Definition of suboptimization

suboptimization

a situation in which an individual manager
pursues goals and objectives that are in his/her own and
his/her segment’s particular interests rather than in the
company’s best interests

Bellwether issues

Related:Benchmark issues.

Best-efforts sale

A method of securities distribution/ underwriting in which the securities firm agrees to sell
as much of the offering as possible and return any unsold shares to the issuer. As opposed to a guaranteed or
fixed price sale, where the underwriter agrees to sell a specific number of shares (with the securities firm
holding any unsold shares in its own account if necessary).

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.

Blue-chip company

Large and creditworthy company.

Builder buydown loan

A mortgage loan on newly developed property that the builder subsidizes during the
early years of the development. The builder uses cash to buy down the mortgage rate to a lower level than the
prevailing market loan rate for some period of time. The typical buydown is 3% of the interest-rate amount
for the first year, 2% for the second year, and 1% for the third year (also referred to as a 3-2-1 buydown).

Buydowns

Mortgages in which monthly payments consist of principal and interest, with portions of these
payments during the early period of the loan being provided by a third party to reduce the borrower's monthly
payments.

Common stock/other equity

Value of outstanding common shares at par, plus accumulated retained
earnings. Also called shareholders' equity.

Company-specific risk

Related: Unsystematic risk

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.

Cramdown

The ability of the bankruptcy court to confirm a plan of reorganization over the objections of
some classes of creditors.

Crown jewel

A particularly profitable or otherwise particularly valuable corporate unit or asset of a firm.

Depository Trust Company (DTC)

DTC is a user-owned securities depository which accepts deposits of
eligible securities for custody, executes book-entry deliveries and records book-entry pledges of securities in
its custody, and provides for withdrawals of securities from its custody.

Down-and-in option

Barrier option that comes into existence if asset price hits a barrier.

Down-and-out option

Barrier option that expires if asset price hits a barrier.

Downgrade

A classic negative change in ratings for a stock, and or other rated security.

Either/or facility

An agreement permitting a bank customer to borrow either domestic dollars from the
bank's head office or Eurodollars from one of its foreign branches.

Either-way market

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

Employee stock ownership plan (ESOP)

A company contributes to a trust fund that buys stock on behalf of
employees.

Financial objectives

objectives of a financial nature that the firm will strive to accomplish during the period
covered by its financial plan.

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.

Fisher's separation theorem

The firm's choice of investments is separate from its owner's attitudes towards
investments. Also refered to as portfolio separation theorem.

Group rotation manager

A top-down manager who infers the phases of the business cycle and allocates
assets accordingly.

Growth manager

A money manager who seeks to buy stocks that are typically selling at relatively high P/E
ratios due to high earnings growth, with the expectation of continued high or higher earnings growth.

Herstatt risk

The risk of loss in foreign exchange trading that one party will deliver foreign exchange but the counterparty financial institution will fail to deliver its end of the contract. It is also referred to as settlement risk.

Historical exchange rate

An accounting term that refers to the exchange rate in effect when an asset or
liability was acquired.

Holding company

A corporation that owns enough voting stock in another firm to control management and
operations by influencing or electing its board of directors.

Intercompany loan

Loan made by one unit of a corporation to another unit of the same corporation.

Intercompany transaction

Transaction carried out between two units of the same corporation.

International Fisher effect

States that the interest rate differential between two countries should be an
unbiased predictor of the future change in the spot rate.

Investment manager

Also called a portfolio manager and money manager, the individual who manages a
portfolio of investments.

Lead manager

The commercial or investment bank with the primary responsibility for organizing syndicated
bank credit or bond issue. The lead manager recruits additional lending or underwriting banks, negotiates
terms of the issue with the issuer, and assesses market conditions.

Managerial decisions

Decisions concerning the operation of the firm, such as the choice of firm size, firm
growth rates, and employee compensation.

Market segmentation theory or preferred habitat theory

A biased expectations theory that asserts that the
shape of the yield curve is determined by the supply of and demand for securities within each maturity sector.

Money manager

Related: Investment manager.

Other capital

In the balance of payments, other capital is a residual category that groups all the capital
transactions that have not been included in direct investment, portfolio investment, and reserves categories. It
is divided into long-term capital and short-term capital and, because of its residual status, can differ from
country to country. Generally speaking, other long-term capital includes most non-negotiable instruments of a
year or more like bank loans and mortgages. Other short-term capital includes financial assets of less than a
year such as currency, deposits, and bills.

Other current assets

Value of non-cash assets, including prepaid expenses and accounts receivable, due
within 1 year.

Other long term liabilities

Value of leases, future employee benefits, deferred taxes and other obligations
not requiring interest payments that must be paid over a period of more than 1 year.

Other sources

Amount of funds generated during the period from operations by sources other than
depreciation or deferred taxes. Part of Free cash flow calculation.

Paydown

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

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.

Portfolio manager

Related: Investment manager

Red herring

A preliminary prospectus containing information required by the SEC. It excludes the offering
price and the coupon of the new issue.

Retail investors, individual investors

Small investors who commit capital for their personal account.

Top-down equity management style

A management style that begins with an assessment of the overall
economic environment and makes a general asset allocation decision regarding various sectors of the financial
markets and various industries. The bottom-up manager, in contrast, selects the specific securities within the
favored sectors.

Value manager

A manager who seeks to buy stocks that are at a discount to their "fair value" and sell them at
or in excess of that value. Often a value stock is one with a low price to book value ratio.

Write-down

Decreasing the book value of an asset if its book value is overstated compared to current market values.

STOCKHOLDERS’ (OR OWNERS’) EQUITY

The value of the owners’ interests in a company.

inventory write-down

Refers to making an entry, usually at the close of a
period, to decrease the cost value of the inventories asset account in
order to recognize the lost value of products that cannot be sold at their
normal markups or will be sold below cost. A business compares the
recorded cost of products held in inventory against the sales value of the
products. Based on the lower-of-cost-or-market rule, an entry is made to
record the inventory write-down as an expense.

owners' equity

Refers to the capital invested in a business by its shareowners
plus the profit earned by the business that has not been distributed
to its shareowners, which is called retained earnings. owners’
equity is one of the two basic sources of capital for a business, the other
being borrowed money, or debt. The book value, or value reported in a
balance sheet for owners’ equity, is not the market value of the business.
Rather, the balance sheet value reflects the historical amounts of capital
invested in the business by the owners over the years plus the accumulation
of yearly profits that were not paid out to owners.

Companyspecific Risk

See asset-specific risk

downsizing

any management action that reduces employment
upon restructuring operations in response to competitive
pressures

Employee Stock Ownership Plan (ESOP)

a profit-sharing compensation program in which investments are made in
the securities of the employer

Fisher rate

the rate of return that equates the present values
of the cash flows of all projects being considered; it is the
rate of indifference

historical cost

a cost incurred in the past; the recorded purchase
price of an asset; a sunk cost

limited liability company

an organizational form that is a hybrid of the corporate and partnership organizational
forms and used to limit the personal liability of the owners;
it is typically used by small professional (such as accounting) firms

segment margin

the excess of revenues over direct variable expenses and avoidable fixed expenses for a particular segment

service company

an individual or firm engaged in a high or moderate degree of conversion that results in service output

Historical cost

The original cost required to perform a service or purchase an asset.

Other assets

A cluster of accounts that are listed after fixed assets on the balance sheet,
and which contain minor assets that cannot be reasonably fit into any of the other
main asset categories.

Owners' equity

The total of all capital contributions and retained earnings on a business’s
balance sheet.

Parent company

A company that retains control over one or more other companies.

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.

Segment reporting

A portion of the financial statements that breaks out the results of
specific business units.

Subsidiary company

A company that is controlled by another company through ownership
of the majority of its voting stock.

company cost of capital

Expected rate of return demanded by investors in a company, determined by the average risk of the company’s assets and operations.

international Fisher effect

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

Bellwether

A signalling device.

Employee Stock Ownership Plan (ESOP)

A fund containing company stock and owned by employees, paid for by ongoing contributions by the employer.

Individual Retirement Account

A personal savings account into which a defined
maximum amount may be contributed, and for which any resulting interest
is tax deferred.

Individual Retirement Annuity

An IRA comprised of an annuity that is managed
through and paid out by a life insurance company.

Accumulated Other Comprehensive Income

Cumulative gains or losses reported in shareholders'
equity that arise from changes in the fair value of available-for-sale securities, from the
effects of changes in foreign-currency exchange rates on consolidated foreign-currency financial
statements, certain gains and losses on financial derivatives, and from adjustments for underfunded
pension plans.

Cherry Picking

Selecting specific assets for sale so as to record desired gains or losses.

Other-than-Temporary Decline in Market Value

The standard used to describe a decline in market value that is not expected to recover. The use of the other-than-temporary description as
opposed to describing a loss as permanent stresses the fact that the burden of proof is on the
investor who believes a decline is only temporary. That investor must have the intent and financial
ability to hold the investment until its market value recovers. In the absence of an ability to
demonstrate that a decline is temporary, the conclusion must be that a decline in value is other
than temporary, in which case the decline in value must be recognized in income.

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.

Write-Down

A reduction in the balance-sheet valuation of an asset with an accompanying
expense or loss recorded in earnings.

Where-used report

A report listing every product whose bill of material calls for
the use of a specific component.

Contingent Owner

This is the person designated to become the new owner of a life insurance policy if the original owner dies before the life insured.

Owner

This is the person who owns the insurance policy. It is usually the same person as the insured but it could be someone else who has the permission of the insured to be the owner, like a spouse, a common-law-spouse, an offspring, a parent, a corporation with insurable interest or a business partner with insurable interest. In order for someone else to be an owner of your policy, they have to have a legitimate insurable interest in you.

Company Acquisitions

Assets acquired to create money. May include plant, machinery and equipment, shares of another company etc.

Finance Company

company engaged in making loans to individuals or businesses. Unlike a bank, it does not receive deposits from the public.

Insurance Company

A firm licensed to sell insurance to the public.

Trust Company

Organization usually combined with a commercial bank, which is engaged as a trustee for individuals or businesses in the administration of Trust funds, estates, custodial arrangements, stock transfer and registration, and other related services.

Individual Insurance

Insurance that is offered to individuals rather than groups.

Policyowner

The person who owns and holds all rights under the policy, including the power to name and change beneficiaries, make a policy loan, assign the policy to a financial institution as collateral for a loan, withdraw funds or surrender the policy.

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