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Accounting rate of return (ARR) |
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Definition of Accounting rate of return (ARR)Accounting rate of return (ARR)A method of investment appraisal that measures 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
Related Terms:CARs (cumulative abnormal returns)a measure used in academic finance articles to measure the excess returns an investor would have received over a particular time period if he or she were invested in a particular stock. discount ratethe rate of return on investment that would be required by a prudent investor to invest in an asset with a specific level risk. Also, a rate of return used to convert a monetary sum, payable or receivable in the future, into present value. Abnormal returnsPart of the return that is not due to systematic influences (market wide influences). In Accelerated cost recovery system (ACRS)Schedule of depreciation rates allowed for tax purposes. Accelerated depreciationAny depreciation method that produces larger deductions for depreciation in the Accounting exposureThe change in the value of a firm's foreign currency denominated accounts due to a Accounting earningsEarnings of a firm as reported on its income statement. Accounting insolvencyTotal liabilities exceed total assets. A firm with a negative net worth is insolvent on Accounting liquidityThe ease and quickness with which assets can be converted to cash. Active portfolio strategyA strategy that uses available information and forecasting techniques to seek a Adjustable rate preferred stock (ARPS)Publicly traded issues that may be collateralized by mortgages and MBSs. After-tax real rate of returnMoney after-tax rate of return minus the inflation rate. All equity rateThe discount rate that reflects only the business risks of a project and abstracts from the Amortizing interest rate swapSwap in which the principal or national amount rises (falls) as interest rates Annual percentage rate (APR)The periodic rate times the number of periods in a year. For example, a 5% Annualized holding period returnThe annual rate of return that when compounded t times, would have Annuity in arrearsAn annuity with a first payment on full period hence, rather than immediately. Arithmetic average (mean) rate of returnArithmetic mean return. Arithmetic mean returnAn average of the subperiod returns, calculated by summing the subperiod returns Auction rate preferred stock (ARPS)Floating rate preferred stock, the dividend on which is adjusted every Average accounting returnThe average project earnings after taxes and depreciation divided by the average Average rate of return (ARR)The ratio of the average cash inflow to the amount invested. Average tax rateTaxes as a fraction of income; total taxes divided by total taxable income. Barbell strategyA strategy in which the maturities of the securities included in the portfolio are concentrated BARRA's performance analysis (PERFAN)A method developed by BarrA, a consulting firm in Barrier optionsContracts with trigger points that, when crossed, automatically generate buying or selling of Base interest rateRelated: Benchmark interest rate. Basic business strategiesKey strategies a firm intends to pursue in carrying out its business plan. Benchmark interest rateAlso called the base interest rate, it is the minimum interest rate investors will Break-even payment rateThe prepayment rate of a MBS coupon that will produce the same CFY as that of Break-even tax rateThe tax rate at which a party to a prospective transaction is indifferent between entering Broker loan rateRelated: Call money rate. Bullet strategyA strategy in which a portfolio is constructed so that the maturities of its securities are highly Buy-and-hold strategyA passive investment strategy with no active buying and selling of stocks from the Call money rateAlso called the broker loan rate , the interest rate that banks charge brokers to finance CarryRelated:net financing cost. Carring costsCosts that increase with increases in the level of investment in current assets. Carrying valueBook value. Cash and carryPurchase of a security and simultaneous sale of a future, with the balance being financed Combination strategyA strategy in which a put and with the same strike price and expiration are either both ConglomerateA firm engaged in two or more unrelated businesses. Conglomerate mergerA merger involving two or more firms that are in unrelated businesses. Corporate acquisitionThe acquisition of one firm by anther firm. Corporate bondsDebt obligations issued by corporations. Corporate charterA legal document creating a corporation. Corporate financeOne of the three areas of the discipline of finance. It deals with the operation of the firm Corporate financial managementThe application of financial principals within a corporation to create and Corporate financial planningFinancial planning conducted by a firm that encompasses preparation of both Corporate processing floatThe time that elapses between receipt of payment from a customer and the Corporate tax viewThe argument that double (corporate and individual) taxation of equity returns makes Corporate taxable equivalentrate of return required on a par bond to produce the same after-tax yield to Cost company arrangementarrangement whereby the shareholders of a project receive output free of Cost of carryRelated: Net financing cost Coupon rateIn bonds, notes or other fixed income securities, the stated percentage rate of interest, usually Covered call writing strategyA strategy that involves writing a call option on securities that the investor Covered or hedge option strategiesStrategies that involve a position in an option as well as a position in the Crediting rateThe interest rate offered on an investment type insurance policy. Cross ratesThe exchange rate between two currencies expressed as the ratio of two foreign exchange rates Crossover rateThe return at which two alternative projects have the same net present value. Cumulative abnormal return (CAR)Sum of the differences between the expected return on a stock and the Current rate methodUnder this currency translation method, all foreign currency balance-sheet and income Dedication strategyRefers to multi-period cash flow matching. Detachable warrantA warrant entitles the holder to buy a given number of shares of stock at a stipulated Discount rateThe interest rate that the Federal Reserve charges a bank to borrow funds when a bank is Dividend rateThe fixed or floating rate paid on preferred stock based on par value. Dollar returnThe return realized on a portfolio for any evaluation period, including (1) the change in market Dollar-weighted rate of returnAlso called the internal rate of return, the interest rate that will make the Effective annual interest rateAn annual measure of the time value of money that fully reflects the effects of Effective rateA measure of the time value of money that fully reflects the effects of compounding. Equilibrium rate of interestThe interest rate that clears the market. Also called the market-clearing interest Ex post returnRelated: Holding period return Exante returnThe expected return of a portfolio based on the expected returns of its component assets and Excess return on the market portfolioThe difference between the return on the market portfolio and the Excess returnsAlso called abnormal returns, returns in excess of those required by some asset pricing model. Exchange rateThe price of one country's currency expressed in another country's currency. Exchange Rate Mechanism (ERM)The methodology by which members of the EMS maintain their Exchange rate riskAlso called currency risk, the risk of an investment's value changing because of currency Expected future returnThe return that is expected to be earned on an asset in the future. Also called the Expected returnThe return expected on a risky asset based on a probability distribution for the possible rates Expected return on investmentThe return one can expect to earn on an investment. See: capital asset Expected return-beta relationshipImplication of the CAPM that security risk premiums will be Federal funds rateThis is the interest rate that banks with excess reserves at a Federal Reserve district bank Fixed-exchange rateA country's decision to tie the value of its currency to another country's currency, gold Fixed-rate loanA loan on which the rate paid by the borrower is fixed for the life of the loan. Fixed-rate payerIn an interest rate swap the counterparty who pays a fixed rate, usually in exchange for a Floating exchange rateA country's decision to allow its currency value to freely change. The currency is not Floating-rate contractA guaranteed investment contract where the credit rating is tied to some variable Floating-rate note (FRN)Note whose interest payment varies with short-term interest rates. Floating-rate payerIn an interest rate swap, the counterparty who pays a rate based on a reference rate, Floating-rate preferredPreferred stock paying dividends that vary with short-term interest rates. Forward exchange rateExchange rate fixed today for exchanging currency at some future date. Forward interest rateInterest rate fixed today on a loan to be made at some future date. Forward rateA projection of future interest rates calculated from either the spot rates or the yield curve. Forward rate agreement (FRA)Agreement to borrow or lend at a specified future date at an interest rate Generally Accepted Accounting Principals (GAAP)A technical accounting term that encompasses the Geometric mean returnAlso called the time weighted rate of return, a measure of the compounded rate of Growth ratesCompound annual growth rate for the number of full fiscal years shown. If there is a negative Harmless warrantWarrant that allows the user to purchase a bond only by surrendering an existing bond
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