Glossary Flashcards
(251 cards)
1
Q
Absolute advantage
A
When a country is more efficient in
producing a good or a service than other countries—that is, it needs less resources to produce the good or service
2
Q
Absolute returns
A
The returns achieved over a certain time
period. Absolute returns do not consider the risk of the
investment or the returns achieved by similar investments.
3
Q
Accounting profit
A
Difference between the revenue generated
from selling products and services and the explicit costs of producing them.
4
Q
Accounts payable
A
Money owed by a company to suppliers
that have extended the company credit.
5
Q
Accounts receivable
A
Money owed to a company by customers
who purchase on credit.
6
Q
Accrual basis
A
Accounting method in which revenues and
related expenses are recorded when the revenues are earned and the expenses are recognised rather than when the cash is received and paid.
7
Q
Accrued liabilities
A
Liabilities related to expenses that have been
incurred but not yet paid as of the end of an accounting
period
8
Q
Active investment managers
A
Investment managers who try to predict which securities and assets will outperform or underperform comparable securities and assets and who act on their opinions by buying the securities and assets that they expect to outperform and selling (or simply not buying) the securities and assets that they expect to underperform.
9
Q
Ad hoc documents
A
Documents that are typically informal,
such as letters, memos, and e-mails.
10
Q
Adverse selection
A
Tendency of people who are most at risk
to buy insurance, causing insured losses to be greater than average losses.
11
Q
Allocationally efficient economies
A
Economies that use resources where they are the most valuable.
12
Q
Alpha
A
Outperformance relative to a relevant market
benchmark.
13
Q
Alternative investments
A
A diverse asset class that typically includes private equity, real estate, and commodities. It
provides an alternative to traditional investments, such
as debt and equity securities.
14
Q
Amortisation
A
The process of expensing the costs of intangible
assets over their useful lives.
15
Q
Annual percentage rate
A
The cost of borrowing expressed as a yearly rate without compounding.
16
Q
Annuity
A
The exchange of an initial amount for a fixed number
of future payments of a certain amount.
17
Q
Appraisal
A
Assessment or estimation of the value of an asset, such as real estate, that is subject to certain assumptions, which may not always be realistic.
18
Q
Appreciation
A
A situation in which a currency is getting stronger
relative to other currencies.
19
Q
Arbitrage opportunity
A
An opportunity to make money by taking advantage of a price difference between two markets.
20
Q
Arithmetic mean
A
The sum of the items in a data set divided
by the number of items
21
Q
Ask exchange rate
A
See offer exchange rate.
22
Q
Ask prices
A
Prices at which a dealer is willing to sell an asset
or a security, typically qualified by a maximum quantity
(ask size). Also called offer price.
23
Q
Asset allocation
A
The process to determine the proportion of a
portfolio to hold in various asset classes or the proportion of a portfolio held in various asset classes.
24
Q
Asset-backed securities
A
Financial securities created by securitisation whose associated payments and value are backed
by a pool of underlying assets, such as car loans, credit card receivables, bank loans, or airplane leases.
25
Asset class
A broad grouping of similar types of investments,
| such as shares, bonds, real estate, and commodities.
26
Asset managers
See investment managers
27
Asset turnover
A measure that indicates the volume of revenues being generated by the assets used in the business,
or how effectively the company uses its assets to generate revenue.
28
Assets
Items that have value and include real assets and
| financial assets.
29
Back office
Administrative and support functions necessary
to run the firm, including accounting, human resources,
payroll, and operations.
30
Balance of payments
Record that tracks transactions between
| residents of one country and residents of the rest of the world over a period of time, usually a year.
31
Balance of trade
See net exports.
32
Balance sheet
A statement of the company’s financial position at a specified point in time; essentially, it shows the
company’s assets, liabilities or debt, and owner-supplied capital or equity
33
Brokerage services
```
Trading services provided to clients who want to buy and sell securities; they include not only
execution services (that is, processing orders on behalf of clients) but also investment advice and research.
```
34
Banks
Financial institutions that collect deposits from savers
| and transform them into loans to borrowers.
35
Brokered markets
Markets in which brokers arrange trades
among their clients, particularly for such assets as large
blocks of securities or real estate that are unique and
thus of interest as potential investments to only a limited number of investors.
36
Barriers to entry
Obstacles, such as licences, brand loyalty,
| or control of natural resources, that prevent competitors from entering the market.
37
Basic earning power
A measure that compares the profit
| generated from operations with the assets used to generate that income.
38
Brokers
Trading services providers who act as agents and,
in exchange for a commission, arrange trades by finding sellers for their clients who want to buy and buyers for their clients who want to sell.
39
Basis point
A measure equal to 0.01% or 0.0001
40
Business cycles
Economy-wide fluctuations in economic
| activity.
41
Benchmark
A comparison portfolio (e.g., the S&P 500 Index).
42
Best efforts offering
Type of public offering in which the
| investment bank acts only as a broker and does not take the risk of having to buy securities.
43
Buy-side firms
Institutional investors and investment managers who purchase investment products and services from
sell-side firms.
44
Beta
A generic term for market risk, systematic risk, or non-diversifiable risk.
45
Buyouts
Private equity investment strategy that consists of
financing established companies that require capital to
restructure and facilitating a change of ownership.
46
Bid–ask spreads
Difference between the bid price and the
offer price quoted by a dealer, which represents the compensation dealers expect for taking the risk of buying and selling securities.
47
Call market
Market in which trades can be arranged only when
| the market is called, which is usually once a day.
48
Bid exchange rate
The exchange rate at which a bank or
| currency dealer will buy foreign currency.
49
Call option
The right (but not the obligation) to buy an underlying at the exercise price until the option expires.
50
Bid prices
Prices at which a dealer is willing to buy an asset
or a security, typically qualified by a maximum quantity
(bid size).
51
Call risk
The risk that the issuer will buy back the bond issue
| prior to maturity through the exercise of a call provision.
52
Block brokers
Brokers who help investors who want to trade
| large blocks of securities.
53
Cap-weighted indices
See capitalisation-weighted indices.
54
Board of directors
A group of people whose job is to monitor the company’s business activities on behalf of its
shareholders.
55
Capital account
A component of the balance of payments that
reports capital transfers between domestic entities and
foreign entities, such as debt forgiveness or the transfer of assets by migrants entering or leaving the country.
56
Bond
A formal contract that represents a loan from an investor (bondholder) to an issuer. The contract describes the key terms of the debt obligation, such as the interest rate and the maturity.
57
Capital markets
See financial markets.
58
Book values
Balance sheet values of a company’s assets, liabilities, and equity.
59
Capitalisation-weighted indices
Indices for which the weight
assigned to each security depends on the security’s market capitalisation—that is, the market price of the security multiplied by the number of units outstanding of the security. Also called cap-weighted, market-weighted, or value-weighted indices.
60
Breakeven point
The number of units produced and sold
at which the company’s profit is zero—that is, revenues
exactly cover total costs. If the company sells less units
than the breakeven point, it will suffer a loss. In contrast, if it sells more units than the breakeven point, it will make a profit.
61
Capitalised
Classifying a cost as generating long-term economic benefits and reporting it as an asset rather than
charging it as an expense to current operations.
62
Capitalism
An economic system that promotes private ownership as the means of production and markets as the means
of allocating scarce resources.
63
Carried interest
A form of incentive fee that general partners
deduct before distributing the profit made on investments to the limited partners. It is designed to ensure that general partners’ interests are aligned with the limited partners’ interests.
64
Complementary products
Products that are frequently consumed together, such as printers and ink cartridges.
65
Cartel
A special case of oligopoly in which a group of producers jointly control the production and pricing of products or services produced by the group.
66
Complements
See complementary products.
67
Compliance risk
The risk that an organisation fails to comply with all applicable rules, laws, and regulations and
faces sanctions and damage of its reputation as a result of non-compliance.
68
Cash flow rights
The rights of shareholders to distributions,
| such as dividends, made by the company.
69
Compound interest
Interest that is calculated on principal
and interest; it assumes reinvestment of interest received. Compound interest is often referred to as interest on interest.
70
Churning
Excessive trading to increase commissions.
71
Clearing
All activities that occur from the arrangement of the
| trade to its settlement.
72
Confirmation
Clearing activity that takes place before settlement in which the buyer and seller must confirm that they
traded and the exact terms of their trade.
73
Clearing houses
Trading services providers that arrange for
| final settlement of trades.
74
Conflict of interest
When either the employee’s personal
interests or the employer’s interests conflict with the interests of the client. Conflicts of interest can also arise when employee’s and employer’s interests conflict.
75
Client on-boarding
The process by which an organisation
accepts a new client and inputs the client’s details into its records to enable the organisation to conduct transactions with and on behalf of the client.
76
Closed-end funds
Pooled investment vehicles that have a
fixed number of shares and thus do not issue or redeem shares on demand. Investors who want to buy or sell closed-end funds must trade with investors willing to sell or buy these funds
77
Consumer price index
Constructed by determining the weight
(or relative importance) of each product and service in a typical household’s spending in a particular base year and then measuring the overall price of that basket of goods from year to year.
78
Coincident indicators
Measures of economic activity that
are intended to measure the current state of the economy rather than the past or to predict the future. Coincident indicators have a tendency to change at the same time as the economy measured as a whole.
79
Continuous data
Data that can take on an infinite number of
| values between whole numbers.
80
Collateral
```
Specific assets (generally a tangible asset) that a
borrower pledges to a lender to secure a loan.
```
81
Continuous trading market
Market in which trades can be
| arranged and executed any time the market is open.
82
Convertible bond
A bond that offers the bondholder the right
| to convert the bond into a pre-specified number of shares of common stock of the issuing company.
83
Commercial real estate
Income-generating real estate that
| includes, for example, offices, multifamily residential dwellings, retail and industrial properties, and hotels.
84
Correlation
A measure of the strength of a relationship between
two variables; essentially, two variables are correlated
when a change in one variable is always accompanied by a change in another variable. Variables can be positively or negatively correlated.
85
Commingled account
Pooling together the capital of two or
| more investors, which is then jointly managed.
86
Commodities
Physical products, such as precious and base
metals (e.g., gold, copper), energy products (e.g., oil), and agricultural products that are typically consumed (e.g., corn, cattle, wheat) or used in the manufacture of goods(e.g., lumber, cotton, sugar).
87
Correlation coefficient
A number between –1 and +1 that
| measures the consistency or tendency for two variables to move in tandem with each other.
88
Common stock
k Also known as common shares, ordinary
shares, or voting shares, it is the main type of equity
security issued by a company. It represents an ownership stake in the company
89
Corruption
The abuse of power for private gain
90
Counterparty risk
Risk that one of the parties to a contract
| will fail to honour the terms of the contract.
91
Coupon rate
The interest rate for a bond. The bond’s coupon
| rate multiplied by its par value equals the annual interest owed to the bondholders.
92
Comparative advantage
A country’s ability to produce a good
or service relatively more efficiently (that is, at a lower
relative cost) than other countries.
93
Covenants
Actions that the issuer must perform (positive
covenants) or is prohibited from performing (negative
covenants) .
94
Credit default swap
A contract that protects the buyer against
a loss of value in a debt security or index of debt securities. The contract will specify under what conditions the other party has to make payment to the buyer of the CDS.
95
Custodians
Typically, banks and brokerage firms that hold
money and securities for safekeeping on behalf of their
clients.
96
Credit rating
Assessment of the credit quality of a bond based
| on the creditworthiness of the issuer.
97
Dark pools
Type of alternative trading venue that does not
| display orders from clients to other market participants.
98
Credit rating agencies
Investment research service providers that specialise in providing opinions about the credit
quality of bonds and of their issuers.
99
Data vendors
Investment research service providers of historical and real-time data about companies and market
conditions.
100
Credit risk
For a lender, the risk of loss caused by a borrower’s failure to honour the contract and make a promised
payment in a timely manner.
101
Dealers
Trading services providers who participate in their
clients’ trades and stand ready to buy or sell when their
clients want to sell or buy, providing liquidity and profiting when they can buy securities for less than they sell them. Also called market makers.
102
Credit Spread
The difference between a risky bond’s yield and
| the yield on a government bond with the same maturity
103
Debt-to-equity ratio
A measure of financial leverage that
| indicates the extent to which debt is used in the financing of the company.
104
Cross-price elasticity of demand
The percentage change in
quantity demanded of a product or service in response
to a percentage change in the price of another product.
105
Default
A situation in which the bond issuer fails to make the
| promised payments.
106
Crossing network
Type of alternative trading venue in which
an electronic trading system matches buyers and sellers
who are willing to trade at prices obtained from exchanges or other alternative trading venues but who are concerned about moving the price of the securities by submitting an order to an exchange.
107
Defined benefit pension plans
Pension plans that promise a certain amount to their beneficiaries during their retirement.
108
Currency risk
The risk associated with the fluctuation of
| exchange rates; also called foreign exchange risk.
109
Currency swap
The exchange of debt service obligations
| denominated in different currencies.
110
Deflation
A persistent and pronounced decrease in prices
| across most products and services in an economy.
111
Current account
A component of the balance of payments
that indicates how much a country consumes and invest (outflows) with how much it receives (inflows). It includes
three components, the goods and services account, the
income account, and the current transfers account.
112
Demand curve
The curve that shows the quantity of a product
| or service demanded at different prices.
113
Current account balance
The sum of the goods and services,
| income, and current transfers accounts.
114
Deposit-taking institutions
Financial institutions that take
| deposits, such as banks; also called depository institutions.
115
Current account deficit
A negative current account balance.
116
Current account surplus
A positive current account balance.
117
Depositary receipt
A security issued by a financial institution
that represents an economic interest in a foreign company. The financial institution holds the foreign company’s shares in custody and issues depositary receipts against the shares held. These depositary receipts trade like common stock on the local stock exchange.
118
Current assets
```
Short-term assets that are expected to be
converted into cash, used up, or sold within the current
operating period (usually one year), such as cash, inventories, and accounts receivable.
```
119
Current liabilities
Short-term liabilities that must be repaid
| within the next year.
120
Current ratio
A liquidity ratio calculated as current assets
| divided by current liabilities.
121
Current yield
The annual coupon payment divided by the
| current market price.
122
Depositories
Typically, banks and brokerage firms that are regulated and act not only as custodians but also as monitors,
playing an important role in preventing investment fraud.
123
Depreciation
The process of allocating the cost of an asset
| over the asset's estimated useful life; a situation in which a currency is getting weaker relative to other currencies.
124
Depreciation expense
The amount of depreciation allocated
| each year and reported on the income statement as an expense.
125
Derivatives
Contracts (agreements to do something in the
future) that derive their value from the performance of
an underlying asset, event, or outcome.
126
Economies of scale
Cost savings arising from a significant
increase in output without a simultaneous increase in
fixed costs.
127
Devaluation
The decision made by a country’s central bank
| to decrease the value of the domestic currency relative to other currencies
128
Effective annual rate
The amount by which a unit of currency
| will grow in a year, with interest on interest included.
129
Direct investments
Purchase of securities issued by companies,
| governments, and individuals and of real assets, such as real estate, art, or timber.
130
Elasticity
In economics, how the quantity demanded or supplied changes in response to small changes in a related
factor, such as price, income, and the price of a substitute or complementary product.
131
Disclosure-based
Regulatory system in which regulators
| emphasise disclosure of material information.
132
Endowment funds
Long-term funds owned by non-profit
| institutions.
133
Discount rate
The rate used to calculate the present value of
| some future amount.
134
Enterprise risk management (ERM)
A framework that helps
| organisations manage all their risks together in an integrated fashion.
135
Discrete data
Data that show observations only as distinct
| values.
136
Equal-weighted indices
Indices for which an equal weight is
| assigned to each security included in the index.
137
Discretionary relationships
Relationships that permit the
| service provider to act on behalf of the client.
138
Equilibrium price
Price at which the quantity of a product or
| service demanded equals the quantity supplied. Point at which the demand and supply curves intersect.
139
Distressed
Private equity investment strategy that focuses on
| purchasing the debt of troubled companies that may have defaulted or are on the brink of defaulting.
140
Equity
Assets minus liabilities; the shareholders’ (owners’)
| investment in the company
141
Distribution
The set of values that a variable can take, showing
| their observed or theoretical frequency of occurrence.
142
Equity multiplier ratio
A measure of financial leverage that
indicates the amount of total assets supported by one
monetary unit of equity
143
Diversification
The practice of combining assets and types of
| assets with different characteristics in a portfolio for the purpose of reducing risk.
144
Ethical dilemmas
Situations in which values, interests, and/
| or rules potentially conflict.
145
Dividend per share
The amount of cash dividends the company
| pays for each share outstanding
146
Ethical standards
Principles that support and promote desired
| values or behaviours.
147
Ethics
A set of moral principles, or the principles of conduct
| governing an individual or a group.
148
Downside deviation
A measure of return dispersion similar
| to standard deviation but that focuses only on negative deviations.
149
Earnings per share
The amount of income earned during a
| period per share of common stock; net income divided by the number of shares outstanding.
150
Exchange-traded funds (ETFs)
Pooled investment vehicles
that are typically passively managed to track a particular
index or sector and that trade continuously as common
stocks on exchanges or through dealers.
151
Economic growth
The percentage change in real output (real
| GDP) for an economy.
152
Exercise price
Specified in an options contract, the price to
| trade the underlying in the future. Also called the strike price.
153
Economic indicator
A measure that offers insight regarding
| economic activity.
154
Expenses
The cost of using up company resources to earn
revenues. Typical expenses include operating expenses
(such as cost of sales; selling, general, and administrative expenses; and depreciation expenses); interest expenses; and income taxes.
155
Economic profit
Equal to accounting profit minus the implicit
| opportunity costs not included in total accounting costs; the difference between total revenue and total cost.
156
Economics
The study of production, distribution, and consumption or the study of choices in the presence of scarce
resources.
157
Exports
Products and services that are produced within a
| country’s borders and then transported to another country.
158
External documents
Documents that articulate business
relationships and obligations undertaken by the parties
involved and that are often legally binding.
159
Fixed-rate bonds
A bond with a finite life that offers a coupon
rate that does not change over the life of the bond. Also
known as straight bonds.
160
Fair value
Value that reflects the amount for which an asset
could be sold in an arm’s length transaction between willing
and unrelated parties.
161
Floating exchange rate system
An exchange rate system
driven by supply and demand for each currency, allowing
exchange rates to adjust to correct imbalances, such as
current account deficits.
162
Family office
Private company that manages the financial
affairs of one or more members of a family or of multiple
families.
163
Floating-rate bonds
A bond with a finite life that offers a coupon rate that changes over time. Also known as variable rate bonds.
164
Financial account
A component of the balance of payments
that reflects investments domestic entities make in foreign
entities and investments foreign entities make in domestic
entities. It includes direct investments, portfolio investments, other investments, and the reserve account
165
Foreign direct investments (FDIs)
Direct investments made
| by foreign investors and companies.
166
Financial assets
Claims on other assets; for example, a share
of stock represents ownership in a company or a claim to
some of the company’s assets and earnings.
167
Foreign exchange market
A highly integrated decentralised
| network in which currencies are traded.
168
Financial capital
Money provided to individuals, companies,
| and governments to finance their needs.
169
Forward contract
An agreement between two parties in which
one party agrees to buy from the seller an underlying at a
later date for a price established at the start of the contract.
170
Financial contagion
A situation in which financial shocks
spread from their place of origin to other locales; in essence,
a faltering economy infects other healthier economies.
171
Forward market
Foreign exchange market in which currencies
| are traded now but delivered at some future date.
172
Financial institutions
Financial intermediaries, such as banks
and insurance companies, whose role is to collect money
from savers and to invest it in financial assets.
173
Forward rate
The exchange rate for forward market
| transactions.
174
Financial intermediaries
Organisations that act as middlemen between those who have money and those who need
money
175
Foundations
Grant-making institutions funded by gifts and
| by the investment income that they produce.
176
Fraud
Intentional deception, such as deliberately causing or
| falsely reporting losses to collect insurance settlements.
177
Financial planners
Investment professionals who help their
clients set their financial goals and determine how much
money they should save for future expenses and/or how
much money they can spend on current expenses while
still preserving their capital.
178
Front office
Client-facing activities that provide direct revenue generation, such as sales, marketing, and customer
service activities
179
Financial services industry
Industry that offers a range
of products and services to those who have money to
invest and those who need money and help channel funds
between them.
180
Front running
The act of placing an order ahead of a customer’s order to take advantage of the price impact that the
customer’s order will have.
181
Funds of funds
Investment vehicles that invest in other funds.
182
Future value
The amount to which a payment or series of
| payments will grow by a stated future date.
183
Fiscal policy
The use of taxes and government spending to
| affect the level of aggregate expenditures.
184
Futures contract
An agreement that obligates the seller, at
a specified future date, to deliver to the buyer a specified
underlying in exchange for the specified futures price.
185
Fixed costs
Costs that do not fluctuate with the level of output
| of the company.
186
GDP per capita
Gross domestic product divided by the population; a measure of average output or income per person.
187
Fixed exchange rate system
An exchange rate system that
does not allow for fluctuations of currencies. The value of a
country’s currency is tied to the value of another country’s
currency or a commodity, such as gold
188
General partner
In a partnership, the partner that sets the
partnership, raises capital, finds suitable investments, and
make decisions. Unlike limited partners, the general partner has unlimited personal liability for all the debts of the
partnership.
189
Geometric average
The average compounded return for each
period; the average return for each period assuming that
returns are compounding.
190
Goodwill
An intangible asset that arises when a company
purchases another company and pays more than the fair
value of the net assets (assets minus liabilities) of the
purchased company.
191
Gross domestic product
The total value of all final products
and services produced within an economy in a given period
of time (output definition), or equivalently, the aggregate
income earned by all households, all companies, and the
government within an economy in a given period of time
(income definition). Nominal GDP uses current market
values. Real GDP adjusts for changes in price levels.
192
Gross profit
Sales minus the cost of sales.
193
Growth equity
Private equity investment strategy that usually
focuses on financing companies with proven business
models, good customer bases, and positive cash flows
and profits but that need additional capital to support
their growth plans.
194
Hedge
To reduce or eliminate risk caused by fluctuations in
| the prices of commodities, securities, or currencies.
195
Hedge funds
Private investment pools that investment managers organise and manage. They are characterised by
their availability to only a limited number of investors,
agreements that lock up the investors’ capital for fixed
periods, and performance-based managerial compensation
196
Hidden orders
Orders that are only seen by the brokers or
trading venues that receive them and cannot be seen by
other traders until the orders can be filled.
197
High-water mark
Highest value, net of fees, that a fund has
reached in the past. The investment manager usually earns
the performance fee only if the fund is above its highwater mark.
198
High-yield bonds
See non-investment-grade bonds.
199
Histogram
A diagram with bars that are proportional to the
| frequency of occurrence in each group of observations.
200
Historical cost
The actual cost of acquiring an asset.
201
Holding-period return
The return generated for investors over
a specific time frame, usually annually; a synonym for
total return.
202
Hurdle rate
Minimum annual rate of return that the fund
must generate before the investment manager can receive
a performance fee.
203
Hyperinflation
Price increases so large and rapid that people
| find it difficult to purchase products and services.
204
Implicit GDP deflator
A gauge of prices and inflation that
measures the aggregate changes in prices across the overall
economy
205
Imports
Products and services that are produced outside a
| country’s borders and then brought into the country
206
Income effect
A change in demand for a product or service
| as a result of a change in purchasing power.
207
Income elasticity of demand
The percentage change in the
quantity demanded of a product or service divided by the
corresponding percentage change in income.
208
Income statement
A financial statement that identifies the
profit or loss of a company during a given time period,
such as one year.
209
Index fund
A portfolio of securities structured to track the
| returns of a specific index called the benchmark index.
210
Index of leading economic indicators
A composite of economic
| indicators used to predict future economic conditions.
211
Index rebalancing
The process of adjusting the weights of
the securities in an index. That is, the weights given to
securities whose prices have risen must be decreased and
the weights given to securities whose prices have fallen
must be increased.
212
Index reconstitution
The process of adding or removing securities included in the index.
213
Indirect investments
Purchase of securities of companies,
trusts, and partnerships that make direct investments,
such as shares in mutual funds and exchange-traded funds,
limited partnership interests in hedge funds, asset-backed
securities, and interests in pension funds, foundation funds,
and endowment funds.
214
Industrial production
A measure of economic output by the
following three segments of an economy: manufacturing,
mining, and utilities.
215
Inferior goods
Products whose consumption decreases as
| income increases.
216
Inflation
The percentage increase in the general price level
from one period to the next; a sustained rise in the overall
level of prices for products and services
217
Inflation-linked bonds
Bonds that contain a provision that
adjusts the bond’s par value for inflation and thus mitigates
inflation risk.
218
Information ratio
A reward-to-risk ratio defined as the portfolio’s mean active return (the difference in average return
between the portfolio and its benchmark) over its active
risk (tracking error).
219
Informationally efficient prices
Prices that reflect all available
| information about fundamental values.
220
Initial margin
The amount that must be deposited on the day
| the transaction is opened.
221
Initial public offering
The first issuance of common shares to
| the public by a formerly private corporation.
222
Insider trading
Trading while in possession of material nonpublic information.
223
Insurance companies
Financial institutions that help individuals and companies offset the risks they face; also among
the largest investors.
224
Insurance company
A company that sells insurance contracts
(policies) that provide payments in the event that losses
occur.
225
Intangible assets
Assets lacking physical substance, such as
| patents and trademarks.
226
Interest
Payment for the use of borrowed money.
227
Interest rate risk
The risk associated with decreases in bond
| prices resulting from increases in interest rates.
228
Interest rate swap
An agreement between two parties to
exchange interest rate obligations for the benefit of both
parties; usually exchanges a fixed-rate payment for a
floating-rate payment.
229
Internal audit
A function independent from other business
functions that delves into the details of business processes
and ensures that IT and accounting systems accurately
reflect transactions.
230
Internal documents
Documents that are generally administrative and that formalise policies, procedures, and processes.
231
Internal risk limits
Limits that incorporate an organisation’s
overall risk tolerance and risk management strategy—for
example, the maximum amount of a risky security that can
be held or the maximum aggregate exposure to one asset
type or to one counterparty
232
International trade
The exchange of goods, services, and
| capital between countries.
233
Inventories
The unsold units of production on hand.
234
Investment banks
Financial intermediaries that assist companies and governments raise capital and can provide other
services, such as strategic advisory services, brokerage
and dealing services, and research services; also known
as merchant banks.
235
Investment companies
Companies that exist solely to hold
investments on behalf of their shareholders, partners, or
unitholders, including mutual funds, hedge funds, venture
capital funds, and investment trusts.
236
Investment-grade bonds
Bonds rated BBB– or higher by
| Standard & Poor’s and Fitch or Baa3 or higher by Moody’s.
237
Investment industry
Subset of the financial services industry
that comprises all the participants that are instrumental
in helping savers invest their money and spenders raise
capital in financial markets.
238
Investment managers
Investment professionals who receive
authority from their clients to trade securities and assets
on their behalf. Also called asset managers.
239
Investment policy statement (IPS)
A written planning document describing a client’s investment objectives—return
requirements and risk tolerance—over a relevant time
horizon, along with constraints that apply to the client’s
portfolio. The IPS serves as a guide to what is required and
acceptable in the investment portfolio.
240
Investment risk
The risk associated with investing that arises
| from the fluctuation in the value of investments.
241
Investment vehicles
Assets, such as securities and real assets,
created by the investment industry to help investors move
money from the present to the future, with the hope of
increasing the value of their money
242
Issuers
Typically companies and governments that sell securities to investors in exchange for cash to raise money.
243
J curve
The graphical representation of net cash flow (that
is, the cash distributions net of carried interest minus the
sum of the capital calls and management fees) for limited
partners. It shows that net cash flows are negative in the
early years of a fund, but turn positive toward the end of
a fund’s life.
244
Junk bonds
See non-investment-grade bonds.
245
Key risk measures
Measures that provide a warning when
| risk levels are rising.
246
Keynesians
Economists who believe that fiscal policy can
have powerful effects on aggregate demand, output, and
employment when there is substantial spare capacity in
an economy.
247
Lagging indicators
Turning points that signal a change in
| economic activity after output has already changed.
248
Law of demand
The economic principle that as the price of
a product increases, buyers will buy less of it, and as its
price decreases, they will buy more of it.
249
Law of diminishing marginal utility
The economic principle
that the additional satisfaction consumers get from each
additional unit of a product decreases as the total amount
consumed increases.
250
Law of diminishing returns
The economic principle that the
gain in output from adding variable inputs of one factor,
such as labour, will increase at a decreasing rate even if the
fixed inputs of production remain unchanged.
251
Law of supply
The economic principle that when the price of
| a product increases, the quantity supplied increases too.
