Ben Chuanlong Du's Blog

Stock Ticker

A stock ticker is a report of the price for certain securities, updated continuously throughout the trading session by the various stock exchanges. A "tick" is any change in price, whether that movement is up or down. A stock ticker automatically displays these ticks, along with other relevant information, like volume, that investors use to stay informed about current market conditions.

A limited number of stocks appear on the stock ticker during any particular period, due to the large number of stocks that are actually trading at the same time. Often, the stocks that have the greatest change in price from the previous day's trading session, or those that are trading under the highest volume appear on the stock ticker.

You may have seen a stock ticker scrolling by at the bottom of any financial news networks on television. The ticker provides current information for certain stocks, including: the ticker symbol (the one to four letter code that represents a particular stock); quantity traded (volume for each transaction); price, a green "up" arrow if price is higher than the previous day's closing value, a red "down" arrow if price is lower than the previous day; and the net price change (either as a dollar amount or as a percentage) from the previous day's close. If the price is unchanged, the arrow may be gray in color or simply absent. Often, the ticker symbol and the net price change appear color-coded: green if the price is higher than the previous session, red if price is lower.

Many of today's fully-electronic stock tickers display market data in real-time or with a small delay. You can watch stock tickers on a variety of financial news networks, and many trading platforms allow you to customize and view stock tickers that can be displayed at the bottom of your computer monitor.

Personal Consumption Expenditures - PCE

A measure of price changes in consumer goods and services. Personal consumption expenditures consist of the actual and imputed expenditures of households; the measure includes data pertaining to durables, non-durables and services. It is essentially a measure of goods and services targeted toward individuals and consumed by individuals.

Also referred to as "consumption." Investopedia Says
Investopedia explains 'Personal Consumption Expenditures - PCE' Similar to the Consumer Price Index (CPI), PCE is a report (actually a part of the personal income report) put out by the Bureau of Economic Analysis of the Department of Commerce.

There are two broad indexes of consumer prices in the United States: the CPI and the Chain Price Index for Personal Consumption Expenditures (PCEPI). They are similar in many respects, but there are some important differences that can lead to large gaps between CPI and PCEPI inflation rates. The PCEPI uses a chain index, which takes consumers' changing consumption due to prices into account; the CPI uses a fixed basket of goods with weightings that do not change over time.

The PCE is a fairly predictable report that has little impact on the markets.

Beginning Market Value (BMV)

The valuation at which the property should exchange at the date of origin, and the beginning of each period. The beginning market value at the start of every period is equal to the ending market value of the previous period.

The market value is based on what both the buyer and seller (effectively, the market), deem the true value of the property to be. Market value is similar to market price given that the market remains efficient and the players are rational.

Ending Market Value (EMV)

The value of an investment at the end of the investment period. Ending market value (EMV) is calculated by taking the beginning market value and adding the interest earned over the course of the investment.

$$\text{Ending Market Value} = \text{Beginning Market Value} \times (1 + \text{Interest Rate}).$$

For example:

$$\text{Beginning market value} = 100 \text{Interest Rate} = 10% EMV = 100 \times (1 + 0.10) = 110$$

This is an important equation to consider when choosing an investment as the time value of money can be a valuable decision-making variable.

Fair Market Value (FMV)

The price that a given property or asset would fetch in the marketplace, subject to the following conditions:

1. Prospective buyers and sellers are reasonably knowledgeable about the asset; they are behaving in their own best interests and are free of undue pressure to trade.

2. A reasonable time period is given for the transaction to be completed.

Given these conditions, an asset's fair market value should represent an accurate valuation or assessment of its worth.

Fair market values are widely used across many areas of commerce. For example, municipal property taxes are often assessed based on the fair market value of the owner's property. Depending upon how many years the owner has owned the home, the difference between the purchase price and the residence's fair market value can be substantial.

Fair market values are often used in the insurance industry as well. For example, when an insurance claim is made as a result of a car accident, the insurance company covering the damage to the owner's vehicle will usually cover damages up to the fair market value of the automobile.

Capital Appreciation

A rise in the value of an asset based on a rise in market price. Essentially, the capital that was invested in the security has increased in value, and the capital appreciation portion of the investment includes all of the market value exceeding the original investment or cost basis. Capital appreciation is one of the two main sources of investment returns, with the other being dividend or interest income.

For example, say you purchase a share for \$$10, which pays a dividend of a \$$1 per share each year, and is now trading at \$$15 per share a year later. Your capital appreciation in the investment is \$$5, or 50%, as the price of the share has increased \$$5 over your purchase price or cost basis. Your interest income return is \$$1, or 10%, for a total return on the shares is \$6 or 60%. Capital appreciation is often a stated investment goal of many mutual funds. These funds look to find investments that will rise in value based on increased earnings or other fundamental metrics. Investments targeted for capital appreciation tend have more risk than assets chosen for capital preservation and income generation, such as government, municipal bonds, or dividend-paying stocks. Because of this, capital appreciation funds are considered appropriate for risk-tolerant investors. Mutual Fund An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. Mutual funds are operated by money managers, who invest the fund's capital and attempt to produce capital gains and income for the fund's investors. A mutual fund's portfolio is structured and maintained to match the investment objectives stated in its prospectus. One of the main advantages of mutual funds is that they give small investors access to professionally managed, diversified portfolios of equities, bonds and other securities, which would be quite difficult (if not impossible) to create with a small amount of capital. Each shareholder participates proportionally in the gain or loss of the fund. Mutual fund units, or shares, are issued and can typically be purchased or redeemed as needed at the fund's current net asset value (NAV) per share, which is sometimes expressed as NAVPS. Security A financial instrument that represents: an ownership position in a publicly-traded corporation (stock), a creditor relationship with governmental body or a corporation (bond), or rights to ownership as represented by an option. A security is a fungible, negotiable financial instrument that represents some type of financial value. T he company or entity that issues the security is known as the issuer. For example, the issuer of a bond issue may be a municipal government raising funds for a particular project. Investors of securities may be retail investors (those who buy and sell securities on their own behalf and not for an organization) and wholesale investors (financial institutions acting on behalf of clients or acting on their own account). Institutional investors include investment banks, pension funds, managed funds and insurance companies. Securities are typically divided into debt securities and equities. A debt security is a type of security that represents money that is borrowed that must be repaid, with terms that define the amount borrowed, interest rate and maturity/renewal date. Debt securities include government and corporate bonds, certificates of deposit (CDs), preferred stock and collateralized securities (such as CDOs and CMOs). Equities represent ownership interest held by shareholders in a corporation, such as a stock. Unlike holders of debt securities who generally receive only interest and the repayment of the principal, holders of equity securities are able to profit from capital gains. In the United States, the U.S. Securities and Exchange Commission (SEC) and other self-regulatory organizations (such as the Financial Industry Regulatory Authority) regulate the public offer and sale of securities. Principal 1. The amount borrowed or the amount still owed on a loan, separate from interest. 2. The original amount invested, separate from earnings. 3. The face value of a bond. 4. The owner of a private company. 5. The main party to a transaction, acting as either a buyer or seller for his/her own account and risk. Be sure to take into account the context in which this term is used, as the exact meaning of the term has many variations. Also referred to as "corpus." Hedge Fund An aggressively managed portfolio of investments that uses advanced investment strategies such as leveraged, long, short and derivative positions in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark). Legally, hedge funds are most often set up as private investment partnerships that are open to a limited number of investors and require a very large initial minimum investment. Investments in hedge funds are illiquid as they often require investors keep their money in the fund for at least one year. For the most part, hedge funds (unlike mutual funds) are unregulated because they cater to sophisticated investors. In the U.S., laws require that the majority of investors in the fund be accredited. That is, they must earn a minimum amount of money annually and have a net worth of more than \$1 million, along with a significant amount of investment knowledge. You can think of hedge funds as mutual funds for the super rich. They are similar to mutual funds in that investments are pooled and professionally managed, but differ in that the fund has far more flexibility in its investment strategies.

It is important to note that hedging is actually the practice of attempting to reduce risk, but the goal of most hedge funds is to maximize return on investment. The name is mostly historical, as the first hedge funds tried to hedge against the downside risk of a bear market by shorting the market (mutual funds generally can't enter into short positions as one of their primary goals). Nowadays, hedge funds use dozens of different strategies, so it isn't accurate to say that hedge funds just "hedge risk". In fact, because hedge fund managers make speculative investments, these funds can carry more risk than the overall market.

Total Return

When measuring performance, the actual rate of return of an investment or a pool of investments over a given evaluation period. Total return includes interest, capital gains, dividends and distributions realized over a given period of time.

Total return accounts for two categories of return: income and capital appreciation. Income includes interest paid by fixed-income investments, distributions or dividends. Capital appreciation represents the change in the market price of an asset.

Distribution

1. When trading volume is higher than that of the previous day without any price appreciation.

2. The removal of assets from a retirement account. The assets are then paid to the retirement account owner or beneficiary.

3. A company's payment of cash, stock or physical products to its shareholders.

4. Distributions of income and capital gains that mutual funds make to their investors periodically during a calendar year.

5. A market that is in distribution has already hit its apex and is expected to decline.

6. The retirement account owner (or beneficiary) may be required to pay income tax on distributions received during the year. Early-distribution penalties may also apply if the distribution occurs while the retirement account owner is under the age of 59.5. While distributions from IRAs can occur at any time, certain requirements must be met before distributions can occur from qualified plans, 457 plans and 403(b) accounts. Participants must check with their employers regarding the rules of the plan.

7. The income that is generated from an investment trust is given to investors through monthly or quarterly distributions. In this manner, distributions are similar to stock dividends; however, they usually offer much higher yields of up to 10% a year. The distributions received reduce a trust's taxable income and, therefore, little or no income tax is paid.

8. Mutual funds pay out interest and dividend income received from their portfolio holdings as dividends (income distribution) to fund shareholders. In addition, capital gains from the portfolio's trading activities are generally paid out (capital gains distribution) at the end of the year.

Junk Bond (Speculative Investment)

A colloquial term for a high-yield or non-investment grade bond. Junk bonds are fixed-income instruments that carry a rating of 'BB' or lower by Standard & Poor's, or 'Ba' or below by Moody's. Junk bonds are so called because of their higher default risk in relation to investment-grade bonds.

Junk bonds are risky investments, but have speculative appeal because they offer much higher yields than safer bonds. Companies that issue junk bonds typically have less-than-stellar credit ratings, and investors demand these higher yields as compensation for the risk of investing in them. A junk bond issued from a company that manages to turn its performance around for the better and has its credit rating upgraded will generally have a substantial price appreciation.

A rating that indicates that a municipal or corporate bond has a relatively low risk of default. Bond rating firms, such as Standard & Poor's, use different designations consisting of upper- and lower-case letters 'A' and 'B' to identify a bond's credit quality rating. 'AAA' and 'AA' (high credit quality) and 'A' and 'BBB' (medium credit quality) are considered investment grade. Credit ratings for bonds below these designations ('BB', 'B', 'CCC', etc.) are considered low credit quality, and are commonly referred to as "junk bonds" (or sometimes speculative investment).

Investors should note that government bonds, or Treasuries, are not subject to credit quality ratings. These securities are considered to be of the very highest credit quality. In the case of municipal and corporate bond funds, fund company literature, such as the fund prospectus and independent investment research reports will report an "average credit quality" for the fund's portfolio as a whole.

Investors should be aware that an agency downgrade of a company's bonds from 'BBB' to 'BB' reclassifies its debt from investment grade to "junk" status with just a one-step drop in quality. The repercussions of such an event can be highly problematic for the issuer and can also adversely affect bond prices for investors. Safety-conscious fund investors should pay attention to a bond fund's portfolio credit quality breakdown.

Loss Given Default (LGD)

The amount of funds that is lost by a bank or other financial institution when a borrower defaults on a loan. Academics suggest that there are several methods for calculating the loss given default, but the most frequently used method compares actual total losses to the total potential exposure at the time of default.

Of course, most banks don't simply calculate the LGD for one loan. Instead, they review their entire portfolio and determine LGD based on cumulative losses and exposure.

Year Over Year (YoY)

A method of evaluating two or more measured events to compare the results at one time period with those from another time period (or series of time periods), on an annualized basis. Year-over-year comparisons are a popular way to evaluate the performance of investments. Any measurable events that recur annually can be compared on a year-over-year basis - from annual performance, to quarterly performance, to daily performance.

Year-over-year performance is frequently used by investors seeking to gauge whether a company's financial performance is improving or worsening. For example, a business may report that its revenues have increased for the third quarter on a year-over-year basis for the last three years. This means that revenues at that company in the third quarter of year three were higher than revenues in the third quarter in year two, which were higher than revenues in the third quarter of year one.

As another example, a mutual fund that returned 50% last year may have a YOY return of 12%, as the year-over-year return takes into account each annual return since the fund's inception.

Stress Testing

A simulation technique used on asset and liability portfolios to determine their reactions to different financial situations. Stress tests are also used to gauge how certain stressors will affect a company or industry. They are usually computer-generated simulation models that test hypothetical scenarios. This is also known as a "stress test".

Stress testing is a useful method for determining how a portfolio will fare during a period of financial crisis. The Monte Carlo simulation is one of the most widely used methods of stress testing.

A stress test is also used to evaluate the strength of institutions. For example, the Treasury Department could run stress tests on banks to determine their financial condition. Banks often run these tests on themselves. Changing factors could include interest rates, lending requirements or unemployment.

Default Rate/Probability of Default (PD)/Expected Default Frequency (EDF)

This rate can be used in reference to two main things:

1. The rate of borrowers who fail to remain current on their loans. It is a critical piece of information used by lenders to determine their risk exposure and economists to evaluate the health of the overall economy.

2. The interest rate charged to a borrower when payments on a revolving line of credit are overdue. This higher rate is applied to outstanding balances in arrears in addition to the regular interest charges for the debt.

Prior to passage of the Credit Card Accountability, Responsibility and Disclosure (CARD) Act of 2009, the language in some credit card agreements allowed credit card companies to hike the interest charged on the card balance to the default rate even if consumers were current on their account but had an outstanding balance on another credit card (a practice known as "universal default").

The law, which took effect in the fall of 2009 imposed sweeping new restrictions on the credit industry, including the elimination of the universal default rate.

Constant Default Rate (CDR)

An annualized rate of default on a group of mortgages, typically within a collateralized product such as a mortgage-backed security (MBS). The constant default rate represents the percentage of outstanding principal balances in the pool that are in default, which typically equates to the home being past 60-day and 90-day notices and in the foreclosure process.

The constant default rate analysis assumes that if a home is in foreclosure (a process that can take 12 months or more to complete), the interest and principal payments are being advanced into the MBS by the mortgage servicing company.

The CDR method for evaluating losses is one of several methods used by analysts and company controllers to determine the current market value or asset value of a mortgage-backed security. The CDR method can account for both fixed-rate and adjustable-rate mortgages.

Another method is the Standard Default Assumption (SDA) model created by the Bond Market Association, but this is more suited to standard 30-year fixed mortgages. In the mortgage crisis of 2007-2008, the SDA model proved to have vastly underestimated the true rate of default; foreclosure rates hit multi-decade highs during that period.

Commercial and Industrial (C&I) Loan

Any type of loan made to a business or corporation and not to an individual. Commercial and industrial loans can be made in order to provide either working capital or to finance major capital expenditures. This type of loan is usually short-term in nature and is almost always backed with some sort of collateral.

Commercial loans usually charge flexible rates of interest that are tied to the bank prime rate or else to the LIBOR. Many borrowers must also file regular financial statements, usually at least annually. Lenders also usually require proper maintenance of the loan collateral property.

Capital Commitment

Future capital expenditures that a company has committed to spend on long-term assets over a period of time. Capital commitment also refers to securities inventory carried by a market maker. The term may also refer to investments in blind pool funds by venture capital investors, which they contribute over time when requested to do so by the fund manager.

A company has to exercise the ultmost care in structuring its capital commitments, since an inordinately high amount will put undue strain on its finances. It would need to ensure that operating cash flow is sufficient to meet capital expenditures, and if it is not, make arrangements to ensure that it can raise the additional funds on the capital markets. Capital commitments are generally the highest for companies in capital-intensive industries such as power generation.

Loan Commitment

A loan amount that may be drawn down, or is due to be contractually funded in the future. Loan commitments are found at commercial banks and other lending institutions and consist of both open-end and closed-end loans. Open-end loan commitments act like revolving credit lines, whereby if a portion of the loan is paid off, the principle repayment amount is added back to the allowable loan limit. Closed-end loans are reduced once any repayments are made.

Banks and investment shops must account for the value of outstanding loan commitments so that funds are available should the borrower request them. They represent a future obligation in full, even though a percentage of the notional loan amounts will never be utilized by the borrowers themselves. Also known as "unfunded loan commitments," because the total capital outlay is not provided by the lender up front.

The aggregate loan commitments of commercial banks, savings & loans and investments banks registered in the United States must be disclosed on quarterly financial reports to regulators at the FDIC. These reports are known as the "Call Reports" and can be found either through the FDIC or the lender's corporate website.

Loan commitments get increased attention during times of economic weakness, as more borrowers delay making repayments and may draw down the max on their revolving credit lines. This decreases the return the bank can earn on the capital deployed. The same is true for many construction loans, which are typically classified as closed-end loan commitments.

Committed Capital

A contractual agreement between an investor and a venture-capital fund that obligates the investor to contribute money to the fund. The investor may pay all of the committed capital at one time, or make contributions over a period of time. This often takes place over a number of years. Also known as "commitments".

When an investor commits capital to a venture capital fund, the investor typically has many years to satisfy the agreement. Often, contributions will be made over a period of three to five years after the fund is formed.

The private equity market can be viewed as riskier than the public equity market, as returns in the private market tend to have higher dispersion of returns than the public market. Therefore, investing in the right business ventures can offer substantial rewards for top tier funds.

Commitment Fee

A fee charged by a lender to a borrower for an unused credit line or undisbursed loan. A commitment fee is generally specified as a fixed percentage of the undisbursed loan amount. The lender charges a commitment fee as compensation for keeping a line of credit open or to guarantee a loan at a specific date in future. The borrower pays the fee in return for the assurance that the lender will supply the loan funds at the specified future date and at the contracted interest rate, regardless of conditions in the financial and credit markets.

A commitment fee is different from interest; although, the two are often confused. A commitment fee is separate from the interest rate that is charged by the lender on the loan. A key distinction is that the commitment fee is charged on the undisbursed loan amount, while interest is charged on the disbursed amount of the loan.

Forward Commitment

1. A contract pertaining to the future sale or purchase of a security. Price and date are specified in the contract.

2. A formal promise to make a loan sometime in the future. It typically refers to a mortgage-backed security where the funds are usually needed at a later date.

3. A formal commitment in the form of a future security sale or purchase allows both parties to omit the risk pertaining to stock price volatility.

4. A formal commitment can provide the borrower with the security of knowing they will have the funds when they need them as well as give the lender the ability to forecast future business.

Take-Out Commitment

A specific type of mortgage purchase agreement. Under a take-out commitment, a long-term investor agrees to buy a mortgage from a mortgage banker at a specific date in the future. Take-out commitments are enforced once a project reaches a particular stage where long-term, rather than short-term, financing is the preferred alternative.

There are a few specific types of investors that purchase take-out commitments. In most cases, these are insurance companies or other financial institutions. They are known as "take-out lenders."

Average Outstanding Balance (AOB)

The unpaid, interest-bearing balance of a loan or loan portfolio averaged over a period of time, usually one month. The average outstanding balance refers to any term, instalment, revolving or credit card debt on which interest is charged.

The average outstanding balance on credit cards and loans is a critical factor in a consumer's credit rating. Average outstanding balances on credit cards are reported to credit agencies monthly on active accounts, along with any amounts that are past due.

Outstanding Shares

Stock currently held by investors, including restricted shares owned by the company's officers and insiders, as well as those held by the public. Shares that have been repurchased by the company are not considered outstanding stock.

This number is shown on a company's balance sheet under the heading "Capital Stock" and is more important than the authorized shares or float. It is used to calculate many metrics, including market capitalization and earnings per share (EPS).

Net Debt

A metric that shows a company's overall debt situation by netting the value of a company's liabilities and debts with its cash and other similar liquid assets.

When investing in a company, one of the most important factors you need to consider is how much debt the company is carrying. Here are some questions to ask yourself when analyzing a company's debt: How much debt really exists? What kind of debt is it (long/short-term maturities)? What is the debt for (repay or refinance old debts)? Can the company afford the debt if it runs into financial trouble? And, finally, how does it compare to the debt levels of competing companies?

Net Worth

The amount by which assets exceed liabilities. Net worth is a concept applicable to individuals and businesses as a key measure of how much an entity is worth. A consistent increase in net worth indicates good financial health; conversely, net worth may be depleted by annual operating losses or a substantial decrease in asset values relative to liabilities. In the business context, net worth is also known as book value or shareholders' equity.

Consider a couple with the following assets.

• primary residence valued at \$250,000 • an investment portfolio with a market value of \$100,000
• automobiles and other assets valued at \$25,000 • liabilities are primarily an outstanding mortgage balance of \$$100,000 and a car loan of \$$10,000 The couple's net worth would therefore be $$265,000 ([\250,000 + \100,000 + \25,000] - [\100,000 + \10,000]).$$ Assume that five years later, the couple's financial position is as follows • residence value \$225,000
• investment portfolio \$120,000 • savings \$20,000
• automobile and other assets \$15,000 • mortgage loan balance \$80,000
• car loan \$0 (paid off) The net worth would now be \$$300,000. In other words, the couple's net worth has gone up by \$$35,000 despite the decrease in the value of their residence and car, because this decline is more than offset by increases in other assets (such as the investment portfolio and savings) as well as the decrease in their liabilities. People with a substantial net worth are known as high net worth individuals, and form the prime market for wealth managers and investment counselors. Investors with a net worth (excluding their primary residence) of at least \$1 million - either alone or together with their spouse - are considered as "accredited investors" by the Securities and Exchange Commission, for the purpose of investing in unregistered securities offerings. A company that is consistently profitable will have a rising net worth or book value, as long as these earnings are not fully distributed to shareholders but are retained in the business. For public companies, rising book values over time may be rewarded by an increase in stock market value.

A total value that a bank is exposed to at the time of default. Each underlying exposure that a bank has is given an EAD value and is identified within the bank's internal system. Using the internal ratings board (IRB) approach, financial institutions will often use their own risk management default models to calculate their respective EAD systems.

Exposure at default (along with loss given default (LGD) and probability of default (PD)) is used to calculate the credit risk capital of financial institutions. The expected loss that will arise at default is often measured over one year. The calculation of EAD is done by multiplying each credit obligation by an appropriate percentage. Each percentage used coincides with the specifics of each respective credit obligation.

Public Company/Firm

A company that has issued securities through an initial public offering (IPO) and is traded on at least one stock exchange or in the over the counter market. Although a small percentage of shares may be initially "floated" to the public, the act of becoming a public company allows the market to determine the value of the entire company through daily trading.

Public companies have inherent advantages over private companies, including the ability to sell future equity stakes and increased access to the debt markets. With these advantages, however, comes increased regulatory scrutiny and less control for majority owners and company founders.

Once a company goes public, it has to answer to its shareholders. For example, certain corporate structure changes and amendments must be brought up for shareholder vote. Shareholders can also vote with their dollars by bidding up the company to a premium valuation or selling it to a level below its intrinsic value.

Public companies must meet stringent reporting requirements set out by the Securities and Exchange Commission (SEC), including the public disclosure of financial statements and annual 10-k reports discussing the state of the company. Each stock exchange also has specific financial and reporting guidelines that govern whether a stock is allowed to be listed for trading.

Private Company/Firm

A company whose ownership is private. As a result, it does not need to meet the strict Securities and Exchange Commission filing requirements of public companies.

Private companies may issue stock and have shareholders. However, their shares do not trade on public exchanges and are not issued through an initial public offering. In general, the shares of these businesses are less liquid and the values are difficult to determine.

Private Equity

Equity capital that is not quoted on a public exchange. Private equity consists of investors and funds that make investments directly into private companies or conduct buyouts of public companies that result in a delisting of public equity. Capital for private equity is raised from retail and institutional investors, and can be used to fund new technologies, expand working capital within an owned company, make acquisitions, or to strengthen a balance sheet.

The majority of private equity consists of institutional investors and accredited investors who can commit large sums of money for long periods of time. Private equity investments often demand long holding periods to allow for a turnaround of a distressed company or a liquidity event such as an IPO or sale to a public company.

The size of the private equity market has grown steadily since the 1970s. Private equity firms will sometimes pool funds together to take very large public companies private. Many private equity firms conduct what are known as leveraged buyouts (LBOs), where large amounts of debt are issued to fund a large purchase. Private equity firms will then try to improve the financial results and prospects of the company in the hope of reselling the company to another firm or cashing out via an IPO.

Gross Domestic Product (GDP)

The monetary value of all the finished goods and services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.

$$GDP = C + G + I + NX$$

where:

$$C$$ is equal to all private consumption, or consumer spending, in a nation's economy; $$G$$ is the sum of government spending; $$I$$ is the sum of all the country's businesses spending on capital; $$NX$$ is the nation's total net exports, calculated as total exports minus total imports. ($$NX = Exports - Imports$$).

GDP is commonly used as an indicator of the economic health of a country, as well as to gauge a country's standard of living. Critics of using GDP as an economic measure say the statistic does not take into account the underground economy (transactions that, for whatever reason, are not reported to the government). Others say that GDP is not intended to gauge material well-being, but serves as a measure of a nation's productivity, which is unrelated.

1. The spread between Treasury securities and non-Treasury securities that are identical in all respects except for quality rating.

2. An options strategy where a high premium option is sold and a low premium option is bought on the same underlying security.

3. For instance, the difference between yields on treasuries and those on single A-rated industrial bonds. A company must offer a higher return on their bonds because their credit is worse than the government's.

4. An example would be buying a Jan 50 call on ABC for \$$2, and writing a Jan 45 call on ABC for \$$5. The net amount received (credit) is \$3. The investor will profit if the spread narrows. Can also be called "credit spread option" or "credit risk option". (For my intern at Union Bank: Defined as the differeence between the interest of Moody's BAA rate cooperate bond and that of the US 10-year treausy.) House Price Index (HPI) A broad measure of the movement of single-family house prices in the U.S. Apart from serving as an indicator of house price trends, the House Price Index (HPI) provides an analytical tool for estimating changes in the rates of mortgage defaults, prepayments and housing affordability. The HPI is published by the Federal Housing Finance Agency (FHFA) using data supplied by Fannie Mae and Freddie Mac. The HPI is based on transactions involving conventional and conforming mortgages (only on single-family properties) that have been purchased or securitized by Fannie Mae or Freddie Mac. It is a weighted, repeat-sales index, which means that it measures average price changes in repeat sales or refinancings on the same properties. A comprehensive HPI report is published every quarter, while a monthly report has been published from March 2008. The HPI differs from the well-known S&P/Case-Shiller Home Price Indexes in a number of ways. For example, while the Case-Shiller indexes only use purchase prices, the all-transactions HPI also includes refinance appraisals. Dow Jones Industrial Average (DJIA) The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the Nasdaq. The DJIA was invented by Charles Dow back in 1896. Often referred to as "the Dow," the DJIA is one of the oldest and single most watched index in the world. The DJIA includes companies like General Electric, Disney, Exxon and Microsoft. When the TV networks say "the market is up today," they are generally referring to the Dow. Standard & Poor's 500 Index - S&P 500 An index of 500 stocks chosen for market size, liquidity and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe. Companies included in the index are selected by the S&P Index Committee, a team of analysts and economists at Standard & Poor's. The S&P 500 is a market value weighted index (each stock's weight is proportionate to its market value). The S&P 500 is one of the most commonly used benchmarks for the overall U.S. stock market. The Dow Jones Industrial Average (DJIA) was at one time the most renowned index for U.S. stocks, but because the DJIA contains only 30 companies, most people agree that the S&P 500 is a better representation of the U.S. market. In fact, many consider it to be the definition of the market. Other popular Standard & Poor's indexes include the S&P 600, an index of small cap companies with market capitalizations between \$$300 million and \$$2 billion, and the S&P 400, an index of mid cap companies with market capitalizations of \$$2 billion to \$$10 billion. A number of financial products based on the S&P 500 are available to investors. These include index funds and exchange-traded funds. However, it would be difficult for individual investors to buy the index, as this would entail buying 500 different stocks. West Texas Intermediate (WTI) Light, sweet crude oil commonly referred to as "oil" in the Western world. WTI is the underlying commodity of the New York Merchantile Exchange's oil futures contracts. WTI is considered a "sweet" crude because it is about 0.24% sulfur, a lower concentration than North Sea Brent crude. WTI is high quality oil that is easily refined. Brent Blend A type of sweet crude oil that is used as a benchmark for the prices of other crude oils. Brent blend is most often found in parts of the North Sea off the coast of the U.K. and Norway. Brent blend makes up more than half of the world's globally traded supply of crude oil, which is why it makes an obvious choice for the benchmark of crude oil. As previously mentioned, the brent blend is a mix of crude oil from several facilities in the Ninian and Brent fields on the North Sea. Much like the other internationally recognized benchmark for crude oil, West Texas Intermediate, the Brent blend is a light and sweet crude oil, though not as light or sweet as WTI. Brent futures are traded on both the ICE and NYMEX exchanges, with delivery dates for all 12 months of the year. Index A statistical measure of change in an economy or a securities market. In the case of financial markets, an index is an imaginary portfolio of securities representing a particular market or a portion of it. Each index has its own calculation methodology and is usually expressed in terms of a change from a base value. Thus, the percentage change is more important than the actual numeric value. Stock and bond market indexes are used to construct index mutual funds and exchange-traded funds (ETFs) whose portfolios mirror the components of the index. The Standard & Poor's 500 is one of the world's best known indexes, and is the most commonly used benchmark for the stock market. Other prominent indexes include the DJ Wilshire 5000 (total stock market), the MSCI EAFE (foreign stocks in Europe, Australasia, Far East) and the Lehman Brothers Aggregate Bond Index (total bond market). Because, technically, you can't actually invest in an index, index mutual funds and exchange-traded funds (based on indexes) allow investors to invest in securities representing broad market segments and/or the total market. Compound Annual Growth Rate (CAGR) The year-over-year growth rate of an investment over a specified period of time. The compound annual growth rate is calculated by taking the nth root of the total percentage growth rate, where n is the number of years in the period being considered. This can be written as follows: $$CAGR = \left(\frac{\text{Ending Value}}{\text{Begining Value}}\right)^{\frac{1}{\text{number of years}}} - 1$$ CAGR isn't the actual return in reality. It's an imaginary number that describes the rate at which an investment would have grown if it grew at a steady rate. You can think of CAGR as a way to smooth out the returns. Don't worry if this concept is still fuzzy to you. CAGR is one of those terms best defined by example. Suppose you invested \$$10,000 in a portfolio on Jan 1, 2005. Let's say by Jan 1, 2006, your portfolio had grown to \$$13,000, then \$$14,000 by 2007, and finally ended up at \$$19,500 by 2008. Your CAGR would be $$(\frac{19500}{10,000})^{\frac{1}{3}} - 1 = 0.2493$$ Thus, your CAGR for your three-year investment is equal to 24.93%, representing the smoothed annualized gain you earned over your investment time horizon. Average Annual Growth Rate (AAGR) The average increase in the value of an individual investment or portfolio over the period of a year. It is calculated by taking the arithmetic mean of the growth rate over two annual periods. The average annual growth rate can be calculated for any investment, but will not include any measure of the investment's overall risk, as measured by its price volatility. For example, if your portfolio grows 10% one year and 20% the next, your AAGR would be 15%. To this end, fluctuations in the portfolio's rate of return between the beginning of the first year and the end of the year are not included in the calculations, which may lead to some measurement error. To reduce any possible measurement error, an analyst can simply take the average price at the beginning and end of the two measurement periods, and use those average prices to determine each year's return, and then the AAGR. Moody's An independent, unaffiliated research company that rates fixed income securities. Moody's assigns ratings on the basis of risk and the borrower's ability to make interest payments. Moody's backs its ratings with exhaustive financial research and unbiased commentary and analysis. Many bond investors pay close attention to the rating Moody assigns to bonds and preferred stock. Moody's ratings are ranked as follows: AAA - highest grade, best quality issuer, lowest risk AA A BAA - medium grade, moderate risk BA B CAA - Poor grade, high risk CA C Financial Statements Records that outline the financial activities of a business, an individual or any other entity. Financial statements are meant to present the financial information of the entity in question as clearly and concisely as possible for both the entity and for readers. Financial statements for businesses usually include: income statements, balance sheet, statements of retained earnings and cash flows, as well as other possible statements. It is a standard practice for businesses to present financial statements that adhere to generally accepted accounting principles (GAAP), to maintain continuity of information and presentation across international borders. As well, financial statements are often audited by government agencies, accountants, firms, etc. to ensure accuracy and for tax, financing or investing purposes. Financial statements are integral to ensuring accurate and honest accounting for businesses and individuals alike. Income Statement A financial statement that measures a company's financial performance over a specific accounting period. Financial performance is assessed by giving a summary of how the business incurs its revenues and expenses through both operating and non-operating activities. It also shows the net profit or loss incurred over a specific accounting period, typically over a fiscal quarter or year. Also known as the "profit and loss statement" or "statement of revenue and expense." The income statement is the one of the three major financial statements. The other two are the balance sheet and the statement of cash flows. The income statement is divided into two parts: the operating and non-operating sections. The portion of the income statement that deals with operating items is interesting to investors and analysts alike because this section discloses information about revenues and expenses that are a direct result of the regular business operations. For example, if a business creates sports equipment, then the operating items section would talk about the revenues and expenses involved with the production of sports equipment. The non-operating items section discloses revenue and expense information about activities that are not tied directly to a company's regular operations. For example, if the sport equipment company sold a factory and some old plant equipment, then this information would be in the non-operating items section. Debt-Service Coverage Ratio (DSCR) In corporate finance, it is the amount of cash flow available to meet annual interest and principal payments on debt, including sinking fund payments. In government finance, it is the amount of export earnings needed to meet annual interest and principal payments on a country's external debts. In personal finance, it is a ratio used by bank loan officers in determining income property loans. This ratio should ideally be over 1. That would mean the property is generating enough income to pay its debt obligations. In general, it is calculated by: $$DSCR = \frac{\text{Net Operating Income}}{\text{Total Debt Service}}$$ A DSCR of less than 1 would mean a negative cash flow. A DSCR of less than 1, say .95, would mean that there is only enough net operating income to cover 95% of annual debt payments. For example, in the context of personal finance, this would mean that the borrower would have to delve into his or her personal funds every month to keep the project afloat. Generally, lenders frown on a negative cash flow, but some allow it if the borrower has strong outside income. Debt-To-Income Ratio (DTI) A personal finance measure that compares an individual's debt payments to the income he or she generates. This measure is important in the lending industry as it gives lenders an idea of how likely it is that the borrower will repay the loan. The higher this ratio, the more burden there is on the individual to make payments on his or her debts. If the ratio is too high, the individual will have a hard time accessing other forms of financing. Gross Debt Service Ratio (GDS) A debt service measure that financial lenders use as a rule of thumb to give a preliminary assessment about whether a potential borrower is already in too much debt. Receiving a ratio of less than 30% means that the potential borrower has an acceptable level of debt. Calculated as: $$GDS = \frac{\text{Annual Mortgage Payments + Property Taxes}}{\text{Gross Family Income}}$$ For example, Jack and Jill, two law students, have a monthly mortgage payment of \$$1,000 (annual payment of \$$12,000), property taxes of \$$3,000 and a gross family income of \$$45,000. This would give a GDS of 33 %. Based on the benchmark of 30%, Jack and Jill appear to be carrying an unacceptable amount of debt. Keep in mind that this ratio is only a very rough benchmark. The acceptance of a loan application is not solely determined by this ratio. Since this is a very simple ratio, there are a lot of subsequent factors that lenders consider. For example, even though Jack and Jill's GDS is above the benchmark, a lender may still lend to Jack and Jill because of their future earning potential as lawyers. When combined with other personal information, GDS can be a good way for lenders to screen borrowers. Total Debt Service Ratio (TDS) A debt service measure that financial lenders use as a rule of thumb to give a preliminary assessment of whether a potential borrower is already in too much debt. More specifically, this ratio shows the proportion of gross income that is already spent on housing-related and other similar payments. Receiving a ratio of less than 40% means that the potential borrower has an acceptable level of debt. $$TDS = \frac{\text{Annual Mortgage Payments} + \text{Propety Taxes} + \text{Other Debt Payments}}{\text{Gross Family Income}}$$ For example, Jack and Jill, two law students, have a monthly mortgage payment of \$$1,000 (annual payment of \$$12,000), property taxes of \$$3,000, credit card balances totaling \$$1,000 and a gross family income of \$45,000. This would give a TDS of around 36%. Based on the benchmark of 40%, Jack and Jill appear to be carrying an acceptable amount of debt.

This ratio is very similar to the gross debt service ratio (GDS) except that the GDS does not account for non-housing related payments. TDS allows for a slightly more detailed view of a potential borrower's financial situation.

Leverage Ratio

1. Any ratio used to calculate the financial leverage of a company to get an idea of the company's methods of financing or to measure its ability to meet financial obligations. There are several different ratios, but the main factors looked at include debt, equity, assets and interest expenses.

2. A ratio used to measure a company's mix of operating costs, giving an idea of how changes in output will affect operating income. Fixed and variable costs are the two types of operating costs; depending on the company and the industry, the mix will differ.

3. The most well known financial leverage ratio is the debt-to-equity ratio. For example, if a company has \$$10M in debt and \$$20M in equity, it has a debt-to-equity ratio of 0.5 ($$\$$10M/\$$20M$$).

4. Companies with high fixed costs, after reaching the breakeven point, see a greater increase in operating revenue when output is increased compared to companies with high variable costs. The reason for this is that the costs have already been incurred, so every sale after the breakeven transfers to the operating income. On the other hand, a high variable cost company sees little increase in operating income with additional output, because costs continue to be imputed into the outputs. The degree of operating leverage is the ratio used to calculate this mix and its effects on operating income.

Leverage

1. The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment.

2. The amount of debt used to finance a firm's assets. A firm with significantly more debt than equity is considered to be highly leveraged.

Leverage is most commonly used in real estate transactions through the use of mortgages to purchase a home.

1. Leverage can be created through options, futures, margin and other financial instruments. For example, say you have \$$1,000 to invest. This amount could be invested in 10 shares of Microsoft stock, but to increase leverage, you could invest the \$$1,000 in five options contracts. You would then control 500 shares instead of just 10.

2. Most companies use debt to finance operations. By doing so, a company increases its leverage because it can invest in business operations without increasing its equity. For example, if a company formed with an investment of \$$5 million from investors, the equity in the company is \$$5 million - this is the money the company uses to operate. If the company uses debt financing by borrowing \$$20 million, the company now has \$$25 million to invest in business operations and more opportunity to increase value for shareholders.

Leverage helps both the investor and the firm to invest or operate. However, it comes with greater risk. If an investor uses leverage to make an investment and the investment moves against the investor, his or her loss is much greater than it would've been if the investment had not been leveraged - leverage magnifies both gains and losses. In the business world, a company can use leverage to try to generate shareholder wealth, but if it fails to do so, the interest expense and credit risk of default destroys shareholder value.

Net Operating Income (NOI)

A company's operating income after operating expenses are deducted, but before income taxes and interest are deducted. If this is a positive value, it is referred to as net operating income, while a negative value is called a net operating loss (NOL).

NOI is often viewed as a good measure of company performance. Some believe this figure is less susceptible than other figures to manipulation by management.

Charge-Off

A term describing an expense on a company's income statement. A charge-off will fall under one of the following categories:

1. A debt that is deemed uncollectible by the reporting firm and is subsequently written off. This type will be classified as 'bad debt expense' on the income statement, and removed from the balance sheet.

2. A probable one-time extraordinary expense incurred by a company that negatively affects earnings and results in a write-down of some of the firm's assets. The write-down arises due to impairments of assets.

3. Bad debt expenses arise when a firm is unable to collect on some of its accounts receivable (AR). When this occurs, the firm has little recourse; it could either sell the probable bad debt to a collection agency (a sale will be recorded on the firm's books, but not as an expense), or it could just write-off the uncollectible amount as an expense on the income statement.

4. Companies often say something like: "we will take a one-time charge against earnings this quarter." This means that an extraordinary event has occurred and, altough it affects present earnings, it is unlikely to occur again. As a result, a company will usually provide an earnings per share (EPS) figure with and without this charge.

Net Charge Off (NCO)

The dollar amount representing the difference between gross charge-offs and any subsequent recoveries of delinquent debt. Net charge offs refer to debt owed to a company that is unlikely to be recovered by that company. This "bad debt" often written off and classified as gross charge-offs. If, at a later date, some money is recovered on the debt, the amount is subtracted from the gross charge-offs to compute the net charge-off value.

Bad debt or poor credit quality loans are regularly charged off as bad debt and purged from the books, often on a monthly or quarterly basis. If, at a later date, the company find out it was wrong and part of the debt is actually repaid, the net charge-off can be calculated by finding the difference the gross charge-offs and the repaid debt. A negative value for net charge-offs indicates that recoveries are greater than charge-offs during a particular accounting period. Companies want this number to be low.

Scenario Analysis

The process of estimating the expected value of a portfolio after a given period of time, assuming specific changes in the values of the portfolio's securities or key factors that would affect security values, such as changes in the interest rate.

Scenario analysis commonly focuses on estimating what a portfolio's value would decrease to if an unfavorable event, or the "worst-case scenario", were realized. Scenario analysis involves computing different reinvestment rates for expected returns that are reinvested during the investment horizon.

There are many different ways to approach scenario analysis, but a common method is to determine what the standard deviation of daily or monthly security returns are, and then compute what value would be expected for the portfolio if each security generated returns two or three standard deviations above and below the average return.

In this way, an analyst can have reasonable certainty that the value of a portfolio is unlikely to fall below (or rise above) a specific value during a given time period.

Financial Repression

A term that describes measures by which governments channel funds to themselves as a form of debt reduction. This concept was introduced in 1973 by Stanford economists Edward S. Shaw and Ronald I. McKinnon. Financial repression can include such measures as directed lending to the government, caps on interest rates, regulation of capital movement between countries and a tighter association between government and banks. The term was initially used in response to the emerging market financial systems during the 1960s, '70s and '80s.

In 2011, economists Carmen M. Reinhart and M. Belen Sbrancia hypothesized in a National Bureau of Economic Research (NBER) working paper entitled "The Liquidation of Government Debt" that governments could return to financial repression to deal with debt following the 2008 economic crisis. Reinhart and Sbrancia indicate that financial repression features:

Caps or ceilings on interest rates Government ownership or control of domestic banks and financial institutions Creation or maintenance of a captive domestic market for government debt Restrictions on entry to the financial industry Directing credit to certain industries

Credit Report

A detailed report of an individual's credit history prepared by a credit bureau and used by a lender to in determining a loan applicant's creditworthiness, including:

1. Personal data (current and previous addresses, social security number, employment history)
2. Summary of credit history (number and type of accounts that are past-due or in good standing)
3. Detailed account information
4. Inquires into applicant's credit history (number and type of inquiries into applicant's credit report)
5. Details of any accounts turned over to credit agency (such as information about liens, wages garnishments via federal, state or county records)
6. Information on how to dispute any of the above information.

Once negative information appears on your credit report, there is little you can do to clear it up if the information is truthful and accurate. Generally such information remains for about seven years, while bankruptcy filings typically stay on the credit report for about 10 years.

Absorption Rate

The rate at which available homes are sold in a specific real estate market during a given time period. It is calculated by dividing the total number of available homes by the average number of sales per month. The figure shows how many months it will take to exhaust the supply of homes on the market. A high absorption rate may indicate that the supply of available homes will shrink rapidly, increasing the odds that a homeowner will sell a piece of property in a shorter period of time.

For example, suppose that a city has 1,000 homes currently on the market to be sold. If buyers snap up 100 homes per month, the supply of homes will be exhausted in 10 months (1,000 homes divided by 100 homes sold per month). If a homeowner is looking to sell a piece of property, he knows that half of the market will be sold out in five months. This rate does not take in to account additional homes that enter the market. The absorption rate can also be a signal to developers to start building new homes.

Market Exposure

The amount of funds invested in a particular type of security and/or market sector or industry and usually expressed as a percentage of total portfolio holdings. Thus, it is the amount an investor has at risk or the amount he/she can lose.

The exposure of a portfolio to particular securities/markets/sectors must be considered when determining asset allocation since it can greatly increase returns or, if properly done, minimizes losses. For example, a portfolio with both stocks and bonds holdings will typically have less risk than a portfolio with exposure only to stocks.

Basis Point (BPS)

A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly used for calculating changes in interest rates, equity indexes and the yield of a fixed-income security.

The relationship between percentage changes and basis points can be summarized as follows: 1% change = 100 basis points, and 0.01% = 1 basis point.

So, a bond whose yield increases from 5% to 5.5% is said to increase by 50 basis points; or interest rates that have risen 1% are said to have increased by 100 basis points.