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Financial risk: The possibility that a bond issuer will default, by failing to repay principal and interest in a timely manner. Bonds issued by the federal government, for the most part, are immune from default (if the government needs money it can just print more). Bonds issued by corporations are more likely to be defaulted on, since companies often go bankrupt. Municipalities occasionally default as well, although it is much less common. Also called default risk or credit risk. 2. Store of value: A commodity, currency or other type of capital that is tradable and can be stored for future use. It is a fundamental component of the economic system because it allows trade to occur with items that have inherent value. An example of a store of value is currency, which can be exchanged for goods and services. If the value of currency becomes unpredictable, such as in times of hyperinflation, investors and consumers will shift to alternative stores of value, such as gold, silver, precious stones and real estate. 3. Investment banker: An individual or institution which acts as an underwriter or agent for corporations and municipalities issuing securities. Most also maintain broker/dealer operations, maintain markets for previously issued securities, and offer advisory services to investors. Investment banks also have a large role in facilitating mergers and acquisitions, private equity placements and corporate restructuring. Unlike traditional banks, investment banks do not accept deposits from and provide loans to individuals. Also called investment banker. 4. 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. 5. 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. 6. 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. 7. 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

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company's short term debt can be met by selling all the company's liquid assets at very short notice. Also called acid-test ratio. Principle-agent relationship: The arrangement that exists when one person or entity (called the agent) acts on behalf of another (called the principal). For example, shareholders of a company (principals) elect management (agents) to act on their behalf, and investors (principals) choose fund managers (agents) to manage their assets. This arrangement works well when the agent is an expert at making the necessary decisions, but doesn't work well when the interests of the principal and agent differ substantially. In general, a contract is used to specify the terms of a principal-agent relationship. Earnings management: Manipulation of a company's financial earnings either directly or through indirect accounting methods. This is more likely to occur when a company habitually is unable to meet investor expectations or in periods of volatile earnings. Earnings management is often considered materially misleading and thus a fraudulent activity. Even though the changes may follow all of the accounting standards and laws, they may go against what the standards and laws were originally trying to establish. For example, a change from FIFO to LIFO in inventory management may help a company's financial ratios, but may not reflect the true value of its inventory. See creative accounting. Constant maturity swap: CMS. A variation an interest rate swap in which the rate of one portion of the swap is fixed or set at a rate relative to LIBOR, while the other portion of the swap is reset periodically against the rate of a fixed maturity instrument, such as a Treasury. The duration of the swap is longer than the periods that the constant maturity is reset to, meaning that investors in a constant maturity swap are exposed to changes in the market over a longer period of time. Sector: A distinct subset of a market, society, industry, or economy, whose components share similar characteristics. Stocks are often grouped into different sectors depending upon the company's business. Standard & Poor's breaks the market into 11 sectors. Two of these sectors, utilities and consumer staples, are said to be defensive sectors, while the rest tend to be more cyclical in nature. The other nine sectors are: transportation, technology, health care, financial, energy, consumer cyclical, basic materials, capital goods, and communications services. Other groups break up the market into different sector categorizations, and sometimes break them down further into subsectors 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. Leading indicator: An economic indicator that changes before the economy has changed. Examples of leading indicators include production workweek, building permits, unemployment insurance claims, money 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

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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. 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 a bond issue for a borrower, and ensures that the issuer meets all the terms and conditions associated with the borrowing. Deflation: A decline in general price levels, often caused by a reduction in the supply of money or credit. Deflation can also be brought about by direct contractions in spending, either in the form of a reduction in government spending, personal spending or investment spending. Deflation has often had the side effect of increasing unemployment in an economy, since the process often leads to a lower level of demand in the economy. Opposite of inflation. Re-financing: Paying off an existing loan with the proceeds from a new loan, usually of the same size, and using the same property as collateral. In order to decide whether this is worthwhile, the savings in interest must be weighed against the fees associated with refinancing. The difficult part of this calculation is predicting how much the up-front money would be worth when the savings are received. Other reasons to refinance include reducing the term of a longer mortgage, or switching between a fixed-rate and an adjustable-rate mortgage. If there are prepayment fees attached to the existing mortgage, refinancing becomes less favorable because of the increased cost to the borrower at the time of the refinancing Demand: The amount of a particular economic good or service that a consumer or group of consumers will want to purchase at a given price. The demand curve is usually downward sloping, since consumers will want to buy more as price decreases. Demand for a good or service is determined by many different factors other than price, such as the price of substitute goods and complementary goods. In extreme cases, demand may be completely unrelated to price, or nearly infinite at a given price. Along with supply, demand is one of the two key determinants of the market price. Continuous inventory: Keeping book inventory continuously in agreement with stock on hand within specified time periods. In some cases, book inventory and stock on hand may be reconciled as often as after each transaction, while in some systems these two numbers may be reconciled less often. This process is useful in keeping track of actual availability of goods and determining what the correct time to reorder from suppliers might be. Sometimes also called perpetual inventory. 403(b) plan: A retirement plan similar to a 401(k) plan, but one which is offered by non-profit organizations, such as universities and some charitable organizations, rather than corporations. There are several advantages to 403(b) plans: contributions lower taxable income, larger contributions can be made to the account, earnings can grow tax-deferred, and some plans allow loans. Contributions can grow tax-deferred until withdrawal at which time the money is taxed as ordinary income (which is sometimes a disadvantage). 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.

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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. Balanced fund: A mutual fund that buys a combination of common stock, preferred stock, bonds, and short-term 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 that combines 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 stock 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. Internal audit: An ongoing appraisal of the financial health of a company's operations by its own employees. Employees who carry out this function are called internal auditors. During an internal audit, internal auditors will evaluate and monitor a company's risk management, reporting, and control practices and make suggestions for improvement. Internal auditing covers not only an organization's finance function, but all the operations and systems in a firm. While internal auditors are typically accountants, this activity can also be carried out by other professionals who are well-versed with a company's functions and the relevant regulatory requirements, 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 Accounting Standards Board, particularly statements 8 and 52 (FASB No. 8 and FASB No. 52). 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. 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 of investment.

26. Discount rate: The rate at which member banks may borrow short term funds directly from a Federal Reserve Bank. The discount rate is one of the two interest rates set by the Fed, the other being the Federal funds rate. The Fed actually controls this rate directly, but this fact does not really help in policy implementation, since banks can also find such funds elsewhere. also called Federal Reserve Discount Rate. The interest rate used in discounting future cash flows; here also called capitalization rate. 27. Interest rate parity: Relationship between the currency exchange rates of two nations and their local interest rates, and the essential role that it plays in foreign exchange markets. According to this concept, the difference between the market interest rates in any two countries is about the same as the difference between the forward and the spot exchange rates of their respective currencies. Therefore no arbitrage opportunity in the mutual trading of their currencies can exist unless this parity breaks down. In practice however, due to the government interference via currency controls, the full realization of this parity might not occur. 28. Profit maximization: A process that companies undergo to determine the best output and price levels in order to maximize its return. The company will usually adjust influential factors such as production costs, sale prices, and output levels as a way of reaching its profit goal. There are two main profit maximization methods used, and they are Marginal Cost-Marginal Revenue Method and Total Cost-Total Revenue Method. Profit maximization is a good thing for a company, but can be a bad thing for consumers if the company starts to use cheaper products or decides to raise prices. 29. Eurozone: The collective group of countries which use the Euro as their common currency. The Eurozone came into being in 1999, and originally consisted of 11 countries. As of 2009, 16 countries were part of the Eurozone. The Eurozone does not include every country in the European Union (some countries are not yet using the Euro), and does not include every country who is using the Euro (to become part of the Eurozone, the country must use the Euro as its sole legal currency). As a currency union, monetary rules are created and maintained by the European Central Bank. 30. Fair price: Futures trading: Price at which the demand for a certain type of futures contract matches the availability of such contracts. In case of index futures, it is based on the spot index, the cost of carrying the underlying asset until the futures contract expires (cost of carry), and the expected dividends. In case of derivatives, the fair price is the price that doesn't allow any opportunity for profitable arbitrage. In case of common stock, it equals the spot price plus the interest costs minus the future value of the expected dividends. There are several formulas for computing the fair price of an option, such as the Black-Scholes Option Pricing Model.Also called theoretical futures price. 31. Negative working capital: The state where a company is basically operating with no capital because the company's liabilities exceed the available assets. A company cannot operate with negative working capital for an extended period of time because the company will be unable to meet payment requirements on certain liabilities if the additional funds are not acquired. A company can quickly identify this state by looking at the accounts receivable information and comparing that to accounts payable information.

32. Equity: Ownership interest in a corporation in the form of common stock or preferred stock. It also refers to total assets minus total liabilities, in which case it is also referred to as shareholder's equity or net worth or book value. In real estate, it is the difference between what a property is worth and what the owner owes against that property (i.e. the difference between the house value and the remaining mortgage or loan payments on a house). In the context of a futures trading account, it is the value of the securities in the account, assuming that the account is liquidated at the going price. In the context of a brokerage account, it is the net value of the account, i.e. the value of securities in the account less any margin requirements. 33. Profit Sharing: An arrangement in which an employer shares some of its profits with its employees. The compensation can be stocks, bonds, or cash, and can be immediate or deferred until retirement. Profit-sharing allows for changing contributions each year. Contributions are determined by a formula to allocate the overall contribution and distribution of accumulated funds after the retirement age. Unless the plans are defined as an elective deferral plan, the contributions are not tax deductible. Contributions and earnings can grow tax-deferred until withdrawal. 34. Settlement options: The different methods for paying out a benefit available to beneficiaries when an individual covered by a life insurance policy dies. The simplest method is a lump sum payment of the value of the policy. It is also possible to leave the entire settlement with the insurance company and collect interest, retaining the right to withdraw principal funds at any time. Payment schedules are also available based on payment amount or duration. In either case, interest will accrue on the money that remains with the insurance company. There are also a range of options that pay benefits over the entire life of the beneficiary. 35. ESOP: A trust established by a corporate which acts as a tax-qualified, defined-contribution retirement plan by making the corporation's employees partial owners. Contributions are made by the sponsoring employer, and can grow tax-deferred, just as with an IRA or 401(k) plan. But unlike other retirement plans, the contributions must be invested in the company's stock. The benefits for the company include increased cash flow, tax savings, and increased productivity from highly motivated workers. The main benefit for the employees is the ability to share in the company's success. Due to the tax benefits, the administration of ESOPs is regulated, and numerous restrictions apply. Also called stock purchase plan. 36. BPO: The contracting out of a particular business function to an outside company in order to reduce costs. An example of BPO would be a manufacturing company outsourcing its accounting work to an outside accounting firm, or a telecommunications firm using an outside company to handle customer service.

37. Momentum: The perceived strength behind a price movement. Momentum investors seek to
take advantage of upward or downward trends in stock prices or earnings. They believe that these stocks will continue to head in the same direction because of the momentum that is already behind them. The idea relies on the belief that there are a large number of investors in the market who will buy whatever stock is already hot. Momentum investors do not necessarily believe that momentum stocks will do well in the long run, but they do think that in the short run people will continue to buy them as they have in the immediate past. This therefore involves market timing which is very risky.