Glossary of Terms
Investment Management And Corporate Finance
Glossary of Investment Terms
Example 1:
Bull market – Any market in which prices are advancing in an upward trend. In general, someone is bullish if they believe the value of a security or market will rise. The opposite of a bear market…Read more
Example 2:
Bond (also Fixed-Income Security): a type of investment in which the holder lends money to another entity and is then entitled to periodic payments of interest and a return of the capital at a specified time in the future…Read more
Common Words Used in… Corporate Finance
Example 1:
P/E (Price to Earnings) Ratio – Market price per share divided by annual earnings per share. Investors use this common ratio to determine whether they should purchase shares in a company. Often, investors want a high return – i.e. a low P/E – on their investments. Where people are buying stock at a high P/E, it implies that they’re expecting much higher profits in the future than they’re getting now…Read more
Example 2
Asset – An asset is a resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide a future benefit. Assets are reported on a company’s balance sheet and are bought or created to increase a firm’s value or benefit the firm’s operations. An asset can be thought of as something that, in the future, can generate cash flow, reduce expenses, or improve sales, regardless of whether it’s manufacturing equipment or a patent…Read more
Glossary
Active management strategy
A strategy in which the portfolio manager actively manages investments by altering the proportions of different asset types in the portfolio.
American style option
An option contract that allows the owner to exercise the option at any time before or at expiration of the contract.
Annuity
A series of identical cash flows that are expected to occur each period for a specified number of periods.
Anticipatory hedge
A hedging strategy that involves entering into a futures position now in anticipation of a cash transaction in the future.
Arbitrage
The nearly simultaneous purchase and sale of assets in different markets in order to profit from price discrepancies.
Arbitrage pricing theory (APT)
An asset pricing model developed by Stephen Ross based on arbitrage arguments. APT recognises that expected returns are affected by several factors such as macroeconomic factors as well as firm-specific factors.
Arithmetic mean return
A measure of average annual returns equal to the sum of annual holding period yields divided by the number of years.
Articles of Association
The documents of a company that govern the management and administration of the company.
Asset allocation
The distribution of an investor’s wealth among different asset classes for investment purposes.
Asset swap
An interest rate swap used to alter the cash flow characteristics of a company’s assets in order to provide a better match with its liabilities.
Asset-based valuation
A valuation method based on the value of the assets of the target and includes approaches like notional realisation of assets, value of net tangible assets and replacement costs.
Asset
Anything that has a commercial value in an exchange.
Associated companies
A company that is not a subsidiary of the investing company, but one in which the investing company has a long-term interest and has substantial influence over its affairs. In accounting terms, a company is an associated company if the investing company owns not less than 20% equity interest and not more than 50% equity interest in that company.
At-the-money option
An option is at-the-money if the strike price of the option is equal to the market price of the underlying security.
Authorised shares
The maximum number of shares a company is allowed to issue as stated in its Memorandum of Association. A company cannot issue more than its authorised capital unless approval is obtained from its shareholders.
Balance sheet
A statement of financial condition that summarises a company’s assets, liabilities, and owners’ equity.
Bankruptcy
A state of insolvency of an individual or business entity.
Basis
When used in the commodities market, it represents the difference between the spot price and the futures price as seen in the market.
Bear spread
Combination of calls or puts in which a decline in the price of the underlying asset will theoretically result in a profit.
Benchmark error
Occurs when an inappropriate benchmark is used to compare and assess portfolio returns and management.
Beta
A coefficient measuring the volatility of a security in relation to the market or to an alternative benchmark. Beta is also a measure of systematic risk.
Binomial model
An option pricing model based on the assumption that the underlying asset can assume only one of two possible values in the next period for each value that it takes on in the preceding period. The model reflects all the inputs used in pricing options — share price, exercise price, time, interest rates and volatility
Black Scholes model
A model for pricing options based on volatility of return, discount rate, price of the underlying, strike price and time arguments. The model is also based on the concept of arbitrage.
Blockage discount
A reduction in value from the current market price of a parcel of securities when the parcel is of a size that could not be sold in a reasonable period of time given normal trading volume.
Bond
A form of interest-bearing or discounted debt issued by companies or governments.
Book value
Total assets minus intangible assets and liabilities (debt) (amount shown in the balance sheet).
Bull spread
Combination of calls or puts in which a rise in the price of the underlying asset will theoretically increase the value of the spread.
Business risk
A risk involving the impairment of cash flows of an issuer due to adverse conditions, resulting in the inability to meet operating expenses. The operating risk that cannot be controlled by the company. Inherent business risk, not taking into account financial risk.
Butterfly spread
An options strategy involving three different exercise prices. One option is purchased (sold) at the lowest exercise price. Two identical options are sold (purchased) at the middle exercise price. And one option is purchased (sold) at the highest exercise price.
Buy-and-hold strategy
An investment strategy where there is no active buying and selling of shares involved from the time the portfolio is created until the end of the investment period.
Buying hedge
A hedging transaction in which futures contracts are bought to protect against possible increased cost of a long-term commitment.
Cagamas instruments
Mortgaged-backed instruments issued by Malaysia’s national mortgage corporation, Cagamas Bhd. Sold on an auction basis through principal dealers, the bonds raise funds which are used by Cagamas to buy housing loans from financial institutions.
Call option
An option that gives the holder the right, but not the obligation, to purchase a specified number of the underlying asset (e.g. shares) at a given price and time. The seller or writer of the option has the obligation to perform. States when and how a company can redeem bonds outstanding prior to their maturity.
Capital asset pricing model
A theory describing the relationship between risk (CAPM) and expected return which serves as a model for the pricing of risky securities.
Capital budgeting
The process of analysing projects for investment.
Capital market line (CML)
A graph expressing the relationship between the risk and expected return of a portfolio containing a risk-free asset and risky assets. The CML also represents investment possibilities extending outward from the risk-free rate and passing through the expected return on the market portfolio.
Capital reduction and Consolidation
Capital reduction involves writing off a portion of the capital of the company. This is normally followed by a capital consolidation exercise where the shares are consolidated back to its original par value.
Capitalisation of earnings approach
A valuation approach where future maintainable earnings are multiplied by the appropriate price earnings ratio to establish the market value of the business.
Carve-out
The sale of an interest in a subsidiary to another party.
Cash and carry arbitrage
An arbitrage trade which involves the purchase of the physical commodity against the forward sale of that commodity in the futures market where the cost of carry is lower than the futures price. The physical commodity is then delivered in fulfillment of the futures contract.
Cash dividends
A dividend paid to shareholders in cash from profits or retained profits.
Cash flow
The amount of cash a company receives and pays out in a particular period.
Cash flow return on investment (CFROI)
The rate of return that equates the gross cash investment to the present value of future gross cash flows plus a terminal value. Gross cash investment is computed by adding book value to accumulated depreciation and inflation adjustments. Gross cash flows are computed by adding after-tax operating income with depreciation and amortisation.
Cash flow statement
A statement that shows the outflows and inflows of cash and cash equivalents from operating and other activities over an accounting period.
Cash ratio
A ratio measuring the proportion of a company’s assets that are held as cash versus non-cash assets.
Certainty equivalent
A risk-free amount that is accepted today instead of a chance to receive an uncertain but possibly higher amount in the future.
Chinese walls
Internal controls put in place by an organisation to isolate the information available to one part of the organisation from other parts. Chinese walls can also act to prevent the decisions and actions of one part of the organisation from being influenced by another.
Circus swap
A combination of a plain vanilla interest rate swap and a fixed for floating rate currency swap.
Clearing house
A clearing organisation through which all transactions are settled by process of matching purchases with sales, and also charged with ensuring proper conduct in accord with procedures as well as financing of the entire exchange.
Clientele effect
The division of a group of investors based on their preference of the financing policy that a company follows.
Coefficient of variation (CV)
A relative measure of variability to indicate risk per unit of expected return.[Standard deviation / Expected rate of return]
Collateral
An asset(s) that is provided to the lender as security for a loan. The lender acquires the right to the asset(s) in the event of default by the borrower.
Commercial Papers (CP)
Revolving short-term unsecured promissory notes with tenures of not less than one month but not more than 12 months.
Common shares
Shares that represent ownership usually entitle the holder to vote at shareholder’s meetings. In the event of liquidation, common shares will rank behind preference shares.
Condor
An option strategy consisting of both puts and calls at different strike prices to capitalise on a narrow range of volatility.
Constant growth model
A model involving the discounting of future dividend streams that assumes a fixed growth rate for future dividends and a single discount rate.
Consumer price index (CPI)
A measure measuring the price of consumer goods and services relative to a base year and functioning as an indicator of the pace of inflation in the economy.
Contract
A promise or set of promises which the law will enforce. A contract may arise either by word of mouth, in writing or both.
Control premium
An amount by which the pro rata value of a controlling interest exceeds the pro rata value of a non-controlling interest (usually expressed in percentage form).
Conversion parity/value
The common share price at which a convertible security can be converted into common share(s) of equal value.
Conversion premium
The extent by which the conversion price of a convertible security exceeds the prevailing common share price at the time the convertible security is issued.
Conversion price
The ringgit value at which convertible securities can be converted into common
shares, as specified when the convertible is issued.
Conversion ratio
The number of shares received in exchange for each convertible security when a conversion takes place.
Convertible bonds
General debt obligation of a company that can be exchanged for a set number of common shares of the issuing company at a pre-stated conversion price.
Convexity
The degree of curvature of the price-yield function of a bond.
Corporate Bonds
Bonds issued by companies.
Correlation coefficient
A statistical measure of the degree to which the movements of two variables are related.
Cost of capital
The required rate of return required for an investment by the company to maintain the value of the business.
Costs of goods sold (COGS)
The total cost of all factors that go into producing finished goods.
Counterparty
The party on the other side of a transaction.
Country risk
Risk or uncertainty due to the possibility of major political or economic changes in the country where an investment is located. Also called political risk.
Coupon
An interest payment made periodically to bondholders during the life of the given bond.
Covariance
A measure of the degree to which two variables move together over time relative to their individual mean returns.
Covered call
A trading strategy in which a call option is sold as a supplement to a long position in an underlying asset or portfolio of assets.
Currency swaps
Switching a series of payment obligations denominated in one currency for the same in a different currency.
Current ratio
An accounting ratio that measures liquidity. It is derived by dividing current assets by current liabilities.
Current yield
The coupon rate of notes or bonds divided by their market price.
Cyclical
Occurring or repeated in cycles.
Debenture
Includes loan stocks, notes and any other evidence of indebtedness.
Debt
An amount of money or a service owed.
Debt/equity ratio
An indicator of financial leverage which is determined by dividing debt by common shareholder’s equity.
Default
Failure to make timely payment on a debt or to otherwise comply with debt covenants.
Default risk
The risk that a borrower may not be able to make timely repayments of principal and interest.
Degree of financial leverage (DFL)
DFL shows the effect of a change in gross earnings (profit before tax) per share due to a change in earnings before interest and taxes.
Degree of operating leverage (DOL)
DOL shows the percentage change in earnings before interest and taxes that results from a change in sales.
Degree of total leverage (DTL)
DTL combines the effects of financial leverage and operating leverage to show the percentage change in gross earnings per share that results from a change in sales.
Delta
The sensitivity of an option’s value due to a change in the price of the underlying asset.
Demerger
Involves the splitting up of a corporate body into two or more separate and independent bodies.
Depreciation
An accounting concept for the reduction in value of an asset over time.
Dilution of earnings
Reduction in earnings per share as a result of an issuance of additional shares by the company.
Dilution of control
Reduction in proportionate ownership interest as a result of an issuance of additional shares.
Discount rate
The rate used to determine the present value of money received at a future date.
Discounted payback period
The period it takes for an investment’s discounted future cash flows to equal the investment’s initial cost.
Discounted/Zero-coupon bond
A discounted bond that does not make coupon payments. Also called a pure discount bond.
Discounted cash flow (DCF)
Future annual cash flows discounted by an annual discount factor to achieve comparability of the flows in today’s dollar value.
Diversification
Spreading investment funds among different securities in an effort to minimise unsystematic risk.
Diverstiture
Disposal of an asset.
Dividend
A distribution of a company’s earnings to its shareholders in the form of cash, shares or sometimes other assets.
Dividend discount model
A model for valuing a company’s shares based on the present value of a company’s expected future dividends.
Dividend policy
The policies by which a company determines its dividend payment.
Dividend yield
A measure of dividend over current share price.
Dollar-weighted rate of return
The rate of return of a portfolio that discounts the terminal value and interim cash flows back to its initial value.
Duration
The weighted average of time periods over which a bond’s cash flows accrue to the bondholder. Time periods are weighted by multiplying the present value of its cash flow divided by the bond’s price.
Economic life
The period of time over which the asset may generate economic benefits.
Economic value added (EVA)
An internal management performance measure based on the excess of net operating profit over total cost of capital.
Efficient frontier
The combinations of securities portfolios that maximise expected return for any level
of expected risk, or that minimises expected risk for any level of expected return.
Efficient market hypothesis
States that all relevant information is fully and immediately reflected in a security’s market price, thereby assuming that an investor will obtain an equilibrium rate of return.
Efficient portfolio
A portfolio that gives the greatest expected return given the level of risk, or conversely, the lowest level of risk given the expected return.
Equilibrium
A state of balance where there is no tendency to change.
Equity swap
A swap in which cash flows are exchanged based on the total return on some market index and an interest rate. Equity swaps can allow fixed income portfolio holders to create a synthetic equity position to take advantage of expected market movements (investment tool). Similarly, it can also allow equity portfolio holders to create a synthetic fixed income position for risk management purposes (hedging tool).
European style option
An option that can be exercised only at the maturity date.
Exercise price
The price at which the buyer of a call (put) can purchase (sell) the underlying asset during the life of the option.
Face value
The amount that an issuer agrees to pay at the maturity date.
Fair market value
The cash or cash equivalent price at which an asset would change hands between a willing buyer and a willing seller.
Financial distress
Financial difficulty, including bankruptcy and loan default.
Financial ratio
An expression of the relationship of one financial item to another to facilitate the analysis of financial statements.
Financial risk
The possibility that an issuer will not be able to meet debt obligations.
Financing decision
Decisions made in regard to whether funding should come from liabilities or shareholders equity.
Fire sale value
The price that one can obtain within the shortest period of time regardless of how low the price that can be obtained is.
Fiscal policy
Government spending and taxing for the specific purpose of stabilising the business cycle, containing inflationary pressures and achieving full employment while creating sustainable growth.
Fixed asset
Long-lived items or properties owned by a firm that are used to generate income and are not sold in the normal course of business of the firm. Examples of fixed assets are plant and equipment.
Fixed income instruments
Securities that pay a fixed rate of return, such as bonds.
Flotation cost
The costs associated with creating capital through the issue of new shares or bonds, including the remuneration earned by the investment banker, plus legal, accounting and printing expenses.
Foreign exchange risk
The risk that an investment’s return could suffer due to an adverse movement in the relevant exchange rates.
Forward contract
Similar to the futures contract, an agreement for the future delivery of a specified amount of a valued item at a specified price and time. It is not standardised and is not traded on organised exchanges.
Fundamental analysis
An analysis that tries to determine whether securities are under-valued or over-valued through analysis of a company’s business potential.
Futures contract
An agreement entered into at present that gives the holder both the right and full legal obligation to conduct a transaction at a specific future time involving a specific quantity and type of asset at a predetermined price.
Futures price
The agreed-upon price in a futures contract.
Geometric mean return
The compounded rate of growth on the initial portfolio. It is computed by taking the nth root of the product of the annual holding period returns (HPR) for n years minus 1 or [(P HPR)1 / n — 1 [.
Goodwill
Excess of the purchase price over the fair market value of the net assets acquired under the acquisition method of accounting.
Gross profit
Revenue from sale of goods minus cost of goods sold.
Hedge ratio (delta)
A calculation of the number of futures or options contracts required to hedge an instrument that does not correlate with the futures or options contract.
Hedge
The use of the futures or options market to reduce or completely offset a risk exposure from market fluctuations.
Holding period
The length of time that a security is held by the investor.
Holding period return (HPR)
The rate of return over a specific period of time.
Holding period yield (HPY)
The total return from an investment for a given period of time, stated as a percentage.
Homemade dividends
The sales of shares to obtain cash that simulates receiving a cash dividend.
Income statement
A statement reporting the performance of the company resulting from its operating activities. It measures the profit or loss that the company made over a period of time.
Index option
An option based on a share market index.
Indexed management strategy
A passive management strategy that seeks to match the composition and returns of a selected market index.
Indifference (utility) curve
A graph where the horizontal axis represents risk and the vertical axis represents expected return; all points on the curve yield the same level of utility.
Inflation rate
The rate at which consumer prices for goods and services is rising.
Information asymmetry
A situation where information is known to some, but not all, market participants.
Initial margin requirement
The amount of cash and securities that an investor must have in their account before trading on margin.
Initial public offering (IPO)
The first sale of shares by a company to the public.
Insider
A person that possesses material information not generally available and who knows that the said information is not available (see section 89E subsection 1 of the Securities Industry Act 1983).
Interest rate caps
An agreement whereby payments are made when the referenced interest rate exceeds the strike rate.
Interest rate collar
Involves the purchase of a cap at a higher strike price and the sale of a floor at a lower strike price. The sale of the floor offsets the cost of purchasing the cap. This is primarily used to confine interest rate payments to a range bounded by the strike prices of the cap and floor options.
Interest rate floor
Agreement whereby payments are made when the referenced interest rate falls below the strike rate.
Interest rate options
A right to pay or receive a specific interest rate on a predetermined principal for a set interval.
Interest rate risk
The risk that a security’s value will be affected by a change in interest rates.
Interest rate swap
A contract between two parties to exchange periodic interest payments on a predetermined principal, or a notional principal amount.
Interest-on-interest
Interest income from reinvestment of interest.
Internal controls
Operating systems and designs put into place to ensure that the business is run effectively and efficiently, financial and management reporting are timely and all relevant laws are complied with.
Internal rate of return (IRR)
The discount rate where net present value is zero.
Interpolation
A method of approximating an unknown figure that is between two numbers that are known.
In-the-money option
An option is in-the-money when it has positive intrinsic value.
Intrinsic value of an option
The greater of zero or the difference between the exercise price and the current market price of a share. [Value of the option = Intrinsic value + Time value].
Investment adviser
A person who or company which carries out a business of advising others concerning securities or as a part of a business, issues, promulgates or analyses reports concerning securities.
Investment decisions
Determinations made concerning which assets to invest.
Investment objectives
The objectives of an investor in making an investment.
Investment representatives
A person acting on behalf of an investment adviser.
Investment strategy
An investor’s plan on how to allocate assets among the available asset classes after taking into consideration various expectations and requirements.
Investments
The creation of more income or capital gains through the use of capital.
Issued share capital
The total amount of a company’s shares that are in issue.
Jensen’s alpha
A measure of a portfolio’s risk-adjusted performance by looking at the differential return for a given level of risk.
Leverage
The use of debt as a means of financing.
Leveraged buyouts
Acquisition of a company using debt.
Liabilities
Obligations from past transactions that require the company to pay money, provide goods, or perform services in the future.
Liability swap
An interest rate swap used to alter the cash flow profile of liabilities to improve the match between liabilities and assets.
Liquidation
The termination of a business. In a liquidation, all the assets of the company are sold, the proceeds will be used to repay the company’s obligations and the residual distributed to shareholders; also refers to a transaction that closes out a position.
Liquidation value
The value of a company should it be wound up, resulting in the need to sell assets in a relatively short time frame.
Liquidity
The ability to readily convert assets or investments to cash.
Long position
Owning an asset in the cash market or buying a contract in the futures market with no offsetting position.
Macroeconomics
Analysis of a country’s economy as a whole.
Maintainable earnings
The level of real earnings that can reasonably be sustained in the future.
Maintenance margin requirement
The minimum balance in a customer’s margin requirement account that must be maintained at all times.
Malaysian Government Securities (MGS)
Long-term government securities with interest usually payable semi-annually, with a tenure of more than one year.
Management buyouts (MBO)
A leveraged buyout led by the company’s management.
Margin
The amount a client deposits with his broker when purchasing securities by borrowing from the broker.
Market
The means through which buyers and sellers are brought together to transact.
Market analysis
Research based on market data or fundamental information to predict movements in the market.
Market capitalisation
The value of a company based on the current market price of its shares multiplied by the total number of shares outstanding.
Market index
A market measure that consists of weighted values of that index’s components.
Market portfolio
A portfolio of assets representing all assets available to investors in the proportion of the market value of that asset to the total market value of all assets.
Market price
The amount that buyers will pay for and sellers will sell a security on the market.
Market risk
The risk that cannot be reduced with diversification because it is common to all assets of the same class. Also known as systematic risk.
Market risk premium
The difference between the market return (the return that is expected as compensation for systematic risk) and the risk-free rate.
Market timing
The practice of forecasting market changes and then investing according to those forecasts.
Market value added (MVA)
A measure comparing the market value of the company with the total capital invested in the company.
Marketability
The ease with which a security can be bought and sold. Sometimes used interchangeably with liquidity. However, in strict terms, liquidity looks at a situation where the transaction does not give rise to a diminution of value.
Marking-to-market
Revaluing an asset to its present market value. In futures, it is the settlement process in which the margin account of a futures contract is adjusted daily based on the changes in the price of the underlying asset.
Markowitz efficient portfolio
A portfolio structured so that it has the highest expected return for a given level of risk.
Maturity date
The date on which the principal amount of a debt instrument is to be paid off.
Maturity value
The redemption value of a security at maturity date.
Medium-term notes (MTNs)
Instruments with a maturity of more than one year but less than five years and may be issued based on
conventional or Islamic principles.
Merger
Technically, it is the amalgamation of two companies where only one survives as a legal entity.
Minority discount
An amount deducted from the value of an ownership interest to reflect the relative absence of the powers of control.
Minority interest
When a parent company owns less than a 100% shareholding in a company, the parent company would
need to show the portion of shareholders funds in the subsidiary company that does not belong to the shareholders of the parent company.
Mission statement
A statement of the role, or purpose, of the organisation. It sets the scope and boundaries of the organisation and aims to communicate to those involved in strategic decisions, the broad ground rules in conducting the organisation’s business.
Modified duration
A measure comparing the weighted average maturity of cash flows from a bond to the bond yield. [Duration/(1 +Yield)]
Monetary policy
Actions taken by the central bank to influence the money supply and interest rates with the aim of managing the growth of the economy.
Mutually exclusive
A relationship when the existence of one excludes or precludes the other.
Net earnings
Residual income after all expenses and taxes have been paid.
Net present value (NPV)
The value of all expected cash inflows less related cash outflows in today’s terms.
Net profit
See net earnings.
Net sales
Gross sales less returns and allowances, freight out, and cash discounts allowed.
Net worth
Total assets less total liabilities.
No-arbitrage principle
A principal where one is not able to make a profit by using arbitrage trading strategies.
Nominal yield
The coupon rate of a bond. [Coupon payment/Nominal value]
Non-systematic risk
A component of risk specific to an asset that can be eliminated by diversification within the asset class.
Offer
Indicates a willingness to buy or sell at a given price.
Offer for sale
An offer to sell securities to the public by the existing security holders.
On-the-money option
Options that have the same price as the previous sale.
Open interest
The total number of unexpired derivatives contracts entered into that have yet to be exercised or liquidated.
Open-market operation
The purchase or sale of government securities by the central bank to increase or decrease the domestic money supply.
Open outcry
The method of trading that involves calling out the details of an order for other traders to hear and to respond verbally.
Operating leverage
The relationship between the fixed and variable costs of a company.
Operating profit
Revenue from a company’s regular activities less costs and expenses associated with operating activities.
Option
A derivative that gives the buyer the right to either buy or sell an asset at a specified price by a given date. The seller or writer of the contract has the obligation to perform. See American and European style options.
Option on futures
An option that uses a futures contract as the underlying asset.
Option premium
The price of the option.
Out-of-the-money option
An option is out of the money when it has no intrinsic value; the strike price of the option is more than the market price of the underlying asset for call options and vice versa for put options.
Over-the-counter (OTC)
A decentralised market where geographically dispersed dealers are linked by telephones and computer screens.
Owner’s equity
See shareholder’s equity.
Par value
The nominal value of an equity or the amount that an issuer of a debt instrument agrees to pay at the maturity date, also known as the face value or maturity value.
Parent company
A company that controls another through its ownership of voting shares.
Passive investment strategy
An investment strategy that attempts to reconstruct a well-diversified portfolio to reflect a certain performance benchmark portfolio without making an effort to seek out mispriced securities.
Payback period (PBP)
The period for a project to recover its initial investments, without taking into consideration the time value of money.
Payer’s swaption
A swap option giving the holder the right to pay a fixed rate and receive a floating rate in an interest rate swap.
Payout ratio
The proportion of earnings paid as dividends to the shareholders.
Performance attribution analysis
The decomposition of a fund manager’s performance results by showing the components that enabled a certain performance to be achieved.
Performance evaluation
An assessment to evaluate and measure a manager’s performance.
Perpetuity
A series of identical cash flows that continue indefinitely.
Plain vanilla
Refers to straight forward securities.
Pledging
Using an asset as collateral to secure a loan.
Portfolio
A holding of more than one type of asset.
Portfolio insurance
The use of derivatives to protect a portfolio from adverse market movements.
Portfolio management
The process of managing an investment portfolio.
Portfolio manager
A person who is responsible for the management of a particular securities portfolio.
Preference dividends
Dividends paid to preference shareholders.
Preference shares
Shares that give their holders a fixed dividend from the company’s earnings and they are paid before common shareholders. On liquidation, preference shareholders rank before common shareholders for distributions.
Present value
The value of future cash flows discounted to today’s value.
Price discovery
The establishment of the prices of assets through the interactions of buyers and sellers in the marketplace.
Price earnings ratio
A share’s market price divided by the corresponding company’s earnings per share.
Price-yield curve
A graph expressing the relationship of the yield to maturity and the price of a bond.
Principal amount
Face value of debt; balance of borrowed amount yet to be repaid excluding interest.
Private placements
The sale of securities to a limited number of investors.
Promised yield to call
A bond’s yield if held until the first available call date assuming that all coupon payments are reinvested at the yield-to-call rate.
Prospectus
A legal document to sell securities to the public containing information about the issue and the securities to enable the investors to make an informed decision.
Proxy
An authorisation for a shareholder’s vote to be cast by others.
Public information
Information that is known to everyone.
Public issue
The issue of shares in a company directly to the public.
Purchasing power
An index of the quantity of goods that can be bought for a unit of currency.
Put call parity
A pricing relationship between call and put options that must exist in an efficient market. If the put-call parity relationship does hold, the potential for riskless arbitrage profits will exist.
Put option
A contract that gives its holder the right, but not the obligation, to sell a security at a specified price at or by a specified date.
Quick ratio
The ratio is derived from taking current assets less inventories, divided by liabilities and it reflects a company’s liquidity. Also known as acid test.
Random walk
A theory that share price changes from day to day are haphazard and independent from past performance.
Rational expectations
The idea that people rationally anticipate and respond to future predictions.
Real rate of return
Rate of return on an investment adjusted for inflation.
Recapitalisation
A replacement of debt with equity by the company resulting in the existing shareholders owning a larger proportion of the equity and there is no change in control of the company.
Receivables turnover ratio
Total operating revenues divided by average receivables, used to measure how effectively a company is managing its account receivables.
Reinvestment rate
The rate at which interest payments made on a debt security can be reinvested.
Realised return
The actual returns earned over a period of time.
Replacement value
The value of a similar asset having the nearest equivalent utility to the asset being valued.
Required rate of return
Minimum return that an investor must earn to be willing to make an investment.
Residual value
The amount leftover from the historical cost of an asset minus its depreciated value.
Retention rate
The percentage of earnings that is not paid out as dividends.
Reverse cash and carry
An arbitrage trade which involves short selling the physical asset and buying the futures. At the end of the futures exercise period, delivery of the futures will be taken to cover the short sale.
Risk
Uncertainty regarding an outcome.
Risk averse
Preference for lower risk for a given level of returns.
Risk-adjusted return
The return earned on an asset adjusted for the amount of risk involved with that particular asset.
Risk-free rate Rate of return earned on a riskless asset.
Riskless arbitrage
A trading strategy involving the almost simultaneous and riskless purchase and sale of an asset(s) for a guaranteed profit.
Schemes of arrangement
Used by businesses in financial and reconstruction distress as a reconstruction avenue to reconstruct their balance sheets.
Securitisation
The repackaging of otherwise unmarketable assets into marketable securities.
Securities
Any instrument that presents a claim on future cash flows.
Security market line (SML)
A line depicting the relationship between the required rate of return on an investment and its systematic risk.
Semi-strong form EMH
The hypothesis stating that security prices fully reflect all publicly available information.
Separation theorem
The theory states that the decision to hold a portfolio of risky assets is separate from the decision to allocate investment funds between the risk-free and risky assets.
Share buy-backs
A company’s repurchase or buy-back of outstanding shares from its shareholders. Also referred to as share repurchase.
Share dividends (bonus issues)
An issue of new shares to existing shareholders made through the capitalisation of reserves, i.e. in the company’s records, a transfer is made usually from revenue reserves to share capital.
Share splits
A reapportioning of the claim size of a share so that there are more shares and each share has a proportionately smaller ownership interest.
Shareholders’ equity
See owner’s equity. Also referred to as shareholders’ funds.
Sharpe index
Excess reward to variability ratio that measures the excess return (portfolio return less risk-free rate) relative to the portfolio’s total risk measured by standard deviation.
Short sale
When a trader has sold a contract and established a market position, but has not yet made an offsetting purchase to close-out the position.
Special issues
Issue of shares of a company to a special class of investors.
Speculators
A person who attempts to profit through the buying and selling of contracts (usually short term in nature). In speculating, a person trades for profit in situations.