Category: Financial Terms

Understanding the Back Office The back office comprises the administrative and support functions of a company that do not interact directly with clients. These roles—commonly grouped under “operations”—handle essential tasks such as settlements, record-keeping, regulatory compliance, accounting, and IT support. While they typically do not generate revenue directly, back-office functions are critical for enabling and…

What is the Back-End Ratio? The back-end ratio (also called the debt-to-income ratio or total debt ratio) measures the percentage of a borrower’s gross monthly income that goes toward paying all monthly debt obligations. Lenders use it to assess how much of your income is already committed to debt and how risky it would be…

Baby Boomer: Definition, Age Range, Characteristics, and Impact A baby boomer is someone born between 1946 and 1964, part of a large post–World War II generation that reshaped demographics, culture, and the economy. Once the largest generational cohort in U.S. history, baby boomers continue to exert substantial economic and political influence as they move through…

Baby Bond Key takeaways * A baby bond is a fixed-income security with a face (par) value under $1,000, designed to be affordable for individual retail investors. * Issuers include municipal governments and corporations; terms vary by issuer type and credit quality. * Common features include unsecured status, higher coupons to compensate risk, and often…

Axe (in securities trading) Definition An “axe” (or “axe to grind”) is a trader’s interest or motivation to buy or sell a security they already hold. It often reflects a desire to hedge, liquidate, or otherwise manage an existing position. Traders commonly keep their axes private to avoid others exploiting that information. Origin and meaning…

Average True Range (ATR) What is ATR? The Average True Range (ATR) is a volatility indicator introduced by J. Welles Wilder Jr. It quantifies how much an asset’s price typically moves over a given period, without indicating price direction. ATR is most commonly calculated using a 14-period moving average of the True Range (TR). Why…

Average Selling Price (ASP) What is ASP? Average Selling Price (ASP) is the typical price at which a product or service is sold across channels, product categories, or the market as a whole. It serves as a benchmark for pricing decisions and reflects where a product is positioned (e.g., premium vs. budget). How to calculate…

Understanding Average Return What is the average return? The average return (arithmetic average) is the simple mean of a series of investment returns over a specified period. It shows past performance by summing periodic returns and dividing by the number of periods. Unlike annualized or geometric measures, the arithmetic average does not account for compounding….

Average Propensity to Consume (APC) Definition Average propensity to consume (APC) is the share of income that an individual, household, or economy spends on goods and services rather than saves. It is expressed as a decimal between 0 and 1 or as a percentage between 0% and 100%. Formula APC = Consumption / Income Explore…

Average Outstanding Balance What it is The average outstanding balance is the unpaid, interest-bearing amount on a loan or credit account averaged over a specific period (commonly a monthly statement cycle). It applies to term loans, installment loans, lines of credit, and revolving accounts such as credit cards. Why it matters Lenders use average outstanding…

Understanding Average Life: Definition, Calculation, and Risks What is average life? Average life (also called weighted average life or weighted average maturity) measures the average time it takes for the principal of a debt issue to be repaid. It focuses solely on principal repayments, not interest. Average life is especially useful for amortizing securities—those that…

Average Directional Index (ADX) The Average Directional Index (ADX) is a technical indicator that measures the strength of a trend—up or down—without indicating its direction by itself. It is usually plotted with two companion lines: the Positive Directional Indicator (+DI) and the Negative Directional Indicator (−DI). Together these three lines help traders decide whether to…

Average Daily Trading Volume (ADTV) Average Daily Trading Volume (ADTV) measures how many shares or contracts of a security are traded on average each day over a specified period. It’s a key gauge of market interest and liquidity: higher ADTV usually means it’s easier to enter or exit positions without moving the market price, while…

Average Daily Rate (ADR) The average daily rate (ADR) is a key performance metric in the hospitality industry that measures the average revenue earned per occupied room per day. It helps hotels understand how much revenue they generate from rooms on a per-room basis and, when combined with occupancy data, provides insight into overall revenue…

Average Daily Balance Method Key takeaways The average daily balance method is the most common way credit card issuers calculate monthly interest. It averages the account balance for each day in the billing cycle, then applies the card’s daily periodic rate. Monthly interest = average daily balance × daily periodic rate × number of days…

Average Cost Method The average cost method (also called the weighted-average method) values inventory by assigning each unit the same cost: the total cost of goods purchased or produced during a period divided by the total number of units purchased or produced. The resulting average cost is used to calculate both cost of goods sold…

Average Cost Basis The average cost basis method determines the per-share cost of a mutual fund holding in a taxable account by dividing the total dollars invested by the number of shares owned. That average is compared with the sale price to calculate capital gains or losses for tax reporting. How it works Formula: Average…

Average Collection Period The average collection period measures how long, on average, it takes a business to collect payments on credit sales. It’s a key indicator of accounts receivable (AR) management and short-term liquidity: shorter collection periods generally mean faster cash inflows, while longer periods can strain cash flow and signal credit risk. Why it…

Average Inventory Average inventory measures the typical amount or value of inventory a company holds over a specified period. It smooths fluctuations between inventory counts and is useful for performance analysis, planning, and financial ratios. Why it matters Helps assess how efficiently a business manages stock relative to sales (e.g., inventory turnover). Reveals potential inventory…

Average Annual Return (AAR) Average Annual Return (AAR) is a simple percentage measure that summarizes a fund’s or investment’s historical performance over a specified period (for example, three, five, or ten years). It aggregates the effects of share price appreciation, capital gains distributions, and dividends to give a single, easy-to-read figure investors can use to…

Average Annual Growth Rate (AAGR) What it is The Average Annual Growth Rate (AAGR) is the arithmetic mean of periodic growth rates over a specified time frame. It expresses the average yearly percentage change in a variable (investment value, revenue, GDP, etc.) but does not account for compounding. Formula and calculation Calculate the growth rate…

Average Age of Inventory What it is The average age of inventory (also called days’ sales in inventory, DSI) measures the average number of days a company holds inventory before selling it. It gauges how quickly inventory turns into sales and helps assess inventory-management efficiency. Formula Average Age of Inventory (days) = (Average Inventory /…

Available-for-Sale Security What is an available-for-sale (AFS) security? An available-for-sale security is a debt or equity investment that a company purchases with the intent to sell before it reaches maturity (or to hold for an indefinite period if the security has no maturity). Accounting standards require firms to classify investments at purchase as one of…

Available Balance: What It Means and How to Use It Key takeaways * Available balance is the amount you can use or withdraw immediately from your account. * Current balance (also called ledger balance) includes pending transactions and can differ from available balance until those items clear. * For credit cards, available credit = credit…

Autoregressive Integrated Moving Average (ARIMA) Key takeaways * ARIMA is a statistical model for analyzing and forecasting univariate time series. * It combines autoregression (AR), differencing to achieve stationarity (I), and moving averages (MA). * The model is specified by three integers: p (AR order), d (degree of differencing), and q (MA order). * ARIMA…

Autoregressive Models Definition Autoregressive (AR) models are time series models that predict a variable using a linear combination of its own past values. They assume that past observations contain information useful for forecasting future values. Key takeaways AR models forecast future values from past values of the same series. Common forms are AR(1), AR(2), ……

Autonomous Expenditure An autonomous expenditure is a component of aggregate spending that does not depend on the current level of real income. These are necessary or “automatic” outlays—by households, businesses, or government—that must be made regardless of income fluctuations. Examples include basic household consumption (food, shelter), many types of government spending, planned investment, and exports….

Autonomous Consumption Definition Autonomous consumption is the level of spending on essential goods and services that consumers undertake even when they have no disposable income. These expenditures—such as food, shelter, utilities, and basic health care—are considered independent of current income and often force households to draw on savings or borrow. Why it matters It determines…

Automatic Stabilizers What they are Automatic stabilizers are fiscal mechanisms built into tax and transfer systems that automatically dampen fluctuations in economic activity without new legislative action. By changing government receipts and payments in response to income and employment shifts, they help smooth the business cycle. How they work Automatic stabilizers operate countercyclically: * During…

Automatic Premium Loan An automatic premium loan (APL) is a policy provision in cash-value (permanent) life insurance that lets the insurer cover an overdue premium by taking a loan against the policy’s accumulated cash value. The loan is applied automatically when a premium remains unpaid past the policy’s grace period, helping prevent the policy from…

Automatic Bill Payment Automatic bill payment (auto pay) is a scheduled transfer that pays a recurring bill on a predetermined date. You can set it up with the company receiving the payment (the vendor) or through your bank’s online bill-pay service. Auto pay can come from checking accounts, brokerages, or mutual fund accounts and is…

Automated Teller Machine (ATM) An automated teller machine (ATM) is a self-service electronic terminal that lets bank customers perform basic financial transactions without interacting with a teller. Common services include cash withdrawals, deposits, balance inquiries, transfers, and bill payments. ATMs provide convenient, often 24/7 access to accounts and are found inside and outside bank branches…

Automated Customer Account Transfer Service (ACATS) ACATS is an automated system that moves securities and cash between brokerage accounts at different firms. Developed by the National Securities Clearing Corporation (NSCC), it replaces manual transfers with a standardized electronic process that reduces time, cost, and human error. In the UK and Ireland, a similar function is…

Automated Clearing House (ACH) Definition The Automated Clearing House (ACH) is an electronic funds-transfer network that moves money between bank accounts in the U.S. It handles large volumes of credit and debit transactions—such as payroll direct deposits, bill payments, tax refunds, and government benefits—by batching and clearing them through participating financial institutions. How ACH Works…

Autocorrelation Definition Autocorrelation (serial correlation or lagged correlation) measures how similar a time series is to a lagged version of itself. It quantifies the relationship between observations at different time points: a positive autocorrelation means past values tend to be followed by similar values; a negative autocorrelation means past values tend to be followed by…