© CFA Institute. For candidate use only. Not for distribution.

G-1

Glossary
Abandonment option The option to terminate an investment All-or-nothing (AON) orders An order that includes the
at some future time if the financial results are disappointing. instruction to trade only if the trade fills the entire quan-
Abnormal return The return on an asset in excess of the asset’s tity (size) specified.
required rate of return; the risk-adjusted return. Allocationally efficient A characteristic of a market, a financial
Absolute dispersion The amount of variability present without system, or an economy that promotes the allocation of
comparison to any reference point or benchmark. resources to their highest value uses.
Accelerated book build An offering of securities by an invest- Altcoin A cryptocurrency other than Bitcoin.
ment bank acting as principal that is accomplished in only Alternative data Data that are generated from non-traditional
one or two days. sources, such as social media and sensor networks.
Accounting profit Income as reported on the income state- Alternative hypothesis The hypothesis that is accepted if the
ment, in accordance with prevailing accounting standards, null hypothesis is rejected.
before the provisions for income tax expense. Also called Alternative investment markets Market for investments other
income before taxes or pretax income. than traditional securities investments (i.e., traditional
Accredited investors Investors that meet certain minimum common and preferred shares and traditional fixed income
regulatory net worth or other requirements in order to instruments). The term usually encompasses direct and
invest in certain types of alternative assets. indirect investment in real estate (including timberland
Accrued interest The amount of interest in currency or par and farmland) and commodities (including precious met-
value terms of a fixed-income instrument that accumulates als); hedge funds, private equity, and other investments
from the last coupon payment until the trade settlement requiring specialized due diligence.
date. The amount is paid by the buyer to the seller. Alternative trading systems Trading venues that function like
Action lag Delay from policy decisions to implementation. exchanges but that do not exercise regulatory authority
Active investment An approach to investing in which the over their subscribers except with respect to the conduct
investor seeks to outperform a given benchmark. of the subscribers’ trading in their trading systems. Also
Active return The return on a portfolio minus the return on called electronic communications networks or multilateral
the portfolio’s benchmark. trading facilities.
Activist Short for “activist shareholder.” Managers secure suf- American depository receipt A US dollar-denominated secu-
ficient equity holdings to allow them to seek a position rity that trades like a common share on US exchanges.
in a company’s board and influence corporate policies or American depository share The underlying shares on which
direction. American depository receipts are based. They trade in the
Activity ratios Ratios that measure how well a company is issuing company’s domestic market.
managing key current assets and working capital over time. American options Options that may be exercised at any time
Ad hoc committee A small group of lenders or bondholders from contract inception until maturity.
who negotiate with an issuer on debt restructuring and American-style Type of option contract that can be exercised
refinancing before the issuer submits a final proposal to at any time up to the option’s expiration date.
the wider group of all lenders and bondholders. Amortization The process of allocating the cost of intangible
Add-on pricing A pricing approach based on high-margin long-term assets having a finite useful life to accounting
optional features, customizations, and additional content. periods; the allocation of the amount of a bond premium
Add-on rate A yield or pricing convention for money market or discount to the periods remaining until bond maturity.
instrument quotations. It is the interest earned on an Amortizing debt A loan or bond with a payment schedule
instrument, derived from the difference between the price that calls for periodic payments of interest and repayments
and face value, expressed as a percentage of the price and of principal.
multiplied by the periodicity of the annual rate. Analysis of variance (ANOVA) A table that presents the sums of
Agency costs Direct and indirect costs borne by the princi- squares, degrees of freedom, mean squares, and F-statistic
pal in a principal-agent relationship owing primarily to for a regression model.
information asymmetries. Agency costs include the costs Analytical duration Estimates of duration using mathematical
of monitoring and assessing the agent as well as missed formulas. Estimates of the impact of yield changes on bond
opportunities. prices using analytical duration implicitly assume that
Agency RMBS Securities created by the pooling of residential benchmark yields and spreads are independent variables
mortgage-backed securities in the United States by either and are uncorrelated.
the Federal National Mortgage Association (Fannie Mae) Anchoring and adjustment bias An information-processing
or the Federal Home Loan Mortgage Corporation (Freddie bias in which the use of a psychological heuristic influences
Mac). These RMBS carry the full faith and credit of the the way people estimate probabilities.
government, essentially a guarantee with respect to timely Annual general meeting (AGM) A yearly meeting of the cor-
payment of interest and repayment of principal. porate board of directors and shareholders, typically held
in person and digitally, during which votes on directors,
compensation plans, shareholder resolutions, and any
 © CFA Institute. For candidate use only. Not for distribution.
G-2 Glossary

other matters properly brought forward at the meeting At-the-money Describes a unique situation in which the price
are held. Issuer management may also make presentations of the underlying is equal to an option’s exercise price. Like
and hold events. an out-of-the-money option, the intrinsic value is zero.
Anomalies Apparent deviations from market efficiency. Auction/reverse auction models Pricing models that establish
Antidilutive With reference to a transaction or a security, one prices through bidding (by sellers in the case of reverse
that would increase earnings per share (EPS) or result in auctions).
EPS higher than the company’s basic EPS—antidilutive Autarky Countries seeking political self-sufficiency with little
securities are not included in the calculation of diluted EPS. or no external trade or finance. State-owned enterprises
Arbitrage 1) The simultaneous purchase of an undervalued control strategic domestic industries.
asset or portfolio and sale of an overvalued but equivalent Automatic stabilizer A countercyclical factor that automat-
asset or portfolio, in order to obtain a riskless profit on the ically comes into play as an economy slows and unem-
price differential. Taking advantage of a market inefficiency ployment rises.
in a risk-free manner. 2) The condition in a financial market Availability bias An information-processing bias in which
in which equivalent assets or combinations of assets sell for people take a heuristic approach to estimating the prob-
two different prices, creating an opportunity to profit at no ability of an outcome based on how easily the outcome
risk with no commitment of money. In a well-functioning comes to mind.
financial market, few arbitrage opportunities are possible. Available-for-sale Under US GAAP, debt securities not classi-
3) A risk-free operation that earns an expected positive net fied as either held-to-maturity or held-for-trading securi-
profit but requires no net investment of money. ties. The investor is willing to sell but not actively planning
Arbitrageurs Traders who engage in arbitrage. See arbitrage. to sell. In general, available-for-sale debt securities are
Arithmetic mean The sum of the observations divided by the reported at fair value on the balance sheet, with unrealized
number of observations. gains included as a component of other comprehensive
Artificial intelligence (AI) Computer systems that are capable income.
of performing tasks that previously required human intelli- Average revenue (AR) Total revenue divided by quantity sold.
gence. AI methods are sometimes better suited to identify Backfill Bias A problem whereby certain surviving hedge funds
complex, non-linear relationships than are traditional may be added to databases and various hedge fund indexes
quantitative and statistical methods. only after they are initially successful and start to report
Ask The price at which a dealer or trader is willing to sell their returns. Also see survivorship bias.
an asset, typically qualified by a maximum quantity (ask Backup line of credit A type of credit enhancement provided
size). See offer. by a bank to an issuer of commercial paper to ensure that
Ask size The maximum quantity of an asset that pertains to a the issuer will have access to sufficient liquidity to repay
specific ask price from a trader. For example, if the ask for maturing commercial paper if issuing new paper is not a
a share issue is $30 for a size of 1,000 shares, the trader is viable option.
offering to sell at $30 up to 1,000 shares. Backwardation A downward-sloping, or inverted, forward
Asset allocation The process of determining how investment curve in a futures market.
funds should be distributed among asset classes. Balance sheet ratios Financial ratios involving balance sheet
Asset class A group of assets that have similar characteristics, items only.
attributes, and risk–return relationships. Balanced With respect to a government budget, one in which
Asset utilization ratios Ratios that measure how efficiently a spending and revenues (taxes) are equal.
company performs day-to-day tasks, such as the collection Balloon payment A large payment required at maturity to
of receivables and management of inventory. retire a bond’s outstanding principal amount.
Asset-backed commercial paper Secured form of commercial Base rates The reference rate on which a bank bases lending
paper issuance. Loans or receivables are sold to a special rates to all other customers.
purpose entity that issues the ABCP and makes interest Base-rate neglect A type of representativeness bias in which
and principal payments to investors from asset cash flows. the base rate or probability of the categorization is not
Asset-backed securities (ABS) A type of bond issued by a adequately considered.
legal entity called a special purpose entity created solely Basic EPS Net earnings available to common shareholders
to own assets such as loans, receivables, and mortgages (i.e., net income minus preferred dividends) divided by the
and to distribute cash flows to ABS investors. Generally, weighted average number of common shares outstanding.
ABS backed by mortgages are known as mortgage-backed Basis risk The possibility that the expected value of a derivative
securities (MBS) while ABS refer to non-mortgage ABS. differs unexpectedly from that of the underlying.
Asset-backed token A token that represents the ownership of Basket of listed depository receipts (BLDR) An
a physical asset that does not exist on the blockchain and exchange-traded fund (ETF) that represents a portfolio
whose value is based on the underlying asset. of depository receipts.
Asset-based valuation models Valuation based on estimates Bayes’ formula The rule for updating the probability of an
of the market value of a company’s assets. event of interest—given a set of prior probabilities for the
Asymmetric information Also known as information asym- event, information, and information given the event—if
metry; the differential of information between corporate you receive new information.
insiders and outsiders regarding the company’s perfor- Bearer bonds Bonds for which ownership is not recorded;
mance and prospects. Managers typically have more infor- only the clearing system knows who the bond owner is.
mation about the company’s performance and prospects Behavioral finance A field of finance that examines the psy-
than owners and creditors. chological variables that affect and often distort the invest-
ment decision making of investors, analysts, and portfolio
managers.
 © CFA Institute. For candidate use only. Not for distribution.
Glossary G-3

Behind the market Said of prices specified in orders that are Bond market vigilantes Bond market participants who might
worse than the best current price; e.g., for a limit buy order, reduce their demand for long-term bonds, thus pushing
a limit price below the best bid. up their yields.
Benchmark A bond used to compare against another bond to Bondholders Investors in an entity’s securitized debt claims,
discern attributes, often a government bond with the same such as commercial paper, notes, and bonds. Common
or similar time-to-maturity as the bond under analysis. types of bondholders include investment funds and insti-
Benchmark spread The difference in yield-to-maturity between tutional investors.
a bond and that of a benchmark bond. Bonds Contractual agreements between an issuer and
Best bid The highest bid in the market. bondholders.
Best effort offering An offering of a security using an invest- Bonus issue of shares A type of dividend in which a com-
ment bank in which the investment bank, as agent for the pany distributes additional shares of its common stock to
issuer, promises to use its best efforts to sell the offering shareholders instead of cash.
but does not guarantee that a specific amount will be sold. Book building Investment bankers’ process of compiling a
Best offer The lowest offer (ask price) in the market. “book” or list of indications of interest to buy part of an
Best-in-class An ESG implementation approach that seeks to offering.
identify the most favorable companies in an industry based Book value The net amount shown for an asset or liability
on ESG considerations. on the balance sheet; book value may also refer to the
Beta A measure of systematic risk that is based on the cova- company’s excess of total assets over total liabilities. Also
riance of an asset’s or portfolio’s return with the return of called carrying value.
the overall market; a measure of the sensitivity of a given Boom An expansionary phase characterized by economic
investment or portfolio to movements in the overall market. growth “testing the limits” of the economy.
Bid The price at which a dealer or trader is willing to buy an Bootstrap A resampling method that repeatedly draws sam-
asset, typically qualified by a maximum quantity. ples with replacement of the selected elements from the
Bid size The maximum quantity of an asset that pertains to a original observed sample. Bootstrap is usually conducted
specific bid price from a trader. by using computer simulation and is often used to find
Big data The vast amount of information being generated by standard error or construct confidence intervals of pop-
both traditional sources—for example, stock exchanges, ulation parameters.
companies, governments—and non-traditional sources— Bottom-up analysis An investment selection approach that
for example, electronic devices, social media, sensor net- focuses on company-specific circumstances rather than
works, and company exhaust. emphasizing economic cycles or industry analysis.
Bilateralism The conduct of political, economic, financial, or Box and whisker plot A graphic for visualizing the dispersion
cultural cooperation between two countries. Countries of data across quartiles. It consists of a box with “whiskers”
engaging in bilateralism may have relations with many connected to the box.
different countries but in one-at-a-time agreements without Breakeven point Represents the price of the underlying in a
multiple partners. Typically, countries exist on a spectrum derivative contract in which the profit to both counter-
between bilateralism and multilateralism. parties would be zero.
Bimodal A distribution that has two most frequently occur- Bridge financing Interim financing that provides funds until
ring values. permanent financing can be arranged.
Bitcoin A cryptocurrency using blockchain technology that Broker An agent who executes orders to buy or sell securities
was created in 2009. on behalf of a client in exchange for a commission.
Bivariate correlation Also known as Pearson correlation. Brokered market A market in which brokers arrange trades
A parametric measure of the relationship between two among their clients.
variables. Broker–dealer A financial intermediary (often a company)
Black swan risk An event that is rare and difficult to predict that may function as a principal (dealer) or as an agent
but has an important impact. (broker) depending on the type of trade.
Block brokers A broker (agent) that provides brokerage ser- Brownfield investments The third stage of development of
vices for large-size trades. an infrastructure asset. Brownfield investments involve
Blockchain A type of digital ledger in which information is expanding existing facilities and may involve privatization
recorded sequentially and then linked together and secured of public assets or a sale leaseback of completed greenfield
using cryptographic methods. projects. They are characterized by a shorter investment
Blue chip Widely held large market capitalization companies period with immediate cash flows and an operating history.
that are considered financially sound and are leaders in Budget surplus/deficit The difference between government
their respective industry or local stock market. revenue and expenditure for a stated fixed period of time.
Board of directors A body or individual selected by a lim- Bullet bond A bond whose principal repayment is made
ited company’s member(s) or shareholder(s), in a manner entirely at maturity.
determined by the company’s charter, that manages the Bundling A pricing approach that refers to combining multiple
company. Typically, for larger companies, boards of direc- products or services so that customers are incentivized or
tors appoint and oversee executive management. required to buy them together.
Bond equivalent yield A money market interest rate quoted Business cycles Are recurrent expansions and contractions in
on a 365-day add-on rate basis. economic activity affecting broad segments of the economy.
Bond indenture A legal document between a bond issuer Business model A concise description of how a business works
and investors that governs each party’s rights and and makes revenues and profits, including its customers,
responsibilities. products or services, channels for reaching customers,
and pricing.
 © CFA Institute. For candidate use only. Not for distribution.
G-4 Glossary

Businesses Organization entities formed and managed for the Capital restrictions Controls placed on foreigners’ ability to
purpose of providing a return or economic benefits to its own domestic assets and/or domestic residents’ ability to
investors and owners. own foreign assets.
Buy-side firm An investment management company or other Capital structure The mix of debt and equity that a company
investor that uses the services of brokers or dealers (i.e., uses to finance its business; a company’s specific mix of
the client of the sell side firms). long-term financing.
Buyback A transaction in which a company buys back its Capital-indexed bond A type of index-linked bond for which
own shares. Unlike stock dividends and stock splits, share changes in the index are captured with adjustments to
repurchases use corporate cash. the principal. A common example is Treasury Inflation
Cabotage The right to transport passengers or goods within a Protected Securities (TIPS) issued by the United States
country by a foreign firm. Many countries—including those government.
with multilateral trade agreements—impose restrictions Capital-intensive businesses Companies or business activi-
on cabotage across transportation subsectors, meaning ties that are characterized by a relatively low fixed asset
that shippers, airlines, and truck drivers are not allowed turnover, a high percentage of capital expenditures to sales,
to transport goods and services within another country’s or a high net-working-capital-to-sales ratio.
borders. Capital-light businesses Also known as asset light businesses,
Call market A market in which trades occur only at a particular companies or business activities characterized by relatively
time and place (i.e., when the market is called). high fixed asset turnover, a low percentage of capital expen-
Call money rate The interest rate that buyers pay for their ditures to sales, or a low net-working-capital-to-sales ratio.
margin loan. Carried interest A performance fee (also referred to as an
Call option The right to buy an underlying. incentive fee, or carry) that is applied based on excess
Call period The time during which the issuer of a callable bond returns above a hurdle rate.
can exercise the call option. Carrying Investing and holding an asset for a period of time.
Call price The price at which the issuer of a callable bond has Carrying amount The amount at which an asset or liability is
the right to purchase the bond from investors. valued according to accounting principles.
Call protection period The time during which the issuer of Carrying value Of a fixed-income instrument is the purchase
a callable bond is not allowed to exercise the call option. price plus (minus) the amortized amount of the discount
Call risk The uncertain maturity and limited price appreciation (premium) if the bond is purchased at a price below (above)
associated with callable bonds. par value.
Callable bond A bond containing an embedded call option Cartel Participants in collusive agreements that are made
that gives the issuer the right to buy the bond back from openly and formally.
the investor at specified prices on predetermined dates. Cash conversion cycle The amount of time between an issuer
Cannibalization A transfer of sales or market share from one paying its suppliers in cash and receiving cash from its
product to another product owned by the same company. customers.
It tends to occur when the two products are actual or Cash flow additivity principle The principle that dollar
perceived substitutes. amounts indexed at the same point in time are additive.
Capacity The ability of the borrower to make its debt pay- Cash flow from operations A cash profit measure over a period
ments on time. for an issuer’s primary business activities. It includes cash
Capital Other company resources available that reduce reli- from customers as well as interest and dividends received
ance on debt. from financial investments, less cash paid to employees
Capital allocation The process that companies use for decision and suppliers as well as taxes paid to governments and
making on capital investments—those projects with a life interest paid to lenders.
of one year or longer. Cash flow hedge Refers to a specific hedge accounting clas-
Capital allocation line (CAL) A graph line that describes the sification in which a derivative is designated as absorbing
combinations of expected return and standard deviation of the variable cash flow of a floating-rate asset or liability,
return available to an investor from combining the optimal such as foreign exchange, interest rates, or commodities.
portfolio of risky assets with the risk-free asset. Cash markets Markets in which specific assets are exchanged
Capital asset pricing model (CAPM) An equation describing at current prices. Cash markets are often referred to as
the expected return on any asset (or portfolio) as a linear spot markets.
function of its beta relative to the market portfolio. Cash prices The current prices prevailing in cash markets.
Capital expenditure Expenditure on physical capital (fixed Cash ratio A measure of liquidity that is the ratio of cash and
assets). marketable securities to current liabilities.
Capital investments An expenditure for an asset or resource Catch-up clause A clause in an agreement that favors the GP.
with a useful life of more than one year. For a GP who earns a 20% performance fee, a catch-up
Capital market expectations (CME) Expectations concerning clause allows the GP to receive 100% of the distributions
the risk and return prospects of asset classes. above the hurdle rate until she receives 20% of the prof-
Capital market line (CML) The line with an intercept point its generated, and then every excess dollar is split 80/20
equal to the risk-free rate that is tangent to the efficient between the LPs and GP.
frontier of risky assets; represents the efficient frontier CDS credit spread Reflects the credit spread of a credit default
when a risk-free asset is available for investment. swap (CDS) derivative contract. As with cash bonds, CDS
Capital market securities Fixed-income securities with orig- credit spreads depend on the probability of default (POD)
inal maturities greater than one year. and the loss given default (LGD).
Capital markets Financial markets that trade securities of
longer duration, such as bonds and equities.
 © CFA Institute. For candidate use only. Not for distribution.
Glossary G-5

Central bank digital currencies (CBDCs) A tokenized version Code of ethics An established guide that communicates an
of the currency issued by the central bank, such as a digital organization’s values and overall expectations regarding
bank note or coin, and a digital liability of the central bank. member behavior. A code of ethics serves as a general
Central bank funds market The market in which deposit-taking guide for how community members should act.
banks that have an excess reserve with their national cen- Coefficient of determination (R2) The percentage of the vari-
tral bank can lend money to banks that need funds for ation of the dependent variable that is explained by the
maturities ranging from overnight to one year. Called the independent variable. It is a measure of goodness of fit of
federal or fed funds market in the United States. a regression model.
Central bank funds rate The interest rate at which central bank Coefficient of variation The ratio of a set of observations’
funds are bought (borrowed) and sold (lent) for maturities standard deviation to the observations’ mean value.
ranging from overnight to one year. Called federal or fed Cognitive cost The effort involved in processing new infor-
funds rate in the United States. mation and updating beliefs.
Central clearing mandate A requirement instituted by global Cognitive dissonance The mental discomfort that occurs when
regulatory authorities following the 2008 global financial new information conflicts with previously held beliefs or
crisis that most over-the-counter (OTC) derivatives be cognitions.
cleared by a central counterparty (CCP). Cognitive errors Behavioral biases resulting from faulty
Central counterparty (CCP) An economic entity that assumes reasoning; cognitive errors stem from basic statistical,
the counterparty credit risk between derivative counter- information-processing, or memory errors.
parties, one of which is typically a financial intermediary. Coincident economic indicators Turning points that are usu-
CCPs provide clearing and settlement for most derivative ally close to those of the overall economy; they are believed
contracts. to have value for identifying the economy’s present state.
Central limit theorem The theorem that states the sum (and Collateral Assets or financial guarantees underlying a debt
the mean) of a set of independent, identically distributed obligation that are above and beyond the issuer’s promise
random variables with finite variances is normally distrib- to pay.
uted, whatever distribution the random variables follow. Collateral manager Buys and sells debt obligations for and
Certificate of deposit (CD) An instrument that represents a from the CDO’s collateral pool to generate sufficient cash
specified amount of funds on deposit with a bank for a spec- flows to meet the obligations to the CDO bondholders.
ified maturity and interest rate. CDs are issued in various Collateralized bond obligations (CBOs) CDOs backed by
denominations and can be negotiable or non-negotiable. high-yield corporate and emerging market bonds.
Channels Venues where a company markets and/or delivers Collateralized debt obligations (CDOs) Securities backed by
its products and services. a diversified pool of one or more debt obligations. CDOs
Character The quality of a debt issuer’s management. can be backed by a broad range of debt.
Checking accounts Bank deposits with no stated maturity Collateralized loan obligations (CLOs) CDOs backed by lev-
available for transactional purposes that pay little or no eraged bank loans.
interest. Also known as a demand deposit. Collateralized mortgage obligations Securitize mortgage
Circuit breaker A pause in intraday trading for a brief period pass-through securities or multiple pools of loans. CMOs
if a price limit is reached. are structured to redistribute the cash flows to different
Classical cycle Refers to fluctuations in the level of economic bond classes or tranches and create securities that have
activity when measured by GDP in volume terms. different exposures to prepayment risk.
Clawback A requirement that the general partner return any Commercial paper (CP) Short-term, negotiable, unsecured
funds distributed as incentive fees until the limited partners promissory note that represents a debt obligation of the
have received their initial investment and a percentage of issuer.
the total profit. Committed (regular) lines of credit Bank commitments to
Clearing An exchange’s process of verifying the execution of extend credit; the commitment is considered a short-term
a transaction, exchange of payments, and recording of liability and is usually in effect for 364 days (one day short
participants. of a full year).
Clearing instructions Instructions that indicate how to arrange Committed capital The amount that the limited partners have
the final settlement (“clearing”) of a trade. agreed to provide to the private equity fund.
Clearinghouse An entity associated with a futures market Commodities A product or service from a firm that is indis-
that acts as middleman between the contracting parties tinguishable from products or services of competing
and guarantees to each party the performance of the other. firms, usually conforming to a common standard or grade
Closed-end fund A mutual fund in which no new investment imposed by convention or regulation.
money is accepted. New investors invest by buying existing Commoditization A process by which competing products
shares, and investors in the fund liquidate by selling their become less differentiated over time and become inter-
shares to other investors. changeable “commodities” in the eyes of customers. This
Cluster sampling A procedure that divides a population into process is typically associated with declining profitability
subpopulation groups (clusters) representative of the pop- for the selling firms.
ulation and then randomly draws certain clusters to form Commodity producers A firm that makes and/or sells
a sample. commodities.
Co-investing In co-investing, the investor invests in assets indi- Commodity swap A type of swap involving the exchange of
rectly through the fund but also possesses rights (known payments over multiple dates as determined by specified
as co-investment rights) to invest directly in the same reference prices or indexes relating to commodities.
assets. Through co-investing, an investor is able to make an
investment alongside a fund when the fund identifies deals.
 © CFA Institute. For candidate use only. Not for distribution.
G-6 Glossary

Common market Level of economic integration that incorpo- Contingent claim A type of derivative in which one of the
rates all aspects of the customs union and extends it by counterparties determines whether and when the trade will
allowing free movement of factors of production among settle. An option is a common type of contingent claim.
members. Contingent convertible bonds Bonds that automatically con-
Common shares A type of security that represents an own- vert to equity if a specific event or circumstance occurs,
ership interest in a company. Also called common stock. such as the issuer’s equity capital falling below the mini-
Common stock A type of security that represents an ownership mum requirement set by regulators.
interest in a company. Also called common shares. Continuous trading market A market in which trades can
Common-size analysis The restatement of financial statement be arranged and executed any time the market is open.
items using a common denominator or reference item Continuously compounded return The natural logarithm of 1
that allows one to identify trends and major differences; plus the holding period return, or equivalently, the natural
an example is an income statement in which all items are logarithm of the ending price over the beginning price.
expressed as a percent of revenue. Contract manufacturers Companies that make products for
Companies Organization entities formed and managed for the other companies that meet specific terms and specifications.
purpose of providing a return or economic benefits to its Contract size Amount(s) used for calculation to price and
investors and owners. value the derivative. The contract size is often referred to
Company research report A document that presents an as “notional amount or notional principal.”
analyst’s investment recommendation on an issuer and Contraction The period of a business cycle after the peak and
its securities, supported by financial modeling, industry before the trough; often called a recession or, if exceptionally
overviews and competitive analyses, valuation scenarios, severe, called a depression.
ESG considerations, and investment risks. Contraction risk The risk of earlier repayment of a
Complete markets Informally, markets in which the variety mortgage-backed security than expected.
of distinct securities traded is so broad that any desired Contractionary Tending to cause the real economy to contract.
payoff in a future state-of-the-world is achievable. Contractionary fiscal policy A fiscal policy that has the objec-
Concession agreement A contractual arrangement under tive to make the real economy contract.
which an entity (also known as a grantor) establishes terms Contribution margin A profitability measure using variable
and conditions with a developer or operator (referred to costs: unit price less unit variable cost. It can also be
as a concessionaire) to plan, build, operate, finance, and expressed as a percentage of price or sales.
maintain an infrastructure asset for a specific period. Controlling shareholder An individual or entity that owns a
Conditional expected value The expected value of a stated majority of the voting rights in a corporation.
event given that another event has occurred. Convenience sampling A procedure of selecting an element
Conditional pass-through covered bonds Convert to from a population on the basis of whether or not it is
pass-through securities after the original maturity date if accessible to a researcher or how easy it is for a researcher
all bond payments have not yet been made. to access the element.
Conditional variances The variance of one variable, given the Convenience yield A non-cash benefit of holding a physical
outcome of another. commodity versus a derivative.
Conditions The general economic, competitive, and business Conversion price For a convertible bond, the price per share
environment faced by all borrowers that may affect their at which the bond can be converted into shares.
ability to service or refinance debt. Conversion ratio Number of common shares received in
Confidence level The complement of the level of significance. exchange for each preferred share after a predetermined
Confirmation bias A belief perseverance bias in which people period.
tend to look for and notice what confirms their beliefs, to Conversion value For a convertible bond, the value of the
ignore or undervalue what contradicts their beliefs, and bond if it is converted at the market price of the shares.
to misinterpret information as support for their beliefs. Also called parity value.
Consensus protocol A set of rules governing how blocks can Convertible bond A bond that gives the bondholder the right
join the blockchain that is designed to resist attempts at to exchange the bond for a specified number of common
malicious manipulation up to a certain level of security; it shares in the issuing company.
can be either a proof of work or a proof of stake. Convertible debt A debt instrument that gives the holder the
Conservatism bias A belief perseverance bias in which people right to exchange the instrument for a specified number
maintain their prior views or forecasts by inadequately of common shares in the issuing company.
incorporating new information. Convertible preference shares A type of equity security that
Constant yield-price trajectory A graphical depiction of entitles shareholders to convert their shares into a specified
the relationship between time to maturity and a bond number of common shares.
price, assuming no default, that shows that a bond price Convexity An interest rate risk measure used in conjunction
approaches par as time passes. with duration; captures the degree of nonlinearity (curva-
Constituent securities With respect to an index, the individual ture) in the relation between price change and yield change.
securities within an index. Convexity adjustment A measure that is used to complement
Contango Refers to spot price below forward price in a futures modified duration to capture the second-order effect of
market. yield changes on a bond’s price. It is equal to the annual
Contingency provision Clause in a legal document that allows convexity statistic times one-half times the given change
for some action if a specific event or circumstance occurs. in the yield-to-maturity squared.
Contingency table A table of the frequency distribution Convexity bias Refers to the difference in price changes
of observations classified on the basis of two discrete for a given change in yield between interest rate futures
variables. and interest rate forward contracts. That is, interest rate
 © CFA Institute. For candidate use only. Not for distribution.
Glossary G-7

forwards exhibit a non-linear or convex relationship Cournot assumption Assumption in which each firm deter-
between price and yield, while the price–yield relationship mines its profit-maximizing production level assuming
is linear for interest rate futures. that the other firms’ output will not change.
Cooperation The process by which countries work together Covariance A measure of the co-movement (linear association)
toward some shared goal or purpose. These goals may, and between two random variables.
often do, vary widely—from strategic or military concerns, Covenants The terms and conditions of lending agreements
to economic influence, to cultural preferences. that the issuer must comply with; they specify the actions
Cooperative country A country that engages and recipro- that an issuer is obligated to perform (affirmative covenant)
cates in rules standardization; harmonization of tariffs; or prohibited from performing (negative covenant).
international agreements on trade, immigration, or regu- Credit default swap (CDS) A type of credit derivative in which
lation; and allowing the free flow of information, including one party, the credit protection buyer who is seeking
technology transfer. credit protection against a third party, makes a series of
Core real estate strategies Strategies with exposure to regularly scheduled payments to the other party, the credit
well-leased, high-quality commercial and residential real protection seller. The seller makes no payments until a
estate in the best markets, generally offered by open-end credit event occurs.
funds. Investors expect core real estate to deliver stable Credit enhancements Provisions or methods that allow a
returns, primarily from income from the property. borrower improve their creditworthiness in a structured
Core-plus real estate strategies Value-add investments that transaction.
require modest redevelopment or upgrades to lease any Credit event An event that defines a payout in a credit deriv-
vacant space together with possible alternative use of ative. Events are usually defined as bankruptcy, failure to
the underlying properties. Compared to core real estate pay an obligation, or an involuntary debt restructuring.
strategies, these may be appealing for investors seeking Credit facilities Loan agreements with pre-specified terms
higher returns and willing to accept additional risks from and limits but with fluctuating balances based on
development, redevelopment, repositioning, and leasing. borrower-specific needs at different points in time, anal-
Corporate issuers Limited companies or corporations that ogous to a credit card.
seek financing in financial markets by, for example, issuing Credit migration risk The risk that a bond issuer’s creditwor-
debt or equity securities. thiness deteriorates, or migrates lower, leading investors
Corporations Another term for limited companies, though to believe the risk of default is higher. Also called down-
often used to refer to public limited companies. See lim- grade risk.
ited company, private limited company, and public limited Credit rating Letter-grade, qualitative measures of an issu-
company. er’s ability to meet its debt obligations based on both
Correlation A measure of the linear relationship between two the probability of default and the expected loss under a
random variables. default scenario.
Correlation coefficient A number between −1 and +1 that Credit rating agencies Institutions that issue and maintain
measures the consistency or tendency for two investments credit ratings. The three largest are Standard & Poor’s,
to act in a similar way. It is used to determine the effect on Moody’s, and Fitch Ratings.
portfolio risk when two assets are combined. Credit risk The expected economic loss under a potential
Cost averaging The periodic investment of a fixed amount borrower default over the life of the contract
of money. Credit spread A premium over and above the current gov-
Cost of capital The cost of financing for a company; the rate ernment bond yield.
of return that suppliers of capital require as compensation Credit spread risk The risk of greater expected loss due to
for their contribution of capital (also called opportunity changes in credit conditions as a result of macroeconomic,
cost of funds). market, and/or issuer-related factors.
Cost of carry The net of the costs and benefits related to owning Credit tranching Internal credit enhancement where cash
an underlying asset for a specific period. flows into a senior/subordinate structure.
Cost of debt The required return on debt financing for a Credit-linked notes Bonds whose coupon changes when the
company, such as when it issues a bond, takes out a bank bonds’ credit rating changes.
loan, or leases an asset through a finance lease. Critical values Values of the test statistic at which the decision
Cost of equity The return required by equity investors to changes from fail to reject the null hypothesis to reject the
compensate for both the time value of money and the risk. null hypothesis.
Also referred to as the required rate of return on common Cross-default clause Covenant or contract clause that speci-
stock or the required return on equity. fies borrowers are considered in default if they default on
Counterparty Legal entities entering a derivative contract. another debt obligation.
Counterparty credit risk The likelihood that a counterparty is Cross-sectional analysis Also called relative analysis. Analysis
unable to meet its financial obligations under the contract. that involves comparisons across individuals in a group
Counterparty risk The risk that the other party to a contract over a given time period or at a given point in time.
will fail to honor the terms of the contract. Crossing networks Trading systems that match buyers and
Country The geopolitical environment as well as the legal and sellers who are willing to trade at prices obtained from
political system faced by all issuers in a jurisdiction that other markets.
may affect debt payment. Crowdsourcing A business model that enables users to con-
Coupon Periodic interest payments paid by a bond issuer to tribute directly to a product, service, or online content.
investors, typically expressed as a percentage of par on Cryptocurrency An electronic medium of exchange that lacks
an annual basis. physical form.
 © CFA Institute. For candidate use only. Not for distribution.
G-8 Glossary

Cryptocurrency wallet A storage unit for public and/or private Dealers Financial intermediaries, such as commercial banks
keys for cryptocurrency transactions. These wallets may or investment banks, who transact as counterparties with
be a physical device, program, or service. derivative end users.
Cryptography An algorithmic process to encrypt data, making Debt A claim against an entity to receive cash, stock, or other
the data unusable if received by unauthorized parties. assets at a future date. From the perspective of the debtor or
Cumulative preference shares Preference shares for which borrower, an obligation to pay cash, stock, or other assets
any dividends that are not paid accrue and must be paid at a future date. Generally, debt claims are unconditional
in full before dividends on common shares can be paid. and are senior to equity claims.
Cumulative voting A voting process whereby shareholders can Debt service coverage ratio A ratio in which the net operating
accumulate and vote all their shares for a single candidate income of a real estate investment for a specific period is
in an election, as opposed to having to allocate their voting divided by the amount of debt service to be paid during
rights evenly among all candidates. the same time period.
Currencies Monies issued by national monetary authorities. Debt tax shield The tax benefit from interest paid on debt
Currency Money issued by national monetary authorities. being tax deductible from income, equal to the marginal
Currency swap A swap in which each party makes interest tax rate multiplied by the value of the debt.
payments to the other in different currencies. Debt-to-assets ratio A solvency ratio calculated as total debt
Current government spending With respect to government divided by total assets.
expenditures, spending on goods and services that are Debt-to-capital ratio A solvency ratio calculated as total debt
provided on a regular, recurring basis including health, divided by total debt plus total shareholders’ equity.
education, and defense. Debt-to-equity ratio A solvency ratio calculated as total debt
Current ratio A measure of liquidity that is the ratio of current divided by total shareholders’ equity.
assets to current liabilities. Debt-to-income ratio (DTI) Residential lending metric that
Current yield The sum of the coupon payments received over compares an individual’s monthly debt payments to their
the year divided by the flat price. Also called the income, monthly pre-tax, gross income.
interest yield, or running yield. Debut issuer An issuer approaching the bond market for the
Customs union Extends the free trade area (FTA) by not only first time.
allowing free movement of goods and services among Deciles Quantiles that divide a distribution into 10 equal parts.
members, but also creating a common trade policy against Declaration date The day that the corporation issues a state-
nonmembers. ment declaring a specific dividend.
CVaR Conditional VaR, a tail loss measure. The weighted Decreasing returns to scale When a production process leads
average of all loss outcomes in the statistical distribution to increases in output that are proportionately smaller than
that exceed the VaR loss. the increase in inputs.
Daily settlement A specific process of mark-to-market by a Deductible temporary differences Temporary differences
central clearing party in which the profits and losses of that result in a reduction of or deduction from taxable
all counterparties to derivatives contracts are determined income in a future period when the balance sheet item is
using settlement prices for each contract. recovered or settled.
Dark pools Alternative trading systems that do not display the Deep learning An area of artificial intelligence in which
orders that their clients send to them. a system uses neural networks to perform multistage,
Data mining The practice of determining a model by extensive non-linear data processing to identify patterns. Also called
searching through a dataset for statistically significant deep learning nets.
patterns. Deep learning nets See Deep learning.
Data science An interdisciplinary field that harnesses advances Deep-in-the-money option An option that is highly likely
in computer science, statistics, and other disciplines for to be exercised.
the purpose of extracting information from big data (or Deep-out-of-the-money option An option that is highly
data in general). unlikely to be exercised.
Data snooping The practice of determining a model by exten- Default When a borrower on a mortgage loan fails to meet
sive searching through a dataset for statistically significant the obligations of the loan.
patterns. Default risk premium An extra return that compensates inves-
Day order An order that is good for the day on which it is tors for the possibility that the borrower will fail to make
submitted. If it has not been filled by the close of business, a promised payment at the contracted time and in the
the order expires unfilled. contracted amount.
Days of inventory on hand (DOH) The average number of days Defeasance Mechanism that allows prepayment on mortgage,
it would take to sell the amount of inventory on hand. It is but the borrower must purchase a portfolio of government
calculated as either the ending or average balance of inven- securities that fully replicates the cash flows of the remain-
tories divided by (cost of goods sold/days in the period). ing scheduled principal and interest payments, including
Days payable outstanding (DPO) The average number of days the balloon loan balance, on the loan.
it takes a company to pay its suppliers. It is calculated as Defensive interval ratio A liquidity ratio that estimates the
either the ending or average balance of accounts payable number of days that an entity could meet cash needs
divided by (cost of goods sold/days in the period). from liquid assets; calculated as (cash + short-term mar-
Days sales outstanding (DSO) The average number of days it ketable investments + receivables) divided by daily cash
takes for a company to receive payment from customers expenditures.
who purchase goods or services on credit. It is calculated as
either the ending or average balance of accounts receivable
divided by (revenues/days in the period).
 © CFA Institute. For candidate use only. Not for distribution.
Glossary G-9

Deferred coupon bonds Bonds that pay no coupons for their Derivative contract A legal agreement between counterparties
first few years but then pay a higher coupon than they with a specific maturity, or length of time, until the closing
otherwise normally would for the remainder of their life. of the transaction, or settlement.
Also called split coupon bonds. Derivative pricing rule A pricing rule used by crossing net-
Deferred tax assets A balance sheet asset that arises when an works in which a price is taken (derived) from the price
excess amount is paid for income taxes relative to account- that is current in the asset’s primary market.
ing profit. The taxable income is higher than accounting Derivatives A financial instrument whose value depends on
profit and income tax payable exceeds tax expense. The the value of some underlying asset or factor (e.g., a stock
company expects to recover the difference during the price, an interest rate, or exchange rate).
course of future operations when tax expense exceeds Differentiated products A product or service from a firm
income tax payable. that is distinguishable or distinct from those of competing
Deferred tax liabilities A balance sheet liability that arises firms. It is customers who determine and value whether a
when a deficit amount is paid for income taxes relative product is differentiated.
to accounting profit. The taxable income is less than the Diffuse prior The assumption of equal prior probabilities.
accounting profit and income tax payable is less than tax Diffusion index Reflects the proportion of the index’s com-
expense. The company expects to eliminate the liability over ponents that are moving in a pattern consistent with the
the course of future operations when income tax payable overall index.
exceeds tax expense. Digital assets The umbrella term covering assets that can be
Defined benefit pension plans (DB plans) Plans in which the created, stored, and transmitted electronically and have
company promises to pay a certain annual amount (defined associated ownership or use rights. Digital assets include a
benefit) to the employee after retirement. The company variety of assets, such as cryptocurrencies, tokens (security
bears the investment risk of the plan assets. and utility), and digital collectables.
Defined contribution pension plans Individual accounts to Diluted EPS The EPS that would result if all dilutive securities
which an employee and typically the employer makes con- were converted into common shares.
tributions during their working years and expect to draw Dilution An increase in the number of shares outstanding
on the accumulated funds at retirement. The employee from share issuance that decreases the percentage of shares
bears the investment and inflation risk of the plan assets. owned by existing shareholders.
Deflation Negative inflation. Direct investing Occurs when an investor makes a direct
Degree of financial leverage The ratio of percentage change investment in an asset without the use of an intermediary.
in net income to percentage change in operating income Direct lending Providing capital directly from private debt
over a period. It is a measure of how sensitive net income investors.
is to changes in operating income, driven by the firm’s use Direct listing Where the equity of a security is floated on the
of debt in its capital structure. public markets directly, without underwriters, reducing
Degree of operating leverage (DOL) The ratio of percentage the complexity and cost of the transaction.
change in operating income to percentage change in sales Direct sales Marketing and/or delivering products and ser-
over a period. It is a measure of how sensitive operating vices to customers without an intermediary or third party
income is to changes in sales, driven by the fixed and between the customer and seller.
variable cost composition of operating expenses. Direct taxes Taxes levied directly on income, wealth, and
Delta The relationship between the option price and the under- corporate profits.
lying price, which reflects the sensitivity of the price of the Discount factor The price equivalent of a zero rate. Also
option to changes in the price of the underlying. Delta is may be stated as the present value of a currency unit on
a good approximation of how an option price will change a future date.
for a small change in the stock. Discount rate A yield or pricing convention for money mar-
Demand shock A typically unexpected disturbance to ket instrument quotations. It is the interest earned on an
demand, such as an unexpected interruption in trade or instrument, derived from the difference between the price
transportation. and face value, expressed as a percentage of the face value
Dependent variable The variable that is explained by a regres- and multiplied by the periodicity of the annual rate.
sion model. Discounted cash flow models Valuation models that estimate
Depository bank A bank that raises funds from depositors the intrinsic value of a security as the present value of the
and other investors and lends it to borrowers. future benefits expected to be received from the security.
Depository institutions Commercial banks, savings and loan Discriminatory pricing rule A pricing rule used in continuous
banks, credit unions, and similar institutions that raise markets in which the limit price of the order or quote that
funds from depositors and other investors and lend it to first arrived determines the trade price.
borrowers. Diseconomies of scale Increase in cost per unit resulting from
Depository receipt A security that trades like an ordinary increased production.
share on a local exchange and represents an economic Dispersion The variability of a population or sample of obser-
interest in a foreign company. vations around the central tendency.
Depreciation The process of systematically allocating the cost Display size The size of an order displayed to public view.
of long-lived (tangible) assets to the periods during which Disposition effect As a result of loss aversion, an emotional
the assets are expected to provide economic benefits. bias whereby investors are reluctant to dispose of losers.
Derivative A financial instrument that derives its value from This results in an inefficient and gradual adjustment to
the performance of an underlying asset. deterioration in fundamental value.
Distressed debt Debt of mature companies in financial diffi-
culty, in bankruptcy, or likely to default on debt.
 © CFA Institute. For candidate use only. Not for distribution.
G-10 Glossary

Distressed/restructuring These strategies focus on securities Economic indicators Economic statistics provided by govern-
of companies either in or perceived to be near bank- ment and established private organizations that contain
ruptcy. In one approach, hedge funds simply purchase information on an economy’s recent past activity or its
fixed-income securities trading at a significant discount current or future position in the business cycle.
to par but that are still senior enough to be backed by Economic infrastructure investments A category of infra-
sufficient corporate assets. structure investments that support economic activity
Distributed ledger A type of database that can be shared through transportation assets, information and commu-
among entities in a network. nication technology assets, and utility and energy assets.
Distributed ledger technology (DLT) Technology based on Economic stabilization Reduction of the magnitude of eco-
a distributed ledger. nomic fluctuations.
Diversification ratio The ratio of the standard deviation of an Economic union Incorporates all aspects of a common market
equally weighted portfolio to the standard deviation of a and in addition requires common economic institutions
randomly selected security. and coordination of economic policies among members.
Dividend A distribution paid to shareholders based on the Economies of scale A decline in costs per unit as output
number of shares owned. grows, generally resulting from having fixed costs in the
Dividend discount model (DDM) A present value model of cost structure that are spread over more units of output.
stock value that views the intrinsic value of a stock as Economies of scope A decline in costs per unit as the number
present value of the stock’s expected future dividends. of product or business lines increases, generally resulting
Dividend payout ratio The ratio of cash dividends paid to from having shared costs between the product lines.
earnings for a period. Effective annual rate An interest rate with a periodicity of one.
Dividends Distributions of profits and/or net assets from a cor- Effective convexity An interest rate risk statistic that mea-
poration to its shareholders. While often in cash, dividends sures the non-linear/second-order effect of changes in the
can be also be paid in stock or assets, such as property. benchmark yield curve on a bond’s price.
Divisor A number (denominator) used to determine the value Effective duration The sensitivity of the bond’s price to an
of a price return index. It is initially chosen at the incep- instantaneous parallel shift in a benchmark yield curve—for
tion of an index and subsequently adjusted by the index example, the government par curve.
provider, as necessary, to avoid changes in the index value Efficient market A market in which asset prices reflect new
that are unrelated to changes in the prices of its constit- information quickly and rationally. See also, informationally
uent securities. efficient market.
Domestic bonds A type of bond for which the issuer’s domicile Either/or fee A custom fee arrangement whereby major inves-
and jurisdiction of issuance are the same. tors are offered a structure where managers agree to charge
Domestic content provisions Stipulate that some percentage either a lower management fee or a higher incentive fee,
of the value added or components used in production whichever is greater.
should be of domestic origin. Electronic communications networks (ECNs) See alternative
Double taxation The taxation of business income at both the trading systems and multilateral trading facilities.
entity and personal or owner levels. In most jurisdictions, Embedded derivative A derivative within an underlying, such
this taxation scheme applies to public limited companies. as a callable, putable, or convertible bond.
Downside risk The potential for loss. Embedded options Contingency provisions found in a bond’s
Drag on liquidity An action or event that reduces available indenture representing rights that enable their holders to
funds or delays cash inflows. take advantage of interest rate movements. They can be
Drivers Causative factors that explain the level of and changes exercised by the issuer, by the bondholder, or automatically
in an output variable. depending on the course of interest rates.
DSC ratio A property’s annual net operating income (NOI) Emotional biases Behavioral biases resulting from reasoning
divided by the debt service. influenced by feelings; emotional biases stem from impulse
Dual-class structure A capital structure that includes at least or intuition.
two classes of equity shares with unequal voting rights. Empirical duration Estimates of duration calculated over
Dupont analysis An approach to decomposing return on time and in different interest rate environments. Unlike
investment, e.g., return on equity, as the product of other analytical duration, empirical duration estimates do not
financial ratios. assume that benchmark yields and spreads are independent
Duration The percentage change in bond price given an unan- variables and are uncorrelated.
ticipated small change in interest rates. Employee stock ownership plan (ESOP) A type of employee
Duration gap The difference between a bond’s Macaulay dura- benefit plan in which a company sets up a trust fund to
tion and its investor’s investment horizon. receive contributions of newly issued shares or cash to
Dynamic pricing A pricing approach that charges different buy existing shares. Contributions are tax deductible up
prices at different times. Specific examples include off-peak to certain limits. Shares in the trust fund are allocated to
pricing, “surge” pricing, and “congestion” pricing. individual employees based on relative pay or a formula.
Early repayment option May entitle the borrower to prepay Endowment bias An emotional bias in which people value
all or part of the outstanding mortgage principal prior to an asset more when they hold rights to it than when they
maturity. This creates a risk from the lender’s or investor’s do not.
viewpoint because the cash flow amounts and timing Enterprise risk management An overall assessment of a
cannot be known with certainty. company’s risk position. A centralized approach to risk
Earnings surprise The portion of a company’s earnings that is management sometimes called firmwide risk management.
unanticipated by investors and, according to the efficient
market hypothesis, merits a price adjustment.
 © CFA Institute. For candidate use only. Not for distribution.
Glossary G-11

Enterprise value (EV) Total company value (the market value Exercise price The pre-agreed execution price specified in an
of debt, common equity, and preferred equity) minus the option contract. Sometimes, this price is referred to as
value of cash and investments. the strike price.
Equal weighting An index weighting method in which an equal Exogenous risk A sudden or unanticipated risk that impacts
weight is assigned to each constituent security at inception. either a country’s cooperative stance, the ability of non-state
Equity Ownership interest in an entity. A residual claim on the actors to globalize, or both. Examples include sudden
assets of an entity after more senior claims, such as debt, uprisings, invasions, or the aftermath of natural disasters.
have been satisfied. Also known as net assets. Expansion The period of a business cycle after its lowest point
Equity swap A swap transaction in which at least one cash and before its highest point.
flow is tied to the return on an equity portfolio position, Expansionary Tending to cause the real economy to grow.
often an equity index. Expansionary fiscal policy Fiscal policy aimed at achieving
Error term Represents the difference between the observed real economic growth.
value of the independent variable and that expected from Expected exposure (EE) The size of the investor’s claim at
the true underlying population relation between the depen- the time of default.
dent and independent variable. Expected loss (EL) Default probability times loss severity
Estimated parameters In a simple linear regression, the esti- given default.
mated parameters are the intercept and slope of the fitted Expected return on the portfolio Denoted as (E (Rp)). The
line. weighted average of the expected returns (R1 to Rn) on
Ether A programmable cryptocurrency created on the the component securities using their respective weights
Ethereum blockchain in 2015 that allows for the execu- (w1 to wn).
tion of smart contracts. Expected value of a random variable The probability-weighted
Ethical principles Beliefs regarding what is good, acceptable, average of the possible outcomes of a random variable.
or obligatory behavior and what is bad, unacceptable, or Expert system A type of computer programming, often based
forbidden behavior. on “if–then” rules, that attempts to simulate the knowledge
Ethics The study of moral principles or of making good choices. base and analytical abilities of human experts in specific
Ethics encompasses a set of moral principles and rules of problem-solving contexts.
conduct that provide guidance for our behavior. Export subsidy Paid by the government to the firm when it
Eurobonds A type of bond issued internationally, outside the exports a unit of a good that is being subsidized.
jurisdiction of the country in whose currency the bond is Exposure at default (EAD) The size of the investor’s claim at
denominated. the time of default.
European options Options that may be exercised only at Extension risk The risk of later repayment of a mortgage-backed
contract maturity. security than expected.
European-style Said of an option contract that can only be External credit enhancements Provisions or methods from
exercised on the option’s expiration date. a third party that allow a borrower improve their credit-
Event risk Risk that evolves around set dates, such as elections, worthiness in a structured transaction.
new legislation, or other date-driven milestones, such as External debt Sovereign debt owed to foreign creditors.
holidays or political anniversaries, known in advance. Extra dividend A dividend paid by a company that does not
Example: Brexit referendum. pay dividends on a regular schedule, or a dividend that
Ex-dividend date The first date that a share trades without supplements regular cash dividends with an extra payment.
(i.e., “ex”) the right to receive the declared dividend for Extraordinary general meetings (EGMs) Meetings besides an
the period. AGM of the corporate board and shareholders, typically
Excess kurtosis Degree of kurtosis (fatness of tails) relative to held to deliberate and vote on urgent matters. Corporate
the kurtosis of the normal distribution. charters and bylaws specify who can call an EGM and
Excess spread Surplus difference of yield remaining after pay- under what conditions.
ments to bondholders are made after expenses are made Extreme value theory A branch of statistics that focuses
and losses are covered. primarily on extreme outcomes.
Exchange A rules-based, open access market venue where Face value The amount of principal on a bond, also known
financial instruments are traded, with price and volume as par value.
transparency accessible by issuers, investors, and their Factoring arrangement When a company sells its accounts
intermediaries. receivable to a lender (known as a factor) that assumes
Exchange-traded derivative (ETD) Futures, options, and other responsibility for the credit-granting and collection process.
financial contracts available on exchanges. Fair value A market-based measure of an investment based
Exchanges Places where traders can meet to arrange their on observable or derived assumptions to determine a price
trades. that market participants would use to exchange an asset or
Execution instructions Instructions that indicate how to fill liability in an orderly transaction at a specific time.
an order. Fair value hedge Refers to a specific hedge accounting des-
Exercise The decision to transact the underlying by an option ignation that applies when a derivative is deemed to offset
holder. the fluctuation in fair value of an asset or liability.
Exercise date The day that an option is exercised by its holder. Fallen angels Formerly investment-grade issuers whose credit
For a call option, the day the strike price is paid and under- quality has deteriorated since the time of issuance.
lying is purchased. For a put option, when the strike price Fat-Tailed Describes a distribution that has fatter tails than a
is received and the underlying is sold. normal distribution (also called leptokurtic).
Fed funds rate The US interbank lending rate on overnight
borrowings of reserves.
 © CFA Institute. For candidate use only. Not for distribution.
G-12 Glossary

Federal funds rate The US interbank lending rate on overnight Floating-rate notes Notes on which interest payments are not
borrowings of reserves. Also known as Fed Funds rate. fixed but instead vary from period to period depending on
Fiat money Money that is not convertible into any other the current level of a reference interest rate. Also known
commodity. as floaters.
Fiduciary call A combination of a purchased call option and Floating-rate payer The counterparty paying the variable
investment in a risk-free bond with face value of the option’s cash flows in a swap contract. May also be referred to as
exercise price. the fixed-rate receiver.
Fill or kill See immediate or cancel order. Forecast object A variable on or related to an issuer’s financial
Finance lease A type of lease which is more akin to the pur- statements that an analyst makes a projection for. Examples
chase or sale of the underlying asset. include drivers of financial statements, financial statement
Financial leverage The use of debt in the capital structure. lines, and summary measures like EBITDA.
Measured using ratios such as operating income to oper- Foreclosure Allows a lender to take possession of the property
ating income less interest expense, total assets to total and ultimately sell the property to recover funds toward
equity, or debt to equity. satisfying the outstanding debt obligation.
Financial leverage ratio A measure of financial leverage calcu- Foreign bonds A type of bond for which the issuer’s domicile
lated as average total assets divided by average total equity. and jurisdiction of issuance are different.
Financial risk The risk arising from a company’s capital struc- Foreign currency reserves Holding by the central bank of
ture and, specifically, from the level of debt and debt-like non-domestic currency deposits and non-domestic bonds.
obligations. Foreign direct investments (FDI) Long-term investments in
Fintech Technological innovation in the financial services the productive capacity of a foreign country.
industry, specifically with the design and delivery of finan- Foreign exchange gains (or losses) Gains (or losses) that
cial services and products. It may also refer more broadly occur when the exchange rate changes between the inves-
to companies involved in developing the new technologies tor’s currency and the currency that foreign securities are
and their applications, as well as the business sector that denominated in.
includes such companies. Forward contract A derivative contract for the future
Firm commitment A pre-determined amount (price and quan- exchange of an underlying at a fixed price set at contract
tity) is agreed to be exchanged at settlement. Examples signing.
of firm commitments include forward contracts, futures Forward price Represents the price agreed upon in a forward
contracts, and swaps. contract to be exchanged at the contract’s maturity date,
First lien Security interest in a property that gives the lender T. This price is shown in equations as F0(T).
the right to seize the collateral if the borrower does not Forward price-to-earnings ratio A P/E calculated on the basis
pay as agreed. of a forecast of EPS; a stock’s current price divided by next
First lien debt Debt secured by a pledge of certain assets that year’s expected earnings.
could include buildings, but it may also include property Forward rate agreement (FRA) An OTC derivatives contract
and equipment, licenses, patents, brands, etc. in which counterparties agree to apply a specific interest
First mortgage debt Debt secured by a pledge of a specific rate to a future time period.
property. Founders class shares A way to entice early participation
Fiscal multiplier The ratio of a change in national income to in startup funds whereby managers offer incentives that
a change in government spending. entitle investors to a lower fee structure and/or other
Fiscal policy The use of taxes and government spending to favorable terms.
affect the level of aggregate expenditures. Framing bias An information-processing bias in which a per-
Fixed charge coverage A solvency ratio measuring the num- son answers a question differently based on the way in
ber of times interest and lease payments are covered by which it is asked (framed).
operating income, calculated as (EBIT + lease payments) Franchising A situation where an owner of an asset and asso-
divided by (interest payments + lease payments). ciated intellectual property divests the asset and licenses
Fixed charge coverage ratio A measure of how well a compa- intellectual property to a third-party operator (franchisee)
ny's earnings covers its fixed expenses, which may include in exchange for royalties. Franchisees operate under the
debt payments, interest expense, and lease costs. constraints of a franchise agreement.
Fixed-income instruments Debt instruments such as loans Free cash flow The actual cash that would be available to the
or bonds. company’s investors after making all investments necessary
Fixed-income securities Fixed-income instruments designed to maintain the company as an ongoing enterprise (also
to be more easily tradeable than a loan, such as a bond. referred to as free cash flow to the firm); the internally
Fixed-price call A contingency provision that grants an issuer generated funds that can be distributed to the company’s
the right to buy back a bond at a predetermined price in investors (e.g., shareholders and bondholders) without
the future. impairing the value of the company.
Fixed-rate payer The counterparty paying fixed cash flows in a Free cash flow hypothesis The hypothesis that higher debt
swap contract. May also be referred to as the floating-rate levels discipline managers by forcing them to make fixed
receiver. debt service payments and by reducing the company’s
Flat price The full price of a bond minus accrued interest. Flat free cash flow.
prices are usually quoted by bond dealers. Free float The portion of a listed company’s equity securities
Float-adjusted market-capitalization weighting An index that are not held by insiders, strategic investors, sponsors,
weighting method in which the weight assigned to each founders, and so on, that are more freely available for
constituent security is determined by adjusting its market trading.
capitalization for its market float.
 © CFA Institute. For candidate use only. Not for distribution.
Glossary G-13

Free trade areas One of the most prevalent forms of regional FX swap The combination of a spot and a forward FX
integration, in which all barriers to the flow of goods and transaction.
services among members have been eliminated. G-spread Yield spread in basis points between a bond’s
Free-cash-flow-to-equity models Valuation models based yield-to-maturity and that of an actual or interpolated
on discounting expected future free cash flow to equity. government bond. It represents the return for bearing
Freemium business model A pricing approach that allows risks relative to the government bond.
customers a certain level of usage or functionality at no Game theory The set of tools decision makers use to incorpo-
charge. Those who wish to use more must pay. rate responses by rival decision makers into their strategies.
Frequency table A representation of the frequency of occur- Gamma A numerical measure of how sensitive an option’s delta
rence of two discrete variables. (the sensitivity of the derivative’s price) is to a change in
Full price The price of a bond including any accrued interest the value of the underlying.
owed to the seller. It is the flat price plus accrued interest. Gate A provision that when implemented limits or restricts
Fully amortizing loan A loan or bond with a payment schedule redemptions for a period of time.
that calls for the complete repayment of principal over the General collateral repo Rather than involving a specific secu-
instrument’s time to maturity. rity, a repo that instead references a specific group of
Fund investing In fund investing, the investor invests in assets securities as eligible collateral (such as government bonds
indirectly by contributing capital to a fund as part of a of a specific maturity).
group of investors. Fund investing is available for all major General collateral repo rate The interest rate on a general
alternative investment types. collateral repo.
Fund of funds Funds that hold a portfolio of hedge funds; also General obligation (GO) bonds Unsecured bonds issued by a
called funds of hedge funds. non-sovereign government which are backed by the taxing
Fundamental analysis The examination of publicly available authority of the issuer.
information and the formulation of forecasts to estimate General obligation bonds Also known as GO bonds. Bonds
the intrinsic value of assets. issued by non-sovereign governments for general purposes
Fundamental growth These strategies use fundamental anal- and repaid from tax cash flows.
ysis to identify companies expected to exhibit high growth General partners (GPs) Owners of a general partnership or
and capital appreciation. limited partnership with unlimited liability and other attri-
Fundamental long/short In this strategy, the hedge fund takes butes as specified in the partnership agreement.
a long position in companies that are trading at inexpensive General partnership A business organizational form owned
levels compared to their potential intrinsic value and shorts entirely by general partners.
those that trade in the other direction, with the intention Geophysical resource endowment Includes such factors as
of reversing this trade to obtain alpha. livable geography and climate as well as access to food
Fundamental value These strategies use fundamental anal- and water, which are necessary for sustainable growth.
ysis to identify undervalued and unloved companies for Geophysical resource endowment is highly unequal among
which there is a possibility that a corporate turnaround, countries.
with future revenue and cash flow growth, will result in Geopolitics The study of how geography affects politics and
higher valuations. international relations. These relations matter for invest-
Fundamental weighting An index weighting method in which ments because they contribute to important drivers of
the weight assigned to each constituent security is based investment performance, including economic growth, busi-
on its underlying company’s size. It attempts to address ness performance, market volatility, and transaction costs.
the disadvantages of market-capitalization weighting by Gilts Bonds issued by the UK government.
using measures that are independent of the constituent Global depository receipt (GDR) A depository receipt that is
security’s price. issued outside of the company’s home country and outside
Fungible Freely exchangeable, interchangeable, or substitutable of the United States.
with other things of the same type. Money and commodi- Global minimum-variance portfolio The portfolio on the
ties are the most common examples. minimum-variance frontier with the smallest variance
Futures contract A variation of a forward contract that has of return.
essentially the same basic definition but with some addi- Global registered share (GRS) A common share that is traded
tional features, such as a clearinghouse guarantee against on different stock exchanges around the world in different
credit losses, a daily settlement of gains and losses, and an currencies.
organized electronic or floor trading facility. Globalization The process of interaction and integration
Futures contract basis point value (BPV) The change in among people, companies, and governments worldwide.
price of a futures contract given a 1 basis point (0.01%) It is marked by the spread of products, information, jobs,
change in yield. and culture across borders.
Futures contracts Forward contracts with standardized sizes, Gold standard With respect to a currency, if a currency is on
dates, and underlyings that trade on futures exchanges. the gold standard a given amount can be converted into a
Futures margin account An account held by an exchange prespecified amount of gold.
clearinghouse for each derivatives counterparty. The funds Good-on-close An execution instruction specifying that an
in such an account are used to ensure that counterparties order can only be filled at the close of trading. Also called
do not default on their contract obligation. market-on-close.
Futures price The pre-agreed price at which a futures contract Good-on-open An execution instruction specifying that an
buyer (seller) agrees to pay (receive) for the underlying at order can only be filled at the opening of trading.
the maturity date of the futures contract.
 © CFA Institute. For candidate use only. Not for distribution.
G-14 Glossary

Good-till-cancelled order An order specifying that it is valid Hedge accounting Accounting standard(s) that allow an issuer
until the entity placing the order has cancelled it (or, com- to offset a hedging instrument (usually a derivative) against
monly, until some specified amount of time such as 60 days a hedged transaction or balance sheet item to reduce
has elapsed, whichever comes sooner). financial statement volatility.
Goodwill An intangible asset that represents the excess of the Hedge funds Private investment vehicles that may invest in
purchase price of an acquired company over the value of public equities or publicly traded fixed-income assets,
the net identifiable assets acquired. private capital, and/or real assets, but they are distin-
Governance tokens In permissionless networks, governance guished by their investment approach rather than by the
tokens serve as votes to determine how the particular investments themselves.
network is run. Hedge ratio The proportion of an underlying that will offset
Government debt management Government policies that the risk associated with a derivative position.
relate to the issuance of debt securities, typically handled Hedging The use of a derivative contract to offset or neutralize
by a treasurer or finance ministry. existing or anticipated exposure to an underlying.
Government equivalent yield Measures quoted using actual/ Hegemony Countries that are regional or even global leaders
actual day counts. and use their political or economic influence of others to
Grant date The day that terms of compensation are communi- control resources.
cated by an issuer and accepted by an employee recipient. Held-to-maturity Debt (fixed-income) securities that a com-
Green bonds Bonds used in green finance whereby the pany intends to hold to maturity; these are presented at
proceeds are earmarked toward environmental-related their original cost, updated for any amortisation of dis-
products. counts or premiums.
Greenfield investments The first stage of development of Herding Clustered trading that may or may not be based on
an infrastructure asset. Greenfield investments involve information.
developing new assets and new infrastructure with the Herfindahl-Hirschman Index (HHI) A measure of market
intention either to lease or sell the assets to the govern- concentration, calculated as the sum of the squares of
ment after construction or to hold and operate the assets. competitor market shares. Antitrust regulators in some
Greenfield investors typically invest alongside strategic countries consider markets with an HHI between 1,500
investors or developers that specialize in developing the and 2,500 moderately concentrated and consider markets
underlying assets. with an HHI over 2,500 highly concentrated.
Gross profit margin The ratio of gross profit to revenues. Heteroskedasticity Non-constant variance across all
Groupthink The practice of thinking or making decisions as observations.
a group in a way that discourages creativity or individual Hidden order An order that is exposed not to the public but
responsibility. For scenario analysis to be useful in portfo- only to the brokers or exchanges that receive it.
lio management, teams must work hard to build creative Hidden revenue business model Business models that pro-
processes, identify scenarios, track these scenarios, and vide services to users at no charge and generate revenues
assess the need for action on a regular cadence. elsewhere.
Growth cycle Refers to fluctuations in economic activity High yield Bond issuers and issues rated BB+ (Ba1 on Moody’s
around the long-term potential trend growth level, focusing scale) or lower. Also known as speculative grade and junk.
on how much actual economic activity is below or above High-water mark The highest value, net of fees, that a fund
trend growth in economic activity. has reached in history. It reflects the highest cumulative
Growth option The option to make additional investments return used to calculate an incentive fee.
in a project at some future time if the financial results are Hindsight bias A bias with selective perception and retention
strong. Also called an expansion option. aspects in which people may see past events as having been
Growth rate cycle Refers to fluctuations in the growth rate of predictable and reasonable to expect.
economic activity. Holder-of-record date The date that a shareholder listed on the
Haircut The difference between the market value of the security corporation’s books will be deemed to have ownership of
used as collateral and the value of the loan. Also called the shares for purposes of receiving an upcoming dividend.
repo margin. Holding period return The single-period internal rate of return
Halo effect An emotional bias that extends a favorable eval- for a real estate property that includes property income
uation of some characteristics to other characteristics. and the change in property value over the period.
Hard commodities Traded natural resources, such as crude Home bias A preference for securities listed on the exchanges
oil and metals, with markets often involving the physical of one’s home country.
delivery of the underlying upon settlement. Homogeneity of expectations The assumption that all inves-
Hard hurdle rate Hurdle ratewhere the manager earns fees on tors have the same economic expectations and thus have
annual returns in excess of the hurdle rate. the same expectations of prices, cash flows, and other
Hard-bullet covered bonds Type of security where if pay- investment characteristics.
ments do not occur according to the original schedule Homoskedasticity Constant variance across all observations.
of a covered bond, a bond default is triggered and bond Horizon yield An investor’s total rate of return on a fixed
payments are accelerated. income instrument over their holding period, including
Harmonic mean A type of weighted mean computed as the reinvested coupon payments. It is an internal rate of return
reciprocal of the arithmetic average of the reciprocals. expressed as an annualized rate.
Hedge The derivative contract used in hedging an exposure.
 © CFA Institute. For candidate use only. Not for distribution.
Glossary G-15

Hostile takeover When a potential acquirer seeks to acquire Independent directors Members of a corporation’s board of
a company (the target) against the wishes of the target’s directors who do not have an employment or familial rela-
board of directors. Typically, a tender offer is used to carry tionship with the company, nor do they have a relationship
out the hostile takeover, against which a board might use that would impair their independence such as an economic
a poison pill in its defense. interest in a vendor or competitor of the company.
Household A person or a group of people living in the same Independent variable An explanatory variable in a regression
residence, taken as a basic unit in economic analysis. model.
Human capital The present value of an individual’s future Independently and identically distributed With respect to
expected labor income. random variables, the property of random variables that
Hurdle rate The rate of return that a project’s IRR must exceed are independent of each other but follow the identical
for the project to be accepted by the company. probability distribution.
Hypothesis A proposed explanation or theory that can be Index-linked bonds A bond whose coupon payments or prin-
tested. cipal repayment is linked to a specified index.
Hypothesis testing The process of testing of hypotheses about Indexing An investment strategy in which an investor con-
one or more populations using statistical inference. structs a portfolio to mirror the performance of a specified
I-spread Also known as interpolated spread, it is the yield index.
spread for a bond over the standard swap rate in that Indicator variable A variable that takes on only one of two
currency of the same tenor. values, 0 or 1, based on a condition. In simple linear regres-
Iceberg order An order in which the display size is less than sion, the slope is the difference in the dependent variable for
the order’s full size. the two conditions. Also referred to as a dummy variable.
If-converted method A method for accounting for the effect Indifference curve A curve representing all the combinations
of convertible securities on earnings per share (EPS) that of two goods or attributes such that the consumer is entirely
specifies what EPS would have been if the convertible secu- indifferent among them.
rities had been converted at the beginning of the period, Indirect taxes Taxes such as taxes on spending, as opposed
taking account of the effects of conversion on net income to direct taxes.
and the weighted average number of shares outstanding. Inflation premium An extra return that compensates investors
Illusion of control bias A bias in which people tend to believe for expected inflation.
that they can control or influence outcomes when, in fact, Inflation reports A type of economic publication put out by
they cannot. many central banks.
Immediate or cancel order An order that is valid only upon Inflation-linked bonds Debt instruments that link the prin-
receipt by the broker or exchange. If such an order can- cipal and interest to inflation.
not be filled in part or in whole upon receipt, it cancels Information cascade The transmission of information from
immediately. Also called fill or kill. those participants who act first and whose decisions influ-
Impact lag The lag associated with the result of actions affect- ence the decisions of others.
ing the economy with delay. Information-motivated traders Traders that trade to profit
Implied forward rate An interest rate or yield over a future from information that they believe allows them to predict
period implied by the current term structure of interest future prices.
rates. Informationally efficient market A market in which asset
Import license Specifies the quantity of a good that can be prices reflect new information quickly and rationally.
imported into a country. Infrastructure A type of real asset that is intended for public
In-the-money Describes an option with a positive intrinsic use and provides essential services. These assets are typi-
value. cally long-lived fixed assets, such as bridges and toll roads.
Income tax paid The actual amount paid for income taxes in Initial coin offering (ICO) An unregulated process whereby
the period; not a provision, but the actual cash outflow. companies raise capital by selling crypto-tokens to inves-
Income tax payable The income tax owed by the company tors in exchange for fiat money or another agreed-upon
on the basis of taxable income. cryptocurrency.
Increasing returns to scale When a production process leads Initial margin The ratio of the price of collateral to the value
to increases in output that are proportionately larger than of cash exchanged in a repo; a value over 1.0 or 100%
the increase in inputs. indicates overcollateralization.
Incurrence test A financial ratio or other measurement taken Initial margin requirement The margin requirement on the
prior to an action such as debt issuance, usually on a pro first day of a transaction as well as on any day in which
forma basis taking the action into account. Satisfaction of additional margin funds must be deposited.
the test (e.g., leverage ratio below a certain value) is linked Initial public offering (IPO) The first issuance of common
to covenants between the issuer and investors. shares to the public by a formerly private corporation.
Indenture A written contract between a lender and borrower Inside directors Members of a corporation’s board of directors
that specifies the terms of the loan, such as interest rate, who are not independent. Typically, inside directors are
interest payment schedule, or maturity. employees or founders (and their family) of the company.
Independent With reference to events, the property that the Insolvency Refers to the condition in which firm value is below
occurrence of one event does not affect the probability of the face value of debt used to finance the firm’s assets.
another event occurring. With reference to two random Institution An established organization or practice in a society
variables X and Y, they are independent if and only if or culture. An institution can be a formal structure, such
P(X,Y) = P(X)P(Y). as a university, organization, or process backed by law; or
it can be informal, such as a custom or behavioral pattern
important to society. Institutions can, but need not be,
 © CFA Institute. For candidate use only. Not for distribution.
G-16 Glossary

formed by national governments. Examples of institutions J-curve effect Represents the initial negative return in the
include non-governmental organizations, charities, reli- capital commitment phase followed by an acceleration of
gious customs, family units, the media, political parties, returns through the capital deployment phase.
and educational practice. Jackknife A resampling method that repeatedly draws samples
Intangible assets Assets without a physical form, such as by taking the original observed data sample and leaving
patents and trademarks. out one observation at a time (without replacement) from
Interbank market The market of loans and deposits between the set.
banks for maturities ranging from overnight to one year. January effect Calendar anomaly that stock market returns
Intercept The estimated value of the dependent variable when in January are significantly higher compared to the rest of
the independent variable is zero. the months of the year, with most of the abnormal returns
Interest coverage A solvency ratio calculated as EBIT divided reported during the first five trading days in January. Also
by interest payments. called turn-of-the-year effect.
Interest coverage ratio A measure of an issuer's ability to Joint probability function A function giving the probability
service its debt, typically the ratio of operating income or of joint occurrences of values of stated random variables.
EBIT to interest expense. Judgmental sampling A procedure of selectively handpick-
Interest rate A rate of return that reflects the relationship ing elements from the population based on a researcher’s
between differently dated cash flows; a discount rate. knowledge and professional judgment.
Interest rate swap A swap in which the underlying is an Junior debt Debt obligation with lower priority of payment
interest rate. Can be viewed as a currency swap in which than senior debt obligations.
both currencies are the same and can be created as a Key rate duration Also known as partial duration, is a measure
combination of currency swaps. of a bond’s sensitivity to a change in the benchmark yield
Interest-indexed bond A type of index-linked bond for which at a specific maturity.
changes in the index are captured with adjustments to Keynesians Economists who believe that fiscal policy can
interest payments. have powerful effects on aggregate demand, output, and
Internal credit enhancements Provisions or methods a bor- employment when there is substantial spare capacity in
rower initiates to improve their creditworthiness in a an economy.
structured transaction, such as overcollateralization or Kurtosis The statistical measure that indicates the combined
excess spread. weight of the tails of a distribution relative to the rest of
Internal rate of return The discount rate that makes net the distribution.
present value equal 0; the discount rate that makes the Lagging economic indicators Turning points that take place
present value of an investment’s costs (outflows) equal to later than those of the overall economy; they are believed
the present value of the investment’s benefits (inflows). to have value in identifying the economy’s past condition.
Internal rate of return (IRR) The discount rate that makes net Law of one price A principle that states that if two investments
present value equal 0; the discount rate that makes the have the same or equivalent future cash flows regardless of
present value of an investment’s costs (outflows) equal to what will happen in the future, then these two investments
the present value of the investment’s benefits (inflows). should have the same current price.
Internet of things The vast array of physical devices, home Lead underwriter The lead investment bank in a syndicate
appliances, smart buildings, vehicles, and other items that of investment banks and broker–dealers involved in a
are embedded with electronics, sensors, software, and securities underwriting.
network connections that enable the objects in the system Leading economic indicators Turning points that usually
to interact and share information. precede those of the overall economy; they are believed
Interquartile range The difference between the third and first to have value for predicting the economy’s future state,
quartiles of a dataset. usually near-term.
Intrinsic value The amount gained (per unit) by an option Legal tender Something that must be accepted when offered
buyer if an option is exercised at any given point in time. in exchange for goods and services.
May be referred to as the exercise value of the option. Lender of last resort An entity willing to lend money when
Investment banks Financial intermediaries that provide no other entity is ready to do so.
advice to their mostly corporate clients and help them Leptokurtic Describes a distribution that has fatter tails than
arrange transactions such as initial and seasoned securities a normal distribution (also called fat-tailed).
offerings. Lessee Tenant or property user that enters a lease with a
Investment grade Bond issuers and issues rated BBB- (Baa3 property owner or lessor.
on Moody’s scale). Lessor Property owner or manager that leases a property to a
Investment policy statement A written planning document tenant or property user.
that describes a client’s investment objectives and risk Level of significance The probability of a Type I error in
tolerance over a relevant time horizon, along with the testing a hypothesis.
constraints that apply to the client’s portfolio. Leverage A measure for identifying a potentially influential
Issue rating A rating which seeks to capture the probability high-leverage point.
of default or expected loss of the issuer’s senior unsecured Leveraged buyout A transaction whereby the target company
bonds. management team converts the target to a privately held
Issuer rating A rating which seeks to capture the credit risk company by using heavy borrowing to finance the purchase
of a specific financial obligation of an issuer which takes of the target company’s outstanding shares.
such factors as seniority into account.
 © CFA Institute. For candidate use only. Not for distribution.
Glossary G-17

Leveraged buyout (LBO) An acquirer (typically an investment Liquidity trap A condition in which the demand for money
fund specializing in LBOs) uses a significant amount of becomes infinitely elastic (horizontal demand curve) so
debt to finance the acquisition of a target and then pursues that injections of money into the economy will not lower
restructuring actions, with the goal of exiting the target interest rates or affect real activity.
with a sale or public listing. Load fund A mutual fund in which, in addition to the annual
Leveraged buyouts Buyout equity transactions that utilize fee, a percentage fee is charged to invest in the fund and/
a high proportion of debt financing to make a company or for redemptions from the fund.
acquisition. Loan-to-value ratio (LTV) Ratio of the amount of the mortgage
Leveraged loan Where private debt investor firms borrow to the property’s value. The lower the LTV, the higher
money to make a direct loan to a borrower. the borrower’s equity. From the lender’s perspective, the
Leveraged loans Loans made to a borrower or issuer with higher the borrower’s equity, the less likely the borrower
relatively lower credit quality and/or higher leverage. is to default.
Liability-driven investing An investment industry term that Loans Debt instruments agreed to between a borrower and
generally encompasses asset allocation that is focused on lender, typically a bank.
funding an investor’s liabilities in institutional contexts. Lockout or revolving period For an ABS with a non-amortizing
Licensing arrangements Rights to produce a product or have collateral pool, such as credit card debt, is the period in
access to intangible assets using someone else’s brand name which the cash proceeds from principal repayments are
in return for a royalty (often a percentage of revenues). reinvested in additional loans with a principal equal to the
Lien A legal right or claim to property by a creditor. principal repaid. During this period, there is no prepayment
Likelihood The probability of an observation, given a particular risk and potential default risk is generally limited. When
set of conditions. the lockout period is over, principal repayments are used
Limit order Instructions to a broker or exchange to obtain the to pay off the outstanding principal on the ABS. Lockout
best price immediately available when filling an order, but period and revolving period are interchangeable.
in no event accept a price higher than a specified (limit) Lockup period The minimum holding period before investors
price when buying or accept a price lower than a specified are allowed to make withdrawals or redeem shares from
(limit) price when selling. a fund. Its purpose is to allow the hedge fund manager
Limit order book The book or list of limit orders to buy and the required time to implement and potentially realize a
sell that pertains to a security. strategy’s expected results.
Limited company A business organizational form owned by Log-lin model A functional form for transforming regression
shareholders or members with limited liability who elect model data in which the dependent variable is logarithmic
a board of directors to appoint management. Generally, but the independent variable is linear.
limited companies have indefinite life and easier transfer Log-log model A functional form for transforming regression
of ownership interests than limited partnerships. model data in which both the dependent and independent
Limited liability partnership (LLP) A business organizational variables are in logarithmic form.
form available in some jurisdictions owned entirely by Long A trading position in a derivative contract that gains
limited partners with limited liability. value as the price of the underlying moves higher.
Limited partners (LPs) Owners of a limited partnership with Long position A position in an asset or contract in which
limited liability and other attributes as specified in the one owns the asset or has an exercisable right under the
partnership agreement. contract.
Limited partnership A business organizational form owned Long-run average total cost The curve describing average
by a general partner and limited partners. total cost when no costs are considered fixed.
Limited partnership agreement (LPA) A legal document that Loss aversion The tendency of people to dislike losses more
outlines the rules of the partnership and establishes the than they like comparable gains.
framework that ultimately guides the fund’s operations Loss given default (LGD) The investor’s loss conditional on
throughout its life. an issuer event of default.
Lin-log model A functional form for transforming regression Loss severity Portion of a bond’s value (including unpaid
model data in which the dependent variable is linear but interest) an investor loses in the event of default.
the independent variable is logarithmic. Loss-aversion bias A bias in which people tend to strongly
Linear derivatives Firm commitment derivative contracts in prefer avoiding losses as opposed to achieving gains.
which the contract’s payoff/profit function is linear with Low-cost producer A firm with lower production costs than
respect to the price of the underlying. its industry competitors.
Liquid market Said of a market in which traders can buy or sell M2 An appraisal measure that indicates what a portfolio would
with low total transaction costs when they want to trade. have returned, assuming the same total risk as the market
Liquidity The extent to which a company is able to meet its index.
short-term obligations using cash flows and those assets M2 alpha Difference between the risk-adjusted performance
that can be readily transformed into cash. of the portfolio and the performance of the benchmark.
Liquidity premium An extra return that compensates investors Macaulay duration The present-value weighted average time to
for the risk of loss relative to an investment’s fair value receipt of cash flows for fixed-income instrument, also the
if the investment needs to be converted to cash quickly. holding period needed to balance coupon reinvestment risk
Liquidity ratios Financial ratios measuring the company’s and price risk for a one-time instantaneous “parallel” shift
ability to meet its short-term obligations to creditors as in the yield curve once the bond purchase is settled. It is
they come due. named after Frederick Macaulay, the Canadian economist
Liquidity risk A divergence in thecash flow timing of a deriv- who introduced the concept in 1938.
ative versus that of an underlying transaction.
 © CFA Institute. For candidate use only. Not for distribution.
G-18 Glossary

Machine learning (ML) Involves computer-based techniques Market model A regression equation that specifies a linear
that seek to extract knowledge from large amounts of data relationship between the return on a security (or portfolio)
without making any assumptions about the data’s underly- and the return on a broad market index.
ing probability distribution. The goal of ML algorithms is Market multiple models Valuation models based on share
to automate decision-making processes by generalizing, or price multiples or enterprise value multiples.
“learning,” from known examples to determine an under- Market neutral These strategies use quantitative, fundamental,
lying structure in the data. and technical analysis to identify under- and overvalued
Maintenance capital expenditures Investments in assets to equity securities. The hedge fund takes long positions in
keep them in operation or increase their efficiency without undervalued securities and short positions in overvalued
extending their useful lives. securities, while seeking to maintain a market-neutral
Maintenance margin Minimum balance set below the initial net position.
margin that each contract buyer and seller must hold in Market order Instructions to a broker or exchange to obtain
the futures margin account from trade initiation until final the best price immediately available when filling an order.
settlement at maturity. Market reference rate A market-determined interest rate used
Maintenance margin requirement The margin requirement as the underlying in financial instruments and contracts
on any day other than the first day of a transaction. such as variable-rate debt and interest rate swaps. An exam-
Management buy-in A type of leveraged buyout where the ple is the Secured Overnight Financing Rate (SOFR), which
current management team is replaced with the acquiring is an overnight cash borrowing rate collateralized by US
team involved in managing the company. Treasuries. Other MRRs include the euro short-term rate
Management buyout A type of leveraged buyout where the (€STR) and the Sterling Overnight Index Average (SONIA).
current management team participates in the acquisition. Market reference rate (MRR) The interest rate underlying used
Management guidance Management of public companies in interest rate swaps. These rates typically match those of
may publicly provide targets for earnings, revenues, and loans or other short-term obligations. Survey-based Libor
other measures (e.g., capital expenditures) for the next rates used as reference rates in the past have been replaced
quarter, year, or longer term. Guidance can be detailed by rates based on a daily average of observed market
or rather directional and is often updated throughout the transaction rates. For example, the Secured Overnight
year. Initial guidance for next fiscal year might be provided Financing Rate (SOFR) is an overnight cash borrowing rate
during the fourth-quarter earnings call and updated for collateralized by US Treasuries. Other MRRs include the
completed quarters, and new information provided at euro short-term rate (€STR) and the Sterling Overnight
the first-, second-, and third-quarter earnings calls. Also Index Average (SONIA).
known simply as guidance. Market risk Risk related to market movements, e.g., unexpected
Margin call Request to a derivatives contract counterparty to changes in share prices, interest rates, currency exchange
immediately deposit funds to return the futures margin rates, and commodity prices.
account balance to the initial margin. Market share A company’s or product’s revenue expressed as
Margin financing A financing arrangement whereby the prime a percentage of its market size.
broker lends shares, bonds, or derivatives and the hedge Market size Total sales for a good or service, which can be
fund (or investment manager) deposits cash or other col- calculated on a global or more regional basis.
lateral into a margin account at the prime broker based on Market value The price at which an asset or security can
certain fractions of the investment positions. currently be bought or sold in an open market.
Margin loan Money borrowed from a broker to purchase Market-capitalization weighting An index weighting method
securities. in which the weight assigned to each constituent security is
Marginal propensity to consume The proportion of an addi- determined by dividing its market capitalization by the total
tional unit of disposable income that is consumed or spent; market capitalization (sum of the market capitalization)
the change in consumption for a small change in income. of all securities in the index. Also called value weighting.
Marginal propensity to save The proportion of an additional Market-on-close An execution instruction specifying that an
unit of disposable income that is saved (not spent). order can only be filled at the close of trading.
Mark to market (MTM) The practice in which a central clearing Marketable limit order A buy limit order in which the limit
party assigns profits and losses to counterparties to deriv- price is placed above the best offer, or a sell limit order in
ative contracts. In exchange-traded markets, this practice which the limit price is placed below the best bid. Such
takes place daily and is often referred to as daily settlement. orders generally will partially or completely fill right away.
Market anomaly Change in the price or return of a security Markowitz efficient frontier The graph of the set of portfolios
that cannot directly be linked to current relevant infor- offering the maximum expected return for their level of
mation known in the market or to the release of new risk (standard deviation of return).
information into the market. Master limited partnership (MLP) Has similar features to
Market bid–ask spread The difference between the best bid limited partnerships but is usually a more liquid investment
and the best offer. that is often publicly traded.
Market discount rate The rate of return required by investors Master repurchase agreement A legal document governing
given the risk of the bond investment, also known as the all repo trades between two parties.
required yield or required rate of return. Match funding Financing an asset with a source, such as a
Market float The number of shares that are available to the loan or bond, that is aligned with certain attributes of
investing public. the asset, such as duration and the respective streams of
Market makers Over-the-counter (OTC) dealers who typ- income and financing costs.
ically enter into offsetting bilateral transactions with one Material (materiality) Refers to information that is
another to transfer risk to other parties. decision-useful for a reasonable investor.
 © CFA Institute. For candidate use only. Not for distribution.
Glossary G-19

Matrix pricing An estimation process for financial instruments Minority shareholder An individual or entity that owns less
based on the prices of comparable instruments. than a majority of the voting rights in a corporation.
Maturity The date of a fixed-income instrument’s final payment Mode The most frequently occurring value in a distribution.
to investors. Modern portfolio theory (MPT) The analysis of rational port-
Maturity premium An extra return that compensates investors folio choices based on the efficient use of risk.
for the increased sensitivity of the market value of debt to Modified duration The first derivative of a bond’s price with
a change in market interest rates as maturity is extended. respect to its yield, this statistic is a measure of interest
Maturity structure of interest rates Also known as the term rate risk used to estimate the percentage price change for
structure of interest rates, refers to the difference in interest a given change in yield-to-maturity.
rates or benchmark yields by time-to-maturity. Monetarists Economists who believe that the rate of growth
Mean absolute deviation With reference to a sample, the mean of the money supply is the primary determinant of the
of the absolute values of deviations from the sample mean. rate of inflation.
Mean square error (MSE) Calculated as the sum of squares Monetary policy Actions taken by a nation’s central bank to
error (SSE) divided by the degrees of freedom, which are affect aggregate output and prices through changes in bank
the number of observations minus the number of indepen- reserves, reserve requirements, or its target interest rate.
dent variables minus one. Since simple linear regression Monetary transmission mechanism The process whereby
has just one independent variable, the degrees of freedom a central bank’s interest rate gets transmitted through
calculation is the number of observations minus 2. the economy and ultimately affects the rate of increase
Mean square regression (MSR) Calculated as the sum of of prices.
squares regression (SSR) divided by the number of inde- Monetary union An economic union in which the members
pendent variables in the regression model. In simple linear adopt a common currency.
regression, there is only one independent variable, so MSR Money convexity A measure that is used to complement mod-
equals SSR. ified duration to capture the second-order effect of yield
Mean–variance analysis An approach to portfolio analysis changes on a bond’s price, expressed in currency terms.
using expected means, variances, and covariances of asset Money duration A measure of the price change of a
returns. fixed-income instrument in currency units from a change
Measure of central tendency A quantitative measure that in yield-to-maturity. The money duration can be stated per
specifies where data are centered. 100 of par value or in terms of the actual position size. In
Measures of location Quantitative measures that describe the United States, money duration is commonly called
the location or distribution of data. They include not only “dollar duration.”
measures of central tendency but also other measures, Money market The market for short-term debt instruments
such as percentiles. (one-year maturity or less).
Median The value of the middle item of a set of items that has Money market securities Fixed-income securities with original
been sorted into ascending or descending order (i.e., the maturities of one year or less.
50th percentile). Money-weighted return The internal rate of return on a
Meme coin A type of altcoin that is often inspired by a joke. portfolio, taking account of all cash flows.
Mental accounting bias An information-processing bias in Moneyness Expresses the relationship between an option’s
which people treat one sum of money differently from value and its exercise price across the full range of possible
another equal-sized sum based on which mental account underlying prices.
the money is assigned to. Monopolistic competition Highly competitive form of imper-
Merger arbitrage Generally, these strategies involve going fect competition; the competitive characteristic is a notably
long (buying) the stock of the company being acquired large number of firms, while the monopoly aspect is the
at a discount to its announced takeover price and going result of product differentiation.
short (selling) the stock of the acquiring company when Monopoly In pure monopoly markets, there are no substi-
the merger or acquisition is announced. tutes for the given product or service. There is a single
Mesokurtic Describes a distribution with kurtosis equal to that seller, which exercises considerable power over pricing
of the normal distribution, namely, kurtosis equal to three. and output decisions.
Mezzanine debt Refers to private credit subordinated to senior Monte Carlo simulation A technique that uses the inverse
secured debt but senior to equity in the borrower’s capital transformation method for converting a randomly gener-
structure. ated uniformly distributed number into a simulated value
Mezzanine-stage financing Mezzanine venture capital that of a random variable of a desired distribution. Each key
prepares a company to go public as it continues to expand decision variable in a Monte Carlo simulation requires an
capacity and enhance its growth trajectory. It represents assumed statistical distribution; this assumption facilitates
the bridge financing needed to fund a private firm until it incorporating non-normality, fat tails, and tail dependence
can execute an IPO or be sold. as well as solving high-dimensionality problems.
Miner A validator of transactions on the blockchain that locks Moral principles Beliefs regarding what is good, acceptable,
blocks of transactions into the blockchain and receives or obligatory behavior and what is bad, unacceptable, or
compensation for this process in the form of a digital asset. forbidden behavior.
Minimum efficient scale The smallest output that a firm Mortgage loan Agreement to finance real estate by the col-
can produce such that its long-run average total cost is lateral of a specified property that obliges the borrower to
minimized. make a predetermined series of payments to the lender.
Minimum-variance portfolio The portfolio with the minimum
variance for each given level of expected return.
 © CFA Institute. For candidate use only. Not for distribution.
G-20 Glossary

Mortgage pass-through security Security created when mort- Net investment hedge Refers to a specific hedge accounting
gage lenders pool mortgages together and sell securities to designation that applies when either a foreign currency
investors. The cash flow from the mortgage pool––monthly bond or a derivative, such as an FX swap or forward, is
payments of principal, interest, and prepayments––are used to offset the exchange rate risk of the equity of a
“passed through” to the security holders. foreign operation.
Mortgage-backed securities Debt obligations that represent Net present value (NPV) The present value of an investment’s
claims to the cash flows from pools of mortgage loans, cash inflows (benefits) minus the present value of its cash
most commonly on residential property. outflows (costs).
Mortgage-backed securities (MBS) Bonds created from the Net profit margin An indicator of profitability, calculated as
securitization of mortgages. net income divided by revenue; indicates how much of
Multi-factor model A model that explains a variable in terms each dollar of revenues is left after all costs and expenses.
of the values of a set of factors. Also called profit margin or return on sales.
Multi-market indexes Comprised of indexes from different Net tax rate The tax rate net of transfer payments.
countries, designed to represent multiple security markets. Net working capital Working capital excluding short-term
Multilateral trading facilities See alternative trading systems. items unrelated to business operations, such as cash, mar-
Multilateralism The conduct of countries who participate in ketable securities, and short-term debt.
mutually beneficial trade relationships and extensive rules Network effects A business model that enables users to con-
harmonization. Private firms are fully integrated into global tribute directly to a product, service, or online content.
supply chains with multiple trade partners. Examples of Neural networks A type of computer program design based
multilateral countries include Germany and Singapore. on how the human brain learns and processes information.
Multiple of invested capital (MOIC) A simplified calculation Neutral rate of interest The rate of interest that neither spurs
that measures the total value of all distributions and resid- on nor slows down the underlying economy.
ual asset values relative to an initial total investment; also No-load fund A mutual fund in which there is no fee for invest-
known as a money multiple. ing in the fund or for redeeming fund shares, although
Multiple-price auction A debt securities auction in which there is an annual fee based on a percentage of the fund’s
bidders receive distinct prices based on their bids. net asset value.
Multiplier models Valuation models based on share price Node Each value on a binomial tree from which successive
multiples or enterprise value multiples. moves or outcomes branch.
Mutual fund A comingled investment pool in which investors Non-agency RMBS MBS backed by residential mortgages
in the fund each have a pro-rata claim on the income and that are issued by private entities and not guaranteed by
value of the fund. a federal agency or a GSE.
Nash equilibrium When two or more participants in a Non-amortizing loans Type of debt where there are no sched-
non-coop-erative game have no incentive to deviate from uled principal repayments.
their respective equilibrium strategies given their oppo- Non-cooperative country A country with inconsistent and
nent’s strategies. even arbitrary rules; restricted movement of goods, ser-
Nationalism The promotion of a country’s own economic inter- vices, people, and capital across borders; retaliation; and
ests to the exclusion or detriment of the interests of other limited technology exchange.
nations. Nationalism is marked by limited economic and Non-cumulative preference shares Preference shares for
financial cooperation. These actors may focus on national which dividends that are not paid in the current or subse-
production and sales, limited cross-border investment and quent periods are forfeited permanently (instead of being
capital flows, and restricted currency exchange. accrued and paid at a later date).
Natural language processing (NLP) A field of research within Non-financial risks Risks that arise from sources other than
the field of text analytics and at the intersection of com- changes in the external financial markets, such as changes
puter science, AI, and linguistics that focuses on develop- in accounting rules, legal environment, or tax rates.
ing computer programs to analyze and interpret human Non-fungible token (NFT) A unique cryptographic token on
language. the blockchain that cannot be replicated and is used to
Natural resources These include commodities (hard and soft), represent ownership of physical assets, such as artwork,
agricultural land (farmland), and timberland. real estate, or other assets.
Negative externalities A cost to a third party because of the Non-linear derivatives Derivatives, such as options or other
production or consumption of a good or service. contingent claims, with payoff/profit profiles that are
Negative pledge clause Limitations on investments, the non-linear (asymmetric) with respect to the price of the
disposal of assets, or issuance of debt senior to existing underlying.
obligations. Negative covenants seek to ensure that an Non-participating preference shares Preference shares that
issuer maintains the ability to make interest and principal do not entitle shareholders to share in the profits of the
payments. company. Instead, shareholders are only entitled to receive
Net cash An issuer's total debt less cash and marketable secu- a fixed dividend payment and the par value of the shares
rities. When the balance is negative it is referred to as in the event of liquidation.
net cash. Non-probability sampling A sampling plan dependent on
Net debt An issuer's total debt less cash and marketable secu- factors other than probability considerations, such as a
rities. When the balance is positive it is referred to as net sampler’s judgment or the convenience to access data.
debt. Non-recourse loan Loan in which the lender does not have a
claim against the borrower and thus can look only to the
property to recover the outstanding mortgage balance.
 © CFA Institute. For candidate use only. Not for distribution.
Glossary G-21

Non-state actors Those that participate in global political, Open-end fund A mutual fund that accepts new investment
economic, or financial affairs but do not directly con- money and issues additional shares at a value equal to
trol national security or country resources. Examples of the net asset value of the fund at the time of investment.
non-state actors are non-governmental organizations Operating cycle The length of time between a company’s
(NGOs), multinational companies, charities, and even acquisition of goods or raw materials and the collection
influential individuals, such as business leaders or cultural of cash from sales to customers.
icons. Operating efficiency ratios Ratios that measure how effi-
Nonparametric test A test that is not concerned with a param- ciently a company performs day-to-day tasks, such as the
eter or that makes minimal assumptions about the popu- collection of receivables and management of inventory.
lation from which a sample comes. Operating leases A type of lease which is more akin to the
Nonsystematic risk Unique risk that is local or limited to a rental of the underlying asset.
particular asset or industry that need not affect assets Operating leverage The sensitivity of a firm’s operating profit
outside of that asset class. to a change in revenues, determined by the composition
Normal distribution A continuous, symmetric probability of fixed and variable operating costs.
distribution that is completely described by its mean and Operating profit margin A profitability ratio calculated as
its variance. operating income (i.e., income before interest and taxes)
Normalized earnings The expected level of mid-cycle earnings divided by revenue. Also called operating margin.
for a company in the absence of any unusual or tempo- Operational deposits Bank deposits generated by clearing,
rary factors that affect profitability (either positively or custody, and cash management activities.
negatively). Operational independence A bank’s ability to execute mon-
Notching Ratings adjustment methodology where specific etary policy and set interest rates in the way it thought
issues from the same borrower may be assigned different would best meet the inflation target.
credit ratings. Operational risk The risk that arises from inadequate or failed
Notice period The length of time (typically 30–90 days) in people, systems, and internal policies, procedures, and
advance that investors may be required to notify a fund processes, as well as from external events that are beyond
of their intent to redeem some or all of their investment. the control of the organization but that affect its operations.
This allows a fund manager to liquidate a position in an Operationally efficient Said of a market, a financial system,
orderly fashion without magnifying losses. or an economy that has relatively low transaction costs.
Novation process A process thatsubstitutes the initial swap Opportunistic real estate strategies Include major rede-
execution facility(SEF) contract with identical trades velopment, repurposing of assets, taking on large vacan-
facing the central counterparty (CCP). The CCP serves as cies, or speculating on significant improvement in market
counterparty for both financial intermediaries, eliminating conditions. These may be appealing for investors seeking
bilateral counterparty credit risk and providing clearing higher returns and willing to accept additional risks from
and settlement services. development, redevelopment, repositioning, and leasing.
Null hypothesis The hypothesis that is tested. Opportunity cost The value that investors forgo by choosing
Off-the-run Seasoned government bonds that are often less a particular course of action; the value of something in its
liquid. best alternative use.
Off-the-run securities Sovereign debt securities outstanding Optimal capital structure The capital structure at which the
other than on-the-sun securities. Off-the-run securities value of the company is maximized.
are less liquid than on-the-run securities. Option A primary example of a contingent claim. A deriv-
Offer The price at which a dealer or trader is willing to sell an ative contract that provides the buyer the right, but not
asset, typically qualified by a maximum quantity (ask size). the obligation, to buy or sell an underlying.
Official interest rate An interest rate that a central bank sets Option contract See option.
and announces publicly; normally the rate at which it is Option premium An amount that is paid upfront from the
willing to lend money to the commercial banks. Also called option buyer to the option seller. Reflects the value of the
official policy rate or policy rate. option buyer’s right to exercise in the future.
Official policy rate An interest rate that a central bank sets Option-adjusted price The sum of a bond’s flat price and value
and announces publicly; normally the rate at which it is of an embedded option.
willing to lend money to the commercial banks. Option-adjusted spread Or OAS for a bond is its Z-spread
Oligopoly Market structure with a relatively small number of adjusted for the value of an embedded option.
firms supplying the market. Option-adjusted yield A yield measure for a bond adjusted
Omnichannel Refers to a company selling its products or for embedded options.
services in multiple channels, such as in store and online. Order A specification of what instrument to trade, how much
On-the-run Most recently issued, and liquid, government to trade, and whether to buy or sell.
bonds. Order precedence hierarchy With respect to the execution of
On-the-run securities The most recently issued and liquid orders to trade, a set of rules that determines which orders
sovereign debt securities. execute before other orders.
Open interest The number of outstanding contracts. Order-driven markets A market (generally an auction market)
Open market operations The purchase or sale of bonds by that uses rules to arrange trades based on the orders that
the national central bank to implement monetary policy. traders submit; in their pure form, such markets do not
The bonds traded are usually sovereign bonds issued by make use of dealers.
the national government. Ordinary shares Equity shares that are subordinate to all other
types of equity (e.g., preferred equity). Also called common
stock or common shares.
 © CFA Institute. For candidate use only. Not for distribution.
G-22 Glossary

Organizational form A legal and tax classification of a busi- Passive investment In the fixed-income context, it is invest-
ness, specific to a jurisdiction, that determines the organi- ment that seeks to mimic the prevailing characteristics
zation’s legal identity, owner–manager relationship, owner of the overall investments available in terms of credit
liability, taxation, and access to financing. quality, type of borrower, maturity, and duration rather
Out-of-the-money Describes an option with zero intrinsic than express a specific market view.
value because the option buyer would not rationally exer- Payable date The day that the company actually mails out (or
cise the option. An example of such would be the case in electronically transfers) a dividend payment.
which the price of the underlying is less than the option’s Payment date The day that the company actually mails out
exercise price for a call option. (or electronically transfers) a dividend payment.
Over-the-counter (OTC) Refers to derivative markets in which Payment-in-kind A bond feature whereby coupon payments
derivative contracts are created and traded between deriv- can be fully or partially paid in the form of additional
atives end users and dealers, or financial intermediaries, issuance or added to the principal amount.
such as commercial banks or investment banks. Payments system The system for the transfer of money.
Overcollateralization Credit enhancement technique where Pearson correlation A parametric measure of the relationship
collateral underlying the transaction exceeds the face value between two variables.
of the issued bonds. Pecking order theory The theory that managers consider
Overconfidence bias A bias in which people demonstrate how their actions might be interpreted by outsiders and
unwarranted faith in their own intuitive reasoning, judg- thereby order their preferences for various forms of cor-
ments, and/or cognitive abilities. porate financing. Forms of financing that are least visible
Overfitting When a machine learning model learns the input to outsiders (e.g., internally generated funds) are most
and target dataset too precisely, making the system more preferable to managers, and those that are most visible
likely to discover false relationships or unsubstantiated (e.g., equity issuance) are least preferable.
patterns that will lead to prediction errors. Penetration pricing A discount pricing approach used when
P-value The smallest level of significance at which the null a firm willingly sacrifices margins in order to build scale
hypothesis can be rejected. and market share.
Par rate A yield-to-maturity that makes the present value of Percentiles Quantiles that divide a distribution into 100 equal
a bond’s cash flows equal to par. parts that sum to 100.
Par swap rate The fixed swap rate that equates the present Perfect competition A market structure in which the individ-
value of all future expected floating cash flows to the ual firm has virtually no impact on market price, because
present value of fixed cash flows. it is assumed to be a very small seller among a very large
Par value The amount of principal on a bond, also known as number of firms selling essentially identical products.
face value. Performance evaluation The measurement and assessment
Parallel shift When all maturities along a yield curve increase of the outcomes of investment management decisions.
or decrease in yield in the same direction by the same Performance fee Fee paid to the general partner from the
magnitude. A parallel shift in the yield curve is implicitly limited partner(s) based on realized net profits.
assumed in analytical duration and convexity. Period costs Costs (e.g., executives’ salaries) that cannot be
Parameter A descriptive measure computed from or used to directly matched with the timing of revenues and which
describe a population of data, conventionally represented are thus expensed immediately.
by Greek letters. Periodicity Number of periods in a year, used for compound
Parametric test Any test (or procedure) concerned with param- interest. The periodicity of a fixed-income instrument
eters or whose validity depends on assumptions concerning usually matches the frequency of its coupon payments.
the population generating the sample. Permanent differences Differences between tax and financial
Pari passu clause A covenant or contract clause that ensures reporting of revenue (expenses) that will not be reversed
a debt obligation is treated the same as the borrower’s at some future date. These result in a difference between
other senior debt instruments and is not subordinated to the company’s effective tax rate and statutory tax rate and
similar obligations. do not result in a deferred tax item.
Partially amortizing bond A loan or bond with a payment Permissioned networks Networks that are fully open only to
schedule that calls for the complete repayment of principal select participants on a DLT network.
over the instrument’s time to maturity. Permissionless networks Networks that are fully open to any
Participating preference shares Preference shares that entitle user on a DLT network.
shareholders to receive the standard preferred dividend Perpetual bonds Bonds with no stated maturity date.
plus the opportunity to receive an additional dividend if Perpetuity A perpetual annuity, or a set of never-ending level
the company’s profits exceed a pre-specified level. sequential cash flows, with the first cash flow occurring
Pass-through businesses Businesses that, by virtue of their one period from now.
organizational form and/or other legal and regulatory PESTLE analysis A framework for analyzing factors that influ-
attributes, do not pay entity-level taxes on income or ence an industry’s economic outcomes.
loss; income or loss is passed through to owners, who pay Pet projects A capital investment that is pursued by manage-
personal taxes. ment but is not economically justifiable by a disinterested
Pass-through rate The coupon rate of a mortgage pass-through party. Motivations for pet projects include self-dealing
security that is received by the investor after administrative and vanity.
charges. It is lower than the weighted average mortgage Physical risks Economic and financial losses from the increase
rate earned on the underlying pool of mortgages because in the severity and frequency of extreme weather due to
of administrative charges. The pass-through rate that the climate change—for example, the loss of coastal real estate
investor receives is said to be “net interest” or “net coupon.” from a storm.
 © CFA Institute. For candidate use only. Not for distribution.
Glossary G-23

PIPE (private investment in public equity) A private offering Price index Represents the average prices of a basket of goods
to select investors with fewer disclosures and lower trans- and services.
action costs that allows the issuer to raise capital more Price limits Establish a band relative to the previous day’s
quickly and cost effectively. settlement price within which all trades must occur.
Platykurtic Describes a distribution that has relatively less Price multiple A ratio that compares the share price with some
weight in the tails than the normal distribution (also called sort of monetary flow or value to allow evaluation of the
thin-tailed). relative worth of a company’s stock.
Pledge A legal right or claim to property by a creditor. Also Price priority The principle that the highest priced buy orders
called a lien. and the lowest priced sell orders execute first.
Poison pill Officially known as a shareholder rights plan, a Price return Measures only the price appreciation or percent-
poison pill is a hostile-takeover defense adopted by boards age change in price of the securities in an index or portfolio.
of directors according to rules specified in the corporate Price return index An index that reflects only the price appre-
charter. There are several types of poison pills. Generally, ciation or percentage change in price of the constituent
they allow shareholders, excluding the shareholder making securities. Also called price index.
the hostile bid and their affiliates, to buy newly issued Price stability In economics, refers to an inflation rate that is
shares at a discounted price. The share issuance would low on average and not subject to wide fluctuation.
dilute the bidder’s ownership percentage, rendering it Price takers Producers that must accept whatever price the
impossible for the bidder to attain control. market dictates.
Policy rate An interest rate that a central bank sets and Price value of a basis point (PVBP) An estimate of the change
announces publicly; normally the rate at which it is willing in the full price of a bond given a 1 bp change in its
to lend money to the commercial banks. yield-to-maturity. The PVBP is also called the “PV01,”
Portfolio companies The individual companies owned by a standing for the “price value of an 01” or “present value of
private equity firm. an 01,” where “01” means 1 bp. In the United States, it is
Portfolio investment flows Short-term investments in foreign commonly called the “DV01” for the “dollar value” of 1 bp.
assets, such as stocks or bonds. Price weighting An index weighting method in which the
Portfolio planning The process of creating a plan for building weight assigned to each constituent security is determined
a portfolio that is expected to satisfy a client’s investment by dividing its price by the sum of all the prices of the
objectives. constituent securities.
Position The quantity of an asset that an entity owns or owes. Price-setting option The option to adjust prices when demand
Posterior probability An updated probability that reflects or or supply varies from what is forecast.
comes after new information. Price-to-earnings ratio (P/E) The ratio of share price to earn-
Power of a test The probability of correctly rejecting the ings per share.
null—that is, rejecting the null hypothesis when it is false. Pricing power A company’s ability to set prices and other
Pre-funding period Allows the trust to acquire during a certain economic terms with customers without affecting its sales
period of time after the close of the transaction. volumes.
Preference shares A type of equity interest which ranks above Primary bond markets Fixed-income markets comprised of
common shares with respect to the payment of dividends issuers issuing bonds to investors to raise capital, often
and the distribution of the company’s net assets upon intermediated by a third-party such as an investment bank.
liquidation. They have characteristics of both debt and Primary capital markets (primary markets) The market where
equity securities. Also called preferred stock. securities are first sold and the issuers receive the proceeds.
Preferred stock See preference shares. Primary dealer Financial institution that is authorized to deal
Premium In the case of bonds, premium refers to the amount in new issues of sovereign bonds and that serves primar-
by which a bond is priced above its face (par) value. In the ily as a trading counterparty of the office responsible for
case of an option, the amount paid for the option contract. issuing sovereign bonds.
Prepayment option May entitle the borrower to prepay all Primary market The market where securities are first sold and
or part of the outstanding mortgage principal prior to the issuers receive the proceeds.
maturity. This creates a risk from the lender’s or investor’s Prime broker A broker that provides services that commonly
viewpoint because the cash flow amounts and timing include custody, administration, lending, short borrowing,
cannot be known with certainty. and trading.
Prepayment risk The risk that the some or all of a Prime loans Lending made to borrowers of high credit quality
mortgage-backed security’s principal is repaid at a differ- with strong employment and credit histories, a low DTI,
ent speed than expected, either in the form of contraction substantial equity in the underlying property, and a first
risk (or earlier repayment than expected) or extension risk lien on the mortgaged property serving as the collateral
(later repayment). for the loan.
Present value models Valuation models that estimate the Principal The amount that an issuer agrees to repay the deb-
intrinsic value of a security as the present value of the tholders on the maturity date.
future benefits expected to be received from the security. Principal-agent relationship An arrangement in which one
Also called discounted cash flow models. party (the agent) has authority to act for or on behalf of
Pretax margin A profitability ratio calculated as earnings another party (the principal). Such an arrangement imposes
before taxes divided by revenue. a duty on the agent to act in the principal’s best interest.
Price discrimination A pricing approach that charges different Prior probabilities Probabilities reflecting beliefs prior to the
prices to different customers based on their willingness arrival of new information.
to pay.
 © CFA Institute. For candidate use only. Not for distribution.
G-24 Glossary

Priority of claims Priority of payment, with the most senior Proxy voting A form of casting a ballot in an election in which
or highest ranking debt having the first claim on the cash a voter authorizes a representative to vote on their behalf
flows and assets of the issuer. according to instructions. In corporate elections, proxy
Private capital Funding provided to companies that is not ballots are cast by shareholders that direct a representa-
sourced from the public markets. tive, typically the corporate secretary, to enter their votes
Private company A company, typically a limited company, that as instructed.
does not list its equity securities on an exchange. Public (listed) company A company with its equity securities
Private debt Capital extended to companies through a loan traded on an exchange.
or other form of debt. Public limited companies A type of limited company in many
Private debtholders Investors in an entity’s non-securitized jurisdictions with entity-level taxation but no restrictions
debt claims, such as a loan or lease. The most common on the number of shareholders or transferability of own-
type of private debtholder is a bank. ership interest; the most suitable organizational form for
Private equity Equity investment capital raised from sources a company that seeks to go public.
other than public markets and traditional institutions. Public–private partnership A long-term contractual rela-
Private equity fund A hedge fund that seeks to buy, optimize, tionship between the public and private sectors for the
and ultimately sell portfolio companies to generate profits. purpose of having the private sector deliver a project
See venture capital fund. or service traditionally provided by the public sector.
Private equity securities Securities that are not listed on public Infrastructure is increasingly being financed privately
exchanges and have no active secondary market. They are through public–private partnerships by local, regional,
issued primarily to institutional investors via non-public and national governments.
offerings, such as private placements. Public–private partnership (PPP) An agreement between
Private investment in public equity (PIPE) An investment the public sector and the private sector to finance, build,
in the equity of a publicly traded firm that is made at a and operate public infrastructure, such as hospitals and
discount to the market value of the firm’s shares. toll roads.
Private limited company A type of limited company in many Pull on liquidity An action or event that accelerates cash
jurisdictions with pass-through taxation but restrictions outflows.
on the number of shareholders or members and on the Purchase agreement Legal document in a securitization trans-
transfer of ownership interest. action that outlines the representations and warranties that
Private placement A sale of debt or equity securities to a small the seller makes about the assets sold.
group of investors on an unregulated basis. The terms of Pure discount bonds Bonds that do not pay interest during
the offering are negotiated by the issuer and investors. their life. They are issued at a discount to par value and
Probability of default (POD) The likelihood that an issuer fails redeemed at par. Also called zero-coupon bonds.
to make full and timely payments of principal and interest; Put An option that gives the holder the right to sell an under-
typically an annualized measure. lying asset to another party at a fixed price over a specific
Probability sampling A sampling plan that allows every mem- period of time.
ber of the population to have an equal chance of being Put option The right to sell an underlying.
selected. Putable bonds Bonds that give the bondholder the right to
Probability tree diagram A diagram with branches emanating sell the bond back to the issuer at a predetermined price
from nodes representing either mutually exclusive chance on specified dates.
events or mutually exclusive decisions. Put–call forward parity Describes the no-arbitrage condition
Production flexibility option The option to alter production in which at t = 0 the present value of the price of a long
when demand varies from what is forecast. forward commitment plus the price of the long put must
Profession An occupational group that has specific educa- equal the price of the long call plus the price of the risk-free
tion, expert knowledge, and a framework of practice and asset (with face value of the exercise price of both the call
behavior that underpins community trust, respect, and and the put).
recognition. Put–call parity Describes the no-arbitrage condition in which
Profit margin An indicator of profitability, calculated as net at t = 0 the price of the long underlying asset plus the price
income divided by revenue; indicates how much of each of the long put must equal the price of the long call plus the
dollar of revenues is left after all costs and expenses. price of the risk-free asset (with face value of the exercise
Profitability ratios Ratios that measure a company’s ability to price of both the call and the put).
generate profitable sales from its resources (assets). Quantile A value at or below which a stated fraction of the
Prospectus Legal document in securitization that describes data lies. Also referred to as a fractile.
the structure of the transaction, including the priority and Quantitative easing An expansionary monetary policy based
amount of payments to be made to the servicer, adminis- on aggressive open market purchase operations.
trators, and the ABS holders, as well as the credit enhance- Quartiles Quantiles that divide a distribution into four equal
ments used in the securitization. parts.
Protective put A strategy of purchasing an underlying asset Quick ratio A measure of liquidity that is the ratio of cash,
and purchasing a put on the same asset. marketable securities, and receivables to current liabilities.
Proxy contest When a shareholder or group of shareholders Quintiles Quantiles that divide a distribution into five equal
campaigns for certain matters they have submitted to a parts.
shareholder vote, often a slate of directors who oppose the Quota rents Profits that foreign producers can earn by raising
incumbent board and management. The incumbent board the price of their goods higher than they would without
and management simultaneously campaign for their side. a quota.
 © CFA Institute. For candidate use only. Not for distribution.
Glossary G-25

Quotas Government policies that restrict the quantity of a Regression analysis Allows us to test hypotheses about the
good that can be imported into a country, generally for a relationship between two variables, by quantifying the
specified period of time. strength of the relationship between the two variables,
Quote-driven market A market in which dealers acting as and to use one variable to make predictions about the
principals facilitate trading. other variable.
Quoted margin Specified spread of a floating rate instrument Regression coefficients The collective term for the intercept
over a market reference rate or benchmark. and slope coefficients in the regression model.
Range The difference between the maximum and minimum Regret The feeling that an opportunity has been missed; typ-
values in a dataset. ically, an expression of hindsight bias.
Rapid amortization provisions Provisions in receivable ABS Regret-aversion bias An emotional bias in which people tend
that may require early principal amortization if specific to avoid making decisions that will result in action out of
events occur. Such provisions are referred to as early amor- fear that the decision will turn out poorly.
tization and are included to safeguard the credit quality of Relative dispersion The amount of dispersion relative to a
the issue, particularly during the revolving period. reference value or benchmark.
Razor, razorblade pricing A pricing approach that combines a Reopening Issuing bonds by increasing the size of an existing
low price on a piece of equipment and high-margin pricing bond issue with a price significantly different from par.
on repeat-purchase consumables. Replication A strategy in which a derivative’s cash flow stream
Real assets Generally, these are tangible physical assets, such may be recreated using a combination of long or short posi-
as real estate, infrastructure, and natural resources, but they tions in an underlying asset and borrowing or lending cash.
also include such intangibles as patents, intellectual prop- Repo rate The interest rate on a repurchase agreement.
erty, and goodwill. Real assets generate current or expected Representativeness bias A belief perseverance bias in which
future cash flows and/or are considered a store of value. people tend to classify new information based on past
Real estate Includes borrowed or ownership capital in buildings experiences and classifications.
or land. Developed land includes commercial and industrial Repurchase agreement (Repo) A form of collateralized loan
real estate, residential real estate, and infrastructure. involving the sale of a security with a simultaneous agree-
Real option A right, but not an obligation, for management ment by the seller to buy back the same security from the
to make a decision with respect to a capital investment purchaser at an agreed-on price and future date. The party
that alters future cash flows from the original forecasted who sells the security at the inception of the repurchase
scenario. agreement and buys it back at maturity is borrowing money
Real risk-free interest rate The single-period interest rate for a from the other party, and the security sold and subse-
completely risk-free security if no inflation were expected. quently repurchased represents the collateral.
Rebalancing In the context of asset allocation, a discipline Repurchase date The date when the party who sold the security
for adjusting the portfolio to align with the strategic asset at the inception of a repurchase agreement buys back the
allocation. security from the cash lending counterparty.
Rebalancing policy The set of rules that guide the process of Repurchase price The price at which the party who sold the
restoring a portfolio’s asset class weights to those specified security at the inception of the repurchase agreement
in the strategic asset allocation. buys back the security from the cash lending counterparty.
Recapitalization Recapitalization via private equity describes Required margin Yield spread of a floating rate instrument
the steps a firm takes to increase or introduce leverage to such that the instrument is priced at par value on a rate
its portfolio company and pay itself a dividend out of the reset date.
new capital structure. Required rate of return The rate of return required by inves-
Recognition lag The lag in government response to an eco- tors given the risk of the bond investment, also known as
nomic problem resulting from the delay in confirming a the market discount rate or required yield.
change in the state of the economy. Required yield The rate of return required by investors given
Recourse loan Loan in which the lender has a claim against the the risk of the bond investment, also known as the market
borrower for the shortfall (deficiency) between the amount discount rate of required rate of return.
of the outstanding mortgage balance and the proceeds Required yield spread The difference in yield-to-maturity
received from the sale of the property. between a bond and that of a government benchmark bond
Recovery rate (RR) The percentage of an outstanding debt with the same or similar time-to-maturity.
claim recovered when an issuer defaults Resampling A statistical method that repeatedly draws samples
Redemption fee A fee charged to discourage redemptions from the original observed data sample for the statistical
and to offset the transaction costs for remaining investors inference of population parameters.
in the fund. Reserve currency A currency held by global central banks in
Refinancing rate A type of central bank policy rate. significant quantities and widely used to conduct interna-
Regionalism In between the two extremes of bilateralism tional trade and financial transactions.
and multilateralism. In regionalism, a group of countries Reserve requirement The requirement for banks to hold
cooperate with one another. Both bilateralism and region- reserves in proportion to the size of deposits.
alism can be conducted at the exclusion of other groups. Residual The amount of deviation of an observed value of the
For example, regional blocs may agree to provide trade dependent variable from its estimated value based on the
benefits to one another and increase barriers for those fitted regression line.
outside of that group. Restricted domestic currency A currency with limited con-
Registered bonds Bonds for which ownership is recorded by vertibility into other currencies due to illiquidity.
either name or serial number.
 © CFA Institute. For candidate use only. Not for distribution.
G-26 Glossary

Return on assets (ROA) A profitability ratio calculated as net Risk shifting Actions to change the distribution of risk
income divided by average total assets; indicates a compa- outcomes.
ny’s net profit generated per dollar invested in total assets. Risk tolerance the level of risk an investor is willing and able
Return on equity (ROE) A profitability ratio calculated as net to bear.
income divided by average shareholders’ equity. Risk transfer Actions to pass on a risk to another party, often,
Return on invested capital (ROIC) A measure of the profitabil- but not always, in the form of an insurance policy.
ity of a company relative to the amount of capital invested Risk-neutral pricing A no-arbitrage derivative value estab-
by the equityholders and debtholders. lished separately from investor views on risk that uses
Return on sales An indicator of profitability, calculated as net underlying asset volatility and the risk-free rate to calculate
income divided by revenue; indicates how much of each the present value of future cash flows.
dollar of revenues is left after all costs and expenses. Also Risk-neutral probability The computed probability used in
referred to as net profit margin. binomial option pricing by which the discounted weighted
Return-generating model A model that can provide an esti- sum of expected values of the underlying equal the current
mate of the expected return of a security given certain option price. Specifically, this probability is computed using
parameters and estimates of the values of the independent the risk-free rate and assumed up gross return and down
variables in the model. gross return of the underlying.
Revenue bonds Bonds issued by non-sovereign governments Rollover risk The likelihood that a property owner will lose an
related to a government sponsored project expected to existing tenant and forgo income until a new one is found.
generate future cash flow as a primary source of repayment. Safety-first rules Rules for portfolio selection that focus on the
Reverse repurchase agreement A repurchase agree- risk that portfolio value or portfolio return will fall below
ment viewed from the perspective of the cash lending some minimum acceptable level over some time horizon.
counterparty. Sample correlation coefficient A standardized measure of
Reverse stock split A reduction in the number of shares how two variables in a sample move together. It is the
outstanding with a corresponding increase in share price, ratio of the sample covariance to the product of the two
but no change to the company’s underlying fundamentals. variables’ standard deviations.
Revolving credit agreements The most reliable form of Sample covariance A measure of how two variables in a
short-term bank borrowing facilities; they are in effect sample move together.
for multiple years (e.g., three to five years) and can have Sample excess kurtosis A sample measure of the degree of
optional medium-term loan features. Also known as a distribution’s kurtosis in excess of the normal distribu-
revolvers. tion’s kurtosis.
Rho The change in a given derivative instrument for a given Sample mean The sum of the sample observations divided
small change in the risk-free interest rate, holding every- by the sample size.
thing else constant. Rho measures the sensitivity of the Sample skewness A sample measure of the degree of asym-
option to the risk-free interest rate. metry of a distribution.
Ricardian equivalence An economic theory that implies that Sample standard deviation The positive square root of the
it makes no difference whether a government finances a sample variance.
deficit by increasing taxes or issuing debt. Sample variance The sum of squared deviations around the
Risk Exposure to uncertainty. The chance of a loss or adverse mean divided by the degrees of freedom.
outcome as a result of an action, inaction, or external event. Sample-size neglect A type of representativeness bias in
Risk averse The assumption that an investor will choose the which financial market participants incorrectly assume
least risky alternative. that small sample sizes are representative of populations
Risk aversion The degree of an investor’s inability and unwill- (or “real” data).
ingness to take risk. Sampling distribution The distribution of all distinct possible
Risk budgeting The establishment of objectives for individ- values that a statistic can assume when computed from
uals, groups, or divisions of an organization that takes samples of the same size randomly drawn from the same
into account the allocation of an acceptable level of risk. population.
Risk exposure The state of being exposed or vulnerable to a Sampling error The difference between the observed value of
risk. The extent to which an organization is sensitive to a statistic and the estimate resulting from using subsets
underlying risks. of the population.
Risk governance The top-down process and guidance that Sampling plan The set of rules used to select a sample.
directs risk management activities to align with and support Saving deposits Bank deposits typically held for
the overall enterprise. non-transactional purposes that often have a stated term.
Risk management The process of identifying the level of risk Scatter plot A two-dimensional graphical plot of paired obser-
an organization wants, measuring the level of risk the orga- vations of values for the independent and dependent vari-
nization currently has, taking actions that bring the actual ables in a simple linear regression.
level of risk to the desired level of risk, and monitoring the Scenario analysis A variation of the valuation process com-
new actual level of risk so that it continues to be aligned bining a base case with alternative outcomes, allowing the
with the desired level of risk. incorporation of more favorable or adverse scenarios in
Risk management framework The infrastructure, process, the valuation process.
and analytics needed to support effective risk management Scraping An automated, large-scale, algorithm-driven approach
in an organization. that retrieves otherwise unstructured data available on
Risk premium An extra return expected by investors for bear- websites and creates data in a more structured format.
ing some specified risk. Seasoned offering An offering in which an issuer sells addi-
tional units of a previously issued security.
 © CFA Institute. For candidate use only. Not for distribution.
Glossary G-27

Secondary bond markets Fixed-income markets comprised Senior unsecured debt The highest-ranked debt in an issu-
of investors trading existing bonds amongst themselves. er's capital structure which is a general obligation of the
Secondary market The market where securities are traded borrower.
among investors. Seniority Priority of payment of various debt obligations.
Secondary precedence rules Rules that determine how to Sensitivity analysis A form of analysis used to determine the
rank orders placed at the same time. impact of a change in one or more key variables affecting
Secondary sale Sale of a private company stake to another investment returns or valuation.
private equity firm or group of financial buyers. Separately managed account (SMA) An investment portfolio
Secondary-stage investments The second stage of develop- managed exclusively for the benefit of an individual or
ment of an infrastructure asset. Secondary-stage invest- institution.
ments involve existing infrastructure facilities or fully Separately managed accounts Accounts that are managed
operational assets that do not require further investment in accordance with an investor’s specific investment pref-
or development over the investment horizon. These assets erences and risk tolerance.
generate immediate cash flow and returns expected over Service period The time between the grant and vesting dates
the investment period. for an employee share-based award, usually measured in
Sector indexes Indexes that represent and track different eco- years.
nomic sectors—such as consumer goods, energy, finance, Settlement The closing date at which the counterparties of a
health care, and technology—on either a national, regional, derivative contract exchange payment for the underlying
or global basis. as required by the contract.
Secured With collateral; secured debt is backed by the cash Settlement price The price determined by an exchange’s clear-
flows of the issuer and the collateral as a secondary source inghouse in the daily settlement of the mark-to-market
of repayment. process. The price reflects an average of the final futures
Secured loans Loans collateralized by an asset of the borrower. trades of the day.
Security Evidence of equity or debt interest or in an entity or Share class Types of equity securities that have different voting
a related right, such as a derivative. Often standardized to rights—for example, an issuer may issue Class A shares
conform to security exchange requirements. that carry one vote per share and Class B shares that carry
Security characteristic line A plot of the excess return of a ten votes per share.
security on the excess return of the market. Share repurchase A transaction in which a company buys
Security market index A portfolio of securities representing back its own shares. Unlike stock dividends and stock
a given security market, market segment, or asset class. splits, share repurchases use corporate cash.
Security market line The graphical representation of the Shareholder activism A range of actions by a corporation’s
CAPM formula, showing the relationship between expected shareholders that are intended to result in some change in
return and beta. the corporation, typically a change in the board of directors,
Security selection The process of selecting individual secu- management, or business strategy.
rities; typically, security selection has the objective of Shareholder derivative lawsuit A legal action by a shareholder
generating superior risk-adjusted returns relative to a on behalf of a company, not the shareholder personally,
portfolio’s benchmark. against a third party. Often, the third party is a director
Security tokens Digitizes the ownership rights associated with or manager who the shareholder believes has harmed the
publicly traded securities. company.
Segmenting A process of identifying and grouping customers Shareholder engagement Shareholder engagement reflects
by decision-useful attributes. active ownership by investors in which the investor seeks
Self-attribution bias A bias in which people take too much to influence a corporation’s decisions on ESG matters,
credit for successes (self-enhancing) and assign responsi- either through dialogue with corporate officers or votes
bility to others for failures (self-protecting). at a shareholder assembly (in the case of equity).
Self-control bias A bias in which people fail to act in pursuit Shareholder theory of corporate governance Espoused by
of their long-term, overarching goals because of a lack of Milton Friedman in his famous 1970 essay, the shareholder
self-discipline. theory holds that the objective of a business is to increase
Self-investment limits With respect to investment limitations profits and shareholder value.
applying to pension plans, restrictions on the percentage Shareholders Hold a direct equity position in a firm, and
of assets that can be invested in securities issued by the both individual persons and financial institutions can
pension plan sponsor. be shareholders. The term comes from the individual or
Sell-side firm A broker/dealer that sells securities and provides investment firm literally having a share of the company.
independent investment research and recommendations It is most commonly used when talking about the rights
to their clients (i.e., buy-side firms). and responsibilities that come with being an “owner” of a
Semi-strong-form efficient market A market in which security company, such as stewardship, voting, and engagement.
prices reflect all publicly known and available information. This differentiates it from a situation where an individual
Semiannual bond basis yield Also known as a semiannual or an investment firm lends money or invests in a bond (in
bond equivalent yield, it is an annualized interest rate with other words, they are not an equityholder of a company).
a periodicity of two. Because bond investors do not have a share and are not
Semiannual bond equivalent yield Also known as a semi- owners of a company, they cannot vote. Nonetheless,
annual bond basis yield, it is an annualized interest rate expectations around engagement are increasing for those
with a periodicity of two. who invest in loans and bonds as well, making the difference
Senior debt A debt obligation with higher priority of payment between the two terms more subtle.
than junior debt obligations. Shares Units of ownership interest in a limited company.
 © CFA Institute. For candidate use only. Not for distribution.
G-28 Glossary

Sharpe ratio The average return in excess of the risk-free rate Skewness A quantitative measure of skew (lack of symmetry);
divided by the standard deviation of return; a measure of a synonym of skew. It is computed as the average cubed
the average excess return earned per unit of standard devi- deviation from the mean standardized by dividing by the
ation of return. Also known as the reward-to-variability standard deviation cubed.
ratio. Slope coefficient The change in the estimated value of the
Shelf registration A type of public offering that allows the dependent variable for a one-unit change in the value of
issuer to file a single, all-encompassing offering circular the independent variable.
that covers a series of bond issues. Small country A country that is a price taker in the world
Short A trading position in a derivative contract that gains market for a product and cannot influence the world
value as the price of the underlying moves lower. market price.
Short biased These strategies use quantitative, technical, and Smart beta Involves the use of transparent, rules-based strat-
fundamental analysis to short overvalued equity securities egies as a basis for investment decisions.
with limited or no long-side exposures. Smart contracts Computer programs that are designed to
Short position A position in an asset or contract in which one self-execute on the basis of pre-specified terms and con-
has sold an asset one does not own, or in which a right ditions agreed to by parties to a contract.
under a contract can be exercised against oneself. Social infrastructure investments A category of infrastructure
Short selling A transaction in which borrowed securities are investments that are directed toward human activities
sold with the intention to repurchase them at a lower price and include such assets as educational, health care, social
at a later date and return them to the lender. housing, and correctional facilities, with the focus on pro-
Short-run average total cost The curve describing average viding, operating, and maintaining the asset infrastructure.
total cost when some costs are considered fixed. Soft commodities Standardized agricultural products, such as
Shortfall risk The risk that portfolio value or portfolio return cattle and corn, with markets often involving the physical
will fall below some minimum acceptable level over some delivery of the underlying upon settlement.
time horizon. Soft hurdle rate Hurdle rate where the fee is calculated on
Shutdown point The point at which average revenue is equal the entire return when the hurdle is exceeded. With a soft
to the firm’s average variable cost. hurdle, GPs are able to catch up performance fees once
Side letter A side agreement created between the GP and the hurdle threshold is exceeded.
specific LPs. These agreements exist outside the LPA. Soft power A means of influencing another country’s decisions
These agreements provide additional terms and conditions without force or coercion. Soft power can be built over time
related to the investment agreement. through actions, such as cultural programs, advertisement,
Signpost An indicator, market level, data piece, or event that travel grants, and university exchange.
signals a risk is becoming more or less likely. An analyst Soft-bullet covered bonds Delay the bond default and pay-
can think of signposts like a traffic light. ment acceleration of bond cash flows until a new final
Simple linear regression (SLR) An approach for estimating maturity date, which is usually up to a year after the original
the linear relationship between a dependent variable and maturity date.
a single independent variable by minimizing the sum of Solvency Refers to the condition in which firm value exceeds
the squared deviations between the fitted line and the the face value of debt used to finance the firm’s assets.
observed values. Solvency ratios Ratios that measure a company’s ability to
Simple random sample A subset of a larger population created meet its long-term obligations.
in such a way that each element of the population has an Solvency risk The risk that an organization does not survive or
equal probability of being selected to the subset. succeed because it runs out of cash, even though it might
Simple random sampling The procedure of drawing a sample otherwise be solvent.
to satisfy the definition of a simple random sample. Sophisticated investors Individuals or entities that are per-
Simple yield The sum of the coupon payments plus the mitted in a jurisdiction to trade unregistered or, generally,
straight-line amortized share of the gain or loss divided less regulated securities, including shares of privately held
by the bond’s flat price. Simple yields are used mostly to companies; also called accredited investors.
quote JGBs. Sovereign immunity A principle limiting the legal recourse
Simulation A technique for exploring how a target variable of bondholders holding national government debt from
(e.g. portfolio returns) would perform in a hypothetical forcing the issuer to declare bankruptcy or liquidate assets
environment specified by the user, rather than a historical to settle debt claims.
setting. Spearman rank correlation coefficient A measure of correla-
Simulation trial A complete pass through the steps of a tion applied to ranked data.
simulation. Special dividend A dividend paid by a company that does not
Single-price auction A debt securities auction in which all pay dividends on a regular schedule, or a dividend that
bidders pay the same price. supplements regular cash dividends with an extra payment.
Sinking fund Provisions that reduce the credit risk of a bond Special purpose acquisition company A “blank check”
issue by requiring the issuer to retire a portion of the bond’s company that exists solely for the purpose of acquiring
principal outstanding each year. an unspecified private company within a predetermined
Situational influences External factors, such as environmental period or return capital to investors.
or cultural elements, that shape our behavior. Special purpose entity (SPE) Also referred to as a special
Skewed Not symmetrical. purpose vehicle or SPV, this legal entity is created for a
specific economic purpose. In the case of a project SPV,
 © CFA Institute. For candidate use only. Not for distribution.
Glossary G-29

the entity’s sole purpose is to facilitate the construction, Standard error of the forecast Used to provide an inter-
operation, and financing of an infrastructure asset over val estimate around the estimated regression line. It is
its contractual life. necessary because the regression line does not describe
Special purpose vehicle See special purpose entity. the relationship between the dependent and independent
Special situations An area of private capital investment variables perfectly.
which targets return by investing in stressed, distressed, Standard error of the slope coefficient Calculated for simple
or event-driven opportunities. linear regression by dividing the standard error of the
Split ratings Complex risks viewed very differently by rating estimate by the square root of the variation of the inde-
agencies pendent variable.
Sponsored A type of depository receipt in which the foreign Standardization The process of creating protocols for the
company whose shares are held by the depository has a production, sale, transport, or use of a product or service.
direct involvement in the issuance of the receipts. Standardization occurs when relevant parties agree to
Spot curve Yields-to-maturity on a series of default-risk-free follow these protocols together. It helps support expanded
zero-coupon bonds. economic and financial activities, such as trade and capital
Spot markets Markets in which specific assets are exchanged flows that support higher economic growth and standards
at current prices. Spot markets are often referred to as of living, across borders.
cash markets. Standards of conduct Behaviors required by a group; estab-
Spot prices The current prices prevailing in spot markets. lished benchmarks that clarify or enhance a group’s code
Spot rates Yields-to-maturity on default-risk-free zero-coupon of ethics.
bonds. Standing limit orders A limit order at a price below market
Spread The difference in yield-to-maturity between a bond and which therefore is waiting to trade.
and that of a another bond. State actors Typically national governments, political organi-
Spread risk Bond price risk arising from changes in the yield zations, or country leaders that exert authority over a coun-
spread on credit-risky bonds; reflects changes in the mar- try’s national security and resources. The South African
ket’s assessment and/or pricing of credit migration (or President, Sultan of Brunei, Malaysia’s Parliament, and
downgrade) risk and market liquidity risk. the British Prime Minister are all examples of state actors.
Spurious correlation Refers to: 1) correlation between two Statement of cash flows A financial statement that details the
variables that reflects chance relationships in a particular movement of cash over a period. The statement is classified
dataset; 2) correlation induced by a calculation that mixes into operating, investing, and financing activities.
each of two variables with a third variable; and 3) correla- Static trade-off theory of capital structure A theory pertain-
tion between two variables arising not from a direct relation ing to a company’s optimal capital structure; the optimal
between them but from their relation to a third variable. level of debt is found at the point where additional debt
Stablecoin A cryptocurrency that aims to maintain a stable would cause the costs of financial distress to increase by a
value relative to a specified asset or to a pool or basket greater amount than the benefit of the additional tax shield.
of assets. Statistically significant A result indicating that the null
Stackelberg model A prominent model of strategic decision hypothesis can be rejected; with reference to an estimated
making in which firms are assumed to make their decisions regression coefficient, frequently understood to mean a
sequentially. result indicating that the corresponding population regres-
Staggered board A structure of board elections in which only sion coefficient is different from zero.
part of the board is elected simultaneously—for example, Status quo bias An emotional bias in which people do nothing
only one-third of the board may be up for election each (i.e., maintain the status quo) instead of making a change.
year, so the board can be replaced over three years, not in Statutory voting A common method of voting where each
one year if all seats were elected annually. This structure share represents one vote.
fosters greater continuity of board members but is an Step-up bonds Bonds for which the coupon, be it fixed or
obstacle for shareholders seeking to effect change. floating, increases by specified margins at specified dates.
Stakeholder theory of corporate governance An expansion Stock dividend A type of dividend in which a company distrib-
of the shareholder theory of corporate governance under utes additional shares of its common stock to shareholders
which the objective of a business is to maximize value for, instead of cash.
and balance the interests of, a broad group of stakehold- Stock exchange An exchange in which equity securities are
ers, including shareholders, employees, society, and the traded. See exchanges.
non-human environment. Stock split An increase in the number of shares outstanding
Stakeholders Any party with an interest, financial or with a consequent decrease in share price, but no change
non-financial, in an entity or its actions. to the company’s underlying fundamentals.
Standard deviation The positive square root of the variance; a Stockholder overhang The downward pressure on the share
measure of dispersion in the same units as the original data. price of stock as large blocks of shares are being sold on
Standard error of the estimate A measure of the distance the open market.
between the observed values of the dependent variable Stop order An order in which a trader has specified a stop
and those predicted from the estimated regression. The price condition. Also called stop-loss order.
smaller this value, the better the fit of the model. Also Stop-loss order See stop order.
known as the standard error of the regression and the root Stranded assets A resource that is no longer economically
mean square error. valuable owing to changes in demand, regulations, or
availability of substitutes—for example, a newly discovered
oil well that will not be brought into production.
 © CFA Institute. For candidate use only. Not for distribution.
G-30 Glossary

Strategic asset allocation A long-term strategy that establishes Supervisory board In some jurisdictions, a corporation’s board
target allocations for various asset classes and aims to of directors is formally composed of a supervisory board
optimize the balance between risk and reward by diver- and a management board. The supervisory board appoints
sifying investments. and oversees the management board and often includes
Stratified random sampling A procedure that first divides a representatives of employees and other non-shareholder
population into subpopulations (strata) based on classi- stakeholders.
fication criteria and then randomly draws samples from Supply chain The sequence of processes involved in the cre-
each stratum in sizes proportional to that of each stratum ation and delivery of a physical product to the end cus-
in the population. tomer, both within and external to a firm, regardless of
Street convention For yield measures on fixed-income instru- whether those steps are performed by a single firm.
ments that assume payments are made on scheduled dates Supply shock A typically unexpected disturbance to supply.
and ignore weekends and holidays. Survivorship bias Relates to the inclusion of only current
Stress testing A specific type of scenario analysis that estimates investment funds in a database. As such, the returns of
losses in rare and extremely unfavorable combinations of funds that are no longer available in the marketplace (have
events or scenarios. been liquidated) are excluded from the database. Also see
Strong-form efficient market A market in which security backfill bias.
prices reflect all public and private information. Swap A firm commitment involving a periodic exchange of
Structural budget deficit Also known as the cyclically adjusted cash flows.
budget deficit. The deficit that would exist if the economy Swap contract An agreement between two parties to exchange
was at full employment (or full potential output). a series of future cash flows.
Structural subordination Arises in a holding company struc- Swap execution facility (SEF) A swap trading platform
ture when the debt of operating subsidiaries is serviced by accessed by multiple dealers.
the cash flow and assets of the subsidiaries before funds Swap rate The fixed rate to be paid by the fixed-rate payer
can be passed to the holding company to service debt at specified in a swap contract.
the parent level. Syndicate A group of lenders, typically made up of banks.
Structured notes A broad category of securities that incor- Synthetic protective put The combination of a synthetic long
porate the features of debt instruments and one or more underlying position (i.e., a long forward and risk-free bor-
embedded derivatives designed to achieve a particular rowing) and a purchased put on the underlying.
issuer or investor objective. Systematic risk The risk of severe damage to the real economy
Subordinated debt A class of unsecured debt that ranks below caused by the impairment of (parts of ) the financial system.
a firm’s senior unsecured obligations. Systematic sampling A procedure of selecting every kth mem-
Subordination A form of internal credit enhancement that ber until reaching a sample of the desired size. The sample
relies on creating more than one bond tranche and ordering that results from this procedure should be approximately
the claim priorities for ownership or interest in an asset random.
between the tranches. The ordering of the claim priorities is Systemic risk Refers to risks supervisory authorities believe
called a senior/subordinated structure, where the tranches are likely to have broad impact across the financial mar-
of highest seniority are called senior, followed by subor- ket infrastructure and affect a wide swath of market
dinated or junior tranches. Also called credit tranching. participants.
Subprime loans Lending to borrowers with lower credit Tactical asset allocation A proactive strategy that adjusts asset
quality, high DTI, and/or are loans with higher LTV, and class allocations within a portfolio based on short-term
include loans that are secured by second liens otherwise market trends, economic conditions, or valuation changes
subordinated to other loans. to capitalize on temporary market inefficiencies or oppor-
Sum of squares error (SSE) A measure of the total deviation tunities to improve returns or manage risk more effectively.
between observed and estimated values of the dependent Target capital structure Management’s desired proportions of
variable. It is calculated by subtracting each estimated debt and equity financing, usually stated on a book value
ˆ​i​f​rom its corresponding observed value Y
value ​Y ​ i​​,​ squaring basis or indirectly using a financial leverage metric, such
each of these differences, and then summing all of these as net or gross debt to EBITDA or credit rating.
squared differences. Target independent A bank’s ability to determine the defi-
Sum of squares regression (SSR) A measure of the explained nition of inflation that they target, the rate of inflation
variation in the dependent variable, calculated as the sum that they target, and the horizon over which the target is
of the squared differences between the predicted value to be achieved.
of the dependent variable, Y _̂ i, based on the estimated Target semideviation A measure of downside risk, calculated
regression line, and the mean of the dependent variable, Y ̅. as the square root of the average of the squared deviations
Sum of squares total (SST) A measure of the total variation of observations below the target (also called target down-
in the dependent variable in a simple linear regression. side deviation).
It is calculated by subtracting the mean of the observed Tariffs Taxes that a government levies on imported goods.
_
values ​​Y ​​from each of the observed values ​Y ​ i​​,​ squaring Tax base The amount at which an asset or liability is valued
each of these differences, and then summing all of these for tax purposes.
squared differences. Tax expense An aggregate of an entity’s income tax payable (or
Sunk costs A cost that has already been incurred. recoverable in the case of a tax benefit) and any changes in
Supervised learning A type of machine learning in which the deferred tax assets and liabilities. It is essentially the income
system attempts to learn to model relationships based on tax payable or recoverable if these had been determined
labeled training data. based on accounting profit rather than taxable income.
 © CFA Institute. For candidate use only. Not for distribution.
Glossary G-31

Taxable income The portion of an entity’s income that is sub- Top-down analysis An investment selection approach that
ject to income taxes under the tax laws of its jurisdiction. begins with consideration of macroeconomic conditions
Taxable temporary differences Temporary differences that and then evaluates markets and industries based upon
result in a taxable amount in a future period when deter- such conditions.
mining the taxable profit as the balance sheet item is Total probability rule for expected value A rule explain-
recovered or settled. ing the expected value of a random variable in terms of
Technical analysis A form of security analysis that uses price expected values of the random variable conditional on
and volume data, often displayed graphically, in decision mutually exclusive and exhaustive scenarios.
making. Total return Measures the price appreciation, or percentage
Tender offer A solicitation by a current or prospective share- change in price of the securities in an index or portfolio,
holder to other shareholders to acquire a substantial per- plus any income received over the period.
centage, including 100%, of shares at a specified price. Total return index An index that reflects the price appreciation
This action is usually undertaken by a potential acquirer or percentage change in price of the constituent securities
whose bid was rejected by the issuer’s board of directors, plus any income received since inception.
prompting the potential acquirer to appeal directly to Total working capital The difference between current assets
shareholders. and current liabilities.
Tenor The remaining time to maturity for a bond or derivative Tracking error The standard deviation of the differences
contract. Also called term to maturity. between a portfolio’s returns and its benchmark’s returns;
Term repos Repos with a maturity longer than one day. a synonym of active risk. Also called tracking risk.
Term structure of interest rates Also known as the maturity Tracking risk The standard deviation of the differences between
structure of interest rates, refers to the difference in interest a portfolio’s returns and its benchmark’s returns. Also
rates or benchmark yields by time-to-maturity. called tracking error and active risk.
Terminal stock value The expected value of a share at the end Trade creation When regional integration results in the
of the investment horizon—in effect, the expected selling replacement of higher cost domestic production by lower
price. Also called terminal value. cost imports from other members.
Terminal value The expected value of a share at the end of the Trade diversion When regional integration results in lower-cost
investment horizon—in effect, the expected selling price. imports from non-member countries being replaced with
Test of the mean of the differences A statistical test for dif- higher-cost imports from members.
ferences based on paired observations drawn from samples Trade sale A portion or division of a private company sold via
that are dependent on each other. either direct sale or auction to a strategic buyer interested
Text analytics Involves the use of computer programs to ana- in increasing the scale and scope of an existing business.
lyze and derive meaning typically from large, unstructured Trade settlement date The date when the buyer and seller
text- or voice-based datasets, such as company filings, transfer consideration and securities.
written reports, quarterly earnings calls, social media, Traditional investment markets Markets for traditional
email, internet postings, and surveys. investments, which include all publicly traded debts and
Thematic risks Known risks that evolve and expand over a equities and shares in pooled investment vehicles that hold
period of time. Climate change, pattern migration, the rise publicly traded debts and/or equities.
of populist forces, and the ongoing threat of terrorism fall Tranches A grouping of securities within an issue with char-
into this category. acteristics that vary from other tranches, such as different
Thin-tailed Describes a distribution that has relatively less credit quality and seniority.
weight in the tails than the normal distribution (also called Transfer payments Welfare payments made through the social
platykurtic). security system that exist to provide a basic minimum level
Tiered pricing A pricing approach that charges different prices of income for low-income households.
to different buyers, commonly based on volume purchased. Transition risks Economic and financial losses from the tran-
Timberland investment management organizations Entities sition to a lower-carbon economy in response to climate
that support institutional investors by managing their change—for example, the abandonment of an oil well that
investments in timberland by analyzing and acquiring is no longer economical.
suitable timberland holdings. Treasury Inflation-Protected Securities (TIPS) US Treasury
Time tranching Structure of a securitization that allows for the bonds with a principal that is adjusted for changes in the
redistribution of “prepayment risk” among bond classes Consumer Price Index. TIPS are issued in 5-, 10-, and
by creating bond classes of different expected maturities. 30-year maturities.
Time value The difference between an option’s premium and Treynor ratio A measure of risk-adjusted performance that
its intrinsic value. relates a portfolio’s returns in excess of the risk-free rate
Time value decay The process by which the time value of an to a portfolio’s beta.
option declines toward zero as the option’s expiration date Trimmed mean A mean computed after excluding a stated
is approached. small percentage of the lowest and highest observations.
Time-weighted rate of return The compound rate of growth Triparty repo A repurchase agreement in which the transacting
of one unit of currency invested in a portfolio during a parties agree to use a third-party agent that provides access
stated measurement period; a measure of investment per- to a larger collateral pool and multiple counterparties, as
formance that is not sensitive to the timing and amount well as valuation and safekeeping of assets.
of withdrawals or additions to the portfolio. True yield Measures on fixed-income instruments use actual
Tokenization The process of representing ownership rights payment dates, accounting for weekends and holidays.
to physical assets on a blockchain or distributed ledger. The true yield on an instrument is always lower than the
street convention yield.
 © CFA Institute. For candidate use only. Not for distribution.
G-32 Glossary

Turn-of-the-year effect Calendar anomaly that stock mar- Value proposition The product or service attributes valued
ket returns in January are significantly higher compared by a firm’s target customer that lead those customers to
to the rest of the months of the year, with most of the prefer that firm’s offering.
abnormal returns reported during the first five trading Value-add real estate strategies Strategies that involve
days in January. larger-scale redevelopment and repositioning of existing
Two-fund separation theorem The theory that all investors assets and that may allow the investor to earn a higher
regardless of taste, risk preferences, and initial wealth will return compared with core-plus real estate strategies.
hold a combination of two portfolios or funds: a risk-free Value-based pricing Pricing set primarily by reference to the
asset and an optimal portfolio of risky assets. value of the product or service to customers.
Two-way table A table of the frequency distribution of obser- VaR See value at risk.
vations classified on the basis of two discrete variables. Variance The expected value (the probability-weighted average)
Also known as Contingency table. of squared deviations from a random variable's expected
Two-week repo rate The interest rate on a two-week repur- value.
chase agreement; may be used as a policy rate by a central Variance of a random variable The expected value (the
bank. probability-weighted average) of squared deviations from
Type I error The error of rejecting a true null hypothesis; a a random variable's expected value.
false positive. Variation margin The difference between current margin
Type II error The error of not rejecting a false null hypothesis; required and the current collateral price in a repurchase
false negative. agreement.
Uncommitted lines of credit Sources of bank credit that a Vega The change in a given derivative instrument for a given
bank can refuse to honor. Uncommitted credit lines are small change in volatility, holding everything else constant.
made up to a certain principal amount for a pre-determined A sensitivity measure for options that reflects the effect
maximum maturity, charging a market reference rate plus of volatility.
an issuer-specific spread on only the principal outstanding Velocity The pace at which geopolitical risk impacts an inves-
for the period of use. tor portfolio.
Underfitted When a machine learning model treats true Venture capital Private equity investment in a startup or
parameters as if they are noise and is unable to recognize early-stage company involving high risk and a high rate
relationships in the training data, making the model more of failure.
likely to fail to fully discover patterns that underlie the data. Venture capital fund A hedge fund that seeks to buy, optimize,
Underlying The asset referred to in a derivative contract. and ultimately sell portfolio companies to generate profits.
Underwritten offering A type of securities issue mechanism See private equity fund.
in which the investment bank guarantees the sale of the Venture debt Private debt funding that provides venture capital
securities at an offering price that is negotiated with the backing to start-up or early-stage companies that may be
issuer. Also known as firm commitment offering. generating little or negative cash flow.
Unearned revenue A liability account for money that has Vest To become unconditionally entitled to.
been collected for goods or services that have not yet been Vesting date The day that an employee becomes uncondition-
delivered; payment received in advance of providing a good ally entitled to compensation.
or service. Also called deferred revenue or deferred income. Vintage year The year in which a private capital fund makes
Unimodal A distribution with a single value that is most its first investment.
frequently occurring. Volatility The standard deviation of the continuously com-
Unit economics The expression of revenues and costs on a pounded returns on the underlying asset.
per-unit basis. Vote by proxy A mechanism that allows a designated party—
Unitranche debt A hybrid or blended loan structure combining such as another shareholder, a shareholder representative,
different tranches of secured and unsecured debt into a or management—to vote on the shareholder’s behalf.
single loan with a single, blended interest rate. Voting rights The power of shareholders to cast votes in cor-
Unsecured Without collateral; unsecured debt is backed only porate elections for directors and other matters submitted
by cash flows of the issuer. to a shareholder vote.
Unsponsored A type of depository receipt in which the foreign Warrant An attached option that gives its holder the right to
company whose shares are held by the depository has no buy the underlying stock of the issuing company at a fixed
involvement in the issuance of the receipts. exercise price until the expiration date.
Unsupervised learning A type of machine learning in which Waterfall structures These represent the distribution order
the system tries to learn the structure of unlabeled data. for cash flows and risk to different tranches in a financing
Utility tokens Tokens that provide services within a network, structure.
such as paying for services and network fees. Weak-form efficient market hypothesis The belief that secu-
Validity instructions Instructions which indicate when the rity prices fully reflect all past market data, which refers
order may be filled. to all historical price and volume trading information.
Value added resellers Businesses that distribute a product and Weighted average cost of capital (WACC) The expected cost
also handle more complex aspects of product installation, of debt and equity weighted by the proportion of each used
customization, service, or support. in a company’s capital structure.
Value at risk A money measure of the minimum value of Weighted average coupon rate (WAC) Rate calculated for a
losses expected during a specified time period at a given mortgage pass-through security by weighting the mortgage
level of probability. rate of each mortgage in the pool by the percentage of the
Value chain The systems and processes in a firm that create outstanding mortgage balance relative to the outstanding
value for its customers. amount of all the mortgages in the pool.
 © CFA Institute. For candidate use only. Not for distribution.
Glossary G-33

Weighted average maturity (WAM) Calculated for a mortgage Yield-to-call An internal rate of return on a fixed-income
pass-through security by weighting the remaining number instrument’s cash flows assuming cash flows are received
of months to maturity of each mortgage in the pool by the on scheduled dates and the bond is called at a certain call
outstanding mortgage balance relative to the outstanding price and date.
amount of all the mortgages in the pool. Yield-to-maturity The internal rate of return that an investor
Winsorized mean A mean computed after assigning a stated earns on a bond assuming no default, the bond is held
percentage of the lowest values equal to one specified low to maturity, and periodic cash flows are reinvested at
value and a stated percentage of the highest values equal the yield-to-maturity. Also called yield-to-redemption or
to one specified high value. redemption yield.
Write-off/liquidation Refers to a transaction that has not gone Yield-to-worst The lowest among a fixed-income instrument’s
well, and the investment is likely to lose value. The private yields-to-call and yield-to-maturity. A commonly cited
equity firm revises the value of its investment downward yield measure for fixed-rate callable bonds.
or liquidates the portfolio company. Z-spread or zero-volatility spread is a constant yield spread
Yield curve A graphical depiction of yields-to-maturity of for a bond over a government or swap curve.
bonds from the same issuer across maturities. Zero-coupon bond A bond that does not pay a coupon but is
Yield spread The difference in yield-to-maturity between a priced at a discount and pays its full face value at maturity.
bond and that of a another bond. Zero-coupon bonds Bonds that do not pay interest during
their life. They are issued at a discount to par value and
redeemed at par. Also called pure discount bond.