Professional Documents
Culture Documents
Asset Allocation: The process of determining the optimal division of an investor's portfolio
among different assets. Most frequently this refers to allocations between debt, equity, and
cash.
Average Tax Rate: The rate calculated by dividing the total tax liability by the entity's taxable
income. Also referred to as “Effective Tax Rate” (ETR)
Balance Sheet: A basic accounting statement that represents the financial position of a firm on
a given date.
Basis Point: .01 percent. Used to measure changes in yields of bonds. Always used in
“floating rate of interest” as opposed to “fixed rate of interest”.
Beta: A relative (to a benchmark) measure of risk. Measures of an asset's non-diversifiable --
market-- risk. See also systematic risk.
Bid: The lowest price anyone wants to sell the security for at a given time. (See: Ask, and Bid-
Ask Spread)
Bid-Ask Spread: The difference between the bid and the ask for a security at a given time.
Bill Debt: that has less than 1-year maturity at time of issue.
Bond Long-Term IOU: Whereby the holder (lender or buyer) is promised to receive fixed
payments over a pre-specified time period. Corporate bonds are one of the available
instruments that companies can resort to for their financing needs.
Bond Par Value: The face value that is to be returned to a bondholder at maturity.
Book Value: The depreciated value of a company's assets (original cost less accumulated
depreciation) less the outstanding liabilities. This can be book value of equity shares, book
value of fixed assets, book value of investments made by a business entity etc.
Broker: A person who facilitates transactions (buy and sell) in the secondary market.
Brokerage Commission: The amount of money your brokerage house would charge for a
given transaction (buy/sell). This is how these firms make their living.
Buyback: When a firm repurchases its own stock from the public.
Call Provision: A provision that entitles the corporation to repurchase its bonds or preferred
stock from their holders at stated prices over specified periods.
Callable Bond: A bond that may be terminated prior to maturity by its issuer.
Capital Asset: All property used in conducting a business other than assets held primarily for
sale in the ordinary course of business or depreciable, and real property used in conducting a
business.
Capital Asset Pricing Model (CAPM): An equation relating an asset's relative riskiness
(beta) to its required return.
Capital Budgeting: The decision-making process with respect to investment in fixed-assets. It
involves measuring the additional cash flows associated with investment proposals and
evaluating the viability of those proposed investment.
Capital Gains or Loss: The profit or loss made when an asset is sold for more than the
purchase price is a capital gain. If the sale price is less than the purchase price, this is a capital
loss.
Capital Rationing: Shortage of funds that forces a company to choose between projects.
Capital Structure Mix of different securities issued by a company.
Cash Budget: A detailed plan of future cash flows. This budget is composed of four elements:
cash receipts, cash disbursements, net change in cash for the period, and new financing
needed.
CD (Certificate of Deposit): Receipts for funds deposited in bank or S&L for a fixed period.
The funds earn a fixed interest rate.
Change: This shows the change in price of a security from the previous day's closing price.
Cheap: An asset is said to be cheap when it is worth (intrinsic value) more than its market
value.
Closing Price (alternatively close) : The price at which the last trade took place on a given
day in a particular security.
Commercial Paper: Unsecured debt (IOU), issued by large corporations, with maturities (at
time of issue) less than a year. They can be traded on OTC.
Common Shares: These are securities that represent equity ownership in a company.
Common shares typically allow an investor to vote on such matters as the election of board of
directors. They also give the holder a share in a company's profits via dividend payments or
the capital appreciation of the security. Also referred to as “equity shares” or “equity”.
Consumer Price Index (CPI): The CPI measures the prices of consumer goods and services
and is a measure of the pace of Indian inflation.
Conversion Ratio: The number of shares of common stock for which a convertible security
can be exchanged. Convertible debentures, convertible bonds or convertible preference
shares.
Convertible Bond: Bond that can be converted to equity at a pre-specified conversion ratio.
Corporation: A legal entity that functions separate and apart from its owners.
Correlated exposure: Exposure to a risk factor, taking into account the impact of correlated
risk factors.
Cost Budgets: Budgets prepared for every major expense category of the firm, such as
administrative cost, financing cost, production cost, selling cost, and research and
development.
Cost of Capital: The rate that must be earned by the company to satisfy all the firm's
providers of capital. It is based on the opportunity cost of funds.
Coupon Interest Rate: The Interest to be annually paid by the issuer of a bond as a percent of
per value, which is specified in the contractual agreement.
Credit Enhancement: Any methodology that reduces the credit risk in a commercial or
financial transaction. Commercial transaction – selling goods or services for money. Financial
transaction – giving loans.
Credit Risk: The risk that the other party in a business deal or transaction may fail to perform
on its obligations.
Credit Scoring: A procedure for assigning scores to companies or individuals on the basis of
the risk of default.
Credit Spread: A spread in prices or interest rates resulting from credit risk.
Cum dividend: With dividend – when you purchase a share it is just before declaration of
dividend by the shares issuing company. Hence the price will be slightly higher as the seller
requires compensation for loss of dividend.
Cum Rights: With rights – when you purchase a share it is just before declaration of Rights
Issue. As a holder of equity shares, you have the option of purchasing the Rights Issue shares
or sell off the rights. Hence the price will be higher than post-Rights Issue.
Current Asset: Asset that is expected to be turned into cash within a year.
Date of Record: The date on which a shareholder must officially own shares in order to be
entitled to a dividend.
Debentures: Secured medium-term debt and debenture certificates are issued to the holders by
the debt raising company.
Default Risk: Uncertainty of a firm's ability to meet its debt obligations on time and in full.
Discounting: The inverse of compounding. This process is used to determine the present value
of a cash flow.
Diversifiable Risk: The components of an asset's risk that can be eliminated when the asset is
combined in a well-diversified portfolio.
Diversification: A technique for managing risk where risk is divided among multiple,
uncorrelated exposures.
Earnings Per Share (EPS): Company's earnings divided by the number of shares outstanding.
Exchange Rate Mechanism (ERM): Or the currency grid - is a system that limits currency
fluctuations to a range of 15 percent in either direction.
Exchange Traded: Traded on an exchange, as opposed to being traded over the counter.
Ex-Dividend Date: The date that determines ownership of stock for the purpose of paying
dividends. Owners purchasing shares on or after the ex-dividend date do not receive the
dividends. Only owners before this date would be registered to receive the declared dividend.
The date is set at four business days prior to the record date. Also see dividend.
External Financing: Financing projects through new issues of securities; debt and/or equity.
Face Value: Value of security shown on certificate. Also called par value, which is typically
Re.1/- to Rs.100/- in the case of equity shares and Rs.100/- to Rs.1000/- in the case of bond or
a debenture.
Financial Assets: Securities that have a claim on assets of a borrower. Term used to denote
the assets of a lender.
Financial Intermediaries: Financial institutions, banks, NBFCs that assist the transfer of
savings from economic agents with excess savings to those that need capital for investments.
Financial Risk Management: The process whereby an organization optimizes the manner in
which it takes risks.
Firm Specific Risk Uncertainty in returns due to factors specific to the company. See
diversifiable risk.
Fixed Costs (overhead): A cost that is fixed for a given period of time. It is not dependent on
the amount of goods and services produced during the period. Fixed costs are to a large extent
dependent upon fixed assets.
Floatation Cost: The underwriter's revenue associated with assisting a firm in issuing and
marketing new securities.
Forward Rate Agreement: A type of forward contract that is linked to interest rates.
Free Cash Flow Value: The value of a firm based on the cash flow available for distributing
to any of the providers of long-term capital to the firm. The free cash flows equal operating
cash flow less any incremental investments made to support a firm's future growth.
Futures Contract: This is an agreement that allows an investor to buy or sell a commodity,
like gold or wheat, or a financial instrument, like a currency, at some time in future. A future
is part of a class of securities called derivatives, so named because such securities derive their
value from the worth of an underlying asset. These contracts trade on organized futures
exchanges.
Growth: Stocks of companies that have an opportunity to invest in projects that earn more that
the required rate of return.
Hedging: The purchase or sale of a derivative security (such as options or futures) in order to
reduce or eliminate risk associated with undesirable price changes of another security.
High-Yield Bond: A bond that pays a high yield due to significant credit risk.
Horizontal Integration: When firms in the same industry merge. Also referred to as
horizontal merger.
Horizontal Merger: Merger between two companies that produce similar products. Also
referred to as horizontal integration.
Hostile Takeover: A merger or acquisition in which management resists the group initiating
the transaction.
Income Stocks: Companies with high dividend yield or no NPV > 0 opportunities.
Indenture: The legal agreement between the firm issuing the bond and the bondholders,
providing the specific terms of the loan agreement.
Investment Banks: Are firms that assist companies in initial sale of securities in primary
market.
IPO (Initial Public Offering): Securities are offered for the first time to the public.
Junk bond: A bond that pays a high yield due to significant credit risk.
Letter of Credit: Letter from a bank stating that it has established credit in the company's
favor.
Leverage: Operating and financial. Operating – taking advantage of operating fixed costs
remaining constant for some time and financial – use of debt financing to enhance EPS.
(LIBOR) London Inter-Bank Offered Rate: The lending rate among international banks in
London. Typical example of Floating Rate of Interest
Liquidation Value: The amount that could be realized if an asset were sold independently of
the going concern.
Liquidity: Refers to an investor's ability to convert an asset into cash. The faster the
conversion the more liquid the asset. Illiquidity is a risk in that an investor might not be able to
convert the asset to cash when most needed. Moreover, having to wait for the sale of an asset
can pose an additional risk if the price of the asset decreases while waiting to liquidate.
Long Investors who go "long" own stock or another financial security. It is a term that means
the opposite of "short." See short selling.
Long-term gain: A gain on the sale of a capital asset where the holding period was six months
or more and the profit was subject to the long-term capital gains tax.
Margin Cash or securities set aside by an investor as evidence for ability to honor a financial
commitment.
Market Portfolio: A theoretical portfolio that comprises all risky assets available to investors.
Market value: The value at which an asset trades, or would trade in the market.
Marketable Securities: Security investments that the firm can quickly convert into cash
balances.
Maturity Date: The date on which the last payment on a bond is due.
Maturity Matching: The practice of financing long-term projects with long-term assets, while
financing short-term projects with short-term financing.
Medium-term Note Debt: With a typical maturity of 1 to 10 years at the time of issue that is
offered by a company..
Merger Acquisition: In which all assets and liabilities of a company are absorbed by the
buyer to form a combined business entity.
MM: Short-hand notation for "millions."
Modern Portfolio Theory: A body of theory relating to how investors optimize portfolio
selections.
NAV (Net Asset Value): The market value of a fund share, synonymous with a bid price. In
the case of no-load funds, the NAV, market price, and offering price are all the same figure,
which the public pays to buy shares; load fund market or offer prices are quoted after adding
the sales charge to the net asset value. NAV is calculated by most funds after the close of the
exchanges each day by taking the closing market value of all securities owned plus all other
assets such as cash, subtracting all liabilities, then dividing the result (total net assets) by the
total number of shares outstanding. The number of shares outstanding can vary each day
depending on the number of purchases and redemptions
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Net Present Value (NPV): A project's net contribution to shareholders wealth, which is
determined by the present value of a project's cash flows less initial investment.
Nominal Interest: Rate Interest as expressed in money terms. See real interest rate
Odd Lot: Refers to buying stocks in a quantity that is not a multiple of 100.
Open Order: An order to buy or sell a security that remains in effect until it is either canceled
by the customer or executed.
Open-End Fund A mutual fund that stands ready to redeem stocks and issue new stock. Also
see closed-end funds.
Opportunity Cost of Capital: The expected return that is foregone by investing in a project
rather than a financial security with comparable risk.
Overbought: Typically a reference to a security or the general market after it exhibits a sharp
rise in prices.
Over-valued: An asset whose market value is greater than its intrinsic (formula or theoretical)
value.
P/E Ratio: Price to earnings ratio. The price of a share of stock divided by earnings per share
of stock for a twelve-month period.
Portfolio Theory: A body of theory relating to how investors optimize portfolio selections.
Preferred Stock: Stock that takes priority over common stock in regard to dividend and
liquidation. The dividend is usually fixed at time of issue.
Premium :(1) This generally refers to extra money an investor is willing to pay to buy
something. (2) For a bond, a premium is the amount for which the security sells above its par
value.
Primary Instrument: A financial instrument whose value is not derived from that of another
instrument, but instead is determined by the market.
Primary Market is where firms sell new financial assets typically with the assistance of an
investment banker.
Prime Rate: The interest rate that banks charge their "best" clients, , i.e., those with the lowest
possibility of default.
Principal: (1) Shareholders; (2) Amount of debt that must be paid at maturity.
Private Placement: A direct sale, by the issuing firm, of newly issued securities to a small
group of investors.
Probability Distribution: A graph that shows the different possible outcomes of a single
variable and the probability of getting the outcome.
Put Option :Option to sell an asset at a specified excise price on or before a specified exercise
date. Also see call option.
Quote: The highest bid to buy and the lowest offer to sell a security at a given time. (See: Ask,
and Bid)
Rating: Agency Companies that rate the likelihood of a firm to default on its debt obligations.
Real Assets: Tangible assets include: plant and equipment; intangible include: technical
expertise, trademarks & patents.
Record Date: Date set by the company when dividends are declared. Owners who are
registered on this date receive dividends. Also see ex-dividend date.
Regression Analysis: A statistical technique for fitting best line through data.
Reorganization: Financial restructuring of a firm under bankruptcy. Both the firm's assets
and its financial structure are modified.
Required Return: Minimum return required by investors to compensate them for assuming
risk.
Residual Dividend: An approach to dividends that suggests a firm pay dividends if and only if
acceptable investment opportunities for those funds are currently unavailable.
Return on Equity: The return on the equity shareholders’ funds = Paid up capital and reserves
and surplus. Formula = {PAT (-) Preference share dividend}/Paid up capital + reserves and
surplus.
Risk Premium: Additional return, over the risk-free rate, to compensate investors for
accepting (holding) risk.
Risk-Free-Rate: A theoretical interest rate at which an investment may earn interest without
incurring any risk.
Round Lot :The purchase or sale of a quantity of stocks that is in multiples of 100, such as
200, 1,000, etc.
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Secondary Market: Where trading (exchange of ownership) of financial assets takes place.
Senior Debt: Debt that in the event of liquidation, must be repaid before subordinated debt
receives any payment. Also see Junior Debt.
Share: A unit of measuring ownership in a company (i.e., if a firm has 1,000 shares
outstanding and if you own 100 of them, then you have a 10% claim on the firm's net income
(NI) and assets).
Short Sale: Sale of an asset that the investor does not own or any sale that is completed by the
delivery of a security borrowed by the seller. Short selling is a legitimate trading strategy.
Short sellers assume the risk that they will be able to buy the stock at a more favorable price
than the price at which they sold short.
Short Term Gain (Loss): The gain (loss) realized from the sale of securities or other capital
assets held six months or less.
Spin-Off: A newly created company that used to be part of a parent company. Parent company
shareholders receive a pro rata ownership in the new company.
Stock Split: An accounting transaction that increases the number of shares held by existing
shareholders in proportion to the number of shares currently held.
Structured Note: A type of security.
Subordinated Debt (Junior debt) : Debt whose holders, in the event of liquidation, get paid
only after senior debt is paid off in full. (Also see senior debt)
Syndicate: A group of investment bankers who together underwrite and market a new issue of
securities or a large block of an outstanding issue.
T-Bill (Treasury Bill): Debt issued by the RBI with maturity less than a year.
Uncorrelated Exposure: Exposure to a risk factor, assuming that all other risk factors will
remain constant.
Under-valued: An asset that is selling at a price below its intrinsic (theoretical or formula)
value.
Underwriter (Investment Banker) Firm that buys an issue from a company and resells it to
investors; a primary market activity.
Vertical Integration: Merger between a supplier and its customers. An example would be
when an oil-refining firm acquires a firm that owns oil fields.
Warrant: A financial asset, issued by the firm, which gives its holder the right to purchase a
fixed number of shares of common stock at a predetermined price. Also referred to as “equity
warrants”
XYZ
Yield Curve: The return on debt securities with different maturities, for a level of default risk.
Yield to Maturity (YTM): The market interest rate on a bond. It is the yield an investor
would receive in the bond is held to maturity.
Yield to Maturity (YTM): The rate of return the investor will earn if the bond is held to
maturity.
Zero Coupon Bond: A bond that has no coupon payments. It pays only a single cash flow at
maturity.
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