Definition of big bath

big bath

A street-smart term that refers to the practice by many businesses
of recording very large lump-sum write-offs of certain assets or
recording large amounts for pending liabilities triggered by business
restructurings, massive employee layoffs, disposals of major segments of
the business, and other major traumas in the life of a business. Businesses
have been known to use these occasions to record every conceivable
asset write-off and/or liability write-up that they can think of in
order to clear the decks for the future. In this way a business avoids
recording expenses in the future, and its profits in the coming years will
be higher. The term is derisive, but investors generally seem very forgiving
regarding the abuses of this accounting device. But you never
know—investors may cast a more wary eye on this practice in the future.

Big Bath

A wholesale write-down of assets and accrual of liabilities in an effort to make the
balance sheet particularly conservative so that there will be fewer expenses to serve as a drag on future earnings.

Big Bang

The term applied to the liberalization in 1986 of the London Stock Exchange in which trading was
automated with the use of computers.

Big Board

A nickname for the New York Stock Exchange. Also known as The Exchange. More than 2,000
common and preferred stocks are traded. Founded in 1792, the NYSE is the oldest exchange in the United
States, and the largest. It is located on Wall Street in New York City.

markup

the period after an announcement of a takeover bid in which Stock prices typically rise until a merger or acquisition is made (or until it falls through).

runup

the period before a formal announcement of a takeover bid in which one or more bidders are either preparing to make an announcement or speculating that someone else will.

Absolute priority

Rule in bankruptcy proceedings whereby senior creditors are required to be paid in full
before junior creditors receive any payment.

Accelerated cost recovery system (ACRS)

Schedule of depreciation rates allowed for tax purposes.

Accounting exposure

The change in the value of a firm's foreign currency denominated accounts due to a
change in Exchange rates.

Accounting earnings

earnings of a firm as reported on its income statement.

Accounting insolvency

Total liabilities exceed total assets. A firm with a negative net worth is insolvent on
the books.

Accounting liquidity

The ease and quickness with which assets can be converted to cash.

Accrual bond

A bond on which interest accrues, but is not paid to the investor during the time of accrual.
The amount of accrued interest is added to the remaining principal of the bond and is paid at maturity.

Acquisition of assets

A merger or consolidation in which an acquirer purchases the selling firm's assets.

Acquisition of stock

A merger or consolidation in which an acquirer purchases the acquiree's Stock.

Adjustable rate preferred stock (ARPS)

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

American Stock Exchange (AMEX)

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

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.

Asset

Any possession that has value in an Exchange.

Asset/equity ratio

The ratio of total assets to Stockholder equity.

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.

Asset activity ratios

Ratios that measure how effectively the firm is managing its assets.

Asset allocation decision

The decision regarding how an institution's funds should be distributed among the
major classes of assets in which it may invest.

Asset-backed security

A security that is collateralized by loans, leases, receivables, or installment contracts
on personal property, not real estate.

Asset-based financing

Methods of financing in which lenders and equity investors look principally to the
cash flow from a particular asset or set of assets for a return on, and the return of, their financing.

Asset classes

Categories of assets, such as Stocks, bonds, real estate and foreign securities.

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 for asset swap

Creditors Exchange the debt of one defaulting borrower for the debt of another
defaulting borrower.

Asset pricing model

A model for determining the required rate of return on an asset.

Asset substitution

A firm's investing in assets that are riskier than those that the debtholders expected.

Asset substitution problem

Arises when the Stockholders substitute riskier assets for the firm's existing
assets and expropriate value from the debtholders.

Asset swap

An interest rate swap used to alter the cash flow characteristics of an institution's assets so as to
provide a better match with its iabilities.

Asset turnover

The ratio of net sales to total assets.

Asset pricing model

A model, such as the Capital asset Pricing Model (CAPM), that determines the required
rate of return on a particular asset.

Assets

A firm's productive resources.

Assets requirements

A common element of a financial plan that describes projected capital spending and the
proposed uses of net working capital.

Auction rate preferred stock (ARPS)

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

Automated Clearing House (ACH)

A collection of 32 regional electronic interbank networks used to
process transactions electronically with a guaranteed one-day bank collection float.

Average accounting return

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

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
paydowns.

Away

A trade, quote, or market that does not originate with the dealer in question, e.g., "the bid is 98-10
away from me."

Back-up

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.

Balance of payments

A statistical compilation formulated by a sovereign nation of all economic transactions
between residents of that nation and residents of all other nations during a stipulated period of time, usually a
calendar year.

Balance of trade

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

Balance sheet

Also called the statement of financial condition, it is a summary of the assets, liabilities, and
owners' equity.

Balance sheet exposure

See:accounting exposure.

Balance sheet identity

Total assets = Total liabilities + Total Stockholders' Equity

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.

Bankruptcy

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

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.

Basic balance

In a balance of payments, the basic balance is the net balance of the combination of the current
account and the capital account.

Basic business strategies

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

Best-efforts sale

A method of securities distribution/ underwriting in which the securities firm agrees to sell
as much of the offering as possible and return any unsold shares to the issuer. As opposed to a guaranteed or
fixed price sale, where the underwriter agrees to sell a specific number of shares (with the securities firm
holding any unsold shares in its own account if necessary).

Beta equation (Stocks)

The beta of a Stock 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 (24-60 months)
x = rate of return for the S&P 500 Index
y = rate of return for the Stock

Bill of exchange

General term for a document demanding payment.

Block house

Brokerage firms that help to find potential buyers or sellers of large block trades.

Bottom-up equity management style

A management style that de-emphasizes the significance of economic
and market cycles, focusing instead on the analysis of individual Stocks.

British clearers

The large clearing banks that dominate deposit taking and short-term lending in the domestic
sterling market.

Builder buydown loan

A mortgage loan on newly developed property that the builder subsidizes during the
early years of the development. The builder uses cash to buy down the mortgage rate to a lower level than the
prevailing market loan rate for some period of time. The typical buydown is 3% of the interest-rate amount
for the first year, 2% for the second year, and 1% for the third year (also referred to as a 3-2-1 buydown).

Business cycle

Repetitive cycles of economic expansion and recession.

Business failure

A business that has terminated with a loss to creditors.

Business risk

The risk that the cash flow of an issuer will be impaired because of adverse economic
conditions, making it difficult for the issuer to meet its operating expenses.

Buy limit order

A conditional trading order that indicates a security may be purchased only at the designated
price or lower.
Related: Sell limit order.

Buydowns

Mortgages in which monthly payments consist of principal and interest, with portions of these
payments during the early period of the loan being provided by a third party to reduce the borrower's monthly
payments.

Buyout

Purchase of a controlling interest (or percent of shares) of a company's Stock. A leveraged buy-out is
done with borrowed money.

Capital asset pricing model (CAPM)

An economic theory that describes the relationship between risk and
expected return, and serves as a model for the pricing of risky securities. The CAPM asserts that the only risk
that is priced by rational investors is systematic risk, because that risk cannot be eliminated by diversification.
The CAPM says that the expected return of a security or a portfolio is equal to the rate on a risk-free security
plus a risk premium.

Cash delivery

The provision of some futures contracts that requires not delivery of underlying assets but
settlement according to the cash value of the asset.

Certainty equivalent

An amount that would be accepted in lieu of a chance at a possible higher, but
uncertain, amount.

Chicago Mercantile Exchange (CME)

A not-for-profit corporation owned by its members. Its primary
functions are to provide a location for trading futures and options, collect and disseminate market information,
maintain a clearing mechanism and enforce trading rules.

Clear

A trade is carried out by the seller delivering securities and the buyer delivering funds in proper form.
A trade that does not clear is said to fail.

Clear a position

To eliminate a long or short position, leaving no ownership or obligation.

Clearing House Automated Payments System (CHAPS)

A computerized clearing system for sterling funds
that began operations in 1984. It includes 14 member banks, nearly 450 participating banks, and is one of the
clearing companies within the structure of the Association for Payment clearing Services (APACS).

Clearing House Interbank Payments System (CHIPS)

An international wire transfer system for high-value
payments operated by a group of major banks.

Clearing member

A member firm of a clearing house. Each clearing member must also be a member of the
Exchange. Not all members of the Exchange, however, are members of the clearing organization. All trades of
a non-clearing member must be registered with, and eventually settled through, a clearing member.

Clearing house / Clearinghouse

An adjunct to a futures Exchange through which transactions executed its floor are settled by a
process of matching purchases and sales. A clearing organization is also charged with the proper conduct of
delivery procedures and the adequate financing of the entire operation.

Coefficient of determination

A measure of the goodness of fit of the relationship between the dependent and
independent variables in a regression analysis; for instance, the percentage of variation in the return of an
asset explained by the market portfolio return.

Commission house

A firm which buys and sells future contracts for customer accounts. Related: futures
commission merchant, omnibus account.

Commodities Exchange Center (CEC)

The location of five New York futures Exchanges: Commodity
Exchange, Inc. (COMEX), the New York Mercantile Exchange (NYMEX), the New York Cotton Exchange,
the Coffee, Sugar and Cocoa Exchange (CSC), and the New York futures Exchange (NYFE). common size
statement A statement in which all items are expressed as a percentage of a base figure, useful for purposes of
analyzing trends and the changing relationship between financial statement items. For example, all items in
each year's income statement could be presented as a percentage of net sales.

Common stock

these are securities that represent equity ownership in a company. Common shares let an
investor vote on such matters as the election of directors. they also give the holder a share in a company's
profits via dividend payments or the capital appreciation of the security.

Common stock/other equity

Value of outstanding common shares at par, plus accumulated retained
earnings. Also called shareholders' equity.

Common stock equivalent

A convertible security that is traded like an equity issue because the optioned
common Stock is trading high.

Common stock market

The market for trading equities, not including preferred Stock.

Common stock ratios

Ratios that are designed to measure the relative claims of Stockholders to earnings
(cash flow per share), and equity (book value per share) of a firm.

Comparison universe

The collection of money managers of similar investment style used for assessing
relative performance of a portfolio manager.

Compensating balance

An excess balance that is left in a bank to provide indirect compensation for loans
extended or services provided.

Conflict between bondholders and stockholders

these two groups may have interests in a corporation that
conflict. sources of conflict include dividends, distortion of investment, and underinvestment. Protective
covenants work to resolve these conflicts.

Consensus forecast

The mean of all financial analysts' forecasts for a company.

Consol

A type of bond that has an infinite life but is not issued in the U.S. capital markets.

Consolidation

The combining of two or more firms to form an entirely new entity.

Consortium banks

A merchant banking subsidiary set up by several banks that may or may not be of the
same nationality. Consortium banks are common in the Euromarket and are active in loan syndication.

Consumer credit

Credit granted by a firm to consumers for the purchase of goods or services. Also called
retail credit.

Consumer Price Index (CPI)

The CPI, as it is called, measures the prices of consumer goods and services and is a
measure of the pace of U.S. inflation. The U.S.Department of Labor publishes the CPI very month.

Contingent pension liability

Under ERISA, the firm is liable to the plan participants for up to 39% of the net
worth of the firm.

Convertible exchangeable preferred stock

Convertible preferred Stock that may be Exchanged, at the
issuer's option, into convertible bonds that have the same conversion features as the convertible preferred
Stock.

Convertible preferred stock

Preferred Stock that can be converted into common Stock at the option of the holder.

Coupon

The periodic interest payment made to the bondholders during the life of the bond.

Coupon equivalent yield

True interest cost expressed on the basis of a 365-day year.

Coupon payments

A bond's interest payments.

Coupon rate

In bonds, notes or other fixed income securities, the stated percentage rate of interest, usually
paid twice a year.

Cramdown

The ability of the bankruptcy court to confirm a plan of reorganization over the objections of
some classes of creditors.

Cross-border risk

refers to the volatility of returns on international investments caused by events associated
with a particular country as opposed to events associated solely with a particular economic or financial agent.

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