Financial Terminology

Price to Book Ratio

A stock's capitalization divided by its book value. The value is the same whether the calculation is done for the whole company or on a per-share basis. This ratio compares the market's valuation of a company to the value of that company as indicated on its financial statements. The higher the ratio, the higher the premium the market is willing to pay for the company above its hard assets. A low ratio may signal a good investment opportunity, but the ratio is less meaningful for some types of companies, such as those in technology sectors. This is because such companies have hidden assets such as intellectual property which are of great value, but not reflected in the book value. In general, price to book ratio is of more interest to value investors than growth investors.

Private Mortgage Insurance – PMI

A policy provided by private mortgage insurers to protect lenders against loss if a borrower defaults. Most lenders require PMI for loans with loan-to-value (LTV) percentages in excess of 80%. This allows the borrower to make a smaller down payment of as low as 3%, instead of about 20%, and usually requires an initial premium payment and possibly an additional monthly fee depending on the loan's structure.

Business Tax

Five major types of business taxes are: (1) corporate franchise tax, (2) employment (withholding) tax, (3) excise tax, (4) gross-receipts tax, and (5) value added tax (VAT). Some types of firms (such as insurance, mining, and petroleum extraction companies) pay additional taxes peculiar to their industries. While firms too pay income, property, and sales taxes, such taxes are not specific to businesses. In terms of economic impact, however, all taxes are 'people taxes' because they affect human beings and not some abstraction labeled 'business.' Also called business activity tax.

Currency Swap

An arrangement in which two parties exchange specific amounts of different currencies initially, and a series of interest payments on the initial cash flows are exchanged. Often, one party will pay a fixed interest rate, while another will pay a floating exchange rate (though there may also be fixed-fixed and floating-floating arrangements). At the maturity of the swap, the principal amounts are exchanged back. Unlike an interest rate swap, the principal and interest are both exchanged in full in a currency swap.

Aggregator Model

Electronic commerce business model where a firm (that does not produce or warehouses any item) collects (aggregates) information on goods and/or services from several competing sources at its website. The firm's strength lies in its ability to create an 'environment' which draws visitors to its website, and in designing a system which allows easy matching of prices and specifications. See also affiliate model.

Credit Union

A non-profit financial institution that is owned and operated entirely by its members. Credit unions provide financial services for their members, including savings and lending. Large organizations and companies may organize credit unions for their members and employees, respectively. To join a credit union, a person must ordinarily belong to a participating organization, such as a college alumni association or labor union. When a person deposits money in a credit union, he/she becomes a member of the union because the deposit is considered partial ownership in the credit union.