Financial Terms One-factor APT

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# Definition of One-factor APT

## One-factor APT

A special case of the arbitrage pricing theory that is derived from the one-factor model by
using diversification and arbitrage. It shows the expected return on any risky asset is a linear function of a
single factor.

# Related Terms:

## ADF (annuity discount factor)

the present value of a finite stream of cash flows for every beginning \$1 of cash flow.

## All or none

Requirement that none of an order be executed unless all of it can be executed at the specified price.

## All-or-none underwriting

An arrangement whereby a security issue is canceled if the underwriter is unable
to re-sell the entire issue.

## Amortization factor

The pool factor implied by the scheduled amortization assuming no prepayemts.

## Annuity factor

Present value of \$1 paid for each of t periods.

## annuity factor

Present value of an annuity of \$1 per period.

## Arbitrage Pricing Theory (APT)

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

## 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.

## 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.

## Call swaption

A swaption in which the buyer has the right to enter into a swap as a fixed-rate payer. The
writer therefore becomes the fixed-rate receiver/floating rate payer.

## Captive Agent

A licensed insurance agent who sells insurance for only one company.

## Component

Raw materials or subassemblies used to make either finished goods
or higher levels of subassembly.

## Conversion factors

Rules set by the Chicago Board of Trade for determining the invoice price of each
acceptable deliverable Treasury issue against the Treasury Bond futures contract.

## critical success factors (CSF)

any item (such as quality, customer
service, efficiency, cost control, or responsiveness
to change) so important that, without it, the organization
would cease to exist

## Discount factor

Present value of \$1 received at a stated future date.

## discount factor

Present value of a \$1 future payment.

## Dow Jones industrial average

This is the best known U.S.index of stocks. It contains 30 stocks that trade on
the New York Stock Exchange. The Dow, as it is called, is a barometer of how shares of the largest
U.S.companies are performing. There are thousands of investment indexes around the world for stocks,
bonds, currencies and commodities.

## Dow Jones Industrial Average

Index of the investment performance of a portfolio of 30 “blue-chip” stocks.

## economic components model

Abrams’ model for calculating DLOM based on the interaction of discounts from four economic components.
This model consists of four components: the measure of the economic impact of the delay-to-sale, monopsony power to buyers, and incremental transactions costs to both buyers and sellers.

## European Monetary System (EMS)

An exchange arrangement formed in 1979 that involves the currencies
of European Union member countries.

## Factor

A financial institution that buys a firm's accounts receivables and collects the debt.

## Factor

An agent who buys and sells goods on behalf of others for a commission.

## Factor analysis

A statistical procedure that seeks to explain a certain phenomenon, such as the return on a
common stock, in terms of the behavior of a set of predictive factors.

## Factor model

A way of decomposing the factors that influence a security's rate of return into common and
firm-specific influences.

## Factor of Production

A resource used to produce a good or service. The main macroeconomic factors of production are capital and labor.

## Factor portfolio

A well-diversified portfolio constructed to have a beta of 1.0 on one factor and a beta of
zero on any other factors.

## Factoring

Sale of a firm's accounts receivable to a financial institution known as a factor.

## Factoring

The sale of accounts receivable to a third party, with the third party bearing
the risk of loss if the accounts receivable cannot be collected.

## Factoring

The discounting, or sale at a discount, of receivables on a nonrecourse, notification
basis. The purchaser of the accounts receivable, the factor, assumes full risk of collection and
credit losses, without recourse to the firms discounting the receivables. Customers are notified to
remit directly to the factor.

## Factoring

Type of financial service whereby a firm sells or transfers title to its accounts receivable to a factoring company, which then acts as principal, not as agent.

## Factory overhead

All the costs incurred during the manufacturing process, minus the
costs of direct labor and materials.

## Fiat Money

Fiat Money is paper currency made legal tender by law or fiat. It is not backed by gold or silver and is not necessarily redeemable in coin. This practice has had widespread use for about the last 70 years. If governments produce too much of it, there is a loss of confidence. Even so, governments print it routinely when they need it. The value of fiat money is dependent upon the performance of the economy of the country which issued it. Canada's currency falls into this category.

See money base.

## Hot money

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

## 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.

## Interest Factor

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

## International Monetary Fund

An organization founded in 1944 to oversee exchange arrangements of
member countries and to lend foreign currency reserves to members with short-term balance of payment
problems.

## International Monetary Fund (IMF)

Organization originally established to manage the postwar fixed exchange rate system.

## International Monetary Market (IMM)

A division of the CME established in 1972 for trading financial
futures. Related: Chicago Mercantile Exchange (CME).

## Law of one price

An economic rule stating that a given security must have the same price regardless of the
means by which one goes about creating that security. This implies that if the payoff of a security can be
synthetically created by a package of other securities, the price of the package and the price of the security
whose payoff it replicates must be equal.

## law of one price

Theory that prices of goods in all countries should be equal when translated to a common currency.

## Limiting factor

The production resource that, as a result of scarce resources, limits the production of goods
or services, i.e. a bottleneck.

## Maturity factoring

factoring arrangement that provides collection and insurance of accounts receivable.

## Monetarism

School of economic thought stressing the importance of the money supply in the economy. Adherents believe that the economy is inherently stable, so that policy is best undertaken through adoption of a policy rule.

## Monetarist Rule

Proposal that the money supply be increased at a steady rate equal approximately to the real rate of growth of the economy. Contrast with discretionary policy.

## Monetary Aggregate

Any measure of the economy's money supply.

See money base.

## Monetary gold

Gold held by governmental authorities as a financial asset.

## Monetary / non-monetary method

Under this translation method, monetary items (e.g. cash, accounts
payable and receivable, and long-term debt) are translated at the current rate while non-monetary items (e.g.
inventory, fixed assets, and long-term investments) are translated at historical rates.

## Monetary policy

Actions taken by the Board of Governors of the Federal Reserve System to influence the
money supply or interest rates.

## Monetary Policy

Actions taken by the central bank to change the supply of money and the interest rate and thereby affect economic activity.

## Monetizing the Debt

See printing money.

## Money

Any item that serves as a medium of exchange, a store of value, and a unit of account. See medium of exchange.

## Money base

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

## Money Base

Cash plus deposits of the commercial banks with the central bank.

## Money center banks

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

## Money Laundering

This is the process by which "dirty money" generated by criminal activities is converted through legitimate businesses into assets that cannot be easily traced back to their illegal origins.

## 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

A market that specializes in trading short-term, low-risk, very liquid
debt securities

## money market

Market for short-term financial assets.

## Money Market

A financial market in which short-term (maturity of less than a year) debt instruments such as bonds are traded.

## Money Market

Financial market in which funds are borrowed or lent for short periods. (The money market is distinguished from the capital market, which is the market for long term funds.)

## 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 fund

A type of mutual fund that invests primarily in short-term debt securities maturing in one year or less. These include treasury bills, bankers’ acceptances, commercial paper, discount notes and guaranteed investment certficates.

## 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 Multiplier

Change in the money supply per change in the money base.

## money order

A guaranteed form of payment in amounts up to and including \$5,000. You might request a money order in order to pay for tuition fees at a university or a college, or for a magazine subscription.

## 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 Interest

See interest rate, nominal.

## 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.

## Multifactor CAPM

A version of the capital asset pricing model derived by Merton that includes extramarket
sources of risk referred to as factor.

## Net benefit to leverage factor

A linear approximation of a factor, T*, that enables one to operationalize the
total impact of leverage on firm value in the capital market imperfections view of capital structure.

## Neutrality of Money

The doctrine that the money supply affects only the price level, with no long-run impact on real variables.

## New money

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

## Old-line factoring

factoring arrangement that provides collection, insurance, and finance for accounts receivable.

## One man picture

The picture quoted by a broker is said to be a one-man picture if both the bid and offered
prices come from the same source.

## One-way market

1) A market in which only one side, the bid or asked, is quoted or firm.
2) A market that is moving strongly in one direction.

## 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.

## Phone switching

In mutual funds, the ability to transfer shares between funds in the same family by
telephone request. There may be a charge associated with these transfers. Phone switching is also possible
among different fund families if the funds are held in street name by a participating broker/dealer.

## Pool factor

The outstanding principal balance divided by the original principal balance with the result
expressed as a decimal. Pool factors are published monthly by the Bond Buyer newspaper for Ginnie Mae,
Fannie Mae, and Freddie Mac(Federal Home Loan Mortgage Corporation) MBSs.

## Postponement option

The option of postponing a project without eliminating the possibility of undertaking it.

## PPF (periodic perpetuity factor)

a generalization formula invented by Abrams that is the present value of regular but noncontiguous cash flows that have constant growth to perpetuity.

## Precautionary demand (for money)

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

## Present value factor

factor used to calculate an estimate of the present value of an amount to be received in
a future period.

## Printing Money

Sale of bonds by the government to the central bank.

## Put swaption

A financial tool in which the buyer has the right, or option, to enter into a swap as a floatingrate
payer. The writer of the swaption therefore becomes the floating-rate receiver/fixed-rate payer.

## Quantity Theory of Money

Theory that velocity is constant, and so a change in money supply will change nominal income by the same percentage. Formalized by the equation Mv = PQ.

## Real Money Supply

Money supply expressed in base-year dollars, calculated by dividing the money supply by a price index.

## Reported factor

The pool factor as reported by the bond buyer for a given amortization period.

## Risk prone

Willing to pay money to transfer risk from others.

## Scrap factor

An anticipated loss percentage included in the bill of material and
used to order extra materials for a production run, in anticipation of scrap losses.

## Seasoned datings

Extended credit for customers who order goods in periods other than peak seasons.

## Seasoned issue

Issue of a security for which there is an existing market. Related: Unseasoned issue.

## Seasoned new issue

A new issue of stock after the company's securities have previously been issued. A
seasoned new issue of common stock can be made by using a cash offer or a rights offer.

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