The quotient of two bond yields.
Similar financial termsYield to maturity
The total yield on a bond obtained by equating the bond's current market value to the discounted cash flows promised by the bond. Also referred to as actuarial yield or just yield.
The yield curve, which plots the term structure, shows the relationship between yield (interest rate) and maturity for a set of similar securities. Typically, different yield curves are drawn for zero-coupon bonds (zero-coupon yield curve) and for coupon bonds quoted at par (par yield curve).
In general, the yield is the return on an investor's capital investment. For bonds it is the coupon rate of interest divided by the purchase price, called current yield. Also, the rate of return on a bond, taking into account the total of annual interest payments, the purchase price, the redemption value, and the amount of time remaining until maturity.
A stock's daily percentage summary of yield, calculated by dividing annual dividend per share by the day's closing stock price.
Yield to call
The percentage rate of a bond or note, if you were to buy and hold the security until the call date. This yield is valid only if the security is called prior to maturity. Generally bonds are callable over several years and normally are called at a slight premium. The calculation of yield to call is based on the coupon rate, length of time to the call and the market price.
Yield spread strategies
Strategies that involve positioning a portfolio to capitalize on expected changes inyield spreads between sectors of the bond market.
Yield curve strategies
Positioning a portfolio to capitalize on expected changes in the shape of the Treasury yield curve.
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.
Weighted average portfolio yield
The weighted average of the yield of all the bonds in a portfolio.
Annual percentage yield (APY)
The effective, or true, annual rate of return. The APY is the rate actually earned or paid in one year, taking into account the affect of compounding. The APY is calculated by taking one plus the periodic rate and raising it to the number of periods in a year. For example, a 1% per month rate has an APY of 12.68% (1.01^12).
Steepening of the yield curve
A change in the yield curve where the spread between the yield on a long-term and short-term Treasury has increased.
Riding the yield curve
Buying long-term bonds in anticipation of capital gains as yields fall with the declining maturity of the bonds.
Generally referring to bonds, the yield required by the marketplace to match available returns for financial instruments with comparable risk.
In a purchase and sale, the yield to maturity at which the underwriter offers to sell the bonds to investors.
Relative yield spread
The ratio of the yield spread to the yield level.
Realized compound yield
Yield assuming that coupon payments are invested at the going market interest rate at the time of their receipt and rolled over until the bond matures.
Pure yield pickup swap
Moving to higher yield bonds.
Parallel shift in the yield curve
A shift in the yield curve in which the change in the yield on all maturities is the same number of basis points. In other words, if the 3 month T-bill increases 100 basis points (one percent), then the 6 month, 1 year, 5 year, 10 year, 20 year, and 30 year rates increase by 100 basis points as well.
Non-parallel shift in the yield curve
A shift in the yield curve in which yields do not change by the same number of basis points for every maturity.
Liquid yield option note (LYON)
Zero-coupon, callable, putable, convertible bond invented by Merrill Lynch & Co.
Bond equivalent yield
Bond yield calculated on an annual percentage rate method. Differs from annual effective yield.
The annualized yield to maturity computed by doubling the semiannual yield.
Capital gains yield
The price change portion of a stock's return.
The extra advantage that firms derive from holding the commodity rather than the future.
Coupon equivalent yield
True interest cost expressed on the basis of a 365-day year.
For bonds or notes, the coupon rate divided by the market price of the bond.
Yield to worst
The bond yield computed by using the lower of either the yield to maturity or the yield to call on every possible call date.
A municipal bond financing method. Underwriters in advance refundings add large markups on US Treasury bonds bought and held in escrow to compensate investors while waiting for repayment of old bonds after issuance of the new bonds. Since bond prices and yields move in opposite directions, when the bonds are marked up, they "burn down" the yield, which may violate federal tax rules and diminishes tax revenues.
Four-firm concentration ratio
The sum of the portions of sales, value added, assets, or employees held by the largest four firms in an industry. A measure of competitiveness according to the structural theory
The percentage of the position in an asset that is hedged with derivatives.
The quick ratio (also known as acid test) is a financial ratio similar to the current ratio, but more stringent. It is defined as: current assets minus stocks, divided by current liabilities. It shows whether a company would be able to pay its debts if its creditors were hammering at the door AND it had no time to sell any of its stock. If the acid test is 1 or higher, a company passes the test.
A ratio showing the portion of total capitalization represented by bonds. To compute the ratio, dived the dollar value of bonds by total capitalization; the result is expressed as a percentage
Common stock ratio
A ratio showing the portion of total capitalization represented by common stock and retained earnings. To calculate, add the dollar value of common stock plus retained earnings and divide by total capitalization; the result is expressed as a percentage
A ratio that tests the strength of a company's working capital. Current assets are divided by current liabilities and the result is expressed as a factor, x to y.
A ratio showing the percentage of total shareholders' equity represented by long-term dept. This important fundamental test shows the degree of capitalization that is derived from dept rather than from equity.
Dividend payout ratio
A ratio showing the percentage of net profits paid out in dividends on common stock, after reducing net profits by the amount of dividends paid on preferred stock.
The date on which an option expires, after which the option cannot be exercised.
Also called the quick ratio, the ratio of current assets minus inventories, accruals, and prepaid items to current liabilities.
Working capital ratio
Working capital expressed as a percentage of sales.
Two-fund separation theorem
The theoretical result that all investors will hold a combination of the risk-free asset and the market portfolio.
Total debt to equity ratio
A capitalization ratio comparing current liabilities plus long-term debt to shareholders' equity.
Earnings before interest and tax, divided by interest payments.
Time until expiration
The time remaining until a financial contract expires. Also called time to maturity.
Target payout ratio
A firm's long-run dividend-to-earnings ratio. The firm's policy is to attempt to pay out a certain percentage of earnings, but it pays a stated dollar dividend and adjusts it to the target as base-line increases in earnings occur.
Soft Capital Rationing
Capital rationing that under certain circumstances can be violated or even viewed as made up of targets rather than absolute constraints.
Short-term solvency ratios
Ratios used to judge the adequacy of liquid assets for meeting short-term obligations as they come due, including (a) the current ratio, (b) the acid-test ratio, (c) the inventory turnover ratio, and (d) the accounts receivable turnover ratio.
A procedure that allows firms to file one registration statement covering several issues of the same security.
A measure of a portfolio's excess return relative to the total variability of the portfolio.
The value of an investment to an individual is not dependent on consumption preferences. All investors will want to accept or reject the same investment projects by using the NPV rule, regardless of personal preference.
The property that portfolio choice can be separated into two independent tasks: (a) determination of the optimal risky portfolio, which is a purely technical problem, and (b) the personal choice of the best mix of the risky portfolio and the risk-free asset.
Ratio of excess return to portfolio standard deviation.
Specified percentages of deposits, established by the Federal Reserve Board, that banks must keep in a non-interest-bearing account at one of the twelve Federal Reserve Banks.
A legal document that is filed with the SEC to register securities for public offering.
Receivables turnover ratio
Total operating revenues divided by average receivables. Used to measure how effectively a firm is managing its accounts receivable.
The idea that people rationally anticipate the future and respond to what they see ahead.
Rate of return ratios
Ratios that are designed to measure the profitability of the firm in relation to various measures of the funds invested in the firm.
Market value of a firm's assets divided by replacement value of the firm's assets.
Public Securities Administration (PSA)
The trade association for primary dealers in US government securities, including MBSs.
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.
Private Export Funding Corporation (PEFCO)
Company that mobilizes private capital for financing the export of big-ticket items by US firms by purchasing at fixed interest rates the medium- to long-term debt obligations of importers of US products.
Determined by dividing current stock price by revenue per share (adjusted for stock splits). Revenue per share for the P/S ratio is determined by dividing revenue for past 12 months by number of shares outstanding.
Shows the "multiple" of earnings at which a stock sells. Determined by dividing current stock price by current earnings per share (adjusted for stock splits). Earnings per share for the P/E ratio is determined by dividing earnings for past 12 months by the number of common shares outstanding. Higher "multiple" means investors have higher expectations for future growth, and have bid up the stock's price.
A type of corporation permitted under the U.S. tax code whereby a branch operation in a U.S. possessions can obtain tax benefits as though it were operating as a foreign subsidiary.
Portfolio separation theorem
An investor's choice of a risky investment portfolio is separate from his attitude towards risk.
Pension Benefit Guaranty Corporation (PBGC)
A federal agency that insures the vested benefits of pension plan participants (established in 1974 by the ERISA legislation).
Generally, the proportion of earnings paid out to the common stockholders as cash dividends. More specifically, the firm's cash dividend divided by the firm's earnings in the same reporting period.
Assume Deutsche Bank sells for €25.50 per share and has earned €2.55 per share this year; €25.50 = 10 times €2.55. Deutsche Bank stock sells for 10 times earnings. P/E = Current stock price divided by trailing annual earnings per share or expected annual earnings per share.
Operationally efficient market
Also called an internally efficient market, one in which investors can obtain transactions services that reflect the true costs associated with furnishing those services.
Open-market purchase operation
A systematic program of repurchasing shares of stock in market transactions at current market prices, in competition with other prospective investors.
Purchase or sale of government securities by the monetary authorities to increase or decrease the domestic money supply.
A situation in which the price of the MBS moves in the same direction as interest rates.
A firm that operates in more than one country.
Mortgage-Backed Securities Clearing Corporation
A wholly owned subsidiary of the Midwest Stock Exchange that operates a clearing service for the comparison, netting, and margining of agency-guaranteed MBSs transacted for forward delivery.
A modification of standard duration to account for the impact on duration of MBSs of changes in prepayment speed resulting from changes in interest rates. Two factors are employed: one that reflects the impact of changes in prepayment speed or price.
The ratio of Macaulay duration to (1 + y), where y = the bond yield. Modified duration is inversely related to the approximate percentage change in price for a given change in yield.
Market value ratios
Ratios that relate the market price of the firm's common stock to selected financial statement items.
The weighted-average term to maturity of the cash flows from the bond, where the weights are the present value of the cash flow divided by the price of the bond.
D = [(1 x (C/1+y)) + (2 x (C/1+y^2)) + (3 x ((C + FV)/1+y^3))] / [(C/1+y) + (C/1+y^2) + (C + FV/1+y^3)]
Low price-earnings ratio effect
The tendency of portfolios of stocks with a low price-earnings ratio to outperform portfolios consisting of stocks with a high price-earnings ratio.
Long-term debt to equity ratio
A capitalization ratio comparing long-term debt to shareholders' equity.
Long-term debt ratio
The ratio of long-term debt to total capitalization.
Ratios that measure a firm's ability to meet its short-term financial obligations on time.
Measures of the relative contribution of stockholders and creditors, and of the firm's ability to pay financing charges. Value of firm's debt to the total value of the firm.
Incorporation is the process of creating a legal, tax-paying entity. Businesses or companies can be incorporated or unincorporated. If unincorporated, the owner(s) of the business personally take on the assets and liabilities of the business and are personally responsible for all taxes. When incorporating, which is simply a legal registration process, a new, tax-payer is, in essence, created. Incorporating a business is a straightforward process. Lawyers and other agencies usually provide this s ...
Placing one or more limits on the amount of new investment undertaken by a firm, either by using a higher cost of capital, or by setting a maximum on parts of, and/or the entirety of, the capital budget.
Also called financial leverage ratios, these ratios compare debt to total capitalization and thus reflect the extent to which a corporation is trading on its equity. Capitalization ratios can be interpreted only in the context of the stability of industry and company earnings and cash flow.
Cash flow coverage ratio
The number of times that financial obligations (for interest, principal payments, preferred stock dividends, and rental payments) are covered by earnings before interest, taxes, rental payments, and depreciation.
Cash flow from operations
A firm's net cash inflow resulting directly from its regular operations (disregarding extraordinary items such as the sale of fixed assets or transaction costs associated with issuing securities), calculated as the sum of net income plus non-cash expenses that were deducted in calculating net income.
The proportion of a firm's assets held as cash.
Common stock ratios
Ratios that are designed to measure the relative claims of stockholders to earnings (cash flow per share), and equity (book value per share) of a firm.
A single centralized account into which funds collected at regional locations (lockboxes) are transferred.
Movement of cash from different lockbox locations into a single concentration account from which disbursements and investments are made.
The number of shares of common stock that the security holder will receive from exercising the call option of a convertible security.
A legal "person" that is separate and distinct from its owners. A corporation is allowed to own assets, incur liabilities, and sell securities, among other things.
The net present value of an investment divided by the investment's initial cost. Also called the profitability index.
Ratios used to test the adequacy of cash flows generated through earnings for purposes of meeting debt and lease obligations, including the interest coverage ratio and the fixed charge coverage ratio.
Customary payout ratios
A range of payout ratios that is typical based on an analysis of comparable firms.
In game theory, one of the most common assumptions made is that every player/participant is rational. In its mildest form, rationality implies that every player is motivated by maximizing his own payoff. In a stricter sense, it implies that every player always maximizes his utility, thus being able to perfectly calculate the probabilistic result of every action.
The BIS ratio gives an indication of the solvency of a bank. It gives the ratio between the risk-bearing capital and the risk-weighted assets.
Capital coverage ratio
Available capital divided by required capital.
Remuneration and Nomination Committee
A committee that advises the Supervisory Board in a company on compensation policies and the composition of the Supervisory Board and Executive Board. The committee also advises the Supervisory Board on the compensation packages of the members of the Executive Board and the Supervisory Board.
A trust in which a principal amount is placed in a trust on the death of person A and is transferred to A's grandchildren when A's children die. However, the income generated from the trust while the children of person A are alive goes to the children of person A.
Controlled Foreign Corporation (CFC)
An offshore company which, because of ownership or voting control of U.S. persons, is treated by the IRS as a U.S. tax reporting entity. IRC 951 and 957 collectively define the CFC as one in which a U.S. person owns 10 percent or more of a foreign corporation or in which 50 percent or more of the total voting stock is owned by U.S. shareholders collectively or 10 percent or more of the voting control is owned by U.S. persons.
The Securities Industry Protection Corporation
Commonly named the SIPC. Provides up to $500,000 insurance protection for your U.S. stock brokerage account.
A measure of a bond's price sensitivity to changes in interest rates.
The acquisition by a company operating in one market, of another company that is complementary to its existing business, perhaps as a supplier or user of product, for example a newspaper publishing company acquiring a paper manufacturer. See Vertical merger.