Commercial Banking Students of 2009-11, Group –I
WHAT THIS BOOK WILL DO FOR YOU
The IFIM Business School Dictionary of Finance is written for professional students
engaged in the fields of studying international finance, global trade, foreign investments, and
banking. It may be used for day-to-day practice and for technical research. The IFIM Business
School Dictionary is a practical reference of proven techniques, strategies, and approaches that
are successfully used by professionals to diagnose multinational finance and banking problems.
The IFIM Business School Dictionary of Finance will enlighten the practitioner by
presenting the most current information, offering important directives, and explaining the
technical procedures involved in the aforementioned dynamic business disciplines. This
reference book will help you diagnose and evaluate financial situations face daily. This library of
international finance and banking will answer nearly every question you may have.
The IFIM Business School Dictionary of Finance is a handy reference for today’s busy
financial executive. It is a working guide to help you quickly pinpoint
• What to look for
• How to do it
• What to watch out for
• How to apply it in the complex world of business
• What to do
First we would extend our honest thank to our faculty Prof. Revathy Iyer (Associate
Professor, Finance) for giving us the opportunity to prepare this Dictionary
We also thank one and all who have helped in making this dictionary.
Last but not least our families for extending their support.
While the dictionary was taking its form, we realized how true the below quote is
“Coming together is a beginning.
Keeping together is progress. Working together is success.”
: Henry Ford
This project is not the endeavor of individual only, but is the result of valuable
time, effort and co-operation of one and all of us. So, we would like to acknowledge each other
for a great teamwork, Thank You.
List of the Students who contributing their work:
SL NO. NAMES Alphabets
1 Harish Kumar Jain K A
2 Ranjan Shetty B
3 Chithra K & Monika Gosh C
4 Deepa Joshi & Anindita Dhar D
5 Bhujanga Rao Sandeep B & Bala Kishore Swamy E
6 Gourav Khandelwal F
7 Ashvani Kumari & Sandeep Dutta G
8 Abhishek L H
9 Jins Varghese I
10 Jose John J
11 K. Anish K
12 Anindita Banerjee & Ranjan Shetty L
13 Mini Dhingra M
14 Nabanita Chakraborty N
15 Krishna Kant O
16 Neha Yadav & Fahim Ahmed P
17 Bornali Dey Q
18 Anshu Teria R
19 Anjana Das S
20 Kush T
21 Adarsh Gautam U
22 Harkeerat Singh Mavi V
23 Arun Aggarwal W
24 Ashlesa Dash X
25 Jitendra Singh Y
26 Narasimhabala S Z
27 Nithya Sridhar Typing
28 Aparupa Chakraborty Proof reading
29 Amith L Re-Proof reading
30 Atmakuri Ram Mohan Coordinating
31 Ranjan Shetty
& Final Draft
ABA Transit Number
A unique identifying number, assigned by the American Bankers Association under the
National Numerical System, to facilitate the sorting and processing of checks. It has two
parts, separated by a hyphen. The first part identifies the city, state, or territory in which
the bank is located; the second part identifies the bank itself. The transit number appears in
the upper right-hand corner of checks as the numerator (upper portion) of a fraction.
A relationship involving a credit established under a particular name, usually by deposit,
against which withdrawals may be made.
The process of determining the profit or loss to a bank in handling an account for a given
period. It shows the activity involved, the cost of that activity as determined by multiplying
unit costs by transaction volume, and the estimated earnings on average investable
balances maintained during the period after all expenses have been listed.
Account Reconciliation (Reconcilement)
A bookkeeping service offered to bank customers who use a large volume of checks. The
service is designed to assist them in balancing their accounts and includes numerically
sorting checks, itemizing outstanding checks, and actually balancing the account.
Those amounts due to vendors or suppliers that must be paid within one year.
Short-term assets, representing amounts due to a vendor or suppliers of goods or services
that were sold on credit terms.
The accounting system that records all income when it is earned and all expenses when
they are incurred.
Adjustable Rate Loan.
See variable rate loan.
A party appointed by a court to settle an estate when the decedent has left no valid will, no
executor is named in the will, the named executor cannot or will not serve.
A written acknowledgment by a bank of a transaction affecting an account; for example, a
debit or credit advice.
A bank that has received notification from another financial institution of the opening of a
letter of credit. The advising bank then contracts the beneficiary, reaffirming the terms and
conditions of the letter of credit. Affidavit. A voluntary sworn statement of facts signed
before a notary public, court officer, or other authority.
The relationship between a party who acts on behalf of another, and the principal on whose
behalf the agent acts. In agency relationships, the principal retains legal title to property or
A party who acts on behalf of another by the latter’s authority. The agent does not have
legal title to the property of the principal.
Alaska Unclaimed Property Act.
Alaska Statute 34.45 requires that financial institutions we make available to the state all
bank deposits for which no claim of ownership has been made for seven years. An account
is presumed abandoned if seven years have elapsed since you have made a deposit or
withdrawal or corresponded with the bank concerning the account.
A check on which a material change, such as in the dollar amount, has been made. Banks
are expected to detect alterations and are responsible for paying checks only as originally
American Bankers Association (ABA).
An organization of commercial banks, founded in 1875 to keep members aware of
developments affecting the industry, to develop educated and competent bank personnel,
and to seek improvements in bank management and service.
American Institute of Banking (AIB).
A section of the American Bankers Association founded in 1900 to provide bank-oriented
education for bank employees. AIB’s activities are conducted through chapters and study
groups throughout the county. In addition to its regular classes, the Institute conducts
correspondence courses. Membership and enrollment are open to employees and officers
of ABA member institutions.
The gradual reduction of a loan or other obligation by making periodic payments of
principal and interest.
The maximum amount by which the interest rate on an adjustable rate mortgage may be
raised in any one year.
Annual Percentage Rate (APR).
The true cost of credit on a yearly basis. Expressed as a percentage, the APR results from an
equation that considers the amount financed, the finance charge, and the term of the loan.
The APR is usually expressed in terms of the effective annual simple interest rate.
Annual Percentage Yield (APY).
A percentage rate reflecting the total amount of interest paid on an account, based on the
interest rate and the frequency of compounding for a 365 day period. Appraisal. A
professional evaluation of the market value of some assets by an independent expert.
Anything owned that has commercial or exchange value. Assets may consist of specific
property or of claims against others, as opposed to obligations due to others (liabilities).
A court or a state or federal agency may order a financial institution to withhold funds from
your account to satisfy a levy or order. Generally after deducting service charges and fees,
financial institutions will comply with orders that are properly executed and served and
will produce funds from your account without regard to whether the account is held in one
name, held jointly, or held jointly and requiring more than one signature for withdrawal.
Also referred to as Writ of Attachment or Levy.
A formal or official examination of and verification of accounts.
The signature(s) affixed to a negotiable instrument by the party or parties who have the
legal right to issue instructions regarding its handling.
Automated Clearing House (ACH).
A computerized facility that electronically processes interbank credits and debits among
member financial institutions, avoiding the use of paper documents.
You pre-authorize transfer of funds from one account to another.
A list indicating the number of days, subject to the terms of Regulation CC, that must elapse
before deposited checks can be considered converted into usable funds.
The portion of a customer’s account balance on which the bank has placed no restrictions,
making it available for immediate withdrawal.
Average Daily Float.
The portion of a customer’s account balance that consists of deposited checks in the
process of collection.
An intercompany loan arranged through a bank.
BACK-TO-BACK LETTER OF CREDIT
Back-to-back letter of credit is one type of letter of credit (L/C). It is a form of Pretrade
financing in which the exporter employs the importer’s L/C as a means for securing credit
from a bank, which in turn supports its L/C to the exporter with the good chance of ability
to repay that the importer’s L/C represents.
Also called link financing, parallel loan or fronting loan, a back-to-back loan is a type of
swaps used to raise or transfer capital. It may take several forms:
1. A loan made by two parent companies, each to the subsidiary of the other. As is shown in
Exhibit 14, each loan is made and repaid in one currency, thus avoiding foreign exchange
risk. Each loan should have the right to offset, which means that if either subsidiary
defaults on its payment, the other subsidiary can withhold its repayment. This eliminates
the need for parent company guarantees.
2. A loan in which two multinational companies in separate countries borrow each other’s
currency for a specific period of time and repay the other’s currency at an agreed maturity.
The loan is conducted outside the foreign exchange market and often channeled through a
bank as an intermediary.
a company set up to organize the payment of direct debits, standing orders, salary cheques
and other payments generated by computers.
It operates for all the British clearing banks and several building societies; it forms part of
APACS. Full form Bankers’ Automated Clearing Services
A debt which will not be paid, usually because the debtor has gone out of business, and
which has to be written off in the accounts
A transfer of goods by someone (the bailor) to someone (the bailee) who then holds them
until they have to be returned to the bailor (NOTE: Putting jewels in a bank’s safe deposit
box is an example of bailment.)
To rescue a company which is in financial difficulties?
The amount which has to be put in one of the columns of an account to make the total
debits and credits equal balance in hand cash held to pay small debts balance brought
down or forward the closing balance of the previous period used as the opening balance of
the current period balance carried down or forward the closing balance of the current
period balance due to us the amount owed to us which is due to be paid to balance off the
accounts to make the two sides of an account balance at the end of an accounting period, by
entering a debit balance in the credit side or a credit balance in the debit side, and carrying
the balance forward into the next period to calculate the amount needed to make the two
sides of an account equal.
BALANCE OF PAYMENTS (BOP)
The balance of payments (BOP) is a systematic record of a country’s receipts from, or
payments to, other countries. In a way, it is like the balance sheets for businesses, only on a
national level. The reference you see in the media to the balance of trade usually refer to
goods within the goods and services category of the current account. It is also known as
merchandise or “visible” trade because it consists of tangibles such as foodstuffs,
manufactured goods, and raw materials. “Services,” the other part of the category, is known
as “invisible” trade and consists of intangibles such as interest or dividends, technology
transfers, and others (e.g., insurance, transportation, financial). When the net result of both
the current account and the capital account yields more credits than debits, the country is
said to have a surplus in its balance of payments. When there are more debits than credits,
the country has a deficit in the balance of payments. Exhibit 16 presents the components of
each and their interrelationships. Data is collected by the U.S. Customs Service. Figures are
reported in seasonally adjusted volumes and dollar amounts. It is the only non-survey,
nonjudgmental report produced by the Department of Commerce.
BALANCE OF PAYMENTS ACCOUNTING
The balance of payments (BOP) statement is based on a double-entry bookkeeping system
that is used to record transactions. Every transaction is recorded as if it consisted of an
exchange of something for something else—that is, as a debit and a credit. As a general rule,
currency inflows are recorded as credits, and outflows are recorded as Debits . Exports of
goods and services are recorded as credits. In the case of imports, goods and services are
normally acquired for money or debt. Hence, they are recorded as debits. Where items are
given rather than exchanged, special types of counterpart entries are made in order to
furnish the required offsets. Just as in counting, the words Debits and credit shave no value-
laden meaning—either good or bad. They are merely rules or conventions; they are not
economic truths. Under the conventions of double-entry bookkeeping, an increase in the
assets of an entity is always recorded as a debit and an increase in liabilities as a credit.
Thus a debit records (1) the import of goods and services, (2) increase in assets, or (3)
reductions in liabilities. A credit records (1) the export of goods and services, (2) a
decrease in assets, or(3) increases in liabilities. The balance of payments statement is
traditionally divided into three major groups of accounts: (1) current accounts, (2) capital
accounts, and (3) official reserves accounts. We will define these accounts and illustrate
them with some transactions. The double-entry system used in the preparation of' the
balance of' payments allows us to see how each transaction is financed and how
international transactions usually affect more than one type of account in the balance of
The current accounts record the trade in goods and services and the exchange of gifts
among countries. The trade in goods is composed of exports and imports. A country
increases its exports when it sells merchandise to foreigners. This is a source of funds and a
decrease in real assets. A country increases its imports when it buys merchandise from
foreigners. This is a use of funds and an acquisition of real assets.
B. Capital Accounts
The capital accounts record the changes in the levels of international financial assets and
liabilities. The various classifications within the capital account are based on the original
term to maturity of the financial instrument and on the extent of the involvement of the
owner of the financial asset in the activities of the security's issuer. Accordingly, the capital
accounts are subdivided into direct investment, portfolio investment, and private short-term
capital flows. Direct investment and portfolio investment involve financial instruments that
had a maturity of more than 1 year when issued initially. The distinction between direct
investment and portfolio investment is made on the basis of the degree of management
involvement. Considerable management involvement is presumed to exist in the case of
direct investment (usually a minimum of 10% ownership in a firm), but not of portfolio
investment. are financial assets denominated in such currencies as the U.S. dollar, which
are freely and easily convertible into other currencies, but not in such currencies as the
Indian rupee, because the Indian government does not guarantee the free conversion of its
currency into others and not much of an exchange market exists. An increase in any of
these financial assets constitutes a use of funds, while a decrease in reserve assets implies a
source of funds. In some situations, this fact seems to run against intuitive interpretations,
as when we say that an increase in gold holdings is a use of funds (signified by a minus sign
or debit in the U.S. balance of payments). However, an increase in gold holdings is a use of
funds in the sense that the U.S. might have chosen to purchase an alternative asset such as a
bond issued by a foreign government. In order to be considered part of official reserves, the
financial asset must be owned by the monetary authorities. The same asset in private
hands is not considered part of official reserves. In addition, the country’s own currency
cannot be considered part of its reserve assets; a country’s currency is a liability of its
monetary authorities. Changes in these liabilities are reported in the short-term capital
BALANCE OF PAYMENTS ADJUSTMENT
Balance of payments adjustment is the automatic response of an economy to a country’s
payments imbalances (payments deficits or surpluses). An adjustment is often necessary to
correct an imbalance disequilibrium) of payments. Theoretically, if foreign exchange rates
are freely floating, the market will automatically adjust for deficits through foreign
exchange values and for surpluses through higher values. With fixed exchange rates,
central banks must finance deficits, allow devaluation, or use trade restrictions to restore
equilibrium. Adjustment measures that can be taken to correct the imbalances include: (1)
the use of fiscal and monetary policies to vary the prices of domestically produced goods
and services vis-à-vis those made by other countries so as to make exports relatively
cheaper (or more expensive) and imports more expensive (or cheaper) in foreign currency
terms; and (2) the use of tariffs, quotas, controls, and the like to affect the price and
availability of goods and services.
BALANCE OF TRADE
Also called merchandise trade balance or visible trade, the balance of trade is merchandise
exports minus imports. Thus, if exports of goods exceed imports the trade balance is said to
be “favorable” or to have a trade surplus, while an excess of imports over exports yields an
“unfavorable” trade balance or a trade deficit. The balance of trade is an important item in
calculating balance of payments. See also BALANCE OF PAYMENTS.
Statement of the financial position of a company at a particular time, such as the end of the
financial year or the end of a quarter, showing the company’s assets and liabilities
BALANCE SHEET HEDGING
Balance sheet hedging is the MNC strategy of using hedges (such as forward contracts) to
avoid currency risk (i.e., translation exposure, transaction exposure, and/or economic
exposure) that would potentially adversely affect the company’s balance sheet. This
strategy involves bringing exposed assets equal to exposed liabilities. If the goal is
protection against translation exposure, the procedure is to have monetary assets in a
specific currency equal
monetary liabilities in that currency. If the goal is to reduce transaction or economic
exposure, the strategy is to denominate debt in a currency whose change in value will offset
the change in value of future cash receipts.
A range of figures with an upper and a lower limit, to which something, e.g. the amount of
someone’s salary or the exchange value
of a currency, is restricted but within which it can move
A business which holds money for its clients, lends money at interest, and trades generally
Banker’s acceptance (BA) is a time draft drawn on by a business firm and accepted by a
bank to be paid at maturity. A bank creates a BA by approving a line of credit for a
customer. It is an important source of financing in international trade, when the exporter of
goods can be certain that the importer’s draft will actually have funds behind it. Banker’s
acceptances are short-term, money-market instruments actively traded in the secondary
market. Depending on the bank’s creditworthiness, the acceptance becomes a financial
instrument which can be discounted. In addition to the discount, an acceptance fee (usually
1.5% of the value of the draft) is charged to customers seeking acceptances.
An account which a customer has with a bank, where the customer can deposit and
Bank base rate
A basic rate of interest, on which the actual rate a bank charges on loans to its customers is
A book, given by a bank, which shows money which you deposit or withdraw from your
savings account (also called a ‘passbook’)
a credit card or debit card issued to a customer by a bank for use instead of cash when
buying goods or services (NOTE: There are internationally recognized rules that govern the
authorization of the use of bank cards and the clearing and settlement of transactions in
which they are used.)
Charges which a bank makes for carrying out work for a customer
Bank discount rate
a rate charged by a bank for a loan where the interest charges are deducted when the loan
An order by one bank telling another bank, usually in another country, to pay money to
BANK FOR INTERNATIONAL SETTLEMENTS (BIS)
Bank for International Settlements (http://www.bis.org), established in 1930, promotes
cooperation among central banks in international financial settlements. Members include:
Australia, Austria, Belgium, Bulgaria, Canada, Czechoslovakia, Denmark, Finland, France,
Germany, Greece, Hungary, Iceland, and Ireland.
The act of making sure that the bank statements agree with the company’s ledgers
Cash and securities held by a bank to cover deposits
Who has been declared by a court not to be capable of paying his or her debts and whose
affairs are put into the hands of a receiver?
The state of being bankrupt
A written statement from a bank showing the balance of an account at a specific date.
1. A swap between banks (commercial or central) of two or more countries for the purpose
of acquiring temporarily needed foreign exchange.
2. A swap in which a bank in a soft-currency country will lend to an MNC subsidiary there,
to avoid currency exchange problems. The MNC or its bank will make currency available to
the lending bank outside the soft-currency country.
To pass information among member banks
A system of lines printed on a product which, when read by a computer, give a reference
number or price
Barter is international trade conducted by the direct exchange of goods or services
between two parties without a cash transaction.
The basic balance is a balance of payments that measures all of the current account items
and the net exports of long-term capital during a specified time period. It stresses the long-
term trends in the balance of payments.
A basis point is a unit of measure for the change in interest rates for fixed income securities
such as bonds and notes. One basis point is equal to 1/100th of a percent, that is, 0.01%.
Thus, 100 basis points equal 1%. For example, an increase in a bond’s yield from 6.0% to
6.5% is a rise of 50 basis points. A basis point should not be confused with a “point,” which
represents one percent.
A bearer bond is a corporate or governmental bond that is not registered to any owner.
Custody of the bond implies ownership, and interest is obtained by clipping a coupon
attached to the bond. The benefit of the bearer form is easy transfer at the time of a sale,
easy use as collateral for a debt, and what some cynics call “taxpayer anonymity,” signifying
that governments find it hard to trace interest payments in order to collect income taxes.
Bearer bonds are common in Europe, but are seldom issued any more in the United States.
The alternate form to a bearer bond is a registered bond.
Also called beta coefficients, beta (β), the second letter of Greek alphabet, is used as a
statistical measure of risk in the Capital Asset Pricing Model (CAPM). It measures a
security’s (or mutual fund’s) volatility relative to an average security (or market portfolio).
Put another way, it is a measure of a security’s return over time to that of the overall
market. For example, if ABC’s beta is 1.5, it means that if the stock market goes up 10%,
ABC’s common stock goes up 15%; if the market goes down 10%, ABC goes down 15%.
Also called a quotation or quote, bid is the price which a dealer is willing to pay for (i.e.,
buy) foreign exchange or a security.
The bid–ask spread is the spread between the bid (to buy) and the ask (to sell or offer)
price and represents a transaction cost. It is based on the breadth and depth of the market
for that currency as well as on the currency’s volatility.
See BID RATE.
Also called the buying rate, bid rate is the rate at which a bank buys foreign currency from a
customer by paying in home currency.
1. Advocating drastic changes in the policies of a country or an MNC.
2. The liberalization of the London capital markets that transpired in the month of October
Currencies participating in the European Economic and Monetary Union (EMU) are units of
the euro until January 1, 2002. To convert one currency to another, you must use the
triangulation method: Convert the first currency to the euro and then convert that amount
in euros to the second currency, using the fixed conversion rates adopted on January 1,
BILL OF EXCHANGE
Also called a draft, a bill of exchange (B/E) is an unconditional written agreement between
two parties, written by an exporter instructing an importer or an importer’s agent such as a
bank to pay a specified amount of money at a specified time. Examples are acceptances or
the commercial bank check. The business initiating the bill of exchange is called the maker,
while the party to whom the bill is presented is called the drawee.
BILL OF LADING
The bill of lading (B/L) is a receipt issued to the exporter by a common carrier that
acknowledges possession of the goods described on the face of the bill. It serves as a
contract between the exporter and the shipping company. If it is properly prepared, a bill of
lading is also a document of title that follows the merchandise throughout the transport
process. As a document of title, it can be used by the exporter either as collateral for loans
prior to payment or
as a means of obtaining payment (or acceptance of a time draft) before the goods are
released to the importer. There are different types of B/L:
1. A negotiable or shipper’s order B/L can be bought, sold, or traded while goods are in
2. A straight B/L is nether neither negotiable nor transferable.
3. An order B/L is cosigned to the exporter who keeps title to the merchandise until the
B/L is endorsed.
4. An on-board B/L certifies that the goods have been actually placed on board the ship.
5. A received-for-shipment B/L simply acknowledges that the goods have been received for
BILL OF SALE
A bill of sale is a written document which transfers goods, title, or other interests from a
seller to a buyer and specifies the terms and conditions of the transaction.
BANK FOR INTERNATIONAL SETTLEMENTS
BILL OF LADING.
Black markets are illegal markets in foreign exchange. Developing nations generally do not
permit free markets in foreign exchange and impose many restrictions on foreign currency
transactions. These restrictions take many forms, such as limiting the amounts of foreign
currency that may be purchased or having government licensing requirements. As a result,
illegal markets in foreign exchange develop to satisfy trader demand. In many countries
such illegal markets exist openly, with little government intervention.
Blocked funds are funds in one nation’s currency that may not be exchanged freely due to
exchange controls or other reasons.
Brady bonds are bonds issued by emerging countries under a debt-reduction plan and are
named after a former U.S. Secretary of the Treasury. They are traded on the international
Break-even analysis is used to determine the amount of currency change that will equate
the cost of local currency financing with the cost of home currency (INR) financing.
Payment to a broker for a deal carried out
The percentage of the commission paid to a broker which is returned to the customer as an
incentive to do more business
The payment to a broker for a deal which he or she has carried out (NOTE: Formerly, the
commission charged by brokers on the London Stock Exchange was fixed, but since 1986,
commissions have been variable.)
The brokers’ market is the market for exchange of financial instruments between any two
parties using a broker as an intermediary or agent. Along with the interbank market, the
broker’s market provides another area of large-scale foreign exchange dealing in the
United States. A good number of foreign exchange brokerage firms make markets for
foreign currencies in New York (as well as in London and elsewhere), creating trading in
many currencies similar to that in the interbank market. The key differences are that the
brokers (1) seek to match buyers and sellers on any given transaction, without taking a
position themselves; (2) deal simultaneously with many banks (and other firms); and (3)
offer both buy and sell positions to clients (where a bank may wish to operate on only one
side of the market at any particular time). Also, the brokers deal “blind,” offering rate
quotations without naming the potential seller/buyer until a deal has been negotiated.
The business of dealing in stocks and shares
An index of prices on the Indian Stock Exchange. Full form Bombay Stock Exchange Index
A plan of expected spending and income for a period of time _ to draw up a budget for
salaries for the coming year
Stocks of a commodity bought by an international body when prices are low and held for
resale at a time when prices have risen, with the intention of reducing sharp fluctuations in
world prices of the commodity
Bulldogs are sterling-denominated bonds issued within the United Kingdom by a foreign
borrower. They are foreign bonds sold in the United Kingdom.
A gold or silver bar the price of bullion is fixed daily
A period when share prices rise because people are optimistic and buy shares (NOTE: The
opposite is a bear market.)
Referring to a market where share prices are rising continuously
Also called cash burn rate, burn rate is how quickly a company uses up its capital to finance
operations before generating positive cash flow from operations. This rate is a critical key
to survival in the case of small, fast growing companies that need constant access to capital.
Many technology and Internet companies are examples. It is not uncommon for enterprises
to lose money in their early goings, but it is important for financial analysts and investors
to assess how much money those firms are taking in and using up. The number to examine
is free cash flow, which is the company’s operating cash flows (before interest) minus cash
outlays for capital spending. It is the amount available to finance planned expansion of
operating capacity. Burn rate is generally used in terms of cash spent per month. A burn
rate of 1 million would mean the company is spending 1 million per month. When the burn
rate begins to exceed plan or revenue fails to meet expectations, the usual recourse is to
reduce the burn rate. In order to stay afloat, the business will have to reduce the staff, cut
spending (possibly resulting in slower growth), or raise new capital, probably by taking on
debt (resulting in interest expense) or by selling additional equity stock (diluting existing
shareholders’ ownership stake).
A type of loan agreement to repurchase bonds or securities at a later date for the same
price as they are being sold
The action of paying extra money to a mortgage in order to get a better rate in the future
(Abbreviation) compound Annual Growth Rate – compounding rate of return over a period.
A whole month as on a calendar, from the 1st to the 30th or 31st
A year from the 1st January to 31st December
1. A demand for repayment of a loan by a lender
2. FIN a demand to pay for new shares which then become paid up
3. FIN a price established during a trading session.
A bond which can be redeemed before it matures
To ask for a debt to be paid
A bank loan repayable at call
1. To stop something this has been agreed or planned
2. To cancel a cheque to stop payment of a cheque which has been signed?
An upper limit placed on something, such as an interest rate (the opposite, i.e. a lower limit,
is a ‘floor’)
Cap and collar
An agreement giving both an upper and a lower limit to a loan Capital the money, property
and assets used in a business. Money owned by individuals or companies, which they use
An account of dealings such as money invested in or taken out of the company by the
owners of a company
Capital adequacy / capital adequacy ratio
The amount of money which a bank has to have in the form of shareholders’ capital, shown
as a percentage of its assets. Also called capital-to-asset ratio
CAPM abbreviation capital asset pricing model
Capped floating rate note
A floating rate note which has an agreed maximum rate
A mortgage rate which is guaranteed not to go above a certain level for a set period of time,
although it can move downwards
A person who holds a credit card or bank cash card
To take an account balance at the end of the current period or page as the starting point for
the next period or page
The first day of trading on a new account on the London Stock Exchange
Money in the form of coins or notes to cash a cheque to exchange a cheque for cash
Which can be cashed, a crossed cheque is not cashable at any bank.
An account which records the money which is received and spent
A loan in cash against a future payment
Cash box metal box for keeping cash
1. A person who takes money from customers in a shop or who deals with the money that
has been paid
2. A person who deals with customers in a bank and takes or gives cash at the counter
US a bank’s own cheque, drawn on itself and signed by a cashier or other bank official
To sell shares or other property for cash
Cash in transit
Cash being moved from one bank or business to another _ Cash-in-transit services are an
easy target for robbers.
A society where no one uses cash, all purchases being made by credit cards, charge cards,
cheques or direct transfer from one account to another
1. A fixed amount of money which can be spent during a certain period
2. A maximum amount someone can withdraw from an ATM using a cash card
US a system operated by a group of banks to clear payments between member banks
A bond with very high interest rate but, which may be worth less, or give a lower rate of
interest, if a disaster such as an earthquake occurs
CD abbreviation certificate of deposit
The highest point that something can reach, e.g. the highest rate of a pay increase _ to fix a
ceiling for a budget _ there is a ceiling of $100,000 on deposits. _ Output reached its ceiling in
June and has since fallen back. _ What ceiling has the government put on wage increases this
The main government-controlled bank in a country, which controls that country’s financial
affairs by fixing main interest rates, issuing currency, supervising the commercial banks
and trying to control the foreign exchange rate
Central bank discount rate
The rate at which a central bank discounts bills, such as treasury bills
Central bank intervention
An action by a central bank to change base interest rates, to impose exchange controls or to
buy or sell the country’s own currency in an attempt to influence international money
A bankrupt who has been discharged from bankruptcy with a certificate to show that he or
she was not at fault
Certificate of deposit
A document from a bank showing that money has been deposited at a certain guaranteed
interest rate for a certain period of time.
A cheque which a bank says is good and will be paid out of money put aside from the
payer’s bank account
CFO abbreviation chief financial officer
CFP abbreviation Communauté Française du Pacifique
A franc with a fixed exchange rate against the euro, used in French territories in the Pacific
CGT abbreviation capital gains tax
A computerised system for clearing cheques organised by the banks. Compare BACS. Full
form Clearing House Automated Payments System
A bank which has been set up by government charter (formerly used in England, but now
only done in the USA and Canada)
Chartered Institute of Bankers
A professional association of bankers, providing training, professional examinations and
qualifications which are recognised worldwide.
US referring to a deposit account on which checks can be drawn
US a card issued by a bank to use in ATMs, but also used in some retail outlets
Checking account US same as current account 1
A note to a bank asking them to pay money from your account to the account of the person
whose name is written on the note _ a cheque for £10 or a £10 cheque (NOTE: The US
spelling is check.) _ to cash a cheque to exchange a cheque for cash _ to endorse a cheque
to sign a cheque on the back to show that you accept it to make out a cheque to someone
to write someone’s name on a cheque Who shall I make the cheque out to? _ to pay by
cheque to pay by writing a chattel mortgage 60 cheque, and not using cash or a credit
card _ to pay a cheque into your account to deposit a cheque _ the bank referred the
cheque to the drawer the bank returned the cheque to the person who wrote it because
there was not enough money in the account to pay it _ to sign a cheque to sign on the front
of a cheque to show that you authorise the bank to pay the money from your account _ to
stop a cheque to ask a bank not to pay a cheque which has been signed and sent
Same as current account
A booklet with new blank cheques (NOTE: The usual US term is check book.)
Cheque card, cheque guarantee card
A plastic card from a bank which guarantees payment of a cheque up to a certain amount,
even if the user has no money in his account
A piece of paper left in a cheque book after a cheque has been written and taken out
Cheque to bearer
A cheque with no name written on it, so that the person who holds it can cash it
A main cashier in a bank
Same as smart card
CIB abbreviation Chartered Institute of Bankers
Movement _ to put money into circulation to issue new notes to business and the public _
the amount of money in circulation increased more than was expected.
1. Clearing of goods through customs passing of goods through customs
2. An act of passing of a cheque through the banking system, transferring money from one
account to another
A bank which clears cheques, especially one of the major British High Street banks,
specialising in normal banking business for ordinary customers, such as loans, cheques,
overdrafts and interest- bearing deposits
A central office where clearing banks exchange cheques, or where stock exchange or
commodity exchange transactions are settled
Clearing House Automated Payments System
A computerised system which is organised by the banks and used for clearing cheques.
An account with a bank for clients of a solicitor
A bank which offers banking services to the public, as opposed to a merchant bank
A bill of exchange issued by a company (a trade bill) or accepted by a bank (a bank bill) (as
opposed to Treasury bills which are issued by the government)
A financial collapse or Bankruptcy
A fee paid to a bank which has arranged a line of credit which has not been fully used
The amount of money which a customer has to keep in a bank account in order to get free
services from the bank
Comptroller of the Currency
An official of the US government responsible for the regulation of US national banks (that
is, banks which are members of the Federal Reserve)
Same as retail bank
The credit given by shops, banks and other financial institutions to consumers so that they
can buy goods (NOTE: Lenders have to be licensed under the Consumer Credit Act, 1974.
The US term is instalment credit.)
A bank which is owned by its members, who deposit money or who borrow money as loans
A bank which acts as an agent for a foreign bank
US a bank based in a town which has no office of the Federal Reserve
A bank which lends money
Finding methods of financing a commercial project that are different from the normal
methods of raising money
A period when lending by banks is restricted by the government
An overdraft, the amount by which a person can draw money from an account with no
funds, with the agreement of the bank _ to open a credit line or line of credit to make
credit available to someone
A company credit 85 credit-reference agency used by businesses and banks to assess the
creditworthiness of people
Details of persons, companies or banks who have given credit to a person or company in
the past, supplied as references when opening a credit account with a new supplier
A period when lending by the banks is restricted by the government
Cross - to cross a cheque
To write two lines across a cheque to show that it has to be paid into a bank
A cheque with two lines across it showing that it can only be deposited at a bank and not
exchanged for cash
A bank note
An account in an bank from which the customer can withdraw money when he or she
wants. Current accounts do not always pay interest. _ to pay money into a current account
also called cheque account (NOTE: The US term is checking account.)
Customer identification file
US a computer record which a bank keeps on each customer, containing information about
the customer’s credit rating.
It helps in calculating the financial leverage of any bank or organization. To measure this,
one needs to divide the total liabilities of the banks by stakeholders' equity. This in turn
gives an idea of the ratio of equity and the debt used by the bank in financing the assets.
If a person wants to continue his/her credit account, he/she either needs to give equated
monthly installments (EMIS) or pay the due amount on credit account each month within a
fixed date. If the person fails to make payment before the specified date, it is considered as
Down payment/margin money
When a bank asks the borrower to share a part of the credit risk and the payment that is
received from him/her on this account, is referred to as down payment/ margin money.
Also referred to as Electronic Clearing Facility (ECS), direct debit option proves beneficial
in case of servicing of various lines of credit. This is a facility whereby the person
empowers his/her bank to take off a particular amount from his/her account on a
particular date every month. This facility enables a person to make his payments without
visiting the lending institution or bank personally on a frequent basis. However, the person
has to be aware of the fund availability in his account, as the bank is not responsible for
intimating its customer when the amount is debited from his/her account.
The banks or lending institutions require certain documents from the person, who has
applied for a loan, to look into his/ her creditworthiness. The lending institution levies
some charges for this purpose. These charges are known as documentation charges. The
documentation charges are separate from registration charge, stamp duty and lawyers fee.
If an individual has not made any transactions from his/her account for more than 2 years,
a savings/current account is declared as inoperative or dormant.
In accounting, an entry on the left-hand side of an account recording which amounts is recorded
in a double entry system of bookkeeping. A charge to a customer’s access account or
A card that resembles a credit card but which debits a transaction account (checking
account) with the transfers occurring contemporaneously with the customers purchases. A
debit card may be machine readable, allowing for the activation of an automat
Money, services, goods or anything else of value that is owed by one person to another as
the result of a previous agreement.
The control of maturities, timing, quantum and composition of debt by a business.
The ratio of the borrowers total monthly obligations - including housing expenses and
recurring debts - to monthly income. It’s used to determine your capacity to repay the
mortgage and all other debts.
Decile rank refers to performance over time rated on a scale of 1-10. A ranking of 1
indicates that whatever is being ranked - usually a mutual fund - is in the top 10% of the
sample; a decile of 2 indicates that it is in the top 20%.
Written agreement in proper legal form that conveys title to, or an interest in, real
Deed of Trust
A legal instrument used instead of a mortgage in certain states. This document allows legal
title to a real property to be vested in trustees to secure payment of a note
Failure to make monthly mortgage payments on time. This is serious for the borrower
since it can result in foreclosure on a property.
A loan that is 30 to 60 days past due with no payments being made.
The delta of an option measures the change in the option price for any given change in the
price of the underlying and thus makes it possible to determine exposure to the underlying.
The delta is between 0 and +1 for calls and between 0 and -1
A deposit that may be withdrawn at any time without prior written notice to the depository
institution. A checking account is the most common form of demand deposit.
Demand Deposit Account (DDA)
An account from which a depositor may withdraw funds immediately without prior notice,
commonly known as a checking account. Since funds may be withdrawn on demand in
person or by presentation of a check, the account has many of the liquid characteristics
The placement of funds into an account at an institution in order to increase the credit
balance of the account. That which is deposited. A sum of money given to assure the future
purchase of something. A portion of the purchase price given as earnest money
Deposit Ceiling Rates Of Interest
Maximum interest rates that can be paid on savings and time deposits at federally insured
commercial banks, mutual savings banks, savings and loan associations, and credit unions.
Ceilings on credit union deposits are established by the Depository Ins
Deposit insurance is a system established to protect depositors against the loss of their
deposits in the event a insured institution of the deposit insurer is unable to meet its
obligations to depositors. Similar terms such as deposit guarantee or deposit protection are
used in some countries.
A resolution method for failed institutions that involves the reimbursement of deposits and
the transfer of the banks assets to a receiver for liquidation.
A financial institution that obtains its funds mainly through deposits from the public. This
includes commercial banks, savings and loan associations, savings banks, and credit unions.
Depository Institutions Deregulation And Monetary Control Act Of 1980 (DIDMCA)
Among its major provisions, this Act applied uniform reserve requirements to all
depository institutions with certain types of accounts and required reports from these
Depository Institutions Deregulation Committee (DIDC)
The Committee responsible for the orderly phase-out over a six-year period of interest rate
ceilings on time and savings accounts at depository institutions. Voting members of the
DIDC are the Secretary of the Treasury and the chairmen of the Federal
Deposits (and their opposite, loans) are non-negotiable, cash money-market instruments in
which a sum of money (proceeds) is borrowed for an agreed period of time (term to
maturity) and on which the borrower pays the lender a pre-arranged amount of income
A levy on a bank assessed on the basis of that banks risk profile (also called Risk-Adjusted
A type of floating exchange rate that is not completely freely floating because central banks
intervene from time to time to alter the rate from its free-market level.
Payable to the lender by the borrower or seller to decrease the interest rate. One point is
equal to 1 percent of the loan amount.
Interest rate at which an eligible depository institution may borrow funds, typically for a
short period, directly from a Federal Reserve Bank.
Figurative expression for Federal Reserve facility for extending credit directly to eligible
depository institutions (those with transaction accounts or non-personal time deposits).
Reducing risk by spreading investments among different investments, sectors, markets and
A measure introduced by Moody’s to measure portfolio concentration. A high score means
that the portfolio is well diversified.
Domestic bonds are bonds issued in the same currency as the currency of the place where
the bond issuer is domiciled. So, a company registered in the UK that issues bonds in
sterling issues a domestic bond.
A written order signed by one party (the drawer) requesting a second party (the drawee)
to pay a specified amount of money to a third party (the payee) at some future time. A
check is a draft.
He drawing of funds against a line of credit.
The date on which all or part of a debt is required to be paid; the maturity date.
The act of withdrawing money from a deposit account before the due date
Early withdrawal penalty-
A penalty which a depositor pays for withdrawing money early from an account
1. To reserve for a special purpose
2. To link a tax to a particular service, such as earmarking road taxes for the upkeep of
Earnings before interest, taxes, depreciation and amortization
Revenue received by a company in its usual business before various deductions are made.
The upper limit on the amount of salary that can be taken into account when calculating
An allowance which reduces bank charges on checking accounts
An independent European stock market, based in Brussels and London, trading in
companies with European-wide interests
East Caribbean dollar
A unit of currency used in Antigua, Dominica, Grenada, Montserrat, St Lucia and St Vincent
1. Money which can be earned with no difficulty
2. A loan available on easy repayment terms
Easy money policy
A government policy of expanding the economy by making money more easily available
(through lower interest rates and easy access to credit)
Financial terms which are not difficult to accept _ the shop is let on very easy terms.
EBA -Euro Banking Association
Earnings before interest, taxes, depreciation and amortization
EBRD - European Bank for Reconstruction and Development
A general term that refers to any type of business activity on the Internet, including
marketing, branding and research _
EC- European Community
(NOTE: now called the European Union)
Same as digital cash
ECB -European Central Bank
ECGD- Export Credit Guarantee Department
Effective exchange rate
A rate of exchange for a currency calculated against a basket of currencies
A real interest rate on a loan or deposit (i.e. the APR)
An actual yield shown as a percentage of the price paid after adjustments have been made
EFT abbreviation electronic funds transfer
EFTA abbreviation European Free Trade Association
EFTPOS abbreviation electronic funds transfer at a point of sale
EGM abbreviation extraordinary general meeting
EIB abbreviation European Investment Bank
EIRIS abbreviation ethical investment research service
EIS abbreviation Enterprise Investment Scheme
Electric utility stocks
Shares in electricity companies
Referring to computers and electronics
The use of computers to carry out banking transactions, such as withdrawals through cash
dispensers or transfer of funds at point of sale
Same as e-business effective date 117 electronic business
Same as digital cash
An electronic cheque, which a person writes and sends via a computer and the Internet
Same as e-commerce
Electronic data interchange
A standard format used when business documents such as invoices and purchase orders
are exchanged over electronic networks such as the Internet. Abbreviation EDI
Electronic funds transfer
A system for transferring money from one account to another electronically (as when using
a smart card). Abbreviation EFT
Same as email
Same as digital wallet eligible liabilities which go into the calculation of a bank’s reserves
Credit given by the Fed electronic
Emerging growth fund
Growth fund that invests in emerging markets
Pay, salary or fees, or the earnings of directors who are not employees (NOTE: US English
uses the singular emolument.)
Same as digital money
EMS abbreviation European Monetary System
EMU abbreviation Economic Monetary Union
To cash a cheque, to exchange a cheque for cash emerging 119 encash
Which can be cashed?
An act of exchanging for cash
A conversion of plain text to a secure coded form by means of a cipher system
A liability, such as a mortgage or charge, which is attached usually to a property or land
end the final point or last _ at the end of six months after six months have passed _ to
finish _ The distribution agreement ends in July. _ the chairman ended the discussion by
getting up and walking out of the room.
To say that a product is good _ to endorse a bill or a cheque to sign a bill or cheque on the
back to show that you accept it
A person whose name is written on a bill or cheque as having the right to cash it
1. The act of endorsing
2. A signature on a document which endorses it
3. A note on an insurance policy which adds conditions to the policy
A person who endorses a bill or cheque which is then paid to him or her
The act of giving money to provide a regular income
An insurance policy where a sum of money is paid to the insured person on a certain date
or to his heirs if he dies before that date
A mortgage backed by an endowment policy COMMENT: The borrower pays interest on the
mortgage in the usual way, but does not repay the capital. Instead, he or she takes out an
endowment assurance (a life insurance) policy, which is intended to cover the total capital
sum borrowed. When the assurance matures, the capital is in theory paid off, though this
depends on the performance of the investments made by the company providing the
endowment assurance and the actual yield of the policy may be less or more than the sum
required. A mortgage where the borrower repays both interest and capital is called a
Shares in companies which provide energy
A legal condition which passes ownership of a property only to certain persons _ to involve
Enterprise Investment Scheme
A scheme which provides income and CGT relief for people prepared to risk investing in a
single unquoted or AIM-listed trading company. Abbreviation
EPS abbreviation earnings per share
Same as digital wallet
1. The ordinary shares in a company
2. The value of a company which is the property of its shareholders (the company’s assets
less its liabilities, not including the ordinary share capital)
3. The value of an asset, such as a house, less any mortgage on it
A method of accounting which puts part of the profits of a subsidiary into the parent
The nominal value of the shares owned by the ordinary shareholders of a company (NOTE:
Preference shares are not equity capital. If the company were wound up, none of the equity
capital would be distributed to preference shareholders.)
Profits after tax, which are available for distribution to shareholders in the form of
dividends, or which can be retained in the company for future development
Finance for a company in the form of ordinary shares paid for by shareholders
A fund which is invested in equities, not in government securities or other funds
The ratio between a company’s borrowings at interest and its ordinary share capital
Equity growth fund
A fund invested in equities, aiming to provide capital growth
Equity investment fund
Same as equity fund
US an incentive given to people to lend a company money, in the form of a warrant to share
in future earnings (NOTE: The UK term is equity sweetener.)
Equity of redemption
A right of a mortgagor to redeem the estate by paying off the principal and interest
A trust which invests in rented property.
The act of remortgaging a property on which there is currently no mortgage, in order to use
it as security for new borrowing
Equity risk premium
An extra return on equities over the return on bonds, because of the risk involved in
investing in equities
An incentive to encourage people to lend a company money, in the form of a warrant giving
the right to buy shares at a later date and at a certain price
ERDF abbreviation European Regional Development Fund
ERM abbreviation exchange rate mechanism
The number of mistakes per thousand entries or per page
A fixed-rate bond where the rate rises each year
ESCB abbreviation European System of Central Banks
An agreement between two parties that something should be held by a third party until
certain conditions are fulfilled _ in escrow held in safe keeping by a third party _
document held in escrow a document given to a third party to keep and to pass on to
someone when money has been paid
US an account where money is held in escrow until a contract is signed or until goods are
A former unit of currency in Portugal
A calculation of the probable cost, size or time of something
A fund which invests in companies which follow certain moral standards, e.g. companies
which do not manufacture weapons, or which do not trade with certain countries or which
only use environmentally acceptable sources of raw materials
An index of shares in companies which follow certain moral standards
An investment in companies which follow certain moral standards
Ethical Investment Research Service
An organization which does research into companies and recommends those which follow
certain standards. Abbreviation EIRIS
Checking companies against certain moral standards, and removing those which do not
EU abbreviation European Union _ EU ministers met today in Brussels. _ The USA is
increasing its trade with the EU.
A European derivatives market developed by combining the German Terminbörse and the
EURIBOR abbreviation European Interbank Offered Rate
A unit of currency adopted as legal tender in several European countries from January 1st,
Euro- referring to Europe or the European Union
A bank account in euros
A long-term bearer bond issued by an international corporation or government outside its
country of origin and sold to purchasers who pay in a Eurocurrency (sold on the Eurobond
A cheque card used when writing Eurocheques
A cheque which can be cashed in any European bank (the Eurocheque system is based in
A form of short-term borrowing in eurocurrencies. Abbreviation ECP
A large bank loan in a eurocurrency (usually provided by a group of banks to a large
Any currency used for trade within Europe but outside its country of origin, the eurodollar
being the most important _ a Eurocurrency loan _ the Eurocurrency market
A deposit of eurodollars in a bank outside the US
The European countries which use the euro as a common currency, seen as a group
1. The European Union seen as a potential market for sales
2. The Eurocurrency market, the international market for lending or borrowing in Eurocurrencies
A short-term eurocurrency bearer note
An option to buy European bonds at a later date
European Bank for Reconstruction and Development
Bank, based in London, which channels aid from the EU to Eastern European countries.
European Central Bank
central bank for most of the countries in the European Union, those which have accepted
European Monetary Union and have the euro as their common currency. Abbreviation ECB
European Interbank Offered Rate
Rate at which European banks offer to lend funds to other banks
European Investment Bank
International European bank set up to provide loans to European countries.
A Japanese yen deposited in a European bank and used for trade within Europe
The European countries which use the euro as a common currency, seen as a group
EVA abbreviation economic value added
An annual interest calculated on the basis of 365 days (as opposed to ordinary interest,
calculated on 360 days)
Cash held by a bank above the normal requirement for that bank
1. The act of giving one thing for another
2. A market for shares, commodities, futures, etc. to exchange something (for something
else) to give one thing in place of something else _ He exchanged his motorcycle for a car. _
Goods can be exchanged only on production of the sales slip.
3. To change money of one country for money of another _ to exchange euros for pounds
Exchange cross rates
Rates of exchange for two currencies, shown against each other, but in terms of a third
currency, often the US dollar. Also called cross rates
Exchange Equalisation Account
An account with the Bank of England used by the government when buying or selling
foreign currency to influence the sterling exchange rate
An extra cost above the normal rate for buying a foreign currency
A person who buys and sells foreign currency
1. A rate at which one currency is exchanged for another. Also called rate of exchange
2. A figure that expresses how much a unit of one country’s currency is worth in terms of
the currency of another country
Exchange rate mechanism
A method of stabilising exchange rates within the European Monetary System, where
currencies could only move up or down within a narrow band (usually 2.25% either way,
but for certain currencies widened to 6%) without involving a realignment of all the
currencies in the system. Abbreviation ERM
Expense account 131 exposure
Investments collapse (his or her exposure in the stock market).
Express money transfer
A foreign currency payment to an individual or organization delivered electronically to a
1. To offer something _ to extend credit to a customer
2. To make something longer her contract of employment was extended for two years. We
have extended the deadline for making the appointment by two weeks.
1. credit allowing the borrower a very long time to pay
2. Sell to Australia on extended credit.
3. US an extra-long credit used by commercial banks borrowing from the Federal Reserve
1. A longer time allowed for something than was originally agreed _ to get an extension of
credit to get more time to pay back _ extension of a contract the continuing of a contract
for a further period
2. (In an office) an individual telephone linked to the main switchboard the sales manager is
on extension 53. _ Can you get me extension 21?
An account in a British bank belonging to someone who is living in another country
Money which a company has borrowed from outside sources (such as a bank) as opposed
to money raised from shareholders
Same as external debt
Lender’s charge for making a line of credit or other credit facility available to a borrower,
for example, a commitment fee
1. Banking. The inability of a bank to meet its credit obligations to other banks in private wire
transfer systems, possibly causing settlement failures at other banks. This is known as systemic
2. Securities. A trade in which delivery does not take place on the settlement date. If
it is the fault of the seller, that is, the seller fails to present the securities, the trade
is noted as a fail to deliver. If buyer fails to pay because securities have not been
delivered by the seller's broker, it is a fail to receive. Fails normally occur when the
buyer and seller disagree on whether the securities delivered meet the
specifications of the purchase order
A charge for services performed.
1. Banking. A lender's charge for making credit available, for example, a commitment fee or credit
card annual fee. Also, charges for noncredit services, such as a trust department's allowance or
2. Estates. An inheritable estate in land usually referred to as a fee simple estate or freehold estate. A
fee simple absolute is an estate to which the holder has unquestioned ownership, whereas a fee tail
is inheritable only by a limited group of heirs.
Paper money that is backed only by the issuing government's decree that it is acceptable
as legal tender currency. Its value stems from public confidence, rather than convertible
into gold or other hard currency.
Insurance coverage against specified losses that occur from the dishonest acts or
defalcations of employees. This bond may be applied to persons or positions
Individual or institution responsible for holding or administering property owned by
another. An executor, guardian, trustee, and administrator are examples of a fiduciary. The
Prudent Man Rule is one way states ensure that fiduciaries invest responsibly
Finality of payment
Guaranty of payment to the party receiving an electronic funds transfer. Interbank
payments over the Federal Reserve Wire Network (federal wire (fed wire) are final and
irrevocable when transmitted, and are credited to the receiving bank's reserve account at
the time of the transaction
Bill of exchange that, when accepted by a bank, becomes a source of short-term credit for
working capital rather than import or export finance. Finance bills, which usually have
maturities longer than 60 days, are sometimes issued in tight money periods. They are
subject to reserve requirements, unlike ordinary bankers' acceptances, and cannot be
rediscounted at the Federal Reserve window. Also called a bankers' bill or working capital
Cost of credit, including interest, paid by a customer for a consumer loan. Under the Truth
in Lending Act, the finance charge must be disclosed to the customer in advance.
Financial Accounting Standards Board (FASB)
www.fasb.org) nongovernmental body with the authority to promulgate Generally
Accepted Accounting Principles (GAAP) and reporting practices. These are published in the
form of FASB Statements. Practicing CPAs are required to follow the FASB procements in
their accounting and financial reporting functions. The FASB is independent of other
companies and professional organizations. The American institute of certified public
accountants (AICPA) and the Securities and Exchange Commission (SEC) officially
recognize the Statements issued by he Financial Accounting Standards Board. The FASB
was established in 1973 to succeed the Accounting Principles Board (APB)
1. Banking. Capital budgeting and profit planning carried out by a bank's senior
management committee, with the aim of managing asset growth, net income, and
expenses to meet specific objectives in future time periods. Financial planning is
broader in scope than Asset-Liability Management, which is largely concerned with
pricing interest sensitive deposits and bank loans and managing interest rate risk and
liquidity risk. In a larger sense, bank financial planning is synonymous with strategic
planning and market planning, both of which are concerned with setting specific
targets for deposit growth, net income, and expected payback or return from new
branch offices, automated teller machines, and other facilities. Through financial
planning, a bank's senior management committee formulates plans for meeting
competition from other financial services companies and sets objectives for
profitability, growth in market share, types of customers to be served, and so on, all of
which determine the future direction of the bank.
2. Investments. Financial counseling designed to help individuals make the best use of
their financial assets and achieve specific economic objectives, such as adequate
funding of a child's college education expenses, or post-retirement needs. Financial
planning entails writing objectives, setting up budgets, and periodically reviewing a
plan. Many banks and bank trust departments offer financial planning services to help
private banking or retail customers select customized financial services suiting their
individual needs, charging an hourly rate or a flat fee for writing a financial plan.
Professional financial planners are certified by the College for Financial Planning,
Non-cancellable indemnity bond guaranteeing the timely payment of principal and interest
due on securities by the maturity date. If the issuer defaults, the insurer will pay a fixed
sum of money to holders of the securities. Financial guarantees are similar to a standby
letter of credit, but are issued by an insurance company.
Payment system advances altering or modifying the role of banks, and financial institutions
in general, as intermediaries between suppliers and users of funds. Technological
innovations, such as Electronic Funds Transfer (EFT) payments, replace checks with
electronic debits and credits. Risk transferring innovations, such as adjustable-rate
mortgage (ARM) , transfer credit risk from one party to another. Credit generating
innovations, for example, home equity credit lines, give borrowers new ways to use
financial assets, increasing the supply of available credit. Equity generating innovations,
such as trust preferred stock, give banks a less costly way to raise equity capital than
issuing new shares of common stock.
Institution that collects funds from the public to place in financial assets such as stocks,
bonds, money market instruments, bank deposits, or loans. Depository institutions (banks,
savings and loans, savings banks, credit unions) pay interest on deposits and invest the
deposit money mostly in loans. Non-depository institutions (insurance companies, pension
plans) collect money by selling insurance policies or receiving employer contributions and
pay it out for legitimate claims or for retirement benefits. Increasingly, many institutions
are performing both depository and non-depository functions. For instance, brokerage
firms now place customers' money in certificates of deposit and money market funds and
Financial Institutions Reform, Recovery and Enforcement Act (FIRREA)
Federal legislation of 1989 providing government funds to insolvent savings and loan
associations, and mandating sweeping changes in the examination and supervision of
savings and loans. The act required savings and loans to adopt new capital standards,
transferred the regulatory powers of the Federal Home Loan Bank Board to a new agency,
the office of thrift supervision , a bureau within the U.S. Treasury Department; and placed
the 12 district Federal Home Loan Banks under control of an oversight board, the Federal
Housing Finance Board , The act also abolished the defunct Federal Savings and Loan
Insurance Corporation (FSLIC)
Financial Institutions Regulatory Act
Federal law enacted in 1978 that made several important changes in regulation and
supervision of depository financial institutions. The act: (1) created the federal financial
institutions examination council to coordinate the supervisory activities of federal
supervisory agencies; (2) authorized banking regulators to issue cease and desist
order orders against officers and directors of financial institutions; (3) required banks to
make loans to directors, officers, and major stockholders on the same terms as other
borrowers; (4) created a credit union Central Liquidity Facility to meet short-term liquidity
needs of insured credit unions; and (5) placed Electronic Funds Transfer between financial
institutions and consumers under federal regulation.
Commercial bank, savings and loan, mutual savings bank, credit union, or other
"middleman" that smooth’s the flow of funds between "savings surplus units" and "savings
deficit units." In an economy viewed as three sectors-households, businesses, and
government-a savings surplus unit is one where income exceeds consumption; a savings
deficit unit is one where current expenditures exceed current income and external sources
must be called upon to make up the difference. As a whole, households are savings surplus
units, whereas businesses and governments are savings deficit units. Financial
intermediaries redistribute savings into productive uses and, in the process, serve two
other important functions: By making savers infinitesimally small "shareholders" in huge
pools of capital, which in turn are loaned out to a wide number and variety of borrowers,
the intermediaries provide both diversification of risk and liquidity to the individual saver.
Term used by lenders to refer to an agreement to make a loan to a specific borrower within
a specific period of time and, if applicable, on a specific property. See also commitment fee.
First day notice
First date on which a seller in the futures market notifies a clearing house of his intention to
deliver a financial instrument, in fulfillment of a futures contract. Also, the date on which a
clearing house notifies a buyer.
Real estate loan that gives the mortgagee (lender) a primary lien against a specified piece of
property. A primary lien has precedence over all other mortgages in case of default.
1. Usually a bank or trust company acting for a corporation under a corporate trust
agreement. The fiscal agent handles such matters as disbursing funds for dividend
payments, redeeming bonds and coupons, handling taxes related to the issue of bonds,
and paying rents.
2. Agent of the national government or its agencies or of a state or municipal government
that performs functions relating to the issue and payment of bonds. For example, the
Federal Reserve is the U.S. government's fiscal agent.
Any 12-month period or period of 52 weeks, designated by a corporation, government
agency, or any other organization as the time period for filing financial reports, balance
sheets, and income statements. This period may differ from the calendar year.
Fives of credit
Judgmental method of evaluating a potential borrower's creditworthiness, based on five
criteria: character, capital, collateral, and conditions. The first four deal with a
borrower's ability to pay, whereas the last point refers to general business conditions in the
Item that has physical substance and a life in excess of one year. It is bought for use in the
operation of the business and not intended for resale to customers. Examples are building,
machinery, auto, and land. Fixed assets with the exception of land are subject
to depreciation. Fixed assets are usually referred to as property, plant, and equipment.
Fixed exchange rates
Foreign exchange rate system that existed under the Bretton woods system , in which the
value of national currencies is set vis-à-vis the value of other currencies. Also called pegged
exchange rates. Each country is required to maintain its currency at or near this fixed rate.
Fixed exchange rates, established at the Bretton Woods International Monetary Conference
of 1944, were used until the early 1970s, when the United States abandoned the gold
standard and a system of floating exchange rate was adopted. A modified form of fixed
exchange currency rates continues today in the European Monetary System snake , a
monetary system adopted in the 1970s to hold currency fluctuations to a band of exchange
rates with upper and lower limits
Fixed rate loan
Loan with an interest rate that does not vary over the term of the loan, as opposed to a
variable rate loan or adjustable-rate mortgage. Fixed rate loans generally are constant
payment, fully-amortizing loans, for example, a 30-year fixed rate mortgage repayable
through equal monthly payments of principal and interest. Many consumer installment
loans, such as auto loans, boat loans, and home improvement loans, are made at fixed rates.
Fixed rate loans often have a higher initial cost than adjustable rate loans because the
lender isn't protected against increases in money costs-the lender's cost of funds-but the
borrower has the comfort of knowing the rate and payment will not vary over the life of the
1. In bond trading, without accrued interest. This means that accrued interest will be
received by the buyer if and when paid but that no accrued interest is payable to the
seller. Issues in default and income bonds are normally quoted and traded flat. The
opposite of a flat bond is an interest bond. See also loaned flat.
2. Inventory of a market maker with a net zero position-i.e., neither long nor short.
3. Position of an underwriter whose account is completely sold.
Flat bed imprinter
Manual device that copies the embossed characters of a bank card or charge card on all
copies of a sales draft. These are used most often by smaller merchants with low sales
Flexible rate mortgage
Residential mortgage in which the interest rate floats up or down according to changes in an
index rate. Adjustable-rate mortgages usually have lower initial interest rates than fixed-rate
mortgages, so there is an opportunity for substantial interest savings over the life of the loan if
rates remain steady or decline.
1. Amount of funds represented by checks that have been issued but not yet collected.
2. Time between the deposit of checks in a bank and payment. Due to the time difference, many
firms are able to "play the float," that is, to write checks against money not presently in the
firm's bank account.
3. To issue new securities, usually through an underwriter
Debt instrument with a variable interest rate tied to another interest rate, e.g., the rate paid
by Treasury bills. A floating rate note, for instance, provides a holder with additional
interest if the applicable interest rate rises and less interest if the rate falls. It is generally
best to buy floaters if it appears that interest rates will rise. If the outlook is for falling rates,
investors typically favor fixed rate instruments. Floaters spread risk between issuers and
Endorsement to a homeowner's or renter's insurance policy, a form of property insurance
for items that are moved from location to location. Typically, a floater is bought to cover
jewelry, furs, and other items whose full value is not covered in standard homeowner's or
renter's policies. A standard homeowner's policy typically covers $1,000 to $2,000 for
jewelry, furs, and watches. Also called a rider.
Continuously renewed or refinanced short-term debt of companies or governments used to
finance ongoing operating needs
Floating exchange rate
Movement of a foreign currency exchange rate in response to changes in the market forces
of supply and demand; also known as flexible exchange rate. Currencies strengthen or
weaken based on a nation's reserves of hard currency and gold, its international trade
balance, its rate of inflation and interest rates, and the general strength of its economy.
Nations generally do not want their currency to be too strong, because this makes the
country's goods too expensive for foreigners to buy. A weak currency, on the other hand,
may signify economic instability if it has been caused by high inflation or a weak economy.
The opposite of the floating exchange rate is the fixed exchange rate system.
Floating interest rate
Loan interest rate that changes whenever an index rate, or base rate, such as the
bank prime rate, the London Interbank Offered Rate (LIBOR) , or Federal Home Loan Bank
index rate changes. There are numerous examples: (1) consumer loan rate, for example, the
rate charged on adjustable rate mortgages or variable rate auto loans, that is indexed to
another rate, such as the commercial bank prime rate, a Cost Of Funds Index, or a lender's
internal cost of funds; (2) key lending rate, such as the prime rate that moves upward or
downward, depending on market demand for funds, available reserves in the banking
system, and other factors. Contrast with fixed rate loan
Loan or credit facility secured by inventory or receivables. This type of security agreement
gives the lender an interest in assets acquired by the borrower after the agreement, as well
as those owned when the agreement was made. When the agreement covers proceeds from
sales, the lender also has recourse against receivables.
Floating rate certificate of deposit
Large dollar certificate of deposit (CD) paying a rate tied to a money market rate.
Commonly used in the Euro market to finance interbank lending, floating rate CDs or
floaters are usually denominated in units of $250,000 with a coupon rate tied to the six-
month London Interbank Offered Rate (LIBOR).
Minimum rate that a bank can impose on a floating rate or variable rate loan. A floor rate is
often negotiated together with a rate ceiling, called an interest rate cap ; the two financial
guarantees are collectively referred to as an interest rate collar . The floor protects the
lender from a sharp drop-off in rates; the cap assures the borrower that financing costs will
not rise excessively.
Largest credit card a retail merchant may accept without obtaining authorization by the
card issuer. Contrast with zero-floor limit.
Initial funding of a construction mortgage that a lender agrees to advance without regard
for tenant leasing, or requiring the builder to substantially complete the project and have a
certificate of occupancy. For example, the lender may fund 80% of the total cost of a
project, with the remainder, called a holdback, held aside until the builder has leased the
majority of units or has the building ready for occupancy. A floor to ceiling loan, in contrast,
has two separate fundings: one at satisfactory completion of the project, and a second
funding when the building is fully occupied or meets cash flow requirements set by the
Bank loan made to finance a dealer's inventory. The dealer issues a trust receipt to the
bank, and the bank is repaid when the inventory is sold. Floor planning has a lower profit
margin and is less desirable than other forms of commercial lending. In addition to bearing
the financing risk, the bank stands to lose money if the dealer makes a sale without
notifying the lender, known as selling out of trust. Dealer financing is usually done only on
goods for which broad consumer demand exists
Flow of funds
1. Quarterly Federal Reserve survey showing the movement of funds between different
sectors of the economy-households, businesses, governments, and financial
institutions. The survey, the "Flow of Funds Accounts," is reported monthly in
the Federal Reserve Bulletin and is a useful indicator of buying preferences of
2. statement in the bond resolution of a municipal bond issuer stating how municipal
revenues are to be applied, generally giving priority to maintenance and operations,
and bond debt service
Expression for the bottom line figure on a bank's balance sheet: the sum of assets or
liabilities, plus equity capital.
1. Lender’s decision not to exercise a legally enforceable right against a borrower in
default, in exchange for a promise to make regular payments in the future. For
example, a mortgage lender will agree not to initiate foreclosure proceedings against a
mortgagor whose loan is in arrears.
2. Temporary relief granted a bank by a regulatory agency from compliance with
minimum capital requirements or other banking regulations, extended to financial
institutions in economically depressed areas. Banks given capital forbearance must file
a plan to restore their capital base within a specified period
1. In Asset-Liability Management, an estimate of future expectations based on historical
information, current and projected market conditions, and management assumptions
about interest rates and market demand for credit. As used in an asset-liability model,
forecasting is a planning tool that estimates the amount of interest earning assets and
interest sensitive liabilities to try to determine whether the balance sheet will be asset
sensitive or liability sensitive during specific time periods in the future. The forecast is
normally revised periodically as market conditions or management assumptions
2. In corporate cash management, an estimate of future cash receipts from conversion of
assets into cash. Forecasting tries to anticipate changes in cash flow for purposes of
funds management and debt management.
3. Projecting corporate earnings, financial institutions, sales, and so on in future time
Branches of U.S. banks in foreign countries or branches of foreign banks in the United
States. By reciprocal agreement among central banks, foreign branches are subject to the
banking laws and regulations in their host country. The International Banking Act of 1978,
for example, requires U.S. offices of foreign banks to maintain reserve accounts with a
Federal Reserve Bank, choose a home state as their U.S. base of operations, and meet
federal regulations covering bank holding companies.
Legal term for a corporation chartered in a state other than the one where it does business.
A bank chartered in New York, but owning a loan production office in California, is a
foreign corporation in California. The less confusing designation, out-of State Corporation, is
preferred in general usage.
Foreign Credit Insurance Association (FCIA)
Voluntary association of some 50 U.S. insurance companies formed in 1961 under the
sponsorship of the export-import bank. Acting as agent for the Exim Bank and its member
companies, it provides insurance coverage for credits extended by U.S. exporters to foreign
purchasers. FCIA provides some degree of insurance for commercial risk, whereas Exim
Bank assumes coverage for political risk
Deposits at branch offices of domestic banks outside the United States or its overseas
territories. Such deposits are not subject to deposit insurance premiums or reserve
requirements, and are not included in computing the net demand deposits of domestic
banks. This freedom from bank regulation was one reason the International Banking
Facility was authorized by state governments -mostly in New York and California-to create
a domestic environment competitive with the relatively unrestricted Bahama and Cayman
Islands Offshore Banking Centers
Check denominated in a specific foreign currency, usually drawn to the seller on a bank
account in the country of the currency's origin
Currency-literally foreign money-used in settlement of international trade between
countries. Trading in foreign exchange is the means by which values are established for
commodities and manufactured goods imported or exported between countries. Creditors
and borrowers settle the resulting international trade obligations, such as bank drafts, bills
of exchange, bankers' acceptances, and letters of credit, by exchanging different currencies
at agreed upon rates. The result of all this international trade is that financial institutions
accumulate surpluses of different currencies from loan repayments by foreign borrowers,
and also from import-export trade financing on behalf of bank customers.
The interbank foreign exchange market is an over-the-counter market, a network of
commercial banks, central banks, brokers, and customers who communicate with each
other by telex and telephone throughout the world's major financial centers. Foreign
exchange traders also make markets or speculate in different currencies, usually
anticipating future appreciation of stronger currencies against weaker ones, through the
foreign exchange forward market and the currency futures market.
Proportion of bank deposits that must be kept as legal reserves . Bank reserves are a tool of
central bank monetary policy; an increase in the ratio of required reserves to deposits
indicates a tightening in credit policy by the Federal Reserve. Large banks are required to
keep up to 12% of checking account deposits in a noninterest earning account at the Fed.
Smaller banks have lower reserve requirements. The multiplier effect of money allows a
bank to re-lend most (88 ¢ of $1 in deposits, at a 12% reserve requirement) of the funds in
new deposits, in effect, creating new deposits. Because only a portion of deposits are
backed by reserves, banks can suffer losses, or even fail, due to a sudden runoff of deposits,
as in a bank run . This risk is known as liquidity risk .
1. Deliberate action by individual or entity to cheat another, causing damage. There is typically
a misrepresentation to deceive, or purposeful withholding of material data needed for a proper
decision. An example of fraud is when a bookkeeper falsifies records in order to steal money.
See also negligence.
2. Falsification of a tax return by an individual. Examples of tax fraud are intentionally not
reporting taxable income or overstating expenses. Tax fraud is a criminal act.
Investor-owned Corporation chartered by Congress in 1970 to create a secondary market for
conventional mortgage loans- loans not backed or guaranteed by a government agency-and
promote affordable home ownership. Freddie Mac purchases single-family and multifamily
mortgage loans (called conforming loans) that have an original principal amount not
greater than the conforming loan ceiling. An early pioneer in mortgage securitization,
Freddie Mac issued the first conventional mortgage pass-through certificate (a type of
mortgage security that pays monthly principal and interest payments from the underlying
mortgage loan pool) in 1971 and the first Collateralized Mortgage Obligation in 1983.
In credit cards, the time interval in which interest is charged for current purchases. This
period usually runs anywhere from 10 to 25 days after the billing date. Also called grace
period or days of grace.
Funds available to banks for lending or investment, widely regarded as an indicator of
available bank credit . Excess reserves are the amount remaining after required reserves
are subtracted from reserve balances deposited with a Federal Reserve Bank. The total of
free reserves is computed by subtracting from a bank's excess reserves (or reserve account
balances above its reserve requirements) any borrowings from the Federal Reserve.
Legal estate in land, giving the owner the right to hold the property for life, passing it down
to his or her legal heirs. There are three types of freehold estates: life estate , an estate
limited to the life of the holder; fee simple, an estate without any restrictions; and fee tail,
an estate inherited by the donor's direct descendants. Contrast with leasehold
1. Sales charge when mutual fund shares are purchased, payable to the broker handling
the sale. The sales load is added to the Net Asset Value (NAV) per share when
computing the offering price. Annuities, life insurance policies, and limited