Dictionary of Financial and Business Terms (Part 3)

Agency theory The analysis of principal-agent relationships, wherein one person, an agent, acts on behalf of anther person, a principal.

Agent The decision-maker in a principal-agent relationship.

Aggregation Process in corporate financial planning whereby the smaller investment proposals of each of the firm's operational units are added up and in effect treated as a big picture.

Aging schedule A table of accounts receivable broken down into age categories (such as 0-30 days, 30-60 days, and 60-90 days), which is used to see whether customer payments are keeping close to schedule.

AIBD Association of International Bond Dealers.

All equity rate The discount rate that reflects only the business risks of a project and abstracts from the effects of financing.

All or none Requirement that none of an order be executed unless all of it can be executed at the specified price.

All-equity rate The discount rate that reflects only the business risks of a project and abstracts from the effects of financing.

All-in cost Total costs, explicit and implicit.

All-or-none underwriting An arrangement whereby a security issue is canceled if the underwriter is unable to re-sell the entire issue.

Alpha A measure of selection risk (also known as residual risk) of a mutual fund in relation to the market. A positive alpha is the extra return awarded to the investor for taking a risk, instead of accepting the market return. For example, an alpha of 0.4 means the fund outperformed the market-based return estimate by 0.4%. An alpha of -0.6 means a fund's monthly return was 0.6% less than would have been predicted from the change in the market alone. In a Jensen Index, it is factor to represent the portfolio's performance that diverges from its beta, representing a measure of the manager's performance.

Alpha equation The alpha of a fund is determined as follows:

[ (sum of y) -((b)(sum of x)) ] / n

where: n =number of observations (36 months)

b = beta of the fund

x = rate of return for the S&P 500

y = rate of return for the fund

Alternative mortgage instruments Variations of mortgage instruments such as adjustable-rate and variable rate mortgages, graduated-payment mortgages, reverse-annuity mortgages, and several seldom-used variations.

American Depositary Receipts (ADRs) Certificates issued by a U.S. depositary bank, representing foreign shares held by the bank, usually by a branch or correspondent in the country of issue. One ADR may represent a portion of a foreign share, one share or a bundle of shares of a foreign corporation. If the ADR's are "sponsored," the corporation provides financial information and other assistance to the bank and may subsidize the administration of the ADRs. "Unsponsored" ADRs do not receive such assistance. ADRs carry the same currency, political and economic risks as the underlying foreign share; the prices of the two, adjusted for the SDR/ordinary ratio, are kept essentially identical by arbitrage. American depositary shares(ADSs) are a similar form of certification.

American option An option that may be exercised at any time up to and including the expiration date. Related: European option

American shares Securities certificates issued in the U.S. by a transfer agent acting on behalf of the foreign issuer. The certificates represent claims to foreign equities.

American Stock Exchange (AMEX) The second-largest stock exchange in the United States. It trades mostly in small-to medium-sized companies.

American-style option An option contract that can be exercised at any time between the date of purchase and the expiration date. Most exchange-traded options are American style.

Amortization The repayment of a loan by installments.

Amortization factor The pool factor implied by the scheduled amortization assuming no prepayemts.

Amortizing interest rate swap Swap in which the principal or national amount rises (falls) as interest rates rise (decline).