Plain-language definitions of the terms used across this volume. Use the letter links to move between the glossary pages.
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50 Percent Rule
OFAC’s rule that an entity owned 50% or more, in aggregate, by blocked persons is itself blocked, whether or not it is listed (Part 9.3).
A
Account Aggregator
An RBI-licensed intermediary in India that moves a customer’s financial data between institutions only with that customer’s consent (Part 11.8).
Accredited investor
Under SEC Rule 501(a), an individual with net worth above $1 million excluding the primary residence, or income above $200,000 ($300,000 jointly) in each of the last two years; eligible for most private fund offerings (Part 8.1).
Accretive / dilutive
A deal is accretive if it raises the acquirer’s earnings per share and dilutive if it lowers it. Accretion is a screen, not a measure of value (Part 2.4).
Accruals ratio
Net income minus operating cash flow, scaled by total or average assets; high values mean profit is running ahead of cash (Part 6.7).
Accrued interest
The part of the next coupon earned by the seller between the last coupon date and settlement; US corporate bonds count it on a 30/360 basis (Part 3.1).
Active share
Half the sum of the absolute differences between a fund’s and its benchmark’s holding weights; 0% means an exact index copy (Part 5.3).
Activist investor
A shareholder that takes a stake in a public company to push for change, escalating from private talks to public campaigns and, if needed, a proxy fight (Part 7.7).
Additional Tier 1 (AT1) capital
Perpetual bonds that count as bank regulatory capital because they can skip coupons and be written down or converted into shares when capital falls below a trigger or the bank is declared non-viable (Part 10.9).
Adjusted beta
A raw regression beta shrunk toward 1, commonly 0.67 × raw beta + 0.33, reflecting the tendency of measured betas to drift toward the market average (Section 0.4).
Alternative Investment Funds (AIFs)
India’s SEBI-regulated pooled vehicles for private equity, venture, private credit and hedge-fund-style strategies, in Categories I, II and III (Part 8, India Lens).
Alternative investments
Investments outside listed stocks, bonds and cash, such as hedge funds, private equity, private credit, real assets and commodities, usually with less liquidity and transparency (Part 8.1).
Annual percentage yield (APY)
The annualized deposit rate, including compounding, that US banks must disclose under Regulation DD, calculated on a 365-day basis (Section 0.4).
Annuity
A fixed payment for a set number of periods, worth CF × [1 − (1 + r)⁻ⁿ] ÷ r today (Part 1.2).
Asset-liability management
Automated market maker
A smart contract that prices trades from the ratio of two token reserves, for example by keeping x × y = k, instead of using an order book (Part 11.6).
B
Backtesting
Comparing actual daily losses with the VaR forecast for each day and counting exceptions; a correct 99% model shows about 2.5 per 250 days (Part 5.6).
Backwardation
A futures curve in which futures trade below spot, common when physical supply is tight and holders earn a convenience yield. (Part 4.1)
Balance sheet recession
A downturn in which firms and households whose debts exceed their asset values repay debt instead of borrowing, so low interest rates do little to revive credit; Richard Koo’s term for Japan after 1990 (Part 10.5).
Bank receipt
A certificate in which a selling bank stated it held securities on the buyer’s behalf; in 1992 receipts issued without securities behind them hid the diversion of bank money (Part 10.8).
Bargain purchase
An acquisition in which identifiable net assets at fair value exceed the price; after rechecking the valuations, the acquirer books the difference as a gain (Part 6.4).
Basis
The gap between a futures price and the spot price of the same asset; it reflects carrying costs and shrinks to zero at expiry. (Part 4.1)
Basis risk
The risk that a hedge instrument and the exposure it protects move differently, as when jet fuel is hedged with heating oil futures. (Part 4.8)
Beneish M-score
An eight-index model of earnings-manipulation risk published in 1999; scores above about −1.78 are the usual warning level (Part 6.7).
Beta-adjusted net exposure
Longs times their beta minus shorts times their beta, as a percentage of capital; a better measure of market risk than dollar net exposure (Part 8.2).
Bill-and-hold
An arrangement in which goods are billed but kept at the seller’s site. Revenue is allowed only if there is a substantive reason and the goods are identified, ready to ship and cannot be redirected (Part 6.2).
Binomial tree
An option pricing method that lets the underlying move up or down in discrete steps and values the option backward from expiry; it converges to Black-Scholes as steps increase. (Part 4.4)
Blockchain
A ledger copied across many independent computers in which each block of transactions carries the hash of the previous block, so past records cannot be altered without detection (Part 11.1).
Bootstrapping
Solving for spot rates one maturity at a time from coupon bond prices, using each discount factor already found to price the next bond’s earlier coupons (Part 3.4).
Break price
The price a target is expected to trade at if its announced deal fails; used to back out the market’s implied completion probability (Part 8.3).
Breakeven inflation
The nominal Treasury yield minus the TIPS real yield of the same maturity; the average inflation rate at which the two earn the same (Part 3.4).
Bubble Act
The British act of June 1720, passed under pressure from the South Sea Company, that made trading companies without a charter illegal; it was repealed in 1825 (Part 10.2).
Buy now, pay later (BNPL)
Point-of-sale installment credit, often four interest-free payments, funded mainly by fees charged to the merchant (Part 11.8).
C
Call loans
Loans repayable on demand; in the 1920s they funded brokers’ margin lending and were withdrawn quickly when stocks fell (Part 10.8).
Capital budgeting
The process of deciding which long-term projects to fund by valuing their incremental cash flows (Part 1.11).
Capital conservation buffer
A 2.5% layer of CET1 above the minimum; a bank inside it faces limits on dividends, buybacks and discretionary bonuses (Part 9.5).
Capital Market Line
The straight line of portfolios mixing the risk-free asset with the tangency portfolio: E(Rp) = Rf + [(E(RT) − Rf) ÷ σT] × σp (Part 5.3).
Capital rationing
A limit on total investment spending, under which the goal is the affordable combination of projects with the highest total NPV (Part 1.11).
Carried interest
The general partner’s share of a fund’s profits, typically 20%, paid only after limited partners receive their capital and preferred return (Part 2.8).
Cash flow hedge
A US GAAP hedge designation under which a derivative’s gains and losses are held in other comprehensive income until the hedged forecast cash flow affects earnings (Section 12.4).
Cash sweep
A loan term requiring the borrower to use some or all of its excess free cash flow to prepay debt (Part 2.7).
Catch-up
The waterfall tier that sends distributions to the general partner after the preferred return until it has received its full share of all profits (Part 2.8).
CBDC
Central bank digital currency: a digital form of money that is a direct liability of the central bank, unlike a commercial bank deposit (Part 11.5).
Central counterparty (CCP)
A clearing house that becomes buyer to every seller and seller to every buyer, guaranteeing trades with margin and a default fund. (Part 4.1; Volume I, Part 11)
Circuit breakers
Exchange-wide trading halts triggered by large index falls; US halts trigger at 7%, 13% and 20% falls in the S&P 500, India’s at 10%, 15% and 20% moves in the Sensex or Nifty (Part 10.8).
Claims basis
Sharing a client money pool according to each client’s claim, including unsegregated balances, as the UK Supreme Court held for Lehman in 2012 (Part 9.7).
Clawback
A fund term requiring the general partner to return carried interest it received earlier if, at the end of the fund, it has taken more than its agreed share of total profits (Part 2.8).
Clean price
The quoted price of a bond, excluding interest accrued since the last coupon date (Part 3.1).
Closet indexer
A fund that charges active-management fees while holding a portfolio close to its benchmark, so most of the fee buys index exposure (Part 5.3).
Common Equity Tier 1
The highest-quality bank capital, mainly common shares and retained earnings; Basel III requires at least 4.5% of risk-weighted assets (Part 9.5).
Comparable company analysis
Valuing a business at the multiples similar listed companies currently trade at, applied to its own earnings (Part 1.7).
Compensation actually paid
The SEC’s pay-versus-performance measure, which revalues unvested equity at each year-end and is shown for five years beside TSR and net income (Part 7.4).
Compensation clawback
Recovery of incentive pay that restated financial results would not have earned; mandatory for NYSE- and Nasdaq-listed companies on a no-fault basis for pay received from October 2, 2023, under SEC Rule 10D-1 (Part 7.4).
Compensation committee
A board committee of independent directors that designs executive pay, sets targets and certifies payouts (Part 7.5).
Confirmation
A block added on top of the one that contains a payment; each confirmation makes reversal of the payment on a Proof-of-Work chain exponentially less likely (Part 11.1).
Conglomerate discount
The amount by which a diversified company’s market value falls short of its sum-of-the-parts value (Part 1.9).
Contango
A futures curve in which futures trade above spot and longer maturities cost more, typical for assets with financing and storage costs such as gold. (Part 4.1)
Continuous compounding
Compounding in infinitely small intervals, so a nominal rate r grows $1 to e^r after one year; 6% compounded continuously is 6.184% effective (Section 0.4).
Contract liability
Cash received before the company has performed, also called deferred revenue; it becomes revenue as the obligation is satisfied (Part 6.2).
Control premium
The amount a buyer pays above the standalone minority value of a company for the right to control it, funded mainly by expected synergies (Part 1.8).
Controlled company
A listed company in which one person, group or company holds more than 50% of the voting power for electing directors; US exchanges exempt it from majority-independent board and independent pay and nominating committee rules, but not from the independent audit committee (Part 7.1).
Convenience yield
The benefit of holding a physical commodity rather than a futures contract, such as keeping a refinery running in a shortage; it lowers the futures price. (Part 4.1)
Convergence trades
Positions that buy the cheaper and sell the more expensive of two closely related securities, betting that the price gap will narrow; profits per dollar are small, so they are usually leveraged (Part 10.4).
Convexity
A measure of how a bond’s duration changes as its yield changes; it adds a second-order term, ½ × C × Δy², to the duration estimate of price change (Part 3.3).
Correlation
Covariance divided by the product of the two standard deviations, giving a unit-free number ρ between −1 and +1; the input that determines how much diversification reduces portfolio risk (Section 0.4).
Cost of equity
The return shareholders require for bearing a company’s equity risk, usually estimated with CAPM (Part 1.5).
Cost-of-carry model
The rule that a forward or futures price equals spot grown at the financing rate, plus storage, minus income: F = S × (1 + r)ᵗ for an asset with no income or storage cost. (Part 4.1)
Covariance
A measure of whether two variables move together, Cov(A, B) = E[(A − μ_A)(B − μ_B)]; its size depends on the units and volatility of each variable (Section 0.4).
Covenant cushion
How far EBITDA can fall before a leverage covenant is breached: 1 − (debt ÷ covenant maximum) ÷ EBITDA (Section 12.2).
Covenant waiver
Lenders’ agreement not to enforce a covenant breach, usually granted for a fee, a higher margin or tighter reporting (Section 12.3).
Covenant-lite loan
A loan without maintenance covenants that restricts only specific actions, such as new borrowing or dividends (Part 2.6).
Covered interest parity
The no-arbitrage condition that a currency forward equals spot times (1 + domestic rate) ÷ (1 + foreign rate). (Part 4.6)
Credit event
A default trigger defined in a CDS contract, such as bankruptcy, failure to pay or a qualifying restructuring, determined by an ISDA committee. (Part 4.7)
Credit memo
A lender’s written case for approving, changing or refusing credit: borrower, purpose, leverage, coverage, covenants, collateral or enterprise-value coverage, risks and a recommendation (Section 12.3).
Credit support annex (CSA)
The part of ISDA documentation that sets when each party posts collateral as a derivative’s value moves, including thresholds and eligible collateral (Section 12.4).
Credit triangle
The approximation that a CDS spread equals the annual default probability times loss given default: spread ≈ PD × (1 − R). (Part 4.7)
Cross-currency basis
The persistent deviation of market currency forwards and swaps from covered interest parity since 2008, linked to the cost of bank balance sheets. (Part 4.6)
Crossover rate
The discount rate at which two projects have equal NPV; the IRR of the difference in their cash flows (Part 1.11).
Crystallization
The point at which an accrued performance fee is paid to the manager and can no longer be reduced by later losses (Part 8.2).
Currency Transaction Report
A US filing required for cash in or out of more than $10,000 in one business day, aggregating transactions known to be by the same person (Part 9.2).
D
Day-count convention
The rule fixing how many days of interest accrue and how long a year is, such as actual/360 for SOFR or 30/360 for US municipal bonds (Section 0.4).
Days payable outstanding
Trade payables ÷ cost of goods sold × 365: how long a company takes to pay suppliers. A sudden rise adds operating cash once (Part 6.3, 6.7).
Days sales outstanding (DSO)
Receivables ÷ revenue × 365: the average number of days customers take to pay. A rise without a change in terms can signal sales booked before they were earned (Section 12.3).
Decentralized finance (DeFi)
Financial services such as trading and lending run by smart contracts without a bank, broker or exchange as intermediary (Part 11.6).
Delta hedge
Holding delta units of the underlying against each option so that small price moves leave the combined position unchanged. (Part 4.3)
Dirty price
The full price a bond buyer pays at settlement: the clean price plus accrued interest (Part 3.1).
Disgorgement
Giving up the profit gained or loss avoided from a violation, ordered on top of any civil penalty (Part 9.1).
Distressed debt
Bonds or loans of companies in or near default, bought at a deep discount in the expectation of a higher recovery (Part 8.3).
Downside deviation
The standard deviation of returns that fall below a chosen target such as the risk-free rate (Part 5.4).
DPI / TVPI
Distributed to paid-in capital (cash returned per dollar paid in) and total value to paid-in capital (cash returned plus remaining net asset value per dollar paid in) (Part 2.9).
Dual-class share
A share structure in which one class (usually held by founders) carries more votes per share than the class sold to the public, so insiders can control votes with a minority of the capital. At ten votes per share, 10% of the shares carries 52.6% of the votes (Part 7.1).
DV01
Dollar value of a basis point: the change in a position’s value for a one-basis-point change in yield, equal to modified duration × price × 0.0001 (Part 3.2).