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Underlying Security

[UN-der-lying si-KYUR-i-tee]

What is the definition of Underlying Security?

The specific security that must be delivered or received when a derivative contract, such as an option or futures contract, is exercised or settled.

Using Underlying Security in an Example

In the context of a call option on stocks, the underlying security is the stock itself. If the holder of the call option decides to exercise the option, they have the right to buy the stock at the agreed-upon strike price, which involves the actual shares of the stock being the underlying security.

Using Underlying Security in a sentence

When discussing the new options available for trading, the broker emphasized the importance of understanding the underlying security to predict the option's performance accurately.

Related Terms

UAA

The Uniform Accountancy Act (UAA) is a regulatory framework developed jointly by the American Institute of Certified Public Accountants (AICPA) and the National Association of State Boards of Accountancy (NASBA). It aims to enhance interstate reciprocity, facilitate cross-state practice by CPAs, meet the evolving needs of the accounting profession, respond to market demands, and protect the public interest.

Unamortized Bond Discount

The portion of the bond discount that has not yet been amortized. This discount represents the difference between the face value of a bond and the lower price at which it was issued or sold by the company, which has not yet been expensed in the profit and loss statement over the bond's life.

Unamortized Premiums on Investments

The portion of the purchase price of securities that exceeds their par value, which has not yet been expensed over the life of the investment.

Unaudited Financial Statements

Financial statements that have not been examined and verified by an independent Certified Public Accountant (CPA) through a detailed audit process.

Underlying Debt

In the context of municipal bonds, underlying debt refers to the debt obligations of smaller government entities within the jurisdiction of a larger government entity, where the larger entity bears partial credit responsibility.

Undervalued

A term used to describe securities or assets that are selling below their perceived intrinsic value, often assessed through fundamental analysis or by comparing the current market price to measures such as liquidation value.

Underwrite

To assume the risk of buying a new issue of securities from the issuing corporation or government entity and reselling them to the public, either directly or through dealers.

Unearned Discount

An account on the books of a lending institution that represents interest deducted in advance from a loan, which is recognized as income progressively over the life of the loan.

Unearned Income

Payments received for services which have not yet been performed or income received before the corresponding service or work is provided.

Unearned Interest

Interest that has been collected on a loan by a financial institution but cannot yet be recognized as earnings because the principal of the loan has not been outstanding for a sufficient period.

Unequal Cash Flows

Cash flows from an asset or investment that vary in amount over different periods.

Uniform Accountancy Act (UAA)

A regulatory framework for the public accounting profession developed jointly by the American Institute of Certified Public Accountants (AICPA) and the National Association of State Boards of Accountancy (NASBA). It aims to enhance interstate reciprocity, facilitate cross-state practice by CPAs, meet the evolving needs of the profession, and protect the public interest.

Uniform Capitalization Rules

A set of IRS regulations that require the capitalization of both direct costs and an allocable portion of indirect costs related to producing, acquiring, and holding property. These costs must be included in inventory and are not deductible as current expenses but are recovered through depreciation or amortization.

Unissued Stock

Shares of a corporation's stock that have been authorized in its charter but have not yet been issued to shareholders.

Unit

Any division of quantity accepted as a standard of measurement or exchange.

Unlimited Liability

A legal obligation where all business owners are personally responsible for all debts of the business, without any limit on the amount for which they are liable.

Unqualified Opinion

An audit opinion that is not qualified for any material scope restrictions or departures from Generally Accepted Accounting Principles (GAAP). It is issued when the auditor finds no material weaknesses and there have been no restrictions on the scope of the auditor's work, indicating that the financial statements present a true and fair view of the financial position and performance of the entity.

Unrealized Loss or Gain on Long-Term Investments

Unrealized losses or gains on long-term investments refer to increases or decreases in the value of investments that have not yet been sold. These are reflected in the balance sheet and affect the company's net worth but do not impact the cash flow until the investments are actually sold.

Unrealized Profit (or Loss)

A financial gain or loss that exists on paper, resulting from an investment that has not yet been sold or settled. The profit or loss remains unrealized until the asset is actually disposed of.

Unrestricted Funds

Resources of a not-for-profit entity that have no restrictions as to use or purpose, allowing the organization flexibility in applying these funds to fulfill its mission.

Unsecured Bond

A bond issued based solely on the issuer's creditworthiness without specific collateral backing, relying on the general credit of the company.

Use of Professional Skepticism when Evaluating the Results of Testing

The application of professional skepticism involves auditors adopting a questioning mind and a critical assessment of audit evidence when conducting an audit of internal control over financial reporting and the audit of the financial statements.

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