CFA Glossary A full glossary of financial terms, sourced from the CFA Program curriculum

Daily settlement
See marking to market.

Data mining
The practice of determining a model by extensive searching through a dataset for statistically significant patterns.

Synonyms: Data snooping

Date of book closure
The date that a shareholder listed on the corporation's books will be deemed to have ownership of the shares for the purposes of receiving an upcoming dividend; two business days after the ex-dividend date.

Synonyms: Date of record
Related Terms: Ex-dividend date 

Day trader
A trader holding a position open somewhat longer than a scalper but closing all positions at the end of the day. Traders that rapidly buy and sell stocks in the hope that the stocks will continue to rise or fall in value for the seconds or minutes they are prepared to hold a position.

Days of inventory on hand
An activity ratio equal to the number of days in the period divided by inventory turnover over the period.

Synonyms: DOH

Days of sales outstanding
An activity ratio equal to the number of days in period divided by receivables turnover.

Synonyms: DSO

Dead-hand provision
A poison pill provision that allows for the redemption or cancellation of a poison pill provision only by a vote of continuing directors (generally directors who were on the target company’s board prior to the takeover attempt).

Related Terms: Poison pill 

A business entity that is ready to buy an asset for inventory or sell an asset from inventory to provide the other side of an order.

Synonyms: market maker

Dealing securities
Securities held by banks or other financial intermediaries for trading purposes.

With respect to double-entry accounting, a debit records increases of asset and expense accounts or decreases in liability and owners’ equity accounts.

Debt covenants
Agreements between the company as borrower and its creditors.

Debt incurrence test
A financial covenant made in conjunction with existing debt that restricts a company’s ability to incur additional debt at the same seniority based on one or more financial tests or conditions.

Debt rating approach
A method for estimating a company’s before-tax cost of debt based upon the yield on comparably rated bonds for maturities that closely match that of the company’s existing debt.

Debt ratings
An objective measure of the quality and safety of a company’s debt based upon an analysis of the company’s ability to pay the promised cash flows, as well as an analysis of any indentures.

Debt-to-assets ratio
A solvency ratio calculated as total debt divided by total assets.

Debt-to-capital ratio
A solvency ratio calculated as total debt divided by total debt plus total shareholders’ equity.

Debt-to-equity ratio
A solvency ratio calculated as total debt divided by total shareholders’ equity.

Decentralized risk management
A system that allows individual units within an organization to manage risk. Decentralization results in duplication of effort but has the advantage of having people closer to the risk be more directly involved in its management.

Decision price
The prevailing price when the decision to trade is made.

Synonyms: arrival price strike price

Decision risk
The risk of changing strategies at the point of maximum loss.

Decision rule
With respect to hypothesis testing, the rule according to which the null hypothesis will be rejected or not rejected; involves the comparison of the test statistic to rejection point(s).

Related Terms: Hypothesis testing 

Declaration date
The day that the corporation issues a statement declaring a specific dividend.

Deductible temporary differences
Temporary differences that result in a reduction of or deduction from taxable income in a future period when the balance sheet item is recovered or settled.

Deep in the money
Options that are far in-the-money.

Related Terms: Option 

Deep out of the money
Options that are far out-of-the-money.

Related Terms: Option 

Default risk
1) The probability that a borrower defaults or fails to meet its obligation to make full and timely payments of principal and interest, according to the terms of the debt security. 2) The risk of loss if an issuer or counterparty does not fulfill its contractual obligations.

Synonyms: Default probability
Related Terms: Credit risk 

Default risk premium
An extra return that compensates investors for the possibility that the borrower will fail to make a promised payment at the contracted time and in the contracted amount.

Default swap
A contract in which the swap buyer pays a regular premium; in exchange, if a default in a specified bond occurs, the swap seller pays the buyer the loss due to the default.

Defaultable debt
Debt with some meaningful amount of credit risk.

Related Terms: Credit risk 

Defensive interval ratio
A liquidity ratio that estimates the number of days that an entity could meet cash needs from liquid assets; calculated as (cash + short-term marketable investments + receivables) divided by daily cash expenditures.

Deferred tax assets
A balance sheet asset that arises when an excess amount is paid for income taxes relative to accounting profit. The taxable income is higher than the accounting profit, and income tax payable exceeds tax expense. The company expects to recover the difference during the course of future operations when tax expense exceeds income tax payable.

Deferred tax liabilities
A balance sheet liability that arises when a deficit amount is paid for income taxes relative to accounting profit. The taxable income is less than the accounting profit, and income tax payable is less than tax expense. The company expects to eliminate the liability over the course of future operations when income tax payable exceeds tax expense.

Defined-benefit pension plans
Plans in which the company promises to pay a certain annual amount (defined benefit) to employees after retirement. The company bears the investment risk of the plan assets.

Defined-contribution pension plans
Individual accounts to which an employee and typically the employer makes contributions, generally on a tax-advantaged basis. The amounts of contributions are defined at the outset, but the future value of the benefit is unknown. The employee bears the investment risk of the plan assets.

Definitive merger agreement
A contract signed by both parties to a merger that clarifies the details of the transaction— including the terms, warranties, conditions, termination details, and the rights of all parties.

A decrease in the general level of prices; an increase in the purchasing power of a unit of currency.

Synonyms: Negative inflation

Degree of confidence
The probability that a confidence interval includes the unknown population parameter.

Degree of financial leverage
The ratio of the percentage change in net income to the percentage change in operating income; the sensitivity of the cash flows available to owners when operating income changes.

Synonyms: DFL

Degree of operating leverage
The ratio of the percentage change in operating income to the percentage change in units sold; the sensitivity of operating income to changes in units sold.

Synonyms: DOL

Degree of total leverage
The ratio of the percentage change in net income to the percentage change in units sold; the sensitivity of the cash flows to owners to changes in the number of units produced and sold.

Degrees of freedom
The number of independent observations used.

Synonyms: DF

Delay costs
Implicit trading costs that arise from the inability to complete desired trades immediately due to order size or market liquidity.

Synonyms: slippage

A process used in a deliverable forward contract in which the long pays the agreed-upon price to the short, which in turn delivers the underlying asset to the long.

Related Terms: Forward contract 

Delivery option
The feature of a futures contract giving the short the right to make decisions about what, when, and where to deliver.

Related Terms: Futures contract 

The relationship between the option price and the underlying price, which reflects the sensitivity of the price of the option to changes in the price of the underlying.

Related Terms: Option 

Delta hedge
An option strategy in which a position in an asset is converted to a risk-free position with a position in a specific number of options. The number of options per unit of the underlying changes through time, and the position must be revised to maintain the hedge.

Related Terms: Option 

Delta-normal method
A measure of VAR equivalent to the analytical method but that refers to the use of delta to estimate the option’s price sensitivity.

Related Terms: Value at risk 

Demand deposit
A deposit that can be drawn upon without prior notice, such as a checking account.

The process of converting an insurance company from mutual form to stock.

With reference to events, the property that the probability of one event occurring depends on (is related to) the occurrence of another event.

Dependent variable
The variable whose variation about its mean is to be explained by the regression; the left-hand-side variable in a regression equation.

The process of systematically allocating the cost of long-lived (tangible) assets to the periods during which the assets are expected to provide economic benefits.

A financial instrument whose value depends on the value of some underlying asset or factor (e.g., a stock price, an interest rate, or an exchange rate).

Descriptive statistics
The study of how data can be summarized effectively.

Diff swaps
A swap in which the payments are based on the difference between interest rates in two countries but payments are made in only a single currency.

Related Terms: Swap contract 

Differential returns
Returns that deviate from a manager’s benchmark.

Related Terms: Benchmark 

Diffuse prior
The assumption of equal prior probabilities.

Diffusion index for stocks
An indicator of the number of stocks rising during a specified period of time relative to the number of stocks declining and not changing price.

Diluted EPS
Net income, minus preferred dividends, divided by the number of common shares outstanding considering all dilutive securities (e.g., convertible debt and options); the EPS that would result if all dilutive securities were converted into common shares.

Diluted shares
The number of shares that would be outstanding if all potentially dilutive claims on common shares (e.g., convertible debt, convertible preferred stock, and employee stock options) were exercised.

Diminishing balance method
An accelerated depreciation method (i.e., one that allocates a relatively large proportion of the cost of an asset to the early years of the asset’s useful life).

Related Terms: Depreciation 

Direct commodity investment
Commodity investment that involves cash market purchase of physical commodities or exposure to changes in spot market values via derivatives, such as futures.

Related Terms: Commodities 

Direct debit program
An arrangement whereby a customer authorizes a debit to a demand account; typically used by companies to collect routine payments for services.

Direct financing lease
A type of finance lease, from a lessor perspective, where the present value of the lease payments (lease receivable) equals the carrying value of the leased asset. The revenues earned by the lessor are financing in nature.

Direct format
With reference to the cash flow statement, a format for the presentation of the statement in which cash flow from operating activities is shown as operating cash receipts less operating cash disbursements.

Synonyms: direct method

Direct market access
Platforms sponsored by brokers that permit buy-side traders to directly access equities, fixed income, futures, and foreign exchange markets, clearing via the broker.

Direct quotation
Quotation in terms of domestic currency/foreign currency.

Direct write-off method
An approach to recognizing credit losses on customer receivables in which the company waits until such time as a customer has defaulted and only then recognizes the loss.

Disbursement float
The amount of time between check issuance and a check’s clearing back against the company’s account.

To reduce the value of a future payment in allowance for how far away it is in time; to calculate the present value of some future amount. Also, the amount by which an instrument is priced below its face value.

Discount interest
A procedure for determining the interest on a loan or bond in which the interest is deducted from the face value in advance.

Related Terms: Discount 

Discounted cash flow analysis
In the context of merger analysis, it is an estimate of a target company’s value found by discounting the company’s expected future free cash flows to the present.

Discounted cash flow models
Valuation models that express the idea that an asset’s value is the present value of its (expected) cash flows.

Synonyms: DCF models
Related Terms: Valuation 

Discrete random variable
A random variable that can take on at most a countable number of possible values.

Discrete time
Time thought of as advancing in distinct finite increments.

Discriminant analysis
A multivariate classification technique used to discriminate between groups, such as companies that either will or will not become bankrupt during some time frame.

To withdraw funds from financial intermediaries for placement with other financial intermediaries offering a higher return or yield. Or, to withdraw funds from a financial intermediary for the purposes of direct investment, such as withdrawing from a mutual fund to make direct stock investments.

The variability around the central tendency.

Distressed debt arbitrage
A distressed securities investment discipline that involves purchasing the traded bonds of bankrupt companies and selling the common equity short.

Distressed securities
Securities of companies that are in financial distress or near bankruptcy; the name given to various investment disciplines employing securities of companies in distress.

Diversification effect
In reference to VAR across several portfolios (for example, across an entire firm), this effect equals the difference between the sum of the individual VARs and total VAR.

Related Terms: Value at risk 

The sale, liquidation, or spin-off of a division or subsidiary.

Dividend discount model
A present value model of stock value that views the intrinsic value of a stock as the present value of the stock’s expected future dividends.

Synonyms: DDM

Dividend discount model based approach
An approach for estimating a country’s equity risk premium. The market rate of return is estimated as the sum of the dividend yield and the growth rate in dividends for a market index. Subtracting the risk-free rate of return from the estimated market return produces an estimate for the equity risk premium.

Related Terms: Dividend discount model 

Dividend displacement of earnings
The concept that dividends paid now displace earnings in all future periods.

Dividend payout ratio
The ratio of cash dividends paid to earnings for a period.

Dividend policy
The strategy a company follows with regard to the amount and timing of dividend payments.

Dividend rate
The most recent quarterly dividend multiplied by four.

Dividend recapitalization
A method by which a buyout fund can realize the value of a holding; involves the issuance of debt by the holding to finance a special dividend to owners.

Dividends per share
The dollar amount of cash dividends paid during a period per share of common stock.

Dollar duration
A measure of the change in portfolio value for a 100 bps change in market yields.

Double declining balance depreciation
An accelerated depreciation method that involves depreciating the asset at double the straight-line rate. This rate is multiplied by the book value of the asset at the beginning of the period (a declining balance) to calculate depreciation expense.

Related Terms: Depreciation 

Double taxation system
Corporate earnings are taxed twice when paid out as dividends. First, corporate earnings are taxed regardless of whether they will be distributed as dividends or retained at the G-13 corporate level; second, dividends are taxed again at the individual shareholder level.

Double-entry accounting
The accounting system of recording transactions in which every recorded transaction affects at least two accounts so as to keep the basic accounting equation (assets = liabilities + owners’ equity) in balance.

Down transition probability
The probability that an asset’s value moves down in a model of asset price dynamics.

Downgrade risk
1) The risk that a bond issuer's creditworthiness deteriorates, or migrates lower, leading investors to believe the risk of default is higher. 2) The risk that one of the major rating agencies will lower its rating for an issuer based on its specified rating criteria.

Synonyms: credit migration risk

Downside deviation
A measure of volatility using only rate of return data points below the investor’s minimum acceptable return.

Downside risk
Risk of loss or negative return.

A transaction between two related companies, an investor company (or a parent company) and an associate company (or a subsidiary), such that the investor company records a profit on its income statement. An example is a sale of inventory by the investor company to the associate or by a parent to a subsidiary company.

Drag on liquidity
When receipts lag, creating pressure from the decreased available funds.

Due diligence
Investigation and analysis in support of a recommendation; the failure to exercise due diligence may sometimes result in liability according to various securities laws.

Dummy variable
A type of qualitative variable that takes on a value of 1 if a particular condition is true and 0 if that condition is false.

DuPont analysis
An approach to decomposing return on investment (e.g., return on equity) as the product of other financial ratios.

A measure of an option-free bond’s average maturity. Specifically, the weighted average maturity of all future cash flows paid by a security in which the weights are the present value of these cash flows as a fraction of the bond’s price. A measure of a bond’s price sensitivity to interest rate movements.

Dutch Book theorem
A result in probability theory stating that inconsistent probabilities create profit opportunities.

Dynamic approach
With respect to strategic asset allocation, an approach that accounts for links between optimal decisions at different points in time.

Dynamic hedging
A strategy in which a position is hedged by making frequent adjustments to the quantity of the instrument used for hedging in relation to the instrument being hedged.

Related Terms: Hedging