Acceleration

A lenders right to demand immediate or accelerated repayment upon an event of default.

 

Accordion Feature

A feature in a loan agreement which allows borrowers to increase the principal, subject to there being no event of default. Interest, maturity and other terms will remain identical to the existing agreement.

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Accrual
The accumulation of interest or other payoffs between payment dates.

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Accrued Interest

Interest which has accumulated on a security since the last interest payment date, but has not yet been paid. Accrued interest should be accounted for in the purchase price of debt securities.

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Additional Margin

An additional cost which could be incurred when liquidating a position.

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Adjustable Rate
A debt security whose interest coupon changes periodically, typically against a specified formula based on risk or market conditions.

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Adjusted Present Value / APV

A method of investment appraisal used to quantify the effect of using debt in funding a project. APV is the sum of (i) the net present value of the project assuming it is wholly funded by equity plus (ii) the present value of the tax shield benefit arising from using debt.

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Affirmation

The process through which two parties verify their acceptance of the key terms of a trade.

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Agency Bond

A debt security issued by a government sponsored enterprise designed to resemble a Treasury bond.

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Aggregated Risk

The total amount of exposure one counterparty, such as a bank, has against another counterparty.

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Aggregation

The principle of consolidating individual exposures into an accumulated total based on a measurable criteria such as counterparty, currency, sector, etc. 

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Allocation

The process through which a block trade is divided into smaller holdings and allocated to individual owners by the bookrunner(s) of the original trade.

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Alpha

A co-efficient measuring risk adjusted performance. Considers risk arising from the specific security rather than the overall market. A large Alpha indicates the security outperformed the market and better than would be predicted given its beta (volatility).

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Amortisation

The repayment of obligations over a certain period, through regular or irregular instalments of principal.

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Annual Equivalent Rate / AER 
The notional annual interest rate applied to investments, assuming that all interest is reinvested. Due to compounding the AER will be greater than the periodic interest rate multiplied by the number of periods.

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Annual Percentage Rate / APR 
The nominal interest rate for one year.
 

Annuity Loan

A debt security with fixed, recurring payments over a specified period of time. The interest may be fixed or floating.

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Appreciation

Describes a currency strengthening in response to market demand rather than by official action.

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Arbitrage

The simultaneous purchase of an asset in one market and sale of an identical asset in another market to benefit from a discrepancy in their price relationship. Often the assets will be identical in a complicated way e.g. different types of security that are exposed to identical risks.

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Ask

The price at which a seller is willing to sell a security. Opposite of Bid.

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Asset Allocation

Investment practice that divides funds among different markets to achieve diversification for risk management purposes and/or expected returns consistent with an investor's objectives.

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Asset Backed 

Debt made available against a charge of security over an underlying asset such as property, plant, receivables, cash, etc. See also Factoring, Finance lease, Invoice finance, Operating lease and Securitisation. 

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Asset Backed Securities / ABS 
Debt securities which are secured by income producing assets. Typically an ABS is constructed by packaging together a group of assets or securities, selling them to an SPV, and the SPV issuing a new security whose buyer has a claim against the cash flows generated by the original package. Principal and interest on the bond is serviced from the cash flows of the underlying assets. See also Securitisation.

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Asset Class

Consolidating assets or securities of common nature based on a classification such as Interest Rate, FX, Commodities, Equity, Credit, Real Estate, etc.

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Assets Under Management

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Assignment

In general, the transfer of obligations to another party.​ 

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At Best
An instruction given to a dealer to buy or sell at the best rate that is currently available in the market.
 

At or Better

An order to deal at a specific rate or better

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At Par Forward Spread 
When the forward price is equivalent to the spot price.
 

At the Price Stop-Loss Order
A stop-loss order that must be executed at the requested price regardless of market conditions.

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At-the-Money

An option whose strike price is identical to the market price of the underlying. The option there fore has no intrinsic value.

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Auction Rate Security

A debt security which offers a short term interest rate. The investor can sell the security back to the issuer on each interest rate re-fixing.

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Average Effective Maturity

A maturity of a portfolio taking into account any potential early redemption.

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Average Nominal Maturity

A calculation of maturity on a portfolio, which does not take account of any potential early redemption.

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Average Weighted Maturity

A calculation of maturity on a portfolio, weighted by the nominal amount of each security and its amortisation conditions.

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Back-to-back loan

A loan facility made available against the security of another loan (the Master) on the understanding that repayment will come once the obligations under the Master are fulfilled.

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Back to Back

(1) Transaction where all the obligations and liabilities in one transaction are mirrored in a second transaction. (2) Transaction where a loan is made in one currency in one country against a loan in another country in another currency.

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Bad Business Day

A day on which banks are not open, thus making it impossible to make a settlement on that date. In such cae settlement will be dictated by the business day convention.

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Balloon Repayment
Repayment of a loan where the amortisation schedule is heavily weighted towards the final payment.

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Band

The range in which a currency is permitted to move.

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Bankers Acceptance

A short term credit instrument issued by a non financial counterpart, the payment of which is guaranteed by a bank.

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Barrier

A specified rate at which an event will occur e.g. payment, collateral call, option exercise, etc.

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Base Currency

The currency against which other currencies are measured e.g. a multi-currency portfolio may be translated back to the accounting currency.

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Base Rate

The interest rate the Bank of England charges commercial banks. Base rate is used as a tool to manage short-term interest rates and the cost of money.

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Basis

The method or convention upon which interest rates are calculated for bond and money market instruments. In futures, the difference between the relevant cash instrument price and the futures price. Carry basis is the theoretical price of the future, minus the spot price of the underlying and is equal to the net cost of carry. Value basis is the difference between the theoretical price of the future and its market price.

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Basis Point / BP
One-hundredth of one percent e.g. 0.01%. Also be known as bips or bps.

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Basis Point Value / BPV

The change in the value of a security or portfolio resulting from a 1 basis point increase in interest rates. Used as a measure of interest rate risk (based on the assumption that interest rates move in a parallel fashion to risk).

      

Basis Risk

The risk of an unfavourable change in the relationship between the price of a derivative and the market value of an underlying.

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Bear

One who expects a fall in prices. Opposite of a Bull.

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Benchmark

A reference point, index or basket against which performance or risk is measured.

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Beta

A co-efficient measuring how much a security or portfolio will move if its benchmark moves by 1 unit. Beta therefore measures sensitivity of an asset's return to changes in the market as a whole e.g. market risk. A Beta value above 1 implies potential for outperformance in a rising market and greater reductions when the market is falling. A Beta value below 1 implies the opposite behaviour. Betas are additive, thus the beta of a portfolio is the weighted average of all the individual betas in a portfolio. The capital asset pricing model states that unique or unsystematic risk can be diversified away so that only systematic risk commands a risk premium. See also Greeks.

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Bid
The price at which a buyer will purchase an asset. Opposite of Ask.

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Bid-Ask Spread

The Bid-Ask spread is the difference between the Bid and Ask prices. May also be known as the Bid-Offer spread.

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Bifurcation

Splitting something into two. For example, an effective interest rate comprises the sum of the underlying and any derivative.

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Bilateral Loan
A loan granted directly between a bank and borrower (as opposed to a syndicated loan). Typically the borrower will have a number of bi-lateral loans, on similar terms but with different maturities to reduce liquidity risk.
 

Bill of Exchange

An unconditional order in writing, addressed by one person to another, signed by the person giving it. Requires the person to whom it is addressed to pay on demand or at fixed or determinable future date.

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Bollinger Bands
A quantitative method which combines a securities moving average and volatility. The bands were designed to gauge whether the prices are high or low on relative basis. They are plotted two standard deviations above and below a simple moving average.

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Bond

A debt security which guarantees regular payment of interest and repayment of principal on specified dates. Provides longer-term of finance for issuers, and a predictable income stream for buyers. Once issued a Bond may be traded on a market, with its price fluctuating based on factors such as credit risk, term to maturity, market demand and the yield curve. An issuer may therefore require a credit rating. Interest is typically fixed but can be floating.

The yield on a bond is the interest coupon expressed as a function of the market value. Bonds are redeemed at par (100%) unless there is an event of default or haircut.

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Bond Basis

A day count convention which used 30 days in a month and 360 days in a year.

 

Book Value
The value of an asset as published in the financial accounts. May be different to the market value.

 

Bookrunner
In a syndicated loan issue, the arranger who is responsible for issuing invitations, disseminating information and ensuring the process runs to plan. This role is often performed jointly by two to four banks on larger loans. The bookrunners may also underwrite the issue.

 

Bootstrapping
In funding, the use of self-generated sources of capital to grow a business. Also, techniques used to decompose market prices to the prices of instruments that are more relevant and easier to understand.

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Break Cost
Any cost associated with terminating a loan, hedging or deposit agreement early.

 

Breakeven

The level a spot price has to reach in order for an option buyer to cover the cost of the premium. Also, the price or time at which a hedging strategy has no gain or loss relative to another strategy, usually a cash position or a "do-nothing strategy".

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Bridge Loan

A short-term loan which allows a borrower to finance operations or acquisitions until it can arrange longer-term or alternative financing.

 

Broken Dates
Deals undertaken for value dates that are not standard periods e.g. 1 week, 2 weeks, 1, 2, 3, 6, and 12 months. Also known as Odd dates or Broken period.
 

Broker
An agent who executes orders to buy/sell currencies or securities on behalf of others, either for a commission or spread.
 

Bull

One who expects a rise in prices. Opposite of a Bear.

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Bull Spread

The simultaneous purchase and sale of two futures contracts with the intention of profiting from a rise in prices, but at the same time limiting the potential loss if this expectation does not occur.

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Also, the simultaneous purchase and sale of options of the same class and expiration date but different strike prices. In a bull vertical spread, the purchased option has a higher delta than the option that is sold.

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Bullet Repayment

Repayment of debt in one amount, on the final maturity date of the agreement. See also Amortization and Balloon repayment.

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Bullion

Precious metal cast into bars.

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Bunds
Bonds of 2–30 years issued by the German government. The interest rate on Bunds is often used as a benchmark to compare the price of risk for sovereign borrowers.

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Business Day Convention

Conventions are used to define how bad business days are accounted for when determining accrued interest and payments.

 

Buyer Credit

A form of export finance where the export credit agency (ECA) of the seller’s country provides funding to the overseas buyer to facilitate the sale.

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Call Price
The price at which a debt security can be redeemed before its specified maturity date.

 

Call Protection
The period following the issue of a debt security during which it cannot be called.

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Call Provision
A provision in the issue terms of a debt security, according to which the issuer has the option to redeem or buy back the security before its maturity date.

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Call Risk
The risk that a callable debt security will be redeemed as a result of falling interest rates.

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Call
(1) An option that gives the holder the right to buy the underlying instrument at a specified price during a fixed period.
(2) A period of trading.
(3) The right of an bond issuer to pre-pay debt and demand the surrender of its bonds.

Callable bond

A debt security which can be redeemed by the issuer, at a specified price and date.

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Capital Markets Union

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Capital Asset Pricing Model (CAPM)

A model for valuing financial assets which incorporates both risk and the time value of money in calculating expected returns.

 

Risk is calculated by taking the Beta.  The time value of money is calculated by the Risk Free Rate.

 

If the expected return does not meet or beat the required return then the investment should not be undertaken.

 

Carry trade

Borrowing in a low interest rate and using the funds to buy something which has a higher interest rate or return.

 

Carry trades are most commonly used to exploit foreign currency differences.

 

Carry
The benefits/costs associated with maintaining a position.

 

Financial benefits/costs include margin, interest and dividends; Economic benefits/costs include storage, maintenance, etc and the Opportunity cost is the benefit foregone by not taking an alternative action.

 

Carry should be considered when calculating the true return on a transaction.

 

in the cash market due to interest rate differentials.

 

For example, in a positive yield curve environment carry is positive if one receives the long (swap) rate and pays the short rate (Libor). In the FX markets, carry is positive i

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Cash investment

Generally, a deposit which can be withdrawn on demand and receives a floating rate of interest.

 

Cash settlement

If a contract is cash settled, on the delivery date instead of actual physical delivery of the underlying asset...

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Central Bank

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Closed Position
A transaction which leaves the trade with a zero net commitment to the market.

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Collateral

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Collateralised Debt Obligation / CDO

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Combating the Financing of Terrorism / CFT

Laws and regulations to be implemented by financial service providers to prevent or uncover the funding of terrorism or illegal purchase of assets.

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Commercial paper (CP)

An unsecured debt instrument used to fund short-term (typically up to 1yr) borrowing requirements. Used by larger issuers with strong ratings.

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Commitment fee
The fee payable by borrowers on the unutilised amount of a committed debt facility (to compensate the lender for having to set aside capital at the central bank). Commitment fees are usually calculated daily and paid quarterly.

 

Concentration risk

The risk arising from concentrations in a counterparty, tenor, currency or instrument.

 

Contingent liability

A liability which arises only under specific conditions in the future e.g. non performance of certain terms.

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Covenant

Covenant

A test used by lenders to ensure that the performance of the borrower stays within the range agreed at the time the debt facility was granted.

 

Financial covenants measure leverage, asset value, profitability, interest cover and cash flow.

 

Non-financial covenants include restrictions of borrowing, asset sales, pledges of security, etc

 

Covenants should be set as an early warning, providing time for the parties to take remedial action in the event of a breach.

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Convertible bond
A bond giving the holder the right to exchange it for equity in the same issuer at a future date.

 

Offers the investor the potential to earn yield during the bond component and an option on taking an equity interest

 

May offer the issuer favorable accounting treatment – the bond being treated as equity rather than debt – and issuing their equity at a premium to the current market price.

 

Conversion may take place before the bond’s maturity if specified criteria are met or on the maturity date, instead of repayment of the principal.

 

Convertible bond investors typically rank above shareholders in case of liquidation of the company’s assets.

 

Cost of Carry
The interest rate parity, where the forward price is determined by the cost of borrowing money in order to hold the position.

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Country risk
The risk of financial loss arising from political or legal risks in a particular country.

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Credit Default Swap

A credit derivative by which one party protects their financial interests by insuring against the default of another.

 

CDS have also become used for speculative purposes against weaker or troubles bond issuers – corporate and sovereign – as do not require ownership of an underlying security.

 

The party buying the protection must make fixed payments on a regular basis (in effect an insurance premium). The price of will vary based upon factors such as the rating of the underlying issuer, rating of related bonds (reference obligations) and market sentiment.

 

In the event the rating of the reference obligation declines then the price of the CDS would widen and the holder could sell for a profit. In the event of a default proper the CDS proceeds could cover the holder’s position (such as a loan or bond).

 

CDS are OTC derivative although there are liquid markets for secondary sales and trading.

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Credit linked notes

A credit linked note is a debt instrument with an embedded credit derivative. It lets the seller transfer a specific credit risk to the buyer (investor).

In return for accepting this exposure, the investor receives a higher yield on the note.

 

Credit Risk

The risk of financial loss arising from the failure of a counterparty to pay principal or interest.

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Credit Rating

An assessment of the relative strength, or risk, of a counterparty or security by a credit ratings agency. Investment grade ratings imply a low probability of default and strong ability to repay capital and interest. Sub-investment grade implies a higher probability of default.

 

The credit rating will directly influence the cost/returns. Many institutions also have risk and asset allocation policies based on credit ratings.

 

The methodology in calculating a credit rating involves detailed quantitative (leverage, profitability, cash generation) and qualitative (management, sector, strategy) analysis and financial modelling. Some credit ratings agencies assess the overall issuer while others assess individual securities. Limitations exist as the data is primarily sourced from the issuer and ratings actions often lag the speed with which market and credit conditions change.

 

Further criticism has been levelled at the credit rating process as the issuer typically pays for the rating, thus creating a potential conflict of interest.

 

Credit Rating Agency

 The three largest rating agencies are Standard & Poors, Moodys and Fitch, although many more exist and are likely to grow as the sector is increasing reformed and regulated.

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Crowdfunding 

Transactions occurring between persons and companies via a marketplace. Includes debt, invoices and equity in return for interest, shares and rewards. Provides liquidity to companies or persons who might otherwise be excluded from the market and a new (often unregulated) asset class for investors.