Flashcards in Investment Banking Glossery Deck (77):
A combination of financial statements, management discussion and analysis, and graphs and charts provided annually to investors; they’re required for companies traded publicly in the U.S.
Also known as investment management. Money managers at investment management firms and investment banks take money given to them by pension funds and individual investors and invest it. For wealthy individuals (private clients), the investment bank will set up an individual account and manage the account; for the less well-endowed, the bank will offer mutual funds. Asset managers are compensated primarily by taking a percentage each year from the total assets managed. (They may also charge an upfront load, or commission, of a few percent of the initial money invested.)
An examination of transactions and financial statements made in accordance with generally accepted auditing standards.
A person who examines the information used by managers to prepare the financial statements and attests to the credibility of those statements.
The difference between the yield of a corporate bond and a U.S. Treasury security of similar time to maturity.
The largest and most prestigious firms on Wall Street (including Goldman Sachs, Morgan Stanley, Merrill Lynch, Salomon Smith Barney and Credit Suisse First Boston).
The clients of investment banks (mutual funds, pension funds) who buy the stocks, bonds and securities sold by the banks. (The investment banks that sell these products to investors are known as the sell- side.)
Certified public accountant (CPA)
In the United States, a person earns this designation through a combination of education, qualifying experience and by passing a national written examination.
Chartered Financial Analyst (CFA)
A designation given to professionals who complete a multi-part exam designed to test accounting and investment knowledge and professional ethics.
A bank that lends, rather than raises, money. For example, if a company wants $30 million to open a new production plant, it can approach a commercial bank for a loan.
Short-term corporate debt, typically maturing in nine months or less.
A document that outlines the terms of a loan a commercial bank gives a client.
Assets (usually agricultural products or metals) that are generally interchangeable with one another and therefore share a common price. For example, corn, wheat and rubber generally trade at one price on commodity markets worldwide.
Also called common equity, common stock represents an ownership interest in a company. (As opposed to preferred stock, see below.) The vast majority of stock traded in the markets today is common, as common stock enables investors to vote on company matters. An individual who owns at least 51 percent of a company’s shares controls the company’s decisions and can appoint anyone he/she wishes to the board of directors or to the management team.
Comparable company analysis (Comps)
The primary tool of the corporate finance analyst. Comps include a list of financial data, valuation data and ratio data on a set of companies in an industry. Comps are used to value private companies or better understand a how the market values an industry or particular player in the industry.
Consumer Price Index (CPI)
The CPI measures the percentage increase in a standard basket of goods and services. The CPI is a measure of inflation for consumers.
Bonds that can be converted into a specified number of shares of stock.
An asset whose value is derived from the price of another asset. Examples include call options, put options, futures and interest-rate swaps.
A widely followed short-term interest rate set by the Federal Reserve to cause market interest rates to rise or fall, thereby spurring the U.S. economy to grow more quickly or less quickly. More specifically, the discount rate is the rate at which federal banks lend money to each other on overnight loans. Today, the discount rate can be directly moved by the Fed, but largely maintains a symbolic role.
A payment by a company to shareholders of its stock, usually as a way to distribute profits.
In short, stock. Equity means ownership in a company that is usually represented by stock.
Employee Retirement Income Security Act of 1974. The federal law that sets most pension plan requirements.
The Federal Reserve, which gently (or sometimes roughly), manages the country’s economy by setting interest rates.
Federal funds rate
The rate domestic banks charge one another on overnight loans to meet Federal Reserve requirements. This rate tracks very closely to the discount rate, but is usually slightly higher.
Financial Accounting Standards Board (FASB)
A private-sector body that determines generally accepted accounting principles in the United States.
The field of accounting that serves external decision makers, such as stockholders, suppliers, banks and government agencies.
Bonds and other securities that earn a fixed rate of return. Bonds are typically issued by governments, corporations and municipalities.
Generally Accepted Accounting Principles (GAAP)
The broad concepts or guidelines and detailed practices in accounting, including all conventions, rules and procedures that make up accepted accounting practices.
Part of the legislation passed in 1933 during the Great Depression designed to help prevent future bank failure – the establishment of the F.D.I.C. was also part of this movement. The Glass-Steagall Act split America’s investment-banking (issuing and trading securities) operations from commercial banking (lending). For example, J.P. Morgan was forced to spin off its securities unit as Morgan Stanley. The act was gradually weakened throughout the 1990s. In 1999 Glass-Steagall was effectively repealed by the Graham-Leach-Bliley Act.
Also known as the Financial Services Modernization Act of 1999. Essentially repealed many of the restrictions of the Glass-Steagall Act and made possible the current trend of consolidation in the financial services industry. Allows commercial banks, investment banks and insurance companies to affiliate under a holding company structure.
Industry leaders that investors and analysts believe will continue to prosper and exceed expectations. These companies have above average revenue and earnings growth and their stocks trade at high price- to-earnings and price-to-book ratios. Technology and telecommunications companies such as Microsoft and Cisco are good examples of traditional growth stocks.
To balance a position in the market in order to reduce risk. Hedges work like insurance: a small position pays off large amounts with a slight move in the market.
An investment partnership, similar to a mutual fund, made up of wealthy investors. In comparison to most investment vehicles, hedge funds are loosely regulated, allowing them to take more risks with their investments.
High-grade corporate bond
A corporate bond with a rating above BB. Also called investment grade debt.
High-yield debt (a.k.a. Junk bonds)
Corporate bonds that pay high interest rates (to compensate investors for high risk of default). Credit rating agencies such as Standard & Poor’s rate a company’s (or a municipality’s) bonds based on default risk. Junk bonds rate below BB.
Initial public offering (IPO)
The dream of every entrepreneur, the IPO marks the first time a company issues stock to the public. Going public means more than raising money for the company: By agreeing to take on public shareholders, a company enters a whole world of required SEC filings and quarterly revenue and earnings reports, not to mention possible shareholder lawsuits.
Institutional clients or investors
Large investors, such as pension funds or municipalities (as opposed to retail investors or individual investors).
The primary investment bank managing a securities offering. (An investment bank may share this responsibility with one or more co-managers.)
Tables that rank investment banks based on underwriting volume in numerous categories, such as stocks, bonds, high yield debt, convertible debt, etc. High rankings in league tables are key selling points used by investment banks when trying to land a client.
Leveraged buyout (LBO)
The buyout of a company with borrowed money, often using that company’s own assets as collateral. LBOs were the order of the day in the heady 1980s, when successful LBO firms such as Kohlberg Kravis Roberts made a practice of buying up companies, restructuring them and then reselling them or taking them public at a significant profit.
The Long Bond
The 30-year U.S. Treasury bond. Treasury bonds are used as the starting point for pricing many other bonds, because Treasury bonds are assumed to have zero credit risk taking into account factors such as inflation. For example, a company will issue a bond that trades “40 over Treasuries.” The “40” refers to 40 basis points (100 basis points = 1 percentage point).
A function performed by investment banks to provide liquidity for their clients in a particular security, often for a security that the investment bank has underwritten. (In others words, the investment bank stands willing to buy the security, if necessary, when the investor later decides to sell it.)
Market capitalization (market cap)
The total value of a company in the stock market (total shares outstanding multiplied by price per share).
The department within an investment bank that invests the firm’s own money in other companies. Analogous to a venture capital arm.
Money market securities
This term is generally used to represent the market for securities maturing within one year. These include short-term CDs, repurchase agreements and commercial paper (low-risk corporate issues), among others. These are low risk, short-term securities that have yields similar to Treasuries.
Bonds collateralized by a pool of mortgages. Interest and principal payments are based on the individual homeowners making their mortgage payments. The more diverse the pool of mortgages backing the bond, the less risky they are.
Municipal bonds (Munis)
Bonds issued by local and state governments, a.k.a. municipalities. Municipal bonds are structured as tax-free for the investor, which means investors in munis earn interest payments without having to pay federal taxes. Sometimes investors are exempt from state and local taxes, too. Consequently, municipalities can pay lower interest rates on muni bonds than other bonds of similar risk.
An investment vehicle that collects funds from investors (both individual and institutional) and invests in a variety of securities, including stocks and bonds. Mutual funds make money by charging a percentage of assets in the fund.
The price-to-earnings ratio. This is the ratio of a company’s stock price to its earnings-per-share. The higher the P/E ratio, the more expensive a stock is (and the faster investors believe the company will grow). Stocks in fast-growing industries tend to have higher P/E ratios.
Relies on diversification to match the performance of a stock market index (e.g., the S&P 500 Index or the the Wilshire 4500 Completion Index). Because a passive portfolio strategy involves matching an index, this strategy is commonly referred to as indexing.
Traders who are positioned on the floor of stock and commodity exchanges (as opposed to floor traders, situated in investment bank offices).
The book of exhibits, graphs and initial recommendations presented by bankers to prospective clients when trying to land an engagement.
The base rate U.S. banks use to price loans for their best customers.
Accountants who work for businesses, as well as government agencies, and other non-profit organizations.
Producer Price Index
The PPI measures the percentage increase in a standard basket of goods and services. PPI is a measure of inflation for producers and manufacturers.
Trading of the firm’s own assets (as opposed to trading client assets).
A report issued by a company (filed with and approved by the SEC) that wishes to sell securities to investors. Distributed to prospective investors, the prospectus discloses the company’s financial position, business description and risk factors.
Accountants who offer services to the general public on a fee basis including auditing, tax work and management consulting.
Request for proposal (RFP)
Statement issued by institutions (i.e., pension funds or corporate retirement plans) when they are looking to hire a new investment manager. They typical detail the style of money management required and the types of credentials needed.
Individual investors (as opposed to institutional clients).
Return on equity
The ratio of a firm’s profits to the value of its equity. Return on equity, or ROE, is a commonly used measure of how well an investment bank is doing, because it measures how efficiently and profitably the firm is using its capital.
The series of presentations to investors that a company undergoing an IPO usually gives in the weeks preceding the offering. Here’s how it works: The company and its investment bank will travel to major cities throughout the country. In each city, the company’s top executives make a presentation to analysts, mutual fund managers and other attendees and also answer questions.
A type of legal document filed with the SEC for a private company aiming to go public. The S-1 is almost identical to the prospectus sent to potential investors. The SEC must approve the S-1 before the stock can be sold to investors.
A type of legal document filed with the SEC for a public company looking to sell additional shares in the market. The S-2 is almost identical to the prospectus sent to potential investors. The SEC must approve the S- 2 before the stock is sold.
Short reports written by the corporate finance bankers and distributed to the bank’s salespeople. The sales memo provides salespeople with points to emphasize when hawking the stocks and bonds the firm is underwriting.
Securities and Exchange Commission (SEC)
A federal agency that, like the Glass-Steagall Act, was established as a result of the stock market crash of 1929 and the ensuing depression. The SEC monitors disclosure of financial information to stockholders and protects against fraud. Publicly traded securities must be approved by the SEC prior to trading.
A bond that matures in nine months or less. Also called commercial paper.
An investment management firm that focus on one type of style, product or client type.
A group of investment banks that together will underwrite a particular stock or debt offering. Usually the lead manager will underwrite the bulk of a deal, while other members of the syndicate will each underwrite a small portion.
The yield or internal rate of return an investor would receive at any given moment on a 90-120 government treasury bill.
Municipal bonds (also known as munis). Munis are free from federal taxes and, sometimes, state and local taxes.
An annual report filed by a publicly traded company with the SEC. Includes financial information, company information, risk factors, etc.
Similar to a 10K, but filed quarterly.
Securities issued by the U.S. government. These are divided into Treasury Bills (maturity of up to two years), Treasury Notes (from two years to 10 years maturity), and Treasury Bonds (10 years to 30 years). As they are government guaranteed, treasuries are often considered risk-free. In fact, while U.S. Treasuries have no default risk, they do have interest rate risk; if rates increase, then the price of U.S. Treasuries will decrease.
The function performed by investment banks when they help companies issue securities to investors. Technically, the investment bank buys the securities from the company and immediately resells the securities to investors for a slightly higher price, making money on the spread.
Well-established, high dividend paying companies with low price to earnings and price to book ratios. Essentially, they are “diamonds in the rough” that typically have undervalued assets and earnings potential. Classic value stocks include oil companies like ExxonMobil and banks such as BankAmerica or J.P. Morgan Chase.