Definition of QMDM (quantitative marketability discount model)

QMDM (quantitative marketability discount model)

model for calculating DLOM for minority interests r the discount rate

ADF (annuity discount factor)

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

DLOC (discount for lack of control)

an amount or percentage deducted from a pro rata share of the value of 100% of an equity interest in a business, to reflect the absence of some or all of the powers of control.

DLOM (discount for lack of marketability)

an amount or percentage deducted from an equity interest to reflect lack of marketability.

economic components model

Abrams’ model for calculating DLOM based on the interaction of discounts from four economic components.
This model consists of four components: the measure of the economic impact of the delay-to-sale, monopsony power to buyers, and incremental transactions costs to both buyers and sellers.

discount rate

the rate of return on investment that would be required by a prudent investor to invest in an asset with a specific level risk. Also, a rate of return used to convert a monetary sum, payable or receivable in the future, into present value.

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.

Gordon model

present value of a perpetuity with growth.
The end-ofyear Gordon model formula is: 1/(r - g)
and the midyear formula is: SQRT(1 + r)/(r - g).

log size model

Abrams’ model to calculate discount rates as a function of the logarithm of the value of the firm.

Accretion (of a discount)

In portfolio accounting, a straight-line accumulation of capital gains on discount
bond in anticipation of receipt of par at maturity.

Arbitrage-free option-pricing models

Yield curve option-pricing models.

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.

Bank discount basis

A convention used for quoting bids and offers for treasury bills in terms of annualized
yield , based on a 360-day year.

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.

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.

Cash discount

An incentive offered to purchasers of a firm's product for payment within a specified time
period, such as ten days.

Constant-growth model

Also called the Gordon-Shapiro model, an application of the dividend discount
model which assumes (1) a fixed growth rate for future dividends and (2) a single discount rate.

Deep-discount bond

A bond issued with a very low coupon or no coupon and selling at a price far below par
value. When the bond has no coupon, it's called a zero coupon bond.

Deterministic models

Liability-matching models that assume that the liability payments and the asset cash
flows are known with certainty. Related: Compare stochastic models

Discount

Referring to the selling price of a bond, a price below its par value. Related: premium.

Discount bond

Debt sold for less than its principal value. If a discount bond pays no interest, it is called a
zero coupon bond.

Discount factor

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

Discount period

The period during which a customer can deduct the discount from the net amount of the bill
when making payment.

Discount rate

The interest rate that the Federal Reserve charges a bank to borrow funds when a bank is
temporarily short of funds. Collateral is necessary to borrow, and such borrowing is quite limited because the
Fed views it as a privilege to be used to meet short-term liquidity needs, and not a device to increase earnings.

Discount securities

Non-interest-bearing money market instruments that are issued at a discount and
redeemed at maturity for full face value, e.g. U.S. Treasury bills.

Discount window

Facility provided by the Fed enabling member banks to borrow reserves against collateral
in the form of governments or other acceptable paper.

Discounted basis

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.

Discounted cash flow (DCF)

Future cash flows multiplied by discount factors to obtain present values.

Discounted dividend model (DDM)

A formula to estimate the intrinsic value of a firm by figuring the
present value of all expected future dividends.

Discounted payback period rule

An investment decision rule in which the cash flows are discounted at an
interest rate and the payback rule is applied on these discounted cash flows.

Discounting

Calculating the present value of a future amount. The process is opposite to compounding.

Dividend discount model (DDM)

A model for valuing the common stock of a company, based on the
present value of the expected cash flows.

Dividend growth model

A model wherein dividends are assumed to be at a constant rate in perpetuity.

Documented discount notes

Commercial paper backed by normal bank lines plus a letter of credit from a
bank stating that it will pay off the paper at maturity if the borrower does not. Such paper is also referred to as
LOC (letter of credit) paper.

Extrapolative statistical models

models that apply a formula to historical data and project results for a
future period. Such models include the simple linear trend model, the simple exponential model, and the
simple autoregressive model.

Factor model

A way of decomposing the factors that influence a security's rate of return into common and
firm-specific influences.

Forward discount

A currency trades at a forward discount when its forward price is lower than its spot price.

Garmen-Kohlhagen option pricing model

A widely used model for pricing foreign currency options.

Index model

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

Market model

This relationship is sometimes called the single-index model. The market model says that the
return on a security depends on the return on the market portfolio and the extent of the security's
responsiveness as measured, by beta. In addition, the return will also depend on conditions that are unique to
the firm. Graphically, the market model can be depicted as a line fitted to a plot of asset returns against
returns on the market portfolio.

Marketability

A negotiable security is said to have good marketability if there is an active secondary market
in which it can easily be resold.

Modeling

The process of creating a depiction of reality, such as a graph, picture, or mathematical
representation.

Original issue discount debt (OID debt)

Debt that is initially offered at a price below par.

Pie model of capital structure

A model of the debt/equity ratio of the firms, graphically depicted in slices of
a pie that represent the value of the firm in the capital markets.

Pure-discount bond

A bond that will make only one payment of principal and interest. Also called a zerocoupon
bond or a single-payment bond.

Single factor model

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

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 linear trend model

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

Single-index model

Related: market model

Stochastic models

Liability-matching models that assume that the liability payments and the asset cash flows
are uncertain. Related: Deterministic models.

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.

Value-at-Risk model (VAR)

Procedure for estimating the probability of portfolio losses exceeding some
specified proportion based on a statistical analysis of historical market price trends, correlations, and volatilities.

Yield curve option-pricing models

models that can incorporate different volatility assumptions along the
yield curve, such as the Black-Derman-Toy model. Also called arbitrage-free option-pricing models.

Discounted cash flow (DCF)

A method of investment appraisal that discounts future cash flows to present value using a discount rate, which is the risk-adjusted cost of capital.

Purchase discounts

A contra account that reduces purchases by the amount of the discounts taken for early payment.

Sales discounts

A contra account that offsets revenue. It represents the amount of the discounts for early payment allowed on sales.

discounted cash flow (DCF)

Refers to a capital investment analysis technique
that discounts, or scales down, the future cash returns from an
investment based on the cost-of-capital rate for the business. In essence,
each future return is downsized to take into account the cost of capital
from the start of the investment until the future point in time when the
return is received. Present value (PV) is the amount resulting from discounting
the future returns. Present value is subtracted from the entry
cost of the investment to determine net present value (NPV). The net
present value is positive if the present value is more than the entry cost,
which signals that the investment would earn more than the cost-ofcapital
rate. If the entry cost is more than the present value, the net
present value is negative, which means that the investment would earn
less than the business’s cost-of-capital rate.

Capital Asset Pricing Model (CAPM)

A model for estimating equilibrium rates of return and values of
assets in financial markets; uses beta as a measure of asset risk
relative to market risk

Continuous Discounting

The process of calculating the present value of a stream of future
cash flows by discounting over a continuous period of time

Discount Rate

The rate of interest used to calculate the present value of a stream
of future cash flows

Discounting

The process of calculating the present value of a stream of future
cash flows

ad hoc discount

a price concession made under competitive pressure (real or imagined) that does not relate to quantity purchased

discounting

the process of reducing future cash flows to present value amounts

discount rate

the rate of return used to discount future cash
flows to their present value amounts; it should equal or
exceed an organization’s weighted average cost of capital

Internet business model

a model that involves
(1) few physical assets,
(2) little management hierarchy, and
(3) a direct pipeline to customers

risk-adjusted discount rate method

a formal method of adjusting for risk in which the decision maker increases the rate used for discounting the future cash flows to compensate for increased risk

Binomial model

A method of pricing options or other equity derivatives in
which the probability over time of each possible price follows a binomial
distribution. The basic assumption is that prices can move to only two values
(one higher and one lower) over any short time period.

Black-Scholes model

The first complete mathematical model for pricing
options, developed by Fischer Black and Myron Scholes. It examines market
price, strike price, volatility, time to expiration, and interest rates. It is limited
to only certain kinds of options.

Discount curve

The curve of discount rates vs. maturity dates for bonds.

Markowitz model

A model for selecting an optimum investment portfolio,
devised by H. M. Markowitz. It uses a discrete-time, continuous-outcome
approach for modeling investment problems, often called the mean-variance
paradigm. See Efficient frontier.

Discounted cash flow

A technique that determines the present value of future cash
flows by applying a rate to each periodic cash flow that is derived from the cost of
capital. Multiplying this discount by each future cash flow results in an amount that
is the present value of all the future cash flows.

Sales discount

A reduction in the price of a product or service that is offered by the
seller in exchange for early payment by the buyer.

capital asset pricing model (CAPM)

Theory of the relationship between risk and return which states that the expected risk
premium on any security equals its beta times the market risk premium.

constant-growth dividend discount model

Version of the dividend discount model in which dividends grow at a constant rate.

discount factor

Present value of a $1 future payment.

discount rate

Interest rate used to compute present values of future cash flows.

dividend discount model

Computation of today’s stock price which states that share value equals the present value of all expected future dividends.

percentage of sales models

Planning model in which sales forecasts are the driving variables and most other variables are
proportional to sales.

Discount

The percentage amount at which bonds sell below their par value. Also the percentage amount at which a currency sells on the forward market below its current rate on the spot market.

Discount Bond

A bond with no coupons, priced below its face value; the return on this bond comes from the difference between its face value and its current price.

Discounting

Calculating the present value of a future payment.

Discount Rate

The interest rate at which the Fed is prepared to loan reserves to commercial banks.

Discount Window

The Federal Reserve facility at which reserves are loaned to banks at the discount rate.

Non-Smoker Discount

In October 1996 it was announced in the international news that scientists had finally located the link between cigarette smoking and lung cancer. In the early 1980's, some Canadian Life Insurance Companies had already started recognizing that non-smokers had a better life expectancy than smokers so commenced offering premium discounts for life insurance to new applicants who have been non-smokers for at least 12 months before applying for coverage. Today, most life insurance companies offer these discounts.
Savings to non-smokers can be up to 50% of regular premium depending on age and insurance company. Most life insurance companies offering non-smoker rates insist that the person applying for coverage have abstained from any form of tobacco or marijuana for at least twelve months, some companies insist on longer periods, up to 15 years.
Tobacco use is generally considered to be cigarettes, cigarillos, cigars, pipes, chewing tobacco, nicorette gum, snuff, marijuana and nicotine patches. In addition to these, if anyone tests positive to cotinine, a by-product of nicotine, they are also considered a smoker. There are some insurance companies which allow moderate or occasional use of cigars, cigarillos or pipes as acceptable for non-smoker status. Experienced brokers are aware of how to locate these insurance companies and save you money.
Special care should be taken by applicants for coverage who qualify for non-smoker rates by virtue of having ceased a smoking habit for the required period before application, but for some reason, fall back into the smoking habit some time after obtaining coverage. While contractually, the insurance company is still bound to a non-smoking rate, the facts of the applicant's smoking hiatus may become vague over the subsequent years of the resumed habit and at time of death claim, the insurance company may decide to contest the original non-smoking declaration. The consequence is not simply a need to back pay the difference between non-smoker and smoker rates but in reality the possibility of denial of death claim. It is therefore, important to advise the servicing broker as well as the insurance company of the change in smoking habits to make certain that sufficient evidence is documented to track the non-smoking period.

Discount Rate

A rate of return used to convert a monetary sum, payable or receivable in the future, into present value.

Discounted Cash Flow

Techniques for establishing the relative worth of a future investment by discounting (at a required rate of return) the expected net cash flows from the project.

Discounting

The process of finding the present value of a series of future cash flows. discounting is the reverse of compounding.

Discounting of Accounts Receivable

Short-term financing in which accounts receivable are used as collateral to secure a loan. The lender does not buy the accounts receivable but simply uses them as collateral for the loan. Also called pledging of accounts receivable.

Supplier Discount

An amount deducted from an invoice by a supplier in exchange for quick payment (a typical example might be a 2% discount if paid in 10 days or the full amount of the invoice in 30 days).

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