Glossary (2)

 Glossary 

Catalyst—an internally or externally instigated corporate event that results in security holders realizing some or all of a company’s underlying value 

Chapter 11—a section of the federal bankruptcy code whereby a debtor is reorganized as a going concern rather than liquidated (see bankruptcy) 

Closed-end mutual fund—mutual fund having a fixed number of outstanding shares that trade based on supply and demand at prices not necessarily equal to underlying net asset value (see open-end mutual fund) 

Collateralized bond obligation (CBO)—diversified investment pools of junk bonds that issue their own securities, usually in several tranches, each of which has risk and return characteristics that differ from those of the underlying junk bonds themselves 

Commercial paper—short-term loans from institutional investors to businesses 

Commission—a charge for transacting in securities 

Complex securities—securities with unusual cash flow characteristics 

Contingent-value rights—tradable rights that are redeemable for cash if a stock fails to reach specified price levels 

Convertible arbitrage—arbitrage transactions designed to take advantage of price discrepancies between convertible securities and the securities into which they are convertible 

Convertible bonds—bonds that can be exchanged for common stock or other assets of a company at a specified price 

Coupon—the specified interest payment on a bond expressed as a percentage 

Covered-call writing—the practice of purchasing common stocks and then selling call options against them 

Cram-down security—security distributed in a merger transaction, not sold by an underwriter 

Credit cycle—the ebb and flow in the availability of credit 

Debtor-in-possession (DIP) financing—loan to a bankrupt company operating in Chapter 11 

Debt-to-equity ratio—the ratio of a company’s outstanding debt to the book value of its equity; a measure of a company’s financial leverage 

Default—the status of a company that fails to make an interest or principal payment on a debt security on the required date 

Default rate of junk bonds—calculated by many junk-band-market participants as the dollar volume of junk-bond defaults occurring in a particular year divided by the total volume of junk bonds outstanding 

Depreciation—an accounting procedure by which long-lived assets are capitalized and then expensed over time 

Discount rate—the rate of interest that would make an investor indifferent between present and future dollars 

Diversification—ownership of many rather than a small number of securities; the goal of diversification is to limit the risk of company-specific events on one’s portfolio as a whole 

Dividend—cash distributed by a company to its shareholders out of after-tax earnings 

Earnings before interest, taxes, depreciation, and amortization (EBITDA)—a nonsensical number thought by some investors to represent the cash flow of a business 

Earnings per share—a company’s after-tax earnings divided by the total number of shares outstanding