FBS 112

• Accrued interest


  The amount of interest that has accrued on a bond since the last coupon payment. Ifa bond is quoted ex-dividend, accrued interest is negative
• American option

  An option that can be exercised on any date before its expiry
• Arbitrage


  The simultaneous buying and selling of two economically equivalent but differentially priced portfolios so as to make a risk-free profit
• Bear market 


  A period of time during which investors are generally unconfident and stock marketprices decline. One commonly accepted measure is a price decline of 20% or more,over a period of two months or longer
• Bearer document


  A document that proves ownership of a security and where the interest and the redemption proceeds must be claimed by the bearer or holder. There is no register of the owners of the security.
• Benchmark


  A standard or model portfolio against which a fund’s structure and performance willbe assessed.
• Beta value


  A measure of a stock’s volatility relative to movements in the whole market. Usuallydefined as the covariance of the return on the stock with the return on the market,divided by the variance of the market return
• Bid price


  The price at which a market maker offers to buy a security
• Bill of exchange


  A bill of exchange is an invoice which is endorsed by an investment bank and whichcan be sold to a discount house to raise short-term finance. Where the endorser isan “eligible” bank the bill is known as an “eligible bill of exchange”. In the case of an“eligible bill” the bill of exchange is a very secure investment.
• Bulldog


  A sterling denominated foreign bond issued by an overseas borrower in thetraditional UK bond market.
• Bull market 


  A period of time during which investors are generally confident and stock marketprices increase
• Callable bond 


  A bond containing provisions that allow the issuer to buy it back at a predeterminedprice at certain times during its life. (Compare puttable bond.)
• Call Option


  The right, but not the obligation, to buy a specified asset on a set date in the future for a specified price. (Compare with put option.
• Capital cover 


  A calculation made for loans issued by companies. The capital cover is the number of times that the assets of the company (excluding intangibles and after notionally paying current liabilities) cover the amount of the loan (including prior ranking loans).
• Cash settlement 


  A procedure for settling a futures or options contract in cash rather than by delivering the underlying asset
• Certificate of deposit


  A certificate issued by a bank showing that a stated sum of money has been deposited for a specified time at a specified rate of interest. Certificates of deposit can be traded (ie sold) by the original depositor.
• Chinese walls 


  Regulations intended to prevent conflicts of interest in integrated security firms
• Clean price 


  The price of a bond without allowance for accrued interest. (Compare dirty price.)
• Clearing house


  A firm that guarantees the performance of the parties in an exchange-tradedderivatives transaction
• Commercial paper


  A generic term for short-term debt issued by companies. (The terms “paper” or“notes” are often used when referring to short-term debt.) Commercial paper is asingle name form of short-term borrowing used by large companies. It comes in theform of bearer documents for large denominations which are issued at a discountand redeemed at par
• Convertible security


  A security which may be converted into something else (usually into shares in thesame company) on specified terms.
• corporation tax

  Tax on company profits.
• Counterparty


  The opposite side in a financial transaction
• Coupon


  The (usually six-monthly) interest payments on a bond.
• Covenant 


  An agreement that is legal and binding on the parties involved. The expression isoften used in association with corporate debt, because the borrower is bound to theterms of the agreement. The expression is also used in property investment becausethe tenant or lessee is bound to the terms of the lease agreement. In fact themeaning of covenant has been extended in the context of property investment sothat it usually refers to the quality of the tenant, eg a tenant with a good covenant is agood quality tenant who is unlikely to break the terms of the agreement
• Credit rating 


  A rating given to a company’s debt by a credit-rating company as an indication of thelikelihood of default. Top rating is usually AAA. Credit ratings are much used and aregenerally highly reliable
• Credit risk


  The risk that the counterparty to an agreement will be unable or unwilling to make the payments required under the agreement.
• Cum-dividend


  The state of a security where the purchaser of a bond or share is entitled to the next coupon or dividend. Opposite of ex-dividend
• Custodian


  The keeper of security certificates and other assets on behalf of investors
• Dealing costs


  The usual expenses of dealing in securities – commission, stamp duty and any regulators’ levies
• Debenture


  A loan made to a company which is secured against the assets of the company. Debentures usually have a floating charge over the assets of the company so that debenture holders rank above other creditors should the company be wound up. Debentures with fixed charges are called mortgage debentures
• Depreciation


  An accounting convention whereby firms write down the value of their assets overtime
• Derivative instrument


  A financial instrument with a value dependent on the value of some other, underlying asset
• Dirty price


  The price of a bond allowing for accrued interest.
• Dividend cover 


  The number of times that the dividend payments are covered by earnings for the relevant period. Defined as: earnings per share  dividend per share. It is the inverse of the payout ratio. Care needs to be taken that the tax treatment of the earnings and dividend figures are consistent
• Dividend yield


  The running yield (dividends share price) on an equity.
• Emerging markets


  Stock markets in developing countries such as China, Mexico, Singapore etc. They offer high expected returns due to rapid industrialisation. They are also very risky markets
• Eurobond

  An international bond issued by a company or government, often in a currency otherthan the currency of the borrower. The bonds are traded internationally throughbanks, and not in the traditional bond markets
• European option

  An option that can only be exercised at expiry.
• Ex dividend 


  Where the purchaser of a bond or equity is not entitled to the next coupon ordividend payment. Instead the seller receives the next coupon or dividend payment.(See cum-dividend.)