Definition of Real

Real

Measured in base year, or constant, dollars. Contrast with nominal.

After-tax real rate of return

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

Real assets

Identifiable assets, such as buildings, equipment, patents, and trademarks, as distinguished from a
financial obligation.

Real capital

Wealth that can be represented in financial terms, such as savings account balances, financial
securities, and real estate.

Real cash flow

A cash flow is expressed in real terms if the current, or date 0, purchasing power of the cash
flow is given.

Real exchange rates

Exchange rates that have been adjusted for the inflation differential between two countries.

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.

Real market

The bid and offer prices at which a dealer could do "size." Quotes in the brokers market may
reflect not the real market, but pictures painted by dealers playing trading games.

Real time

A real time stock or bond quote is one that states a security's most recent offer to sell or bid (buy).
A delayed quote shows the same bid and ask prices 15 minutes and sometimes 20 minutes after a trade takes place.

Realized compound yield

Yield assuming that coupon payments are invested at the going market interest
rate at the time of their receipt and rolled over until the bond matures.

Realized return

The return that is actually earned over a given time period.

REIT (real estate investment trust)

real estate investment trust, which is similar to a closed-end mutual
fund. REITs invest in real estate or loans secured by real estate and issue shares in such investments.

REMIC (real estate mortgage investment conduit)

A pass-through tax entity that can hold mortgages
secured by any type of real property and issue multiple classes of ownership interests to investors in the form
of pass-through certificates, bonds, or other legal forms. A financing vehicle created under the Tax Reform
Act of 1986.

Real Interest Rate

The rate of interest paid on an investment adjusted for inflation

approximated net realizable value at split-off allocation

a method of allocating joint cost to joint products using a
simulated net realizable value at the split-off point; approximated
value is computed as final sales price minus
incremental separate costs

net realizable value approach

a method of accounting for by-products or scrap that requires that the net realizable value of these products be treated as a reduction in the cost of the primary products; primary product cost may be reduced by decreasing either
(1) cost of goods sold when the joint products are sold or
(2) the joint process cost allocated to the joint products

net realizable value at split-off allocation

a method of allocating joint cost to joint products that uses, as the proration base, sales value at split-off minus all costs necessary
to prepare and dispose of the products; it requires
that all joint products be salable at the split-off point

real microprofit center

a center whose output has a market value

realized value approach

a method of accounting for byproducts or scrap that does not recognize any value for these products until they are sold; the value recognized
upon sale can be treated as other revenue or other income

Net realizeable value

The expected revenue to be gained from the sale of an item or
service, less the costs of the sale transaction.

real assets

Assets used to produce goods and services.

real interest rate

Rate at which the purchasing power of an investment increases.

real options

Options embedded in real assets.

real value of $1

Purchasing power–adjusted value of a dollar.

Exchange Rate, Real

The nominal exchange rate corrected for price level differences.

Interest Rate, Real

Nominal interest rate less expected inflation.

Real Business Cycle Theory

Belief that business cycles arise from real shocks to the economy, such as technology advances and natural resource discoveries, and have little to do with monetary policy.

Real Exchange Rate

Exchange rate adjusted for relative price levels.

Real GDP

GDP expressed in base-year dollars, calculated by dividing nominal GDP by a price index.

Real Income

Income expressed in base-year dollars, calculated by dividing nominal income by a price index.

Real Money Supply

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

Real Rate of Interest

See interest rate, real.

Real Wage

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

Real Actions (Earnings) Management

Involves operational steps and not simply acceleration
or delay in the recognition of revenue or expenses. The delay or acceleration of shipment would
be an example.

Realized Gains and Losses

Increases or decreases in the fair value of an asset or a liability that
are realized through sale or settlement.

Realizable Revenue A revenue transaction where assets received in exchange for goods and

services are readily convertible into known amounts of cash or claims to cash.

Realized Revenue

A revenue transaction where goods and services are exchanged for cash or
claims to cash.

Net Realizable Value

Selling price of an asset less expenses of bringing the asset into a saleable state and expenses of the sale.

Asset-backed security

A security that is collateralized by loans, leases, receivables, or installment contracts
on personal property, not real estate.

Asset classes

Categories of assets, such as stocks, bonds, real estate and foreign securities.

Bane

In the words of Warren Buffet, Bill Bane Sr., is, "a great American and one of the last real traders
around. I like to call him 'Salvo.'" His wife, Carol, is a huge NASCAR fan, and in her own words "delights in
pulling the legs off central bankers." Cooper Bane, son number two, is a thriving artiste who specializes in
making art that is much better than the stuff most folks are doing. Jackson, son number three, is a world
renowned master chef and plans on opening a restaurant. Bill Bane Jr., son number one, plans on giving Mr.
Monroe Trout a run for his money. [Bill Bane, Jr. helped Professor Harvey put the hypertextual glossary
together while an MBA student at Duke University.]

Cash flow

In investments, it represents earnings before depreciation , amortization and non-cash charges.
Sometimes called cash earnings. Cash flow from operations (called funds from operations ) by real estate and
other investment trusts is important because it indicates the ability to pay dividends.

Dollar return

The return realized on a portfolio for any evaluation period, including (1) the change in market
value of the portfolio and (2) any distributions made from the portfolio during that period.

Economic earnings

The real flow of cash that a firm could pay out forever in the absence of any change in
the firm's productive capacity.

Financial assets

Claims on real assets.

Fisher effect

A theory that nominal interest rates in two or more countries should be equal to the required real
rate of return to investors plus compensation for the expected amount of inflation in each country.

Fixed asset

Long-lived property owned by a firm that is used by a firm in the production of its income.
Tangible fixed assets include real estate, plant, and equipment. Intangible fixed assets include patents,
trademarks, and customer recognition.

Funds From Operations (FFO)

Used by real estate and other investment trusts to define the cash flow from
trust operations. It is earnings with depreciation and amortization added back. A similar term increasingly
used is Funds Available for Distribution (FAD), which is FFO less capital investments in trust property and
the amortization of mortgages.

Inflation risk

Also called purchasing-power risk, the risk that changes in the real return the investor will
realize after adjusting for inflation will be negative.

Informationless trades

Trades that are the result of either a reallocation of wealth or an implementation of an
investment strategy that only utilizes existing information.

Intermarket spread swaps

An exchange of one bond for another based on the manager's projection of a
realignment of spreads between sectors of the bond market.

Liquidation value

Net amount that could be realized by selling the assets of a firm after paying the debt.

Modeling

The process of creating a depiction of reality, such as a graph, picture, or mathematical
representation.

Mortgage

A loan secured by the collateral of some specified real estate property which obliges the borrower
to make a predetermined series of payments.

Nominal exchange rate

The actual foreign exchange quotation in contrast to the real exchange rate that has
been adjusted for changes in purchasing power.

Normalizing method

The practice of making a charge in the income account equivalent to the tax savings
realized through the use of different depreciation methods for shareholder and income tax purposes, thus
washing out the benefits of the tax savings reported as final net income to shareholders.

Operating cycle

The average time intervening between the acquisition of materials or services and the final
cash realization from those acquisitions.

Paper gain (loss)

Unrealized capital gain (loss) on securities held in portfolio, based on a comparison of
current market price to original cost.

Performance measurement

The calculation of the return realized by a money manager over some time interval.

Portfolio

A collection of investments, real and/or financial.

Production payment financing

A method of nonrecourse asset-based financing in which a specified
percentage of revenue realized from the sale of the project's output is used to pay debt service.

Random variable

A function that assigns a real number to each and every possible outcome of a random experiment.

Rebalancing

realigning the proportions of assets in a portfolio as needed.

Return-to-maturity expectations

A variant of pure expectations theory which suggests that the return that an
investor will realize by rolling over short-term bonds to some investment horizon will be the same as holding
a zero-coupon bond with a maturity that is the same as that investment horizon.

Tangible asset

An asset whose value depends on particular physical properties. These i nclude reproducible
assets such as buildings or machinery and non-reproducible assets such as land, a mine, or a work of art. Also
called real assets. Related: Intangible asset

Tax clawback agreement

An agreement to contribute as equity to a project the value of all previously
realized project-related tax benefits not already clawed back to the extent required to cover any cash
deficiency of the project.

Tax free acquisition

A merger or consolidation in which 1) the acquirer's tax basis in each asset whose
ownership is transferred in the transaction is generally the same as the acquiree's, and 2) each seller who
receives only stock does not have to pay any tax on the gain he realizes until the shares are sold.

Tax deferral option

The feature of the U.S. Internal Revenue Code that the capital gains tax on an asset is
payable only when the gain is realized by selling the asset.

Total return

In performance measurement, the actual rate of return realized over some evaluation period. In
fixed income analysis, the potential return that considers all three sources of return (coupon interest, interest
on interest, and any capital gain/loss) over some i nvestment horizon.

Workout period

realignment period of a temporary misaligned yield relationship that sometimes occurs in
fixed income markets.

ACID-TEST RATIO

A ratio that shows how well a company could pay its current debts using only its most liquid or “quick” assets. It’s a more pessimistic—but also realistic—measure of safety than the current ratio, because it ignores sluggish, hard-toliquidate current assets like inventory and notes receivable. Here’s the formula:
(Cash + Accounts receivable + Marketable securities) / (Current liabilities)

accelerated depreciation

(1) The estimated useful life of the fixed asset being depreciated is
shorter than a realistic forecast of its probable actual service life;
(2) more of the total cost of the fixed asset is allocated to the first
half of its useful life than to the second half (i.e., there is a
front-end loading of depreciation expense).

fixed assets

An informal term that refers to the variety of long-term operating
resources used by a business in its operations—including real
estate, machinery, equipment, tools, vehicles, office furniture, computers,
and so on. In balance sheets, these assets are typically labeled property,
plant, and equipment. The term fixed assets captures the idea that the
assets are relatively fixed in place and are not held for sale in the normal
course of business. The cost of fixed assets, except land, is depreciated,
which means the cost is allocated over the estimated useful lives of the
assets.

negative cash flow

The cash flow from the operating activities of a business
can be negative, which means that its cash balance decreased from
its sales and expense activities during the period. When a business is
operating at a loss instead of making a profit, its cash outflows for
expenses very likely may be more than its cash inflow from sales. Even
when a business makes a profit for the period, its cash inflow from sales
could be considerably less than the sales revenue recorded for the
period, thus causing a negative cash flow for the period. Caution: This
term also is used for certain types of investments in which the net cash
flow from all sources and uses is negative. For example, investors in
rental real estate properties often use the term to mean that the cash
inflow from rental income is less than all cash outflows during the
period, including payments on the mortgage loan on the property.

ad hoc discount

a price concession made under competitive pressure (real or imagined) that does not relate to quantity purchased

electronic data interchange (EDI)

the computer-to-computer transfer of information in virtual real time using standardized formats developed by the American National Standards Institute

enterprise resource planning (ERP) system

a packaged software program that allows a company to
(1) automate and integrate the majority of its business processes,
(2) share common data and practices across the entire enterprise, and
(3) produce and access information in a realtime environment

Opportunity cost

Lost revenue that would otherwise have been realized if a different
decision point had been selected.

Write off

The transfer of some or all of the contents of an asset account into an expense
account upon the realization that the asset no longer can be converted into cash, can
be of no further use to the company, or has no market value.

capital budgeting decision

Decision as to which real assets the firm should acquire.

financial assets

Claims to the income generated by real assets. Also called securities.

financing decision

Decision as to how to raise the money to pay for investments in real assets.

international Fisher effect

Theory that real interest rates in all countries should be equal, with differences in nominal rates reflecting differences in expected inflation.

liquidation value

Net proceeds that would be realized by selling the firm’s assets and paying off its creditors.

Accomodating Policy

A monetary policy of matching wage and price increases with money supply increases so that the real money supply does not fall and push the economy into recession.

Capital

a) Physical capital: buildings, equipment, and any materials used to produce other goods and services in the future rather than being consumed today.
b) Financial capital: funds available for acquiring real capital.
c) Human capital: the value of the education and experience that make people more productive.

Constant dollars

See real dollars.

Current Dollars

A variable like GDP is measured in current dollars if each year's value is measured in prices prevailing during that year. In contrast, when measured in real or constant dollars, each year's value is measured in a base year's prices.

Deflator

A price index used to deflate a nominal value to a real value by dividing the nominal value by the price deflator.

GDP Deflator

Price index used to deflate nominal GDP to real GDP by dividing nominal GDP by the GDP deflator.

Index

A series of numbers measuring percentage changes over time from a base period. The index number for the base period is by convention set equal to 100.
Indexing
Linking money payments to a price index to hold the real value of those money payments constant.

Inflation Tax

The loss in purchasing power due to inflation eroding the real value of financial assets such as cash.

Interest Rate Parity

Theory that real interest rates are approximately the same across countries except for a risk premium.

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.

Neutrality of Money

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

Nominal

Measured in money terms, in current rather than real dollars. Contrast with real.

Purchasing Power Parity

Theory that says that over the long run exchange rate changes offset any difference between foreign and domestic inflation. This result assumes that the real exchange rate remains constant, something that is not true even in the long run.

Recession

Loosely speaking, a period of less-than-normal economic growth. Technically, a downturn in economic activity in which real GDP falls in two consecutive quarters.

Aggressive Capitalization Policies

Capitalizing and reporting as assets significant portions of
expenditures, the realization of which require unduly optimistic assumptions.

Deferred Tax Asset

Future tax benefit that results from (1) the origination of a temporary difference
that causes pretax book income to be less than taxable income or (2) a loss, credit, or other
carryforward. Future tax benefits are realized on the reversal of deductible temporary differences
or the offsetting of a loss carryforward against taxable income or a tax-credit carryforward against
the current tax provision.

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