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Market capitalization rate

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Definition of Market capitalization rate

Market Capitalization Rate Image 1

Market capitalization rate

Expected return on a security. The market-consensus estimate of the appropriate
discount rate for a firm's cash flows.



Related Terms:

DLOM (discount for lack of marketability)

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


discount rate

the rate of return on investment that would be required by a prudent investor to invest in an asset with a specific level risk. Also, a rate of return used to convert a monetary sum, payable or receivable in the future, into present value.


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.


Accelerated depreciation

Any depreciation method that produces larger deductions for depreciation in the
early years of a project's life. Accelerated cost recovery system (ACRS), which is a depreciation schedule
allowed for tax purposes, is one such example.



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


Adjustable rate preferred stock (ARPS)

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


Market Capitalization Rate Image 2

After-tax real rate of return

Money after-tax rate of return minus the inflation rate.


All equity rate

The discount rate that reflects only the business risks of a project and abstracts from the
effects of financing.


Amortizing interest rate swap

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


Annual percentage rate (APR)

The periodic rate times the number of periods in a year. For example, a 5%
quarterly return has an APR of 20%.


Arithmetic average (mean) rate of return

Arithmetic mean return.


Auction markets

markets in which the prevailing price is determined through the free interaction of
prospective buyers and sellers, as on the floor of the stock exchange.


Auction rate preferred stock (ARPS)

Floating rate preferred stock, the dividend on which is adjusted every
seven weeks through a Dutch auction.


Average rate of return (ARR)

The ratio of the average cash inflow to the amount invested.


Average tax rate

Taxes as a fraction of income; total taxes divided by total taxable income.


Barbell strategy

A strategy in which the maturities of the securities included in the portfolio are concentrated
at two extremes.


Base interest rate

Related: Benchmark interest rate.



Basic business strategies

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


Bear market

Any market in which prices are in a declining trend.


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").


Black market

An illegal market.


Break-even payment rate

The prepayment rate of a MBS coupon that will produce the same CFY as that of
a predetermined benchmark MBS coupon. Used to identify for coupons higher than the benchmark coupon
the prepayment rate that will produce the same CFY as that of the benchmark coupon; and for coupons lower
than the benchmark coupon the lowest prepayment rate that will do so.


Break-even tax rate

The tax rate at which a party to a prospective transaction is indifferent between entering
into and not entering into the transaction.


Broker loan rate

Related: Call money rate.


Brokered market

A market where an intermediary offers search services to buyers and sellers.


Bull market

Any market in which prices are in an upward trend.


Bulldog market

The foreign market in the United Kingdom.



Bullet strategy

A strategy in which a portfolio is constructed so that the maturities of its securities are highly
concentrated at one point on the yield curve.


Buy-and-hold strategy

A passive investment strategy with no active buying and selling of stocks from the
time the portfolio is created until the end of the investment horizon.


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.


Capital market

The market for trading long-term debt instruments (those that mature in more than one year).


Capital market efficiency

Reflects the relative amount of wealth wasted in making transactions. An efficient
capital market allows the transfer of assets with little wealth loss. See: efficient market hypothesis.


Capital market imperfections view

The view that issuing debt is generally valuable but that the firm's
optimal choice of capital structure is a dynamic process that involves the other views of capital structure (net
corporate/personal tax, agency cost, bankruptcy cost, and pecking order), which result from considerations of
asymmetric information, asymmetric taxes, and transaction costs.


Capital market line (CML)

The line defined by every combination of the risk-free asset and the market portfolio.


Capitalization

The debt and/or equity mix that fund a firm's assets.


Capitalization method

A method of constructing a replicating portfolio in which the manager purchases a
number of the largest-capitalized names in the index stock in proportion to their capitalization.


Capitalization ratios

Also called financial leverage ratios, these ratios compare debt to total capitalization
and thus reflect the extent to which a corporation is trading on its equity. capitalization ratios can be
interpreted only in the context of the stability of industry and company earnings and cash flow.


Capitalization table

A table showing the capitalization of a firm, which typically includes the amount of
capital obtained from each source - long-term debt and common equity - and the respective capitalization
ratios.


Cash markets

Also called spot markets, these are markets that involve the immediate delivery of a security
or instrument.
Related: derivative markets.


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


Common market

An agreement between two or more countries that permits the free movement of capital
and labor as well as goods and services.


Common stock market

The market for trading equities, not including preferred stock.


Complete capital market

A market in which there is a distinct marketable security for each and every
possible outcome.


Conglomerate

A firm engaged in two or more unrelated businesses.


Conglomerate merger

A merger involving two or more firms that are in unrelated businesses.


Corner A Market

To purchase enough of the available supply of a commodity or stock in order to
manipulate its price.


Corporate acquisition

The acquisition of one firm by anther firm.


Corporate bonds

Debt obligations issued by corporations.


Corporate charter

A legal document creating a corporation.


Corporate finance

One of the three areas of the discipline of finance. It deals with the operation of the firm
(both the investment decision and the financing decision) from that firm's point of view.


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.


Corporate tax view

The argument that double (corporate and individual) taxation of equity returns makes
debt a cheaper financing method.


Corporate taxable equivalent

rate of return required on a par bond to produce the same after-tax yield to
maturity that the premium or discount bond quoted would.


Coupon rate

In bonds, notes or other fixed income securities, the stated percentage rate of interest, usually
paid twice a year.


Covered call writing strategy

A strategy that involves writing a call option on securities that the investor
owns in his or her portfolio. See covered or hedge option strategies.


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


Crediting rate

The interest rate offered on an investment type insurance policy.


Cross rates

The exchange rate between two currencies expressed as the ratio of two foreign exchange rates
that are both expressed in terms of a third currency.


Crossover rate

The return at which two alternative projects have the same net present value.


Current rate method

Under this currency translation method, all foreign currency balance-sheet and income
statement items are translated at the current exchange rate.


Dealer market

A market where traders specializing in particular commodities buy and sell assets for their
own accounts.


Debt market

The market for trading debt instruments.


Dedication strategy

Refers to multi-period cash flow matching.


Derivative markets

markets for derivative instruments.


Direct search market

Buyers and sellers seek each other directly and transact directly.


Discount rate

The interest rate that the Federal Reserve charges a bank to borrow funds when a bank is
temporarily short of funds. Collateral is necessary to borrow, and such borrowing is quite limited because the
Fed views it as a privilege to be used to meet short-term liquidity needs, and not a device to increase earnings.


Dividend rate

The fixed or floating rate paid on preferred stock based on par value.


Dollar-weighted rate of return

Also called the internal rate of return, the interest rate that will make the
present value of the cash flows from all the subperiods in the evaluation period plus the terminal market value
of the portfolio equal to the initial market value of the portfolio.


Domestic market

Part of a nation's internal market representing the mechanisms for issuing and trading
securities of entities domiciled within that nation. Compare external market and foreign market.


Effective annual interest rate

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


Effective rate

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


Efficient capital market

A market in which new information is very quickly reflected accurately in share
prices.


Efficient Market Hypothesis

In general the hypothesis states that all relevant information is fully and
immediately reflected in a security's market price thereby assuming that an investor will obtain an equilibrium
rate of return. In other words, an investor should not expect to earn an abnormal return (above the market
return) through either technical analysis or fundamental analysis. Three forms of efficient market hypothesis
exist: weak form (stock prices reflect all information of past prices), semi-strong form (stock prices reflect all
publicly available information) and strong form (stock prices reflect all relevant information including insider
information).


Either-way market

In the interbank Eurodollar deposit market, an either-way market is one in which the bid
and offered rates are identical.


Emerging markets

The financial markets of developing economies.


Equilibrium market price of risk

The slope of the capital market line (CML). Since the CML represents the
return offered to compensate for a perceived level of risk, each point on the line is a balanced market
condition, or equilibrium. The slope of the line determines the additional return needed to compensate for a
unit change in risk.


Equilibrium rate of interest

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


Equity market

Related:Stock market


Eurocurrency market

The money market for borrowing and lending currencies that are held in the form of
deposits in banks located outside the countries of the currencies issued as legal tender.


Excess return on the market portfolio

The difference between the return on the market portfolio and the
riskless rate.


Exchange rate

The price of one country's currency expressed in another country's currency.


Exchange Rate Mechanism (ERM)

The methodology by which members of the EMS maintain their
currency exchange rates within an agreed upon range with respect to other member countries.


Exchange rate risk

Also called currency risk, the risk of an investment's value changing because of currency
exchange rates.


External market

Also referred to as the international market, the offshore market, or, more popularly, the
Euromarket, the mechanism for trading securities that (1) at issuance are offered simultaneously to investors
in a number of countries and (2) are issued outside the jurisdiction of any single country. Related: internal
market


Fair market price

Amount at which an asset would change hands between two parties, both having
knowledge of the relevant facts. Also referred to as market price.


Federal funds market

The market where banks can borrow or lend reserves, allowing banks temporarily
short of their required reserves to borrow reserves from banks that have excess reserves.


Federal funds rate

This is the interest rate that banks with excess reserves at a Federal Reserve district bank
charge other banks that need overnight loans. The Fed Funds rate, as it is called, often points to the direction
of U.S. interest rates.


Financial market

An organized institutional structure or mechanism for creating and exchanging financial assets.


Fixed-exchange rate

A country's decision to tie the value of its currency to another country's currency, gold
(or another commodity), or a basket of currencies.


Fixed-income market

The market for trading bonds and preferred stock.


Fixed-rate loan

A loan on which the rate paid by the borrower is fixed for the life of the loan.


Fixed-rate payer

In an interest rate swap the counterparty who pays a fixed rate, usually in exchange for a
floating-rate payment.


Floating exchange rate

A country's decision to allow its currency value to freely change. The currency is not
constrained by central bank intervention and does not have to maintain its relationship with another currency
in a narrow band. The currency value is determined by trading in the foreign exchange market.


Floating-rate contract

A guaranteed investment contract where the credit rating is tied to some variable
("floating") interest rate benchmark, such as a specific-maturity Treasury yield.


Floating-rate note (FRN)

Note whose interest payment varies with short-term interest rates.


Floating-rate payer

In an interest rate swap, the counterparty who pays a rate based on a reference rate,
usually in exchange for a fixed-rate payment



 

 

 

 

 

 

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