Definition of Basis
Basis
Regarding a futures contract, the difference between the cash price and the futures price observed in the
market. Also, it is the price an investor pays for a security plus any out-of-pocket expenses. It is used to
determine capital gains or losses for tax purposes when the stock is sold.
Related Terms:
A means of compensating the broker of a program trade solely on the basis of commission
established through bids submitted by various brokerage firms. agency incentive arrangement. A means of
compensating the broker of a program trade using benchmark prices for issues to be traded in determining
commissions or fees.
A convention used for quoting bids and offers for treasury bills in terms of annualized
yield , based on a 360-day year.
In the bond market, the smallest measure used for quoting yields is a basis point. Each percentage
point of yield in bonds equals 100 basis points. basis points also are used for interest rates. An interest rate of
5% is 50 basis points greater than an interest rate of 4.5%.
Price expressed in terms of yield to maturity or annual rate of return.
The uncertainty about the basis at the time a hedge may be lifted. Hedging substitutes basis risk for
price risk.
The method used for computing the bond-equivalent yield.
Selling something on a discounted basis is selling below what its value will be at maturity,
so that the difference makes up all or part of the interest.
An offering of securities at a fixed price.
An account for the investment credit to show all income statement benefits of the credit
in the year of acquisition, rather than spreading them over the life of the asset acquired.
A method of selling a new issue of common stock in which the SEC declares the registration
statement effective on the basis of a price formula rather than on a specific range.
Also called the dollar value of a basis point, a measure of the change in
the price of the bond if the required yield changes by one basis point.
An asset’s purchase price, plus costs associated with the purchase, like installation fees, taxes, etc.
Well, frankly, accrual is not a good descriptive
term. Perhaps the best way to begin is to mention that accrual-basis
accounting is much more than cash-basis accounting. Recording only the
cash receipts and cash disbursement of a business would be grossly
inadequate. A business has many assets other than cash, as well as
many liabilities, that must be recorded. Measuring profit for a period as
the difference between cash inflows from sales and cash outflows for
expenses would be wrong, and in fact is not allowed for most businesses
by the income tax law. For management, income tax, and financial
reporting purposes, a business needs a comprehensive record-keeping
system—one that recognizes, records, and reports all the assets and liabilities
of a business. This all-inclusive scope of financial record keeping
is referred to as accrual-basis accounting. Accrual-basis accounting
records sales revenue when sales are made (though cash is received
before or after the sales) and records expenses when costs are incurred
(though cash is paid before or after expenses are recorded). Established
financial reporting standards require that profit for a period
must be recorded using accrual-basis accounting methods. Also, these
authoritative standards require that in reporting its financial condition a
business must use accrual-basis accounting.
One one-hundredth of one percent
One hundredth of one percentage point, or 0.0001.
Basis Point
One one-hundredth of a percentage point, used to express variations in yields. For example, the difference between 5.36 percent and 5.38 percent is 2 basis points.
Bootstrapping
A process of creating a theoretical spot rate curve , using one yield projection as the basis for
the yield of the next maturity.
Capital gain
When a stock is sold for a profit, it's the difference between the net sales price of securities and
their net cost, or original basis. If a stock is sold below cost, the difference is a capital loss.
Collateralized mortgage obligation (CMO)
A security backed by a pool of pass-throughs , structured so that
there are several classes of bondholders with varying maturities, called tranches. The principal payments from
the underlying pool of pass-through securities are used to retire the bonds on a priority basis as specified in
the prospectus.
Related: mortgage pass-through security
Commission broker
A broker on the floor of an exchange acts as agent for a particular brokerage house and
who buys and sells stocks for the brokerage house on a commission basis.
Continuous compounding
The process of accumulating the time value of money forward in time on a
continuous, or instantaneous, basis. Interest is earned continuously, and at each instant, the interest that
accrues immediately begins earning interest on itself.
Coupon equivalent yield
True interest cost expressed on the basis of a 365-day year.
Currency basket
The value of a portfolio of specific amounts of individual currencies, used as the basis for
setting the market value of another currency. It is also referred to as a currency cocktail.
Demand line of credit
A bank line of credit that enables a customer to borrow on a daily or on-demand basis.
Employee stock fund
A firm-sponsored program that enables employees to purchase shares of the firm's
common stock on a preferential basis.
Long-term assets
Value of property, equipment and other capital assets minus the depreciation. This is an
entry in the bookkeeping records of a company, usually on a "cost" basis and thus does not necessarily reflect
the market value of the assets.
Mismatch bond
Floating rate note whose interest rate is reset at more frequent intervals than the rollover
period (e.g. a note whose payments are set quarterly on the basis of the one-year interest rate).
Multiple-discriminant analysis (MDA)
Statistical technique for distinguishing between two groups on the
basis of their observed characteristics.
Mutual fund
Mutual funds are pools of money that are managed by an investment company. They offer
investors a variety of goals, depending on the fund and its investment charter. Some funds, for example, seek
to generate income on a regular basis. Others seek to preserve an investor's money. Still others seek to invest
in companies that are growing at a rapid pace. Funds can impose a sales charge, or load, on investors when
they buy or sell shares. Many funds these days are no load and impose no sales charge. Mutual funds are
investment companies regulated by the Investment Company Act of 1940.
Related: open-end fund, closed-end fund.
Negative convexity
A bond characteristic such that the price appreciation will be less than the price
depreciation for a large change in yield of a given number of basis points.
Non-parallel shift in the yield curve
A shift in the yield curve in which yields do not change by the same
number of basis points for every maturity. Related: Parallel shift in the yield curve.
Open repo
A repo with no definite term. The agreement is made on a day-to-day basis and either the
borrower or the lender may choose to terminate. The rate paid is higher than on overnight repo and is subject
to adjustment if rates move.
Option-adjusted spread (OAS)
1) The spread over an issuer's spot rate curve, developed as a measure of
the yield spread that can be used to convert dollar differences between theoretical value and market price.
2) The cost of the implied call embedded in a MBS, defined as additional basis-yield spread. When added to the
base yield spread of an MBS without an operative call produces the option-adjusted spread.
Parallel shift in the yield curve
A shift in the yield curve in which the change in the yield on all maturities is
the same number of basis points. In other words, if the 3 month T-bill increases 100 basis points (one
percent), then the 6 month, 1 year, 5 year, 10 year, 20 year, and 30 year rates increase by 100 basis points as
well.
Related: Non-parallel shift in the yield curve.
Payments netting
Reducing fund transfers between affiliates to only a netted amount. Netting can be done on
a bilateral basis (between pairs of affiliates), or on a multi-lateral basis (taking all affiliates together).
Performance shares
Shares of stock given to managers on the basis of performance as measured by earnings
per share and similar criteria. A control device used by shareholders to tie management to the self-interest of
shareholders.
Planned amortization class CMO
1) One class of CMO that carries the most stable cash flows and the
lowest prepayement risk of any class of CMO. Because of that stable cash flow, it is considered the least risky CMO.
2) A CMO bond class that stipulates cash-flow contributions to a sinking fund. With the PAC,
principal payments are directed to the sinking fund on a priority basis in accordance with a predetermined
payment schedule, with prior claim to the cash flows before other CMO classes. Similarly, cash flows
received by the trust in excess of the sinking fund requirement are also allocated to other bond classes. The
prepayment experience of the PAC is therefore very stable over a wide range of prepayment experience.
Project notes (PNs)
Project notes are issued by municipalities to finance federally sponsored programs in
urban renewal and housing and are guaranteed by the U.S. Department of Housing and Urban Development.
Project financing A form of asset-based financing in which a firm finances a discrete set of assets on a standalone
basis.
Projected benefit obligation (PBO) A measure of a pension plan's liability at the calculation date assuming
that the plan is ongoing and will not terminate in the foreseeable future. Related:accumulated benefit obligation.
Regular way settlement
In the money and bond markets, the regular basis on which some security trades are
settled is that the delivery of the securities purchased is made against payment in Fed funds on the day
following the transaction.
Right
A short-lived (typically less than 90 days) call option for purchasing additional stock in a firm, issued
by the firm to all its shareholders on a pro rata basis.
Rollover
Most term loans in the Euromarket are made on a rollover basis, which means that the loan is
periodically repriced at an agreed spread over the appropriate, currently prevailing LIBO rate.
Step-up
To increase, as in step up the tax basis of an asset.
Subjective probabilities
Probabilities that are determined subjectively (for example, on the basis of
judgement rather than using statistical sampling).
Syndicate
A group of banks that acts jointly, on a temporary basis, to loan money in a bank credit (syndicated
credit) or to underwrite a new issue of bonds.
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.
Technical descriptors
Variables that are used to describe the market on a technical basis.
Trade on top of
Trade at a narrow or no spread in basis points relative to some other bond yield, usually
Treasury bonds.
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.
Wi wi
Treasury bills trade on a wi basis between the day they are auctioned and the day settlement is made.
Bills traded before they are auctioned are said to be traded wi wi.
BOOK VALUE
An asset’s cost basis minus accumulated depreciation.
Line item
Generic types of assets, liabilities, income or expense that are common to all businesses and
used as the basis of financial reporting, e.g. rent, salaries, advertising etc.
Overhead rate
The rate (often expressed per hour) applied to the time taken to produce a product/service, used to allocate production overheads to particular products/services based on the time taken. May be calculated on a business-wide or cost centre basis.
Source document
The document that records a transaction and forms the basis for recording in a business’s
accounting system.
capitalization of costs
When a cost is recorded originally as an increase
to an asset account, it is said to be capitalized. This means that the outlay
is treated as a capital expenditure, which becomes part of the total
cost basis of the asset. The alternative is to record the cost as an expense
immediately in the period the cost is incurred. Capitalized costs refer
mainly to costs that are recorded in the long-term operating assets of a
business, such as buildings, machines, equipment, tools, and so on.
cash flow from operating activities, or cash flow from profit
This equals the cash inflow from sales during the period minus the cash
outflow for expenses during the period. Keep in mind that to measure
net income, generally accepted accounting principles require the use of
accrual-basis accounting. Starting with the amount of accrual-basis net
income, adjustments are made for changes in accounts receivable,
inventories, prepaid expenses, and operating liabilities—and depreciation
expense is added back (as well as any other noncash outlay
expense)—to arrive at cash flow from profit, which is formally labeled
cash flow from operating activities in the externally reported statement
of cash flows.
double-entry accounting
See accrual-basis accounting.
financial leverage
The equity (ownership) capital of a business can serve
as the basis for securing debt capital (borrowing money). In this way, a
business increases the total capital available to invest in its assets and
can make more sales and more profit. The strategy is to earn operating
profit, or earnings before interest and income tax (EBIT), on the capital
supplied from debt that is more than the interest paid on the debt capital.
A financial leverage gain equals the EBIT earned on debt capital
minus the interest on the debt. A financial leverage gain augments earnings
on equity capital. A business must earn a rate of return on its assets
(ROA) that is greater than the interest rate on its debt to make a financial
leverage gain. If the spread between its ROA and interest rate is unfavorable,
a business suffers a financial leverage loss.
weighted-average cost of capital
Weighted means that the proportions of
debt capital and equity capital of a business are used to calculate its
average cost of capital. This key benchmark rate depends on the interest
rate(s) on its debt and the ROE goal established by a business. This is a
return-on-capital rate and can be applied either on a before-tax basis or
an after-tax basis. A business should earn at least its weighted-average
rate on the capital invested in its assets. The weighted-average cost-ofcapital
rate is used as the discount rate to calculate the present value
(PV) of specific investments.
Coupon Rate
The rate of interest paid on a debt security. Generally stated on an
annual basis, even if the payments are made at some other
interval.
Earnings per Share
A measure of the earnings generated by a company on a per
share basis. It is calculated by dividing income available for
distribution to shareholders by the number of common shares
outstanding.
Market to Book Ratio
Measure of the book value of a company on a per share basis. It is
calculated by dividing the book value of the company by the
number of common shares outstanding.
activity-based costing (ABC)
a process using multiple cost drivers to predict and allocate costs to products and services;
an accounting system collecting financial and operational
data on the basis of the underlying nature and extent
of business activities; an accounting information and
costing system that identifies the various activities performed
in an organization, collects costs on the basis of
the underlying nature and extent of those activities, and
assigns costs to products and services based on consumption
of those activities by the products and services
continuous improvement
an ongoing process of enhancing employee task performance, level of product quality, and level of company service through eliminating nonvalue-added activities to reduce lead time, making products
(performing services) with zero defects, reducing
product costs on an ongoing basis, and simplifying products
and processes
cost allocation
the assignment, using some reasonable basis,
of any indirect cost to one or more cost objects
cost center
a responsibility center in which the manager has
the authority to incur costs and is evaluated on the basis
of how well costs are controlled
ideal standard
a standard that provides for no inefficiencies
of any type; impossible to attain on a continuous basis
independent variable
a variable that, when changed, will
cause consistent, observable changes in another variable;
a variable used as the basis of predicting the value of a
dependent variable
manufacturing resource planning (MRP II)
a fully integrated materials requirement planning system that involves
top management and provides a basis for both strategic
and tactical planning
open purchase ordering
a process by which a single purchase
order that expires at a set or determinable future
date is prepared to authorize a supplier to provide a large
quantity of one or more specified items on an as-requested
basis by the customer
sales value at split-off allocation
a method of assigning joint cost to joint products that uses the relative sales values of the products at the split-off point as the proration basis; use of this method requires that all joint products
are salable at the split-off point
variable cost
a cost that varies in total in direct proportion
to changes in activity; it is constant on a per unit basis
Allowance for bad debts
An offset to the accounts receivable balance, against which
bad debts are charged. The presence of this allowance allows one to avoid severe
changes in the period-to-period bad debt expense by expensing a steady amount to
the allowance account in every period, rather than writing off large bad debts to
expense on an infrequent basis.
Variable cost
A cost that changes in amount in relation to changes in a related activity.
Variance
The difference between an actual measured result and a basis, such as a budgeted amount.
Work Week
A fixed period of 168 consecutive hours that recurs on a consistent basis.
Factoring
The discounting, or sale at a discount, of receivables on a nonrecourse, notification
basis. The purchaser of the accounts receivable, the factor, assumes full risk of collection and
credit losses, without recourse to the firms discounting the receivables. Customers are notified to
remit directly to the factor.
Nonrecurring Items
Revenues or gains and expenses or losses that are not expected to recur
on a regular basis. This term is often used interchangeably with special items.
Restatement of Prior-Year Financial Statements
A recasting of prior-year financial statements to remove the effects of an error or other adjustment and report them on a new basis.
Configuration audit
A review of all engineering documentation used as the basis
for a manufactured product to see if the documentation accurately represents
the finished product.
Periodic inventory
A physical inventory count taken on a repetitive basis.
RFID
Acronym for Radio Frequency Identification. It is the basis for small radio
transmitters that emit an RFID to receiver devices. The transmitter is a tiny tag,
storing a unique product identification code that is transmitted and used for inventory
tracking.
Living Benefit
Some insurance companies include this benefit option at no cost to their policy holders. The insurer considers on a case to case basis, the need for insurance funds before death. If the insured can demonstrate a shortened life of less than two years and with some insurers one year, the insurer will consider releasing up to 50% or a maximum of $100,000 of the life insurance coverage held by the insured. Not all insurers offer this benefit for free. The need has resulted in specific stand alone living benefit/critical illness policies coming into existence. Look under "Different types of Life Insurance" for further information. You might have heard of "Viatical Settlements", the practice of seriously ill people selling the rights to their life insurance policies to third parties. This practice is common in the United States but has not caught on in Canada.
Structured Settlement
Historically, damages paid out during settlement of personal physical injury cases were distributed in the form of a lump-sum cash payment to the plaintiff. This windfall was intended to provide for a lifetime of medical and income needs. The claimant or his/her family was then forced into the position of becoming the manager of a large sum of money.
In an effort to create a more financially stable arrangement for the claimant, the Structured Settlement was developed. A Structured Settlement is an alternative to a lump sum cash payment in the resolution of personal physical injury, wrongful death, or workers’ compensation cases. The settlement usually consists of two components: an up-front cash payment to provide for immediate needs and a series of future periodic payments which are funded by the defendant’s purchase of one or more annuity policies. Those payors make payments directly to the claimant. In the unfortunate event of the claimant’s death, a guaranteed portion of the settlement may be directed to a beneficiary or his/her estate.
A Structured Settlement is a guaranteed source of funds paid to the claimant or his/her family on a tax-free basis.
Amortize
To liquidate on an instalment basis; an amortized loan is one on which the principal amount of the loan is repaid in instalments during the life of the loan.
Generally Accepted Accounting Principles (GAAP)
GAAP is the term used to describe the underlying rules basis on which financial statements are normally prepared. This is codified in the Handbook of The Canadian Institute of Chartered Accountants.
earned income
Earned income is generally an individual's salary or wages from employment. It also includes some taxable benefits. Earned income also includes business income if the individual is self-employed. Earned income is used as the basis for calculating RRSP maximum contribution limits.
EFT (electronic funds transfer)
Funds which are electronically credited to your account (e.g. direct deposit), or electronically debited from your account on an ongoing basis (e.g. a pre-authorized monthly bill payment, or a monthly loan or mortgage payment). A wire transfer is a form of EFT.
personal loan
A lump sum that you borrow from a financial institution for a specified period of time. To repay the loan, you pay interest on the entire lump sum, and make payments on a scheduled basis.
volatility
A measure of the amount of change in the daily price of a security over a specified period of time. It is Uusually given as the standard deviation of the daily price changes of that security on an annual basis.
Joint Policy Life
One insurance policy that covers two lives, and generally provides for payment at the time of the first insured's death. It could also be structured to pay on second death basis for estate planning purposes.
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