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Rally
An
upward movement of prices. Opposite of recovery. Related:
Recovery
Range
The
high and low prices, or high and low bids and offers recorded
during a specified time.
Rate
anticipation swaps
An
exchange of bonds in a portfolio for new bonds that will achieve
the target portfolio duration, based on the investor’s
assumptions about future changes in interest rates.
Reaction
A
decline in prices following an advance. Opposite of rally. Related:
Rally
Reference
rate
A
benchmark interest rate (such as LMOR), used to specify conditions
of an interest rate swap or an interest rate agreement.
Refunding
The
redemption of a bond with proceeds received from issuing
lower-cost debt obligations ranking equal to or superior to the
debt to be redeemed.
Registered
representative
A
person registered with the CFTC who is employed by, and soliciting
business for, a commission house or futures commission merchant. Related:
CFTC, Futures commission merchant
Relative
strength
Also
called price momentum or price persistence, the ratio of the price
of a stock to some price index. Changes in the ratio can be
interpreted as uptrends or downtrends relative to the price index.
Relative
yield spread
The
ratio of the yield spread to the yield level.
Rembrandt
market
The
foreign market in the Netherlands.
Replicating
portfolio
A
portfolio constructed to match an index or benchmark.
Required
reserves
The
dollar amounts based on reserve ratios that banks are required to
keep on deposit at a Federal Reserve Bank.
Required
yield
Generally
referring to bonds, the yield required by the marketplace to match
available returns for financial instruments with comparable risk.
Reserve
An
accounting entry that properly reflects the contingent liabilities
of an insurance company.
Reserve
ratios
Specified
percentages of deposits, established by the Federal Reserve Board,
that banks must keep in a non-interest-bearing account at one of
the twelve Federal Reserve Banks.
Reset
frequency in an interest rate swap
The
frequency with which the floating rate changes.
Residual
risk.
Related:
Unsystematic risk
Retail
investors individual investors
Institutional
investors.
Retention
rate
The
percentage of present earnings held back or retained by a
corporation.
Return
The
change in the value of a portfolio over an evaluation period,
including any distributions made from the portfolio during that
period.
Return
on stockholders’ equity
The
ratio of earnings to stockholders’ equity.
Return
on total assets
The
ratio of earnings available to common stockholders to total
assets.
Return-to-maturity
expectations interpretation
A
variant of pure expectations theory which suggests that the return
that an investor will realize by rolling over short-term bonds to
some investment horizon will be the same as holding a zero-coupon
bond with a maturity that is the same as that investment horizon.
Revenue
bond
A
bond issued by a municipality to finance either a project or an
enterprise where the issuer pledges to the bondholders the
revenues generated by the operating projects financed, for
instance, hospital revenue bonds and sewer revenue bonds.
Revenue
fund
A
fund accounting for all revenues from an enterprise financed by a
municipal revenue bond.
Rings
Trading
arenas located on the floor of an exchange in which traders
execute orders. Sometimes called a pit. Related: Pit
Risk
averse
A
risk-averse investor is one who when faced with two investments
with the same expected return but two different risks will prefer
the one with the lower risk.
Risk-free
or riskless asset
An
asset whose future return is known today with certainty. The risk
free asset is commonly defined as short-term obligations of the
U.S. government.
Risk
indexes
Categories
of risk used to calculate fundamental beta, including (1) market
variability, (2) earnings variability, (3) low valuation and
unsuccess, (4) immaturity and smallness, (5) growth orientation,
and (6) financial risk.
Risk
premium
The
reward for holding the risky market portfolio rather than the
risk-free asset. The spread between Treasury and non-Treasury
bonds of comparable maturity.
Risk
premium approach
The
most common approach for tactical asset allocation to determine
the relative valuation of asset classes based on expected returns.
Risky
asset
An
asset whose future return is uncertain.
Round
lot
A
trading order typically of 100 shares of a stock or some multiple
of 100. Related: Odd lot
Round-trip
transaction costs
Costs
of completing a transaction, including commissions, market impact
costs, and taxes.
Round-turn
Procedure
by which the long or short position of an individual is offset by
an opposite transaction or by accepting or making delivery of the
actual financial instrument or physical commodity.
Scalp
To
trade for small gains. It normally involves establishing and
liquidating a position quickly, usually within the same day.
Scenario
analysis
The
use of horizon analysis to project bond total returns under
different reinvestment rates and future market yields.
Search
costs
Costs
associated with locating a counterparty to a trade, including
explicit costs (such as advertising) and implicit costs (such as
the value of time). Related: Information costs
Secondary
market
The
market where securities are traded after they are initially
offered in the primary market.
Securities
analysts
Related:
Financial analysts
Securitization
The
process of creating a passthrough, such as the mortgage
pass-through security, by which the pooled assets become standard
securities backed by those assets.
Security
deposit (initial)
Synonymous
with the term margin. A cash amount of funds that must be
deposited with the broker for each contract as a guarantee of
fulfillment of the futures contact. It is not considered as part
payment or purchase. Related: Margin
Security
deposit (maintenance)
A
description of the risk return relationship for individual
securities, expressed in a form similar to the capital market
line.
Related:
Maintenance margin security market line (SML).
Sell
hedge
Related:
Short hedge
Sell
limit order
Conditional
trading order that indicates that a security may be sold at the
designated price or higher. Related: Buy limit order
Sell-side
analyst
Also
called a Wall Street analyst, a financial analyst who works for a
brokerage firm and whose recommendations are passed on to the
brokerage firm’s customers.
Selling
short
A
trade in which the investor (working through a broker) borrows a
security, sells it, repurchases it at a later time, and then
returns it to the party who initially loaned the security. If the
price has fallen, the short seller profits. When the security is
returned, the investor is said to have "covered the short
position."
Semistrong
form efficiency
A
form of pricing efficiency where the price of the security fully
reflects all public information (including, but not limited to,
historical price and trading patterns). Compare weak form
efficiency and strong form efficiency.
Serial
bonds
Corporate
bonds arranged so that specified principal amounts become due on
specified dates. Related: Term bonds
Settlement
date
Also
called the delivery date, the designated date at which the parties
to a futures contract must transact.
Settlement
Price
A
figure determined by the closing range which is used to calculate
gains and losses in futures market accounts. Settlement prices are
used to determine gains, losses, margin calls, and invoice prices
for deliveries. Related: Closing range
Settlement
rate
The
rate suggested in Financial Accounting Standard Board (FASB) 87
for discounting the obligations of a pension plan. The rate at
which the pension benefits could be effectively settled if the
pension plan wished to terminate its pension obligation.
Sharpe
benchmark
A
statistically created benchmark that adjusts for a manager’s
index-like tendencies.
Sharpe
Index
A
measure of a portfolio’s excess return relative to the total
variability of the portfolio. Related: Treynor Index
Short
One
who has sold a contract to establish a market position and who has
not yet closed out this position through an offsetting purchase;
the opposite of a long. Related: Long
Short
hedge
The
sale of a futures contract(s) to eliminate or lessen the possible
decline in value ownership of an approximately equal amount of the
actual financial instrument or physical commodity. Related:
Long hedge
Short
position
In
the cash market, a sale of securities not owned. The securities
sold are borrowed. In the futures market, the sale of a futures
contract with no offsetting long position. In the options market,
the sale of an option with no offsetting long position.
Short
selling
Establishing
a market position by selling a futures contract.
Short
squeeze
A
situation in which a lack of supply tends to force prices upward.
Short
straddle
A
straddle in which one put and one call are sold.
Short-term
solvency ratios
Ratios
used to judge the adequacy of liquid assets for meeting short-term
obligations as they come due, including (1) the current ratio, (2)
the acid-test ratio, (3) the inventory turnover ratio, and (4) the
accounts receivable turnover ratio.
Shortfall
risk
The
risk of falling short of any investment target.
Simple
moving average
The
mean, calculated at any time over a past period of fixed length.
Single-index
model
Related:
Market model
Sinking
fund requirement
A
condition included in some corporate bond indentures that requires
the issuer to retire a specified portion of debt each year. Any
principal due at maturity is called the balloon maturity.
Small-firm
effect
The
tendency of small firms (in terms of total market capitalization)
to outperform the stock market (consisting of both large and small
firms).
Specialist
On
an exchange, the member firm that is designated as the market
maker (or dealer for a listed common stock. Only one specialist
can be designated for a given stock, but dealers may be
specialists for several stocks. In contrast, there can be multiple
market makers in the OTC market.
Speculator
One,
who attempts to anticipate price changes and, through buying and
selling contracts, aims to make profits. A speculator does not use
the market in connection with the production, processing,
marketing or handling of a product.
Speed
Related:
Prepayment speed
Spot
markets
Related:
Cash markets
Spot
month
The
nearest delivery month on a futures contract.
Spot
price
The
current market price of the actual physical commodity. Also called
cash price.
Spot
rate
The
theoretical yield on a zero-coupon Treasury security.
Spot
rate curve
The
graphical depiction of the relationship between the spot rates and
maturity.
Spread
The
simultaneous purchase and sale of separate futures or options
contracts for the same commodity for delivery in different months.
Also known as a straddle.
Spread
income
Also
called margin income, the difference between income and cost. For
a depository institution, the difference between the assets it
invests in (loans and securities) and the cost of its funds
(deposits and other sources).
Spread
strategy
A
strategy that involves a position in one or more options so that
the cost of buying an option is funded entirely or in part by
selling another option in the same underlying.
Standard
deviation
The
square root of the variance. A measure of dispersion of a set of
data from their mean.
Standardized
value
Also
called the normal deviate, the distance of one data point from the
mean, divided by the standard deviation of the distribution.
Stated
conversion price
At
the time of issuance of a convertible security, the price the
issuer effectively grants the securityholder to purchase the
common stock, equal to the par value of the convertible security
divided by the conversion ratio.
Steepening
of the yield curve
A
change in the yield curve where the spread between the yield on a
long-term and short-term Treasury has increased. Compare
flattening of the yield curve and butterfly shift.
Step-up
bond
A
bond that pays a lower coupon rate for an initial period which
then increases to a higher coupon rate. Related:
Deferred-interest bond, Payment-in-kind bond
Stochastic
models
Liability-matching
models that assume that the liability payments and the asset cash
flows are uncertain. Related: Deterministic models
Stock
index option
An
option in which the underlying is a common stock index.
Stock
market
Also
called the equity market, the market for trading equities.
Stock
option
An
option in which the underlying is the common stock of a
corporation.
Stock
replacement strategy
A
strategy for enhancing a portfolio’s return, employed when the
futures contract is expensive based on its theoretical price,
involving a swap between the futures, Treasury bills portfolio and
a stock portfolio.
Stop-limit
order
A
stop order that designates a price limit. In contrast to the stop
order, which becomes a market order if the stop is reached, the
stop-limit order becomes a limit order if the stop is reached.
Stop
order (or stop)
An
order to buy or sell at the market when a definite price is
reached, either above (on a buy) or below (on a sell) the price
that prevailed when the order was given.
Straddle
Purchase
or sale of an equal number of puts and calls with the same terms
at the same time. Related: Spread
Straight
value
Also
called investment value, the value of a convertible security
without the conversion option.
Stratified
equity indexing
A
method of constructing a replicating portfolio in which the stocks
in the index are classified into stratum, and each stratum is
represented in the portfolio.
Stratified
sampling approach to indexing
An
approach in which the index is divided into cells, each
representing a different characteristic of the index, such as
duration or maturity.
Stratified
sampling bond indexing
A
method of bond indexing that divides the index into cells, each
cell representing a different characteristic, and that buys bonds
to match those characteristics.
Strike
index
For
a stock index option, the index value at which the buyer of the
option can buy or sell the underlying stock index. The strike
index is converted to a dollar value by multiplying by the option’s
contract multiple. Related: Strike price
Strike
price
The
price at which an option can be converted by exercise into the
underlying futures contract.
Strong
form efficiency
Pricing
efficiency, where the price of a security reflects all
information, whether or not it is publicly available. Related:
Weak form efficiency, Semistrong form efficiency
Structured
portfolio strategy
A
strategy in which a portfolio is designed to achieve the
performance of some predetermined liabilities that must be paid
out in the future.
Swap
reversal
An
interest rate swap designed to end a counterparty’s role in
another interest rate swap, accomplished by counterbalancing the
original swap in maturity, reference rate, and notional amount.
Swap
sale
Also
called a swap assignment, a transaction that ends one counterparty’s
role in an interest rate swap by substituting a new counterparty
whose credit is acceptable to the other original counterparty.
Swaptions
Options
on interest rate swaps. The buyer of a swaption has the right to
enter into an interest rate swap agreement by some specified date
in the future. The swaption agreement will specify whether the
buyer of the swaption will be a fixed-rate receiver or a
fixed-rate payer. The writer of the swaption becomes the
counterparty to the swap if the buyer exercises.
Switching
Liquidating
an existing position and simultaneously reinstating a position in
another futures contract of the same type.
Symmetric
cash matching
An
extension of cash flow matching that allows for the short-term
borrowing of funds to satisfy a liability prior to the liability
due date, resulting in a reduction in the cost of funding
liabilities.
Systematic
risk
Also
called undiversifiable risk or market risk, the minimum level of
risk that can be obtained for a portfolio by means of
diversification across a large number of randomly chosen assets. Related:
Unsystematic risk
Tactical
assest allocation (TAA)
An
asset allocation strategy that allows active departures from the
normal asset mix based upon rigorous objective measures of value.
Tangible
asset
An
asset whose value depends on particular physical properties. These
include reproducible assets such as buildings or machinery and
non-reproducible assets such as land, a mine, or a work of art. Related:
Intangible asset
Technical
analysts
Also
called chartists or technicians, analysts who use mechanical rules
to detect changes in the supply of and demand for a stock and
capitalize on the expected change.
Technical
descriptors
In
the model for calculating fundamental beta, ratios in the market
variability risk index which rely on market-related data.
Technician
Related:
Technical analysts
Tender
To
offer for delivery against futures.
Term
bonds
Often
referred to as bullet-maturity bonds or simply bullet bonds, bonds
whose principal is payable at maturity. Related: Serial
bonds
Term
repo
A
repurchase agreement with a term of more than one day.
Term
structure of interest rates
The
relationship between the yields on otherwise comparable securities
with different maturities, often depicted as a yield curve.
Term
to maturity
The
time remaining on a bond’s life, or the date on which the debt
will cease to exist and the borrower will have completely paid off
the amount borrowed.
Term
trust
A
closed-end fund that has a fixed termination or maturity date.
Theoretical
futures price
Also
called the fair price, the equilibrium futures price.
Theoretical
spot rate curve
A
curve derived from theoretical considerations as applied to the
yields of actually traded Treasury debt securities because there
are no zero-coupon Treasury debt issues with a maturity greater
than one year. Like the yield curve, this is a graphical depiction
of the term structure of interest rates.
Theta
Also
called time decay, the ratio of the change in an option price to
the decrease in time to expiration.
Three-phase
DDM
A
version of the dividend discount model which applies a different
expected dividend rate depending on a company’s life-cycle
phase, growth phase, transition phase, or maturity phase.
Tick
Refers
to change in price, either up or down. Related: Point
Tick-test
rules
SEC-imposed
restrictions on when a short sale may be executed, intended to
prevent investors from destabilizing the price of a stock when the
market price is falling. A short sale can be made only when either
(1) the sale price of the particular stock is higher than the last
trade price (referred to as an uptick trade) or (2) if there is
not change in the last trade price of the particular stock, the
previous trade price must be higher than the trade price that
preceded it (referred to as a zero uptick).
Tilted
portfolio
An
indexing strategy that is linked to active management through the
emphasis of a particular industry sector, selected performance
factors such as earnings momentum, dividend yield, price-earnings
ratio, or selected economic factors such as interest rates and
inflation.
Time
decay
Related:
Theta
Time
deposit
Related:
Certificate of deposit
Time
premium
Also
called time value, the amount by which the option price exceeds
its intrinsic value.
Time
value of an option
Related:
Time premium
Time
value
The
market value of an option minus its intrinsic value; that is, the
difference between the option premium and the amount, if any, that
the option is in-the-money. Related: In-the-Money
Time-weighted
rate of return
Related:
Geometric mean return
Timing
option
For
a Treasury bond or note futures contract, the seller’s choice of
when in the delivery month to deliver.
Total
asset turnover
The
ratio of net sales to total assets.
Total
debt to equity ratio
A
capitalization ratio comparing current liabilities plus long-term
debt to shareholders’ equity.
Total
return
In
performance measurement, the actual rate of return realized over
some evaluation period. In fixed income analysis, the potential
return that considers all three sources of return (coupon
interest, interest on interest, and any capital gain/loss) over
some investment horizon.
Tracking
error
In
an indexing strategy, the difference between the performance of
the benchmark and the replicating portfolio.
Trade
house
A
firm which deals in actual commodities.
Tranche
One
of several related securities offered at the same time.
Trade
date
In
an interest rate swap, the date that the counterparties commit to
the swap.
Transactions
costs
Related:
Round-trip transactions costs, Information costs, Search costs
Transition
phase
A
phase of development in which the company’s earnings begin to
mature and decelerate to the rate of growth of the economy as a
whole. Related: Three-phase DDM
Treasuries
Related:
Treasury securities
Treasury
bills
Debt
obligations of the U.S. Treasury that have maturities of one year
or less.
Treasury
bonds
Debt
obligations of the U.S. Treasury that have maturities of 10 years
or more.
Treasury
notes
Debt
obligations of the U.S. Treasury that have maturities of more than
2 years but less than 10 years.
Treasury
securities
Securities
issued by the U.S. Department of the Treasury.
Trend
The
general direction of the market.
Treynor
Index
A
measure of the excess return per unit or risk, where excess return
is defined as the difference between the portfolio’s return and
the risk-free rate of return over the same evaluation period and
where the unit of risk is the portfolio’s beta. Related:
Sharpe Index
12b-i
funds
Mutual
funds that do not charge an upfront or back-end commission, but
instead take out up to 1.25% of average daily fund assets each
year to cover the costs of selling and marketing shares, an
arrangement allowed by the SEC’s 12b-I (passed in 1980).
Two-factor
model
Black’s
zero-beta version of the capital asset pricing model.
Two-fund
separation theorem
The
theoretical result that all investors will hold a combination of
the risk-free asset and the market portfolio.
Underlying
The
"something" that the parties agree to exchange in a
derivative contract.
Undiversifiable
risk
Related:
Systematic risk
Unsystematic
risk
Also
called the diversifiable risk, residual risk, or company-specific
risk, the risk that is unique to a company such as a strike, the
outcome of unfavorable litigation, or a natural catastrophe. Related:
Systematic risk
Upstairs
market
A
network of trading desks for the major brokerage firms and
institutional investors that communicate with each other by means
of electronic display systems and telephones to facilitate block
trades and program trades.
Uptick
trade
Related:
Tick-test rules
Value
manager
A
manager who seeks to buy stocks that are at a discount to their
"fair value" and sell them at or in excess of that
value. Also called contrarians because they see value where many
other market participants do not.
Variable
life
A
whole life insurance policy that provides a death benefit that
depends on the market value of the insured’s portfolio at the
time of the death. Typically the company invests premiums in
common stocks, and hence variable life policies are referred to as
equity-linked policies.
Variance
A
measure of dispersion of a set of data points around their mean
value.
Variance
minimization approach to tracking
An
approach to bond indexing that uses historical data to estimate
the variance of the tracking error.
Variation
margin
An
additional required deposit to bring an investor’s equity
account up to the initial margin level when the balance falls
below the maintenance margin requirement.
Venture
capital
An
investment in a start-up business that is perceived to have
excellent growth prospects but does not have access to capital
markets.
Vertical
analysis
The
process of dividing each expense item in the income statement of a
given year by net sales to identify expense items that rise faster
or slower than a change in sales.
Volume
The
number of transactions in a contract made during a specified
period of time.
Warrant
An
options contract often sold with another security. For instance,
corporate bonds may be sold with warrants to buy common stock of
that corporation. Warrants are generally detachable.
Weak
form efficiency
A
form of pricing efficiency where the price of the security
reflects the past price and trading history of the security. Related:
Semistrong form efficiency, Strong form efficiency
Weighted-average
portfolio yield
The
weighted average of the yield of all the bonds in a portfolio.
Wild
card option
The
right of the seller of a Treasury bond futures contract to give
notice of intent to deliver at or before 8:00 p.m. Chicago time
after the closing of the exchange (3:15 p.m. Chicago time) when
the futures settlement price has been fixed. Related:
Timing option
Window
contract
A
guaranteed investment contract purchased with deposits over some
future designated time period (the "window"), usually
between 3 and 12 months. All deposits made are guaranteed the same
credit rating. Related: Bullet contract
Wire
house
A
firm operating a private wire to its own branch offices or to
other firms, commission houses or brokerage houses.
Writer
The
seller of an option.
Yankee
market
The
foreign market in the United States.
Yield
curve
The
graphical depiction of the relationship between the yield on bonds
of the same credit quality but different maturities: Related:
Term structure of interest rates
Yield
curve option-pricing models
Also
called arbitrage-free option-pricing models, models that can
incorporate different volatility assumptions along the yield
curve, such as the Black-Derman-Toy model.
Yield
curve strategies
Positioning
a portfolio to capitalize on expected changes in the shape of the
Treasury yield curve.
Yield
ratio
The
quotient of two bond yields.
Yield
spread strategies
Strategies
that involve positioning a portfolio to capitalize on expected
changes in yield spreads between sectors of the bond market.
Yield
to call
For
a bond that may be called prior to maturity, the yield to the
first call date.
Yield
to maturity
The
interest rate that will make the present value of a bond’s
remaining cash flows (if held to maturity) equal to the price
(plus accrued interest, if any).
Yield
to worst
The
bond yield computer by always using the lower of either the yield
to maturity or the yield to call on every possible call date.
Zero-beta
portfolio
A
portfolio constructed to represent the risk-free asset, that is,
having a beta of zero.
Zero-coupon
bond
A
bond in which no periodic coupon is paid over the life of the
contract. Instead, both the principal and the interest are paid at
the maturity date.
Zero
uptick
Related:
Tick-test rules
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