Definition of Keynesianism

Keynesianism

The school of macroeconomic thought based on the ideas of John Maynard Keynes as published in his 1936 book The General Theory of Employment, Interest, and Money. A Keynesian believes the economy is inherently unstable and requires active government intervention to achieve stability.

Classical Macroeconomics

The school of macroeconomic thought prior to the rise of keynesianism.

Macroeconomics

The study of the determination of economic aggregates such as total output and the price level.

New Classicals

Economists who, like classical economists, believe that wages and prices are sufficiently flexible to solve the unemployment problem without help from government policy.

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.

Absolute priority

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

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).

Active

A market in which there is much trading.

Active portfolio strategy

A strategy that uses available information and forecasting techniques to seek a
better performance than a portfolio that is simply diversified broadly. Related: passive portfolio strategy

Agency theory

The analysis of principal-agent relationships, wherein one person, an agent, acts on behalf of
anther person, a principal.

Amortizing interest rate swap

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

Arbitrage Pricing Theory (APT)

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

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.

At-the-money

An option is at-the-Money if the strike price of the option is equal to the market price of the
underlying security. For example, if xyz stock is trading at 54, then the xyz 54 option is at-the-Money.

Base interest rate

Related: Benchmark Interest rate.

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.

Book

A banker or trader's positions.

Book

cash A firm's cash balance as reported in its financial statements. Also called ledger cash.

Book profit

The cumulative book income plus any gain or loss on disposition of the assets on termination of the SAT.

Book runner

The managing underwriter for a new issue. The book runner maintains the book of securities sold.

Book value

A company's book value is its total assets minus intangible assets and liabilities, such as debt. A
company's book value might be more or less than its market value.

Book value per share

The ratio of stockholder equity to the average number of common shares. book value
per share should not be thought of as an indicator of economic worth, since it reflects accounting valuation
(and not necessarily market valuation).

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.

Bubble theory

Security prices sometimes move wildly above their true values.

Call money rate

Also called the broker loan rate , the Interest rate that banks charge brokers to finance
margin loans to investors. The broker charges the investor the call Money rate plus a service charge.

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.

Cash flow after interest and taxes

Net income plus depreciation.

Compound interest

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

Country risk General

Level of political and economic uncertainty in a country affecting the value of loans or
investments in that country.

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.

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 surprises

Positive or negative differences from the consensus forecast of earnings by institutions
such as First Call or IBES. Negative earnings surprises Generally have a greater adverse affect on stock prices
than the reciprocal positive earnings surprise on stock prices.

Effective annual interest rate

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

Equilibrium rate of interest

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

Forward interest rate

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

General cash offer

A public offering made to investors at large.

General obligation bonds

Municipal securities secured by the issuer's pledge of its full faith, credit, and
taxing power.

General partner

A partner who has unlimited liability for the obligations of the partnership.

General partnership

A partnership in which all partners are General partners.

Generally Accepted Accounting Principals (GAAP)

A technical accounting term that encompasses the
conventions, rules, and procedures necessary to define accepted accounting practice at a particular time.

Government bond

See: government securities.

Government National Mortgage Association (Ginnie Mae)

A wholly owned U.S. government corporation
within the Department of Housing & Urban Development. Ginnie Mae guarantees the timely payment of
principal and Interest on securities issued by approved servicers that are collateralized by FHA-issued, VAguaranteed,
or Farmers Home Administration (FmHA)-guaranteed mortgages.

Government sponsored enterprises

Privately owned, publicly chartered entities, such as the Student Loan
Marketing Association, created by Congress to reduce the cost of capital for certain borrowing sectors of the
economy including farmers, homeowners, and students.

Government securities

Negotiable U.S. Treasury securities.

Gross interest

Interest earned before taxes are deducted.

Historical exchange rate

An accounting term that refers to the exchange rate in effect when an asset or
liability was acquired.

Hot money

Money that moves across country borders in response to Interest rate differences and that moves
away when the Interest rate differential disappears.

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 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 payments

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

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 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 floor

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

Interest rate on debt

The firm's cost of debt capital.

Interest rate parity theorem

Interest rate differential between two countries is equal to the difference
between the forward foreign exchange rate and the spot rate.

Interest rate risk

The risk that a security's value changes due to a change in Interest rates. For example, a
bond's price drops as Interest rates rise. For a depository institution, also called funding risk, the risk that
spread income will suffer because of a change in Interest rates.

Interest rate swap

A binding agreement between counterparties to exchange periodic Interest payments on
some predetermined dollar principal, which is called the notional principal amount. For example, one party
will pay fixed and receive variable.

Interest subsidy

A firm's deduction of the Interest payments on its debt from its earnings before it calculates
its tax bill under current tax law.

Interest tax shield

The reduction in income taxes that results from the tax-deductibility of Interest payments.

In-the-money

A put option that has a strike price higher than the underlying futures price, or a call option
with a strike price lower than the underlying futures price. For example, if the March COMEX silver futures
contract is trading at $6 an ounce, a March call with a strike price of $5.50 would be considered in-the-Money
by $0.50 an ounce.
Related: put.

Limit order book

A record of unexecuted limit orders that is maintained by the specialist. These orders are
treated equally with other orders in terms of priority of execution.

Limited-tax general obligation bond

A General obligation bond that is limited as to revenue sources.

Liquidity theory of the term structure

A biased expectations Theory that asserts that the implied forward
rates will not be a pure estimate of the market's expectations of future Interest rates because they embody a
liquidity premium.

Local expectations theory

A form of the pure expectations Theory which suggests that the returns on bonds
of different maturities will be the same over a short-term investment horizon.

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.

Market-book ratio

Market price of a share divided by book value per share.

Matched book

A bank runs a matched book when the distribution of maturities of its assets and liabilities are equal.

Modern portfolio theory

Principles underlying the analysis and evaluation of rational portfolio choices
based on risk-return trade-offs and efficient diversification.

Money base

Composed of currency and coins outside the banking system plus liabilities to the deposit Money banks.

Money center banks

Banks that raise most of their funds from the domestic and international Money markets, relying less on depositors for funds.

Money management

Related: Investment management.

Money manager

Related: Investment manager.

Money market

Money markets are for borrowing and lending Money for three years or less. The securities in
a Money market can be U.S.government bonds, treasury bills and commercial paper from banks and
companies.

Money market demand account

An account that pays Interest based on short-term Interest rates.

Money market fund

A mutual fund that invests only in short term securities, such as bankers' acceptances,
commercial paper, repurchase agreements and government bills. The net asset value per share is maintained at
$1. 00. Such funds are not federally insured, although the portfolio may consist of guaranteed securities
and/or the fund may have private insurance protection.

Money market hedge

The use of borrowing and lending transactions in foreign currencies to lock in the
home currency value of a foreign currency transaction.

Money market notes

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

Money purchase plan

A defined benefit contribution plan in which the participant contributes some part and
the firm contributes at the same or a different rate. Also called and individual account plan.

Money rate of return

Annual Money return as a percentage of asset value.

Money supply

M1-A: Currency plus demand deposits
M1-B: M1-A plus other checkable deposits.
M2: M1-B plus overnight repos, Money market funds, savings, and small (less than $100M) time deposits.
M3: M-2 plus large time deposits and term repos.
L: M-3 plus other liquid assets.

Net book value

The current book value of an asset or liability; that is, its original book value net of any
accounting adjustments such as depreciation.

New money

In a Treasury auction, the amount by which the par value of the securities offered exceeds that of
those maturing.

Nominal interest rate

The Interest rate unadjusted for inflation.

Normal backwardation theory

Holds that the futures price will be bid down to a level below the expected
spot price.

Open book

See: unmatched book.

Open interest

The total number of derivative contracts traded that not yet been liquidated either by an
offsetting derivative transaction or by delivery. Related: liquidation

Out-of-the-money option

A call option is out-of-the-Money if the strike price is greater than the market price
of the underlying security. A put option is out-of-the-Money if the strike price is less than the market price of
the underlying security.

Pooling of interests

An accounting method for reporting acquisitions accomplished through the use of equity.
The combined assets of the merged entity are consolidated using book value, as opposed to the purchase
method, which uses market value. The merging entities' financial results are combined as though the two
entities have always been a single entity.

Precautionary demand (for money)

The need to meet unexpected or extraordinary contingencies with a
buffer stock of cash.

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.

Price/book ratio

Compares a stock's market value to the value of total assets less total liabilities (book
value). Determined by dividing current stock price by common stockholder equity per share (book value),
adjusted for stock splits. Also called Market-to-book.

Pure expectations theory

A Theory that asserts that the forward rates exclusively represent the expected
future rates. In other words, the entire term structure reflects the markets expectations of future short-term
rates. For example, an increasing sloping term structure implies increasing short-term Interest rates. Related:
biased expectations theories

Rate of interest

The rate, as a proportion of the principal, at which Interest is computed.

Real interest rate

The rate of Interest excluding the effect of inflation; that is, the rate that is earned in terms
of constant-purchasing-power dollars. Interest rate expressed in terms of real goods, i.e. nominal Interest rate
adjusted for inflation.

Short book

See: unmatched book.

Short interest

This is the total number of shares of a security that investors have borrowed, then sold in the
hope that the security will fall in value. An investor then buys back the shares and pockets the difference as profit.

Simple interest

Interest calculated only on the initial investment. Related:compound Interest.

Speculative demand (for money)

The need for cash to take advantage of investment opportunities that may arise.

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