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Financial Glossary

Macaulay duration

The weighted-average term to maturity of the cash flows from the bond, where the weights are the present value of the cash flow divided by the price.

Magic of diversification

The effective reduction of risk (variance) of a portfolio, achieved without reduction to expected returns through the combination of assets with low or negative correlations (covariances). Related: Markowitz diversification

Mail float

Refers to the part of the collection and disbursement process where checks are trapped in the postal system.

Maintenance margin requirement

A sum, usually smaller than -but part of the original margin, which must be maintained on deposit at all times. If a customer's equity in any futures position drops to, or under, the maintenance margin level, the broker must issue a margin call for the amount at money required to restore the customer's equity in the account to the original margin level. Related: margin, margin call.

Majority voting

Voting system under which each director is voted upon separately. Related: cumulative voting.

Make a market

A dealer is said to make a market when he quotes bid and offered prices at which he stands ready to buy and sell.

Making delivery

Refers to the seller's actually turning over to the buyer the asset agreed upon in a forward contract.

Managed float

Also known as ``dirty'' float, this is a system of floating exchange rates with central bank intervention to reduce currency fluctuations.

Management buyout (MBO)

Leveraged buyout whereby the acquiring group is led by the firm's management.

Management/closely held shares

Percentage of shares held by persons closely related to a company, as defined by the Securities and exchange commission. Part of these percentages often is included in Institutional Holdings -- making the combined total of these percentages over 100. There is overlap as institutions sometimes acquire enough stock to be considered by the SEC to be closely allied to the company.

Management fee

An investment advisory fee charged by the financial advisor to a fund based on the fund's average assets, but sometimes determined on a sliding scale that declines as the dollar amount of the fund increases.

Managerial decisions

Decisions concerning the operation of the firm, such as the choice of firm size, firm growth rates, and employee compensation.

Mandatory redemption schedule

Schedule according to which sinking fund payments must be made.

Mangement's discussion

A report from management to the shareholders that accompanies the firm's financial statements in the annual report. This report explains the period's financial results and enables management to discuss other ideas that may not be apparent in the financial statements in the annual report.

Manufactured housing securities (MHSs)

Loans on manufactured homes - that is, factory-built or prefabricated housing, including mobile homes.

Margin

This allows investors to buy securities by borrowing money from a broker. The margin is the difference between the market value of a stock and the loan a broker makes. Related: security deposit (initial).

Margin account (Stocks)

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

Marginal

Incremental.

Marginal tax rate

The tax rate that would have to be paid on any additional dollars of taxable income earned.

Margin call

A demand for additional funds because of adverse price movement. Maintenance margin requirement, security deposit maintenance

Margin of safety

With respect to working capital management, the difference between 1) the amount of long-term financing, and 2) the sum of fixed assets and the permanent component of current assets.

Margin requirement (Options)

The amount of cash an uncovered (naked) option writer is required to deposit and maintain to cover his daily position valuation and reasonably foreseeable intra-day price changes.

Marked-to-market

An arrangement whereby the profits or losses on a futures contract are settled each day.

Market

Usually refers to the equity market. ``The market wend down today'' meaning that the value of the stock market dropped that day.

Marketability

A negotiable security is said to have good marketability if there is an active secondary market in which it can easily be resold.

Market-book ratio

Market price of a share divided by book value per share.

Market capitalization

The total dollar value of all outstanding shares. Computed as shares times current market price. It is a measure of corporate size.

Market capitalization rate

Expected return on a security. The market-consensus estimate of the appropriate discount rate for a firm's cash flows.

Market clearing

Total demand for loans by borrowers equals total supply of loans from lenders. The market, any market, clears at the equilibrium rate of interest or price.

Market conversion price

Also called conversion parity price, the price that an investor effectively pays for common stock by purchasing a convertible security and then exercising the conversion option. This price is equal to the market price of the convertible security divided by the conversion ratio.

Market cycle

The period between the 2 latest highs or lows of the S&P 500, showing net performance of a fund through both an up and a down market. A market cycle is complete when the S&P is 15% below the highest point or 15% above the lowest point (ending a down market). The dates of the last market cycle are: 12/04/87 to 10/11/90 (low to low).

Marketed claims

Claims that can be bought and sold in financial markets, such as those of stockholders and bondholders.

Market-if-touched (MIT)

A price order, below market if a buy or above market if a sell, that automatically becomes a market order if the specified price is reached.

Market impact costs

Also called price impact costs, the result of a bid/ask spread and a dealer's price concession.

Market maker

Person that brings buyers and sellers together.

Market model

This relationship is sometimes called the single-index model. The market model says that the return on a security depends on the return on the market portfolio and the extent of the security's responsiveness as measured, by beta. In addition, the return will also depend on conditions that are unique to the firm. Graphically, the market model can be depicted as a line fitted to a plot of asset returns against returns on the market portfolio.

Market order

This is an order to immediately buy or sell a security at the current trading price.

Market overhang

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

Marketplace price efficiency

The degree to which the prices of assets reflect the available marketplace information. Marketplace price efficiency is sometimes estimated as the difficulty faced by active management of earning a greater return than passive management would, after adjusting for the risk associated with a strategy and the transactions costs associated with implementing a strategy.

Market portfolio

A portfolio consisting of all assets available to investors, with each asset held -in proportion to its market value relative to the total market value of all assets.

Market price of risk

A measure of the extra return, or risk premium, that investors demand to bear risk. The reward-to-risk ratio of the market portfolio.

Market prices

The amount of money that a willing buyer pays to acquire something from a willing seller, when a buyer and seller are independent and when such an exchange is motivated by only commercial consideration.

Market return

The return on the market portfolio.

Market risk

Risk that cannot be diversified away. Related: systematic risk

Market sectors

The classifications of bonds by issuer characteristics, such as state government, corporate, or utility.

Market segmentation theory or preferred habitat theory

A biased expectations theory that asserts that the shape of the yield curve is determined by the supply of and demand for securities within each maturity sector.

Market timer

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

Market timing

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

Market timing costs

Costs that arise from price movement of the stock during the time of the transaction which is attributed to other activity in the stock.

Market value

(1) The price at which a security is trading and could presumably be purchased or sold. (2) The value investors believe a firm is worth; calculated by multiplying the number of shares outstanding by the current market price of a firm's shares.

Market value ratios

Ratios that relate the market price of the firm's common stock to selected financial statement items.

Market value-weighted index

An index of a group of securities computed by calculating a weighted average of the returns on each security in the index, with the weights proportional to outstanding market value.

Markowitz diversification

A strategy that seeks to combine assets a portfolio with returns that are less than perfectly positively correlated, in an effort to lower portfolio risk (variance) without sacrificing return. Related: naive diversification

Markowitz efficient frontier

The graphical depiction of the Markowitz efficient set of portfolios representing the boundary of the set of feasible portfolios that have the maximum return for a given level of risk. Any portfolios above the frontier cannot be achieved. Any below the frontier are dominated by Markowitz efficient portfolios.

Markowitz efficient portfolio

Also called a mean-variance efficient portfolio, a portfolio that has the highest expected return at a given level of risk.

Markowitz efficient set of portfolios

The collection of all efficient portfolios, graphically referred to as the Markowitz efficient frontier.

Markowitz, Harry

Nobel laureate in economics. Father of modern portfolio theory.

Mark-to-market

The process whereby the book value or collateral value of a security is adjusted to reflect current market value.

Master limited partnership (MLP)

A publicly traded limited partnership.

Matador market

The foreign market in Spain.

Matched book

A bank runs a matched book when the distribution of maturities of its assets and liabilities are equal.

Match fund

A bank is said to match fund a loan or other asset when it does so by buying (taking) a deposit of the same maturity. The term is commonly used in the Euromarket.

Matching concept

The accounting principle that requires the recognition of all costs that are associated with the generation of the revenue reported in the income statement.

Materials requirement planning

Computer-based systems that plan backward from the production schedule to make purchases in order to manage inventory levels.

Mathematical programming

An operations research technique that solves problems in which an optimal value is sought subject to specified constraints. Mathematical programming models include linear programming, quadratic programming, and dynamic programming.

Mature

To cease to exist; to expire.

Maturity

For a bond, the date on which the principal is required to be repaid. In an interest rate swap, the date that the swap stops accruing interest.

Maturity date

Usually used for bonds. The maturity date is the date that the bond finishes and is paid off.

Maturity factoring

Factoring arrangement that provides collection and insurance of accounts receivable.

Maturity phase

A phase of company development in which earnings continue to grow at the rate of the general economy. Related: Three-phase DDM.

Maturity spread

The spread between any two maturity sectors of the bond market.

Maturity value

Related: par value.

Maximum price fluctuation

The maximum amount the contract price can change, up or down, during one trading session, as fixed by exchange rules in the contract specification. Related: limit price.

MBS Depository

A book-entry depository for GNMA securities. The depository was initially operated by MBSCC and is currently in the process of becoming a separately incorporated, participant-owned, limited-purpose trust company organized under the State of New York Banking Law.

MBS servicing

The requirement that the mortgage servicer maintain payment of the full amount of contractually due principal and interest payments whether or not actually collected.

Mean

The expected value of a random variable.

Mean of the sample

The arithmetic average; that is, the sum of the observations divided by the number of observations.

Mean-variance analysis

Evaluation of risky prospects based on the expected value and variance of possible outcomes.

Mean-variance criterion

The selection of portfolios based on the means and variances of their returns. The choice of the higher expected return portfolio for a given level of variance or the lower variance portfolio for a given expected return.

Mean-variance efficient portfolio

Related: Markowitz efficient portfolio

Measurement error

Errors in measuring an explanatory variable in a regression that leads to biases in estimated parameters.

Medium-term note

A corporate debt instrument that is continuously offered to investors over a period of time by an agent of the issuer. Investors can select from the following maturity bands: 9 months to 1 year, more than 1 year to 18 months, more than 18 months to 2 years, etc., up to 30 years.

Membership or a seat on the exchange

A limited number of exchange positions that enable the holder to trade for the holder's own accounts and charge clients for the execution of trades for their accounts.

Merchandise

All movable goods such as cars, textiles, appliances, etc. and 'f.o.b.' means free on board.

Merchant bank

A British term for a bank that specializes not in lending out its own funds, but in providing various financial services such as accepting bills arising out of trade, underwriting new issues, and providing advice on acquisitions, mergers, foreign exchange, portfolio management, etc.

Merger

(1) Acquisition in which all assets and liabilities are absorbed by the buyer. (2) More generally, any combination of two companies.

Mimic

An imitation that sends a false signal.

Minimum price fluctuation

Smallest increment of price movement possible in trading a given contract. Also called point or tick. The zero-beta portfolio with the least risk.

Minimum purchases

For mutual funds, the amount required to open a new account (Minimum Initial Purchase) or to deposit into an existing account (Minimum Additional Purchase). These minimums may be lowered for buyers participating in an automatic purchase plan

Minimum-variance frontier

Graph of the lowest possible portfolio variance that is attainable for a given portfolio expected return.

Minimum-variance portfolio

The portfolio of risky assets with lowest variance.

Minority interest

An outside ownership interest in a subsidiary that is consolidated with the parent for financial reporting purposes.

Mismatch bond

Floating rate note whose interest rate is reset at more frequent intervals than the rollover period (e.g. a note whose payments are set quarterly on the basis of the one-year interest rate).

Modeling

The process of creating a depiction of reality, such as a graph, picture, or mathematical representation.

Modern portfolio theory

Principles underlying the analysis and evaluation of rational portfolio choices based on risk-return trade-offs and efficient diversification.

Modified duration

The ratio of Macaulay duration to (1 + y), where y = the bond yield. Modified duration is inversely related to the approximate percentage change in price for a given change in yield.

Modified pass-throughs

Agency pass-throughs that guarantee (1) timely interest payments and (2) principal payments as collected, but no later than a specified time after they are due. Related: fully modified pass-throughs

Modigliani and Miller Proposition I

A proposition by Modigliani and Miller which states that a firm cannot change the total value of its outstanding securities by changing its capital structure proportions. Also called the irrelevance proposition.

Modigliani and Miller Proposition II

A proposition by Modigliani and Miller which states that the cost of equity is a linear function of the firm's debt/equity-ratio.

Monetary gold

Gold held by governmental authorities as a financial asset.

Monetary / non-monetary method

Under this translation method, monetary items (e.g. cash, accounts payable and receivable, and long-term debt) are translated at the current rate while non-monetary items (e.g. inventory, fixed assets, and long-term investments) are translated at historical rates.

Monetary policy

Actions taken by the Board of Governors of the Federal Reserve System to influence the money supply or interest rates.

Money base

Composed of currency and coins outside the banking system plus liabilities to the deposit money banks.

Money center banks

Banks that raise most of their funds from the domestic and international money markets , relying less on depositors for funds.

Money management

Related: Investment management.

Money manager

Related: Investment manager.

Money market

Money markets are for borrowing and lending money for three years or less. The securities in a money market can be U.S.government bonds, treasury bills and commercial paper from banks and companies.

Money market demand account

An account that pays interest based on short-term interest rates.

Money market fund

A mutual fund that invests only in short term securities, such as bankers' acceptances, commercial paper, repurchase agreements and government bills. The net asset value per share is maintained at $1. 00. Such funds are not federally insured, although the portfolio may consist of guaranteed securities and/or the fund may have private insurance protection.

Money market hedge

The use of borrowing and lending transactions in foreign currencies to lock in the home currency value of a foreign currency transaction.

Money market notes

Publicly traded issues that may be collateralized by mortgages and MBSs.

Money purchase plan

A defined benefit contribution plan in which the participant contributes some part and the firm contributes at the same or a different rate. Also called and individual account plan.

Money rate of return

Annual money return as a percentage of asset value.

Money supply

M1-A: Currency plus demand deposits
M1-B: M1-A plus other checkable deposits.
M2: M1-B plus overnight repos, money market funds, savings, and small (less than $100M) time deposits.
M3: M-2 plus large time deposits and term repos.
L: M-3 plus other liquid assets.

Monitor

To seek information about an agent's behavior; a device that provides such information.

Monte Carlo simulation

An analytical technique for solving a problem by performing a large number of trail runs, called simulations, and inferring a solution from the collective results of the trial runs. Method for calculating the probability distribution of possible outcomes.

Monthly income preferred security (MIP)

Preferred stock issued by a subsidiary located in a tax haven. The subsidiary relends the money to the parent.

Moral hazard

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

Mortality tables

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

Mortgage

A loan secured by the collateral of some specified real estate property which obliges the borrower to make a predetermined series of payments.

Mortgage-backed securities

Securities backed by a pool of mortgage loans.

Mortgage-Backed Securities Clearing Corporation

A wholly owned subsidiary of the Midwest Stock Exchange that operates a clearing service for the comparison, netting, and margining of agency-guaranteed MBSs transacted for forward delivery.

Mortgage bond

A bond in which the issuer has granted the bondholders a lien against the pledged assets. Collateral trust bonds

Mortgage duration

A modification of standard duration to account for the impact on duration of MBSs of changes in prepayment speed resulting from changes in interest rates. Two factors are employed: one that reflects the impact of changes in prepayment speed or price.

Mortgagee

The lender of a loan secured by property.

Mortgage pass-through security

Also called a passthrough, a security created when one or more mortgage holders form a collection (pool) of mortgages sells shares or participation certificates in the pool. The cash flow from the collateral pool is ``passed through'' to the security holder as monthly payments of principal, interest, and prepayments. This is the predominant type of MBS traded in the secondary market.

Mortgage pipeline

The period from the taking of applications from prospective mortgage borrowers to the marketing of the loans.

Mortgage-pipeline risk

The risk associated with taking applications from prospective mortgage borrowers who may opt to decline to accept a quoted mortgage rate within a certain grace period.

Mortgager

The borrower of a loan secured by property.

Mortgage rate

The interest rate on a mortgage loan.

Most distant futures contract

When several futures contracts are considered, the contract settling last. Related: nearby futures contract

Moving average

Used in charts and technical analysis, the average of security or commodity prices constructed in a period as short as a few days or as Long as several years and showing trends for the latest interval. As each new variable is included in calculating the average, the last variable of the series is deleted.

Multicurrency clause

Such a clause on a Euro loan permits the borrower to switch from one currency to another currency on a rollover date.

Multicurrency loans

Give the borrower the possibility of drawing a loan in different currencies.

Multifactor CAPM

A version of the capital asset pricing model derived by Merton that includes extra-market sources of risk referred to as factor.

Multifamily loans

Loans usually represented by conventional mortgages on multi-family rental apartments.

Multinational corporation

A firm that operates in more than one country.

Multi-option financing facility

A syndicated confirmed credit line with attached options.

Multiperiod immunization

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

Multiple-discriminant analysis (MDA)

Statistical technique for distinguishing between two groups on the basis of their observed characteristics.

Multiple-issuer pools

Under the GNMA-II program, pools formed through the aggregation of individual issuers' loan packages.

Multiple rates of return

More than one rate of return from the same project that make the net present value of the project equal to zero. This situation arises when the IRR method is used for a project in which negative cash flows follow positive cash flows. For each sign change in the cash flows, there is a rate of return.

Multiple regression

The estimated relationship between a dependent variable and more than one explanatory variable.

Multiples

Another name for price/earnings ratios.

Multirule system

A technical trading strategy that combines mechanical rules, such as the CRISMA (cumulative volume, relative strength, moving average) Trading System of Pruitt and White.

Municipal bond

State or local governments offer muni bonds or municipals, as they are called, to pay for special projects such as highways or sewers. The interest that investors receive is exempt from some income taxes.

Municipal notes

Short-term notes issued by municipalities in anticipation of tax receipts, proceeds from a bond issue, or other revenues.

Mutual fund

Mutual funds are pools of money that are managed by an investment company. They offer investors a variety of goals, depending on the fund and its investment charter. Some funds, for example, seek to generate income on a regular basis. Others seek to preserve an investor's money. Still others seek to invest in companies that are growing at a rapid pace. Funds can impose a sales charge, or load, on investors when they buy or sell shares. Many funds these days are no load and impose no sales charge. Mutual funds are investment companies regulated by the Investment Company Act of 1940.
Related: open-end fund, closed-end fund.

Mutual fund theorem

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

Mutually exclusive investment decisions

Investment decisions in which the acceptance of a project precludes the acceptance of one or more alternative projects.

Mutual offset

A system, such as the arrangement between the CME and SIMEX, which allows trading positions established on one exchange to be offset or transferred on another exchange.