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RATE
Accelerated cost recovery system
Accelerated depreciation
• Any depreciation method that produces larger deductions for depreciation in the
early years of a project's life. Accelerated cost recovery system (ACRS), which is a
depreciation schedule allowed for tax purposes, is one such example.
Add on rate
• Preferred share whose dividend rate is tied to interest rates on specific government
securities.
• Money after-tax rate of return minus the inflation rate. Hence, this refers to the
purchasing power increase.
• A funding strategy under which the firm finances its seasonal needs, and possibly
some of its permanent needs, with short-term debt and its permanent needs with
long-term debt.
• The discount rate that reflects only the business risks of a project and abstracts
from the effects of financing.
• Swap in which the principal or national amount rises (falls) as interest rates rise
(decline).
• The nominal annual rate of interest interest rate, found by multiplying the periodic
rate by the number of periods in a year.
• This is a standardized way of computing the interest rate. The exact method uses
the actuarial methods. It reflects the true cost of interest after taking into account all
costs such as fees, points, early payments and so on.
• Abbreviated APR. The periodic rate times the number of periods in a year. For
example, a 5% quarterly return has an APR of 20%.
Annuity rate
• The single-sum price that an insurance company or pension plan charges for an
annuity contract or option of a standard amount such as $1 per month. Annuity rates
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usually vary by age, and by sex if the annuity is outside a private pension plan, and
are in addition to fixed expense charges. Also known as annuity purchase rate. See
unisex annuity rate.
• Abbreviated ARPS. Floating rate preferred stock, the dividend on which is adjusted
• Abbreviated ARR. The ratio of the average cash inflow to the amount invested.
Bank rate
• the interest rate the Bank of Canada charges on one-day loans to financial
institutions (chartered banks and investment dealers) as the lender of last resort.
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Barbell strategy
• A strategy in which the maturities of the securities included in the portfolio are
concentrated at two extremes.
Base rate
• Base Rate is quoted off a short term fluctuating rate such as LIBOR or Prime Rate.
• Key strategies a firm intends to pursue in carrying out its business plan.
• Also called the base interest rate, it is the minimum interest rate investors will
demand for investing in a non-Treasury security. It is also tied to the yield to maturity
offered on a comparable-maturity Treasury security that was most recently issued (
on-the-run ).
• The prepayment rate of a MBS coupon that will produce the same CFY as that of a
predetermined benchmark MBS coupon. Used to identify for coupons higher than
the benchmark coupon the prepayment rate that will produce the same CFY as that
of the benchmark coupon; and for coupons lower than the benchmark coupon the
lowest prepayment rate that will do so.
Bullet strategy
Capitalization rate
Cca rates
• Rates set by Canada Customs and Revenue Agency (CCRA) that are used to
calculate CCA on an asset class: the rates range from 4 percent to 100 percent.
• A 7 percent reduction in the general federal tax rate for Canadian-controlled private
corporations on taxable income of between $200,000 and $300,000.
Combination strategy
• A strategy in which a put and with the same strike price and expiration are either
both bought or both sold. Related: Straddle
Conglomerate
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Conglomerate merger
• A funding strategy under which the firm finances both its seasonal and its
permanent requirements with long-term debt.
Corporate bond
• This is the public debt (IOU) of corporations. Instead of taking a bank loan,
corporations can directly borrow from institutions or individuals by selling them
bonds. They pay interest with coupons attached to the bonds. They usually have
long lives such as 20 or 30 years. They come in denominations of $l,000 and pay
interest every 6 months.
• A Debt Security issued by a corporation. A corporate bond typically has a par value
of $1,000, is taxable, has a term maturity, and is traded on a major exchange.
Corporate bonds
Intermediate Corporates,
Distressed Securities,
Junk Bonds,
Long Industrials,
•Utilities. There are other categories and subcategories, such as, financials -bank
Corporate charter
Corporate finance
• One of the three areas of the discipline of finance. It deals with the operation of the
firm(both the investment decision and the financing decision) from that firm's point of
view.
Corporate governance
• The set of actions and procedures common shareholders use to ensure they
receive a reasonable return on their investment in the company.
Corporate resolution
• Is a document which empowers and lists which individuals and departments can
trade, invest, speculate, or hedge on the behalf of the corporation. Resolutions are
passed on a case-by-case basis unlike the Corporate Charter. This document is
authorized by the Board of Directors.
Corporate restructuring
• The argument that double (corporate and individual) taxation of equity returns
makes debt a cheaper financing method.
• Rate of return required on a par bond to produce the same after-tax yield to
maturity that the premium or discount bond quoted would.
• Rate of return required on a par bond to produce the same after-tax yield to
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Coupon rate
• The interest rate on a long-term debt issue which is set at the time of the original
issue and is constant for the full term of the issue.
• The annual interest rate that an issuer promises to pay periodically over the life of a
bond or other debt security, expressed as a percentage of the security s face value.
• A strategy that involves writing a call option on securities that the investor owns in
his or her portfolio. See covered or hedge option strategies.
Crediting rate
• The discount rate where NPV profiles intersect meaning the NPVs of the two
projects are equal, and where the ranking decision for the projects changes.
Cross rates
• The exchange rate between two currencies expressed as the ratio of two foreign
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Crossover rate
• The return at which two alternative projects have the same net present value.
• Under this currency translation method, all foreign currency balance-sheet and
income statement items are translated at the current exchange rate.
• All financial transactions are measured in the currency of the foreign operations
Dedication strategy
Discount rate
• Is the interest rate used for adjusting for the time value of money for Net Present
Value, Option Pricing or other Market Models. It can also refer to the rate that the
Federal Reserve charges its members.
• Also known as the Capitalization Rate. The interest rate charged by the twelve
Federal Reserve Banks for short-term loans made to member banks. This is the rate
used in discounting future cash flows.
• The interest rate that the Federal Reserve charges a bank to borrow funds when a
bank is temporarily short of funds. Collateral is necessary to borrow, and such
borrowing is quite limited because the Fed views it as a privilege to be used to meet
short-term liquidity needs, and not a device to increase earnings.
• In corporate finance this is the rate by which you divide the cash flows to obtain
present value. Other names for discount rate would be hurdle rate, market rate of
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capitalization, and opportunity cost of capital. In banking, this is the rate of interest
charged by the Fed to member banks that borrow at the discount window. The
discount rate is an add-on interest rate.
Dividend rate
• The fixed or floating rate paid on preferred stock based on par value.
• Also called the internal rate of return, the interest rate that will make the present
• An annual measure of the time value of money that fully reflects the effects of
compounding.
• The rate equal to the nominal rate plus (or minus) any forecast appreciation (or
depreciation) of a foreign currency relative to the currency of the MNC parent.
Effective rate
• A measure of the time value of money that fully reflects the effects of
compounding.
• The interest rate that clears the market. Also called the market-clearing interest
rate.
Exchange rate
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• Abbreviated ERM. The methodology by which members of the EMS maintain their
currency exchange rates within an agreed upon range with respect to other member
countries.
• a) The danger that an unexpected change in the exchange rate between the dollar
and the currency in which a project's cash flows are denominated can reduce the
market value of that project's cash flow; b) The risk caused by varying exchange
rates between two currencies.
• Danger that an unexpected change in the exchange rate between the dollar and
the currency in which the project's cash flows are denominated can reduce the
market value of that project's cash flow.
• A theory of foreign exchange rates that holds that the expected future spot foreign
exchange rate t periods in the future equals the current t-period forward exchange
rate.
• This is the interest rate that banks with excess reserves at a Federal Reserve
district bank charge other banks that need overnight loans. The Fed Funds rate, as it
is called, often points to the direction of U.S. interest rates.
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• The rate of interest charged by banks for short-term OVERNIGHT to other banks.
The Federal Reserve Bank through open-market operations establishes this rate.
• The rate of interest at which Fed funds are traded. This rate is currently pegged by
the Federal Reserve through open market operations.
• The interest rate charged by one institution lending federal funds to another.
• A country's decision to tie the value of its currency to another country's currency,
• A loan with a rate of interest that is determined at a set increment above the prime
rate at which it remains fixed until maturity.
• A loan on which the rate paid by the borrower is fixed for the life of the loan.
• A loan on which the rate paid by the borrower is fixed for the life of the loan.
• In an interest rate swap the counterparty who pays a fixed rate, usually in
exchange for a floating-rate payment.
• A country's decision to allow its currency value to freely change. The currency is
not constrained by central bank intervention and does not have to maintain its
relationship with another currency in a narrow band. The currency value is
determined by trading in the foreign exchange market.
Floating rate
• Refers to the condition whereby exchange rates are relatively free to change. It can
also refer to an interest rate which changes relatively quickly or frequently.
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• bonds where the stated interest rate is adjusted periodically within stated limits in
response to changes in specified money or capital market rates.
• A guaranteed investment contract where the credit rating is tied to some variable (
floating ) interest rate benchmark, such as a specific-maturity Treasury yield.
• A note that pays an interest rate tied to current money market rates. The holder
may have the right to demand redemption at par on specified dates.
• Abbreviated FRN. Note whose interest payment varies with short-term interest
rates.
• In an interest rate swap, the counterparty who pays a rate based on a reference
rate, usually in exchange for a fixed-rate payment
• Preferred stock paying dividends that vary with short-term interest rates.
• The quarterly dividend paid is based on interest rates in the market and will float
with these rates.
Floor rate
• Exchange rate fixed today for exchanging currency at some future date.
• The rate of exchange between two currencies at some specified future date.
Forward rate
• A projection of future interest rates calculated from either the spot rates or the yield
curve.
• The rate at which forward transactions in some specific maturity are being made;
for example, the dollar price at which DM can be bought for delivery three months
hence.
Growth rate
• Growth rate equals the return on equity times the plowback ratio. To be
sustainable, growth rate must be less than the market capitalization rate.
• Compound annual growth rate for the number of full fiscal years shown. If there is a
negative or zero value for the first or last year, the growth is NM (not meaningful).
Hedging strategies
• Techniques used to offset or protect against risk; in the international context these
include borrowing or lending in different currencies, undertaking contracts in the
forward, futures, and/or options markets, and also swapping assets/liabilities with
other parties.
• An accounting term that refers to the exchange rate in effect when an asset or
liability was acquired.
Immunization strategy
• A bond portfolio strategy whose goal is to eliminate the portfolio's risk against a
general change in the rate of interest through the use of duration.
• Is influenced by the cost of funds, tax rates, deductibility of carry charges, yields,
the time to expiration and organizational constraints. It indicates the implied rate of
return for specified investments. While many quote services list an assumed or
benchmark Implied RepoRate, there are many because each investor has his or her
own schedule of financing costs and investment opportunities.
• The rate that a seller of a futures contract can earn by buying an issue and then
delivering it at the settlement date. Related: cheapest to deliver issue
Intercorporate dividends
Interest rate
• The cost of money. The greater the risk of the debt security, the higher the interest
rate lenders will require. The compensation paid by the borrower of funds to the
lender; from the borrower's point of view, the cost of borrowing funds.
• This is the cost of borrowing. If the interest rate is 10% and you borrow $1,000,
then $100 must be paid as interest payments at the end of each year.
• Also called an interest rate ceiling, an interest rate agreement in which payments
are made when the reference rate exceeds the strike rate.
• An interest rate agreement in which payments are made when the reference rate
falls below the strike rate.
15%, and end up with 11,500 MP, convert them back into USD at the forward price
of 10.95, you end up with exactly $1050 USD next year, which is exactly the same
as if you lent in the US. This is an example of interest rate parity.
• Interest rate differential between two countries is equal to the difference between
the forward foreign exchange rate and the spot rate.
• The chance that interest rates will change and thereby change the required return
and bond value. Rising rates, which result in decreasing bond values, are of greatest
• The risk that a security's value changes due to a change in interest rates. For
example, a bond's price drops as interest rates rise. For a depository institution, also
called funding risk, the risk that spread income will suffer because of a change in
interest rates.
• The risk of changes in value due to changes in interest rate is called interest rate
risk. Long lived assets lose more of their value when interest rates rise than short
lived assets. If a bank has more long-lived assets than liabilities, then the bank
worries about interest rate increases.
• Is the risk associated with changes in general interest rate levels or yield curves.
This compares to Prepayment Risk.
• If a bank expects a rise in interest rates, it increases the maturity of its liabilities
and decreases the maturity of its assets. If a bank expects the interest rates to
remain the same or decline, it holds more long term assets than liabilities.
are floating.
• The buyer of the swap agrees to make a number of fixed interest rate payments
periodically to the seller on some agreed upon notational amount. In return, the
seller agrees to make floating rate interest payment on the same dates to the buyer
on the same notational amount.
• Are investment grade notes and bonds issued by corporations. The maturities
range between 1 to 10 years. These securities encompass banks, other financial
institutions, and industrial issuers.
• Maximum rate a firm can expand without outside source of funding. Growth
generated by cash flows retained by company.
• Abbreviated IRR. The discount rate that equates the present value of cash inflows
with the initial cost of a capital budgeting project; the discount rate that makes the
NPV of the project equal to $0.
• Dollar-weighted rate of return. Discount rate at which net present value (NPV)
investment is zero. The rate at which a bond's future cash flows, discounted back to
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• An approach to capital rationing that involves the graphic plotting of project IRRs in
descending order against the total dollar investment to determine the group of
acceptable projects.
• A variable rate security whose coupon rate increases as a benchmark interest rate
declines.
Ladder strategy
Lease rate
• Investment strategies that select assets so that cash flows will equal or exceed the
client's obligations.
• Planned financial actions and the anticipated financial impact of those actions over
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• The tax rate that would have to be paid on any additional dollars of taxable income
earned.
• The tax rate that would have to be paid on any additional dollars of taxable income
earned.
Mortgage rate
• 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.
• An un hedged strategy making exclusive use of one of the following: Long call
strategy (buying call options ), short call strategy (selling or writing call options),
Long put strategy (buying put options ), and short put strategy (selling or writing put
options). By themselves, these positions are called naked strategies because they
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• The actual foreign exchange quotation in contrast to the real exchange rate that
has been adjusted for changes in purchasing power.
• The stated interest rate charged on financing when only the MNC parent's currency
is involved.
• The actual rate of interest charged by the supplier of funds and paid by the
demander.
Underlying, Synthetic Long Put, Synthetic Long Straddle, Synthetic Short Call,
Synthetic Short Futures or Underlying, Synthetic Short Put, Synthetic Short Straddle,
Vertical, and Volatility. There are also compound and nested options or strategies.
Among these are: call-on-a-call, a call-on-a-put, a put-on-a-put, and a put-on-a-call.
Outright rate
• Actual forward rate expressed in dollars per currency unit, or vice versa.
Overlay strategy
Overnight rate
• the average interest rate the Bank of Canada wants financial institutions to use
when they lend each other money for one day, or overnight.
• Takeover defense strategy in which the prospective acquires retaliates against the
acquirer's tender offer by launching its own tender offer for the other firm.
• The interest rate paid on a securitized pool of assets, which is less than the rate
paid on the underlying loans by an amount equal to the servicing and guaranteeing
fees.
• The net interest rate passed through to investors after deducting servicing,
management, and guarantee fees from the gross mortgage coupon.
Plowback rate
• The rate of return computed by first determining the cash flows for all the bonds in
the portfolio and then finding the interest rate that will make the present value of the
cash flows equal to the market value of the portfolio.
Prime rate
• The interest rate at which banks lend to their best (prime) customers. Much more
often than not, a bank's most creditworthy customers borrow at rates below the
prime rate.
• The lowest rate of interest charged by leading banks on business loans to their
most secure business borrowers.
• The rate at which banks lend to their (supposedly) best (prime) customers. The all-
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in cost of a bank loan to a prime credit equals the prime rate plus the cost of holding
compensating balances.
• The interest rate that commercial banks charge their prime or most creditworthy
customers, generally large corporations.
• A strategy that involves buying a put option on the underlying security that is held
in a portfolio. Related: Hedge option strategies
• 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
Rate of return
• The yield obtainable on a security based on its purchase price or its current market
price. This may be the amortized yield to maturity on a bond the current income
return.
• 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.
See interest 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.
• For a given time horizon t, all assets whose return is not fixed but will be repriced
with changes in interest rates are called Rate Sensitive Assets, or RSA.
• Rate Sensitive Liabilities are all those liabilities scheduled to reprice or mature
within one year. It includes domestic time certificates of deposits of $100,000 or
more, all other domestic time deposits, total deposits in foreign offices, money
market deposit accounts, Super NOWs and demand notes issued to the U.S.
Treasury..
• Exchange rates that have been adjusted for the inflation differential between two
countries.
• The real interest rate is the interest rate that would prevail in an economy with no
inflation and no risk. Real interest rate is determined by the propensity to save
(supply of funds) and by the demand for capital. Real interest rate equals nominal
interest rate minus expected inflation.
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• 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.
• The rate that creates an equilibrium between the supply of savings and the
demand for investment funds in a perfect world, without inflation, where funds
suppliers and demanders have no liquidity preference and all outcomes are certain.
Reference rate
Reinvestment rate
• (1) The rate at which an investor assumes interest payments made on a debt
security can be reinvested over the life of that security. (2) Also, the rate at which
funds from a maturity or sale of a security can be reinvested. Often used in
comparison to give-up yield.
• The rate at which an investor assumes interest payments made on a debt security
can be reinvested over the life of that security.
Retention rate
• Abbreviated RADR. The rate of return that must be earned on a given project to
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• The rate of return that one would earn on a virtually riskless investment such as a
Government of Canada Treasury Bill.
• The rate of return that one would earn on a virtually riskless investment such as a
three-month Government of Canada Treasury bill. Such an investment offers little or
no risk of default and very low interest rate (price) risk because of its short term to
maturity.
Riskless rate
• The rate earned on a riskless investment, typically the rate earned on the 90-day
U.S. Treasury Bill.
Separate account
Settlement rate
• A tax system that taxes retained earnings at a higher rate than earnings that are
distributed as dividends.
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• Exchange rate on currency for immediate delivery. Related: forward exchange rate.
• Interest rate fixed today on a loan that is made today. Related: forward interest
rates.
Spot rate
• These are the interest rates that are in effect at this time. If you want an immediate
loan, you pay the spot rate. If you want a loan some time in the future, you can
negotiate for a loan commitment.
• The graphical depiction of the relationship between the spot rates and maturity.
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. Also called spreading.
• The interest rate expressed as a per annum percentage, by which interest payment
is determined.
• 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,
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Strategic merger
• Maximum rate of growth a firm can sustain without increasing financial leverage.
• The buyer of the Swap agrees to make a number of fixed interest rate payments
periodically to the seller or some agreed upon notional amount. In return, the seller
agrees to make floating rate interest payment on the same dates to the buyer on the
same notional amount. By entering into the swap, both parties attempt to hedge their
interest rate exposures.
Swap rate
• In the foreign-exchange market, the difference between the spot and forward rates
at which a currency is traded.
• The difference between spot and forward rates expressed in points, e.g., $0.0001
per pound sterling.
• The relationship between the interest rate or rate of return (as measured by the
yield to maturity on a bond) and the time to maturity for similar risk debt securities.
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• Refers to the variability of short-term rates relative to longer-term rates. It has been
documented that short-term rates exhibit greater variability or volatility than long-
term rates. However, longer-term instruments experience greater price sensitivity
• Refers to the change in asset value plus income. For a stock it would refer to the
change in the adjusted stock price plus and dividends and other distributions, if any.
For a bond it would reflect the change in bond price plus any interest received or
accrued. It more completely measures the overall perform of an investment.
• The ratio of the number of people classified as unemployed to the total labor force.
• An annuity rate that is the same for men and women, as required by federal law
governing benefits under public and private employee benefit plans. On the average,
women tend to live longer than men and thus pay more than men for an annuity
issued outside such a plan.
• Short-term CDs that pay interest periodically on roll dates; on each roll date the
coupon on the CD is adjusted to reflect current market rates.
• Loan made at an interest rate that fluctuates based on a base interest rate such as
the Prime Rate or LIBOR.
• Floating rate bond that can be sold back periodically to the issuer.