilities Loan agreements with pre-specified terms
higher returns and willing to accept additional risks from and limits but with fluctuating balances based on
development, redevelopment, repositioning, and leasing. borrower-specific needs at different points in time, anal-
Corporate issuers Limited companies or corporations that ogous to a credit card.
seek financing in financial markets by, for example, issuing Credit migration risk The risk that a bond issuer’s creditwor-
debt or equity securities. thiness deteriorates, or migrates lower, leading investors
Corporations Another term for limited companies, though to believe the risk of default is higher. Also called down-
often used to refer to public limited companies. See lim- grade risk.
ited company, private limited company, and public limited Credit rating Letter-grade, qualitative measures of an issu-
company. er’s ability to meet its debt obligations based on both
Correlation A measure of the linear relationship between two the probability of default and the expected loss under a
random variables. default scenario.
Correlation coefficient A number between −1 and +1 that Credit rating agencies Institutions that issue and maintain
measures the consistency or tendency for two investments credit ratings. The three largest are Standard & Poor’s,
to act in a similar way. It is used to determine the effect on Moody’s, and Fitch Ratings.
portfolio risk when two assets are combined. Credit risk the expected economic loss under a potential
Cost averaging The periodic investment of a fixed amount borrower default over the life of the contract
of money. Credit spread The compensation for the risk of default in a
Cost of capital The cost of financing for a company; the rate debt security, typically measured by the yield-to-maturity
of return that suppliers of capital require as compensation difference between a bond and a comparable government
for their contribution of capital (also called opportunity benchmark security.
cost of funds). Credit spread risk The risk of greater expected loss due to
Cost of carry The net of the costs and benefits related to owning changes in credit conditions as a result of macroeconomic,
an underlying asset for a specific period. market, and/or issuer-related factors.
Cost of debt The required return on debt financing for a Credit tranching Internal credit enhancement where cash
company, such as when it issues a bond, takes out a bank flows into a senior/subordinate structure.
loan, or leases an asset through a finance lease. Credit-linked notes Bonds whose coupon changes when the
Cost of equity The return required by equity investors to bonds’ credit rating changes.
compensate for both the time value of money and the risk. Critical values Values of the test statistic at which the decision
Also referred to as the required rate of return on common changes from fail to reject the null hypothesis to reject the
stock or the required return on equity. null hypothesis.
Counterparty Legal entities entering a derivative contract. Cross-default clause Covenant or contract clause that speci-
Counterparty credit risk The likelihood that a counterparty is fies borrowers are considered in default if they default on
unable to meet its financial obligations under the contract. another debt obligation.
 © CFA Institute. For candidate use only. Not for distribution.
G-8 Glossary

Cross-sectional analysis Also called relative analysis. Analysis Days payable outstanding (DPO) The average number of days
that involves comparisons across individuals in a group it takes a company to pay its suppliers. It is calculated as
over a given time period or at a given point in time. either the ending or average balance of accounts payable
Crossing networks Trading systems that match buyers and divided by (cost of goods sold/days in the period).
sellers who are willing to trade at prices obtained from Days sales outstanding (DSO) The average number of days it
other markets. takes for a company to receive payment from customers
Crowdsourcing A business model that enables users to con- who purchase goods or services on credit. It is calculated as
tribute directly to a product, service, or online content. either the ending or average balance of accounts receivable
Cryptocurrency An electronic medium of exchange that lacks divided by (revenues/days in the period).
physical form. Dealers Financial intermediaries, such as commercial banks
Cryptocurrency wallet A storage unit for public and/or private or investment banks, who transact as counterparties with
keys for cryptocurrency transactions. These wallets may derivative end users.
be a physical device, program, or service. Debt A claim against an entity to receive cash, stock, or other
Cryptography An algorithmic process to encrypt data, making assets at a future date. From the perspective of the debtor or
the data unusable if received by unauthorized parties. borrower, an obligation to pay cash, stock, or other assets
Cumulative preference shares Preference shares for which at a future date. Generally, debt claims are unconditional
any dividends that are not paid accrue and must be paid and are senior to equity claims.
in full before dividends on common shares can be paid. Debt service coverage ratio The ratio of project revenue avail-
Cumulative voting A voting process whereby shareholders can able to cover interest and principal payments to debt service
accumulate and vote all their shares for a single candidate used as a measure of creditworthiness for revenue bonds.
in an election, as opposed to having to allocate their voting Debt tax shield The tax benefit from interest paid on debt
rights evenly among all candidates. being tax deductible from income, equal to the marginal
Currency Money issued by national monetary authorities. tax rate multiplied by the value of the debt.
Currency swap A swap in which each party makes interest Debt-to-assets ratio A solvency ratio calculated as total debt
payments to the other in different currencies. divided by total assets.
Current government spending With respect to government Debt-to-capital ratio A solvency ratio calculated as total debt
expenditures, spending on goods and services that are divided by total debt plus total shareholders’ equity.
provided on a regular, recurring basis including health, Debt-to-equity ratio A solvency ratio calculated as total debt
education, and defense. divided by total shareholders’ equity.
Current ratio A measure of liquidity that is the ratio of current Debt-to-income ratio (DTI) Residential lending metric that
assets to current liabilities. compares an individual’s monthly debt payments to their
Current yield (CY) The sum of the coupon payments received monthly pre-tax, gross income.
over the year divided by the flat price. Also called the Debut issuer An issuer approaching the bond market for the
income, interest yield, or running yield. first time.
Customs union Extends the free trade area (FTA) by not only Deciles Quantiles that divide a distribution into 10 equal parts.
allowing free movement of goods and services among Declaration date The day that the corporation issues a state-
members, but also creating a common trade policy against ment declaring a specific dividend.
nonmembers. Decreasing returns to scale When a production process leads
CVaR Conditional VaR, a tail loss measure. The weighted to increases in output that are proportionately smaller than
average of all loss outcomes in the statistical distribution the increase in inputs.
that exceed the VaR loss. Deductible temporary differences Temporary differences
Daily settlement A specific process of mark-to-market by a that result in a reduction of or deduction from taxable
central clearing party in which the profits and losses of income in a future period when the balance sheet item is
all counterparties to derivatives contracts are determined recovered or settled.
using settlement prices for each contract. Deep learning An area of artificial intelligence in which
Dark pools Alternative trading systems that do not display the a system uses neural networks to perform multistage,
orders that their clients send to them. non-linear data processing to identify patterns. Also called
Data mining The practice of determining a model by extensive deep learning nets.
searching through a dataset for statistically significant Deep learning nets See Deep learning.
patterns. Deep-in-the-money option An option that is highly likely
Data science An interdisciplinary field that harnesses advances to be exercised.
in computer science, statistics, and other disciplines for Deep-out-of-the-money option An option that is highly
the purpose of extracting information from big data (or unlikely to be exercised.
data in general). Default When a borrower on a mortgage loan fails to meet
Data snooping The practice of determining a model by exten- the obligations of the loan.
sive searching through a dataset for statistically significant Default risk premium An extra return that compensates inves-
patterns. tors for the possibility that the borrower will fail to make
Day order An order that is good for the day on which it is a promised payment at the contracted time and in the
submitted. If it has not been filled by the close of business, contracted amount.
the order expires unfilled. Defeasance Mechanism that allows prepayment on mortgage,
Days of inventory on hand (DOH) The average number of days but the borrower must purchase a portfolio of government
it would take to sell the amount of inventory on hand. It is securities that fully replicates the cash flows of the remain-
calculated as either the ending or average balance of inven- ing scheduled principal and interest payments, including
tories divided by (cost of goods sold/days in the period). the balloon loan balance, on the loan.
 © CFA Institute. For candidate use only. Not for distribution.
Glossary G-9

Defensive interval ratio A liquidity ratio that estimates the Depreciation The process of systematically allocating the cost
number of days that an entity could meet cash needs of long-lived (tangible) assets to the periods during which
from liquid assets; calculated as (cash + short-term mar- the assets are expected to provide economic benefits.
ketable investments + receivables) divided by daily cash Derivative A financial instrument whose value depends on
expenditures. the value of some underlying asset or factor (e.g., a stock
Deferred coupon bonds Bonds that pay no coupons for their price, an interest rate, or exchange rate).
first few years but then pay a higher coupon than they Derivative contract A legal agreement between counterparties
otherwise normally would for the remainder of their life. with a specific maturity, or length of time, until the closing
Also called split coupon bonds. of the transaction, or settlement.
Deferred tax asset A balance sheet asset that arises when an Derivative pricing rule A pricing rule used by crossing net-
excess amount is paid for income taxes relative to account- works in which a price is taken (derived) from the price
ing profit. The taxable income is higher than accounting that is current in the asset’s primary market.
profit and income tax payable exceeds tax expense. The Differentiated products A product or service from a firm
company expects to recover the difference during the that is distinguishable or distinct from those of competing
course of future operations when tax expense exceeds firms. It is customers who determine and value whether a
income tax payable. product is differentiated.
Deferred tax liabilities A balance sheet liability that arises Diffuse prior The assumption of equal prior probabilities.
when a deficit amount is paid for income taxes relative Diffusion index Reflects the proportion of the index’s com-
to accounting profit. The taxable income is less than the ponents that are moving in a pattern consistent with the
accounting profit and income tax payable is less than tax overall index.
expense. The company expects to eliminate the liability over Digital assets The umbrella term covering assets that can be
the course of future operations when income tax payable created, stored, and transmitted electronically and have
exceeds tax expense. associated ownership or use rights. Digital assets include a
Defined benefit pension plans (DB plans) Plans in which the variety of assets, such as cryptocurrencies, tokens (security
company promises to pay a certain annual amount (defined and utility), and digital collectables.
benefit) to the employee after retirement. The company Diluted EPS The EPS that would result if all dilutive securities
bears the investment risk of the plan assets. were converted into common shares.
Defined contribution pension plans Individual accounts to Dilution An increase in the number of shares outstanding
which an employee and typically the employer makes con- from share issuance that decreases the percentage of shares
tributions during their working years and expect to draw owned by existing shareholders.
on the accumulated funds at retirement. The employee Direct investing Occurs when an investor makes a direct
bears the investment and inflation risk of the plan assets. investment in an asset without the use of an intermediary.
Deflation Negative inflation. Direct lending Providing capital directly from private debt
Degree of financial leverage The ratio of percentage change investors.
in net income to percentage change in operating income Direct listing Where the equity of a security is floated on the
over a period. It is a measure of how sensitive net income public markets directly, without underwriters, reducing
is to changes in operating income, driven by the firm’s use the complexity and cost of the transaction.
of debt in its capital structure. Direct sales Marketing and/or delivering products and ser-
Degree of operating leverage (DOL) The ratio of percentage vices to customers without an intermediary or third party
change in operating income to percentage change in sales between the customer and seller.
over a period. It is a measure of how sensitive operating Direct taxes Taxes levied directly on income, wealth, and
income is to changes in sales, driven by the fixed and corporate profits.
variable cost composition of operating expenses. Discount factor The price equivalent of a zero rate. Also
Delta The relationship between the option price and the under- may be stated as the present value of a currency unit on
lying price, which reflects the sensitivity of the price of the a future date.
option to changes in the price of the underlying. Delta is Discount rate A yield or pricing convention for money mar-
a good approximation of how an option price will change ket instrument quotations. It is the interest earned on an
for a small change in the stock. instrument, derived from the difference between the price
Demand shock A typically unexpected disturbance to and face value, expressed as a percentage of the face value
demand, such as an unexpected interruption in trade or and multiplied by the periodicity of the annual rate.
transportation. Discounted cash flow models Valuation models that estimate
Dependent variable The variable that is explained by a regres- the intrinsic value of a security as the present value of the
sion model. future benefits expected to be received from the security.
Depository bank A bank that raises funds from depositors Discriminatory pricing rule A pricing rule used in continuous
and other investors and lends it to borrowers. markets in which the limit price of the order or quote that
Depository institutions Commercial banks, savings and loan first arrived determines the trade price.
banks, credit unions, and similar institutions that raise Diseconomies of scale Increase in cost per unit resulting from
funds from depositors and other investors and lend it to increased production.
borrowers. Dispersion The variability of a population or sample of obser-
Depository receipt A security that trades like an ordinary vations around the central tendency.
share on a local exchange and represents an economic Display size The size of an order displayed to public view.
interest in a foreign company.
 © CFA Institute. For candidate use only. Not for distribution.
G-10 Glossary

Disposition effect As a result of loss aversion, an emotional Early repayment option May entitle the borrower to prepay
bias whereby investors are reluctant to dispose of losers. all or part of the outstanding mortgage principal prior to
This results in an inefficient and gradual adjustment to maturity. This creates a risk from the lender’s or investor’s
deterioration in fundamental value. viewpoint because the cash flow amounts and timing
Distressed debt Debt of mature companies in financial diffi- cannot be known with certainty.
culty, in bankruptcy, or likely to default on debt. Earnings surprise The portion of a company’s earnings that is
Distressed/restructuring These strategies focus on securities unanticipated by investors and, according to the efficient
of companies either in or perceived to be near bank- market hypothesis, merits a price adjustment.
ruptcy. In one approach, hedge funds simply purchase Economic indicators Economic statistics provided by govern-
fixed-income securities trading at a significant discount ment and established private organizations that contain
to par but that are still senior enough to be backed by information on an economy’s recent past activity or its
sufficient corporate assets. current or future position in the business cycle.
Distributed ledger A type of database that can be shared Economic infrastructure investments A category of infra-
among entities in a network. structure investments that support economic activity
Distributed ledger technology (DLT) Technology based on through transportation assets, information and commu-
a distributed ledger. nication technology assets, and utility and energy assets.
Diversification ratio The ratio of the standard deviation of an Economic stabilization Reduction of the magnitude of eco-
equally weighted portfolio to the standard deviation of a nomic fluctuations.
randomly selected security. Economic union Incorporates all aspects of a common market
Dividend discount model (DDM) A present value model of and in addition requires common economic institutions
stock value that views the intrinsic value of a stock as and coordination of economic policies among members.
present value of the stock’s expected future dividends. Economies of scale A decline in costs per unit as output
Dividend payout ratio The ratio of cash dividends paid to grows, generally resulting from having fixed costs in the
earnings for a period. cost structure that are spread over more units of output.
Dividends Distributions of profits and/or net assets from a cor- Economies of scope A decline in costs per unit as the number
poration to its shareholders. While often in cash, dividends of product or business lines increases, generally resulting
can be also be paid in stock or assets, such as property. from having shared costs between the product lines.
Divisor A number (denominator) used to determine the value Effective annual rate An interest rate with a periodicity of one.
of a price return index. It is initially chosen at the incep- Effective convexity An interest rate risk statistic that mea-
tion of an index and subsequently adjusted by the index sures the non-linear/second-order effect of changes in the
provider, as necessary, to avoid changes in the index value benchmark yield curve on a bond’s price.
that are unrelated to changes in the prices of its constit- Effective duration The sensitivity of the bond’s price to an
uent securities. instantaneous parallel shift in a benchmark yield curve—for
Domestic bonds A type of bond for which the issuer’s domicile example, the government par curve.
and jurisdiction of issuance are the same. Efficient market A market in which asset prices reflect new
Domestic content provisions Stipulate that some percentage information quickly and rationally. See also, informationally
of the value added or components used in production efficient market.
should be of domestic origin. Either/or fee A custom fee arrangement whereby major inves-
Double taxation The taxation of business income at both the tors are offered a structure where managers agree to charge
entity and personal or owner levels. In most jurisdictions, either a lower management fee or a higher incentive fee,
this taxation scheme applies to public limited companies. whichever is greater.
Downside risk Risk of incurring returns below a specified Electronic communications networks (ECNs) See alternative
value. trading systems and multilateral trading facilities.
Drag on liquidity An action or event that reduces available Embedded derivative A derivative within an underlying, such
funds or delays cash inflows. as a callable, putable, or convertible bond.
Drivers Causative factors that explain the level of and changes Embedded options Contingency provisions found in a bond’s
in an output variable indenture representing rights that enable their holders to
DSC ratio A property’s annual net operating income (NOI) take advantage of interest rate movements. They can be
divided by the debt service. exercised by the issuer, by the bondholder, or automatically
Dual-class structure A capital structure that includes at least depending on the course of interest rates.
two classes of equity shares with unequal voting rights. Emotional biases Behavioral biases resulting from reasoning
Dupont analysis An approach to decomposing return on influenced by feelings; emotional biases stem from impulse
investment, e.g., return on equity, as the product of other or intuition.
financial ratios. Empirical duration Estimates of duration calculated over
Duration A measure of the approximate sensitivity of a secu- time and in different interest rate environments. Unlike
rity to a change in interest rates (i.e., a measure of interest analytical duration, empirical duration estimates do not
rate risk). assume that benchmark yields and spreads are independent
Duration gap The difference between a bond’s Macaulay dura- variables and are uncorrelated
tion and its investor’s investment horizon. Employee stock ownership plan (ESOP) A type of employee
Dynamic pricing A pricing approach that charges different benefit plan in which a company sets up a trust fund to
prices at different times. Specific examples include off-peak receive contributions of newly issued shares or cash to
pricing, “surge” pricing, and “congestion” pricing. buy existing shares. Contributions are tax deductible up
to certain limits. Shares in the trust fund are allocated to
individual employees based on relative pay or a formula.
 © CFA Institute. For candidate use only. Not for distribution.
Glossary G-11

Endowment bias An emotional bias in which people value Exercise date The day that an option is exercised by its holder.
an asset more when they hold rights to it than when they For a call option, the day the strike price is paid and under-
do not. lying is purchased. For a put option, when the strike price
Enterprise risk management An overall assessment of a is received and the underlying is sold.
company’s risk position. A centralized approach to risk Exercise price The pre-agreed execution price specified in an
management sometimes called firmwide risk management. option contract. Sometimes, this price is referred to as
Enterprise value (EV) Total company value (the market value the strike price.
of debt, common equity, and preferred equity) minus the Exogenous risk A sudden or unanticipated risk that impacts
value of cash and investments. either a country’s cooperative stance, the ability of non-state
Equal weighting An index weighting method in which an equal actors to globalize, or both. Examples include sudden
weight is assigned to each constituent security at inception. uprisings, invasions, or the aftermath of natural disasters.
Equity Ownership interest in an entity. A residual claim on the Expansion The period of a business cycle after its lowest point
assets of an entity after more senior claims, such as debt, and before its highest point.
have been satisfied. Also known as net assets. Expansionary Tending to cause the real economy to grow.
Equity swap A swap transaction in which at least one cash Expansionary fiscal policy Fiscal policy aimed at achieving
flow is tied to the return on an equity portfolio position, real economic growth.
often an equity index. Expected exposure (EE) The size of the investor’s claim at
Error term Represents the difference between the observed the time of default
value of the independent variable and that expected from Expected loss (EL) Default probability times loss severity
the true underlying population relation between the depen- given default.
dent and independent variable. Expected return on the portfolio Denoted as (E (Rp)). The
Estimated parameters In a simple linear regression, the esti- weighted average of the expected returns (R1 to Rn) on
mated parameters are the intercept and slope of the fitted the component securities using their respective weights
line. (w1 to wn).
Ether A programmable cryptocurrency created on the Expected value of a random variable The probability-weighted
Ethereum blockchain in 2015 that allows for the execu- average of the possible outcomes of a random variable.
tion of smart contracts. Expert system A type of computer programming, often based
Ethical principles Beliefs regarding what is good, acceptable, on “if–then” rules, that attempts to simulate the knowledge
or obligatory behavior and what is bad, unacceptable, or base and analytical abilities of human experts in specific
forbidden behavior. problem-solving contexts.
Ethics The study of moral principles or of making good choices. Export subsidy Paid by the government to the firm when it
Ethics encompasses a set of moral principles and rules of exports a unit of a good that is being subsidized.
conduct that provide guidance for our behavior. Exposure at default (EAD) The size of the investor’s claim at
Eurobonds A type of bond issued internationally, outside the the time of default
jurisdiction of the country in whose currency the bond is Extension risk The risk that the borrower repays the principal
denominated. or a proportion of the principal in a longer time period
European options Options that may be exercised only at than the contractually agreed scheduled payment.
contract maturity. External credit enhancements Provisions or methods from
European-style Said of an option contract that can only be a third party that allow a borrower improve their credit-
exercised on the option’s expiration date. worthiness in a structured transaction..
Event risk Risk that evolves around set dates, such as elections, External debt Sovereign debt owed to foreign creditors.
new legislation, or other date-driven milestones, such as Extra dividend A dividend paid by a company that does not
holidays or political anniversaries, known in advance. pay dividends on a regular schedule, or a dividend that
Example: Brexit referendum. supplements regular cash dividends with an extra payment.
Ex-dividend date The first date that a share trades without Extraordinary general meetings (EGMs) Meetings besides an
(i.e., “ex”) the right to receive the declared dividend for AGM of the corporate board and shareholders, typically
the period. held to deliberate and vote on urgent matters. Corporate
Excess kurtosis Degree of kurtosis (fatness of tails) relative to charters and bylaws specify who can call an EGM and
the kurtosis of the normal distribution. under what conditions.
Excess spread Surplus difference of yield remaining after pay- Extreme value theory A branch of statistics that focuses
ments to bondholders are made after expenses are made primarily on extreme outcomes.
and losses are covered. Face value The amount of principal on a bond, also known
Exchange A rules-based, open access market venue where as par value.
financial instruments are traded, with price and volume Factoring arrangement When a company sells its accounts
transparency accessible by issuers, investors, and their receivable to a lender (known as a factor) that assumes
intermediaries. responsibility for the credit-granting and collection process.
Exchange-traded derivative (ETD) Futures, options, and other Fair value A market-based measure of an investment based
financial contracts available on exchanges. on observable or derived assumptions to determine a price
Exchanges Places where traders can meet to arrange their that market participants would use to exchange an asset or
trades. liability in an orderly transaction at a specific time.
Execution instructions Instructions that indicate how to fill Fair value hedge Refers to a specific hedge accounting des-
an order. ignation that applies when a derivative is deemed to offset
Exercise The decision to transact the underlying by an option the fluctuation in fair value of an asset or liability.
holder.
 © CFA Institute. For candidate use only. Not for distribution.
G-12 Glossary

Fallen angels Formerly investment-grade issuers whose credit Float-adjusted market-capitalization weighting An index
quality has deteriorated since the time of issuance. weighting method in which the weight assigned to each
Fat-Tailed Describes a distribution that has fatter tails than a constituent security is determined by adjusting its market
normal distribution (also called leptokurtic). capitalization for its market float.
Federal funds rate The US interbank lending rate on overnight Floating-rate notes (FRNs) Notes on which interest pay-
borrowings of reserves. Also known as Fed Funds rate. ments are not fixed but instead vary from period to period
Fiat money Money that is not convertible into any other depending on the current level of a reference interest rate.
commodity. Also known as floaters.
Fiduciary call A combination of a purchased call option and Floating-rate payer The counterparty paying the variable
investment in a risk-free bond with face value of the option’s cash flows in a swap contract. May also be referred to as
exercise price. the fixed-rate receiver.
Fill or kill See immediate or cancel order. Forecast object A variable on or related to an issuer’s financial
Finance lease A type of lease which is more akin to the pur- statements that an analyst makes a projection for. Examples
chase or sale of the underlying asset. include drivers of financial statements, financial statement
Financial leverage The use of debt in the capital structure. lines, and summary measures like EBITDA.
Measured using ratios such as operating income to oper- Foreclosure Allows a lender to take possession of the property
ating income less interest expense, total assets to total and ultimately sell the property to recover funds toward
equity, or debt to equity. satisfying the outstanding debt obligation.
Financial leverage ratio A measure of financial leverage calcu- Foreign bonds A type of bond for which the issuer’s domicile
lated as average total assets divided by average total equity. and jurisdiction of issuance are different.
Financial risk The risk arising from a company’s capital struc- Foreign currency reserves Holding by the central bank of
ture and, specifically, from the level of debt and debt-like non-domestic currency deposits and non-domestic bonds.
obligations. Foreign direct investments (FDI) Long-term investments in
Fintech Technological innovation in the financial services the productive capacity of a foreign country.
industry, specifically with the design and delivery of finan- Foreign exchange gains (or losses) Gains (or losses) that
cial services and products. It may also refer more broadly occur when the exchange rate changes between the inves-
to companies involved in developing the new technologies tor’s currency and the currency that foreign securities are
and their applications, as well as the business sector that denominated in.
includes such companies. Forward contract A derivative contract for the future
Firm commitment A pre-determined amount (price and quan- exchange of an underlying at a fixed price set at contract
tity) is agreed to be exchanged at settlement. Examples signing.
of firm commitments include forward contracts, futures Forward price Represents the price agreed upon in a forward
contracts, and swaps. contract to be exchanged at the contract’s maturity date,
First lien Security interest in a property that gives the lender T. This price is shown in equations as F0(T).
the right to seize the collateral if the borrower does not Forward price-to-earnings ratio A P/E calculated on the basis
pay as agreed. of a forecast of EPS; a stock’s current price divided by next
First lien debt Debt secured by a pledge of certain assets that year’s expected earnings.
could include buildings, but it may also include property Forward rate agreement (FRA) An OTC derivatives contract
and equipment, licenses, patents, brands, etc. in which counterparties agree to apply a specific interest
First mortgage debt Debt secured by a pledge of a specific rate to a future time period.
property. Founders class shares A way to entice early participation
Fiscal multiplier The ratio of a change in national income to in startup funds whereby managers offer incentives that
a change in government spending. entitle investors to a lower fee structure and/or other
Fiscal policy The use of taxes and government spending to favorable terms.
affect the level of aggregate expenditures. Framing bias An information-processing bias in which a per-
Fixed charge coverage A solvency ratio measuring the num- son answers a question differently based on the way in
ber of times interest and lease payments are covered by which it is asked (framed).
operating income, calculated as (EBIT + lease payments) Franchising A situation where an owner of an asset and asso-
divided by (interest payments + lease payments). ciated intellectual property divests the asset and licenses
Fixed charge coverage ratio A measure of how well a compa- intellectual property to a third-party operator (franchisee)
ny's earnings covers its fixed expenses, which may include in exchange for royalties. Franchisees operate under the
debt payments, interest expense, and lease costs. constraints of a franchise agreement.
Fixed-income instruments Debt instruments such as loans Free cash flow The actual cash that would be available to the
or bonds. company’s investors after making all investments necessary
Fixed-income securities Fixed-income instruments designed to maintain the company as an ongoing enterprise (also
to be more easily tradeable than a loan, such as a bond. referred to as free cash flow to the firm); the internally
Fixed-price call A contingency provision that grants an issuer generated funds that can be distributed to the company’s
the right to buy back a bond at a predetermined price in investors (e.g., shareholders and bondholders) without
the future. impairing the value of the company.
Fixed-rate payer The counterparty paying fixed cash flows in a Free cash flow hypothesis The hypothesis that higher debt
swap contract. May also be referred to as the floating-rate levels discipline managers by forcing them to make fixed
receiver. debt service payments and by reducing the company’s
Flat price The full price of a bond minus accrued interest. Flat free cash flow.
prices are usually quoted by bond dealers.
 © CFA Institute. For candidate use only. Not for distribution.
Glossary G-13

Free float The portion of a listed company’s equity securities Futures price The pre-agreed price at which a futures contract
that are not held by insiders, strategic investors, sponsors, buyer (seller) agrees to pay (receive) for the underlying at
founders, and so on, that are more freely available for the maturity date of the futures contract.
trading. FX swap The combination of a spot and a forward FX
Free trade areas One of the most prevalent forms of regional transaction.
integration, in which all barriers to the flow of goods and G-spread Yield spread in basis points between a bond’s
services among members have been eliminated. yield-to-maturity and that of an actual or interpolated
Free-cash-flow-to-equity models Valuation models based government bond. It represents the return for bearing
on discounting expected future free cash flow to equity. risks relative to the government bond.
Freemium business model A pricing approach that allows Game theory The set of tools decision makers use to incorpo-
customers a certain level of usage or functionality at no rate responses by rival decision makers into their strategies.
charge. Those who wish to use more must pay. Gamma A numerical measure of how sensitive an option’s delta
Frequency table A representation of the frequency of occur- (the sensitivity of the derivative’s price) is to a change in
rence of two discrete variables. the value of the underlying.
Full price The price of a bond including any accrued interest Gate A provision that when implemented limits or restricts
owed to the seller. It is the flat price plus accrued interest. redemptions for a period of time.
Fully amortizing loan A loan or bond with a payment schedule General collateral repo Rather than involving a specific secu-
that calls for the complete repayment of principal over the rity, a repo that instead references a specific group of
instrument’s time to maturity. securities as eligible collateral (such as government bonds
Fund investing In fund investing, the investor invests in assets of a specific maturity).
indirectly by contributing capital to a fund as part of a General collateral repo rate The interest rate on a general
group of investors. Fund investing is available for all major collateral repo.
alternative investment types. General obligation (GO) bonds Unsecured bonds issued by a
Fund of funds Funds that hold a portfolio of hedge funds; also non-sovereign government which are backed by the taxing
called funds of hedge funds. authority of the issuer.
Fundamental analysis The examination of publicly available General partners (GPs) Owners of a general partnership or
information and the formulation of forecasts to estimate limited partnership with unlimited liability and other attri-
the intrinsic value of assets. butes as specified in the partnership agreement.
Fundamental growth These strategies use fundamental anal- General partnership A business organizational form owned
ysis to identify companies expected to exhibit high growth entirely by general partners.
and capital appreciation. Geophysical resource endowment Includes such factors as
Fundamental long/short In this strategy, the hedge fund takes livable geography and climate as well as access to food
a long position in companies that are trading at inexpensive and water, which are necessary for sustainable growth.
levels compared to their potential intrinsic value and shorts Geophysical resource endowment is highly unequal among
those that trade in the other direction, with the intention countries.
of reversing this trade to obtain alpha. Geopolitics The study of how geography affects politics and
Fundamental value These strategies use fundamental anal- international relations. These relations matter for invest-
ysis to identify undervalued and unloved companies for ments because they contribute to important drivers of
which there is a possibility that a corporate turnaround, investment performance, including economic growth, busi-
with future revenue and cash flow growth, will result in ness performance, market volatility, and transaction costs.
higher valuations. Gilts Bonds issued by the UK government.
Fundamental weighting An index weighting method in which Global depository receipt (GDR) A depository receipt that is
the weight assigned to each constituent security is based issued outside of the company’s home country and outside
on its underlying company’s size. It attempts to address of the United States.
the disadvantages of market-capitalization weighting by Global minimum-variance portfolio The portfolio on the
using measures that are independent of the constituent minimum-variance frontier with the smallest variance
security’s price. of return.
Fungible Freely exchangeable, interchangeable, or substitutable Global registered share (GRS) A common share that is traded
with other things of the same type. Money and commodi- on different stock exchanges around the world in different
ties are the most common examples. currencies.
Futures contract A variation of a forward contract that has Globalization The process of interaction and integration
essentially the same basic definition but with some addi- among people, companies, and governments worldwide.
tional features, such as a clearinghouse guarantee against It is marked by the spread of products, information, jobs,
credit losses, a daily settlement of gains and losses, and an and culture across borders.
organized electronic or floor trading facility. Gold standard With respect to a currency, if a currency is on
Futures contract basis point value (BPV) The change in the gold standard a given amount can be converted into a
price of a futures contract given a 1 basis point (0.01%) prespecified amount of gold.
change in yield. Good-on-close An execution instruction specifying that an
Futures contracts Forward contracts with standardized sizes, order can only be filled at the close of trading. Also called
dates, and underlyings that trade on futures exchanges. market-on-close.
Futures margin account An account held by an exchange Good-on-open An execution instruction specifying that an
clearinghouse for each derivatives counterparty. The funds order can only be filled at the opening of trading.
in such an account are used to ensure that counterparties
do not default on their contract obligation.
 © CFA Institute. For candidate use only. Not for distribution.
G-14 Glossary

Good-till-cancelled order An order specifying that it is valid Hedge accounting Accounting standard(s) that allow an issuer
until the entity placing the order has cancelled it (or, com- to offset a hedging instrument (usually a derivative) against
monly, until some specified amount of time such as 60 days a hedged transaction or balance sheet item to reduce
has elapsed, whichever comes sooner). financial statement volatility.
Goodwill An intangible asset that represents the excess of the Hedge funds Private investment vehicles that may invest in
purchase price of an acquired company over the value of public equities or publicly traded fixed-income assets,
the net identifiable assets acquired. private capital, and/or real assets, but they are distin-
Governance tokens In permissionless networks, governance guished by their investment approach rather than by the
tokens serve as votes to determine how the particular investments themselves.
network is run. Hedge ratio The proportion of an underlying that will offset
Government debt management Government policies that the risk associated with a derivative position.
relate to the issuance of debt securities, typically handled Hedging The use of a derivative contract to offset or neutralize
by a treasurer or finance ministry. existing or anticipated exposure to an underlying.
Government equivalent yield Measures quoted using actual/ Hegemony Countries that are regional or even global leaders
actual day counts. and use their political or economic influence of others to
Grant date The day that terms of compensation are communi- control resources.
cated by an issuer and accepted by an employee recipient. Held-to-maturity Debt (fixed-income) securities that a com-
Green bonds Bonds used in green finance whereby the pany intends to hold to maturity; these are presented at
proceeds are earmarked toward environmental-related their original cost, updated for any amortisation of dis-
products. counts or premiums.
Greenfield investments The first stage of development of Herding Clustered trading that may or may not be based on
an infrastructure asset. Greenfield investments involve information.
developing new assets and new infrastructure with the Herfindahl-Hirschman Index (HHI) A measure of market
intention either to lease or sell the assets to the govern- concentration, calculated as the sum of the squares of
ment after construction or to hold and operate the assets. competitor market shares. Antitrust regulators in some
Greenfield investors typically invest alongside strategic countries consider markets with an HHI between 1,500
investors or developers that specialize in developing the and 2,500 moderately concentrated and consider markets
underlying assets. with an HHI over 2,500 highly concentrated.
Gross profit margin The ratio of gross profit to revenues. Heteroskedasticity Non-constant variance across all
Groupthink The practice of thinking or making decisions as observations.
a group in a way that discourages creativity or individual Hidden order An order that is exposed not to the public but
responsibility. For scenario analysis to be useful in portfo- only to the brokers or exchanges that receive it.
lio management, teams must work hard to build creative Hidden revenue business model Business models that pro-
processes, identify scenarios, track these scenarios, and vide services to users at no charge and generate revenues
assess the need for action on a regular cadence. elsewhere.
Growth cycle Refers to fluctuations in economic activity High yield Bond issuers and issues rated BB+ (Ba1 on Moody’s
around the long-term potential trend growth level, focusing scale) or lower. Also known as speculative grade and junk.
on how much actual economic activity is below or above High-water mark The highest value, net of fees, that a fund
trend growth in economic activity. has reached in history. It reflects the highest cumulative
Growth option The option to make additional investments return used to calculate an incentive fee.
in a project at some future time if the financial results are Hindsight bias A bias with selective perception and retention
strong. Also called an expansion option. aspects in which people may see past events as having been
Growth rate cycle Refers to fluctuations in the growth rate of predictable and reasonable to expect.
economic activity. Holder-of-record date The date that a shareholder listed on the
Haircut The difference between the market value of the security corporation’s books will be deemed to have ownership of
used as collateral and the value of the loan. Also called the shares for purposes of receiving an upcoming dividend.
repo margin. Holding period return The return that an investor earns during
Halo effect An emotional bias that extends a favorable eval- a specified holding period; a synonym for total return.
uation of some characteristics to other characteristics. Home bias A preference for securities listed on the exchanges
Hard commodities Traded natural resources, such as crude of one’s home country.
oil and metals, with markets often involving the physical Homogeneity of expectations The assumption that all inves-
delivery of the underlying upon settlement. tors have the same economic expectations and thus have
Hard hurdle rate Hurdle ratewhere the manager earns fees on the same expectations of prices, cash flows, and other
annual returns in excess of the hurdle rate investment characteristics.
Hard-bullet covered bonds Type of security where if pay- Homoskedasticity Constant variance across all observations.
ments do not occur according to the original schedule Horizon yield An investor’s total rate of return on a fixed
of a covered bond, a bond default is triggered and bond income instrument over their holding period, including
payments are accelerated. reinvested coupon payments. It is an internal rate of return
Harmonic mean A type of weighted mean computed as the expressed as an annualized rate.
reciprocal of the arithmetic average of the reciprocals. Hostile takeover When a potential acquirer seeks to acquire
Hedge The derivative contract used in hedging an exposure. a company (the target) against the wishes of the target’s
board of directors. Typically, a tender offer is used to carry
out the hostile takeover, against which a board might use
a poison pill in its defense.
 © CFA Institute. For candidate use only. Not for distribution.
Glossary G-15

Household A person or a group of people living in the same Independent directors Members of a corporation’s board of
residence, taken as a basic unit in economic analysis. directors who do not have an employment or familial rela-
Human capital The accumulated knowledge and skill that tionship with the company, nor do they have a relationship
workers acquire from education, training, or life experience that would impair their independence such as an economic
and the corresponding present value of future earnings to interest in a vendor or competitor of the company.
be generated by said skilled individual. Independent variable An explanatory variable in a regression
Hurdle rate Also called “preferred return.” The minimum rate model.
of return on investment that a fund must reach before a Independently and identically distributed With respect to
GP receives carried interest. random variables, the property of random variables that
Hypothesis A proposed explanation or theory that can be are independent of each other but follow the identical
tested. probability distribution.
Hypothesis testing The process of testing of hypotheses about Index-linked bonds A bond whose coupon payments or prin-
one or more populations using statistical inference. cipal repayment is linked to a specified index.
I-spread Also known as interpolated spread, it is the yield Indexing An investment strategy in which an investor con-
spread for a bond over the standard swap rate in that structs a portfolio to mirror the performance of a specified
currency of the same tenor. index.
Iceberg order An order in which the display size is less than Indicator variable A variable that takes on only one of two
the order’s full size. values, 0 or 1, based on a condition. In simple linear regres-
If-converted method A method for accounting for the effect sion, the slope is the difference in the dependent variable for
of convertible securities on earnings per share (EPS) that the two conditions. Also referred to as a dummy variable.
specifies what EPS would have been if the convertible secu- Indifference curve A curve representing all the combinations
rities had been converted at the beginning of the period, of two goods or attributes such that the consumer is entirely
taking account of the effects of conversion on net income indifferent among them.
and the weighted average number of shares outstanding. Indirect taxes Taxes such as taxes on spending, as opposed
Illusion of control bias A bias in which people tend to believe to direct taxes.
that they can control or influence outcomes when, in fact, Inflation premium An extra return that compensates investors
they cannot. for expected inflation.
Immediate or cancel order An order that is valid only upon Inflation reports A type of economic publication put out by
receipt by the broker or exchange. If such an order can- many central banks.
not be filled in part or in whole upon receipt, it cancels Inflation-linked bonds A type of index-linked bond that offer
immediately. Also called fill or kill. investors protection against inflation by linking the bonds’
Impact lag The lag associated with the result of actions affect- coupon payments and/or the principal repayment to an
ing the economy with delay. index of consumer prices. Also called linkers.
Implied forward rate (IFR) An interest rate or yield over a Information cascade The transmission of information from
future period implied by the current term structure of those participants who act first and whose decisions influ-
interest rates. ence the decisions of others.
Import license Specifies the quantity of a good that can be Information-motivated traders Traders that trade to profit
imported into a country. from information that they believe allows them to predict
In-the-money Describes an option with a positive intrinsic future prices.
value. Informationally efficient market A market in which asset
Income tax paid The actual amount paid for income taxes in prices reflect new information quickly and rationally.
the period; not a provision, but the actual cash outflow. Infrastructure A type of real asset that is intended for public
Income tax payable The income tax owed by the company use and provides essential services. These assets are typi-
on the basis of taxable income. cally long-lived fixed assets, such as bridges and toll roads.
Increasing returns to scale When a production process leads Initial coin offering (ICO) An unregulated process whereby
to increases in output that are proportionately larger than companies raise capital by selling crypto-tokens to inves-
the increase in inputs. tors in exchange for fiat money or another agreed-upon
Incurrence test A financial ratio or other measurement taken cryptocurrency.
prior to an action such as debt issuance, usually on a pro Initial margin The ratio of the price of collateral to the value
forma basis taking the action into account. Satisfaction of of cash exchanged in a repo; a value over 1.0 or 100%
the test (e.g., leverage ratio below a certain value) is linked indicates overcollateralization.
to covenants between the issuer and investors. Initial margin requirement The margin requirement on the
Indenture A written contract between a lender and borrower first day of a transaction as well as on any day in which
that specifies the terms of the loan, such as interest rate, additional margin funds must be deposited.
interest payment schedule, or maturity. Initial public offering (IPO) The first issuance of common
Independent With reference to events, the property that the shares to the public by a formerly private corporation.
occurrence of one event does not affect the probability of Inside directors Members of a corporation’s board of directors
another event occurring. With reference to two random who are not independent. Typically, inside directors are
variables X and Y, they are independent if and only if employees or founders (and their family) of the company.
P(X,Y) = P(X)P(Y). Insolvency Refers to the condition in which firm value is below
the face value of debt used to finance the firm’s assets.
Institution An established organization or practice in a society
or culture. An institution can be a formal structure, such
as a university, organization, or process backed by law; or
 © CFA Institute. For candidate use only. Not for distribution.
G-16 Glossary

it can be informal, such as a custom or behavioral pattern Jackknife A resampling method that repeatedly draws samples
important to society. Institutions can, but need not be, by taking the original observed data sample and leaving
formed by national governments. Examples of institutions out one observation at a time (without replacement) from
include non-governmental organizations, charities, reli- the set.
gious customs, family units, the media, political parties, January effect Calendar anomaly that stock market returns
and educational practice. in January are significantly higher compared to the rest of
Intangible assets Assets without a physical form, such as the months of the year, with most of the abnormal returns
patents and trademarks. reported during the first five trading days in January. Also
Interbank market The market of loans and deposits between called turn-of-the-year effect.
banks for maturities ranging from overnight to one year. Joint probability function A function giving the probability
Intercept The estimated value of the dependent variable when of joint occurrences of values of stated random variables.
the independent variable is zero. Judgmental sampling A procedure of selectively handpick-
Interest coverage A solvency ratio calculated as EBIT divided ing elements from the population based on a researcher’s
by interest payments. knowledge and professional judgment.
Interest coverage ratio A measure of an issuer's ability to Junior debt Debt obligation with lower priority of payment
service its debt, typically the ratio of operating income or than senior debt obligations.
EBIT to interest expense. Key rate duration A method of measuring interest rate sensi-
Interest rate A rate of return that reflects the relationship tivities of a fixed-income instrument or portfolio to shifts
between differently dated cash flows; a discount rate. in key points along the yield curve.
Interest rate swap A swap in which the underlying is an Keynesians Economists who believe that fiscal policy can
interest rate. Can be viewed as a currency swap in which have powerful effects on aggregate demand, output, and
both currencies are the same and can be created as a employment when there is substantial spare capacity in
combination of currency swaps. an economy.
Interest-indexed bond A type of index-linked bond for which Kurtosis The statistical measure that indicates the combined
changes in the index are captured with adjustments to weight of the tails of a distribution relative to the rest of
interest payments. the distribution.
Internal credit enhancements Provisions or methods a bor- Lagging economic indicators Turning points that take place
rower initiates to improve their creditworthiness in a later than those of the overall economy; they are believed
structured transaction, such as overcollateralization or to have value in identifying the economy’s past condition.
excess spread. Law of one price A principle that states that if two investments
Internal rate of return (IRR) The discount rate that makes net have the same or equivalent future cash flows regardless of
present value equal 0; the discount rate that makes the what will happen in the future, then these two investments
present value of an investment’s costs (outflows) equal to should have the same current price.
the present value of the investment’s benefits (inflows). Lead underwriter The lead investment bank in a syndicate
Internet of things The vast array of physical devices, home of investment banks and broker–dealers involved in a
appliances, smart buildings, vehicles, and other items that securities underwriting.
are embedded with electronics, sensors, software, and Leading economic indicators Turning points that usually
network connections that enable the objects in the system precede those of the overall economy; they are believed
to interact and share information. to have value for predicting the economy’s future state,
Interquartile range The difference between the third and first usually near-term.
quartiles of a dataset. Legal tender Something that must be accepted when offered
Intrinsic value The amount gained (per unit) by an option in exchange for goods and services.
buyer if an option is exercised at any given point in time. Lender of last resort An entity willing to lend money when
May be referred to as the exercise value of the option. no other entity is ready to do so.
Investment banks Financial intermediaries that provide Leptokurtic Describes a distribution that has fatter tails than
advice to their mostly corporate clients and help them a normal distribution (also called fat-tailed).
arrange transactions such as initial and seasoned securities Lessee The party obtaining the use of an asset through a lease.
offerings. Lessor The owner of an asset that grants the right to use the
Investment grade Bond issuers and issues rated BBB- (Baa3 asset to another party.
on Moody’s scale). Level of significance The probability of a Type I error in
Investment policy statement A written planning document testing a hypothesis.
that describes a client’s investment objectives and risk Leverage A measure for identifying a potentially influential
tolerance over a relevant time horizon, along with the high-leverage point.
constraints that apply to the client’s portfolio. Leveraged buyout A transaction whereby the target company
Issue rating A rating which seeks to capture the probability management team converts the target to a privately held
of default or expected loss of the issuer’s senior unsecured company by using heavy borrowing to finance the purchase
bonds of the target company’s outstanding shares.
Issuer rating A rating which seeks to capture the credit risk Leveraged buyout (LBO) An acquirer (typically an investment
of a specific financial obligation of an issuer which takes fund specializing in LBOs) uses a significant amount of
such factors as seniority into account. debt to finance the acquisition of a target and then pursues
J-curve effect Represents the initial negative return in the restructuring actions, with the goal of exiting the target
capital commitment phase followed by an acceleration of with a sale or public listing.
returns through the capital deployment phase.
 © CFA Institute. For candidate use only. Not for distribution.
Glossary G-17

Leveraged buyouts Transactions whereby the target compa- Load fund A mutual fund in which, in addition to the annual
ny's management team converts the target to a privately fee, a percentage fee is charged to invest in the fund and/
held company by using heavy borrowing to finance the or for redemptions from the fund.
purchase of the target company's outstanding shares. Loan-to-value ratio (LTV) Ratio of the amount of the mortgage
Leveraged loan Where private debt investor firms borrow to the property’s value. The lower the LTV, the higher
money to make a direct loan to a borrower. the borrower’s equity. From the lender’s perspective, the
Leveraged loans Loans made to a borrower or issuer with higher the borrower’s equity, the less likely the borrower
relatively lower credit quality and/or higher leverage. is to default.
Liability-driven investing An investment industry term that Loans Debt instruments agreed to between a borrower and
generally encompasses asset allocation that is focused on lender, typically a bank.
funding an investor’s liabilities in institutional contexts. Lockout or revolving period For an ABS with a non-amortizing
Licensing arrangements Rights to produce a product or have collateral pool, such as credit card debt, is the period in
access to intangible assets using someone else’s brand name which the cash proceeds from principal repayments are
in return for a royalty (often a percentage of revenues). reinvested in additional loans with a principal equal to the
Lien A legal right or claim to property by a creditor. principal repaid. During this period, there is no prepayment
Likelihood The probability of an observation, given a particular risk and potential default risk is generally limited. When
set of conditions. the lockout period is over, principal repayments are used
Limit order Instructions to a broker or exchange to obtain the to pay off the outstanding principal on the ABS. Lockout
best price immediately available when filling an order, but period and revolving period are interchangeable.
in no event accept a price higher than a specified (limit) Lockup period The minimum holding period before investors
price when buying or accept a price lower than a specified are allowed to make withdrawals or redeem shares from
(limit) price when selling. a fund. Its purpose is to allow the hedge fund manager
Limit order book The book or list of limit orders to buy and the required time to implement and potentially realize a
sell that pertains to a security. strategy’s expected results.
Limited company A business organizational form owned by Log-lin model A functional form for transforming regression
shareholders or members with limited liability who elect model data in which the dependent variable is logarithmic
a board of directors to appoint management. Generally, but the independent variable is linear.
limited companies have indefinite life and easier transfer Log-log model A functional form for transforming regression
of ownership interests than limited partnerships. model data in which both the dependent and independent
Limited liability partnership (LLP) A business organizational variables are in logarithmic form.
form available in some jurisdictions owned entirely by Long A trading position in a derivative contract that gains
limited partners with limited liability. value as the price of the underlying moves higher.
Limited partners (LPs) Owners of a limited partnership with Long position A position in an asset or contract in which
limited liability and other attributes as specified in the one owns the asset or has an exercisable right under the
partnership agreement. contract.
Limited partnership A business organizational form owned Long-run average total cost The curve describing average
by a general partner and limited partners. total cost when no costs are considered fixed.
Limited partnership agreement (LPA) A legal document that Loss aversion The tendency of people to dislike losses more
outlines the rules of the partnership and establishes the than they like comparable gains.
framework that ultimately guides the fund’s operations Loss given default (LGD) The investor’s loss conditional on
throughout its life. an issuer event of default.
Lin-log model A functional form for transforming regression Loss severity Portion of a bond’s value (including unpaid
model data in which the dependent variable is linear but interest) an investor loses in the event of default.
the independent variable is logarithmic. Loss-aversion bias A bias in which people tend to strongly
Linear derivatives Firm commitment derivative contracts in prefer avoiding losses as opposed to achieving gains.
which the contract’s payoff/profit function is linear with Low-cost producer A firm with lower production costs than
respect to the price of the underlying. its industry competitors.
Liquid market Said of a market in which traders can buy or sell M2 A measure of what a portfolio would have returned if it had
with low total transaction costs when they want to trade. taken on the same total risk as the market index.
Liquidity The extent to which a company is able to meet its M2 alpha Difference between the risk-adjusted performance
short-term obligations using cash flows and those assets of the portfolio and the performance of the benchmark.
that can be readily transformed into cash. Macaulay duration The present-value weighted average time to
Liquidity premium An extra return that compensates investors receipt of cash flows for fixed-income instrument, also the
for the risk of loss relative to an investment’s fair value holding period needed to balance coupon reinvestment risk
if the investment needs to be converted to cash quickly. and price risk for a one-time instantaneous “parallel” shift
Liquidity ratios Financial ratios measuring the company’s in the yield curve once the bond purchase is settled. It is
ability to meet its short-term obligations to creditors as named after Frederick Macaulay, the Canadian economist
they come due. who introduced the concept in 1938.
Liquidity risk A divergence in thecash flow timing of a deriv- Machine learning (ML) Involves computer-based techniques
ative versus that of an underlying transaction. that seek to extract knowledge from large amounts of data
Liquidity trap A condition in which the demand for money without making any assumptions about the data’s underly-
becomes infinitely elastic (horizontal demand curve) so ing probability distribution. The goal of ML algorithms is
that injections of money into the economy will not lower
interest rates or affect real activity.
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G-18 Glossary

to automate decision-making processes by generalizing, or Market multiple models Valuation models based on share
“learning,” from known examples to determine an under- price multiples or enterprise value multiples.
lying structure in the data. Market neutral These strategies use quantitative, fundamental,
Maintenance capital expenditures Investments in assets to and technical analysis to identify under- and overvalued
keep them in operation or increase their efficiency without equity securities. The hedge fund takes long positions in
extending their useful lives. undervalued securities and short positions in overvalued
Maintenance margin Minimum balance set below the initial securities, while seeking to maintain a market-neutral
margin that each contract buyer and seller must hold in net position.
the futures margin account from trade initiation until final Market order Instructions to a broker or exchange to obtain
settlement at maturity. the best price immediately available when filling an order.
Maintenance margin requirement The margin requirement Market reference rate A market-determined interest rate used
on any day other than the first day of a transaction. as the underlying in financial instruments and contracts
Management buy-in A type of leveraged buyout where the such as variable-rate debt and interest rate swaps. An exam-
current management team is replaced with the acquiring ple is the Secured Overnight Financing Rate (SOFR), which
team involved in managing the company. is an overnight cash borrowing rate collateralized by US
Management buyout A type of leveraged buyout where the Treasuries. Other MRRs include the euro short-term rate
current management team participates in the acquisition. (€STR) and the Sterling Overnight Index Average (SONIA).
Management guidance Management of public companies Market reference rate (MRR) The interest rate underlying used
may publicly provide targets for earnings, revenues, and in interest rate swaps. These rates typically match those of
other measures (e.g., capital expenditures) for the next loans or other short-term obligations. Survey-based Libor
quarter, year, or longer term. Guidance can be detailed rates used as reference rates in the past have been replaced
or rather directional and is often updated throughout the by rates based on a daily average of observed market
year. Initial guidance for next fiscal year might be provided transaction rates. For example, the Secured Overnight
during the fourth-quarter earnings call and updated for Financing Rate (SOFR) is an overnight cash borrowing rate
completed quarters, and new information provided at collateralized by US Treasuries. Other MRRs include the
the first-, second-, and third-quarter earnings calls. Also euro short-term rate (€STR) and the Sterling Overnight
known simply as guidance. Index Average (SONIA).
Margin call Request to a derivatives contract counterparty to Market risk The risk that arises from movements in interest
immediately deposit funds to return the futures margin rates, stock prices, exchange rates, and commodity prices.
account balance to the initial margin. Market share A company’s or product’s revenue expressed as
Margin financing A financing arrangement whereby the prime a percentage of its market size.
broker lends shares, bonds, or derivatives and the hedge Market size Total sales for a good or service, which can be
fund (or investment manager) deposits cash or other col- calculated on a global or more regional basis.
lateral into a margin account at the prime broker based on Market value The price at which an asset or security can
certain fractions of the investment positions. currently be bought or sold in an open market.
Margin loan Money borrowed from a broker to purchase Market-capitalization weighting An index weighting method
securities. in which the weight assigned to each constituent security is
Marginal propensity to consume The proportion of an addi- determined by dividing its market capitalization by the total
tional unit of disposable income that is consumed or spent; market capitalization (sum of the market capitalization)
the change in consumption for a small change in income. of all securities in the index. Also called value weighting.
Marginal propensity to save The proportion of an additional Market-on-close An execution instruction specifying that an
unit of disposable income that is saved (not spent). order can only be filled at the close of trading.
Mark to market (MTM) The practice in which a central clearing Marketable limit order A buy limit order in which the limit
party assigns profits and losses to counterparties to deriv- price is placed above the best offer, or a sell limit order in
ative contracts. In exchange-traded markets, this practice which the limit price is placed below the best bid. Such
takes place daily and is often referred to as daily settlement. orders generally will partially or completely fill right away.
Market anomaly Change in the price or return of a security Markowitz efficient frontier The graph of the set of portfolios
that cannot directly be linked to current relevant infor- offering the maximum expected return for their level of
mation known in the market or to the release of new risk (standard deviation of return).
information into the market. Master limited partnership (MLP) Has similar features to
Market bid–ask spread The difference between the best bid limited partnerships but is usually a more liquid investment
and the best offer. that is often publicly traded.
Market discount rate The rate of return required by investors Master repurchase agreement A legal document governing
given the risk of the bond investment, also known as the all repo trades between two parties.
required yield or required rate of return. Match funding Financing an asset with a source, such as a
Market float The number of shares that are available to the loan or bond, that is aligned with certain attributes of
investing public. the asset, such as duration and the respective streams of
Market makers Over-the-counter (OTC) dealers who typ- income and financing costs.
ically enter into offsetting bilateral transactions with one Material (materiality) Refers to information that is
another to transfer risk to other parties. decision-useful for a reasonable investor.
Market model A regression model with the return on a stock Matrix pricing An estimation process for financial instruments
as the dependent variable and the returns on a market based on the prices of comparable instruments.
index as the independent variable. Maturity The date of a fixed-income instrument’s final pay-
ment to investors.
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Glossary G-19

Maturity premium An extra return that compensates investors Modified duration The first derivative of a bond’s price with
for the increased sensitivity of the market value of debt to respect to its yield, this statistic is a measure of interest
a change in market interest rates as maturity is extended. rate risk used to estimate the percentage price change for
Maturity structure of interest rates Also known as the term a given change in yield-to-maturity.
structure of interest rates, refers to the difference in interest Monetarists Economists who believe that the rate of growth
rates or benchmark yields by time-to-maturity. of the money supply is the primary determinant of the
Mean absolute deviation With reference to a sample, the mean rate of inflation.
of the absolute values of deviations from the sample mean. Monetary policy Actions taken by a nation’s central bank to
Mean square error (MSE) Calculated as the sum of squares affect aggregate output and prices through changes in bank
error (SSE) divided by the degrees of freedom, which are reserves, reserve requirements, or its target interest rate.
the number of observations minus the number of indepen- Monetary transmission mechanism The process whereby
dent variables minus one. Since simple linear regression a central bank’s interest rate gets transmitted through
has just one independent variable, the degrees of freedom the economy and ultimately affects the rate of increase
calculation is the number of observations minus 2. of prices.
Mean square regression (MSR) Calculated as the sum of Monetary union An economic union in which the members
squares regression (SSR) divided by the number of inde- adopt a common currency.
pendent variables in the regression model. In simple linear Money convexity A measure that is used to complement mod-
regression, there is only one independent variable, so MSR ified duration to capture the second-order effect of yield
equals SSR. changes on a bond’s price, expressed in currency terms.
Mean–variance analysis An approach to portfolio analysis Money duration A measure of the price change of a
using expected means, variances, and covariances of asset fixed-income instrument in currency units from a change
returns. in yield-to-maturity. The money duration can be stated per
Measure of central tendency A quantitative measure that 100 of par value or in terms of the actual position size. In
specifies where data are centered. the United States, money duration is commonly called
Measures of location Quantitative measures that describe “dollar duration.”
the location or distribution of data. They include not only Money market The market for short-term debt instruments
measures of central tendency but also other measures, (one-year maturity or less).
such as percentiles. Money market securities Fixed-income securities with original
Median The value of the middle item of a set of items that has maturities of one year or less.
been sorted into ascending or descending order (i.e., the Money-weighted return The internal rate of return on a
50th percentile). portfolio, taking account of all cash flows.
Meme coin A type of altcoin that is often inspired by a joke. Moneyness Expresses the relationship between an option’s
Mental accounting bias An information-processing bias in value and its exercise price across the full range of possible
which people treat one sum of money differently from underlying prices.
another equal-sized sum based on which mental account Monopolistic competition Highly competitive form of imper-
the money is assigned to. fect competition; the competitive characteristic is a notably
Merger arbitrage Generally, these strategies involve going large number of firms, while the monopoly aspect is the
long (buying) the stock of the company being acquired result of product differentiation.
at a discount to its announced takeover price and going Monopoly In pure monopoly markets, there are no substi-
short (selling) the stock of the acquiring company when tutes for the given product or service. There is a single
the merger or acquisition is announced. seller, which exercises considerable power over pricing
Mesokurtic Describes a distribution with kurtosis equal to that and output decisions.
of the normal distribution, namely, kurtosis equal to three. Monte Carlo simulation A technique that uses the inverse
Mezzanine debt Refers to private credit subordinated to senior transformation method for converting a randomly gener-
secured debt but senior to equity in the borrower’s capital ated uniformly distributed number into a simulated value
structure. of a random variable of a desired distribution. Each key
Mezzanine-stage financing Mezzanine venture capital that decision variable in a Monte Carlo simulation requires an
prepares a company to go public as it continues to expand assumed statistical distribution; this assumption facilitates
capacity and enhance its growth trajectory. It represents incorporating non-normality, fat tails, and tail dependence
the bridge financing needed to fund a private firm until it as well as solving high-dimensionality problems.
can execute an IPO or be sold. Moral principles Beliefs regarding what is good, acceptable,
Miner A validator of transactions on the blockchain that locks or obligatory behavior and what is bad, unacceptable, or
blocks of transactions into the blockchain and receives forbidden behavior.
compensation for this process in the form of a digital asset. Mortgage loan Agreement to finance real estate by the col-
Minimum efficient scale The smallest output that a firm lateral of a specified property that obliges the borrower to
can produce such that its long-run average total cost is make a predetermined series of payments to the lender.
minimized. Mortgage pass-through security Security created when mort-
Minimum-variance portfolio The portfolio with the minimum gage lenders pool mortgages together and sell securities to
variance for each given level of expected return. investors. The cash flow from the mortgage pool––monthly
Minority shareholder An individual or entity that owns less payments of principal, interest, and prepayments––are
than a majority of the voting rights in a corporation. “passed through” to the security holders.
Mode The most frequently occurring value in a distribution. Mortgage-backed securities Debt obligations that represent
Modern portfolio theory (MPT) The analysis of rational port- claims to the cash flows from pools of mortgage loans,
folio choices based on the efficient use of risk. most commonly on residential property.
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G-20 Glossary

Mortgage-backed securities (MBS) Bonds created from the Net profit margin An indicator of profitability, calculated as
securitization of mortgages. net income divided by revenue; indicates how much of
Multi-factor model A model that explains a variable in terms each dollar of revenues is left after all costs and expenses.
of the values of a set of factors. Also called profit margin or return on sales.
Multi-market indexes Comprised of indexes from different Net tax rate The tax rate net of transfer payments.
countries, designed to represent multiple security markets. Net working capital Working capital excluding short-term
Multilateral trading facilities See alternative trading systems. items unrelated to business operations, such as cash, mar-
Multilateralism The conduct of countries who participate in ketable securities, and short-term debt.
mutually beneficial trade relationships and extensive rules Network effects A business model that enables users to con-
harmonization. Private firms are fully integrated into global tribute directly to a product, service, or online content.
supply chains with multiple trade partners. Examples of Neural networks A type of computer program design based
multilateral countries include Germany and Singapore. on how the human brain learns and processes information.
Multiple of invested capital (MOIC) A simplified calculation Neutral rate of interest The rate of interest that neither spurs
that measures the total value of all distributions and resid- on nor slows down the underlying economy.
ual asset values relative to an initial total investment; also No-load fund A mutual fund in which there is no fee for invest-
known as a money multiple. ing in the fund or for redeeming fund shares, although
Multiple-price auction A debt securities auction in which there is an annual fee based on a percentage of the fund’s
bidders receive distinct prices based on their bids. net asset value.
Multiplier models Valuation models based on share price Node Each value on a binomial tree from which successive
multiples or enterprise value multiples. moves or outcomes branch.
Mutual fund A comingled investment pool in which investors Non-agency RMBS MBS backed by residential mortgages
in the fund each have a pro-rata claim on the income and that are issued by private entities and not guaranteed by
value of the fund. a federal agency or a GSE.
Nash equilibrium When two or more participants in a Non-amortizing loans Type of debt where there are no sched-
non-coop-erative game have no incentive to deviate from uled principal repayments.
their respective equilibrium strategies given their oppo- Non-cooperative country A country with inconsistent and
nent’s strategies. even arbitrary rules; restricted movement of goods, ser-
Nationalism The promotion of a country’s own economic inter- vices, people, and capital across borders; retaliation; and
ests to the exclusion or detriment of the interests of other limited technology exchange.
nations. Nationalism is marked by limited economic and Non-cumulative preference shares Preference shares for
financial cooperation. These actors may focus on national which dividends that are not paid in the current or subse-
production and sales, limited cross-border investment and quent periods are forfeited permanently (instead of being
capital flows, and restricted currency exchange. accrued and paid at a later date).
Natural language processing (NLP) A field of research within Non-financial risks Risks that arise from sources other than
the field of text analytics and at the intersection of com- changes in the external financial markets, such as changes
puter science, AI, and linguistics that focuses on develop- in accounting rules, legal environment, or tax rates.
ing computer programs to analyze and interpret human Non-fungible token (NFT) A unique cryptographic token on
language. the blockchain that cannot be replicated and is used to
Natural resources These include commodities (hard and soft), represent ownership of physical assets, such as artwork,
agricultural land (farmland), and timberland. real estate, or other assets.
Negative externalities A cost to a third party because of the Non-linear derivatives Derivatives, such as options or other
production or consumption of a good or service. contingent claims, with payoff/profit profiles that are
Negative pledge clause Limitations on investments, the non-linear (asymmetric) with respect to the price of the
disposal of assets, or issuance of debt senior to existing underlying.
obligations. Negative covenants seek to ensure that an Non-participating preference shares Preference shares that
issuer maintains the ability to make interest and principal do not entitle shareholders to share in the profits of the
payments. company. Instead, shareholders are only entitled to receive
Net cash An issuer's total debt less cash and marketable secu- a fixed dividend payment and the par value of the shares
rities. When the balance is negative it is referred to as in the event of liquidation.
net cash. Non-probability sampling A sampling plan dependent on
Net debt An issuer's total debt less cash and marketable secu- factors other than probability considerations, such as a
rities. When the balance is positive it is referred to as net sampler’s judgment or the convenience to access data.
debt. Non-recourse loan Loan in which the lender does not have a
Net investment hedge Refers to a specific hedge accounting claim against the borrower and thus can look only to the
designation that applies when either a foreign currency property to recover the outstanding mortgage balance.
bond or a derivative, such as an FX swap or forward, is Non-state actors Those that participate in global political,
used to offset the exchange rate risk of the equity of a economic, or financial affairs but do not directly con-
foreign operation. trol national security or country resources. Examples of
Net present value (NPV) The present value of an investment’s non-state actors are non-governmental organizations
cash inflows (benefits) minus the present value of its cash (NGOs), multinational companies, charities, and even
outflows (costs). influential individuals, such as business leaders or cultural
icons.
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Glossary G-21

Nonparametric test A test that is not concerned with a param- Operating leases A type of lease which is more akin to the
eter or that makes minimal assumptions about the popu- rental of the underlying asset.
lation from which a sample comes. Operating leverage The sensitivity of a firm’s operating profit
Nonsystematic risk Unique risk that is local or limited to a to a change in revenues, determined by the composition
particular asset or industry that need not affect assets of fixed and variable operating costs.
outside of that asset class. Operating profit margin A profitability ratio calculated as
Normal distribution A continuous, symmetric probability operating income (i.e., income before interest and taxes)
distribution that is completely described by its mean and divided by revenue. Also called operating margin.
its variance. Operational deposits Bank deposits generated by clearing,
Normalized earnings The expected level of mid-cycle earnings custody, and cash management activities.
for a company in the absence of any unusual or tempo- Operational independence A bank’s ability to execute mon-
rary factors that affect profitability (either positively or etary policy and set interest rates in the way it thought
negatively). would best meet the inflation target.
Notching Ratings adjustment methodology where specific Operational risk The risk that arises from inadequate or failed
issues from the same borrower may be assigned different people, systems, and internal policies, procedures, and
credit ratings. processes, as well as from external events that are beyond
Notice period The length of time (typically 30–90 days) in the control of the organization but that affect its operations.
advance that investors may be required to notify a fund Operationally efficient Said of a market, a financial system,
of their intent to redeem some or all of their investment. or an economy that has relatively low transaction costs.
This allows a fund manager to liquidate a position in an Opportunistic real estate strategies Include major rede-
orderly fashion without magnifying losses. velopment, repurposing of assets, taking on large vacan-
Novation process A process thatsubstitutes the initial swap cies, or speculating on significant improvement in market
execution facility(SEF) contract with identical trades conditions. These may be appealing for investors seeking
facing the central counterparty (CCP). The CCP serves as higher returns and willing to accept additional risks from
counterparty for both financial intermediaries, eliminating development, redevelopment, repositioning, and leasing.
bilateral counterparty credit risk and providing clearing Opportunity cost The value that investors forgo by choosing
and settlement services. a particular course of action; the value of something in its
Null hypothesis The hypothesis that is tested. best alternative use.
Off-the-run Seasoned government bonds that are often less Optimal capital structure The capital structure at which the
liquid. value of the company is maximized.
Off-the-run securities Sovereign debt securities outstanding Option A primary example of a contingent claim. A deriv-
other than on-the-sun securities. Off-the-run securities ative contract that provides the buyer the right, but not
are less liquid than on-the-run securities. the obligation, to buy or sell an underlying.
Offer The price at which a dealer or trader is willing to sell an Option contract See option.
asset, typically qualified by a maximum quantity (ask size). Option premium An amount that is paid upfront from the
Official interest rate An interest rate that a central bank sets option buyer to the option seller. Reflects the value of the
and announces publicly; normally the rate at which it is option buyer’s right to exercise in the future.
willing to lend money to the commercial banks. Also called Option-adjusted price The sum of a bond’s flat price and value
official policy rate or policy rate. of an embedded option.
Official policy rate An interest rate that a central bank sets Option-adjusted spread Or OAS for a bond is its Z-spread
and announces publicly; normally the rate at which it is adjusted for the value of an embedded option.
willing to lend money to the commercial banks. Option-adjusted yield A yield measure for a bond adjusted
Oligopoly Market structure with a relatively small number of for embedded options.
firms supplying the market. Order A specification of what instrument to trade, how much
Omnichannel Refers to a company selling its products or to trade, and whether to buy or sell.
services in multiple channels, such as in store and online. Order precedence hierarchy With respect to the execution of
On-the-run Most recently issued, and liquid, government orders to trade, a set of rules that determines which orders
bonds. execute before other orders.
On-the-run securities The most recently issued and liquid Order-driven markets A market (generally an auction market)
sovereign debt securities. that uses rules to arrange trades based on the orders that
Open interest The number of outstanding contracts. traders submit; in their pure form, such markets do not
Open market operations The purchase or sale of bonds by make use of dealers.
the national central bank to implement monetary policy. Ordinary shares Equity shares that are subordinate to all other
The bonds traded are usually sovereign bonds issued by types of equity (e.g., preferred equity). Also called common
the national government. stock or common shares.
Open-end fund A mutual fund that accepts new investment Organizational form A legal and tax classification of a busi-
money and issues additional shares at a value equal to ness, specific to a jurisdiction, that determines the organi-
the net asset value of the fund at the time of investment. zation’s legal identity, owner–manager relationship, owner
Operating cycle The length of time between a company’s liability, taxation, and access to financing.
acquisition of goods or raw materials and the collection Out-of-the-money Describes an option with zero intrinsic
of cash from sales to customers. value because the option buyer would not rationally exer-
Operating efficiency ratios Ratios that measure how effi- cise the option. An example of such would be the case in
ciently a company performs day-to-day tasks, such as the which the price of the underlying is less than the option’s
collection of receivables and management of inventory. exercise price for a call option.

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G-22 Glossary

Over-the-counter (OTC) Refers to derivative markets in which Payment-in-kind A bond feature whereby coupon payments
derivative contracts are created and traded between deriv- can be fully or partially paid in the form of additional
atives end users and dealers, or financial intermediaries, issuance or added to the principal amount.
such as commercial banks or investment banks. Payments system The system for the transfer of money.
Overcollateralization Credit enhancement technique where Pearson correlation A parametric measure of the relationship
collateral underlying the transaction exceeds the face value between two variables.
of the issued bonds. Pecking order theory The theory that managers consider
Overconfidence bias A bias in which people demonstrate how their actions might be interpreted by outsiders and
unwarranted faith in their own intuitive reasoning, judg- thereby order their preferences for various forms of cor-
ments, and/or cognitive abilities. porate financing. Forms of financing that are least visible
Overfitting When a machine learning model learns the input to outsiders (e.g., internally generated funds) are most
and target dataset too precisely, making the system more preferable to managers, and those that are most visible
likely to discover false relationships or unsubstantiated (e.g., equity issuance) are least preferable.
patterns that will lead to prediction errors. Penetration pricing A discount pricing approach used when
p-Value The smallest level of significance at which the null a firm willingly sacrifices margins in order to build scale
is rejected. and market share.
Par rate A yield-to-maturity that makes the present value of Percentiles Quantiles that divide a distribution into 100 equal
a bond’s cash flows equal to par. parts that sum to 100.
Par swap rate The fixed swap rate that equates the present Perfect competition A market structure in which the individ-
value of all future expected floating cash flows to the ual firm has virtually no impact on market price, because
present value of fixed cash flows. it is assumed to be a very small seller among a very large
Par value The amount of principal on a bond, also known as number of firms selling essentially identical products.
face value. Performance evaluation The measurement and assessment
Parallel shift When all maturities along a yield curve increase of the outcomes of investment management decisions.
or decrease in yield in the same direction by the same Performance fee Fee paid to the general partner from the
magnitude. A parallel shift in the yield curve is implicitly limited partner(s) based on realized net profits.
assumed in analytical duration and convexity. Period costs Costs (e.g., executives’ salaries) that cannot be
Parameter A descriptive measure computed from or used to directly matched with the timing of revenues and which
describe a population of data, conventionally represented are thus expensed immediately.
by Greek letters. Periodicity Number of periods in a year, used for compound
Parametric test Any test (or procedure) concerned with param- interest. The periodicity of a fixed-income instrument
eters or whose validity depends on assumptions concerning usually matches the frequency of its coupon payments.
the population generating the sample. Permanent differences Differences between tax and financial
Pari passu clause A covenant or contract clause that ensures reporting of revenue (expenses) that will not be reversed
a debt obligation is treated the same as the borrower’s at some future date. These result in a difference between
other senior debt instruments and is not subordinated to the company’s effective tax rate and statutory tax rate and
similar obligations. do not result in a deferred tax item.
Partially amortizing bond A loan or bond with a payment Permissioned networks Networks that are fully open only to
schedule that calls for the complete repayment of principal select participants on a DLT network.
over the instrument’s time to maturity. Permissionless networks Networks that are fully open to any
Participating preference shares Preference shares that entitle user on a DLT network.
shareholders to receive the standard preferred dividend Perpetual bonds Bonds with no stated maturity date.
plus the opportunity to receive an additional dividend if Perpetuity A perpetual annuity, or a set of never-ending level
the company’s profits exceed a pre-specified level. sequential cash flows, with the first cash flow occurring
Pass-through businesses Businesses that, by virtue of their one period from now.
organizational form and/or other legal and regulatory PESTLE analysis A framework for analyzing factors that influ-
attributes, do not pay entity-level taxes on income or ence an industry’s economic outcomes.
loss; income or loss is passed through to owners, who pay Pet projects A capital investment that is pursued by manage-
personal taxes. ment but is not economically justifiable by a disinterested
Pass-through rate The coupon rate of a mortgage pass-through party. Motivations for pet projects include self-dealing
security that is received by the investor after administrative and vanity.
charges. It is lower than the weighted average mortgage Physical risks Economic and financial losses from the increase
rate earned on the underlying pool of mortgages because in the severity and frequency of extreme weather due to
of administrative charges. The pass-through rate that the climate change—for example, the loss of coastal real estate
investor receives is said to be “net interest” or “net coupon.” from a storm.
Passive investment A buy and hold approach in which PIPE (private investment in public equity) A private offering
an investor does not make portfolio changes based on to select investors with fewer disclosures and lower trans-
short-term expectations of changing market or security action costs that allows the issuer to raise capital more
performance. quickly and cost effectively.
Payable date The day that the company actually mails out (or Platykurtic Describes a distribution that has relatively less
electronically transfers) a dividend payment. weight in the tails than the normal distribution (also called
Payment date The day that the company actually mails out thin-tailed).
(or electronically transfers) a dividend payment. Pledge A legal right or claim to property by a creditor. Also
called a lien.
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Glossary G-23

Poison pill Officially known as a shareholder rights plan, a Price return index An index that reflects only the price appre-
poison pill is a hostile-takeover defense adopted by boards ciation or percentage change in price of the constituent
of directors according to rules specified in the corporate securities. Also called price index.
charter. There are several types of poison pills. Generally, Price stability In economics, refers to an inflation rate that is
they allow shareholders, excluding the shareholder making low on average and not subject to wide fluctuation.
the hostile bid and their affiliates, to buy newly issued Price takers Producers that must accept whatever price the
shares at a discounted price. The share issuance would market dictates.
dilute the bidder’s ownership percentage, rendering it Price value of a basis point (PVBP) An estimate of the change
impossible for the bidder to attain control. in the full price of a bond given a 1 bp change in its
Policy rate An interest rate that a central bank sets and yield-to-maturity. The PVBP is also called the “PV01,”
announces publicly; normally the rate at which it is willing standing for the “price value of an 01” or “present value of
to lend money to the commercial banks. an 01,” where “01” means 1 bp. In the United States, it is
Portfolio companies The individual companies owned by a commonly called the “DV01” for the “dollar value” of 1 bp.
private equity firm. Price weighting An index weighting method in which the
Portfolio investment flows Short-term investments in foreign weight assigned to each constituent security is determined
assets, such as stocks or bonds. by dividing its price by the sum of all the prices of the
Portfolio planning The process of creating a plan for building constituent securities.
a portfolio that is expected to satisfy a client’s investment Price-setting option The option to adjust prices when demand
objectives. or supply varies from what is forecast.
Position The quantity of an asset that an entity owns or owes. Price-to-earnings ratio (P/E) The ratio of share price to earn-
Posterior probability An updated probability that reflects or ings per share.
comes after new information. Pricing power The ability of a firm to set prices for its prod-
Power of a test The probability of correctly rejecting the ucts or services without materially losing volume share.
null—that is, rejecting the null hypothesis when it is false. Generally this means that the product or service is not a
Pre-funding period Allows the trust to acquire during a certain commodity because the firm is not a price taker.
period of time after the close of the transaction. Primary bond markets Fixed-income markets comprised of
Preference shares A type of equity interest which ranks above issuers issuing bonds to investors to raise capital, often
common shares with respect to the payment of dividends intermediated by a third-party such as an investment bank.
and the distribution of the company’s net assets upon Primary capital markets (primary markets) The market where
liquidation. They have characteristics of both debt and securities are first sold and the issuers receive the proceeds.
equity securities. Also called preferred stock. Primary dealer Financial institution that is authorized to deal
Preferred stock See preference shares. in new issues of sovereign bonds and that serves primar-
Premium In the case of bonds, premium refers to the amount ily as a trading counterparty of the office responsible for
by which a bond is priced above its face (par) value. In the issuing sovereign bonds.
case of an option, the amount paid for the option contract. Primary market The market where securities are first sold and
Prepayment option May entitle the borrower to prepay all the issuers receive the proceeds.
or part of the outstanding mortgage principal prior to Prime broker A broker that provides services that commonly
maturity. This creates a risk from the lender’s or investor’s include custody, administration, lending, short borrowing,
viewpoint because the cash flow amounts and timing and trading.
cannot be known with certainty. Prime loans Lending made to borrowers of high credit quality
Prepayment risk The risk that the principal or a proportion of with strong employment and credit histories, a low DTI,
the principal is paid back at a different pace from the con- substantial equity in the underlying property, and a first
tractually agreed scheduled payment plan by the borrower. lien on the mortgaged property serving as the collateral
Present value models Valuation models that estimate the for the loan.
intrinsic value of a security as the present value of the Principal The amount that an issuer agrees to repay the deb-
future benefits expected to be received from the security. tholders on the maturity date.
Also called discounted cash flow models. Principal-agent relationship An arrangement in which one
Pretax margin A profitability ratio calculated as earnings party (the agent) has authority to act for or on behalf of
before taxes divided by revenue. another party (the principal). Such an arrangement imposes
Price discrimination A pricing approach that charges different a duty on the agent to act in the principal’s best interest.
prices to different customers based on their willingness Prior probabilities Probabilities reflecting beliefs prior to the
to pay. arrival of new information.
Price index Represents the average prices of a basket of goods Priority of claims Priority of payment, with the most senior
and services. or highest ranking debt having the first claim on the cash
Price limits Establish a band relative to the previous day’s flows and assets of the issuer.
settlement price within which all trades must occur. Private capital Funding provided to companies that is not
Price multiple A ratio that compares the share price with some sourced from the public markets.
sort of monetary flow or value to allow evaluation of the Private company A company, typically a limited company, that
relative worth of a company’s stock. does not list its equity securities on an exchange.
Price priority The principle that the highest priced buy orders Private debt Capital extended to companies through a loan
and the lowest priced sell orders execute first. or other form of debt.
Price return Measures only the price appreciation or percent- Private debtholders Investors in an entity’s non-securitized
age change in price of the securities in an index or portfolio. debt claims, such as a loan or lease. The most common
type of private debtholder is a bank.
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G-24 Glossary

Private equity Equity investment capital raised from sources Public–private partnership (PPP) An agreement between
other than public markets and traditional institutions. the public sector and the private sector to finance, build,
Private equity fund A hedge fund that seeks to buy, optimize, and operate public infrastructure, such as hospitals and
and ultimately sell portfolio companies to generate profits. toll roads.
See venture capital fund. Pull on liquidity An action or event that accelerates cash
Private equity securities Securities that are not listed on public outflows.
exchanges and have no active secondary market. They are Purchase agreement Legal document in a securitization trans-
issued primarily to institutional investors via non-public action that outlines the representations and warranties that
offerings, such as private placements. the seller makes about the assets sold.
Private investment in public equity (PIPE) An investment Pure discount bonds Bonds that do not pay interest during
in the equity of a publicly traded firm that is made at a their life. They are issued at a discount to par value and
discount to the market value of the firm’s shares. redeemed at par. Also called zero-coupon bonds.
Private limited company A type of limited company in many Put An option that gives the holder the right to sell an under-
jurisdictions with pass-through taxation but restrictions lying asset to another party at a fixed price over a specific
on the number of shareholders or members and on the period of time.
transfer of ownership interest. Put option The right to sell an underlying.
Private placement A sale of debt or equity securities to a small Putable bonds Bonds that give the bondholder the right to
group of investors on an unregulated basis. The terms of sell the bond back to the issuer at a predetermined price
the offering are negotiated by the issuer and investors. on specified dates.
Probability of default (POD) The likelihood that an issuer fails Put–call forward parity Describes the no-arbitrage condition
to make full and timely payments of principal and interest; in which at t = 0 the present value of the price of a long
typically an annualized measure. forward commitment plus the price of the long put must
Probability sampling A sampling plan that allows every mem- equal the price of the long call plus the price of the risk-free
ber of the population to have an equal chance of being asset (with face value of the exercise price of both the call
selected. and the put).
Probability tree diagram A diagram with branches emanating Put–call parity Describes the no-arbitrage condition in which
from nodes representing either mutually exclusive chance at t = 0 the price of the long underlying asset plus the price
events or mutually exclusive decisions. of the long put must equal the price of the long call plus the
Production flexibility option The option to alter production price of the risk-free asset (with face value of the exercise
when demand varies from what is forecast. price of both the call and the put).
Profession An occupational group that has specific educa- Quantile A value at or below which a stated fraction of the
tion, expert knowledge, and a framework of practice and data lies. Also referred to as a fractile.
behavior that underpins community trust, respect, and Quantitative easing An expansionary monetary policy based
recognition. on aggressive open market purchase operations.
Profit margin An indicator of profitability, calculated as net Quartiles Quantiles that divide a distribution into four equal
income divided by revenue; indicates how much of each parts.
dollar of revenues is left after all costs and expenses. Quick ratio A measure of liquidity that is the ratio of cash,
Profitability ratios Ratios that measure a company’s ability to marketable securities, and receivables to current liabilities.
generate profitable sales from its resources (assets). Quintiles Quantiles that divide a distribution into five equal
Prospectus Legal document in securitization that describes parts.
the structure of the transaction, including the priority and Quota rents Profits that foreign producers can earn by raising
amount of payments to be made to the servicer, adminis- the price of their goods higher than they would without
trators, and the ABS holders, as well as the credit enhance- a quota.
ments used in the securitization. Quotas Government policies that restrict the quantity of a
Protective put A strategy of purchasing an underlying asset good that can be imported into a country, generally for a
and purchasing a put on the same asset. specified period of time.
Proxy contest When a shareholder or group of shareholders Quote-driven market A market in which dealers acting as
campaigns for certain matters they have submitted to a principals facilitate trading.
shareholder vote, often a slate of directors who oppose the Quoted margin Specified spread of a floating rate instrument
incumbent board and management. The incumbent board over a market reference rate or benchmark.
and management simultaneously campaign for their side. Range The difference between the maximum and minimum
Proxy voting A form of casting a ballot in an election in which values in a dataset.
a voter authorizes a representative to vote on their behalf Rapid amortization provisions Provisions in receivable ABS
according to instructions. In corporate elections, proxy that may require early principal amortization if specific
ballots are cast by shareholders that direct a representa- events occur. Such provisions are referred to as early amor-
tive, typically the corporate secretary, to enter their votes tization and are included to safeguard the credit quality of
as instructed. the issue, particularly during the revolving period.
Public (listed) company A company with its equity securities Razor, razorblade pricing A pricing approach that combines a
traded on an exchange. low price on a piece of equipment and high-margin pricing
Public limited companies A type of limited company in many on repeat-purchase consumables.
jurisdictions with entity-level taxation but no restrictions
on the number of shareholders or transferability of own-
ership interest; the most suitable organizational form for
a company that seeks to go public.
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Glossary G-25

Real assets Generally, these are tangible physical assets, such Replication A strategy in which a derivative’s cash flow stream
as real estate, infrastructure, and natural resources, but they may be recreated using a combination of long or short posi-
also include such intangibles as patents, intellectual prop- tions in an underlying asset and borrowing or lending cash.
erty, and goodwill. Real assets generate current or expected Repo rate The interest rate on a repurchase agreement.
future cash flows and/or are considered a store of value. Representativeness bias A belief perseverance bias in which
Real estate Includes borrowed or ownership capital in buildings people tend to classify new information based on past
or land. Developed land includes commercial and indus- experiences and classifications.
trial real estate, residential real estate, and infrastructure. Repurchase agreement (Repo) A form of collateralized loan
Real option A right, but not an obligation, for management involving the sale of a security with a simultaneous agree-
to make a decision with respect to a capital investment ment by the seller to buy back the same security from the
that alters future cash flows from the original forecasted purchaser at an agreed-on price and future date. The party
scenario. who sells the security at the inception of the repurchase
Real risk-free interest rate The single-period interest rate for a agreement and buys it back at maturity is borrowing money
completely risk-free security if no inflation were expected. from the other party, and the security sold and subse-
Rebalancing In the context of asset allocation, a discipline quently repurchased represents the collateral.
for adjusting the portfolio to align with the strategic asset Repurchase date The date when the party who sold the security
allocation. at the inception of a repurchase agreement buys back the
Rebalancing policy The set of rules that guide the process of security from the cash lending counterparty.
restoring a portfolio’s asset class weights to those specified Repurchase price The price at which the party who sold the
in the strategic asset allocation. security at the inception of the repurchase agreement
Recapitalization Recapitalization via private equity describes buys back the security from the cash lending counterparty.
the steps a firm takes to increase or introduce leverage to Required margin Yield spread of a floating rate instrument
its portfolio company and pay itself a dividend out of the such that the instrument is priced at par value on a rate
new capital structure. reset date.
Recognition lag The lag in government response to an eco- Required rate of return The rate of return required by inves-
nomic problem resulting from the delay in confirming a tors given the risk of the bond investment, also known as
change in the state of the economy. the market discount rate or required yield.
Recourse loan Loan in which the lender has a claim against the Required yield The rate of return required by investors given
borrower for the shortfall (deficiency) between the amount the risk of the bond investment, also known as the market
of the outstanding mortgage balance and the proceeds discount rate of required rate of return.
received from the sale of the property. Required yield spread The difference in yield-to-maturity
Recovery rate (RR) The percentage of an outstanding debt between a bond and that of a government benchmark bond
claim recovered when an issuer defaults with the same or similar time-to-maturity.
Redemption fee A fee charged to discourage redemptions Resampling A statistical method that repeatedly draws samples
and to offset the transaction costs for remaining investors from the original observed data sample for the statistical
in the fund. inference of population parameters.
Refinancing rate A type of central bank policy rate. Reserve currency A currency held by global central banks in
Regionalism In between the two extremes of bilateralism significant quantities and widely used to conduct interna-
and multilateralism. In regionalism, a group of countries tional trade and financial transactions.
cooperate with one another. Both bilateralism and region- Reserve requirement The requirement for banks to hold
alism can be conducted at the exclusion of other groups. reserves in proportion to the size of deposits.
For example, regional blocs may agree to provide trade Residual The amount of deviation of an observed value of the
benefits to one another and increase barriers for those dependent variable from its estimated value based on the
outside of that group. fitted regression line.
Registered bonds Bonds for which ownership is recorded by Restricted domestic currency A currency with limited con-
either name or serial number. vertibility into other currencies due to illiquidity.
Regression analysis Allows us to test hypotheses about the Return on assets (ROA) A profitability ratio calculated as net
relationship between two variables, by quantifying the income divided by average total assets; indicates a compa-
strength of the relationship between the two variables, ny’s net profit generated per dollar invested in total assets.
and to use one variable to make predictions about the Return on equity (ROE) A profitability ratio calculated as net
other variable. income divided by average shareholders’ equity.
Regression coefficients The collective term for the intercept Return on invested capital (ROIC) A measure of the profitabil-
and slope coefficients in the regression model. ity of a company relative to the amount of capital invested
Regret The feeling that an opportunity has been missed; typ- by the equityholders and debtholders.
ically, an expression of hindsight bias. Return on sales An indicator of profitability, calculated as net
Regret-aversion bias An emotional bias in which people tend income divided by revenue; indicates how much of each
to avoid making decisions that will result in action out of dollar of revenues is left after all costs and expenses. Also
fear that the decision will turn out poorly. referred to as net profit margin.
Relative dispersion The amount of dispersion relative to a Return-generating model A model that can provide an esti-
reference value or benchmark. mate of the expected return of a security given certain
Reopening Issuing bonds by increasing the size of an existing parameters and estimates of the values of the independent
bond issue with a price significantly different from par. variables in the model.

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G-26 Glossary

Revenue bonds Bonds issued by non-sovereign governments Rollover risk The possibility that an issuer will be unable to
related to a government sponsored project expected to refinance maturing (typically short-term) debt at econom-
generate future cash flow as a primary source of repayment. ical terms or at all.
Reverse repurchase agreement A repurchase agree- Safety-first rules Rules for portfolio selection that focus on the
ment viewed from the perspective of the cash lending risk that portfolio value or portfolio return will fall below
counterparty. some minimum acceptable level over some time horizon.
Reverse stock split A reduction in the number of shares Sample correlation coefficient A standardized measure of
outstanding with a corresponding increase in share price, how two variables in a sample move together. It is the
but no change to the company’s underlying fundamentals. ratio of the sample covariance to the product of the two
Revolving credit agreements The most reliable form of variables’ standard deviations.
short-term bank borrowing facilities; they are in effect Sample covariance A measure of how two variables in a
for multiple years (e.g., three to five years) and can have sample move together.
optional medium-term loan features. Also known as Sample excess kurtosis A sample measure of the degree of
revolvers. a distribution’s kurtosis in excess of the normal distribu-
Rho The change in a given derivative instrument for a given tion’s kurtosis.
small change in the risk-free interest rate, holding every- Sample mean The sum of the sample observations divided
thing else constant. Rho measures the sensitivity of the by the sample size.
option to the risk-free interest rate. Sample skewness A sample measure of the degree of asym-
Ricardian equivalence An economic theory that implies that metry of a distribution.
it makes no difference whether a government finances a Sample standard deviation The positive square root of the
deficit by increasing taxes or issuing debt. sample variance.
Risk Exposure to uncertainty. The chance of a loss or adverse Sample variance The sum of squared deviations around the
outcome as a result of an action, inaction, or external event. mean divided by the degrees of freedom.
Risk averse The assumption that an investor will choose the Sample-size neglect A type of representativeness bias in
least risky alternative. which financial market participants incorrectly assume
Risk aversion The degree of an investor’s unwillingness to take that small sample sizes are representative of populations
risk; the inverse of risk tolerance. (or “real” data).
Risk budgeting The establishment of objectives for individ- Sampling distribution The distribution of all distinct possible
uals, groups, or divisions of an organization that takes values that a statistic can assume when computed from
into account the allocation of an acceptable level of risk. samples of the same size randomly drawn from the same
Risk exposure The state of being exposed or vulnerable to a population.
risk. The extent to which an organization is sensitive to Sampling error The difference between the observed value of
underlying risks. a statistic and the estimate resulting from using subsets
Risk governance The top-down process and guidance that of the population.
directs risk management activities to align with and support Sampling plan The set of rules used to select a sample.
the overall enterprise. Saving deposits Bank deposits typically held for
Risk management The process of identifying the level of risk non-transactional purposes that often have a stated term.
an organization wants, measuring the level of risk the orga- Scatter plot A two-dimensional graphical plot of paired obser-
nization currently has, taking actions that bring the actual vations of values for the independent and dependent vari-
level of risk to the desired level of risk, and monitoring the ables in a simple linear regression.
new actual level of risk so that it continues to be aligned Scenario analysis A technique for exploring the performance
with the desired level of risk. and risk of investment strategies in different structural
Risk management framework The infrastructure, process, regimes.
and analytics needed to support effective risk management Scraping An automated, large-scale, algorithm-driven approach
in an organization. that retrieves otherwise unstructured data available on
Risk premium An extra return expected by investors for bear- websites and creates data in a more structured format.
ing some specified risk. Seasoned offering An offering in which an issuer sells addi-
Risk shifting Actions to change the distribution of risk tional units of a previously issued security.
outcomes. Secondary bond markets Fixed-income markets comprised
Risk tolerance The amount of risk an investor is willing and of investors trading existing bonds amongst themselves.
able to bear to achieve an investment goal. Secondary market The market where securities are traded
Risk transfer Actions to pass on a risk to another party, often, among investors.
but not always, in the form of an insurance policy. Secondary precedence rules Rules that determine how to
Risk-neutral pricing A no-arbitrage derivative value estab- rank orders placed at the same time.
lished separately from investor views on risk that uses Secondary sale Sale of a private company stake to another
underlying asset volatility and the risk-free rate to calculate private equity firm or group of financial buyers.
the present value of future cash flows. Secondary-stage investments The second stage of develop-
Risk-neutral probability The computed probability used in ment of an infrastructure asset. Secondary-stage invest-
binomial option pricing by which the discounted weighted ments involve existing infrastructure facilities or fully
sum of expected values of the underlying equal the current operational assets that do not require further investment
option price. Specifically, this probability is computed using or development over the investment horizon. These assets
the risk-free rate and assumed up gross return and down generate immediate cash flow and returns expected over
gross return of the underlying. the investment period.
 © CFA Institute. For candidate use only. Not for distribution.
Glossary G-27

Sector indexes Indexes that represent and track different eco- Settlement The closing date at which the counterparties of a
nomic sectors—such as consumer goods, energy, finance, derivative contract exchange payment for the underlying
health care, and technology—on either a national, regional, as required by the contract.
or global basis. Settlement price The price determined by an exchange’s clear-
Secured With collateral; secured debt is backed by the cash inghouse in the daily settlement of the mark-to-market
flows of the issuer and the collateral as a secondary source process. The price reflects an average of the final futures
of repayment. trades of the day.
Secured loans Loans collateralized by an asset of the borrower. Share class Types of equity securities that have different voting
Security Evidence of equity or debt interest or in an entity or rights—for example, an issuer may issue Class A shares
a related right, such as a derivative. Often standardized to that carry one vote per share and Class B shares that carry
conform to security exchange requirements. ten votes per share.
Security characteristic line A plot of the excess return of a Share repurchase A transaction in which a company buys
security on the excess return of the market. back its own shares. Unlike stock dividends and stock
Security market index A portfolio of securities representing splits, share repurchases use corporate cash.
a given security market, market segment, or asset class. Shareholder activism A range of actions by a corporation’s
Security market line (SML) The graph of the capital asset shareholders that are intended to result in some change in
pricing model. the corporation, typically a change in the board of directors,
Security selection The process of selecting individual secu- management, or business strategy.
rities; typically, security selection has the objective of Shareholder derivative lawsuit A legal action by a shareholder
generating superior risk-adjusted returns relative to a on behalf of a company, not the shareholder personally,
portfolio’s benchmark. against a third party. Often, the third party is a director
Security tokens Digitizes the ownership rights associated with or manager who the shareholder believes has harmed the
publicly traded securities. company.
Segmenting A process of identifying and grouping customers Shareholder engagement Shareholder engagement reflects
by decision-useful attributes. active ownership by investors in which the investor seeks
Self-attribution bias A bias in which people take too much to influence a corporation’s decisions on ESG matters,
credit for successes (self-enhancing) and assign responsi- either through dialogue with corporate officers or votes
bility to others for failures (self-protecting). at a shareholder assembly (in the case of equity).
Self-control bias A bias in which people fail to act in pursuit Shareholder theory of corporate governance Espoused by
of their long-term, overarching goals because of a lack of Milton Friedman in his famous 1970 essay, the shareholder
self-discipline. theory holds that the objective of a business is to increase
Self-investment limits With respect to investment limitations profits and shareholder value.
applying to pension plans, restrictions on the percentage Shareholders Individuals or entities that own a share.
of assets that can be invested in securities issued by the Shares Units of ownership interest in a limited company.
pension plan sponsor. Sharpe ratio The average return in excess of the risk-free rate
Sell-side firm A broker/dealer that sells securities and provides divided by the standard deviation of return; a measure
independent investment research and recommendations of the average excess return earned per unit of standard
to their clients (i.e., buy-side firms). deviation of return.
Semi-strong-form efficient market A market in which security Shelf registration A type of public offering that allows the
prices reflect all publicly known and available information. issuer to file a single, all-encompassing offering circular
Semiannual bond basis yield Also known as a semiannual that covers a series of bond issues.
bond equivalent yield, it is an annualized interest rate with Short A trading position in a derivative contract that gains
a periodicity of two. value as the price of the underlying moves lower.
Semiannual bond equivalent yield Also known as a semi- Short biased These strategies use quantitative, technical, and
annual bond basis yield, it is an annualized interest rate fundamental analysis to short overvalued equity securities
with a periodicity of two. with limited or no long-side exposures.
Senior debt A debt obligation with higher priority of payment Short position A position in an asset or contract in which one
than junior debt obligations. has sold an asset one does not own, or in which a right
Senior unsecured debt The highest-ranked debt in an issu- under a contract can be exercised against oneself.
er's capital structure which is a general obligation of the Short selling A transaction in which borrowed securities are
borrower. sold with the intention to repurchase them at a lower price
Seniority Priority of payment of various debt obligations. at a later date and return them to the lender.
Sensitivity analysis Analysis that shows the range of possible short-run average total cost The curve describing average
outcomes as specific assumptions are changed. total cost when some costs are considered fixed.
Separately managed account (SMA) An investment portfolio Shortfall risk The risk that portfolio value or portfolio return
managed exclusively for the benefit of an individual or will fall below some minimum acceptable level over some
institution. time horizon.
Separately managed accounts Accounts that are managed Shutdown point The point at which average revenue is equal
in accordance with an investor’s specific investment pref- to the firm’s average variable cost.
erences and risk tolerance. Side letter A side agreement created between the GP and
Service period The time between the grant and vesting dates specific LPs. These agreements exist outside the LPA.
for an employee share-based award, usually measured in These agreements provide additional terms and conditions
years. related to the investment agreement.
 © CFA Institute. For candidate use only. Not for distribution.
G-28 Glossary

Signpost An indicator, market level, data piece, or event that Soft-bullet covered bonds Delay the bond default and pay-
signals a risk is becoming more or less likely. An analyst ment acceleration of bond cash flows until a new final
can think of signposts like a traffic light. maturity date, which is usually up to a year after the original
Simple linear regression (SLR) An approach for estimating maturity date.
the linear relationship between a dependent variable and Solvency Refers to the condition in which firm value exceeds
a single independent variable by minimizing the sum of the face value of debt used to finance the firm’s assets.
the squared deviations between the fitted line and the Solvency ratios Ratios that measure a company’s ability to
observed values. meet its long-term obligations.
Simple random sample A subset of a larger population created Solvency risk The risk that an organization does not survive or
in such a way that each element of the population has an succeed because it runs out of cash, even though it might
equal probability of being selected to the subset. otherwise be solvent.
Simple random sampling The procedure of drawing a sample Sophisticated investors Individuals or entities that are per-
to satisfy the definition of a simple random sample. mitted in a jurisdiction to trade unregistered or, generally,
Simple yield The sum of the coupon payments plus the less regulated securities, including shares of privately held
straight-line amortized share of the gain or loss divided companies; also called accredited investors.
by the bond’s flat price. Simple yields are used mostly to Sovereign immunity A principle limiting the legal recourse
quote JGBs. of bondholders holding national government debt from
Simulation A technique for exploring how a target variable forcing the issuer to declare bankruptcy or liquidate assets
(e.g. portfolio returns) would perform in a hypothetical to settle debt claims.
environment specified by the user, rather than a historical Spearman rank correlation coefficient A measure of correla-
setting. tion applied to ranked data.
Simulation trial A complete pass through the steps of a Special dividend A dividend paid by a company that does not
simulation. pay dividends on a regular schedule, or a dividend that
Single-price auction A debt securities auction in which all supplements regular cash dividends with an extra payment.
bidders pay the same price. Special purpose acquisition company (SPAC) A company
Sinking fund Provisions that reduce the credit risk of a bond that has gone public, raising money to acquire a private
issue by requiring the issuer to retire a portion of the bond’s company using stock and, often, private investments from
principal outstanding each year. institutional investors. In connection with the acquisition
Situational influences External factors, such as environmental (known as a de-SPAC), the private company becomes a
or cultural elements, that shape our behavior. public company.
Skewed Not symmetrical. Special purpose entity (SPE) A legal entity created for a tem-
Skewness A quantitative measure of skew (lack of symmetry); porary or narrow legal purpose to isolate a parent entity
a synonym of skew. It is computed as the average cubed from risk. Sometimes also called a special purpose vehicle
deviation from the mean standardized by dividing by the (SPV) or a special purpose company.
standard deviation cubed. Special purpose vehicle See special purpose entity.
Slope coefficient The change in the estimated value of the Special situations These strategies focus on opportunities to
dependent variable for a one-unit change in the value of buy the equity of companies engaged in security issuance
the independent variable. or repurchase, special capital distributions, rescue finance,
Small country A country that is a price taker in the world asset sales/spin-offs, or other catalyst-oriented situations.
market for a product and cannot influence the world Split ratings Complex risks viewed very differently by rating
market price. agencies
Smart beta Involves the use of simple, transparent, rules-based Sponsored A type of depository receipt in which the foreign
strategies as a basis for investment decisions. company whose shares are held by the depository has a
Smart contracts Computer programs that are designed to direct involvement in the issuance of the receipts.
self-execute on the basis of pre-specified terms and con- Spot curve Yields-to-maturity on a series of default-risk-free
ditions agreed to by parties to a contract. zero-coupon bonds.
Social infrastructure investments A category of infrastructure Spot markets Markets in which specific assets are exchanged
investments that are directed toward human activities at current prices. Spot markets are often referred to as
and include such assets as educational, health care, social cash markets.
housing, and correctional facilities, with the focus on pro- Spot prices The current prices prevailing in spot markets.
viding, operating, and maintaining the asset infrastructure. Spot rates Yields-to-maturity on default-risk-free zero-coupon
Soft commodities Standardized agricultural products, such as bonds.
cattle and corn, with markets often involving the physical Spread The difference in yield-to-maturity between a bond
delivery of the underlying upon settlement. and that of a another bond.
Soft hurdle rate Hurdle rate where the fee is calculated on Spread risk Bond price risk arising from changes in the yield
the entire return when the hurdle is exceeded. With a soft spread on credit-risky bonds; reflects changes in the mar-
hurdle, GPs are able to catch up performance fees once ket’s assessment and/or pricing of credit migration (or
the hurdle threshold is exceeded. downgrade) risk and market liquidity risk.
Soft power A means of influencing another country’s decisions Spurious correlation Refers to: 1) correlation between two
without force or coercion. Soft power can be built over time variables that reflects chance relationships in a particular
through actions, such as cultural programs, advertisement, dataset; 2) correlation induced by a calculation that mixes
travel grants, and university exchange. each of two variables with a third variable; and 3) correla-
tion between two variables arising not from a direct relation
between them but from their relation to a third variable.
 © CFA Institute. For candidate use only. Not for distribution.
Glossary G-29

Stablecoin A cryptocurrency that aims to maintain a stable Statistically significant A result indicating that the null
value relative to a specified asset or to a pool or basket hypothesis can be rejected; with reference to an estimated
of assets. regression coefficient, frequently understood to mean a
Stackelberg model A prominent model of strategic decision result indicating that the corresponding population regres-
making in which firms are assumed to make their decisions sion coefficient is different from zero.
sequentially. Status quo bias An emotional bias in which people do nothing
Staggered board A structure of board elections in which only (i.e., maintain the status quo) instead of making a change.
part of the board is elected simultaneously—for example, Statutory voting A common method of voting where each
only one-third of the board may be up for election each share represents one vote.
year, so the board can be replaced over three years, not in Step-up bonds Bonds for which the coupon, be it fixed or
one year if all seats were elected annually. This structure floating, increases by specified margins at specified dates.
fosters greater continuity of board members but is an Stock dividend A type of dividend in which a company distrib-
obstacle for shareholders seeking to effect change. utes additional shares of its common stock to shareholders
Stakeholder theory of corporate governance An expansion instead of cash.
of the shareholder theory of corporate governance under Stock exchange An exchange in which equity securities are
which the objective of a business is to maximize value for, traded. See exchanges.
and balance the interests of, a broad group of stakehold- Stock split An increase in the number of shares outstanding
ers, including shareholders, employees, society, and the with a consequent decrease in share price, but no change
non-human environment. to the company’s underlying fundamentals.
Stakeholders Any party with an interest, financial or Stockholder overhang The downward pressure on the share
non-financial, in an entity or its actions. price of stock as large blocks of shares are being sold on
Standard deviation The positive square root of the variance; a the open market.
measure of dispersion in the same units as the original data. Stop order An order in which a trader has specified a stop
Standard error of the estimate A measure of the distance price condition. Also called stop-loss order.
between the observed values of the dependent variable Stop-loss order See stop order.
and those predicted from the estimated regression. The Stranded assets A resource that is no longer economically
smaller this value, the better the fit of the model. Also valuable owing to changes in demand, regulations, or
known as the standard error of the regression and the root availability of substitutes—for example, a newly discovered
mean square error. oil well that will not be brought into production.
Standard error of the forecast Used to provide an inter- Strategic asset allocation Strategic asset allocation is an
val estimate around the estimated regression line. It is investment strategy premised on long-term asset allocation.
necessary because the regression line does not describe This strategy only rebalances its portfolio when the asset
the relationship between the dependent and independent mix represents significant deviation from the original or
variables perfectly. targeted allocation mix.
Standard error of the slope coefficient Calculated for simple Stratified random sampling A procedure that first divides a
linear regression by dividing the standard error of the population into subpopulations (strata) based on classi-
estimate by the square root of the variation of the inde- fication criteria and then randomly draws samples from
pendent variable. each stratum in sizes proportional to that of each stratum
Standardization The process of creating protocols for the in the population.
production, sale, transport, or use of a product or service. Street convention For yield measures on fixed-income instru-
Standardization occurs when relevant parties agree to ments that assume payments are made on scheduled dates
follow these protocols together. It helps support expanded and ignore weekends and holidays.
economic and financial activities, such as trade and capital Stress testing A specific type of scenario analysis that estimates
flows that support higher economic growth and standards losses in rare and extremely unfavorable combinations of
of living, across borders. events or scenarios.
Standards of conduct Behaviors required by a group; estab- Strong-form efficient market A market in which security
lished benchmarks that clarify or enhance a group’s code prices reflect all public and private information.
of ethics. Structural budget deficit Also known as the cyclically adjusted
Standing limit orders A limit order at a price below market budget deficit. The deficit that would exist if the economy
and which therefore is waiting to trade. was at full employment (or full potential output).
State actors Typically national governments, political organi- Structural subordination Arises in a holding company struc-
zations, or country leaders that exert authority over a coun- ture when the debt of operating subsidiaries is serviced by
try’s national security and resources. The South African the cash flow and assets of the subsidiaries before funds
President, Sultan of Brunei, Malaysia’s Parliament, and can be passed to the holding company to service debt at
the British Prime Minister are all examples of state actors. the parent level.
Statement of cash flows A financial statement that details the Structured notes A broad category of securities that incor-
movement of cash over a period. The statement is classified porate the features of debt instruments and one or more
into operating, investing, and financing activities. embedded derivatives designed to achieve a particular
Static trade-off theory of capital structure A theory pertain- issuer or investor objective.
ing to a company’s optimal capital structure; the optimal Subordinated debt A class of unsecured debt that ranks below
level of debt is found at the point where additional debt a firm’s senior unsecured obligations.
would cause the costs of financial distress to increase by a Subordination A form of internal credit enhancement that
greater amount than the benefit of the additional tax shield. relies on creating more than one bond tranche and ordering
the claim priorities for ownership or interest in an asset
 © CFA Institute. For candidate use only. Not for distribution.
G-30 Glossary

between the tranches. The ordering of the claim priorities is Systematic sampling A procedure of selecting every kth mem-
called a senior/subordinated structure, where the tranches ber until reaching a sample of the desired size. The sample
of highest seniority are called senior, followed by subor- that results from this procedure should be approximately
dinated or junior tranches. Also called credit tranching. random.
Subprime loans Lending to borrowers with lower credit Systemic risk Refers to risks supervisory authorities believe
quality, high DTI, and/or are loans with higher LTV, and are likely to have broad impact across the financial mar-
include loans that are secured by second liens otherwise ket infrastructure and affect a wide swath of market
subordinated to other loans. participants.
Sum of squares error (SSE) A measure of the total deviation Tactical asset allocation Asset allocation that involves making
between observed and estimated values of the dependent short-term adjustments to asset class weights based on
variable. It is calculated by subtracting each estimated short-term predictions of relative performance among
ˆ​i​ ​from its corresponding observed value Y
value ​Y ​ i​​,​ squaring asset classes.
each of these differences, and then summing all of these Target capital structure Management’s desired proportions of
squared differences. debt and equity financing, usually stated on a book value
Sum of squares regression (SSR) A measure of the explained basis or indirectly using a financial leverage metric, such
variation in the dependent variable, calculated as the sum as net or gross debt to EBITDA or credit rating.
of the squared differences between the predicted value Target independent A bank’s ability to determine the defi-
of the dependent variable, Y _̂ i, based on the estimated nition of inflation that they target, the rate of inflation
regression line, and the mean of the dependent variable, Y ̅. that they target, and the horizon over which the target is
Sum of squares total (SST) A measure of the total variation to be achieved.
in the dependent variable in a simple linear regression. Target semideviation A measure of downside risk, calculated
It is calculated by subtracting the mean of the observed as the square root of the average of the squared deviations
_
values ​​Y ​​from each of the observed values ​Y ​ i​​,​ squaring of observations below the target (also called target down-
each of these differences, and then summing all of these side deviation).
squared differences. Tariffs Taxes that a government levies on imported goods.
Sunk costs A cost that has already been incurred. Tax base The amount at which an asset or liability is valued
Supervised learning A type of machine learning in which the for tax purposes.
system attempts to learn to model relationships based on Tax expense An aggregate of an entity’s income tax payable (or
labeled training data. recoverable in the case of a tax benefit) and any changes in
Supervisory board In some jurisdictions, a corporation’s board deferred tax assets and liabilities. It is essentially the income
of directors is formally composed of a supervisory board tax payable or recoverable if these had been determined
and a management board. The supervisory board appoints based on accounting profit rather than taxable income.
and oversees the management board and often includes Taxable income The portion of an entity’s income that is sub-
representatives of employees and other non-shareholder ject to income taxes under the tax laws of its jurisdiction.
stakeholders. Taxable temporary differences Temporary differences that
Supply chain The sequence of processes involved in the cre- result in a taxable amount in a future period when deter-
ation and delivery of a physical product to the end cus- mining the taxable profit as the balance sheet item is
tomer, both within and external to a firm, regardless of recovered or settled.
whether those steps are performed by a single firm. Technical analysis A form of security analysis that uses price
Supply shock A typically unexpected disturbance to supply. and volume data, often displayed graphically, in decision
Survivorship bias Relates to the inclusion of only current making.
investment funds in a database. As such, the returns of Tender offer A solicitation by a current or prospective share-
funds that are no longer available in the marketplace (have holder to other shareholders to acquire a substantial per-
been liquidated) are excluded from the database. Also see centage, including 100%, of shares at a specified price.
backfill bias. This action is usually undertaken by a potential acquirer
Swap A firm commitment involving a periodic exchange of whose bid was rejected by the issuer’s board of directors,
cash flows. prompting the potential acquirer to appeal directly to
Swap contract An agreement between two parties to exchange shareholders.
a series of future cash flows. Tenor The remaining time to maturity for a bond or derivative
Swap execution facility (SEF) A swap trading platform contract. Also called term to maturity.
accessed by multiple dealers. Term repos Repos with a maturity longer than one day.
Swap rate The fixed rate to be paid by the fixed-rate payer Term structure of interest rates Also known as the maturity
specified in a swap contract. structure of interest rates, refers to the difference in interest
Syndicate A group of lenders, typically made up of banks. rates or benchmark yields by time-to-maturity.
Synthetic protective put The combination of a synthetic long Terminal stock value The expected value of a share at the end
underlying position (i.e., a long forward and risk-free bor- of the investment horizon—in effect, the expected selling
rowing) and a purchased put on the underlying. price. Also called terminal value.
Systematic risk Risk that affects the entire market or econ- Terminal value The expected value of a share at the end of the
omy; it cannot be avoided and is inherent in the overall investment horizon—in effect, the expected selling price.
market. Systematic risk is also known as non-diversifiable Test of the mean of the differences A statistical test for dif-
or market risk. ferences based on paired observations drawn from samples
that are dependent on each other.
 © CFA Institute. For candidate use only. Not for distribution.
Glossary G-31

Text analytics Involves the use of computer programs to ana- Trade settlement date The date when the buyer and seller
lyze and derive meaning typically from large, unstructured transfer consideration and securities.
text- or voice-based datasets, such as company filings, Traditional investment markets Markets for traditional
written reports, quarterly earnings calls, social media, investments, which include all publicly traded debts and
email, internet postings, and surveys. equities and shares in pooled investment vehicles that hold
Thematic risks Known risks that evolve and expand over a publicly traded debts and/or equities.
period of time. Climate change, pattern migration, the rise Tranches A grouping of securities within an issue with char-
of populist forces, and the ongoing threat of terrorism fall acteristics that vary from other tranches, such as different
into this category. credit quality and seniority.
Thin-tailed Describes a distribution that has relatively less Transfer payments Welfare payments made through the social
weight in the tails than the normal distribution (also called security system that exist to provide a basic minimum level
platykurtic). of income for low-income households.
Tiered pricing A pricing approach that charges different prices Transition risks Economic and financial losses from the tran-
to different buyers, commonly based on volume purchased. sition to a lower-carbon economy in response to climate
Timberland investment management organizations Entities change—for example, the abandonment of an oil well that
that support institutional investors by managing their is no longer economical.
investments in timberland by analyzing and acquiring Treasury Inflation-Protected Securities (TIPS) US Treasury
suitable timberland holdings. bonds with a principal that is adjusted for changes in the
Time tranching Structure of a securitization that allows for the Consumer Price Index. TIPS are issued in 5-, 10-, and
redistribution of “prepayment risk” among bond classes 30-year maturities.
by creating bond classes of different expected maturities. Treynor ratio A measure of risk-adjusted performance that
Time value The difference between an option’s premium and relates a portfolio’s excess returns to the portfolio’s beta.
its intrinsic value. Trimmed mean A mean computed after excluding a stated
Time value decay The process by which the time value of an small percentage of the lowest and highest observations.
option declines toward zero as the option’s expiration date Triparty repo A repurchase agreement in which the transacting
is approached. parties agree to use a third-party agent that provides access
Time-weighted rate of return The compound rate of growth to a larger collateral pool and multiple counterparties, as
of one unit of currency invested in a portfolio during a well as valuation and safekeeping of assets.
stated measurement period; a measure of investment per- True yield Measures on fixed-income instruments use actual
formance that is not sensitive to the timing and amount payment dates, accounting for weekends and holidays.
of withdrawals or additions to the portfolio. The true yield on an instrument is always lower than the
Tokenization The process of representing ownership rights street convention yield.
to physical assets on a blockchain or distributed ledger. Turn-of-the-year effect Calendar anomaly that stock mar-
Top-down analysis An investment selection approach that ket returns in January are significantly higher compared
begins with consideration of macroeconomic conditions to the rest of the months of the year, with most of the
and then evaluates markets and industries based upon abnormal returns reported during the first five trading
such conditions. days in January.
Total probability rule for expected value A rule explain- Two-fund separation theorem The theory that all investors
ing the expected value of a random variable in terms of regardless of taste, risk preferences, and initial wealth will
expected values of the random variable conditional on hold a combination of two portfolios or funds: a risk-free
mutually exclusive and exhaustive scenarios. asset and an optimal portfolio of risky assets.
Total return Measures the price appreciation, or percentage Two-way table A table of the frequency distribution of obser-
change in price of the securities in an index or portfolio, vations classified on the basis of two discrete variables.
plus any income received over the period. Also known as Contingency table.
Total return index An index that reflects the price appreciation Two-week repo rate The interest rate on a two-week repur-
or percentage change in price of the constituent securities chase agreement; may be used as a policy rate by a central
plus any income received since inception. bank.
Total working capital The difference between current assets Type I error The error of rejecting a true null hypothesis; a
and current liabilities. false positive.
Tracking error The standard deviation of the differences Type II error The error of not rejecting a false null hypothesis;
between a portfolio’s returns and its benchmark’s returns; false negative.
a synonym of active risk. Also called tracking risk. Uncommitted lines of credit Sources of bank credit that a
Tracking risk The standard deviation of the differences between bank can refuse to honor. Uncommitted credit lines are
a portfolio’s returns and its benchmarks returns. Also made up to a certain principal amount for a pre-determined
called tracking error. maximum maturity, charging a market reference rate plus
Trade creation When regional integration results in the an issuer-specific spread on only the principal outstanding
replacement of higher cost domestic production by lower for the period of use.
cost imports from other members. Underfitted When a machine learning model treats true
Trade diversion When regional integration results in lower-cost parameters as if they are noise and is unable to recognize
imports from non-member countries being replaced with relationships in the training data, making the model more
higher-cost imports from members. likely to fail to fully discover patterns that underlie the data.
Trade sale A portion or division of a private company sold via Underlying The asset referred to in a derivative contract.
either direct sale or auction to a strategic buyer interested
in increasing the scale and scope of an existing business.
 © CFA Institute. For candidate use only. Not for distribution.
G-32 Glossary

Underwritten offering A type of securities issue mechanism Venture debt Private debt funding that provides venture capital
in which the investment bank guarantees the sale of the backing to start-up or early-stage companies that may be
securities at an offering price that is negotiated with the generating little or negative cash flow.
issuer. Also known as firm commitment offering. Vest To become unconditionally entitled to.
Unearned revenue A liability account for money that has Vesting date The day that an employee becomes uncondition-
been collected for goods or services that have not yet been ally entitled to compensation.
delivered; payment received in advance of providing a good Vintage year The year in which a private capital fund makes
or service. Also called deferred revenue or deferred income. its first investment.
Unimodal A distribution with a single value that is most Volatility The standard deviation of the continuously com-
frequently occurring. pounded returns on the underlying asset.
Unit economics The expression of revenues and costs on a Vote by proxy A mechanism that allows a designated party—
per-unit basis. such as another shareholder, a shareholder representative,
Unitranche debt A hybrid or blended loan structure combining or management—to vote on the shareholder’s behalf.
different tranches of secured and unsecured debt into a Voting rights The power of shareholders to cast votes in cor-
single loan with a single, blended interest rate. porate elections for directors and other matters submitted
Unsecured Without collateral; unsecured debt is backed only to a shareholder vote.
by cash flows of the issuer. Warrant An attached option that gives its holder the right to
Unsponsored A type of depository receipt in which the foreign buy the underlying stock of the issuing company at a fixed
company whose shares are held by the depository has no exercise price until the expiration date.
involvement in the issuance of the receipts. Waterfall structures These represent the distribution order
Unsupervised learning A type of machine learning in which for cash flows and risk to different tranches in a financing
the system tries to learn the structure of unlabeled data. structure.
Utility tokens Tokens that provide services within a network, Weak-form efficient market hypothesis The belief that secu-
such as paying for services and network fees. rity prices fully reflect all past market data, which refers
Validity instructions Instructions which indicate when the to all historical price and volume trading information.
order may be filled. Weighted average coupon rate (WAC) Rate calculated for a
Value added resellers Businesses that distribute a product and mortgage pass-through security by weighting the mortgage
also handle more complex aspects of product installation, rate of each mortgage in the pool by the percentage of the
customization, service, or support. outstanding mortgage balance relative to the outstanding
Value at risk A money measure of the minimum value of amount of all the mortgages in the pool.
losses expected during a specified time period at a given Weighted average maturity (WAM) Calculated for a mortgage
level of probability. pass-through security by weighting the remaining number
Value chain The systems and processes in a firm that create of months to maturity of each mortgage in the pool by the
value for its customers. outstanding mortgage balance relative to the outstanding
Value proposition The product or service attributes valued amount of all the mortgages in the pool.
by a firm’s target customer that lead those customers to Weighted-average cost of capital (WACC) A weighted average
prefer that firm’s offering. of the after-tax required rates of return on a company’s
Value-add real estate strategies Strategies that involve equity, debt, preferred stock, and other long-term financing
larger-scale redevelopment and repositioning of existing sources, where the weights are the fraction of each source
assets and that may allow the investor to earn a higher of financing in the company’s current market value or
return compared with core-plus real estate strategies. management’s target capital structure.
Value-based pricing Pricing set primarily by reference to the Winsorized mean A mean computed after assigning a stated
value of the product or service to customers. percentage of the lowest values equal to one specified low
VaR See value at risk. value and a stated percentage of the highest values equal
Variance The expected value (the probability-weighted average) to one specified high value.
of squared deviations from a random variable's expected Write-off/liquidation Refers to a transaction that has not gone
value. well, and the investment is likely to lose value. The private
Variance of a random variable The expected value (the equity firm revises the value of its investment downward
probability-weighted average) of squared deviations from or liquidates the portfolio company.
a random variable's expected value. Yield curve A graphical depiction of yields-to-maturity of
Variation margin The difference between current margin bonds from the same issuer across maturities.
required and the current collateral price in a repurchase Yield spread The difference in yield-to-maturity between a
agreement. bond and that of a another bond.
Vega The change in a given derivative instrument for a given Yield-to-call An internal rate of return on a fixed-income
small change in volatility, holding everything else constant. instrument’s cash flows assuming cash flows are received
A sensitivity measure for options that reflects the effect on scheduled dates and the bond is called at a certain call
of volatility. price and date.
Velocity The pace at which geopolitical risk impacts an inves- Yield-to-maturity Internal rate of return on a fixed-income
tor portfolio. instrument’s cash flows assuming all cash flows are received
Venture capital Investments or financing to private companies on their scheduled dates.
with high growth potential. Yield-to-worst The lowest among a fixed-income instrument’s
Venture capital fund A hedge fund that seeks to buy, optimize, yields-to-call and yield-to-maturity. A commonly cited
and ultimately sell portfolio companies to generate profits. yield measure for fixed-rate callable bonds.
See private equity fund.
 © CFA Institute. For candidate use only. Not for distribution.
Glossary G-33

Z-spread Z-spread (or zero-volatility spread) is a constant Zero-coupon bonds Bonds that do not pay interest during
yield spread for a bond over a government or swap curve. their life. They are issued at a discount to par value and
Zero-coupon bond A bond that does not pay a coupon but is redeemed at par. Also called pure discount bond.
priced at a discount and pays its full face value at maturity.

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