dictionary of finance and investment terms 5th edition phần 2 pps

< previous page page_69 next page > Page 69 deficits must be reduced or eliminated by increasing sales and reducing expenditures, or the company will not survive in the long run. Similarly, individuals who consistently spend more than they earn will accumulate huge debts, which may ultimately force them to declare bankruptcy if the debt cannot be serviced. BUDGET SURPLUS excess of income over spending for a government, corporation, or individual over a particular period of time. A government with a budget surplus may choose to start new programs or cut taxes. A corporation with a surplus may expand the business through investment or acquisition, or may choose to buy back its own stock. An individual with a budget surplus may choose to pay down debt or increase spending or investment. BULGE quick, temporary price rise that applies to an entire commodities or stock market, or to an individual commodity or stock. BULGE BRACKET the group of firms in an underwriting syndicate that share the largest participation. TOMBSTONE ads list the participants alphabetically within groupings organized by size of participation and presented in tiers. The first and lead grouping is the "bulge bracket." See also MEZZANINE BRACKET. BULL person who thinks prices will rise. One can be bullish on the prospects for an individual stock, bond, or commodity, an industry segment, or the market as a whole. In a more general sense, bullish means optimistic, so a person can be bullish on the economy as a whole. BULLION COINS coins composed of metal such as gold, silver, platinum, or palladium. Bullion coins provide the purest play on the "up or down" price moves of the underlying metal, and are the most actively traded. These coins trade at a slight premium over their metal content, unlike NUMISMATIC COINS, which trade on their rarity and artistic value. Some of the most popular bullion coins minted by major governments around the world include the American Eagle, the Canadian Maple Leaf, the South African Kruggerand, and the Australian Kangaroo. In addition to trading bullion in coin form, nearly pure precious metals also are available in bar form. BULL MARKET prolonged rise in the prices of stocks, bonds, or commodities. Bull markets usually last at least a few months and are characterized by high trading volume. BULL SPREAD option strategy, executed with puts or calls, that will be profitable if the underlying stock rises in value. The following are three varieties of bull spread: Vertical spread: simultaneous purchase and sale of options of the same class at different strike prices, but with the same expiration date. Calendar spread: simultaneous purchase and sale of options of the same class and the same price but at different expiration dates. < previous page page_69 next page > < previous page page_70 next page > Page 70 Diagonal spread: combination of vertical and calendar spreads wherein the investor buys and sells options of the same class at different strike prices and different expiration dates. An investor who believes, for example, that XYZ stock will rise, perhaps only moderately, buys an XYZ 30 call for 1 1/2 and sells an XYZ 35 call for 1/2; both options are OUT OF THE MONEY. The 30 and 35 are strike prices and the 1 1/2 and 1/2 are premiums. The net cost of this spread, or difference between the premiums is $1. If the stock rises to 35 just prior to expiration, the 35 call becomes worthless and the 30 call is worth $5. Thus the spread provides a profit of $4 on an invesment of $1. If on the other hand the price of the stock goes down, both options expire worthless and the investor losses the entire premium. BUMP-UP CD certificate of deposit that gives its owner a one-time right to increase its yield for the remaining term of the CD if interest rates have risen from the rate of issuance. The CD's yield will not be adjusted downward if rates fall, however. If rates remain stable or decline, the CD will pay its stated rate of interest until maturity. BUNCHING 1. combining many round-lot orders for execution at the same time on the follr of an exchange. This technique can also be used with odd lot orders, when combining many small orders can save the odd-lot differential for each customer. 2. pattern on the ticker tape when a series of trades in the same security appear consecutively. 3. aggregating incaome items of deductions in a single year to minimize taxes in that year. BURNOUT exhaustion of a tax shelter's benefits, when an investor starts to recieve income from the investment. This income must be repaorted to the Internal Revenue Service, and taxes must be paid on it. BURN RATE in venture capital financing, the rate at which a start-up company spends capital to finance overhead before generating a positive cash flow from operations. BUISNESS COMBINATION see MERGER. BUISNESS CYCLE recurrence of periods of exansion(RECOVERY) and contraction (RECESSION) in enconomic activity with effects on inflation, growth, and employment. One cycle extends from a GROSS DOMESTIC PRODUCT (GDP) base line through one rise and one decline and back to the base line, a period typically averaging about 2 1/2 years. The 1990's however, saw an extended period of expansion. A buisness cycle affects profitability and CASH FLOW, making it a key consideration in coroporate dividend policy, and a factor in the rise and fall of the inflation rate, which in turn affects return on investments. See also SOFT LANDING. < previous page page_70 next page > < previous page page_71 next page > Page 71 BUSINESS DAY In general: hours when most businesses are in operation. Although individual working hours may differ, and particular firms may choose staggered schedules, the conventional business day is 9 A.M. to 5P.M. Finance and investments: day when financial marketplaces are open for trading. In figuring the settlement date on a regular way securities transactionwhich is the fifth business day after the trade dateSaturday, Sunday, and a legal holiday would not be counted, for example. BUSINESS SEGMENT REPORTING reporting the results of the divisions, subsidiaries, or other segments of a business separately so that income, sales, and assets can be compared. When not a separate part of the business structure, a segment is generally defined as any grouping of products and services comprising a significant industry, which is one representing 10% or more of total revenues, assets, or income. Allocation of central corporate expenses is not required by the Financial Accounting Standards Board. Also called line of business reporting. BUSTED CONVERTIBLES CONVERTIBLES that trade like fixed-income investments because the market price of the common stock they convert to has fallen so low as to render the conversion feature valueless. BUST-UP TAKEOVER LEVERAGED BUYOUT in which TARGET COMPANY assets or activities are sold off to repay the debt that financed the TAKEOVER. BUTTERFLY SPREAD complex option strategy that involves selling two calls and buying two calls on the same or different markets, with several maturity dates. One of the options has a higher exercise price and the other has a lower exercise price than the other two options. An investor in a butterfly spread will profit if the underlying security makes no dramatic movements because the premium income will be collected when the options are sold. BUY acquire property in return for money. Buy can be used as a synonym for bargain. BUY AND HOLD STRATEGY strategy that calls for accumulating shares in a company over the years. This allows the investor to pay favorable long-term capital gains tax on profits and requires far less attention than a more active trading strategy. BUY AND WRITE STRATEGY conservative options strategy that entails buying stocks and then writing covered call options on them. Investors receive both the dividends from the stock and the premium income from the call options. However, the investor may have to sell the stock below the current market price if the call is exercised. BUYBACK purchase of a long contract to cover a short position, usually arising out of the short sale of a commodity. Also, purchase of identical < previous page page_71 next page > < previous page page_72 next page > Page 72 securities to cover a short sale. Synonym: short covering. See also STOCK BUYBACK. Bond buyback: corporation's purchase of its own bonds at a discount in the open market. This is done in markets characterized by rapidly rising interest rates and commensurately declining bond prices. BUY DOWN cash payment by a mortgage lender allowing the borrower to receive a lower rate of interest on a mortgage loan. For example, a home builder having trouble selling homes may offer a buy down with a local lender which will enable home buyers to qualify for mortgages that they would otherwise not qualify for. The buy down may lower the mortgage rate for the life of the loan, or sometimes just for the first few years of the loan. BUYER'S MARKET market situation that is the opposite of a SELLER'S MARKET. Since there is more supply of a security or product than there is current demand, the prices tend to fall allowing buyers to set both the price and terms of the sale. It contrasts with a seller's market, characterized by excess demand, high prices, and terms suited to seller's desires. BUY HEDGE see LONG HEDGE. BUY IN Options trading: procedure whereby the responsibility to deliver or accept stock can be terminated. In a transaction called buying-in or CLOSING PURCHASE, the writer buys an identical option (only the premium or price is different). The second of these options offsets the first, and the profit or loss is the difference in premiums. Securities: transaction between brokers wherein securities are not delivered on time by the broker on the sell side, forcing the buy side broker to obtain shares from other sources. BUYING CLIMAX rapid rise in the price of a stock or commodity, setting the stage for a quick fall. Such a surge attracts most of the potential buyers of the stock, leaving them with no one to sell their stock to at higher prices. This is what causes the ensuing fall. Technical chartists see a buying climax as a dramatic run-up, accompanied by increased trading volume in the stock. BUYING ON MARGIN buying securities with credit available through a relationship with a broker, called a MARGIN ACCOUNT. Arrangements of this kind are closely regulated by the Federal Reserve Board. See also MARGIN. BUYING POWER amount of money available to buy securities, determined by tabulating the cash held in brokerage accounts, and adding the amount that could be spent if securities were margined to the limit. The market cannot rise beyond the available buying power. See also PURCHASING POWER. < previous page page_72 next page > < previous page page_73 next page > Page 73 BUY MINUS order to buy a stock at a price lower than the current market price. Traders try to execute a buy minus order on a temporary dip in the stock's price. BUY ON THE BAD NEWS strategy based on the belief that, soon after a company announces bad news, the price of its stock will plummet. Those who buy at this stage assume that the price is about as low as it can go, leaving plenty of room for a rise when the news improves. If the adverse development is indeed temporary, this technique can be quite profitable. See also BOTTOM FISHER. BUY ORDER in securities trading, an order to a broker to purchase a specified quality of a security at the MARKET PRICE or at another stipulated price. BUYOUT purchase of at least a controlling percentage of a company's stock to take over its assets and operations. A buyout can be accomplished through negotiation or through a tender offer. A LEVERAGED BUYOUT occurs when a small group borrows the money to finance the purchase of the shares. The loan is ultimately repaid out of cash generated from the acquired company's operations or from the sale of its assets. See also GOLDEN PARACHUTE. BUY STOP ORDER BUY ORDER marked to be held until the market price rises to the STOP PRICE, then to be entered as a MARKET ORDER to buy at the best available price. Sometimes called a suspended market order, because it remains suspended until a market transaction elects, activates, or triggers the stop. Such an order is not permitted in the over-the-counter market. See also STOP ORDER. BUY THE BOOK order to a broker to buy all the shares available from the specialist in a security and from other brokers and dealers at the current offer price. The book is the notebook in which specialists kept track of buy and sell orders before computers. The most likely source of such an order is a professional trader or a large institutional buyer. BYLAWS rules governing the internal management of an organization which, in the case of business corporations, are drawn up at the time of incorporation. The charter is concerned with such broad matters as the number of directors and the number of authorized shares; the bylaws, which can usually be amended by the directors themselves, cover such points as the election of directors, the appointment of executive and finance committees, the duties of officers, and how share transfers may be made. Bylaws, which are also prevalent in not-for-profit organizations, cannot countermand laws of the government. BYPASS TRUST agreement allowing parents to pass assets on to their children to reduce estate taxes. The trust must be made irrevocable, meaning that the terms can never be changed. Assets put in such a trust usually exceed the amount that children and other heirs can receive < previous page page_73 next page > < previous page page_74 next page > Page 74 tax-free at a parent's death. The estate tax exclusion amount was $625,000 in 1998, scheduled to increase gradually to $1 million in 2006 according to the TAXPAYER RELIEF ACT OF 1997. Parents can arrange to receive income from the assets during their lifetimes and may even be able to touch the principal in case of dire need. One variation of a bypass trust is the qualified terminable interest property trust, or Q-TIP TRUST. < previous page page_74 next page > < previous page page_75 next page > Page 75 C CABINET CROWD members of the New York Stock Exchange who trade in infrequently traded bonds. Also called inactive bond crowd or book crowd. Buy and sell LIMIT ORDERS for these bonds are kept in steel racks, called cabinets, at the side of the bond trading floor; hence the name cabinet crowd. See also AUTOMATED BOND SYSTEM (ABS). CABINET SECURITY stock or bond listed on a major exchange but not actively traded. There are a considerable number of such bonds and a limited number of such stocks, mainly those trading in ten-share units. Cabinets are the metal storage racks that LIMIT ORDERS for such securities are filed in pending execution or cancellation. See also AUTOMATED BOND SYSTEM (ABS); CABINET CROWD. CAC 40 INDEX broad-based index of common stocks on the Paris Bourse, based on 40 of the 100 largest companies listed on the forward segment of the official list (reglement menseul); it has a base of 100. It is comparable to the Dow Jones Industrial Average. There are index futures and index options contracts based on the CAC 40 index. CAFETERIA EMPLOYEE BENEFIT PLAN plan offering employees numerous options among their employee benefits. Each employee is able to pick the benefits that are most valuable in his or her particular situation. For example, a young employee with children may want to receive more life and health insurance than a mid-career employee who is more concerned with building up retirement plan assets. CAGE section of a brokerage firm's back office where funds are received and disbursed. Also, the installation where a bank teller works. CALENDAR list of securities about to be offered for sale. Separate calendars are kept for municipal bonds, corporate bonds, government bonds, and new stock offerings. CALENDAR SPREAD options strategy that entails buying two options on the same security with different maturities. If the EXERCISE PRICE is the same (a June 50 call and a September 50 call) it is a HORIZONTAL SPREAD. If the exercise prices are different (a June 50 call and a September 45 call), it is a DIAGONAL SPREAD. Investors gain or lose as the difference in price narrows or widens. CALL Banking: demand to repay a secured loan usually made when the borrower has failed to meet such contractual obligations as timely payment of interest. When a banker calls a loan, the entire principal amount is due immediately. See also BROKER LOAN RATE. Bonds: right to redeem outstanding bonds before their scheduled maturity. The first dates when an issuer may call bonds are specified < previous page page_75 next page > < previous page page_76 next page > Page 76 in the prospectus of every issue that has a call provision in its indenture. See also CALLABLE; CALL PRICE. Options: right to buy a specific number of shares at a specified price by a fixed date. See also CALL OPTION. CALLABLE redeemable by the issuer before the scheduled maturity. The issuer must pay the holders a premium price if such a security is retired early. Bonds are usually called when interest rates fall so significantly that the issuer can save money by floating new bonds at lower rates. See also CALL PRICE; DEMAND LOAN. CALL DATE date on which a bond may be redeemed before maturity. If called, the bond may be redeemed at PAR or at a slight premium to par. For example, a bond may be scheduled to mature in 20 years but may have a provision that it can be called in 10 years if it is advantageous for the issuer to refinance the issue. The date 10 years from the issue date is the call date. When buying a bond, it is important to know the bond's call date, because you cannot be assured that you will receive interest from that bond beyond the call date. CALLED AWAY term for a bond redeemed before maturity, or a call or put option exercised against the stockholder, or a delivery required on a short sale. CALL FEATURE part of the agreement a bond issuer makes with a buyer, called the indenture, describing the schedule and price of redemptions before maturity. Most corporate and municipal bonds have 10-year call features (termed CALL PROTECTION by holders); government securities usually have none. See also CALL PRICE. CALL LOAN any loan repayable on demand, but used in newspaper money rate tables as a synonym for broker loan or broker overnight loan. See BROKER LOAN RATE. CALL LOAN RATE see BROKER LOAN RATE. CALL OPTION right to buy 100 shares of a particular stock or stock index at a predetermined price before a preset deadline, in exchange for a premium. For buyers who think a stock will go up dramatically, call options permit a profit from a smaller investment than it would take to buy the stock. These options can also produce extra income for the seller, who gives up ownership of the stock if the option is exercised. CALL PREMIUM amount that the buyer of a call option has to pay to the seller for the right to purchase a stock or stock index at a specified price by a specified date. In bonds, preferreds, and convertibles, the amount over par that an issuer has to pay to an investor for redeeming the security early. CALL PRICE price at which a bond or preferred stock with a call provision or CALL FEATURE can be redeemed by the issuer; also known as < previous page page_76 next page > < previous page page_77 next page > Page 77 redemption price. To compensate the holder for loss of income and ownership, the call price is usually higher than the par value of the security, the difference being the CALL PREMIUM. See also CALL PROTECTION. CALL PROTECTION length of time during which a security cannot be redeemed by the issuer. U.S. government securities are generally not callable, although there is an exception in certain 30-year Treasury bonds, which become callable after 25 years. Corporate and municipal issuers generally provide 10 years of call protection. Investors who plan to live off the income from a bond should be sure they have call protection, because without it the bond could be CALLED AWAY at any time specified in the indenture. CALL PROVISION clause in a bond's INDENTURE that allows the issuer to redeem the bond before maturity. The call provision will spell out the first CALL DATE and whether the bond will be called at PAR or at a slight premium to par. Some preferred stock issues also have call provisions spelling out the conditions of a redemption. CALL RISK risk to a bondholder that a bond may be redeemed before scheduled maturity. Bondholders should read the CALL PROVISIONS in a bond's INDENTURE to understand the earliest potential CALL DATE for their bond. The main risk of having a bond called before maturity is that the investor will be unable to replace the bond's yield with another similar-quality bond paying the same yield. The reason the bond issuer will call the bond is that interest rates will have fallen from the time of issuance, and the bond can be refinanced at lower rates. CAMPS acronym for Cumulative Auction Market Preferred Stocks, Oppenheimer & Company's DUTCH AUCTION PREFERRED STOCK product. CANADIAN DEALING NETWORK, INC. (CDN) the organized over-the-counter stock market of Canada. The CDN became a subsidiary of the TORONTO STOCK EXCHANGE in 1991. Previously, CDN was known as the Canadian Over-the-Counter Automated Trading System (COATS). CANCEL In general: void a negotiable instrument by annulling or paying it; also, prematurely terminate a bond or other contract. Securities trading: void an order to buy or sell. See also GOOD TILL CANCELED ORDER. CAP Bonds: highest level interest rate that can be paid on a floating-rate debt instrument. For example, a variable-rate note might have a cap of 8%, meaning that the yield cannot exceed 8% even if the general level of interest rates goes much higher than 8%. Mortgages: highest interest rate level that an adjustable-rate mortgage (ARM) can rise to over a particular period of time. For example, an < previous page page_77 next page > < previous page page_78 next page > Page 78 ARM contract may specify that the rate cannot jump more than two points in any year, or a total of six points during the life of the mortgage. Stocks: short for CAPITALIZATION, or the total current value of a company's outstanding shares in dollars. A stock's capitalization is determined by multiplying the total number of shares outstanding by the stock's price. Analysts also refer to small-, medium- and large-cap stocks as a way of distinguishing the capitalizations of companies they are interested in. Many mutual funds restrict themselves to the small-, medium- or large-cap universes. See also COLLAR. CAPACITY Debt: ability to repay loans, as measured by credit grantors. Creditors judge an applicant's ability to repay a loan based on assets and income, and assign a certain capacity to service debt. If someone has many credit cards and credit lines outstanding, even if there are no outstanding balances, that is using up that person's debt capacity. Economics: the amount of productive capacity in the economy is known as industrial capacity. This figure is released on a monthly basis by the Federal Reserve to show how much of the nation's factories, mines, and utilities are in use. If more than 85% of industrial capacity is in use, economists worry that production bottlenecks may form and create inflationary pressure. On the other hand, if less than 80% of capacity is in use, industrial production may be slack and inflationary pressures low. CAPACITY UTILIZATION RATE percentage of production capacity in use by a particular company, an industry, or the entire economy. While in theory a business can operate at 100% of its productive capacity, in practice the maximum output is less than that, because machines need to be repaired, employees take vacations, etc. The operating rate is expressed as a percentage of the potential 100% production output. For example, a company may be producing at an 85% operating rate, meaning its output is 85% of the maximum that could be produced with its existing resources. See also CAPACITY. CAPITALASSET long-term asset that is not bought or sold in the normal course of business. Generally speaking, the term includes FIXED ASSETSland, buildings, equipment, furniture and fixtures, and so on. The Internal Revenue Service definition of capital assets includes security investments. CAPITAL ASSET PRICING MODEL (CAPM) sophisticated model of the relationship between expected risk and expected return. The model is grounded in the theory that investors demand higher returns for higher risks. It says that the return on an asset or a security is equal to the risk-free returnsuch as the return on a short-term Treasury securityplus a risk premium. CAPITAL BUDGET program for financing long-term outlays such as plant expansion, research and development, and advertising. Among < previous page page_78 next page > [...]... operating officer reports to the CHIEF EXECUTIVE OFFICER and may or may not be on the board of directors (presidents typically serve as board members) See also CHAIRMAN OF THE BOARD CHINESE WALL imaginary barrier between the investment banking, corporate finance, and research departments of a brokerage house and the sales and trading departments Since the investment banking side has sensitive knowledge of. .. amount of experience, reached a certain age, and met all other statutory and licensing requirements of the U.S state where he or she works In addition to accounting and auditing, CPAs prepare tax returns for corporations and individuals CHAIRMAN OF THE BOARD member of a corporation's board of directors who presides over its meetings and who is the highest ranking officer in the corporation The chairman of. .. page_ 92 next page > Page 92 when prices fall For example, an investor may want to buy shares of a stock at $20 and place a limit order to do so But when the shares rise above $25 , and then $28 , the customer decides to enter a market order and buy the stock before it goes even higher Investors can also chase the market when selling a stock For example, if an investor wants to sell a stock at $20 and it... accounting, systems and procedures, data processing, acquisitions analysis, and financial planning The controller may also have internal audit responsibilities The treasury function is concerned with the receipt, custody, investment, and disbursement of corporate funds and for borrowings and the maintenance of a market for the company's securities CHIEF OPERATING OFFICER (COO) officer of a firm, usually... relevance to finance and investments 1 auditor's certificate, sometimes called certificate of accounts, or ACCOUNTANT'S OPINION 2 bond certificate, certificate of indebtedness issued by a corporation containing the terms of the issuer's promise to repay principal and pay interest, and describing collateral, if any Traditionally, bond certificates had coupons attached, which were exchanged for payment of interest... new stock and bond issues, divestitures, spin-offs and the like, it would be unfair to the general investing public if the sales and trading side of the firm had advance knowledge of such transactions So several SEC and stock exchange rules mandate that a Chinese Wall be erected to prevent premature leakage of this market-moving information It became law with the passage of SEC Rule 10b-5 of the Securities... (World Bank) Bonds finance general operations of the bank and the terms are determined by bank management at the time of each new offering COMBINATION 1 arrangement of options involving two long or two short positions with different expiration dates or strike (exercise) prices A trader could order a combination with a long call and a long put or a short call and a short put 2 joining of competing companies... evidence of ownership of a corporation showing number of shares, name of issuer, amount of par or stated value represented or a declaration of no-par value, and rights of the shareholder Preferred stock certificates also list the issuer's responsibilities with respect to dividends and voting rights, if any CERTIFICATE FOR AUTOMOBILE RECEIVABLES (CARS) PASS-THROUGH SECURITY backed by automobile loan paper of. .. telephone or other means in search of the best bid or offer price CHICAGO BOARD OF TRADE (CBOT) formed in 1848 as a centralized marketplace for the grain trade, CBOT is a pioneer in the development of financial futures and options Building on its agricultural and precious metals futures and options contracts on grains and silver and gold, CBOT launched GNMA futures in 1975 and grew to become the largest... COLLECTION of funds on which a check is drawn, and payment of those funds to the holder of the check See also CLEARING HOUSE FUNDS Finance: asset not securing a loan and not otherwise encumbered As a verb, to clear means to make a profit: "After all expenses, we cleared $1 million." Securities: COMPARISON of the details of a transaction between brokers prior to settlement; final exchange of securities . XYZ 30 call for 1 1 /2 and sells an XYZ 35 call for 1 /2; both options are OUT OF THE MONEY. The 30 and 35 are strike prices and the 1 1 /2 and 1 /2 are premiums. The net cost of this spread, or. executive and finance committees, the duties of officers, and how share transfers may be made. Bylaws, which are also prevalent in not-for-profit organizations, cannot countermand laws of the. current demand, the prices tend to fall allowing buyers to set both the price and terms of the sale. It contrasts with a seller's market, characterized by excess demand, high prices, and terms