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Scale enhancing

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Definition of Scale enhancing

Scale Enhancing Image 1

Scale enhancing

Describes a project that is in the same risk class as the whole firm.



Related Terms:

Economies of scale

The decrease in the marginal cost of production as a plant's scale of operations increases.


Scale

A bank that offers to pay different rates of interest on CDs of varying rates is said to "post a scale."
Commercial paper dealers also post scales.


Scale in

When a trader or investor gradually takes a position in a security or market over time.


Logarithmic Scale

A scale in which equal proportions are shown as equal distances so that, for example, a doubling from 2 to 4 is represented by one inch, as is a doubling from 4 to 8.


Ratio Scale

See logarithmic scale.



Economies of scope

Scope economies exist whenever the same investment can support multiple profitable
activities less expensively in combination than separately.


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.


Scale Enhancing Image 1

Accelerated cost recovery system (ACRS)

Schedule of depreciation rates allowed for tax purposes.


Accounts payable

Money owed to suppliers.


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).


Affirmative covenant

A bond covenant that specifies certain actions the firm must take.


Agency bank

A form of organization commonly used by foreign banks to enter the U.S. market. An agency
bank cannot accept deposits or extend loans in its own name; it acts as agent for the parent bank.


Agency cost view

The argument that specifies that the various agency costs create a complex environment in
which total agency costs are at a minimum with some, but less than 100%, debt financing.


Agency costs

The incremental costs of having an agent make decisions for a principal.


All-in cost

Total costs, explicit and implicit.


Amortizing interest rate swap

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


Scale Enhancing Image 2

Asset classes

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


Average cost of capital

A firm's required payout to the bondholders and to the stockholders expressed as a
percentage of capital contributed to the firm. Average cost of capital is computed by dividing the total
required cost of capital by the total amount of contributed capital.



Balance of payments

A statistical compilation formulated by a sovereign nation of all economic transactions
between residents of that nation and residents of all other nations during a stipulated period of time, usually a
calendar year.


BAN (Bank anticipation notes)

Notes issued by states and municipalities to obtain interim financing for
projects that will eventually be funded long term through the sale of a bond issue.


Bank collection float

The time that elapses between when a check is deposited into a bank account and when the funds are available to the depositor, during which period the bank is collecting payment from the payer's bank.


Bank discount basis

A convention used for quoting bids and offers for treasury bills in terms of annualized
yield , based on a 360-day year.


Bank draft

A draft addressed to a bank.


Bank line

Line of credit granted by a bank to a customer.


Bank wire

A computer message system linking major banks. It is used not for effecting payments, but as a
mechanism to advise the receiving bank of some action that has occurred, e.g. the payment by a customer of
funds into that bank's account.


Banker's acceptance

A short-term credit investment created by a non-financial firm and guaranteed by a
bank as to payment. Acceptances are traded at discounts from face value in the secondary market. These
instruments have been a popular investment for money market funds. They are commonly used in
international transactions.


Bank for International Settlements (BIS)

An international bank headquartered in Basel, Switzerland, which
serves as a forum for monetary cooperation among several European central banks, the bank of Japan, and the
U.S. Federal Reserve System. Founded in 1930 to handle the German payment of World War I reparations, it
now monitors and collects data on international banking activity and promulgates rules concerning
international bank regulation.


Bankruptcy

State of being unable to pay debts. Thus, the ownership of the firm's assets is transferred from
the stockholders to the bondholders.



Bankruptcy cost view

The argument that expected indirect and direct bankruptcy costs offset the other
benefits from leverage so that the optimal amount of leverage is less than 100% debt finaning.


Bankruptcy risk

The risk that a firm will be unable to meet its debt obligations. also referred to as default or insolvency risk.


Bankruptcy view

The argument that expected bankruptcy costs preclude firms from being financed entirely
with debt.


Base interest rate

Related: Benchmark interest rate.


Basis risk

The uncertainty about the basis at the time a hedge may be lifted. Hedging substitutes basis risk for
price risk.


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.


Break-even lease payment

The lease payment at which a party to a prospective lease is indifferent between
entering and not entering into the lease arrangement.


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.


Business risk

The risk that the cash flow of an issuer will be impaired because of adverse economic
conditions, making it difficult for the issuer to meet its operating expenses.


Call risk

The combination of cash flow uncertainty and reinvestment risk introduced by a call provision.


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.


Carring costs

costs that increase with increases in the level of investment in current assets.


Cash flow after interest and taxes

Net income plus depreciation.


Cash flow from operations

A firm's net cash inflow resulting directly from its regular operations
(disregarding extraordinary items such as the sale of fixed assets or transaction costs associated with issuing
securities), calculated as the sum of net income plus non-cash expenses that were deducted in calculating net
income.


Clearing House Automated Payments System (CHAPS)

A computerized clearing system for sterling funds
that began operations in 1984. It includes 14 member banks, nearly 450 participating banks, and is one of the
clearing companies within the structure of the Association for payment Clearing Services (APACS).


Clearing House Interbank Payments System (CHIPS)

An international wire transfer system for high-value
payments operated by a group of major banks.


Commercial draft

Demand for payment.


Commercial paper

Short-term unsecured promissory notes issued by a corporation. The maturity of
Commercial paper is typically less than 270 days; the most common maturity range is 30 to 50 days or less.


Commercial risk

The risk that a foreign debtor will be unable to pay its debts because of business events,
such as bankruptcy.


Company-specific risk

Related: Unsystematic risk


Completion risk

The risk that a project will not be brought into operation successfully.


Compound interest

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


Confirmation

he written statement that follows any "trade" in the securities markets. Confirmation is issued
immediately after a trade is executed. It spells out settlement date, terms, commission, etc.


Consortium banks

A merchant banking subsidiary set up by several banks that may or may not be of the
same nationality. Consortium banks are common in the Euromarket and are active in loan syndication.


Contingent deferred sales charge (CDSC)

The formal name for the load of a back-end load fund.


Conventional project

A project with a negative initial cash flow (cash outflow), which is expected to be
followed by one or more future positive cash flows (cash inflows).


Cost company arrangement

Arrangement whereby the shareholders of a project receive output free of
charge but agree to pay all operating and financing charges of the project.


Cost of capital

The required return for a capital budgeting project.


Cost of carry

Related: Net financing cost


Cost of funds

interest rate associated with borrowing money.


Cost of lease financing

A lease's internal rate of return.


Cost of limited partner capital

The discount rate that equates the after-tax inflows with outflows for capital
raised from limited partners.


Cost-benefit ratio

The net present value of an investment divided by the investment's initial cost. also called
the profitability index.


Counterparty risk

The risk that the other party to an agreement will default. In an options contract, the risk
to the option buyer that the option writer will not buy or sell the underlying as agreed.
Country economic risk Developments in a national economy that can affect the outcome of an international
financial transaction.


Country financial risk

The ability of the national economy to generate enough foreign exchange to meet
payments of interest and principal on its foreign debt.


Country risk General

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


Coupon payments

A bond's interest payments.


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.


Credit risk

The risk that an issuer of debt securities or a borrower may default on his obligations, or that the
payment may not be made on a negotiable instrument. Related: Default risk


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.


Cross-border risk

Refers to the volatility of returns on international investments caused by events associated
with a particular country as opposed to events associated solely with a particular economic or financial agent.


Currency risk

Related: Exchange rate risk


Currency risk sharing

An agreement by the parties to a transaction to share the currency risk associated with
the transaction. The arrangement involves a customized hedge contract embedded in the underlying
transaction.


Customary payout ratios

A range of payout ratios that is typical based on an analysis of comparable firms.


Date of payment

Date dividend checks are mailed.


Default risk

also referred to as credit risk (as gauged by Commercial rating companies), the risk that an
issuer of a bond may be unable to make timely principal and interest payments.


Delivery versus payment

A transaction in which the buyer's payment for securities is due at the time of
delivery (usually to a bank acting as agent for the buyer) upon receipt of the securities. The payment may be
made by bank wire, check, or direct credit to an account.


Devaluation A decrease in the spot price of the currency



Differential disclosure

The practice of reporting conflicting or markedly different information in official
corporate statements including annual and quarterly reports and the 10-Ks and 10-Qs.


Differential swap

Swap between two LIBO rates of interest, e.g. yen LIBOR for dollar LIBOR. payments are
in one currency.


Direct paper

Commercial paper sold directly by the issuer to investors.


Discounted payback period rule

An investment decision rule in which the cash flows are discounted at an
interest rate and the payback rule is applied on these discounted cash flows.


Diversifiable risk

Related: unsystematic risk.


Dividend payout ratio

Percentage of earnings paid out as dividends.


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.


Economic risk

In project financing, the risk that the project's output will not be salable at a price that will
cover the project's operating and maintenance costs and its debt service requirements.


Effective annual interest rate

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


Eligible bankers' acceptances

In the BA market, an acceptance may be referred to as eligible because it is
acceptable by the Fed as collateral at the discount window and/or because the accepting bank can sell it
without incurring a reserve requirement.


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.


Equivalent annual cost

The equivalent cost per year of owning an asset over its entire life.


Euro CDs

CDs issued by a U.S. bank branch or foreign bank located outside the U.S. Almost all Euro CDs
are issued in London.


Eurobank

A bank that regularly accepts foreign currency denominated deposits and makes foreign currency loans.


Euro-commercial paper

Short-term notes with maturities up to 360 days that are issued by companies in
international money markets.


Event risk

The risk that the ability of an issuer to make interest and principal payments will change because
of rare, discontinuous, and very large, unanticipated changes in the market environment such as (1) a natural
or industrial accident or some regulatory change or (2) a takeover or corporate restructuring.


Ex post return

Related: Holding period return


Exchange rate risk

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


Exchange risk

The variability of a firm's value that results from unexpected exchange rate changes or the
extent to which the present value of a firm is expected to change as a result of a given currency's appreciation
or depreciation.


Execution costs

The difference between the execution price of a security and the price that would have
existed in the absence of a trade, which can be further divided into market impact costs and market timing
costs.


Export-Import Bank (Ex-Im Bank)

The U.S. federal government agency that extends trade credits to U.S.
companies to facilitate the financing of U.S. exports.


Fallout risk

A type of mortgage pipeline risk that is generally created when the terms of the loan to be
originated are set at the same time as the sale terms are set. The risk is that either of the two parties, borrower
or investor, fails to close and the loan "falls out" of the pipeline.


Feasible target payout ratios

payout ratios that are consistent with the availability of excess funds to make
cash dividend payments.


Federal Financing Bank

A federal institution that lends to a wide array of federal credit agencies funds it
obtains by borrowing from the U.S. Treasury.


Federal Home Loan Banks

The institutions that regulate and lend to savings and loan associations. The
Federal Home Loan banks play a role analogous to that played by the Federal Reserve banks vis-Ó-vis
member Commercial banks.


FHA prepayment experience

The percentage of loans in a pool of mortgages outstanding at the origination
anniversary, based on annual statistical historic survival rates for FHA-insured mortgages.


Financial distress costs

Legal and administrative costs of liquidation or reorganization. also includes
implied costs associated with impaired ability to do business (indirect costs).



 

 

 

 

 

 

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