Definition of Price Index

Price Index

A measure of the price level calculated by comparing the cost of a bundle of goods and services in a given year with its cost in a base year. See also index.

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.

Consumer Price Index (CPI)

An index calculated by tracking the cost of a typical bundle of consumer goods and services over time. It is commonly used to measure inflation.

Indexed bond

Bond whose payments are linked to an index, e.g. the consumer price index.

Constant dollar accounting

A method for restating financial statements by reducing or
increasing reported revenues and expenses by changes in the consumer price index,
thereby achieving greater comparability between accounting periods.

Base Year

The reference year when constructing a price index. By tradition it is given the value 100.

Deflator

A price index used to deflate a nominal value to a real value by dividing the nominal value by the price deflator.

GDP Deflator

price index used to deflate nominal GDP to real GDP by dividing nominal GDP by the GDP deflator.

Index

A series of numbers measuring percentage changes over time from a base period. The index number for the base period is by convention set equal to 100.
indexing
Linking money payments to a price index to hold the real value of those money payments constant.

Price Level

A weighted average of prices of all goods and services where the weights are given by total spending on each good or service. Measured by a price index.

Real GDP

GDP expressed in base-year dollars, calculated by dividing nominal GDP by a price index.

Real Income

Income expressed in base-year dollars, calculated by dividing nominal income by a price index.

Real Money Supply

Money supply expressed in base-year dollars, calculated by dividing the money supply by a price index.

Real Wage

Wage expressed in base-year dollars, calculated by dividing the money wage by a price index.

Terms of Trade

The quantity of imports that can be obtained for a unit of exports, measured by the ratio of an export price index to an import price index.

Arms index

Also known as a trading index (TRIN)= (number of advancing issues)/ (number of declining
issues) (Total up volume )/ (total down volume). An advance/decline market indicator. Less than 1.0 indicates
bullish demand, while above 1.0 is bearish. The index often is smoothed with a simple moving average.

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.

Bargain-purchase-price option

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

Basis price

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

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.

Bond indexing

Designing a portfolio so that its performance will match the performance of some bond index.

Buying the index

Purchasing the stocks in the S&P 500 in the same proportion as the index to achieve the
same return.

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.

Clean price

Bond price excluding accrued interest.

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.

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

Dirty price

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

Dollar price of a bond

Percentage of face value at which a bond is quoted.

EAFE index

The European, Australian, and Far East stock index, computed by Morgan Stanley.

Effective call price

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

Enhanced indexing

Also called indexing plus, an indexing strategy whose objective is to exceed or replicate
the total return performance of some predetermined index.

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.

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.

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.

Full price

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

Futures price

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

High price

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

Index and Option Market (IOM)

A division of the CME established in 1982 for trading stock index
products and options. Related: Chicago Mercantile Exchange (CME).

Index arbitrage

An investment/trading strategy that exploits divergences between actual and theoretical
futures prices.

Index fund

Investment fund designed to match the returns on a stockmarket index.

Index model

A model of stock returns using a market index such as the S&P 500 to represent common or
systematic risk factors.

Index option

A call or put option based on a stock market index.

Index warrant

A stock index option issued by either a corporate or sovereign entity as part of a security
offering, and guaranteed by an option clearing corporation.

Indexing

A passive instrument strategy consisting of the construction of a portfolio of stocks designed to
track the total return performance of an index of stocks.

Invoice price

The price that the buyer of a futures contract must pay the seller when a Treasury Bond is delivered.

Jensen index

An index that uses the capital asset pricing model to determine whether a money manager
outperformed a market index. The "alpha" of an investment or investment manager.

Law of one price

An economic rule stating that a given security must have the same price regardless of the
means by which one goes about creating that security. This implies that if the payoff of a security can be
synthetically created by a package of other securities, the price of the package and the price of the security
whose payoff it replicates must be equal.

Limit price

Maximum price fluctuation
Limitation on asset dispositions A bond covenant that restricts in some way a firm's ability to sell major
assets.

Low price

This is the day's lowest price of a security that has changed hands between a buyer and a seller.

Low price-earnings ratio effect

The tendency of portfolios of stocks with a low price-earnings ratio to
outperform portfolios consisting of stocks with a high price-earnings ratio.

Limit price

Maximum price fluctuation

Market conversion price

Also called conversion parity price, the price that an investor effectively pays for
common stock by purchasing a convertible security and then exercising the conversion option. This price is
equal to the market price of the convertible security divided by the conversion ratio.

Market price of risk

A measure of the extra return, or risk premium, that investors demand to bear risk. The
reward-to-risk ratio of the market portfolio.

Market prices

The amount of money that a willing buyer pays to acquire something from a willing seller,
when a buyer and seller are independent and when such an exchange is motivated by only commercial
consideration.

Market value-weighted index

An index of a group of securities computed by calculating a weighted average
of the returns on each security in the index, with the weights proportional to outstanding market value.

Marketplace price efficiency

The degree to which the prices of assets reflect the available marketplace
information. Marketplace price efficiency is sometimes estimated as the difficulty faced by active
management of earning a greater return than passive management would, after adjusting for the risk
associated with a strategy and the transactions costs associated with implementing a strategy.

Maximum price fluctuation

The maximum amount the contract price can change, up or down, during one
trading session, as fixed by exchange rules in the contract specification. Related: limit price.

Minimum price fluctuation

Smallest increment of price movement possible in trading a given contract. Also
called point or tick. The zero-beta portfolio with the least risk.

Nominal price

price quotations on futures for a period in which no actual trading took place.

Opening price

The range of prices at which the first bids and offers were made or first transactions were
completed.

Optimization approach to indexing

An approach to indexing which seeks to Optimize some objective, such
as to maximize the portfolio yield, to maximize convexity, or to maximize expected total returns.

Option price

Also called the option premium, the price paid by the buyer of the options contract for the right
to buy or sell a security at a specified price in the future.

Price/book ratio

Compares a stock's market value to the value of total assets less total liabilities (book
value). Determined by dividing current stock price by common stockholder equity per share (book value),
adjusted for stock splits. Also called Market-to-Book.

Price/earnings ratio (PE ratio)

Shows the "multiple" of earnings at which a stock sells. Determined by dividing current
stock price by current earnings per share (adjusted for stock splits). Earnings per share for the P/E ratio is
determined by dividing earnings for past 12 months by the number of common shares outstanding. Higher
"multiple" means investors have higher expectations for future growth, and have bid up the stock's price.

Price/sales ratio (PS Ratio)

Determined by dividing current stock price by revenue per share (adjusted for stock splits).
Revenue per share for the P/S ratio is determined by dividing revenue for past 12 months by number of shares
outstanding.

Price compression

The limitation of the price appreciation potential for a callable bond in a declining interest
rate environment, based on the expectation that the bond will be redeemed at the call price.

Price discovery process

The process of determining the prices of the assets in the marketplace through the
interactions of buyers and sellers.

Price elasticities

The percentage change in the quantity divided by the percentage change in the price.

Price impact costs

Related: market impact costs

Price momentum

Related: Relative strength

Price persistence

Related: Relative strength

Price risk

The risk that the value of a security (or a portfolio) will decline in the future. Or, a type of
mortgage-pipeline risk created in the production segment when loan terms are set for the borrower in advance
of terms being set for secondary market sale. If the general level of rates rises during the production cycle, the
lender may have to sell his originated loans at a discount.

Price takers

Individuals who respond to rates and prices by acting as though they have no influence on them.

Priced out

The market has already incorporated information, such as a low dividend, into the price of a stock.

Price value of a basis point (PVBP)

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.

Prices

price of a share of common stock on the date shown. Highs and lows are based on the highest and
lowest intraday trading price.

Price-specie-flow mechanism

Adjustment mechanism under the classical gold standard whereby
disturbances in the price level in one country would be wholly or partly offset by a countervailing flow of
specie (gold coins) that would act to equalize prices across countries and automatically bring international
payments back in balance.

Price-volume relationship

A relationship espoused by some technical analysts that signals continuing rises
and falls in security prices based on accompanying changes in volume traded.

Profitability index

The present value of the future cash flows divided by the initial investment. Also called
the benefit-cost ratio.

Pure index fund

A portfolio that is managed so as to perfectly replicate the performance of the market portfolio.

Put price

The price at which the asset will be sold if a put option is exercised. Also called the strike or
exercise price of a put option.

Reverse price risk

A type of mortgage-pipeline risk that occurs when a lender commits to sell loans to an
investor at rates prevailing at application but sets the note rates when the borrowers close. The lender is thus
exposed to the risk of falling rates.

Risk indexes

Categories of risk used to calculate fundamental beta, including (1) market variability, (2)
earnings variability, (3) low valuation, (4) immaturity and smallness, (5) growth orientation, and (6) financial risk.

Settlement price

A figure determined by the closing range which is used to calculate gains and losses in
futures market accounts. Settlement prices are used to determine gains, losses, margin calls, and invoice
prices for deliveries. Related: closing range.

Single index model

A model of stock returns that decomposes influences on returns into a systematic factor,
as measured by the return on the broad market index, and firm specific factors.

Single-index model

Related: market model

Spot price

The current marketprice of the actual physical commodity. Also called cash price.

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.

Stock index option

An option in which the underlying is a common stock index.

Stratified equity indexing

A method of constructing a replicating portfolio in which the stocks in the index
are classified into stratum, and each stratum is represented in the portfolio.

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