K percent rule

According to K percent rule the money supply should be increased at a constant percentage rate year in and year out, irrespective of cyclical changes in national income.

According to Milton Friedman "The stock of money [should be] increased at a fixed rate year-in and year-out without any variation in the rate of increase to meet cyclical needs." (Friedman 1960) Giving governments any flexibility in setting money growth will lead to inflation according to Friedman. The main policy to be avoided is countercyclical monetary policy, the standard Keynesian policy recommendation at the time. For this reason, the central bank should be forced to expand the money supply at a constant rate, equivalent to the rate of growth of real GDP.

Derivative instruments

A derivative is a financial instrument whose value depends on underlying variables. The most common derivatives are futures, options, and swaps but may also include other tradable assets such as a stock or commodity. A derivative is essentially a contract whose payoff depends on the behavior of a benchmark.

Derivatives are broadly categorized by the relationship between the underlying asset and the derivative (e.g., forward, option, swap); the type of underlying asset (e.g., equity derivatives, foreign exchange derivatives, interest rate derivatives, commodity derivatives or credit derivatives); the market in which they trade (e.g., exchange-traded or over-the-counter); and their pay-off profile.

Derivatives can be used for speculating purposes ("bets") or to hedge ("insurance"). Very commonly, companies buy currency forwards in order to limit losses due to fluctuations in the exchange rate of two currencies.

Arms index

The Arms Index, also known as TRIN, an acronym for TRading INdex, was developed in 1967 by Richard Arms. It is a volume-based indicator, which determines market strength and breadth by analysing the relationship between advancing and declining issues and their respective volume; it is used to measure intra-day market supply and demand, and it can be applied over short or longer time periods.

The index is calculated using the following formula:

Arms index or TRIN= (number of advancing issues)/ (number of declining issues) (Total up volume)/ (total down volume).

An index value of 1.0 indicates that the ratio of up volume to down volume is equal to the ratio of advancing issues to the declining issues. The market is said to be in a neutral state when the index equals 1.0 since the up volume is evenly distributed over the advancing issues and the down volume is evenly distributed over the declining issues.

Market conversion price

Market conversion price is the price that an investor effectively pays for common stock by purchasing a convertible security and then exercising the conversion option. This price is equal to the market price of the convertible security divided by the conversion ratio.

Conversion ratio is the number of shares of common stock one receives by exercising the conversion option. In order for the exercise of the option to be worthwhile, the market conversion price must be lower than the market price of common stock. It is also called the conversion parity price and the conversion value.

Deadweight loss

In economics, a deadweight loss is a loss of economic efficiency that can occur when equilibrium for a good or service is not Pareto optimal. In other words, either people who would have more marginal benefit than marginal cost are not buying the product, or people who have more marginal cost than marginal benefit are buying the product. Deadweight loss can be beneficial when there is a negative externality, in which case it can be considered a deadweight gain, as it would help those that the negative externality was hurting.

Causes of deadweight loss can include monopoly pricing, externalities, taxes or subsidies, and binding price ceilings or floors. The term deadweight loss may also be referred to as the "excess burden" of monopoly or taxation.

Free Riding

Free Riding means getting the benefit of a good or service without paying for it. This may be possible because certain types of goods and services are actually hard to charge for--a firework display, for instance. Free riders are those who consume a resource without paying for it, or pay less than the full cost of its production.   However, there can sometimes be a free-rider problem, if the number of people willing to pay for the good or service is not enough to cover the cost of providing it. In this case, the good or service might not be produced, even though it would be beneficial for the economy as a whole to have it. Free riding is usually considered to be an economic "problem" only when it leads to the non-production or under-production of a public good, or when it leads to the excessive use of a common property resource.  Public goods are often at risk of free riding. The free rider problem is the question of how to limit free riding (or its negative effects) in these situations.  The problem can be overcome by financing the good by imposing a tax on the entire population.

Information coefficient

Information coefficient is the correlation between predicted and actual stock returns, sometimes used to measure the value of a financial analyst. It is a measure of the correlation between expected and actual returns. The IC is used internally within a firm to judge the performance of individual financial forecasters. The IC is measured on a scale between 0 to 1, with 1 indicating no difference between expected and actual returns. An IC of 1.0 indicates a perfect linear relationship between predicted and actual returns, while an IC of 0.0 indicates no linear relationship.

Omnibus account

Omnibus account is an account carried by one futures commission merchant with another futures commission merchant in which the transactions of two or more persons are combined and carried in the name of the originating broker, rather than designated separately. It is an account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined in this type of account, allowing for easier management by the futures merchant.

Debt swap

Debt swap is a set of transactions in which a firm buys a country's dollar bank debt at a discount and swaps this debt with the central bank for local currency that it can use to acquire local equity.  

A company can undergo some financial restructuring for long term success. One possible way to achieve this goal is to issue a debt/equity or an equity/debt swap. In the case of an equity/debt swap, all specified shareholders are given the right to exchange their stock for a predetermined amount of debt (i.e. bonds) in the same company. A debt/equity swap works the opposite way: debt is exchanged for a predetermined amount of equity (or stock). The value of the swap is determined usually at current market rates, but management may offer higher exchange values to entice share and debt holders to participate in the swap. After the swap takes place, the preceding asset class is cancelled for the newly acquired asset class.

Extrapolative statistical models

Extrapolative statistical models are models that attempts to use past trends in data in order to predict future trends. This may be used in any number of business or non-business situations. They are the models that apply a formula to historical data and project results for a future period. Such models include the simple linear trend model, the simple exponential model, and the simple autoregressive model.

The technical analysts commonly use extrapolative statistical models in order to predict future prices of securities. This can be quite important in the futures and option markets.

Variable-rate mortgage

A variable-rate mortgage or adjustable-rate mortgage (ARM) is a mortgage loan with the interest rate on the note periodically adjusted based on an index which reflects the cost to the lender of borrowing on the credit markets. The loan may be offered at the lender's standard variable rate/base rate. There may be a direct and legally defined link to the underlying index, but where the lender offers no specific link to the underlying market of index they can choose to increase or decrease at their discretion. The term "variable-rate mortgage" is most common outside the United States, whilst in the United States, "adjustable-rate mortgage" is most common, and implies a mortgage regulated by the Federal government,  with limitations on charges ("caps"). In many countries, adjustable rate mortgages are the norm, and in such places, may simply be referred to as mortgages.

Adjustable rate mortgage is a mortgage that features predetermined adjustments of the loan interest rate at regular intervals based on an established index. The interest rate is adjusted at each interval to a rate equivalent to the index value plus a predetermined spread, or margin, over the index, usually subject to per-interval and to life-of-loan interest rate and/or payment rate caps.

Holding period return

Holding period return (HPR) is the total return on an asset or portfolio over the period during which it was held. It is one of the simplest measures of investment performance.

HPR is the percentage by which the value of a portfolio (or asset) has grown for a particular period. It is the sum of income and capital gains divided by the initial period value (asset value at the beginning of the period).

HPR = ((Present Value, or face Value, End-Of-Period Value) + (Any Intermediate Gains eg. Dividends) - (Initial Value)) /(Initial Value)

HPR_n = Income + (P_n+1 – P_n)/ P_n

Annualized holding period return is the annual rate of return that when compounded t times, would have given the same t-period holding return as actually occurred from period 1 to period t.

Quality spread

Quality spread is, the spread between Treasury securities and non-Treasury securities that are identical in all respects except for quality rating. For instance, the difference between yields on Treasuries and those on single A-rated industrial bonds. It is also called credit spread. 

In an interest rate swap quality spread differential is the difference between the interest rates of debt obligations offered by two parties of different creditworthiness that engage in the swap. A swap transaction is considered beneficial to both parties only when the QSD is positive.

J-curve

The term J-curve is used in several different fields to refer to a variety of unrelated J-shaped diagrams where a curve initially falls, but then rises to higher than the starting point.

In private equity, the J curve is used to illustrate the historical tendency of private equity funds to deliver negative returns in early years and investment gains in the outlying years as the portfolios of companies mature.

In economics, the 'J curve' refers to the trend of a country’s trade balance following a devaluation or depreciation under a certain set of assumptions. A devalued currency means imports are more expensive, and on the assumption that the volume of imports and exports change little immediately, this causes a depreciation of the current account (a bigger deficit or smaller surplus). After some time, though, the volume of exports may start to rise because of their lower more competitive prices to foreign buyers, and domestic consumers may buy fewer of the costlier imports. Eventually, if this happens, the trade balance may improve on what it was before the devaluation. If there is a currency revaluation or appreciation the same reasoning leads to an inverted J-curve.

Decile rank

Decile rank is a rating of performance over time. It is rated on a scale of 1-10, where 1 is best and 10 is worst. For performance of mutual funds, 1 indicates that a mutual fund's return was in the top 10% of funds being compared, while 3 means the return was in the top 30%.

General ledger

The general ledger is where financial information from all aspects of your business is consolidated.  Each General Ledger is divided into debits and credits sections. The general ledger is a collection of the group of accounts that supports the value items shown in the major financial statements. It is built up by posting transactions recorded in the sales daybook, purchases daybook, cash book and general journals daybook. The general ledger can be supported by one or more subsidiary ledgers that provide details for accounts in the general ledger. For instance, an accounts receivable subsidiary ledger would contain a separate account for each credit customer, tracking that customer's balance separately. This subsidiary ledger would then be totaled and compared with its controlling account (in this case, Accounts Receivable) to ensure accuracy as part of the process of preparing a trial balance.

There basic categories in which all accounts are grouped are:

1. Assets
2. Liability
3. Owner's equity
4. Revenue
5. Expense
6. (Gains)
7. (Loss)

The balance sheet and the income statement are both derived from the general ledger.

Earnings per share

Earnings per share (EPS) is calculated by dividing company’s profit by its number of outstanding shares. If a company earned $2 million in one year had 2 million shares of stock outstanding, its EPS would be $1 per share.

The portion of a company's profit allocated to each outstanding share of common stock. Earnings per share serve as an indicator of a company's profitability.

The company often uses a weighted average of shares outstanding over the reporting term. When calculating, it is more accurate to use a weighted average number of shares outstanding over the reporting term, because the number of shares outstanding can change over time. However, data sources sometimes simplify the calculation by using the number of shares outstanding at the end of the period.

Global Internet body to unleash domain names

The regulatory body that oversees Internet domain names voted on Monday to revamp the domain naming system for websites, allowing them to end with words like "apple" and "orange" instead of suffixes such as ".com" or ".gov."

"ICANN has opened the Internet's naming system to unleash the global human imagination. Today's decision respects the rights of groups to create new top level domains in any language or script," the regulatory body said after a board meeting in Singapore.

Complete news.

Statistical hypothesis test

A one-sided test is a statistical hypothesis test in which the values for which we can reject the null hypothesis, H0 are located entirely in one tail of the probability distribution. In other words, the critical region for a one-sided test is the set of values less than the critical value of the test, or the set of values greater than the critical value of the test.

A two-sided test is a statistical hypothesis test in which the values for which we can reject the null hypothesis, H0, are located in both tails of the probability distribution.

Law of diminishing returns

In economics, diminishing returns (also called diminishing marginal returns) refers to progressive decrease in the marginal (per-unit) output of a production process as the amount of a single factor of production is increased, while holding the amounts of all other factors of production constant.

The law of diminishing returns states that in all productive processes, adding more of one factor of production, while holding all others constant, will at some point yield lower per-unit returns. The law of diminishing returns does not imply that adding more of a factor will decrease the total production, a condition known as negative returns, though in fact this is common.

Naïve diversification

Naïve diversification is a strategy whereby an investor simply invests in a number of different assets and hopes that the variance of the expected return on the portfolio is lowered. It is a diversification of a portfolio without regard, for the mathematical formulas in the capital asset pricing model. Naive diversification rests on the assumption that simply investing in enough unrelated assets will reduce risk sufficiently to make a profit. Alternately, one may diversify naively by applying the capital asset pricing model incorrectly and finding the wrong efficient portfolio frontier. Such diversification does not necessarily decrease risk at a given expected return, and may in fact increase risk.

Hell or high water contract

A contract that obligates a purchaser of a project's output to make cash payments to the project in all events, even if no product is offered for sale. It is a non-cancellable contract whereby the purchaser must make the specified payments to the seller, regardless of any difficulties they may encounter. 

It is a contract including a clause stating that payments must be made regardless of what happens. Specifically, a hell or high water contract requires one party to continue to receive payments even if an act of God prevents the contract from being completed. For example, suppose two parties sign a contract renting an apartment. The contract may contain a hell or high water clause saying that the renter must pay rent every month even if the apartment floods or burns down. It is also called a promise to pay contract.

Growing equity mortgages

Growing equity mortgages are the mortgages in which annual increases in monthly payments are used to reduce outstanding principal and to shorten the term of the loan. 

It is a fixed rate mortgage on which the monthly payments increase over time according to a set schedule. The interest rate on the loan does not change, and there is never any negative amortization. In other words, the first payment is a fully amortizing payment. As the payments increase, the additional amount above and beyond what would be a fully amortizing payment is applied directly to the remaining balance of the mortgage, shortening the life of the mortgage and increasing interest savings.

Working Capital

Working capital is defined as those funds a business has available to meet its day-to-day financial obligations. A sustainable business must have sufficient funds available at all times to meet its financial obligations as they become due. Working capital can be expressed in a layman's formula: 

Working Capital = Available funds - day to day financial obligations 

In accounting terms,

Working Capital = Current Assets – Current Liabilities

Current assets are items of economic value that can be converted into cash quite quickly in the accounting period (usually 1-3 months). These items typically include cash, inventory, accounts receivable (i.e. what customers owe to the business).

Current liabilities are monies that a business owes to external parties (not owners) and are due for payment within the current accounting period (usually within the next 12 months). These items are typically accounts payable (i.e. what the business owes to suppliers) plus other payables like income tax or council rates.

Operating Cycle

The Operating Cycle of a business is the length of time between the cash outflow on purchased material and cash inflow from the sale of goods. The Operating Cycle determines the amount of working capital that a business requires to operate on a day-to-day basis. The shorter the Operating Cycle the lower the amount of working capital required for the business and the greater opportunity for investments in other value-adding activities.

The Operating Cycle for a manufacturing based business can involve many stages, namely:

1. Purchase - the receipt of raw materials from suppliers on account.
2. Conversion - the conversion of these raw materials into finished goods
3. Inventory - the holding and storage of raw materials, Work-In-Progress (WIP) and Finished Goods.
4. Payment - the payment of the supplier's account for the raw materials received earlier.
5. Sale - the sale of finished goods to customers on account
6. Collection - the collection of money from these customers in payment of their account

Learning curve

A learning curve is a graphical representation of the changing rate of learning (in the average person) for a given activity or tool. Typically, the increase in retention of information is sharpest after the initial attempts, and then gradually evens out, meaning that less and less new information is retained after each repetition.

The learning curve can also represent at a glance the initial difficulty of learning something and, to an extent, how much there is to learn after initial familiarity.

In economics, learning curve is a curve showing how a firm's costs of producing at a given rate of output fall as the total amount produced increases over time as a result of accumulated learning of how to make the product efficiently using given equipment.

Market model

This relationship is sometimes called the single-index model. The market model says that the return on a security depends on the return on the market portfolio and the extent of the security's responsiveness as measured, by beta. In addition, the return will also depend on conditions that are unique to the firm. Graphically, the market model can be depicted as a line fitted to a plot of asset returns against returns on the market portfolio.

 Mathematically it is expressed as:

where:

r_it is return to stock i in period t

r_f is the risk free rate (i.e. the interest rate on treasury bills)

r_mt is the return to the market portfolio in period t

α_i is the stock's alpha, or abnormal return

β_i is the stocks's beta, or responsiveness to the market return

Note that r_it − r_f is called the excess return on the stock, r_mt − r_f the excess return on the market

ε_it is the residual (random) return, which is assumed normally distributed with mean zero and standard deviation σ_i

These equations show that the stock return is influenced by the market (beta), has a firm specific expected value (alpha) and firm-specific unexpected component (residual). Each stock's performance is in relation to the performance of a market index.

Program (or Project) Evaluation and Review Technique

The Program (or Project) Evaluation and Review Technique (PERT), is a model for project management designed to analyze and represent the tasks involved in completing a given project. It is commonly used in conjunction with the critical path method or CPM.

PERT is a method to analyze the involved tasks in completing a given project, especially the time needed to complete each task, and identifying the minimum time needed to complete the total project.

PERT was developed primarily to simplify the planning and scheduling of large and complex projects. It was developed for the U.S. Navy Special Projects Office in 1957 to support the U.S. Navy's Polaris nuclear submarine project. It was able to incorporate uncertainty by making it possible to schedule a project while not knowing precisely the details and durations of all the activities. It is more of an event-oriented technique rather than start- and completion-oriented, and is used more in projects where time, rather than cost, is the major factor. It is applied to very large-scale, one-time, complex, non-routine infrastructure and Research and Development projects.

A PERT chart is a tool that facilitates decision making. The first draft of a PERT chart will number its events sequentially in 10s (10, 20, 30, etc.) to allow the later insertion of additional events. Two consecutive events in a PERT chart are linked by activities, which are conventionally represented as arrows. The events are presented in a logical sequence and no activity can commence until its immediately preceding event is completed. The planner decides which milestones should be PERT events and also decides their “proper” sequence. A PERT chart may have multiple pages with many sub-tasks.

PERT is valuable to manage where multiple tasks are occurring simultaneously to reduce redundancy.

Passive portfolio strategy

Passive portfolio strategy is a strategy that involves minimal expectational input, and instead relies on diversification to match the performance of some market index. A passive strategy assumes that the marketplace will reflect all available information in the price paid for securities, and therefore, does not attempt to find mispriced securities. 

It is a strategy in which an investor (or a fund manager) invests in accordance with a pre-determined strategy that doesn't entail any forecasting (e.g., any use of market timing or stock picking would not qualify as passive management). The idea is to minimize investing fees and to avoid the adverse consequences of failing to correctly anticipate the future. The most popular method is to mimic the performance of an externally specified index. Retail investors typically do this by buying one or more 'index funds'. By tracking an index, an investment portfolio typically gets good diversification, low turnover (good for keeping down internal transaction costs), and extremely low management fees. With low management fees, an investor in such a fund would have higher returns than a similar fund with similar investments but higher management fees and/or turnover/transaction costs.

Active portfolio strategy

Active portfolio strategy is a strategy that uses available information and forecasting techniques to seek a better performance than a portfolio that is simply diversified broadly.

It is a strategy where the manager makes specific investments with the goal of outperforming an investment benchmark index. Investors or mutual funds that do not aspire to create a return in excess of a benchmark index will often invest in an index fund that replicates as closely as possible the investment weighting and returns of that index; this is called passive management. Active management is the opposite of passive management, because in passive management the manager does not seek to outperform the benchmark index.

Cash flow matching

Cash flow matching is the practice of matching returns on a portfolio to future capital outlays. It involves investing in certain securities with a certain expected return so that the investor will be able to pay for future liabilities. Pension funds and annuities perform the most cash flow matching, as they have future liabilities that are both large and relatively easy to estimate. Portfolios that perform cash flow matching usually invest in low-risk, investment-grade securities. The practice is also called portfolio dedication, matching, or the structured portfolio strategy.

Bullet strategy

Bullet strategy is a strategy in which a portfolio is constructed so that the maturities of its securities are highly concentrated at one point on the yield curve.

The bullet strategy is based on the acquisition of a number of different types of securities over an extended period of time, but with all the securities maturing around the same target date. One of the main benefits of the bullet strategy is that it allows the investor to minimize the impact of fluctuations in the interest rate, while still realizing excellent returns on the investments.

This is useful when you know that you will need the proceeds from the bonds at a specific time, such as when a child begins college.

The Harmonized Commodity Description and Coding System

The Harmonized Commodity Description and Coding System (HS) of tariff nomenclature is an internationally standardized system of names and numbers for classifying traded products developed and maintained by the World Customs Organization (WCO) (formerly the Customs Co-operation Council), an independent intergovernmental organization with over 170 member countries based in Brussels, Belgium.

Under the HS Convention, the contracting parties are obliged to base their tariff schedules on the HS nomenclature, although parties set their own rates of duty. The system begins by assigning goods to categories of crude and natural products, and from there proceeds to categories with increasing complexity. The codes with the broadest coverage are the first four digits, and are referred to as the heading. The HTS therefore sets forth all the international nomenclature through the 6-digit level and, where needed, contains added subdivisions assigned 2 more digits, for a total of 8 at the tariff-rate line (legal) level. Two final (non-legal) digits are assigned as statistical reporting numbers if warranted, for a total of 10 digits to be listed on entries.

To ensure harmonization, the contracting parties must employ all 4- and 6-digit provisions and the international rules and notes without deviation, but are free to adopt additional subcategories and notes.

Price skimming

A product pricing strategy by which a firm charges the highest initial price that customers will pay. As the demand of the first customers is satisfied, the firm lowers the price to attract another, more price-sensitive segment.

The skimming strategy gets its name from skimming successive layers of "cream," or customer segments, as prices are lowered over time. It allows the firm to recover its sunk costs quickly before competition steps in and lowers the market price.

Price skimming is sometimes referred to as riding down the demand curve. The objective of a price skimming strategy is to capture the consumer surplus.

It is effective only when the firm is facing an inelastic demand curve. Skimming encourages the entry of competitors. When other firms see the high margins available in the industry, they will quickly enter.

Price skimming occurs in mostly technological markets as firms set a high price during the first stage of the product life cycle. The top segments of the market which are willing to pay the highest price are skimmed of first. When the product enters maturity the price is lowered.

Clearing House Interbank Payments System (CHIPS)

The Clearing House Interbank Payments System (CHIPS) is the main privately held clearing house for large-value transactions in the United States, settling well over US$1 trillion a day in around 250,000 interbank payments. Together with the Fedwire Funds Service CHIPS forms the primary U.S. network for large-value domestic and international USD payments (where it has a market share of around 96%).

CHIPS is owned by financial institutions. According to the Federal Financial Institutions Examination Council (FFIEC), an interagency office of the United States government, "any banking organization with a regulated U.S. presence may become an owner and participate in the network." CHIPS participants may be commercial banks, Edge Act corporations or investment companies.

Banks typically prefer to make payments of higher value and of a less time-sensitive nature by CHIPS instead of Fedwire, as CHIPS is less expensive (both by charges and by funds required).

CHIPS differ from the Fedwire payment system in three key ways. First, it is privately owned, whereas the Fed is part of a regulatory body. Second, it has 47 member participants (with some merged banks constituting separate participants), compared with 9,289 banking institutions (as of March 19, 2009) eligible to make and receive funds via Fedwire. Third, it is a netting engine (and hence, not real-time).

A netting engine consolidates all of the pending payments into fewer single transactions. For example, if Bank of America is to pay American Express US$1.2 million, and American Express is to pay Bank of America $800,000, the CHIPS system aggregates this to a single payment of $400,000 from Bank of America to American Express — only 20% of the $2 million to be transferred actually changes hands. The Fedwire system would require two separate payments for the full amounts ($1.2 million to American Express and $800,000 to Bank of America).

Only the largest banks dealing in U.S. dollars participate in CHIPS; about 70% of these are non-U.S. banks. Smaller banks have not found it cost effective to participate in CHIPS but many have accounts at CHIPS-participating banks to send and receive payments.

Samurai bond

A samurai bond is “a yen-dominated bond issued in Tokyo by non- Japanese companies and subject to Japanese regulations”. These bonds provide the issuer with an access to Japanese capital, which can be used for local investments or for financing operations outside Japan.  Foreign borrowers may want to issue in Samurai market to hedge against foreign currency exchange risk. Another intention may be simultaneously exchanging the issue into another currency, in order to take advantage of lower costs. Lower costs may result from investor preferences that differ across segmented markets or from temporary market conditions that differentially affect the swaps and bond markets.

Samurai Bond Market was opened in 1970. The Asian Development Bank issued the first Samurai bond in November 1970.The issue amount was 6 billion yen with a 7-year maturity, and the bond was accepted very well in the market.

Head and shoulders pattern

Head and shoulders is a technical analysis term used to describe a chart formation in which a stock price reaches a peak and declines, rises above its former peak and again declines and rises again but not to the second peak and then again declines. The first and third peaks are shoulders, while the second peak is the formation's head.

A head and shoulders pattern consists of a peak followed by a higher peak and then a lower peak with a break below the neckline. The neckline is drawn through the lowest points of the two intervening troughs and may slope upward or downward. A downward sloping neckline is more reliable as a signal. Technical analysts generally consider a head and shoulders formation to be a very bearish indication.

Blanket mortgage

Blanket mortgage is a mortgage which covers two or more pieces of real estate. It is a mortgage covering at least two pieces of real estate as security for the same mortgage. This sort of loan is more common for commercial property or "special case" loans.

It is a type of mortgage used to fund the purchase of more than one piece of real property. Blanket loans are popular with builders and developers who buy large tracts of land, then subdivide them to create many individual parcels to be gradually sold one at a time. Rather than securing a new mortgage each time a portion of the development is sold, the borrower uses the blanket loan to buy them all.

Perverse demand curve

A perverse demand curve is one which slopes upwards from left to right. Therefore an increase in price leads to an increase in demand. This may happen where goods are strongly affected by price expectations or in the case of Giffen goods.

Narrow Money

Narrow Money is a measure of money supply that includes all physical money like coins and currency along with demand deposits and other liquid assets held by the central bank. This is called narrow money because it applies the most restrictive definition of money.

Behavioral economics

A branch of economics that concentrates on explaining the economic decisions people make in practice, especially when these conflict with what conventional economic theory predicts they will do. Behaviorists try to augment or replace traditional ideas of economic rationality with decision-making models borrowed from psychology.

Behavioral economics use social, cognitive and emotional factors in understanding the economic decisions of individuals and institutions performing economic functions, including consumers, borrowers and investors, and their effects on market prices, returns and the resource allocation. The fields are primarily concerned with the bounds of rationality of economic agents.

Behavioral analysts are not only concerned with the effects of market decisions but also with public choice, which describes another source of economic decisions with related biases towards promoting self-interest.

Fiscal drag

Fiscal drag refers to a situation when the government's net fiscal position (spending minus taxation) fails to cover the net savings desires of the private economy, also called the private economy's spending gap (earnings minus spending and private investment). The resulting lack of aggregate demand leads to deflationary pressure, or drag, on the economy, essentially due to lack of state spending or to excess taxation.

One cause of fiscal drag is the consequence of expanding economies with progressive taxation. In general, individuals are forced into higher tax brackets as their income rises. The greater tax burden can lead to less consumer spending. For the individuals pushed into a higher tax bracket, the proportion of income as tax has increased, resulting in fiscal drag. It refers to the weight of higher taxes on higher incomes so that after-tax incomes do not reflect the extent of a wage rise.

When people's money income rises, dragging them into higher tax brackets. Fiscal drag is therefore referring to the effect inflation has on average tax rates. If tax allowances are not increased in line with inflation, and people's incomes increase with inflation then they will be moved up into higher tax bands and so their tax bill will go up. However, they are actually worse off because inflation has cancelled out their pay rise and their tax bill is higher.

Reasonableness test

Reasonableness test is a procedure to examine the logic of accounting information. It is where the expected value is determined by reference to data partly or wholly independent of the accounting information system, and for that reason, evidence obtained through the application of such a test may be more reliable than evidence gathered using other analytical procedures.

For example, the trend in promotion and entertainment expense for a company can be compared to that of prior years of the same company or to competitive companies, or to industry norms. If the promotion and entertainment expense is relatively high, it will require investigation because it does not appear reasonable.

Balloon Maturity

Balloon Maturity means a repayment schedule for a bond issue where a large number of the bonds come due at a one time, usually at the final maturity date. Balloon maturity occurs only in bonds without a sinking fund provision; rather than retiring part of the principal at different times, balloon maturity returns most or the entire principal on a single date. Issuers of bonds with balloon maturities can have difficulty in repayment if they have not set aside a sufficient amount of money.

A final loan payment that is considerably higher than prior payments is also known as a "balloon payment."

Endowment funds

Endowment funds are the investment funds established for the support of institutions such as colleges, private schools, museums, hospitals, and foundations. An investment fund set up by an institution in which regular withdrawals from the invested capital are used for ongoing operations or other specified purposes.

An endowment may come with stipulations regarding its usage. In some circumstances an endowment may be required to be spent in a certain way or alternatively invested, with the principal to remain intact in perpetuity or for a defined time period. This allows for the donation to have an impact over a longer period of time than if it were spent all at once.

True Endowment funds are received from external donors with restriction that the principal or gift amount is to be retained in perpetuity and cannot be spent.

In Term Endowment funds all or part of the principal may be expended only after the expiration of a stated period of time or occurrence of a specified event, depending on donor wishes.

Quasi Endowment funds must retain the purpose and intent as specified by the donor or source of the original funds and earnings may be expended only for the specified purpose.

Veblen Goods

Veblen goods are a group of commodities for which people's preference for buying them increases as a direct function of their price, as greater price confers greater status, instead of decreasing according to the law of demand. A Veblen good is often also a positional good. The Veblen effect is named after economist Thorstein Veblen, who first pointed out the concepts of conspicuous consumption and status-seeking.

Some types of high-status goods, such as high-end wines, designer handbags and luxury cars are Veblen goods, in that decreasing their prices decreases people's preference for buying them because they are no longer perceived as exclusive or high status products.

Business Cycle

The term business cycle (or economic cycle) refers to economy-wide fluctuations in production or economic activity over several months or years. These fluctuations occur around a long-term growth trend, and typically involve shifts over time between periods of relatively rapid economic growth (an expansion or boom), and periods of relative stagnation or decline (a contraction or recession).

The usual pattern of the business cycle is: bust, recovery, boom and recession. The levels of economic growth, employment, and inflation are directly affected in each of the phases of the business cycle. The business cycle has an impact also on corporate earnings and cash flows.

Business cycles are usually measured by considering the growth rate of real gross domestic product. Despite being termed cycles, these fluctuations in economic activity do not follow a mechanical or predictable periodic pattern.

Many developments and indicators are cited as causes of the business cycles. The most common ones, however, are: over-investment, under-consumption, fluctuations in agricultural output, the interaction of the multiplier and accelerator, war and international politics.

Kurtosis

Kurtosis is a measure of the peakedness of the probability distribution of a real-valued random variable. It is the fourth central movement of a distribution. The first three movements are mean, standard deviation, and skewness.  It measures the distribution’s peakedness and the thickness of its tails.

Higher kurtosis means more of the variance is the result of infrequent extreme deviations, as opposed to frequent modestly sized deviations. Leptokurtosis, or positive excess kurtosis, indicates a distribution that is more peaked at the center and has fatter than normal tails. Platykurtosis, or negative excess kurtosis, indicates a relatively flatter top and thinner tails.

Debt service parity approach

Debt service parity approach is an analysis wherein the payment alternatives under consideration will provide the firm with the exact same schedule of after-tax debt payments (including both interest and principal).

Daily trading limit

Daily trading limit is the maximum amount, set by the exchange that the price of a stock, commodity or futures/options contract can rise or fall in a single day.

It is the maximum gain or loss on a derivative contract, such as options and futures contracts that is allowed in any one trading session. Derivatives, currencies, and commodities can be extremely volatile investments. In order to prevent this volatility from spiralling out of control, options and futures exchanges enact daily trading limits stating that a security cannot rise or fall more than a certain percent in a given trading day. Trading in an asset is automatically suspended when the daily limit is reached.

Kaizen

Kaizen is a system of continuous improvement in quality, technology, processes, company, culture, productivity, safety and leadership.

Kaizen is Japanese term for "improvement" or "change for the better". It comes from the Japanese words 改 ("kai") which means "change" or "to correct" and 善 ("zen") which means "good". Kaizen was created in Japan following World War II.

It refers to philosophy or practices that focus upon continuous improvement of processes in manufacturing, engineering, supporting business processes, and management. It has been applied in healthcare, psychotherapy, life-coaching, government, banking, and many other industries. When used in the business sense and applied to the workplace, kaizen refers to activities that continually improve all functions, and involves all employees from the CEO to the assembly line workers. It also applies to processes, such as purchasing and logistics that cross organizational boundaries into the supply chain.

Everyone is encouraged to come up with small improvement suggestions on a regular basis. This is not a once a month or once a year activity. It is continuous. In Japanese companies, a total of 60 to 70 suggestions per employee per year are written down, shared and implemented. Suggestions are not limited to a specific area such as production or marketing. Kaizen is based on making changes anywhere that improvements can be made.

Kaizen involves setting standards and then continually improving those standards. To support the higher standards Kaizen also involves providing the training, materials and supervision that is needed for employees to achieve the higher standards and maintain their ability to meet those standards on an on-going basis.