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Definition of AD

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Aggregate demand.

Related Terms:

ADF (annuity discount factor)

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

Additional hedge

A protection against borrower fallout risk in the mortgage pipeline.

Adjustable rate preferred stock (ARPS)

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

Adjusted present value (APV)

The net present value analysis of an asset if financed solely by equity
(present value of un-levered cash flows), plus the present value of any financing decisions (levered cash
flows). In other words, the various tax shields provided by the deductibility of interest and the benefits of
other investment tax credits are calculated separately. This analysis is often used for highly leveraged
transactions such as a leverage buy-out.

Administrative pricing rules

IRS rules used to allocate income on export sales to a foreign sales corporation.

Advance commitment

A promise to sell an asset before the seller has lined up purchase of the asset. This
seller can offset risk by purchasing a futures contract to fix the sales price.

Adverse selection

A situation in which market participation is a negative signal.

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American Depositary Receipts (ADRs)

Certificates issued by a U.S. depositary bank, representing foreign
shares held by the bank, usually by a branch or correspondent in the country of issue. One adR may
represent a portion of a foreign share, one share or a bundle of shares of a foreign corporation. If the adR's
are "sponsored," the corporation provides financial information and other assistance to the bank and may
subsidize the administration of the adRs. "Unsponsored" adRs do not receive such assistance. adRs carry
the same currency, political and economic risks as the underlying foreign share; the prices of the two, adjusted for the SDR/ordinary ratio, are kept essentially identical by arbitrage. American depositary shares(adSs) are
a similar form of certification.

Balance of trade

Net flow of goods (exports minus imports) between countries.

Basket trades

Related: Program trades.

Bill of lading

A contract between the exporter and a transportation company in which the latter agrees to
transport the goods under specified conditions which limit its liability. It is the exporter's receipt for the goods
as well as proof that goods have been or will be received.

Block trade

A large trading order, defined on the New York Stock Exchange as an order that consists of
10,000 shares of a given stock or a total market value of $200,000 or more.

Brady bonds

Bonds issued by emerging countries under a debt reduction plan.

Bull spread

A spread strategy in which an investor buys an out-of-the-money put option, financing it by
selling an out-of-the money call option on the same underlying.

Canadian agencies

Agency banks established by Canadian banks in the U.S.

Counter trade

The exchange of goods for other goods rather than for cash; barter.

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Credit spread

Related:Quality spread

Cumulative Translation Adjustment (CTA) account

An entry in a translated balance sheet in which gains
and/or losses from translation have been accumulated over a period of years. The CTA account is required
under the FASB No. 52 rule.

Day trading

Refers to establishing and liquidating the same position or positions within one day's trading.

Dead cat bounce

A small upmove in a bear market.


A classic negative change in ratings for a stock, and or other rated security.

Effective spread

The gross underwriting spread adjusted for the impact of the announcement of the common
stock offering on the firm's share price.

Flat trades

1) A bond in default trades flat; that is, the price quoted covers both principal and unpaid,
accrued interest.
2) Any security that trades without accrued interest or at a price that includes accrued
interest is said to trade flat.

Floor trader

A member who generally trades only for his own account, for an account controlled by him or
who has such a trade made for him. Also referred to as a "local".

Forward trade

A transaction in which the settlement will occur on a specified date in the future at a price
agreed upon the trade date.

Graduated-payment mortgages (GPMs)

A type of stepped-payment loan in which the borrower's payments
are initially lower than those on a comparable level-rate mortgage. The payments are gradually increased over
a predetermined period (usually 3,5, or 7 years) and then are fixed at a level-pay schedule which will be
higher than the level-pay amortization of a level-pay mortgage originated at the same time. The difference
between what the borrower actually pays and the amount required to fully amortize the mortgage is added to
the unpaid principal balance.

Gross spread

The fraction of the gross proceeds of an underwritten securities offering that is paid as
compensation to the underwriters of the offering.

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Head & shoulders

In technical analysis, a chart formation in which a stock price reaches a peak and declines,
rises above its former peak and again declines and rises again but not to the second peak and then again
declines. The first and third peaks are shoulders, while the second peak is the formation's head. Technical
analysts generally consider a head and shoulders formation to be a very bearish indication.

Homemade dividend

Sale of some shares of stock to get cash that would be similar to receiving a cash dividend.

Homemade leverage

Idea that as long as individuals borrow (or lend) on the same terms as the firm, they can
duplicate the affects of corporate leverage on their own. Thus, if levered firms are priced too high, rational
investors will simply borrow on personal accounts to buy shares in unlevered firms.

Horizontal spread

The simultaneous purchase and sale of two options that differ only in their exercise date.

Informationless trades

Trades that are the result of either a reallocation of wealth or an implementation of an
investment strategy that only utilizes existing information.

Information-motivated trades

Trades in which an investor believes he or she possesses pertinent
information not currently reflected in the stock's price.

Insider trading

Trading by officers, directors, major stockholders, or others who hold private inside
information allowing them to benefit from buying or selling stock.

Intermarket spread swaps

An exchange of one bond for another based on the manager's projection of a
realignment of spreads between sectors of the bond market.

Intramarket sector spread

The spread between two issues of the same maturity within a market sector. For
instance, the difference in interest rates offered for five-year industrial corporate bonds and five-year utility
corporate bonds.

Investment grade bonds

A bond that is assigned a rating in the top four categories by commercial credit
rating companies. For example, S&P classifies investment grade bonds as BBB or higher, and Moodys'
classifies investment grade bonds as Ba or higher. Related: High-yield bond.

Ladder strategy

A bond portfolio strategy in which the portfolio is constructed to have approximately equal
amounts invested in every maturity within a given range.

Last trading day

The final day under an exchange's rules during which trading may take place in a particular
futures or options contract. Contracts outstanding at the end of the last trading day must be settled by delivery
of underlying physical commodities or financial instruments, or by agreement for monetary settlement
depending upon futures contract specifications.


Payment of a financial obligation earlier than is expected or required.

Lead manager

The commercial or investment bank with the primary responsibility for organizing syndicated
bank credit or bond issue. The lead manager recruits additional lending or underwriting banks, negotiates
terms of the issue with the issuer, and assesses market conditions.

Leading economic indicators

Economic series that tend to rise or fall in advance of the rest of the economy.

Load fund

A mutual fund with shares sold at a price including a large sales charge -- typically 4% to 8% of
the net amount indicated. Some "no-load" funds have distribution fees permitted by article 12b-1 of the
Investment Company Act; these are typically 0. 25%. A "true no-load" fund has neither a sales charge nor
Freddie Mac program, the aggregation that the fund purchaser receives some investment advice or other
service worthy of the charge.


Arrangement whereby the customer pays for the last delivery when the next one is received.

Long straddle

A straddle in which a long position is taken in both a put and call option.

Matador market

The foreign market in Spain.

Maturity spread

The spread between any two maturity sectors of the bond market.

Net adjusted present value

The adjusted present value minus the initial cost of an investment.

Net advantage of refunding

The net present value of the savings from a refunding.

Net advantage to leasing

The net present value of entering into a lease financing arrangement rather than
borrowing the necessary funds and buying the asset.

Net advantage to merging

The difference in total post- and pre-merger market value minus the cost of the merger.

No load mutual fund

An open-end investment company, shares of which are sold without a sales charge.
There can be other distribution charges, however, such as Article 12B-1 fees. A true "no load" fund will have
neither a sales charge nor a distribution fee.

No-load fund

A mutual fund that does not impose a sales commission. Related: load fund


Refer to goods and services produced and consumed domestically that are not close
substitutes to import or export goods and services.

Option-adjusted spread (OAS)

1) The spread over an issuer's spot rate curve, developed as a measure of
the yield spread that can be used to convert dollar differences between theoretical value and market price.
2) The cost of the implied call embedded in a MBS, defined as additional basis-yield spread. When added to the
base yield spread of an MBS without an operative call produces the option-adjusted spread.

Philadelphia Stock Exchange (PHLX)

A securities exchange where American and European foreign
currency options on spot exchange rates are traded.

Posttrade benchmarks

Prices after the decision to trade.

Preauthorized electronic debits (PADs)

Debits to its bank account in advance by the payer. The payer's
bank sends payment to the payee's bank through the _ACH)Automated Clearing House (ACH) system.

Pre-trade benchmarks

Prices occurring before or at the decision to trade.

Program trades

Also called basket trades, orders requiring the execution of trades in a large number of
different stocks at as near the same time as possible. Related: block trade

Program trading

Trades based on signals from computer programs, usually entered directly from the trader's
computer to the market's computer system and executed automatically.

Public Securities Administration (PSA)

The trade association for primary dealers in U.S. government
securities, including MBSs.

Publicly traded assets

Assets that can be traded in a public market, such as the stock market.

Quality spread

Also called credit spread, the spread between Treasury securities and non-Treasury securities
that are identical in all respects except for quality rating. For instance, the difference between yields on
Treasuries and those on single A-rated industrial bonds.

Registered trader

A member of the exchange who executes frequent trades for his or her own account.

Relative yield spread

The ratio of the yield spread to the yield level.

Reversing trade

Entering the opposite side of a currently held futures position to close out the position.

Risk-adjusted profitability

A probability used to determine a "sure" expected value (sometimes called a
certainty equivalent) that would be equivalent to the actual risky expected value.


return Return earned on an asset normalized for the amount of risk associated with that asset.

Short straddle

A straddle in which one put and one call are sold.

Speculative grade bond

Bond rated Ba or lower by Moody's, or BB or lower by S&P, or an unrated bond.

Spot trade

The purchase and sale of a foreign currency, commodity, or other item for immediate delivery.


1) The gap between bid and ask prices of a stock or other security.
2) The simultaneous purchase and sale of separate futures or options contracts for the same commodity for delivery in different months.
Also known as a straddle.
3) Difference between the price at which an underwriter buys an issue from a firm
and the price at which the underwriter sells it to the public.
4) The price an issuer pays above a benchmark fixed-income yield to borrow money.

Spread income

Also called margin income, the difference between income and cost. For a depository
institution, the difference between the assets it invests in (loans and securities) and the cost of its funds
(deposits and other sources).

Spread strategy

A strategy that involves a position in one or more options so that the cost of buying an
option is funded entirely or in part by selling another option in the same underlying. Also called spreading.


A computer program that organizes numerical data into rows and columns on a terminal screen,
for calculating and making adjustments based on new data.

Steady state

As the MBS pool ages, or four to six months after it was passed at least once through the
threshold for refinancing, the prepayment speed tends to stabilize within a fairly steady range.


Purchase or sale of an equal number of puts and calls with the same terms at the same time.
Related: spread

TED spread

Difference between U.S. Treasury bill rate and eurodollar rate; used by some traders as a
measure of investor/trader anxiety.

Terms of trade

The weighted average of a nation's export prices relative to its import prices.

Thinly traded

Infrequently traded.


A verbal (or electronic) transaction involving one party buying a security from another party. Once a
trade is consummated, it is considered "done" or final. Settlement occurs 1-5 business days later.

Trade acceptance

Written demand that has been accepted by an industrial company to pay a given sum at a future date.
Related: banker's acceptance.

Trade credit

Credit granted by a firm to another firm for the purchase of goods or services.

Trade date

In an interest rate swap, the date that the counterparties commit to the swap. Also, the date on
which a trade occurs. Trades generally settle (are paid for) 1-5 business days after a trade date. With stocks,
settlement is generally 3 business days after the trade.

Trade debt

Accounts payable.

Trade draft

A draft addressed to a commercial enterprise. See:draft.

Trade on top of

Trade at a narrow or no spread in basis points relative to some other bond yield, usually
Treasury bonds.

Trade house

A firm which deals in actual commodities.


Persons who take positions in securities and their derivatives with the objective of making profits.
Traders can make markets by trading the flow. When they do that, their objective is to earn the bid/ask spread.
Traders can also be of the sort who take proprietary positions whereby they seek to profit from the directional
movement of prices or spread positions.


Buying and selling securities.

Trading costs

Costs of buying and selling marketable securities and borrowing. Trading costs include
commissions, slippage, and the bid/ask spread. See: transaction costs.

Trading halt

Trading of a stock, bond, option or futures contract can be halted by an exchange while news is
being broadcast about the security.

Trading paper

CDs purchased by accounts that are likely to resell them. The term is commonly used in the Euromarket.

Trading posts

The posts on the floor of a stock exchange where the specialists stand and securities are traded.

Trading range

The difference between the high and low prices traded during a period of time;
with commodities, the high/low price limit established by the exchange for a specific commodity for any one day's trading.

Traditional view (of dividend policy)

An argument that "within reason," investors prefer large dividends to
smaller dividends because the dividend is sure but future capital gains are uncertain.

Uptick trade

Related:Tick-test rules

Value-added tax

Method of indirect taxation whereby a tax is levied at each stage of production on the value
added at that specific stage.







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