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Investments Dictionary

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Difficulty, cost, and/or delay in selling an asset on short notice without offering substantial price concessions.
Illiquidity Cost
Costs due to imperfect liquidity of some security.
Illiquidity Premium
Extra expected return as compensation for limited liquidity.
A strategy that matches durations of assets and liabilities so as to make net worth unaffected by interest rate movements.
Implied Volatility
The standard deviation of stock returns that is consistent with an options market value.
In the Money
In the money describes an option whose exercise would produce profits. Out of the money describes an option where exercise would not be profitable.
Incentive fee
A fee charged by hedge funds equal to a share of any investment returns beyond a stipulated benchmark performance.
Income Beneficiary
One who receives income from a trust.
Income Statement
A financial statement showing a firm's revenues and expenses during a specified period.
The document defining the contract between the bond issuer and the bondholder.
Index Arbitrage
An investment strategy that exploits divergences between actual futures prices and their theoretically correct parity values to make a profit.
Index Fund
A mutual fund holding shares in proportion to their representation in a market index such as the S&P 500.
Index Model
A model of stock returns using a market index such as the S&P 500 to represent common or systematic risk factors.
Index Option
A call or put option based on a stock market index.
Indifference Curve
A curve connecting all portfolios with the same utility according to their means and standard deviations.
Industry Life Cycle
Stages through which firms typically pass as they mature.
The rate at which the general level of prices for goods and services is rising.
Information Ratio
Ratio of alpha to the standard deviation of diversifiable risk.
Initial Public Offering
Stock issued to the public for the first time by a formerly privately owned company.
Input List
List of parameters such as expected returns, variances, and covariances necessary to determine the optimal risky portfolio.
Inside Information
Nonpublic knowledge about a corporation possessed by corporate officers, major owners, or other individuals with privileged access to information about a firm.
Insider Trading
Trading by officers, directors, major stockholders, or others who hold private inside information allowing them to benefit from buying or selling stock.
Insurance Principle
The law of averages. The average outcome for many independent trials of an experiment will approach the expected value of the experiment.
Interest Coverage Ratio
Measure of financial leverage. Earnings before interest and taxes as a multiple of interest expense.
Interest Coverage Ratio, or Times Interest Earned
A financial leverage measure (EBIT divided by interest expense).
Interest Rate
The number of dollars earned per dollar invested per period.
Interest Rate parity relationship (theorem)
The spot‐futures exchange rate relationship that prevails in well‐functioning markets.
Interest Rate Swaps
A method to manage interest rate risk where parties trade the cash flows corresponding to different securities without actually exchanging securities directly.
Intermarket Spread Swap
Switching from one segment of the bond market to another (from Treasuries to corporates, for example).
Intrinsic Value (of a Firm)
The present value of a firm's expected future net cash flows discounted by the required rate of return.
Intrinsic Value of an Option
Stock price minus exercise price, or the profit that could be attained by immediate exercise of an in‐the‐money option.
Inventory Turnover Ratio
Cost of goods sold as a multiple of average inventory.
Commitment of current resources in the expectation of deriving greater resources in the future.
Investment Bankers
Firms specializing in the sale of new securities to the public, typically by underwriting the issue.
Investment Company
Firm managing funds for investors. An investment company may manage several mutual funds.
Investment Horizon
Time horizon for purposes of investment decisions.
Investment Portfolio
Set of securities chosen by an investor.
Investment-grade Bond
Bond rated BBB and above or BAA and above. Lower‐rated bonds are classified as speculative grade or junk bonds.

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