Definition of profitability index (Pl)

profitability index (Pl)

a ratio that compares the present value of net cash flows to the present value of the net investment

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.

Baker Plan

A plan by U.S. Treasury Secretary James Baker under which 15 principal middle-income debtor
countries (the Baker 15) would undertake growth-oriented structural reforms, to be supported by increased
financing from the World Bank and continued lending from commercial banks.

Boilerplate

Standard terms and conditions.

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.

Capital surplus

Amounts of directly contributed equity capital in excess of the par value.

Committee, AIMR Performance Presentation Standards Implementation Committee

The Association for Investment Management and Research (AIMR)'s Performance Presentation Standards Implementation
Committee is charged with the responsibility to interpret, revise and update the AIMR Performance
Presentation Standards (AIMR-PPS(TM)) for portfolio performance presentations.

Complete capital market

A market in which there is a distinct marketable security for each and every
possible outcome.

Complete portfolio

The entire portfolio, including risky and risk-free assets.

Completion bonding

Insurance that a construction contract will be successfully completed.

Completion risk

The risk that a project will not be brought into operation successfully.

Completion undertaking

An undertaking either (1) to complete a project such that it meets certain specified
performance criteria on or before a certain specified date or (2) to repay project debt if the completion test
cannot be met.

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.

Corporate financial planning

Financial planning conducted by a firm that encompasses preparation of both
long- and short-term financial plans.

Debt displacement

The amount of borrowing that leasing displaces. Firms that do a lot of leasing will be
forced to cut back on borrowing.

Defined benefit plan

A pension plan in which the sponsor agrees to make specified dollar payments to
qualifying employees. The pension obligations are effectively the debt obligation of the plan sponsor.
Related: defined contribution plan

Defined contribution plan

A pension plan in which the sponsor is responsible only for making specified
contributions into the plan on behalf of qualifying participants. Related: defined benefit plan
Delayed issuance pool Refers to MBSs that at the time of issuance were collateralized by seasoned loans
originated prior to the MBS pool issue date.

Direct placement

Selling a new issue not by offering it for sale publicly, but by placing it with one of several
institutional investors.

Dividend reinvestment plan (DRP)

Automatic reinvestment of shareholder dividends in more shares of a
company's stock, often without commissions. Some plans provide for the purchase of additional shares at a
discount to market price. Dividend reinvestment plans allow shareholders to accumulate stock over the Long
term using dollar cost averaging. The DRP is usually administered by the company without charges to the
holder.

EAFE index

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

Economic surplus

For any entity, the difference between the market value of all its assets and the market
value of its liabilities.

Employee stock fund

A firm-sponsored program that enables employees to purchase shares of the firm's
common stock on a preferential basis.

Employee stock ownership plan (ESOP)

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

Enhanced indexing

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

Equity multiplier

Total assets divided by total common stockholders' equity; the amount of total assets per
dollar of stockholders' equity.

Financial plan

A financial blueprint for the financial future of a firm.

Financial planning

The process of evaluating the investing and financing options available to a firm. It
includes attempting to make optimal decisions, projecting the consequences of these decisions for the firm in
the form of a financial plan, and then comparing future performance against that plan.

Floating supply

The amount of securities believed to be available for immediate purchase, that is, in the
hands of dealers and investors wanting to sell.

Floor planning

Arrangement used to finance inventory. A finance company buys the inventory, which is then
held in trust by the user.

Forward looking multiple

A truncated expression for a P/E ratio that is based on forward (expected)
earnings rather than on trailing earnings.

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.

Implied call

The right of the homeowner to prepay, or call, the mortgage at any time.

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. Related: cheapest to deliver issue

Implied volatility

The expected volatility in a stock's return derived from its option price, maturity date,
exercise price, and riskless rate of return, using an option-pricing model such as Black/Scholes.

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.

Indexed bond

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

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.

Insurance principle

The law of averages. The average outcome for many independent trials of an experiment
will approach the expected value of the experiment.

Insured plans

Defined benefit pension plans that are guaranteed by life insurance products. Related: noninsured plans

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.

Last split

After a stock split, the number of shares distributed for each share held and the date of the
distribution.

Long-term financial plan

Financial plan covering two or more years of future operations.

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.

Materials requirement planning

Computer-based systems that plan backward from the production schedule
to make purchases in order to manage inventory levels.

Mean of the sample

The arithmetic average; that is, the sum of the observations divided by the number of
observations.

Money purchase plan

A defined benefit contribution plan in which the participant contributes some part and
the firm contributes at the same or a different rate. Also called and individual account plan.

Money supply

M1-A: Currency plus demand deposits
M1-B: M1-A plus other checkable deposits.
M2: M1-B plus overnight repos, money market funds, savings, and small (less than $100M) time deposits.
M3: M-2 plus large time deposits and term repos.
L: M-3 plus other liquid assets.

Multiple rates of return

More than one rate of return from the same project that make the net present value
of the project equal to zero. This situation arises when the IRR method is used for a project in which negative
cash flows follow positive cash flows. For each sign change in the cash flows, there is a rate of return.

Multiple regression

The estimated relationship between a dependent variable and more than one explanatory variable.

Multiples

Another name for price/earnings ratios.

Multiple-discriminant analysis (MDA)

Statistical technique for distinguishing between two groups on the
basis of their observed characteristics.

Multiple-issuer pools

Under the GNMA-II program, pools formed through the aggregation of individual
issuers' loan packages.

Negative pledge clause

A bond covenant that requires the borrower to grant lenders a lien equivalent to any
liens that may be granted in the future to any other currently unsecured lenders.

Non-insured plans

Defined benefit pension plans that are not guaranteed by life insurance products. Related:
insured plans

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.

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).

Overfunded pension plan

A pension plan that has a positive surplus (i.e., assets exceed liabilities).

P/E ratio (PE ratio / multiple)

Assume XYZ Co. sells for $25.50 per share and has earned $2.55 per share this year; $25. 50 = 10
times $2. 55
XYZ stock sells for 10 times earnings. P/E = Current stock price divided by trailing annual earnings per
share or expected annual earnings per share.

Pension plan

A fund that is established for the payment of retirement benefits.

Placement

A bank depositing Eurodollars with (selling Eurodollars to) another bank is often said to be
making a placement.

Plain vanilla

A term that refers to a relatively simple derivative financial instrument, usually a swap or other
derivative that is issued with standard features.

Plan for reorganization

A plan for reorganizing a firm during the Chapter 11 bankruptcy process.

Plan sponsors

The entities that establish pension plans, including private business entities acting for their
employees; state and local entities operating on behalf of their employees; unions acting on behalf of their
members; and individuals representing themselves.

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.

Planned capital expenditure program

Capital expenditure program as outlined in the corporate financial plan.

Planned financing program

Program of short-term and long-term financing as outlined in the corporate
financial plan.

Planning horizon

The length of time a model projects into the future.

Plowback rate

Related: retention rate.

Plug

A variable that handles financial slack in the financial plan.

Plus

ealers in government bonds normally give price quotes in 32nds. To quote a bid or offer in 64ths, they
use pluses; a dealer who bids 4+ is bidding the handle plus 4/32 + 1/64, which equals the handle plus 9/64.

Private placement

The sale of a bond or other security directly to a limited number of investors.

Profitability index

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

Profitability ratios

Ratios that focus on the profitability of the firm. Profit margins measure performance
with relation to sales. Rate of return ratios measure performance relative to some measure of size of the
investment.

Project loan certificate (PLC)

A primary program of Ginnie Mae for securitizing FHA-insured and coinsured
multifamily, hospital, and nursing home loans.

Pure index fund

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

Raw material supply agreement

As used in connection with project financing, an agreement to furnish a
specified amount per period of a specified raw material.

Regulatory surplus

The surplus as measured using regulatory accounting principles (RAP) which may allow
the non-market valuation of assets or liabilities and which may be materially different from economic surplus.

Replacement cost

Cost to replace a firm's assets.

Replacement cycle

The frequency with which an asset is replaced by an equivalent asset.

Replacement value

Current cost of replacing the firm's assets.

Replacement-chain problem

Idea that future replacement decisions must be taken into account in selecting
among projects.

Replicating portfolio

A portfolio constructed to match an index or benchmark.

Reverse stock split

A proportionate decrease in the number of shares, but not the value of shares of stock
held by shareholders. Shareholders maintain the same percentage of equity as before the split. For example, a
1-for-3 split would result in stockholders owning 1 share for every 3 shares owned before the split. After the
reverse split, the firm's stock price is, in this example, worth three times the pre-reverse split price. A firm
generally institutes a reverse split to boost its stock's market price and attract investors.

Risk-adjusted profitability

A probability used to determine a "sure" expected value (sometimes called a
certainty equivalent) that would be equivalent to the actual risky expected value.

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.

Short-term financial plan

A financial plan that covers the coming fiscal year.

Simple prospect

An investment opportunity where a certain initial wealth is placed at risk and only two
outcomes are possible.

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.

Simple compound growth method

A method of calculating the growth rate by relating the terminal value to
the initial value and assuming a constant percentage annual rate of growth between these two values.

Simple interest

Interest calculated only on the initial investment. Related:compound interest.

Simple linear regression

A regression analysis between only two variables, one dependent and the other explanatory.

Simple linear trend model

An extrapolative statistical model that asserts that earnings have a base level and
grow at a constant amount each period.

Simple moving average

The mean, calculated at any time over a past period of fixed length.

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