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).