Definition of Will

Will

This is a legal document detailing how you want your assets to be distributed upon your death. You may also stipulate how you wish to be buried or who you would like to take care of any surviving dependent family members. In my opinion, it is very important to be quite specific about your wishes for the distribution of special assets such as the antique grandfather clock, the classic silver tea set or the antique piano. If you think that your beneficiaries may dispute how your things are to be distributed, consider stipulating that an auction be held in which all beneficiaries may bid on the item which they value and all moneys collected are then shared in the same manner in which you distributed your other liquid assets. Your might want to remember that a will is automatically revoked upon marriage unless the will specifically states that the will is made in contemplation of marriage.

Goodwill

Excess of the purchase price over the fair market value of the net assets acquired under purchase
accounting.

Goodwill

The excess of the price paid to buy another company over the book value of
its assets and the increase in cost of its fixed assets to fair market value.

Negative goodwill

A term used to describe a situation in which a business combination
results in the fair market value of all assets purchased being more than the purchase
price.

Living Will

This is a will which specifically expresses the testator's desire not to be kept alive on life support machines, should the occasion arise.

Goodwill

Intangible assets of a firm established by the excess of the price paid for the going concern over the value of its assets.

runup

the period before a formal announcement of a takeover bid in which one or more bidders are either preparing to make an announcement or speculating that someone else will.

Arm's length price

The price at which a willing buyer and a willing unrelated seller would freely agree to
transact.

Ask

This is the quoted ask, or the lowest price an investor will accept to sell a stock. Practically speaking, this
is the quoted offer at which an investor can buy shares of stock; also called the offer price.

BAN (Bank anticipation notes)

Notes issued by states and municipalities to obtain interim financing for
projects that will eventually be funded long term through the sale of a bond issue.

Bankruptcy risk

The risk that a firm will be unable to meet its debt obligations. Also referred to as default or insolvency risk.

Bear

An investor who believes a stock or the overall market will decline. A bear market is a prolonged period
of falling stock prices, usually by 20% or more. Related: bull.

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").

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.

Bill of lading

A contract between the exporter and a transportation company in which the latter agrees to
transport the goods under specified conditions which limit its liability. It is the exporter's receipt for the goods
as well as proof that goods have been or will be received.

Bond indexing

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

Borrow

To obtain or receive money on loan with the promise or understanding that it will be repaid.

Borrower fallout

In the mortgage pipeline, the risk that prospective borrowers of loans committed to be
closed will elect to withdraw from the contract.

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.

Bull

An investor who thinks the market will rise. Related: bear.

Business risk

The risk that the cash flow of an issuer will be impaired because of adverse economic
conditions, making it difficult for the issuer to meet its operating expenses.

Cash-flow break-even point

The point below which the firm will need either to obtain additional financing
or to liquidate some of its assets to meet its fixed costs.

Cash-surrender value

An amount the insurance company will pay if the policyholder ends a whole life
insurance policy.

Claim dilution

A reduction in the likelihood one or more of the firm's claimants will be fully repaid,
including time value of money considerations.

Commercial risk

The risk that a foreign debtor will be unable to pay its debts because of business events,
such as bankruptcy.

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.

Conversion ratio

The number of shares of common stock that the security holder will receive from
exercising the call option of a convertible security.

Counterparty risk

The risk that the other party to an agreement will default. In an options contract, the risk
to the option buyer that the option writer will not buy or sell the underlying as agreed.
Country economic risk Developments in a national economy that can affect the outcome of an international
financial transaction.

Covered or hedge option strategies

Strategies that involve a position in an option as well as a position in the
underlying stock, designed so that one position will help offset any unfavorable price movement in the other,
including covered call writing and protective put buying. Related: naked strategies

Cumulative probability distribution

A function that shows the probability that the random variable will
attain a value less than or equal to each value that the random variable can take on.

Dealer

An entity that stands ready and willing to buy a security for its own account (at its bid price) or sell
from its own account (at its ask price).

Debt displacement

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

Debt service parity approach

An analysis wherein the alternatives under consideration will provide the firm
with the exact same schedule of after-tax debt payments (including both interest and principal).

Deferred equity

A common term for convertible bonds because of their equity component and the
expectation that the bond will ultimately be converted into shares of common stock.

Deliverable instrument

The asset in a forward contract that will be delivered in the future at an agree-upon price.

Delivery options

The options available to the seller of an interest rate futures contract, including the quality
option, the timing option, and the wild card option. Delivery options make the buyer uncertain of which
Treasury Bond will be delivered or when it will be delivered.

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.

Distributed

After a Treasury auction, there will be many new issues in dealer's hands. As those issues are
sold, it is said that they are distributed.

Dividend policy

An established guide for the firm to determine the amount of money it will pay as dividends.

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.

Dollar-weighted rate of return

Also called the internal rate of return, the interest rate that will make the
present value of the cash flows from all the subperiods in the evaluation period plus the terminal market value
of the portfolio equal to the initial market value of the portfolio.

Economic exposure

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

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.

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.

Efficient diversification

The organizing principle of modern portfolio theory, which maintains that any riskaverse
investor will search for the highest expected return for any level of portfolio risk.

Efficient Market Hypothesis

In general the hypothesis states that all relevant information is fully and
immediately reflected in a security's market price thereby assuming that an investor will obtain an equilibrium
rate of return. In other words, an investor should not expect to earn an abnormal return (above the market
return) through either technical analysis or fundamental analysis. Three forms of efficient market hypothesis
exist: weak form (stock prices reflect all information of past prices), semi-strong form (stock prices reflect all
publicly available information) and strong form (stock prices reflect all relevant information including insider
information).

Event risk

The risk that the ability of an issuer to make interest and principal payments will change because
of rare, discontinuous, and very large, unanticipated changes in the market environment such as (1) a natural
or industrial accident or some regulatory change or (2) a takeover or corporate restructuring.

Expected return-beta relationship

Implication of the CAPM that security risk premiums will be
proportional to beta.

Expiration cycle

An expiration cycle relates to the dates on which options on a particular security expire. A
given option will be placed in 1 of 3 cycles, the January cycle, the February cycle, or the March cycle. At any
point in time, an option will have contracts with 4 expiration dates outstanding, 2 in near-term months and 2
in far-term months.

Expiration date

The last day (in the case of American-style) or the only day (in the case of European-style)
on which an option may be exercised. For stock options, this date is the Saturday immediately following the
3rd Friday of the expiration month; however, brokerage firms may set an earlier deadline for notification of
an option holder's intention to exercise. If Friday is a holiday, the last trading day will be the preceding
Thursday.

Ex-dividend date

The first day of trading when the seller, rather than the buyer, of a stock will be entitled to
the most recently announced dividend payment. This date set by the NYSE (and generally followed on other
US exchanges) is currently two business days before the record date. A stock that has gone ex-dividend is
marked with an x in newspaper listings on that date.

Financial objectives

Objectives of a financial nature that the firm will strive to accomplish during the period
covered by its financial plan.

Financial risk

The risk that the cash flow of an issuer will not be adequate to meet its financial obligations.
Also referred to as the additional risk that a firm's stockholder bears when the firm utilizes debt and equity.

Force majeure risk

The risk that there will be an interruption of operations for a prolonged period after a
project finance project has been completed due to fire, flood, storm, or some other factor beyond the control
of the project's sponsors.

Forced conversion

Use of a firm's call option on a callable convertible bond when the firm knows that the
bondholders will exercise their option to convert.

Forward delivery

A transaction in which the settlement will occur on a specified date in the future at a price
agreed upon on the trade date.

Forward trade

A transaction in which the settlement will occur on a specified date in the future at a price
agreed upon the trade date.

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.

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.

Homemade leverage

Idea that as long as individuals borrow (or lend) on the same terms as the firm, they can
duplicate the affects of corporate leverage on their own. Thus, if levered firms are priced too high, rational
investors will simply borrow on personal accounts to buy shares in unlevered firms.

Inflation risk

Also called purchasing-power risk, the risk that changes in the real return the investor will
realize after adjusting for inflation will be negative.

Insolvency risk

The risk that a firm will be unable to satisfy its debts. Also known as bankruptcy risk.

Insurance principle

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

Intangible asset

A legal claim to some future benefit, typically a claim to future cash. Goodwill, intellectual
property, patents, copyrights, and trademarks are examples of intangible assets.

Interest rate risk

The risk that a security's value changes due to a change in interest rates. For example, a
bond's price drops as interest rates rise. For a depository institution, also called funding risk, the risk that
spread income will suffer because of a change in interest rates.

Interest rate swap

A binding agreement between counterparties to exchange periodic interest payments on
some predetermined dollar principal, which is called the notional principal amount. For example, one party
will pay fixed and receive variable.

J-curve

Theory that says a country's trade deficit will initially worsen after its currency depreciates because
higher prices on foreign imports will more than offset the reduced volume of imports in the short-run.

Lend

To provide money temporarily on the condition that it or its equivalent will be returned, often with an
interest fee.

Liability funding strategies

Investment strategies that select assets so that cash flows will equal or exceed
the client's obligations.

Line of credit

An informal arrangement between a bank and a customer establishing a maximum loan
balance that the bank will permit the borrower to maintain.

Liquidity theory of the term structure

A biased expectations theory that asserts that the implied forward
rates will not be a pure estimate of the market's expectations of future interest rates because they embody a
liquidity premium.

Local expectations theory

A form of the pure expectations theory which suggests that the returns on bonds
of different maturities will be the same over a short-term investment horizon.

Lock-up CDs

CDs that are issued with the tacit understanding that the buyer will not trade the certificate.
Quite often, the issuing bank will insist that the certificate be safekept by it to ensure that the understanding is
honored by the buyer.

Lookback option

An option that allows the buyer to choose as the option strike price any price of the
underlying asset that has occurred during the life of the option. If a call, the buyer will choose the minimal
price, whereas if a put, the buyer will choose the maximum price. This option will always be in the money.

Line of credit

An informal arrangement between a bank and a customer establishing a maximum loan
balance that the bank will permit the borrower to maintain.

Margin account (Stocks)

A leverageable account in which stocks can be purchased for a combination of
cash and a loan. The loan in the margin account is collateralized by the stock and, if the value of the stock
drops sufficiently, the owner will be asked to either put in more cash, or sell a portion of the stock. Margin
rules are federally regulated, but margin requirements and interest may vary among broker/dealers.

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.

Market overhang

The theory that in certain situations, institutions wish to sell their shares but postpone the
share sales because large orders under current market conditions would drive down the share price and that
the consequent threat of securities sales will tend to retard the rate of share price appreciation. Support for this
theory is largely anecdotal.

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 timer

A money manager who assumes he or she can forecast when the stock market will go up and down.

Market timing

Asset allocation in which the investment in the market is increased if one forecasts that the
market will outperform T-bills.

Moral hazard

The risk that the existence of a contract will change the behavior of one or both parties to the
contract, e.g. an insured firm will take fewer fire precautions.

Mortality tables

Tables of probability that individuals of various ages will die within one year.

Multiperiod immunization

A portfolio strategy in which a portfolio is created that will be capable of
satisfying more than one predetermined future liability regardless if interest rates change.

Mutual fund theorem

A result associated with the CAPM, asserting that investors will choose to invest their
entire risky portfolio in a market-index or mutual fund.

Negative convexity

A bond characteristic such that the price appreciation will be less than the price
depreciation for a large change in yield of a given number of basis points.

No load mutual fund

An open-end investment company, shares of which are sold without a sales charge.
There can be other distribution charges, however, such as Article 12B-1 fees. A true "no load" fund will have
neither a sales charge nor a distribution fee.

Normal backwardation theory

Holds that the futures price will be bid down to a level below the expected
spot price.

Note issuance facility (NIF)

An agreement by which a syndicate of banks indicates a willingness to accept
short-term notes from borrowers and resell these notes in the Eurocurrency markets.

Offer

Indicates a willingness to sell at a given price. Related: bid
Offer price See: offer.

Open position

A net long or short position whose value will change with a change in prices.

Operating exposure

Degree to which exchange rate changes, in combination with price changes, will alter a
company's future operating cash flows.

Opinion shopping

A practice prohibited by the SEC which involves attempts by a corporation to obtain
reporting objectives by following questionable accounting principles with the help of a pliable auditor willing
to go along with the desired treatment.

Option

Gives the buyer the right, but not the obligation, to buy or sell an asset at a set price on or before a
given date. Investors, not companies, issue options. Investors who purchase call options bet the stock will be
worth more than the price set by the option (the strike price), plus the price they paid for the option itself.
Buyers of put options bet the stock's price will go down below the price set by the option. An option is part of
a class of securities called derivatives, so named because these securities derive their value from the worth of
an underlying investment.

Passive portfolio strategy

A strategy that involves minimal expectational input, and instead relies on
diversification to match the performance of some market index. A passive strategy assumes that the
marketplace will reflect all available information in the price paid for securities, and therefore, does not
attempt to find mispriced securities. Related: active portfolio strategy

Payment date

The date on which each shareholder of record will be sent a check for the declared dividend.

Payments pattern

escribes the lagged collection pattern of receivables, for instance the probability that a
72-day-old account will still be unpaid when it is 73-days-old.

Pay-up

The loss of cash resulting from a swap into higher price bonds or the need/willingness of a bank or
other borrower to pay a higher rate of interest to get funds.

Perfected first lien

A first lien that is duly recorded with the cognizant governmental body so that the lender
will be able to act on it should the borrower default.

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