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Financial Glossary

EAFE index

The European, Australian, and Far East stock index, computed by Morgan Stanley.

Earning power

Earnings before interest and taxes (EBIT) divided by total assets.

Earnings

Net income for the company during the period.

Earnings before interest and taxes (EBIT)

A financial measure defined as revenues less cost of goods sold and selling, general, and administrative expenses. In other words, operating and non-operating profit before the deduction of interest and income taxes.

Earnings per share (EPS)

EPS, as it is called, is a company's profit divided by its number of outstanding shares. If a company earned $2 million in one year had 2 million shares of stock outstanding, its EPS would be $1 per share. The company often uses a weighted average of shares outstanding over the reporting term.

Earnings retention ratio

Plowback rate.

Earnings surprises

Positive or negative differences from the consensus forecast of earnings by institutions such as First Call or IBES. Negative earnings surprises generally have a greater adverse affect on stock prices than the reciprocal positive earnings surprise on stock prices.

Earnings yield

The ratio of earnings per share after allowing for tax and interest payments on fixed interest debt, to the current share price. The inverse of the price/earnings ratio. It's the Total Twelve Months earnings divided by number of outstanding shares, divided by the recent price, multiplied by 100. The end result is shown in percentage.

Economic assumptions

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

Economic defeasance

See: in-substance defeasance.

Economic dependence

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

Economic earnings

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

Economic exposure

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

Economic income

Cash flow plus change in present value.

Economic order quantity (EOQ)

The order quantity that minimizes total inventory costs.

Economic rents

Profits in excess of the competitive level.

Economic risk

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

Economic surplus

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

Economic union

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

Economies of scale

The decrease in the marginal cost of production as a plant's scale of operations increases.

Economies of scope

Scope economies exist whenever the same investment can support multiple profitable activities less expensively in combination than separately.

EDGAR

The Securities & Exchange Commission uses Electronic Data Gathering and Retrieval to transmit company documents such as 10-Ks, 10-Qs, quarterly reports, and other SEC filings, to investors.

Edge corporations

Specialized banking institutions, authorized and chartered by the Federal Reserve Board in the U.S., which are allowed to engage in transactions that have a foreign or international character. They are not subject to any restrictions on interstate banking. Foreign banks operating in the U.S. are permitted to organize and own and Edge corporation.

Effective annual interest rate

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

Effective annual yield

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

Effective call price

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

Effective convexity

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

Effective date

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

Effective duration

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

Effective margin (EM)

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

Effective rate

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

Effective spread

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

Efficiency

Reflects the amount of wasted energy.

Efficient capital market

A market in which new information is very quickly reflected accurately in share prices.

Efficient diversification

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

Efficient frontier

The combinations of securities portfolios that maximize expected return for any level of expected risk, or that minimizes expected risk for any level of expected return.

Efficient Market Hypothesis

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

Efficient portfolio

A portfolio that provides the greatest expected return for a given level of risk (i.e. standard deviation), or equivalently, the lowest risk for a given expected return.

Efficient set

Graph representing a set of portfolios that maximize expected return at each level of portfolio risk.

Either/or facility

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

Either-way market

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

Elasticity of an option

Percentage change in the value of an option given a 1% change in the value of the option's underlying stock.

Electronic data interchange (EDI)

The exchange of information electronically, directly from one firm's computer to another firm's computer, in a structured format.

Electronic depository transfers

The transfer of funds between bank accounts through the Automated Clearing House (ACH) system.

Eligible bankers' acceptances

In the BA market, an acceptance may be referred to as eligible because it is acceptable by the Fed as collateral at the discount window and/or because the accepting bank can sell it without incurring a reserve requirement.

Embedded option

An option that is part of the structure of a bond that provides either the bondholder or issuer the right to take some action against the other party, as opposed to a bare option, which trades separately from any underlying security.

Emerging markets

The financial markets of developing economies.

Employee stock fund

A firm-sponsored program that enables employees to purchase shares of the firm's common stock on a preferential basis.

Employee stock ownership plan (ESOP)

A company contributes to a trust fund that buys stock on behalf of employees.

End-of-year convention

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

Endogenous variable

A value determined within the context of a model.

Endowment funds

Investment funds established for the support of institutions such as colleges, private schools, museums, hospitals, and foundations. The investment income may be used for the operation of the institution and for capital expenditures.

Enhanced indexing

Also called indexing plus, an indexing strategy whose objective is to exceed or replicate the total return performance of some predetermined index.

Enhancement

An innovation that has a positive impact on one or more of a firm's existing products.

Equilibrium market price of risk

The slope of the capital market line (CML). Since the CML represents the return offered to compensate for a perceived level of risk, each point on the line is a balanced market condition, or equilibrium. The slope of the line determines the additional return needed to compensate for a unit change in risk.

Equilibrium rate of interest

The interest rate that clears the market. Also called the market-clearing interest rate.

Equipment trust certificates

Certificates issued by a trust that was formed to purchase an asset and lease it to a lessee. When the last of the certificates has been repaid, title of ownership of the asset reverts to the lessee.

Equity

Represents ownership interest in a firm. Also the residual dollar value of a futures trading account, assuming its liquidation at the going market price.

Equity cap

An agreement in which one party, for an upfront premium, agrees to compensate the other at specific time periods if a designated stock market benchmark is greater than a predetermined level.

Equity claim

Also called a residual claim, a claim to a share of earnings after debt obligation have been satisfied.

Equity collar

The simultaneous purchase of an equity floor and sale of an equity cap.

Equity contribution agreement

An agreement to contribute equity to a project under certain specified conditions.

Equity floor

An agreement in which one party agrees to pay the other at specific time periods if a specific stock market benchmark is less than a predetermined level.

Equityholders

Those holding shares of the firm's equity.

Equity kicker

Used to refer to warrants because they are usually issued attached to privately placed bonds.

Equity-linked policies

Related: Variable life

Equity market

Related:Stock market

Equity multiplier

Total assets divided by total common stockholders' equity; the amount of total assets per dollar of stockholders' equity.

Equity options

Securities that give the holder the right to buy or sell a specified number of shares of stock, at a specified price for a certain (limited) time period. Typically one option equals 100 shares of stock.

Equity swap

A swap in which the cash flows that are exchanged are based on the total return on some stock market index and an interest rate (either a fixed rate or a floating rate). Related: interest rate swap.

Equivalent annual annuity

The equivalent amount per year for some number of years that has a present value equal to a given amount.

Equivalent annual benefit

The equivalent annual annuity for the net present value of an investment project.

Equivalent annual cash flow

Annuity with the same net present value as the company's proposed investment.

Equivalent annual cost

The equivalent cost per year of owning an asset over its entire life.

Equivalent bond yield

Annual yield on a short-term, non-interest bearing security calculated so as to be comparable to yields quoted on coupon securities.

Equivalent loan

Given the after-tax stream associated with a lease, the maximum amount of conventional debt that the same period-by-period after-tax debt service stream is capable of supporting.

Equivalent taxable yield

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

Erosion

An innovation that has a negative impact on one or more of a firm's existing assets.

Ethics

Standards of conduct or moral judgement.

Eurobank

A bank that regularly accepts foreign currency denominated deposits and makes foreign currency loans.

Eurobond

A bond that is (1) underwritten by an international syndicate, (2) offered at issuance simultaneously to investors in a number of countries, and (3) issued outside the jurisdiction of any single country.

Euro CDs

CDs issued by a U.S. bank branch or foreign bank located outside the U.S. Almost all Euro CDs are issued in London.

Euroclear

One of two principal clearing systems in the Eurobond market. It began operations in 1968, is located in Brussels, and is managed by Morgan Guaranty Bank.

Euro-commercial paper

Short-term notes with maturities up to 360 days that are issued by companies in international money markets.

Eurocredits

Intermediate-term loans of Eurocurrencies made by banking syndicates to corporate and government borrowers.

Eurocurrency

Euro just means outside your country. So a Eurodoallar is a certificate of deposit in U.S. dollars in some other country (though mainly traded in London).

Eurocurrency deposit

A short-term fixed rate time deposit denominated in a currency other than the local currency (i.e. US$ deposited in a London bank).

Eurocurrency market

The money market for borrowing and lending currencies that are held in the form of deposits in banks located outside the countries of the currencies issued as legal tender.

Eurodollar

Refers to a certificate of deposit in U.S. dollars in a bank that is not located in the U.S. Most of the Eurodollar deposits are in London banks but it is possible to have Eurodeposits anywhere other than the U.S. Similarly, a Euroyen or Eurodm deposit represents the CD in Yen or DM outside Japan and Germany, respectively.

Eurodollar bonds

Eurobonds denominated in U.S.dollars.

Euroequity issues

Securities sold in the Euromarket. That is, securities initially sold to investors simultaneously in several national markets by an international syndicate. Euromarket. Related: external market

Euro lines

Lines of credit granted by banks (foreign or foreign branches of U.S. banks) for Eurocurrencies.

Euro-medium term note (Euro-MTN)

A non-underwritten Euronote issued directly to the market. Euro-MTNs are offered continuously rather than all at once as a bond issue is. Most Euro-MTN maturities are under five years.

Euro-note

Short- to medium-term debt instrument sold in the Eurocurrency market.

European Currency Unit (ECU)

An index of foreign exchange consisting of about 10 European currencies, originally devised in 1979.

European Monetary System (EMS)

An exchange arrangement formed in 1979 that involves the currencies of European Union member countries.

European option

Option that may be exercised only at the expiration date. Related: american option.

European-style option

An option contract that can only be exercised on the expiration date.

European Union (EU)

An economic association of European countries founded by the Treaty of Rome in 1957 as a common market for six nations. It was known as the European Community before 1993 and is comprised of 15 European countries. Its goals are a single market for goods and services without any economic barriers and a common currency with one monetary authority. The EU was known as the European Community until January 1, 1994.

Euro straight

A fixed-rate coupon Eurobond.

Euroyen bonds

Eurobonds denominated in Japanese yen.

Evaluation period

The time interval over which a money manager's performance is evaluated.

Evening up

Buying or selling to offset an existing market position.

Event risk

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

Events of default

Contractually specified events that allow lenders to demand immediate repayment of a debt.

Event study

A statistical study that examines how the release of information affects prices at a particular time.

Evergreen credit

Revolving credit without maturity.

Exact matching

A bond portfolio management strategy that involves finding the lowest cost portfolio generating cash inflows exactly equal to cash outflows that are being financed by investment.

Exante return

The expected return of a portfolio based on the expected returns of its component assets and their weights.

Except for opinion

An auditor's opinion reflecting the fact that the auditor was unable to audit certain areas of the company's operations because of restrictions imposed by management or other conditions beyond the auditor's control.

Excess reserves

Any excess of actual reserves above required reserves.

Excess return on the market portfolio

The difference between the return on the market portfolio and the riskless rate.

Excess returns

Also called abnormal returns, returns in excess of those required by some asset pricing model.

Exchange

The marketplace in which shares, options and futures on stocks, bonds, commodities and indices are traded. Principal US stock exchanges are: New York Stock Exchange (NYSE), American Stock Exchange (AMEX) and the National Association of Securities Dealers Automatic Quotation System (NASDAQ)

Exchangeable Security

Security that grants the security holder the right to exchange the security for the common stock of a firm other than the issuer of the security.

Exchange controls

Governmental restrictions on the purchase of foreign currencies by domestic citizens or on the purchase of the local domestic currency by foreigners.

Exchange of assets

Acquisition of another company by purchase of its assets in exchange for cash or stock.

Exchange offer

An offer by the firm to give one security, such as a bond or preferred stock, in exchange for another security, such as shares of common stock.

Exchange of stock

Acquisition of another company by purchase of its stock in exchange for cash or shares.

Exchange rate

The price of one country's currency expressed in another country's currency.

Exchange Rate Mechanism (ERM)

The methodology by which members of the EMS maintain their currency exchange rates within an agreed upon range with respect to other member countries.

Exchange rate risk

Also called currency risk, the risk of an investment's value changing because of currency exchange rates.

Exchange risk

The variability of a firm's value that results from unexpected exchange rate changes or the extent to which the present value of a firm is expected to change as a result of a given currency's appreciation or depreciation.

Exclusionary self-tender

The firm makes a tender offer for a given amount of its own stock while excluding targeted stockholders.

Ex-dividend

This literally means ``without dividend.'' The buyer of shares when they are quoted ex-dividend is not entitled to receive a declared dividend.

Ex-dividend date

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

Execution

The process of completing an order to buy or sell securities. Once a trade is executed, it is reported by a Confirmation Report; settlement (payment and transfer of ownership) occurs in the U.S. between 1 (mutual funds) and 5 (stocks) days after an order is executed. Settlement times for exchange listed stocks are in the process of being reduced to three days in the U. S.

Execution costs

The difference between the execution price of a security and the price that would have existed in the absence of a trade, which can be further divided into market impact costs and market timing costs.

Exempt securities

Instruments exempt from the registration requirements of the Securities Act of 1933 or the margin requirements of the SEC Act of 1934. Such securities include government bonds, agencies, munis, commercial paper, and private placements.

Exercise

To implement the right of the holder of an option to buy (in the case of a call) or sell (in the case of a put) the underlying security.

Exercise price

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

Exercise value

The amount of advantage over a current market transaction provided by an in-the-money option.

Exercising the option

The act buying or selling the underlying asset via the option contract.

Exogenous variable

A variable whose value is determined outside the model in which it is used. Also called a parameter.

Expectations hypothesis theories

Theories of the term structure of interest rates which include the pure expectations theory, the liquidity theory of the term structure, and the preferred habitat theory. These theories hold that each forward rate equals the expected future interest rate for the relevant period. These three theories differ, however, on whether other factors also affect forward rates, and how.

Expectations theory of forward exchange rates

A theory of foreign exchange rates that holds that the expected future spot foreign exchange rate t periods in the future equals the current t-period forward exchange rate.

Expected future cash flows

Projected future cash flows associated with an asset of decision.

Expected future return

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

Expected return

The return expected on a risky asset based on a probability distribution for the possible rates of return. Expected return equals some risk free rate (generally the prevailing U.S. Treasury note or bond rate) plus a risk premium (the difference between the historic market return, based upon a well diversified index such as the S&P500 and historic U.S. Treasury bond) multiplied by the assets beta.

Expected return-beta relationship

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

Expected return on investment

The return one can expect to earn on an investment. See: capital asset pricing model.

Expected value

The weighted average of a probability distribution.

Expected value of perfect information

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

Expensed

Charged to an expense account, fully reducing reported profit of that year, as is appropriate for expenditures for items with useful lives under one year.

Expense ratio

The percentage of the assets that were spent to run a mutual fund (as of the last annual statement). This includes expenses such as management and advisory fees, overhead costs and 12b-1 (distribution and advertising ) fees. The expense ratio does not include brokerage costs for trading the portfolio, although these are reported as a percentage of assets to the SEC by the funds in a Statement of Additional Information (SAI). the SAI is available to shareholders on request. Neither the expense ratio or the SAI includes the transaction costs of spreads, normally incurred in unlisted securities and foreign stocks. These two costs can add significantly to the reported expenses of a fund. The expense ratio is often termed an Operating Expense Ratio (OER).

Expiration

The time when the option contract ceases to exist (expires).

Expiration cycle

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

Expiration date

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

Export-Import Bank (Ex-Im Bank)

The U.S. federal government agency that extends trade credits to U.S. companies to facilitate the financing of U.S. exports.

Ex post return

Related: Holding period return

Exposure netting

Offsetting exposures in one currency with exposures in the same or another currency, where exchange rates are expected to move in such a way that losses or gains on the first exposed position should be offset by gains or losses on the second currency exposure.

Expropriation

The official seizure by a government of private property. Any government has the right to seize such property, according to international law, if prompt and adequate compensation is given.

Ex-rights

In connection with a rights offering, shares of stock that are trading without the rights attached.

Ex-rights date

The date on which a share of common stock begins trading ex-rights.

Extendable bond

Bond whose maturity can be extended at the option of the lender or issuer.

Extendable notes

Note the maturity of which can be extended by mutual agreement of the issuer and investors.

Extension

Voluntary arrangements to restructure a firm's debt, under which the payment date is postponed.

Extension date

The day on which the first option either expires or is extended.

Extension swap

Extending maturity through a swap, e.g. selling a 2-year note and buying one with a slightly longer current maturity.

External efficiency

Related: pricing efficiency.

External finance

Finance that is not generated by the firm: new borrowing or a stock issue.

External market

Also referred to as the international market, the offshore market, or, more popularly, the Euromarket, the mechanism for trading securities that (1) at issuance are offered simultaneously to investors in a number of countries and (2) are issued outside the jurisdiction of any single country. Related: internal market

Extinguish

Retire or pay off debt.

Extraordinary positive value

A positive net present value.

Extra or special dividends

A dividend that is paid in addition to a firm's ``regular'' quarterly dividend.

Extrapolative statistical models

Models that apply a formula to historical data and project results for a future period. Such models include the simple linear trend model, the simple exponential model, and the simple autoregressive model.

The Exchange

A nickname for the New York stock exchange. Also known as the Big Board. More than 2,000 common and preferred stocks are traded. The exchange is the oldest in the United States, founded in 1792, and the largest. It is located on Wall Street in New York City.