Definition of Act of state doctrine

Act of state doctrine

This doctrine says that a nation is sovereign within its own borders and its domestic
actions may not be questioned in the courts of another nation.

ADF (annuity discount factor)

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

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.

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.

Active

A market in which there is much trading.

Active portfolio strategy

A strategy that uses available information and forecasting techniques to seek a
better performance than a portfolio that is simply diversified broadly. Related: passive portfolio strategy

Actuals

The physical commodity underlying a futures contract. Cash commodity, physical.

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.

Asset activity ratios

Ratios that measure how effectively the firm is managing its assets.

Bullet contract

A guaranteed investment contract purchased with a single (one-shot) premium. Related:
Window contract.

Cash settlement contracts

Futures contracts, such as stock index futures, that settle for cash, not involving
the delivery of the underlying.

Cash transaction

A transaction where exchange is immediate, as contrasted to a forward contract, which
calls for future delivery of an asset at an agreed-upon price.

Characteristic line

The market model applied to a single security. The slope of the line is a security's beta.

Collection fractions

The percentage of a given month's sales collected during the month of sale and each
month following the month of sale.

Conditional sales contracts

Similar to equipment trust certificates except that the lender is either the
equipment manufacturer or a bank or finance company to whom the manufacturer has sold the conditional
sales contract.

Contract

A term of reference describing a unit of trading for a financial or commodity future. Also, the actual
bilateral agreement between the buyer and seller of a transaction as defined by an exchange.

Contract month

The month in which futures contracts may be satisfied by making or accepting a delivery.
Also called value managers, those who assemble portfolios with relatively lower betas, lower price-book and
P/E ratios and higher dividend yields, seeing value where others do not.

Convention statement

An annual statement filed by a life insurance company in each state where it does
business in compliance with that state's regulations. The statement and supporting documents show, among
other things, the assets, liabilities, and surplus of the reporting company.

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.

De facto

Existing in actual fact although not by official recognition.

Discount factor

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

Doctrine of sovereign immunity

doctrine that says a nation may not be tried in the courts of another country
without its consent.

Exact matching

A bond portfolio management strategy that involves finding the lowest cost portfolio
generating cash inflows exactly equal to cash outflows that are being financed by investment.

Factor

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

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 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.

Floating-rate contract

A guaranteed investment contract where the credit rating is tied to some variable
("floating") interest rate benchmark, such as a specific-maturity Treasury yield.

Forward contract

A cash market transaction in which delivery of the commodity is deferred until after the
contract has been made. It is not standardized and is not traded on organized exchanges. Although the
delivery is made in the future, the price is determined at the initial trade date.

Forward forward contract

In Eurocurrencies, a contract under which a deposit of fixed maturity is agreed to
at a fixed price for future delivery.

Futures contract

Agreement to buy or sell a set number of shares of a specific stock in a designated future
month at a price agreed upon by the buyer and seller. The contracts themselves are often traded on the futures
market. A futures contract differs from an option because an option is the right to buy or sell, whereas a
futures contract is the promise to actually make a transaction. A future is part of a class of securities called
derivatives, so named because such securities derive their value from the worth of an underlying investment.

Futures contract multiple

A constant, set by an exchange, which when multiplied by the futures price gives
the dollar value of a stock index futures contract.

Glass-Steagall Act

A 1933 act in which Congress forbade commercial banks to own, underwrite, or deal in
corporate stock and corporate bonds.

Going-private transactions

Publicly owned stock in a firm is replaced with complete equity ownership by a
private group. The shares are delisted from stock exchanges and can no longer be purchased in the open
markets.

Guaranteed insurance contract

A contract promising a stated nominal interest rate over some specific time
period, usually several years.

Guaranteed investment contract (GIC)

A pure investment product in which a life company agrees, for a
single premium, to pay the principal amount of a predetermined annual crediting (interest) rate over the life of
the investment, all of which is paid at the maturity date.

Hell-or-high-water contract

A contract that obligates a purchaser of a project's output to make cash
payments to the project in all events, even if no product is offered for sale.

Highly leveraged transaction (HLT)

Bank loan to a highly leveraged firm.

Income statement (statement of operations)

A statement showing the revenues, expenses, and income (the
difference between revenues and expenses) of a corporation over some period of time.

Intercompany transaction

Transaction carried out between two units of the same corporation.

Manufactured housing securities (MHSs)

Loans on manufactured homes - that is, factory-built or
prefabricated housing, including mobile homes.

Market impact costs

Also called price impact costs, the result of a bid/ask spread and a dealer's price concession.

Maturity factoring

Factoring arrangement that provides collection and insurance of accounts receivable.

Most distant futures contract

When several futures contracts are considered, the contract settling last.
Related: nearby futures contract

Multifactor CAPM

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

Nearby futures contract

When several futures contracts are considered, the contract with the closest
settlement date is called the nearby futures contract. The next futures contract is the one that settles just after
the nearby futures contract. The contract farthest away in time from settlement is called the most distant
futures contract.

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.

Next futures contract

The contract settling immediately after the nearby futures contract.

Nexus (of contracts)

A set or collection of something.

Notes to the financial statements

A detailed set of notes immediately following the financial statements in
an annual report that explain and expand on the information in the financial statements.

Official statement

A statement published by an issuer of a new municipal security describing itself and the issue

Old-line factoring

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

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.

Open contracts

Contracts which have been bought or sold without the transaction having been completed by
subsequent sale or purchase, or by making or taking actual delivery of the financial instrument or physical
commodity.

Optimal contract

The contract that balances the three types of agency costs (contracting, monitoring, and
misbehavior) against one another to minimize the total cost.

Options contract

A contract that, in exchange for the option price, gives the option buyer the right, but not
the obligation, to buy (or sell) a financial asset at the exercise price from (or to) the option seller within a
specified time period, or on a specified date (expiration date).

Options contract multiple

A constant, set at $100, which when multiplied by the cash index value gives the
dollar value of the stock index underlying an option. That is, dollar value of the underlying stock index = cash
index value x $100 (the options contract multiple).

Overreaction hypothesis

The supposition that investors overreact to unanticipated news, resulting in
exaggerated movement in stock prices followed by corrections.

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.

Present value factor

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

Price impact costs

Related: market impact costs

Pro forma financial statements

Financial statements as adjusted to reflect a projected or planned transaction.

Pro forma statement

A financial statement showing the forecast or projected operating results and balance
sheet, as in pro forma income statements, balance sheets, and statements of cash flows.

Reaction

A decline in prices following an advance. Opposite of rally.

Receivables balance fractions

The percentage of a month's sales that remain uncollected (and part of
accounts receivable) at the end of succeeding months.

Registration statement

A legal document that is filed with the SEC to register securities for public offering.

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.

Reported factor

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

Round-trip transactions costs

Costs of completing a transaction, including commissions, market impact
costs, and taxes.

Security characteristic line

A plot of the excess return on a security over the risk-free rate as a function of
the excess return on the market.

Set of contracts perspective

View of corporation as a set of contracting relationships, among individuals
who have conflicting objectives, such as shareholders or managers. The corporation is a legal contrivance that
serves as the nexus for the contracting relationships.

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.

Single factor model

A model of security returns that acknowledges only one common factor.
See: factor model.

Stated annual interest rate

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

Stated conversion price

At the time of issuance of a convertible security, the price the issuer effectively
grants the security holder to purchase the common stock, equal to the par value of the convertible security
divided by the conversion ratio.

Stated maturity

For the CMO tranche, the date the last payment would occur at zero CPR.

Statement billing

Billing method in which the sales for a period such as a month (for which a customer also
receives invoices) are collected into a single statement and the customer must pay all of the invoices
represented on the statement.

Statement of cash flows

A financial statement showing a firm's cash receipts and cash payments during a
specified period.

Statement-of-cash-flows method

A method of cash budgeting that is organized along the lines of the statement of cash flows.

Statement of Financial Accounting Standards No. 8

This is a currency translation standard previously in
use by U.S. accounting firms. See: statement of Accounting Standards No. 52.

Statement of Financial Accounting Standards No. 52

This is the currency translation standard currently
used by U.S. firms. It mandates the use of the current rate method. See: statement of Financial Accounting
Standards No. 8.

Steady state

As the MBS pool ages, or four to six months after it was passed at least once through the
threshold for refinancing, the prepayment speed tends to stabilize within a fairly steady range.

Structured arbitrage transaction

A self-funding, self-hedged series of transactions that usually utilize
mortgage securities as the primary assets.

Tactical Asset Allocation (TAA)

An asset allocation strategy that allows active departures from the normal
asset mix based upon rigorous objective measures of value. Often called active management. It involves
forecasting asset returns, volatilities and correlations. The forecasted variables may be functions of
fundamental variables, economic variables or even technical variables.

Take-or-pay contract

A contract that obligates the purchaser to take any product that is offered to it (and pay
the cash purchase price) or pay a specified amount if it refuses to take the product.

Tax Reform Act of 1986

A 1986 law involving a major overhaul of the U.S. tax code.

Taxable transaction

Any transaction that is not tax-free to the parties involved, such as a taxable acquisition.

Transaction exposure

Risk to a firm with known future cash flows in a foreign currency that arises from
possible changes in the exchange rate. Related:translation exposure.

Transactions costs

The time, effort, and money necessary, including such things as commission fees and the
cost of physically moving the asset from seller to buyer. Related: Round-trip transaction costs, Information
costs, search costs.

Transaction loan

A loan extended by a bank for a specific purpose. In contrast, lines of credit and revolving
credit agreements involve loans that can be used for various purposes.

Transaction demand (for money)

The need to accommodate a firm's expected cash transactions.

Transactions motive

A desire to hold cash for the purpose of conducting cash based transactions.

Turnkey construction contract

A type of construction contract under which the construction firm is
obligated to complete a project according to prespecified criteria for a price that is fixed at the time the
contract is signed.

Two-factor model

Black's zero-beta version of the capital asset pricing model.

Two-state option pricing model

An option pricing model in which the underlying asset can take on only two
possible (discrete) values in the next time period for each value it can take on in the preceding time period.
Also called the binomial option pricing model.

Window contract

A guaranteed investment contract purchased with deposits over some future designated
time period (the "window"), usually between 3 and 12 months. All deposits made are guaranteed the same
credit rating.
Related: bullet contract.

CASH-FLOW STATEMENT

A statement that shows where a company’s cash came from and where it went for a period of time, such as a year.

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