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Reproduced with the kind permission of Jim Wyckoff
Glossary R-Z Rally An upward movement of prices. Opposite of recovery. Related: Recovery Range The high and low prices, or high and low bids and offers recorded during a specified time. Rate anticipation swaps An exchange of bonds in a portfolio for new bonds that will achieve the target portfolio duration, based on the investor’s assumptions about future changes in interest rates. Reaction A decline in prices following an advance. Opposite of rally. Related: Rally Reference rate A benchmark interest rate (such as LMOR), used to specify conditions of an interest rate swap or an interest rate agreement. Refunding The redemption of a bond with proceeds received from issuing lower-cost debt obligations ranking equal to or superior to the debt to be redeemed. Registered representative A person registered with the CFTC who is employed by, and soliciting business for, a commission house or futures commission merchant. Related: CFTC, Futures commission merchant Relative strength Also called price momentum or price persistence, the ratio of the price of a stock to some price index. Changes in the ratio can be interpreted as uptrends or downtrends relative to the price index. Relative yield spread The ratio of the yield spread to the yield level. Rembrandt market The foreign market in the Netherlands. Replicating portfolio A portfolio constructed to match an index or benchmark. Required reserves The dollar amounts based on reserve ratios that banks are required to keep on deposit at a Federal Reserve Bank. Required yield Generally referring to bonds, the yield required by the marketplace to match available returns for financial instruments with comparable risk. Reserve An accounting entry that properly reflects the contingent liabilities of an insurance company. Reserve ratios Specified percentages of deposits, established by the Federal Reserve Board, that banks must keep in a non-interest-bearing account at one of the twelve Federal Reserve Banks. Reset frequency in an interest rate swap The frequency with which the floating rate changes. Residual risk. Related: Unsystematic risk Retail investors individual investors Institutional investors. Retention rate The percentage of present earnings held back or retained by a corporation. Return The change in the value of a portfolio over an evaluation period, including any distributions made from the portfolio during that period. Return on stockholders’ equity The ratio of earnings to stockholders’ equity. Return on total assets The ratio of earnings available to common stockholders to total assets. Return-to-maturity expectations interpretation A variant of pure expectations theory which suggests that the return that an investor will realize by rolling over short-term bonds to some investment horizon will be the same as holding a zero-coupon bond with a maturity that is the same as that investment horizon. Revenue bond A bond issued by a municipality to finance either a project or an enterprise where the issuer pledges to the bondholders the revenues generated by the operating projects financed, for instance, hospital revenue bonds and sewer revenue bonds. Revenue fund A fund accounting for all revenues from an enterprise financed by a municipal revenue bond. Rings Trading arenas located on the floor of an exchange in which traders execute orders. Sometimes called a pit. Related: Pit Risk averse A risk-averse investor is one who when faced with two investments with the same expected return but two different risks will prefer the one with the lower risk. Risk-free or riskless asset An asset whose future return is known today with certainty. The risk free asset is commonly defined as short-term obligations of the U.S. government. Risk indexes Categories of risk used to calculate fundamental beta, including (1) market variability, (2) earnings variability, (3) low valuation and unsuccess, (4) immaturity and smallness, (5) growth orientation, and (6) financial risk. Risk premium The reward for holding the risky market portfolio rather than the risk-free asset. The spread between Treasury and non-Treasury bonds of comparable maturity. Risk premium approach The most common approach for tactical asset allocation to determine the relative valuation of asset classes based on expected returns. Risky asset An asset whose future return is uncertain. Round lot A trading order typically of 100 shares of a stock or some multiple of 100. Related: Odd lot Round-trip transaction costs Costs of completing a transaction, including commissions, market impact costs, and taxes. Round-turn Procedure by which the long or short position of an individual is offset by an opposite transaction or by accepting or making delivery of the actual financial instrument or physical commodity. Scalp To trade for small gains. It normally involves establishing and liquidating a position quickly, usually within the same day. Scenario analysis The use of horizon analysis to project bond total returns under different reinvestment rates and future market yields. Search costs Costs associated with locating a counterparty to a trade, including explicit costs (such as advertising) and implicit costs (such as the value of time). Related: Information costs Secondary market The market where securities are traded after they are initially offered in the primary market. Securities analysts Related: Financial analysts Securitization The process of creating a passthrough, such as the mortgage pass-through security, by which the pooled assets become standard securities backed by those assets. Security deposit (initial) Synonymous with the term margin. A cash amount of funds that must be deposited with the broker for each contract as a guarantee of fulfillment of the futures contact. It is not considered as part payment or purchase. Related: Margin Security deposit (maintenance) A description of the risk return relationship for individual securities, expressed in a form similar to the capital market line. Related: Maintenance margin security market line (SML). Sell hedge Related: Short hedge Sell limit order Conditional trading order that indicates that a security may be sold at the designated price or higher. Related: Buy limit order Sell-side analyst Also called a Wall Street analyst, a financial analyst who works for a brokerage firm and whose recommendations are passed on to the brokerage firm’s customers. Selling short A trade in which the investor (working through a broker) borrows a security, sells it, repurchases it at a later time, and then returns it to the party who initially loaned the security. If the price has fallen, the short seller profits. When the security is returned, the investor is said to have "covered the short position." Semistrong form efficiency A form of pricing efficiency where the price of the security fully reflects all public information (including, but not limited to, historical price and trading patterns). Compare weak form efficiency and strong form efficiency. Serial bonds Corporate bonds arranged so that specified principal amounts become due on specified dates. Related: Term bonds Settlement date Also called the delivery date, the designated date at which the parties to a futures contract must transact. Settlement Price A figure determined by the closing range which is used to calculate gains and losses in futures market accounts. Settlement prices are used to determine gains, losses, margin calls, and invoice prices for deliveries. Related: Closing range Settlement rate The rate suggested in Financial Accounting Standard Board (FASB) 87 for discounting the obligations of a pension plan. The rate at which the pension benefits could be effectively settled if the pension plan wished to terminate its pension obligation. Sharpe benchmark A statistically created benchmark that adjusts for a manager’s index-like tendencies. Sharpe Index A measure of a portfolio’s excess return relative to the total variability of the portfolio. Related: Treynor Index Short One who has sold a contract to establish a market position and who has not yet closed out this position through an offsetting purchase; the opposite of a long. Related: Long Short hedge The sale of a futures contract(s) to eliminate or lessen the possible decline in value ownership of an approximately equal amount of the actual financial instrument or physical commodity. Related: Long hedge Short position In the cash market, a sale of securities not owned. The securities sold are borrowed. In the futures market, the sale of a futures contract with no offsetting long position. In the options market, the sale of an option with no offsetting long position. Short selling Establishing a market position by selling a futures contract. Short squeeze A situation in which a lack of supply tends to force prices upward. Short straddle A straddle in which one put and one call are sold. Short-term solvency ratios Ratios used to judge the adequacy of liquid assets for meeting short-term obligations as they come due, including (1) the current ratio, (2) the acid-test ratio, (3) the inventory turnover ratio, and (4) the accounts receivable turnover ratio. Shortfall risk The risk of falling short of any investment target. Simple moving average The mean, calculated at any time over a past period of fixed length. Single-index model Related: Market model Sinking fund requirement A condition included in some corporate bond indentures that requires the issuer to retire a specified portion of debt each year. Any principal due at maturity is called the balloon maturity. Small-firm effect The tendency of small firms (in terms of total market capitalization) to outperform the stock market (consisting of both large and small firms). Specialist On an exchange, the member firm that is designated as the market maker (or dealer for a listed common stock. Only one specialist can be designated for a given stock, but dealers may be specialists for several stocks. In contrast, there can be multiple market makers in the OTC market. Speculator One, who attempts to anticipate price changes and, through buying and selling contracts, aims to make profits. A speculator does not use the market in connection with the production, processing, marketing or handling of a product. Speed Related: Prepayment speed Spot markets Related: Cash markets Spot month The nearest delivery month on a futures contract. Spot price The current market price of the actual physical commodity. Also called cash price. Spot rate The theoretical yield on a zero-coupon Treasury security. Spot rate curve The graphical depiction of the relationship between the spot rates and maturity. Spread The simultaneous purchase and sale of separate futures or options contracts for the same commodity for delivery in different months. Also known as a straddle. Spread income Also called margin income, the difference between income and cost. For a depository institution, the difference between the assets it invests in (loans and securities) and the cost of its funds (deposits and other sources). Spread strategy A strategy that involves a position in one or more options so that the cost of buying an option is funded entirely or in part by selling another option in the same underlying. Standard deviation The square root of the variance. A measure of dispersion of a set of data from their mean. Standardized value Also called the normal deviate, the distance of one data point from the mean, divided by the standard deviation of the distribution. Stated conversion price At the time of issuance of a convertible security, the price the issuer effectively grants the securityholder to purchase the common stock, equal to the par value of the convertible security divided by the conversion ratio. Steepening of the yield curve A change in the yield curve where the spread between the yield on a long-term and short-term Treasury has increased. Compare flattening of the yield curve and butterfly shift. Step-up bond A bond that pays a lower coupon rate for an initial period which then increases to a higher coupon rate. Related: Deferred-interest bond, Payment-in-kind bond Stochastic models Liability-matching models that assume that the liability payments and the asset cash flows are uncertain. Related: Deterministic models Stock index option An option in which the underlying is a common stock index. Stock market Also called the equity market, the market for trading equities. Stock option An option in which the underlying is the common stock of a corporation. Stock replacement strategy A strategy for enhancing a portfolio’s return, employed when the futures contract is expensive based on its theoretical price, involving a swap between the futures, Treasury bills portfolio and a stock portfolio. Stop-limit order A stop order that designates a price limit. In contrast to the stop order, which becomes a market order if the stop is reached, the stop-limit order becomes a limit order if the stop is reached. Stop order (or stop) An order to buy or sell at the market when a definite price is reached, either above (on a buy) or below (on a sell) the price that prevailed when the order was given. Straddle Purchase or sale of an equal number of puts and calls with the same terms at the same time. Related: Spread Straight value Also called investment value, the value of a convertible security without the conversion option. Stratified equity indexing A method of constructing a replicating portfolio in which the stocks in the index are classified into stratum, and each stratum is represented in the portfolio. Stratified sampling approach to indexing An approach in which the index is divided into cells, each representing a different characteristic of the index, such as duration or maturity. Stratified sampling bond indexing A method of bond indexing that divides the index into cells, each cell representing a different characteristic, and that buys bonds to match those characteristics. Strike index For a stock index option, the index value at which the buyer of the option can buy or sell the underlying stock index. The strike index is converted to a dollar value by multiplying by the option’s contract multiple. Related: Strike price Strike price The price at which an option can be converted by exercise into the underlying futures contract. Strong form efficiency Pricing efficiency, where the price of a security reflects all information, whether or not it is publicly available. Related: Weak form efficiency, Semistrong form efficiency Structured portfolio strategy A strategy in which a portfolio is designed to achieve the performance of some predetermined liabilities that must be paid out in the future. Swap reversal An interest rate swap designed to end a counterparty’s role in another interest rate swap, accomplished by counterbalancing the original swap in maturity, reference rate, and notional amount. Swap sale Also called a swap assignment, a transaction that ends one counterparty’s role in an interest rate swap by substituting a new counterparty whose credit is acceptable to the other original counterparty. Swaptions Options on interest rate swaps. The buyer of a swaption has the right to enter into an interest rate swap agreement by some specified date in the future. The swaption agreement will specify whether the buyer of the swaption will be a fixed-rate receiver or a fixed-rate payer. The writer of the swaption becomes the counterparty to the swap if the buyer exercises. Switching Liquidating an existing position and simultaneously reinstating a position in another futures contract of the same type. Symmetric cash matching An extension of cash flow matching that allows for the short-term borrowing of funds to satisfy a liability prior to the liability due date, resulting in a reduction in the cost of funding liabilities. Systematic risk Also called undiversifiable risk or market risk, the minimum level of risk that can be obtained for a portfolio by means of diversification across a large number of randomly chosen assets. Related: Unsystematic risk Tactical assest allocation (TAA) An asset allocation strategy that allows active departures from the normal asset mix based upon rigorous objective measures of value. Tangible asset An asset whose value depends on particular physical properties. These include reproducible assets such as buildings or machinery and non-reproducible assets such as land, a mine, or a work of art. Related: Intangible asset Technical analysts Also called chartists or technicians, analysts who use mechanical rules to detect changes in the supply of and demand for a stock and capitalize on the expected change. Technical descriptors In the model for calculating fundamental beta, ratios in the market variability risk index which rely on market-related data. Technician Related: Technical analysts Tender To offer for delivery against futures. Term bonds Often referred to as bullet-maturity bonds or simply bullet bonds, bonds whose principal is payable at maturity. Related: Serial bonds Term repo A repurchase agreement with a term of more than one day. Term structure of interest rates The relationship between the yields on otherwise comparable securities with different maturities, often depicted as a yield curve. Term to maturity The time remaining on a bond’s life, or the date on which the debt will cease to exist and the borrower will have completely paid off the amount borrowed. Term trust A closed-end fund that has a fixed termination or maturity date. Theoretical futures price Also called the fair price, the equilibrium futures price. Theoretical spot rate curve A curve derived from theoretical considerations as applied to the yields of actually traded Treasury debt securities because there are no zero-coupon Treasury debt issues with a maturity greater than one year. Like the yield curve, this is a graphical depiction of the term structure of interest rates. Theta Also called time decay, the ratio of the change in an option price to the decrease in time to expiration. Three-phase DDM A version of the dividend discount model which applies a different expected dividend rate depending on a company’s life-cycle phase, growth phase, transition phase, or maturity phase. Tick Refers to change in price, either up or down. Related: Point Tick-test rules SEC-imposed restrictions on when a short sale may be executed, intended to prevent investors from destabilizing the price of a stock when the market price is falling. A short sale can be made only when either (1) the sale price of the particular stock is higher than the last trade price (referred to as an uptick trade) or (2) if there is not change in the last trade price of the particular stock, the previous trade price must be higher than the trade price that preceded it (referred to as a zero uptick). Tilted portfolio An indexing strategy that is linked to active management through the emphasis of a particular industry sector, selected performance factors such as earnings momentum, dividend yield, price-earnings ratio, or selected economic factors such as interest rates and inflation. Time decay Related: Theta Time deposit Related: Certificate of deposit Time premium Also called time value, the amount by which the option price exceeds its intrinsic value. Time value of an option Related: Time premium Time value The market value of an option minus its intrinsic value; that is, the difference between the option premium and the amount, if any, that the option is in-the-money. Related: In-the-Money Time-weighted rate of return Related: Geometric mean return Timing option For a Treasury bond or note futures contract, the seller’s choice of when in the delivery month to deliver. Total asset turnover The ratio of net sales to total assets. Total debt to equity ratio A capitalization ratio comparing current liabilities plus long-term debt to shareholders’ equity. Total return In performance measurement, the actual rate of return realized over some evaluation period. In fixed income analysis, the potential return that considers all three sources of return (coupon interest, interest on interest, and any capital gain/loss) over some investment horizon. Tracking error In an indexing strategy, the difference between the performance of the benchmark and the replicating portfolio. Trade house A firm which deals in actual commodities. Tranche One of several related securities offered at the same time. Trade date In an interest rate swap, the date that the counterparties commit to the swap. Transactions costs Related: Round-trip transactions costs, Information costs, Search costs Transition phase A phase of development in which the company’s earnings begin to mature and decelerate to the rate of growth of the economy as a whole. Related: Three-phase DDM Treasuries Related: Treasury securities Treasury bills Debt obligations of the U.S. Treasury that have maturities of one year or less. Treasury bonds Debt obligations of the U.S. Treasury that have maturities of 10 years or more. Treasury notes Debt obligations of the U.S. Treasury that have maturities of more than 2 years but less than 10 years. Treasury securities Securities issued by the U.S. Department of the Treasury. Trend The general direction of the market. Treynor Index A measure of the excess return per unit or risk, where excess return is defined as the difference between the portfolio’s return and the risk-free rate of return over the same evaluation period and where the unit of risk is the portfolio’s beta. Related: Sharpe Index 12b-i funds Mutual funds that do not charge an upfront or back-end commission, but instead take out up to 1.25% of average daily fund assets each year to cover the costs of selling and marketing shares, an arrangement allowed by the SEC’s 12b-I (passed in 1980). Two-factor model Black’s zero-beta version of the capital asset pricing model. Two-fund separation theorem The theoretical result that all investors will hold a combination of the risk-free asset and the market portfolio. Underlying The "something" that the parties agree to exchange in a derivative contract. Undiversifiable risk Related: Systematic risk Unsystematic risk Also called the diversifiable risk, residual risk, or company-specific risk, the risk that is unique to a company such as a strike, the outcome of unfavorable litigation, or a natural catastrophe. Related: Systematic risk Upstairs market A network of trading desks for the major brokerage firms and institutional investors that communicate with each other by means of electronic display systems and telephones to facilitate block trades and program trades. Uptick trade Related: Tick-test rules Value manager A manager who seeks to buy stocks that are at a discount to their "fair value" and sell them at or in excess of that value. Also called contrarians because they see value where many other market participants do not. Variable life A whole life insurance policy that provides a death benefit that depends on the market value of the insured’s portfolio at the time of the death. Typically the company invests premiums in common stocks, and hence variable life policies are referred to as equity-linked policies. Variance A measure of dispersion of a set of data points around their mean value. Variance minimization approach to tracking An approach to bond indexing that uses historical data to estimate the variance of the tracking error. Variation margin An additional required deposit to bring an investor’s equity account up to the initial margin level when the balance falls below the maintenance margin requirement. Venture capital An investment in a start-up business that is perceived to have excellent growth prospects but does not have access to capital markets. Vertical analysis The process of dividing each expense item in the income statement of a given year by net sales to identify expense items that rise faster or slower than a change in sales. Volume The number of transactions in a contract made during a specified period of time. Warrant An options contract often sold with another security. For instance, corporate bonds may be sold with warrants to buy common stock of that corporation. Warrants are generally detachable. Weak form efficiency A form of pricing efficiency where the price of the security reflects the past price and trading history of the security. Related: Semistrong form efficiency, Strong form efficiency Weighted-average portfolio yield The weighted average of the yield of all the bonds in a portfolio. Wild card option The right of the seller of a Treasury bond futures contract to give notice of intent to deliver at or before 8:00 p.m. Chicago time after the closing of the exchange (3:15 p.m. Chicago time) when the futures settlement price has been fixed. Related: Timing option Window contract A guaranteed investment contract purchased with deposits over some future designated time period (the "window"), usually between 3 and 12 months. All deposits made are guaranteed the same credit rating. Related: Bullet contract Wire house A firm operating a private wire to its own branch offices or to other firms, commission houses or brokerage houses. Writer The seller of an option. Yankee market The foreign market in the United States. Yield curve The graphical depiction of the relationship between the yield on bonds of the same credit quality but different maturities: Related: Term structure of interest rates Yield curve option-pricing models Also called arbitrage-free option-pricing models, models that can incorporate different volatility assumptions along the yield curve, such as the Black-Derman-Toy model. Yield curve strategies Positioning a portfolio to capitalize on expected changes in the shape of the Treasury yield curve. Yield ratio The quotient of two bond yields. Yield spread strategies Strategies that involve positioning a portfolio to capitalize on expected changes in yield spreads between sectors of the bond market. Yield to call For a bond that may be called prior to maturity, the yield to the first call date. Yield to maturity The interest rate that will make the present value of a bond’s remaining cash flows (if held to maturity) equal to the price (plus accrued interest, if any). Yield to worst The bond yield computer by always using the lower of either the yield to maturity or the yield to call on every possible call date. Zero-beta portfolio A portfolio constructed to represent the risk-free asset, that is, having a beta of zero. Zero-coupon bond A bond in which no periodic coupon is paid over the life of the contract. Instead, both the principal and the interest are paid at the maturity date. Zero uptick Related: Tick-test rules |
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