Financial Terms Annual fund operating expenses

# Definition of Annual fund operating expenses

## Annual fund operating expenses

For investment companies, the management fee and "other expenses,"
including the expenses for maintaining shareholder records, providing shareholders with financial statements,
and providing custodial and accounting services. For 12b-1 funds, selling and marketing costs are included.

# Related Terms:

## 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 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).

## Annual report

Yearly record of a publicly held company's financial condition. It includes a description of the
firm's operations, its balance sheet and income statement. SEC rules require that it be distributed to all
shareholders. A more detailed version is called a 10-K.

## Annualized gain

If stock X appreciates 1.5% in one month, the annualized gain for that sock over a twelve
month period is 12*1.5% = 18%. Compounded over the twelve month period, the gain is (1.015)^12 = 19.6%.

## Annualized holding period return

The annual rate of return that when compounded t times, would have
given the same t-period holding return as actually occurred from period 1 to period t.

## Balanced fund

An investment company that invests in stocks and bonds. The same as a balanced mutual fund.

## Balanced mutual fund

This is a fund that buys common stock, preferred stock and bonds. The same as a
balanced fund.

## Beta (Mutual Funds)

The measure of a fund's or stocks risk in relation to the market. A beta of 0.7 means
the fund's total return is likely to move up or down 70% of the market change; 1.3 means total return is likely
to move up or down 30% more than the market. Beta is referred to as an index of the systematic risk due to
general market conditions that cannot be diversified away.

## Beta equation (Mutual Funds)

The beta of a fund is determined as follows:
[(n) (sum of (xy)) ]-[ (sum of x) (sum of y)]
[(n) (sum of (xx)) ]-[ (sum of x) (sum of x)]
where: n = # of observations (36 months)
x = rate of return for the S&P 500 Index
y = rate of return for the fund

## Closed-end fund

An investment company that sells shares like any other corporation and usually does not
redeem its shares. A publicly traded fund sold on stock exchanges or over the counter that may trade above or
below its net asset value. Related: Open-end fund.

## Cost of funds

Interest rate associated with borrowing money.

## Dividend yield (Funds)

Indicated yield represents return on a share of a mutual fund held over the past 12
months. Assumes fund was purchased 1 year ago. Reflects effect of sales charges (at current rates), but not
redemption charges.

## Effective annual interest rate

An annual measure of the time value of money that fully reflects the effects of
compounding.

## Effective annual yield

annualized interest rate on a security computed using compound interest techniques.

## Employee stock fund

A firm-sponsored program that enables employees to purchase shares of the firm's
common stock on a preferential basis.

## Endowment funds

Investment funds established for the support of institutions such as colleges, private
schools, museums, hospitals, and foundations. The investment income may be used for the operation of the
institution and for capital expenditures.

## Equivalent annual annuity

The equivalent amount per year for some number of years that has a present
value equal to a given amount.

## Equivalent annual benefit

The equivalent annual annuity for the net present value of an investment project.

## Equivalent annual cash flow

Annuity with the same net present value as the company's proposed investment.

## Equivalent annual cost

The equivalent cost per year of owning an asset over its entire life.

## Federal funds

Non-interest bearing deposits held in reserve for depository institutions at their district Federal
Reserve Bank. Also, excess reserves lent by banks to each other.

## Federal funds market

The market where banks can borrow or lend reserves, allowing banks temporarily
short of their required reserves to borrow reserves from banks that have excess reserves.

## Federal funds rate

This is the interest rate that banks with excess reserves at a Federal Reserve district bank
charge other banks that need overnight loans. The Fed funds rate, as it is called, often points to the direction
of U.S. interest rates.

## Forward Fed funds

Fed funds traded for future delivery.

## Fund family

Set of funds with different investment objectives offered by one management company. In many
cases, investors may move their assets from one fund to another within the family at little or no cost.

## Fundamental analysis

Security analysis that seeks to detect misvalued securities by an analysis of the firm's
business prospects. Research analysis often focuses on earnings, dividend prospects, expectations for future
interest rates, and risk evaluation of the firm.

## Fundamental beta

The product of a statistical model to predict the fundamental risk of a security using not
only price data but other market-related and financial data.

## Fundamental descriptors

In the model for calculating fundamental beta, ratios in risk indexes other than
market variability, which rely on financial data other than price data.

## Funded debt

Debt maturing after more than one year.

## Funding ratio

The ratio of a pension plan's assets to its liabilities.

## Funding risk

Related: interest rate risk

## Funds From Operations (FFO)

Used by real estate and other investment trusts to define the cash flow from
trust operations. It is earnings with depreciation and amortization added back. A similar term increasingly
used is funds Available for Distribution (FAD), which is FFO less capital investments in trust property and
the amortization of mortgages.

## Global fund

A mutual fund that can invest anywhere in the world, including the U.S.

## Hedge fund

A fund that may employ a variety of techniques to enhance returns, such as both buying and
shorting stocks based on a valuation model.

## High-coupon bond refunding

Refunding of a high-coupon bond with a new, lower coupon bond.

## Income fund

A mutual fund providing for liberal current income from investments.

## Index fund

Investment fund designed to match the returns on a stockmarket index.

## International fund

A mutual fund that can invest only outside the United States.

## International Monetary Fund

An organization founded in 1944 to oversee exchange arrangements of
member countries and to lend foreign currency reserves to members with short-term balance of payment
problems.

## Liability funding strategies

Investment strategies that select assets so that cash flows will equal or exceed
the client's obligations.

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.

## Low-coupon bond refunding

Refunding of a low coupon bond with a new, higher coupon bond.

## Match fund

A bank is said to match fund a loan or other asset when it does so by buying (taking) a deposit of
the same maturity. The term is commonly used in the Euromarket.

## Money market fund

A mutual fund that invests only in short term securities, such as bankers' acceptances,
commercial paper, repurchase agreements and government bills. The net asset value per share is maintained at
\$1. 00. Such funds are not federally insured, although the portfolio may consist of guaranteed securities
and/or the fund may have private insurance protection.

## Mutual fund

Mutual funds are pools of money that are managed by an investment company. They offer
investors a variety of goals, depending on the fund and its investment charter. Some funds, for example, seek
to generate income on a regular basis. Others seek to preserve an investor's money. Still others seek to invest
in companies that are growing at a rapid pace. funds can impose a sales charge, or load, on investors when
they buy or sell shares. Many funds these days are no load and impose no sales charge. Mutual funds are
investment companies regulated by the Investment Company Act of 1940.
Related: open-end fund, closed-end fund.

## Mutual fund theorem

A result associated with the CAPM, asserting that investors will choose to invest their
entire risky portfolio in a market-index or mutual fund.

The net present value of the savings from a refunding.

## Net operating losses

Losses that a firm can take advantage of to reduce taxes.

## Net operating margin

The ratio of net operating income to net sales.

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.

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

## Nominal annual rate

An effective rate per period multiplied by the number of periods in a year.

## Nonrefundable

Not permitted, under the terms of indenture, to be refundable.

## Objective (mutual fund)

The fund's investment strategy category as stated in the prospectus. There are
more than 20 standardized categories.

## Open-end fund

Also called a mutual fund, an investment company that stands ready to sell new shares to the
public and to redeem its outstanding shares on demand at a price equal to an appropriate share of the value of
its portfolio, which is computed daily at the close of the market.

## Operating cash flow

Earnings before depreciation minus taxes. It measures the cash generated from
operations, not counting capital spending or working capital requirements.

## Operating cycle

The average time intervening between the acquisition of materials or services and the final
cash realization from those acquisitions.

## Operating exposure

Degree to which exchange rate changes, in combination with price changes, will alter a
company's future operating cash flows.

## Operating profit margin

The ratio of operating margin to net sales.

## Operating lease

Short-term, cancelable lease. A type of lease in which the period of contract is less than the
life of the equipment and the lessor pays all maintenance and servicing costs.

## Operating leverage

Fixed operating costs, so-called because they accentuate variations in profits.

## Operating risk

The inherent or fundamental risk of a firm, without regard to financial risk. The risk that is
created by operating leverage. Also called business risk.

## Overfunded pension plan

A pension plan that has a positive surplus (i.e., assets exceed liabilities).

Refunded bond.

## Private Export Funding Corporation (PEFCO)

Company that mobilizes private capital for financing the
export of big-ticket items by U.S. firms by purchasing at fixed interest rates the medium- to long-term debt
obligations of importers of U.S. products.

## Purchase fund

Resembles a sinking fund except that money is used only to purchase bonds if they are selling
below their par value.

## Pure index fund

A portfolio that is managed so as to perfectly replicate the performance of the market portfolio.

## Refundable

Eligible for refunding under the terms of indenture.

## Refunded bond

Also called a prerefunded bond, one that originally may have been issued as a general
obligation or revenue bond but that is now secured by an "escrow fund" consisting entirely of direct U.S.
government obligations that are sufficient for paying the bondholders.

## Refunding

The redemption of a bond with proceeds received from issuing lower-cost debt obligations
ranking equal to or superior to the debt to be redeemed.

## Regional fund

A mutual fund that invests in a specific geographical area overseas, such as Asia or Europe.

## Revenue fund

A fund accounting for all revenues from an enterprise financed by a municipal revenue bond.

## Short-run operating activities

Events and decisions concerning the short-term finance of a firm, such as
how much inventory to order and whether to offer cash terms or credit terms to customers.

## Single country fund

A mutual fund that invests in individual countries outside the United States.

## Sinking fund requirement

A condition included in some corporate bond indentures that requires the issuer to
retire a specified portion of debt each year. Any principal due at maturity is called the balloon maturity.

## Stated annual interest rate

The interest rate expressed as a per annum percentage, by which interest
payment is determined.

## Stopping curve refunding rate

A refunding rate that falls on the stopping curve.

## Surplus funds

Cash flow available after payment of taxes in the project.

## Term Fed Funds

Fed funds sold for a period of time longer than overnight.

## 12b-1 funds

Mutual funds that do not charge an upfront or back-end commission, but instead take out up to
1.25% of average daily fund assets each year to cover the costs of selling and marketing shares, an
arrangement allowed by the SEC's Rule 12b-I (passed in 1980).

## Two-fund separation theorem

The theoretical result that all investors will hold a combination of the riskfree
asset and the market portfolio.

## Underfunded pension plan

A pension plan that has a negative surplus (i.e., liabilities exceed assets).

## Unfunded debt

Debt maturing within one year (short-term debt). See: funded debt.

What was spent to run the non-sales and non-manufacturing part of a company, such as office salaries and interest paid on loans.

## OPERATING EXPENSES

The total amount that was spent to run a company this year.

## SELLING EXPENSES

What was spent to run the sales part of a company, such as sales salaries, travel, meals, and lodging for salespeople, and advertising.

## VARIABLE EXPENSES

Those that vary with the amount of goods you produce or sell. These may include utility bills, labor, etc.

## Annual Report

The report required by the Stock Exchange for all listed companies, containing the companyâ€™s financial statements.

## Expenses

The costs incurred in buying, making or producing goods and services.

## Operating profit

The profit made by the business for an accounting period, equal to gross profit less selling, finance, administration etc. expenses, but before deducting interest or taxation.

## Shareholdersâ€™ funds

The capital invested in a business by the shareholders, including retained profits.

## Accrued expenses payable

expenses that have to be recorded in order for the financial statements to be accurate. Accrued expenses usually do not involve the receipt of an invoice from the company providing the goods or services.

## Expenses

Costs involved in running the company.

## Prepaid expenses

expenses that have been paid for but have not yet been used up; examples are prepaid insurance and prepaid rent.

## accrued expenses payable

The account that records the short-term, noninterest-
bearing liabilities of a business that accumulate over time, such
as vacation pay owed to employees. This liability is different than
accounts payable, which is the liability account for bills that have been

## cash flow from operating activities, or cash flow from profit

This equals the cash inflow from sales during the period minus the cash
outflow for expenses during the period. Keep in mind that to measure
net income, generally accepted accounting principles require the use of
accrual-basis accounting. Starting with the amount of accrual-basis net
inventories, prepaid expenses, and operating liabilitiesâ€”and depreciation
expense is added back (as well as any other noncash outlay
expense)â€”to arrive at cash flow from profit, which is formally labeled
cash flow from operating activities in the externally reported statement
of cash flows.

## fixed expenses (costs)

expenses or costs that remain the same in amount,
or fixed, over the short run and do not vary with changes in sales volume
or sales revenue or other measures of business activity. Over the
longer run, however, these costs increase or decrease as the business
grows or declines. Fixed operating costs provide capacity to carry on
operations and make sales. Fixed manufacturing overhead costs provide
production capacity. Fixed expenses are a key pivot point for the analysis
of profit behavior, especially for determining the breakeven point and for
analyzing strategies to improve profit performance.

## operating activities

Includes all the sales and expense activities of a business.
But the term is very broad and inclusive; it is used to embrace all
types of activities engaged in by profit-motivated entities toward the
objective of earning profit. A bank, for instance, earns net income not
from sales revenue but from loaning money on which it receives interest
income. Making loans is the main revenue operating activity of banks.

## operating cash flow

See cash flow from operating activities.