|Fallacy of Composition
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Definition of Fallacy of Composition
Fallacy of Composition
The incorrect conclusion that something that is true for an individual is necessarily true for the economy as a whole.
Voluntary arrangement to restructure a firm's debt, under which payment is reduced.
A bond covenant that specifies certain actions the firm must take.
An arrangement whereby a security issue is canceled if the underwriter is unable
A statistical compilation formulated by a sovereign nation of all economic transactions
The lease payment at which a party to a prospective lease is indifferent between
The prepayment rate of a MBS coupon that will produce the same CFY as that of
A computerized clearing system for sterling funds
An international wire transfer system for high-value
An undertaking either (1) to complete a project such that it meets certain specified
he written statement that follows any "trade" in the securities markets. Confirmation is issued
arrangement whereby the shareholders of a project receive output free of
A bond's interest payments.
Date dividend checks are mailed.
Indicator of financial leverage. Compares assets provided by creditors to assets provided
Ability to borrow. The amount a firm can borrow up to the point where the firm value no
The amount of borrowing that leasing displaces. firms that do a lot of leasing will be
An asset requiring fixed dollar payments, such as a government or corporate bond.
The amplification of the return earned on equity when an investment or firm is financed
A bond covenant that restricts in some way the firm's ability to incur additional indebtedness.
The market for trading debt instruments.
Total debt divided by total assets.
Reducing the principal and/or interest payments on LDC loans.
IOUs created through loan-type transactions - commercial paper, bank CDs, bills, bonds, and
Interest payment plus repayments of principal to creditors, that is, retirement of debt.
Debt service parity approach
An analysis wherein the alternatives under consideration will provide the firm
Debt-service coverage ratio
Earnings before interest and income taxes plus one-third rental charges, divided
A set of transactions (also called a debt-equity swap) in which a firm buys a country's dollar bank
Debtor in possession
A firm that is continuing to operate under Chapter 11 bankruptcy process.
New debt obtained by a firm during the Chapter 11 bankruptcy process.
Delivery versus payment
A transaction in which the buyer's payment for securities is due at the time of
FHA prepayment experience
The percentage of loans in a pool of mortgages outstanding at the origination
Refers to an order to buy or sell that can be executed without confirmation for some fixed period. Also,
Firm commitment underwriting
An undewriting in which an investment banking firm commits to buy the
Firm's net value of debt
Total firm value minus total firm debt.
See:diversifiable risk or unsystematic risk.
debt maturing after more than one year.
Graduated-payment mortgages (GPMs)
A type of stepped-payment loan in which the borrower's payments
Contractual debt payments based on the coupon rate of interest and the principal amount.
Interest rate on debt
The firm's cost of debt capital.
Intrinsic value of a firm
The present value of a firm's expected future net cash flows discounted by the
Involuntary liquidation preference
A premium that must be paid to preferred or preference stockholders if
Junior debt (subordinate debt)
debt whose holders have a claim on the firm's assets only after senior
Lag response of prepayments
There is typically a lag of about three months between the time the weighted
An obligation having a maturity of more than one year from the date it was issued. Also
Indicator of financial leverage. Shows long-term debt as a proportion of the
Long-term debt ratio
The ratio of long-term debt to total capitalization.
Long-term debt to equity ratio
A capitalization ratio comparing long-term debt to shareholders' equity.
Neglected firm effect
The tendency of firms that are neglected by security analysts to outperform firms that
Original issue discount debt (OID debt)
debt that is initially offered at a price below par.
The date on which each shareholder of record will be sent a check for the declared dividend.
Company-written checks that have not yet cleared.
Reducing fund transfers between affiliates to only a netted amount. Netting can be done on
escribes the lagged collection pattern of receivables, for instance the probability that a
bond A bond that gives the issuer an option (during an initial period) either to make
Also called speed, the estimated rate at which mortgagors pay off their loans ahead of
payments made in excess of scheduled mortgage principal repayments.
Production payment financing
A method of nonrecourse asset-based financing in which a specified
Retail investors, individual investors
Small investors who commit capital for their personal account.
debt that, in the event of default, has first claim on specified assets.
debt that, in the event of bankruptcy, must be repaid before subordinated debt receives any payment.
A bond that will make only one payment of principal and interest.
The tendency of small firms (in terms of total market capitalization) to outperform the
debt that has been customized for the buyer, often by incorporating unusual options.
debt over which senior debt takes priority. In the event of bankruptcy, subordinated
A firm that is the object of a takeover by another firm.
Target zone arrangement
A monetary system under which countries pledge to maintain their exchange rates
Total debt to equity ratio
A capitalization ratio comparing current liabilities plus long-term debt to
True interest cost
For a security such as commercial paper that is sold on a discount basis, the coupon rate
A contract that qualifies as a valid lease agreement under the Internal Revenue code.
Underfunded pension plan
A pension plan that has a negative surplus (i.e., liabilities exceed assets).
The mirror image of the asset substitution problem, wherein stockholders refuse
The asset that an option gives the option holder the right to buy or to sell.
Options: the security subject to being purchased or sold upon exercise of an option
When a security is expected to appreciate at a slower rate than the overall market.
Issue of securities below their market value.
To guarantee, as to guarantee the issuer of securities a specified price by entering into a purchase
A party that guarantees the proceeds to the firm from a security sale, thereby in effect taking
Acting as the underwriter in a purchase and sale.
The portion of the gross underwriting spread that compensates the securities firms that
For an insurance company, the difference between the premiums earned and the costs
A group of investment banks that work together to sell new security offerings to
debt maturing within one year (short-term debt). See: funded debt.
debt that does not identify specific assets that can be taken over by the debtholder in case of default.
Whole life insurance
A contract with both insurance and investment components: (1) It pays off a stated
Wholesale mortgage banking
The purchasing of loans originated by others, with the servicing rights
assumption The assumption of payment of scheduled principal and interest with no payments.
RATIO OF DEBT TO STOCKHOLDERSâ€™ EQUITY
A ratio that shows which groupâ€”creditors or stockholdersâ€”has the biggest stake in or the most control of a company:
Borrowings from financiers.
Sales to customers who have bought goods or services on credit but who have not yet paid their debt.
A payment made in advance of when it is treated as an expense for profit purposes.
The amount of accounts receivable that is not expected to be collected.
The date established for the payment of a declared dividend.
Refers to accounts receivable from credit sales to customers
A widely used financial statement ratio to assess the
Cost of Debt
The cost of debt (bonds, loans, etc.) that a company is charged for
The percentage of debt that is used in the total capitalization of a
Total Debt to Total Assets Ratio
See debt ratio
dual pricing arrangement
a transfer pricing system that allows
an economy characterized by the international
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