Business / Finance Glossary

Effective Date: The convexity of a bond calculated using cash flows that change with yields.

Effective Debt: In an interest rate swap, the date the swap begins accruing interest.

Effective Duration: The total debt owed by a firm to its creditors.

Effective Margin (EM): The duration calculated using the approximate duration formula for a bond with an embedded option, reflecting the expected change in the cash flow caused by the option. Measures the responsi . . . View Full Definition

Effective Net Worth: Used with SAT performance measures, the amount equal to the net earned spread, or margin of income, on assets in excess of financing costs for a given interest rate and prepayment rate scenario.

Effective Rate: Net worth plus subordinated debt.

Effective Sale: A measure of the time value of money that fully reflects the effects of compounding.

Effective Spread: A sale based on the most recent round-lot price, which determines the price of the next odd lot. The difference created between the last round-lot price and the odd-lot price is referred to . . . View Full Definition

Effective Tax Rate: The gross underwriting spread adjusted for the impact that a common stock offering's announcement has on the firm's share price.

Efficiency: The net rate a taxpayer pays on income that includes all forms of taxes. It is calculated by dividing the total tax paid by taxable income.

Efficient Capital Market: The degree and speed with which a market accurately incorporates information into prices.

Efficient Diversification: A market in which new information is very quickly reflected accurately in share prices.

Efficient Frontier: The organizing principle of modern portfolio theory, which maintains that any risk-averse investor will search for the highest expected return for any particular level of portfolio risk.

Efficient Market Hypothesis: The combinations of securities portfolios that maximize expected return for any level of expected risk, or that minimizes expected risk for any level of expected return. Pioneered by Harry Markowitz.

Efficient Portfolio: States that all relevant information is fully and immediately reflected in a security's market price, thereby assuming that an investor will obtain an equilibrium rate of return. In other wo . . . View Full Definition

Efficient Set: A portfolio that provides the greatest expected return for a given level of risk (i.e., standard deviation), or, equivalently, the lowest risk for a given expected return.

Eighth[-Ed]: Graph representing a set of portfolios that maximize expected return at each level of portfolio risk.

Either-Or Facility: Used in the context of general equities. A specialist or another broker is bidding higher or offering lower than we are, often topping or undercutting us by an eighth.

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