Definition of What If Scenarios

What If Scenarios

Analysis of the economic effect of possible future situations such as economic downturns, loss of key customers, changes in interest rates or price levels, new competitors or technologies.

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.

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).

Amortizing interest rate swap

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

Antidilutive effect

Result of a transaction that increases earnings per common share (e.g. by decreasing the
number of shares outstanding).

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.

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.

Base interest rate

Related: Benchmark interest rate.

Base probability of loss

The probability of not achieving a portfolio expected return.

Basis price

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

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").

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.

Break-even analysis

An Analysis of the level of sales at which a project would make zero profit.

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.

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 loss

The difference between the net cost of a security and the net sale price, if that security is sold at a loss.

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.

Changes in Financial Position

Sources of funds internally provided from operations that alter a company's
cash flow position: depreciation, deferred taxes, other sources, and capital expenditures.

Clean price

Bond price excluding accrued interest.

Clientele effect

The grouping of investors who have a preference that the firm follow a particular financing
policy, such as the amount of leverage it uses.

Cluster analysis

A statistical technique that identifies clusters of stocks whose returns are highly correlated
within each cluster and relatively uncorrelated between clusters. Cluster Analysis has identified groupings
such as growth, cyclical, stable and energy stocks.

Coinsurance effect

Refers to the fact that the merger of two firms decreases the probability of default on
either firm's debt.

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.

Comparative credit analysis

A method of Analysis in which a firm is compared to others that have a desired
target debt rating in order to infer an appropriate financial ratio target.

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.

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.

Credit analysis

The process of analyzing information on companies and bond issues in order to estimate the
ability of the issuer to live up to its future contractual obligations. Related: default risk

Cross rates

The exchange rate between two currencies expressed as the ratio of two foreign exchange rates
that are both expressed in terms of a third currency.

Currency future

A financial future contract for the delivery of a specified foreign currency.

Deferred futures

The most distant months of a futures contract. A bond that sells at a discount and does not
pay interest for an initial period, typically from three to seven years. Compare step-up bond and payment-inkind
bond.

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

Dilutive effect

Result of a transaction that decreases earnings per common share.

Dirty price

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

Discriminant analysis

A statistical process that links the probability of default to a specified set of financial ratios.

Dollar price of a bond

Percentage of face value at which a bond is quoted.

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.

Economic assumptions

economic environment in which the firm expects to reside over the life of the
financial plan.

Economic defeasance

See: in-substance defeasance.

Economic dependence

Exists when the costs and/or revenues of one project depend on those of another.

Economic earnings

The real flow of cash that a firm could pay out forever in the absence of any change in
the firm's productive capacity.

Economic exposure

The extent to which the value of the firm will change because of an exchange rate change.

Economic income

Cash flow plus change in present value.

Economic order quantity (EOQ)

The order quantity that minimizes total inventory costs.

Economic rents

Profits in excess of the competitive level.

Economic risk

In project financing, the risk that the project's output will not be salable at a price that will
cover the project's operating and maintenance costs and its debt service requirements.

Economic surplus

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

Economic union

An agreement between two or more countries that allows the free movement of capital,
labor, all goods and services, and involves the harmonization and unification of social, fiscal, and monetary
policies.

Effective annual interest rate

An annual measure of the time value of money that fully reflects the effects of
compounding.

Effective annual yield

Annualized interest rate on a security computed using compound interest techniques.

Effective call price

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

Effective convexity

The convexity of a bond calculated with cash flows that change with yields.

Effective date

In an interest rate swap, the date the swap begins accruing interest.

Effective duration

The duration calculated using the approximate duration formula for a bond with an
embedded option, reflecting the expected change in the cash flow caused by the option. Measures the
responsiveness of a bond's price taking into account the expected cash flows will change as interest rates
change due to the embedded option.

Effective margin (EM)

Used with SAT performance measures, the amount equaling the net earned spread, or
margin, of income on the assets in excess of financing costs for a given interest rate and prepayment rate
scenario.

Effective rate

A measure of the time value of money that fully reflects the effects of compounding.

Effective spread

The gross underwriting spread adjusted for the impact of the announcement of the common
stock offering on the firm's share price.

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.

Exercise price

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

Expected future cash flows

Projected future cash flows associated with an asset of decision.

Expected future return

The return that is expected to be earned on an asset in the future. Also called the
expected return.

Factor analysis

A statistical procedure that seeks to explain a certain phenomenon, such as the return on a
common stock, in terms of the behavior of a set of predictive factors.

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.

Financial future

A contract entered into now that provides for the delivery of a specified asset in exchange
for the selling price at some specified future date.

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.

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 price

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

Fundamental analysis

Security Analysis that seeks to detect misvalued securities by an Analysis of the firm's
business prospects. Research Analysis often focuses on earnings, dividend prospects, expectations for future
interest rates, and risk evaluation of the firm.

Future

A term used to designate all contracts covering the sale of financial instruments or physical
commodities for future delivery on a commodity exchange.

Future investment opportunities

The options to identify additional, more valuable investment opportunities
in the future that result from a current opportunity or operation.

Future value

The amount of cash at a specified date in the future that is equivalent in value to a specified
sum today.

Futures

A term used to designate all contracts covering the sale of financial instruments or physical
commodities for future delivery on a commodity exchange.

Futures commission merchant

A firm or person engaged in soliciting or accepting and handling orders for
the purchase or sale of futures contracts, subject to the rules of a futures exchange and, who, in connection
with such solicitation or acceptance of orders, accepts any money or securities to margin any resulting trades
or contracts. The FCM must be licensed by the CFTC. Related: commission house , omnibus account

Futures contract

Agreement to buy or sell a set number of shares of a specific stock in a designated future
month at a price agreed upon by the buyer and seller. The contracts themselves are often traded on the futures
market. A futures contract differs from an option because an option is the right to buy or sell, whereas a
futures contract is the promise to actually make a transaction. A future is part of a class of securities called
derivatives, so named because such securities derive their value from the worth of an underlying investment.

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.

Futures market

A market in which contracts for future delivery of a commodity or a security are bought or sold.

Futures option

An option on a futures contract. Related: options on physicals.

Futures price

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

Gross interest

interest earned before taxes are deducted.

Growth rates

Compound annual growth rate for the number of full fiscal years shown. If there is a negative
or zero value for the first or last year, the growth is NM (not meaningful).

High price

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

Horizon analysis

An Analysis of returns using total return to assess performance over some investment horizon.

Horizontal analysis

The process of dividing each expense item of a given year by the same expense item in
the base year. This allows for the exploration of changes in the relative importance of expense items over time
and the behavior of expense items as sales change.

Information-content effect

The rise in the stock price following the dividend signal.

Interest

The price paid for borrowing money. It is expressed as a percentage rate over a period of time and
reflects the rate of exchange of present consumption for future consumption. Also, a share or title in property.

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