Financial Innovation: Advances over time in the financial instruments and payment systems

used in the lending and borrowing of funds. These changes, which include innovations in
technology, risk transfer and credit and equity generation, have increased available credit for
borrowers and given banks new and less costly ways to raise equity capital. In general, it refers
to the creating and marketing of new types of securities.
GDP Price Deflator: The GDP deflator shows how much a change in the base year's GDP relies
upon changes in the price level. Also known as the "GDP implicit price deflator."
The GDP deflator is an economic measure that tracks the cost of goods produced in an
economy relative to the purchasing power of the dollar.
In economics, the GDP deflator (implicit price deflator for GDP) is a measure of the level of
prices of all new, domestically produced, final goods and services in an economy.

Bank Run: A situation that occurs when a large number of bank or other financial institution's
customers withdraw their deposits simultaneously due to concerns about the bank's solvency. As
more people withdraw their funds, the probability of default increases, thereby prompting more
people to withdraw their deposits. In extreme cases, the bank's reserves may not be sufficient to
cover the withdrawals. A bank run is typically the result of panic, rather than a true insolvency
on the part of the bank; however, the bank does risk default as more and more individuals
withdraw funds - what began as panic can turn into a true default situation
Business cycle: The term business cycle (or economic cycle or boom-bust cycle) refers to
economy-wide fluctuations in production, trade and economic activity in general over several
months or years in an economy organized on free-enterprise principles. The five stages of the
business cycle are growth (expansion), peak, recession (contraction), trough and recovery

Loan Commitment: The amount in loans that a bank will make or may be required to make in
the near future, but has not yet made. Loan commitments may be open-ended or closed-ended.
Open-end loan commitments act like revolving credit lines, whereby if a portion of the loan is
paid off, the principle repayment amount is added back to the allowable loan limit. Closed-end
loans are reduced once any repayments are made.
Binding promise from a lender that a specified amount of loan or line of credit will be made
available to the named borrower at a certain interest rate, during a certain period and, usually, for
a certain purpose.

Fiat Money: Currency that a government has declared to be legal tender, but is not backed by a
physical commodity. The value of fiat money is derived from the relationship between supply
and demand rather than the value of the material that the money is made of.
Money which has no intrinsic value and cannot be redeemed for specie or any commodity, but is
made legal tender through government decree. All modern paper currencies are fiat money, as
are most modern coins. The value of fiat money depends on the strength of the issuing country's
economy.
Monetary Base: The total amount of a currency that is either circulated in the hands of the
public or in the commercial bank deposits held in the central bank's reserves. This measure of the
money
supply
typically
only
includes
the
most
liquid
currencies.
Sum of a country's liquid financial assets comprising of currency (notes and coins) in circulation
held by public, and by financial institutions in their vaults and as reserve requirement with the
central bank.
Special Drawing Rights SDR: An international type of monetary reserve currency, created by
the International Monetary Fund (IMF) in 1969, which operates as a supplement to the existing
reserves of member countries. Created in response to concerns about the limitations of gold and
dollars as the sole means of settling international accounts, SDRs are designed to
Yield Curve: A line that plots the interest rates, at a set point in time, of bonds having equal
credit quality, but differing maturity dates.
Free Rider Problem: A free rider, in economics, refers to someone who benefits from
resources, goods, or services without paying for the cost of the benefit.
The Free Rider Problem occurs when people can enjoy a good service without paying anything
(or making a small contribution less than their benefit.) If enough people can enjoy a good
without paying for the cost then there is a danger that, in a free market, the good will be underprovided or not provided at all.
Externality: A consequence of an economic activity that is experienced by unrelated third
parties. An externality can be either positive or negative. An externality is a cost or benefit that
affects a party who did not choose to incur that cost or benefit. Positive externalities are benefits
that are infeasible to charge to provide; negative externalities are costs that are infeasible to
charge to not provide.
Public Debt: Public debt refers to the amount of money owed by a central government. The
operations of a government are normally financed through public debt. Another term for public
debt is government debt.
Fiscal policy : In economics and political science, fiscal policy is the use of government revenue
collection (taxation) and expenditure (spending) to influence the economy. The two main

instruments of fiscal policy are changes in the level and composition of taxation and government
spending in various sectors.
Fiscal policy is the means by which a government adjusts its spending levels and tax rates to
monitor and influence a nation's economy.
Laissez Faire: An economic theory from the 18th century that is strongly opposed to any
government
intervention
in
business
affairs.
Laissez-faire (or sometimes laisser-faire) is an economic environment in which transactions
between private parties are free from government restrictions, tariffs, and subsidies, with only
enough regulations to protect property rights. The phrase laissez-faire is French and literally
means "let [them] do," but it broadly implies "let it be," "let them do as they will," or "leave it
alone."
Public Good: A product that one individual can consume without reducing its availability to
another individual and from which no one is excluded. Economists refer to public goods as "nonrivalrous" and "non-excludable". National defense, sewer systems, public parks and basic
television and radio broadcasts could all be considered public goods.
Tax Incidence: An economic term for the division of a tax burden between buyers and sellers.
Tax incidence is related to the price elasticity of supply and demand. When supply is more
elastic than demand, the tax burden falls on the buyers. If demand is more elastic than supply,
producers will bear the cost of the tax.
Tax incidence is the degree to which a given tax is paid or borne by a particular economic unit
such as consumers, producers, employers, employees etc
Market Failure: An economic term that encompasses a situation where, in any given market,
the quantity of a product demanded by consumers does not equate to the quantity supplied by
suppliers. This is a direct result of a lack of certain economically ideal factors, which prevents
equilibrium.
Public Revenue: Public Revenue is the income realized by the government for purposes of
financing public administration. Public revenue may be realized from taxation of the various
entities and activities within the country or from non-tax sources such as revenue from
government-owned corporations, public wealth funds, grants etc.
Social safety net: Social welfare services provided by a community of individuals at the state
and local levels These services are geared toward eliminating poverty in a specific area. These
services may include housing re-assignment, job placement, subsidies for household bills, and
other cash equivalents for food. Social safety net works in conjunction with a number of other
poverty reduction programs with the primary goal of reducing/preventing poverty.
Hedging: A risk management strategy used in limiting or offsetting probability of loss from
fluctuations in the prices of commodities, currencies, or securities. In effect, hedging is a transfer
of risk without buying insurance policies.

Making an investment to reduce the risk of adverse price movements in an asset. Normally, a
hedge consists of taking an offsetting position in a related security, such as a futures contract.
Liquidity: The degree to which an asset or security can be bought or sold in the market without
affecting the asset's price. Liquidity is characterized by a high level of trading activity. Assets
that can be easily bought or sold are known as liquid assets.
The ability to convert an asset to cash quickly. Also known as "marketability."

Price Risk: The risk of a decline in the value of a security or a portfolio. Price risk is the biggest
risk faced by all investors. Although price risk specific to a stock can be minimized through
diversification, market risk cannot be diversified away. Price risk, while unavoidable, can be
mitigated through the use of hedging techniques.

Floor Broker (FB): An independent member of an exchange who is authorized to execute trades
on the exchange floor on behalf of clients. A floor broker is a middleman who acts as an agent
for clients, indirectly giving them the best access possible to the exchange floor. A floor brokers
clients typically include institutions and wealthy people such as financial-service firms, pension
funds, mutual funds, high net worth individuals and traders. A floor brokers primary
responsibility is best execution of client orders, and to achieve this objective, he or she must
continuously assess myriad factors including market information, market

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
Member-owned financial co-operative. These institutions are created and operated by its
members and profits are shared amongst the owners
Mutual fund: An open-ended fund operated by an investment company which raises money
from shareholders and invests in a group of assets, in accordance with a stated set of objectives.
An investment vehicle that is made up of a pool of funds collected from many investors for the
purpose of investing in securities such as stocks, bonds, money market instruments and similar
assets. Mutual funds are operated by money managers, who invest the fund's capital and attempt
to produce capital gains and income for the fund's investors. A mutual fund's portfolio is
structured and maintained to match the investment objectives stated in its prospectus.

Leveraged Buyout LBO: The acquisition of another company using a significant amount of
borrowed money (bonds or loans) to meet the cost of acquisition. Often, the assets of the
company being acquired are used as collateral for the loans in addition to the assets of the
acquiring company. The purpose of leveraged buyouts is to allow companies to make large
acquisitions without having to commit a lot of capital

Institutional investors: Institutional investors are organizations which pool large sums of
money and invest those sums in securities, real property and other investment assets. They can
also include operating companies which decide to invest their profits to some degree in these
types of assets.
Graduated Payment Mortgage: A type of fixed-rate mortgage in which the payment increases
gradually from an initial low base level to a desired, final level. Typically, the payments will
grow 7-12% annually from their initial base payment amount until the full payment is reached.
Decision tree: A decision tree is a diagram that a decision maker can create to help select the
best of several alternative courses of action. The primary advantage of a decision tree is that it
assigns exact values to the outcomes of different actions, thus minimizing the ambiguity of
complicated decisions

'Capital Market Line - CML'

A line used in the capital asset pricing model to illustrate the rates of return for efficient portfolios
depending on the risk-free rate of return and the level of risk (standard deviation) for a particular
portfolio.
The CML is derived by drawing a tangent line from the intercept point on the efficient frontier to
the point where the expected return equals the risk-free rate of return.
The CML is considered to be superior to the efficient frontier since it takes into account the
inclusion of a risk-free asset in the portfolio. The capital asset pricing model (CAPM) demonstrates
that the market portfolio is essentially the efficient frontier. This is achieved visually through the
security market line (SML).

'Security Market Line - SML'

A line that graphs the systematic, or market, risk versus return of the whole market at a certain time
and shows all risky marketable securities. Also referred to as the "characteristic line".
The SML essentially graphs the results from the capital asset pricing model (CAPM) formula. The xaxis represents the risk (beta), and the y-axis represents the expected return. The market risk
premium is determined from the slope of the SML.
The security market line is a useful tool in determining whether an asset being considered for a

portfolio offers a reasonable expected return for risk. Individual securities are plotted on the SML
graph. If the security's risk versus expected return is plotted above the SML, it is undervalued
because the investor can expect a greater return for the inherent risk. A security plotted below the
SML is overvalued because the investor would be accepting less return for the amount of risk
assumed.