Definition of Circle

Circle

Underwriters, actual or potential, often seek out and "circle" investor interest in a new issue before
final pricing. The customer circled basically made a commitment to purchase the issue if it comes at an
agreed-upon price. In the latter case, if the price is other than that stipulated, the customer supposedly has first
offer at the actual price.

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).

Actuals

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

Administrative pricing rules

IRS rules used to allocate income on export sales to a foreign sales corporation.

Advance commitment

A promise to sell an asset before the seller has lined up purchase of the asset. This
seller can offset risk by purchasing a futures contract to fix the sales price.

Amortizing interest rate swap

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

Arbitrage Pricing Theory (APT)

An alternative model to the capital asset pricing model developed by
Stephen Ross and based purely on arbitrage arguments.

Arbitrage-free option-pricing models

Yield curve option-pricing models.

Arm's length price

The price at which a willing buyer and a willing unrelated seller would freely agree to
transact.

Ask price

A dealer's price to sell a security; also called the offer price.

Asset pricing model

A model for determining the required rate of return on an asset.

Asset pricing model

A model, such as the Capital Asset pricing Model (CAPM), that determines the required
rate of return on a particular asset.

Bargain-purchase-price option

Gives the lessee the option to purchase the asset at a price below fair market
value when the lease expires.

Base interest rate

Related: Benchmark interest rate.

Basis price

price expressed in terms of yield to maturity or annual rate of return.

Before-tax profit margin

The ratio of net income before taxes to net sales.

Bellwether issues

Related:Benchmark issues.

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").

Benchmark issues

Also called on-the-run or current coupon issues or bellwether issues. In the secondary
market, it's the most recently auctioned Treasury issues for each maturity.

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.

Bid price

This is the quoted bid, or the highest price an investor is willing to pay to buy a security. Practically
speaking, this is the available price at which an investor can sell shares of stock. Related: Ask , offer.

Binomial 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 that it can take on in the preceding time period.

Black-Scholes option-pricing model

A model for pricing call options based on arbitrage arguments that uses
the stock price, the exercise price, the risk-free interest rate, the time to expiration, and the standard deviation
of the stock return.

Borrower fallout

In the mortgage pipeline, the risk that prospective borrowers of loans committed to be
closed will elect to withdraw from the contract.

Breakout

A rise in a security's price above a resistance level (commonly its previous high price) or drop
below a level of support (commonly the former lowest price.) A breakout is taken to signify a continuing
move in the same direction. Can be used by technical analysts as a buy or sell indicator.

Buyout

purchase of a controlling interest (or percent of shares) of a company's stock. A leveraged buy-out is
done with borrowed money.

Call price

The price, specified at issuance, at which the issuer of a bond may retire part of the bond at a
specified call date.

Call price

The price for which a bond can be repaid before maturity under a call provision.

Capital asset pricing model (CAPM)

An economic theory that describes the relationship between risk and
expected return, and serves as a model for the pricing of risky securities. The CAPM asserts that the only risk
that is priced by rational investors is systematic risk, because that risk cannot be eliminated by diversification.
The CAPM says that the expected return of a security or a portfolio is equal to the rate on a risk-free security
plus a risk premium.

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.

Cash flow after interest and taxes

Net income plus depreciation.

Cash offer

A public equity issue that is sold to all interested investors.

Cashout

Refers to a situation where a firm runs out of cash and cannot readily sell marketable securities.

Cheapest to deliver issue

The acceptable Treasury security with the highest implied repo rate; the rate that a
seller of a futures contract can earn by buying an issue and then delivering it at the settlement date.

Clean price

Bond price excluding accrued interest.

Closing purchase

A transaction in which the purchaser's intention is to reduce or eliminate a short position in
a stock, or in a given series of options.

Commitment

A trader is said to have a commitment when he assumes the obligation to accept or make
delivery on a futures contract. Related: Open interest

Commitment fee

A fee paid to a commercial bank in return for its legal commitment to lend funds that have
not yet been advanced.

Common stock/other equity

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

Competitive offering

An offering of securities through competitive bidding.

Compound interest

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

Consumer Price Index (CPI)

The CPI, as it is called, measures the prices of consumer goods and services and is a
measure of the pace of U.S. inflation. The U.S.Department of Labor publishes the CPI very month.

Conversion parity price

Related:Market conversion price

Convertible price

The contractually specified price per share at which a convertible security can be
converted into shares of common stock.

Coupon

The periodic interest payment made to the bondholders during the life of the bond.

Coupon equivalent yield

True interest cost expressed on the basis of a 365-day year.

Coupon payments

A bond's interest payments.

Coupon rate

In bonds, notes or other fixed income securities, the stated percentage rate of interest, usually
paid twice a year.

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.

Current coupon

A bond selling at or close to par, that is, a bond with a coupon close to the yields currently
offered on new bonds of a similar maturity and credit risk.

Current issue

In Treasury securities, the most recently auctioned issue. Trading is more active in current
issues than in off-the-run issues.

Current-coupon issues

Related: Benchmark issues

Customary payout ratios

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

Days' sales outstanding

Average collection period.

Delivery price

The price fixed by the Clearing house at which deliveries on futures are in invoiced; also the
price at which the futures contract is settled when deliveries are made.

Devaluation A decrease in the spot price of the currency

Direct stock-purchase programs

The purchase by investors of securities directly from the issuer.

Dirty price

Bond price including accrued interest, i.e., the price paid by the bond buyer.

Dividend payout ratio

Percentage of earnings paid out as dividends.

Dollar price of a bond

Percentage of face value at which a bond is quoted.

Down-and-out option

Barrier option that expires if asset price hits a barrier.

Dual syndicate equity offering

An international equity placement where the offering is split into two
tranches - domestic and foreign - and each tranche is handled by a separate lead manager.

Dual-currency issues

Eurobonds that pay coupon interest in one currency but pay the principal in a different
currency.

Dupont system of financial control

Highlights the fact that return on assets (ROA) can be expressed in terms
of the profit margin and asset turnover.

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.

Effective call price

The strike price in an optional redemption provision plus the accrued interest to the
redemption date.

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.

Euroequity issues

Securities sold in the Euromarket. That is, securities initially sold to investors
simultaneously in several national markets by an international syndicate. Euromarket.
Related: external market

Exchange offer

An offer by the firm to give one security, such as a bond or preferred stock, in exchange for
another security, such as shares of common stock.

Exercise price

The price at which the underlying future or options contract may be bought or sold.

Fair market price

Amount at which an asset would change hands between two parties, both having
knowledge of the relevant facts. Also referred to as market price.

Fair price

The equilibrium price for futures contracts. Also called the theoretical futures price, which equals
the spot price continuously compounded at the cost of carry rate for some time interval.

Fair price provision

See:appraisal rights.

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.

Firm commitment underwriting

An undewriting in which an investment banking firm commits to buy the
entire issue and assumes all financial responsibility for any unsold shares.

First notice day

The first day, varying by contracts and exchanges, on which notices of intent to deliver
actual financial instruments or physical commodities against futures are authorized.

First-call

With CMOs, the start of the cash flow cycle for the cash flow window.

First-In-First-Out (FIFO)

A method of valuing the cost of goods sold that uses the cost of the oldest item in
inventory first.

First-pass regression

A time series regression to estimate the betas of securities portfolios.

Fixed price basis

An offering of securities at a fixed price.

Fixed-price tender offer

A one-time offer to purchase a stated number of shares at a stated fixed price,
usually a premium to the current market price.

Flat price risk

Taking a position either long or short that does not involve spreading.

Flat price (also clean price)

The quoted newspaper price of a bond that does not include accrued interest.
The price paid by purchaser is the full price.

Forward interest rate

interest rate fixed today on a loan to be made at some future date.

Full coupon bond

A bond with a coupon equal to the going market rate, thereby, the bond is selling at par.

Full price

Also called dirty price, the price of a bond including accrued interest. Related: flat price.

Full-payout lease

See: financial lease.

Futures price

The price at which the parties to a futures contract agree to transact on the settlement date.

Garmen-Kohlhagen option pricing model

A widely used model for pricing foreign currency options.

General cash offer

A public offering made to investors at large.

Gross interest

interest earned before taxes are deducted.

Growth phase

A phase of development in which a company experiences rapid earnings growth as it produces
new products and expands market share.

High-coupon bond refunding

Refunding of a high-coupon bond with a new, lower coupon bond.

High price

The highest (intraday) price of a stock over the past 52 weeks, adjusted for any stock splits.

Homemade dividend

Sale of some shares of stock to get cash that would be similar to receiving a cash dividend.

Homemade leverage

Idea that as long as individuals borrow (or lend) on the same terms as the firm, they can
duplicate the affects of corporate leverage on their own. Thus, if levered firms are priced too high, rational
investors will simply borrow on personal accounts to buy shares in unlevered firms.

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