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Definition of Short interest

Short Interest Image 1

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.



Related Terms:

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.


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).


Amortizing interest rate swap

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


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.


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.


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Cash flow after interest and taxes

Net income plus depreciation.


Compound interest

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


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.


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.


Gross interest

interest earned before taxes are deducted.


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.


Short Interest Image 3

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.


Short Interest Image 4

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.


Nominal interest rate

The interest rate unadjusted for inflation.


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


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.


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.


Selling short

If an investor thinks the price of a stock is going down, the investor could borrow the stock from
a broker and sell it. Eventually, the investor must buy the stock back on the open market. For instance, you
borrow 1000 shares of XYZ on July 1 and sell it for $8 per share. Then, on Aug 1, you purchase 1000 shares
of XYZ at $7 per share. You've made $1000 (less commissions and other fees) by selling short.


Short

One who has sold a contract to establish a market position and who has not yet closed out this position
through an offsetting purchase; the opposite of a long position. Related: Long.


Short bonds

Bonds with short current maturities.


Short book

See: unmatched book.


Short hedge

The sale of a futures contract(s) to eliminate or lessen the possible decline in value ownership of
an approximately equal amount of the actual financial instrument or physical commodity.
Related: Long hedge.


Short position

Occurs when a person sells stocks he or she does not yet own. Shares must be borrowed,
before the sale, to make "good delivery" to the buyer. Eventually, the shares must be bought to close out the
transaction. This technique is used when an investor believes the stock price will go down.


Short sale

Selling a security that the seller does not own but is committed to repurchasing eventually. It is
used to capitalize on an expected decline in the security's price.


Short selling

Establishing a market position by selling a security one does not own in anticipation of the price
of that security falling.


Short squeeze

A situation in which a lack of supply tends to force prices upward.


Short straddle

A straddle in which one put and one call are sold.


Shortage cost

Costs that fall with increases in the level of investment in current assets.


Shortfall risk

The risk of falling short of any investment target.


Short-run operating activities

Events and decisions concerning the short-term finance of a firm, such as
how much inventory to order and whether to offer cash terms or credit terms to customers.


Short-term financial plan

A financial plan that covers the coming fiscal year.


Short-term investment services

Services that assist firms in making short-term investments.


Short-term solvency ratios

Ratios used to judge the adequacy of liquid assets for meeting short-term
obligations as they come due, including
1) the current ratio,
2) the acid-test ratio,
3) the inventory turnover ratio, and
4) the accounts receivable turnover ratio.


Short-term tax exempts

short-term securities issued by states, municipalities, local housing agencies, and
urban renewal agencies.


Simple interest

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


Spot interest rate

interest rate fixed today on a loan that is made today. Related: forward interest rates.


Stated annual interest rate

The interest rate expressed as a per annum percentage, by which interest
payment is determined.


Times-interest-earned ratio

Earnings before interest and tax, divided by interest payments.


True interest cost

For a security such as commercial paper that is sold on a discount basis, the coupon rate
required to provide an identical return assuming a coupon-bearing instrument of like maturity that pays
interest in arrears.


Earnings before interest and taxes (EBIT)

The operating profit before deducting interest and tax.


Earnings before interest, taxes, depreciation and amortization (EBITDA)

The operating profit before deducting interest, tax, depreciation and amortization.


Interest

The cost of money, received on investments or paid on borrowings.


Profit before interest and taxes (PBIT)

See EBIT.


Interest income

Income that a company receives in the form of interest, usually as the result of keeping money in interest-bearing accounts at financial institutions and the lending of money to other companies.


Interest payable

The amount of interest that is owed but has not been paid at the end of a period.


earnings before interest and income tax (EBIT)

A measure of profit that
equals sales revenue for the period minus cost-of-goods-sold expense
and all operating expensesóbut before deducting interest and income
tax expenses. It is a measure of the operating profit of a business before
considering the cost of its debt capital and income tax.


times interest earned

A ratio that tests the ability of a business to make
interest payments on its debt, which is calculated by dividing annual
earnings before interest and income tax by the interest expense for the
year. There is no particular rule for this ratio, such as 3 or 4 times, but
obviously the ratio should be higher than 1.


Accrued Interest

The amount of interest accumulated on a debt security between
interest paying dates


Compound Interest

interest paid on principal and on interest earned in previous
periods


Effective Interest Rate

The rate of interest actually earned on an investment. It is
calculated as the ratio of the total amount of interest actually
earned for one year divided by the amount of the principal.


Nominal Interest Rate

The rate of interest quoted, or stated, to be paid on a security


Real Interest Rate

The rate of interest paid on an investment adjusted for inflation


Simple Interest

interest paid only on the principal; calculated by multiplying the
interest rate by the principal


Times Interest Earned Ratio

A measure of how well a company is able to meet its interest
payments based on the cash generated by its operations. It is
calculated by dividing the earnings before interest and taxes by the
total interest charges incurred by the firm.


compound interest

a method of determining interest in which interest that was earned in prior periods is added to the original investment so that, in each successive period, interest is earned on both principal and interest


simple interest

a method of determining interest in which interest is earned only on the original investment (or principal) amount


Short rate

The annualized one-period interest rate.


Short sale, short position

The sale of a security or financial instrument not
owned, in anticipation of a price decline and making a profit by purchasing the
instrument later at a lower price, and then delivering the instrument to
complete the sale. See Long position.


Interest

The cost of funds loaned to an entity. It can also refer to the equity ownership
of an investor in a business entity.


Pooling of interests

An method for accounting for a business combination. When used, the expenses of the combination are charged against income at once, and the net
income of the acquired company is added to the full-year reported results of the acquiring company.


compound interest

interest earned on interest.


effective annual interest rate

interest rate that is annualized using compound interest.


interest rate parity

Theory that forward premium equals interest rate differential.


interest tax shield

Tax savings resulting from deductibility of interest payments.


nominal interest rate

Rate at which money invested grows.


real interest rate

Rate at which the purchasing power of an investment increases.


shortage costs

Costs incurred from shortages in current assets.


short position

The sale of an investment, particularly by someone who does not yet own it.


simple interest

interest earned only on the original investment; no interest is earned on interest.


Interest Rate Differential

The interest rate on our financial assets minus the interest rate on a foreign country's financial assets.


Interest Rate, Nominal

Payment for the use of borrowed funds, measured as a percentage per year of these funds.


Interest Rate Parity

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


Interest Rate, Real

Nominal interest rate less expected inflation.


Money Rate of Interest

See interest rate, nominal.


Real Rate of Interest

See interest rate, real.


Term Structure of Interest Rates

Relationship among interest rates on bonds with different terms to maturity.


Capitalized Interest

interest incurred during the construction period on monies invested in
assets under construction that is added to the cost of the assets.


Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)

An earningsbased measure that, for many, serves as a surrogate for cash flow. Actually consists of working
capital provided by operations before interest and taxes.


Compound Interest

interest earned on an investment at periodic intervals and added to principal and previous interest earned. Each time new interest earned is calculated it is on a combined total of principal and previous interest earned. Essentially, interest is paid on top of interest.



 

 

 

 

 

 

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