Category: Financial Terms

Underlying Security Key takeaways An underlying security is the asset (stock, bond, commodity, index, currency, or even another derivative) on which a derivative is based. The derivative’s value and settlement depend on the price or performance of the underlying. Derivatives are used to speculate on or hedge against future movements in the underlying; settlement may…

Underlying Retention: What It Is and How It Works Definition Underlying retention is the portion of risk or liability from an insurance policy (or portfolio of policies) that a ceding insurer keeps for itself after transferring the remainder to a reinsurer. It represents the insurer’s retained exposure and the threshold before reinsurance coverage applies. Why…

Underlying Profit Overview Underlying profit is a company’s internal measure of profit intended to reflect earnings from its regular, ongoing operations. It adjusts the statutory accounting profit by removing one-off, unusual, or infrequent items so that year‑to‑year operating performance is clearer. How it works Statutory profit (reported under GAAP or other accounting standards) includes all…

Underlying Security: What it Is and How It Works An underlying security is the asset, instrument, or index on which a derivative’s value is based. Common underlyings include stocks, bonds, commodities, currencies, and indexes. Even other derivatives can serve as underlyings for more complex products. Key takeaways The underlying security is the item whose price…

Underlying Mortality Assumption: What It Is and Why It Matters What it is The underlying mortality assumption is an actuary’s projection of future death rates used to estimate life expectancies. These projections — typically expressed through mortality tables — form the basis for pricing life insurance, calculating reserves, and measuring pension plan liabilities. How it’s…

Underlying Debt Key takeaways Underlying debt refers to smaller government entities’ obligations that are implicitly supported by the creditworthiness or taxing authority of a larger government in the same jurisdiction. It most commonly applies to general obligation municipal bonds and functions as a form of credit enhancement. Ratings agencies consider both the standalone profile of…

Underlying Asset What is an underlying asset? An underlying asset is the financial instrument, commodity, or index on which a derivative contract is based. The derivative’s value moves in relation to the price or performance of that underlying asset. Why it matters Derivatives (options, futures, swaps, etc.) do not have intrinsic value on their own;…

What Is an Underlying? An underlying (or underlying asset) is the security, commodity, index, interest rate, or other measurable item on which a financial contract is based. In derivatives and convertible instruments, the underlying is the asset whose price or value determines the contract’s payoff or delivery obligation. Key points * The underlying is the…

Underinvestment Problem What it is The underinvestment problem occurs when a highly indebted firm forgoes positive net present value (NPV) investments because expected returns would flow primarily to creditors rather than to shareholders. Managers acting in shareholders’ interest then reject projects that would increase the firm’s total value, producing suboptimal investment outcomes. How it works…

Underinsured Motorist Coverage (UIM) Underinsured motorist coverage (UIM) is an auto insurance endorsement that protects you when an at-fault driver’s liability limits are too low to cover your medical bills or vehicle damage. If the other driver’s policy doesn’t fully pay your losses, your UIM policy can cover the remainder, up to your policy limits….

Underinsured Motorist Coverage Limits Trigger Key takeaways Underinsured motorist (UIM) coverage protects you when an at-fault driver’s liability limits are too low to cover your damages. The “limits trigger” activates UIM when the other driver’s liability limit is less than your own policy limit. UIM is usually an inexpensive endorsement and is often offered or…

Underinsured Motorist Coverage Underinsured motorist (UIM) coverage is an auto insurance add-on that protects you when an at-fault driver’s liability policy isn’t large enough to pay your medical bills or vehicle repairs. It fills the gap between the other driver’s coverage limit and your actual expenses, up to your UIM policy limit. How it works…

Underinsurance Underinsurance occurs when an insurance policy does not provide enough coverage to protect the policyholder from a major loss. This gap can expose individuals, families, and businesses to large out-of-pocket expenses that may cause financial hardship. Key takeaways Underinsurance means the policy won’t cover a significant portion of a claim, leaving the insured responsible…

Underground Economy: Definition, Size, Examples, and Effects The underground economy (also called the shadow economy, black market, or informal economy) consists of economic transactions that evade legal oversight. This includes activities that are illegal by nature (e.g., illicit drugs, human trafficking) and otherwise legal activities that go unreported to avoid taxes, regulation, or paperwork (e.g.,…

Underfunded Pension Plan An underfunded pension plan is a company-sponsored defined-benefit retirement plan whose liabilities (the present value of promised benefits) exceed its assets. That shortfall means there may not be enough money to pay current or future retirees the benefits they expect. How these plans work Employers fund a pension trust and invest assets…

Underemployment Equilibrium: Definition, Causes, and Policy Responses What is underemployment equilibrium? Underemployment equilibrium is a macroeconomic state in which an economy settles at a sustained level of output and employment below its full potential. In this condition, unemployment remains persistently above the natural rate (sometimes described as the NAIRU — non-accelerating inflation rate of unemployment)…

Underemployment: Definition, Causes, and Why It Matters What is underemployment? Underemployment occurs when people work in jobs that do not fully use their skills, experience, or availability. That includes: Working part-time but wanting full-time work. Holding low-skill or low-pay jobs despite higher qualifications. Being outside the labor force because of discouragement after unsuccessful job searches…

Underconsumption Key takeaways Underconsumption describes a situation where consumer demand is persistently lower than available supply, contributing to recessions and stagnation. The theory holds that inadequate purchasing power—often because wages lag productivity—prevents workers from buying what they produce, causing demand shortfalls and business decline. Modern macroeconomic thought (Keynesian and aggregate-demand frameworks) treats insufficient consumer demand…

Undercast: Meaning, Causes, Examples, and How to Prevent It Key takeaways Undercast is a forecasting error in which estimates are lower than actual results (sales, expenses, income, cash flow, or other metrics). Causes include conservative assumptions, volatile markets, poor forecasting methods, or deliberate manipulation tied to incentives. Repeated undercasting can harm resource allocation, decision-making, and…

Undercapitalization: Definition, Causes, Risks, and Prevention What is undercapitalization? Undercapitalization occurs when a business lacks sufficient capital to conduct normal operations and meet obligations to creditors. It commonly shows up as persistent negative cash flow, an inability to access affordable financing, or reliance on high-cost, short-term credit. Left unchecked, undercapitalization increases the risk of bankruptcy…

Underbanked Definition Underbanked describes people or households that have a bank account but frequently rely on alternative financial services—such as payday loans, check‑cashing services, money orders, prepaid cards, and other nonbank products—to meet their everyday financial needs. How the underbanked use financial services Underbanked consumers may: * Use cash or prepaid products for transactions. *…

Underapplied Overhead (vs. Overapplied Overhead) Overview Underapplied overhead occurs when a company’s actual overhead costs exceed the amount it budgeted or applied to production. It is considered an unfavorable variance because the business spent more on indirect costs than planned, which increases the cost of goods sold (COGS) relative to expectations. How it happens (simple…

Underreporting What is underreporting? Underreporting is the intentional act of declaring less income or revenue than was actually received, typically to reduce tax liabilities. It can be committed by individuals, self-employed workers, and businesses. When done deliberately, underreporting is a form of tax fraud. How it happens Businesses: Some companies may hide or defer revenue…

Undated Issue Key takeaways An undated issue is a government bond with no maturity date, paying interest indefinitely. Also called a perpetual bond or “perp,” it resembles a dividend-paying stock from the holder’s perspective. Banks may treat undated issues as Tier 1 capital because of their perpetual nature. Governments can redeem them, but redemption is…

Uncovered Option: What It Is and How It Works Key takeaways * An uncovered (or naked) option is a written option where the seller does not hold an offsetting position in the underlying security. * Profit is limited to the premium received; potential losses can be large (puts) or theoretically unlimited (calls). * Suitable only…

Uncovered Interest Rate Parity (UIP) Uncovered interest rate parity (UIP) is a financial theory that links interest rate differentials between two countries to expected changes in their exchange rate. It predicts that a currency with a higher nominal interest rate will tend to depreciate relative to a lower-yielding currency by roughly the interest-rate gap, eliminating…

Uncovered Interest Arbitrage Uncovered interest arbitrage is an investment strategy that seeks higher returns by converting domestic funds into a foreign currency to take advantage of a higher deposit interest rate. The position is “uncovered” because the investor does not hedge the foreign exchange (FX) risk with a forward or futures contract—exchange-rate movements between the…

Unconventional Oil: What It Is, How It Works, and Examples Key takeaways Unconventional oil is crude obtained by methods other than traditional vertical-well drilling. Techniques include hydraulic fracturing, directional drilling, and oil-sands extraction. Advances in technology and changing oil prices have made many unconventional methods economically viable. These methods can unlock previously inaccessible resources but…

Unconventional Cash Flow Key takeaways * An unconventional cash flow has more than one change in sign (inflows and outflows switch direction multiple times) over a project’s life. * Such cash flows can produce multiple internal rates of return (IRRs), creating ambiguity in IRR-based decisions. * Use NPV, the modified internal rate of return (MIRR),…

Unconstrained Investing: What It Is and How It Works Unconstrained investing is an approach that frees portfolio managers from strict benchmark tracking. Instead of aiming to match or modestly beat an index (like the S&P 500), managers pursue returns across a wide range of asset classes, sectors, geographies, and instruments to achieve performance objectives over…

Unconsolidated Subsidiary An unconsolidated subsidiary is a company that a parent firm owns (partially) but does not include in its consolidated financial statements. Instead of combining the subsidiary’s individual line-by-line results with the parent’s, the parent reports its stake as an investment on the balance sheet. When a subsidiary is unconsolidated A subsidiary is typically…

What is an uncommitted facility? An uncommitted facility is a short-term lending arrangement in which a lender agrees it may make funds available to a borrower but has no binding obligation to do so. The lender can decide whether to extend credit, set the limit, and demand repayment on short notice. These facilities are typically…

Uncollected Funds: Explanation, Benefits, and Examples Uncollected funds are portions of a deposit—commonly from a deposited check—that a bank shows as received but does not yet make available for withdrawal. The bank holds these funds until it verifies that the issuing bank has paid the check and the payment has cleared the banking system. How…

Uncle Sam: Iconic Symbol of the U.S. Government Uncle Sam is the personified symbol of the U.S. federal government. Originating in early 19th-century military supply culture, the figure evolved into a widely recognized icon used in political messaging, military recruitment, and financial discourse. Key takeaways The nickname “Uncle Sam” traces to Samuel Wilson, a New…

Unclaimed Funds Unclaimed funds are money or assets owed to an individual that have not been collected and whose owner cannot be located. After a defined dormancy period, custodians (banks, employers, insurers, etc.) are typically required to report and transfer these assets to the state where the property is held. The state holds the property…