T.

MURUGAN, FMS, VMKVEC, SALEM

Term of the Day

Operating income before depreciation and amortization

OIBDA. A financial measure similar to EBITDA, except that it uses Net Operating Income as opposed to net income. It is calculated by adding interest, taxes, depreciation and amortization (also known as ITDA) to the company's operating income. OIBDA is used by companies more frequently, although it is still a non-GAAP measure. Some companies prefer to use OIBDA because it doesn't consider non-operating income, and therefore tends to give a better indication of income from regular operations. Term of the Day

Secured bond
Bond backed by collateral, such as a mortgage or lien, the title to which would be transferred to the bondholders in the event of default. The most common form of secured bonds is mortgage bonds. These bonds are backed by real estate or physical equipment that can be liquidated. These are thought to be high-grade, safe investments. Other bonds are secured by the revenues created by projects. If an issuer in default has both secured and unsecured bonds outstanding, secured bondholders are paid off first, then unsecured bondholders. Naturally, because unsecured bonds carry greater risk than secured bonds, they usually pay higher yields. Term of the Day

Straddle
The purchase or sale of an equal number of puts and calls, with the same strike price and expiration dates. A straddle provides the opportunity to profit from a prediction about the future volatility of the market. Long straddles are used to profit from high volatility. Long straddles can be effective when an investor is confident that a stock price will change dramatically, but cannot predict the direction of the move. Short straddles represent the opposite prediction, that a stock price will not change.

Term of the Day

Acid-test ratio
The ratio of current assets less inventories to total current liabilities. This ratio is the most stringent measure of how well the company is covering its short-term obligations, since the ratio only considers that part of current assets which can be turned into cash immediately (thus the exclusion of inventories). The ratio tells creditors how much of the company's short term debt can be met by selling all the company's liquid assets at very short notice. also called acidtest ratio.
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T.MURUGAN, FMS, VMKVEC, SALEM

Term of the Day

Net margin
Net profit divided by net revenues, often expressed as a percentage. This number is an indication of how effective a company is at cost control. The higher the net margin is, the more effective the company is at converting revenue into actual profit. The net margin is a good way of comparing companies in the same industry, since such companies are generally subject to similar business conditions. However, the net margins are also a good way to to compare companies in different industries in order to gauge which industries are relatively more profitable. Also called net profit margin. Term of the Day

Leading indicator
An economic indicator that changes before the economy has changed. Examples of leading indicators include production workweek, building permits, unemployment insurance claims, supply, inventory changes, and stock prices. The Fed watches many of these indicators as it decides what to do about interest rates. There are also coincident indicators, which change about the same time as the overall economy, and lagging indicators, which change after the overall economy, but these are of minimal use as predictive tools.

Term of the Day

Trustee
An individual or organization which holds or manages and invests assets for the benefit of another. The trustee is legally obliged to make all trust-related decisions with the beneficiary's interests in mind, and may be liable for damages in the event of not doing so. Trustees may be entitled to a payment for their services, if specified in the trust deed. In the specific case of the bond market, a trustee administers bond for a borrower, and ensures that the issuer meets all the terms and conditions associated with the borrowing. Term of the Day

Cost of capital
The opportunity cost of an investment; that is, the rate of return that a company would otherwise be able to earn at the same risk level as the investment that has been selected. For example, when an investor purchases stock in a company, he/she expects to see a return on that investment. Since the individual expects to get back more than his/her initial investment, the cost of capital is equal to this return that the investor receives, or the money that the company misses out on by selling its stock.

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T.MURUGAN, FMS, VMKVEC, SALEM

Term of the Day

Balanced fund
A mutual fund that buys a combination of common stock, preferred stock, bonds, and shortterm bonds, to provide both income and capital appreciation while avoiding excessive risk. The purpose of balanced funds (also sometimes called hybrid funds) is to provide investors with a single mutual fund thatcombines both growth and income objectives, by investing in both stocks (for growth) and bonds (for income). Such diversified holdings ensure that these funds will manage downturns in the market without too much of a loss; the flip side, of course, is that balanced funds will usually increase less than an all-stock fund during a bull market. Term of the Day

Functional currency
Currency of the country (called the 'primary environment) in which a firm a conducts its business activities and generates most or all of its income and expenses. It may or may not be the currency in which it presents its financial statements, which is called reporting currency or presentation currency. For U.S. firms operating in foreign countries, the reporting requirements are governed by the rules of the Financial, particularly statements 8 and 52 (FASB No. 8 and FASB No. 52). Term of the Day

Margin account
A brokerage account in which the brokerage lends the customer cash with which to purchase securities. Unlike a cash account, a margin account allows an investor to buy securities with money that he/she does not have, by borrowing the money from the broker. The Federal Reserve limits margin borrowing to at most 50% of the amount invested. Some brokerages have even stricter requirements, especially for volatile stocks. People usually open margin accounts to take advantage of an opportunity to leverage their investment, rather than because they don't have the money to make the full purchase. Brokerages charge a relatively low interest rate on margin loans in order to entice investors into buying on margin. Term of the Day

Divestment
Refers to the sale of an asset for financial, legal or personal reasons. For corporations, divestment can refer to a company selling off a portion of its assets, such as a subsidiary, to raise capital or to focus the business on a smaller core of goods and services. For investors, divestment can be used as a social tool to protest particular corporate policies, such as a company trading with a country known for child labor abuses. Divestment can also be required of companies by the Federal Trade Commission in order to have a merger approved. A famous example of this is the breakup of Bell System (Ma Bell) into AT&T and the Baby Bells in 1984. Opposite investment
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