Definition of W-2 Form

W-2 Form

A form used to report gross pay and tax deductions for each employee
to the IRS for a calendar year.
W-4 form
A form on which an employee declares the amount of federal tax deductions
to be deducted from his or her pay.

Accounts payable

Money owed to suppliers.

After-tax profit margin

The ratio of net income to net sales.

After-tax real rate of return

Money after-tax rate of return minus the inflation rate.

Annual report

yearly record of a publicly held company's financial condition. It includes a description of the
firm's operations, its balance sheet and income statement. SEC rules require that it be distributed to all
shareholders. A more detailed version is called a 10-K.

Asymmetric information

InFormation that is known to some people but not to other people.

Asymmetric taxes

A situation wherein participants in a transaction have different net tax rates.

Auditor's report

A section of an annual report containing the auditor's opinion about the veracity of the
financial statements.

Average tax rate

taxes as a fraction of income; total taxes divided by total taxable income.

Balance of payments

A statistical compilation Formulated by a sovereign nation of all economic transactions
between residents of that nation and residents of all other nations during a stipulated period of time, usually a
calendar year.

BARRA's performance analysis (PERFAN)

A method developed by BARRA, a consulting firm in
Berkeley, Calif. It is commonly used by institutional investors applying perFormance attribution analysis to
evaluate their money managers' perFormances.

Before-tax profit margin

The ratio of net income before taxes to net sales.

Bellwether issues

Related:Benchmark issues.

Break-even lease payment

The lease payment at which a party to a prospective lease is indifferent between
entering and not entering into the lease arrangement.

Break-even payment rate

The prepayment rate of a MBS coupon that will produce the same CFY as that of
a predetermined benchmark MBS coupon. used to identify for coupons higher than the benchmark coupon
the prepayment rate that will produce the same CFY as that of the benchmark coupon; and for coupons lower
than the benchmark coupon the lowest prepayment rate that will do so.

Break-even tax rate

The tax rate at which a party to a prospective transaction is indifferent between entering
into and not entering into the transaction.

Calendar

List of new issues scheduled to come to market shortly.

Calendar effect

The tendency of stocks to perForm differently at different times, including such anomalies as
the January effect, month-of-the-year effect, day-of-the-week effect, and holiday effect.

Cash flow after interest and taxes

Net income plus depreciation.

Clearing House Automated Payments System (CHAPS)

A computerized clearing system for sterling funds
that began operations in 1984. It includes 14 member banks, nearly 450 participating banks, and is one of the
clearing companies within the structure of the Association for payment Clearing Services (APACS).

Clearing House Interbank Payments System (CHIPS)

An international wire transfer system for high-value
payments operated by a group of major banks.

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.

Common stock/other equity

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

Common-base-year analysis

The representing of accounting inFormation over multiple years as percentages
of amounts in an initial year.
Common-size analysis The representing of balance sheet items as percentages of assets and of income
statement items as percentages of sales.

Corporate tax view

The argument that double (corporate and individual) taxation of equity returns makes
debt a cheaper financing method.

Corporate taxable equivalent

Rate of return required on a par bond to produce the same after-tax yield to
maturity that the premium or discount bond quoted would.

Coupon payments

A bond's interest payments.

Customary payout ratios

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

Date of payment

Date dividend checks are mailed.

Deferred taxes

A non-cash expense that provides a source of free cash flow. amount allocated during the
period to cover tax liabilities that have not yet been paid.

Delivery versus payment

A transaction in which the buyer's payment for securities is due at the time of
delivery (usually to a bank acting as agent for the buyer) upon receipt of the securities. The payment may be
made by bank wire, check, or direct credit to an account.

Depreciation tax shield

The value of the tax write-off on depreciation of plant and equipment.

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.

Dividend payout ratio

Percentage of earnings paid out as dividends.

Double-tax agreement

Agreement between two countries that taxes paid abroad can be offset against
domestic taxes levied on foreign dividends.

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.

Either/or facility

An agreement permitting a bank customer to borrow either domestic dollars from the
bank's head office or Eurodollars from one of its foreign branches.

Either-way market

In the interbank Eurodollar deposit market, an either-way market is one in which the bid
and offered rates are identical.

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.

End-of-year convention

Treating cash flows as if they occur at the end of a year as opposed to the date
convention. Under the end-of-year convention, the present is time 0, the end of year 1 occurs one year hence,
etc.

Equivalent taxable yield

The yield that must be offered on a taxable bond issue to give the same after-tax
yield as a tax-exempt issue.

Expected value of perfect information

The expected value if the future uncertain outcomes could be known
minus the expected value with no additional inFormation.

Feasible target payout ratios

payout ratios that are consistent with the availability of excess funds to make
cash dividend payments.

Federal agency securities

Securities issued by corporations and agencies created by the U.S. government,
such as the federal Home Loan Bank Board and Ginnie Mae.

Federal credit agencies

Agencies of the federal government set up to supply credit to various classes of
institutions and individuals, e.g. S&Ls, small business firms, students, farmers, and exporters.

Federal Deposit Insurance Corporation (FDIC)

A federal institution that insures bank deposits.

Federal Financing Bank

A federal institution that lends to a wide array of federal credit agencies funds it
obtains by borrowing from the U.S. Treasury.

Federal funds

Non-interest bearing deposits held in reserve for depository institutions at their district federal
Reserve Bank. Also, excess reserves lent by banks to each other.

Federal funds market

The market where banks can borrow or lend reserves, allowing banks temporarily
short of their required reserves to borrow reserves from banks that have excess reserves.

Federal funds rate

This is the interest rate that banks with excess reserves at a federal Reserve district bank
charge other banks that need overnight loans. The Fed Funds rate, as it is called, often points to the direction
of U.S. interest rates.

Federal Home Loan Banks

The institutions that regulate and lend to savings and loan associations. The
federal Home Loan Banks play a role analogous to that played by the federal Reserve Banks vis-à-vis
member commercial banks.

Federal Reserve System

The central bank of the U.S., established in 1913, and governed by the federal
Reserve Board located in Washington, D.C. The system includes 12 federal Reserve Banks and is authorized
to regulate monetary policy in the U.S. as well as to supervise federal Reserve member banks, bank holding
companies, international operations of U.S.banks, and U.S.operations of foreign banks.

Federally related institutions

Arms of the federal government that are exempt from SEC registration and
whose securities are backed by the full faith and credit of the U.S. government (with the exception of the
Tennessee Valley Authority).

FHA prepayment experience

The percentage of loans in a pool of mortgages outstanding at the origination
anniversary, based on annual statistical historic survival rates for FHA-insured mortgages.

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.

Fisher effect

A theory that nominal interest rates in two or more countries should be equal to the required real
rate of return to investors plus compensation for the expected amount of inflation in each country.

Fisher's separation theorem

The firm's choice of investments is separate from its owner's attitudes towards
investments. Also refered to as portfolio separation theorem.

Fixed-rate payer

In an interest rate swap the counterparty who pays a fixed rate, usually in exchange for a
floating-rate payment.

Flat benefit formula

Method used to determine a participant's benefits in a defined benefit plan by
multiplying months of service by a flat monthly benefit.

Floating-rate payer

In an interest rate swap, the counterparty who pays a rate based on a reference rate,
usually in exchange for a fixed-rate payment

Foreign tax credit

Home country credit against domestic income tax for foreign taxes paid on foreign
derived earnings.

Formula basis

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.

Freddie Mac (Federal Home Loan Mortgage Corporation)

A Congressionally chartered corporation that
purchases residential mortgages in the secondary market from S&Ls, banks, and mortgage bankers and
securitizes these mortgages for sale into the capital markets.

Full-payout lease

See: financial lease.

Graduated-payment mortgages (GPMs)

A type of stepped-payment loan in which the borrower's payments
are initially lower than those on a comparable level-rate mortgage. The payments are gradually increased over
a predetermined period (usually 3,5, or 7 years) and then are fixed at a level-pay schedule which will be
higher than the level-pay amortization of a level-pay mortgage originated at the same time. The difference
between what the borrower actually pays and the amount required to fully amortize the mortgage is added to
the unpaid principal balance.

Gross domestic product (GDP)

The market value of goods and services produced over time including the
income of foreign corporations and foreign residents working in the U.S., but excluding the income of U.S.
residents and corporations overseas.

Gross interest

Interest earned before taxes are deducted.

Gross national product (GNP)

Measures and economy's total income. It is equal to GDP plus the income
abroad accruing to domestic residents minus income generated in domestic market accruing to non-residents.

Gross profit margin

gross profit divided by sales, which is equal to each sales dollar left over after paying
for the cost of goods sold.

Gross spread

The fraction of the gross proceeds of an underwritten securities offering that is paid as
compensation to the underwriters of the offering.

Herstatt risk

The risk of loss in foreign exchange trading that one party will deliver foreign exchange but the counterparty financial institution will fail to deliver its end of the contract. It is also referred to as settlement risk.

Historical exchange rate

An accounting term that refers to the exchange rate in effect when an asset or
liability was acquired.

Imputation tax system

Arrangement by which investors who receive a dividend also receive a tax credit for
corporate taxes that the firm has paid.

Information asymmetry

A situation involving inFormation that is known to some, but not all, participants.

Information Coefficient (IC)

The correlation between predicted and actual stock returns, sometimes used to
measure the value of a financial analyst. An IC of 1.0 indicates a perfect linear relationship between predicted
and actual returns, while an IC of 0.0 indicates no linear relationship.

Information costs

Transaction costs that include the assessment of the investment merits of a financial asset.
Related: search costs.

Information services

Organizations that furnish investment and other types of inFormation, such as
inFormation that helps a firm monitor its cash position.

Information-content effect

The rise in the stock price following the dividend signal.

Informational efficiency

The speed and accuracy with which prices reflect new inFormation.

Informationless trades

Trades that are the result of either a reallocation of wealth or an implementation of an
investment strategy that only utilizes existing inFormation.

Information-motivated trades

Trades in which an investor believes he or she possesses pertinent
inFormation not currently reflected in the stock's price.

Insider information

Relevant inFormation about a company that has not yet been made public. It is illegal for
holders of this inFormation to make trades based on it, however received.

Interest equalization tax

tax on foreign investment by residents of the U.S. which was abolished in 1974.

Interest payments

Contractual debt payments based on the coupon rate of interest and the principal amount.

Interest tax shield

The reduction in income taxes that results from the tax-deductibility of interest payments.

International Fisher effect

States that the interest rate differential between two countries should be an
unbiased predictor of the future change in the spot rate.

Investment tax credit

Proportion of new capital investment that can be used to reduce a company's tax bill
(abolished in 1986).

Lag response of prepayments

There is typically a lag of about three months between the time the weighted
average coupon of an MBS pool has crossed the threshold for refinancing and an acceleration in prepayment
speed is observed.

Last-In-First-Out (LIFO)

A method of valuing inventory that uses the cost of the most recent item in
inventory fIRSt.

Level pay

The characteristic of the scheduled principal and interest payments due under a mortgage such that
total monthly payment of P&I is the same while characteristically the principal payment component of the
monthly payment becomes gradually greater while the monthly interest payment becomes less.

LIFO (Last-in-first-out)

The last-in-fIRSt-out inventory valuation methodology. A method of valuing
inventory that uses the cost of the most recent item in inventory fIRSt.

Limited-tax general obligation bond

A general obligation bond that is limited as to revenue sources.

Marginal tax rate

The tax rate that would have to be paid on any additional dollars of taxable income earned.

Normal annuity form

The manner in which retirement benefits are paid out.

Notional principal amount

In an interest rate swap, the predetermined dollar principal on which the
exchanged interest payments are based.

Other capital

In the balance of payments, other capital is a residual category that groups all the capital
transactions that have not been included in direct investment, portfolio investment, and reserves categories. It
is divided into long-term capital and short-term capital and, because of its residual status, can differ from
country to country. Generally speaking, other long-term capital includes most non-negotiable instruments of a
year or more like bank loans and mortgages. Other short-term capital includes financial assets of less than a
year such as currency, deposits, and bills.

Other current assets

Value of non-cash assets, including prepaid expenses and accounts receivable, due
within 1 year.

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