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Jargon buster
Financial terminology
1
Jargon buster
Financial
glossary
Speaking the language of finance with confidence is
often a deal-breaker. If you need to brush up on your
financial terminology, take a look at our AtoZ guide.
www.london.edu
Jargon buster
Financial terminology
www.london.edu 2
Active return
Return on an investment relative to a benchmark.
For example, if a portfolio has a benchmark return
of 5% but the actual return is 8%, then the active
return is 3% (actual return minus the benchmark return).
Active returns can be positive or negative depending
on whether the actual return outperforms the
benchmark or not.
Jargon buster
Financial terminology
www.london.edu 3
Arbitrage
Exploiting usually small differences in the price
of securities, currencies, commodities, or other
assets to make a profit. Arbitrage can only happen
in an inefficient market.
Jargon buster
Financial terminology
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The total market value of financial assets an investment
company manages on behalf of its clients.
Assets under
management (AUM)
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Financial terminology
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A graphical model for valuing options. It is one of two
major methods for pricing options. The other being
Black-Scholes.
Binomial tree
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Financial terminology
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The formula that made it possible to create prices
in the derivatives market. The formula is named after
its creators: Fischer Black and Myron Scholes.
Black-Scholes
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Financial terminology
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A certificate issued by a government, company
or other organisation promising to repay borrowed
money at a fixed rate of interest at a specified time.
Bond
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Financial terminology
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The value that a convertible bond would have if it was no
longer convertible. The bond value represents the market
value of the bond less the value of the conversion option.
Bond value
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Financial terminology
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Organisations that buy investment services. These
include private equity funds, mutual funds, life insurance
companies, unit trusts, hedge funds and pension funds.
Buy-side
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Financial terminology
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For investors, it refers to their stock of wealth, which can be put to work in
order to earn income.
For companies, it typically refers to sources of financing such as newly issued
shares.
For banks, it refers to their ability to absorb losses in their accounts. Banks
normally obtain capital either by issuing new shares, or by keeping hold of
profits instead of paying them out as dividends. If a bank writes off a loss on
one of its assets – for example, if it makes a loan that is not repaid – then the
bank must also write off a corresponding amount of its capital. If a bank runs
out of capital, then it is insolvent, meaning it does not have enough assets to
repay its debts.
Capital
Jargon buster
Financial terminology
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The part of a financial system concerned with raising
capital by dealing in shares, bonds and other long-term
investments.
Capital markets
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Financial terminology
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The composition of a company’s mixture of debt and
equity financing. A company’s debt-equity ratio is often
referred to as its gearing.
Capital structure
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Financial terminology
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A small company created from a larger one. A company
undertaking a carve-out is not selling a business unit
outright, and may instead sell an equity stake in that
business or spin the business off on its own while
retaining an equity stake itself.
Carve-outs
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Financial terminology
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A measure of a company’s financial performance based
on the cash flow a company produces with its invested
capital.
Cash return on
gross investment (CROGI)
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Financial terminology
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A bond that uses a variety of high-yield junk bonds as
collateral. These bonds are separated, or pooled, into
tranches with higher and lower levels of risk.
Collateralised bond
obligations (CBO)
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Financial terminology
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A tradable derivative. A number of loans or debt securities
payable by various companies are put into a pool, and
new securities are issued which pay out according to the
pool’s collective performance.
Collateralised debt
obligation (CDO)
Jargon buster
Financial terminology
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Convexity
A measure of the way that bond duration and prices
change when interest rates fluctuate as shown in the
curve of the price to yield relationship. The shape of the
typical curve is convex.
Jargon buster
Financial terminology
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How a company is managed, in terms of the institutional
systems and protocols meant to ensure accountability
and sound ethics. The concept encompasses a variety of
issues, including disclosure of information to shareholders
and board members, senior executive pay, potential
conflicts of interest among managers and directors,
supervisory structures, etc.
Corporate
governance
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Financial terminology
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Derivatives that investors use to protect against, or bet
on, an entity being unable to repay its debts. The credit
default swaps market is believed to have played a big
part in the 2008 financial crisis.
Credit default
swap (CDS)
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Financial terminology
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The risk that a borrower will default on any type of debt
by failing to make required payments.
Credit risk
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Financial terminology
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A financial market where participants can issue new
debt, known as the primary market, or buy and sell debt
securities, known as the secondary market. This is usually
in the form of bonds, but it may include notes, bills, and
so on.
Debt market
Jargon buster
Financial terminology
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A financial contract which provides a way of investing in a particular product
without having to own it directly. For example, a stock market futures contract
allows investors to make bets on the value of a stock market index such
as the FTSE 100 without having to buy or sell any shares. The value of a
derivative can depend on anything from the price of coffee to interest rates
or what the weather is like. Credit derivatives such as credit default swaps
depend on the ability of a borrower to repay its debts. Derivatives allow
investors and banks to hedge their risks, or to speculate on markets. Futures,
forwards, swaps and options are all types of derivatives.
Derivative
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Financial terminology
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A way of estimating the attractiveness of an investment.
DCF analysis uses future free cash flow projections and
discounts them (most often using the weighted average
cost of capital) to arrive at a present value, which is
used to evaluate the potential for investment. If the value
arrived at through DCF analysis is higher than the current
cost of the investment, the opportunity may be a good
one.
Discounted cash
flow (DCF)
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Financial terminology
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The process of selling subsidiary business interests or
investments. Not to be confused with disinvestment,
which is a reduction in a company’s capital goods.
Divestment
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Financial terminology
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An income payment by a company to its shareholders
usually linked to its profits.
Dividend
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Financial terminology
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Dual-listed company
A merger between two companies, in which they agree
to combine their operations and cash flows, and make
similar dividend payments to shareholders in both
companies, while retaining separate shareholder registries
and identities. In most cases, the two companies are
listed in different countries.
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Financial terminology
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The value of a business or investment after subtracting
any debts owed by it. The equity in a company is the
value of all its shares.
Equity
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Financial terminology
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Same as stock market. Not to be confused with the
physical place where shares are traded. That’s called a
stock exchange.
Equity market
Jargon buster
Financial terminology
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A condition where a company cannot meet, or has
difficulty paying off its financial obligations to its creditors.
The chance of financial distress increases when a firm
has high fixed costs, illiquid assets, or revenues that are
sensitive to economic downturns.
Financial distress
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Financial terminology
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The organisation responsible for regulating the financial
services industry in the UK.
Financial Services
Authority (FSA)
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Financial terminology
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Fixed income
Any type of investment, such as bonds and other debt
instruments, that produces regular or fixed returns.
Jargon buster
Financial terminology
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Foreign exchange.
Forex (FX)
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Financial terminology
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The qualitative and quantitative information that
contributes to the economic well-being and the
subsequent financial valuation of a company, security
or currency. Analysts and investors analyse these
fundamentals to develop an estimate as to whether the
underlying asset is considered a worthwhile investment.
For businesses, information such as revenue, earnings,
assets, liabilities and growth are considered some of the
fundamentals.
Fundamentals
Jargon buster
Financial terminology
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A futures contract is an agreement to buy or sell a
commodity at a predetermined date and price. It could
be used to hedge or to speculate on the price of the
commodity. Futures contracts are a type of derivative and
are traded on an exchange.
Futures
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Financial terminology
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Same as leverage. The extent to which a company’s
operations are funded by lenders versus shareholders. A
company with a high proportion of debt to equity is highly
geared and is more vulnerable to fluctuations in business
activity. It presents a higher risk for shareholders.
Gearing
Jargon buster
Financial terminology
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A private investment fund which uses a range of
sophisticated strategies to maximise returns including
leveraging and derivatives trading. Despite its name,
hedging is rarely used.
Hedge fund
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Financial terminology
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A strategy to minimise risk. It involves deliberately taking
on a new risk that offsets the existing one. For example,
an importer of a commodity may sell futures contracts to
offset losses if prices fall.
Hedging
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Financial terminology
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The first sale of stock by a company to the public. A
company can raise money by issuing either debt or
equity. If the company has never issued equity to the
public, it’s known as an IPO.
Initial public
offering (IPO)
Jargon buster
Financial terminology
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A financial instrument based on an underlying financial
security whose value is affected by changes in interest
rates. Interest-rate derivatives are hedges used by
institutional investors such as banks to combat the
changes in market interest rates.
Interest-rate
derivatives
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Financial terminology
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Need for intermediation occurs due to the imperfect
nature of markets and everyday situations where the
complete (‘perfect’) knowledge about providers and
seekers (and about what they seek) is not available to
everyone.
Intermediation
Jargon buster
Financial terminology
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Agreement between two or more companies to cooperate
on a particular project or a business that serves their
mutual interests. In most cases, the agreement involves
the parties taking a share in the capital of a joint venture
company, and sharing costs and earnings in proportion to
that share.
Joint venture
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Financial terminology
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The acquisition of another company using a significant
amount of borrowed money (bonds or loans) to meet the
cost of acquisition.
Leveraged buy-out
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Financial terminology
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Holding a security such as a stock, commodity or
currency, with the expectation that the price will rise.
Long
(or ‘long position’)
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Financial terminology
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The branch of economics concerned with large-scale
or general economic factors, such as interest rates and
national productivity.
Macroeconomics
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Financial terminology
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A transaction where a company’s management team
purchases the assets and operations of the business they
manage.
Management
buy-out (MBO)
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Financial terminology
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When two businesses join together, either by merging or
by one company taking over the other.
Mergers and
acquisitions(M&A)
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Financial terminology
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Modern portfolio theory is based on the simple idea that
diversification can produce the same total returns for
less risk. Combining many financial assets in a portfolio
is less risky than putting all your investment eggs in one
basket. Harry Markowitz was awarded a Nobel Prize in
Economics for developing this theory. However, when it
came to investing his own money, Markowitz didn’t use
MPT, but chose a simpler rule which allocates money
equally across a number of funds under consideration.
Modern portfolio
theory (MPT)
Jargon buster
Financial terminology
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An investment fund that gathers capital from a number
of investors to create a pool of money that is then re-
invested into stocks, bonds and other assets. Mutual
funds are known as unit trusts in the UK.
Mutual fund
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Financial terminology
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A value that helps people decide whether to go ahead
with an investment or project. It is the current value of the
investment plus the present value of future cash flows,
minus the initial cost of the investment plus the present
value of any future cost.
Net present value (NPV)
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Financial terminology
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A type of derivative that gives an investor the right to buy
(or to sell) something at an agreed price and at an agreed
time in the future. Options become much more valuable
when markets are volatile, as they can be an insurance
against price swings.
Options
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Financial terminology
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Greeks – the quantities representing the sensitivity of
the price of derivatives such as options to a change
in underlying parameters on which the value of an
instrumentor portfolio of financial instruments is
dependent.
Exotics – Exotics are derivatives that are complex or are
available in emerging economies.
Options: Greeks,
Exotics
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Financial terminology
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Deciding on the weights of securities so that they best
suit the goal of the portfolio, such as: ‘maximise return for
a given risk’.
Portfolio
optimisation
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Financial terminology
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A simple way of judging whether shares are cheap or
expensive. It is the ratio of the market price of a share to
the company’s earnings (profit) per share.
Price-earning ratio
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Financial terminology
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A firm that specialises in buying up troubled or
undervalued companies, taking them private with the aim
of running them better and later taking them public or
selling them at a profit.
Private equity firm
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Financial terminology
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In the UK, a way of creating public-private partnerships by
funding public infrastructure projects with private capital.
Private finance
initiative (PFI)
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Financial terminology
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A financial ratio that measures a company’s profitability
and the efficiency with which its capital is employed.
Return on capital
employed (ROCE)
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Financial terminology
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The profit on an investment in relation to the amount
invested.
Return on
investment (ROI)
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Financial terminology
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An accounting principle under generally accepted
recognition accounting principles (GAAP) that determines
the specific conditions under which income becomes
realised as revenue. Generally, revenue is recognised only
when a pecific critical event has occurred and the amount
of revenue is measurable.
Revenue
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Financial terminology
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The process of managing the risk you want to bear, and
minimising your exposure to the risk you do not want.
Some of the ways that companies manage risk include
hedging, diversification, buying insurance and, simply,
avoidance.
Risk management
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Financial terminology
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The part of the financial industry involved with the
creation, promotion, analysis and sale of securities. Sell-
side individuals and firms work to create and service
stock products that will be made available to the buy-side
of the financial industry.
Sell-side
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Financial terminology
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The sale of a borrowed security, commodity or currency
with the expectation that the asset will fall in value.
Strategic asset The practice of realigning a portfolio’s
asset composition in allocation order to accommodate
changes in market.
Shorting
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Financial terminology
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An exchange of securities between two parties. For
example, if a firm in one country has a lower fixed interest
rate and one in another country has a lower floating
interest rate, an interest rate swap could be mutually
beneficial.
Swap
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Financial terminology
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Determining the value of an asset or a company.
Valuation
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Financial terminology
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The strategy of selecting stocks that trade for less
than their intrinsic values. Value investors actively seek
stocks of companies that they believe the market has
undervalued.
Value investing
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Financial terminology
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Private equity to help new companies grow. An alternative
source of finance for entrepreneurs who might otherwise
have to rely on a bank loan.
Venture capital
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Financial terminology
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A graph of the relationship between the yields and
maturities of different bonds of similar quality, currency
denomination and risk (usually government bonds).
Yield curve
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Financial terminology
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Masters in Finance – MiF
Masters in Financial Analysis – MFA
Beyond the jargon:
finance programmes at LBS
Jargon buster
Financial terminology
www.london.edu 68
Executive Education Programmes
■■ Corporate Finance Portfolio:
■■ Accounting and Financial Analysis
■■ Valuation
■■ Financial Strategies for Value Creation
■■ Advanced Corporate Finance
■■ Financing the Entrepreneurial Business
■■ Financial Seminar for Senior Managers
■■ Investment Management Programmes:
■■ Equity Portfolio Management
■■ Fixed Income Markets and Bond Portfolio
Management
■■ Masterclass in Private Equity
■■ Mergers and Acquisitions
■■ Project and Infrastructure Finance
■■ Strategic Investment Management
Beyond the jargon:
finance programmes at LBS

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Financial Glossary

  • 1. Jargon buster Financial terminology 1 Jargon buster Financial glossary Speaking the language of finance with confidence is often a deal-breaker. If you need to brush up on your financial terminology, take a look at our AtoZ guide. www.london.edu
  • 2. Jargon buster Financial terminology www.london.edu 2 Active return Return on an investment relative to a benchmark. For example, if a portfolio has a benchmark return of 5% but the actual return is 8%, then the active return is 3% (actual return minus the benchmark return). Active returns can be positive or negative depending on whether the actual return outperforms the benchmark or not.
  • 3. Jargon buster Financial terminology www.london.edu 3 Arbitrage Exploiting usually small differences in the price of securities, currencies, commodities, or other assets to make a profit. Arbitrage can only happen in an inefficient market.
  • 4. Jargon buster Financial terminology www.london.edu 4 The total market value of financial assets an investment company manages on behalf of its clients. Assets under management (AUM)
  • 5. Jargon buster Financial terminology www.london.edu 5 A graphical model for valuing options. It is one of two major methods for pricing options. The other being Black-Scholes. Binomial tree
  • 6. Jargon buster Financial terminology www.london.edu 6 The formula that made it possible to create prices in the derivatives market. The formula is named after its creators: Fischer Black and Myron Scholes. Black-Scholes
  • 7. Jargon buster Financial terminology www.london.edu 7 A certificate issued by a government, company or other organisation promising to repay borrowed money at a fixed rate of interest at a specified time. Bond
  • 8. Jargon buster Financial terminology www.london.edu 8 The value that a convertible bond would have if it was no longer convertible. The bond value represents the market value of the bond less the value of the conversion option. Bond value
  • 9. Jargon buster Financial terminology www.london.edu 9 Organisations that buy investment services. These include private equity funds, mutual funds, life insurance companies, unit trusts, hedge funds and pension funds. Buy-side
  • 10. Jargon buster Financial terminology www.london.edu 10 For investors, it refers to their stock of wealth, which can be put to work in order to earn income. For companies, it typically refers to sources of financing such as newly issued shares. For banks, it refers to their ability to absorb losses in their accounts. Banks normally obtain capital either by issuing new shares, or by keeping hold of profits instead of paying them out as dividends. If a bank writes off a loss on one of its assets – for example, if it makes a loan that is not repaid – then the bank must also write off a corresponding amount of its capital. If a bank runs out of capital, then it is insolvent, meaning it does not have enough assets to repay its debts. Capital
  • 11. Jargon buster Financial terminology www.london.edu 11 The part of a financial system concerned with raising capital by dealing in shares, bonds and other long-term investments. Capital markets
  • 12. Jargon buster Financial terminology www.london.edu 12 The composition of a company’s mixture of debt and equity financing. A company’s debt-equity ratio is often referred to as its gearing. Capital structure
  • 13. Jargon buster Financial terminology www.london.edu 13 A small company created from a larger one. A company undertaking a carve-out is not selling a business unit outright, and may instead sell an equity stake in that business or spin the business off on its own while retaining an equity stake itself. Carve-outs
  • 14. Jargon buster Financial terminology www.london.edu 14 A measure of a company’s financial performance based on the cash flow a company produces with its invested capital. Cash return on gross investment (CROGI)
  • 15. Jargon buster Financial terminology www.london.edu 15 A bond that uses a variety of high-yield junk bonds as collateral. These bonds are separated, or pooled, into tranches with higher and lower levels of risk. Collateralised bond obligations (CBO)
  • 16. Jargon buster Financial terminology www.london.edu 16 A tradable derivative. A number of loans or debt securities payable by various companies are put into a pool, and new securities are issued which pay out according to the pool’s collective performance. Collateralised debt obligation (CDO)
  • 17. Jargon buster Financial terminology www.london.edu 17 Convexity A measure of the way that bond duration and prices change when interest rates fluctuate as shown in the curve of the price to yield relationship. The shape of the typical curve is convex.
  • 18. Jargon buster Financial terminology www.london.edu 18 How a company is managed, in terms of the institutional systems and protocols meant to ensure accountability and sound ethics. The concept encompasses a variety of issues, including disclosure of information to shareholders and board members, senior executive pay, potential conflicts of interest among managers and directors, supervisory structures, etc. Corporate governance
  • 19. Jargon buster Financial terminology www.london.edu 19 Derivatives that investors use to protect against, or bet on, an entity being unable to repay its debts. The credit default swaps market is believed to have played a big part in the 2008 financial crisis. Credit default swap (CDS)
  • 20. Jargon buster Financial terminology www.london.edu 20 The risk that a borrower will default on any type of debt by failing to make required payments. Credit risk
  • 21. Jargon buster Financial terminology www.london.edu 21 A financial market where participants can issue new debt, known as the primary market, or buy and sell debt securities, known as the secondary market. This is usually in the form of bonds, but it may include notes, bills, and so on. Debt market
  • 22. Jargon buster Financial terminology www.london.edu 22 A financial contract which provides a way of investing in a particular product without having to own it directly. For example, a stock market futures contract allows investors to make bets on the value of a stock market index such as the FTSE 100 without having to buy or sell any shares. The value of a derivative can depend on anything from the price of coffee to interest rates or what the weather is like. Credit derivatives such as credit default swaps depend on the ability of a borrower to repay its debts. Derivatives allow investors and banks to hedge their risks, or to speculate on markets. Futures, forwards, swaps and options are all types of derivatives. Derivative
  • 23. Jargon buster Financial terminology www.london.edu 23 A way of estimating the attractiveness of an investment. DCF analysis uses future free cash flow projections and discounts them (most often using the weighted average cost of capital) to arrive at a present value, which is used to evaluate the potential for investment. If the value arrived at through DCF analysis is higher than the current cost of the investment, the opportunity may be a good one. Discounted cash flow (DCF)
  • 24. Jargon buster Financial terminology www.london.edu 24 The process of selling subsidiary business interests or investments. Not to be confused with disinvestment, which is a reduction in a company’s capital goods. Divestment
  • 25. Jargon buster Financial terminology www.london.edu 25 An income payment by a company to its shareholders usually linked to its profits. Dividend
  • 26. Jargon buster Financial terminology www.london.edu 26 Dual-listed company A merger between two companies, in which they agree to combine their operations and cash flows, and make similar dividend payments to shareholders in both companies, while retaining separate shareholder registries and identities. In most cases, the two companies are listed in different countries.
  • 27. Jargon buster Financial terminology www.london.edu 27 The value of a business or investment after subtracting any debts owed by it. The equity in a company is the value of all its shares. Equity
  • 28. Jargon buster Financial terminology www.london.edu 28 Same as stock market. Not to be confused with the physical place where shares are traded. That’s called a stock exchange. Equity market
  • 29. Jargon buster Financial terminology www.london.edu 29 A condition where a company cannot meet, or has difficulty paying off its financial obligations to its creditors. The chance of financial distress increases when a firm has high fixed costs, illiquid assets, or revenues that are sensitive to economic downturns. Financial distress
  • 30. Jargon buster Financial terminology www.london.edu 30 The organisation responsible for regulating the financial services industry in the UK. Financial Services Authority (FSA)
  • 31. Jargon buster Financial terminology www.london.edu 31 Fixed income Any type of investment, such as bonds and other debt instruments, that produces regular or fixed returns.
  • 32. Jargon buster Financial terminology www.london.edu 32 Foreign exchange. Forex (FX)
  • 33. Jargon buster Financial terminology www.london.edu 33 The qualitative and quantitative information that contributes to the economic well-being and the subsequent financial valuation of a company, security or currency. Analysts and investors analyse these fundamentals to develop an estimate as to whether the underlying asset is considered a worthwhile investment. For businesses, information such as revenue, earnings, assets, liabilities and growth are considered some of the fundamentals. Fundamentals
  • 34. Jargon buster Financial terminology www.london.edu 34 A futures contract is an agreement to buy or sell a commodity at a predetermined date and price. It could be used to hedge or to speculate on the price of the commodity. Futures contracts are a type of derivative and are traded on an exchange. Futures
  • 35. Jargon buster Financial terminology www.london.edu 35 Same as leverage. The extent to which a company’s operations are funded by lenders versus shareholders. A company with a high proportion of debt to equity is highly geared and is more vulnerable to fluctuations in business activity. It presents a higher risk for shareholders. Gearing
  • 36. Jargon buster Financial terminology www.london.edu 36 A private investment fund which uses a range of sophisticated strategies to maximise returns including leveraging and derivatives trading. Despite its name, hedging is rarely used. Hedge fund
  • 37. Jargon buster Financial terminology www.london.edu 37 A strategy to minimise risk. It involves deliberately taking on a new risk that offsets the existing one. For example, an importer of a commodity may sell futures contracts to offset losses if prices fall. Hedging
  • 38. Jargon buster Financial terminology www.london.edu 38 The first sale of stock by a company to the public. A company can raise money by issuing either debt or equity. If the company has never issued equity to the public, it’s known as an IPO. Initial public offering (IPO)
  • 39. Jargon buster Financial terminology www.london.edu 39 A financial instrument based on an underlying financial security whose value is affected by changes in interest rates. Interest-rate derivatives are hedges used by institutional investors such as banks to combat the changes in market interest rates. Interest-rate derivatives
  • 40. Jargon buster Financial terminology www.london.edu 40 Need for intermediation occurs due to the imperfect nature of markets and everyday situations where the complete (‘perfect’) knowledge about providers and seekers (and about what they seek) is not available to everyone. Intermediation
  • 41. Jargon buster Financial terminology www.london.edu 41 Agreement between two or more companies to cooperate on a particular project or a business that serves their mutual interests. In most cases, the agreement involves the parties taking a share in the capital of a joint venture company, and sharing costs and earnings in proportion to that share. Joint venture
  • 42. Jargon buster Financial terminology www.london.edu 42 The acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition. Leveraged buy-out
  • 43. Jargon buster Financial terminology www.london.edu 43 Holding a security such as a stock, commodity or currency, with the expectation that the price will rise. Long (or ‘long position’)
  • 44. Jargon buster Financial terminology www.london.edu 44 The branch of economics concerned with large-scale or general economic factors, such as interest rates and national productivity. Macroeconomics
  • 45. Jargon buster Financial terminology www.london.edu 45 A transaction where a company’s management team purchases the assets and operations of the business they manage. Management buy-out (MBO)
  • 46. Jargon buster Financial terminology www.london.edu 46 When two businesses join together, either by merging or by one company taking over the other. Mergers and acquisitions(M&A)
  • 47. Jargon buster Financial terminology www.london.edu 47 Modern portfolio theory is based on the simple idea that diversification can produce the same total returns for less risk. Combining many financial assets in a portfolio is less risky than putting all your investment eggs in one basket. Harry Markowitz was awarded a Nobel Prize in Economics for developing this theory. However, when it came to investing his own money, Markowitz didn’t use MPT, but chose a simpler rule which allocates money equally across a number of funds under consideration. Modern portfolio theory (MPT)
  • 48. Jargon buster Financial terminology www.london.edu 48 An investment fund that gathers capital from a number of investors to create a pool of money that is then re- invested into stocks, bonds and other assets. Mutual funds are known as unit trusts in the UK. Mutual fund
  • 49. Jargon buster Financial terminology www.london.edu 49 A value that helps people decide whether to go ahead with an investment or project. It is the current value of the investment plus the present value of future cash flows, minus the initial cost of the investment plus the present value of any future cost. Net present value (NPV)
  • 50. Jargon buster Financial terminology www.london.edu 50 A type of derivative that gives an investor the right to buy (or to sell) something at an agreed price and at an agreed time in the future. Options become much more valuable when markets are volatile, as they can be an insurance against price swings. Options
  • 51. Jargon buster Financial terminology www.london.edu 51 Greeks – the quantities representing the sensitivity of the price of derivatives such as options to a change in underlying parameters on which the value of an instrumentor portfolio of financial instruments is dependent. Exotics – Exotics are derivatives that are complex or are available in emerging economies. Options: Greeks, Exotics
  • 52. Jargon buster Financial terminology www.london.edu 52 Deciding on the weights of securities so that they best suit the goal of the portfolio, such as: ‘maximise return for a given risk’. Portfolio optimisation
  • 53. Jargon buster Financial terminology www.london.edu 53 A simple way of judging whether shares are cheap or expensive. It is the ratio of the market price of a share to the company’s earnings (profit) per share. Price-earning ratio
  • 54. Jargon buster Financial terminology www.london.edu 54 A firm that specialises in buying up troubled or undervalued companies, taking them private with the aim of running them better and later taking them public or selling them at a profit. Private equity firm
  • 55. Jargon buster Financial terminology www.london.edu 55 In the UK, a way of creating public-private partnerships by funding public infrastructure projects with private capital. Private finance initiative (PFI)
  • 56. Jargon buster Financial terminology www.london.edu 56 A financial ratio that measures a company’s profitability and the efficiency with which its capital is employed. Return on capital employed (ROCE)
  • 57. Jargon buster Financial terminology www.london.edu 57 The profit on an investment in relation to the amount invested. Return on investment (ROI)
  • 58. Jargon buster Financial terminology www.london.edu 58 An accounting principle under generally accepted recognition accounting principles (GAAP) that determines the specific conditions under which income becomes realised as revenue. Generally, revenue is recognised only when a pecific critical event has occurred and the amount of revenue is measurable. Revenue
  • 59. Jargon buster Financial terminology www.london.edu 59 The process of managing the risk you want to bear, and minimising your exposure to the risk you do not want. Some of the ways that companies manage risk include hedging, diversification, buying insurance and, simply, avoidance. Risk management
  • 60. Jargon buster Financial terminology www.london.edu 60 The part of the financial industry involved with the creation, promotion, analysis and sale of securities. Sell- side individuals and firms work to create and service stock products that will be made available to the buy-side of the financial industry. Sell-side
  • 61. Jargon buster Financial terminology www.london.edu 61 The sale of a borrowed security, commodity or currency with the expectation that the asset will fall in value. Strategic asset The practice of realigning a portfolio’s asset composition in allocation order to accommodate changes in market. Shorting
  • 62. Jargon buster Financial terminology www.london.edu 62 An exchange of securities between two parties. For example, if a firm in one country has a lower fixed interest rate and one in another country has a lower floating interest rate, an interest rate swap could be mutually beneficial. Swap
  • 63. Jargon buster Financial terminology www.london.edu 63 Determining the value of an asset or a company. Valuation
  • 64. Jargon buster Financial terminology www.london.edu 64 The strategy of selecting stocks that trade for less than their intrinsic values. Value investors actively seek stocks of companies that they believe the market has undervalued. Value investing
  • 65. Jargon buster Financial terminology www.london.edu 65 Private equity to help new companies grow. An alternative source of finance for entrepreneurs who might otherwise have to rely on a bank loan. Venture capital
  • 66. Jargon buster Financial terminology www.london.edu 66 A graph of the relationship between the yields and maturities of different bonds of similar quality, currency denomination and risk (usually government bonds). Yield curve
  • 67. Jargon buster Financial terminology www.london.edu 67 Masters in Finance – MiF Masters in Financial Analysis – MFA Beyond the jargon: finance programmes at LBS
  • 68. Jargon buster Financial terminology www.london.edu 68 Executive Education Programmes ■■ Corporate Finance Portfolio: ■■ Accounting and Financial Analysis ■■ Valuation ■■ Financial Strategies for Value Creation ■■ Advanced Corporate Finance ■■ Financing the Entrepreneurial Business ■■ Financial Seminar for Senior Managers ■■ Investment Management Programmes: ■■ Equity Portfolio Management ■■ Fixed Income Markets and Bond Portfolio Management ■■ Masterclass in Private Equity ■■ Mergers and Acquisitions ■■ Project and Infrastructure Finance ■■ Strategic Investment Management Beyond the jargon: finance programmes at LBS