Banking dictionary


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Banking dictionary

  1. 1. First Edition Commercial Banking Students of 2009-11, Group –I
  2. 2. 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
  3. 3. Acknowledgment 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.
  4. 4. List of the Students who contributing their work: COMMERCIAL BANKIG CLASS I 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 Coordinating 31 Ranjan Shetty & Final Draft
  5. 5. A 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. Account A relationship involving a credit established under a particular name, usually by deposit, against which withdrawals may be made. Account Analysis 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. Accounts Payable Those amounts due to vendors or suppliers that must be paid within one year. Account Receivable Short-term assets, representing amounts due to a vendor or suppliers of goods or services that were sold on credit terms. Accrual Accounting. 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.
  6. 6. Administrator. 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. Advice. A written acknowledgment by a bank of a transaction affecting an account; for example, a debit or credit advice. Advising Bank. 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. Agency. 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 other assets. Agent. 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. Altered check. 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 drawn. 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.
  7. 7. 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. Amortization. The gradual reduction of a loan or other obligation by making periodic payments of principal and interest. Annual Cap. 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. Asset. 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). Attachment. 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. Audit. A formal or official examination of and verification of accounts.
  8. 8. Authorized Signature. 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. Automatic Transfer. You pre-authorize transfer of funds from one account to another. Availability Schedule. 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. Available Balance. 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.
  9. 9. B BACK-TO-BACK FINANCING 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. BACK-TO-BACK LOANS 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. BACS 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 Bad debt 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 Bailment 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.) Bail out To rescue a company which is in financial difficulties?
  10. 10. BAHT Thailand’s currency Balance 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
  11. 11. 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 payments. Current Accounts 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 account. 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,
  12. 12. 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. Balance sheet 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. Band 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 Bank A business which holds money for its clients, lends money at interest, and trades generally in money BANKER’S ACCEPTANCE 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
  13. 13. 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. Bank account An account which a customer has with a bank, where the customer can deposit and withdraw money. Bank base rate A basic rate of interest, on which the actual rate a bank charges on loans to its customers is calculated. Bank book A book, given by a bank, which shows money which you deposit or withdraw from your savings account (also called a ‘passbook’) Bank card 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.) Bank charges 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 is made Bank draft An order by one bank telling another bank, usually in another country, to pay money to someone BANK FOR INTERNATIONAL SETTLEMENTS (BIS) Bank for International Settlements (, 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. Bank reconciliation The act of making sure that the bank statements agree with the company’s ledgers Bank reserves Cash and securities held by a bank to cover deposits
  14. 14. Bankrupt 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? Bankruptcy The state of being bankrupt Bank statement A written statement from a bank showing the balance of an account at a specific date. BANK SWAPS 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. Bank wire To pass information among member banks Bar code A system of lines printed on a product which, when read by a computer, give a reference number or price BARTER Barter is international trade conducted by the direct exchange of goods or services between two parties without a cash transaction. BASIC BALANCE 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. BASIS POINT 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. BEARER BOND 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.
  15. 15. 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. BETA 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%. BID 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. BID–ASK SPREAD 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. BID PRICE See BID RATE. 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. BIG BANG 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 1986. BILATERAL EXCHANGES 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, 1999 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.
  16. 16. 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 transit. 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 shipment. 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. BIS BANK FOR INTERNATIONAL SETTLEMENTS B/L BILL OF LADING. BLACK MARKETS 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 Blocked funds are funds in one nation’s currency that may not be exchanged freely due to exchange controls or other reasons. BOLIVAR Venezuela’s currency. BOLIVIANO Bolivia’s currency.
  17. 17. BRADY BONDS 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 bond market. BREAK-EVEN ANALYSIS 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. Brokerage Payment to a broker for a deal carried out Brokerage rebates The percentage of the commission paid to a broker which is returned to the customer as an incentive to do more business Broker’s commission 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.) BROKERS’ MARKET 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. Broking The business of dealing in stocks and shares BSE Index An index of prices on the Indian Stock Exchange. Full form Bombay Stock Exchange Index Budget A plan of expected spending and income for a period of time _ to draw up a budget for salaries for the coming year
  18. 18. Buffer stocks 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 Bulldogs are sterling-denominated bonds issued within the United Kingdom by a foreign borrower. They are foreign bonds sold in the United Kingdom. Bullion A gold or silver bar the price of bullion is fixed daily Bull market A period when share prices rise because people are optimistic and buy shares (NOTE: The opposite is a bear market.) Buoyant Referring to a market where share prices are rising continuously BURN RATE 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). Buy back A type of loan agreement to repurchase bonds or securities at a later date for the same price as they are being sold Buy down The action of paying extra money to a mortgage in order to get a better rate in the future
  19. 19. C CAGR (Abbreviation) compound Annual Growth Rate – compounding rate of return over a period. Calendar month A whole month as on a calendar, from the 1st to the 30th or 31st Calendar year A year from the 1st January to 31st December Call 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. Callable bond A bond which can be redeemed before it matures Call in To ask for a debt to be paid Call loan A bank loan repayable at call Cancel 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? Cap 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 for investment Capital account An account of dealings such as money invested in or taken out of the company by the owners of a company
  20. 20. 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 Capped 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 Cardholder A person who holds a credit card or bank cash card Carry forward To take an account balance at the end of the current period or page as the starting point for the next period or page Carryover day The first day of trading on a new account on the London Stock Exchange Cash Money in the form of coins or notes to cash a cheque to exchange a cheque for cash Cashable Which can be cashed, a crossed cheque is not cashable at any bank. Cash account An account which records the money which is received and spent Cash advance A loan in cash against a future payment Cash box metal box for keeping cash Cashier 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 Cashier’s check US a bank’s own cheque, drawn on itself and signed by a cashier or other bank official
  21. 21. Cash in 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. Cashless society 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 Cash limit 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 Cash wire US a system operated by a group of banks to clear payments between member banks Catastrophe bond 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 Ceiling 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 year? Central bank 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 markets Certificated bankrupt A bankrupt who has been discharged from bankruptcy with a certificate to show that he or she was not at fault
  22. 22. 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. Certified cheque 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 CFP franc A franc with a fixed exchange rate against the euro, used in French territories in the Pacific CGT abbreviation capital gains tax CHAPS A computerised system for clearing cheques organised by the banks. Compare BACS. Full form Clearing House Automated Payments System Chartered bank 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. Checkable US referring to a deposit account on which checks can be drawn Check card 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 Cheque 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
  23. 23. 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 Cheque account Same as current account Cheque book 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 Cheque stub 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 Chief cashier A main cashier in a bank Chip card Same as smart card CIB abbreviation Chartered Institute of Bankers Circulation 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. Clearing 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 Clearing bank 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 Clearing house A central office where clearing banks exchange cheques, or where stock exchange or commodity exchange transactions are settled
  24. 24. Clearing House Automated Payments System A computerised system which is organised by the banks and used for clearing cheques. Clients’ account An account with a bank for clients of a solicitor Commercial bank A bank which offers banking services to the public, as opposed to a merchant bank Commercial bill 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) Commercial failure A financial collapse or Bankruptcy Commitment fee A fee paid to a bank which has arranged a line of credit which has not been fully used Compensating balance 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) Consumer bank Same as retail bank Consumer credit 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.) Cooperative bank A bank which is owned by its members, who deposit money or who borrow money as loans Correspondent bank A bank which acts as an agent for a foreign bank Country bank US a bank based in a town which has no office of the Federal Reserve Credit bank A bank which lends money
  25. 25. Creative financing Finding methods of financing a commercial project that are different from the normal methods of raising money Credit freeze A period when lending by banks is restricted by the government Credit line 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 Credit-reference agency A company credit 85 credit-reference agency used by businesses and banks to assess the creditworthiness of people Credit references 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 Credit squeeze 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 Crossed cheque A cheque with two lines across it showing that it can only be deposited at a bank and not exchanged for cash Currency note A bank note Current account 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.
  26. 26. D Debt-equity ratio 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. Default 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 default. 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. Direct debit 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. Documentation charges 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. Dormant/inoperative account 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. Debit 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 deposit account.
  27. 27. Debit Card 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 Debt Money, services, goods or anything else of value that is owed by one person to another as the result of a previous agreement. Debt Management The control of maturities, timing, quantum and composition of debt by a business. Debt-to-Income Ratio 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 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%. Deed Written agreement in proper legal form that conveys title to, or an interest in, real property. 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 Delinquency Failure to make monthly mortgage payments on time. This is serious for the borrower since it can result in foreclosure on a property. Delinquent Loan A loan that is 30 to 60 days past due with no payments being made. Delta 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 Demand Deposit 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.
  28. 28. 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 Deposit 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 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. Deposit Payout A resolution method for failed institutions that involves the reimbursement of deposits and the transfer of the banks assets to a receiver for liquidation. Depository Institution 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. 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 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
  29. 29. Differential Premium A levy on a bank assessed on the basis of that banks risk profile (also called Risk-Adjusted Differential Premium). Dirty Float 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. Discount Points 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. Discount Rate Interest rate at which an eligible depository institution may borrow funds, typically for a short period, directly from a Federal Reserve Bank. Discount Window Figurative expression for Federal Reserve facility for extending credit directly to eligible depository institutions (those with transaction accounts or non-personal time deposits). Diversification Reducing risk by spreading investments among different investments, sectors, markets and instruments. Diversity Score A measure introduced by Moody’s to measure portfolio concentration. A high score means that the portfolio is well diversified. Domestic Bonds 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. Draft 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. Drawdowns He drawing of funds against a line of credit. Due Date The date on which all or part of a debt is required to be paid; the maturity date.
  30. 30. E Early 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 Earmark 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 roads Earnings before interest, taxes, depreciation and amortization Revenue received by a company in its usual business before various deductions are made. Abbreviation EBITDA Earnings cap The upper limit on the amount of salary that can be taken into account when calculating pensions Earnings credit An allowance which reduces bank charges on checking accounts EASDAQ 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 Easy money 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) Easy terms Financial terms which are not difficult to accept _ the shop is let on very easy terms.
  31. 31. EBA -Euro Banking Association EBITDA Earnings before interest, taxes, depreciation and amortization EBRD - European Bank for Reconstruction and Development E-business 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) E-cash 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 Effective rate A real interest rate on a loan or deposit (i.e. the APR) Effective yield 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
  32. 32. Electronic Referring to computers and electronics Electronic banking The use of computers to carry out banking transactions, such as withdrawals through cash dispensers or transfer of funds at point of sale Electronic business Same as e-business effective date 117 electronic business Electronic cash Same as digital cash Electronic cheque An electronic cheque, which a person writes and sends via a computer and the Internet Electronic commerce 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 Electronic mail Same as email Electronic purse Same as digital wallet eligible liabilities which go into the calculation of a bank’s reserves Emergency credit Credit given by the Fed electronic Emerging growth fund Growth fund that invests in emerging markets Emoluments Pay, salary or fees, or the earnings of directors who are not employees (NOTE: US English uses the singular emolument.) E-money Same as digital money
  33. 33. EMS abbreviation European Monetary System EMU abbreviation Economic Monetary Union Encash To cash a cheque, to exchange a cheque for cash emerging 119 encash Encashable Which can be cashed? Encashment An act of exchanging for cash Encryption A conversion of plain text to a secure coded form by means of a cipher system Encumbrance 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. Endorse 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 Endorsee A person whose name is written on a bill or cheque as having the right to cash it Endorsement 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 Endorser A person who endorses a bill or cheque which is then paid to him or her Endowment The act of giving money to provide a regular income Endowment insurance 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 Endowment mortgage 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
  34. 34. 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 ’repayment mortgage’. Energy shares Shares in companies which provide energy Entail 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 E-purse Same as digital wallet Equities Ordinary shares Equity 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 Equity accounting A method of accounting which puts part of the profits of a subsidiary into the parent company’s books Equity capital 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.) Equity earnings 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 Equity finance Finance for a company in the form of ordinary shares paid for by shareholders
  35. 35. Equity fund A fund which is invested in equities, not in government securities or other funds Equity gearing 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 Equity kicker 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 Equity REIT A trust which invests in rented property. Equity release 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 Equity sweetener 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 Error rate The number of mistakes per thousand entries or per page Escalator bond A fixed-rate bond where the rate rises each year ESCB abbreviation European System of Central Banks
  36. 36. Escrow 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 Escrow account US an account where money is held in escrow until a contract is signed or until goods are delivered Escudo A former unit of currency in Portugal Estimate A calculation of the probable cost, size or time of something Ethical fund 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 Ethical index An index of shares in companies which follow certain moral standards Ethical investment 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 Ethical screening Checking companies against certain moral standards, and removing those which do not conform EU abbreviation European Union _ EU ministers met today in Brussels. _ The USA is increasing its trade with the EU. Eurex A European derivatives market developed by combining the German Terminbörse and the Swiss Soffex EURIBOR abbreviation European Interbank Offered Rate
  37. 37. Euro A unit of currency adopted as legal tender in several European countries from January 1st, 1999 Euro- referring to Europe or the European Union Euro account A bank account in euros Eurobond 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 market) Eurocard A cheque card used when writing Eurocheques Eurocheque A cheque which can be cashed in any European bank (the Eurocheque system is based in Brussels) Eurocommercial paper A form of short-term borrowing in eurocurrencies. Abbreviation ECP Eurocredit A large bank loan in a eurocurrency (usually provided by a group of banks to a large commercial undertaking) Eurocurrency 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 Eurodeposit A deposit of eurodollars in a bank outside the US Euroland The European countries which use the euro as a common currency, seen as a group Euromarket 1. The European Union seen as a potential market for sales 2. The Eurocurrency market, the international market for lending or borrowing in Eurocurrencies Euronote A short-term eurocurrency bearer note Euro-option
  38. 38. 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. Abbreviation EBRD 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. Abbreviation EIB Euroyen A Japanese yen deposited in a European bank and used for trade within Europe Eurozone The European countries which use the euro as a common currency, seen as a group EVA abbreviation economic value added Exact interest An annual interest calculated on the basis of 365 days (as opposed to ordinary interest, calculated on 360 days) Excess liquidity Cash held by a bank above the normal requirement for that bank Exchange 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 Exchange premium
  39. 39. An extra cost above the normal rate for buying a foreign currency Exchanger A person who buys and sells foreign currency Exchange rate 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 bank Extend 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. Extended credit 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 Extension 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? External account An account in a British bank belonging to someone who is living in another country External debt
  40. 40. Money which a company has borrowed from outside sources (such as a bank) as opposed to money raised from shareholders External funds Same as external debt
  41. 41. F Facility fee Lender’s charge for making a line of credit or other credit facility available to a borrower, for example, a commitment fee Fail 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 risk. 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 Fee 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 commission. 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. Fiat money 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. Fidelity bond Insurance coverage against specified losses that occur from the dishonest acts or defalcations of employees. This bond may be applied to persons or positions Fiduciary 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
  42. 42. 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 Finance bill 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 acceptance Finance charge 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) 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) Financial counseling 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.
  43. 43. 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, Denver, Colorado. Financial guarantee 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. Financial innovation 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. Financial institution 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 sell insurance. 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
  44. 44. 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. Financial intermediary 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. Lending 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. First mortgage 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.
  45. 45. Fiscal agent 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. Fiscal year 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 borrower's industry. Fixed asset 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
  46. 46. 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 loan. Flat 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 volume. 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. Float 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 Floater Bonds 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 debt holders.
  47. 47. Insurance 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. Floating debt 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 Floating lien 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).
  48. 48. Floor 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. Floor limit Largest credit card a retail merchant may accept without obtaining authorization by the card issuer. Contrast with zero-floor limit. Floor loan 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 lender. Floor planning 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 institutional investors. 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 Footings Expression for the bottom line figure on a bank's balance sheet: the sum of assets or liabilities, plus equity capital.
  49. 49. Forbearance 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 Forecasting 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 change. 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 periods. Foreign branches 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. Foreign Corporation 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
  50. 50. 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 Foreign deposits 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 Foreign draft Check denominated in a specific foreign currency, usually drawn to the seller on a bank account in the country of the currency's origin Foreign exchange 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. Fractional reserves 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 .
  51. 51. Fraud 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. Freddie mac 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. Free period 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. Free reserves 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. Freehold 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 Front-end load 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