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Glossary : L

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Ladder strategy: A bond portfolio strategy in which the portfolio is constructed to have approximately equal amounts invested in every maturity within a given range.
Lag: Payment of a financial obligation later than is expected or required, as in lead and lag. Also, the number of periods that an independent variable in a regression model is "held back" in order to predict the dependent variable.
Lag response of prepayments: There is typically a lag of about three months between the time the weighted average coupon of an M.B.S. pool has crossed the threshold for refinancing and an acceleration in prepayment speed is observed.
Lambda: The ratio of a change in the option price to a small change in the option volatility. It is the partial derivative of the option price with respect to the option volatility.
Last split: After a stock split, the number of shares distributed for each share held and the date of the distribution.
Last trading day: The final day under an exchange's rules during which trading may take place in a particular futures or options contract. Contracts outstanding at the end of the last trading day must be settled by delivery of underlying physical commodities or financial instruments, or by agreement for monetary settlement depending upon futures contract specifications.
Last-In-First-Out (L.I.F.O.): A method of valuing inventory that uses the cost of the most recent item in inventory first. Related: F.I.F.O.
Law of large numbers: The mean of a random sample approaches the mean (expected value) of the population as the sample grows.
Law of one price: An economic rule stating that a given security must have the same price regardless of the means by which one goes about creating that security. This implies that if the payoff of a security can be synthetically created by a package of other securities, the price of the package and the price of the security whose payoff it replicates must be equal. If it is unequal, an arbitrage opportunity would present itself.
Layoff: Used in the context of general equities. Eliminate all or part of a position by finding customers or other dealers to take them.
Layup: Used in the context of general equities. Easily executed trade or order. See: Lead pipe
Lead: Payment of a financial obligation earlier than is expected or required.
Lead manager: The commercial or investment bank with the primary responsibility for organizing syndicated bank credit or bond issued. The lead manager recruits additional lending or underwriting banks, negotiates terms of the issue with the issuer, and assesses market conditions.
Lead pipe: Used in the context of general equities. Cinch, virtually certain that trade will take place. See: Layup
Lead underwriter: The head of a syndicate of financial firms that are sponsoring an initial public offering of securities or a seconday offering of securities. Could also apply to bond issues.
Leading economic indicators: Economic series that tend to rise or fall in advance of the rest of the economy.
Leading the market: Used in the context of general equities. Stock or group of stocks moving with the market as a whole, but moving in advance of the general market.
Leakage: Release of information to some persons before official public announcement.
LEAPS: Long-term equity anticipation securities. Long-term options.
Lease: A long-term rental agreement, and a form of secured long-term debt.
Lease rate: The payment per period stated in a lease contract.
Leaves: Used in the context of general equities. Remains to buy or sell of a previously entered order after a report of partial execution has been given. If I had told the floor broker to buy 20M IBM @ $115, and he later bought 6M at this price, his report would be "You bought 6M IBM @ $115, leaves 14."

Ledger cash: A firm's cash balance as reported in its financial statements. Also called book cash.
Legal capital: Value at which a company's shares are recorded in its books.
Legal bankruptcy: A legal proceeding for liquidating or reorganizing a business.
Legal defeasance: The deposit of cash and permitted securities, as specified in the bond indenture, into an irrevocable trust sufficient to enable the issuer to discharge fully its obligations under the bond indenture.
Legal investments: Investments that a regulated entity is permitted to make under the rules and regulations that govern its investing.
Legitimate: Used in the context of general equities. Real interest in trading as compared to a profile stance. See: Natural
Leg up: Used in the context of general equities. (1)Having a portion of the offsetting side of a trade in your pocket (spoken for) so your capital risk in the transaction is reduced. (having purchased 10,000 of a 50,000 buy order leaves the trader a "leg up" on 10M shares.); (2) having completed one side of a two-sided transaction, as in a swap or contingency order.
Lend: To provide money temporarily on the condition that it or its equivalent will be returned, often with an interest fee.
Lender: Businesses that provide loans to others.
Less developed countries (L.D.C.s): Also known as emerging markets. Per capita G.D.P. is below a World Bank determined level.
Lessee: An entity that leases an asset from another entity.
Lessor: An entity that leases an asset to another entity.
Letter of comment: A communication to the firm from the S.E.C. that suggests changes to its registration statement.
Letter of credit (L.O.C.): A form of guarantee of payment issued by a bank used to guarantee the payment of interest and repayment of principal on bond issues.
Letter stock: Privately placed common stock, so-called because the S.E.C. requires a letter from the purchaser stating that the stock is not intended for resale.
Level: Used in the context of general equities. Price parameter of an indication.
Level pay: The characteristic of the scheduled principal and interest payments (P&I) due under a mortgage such that total monthly payment of P&I is the same while characteristically the principal payment component of the monthly payment becomes gradually greater while the monthly interest payment becomes less.
Level-coupon bond: Bond with a stream of coupon payments that are the same throughout the life of the bond.
Leverage: Used in the context of general equities. For corporations, property of rising or falling at a proportionally greater amount than comparable investments. For example, an option is said to have high leverage relative to the underlying stock because a price change in the stock may result in a relatively large increase or decrease in the value of the option. The use of debt financing.
Leverage clientele: A group of shareholders who, because of their personal leverage, seek to invest in corporations that maintain a compatible degree of corporate leverage.
Leverage ratios: Measures of the relative contribution of stockholders and creditors, and of the firm's ability to pay financing charges. Value of firm's debt to the total value of the firm.
Leverage rebalancing: Making transactions to adjust (rebalance) a firm's leverage ratio back to its target.
Leveraged beta: The beta of a leveraged required return; that is, the beta as adjusted for the degree of leverage in the firm's capital structure.
Leveraged buyout (L.B.O.): A transaction used for taking a public corporation private financed through the use of debt funds: bank loans and bonds. Because of the large amount of debt relative to equity in the new corporation, the bonds are typically rated below investment grade, properly referred to as high-yield bonds or junk bonds. Investors can participate in an L.B.O. through either the purchase of the debt (i.e., purchase of the bonds or participation in the bank loan) or the purchase of equity through an L.B.O. fund that specializes in such investments.

Leveraged equity: Stock in a firm that relies on financial leverage. Holders of leveraged equity face the benefits and costs of using debt.
Leveraged lease: A lease arrangement under which the lessor borrows a large proportion of the funds needed to purchase the asset and grants the lender a lien on the assets and a pledge of the lease payments to secure the borrowing.
Leveraged portfolio: A portfolio that includes risky assets purchased with funds borrowed.
Leveraged recapitalization: Often used in risk arbitrage. Popular form of shark repellant whereby a public company takes on significant additional debt with the purpose of either paying an extraordinary dividend or repurchasing shares, leaving the public shareholders with a continuing interest in a more financially-leveraged company. See: stub.
Leveraged required return: The required return on an investment when the investment is financed partially by debt.
Liability: A financial obligation, or the cash outlay that must be made at a specific time to satisfy the contractual terms of such an obligation.
Liability funding strategies: Investment strategies that select assets so that cash flows will equal or exceed the client's obligations.
Liability swap: An interest rate swap used to alter the cash flow characteristics of an institution's liabilities so as to provide a better match with its assets.
Lien: A security interest in one or more assets that is granted to lenders in connection with secured debt financing.
Lifted: Refers to over-the-counter trading. Having an offer taken in a stock, followed by the market-maker raising his offer price.
Lifting a leg: Closing out one side of a long-short arbitrage before the other is closed.
Limit order: An order to buy a stock at or below a specified price or to sell a stock at or above a specified price. For instance, you could tell a broker "buy me 100 shares of XYZ Corp at $8 or less" or to "sell 100 shares of XYZ at $10 or better." The customer specifies a price and the order can be executed only if the market reaches or betters that price. A conditional trading order designed to avoid the danger of adverse unexpected price changes.
Limit order book: A record of unexecuted limit orders that is maintained by the specialist. These orders are treated equally with other orders in terms of priority of execution.
Limit price: See: Maximum price fluctuation
Limitation on asset dispositions: A bond covenant that restricts in some way a firm's ability to sell major assets.
Limitation on conversion: Mainly applies to convertible securities. Possible delay in convertibility. More frequently, the right to convert may be terminable prior to a redemption date, preventing the holder from receiving a final coupon or dividend. This latter is known as the "screw you" clause. See accrued interest
Limitation on liens: A bond covenant that restricts in some way a firm's ability to grant liens on its assets.
Limitation on merger, consolidation, or sale: A bond covenant that restricts in some way a firm's ability to merge or consolidate with another firm.
Limitation on sale-and-leaseback: A bond covenant that restricts in some way a firm's ability to enter into sale-and-leaseback transactions.
Limitation on subsidiary borrowing: A bond covenant that restricts in some way a firm's ability to borrow at the subsidiary level.
Limited liability: Limitation of possible loss to what has already been invested.
Limited-liability instrument: A security, such as a call option, in which the owner can only lose his initial investment.
Limited partner: A partner who has limited legal liability for the obligations of the partnership.
Limited partnership: A partnership that includes one or more partners who have limited liability.
Limited price order: Used in the context of general equities. See: Limit order
Limited-tax general obligation bond: A general obligation bond that is limited as to revenue sources.
Line of credit: An informal arrangement between a bank and a customer establishing a maximum loan balance that the bank will permit the borrower to maintain.
Linear programming: Technique for finding the maximum value of some equation subject to stated linear constraints.
Linear regression: A statistical technique for fitting a straight line to a set of data points.
Lintner's observations: John Lintner's work (1956) suggested that dividend policy is related to a target level of dividends and to the speed of adjustment of change in dividends.
Liquid asset: Asset that is easily and cheaply turned into cash - notably cash itself and short-term securities.
Liquid yield option note (L.Y.O.N.): Zero-coupon, callable, putable, convertible bond invented by Merrill Lynch & Co.
Liquidating dividend: Payment by a firm to its owners from capital rather than from earnings.
Liquidation: When a firm's business is terminated, assets are sold, proceeds pay creditors and any leftovers are distributed to shareholders. Any transaction that offsets or closes out a long or short position. Related: buy in, evening up, offset liquidity.
Liquidation rights: The rights of a firm's securityholders in the event the firm liquidates.
Liquidation value: Net amount that could be realized by selling the assets of a firm after paying the debt.
Liquidator: Person appointed by an unsecured creditor in the United Kingdom to oversee the sale of an insolvent firm's assets and the repayment of its debts.
Liquidity: A market is liquid when it has a high level of trading activity, allowing buying and selling with minimum price disturbance. Also a market characterized by the ability to buy and sell with relative ease. Antithesis of illiquid.
Liquidity diversification: Investing in a variety of maturities to reduce the price risk to which holding long bonds exposes the investor.
Liquidity preference hypothesis: The argument that greater liquidity is valuable, all else equal. Also, the theory that the forward rate exceeds expected future interest rates.
Liquidity premium: Forward rate minus expected future short-term interest rate.
Liquidity ratios: Ratios that measure a firm's ability to meet its short-term financial obligations on time.
Liquidity risk: The risk that arises from the difficulty of selling an asset in a timely manner. It can be thought of as the difference between the "true value" of the asset and the likely price, less commissions.
Liquidity theory of the term structure: A biased expectations theory that asserts that the implied forward rates will not be a pure estimate of the market's expectations of future interest rates because they embody a liquidity premium.
Listed security: Used for listed equity securities. Stock or bond that has been accepted for trading by one of the organized and registered securities exchanges in the United States. Generally, the advantages of being "listed" are that exchanges provide: a) an orderly marketplace; b) liquidity; c) fair price determination; d) accurate and continuous reporting on sales and quotations; e) information on listed companies; and f) strict regulation for the protection of securityholders. Antithesis of O.T.C. Security.
Listed stocks: Stocks that are traded on an exchange.
Load fund: A mutual fund with shares sold at a price including a large sales charge -- typically 4% to 8% of the net amount indicated. Some "no-load" funds have distribution fees permitted by article 12b-1 of the Investment Company Act; these are typically 0. 25%. A "true no-load" fund has neither a sales charge nor Freddie Mac (Federal Home Loan Mortgage Corporation) program, the aggregation that the fund purchaser receives some investment advice or other service worthy of the charge.
Load-to-load: Arrangement whereby the customer pays for the last delivery when the next one is received.
Loan: If you borrow $1 million dollars, it is said that you have taken out a loan for $1 million dollars.
Loan amortization schedule: The schedule for repaying the interest and principal on a loan.
Loan syndication: Group of banks sharing a loan. See: syndicate.
Loan value: The amount a policyholder may borrow against a whole life insurance policy at the interest rate specified in the policy.
Local expectations theory: A form of the pure expectations theory which suggests that the returns on bonds of different maturities will be the same over a short-term investment horizon.
Lock: Used in the context of general equities. Make a market both ways (bid and offer) either on the bid, offering, or an in between price only. Locking on the offering is done to attract a seller, since the trader is willing to pay (and ask) the offering side when others only ask it. Locking on the bid side attracts buyers for similar reasons. Typically, sell side requires a plus tick to comply with short sale rules.
Lockbox: A collection and processing service provided to firms by banks, which collect payments from a dedicated postal box that the firm directs its customers to send payment to. The banks make several collections per day, process the payments immediately, and deposit the funds into the firm's bank account.
Locked market: A market is locked if the bid = ask price. This can occur, for example, if the market is brokered and brokerage is paid by one side only, the initiator of the transaction. Refers to over-the-counter trading. Highly competitive market environment with inside bid and offering at the same price. Often occurs when an O.T.C. dealer has not updated his market.
Lock in: Used in the context of general equities. Assures that an individual contracts all his or her business with a sole broker by providing superior services, such as accommodating block buy and sell needs or preparing excellent research (soft dollar lock). This usually guarantees a certain volume of business.
Lock-out: With P.A.C. bond C.M.O. classes, the period before the P.A.C. sinking fund becomes effective. With multifamily loans, the period of time during which prepayment is prohibited.
Lock up option: Often used in risk arbitrage. Privilege offered a White Knight (friendly acquirer) by a target company of buying crown jewels or additional equity. The aim is to discourage a hostile takeover. See: shark repellant
Lock-up C.D.s: C.D.s that are issued with the tacit understanding that the buyer will not trade the certificate. Quite often, the issuing bank will insist that the certificate be safekept by it to ensure that the understanding is honored by the buyer.
Log-linear least-squares method: A statistical technique for fitting a curve to a set of data points. One of the variables is transformed by taking its logarithm, and then a straight line is fitted to the transformed set of data points.
Lognormal distribution: A distribution where the logarithm of the variable follows a normal distribution. Lognormal distributions are used to describe returns calculated over periods of a year or more.
Lombard rate: Mainly applies to international equities. Interest rate used by the German Bundesbank to form an upper limit to the day-to-day money rate, since no bank will pay higher rates in the money market than it has to pay for very short-term recourse to Lombard credit.
The London Interbank Offered Rate (L.I.B.O.R.): The rate of interest that major international banks in London charge each other for borrowings. Many variable interest rates in the U.S. are based on spreads off of L.I.B.O.R. There are many different L.I.B.O.R. tenors.
London International Financial Futures Exchange (L.I.F.F.E.): A London exchange where Eurodollar futures as well as futures-style options are traded. By contrast with the bid rate L.I.B.I.D. quoted by banks seeking such deposits.
Long: One who has bought a contract(s) to establish a market position and who has not yet closed out this position through an offsetting sale; the opposite of short.
Long bonds: Bonds with a long current maturity. The "long bond" is the 30-year U.S. Treasury bond.
Long coupons: (1) Bonds or notes with a long current maturity. (2) A bond on which one of the coupon periods, usually the first, is longer than the other periods or the standard period.
Long hedge: The purchase of a futures contract(s) in anticipation of actual purchases in the cash market. Used by processors or exporters as protection against an advance in the cash price. Related: hedge, short hedge
Long position: An options position where a person has executed one or more option trades where the net result is that they are an "owner" or holder of options (i. e. the number of contracts bought exceeds the number of contracts sold). For equities, it occurs when an individual owns securities. An owner of 1,000 shares of stock is said to be "Long the stock." Related: Short position
Long run: A period of time in which all costs are variable; greater than one year.
Long straddle: A straddle in which a long position is taken in both a put and call option.
Long-term: In accounting information, one year or greater.
Long-term assets: Value of property, equipment and other capital assets minus the depreciation. This is an entry in the bookkeeping records of a company, usually on a "cost" basis and thus does not necessarily reflect the market value of the assets.
Long-term debt: An obligation having a maturity of more than one year from the date it was issued. Also called funded debt.
Long-term debt/capitalization: Indicator of financial leverage. Shows long-term debt as a proportion of the capital available. Determined by dividing long-term debt by the sum of long-term debt, preferred stock and common stockholder equity.
Long-term debt ratio: The ratio of long-term debt to total capitalization.
Long-term financial plan: Financial plan covering two or more years of future operations.
Long-term liabilities: Amount owed for leases, bond repayment and other items due after 1 year.
Long-term debt to equity ratio: A capitalization ratio comparing long-term debt to shareholders' equity.
Look: Used for listed equity securities. See: Picture
Look-thru: A method for calculating U.S. taxes owed on income from controlled foreign corporations that was introduced by the Tax Reform Act of 1986.
Lookback option: An option that allows the buyer to choose as the option strike price any price of the underlying asset that has occurred during the life of the option. If a call, the buyer will choose the minimal price, whereas if a put, the buyer will choose the maximum price. This option will always be in the money.
Looking for: Used in the context of general equities. Describing a buy interest in which a dealer is asked to offer stock, often involving a capital commitment. Antithesis of in touch with.
Lots: Used in the context of general equities. Blocks or portions of trades that encompass the specific activity done in a stock at a certain time, often implying execution at the same price (i.e., "I traded 40m in two lots of 10 and four lots of 5 ").
Low: Used in the context of general equities. Specific low limit required by a seller in the execution of his order ("I'll sell 50 with an eighth low "); implies a not-held limit order. Antithesis of top.
Low-coupon bond refunding: Refunding of a low coupon bond with a new, higher coupon bond.
Low price: This is the day's lowest price of a security that has changed hands between a buyer and a seller.
Low price-earnings ratio effect: The tendency of portfolios of stocks with a low price-earnings ratio to outperform portfolios consisting of stocks with a high price-earnings ratio.

Glossary created by Campbell R. Harvey, Professor of Finance, Fuqua School of Business at Duke University.