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Due Diligence

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Definition of Due Diligence

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Due Diligence

The process of systematically evaluating information, to identify risks and issues relating to a proposed transaction.(i.e. verify that information is what it is proposed to be).



Related Terms:

Comprehensive due diligence investigation

The investigation of a firm's business in conjunction with a
securities offering to determine whether the firm's business and financial situation and its prospects are
adequately disclosed in the prospectus for the offering.


Letter of Intent

A document signifying genuine interest in reaching a final agreement, conditional upon the results of more detailed due diligence and negotiations.


Annuity due

An annuity with n payments, wherein the first payment is made at time t = 0 and the last
payment is made at time t = n - 1.


Annuity Due

Annuity where the payments are to be made at the beginning of
each period


annuity due

a series of equal cash flows being received or paid at the beginning of a period



annuity due

Level stream of cash flows starting immediately.


Due bill

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


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Accumulated Other Comprehensive Income

Cumulative gains or losses reported in shareholders'
equity that arise from changes in the fair value of available-for-sale securities, from the
effects of changes in foreign-currency exchange rates on consolidated foreign-currency financial
statements, certain gains and losses on financial derivatives, and from adjustments for underfunded
pension plans.


Letter of comment

A communication to the firm from the SEC that suggests changes to its registration
statement.


Letter of credit (L/C)

A form of guarantee of payment issued by a bank used to guarantee the payment of
interest and repayment of principal on bond issues.


Letter stock

Privately placed common stock, so-called because the SEC requires a letter from the purchaser
stating that the stock is not intended for resale.


Letters of Credit

A letter of credit is a guarantee of payment by a bank (issuing institution)to a third party for a specific amount of money, if certain conditions are met.


Shareholders' letter

A section of an annual report where one can find jargon-free discussions by
management of successful and failed strategies which provides guidance for the probing of the rest of the
report.


Side Letter

A separate agreement that is used to clarify or modify the terms of a sales agreement.
Side letters become a problem for revenue recognition when they undermine a sales agreement
by effectively negating some or all of an agreement's underlying terms and are maintained
outside of normal reporting channels.


Accrued interest

The accumulated coupon interest earned but not yet paid to the seller of a bond by the
buyer (unless the bond is in default).


Accrued Interest

The amount of interest accumulated on a debt security between
interest paying dates


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Accrued Interest

The amount of interest owing but not paid.


Affirmative covenant

A bond covenant that specifies certain actions the firm must take.



Amortizing interest rate swap

Swap in which the principal or national amount rises (falls) as interest rates
rise (decline).


Annuity due

An annuity with n payments, wherein the first payment is made at time t = 0 and the last
payment is made at time t = n - 1.


Annuity Due

Annuity where the payments are to be made at the beginning of
each period


annuity due

a series of equal cash flows being received or paid at the beginning of a period


annuity due

Level stream of cash flows starting immediately.


Asset-Backed Securities

Bond or note secured by assets of company.


Asymmetric information

information that is known to some people but not to other people.


Base interest rate

Related: Benchmark interest rate.


Basic business strategies

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


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Bellwether issues

Related:Benchmark issues.



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.


Best-interests-of-creditors test

The requirement that a claim holder voting against a plan of reorganization
must receive at least as much as he would have if the debtor were liquidated.


Bond agreement

A contract for privately placed debt.


Book-entry securities

The Treasury and federal agencies are moving to a book-entry system in which securities are not represented by engraved pieces of paper but are maintained in computerized records at the
Fed in the names of member banks, which in turn keep records of the securities they own as well as those they
are holding for customers. In the case of other securities where a book-entry has developed, engraved
securities do exist somewhere in quite a few cases. These securities do not move from holder to holder but are
usually kept in a central clearinghouse or by another agent.


Bretton Woods Agreement

An agreement signed by the original United Nations members in 1944 that
established the International Monetary Fund (IMF) and the post-World War II international monetary system
of fixed exchange rates.


Business cycle

Repetitive cycles of economic expansion and recession.


Business Cycle

Fluctuations of GDP around its long-run trend, consisting of recession, trough, expansion, and peak.


Business Expansion Investment

The use of capital to create more money through the addition of fixed assets or through income producing vehicles.


Business failure

A business that has terminated with a loss to creditors.


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


business process reengineering (BPR)

the process of combining information technology to create new and more effective
business processes to lower costs, eliminate unnecessary
work, upgrade customer service, and increase
speed to market


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.


business-value-added activity

an activity that is necessary for the operation of the business but for which a customer would not want to pay


Buy/Sell Agreement

This is an agreement entered into by the owners of a business to define the conditions under which the interests of each shareholder will be bought and sold. The agreement sets the value of each shareholders interest and stipulates what happens when one of the owners wishes to dispose of his/her interest during his/her lifetime as well as disposal of interest upon death or disability. Life insurance, critical illness coverage and disability insurance are major considerations to help fund this type of agreement.


Capitalized interest

interest that is not immediately expensed, but rather is considered as an asset and is then
amortized through the income statement over time.


Capitalized Interest

interest incurred during the construction period on monies invested in
assets under construction that is added to the cost of the assets.


Cash deficiency agreement

An agreement to invest cash in a project to the extent required to cover any cash
deficiency the project may experience.


Cash flow after interest and taxes

Net income plus depreciation.


Cash transaction

A transaction where exchange is immediate, as contrasted to a forward contract, which
calls for future delivery of an asset at an agreed-upon price.


Changes in Financial Position

Sources of funds internally provided from operations that alter a company's
cash flow position: depreciation, deferred taxes, other sources, and capital expenditures.


chief financial officer (CFO)

Officer who oversees the treasurer and controller and sets overall financial strategy.


Commercial Business Loan (Credit Insurance)

An agreement between a creditor and a borrower, where the creditor has loaned an amount to the borrower for business purposes.


Competitive offering

An offering of securities through competitive bidding.


Compound interest

interest paid on previously earned interest as well as on the principal.


Compound Interest

interest paid on principal and on interest earned in previous
periods


compound interest

a method of determining interest in which interest that was earned in prior periods is added to the original investment so that, in each successive period, interest is earned on both principal and interest


compound interest

interest earned on interest.


Compound Interest

interest earned on an investment at periodic intervals and added to principal and previous interest earned. Each time new interest earned is calculated it is on a combined total of principal and previous interest earned. Essentially, interest is paid on top of interest.


Concession agreement

An understanding between a company and the host government that specifies the
rules under which the company can operate locally.


Conditional Buyer

One of two parties to a conditional sale agreement, the other being the conditional seller.


Conditional Sale

A type of agreement to sell whereby a seller retains title to goods sold and delivered to a purchaser until full payment has been made.


Conditional Sale Agreement

An agreement entered into between a conditional buyer and a conditional seller setting out the terms under which goods change hands.


Conditional sales contracts

Similar to equipment trust certificates except that the lender is either the
equipment manufacturer or a bank or finance company to whom the manufacturer has sold the conditional
sales contract.


Conditional Seller

One of two parties to a conditional sale agreement, the other being the conditional buyer.


Confidentiality Agreement

A legal document whereby the one party, usually the prospective investor, pledges to keep strictly confidential, and return on request, any and all information provided by the entrepreneur seeking funding.


Confirmation

he written statement that follows any "trade" in the securities markets. Confirmation is issued
immediately after a trade is executed. It spells out settlement date, terms, commission, etc.


Corporate financial management

The application of financial principals within a corporation to create and
maintain value through decision making and proper resource management.


Corporate financial planning

financial planning conducted by a firm that encompasses preparation of both
long- and short-term financial plans.


Corporate processing float

The time that elapses between receipt of payment from a customer and the
depositing of the customer's check in the firm's bank account; the time required to process customer
payments.


cost-benefit analysis the analytical process of comparing the

relative costs and benefits that result from a specific course
of action (such as providing information or investing in a
project)


costs of financial distress

Costs arising from bankruptcy or distorted business decisions before bankruptcy.


Country financial risk

The ability of the national economy to generate enough foreign exchange to meet
payments of interest and principal on its foreign debt.


Coupon

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


Coupon

Detachable certificate attached to a bond that shows the amount of
interest payable at regular intervals, usually semi-annually.Originally
coupons were actually attached to the bonds and had to be cut off or “clipped”
to redeem them and receive the interest payment.


coupon

The interest payments paid to the bondholder.


Coupon

The annual interest payment associated with a bond.


Coupon Bond

Any bond with a coupon. Contrast with discount bond.


Coupon / Coupons

The periodic interest payment(s) made by the issuer of a bond
(debt security). Calculated by multiplying the face value of the
security by the coupon rate.


Coupon dates

The dates when the coupons are paid. Typically a bond pays
coupons annually or semi-annually.


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.


Coupon Rate

The rate of interest paid on a debt security. Generally stated on an
annual basis, even if the payments are made at some other
interval.


Coupon rate

The nominal interest rate that the issuer promises to pay the
buyer of a bond.


coupon rate

Annual interest payment as a percentage of face value.


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.


Current coupon

A bond selling at or close to par, that is, a bond with a coupon close to the yields currently
offered on new bonds of a similar maturity and credit risk.


Current-coupon issues

Related: Benchmark issues


Daily Interest Accumulation

Account in which interest is accrued daily and credited to the account at the end of a specified time.


Debt securities

IOUs created through loan-type transactions - commercial paper, bank CDs, bills, bonds, and
other instruments.


Detailed Program

Design In software development, a detailed step-by-step plan for completing the software.


Diffusion process

A conception of the way a stock's price changes that assumes that the price takes on all
intermediate values. dirty price. Related: full price


Discount securities

Non-interest-bearing money market instruments that are issued at a discount and
redeemed at maturity for full face value, e.g. U.S. Treasury bills.


Documented discount notes

Commercial paper backed by normal bank lines plus a letter of credit from a
bank stating that it will pay off the paper at maturity if the borrower does not. Such paper is also referred to as
LOC (letter of credit) paper.


Double-tax agreement

agreement between two countries that taxes paid abroad can be offset against
domestic taxes levied on foreign dividends.


Dual-currency issues

Eurobonds that pay coupon interest in one currency but pay the principal in a different
currency.


Dual syndicate equity offering

An international equity placement where the offering is split into two
tranches - domestic and foreign - and each tranche is handled by a separate lead manager.


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 income tax (EBIT)

A measure of profit that
equals sales revenue for the period minus cost-of-goods-sold expense
and all operating expenses—but before deducting interest and income
tax expenses. It is a measure of the operating profit of a business before
considering the cost of its debt capital and income tax.


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.


Earnings before interest and taxes (EBIT)

The operating profit before deducting interest and tax.


Earnings before interest, taxes, depreciation and amortization (EBITDA)

The operating profit before deducting interest, tax, depreciation and amortization.


Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)

An earningsbased measure that, for many, serves as a surrogate for cash flow. Actually consists of working
capital provided by operations before interest and taxes.


Effective annual interest rate

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


effective annual interest rate

interest rate that is annualized using compound interest.


Effective Interest Rate

The rate of interest actually earned on an investment. It is
calculated as the ratio of the total amount of interest actually
earned for one year divided by the amount of the principal.


Emerging Issues Task Force (EITF)

A special committee of the financial Accounting Standards Board established to reach consensus of how to account for new and unusual financial transactions that have the potential for creating differing financial reporting practices.


Emerging Issues Task Force (EITF)

A separate committee within the financial Accounting Standards Board composed of 13 members representing CPA firms and preparers of financial statements
whose purpose is to reach a consensus on how to account for new and unusual financial transactions
that have the potential for creating differing financial reporting practices.


Equilibrium rate of interest

The interest rate that clears the market. Also called the market-clearing interest
rate.


Equity contribution agreement

An agreement to contribute equity to a project under certain specified
conditions.


Euroequity issues

securities sold in the Euromarket. That is, securities initially sold to investors
simultaneously in several national markets by an international syndicate. Euromarket.
Related: external market


Exempt securities

Instruments exempt from the registration requirements of the securities Act of 1933 or the
margin requirements of the SEC Act of 1934. Such securities include government bonds, agencies, munis,
commercial paper, and private placements.



 

 

 

 

 

 

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