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DEFINITION of 'Commercial Paper'

An unsecured, short-term debt instrument issued by a corporation, typically for the


financing of accounts receivable, inventories and meeting short-term liabilities. Maturities
on commercial paper rarely range any longer than 270 days. The debt is usually issued
at a discount, reflecting prevailing market interest rates.

DEFINITION of 'Fixed Cost'


A cost that does not change with an increase or decrease in the amount of goods or
services produced. Fixed costs are expenses that have to be paid by a company,
independent of any business activity. It is one of the two components of the total cost of
a good or service, along with variable cost.

DEFINITION of 'Circuit Breaker'


Refers to any of the measures used by stock exchanges during large sell-offs to avert
panic selling. Sometimes called a "collar."

DEFINITION of 'Crowding Out Effect'


An economic concept where increased public sector spending replaces, or drives down,
private sector spending. Crowding out refers to when government must finance its
spending with taxes and/or with deficit spending, leaving businesses with less money
and effectively "crowding them out."

DEFINITION of 'Dividend Discount Model - DDM'


A procedure for valuing the price of a stock by using predicted dividends and discounting
them back to present value. The idea is that if the value obtained from the DDM is higher
than what the shares are currently trading at, then the stock is undervalued.

DEFINITION of 'Capital Asset Pricing Model - CAPM'


A model that describes the relationship between risk and expected return and that is
used in the pricing of risky securities.

DEFINITION of 'Market Segmentation Theory'


A modern theory pertaining to interest rates stipulating that there is no necessary
relationship between long and short-term interest rates. Furthermore, short and longterm markets fall into two different categories. Therefore, the yield curve is shaped
according to the supply and demand of securities within each maturity length.

DEFINITION of 'Over-The-Counter Market'


A decentralized market, without a central physical location, where market participants
trade with one another through various communication modes such as the telephone,
email and proprietary electronic trading systems. An over-the-counter (OTC) market and
an exchange market are the two basic ways of organizing financial markets. In an OTC
market, dealers act as market makers by quoting prices at which they will buy and sell a
security or currency. A trade can be executed between two participants in an OTC
market without others being aware of the price at which the transaction was effected. In
general, OTC markets are therefore less transparent than exchanges and are also
subject to fewer regulations.

DEFINITION of 'Repurchase Agreement - Repo'


A form of short-term borrowing for dealers in government securities. The dealer sells the
government securities to investors, usually on an overnight basis, and buys them back
the following day.

DEFINITION of 'Price-Earnings Ratio - P/E Ratio'


A valuation ratio of a company's current share price compared to its per-share earnings.
Calculated as:

Market Value per Share / Earnings per Share (EPS)

DEFINITION of 'Margin'
1. Borrowed money that is used to purchase securities. This practice is referred to as
"buying on margin".
2. The amount of equity contributed by a customer as a percentage of the current market
value of the securities held in a margin account.
3. In a general business context, the difference between a product's (or service's) selling
price and the cost of production.