Financial Terms
Acceleration Clause

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Definition of Acceleration Clause

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Acceleration Clause

clause causing repayment of a debt, if specified events occur or are not met.

Related Terms:

Accelerationist Hypothesis

Belief that an effort to keep unemployment below its natural rate results in an accelerating inflation.

Incontestable Clause

This clause in regular life insurance policy provides for voiding the contract of insurance for up to two years from the date of issue of the coverage if the life insured has failed to disclose important information or if there has been a misrepresentation of a material fact which would have prevented the coverage from being issued in the first place. After the end of two years from issue, a misrepresentation of smoking habits or age can still void or change the policy.

Inflation-escalator clause

A clause in a contract providing for increases or decreases in inflation based on
fluctuations in the cost of living, production costs, and so forth.

Multicurrency clause

Such a clause on a Euro loan permits the borrower to switch from one currency to
another currency on a rollover date.

Negative pledge clause

A bond covenant that requires the borrower to grant lenders a lien equivalent to any
liens that may be granted in the future to any other currently unsecured lenders.

Subordination clause

A provision in a bond indenture that restricts the issuer's future borrowing by
subordinating the new lender's claims on the firm to those of the existing bond holders.

Suicide Clause

Generally, a suicide clause in a regular life insurance policy provides for voiding the contract of insurance if the life insured commits suicide within two years of the date of issue of the coverage.

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Efficient Market Hypothesis

In general the hypothesis states that all relevant information is fully and
immediately reflected in a security's market price thereby assuming that an investor will obtain an equilibrium
rate of return. In other words, an investor should not expect to earn an abnormal return (above the market
return) through either technical analysis or fundamental analysis. Three forms of efficient market hypothesis
exist: weak form (stock prices reflect all information of past prices), semi-strong form (stock prices reflect all
publicly available information) and strong form (stock prices reflect all relevant information including insider

Efficient Markets Hypothesis

The hypothesis that securities are typically in equilibrium--that they are fairly priced in the sense that the price reflects all publicly available information on the security.

Expectations hypothesis theories

Theories of the term structure of interest rates which include the pure
expectations theory, the liquidity theory of the term structure, and the preferred habitat theory. These theories
hold that each forward rate equals the expected future interest rate for the relevant period. These three theories
differ, however, on whether other factors also affect forward rates, and how.
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

Liquidity preference hypothesis

The argument that greater liquidity is valuable, all else equal. Also, the
theory that the forward rate exceeds expected future interest rates.

Overreaction hypothesis

The supposition that investors overreact to unanticipated news, resulting in
exaggerated movement in stock prices followed by corrections.

Permanent Income Hypothesis

Theory that individuals base current consumption spending on their perceived long-run average income rather than their current income.

Absolute Advantage

The ability to produce a good or service with fewer resources than competitors. See also comparative advantage.

Abusive Earnings Management

The use of various forms of gimmickry to distort a company's true financial performance in order to achieve a desired result.

Abusive Earnings Management

A characterization used by the Securities and Exchange
Commission to designate earnings management that results in an intentional and material misrepresentation
of results.

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Accelerated cost recovery system (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.

accelerated depreciation

(1) The estimated useful life of the fixed asset being depreciated is
shorter than a realistic forecast of its probable actual service life;
(2) more of the total cost of the fixed asset is allocated to the first
half of its useful life than to the second half (i.e., there is a
front-end loading of depreciation expense).

Accelerated depreciation

Any of several methods that recognize an increased amount
of depreciation in the earliest years of asset usage. This results in increased tax benefits
in the first few years of asset usage.

Accidental Dismemberment: (Credit Insurance)

provides additional financial security should an insured person be dismembered or lose the use of a limb as the result of an accident.

Accomodating Policy

A monetary policy of matching wage and price increases with money supply increases so that the real money supply does not fall and push the economy into recession.

Accounting change

An alteration in the accounting methodology or estimates used in
the reporting of financial statements, usually requiring discussion in a footnote
attached to the financial statements.

Accounting Irregularities

Intentional misstatements or omissions of amounts or disclosures in
financial statements done to deceive financial statement users. The term is used interchangeably with fraudulent financial reporting.

Accounting rate of return (ARR)

A method of investment appraisal that measures
the profit generated as a percentage of the
investment – see return on investment.

accounting rate of return (ARR)

the rate of earnings obtained on the average capital investment over the life of a capital project; computed as average annual profits divided by average investment; not based on cash flow

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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activity-based management (ABM)

a discipline that focuses on the activities incurred during the production/performance process as the way to improve the value received
by a customer and the resulting profit achieved by providing
This value

ADF (annuity discount factor)

the present value of a finite stream of cash flows for every beginning $1 of cash flow.

Adjustable rate preferred stock (ARPS)

Publicly traded issues that may be collateralized by mortgages and MBSs.

Advance material request

Very early orders for materials before the completion
of a product design, given the long lead times required to supply some items.

After-tax profit margin

The ratio of net income to net sales.

After-tax real rate of return

Money After-tax rate of return minus the inflation rate.


Federal agency securities.


A grouping of sales producers according to region. Compare with Branch.

Agency bank

A form of organization commonly used by foreign banks to enter the U.S. market. An agency
bank cannot accept deposits or extend loans in its own name; it acts as agent for the parent bank.

Agency basis

A means of compensating the broker of a program trade solely on the basis of commission
established through bids submitted by various brokerage firms. agency incentive arrangement. A means of
compensating the broker of a program trade using benchmark prices for issues to be traded in determining
commissions or fees.

Agency cost view

The argument that specifies that the various agency costs create a complex environment in
which total agency costs are at a minimum with some, but less than 100%, debt financing.

Agency costs

The incremental costs of having an agent make decisions for a principal.

Agency pass-throughs

Mortgage pass-through securities whose principal and interest payments are
guaranteed by government agencies, such as the Government National Mortgage Association ("Ginnie Mae"), Federal Home Loan Mortgage Corporation ("Freddie Mac") and Federal National Mortgage Association ("Fannie Mae").

Agency problem

Conflicts of interest among stockholders, bondholders, and managers.

agency problems

Conflicts of interest between the firm’s owners and managers.

Agency theory

The analysis of principal-agent relationships, wherein one person, an agent, acts on behalf of
anther person, a principal.


The decision-maker in a principal-agent relationship.


One who represents Canada life when providing services to clients

Aggregate Expenditure Curve

Aggregate demand for goods and services drawn as a function of the level of national income.

Aggregate Supply

Total quantity of goods and services supplied.

Aggregate Supply Curve

Combinations of price level and income for which the labor market is in equilibrium. The short-run aggregate supply curve incorporates information and price/wage inflexibilities in the labor market, whereas the long-run aggregate supply curve does not.

algebraic method

a process of service department cost allocation
that considers all interrelationships of the departments
and reflects these relationships in simultaneous

All equity rate

The discount rate that reflects only the business risks of a project and abstracts from the
effects of financing.

Allowance for bad debts

An offset to the accounts receivable balance, against which
bad debts are charged. The presence of This allowance allows one to avoid severe
changes in the period-to-period bad debt expense by expensing a steady amount to
the allowance account in every period, rather than writing off large bad debts to
expense on an infrequent basis.

Allowance method

A method of adjusting accounts receivable to the amount that is expected to be collected based on company experience.

Alternative mortgage instruments

Variations of mortgage instruments such as adjustable-rate and variablerate
mortgages, graduated-payment mortgages, reverse-annuity mortgages, and several seldom-used

American Stock Exchange (AMEX)

The second-largest stock exchange in the United States. It trades
mostly in small-to medium-sized companies.

Amortization (Credit Insurance)

Refers to the reduction of debt by regular payments of interest and principal in order to pay off a loan by maturity.

Amortization factor

The pool factor implied by the scheduled amortization assuming no prepayemts.

Amortizing interest rate swap

Swap in which the principal or national amount rises (falls) as interest rates
rise (decline).

Announcement date

date on which particular news concerning a given company is announced to the public.
Used in event studies, which researchers use to evaluate the economic impact of events of interest.

Annual percentage rate (APR)

The periodic rate times the number of periods in a year. For example, a 5%
quarterly return has an APR of 20%.

annual percentage rate (APR)

Interest rate that is annualized using simple interest.

Annual percentage yield (APY)

The effective, or true, annual rate of return. The APY is the rate actually
earned or paid in one year, taking into account the affect of compounding. The APY is calculated by taking
one plus the periodic rate and raising it to the number of periods in a year. For example, a 1% per month rate
has an APY of 12.68% (1.01^12).

Annuity factor

Present value of $1 paid for each of t periods.

annuity factor

Present value of an annuity of $1 per period.


The simultaneous buying and selling of a security at two different prices in two different markets,
resulting in profits without risk. Perfectly efficient markets present no arbitrage opportunities. Perfectly
efficient markets seldom exist.


The purchase of securities on one market for immediate resale on
another market in order to profit from a price or currency discrepancy.


Transactions designed to make a sure profit from inconsistent prices.

Arbitrage-free option-pricing models

Yield curve option-pricing models.

Arbitrage Pricing Theory (APT)

An alternative model to the capital asset pricing model developed by
Stephen Ross and based purely on arbitrage arguments.


People who search for and exploit arbitrage opportunities.

Arithmetic average (mean) rate of return

Arithmetic mean return.

Arithmetic mean return

An average of the subperiod returns, calculated by summing the subperiod returns
and dividing by he number of subperiods.

Asset Coverage

Extent to which a company's net assets cover a particular debt obligation, class of preferred stock, or equity position.

Asset-coverage test

A bond indenture restriction that permits additional borrowing on if the ratio of assets to
debt does not fall below a specified minimum.

Asset/liability management

Also called surplus management, the task of managing funds of a financial
institution to accomplish the two goals of a financial institution:
1) to earn an adequate return on funds invested, and
2) to maintain a comfortable surplus of assets beyond liabilities.

Asymmetric information

information that is known to some people but not to other people.

Asymmetric taxes

A situation wherein participants in a transaction have different net tax rates.


A lack of equivalence between two things, such as the unequal tax treatment of interest expense
and dividend payments.

Auction rate preferred stock (ARPS)

Floating rate preferred stock, the dividend on which is adjusted every
seven weeks through a Dutch auction.

Automated storage/retrieval system

A racking system using automated systems
to load and unload the racks.

Autonomous Expenditure

Elements of spending that do not vary systematically with variables such as GDP that are explained by the theory. See also exogenous expenditure.


An arithmetic mean of selected stocks intended to represent the behavior of the market or some
component of it. One good example is the widely quoted Dow Jones Industrial Average, which adds the
current prices of the 30 DJIA's stocks, and divides the results by a predetermined number, the divisor.

Average accounting return

The average project earnings After taxes and depreciation divided by the average
book value of the investment during its life.

Average (across-day) measures

An estimation of price that uses the average or representative price of a
large number of trades.

Average age of accounts receivable

The weighted-average age of all of the firm's outstanding invoices.

Average Amortization Period

The average useful life of a company's collective amortizable asset base.

Average Collection Period

Average number of days necessary to receive cash for the sale of
a company's products. It is calculated by dividing the value of the
accounts receivable by the average daily sales for the period.

Average collection period, or days' receivables

The ratio of accounts receivables to sales, or the total
amount of credit extended per dollar of daily sales (average AR/sales * 365).

Average-Cost Inventory Method

The inventory cost-flow assumption that assigns the average
cost of beginning inventory and inventory purchases during a period to cost of goods sold and
ending inventory.

Average cost of capital

A firm's required payout to the bondholders and to the stockholders expressed as a
percentage of capital contributed to the firm. Average cost of capital is computed by dividing the total
required cost of capital by the total amount of contributed capital.

Average inventory

The beginning inventory for a period, plus the amount at the end of
the period, divided by two. It is most commonly used in situations in which just
using the period-end inventory yields highly variable results, due to constant and
large changes in the inventory level.

Average life

Also referred to as the weighted-average life (WAL). The average number of years that each
dollar of unpaid principal due on the mortgage remains outstanding. Average life is computed as the weighted average time to the receipt of all future cash flows, using as the weights the dollar amounts of the principal

Average maturity

The average time to maturity of securities held by a mutual fund. changes in interest rates
have greater impact on funds with longer average life.

Average Propensity to Consume

Ratio of consumption to disposable income. See also marginal propensity to consume.

Average Propensity to Save

Ratio of saving to disposable income. See also marginal propensity to save.

Average rate of return (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.

average tax rate

Total taxes owed divided by total income.

Avoidable costs

Costs that are identifiable with and able to be influenced by decisions made at the business
unit (e.g. division) level.


1) When bond yields and prices fall, the market is said to back-up.
2) When an investor swaps out of one security into another of shorter current maturity he is said to back up.

Bad debt

An account receivable that cannot be collected.

Bad debts

The amount of accounts receivable that is not expected to be collected.

bad debts

Refers to accounts receivable from credit sales to customers
that a business will not be able to collect (or not collect in full). In hindsight,
the business shouldn’t have extended credit to these particular
customers. Since these amounts owed to the business will not be collected,
they are written off. The accounts receivable asset account is
decreased by the estimated amount of uncollectible receivables, and the
bad debts expense account is increased This amount. These write-offs
can be done by the direct write-off method, which means that no
expense is recorded until specific accounts receivable are identified as
uncollectible. Or the allowance method can be used, which is based on
an estimated percent of bad debts from credit sales during the period.
Under This method, a contra asset account is created (called allowance
for bad debts) and the balance of This account is deducted from the
accounts receivable asset account.


State of being unable to pay debts. Thus, the ownership of the firm's assets is transferred from
the stockholders to the bondholders.


The reorganization or liquidation of a firm that cannot pay its debts.

Bankruptcy cost view

The argument that expected indirect and direct bankruptcy costs offset the other
benefits from leverage so that the optimal amount of leverage is less than 100% debt finaning.

Bankruptcy risk

The risk that a firm will be unable to meet its debt obligations. Also referred to as default or insolvency risk.

Bankruptcy view

The argument that expected bankruptcy costs preclude firms from being financed entirely
with debt.

Barbell strategy

A strategy in which the maturities of the securities included in the portfolio are concentrated
at two extremes.

Bargain-purchase-price option

Gives the lessee the option to purchase the asset at a price below fair market
value when the lease expires.

Base interest rate

Related: Benchmark interest rate.

Basic business strategies

Key strategies a firm intends to pursue in carrying out its business plan.

Beggar-My-Neighbor Policy

A policy designed to increase an economy's prosperity at the expense of another country's prosperity.







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