Copy of `New York Times - Business and Finance Glossary`

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New York Times - Business and Finance Glossary Category: Economy and Finance Date & country: 11/09/2007, USA Words: 2680

Principal amount
The face amount of debt; the amount borrowed or lent. Often called principal.

Principal of diversification
Highly diversified portfolios will have negligible unsystematic risk. In other words, unsystematic risks disappear in portfolios, and only systematic risks survive.

Principal only (PO)
A mortgage-backed security in which the holder receives only principal cash flows on the underlying mortgage pool. The principal-only portion of a stripped MBS. For PO securities, all of the principal distribution due from the underlying collateral pool is paid to the registered holder of the stripped MBS based on the current face value of the underlying collateral pool.

Principal-agent relationship
A situation that can be modeled as one person, an agent, who acts on the behalf of another person, the principal.

Private placement
The sale of a bond or other security directly to a limited number of investors.

Private unrequited transfers
Refers to resident immigrant workers' remittances to their country of origin as well as gifts, dowries, inheritances, prizes, charitable contributions, etc.

Private-label pass-throughs
Related: Conventional pass-throughs.

Privatization
The act of returning state-owned or state-run companies back to the private sector, usually by selling them.

Pro forma financial statements
Financial statements as adjusted to reflect a projected or planned transaction.

Pro forma statement
A financial statement showing the forecast or projected operating results and balance sheet, as in pro forma income statements, balance sheets, and statements of cash flows.

Probability
The relative likelihood of a particular outcome among all possible outcomes.

Probability density function
The probability function for a continuous random variable.

Probability distribution
Also called a probability function, a function that describes all the values that the random variable can take and the probability associated with each.

Probability function
A function that assigns a probability to each and every possible outcome.

Product cycle
The time it takes to bring new and/or improved products to market.

Product risk
A type of mortgage-pipeline risk that occurs when a lender has an unusual loan in production or inventory but does not have a sale commitment at a prearranged price.

Production payment financing
A method of nonrecourse asset-based financing in which a specified percentage of revenue realized from the sale of the project's output is used to pay debt service.

Production-flow commitment
An agreement by the loan purchaser to allow the monthly loan quota to be delivered in batches.

Profit margin
Indicator of profitability. The ratio of earnings available to stockholders to net sales. Determined by dividing net income by revenue for the same 12-month period. Result is shown as a percentage.

Profitability index
The present value of the future cash flows divided by the initial investment. Also called the benefit-cost ratio.

Profitability ratios
Ratios that focus on the profitability of the firm. Profit margins measure performance with relation to sales. Rate of return ratios measure performance relative to some measure of size of the investment.

Program trades
Also called basket trades, orders requiring the execution of trades in a large number of different stocks at as near the same time as possible. Related: block trade

Program trading
Trades based on signals from computer programs, usually entered directly from the trader's computer to the market's computer system and executed automatically.

Progress review
A periodic review of a capital investment project to evaluate its continued economic viability.

Progressive tax system
A tax system wherein the average tax rate increases for some increases in income but never decreases with an increase in income.

Project financing
A form of asset-based financing in which a firm finances a discrete set of assets on a stand-alone basis.

Project loan certificate (PLC)
A primary program of Ginnie Mae for securitizing FHA-insured and co-insured multifamily, hospital, and nursing home loans.

Project loan securities
Securities backed by a variety of FHA-insured loan types - primarily multi-family apartment buildings, hospitals, and nursing homes.

Project loans
Usually FHA-insured and HUD-guaranteed mortgages on multiple-family housing complexes, nursing homes, hospitals, and other development types.

Project notes (PNs)
Project notes are issued by municipalities to finance federally sponsored programs in urban renewal and housing and are guaranteed by the U.S. Department of Housing and Urban Development.

Projected benefit obligation (PBO)
A measure of a pension plan's liability at the calculation date assuming that the plan is ongoing and will not terminate in the foreseeable future. Related:accumulated benefit obligation.

Projected maturity date
With CMOs, final payment at the end of the estimated cash flow window.

Promissory note
Written promise to pay.

Property rights
Rights of individuals and companies to own and utilize property as they see fit and to receive the stream of income that their property generates.

Prospectus
Formal written document to sell securities that describes the plan for a proposed business enterprise, or the facts concerning an existing one, that an investor needs to make an informed decision. Prospectuses are used by mutual funds to describe the fund objectives, risks and other essential information.

Protectionism
Protecting domestic industry from import competition by means of tariffs, quotas, and other trade barriers.

Protective covenant
A part of the indenture or loan agreement that limits certain actions a company takes during the term of the loan to protect the lender's interests.

Protective put buying strategy
A strategy that involves buying a put option on the underlying security that is held in a portfolio. Related: Hedge option strategies

Provisional call feature
A feature in a convertible issue that allows the issuer to call the issue during the non-call period if the price of the stock reaches a certain level.

Proxy
Document intended to provide shareholders with information necessary to vote in an informed manner on matters to be brought up at a stockholders' meeting. Includes information on closely held shares. Shareholders can and often do give management their proxy, representing the right and responsibility to vote their shares as specified in the proxy statement.

Proxy contest
A battle for the control of a firm in which the dissident group seeks, from the firm's other shareholders, the right to vote those shareholder's shares in favor of the dissident group's slate of directors. Also called proxy fight.

Proxy vote
Vote cast by one person on behalf of another.

PSA
A prepayment model based on an assumed rate of prepayment each month of the then unpaid principal balance of a pool of mortgages. PSA is used primarily to derive an implied prepayment speed of new production loans, a 100% PSA assumes a prepayment rate of 2% per month in the first month following the date of issue, increasing at 2% per month thereafter until the 30th month. Thereafter, 100% PSA is the same as 6% CPR.

Public offering
The sale of registered securities by the issuer (or the underwriters acting in the interests of the issuer) in the public market. Also called public issue.

Public warehouse
Warehouse operated by an independent warehouse company on its own premises.

Publicly traded assets
Assets that can be traded in a public market, such as the stock market.

Puke
Slang for a trader selling a position, usually a losing position, as in, 'When in doubt, puke it out.'

Purchase
To buy, to be long, to have an ownership position.

Purchase accounting
Method of accounting for a merger in which the acquirer is treated as having purchased the assets and assumed liabilities of the acquiree, which are all written up or down to their respective fair market values, the difference between the purchase price and the net assets acquired being attributed to goodwill.

Purchase agreement
As used in connection with project financing, an agreement to purchase a specific amount of project output per period.

Purchase and sale
A method of securities distribution in which the securities firm purchases the securities from the issuer for its own account at a stated price and then resells them, as contrasted with a best-efforts sale.

Purchase fund
Resembles a sinking fund except that money is used only to purchase bonds if they are selling below their par value.

Purchase method
Accounting for an acquisition using market value for the consolidation of the two entities' net assets on the balance sheet. Generally, depreciation/amortization will increase for this method compared with pooling and will result in lower net income.

Purchasing power parity
The notion that the ratio between domestic and foreign price levels should equal the equilibrium exchange rate between domestic and foreign currencies.

Purchasing-power risk
Related: inflation risk

Pure expectations theory
A theory that asserts that the forward rates exclusively represent the expected future rates. In other words, the entire term structure reflects the markets expectations of future short-term rates. For example, an increasing sloping term structure implies increasing short-term interest rates. Related: biased expectations theories

Pure index fund
A portfolio that is managed so as to perfectly replicate the performance of the market portfolio.

Pure yield pickup swap
Moving to higher yield bonds.

Pure-discount bond
A bond that will make only one payment of principal and interest. Also called a zero-coupon bond or a single-payment bond.

Put
An option granting the right to sell the underlying futures contract. Opposite of a call.

Put an option
To exercise a put option.

Put bond
A bond that the holder may choose either to exchange for par value at some date or to extend for a given number of years.

Put option
This security gives investors the right to sell (or put) fixed number of shares at a fixed price within a given time frame. An investor, for example, might wish to have the right to sell shares of a stock at a certain price by a certain time in order to protect, or hedge, an existing investment.

Put price
The price at which the asset will be sold if a put option is exercised. Also called the strike or exercise price of a put option.

Put provision
Gives the holder of a floating-rate bond the right to redeem his note at par on the coupon payment date.

Put swaption
A financial tool in which the buyer has the right, or option, to enter into a swap as a floating-rate payer. The writer of the swaption therefore becomes the floating-rate receiver/fixed-rate payer.

Put-call parity relationship
The relationship between the price of a put and the price of a call on the same underlying security with the same expiration date, which prevents arbitrage opportunities. Holding the stock and buying a put will deliver the exact payoff as buying one call and investing the present value (PV) of the exercise price. The call value equals C=S+P-PV(k).

Pyramid scheme
An illegal, fraudulent scheme in which a con artist contrives victims to invest by promising an extraordinary return but simply uses newly invested funds to pay off any investors who insist on terminating their investment.

Quadratic programming
Variant of linear programming whereby the equations are quadratic rather than linear.

Quality option
Also called the swap option, the seller's choice of deliverables in Treasury Bond and Treasury note futures contract. Related: cheapest to deliver issue

Quality spread
Also called credit spread, the spread between Treasury securities and non-Treasury securities that are identical in all respects except for quality rating. For instance, the difference between yields on Treasuries and those on single A-rated industrial bonds.

Quanto swap
See: differential swap.

Quantos
Currency options with a guaranteed exchange rate that enable buyers who like the asset, German bonds for example, but not the asset's pricing currency, to arrange to be paid in a different currency for a fee.

Quick assets
Current assets minus inventories.

Quick ratio
Indicator of a company's financial strength (or weakness). Calculated by taking current assets less inventories, divided by current liabilities. This ratio provides information regarding the firm's liquidity and ability to meet its obligations. Also called the Acid Test ratio.

Quotation
The bid and offered prices a dealer is willing to buy or sell at.

Rally (recovery)
An upward movement of prices. Opposite of reaction.

RAMs (Reverse-annuity mortgages)
Mortgages in which the bank makes a loan for an amount equal to a percentage of the appraisal value of the home. The loan is then paid to the homeowner in the form of an annuity.

Random variable
A function that assigns a real number to each and every possible outcome of a random experiment.

Random walk
Theory that stock price changes from day to day are at random; the changes are independent of each other and have the same probability distribution. Many believers of the random walk theory believe that it is impossible to outperform the market consistently without taking additional risk.

Randomized strategy
A strategy of introducing into the decision-making process a random element that is designed to reduce the information content of the decision-maker's observed choices.

Range
The high and low prices, or high and low bids and offers recorded during a specified time.

Range forward
A forward exchange rate contract that places upper and lower bounds on the cost of foreign exchange.

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.

Rate lock
An agreement between the mortgage banker and the loan applicant guaranteeing a specified interest rate for a designated period, usually 60 days.

Rate of interest
The rate, as a proportion of the principal, at which interest is computed.

Rate of return ratios
Ratios that are designed to measure the profitability of the firm in relation to various measures of the funds invested in the firm.

Rate risk
In banking, the risk that profits may decline or losses occur because a rise in interest rates forces up the cost of funding fixed-rate loans or other fixed-rate assets.

Ratings
An evaluation of credit quality Moody's, S&P, and Fitch Investors Service give to companies used by investors and analysts.

Rational expectations
The idea that people rationally anticipate the future and respond to what they see ahead.

Raw material supply agreement
As used in connection with project financing, an agreement to furnish a specified amount per period of a specified raw material.

Reaction
A decline in prices following an advance. Opposite of rally.

Real assets
Identifiable assets, such as buildings, equipment, patents, and trademarks, as distinguished from a financial obligation.

Real capital
Wealth that can be represented in financial terms, such as savings account balances, financial securities, and real estate.

Real cash flow
A cash flow is expressed in real terms if the current, or date 0, purchasing power of the cash flow is given.

Real exchange rates
Exchange rates that have been adjusted for the inflation differential between two countries.

Real interest rate
The rate of interest excluding the effect of inflation; that is, the rate that is earned in terms of constant-purchasing-power dollars. Interest rate expressed in terms of real goods, i.e. nominal interest rate adjusted for inflation.

Real market
The bid and offer prices at which a dealer could do 'size.' Quotes in the brokers market may reflect not the real market, but pictures painted by dealers playing trading games.

Real time
A real time stock or bond quote is one that states a security's most recent offer to sell or bid (buy). A delayed quote shows the same bid and ask prices 15 minutes and sometimes 20 minutes after a trade takes place.

Realized compound yield
Yield assuming that coupon payments are invested at the going market interest rate at the time of their receipt and rolled over until the bond matures.