Final - Financial Terms Made Easy by Adeel and Mohsin

7/28/2019 Final - Financial Terms Made Easy by Adeel and Mohsin

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FINANCIAL TERMS MADE EASY

BY ADEEL AND MOHSIN

A

Accrual -Estimates of costs incurred but not yet invoiced. They are charged to the Profit andLoss Account and will also appear as liabilities in the Balance Sheet.

Examples:

A business records its utility bills as soon as it receives them and not when they are paid,

because the service has already been used. The company ignored the date when the

payment will be made.

An airline sells its tickets days or even weeks before the flight is made, but it does not record

the payments as revenue because the flight, the event on which the revenue is based has

not occurred yet.

Acquisition- When one company purchases a majority interest in the acquired.

Ad valorem -A tax based on the assessed value of real estate or asset. Ad valorem taxescan be property tax or even duty on imported items. Property ad valorem taxes are the major source

of revenue for state and municipal governments.

Explanation:

The phrase ad valorem is Latin for "according to value". In the case of municipal property

taxes, property owners have their property assessed on a periodic basis by a public tax

assessor.

Aging schedule - Tablethat classifiesaccounts payableoraccountsreceivableaccording to theirdates. It helps in analyzing whichpaymentsare behind theirdue date,

and by how manydays.

American depository receipt-A negotiable certificate issued by a U.S. bankrepresenting a specified number of shares (or one share) in a foreign stock that is traded on a U.S.

exchange. ADRs are denominated in U.S. dollars, with the underlying security held by a U.S. financialinstitution overseas. ADRs help to reduce administration and duty costs that would otherwise be


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levied on each transaction.

Explanation: This is an excellent way to buy shares in a foreign company while realizing any dividends and

capital gains in U.S. dollars. However, ADRs do not eliminate the currency and economic risks for the

underlying shares in another country. For example, dividend payments in euros would be converted to U.S.

dollars, net of conversion expenses and foreign taxes and in accordance with the deposit agreement. ADRs are

listed on either the NYSE, AMEX or Nasdaq as well as OTC.

Amortization -A process of decreasing, or accounting for, an amount over a period. When

used in the context of a home purchase, amortization is the process by which loan principal

decreases over the life of a loan. With each mortgage payment that is made, a portion of

the payment is applied towards reducing the principal, and another portion of the payment

is applied towards paying the interest on the loan.

Annuity - An Annuity is any continuing payment with a fixed total annual amount. Inmost cases an Annuity may refer to a financial product sold by financial institutions that is

designed to accept and grow funds from an individual and then, upon annuitization, pay out

a stream of payments to the individual at a later point in time. Annuities are primarily used

as a means of securing a steady cash flow for an individual during their retirement years.

Arbitrage - The simultaneous purchase and sale of an asset in order to profit from adifference in the price. It is a trade that profits by exploiting price differences of identical or similar

financial instruments, on different markets or in different forms. Arbitrage exists as a result of

market inefficiencies; it provides a mechanism to ensure prices do not deviate substantially from fair

value for long periods of time.

Ask price - The price a seller is willing to accept for a security, also known as the offer price.This is the opposite of bid, which is the price a buyer is willing to pay for a security, and the ask will

always be higher than the bid. The terms "bid" and "ask" are used in nearly every financial market in

the world covering stocks, bonds, currency and derivatives.

Asset Allocation - An investment strategy that aims to balance risk and rewardby apportioning a portfolio's assets according to an individual's goals, risk tolerance and investment

horizon.

The three main asset classes - equities, fixed-income, and cash and equivalents - have different

levels of risk and return, so each will behave differently over time.


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Asset Play - An incorrectly-valued stock that is attractive because its combined asset valueis higher than its market capitalization. "Asset play" is a stock market term that refers to a stock that

is believed by investors to be undervalued because the current price does not reflect the current

value of the corporation's assets. This type of stock is called an asset play because the driving force

behind the purchase of the stock is the fact that the company's assets are being offered to themarket relatively cheaply, making it an attractive buy or play. Many investors consider asset plays to

be sound investments since they are backed by strong assets.

Auditors - External Auditors are External Accountants who report on the "truth and fairness"of the published financial statements. Internal Auditors co-operate with the External Auditors but

also review management data and operational aspects of the business.

Aum (Assets Under Management) - The market value of assets that aninvestment company manages on behalf of investors. Assets under management (AUM) is looked at

as a measure of success against the competition and consists of growth/decline due to both capital

appreciation/losses and new money inflow/outflow.

Authorized share capital - Theauthorized capitalof acompany(sometimes

referred to as theauthorized share capital,registered capitalornominal capital) is the maximumamount ofshare capitalthat the company is authorized by itsconstitutional documentsto issue

(allocate) toshareholders. Part of the authorized capital can (and frequently does) remain unissued.

This number can be changed byshareholders' approval. The part of the authorized capital which has

been issued to shareholders is referred to as theissued share capitalof the company.

Auction rate bond - A debt security with an adjustable interest rate and fixed termof 20-30 years. An auction rate bond's (ARB) interest rate is determined through a modified Dutch

auction (where the price starts high and gets lower and lower until buyers are found) on a set

schedule every seven, 14, 28 or 35 days. Non-profit institutions and municipalities utilize ARBs as ameans to reduce borrowing costs for long-term financing.

Explanation - The rates on ARBs are set in a similar way to how rates on new U.S. Treasury bills are

set when they are issued. However, when an auction fails due to a lack of buyers, both bondholders

and bond issuers are negatively impacted. The bondholders can't sell what is supposed to be a liquid

investment and issuers are forced to pay higher default rates (set when the bonds were initially

sold).


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B

Bad debt - A debt that is not collectible and therefore worthless to the creditor. This occursafter all attempts are made to collect on the debt. Bad debt is usually a product of the debtor going

into bankruptcy or where the additional cost of pursuing the debt is more than the amount the

creditor could collect. This debt, once considered to be bad, will be written off by the company as an

expense.

Balance of payment - A record of all transactions made between one particularcountry and all other countries during a specified period of time. BOP compares the dollar difference

of the amount of exports and imports, including all financial exports and imports. A negative balance

of payments means that more money is flowing out of the country than coming in, and vice versa.

Balloon payment - An oversized payment due at the end of a mortgage, commercialloan or other amortized loan. Because the entire loan amount is not amortized over the life of the

loan, the remaining balance is due as a final repayment to the lender.

Bank rate - The interest rate at which a nation's central bank lends money to domesticbanks. Often these loans are very short in duration. Managing the bank rate is a preferred method

by which central banks can regulate the level of economic activity. Lower bank rates can help to

expand the economy, when unemployment is high, by lowering the cost of funds for borrowers.

Conversely, higher bank rates help to reign in the economy, when inflation is higher than desired.

Banking Ombudsmen Scheme - The Banking Ombudsman Scheme enables

an expeditious and inexpensive forum to bank customers for resolution of complaints relating tocertain services rendered by banks.

The Banking Ombudsman is a senior official appointed by the Reserve Bank of India to redress

customer complaints against deficiency in certain banking services.

The Banking Ombudsman Scheme was first introduced in India in 1995, and was revised in 2002. The

current scheme became operative from the 1 January 2006, and replaced and superseded the

banking Ombudsman Scheme 2002.


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Bill of exchange - A non-interest-bearing written order used primarily in internationaltrade that binds one party to pay a fixed sum of money to another party at a predetermined future

date.

Explanation -Bills of exchange are similar to checks and promissory notes. They can be drawn byindividuals or banks and are generally transferable by endorsements. The difference between a

promissory note and a bill of exchange is that this product is transferable and can bind one party to

pay a third party that was not involved in its creation. If these bills are issued by a bank, they can be

referred to as bank drafts. If they are issued by individuals, they can be referred to as trade drafts.

Bill of Lading (BoL) - A document issued by a carrier to a shipperacknowledging that specified goods are received on board as cargo for conveyance to a

named place for delivery to the consignee.

Often shortened to BL, BoL or B/L.

Bond rating - A grade given to bonds that indicates their credit quality. Privateindependent rating services such as Standard & Poor's, Moody's and Fitch provide these evaluations

of a bond issuer's financial strength, or its the ability to pay a bond's principal and interest in a timely

fashion.

Explanation - Bond ratings are expressed as letters ranging from 'AAA', which is the highest grade, to

'C' ("junk"), which is the lowest grade. Different rating services use the same letter grades, but use

various combinations of upper- and lower-case letters to differentiate themselves.

To illustrate the bond ratings and their meaning, we'll use the Standard & Poor's format:

AAA and AA:High credit-quality investment gradeAA and BBB:Medium credit-quality investment

gradeBB, B, CCC, CC, C: Low credit-quality (non-investment grade), or "junk bonds" .D: Bonds in

default for non-payment of principal and/or interest

Bonus share - Abonus shareis a freeshare of stockgiven to currentshareholdersinacompany, based upon the number of shares that the shareholder already owns. While the issue of

bonus shares increases the total number of shares issued and owned, it does not change the value of

the company. Although the total number ofissued sharesincreases, the ratio of number of shares

held by each shareholder remains constant.


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Bracket creep -A situation where inflation pushes income into higher tax brackets. Theresult is an increase in income taxes but no increase in real purchasing power.

Breakeven point

1. In general, the point at which gains equal losses.

2. In options, the market price that a stock must reach for option buyers to avoid a loss if they

exercise. For a call, it is the strike price plus the premium paid. For a put, it is the strike price minus

the premium paid.

Bridge loan - A short-term loan that is used until a person or company secures permanentfinancing or removes an existing obligation. This type of financing allows the user to meet current

obligations by providing immediate cash flow. The loans are short-term (up to one year)

with relatively high interest rates and are backed by some form of collateral such as real estate or

inventory.

Also known as "interim financing", "gap financing" or a "swing loan".

Explanation - As the term implies, these loans "bridge the gap" between times when financing is

needed. They are used by both corporations and individuals and can be customized for many

different situations. For example, let's say that a company is doing a round of equity financing that is

expecting to close in six months. A bridge loan could be used to secure working capital until the

round of funding goes through. In the case of an individual, bridge loans are common in the real

estate market. As there can often be a time lag between the sale of one property and the purchase

of another, a bridge loan allows a homeowner more flexibility.

Budget deficit - A financial situation that occurs when an entity has more money going outthan coming in. The term "budget deficit" is most commonly used to refer to government

spending rather than business or individual spending. When it refers to central government

spending, a budget deficit is also known as the "national debt." The opposite of a budget

deficit is a budget surplus, and when inflows are equal to outflows, the budget is said to be

balanced.

Explanation - Government budget deficits can be cured by cutting spending, raising taxes or

a combination of the two. Deficits must be financed by borrowing money. Interest must be

paid on borrowed funds, which worsens the deficit.


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CCAG (comptroller and auditor general) - Comptroller and auditor-generalis the title of a government official in jurisdictions including the UK, the Republic of Ireland

and India. Acomptroller is responsible for supervising the quality of accounting and financial

reporting of an organization. Similar roles in other countries include theComptroller General of the

United Statesand the Auditor General of China.

Cap - An upper limit placed on the payoff of a trade, limiting the upside to the buyer andthe downside to the seller.

Capital Employed - The value of all resources available to the company, typicallycomprising share capital, retained profits and reserves, long-term loans and deferred taxation.

Viewed from the other side of the balance sheet, capital employed comprises fixed assets,

investments and the net investment in working capital (current assets less current liabilities). In

other words: the total long-term funds invested in or lent to the business and used by it in carrying

out its operations.

Capital markets - A market in which individuals and institutions trade financialsecurities. Organizations/institutions in the public and private sectors also often sell securities on the

capital markets in order to raise funds. Thus, this type of market is composed of both the primary

and secondary markets.

Explanation-Both the stock and bond markets are parts of the capital markets. For example, when a

company conducts an IPO, it is tapping the investing public for capital and is therefore using thecapital markets. This is also true when a country's government issues Treasury bonds in the bond

market to fund its spending initiatives.

Capitalism

Capitalism as an economy is based on a democratic political ideology and produces a free market

economy, where businesses are privately owned and operated for profit; in capitalism, all of the

capital investments and decisions about production, distribution, and the prices of goods, services,

and labor, are determined in the free market and affected by the forces of supply and demand.


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Cash dividend - Money paid to stockholders, normally out of the corporation's currentearnings or accumulated profits. All dividends must be declared by the board of directors and are

taxable as income to the recipients.

Explanation - Long-term investors who want to maximize their gains should consider reinvesting the

dividends. Most brokers offer a choice as to whether you wish to reinvest or take cash dividends.

Characteristic line - A line formed using regression analysis that summarizes aparticular security or portfolio's systematic risk and rate of return. The rate of return is dependent

on the standard deviation of the asset's returns and the slope of the characteristic line, which is

represented by the asset's beta.

Explanation -A characteristic line of a stock is the same as the security market line, and is very usefulwhen employing the capital asset pricing model, or when using modern portfolio formation

techniques. The slope of the line, which is a measure of systematic risk, determines the risk-return

tradeoff. According to this metric, the more risk you take on - as measured by variability in returns -

the higher the returns you can expect to earn.

There is considerable controversy regarding the use of beta as a measure of risk and return.

Chart patterns - APrice patternis apatternthat is formed within achartwhen pricesare graphed. In stock andcommodity marketstrading, chart pattern studies play a large role

duringtechnical analysis. Whendatais plotted there is usually a pattern which naturally occurs and

repeats over a period. Chart patterns are used as either reversal or continuation signals.

Circuit filter - Circuit filters are price bands imposed by the Securities ExchangeBoard of India (SEBI) to restrict the movement of stock prices (up or down), of listed

securities. This is to curb manipulation done in share prices by operators.

Stock exchanges introduced circuit filters, as per SEBI guidelines to prevent a steel fall/rise in

stock prices and to safe gaurd interest of investors from volatility in price.

Explanation -When the stock price breaches a stipulated price band as decided by stock exchanges,trading in that particular stock is suspended. For example, if you have a share price of Rs 100, and

there is a circuit breaker of 5%, it will stop trading if the share price goes above Rs 105. Similarly.if

the stock drops below Rs 95, the lower end circuit filter is applied and trading is suspended.

Clean price - The price of a coupon bond not including any accrued interest. A clean priceis the discounted future cash flows, not including any interest accruing on the next coupon payment

date. Immediately following each coupon payment, the clean price will equal the dirty price.


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Confidence index - A confidence indicator calculated by dividing the average yield onhigh-grade bonds by the average yield on intermediate-grade bonds. The discrepancy between the

yields is indicative of investor confidence.A rising ratio indicates investors are demanding a lower

premium in yield for increased risk and so are showing confidence in the economy.

Explanation: The theory is that if investors are optimistic they are more likely to invest in the more

speculative grade of bonds, driving yields downwards and the confidence index upwards. The

opposite is true if investors are pessimistic.

Collateral - An acceptable asset or cash posted to/by a counterparty used as a credit riskmitigation tool.

Consortium - A group made up of two or more individuals, companies or governmentsthat work together toward achieving a chosen objective. Each entity within the consortium is only

responsible to the group in respect to the obligations that are set out in the consortium's

contract. Therefore, every entity that is under the consortium remains independent in his or

her normal business operations and has no say over another member's operations that are not

related to the consortium.

Explanation: Consortiums are often used within the non-profit sector, specifically with educational

institutions. They often pool resources such as libraries and professors and share them among the

members of the group. Several groups of North American colleges and universities operate under

consortiums.

For-profit consortiums also exist, but they are less prevalent. One of the most famous for-profit

consortiums is the airline manufacturer Airbus.

Consolidated Fund -This fund is made of the revenues that is received byGovernment plus the loans that is raised by this revenue as well as the receipts from

recoveries of loans granted by it.

Convertible bond - A bond that can be converted into a predetermined amount ofthe company's equity at certain times during its life, usually at the discretion of the bondholder.

Convertibles are sometimes called "CVs."


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Contingency Fund -The fund that is used by the government in order to meetthe unforeseen expenditure or incase to meet emergencies. The contingency fund is

generally used when the government cannot wait for long for the parliament to authorise

the expenses on the expenditure.

Cost of capital - The required return necessary to make a capital budgeting project,such as building a new factory, worthwhile. Cost of capital includes the cost of debt and the cost of

equity.

Explanation: The cost of capital determines how a company can raise money (through a stock issue,

borrowing, or a mix of the two). This is the rate of return that a firm would receive if it invested in a

different vehicle with similar risk.

Cost of goods sold (COGS) - COGS is the costs that go into creating theproducts that a company sells; therefore, the only costs included in the measure are those that aredirectly tied to the production of the products. For example, the COGS for an automaker would

include the material costs for the parts that go into making the car along with the labor costs used to

put the car together. The cost of sending the cars to dealerships and the cost of the labor used to sell

the car would be excluded.

Coupon rate - The yield paid by a fixed income security. A fixed income security's couponrate is simply just the annual coupon payments paid by the issuer relative to the bond's face or par

value. The coupon rate is the yield the bond paid on its issue date. This yield, however, will change

as the value of the bond changes, thus giving the bond's yield to maturity.

Credit rating - An assessment of the credit worthiness of individuals and corporations.

It is based upon the history of borrowing and repayment, as well as the availability of assets

and extent of liabilities.

Cash Reserve Ratio (CRR) - The portion (expressed as a percent) ofdepositors' balances banks must have on hand as cash. This is a requirement determined by the

country's central bank, which in India is the RBI. The reserve ratio affects the money supply in a

country.This is also referred to as the "cash reserve ratio" (CRR).

Explanation: For example, if the reserve ratio in India is determined by the RBI to be 11%, this means

all banks must have 11% of their depositers' money on reserve in the bank. So, if a bank has deposits

of Rs.1 crore, it is required to have Rs.11 Lakh on reserve.


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D

Debt/Equity Ratio

A measure of a company's financial leverage calculated by dividing its total

liabilities by stockholders' equity. It indicates what proportion of equity and debt the

company is using to finance its assets.

Note: Sometimes only interest-bearing, long-term debt is used instead of total liabilities in the

calculation.

Also known as the Personal Debt/Equity Ratio, this ratio can be applied to personal financial

statements as well as corporate ones.


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Explanation

A high debt/equity ratio generally means that a company has been aggressive in financing its growth

with debt. This can result in volatile earnings as a result of the additional interest expense.

If a lot of debt is used to finance increased operations (high debt to equity), the company could

potentially generate more earnings than it would have without this outside financing. If this were to

increase earnings by a greater amount than the debt cost (interest), then the shareholders benefit

as more earnings are being spread among the same amount of shareholders. However, the cost of

this debt financing may outweigh the return that the company generates on the debt through

investment and business activities and become too much for the company to handle. This can lead

to bankruptcy, which would leave shareholders with nothing.

The debt/equity ratio also depends on the industry in which the company operates. For

example, capital-intensive industries such as auto manufacturing tend to have a debt/equity

ratio above 2, while personal computer companies have a debt/equity of under 0.5.

Debt-Service Coverage Ratio - DSCRIn corporate finance, it is the amount of cash flow available to meet annual interest and principal

payments on debt, including sinking fund payments.

In government finance, it is the amount of export earnings needed to meet annual interest and

principal payments on a country's external debts.

In personal finance, it is a ratio used by bank loan officers in determining income property loans. This

ratio should ideally be over 1. That would mean the property is generating enough income to pay its

debt obligations.

In general, it is calculated by:

A DSCR of less than 1 would mean a negative cash flow. A DSCR of less than 1, say .95, would mean

that there is only enough net operating income to cover 95% of annual debt payments. For example,

in the context of personal finance, this would mean that the borrower would have to delve into his

or her personal funds every month to keep the project afloat. Generally, lenders frown on a negative

cash flow, but some allow it if the borrower has strong outside income.


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Demutualization - When a mutual company owned by its users/members convertsinto a company owned by shareholders. In effect, the users/members exchange their rights of use

for shares in the demutualized company. A mutual company (not to be confused with a mutual fund)

is a company created to provide specific services at the lowest possible price to benefit its

users/members. In demutualization, ownership of the mutual company is separated from theexclusive right to use the services provided by the company.

Devaluation - Devaluationin modernmonetary policyis a reduction in the value ofacurrencywith respect to those goods, services or other monetary units with which that currency

can be exchanged. Devaluation means official lowering of the value of a country's currency within a

fixed exchange rate system, by which the monetary authority formally sets a new fixed rate with

respect to a foreign reference currency.

Dilution of shares - A reduction in earnings per share of common stock that occursthrough the issuance of additional shares or the conversion of convertible securities. In simple words,

Adding to the number of shares outstanding reduces the value of holdings of existing shareholders.

Dirty price - A bond pricing quote referring to the price of a coupon bond that includesthe present value of all future cash flows, including interest accruing on the next coupon payment.

The dirty price is how the bond is quoted in most European markets, and is the price an investor will

pay to acquire the bond.

Accrued interest is earned when a coupon bond is currently in between coupon payment dates. As

the next coupon payment date approaches, the accrued interest increases until the coupon is paid.

Immediately following the coupon payment, the clean price and dirty price will be equal.

The dirty price is sometimes called the "price plus accrued".

Disintermediation

1. In finance, withdrawal of funds from intermediary financial institutions, such as banks and savings

and loan associations, in order to invest them directly.

2. Generally, removing the middleman or intermediary.

Disintermediation is usually done in order to invest in instruments yielding a higher return.

Disinvestment


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The action of an organization or government selling or liquidating an asset or subsidiary.

Also known as "divestiture".

A reduction in capital expenditure, or the decision of a company not to replenish depleted

capital goods.

Explanation:

A company or government organization will divest an asset or subsidiary as a strategic move

for the company, planning to put the proceeds from the divestiture to better use

that garners a higher return on investment.

A company will likely not replace capital goods or continue to invest in certain assets unless

it feels it is receiving a return that justifies the investment. If there is a better place to invest,

they may deplete certain capital goods and invest in other more profitable assets.

Alternatively a company may have to divest unwillingly if it needs cash to sustain operations.

Dividend -

1. A distribution of a portion of a company's earnings, decided by the board of directors, to

a class of its shareholders. The dividend is most often quoted in terms of the dollar amount

each share receives (dividends per share). It can also be quoted in terms of a percent of the

current market price, referred to as dividend yield.

Also referred to as "Dividend Per Share (DPS)."

2. Mandatory distributions of income and realized capital gains made to mutual fund

investors.

Explanation

1. Dividends may be in the form of cash, stock or property. Most secure and stable companies offer

dividends to their stockholders. Their share prices might not move much, but the dividend attempts

to make up for this.

High-growth companies rarely offer dividends because all of their profits are reinvested to help

sustain higher-than-average growth.

2. Mutual funds pay out interest and dividend income received from their portfolio holdings as

dividends to fund shareholders. In addition, realized capital gains from the portfolio's trading

activities are generally paid out (capital gains distribution) as a year-end dividend.


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Dividend stripping - Dividend stripping is the purchase of shares just beforea dividend is paid, and the sale of those shares after that payment, i.e. when they go ex-

dividend.

This may be done either by an ordinary investor as an investment strategy, or by acompany's owners or associates as a tax avoidance strategy.

Dual purpose fund - A fund created by a closed-ended investment company thatoffers two classes of stock. Each class offers entitlements to either income or capital appreciation.

The two types of stock offered by a dual purpose fund are capital and income. The fund's two kinds

of potential cash flows allow individual investors to choose classes that are more in line with their

investment objectives.

E

Economic value added - A measure of a company's financial performance basedon the residual wealth calculated by deducting cost of capital from its operating profit (adjusted for

taxes on a cash basis). (Also referred to as "economic profit".)

The formula for calculating EVA is as follows:

= Net Operating Profit After Taxes (NOPAT) - (Capital * Cost of Capital).

This measure was devised by Stern Stewart & Co. Economic value added attempts to capture the

true economic profit of a company.

EEFC Account - Exchange Earners' Foreign Currency Account (EEFC) is an accountmaintained in foreign currency with an Authorised Dealer i.e. a bank dealing in foreign exchange. It

is a facility provided to the foreign exchange earners, including exporters, to credit 100 per cent of

their foreign exchange earnings to the account, so that the account holders do not have to convert

foreign exchange into Rupees and vice versa, thereby minimizing the transaction costs.

EPS - The portion of a company's profit allocated to each outstanding share of commonstock. Earnings per share serve as an indicator of a company's profitability.

Calculated as:


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When calculating, it is more accurate to use a weighted average number of shares outstanding over

the reporting term, because the number of shares outstanding can change over time. However, data

sources sometimes simplify the calculation by using the number of shares outstanding at the end of

the period.

Diluted EPS expands on basic EPS by including the shares of convertibles or warrants outstanding in

the outstanding shares number.

Earnings per share are generally considered to be the single most important variable in determininga share's price. It is also a major component used to calculate the price-to-earnings valuation ratio.

For example, assume that a company has a net income of $25 million. If the company pays out $1

million in preferred dividends and has 10 million shares for half of the year and 15 million shares for

the other half, the EPS would be $1.92 (24/12.5). First, the $1 million is deducted from the net

income to get $24 million, and then a weighted average is taken to find the number of shares

outstanding (0.5 x 10M+ 0.5 x 15M = 12.5M).

An important aspect of EPS that's often ignored is the capital that is required to generate theearnings (net income) in the calculation. Two companies could generate the same EPS number, but

one could do so with less equity (investment) - that company would be more efficient at using

its capital to generate income and, all other things being equal, would be a "better" company.

Investors also need to be aware of earnings manipulation that will affect the quality of the earnings

number. It is important not to rely on any one financial measure, but to use it in conjunction with

statement analysis and other measures.

Eurobond - A bond issued in a currency other than the currency of the country or market in whichit is issued.

Usually, a Eurobond is issued by an international syndicate and categorized according to the

currency in which it is denominated. A Eurodollar bond that is denominated in U.S. dollars and

issued in Japan by an Australian company would be an example of a Eurobond. The Australian

company in this example could issue the Eurodollar bond in any country other than the U.S.

Eurobonds are attractive financing tools as they give issuers the flexibility to choose the country in

which to offer their bond according to the country's regulatory constraints. They may also

denominate their Eurobond in their preferred currency. Eurobonds are attractive to investors as

they have small par values and high liquidity.


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Excess reserves - Capital reserves held by a bank or financial institution in excess ofwhat is required by regulators, creditors or internal controls. For commercial banks, excess reserves

are measured against standard reserve requirement amounts set by central banking authorities.

These required reserve ratios set the minimum liquid deposits (such as cash) that must be in

reserve at a bank; more is considered excess.

Explanation - Financial firms that carry excess reserves have an extra measure of safety in the event

of sudden loan losses or cash withdrawals by customers. This may increase the attractiveness of the

company that holds excess reserves to investors, especially in times of economic uncertainty.

Boosting the level of excess reserves can also improve an entity's credit rating, as measured by

ratings agencies like Standard & Poor's.

Reserves need to be in liquid forms of capital such as cash in a vault, which does not create income.

Banks will therefore try to minimize their excess reserves by lending the maximum allowable

amount to borrowers.

Export credit agency - A financial institution or agency that provides tradefinancing to domestic companies for their international activities. Export credit agencies (ECAs)

provide financing services such as guarantees, loans and insurance to these companies in order to

promote exports in the domestic country. The primary objective of ECAs is to remove the risk and

uncertainty of payments to exporters when exporting outside their country. ECAs take the risk away

from the exporter and shift it to themselves, for a premium. ECAs also underwrite the commercial

and political risks of investments in overseas markets that are typically deemed to be high risk.

F

Fallout risk - The lending risk that occurs when the terms of a loan are confirmedsimultaneously with the terms of a property sale. Because the mortgage terms are set but the sale is

not finalized, there is a risk that the transaction may not be completed. This represents a risk to the

mortgage pipeline, as the loan may not be issued.

Explanation- When a mortgage originator confirms the details of a loan, it expects the lending

process to be completed. Arrangements are usually made to package the loan for resale in thesecondary mortgage market. With fallout risk, the deal might not be completed and the loan will fall

out of the mortgage pipeline.

Filter rule - A trading strategy where technical analysts set rules for when to buy and sellinvestments, based on percentage changes in price from previous lows and highs. The filter rule is

based on a certainty in price momentum, or the belief that rising prices tend to continue to rise and

falling prices tend to continue to fall. It is often considered a subjective screener, due to it being setby an analyst's own interpretation of a stock's historical price history.


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Fiscal deficit -When a government's total expenditures exceed the revenue that it generates(excluding money from borrowings). Deficit differs from debt, which is an accumulation of yearly deficits.

A fiscal deficit is regarded by some as a positive economic event. For example, economist John Maynard

Keynes believed that deficits help countries climb out of economic recession. On the other hand, fiscal

conservatives feel that governments should avoid deficits in favor of a balanced budget policy.

Float

1. The total number of shares publicly owned and available for trading. The float iscalculated by subtracting restricted shares from outstanding shares.

2.

A float can also refer to a small portion of the money supply representing a balancethat is simultaneously present in a buyers and a payers account. A float results from

the delay occurring between the time that a cheque is written and the money

actually being deducted from the writer's account. These balances are temporarily

double counted as part of the overall money supply.

Floating Rate - Interest rate which is not fixed over the lifetime of an instrument.Such rates take any specific index or base rate as a reference to establish the interest rate.

One of the most commonly used base rates as a benchmark for applying rate is LIBOR.

Foreign currency convertible bond - A type of convertiblebond issued in a currency different than the issuer's domestic currency. In other words, the

money being raised by the issuing company is in the form of a foreign currency. A

convertible bond is a mix between a debt and equity instrument. It acts like a bond by

making regular coupon and principal payments, but these bonds also give the bondholder

the option to convert the bond into stock.

Explanation - Foreign Currency Convertible Bonds commonly referred to as FCCB's are a

special category of bonds. FCCB's are issued in currencies different from the issuing

company's domestic currency. Corporates issue FCCB's to raise money in foreign currencies.

These bonds retain all features of a convertible bond making them very attractive to both

the investors and the issuers. These bonds assume great importance for multi-nationals and

in the current business scenario of globalisation where companies are constantly dealing in

foreign currencies. FCCBs are quasi-debt instruments and tradable on the stock exchange.

Investors are hedge-fund arbitrators or foreign nationals. FCCB's appear on the liabilities


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side of the issuing company's balance-sheet Under IFRS provisions; a company must mark-

to-market the amount of its outstanding bonds

Forfeited Share - A share in a company that the owner loses (forfeits) by failingto meet the purchase requirements. Requirements may include paying any allotment or call

money owed, or avoiding selling or transferring shares during a restricted period. When a

share is forfeited, the shareholder no longer owes any remaining balance, surrenders any

potential capital gain on the shares and the shares become the property of the issuing

company. The issuing company can re-issue forfeited shares at par, a premium or a discount

as determined by the board of directors.

In certain cases, companies allow executives and employees to receive a portion of their

cash compensation to purchase shares in the company at a discount. This is commonly

referred to as an employee stock purchase plan. Typically, there will be restrictions on the

purchase (i.e. stock cannot be sold or transferred within a set period of time after the initial

purchase). If an employee remains with the company and meets the qualifications, he or

she becomes fully vested in those shares on the stated date. If the employee leaves the

company and/or violates the terms of the initial purchase he or she will most likely forfeit

those shares.

Forward discount- In a foreign exchange situation where the domestic current spotexchange rate is trading at a higher level then the current domestic futures spot rate for a maturity period. A

forward discount is an indication by the market that the current domestic exchange rate is going to depreciate

in value against another currency.

A forward discount means the market expects the domestic currency to depreciate against another currency,

but that is not to say that will happen. Although the forward expectation's theory of exchange rates states this

is the case, the theory does not always hold.

Forward premium -When dealing with foreign exchange (FX), a situation where the spotfutures exchange rate, with respect to the domestic currency, is trading at a higher spot exchange rate then it

is currently. A forward premium is frequently measured as the difference between the current spot rate and

the forward rate, but any expected future exchange rate will suffice.

It is a reasonable assumption to make that the future spot rate will be equal to the current futures rate.

According to the forward expectation's theory of exchange rates, the current spot futures rate will be the

future spot rate. This theory is routed in empirical studies and is a reasonable assumption to make in the long

term.


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Futures market -An auction market in which participants buy and sell commodity/futurecontracts for delivery on a specified future date. Trading is carried on through open yelling and hand signals in

a trading pit.

G

Gain - In finance, gain is a profit or an increase in value of an investment such asa stock or bond. Gain is calculated by fair market value or the proceeds from the sale of the

investment minus the sum of the purchase price and all costs associated with it. If the

investment is not converted into cash or another asset, the gain is then called an unrealized

gain.

GDP The monetary value of all the finished goods and services produced within acountry's borders in a specific time period, though GDP is usually calculated on an annual

basis. It includes all of private and public consumption, government outlays, investments

and exports less imports that occur within a defined territory.

GDR (Global Depository Receipt) - A bank certificate issued in more thanone country for shares in a foreign company. The shares are held by a foreign branch of an international bank.

The shares trade as domestic shares, but are offered for sale globally through the various bank branches.

GNP - An economic statistic that includes GDP, plus any income earned by residents from overseasinvestments, minus income earned within the domestic economy by overseas residents. GNP is a measure of a

country's economic performance, or what its citizens produced (i.e. goods and services) and whether they

produced these items within its borders.

Go Go funds - A slang name for a mutual fund that has an investment strategy that focuses on

high-risk securities in an attempt to capture above average returns. A go-go fund's aggressive approach usuallyinvolves holding large positions in growth stocks.

Go-go funds entice investors by promising large, abnormal returns created from shifting portfolio weights

around speculative information. While investors may experience superior profits, they are also bearing a great

deal of risk. These types of mutual funds were highly valued in the 1960s, but became less popular after large

downturns in their speculative holdings.

GILT FUND - A mutual fund that invests in several different types of medium and long-termgovernment securities in addition to top quality corporate debt.


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GOING PUBLIC - The process of selling shares that were formerly privately held to newinvestors for the first time. Also known as Initial public offering(IPO).

GREEN FIELD INVESTMENT - A form of foreign direct investment where a

parent company starts a new venture in a foreign country by constructing new operational facilities fromthe ground up.

GREENSHOE OPTION - A provision contained in an underwriting agreement that givesthe underwriter the right to sell investors more shares than originally planned by the issuer.

GROWTH FUND - A diversified portfolio of stocks that has capital appreciation as itsprimary goal, and thereby invests in companies that reinvest their earnings into expansion, acquisitions,

and/or research and development.

GUIDANCE - Information that a company provides as an indication or estimate of their futureearnings.

H

HAIRCUT - The difference between prices at which a market maker can buy and sell asecurity.

HEDGE FUND - Hedge means to reduce financial risk.A hedge fund isan investment fund open to a limited range of investors and requires a very

large initial minimum investment. It is important to note that hedging is actually the practice

of attempting to reduce risk, but the goal of most hedge funds is to maximize return on

investment.

Hire purchase - A method of buying goods through making installment payments

over time. The term hire purchase originated in the U.K., and is similar to what are called"rent-to-own" arrangements in the United States. Under a hire purchase contract, the buyer

is leasing the goods and does not obtain ownership until the full amount of the contract is

paid.

Leasing goods in this manner is a tactic commonly employed by businesses in order to

enhance the appearance of earnings metrics. For instance, by leasing assets, it may be

possible to keep the debt used to pay for the assets and the asset itself off the balance

sheet, resulting in higher operational and return-on-asset figures. In the U.S., consumerrent-to-own arrangements are controversial because they can be used in a way which


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attempts to circumvent proper accounting standards.

Holding period yield - The total return received from holding an asset orportfolio of assets. Holding period return/yield is calculated as the sum of all income and

capital growth divided by the value at the beginning of the period being measured.

Holding period return is a very basic way to measure how much return you have obtained

on a particular investment. This calculation is on a per-dollar-invested basis, rather than a

time basis, which makes it difficult to compare returns on different investments with

different time frames. When making comparisons such as this, the annualized

calculation shown above should be used.

Hot money - 1. Money that flows regularly between financial markets as investorsattempt to ensure they get the highest short-term interest rates possible. Hot money will

flow from low interest rate yielding countries into higher interest rates countries byinvestors looking to make the highest return. These financial transfers could affect the

exchange rate if the sum is high enough and can therefore impact the balance of payments.

2. Stolen money that is marked so as as to be traceable.

1. Banks usually attract "hot money" by offering relatively short-term certificates of deposit

that have above-average interest rates. As soon as the institution reduces interest rates or

another institution offers higher rates, investors with "hot money" withdraw their funds and

move them to another institution with higher rates.


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2. Hot money might have been involved in a robbery and tracked through dye marks on

each bill or through recorded serial numbers.

Hypothecation - When a person pledges a mortgage as collateral for a loan, itrefers to the right that a banker has to liquidate goods if you fail to service a loan. The term

also applies to securities in a margin account used as collateral for money loaned from a

brokerage.

I

Implied repo rate - The rate of return that can be earned by simultaneouslyselling a bond futures or forward contract and then buying an actual bond of equal amount

in the cash market using borrowed money. The bond is held until it is delivered into the

futures or forward contract and the loan is repaid.

Explanation - The implied repo rate comes from the reverse repo market, which has similar

gain/loss variables as the implied repo rate. All types of futures and forward contracts have

an implied repo rate, not just bond contracts.

For example, the price at which wheat can be simultaneous purchased in the cash market

and sold in the futures market (minus storage, delivery and borrowing costs) is an implied

repo rate. In the mortgage-backed securities TBA market, the implied repo rate is known as

the dollar roll arbitrage.

Implied volatility - The estimated volatility of a security's price. In general, implied volatilityincreases when the market is bearish and decreases when the market is bullish. This is due to the common

belief that bearish markets are more risky than bullish markets.

Explanation - In addition to known factors such as market price, interest rate, expiration date, and strike price,

implied volatility is used in calculating an option's premium. IV can be derived from a model such as the Black-

Scholes Model.


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Income bond - A type of debt security in which only the face value of the bond is promised to bepaid to the investor, with any coupon payments being paid only if the issuing company has enough earnings to

pay for the coupon payment.

Explanation - The income bond is a somewhat rare financial instrument which generally serves a corporatepurpose similar to that of preferred shares. It may be structured so that unpaid interest payments accumulate

and become due upon maturity of the bond issue, but this is usually not the case; as such, it can be a useful

tool to help a corporation avoid bankruptcy during times of poor financial health or ongoing reorganization.

Institutional investorA non-bank person or organization that trades securities in largeenough share quantities or dollar amounts that they qualify for preferential treatment and lower commissions.

Institutional investors face fewer protective regulations because it is assumed that they are more

knowledgeable and better able to protect themselves.

Explanation - Watching what the big money is buying can sometimes be a good indicator, as they (supposedly)

know what they are doing. Some examples of institutional investors are pension funds and life insurance

companies.

Interest rate collar - An investment strategy that uses derivatives to hedge an investor'sexposure to interest rate fluctuations. The investor purchases an interest rate ceiling for a premium, which is

offset by selling an interest rate floor. This strategy protects the investor by capping the maximum interest

rate paid at the collar's ceiling, but sacrifices the profitability of interest rate drops.

Explanation - An interest rate collar can be an effective way of hedging interest rate risk associated with

holding bonds. Since a bond's price falls when interest rates go up, the interest rate cap can guarantee a

maximum decline in the bond's value. While interest rate floor does limit the potential appreciation of a bond

given a decrease in rates, it provides upfront cash to help pay for the cost of the ceiling.

Let's say an investor enters a collar by purchasing a ceiling with a rate of 10% and sells a floor at 8%. Whenever

the interest rate is above 10%, the investor will receive a payment from whoever sold the ceiling. If the

interest rate drops to 7%, which is under the floor, the investor must now make a payment to the party that

bought the floor.

Interest rate floor - An over-the-counter investment instrument that protects the floorbuyer from losses resulting from a decrease in interest rates. The floor seller compensates the buyer with a

payoff when the reference interest rate falls below the floor's strike rate.

Explanation - For example, assume that an investor is securing a floating rate loan and is looking for

protection against lost income that would arise if interest rates were to decline. Suppose the floor rate is 8%and that on a particular day, the rate on the investor's floating-rate loan of $1 million is 7%. The floor provides


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a payoff of $10,000 (($1 million *.08) - ($1 million*.07)).

Interest rate parity - A theory in which the interest rate differential between twocountries is equal to the differential between the forward exchange rate and the spot exchange rate. Interestrate parity plays an essential role in foreign exchange markets, connecting interest rates, spot exchange rates

and foreign exchange rates.

Explanation - The relationship can be seen when you follow the two methods an investor may take to convert

foreign currency into U.S. dollars.

Option A would be to invest the foreign currency locally at the foreign risk-free rate for a specific time period.

The investor would then simultaneously enter into a forward rate agreement to convert the proceeds from the

investment into U.S. dollars, using a forward exchange rate, at the end of the investing period.

Option B would be to convert the foreign currency to U.S. dollars at the spot exchange rate, then invest thedollars for the same amount of time as in option A, at the local (U.S.) risk-free rate. When no arbitrage

opportunities exist, the cash flows from both options are equal.

Interest rate risk- The risk that an investment's value will change due to a change in theabsolute level of interest rates, in the spread between two rates, in the shape of the yield curve or in any other

interest rate relationship. Such changes usually affect securities inversely and can be reduced by diversifying

(investing in fixed-income securities with different durations) or hedging (e.g. through an interest rate swap).

Explanation - Interest rate risk affects the value of bonds more directly than stocks, and it is a major risk to all

bondholders. As interest rates rise, bond prices fall and vice versa. The rationale is that as interest rates

increase, the opportunity cost of holding a bond decreases since investors are able to realize greater yields by

switching to other investments that reflect the higher interest rate. For example, a 5% bond is worth more if

interest rates decrease since the bondholder receives a fixed rate of return relative to the market, which is

offering a lower rate of return as a result of the decrease in rates.

Intrinsic value - 1. The actual value of a company or an asset based on an underlyingperception of its true value including all aspects of the business, in terms of both tangible and

intangible factors. This value may or may not be the same as the current market value. Value investors use avariety of analytical techniques in order to estimate the intrinsic value of securities in hopes of finding

investments where the true value of the investment exceeds its current market value.

2. For call options, this is the difference between the underlying stock's price and the strike price. For put

options, it is the difference between the strike price and the underlying stock's price. In the case of both puts

and calls, if the respective difference value is negative, the instrinsic value is given as zero.

Explanation - 1. For example, value investors that follow fundamental analysis look at both qualitative

(business model, governance, target market factors etc.) and quantitative (ratios, financial statement analysis,

etc.) aspects of a business to see if the business is currently out of favor with the market and is really worth

much more than its current valuation.


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2. Intrinsic value in options is the in-the-money portion of the option's premium. For example, If a call options

strike price is $15 and the underlying stock's market price is at $25, then the intrinsic value of the call option is

$10. An option is usually never worth less than what an option holder can receive if the option is exercised.

Initial Public Offering (IPO) - When an unlisted company makes either afresh issue of securities or an offer for sale of its existing securities, or both, for the first

time. IPO paves way for listing and trading of the securities.

Issued Shares - The number of authorized shares that is sold to and held by the shareholdersof a company, regardless of whether they are insiders, institutional investors or the general public.

Also known as "issued stock".

Issued shares include the stock that a company sells publicly in order to generate capital and the stock given to

insiders as part of their compensation packages. Unlike shares that are held as treasury stock, shares that havebeen retired are not included in this figure. The amount of issued shares can be all or part of the total amount

of authorized shares of a corporation.

The total number of issued shares outstanding in a company is most often shown in the annual report.

Issuer - A legal entity that develops, registers and sells securities for the purpose of financing itsoperations. Issuers may be domestic or foreign governments, corporations or investment trusts. Issuers

are legally responsible for the obligations of the issue and for reporting financial conditions, material

developments and any other operational activities as required by the regulations of their jurisdictions. The

most common types of securities issued are common and preferred stocks, bonds, notes, debentures, bills

and derivatives.

Explanation - Say ABC Corp. sells common shares to the general public on the market in order to generate

capital to finance its business operations. This means ABC Corp. is an issuer, and it's therefore required to file

with regulators, such as the Securities and Exchange Commission, disclosing relevant financial information

about the company. ABC must also meet any legal obligations or regulations in the jurisdiction where it issued

the security.

Writers of options are occasionally referred to as issuers of options because they also sell securities on a

market.

J


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Joint annuity - An insurance product that continues regular payments as long as one of theannuitants is alive. A joint and survivor annuity must have two or more annuitants, and is often purchased by

married couples who want to guarantee that a surviving spouse will receive regular income for life. Annuities

are generally used to provide a steady income during retirement.

Explanation - Different types of joint and survivor annuities are available. For example, a joint and one-half

annuity would reduce the payments to one-half of the original payment amount following the death of the

first annuitant; and a joint and two-thirds annuity would reduce the payments to two-thirds the initial

payment amount. A joint and survivor annuity is often appropriate for married couples who want to make sure

the surviving spouse will continue to receive payments for life. This differs from other annuity products where

it would be possible for a surviving spouse to outlive income payments.

Joint clearing members

Joint tenants with rights of survivorship - A type of brokerageaccount which is owned by at least two people, where all tenants have an equal right to the account's assets

and are afforded survivorship rights in the event of the death of another account holder.

Explanation - In this type of brokerage account, a surviving member will inherit the total value of the other

member's share of account assets upon the death of that other member. All members of the account are

afforded the power to conduct investment transactions within the account as well.

Joint venture - The cooperation of two or more individuals or businesses in which each agreesto share profit, loss and control in a specific enterprise.

Explanation - Forming a joint venture is a good way for companies to partner without having to merge. JVs are

typically taxed as a partnership.

Junk bond - A bond rated 'BB' or lower because of its high default risk.Also known as a "high-yield bond" or "speculative bond".

Explanation - These are usually purchased for speculative purposes. Junk bonds typically offer interest rates

three to four percentage points higher than safer government issues.

K


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Kaizen - A philosophy that sees improvement in productivity as a gradual and methodical process.Kaizen is a Japanese term meaning "change for the better". The concept of Kaizen encompasses a wide range

of ideas: it involves making the work environment more efficient and effective by creating a team atmosphere,

improving everyday procedures, ensuring employee satisfaction and making a job more fulfilling, less tiring

and safer.

Keynesian Economics - An economic theory stating that active governmentintervention in the marketplace and monetary policy is the best method of ensuring economic growth and

stability.

A supporter of Keynesian economics believes it is the government's job to smooth out the bumps in business

cycles. Intervention would come in the form of government spending and tax breaks in order to stimulate the

economy, and government spending cuts and tax hikes in good times, in order to curb inflation.

Knowledge Capital - An intangible asset that comprises the information andskills of a company's employees, their experience with business processes, group work and

on-the-job learning. Knowledge capital is not like the physical factors of production - land,

labor and capital - in that it is based on skills that employees share with each other in order

to improve efficiencies, rather than on physical items. Having employees with skills and

access to knowledge capital puts a company at a comparative advantage to its competitors.

Knowledge Process Outsourcing (KPO) - A form of outsourcing in

which knowledge and information related work is carried out by workers in a different company or by asubsidiary of the same organization. This subsidiary may be in the same country or in an offshore location to

save costs or other resources. Companies resort to knowledge process outsourcing when they have a shortage

of skilled professionals and have the opportunity to hire skilled workers earning lower wages in another

location for a lower overall cost.

Kurtosis - A statistical measure used to describe the distribution of observed data around the mean.

It is sometimes referred to as the "volatility of volatility."

Explanation - Used generally in the statistical field, kurtosis describes trends in charts. A high kurtosis portraysa chart with fat tails and a low, even distribution, whereas a low kurtosis portrays a chart with skinny tails and

a distribution concentrated toward the mean.

L

Letter of credit - A letter from a bank guaranteeing that a buyer's payment to a seller will bereceived on time and for the correct amount. In the event that the buyer is unable to make payment on the

purchase, the bank will be required to cover the full or remaining amount of the purchase.


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Explanation - Letters of credit are often used in international transactions to ensure that payment will be

received. Due to the nature of international dealings including factors such as distance, differing laws in each

country and difficulty in knowing each party personally, the use of letters of credit has become a very

important aspect of international trade. The bank also acts on behalf of the buyer (holder of letter of credit) by

ensuring that the supplier will not be paid until the bank receives a confirmation that the goods have been

shipped.

Leveraged equity -

Liability funding strategy -

Liability transformation effect

LIBOR

Limit order - An order placed with a brokerage to buy or sell a set number of shares at a specifiedprice or better. Limit orders also allow an investor to limit the length of time an order can be outstanding

before being canceled.

Depending on the direction of the position, l imit orders are sometimes referred to more specifically as a buy

limit order, or a sell limit order.

Explanation - Limit orders typically cost more than market orders. Despite this, limit orders are beneficial

because when the trade goes through, investors get the specified purchase or sell price. Limit orders are

especially useful on a low-volume or highly volatile stock.

Limit order book - A record of unexecuted limit orders maintained by the specialist.

Explanation - The specialist has the responsibility to guarantee that the top priority order is executed before

other orders in the book, and before other orders at an equal or worse price held or submitted by other

traders on the floor (floor brokers, market makers, etc).

Limited liability - A type of liability that does not exceed the amount invested in apartnership or limited liability company. The limited liability feature is one of the biggest advantages of

investing in publicly listed companies. While a shareholder can participate wholly in the growth of a company,

his or her liability is restricted to the amount of the investment in the company, even if it subsequently goes

bankrupt and racks up millions or billions in liabilities.


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In a partnership, the limited partners have limited liability, while the general partner has unlimited liability.

The limited liability feature protects the investor's or partner's personal assets from the risk of being seized to

satisfy creditor claims in the event of the company's or partnership's insolvency.

Explanation - In the context of a private company, incorporation can provide its owners with limited liability,

since an incorporated company is treated as a separate and independent legal entity.Limited liability is especially desirable when dealing in industries that can be subject to massive losses, such as

insurance. As an example, consider the misfortune that befell numerous Lloyd's Names, who are private

individuals that agree to take on unlimited liabilities related to insurance risk in return for pocketing profits

from insurance premiums. In the late 1990s, hundreds of these names had to declare bankruptcy in the face of

catastrophic losses incurred on claims related to asbestosis.

Contrast this with the losses incurred by shareholders in some of the biggest public companies to go bankrupt,

such as Enron and Lehman Brothers. Although shareholders in these companies lost all of their investment in

them, at least they were not held liable for the hundreds of billions of dollars owed by these companies to

their creditors subsequent to their bankruptcies.

Liquidity - 1. The degree to which an asset or security can be bought or sold in the market withoutaffecting 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.

2. The ability to convert an asset to cash quickly. Also known as "marketability".

There is no specific liquidity formula; however, liquidity is often calculated by using liquidity ratios.

Explanation - 1. It is safer to invest in liquid assets than illiquid ones because it is easier for an investor to get

his/her money out of the investment.

2. Examples of assets that are easily converted into cash include blue chip and money market securities.

Liquidity Adjustment Facility(LAF) - A tool used in monetary policy

that allows banks to borrow money through repurchase agreements. This arrangementallows banks to respond to liquidity pressures and is used by governments to assure basic

stability in the financial markets.

Loan syndication - The process of involving several different lenders in providing variousportions of a loan. Loan syndication most often occurs in situations where a borrower requires a large sum of

capital that may either be too much for a single lender to provide, or may be outside the scope of a lender's

risk exposure levels. Thus, multiple lenders will work together to provide the borrower with the capital

needed, at an appropriate rate agreed upon by all the lenders.

Explanation - Mainly used in extremely large loan situations, syndication allows any one lender to provide alarge loan while maintaining a more prudent and manageable credit exposure, because the lender isn't the


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only creditor. Loan syndication is common in mergers, acquisitions and buyouts, where borrowers often need

very large sums of capital to complete a transaction, often more than a single lender is able or willing to

provide.

M

M3 - The category of the money supply that includes M2 as well as all large time deposits, institutionalmoney-market funds, short-term repurchase agreements, along with other larger liquid assets.

Explanation - This is the broadest measure of money; it is used by economists to estimate the entire supply of

money within an economy.

Margin trading - The funds that remain in a margin trading accounts that are available to usetowards the purchase of a new position or the increase of an existing position. Traders and investors often

take advantage of margin accounts that provide a leveraged amount of funds with which to trade or invest.

Explanation - A margin account allows traders or investors the ability to purchase beyond the actual cash value

of the account by utilizing leverage. For instance, a trader could have Rs.10,000 cash in a trading account and

be able to trade a value of Rs.100,000 with a 10:1 leverage. The trading margin excess is the funding that is

currently available to trade with. While margin allows traders and investors the opportunity to profit, caution

must be used due to the potential to sustain catastrophic losses.

Market capitalization - The total dollar market value of all of a company's outstandingshares. Market capitalization is calculated by multiplying a company's shares outstanding by the current

market price of one share. The investment community uses this figure to determine a company's size, as

opposed to sales or total asset figures.

Frequently referred to as "market cap."

Explanation - If a company has 35 million shares outstanding, each with a market value of $100, the company's

market capitalization is $3.5 billion (35,000,000 x $100 per share).

Company size is a basic determinant of asset allocation and risk-return parameters for stocks and stock mutual

funds. The term should not be confused with a company's "capitalization," which is a financial statement term

that refers to the sum of a company's shareholders' equity plus long-term debt.


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The stocks of large, medium and small companies are referred to as large-cap, mid-cap, and small-cap,

respectively. Investment professionals differ on their exact definitions, but the current approximate categories

of market capitalization are:

Large Cap: $10 billion plus and include the companies with the largest market capitalization.

Mid Cap: $2 billion to $10 billionSmall Cap: Less than $2 billion

Market risk - The day-to-day potential for an investor to experience losses from fluctuations insecurities prices. This risk cannot be diversified away.

Also referred to as "systematic risk."

Explanation - The beta of a stock is a measure of how much market risk a stock faces.

Marketability/Liquidity risk - The risk stemming from the lack of marketabilityof an investment that cannot be bought or sold quickly enough to prevent or minimize a loss. Usually reflected

in a wide bid-ask spread or large price movements

Merchant banker - A bank that deals mostly in (but is not limited to) international finance,long-term loans for companies and underwriting. Merchant banks do not provide regular banking services to

the general public.

Explanation - Their knowledge in international finances make merchant banks specialists in dealing with

multinational corporations.

Micro credit - It is a term used to extend small loans to very poor people for self-employment projects that generate income, allowing them to care for themselves and their families.

Micro finance - A type of banking service that is provided to unemployed or low-income individuals or groups who would otherwise have no other means of gaining financial services.

Ultimately, the goal of microfinance is to give low income people an opportunity to become self-sufficient by

providing a means of saving money, borrowing money and insurance.

Explanation - Microfinancing is not a new concept. Small microcredit operations have existed since the mid

1700s. Although most modern microfinance institutions operate in developing countries, the rate of paymentdefault for loans is surprisingly low - more than 90% of loans are repaid.


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Like conventional banking operations, microfinance institutions must charge their lenders interests on

loans. While these interest rates are generally lower than those offered by normal banks, some opponents of

this concept condemn microfinance operations for making profits off of the poor.

The World Bank estimates that there are more than 500 million people who have directly or indirectlybenefited from microfinance-related operations.

N

Naked Put - A put option whose writer does not have a short position in the stock on which he orshe has written the put. Sometimes referred to as an "uncovered put."

Naked puts are very risky since the writer can lose big if the underlying asset moves opposite to the desired

direction. But, profits are huge if the underlying asset moves in the right direction.

NAV - A mutual fund's price per share or exchange-traded fund's (ETF) per-share value. In both cases, theper-share dollar amount of the fund is calculated by dividing the total value of all the securities in its portfolio,

less any liabilities, by the number of fund shares outstanding.

Explanation - In the context of mutual funds, NAV per share is computed once a day based on the closing

market prices of the securities in the fund's portfolio. All mutual funds' buy and sell orders are processed atthe NAV of the trade date. However, investors must wait until the following day to get the trade price.

Mutual funds pay out virtually all of their income and capital gains. As a result, changes in NAV are not the best

gauge of mutual fund performance, which is best measured by annual total return.

Because ETFs and closed-end funds trade like stocks, their shares trade at market value, which can be a dollar

value above (trading at a premium) or below (trading at a discount) NAV.


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NBFC - Non-banking financial companies, or NBFCs, are financial institutions that provide bankingservices, but do not hold a banking license. These institutions are not allowed to take deposits from the

public. Nonetheless, all operations of these institutions are still covered under banking regulations.

Explanation - NBFCs do offer all sorts of banking services, such as loans and credit facilities, retirementplanning, money markets, underwriting, and merger activites. The number of non-banking financial

companies has expanded greatly in the last several years as venture capital companies, retail and industrial

companies have entered the lending business.

NFOs - A security offering in which investors may purchase units of a closed-end mutual fund. A newfund offer occurs when a mutual fund is launched, allowing the firm to raise capital for purchasing securities.

Explanation - A new fund offer is similar to an initial public offering. Both represent attempts to raise capital to

further operations. New fund offers are often accompanied by aggressive marketing campaigns, created to

entice investors to purchase units in the fund. However, unlike an initial public offering (IPO), the price paid for

shares or units is often close to a fair value. This is because the net asset value of the mutual fund typically

prevails. Because the future is less certain for companies engaging in an IPO, investors have a better chance to

purchase undervalued shares.

Nontaxable Dividends - Dividends from a mutual fund or some otherregulated investment company that are not taxed. Taxes are not paid out becausethe fund invests in municipal and other tax exempt investments. The mutual fund

must invest over 50% of its capital into tax exempt investments for the dividends to

be classified as nontaxable.

'Nonprofit Organization' - A business entity that is granted tax-exemptstatus by the Internal Revenue Service. Donations to a nonprofit organization are often tax

deductible to the individuals and businesses making the contributions. Nonprofit

organizations must disclose a great deal of financial and operating information to the public,

so that donors can ensure their contributions are used effectively.

Notary - Also called a "notary public," this state-appointed official witnesses important documentsignings and verifies the identities of the signers to help deter fraud and identity theft. A notarized document

will contain the seal and signature of the notary who witnessed the signing and will have more legal weight

than a document that is not notarized. Document signings where consumers are likely to need the services of

a notary include real estate deeds, affidavits, wills, trusts and powers of attorney.


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NPAs - A debt obligation where the borrower has not paid any previously agreed upon interest andprincipal repayments to the designated lender for an extended period of time. The nonperforming asset is

therefore not yielding any income to the lender in the form of principal and interest payments.

Explanation - For example, a mortgage in default would be considered non-performing. After a prolongedperiod of non-payment, the lender will force the borrower to liquidate any assets that were pledged as part of

the debt agreement. If no assets were pledged, the lenders might write-off the asset as a bad debt and then

sell it at a discount to a collections agency.

NPV - The difference between the present value of cash inflows and the present value of cash outflows.NPV is used in capital budgeting to analyze the profitability of an investment or project.

NPV analysis is sensitive to the reliability of future cash inflows that an investment or project will yield.

Formula:

In addition to the formula, net present value can often be calculated using tables, and spreadsheets such as

Microsoft Excel.

Explanation - NPV compares the value of a dollar today to the value of that same dollar in the future, taking

inflation and returns into account. If the NPV of a prospective project is positive, it should be accepted.

However, if NPV is negative, the project should probably be rejected because cash flows will also be negative.

For example, if a retail clothing business wants to purchase an existing store, it would first estimate the future

cash flows that store would generate, and then discount those cash flows into one lump-sum present value

amount, say $565,000. If the owner of the store was willing to sell his business for less than $565,000, the

purchasing company would likely accept the offer as it presents a positive NPV investment. Conversely, if the

owner would not sell for less than $565,000, the purchaser would not buy the store, as the investment

would present a negative NPV at that time and would, therefore, reduce the overall value of the clothingcompany.

O

Oligopoly - A situation in which a particular market is controlled by a small group offirms. An oligopoly is much like a monopoly, in which only one company exerts control over

most of a market. In an oligopoly, there are at least two firms controlling the market. The


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retail gas market is a good example of an oligopoly because a small number of firms control

a large majority of the market.

Ombudsman - An official who investigates complaints (usually lodged by private citizens)against businesses, financial institutions and/or the government. An ombudsman can be likened to a

private investigator; although the decision is not typically binding, it does carry considerable weight

with those who are sanctioned to uphold the rules and regulations pertaining to each specific case.

When appointed, the ombudsman is typically paid via levies and case fees.

Open market operations - The buying and selling of government securities inthe open market in order to expand or contract the amount of money in the banking system by RBI.

Open market operations are the principal tools of monetary policy.

Operating Cost - Expenses associated with administering a business on a day to daybasis. Operating costs include both fixed costs and variable costs. Fixed costs, such as

overhead, remain the same regardless of the number of products produced; variable costs, such as

materials, can vary according to how much product is produced.

Operating Profit - The profit earned from a firm's normal core business operations. Thisvalue does not include any profit earned from the firm's investments (such as earnings from firms in which the

company has partial interest) and the effects of interest and taxes.

Calculated as:

Operating leverage

Operational Risk - A form of risk that summarizes the risks a company or firmundertakes when it attempts to operate within a given field or industry. Operational risk is the risk that is not

inherent in financial, systematic or market-wide risk. It is the risk remaining after determining financing and

systematic risk, and includes risks resulting from breakdowns in internal procedures, people and systems.

Opportunity cost


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Documents

Final - Financial Terms Made Easy by Adeel and Mohsin