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Interest Option

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Definition of Interest Option

Interest Option Image 1

Interest Option

One of several investment accounts in which your premiums may be invested within your life insurance policy.



Related Terms:

Account Value

The sum of all the interest options in your policy, including interest.


Abandonment option

The option of terminating an investment earlier than originally planned.


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


Accrued Interest

The amount of interest owing but not paid.



American option

An option that may be exercised at any time up to and including the expiration date.
Related: European option


American option

An option that can be exercised any time until its
expiration date. Contrast with European option.


Interest Option Image 2

American-style option

An option contract that can be exercised at any time between the date of purchase and
the expiration date. Most exchange-traded options are American style.


Amortizing interest rate swap

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


Arbitrage-free option-pricing models

Yield curve option-pricing models.


Asian option

option based on the average price of the asset during the life of the option.


Bargain-purchase-price option

Gives the lessee the option to purchase the asset at a price below fair market
value when the lease expires.


Barrier options

Contracts with trigger points that, when crossed, automatically generate buying or selling of
other options. These are very exotic options.


Base interest rate

Related: Benchmark interest rate.


Basket options

Packages that involve the exchange of more than two currencies against a base currency at
expiration. The basket option buyer purchases the right, but not the obligation, to receive designated
currencies in exchange for a base currency, either at the prevailing spot market rate or at a prearranged rate of
exchange. A basket option is generally used by multinational corporations with multicurrency cash flows
since it is generally cheaper to buy an option on a basket of currencies than to buy individual options on each
of the currencies that make up the basket.


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").


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.


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.



Black-Scholes option-pricing model

A model for pricing call options based on arbitrage arguments that uses
the stock price, the exercise price, the risk-free interest rate, the time to expiration, and the standard deviation
of the stock return.


cafeteria plan a “menu” of fringe benefit options that include

cash or nontaxable benefits


Call an option

To exercise a call option.


Call option

An option contract that gives its holder the right (but not the obligation) to purchase a specified
number of shares of the underlying stock at the given strike price, on or before the expiration date of the
contract.
Call premium
Premium in price above the par value of a bond or share of preferred stock that must be paid to
holders to redeem the bond or share of preferred stock before its scheduled maturity date.


Call Option

A contract that gives the holder the right to buy an asset for a
specified price on or before a given expiration (maturity) date


call option

Right to buy an asset at a specified exercise price on or before the exercise date.


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 flow after interest and taxes

Net income plus depreciation.


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.


Compound option

option on an option.


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.


Covered or hedge option strategies

Strategies that involve a position in an option as well as a position in the
underlying stock, designed so that one position will help offset any unfavorable price movement in the other,
including covered call writing and protective put buying. Related: naked strategies


Currency option

An option to buy or sell a foreign currency.


Daily Interest Accumulation

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


Dealer options

Over-the-counter options, such as those offered by government and mortgage-backed
securities dealers.


Delivery options

The options available to the seller of an interest rate futures contract, including the quality
option, the timing option, and the wild card option. Delivery options make the buyer uncertain of which
Treasury Bond will be delivered or when it will be delivered.


Doubling option

A sinking fund provision that may allow repurchase of twice the required number of bonds
at the sinking fund call price.


Down-and-in option

Barrier option that comes into existence if asset price hits a barrier.


Down-and-out option

Barrier option that expires if asset price hits a barrier.


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.


Elasticity of an option

Percentage change in the value of an option given a 1% change in the value of the
option's underlying stock.


Embedded option

An option that is part of the structure of a bond that provides either the bondholder or
issuer the right to take some action against the other party, as opposed to a bare option, which trades
separately from any underlying security.


Equilibrium rate of interest

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


Equity options

Securities that give the holder the right to buy or sell a specified number of shares of stock, at
a specified price for a certain (limited) time period. Typically one option equals 100 shares of stock.


Escalating Price Option

A nonqualified stock option that uses a sliding scale for
the option price that changes in concert with a peer group index.


European option

option that may be exercised only at the expiration date. Related: american option.


European option

An option that can be exercised only on its expiration date.
Contrast with American option.


European-style option

An option contract that can only be exercised on the expiration date.


Exercising the option

The act buying or selling the underlying asset via the option contract.


Exit Options

A variety of options available to an investor to recover their invested capital and the return on their investment.


Fixed Interest Rate

A rate that does not fluctuate with general market conditions.


Floating Interest Rate

A rate that fluctuates with general market condition.


Foreign currency option

An option that conveys the right to buy or sell a specified amount of foreign
currency at a specified price within a specified time period.


Forward interest rate

interest rate fixed today on a loan to be made at some future date.


fractional interest discount

the combined discounts for lack of control and marketability. g the constant growth rate in cash flows or net income used in the ADF, Gordon model, or present value factor.


Futures option

An option on a futures contract. Related: options on physicals.


Garmen-Kohlhagen option pricing model

A widely used model for pricing foreign currency options.


Greenshoe option

option that allows the underwriter for a new issue to buy and resell additional shares.


Gross interest

interest earned before taxes are deducted.


Guaranteed Interest Annuity (GIA)

interest bearing investment with fixed rate and term.


Guaranteed Interest Certificate (GIC)

interest bearing investment with fixed rate and term.


Heavenly Parachute Stock Option

A nonqualified stock option that allows a deceased option holder’s estate up to three years in which to exercise his or her
options.


Incentive Stock Option

An option to purchase company stock that is not taxable
to the employee at the time it is granted nor at the time when the employee
eventually exercises the option to buy stock.


Index and Option Market (IOM)

A division of the CME established in 1982 for trading stock index
products and options. Related: Chicago Mercantile Exchange (CME).


Index option

A call or put option based on a stock market index.


Insurable Interest

In England in the 1700's it was popular to bet on the date of death of certain prominent public figures. Anyone could buy life insurance on another's life, even without their consent. Unfortunately, some died before it was their time, dispatched prematurely in order that the life insurance proceeds could be collected. In 1774, English Parliament passed a law which restricted the right to be a beneficiary on a life insurance contract to those who would suffer an economic loss when the life insured died. The law also provided that a person has an unlimited insurable interest in his own life. It is still a legal stipulation that an insurance contract is not valid unless insurable interest exists at the time the policy is issued. Life Insurance companies will not, however, issue unlimited amounts of coverage to an individual. The amount of life insurance which will be approved has to approximate the loss caused by the death of the individual and must not result in a windfall for the beneficiary.


Interest

The price paid for borrowing money. It is expressed as a percentage rate over a period of time and
reflects the rate of exchange of present consumption for future consumption. Also, a share or title in property.


Interest

The cost of money, received on investments or paid on borrowings.


Interest

The cost of funds loaned to an entity. It can also refer to the equity ownership
of an investor in a business entity.


Interest

A charge for the use of money supplied by a lender.


interest

The cost of a loan or the compensation paid for the use of money. For example, you are paid interest for deposits you make into a savings account, and you pay interest for money that you borrow from a low-cost borrowing account.


Interest coverage ratio

The ratio of the earnings before interest and taxes to the annual interest expense. This
ratio measures a firm's ability to pay interest.


Interest coverage test

A debt limitation that prohibits the issuance of additional long-term debt if the issuer's
interest coverage would, as a result of the issue, fall below some specified minimum.


Interest equalization tax

Tax on foreign investment by residents of the U.S. which was abolished in 1974.


Interest Factor

Numbers found in compound interest and annuity tables. Usually called the FVIF or PVIF.


Interest income

Income that a company receives in the form of interest, usually as the result of keeping money in interest-bearing accounts at financial institutions and the lending of money to other companies.


Interest on interest

interest earned on reinvestment of each interest payment on money invested.
See: compound interest.


Interest-only strip (IO)

A security based solely on the interest payments form a pool of mortgages, Treasury
bonds, or other bonds. Once the principal on the mortgages or bonds has been repaid, interest payments stop
and the value of the IO falls to zero.


Interest payable

The amount of interest that is owed but has not been paid at the end of a period.


Interest payments

Contractual debt payments based on the coupon rate of interest and the principal amount.


Interest Rate

Cost of using money, expressed as a rate per period of time, usually one year.


Interest Rate

Rate charged or paid for the use of money, normally expressed as a percentage


Interest rate agreement

An agreement whereby one party, for an upfront premium, agrees to compensate the
other at specific time periods if a designated interest rate (the reference rate) is different from a predetermined
level (the strike rate).


Interest rate cap

Also called an interest rate ceiling, an interest rate agreement in which payments are made
when the reference rate exceeds the strike rate.


Interest rate ceiling

Related: interest rate cap.


Interest Rate Differential

The interest rate on our financial assets minus the interest rate on a foreign country's financial assets.


Interest rate floor

An interest rate agreement in which payments are made when the reference rate falls
below the strike rate.


Interest Rate, Nominal

Payment for the use of borrowed funds, measured as a percentage per year of these funds.


Interest rate on debt

The firm's cost of debt capital.



 

 

 

 

 

 

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