WELCOME TO 'EQUITY STOCK MARKETS: CONCEPTS, INSTRUMENTS, RISKS AND DERIVATIVES' COURSE!
Glossary
Click on the letters inside the menu:
- Adverse Selection:
- Adverse selection refers generally to a situation one party to the transaction has information that other party does not have leading one party (who lacks information) to take inefficient decisions.
- Agency Bonds:
- Bonds issued by market makers in the home mortgages market like Fannie Mae, and Ginnie Mae to facilitate financing of home mortgages.
- Annualized Yield:
- The annualized yield is the effective annual rate of return considering the effect of compounding interest.
- Asset Turnover Ratio:
- Measures the value of a company's sales or revenues generated relative to the value of its assets using the formula: Sales / Average Total Assets.
- Assignments:
- A form of lending where ‘charges’ are created on assets and future receivables of the borrower are ‘assigned’ to the lender.
- Banker’s Acceptance:
- An order to pay the holder of the instrument the specified amount on a specified future date, such a future payment being guaranteed by a bank (Also see Bill of Exchange).
- Bill of Exchange:
- An order to pay the holder of the instrument the specified amount on a specified future date, such a future payment being guaranteed by a bank (Also see Banker’s Acceptance).
- Bond:
- A bond is a borrower's contractual promise to make future cash payments.
- Call Money Market:
- A short-term money market which allows for large financial institutions, such as banks, mutual funds and corporations, to borrow and lend money at interbank rates.
- Call Option:
- A Financial derivative instrument that provides the issuer of the bond an option to buy back the bonds before maturity.
- Capital Adequacy Ratio (CAR):
- A ratio that specifies the minimum capital to be maintained by every regulated entity, in that country, as a percentage of its loans and investments, which would serve as a cushion against potential insolvency. It is the ratio of the bank’s capital comprising Tier I and Tier II capital to the risk weighted assets.
- Cash Reserve:
- This represents the cash held in the vault or in the bank's current account with the central bank.
- Collateralized Borrowing and Lending Obligation (CBLO):
- CBLO is an authority to the lender to receive the money lent at a specified future date with an option or a privilege to transfer the authority to another person for value received.
- Commercial Paper:
- An unsecured promissory note of fixed denomination usually issued by corporations with very high credit rating to meet their short-term funding requirements.
- Competitive Bidding:
- A type of bidding process where the bidders quote the amount of securities they wish to buy in the auction and the yield at which they wish to buy.
- Concentration Risk:
- Higher probability of loss arising from heavily lopsided exposure to a particular counterparty or a group of counterparties.
- Consortium Lending (Syndicated Lending):
- A group of financial intermediaries come together either because the loan amount involved is very large or the lending could be cross-border.
- Contingent Liability:
- A contingent liability is a potential liability that may occur depending on the outcome of an uncertain future event.
- Convertible Bonds:
- Bonds that can be exchanged for other securities such as equity shares of the issuing firm as per the pre-specified terms and at the discretion of the bondholder.
- Corporate Bond:
- A Corporate bond is a debt security, issued by a corporation and is backed either by physical assets or by the potential profits from future operations.
- Coupon Rate:
- A coupon rate therefore, as a recap, is based on the risk-free rate plus a premium for the perceived risk of the issuer when the bond was issued.
- Credit Enhancement:
- This is a facility through which a lender is provided reassurance that a borrower will honor its obligation through additional collateral, insurance or a third-party guarantee.
- Credit Risk:
- Risk resulting from the failure of a borrower or an issue of bonds to meet his contracted cash outflow obligations either on the loan that he has taken or on the bonds that he has issued and the consequent loss the lenders or the investors are likely to suffer.
- Credit Risk Assessment Models:
- These are quantitative methods to determine the prospective borrower's probability of default and/or to classify borrowers into different credit risk or default risk buckets or groups.
- Credit Risk Premium:
- Represents the additional interest rate that must be charged to the borrower by the lending institution as a precaution against potential default on the loan.
- Credit Score:
- A credit score, arrived at on the basis of the credit history of the prospective borrower, is a number that reflects the likelihood repayment by the borrower.
- Credit Turnover:
- Denotes the number and value of credits in the bank account of the borrower primarily through realization of receivables.
- Creditor:
- In the context of a bank guarantee, the creditor is an entity to whom the guarantee is given.
- Currency Intermediation:
- Currency Intermediation is the ability to lend cross currency.
- Current Ratio:
- A liquidity ratio that measures a company's ability to pay short-term and long-term obligations by measuring the current total assets of a company (both liquid and illiquid) relative to that company's current total liabilities.
- Debentures:
- Debentures debt securities backed only by the generally credit standing of the issuing firm, not secured by a specific asset or a collateral.
- Debit Turnover:
- Denotes the number and value of debits in the bank account of the borrower primarily due to payment to suppliers or accounts payables.
- Default Risk Intermediation:
- Willingness to give loans to risky borrowers without hurting the returns to the savers.
- Demand-Side Financing:
- Refers to providing loans for consumption demand.
- Denomination Intermediation:
- Small amount of savings from individuals are pooled together to give loans of varying sizes, large, medium, and small.
- Derivative Contracts:
- A contract between two parties which derives its value/price from an underlying asset.
- Direct Finance:
- A method of finance where engaged in by entities in the financial system where the risk is carried entirely by the saver or the investor.
- Equity Participating Mortgages (EPMs):
- An investor co-invests in the property and provides the loan at a lower interest cost and hence shares the appreciation and the consequent profit when the property is sold off.
- Exogenous Variables:
- The variables that are external to the system within which that firm is operating.
- Factor Markets:
- Those where the prerequisites for production are bought and sold.
- Financial Intermediaries:
- An entity that intermediates funds from savers to borrowers in the most risk-free manner.
- Financial Intermediation:
- Financial Intermediation is the process that facilitates the flow of funds from entities who have excess funds to entities who need it.
- Financial Markets:
- The market that firms go to, to source capital either in the form of Equity or in the form of Debt.
- Foreign Exchange Risk:
- Risk relating to the gain or the loss that arise due to fluctuations in the foreign exchange rate.
- Government Securities or GILT-edged Securities or GILTS:
- Long-term financial instruments issued by governments around the world to finance their national debt and government deficits.
- Graduated Payment Mortgages (GPMs):
- Allows borrowers to make small payments early in the life of the mortgage, then increase as the years go by, and level off towards the end of the mortgage repayment period.
- Gross Debt Service Coverage Ratio (GDSCR):
- The proportion of housing debt that a borrower is paying in comparison to their income. It is calculated as, Annual mortgage payments divided by annual gross income of the borrower.
- Growing Equity Mortgages (GEMs):
- The initial payment is same as in a conventional mortgage, but they could increase over a specific period or for the entire life of the mortgage so that the mortgage can be paid off in a shorter period than stated in the mortgages contract, and hence the borrower could save significantly on his interest cost of the mortgage.
- Guarantee:
- A guarantee is a legally binding contract to discharge the liability of a third party in case of his default.
- Indirect Finance:
- A method of finance engaged in by banks and financial intermediaries where, the risk is carried almost entirely by the bank or the financial intermediary.
- Inflation Indexed Bonds:
- Bonds that offer fixed interest rate on a principal amount that changes based on the Consumer Price Index. On maturity date, the bonds are redeemed either at the original par value or the inflation adjusted principal, whichever is higher.
- Information Asymmetry:
- Information asymmetry occurs when one party to the transaction has access to greater material knowledge than the other party to the transaction.
- Information Intermediation:
- Refers to the ability of financial intermediaries to gather and process information from the financial marketplace far more effectively than individual savers.
- Interest Rate Risk:
- Interest rate risk reflects the sensitivity of a bank's capital and income to volatilities in interest rates.
- Letter of Credit:
- In the context of international trade, a letter issued by the importer’s bank (issuing bank) to the exporter guaranteeing the payment against goods delivered by the exporter.
- Lien:
- A form of lending where a financial instrument such as a certificate of deposit (CD) or a fixed deposit (FD) is used as the collateral.
- Liquidity Adjustment Facility (LAF):
- A short-term liquidity adjustment tool through which the central bank of the country participates in the REPO market as a cash provider (REPO transaction) to infuse liquidity or as a borrower (reverse REPO) to reduce liquidity in the system.
- Liquidity Intermediation:
- Claims from savers which are shorter term are highly liquid while loans to borrowers which are longer term are relatively less liquid.
- Liquidity Risk:
- Risk pertaining to the potential inability of any bank or financial market entity to generate additional liabilities to cope with a sudden decline in liabilities or increase in its assets.
- Loan Concentration Risk:
- The risk associated with loans by a lending institution that are more concentrated, for instance, in a particular industry sector; or to a single firm or to a group of related firms.
- Loanable Funds:
- Amount that is available with the bank to lend after providing for the necessary regulatory requirements is called loanable funds.
- Mark-to-Market Loss:
- Mark-to-market losses can occur when the current market value of financial instruments held by any company or financial institution is lower than the value at which the financial instrument is recorded in the financial statements of the company or financial institution.
- Market Risk:
- Changes in interest rates and exchange rates are largely a result of macroeconomic factors and impact all entities in that financial system. Hence, interest rate risk and exchange rate risk are together referred to as market risk.
- Maturity Intermediation:
- Ability to create loans whose maturities do not match with the corresponding liabilities.
- Moral Hazard:
- Moral hazard is the risk that a party to a transaction has not entered into the contract in good faith, has provided misleading information about its assets, liabilities or credit capacity.
- Mortgage:
- A form of lending where the asset that serves as the underlying collateral is in the possession of the borrower.
- Mortgage Bonds:
- Bonds whose proceeds are deployed to create specific assets that are in turn pledged as collateral for that bond issue.
- Negotiable CDs:
- Negotiable CDs are what we call Bearer instruments, which implies a—such CDs can be bought and sold any number of times until maturity, and whoever is holding the CD on the maturity date will receive the face value, i.e., the principle plus interest.
- Net Demand and Time Liabilities (NDTL):
- NDTL would comprise of three components: (a) All forms of demand liabilities, such as current account and savings account balances, (b) Time liabilities such as fixed deposits, certificate of deposits, etc., and (c) Net Inter Bank Liabilities, which is borrowings from the banking system minus the loans to the banking system.
- Nominal Interest Rate:
- A nominal interest rate is the interest rate that is not adjusted for inflation.
- Non-Competitive Bidding:
- A type of bidding process where the investors state only the amount of securities they wish to buy but not the price.
- Non-Fund-Based Services:
- A type of service provided by banks where there is no immediate impact on the asset side or the liabilities side of the bank’s balance sheet.
- Non-Performing Loans:
- A non-performing asset (NPA) refers to a classification for loans or advances that are in default or are in arrears on scheduled payments of principal or interest.
- Off-balance Sheet Risk:
- Risk relating to the contingent liabilities that are held below the line or off-balance sheet by the bank.
- Operational Risk:
- Risk of direct or indirect losses resulting from failed or inadequate internal processes, people, breakdown of information and technology, or other external events, such as terrorist attacks, floods, typhoons, etc.
- Overdraft Facilities/Working Capital Loan:
- Funds provided by financial intermediaries to help companies and businesses to manage their cash flow mismatches day-on-day between receivables, payables, inventories, etc.
- Pledge:
- A Pledge is a form of collateral-based lending where the assets given as collateral to obtain the loan is in the custody of the lender.
- Principal-Agent Problem:
- The principal-agent problem occurs when a principal delegates an action to another individual (agent) and the interests of the principal diverge from that of the agent, leading to an outcome that is less desirable than what the principal expects.
- Principal Debtor:
- In the context of a bank guarantee, the principal debtor is an entity in respect of whose default the guarantee is given.
- Product Markets:
- Those where goods and services produced by firms are sold to customers.
- Project Finance / Term Loans:
- Long term loans provided by financial intermediaries to companies and businesses to enable them to invest in plant, machinery, land, building, etc.
- Put Option:
- A Financial derivative instrument that provides the investor in the bond an option to sell back the bonds back to the issuer before maturity.
- Quick Ratio:
- Also known as the acid-test ratio, it measures how well a company can meet its short-term financial liabilities and is calculated as (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities.
- REPO:
- A repo agreement or a repurchase agreement is a contractual agreement whereby one party sells securities for cash at a specified price with a commitment to repurchase the same securities at a later pre-agreed date at another specified price.
- Retail Lending:
- Practice of extending small value loans to individuals rather than to institutions.
- Reverse Annuity Mortgage:
- The financial institution advances a sum of money to the beneficiary on a monthly basis, secured by his or her home on which the mortgage is being fully paid off. Those monthly payments by the financial institution are accumulated and reflected in a loan account.
- Risk Adjusted Return On Capital (RAROC):
- It is a proactive measure to evaluate the credit risk associated with large value loans. It is measured as one year income from the loan /the loan amount at risk.
- Risk Free Rate:
- The risk-free interest rate is the rate of return of a hypothetical investment with no risk of financial loss, over a given period. It is the rate at which the government of a country (a risk-free institution) borrows.
- Risk Weighted Assets:
- Risk-weighted asset is a bank's assets or off-balance-sheet exposures, weighted according to risk.
- Roll Over Risk:
- The potential inability of the issuer to issue fresh commercial paper in the market to repay the maturing commercial paper.
- Serial Bonds:
- The bonds mature on pre-specified dates with a portion of the bond issue paid off on each maturity date.
- Set Off:
- Banks can use debt obligations of its borrowers to set off an outstanding loan.
- Share Appreciation Mortgage (SAM):
- To help borrowers qualify and to keep the loan value very high, lenders lower the interest rate on the mortgage in exchange for a share in the appreciation and the consequent profit when the real estate underlying the mortgage is sold off at any point in the future.
- Sinking Fund Provision:
- A provision in some bond indentures requiring the issuer to put money aside to repay bondholders at maturity.
- Solvency Risk:
- Risk that a bank may not have adequate capital or net worth to cope with a sudden steep increase in the non-performing loans or a sudden steep decline in the mark-to-market value of its assets.
- Statutory Liquidity Reserve:
- These are reserves held as investment in government securities that are highly liquid and can be converted to cash at very short notice.
- STRIPS (Separate Trading of Registered Interest and Principal Securities):
- Security in which the face value of the bond payable on maturity is separated out from the periodic coupon payments.
- Subordinated Bonds:
- Bonds whose claims are junior to both the mortgage bonds and the regular debenture bond issued by the same firm, if the issuing firm has to be liquidated.
- Supply-Side Financing:
- Refers to the funding requirements of companies that produce goods and services.
- Surety:
- In the context of a bank guarantee, a surety is an entity who gives the guarantee.
- Syndicated Lending (Consortium Lending):
- A group of financial intermediaries come together either because the loan amount involved is very large or the lending could be cross-border.
- Tax Free Bonds:
- Bond whose interest payments are exempt from income tax and are issued by state governments, government entities that are mandated to source and deploy long-term funds in infrastructure sectors such as power, roadways, railways, etc.
- Term Bonds:
- The entire bond issue matures on a specific single date in the future.
- Term Loans / Project Finance:
- Long term loans provided by financial intermediaries to companies and businesses to enable them to invest in plant, machinery, land, building, etc.
- Term to Maturity:
- Term to maturity refers to the remaining life of a debt instrument.
- Tier-I Capital:
- Under Basel accord, Tier I capital is the core capital comprising of paid-up equity capital, statutory reserves, capital reserves less the carry forward losses, if any, reflected in the balance sheet of the bank.
- Tier-II Capital:
- Under Basel accord, Tier II capital comprises subordinated debt, which are long-term bonds issued by the bank minus investments in the equity capital of subsidiaries.
- Total Debt Service Coverage Ratio (TDSCR):
- A measure of the cash flow available to pay current debt obligations. The proportion of all debt obligations that a borrower is paying in comparison to their income. It is the sum of monthly payments on all loans including credit cards divided by the borrower’s gross monthly income.
- Treasury Bills:
- Short-term discounted instruments with maturities up to 180 days, issued by governments to encounter mismatches in their short-term cash flows.
- Treasury Bond:
- A Treasury bond (T-bond) is a marketable, fixed-interest government debt security with a maturity of more than 10 years and make semi-annual interest payments.
- Uniform Price Auction:
- An auction process for T bills where all accepted bidders are allocated T-bills at the highest yield or the lowest price is known as a uniform price auction.
- Working Capital Loan / Overdraft Facilities:
- Funds provided by financial intermediaries to help companies and businesses to manage their cash flow mismatches day-on-day between receivables, payables, inventories, etc.
- Yield:
- Income earned on an investment, in the form of interest or dividends received from holding a security.
- Yield Curve:
- Yield curve is a graph which represents the relationship between yield, i.e. the returns on the Y axis, and the tenure or the time period on the X axis.
- Yield-to-Maturity:
- Total return anticipated on a bond if the bond is held until maturity. It is based on the risk-free rate plus a premium for the perceived risk of the issuer on any given date.