CFA® glossary: E

35 terms beginning with E.

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Early amortisation trigger

An event, such as charge-offs rising past a threshold, that ends the revolving period early and starts returning principal to investors before the pool deteriorates further.

Early exercise

Exercising an American option before expiry. It can pay for a deep in-the-money put, to earn interest on the strike sooner, but a call on a non-dividend-paying share should never be exercised early. Where it appears →

Earnings quality

Whether reported performance is sustainable and real, as opposed to whether it was reported faithfully. The two are separate questions and the second comes first. Where it appears →

Earnings surprise

Reported earnings per share minus the expected figure, usually the analysts' consensus. Prices tend to keep drifting in the direction of a large surprise after the announcement.

Earnings yield

Earnings per share divided by the share price, the reciprocal of the P/E. Still usable when earnings are negative or near zero; in a buyback it is compared with the after-tax cost of funds. Where it appears →

Ebitda

Profit before interest, taxes, depreciation and amortisation: a rough proxy for operating cash earnings before capital spending. Buyout prices and debt capacity are usually quoted as multiples of it. Where it appears →

Economic balance sheet

A household's full balance sheet: human capital and pension rights alongside financial assets, set against the present value of spending needs and debts. It shows risks that a list of investments hides. Where it appears →

Economic net worth

Financial assets plus human capital and other implicit assets such as pension rights, less the present value of all obligations. It is what a family's planning should protect, not the investment account alone. Where it appears →

Economic profit

Revenue less all costs, including the opportunity cost of the owners' capital. Zero means a normal return: enough to stay in the industry, not enough to attract entrants. Where it appears →

Economic value added

Net operating profit after tax minus a charge for all the capital used, at the weighted average cost of capital. A form of residual income used in pay schemes and to judge divisions. Where it appears →

Effective duration

Price sensitivity measured by revaluing a bond under a shift in rates. It is the only one that works when an option changes the cash flows themselves. Where it appears →

Effective spread

Twice the gap between a trade's price and the midpoint prevailing when the order arrived. Unlike the quoted spread, it reflects trades done inside or outside the quote, so it measures the cost actually paid. Where it appears →

Effective tax rate

Total tax expense over pre-tax accounting profit. It blends things that recur with things that do not, so projecting it forward is where forecasts go wrong. Where it appears →

Efficient frontier

The portfolios with the highest expected return for each level of risk: the upper part of the minimum-variance frontier. Anything beneath it is beaten by something on it. Where it appears →

Elasticity

How much quantity responds to a change in price, in proportional terms. It belongs to a price and a horizon, never to a good.

Embedded option

An option written into a bond's terms, such as the issuer's right to call it or the holder's right to put or convert it. Its value is the gap between the bond's price and that of an option-free bond. Where it appears →

Embryonic

The first phase of an industry's life cycle: small demand, high costs and prices, and extreme failure rates while the product and its market are still being established. Where it appears →

Endogenous growth

Growth theory that explains technology inside the model, through investment in knowledge and human capital. Because spillovers offset diminishing returns, saving and policy can raise long-run growth permanently. Where it appears →

Enterprise value

The value of the whole firm to all its capital providers: equity market value plus debt and preferred stock, less cash and investments. Set against pre-interest measures such as EBITDA, it compares firms financed differently. Where it appears →

Equal-weighted

Giving every constituent of an index or portfolio the same weight. It tilts towards smaller companies and must be traded back after every move, so its published return overstates what a fund nets. Where it appears →

Equity issuance

Raising capital by selling new shares. Costly, through underwriting fees and because investors may read it as a sign management thinks the shares are overvalued, so firms tend to use retained earnings and debt first. Where it appears →

Equity method

Accounting for an investment with significant influence as one asset that grows with the investor's share of profits and falls with dividends received. The investee's revenue, assets and debt stay off the investor's statements. Where it appears →

Equity risk premium

The return investors expect from equities above the risk-free rate. It cannot be observed, so it is estimated from history, from dividend or earnings models, or from surveys. Where it appears →

Equity swap

A swap exchanging the return on a share or index for a fixed or floating rate, or for another equity return. It lets an investor take on or shed equity exposure without trading the shares. Where it appears →

Esg

Environmental, social and governance: factors outside the usual financial statements, such as emissions, labour practices and board structure, that can affect a company's risk, cash flows or cost of capital. Where it appears →

Estate tax

A tax on a deceased person's estate before it passes to heirs. Because it is charged on everything, including the money that pays it, it can take more than a gift tax at the same rate.

Estimation error

Error that comes from imperfect inputs or models rather than from what is being measured, as in an estimated beta. In valuation, the part of a gap between value and price that is the analyst's mistake, not genuine mispricing. Where it appears →

European option

An option that can be exercised only at expiry, so its value depends only on the payoff at that date. Never worth more than the equivalent American option, and the kind most pricing formulas value directly. Where it appears →

Ex-dividend date

The first day a share trades without the right to a declared dividend, so the price typically falls by about the dividend. Set by the settlement cycle, it is the date a buyer must beat, not the record date. Where it appears →

Exchange-traded fund

A fund whose shares trade on an exchange throughout the day. Authorised participants create and redeem shares in kind, which keeps the market price close to net asset value. Where it appears →

Exchange-traded note

Unsecured debt of an issuing bank that promises an index's return. Unlike an ETF it holds no assets for investors, so they carry the bank's credit risk.

Exercise price

The price at which an option's holder may buy the underlying (a call) or sell it (a put). Where the underlying stands relative to it decides whether exercising is worth anything. Where it appears →

Expected loss

The chance of default multiplied by the share not recovered. Both are averages, and they worsen together in a recession, so it understates the tail. Where it appears →

Expected value

The probability-weighted average of all possible outcomes: what would be averaged over many repetitions, not necessarily a value that can occur. Two prospects sharing it can carry very different downside. Where it appears →

Extension risk

The risk that a mortgage security repays slower than expected when rates rise, locking capital in below the market just as better rates appear.