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RATE

Accelerated cost recovery system • Abbreviated ACRS. Schedule of depreciation rates allowed for tax purposes. Accelerated depreciation • Any depreciation method that produces larger deductions for depreciation in the early years of a project's life. Accelerated cost recovery system (ACRS), which is a depreciation schedule allowed for tax purposes, is one such example. • Is an accounting technique which provides larger than straight-line depreciation amounts in the early years and smaller than straight-line depreciation amounts in the later years. Active portfolio strategy • A strategy that uses available information and forecasting techniques to seek a better performance than a portfolio that is simply diversified broadly. Related:passive portfolio strategy

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Add on rate • A specific rate of interest to be paid. Stands in contrast to the rate on a discount security, such as a Treasury bill, that pays no interest. Repo rate is an add-on rate. Adjustable rate mortgage • Is a loan which has a coupon or interest rate that is subject to change on predetermined reset dates. These loans use interest rate indices as the benchmark rate. Adjustable Rate Mortgages come in many variations. Typically, the reset dates

may have cap and floor features which constrain each reset change in interest rates. There may also be lifetime cap and floor features. Adjustable Rate Mortgages may be strictly amortizing though some have negative amortization features. • A mortgage whose interest rate changes periodically based on the upward or downward movement of a specified benchmark, e.g. six month or one-year Treasury bills. Adjustable rate or floating rate preferred share arps • Preferred share whose dividend rate is tied to interest rates on specific government securities. Adjustable rate preferred stock • Abbreviated ARPS. Publicly traded issues that may be collateralized by mortgages and MBSs. After tax real rate of return • Money after-tax rate of return minus the inflation rate. • Money after-tax rate of return minus the inflation rate. Hence, this refers to the purchasing power increase. Aggressive funding strategy

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recur every 1, 3, or 5 years; but there are other periods used as well. These loans

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• A funding strategy under which the firm finances its seasonal needs, and possibly some of its permanent needs, with short-term debt and its permanent needs with long-term debt. All current rate method • The method by which the functional currency--denominated financial statements of an MNC's subsidiary is translated into the parent company's currency. All equity rate • The discount rate that reflects only the business risks of a project and abstracts from the effects of financing. • The discount rate that reflects only the business risks of a project and abstracts from the effects of financing. Amortizing interest rate swap • Swap in which the principal or national amount rises (falls) as interest rates rise (decline). Annual percentage rate • The nominal annual rate of interest interest rate, found by multiplying the periodic rate by the number of periods in a year. • This is a standardized way of computing the interest rate. The exact method uses the actuarial methods. It reflects the true cost of interest after taking into account all costs such as fees, points, early payments and so on. • Abbreviated APR. The periodic rate times the number of periods in a year. For example, a 5% quarterly return has an APR of 20%. Annuity rate • The single-sum price that an insurance company or pension plan charges for an annuity contract or option of a standard amount such as $1 per month. Annuity rates

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usually vary by age, and by sex if the annuity is outside a private pension plan, and are in addition to fixed expense charges. Also known as annuity purchase rate. See unisex annuity rate. Arithmetic average mean rate of return • Arithmetic mean return. Auction rate preferred stock • Abbreviated ARPS. Floating rate preferred stock, the dividend on which is adjusted every seven weeks through a Dutch auction. Average rate of return • Abbreviated ARR. The ratio of the average cash inflow to the amount invested. Average tax rate • Taxes as a fraction of income; total taxes divided by total taxable income. • A firm's taxes divided by its taxable income. Back discount rate • Yield basis on which short-term, non-interest-bearing money market securities are quoted. A rate quoted on a discount basis understands bond equivalent yield. That must be calculated when comparing return against coupon securities. Balanced investment strategy • A method of portfolio allocation and management aimed at balancing risk and return; a balanced portfolio may combine stocks, bonds, packaged products, and cash equivalents. Bank rate • the interest rate the Bank of Canada charges on one-day loans to financial institutions (chartered banks and investment dealers) as the lender of last resort.

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Barbell strategy • A strategy in which the maturities of the securities included in the portfolio are concentrated at two extremes. Base interest rate • Related: Benchmark interest rate. Base rate • Base Rate is quoted off a short term fluctuating rate such as LIBOR or Prime Rate. LIBOR denotes London InterBank Offered Rate. Prime is an administered rate announced by large banks. Hence a base rate may be quoted as LIBOR plus say 1%. Basic business strategies • Key strategies a firm intends to pursue in carrying out its business plan. Benchmark interest rate • Also called the base interest rate, it is the minimum interest rate investors will demand for investing in a non-Treasury security. It is also tied to the yield to maturity offered on a comparable-maturity Treasury security that was most recently issued ( on-the-run ). Break even payment rate • The prepayment rate of a MBS coupon that will produce the same CFY as that of a predetermined benchmark MBS coupon. Used to identify for coupons higher than the benchmark coupon the prepayment rate that will produce the same CFY as that of the benchmark coupon; and for coupons lower than the benchmark coupon the lowest prepayment rate that will do so. Break even tax rate • The tax rate at which a party to a prospective transaction is indifferent between

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entering into and not entering into the transaction. Broker loan rate • Related: Call money rate. Bullet strategy • A strategy in which a portfolio is constructed so that the maturities of its securities are highly concentrated at one point on the yield curve. Call money rate • Also called the broker loan rate, the interest rate that banks charge brokers to finance margin loans to investors. The broker charges the investor the call money rate plus a service charge. Capitalization rate • See Discount Rate. Cca rates • Rates set by Canada Customs and Revenue Agency (CCRA) that are used to calculate CCA on an asset class: the rates range from 4 percent to 100 percent. Ccpc rate reduction • A 7 percent reduction in the general federal tax rate for Canadian-controlled private corporations on taxable income of between $200,000 and $300,000. Combination strategy • A strategy in which a put and with the same strike price and expiration are either both bought or both sold. Related: Straddle Compound annual growth rate • Measures the rate of change of a value over a one year period. Conglomerate

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• A firm engaged in two or more unrelated businesses. Conglomerate merger • A merger involving two or more firms that are in unrelated businesses. • A merger combining firms in unrelated businesses. Conservative funding strategy • A funding strategy under which the firm finances both its seasonal and its permanent requirements with long-term debt. Corporate acquisition • The acquisition of one firm by anther firm. Corporate bond • A certificate indicating that a corporation has borrowed a certain amount of money from an institution or an individual and promises to repay it in the future under clearly defined terms. • This is the public debt (IOU) of corporations. Instead of taking a bank loan, corporations can directly borrow from institutions or individuals by selling them bonds. They pay interest with coupons attached to the bonds. They usually have long lives such as 20 or 30 years. They come in denominations of $l,000 and pay interest every 6 months. • A Debt Security issued by a corporation. A corporate bond typically has a par value of $1,000, is taxable, has a term maturity, and is traded on a major exchange. Corporate bond equivalent • See equivalent bond yield. Corporate bonds • Debt obligations issued by corporations.

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• Are obligations issued by corporations. They are frequently categorized as follows: Intermediate Corporates, Distressed Securities, Junk Bonds, Long Industrials, Tennessee Valley Authority Bonds,

and nonbank, foreign, Canadian, Yankee and the list goes on. Corporate charter • Is a document which lists the objectives, powers, and authorities of a corporation. It indicates what the corporation can and cannot do. Some corporations have relatively narrow charters whereas other basically state that they may engage in any legal business activity. Some charters preclude speculative or outside investment activities. It is necessary to obtain a copy of a corporate charter before opening a securities, futures, or derivatives account. This is to determine whether the corporation is empowered to conduct such activities, with whom, and by whom. Corporate Charters are sometimes referred to as Articles of Incorporation. • A legal document creating a corporation. Corporate finance • One of the three areas of the discipline of finance. It deals with the operation of the firm(both the investment decision and the financing decision) from that firm's point of view. Corporate financial management • The application of financial principals within a corporation to create and maintain value through decision making and proper resource management.

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•Utilities. There are other categories and subcategories, such as, financials -bank

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Corporate financial planning • Financial planning conducted by a firm that encompasses preparation of both longand short-term financial plans. Corporate governance • The set of actions and procedures common shareholders use to ensure they receive a reasonable return on their investment in the company. Corporate processing float • The time that elapses between receipt of payment from a customer and the depositing of the customer's check in the firm's bank account; the time required to process customer payments. Corporate resolution • Is a document which empowers and lists which individuals and departments can trade, invest, speculate, or hedge on the behalf of the corporation. Resolutions are passed on a case-by-case basis unlike the Corporate Charter. This document is authorized by the Board of Directors. Corporate restructuring • The activities involving expansion or contraction of a firm's operations or changes in its asset or financial (ownership) structure. Corporate tax view • The argument that double (corporate and individual) taxation of equity returns makes debt a cheaper financing method. Corporate taxable equivalent • Rate of return required on a par bond to produce the same after-tax yield to maturity that the premium or discount bond quoted would. • Rate of return required on a par bond to produce the same after-tax yield to

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maturity that the premium or discount bond quoted would. Coupon rate • The interest rate on a long-term debt issue which is set at the time of the original issue and is constant for the full term of the issue. • The annual interest rate that an issuer promises to pay periodically over the life of a bond or other debt security, expressed as a percentage of the security s face value. • See Nominal Yield. • In bonds, notes or other fixed income securities, the stated percentage rate of interest, usually paid twice a year. Covered call writing strategy • A strategy that involves writing a call option on securities that the investor owns in his or her portfolio. See covered or hedge option strategies. Covered or hedge option strategies • Strategies that involve a position in an option as well as a position in the underlying stock, designed so that one position will help offset any unfavorable price movement in the other, including covered call writing and protective put buying. Related: naked strategies Crediting rate • The interest rate offered on an investment type insurance policy. Cross over rate • The discount rate where NPV profiles intersect meaning the NPVs of the two projects are equal, and where the ranking decision for the projects changes. Cross rates • The exchange rate between two currencies expressed as the ratio of two foreign

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exchange rates that are both expressed in terms of a third currency. Crossover rate • The return at which two alternative projects have the same net present value. Current rate method • Under this currency translation method, all foreign currency balance-sheet and income statement items are translated at the current exchange rate. • All financial transactions are measured in the currency of the foreign operations and consolidation occurs by converting all balance sheet accounts at the exchange rate in effect at the close of the fiscal year and all income statement accounts at the average exchange rate for the fiscal year. Dedication strategy • Refers to multi-period cash flow matching. Discount rate • Is the interest rate used for adjusting for the time value of money for Net Present Value, Option Pricing or other Market Models. It can also refer to the rate that the Federal Reserve charges its members. • Also known as the Capitalization Rate. The interest rate charged by the twelve Federal Reserve Banks for short-term loans made to member banks. This is the rate used in discounting future cash flows. • The interest rate that the Federal Reserve charges a bank to borrow funds when a bank is temporarily short of funds. Collateral is necessary to borrow, and such borrowing is quite limited because the Fed views it as a privilege to be used to meet short-term liquidity needs, and not a device to increase earnings. • In corporate finance this is the rate by which you divide the cash flows to obtain present value. Other names for discount rate would be hurdle rate, market rate of

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capitalization, and opportunity cost of capital. In banking, this is the rate of interest charged by the Fed to member banks that borrow at the discount window. The discount rate is an add-on interest rate. Dividend rate • The fixed or floating rate paid on preferred stock based on par value. Dollar weighted rate of return • Also called the internal rate of return, the interest rate that will make the present value of the cash flows from all the subperiods in the evaluation period plus the terminal market value of the portfolio equal to the initial market value of the portfolio. Effective annual interest rate • An annual measure of the time value of money that fully reflects the effects of compounding. Effective interest rate international context • The rate equal to the nominal rate plus (or minus) any forecast appreciation (or depreciation) of a foreign currency relative to the currency of the MNC parent. Effective rate • A measure of the time value of money that fully reflects the effects of compounding. Effective true annual rate • The rate of interest actually paid or earned. Equilibrium rate of interest • The interest rate that clears the market. Also called the market-clearing interest rate. Exchange rate

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• The price of one country's currency expressed in another country's currency. • The price at which one currency trades for another. Exchange rate mechanism • Abbreviated ERM. The methodology by which members of the EMS maintain their currency exchange rates within an agreed upon range with respect to other member countries. Exchange rate risk • Also called currency risk, the risk of an investment's value changing because of currency exchange rates. • a) The danger that an unexpected change in the exchange rate between the dollar and the currency in which a project's cash flows are denominated can reduce the market value of that project's cash flow; b) The risk caused by varying exchange rates between two currencies. Exchange rate risk capital budgeting • Danger that an unexpected change in the exchange rate between the dollar and the currency in which the project's cash flows are denominated can reduce the market value of that project's cash flow. Expectations theory of forward exchange rates • A theory of foreign exchange rates that holds that the expected future spot foreign exchange rate t periods in the future equals the current t-period forward exchange rate. Federal funds rate • This is the interest rate that banks with excess reserves at a Federal Reserve district bank charge other banks that need overnight loans. The Fed Funds rate, as it is called, often points to the direction of U.S. interest rates.

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• The rate of interest charged by banks for short-term OVERNIGHT to other banks. The Federal Reserve Bank through open-market operations establishes this rate. • The rate of interest at which Fed funds are traded. This rate is currently pegged by the Federal Reserve through open market operations. • The interest rate charged by one institution lending federal funds to another. Fixed exchange rate • A country's decision to tie the value of its currency to another country's currency, gold (or another commodity), or a basket of currencies. Fixed rate loan • A loan with a rate of interest that is determined at a set increment above the prime rate at which it remains fixed until maturity. • A loan on which the rate paid by the borrower is fixed for the life of the loan. • A loan on which the rate paid by the borrower is fixed for the life of the loan. Fixed rate payer • In an interest rate swap the counterparty who pays a fixed rate, usually in exchange for a floating-rate payment. Floating exchange rate • A country's decision to allow its currency value to freely change. The currency is not constrained by central bank intervention and does not have to maintain its relationship with another currency in a narrow band. The currency value is determined by trading in the foreign exchange market. Floating rate • Refers to the condition whereby exchange rates are relatively free to change. It can also refer to an interest rate which changes relatively quickly or frequently.

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Floating rate bonds • bonds where the stated interest rate is adjusted periodically within stated limits in response to changes in specified money or capital market rates. Floating rate contract • A guaranteed investment contract where the credit rating is tied to some variable ( floating ) interest rate benchmark, such as a specific-maturity Treasury yield. Floating rate loan • A loan with a rate of interest initially set at a state premium above the prime rate and allowed to float, or vary, as the prime rate varies until maturity. Floating rate note • A note that pays an interest rate tied to current money market rates. The holder may have the right to demand redemption at par on specified dates. • Abbreviated FRN. Note whose interest payment varies with short-term interest rates. Floating rate payer • In an interest rate swap, the counterparty who pays a rate based on a reference rate, usually in exchange for a fixed-rate payment Floating rate preferred • Preferred stock paying dividends that vary with short-term interest rates. Floating rate preferreds • The quarterly dividend paid is based on interest rates in the market and will float with these rates. Floor rate • The yield on federal government debt or any maturity.

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Foreign exchange rate • The value of two currencies with respect to each other. • The price at which one currency trades for another. Forward exchange rate • Exchange rate fixed today for exchanging currency at some future date. • The rate of exchange between two currencies at some specified future date.

• Interest rate fixed today on a loan to be made at some future date. Forward rate • A projection of future interest rates calculated from either the spot rates or the yield curve. • The rate at which forward transactions in some specific maturity are being made; for example, the dollar price at which DM can be bought for delivery three months hence. Forward rate agreement • Abbreviated FRA. Agreement to borrow or lend at a specified future date at an interest rate that is fixed today. Growth rate • Growth rate equals the return on equity times the plowback ratio. To be sustainable, growth rate must be less than the market capitalization rate. • Compound annual growth rate for the number of full fiscal years shown. If there is a negative or zero value for the first or last year, the growth is NM (not meaningful). • The compounded annualized rate of growth of a company's Revenues, Earnings, Dividends, or another figure.

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Forward interest rate

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Hedging strategies • Techniques used to offset or protect against risk; in the international context these include borrowing or lending in different currencies, undertaking contracts in the forward, futures, and/or options markets, and also swapping assets/liabilities with other parties. Historical exchange rate • An accounting term that refers to the exchange rate in effect when an asset or

Hurdle rate • The required return in capital budgeting. Immunization strategy • A bond portfolio strategy whose goal is to eliminate the portfolio's risk against a general change in the rate of interest through the use of duration. Implied repo rate • Is influenced by the cost of funds, tax rates, deductibility of carry charges, yields, the time to expiration and organizational constraints. It indicates the implied rate of return for specified investments. While many quote services list an assumed or benchmark Implied RepoRate, there are many because each investor has his or her own schedule of financing costs and investment opportunities. • The rate that a seller of a futures contract can earn by buying an issue and then delivering it at the settlement date. Related: cheapest to deliver issue Import substitution development strategy • A development strategy followed by many Latin American countries and other LDCs that emphasized import substitution - accomplished through protectionism - as the route to economic growth.

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liability was acquired.

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Incremental internal rate of return • IRR on the incremental investment from choosing a large project instead of a smaller project. Integrated foreign subsidiary • An operation that is financially or operationally interdependent with the parent company. Intercorporate dividends • a) Dividends received on common and preferred stock held in other corporations. They are included in income for tax purposes, but if they are received from a taxable Canadian corporation, the full amount of the dividend is not taxable and can flow through the receiving company to their shareholders without tax consequences. This avoids the triple taxation; b) Dividends received by a corporation from investments in common and preferred shares held in other corporations. Interest rate • The cost of money. The greater the risk of the debt security, the higher the interest rate lenders will require. The compensation paid by the borrower of funds to the lender; from the borrower's point of view, the cost of borrowing funds. • This is the cost of borrowing. If the interest rate is 10% and you borrow $1,000, then $100 must be paid as interest payments at the end of each year. • Is either the coupon or floating rate attached to a credit instrument or lending operation. Interest rate agreement • An agreement whereby one party, for an upfront premium, agrees to compensate the other at specific time periods if a designated interest rate (the reference rate) is different from a predetermined level (the strike rate).

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Interest rate buydowns • One form of government incentive used to encourage corporate capital expenditures involving Government payments of interest on a loan on behalf of a company. Interest rate cap • Also called an interest rate ceiling, an interest rate agreement in which payments are made when the reference rate exceeds the strike rate. Interest rate ceiling • Related: interest rate cap. Interest rate exposure • Risk of gain or loss to which an institution is exposed due to possible changes in interest-rate levels. Interest rate floor • An interest rate agreement in which payments are made when the reference rate falls below the strike rate. Interest rate on debt • The firm's cost of debt capital. Interest rate parity theorem • Interest rates in different countries are generally different because of the differences in inflation rates. Interest rate parity holds if the differences in interest rates are exactly offset by differences in inflation rates and the resulting currency depreciation. Assume that the risk-free interest rate in the US is 5% and in Mexico 15%. Assume that it takes 10 pesos to USD now and one-year forward price is 10.952381 MP/USD. If you invest $1000 now, next year, you end up with $1050 USD. If you convert $1000 into pesos now, you end up with 10,000 MP, lend them at

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15%, and end up with 11,500 MP, convert them back into USD at the forward price of 10.95, you end up with exactly $1050 USD next year, which is exactly the same as if you lent in the US. This is an example of interest rate parity. • Interest rate differential between two countries is equal to the difference between the forward foreign exchange rate and the spot rate. Interest rate risk • The chance that interest rates will change and thereby change the required return

concern. • The risk that a security's value changes due to a change in interest rates. For example, a bond's price drops as interest rates rise. For a depository institution, also called funding risk, the risk that spread income will suffer because of a change in interest rates. • The risk of changes in value due to changes in interest rate is called interest rate risk. Long lived assets lose more of their value when interest rates rise than short lived assets. If a bank has more long-lived assets than liabilities, then the bank worries about interest rate increases. • Is the risk associated with changes in general interest rate levels or yield curves. This compares to Prepayment Risk. Interest rate risk management • If a bank expects a rise in interest rates, it increases the maturity of its liabilities and decreases the maturity of its assets. If a bank expects the interest rates to remain the same or decline, it holds more long term assets than liabilities. Interest rate swap • An exchange by borrowers or asset holders of interest-rate payments at two different rates (often one rate is fixed, the other floating). In a basis swap, both rates

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and bond value. Rising rates, which result in decreasing bond values, are of greatest

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are floating. • The buyer of the swap agrees to make a number of fixed interest rate payments periodically to the seller on some agreed upon notational amount. In return, the seller agrees to make floating rate interest payment on the same dates to the buyer on the same notational amount. • A binding agreement between counterparties to exchange periodic interest payments on some predetermined dollar principal, which is called the notional

• Is the contract whereby one party typically agrees to exchange a floating rate for a fixed coupon rate. There are many variations to this theme. Some of these other swaps can be cross border, fixed-for-fixed, or floating-for floating. The common denominator to these transactions is the swapping of cashflows and not principal amounts. There are predetermined periodic adjustments in cash flow payments. Intermediate corporate bonds • Are investment grade notes and bonds issued by corporations. The maturities range between 1 to 10 years. These securities encompass banks, other financial institutions, and industrial issuers. Internal growth rate • Maximum rate a firm can expand without outside source of funding. Growth generated by cash flows retained by company. Internal rate of return • Abbreviated IRR. The discount rate that equates the present value of cash inflows with the initial cost of a capital budgeting project; the discount rate that makes the NPV of the project equal to $0. • Dollar-weighted rate of return. Discount rate at which net present value (NPV) investment is zero. The rate at which a bond's future cash flows, discounted back to

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principal amount. For example, one party will pay fixed and receive variable.

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today, equals its price. Internal rate of return approach • An approach to capital rationing that involves the graphic plotting of project IRRs in descending order against the total dollar investment to determine the group of acceptable projects. Internal rate of return irr • This shows the profitability of a project or a bond. It is computed by setting IRR equal to the discount rate that makes the net present value of the cash flows equal to zero. Inverse floating rate note • A variable rate security whose coupon rate increases as a benchmark interest rate declines. Ladder strategy • A bond portfolio strategy in which the portfolio is constructed to have approximately equal amounts invested in every maturity within a given range. Lease rate • The payment per period stated in a lease contract. Liability funding strategies • Investment strategies that select assets so that cash flows will equal or exceed the client's obligations. London interbank offered rate libor • The base interest rate on all Eurocurrency loans. Long term strategic financial plans • Planned financial actions and the anticipated financial impact of those actions over

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periods ranging from 2 to 10 years. Marginal tax rate • The rate at which additional income is taxed. • The tax rate that would have to be paid on any additional dollars of taxable income earned. • The tax rate that would have to be paid on any additional dollars of taxable income earned. Market capitalization rate • Expected return on a security. The market-consensus estimate of the appropriate discount rate for a firm's cash flows. Money rate of return • Annual money return as a percentage of asset value. • Annual return as a percentage of asset value. Mortgage rate • The interest rate on a mortgage loan. Multiple rates of return • More than one rate of return from the same project that make the net present value of the project equal to zero. This situation arises when the IRR method is used for a project in which negative cash flows follow positive cash flows. For each sign change in the cash flows, there is a rate of return. Naked option strategies • An un hedged strategy making exclusive use of one of the following: Long call strategy (buying call options ), short call strategy (selling or writing call options), Long put strategy (buying put options ), and short put strategy (selling or writing put options). By themselves, these positions are called naked strategies because they

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do not involve an offsetting or risk-reducing position in another option or the underlying security. Related: covered option strategies. Nominal annual rate • An effective rate per period multiplied by the number of periods in a year. Nominal exchange rate • The actual foreign exchange quotation in contrast to the real exchange rate that has been adjusted for changes in purchasing power. Nominal interest rate • The interest rate unadjusted for inflation. Nominal interest rate international context • The stated interest rate charged on financing when only the MNC parent's currency is involved. Nominal rate of interest • The actual rate of interest charged by the supplier of funds and paid by the demander. Option trading strategies • Can be market directional, volatility directional, market neutral, volatility neutral, time value capture, time value payment, and numerous variants of the aforementioned. The basic building blocks are puts and calls. These puts and calls can be American Style or European Style. They can be ordinary plain vanilla -or exotic. Among the latter are: Asian, Binary, Lookback, Knockin and Knockout. There are many other structures as well. Some specific strategies are: Backspreads, Bear, Box, Bull, Butterflies, Condors, Conversion, Credit, Debit, Diagonal, Fence, Guts, Horizontal, Purchased Call, Purchased Put, Ratio, Reverse Conversion, Sold Call, Sold Put, Straddles, Strangles, Synthetic Long Call, Synthetic Long Futures or

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Underlying, Synthetic Long Put, Synthetic Long Straddle, Synthetic Short Call, Synthetic Short Futures or Underlying, Synthetic Short Put, Synthetic Short Straddle, Vertical, and Volatility. There are also compound and nested options or strategies. Among these are: call-on-a-call, a call-on-a-put, a put-on-a-put, and a put-on-a-call. Outright rate • Actual forward rate expressed in dollars per currency unit, or vice versa. Overlay strategy • A strategy of using futures for asset allocation by pension sponsors to avoid disrupting the activities of money managers. Overnight rate • the average interest rate the Bank of Canada wants financial institutions to use when they lend each other money for one day, or overnight. Pac man strategy • Takeover defense strategy in which the prospective acquires retaliates against the acquirer's tender offer by launching its own tender offer for the other firm. Pass through coupon rate • The interest rate paid on a securitized pool of assets, which is less than the rate paid on the underlying loans by an amount equal to the servicing and guaranteeing fees. Pass through rate • The net interest rate passed through to investors after deducting servicing, management, and guarantee fees from the gross mortgage coupon. Passive investment strategy • See: passive management.

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Passive portfolio strategy • A strategy that involves minimal expectational input, and instead relies on diversification to match the performance of some market index. A passive strategy assumes that the marketplace will reflect all available information in the price paid for securities, and therefore, does not attempt to find mispriced securities. Related: active portfolio strategy Pibor paris interbank offer rate

Paris. Plowback rate • Related: retention rate. Portfolio internal rate of return • The rate of return computed by first determining the cash flows for all the bonds in the portfolio and then finding the interest rate that will make the present value of the cash flows equal to the market value of the portfolio. Portfolio turnover rate • For an investment company, an annualized rate found by dividing the lesser of purchases and sales by the average of portfolio assets. Prime rate • The interest rate at which banks lend to their best (prime) customers. Much more often than not, a bank's most creditworthy customers borrow at rates below the prime rate. • The lowest rate of interest charged by leading banks on business loans to their most secure business borrowers. • The rate at which banks lend to their (supposedly) best (prime) customers. The all-

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• The deposit rate on interbank transactions in the Eurocurrency market quoted in

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in cost of a bank loan to a prime credit equals the prime rate plus the cost of holding compensating balances. • The interest rate that commercial banks charge their prime or most creditworthy customers, generally large corporations. Protective put buying strategy • A strategy that involves buying a put option on the underlying security that is held in a portfolio. Related: Hedge option strategies Randomized strategy • A strategy of introducing into the decision-making process a random element that is designed to reduce the information content of the decision-maker's observed choices. Rate anticipation swaps • An exchange of bonds in a portfolio for new bonds that will achieve the target portfolio duration, based on the investor's assumptions about future changes in interest rates. Rate lock • An agreement between the mortgage banker and the loan applicant guaranteeing a specified interest rate for a designated period, usually 60 days. Rate of interest • The rate, as a proportion of the principal, at which interest is computed. Rate of return • The yield obtainable on a security based on its purchase price or its current market price. This may be the amortized yield to maturity on a bond the current income return. Rate of return ratios

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• Ratios that are designed to measure the profitability of the firm in relation to various measures of the funds invested in the firm. Rate risk • In banking, the risk that profits may decline or losses occur because a rise in interest rates forces up the cost of funding fixed-rate loans or other fixed-rate assets. See interest rate risk. • In banking, the risk that profits may decline or losses occur because a rise in

Rate sensitive assets • For a given time horizon t, all assets whose return is not fixed but will be repriced with changes in interest rates are called Rate Sensitive Assets, or RSA. Rate sensitive liabilities • Rate Sensitive Liabilities are all those liabilities scheduled to reprice or mature within one year. It includes domestic time certificates of deposits of $100,000 or more, all other domestic time deposits, total deposits in foreign offices, money market deposit accounts, Super NOWs and demand notes issued to the U.S. Treasury.. Real exchange rates • Exchange rates that have been adjusted for the inflation differential between two countries. Real interest rate • The real interest rate is the interest rate that would prevail in an economy with no inflation and no risk. Real interest rate is determined by the propensity to save (supply of funds) and by the demand for capital. Real interest rate equals nominal interest rate minus expected inflation.

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interest rates forces up the cost of funding fixed-rate loans or other fixed-rate assets.

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• The rate of interest excluding the effect of inflation; that is, the rate that is earned in terms of constant-purchasing-power dollars. Interest rate expressed in terms of real goods, i.e. nominal interest rate adjusted for inflation. Real rate of interest • The rate that creates an equilibrium between the supply of savings and the demand for investment funds in a perfect world, without inflation, where funds suppliers and demanders have no liquidity preference and all outcomes are certain.

• The annual percentage return realized on an investment, adjusted for changes in the price level due to inflation or deflation. Reference rate • A benchmark 'interest rate (such as LIBOR), used to specify conditions of an interest rate swap or an interest rate agreement. Reinvestment rate • (1) The rate at which an investor assumes interest payments made on a debt security can be reinvested over the life of that security. (2) Also, the rate at which funds from a maturity or sale of a security can be reinvested. Often used in comparison to give-up yield. • The rate at which an investor assumes interest payments made on a debt security can be reinvested over the life of that security. Retention rate • The percentage of present earnings held back or retained by a corporation, or one minus the dividend payout rate. Also called the retention ratio. Risk adjusted discount rate • Abbreviated RADR. The rate of return that must be earned on a given project to

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Real rate of return

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compensate for the risk of the project. Risk free rate • The rate of return that one would earn on a virtually riskless investment such as a Government of Canada Treasury Bill. • The rate of return that one would earn on a virtually riskless investment such as a three-month Government of Canada Treasury bill. Such an investment offers little or no risk of default and very low interest rate (price) risk because of its short term to

• The rate earned on a riskless asset. Riskless rate • The rate earned on a riskless asset. • The rate earned on a riskless investment, typically the rate earned on the 90-day U.S. Treasury Bill. Separate account • Refers to an insurance company's account which supports some it its products, in particular, variable annuities and life products. One key difference from the General Account is that the investment risks are carried by the policyholder. Settlement rate • The rate suggested in Financial Accounting Standard Board (FASB) 87 for discounting the obligations of a pension plan. The rate at which the pension benefits could be effectively settled off the pension plan wished to terminate its pension obligation. Split rate tax system • A tax system that taxes retained earnings at a higher rate than earnings that are distributed as dividends.

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maturity.

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Spot exchange rate • The rate of exchange between two currencies on any given day. • Exchange rate on currency for immediate delivery. Related: forward exchange rate. Spot interest rate • Interest rate fixed today on a loan that is made today. Related: forward interest rates. Spot rate • The price prevailing in the spot market. • These are the interest rates that are in effect at this time. If you want an immediate loan, you pay the spot rate. If you want a loan some time in the future, you can negotiate for a loan commitment. • The theoretical yield on a zero-coupon Treasury security. Spot rate curve • The graphical depiction of the relationship between the spot rates and maturity. Spread strategy • A strategy that involves a position in one or more options so that the cost of buying an option is funded entirely or in part by selling another option in the same underlying. Also called spreading. Stated annual interest rate • The interest rate expressed as a per annum percentage, by which interest payment is determined. Stock replacement strategy • A strategy for enhancing a portfolio's return, employed when the futures contract is expensive based on its theoretical price, involving a swap between the futures,

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treasury bills portfolio and a stock portfolio. Stopping curve refunding rate • A refunding rate that falls on the stopping curve. Strategic merger • A merger transaction undertaken to achieve economies of scale. Structured portfolio strategy

predetermined liabilities that must be paid out in the future. Sustainable growth rate • Maximum rate of growth a firm can sustain without increasing financial leverage. Swap interest rate • The buyer of the Swap agrees to make a number of fixed interest rate payments periodically to the seller or some agreed upon notional amount. In return, the seller agrees to make floating rate interest payment on the same dates to the buyer on the same notional amount. By entering into the swap, both parties attempt to hedge their interest rate exposures. Swap rate • In the foreign-exchange market, the difference between the spot and forward rates at which a currency is traded. • The difference between spot and forward rates expressed in points, e.g., $0.0001 per pound sterling. Term structure of interest rates • The relationship between the interest rate or rate of return (as measured by the yield to maturity on a bond) and the time to maturity for similar risk debt securities.

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• A strategy in which a portfolio is designed to achieve the performance of some

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• Relationship between \interest rates on bonds of different maturities usually depicted in the form of a graph often depicted as a yield curve. Harvey shows that inverted term structures (long rates below short rates) have preceded every recession over the past 30 years. Term structure of interest rates and volatility • Refers to the variability of short-term rates relative to longer-term rates. It has been documented that short-term rates exhibit greater variability or volatility than long-

than short-term instruments for a given change in the underlying rate. A quick measure of this price sensitivity is provided by duration. Typically, debt instruments without option features, explicit or implicit, have greater duration with longer maturities. Zero coupon securities tend to have the greater price sensitivity relative to coupon paying securities. See Duration. Theoretical spot rate curve • A curve derived from theoretical considerations as applied to the yields of actually traded Treasury debt securities because there are no zero-coupon Treasury debt issues with a maturity greater than one year. Like the yield curve, this is a graphical depiction of the term structure of interest rates. Time weighted rate of return • Related: Geometric mean return. Total rate of return • A measure of a portfolio's performance over time. It is the internal rate of return that equates the beginning value of the portfolio with the ending value, and includes interest earnings and realized and unrealized gains and losses on the portfolio. • The compounded annual return on an investment, including price appreciation and dividends or interest.

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term rates. However, longer-term instruments experience greater price sensitivity

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• In performance measurement, the actual rate of return realized over some evaluation period. In fixed income analysis, the potential return that considers all three sources of return (coupon interest, interest on interest, and any capital gain/loss) over some investment horizon. • Refers to the change in asset value plus income. For a stock it would refer to the change in the adjusted stock price plus and dividends and other distributions, if any. For a bond it would reflect the change in bond price plus any interest received or accrued. It more completely measures the overall perform of an investment. Unemployment rate • The ratio of the number of people classified as unemployed to the total labor force. Unisex annuity rate • An annuity rate that is the same for men and women, as required by federal law governing benefits under public and private employee benefit plans. On the average, women tend to live longer than men and thus pay more than men for an annuity issued outside such a plan. Variable rate cds • Short-term CDs that pay interest periodically on roll dates; on each roll date the coupon on the CD is adjusted to reflect current market rates. • Short-term certificate of deposits that pay interest periodically on roll dates. On each roll date, the coupon on the CD is adjusted to reflect current market rates. Variable rate loan • Loan made at an interest rate that fluctuates with the prime. • Loan made at an interest rate that fluctuates based on a base interest rate such as the Prime Rate or LIBOR. Variable rated demand bond vrdb

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• Floating rate bond that can be sold back periodically to the issuer. Yield curve strategies • Positioning a portfolio to capitalize on expected changes in the shape of the Treasury yield curve. Yield spread strategies • Strategies that involve positioning a portfolio to capitalize on expected changes in yield spreads between sectors of the bond market.

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