Glossary

The yield spread of a specific bond over the standard swap rate in that currency of the same tenor. Compare: Benchmark spread, G-spread

Traders specify display size, where some of the trade is visible to the market, but the rest is not. These are also referred to as iceberg orders because part of most of the order is hidden from view. They allow the investor to advertise some of the trade without revealing the actual size of the trade. 

This framework spells out the ideas on which the IASB bases its standards, and the requirements for financial statements.

A belief perseverance bias in which people tend to believe that they can control or influence outcomes when, in fact, they cannot. The illusion of control bias is often associated with emotional biases like overconfidence bias.

Forward rate that is calculated from spot rates using the spot-forward pricing relationship. This may be different from actual market rate.

Fees paid to the general partner from the limited partners based on realised net profits. Profits can be: any gains in value, any gains in value in excess of the management fee, or gains in excess of a hurdle rate.  High water mark is a feature which ensures that investors will not be charged incentive fees twice on the same ...

The percentage change in quantity demanded divided by the percentage change in income. Measure of the responsiveness of demand of a good/service to changes in consumer income. See also: Cross-price Elasticity of Demand, Own-price Elasticity of Demand, Elasticity

Accounts for the net income of a firm for a reporting period.

Under financial accounting, an expense recognised in the income statement that includes taxes payable and changes in deferred tax assets and deferred tax liabilities. Income tax expense = Taxes payable + Δ DTL − Δ DTA

Events in which the occurrence of one has no influence on the occurrence of the other.

In a simple linear regression study, the independent variable would be the variable that is being used to predict the dependent variable. For example, if the study is trying to predict student test scores based on the number of hours they spend studying, the independent variable would be the number of hours spent studying and the dependent variable would be ...

The process of adding and deleting constituent securities that make up the index. This is necessary as some firms may go bankrupt, delisted, or if they no longer meet the criteria of the index.  Deleted securities are replaced by other securities that meet the index criteria.  The deletion and insertion of securities to an index can also be at the ...

Bond for which coupon payments and/ or principal repayment are linked to a specified index. Such index can be a commodity index, equity index, or inflation index. E.g. Inflation-linked bonds

A curve representing all the combinations of risk and returns such that the investor is entirely indifferent among them. The range of investments that a risk-averse investors would be indifferent towards should follow an upward sloping line.  The higher the risk of an investment, the higher the expected return that the investor demands.  In practise, risk aversion is a spectrum.  ...

A format for the presentation of the cash flow statement in which the operating cash flow section begins with net income then shows additions and subtractions to arrive at operating cash flow. CFO = Net Income ± Adjustments Compare: Direct method

Making estimates about the population from a sample. (vs Descriptive statistics)

Goods/services that are consumed in lesser quantities as consumer income increases. Compare: Normal good See also: Giffen good

An extra return that compensates investors/lenders for expected inflation.

Type of index-linked bonds that offers investors protection against inflation by linking the bond’s coupon payments and/or the principal repayment to an index of consumer prices (e.g. CPI). Structures: Interest-indexed bonds have their coupon rates adjusted for inflation. The principal remains unchanged throughout the tenor, and is fully repaid on maturity. Indexed-annuity bonds are fully amortising bonds in which the ...

An increase in aggregate demand due to factors like loose monetary policy, or a real-estate boom.  This results in higher prices, and a level of GDP greater than full-employment GDP in the short run. We call this an inflationary gap. The economy can operate at this level in the short run, as workers work overtime and maintenance of productive equipment ...

LEVEL II In regression analysis, influence analysis is a method used to identify which observations in a dataset have a disproportionate effect on the estimated regression coefficients. This can help to identify outliers or observations that are having a large effect on the overall regression model. There are several measures that can be used to determine the influence of an ...

LEVEL II The influence plot can summarise the 3 metrics for influence analysis in one single glance. The X-axis plots the leverage, which is normalised between 0 and 1. The Y-axis plots the studentized residuals, which can be positive or negative. The size of the circles for each data point reflect its Cook’s distance.

LEVEL II A data point is considered influential if its exclusion causes substantial changes in the estimated regression. Outliers and high leverage points may not necessarily be influential. They are just potentially influential. The Cook’s distance is a well-known metric for identifying influential data points.  If we remove this influential data point from the regression analysis and re-estimate the regression ...

An information cascade is similar to herding in that investors watch and follow the actions of other investors.  The difference is that the investors do not follow blindly, but make decisions which are influenced by the information from other investors.   Some, however, argue that this may support the argument for efficient markets.  If those who act first are more ...

A form of cognitive error in behavioural finance where the information analysis by the individual is flawed. Information-processing biases include anchoring and adjustment bias, mental accounting bias, framing bias, and availability bias. Compare: Belief perseverance bias, Emotional bias

For futures contracts, the clearinghouse requires both the LONG and the SHORT to place an initial deposit. The initial margin per contract is relatively low as compared to the size of the contract.  For example, if a trader longs the futures at $100, an initial margin of $20 dollars may be imposed by the clearinghouse. The initial margin is deposited ...

The first issuance of common shares to the public by a formerly private company. Public offerings by companies are almost always sold with the assistance of an investment bank. Compare: Seasoned offering See also: Book building, Underwritten offering, Best efforts offering

Non-monetary assets that lack physical substance. They can either be identifiable (e.g. patents, trademarks, copyrights) or unidentifiable (e.g. goodwill). Amortisation applies to identifiable intangible assets with finite lives. Unidentifiable intangible assets are not amortised, but tested annually for impairment. See also: Accounting for intangible assets

A coverage ratio measured by the firm’s ability to meet its interest obligations. Based on cash flows Interest coverage = (CFO + Interest paid + Taxes paid) / Interest paid * If interest paid was classified as a financing activity under IFRS, no interest adjustment is necessary.  Based on EBIT or EBITDA Interest coverage = EBIT / Interest payments Interest ...

A swap in which the underlying is an interest rate.

No principal repayment for the entire life of the loan. Principal has to be repaid in full at maturity. Compare: Fully amortising loan, Partially amortising loan

Provide updated information since the last annual report.  They are published either semiannually, or quarterly, depending on the applicable regulatory requirements. Interim reports generally present the basic  financial statements and condensed notes, but are not audited.

The discount rate that makes NPV = 0. A meaningful measure of the return from an investment based on cash flows. See also: NPV

International body that sets financial reporting standards that have been adopted in many countries. According to the IASB, the objective of financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity. The IASB establishes IFRS – a standard ...

A financial reporting standard established by IASB. It is widely adopted by firms outside the US. Compare: US GAAP

According to the Fisher effect, the nominal interest rate in a given country is approximately the sum of the real interest rate and the expected inflation rate. If this holds true for both the domestic and foreign country, we would expect the difference between nominal interest rates to be equal to the difference between the real rates, plus the difference ...

Not a regulatory authority but its members regulate a significant portion of the world’s financial capital markets. The SEC and ESMA are members of IOSCO. The IOSCO has the goal of uniform financial regulations across countries.

LEVEL II International parity conditions are a set of relationships that exist between different financial variables in international finance. These conditions help explain the relative prices of financial assets in different countries and are crucial for understanding the global financial market. The five key conditions are: These conditions are interrelated and provide a comprehensive understanding of the global financial market, ...

The Internet of Things is formed by a vast array of smart devices like home appliances, smart buildings, and vehicles that are embedded with sensors and network technologies that allow them to interact and share information. See also: Big data

A measurement scale that not only ranks data but also gives assurance that the differences between scale values are equal.

Accounting standards with regards to adjusting the value of inventory on the balance sheet. Under IFRS, inventory value is reported at the lower of cost or net realisable value. If NRV<inventory value, write-down to NRV. Reversal of write-down is allowed. Under US GAAP, inventory value is reported at the lower of cost or market. Market is usually equal to replacement ...

Ending inventory = Beginning inventory + Purchased new inventory – COGS

An activity ratio that measures the efficiency of a firm in managing its inventory. Inventory turnover = COGS / Avg Inventory See also: DOH

A type of leveraged structured financial instrument that the coupon payout are negatively correlated with the reference rate.   The coupon payout increases when the reference rate decreases, and decreases when the reference rate increases. An inverse floater is an example of a leveraged instrument. See also: Floating-rate notes

Activities that involve purchasing and selling long-term assets (PP&E, intangible assets), and other investments. Cash inflows include cash receipts from the sale of such assets.  Cash outflows include payments for the purchase of these assets. Investments in the equity and debt issued by other companies are also considered investing activities. Cash flows are recorded as CFI. Compare: Operating activities, Financing ...

A coverage ratio measured by the firm’s ability to purchase assets, satisfy debts, and pay dividends Investing and financing ratio = CFO / Cash outflows for investing and financing

An investment bank assists its client (issuer) in various steps of a public offering.  This includes: Determining the funding needs of the issuer.   Structuring the security.   Creating the bond indenture (for debt securities).   Naming a bond trustee, which can be a trust company or bank trust department.   Registering the issue with securities regulators.   Assessing demand ...

Bonds with ratings of BBB- or higher (S&P, Fitch). Bonds with ratings of Baa3 or higher (Moody’s). See also: Credit ratings

A document of findings from an investment client during the portfolio planning stage.  The key element of the IPS is the investment objectives and constraints which acts as a guiding principles for the investment manager and any other parties managing the portfolio.   The IPS should also specify a benchmark, that can be used in the feedback stage to assess ...