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Definition of Benchmark

Benchmark Image 1

Benchmark

A standard by which something may be compared and measured


Benchmark

The performance of a predetermined set of securities, for comparison purposes. Such sets may be
based on published indexes or may be customized to suit an investment strategy.



Related Terms:

Benchmark error

Use of an inappropriate proxy for the true market portfolio.


Benchmark interest rate

Also called the base interest rate, it is the minimum interest rate investors will
demand for investing in a non-Treasury security. It is also tied to the yield to maturity offered on a
comparable-maturity Treasury security that was most recently issued ("on-the-run").


Benchmark issues

Also called on-the-run or current coupon issues or bellwether issues. In the secondary
market, it's the most recently auctioned Treasury issues for each maturity.


benchmarking

the process of investigating how others do something better so that the investigating company can imitate,
and possibly improve upon, their techniques



Customized benchmarks

A benchmark that is designed to meet a client's requirements and long-term
objectives.


Posttrade benchmarks

Prices after the decision to trade.


Benchmark Image 2

Pre-trade benchmarks

Prices occurring before or at the decision to trade.


process benchmarking

benchmarking that focuses on practices and how the best-in-class companies achieved their results


results benchmarking

benchmarking in which an end product or service is examined; the focus is on product/service specifications and performance results


Sharpe benchmark

A statistically created benchmark that adjusts for a managers' index-like tendencies.


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.


Base interest rate

Related: benchmark interest rate.


Bellwether issues

Related:benchmark issues.


Break-even payment rate

The prepayment rate of a MBS coupon that will produce the same CFY as that of
a predetermined benchmark MBS coupon. Used to identify for coupons higher than the benchmark coupon
the prepayment rate that will produce the same CFY as that of the benchmark coupon; and for coupons lower
than the benchmark coupon the lowest prepayment rate that will do so.


Current-coupon issues

Related: benchmark issues


Equity cap

An agreement in which one party, for an upfront premium, agrees to compensate the other at
specific time periods if a designated stock market benchmark is greater than a predetermined level.


Equity floor

An agreement in which one party agrees to pay the other at specific time periods if a specific
stock market benchmark is less than a predetermined level.



Floating-rate contract

A guaranteed investment contract where the credit rating is tied to some variable
("floating") interest rate benchmark, such as a specific-maturity Treasury yield.


Hurdle Rate

A pre-determined benchmark rate of return. If the rate of return expected from the project or investment falls below the benchmark, the projected investment will no longer be accepted.


Inverse floating rate note

A variable rate security whose coupon rate increases as a benchmark interest rate declines.


Normal portfolio

A customized benchmark that includes all the securities from which a manager normally
chooses, weighted as the manager would weight them in a portfolio.


Performance evaluation

The evaluation of a manager's performance which involves, first, determining
whether the money manager added value by outperforming the established benchmark (performance
measurement) and, second, determining how the money manager achieved the calculated return (performance
attribution analysis).


prime rate

benchmark interest rate charged by banks.


Reference rate

A benchmark 'interest rate (such as LIBOR), used to specify conditions of an interest rate
swap or an interest rate agreement.


Replicating portfolio

A portfolio constructed to match an index or benchmark.


Spread

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.


standard

a model or budget against which actual results are
compared and evaluated; a benchmark or norm used for
planning and control purposes



Tracking error

In an indexing strategy, the difference between the performance of the benchmark and the
replicating portfolio.


weighted-average cost of capital

Weighted means that the proportions of
debt capital and equity capital of a business are used to calculate its
average cost of capital. This key benchmark rate depends on the interest
rate(s) on its debt and the ROE goal established by a business. This is a
return-on-capital rate and can be applied either on a before-tax basis or
an after-tax basis. A business should earn at least its weighted-average
rate on the capital invested in its assets. The weighted-average cost-ofcapital
rate is used as the discount rate to calculate the present value
(PV) of specific investments.


Yield curve

Graph of yields (vertical axis) of a particular type of security
versus the time to maturity (horizontal axis). This curve usually slopes
upward, indicating that investors usually expect to receive a premium for
securities that have a longer time to maturity. The benchmark yield curve is
for U.S. Treasury securities with maturities ranging from three months to 30
years. See Term structure.



 

 

 

 

 

 

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