Financial market Glossary
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Transcript of Financial market Glossary
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GLOSSARYGLOSSARY
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706 GLOSSARY
acceptance A process whereby a bank acts as acceptor byplacing its name on a bill of exchange issued by a third party, and
thereby accepts primary liability to repay the face value of the billto the holder at the maturity date, and thus improves the pricingand marketability of the bill
accounting ratios Quantitative measures of a companysfinancial and management performance, strength and efficiency;for example, a debt to equity ratio
accounts receivable financingA firm obtains a loan using
its current debtors as security to support the loan application
accumulation fund A superannuation fund that accumulatesthe contributions plus fund earnings of an individual for theireventual retirement
accumulation index A measure of changes in specific shareprices, plus the reinvestment of dividends received
active investment Occurs where an investment portfoliostructure is based on stock analysis, new information andrisk/return preferences
active strategies Hedging techniques that are continuallyadjusted in response to forecast changes in exchange rates,interest rates and price
agency theory Describes the conflict of interests that mayexist between the owners and managers of a corporation
agent bank Conducts the ongoing administration role of anestablished syndicated loan facility
All Ordinaries index An index reflecting share pricemovements on the Australian Stock Exchange
American depositary receipt A security issued by a USdepositary bank that is evidenced by a depositary share based onspecified shares listed on an overseas stock exchange
American-type option An option contract that can beexercised by the buyer at any time up to and including the expirydate
amortised loan A credit foncier type loan where each regularand equal loan instalment comprises the interest payment due,plus repayment of a portion of the principal outstanding
annuity A financial instrument with a cash flow of equalamounts, paid at regular time periods and for a specified numberof periods
annuity due An annuity where cash flows occur at thebeginning of each period
approved deposit fund A rollover fund used to hold eligiblesuperannuation funds
arbitrage A strategy of making a risk-free profit by takingadvantage of price differences between markets, such aspurchasing an asset in one market while simultaneously selling inanother
ascending triangle A pattern of share price variations thatforms an uptrend characterised by troughs increasing in heightand peaks that remain horizontal
ask price The price at which an FX dealer will sell a unit of aquotation
asset management Strategy whereby a bank restrictsgrowth in its lending activities to the level of funds available fromits depositor base
asset transformation The ability of financial intermediaries toprovide borrowers and savers with a wide range of financialinstruments to meet their portfolio preferences
assets repriced before liabilities (ARBL) A riskmanagement principle that ensures net interest margins andprofitability are protected
at-the-market Orders to buy or sell securities are executedby a broker at the best current price
at-the-money An option contract with an exercise price veryclose to the current market price of the underlying asset
Austraclear An electronic clearing-house for a range offinancial transactions, including Treasury bonds
Australian Office of Financial Management (AOFM)A body established to manage the Commonwealth Governmentsdebt issues
Australian Prudential Regulation Authority (APRA)Prudential regulator and supervisor of authorised deposit-takinginstitutions (ADIs) and certain non-bank financial institutions
Australian Securities and Investment Commission(ASIC) The regulatory body responsible for the supervision ofAustralian corporations law and markets
authorised deposit-taking institution (ADI) A financialinstitution authorised by APRA to accept retail deposits; includesbanks, building societies and credit cooperatives (unions)
bailment A situation where a finance company holds title overa dealerships trading stock
balance of payments A countrys account of its transactionswith the rest of the world; comprises current and capitalaccounts
balanced growth fund An investment fund that targets alonger-term income stream supported by capital growth in thevalue of its asset portfolio
bank bills held Bills of exchange that have been acceptedand discounted by a bank and are currently held as an asset onits balance sheet
Bank for International Settlements (BIS) A multilateralorganisation representing central banks of major developedeconomies of the world
bank An authorised deposit-taking institution. Its principalfunction is often seen as an intermediary between borrowers andlenders. However, banks generally provide a full range of financialservices
bank-accepted bill A bill of exchange issued by a corporationthat has been accepted by a bank. Such undertakings improvethe instruments creditworthiness, pricing and marketability
base currency The first-named currency in an FX quote; onecurrency unit expressed in terms of another currency. Forexample the USD is the base currency in the quoteUSD/EUR0.9850
basis point A fractional interest rate measure where 100 basispoints equals one per cent
basis risk A situation where pricing differentials are evidentbetween two markets; for example a futures contact market and itsunderlying physical asset market. Initial basis risk may be evident
today and final basis risk at the closing out of the futures position
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BBSW Bank bill swap rate; the average mid-point of banks bidand offer rates in the bank bill secondary market
bear market A market environment where there is anexpectation that prices will fall. An investor may be said to bebearish. Opposite to a bull market
bearer bond A bond issue where the physical stock is issued;the current holder is presumed to have legal entitlement
beneficiary The party who is entitled to receive payment
under the terms of an insurance policybeta A statistical measure of the volatility relationship between
the price risk of an individual stock, or a portfolio of stocks,relative to the price risk of the whole market
bid price The price at which an FX dealer will buy the unit of aquotation
bid An order to buy a security, at a price based on its yield; inthe futures market, an offer to buy a contract
bill of exchange A short-term security issued at a discount toface value. The discount amount constitutes the cost of borrowing.The drawer issues the bill and the discounted amount is paid to thepayee. An acceptor may be used to increase the creditworthinessof the bill. The bill is purchased by a discounter. At maturity date,
the holder of the bill will be paid the face value of the billbill option clause An agreement that allows a bank toconvert a term loan into a commercial bill facility
bills market An active money market in the issue and tradingof commercial bills that enables participants to manage short-
term liquidity requirements
blue chip company A listed corporation with establishedstrong management and financial structures
board of directors A body elected by shareholders todetermine the objectives and policies of the corporation andgenerally represent the interests of the shareholders
bond A straight bond is a long-term, fixed-interest security thatpays a regular coupon stream (interest payments), with the face
value redeemed on the maturity date. Bonds may also be issuedas indexed bonds, where coupon payments and/or the value of
the bond may be indexed to price movements. Floating rate notesare bonds issued with a variable rate of interest
bonus issue A strategy that allows a company to capitalize itsreserves through the issue of additional shares to shareholders
book-entry USCP The electronic recording of US commercialpaper issues and payments
bottom-up approach Performance analysis that focuses onthe accounting ratios of a corporation
breakout A pattern of share price variation that occurs whenprices break through the neckline
broad money A measure of the money supply that constitutescurrency plus balances held with banks and non-bank financialinstitutions, less NBFI holdings of currency and bank deposits
broker An agent who acts on behalf of a client in order toexecute a buy or sell order. A broker will charge a fee for service
budget deficit Occurs where Government expendituresexceed revenues over a financial year
budget surplus Occurs where Government revenues exceedexpenditures over a financial year
building society A authorised deposit taking institutiona cooperative society providing housing loans and other finservices to the retail and small business sectors
bull market A market environment where there is anexpectation that prices will rise
bullet repayment The principal amount due on a securonly repaid on the maturity date
business cycle Changes in economic activity over time
through cycles of expansion and contraction. The highest peconomic activity in the business cycle is a peak and the lotrough
business risk The exposure of shareholders to the risk cash flows may vary unexpectedly due to changes in the firoperations or structure
call bull spread A combined-option strategy involving tsimultaneous purchase and sale of call options
call deposit Funds held in a savings account that can bewithdrawn on demand
call option An option giving the buyer the right, but not aobligation, to purchase the underlying asset specified in theoption contract at a predetermined price, on or by a specific
cap An over-the-counter option that specifies a maximuminterest rate level. The buyer of a cap pays a premium, but icompensated if interest rates rise above the exercise level
capital adequacy requirement Consolidated bank gromust maintain a ratio of at least 8 per cent of defined capitarisk-weighted assets and off-balance-sheet items. Defined must consist of at least 50 per cent Tier 1 (core) capital. Balsheet assets and off-balance-sheet items are weighted by trelative credit risk. Banks must also hold additional capital fmarket risk exposures
capital gain Occurs where the value of an asset increasabove the purchase and maintenance costs
capital guaranteed fund An investment fund in which
value of the initial investment is guaranteedcapital markets Longer-term finance markets, includingequity, corporate debt and government debt markets, plusassociated foreign exchange and derivatives markets
capital stable fund A fund in which the initial investmesecured, but not explicitly guaranteed
capital structure The proportion of company assets finaby various forms of debt and equity
capital-indexed bond The periodic fixed rate coupon rto the inflation-adjusted principal amount of the bond
carded rate A financial institutions advertised nominal dand loan interest rates
cash advance facility A flexible funding arrangement fcorporate clients
cash and conversion loan A loan that allows an invespurchase new bonds with cash, or convert an existing hold
that is due to mature
cash management trust A trust fund that invests theaccumulated savings of individuals in wholesale money marsecurities
cash market The physical market where the issue and t
GLOSSARY
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GLOSSARY
of commodities and financial instruments occurs; for example, acompany may raise funds in the market through a P-note issue
cash rate The interest rate paid in the interbank market forexchange settlement account funds
CDI A depositary receipt issued by the ASX representinguncertificated equity and debt instruments
central borrowing authority An authority established byeach State and Territory government to facilitate its debt
management program through the issue of debt securitiescertificate of deposit (CD) A short-term money marketsecurity issued by a bank at a discount to the face value
CHESS sponsor A market participant such as a stock-brokerwho has access to CHESS
CHESS Acronym for the electronic payment and settlementsystem operated by the ASX
clean float Where an exchange rate is determined by marketforces without central bank intervention
clearing-house Associated with a formal exchange, such asa stock exchange or a futures exchange; facilitates the financialsettlement and transfer of ownership between buyers and sellers.May provide transaction guarantees. If appropriate, will hold
deposit payments and make margin calls as required
close out To liquidate or offset an open position by taking anequal and opposite position. For example, in the futures market, acompany hedging a risk of interest rate rises would close out itsinitial sell position by buying an opposite futures contract
coincident indicators Economic variables that change at thesame time as the business cycle changes
co-insurance clause If an asset is under-insured the policywill only cover the proportional value of the asset insured
collar A combination of over-the-counter option contractsthrough the purchase of a cap and the sale of a floor. Thesimultaneous buy/sell strategy reduces the net premium cost ofinterest rate cover
collateralised floating charge Allows the lender to takepossession of the assets of a borrower if the borrower defaults onloan repayments
co-managers Assist the lead manager of a syndicated debtfacility
commercial bill market A very liquid secondary market forthe buying and selling of bills of exchange
commercial bill A bill of exchange issued by a drawer toraise funds for business purposes. The bill is sold at a discountand the holder at maturity receives the face value
commercial paper The lending and borrowing of very short-term funds by corporations through the issue of promissory notes
commitment fee A fee charged on any portion of a financingfacility that has not been drawn down
commitments The contractual obligations of a bank that areyet to be completed or delivered
Commonwealth Government The central government inAustralia
company-issued equity warrant An option to buyadditional shares that is attached to an initial debt issue
company-issued option Bestows the right, but not theobligation, on the holder to buy additional company shares
compound interest An arrangement where periodic interestpayments accumulate on a financial instrument
comprehensive insurance A policy that covers damage to amotor vehicle plus any third-party damage
compulsory superannuation Minimum retirement savingsfor employees, specified by legislation
compulsory third party insurance A policy that coverslegal liability for bodily injury resulting from a motor vehicleaccident
confirmations, settlements and reconciliation Theprocess of confirming an FX dealer transaction, arrangingfinancial settlement, and reconciling the FX position
conglomerate takeover Takeover in which the business ofthe target company is unrelated to the business of the takeovercompany
Consumer Price Index (CPI) A measure of changes in theprice of a basket of goods and services
contingency plan A set of predetermined strategies to beimplemented if a designated event occurs
continuation pattern A pattern of sideways trading of sharethat does not normally signal a change in a trend
continuous disclosure A requirement that a listed entitymust immediately advise the stock exchange of any materialchanges
contract date The date on which two parties enter into aforward rate agreement
contract month The month in which delivery or cashsettlement is to be made under the terms and conditions of afutures contract
contract note Advice sent from broker to its client giving fulldetails of a share transaction
contract period The term of an interest-rate cover; forexample with a forward rate agreement, three-month moneybeginning in two months (2Mv5M)
contributing shares Partly paid shares; only a portion of theissue value of the shares has actually been paid. The outstandingamount is payable when the company makes future calls
convertible bond A bond that has the option, at a future date,to convert into equity of the issuer
convertible note Quasi-equity; a debenture that pays periodicinterest until the holder converts the note into ordinary shares of
the issuer company. Where the note has not been converted bymaturity, the holder is entitled to its redemption (face) value
convertible preference shares Preference shares that maybe converted to ordinary shares in the company at a future date
and at a specified price
convexity The existence of curvature in the price/yield curveof a security
corporate bond market The market for the direct issue oflonger-term debt securities by companies
corporate governance The internal relationships betweenshareholders, the board of directors and the managers of acompany
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corporate mission The objectives and purpose of acorporation as determined by the board of directors
corporation A legal entity formed under corporations law; themain source of equity is ordinary shares
correlation coefficient A statistical measure of the degree towhich the movement in a variable is related to a dependentvariable
counter-trade The exchange of product for product, rather
than currency-based buy or sell contractscountry risk The risk that changes in the laws of a foreigncountry will affect a financial transaction
coupon The periodic interest payments associated a bondissue. For example, a Commonwealth Treasury bond pays a half-yearly coupon at a fixed interest rate based on the face value of
the bond. The word coupon derives from bearer bonds where thebond-holder would cut the attached physical coupon from thebond and present it for payment
co-variance or correlation The historic directionalrelationship between share price movements; may be eitherpositive or negative
covenant A term in a loan agreement that protects the lender by
restricting some activity of the borrower, or requiring the borrowerto do something. For example, a covenant may require theborrower to maintain minimum levels of liquidity, capital or stock
cover The purchase of a physical market security to offset aderivatives market short position
covered option An option where the writer holds theunderlying asset or provides a financial guarantee
credit (default) risk The risk that a borrower may not meetfuture commitments to pay interest or repay principal outstandingwhen due
credit card A credit facility that allows the cardholder to obtainfunds up to an agreed limit
credit channel The effect of monetary policy changes on theavailability of credit in the financial system
credit enhancement A financial arrangement, such as aletter of credit, that supports an underlying debt security issue
credit facility An arrangement with a lender that allows aborrower access to short-term funds
credit foncier loan A loan that is amortised over the term ofthe loan; that is, the loan instalments comprise periodic interestand principal repayments
credit rating A measure of the creditworthiness of a debtissue, or of an issuer of financial securities, provided by a creditrating agency
credit rating agency An organisation that specialises inassessing the credit quality associated with financial obligations;provides a standard measure of the creditworthiness of a debtissuer
credit risk transformation A savers credit risk exposure islimited to that of the intermediary, whereas the intermediary isexposed to the credit risk of the ultimate borrower
credit risk weight The multiplication factor used to calculatethe proportional 8 per cent capital adequacy requirement basedon the counterparty to the asset
credit union A cooperative society that pools members in order to extend consumer loans to members. Membersgenerally have a common bond of association such as profe
credit watch Advice to the market that a credit rating is review; may be positive or negative
cross-border transaction International financialtransactions
cross-commodity hedging Strategy of using a futures
contract based on one commodity or financial instrument tohedge a risk associated with a different commodity or finaninstrument
cross-currency swap The transfer of a principal amounassociated ongoing interest payments from one currency toanother based on a fixed exchange rate. The principal is re-exchanged at maturity
cross-rate the application of two sets of exchange rates determine a third exchange rate; for example, USD/EUR andJPY to determine EUR/JPY
crowding out Situation where government borrows a lathan usual proportion of the total funds available for investmthus reducing the amount of loan funds available to the bus
sectorcrystallise Transformation of a f loating charge into a f ixecharge over the assets of a company
cum-dividend When a share price incorporates anentitlement to receive a declared dividend
cumulative preference share A preference share thastipulates that when the fixed dividend is not paid in one pewill be carried forward until paid
currency swap The transfer of a principal amount plusassociated ongoing interest payments from one currency toanother based on a fixed exchange rate. The principal is re-exchanged at maturity
current account The net record of a countrys internatio
earnings less its international paymentscurrent account deficit A situation in which internationexport and investment receipts are less than imports andoverseas debt payments
current deposits Liquid funds held in a cheque accountthe purpose of issuing cheques to conduct financial transacfor goods and services
current ratio Ratio of current assets to current liabilities
dealer Makes a market in a security by quoting both buysell prices
dealer panel Panel whose members promote and distribdebt issues to clients and maintain a secondary market in thpaper
debenture A secured corporate bond. The debenture is acharge over the assets of an issuer; generally incorporates charge and a floating charge over company assets
debenture trust deed Deed that specifies and protectsunderlying security attached to the debenture issue
debt Various forms of funding where repayment is requireexample, an intermediated loan, the issue of discount secur
the issue of fixed-interest or floating rate securities
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debt-to-equity ratio The proportion of a firms debt fundsrelative to its equity funds
default (credit) risk The risk that a borrower will not meetcontractual obligations, such as interest payments and principalrepayment on a loan when they are due
defensive strategy Strategy in which a defined percentageof a risk exposure is automatically hedged
deferred annuity An annuity that provides an income stream
that will begin at a future datedeferred repayment loan A loan for which instalmentscommence after a specified period, usually at a time when aproject is expected to generate cash inflows
deficit unit An economic unit such as a company that spendsmore than it saves in a given period.
defined benefit scheme A superannuation scheme in whichthe amount paid on retirement is based on a defined formulausually related to years of service and final salary
definitive notes Securities issued in their physical form; thebearer securities
delta The change in the value of an option premium relative tothe change in the value of the underlying futures contract;
expressed as a coefficient
demutualisation Changing a company structure to that of apublicly listed corporation
depositary receipt A security representing a quantity ofshares listed on a stock exchange
depositary share A share that represents one or moreordinary shares of a foreign issuer listed on a foreign stockexchange
depreciation The writing-down on the balance sheet of thevalue of an asset over its effective life; the amount by which thevalue of an asset is written down in an accounting period
depth of the market The overall market capitalisation ofcorporations listed on a stock exchange
deregulation The so-called removal of major regulatoryconstraints on specific sectors of the financial system, inparticular the banking sector
derivative contract A synthetic security that derives its pricefrom a physical market commodity or security. Generic derivativecontracts are futures, forwards, options and swaps
derivatives market Exchange traded and over-the-countermarkets for futures, forwards, options and swaps
descending triangle A pattern of share price variation thatforms a downward trend characterised by peaks decreasing inheight and troughs that remain horizontal
detachable warrant A warrant that can be sold separately
from the host bond debt issuedevaluation Occurs when the official value of a currency isreduced in terms of other currencies
direct credit substitute An undertaking by a bank to supportthe financial obligations of a client
direct finance lease Lease in which the lessor purchases anasset and leases it directly to a lessee
direct financing Borrowers and lenders deal directly with
each other; for example, a company issuing debentures into thecapital markets
direct interest-rate risk The possibility that a change ininterest rates will affect the value of assets, liabilities and futurecash flows
direct investment An investor buys and sells shares directlythrough a stockbroker
direct quote An FX quotation that uses the USD as the base
currency or unit of the quotationdiscount broker A broker that executes buy and sell ordersfor clients, but does not provide investment advice to the client
discount rate The effective (simple interest) rate of returnearned on a discount security by an investor
discount security A short-term instrument, such as acommercial bill, P-note, T-note or CD. The security is issued at adiscount to its face value, typically for up to 180 days, and mayinclude a roll-over option. The holder of the discount security willbe paid the face value at maturity date
discounter The party that purchases a discount security; theprovider of funds
dishoarding Occurs when normal cash holdings are reduced
and invested in financial instrumentsdiversification A strategy to lower risk exposures by holding awide range of financial securities and assets in a portfolio
dividend The amount of a corporations after-tax earningsdistributed to shareholders
dividend reinvestment plan An arrangement that allowsshareholders to reinvest their dividends back into a company bypurchasing additional shares
divisibility problem Occurs when a transaction is difficultto carry out because the medium of exchange does not representequal value
domestic bond A bond issued into a local capital market, inthe local currency, by a local company
domestic economy The local or home economy of a nationstate
double coincidence of wants Arises when two parties cometogether to conduct a transaction that meets their mutual needs
downtrend line A line achieved by connecting the higherpoints of a falling price series
drawer The party that issues a bill of exchange
dummy variable A binary variable (either zero or one) used todistinguish between two sets of groups
duration The weighted average time over which cash flowsoccur, where the weights are the relative present values of thecash flows
duration of a portfolio The weighted duration of each assetor liability in the portfolio
earnings per share The net return on a companys sharesexpressed in cents per share
EBIT The earnings of a firm before allowing for interest expenseand tax payments
economic indicators Data that provide some insight intopossible future economic performance
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economic recession Defined as two consecutive quarters ofnegative economic growth
economies of scale Financial and operational benefitsgained as a function of organisation size and volume of business
effective interest rate The actual rate of return earned afteradjusting the nominal rate for the effect of compounding. Theeffective interest rate will be higher than the nominal rate wherecompounding occurs more than once annually
efficient market hypothesis The hypothesis that shareprices reflect available information; there are weak, semi-strongand strong levels of efficiency
efficient price discovery Occurs when new informationrapidly reaches the market and is reflected in share prices
electronic funds transfer at point of sale (EFTPOS) Anelectronic system that facilitates value transactions for goods andservices
electronic sub-register A record of share ownership held ona computer-based system
eligible collateral A claim that is secured by a counterpartyapproved by APRA
eligible termination payments Superannuation funds dueon termination of employment and related redundancy payments
Elliott wave theory The existence of distinctive wavepatterns that characterise share-market cycles
embedded option A specific performance guaranteecontracted into a project
employer-sponsored fund A superannuation fundestablished by an employer for the benefit of employees
endorser The party that signs the reverse of a bill when sellinga bill of exchange
endowment policy A life insurance policy for a specifiedterm that incorporates an investment component
equilibrium exchange rate The FX rate at the point where
the demand and supply curves intersectequity lease A lease in which the lessor provides the majorityof the funds required to purchase an asset to be leased
equity market A market that facilitates the issue of financialsecurities that represent an ownership interest in an asset, suchas ordinary shares in a corporation listed on a stock exchange
equity trust Subject to the trust deed, a trust that invests inclasses of shares listed on stock exchanges
equity Funds provided by, or an interest of, owners of an entity;for example, the issue of ordinary shares in a listed company.Ordinary shares have no maturity date. Shareholders are entitled
to share in the profits of the organisation. Profit distribution mayoccur in the form of dividends payments
equity-funded takeover When a takeover company issuesits own shares in exchange for shares in the target company
escrow A situation in which assets are held by a third partyuntil conditions of a contract are fulfilled
establishment fee A fee charged by the bank to meet thecosts associated with approving a loan facility
euro The official currency of nations who are members of theEuropean Monetary Union
euro floating rate note A bearer bond issued into theeuromarkets that has a variable coupon rate based on anindicator interest rate
euro medium-term note An unsecured, non-homogenbearer security that pays a specified coupon; usually issued
tranches with different currencies, interest rate structures maturities
eurobond A fixed-interest security issued by a foreign
borrower in an offshore market and in a currency other thancurrency of the market in which the bond is being issued
eurocommercial paper A discount security issued intoeuromarkets that is not underwritten
euromarket A market for transactions carried out in a focountry, but denominated in a currency other than the curre
that country; for example, USD securities issued by a NewZealand corporation in London. Includes the eurocurrency,euronote and eurobond markets
euronote issuance facility A discount security issuedthe euromarkets that is underwritten
European-type option An option that can be exercisedon its maturity date
exception report A report that is automatically generatcomputer when a policy or procedure is ignored or exceedesuch as an FX limit is breached
exchange rate The price of one currency in terms of anfor example, AUD/USD0.6750 means $1 Australian will purch$0.6750 US
exchange settlement account (ESA) An accountmaintained by banks and other financial entities with the ReBank for the purpose of clearing transactions between part
the payments system
exchange-traded contract A financial contract issuedtraded on a formal exchange such as a futures exchange;transactions are usually conducted with a broker, and invol
clearing-house
excluded fund A superannuation fund with less than fivmembers
ex-dividend A share is ex-dividend after a declared dividhas been paid to shareholders
exercise (strike) price The price specified in an optioncontract at which the option buyer can buy (call option) or s(put option)
expectations theory A theory that explains the shape oyield curve through current and future short-term interest ra
expected return of a portfolio The weighted averagethe expected returns of each investment held in a port folio
exposure management system Structured procedurenable a firm to effectively measure and manage risk
factoring A factoring company buys a firms accountsreceivable at a discount to book value
factoring company A finance company that purchasesfirms accounts receivables
fiat money Currency issued by the government, held by tnon-bank public, with legal tender status
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final basis risk Occurs at the completion of a hedgingstrategy, where pricing differentials are evident between markets
finance companies and general financiers Companiesthat raise funds in the debt markets and provide finance to smallbusiness and personal borrowers
finance lease A longer-term lease; ownership passes to thelessee on payment of the residual amount
financial asset An asset that entitles the owner to future cash
flows generated by the asset. The cash flows may take the formof interest payments, principal repayments and capital gains.Examples include shares, discount securities and bonds
financial conglomerate A consolidated group of differenttypes of financial institutions
financial engineering The creation of innovative financetechniques or instruments
financial instrument An instrument issued by a party raisingfunds, which acknowledges a financial commitment and entitles
the holder to specified future cash flows
financial risk That part of total risk that affects future cashflows and/or the value of assets and liabilities on the balancesheet. Includes interest rate, foreign exchange, liquidity, price,
investment, credit and capital risksfinancial security A financial asset or instrument issued in aprimary market that can then be bought and sold on an organisedsecondary market
financial system A system comprising a range of financialinstitutions, instruments and markets that facilitate transactionsfor goods and services and financial transactions
financial system liquidity The amount of funds within afinancial system that are available to carry out current
transactions
financing decision The capital structure that provides thefunds for the firms business activities
fiscal policy The management of the annual revenues andexpenditures of government, resulting in a budget surplus ordeficit
fixed charge A charge over the assets of a borrowingcompany, offered as security to support a loan facility. If theborrower defaults on the loan the lender has the right to takepossession of specific asset(s) of the borrower. These assetscannot be sold until the loan has been repaid
fixed exchange rate An exchange rate that is determined bya nations government. A fixed exchange rate may be tied to aspecific currency, such as the USD, or to a basket of currencies
fixed interest rate A specified rate of interest that is set for aperiod specified in a financial contract
fixed interest security A medium- to-longer-term securitythat pays a specified coupon or interest payment at regular timeperiods. Straight bonds are fixed interest securities
float (1) The practice of allowing a currency exchange rate tobe market-determined (2) A primary market issue of ordinaryshares
floating charge Loan security giving the lender the right totake possession of any of the borrowers assets, bar thosespecifically pledged to any other lender in a fixed charge, if the
borrower should default on its loan obligations. A floating chargeallows certain assets to continue to be sold in the course ofnormal business operations
floating exchange rate An exchange rate that is determinedby supply and demand factors in the FX markets
floating rate note (FRN) A medium- to-longer-term securityissued with a variable interest rate. Interest payable on the FRNwill change in line with a nominated reference interest rate atspecified review dates. In the eurobond market, LIBOR may be
the reference rate
floor plan finance Finance provided by a goods supplier forstock on a showroom f loor, such as vehicles
floor An over-the-counter option that specifies a minimuminterest rate level. The buyer of a floor pays a premium, but iscompensated if interest rates fall below the exercise level
flotation of a business The public listing and quotation of acorporation on a stock exchange
foreign bond A bond issued into an overseas debt market anddenominated in the currency of that country
foreign currency liabilities The issue of debt instrumentsinto the international capital markets that are denominated in a
foreign currencyforeign exchange market A global market wherecurrencies are traded. Within Australia, FX dealers require anauthority from the Reserve Bank
foreign exchange risk The risk that the price of onecurrency relative to another currency will change thereby havingan adverse impact on balance sheet values, cash flows orcompetitive position
foreign exchange channel The effect of monetary policychanges on the exchange rate, exports, imports and investment
forward contract An over-the-counter contract negotiatedwith a bank that locks in a price today that will be applied at aspecified future date. Includes forward rate agreements and a
forward exchange contractsforward discount Occurs where the forward exchange rateis less than the spot rate
forward exchange rate The FX bid/offer rate applicable at aspecified date beyond the spot value date
forward exchange contract An agreement to buy or sell aforeign currency at a future date at an exchange rate specified
today. Pricing is based on an adjustment of the spot rate by theinterest rate differentials the relevant countries
forward points The forward exchange rate variation to a spotrate based on interest rate differentials between the twocountries of the quote
forward premium Occurs where the forward exchange rate
is higher than the spot rateforward rate agreement (FRA) an agreement between twoparties that fixes a rate of interest to be applied, at a specifiedfuture date, against a notional principal amount. The agreed rateis established today and measured against a reference rate, suchas the bank bill swap rate (BBSW) or the London interbankoffered rate (LIBOR), at the settlement date. One party willcompensate the other for any adverse movement in the interestrate between the agreed rate and the settlement rate
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FRA agreed rate The interest rate stipulated in the FRA at thecommencement of the contract
FRA settlement rate The reference rate against which theFRA agree rate is benchmarked and compensation calculated
fractional reserve banking Occurs where banks hold someproportion of their liabilities, in the form of liquid assets, asreserves to meet day-to-day demand for operational andprudential liquidity
franked dividend The payment of a dividend thatincorporates an imputed tax credit that can be used to off-set theshareholders personal tax liability
full-service lease A lease in which the lessor is responsiblefor the insurance and maintenance of the leased asset
full-service advisory broker A broker who provides arange of services to clients, including investment advice and theexecution of buy and sell orders
fully drawn advance A term loan issued by a financialinstitution
fundamental analysis A method of analysis that considersmacro and micro fundamentals that impact upon future shareprice movements
futures contract An agreement to trade a specific commodityor financial asset of a specified quality and quantity, at a pre-determined price, and at a specified date in the future; anexchange-traded derivative product that may be used formanaging an underlying risk exposure
FX appreciation Where the value of one currency increasesrelative to another currency
FX broker A broker who obtains the best prices in the FXmarket and matches FX dealers buy and sell orders for a fee(commission)
FX dealer A financial institution that quotes buy and sellprices, and acts as a principal in the FX markets
FX depreciation Where the value of one currency falls
relative to another currencyFX operating exposure The risk that day-to-day operatingrevenues and expenses will be affected by FX movements
FX smoothing Central bank buy/sell actions in the FX marketdesigned to stabilise a volatile market
G-10 Belgium, Canada, France, Germany, Italy, Japan, theNetherlands, Sweden, the United Kingdom, and the United Statesof America
gearing ratio The percentage of a firms total funding providedby debt
general meeting A meeting of shareholders called under theprovisions of the rules of the company
global industry classification standard Ten standardinternational industry sector stock market indices
global notes Securities issued and controlled through anelectronic clearing-house
globalisation The integration of financial institutions,instruments and markets into an international financial system
Government debt Borrowings by government to manage itsday-to-day liquidity position (short-term) and to fund budgetexpenditures (medium- to long-term)
grey market Contingent trading in a security before the closing date of the primary issue
gross domestic product The aggregate value of goodsservices produced within a domestic economy
grossed-up amount The total of a franked dividend pluassociated imputation credit
guarantee An assumption of the liabilities of a third partthe event of default, agreed to by a guarantor
hard currency A currency such as the USD that is generaccepted in international trade transactions
head and shoulders pattern Three successive ralliesreactions; the second rally being stronger than the first or thrally
hedge A strategy that allows an entity (the hedger) to maor protect against an identified risk exposure. For example, company may hedge an exposure to a rise in interest rates selling a futures contract today and closing out the positionlater date
high-value payments Larger value transactions that mcleared by real-time gross settlement
holding period yield The actual return received for theperiod an investment is held
horizontal takeover A takeover in which the companieinvolved in a merger and acquisition are in the same busine
host bond The original bond to which a warrant is attach
hostile takeover A situation in which the target comparejects the advances of the takeover company
humped yield curve The shape of a yield that curve chover time from normal to inverse
hybrid security A financial instrument that incorporatescharacteristics of both debt and equity; for example a prefeshare or a convertible note
immediate annuity The purchase of a specified, periodincome stream
imputation credit The amount of company tax paid on afranked dividend transferred to the shareholder
income effect on interest rates If interest rates rise,economic activity will begin to slow, thus allowing rates to
to ease
income protection insurance An insurance policy thapay a limited income stream if the insured person is unable work due to illness or accident
index fund An investment fund that acquires a share pothat replicates a specific stock market index
index market capitalisation Index share prices multip
by the number of shares issued multiplied by the liquidity faindicator interest rate (reference rate) The adjusteaverage of an interest rate applicable to a specific market dsecurity; for example, BBSW or LIBOR
indirect finance Also called intermediation. Surplus anddeficit units interact via a financial intermediary such as a b
indirect interest-rate risk The risk that a change in intrates will affect the future actions of market participants
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GLOSSARY
indirect investment Investing through a funds manager; forexample, buying units in an equity trust
indirect quote An FX quotation in which the USD is the termscurrency and the other currency is the unit currency
inflation A rise in prices resulting in a depletion in the value ofmoney over time. Generally measured by comparing price changesof a basket of goods in a consumer price index
inflation effect on interest rates As the economy slows
the upward pressure on prices will ease, thus allowing interestrates to fall further
inflation theory An interest rate determination hypothesisthat an inflationary premium, reflecting expected inflation, isincluded in the nominal interest rate in order to maintain the realrate of interest
information memorandum Limited information provided toinstitutional investors by a company issuing securities in a privateplacement issue
information transparency Level of information provided tothe market
initial basis risk Basis risk that exists at the commencementof a hedging strategy
initial margin A deposit lodged with an exchange to coveradverse price movements in a contract
initial public offering (IPO) An offer to investors ofordinary shares in a newly listing company on a stock exchange
inscribed stock Stock for which there is no physical bondissued; ownership is registered electronically with a registry
instalment receipt A receipt issued upon payment of the firstinstalment on a share issue, in lieu of the ordinary share
institutional investors These include funds managers,insurance companies and superannuation funds
interbank market The lending and borrowing of very-short-term funds by banks operating within a financial system
intercompany market Direct, wholesale money marketborrowing and lending between large, creditworthy corporationswith surplus funds and those with short-term funding needs
interest capitalised Occurs when payments due, butdeferred, are added to the total amount owing
interest cover ratio The number of times a firms financialcommitments are covered by earnings
interest rate The return on investment due to the lender fromthe borrower. It can be expressed in a number of ways: real,nominal and effective. Calculation may be simple or compounding
interest rate market Listing, quotation and trading incorporate and government debt securities
interest rate parity Principle that exchange rates will adjustto reflect interest rate differentials between countries
interest rate risk Exists when unexpected changes in interestrates affect the cash flows of a business. Movements in interestrates may also affect the value of existing financial instruments,or the repricing of associated cash flows and maturinginstruments
interest rate sensitivity Occurs when an asset or liability isto be repriced during a planning period
interest rate structure A debt facility with either a fixedinterest rate or a variable interest rate
interest rate swap The exchange between two parties ofinterest payments associated with a notional principal amount
interest withholding tax A tax applied to the amount ofinterest paid by a local borrower to a non-resident lender
interest-indexed bond A bond with periodic coupons thatincrease relative to increases in inflation
intermediated finance A financing arrangement wherebysurplus and deficit units interact via a financial intermediary suchas a bank. Two financial contracts are created: one between thelender and the financial intermediary, and the second between
the financial intermediary and the borrower
internal rate of return (IRR) The required rate of return thatresults in a NPV of zero
in-the-money A situation in which the strike price of a calloption is lower than the price of the underlying commodity orfinancial asset; alternatively, where the strike price of a put optionis above the price of the underlying commodity or financial asset.In these instances an option has a positive intrinsic value; thebuyer is able to exercise the contract at a profit
intrinsic value The market price of the underlying assetrelative to the option exercise price
inverse or negative yield curve The yield curve evidentwhen shorter-term interest rates are higher than longer-terminterest rates
investment banks Specialist providers of financial andadvisory services to corporate and government clients. Oftenspecialise in off-balance-sheet services, including international
trade finance, project finance, corporate finance advice, balancesheet restructuring advice, mergers and acquisition advice, andfunding advice (debt and equity, domestic and offshore)
investment decision The capital budgeting process thatdetermines the strategic activities of a firm
investment grade A debt issue with a credit rating of BBB, orits equivalent, and above
invoice A document that describes the goods supplied andpayment arrangements
junk bond market The issue of securities with a credit ratingless than the investment grade of BBB
lagging indicator An economic variable that changes afterthe business cycle has changed
lagging A strategy of changing the timing of existingtransactions by delaying the cash flows
lead manager The dealer financial institution that acts as thearranger of a syndicated debt facility; structures the issue, forms
the syndicate, prepares documentation
leading indicator An economic variable that changes beforethere is a change in the business cycle
leading A strategy of changing the timing of existingtransactions by bringing cash flows forward
lease A contract where the lessor allows the lessee to usecertain property for a specified period in return for lease payments.The lessor retains ownership of the asset during the contract. The
two basic types are financial leases and operating leases
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lease manager The arranger of a leveraged lease that bringstogether the lessor, debt parties and lessee
lender of last resort The provider (usually a central bank) ofa loan facility to banks under certain circumstances. Penalty ratesare generally charged. It is, as the term suggests, a last-resortoption only. In Australia, the Reserve Bank has withdrawn thisfacility to banks, but offers a rediscount facility for banks holdingsof government securities
lessee The user of an asset subject to a lease agreement;makes lease rental payments to lessor
lessor The owner of an asset that is subject to a leaseagreement; receives lease rental payments
letter of comfort Advice given by a parent company that itssubsidiary can meet its obligations
letter of credit A guarantee issued by a borrowers bank onbehalf of a customer, giving a third party the right to approach thebank that issued the letter of credit for funds should the customerdefault on a f inancial commitment. Often used in conjunction witha bill of exchange in import/export transactions
leveraged finance lease A partnership in which a lessorborrows a substantial portion of the funds required to buy an
asset for leasingliability management The current practice of financialintermediaries whereby they actively manage their sources offunds (liabilities) in order to meet future loan demand (assets)
LIBOR (see London Interbank Offered Rate)
limit order An instruction to a broker to buy or sell a certainquantity of a commodity or financial asset at a specific price, ator within a nominated time period
limited liability company A company structure where theclaims of creditors against shareholders are limited to the valueof fully paid shares
limited recourse lending Lenders have restricted claims on
project sponsor assets if project cash flows are insufficient tocover loan repayments
line fee A fee charged by a lender on the total amount of fundsadvanced to a borrower
liquid ratio Ratio of current assets, less inventory, to currentliabilities, less bank overdraft
liquidation The legal process, carried out by a liquidator, ofwinding-up the affairs of a company in financial distress, through
the sale of its assets and payment of liabilities
liquidity effect on interest rates The effect on the moneysupply and system liquidity of a central banks market operations
liquidity preference theory The hypothesis that investorsperceive that risk and the period of investment are positively
correlated. Therefore, they require a greater reward, via aliquidity premium, from longer-term investments
liquidity transformation Term describing the ability of asaver to convert a financial asset into cash
liquidity Having sufficient cash or liquid assets to meet day-to-day operating needs. Banks must also meet liquidity prudentialstandards. A liquid asset is one that is quickly and easilyconverted into cash without loss of value
listed trust A unit trust in which the units are listed and on a stock exchange
listing rules Specific rules with which an entity seekingon a stock exchange must comply
loan covenant A condition or restriction specified in a locontract, designed to protect the lender; for example, minimliquidity levels and financial reporting requirements
loanable funds The amount of funds available within a
financial system for lendingloanable funds approach Method of determining interates by estimating the supply of and demand for loanable fDemand for loanable funds is affected by government andbusiness, while the supply is affected by savings, changes imoney supply, and dishoarding
London interbank offered rate (LIBOR) A benchmareference interest rate. It is an average of the interest ratesmajor London banks charge one another. Published daily byReuters
long call party The buyer or holder of a call option
long position Holding a financial security, currency orcommodity in expectation of a future sale
long straddle The simultaneous purchase of a long call long put, with a common exercise price
long strangle The purchase of a long call and a long puoption, with out-of-the-money exercise prices
maintenance margin The top-up of an initial margin paan exchanges clearing house to cover adverse contract primovements
managed fund An investment vehicle through which thepooled savings of individuals are invested and managed byprofessional funds managers
managed growth fund A investment fund that seeks greturn through capital growth and less through income stre
margin call Made by an exchanges clearing-house; requfutures contract-holder to top up their margin account in ordcover the risk of closing out an open position
margin (1) Funds lodged with an exchanges clearing houa guarantee of performance in relation to a contract. If thecontract price moves adversely the clearing-house require maintenance margin to be paid; (2) That part of an interest charged on a loan facility over a benchmark or reference rawhich reflects the credit risk of a particular borrower; forexample, LIBOR plus 0.50 per cent
marginal rate of tax The percentage of personal tax pathe highest level of a persons income
marked-to-market The repricing of a contract on a daibasis to reflect current market valuations. Losses are debitegains credited on contracts each day. For example, if the prspecified in the contract is above the days futures price, thseller is credited with a gain and the buyer is debited the lo
market capitalisation The number of shares issued bylisted corporations on a stock exchange multiplied by the cushare prices
market convention A common practice that occurs witparticular financial market
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market liquidity The ratio of the value of share marketturnover to market capitalisation
market maker A dealer that quotes buy (bid) and sell (ask)prices on the secondary market
market operations Intervention in the short-term money marketsby the Reserve Bank in order to affect the level of short-term interestrates, specifically the overnight cash rate. This is achieved byinfluencing the level of liquidity (money supply) in the market.
market order An instruction to a broker to buy or sell at thecurrent market price
market rate-related contract A contract that uses aderivative product to manage an exposure to foreign exchangerisk, interest rate risk, equity price risk or commodity risk
market segmentation theory Interest rate on securitieswith different maturities are determined by market forces within
that market segment. Assumed that investors prefer a particularmaturity market segment and will invest in a different marketsegment only if offered a suitable premium
mark-up An increase in the price of exports or imports tocover worst-case scenario changes in an exchange rate
matched swap A swap intermediary, such as a bank, enters
into opposite swap transactions to offset its net swap exposuresmatching principle Contends that short-term assets shouldbe funded by short-term liabilities, and longer-term assets shouldbe funded by longer-term liabilities and shareholders funds
maturity structure The relative proportions of assets andliabilities on a balance sheet maturing at different time intervals
maturity transformation The process whereby financialintermediaries are able to provide savers and borrowers withfinancial instruments of differing maturities
maximising shareholder value Management strategiesthat seek to increase the share price of a corporation
mean The average of a set of observations; an indicator ofcentral tendency
medium-term note An unsecured debt instrument that paysa specified coupon; issued in tranches
merchant bank Specialist providers of financial and advisoryservices to corporate and government clients. Often specialise inoff-balance-sheet services, including international trade finance,project finance, corporate finance advice, balance sheetrestructuring advice, mergers and acquisition advice, and fundingadvice (debt and equity, domestic and offshore)
mergers and acquisitions Corporate manoeuvres in whicha takeover company seeks to gain control over a target company
modern portfolio theory Concepts that enable aninvestment portfolio to be constructed with optimal risk andreturn relationships
monetary policy Actions of a central bank that influence thelevel of interest rates in order to achieve certain economicperformance outcomes such as managing inflation, employmentand economic growth
monetary policy channel The effects of a change inmonetary policy on interest rates and economic activity
money A commodity that is universally accepted as a mediumof exchange
money market Wholesale market in which securities with amaturity of less than one year are issued and traded, with aminimum transaction size of at least $100 000. This marketenables large corporations and financial institutions to manage
their short-term liquidity demands
money market corporation Official classification ofinvestment banks and merchant banks operating in the Australianfinancial system
money market hedge A strategy that involves borrowing FXtoday, converting it to local currency at the spot rate, theninvesting it in money markets
money supply Various measures of the amount of fundsavailable within the financial system
money-laundering transaction A transaction that enablesthe movement of illegally gained funds into the financial system
moral hazard The risk associated with unnecessarily riskyinvestments undertaken because the downside risk has beenremoved by some form of insurance or implied guarantee
mortgage (service) manager Within a securitisationstructure, is responsible the special purpose vehicle trustee forcollecting the principal and interest payments from the originalsecurities, and paying interest and principal to investors in theasset-backed securities
mortgage insurance Insurance that protects the lender inthe event that a borrower defaults on a loan
mortgage originator The party responsible for originating amortgage contract with a borrower. Typically, a mortgageoriginator will fund its lending program through the process ofsecuritisation
mortgage trust A unit trust that invests in mortgagesregistered as loan securities over land
mortgage A form of security that conveys an interest in landand property thereon to a lender
mortgagee The lender who registers a mortgage as security
for a loanmortgagor The borrower who assigns the mortgage assecurity over land and property thereon
moving averages model A graph of a series of averageprices constructed over time
mutual fund A managed fund in the USA, established under acorporate structure
mutually exclusive projects From a choice of two or moreprojects, only one project will be chosen
naked call option A call option for which the writer does nothold the underlying physical market asset or provide a financialguarantee
naked warrant A warrant that is issued independently of abond
National Guarantee Fund A fund established to compensateinvestors in the event of misconduct by a stockbroker
natural hedge The use of matching transactions to offset apotential risk exposure; for example, the matching of foreigncurrency inflows and outflows
negative correlation The relationship between data, such asexchange rates or share prices, that move in opposite directions
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negative covenant A restriction imposed on the activities andfinancial structure of a borrower; for example, restrictions onfuture borrowings
negotiable certificate of deposit (CD) A discount securityissued by banks into the money markets to raise short-term funds
to meet forecast liquidity needs
negotiable security A financial instrument that can easily besold into a secondary market
net interest margin The difference between the cost offunds and the return on assets
net lease The lessee is responsible for the insurance andmaintenance of the leased asset
net present value (NPV) The difference between the cost ofan asset and the present value of its returns
no liability company A company structure in whichshareholders may decide not to meet future calls on an unpaidportion of shares held, but forfeit the shares instead
nominal rate of interest The market rate incorporating thereal rate of return plus an anticipated inflation component.Typically, interest rates quoted in the market place are nominalrates
non-bank financial institution (NBFI) A financialintermediary that has not been granted a banking authority, suchas a building society, credit union or finance company
non-conventional cash flow Occurs when the ongoingcash flows from an investment are not always positive
non-detachable warrant A warrant that can only be soldwith the associated bond issue
non-executive director A member of a board of directorswho is not part of the management of an institution or itssubsidiaries
non-notification basis Accounts receivables are paid by afirms debtors directly to an address controlled by the factor
non-recourse lending The lender is totally reliant on aprojects future cash flows for loan repayments
non-renounceable right A right attached to a security thatcan only be exercised by the shareholder; it cannot be sold to a
third party
normal or positive yield curve An upward-sloping yieldcurve; longer-term interest rates are higher than shorter-termrates
notification basis The firm must notify debtors that accountsreceivables should be paid directly to the factor
novation An agreement that allows a lender to transfer to athird party all rights and obligations due under a loan agreement
NOW account A negotiable order of withdrawal issued on aninterest-bearing cheque account
objectives and policies What a company intends to achieveand how that will be achieved
obligor A person who is bound to another by contract or otherlegal procedure
off-balance-sheet business Transactions conducted by abank that are currently only a contingent liability and thereforeare not recorded on the balance sheet
offer price The price at which an FX dealer will sell a unquotation
off-exchange transaction Buying and selling of securover-the-counter
official interest rate The central banks target interest for the overnight cash rate
official list The list of companies whose securities are qon a stock exchange
official reserve assets Comprise central bank holdingsforeign currencies, gold and international drawing rights
open outcry A system of share trading whereby dealersconduct face-to-face transactions using verbal and hand siconventions
open position In the futures market, where a futures coposition has not been closed out
operating account A cheque account through which a conducts its day-to-day financial transactions
operating lease A short-term lease where the asset isreturned to the lessor on completion; asset is maintained bylessor
operational liquidity Access to cash to meet day-to-dexpenses and business opportunities
option The right, but not the obligation, to buy or sell acommodity or financial asset at a predetermined exercise pat, or within, a specified time. The buyer of the option pays toption writer or seller a premium. There are two types of opAmerican and European
ordinary annuity An annuity in which regular equal casflows occur at the end of each period
ordinary share A form of equity bestowing ownership rin a company. The security entitles the holder to voting righgeneral meetings and to any dividend declared by the boarddirectors. It ranks last at liquidation
out-clause Specific conditions that preclude an underwagreement from being fully enforced
out-of-the-money A situation where the strike price of aoption is higher than the price of the underlying commodity ofinancial asset; alternatively, where the strike price of a put ois below the price of the underlying commodity or financial a
overdraft facility A fluctuating credit facility provided tborrower by a bank, that allows a business to place its operaccount into deficit without notice, up to an agreed limit
over-the-counter contract A derivative market transacthat is not conducted on an organised exchange, but isnegotiated with a financial institution such as a bank. Produare not standardised and are designed to meet the specific of the client. Examples include forward rate agreements an
forward exchange contracts
P/E ratio The current share price divided by the earningsshare
participating bank A bank that provides funds as part osyndicated loan facility
participating preference share A type of share whosholder will receive a higher dividend if shareholders receiveabove a specified dividend
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passive investment A portfolio in which the structure isbased on the replication of a specific share market index, such as
the S&P/ASX 200 index
payee The party who receives the funds
paying agent The party who arranges periodic couponpayments when due, and redeems bonds at the maturity date
payments system The regulated process that enablesfinancial institutions to settle value transactions for goods and
servicespegged exchange rate An exchange rate that locks onecurrency into a multiple of another currency, such as the USD.For example, the HKD is currently locked into the USD
physical market A market in which a commodity or financialinstrument is traded; for example, the bank accepted bill marketor the stock market
placement The issue of new ordinary shares by a corporationto selected institutional investors
point (1) The final decimal place in an FX quotation. (2) Theminimum price fluctuation permitted in a contract traded on thefutures exchange
pole Rapid rise in share prices and volumes before a pennantor flag forms
policyholder The person who takes out an insurance policythat covers a defined event
portfolio structuring The selection of a combination ofassets and liabilities; each asset and liability comprising desiredattributes of return, risk, liquidity and timing of cash flows
portfolio variance The correlation of pairs of securitieswithin an investment portfolio
positive correlation A relationship between data, such asexchange rates, whereby a price change will be a movement in
the same direction
positive covenant An action stipulated in a loan contract that
must be taken by a borrowerposted rate The interest rate or yield at which an issuer iswilling to sell a security
preference share A hybrid security that pays a fixed dividend,and has priority over ordinary shares if the company is liquidated.They may be cumulative, redeemable, converting, participatingand of different ranking
premium (1) A regular, periodic amount paid by an insurancepolicyholder. (2) The amount paid to the writer of an option by thebuyer
present value The current value of a future cash flowdiscounted by a required rate of return
price risk The possibility that a change in interest rates willaffect the value of a firms assets and liabilities
price series A graph of historic share price or share priceindex movements over time
price to earnings ratio The current share price divided bythe earnings per share
primary market Markets for the issue of new securities suchas shares or debentures; that is, markets in which new funding israised by the issuer/borrower
prime assets requirement A prudential liquidityrequirement imposed by the bank regulator in Australia that hasnow been replaced with new liquidity management guidelines
prime rate An indicator interest rate set by a financialinstitution for the purpose of loan pricing
principal The initial, or current, amount borrowed or invested
profit and loss profile The potential gains and lossesavailable to the buyers and writers of an option
profit test Minimum financial performance requirements to bemet by an entity seeking listing
program trading Buy and sell orders automatically triggeredby computer programs
project completion Point at which a project is built and isgenerating a prescribed level of cash flows
project finance Lending for large projects where loanrepayments are based on projected cash flows
project sponsors The originators and equity providers of aproject
promissory note (P-note) A short-term discount securityissued today for less than the face value which is payable to theholder at maturity. Issued by corporations without an acceptor so
the borrower needs to have a good reputation. Also referred to ascommercial paper. There is an active secondary market incommercial paper
promoter The party seeking to list a corporation on a stockexchange
property trust A unit trust that may invest in industrial,commercial or retail property under the terms of the trust deed
pro-rata offer A proportional offer to existing shareholders tobuy additional shares based on a percentage of their currentshareholding
prospectus Document prepared by a company stating the termsand conditions of a formal offer to the public to purchase securities
proxy A party authorised to vote on behalf of a shareholder at ageneral meeting
prudential liquidity A requirement of the regulator thatfinancial institutions hold a certain amount of liquid assets
prudential supervision The imposition and monitoring ofstandards designed to ensure the soundness and stability of thefinancial system
public liability insurance Insurance that compensates forinjury or death of a third party due to negligence of a propertyowner or occupier
public sector borrowing requirement The total borrowingrequirements of various levels of government and theirinstrumentalities
public unit trust A trust in which funds from the sale of unitsin a trust are pooled and invested in asset classes specified in thetrust deed. Includes equity trust, property trusts, fixed interesttrusts
publicly listed corporation An entity whose ordinaryshares are quoted and traded on a formal stock exchange
purchasing power parity (PPP) The hypothesis thatexchange rates will adjust to ensure that the relative prices for
the same goods are equal between countries
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purchasing power risk The risk that inflation in prices will,over time, erode the ability of a certain sum to purchase assets
put bear spread The simultaneous purchase and sale of putoptions; short put further out-of-the-money
put option An option that gives the buyer the right, but not anobligation, to sell the underlying commodity or financial asset at apredetermined price, at or by a specific date. The buyer pays apremium to the option writer for that right
quasi-equity A security that has the attributes of both debtand equity
quota A government restriction on the amount of a specifiedgood that may be imported
quoting two-way prices The practice of a dealer in quotingboth buy and sell prices on a security
rally An upward movement in market prices after a period ofdecline
random walk hypothesis Contends that each new shareprice is independent of the previous price
rate of return The financial benefit gained from an investment;usually expressed in percentage terms
rating symbol Represents a credit rating given to an issuer;for example, S&P long-term symbols range from AAA to C
real interest rate The nominal interest rate less theanticipated inflation rate; for example, a nominal rate of 7 per centless expected inflation of 2 per cent equals a real interest rate of5 per cent
real-time gross settlement High-value payments systemtransactions are settled immediately through exchangesettlement accounts
reasonable benefit limit The amount of concessionallytaxed superannuation funds allowable to an individual, based onlump sum and pension limits
red herring A preliminary prospectus prepared by the leadmanager
redeemable preference share A preference share that maybe redeemed for cash at the expiry date
redemption yield The total return (interest and capital gains)received if a security is held to maturity
rediscount facility An arrangement where the Reserve Bankrepurchases T-notes in order to increase financial system liquidity
rediscounting The practice of selling existing discountedsecurities, such as bank bills and commercial paper, in the moneymarkets
reference rate A benchmark interest rate published daily andused for pricing variable rate loans; for example, the bank bill
swap rate (BBSW)regression analysis A statistical technique that determines
the relationship between a dependent variable and independentvariables
regression coefficient Measures the responsiveness of adependent variable to an independent variable
reinvestment risk The impact of interest rate changes on theearning potential of future cash flows
renounceable right A right attached to a security that sold to a third party before it is exercised
repricing gap analysis Monitoring the interest ratesensitivities of assets and liabilities over specified planningperiods. Repricing gap equals rate-sensitive assets minusrate-sensitive liabilities
repurchase agreement (repo) The sale of a financialsecurity with an agreement to repurchase that asset at a
specified date. For example the Reserve Bank offers repoarrangements intra-day and overnight to assist with themanagement of financial system liquidity
Reserve Bank of Australia (RBA) The Australian cenbank, responsible for the determination of monetary policy, stability of the financial system, the soundness of the paymsystem, and gathering statistical data
reserve requirement A prudential requirement that a bhold a specified percentage of funds in liquid assets
resistance line The price level at which an increase in shalts a price rise
responsible entity The trustee appointed under a trust
retail market Transactions conducted primarily with finaintermediaries by the household sector (individuals) and thesmall- to medium-sized business sector
return line A line drawn by technical analysts parallel totrend line to create a trend channel
return on equity Net income of a firm as a percentage shareholders funds
return or yield The total financial compensation receivefrom an investment expressed as a percentage of the amouinvested
revolving credit A term loan rollover facility for a specifnumber of periods
revolving facility An arrangement where a P-note facil
matures, new notes are issued and discountedright of foreclosure The right of a lender to take posseof an asset and realise any amount owing
right of perpetual succession The right of a corporatcontinue to operate regardless of changes in ownership
rights issues The issue of additional shares to existing sholders on a pro-rata basis
risk The uncertainty or probability of variance associatedexpected cash flows; the actual return on an investment mafrom the expected return
risk-free rate of return The yield on a security issued bgovernment; zero default risk assumed
RITS An electronic system that facilitates payments systetransactions with the Reserve Bank
rollover facility An arrangement where a bank agrees tdiscount new bills over a specified period as existing bills m
rollover fund A fund that holds eligible termination paymwithin the superannuation tax concession environment
S&P/ASX200 index An aggregate measure of share prmovements of the top 200 companies listed on the ASX
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sale and lease-back arrangement An arrangementwhereby an asset is sold to a lessor on condition that it is leasedback to the original owner
same-day funds Funds that do not require clearing throughthe payments system; used for exchange settlement accounttransactions
SEATS An acronym for the ASXs electronic share tradingsystem
secondary market A market that facilitates the buying andselling of existing financial securities. New securities issued inthe primary market benefit from liquidity in the secondary market
sectorial flow of funds The flow of funds between surplusor deficit sectors in an economy: the business, financialinstitutions, government and household sectors and the rest-of-
the-world sector
secured debt A debt instrument that gives the lender a claimover specified assets of the borrower or a third party in the event
that the borrower defaults on loan repayments
securities dealers licence Issued by ASIC and required bya stockbroker
securities portfolio A portfolio of financial securities held by
an institution that can easily be sold into the secondary marketsfor investment and trading purposes
securitisation A process whereby non-marketable assets aresold in order to generate additional funds and manage thestructure of the balance sheet. These non-liquid assets arebundled into a parcel and sold into a special-purpose vehiclecontrolled by a trustee, who issues new asset-backed securities
that are then serviced with cash flows from the original assets
security A financial asset or instrument that generally can betraded in a secondary market, for example shares, debentures,bank bills, commercial paper
segmented markets theory The theory that all bonds arenot perfect substitutes for each other; that investors have
preferences to invest either short-term or long-termsell-down provision A clause in a loan contract that enablesa lender to sell the debt security to another party
semi-government security A longer-term coupon securitysuch as a note or bond issued by a State government centralborrowing authority
semi-strong form efficiency The hypothesis that all publiclyavailable information is fully reflected in a share price
serial offering technique A method of releasing newinstruments into the market whereby each series tranche has thematurity and coupon characteristics set when the facility isestablished
service fee A fee charged by a lender to offset ongoing loanaccount administration costs
settlement risk The risk that one party to a financialtransaction will not deliver value; for example, due to time zonedifferences
share buy-back An arrangement whereby a company usesexcess capital to repurchase existing shares
share market A formal exchange that facilitates the issue,buying and selling of equity securities, including ordinary shares
share price index Measures changes over time in the priceof shares included in the index; for example the S&P/ASX200index
share price to net tangible assets The current shareprice relative to a firms net tangible assets
share split A proportional division of the number of sharesissued by a company
shelf registration Registration of a delayed or continuous
debt issue with the Securities and Exchange Commission (SEC) inthe USA
short call party The writer or seller of a call option
short position Occurs when the underlying asset has beensold forward, but is not actually owned at the time of entering into
the transaction
short straddle The simultaneous selling a call option and aput option with a single exercise price
short strangle The simultaneous selling of a call option and aput option with out-of-the-money exercise prices
simple interest Interest paid on the original principal amountborrowed or invested
Singapore interbank offered rate (SIBOR) A benchmarkinterest rate in the South-East Asian markets; it is the average of
the interest rates charged among Singapore banks
sovereign risk The risk that a foreign government will defaulton its obligations
special-purpose vehicle A trust established to hold assetsand issue asset-backed securities within the context of asecuritisation structure
speculator A trader of securities and derivatives that takes aview to making a profit from price movements in the contractsbeing traded
spot price In the FX market, it is the price quoted today fordelivery in two days time
spot transaction A transaction in which the FX contract valuedate is two business days from the date of the transaction
spread position Buying and selling of related, same-delivery-date contracts to benefit from price variances
spread The points difference or margin between bid and offerprices for the same commodity or financial asset; for example inan FX quotation
standard deviation A statistical measure of the dispersion ofa set of data around a central point
stand-by facility A contingency line of credit that isestablished with a financial institution
stock market index A measure of the price performance of asector of the share market
stockbroker A party who acts as the agent to an investor inthe buying and selling of stock market securities
straddle Buying and selling of contracts with different deliverydates to benefit from price variances
straight bond A fixed-interest bond paying periodic coupons;principal repayable at maturity
strategic asset allocation The structuring of a portfolio tomeet an investors personal preferences
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strike or exercise price The price specified in an optioncontract, at which the option-holder may exercise a right under
the terms of the contract
strong form efficiency The hypothesis that all publiclyavailable information and private research is fully reflected in ashare price
structured finance Funding provided for major infrastructureprojects
subordinated debt A long-term debt issue; holders claimsare subordinated against all other creditors
subparticipation A lender retains a loan but, for a price,transfers its rights to receive interest and principal repayments
subscription to an issue An agreement to purchase some ofthe securities offered in an issue
Superannuation Savings accumulated by an individual tofund his or her retirement; retirement savings that are availablefor investment
superannuation guarantee charge The compulsorysuperannuation scheme in Australia
superannuation savings plan A structured plan of regularcontributions into a private superannuation fund
support line The price level at which an increase in demandhalts a price fall
surplus unit An economic unit that saves more than it spendsin a given year, providing a source of funds for investment; usually
the household sector and overseas sector within the Australianeconomy
swap contract An agreement between two parties to swapfuture pre-determined cash flows. An interest rate swapexchanges interest payments. A currency swap exchangesforeign currency denominated principal amounts, plus relatedinterest payments
SWIFT Society for Worldwide Interbank FinancialTelecommunications. Global electronic system for financial
transactionssymmetrical triangle A series of price fluctuations witheach top and bottom smaller than the previous triangle
syndicated loan facility A large loan facility made to aborrower by a group of financial institutions. A syndicate will
typically include both domestic and international commercialbanks, investment banks and other institutional lenders.Syndication is necessary due to the higher level of riskassociated with lending a large amount of funds
system being down Payments from the private sectorexceed payments from the official sector
system surplus Payments from the official sector exceedpayments from the private sector
systematic risk Exposures that affect the price of the majorityof shares listed on the stock exchange
systemic risk The risk that the failure of an institution willadversely affect the market as a whole
T + 3 A term for the settlement of a share transaction that willoccur on the transaction day plus three days
tactical asset allocation The structuring of a portfolio totake account of a dynamic investment environment
tap system of selling Series of securities continually oto the public: as one series closes another is opened
tariff A charge levied by a