The highest rating given on bonds by bond rating agencies.

The return that an asset achieves over a certain period of time. This measure looks at the appreciation or depreciation (expressed as a percentage) that an asset - usually a stock or a mutual fund - achieves over a given period of time.

Absolute return differs from relative return because it is concerned with the return of a particular asset and does not compare it to any other measure or benchmark.

Used in corporate financial planning , aggregation is a process whereby a number of a firm's smaller projects are combined and treated as an individual project.

1. A measure of performance on a risk-adjusted basis. Alpha takes the volatility (price risk) of a mutual fund and compares its risk-adjusted performance to a benchmark index. The excess return of the fund relative to the return of the benchmark index is a fund's alpha.
2. The abnormal rate of return on a security or portfolio in excess of what would be predicted by an equilibrium model like the capital asset pricing model (CAPM).

Where more than one loan is used, they may be designated as 'A', 'B', 'C' etc. loans/notes. Alternatively, they may be described as first senior, second senior and so on. Though they rank equally, such loans will have different repayment periods. (taken from: http://www.bankofscotland.co.uk/corporate/finance/acquisitions-and-buyouts/glossary/index.html)

A classification of mortgages where the risk profile falls between prime and subprime. The borrowers behind these mortgages will typically have clean credit histories, but the mortgage itself will generally have some issues that increase its risk profile. These issues include higher loan-to-value and debt-to-income ratios or inadequate documentation of the borrower's income.

1. The paying off of debt in regular instalments over a period of time.
2. The deduction of capital expenses over a specific period of time (usually over the asset's life). More specifically, this method measures the consumption of the value of intangible assets, such as a patent or a copyright.

A financial security backed by a loan, lease or receivables against assets other than real estate and mortgage-backed securities. For investors, asset-backed securities are an alternative to investing in corporate debt.

The electronic system on the NYSE that records bids and offers for inactively traded bonds until they are cancelled or executed.

An accounting book that includes all securities that are not actively traded by the institution , that are meant to be held until they mature. These securities are accounted for in a different way than those in the trading book , which are traded on the market and valued by the performance of the market.

A set of international banking regulations put forth by the Basel Committee on Bank Supervision, which set out the minimum capital requirements of financial institutions with the goal of minimizing credit risk. Banks that operate internationally are required to maintain a minimum amount (8%) of capital based on a percent of risk-weighted assets.

A set of banking regulations put forth by the Basel Committee on Bank Supervision, which regulates finance and banking internationally. Basel II attempts to integrate Basel capital standards with national regulations, by setting the minimum capital requirements of financial institutions with the goal of ensuring institution liquidity.

Hypothesis proposed by mathematician Daniel Bernoulli that expands on the nature of investment risk and the return earned on an investment. Bernoulli stated that an investor's acceptance of risk should incorporate not only the possible losses that can occur, but also the utility, or intrinsic value, of the investment itself. 

Also known as the "expected utility hypothesis".

A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.

Also known as "beta coefficient".

A model of price variation over time of financial instruments such as stocks that can, among other things, be used to determine the price of a European call option. The model assumes that the price of heavily traded assets follow a geometric Brownian motion with constant drift and volatility. When applied to a stock option, the model incorporates the constant price variation of the stock, the time value of money, the option's strike price and the time to the option's expiry.

Also known as the Black-Scholes-Merton Model.

An exchange-traded fund that invests in stocks and listed securities associated with the countries of Brazil, Russia, India and China. BRIC ETFs are designed to give holders diversified exposure to these growing countries. Assets are invested in both locally issued stocks and shares that trade on exchanges in the U.S. and Europe. The portfolio allocation among the four counties may vary from fund to fund, but all ETFs in the space should be passively invested around an underlying index. 

1) A one-time lump-sum repayment of an outstanding loan, typically made by the borrower after very little, if any, amortization of the loan. This can also refer to a loan that requires a disproportionately large portion (or even all) of the loan to be repaid at maturity.
2) A slang term for a letter of rejection sent to a job applicant, informing the candidate that he or she has not been offered the job, has been denied an interview or some similar form of rejection.

An agreement that gives an investor the right (but not the obligation) to buy a stock, bond , commodity, or other instrument at a specified price within a specific time period. 

The price , specified at issuance, at which a bond or preferred stock can be redeemed by the issuer . also called redemption price .

Percentage ratio of a financial institution's primary capital to its assets ( loans and investments ), used as a measure of its financial strength and stability . According to the Capital Adequacy Standard set by Bank for International Settlements (BIS) , banks must have a primary capital base equal at least to eight percent of their assets: a bank that lends 12 dollars for every dollar of its capital is within the prescribed limits

A subsidiary whose purpose is to provide financing to customers buying the parent company's product.

Funds used by a company to acquire or upgrade physical assets such as property, industrial buildings or equipment. This type of outlay is made by companies to maintain or increase the scope of their operations. These expenditures can include everything from repairing a roof to building a brand new  factory .

1. Sometimes known as a partial spinoff, a carve out occurs when a parent company sells a minority (usually 20% or less) stake in a subsidiary for an IPO or rights offering.
2. Where an established brick-and-mortar company hooks up with venture investors and a new management team to launch an Internet spinoff.

An investment-grade security backed by a pool of bonds , loans and other assets. CDOs do not specialize in one type of debt but are often non-mortgage loans or bonds.  

A statistical measure that represents a multivariate uniform distribution, which examines the association or dependence between many variables. Although the statistical calculation of a copula was invented in 1957, it was not applied to financial markets and finance until the late '90s.  

A swap designed to transfer the credit exposure of fixed income products between parties.

A type of mortgage-backed security that is secured by the loan on a commercial property. A CMBS can provide liquidity to real estate investors and to commercial lenders. As with other types of MBS, the increased use of CMBS can be attributable to the rapid rise in real estate prices over the years

A corporation that is made up of a number of different, seemingly unrelated businesses. In a conglomerate, one company owns a controlling stake in a number of smaller companies, which conduct business separately. Each of a conglomerate's subsidiary businesses runs independently of the other business divisions, but the subsidiaries' management reports to senior management at the parent company.

A promise in an indenture, or any other formal debt agreement, that certain activities will or will not be carried out.

A preferred, floating rate issue, whose interest rate is tied to Treasury security rates. They can be exchanged for common stock or cash after the next period's dividend rates are announced. The shares received upon conversion are equal in market value to the par value of the preferred.

An investing strategy that involves the long position on a convertible security and a short position in its converting common stock.

Properties or assets that are offered to secure a loan or other credit. Collateral becomes subject to seizure on default.

In the world of finance, a statistical measure of how two securities move in relation to each other. Correlations are used in advanced portfolio management .

A contractual agreement in which a corporation receives value , usually in the form of a financial loan , and must repay the institution from which it received the loan or other items as per the terms of the agreement.

A bond or note that is backed by mortgages or cash flows from other debt . If the bond issuer goes into bankruptcy , investors who purchased the bonds can lay claim to the underlying assets .

Privately held negotiable bilateral contracts that allow users to manage their exposure to credit risk. Credit derivatives are financial assets like forward contracts, swaps, and options for which the price is driven by the credit risk of economic agents (private investors or governments).

The risk of loss of principal or loss of a financial reward stemming from a borrower's failure to repay a loan or otherwise meet a contractual obligation. Credit risk arises whenever a borrower is expecting to use future cash flows to pay a current debt. Investors are compensated for assuming credit risk by way of interest payments from the borrower or issuer of a debt obligation.

An identification number assigned to all stocks and registered bonds . The Committee on Uniform Securities Identification Procedures (CUSIP) oversees the entire CUSIP system.

A measure of a company's ability to pay off its incurred debt . This ratio gives the investor the approximate amount of time that would be needed to pay off all debt, ignoring the factors of interest, taxes, depreciation and amortization.

1. In corporate finance , it is the amount of cash flow available to meet annual interest and principal payments on debt, including sinking fund payments.
2. In government finance, it is the amount of export earnings needed to meet annual interest and principal payments on a country's external debts.
3. 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:

1. The failure to promptly pay interest or principal when due. Default occurs when a debtor is unable to meet the legal obligation of debt repayment. Borrowers may default when they are unable to make the required payment or are unwilling to honor the debt.
2. The failure to perform on a futures contract as required by an exchange

In finance, a security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage. 

A valuation method used to estimate the attractiveness of an investment opportunity. Discounted cash flow (DCF) analysis uses future free cash flow projections and discounts them (most often using the weighted average cost of capital) to arrive at a present value, which is used to evaluate the potential for investment. If the value arrived at through DCF analysis is higher than the current cost of the investment, the opportunity may be a good one.  

Calculated as:

A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique contends that a portfolio of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio.

A series of indices that track North American and emerging market credit derivative indexes. The purpose of the combined indexes is to track the performance of the various segments of credit derivatives so that the overall return can be benchmarked against funds that invest in similar products.

A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are measured at their gross book value rather than at net book value in order to produce a higher return on equity (ROE). It is also known as "DuPont identity".

DuPont analysis tells us that ROE is affected by three things:
- Operating efficiency, which is measured by profit margin
- Asset use efficiency, which is measured by total asset turnover
- Financial leverage, which is measured by the equity multiplier

ROE = Profit Margin (Profit/Sales) * Total Asset Turnover (Sales/Assets) * Equity Multiplier (Assets/Equity)

A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates . Duration is expressed as a number of years. Rising interest rates mean falling bond prices, while declining interest rates mean rising bond prices. The bigger the duration number, the greater the interest-rate risk or reward for bond prices.

An indicator of a company's financial performance which is calculated as follows:

EBITDA can be used to analyze and compare profitability between companies and industries because it eliminates the effects of financing and accounting decisions. However, this is a non-GAAP measure that allows a greater amount of discretion as to what is (and is not) included in the calculation. This also means that companies often change the items included in their EBITDA calculation from one reporting period to the next.

A line created from the risk-reward graph, comprised of optimal portfolios.

The portion of a company's profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company's profitability.

Calculated as:

In the EPS calculation, it is more accurate to use a weighted average number of shares outstanding over the reporting term, because the number of shares outstanding can change over time. However, data sources sometimes simplify the calculation by using the number of shares outstanding at the end of the period.

Diluted EPS expands on basic EPS by including the shares of convertibles or warrants outstanding in the outstanding shares number.

A financial asset donation made to a non-profit group or institution in the form of investment funds or other property that has a stated purpose at the bequest of the donor. Most endowments are designed to keep the principal amount intact while using the investment income from dividends for charitable efforts.

A security that tracks an index, a commodity or a basket of assets like an index fund , but trades like a stock on an exchange. ETFs experience price changes throughout the day as they are bought and sold.

A type of option that differs from common American or European options in terms of the underlying asset or the calculation of how or when the investor receives a certain payoff. These options are more complex than options that trade on an exchange, and generally trade over the counter.

The risk of a security lengthening in duration due to the deceleration of prepayments.

1. A bond that was once investment grade but has since been reduced to junk bond status.
2. A stock that has fallen substantially from its all time highs.

A type of reinsurance that transfers over only a finite or limited amount of risk. Risk is reduced through accounting or financial methods, along with the actual transfer of economic risk. By transferring less risk to the reinsurer, the insurer receives coverage on its potential claims at a lower cost than traditional reinsurance.

A note with a variable interest rate . The adjustments to the interest rate are usually made every six months and are tied to a certain money-market index. Also known as a "floater".

A break between prices on a chart that occurs when the price of a stock makes a sharp move up or down with no trading occurring in between. Gaps can be created by factors such as regular buying or selling pressure, earnings announcements, a change in an analyst's outlook or any other type of news release. 

The common set of accounting principles, standards and procedures that companies use to compile their financial statements. GAAP are a combination of authoritative standards (set by policy boards) and simply the commonly accepted ways of recording and reporting accounting information.

Level of detail ( fineness ) considered in a model or decision making process . Greater the granularity, deeper the level of detail (fineness of data ).2

1. The difference between prices at which a market maker can buy and sell a security.
2. The percentage by which an asset's market value is reduced for the purpose of calculating capital requirement, margin and collateral levels.

A foreign loan that must be paid in the currency of a nation that has stability and a reputation abroad for economic strength (a hard currency).

Making an investment to reduce the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting position in a related security, such as a futures contract.

An aggressively managed portfolio of investments that uses advanced investment strategies such as leverage, 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).

A model that applies forward rates to an existing term structure of interest rates to determine appropriate prices for securities that are sensitive to changes in interest rates.

A high paying bond with a lower credit rating than investment-grade corporate bonds, Treasury bonds and municipal bonds. Because of the higher risk of default, these bonds pay a higher yield than investment grade bonds.

Based on the two main credit rating agencies, high-yield bonds carry a rating of 'BBB' or lower from S&P, and 'Baa' or lower from Moody's. Bonds with ratings above these levels are considered investment grade.Credit ratings can be as low as 'D' (currently in default), and most bonds with 'C' ratings or lower carry a high risk of default; to compensate for this risk, yields will typically be very high.  

Also known as "junk bonds".

The highest peak in value that an investment fund/account has reached. This term is often used in the context of fund manager compensation, which is performance based.

The real or expected period of time during which an investment is attributable to a particular investor. In a long position, holding period refers to the time between an asset's purchase and its sale. In a short sale, the holding period is the time between when a short seller initially borrows an asset from a brokerage, and when he or she sells it back - in other words, the length of time for which the short position is held.

Risk that affects a very small number of assets, and can be almost eliminated with diversification. Similar to unsystematic risk.

Ijarah means lease, rent or wage. Generally, Ijarah concept means selling benefit or use or service for a fixed price or wage. Under this concept, the Bank makes available to the customer the use of service of assets / equipments such as plant, office automation, motor vehicle for a fixed period and price. (Taken from Wikipedia)

1. A reduction in a company's stated capital.
2. The total capital that is less than the par value of the company's capital stock.

A correlation value that measures the relationship between a variable's predicted and actual values. The information coefficient is a performance measure used for evaluating the forecasting skill of  financial analysts

An older set of standards stating how particular types of transactions and other events should be reflected in financial statements. In the past, international accounting standards (IAS) were issued by the Board of the International Accounting Standards Committee (IASC).

Since 2001, the new set of standards has been known as the international financial reporting standards (IFRS) and has been issued by the International Accounting Standards Board (IASB).

A set of international accounting standards stating how particular types of transactions and other events should be reported in financial statements. IFRS are issued by the International Accounting Standards Board.

An association created by the private negotiated derivatives market that represents participating parties. This association helps to improve the private negotiated derivatives market by identifying and reducing risks in the market.

Created in 1940 through an act of Congress, this piece of legislation clearly defines the responsibilities and limitations placed on fund companies that offer investment products to the public.

The federal law enforced and interpreted by the Securities and Exchange Commission (SEC) that governs investment advisors .

A department, present in most medium to large public companies, that provides investors with an accurate account of the company's affairs. This helps investors to make informed buy or sell decisions.

The interest portion of mortgage, Treasury or bond payments, which is separated and sold individually from the principal portion of those same payments. The periodic payments of several bonds can be "stripped" to form synthetic zero-coupon bonds. 

A banking system that is based on the principles of Islamic law (also known Shariah) and guided by Islamic economics. Two basic principles behind Islamic banking are the sharing of profit and loss and, significantly, the prohibition of the collection and payment of interest. Collecting interest is not permitted under Islamic law.

An international organization that issues guiding principles and standards within the banking, insurance and capital market sectors in order to promote stability in the Islamic financial services industry .

The ISFB consists of:

• The general assembly, which includes all members of the ISFB
• The council, which acts as the policy making body of the IFSB and includes the senior executive of each full member of the organization
• The technical committee, which advises the council on issues and consists of up to 15 persons appointed by the council
• The working group, which drafts standards and guidelines and reports to the technical committee
• The secretariat, which acts as the permanent administrative body and is headed by a secretary-general appointed by the council

Istisna`a is a contract of exchange with deferred delivery, applied to specified made-to-order items. General agreement upon principles of practice is difficult to identify, however it is often stated that: a) the nature and quality of the item to be delivered must be specified.
b) the manufacturer must make a commitment to produce the item as described.
c) the delivery date is not fixed. The item is deliverable upon completion by the manufacturer.
d) the contract is irrevocable after the commencement of manufacture except where delivered goods do not meet the contracted terms.
e) payment can be made in one lump sum or in instalments, and at any time up to or after the time of delivery.
f) the manufacturer is responsible for the sourcing of inputs to the production process. Istisna`a differs from ijara in that the manufacturer must procure his own raw materials. Otherwise the contract would amount to a hiring of the seller's wage labour as occurs under ijara. Istisna`a also differs from bay salam in that a) the subject matter of the contract is always a made-to-order item, b) the delivery date need not be fixed in advance, c) full advance payment is not required and d) the istisna`a contract can be canceled but only before the seller commences manufacture of the agreed item(s). (taken from: http://www.islamic-finance.com/item_istisna_f.htm)

1. The process of offering securities as an attempt to raise funds . Companies may issue bonds or shares to investors as a method of financing the business. 

2. A series of stocks or bonds that have been offered to the public. A bond or stock issue relates to the set of instruments that were released under one offering.

Legal entity that develops registers and sells securities for the purpose of financing its operations. Issuers may be domestic or foreign governments, corporations or investment trusts. Issuers are legally responsible for the obligations of the issue and for reporting financial conditions, material developments and any other operational activities as required by the regulations of their jurisdictions. The most common types of securities issued are common and preferred stocks, bonds, notes, debentures, bills and derivatives.

Short- and long-term Issuer Default Ratings (IDRs) may be assigned to entities for certain sectors, including Corporate, Financial Institution and Sovereign entities, which reflect the ability of an entity to meet financial commitments on a timely basis. Similar to other ratings, these are drawn from the International Long-term and Short-term ratings scales and are identified as IDRs. (This is taken from the FITCH RATINGS website)

A group of international credit derivative indexes that are monitored by the International Index Company (IIC). The credit derivatives market that iTraxx provides allows parties to transfer the risk and return of underlying assets from one party to another without actually transferring the assets. iTraxx indexes cover credit derivatives markets in Europe, Asia and Australia.

A certificate of deposit ( CD ) with a minimum denomination of $100,000.

A mortgage with a loan amount exceeding the conforming loan limits set by the Office of Federal Housing Enterprise Oversight (OFHEO), and therefore, not eligible to be purchased, guaranteed or securitized by Fannie Mae or Freddie Mac. OFHEO sets the conforming loan limit size on an annual basis.

A description of the potential for loss arising from the uncertainty of legal proceedings, such as bankruptcy , and potential legal proceedings . 1

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.

The acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition. Often, the assets of the company being acquired are used as collateral for the loans in addition to the assets of the acquiring company. The purpose of leveraged buyouts is to allow companies to make large acquisitions without having to commit a lot of capital.

A form of investing  in which the main goal is to gain sufficient assets to meet all liabilities, both current and future. This form of investing is most prominent with defined-benefit pension plans, whose liabilities can often reach into the billions of dollars for the largest of plans.

When a creditor or bank has the right to sell the mortgaged or collateral property of those who fail to meet the obligations of a loan contract.

A lending risk assessment ratio that financial institutions and others lenders examine before approving a mortgage. Typically, assessments with high LTV ratios are generally seen as higher risk and, therefore, if the mortgage is accepted, the loan will generally cost the borrower more to borrow or he or she will need to purchase mortgage insurance.

Calculated as:

The risk to which a pension  fund  or life insurance company could be exposed as a result of higher-than-expected payout ratios. Increasing life expectancy trends among policy holders and pensioners can result in payout levels that are higher than what a company or fund originally accounts for. The types of plans exposed to the greatest levels of longevity risk are defined-benefit pension plans and annuities, which guarantee lifetime benefits for policy or plan holders.

An investment technique used to eliminate the risk of a portfolio of assets. In most cases, this would mean taking a position that offsets the whole portfolio. But this technique is difficult in practice because there is rarely one asset that will offset the risk of a broader portfolio, so applying a macro-hedge most likely requires taking an offsetting position in each individual asset. 

1.The act of recording the price or value of a security, portfolio or account to reflect its current market value rather than its book value.
2. In terms of mutual funds , a MTM is when the net asset value (NAV) of the fund is valued upon the most current market values.

A general term used to refer to the consolidation of companies. A merger is a combination of two companies to form a new company, while an acquisition is the purchase of one company by another in which no new company is formed.

A model, named after the financial scholar Robert C. Merton, that was developed in the 1970s and is used today to evaluate the credit risk of a corporation's debt. Brokerage firm analysts and some investors employ the model in order to determine a company's ability to service its debt, meet its financial obligations and to gauge the overall possibility of credit default.

Also referred to as, "Asset Value Model". 

A general term describing a situation where a hybrid debt issue is subordinated to another debt issue from the same issuer. Mezzanine debt has embedded equity instruments (usually warrants) attached, which increase the value of the subordinated debt, and allows for greater flexibility when dealing with bond holders. Mezzanine debt is frequently associated with acquisitions and buyouts where it may be used to prioritize new owners ahead of existing owners in case of bankruptcy.

A theory on how risk-averse investors can construct portfolios to optimize or maximize expected return based on a given level of market risk, emphasizing that risk is an inherent part of higher reward.

Also called "portfolio theory" or " portfolio management theory."

A problem solving technique used to approximate the probability of certain outcomes by running multiple trial runs, called simulations, using random variables. 

A rating system that measures how often a fund loses money compared to the risk-free rate of return (T-bill return). 

A debt security issued by a state, municipality or county to finance its capital expenditures. Municipal bonds are exempt from federal taxes and from most state and local taxes, especially if you live in the state in which the bond is issued.

Also known as a "muni".

A joint enterprise or partnership structure with profit/loss sharing implications that is used in Islamic finance instead of interest-bearing loans. Musharakah allows each party involved in a business to share in the profits and risks. Instead of charging interest as a creditor, the financier will achieve a return in the form of a portion of the actual profits earned, according to a predetermined ratio. However, unlike a traditional creditor, the financier will also share in any losses.

A mutual fund's price per share or exchange-traded fund's ( ETF ) per-share value. In both cases, the per-share dollar amount of the fund is derived by dividing the total value of all the securities in its portfolio, less any liabilities, by the number of fund shares outstanding.

In terms of corporate valuations, the value of assets less liabilities equals net asset value (NAV), or "book value".

1.         Settling mutual obligations at the net value of a contract as opposed to its gross dollar value. 2.         Reducing the transfer of funds between subsidiaries to a net amount

A type of security that allows holders to access excess cash flows resulting from securitized mortgage loan pools.

The difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of an investment or project. 
NPV analysis is sensitive to the reliability of future cash inflows that an investment or project will yield. 

Loans that are in default or close to being in default.

A form of risk that summarizes the risks a company or firm undertakes when it attempts to operate within a given field or industry . Operational risk is the risk that is not inherent in financial, systematic or market-wide risk. It is the risk remaining after determining financing and systematic risk, and includes risks resulting from breakdowns in internal procedures, people and systems.

A financial derivative that represents a contract sold by one party (option writer) to another party (option holder). The contract offers the buyer the right, but not the obligation, to buy (call) or sell (put) a security or other financial asset at an agreed-upon price (the strike price) during a certain period of time or on a specific date (exercise date).

The process of posting more collateral than is needed to obtain or secure  financing . Overcollateralization is often used as a method of credit enhancement by lowering the creditor's exposure to default risk.

Two securities or obligations having equal rights to payment.

The use of a good or service as payment, instead of cash. Also known as "paid in-kind."

A financial statement that summarizes the revenues, costs and expenses incurred during a specific period of time - usually a fiscal quarter or year. These records provide information that shows the ability of a company to generate profit by increasing revenue and reducing costs. The P&L statement is also known as a "statement of profit and loss ", an "income statement" or an "income and expense statement".

A type of fixed-income security where the holder is only entitled to receive regular cash flows that are derived from incoming principal repayments on an underlying loan pool. The loan is often a pool of mortgages in the form of a mortgage-backed security (MBS). 

The risk that one party of a contract will fail to meet the terms of the contract and default before the contract's settlement date, prematurely ending the contract.

A classification of borrowers, rates or holdings in the lending market that are considered to be of high quality. This classification is placed on those borrowers that are deemed to be the most credit-worthy and the prime rate is the rate that a lender will lend to its high quality borrowers.

Raising of capital via private rather than public placement. The result is the sale of securities to a relatively small number of investors. Investors involved in private placements are usually large banks, mutual funds , insurance companies, and pension funds.

A legal clause or condition contained within a contract that requires or prevents either one or both parties to perform a particular requirement by some specified time. Specified requirements can include, but are not limited to, sunset, soft call, anti-dilution, and anti-greenmail provisions.

The current worth of a future sum of money or stream of cash flows  given a specified rate of return. Future cash flows are discounted at the discount rate, and the higher the discount rate, the lower the present value of the future cash flows. Determining the appropriate discount rate is the key to properly valuing future cash flows, whether they be earnings or obligations.

Also referred to as "discounted value".

An option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying asset at a set price within a specified time. The buyer of a put option estimates that the underlying asset will drop below the exercise price before the expiration date.

The possible payoff for a holder of a put option contract is illustrated by the following diagram:

To increase a company's operations in anticipation of increased demand.

The return of an investor's principal in a security, such as a stock, bond , or mutual fund.

The risk that a change in laws and regulations will materially impact a security, business, sector or market. A change in laws or regulations made by the government or a regulatory body can increase the costs of operating a business, reduce the attractiveness of investment  and/or change the competitive landscape.

Exposure to loss remaining after other known risks have been countered, factored in, or eliminated.

A protection-based transfer of assets from one destination to another, usually through the use of offshore accounting. A ring fence is meant to protect the assets from inclusion in an investor's calculable net worth or to lower tax consequences.  

The process of identification, analysis and either acceptance or mitigation of uncertainty in investment decision-making. Essentially, risk management occurs anytime an investor or fund manager analyzes and attempts to quantify the potential for losses in an investment and then takes the appropriate action (or inaction) given their investment objectives and risk tolerance.

A type of security whose  cash flows come from residential debt such as mortgages, home-equity loans and subprime mortgages. This is a type of mortgage-backed securities that focuses on residential instead of commercial debt.

A security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages.

REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate.
Equity REITs: Equity REITs invest in and own properties (thus responsible for the equity or value of their real estate assets). Their revenues come principally from their properties' rents.
Mortgage REITs: Mortgage REITs deal in investment and ownership of property mortgages. These REITs loan money for mortgages to owners of real estate, or purchase existing mortgages or mortgage-backed securities. Their revenues are generated primarily by the interest that they earn on the mortgage loans.

A concept in Islamic banking that refers to charged interest. It is forbidden under Sharia, Islamic religious law, because it is thought to be exploitive. Depending on the interpretation, riba may only refer to excessive interest; however to others, the whole concept of interest is riba, and thus is unlawful.

Also known as "usury".

An indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Calculated by dividing a company's annual earnings by its total assets, ROA is displayed as a percentage. Sometimes this is referred to as " return on investment ".

A measure of a corporation's profitability that reveals how much profit a company generates with the money shareholders have invested.  

A broad definition for three types of arbitrage that contain an element of risk:

1) Merger and acquisition arbitrage - The simultaneous purchase of stock in a company being acquired and the sale (or short sale) of stock in the acquiring company.  
2) Liquidation arbitrage - The exploitation of a difference between a company's current value and its estimated liquidation value.  
3) Pairs trading - The exploitation of a difference between two very similar companies in the same industry that have historically been highly correlated. When the two company's values diverge to a historically high level you can take an offsetting position in each (e.g. go long in one and short the other) because, as history has shown, they will inevitable come to be similarly valued.

A Securities & Exchange Commission rule modifying a two-year holding period requirement on privately placed securities to permit qualified institutional buyers to trade these positions among themselves.

A set of accounting regulations prescribed by the National Association of Insurance Commissioners for the preparation of an insuring firm's financial statements.

Debts that are subordinate to the rights of other, more senior debts issued against the same collateral, or a portion of the same collateral. If a borrower defaults, second lien debts stand behind higher lien debts in terms of rights to collect proceeds from the debt's  underlying collateral.

A government commission created by Congress to regulate the securities markets and protect investors. In addition to regulation and protection, it also monitors the corporate takeovers in the U.S. The SEC is composed of five commissioners appointed by the U.S. President and approved by the Senate. The statutes administered by the SEC are designed to promote full public disclosure and to protect the investing public against fraudulent and manipulative practices in the securities markets. Generally, most issues of securities offered in interstate commerce, through the mail or on the internet must be registered with the SEC.

The process through which an issuer creates a financial instrument by combining other financial assets and then marketing different tiers of the repackaged instruments to investors. The process can encompass any type of financial asset and promotes liquidity in the marketplace.

An instrument representing ownership (stocks), a debt agreement (bonds) or the rights to ownership (derivatives).

The risk that one party will fail to deliver the terms of a contract with another party at the time of settlement. Settlement risk can be the risk associated with default at settlement and any timing differences in settlement between the two parties. This type of risk can lead to principal risk.

Islamic religious law that governs not only religious rituals, but aspects of day-to-day life in Islam. Sharia, literally translated, means "the way."
There is extreme variation in how Sharia is interpreted and implemented among and within Muslim societies today. This is especially prevalent for its financial laws.

Also known as "Shariah" or "Shari'a"

A ratio developed by Nobel laureate William F. Sharpe to measure risk-adjusted performance. The Sharpe ratio is calculated by subtracting the risk-free rate - such as that of the 10-year U.S. Treasury bond - from the rate of return for a portfolio and dividing the result by the standard deviation of the portfolio returns.

An Islamic finance term that describes a partnership between two or more individuals. The parties involved combine a portion of their capital or labor in order to share in the profits and losses of the business.

Shirkah, in the Islamic theory and philosophy of law, is divided into two categories:

1. Shirkah-ul-milk: Joint ownership between the parties involved, where each party has provided capital in order to purchase a particular property.
2. Shirkah-ul-'aqd: A partnership created through a contract. This can also be translated to mean a type of joint commercial enterprise.

The selling of a security that the seller does not own, or any sale that is completed by the delivery of a security borrowed by the seller. Short sellers assume that they will be able to buy the stock at a lower amount than the price at which they sold short.

1. A loan with a below-market rate of interest.
2. Loans made by multinational development banks and the World Bank to developing countries. Typically, soft loans have extended grace periods in which only interest or service charges are due. They also offer longer amortization schedules and lower interest rates than conventional bank loans.

A ratio developed by Frank A. Sortino to differentiate between good and bad volatility in the Sharpe ratio. This differentiation of upwards and downwards volatility allows the calculation to provide a risk-adjusted measure of a security or fund's performance without penalizing it for upward price changes. It it is calculated as follows:

The risk that a foreign central bank will alter its foreign-exchange regulations thereby significantly reducing or completely nulling the value of foreign-exchange contracts.

1. Also referred to as a "bankruptcy-remote entity" whose operations are limited to the acquisition and financing of specific assets. The SPV is usually a subsidiary company with an asset/liability structure and legal status that makes its obligations secure even if the parent company goes bankrupt.
2. A subsidiary corporation designed to serve as a counterparty for swaps and other credit sensitive derivative instruments. Also called a "derivatives product company."

A service offered by many large financial institutions for companies with very unique financing needs. These financing needs usually don't match conventional financial products such as a loan. Structured finance generally involves highly complex financial transactions.

An Islamic financial certificate, similar to a bond in Western finance, that complies with Sharia, Islamic religious law. Because the traditional Western interest paying bond structure is not permissible, the issuer of a sukuk sells an investor group the certificate, who then rents it back to the issuer for a predetermined rental fee. The issuer also makes a contractual promise to buy back the bonds at a future date at par value.

Traditionally, the exchange of one security for another to change the maturity (bonds), quality of issues (stocks or bonds), or because investment objectives have changed. Recently, swaps have grown to include currency swaps and interest rate swaps.

The option to enter into an interest rate swap. In exchange for an option premium, the buyer gains the right but not the obligation to enter into a specified swap agreement with the issuer on a specified future date.

1. The difference between the negotiated and fixed rate of a swap. The spread is determined by characteristics of market supply and creditor worthiness.
2. The difference between the swap rate and the lending rate offered through other investment vehicles with comparable characteristics.

A financial instrument that is created artificially by simulating another instrument with the combined features of a collection of other assets.

Limitation of an estate so that it can be passed on only to the specified entities or relatives, such as sons or daughters (direct descendents).

The amount of time left for the repayment of a loan or contract or the initial term length of a loan. Tenor can be expressed in years, months or days. 

A term used to describe the capital adequacy of a bank . Tier I capital is core capital, this includes equity capital and disclosed reserves.

A term used to describe the capital adequacy of a bank . Tier II capital is secondary bank capital that includes items such as undisclosed reserves, general loss reserves, subordinated term debt, and more.

A type of Islamic insurance, where members contribute money into a pooling system in order to guarantee each other against loss or damage. Takaful-branded insurance is based on Sharia, Islamic religious law, and explains how it is the responsibility of individuals to cooperate and protect each other.

The portfolio of financial instruments held by a brokerage or bank. The financial instruments in the trading book are purchased or sold to facilitate trading for their customers, to profit from spreads between the bid/ask spread, or to hedge against various types of risk.

any buying and selling of securities or commodities and The quantifiable likelihood of loss or less-than-expected returns

An index fund that tracks a broad market index or a segment thereof. Such a fund invests in all, or a representative number, of the securities within the index.  

Also know as an "index fund". 

A technical analysis pattern created by drawing trendlines along a price range that gets narrower over time because of lower tops and higher bottoms. Variations of a triangle include ascending and descending triangles. Triangles are very similar to wedges and pennants.

A normal option with no special or unusual features.

The most basic or standard version of a  financial instrument, usually options, bonds, futures and swaps. Its opposite is an exotic instrument, which alters the components of a traditional financial instrument, resulting in a more complex security.

1.         In derivatives, the security that must be delivered when a derivative contract, such as a put or call option, is exercised. 2.         In equities, the common stock that must be delivered when a warrant is exercised, or when a convertible bond  or convertible preferred share is converted to common stock.

A public limited company that coordinates the distribution and management of unit trusts amongst countries within the European Union.

A loan not secured by an underlying asset or collateral. Unsecured debt is the opposite of secured debt.

The act of lending money at an interest rate higher than that permitted by law.

A technique used to estimate the probability of portfolio losses based on the statistical analysis of historical price trends and volatilities.

A type of volatility swap where the payout is linear to variance rather than volatility. Therefore, the payout will rise at a higher rate than volatility

A term used to distinguish between an original mortgage loan and a pass-through security.

The weighted-average gross interest rates of the pool of mortgages that underlie a mortgage-backed security (MBS) at the time the securities were issued. A mortgage-backed security's current WAC can differ from its original WAC as the underlying mortgages pay down at different speeds. In the weighted-average calculation, the principal balance of each underlying mortgage is used as the weighting factor.

A condition requiring a purchaser using financing to have adequate  credit - as approved by his or her financial lending institution - for the transaction to go through.

A calculation of a firm's cost of capital in which each category of capital is proportionately weighted. All capital sources - common stock, preferred stock, bonds and any other long-term debt - are included in a WACC calculation.

WACC is calculated by multiplying the cost of each capital component by its proportional weight and then summing:

Where:
Re = cost of equity
Rd = cost of debt
E = market value of the firm's equity
D = market value of the firm's debt
V = E + D
E/V = percentage of financing that is equity
D/V = percentage of financing that is debt
Tc = corporate tax rate

A life insurance plan that provides a tax benefit in regards to intergenerational transfers of wealth. The concept occurs when a tax-exempt insurance policy is rolled over to a child or a grandchild. The origin of this term is derived from the fact that this insurance plan is similar to waterfalls in that it only flows downwards.

A strategy used by mutual fund and portfolio managers near the year or quarter end to improve the appearance of the portfolio/fund performance before presenting it to clients or shareholders.

A line that plots the  interest rates , at a set point in time, of bonds having equal credit quality, but differing maturity dates. The most frequently reported yield curve compares the three-month, two-year, five-year and 30-year U.S. Treasury debt. This yield curve is used as a benchmark for other debt in the market, such as mortgage rates or bank lending rates. The curve is also used to predict changes in economic output and growth.