13D Filing
SEC filing required when a beneficial owner acquires more than 5% of a public company's voting shares with intent to influence control. The standard early signal that an activist investor is preparing a campaign.
Three hundred finance terms with concise, opinionated definitions. Search by name, filter by track, or jump alphabetically. Click any underlined term to follow the cross-reference.
SEC filing required when a beneficial owner acquires more than 5% of a public company's voting shares with intent to influence control. The standard early signal that an activist investor is preparing a campaign.
SEC filing required of institutional investment managers with over $100 million under management, disclosing equity holdings quarterly. Source of much "smart money" tracking and the data behind countless sell-side reports on hedge fund positioning.
The systematic recording, summarizing, and reporting of financial transactions. Operates under defined standards (GAAP in the US, IFRS internationally). Accounting profit and economic profit can diverge meaningfully — the source of perennial confusion.
A person or entity meeting income or net-worth thresholds (in the US: $200K income or $1M net worth excluding primary residence) qualifying them to participate in private securities offerings under Reg D. The definition's wealth gates are contentious.
Whether an acquisition increases (accretion) or decreases (dilution) the acquirer's earnings per share in a given year. A standard test in Mergers & Acquisitions (M&A) analysis, though earnings impact is a poor proxy for whether a deal actually creates Shareholder Value.
Interest a bond has earned since its last Coupon payment but has not yet paid. When you buy a bond between coupon dates, you pay the seller the accrued interest in addition to the Clean Price.
Automated Clearing House — the US system for batch processing of electronic payments (direct deposit, bill pay, recurring transfers). Slower than wire transfers but cheaper. Modernized into "Same-Day ACH" in 2016.
An investor who acquires significant equity in a company and publicly pushes for changes — strategy, governance, capital allocation, M&A. Firms like Elliott, ValueAct, Carl Icahn's operations, and Pershing Square define the modern practice.
The mathematical and statistical discipline that prices insurance and pension obligations by quantifying long-term risk. Actuaries are heavily credentialed (SOA, CAS in the US); the profession's rigor and economic significance are underappreciated.
Investment returns above what would be expected given the Beta and the market's return. In theory, alpha measures manager skill; in practice, distinguishing alpha from luck requires long records and careful analysis.
The regulatory framework requiring financial institutions to identify and report suspicious transactions and verify customer identities (KYC). Costs banks billions annually; effectiveness in actually catching laundering is empirically modest.
A DeFi protocol that allows users to trade against a liquidity pool rather than a traditional order book, with prices set algorithmically. Uniswap is the canonical example; AMMs are now a major piece of cryptocurrency market structure.
The systematic write-down of an intangible asset, or the gradual paying down of a loan's principal over time. Two related but distinct uses of the same word; context tells you which is meant.
A wealthy individual investing personal capital in early-stage startups, typically pre-seed or seed stage. The bridge between friends-and-family money and institutional VC. The best angels are operators with relevant operational experience.
The yearly gathering at which a public company's Shareholders vote on directors, executive compensation, and shareholder proposals. Most votes are non-binding advisory; the board retains real power.
The yearly interest rate on a loan, including fees expressed as interest. Disclosed under truth-in-lending laws (US Regulation Z, UK Consumer Credit Act). Distinct from APY (Annual Percentage Yield), which accounts for compounding.
The actual annual return on an investment after accounting for compounding within the year. APY is always at least as large as the stated rate; for very high rates the difference becomes substantial.
Profiting from a price difference for the same (or economically equivalent) asset in different markets. Pure arbitrage is rare; in practice, most "arbitrage" strategies bear some risk that the prices converge as expected.
A bond backed by a pool of cash-generating assets — typically auto loans, credit-card receivables, student loans, or equipment leases. The mortgage-backed equivalent is Mortgage-Backed Security (MBS); both rely on Securitization.
Resources a firm or individual owns that have economic value. The left-hand side of the Balance Sheet; equal to Liabilities plus Equity by the accounting identity.
Independent examination of a company's financial statements by a licensed accountant to express an opinion on whether they fairly present the firm's financial position. The "Big Four" (Deloitte, PwC, EY, KPMG) audit nearly all large public companies.
A snapshot of what a firm owns (Assets) and what it owes (Liabilities) at a specific moment, with Equity being the difference. The fundamental accounting identity is Assets = Liabilities + Equity.
The "central bank for central banks," based in Basel. Hosts the committees that produce the Basel Accords and provides a venue for central bank cooperation on financial stability.
A sudden demand by depositors to withdraw funds, exceeding the bank's liquid reserves. Once dramatic physical lines outside branches; now digital and faster, as the 2023 Silicon Valley Bank collapse demonstrated (a substantial share of deposits departed within hours).
International agreements (Basel I, II, III, IV) that set minimum capital and liquidity standards for banks. Negotiated through the Bank for International Settlements and implemented by national regulators with significant local variation.
One one-hundredth of a percentage point (0.01%). Used in fixed-income and trading because rate differences of single percentage points are often too coarse — "rates rose 25bp" is more precise than "rates rose 0.25%."
A sustained decline in asset prices, conventionally defined as 20% or more from recent highs. The opposite of Bull Market; useful as a rhetorical shorthand but the 20% threshold is arbitrary.
A stock's sensitivity to the broader market. Beta of 1.0 means the stock moves with the market; 1.5 means it moves 50% more on average. The core input to CAPM (Capital Asset Pricing Model) and a basic component of risk analysis.
The difference between the highest price a buyer will pay (bid) and the lowest a seller will accept (ask). A measure of liquidity — tight spreads mean liquid markets; wide spreads mean it's costly to trade.
The 1973 model for pricing European-style options. Inputs are stock price, strike, time to expiry, Risk-Free Rate, and volatility. Real options markets price using extensions of the model — though the assumptions (constant volatility, lognormal returns) are known to be wrong.
A large single trade negotiated off the public order book, typically by an institution. Block trades minimize market impact but require finding a counterparty willing to take the other side.
Total interest income minus total interest expense for a bank. The dollar version of Net Interest Margin (NIM); the largest revenue line for traditional banks. Sensitive to changes in the yield curve and credit cycle.
Short-term financing at checkout, typically four equal payments over six weeks. Companies like Klarna, Affirm, and Afterpay built large businesses; regulatory scrutiny has intensified over consumer protection concerns.
The accounting value of equity on the Balance Sheet — assets minus liabilities. Often diverges meaningfully from market value, especially for asset-light businesses where the book understates intangible value.
Common shorthand for basis points.
A sustained rise in asset prices. Counterpart to Bear Market; like its opposite, the term is rhetorical rather than rigorously defined.
A bond that the issuer can redeem before maturity at a predetermined price. Investors demand higher Yield to compensate for the call risk, since issuers call when refinancing terms are favorable to them.
In convertible-note or SAFE financings, the maximum valuation at which the instrument converts to equity in a future round. Protects early investors from dilution if the company's valuation rises sharply between rounds.
Money spent on long-lived assets — factories, equipment, R&D, software. Distinct from operating expenses in that capex is capitalized on the Balance Sheet and depreciated over time rather than expensed immediately.
The mix of debt and equity a firm uses to finance its operations. The "optimal" structure balances the tax shield from debt against the cost of Financial Distress — a question with no clean answer but enormous practical importance.
A spreadsheet tracking who owns what shares in a private company through multiple financing rounds. Cap-table management is unglamorous but consequential — errors can become litigation; clean tables make exits smoother.
The framework for computing expected return given systematic risk: Expected Return = Risk-Free Rate + Beta × (Market Return − Risk-Free Rate). Workhorse of Cost of Equity estimation despite well-known empirical limitations.
Visa, Mastercard, American Express, Discover — the networks that route credit and debit card transactions between merchants and issuing banks. Their fee structures (interchange) are major political issues across multiple jurisdictions.
Short for "carried interest" — the share of investment profits (typically 20%) paid to general partners of Private Equity and hedge funds. Carry is the path to genuine wealth in those careers; without it, alternative asset managers earn fee income only.
The actual movement of money in and out of a business or person, as distinct from Accounting profit. The famous Warren Buffett observation: "Earnings are an opinion; cash is a fact."
The financial statement showing cash inflows and outflows from operating, investing, and financing activities over a period. Reconciles Net Income (accrual) to actual cash movements. The clearest view of a firm's economic reality.
A brokerage-account-with-banking-features hybrid offered by firms like Fidelity, Schwab, and Robinhood. Combines investment account functionality with checking-account features (debit cards, bill pay). Increasingly competing with traditional bank accounts.
A digital form of central-bank money, distinct from commercial-bank deposits. China's e-CNY is the largest live example; most major central banks are researching or piloting versions. Implications for banking, privacy, and monetary policy are still being worked out.
The institution responsible for monetary policy and (usually) bank supervision in a country. Major examples: Federal Reserve, European Central Bank, Bank of England, Bank of Japan, People's Bank of China.
The most globally recognized professional designation in investment management. Three rigorous exams (taken over a minimum of 2-3 years) covering ethics, financial statement analysis, valuation, and portfolio management.
Consumer Financial Protection Bureau — US regulator of consumer financial products created by Dodd-Frank in 2010. Has authority over credit cards, mortgages, student loans, payday lending. Politically contested since its creation.
Commodity Futures Trading Commission — US regulator of Futures Contract and swap markets. Long-running jurisdictional turf wars with SEC over crypto and other novel instruments. Smaller and less prominent than SEC but oversees consequential markets.
The chapter of the US Bankruptcy Code under which businesses reorganize while continuing operations, with management generally remaining in place as "debtor in possession." The model has been influential globally — many countries have adopted Chapter 11-style proceedings.
Personal bankruptcy chapter used by individuals with regular income to restructure debts over a 3-5 year repayment plan. Less common than Chapter 7 but allows debtors to keep more assets (notably homes).
The chapter of the US Bankruptcy Code under which assets are liquidated and proceeds distributed to creditors. Used by businesses that cannot be reorganized as going concerns and by individuals who lack regular income for Chapter 13 repayment plans.
A broker generating commissions by excessive trading in a client account, beyond what the client's investment objectives justify. Violates Fiduciary Duty and broker-dealer suitability rules. Enforcement has reduced its prevalence but examples persist.
A bond's quoted price excluding Accrued Interest. The actual cost to buy is the clean price plus accrued interest (the "dirty price"). Most bond quote conventions use clean prices.
A fund with a fixed number of shares that trade on exchanges like stocks, often at discounts or premiums to NAV. Common in muni bonds and credit; specialty closed-end fund managers focus on capturing the NAV-price gap.
Assets pledged to secure a loan, available to the lender if the borrower defaults. Secured loans (mortgages, auto loans, asset-backed corporate loans) carry lower interest rates than unsecured because collateral reduces lender risk.
A structured-finance product that pools debt and slices the resulting cash flows into Tranches of varying credit quality. CDOs of mortgage-backed securities were central to the 2007-2009 crisis; the structure itself remains in use for corporate loans (CLOs).
Short-term unsecured debt issued by large corporations, typically with maturities of 1-270 days. A core source of funding for Working Capital needs; major firms roll commercial paper continuously.
Standard equity ownership in a corporation, with voting rights, residual claim on assets, and unlimited upside (and downside). The basic unit of ownership for public companies.
Interest earned not only on the original principal but also on the accumulated interest from previous periods. The foundation of Time Value of Money and the reason long investment horizons matter so disproportionately.
A bond that the holder can exchange for a fixed number of common shares at the holder's option. Combines bond features (coupon, maturity) with equity upside. Heavily used for growth-stage companies that want lower-rate financing than straight debt.
The curvature of a bond's price-yield relationship; a second-order measure beyond Duration. Bonds with higher convexity benefit more from rate decreases and lose less from rate increases, all else equal.
The return shareholders require for bearing equity risk in a firm. Most often estimated via CAPM (Capital Asset Pricing Model). A key input to Weighted Average Cost of Capital (WACC) and Discounted Cash Flow (DCF) valuation.
The periodic interest payment a bond makes to its holder, typically expressed as an annual percentage of Face Value (Par Value). A "5% coupon" on a $1,000 bond pays $50/year, usually in two semi-annual installments.
Contractual restrictions a borrower agrees to in a loan or bond — minimum financial ratios, limits on additional debt, restrictions on dividends. Violation is technically default; lenders may accelerate the loan or waive in exchange for fees or improved terms.
A strategy of writing call Options against stock already owned. Generates income but caps upside if the stock rises above the strike. Popular with income-oriented investors; covered-call ETFs marketed heavily to retirees.
A contract in which one party pays a periodic fee for protection against another party's default. Effectively insurance on a bond — except neither party need own the bond, which made CDS a vehicle for speculation pre-2008.
A bond's assessed credit quality, expressed in letter grades (AAA, AA, A, BBB, BB...). The three major agencies are Moody's, S&P, and Fitch. Bonds rated BB+ and below are "High-Yield Bond" or "junk."
The yield premium over a risk-free benchmark (typically Treasury yields of equivalent maturity) that compensates investors for credit risk. Widening spreads signal market concern about default risk; tightening spreads signal optimism.
A contract provision triggering Default under one obligation if the borrower defaults on a different obligation. Allows lenders to act on early signs of distress before their specific loan is missed. Standard in corporate credit agreements.
A country's commitment to maintain its currency's exchange rate against another currency (or basket). Hong Kong's peg to the US dollar is the most famous current example. Pegs constrain monetary policy and can break under speculative attack.
A private exchange where institutional investors trade large blocks of stock without showing orders to the broader market. Minimizes market impact but reduces price transparency. Regulated more lightly than lit exchanges; subject of ongoing market-structure debate.
Failure to meet a financial obligation — missed interest payment, violated Covenant, or filing for bankruptcy. Different default events trigger different lender remedies; the legal definition matters.
Financial services built on public blockchains — lending, exchange, derivatives, asset management — operating through smart contracts rather than traditional intermediaries. The technical innovation is real; the empirical case that DeFi replaces meaningful traditional finance functions, weaker than its proponents argue.
The change in an option's price for a $1 change in the underlying. A delta of 0.5 means the option moves $0.50 for each $1 move in the stock. Often used as a rough proxy for the option's probability of finishing in-the-money.
Government guarantee of bank deposits up to a stated limit. See FDIC for the US version. Reduces incentive for bank runs but creates moral hazard for banks taking risks with insured deposits.
The accounting allocation of a tangible asset's cost over its useful life. The intangible-asset equivalent is Amortization. Depreciation is a non-cash expense, which is why EBITDA adds it back.
A financial contract whose value derives from an underlying asset, rate, or index. Major types: Futures Contract, Options, swaps, forwards. Used for hedging, speculation, and structuring complex exposures.
A reduction in existing shareholders' ownership percentage when a company issues new shares. A core concern in venture-capital cap tables; also the "D" in Accretion / Dilution M&A analysis.
"Debtor-in-Possession" financing — loans made to a company already in Chapter 11 bankruptcy. DIP lenders get super-priority status, making this a low-risk niche specialty for distressed-debt lenders.
A way to go public without an IPO — no new shares issued, no underwriter, existing shareholders simply start trading on an exchange. Pioneered by Spotify in 2018; used selectively by companies that don't need new capital and want to avoid IPO underpricing.
In convertible notes and SAFEs, the percentage discount at which the instrument converts to equity in a future priced round. Combines with the valuation cap to determine effective conversion price.
The rate used to translate future cash flows into present value, reflecting both the Time Value of Money and the risk of those flows not materializing. Higher discount rate → lower present value.
The Fed's facility for direct lending to banks against eligible collateral. Historically stigmatized — banks borrowed reluctantly — but modernized after the 2023 regional bank crisis to make use less stigmatic and rates more usable.
A valuation method that estimates a firm's worth as the present value of its future free cash flows, discounted at the Weighted Average Cost of Capital (WACC). Conceptually correct; in practice highly sensitive to terminal value and discount rate assumptions.
Debt of companies in or approaching Financial Distress, trading at significant discounts to face value. The specialty of restructuring-focused hedge funds and private equity firms; returns can be high but require legal sophistication and patience.
A cash payment to shareholders from a company's profits. Many mature companies pay regular dividends; growth companies typically don't. The choice between dividends, buybacks, and reinvestment is one of corporate finance's recurring debates.
2010 US financial reform legislation passed after the 2008 crisis. Created the CFPB, introduced bank stress tests, restricted proprietary trading (Volcker Rule), regulated swap markets. Partly rolled back in 2018 for smaller banks.
A financing round at a lower valuation than the previous one. Triggers anti-dilution protections that benefit older investors at the expense of common shareholders and recent employees. The 2022-2023 venture downturn produced many.
A measure of realized returns in private-equity and venture funds — cash distributed to LPs divided by capital they've contributed. The "real" return metric, distinct from paper marks. DPI above 1.0 means LPs have gotten their money back.
A measure of a bond's price sensitivity to interest-rate changes, expressed in years. A bond with duration 7 falls roughly 7% if rates rise 1%. Convexity refines this approximation for larger rate moves.
The difference between a bank's asset Duration and liability duration. Positive gap (assets longer than liabilities) loses value when rates rise. The 2023 Silicon Valley Bank failure was a textbook duration-gap problem.
Earnings Before Interest, Taxes, Depreciation, and Amortization. A proxy for operating cash flow that strips out financing decisions and accounting choices. Useful for cross-firm comparisons; misleading when treated as cash flow (it ignores Capital Expenditure (Capex) and Working Capital needs).
The proposition that asset prices reflect all available information, making consistent outperformance through stock-picking very difficult. Comes in weak, semi-strong, and strong forms; the empirical record is mixed but supports the practical case for Passive Investing.
Stock Options granted to employees as part of compensation, typically with vesting schedules. The major form of incentive compensation in startups and tech firms. Tax treatment is complex and varies sharply between ISO and NSO classifications.
A perpetual investment fund supporting a non-profit institution's mission. Yale's "Endowment Model" — heavy allocations to alternatives, illiquidity premium harvesting — was widely emulated. Performance has been less remarkable in recent years.
Market capitalization plus net debt (debt minus cash). The economic value of the firm as a whole, independent of how it's financed. EV/EBITDA is the most common multiple used in valuation.
Ownership interest in a company; the residual claim after all debts are paid. For shareholders this means upside if the company does well — and the last position in line if it fails.
Environmental, Social, and Governance criteria used to evaluate investments beyond financial returns. The empirical case for ESG outperformance is contested; the case for ESG as risk management is stronger.
Third-party scores of companies' performance on environmental, social, and governance criteria. Notoriously inconsistent across rating providers — different methodologies produce widely different scores for the same firm.
Exchange-Traded Fund — a basket of securities tradable on exchanges like individual stocks. Most ETFs are index funds but many are now active or thematic. The structure offers tax efficiency advantages over mutual funds.
US-dollar deposits held in banks outside the United States. The eurodollar market is enormous and unregulated by the Fed, which is why LIBOR (and now SOFR) became the global benchmark for dollar funding rates.
A Hedge Fund strategy that trades around specific corporate events — mergers, spinoffs, bankruptcies, restructurings. Returns are less correlated with market direction than directional strategies; outcomes depend on individual event resolution.
The amount a bond promises to return to its holder at maturity, also called "par." Most corporate bonds have $1,000 face value; sovereign bonds vary by country. Coupon payments are calculated as a percentage of face.
A private wealth management firm serving a single wealthy family (single-family office) or multiple families (multi-family). Among the most sophisticated investors globally; the bigger ones operate like institutional asset managers with greater discretion.
Financial Accounting Standards Board — the private-sector body that establishes US GAAP accounting standards. SEC has authority over public-company accounting but has long delegated standard-setting to FASB.
Financial Action Task Force — the international body setting standards for AML and counter-terrorist financing. FATF "grey lists" and "black lists" of non-cooperative jurisdictions carry significant financial consequences for the countries named.
Federal Deposit Insurance Corporation — insures bank deposits up to $250,000 per depositor per bank in the US. Created in 1933. Also resolves failed banks, typically by selling them to a healthier acquirer. Funded by bank premiums, not taxpayer dollars.
The overnight rate at which banks lend reserves to each other; the Fed's primary policy lever. Changes in the fed funds rate propagate through the entire structure of US interest rates.
The central bank of the United States — actually a system of 12 regional Reserve Banks plus a Board of Governors in Washington. Sets monetary policy, supervises banks, operates payment systems, and (when needed) acts as Lender of Last Resort.
The dominant US consumer credit score, ranging from 300 to 850, computed by Fair Isaac Corporation. Determines access to credit and pricing terms across mortgages, auto loans, credit cards, even employment. The system has well-documented biases.
The legal obligation to act in the best interests of another party. Investment advisers, board members, and trustees owe fiduciary duty; brokers and dealers historically did not, which is a source of ongoing regulatory debate.
"First-in, first-out" vs. "Last-in, first-out" — two methods for accounting for inventory cost. LIFO produces lower reported profits during inflation and is permitted under US GAAP but not IFRS.
A state in which a firm cannot easily meet its financial obligations, even if not yet in Default. Distress costs — lost customers, departing employees, fire-sale asset divestitures — limit the benefits of Leverage.
Financial Industry Regulatory Authority — the self-regulatory organization for US broker-dealers, registered with the SEC. Administers the Series 7, 63, 79 exams; investigates broker misconduct; runs arbitration of investor disputes.
Catchall term for technology-driven financial services — covering everything from mobile payments to robo-advisers to digital banking to crypto. Most "fintech" innovation is in distribution rather than fundamental finance.
Government taxation and spending decisions. Distinct from Monetary Policy; can complement or counteract central bank actions. The relative effectiveness of monetary vs fiscal stimulus is a perennial macroeconomic debate.
The asset class of debt securities — bonds, notes, bills, and structured-debt instruments. Called "fixed income" because most pay predictable Coupon streams, though floating-rate instruments vary the meaning.
A sudden, extreme price decline that quickly reverses, typically caused by algorithmic trading interacting with thin liquidity. The May 2010 US equity flash crash is the canonical example; similar episodes have occurred in Treasuries and FX.
A bond whose Coupon adjusts periodically based on a reference rate (historically LIBOR, now typically SOFR in the US). FRNs have very low Duration because the coupon resets to market levels.
A secondary equity offering by an already-public company. Can be primary (new shares issued, raising capital for the company) or secondary (existing shareholders selling their stakes). Generally less prestigious than IPOs but enormously common.
The Federal Open Market Committee — the body within the Federal Reserve that sets US monetary policy. Meets eight times a year; its statements and minutes move markets globally.
The legal process by which a lender seizes Collateral (typically a home) when a borrower defaults on a mortgage. Procedures vary substantially across US states — judicial foreclosure (court-supervised) is slower than non-judicial.
A private agreement to buy or sell an asset at a specified future date and price. Like a Futures Contract contract but customized and traded over-the-counter rather than on an exchange, which means counterparty risk is not centrally cleared.
Central bank communication about future policy intentions, used to influence market expectations and longer-term interest rates. Particularly important when policy rates are at zero. Effectiveness depends on credibility.
Cash from operations minus Capital Expenditure (Capex) — the cash a firm generates after maintaining and growing its asset base. The cash available to repay debt, return to shareholders, or reinvest. The standard input to Discounted Cash Flow (DCF) valuation.
Trading ahead of a client's order that one knows about, profiting from the price movement the client's order will cause. Long banned in traditional markets; the DeFi equivalent is MEV extraction.
Fundamental Review of the Trading Book — Basel's overhaul of market-risk capital requirements for bank trading operations. Increases capital required for trading positions and restricts use of internal models; implementation has been repeatedly delayed.
A standardized exchange-traded contract to buy or sell an asset at a future date at a price set today. Unlike forwards, futures are marked-to-market daily and centrally cleared, eliminating most counterparty risk.
Generally Accepted Accounting Principles — the US accounting standards. Rules-based and detailed; differs from the more principles-based IFRS used by most other developed economies.
The rate of change in an option's Delta as the underlying stock price moves. High-gamma positions require constant rehedging; gamma exposure is one of the central concepts in active options trading.
Gross Domestic Product — the total economic output of a country in a given period. The single most-watched economic statistic; growth rates drive expectations for rates, earnings, and asset prices.
General Data Protection Regulation — 2018 EU privacy law with global reach because it applies to any firm handling EU residents' data. Major operational impact on financial services firms with global customer bases.
The manager of a PE, VC, or Hedge Fund fund. Has decision-making authority and personal liability (in structure). Receives management fees plus carried interest on profits.
1933 US law that separated commercial banking (deposits, loans) from investment banking (underwriting, trading). Substantially repealed by GLBA in 1999; its dismantling and possible reinstatement remain perennial financial-reform debates.
1999 US law repealing most remaining Glass-Steagall restrictions on combining commercial banking, investment banking, and insurance. Cleared the way for universal banks (Citigroup, JPMorgan Chase, Bank of America). Controversial role in 2008 financial crisis dynamics.
An accounting entry recording the premium paid for an acquired company above the fair value of its identifiable net assets. Sits on the Balance Sheet as an intangible asset; tested annually for Impairment.
Debt instruments whose proceeds are earmarked for environmentally beneficial projects. The market has grown rapidly since the European Investment Bank's first issuance in 2007; verification standards and "greenwashing" remain ongoing concerns.
The percentage reduction applied to an asset's market value when used as Collateral. A bond worth $100 with a 5% haircut secures $95 of loan. Haircuts widen sharply in stressed markets.
A position taken to offset risk in another position. A wheat farmer selling wheat futures hedges against price declines; an airline buying oil futures hedges against fuel cost increases. Effective hedging is harder than it looks; basis risk and timing mismatches are common pitfalls.
A pooled investment vehicle for sophisticated investors using strategies (long-short, Arbitrage, macro, distressed) that typical mutual funds cannot. The name is historical; modern hedge funds frequently take very directional bets.
Algorithmic trading characterized by very short holding periods (microseconds to seconds), heavy use of co-location with exchange servers, and reliance on market-microstructure profits. Now dominates intraday US equity volume.
In hedge fund fee structures, the highest net asset value an investor's holdings have reached. Performance fees only apply on gains above the high-water mark, preventing funds from earning fees on the same gains twice after losses.
A corporate bond with Credit Rating below BBB-/Baa3 — also called "junk" bonds or "speculative grade." Higher yields compensate for higher default risk. The market is approximately $1.5 trillion in size globally.
International Financial Reporting Standards — the accounting framework used by most developed economies except the US. More principles-based than US GAAP; the two standards have converged on many issues but meaningful differences remain.
Investment intentionally targeting social or environmental outcomes alongside financial returns. Distinct from ESG (which screens) in actively seeking measured impact. Returns expectations vary from "concessional" (below-market) to "market-rate" depending on strategy.
A reduction in the carrying value of an asset on the Balance Sheet when it's no longer worth its book value. Common for Goodwill when an acquisition fails to perform; often a sign that prior strategic decisions went wrong.
Whether an option would have intrinsic value if exercised today. A call is in-the-money when the stock trades above strike; a put is in-the-money when it trades below. Out-of-the-money options have only time value.
The financial statement showing revenue, expenses, and resulting profit over a period (quarter or year). Also called the "P&L" (profit and loss statement). Pairs with the Balance Sheet and Cash Flow Statement.
A passively managed fund that tracks a market index (S&P 500, MSCI World, etc.). Lower-cost than active funds and harder to underperform. Vanguard pioneered the model in 1976; index funds now dominate retail investing.
A sustained rise in the general price level, eroding purchasing power. Measured by indices like CPI and PCE; targeted at 2% by most major central banks. Hyperinflation (>50% per month) is rare but devastating.
The first sale of a company's shares to public investors. Allows founders and early investors to monetize their stakes and gives the company access to public capital markets. Run by investment-bank underwriters.
Trading on material non-public information about a publicly-traded company. Illegal under US securities law and most major jurisdictions. Enforcement is uneven; jury convictions are difficult to obtain in absence of explicit communication evidence.
Fees paid by merchants' banks to cardholders' banks for each card transaction, typically 1-3% of the purchase. Set by card networks; long-running political battles over caps occur in many countries.
The interest rate the Fed pays banks on their reserve balances at the central bank. A monetary-policy tool introduced in 2008 that lets the Fed set a floor under short-term rates regardless of reserve quantity.
The cost of borrowing money, or equivalently, the return on lending. Set by markets for most loans, but heavily influenced by central bank policy rates and the Yield Curve.
A condition in which short-term interest rates exceed long-term ones. Historically a reliable (though imperfect) predictor of US recessions, though the mechanism is debated.
The process by which investment banks distribute IPO shares to institutional investors. Heavily oversubscribed deals lead to small allocations; participation is rationed by relationship and indicated demand. The fairness of allocation practices has been a recurring political issue.
An Options strategy combining four positions to profit from a stock staying within a defined price range. One of the most-discussed retail-trader strategies; profitable in low-volatility regimes but exposed to tail risk.
The Discount Rate that makes a project's NPV (Net Present Value) equal to zero. Used widely to compare investments. Misleading when compared across projects with different scales or cash-flow timing; NPV is theoretically superior but IRR is what gets quoted.
Debt subordinated to other debt in repayment priority. Holders are paid only after Senior Debt holders are made whole in bankruptcy. Carries higher interest rates to compensate.
The process by which financial institutions verify customer identities and screen for money-laundering, sanctions violations, and other financial crimes. Required by regulation globally; a major operational cost for banks.
A central bank's willingness to lend to solvent-but-illiquid banks during financial panic. Walter Bagehot's 1873 dictum: "lend freely, at a penalty rate, against good collateral." The Fed's response to 2008 and 2020 followed this template.
The use of borrowed money to amplify returns (or losses). Operating leverage refers to fixed costs in the business; financial leverage refers to debt in the Capital Structure. More leverage means more upside in good times and more risk of Financial Distress in bad.
An acquisition financed primarily with debt, typically by a private equity firm. The target company's own cash flows service the debt. Returns come from operational improvements, financial engineering, and (most importantly) multiple expansion at exit.
What a firm or person owes to others — debt, accounts payable, pension obligations, deferred taxes. The right-hand side of the Balance Sheet alongside Equity.
London Interbank Offered Rate — historically the benchmark rate for trillions of dollars of loans, derivatives, and bonds. Phased out after a manipulation scandal; the US replacement is SOFR.
Investors in PE, VC, and Hedge Fund funds. Provide capital but have limited liability and limited involvement in fund decisions. Counterpart to General Partners (GPs) who manage the fund.
A right of preferred stockholders (typically VCs) to receive a specified return before common stockholders (typically founders and employees) in an exit. Standard "1x non-participating" is investor-friendly enough; more aggressive terms transfer significant value to investors.
The ease with which an asset can be converted to cash without significant price impact. Cash is the most liquid; real estate is among the least. Markets can lose liquidity rapidly in stress, as in March 2020.
A post-2008 regulatory requirement that banks hold enough liquid assets to survive a 30-day stress scenario. Introduced under Basel III; complements traditional capital requirements with explicit liquidity standards.
In trading: borrowed money used to leverage a position, or the collateral posted to support a derivatives position. In accounting: the difference between revenue and cost. Context determines which is meant.
A company's total share count multiplied by current share price — the public market's estimate of its equity value. Used to classify firms (large-cap >$10B, mid-cap, small-cap, etc.) and weight index funds.
A firm that continuously quotes bid and ask prices for securities, earning the bid-ask spread while bearing inventory risk. Citadel Securities and Virtu dominate US equity market-making; specialist firms operate across asset classes.
A fund structure with multiple "feeder" funds (US, offshore, etc.) investing in a single "master" fund. Allows tax-optimized vehicles for different investor types while maintaining a single underlying portfolio. Standard for international hedge funds.
The bank business model: taking in short-term deposits and lending long-term. Profitable when the Yield Curve slopes upward; risky when depositors demand funds faster than loans can be liquidated, as in classic bank runs.
A strategy of buying the target stock and (sometimes) shorting the acquirer in announced M&A deals, capturing the spread to the deal price if the merger closes. Earns small but consistent returns; occasional deal breaks produce sharp losses.
Transactions where one company buys, sells, or combines with another. Advised by investment-banking M&A teams. Empirically, most M&A deals destroy value for acquirer shareholders; deals creating value tend to be smaller, focused, and adjacent to existing capabilities.
"Maximal Extractable Value" — the value validators on a blockchain can extract by reordering, including, or excluding transactions in a block. The DeFi-native equivalent of front-running in traditional markets.
Micro studies individual choice and firm behavior; macro studies aggregate phenomena (output, inflation, employment). Most finance practice draws on micro (firm valuation) plus a working understanding of macro (rates, cycles).
European Union regulation effective 2018 that unbundled investment research from trading commissions and imposed broad transparency requirements. Compressed the European sell-side research industry significantly.
A central bank's management of short-term interest rates and money supply to achieve macroeconomic goals (price stability, full employment). The major lever of modern macroeconomic management; fiscal policy plays a smaller but consequential role.
A loan secured by real estate, with the property serving as Collateral. US mortgages are unusual globally in their long fixed-rate terms (30 years) and prepayment options. Aggregated mortgages back mortgage-backed securities.
A bond backed by a pool of mortgages. The largest securitization market globally. Central to the 2007-2009 financial crisis; the structural complexity of mortgage Prepayment Risk makes MBS pricing more complex than typical corporate bonds.
A valuation ratio comparing a firm's value to a financial metric — P/E, EV/EBITDA, P/B, EV/Revenue. Quick and useful for relative comparisons; inadequate substitute for understanding the business behind the numbers.
A pooled investment vehicle that issues shares to retail investors, priced once daily at the closing net asset value. The dominant structure for retail investing pre-ETF era; still holds significant assets in 401(k) and IRA accounts.
A digital-native bank without physical branches — Chime, Monzo, N26, Revolut. Some hold full banking licenses; many operate as fintech wrappers around partner banks. Profitability has been a persistent challenge.
The accounting value of a fund's holdings, typically calculated daily for mutual funds and quarterly for Private Equity and venture capital. The price at which investors enter and exit open-ended funds.
A firm's profit after all expenses, interest, and taxes — the "bottom line" of the Income Statement. Important but easily manipulated through accounting choices; Cash Flow gives a clearer picture of economic reality.
A bank's interest income minus interest expense, divided by interest-earning assets. The basic measure of how profitably a bank intermediates between savers and borrowers. Most US banks run NIM of 2-4%.
The sum of an investment's discounted cash flows at the appropriate Discount Rate. Positive NPV means the project creates value; negative NPV means it destroys value. The theoretically correct capital-budgeting criterion.
Office of the Comptroller of the Currency — federal regulator of national banks and federal savings institutions in the US. Bureau within the Treasury Department. Issues bank charters and supervises operations.
Regulatory frameworks (UK's PSD2 was the model) requiring banks to share customer data with third-party fintech providers via APIs. Aims to increase competition and consumer choice; effects vary widely across jurisdictions.
The central bank's purchase or sale of government securities to influence the money supply and short-term interest rates. The Fed's traditional tool for adjusting the federal funds rate.
Day-to-day expenses of running a business — salaries, rent, utilities, marketing. Distinguished from Capital Expenditure (Capex) in that opex is expensed in the period incurred.
Contracts giving the holder the right (not obligation) to buy (call) or sell (put) an asset at a specified price by a specified date. Pricing has been studied since Black-Scholes in 1973; the options market is enormous and central to modern hedging and speculation.
When the Collateral backing a loan or Asset-Backed Security (ABS) is worth more than the loan itself. Provides cushion against losses; common in securitized products.
Share price divided by earnings per share. The most-cited valuation Multiple; broadly indicates how much investors will pay per dollar of current earnings. Useful but limited — heavily influenced by growth expectations and accounting choices.
Latin for "on equal footing" — a status in which different creditors have equal priority claims on a borrower's assets. Sovereign-debt restructurings have generated extensive litigation over what pari passu does and doesn't require.
Investing in funds that track a market index rather than attempting to outperform it. Cheaper and historically better-performing than most active strategies. Now accounts for the majority of US equity mutual fund assets.
Public Company Accounting Oversight Board — the regulator of audits of US public companies, created by Sarbanes-Oxley after Enron. Inspects audit firms and sets auditing standards. Has limited reach into auditors operating in jurisdictions (notably China) that restrict cross-border inspection.
A scheme for funding retirement income. Defined-benefit plans promise specific payouts; defined-contribution plans (like 401(k)s) accumulate individual savings. The shift from DB to DC has transferred enormous investment risk from employers to workers.
A compensation plan tracking the value of company stock without conveying actual ownership. Used by private companies that want equity-like incentives without giving up shares, and in employee plans for companies whose equity isn't freely transferable.
The slide deck investment bankers prepare to win a client mandate or present an acquisition opportunity. The endless production of pitchbooks is core to the analyst-level investment banking experience.
A corporate defense mechanism that triggers harmful consequences for an unwelcome acquirer attempting a hostile takeover — typically by allowing other shareholders to buy stock at a discount, diluting the acquirer's stake. Standard in US corporate governance; restricted in many other jurisdictions.
In venture capital, the firm's valuation before (pre-) and after (post-) a financing round. Post-money equals pre-money plus the new investment. The distinction matters because Dilution is calculated using post-money.
Equity with fixed dividend rights and priority over common stock but no voting rights. Used in venture-capital financings, bank capital structures, and some corporate finance applications. Less common than common stock or straight debt.
The risk that borrowers will repay loans earlier than expected, typically when rates fall. Particularly important for mortgage-backed securities — when rates drop, homeowners refinance, and MBS investors get their principal back at par when they'd prefer to keep earning above-market coupons.
The original amount borrowed or invested, distinct from interest accrued. Also: the person on whose behalf an agent acts — the source of the Principal-Agent Problem.
The conflict of interest when one party (the agent) makes decisions on behalf of another (the principal) — for example, executives running a company for Shareholders. Resolving it through governance, compensation, and incentives is core to corporate finance.
See Private Equity (PE).
Investment in private companies, typically through leveraged buyouts of operating businesses. Returns historically have outperformed public markets but with less liquidity and more variability than industry marketing suggests.
Buying put Options against existing long stock positions to limit downside. Effectively insurance on the position. Cost (the put premium) reduces total returns even when the puts expire worthless.
A campaign by dissident shareholders (typically activist investors) to elect their own directors to a company's board against management opposition. Resolves through shareholder vote; the threat alone often forces governance changes without a full contested vote.
The sale of securities to public investors through registered means. Includes IPOs (first offering) and secondary offerings (subsequent ones). Requires SEC registration in the US and similar disclosure regimes elsewhere.
A scheme to artificially inflate an asset's price through coordinated buying and false promotion, then sell at the inflated price. Historically associated with small-cap stocks; now common in cryptocurrency markets where regulation is weaker.
The two basic types of Options. A call gives the right to buy at a set price; a put gives the right to sell. Most exotic options can be decomposed into combinations of puts and calls.
A no-arbitrage relationship between European put and call prices: Call − Put = Stock − Present Value of Strike. The simplest options pricing relationship; violations indicate either pricing inefficiencies or accounting for dividends/borrow costs.
Central bank purchase of longer-dated government bonds (and sometimes other assets) to lower long-term interest rates when short-term rates are already near zero. Pioneered by the Bank of Japan in the 2000s; deployed massively by the Fed, ECB, and BoE after 2008.
The reverse of quantitative easing — a central bank shrinks its balance sheet by allowing bonds to mature without reinvestment, draining reserves from the banking system. The Fed undertook QT episodes in 2018-2019 and 2022-onward.
Liquid current assets (cash + receivables, excluding inventory) divided by current liabilities. A measure of short-term solvency that's stricter than the Working Capital / current ratio.
A significant decline in economic activity lasting more than a few months. The US NBER defines it qualitatively; the popular "two consecutive quarters of negative GDP growth" definition is convenient but not authoritative.
A lender's legal right to pursue the borrower's other assets if the Collateral is insufficient to cover the debt. Mortgages in some US states are non-recourse; commercial loans typically are recourse.
A firm or individual registered with the SEC (or state regulators, depending on AUM) to provide investment advice for compensation. RIAs owe fiduciary duty to clients; broker-dealers historically did not, a distinction blurred by recent regulation.
SEC rule allowing private companies to raise capital from accredited investors without full public-offering registration. The legal foundation of US venture capital, private placements, and most non-public capital formation.
Insurance for insurance companies — primary insurers cede some risk to reinsurers to manage their own balance sheets. The largest reinsurers (Munich Re, Swiss Re, Berkshire Hathaway's reinsurance operations) are quietly some of finance's most consequential firms.
A company that owns income-producing real estate and is required to distribute most of its income to shareholders in exchange for special tax treatment. The public-equity wrapper for real-estate investing.
Short-term borrowing in which one party sells securities with an agreement to buy them back shortly after at a slightly higher price. The size of the global repo market exceeds GDP; the September 2019 repo squeeze illustrated its centrality to short-term funding.
Bank holdings of central-bank money — either as cash or as deposits at the central bank. Required reserves are minimums set by regulation; excess reserves are voluntary holdings that earn the interest on reserves rate.
A promise to deliver shares to an employee after vesting conditions are met. Replaced stock options as the dominant equity-compensation form at most large public technology companies. Taxed as ordinary income on vesting.
Renegotiation of debt terms to make them sustainable for a financially distressed company, either in or out of court. Out-of-court is faster and cheaper; in-court (US Chapter 11) provides legal binding force.
Net income divided by total Assets. Particularly important for banks, where it expresses earnings power per dollar of balance sheet. Bank ROAs of 1% or above are considered strong.
Net income divided by shareholder equity. A measure of how efficiently a firm uses equity capital. Easily inflated by Leverage; Return on Invested Capital (ROIC) is often a better measure of underlying business quality.
Operating profit (after tax) divided by debt-plus-equity capital. Measures returns on total capital regardless of how it's financed; sustained ROIC above Weighted Average Cost of Capital (WACC) is the textbook definition of value creation.
A way for companies to raise capital by offering existing shareholders the right to buy additional shares at a discount. More common in Europe than the US, where bought deals and follow-ons dominate.
The expected return on a risky asset minus the Risk-Free Rate. The equity risk premium — the long-run excess return of stocks over Treasury bills — has been roughly 4-6% historically in the US, with debate over its forward-looking estimate.
The theoretical return on an investment with no default risk; in practice approximated by short-dated government securities (US Treasury bills in the US). The base rate from which all risky returns are measured.
A strategy of acquiring many small companies in a fragmented industry and consolidating them into a larger operation. Often PE-led; works when there are real economies of scale to capture, fails when "synergies" prove illusory.
A simplified financing instrument used heavily in seed-stage VC, particularly in YC-influenced deals. Converts to equity at the next priced round. Faster to close than convertible notes but creates dilution accounting complexity later.
2002 US legislation passed after Enron and WorldCom, dramatically expanding public-company governance and disclosure requirements. Section 404 (internal controls) was particularly costly to implement; benefits and costs are still debated.
US Securities and Exchange Commission — the primary regulator of US securities markets. Created in 1934 after the 1929 crash. Sets disclosure rules, enforces securities laws, oversees exchanges and investment advisers. Notoriously under-resourced relative to its mandate.
Pooling loans (mortgages, auto loans, credit-card receivables) and issuing bonds backed by their cash flows. Distributes credit risk away from originators; turned out to be more dangerous than understood pre-2008 because of layered re-securitization in CDOs.
Debt with the highest priority claim in bankruptcy. Typically secured by Collateral and carries lower interest rates than junior (subordinated) debt. The classic capital structure goes from senior secured down to common equity.
A portfolio managed for a single client (often an institutional investor) rather than a pooled fund. Offers customization and tax efficiency advantages over mutual funds. Increasingly available to retail investors via "direct indexing" platforms.
See Activist Investor.
The market value of a firm's equity. Whether maximizing it should be the sole purpose of corporate management is the central debate in corporate governance — from Milton Friedman's 1970 framing through stakeholder capitalism today.
Owners of a corporation's Equity. Have residual claim on assets after all debts paid, voting rights on major corporate matters, and (in theory) the right to elect directors who hire and fire management. The Principal-Agent Problem limits how well these rights actually align managerial behavior with their interests.
In real estate: a home sale at a price below the outstanding mortgage balance, with the lender's approval to accept the proceeds as settlement. Distinct from financial-markets Short Selling — same words, completely different meaning.
Borrowing a security to sell it now, hoping to buy it back later at a lower price. Profitable when prices fall; unlimited loss potential if prices rise. Banned periodically in stressed markets, with mixed evidence on whether bans help.
A sharp price rise that forces short sellers to cover their positions, driving the price even higher. Famous examples: Volkswagen in 2008, GameStop in 2021. Hard to predict; spectacular when they happen.
A segregated portion of a fund holding illiquid or distressed assets, with investor redemptions restricted until the assets are realized. Heavily used during the 2008 crisis to suspend redemptions on troubled positions; controversial because some funds abused the mechanism.
Self-executing code on a blockchain (typically Ethereum) that performs financial functions without trusted intermediaries — lending, exchange, derivatives, automated treasury management. The technical foundation of DeFi.
Secured Overnight Financing Rate — the Fed-published benchmark rate that replaced LIBOR for most US dollar contracts. Based on actual transactions in the Treasury repo market rather than the survey-of-banks approach LIBOR used.
A state-owned investment fund managing surplus reserves or commodity proceeds. Major examples: Norway's Government Pension Fund Global, Singapore's GIC and Temasek, Saudi Arabia's PIF, ADIA. Collectively manage approximately $10 trillion globally.
Special Purpose Acquisition Company — a publicly-listed shell that raises money intending to acquire a private company, taking it public via the merger. Boomed in 2020-2021; subsequent regulatory scrutiny and poor returns have cooled the market.
A legal entity created for a specific narrow purpose, often to isolate assets and risks. Used in securitizations to hold the pool of loans; used in project finance; abused pre-2008 to hide leverage off-balance-sheet (Enron, Lehman).
A new company formed when employees leave to commercialize technology or business lines from their former employer. Common in venture capital — many notable startups are spin-outs from large tech firms, universities, or research labs.
A parent company's distribution of shares in a subsidiary to its shareholders, creating an independent public company. Often used to unlock value when a subsidiary's strategic fit with the parent is weak; the spun-off entity historically outperforms in the years following.
Placing orders with intent to cancel before execution, to manipulate prices. Specifically banned by Dodd-Frank. The strategy briefly fooled traders in the 2010 Flash Crash; subsequent enforcement actions against individual traders followed.
The difference between two rates or prices — bid vs ask, corporate yield vs Treasury yield, etc. Context determines the meaning; see Bid-Ask Spread and Credit Spread for two common uses.
A cryptocurrency pegged to a stable asset, typically the US dollar. Major examples: USDC, USDT. Used as the "money" of DeFi and increasingly as cross-border payment rails. Regulation lagging behind adoption.
A board structure where only one-third of directors are up for election each year, making hostile takeovers harder. Common defensive structure that has faced increasing pressure from institutional investors over the past decade.
A simulation of how a bank or portfolio would perform under adverse scenarios — severe recession, market crashes, credit shocks. Required of large US banks annually since Dodd-Frank; similar regimes in Europe and elsewhere.
Status granted to DIP financing in bankruptcy, ranking ahead of all pre-petition debt. The strong protection is why distressed-debt specialists actively compete to provide DIP loans.
A contract in which two parties exchange streams of payments — typically a fixed-rate stream for a floating-rate stream (interest-rate swap), or one currency for another (FX swap). The interest-rate swap market is the largest derivatives market globally.
A messaging network used by banks worldwide to transmit payment instructions. Not a payment system itself — money moves through correspondent banks — but the messaging backbone of international banking. Sanctions on SWIFT access have become a major geopolitical tool.
The risk that the failure of one financial institution will cascade into broader system-wide damage. The justification for treating some banks as "too big to fail" and for the post-2008 regulatory regime aimed at making big banks fail more safely.
The risk of rare but severe events — moves of 3+ standard deviations from expected outcomes. Famously underweighted by VaR models calibrated to normal distributions; the 2008 crisis demonstrated how tail risk can be systematically underestimated.
The reduction in tax owed because interest payments on debt are tax-deductible (in most jurisdictions). The primary theoretical reason debt financing might be preferred to equity; constrained in practice by Financial Distress costs.
A public offer to buy shares directly from shareholders at a specified price. Used in friendly and hostile takeovers, in private-company secondary transactions, and in share buybacks. Subject to specific regulatory requirements (US Williams Act; European equivalents).
The relationship between bond yields and their maturity, depicted by the Yield Curve. Normally upward-sloping (longer-dated bonds yield more); inversions historically predict recessions.
The rate at which an option loses value as time passes, holding other inputs constant. Long-option positions decay; short-option positions benefit from theta. Theta accelerates as expiration approaches.
The highest-quality capital banks hold to absorb losses while remaining a going concern — primarily common equity plus retained earnings. The Basel framework sets minimum Tier 1 ratios; well-capitalized banks hold well above the minimum.
The principle that a dollar today is worth more than a dollar in the future, because today's dollar can be invested. The conceptual foundation underlying discounting, Discounted Cash Flow (DCF) valuation, and most of finance.
A regulatory requirement that systemically important banks issue enough loss-absorbing debt that they could be resolved without taxpayer support. The standard tool by which post-2008 reforms aimed to address Too Big to Fail.
The doctrine that some financial institutions are so systemically important that governments will rescue them rather than allow disorderly failure. Post-2008 reforms aimed to enable orderly resolution of "TBTF" institutions; whether they would actually be used in a real crisis remains untested.
Slices of a securitized cash flow with different priority claims and credit ratings. Senior tranches get paid first and are rated highly; equity tranches absorb losses first. Used in Mortgage-Backed Security (MBS), ABS, CDOs, and CLOs.
Debt issued by the US Treasury — bills (under 1 year), notes (2-10 years), bonds (20-30 years), and TIPS (inflation-protected). The deepest and most liquid sovereign-debt market globally; yields define the Risk-Free Rate in dollar terms.
Total fund value (realized plus unrealized) divided by capital contributed. The most-cited PE/VC performance metric. Includes paper marks that may or may not materialize; DPI is the cleaner realized return.
The traditional Hedge Fund and private equity fee structure: 2% annual management fee plus 20% carry on profits. Has compressed somewhat — large institutional LPs negotiate lower fees — but remains the rhetorical benchmark.
A loan where the Collateral is worth less than the loan balance. Common in mortgages after housing-price declines; the term entered popular discourse during the 2008-2012 US housing crisis.
An investment bank that purchases newly issued securities from an issuer and resells them to investors, taking on the placement risk in exchange for fees (the "underwriting spread"). The standard arrangement for IPOs and large bond offerings.
The process of evaluating and assuming risk for a fee. In insurance: assessing applicants and pricing policies. In investment banking: see Underwriter. Both involve quantifying risk and demanding compensation for bearing it.
A private company valued at $1 billion or more. The term was coined in 2013 when such firms were rare; the 2021 funding boom produced hundreds of "unicorns" of varying quality, with many subsequently down-rounded or written off.
The process of estimating an asset's intrinsic value. Standard approaches: Discounted Cash Flow (DCF) (discounted cash flow), comparable multiples, and (for distressed firms) asset-based methods. Each has weaknesses; serious analysts triangulate among them.
A statistical estimate of the maximum loss a portfolio could experience over a given period at a given confidence level (typically 95% or 99%). Widely used in risk management; famously understated tail risk in 2008.
An option's sensitivity to changes in implied Volatility. Long options have positive vega (benefit from rising volatility); short options have negative vega. Often the dominant exposure in options portfolios at extreme strikes.
Equity investment in early-stage private companies, typically technology firms. A power-law business: most investments fail or break even; a few generate the returns that justify the strategy.
Debt provided to venture-backed companies, typically with warrants attached. Allows founders to delay equity dilution but adds Liabilities to companies that often lack stable cash flows.
A measure of how much an asset's price varies — historically computed as standard deviation of returns. The VIX index measures 30-day implied volatility on S&P 500 options. Volatility is famously not constant, contra Black-Scholes assumptions.
Provision of Dodd-Frank restricting banks from proprietary trading and from sponsoring hedge funds and private equity funds. Largely ended the era of major bank prop-trading desks; some restrictions modified in 2020.
The blended return required by both debt and equity holders, weighted by their proportions in the Capital Structure. The standard Discount Rate for Discounted Cash Flow (DCF) valuation of an entire firm.
A real-time, irrevocable bank-to-bank electronic payment, typically used for large dollar amounts. Two main US networks: Fedwire (Fed-operated) and CHIPS (private, dollar-clearing for international payments).
Current assets minus current liabilities — the short-term capital a business needs to fund day-to-day operations (inventory, receivables, paying suppliers). Growing businesses typically need growing working capital, which consumes cash.
The return on a bond, expressed as an annualized percentage. Multiple definitions in use: yield to maturity, current yield, yield to worst. Inversely related to bond price — when one rises, the other falls.
A plot of bond yields against their maturities — see Term Structure. The US Treasury yield curve is the global benchmark; its shape (steep, flat, inverted) carries information about market expectations of growth and inflation.
The annualized return an investor earns by buying a bond at the current price and holding it to maturity, assuming all coupons are reinvested at the YTM. The most-quoted bond Yield measure.
A bond that pays no coupons and instead is sold at a deep discount to Face Value (Par Value), maturing at par. The return is the difference between purchase price and face value. Long-dated zeros have the highest Duration of any traditional bond.