Definition of business intelligence (BI) system

business intelligence (BI) system

a formal process for gathering and analyzing information and producing intelligence to meet decision making needs; requires information about
internal processes as well as knowledge, technologies, and competitors

DLOM (discount for lack of marketability)

an amount or percentage deducted from an equity interest to reflect lack of marketability.

QMDM (quantitative marketability discount model)

model for calculating DLOM for minority interests r the discount rate

Accelerated cost recovery system (ACRS)

Schedule of depreciation rates allowed for tax purposes.

Arbitrage

The simultaneous buying and selling of a security at two different prices in two different markets,
resulting in profits without risk. Perfectly efficient markets present no arbitrage opportunities. Perfectly
efficient markets seldom exist.

Arbitrage Pricing Theory (APT)

An alternative model to the capital asset pricing model developed by
Stephen Ross and based purely on arbitrage arguments.

Arbitrage-free option-pricing models

Yield curve option-pricing models.

Arbitrageurs

People who search for and exploit arbitrage opportunities.

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.

Attribute bias

The tendency of stocks preferred by the dividend discount model to share certain equity
attributes such as low price-earnings ratios, high dividend yield, high book-value ratio or membership in a
particular industry sector.

Availability float

Checks deposited by a company that have not yet been cleared.

Bank for International Settlements (BIS)

An international bank headquartered in Basel, Switzerland, which
serves as a forum for monetary cooperation among several European central banks, the Bank of Japan, and the
U.S. Federal Reserve system. Founded in 1930 to handle the German payment of World War I reparations, it
now monitors and collects data on international banking activity and promulgates rules concerning
international bank regulation.

Base probability of loss

The probability of not achieving a portfolio expected return.

Basic business strategies

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

Biased expectations theories

Related: pure expectations theory.

Bid price

This is the quoted bid, or the highest price an investor is willing to pay to buy a security. Practically
speaking, this is the available price at which an investor can sell shares of stock. Related: Ask , offer.

Bid-asked

spread The difference between the bid and asked prices.

Bidder

A firm or person that wants to buy a firm or security.

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.

Bill of exchange

General term for a document demanding payment.

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.

Binomial option pricing model

An option pricing model in which the underlying asset can take on only two
possible, discrete values in the next time period for each value that it can take on in the preceding time period.

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.

Cash management bill

Very short maturity bills that the Treasury occasionally sells because its cash
balances are down and it needs money for a few days.

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.

Combination matching

Also called horizon matching, a variation of multiperiod immunization and cash
flow matching in which a portfolio is created that is always duration matched and also cash-matched in the
first few years.

Combination strategy

A strategy in which a put and with the same strike price and expiration are either both
bought or both sold. Related: Straddle

Competitive bidding

A securities offering process in which securities firms submit competing bids to the
issuer for the securities the issuer wishes to sell.

Contingent pension liability

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

Convertibility

The degree of freedom to exchange a currency without government restrictions or controls.

Covered interest arbitrage

A portfolio manager invests dollars in an instrument denominated in a foreign
currency and hedges his resulting foreign exchange risk by selling the proceeds of the investment forward for
dollars.

Cumulative probability distribution

A function that shows the probability that the random variable will
attain a value less than or equal to each value that the random variable can take on.

Currency arbitrage

Taking advantage of divergences in exchange rates in different money markets by
buying a currency in one market and selling it in another market.

Current liabilities

Amount owed for salaries, interest, accounts payable and other debts due within 1 year.

Due bill

An instrument evidencing the obligation of a seller to deliver securities sold to the buyer.
Occasionally used in the bill market.

Dupont system of financial control

Highlights the fact that return on assets (ROA) can be expressed in terms
of the profit margin and asset turnover.

Earnings before interest and taxes (EBIT)

A financial measure defined as revenues less cost of goods sold
and selling, general, and administrative expenses. In other words, operating and non-operating profit before
the deduction of interest and income taxes.

European Monetary System (EMS)

An exchange arrangement formed in 1979 that involves the currencies
of European Union member countries.

Federal Reserve System

The central bank of the U.S., established in 1913, and governed by the Federal
Reserve Board located in Washington, D.C. The system includes 12 Federal Reserve Banks and is authorized
to regulate monetary policy in the U.S. as well as to supervise Federal Reserve member banks, bank holding
companies, international operations of U.S.banks, and U.S.operations of foreign banks.

Imputation tax system

Arrangement by which investors who receive a dividend also receive a tax credit for
corporate taxes that the firm has paid.

Index arbitrage

An investment/trading strategy that exploits divergences between actual and theoretical
futures prices.

Invoice billing

billing system in which the invoices are sent off at the time of customer orders are all separate
bills to be paid.

Just-in-time inventory systems

systems that schedule materials/inventory to arrive exactly as they are
needed in the production process.

Liability

A financial obligation, or the cash outlay that must be made at a specific time to satisfy the
contractual terms of such an obligation.

Liability funding strategies

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

Liability swap

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

Limited liability

Limitation of possible loss to what has already been invested.

Limited-liability instrument

A security, such as a call option, in which the owner can only lose his initial
investment.

Long-term liabilities

Amount owed for leases, bond repayment and other items due after 1 year.

Limited-liability instrument

A security, such as a call option, in which the owner can only lose his initial investment.

Market segmentation theory or preferred habitat theory

A biased expectations theory that asserts that the
shape of the yield curve is determined by the supply of and demand for securities within each maturity sector.

Marketability

A negotiable security is said to have good marketability if there is an active secondary market
in which it can easily be resold.

Multirule system

A technical trading strategy that combines mechanical rules, such as the CRISMA
(cumulative volume, relative strength, moving average) Trading system of Pruitt and White.

Noncompetitive bid

In a Treasury auction, bidding for a specific amount of securities at the price, whatever it
may turn out to be, equal to the average price of the accepted competitive bids.

Nondiversifiability of human capital

The difficulty of diversifying one's human capital (the unique
capabilities and expertise of individuals) and employment effort.

Nonsystematic risk

Nonmarket or firm-specific risk factors that can be eliminated by diversification. Also
called unique risk or diversifiable risk. systematic risk refers to risk factors common to the entire economy.

Normal probability distribution

A probability distribution for a continuous random variable that is forms a
symmetrical bell-shaped curve around the mean.

Other long term liabilities

Value of leases, future employee benefits, deferred taxes and other obligations
not requiring interest payments that must be paid over a period of more than 1 year.

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.

Preferred habitat theory

A biased expectations theory that believes the term structure reflects the
expectation of the future path of interest rates as well as risk premium. However, the theory rejects the
assertion that the risk premium must rise uniformly with maturity. Instead, to the extent that the demand for
and supply of funds does not match for a given maturity range, some participants will shift to maturities
showing the opposite imbalances. As long as such investors are compensated by an appropriate risk premium
whose magnitude will reflect the extent of aversion to either price or reinvestment risk.

Probability

The relative likelihood of a particular outcome among all possible outcomes.

Probability density function

The probability function for a continuous random variable.

Probability distribution

Also called a probability function, a function that describes all the values that the random variable can
take and the probability associated with each.

Probability function

A function that assigns a probability to each and every possible outcome.

Profitability index

The present value of the future cash flows divided by the initial investment. Also called
the benefit-cost ratio.

Profitability ratios

Ratios that focus on the profitability of the firm. Profit margins measure performance
with relation to sales. Rate of return ratios measure performance relative to some measure of size of the
investment.

Progressive tax system

A tax system wherein the average tax rate increases for some increases in income but
never decreases with an increase in income.

Q ratio or Tobin's Q ratio

Market value of a firm's assets divided by replacement value of the firm's assets.
Quadratic programming Variant of linear programming whereby the equations are quadratic rather than linear.

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.

Risk arbitrage

Speculation on perceived mispriced securities, usually in connection with merger and
acquisition deals. Mike Donatelli, John Demasi, Frank Cohane, and Scott Lewis are all hardcore arbs. They
had a huge BT/MCI position in the summer of 1997, and came out smelling like roses.

Risk controlled arbitrage

A self-funding, self-hedged series of transactions that generally utilize mortgage
securities as the primary assets.

Riskless arbitrage

The simultaneous purchase and sale of the same asset to yield a profit.

SBIC

Small business Investment Company.

Split-rate tax system

A tax system that taxes retained earnings at a higher rate than earnings that are
distributed as dividends.

Statement billing

billing method in which the sales for a period such as a month (for which a customer also
receives invoices) are collected into a single statement and the customer must pay all of the invoices
represented on the statement.

Structured arbitrage transaction

A self-funding, self-hedged series of transactions that usually utilize
mortgage securities as the primary assets.

Subjective probabilities

Probabilities that are determined subjectively (for example, on the basis of
judgement rather than using statistical sampling).

Systematic

Common to all businesses.

Systematic risk

Also called undiversifiable risk or market risk, the minimum level of risk that can be
obtained for a portfolio by means of diversification across a large number of randomly chosen assets. Related:
unsystematic risk.

Systematic risk principle

Only the systematic portion of risk matters in large, well-diversified portfolios.
The, expected returns must be related only to systematic risks.

Tax anticipation bills (TABs)

Special bills that the Treasury occasionally issues that mature on corporate
quarterly income tax dates and can be used at face value by corporations to pay their tax liabilities.

Tobin's Q

Market value of assets divided by replacement value of assets. A Tobin's Q ratio greater than 1
indicates the firm has done well with its investment decisions.

Treasury bills

Debt obligations of the U.S. Treasury that have maturities of one year or less. Maturities for Tbills
are usually 91 days, 182 days, or 52 weeks.

Triangular arbitrage

Striking offsetting deals among three markets simultaneously to obtain an arbitrage profit.

Two-tier tax system

A method of taxation in which the income going to shareholders is taxed twice.

Unbiased predictor

A theory that spot prices at some future date will be equal to today's forward rates.

Unlimited liability

Full liability for the debt and other obligations of a legal entity. The general partners of a
partnership have unlimited liability.

Unsystematic risk

Also called the diversifiable risk or residual risk. The risk that is unique to a company
such as a strike, the outcome of unfavorable litigation, or a natural catastrophe that can be eliminated through diversification.
Related: systematic risk

U.S. Treasury bill

U.S. government debt with a maturity of less than a year.

Current liabilities

bills a company must pay within the next twelve months.

LIABILITIES

What a company owes to its creditors. In other words, debts.

LONG-TERM LIABILITIES

bills that are payable in more than one year, such as a mortgage or bonds.

MACRS (Modified Accelerated Cost Recovery System)

A depreciation method created by the IRS under the Tax Reform Act of 1986. Companies must use it to depreciate all plant and equipment assets installed after December 31, 1986 (for tax purposes).

Accountability

The process of satisfying stakeholders in the organization that managers have acted in the best interests of the stakeholders, a result of the stewardship function of managers, which takes place through accounting.

Accounting system

A set of accounts that summarize the transactions of a business that have been recorded on source documents.

Bill of materials

A listing of all the materials and quantities that go to make up a completed product.

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