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									                    Financial Terms related to Ratio

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Acid test ratio

   • Also called the quick ratio, the ratio of current assets minus inventories, accruals,
   and prepaid items to current liabilities.

   • Is another term to describe the Quick Asset Ratio. It measures an organization's
   liquidity by adjusting current assets by subtracting inventories and then dividing by
   the current liabilities.

   • See Quick Ratio.

Activity ratios

   • Used to measure the effectiveness of managing accounts receivable, inventory,
   accounts payable, fixed assets, and total assets.

Appraisal ratio

   • The signal-to-noise ratio of an analyst's forecasts. The ratio of alpha to residual
   standard deviation.                      2|Page


   • Is a process to resolve disputes for securities and futures markets. It can involve
   broker/dealers, clients, and employees of broker/dealers. There are different forums
   such as the NASD and NYSE.

Arbitration panel

   • Is the group of Arbitrators selected to resolve a dispute.

Articles of incorporation

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   • Legal document establishing a corporation and its structure and purpose.

Asset activity ratios

   • Ratios that measure how effectively the firm is managing its assets.

Asset/equity ratio

   • The ratio of total assets to stockholder equity.

Average price earning ratio

   • The average of the annual high and low Price-Earning Ratios for a particular time
   period, typically calculated over the last five years.

Canadian controlled private corporation

   • Abbreviated CCPC. A small corporation whose first $200,000 of taxable income
   qualifies for the small business deduction offered by the federal government.

Capital rationing

   • Placing one or more limits on the amount of new investment undertaken by a firm,
   either by using a higher cost of capital, or by setting a maximum on parts of, and/or
   the entirety of, the capital budget.

   • The financial situation in which a firm has only a fixed number of dollars for
   allocation among competing capital expenditures.                      3|Page

Capitalization ratios

   • Show how a firm has financed the investment in assets. There are three
   capitalization alternatives: debt, preferred equity and common equity.

   • Also called financial leverage ratios, these ratios compare debt to total
   capitalization and thus reflect the extent to which a corporation is trading on its
   equity. Capitalization ratios can be interpreted only in the context of the stability of
   industry and company earnings and cash flow.

Cash concentration

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   • The process used by the firm to bring lockbox and other deposits together into one
   bank, often called the concentration bank.

Cash flow coverage ratio

   • The number of times that financial obligations (for interest, principal payments,
   preferred stock dividends, and rental payments) are covered by earnings before
   interest, taxes, rental payments, and depreciation.

Cash flow from operations

   • A firm's net cash inflow resulting directly from its regular operations (disregarding
   extraordinary items such as the sale of fixed assets or transaction costs associated
   with issuing securities), calculated as the sum of net income plus non-cash
   expenses that were deducted in calculating net income.

Cash ratio

   • The proportion of a firm's assets held as cash.

Common equity ratio

   • Measures the proportion of total assets financed by common shareholders.

Common stock ratios

   • Ratios that are designed to measure the relative claims of stockholders to earnings                      4|Page

   (cash flow per share), and equity (book value per share) of a firm.

Concentration account

   • A single centralized account into which funds collected at regional locations
   (lockboxes) are transferred.

Concentration banking

   • A collection procedure in which payments are made to regionally dispersed
   collection centers, then deposited in local banks for quick clearing. Reduces

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   collection float by shortening mail and clearing float.

Concentration services

   • Movement of cash from different lockbox locations into a single concentration
   account from which disbursements and investments are made.

Constant payout ratio dividend policy

   • A dividend policy based on the payment of a certain percentage of earnings to
   owners in each dividend period.

Continuing operations

   • A term used in an Income Statement to label income of a recurring nature, rather
   than that caused by sales of assets or discontinued operations.

Controlled foreign corporation

   • Abbreviated CFC. A foreign corporation whose voting stock is more than 50%
   owned by U.S. stockholders, each of whom owns at least 10% of the voting power.

Conversion ratio

   • The number of shares of common stock that the security holder will receive from
   exercising the call option of a convertible security.

   • Is the number of common shares that a convertible bond or other security can be                       5|Page

   exchanged upon exercise.

   • The ratio at which a convertible security can be exchanged for common shares.


   • The most common form of business organization, in which the total worth of the
   organization is divided into shares of stock, each share representing a unit of
   ownership. A corporation is ongoing and the owners face only limited liability.

   • a business entity created by law. It has the powers under the law of an individual: it

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   can sue and be sued, make and be party to contracts, acquire property and incur
   debts in its own name.

   • A legal person that is separate and distinct from its owners. A corporation is
   allowed to own assets, incur liabilities, and sell securities, among other things.

Cost benefit ratio

   • The net present value of an investment divided by the investment's initial cost. Also
   called the profitability index.

Coverage ratios

   • Ratios used to test the adequacy of cash flows generated through earnings for
   purposes of meeting debt and lease obligations, including the interest coverage ratio
   and the fixed charge coverage ratio.

   • Ratios that measure the firm's ability to pay certain fixed financing charges.
   Includes times interest earned ratio and the fixed-charge coverage ratio.

Credit rationing

   • Occurs when the terms a borrowing relationship become more restrictive. For
   example, higher margin requirements for security transactions indicates tighter credit
   requirements. Sometimes, credit rationing may occur in some industries and not in
   others to promote or discourage specific types of activities. Credit rationing can                     6|Page

   occur when interest rates have been trending either up or down. In the latter,
   defaults often prompt new and higher margin requirements. Thus, credit availability
   is more limited and interest rates can move higher in the near term as cash
   demands increase.

Current pe ratio

   • The PE Ratio calculated using the last 4 reported quarters of Earnings Per Share.
   See also: Price-Earnings Ratio.

Current ratio

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   • A measure of liquidity calculated by dividing the firm's current assets by its current

   • Refers to the amount of an entity's current assets divided by the amount of current

   • Indicator of short-term debt paying ability. Determined by dividing current assets by
   current liabilities. The higher the ratio, the more liquid the company.

   • Indicator of company's ability to pay short-term obligations, calculated by dividing
   current assets by current liabilities. Used to compare companies within a single
   industry. The higher the ratio, the more Liquid the company.

Customary payout ratios

   • A range of payout ratios that is typical based on an analysis of comparable firms.

Days' sales in inventory ratio

   • The average number of days' worth of sales that is held in inventory.

Debt equity ratio

   • Measures the ratio of long-term debt to common equity.

Debt ratio                       7|Page

   • Total debt divided by total assets.

   • Measures the proportion of total assets financed by the firm's creditors.

Debt service coverage ratio

   • Earnings before interest and income taxes plus one-third rental charges, divided by
   interest expense plus one-third rental charges plus the quantity of principal
   repayments divided by one minus the tax rate.

Debt to capital ratio

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   • The ratio of total debt to total capital ([short + long term debt] / capital). For long-
   term investors, a suggested acceptable percentage is up to 33%. Debt must be
   funded in good times and bad, so a company going through a bad slump has a
   better chance of recovering if its debt load is not too high. Keep in mind that debt
   serves the useful function of helping the company grow. It is up to management to
   use it wisely and increase the sales and earnings.

Debt to equity ratio

   • Refers to the capitalization relationship of securities. Here, it is the amount of
   bonds and preferred stocks relative to the corporate equity position.

   • The ratio identifies the relationship of debt to ownership interest in the firm's
   financial structure. A measure of a company's financial leverage, calculated by
   dividing Long Term Debt by Shareholders' Equity. A higher debt/equity ratio
   generally means that a company has been aggressive in financing its growth with
   debt, which can result in volatile earnings as a result of the additional interest

Debt/equity ratio

   • Indicator of financial leverage. Compares assets provided by creditors to assets
   provided by shareholders. Determined by dividing long-term debt by common
   stockholder equity.                     8|Page

Declaration date

   • The date on which a company's Board of Directors meet to announce the date and
   amount of the next dividend payment. Once the payment has been authorized, it is
   known as a Declared Dividend, and becomes a legal liability that must be paid.

   • The date on which a firm's directors meet and announce the date and amount of
   the next dividend.

Dividend payout ratio

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   • Percentage of earnings paid out as dividends.

   • Is computed by dividing the dividends paid on common shares by the net income
   which would be available for common stockholders.

   • A measurement of the percentage amount of net income paid out in dividends
   rather than retained by the business to help it grow. Recent payout figures higher
   than 50% (and higher than the average payout) may forewarn of a dividend cut. This
   cut may result in the stock price falling. Sometimes, although the dividend payout is
   more than earnings, the company has strong cash flow and can cover the dividend.
   However, a company paying out dividends in excess of earnings on a recurring
   basis is a risky investment.

   • Indicates the percentage of each dollar earned that is distributed to the owners in
   the form of cash; calculated by dividing the firm's cash dividend per share by its
   earnings per share.

Dollar duration

   • The product of modified duration and the initial price.

Domestic international sales corporation

   • Abbreviated DISC. A U.S. corporation that receives a tax incentive for export
   activities.                      9|Page


   • Very closely related to the maturity or the life of bonds. When there are multiple
   cash flows involved, a measure called duration is used to measure the effective life
   of the cash flow. Duration of a cash flow stream is the weighted average of the
   maturities of the cash flow stream's components. The weights are the relative sizes
   of the components. Duration is also a measure of the sensitivity of the cash flow
   stream to interest rate changes.

   • A common gauge of the price sensitivity of an asset or portfolio to a change in

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   interest rates.

   • The weighted average time to maturity of a bond where the weights are the present
   values of future cash flows. Duration measures the price sensitivity of a bond to
   changes in interest rates. (See Modified Duration)

   • Is computed by using zero coupon equivalencies to discount all the cash flows of a
   credit instrument. This statistic is a surrogate for the expected life of the security. In
   general, the term refers to a quantification of a bond as to its yield and price
   sensitivity. It should be noted that duration is additive. This means that assets,
   liabilities, swaps, and other credit instruments can be added to arrive at a portfolio or
   book duration. Some guidelines are:

          Duration of a zero coupon is its maturity.

          Duration of a coupon security is less than its maturity.

          Duration extends with maturity.

          Duration is inversely related to coupon rate.

          Duration is inversely related to the market rate.

   See Effective Duration, Macaulay Duration, and Option Adjusted Duration.

   • A measure of the current maturity of a fixed-income instrument as the weighted                       10 | P a g e

   average of the time to receipt of the payments thrown off by the instrument; the
   weights used are the present values of the future payments to be received.

Duration gap

   • Duration Gap = Duration of the assets - Duration of the Liabilities. A positive
   duration gap means that the duration of assets is greater than the duration of the
   liabilities. When interest rates increase, all securities lose value, and the securities
   with longer durations will lose even more value. Hence, when interest rates increase,
   banks with positive duration gaps will lose value.

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Duration mismatch

   • This term refers to a situation where the bank maintains different durations for its
   assets and liabilities. This exposes the bank to interest rate risk.

Earnings retention ratio

   • Plowback rate.

Edge act corporation

   • A subsidiary of a U.S. bank set up to carry out international banking business. Most
   such "subs" are located within the U.S.

Edge corporations

   • Specialized banking institutions, authorized and chartered by the Federal Reserve
   Board in the U.S., which are allowed to engage in transactions that have a foreign or
   international character. They are not subject to any restrictions on interstate banking.
   Foreign banks operating in the U.S. are permitted to organize and own and Edge

Effective duration

   • Measures the percentage change in price for a 1 percentage point or 100 basis
   point change in interest rates.                       11 | P a g e

   • also known as Option-Adjusted duration measures the responsiveness of bond
   prices to changes in interest rates after taking into account the fact that the cash flow
   expected from a bond could change because of the bond's embedded call features
   or options.

   • The duration calculated using the approximate duration formula for a bond with an
   embedded option, reflecting the expected change in the cash flow caused by the
   option. Measures the responsiveness of a bond's price taking into account the
   expected cash flows will change as interest rates change due to the embedded

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Expense ratio

   • The percentage of the assets that were spent to run a mutual fund (as of the last
   annual statement). This includes expenses such as management and advisory fees,
   overhead costs and 12b-1 (distribution and advertising) fees. The expense ratio
   does not include brokerage costs for trading the portfolio, although these are
   reported as a percentage of assets to the SEC by the funds in a Statement of
   Additional Information (SAI). The SAI is available to shareholders on request.
   Neither the expense ratio nor the SAI includes the transaction costs of spreads,
   normally incurred in unlisted securities and foreign stocks. These two costs can add
   significantly to the reported expenses of a fund. The expense ratio is often termed
   an Operating Expense Ratio (OER).


   • The time when the option contract ceases to exist (expires).

   • Is the date stipulated for the cessation of the life of an option. It is also the formal
   acknowledgment of the option s termination.

Expiration cycle

   • An expiration cycle relates to the dates on which options on a particular security                      12 | P a g e

   expire. A given option will be placed in 1 of 3 cycles, the January cycle, the February
   cycle, or the March cycle. At any point in time, an option will have contracts with 4
   expiration dates outstanding, 2 in near-term months and 2 in far-term months.

Expiration date

   • The last day (in the case of American-style) or the only day (in the case of
   European-style) on which an option may be exercised. For stock options, this date is
   the Saturday immediately following the 3rd Friday of the expiration month; however,
   brokerage firms may set an earlier deadline for notification of an option holder's

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   intention to exercise. If Friday is a holiday, the last trading day will be the preceding

Feasible target payout ratios

   • Payout ratios that are consistent with the availability of excess funds to make cash
   dividend payments.

Federal deposit insurance corporation

   • Abbreviated FDIC. A federal institution that insures bank deposits.

   • A federal agency that insures bank deposits, currently up to $100,000 per deposit.

   • A federal institution that insures bank deposits, currently up to $100,000 per

Federal deposit insurance corporation fdic

   • "The federal corporation that insures bank deposits up to $100,000 per Social
   Security number; not all banks participate.

Federal home loan mortgage corporation

   • Is one of the three Government Sponsored Agencies, issues mortgage pass-
   throughs and provides guarantee against defaults.

Financial leverage ratios                         13 | P a g e

   • Related: capitalization ratios.

Financial ratio

   • The result of dividing one financial statement item by another. Ratios help analysts
   interpret financial statements by focusing on specific relationships.

Fisher's separation theorem

   • The firm's choice of investments is separate from its owner's attitudes towards
   investments. Also refered to as portfolio separation theorem.

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Fixed asset turnover ratio

   • The ratio of sales to fixed assets.

Fixed charge coverage ratio

   • A measure of a firm's ability to meet its fixed-charge obligations: the ratio of(net
   earnings before taxes plus interest charges paid plus long-term lease payments) to
   (interest charges paid plus long-term lease payments).

   • Measures the firm's ability to meet all fixed-payment obligations.

Foreign sales corporation

   • FSC. A special type of corporation created by the Tax Reform Act of 1984 that is
   designed to provide a tax incentive for exporting U.S.-produced goods.

Funding ratio

   • The ratio of a pension plan's assets to its liabilities.

Funds from operations

   • Abbreviated FFO. Used by Real Estate Investment Trusts (REITS) to define the
   cash flow from their operations. It is calculated by adding Depreciation and
   Amortization expenses to earnings, and can be represented as Funds From
   Operations Per Share (FFO/S). FFO/S should be used in lieu of EPS when                       14 | P a g e

   evaluating REITs and other similar investment trusts.

   • Abbreviated FFO. Used by real estate and other investment trusts to define the
   cash flow from trust operations. It is earnings with depreciation and amortization
   added back. A similar term increasingly used is Funds Available for Distribution
   (FAD), which is FFO less capital investments in trust property and the amortization
   of mortgages.

Gold/silver ratio

   • Refers to the monetary conversion rate between one ounce of gold and the

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   appropriate ounces of silver. You divide the one-ounce price of gold by the current
   silver price, for the same delivery time, and determine the number of silver ounces
   required for this equation. This measurement goes back at least to a bimetallic
   monetary standard.

Hard capital rationing

   • Capital rationing that under no circumstances can be violated.

Hedge ratio delta

   • The ratio of volatility of the portfolio to be hedged and the return of the volatility of
   the hedging instrument.

Income replacement ratio

   • The percentage of pre-retirement income that a retiree would need to receive after
   retirement in order to have a post-retirement standard of living equivalent to his or
   her pre-retirement standard of living. This ratio is generally less than 100 percent
   because some expenses (i.e., taxes, commuting costs, clothing expenditures,
   savings needs) decrease after retirement. Also known as a replacement ratio or rate.

Interest coverage ratio

   • The ratio of the earnings before interest and taxes to the annual interest expense.                      15 | P a g e

   This ratio measures a firm's ability to pay interest.

Inventory turnover ratio

   • Is computed by dividing annual sales by inventories. It is usually desireable to have
   a relatively high inventory turnover ratio relative to competitors.

Irrational call option

   • The implied call imbedded in the MBS. Identified as irrational because the call is
   sometimes not exercised when it is in the money (interest rates are below the

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   threshold to refinance). Sometimes exercised when not in the money (home sold
   without regard to the relative level of interest rates).

Lagging pe ratio

   • See Trailing PE Ratio.

Leading pe ratio

   • See Projected PE Ratio.

Leverage ratios

   • Measures of the relative contribution of stockholders and creditors, and of the firm's
   ability to pay financing charges. Value of firm's debt to the total value of the firm.

Liquidity ratios

   • Ratios that measure a firm's ability to meet its short-term financial obligations on

Long term debt ratio

   • The ratio of long-term debt to total capitalization.

Long term debt to equity ratio

   • A capitalization ratio comparing long-term debt to shareholders' equity.

Low price earnings ratio effect                      16 | P a g e

   • The tendency of portfolios of stocks with a low price-earnings ratio to outperform
   portfolios consisting of stocks with a high price-earnings ratio.

Macaulay duration

   • The weighted-average term to maturity of the cash flows from the bond, where the
   weights are the present value of the cash flow divided by the price.

   • Is the present value of all cash flows, both principal and interest, weighted by time.
   It is a measurement expressed in years which is generally less than the stated
   maturity. An exception occurs for zero coupon bonds.

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Margin of profit ratio

   • Also known as the Operating Profit Ratio. A measure of a corporation's relative
   profitability. It is calculated by dividing the operating profit by the net sales. See also:
   Profit Margin.

Market book ratio

   • Market price of a share divided by book value per share.

Market to book ratio

   • See Price-to-Book Ratio.

Market value ratios

   • Ratios that relate the market price of the firm's common stock to selected financial
   statement items.

Modified duration

   • The percent change in price of a bond with no embedded options for a 100 basis
   point change in yields. Modified duration is the best single measure of a portfolio's or
   security's exposure to market risk.

   • The ratio of Macaulay duration to (1 + y), where y = the bond yield. Modified
   duration is inversely related to the approximate percentage change in price for a                        17 | P a g e

   given change in yield.

   • Is considered a more accurate representation of a bond's weighted cash flow
   stream. This statistic adjusts the Macaulay Duration by taking into account the yield
   in the market and the frequency of coupon payments in a year. Modified Duration is
   less than the standard duration. It is computed as: Modified Duration
   =________Duration____________ ( 1 + yield in market/coupons in year)

Mortgage backed securities clearing corporation

   • A wholly owned subsidiary of the Midwest Stock Exchange that operates a clearing

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   service for the comparison, netting, and margining of agency-guaranteed MBSs
   transacted for forward delivery.

Mortgage duration

   • A modification of standard duration to account for the impact on duration of MBSs
   of changes in prepayment speed resulting from changes in interest rates. Two
   factors are employed: one that reflects the impact of changes in prepayment speed
   or price.

Multinational corporation

   • A firm that operates in more than one country.

Negative duration

   • A situation in which the price of the MBS moves in the same direction as interest

Open market operation

   • Purchases and sales of government and certain other securities in the open market
   by the New York Federal Reserve Bank or directed by the FOMC in order to
   influence the volume of money and credit in the economy. Purchases inject reserves
   into the bank system and stimulate growth of money and credit; sales have the
   opposite effect. Open market operations are the Federal Reserve's most important                      18 | P a g e

   and most flexible monetary policy tool.

   • Purchase or sale of government securities by the monetary authorities to increase
   or decrease the domestic money supply.

Open market purchase operation

   • A systematic program of repurchasing shares of stock in market transactions at
   current market prices, in competition with other prospective investors.

Operating profit ratio

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   • See Margin Of Profit Ratio.

Operational risk

   • A technology-operational risk occurs when investments in new technology do not
   produce the estimated cost savings.

Operationally efficient market

   • Also called an internally efficient market, one in which investors can obtain
   transactions services that reflect the true costs associated with furnishing those

Option adjusted duration

   • Refers to the measurement of duration which is targeted for the stated first option
   (put or call) feature. This reduces the duration statistic from its ordinary
   measurement. For embedded option securities such as mortgages or other pre
   payable loans, an estimate is calculated for the expected time of the first option

Options clearing corporation

   • Is the entity through which various securities exchanges clear options transactions.
   This clearing activity consists of serving as the buyer to all sellers and the seller to
   all buyers in terms of guaranteeing contractual performance.                     19 | P a g e

P/e ratio

   • Assume XYZ Co. sells for $25.50 per share and has earned $2.55 per share this
   year; $25. 50 = 10 times $2. 55 XYZ stock sells for 10 times earnings. P/E = Current
   stock price divided by trailing annual earnings per share or expected annual
   earnings per share.

Payout ratio

   • Generally, the proportion of earnings paid out to the common stockholders as cash
   dividends. More specifically, the firm's cash dividend divided by the firm's earnings in

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   the same reporting period.

   • This is the proportion of earnings paid out as dividends. The rest would be
   reinvested in the firm. It equals 1 - plowback ratio. If a corporation pays out 60% of
   its earnings as dividends, its payout ratio would be 60%.

   • The percentage of earnings paid out in dividends, calculated by dividing dividends
   per share by Earnings Per Share. See also: Payout.

Pe ratio

   • See Price-Earnings Ratio.

Pe ratio to eps growth

   • Calculated by dividing a stock's Price-Earnings Ratio by its Earnings Per Share
   growth rate. Provides a comparison between the value that the market has put on a
   company's expected earnings and what the company has actually earned in the

Pension benefit guaranty corporation

   • Abbreviated PBGC. A federal agency that insures the vested benefits of pension
   plan participants (established in 1974 by the ERISA legislation).

   • The U.S. government agency that insures benefits in defined benefit pension plans.                      20 | P a g e

Plowback ratio

   • This is the proportion of earnings reinvested in the firm. It equals 1 - the dividend
   payout rate. If a corporation pays out 60% of its earnings as dividends, its plowback
   ratio would be 40%.

   • See Percent Retained to Common Equity.

Portfolio separation theorem

   • An investor's choice of a risky investment portfolio is separate from his attitude

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   towards risk. Related: Fisher's separation theorem.

Possessions corporation

   • A type of corporation permitted under the U.S. tax code whereby a branch
   operation in a U.S. possession can obtain tax benefits as though it were operating
   as a foreign subsidiary.

Preferred equity ratio

   • Measures the proportion of total assets financed by preferred shareholders.

Price buy zone ratio

   • A ratio that indicates whether the current price meets the target buy zone set in
   your analysis. If the Price-Buy Zone Ratio is above 1, the stock is more costly than
   your target price.

Price earnings ratio

   • Abbreviated PE Ratio. Also known as the Stock's Multiple. Calculated by dividing
   price by EPS.
   PE represents the amount that investors are willing to pay for each dollar of
   earnings. The PE value will fluctuate. The higher the PE ratio, the riskier and more
   volatile the stock. Investors are willing to pay a higher PE for faster growth and
   potential return.                     21 | P a g e

   There are various EPS formulas for PE. A Trailing PE uses reported earnings from
   the last fiscal year. A Current PE uses earnings from the current quarter back four
   quarters. A Projected or Leading PE uses earnings forecasted up to a year ahead.

Price to book ratio

   • Also known as Market-to-Book Ratio. Compares a stock's market value to its book
   value, calculated by dividing the current price by Common Stockholders' Equity Per
   Share (book value). A lower Price-To-Book Ratio might imply a stock is undervalued.

   • Is computed by dividing the current share price by the book value per share. Book

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   value per share is determined by dividing assets less the liabilities (the book value)
   by the number of shares outstanding.

Price to cash flow ratio

   • Price per share divided by Cash Flow Per Share. A measure of the market's
   expectations regarding a firm's future financial health. Provides an indication of
   relative value, similar to the Price-Earnings Ratio.

Price to earnings ratio

   • Is the relationship between the current price of an equity and its earnings stream.

Price to sales ratio

   • Calculated by dividing a stock's current price by its revenues per share. This
   equation is another technique for finding a stock's valuation relative to its own past
   performance, other companies, or the market itself.

Price/book ratio

   • Compares a stock's market value to the value of total assets less total liabilities
   (book value). Determined by dividing current stock price by common stockholder
   equity per share (book value), adjusted for stock splits. Also called Market-to-Book.

Price/earnings p/e ratio                       22 | P a g e

   • Shows the multiple of earnings at which a stock sells. Determined by dividing
   current stock price by current earnings per share (adjusted for stock splits). Earnings
   per share for the P/E ratio are determined by dividing earnings for past 12 months by
   the number of common shares outstanding. Higher multiple means investors have
   higher expectations for future growth, and have bid up the stock's price.

   • Measures the amount investors are willing to pay for each dollar of the firm's
   earnings; the higher the P/E ratio, the greater the investor confidence in the firm.

Price/sales ratio

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   • Determined by dividing current stock price by revenue per share (adjusted for stock
   splits). Revenue per share for the P/S ratio is determined by dividing revenue for
   past 12 months by number of shares outstanding.

Private export funding corporation

   • Abbreviated PEFCO. Company that mobilizes private capital for financing the
   export of big-ticket items by U.S. firms by purchasing at fixed interest rates the
   medium- to long-term debt obligations of importers of U.S. products.

Profitability ratios

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

Projected pe ratio

   • Also known as Leading PE Ratio. This ratio uses 4 consecutive quarters of EPS, at
   least one quarter of which is forecasted. The market drives stock prices up or down
   in anticipation of company results. Using forecasted EPS with the current price gives
   a PE which is more balanced with the current market value of the stock. See also
   Price-Earnings Ratio.

Public securities administration                         23 | P a g e

   • Abbreviated PSA. The trade association for primary dealers in U.S. government
   securities, including MBSs.

Q ratio or tobin's q ratio

   • Market value of a firm's assets divided by replacement value of the firm's assets.

Quick acid test ratio

   • A measure of liquidity calculated by dividing the firm's current assets minus
   inventory by current liabilities.

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Quick asset ratio

   • Refers to the ratio of cash, cash equivalents and accounts receivable relative to the
   total current liabilities. It is also known as the Acid Test Ratio. This measure of
   liquidity is more rigorous than the Current Ratio.

Quick ratio

   • Also known as the Acid-Test Ratio. A liquidity measure calculated by subtracting
   inventories from current assets, then dividing by current liabilities. The Quick Ratio is
   an indicator of a company's financial strength. A ratio of 1 to 1 or higher is usually

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

Rate of return ratios

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

Ratio analysis

   • Involves the methods of calculating and interpreting financial ratios to assess the                      24 | P a g e

   firm's performance and status.

Ratio of exchange

   • The ratio of the amount paid per share of the target company to the per-share
   market price of the acquiring firm.

Ratio of exchange in market price

   • The ratio of the market price per share of the acquiring firm paid to each dollar of
   market price per share of the target firm.

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Ratio spread

   • Is position where you sell more options relative to the number of options
   purchased. Compare to Backspread.

Ratio writes

   • Refers to writing options against the underlying instrument in a greater-or less-than
   one-to-one relationship. Typically, it refers to writing multiple options against a
   position. Sometimes, this activity is explained as being delta neutral and at other
   times it is a more aggressive posture.

Rational expectations

   • The idea that people rationally anticipate the future and respond to what they see

Receivables turnover ratio

   • Total operating revenues divided by average receivables. Used to measure how
   effectively a firm is managing its accounts receivable.

Registration statement

   • A legal document that is filed with the SEC to register securities for public offering.

Reserve ratios                      25 | P a g e

   • Specified percentages of deposits, established by the Federal Reserve Board, that
   banks must keep in a non-interest-bearing account at one of the twelve Federal
   Reserve Banks.

Retention ratio

   • The percent of earnings retained in the firm for investment purposes. See also:
   Retained Earnings.

Reward to volatility ratio

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   • Ratio of excess return to portfolio standard deviation.

Securities investor protection corporation

   • Abbreviated SIPC. A nonprofit membership corporation created by an act of
   Congress to protect clients of brokerage firms that are forced into bankruptcy.
   Membership is composed of all brokers and dealers registered under the Securities
   Exchange Act of 1934, all members of national securities exchanges and most
   NASD members. SIPC provides customers of these firms up to $500,000 coverage
   for cash and securities held by the firms (although coverage of cash is limited to

Securities registration

   • Is the compliance procedure whereby an individual is registered according to
   function, supervisory level, and type of customer contact. Also, firms must be
   registered with the appropriate regulatory bodies. See Account Executive and Series
   7. Securities Registration also refers to the process whereby the corporation or its
   representative applies to the appropriate Federal or State Agency to have the
   securities registered. This registration is not a sign of approval by the Agency but
   rather a notification by the corporation to the agency of its intent to sell securities.

Separation property

   • The property that portfolio choice can be separated into two independent tasks: 1)                      26 | P a g e

   determination of the optimal risky portfolio, which is a purely technical problem, and
   2) the personal choice of the best mix of the risky portfolio and the risk-free asset.

Separation theorem

   • The value of an investment to an individual is not dependent on consumption
   preferences. All investors will want to accept or reject the same investment projects
   by using the NPV rule, regardless of personal preference.

Sharpe ratio

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   • A measure of a portfolio's excess return relative to the total variability of the
   portfolio. Related: treynor index

Shelf registration

   • A procedure that allows firms to file one registration statement covering several
   issues of the same security.

Short term solvency ratios

   • Ratios used to judge the adequacy of liquid assets for meeting short-term
   obligations as they come due, including (1) the current ratio, (2) the acid-test ratio,
   (3) the inventory turnover ratio, and (4) the accounts receivable turnover ratio.

Soft capital rationing

   • Capital rationing that under certain circumstances can be violated or even viewed
   as made up of targets rather than absolute constraints.

Standard & poor's corporation

   • Abbreviated S&P. A company that rates stocks and corporate and municipal bonds
   according to Risk profiles, and that produces and tracks the S&P indexes. The
   company also publishes a variety of financial and investment reports.

Target dividend payout ratio

   • A policy under which the firm attempts to pay out a certain percentage of earnings                      27 | P a g e

   as a stated dollar dividend, which it adjusts toward a target payout as proven
   earnings increases occur.

Target payout ratio

   • A firm's long-run dividend-to-earnings ratio. The firm's policy is to attempt to pay
   out a certain percentage of earnings, but it pays a stated dollar dividend and adjusts
   it to the target as base-line increases in earnings occur.

Time until expiration

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   • The time remaining until a financial contract expires. Also called time to maturity.

Times interest earned ratio

   • Measures the firm's ability to make contractual interest payments. Sometimes
   called the interest coverage ratio.

   • Earnings before interest and tax, divided by interest payments.

Total debt to equity ratio

   • A capitalization ratio comparing current liabilities plus long-term debt to
   shareholders' equity.

Trailing pe ratio

   • Also called Lagging PE Ratio. The Price-Earnings Ratio based on actual EPS over
   the last 4 quarters.

Two fund separation theorem

   • The theoretical result that all investors will hold a combination of the risk-free asset
   and the market portfolio.

Upside/downside ratio

   • The ratio of the potential gain to the risk of loss. This is based on the potential gain
   from the current price rising to the forecasted high price compared to the potential
   loss from the current price dropping to the estimated low price. An upside/downside                    28 | P a g e

   minimum ratio of 3 to 1 is recommended for long-term investments.

Working capital ratio

   • Working capital expressed as a percentage of sales.

Yield ratio

   • The quotient of two bond yields.

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