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Financial Glossary

Ladder strategy

A bond portfolio strategy in which the portfolio is constructed to have approximately equal amounts invested in every maturity within a given range.

Lag

Payment of a financial obligation later than is expected or required, as in lead and lag. Also, the number of periods that an independent variable in a regression model is ``held back'' in order to predict the dependent variable.

Lag response of prepayments

There is typically a lag of about three months between the time the weighted average coupon of an MBS pool has crossed the threshold for refinancing and an acceleration in prepayment speed is observed.

Lambda

The ratio of a change in the option price to a small change in the option volatility. It is the partial derivative of the option price with respect to the option volatility.

Last-In-First-Out (LIFO)

A method of valuing inventory that uses the cost of the most recent item in inventory first.

Last split

After a stock split, the number of shares distributed for each share held and the date of the distribution.

Last trading day

The final day under an exchange's rules during which trading may take place in a particular futures or options contract. Contracts outstanding at the end of the last trading day must be settled by delivery of underlying physical commodities or financial instruments, or by agreement for monetary settlement depending upon futures contract specifications.

Law of large numbers

The mean of a random sample approaches the mean (expected value) of the population as the sample grows.

Law of one price

An economic rule stating that a given security must have the same price regardless of the means by which one goes about creating that security. This implies that if the payoff of a security can be synthetically created by a package of other securities, the price of the package and the price of the security whose payoff it replicates must be equal.

Lead

Payment of a financial obligation earlier than is expected or required.

Leading economic indicators

Economic series that tend to rise or fall in advance of the rest of the economy.

Lead manager

The commercial or investment bank with the primary responsibility for organizing syndicated bank credit or bond issue. The lead manager recruits additional lending or underwriting banks, negotiates terms of the issue with the issuer, and assesses market conditions.

Lead underwriter

The head of a syndicate of financial firms that are sponsoring an initial public offering of securities or a seconday offering of securities. Could also apply to bond issues.

Leakage

Release of information to some persons before official public announcement.

LEAPS

Long-term equity anticipation securities. Long-term options.

Lease

A long-term rental agreement, and a form of secured long-term debt.

Lease Rate

The payment per period stated in a lease contract.

Ledger cash

A firm's cash balance as reported in its financial statements. Also called book cash.

Legal bankruptcy

A legal proceeding for liquidating or reorganizing a business.

Legal capital

Value at which a company's shares are recorded in its books.

Legal defeasance

The deposit of cash and permitted securities, as specified in the bond indenture, into an irrevocable trust sufficient to enable the issuer to discharge fully its obligations under the bond indenture.

Legal investments

Investments that a regulated entity is permitted to make under the rules and regulations that govern its investing.

Lend

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

Lender

Businesses that provide loans to others.

Lessee

An entity that leases an asset from another entity.

Lessor

An entity that leases an asset to another entity.

Letter of comment

A communication to the firm from the SEC that suggests changes to its registration statement.

Letter of credit (L/C)

A form of guarantee of payment issued by a bank used to guarantee the payment of interest and repayment of principal on bond issues.

Letter stock

Privately placed common stock, so-called because the SEC requires a letter from the purchaser stating that the stock is not intended for resale.

Level-coupon bond

Bond with a stream of coupon payments that are the same throughout the life of the bond.

Level pay

The characteristic of the scheduled principal and interest payments due under a mortgage such that total monthly payment of P&I is the same while characteristically the principal payment component of the monthly payment becomes gradually greater while the monthly interest payment becomes less.

Leverage

The use of debt financing.

Leverage clientele

A group of shareholders who, because of their personal leverage, seek to invest in corporations that maintain a compatible degree of corporate leverage.

Leveraged beta

The beta of a leveraged required return; that is, the beta as adjusted for the degree of leverage in the firm's capital structure.

Leveraged buyout (LBO)

A transaction used for taking a public corporation private financed through the use of debt funds: bank loans and bonds. Because of the large amount of debt relative to equity in the new corporation, the bonds are typically rated below investment grade, properly referred to as high-yield bonds or junk bonds. Investors can participate in an LBO through either the purchase of the debt (i.e., purchase of the bonds or participation in the bank loan) or the purchase of equity through an LBO fund that specializes in such investments.

Leveraged equity

Stock in a firm that relies on financial leverage. Holders of leveraged equity face the benefits and costs of using debt.

Leveraged lease

A lease arrangement under which the lessor borrows a large proportion of the funds needed to purchase the asset and grants the lender a lien on the assets and a pledge of the lease payments to secure the borrowing.

Leveraged portfolio

A portfolio that includes risky assets purchased with funds borrowed.

Leveraged required return

The required return on an investment when the investment is financed partially by debt.

Leverage ratios

Measures of the relative contribution of stockholders and creditors, and of the firm's ability to pay financing charges. Value of firm's debt to the total value of the firm.

Leverage rebalancing

Making transactions to adjust (rebalance) a firm's leverage ratio back to its target.

Liability

A financial obligation, or the cash outlay that must be made at a specific time to satisfy the contractual terms of such an obligation.

Liability funding strategies

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

Liability swap

An interest rate swap used to alter the cash flow characteristics of an institution's liabilities so as to provide a better match with its assets.

LIBOR

The London Interbank Offered Rate; the rate of interest that major international banks in London charge each other for borrowings. Many variable interest rates in the U.S. are based on spreads off of LIBOR. There are many different LIBOR tenors.

Lien

A security interest in one or more assets that is granted to lenders in connection with secured debt financing.

LIFO (Last-in-first-out)

The last-in-first-out inventory valuation methodology. A method of valuing inventory that uses the cost of the most recent item in inventory first.

Lifting a leg

Closing out one side of a long-short arbitrage before the other is closed.

Limitation on asset dispositions

A bond covenant that restricts in some way a firm's ability to sell major assets.

Limitation on liens

A bond covenant that restricts in some way a firm's ability to grant liens on its assets.

Limitation on merger, consolidation, or sale

A bond covenant that restricts in some way a firm's ability to merge or consolidate with another firm.

Limitation on sale-and-leaseback

A bond covenant that restricts in some way a firm's ability to enter into sale and lease-back transactions.

Limitation on subsidiary borrowing

A bond covenant that restricts in some way a firm's ability to borrow at the subsidiary level.

Limited liability

Limitation of possible loss to what has already been invested.

Limited-liability instrument

A security, such as a call option, in which the owner can only lose his initial investment.

Limited partner

A partner who has limited legal liability for the obligations of the partnership.

Limited partnership

A partnership that includes one or more partners who have limited liability.

Limited-tax general obligation bond

A general obligation bond that is limited as to revenue sources.

Limit order

An order to buy a stock at or below a specified price or to sell a stock at or above a specified price. For instance, you could tell a broker ``Buy me 100 shares of XYZ Corp at $8 or less'' or to ``sell 100 shares of XYZ at $10 or better.'' The customer specifies a price and the order can be executed only if the market reaches or betters that price. A conditional trading order designed to avoid the danger of adverse unexpected price changes.

Limit order book

A record of unexecuted limit orders that is maintained by the specialist. These orders are treated equally with other orders in terms of priority of execution.

Limit price

Maximum price fluctuation

Linear programming

Technique for finding the maximum value of some equation subject to stated linear constraints.

Linear regression

A statistical technique for fitting a straight line to a set of data points.

Line of credit

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

Linter's observations

John Lintner's work (1956) suggested that dividend policy is related to a target level of dividends and the speed of adjustment of change in dividends.

Liquid asset

Asset that is easily and cheaply turned into cash - notably cash itself and short-term securities.

Liquidating dividend

Payment by a firm to its owners from capital rather than from earnings.

Liquidation

When a firm's business is terminated, assets are sold, proceeds pay creditors and any leftovers are distributed to shareholders. Any transaction that offsets or closes out a Long or short position. Related: buy in, evening up, offsetliquidity.

Liquidation rights

The rights of a firm's securityholders in the event the firm liquidates.

Liquidation value

Net amount that could be realized by selling the assets of a firm after paying the debt.

Liquidator

Person appointed by unsecured creditors in the United Kingdom to oversee the sale of an insolvent firm's assets and the repayment of its debts.

Liquidity

A market is liquid when it has a high level of trading activity, allowing buying and selling with minimum price disturbance. Also a market characterized by the ability to buy and sell with relative ease.

Liquidity diversification

Investing in a variety of maturities to reduce the price risk to which holding long bonds exposes the investor.

Liquidity preference hypothesis

The argument that greater liquidity is valuable, all else equal. Also, the theory that the forward rate exceeds expected future interest rates.

Liquidity premium

Forward rate minus expected future short-term interest rate.

Liquidity ratios

Ratios that measure a firm's ability to meet its short-term financial obligations on time.

Liquidity risk

The risk that arises from the difficulty of selling an asset. It can be thought of as the difference between the ``true value'' of the asset and the likely price, less commissions.

Liquidity theory of the term structure

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

Liquid yield option note (LYON)

Zero-coupon, callable, putable, convertible bond invented by Merrill Lynch & Co.

Listed stocks

Stocks that are traded on an exchange.

Load fund

A mutual fund with shares sold at a price including a large sales charge -- typically 4% to 8% of the net amount indicated. Some ``no-load'' funds have distribution fees permitted by article 12b-1 of the Investment Company Act; these are typically 0. 25%. A ``true no-load'' fund has neither a sales charge nor Freddie Mac(Federal Home Loan Mortgage Corporation) program, the aggregation that the fund purchaser receives some investment advice or other service worthy of the charge.

Load-to-load

Arrangement whereby the customer pays for the last delivery when the next one is received.

Loan

If you borrow $1 million dollars, it is said that you have taken out a loan for $1 million dollars.

Loan amortization schedule

The schedule for repaying the interest and principal on a loan.

Loan syndication

Group of banks sharing a loan. See:syndicate.

Loan value

The amount a policyholder may borrow against a whole life insurance policy at the interest rate specified in the policy.

Local expectations theory

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

Lockbox

A collection and processing service provided to firms by banks, which collect payments from a dedicated postal box that the firm directs its customers to send payment to. The banks make several collections per day, process the payments immediately, and deposit the funds into the firm's bank account.

Locked market

A market is locked if the bid = ask price. This can occur, for example, if the market is brokered and brokerage is paid by one side only, the initiator of the transaction.

Lock-out

With PAC bond CMO classes, the period before the PAC sinking fund becomes effective. With multifamily loans, the period of time during which prepayment is prohibited.

Lock-up CDs

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

Log-linear least-squares method

A statistical technique for fitting a curve to a set of data points. One of the variables is transformed by taking its logarithm, and then a straight line is fitted to the transformed set of data points.

Lognormal distribution

A distribution where the logarithm of the variable follows a normal distribution. Lognormal distributions are used to describe returns calculated over periods of a year or more.

London International Financial Futures Exchange (LIFFE)

A London exchange where Eurodollar futures as well as futures-style options are traded.

Long

One who has bought a contract(s) to establish a market position and who has not yet closed out this position through an offsetting sale; the opposite of short.

Long bonds

Bonds with a long current maturity. The ``long bond'' is the 30-year U.S. government bond.

Long coupons

(1) Bonds or notes with a long current maturity. (2) A bond on which one of the coupon periods, usually the first, is longer than the other periods or the standard period.

Long hedge

The purchase of a futures contract(s) in anticipation of actual purchases in the cash market. Used by processors or exporters as protection against an advance in the cash price. Related: Hedge, short hedge

Long position

An options position where a person has executed one or more option trades where the net result is that they are an ``owner'' or holder of options (i. e. the number of contracts bought exceeds the number of contracts sold).
Occurs when an individual owns securities. An owner of 1,000 shares of stock is said to be ``Long the stock.'' Related: Short position

Long run

A period of time in which all costs are variable; greater than one year.

Long straddle

A straddle in which a long position is taken in both a put and call option.

Long-term

In accounting information, one year or greater.

Long-term assets

Value of property, equipment and other capital assets minus the depreciation. This is an entry in the bookkeeping records of a company, usually on a ``cost'' basis and thus does not necessarily reflect the market value of the assets.

Long-term debt

An obligation having a maturity of more than one year from the date it was issued. Also called funded debt.

Long-term debt/capitalization

Indicator of financial leverage. Shows long-term debt as a proportion of the capital available. Determined by dividing long-term debt by the sum of long-term debt, preferred stock and common stockholder equity.

Long-term debt ratio

The ratio of long-term debt to total capitalization.

Long-term debt to equity ratio

A capitalization ratio comparing long-term debt to shareholders' equity.

Long-term financial plan

Financial plan covering two or more years of future operations.

Long-term liabilities

Amount owed for leases, bond repayment and other items due after 1 year.

Lookback option

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

Look-thru

A method for calculating U.S. taxes owed on income from controlled foreign corporations that was introduced by the Tax Reform Act of 1986.

Low-coupon bond refunding

Refunding of a low coupon bond with a new, higher coupon bond.

Low price

This is the day's lowest price of a security that has changed hands between a buyer and a seller.

Low price-earnings ratio effect

The tendency of portfolios of stocks with a low price-earnings ratio to outperform portfolios consisting of stocks with a high price-earnings ratio.